================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
-----------
FORM 20-F
-----------
[ ] Registration Statement Pursuant to Section 12 (b) or (g) of the Securities
Exchange Act of 1934
OR
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 1-14464
--------------------------------------
TV Azteca, S.A. de C.V.
(Exact name of registrant as specified in its charter)
N/A
(Translation of registrant's name into English)
UNITED MEXICAN STATES
(Jurisdiction of incorporation of organization)
----------------------------------------
Periferico Sur 4121
Colonia Fuentes del Pedregal
14141 Mexico, D.F.
(Address of principal executive offices)
----------------------------------------
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- --------------------
Series A Shares, without par value, ("A Shares") New York Stock Exchange*
Series D-A Shares, without par value, ("D-A Shares") New York Stock Exchange*
Series D-L Shares, without par value, ("D-L Shares") New York Stock Exchange*
Ordinary Participation Certificates ("CPOs"), each
representing one A Share, one D-A Share and
one D-L Share New York Stock Exchange*
American Depositary Shares (as evidenced by
American Depositary Receipts), each representing
sixteen CPOs ("ADS") New York Stock Exchange
----------
* Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
10 1/8% Series A Guaranteed Senior Notes Due 2004 (the "10 1/8% Notes")
10 1/2% Series B Guaranteed Senior Notes Due 2007 (the "10 1/2% Notes")
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report:
A Shares: 4,668,790,769; D-A Shares: 2,198,907,871; D-L Shares:
2,198,907,871
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [ ] Item 18 [X]
================================================================================
TABLE OF CONTENTS
PART I
Item 1.* Identity of Directors, Senior Management and Advisers.................................................1
Item 2.* Offer Statistics and Expected Timetable...............................................................1
Item 3. Key Information.......................................................................................1
Item 4. Information on the Company...........................................................................17
Item 5. Operating and Financial Review and Prospects.........................................................44
Item 6. Directors, Senior Management and Employees...........................................................60
Item 7. Major Shareholders and Related Party Transactions....................................................66
Item 8. Financial Information................................................................................72
Item 9. The Offer and Listing................................................................................72
Item 10. Additional Information...............................................................................74
Item 11. Quantitative and Qualitative Disclosures About Market Risk...........................................91
Item 12.* Description of Securities other than Equity Securities...............................................92
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies......................................................92
Item 14.* Material Modifications to the Rights of Security Holders and Use of Proceeds.........................92
Item 15. Controls and Procedures..............................................................................92
Item 16A.* Audit Committee Financial Expert.....................................................................93
Item 16B.* Code of Ethics.......................................................................................93
PART III
Item 17.** Financial Statements.................................................................................93
Item 18. Financial Statements.................................................................................93
Item 19. Exhibits.............................................................................................93
* Omitted because the item is inapplicable.
** The Registrant has responded to Item 18 in lieu of this Item.
TV Azteca, S.A. de C.V. ("TV Azteca" or the "Company") is a corporation
(sociedad anonima de capital variable) organized under the laws of the United
Mexican States ("Mexico"), and its subsidiaries (unless otherwise indicated).
References to the following terms will have the meanings set forth below.
"Azteca Holdings" Azteca Holdings, S.A. de C.V., a
corporation (sociedad anonima de capital
variable) organized under the laws of
Mexico
"Azteca International" Azteca International Corporation, a
corporation organized under the laws of
the State of Delaware
"Cosmofrecuencias" Cosmofrecuencias, S.A. de C.V., a
corporation (sociedad anonima de capital
variable) organized under the laws of
Mexico, and its subsidiaries
"Dataflux" Dataflux, S.A. de C.V., a corporation
(sociedad anonima de capital variable)
organized under the laws of Mexico
"Grupo COTSA" Grupo COTSA, S.A. de C.V., a corporation
(sociedad anonima de capital variable)
organized under the laws of Mexico, and
its subsidiaries
"Grupo Elektra" Grupo Elektra, S.A. de C.V., a
corporation (sociedad anonima de capital
variable) organized under the laws of
Mexico, and its subsidiaries
"Operadora Unefon" Operadora Unefon, S.A. de C.V., a
corporation (sociedad anonima de capital
variable) organized under the laws of
Mexico
"Servicios" Servicios SPC, S.A. de C.V., a
corporation (sociedad anonima de capital
variable) organized under the laws of
Mexico
"Todito" Todito.com, S.A. de C.V., a corporation
(sociedad anonima de capital variable)
organized under the laws of Mexico
"Unefon" Unefon, S.A. de C.V., a corporation
(sociedad anonima de capital variable)
organized under the laws of Mexico, and
its subsidiaries (except as otherwise
specified)
Except as stated to the contrary herein, all references herein to
television ratings and audience share relate to data gathered by IBOPE AGB
Mexico. IBOPE AGB Mexico is one of the nine Latin American branch offices of the
Brazilian Institute of Statistics and Public Opinion (Instituto Brasileiro de
Opiniao Publica e Estatistica), which was founded in 1942. Unless otherwise
indicated, the survey data provided in this annual report on Form 20-F ("Annual
Report") pertains only to surveys of the 27 largest cities in Mexico, which
represent approximately 46% of Mexico's population. IBOPE AGB Mexico's 27-City
Survey included an estimated 10 million television households as of June 2002,
the most recent date of this survey.
References herein to "audience share" for a period mean the number of
television sets tuned in to a particular program as a percentage of the number
of television households watching television during that period. References to
"commercial audience share" for a period refers to the number of viewers
classified by IBOPE AGB Mexico as ABC+, C and D+ (based on total household
income) watching one of Mexico's four national television networks (the Azteca 7
and 13 networks operated by the Company and Channels 2 and 5, operated by
Televisa, S.A. de C.V. ("Televisa")). References to "rating" for a period refers
to the number of television sets tuned in to a particular program as a
percentage of the total number of all television households. References to
"average weekday, prime-time audience share" mean the average daily audience
share, Monday through Friday, during the hours of 7:00 p.m. to 12:00 a.m.
References to "US$," "$," "dollars," and "U.S. dollars," are to the lawful
currency of the United States of America ("U.S."). All references to "Ps." or
"pesos" are to the lawful currency of Mexico.
References to "U.S. GAAP" are to generally accepted accounting principles
in the U.S. and references to "Mexican GAAP" are to generally accepted
accounting principles in Mexico.
This Annual Report contains both historical and forward-looking
statements. All statements other than statements of historical fact are, or may
be deemed to be, forward-looking statements. These forward-looking statements
are not based on historical facts, but rather reflect the Company's current
expectations concerning future results and events. These forward-looking
statements generally can be identified by the use of statements that include
phrases such as "believe," "expect," "anticipate," "intend," "plan," "foresee,"
"likely," "will" or other similar words or phrases. Similarly, statements that
ii
describe the Company's objectives, plans or goals are or may be forward-looking
statements. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the Company's actual results,
performance or achievements to be different from any future results, performance
or achievements expressed or implied by these statements. Readers are cautioned
to review carefully all information, including the financial statements and the
notes to the financial statements, included or incorporated by reference into
this Annual Report.
In addition to the risk factors described under "Risk Factors," the
following important factors could affect future results, causing these results
to differ materially from those expressed in the Company's forward-looking
statements:
.. the Company's ability to service its debt;
.. the outcome of pending disputes and legal proceedings involving the
Company and its affiliates;
.. competitive factors affecting the Company and its subsidiaries in Mexico
and the U.S.;
.. cancellations of significant advertising contracts of the Company;
.. limitations on the Company's access to sources of financing on competitive
terms;
.. commencement of war or armed hostilities directly or indirectly involving
or affecting Mexico or the U.S.;
.. terrorist attacks initiated against the U.S. or its allies in the U.S. or
elsewhere;
.. significant economic or political developments in Mexico and globally
which affect Mexico; and
.. changes in the Mexican regulatory environment.
These factors and the other risk factors described in this Annual Report
are not necessarily all of the important factors that could cause actual results
to differ materially from those expressed in any of the Company's
forward-looking statements. Other unknown or unpredictable factors also could
harm the Company's future results. The forward-looking statements included in
this Annual Report are made only as of the date of this Annual Report and the
Company cannot assure you that projected results or events will be achieved. The
Company disclaims any obligation to update or revise any of these
forward-looking statements, whether as a result of new information, future
events or otherwise.
The Company maintains its books and records in pesos and prepares its
consolidated financial statements in pesos. The Mexican Institute of Public
Accountants ("MIPA") has issued Bulletin B-10 "Recognition of the Effects of
Inflation on Financial Information" and Bulletin B-12 "Statements of Changes in
Financial Position." These bulletins outline the inflation accounting
methodology mandatory for all Mexican companies reporting under Mexican GAAP.
Pursuant to Mexican GAAP, which differs in some significant respects from U.S.
GAAP, financial data for all periods in the financial statements included in
this Annual Report (the "Consolidated Financial Statements"), unless otherwise
noted, have been restated in constant pesos at December 31, 2002, using the
National Consumer Price Index ("NCPI"). The effect of the inflation accounting
principles described above has not been reversed in the reconciliation to U.S.
GAAP. See Note 17 to the Consolidated Financial Statements.
This Annual Report contains translations of certain peso amounts into U.S.
dollars at specified rates solely for the convenience of the reader. These
translations should not be construed as representations that the peso amounts
actually represent such U.S. dollar amounts or could be converted into U.S.
dollars at the rate indicated. Unless otherwise indicated, U.S. dollar amounts
have been translated from pesos at
iii
an exchange rate of Ps.10.395 to US$1.00, the average interbank free market
exchange rate on December 31, 2002 as reported by the Banco de Mexico ("Mexican
Central Bank"). On June 16, 2003, this exchange rate was Ps.10.470 to US$1.00.
U.S. dollar amounts for Unefon have been translated from pesos at an exchange
rate of Ps.10.4393 to US$1.00, the average rate on December 31, 2002 in the
wholesale foreign exchange market for operations payable in 48 hours as reported
by the Mexican Central Bank. On June 16, 2003, this exchange rate was Ps.10.470
to US$1.00.
Market data and other statistical information used throughout this Annual
Report as noted are based on independent industry publications, government
publications, reports by market research firms or other published independent
sources. Some data are also based on the Company's good faith estimates, which
are derived from its review of internal surveys, as well as the independent
sources listed above. Although the Company believes these sources are reliable,
it has not independently verified the information and cannot guarantee its
accuracy and completeness.
The term "billion" as used in this Annual Report means one thousand
million.
iv
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not required.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not required.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
The following selected historical consolidated financial data for the
years ended December 31, 2000, 2001 and 2002 have been derived from the audited
Consolidated Financial Statements which are included herein, which have been
audited by PricewaterhouseCoopers, the Company's independent auditors, and
prepared in accordance with Mexican GAAP, which differs in certain respects from
U.S. GAAP. Note 17 to the Consolidated Financial Statements provides a
description of the principal differences between Mexican GAAP and U.S. GAAP as
they relate to the Company and a reconciliation to U.S. GAAP of the Company's
results of operations, stockholders' equity and certain other selected financial
data for the years ended December 31, 2000, 2001 and 2002. The historical
consolidated financial information for the years ended December 31, 1998 and
1999 have been derived from the Company's audited financial statements, which
are not included in this Annual Report and which have been audited by the
Company's independent auditors. These historical results are not necessarily
indicative of results to be expected from any future period.
The data set forth below should be read in conjunction with, and is
qualified in its entirety by reference to, the Consolidated Financial
Statements, including the notes to those financial statements, which are
included herein. The Consolidated Financial Statements were prepared giving
effect to Bulletins B-10 and B-12 issued by the MIPA, which provide,
respectively, for the recognition of certain effects of inflation by the Company
and require that the statement of changes in financial position reflect changes
from the restated historical balance sheet to the current balance sheet.
Pursuant to Mexican GAAP, the summary consolidated financial information set
forth below, and all data in the Consolidated Financial Statements, have been
restated in constant pesos as of December 31, 2002. The effect of the inflation
accounting principles described above has not been reversed in the
reconciliation to U.S. GAAP. See Note 17 to the Consolidated Financial
Statements.
(in millions of U.S. dollars or constant pesos of YEAR ENDED DECEMBER 31,
December 31, 2002 purchasing power, except share and --------------------------------------------------------------------
per share data) 1998 1999 2000 2001 2002 2002(1)
-----------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Mexican GAAP:
Net revenue............................................ Ps. 6,090 Ps. 4,944 Ps. 5,987 Ps. 6,123 Ps. 6,690 US$ 643.6
Programming, production, exhibition and transmission
costs................................................. 2,054 2,347 2,680 2,470 2,511 241.6
Selling and administrative expenses.................... 863 885 940 957 974 93.7
Total costs and expenses............................... 2,917 3,232 3,620 3,427 3,485 335.3
Depreciation and amortization(2)....................... 975 641 627 604 385 37.1
Operating profit(3).................................... 2,198 1,071 1,740 2,092 2,819 271.2
Other expenses--net.................................... (379) (995) (376) (244) (442) (42.5)
Net comprehensive financing (cost) income(4)........... (1,405) 39 (665) (331) (1,104) (106.2)
Income before provision for income tax, deferred
income tax and extraordinary items.................... 414 115 699 1,517 1,274 122.6
Provision for income tax and deferred income tax
(expense) benefit..................................... (471) (372) 20 (11) (290) (27.9)
Extraordinary items(5)................................. 133 66 (336) 0 0 0.0
Net income (loss)...................................... 76 (191) 383 1,506 984 94.7
Net (loss) of minority stockholders.................... (27) (21) (6) (2) 0
Net income (loss) of majority stockholders............. 103 (170) 389 1,508 985 94.7
Net income (loss) per share applicable to majority
stockholders.......................................... 0.014 (0.021) 0.043 0.167 0.109 -
Weighted average shares outstanding (in millions)...... 7,519 7,932 8,967 9,025 9,057 -
U.S. GAAP:
Net revenue............................................ Ps. 6,290 Ps. 5,212 Ps. 6,358 Ps. 6,523 Ps. 6,872 US$ 661.1
(in millions of U.S. dollars or constant pesos of AS OF AND FOR THE YEAR ENDED DECEMBER 31,
December 31, 2002 purchasing power, except ratios, --------------------------------------------------------------------
percentages, exchange rates and coverage data) 1998 1999 2000 2001 2002 2002(1)
-----------------------------------------------------------------------------------------------------------------------------
Operating income (loss)(3)............................. Ps. 1,518 (Ps. 912) Ps. 481 Ps. 650 Ps. 1,801 US$ 173.3
Net (loss) income before minority interest............. (448) 42 1 463 521 50.1
Minority interest...................................... 27 21 6 2 - -
Net (loss) income...................................... (421) 63 7 465 521 50.1
Basic and diluted (loss) income per share.............. (0.056) 0.003 (0.004) 0.047 0.053 0
Basic weighted average number of common shares
outstanding (in millions)............................. 7,519 7,932 8,967 9,025 9,057 -
BALANCE SHEET DATA:
Mexican GAAP:
Property, machinery and equipment--Net................. Ps. 3,566 Ps. 3,065 Ps. 2,677 Ps. 2,304 Ps. 2,231 US$ 214.7
Television concessions--Net............................ 4,228 4,048 3,865 3,743 3,742 360.0
Total assets........................................... 17,086 19,678 20,545 21,495 21,660 2,083.7
Total debt(6).......................................... 7,599 7,059 6,563 6,190 6,158 592.4
Advertising advances(7)................................ 3,107 3,704 4,457 4,640 4,446 427.7
Unefon advertising advance............................. 0 2,273 2,313 2,258 2,167 208.5
Todito advertising, programming and services
advance............................................... 0 0 912 715 504 48.5
Capital stock.......................................... 2,429 2,715 2,719 2,737 2,740 263.6
Majority stockholders' equity.......................... 4,224 4,916 4,380 5,769 6,584 633.4
Minority stockholders' equity.......................... 75 39 13 8 9 0.8
Total stockholders' equity............................. 4,299 4,955 4,393 5,778 6,592 634.2
U.S. GAAP:
Property, machinery and equipment--Net................. Ps. 3,633 Ps. 3,245 Ps. 2,865 Ps. 2,497 Ps. 2,264 US$ 217.8
Total assets........................................... 18,292 18,686 19,063 19,752 19,902 1,914.6
Total debt(6).......................................... 7,599 7,059 6,563 6,190 6,365 612.3
Advertising advances(7)................................ 3,107 3,704 4,457 4,640 4,431 426.3
Minority interest...................................... 75 39 13 8 9 0.9
Mandatory redeemable securities........................ 360 311 0 0 - -
Stockholders' equity................................... 3,254 5,199 5,622 6,375 6,930 666.7
OTHER FINANCIAL DATA:
Mexican GAAP:
Cash flow (used in) provided by:
Operating activities................................ (328) 1,134 1,957 1,628 892 85.8
Investing activities................................ (570) (2,421) (1,314) (1,031) (696) (67.0)
Financing activities................................ 334 934 (543) (215) (453) (43.6)
Capital expenditures................................... 644 191 202 177 241 23.2
U.S. GAAP
Net cash provided by (used in):
Operating activities................................ 1,236 573 1,168 1,619 2,011 193.5
Investing activities................................ (2,056) (2,858) (583) (1,670) (1,843) (177.3)
Financing activities................................ 91 2,047 (576) 379 (684) (65.8)
OTHER DATA:
NCPI (at period end)................................... 76.2 85.6 93.2 97.4 102.9 -
Peso/U.S. Dollar exchange rate (at period end)......... Ps. 8.914 Ps. 9.500 Ps. 9.650 Ps. 9.160 Ps. 10.395 -
Coverage of the Azteca 7 network (at period end)(8).... 94% 94% 95% 95% 95% -
Coverage of the Azteca 13 network (at period end)(8)... 97% 97% 97% 97% 97% -
(footnotes on the following page)
2
----------
(1) The U.S. Dollar amounts represent the peso amounts expressed as of
December 31, 2002 purchasing power, translated at an exchange rate of
Ps.10.395 per U.S. Dollar, the average interbank free market exchange rate
on December 31, 2002 as reported by the Mexican Central Bank.
(2) Effective January 1, 2002, the Company changed the annual depreciation
rate applied to its transmission towers from 16% to 5% based on the
remaining useful life of these assets. This resulted in a decrease in
depreciation expense of Ps.42 million (US$4.0 million) for the year ended
December 31, 2002. Also on January 1, 2002, the Company adopted Statement
C-8 "Intangible Assets" issued by the MIPA. As a result of the adoption of
Statement C-8, the Company determined that its television concessions
qualified as indefinite useful life intangible assets. Accordingly, the
Company no longer amortizes its television concessions. The effect of this
adoption resulted in a decrease in amortization expense of Ps.117 million
(US$11.3 million).
(3) The decrease in operating profit in 1999, under Mexican GAAP, resulted
from the absence of World Cup Soccer Championship ("World Cup") revenues
in 1999 and the decision by the Company not to raise its advertising rates
in 1999, which resulted in a decrease in revenues on a constant peso
basis. The decrease in operating income in 1999, under U.S. GAAP, was due
to the write-offs of exhibition rights, inventory and accounts receivable
as well as higher non-cash compensation expense relating to options
granted under the Company's stock option plans in 1999.
(4) Changes in net comprehensive financing cost reflect fluctuations in the
peso-U.S. dollar exchange rate. Net comprehensive financing costs decrease
in years in which the peso appreciates against the U.S. dollar and
increase in years in which the peso depreciates against the U.S. dollar
since the Company's U.S. dollar denominated monetary liabilities exceed
the Company's U.S. dollar denominated monetary assets.
(5) Extraordinary items in 1998 and 1999 include income tax benefits from
utilization of tax loss carryforwards. Extraordinary items in 2000 include
the effect of the National Broadcasting Company ("NBC") Settlement--net of
income tax. Pursuant to a change in Mexican GAAP for the period after
December 31, 1999, the Company is not required to report as an
extraordinary item income tax benefits from utilization of tax loss
carryforwards. Effective January 1, 2000, the Company adopted the
guidelines of new Statement D-4, "Accounting Treatment of Income Tax,
Asset Tax and Employees' Statutory Profit Sharing" issued by the MIPA.
Pursuant to this statement, the amortization of tax loss carryforwards is
not considered an extraordinary item, but rather a component of the
provision for income tax and deferred income tax (expense) benefit. During
the years ended December 31, 2000, 2001 and 2002, the benefit of the
amortization of tax loss carryforwards amounted to Ps.197 million,
Ps.1,183 million and Ps.1,028 million (US$98.8 million), respectively.
(6) Represents the Company's total liabilities excluding the following items:
interest payable, exhibition rights payable, accounts payable and accrued
expenses, amounts due to related parties, advertising advances, Unefon
advertising advance and Todito advertising, programming and services
advance.
(7) Advertising advances are treated as long-term liabilities under Mexican
GAAP but are treated as current liabilities under U.S. GAAP.
(8) Percentage of Mexican television households within broadcast range of the
Azteca 7 and Azteca 13 networks, based upon data internally prepared by
the Company.
3
EXCHANGE RATES
Mexico has had a free market for foreign exchange since 1994. Prior to
December 1994, the Mexican Central Bank kept the peso-U.S. dollar exchange rate
within a range prescribed by the government through intervention in the foreign
exchange market. In December 1994, the government suspended intervention by the
Mexican Central Bank and allowed the peso to float freely against the U.S.
dollar. The peso declined sharply in December 1994 and continued to fall under
conditions of high volatility in 1995. In 1996 and most of 1997, the peso fell
more slowly and was less volatile. In the last quarter of 1997 and for much of
1998, the foreign exchange markets were volatile as a result of financial crises
in Asia and Russia and financial turmoil in countries including Brazil and
Venezuela. The peso declined during this period, but was relatively stable in
1999, 2000 and 2001. The recent financial crises in Argentina and Venezuela have
caused instability in Latin American financial markets and could have a negative
impact on the value of the Mexican peso. The Company cannot assure you that the
Mexican government will maintain its current policies with regard to the peso or
that the peso will not further depreciate or appreciate significantly in the
future.
The following table sets forth, for the periods indicated, the high, low,
average and period-end interbank free market exchange rate. The rates have not
been restated in constant currency units.
EXCHANGE RATE
-------------------------------------------
PERIOD
YEAR ENDED DECEMBER 31, HIGH LOW AVERAGE(1) END
----------------------- ------ ------ ----------- ------
1998......................................................... 10.640 8.039 9.241 8.914
1999......................................................... 10.630 9.275 9.560 9.500
2000......................................................... 10.078 9.181 9.445 9.650
2001......................................................... 9.979 8.966 9.321 9.160
2002......................................................... 10.395 9.050 9.757 10.395
2003 (through June 16, 2003)................................. 11.220 10.120 10.649 10.470
----------
(1) Represents the average rates for each period indicated, based on the
average of the interbank free market exchange rates on the last day of
each month during the period, as reported by the Mexican Central Bank.
The following table sets forth, for the periods indicated, the high and
low interbank free market exchange rate. The rates have not been restated in
constant currency units.
EXCHANGE RATE
-------------------------
MONTH ENDED HIGH LOW
----------- ---- ---
December 31, 2002................................... 10.395 10.380
January 31, 2003.................................... 10.913 10.905
February 28, 2003................................... 11.022 11.017
March 31, 2003...................................... 10.760 10.756
April 30, 2003...................................... 10.770 10.308
May 31, 2003........................................ 10.424 10.113
DIVIDENDS
The table below sets forth the nominal amount of preferential dividends
per D-A Share and D-L Share paid on April 18, 1998, for the fiscal year ended
December 31, 1997; paid on September 30, 1999, for the fiscal year ended
December 31, 1998; paid on October 2, 2000, for the fiscal year ended December
31, 1999; paid on October 2, 2001, for the fiscal year ended December 31, 2000;
and paid on October 1, 2002, for the fiscal year ended December 31, 2001. Peso
amounts have been translated into U.S. dollars at the exchange rate on each of
the respective payment dates.
PESOS PER D-A SHARE PESOS PER D-L SHARE U.S. DOLLARS PER D-A SHARE U.S. DOLLARS PER D-L SHARE
------------------- ------------------- -------------------------- --------------------------
1998 0.03300 0.03300 0.003890 0.003890
1999 0.00819 0.00819 0.000876 0.000876
2000 0.00819 0.00819 0.000851 0.000851
2001 0.00819 0.00819 0.000894 0.000894
2002 0.00819 0.00819 0.000788 0.000788
4
The declaration, amount and payment of dividends are determined by
majority vote of the holders of the A Shares and generally, but not necessarily,
on the recommendation of the Board of Directors. Dividends are declared in the
second quarter of each fiscal year based on the audited financial statements of
the Company for the preceding fiscal year. The amount of any such dividend would
depend on, among other things, the Company's operating results, financial
condition and capital requirements, and on general business conditions.
Under the Company's by-laws and the Ley General de Sociedades Mercantiles
("Mexican Companies Law"), the gross profits of the Company are applied as
described below.
At the annual ordinary general meeting of the shareholders of the Company,
the Board of Directors submits the financial statements of the Company for the
previous fiscal year, together with the report thereon by the Board, to the
holders of A Shares for approval. The holders of A Shares, once the financial
statements have been approved, determine the allocation of the Company's net
profits for the preceding year. They are required by law to allocate at least 5%
of such net profits to a legal reserve, which is not thereafter available for
distribution except as a stock dividend, until the amount of the legal reserve
equals 20% of the Company's historical capital stock (before the effect of
restatement). See Note 11 to the Consolidated Financial Statements. Thereafter,
the holders of A Shares may determine and allocate a certain percentage of net
profits to any general or special reserve, including a reserve for open-market
purchases of the Company's shares. The remainder of net profits is available for
distribution in the form of dividends to the shareholders provided that the
holders of A Shares resolve favorably for the distribution of dividends. Holders
of L Shares and A Shares (directly or through CPOs) shall have equal rights, on
a per share basis, to dividends. Holders of D-A Shares and D-L Shares (directly
or through CPOs) are entitled to receive an annual, cumulative preferential
dividend of approximately nominal Ps.0.00819 per D-A Share or D-L Share
(representing 5% of the theoretical value of the capital attributable to those
shares as set forth in the Company's by-laws) before any dividends are payable
in respect of the A Shares or L Shares. Following payment in full of this small
preferential dividend, dividends may be paid with respect to A Shares and L
Shares, the holders of which will share equally with the D-A Shares and D-L
Shares, on a per share basis, in such dividends. After the tenth anniversary of
the creation of the Mexican trust for the CPOs (the "CPO Trust"), and after the
conversion of the D-A Shares into A Shares and the D-L Shares into L Shares, all
shares of the Company will have equal rights, on a per share basis, to
dividends, and will share equally, on a per share basis, in such dividends. The
CPO Trust Agreement was entered into in August 1997.
Under the terms of certain financings, the Company is subject to covenants
that restrict the payment of dividends. See "--Risk Factors."
RISK FACTORS
Provided below are certain risks associated with the Company and an
investment in the Company's securities. The risks and uncertainties described
below are not the only ones the Company faces and represent some of the risks
that the Company's management believes are material to an investment in the
Company. Some of the risks of investing in the Company's securities are general
risks associated with doing business in Mexico. Other risks are specific to the
Company's business. The discussion below of general risks associated with doing
business in Mexico contains information about the Mexican government and the
Mexican economy obtained from official publications of the Mexican government.
The Company has not independently verified this information. Any of the
following risks, if they actually occur, could materially and adversely affect
the Company's business, financial condition or results of operations. If this
were to occur, the trading price of the Company's securities could decline and
you could lose all or part of your investment.
RISKS RELATED TO THE OPERATIONS OF THE COMPANY
The Company is highly leveraged and its substantial leverage and debt service
obligations could adversely affect its business.
The Company is a highly leveraged company, which means that it has a large
amount of debt relative to its equity. The Company has US$125.0 million
outstanding principal amount of 10 1/8% Notes and US$300.0 million outstanding
principal amount of 10 1/2% Notes (the 10 1/8% Notes and the 10 1/2% Notes,
together, the "TV Azteca Notes") and, as of
5
December 31, 2002, the Company had US$167.4 million of indebtedness in addition
to the TV Azteca Notes. Moreover, the indenture governing the TV Azteca Notes
(the "TV Azteca Indenture") permits the Company, based on its financial results,
to incur substantial additional indebtedness in the future. The Company will
require substantial cash flow to meet its repayment obligations on the TV Azteca
Notes and any future additional indebtedness it may incur. The Company may not
be able to generate enough cash to pay the principal, interest and other amounts
due under its indebtedness, and there is no assurance that market conditions
will permit the Company to refinance its existing indebtedness at maturity. The
Company's substantial leverage could have negative consequences, including:
.. requiring the dedication of a substantial portion of its cash flow from
operations to service indebtedness, thereby reducing the amount of cash
flow available for other purposes, including capital expenditures,
marketing efforts, future growth plans and distributions payable to its
shareholders;
.. limiting its ability to obtain additional financing or to refinance its
existing indebtedness;
.. placing it at a possible competitive disadvantage relative to less
leveraged competitors and competitors with greater access to capital
resources;
.. increasing its vulnerability to downturns in its business or the Mexican
economy generally; and
.. limiting its ability to implement its recently announced distribution
policy.
The Company's operations are subject to covenant restrictions that may
adversely affect its ability to conduct its business.
The TV Azteca Indenture imposes significant operating and financial
restrictions on the Company. Such restrictions will affect, and in many respects
will limit or prohibit, among other things, the Company's ability to create
liens and to use the proceeds from certain asset sales. The restrictive
covenants contained in the TV Azteca Indenture may make the Company more
vulnerable to economic downturns, limit the ability of the Company and reduce
the flexibility of the Company in responding to changing business or economic
conditions or to substantial declines in operating results.
The Company's newly announced distribution policy will significantly decrease
the balance of the restricted payments basket available pursuant to the TV
Azteca Indenture.
On February 6, 2003, the Company announced that its board of directors had
approved a six-year debt reduction plan pursuant to which the Company intends to
use the free cash generated from its operations to reduce its outstanding
indebtedness, which was US$592.4 million as of December 31, 2002. The Company
also announced the board of directors' intention to make scheduled distributions
to shareholders of approximately US$500.0 million to its shareholders over the
next six years. On April 30, 2003, the Company's shareholders approved
distributions to shareholders for an aggregate amount of US$140.0 million to be
paid during 2003.
The TV Azteca Indenture, subject to certain conditions and exceptions,
restricts the Company's ability to make dividends and other distributions in
cash to its shareholders. The Company's ability to make future distributions
will be limited at any time to the then current balance of the restricted
payment basket. Generally, the capacity of the restricted payments basket is
increased by positive adjusted EBITDA of the Company, as defined in the TV
Azteca Indenture, net cash proceeds received by the Company from the sale of its
capital stock and the reduction in investments received by the Company in cash.
In turn, the capacity of the restricted payments basket is decreased when the
Company makes restricted payments, such as dividends and other distributions,
investments other than permitted investments and interest payments on its
indebtedness.
As of June 15, 2003, the balance under the Company's restricted payments
basket was approximately US$382.0 million. However, the balance under the
Company's restricted payments basket will be reduced to US$257.0 million after
giving effect to the payment of the US$125.0 million shareholder distribution on
June 30, 2003. The Company cannot assure you that in the future the balance of
the Company's restricted payments basket will be sufficient to permit it to make
significant scheduled shareholder distributions, if any at all.
6
The Company has a controlling shareholder and the Company engages in
transactions with related parties, including its controlling shareholder.
Approximately 60.0% of the Company's capital stock is owned directly or
indirectly by the family of Ricardo B. Salinas Pliego, who serves as the
Company's Chairman of the Board. Consequently, Mr. Salinas Pliego has the power
to elect a majority of the Company's directors and to determine the outcome of
substantially all actions requiring shareholder approval.
Historically, the Company and its subsidiaries have engaged in a variety
of transactions with certain affiliates, including entities owned or controlled
by the family of Mr. Salinas Pliego, including Unefon, Todito and Grupo Elektra.
While there are restrictions set forth in the TV Azteca Indenture limiting some
types of transactions with affiliates, the Company may engage in certain
permitted affiliated transactions in the future. The Company cannot assure you
that future agreements with the Company's affiliates will be entered into on an
arm's length basis.
Television broadcasting in Mexico is highly competitive.
Television broadcasting in Mexico is highly competitive and the popularity
of television shows, an important factor in advertising sales, is readily
susceptible to change. The Company faces competition from other sources of
television programming. Televisa, the Company's principal competitor, generated
a substantial majority of the Mexican television advertising sales in each of
the last four years. See "Item 4. Information on the Company--Competition."
Televisa, which faced little competition in over-the-air television market prior
to the Company's acquisition of Channels 7 and 13 from the Mexican government in
1993, has substantially more experience in the television industry and
substantially greater resources than the Company does. Televisa is one of the
leading producers of Spanish-language television programming in the world and
has over 20 years of experience producing telenovelas. Televisa also has
significant interests in other media, including radio, publishing, music
recording and the Internet, which enables Televisa to offer its customers
attractive rates for packages combining advertising in various media.
The Company cannot assure you that it will be able to maintain or improve
its share of the Mexican television advertising or viewing market in the future,
nor can the Company assure you that its costs of obtaining programming and
hiring production and creative staff, or the prices at which the Company sells
advertising time, will not be adversely affected by competition. In addition to
competing with conventional, over-the-air television stations, including certain
government-run stations as well as those owned by or affiliated with Televisa,
the Company also competes for Mexican television viewers with pay television
providers. Cable television, multi-channel multipoint distribution systems
("MMDS") and direct-to-home ("DTH") satellite services represent a potential
source of competition for the Company's advertising sales, audiences and program
rights. According to IBOPE AGB Mexico, the penetration of pay television as of
July 31, 2002 was approximately 14.5% of all television households.
In November 1996, the U.S. and Mexico signed an agreement regarding
cross-border satellite television transmissions. Under the agreement, the
Mexican government allows U.S. satellite transmission companies to provide DTH
satellite services to Mexican households. The Company cannot assure you that pay
television services will not secure a more significant share of the Mexican
television audience and television advertising market in the future.
In addition, the Company also competes for advertising revenues with other
forms of advertising media, such as radio, billboards, newspapers, magazines and
the Internet.
The seasonal nature of the Company's business affects the Company's revenue
and low fourth quarter revenues could impact the Company's results of
operations.
The Company's business reflects seasonal patterns of advertising
expenditures, which is common in the television broadcast industry. The
Company's revenue from advertising sales, which is recognized when the
advertising is aired, is generally highest in the fourth quarter because of the
high level of advertising during the holiday season. See "Item 5. Operating and
Financial Review and Prospects--Seasonality of Sales." Accordingly, the
Company's results of operations depend disproportionately on revenue recognized
in the fourth quarter and a low level of fourth quarter advertising revenue
could harm the Company's results of operations for the year.
7
The Company's revenue and profitability are affected by major broadcast
events.
In the past, the Company has generated substantial advertising revenue
from broadcasting infrequently recurring major broadcast events. See "Item 5.
Operating and Financial Review and Prospects--Cyclicality Due to Major Broadcast
Events." The Company's broadcast of the 2000 Summer Olympics, the Eurocup Soccer
Championship, the Gold Cup Soccer Championship and the 2002 World Cup as well as
the 2000 Mexican presidential campaign and election significantly increased net
revenue during the periods in which they were shown. The absence or cancellation
of major broadcast events in some years may harm the Company's financial
condition and results of operations, as in 1999 and 2001, when there were no
Summer Olympic or Soccer Championship games. Similarly, the Company's results of
operations may be harmed in years in which a major broadcast event that is
expected to draw a large viewing audience in Mexico is held but the Company is
unable to obtain the broadcast rights to the event.
If the Company loses one or more of its key advertisers, it could lose a
significant amount of its revenues.
In 2002, the Company's five largest advertisers, Colgate Palmolive, S.A.
de C.V., Pond's de Mexico, S.A. de C.V., Cerveceria Modelo, S.A. de C.V., Grupo
Carso, S.A. de C.V. and Producciones Infovision, S.A. de C.V., and their
affiliates, together accounted for 14% of the Company's advertising revenue. The
termination of the Company's relationship with any one of its principal
advertisers could harm its operating results.
The Company's costs of producing and acquiring programming may increase.
The Company's most significant variable operating costs relate to its
internally produced programming and its purchased programming. See "Item 4.
Information on the Company--Programming--Programming Produced by the Company."
The cost of internally produced programming varies considerably depending on the
type of programming, and is generally more expensive than purchased programming.
Moreover, the production of telenovelas is more expensive relative to the
production of other types of programming.
If the Company fails to manage effectively the costs of its internally
produced programming or of acquiring exhibition rights for purchased
programming, it is possible that its programming costs will increase at a rate
higher than advertising revenue. If programming costs increase substantially,
the Company's results of operations may be negatively affected.
From time to time, litigation matters involving the Company have resulted,
and may in the future result, in the expenditure of significant financial
resources and management attention to the resolution of such controversies.
The Company is currently involved in certain disputes and legal
proceedings. See "Item 10. Additional Information--Legal Proceedings--TV
Azteca." As the Company vigorously defends itself in these disputes, it incurs
significant legal expenses. In addition, these matters may from time to time
divert the attention of the Company's management and staff from their customary
responsibilities. Moreover, an adverse resolution of an existing legal
proceeding involving the Company could have a material adverse effect on the
Company's operating results and financial condition.
If the Company fails to retain members of its senior management, it may be
difficult for it to find equally skilled replacements, and its failure to do
so would adversely affect its ability to conduct its business.
The Company's success depends in large part upon the abilities and
continued service of its senior management, none of whom have executed
employment agreements with the Company. The Company's senior management is
particularly important to its business because of their experience and knowledge
of the media industry both in Mexico and internationally. The loss or
unavailability to the Company of any of its key management personnel could have
significant negative effects. To the extent that the services of its senior
management would be unavailable to it for any reason, the Company would be
required to hire other personnel to manage and operate its company. There may be
a limited number of persons with the requisite skills to serve in these
positions, particularly in the markets where the Company operates its business.
The Company cannot assure you that it would be able to locate or employ such
qualified personnel on acceptable terms.
8
The Company may experience liquidity difficulties.
The Company may experience liquidity difficulties as a result of a
devaluation of the peso or other future economic crises. In addition, any
significant decline in the Company's advertising revenue or significant increase
in the Company's operating costs could cause the Company to experience further
liquidity difficulties. The same would be true of any significant increase in
the peso cost of debt service on the Company's U.S. dollar-denominated
indebtedness.
The Company's business is regulated by the Mexican government and its
business would be harmed if its broadcast concessions were not renewed or
were taken away.
To broadcast commercial television in Mexico, a broadcaster must have a
license from the Secretaria de Comunicaciones y Transportes ("SCT"). The SCT
grants concessions comprised of one or more broadcast licenses. These
concessions may be revoked in very limited circumstances. See "Item 4.
Information on the Company--Regulation--TV Azteca--Concessions." The Company
does not expect any of its concessions to be revoked. The Company's concessions
must be renewed upon expiration and the expiration dates for its broadcast
concessions range from April 2006 to July 2009. However, if the SCT fails to
renew one or more of the Company's concessions, the Company will not be able to
operate. The Company believes, in part based on the government's renewal in 1999
of its concession for broadcast in Chihuahua, that the government generally will
renew its television concessions upon expiration so long as the Company has
operated them in substantial compliance with the terms and conditions of the
concessions and with applicable law. See "Item 4. Information on the
Company--Regulation--TV Azteca--Concessions." However, the Company cannot assure
you that this will happen in the future or that current Mexican law will not
change. If the Company is unable to renew its concessions prior to expiration,
its business would be significantly harmed.
Some holders of ADSs have no voting rights.
Holders of ADSs who are not Eligible Mexican Holders (and all other
holders of CPOs who are not Eligible Mexican Holders) do not have voting rights
with respect to the underlying A Shares or D-A Shares. "Eligible Mexican
Holders" are Mexican individuals and Mexican corporations whose charters contain
a prohibition on ownership by non-Mexicans of the corporation's capital stock.
Voting rights with respect to the A Shares and the D-A Shares held in the CPO
Trust on behalf of holders of CPOs who are not Eligible Mexican Holders will be
voted in the same manner as the respective majority of the A Shares and the D-A
Shares held by Eligible Mexican Holders and voted at the relevant meeting.
All holders of ADSs and CPOs, whether or not they are Eligible Mexican
Holders, are entitled to vote the D-L Shares and (after conversion of the D-L
Shares) the L Shares. See "Item 10. Additional Information--Limitations
Affecting Security Holders." Under the Company's by-laws and Mexican law,
holders of the D-A Shares and the D-L Shares are entitled to vote only in
limited circumstances. Each holder of ten percent of the Company's limited-vote
capital stock (D-A Shares and D-L Shares, and after conversion, the L Shares) is
entitled to elect one of the Company's directors. See "Item 6. Directors, Senior
Management and Employees--Directors." Holders of D-A Shares are entitled to vote
on the following matters:
.. transformation of the Company from one type of company to another;
.. any merger of the Company (including a merger in which the Company is the
surviving entity);
.. extension of the Company's existence beyond June 2092;
.. dissolution of the Company before June 2092;
.. a change of the Company's corporate purposes; and
.. a change of the Company's nationality.
9
Holders of L Shares (into which the D-L Shares will be convertible after,
August 12, 2007, the tenth anniversary of their original issuance), in the
aggregate amount of ten percent of the Company's limited-vote capital stock,
will be entitled (whether the L Shares are held directly or through CPOs or ADSs
and whether or not the holders are Eligible Mexican Holders) to elect one of the
Company's directors. Holders of L Shares also will be entitled (whether or not
they are Eligible Mexican Holders) to vote on the following matters:
.. transformation of the Company from one type of company to another;
.. any merger in which the Company is not the surviving entity; and
.. removal of the L Shares or securities representing them from listing on
the Bolsa Mexicana de Valores, S.A. de C.V. (the "Mexican Stock Exchange")
or any foreign stock exchange and cancellation of the registration of such
shares with the Registro Nacional de Valores ("RNV"), the Mexican National
Securities Registry.
The payment and amount of dividends are subject to covenant restrictions
and to the determination of the Company's controlling shareholder.
The payment and amount of dividends are subject to the recommendation of
the Company's Board of Directors and approval by the holders of the A Shares.
Ricardo B. Salinas Pliego owns directly or indirectly through Azteca Holdings a
majority of the A Shares. As long as he continues to own a majority of these
shares, he will have, as a result, the ability to determine whether or not
dividends are to be paid and the amount of any dividends. In addition, the TV
Azteca Indenture contains covenants that restrict, among other things, the
Company's payment of dividends.
The significant share ownership of the controlling shareholder may have an
adverse effect on the future market price of the CPOs.
Ricardo B. Salinas Pliego controls approximately 60.0% of the Company's
capital stock. Actions by Mr. Salinas Pliego with respect to the disposition of
the CPOs he beneficially owns, or the perception that such actions might occur,
may adversely affect the trading price of the CPOs on the Mexican Stock Exchange
and the market price of the ADSs. In addition, the repayment of debt of Azteca
Holdings that is secured by CPOs may involve the sale of pledged CPOs. See "Item
7. Major Shareholders and Related Party Transactions."
Holders of ADSs may experience dilution as a result of the exercise of
stock options with exercise prices substantially below the market price of the
ADSs.
At May 31, 2003, the Company had outstanding stock options with respect to
approximately 62.87 million CPOs at exercise prices ranging from approximately
US$0.13 to US$0.50 per CPO. Currently there are no new CPOs reserved for
issuance pursuant to stock options. In addition to the options currently
outstanding, the Company has in the past issued options at substantially below
the then-prevailing market price of the Company's CPOs, and the Company may do
so in the future. See "Item 6. Directors, Senior Management and
Employees--Option Plans."
There are risks associated with the Mexican Stock Exchange.
The Mexican securities market is not as large or as active as the
securities markets in the United States and certain other developed market
economies. As a result, the Mexican securities market has been less liquid and
more volatile than other markets. To control excess price volatility, the
Mexican Stock Exchange operates a system that suspends dealing in shares of a
particular issuer when changes in the price of such shares (expressed as a
percentage of that day's opening price) exceed certain levels. This system is
not expected to apply to the CPOs so long as the ADSs are listed on the New York
Stock Exchange or another foreign market.
Preemptive rights may be unavailable to ADS holders.
Under Mexican law, whenever the Company issues new shares for cash, the
Company generally must grant preemptive rights to the Company's shareholders,
giving them the right to purchase a sufficient number of shares to
10
maintain their existing ownership percentage. The Company may not be able to
offer shares to U.S. holders of ADSs pursuant to preemptive rights granted to
the Company's shareholders in connection with any future issuance of shares
unless:
.. a registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), is effective with respect to such rights and shares; or
.. an exemption from the registration requirements of the Securities Act is
available.
The Company intends to evaluate at the time of any rights offering the
costs and potential liabilities associated with a registration statement to
enable U.S. holders of ADSs to exercise their preemptive rights, the indirect
benefits of enabling U.S. holders of ADSs to exercise preemptive rights and any
other factors that the Company considers appropriate at the time. The Company
will then decide whether to file such a registration statement.
The Company cannot assure you that a registration statement would be
filed. In addition, although the depositary for the ADSs is permitted, if at the
time it is both lawful and feasible, to sell preemptive rights and distribute
the proceeds of the sale to holders of ADSs who are entitled to the proceeds,
sales of preemptive rights are not lawful in Mexico at this time. As a result,
U.S. holders of ADSs may not be able to exercise their preemptive rights in
connection with future issuances of the Company's shares. In this event, the
interest of holders of ADSs in the total equity of the Company would decrease in
proportion to the size of the issuance. Depending on the price at which shares
are offered, such an issuance could result in dilution to holders of ADSs.
RISKS RELATED TO THE AZTECA HOLDINGS NOTES AND THE TV AZTECA NOTES
Azteca Holdings may not have sufficient funds to make the principal, interest
and amortization payments on the Azteca Holdings Notes.
Azteca Holdings, the Company's majority shareholder, will need to obtain
sufficient funds to make the following payments: (i) the interest, amortization
and principal payments on the Azteca Holdings 10 3/4% Senior Secured Amortizing
Notes due 2008 (the "Azteca Holdings 10 3/4% Notes"); (ii) the interest and
principal payments on the Azteca Holdings 12 1/2% Senior Secured Notes due 2005
(the "Azteca Holdings 12 1/2% Notes") and (iii) the final interest and principal
payments on the Azteca Holdings 10 1/2% Senior Secured Notes due 2003 (the
"Azteca Holdings 10 1/2% Notes" together with the Azteca Holdings 10 3/4% Notes
and the Azteca Holdings 12 1/2% Notes, the "Azteca Holdings Notes"). If Azteca
Holdings is unsuccessful in obtaining the necessary funds, Azteca Holdings'
failure to make any or all of these payments would result in a default under
each of the indentures governing the Azteca Holdings Notes.
If the holders of the Azteca Holdings Notes pursue an enforcement action
against the TV Azteca shares held by Azteca Holdings which results in Azteca
Holdings beneficially owning less than 51% of the total voting stock of the
Company, then a change of control will be deemed to have occurred under the TV
Azteca Indenture, which would obligate the Company to make an offer to purchase
all of the outstanding TV Azteca Notes. See "--The Company may not be able to
fund a change of control offer."
The Company may not be able to fund a change of control offer.
Upon the occurrence of a change of control (as defined under the TV Azteca
Indenture), the Company will be required to offer to repurchase all outstanding
TV Azteca Notes at 101% of the principal amount of the TV Azteca Notes, plus
accrued but unpaid interest, if any, to the date of the purchase. A change of
control also may constitute a default under the Company's existing or future
indebtedness or the Company's subsidiaries' existing or future indebtedness,
which could result in such indebtedness effectively becoming due and payable.
The source of funds for any repurchase of the TV Azteca Notes and any such other
payments will be the Company's available cash or cash generated from other
sources. However, the Company cannot assure you that it will have sufficient
funds to purchase all of the TV Azteca Notes that might be delivered by
noteholders seeking to accept the offer to purchase as well as all such other
amounts that may be due and payable at that time.
11
Mexican regulations would adversely affect the rights and interests of
noteholders if the Company were subject to a bankruptcy proceeding (concurso
mercantil).
Under Mexico's Ley de Concursos Mercantiles ("Law on Mercantile
Reorganization"), if the Company is declared bankrupt, its obligations under the
TV Azteca Notes:
.. would be converted into pesos and then from pesos into inflation-adjusted
units (Unidades de Inversion);
.. would be satisfied at the time claims of all the Company's creditors are
satisfied;
.. would be subject to the outcome of, and priorities recognized in, the
relevant proceedings;
.. would cease to accrue interest; and
.. would not be adjusted to take into account any depreciation of the peso
against the dollar occurring after such declaration.
The Company may have to make payments due on the TV Azteca Notes in pesos in
certain circumstances.
Although the Company is required to make payments of amounts owed on the
TV Azteca Notes in U.S. dollars, pursuant to the Ley Monetaria de los Estados
Unidos Mexicanos ("Mexican Monetary Law") the Company is legally entitled to pay
in pesos if payment of the TV Azteca Notes is sought in Mexico (through the
enforcement of a non-Mexican judgment or otherwise). Such payment would be made
at the rate of exchange for pesos prevailing at the time and place of payment.
In the event that the Company makes payments in pesos, the Company cannot assure
you that you could convert the amounts paid in pesos into U.S. dollars or that
the peso amounts would be sufficient to purchase U.S. dollars equal to the
amount of principal, interest or additional amounts due on the TV Azteca Notes.
However, the Company has agreed under the TV Azteca Indenture to indemnify the
holder of any TV Azteca Notes for the difference between the U.S. dollar amount
due to the holder and the U.S. dollar amount that the holder is able to purchase
with the amount in pesos that the holder receives or recovers.
RISKS RELATED TO THE AZTECA AMERICA NETWORK
The Azteca America Network's limited history of operations as a U.S. Spanish
language television network makes an evaluation of its business and financial
condition difficult.
The Company's operations in the U.S. commenced only recently and to date
have not generated significant revenue. The growth of the Azteca America
Network, a new Spanish-language television broadcast network in the U.S.
operated by Azteca International, depends on the appeal of the Company's
programming and content to U.S. television audiences and Azteca International's
ability to establish relationships with broadcast stations or cable networks in
U.S. markets that have a substantial Hispanic population. Azteca International's
ability to establish such relationships will be affected by several factors,
including the willingness of prospective affiliates to broadcast the Company's
programming, the availability of channels on cable systems to include the
Company's programming, the ability of Azteca International's affiliates to fund
their operations and capital expenditures and the willingness of Azteca
International's competitors to offer their programming on terms with which
Azteca International is unable to compete.
The television broadcasting industry in the U.S. is subject to extensive
governmental regulation, which may adversely affect Azteca International's
business. Among other things, these regulations limit the percentage of a U.S.
broadcast station that may be owned by a foreign-controlled corporation, such as
Azteca International, to 25%.
Further, the Azteca America Network faces significant competition in the
U.S. Spanish-language television broadcast market from both Univision
Communications, Inc. ("Univision") and Telemundo Group, Inc. ("Telemundo"),
which is owned by NBC. Each of these competitors has a larger network of
affiliates and greater financial resources than Azteca International, and
together they presently have substantially all of the U.S. audience share for
Spanish-language television.
12
Azteca International is subject to risks associated with its joint ventures
with station affiliates.
Azteca International's future growth strategy focuses upon entering into
station affiliation agreements with existing over-the-air television
broadcasting stations that could complement or expand its business. The
negotiation of additional station affiliation agreements, as well as the
integration of new stations into the Azteca America Network, could require the
stations to incur significant costs and cause diversion of management's time and
resources. Failure to achieve the anticipated benefits of any station
affiliation or to successfully integrate the operations of new station
affiliates could also adversely affect Azteca International's business and
results of operations.
If Azteca International is unable to renew its station affiliation agreements
upon termination or enter into new station affiliation agreements, revenues
from the markets served by such stations may be significantly diminished.
The various station affiliation agreements Azteca International has
entered into either terminate or are terminable after a defined period of time.
If Azteca International is unable to agree upon new terms of continuing
affiliation with a station operator or find a comparable affiliate in the
designated market area served by that station, the revenues generated by the
Azteca America Network in that market may be significantly diminished. Moreover,
if the Echostar Satellite Corporation ("Echostar") lawsuit is adversely
determined against the Company, this could have an adverse effect on the ability
of the Company to provide Azteca International's station affiliates and cable
operators with programming that is also broadcast on the Azteca 13 network (the
"Azteca 13 Programming"). See "Item 10. Additional Information--Legal
Proceedings--TV Azteca--Echostar." This in turn could impact the business and
operations of Azteca International and the station affiliates currently
comprising the Azteca America Network as well as reduce the interest of other
broadcast stations in becoming a part of the Azteca America Network. In certain
circumstances, if Echostar obtains an injunction barring Azteca International
from distributing Azteca 13 Programming to over-the-air broadcasters that
retransmit it to U.S. cable operators, then, subject to certain conditions,
certain of Azteca International's station affiliates would have the right to
cancel their station affiliation agreements. Although Echostar is continuing to
seek a permanent injunction against the Company, the Court denied Echostar's
application for a preliminary injunction on April 3, 2003.
Azteca International's inability to sell advertising time on its network will
adversely affect its revenues and its business.
Azteca International's business depends on its and its station affiliates'
ability to sell advertising time. Azteca International's ability to sell
advertising time will depend, in large part, on audience ratings and on the
overall level of demand for television advertising. A downturn in the U.S.
economy could reduce the overall demand for advertising, and therefore adversely
affect Azteca International's ability to generate advertising revenues. A
decline in audience ratings (as a result of competition, a lack of popular
programming or changes in viewer preferences) would also adversely affect Azteca
International's revenues, as advertising revenues depend on audience ratings.
Also, significant audience ratings for a new television network can take longer
to develop as there are multiple viewing options, both in the English and
Spanish language, that U.S. Hispanics are familiar with. Moreover, even if the
broadcaster has accomplished significant audience levels, such levels could take
longer to be reflected in its ratings when measured using certain rating
measurement methodologies that rely on top-of-mind surveys. In addition, because
Azteca International is focusing its business on the Spanish-language television
audience, its level of audience will depend upon:
.. the desire of Spanish-speaking persons in the U.S. to view
Spanish-language programming; and
.. the growth of the Spanish-speaking audience by continued immigration and
the continued use of Spanish among Hispanics in the U.S.
Should either of these factors change, the Azteca America Network could lose
part of its target audience, resulting in a decline in ratings and a loss of
advertising revenues.
Azteca International's ability to sell advertising time will also depend
on the level of demand for television advertising. Historically, the advertising
industry, relative to other industries, has been particularly sensitive to the
general condition of the economy. As a result, Azteca International believes
that spending on advertising tends to decline disproportionately during an
economic recession or downturn as compared to other types of business spending.
13
Consequently, a recession or downturn in the U.S. economy would likely
materially adversely affect the advertising revenues and results of operations
of the Azteca America Network and in turn Azteca International.
Because the U.S. Hispanic population is highly concentrated geographically, a
regional downturn in economic conditions or other negative event in
particular markets could have a material adverse effect on the operations of
the Azteca America Network.
Approximately 33% of all U.S. Hispanics live in the Los Angeles, New York
and Miami-Fort Lauderdale markets, and the top 10 U.S. Hispanic markets
collectively provide coverage to approximately 56% of the U.S. Hispanic
population. The revenues of Azteca International are similarly concentrated in
these key television markets. As a result, a significant decline in the revenue
from the operations of the stations in these television markets, whether due to
a regional economic downturn, increased competition or otherwise, could have a
material adverse effect on the financial performance of the Azteca America
Network.
RISKS RELATED TO UNEFON
Unefon faces intense competition from an increasing number of strong
competitors that could result in an increase in subscriber churn and a
decrease in profit margins.
Unefon has a number of competitors and it expects competition in the
Mexican mobile telecommunications industry to intensify in the future as a
result of new market entrants, consolidation in the industry, the growth of
current operators and new technologies, products and services. Some of these
competitors have greater financial or technological resources and coverage areas
than Unefon.
In addition, Grupo Elektra, the Company's affiliate and Unefon's primary
distribution channel, has begun marketing and selling mobile telecommunications
services of Telcel and Telefonica in its stores. Unefon believes that this
recent development could have a negative impact on future sales through this
distribution channel. Unefon's competitors have established relationships with
third parties that have access to personnel, capital, equipment and other
resources that may not be available to Unefon. These resources provide Unefon's
competitors with advantages that could negatively affect Unefon's business. New
competitors or alliances among competitors could rapidly acquire significant
market share. Unefon cannot be sure that it will be able to develop similar
relationships or successfully compete against such competitors.
The coverage of Unefon's cellular network is limited to urban areas, while
its largest competitor provides national coverage for its subscriber base.
Unefon's business strategy is to develop a significant subscriber base
among the upper-lower and middle income subscribers residing in Mexico's largest
cities. As a result, the breadth of Unefon's network is limited to areas with
dense population. If a Unefon subscriber travels outside of the urban areas in
which Unefon's network has been established, the subscriber will lose his or her
connection to the Unefon network. Alternatively, Telcel has developed a national
cellular network that offers service in many areas where Unefon's coverage is
not available. The lack of national coverage may have an adverse effect on
Unefon's ability to attract and retain subscribers which in turn could adversely
affect Unefon's business and result of operations.
Unefon may face unforeseen difficulties in the expansion of the capacity and
coverage of its network.
Unefon's ability to expand the capacity and coverage of its network is
dependent upon a number of factors, many of which are beyond its control. These
factors include, but are not limited to:
.. the ability to obtain and maintain financing for capital expenditures on
acceptable terms;
.. the ability to obtain and maintain the necessary concessions, licenses,
registrations, permits or authorizations for operation and expansion of
its network and its ability to comply with other regulatory requirements;
14
.. the ability to obtain compatible telecommunications equipment when needed;
.. identifying new tower locations and switch sites for its network;
.. the ability to secure space and rights of way for its telecommunications
equipment in municipalities and delays in the construction of additional
towers and switch sites;
.. unexpected results of operations or strategies in its target markets; and
.. technological and competitive developments, including additional market
developments and new opportunities.
In addition, Unefon may not be able to respond quickly, or at all, to new
or unexpected capital requirements, which could impede Unefon's business and
development. Some of the factors that would cause significant unanticipated
capital needs are regulatory changes, engineering design changes, new
technologies, currency fluctuations and significant departures from Unefon's
business plan.
Unefon's ability to generate revenues depends on its ability to attract and
retain its prepaid subscribers, and without long-term service contracts
Unefon's future revenues are unpredictable.
Unefon's ability to generate revenues depends on its ability to attract
and retain subscribers, which in turn depends on Unefon's ability to maintain
the competitiveness of its prices and to increase the number of subscribers
within its target markets and the quality of its services. In addition, the
development of Unefon's business will depend on a number of factors over which
Unefon has limited or no control, including, but not limited to:
.. changes in pricing policies by its competitors;
.. the introduction of new services and enhanced voice quality by its
competitors;
.. developments or changes in the regulatory framework for the Mexican
telecommunications industry;
.. the growth of the Mexican mobile telecommunications market; and
.. general economic conditions prevailing in Mexico.
In addition, future revenues from Unefon's prepaid subscribers are
unpredictable. Since Unefon does not have contract-based subscribers who provide
payments over the lifetime of a contract, Unefon cannot provide assurances that
its current subscribers will continue to use Unefon's services in the future. As
of December 31, 2002, Unefon had approximately 1.4 million subscribers,
approximately 85% of which use Unefon's network and generate revenue on a
regular basis. The loss of a larger number of subscribers than anticipated could
result in a loss of a significant amount of expected revenues. Since Unefon
incurs capital expenditures based on its expectations of future revenues,
Unefon's failure to accurately predict revenues could negatively affect its
results of operations.
RISKS RELATED TO DOING BUSINESS IN MEXICO
If the peso devalues in the future against the U.S. dollar, it will be more
difficult for the Company to repay debt.
Declines in the value of the peso relative to the U.S. dollar increase the
interest costs in pesos of the Company's non-peso-denominated indebtedness and
increase the cost in pesos of the Company's other dollar- denominated
expenditures. A significant portion of the Company's operating costs and other
expenditures are dollar-denominated. These costs include the fees the Company
pays for the exhibition rights for purchased programming, for the leasing of
satellite transponders and for purchases of capital equipment. As of December
31, 2002, all of the Company's indebtedness was denominated in U.S. dollars.
Since substantially all of the Company's revenue is denominated in pesos, the
increased costs are not offset by any exchange-related increase in revenue.
15
The value of the peso has been subject to significant fluctuations with
respect to the U.S. dollar in the past and may be subject to significant
fluctuations in the future. For example, in 1994, the value of the peso declined
60.8% against the U.S. dollar. Between January 1, 1995 and December 31, 1996,
the Mexican peso depreciated an additional 57.6% against the U.S. dollar. The
significant devaluation of the peso caused the Company's financial results to
suffer. Between May 2, 2002 and May 2, 2003, the Mexican peso depreciated 7.7%%
against the U.S. dollar, and depreciated a further 0.5% in the month of May
2003. The Company cannot assure you that the peso will not depreciate in value
relative to the U.S. dollar in the future. Any future devaluations of the peso
could adversely affect the Company's assets, liquidity and results of
operations.
The Company's financial results are dependent on the Mexican economy.
Declines in growth, high rates of inflation and high interest rates in
Mexico have a generally adverse effect on the Company's business. The slower the
growth of the Mexican economy, the slower the growth of advertising spending. In
the event that inflation in Mexico returns to high levels while economic growth
slows, the Company's' results of operations, its financial condition and the
market price of its securities will all be affected. In addition, high interest
rates and economic instability could increase the Company's costs of financing
or make it difficult for the Company to refinance its existing indebtedness.
Fluctuations in the U.S. economy or the global economy in general may
adversely affect Mexico's economy and the Company's business.
Mexico's economy is vulnerable to market downturns and economic slowdowns
in the U.S. and elsewhere in the world. The recent slowdown in the growth of the
U.S. economy, exacerbated by the September 11 terrorist attacks, has negatively
affected Mexican businesses and limited access to capital for many Mexican
companies. Moreover, the Company is unable to predict the implications of the
war against Iraq on the level of Mexican consumer confidence, and in turn on the
general level of advertising spending in Mexico. In addition, as has happened in
the past, financial problems or an increase in the perceived risks associated
with investing in emerging economies could limit foreign investment in Mexico
and adversely affect the Mexican economy. For example, in October 1997, prices
of Mexican debt securities and equity securities decreased substantially
following a sharp decline in Asian securities markets, and in the second half of
1998, prices of Mexican securities were negatively impacted by economic crises
in Russia and Brazil. The recent fiscal crises in Argentina and Venezuela have
caused instability in Latin American financial markets and could have a negative
impact on the price of Mexican debt and equity securities. Future economic
problems in the U.S. or globally could severely limit the Company's access to
capital and could adversely affect its business.
The Mexican government exercises significant influence over the economy.
The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Economic plans of the Mexican
government in the past often have not fully achieved their objectives, and the
Company cannot assure you that current and future economic plans of the Mexican
government will achieve their stated goals. Similarly, the Company cannot
determine what effect these plans or their implementation will have on the
Mexican economy or on the Company's businesses. Future Mexican governmental
actions could have a significant effect on Mexican companies, including the
Company, and market conditions.
Fluctuations in interest rates and inflation may adversely affect the
Company's business.
In Mexico, inflation has been high in recent years compared to more
developed economies. Any negative fluctuation in interest rates might have an
adverse effect on the Company because the amount of interest may increase with
regard to its present liabilities and indebtedness or other liabilities and
indebtedness incurred in the future. Annual inflation was 8.9%, 4.4% and 5.7%
for the years ended December 31, 2000, 2001 and 2002, respectively. Any
significant increase in the inflation rate in Mexico could adversely affect the
Company's financial condition and results of operations as inflation can
adversely affect consumer purchasing power, which affects the ability of the
Company's advertisers to purchase advertising time on its networks.
The political situation in Mexico could negatively affect the Company's
operating results.
16
Mexico has experienced political changes in recent years. This instability
affects Mexico's business and investment climate. As a Mexican company with
substantially all of its assets and operations in Mexico, the political
environment in Mexico has a significant impact on the Company's financial
condition and results of operations.
If the Mexican government imposes exchange controls and restrictions, the
Company may not be able to service its debt 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 persons or entities to
convert pesos into U.S. dollars, it has done so in the past (most recently in
1982) and could do so again in the future. The Company 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 access to U.S. dollars and limit the Company's ability to pay dividends
on the ADSs and service the Company's U.S. dollar-denominated debt. Moreover,
the Company cannot predict what impact a restrictive exchange control policy
would have on the Mexican economy generally.
The Company's financial statements do not give you the same information as
financial statements prepared under U.S. accounting principles and the
Company publishes U.S. GAAP financial information less frequently than U.S.
companies.
The Company prepares its financial statements in accordance with Mexican
GAAP. These principles differ in significant respects from U.S. GAAP. See "Item
5. Operating and Financial Review and Prospects--U.S. GAAP Reconciliation" and
Note 17 to the Consolidated Financial Statements for a description of the
principal differences between Mexican GAAP and U.S. GAAP as they relate to the
Company. The Company cannot assure you that these will be the only differences
in the future. In addition, the Company generally only prepares U.S. GAAP
information on a yearly basis. As a result, there may be less or different
publicly available information about the Company than there is about U.S.
issuers.
ITEM 4. INFORMATION ON THE COMPANY
GENERAL
The Company is a corporation (sociedad anonima de capital variable)
organized under the laws of Mexico. The Company's deed of incorporation was
executed on June 2, 1993 and the Company was registered in the Public Registry
of Commerce in Mexico City on July 13, 1993 under the number 167346. The term of
the Company is 99 years beginning on the date that the Company's deed of
incorporation was executed. The Company's principal executive offices are
located at Av. Periferico Sur 4121, Col. Fuentes del Pedregal, Mexico D.F.
14141. The Company's telephone number at that location is 011-5255-3099-1313.
The Company's Internet address is www.tvazteca.com.mx.
The Company is one of the largest producers of Spanish-language television
programming in the world and is the second largest television broadcasting
company in Mexico based on audience and market share. Azteca Holdings
beneficially owns 55.0% of the outstanding stock of the Company. The Company has
five principal wholly-owned subsidiaries comprised of one Delaware corporation,
Azteca International, and four Mexican corporations: Television Azteca, S.A. de
C.V. ("Television Azteca"), Azteca Digital, S.A. de C.V. ("Azteca Digital"),
Grupo TV Azteca, S.A. de C.V. ("Grupo TV Azteca") and Red Azteca Internacional,
S.A. de C.V. ("Red Azteca"). Azteca International is a U.S. company that
operates the Azteca America Network, a Spanish-language television broadcasting
network focused on the rapidly growing U.S. Hispanic market. Television Azteca
and Azteca Digital own and operate all of the Company's broadcast assets,
including the licenses to operate television transmitters, the Company's
transmission equipment and the Company's headquarters and production studios in
Mexico City. The majority of payments for advertising on the Azteca 13 network
are made through Grupo TV Azteca. The majority of payments for advertising on
the Azteca 7 network are made through Red Azteca.
In addition to its television broadcast operations, the Company owns:
.. a 46.5% interest in Unefon, a Mexican mobile and fixed wireless
telecommunications company; and
17
.. a 50% interest in Todito, a Mexican company that operates a
Spanish-language Internet portal, Internet connection service and
e-commerce marketplace.
RECENT DEVELOPMENTS
DISTRIBUTION POLICY/DEBT REDUCTION STRATEGY
On February 6, 2003, the Company announced that its board of directors had
approved a six-year debt reduction plan pursuant to which the Company intends to
use the free cash generated from its operations to reduce its outstanding
indebtedness, which was US$592.4 million as of December 31, 2002. The Company
also announced the board of directors' intention to make scheduled distributions
of approximately US$500.0 million to its shareholders over the next six years.
On April 30, 2003, the Company's shareholders approved distributions to
shareholders for an aggregate of US$140.0 million to be paid during 2003. A
distribution of US$125.0 million is scheduled to be made on June 30, 2003 and
another distribution of US$15.0 million is scheduled to be made on December 5,
2003.
NORTEL SETTLEMENT
On June 16, 2003, Unefon reached a settlement with Nortel pursuant to
which Unefon and Nortel released each other from all obligations arising out of
the procurement agreement, finance agreement or any related agreements and
terminated all actions and proceedings of any kind between the parties or
involving the parties and their counsel, in the U.S. and Mexico. Unefon and
Nortel also terminated the procurement agreement and entered into a new supply
agreement. In connection with the settlement, Unefon paid an aggregate of
US$43.0 million to Nortel to be applied to accounts receivable and to a
reduction in the total amount of debt owed by Unefon to Nortel to US$325.0
million. Concurrently with the settlement, Codisco Investments LLC ("Codisco")
purchased the US$325.0 million debt of Unefon from Nortel. Unefon has announced
that the term of this debt between Unefon and Codisco is to be amended to
provide for, among other things, an extension of the maturity date until June
15, 2013. See "--Other Operations--Unefon--Nortel Settlement."
MEXICAN TELEVISION INDUSTRY
The television industry in Mexico began in the early 1950s when the
Mexican government granted licenses for the operation of three very high
frequency ("VHF") television stations in Mexico City. Since then, the Mexican
government has granted licenses for one ultra high frequency ("UHF") station and
four additional VHF stations in Mexico City, including the Company's Channels 7
and 13, and numerous other licenses for the operation of stations in localities
throughout Mexico. See "--Regulation--TV Azteca--Concessions."
According to Mexican government estimates, as of December 31, 2000, the
metropolitan area of Mexico City had a population of over 18 million persons and
nearly 4 million television households, representing approximately 18% of
Mexico's population of approximately 97 million and approximately 18% of the 22
million Mexican television households. As a result, the television stations
broadcasting in Mexico City have historically dominated the industry and have
acted as the anchor stations for networks of stations located outside Mexico
City by providing these stations with all or a substantial portion of their
programming.
Currently, there are seven VHF television stations in Mexico City, six of
which are privately-owned and one of which is government-owned. There are a
large number of television stations elsewhere in Mexico, most of which solely
retransmit programming originated by one of the Mexico City stations. The
Company owns and operates two VHF television stations in Mexico City, Channels 7
and 13, which rebroadcast their signals throughout Mexico under licenses held by
the Company. See "--The Company's Mexican Television Networks." An investor
group led by Ricardo B. Salinas Pliego, Chairman of the Board of the Company,
paid the Mexican government the peso equivalent of approximately US$642.7
million at the time of privatization for Channels 7 and 13 and certain other
assets. In conjunction with a Mexican government sponsored program, in 1999, the
Company began retransmitting programming from Azteca 13 over a digital
television channel in Mexico City, Channel 53, on an experimental basis. The
Company has submitted an application to renew its authorization to transmit
programming on Channel 53, which authorization would otherwise have expired in
February 2002. The Company has permission to continue to transmit programming on
Channel 53 while its renewal is being reviewed.
18
The Company's principal competitor, Televisa, owns and operates four VHF
television stations in Mexico City, Channels 2, 4, 5 and 9. See "--Competition."
The signals from Channels 2 and 5 are rebroadcast throughout Mexico pursuant to
licenses owned by Televisa or its affiliates. Based on information published by
Televisa in 2001, Televisa's Channels 2 and 5 cover 98% and 90%, respectively,
of Mexican television households. Although Channels 4 and 9 broadcast
programming that reaches many of the largest cities in Mexico, neither channel
has full national coverage. Channel 4's coverage is primarily limited to the
Mexico City metropolitan area and, according to Televisa, Channel 9 covers 73%
of Mexican television households. The Mexican government owns one VHF station
and one UHF station in Mexico City, Channels 11 and 22, respectively, as well as
numerous stations outside Mexico City.
Due to technical limitations, there is currently no capacity in Mexico
City on the VHF spectrum (Channels 2 through 13) for additional television
channels. In addition to Channel 22, there are a number of stations that
broadcast on the UHF spectrum (Channels 14 through 69), including certain
stations owned by Televisa that broadcast encoded signals for their pay
television channels.
THE COMPANY'S MEXICAN TELEVISION NETWORKS
The Company currently owns and operates two national television networks
in Mexico, Azteca 7 and Azteca 13. These networks are comprised of 315
television stations located throughout Mexico that broadcast programming at
least 23.5 hours a day, seven days a week. Two hundred seventy-one of the
network's stations are repeater stations that solely rebroadcast programming and
advertisements received from the Mexico City anchor stations. The remaining 44
network stations broadcast local programming and advertisements in addition to
the programming and advertisements supplied by the anchor stations.
Azteca 7 Network.
The Azteca 7 network primarily targets middle and upper income adults
between the ages of 18 and 44. In 2002, the Company produced 47.2% of the Azteca
7 network's weekday prime-time programming hours and 23.3% of its total
programming hours. The network's programming consists primarily of news
programs, game shows, sports broadcasts and major feature films. As of December
31, 2002, the Azteca 7 network reached 95% of all Mexican television households.
Azteca 13 Network
The Azteca 13 network primarily targets middle income family viewers of
all ages. In 2002, the Company produced 99.8% of the Azteca 13 network's weekday
prime-time programming hours and 72.4% of its total programming hours. The
network's programming consists primarily of telenovelas, reality programs, news
programs, talk shows, musical variety programs and sports broadcasts,
principally soccer.
Telenovelas are the most popular programming genre in Mexico and are a key
factor in attracting the network's target audience. In 2002, the Company
produced seven telenovelas, two of which were among the top five highest rated,
regularly scheduled, prime-time programs on the Azteca 13 network. As of
December 31, 2002, the Azteca 13 network reached 97% of all Mexican television
households.
Local Stations
Forty-four of the Company's television stations broadcast local
programming and advertisements in addition to programming and advertisements
provided by the anchor stations. As of December 31, 2002, the Company had
entered into contracts with local business partners with respect to 24 of its
local stations under which the local partners may sell advertising time on these
stations to local advertisers. In each case, the local partners are required to
provide their own office facilities and to purchase the necessary equipment to
block the national signal and insert a local signal. The Company controls the
time periods during which the national signals may be blocked and also restricts
the sale of local air time to its national advertisers. The Company permits
insertion of local advertising only during periods when the Company has
scheduled local advertisements on its Mexico City anchor stations. During those
periods, the Company
19
broadcasts a separate advertisement on its repeater stations. The Company
operates the remaining 20 local stations without local partners.
In addition to the insertion of local advertisements, some of the
Company's local stations broadcast programs that are produced and financed by
local partners. Locally-produced programs include news programs, game shows,
sports events and other entertainment programs. In 2000, 2001 and 2002, the
Company's local television stations produced approximately 2%, 3%, and 2%,
respectively, of the local programming broadcast on those stations.
Transmission Technology and Quality Control
Although the stations of the Azteca 7 and 13 networks broadcasting in the
same locality require separate licenses, transmitters and satellite receivers
for the rebroadcast of their signals, they generally utilize the same broadcast
facilities (buildings and transmission towers). Since 1993, the Company has
invested approximately Ps.781 million in transmitters in order to improve signal
quality and expand the broadcast coverage of its two television networks. The
Company has also relocated some transmitters in order to improve broadcast
signal quality and has invested in the improvement of its equipment maintenance
programs. The Company intends to invest in additional transmitters, receivers
and other equipment in order to improve the quality of the broadcast signals of
its networks in certain areas and to increase their overall coverage of Mexican
television households.
In December 1999, the Company began implementing digital satellite
technology for the transmission of its signals. The digital technology
compresses and encodes the signal, which improves the image and audio quality
and prevents the unauthorized use of the Company's signals. The digital system
requires the capacity of only one transponder for the Company's satellite
transmissions, rather than two transponders as required by the analog system
previously used by the Company. With this technology, the Company can send seven
different broadcast signals to its Mexican and international affiliates. This
technology also allows the Company to tailor its programming and advertising to
the local markets in which it broadcasts. The Company began operating its
digital system in February 2000. See "--Property--Broadcasting, Production and
Office Facilities--Satellites."
In October 1999, the Company received an ISO-9002 certification in
connection with its operation of its television broadcast networks. The Company
was the first broadcast network in Mexico to receive this certification. In
December 1999, the Company implemented its Continuity and Traffic Management
quality system in order to minimize breaks in the signal and to assure the
quality of the Company's broadcast signals. In March 2001, Bureau Veritas
Quality International certified that the Continuity and Traffic Management
quality control system implemented by the Company qualifies under ISO-9002. In
November 2001, the Company's accounting department received an ISO-9001
certification. Most recently, in January 2003, the Company's finance and
administration department received an ISO-9001 certification.
PROGRAMMING
The Company is one of the largest producers of Spanish-language
programming in the world. The Company believes that its ability to provide a
diverse mix of quality programming has been, and will continue to be, one of the
primary factors in maintaining and increasing its overall ratings and share of
the Mexican television audience. The Company focuses on producing and acquiring
programming that appeals to the different target audiences of its Azteca 7 and
13 networks. The Company also believes that developing separate identities for
its networks has helped the Company capture an increasing share of the Mexican
television audience and has provided its advertisers with the opportunity to
tailor their advertisements to specific demographic groups.
In order to maintain the high quality of its programming, the Company
convenes focus groups and conducts surveys to evaluate the prospective
popularity of new programming ideas. The Company also uses portions of its
unsold advertising time to market aggressively both its internally produced
programming and purchased programming in order to create and sustain viewer
interest.
20
Programming Produced by the Company
The Company produces a variety of programs, including telenovelas, reality
programs, news programs, sports broadcasts, musical programs, game shows and
talk and variety shows. In 2001 and 2002, the Company produced approximately 71%
and 72%, respectively, of the weekday, prime-time programming hours aired on its
networks (excluding programming produced by its local stations), including each
of its networks' 10 most highly rated, regularly scheduled weekday programs
shown during prime-time in both 2001 and 2002.
The Company's internally produced programming is more expensive on average
to produce than its purchased programming. The Company seeks to offset its
production costs by selling its internally produced programming outside Mexico.
In 2000, 2001 and 2002, the Company sold approximately 17,228, 17,766 and 20,407
hours (including sales to Echostar), respectively, of internally produced
programming, generating sales of Ps.132 million (nominal), Ps.110 million
(nominal) and Ps.133 million (nominal) (US$12.8 million) (nominal),
respectively.
Since 1996, the Company has produced telenovelas, historically the most
popular programming genre in Mexico and throughout Latin America. Telenovelas
are similar to U.S. soap operas in content, but, unlike U.S. soap operas, they
are generally aired for only six to twelve months. Since 1996, the Company has
invested approximately Ps.178 million (US$17.1 million) in production equipment
devoted primarily to the production of telenovelas. The Company produced nine
telenovelas in 2000, which represented 1,010 hours of programming, seven
telenovelas in 2001, which represented 1,000 hours of programming and seven
telenovelas in 2002, which represented 969 hours of programming. Two of the
telenovelas the Company produced in 2002 were among the Company's 10 highest
rated, regularly scheduled, prime-time programs.
In 2002, the Company launched its first reality program, La Academia, a
"musical reality" television show. This television show featured Mexican
contestants who are trained by a professional team of "star-makers" and, based
on their performance, eliminated one-by-one by the audience. During the show's
run, live concerts were aired every Sunday. The final concert, which aired on
December 1, 2002, marking the conclusion of La Academia's "first generation"
obtained a 68% share of the commercial audience for its time slot. Immediately
following the end of the first season of La Academia, the Company commenced
airing the "second generation" of La Academia with new contestants.
The Company's news programming includes nightly prime-time news programs
geared towards the target audiences of its television networks. The Hechos del
Siete news program, broadcast on the Azteca 7 network, features a fast paced
synopsis of the domestic and international news in a format that is attractive
to its young adult viewers. The Azteca 7 network also broadcasts an interview
program that questions leading politicians, businesspersons and journalists on
issues affecting Mexico. The Hechos news program, broadcast on the Azteca 13
network, presents a more in-depth analysis of daily domestic and international
news.
The Company's internally produced sports programming consists principally
of broadcasts of games of the 20-team First Division of Mexican professional
soccer, as well as sports commentary and highlight shows. Soccer is the most
popular sport in Mexico, and the broadcasts of First Division games generate
ratings at a level comparable to the Company's most highly rated programming.
For the summer and winter 2000 seasons and the summer 2001 season, the Company
had the broadcast rights to the home games of eight First Division teams,
including Club Atletico Morelia, which is owned by the Company. For the winter
2001 and summer 2002 seasons, the Company had the broadcast rights to the home
games of seven First Division teams, including Club Atletico Morelia. For the
winter 2002 season, the Company has the broadcast rights to the home games of
eight First Division teams, including Club Atletico Morelia.
Purchased Programming
The Company also obtains programming from approximately 178 different
distributors. The Company obtains a substantial portion of its purchased
programming from a small number of suppliers, including MGM, Paramount, Sony,
Twentieth Century Fox International, Universal Studios and Warner Bros. The
Company's purchased programming includes primarily cartoons and movies.
Non-Spanish-language programs purchased for the Company's networks are dubbed
into Spanish prior to delivery to the Company. The Company pays the distributor
an additional fee for this
21
service. Purchased programming constituted approximately 29% and 28% of the
weekday, combined prime-time programming hours broadcast on the Company's two
networks in 2001 and 2002, respectively.
Purchased programming is licensed from distributors under separately
negotiated agreements, the terms of which vary. In October 2001, the Company
entered into an exclusive three year license agreement with Buena Vista
International, Inc., an affiliate of The Walt Disney Company. See "--Strategic
Alliances--Buena Vista Agreement." The agreement covers the licensing and
broadcast on the Azteca 7 and 13 networks of certain first-run movies,
mini-series and special events, such as the Academy Awards.
The Company also enters into agreements to broadcast sports programming,
including the Olympic Games, the World Cup, National Basketball Association
("NBA") games, National Football League ("NFL") games, Championship Auto Racing
Teams events and golf tournaments. The Company usually uses its own commentators
for broadcasts of international sports events.
Both the Company and Televisa obtained broadcast rights to the 1998 World
Cup and the 2000 Summer Olympics through the Organization of Spanish American
Television (Organizacion de Television Iberoamericana) ("OTI"), a Latin American
cooperative organization that bids for broadcast rights to international sports
and cultural events. OTI has obtained the broadcast rights to the 2004 and 2008
Summer Olympic Games. Both the Company and Televisa have Mexican broadcast
rights to the 2004 and 2008 Summer Olympics. DirecTV Latin America has obtained
the Mexican broadcast rights to the 2006 World Cup. In February 2002, the
Company entered into an agreement with an affiliate of DirecTV Latin America
which gave the Company the right to broadcast 18 of the 2002 World Cup games,
including all of Mexico's first round games, the semifinals, third place play
off and the final.
The Company has had the exclusive right to broadcast NBA games in Mexico
since 1993. In August 1995, the Company entered into an agreement with NBA
Entertainment, Inc. This agreement, which has since been extended, gave the
Company the exclusive right to broadcast NBA games in Mexico through the end of
the 2002-2003 season. The Company also has a right of first refusal to renew its
exclusive exhibition rights for the 2003-2004 season. See "--Strategic
Alliances--NBA Agreement." The Company also has the right to broadcast NFL games
through the 2003-2004 season and is in the process of renegotiating an exclusive
right to broadcast Championship Auto Racing Teams races.
22
AUDIENCE AND RATINGS SHARE
The Company focuses its efforts on increasing its audience share of
weekday, prime-time viewers. Although weekday, prime-time represents only
approximately 20% of the broadcasting hours on the Company's networks, the total
number of television viewers is highest during that period. As a result,
advertising time during weekday, prime-time is preferred by most advertisers and
the Company charges higher rates for advertising during those hours. As a result
of its efforts the Company has increased its audience share of weekday,
prime-time viewers. Advertising revenue earned during weekday, prime-time
contributed approximately 43%, 47% and 55% of the Company's net advertising
revenue in 2000, 2001 and 2002, respectively.
For the years ended December 31, 2000, 2001 and 2002, the Company's
weekday, prime-time Mexican audience share was 25.1%, 28.3% and 26.3%,
respectively.
COMMERCIAL AUDIENCE
In 1998, the Company began tracking its share of the Mexican commercial
audience as derived from ratings information published by IBOPE AGB Mexico. The
Company focuses on the Mexican commercial audience because it believes that the
Mexican commercial audience is comprised of television viewers with the greatest
purchasing power. The Mexican commercial audience is comprised of viewers
classified by IBOPE AGB Mexico as ABC+, C and D+ (based on total household
income) watching one of Mexico's four national television networks (the Azteca 7
and 13 networks and Televisa's channels 2 and 5). In 2002, as shown in the table
below, the Mexican commercial audience represented 63% of the Mexican population
but controlled 92% of the household income.
[GRAPHIC APPEARS HERE]
COMMERCIAL AUDIENCE
ABC+ C D+ D/E
-------------------------------
92% of Total Household Income 53% 27% 12% 8%
-------------------------------
63% of Mexican Population 15% 26% 22% 37%
-------------------------------
Source: TV Azicca's estimates based on information published by IBOPE AGB
Mexico.
Although 94% of Mexican households have television sets, 37% of Mexican
households (the D/E segment) have household incomes of less than US$400 per
month and therefore have limited ability to purchase many of the goods and
services advertised on television. The Company estimates that approximately 50%
of the goods and services advertised on television are beyond the economic reach
of D/E households.
23
The following chart depicts the weekday, prime-time commercial audience
share for the Company on a monthly basis from January 2000 through December
2002.
[GRAPHIC APPEARS HERE]
In 2000, 2001 and 2002, superior demographics and national coverage on
both of its two networks allowed the Company to deliver 36%, 38% and 37%,
respectively, of the Mexican commercial audience in weekday, prime-time, as
compared to 25%, 28% and 26%, respectively, of the weekday, prime-time Mexican
audience share.
TELEVISION ADVERTISING
General
For the year ended December 31, 2002, approximately 97% of the Company's
net revenue was derived from the sale of national and local advertising. The
Company offers two basic advertising payment plans: the "Azteca Plan" and the
"Mexican Plan". Sales under the Company's Azteca and Mexican Plans are made
throughout the year under contracts between the Company and its customers for
advertising over a specific period of time. The Company also offers its
customers the option of purchasing a set amount of advertising time for a given
price. In setting advertising rates, the Company considers, among other factors,
the rates offered by its competition and the likely effect of rate increases on
advertising volume.
The Company sold an aggregate of 95%, 84% and 83% of the total available
advertising time on its networks during weekday, prime-time in 2000, 2001 and
2002, respectively. The Company uses a variety of means to utilize unsold
advertising time. The Company has entered into advertising contracts with some
of its affiliates under which the Company agreed to make a certain amount of
otherwise unsold advertising time available to these affiliates each year. See
"Item 7. Major Shareholders and Related Party Transactions" and Note 8 to the
Consolidated Financial Statements. In addition, the Company sells a portion of
otherwise unsold advertising time to shared risk advertisers and to companies
that produce infomercials to improve its operating results and cash flow. The
Company also uses the unsold advertising time to broadcast promotional spots for
its programming and to broadcast government and public service announcements.
See "--Regulation--TV Azteca--Supervision of Operations."
Advertising Advances and Spot Sales
The Company has two categories of advertising sales: "advertising
advances," which are commitments to purchase advertisements at least four weeks
in advance of the advertisement's broadcast date, and "spot sales," which are
all other contracts for advertising time (other than contracts entered into with
respect to shared risk advertisements and infomercials).
24
A significant component of the Company's advertising advances consists of
pre-sales of advertising time made in the fourth quarter of a calendar year for
advertising that will be aired during the following calendar year. In the fourth
quarter of 2000, the Company generated Ps.4,457 million in pre-sales of its
advertising time, which represented 73% of its net advertising revenue in 2001.
In the fourth quarter of 2001, the Company generated Ps.4,640 million in
pre-sales of its advertising time, which represented 69% of its net advertising
revenue in 2002. In the fourth quarter of 2002, the Company generated Ps.4,446
million (US$427.7 million) in pre-sales of advertising time, substantially all
of which is to be aired in 2003.
Payment Plans
Under the Azteca Plan, advertisers generally are required to pay in full
within four months of the date they sign an advertising contract. Alternatively,
the Mexican Plan offers flexibility by allowing advertisers to pay for
advertising by making a cash deposit ranging from 10% to 20% of the advertising
commitment, with the balance payable in installments over the term of the
advertising contract, typically a one-year term. Advertising rates offered to
advertisers are lower under the Azteca Plan than under the Mexican Plan. Until
December 2000, the advertising rates under both plans were fixed for the term of
the contract. Effective January 2001, the Company increased its advertising
rates under its new pricing plan every quarter in the increments set forth in
its contracts with advertisers. No adjustments are made for inflation during the
term of a contract.
Once deposited, the Company has full use of funds advanced under the
Mexican Plan and the Azteca Plan. At or about the date of the contract, the
Company generally requires advertisers paying under the Mexican Plan to deliver
non-interest bearing, short-term notes in respect of each installment payment.
An advertiser that participates in either the Azteca Plan or the Mexican Plan is
able to choose during which television programs and at what times, based on
availability, its advertisements will appear. Any unused commitments are carried
forward until fully utilized by the advertiser, although, with the exception of
infomercial contracts, no amounts are carried beyond the expiration of the
period covered by the contract.
The following table sets forth the percentage of the Company's advertising
sales and pre-sales under the Azteca Plan and the Mexican Plan for the years
ended December 31, 2000, 2001 and 2002. See "Item 5. Operating and Financial
Review and Prospects--Liquidity and Capital Resources--Liquidity--Advertising
Advances."
PERCENTAGE OF
TOTAL ADVERTISING SALES
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001 2002
---- ---- ----
Azteca Plan .................... 44% 55% 55%
Mexican Plan ................... 56% 45% 45%
PERCENTAGE OF TOTAL PRE-SALES
YEAR ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
---- ---- ----
Azteca Plan..................... 47% 64% 64%
Mexican Plan.................... 53% 36% 36%
Pricing Plans
To offer additional flexibility to advertisers, the Company offers
"cost-per-rating-point" pricing to the Mexican television advertising market.
Cost-per-rating-point pricing, one of the most widespread methods of pricing
advertising outside Mexico, allows an advertiser to purchase advertising time
based on the ratings of the television programs during which its advertisements
are aired. The Company's principal competitor, Televisa, does not offer its
advertisers the opportunity to purchase advertising time on a cost-per-rating
point basis, which the Company believes gives it a distinct advantage in
attracting and retaining advertisers to its networks.
Local Sales
25
The Company has entered into agreements with local businesses pursuant to
which local advertising spots are inserted in the local broadcasts of 24 of its
44 local stations in place of the national advertising spots broadcast by the
Mexico City anchor stations. See "--The Company's Mexican Television
Networks--Local Stations." These agreements entitle the Company to receive a
majority of the revenue from any local advertising on these local stations. The
Company permits insertion of local advertising only during periods when the
Company has scheduled local advertisements on its Mexico City anchor stations.
During those periods, the Company broadcasts a separate advertisement on its
repeater stations. The Company operates the remaining 20 local stations without
local partners. Advertising revenue generated by all of the Company's local
stations represented 14%, 8% and 18% of its total advertising sales for the
years ended December 31, 2000, 2001 and 2002, respectively.
Infomercials, Shared Risk Advertisements and Integrated Advertising
The Company sells a portion of otherwise unsold advertising time to shared
risk advertisers and to producers of infomercials. With respect to infomercials,
the Company charges a fee for the time slot in which the advertisement runs. The
Company does not, however, receive any proceeds from the sale of the products
shown during the infomercial. Alternatively, with shared risk advertisements the
Company does not receive any advertising fees during the time slot that the
advertisement runs. Instead, the Company receives a percentage of the gross
sales of the offered product or products for a negotiated period of time. For
example, the Company airs advertisements for music recordings at little or no up
front charge, under agreements that entitle the Company to receive a share of
the sales of the recordings for a number of months following the airing of the
advertisements.
The Company also receives revenue from "integrated advertising" in the
form of product placements during the broadcast of the Company's internally
produced programming. Revenues derived from shared risk advertisements,
infomercials and integrated advertising amounted to Ps.900 million, Ps.1,037
million and Ps.1,230 million (US$118.3 million) in the years ended December 31,
2000, 2001 and 2002, respectively. These advertising arrangements accounted for
15%, 17% and 18% of the Company's net revenue in the years ended December 31,
2000, 2001 and 2002, respectively.
Barter Sales
From time to time, the Company enters into barter transactions with third
parties pursuant to which it exchanges advertising time for goods and services,
a substantial portion of which it uses in its operations. These types of
advertising sales accounted for 3%, 1% and 2% of the Company's total advertising
sales for the years ended December 31, 2000, 2001 and 2002, respectively. The
Company has also entered into barter arrangements, particularly with some of its
affiliates, in order to realize value from otherwise unsold advertising time.
PROGRAM SALES
The Company generates revenue through the sale of the rights to broadcast
its internally produced programming abroad. In 2000, 2001 and 2002, the Company
exported 9,084, 11,299 and 13,940 hours of programming (excluding U.S. export
sales), generating sales of US$4.8 million (nominal), US$5.9 million (nominal)
and US$10.1 million (nominal), respectively. The sale of the rights to broadcast
its internally produced programming allows the Company to leverage its
programming library, which has already been paid for in Mexico. The Company
exports programming to television broadcasters for viewing in approximately 60
countries. The Company has provided Azteca International with the right to
broadcast certain of its programming in the U.S.
In 2000, the Company exported 7,461 hours of programming to the U.S.,
generating net sales of US$1.2 million (nominal), including sales to Echostar.
In 2001, the Company exported 6,467 hours of programming to the U.S., generating
net sales of US$2.7 million (nominal), including sales to Echostar. Sales per
hour decreased because the majority of the hours exported by the Company in 2001
were exported for satellite broadcast to paying subscribers as opposed to the
hours exported in 2000, which were exported to over-the-air broadcasters. This
change led to a smaller audience share and less coverage in 2001. In 2002, the
Company exported 6,467 hours of programming to the U.S., generating net sales of
US$2.7 million (nominal), including sales to Echostar, but excluding sales made
through the Azteca America Network.
26
Echostar Agreement
In March 2000, the Company entered into a programming agreement with
Echostar, a U.S. DTH satellite broadcaster. Under this agreement, the Company
delivers to Echostar a satellite signal containing the Azteca 13 Programming.
Pursuant to this agreement, Echostar has the exclusive right in the U.S. to
distribute Azteca 13 Programming via DTH satellite technology. The Company
retains the right to distribute Azteca 13 Programming via any over-the-air
broadcast television station, but only after 30 days have elapsed from the time
the Azteca 13 Programming first aired on Echostar. This 30 day delay does not
apply to the Azteca 13 network's news, news-related and sports programs, which
may be broadcast on a simultaneous basis. The Company also retains its rights to
certain programs, the licensing of which will be negotiated in good faith with
Echostar.
The Echostar agreement has an initial term of three years ending March 16,
2003, and may be extended at Echostar's election in one year increments for up
to an additional two years. On December 12, 2002, Echostar notified the Company
of its intention to extend the term for one additional year. Echostar paid the
Company US$2.5 million for the one-year extension, and would be obligated to pay
an additional amount if it extends the agreement for an additional year.
Under the Echostar agreement, Echostar has the right to offer and sell
subscriptions for satellite programming provided by the Company in the U.S.,
whether by itself or packaged with Echostar's current or future programming.
Echostar also has the right to sell commercial advertisements to be inserted in
the satellite programming and other services offered to its subscribers. The
Company is entitled to receive a percentage of the net advertising revenue
generated by Echostar as a result of these arrangements. In addition, in 2000,
2001 and 2002, Echostar paid the Company the sum of US$1.5 million, US$2.0
million and US$2.5 million, respectively, under this agreement. In the event the
number of subscribers for the Company's programming exceeds certain levels, the
Company will be entitled to receive additional payments from Echostar.
The Echostar agreement also contains certain provisions with respect to
the distribution of Azteca 13 Programming to cable operators in the U.S. The
Company and Echostar have differing interpretations of certain of these
provisions, including whether Echostar has exclusive rights to distribute the
Azteca 13 Programming in certain circumstances. Echostar has notified the
Company of its view that these exclusivity provisions prohibit the Company from
distributing Azteca 13 Programming, or any portion thereof, to U.S. cable
operators, either directly (with the exception of cable operators near the
U.S.-Mexico border) or indirectly through over-the-air broadcast stations whose
signals are retransmitted by cable operators pursuant to the exercise by such
stations of statutory "must-carry" or "re-transmission consent" rights. The
Company believes the exclusivity provisions prohibit the Company during the term
of the Echostar agreement only from granting distribution rights directly to
U.S. cable operators (other than near the border), but do not restrict the
retransmission of Azteca 13 Programming by over-the-air broadcast stations to
cable and DTH satellite operators, and that they prohibit only the distribution
of Azteca 13 Programming (other than news, news-related and sports programming,
which may be transmitted without any waiting period) on the Azteca America
Network earlier than 30 days after it is transmitted to Echostar. Certain of
Azteca International's over-the-air station affiliates have exercised statutory
"must-carry" or "re-transmission consent" rights and, accordingly, are causing
Azteca America Programming (which contains portions of Azteca 13 Programming) to
be re-transmitted on local cable systems. The "Azteca America Programming" is
comprised of certain of the Company's programming, including telenovelas,
reality programming, sports, news and other general entertainment programming in
the Spanish language distributed through the Azteca America Network. In
addition, certain of Azteca International's over-the-air affiliates have
exercised their "must-carry" rights to require Azteca America Programming to be
re-transmitted by DirecTV, a competing satellite broadcaster.
On June 25, 2002, Echostar filed a lawsuit against the Company alleging
that the Company is in breach of the exclusivity provisions of the Echostar
agreement, which lawsuit is currently pending. See "Item 10. Additional
Information--Legal Proceedings--TV Azteca--Echostar."
Alta Empresa
In December 2001, the Company and Alta Empresa Holdings, B.V. ("Alta
Empresa"), its wholly-owned Dutch subsidiary, entered into an agreement for
purposes of marketing and selling the Company's programming in the U.S. Pursuant
to this agreement, the Company agreed to contribute its programming and Alta
Empresa agreed to manage all of
27
the activities involved in the marketing and selling of the Company's
programming throughout the U.S. Initially, Alta Empresa may only market and sell
the Company's programming in the U.S., which it is currently doing through an
agreement with Azteca International. The agreement between the Company and Alta
Empresa has an initial term of 15 years, which may be terminated at any time by
the Company and Alta Empresa. Based upon their relative contributions, the
Company is entitled to 99% of the net profits derived from the marketing and
sale of its programming throughout the United States and Alta Empresa is
entitled to the remaining one percent.
COST MANAGEMENT
The Company takes a disciplined approach in managing its operating costs
and, as a result, it has achieved operating profit margins of 29%, 34% and 42%
for the years ended December 31, 2000, 2001 and 2002, respectively. The Company
has implemented, and will continue to maintain, stringent cost-control
initiatives in connection with its internally produced programming and the
acquisition of purchased programming. With respect to its internally produced
programming, these initiatives include establishing clearly defined
profitability targets for each step of the production process, maintaining
strict controls over hiring decisions and controlling talent costs by hiring
cast members from the Company's acting school. Alternatively, with respect to
its purchased programming, the Company focuses on acquiring programs that it
believes will result in significant viewership by its targeted audiences and
will generate significant advertising revenue in relation to the fees paid for
the programming.
OTHER OPERATIONS
The Company has an investment in the telecommunications industry, through
Unefon, and an investment in the Internet marketplace, through Todito. The
Company also owns a recording company, Azteca Records, S.A. de C.V. ("Azteca
Records"), and Club Atletico Morelia, a professional soccer team in Mexico.
AZTECA INTERNATIONAL
MARKET OVERVIEW
According to July 2001 census figures, the U.S. Hispanic population is
estimated to be approximately 37 million people, or approximately 13% of the
U.S. population, making it the largest ethnic minority group in the U.S. The
U.S. Hispanic population is one of the fastest growing segments of the U.S.
population, growing at approximately five times the rate of the non-Hispanic
population. Moreover, according to industry sources, from 1997 to 2001,
advertising expenditures targeting the U.S. Hispanic community grew at an
average compounded growth rate of 9.5% per year compared to the 4.1% average
compounded growth rate for the general advertising market. Nevertheless,
advertising expenditures targeting the U.S. Hispanic community remains a small
fraction of aggregate advertising spending in the U.S. For example, in 2001,
Hispanic purchasing power amounted to 8% of total U.S. purchasing power, but
advertising expenditures targeting the U.S. Hispanic population represented only
2% of total U.S. advertising expenditures.
STATION AFFILIATIONS
In July 2001, the Company launched the Azteca America Network, a new
Spanish-language television broadcast network in the U.S. Through Azteca
International, its wholly-owned subsidiary, the Company establishes affiliate
relationships with television broadcast stations in U.S. markets that have a
significant Hispanic population. In addition, Azteca International may enter
into distribution agreements with cable operators. Through the Azteca America
Network, the Company distributes in the U.S. the Azteca America Programming.
Azteca International has station affiliation agreements with over-the-air
television broadcast stations in markets that cover approximately 60% of the
U.S. Hispanic population, including stations in the Los Angeles, New York,
Miami, Houston, San Antonio and San Francisco television markets. Pursuant to
these station affiliation agreements, the stations have been granted exclusive
licenses for over-the-air broadcasting of Azteca America Programming in their
respective markets. These agreements have terms ranging up to seven years and
may be automatically renewed for a specified duration. In return for this
programming, Azteca International receives either a percentage of the net
advertising revenue
28
generated by its station affiliates or all of the net advertising revenue with
respect to a percentage of the available advertising time on its station
affiliates.
PAPPAS STATION AFFILIATIONS
Background
In 2001, Azteca International entered into station affiliation agreements
with affiliates of Pappas Telecasting Companies ("Pappas") in the Los Angeles,
San Francisco, Houston and Reno television markets. When Azteca International
entered into station affiliation agreements with Pappas Telecasting of Southern
California LLC ("Pappas Southern California"), operator of its Los Angeles
affiliate, the Company became a party to credit agreements and Azteca
International became a party to an equity option agreement that gave it the
right to acquire an equity interest in Pappas Southern California. Additionally,
in connection with entering into the station affiliation agreements with
affiliates of Pappas in the San Francisco and Houston television markets, Azteca
International acquired a 25% equity interest in each of the television stations
for an aggregate purchase price of US$70.6 million.
In July 2002, a dispute arose between Azteca International and Pappas
regarding the exercise of the purchase option for the Los Angeles station. In
addition, Pappas alleged that Azteca International was in breach of certain of
its obligations under the station affiliation agreements governing the Los
Angeles, San Francisco, Houston and Reno television stations. On February 13,
2003, the Company announced that a definitive settlement agreement that resolved
all of the outstanding litigation and disputes between the Company and Pappas
had been executed. See "Item 10. Additional Information--Legal Proceedings--TV
Azteca--Pappas Settlement" for a discussion of the Pappas and Azteca
International litigation and the settlement of the pending claims.
In connection with the settlement agreement, the Company and Pappas
entered into a number of agreements that will govern their future relationship.
These agreements include a new promissory note issued by Pappas in favor of
Azteca International, a local marketing agreement ("LMA") governing, under
certain circumstances, Azteca International's operation of its Los Angeles
affiliate and a purchase option agreement that grants Azteca International the
right, subject to receipt of all necessary approvals and applicable statutory
limitations, to acquire all of the assets of the Los Angeles station. In
addition to these agreements, Pappas and Azteca International modified their
existing station affiliation agreements and entered into new station affiliation
agreements.
The New Pappas Promissory Note
Pursuant to the settlement agreement and related agreements, Pappas
re-acquired the 25% equity interests owned by Azteca International in its
Houston and San Francisco station affiliates. In addition, the outstanding
secured indebtedness in the amount of US$53.7 million owed to the Company by
Pappas Southern California was cancelled, together with Azteca International's
option to acquire an equity interest in Pappas Southern California.
As consideration for the re-acquisition of the equity interests in its
affiliates and the cancellation of its indebtedness, Pappas issued Azteca
International a promissory note in the principal amount of $128.0 million that
is secured by the assets of the Los Angeles station (the "New Pappas Promissory
Note"). The initial maturity date of the New Pappas Promissory Note is June 30,
2003. Since Pappas did not repay the New Pappas Promissory Note prior to April
30, 2003, the principal amount has been increased to US$129.0 million. The New
Pappas Promissory Note may be prepaid, in whole or in part, at any time. The New
Pappas Promissory Note will bear interest at an annual rate of 11.6279% from and
after the initial maturity date, except as indicated below.
If the LMA is terminated pursuant to the occurrence of certain specified
events and Azteca International does not timely exercise the Los Angeles
purchase option following the termination of the LMA, Azteca International will
have the right to require repayment of the New Pappas Promissory Note on the
earlier of the maturity date of the New Pappas Promissory Note and two years
following the third anniversary of the effectiveness of the Los Angeles purchase
option. Alternatively, if the purchase option is not consummated in a timely
manner after its exercise, Azteca International may, under certain
circumstances, require that the New Pappas Promissory Note be repaid two and a
half years after the date the right to exercise the Los Angeles purchase option
expires.
29
Local Marketing Agreement
Azteca International and Pappas also agreed that, if the New Pappas
Promissory Note is not repaid on or prior to its initial maturity date, then
starting on July 1, 2003, the operation of the Los Angeles station will be
subject to the terms and conditions specified in the LMA.
The LMA will have an initial term of three years, but will continue
thereafter until the New Pappas Promissory Note is paid in full. Under the LMA,
Azteca International will provide programming and services to the Los Angeles
station and will be entitled to retain all advertising and other revenues
generated from the operation of the Los Angeles station. During the initial
three year term of the LMA, Azteca International will pay Pappas Southern
California an annual fee of US$15.0 million which is payable in quarterly
installments. The payment of this fee has been guaranteed by the Company.
Azteca International's payments under the LMA will be offset on a
dollar-for-dollar basis by the amount of interest payable under the New Pappas
Promissory Note. Accordingly, if during the initial three-year term of the LMA,
Pappas Southern California does not make principal payments under the New Pappas
Promissory Note, then Azteca International will not be required to make any cash
payments under the LMA. Following the expiration of the initial three year term
of the LMA, the annual fee for the LMA will be increased to US$24.6 million, a
portion of which would continue to be subject to offset against Pappas' interest
payment obligation, until the New Pappas Promissory Note is paid in full.
In order to resolve any future disputes between Azteca International and
Pappas Southern California arising out of the operation of the Los Angeles
station pursuant to the LMA, the parties have appointed an Federal
Communications Commission ("FCC") expert who, upon request, will arbitrate all
disputes between the parties, including disputes involving FCC matters. The
decisions of the FCC expert will be binding on the parties; however, if the
disputed matter relates to FCC rules or regulations, the parties are permitted
to seek a ruling from the FCC on such matter and the FCC decision will be final
and binding upon the parties.
The LMA will terminate (i) if the New Pappas Promissory Note is paid in
full prior to the initial maturity date of June 30, 2003, (ii) upon the closing
of the purchase option for the assets of the Los Angeles station or (iii) upon
the filing of a petition for bankruptcy of a party to the LMA. The LMA can also
be terminated following the determination of the FCC expert that a party is in
breach of the LMA.
Pursuant to the LMA, Azteca International has agreed, subject to receipt
of regulatory approval, to pay up to US$3.0 million for the installation,
construction and acquisition of broadcasting facilities necessary to operate a
digital television channel in the Los Angeles market. However, if the FCC expert
determines that any cost overruns are reasonable, Azteca International's
financial obligations with respect to this project could exceed US$3.0 million.
If by the third anniversary of the date on which the Los Angeles station
purchase option became exercisable, (i) Azteca International has not closed the
purchase option and (ii) Pappas Southern California has not repaid in full the
principal and interest due on the New Pappas Promissory Note, Pappas Southern
California is required to reimburse Azteca International for the costs incurred
in connection with the development of the digital television channel. The
aggregate amount of the reimbursement obligation shall be added to the then
outstanding principal amount of the New Pappas Promissory Note and will be
secured by the assets of the Los Angeles station.
The Los Angeles Station Purchase Option
In the event the LMA becomes effective, Azteca International will also
have the option, subject to receipt of all necessary approvals and applicable
statutory limitations, to purchase all of the assets of the Los Angeles station,
including its FCC license. This purchase option must be exercised, subject to
limited exceptions, at least six months prior to the third anniversary of the
effective date of the option agreement (i.e., January 1, 2006). The total
purchase price for the assets is US$250.0 million, plus certain specified
liabilities. The purchase price payable for the assets may be offset against all
amounts then outstanding under the New Pappas Promissory Note. In the event the
LMA is terminated in connection with a governmental challenge to its
effectiveness or Azteca International's breach of the LMA, as determined by the
FCC expert, the period of time in which Azteca International may exercise the
purchase option will be shortened.
30
The consummation of the purchase option transaction is subject to certain
governmental filing requirements. Azteca International is permitted to assign
its rights with respect to the purchase option to a qualified third party in
order to obtain any necessary consents. Under applicable FCC rules, Azteca
International has the right to hold up to a 25% equity interest in an entity
that holds a U.S. television broadcasting license.
Amended Station Affiliation Agreements
Azteca International's station affiliation agreements with affiliates of
Pappas in the Los Angeles, San Francisco, Houston and Reno markets will continue
to be in effect through 2003 with certain modifications, except for the Los
Angeles station if the LMA becomes effective. As modified, the allocation of
revenue under the station affiliation agreements will change to a 50-50
time-split arrangement, where network advertising time is equally divided.
Azteca International will have the option to extend these modified station
affiliation agreements until June of 2004, after which these station affiliation
agreements will be automatically renewable for additional six-month periods,
subject to the termination provisions contained in the station affiliation
agreements. As in the case of the LMA, the FCC expert is also authorized to
settle disputes under the modified station affiliation agreements.
Azteca International has agreed to indemnify the Pappas station affiliates
for any damages awarded to Echostar from any Pappas station affiliates, the
costs of defending such actions (including attorney's fees), reasonable out of
pocket expenses incurred in connection with obtaining alternative programming,
and, under certain circumstances, lost profits (see "Item 10. Additional
Information--Legal Proceedings--TV Azteca--Echostar").
In general, the modified station affiliation agreements can be terminated
by either party, subject to compliance with relevant notice provisions, (i) if a
petition for bankruptcy of a party to the station affiliation agreement is
filed, or (ii) following the determination by the FCC expert that a party is in
breach of the station affiliation agreement. In the event the term of a modified
station affiliation is extended to June 30, 2004, either party may terminate the
agreement on 90 days notice effective as of June 30, 2004, or prior to the
expiration of any renewal term.
NEW STATIONS
Affiliates of Pappas and Azteca International have also entered into
station affiliation agreements for several smaller television markets.
UNEFON
BACKGROUND
Unefon is a Mexican mobile telecommunications company that provides
low-cost prepaid telecommunications services primarily to upper-lower and middle
income subscribers residing in urban areas of Mexico. At December 31, 2002,
Unefon had approximately 1.4 million subscribers on its personal communications
services ("PCS") wireless network and had extended its wireless mobile network
coverage to 15 cities in Mexico, including all of Mexico City, reaching
approximately 39 million people, or approximately 39% of the current Mexican
population. In 2001, Unefon generated Ps.1,548 million in revenue and had a net
loss of Ps.1,115 million and in 2002, Unefon generated Ps.3,039 million
(US$291.1 million) in revenue and had a net loss of Ps.872 million (US$83.5
million).
The Company currently owns 46.5% of Unefon's capital stock. In 1999, the
Company acquired its equity interest in Unefon for a purchase price of US$189.8
million in a private transaction with Corporacion RBS, a Mexican company
wholly-owned by Ricardo B. Salinas Pliego, the Chairman of the Board of the
Company. The remaining capital stock of Unefon is owned by Mr. Saba, 46.5%, and
the public market, 7.0%.
WIRELESS CONCESSIONS
In 1998, Unefon won a Mexican government auction of nationwide concessions
to use 80 MHz of radio frequencies. These concessions give Unefon the right to
use 30 MHz of bandwidth within the 1.9 GHz PCS frequency band and 50 MHz of
bandwidth in the 3.4 GHz frequency range. The total purchase price, including
accrued interest, that Unefon paid
31
to the Mexican government for its initial wireless concessions was approximately
Ps.3.2 billion (nominal) (US$342.1 million) (nominal). In 1999, Unefon won
certain Mexican government auctions of nationwide concessions to use 112 MHz of
bandwidth within the 7.0 GHz frequency and 112 MHz of bandwidth within the 38.0
GHz frequency. Unefon acquired these concessions for a total cost of
approximately Ps.31 million (nominal) (US$3.3 million) (nominal). Unefon
utilizes the 1.9 GHz PCS frequency band concession to provide its mobile
wireless telecommunications services.
As a part of a series of transactions commenced in November 2000,
Operadora Unefon transferred its 3.4 GHz frequency concession to Operadora de
Comunicaciones, S.A. de C.V. and transferred its 7.0 GHz frequency concession to
Unefrecuencias, S.A. de C.V. As a part of these transactions, Cosmofrecuencias,
a Mexican corporation 50% owned by an affiliate of Mr. Saba and 50% owned by the
Company, acquired all of the capital stock of each of Operadora de
Comunicaciones and Unefrecuencias. In addition, Operadora Unefon transferred to
Frecuencia Movil, S.A. de C.V. the 38.0 GHz frequency concession. 38 GHTZ, S.A.
de C.V., a Mexican corporation 100% owned by Mr. Salinas is expected to acquire
all of the capital stock of Frecuencia Movil in 2003.
RIGHTS TRANSACTION; SPIN-OFF
The Company has previously announced plans to sell or spin-off its
investment in Unefon. In October 2000, the Company granted rights to acquire all
of the Unefon Series A shares that it owns pro rata to the holders of all of the
Company's outstanding shares and to certain other of the Company's securities,
for an aggregate exercise price of US$177.0 million. The grant of these rights
remains subject to the filing and effectiveness of a registration statement with
the Securities and Exchange Commission (the "SEC") that registers the Unefon
Series A shares underlying the rights and the receipt of all applicable
regulatory and third-party approvals. The rights to acquire the Unefon Series A
shares were originally only exercisable on December 11, 2002, but in December
2002 the Company approved the change of the exercise date to December 12, 2003.
In addition, in August 2002, the Company announced its intention to seek the
approval of its shareholders to the spin-off of its investment in Unefon in the
form of a distribution of all of the shares of Unefon that the Company owns pro
rata to the Company's shareholders at no monetary cost. The spin-off was
scheduled to become effective before the end of 2002, but has been postponed by
the Company.
GRUPO ELEKTRA DISTRIBUTION AGREEMENT
In November 2000, Unefon entered into a 10-year agreement with Grupo
Elektra, an affiliate of the Company, for the marketing, sales and distribution
of its services in Grupo Elektra's national network of stores in Mexico. Grupo
Elektra currently operates over 800 stores in Mexico. Grupo Elektra is the
largest specialty retailing group, in terms of number of stores, in Mexico and
one of the largest, in terms of number of stores, in Latin America, specializing
in the sale of electronic appliances, white goods, furniture and fittings and
casual wear.
TV AZTECA ADVERTISING AGREEMENT
In June 1998, Unefon and the Company entered into a 10-year advertising
agreement pursuant to which the Company agreed to supply Unefon with advertising
spots.
The principal terms and conditions of the Company's agreement with Unefon,
as amended, include:
.. The Company will supply Unefon with advertising spots totaling an aggregate
of 120,000 gross rating points ("GRPs") over the term of the agreement, up
to a maximum of 35,000 GRPs per year. For purposes of the agreement, GRPs
equal the number of total rating points obtained in a 60 second transmission
of commercial messages. Up to 30% of these GRPs may be used during
prime-time, which is defined in the agreement as 7:00 p.m. to 11:00 p.m.,
Monday through Friday, and 6:00 p.m. to 11:00 p.m., Saturday and Sunday.
Unefon can only use the GRPs through December 2009;
.. Unefon will pay the Company 3.0% of its gross revenues up to a maximum of
US$200.0 million. As of December 31, 2002, the Company had broadcast Unefon
advertisements having an aggregate value of Ps.147 million (US$14.1 million)
pursuant to this agreement. The Company records revenue under the terms of
the agreement as the GRPs are consumed on a rate schedule set forth in the
agreement, which provides less expensive GRPs initially and more
32
expensive GRPs over the term of the agreement. Pursuant to the agreement,
Unefon has elected to defer payments due in 2000, 2001 and 2002 and to make
these payments in four equal semi-annual installments during 2003 and 2004,
with the first payment maturing in June 2003. The deferred payments accrue
interest at an annual interest rate of 12%. Starting in 2003, Unefon's
payments to the Company are due on a current basis. At December 31, 2002,
the aggregate deferred payments equaled US$15.7 million (including
interest); and
.. The Company's right to payment under the agreement is subject to compliance
by Unefon with its payment obligations under its finance agreement.
.. Pursuant to the advertising agreement, Unefon's failure to pay advances will
not be considered a default by Unefon under the agreement. However, the
Company will be able to suspend the provision of advertising spots to Unefon
after Unefon's continued failure to pay for one year.
NORTEL FINANCE AGREEMENT
In September 1999, Unefon entered into a finance agreement, a letter
agreement, a procurement agreement, and certain other related agreements with
Nortel. The procurement agreement obligated Nortel to supply Unefon with up to
US$448.0 million of equipment, software and related engineering and other
services. Under the finance agreement, Nortel agreed to provide Unefon with a
multi-drawdown credit facility in an aggregate principal amount of up to
US$618.0 million, divided into two separate tranches, to finance Unefon's
payment obligations under the procurement agreement and its working capital
needs. Borrowings made under the finance agreement were denominated in U.S.
dollars and bear interest at a floating rate based on LIBOR. Unefon was required
to repay the principal of the loans beginning in May 2003 and ending in November
2005. In addition, the finance agreement placed financial and operating
restrictions on Unefon, including restrictions on its ability to pay dividends
and enter into transactions with affiliates. Unefon's obligations under the
finance agreement were secured by all of the shares, government concessions and
other assets owned by Operadora Unefon, Unefon's principal operating subsidiary,
and all of the shares of Servicios, Unefon's subsidiary that employs all of
Unefon's employees. Operadora Unefon and Servicios are wholly-owned subsidiaries
of Unefon.
The first loan tranche under the finance agreement was in the amount of
US$408.0 million, of which US$273.0 million was allocated for payments under the
procurement agreement and US$135.0 million for working capital needs. Through
December 31, 2002, Unefon had drawn down US$383.0 million from the first
tranche. Unefon prepaid US$22.6 million of this amount in December 2000. The
second loan tranche under the finance agreement was for US$210.0 million, of
which US$175.0 million was to be for payments under the procurement agreement
and US$35.0 million for working capital needs. The second tranche was to be made
available on a dollar by dollar basis as Nortel syndicated amounts lent under
the first tranche. An amount equal to US$25.0 million was available under the
second tranche following a one-time optional prepayment of US$25.0 million under
the first tranche, which was made by Unefon in September 2001. Pursuant to the
letter agreement, Nortel was obligated to pursue syndication of the first
tranche in a diligent and timely manner, applying its best efforts consistent
with standards of commercial reasonableness. The second tranche was expected to
be drawn by Unefon from May 2002 to May 2003. As of December 31, 2002, Unefon
had drawn down only US$14.5 million from the second tranche and Nortel had not
syndicated any portion of the first tranche. As of December 31, 2002, there was
US$349.8 million outstanding under the finance agreement.
Pursuant to certain amendments to the finance agreement, Nortel consented
to and approved Unefon's revised business plan and agreed to allow Unefon to
draw down additional financing under the finance agreement, conditioned upon the
shareholders' undertaking to provide Unefon up to US$35.0 million in the event
Unefon had liquidity shortfalls in 2001 or 2002, as described below. See "--The
Company's Financial Commitments."
As of June 16, 2003, Nortel assigned its rights and obligations under the
finance agreement to Codisco. See "--Nortel Settlement."
33
NORTEL PROCUREMENT AGREEMENT
Under the procurement agreement, Nortel committed to supply Unefon with a
Code Division Multiple Access ("CDMA") technology cellular network that operates
in the 1.9 GHz frequency band within designated urban and suburban areas in
Mexico. Under the agreement, Nortel was required to undertake all work and
supply all goods and engineering services necessary for the manufacture,
procurement, supply, delivery and installation of equipment, and testing,
optimizing and commissioning of the network. The procurement agreement covered
the deployment of a network capable of supporting at least 1.416 million
subscribers. This network was to include switches, signaling transfer points,
base transceiver stations, a transmission network based on microwave radios,
metropolitan fiber optic rings, a national network operation center and regional
operations centers and a call center. The network to be supplied also was to
include all necessary software and other ancillary systems and supporting
services to provide full system functionality in accordance with the network
design plan prepared by Nortel. The network system was to include the capacity
to deploy wireless and value-added and other intelligent network features, which
include caller-ID, call waiting, two-way short messaging service and conference
calling.
In July 2002, Unefon and Nortel signed an agreement that upon taking
effect was intended to settle disputes that had arisen in connection with
Nortel's performance under the procurement agreement. Among other things, Nortel
agreed to give Unefon US$51.9 million of credits and economic benefits. The
effectiveness of these agreements was pre-conditioned on certain acts to be
taken by Nortel.
As of June 16, 2003, the procurement agreement between Unefon and Nortel
was terminated and the parties entered into a new supply agreement. See
"--Nortel Settlement."
NORTEL SETTLEMENT
Unefon and Nortel became engaged in a dispute over each party's compliance
with the terms and conditions of the finance agreement, the procurement
agreement and other related agreements entered into by the parties, which
resulted in the filing of various legal actions by such parties. See "Item 10.
Additional Information--Legal Proceedings--Unefon." On June 16, 2003, Unefon
reached a settlement with Nortel, pursuant to which Unefon and Nortel released
each other from all obligations arising out of the procurement agreement,
finance agreement or any related agreements and terminated all actions and
proceedings of any kind between the parties or involving the parties and their
counsel, in the U.S. and Mexico. Unefon and Nortel also terminated the
procurement agreement and entered into a new supply agreement. In connection
with the settlement, Unefon paid an aggregate of US$43.0 million to Nortel to be
applied to accounts receivable and to a reduction in the total amount of debt
owed by Unefon to Nortel to US$325.0 million. In addition, Unefon agreed that in
the event a change of control of Unefon occurs on or before December 15, 2005,
it will pay US$25.0 million to Nortel. Change of control, for these purposes
will be deemed to have occurred if Mr. Saba together with Adela Tuachi Michaw de
Saba and/or the Company and/or Mr. Salinas Pliego and/or their respective
affiliates, collectively, shall at any time beneficially own, directly or
indirectly, in the aggregate less than 40% of the issued and outstanding shares
of each class of voting stock of Operadora Unefon and its subsidiaries.
Concurrently with the settlement, Codisco purchased the US$325.0 million debt
of Unefon from Nortel. Nortel and Codisco entered into to an assignment and
assumption agreement pursuant to which Codisco replaced Nortel as lender under
the finance agreement, and Unefon's stock pledges in favor of Nortel were
assigned to Codisco.
Restructured Note
In connection with the assignment of the Nortel finance agreement by
Nortel to Codisco, Unefon issued a restructured note, dated June 16, 2003, in
favor of Codisco in the amount of US$325.0 million, with interest due at a
floating rate based on LIBOR plus 2.85%. Unefon is currently obligated to pay
the restructured note in 6 consecutive semi-annual installments as follows: (i)
US$15,919,434.17 on each of May 15 and November 15, 2003, (ii) US$31,513,981.93
on each of May 15 and November 15, 2004, (iii) US$113,710,244.07 on May 15, 2005
and (iv) US$116,309,335.36 on November 15, 2005. Unefon has announced that the
term of this debt between Unefon and Codisco is to be amended to provide for,
among other things, an extension of the maturity date until June 15, 2013.
Supply Agreement
In connection with the settlement, Unefon and Nortel entered into a new
supply agreement under which Nortel will provide Unefon with machines,
components, software and services, including, engineering, maintenance,
installation, implementation, design, consulting, business planning, network
planning and analysis. The new supply agreement has a
34
term of five years. The supply agreement contemplates a US$100.0 million
purchase commitment on Unefon's part, with a US$20.0 million annual minimum
purchase requirement (unless Unefon has already met the US$100.0 million
purchase volume commitment), with a target expenditure of US$40.0 million per
year.
THE COMPANY'S FINANCIAL COMMITMENTS
In December 2000, in connection with certain modifications of Unefon's
finance agreement with Nortel, the principal shareholders of Unefon, the Company
and Mr. Saba, agreed in a shareholders' undertaking to provide Unefon up to
US$35.0 million in the aggregate by way of either equity or subordinated debt in
the event Unefon had liquidity shortfalls in 2001 or 2002. On December 20, 2002,
Nortel notified the Company and Mr. Saba of its view that Unefon's non-payment
of the August 2002 interest payment under the Nortel finance agreement triggered
their joint and several obligation to make additional funds available to Unefon
up to an aggregate amount of US$35.0 million as provided in the shareholders'
undertaking. The Company and Mr. Saba disputed this assertion. See "Item 10.
Additional Information--Legal Proceedings--Unefon." In connection with the
settlement with Nortel, Nortel has released the Company and Mr. Saba from any
obligation or liability in connection with this undertaking. However, as of May
31, 2003, TV Azteca and Mr. Saba had made loans to or on behalf of Unefon with
an outstanding aggregate principal amount of US$35.8 million, US$19.1 million of
which was paid by TV Azteca to Unefon and certain of its creditors.
In July 2001, the Company and Mr. Saba announced their intention to
provide credit support to Unefon for up to US$80.0 million each. As of May 31,
2003, the Company had paid US$17.7 million to Unefon and its creditors pursuant
to this credit support and it had outstanding credit support obligations in the
amount of US$12.1 million. The Company has terminated any further credit support
to Unefon.
INTERNET BUSINESS
TODITO
In February 2000, the Company acquired 50% of the capital stock of Todito,
a Mexican company that operates a Spanish-language Internet portal
(www.todito.com) and Internet connection service (www.toditocard.com and
www.toditoilimitado.com) targeting Spanish speakers in the U.S. and Mexico. The
Company also operates a corporate web site (www.tvazteca.com) that is hosted and
managed by Todito and is used to promote the Company's talent and programs.
Todito was launched in August 1999 by Grupo Dataflux, S.A. de C.V., a
Mexican technology company that operates the largest network of computer
training schools in Mexico. Grupo Dataflux also owns the remaining 50% of
Todito's capital stock and is controlled by Guillermo E. Salinas Pliego, the
brother of Ricardo B. Salinas Pliego, Chairman of the Board of the Company.
Todito is one of the most visited sites by Mexican internet users (over 650,000
unique visitors per day) and also operates Mexico's leading pre-paid internet
service provider, with over 150,000 users.
In connection with its acquisition of the Todito capital stock, the
Company entered into a five-year service agreement with Todito. The value of the
service agreement was US$100.0 million at the time of the signing. The service
agreement consisted of advertising time on the Company's networks, the exclusive
online use of the Company's content by Todito and the use of the Company's sales
force to promote Todito to the Company's advertising clients. The three
components of the service agreement were valued at US$45.0 million, US$50.0
million and US$5.0 million, respectively, at the time of signing of the
agreement. Under the service agreement, the Company agreed to provide Todito
with advertising on its Azteca 7 and Azteca 13 networks totaling an aggregate of
78,000 GRPs. The GRPs contemplated by the agreement equal the number of
commercial rating points obtained in a 60 second transmission of commercial
messages. Todito has the right to use up to 30% of the advertising granted under
the service agreement during the networks' prime-time hours. The Company has
also granted Todito the exclusive right to distribute over the Internet the
Company's internally produced programming during the term of the service
agreement. Finally, the service agreement provides that the Company's sales
force will be the exclusive seller of online advertising on www.todito.com for
two years and that the Company's sales force will facilitate contacts between
the Company's television advertising clients and Todito's online advertising
sales force.
35
In May 2001, Todito launched its pre-paid Internet access card, which
functions like a pre-paid phone card. The cards range in price from Ps.100 for
15 hours of navigation to Ps.300 for 90 hours of navigation. The cards can be
purchased online or at over 7,000 points of sale throughout Mexico. Since its
introduction, monthly sales have grown from 5,310 cards in May 2001 to 25,537
cards in December 2002.
Todito reported sales of Ps.103 million and Ps.151 million (US$14.5
million) for the years ended December 31, 2001 and 2002, respectively. Todito's
sales are comprised of the sale of online advertising, the sale of its pre-paid
internet connection cards and commissions from e-commerce transactions. Todito
generated positive cash flow from operations of Ps.34 million and Ps.55 million
(US$5.3 million) for the years ended December 31, 2001 and 2002, respectively.
CHANNEL 40
In December 1998, the Company entered into a joint venture with Televisora
del Valle de Mexico, S.A. de C.V. ("TVM") and TVM's subsidiary, Corporacion de
Noticias e Informacion, S.A. de C.V. ("CNI"), for the operation of a television
channel that broadcasts throughout the Mexico City metropolitan area on UHF
Channel 40. In July 2000, CNI stopped broadcasting the Company's signal as
required by its contractual obligations under the joint venture agreement. In
response to CNI's actions, the Company filed several lawsuits in Mexico against
TVM, CNI and Mr. Moreno Valle, seeking lost profits and the enforcement of its
purchase option right under the joint venture to acquire up to 51% of the
capital stock of TVM. See "Item 10. Additional Information--Legal
Proceedings--TV Azteca--Channel 40."
MUSIC
In May 1996, the Company formed Azteca Records to produce, market and
distribute recorded music. The Company's strategy is to utilize its recording
business to focus on the development and promotion of new Mexican talent and to
take advantage of cross-promotional opportunities. Azteca Records released 33
recordings in 2000 and 48 recordings in 2001, including two soundtracks in 2000
to the Company's internally produced telenovelas. For the year ended December
31, 2002, Azteca Records released 54 recordings. Azteca Records' recordings are
distributed in Mexico, pursuant to agreements between the Company and Sony Music
Entertainment Mexico, S.A. de C.V., BMG Entertainment Mexico, S.A. de C.V. and
Warner Music Mexico, S.A. de C.V., and internationally pursuant to agreements
between the Company and several distributors, which vary depending on the
territory of distribution. In each of the years ended December 31, 2000, 2001
and 2002, the Company's music business accounted for less than 1% of the
Company's net revenue.
SOCCER TEAM
In May 1996, the Company acquired a majority interest in the Club Atletico
Morelia, a Mexican professional soccer team. The Club Atletico Morelia soccer
team belongs to the 20-team First Division of the Mexican professional soccer
league. Each year, the team plays 38 regular season games, half of which are
home games. In the 2000 winter season, the Club Atletico Morelia won the Mexican
Soccer Championship for the first time in its history. In the 2002 and 2003
winter seasons, Club Atletico Morelia was a finalist in the Mexican Soccer
Championship.
TELEVISION CHANNEL 12 IN EL SALVADOR
The Company owns a 75% interest in Canal 12 de Television, S.A., which
owns and operates an over-the-air national television network in El Salvador. In
the years ended December 31, 2000, 2001 and 2002, Canal 12 accounted for 1% of
the Company's net revenue.
STRATEGIC ALLIANCES
NBA Agreement
Since 1993, the Company has had the exclusive right to broadcast NBA games
in Mexico. In August 1995, the Company entered into an agreement with NBA
Entertainment, Inc. This agreement, which has since been extended, gave
36
the Company the exclusive right to broadcast NBA games in Mexico through the end
of the 2002-2003 season. The Company also has a right of first refusal to renew
its exclusive exhibition rights for the 2003-2004 season. In return for the
broadcast rights, NBA Entertainment is entitled to a guaranteed minimum payment
per season if net advertising revenue generated from NBA games is less than or
equal to US$2.3 million. NBA Entertainment is entitled to receive an additional
50% of any net advertising revenue in excess of US$2.3 million.
Buena Vista Agreement
In October 2001, the Company entered into an exclusive three year license
agreement with Buena Vista International, Inc., an affiliate of The Walt Disney
Company. The agreement gives the Company the exclusive access to certain
first-run movies, mini-series and special events, such as the Academy Awards.
COMPETITION
General
Broadcast television stations compete for advertising revenue and viewers
with other television stations in their markets and other advertising media,
such as radio, newspapers, magazines, outdoor advertising, transit advertising,
yellow page directories, direct mail, the Internet and home entertainment
systems (including videocassette recorders, DVDs and television game devices).
Broadcast television stations also face competition from cable television, MMDS,
and DTH satellite services. These other programming, entertainment and video
distribution systems can increase competition for broadcast television stations
by bringing into its market distant broadcast signals not otherwise available to
a station's audience and also by serving as distribution systems for
non-broadcast programming.
TV Azteca
The Company's principal competitor in Mexico is Televisa. Televisa,
through its subsidiaries, is the largest Spanish-language media company in the
world. Televisa owns and operates Channels 2, 4, 5 and 9 in Mexico City, each of
which, to varying degrees of coverage, is broadcast throughout Mexico. Televisa
generated a substantial majority of Mexican television advertising sales in each
of the last three years.
According to IBOPE AGB Mexico, Televisa had a combined weekday, prime-time
Mexican commercial audience share of 64%, 62% and 63%, during 2000, 2001 and
2002, respectively.
Pay television services generally require an initial connection fee, as
well as a periodic subscription fee, but offer both a higher quality picture
than traditional, over-the-air television broadcasts and a larger number of
channels to choose from. Under current Mexican law, cable television services,
but not DTH satellite services or MMDS, are required to include over-the-air
television channels in a basic package of channels offered to subscribers.
DirecTV, a DTH service provider, carries the soccer games broadcast by the
Azteca 7 and Azteca 13 networks throughout Mexico pursuant to an arrangement
with the Company. Many pay television services are offered by companies that are
backed by large, multinational media conglomerates with substantial resources.
Televisa is a partner in a multinational venture to provide DTH services in
Mexico and elsewhere. According to IBOPE AGB Mexico, the penetration of pay
television as of July 31, 2002 was approximately 14.5% of all television
households. The Company believes that pay television consumers are concentrated
in the Mexico City metropolitan area and along the U.S.-Mexico border.
Azteca America Network
Univision and Telemundo are the main competitors of the Azteca America
Network in the U.S. Spanish-language television market. Both Univision and
Telemundo have already established networks in the U.S. television markets that
Azteca International targets or intends to target. According to industry
reports, currently, Univision has an approximate 73% market audience share and
Telemundo has an approximate 27% market audience share. Univision also owns
Galavision, a Spanish-language cable network that, in 2002, according to
Univision, serves approximately 5.7 million Hispanic cable and direct broadcast
system subscribers, and, according to Nielsen Media Research, reaches 90% of all
Hispanic households. In addition, in January 2002, Univision launched the
Telefutura network, a Spanish-language
37
network which can be seen on 42 over-the-air television broadcast stations in
addition to cable systems nationwide. According to Univision, at its launch
Telefutura reached approximately 80% of the U.S. Hispanic population.
Each of Telemundo and Univision has a larger network of affiliates and
greater financial resources than Azteca International. In addition, each of
these competitors has certain programming advantages over Azteca International.
In 2002, NBC acquired Telemundo. As part of the acquisition, NBC provides
Telemundo with the rights to broadcast NBC's programming in the U.S.
Spanish-language television market. Moreover, Univision has a long-term program
license agreements with Televisa and Corporation Venezolana de Television, C.A.,
another prominent producer of Spanish-language programming. These agreements
provide Univision with a significant amount of quality programming that can be
used to attract and retain U.S. Hispanic viewers.
The Azteca America Network also competes with English-language
broadcasters that also broadcast Spanish-language programming and simulcast
certain programming in English and Spanish for their U.S. Hispanic viewers.
These competitors include the four principal English-language television
networks, ABC, CBS, NBC and Fox, and, in certain cities, the UPN and WB
networks.
Unefon
Unefon faces significant competition from Radiomovil Dipsa, S.A. de C.V.,
commonly known as Telcel, in each region in which it operates. As a former
wholly-owned indirect subsidiary of Telefonos de Mexico, S.A. de C.V.
("Telmex"), Mexico's largest telephone company, Telcel has significantly greater
financial and other resources than those available to Unefon. Telcel has
nationwide cellular and PCS concessions and a nationwide cellular network that
offers broader coverage than Unefon's network. Telcel also has the ability to
use Telmex's installed telecommunications systems. As of December 31, 2002,
according to industry reports, Telcel had approximately 20.1 million
subscribers, representing approximately 75% of the Mexican mobile
telecommunications market. Unefon also competes with cellular service providers
such as Grupo Iusacell, S.A. de C.V. ("Grupo Iusacell"), which is currently
controlled by Verizon Wireless, a U.S. based telecommunications company.
However, Movil Access, S.A. de C.V., a Mexican telecommunications service
provider and subsidiary of Biper, S.A. de C.V. ("Biper"), a paging company
controlled by Ricardo B. Salinas Pliego, announced on June 13, 2003 that it has
agreed to make an offer to acquire 100% of the capital stock of Grupo Iusacell.
According to Iusacell, as of December 31, 2002, it had approximately 2.3 million
subscribers representing approximately 9% of the Mexican mobile
telecommunications market. Unefon also faces competition from Telefonica Moviles
Mexico, a company owned by Telefonica S.A., which also provides mobile services.
According to Telefonica, as of December 31, 2002, Telefonica Moviles Mexico had
approximately 2.4 million subscribers, representing approximately 9% of the
Mexican mobile telecommunications market.
REGULATION
TV AZTECA
Concessions
Under the Ley Federal de Radio y Television ("Mexican Federal Radio and
Television Law"), a television broadcaster must have a concession granted by the
SCT to broadcast over a particular frequency. A concession comprises one or more
licenses, each of which gives the concession holder the right to operate a
television transmitter at a certain location. Each concession specifies, among
other things, the authorized signal strength of the concession holder's
transmitter and the principal populations in its broadcast range. In addition,
the SCT may grant the concession holder separate supplemental authorizations to
operate transmitters within the areas covered by the primary licenses contained
in the concession. Supplemental authorizations are granted in order to allow the
concession holder to broadcast its signal to populations that are inaccessible
to the transmitters located where required by the licenses contained within the
concession. Supplemental authorizations may also be granted in response to a
petition from local residents in an area within the area covered by the
concession.
The Company has 11 concessions for 179 channels. Nine of these concessions
relate to the Azteca 7 network and together comprise 88 channels for primary
transmission locations throughout Mexico. The Company has also obtained 83
38
supplemental authorizations related to the Azteca 7 network. For the Azteca 13
network, the Company has a single concession that comprises 90 licenses for
primary transmission locations throughout Mexico, and has 99 related
supplemental licenses. The Company also has a separate concession for a single
primary transmission location related to the network in the state of Chihuahua.
The SCT has authorized, for a two-year period subject to renewal, the Company's
operation for experimental and investigative purposes of Channel 53, a high
definition digital television channel in Mexico City, to retransmit the
programming of Channel 13 in Mexico City. The Company has also obtained the
authorization of the SCT to install and operate equipment to improve broadcast
signal quality and coverage.
Applications to acquire a concession are submitted to the SCT, which
conducts a formal review process of all competing applications, then publishes a
summary of the selected application (followed by a second publication of such
summary after 10 days). For a 30-day period following the second publication,
third parties may object to the granting of the concession. After the expiration
of a 30-day period, the SCT grants the concession to one applicant. The term of
the concession may be for up to 30 years, with most terms currently being for 15
years.
The SCT may revoke a concession if the concession holder takes any of the
following actions:
.. changes the location of its transmission equipment without the approval of
the SCT;
.. broadcasts over a frequency other than the ones assigned without the
approval of the SCT;
.. transfers the concession, the rights derived therefrom, or any of the
transmission equipment related thereto without the approval of the SCT;
.. suspends transmission from its anchor station for a period greater than 60
days;
.. takes any action that is in contravention of the terms of its concessions;
.. changes its by-laws in contravention of the Mexican Federal Radio and
Television Law;
.. transfers, pledges or encumbers to, or for the benefit of, any foreign
party in any way, in whole or in part, the concession or any of the rights
arising thereunder or any of the transmission equipment associated
therewith;
.. provides goods or services associated with the concession to enemies in
time of war;
.. changes its jurisdiction of incorporation to a jurisdiction outside
Mexico; or
.. requests protection of a foreign government, entity or individual.
If a concession is revoked for any of the foregoing reasons, the
concession holder forfeits all of its assets to the Mexican government. If a
concession is revoked for any other reason, the concession holder must remove
all of its broadcast assets from its licensed locations. If this occurs,
however, the Mexican government has the right to purchase those assets for a
fair price determined by an independent appraiser. None of the Company's
concessions has ever been revoked.
Concessions are renewable by the concession holder upon their expiration
for a term of up to 30 years (with 10 years currently being standard). The SCT
will generally renew the concessions upon expiration, so long as they have been
operated in substantial compliance with applicable law. Seven of the concessions
for the Azteca 7 network expire on April 29, 2006. One of the concessions for
the Azteca 7 network, comprising 22 licenses for primary transmission locations
in the Northwest of Mexico, expires on September 29, 2006. The concession for
the Azteca 13 network expires on May 9, 2008. The Company's Chihuahua concession
was renewed on January 26, 2000 and expires on July 2, 2009.
Supervision of Operations
The SCT and the Secretaria de Gobernacion ("Ministry of the Interior")
have the right to conduct inspections of a concession holder's broadcasting
operations.
39
Television programming is not subject to judicial or administrative
censorship in Mexico. However, Mexican law and regulations prohibit programs
that:
.. are offensive to the civic culture of national heroes and religious
beliefs (ofensivo para el culto civico);
.. are racially discriminatory (discriminatorio para las razas);
.. cause corruption of the language (corrupcion del lenguaje);
.. are contrary to public decency (contrarias a las buenas costumbres);
.. glorify violence or criminal acts (apologia de la violencia o del crimen);
or
.. threaten national safety, public order or cause alarm or panic to the
audience.
Under Mexican regulations, the Direccion General de Radio, Television y
Cinematografia ("Mexican General Directorate of Radio, Television and
Cinematography"), a department of the Ministry of the Interior, reviews all
television programming (except for live programs) prior to broadcast and
classifies it according to the age group for which the programming is acceptable
for viewing. Unless otherwise authorized by the Ministry of the Interior,
programs classified for adults may be broadcast only after 10:00 p.m.; programs
classified for adults and adolescents may be broadcast only after 9:00 p.m.;
programs classified for all age groups, including children, may be shown at any
time. Violations of these regulations are punishable by fines ranging from an
amount in pesos equivalent to between 500 and 5,000 days' minimum wages in the
Federal District, effective as of the date on which such violation, if any,
occurs. Mexican regulations also require that the retransmission of broadcasts
from outside Mexico or broadcasts in a foreign language be pre-approved by the
Ministry of the Interior. In connection with such broadcasts, the Mexican
government imposes a fee for each hour of retransmitted non-Mexican programming
that is so authorized, an annual fee for each channel in which the majority of
the programming is produced abroad, and, in some circumstances, a fee for each
non-Mexican-produced broadcast event. The effect of these fees on the Company
has not been material in the past.
Each concession holder is obligated to transmit up to 30 minutes of
government-supplied programming each day containing themes for purposes of
education, culture, and social orientation. Historically, the Mexican government
has not used a significant portion of this time. In addition, during political
campaigns all registered political parties have the right to purchase time to
broadcast political messages at rates not higher than those available for
commercial advertising.
Restrictions on Advertising
Mexican law regulates the type and amount of advertising that may be
broadcast on television. Concession holders are prohibited from broadcasting
advertisements that are misleading. Advertisements for alcoholic beverages
(other than beer and wine) may be broadcast only after 10:00 p.m. and
advertisements for tobacco products may be broadcast only after 9:00 p.m.
Advertising for alcoholic beverages must not be excessive in amount, feature
minors or portray actual consumption of alcoholic beverages and must be balanced
by public service announcements promoting good nutrition and hygiene.
Advertisements for certain products and services, including medicine, require
the approval of the Mexican government prior to their broadcast. Moreover, the
Mexican government must approve all advertisements for lotteries and other
similar games of chance.
Mexican law also regulates the amount of advertising that a concession
holder may broadcast. No more than 18% of broadcast time may be used for
advertisements on any day. Furthermore, from 8:00 p.m. until a concession holder
ceases broadcasting for the day, the amount of broadcast time dedicated to
advertising may not exceed 50% of the concession holder's total permissible
advertising time. Station identification breaks have a maximum duration of two
minutes and may occur once every half hour except during events whose
interruption would inconvenience viewers. During films, telenovelas and other
programs that have dramatic continuity, commercial interruptions may not be more
than six per hour of program transmission and each interruption may not exceed
two minutes in duration. If a program does not have dramatic continuity,
commercial interruptions may not be more than 10 per hour, with each lasting no
longer than one
40
and a half minutes. The Ministry of the Interior may authorize a concession
holder to temporarily increase the duration of commercial breaks. In the past,
the Company has secured such authorizations for broadcasts during the Christmas
season.
The SCT sets minimum advertising rates. There are no restrictions on
maximum advertising rates.
Broadcast Tax
In addition to paying income taxes, all concession holders are subject to
a tax that is payable by granting the Mexican government the right to use up to
12.5% of the concession holder's total daily broadcast time. This government
broadcast time is not cumulative; any broadcast time not used by the Mexican
government on any day is forfeited. As with the 30 minute requirement referred
to under "--Supervision of Operations" above, the Mexican government
historically has not used a significant portion of the time available to it. In
any event, the use of the time must be distributed on a proportional and
equitable basis throughout the concession holder's daily programming but must
not have a materially adverse effect on the business of the concession holder.
Foreign Ownership
There are certain restrictions on the ownership by non-Mexicans of shares
of Mexican enterprises in some economic sectors, including broadcast television.
Under Mexico's Ley de Inversion Extranjera ("Foreign Investment Law") and the
Mexican Federal Radio and Television Law, foreign investors (including Mexican
companies with foreign shareholders) may not own the capital stock of Mexican
broadcasting concession holders (other than through "neutral investment" shares
or instruments, such as CPOs).
Border Stations
Transmissions from television stations located along the U.S.-Mexican
border are governed by a bilateral treaty signed by the governments of the two
countries. The Agreement for the Assignment and Use of Channels for Television
on the Frequency Range of 470-806 MHz Along the Border of Mexico and the United
States sets criteria that all border stations must meet regarding permissible
transmitter strength, antenna height and distance from the border. The Company
believes that it is in compliance with all aspects of the treaty.
AZTECA AMERICA NETWORK
FCC Regulation--General
The U.S. communications industry, including the operation of broadcast
television networks and stations, is subject to substantial federal regulation,
particularly pursuant to the Communications Act of 1934, as amended, and the
rules and regulations promulgated thereunder by the FCC (the "Act"). This Act
empowers the FCC to, among other things, regulate certain aspects of broadcast
programming and the relationship between broadcast television networks and their
affiliated broadcast television stations.
Alien Ownership of Broadcast Television Stations
The Act prohibits the issuance of a broadcast license to, or the holding
of a broadcast license by, an alien corporation, which is any corporation of
which more than 20% of the capital stock is beneficially or nominally owned or
voted by non-U.S. citizens or their representatives or by a foreign government
or a representative thereof, or by any corporation organized under the laws of a
foreign country, or aliens. The Act also authorizes the FCC, if the FCC
determines that it would be in the public interest, to prohibit the issuance of
a broadcast license to, or the holding of a broadcast license by, any
corporation directly or indirectly controlled by any other corporation of which
more than 25% of the capital stock is beneficially or nominally owned or voted
by aliens. The FCC has issued interpretations of existing law under which these
restrictions in modified form apply to ownership in corporations held through
other forms of business organizations, including partnerships.
Other Broadcast Television Regulation
41
The FCC substantially regulates television broadcast stations, which
generally must apply to the FCC for renewal of their licenses every eight years.
Renewal will be granted to the extent that the FCC finds that (i) the station
has served the public interest; (ii) there have been no serious violations by
the licensee under the Act described above or the FCC rules; and (iii) there
have been no other violations by the licensee of such Act or the FCC rules
which, taken together, indicate a pattern of abuse. The FCC also administers
other aspects of broadcast television regulation, including the following:
restrictions on the ownership of multiple media outlets in one market, or on a
national basis; limits on the amount of commercial advertising during children's
programming; requirements that stations air a certain amount of informational or
educational programming directed at children; restrictions on "indecent"
programming; and requirements affecting the availability and cost of political
advertising time. In addition, FCC rules governing network affiliation
agreements mandate that a television broadcast station licensee retain the right
to reject or refuse network programming in certain circumstances, or substitute
programming that the licensee reasonably believes to be of greater local or
national importance. Violations of FCC rules and regulations can result in
substantial monetary forfeitures, periodic reporting conditions, short-term
license renewal and, in egregious cases, denial of license renewal or revocation
of license.
Other Regulatory Considerations
The foregoing does not purport to be a complete discussion of all
provisions of the Act referenced or other congressional acts or of the rules,
regulations and policies of the FCC. For further information, reference should
be made to the Act itself, other congressional acts, and rules, regulations and
public notices promulgated from time to time by the FCC. There are additional
regulations and policies of the FCC and other federal agencies that govern
political broadcasts, public affairs programming, broadcast advertising and
other matters affecting the Company's U.S. business and operations.
UNEFON
Telecommunications Regulation and Concessions
The Mexican government instituted a number of policies commencing in the
late 1980s to liberalize and deregulate important sectors of the Mexican
economy, including the telecommunications industry. The Mexican government has
sought to increase competition in the provision of local, domestic long-distance
and international long-distance telephony services, which have historically been
dominated by Telmex.
Telecommunications systems in Mexico are regulated by the SCT and the
Comision Federal de Telecomunicaciones ("Cofetel"), the Mexican federal
commission for telecommunications, pursuant to the Ley Federal de
Telecomunicaciones ("Mexican Federal Telecommunications Law"), the Reglamento de
Telecomunicaciones ("Telecommunications Regulations") and the Ley de Vias
Generales de Comunicacion ("Mexican General Means of Communications Law"). In
this respect, some of the rules set forth in the General Means of Communications
Law, the Telecommunications Regulations and the rules promulgated thereunder
remain effective if they are not inconsistent with the Federal
Telecommunications Law and the rules promulgated under that law. All of these
laws and regulations, together, complemented by Cofetel's administrative
regulations, define the regulatory structure applicable to the nationwide
telecommunications infrastructure and the supply of telecommunications services
in Mexico. In addition to these laws, telecommunications companies are also
individually bound by the terms and conditions of their respective concessions
or permits granted by the SCT.
Under the Federal Telecommunications Law and the Foreign Investments Law,
concessions may be granted only to Mexican individuals and to Mexican
corporations whose foreign investment participation does not exceed 49% of the
capital stock or who are not otherwise controlled by non-Mexicans. However,
foreign investment participation may exceed 49% of the capital stock of a
wireless concession holder with the prior approval of the Mexican Foreign
Investment Commission of the Mexican Ministry of Economy. Unefon has received a
conditional approval to allow greater than 49% foreign investment participation
in Unefon.
Under the terms of most concessions, an authorization from the SCT is
required in order for a concession holder to transfer or subscribe more than 10%
of its corporate capital. Any transfer of capital or issuance of shares in
breach of
42
these requirements, including the limits on foreign investment, is deemed null
and void under Mexican law. The transfer of an existing concession from one
operator to another operator also requires the approval of the SCT, as well as
approval of the Mexican Antitrust Commission, if applicable. The concession
holder may not assign its rights during the first three years following the
award of the concession. After this period, assignment is subject to the prior
approval of the SCT.
PROPERTY
Broadcasting, Production and Office Facilities
The properties of the Company primarily consist of broadcasting,
production and office facilities, all of which are located in Mexico. The
Company's principal offices, comprised of 42,250 square meters, which it owns,
are located in Mexico City.
The Company owns and operates all of its 323 broadcast facilities
(buildings and transmission towers) and all of the transmission equipment
located at those facilities. Approximately 31% of the sites upon which these
broadcast facilities are located are owned by the Company and the remainder are
leased. From the time of its privatization through December 31, 2002, the
Company has invested approximately Ps.781 million in purchasing new
transmitters.
In February 2000, the Company, together with its subsidiary, Television
Azteca, entered into a 70-year tower project agreement (the "Tower Agreement")
with a Mexican subsidiary of American Tower Corporation ("ATC") regarding space
not used by the Company in its operations. This agreement, which was approved by
the SCT, covers up to 190 of the Company's broadcast transmission towers. In
consideration for the payment of a US$1.5 million annual fee and for a loan of
up to US$119.8 million under the ATC Long-Term Credit Facility (as defined under
"Item 5. Operating and Financial Review and Prospects--Liquidity and Capital
Resources"), the Company granted ATC the right to market and lease the Company's
unused tower space to third parties (including affiliates of the Company) and to
collect for ATC's account all revenue related thereto. The Company retains full
title to the towers and remains responsible for the operation and maintenance
thereof. After the expiration of the initial 20 year term of the ATC Long-Term
Credit Facility, the Company has the right to purchase from ATC at fair market
value all or any portion of the revenues and assets related to ATC's marketing
and leasing rights at any time upon the proportional repayment of the
outstanding principal amount under the ATC Long-Term Credit Facility.
The Company's television production operations are concentrated in two
production studio facilities owned by the Company and located in Mexico City:
the Ajusco Studios facility and the Azteca Digital facility. Ajusco Studios is
located on the same site as the Company's principal offices.
The Company acquired an additional office building in Mexico City in 1997,
located adjacent to its principal offices, for approximately US$25.9 million
with a mortgage loan that is scheduled to mature on November 20, 2003. The
Company has relocated part of its programming operations to the new building and
rented a portion to third parties. One of the towers of this building is
currently being leased to Unefon pursuant to a 10 year lease agreement dated May
22, 1998 that is renewable for an additional 10 years upon notice of at least
180 days prior to expiration. The annual rent under the Unefon lease is
approximately US$2.5 million. See "Item 7. Major Shareholders and Related Party
Transactions--Related Party Transactions--Agreements between TV Azteca and
Unefon."
In October 2001, the Company acquired additional real estate in Mexico
City, located adjacent to its principal offices, for approximately US$4.0
million. The Company is building a new parking lot for its employees on this
property.
Satellites
The Company uses satellite technology to transmit the signals of its two
anchor stations throughout Mexico and to transmit signals from mobile units to
its anchor stations in Mexico City. In January 2000, the Company entered into a
10 year lease of transponder capacity on the satellite SatMex 5 owned by
Satelites Mexicanos, S.A. de C.V. Satellite signals transmitted using SatMex 5
reach Mexico, the U.S., Central America and South America. The annual rent for
the use of the transponder capacity is approximately US$614,000.
43
Insurance
The Company maintains comprehensive insurance coverage that covers its
offices, equipment and other property, subject to customary deductibles and
limits against damage due to natural disasters or other similar events.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements, and the related notes to those statements included
elsewhere herein.
The Company's financial statements have been prepared in accordance with
Mexican GAAP, which differs in some respects from U.S. GAAP. Note 17 to the
Consolidated Financial Statements provides a description of the principal
differences between Mexican GAAP and U.S. GAAP as they relate to the Company and
a reconciliation to U.S. GAAP of its results of operations, stockholders' equity
and certain other selected financial data for the years ended December 31, 2000,
2001 and 2002. Pursuant to Mexican GAAP, financial data for all periods in the
financial statements have been restated in constant pesos as of December 31,
2002. Bulletin B-12 issued by the MIPA requires that the statement of changes in
financial position reflects changes from the restated historical balance sheet
to the current balance sheet.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Operating and Financial Review and Prospects is based upon
the Consolidated Financial Statements, which have been prepared in accordance
with Mexican GAAP. The use of Mexican GAAP as opposed to U.S. GAAP has an impact
on the Company's Critical Accounting Policies and Estimates. The application of
U.S. GAAP would have affected the determination of consolidated net (loss)
income for all periods in the financial statements and the determination of
consolidated stockholders' equity and consolidated financial position as of
December 31, 2002. Note 17 to the Consolidated Financial Statements provides a
reconciliation to U.S. GAAP of the Company's results of operations,
stockholders' equity and certain other selected financial data for the years
ended December 31, 2000, 2001 and 2002.
The preparation of its financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to bad debts, valuation of long-lived and intangible
assets and goodwill, exhibition rights, reserve for obsolescence, income taxes,
deferred income taxes, labor benefits, and contingencies and litigation. The
Company bases its estimates on historical experience and on various other
assumptions that the Company believes to be reasonable under the circumstances.
These estimates form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
Consolidated Financial Statements.
REVENUE RECOGNITION
Revenue for the Company is derived primarily from the sale of advertising
time on a national, spot and local basis and is net of commissions. The Company
earned a majority of its advertising revenue in 2000, 2001 and 2002 pursuant to
advertising contracts under its Azteca Plan and Mexican Plan. These contracts
generally require the advertiser to deposit a portion of the purchase price of
the advertising time at the time the advertiser executes a contract. A
significant percentage of these contracts are commitments for advertising over a
period of approximately one year. From time to time, the Company enters into
barter transactions with third parties in which it exchanges advertising time
for goods, services and other assets, a significant portion of which are used in
the Company's operations. With respect to barter transactions, the Company
values these transactions based on the estimated fair market value of the goods,
services or other assets received by the Company. Such transactions accounted
for approximately 2% of the Company's net revenue for the year ended December
31, 2002.
44
On the date the advertising contract is signed, the Company records cash
or other assets, as the case may be, as an asset on its balance sheet and the
amounts due and its obligation to deliver advertising as advertising advances,
which are recorded as a liability on its balance sheet. These advertising
advances are recognized as revenue at the time, and to the extent, the
advertisements are shown.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
Each customer is analyzed on a case by case basis. If the financial condition of
the Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.
EXHIBITION RIGHTS
The cost of the exhibition rights are amortized on varying bases related
to the license period, usage of the programs and management's estimate of
revenue to be realized from each airing of the programs. The cost of exhibition
rights acquired is amortized as the programming and events are broadcast and on
an accelerated basis when the rights relate to multiple broadcasts. Costs of
internally produced programming, including reality programming, are amortized
when the programs are initially aired. Alternatively, the costs of telenovelas
are amortized on the following schedule: (a) 70% is amortized when the
telenovela is first aired and (b) 30% is amortized over a period of four years
and represents management's estimate of exhibition rights necessary to meet
demand in the U.S., Latin America, Europe, Asia and Africa. The Company bases
its estimates on historical experience and on various other assumptions. If
actual results differ from these estimates, there may be an adverse effect on
the Company's financial results.
INTANGIBLE ASSETS AND GOODWILL
In December 2001, the Accounting Principles Commission of the MIPA issued
Statement C-8 "Intangible Assets," ("Statement C-8"), which went into effect
January 1, 2003. On January 1, 2002, the Company adopted Statement C-8. Under
Statement C-8, the intangible assets must be recognized on the balance sheet
when they meet the following characteristics: (a) they are identifiable, (b)
they have the ability to generate future economic benefits and (c) the company
has the ability to control future economic benefits. The amortization of
intangible assets would be allocated on a systematic basis over the assets'
estimated useful lives, unless the intangible assets are determined to have an
indefinite useful life based on their expected future economic benefits. The
intangible assets should be tested for impairment annually and an impairment
loss would be recognized in the event that the carrying amount of the intangible
asset is not recoverable based on estimated cash flow of operating activities.
As a result of the adoption of Statement C-8, the Company determined that its
television concessions qualified as indefinite useful life intangible assets.
Accordingly, the Company no longer amortizes these concessions. Prior to January
1, 2002, the Company's television concessions were amortized by the
straight-line method over the duration of the relevant concession.
DEFERRED TAXES
As part of the process of preparing its Consolidated Financial Statements,
the Company is required to estimate its income taxes. This process involves
estimating the Company's actual current tax exposure together with assessing
temporary differences resulting from differing tax and accounting treatment of
items such as advertising advances, exhibitions rights and inventories,
television concessions, property, machinery and equipment and tax loss
carryforwards. These differences result in deferred tax assets and liabilities
which are included within the Company's consolidated balance sheet. The Company
must then assess the likelihood that its deferred tax assets will be recovered
from future taxable income and to the extent the Company believes that recovery
is not likely, it must establish a valuation allowance. To the extent the
Company establishes a valuation allowance or increase this allowance in a
period, it must include an expense within the tax provision in the statement of
operations. Significant management judgment is required in determining the
Company's provision for income taxes, the Company's deferred tax assets and
liabilities and any valuation allowance recorded against the Company's net
deferred tax assets.
45
UNEFON INVESTMENT
In October 2000, the Company granted rights to acquire all of the Unefon
Series A shares that it owns pro rata to the holders of all of the Company's
outstanding shares and to certain other of the Company's securities, for an
aggregate exercise price of US$177.0 million. The grant of the rights to acquire
the Unefon Series A shares was subject to receiving the consent of the holders
of the TV Azteca Notes and the Azteca Holdings 11% Senior Secured Notes due 2002
("11% Notes"). On March 27, 2001, the Company and Azteca Holdings obtained these
consents and paid a fee totaling Ps.121,328 (nominal) to certain holders of the
11% Notes and TV Azteca Notes, of which Ps.109,009 (nominal) was recorded as
part of the Company's total investment in Unefon. The grant of the rights
remains subject to the filing and effectiveness of a registration statement with
the SEC that registers the Unefon Series A shares underlying the rights and the
receipt of all applicable regulatory and third-party approvals. The rights to
acquire the Unefon Series A shares were originally only exercisable on December
11, 2002. However, in December 2002, the Company approved the change of the
exercise date to December 12, 2003. See "Item 7. Major Shareholders and Related
Party Transactions--Related Party Transactions--TV Azteca Rights
Transactions--Unefon."
As a result of the grant of the rights to acquire the Unefon Series A
shares in October 2000, the Company stopped recognizing its participation in the
losses of Unefon. Accordingly, at December 31, 2002, the Company's investment in
Unefon reflected the net book value of the investment at the date of the
decision to dispose of the investment. In the event that the disposition of the
Unefon Series A shares is not completed or if the likelihood of the completion
of the transaction is deemed too remote, the Company will be required to record
the differences between the book value of the investment and the value of the
investment under the equity method of accounting, which may result in the
Company's recognition of additional losses. For example, if this adjustment had
been made at December 31, 2002, the Company would have recognized additional
losses equal to Ps.405 million (US$39.0 million).
CONTINGENT LIABILITIES
The Company is a party to certain legal proceedings. Under Mexican and
U.S. GAAP, liabilities are recognized in the financial statements when a loss is
both estimable and probable. If the loss is neither probable nor estimable or if
the likelihood of a loss is remote, no amounts are recognized in the financial
statements. Based on legal advice the Company has received from its Mexican
counsel and other information available to the Company, it has not recognized
any losses in the financial statements as a result of these proceedings.
EFFECTS OF THE PESO DEVALUATION AND INFLATION
GENERAl
The Mexican government's decision in December 1994 to significantly
increase the range within which Mexican pesos would be exchanged for U.S.
dollars and to subsequently permit the peso to float freely against the U.S.
dollar caused a significant devaluation of the peso against the U.S. dollar. The
devaluation produced a number of adverse effects on the Mexican economy that, in
turn, adversely affected the financial condition and results of operations of
the Company. Interest rates in Mexico increased substantially, thus increasing
the cost of borrowing. In addition, in response to the adverse effects of the
devaluation, the Mexican government established an economic recovery program
designed to tighten the money supply, increase domestic savings, discourage
consumption and reduce public spending generally. Foreign investment in Mexico
by private sources declined significantly.
Economic conditions in Mexico generally improved in 1998, 1999 and 2000,
with gross domestic product ("GDP") increasing by 4.8%, 3.8% and 6.9%,
respectively. However, in 2001, GDP decreased 0.3%. For the year ended December
31, 2002, GDP grew by 0.9%. Interest rates on 28-day Mexican government treasury
securities averaged 24.8%, 21.4% 15.3%, 11.3% and 7.1% in 1998, 1999, 2000, 2001
and 2002, respectively.
Inflation during 1998, 1999, 2000, 2001 and 2002 was 18.6%, 12.3%, 8.9%,
4.4% and 5.7%, respectively. In 1998, the peso weakened to Ps.8.914 per U.S.
dollar at December 31, 1998, a 10.5% decrease in value from December 31, 1997.
In 1999, the peso weakened to Ps.9.500 per U.S. dollar on December 31, 1999, a
6.6% decrease in value from December 31, 1998. In 2000, the peso weakened to
Ps.9.650 per U.S. dollar at December 31, 2000, a 1.6% decrease in
46
value from December 31, 1999. In 2001, the peso strengthened to Ps.9.160 per
U.S. dollar at December 31, 2001, a 5.1% increase in value from December 31,
2000. In 2002, the peso weakened to Ps.10.395 per U.S. dollar at December 31,
2002, a decrease of 13.5% in value from December 31, 2001.
U.S. DOLLAR-DENOMINATED OPERATING COSTS
The Company has significant operating costs in U.S. dollars, principally
due to the cost of its purchased programming and the leasing of satellite
transponder capacity. During the years ended December 31, 2000, 2001 and 2002,
the cost of purchased programming and the leasing of satellite transponder
capacity represented 21%, 20% and 22%, respectively, of the Company's total
costs and expenses.
COMPREHENSIVE FINANCING COST
Interest expense. Interest on the Company's U.S. dollar-denominated
indebtedness exposes it to exchange rate fluctuations, with the peso cost of
interest payments on such indebtedness increasing as the peso's value declines
against the U.S. dollar and decreasing when the peso's value appreciates against
the U.S. dollar. See "Item 11. Quantitative and Qualitative Disclosures About
Market Risk."
Interest income. Interest income is positively affected by inflation as
the Company receives higher rates of return on its temporary investments, which
are primarily fixed short-term peso deposits in Mexican banks.
Exchange (loss) gain. The Company records a foreign exchange gain or loss
with respect to U.S. dollar-denominated monetary assets or liabilities when the
peso appreciates or depreciates in relation to the U.S. dollar. The Company's
U.S. dollar-denominated monetary liabilities, which principally consist of U.S.
dollar-denominated indebtedness and accounts payable with respect to exhibition
rights, substantially exceed its U.S. dollar-denominated monetary assets, which
principally consist of U.S. dollar bank deposits. As a result, the Company has
recorded a foreign exchange loss during each period in which the peso
depreciated in relation to the U.S. dollar and a foreign exchange gain during
each period in which the peso appreciated in relation to the U.S. dollar.
Other financing expense. The Company has investments in a portfolio of
equity and cash equivalent instruments that from time to time increase or
decrease in value due to market conditions. When there are gains in the value of
the Company's portfolio investments, the Company's other financing expense
decreases, while conversely a decrease in the value of the Company's portfolio
investments results in an increase in the Company's other financing expense. In
addition, other financing expense also reflects annual amortization of
capitalized debt issuance costs.
Gain or loss on monetary position. The Company records gains or losses
from holding net monetary liabilities or assets due to the effect of inflation.
A gain on monetary position results from holding net monetary liabilities during
periods of inflation, as the purchasing power represented by nominal peso
liabilities declines over time. As of December 31, 2000, 2001 and 2002, the
Company had approximately US$696.9 million, US$705.8 million and US$674.5
million, respectively, of monetary liabilities denominated in U.S. dollars.
Approximately US$616.4 million, US$609.6 million and US$585.8 million of such
monetary liabilities, respectively, represented outstanding indebtedness of the
Company for borrowed money, which constituted all of its outstanding
indebtedness at those dates. The Company's U.S. dollar-denominated monetary
assets as of December 31, 2000, 2001 and 2002 amounted to approximately US$307.6
million, US$357.2 million and US$491.9 million, respectively. Accordingly, since
the Mexican economy experienced inflation and the Company's monetary liabilities
exceeded the Company's monetary assets in 2000, 2001 and 2002, the Company
recorded a gain on monetary position in each of those periods.
ADVERTISING ADVANCES
Advertising advances are non-monetary liabilities because they represent
the Company's obligation to perform services in the future. As a result, the
amount of advertising advances on the balance sheet is restated using the NCPI
in order to reflect the effects of inflation. There is also a restatement of the
corresponding revenue when it is recognized. This effect resulted in increases
of Ps.261 million, Ps.186 million and Ps.220 million (US$21.2 million) in net
revenue for the years ended December 31, 2000, 2001 and 2002, respectively.
47
PRE-SALES OF ADVERTISING TIME
For the years ended December 31, 2000, 2001 and 2002, 59%, 73% and 69%,
respectively, of the Company's net revenue was attributable to pre-sales of
advertising time made prior to that year. At December 31, 2000, pre-sales of
advertising time for 2001 amounted to Ps.4,457 million, which represented a 20%
increase over pre-sales of advertising time for 2000 recorded in 1999. At
December 31, 2001, pre-sales of advertising time for 2002 amounted to Ps.4,640
million, which represented a 4% increase over pre-sales of advertising time for
2001 recorded in 2000. At December 31, 2002, pre-sales of advertising time for
2003 amounted to Ps.4,446 million (US$427.7 million), representing a 4% decrease
compared to pre-sales of advertising time for 2002 recorded in 2001. Pre-sales
of advertising time recorded in 2002 were lower due to the expiration of certain
multi-year advertising contracts.
2001 PRICE INCREASES
The Company implemented a new pricing plan in 2001 pursuant to which the
Company achieved a 42% average nominal rate increase over the average nominal
rates charged in 2000. This rate increase was phased in quarterly during 2001.
The rate increases were higher than the inflation rate for each of the quarterly
periods in which rates were raised. The Company believes these rate increases
resulted in a reduction of the Company's total advertising time sold because
most advertisers have a limited advertising budget. The Company sold a portion
of otherwise unsold advertising time to shared risk advertisers and to producers
of infomercials. The Company also used a portion of the unsold advertising time
to aggressively market the programming of its networks. The Company believes
that the use of its unsold advertising time in this manner helped increase its
audience and advertising share. The average price of the Company's pre-sales of
advertising time for 2003 was the same as the price charged for advertising time
in 2002.
ADVANCE SALES
Unefon Advertising Advances
In October 1999, the Company acquired a 50% equity interest in Unefon, a
Mexican mobile wireless telecommunications company which began operating in
February 2000. The Company currently holds a 46.5% interest in Unefon. The
Company does not consolidate the operations of Unefon.
In June 1998, the Company and Unefon entered into a 10-year advertising
agreement, as amended, pursuant to which the Company agreed to supply Unefon
with advertising spots totaling an aggregate of 120,000 GRPs over the life of
the agreement, up to a maximum of 35,000 GRPs per year. Unefon agreed to pay the
Company 3.0% of its gross revenues up to a maximum of US$200.0 million. As of
December 31, 2002, the Company had broadcast Unefon advertisements having an
aggregate value of Ps.147 million (US$14.1 million) pursuant to this advertising
agreement. Pursuant to the agreement, Unefon has elected to defer payments due
in 2000, 2001 and 2002 and to make these payments in four equal semi-annual
installments during 2003 and 2004, with the first payment maturing in June 2003.
The deferred payments accrue interest at an annual interest rate of 12%.
Starting in 2003, Unefon's payments to the Company are due on a current basis.
At December 31, 2002, the aggregate deferred payments equaled US$15.7 million
(including interest). Unefon can only use the GRPs through December 2009.
Pursuant to the advertising agreement, Unefon's failure to pay advances will not
be considered a default by Unefon under the agreement. However, the Company will
be able to suspend the provision of advertising spots to Unefon after Unefon's
continued failure to pay for one year.
Todito Advertising Programming and Services Advance
In February 2000, the Company acquired a 50% equity interest in Todito, a
Mexican company that operates an Internet portal, Internet connection service
and e-commerce marketplace that targets Spanish speakers in the U.S. and Mexico.
In connection with its investment in Todito, the Company entered into a
five-year advertising, programming and services agreement with Todito, which was
initially recorded as an advertising, programming and services advance in the
amount of US$100.0 million. At December 31, 2002, the unused balance of the
Todito advertising, programming and services advance was Ps.504 million (US$48.5
million).
48
OTHER SALES
Barter Sales
Barter transactions are accounted for in the same manner as other
advertising advances, and the amounts due to the Company are determined based on
the fair market value of the goods, services or other assets received by the
Company. For the years ended December 31, 2000, 2001 and 2002, revenue from
barter transactions accounted for Ps.202 million, Ps.84 million and Ps.146
million (US$14.0 million), respectively, which represented 3.4%, 1.4% and 2.2%
of the Company's net revenue, respectively.
Infomercials, Shared Risk Advertisements and Integrated Advertising
The Company sells a portion of otherwise unsold advertising time to shared
risk advertisers and to producers of infomercials. With respect to infomercials,
the Company charges a fee for the time slot in which the advertisement runs. The
Company does not, however, receive any proceeds from the sale of the products
shown during the infomercial. Alternatively, with respect to shared risk
advertisements, the Company does not receive any advertising fees during the
time slot in which the advertisement runs. Instead, the Company receives a
percentage of the gross sales of the offered product or products for a specified
period of time after the advertisement is broadcast. For example, the Company
airs advertisements for music recordings at little or no up front charge, under
agreements that entitle the Company to receive a share of the sales of the
recordings for a number of months following the airing of the advertisements.
The Company also receives revenue from "integrated advertising" in the form of
product placements during the broadcast of the Company's internally produced
programming. Revenues derived from shared risk advertisements, infomercials and
integrated advertising amounted to Ps.900 million, Ps.1,037 million and Ps.1,230
million (US$118.3 million), which accounted for 15%, 17% and 18%, respectively,
of the Company's net revenue, for the years ended December 31, 2000, 2001 and
2002, respectively.
SEASONALITY OF SALES
The Company's television broadcasting business is seasonal. Advertising
revenue, which is recognized when the advertising is aired, is generally highest
in the fourth quarter due to the high level of advertising aired during the
holiday season.
CYCLICALITY DUE TO MAJOR BROADCAST EVENTS
The Company's net revenue fluctuates as a result of the frequency with
which the Company broadcasts major events. During 2000, the Company recorded
increased advertising revenues due in part to the advertising by political
parties in connection with the Mexican presidential campaign and election, which
accounted for Ps.201 million. Also, during 2000, the Company broadcast the 2000
Summer Olympics, which accounted for Ps.182 million, and the Gold Cup Soccer
Championship, which accounted for Ps.18 million. These events collectively
accounted for approximately 6.7% of the Company's net revenue for the year ended
December 31, 2000. During the year ended December 31, 2002, the Company
broadcast the 2002 World Cup which accounted for approximately Ps.260 million
(US$25.0 million) in net revenue. The Company did not broadcast any major events
in 1999 and 2001. During 2003, there will be a number of local governmental
elections and related campaigns. The Company anticipates receiving additional
advertising revenue in connection with this electoral activity. In addition, the
Company has acquired the Mexican broadcast rights to the 2004 and 2008 Summer
Olympics.
Historically, the broadcast of major events by the Company increased
advertising sales during the periods in which they were shown, reflecting both
the larger audiences drawn to these events relative to the Company's average
audience during the hours that these major events were broadcast, and the fact
that advertisers pay a premium to be associated with such major broadcast events
compared to the Company's regularly scheduled broadcast programs.
49
SELECTED RESULTS OF OPERATION COMPONENTS AS A PERCENTAGE OF NET REVENUE
The following table sets forth, for the periods indicated, results of
operations data for the Company as a percentage of the Company's net revenue.
YEARS ENDED DECEMBER 31,
------------------------
2000 2001 2002
---- ---- ----
Net revenue ...................................... 100% 100% 100%
Programming, production and transmission costs ... (45%) (40%) (38%)
Sales and administrative expenses ................ (16%) (16%) (15%)
Total costs and expenses ......................... (61%) (56%) (53%)
Depreciation and amortization .................... (10%) (10%) (6%)
Operating profit margin .......................... 29% 34% 42%
OPERATING RESULTS
YEAR ENDED DECEMBER 31, 2002 VS. YEAR ENDED DECEMBER 31, 2001
Net revenue for the year ended December 31, 2002 increased by 9% to
Ps.6,690 million (US$643.6 million) from Ps.6,123 million for the year ended
December 31, 2001. The increase in net revenue was due in part to higher ratings
and advertising rates in real terms and the transmission of the 2002 World Cup
and the Company's reality program La Academia. The increase in net revenue also
reflected an increase in local advertising sales, excluding local sales in
Mexico City, which increased by 20% to Ps.576 million (US$55.4 million) for the
year ended December 31, 2002, from Ps.481 million for the year ended December
31, 2001.
Programming, production and transmission costs for the year ended December
31, 2002 increased by 2% to Ps.2,511 million (US$241.5 million) from Ps.2,470
million for the year ended December 31, 2001. This increase was primarily due to
an increase in the exhibition and production costs associated with the broadcast
of the 2002 Soccer World Cup and the La Academia reality program.
Sales and administrative expenses for the year ended December 31, 2002
increased by 2% to Ps.974 million (US$93.7 million) from Ps.957 million for the
year ended December 31, 2001. This difference resulted from the increase in the
Company's personnel expenses and general administrative expenses due to the
operation of its new local stations.
Depreciation and amortization for the year ended December 31, 2002
decreased by 36% to Ps.385 million (US$37.1 million) from Ps.604 million for the
year ended December 31, 2001. This decrease reflects the effects of the
Company's adoption of Statement C-8 "Intangible Assets" as described in
"Critical accounting policies--Intangible Assets and Goodwill" and the
application of these rules with respect to the amortization schedule of the
Company's television concessions. Also effective January 1, 2002, the Company
changed the annual rate of depreciation for its transmission towers from 16% to
5%, based on the remaining useful life of these assets. This resulted in a
decrease in depreciation expense for the year ended December 31, 2002.
As a result of these factors, operating profit for the year ended December
31, 2002 increased by 35% to Ps.2,819 million (US$271.2 million) from Ps.2,092
million for the year ended December 31, 2001.
Other expenses--net for the year ended December 31, 2002 increased by 81%
to Ps.442 million (US$42.5 million) from Ps.244 million for the year ended
December 31, 2001. This increase was primarily due to high losses experienced by
the Company's subsidiaries under the equity method and the write-off of certain
assets.
Net comprehensive financing cost for the year ended December 31, 2002
increased by 234% to Ps.1,104 million (US$106.2 million) from Ps.331 million for
the year ended December 31, 2001. Net comprehensive financing cost includes
interest income and expense, net exchange gains or losses, gain on monetary
position and other financing expense as described below. As of December 31,
2002, substantially all of the Company's indebtedness was denominated in US
dollars. The increase in net comprehensive financing cost for the year ended
December 31, 2002 was primarily due to a foreign exchange loss of Ps.353 million
(US$34.0 million) which reflected a 13.5% depreciation of the peso against
50
the U.S. dollar since December 31, 2001 compared with a foreign exchange gain of
Ps.198 million for the year ended December 31, 2001. Interest income for the
year ended December 31, 2002 decreased by 20% to Ps.192 million (US$18.5
million) from Ps.240 million for the year ended December 31, 2001 as a result of
a reduction of interest rates, and interest expense for the year ended December
31, 2002 decreased by 2% to Ps.725 million (US$69.8 million) from Ps.743 million
for the year ended December 31, 2001. Other financing expense for the year ended
December 31, 2002 increased 404% to Ps.136 million (US$13.1 million) from Ps.27
million for the year ended December 31, 2001. This increase was primarily due to
a significant decline in the market value of the Company's portfolio
investments. For the year ended December 31, 2002 the company had a loss in
monetary position of Ps.82 million (US$7.9 million) compared with a gain in
monetary position of Ps.2 million for the year ended December 31, 2001 as a
result of the decrease in the Company's net monetary liability position in the
year ended December 31, 2002.
Income before provision for income tax and deferred income tax benefit
(expense) for the year ended December 31, 2002 decreased by 16% to Ps.1,274
million (US$122.6 million) from Ps.1,517 million for the year ended December 31,
2001.
Provision for income tax for the year ended December 31, 2002 increased by
26% to Ps.264 million (US$25.4 million) from Ps.210 million for the year ended
December 31, 2001. This increase reflects higher taxable income generated during
the year ended December 31, 2002. Deferred income tax expense for the year ended
December 31, 2002 was Ps.26 million (US$2.5 million) compared with a deferred
income tax benefit of Ps.199 million for the year ended December 31, 2001.
As a result of the foregoing, the Company had net income of Ps.984 million
(US$94.7 million) for the year ended December 31, 2002, as compared with a net
income of Ps.1,506 million for the year ended December 31, 2001. Ps.0.2 million
(US$0 million) of the net income for the year ended December 31, 2002
represented net loss of minority stockholders and Ps.985 million (US$94.7
million) represented net income of majority stockholders compared with a Ps.2
million net loss of minority stockholders and Ps.1,508 million net income of
majority stockholders for the year ended December 31, 2001.
YEAR ENDED DECEMBER 31, 2001 VS. YEAR ENDED DECEMBER 31, 2000
Net revenue for the year ended December 31, 2001 increased 2%, or Ps.136
million (US$13.1 million), from Ps.5,987 million (US$576.0 million) to Ps.6,123
million (US$589.0 million) for the year ended December 31, 2000. The increase in
the Company's net revenue was due in part to local advertising sales, excluding
local sales in Mexico City, which increased 11% to Ps.481 million (US$46.3
million) for the year ended December 31, 2001 from Ps.434 million (US$41.8
million) for the year ended December 31, 2000. The increase in the Company's net
revenue also reflected an increase in the prices charged by the Company for its
advertising time for the year ended December 31, 2001 and Ps.68 million (US$6.5
million) in pre-launch non-competition fees recorded during the year ended
December 31, 2001 from the Company's former joint venture with Pappas, compared
with Ps.69 million (US$6.6 million) recorded during the year ended December 31,
2000. The increase in net revenue was partially offset by the absence of major
broadcast events for the year ended December 31, 2001 compared with the year
ended December 31, 2000, during which period the 2000 Summer Olympics, the
Mexican presidential campaign and election and the Gold Cup Soccer Championship
took place. These major broadcast events contributed, in the aggregate,
approximately Ps.401 million (US$38.6 million) to the Company's net revenue for
the year ended December 31, 2000.
Programming, production and transmission costs for the year ended December
31, 2001 decreased 8% to Ps.2,470 million (US$237.6 million) from Ps.2,680
million (US$257.8 million) for the year ended December 31, 2000. The decrease in
operating costs was due primarily to the reduction in the amount of internally
produced programming and the absence of production costs associated with the
Company's broadcast of major broadcast events during the year ended December 31,
2000. See "Item 4. Information on the Company--Programming."
Sales and administrative expenses for the year ended December 31, 2001
increased 2% to Ps.957 million (US$92.1 million) from Ps.940 million (US$90.4
million) for the year ended December 31, 2000. This increase resulted from the
increase in the Company's personnel expenses and general administrative
expenses.
51
Depreciation and amortization for the year ended December 31, 2001
decreased 4% to Ps.604 million (US$58.1 million) from Ps.627 million (US$60.3
million) for the year ended December 31, 2000. This decrease was primarily due
to the strengthening of the peso as it relates to the Company's assets purchased
outside of Mexico, primarily in the U.S.
As a result of these factors, operating profit for the year ended December
31, 2001 increased 20% to Ps.2,092 million (US$201.3 million) from Ps.1,740
million (US$167.4 million) for the year ended December 31, 2000.
Other expense-net for the year ended December 31, 2001 decreased 35% to
Ps.244 million (US$23.5 million) from Ps.376 million (US$36.2 million) for the
year ended December 31, 2000. The difference primarily reflected the fact that
the Company stopped recognizing its participation in the losses of Unefon since
the fourth quarter of 2000.
Net comprehensive financing cost for the year ended December 31, 2001
decreased 50% to Ps.331 million (US$31.8 million) from Ps.665 million (US$64.0
million) for the year ended December 31, 2000. Net comprehensive financing cost
includes interest income and expense, net exchange gains or losses, gain on
monetary position and other financing expense as described below. The decrease
in net comprehensive financing cost for the year ended December 31, 2001 was
primarily due to a foreign exchange gain of Ps.198 million (US$19.0 million)
which reflected a 5.1% appreciation of the peso against the U.S. dollar since
December 31, 2000 compared with a foreign exchange loss of Ps.128 million
(US$12.3 million) for the year ended December 31, 2000. Interest income for the
year ended December 31, 2001 increased 27% to Ps.240 million (US$23.1 million)
from Ps.188 million (US$18.1 million) for the year ended December 31, 2000, and
interest expense for the year ended December 31, 2001 decreased 6% to Ps.743
million (US$71.5 million) from Ps.791 million (US$76.1 million) for the year
ended December 31, 2000. Gain on monetary position for the year ended December
31, 2001 decreased 99% to Ps.2 million (US$0 million) from Ps.209 million
(US$20.1 million) for the year ended December 31, 2000 as a result of the
decrease in the inflation rate in the year ended December 31, 2001 to 4.4% from
8.9% for the year ended December 31, 2000.
Other financing expense for the year ended December 31, 2001 decreased 81%
to Ps.27 million (US$2.6 million) from Ps.143 million (US$13.8 million) for the
year ended December 31, 2000. The decrease was principally due to a significant
decline in the market value of the Company's publicly-traded shares of El Sitio
International Corporation ("El Sitio"), which amounted to Ps.2 million (US$0
million) for the year ended December 31, 2001, compared with a loss on the
investment of Ps.149 million (US$14.3 million) during the year ended December
31, 2000. In August 2001, the Company sold its interest in El Sitio for
US$179,163.
Income before provision for income tax, deferred income tax benefit
(expense) and extraordinary items for the year ended December 31, 2001 increased
117% to Ps.1,517 million (US$145.9 million) from Ps.699 million (US$67.2
million) for the year ended December 31, 2000. Provision for income tax for the
year ended December 31, 2001 increased 14% to Ps.210 million (US$20.2 million)
from Ps.184 million (US$17.7 million) for the year ended December 31, 2000. The
increase was due to an increase in the Company's taxable profit in the year
ended December 31, 2001 compared with the year ended December 31, 2000. During
the year ended December 31, 2001, the Company had a deferred income tax benefit
of Ps.199 million (US$19.1 million) compared with a deferred income tax benefit
of Ps.204 million (US$19.6 million) for the year ended December 31, 2000. The
change was due to an increase in the Company's tax loss carryforwards.
In April 2000, the Company and NBC and its affiliate, NBC Europe, Inc.
entered into a settlement agreement relating to an outstanding dispute between
the parties. Under the terms of the settlement agreement, the Company paid, from
its operating cash flow, US$46 million to NBC. This settlement, which was
approximately Ps.336 million net of income tax, was recorded as an extraordinary
item.
As a result of the foregoing, the Company had net income of Ps.1,506
million (US$144.9 million) for the year ended December 31, 2001, as compared
with a net income of Ps.383 million (US$36.8 million) for the year ended
December 31, 2000. Ps.2 million (US$0 million) of the net income for the year
ended December 31, 2001 represented net loss of minority stockholders and
Ps.1,508 million (US$145.1 million) represented net income of majority
stockholders compared with a Ps.6 million (US$1 million) net loss of minority
stockholders and Ps.389 million (US$37.4 million) net income of majority
stockholders for the year ended December 31, 2000.
52
LIQUIDITY AND CAPITAL RESOURCES
Factors that may influence the Company's liquidity and capital resources
as discussed below include:
.. The Company's ability to generate sufficient free cash flow and to make
distributions in accordance with its recently announced distribution
policy;
.. The Company's ability to repay the principal and interest of its 10 1/8%
Notes due in 2004 or to refinance these notes on favorable terms;
.. Factors that affect the results of operations of the Company, including
general economic conditions, demand for commercial advertising, the
competitive environment, the relative popularity of the Company's
programs, demographic changes in the Company's market areas and
regulation; and
.. Factors that affect the Company's access to bank financing and the capital
markets, including interest rate fluctuations, availability of credit and
operational risks of the Company.
LIQUIDITY
The Company's principal sources of liquidity include cash on hand, advance
sales of advertising time and uncommitted sources of short-term financing. The
Company's short term financing sources include a US$130.0 million
Euro-commercial paper program (the "ECP Program"). Under the ECP Program, the
Company periodically issues notes with maturities not exceeding 365 days.
Cash and cash equivalents were Ps.1,651 million and Ps.1,393 million
(US$134.0 million) for the years ended December 31, 2001 and 2002, respectively.
The decrease in the Company's cash on hand at December 31, 2002 as compared to
December 31, 2001 was primarily due to the Company's payment of US$32.8 million
to UBS AG to acquire a secured loan in that amount in connection with the
exercise of the option to purchase an equity interest in Azteca International's
Los Angeles affiliate.
Resources generated from operating activities were Ps.1,628 million and
Ps.892 million (US$85.8 million) for the years ended December 31, 2001 and 2002,
respectively. The difference in net resources reflected the depreciation of the
peso against the U.S. dollar which affected negatively the Company's
comprehensive financing cost. As a result, the Company's net income decreased to
Ps.984 million (US$94.7 million) in the year ended December 31, 2002, from
Ps.1,506 million for the year ended December 31, 2001. A significant portion of
the Company's cash flows are generated by its television broadcast operations.
Because operating results may fluctuate significantly as a result of a decline
in the advertising environment or pricing structure, the Company's ability to
generate positive cash flow from its television broadcast operations may be
negatively impacted.
Resources used in investing activities were Ps.1,031 million and Ps.696
million (US$67.0 million) for the years ended December 31, 2001 and 2002,
respectively. The decrease in resources used in investing activities for the
year ended December 31, 2002 was primarily due to Azteca International's
investment of Ps.660 million in certain Pappas affiliates made in the year ended
December 31, 2001 compared with an investment of Ps.456 million (US$43.9
million) for the year ended December 31, 2002, which included US$2.4 million
related to payment for the 25% equity interests in the San Francisco and Houston
stations and US$32.8 million related to the acquisition of a secured loan in
that amount from UBS AG in connection with the exercise of the option to
purchase an equity interest in Azteca International's Los Angeles affiliate.
Resources used in financing activities were Ps.215 million and Ps.453
million (US$43.6 million) for the years ended December 31, 2001 and 2002,
respectively. Resources provided by (used in) financing activities are affected
by various factors including: (i) indebtedness paid or obtained, (ii) the
appreciation or depreciation of the peso against the U.S. dollar net of
inflation, since a substantial amount of the Company's indebtedness is
dollar-denominated and (iii) increases or decreases in the Company's capital
stock, the sale of treasury shares, repurchases of capital stock and the
exercise of employee stock options of the Company's subsidiaries. For the year
ended December 31, 2001, there was Ps.221 million
53
of indebtedness compared to indebtedness paid in the amount of Ps.435 million
(US$41.8 million) for the year ended December 31, 2002. Also for the year ended
December 31, 2001 the peso appreciated by 5.1% against the U.S. dollar resulting
in Ps.596 million used in financing activities, as compared to a 13.5%
depreciation against the U.S. dollar during the year ended December 31, 2002,
which resulted in Ps.404 million (US$38.9 million) provided in financing
activities. In addition, during the year ended December 31, 2001, resources in
the amount of Ps.201 million were provided by the sale of treasury shares and
the exercise of employee stock options, as compared with resources used of Ps.9
million (US$1.0 million) for the year ended December 31, 2002.
Sources of payment for the 10 1/8% Notes
On February 15, 2004, the 10 1/8% Notes mature. As of December 31, 2002,
the outstanding aggregate principal amount of these notes was US$125.0 million.
The Company expects to partially or entirely repay the principal amount of these
notes with its internally generated cash. In the event that the Company does not
have the cash on hand to repay the principal amount of these notes in full, the
Company will evaluate alternative refinancing strategies.
Advertising Advances
Under the Company's Azteca Plan, advertisers generally are required to pay
their advertising commitment in full within four months of the date they sign an
advertising contract. The Company's Mexican Plan, on the other hand, generally
allows advertisers to pay for advertising by making a cash deposit ranging from
10% to 20% of their advertising commitment, with the balance payable in
installments over the term of the advertising contract, typically one year.
Advertising rates are generally lower under the Azteca Plan than under the
Mexican Plan.
Since pre-sales of advertising time are generally made in the last quarter
of the year, the Company's cash and cash equivalents are normally at their
highest level in December, and at their lowest level in the third quarter.
Generally, as the proceeds generated from pre-sales of advertising time are
depleted (together with other sources of cash flow), the Company relies upon
sources of short-term financing, which are subsequently repaid, typically in the
fourth quarter of a calendar year with the proceeds from the pre-sales of
advertising time for the following year.
At December 31, 2002, the Company had generated Ps.4,446 million (US$427.7
million) in pre-sales of advertising time to be aired in 2003, of which 64% were
made under the Azteca Plan, and the remainder under the Mexican Plan. At
December 31, 2001, the Company had generated Ps.4,640 million in pre-sales of
advertising time to be aired in 2002, of which 64% were made under the Azteca
Plan, and the remainder under the Mexican Plan.
Non-Recurring Sources of Liquidity
In April 2000, the Company and NBC, and its affiliate, NBC Europe, Inc.
entered into a binding settlement agreement relating to an outstanding dispute
between them. Under the terms of the settlement agreement, the Company paid,
from its operating cash flow, US$46.2 million to NBC. In addition to the cash
settlement, an affiliate of NBC purchased two million of the Company's ADSs, for
an aggregate price of US$26.2 million.
INDEBTEDNESS
The following chart sets forth the Company's consolidated outstanding
principal amount of indebtedness:
54
AGREEMENT AS OF MAY 31, 2003
(in millions of U.S. dollars)
Banco Bilbao Vizcaya Mortgage Loan..................................... US$ 25.9
Standard Chartered Bank Long-Term Import Credit Facility............... 7.8
ABN-AMRO Bank Euro-Commercial Paper Program............................ 5.1
ATC Long-Term Credit Facility.......................................... 119.8
Banco Inbursa S.A...................................................... 10.0
TV Azteca 10 1/8% Guaranteed Senior Notes due 2004..................... 125.0
TV Azteca 10 1/2% Guaranteed Senior Notes due 2007..................... 300.0
-----------
Total.......................................................... US$ 593.6
On September 18, 1997, the Company obtained a US$25.9 million mortgage
loan from Banco Bilbao Vizcaya, S.A. ("BBV"), for the acquisition of an office
building located adjacent to its principal offices. The mortgage loan accrues
interest at a rate of 8.5% per year, payable on December 31 of each year
beginning December 31, 1997. The principal amount of this mortgage loan matures
on November 30, 2003.
In March 1999, the Company entered into a US$30.2 million long-term import
credit facility with Standard Chartered Bank, as lender, and the Export-Import
Bank of the United States, as guarantor. Under this credit facility, the Company
was permitted until May 2002 to borrow all or a portion of the US$30.2 million
by delivering promissory notes. The import credit facility was established to
finance the Company's purchase of equipment manufactured in the U.S. In October
1999 and March 2000, the Company issued two promissory notes, one in the amount
of US$12.2 million due in October 2004, which accrues interest at a rate of 7.6%
per year, and one in the amount of US$10.5 million due in March 2005, which
accrues interest at a rate of 8.45% per year.
In May 1999, the Company entered into the US$75.0 million ECP Program,
with ABN-AMRO Bank, N.V., as the principal arranger and dealer. The size of the
ECP Program was increased to US$130.0 million in July 1999. Notes issued under
the ECP Program are issued at a discount, and do not bear interest. There is no
commitment to purchase notes to be issued under the ECP Program, and notes
issued thereunder may not have a maturity exceeding 365 days. The ECP Program
permits the Company to issue and have outstanding up to US$130.0 million in
notes at any time.
In February 2000, the Company entered into a long-term credit facility for
up to US$119.8 million with a Mexican subsidiary of ATC (the "ATC Long-Term
Credit Facility"). The ATC Long-Term Credit Facility is comprised of a US$91.8
million unsecured term loan and a US$28.0 million term loan secured by certain
of the Company's real estate properties. The interest rate on each of the loans
is 12.877% per year. The initial term of the US$91.8 million unsecured term loan
is 20 years, which may be extended up to an additional 50 years, so long as the
Tower Agreement remains in effect. The US$28.0 million secured term loan
currently matures in February 2004, but may be renewed annually for successive
one-year periods so long as the Tower Agreement remains in effect.
In February 2003, the Company obtained a US$10.0 million unsecured credit
line from Banco Inbursa S.A. for working capital purposes. The credit line
accrues interest at a rate of 8.87% per year and matures on November 28, 2003.
In February 1997, the Company issued US$125.0 million aggregate principal
amount of 10 1/8% Notes, and US$300.0 million aggregate principal amount of 10
1/2% Notes. The 10 1/8% Notes mature on February 15, 2004, while the 10 1/2%
Notes mature on February 15, 2007. Interest on the TV Azteca Notes is paid
semi-annually on February 15 and August 15. The TV Azteca Notes are jointly and
severally guaranteed by each of the Company's material subsidiaries. The Company
has the option to redeem the 10 1/8% Notes at any time at a redemption price
equal to the greater of (i) 101% of their principal amount and (ii) the sum of
the present values of the remaining scheduled payments of principal and interest
thereon discounted to the date of redemption on a semi-annual basis at the
treasury rate (as defined in the TV Azteca Indenture) plus 50 basis points, plus
interest accrued but unpaid on the date the Company redeems the 10 1/8% Notes.
The Company has the option to redeem the 10 1/2% Notes at 103.5% of the
principal amount if redeemed after February 15, 2003, 101.75% of the principal
amount if redeemed after February 15, 2004 and 100% of the principal amount if
redeemed after February 15, 2005 plus, in each case, interest that is accrued
but unpaid on the date the Company redeems the 10 1/2% Notes.
55
The Company's total debt at May 31, 2003 matures as follows:
(in millions of
YEAR ENDED DECEMBER 31, U.S. dollars)
2003.................................................... US$ 43.2
2004.................................................... 129.5
2005.................................................... 1.1
2006.................................................... 0.0
2007.................................................... 300.0
2008 and thereafter..................................... 119.8
-----------
Total................................................... US$ 593.6
===========
CAPITAL EXPENDITURES
For the years ended December 31, 2001 and 2002, capital expenditures were
Ps.177 million and Ps.241 million (US$23.2 million), respectively. These capital
expenditures were primarily related to the expansion of, and improvements to,
the Company's broadcasting and television production facilities. For the years
ended December 31, 2001 and 2002, the Company paid approximately Ps.13 million
and Ps.23 million (US$2.2 million), respectively, to acquire transmitters that
it used to expand the national coverage of its networks and to improve the
quality and operation of its transmission signal. For the years ended December
31, 2001 and 2002, the Company made purchases of production equipment and
expenditures related to the refurbishment of its production facilities amounting
to Ps.51 million and Ps.98 million (US$9.4 million), respectively. The Company's
capital expenditures are primarily made in U.S. dollars. For the years ended
December 31, 2001 and 2002, the Company made purchases of computer equipment and
vehicles amounting to approximately Ps.44 million and Ps.111 million (US$10.7
million), respectively. For the years ended December 31, 2001 and 2002, the
Company paid approximately Ps.68 million and Ps.9 million (US$0.9 million),
respectively, for the maintenance, remodeling and refurbishment of its buildings
and office facilities.
Unefon
In December 2000, Unefon's principal shareholders, the Company and Mr.
Saba, agreed in a shareholders' undertaking to provide Unefon up to US$35.0
million in the aggregate by way of either equity or subordinated debt in the
event Unefon had liquidity shortfalls in 2001 or 2002. In such event, the
Company and Mr. Saba would be jointly and severally obligated to make additional
funds available to Unefon. On December 20, 2002, Nortel notified the Company and
Mr. Saba of its view that Unefon's non-payment of the August 2002 interest
payment under the Nortel finance agreement triggered their joint and several
obligation to make additional funds available to Unefon up to an aggregate
amount of US$35.0 million as provided in the shareholders' undertaking. The
Company and Mr. Saba disputed this assertion. In connection with the settlement
with Nortel, Nortel has released the Company and Mr. Saba from any obligation or
liability in connection with this undertaking. See "Item 10. Additional
Information--Legal Proceedings--Unefon." However, as of May 31, 2003, TV Azteca
and Mr. Saba had made loans to or on behalf of Unefon with an outstanding
aggregate principal amount of US$35.8 million, US$19.1 million of which was paid
by TV Azteca to Unefon and certain of its creditors.
In July 2001, the Company and Mr. Saba announced their intention to
provide credit support to Unefon for up to US$80.0 million each. As of May 31,
2003, the Company had paid US$17.7 million to Unefon and its creditors pursuant
to this credit support and it had outstanding credit support obligations in the
amount of US$12.1 million. The Company has terminated any further credit support
to Unefon.
2003 Budgeted Capital Expenditures
The Company has an aggregate of approximately US$26.0 million budgeted for
capital expenditures in 2003, of which US$7.9 million has been expended through
May 31, 2003, primarily to be used for the maintenance and expansion of, and
improvements to, the Company's television production and broadcasting facilities
and the acquisition of equipment and expansion. The Company expects to use cash
from its operations to fund these capital expenditures. As a result of the
Company's operating strategy, the Company will not, for the foreseeable future,
make major capital
56
expenditures outside the scope of its core television broadcasting business,
which would include loans, credit support and capital investments in Unefon and
affiliates in the Azteca America Network.
Distribution Policy/Debt Reduction Strategy
The Company's board of directors has approved a six year debt reduction
strategy pursuant to which the Company will use its annual free cash flow to
reduce its outstanding debt, which as of December 31, 2002, was US$592.4
million, and to make annual distributions to its shareholders. On April 30,
2003, the Company received the approval of its shareholders for the payment of
shareholder distributions in 2003 in an aggregate amount of US$140.0 million. A
distribution of US$125.0 million is scheduled to be made on June 30, 2003 and
another distribution of US$15.0 million is scheduled to be made on December 5,
2003. However, there is no assurance that the Company's financial results will
permit it to make such anticipated distributions or that the Company will not
modify or terminate this distribution policy in its entirety.
CONTRACTUAL AND OTHER OBLIGATIONS
The following summarizes the Company's contractual obligations at December
31, 2002, and the effect such obligations are expected to have on its liquidity
and cash flows in future periods (dollars in millions):
PAYMENTS DUE BY YEAR
--------------------
2007 AND
CONTRACTUAL OBLIGATIONS TOTAL 2003 2004 2005 2006 THEREAFTER
----------------------- ------ ---- ---- ---- ---- ----------
Long-term debt................... 550.3 - 129.5 1.0 - 419.8
Short-term debt.................. 42.1 42.1 - - - -
Total contractual cash
obligations..................... 592.4 42.1 129.5 1.0 - 419.8
SHARE REPURCHASE
On an annual basis, the Company's shareholders approve the amount to be
allocated from the reserve in its stockholders' equity account for the
repurchase of its stock, in accordance with rules established by the Comision
Nacional Bancaria y de Valores (the "CNBV"), the Mexican banking and securities
commission. In April 2003, the shareholders approved to increase the reserve for
the repurchase of the Company's shares by Ps.230.0 million, which reserve is
limited to a maximum amount of Ps.1,100 million. The Company may purchase its
CPOs on the Mexican Stock Exchange and its ADSs on The New York Stock Exchange
at prevailing prices up to the amount in this reserve account. As of December
31, 2002, the Company had 26.5 million CPOs in its treasury, acquired through
its repurchase fund and Ps.1,013 million (US$97.5 million) in its reserve.
NEW ACCOUNTING PRONOUNCEMENTS
Mexican GAAP
In December 2001, the MIPA issued Statement C-9 "Liabilities, Provisions,
Assets and Contingent Liabilities and Commitments" ("Statement C-9"), which went
into effect January 1, 2003. This statement establishes specific rules for
valuation, presentation and disclosure of liabilities and provisions, as well as
for valuation and disclosure of assets and contingent liabilities, and for
disclosure of commitments contracted. The Company does not expect the adoption
of Statement C-9 to have a material impact on the Company's consolidated
financial statements.
The MIPA issued Statement C-15, "Impairment of Long-Lived Assets and Their
Disposal," ("Statement C-15"), which will be effective as of January 1, 2004,
although early adoption is recommended. Statement C-15 provides specific
criteria in determining when there is an impairment in the value of long-lived
assets, for both tangible and intangible assets. Furthermore, Statement C-15
establishes a methodology for calculating and recording losses arising from the
impairment of assets and their reversal. Also, Statement C-15 provides guidance
for presentation and disclosure in the case that there is subsequent reversal of
the impairment. In addition, Statement C-15 provided guidance for the
57
accounting, presentation and disclosure for discontinued operations. The Company
is currently evaluating the impact that the adoption of Statement C-15 will have
on the Company's consolidated financial statements.
U.S. GAAP
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," ("SFAS 143"). SFAS 143 addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived assets, except for certain obligations of lessees. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The
Company does not expect the adoption of SFAS 143 to have a material impact on
its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4,
44 and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002,"
("SFAS 145"). SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." As a result, gains and losses from extinguishment of
debt will no longer be classified as extraordinary items unless they meet the
criteria of unusual or infrequent as described in Accounting Principles Board
Opinion 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." In addition, SFAS 145 amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. SFAS 145 is effective for
fiscal years beginning after May 15, 2002. The Company does not expect the
adoption of SFAS 145 to have a significant impact on the Consolidated Financial
Statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," ("SFAS 146"). The issuance of SFAS
No. 146 nullifies the former guidance provided by the Emerging Issues Task
Force, or EITF, Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring," or EITF 94-3. SFAS No. 146 requires the
recognition of a liability for costs associated with exit or disposal activity
when the liability is incurred, rather than on the date commitment to an exit or
disposal plan. SFAS No. 146 is effective for liabilities, related to exit or
disposal activities, which are incurred after December 31, 2002, while earlier
application is encouraged. The Company does not expect the adoption of SFAS 146
to have a significant impact on the Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FAS 123,"
("SFAS 148"). SFAS No. 148 continues to permit entities to apply the intrinsic
method of APB 25, "Accounting for Stock Issued to Employees." However, SFAS 148
is intended to encourage companies to adopt the accounting provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," or SFAS 123. SFAS No. 148
provides three transition methods for companies who choose to adopt the
provisions of SFAS 123, the prospective method, the modified prospective method
and the retroactive restatement method. In addition, SFAS No. 148 mandates
certain new disclosures. SFAS 148 is effective for fiscal years ending after
December 15, 2002, with early adoption permitted. The Company does not expect
the adoption of SFAS 148 to have a significant impact on the Consolidated
Financial Statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of Interpretation No. 34)." FIN 45
clarifies the requirements of SFAS No. 5, "Accounting for Contingencies,"
relating to a guarantor's accounting for, and disclosure of, the issuance of
certain types of guarantees. FIN 45 requires that upon issuance of a guarantee,
the guarantor must recognize a liability for the fair
58
value of the obligation it assumes under that guarantee. FIN 45's provisions for
initial recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The guarantor's previous accounting for guarantees
that were issued before the date of FIN 45's initial application may not be
revised or restated to reflect the effect of the recognition and measurement
provisions of the Interpretation. The disclosure requirements are effective for
financial statements of both interim and annual periods that end after December
15, 2002. The adoption of FIN 45 did not have a material impact on the
Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved through means other than through voting
rights ("variable interest entities" or "VIEs") and how to determine when and
which business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model for consolidation applies to an entity which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 applies to public enterprises as of the
beginning of the applicable interim or annual period, and it applies to
nonpublic enterprises as of the end of the applicable annual period. The Company
is currently evaluating the impact that the adoption of FIN 46 will have on the
consolidated financial statements.
U.S. GAAP RECONCILIATION
Pursuant to Mexican GAAP, the Company's financial statements recognize
certain effects of inflation in accordance with Statement B-10 and Statement
B-12; these effects have not been reversed in the reconciliation to U.S. GAAP.
The following chart illustrates how the difference between Mexican GAAP
and U.S. GAAP affects the calculation of financial data for the majority
stockholders.
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001 2002 2002(1)
---------- --------- ---------- ------------
MEXICAN GAAP
Net income of majority stockholders................. Ps. 389 Ps. 1,508 Ps. 985 US$ 94.7
Majority stockholders' equity....................... Ps. 4,380 Ps. 5,769 Ps. 6,584 US$ 633.4
U.S. GAAP
Net income (loss) of majority stockholders.......... Ps. 7 Ps. 465 Ps. 521 US$ 50.1
Majority stockholders' equity....................... Ps. 5,622 Ps. 6,375 Ps. 6,930 US$ 666.7
----------
(1) The U.S. Dollar amounts represent the peso amounts as of December 31, 2002
expressed as of December 31, 2002 purchasing power, translated at an
exchange rate of Ps.10.395 per U.S. Dollar, the interbank free market
exchange rate on December 31, 2002, as reported by the Mexican Central
Bank.
The principal differences between Mexican GAAP and U.S. GAAP that affect
the Company's net income (loss) and stockholders' equity relate to the treatment
of the following items:
.. accounting for deferred income taxes;
.. goodwill related to the television concessions in 2001 and 2000;
.. stock options;
.. the NBC settlement in 2000;
59
.. the Company's investment in Unefon;
.. Unefon's advertising agreement;
.. the Company's investment in Todito;
.. the effect of the fifth amendment to Statement B-10;
.. Todito's advertising, programming and services agreement;
.. payment of fees and expenses by the Company in connection with the consent
solicitation to obtain the consent of outstanding noteholders to the
Unefon rights transaction; and
.. reversal of capitalized production costs of internally produced
programming.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS
The Company's by-laws provide that the Board of Directors will be elected
by holders of the Company's shares as follows: holders of the A Shares will be
entitled to elect at least seventy percent of the Company's directors and each
holder of ten percent of the Company's limited-vote capital stock (D-A Shares
and D-L Shares, and after conversion, the L Shares) is entitled to elect one of
the Company's directors. All directors serve a term of one year. The current
term of each director will expire on April 30, 2004.
The following table lists each director of the Company, his age at May 31,
2003, and his positions with the Company and year of appointment to the Board of
Directors.
DIRECTOR
NAME AGE POSITION SINCE
---- --- -------- -----
Ricardo B. Salinas Pliego*..... 47 Chairman of the Board 1993
Pedro Padilla Longoria......... 37 Director; Chief Executive Officer 1993
Joaquin Arrangoiz Orvananos.... 46 Director; Co-General Director of Sales 1998
Jose Ignacio Morales Elcoro.... 47 Director 1997
Luis J. Echarte Fernandez...... 58 Director 1999
Guillermo E. Salinas Pliego*... 43 Director 1998
James R. Jones................. 64 Director 2000
J. Michael Gearon, Jr.......... 38 Director 2000
Sergio Gutierrez Muguerza...... 52 Director 2000
Gene F. Jankowski.............. 69 Director 2001
Michael A. Viner............... 59 Director 2001
* Ricardo B. Salinas Pliego and Guillermo E. Salinas Pliego are brothers.
60
The following provides biographical information about the directors of the
Company.
Ricardo B. Salinas Pliego. Mr. Salinas Pliego has been Chairman of the
Board of the Company since 1993, Chairman of the Board of Grupo Elektra since
1993, director of Unefon since 1999 and president of Unefon since 1998. Mr.
Salinas Pliego also serves on the board of directors of numerous other Mexican
companies including Azteca Holdings, Grupo Dataflux, Biper, Cosmofrecuencias,
Todito and Salinas y Rocha. Mr. Salinas Pliego received a degree in accounting
from the Instituto Tecnologico de Estudios Superiores de Monterrey and received
an MBA from the Freeman School of Business at Tulane University.
Pedro Padilla Longoria. Mr. Padilla has served as a director of the
Company since 1993. Mr. Padilla has been Chief Executive Officer of the Company
since October 2001. Mr. Padilla also serves on the board of directors of Azteca
Holdings, Grupo Elektra, Biper, Unefon and Cosmofrecuencias. Mr. Padilla
received a degree in law from the Universidad Nacional Autonoma de Mexico.
Joaquin Arrangoiz Orvananos. Mr. Arrangoiz has served as a director of the
Company since 1998 and Co-General Director of Sales of the Company since 1993.
Mr. Arrangoiz received a degree in administration from Anahuac University.
Jose Ignacio Morales Elcoro. Mr. Morales has served as a director of the
Company since January 1997. Mr. Morales also serves on the board of directors of
Grupo Dataflux, Unefon, Cosmofrecuencias and Todito and Azteca Holdings. Mr.
Morales received a degree as a public accountant from Instituto Tecnologico de
Estudios Superiores de Monterrey, a masters degree in accounting and finance
from the University of Illinois at Urbana-Champaign and an MBA from IPADE.
Luis J. Echarte Fernandez. Mr. Echarte has served as a director of the
Company since November 1999. Prior to joining the Company, he was Grupo
Elektra's Chief Financial Officer. He joined Grupo Elektra in 1994. Mr. Echarte
also serves as Chief Executive Officer of Azteca International and on the board
of directors of Biper, Azteca International Corporation and Foamex International
Inc. Mr. Echarte holds undergraduate degrees from Memphis State University and
the University of Florida and has completed the Executive Management Program at
Stanford University.
Guillermo E. Salinas Pliego. Mr. Salinas has served as director of the
Company since 1998. Mr. Salinas founded Todito in 1999. He also co-founded Grupo
Dataflux and has been its President since 1982. He also sits on the board of
directors of Grupo Elektra. Mr. Salinas is a Certified Public Accountant,
holding an undergraduate degree in accounting from the Instituto Tecnologico de
Estudios Superiores de Monterrey in Monterrey, Mexico.
James R. Jones. Mr. Jones has served as a director of the Company since
February 2000. He currently serves on the boards of directors of several public
companies, including Anheuser Busch, Keyspan Energy Corporation, Kansas City
Southern Industries, Grupo Modelo and Corporacion San Luis Rassini. Since 2001,
he has served as Chief Executive Officer of Manatt Jones Global Strategies, a
law and business consulting company and affiliate of Manatt, Phelps & Phillips
that represented Azteca International on certain intellectual property matters
in the year ended December 31, 2002. He was the U.S. Ambassador to Mexico from
1993 to 1997, served as Chairman and Chief Executive Officer of the American
Stock Exchange from 1989 to 1993 and was President of Warnaco Inc.
International, an apparel company, from 1997 to 1998. Mr. Jones received a
bachelor's degree from the University of Oklahoma and an LLB from Georgetown Law
School.
J. Michael Gearon, Jr. Mr. Gearon has served as a director of the Company
since February 2000. Mr. Gearon has served as President and has been a director
of American Tower International Corporation, a wireless communications and
broadcast infrastructure company, since its merger with Gearon & Co., Inc. on
January 22, 1998. Mr. Gearon received a bachelor's degree in inter-disciplinary
studies from Georgia State University.
Sergio Gutierrez Muguerza. Mr. Gutierrez has served as a director of the
Company since February 2000. Mr. Gutierrez has served as the Chief Executive
Officer of Deacero, S.A., a steel and wire company, since 1981. Mr. Gutierrez
has also served as a director of Alpek S.A. de C.V., a petrochemical company,
and ING Comercial America, an insurance company, since 1997. Mr. Gutierrez
received a degree in industrial engineering from Purdue University.
61
Gene F. Jankowski. Mr. Jankowski has served as a director of the Company
since May 2001. Mr. Jankowski has served as Advising Managing Director of
Veronis Suhler, a New York based media merchant bank, and director and Chairman
of the Board of Trans-Lux Corp., a data provider company, since 1994. Mr.
Jankowski received a bachelor's degree from Canisius College and a master's
degree from Michigan State University.
Michael A. Viner. Mr. Viner has served as a director of the Company since
July 2001. Mr. Viner is President of New Millennium Entertainment Co., a
production company based in Beverly Hills, California, and he has served in this
capacity since 1981. Mr. Viner attended Harvard University and the Georgetown
University.
EMPLOYMENT AGREEMENTS
None of the directors or officers are party to any agreements with the
Company or any of its subsidiaries providing for benefits upon termination of
employment.
BOARD PRACTICES
The September 4, 2001 general extraordinary shareholders' meeting of the
Company amended the by-laws of the Company to incorporate changes mandated by
Mexico's new Securities Market Law. Among other things, these amendments entitle
holders of ten percent of the Company's limited-vote capital stock to designate
one director.
These amendments also established that at least 25 percent of the Board of
Directors of the Company would be independent. Messrs. Gene F. Jankowski, James
R. Jones, J. Michael Gearon, Jr., Sergio Gutierrez Muguerza, and Michael A.
Viner are the Company's current independent directors.
The Company's bylaws were previously amended in November 1999 to reflect
comprehensive changes in the Company's corporate governance procedures. Among
other things, these amendments authorized the Board to create committees to be
comprised of at least three members, a majority of whom must be independent
directors. In February 2000, the Board of Directors formed committees covering
each of the following matters: related party transactions, capital transactions,
audit and compensation.
The committees of the Board of Directors serve the following functions,
which are governed by the by-laws of the Company:
.. The Related Party Transactions Committee reviews any material transaction
with a related party of the Company or its controlling shareholder. The
members of the Related Party Transactions Committee are James R. Jones,
Sergio Gutierrez Muguerza and Jose Ignacio Morales.
.. The Capital Transactions Committee reviews any material investments of the
Company made outside the ordinary course of business or not included in
the annual budget and, with regard to such investments, evaluates
opportunities and business risks. The members of the Investments Committee
are J. Michael Gearon, Jr., Gene F. Jankowski and Joaquin Arrangoiz
Orvananos.
.. The Audit Committee reviews the Company's financial reporting procedures
and internal financial control systems, as well as the activities and
independence of independent auditors and the activities of internal audit
staff. Audit Committee meetings are attended by both external auditors and
the Company's controller. The members of the Audit Committee are J.
Michael Gearon, Jr., Gene F. Jankowski and Joaquin Arrangoiz Orvananos.
.. The Compensation Committee reviews and makes recommendations to the Board
of Directors with regard to the compensation, including incentives and
bonuses, of senior executive officers of the Company. The members of the
Compensation Committee are James R. Jones, Sergio Gutierrez Muguerza and
Jose Ignacio Morales.
STATUTORY AUDITOR
In addition to the Board of Directors, the Company's by-laws provide for a
statutory auditor elected at the ordinary general meeting of shareholders and,
if determined at such meeting, an alternate statutory auditor. According to the
by-
62
laws, holders of 10 percent of the capital stock of the Company regardless of
the type of shares owned, may name a statutory auditor for the Company. Under
Mexican law, the duties of statutory auditors include, among other things, the
examination of the operations, books, records and any other documents of a
company and the presentation of a report of such examination at the annual
ordinary general meeting of shareholders. The statutory auditor is required to
attend all committee, Board of Directors and shareholder meetings of the
Company. The Company currently has one statutory auditor, Luis Moiron Llosa, a
partner of PricewaterhouseCoopers.
EXECUTIVE OFFICERS
The following table lists each executive officer of the Company, his age
at May 31, 2003, his current position and year of appointment as an executive
officer (with the Company or its predecessor entities).
EXECUTIVE
OFFICER
NAME AGE CURRENT POSITION SINCE
---- --- ---------------- ---------
Pedro Padilla Longoria................... 36 Chief Executive Officer 2001
Carlos Hesles Flores..................... 37 Chief Financial Officer 2002
Mario San Roman Flores................... 44 Chief Operating Officer 2002
Francisco X. Borrego..................... 38 General Counsel and Legal 1993
Director
Jose Ramon Fernandez Alvarez............. 57 General Director of Sports 1993
Martin Luna Ortigoza..................... 40 General Director of Estudios 1995
Azteca
Guillermo Pelegrin Alegret Pla........... 43 General Director of Channels 2003
Joaquin Arrangoiz Orvananos.............. 46 Co-Director of Sales 1997
Gustavo Guzman Sepulveda................. 49 General Director of Sales 1993
Jorge Mendoza Garza...................... 51 General Director of 1994
Information and Public
Affairs
The following provides biographical information about the executive
officers of the Company. See "--Directors" for biographical information with
respect to Messrs. Arrangoiz, Morales and Padilla.
Carlos Hesles Flores. Mr. Hesles has served as the Chief Financial Officer
of the Company since 2002. Mr. Hesles serves on the board of directors of Azteca
International Corp. Mr. Hesles received a bachelors degree in public accounting
with a specialization in finance from the Instituto Teconologico de Mexico.
Mario San Roman Flores. Mr. San Roman has been Chief Operating Officer of
the Company since 2002. Mr. San Roman previously served as Marketing Vice
President from August 1998 to March 1999, as Director of Azteca 13 from March
1999 to June 2000 and as General Director of Channels from June 2000 to 2002.
Mr. San Roman received a bachelor's degree in communication sciences from the
Universidad Iberoamericana.
Francisco X. Borrego. Mr. Borrego has served as the General Counsel and
Legal Director of the Company since August 1993. Mr. Borrego also serves on the
Board of Directors of Azteca Holdings. Mr. Borrego received a degree in law from
the Escuela Libre de Derecho.
63
Jose Ramon Fernandez Alvarez. Mr. Fernandez has been General Director of
News and Sports for the Company since April 2001. Mr. Fernandez previously
served as the General Director of Sports for the Company from September 1993
through April 2001. Mr. Fernandez received a degree in business administration
from the Universidad Autonoma de Puebla, a masters in public administration from
the Universidad Nacional Autonoma de Mexico and a masters in Spanish literature
from the Universidad de Oviedo, Espana.
Martin Luna Ortigoza. Mr. Luna has been General Director of Estudios
Azteca since April 2001. Mr. Luna, who has been an officer of the Company since
1995, previously served as General Director of Channels and Production,
Executive President of Content, Executive President of Azteca 13 and General
Director of Estudios Azteca. Mr. Luna received a bachelor's degree in economics
from the Universidad Nacional Autonoma de Mexico.
Guillermo Pelegrin Alegret Pla. Mr. Alegret has been General Director of
Channels since 2003. Mr. Alegret previously served as an officer of the Company
since 1998 in the positions of Director of Product Integration and Marketing
Services General Director. Mr. Alegret has a bachelor's degree in business
administration from Universidad Iberoamerica.
Gustavo Guzman Sepulveda. Mr. Guzman has served as General Director of
Sales of the Company since 1993. Mr. Guzman received a bachelor's degree in
communication from the Instituto Tecnologico de Estudios Superiores de
Monterrey.
Jorge Mendoza Garza. Mr. Mendoza has been General Director of Information
and Public Affairs of the Company since 1993. Mr. Mendoza received a bachelor's
degree in law from the Universidad Nacional Autonoma de Mexico, a masters degree
in public management from the Instituto National de Administration Publique in
Paris, France and a Doctorate in constitutional rights from the Universite de la
Sorbonne.
DIRECTOR AND OFFICER COMPENSATION
For the year ended December 31, 2002, the aggregate compensation paid by
the Company to its executive officers (a total of 10 persons) for services in
all capacities was approximately Ps.20.3 million (US$2.0 million). During 2002,
each of the directors of the Company's Board of Directors received annual
compensation in the amount of US$25,000, half of which was paid in cash and half
of which was paid in CPOs.
EMPLOYEES
As of December 31, 2002, the Company employed 3,947 employees of whom
1,078 were freelance employees. Of the Company's employees, 771 work in
production, 1,876 perform administrative functions and 222 were managers or
executive officers. Approximately 27% of the Company's new hires in 2002 were
freelance employees.
Approximately 20% of the Company's permanent employees are represented by
the television union, with a smaller number of employees represented by the
artists' union or the musicians' union. Under Mexican law, the compensation
terms of the agreements between the Company and its union employees are subject
to renegotiation on an annual basis. All other terms of the agreement are
renegotiated every two years.
The Company believes that its relations with its employees are good. The
Company has never been subject to a strike by its employees.
SHARE OWNERSHIP
With the exception of Ricardo B. Salinas Pliego, there are no directors or
officers who beneficially own more than 1% of the Company's shares. At June 15,
2003, the directors and officers of the Company, other than Mr. Salinas Pliego,
beneficially owned an aggregate of 1.2 million CPOs, as well as options for
800,000 CPOs exercisable within 60 days. At June 15, 2003, the directors and
officers of the Company, other than Mr. Salinas Pliego, beneficially owned
0.065% of the share capital of the Company. For information regarding beneficial
ownership of the Company's shares by Mr. Salinas Pliego, see "Item 7. Major
Shareholders and Related Party Transactions."
64
OPTION PLANS
The Company has reserved for issuance pursuant to employee stock options
approximately 240 million CPOs (after giving effect to the 4-for-1 split of the
Company's stock declared effective on April 22, 1998). In the fourth quarter of
1997, the Company adopted employee stock option plans pursuant to which options
were granted to all current permanent employees who were employed by the Company
as of December 31, 1996, with a more significant number of options being granted
to the Company's senior management and key actors, presenters and creative
personnel. The options, which relate to an aggregate of approximately 76 million
CPOs, generally were granted in equal portions in respect of each employee's
first five years of employment with the Company (whether prior to or after
adoption of the plans). These options generally may be cancelled in the case of
employment years after 1996 if the Company's operating profit before deducting
depreciation and amortization in that year has not increased by at least 15%
(excluding the effect of inflation) as compared to the previous fiscal year. An
employee's options in respect of any employment year generally become
exercisable five years later, unless the employee is no longer employed by the
Company, in which case the options will be reassigned. The options expire on the
fifth anniversary of the date on which they become exercisable.
In 1999, options with respect to 43.6 million CPOs were granted to Moises
Saba Masri, in his capacity as Chairman of Unefon, an affiliate of the Company,
at an exercise price of US$0.0802 per CPO. Forty million of these options were
subsequently exercised by Mr. Saba in 1999 and an additional 2.8 million were
exercised in 2000 after March 31. In addition, options previously granted to the
Company's employees for 0.5 million CPOs were exercised in 1999 at an average
exercise price of US$0.2900 per CPO.
Set forth below are the number of CPOs, the exercise prices and the
expiration dates of all options outstanding (whether or not vested) as of May
31, 2003:
NUMBER OF CPOS EXERCISE PRICES EXPIRATION DATES
-------------- --------------- ----------------
9,012,017 US$0.1300 2003-2009
11,432,574 US$0.2900 2003-2004
8,323,173 US$0.2925 2003-2007
10,730,800 US$0.3225 2004-2008
6,233,600 US$0.3550 2005-2009
15,142,400 US$0.3900 2006-2010
2,000,000 US$0.5000 2003-2009
62,874,564
===========
Included in these outstanding options, options relating to an aggregate of
approximately 22,515,591 CPOs were held by the Company's directors and executive
officers as a group.
Under Mexican GAAP, the granting of these options had no effect on the
Company's results of operations, cash flow or financial condition. Under U.S.
GAAP, the granting of these options gave rise to non-cash compensation expense
in 2000, 2001 and 2002 of approximately Ps.114 million, Ps.35 million and Ps.62
million, respectively. See Note 17 to the Consolidated Financial Statements. The
Company expects that the amount of non-cash compensation expense arising in
future periods under U.S. GAAP from the granting of these options (or options
that the Company may grant in the future with exercise prices below the then
fair market value of the CPOs, a possibility the Company is actively
considering) also will be relatively large.
65
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
The following table sets forth information regarding those shareholders of
the Company that beneficially owned 5% or more of the Company's capital stock as
of May 31, 2003.
CPOs
--------------------------------
PERCENTAGE AGGREGATE AGGREGATE
OF PERCENTAGE PERCENTAGE
OUTSTANDING A SHARES NOT IN OF OUTSTANDING OF OUTSTANDING
IDENTITY OF OWNER QUANTITY CPOS CPOS A SHARES SHARES
----------------- --------------- ----------- ---------------- ---------------- --------------
Azteca Holdings(1).. 862,062,599 (2) 38.74% 2,446,630,810 52.11% 55.00%
Ricardo B. Salinas
Pliego............. 1,008,988,699 (3) 45.34% 2,469,882,902 (4) 52.60% 60.00%
(1) 44 million CPOs and 145 million A Shares owned by Azteca Holdings are held
indirectly through Grupo COTSA, a wholly-owned subsidiary of Azteca
Holdings. In the aggregate, Azteca Holdings possesses 55.0% of the voting
shares of the Company.
(2) Of this amount, approximately 537 million CPOs owned by Azteca Holdings
have been pledged to secure the Azteca Holdings 12 1/2% Notes, 13 million
CPOs owned by Azteca Holdings have been pledged to secure the Azteca
Holdings 10 1/2% Notes and 42 million CPOs owned by Azteca Holdings have
been pledged to secure the Azteca Holdings 10 3/4% Notes.
(3) Represents 142,630,100 CPOs directly owned by Mr. Ricardo B. Salinas
Pliego, including 4,296,000 CPOs underlying options that are exercisable
within 60 days, and 862,062,599 CPOs owned, directly or indirectly, by
Azteca Holdings which Mr. Ricardo B. Salinas Pliego controls.
(4) Represents 23,252,092 A Shares directly owned by Mr. Ricardo B. Salinas
Pliego and 2,446,630,810 A Shares owned, directly or indirectly, by Azteca
Holdings which Mr. Ricardo B. Salinas Pliego controls.
Grupo Elektra has the right to exchange Comunicaciones Avanzadas, S.A. de
C.V. ("CASA") Series N shares that it owns, in whole or in part, at any time
until March 26, 2006 for approximately 226.5 million CPOs owned by Azteca
Holdings (the "Elektra Reserved Shares"). This exchange right allows Grupo
Elektra to acquire up to approximately 7.6% of the capital stock of the Company
from Azteca Holdings, which would reduce Azteca Holdings' direct and indirect
ownership of the capital stock of the Company to 49.8%. Grupo Elektra is
controlled by Mr. Salinas Pliego, who is also Chairman of Grupo Elektra's Board
of Directors.
There have been no significant changes in beneficial ownership of the
major shareholders set forth above during the three-year period ended December
31, 2002.
According to information made available to the Company, at May 31, 2003
there were a total of 46,704,772 ADSs outstanding representing 1,220,761,072
CPOs, or 40% of the total capital stock of the Company at such date. At May 31,
2003, there were a total of 55 holders of record of the ADSs with addresses in
the United States, including the nominee for The Depository Trust Company
("DTC"), which held of record a total of 44,468,002 ADSs on behalf of
approximately 2,530 DTC participants.
RELATED PARTY TRANSACTIONS
The Company engages in transactions with its affiliates, including
entities owned or controlled by certain of its principal shareholders. The TV
Azteca Indenture restricts the Company's ability to engage in transactions with
affiliates. Moreover, the new Sarbanes-Oxley Act rules and regulations, together
with certain existing and proposed listing requirements of the New York Stock
Exchange, place additional restrictions on the Company's affiliate transactions.
See Note 8 to the Consolidated Financial Statements.
66
TV AZTECA RIGHTS TRANSACTIONS
Unefon
In October 2000, the Company granted rights to acquire all of the Unefon
Series A shares that it owns pro rata to the holders of all of the Company's
outstanding shares and to certain other of the Company's securities. The grant
of these rights remains subject to the filing and effectiveness of a
registration statement with the SEC that registers the Unefon Series A shares
underlying the rights and the receipt of all applicable regulatory and
third-party approvals. The rights were granted to:
.. the Company's 8,964,706,897 shares that were outstanding as of October 19,
2000;
.. the 51,578,430 of the Company's shares underlying the Company's employee
stock options which were vested and exercisable as of February 1, 2001;
.. the 206,953,428 of the Company's shares reserved for issuance as of
October 19, 2000 under the Company's management stock option plan; and
.. the Company's 119,858,484 repurchase fund shares held in treasury as of
October 19, 2000.
The aggregate exercise price for all Unefon Series A shares subject to the
rights is approximately US$177.0 million, all of which would be received by the
Company. The exercise price to be paid for one share of Series A stock of Unefon
is US$0.151280667. Holders of rights attached to the Company's Series A shares
are entitled to acquire 0.125226140 shares of Unefon's Series A stock for each
TV Azteca Series A share they own. Holders of rights attached to the Company's
CPOs (which are comprised of one ordinary, no par value, Series A share, one
preferred Series D-A share and one preferred Series D-L share of the Company)
are entitled to acquire 0.37567819 shares of Unefon's Series A Stock for each
CPO they own. Holders of rights attached to the Company's ADSs (which are
comprised of 16 of the Company's CPOs) are entitled to acquire 6.010854704
shares of Unefon's Series A Stock for each ADS they own.
The rights to acquire the Unefon Series A shares do not trade separately
from the Company's shares and were originally only exercisable on December 11,
2002. However, in December 2002, the Company approved the change of the exercise
date to December 12, 2003. Any rights that are not exercised on the exercise
date will expire and the Company will retain ownership of the Unefon Series A
shares underlying the rights. If, prior to December 12, 2003, the board of
directors of the Company approves a merger or consolidation of Unefon, a sale of
all or substantially all of Unefon's assets or a sale (by tender or otherwise)
of at least a majority of Unefon's shares or otherwise determines to accelerate
the exercisability of the rights, each a sale event, the Company will notify its
shareholders that a sale event is anticipated to occur and the rights will be
exercisable in connection therewith for a period of time to be determined by the
Company. Any exercise of the rights in connection with a sale event will be
conditioned on the consummation of the relevant sale event. If such sale event
is consummated, any rights which were not exercised during the period designated
by the Company will expire and the Company will retain ownership of the Unefon
Series A shares underlying the rights.
Cosmofrecuencias
In October 2000, the Company also granted on a pro-rata basis to its
shareholders to whom the rights to acquire the Unefon Series A shares were
granted, rights to purchase all of the Company's shares of Cosmofrecuencias, a
Mexican corporation owned 50% by the Company and 50% by a Mexican company
wholly-owned by Moises Saba Masri.
The aggregate exercise price of all of the Cosmofrecuencias shares subject
to the rights is approximately US$32.0 million. The grant of the rights remains
subject to the receipt of all applicable regulatory approvals. In addition,
Cosmofrecuencias intends to register the underlying Cosmofrecuencias shares
under the U.S. securities laws between October 19, 2004 and October 19, 2006.
The rights do not trade separately from the Company's shares and are exercisable
only for a period of time to be determined by the Company following the
effectiveness of the registration of the underlying Cosmofrecuencias shares. Any
rights that are not exercised during the exercise period designated by the
Company will expire, and the Company will retain ownership of the
Cosmofrecuencias shares underlying such rights. If,
67
prior to the designation of the exercise period, the Board of Directors of the
Company approves a merger or consolidation of Cosmofrecuencias, a sale of all or
substantially all of Cosmofrecuencias's assets or a sale (by tender or
otherwise) of at least a majority of Cosmofrecuencias's outstanding shares or
otherwise determines to accelerate the exercisability of the rights, each a sale
event, the Company will notify its shareholders that a sale event is anticipated
to occur and the rights will be exercisable in connection therewith for a period
of time to be determined by the Company. Any exercise of the rights during the
exercise period designated by the Company in connection with a sale event will
be conditioned on the consummation of the relevant sale event. If such sale
event is consummated, any rights which are not exercised during the exercise
period designated by the Company in connection with a sale event will expire,
and the Company will retain ownership of the shares underlying the rights.
LOANS BETWEEN AZTECA HOLDINGS AND TV AZTECA
From time to time the Company advances funds to Azteca Holdings. In 2001
and 2002, the aggregate amount of these advances equaled Ps.103 million and
Ps.133 million (US$12.8 million). These advances are repaid annually, with a
nominal amount of interest, from dividends that Azteca Holdings receives from
the Company. Advances denominated in U.S. dollars accrue interest at a rate of
12% per annum. Advances denominated in pesos accrue interest at 1.5% per month
plus the daily or monthly interest rates determined by the Mexican Central Bank
and published in the Official Gazette of the Federation of Mexico.
LOANS BY TV AZTECA TO RICARDO B. SALINAS PLIEGO AND HIS AFFILIATES
In December 2000, the Company made three unsecured loans to Ricardo B.
Salinas Pliego for an aggregate amount of US$2.7 million, each with a term of
one year and an annual interest rate of 12%. In December 2000, Azteca Holdings
purchased two of these loans in the aggregate amount of US$1.37 million. In
December 2001, Azteca Holdings sold these two loans back to the Company. The
maturity date of all three loans was extended to December 23, 2002. The full
amounts outstanding under these three loans, were repaid on December 23, 2002.
In December 1999, the Company made two one-year unsecured loans in the
aggregate amount of US$286,000 to Corporacion RBS, with an annual interest rate
of 12%. The Company extended the repayment of the principal and accrued interest
amounts of these loans until December 2002. At the time of the extension, the
aggregate amount of the interest and principal owing under the loan was
US$326,125. The full amounts outstanding under these two loans, were repaid on
December 27, 2002.
AGREEMENTS BETWEEN TV AZTECA AND UNEFON
In July 2001, the Company and Mr. Saba announced their intention to
provide credit support to Unefon for up to US$80.0 million each. As of May 31,
2003, the Company had paid US$17.7 million to Unefon and its creditors pursuant
to this credit support and it had outstanding credit support obligations in the
amount of US$12.1 million. The Company has terminated any further credit support
to Unefon.
In December 2000, as a condition to the modification of Unefon's finance
agreement with Nortel, the principal shareholders of Unefon, the Company and Mr.
Saba, agreed in a shareholder's undertaking to provide Unefon up to US$35.0
million in the aggregate in the event Unefon had liquidity shortfalls in 2001 or
2002. In such event, the Company and Mr. Saba would be jointly and severally
obligated to make additional funds available to Unefon either (i) by way of
equity contribution to Unefon or (ii) as subordinated indebtedness of Unefon. On
December 20, 2002, Nortel notified the Company and Mr. Saba of its view that
Unefon's non-payment of the August 2002 interest payment under the Nortel
finance agreement triggered their joint and several obligation to make
additional funds available to Unefon up to an aggregate amount of US$35.0
million as provided in the shareholders' undertaking. The Company and Mr. Saba
disputed Nortel's assertion. In connection with the settlement with Nortel,
Nortel has released the Company and Mr. Saba from any obligation or liability in
connection with this undertaking. However, as of May 31, 2003, the Company and
Mr. Saba had made loans to or on behalf of Unefon with an outstanding aggregate
principal amount of US$35.8 million, US$19.1 million of which was paid by the
Company to Unefon and certain of its creditors.
68
In June 1998, the Company and Unefon entered into a 10-year advertising
agreement pursuant to which the Company agreed to supply Unefon with advertising
spots.
The principal terms and conditions of the Company's agreement with Unefon,
as amended, include:
.. The Company will supply Unefon with advertising spots totaling an
aggregate of 120,000 GRPs over the term of the agreement, up to a maximum
of 35,000 GRPs per year. For purposes of the agreement, GRPs equal the
number of total rating points obtained in a 60 second transmission of
commercial messages. Up to 30% of these GRPs may be used during
prime-time, which is defined in the agreement as 7:00 p.m. to 11:00 p.m.,
Monday through Friday, and 6:00 p.m. to 11:00 p.m., Saturday and Sunday.
Unefon can only use the GRPs through December 2009;
.. Unefon will pay the Company 3.0% of its gross revenues up to a maximum of
US$200.0 million. As of December 31, 2002, the Company had broadcast
Unefon advertisements having an aggregate value of Ps.147 million (US$14.1
million) pursuant to this agreement. The Company records revenue under the
terms of the agreement as the GRPs are consumed on a rate schedule set
forth in the agreement, which provides less expensive GRPs initially and
more expensive GRPs over the term of the agreement. Pursuant to the
agreement, Unefon has elected to defer payments due in 2000, 2001 and 2002
and to make these payments in four equal semi-annual installments during
2003 and 2004, with the first payment maturing in June 2003. The deferred
payments accrue interest at an annual interest rate of 12%. Starting in
2003, Unefon's payments to the Company are due on a current basis. At
December 31, 2002, the aggregate deferred payments equaled US$15.7 million
(including interest); and
.. The Company's right to payment under the agreement is subject to
compliance by Unefon with its payment obligations under its finance
agreement.
.. Pursuant to the advertising agreement, Unefon's failure to pay advances
will not be considered a default by Unefon under the agreement. However,
the Company will be able to suspend the provision of television services
to Unefon after Unefon's continued failure to pay for one year.
In May 1998, the Company signed a building lease agreement with Unefon.
The lease has a term of 10 years, starting June 1998, with a one-time right to
renew for an additional 10 years upon notice by Unefon at least 180 days prior
to expiration. The rent under the lease is Ps.2.5 million (US$207,900) a month,
payable in advance each month. During the years ended December 31, 2000, 2001
and 2002, the aggregate lease income received by the Company amounted to Ps.23
million, Ps.25 million and Ps.25 million, respectively.
AGREEMENTS BETWEEN TV AZTECA AND TODITO
In connection with its acquisition of 50% of the capital stock of Todito,
the Company entered into a five year service agreement with Todito. The service
agreement consists of advertising time on the Company's networks, the use of the
Company's content on Todito's web site and the use of the Company's sales force
to promote Todito. The three components of the service agreement were valued at
US$45.0 million, US$50.0 million and US$5.0 million, respectively, at the time
of signing. Under the service agreement, the Company agreed to provide Todito
with advertising on its Azteca 7 and Azteca 13 networks totaling an aggregate of
78,000 GRPs. The GRPs contemplated by the agreement equal the number of
commercial rating points obtained in a 60 second transmission of commercial
messages. Todito has the right to use up to 30% of the advertising granted under
the service agreement during the network's prime-time hours. The Company also
granted Todito the exclusive right to distribute over the Internet the Company's
internally produced programming during the term of the service agreement.
The Company has also signed a five-year hosting agreement with Todito, in
February 2000. Under this agreement, the Company has agreed to place a Todito
navigation bar at the top of all pages of the Company's web site,
www.tvazteca.com.mx, which is intended to direct tvazteca.com.mx visitors to
Todito's content and commerce options. The Company has also agreed that
tvazteca.com.mx will be subsumed within Todito, such that all visitors to
tvazteca.com.mx will actually be navigating within Todito. Todito will also have
the right to commercialize advertising space on the Company's website. In
exchange for the placement of its navigation bar on tvazteca.com.mx and the
right to
69
sell tvazteca.com.mx advertising space, Todito has agreed to place the Company's
navigation bar on todito.com and to provide technical support to the Company
with regard to the hosting of tvazteca.com.mx within Todito.
AGREEMENT BETWEEN TV AZTECA AND GRUPO ELEKTRA
In March 1996, the Company entered into a television advertising time
agreement with Grupo Elektra under which Grupo Elektra (or any company in which
Grupo Elektra has an equity interest) has the right to not less than 300
advertising spots per week for a period of 10 years, each spot for a 20 second
duration, totaling 5,200 minutes annually, but only in otherwise unsold airtime.
In exchange for the television advertising airtime, the Company receives Ps.14
million (nominal) (US$1.5 million) (nominal) each year. The agreement may not be
terminated by the Company but may be terminated by Grupo Elektra, which may also
transfer its rights under this agreement to third parties.
AGREEMENTS BETWEEN TV AZTECA AND ALTA EMPRESA
In December 2001, the Company and Alta Empresa entered into an agreement
for purposes of marketing and selling the Company's programming throughout the
world, excluding Mexico. Pursuant to this agreement, the Company agreed to
contribute its programming and Alta Empresa agreed to manage all of the
activities involved in the marketing and selling of the Company's programming
outside of Mexico. Initially, Alta Empresa may only market and sell the
Company's programming in the U.S., which it is currently doing through an
agreement with Azteca International. The agreement between the Company and Alta
Empresa has an initial term of 30 years, which may be terminated at any time by
the Company and Alta Empresa. Based upon their relative contributions, the
Company is entitled to 99% of the net profits derived from the marketing and
sale of its programming outside of Mexico and Alta Empresa is entitled to the
remaining one percent.
AGREEMENT BETWEEN TV AZTECA AND BIPER
In September 2001, the Company entered into an advertising agreement with
Biper covering the period from January 1, 2002 through December 31, 2002. Under
this agreement, Biper had the right to receive advertising in 2002 on the Azteca
7 or 13 networks. In exchange for the advertising time, Biper paid Ps.20 million
(nominal) (US$2.1 million) (nominal) to the Company.
AGREEMENT BETWEEN TV AZTECA AND DATAFLUX
The Company entered into a television advertising time agreement with
Dataflux, effective September 30, 1996. Dataflux is controlled by Guillermo E.
Salinas Pliego, the brother of the Chairman of the Board of the Company, Ricardo
B. Salinas Pliego. Under the terms of this agreement, Dataflux or any of its
subsidiaries has the right to 480 advertising spots per month on the Azteca 7
and 13 networks for a period of 10 years, each spot with 30 seconds average
duration, totaling 2,880 minutes each year, but only in otherwise unsold
airtime. In exchange for the advertising time, Dataflux has agreed to pay the
Company US$830,770 annually, payable in advance each year. The agreement may not
be terminated by the Company; however, it may be terminated by Dataflux at any
time upon at least 90 days' notice.
In December 1996, the Company entered into stock option agreements with
two of Dataflux's principal shareholders, Alberto Hinojosa Canales and Guillermo
E. Salinas Pliego. Under the terms of the stock option agreements, Mr. Hinojosa
Canales and Mr. Guillermo E. Salinas Pliego together had the option to purchase
all of the Company's Dataflux stock, representing a 20% equity interest in
Dataflux. These options, which expired on November 30, 1998, had an aggregate
exercise price of US$20.0 million if exercised on or before November 30, 1997,
with the exercise price increasing until expiration according to interest
schedules in the stock option agreements. Effective as of April 1, 1997, Mr.
Guillermo E. Salinas Pliego and Mr. Hinojosa Canales, through Datacapital, S.A.
de C.V. ("Datacapital"), a holding company, exercised these options with respect
to approximately 87.5% of the 20% equity interest in Dataflux that was subject
to these options, and agreed to pay to the Company Ps.139.4 million (nominal).
Datacapital agreed to pay amounts owed by it by providing the Company with
computer equipment by December 31, 2000. At December 31, 2002, Ps.79 million of
this amount remained outstanding. The parties are currently in negotiations
regarding the remaining amounts owed to the Company.
70
AGREEMENT BETWEEN TV AZTECA AND PRODUCTORA DE MEDIOS
The Company entered into a television advertising time agreement with
Productora de Medios, a former wholly-owned subsidiary of Grupo COTSA, under
which Grupo COTSA or any of Grupo COTSA's subsidiaries has the right to 42
advertising spots per week on the Azteca 7 or 13 networks for a period of 10
years commencing September 30, 1996. Each spot has an average duration of 20
seconds, totaling 728 minutes each year, but only in otherwise unsold airtime.
In exchange for the advertising time, Productora de Medios agreed to pay the
Company US$210,000 each year. The agreement may not be terminated by either
party without the consent of the other party.
On November 15, 2001, Productora de Medios sold the advertising minutes
under the television advertising time agreement to four non-related parties in
return for US$24.0 million, which is to be paid to Cine Alternativo, an
affiliate of Productora de Medios that acts as its depositary for the payments.
Of this amount, approximately US$12.1 million was paid in December 2001, US$5.6
million in June 2002 and US$6.3 million in December 2002.
In December 2001, Cine Alternativo and Productora de Medios were merged
into Azteca Holdings.
AGREEMENTS BETWEEN TV AZTECA AND ATC
John Michael Gearon Jr., a director of the Company since February 2000,
serves as President and a director of American Tower International Corporation.
In February 2000, the Company, together with its subsidiary, Television
Azteca, entered into the Tower Agreement with a Mexican subsidiary of ATC
regarding space not used by the Company in its operations. This agreement, which
was approved by the SCT, covers up to 190 of the Company's broadcast
transmission towers. In consideration for the payment of a US$1.5 million annual
fee and for a loan of up to US$119.8 million under the ATC Long-Term Credit
Facility, the Company granted ATC the right to market and lease the Company's
unused tower space to third parties (including affiliates of the Company) and to
collect for ATC's account all revenue related thereto. The Company retains full
title to the towers and remains responsible for the operation and maintenance
thereof. After the expiration of the initial 20 year term of the ATC Long-Term
Credit Facility, the Company has the right to purchase from ATC at fair market
value all or any portion of the revenues and assets related to ATC's marketing
and leasing rights at any time upon the proportional repayment of the
outstanding principal amount under the ATC Long-Term Credit Facility.
In February 2000, the Company entered into the ATC Long-Term Credit
Facility for up to US$119.8 million. The ATC Long-Term Credit Facility is
comprised of a US$91.8 million unsecured term loan and a US$28.0 million term
loan secured by certain of the Company's real estate properties. The interest
rate on each of the loans is 12.877% per year. The initial term of the US$91.8
million unsecured term loan is 20 years, which may be extended up to an
additional 50 years, so long as the Tower Agreement remains in effect. The
US$28.0 million secured term loan currently matures in February 2004, but may be
renewed annually for successive one-year periods so long as the Tower Agreement
remains in effect.
ADDITIONAL RELATED PARTY LOANS
In April 2000, the Company made an unsecured loan in the principal amount
of US$1.4 million with an annual interest rate of 10.63% to Adrian Steckel
Pflaum, who was one of Azteca Holdings' directors at the time and is Unefon's
chief executive officer. The full amount outstanding under this loan was repaid
on December 31, 2002.
In June 1998, the Company made an unsecured loan in the principal amount
of US$470,000 with an annual interest rate of 12% to Francisco X. Borrego, one
of the Company's executive officers. This loan was repaid in December 2002.
71
ITEM 8. FINANCIAL INFORMATION
See "Item 18. Financial Statements" and the financial statements referred to
therein.
ITEM 9. THE OFFER AND LISTING
PRICE HISTORY AND MARKETS
The CPOs, each representing one A Share, one D-A Share and one D-L Share,
are traded on the Mexican Stock Exchange. The ADSs have been issued by The Bank
of New York, as depositary (the "Depositary"). Prior to April 22, 1998, the
effective date of the stock split described below, each ADS represented four
CPOs, and now each ADS represents 16 CPOs as issued by Nacional Financiera,
S.N.C. as trustee (the "CPO Trustee") for the CPO Trust. The ADSs are traded on
the New York Stock Exchange. The ADSs are also quoted on the Stock Exchange
Automated Quotation system of the International Stock Exchange of the United
Kingdom and the Republic of Ireland, Ltd. (SEAQ International).
The following table sets forth, for the periods indicated, the reported
high and low sales prices for the CPOs on the Mexican Stock Exchange and the
reported high and low sales prices for the ADSs on the New York Stock Exchange.
Prices have not been restated in constant currency units but have been restated
to reflect the stock split described below.
MEXICAN STOCK EXCHANGE NEW YORK STOCK EXCHANGE
PESOS PER CPO U.S. DOLLARS PER ADS
------------------------- ---------------------------
YEAR ENDED DECEMBER HIGH LOW HIGH LOW
------------------- ---- --- ---- ---
1998..................................... Ps.11.5152 Ps.2.7780 US$ 23.0625 US$ 4.2500
1999..................................... 5.3100 5.1900 9.0000 8.9400
2000..................................... 5.9400 5.8000 10.0000 9.7500
2001..................................... 6.5800 2.2000 10.6500 3.7800
2002..................................... 4.9200 2.7000 8.8000 4.3000
MEXICAN STOCK EXCHANGE NEW YORK STOCK EXCHANGE
PESOS PER CPO U.S. DOLLARS PER ADS
------------------------- ---------------------------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
2001:
First Quarter....................... Ps.6.58 Ps.4.12 US$ 10.65 US$ 7.37
Second Quarter...................... 5.21 3.60 9.01 6.41
Third Quarter....................... 4.08 2.20 6.92 3.78
Fourth Quarter...................... 3.96 2.20 6.83 3.79
2002:
First Quarter....................... 4.89 3.70 8.80 6.64
Second Quarter...................... 4.90 4.01 8.78 6.30
Third Quarter....................... 4.30 2.99 7.06 4.69
Fourth Quarter...................... 3.46 2.70 5.60 4.30
2003:
First Quarter....................... 3.39 2.86 5.15 4.22
MEXICAN STOCK EXCHANGE NEW YORK STOCK EXCHANGE
PESOS PER CPO U.S. DOLLARS PER ADS
------------------------- ---------------------------
MONTH ENDED HIGH LOW HIGH LOW
----------- ---- --- ---- ---
December 31, 2002................... Ps.3.08 Ps.3.04 US$ 4.81 US$ 4.69
January 31, 2003.................... 2.97 2.91 4.39 4.25
February 28, 2003................... 3.27 3.20 4.78 4.71
March 31, 2003...................... 3.18 3.00 4.74 4.60
April 30, 2003...................... 3.77 3.65 5.90 5.75
May 31, 2003........................ 3.99 3.89 6.25 6.11
On March 27, 1998, the Company's shareholders approved a 4-for-1 split of
the Company's stock. The split was declared effective on April 22, 1998. As a
result of the split, each ADS currently represents 16 CPOs; each CPO continues
to represent one A Share, one D-A Share and one D-L Share.
72
At the Company's annual ordinary and extraordinary meeting of shareholders
held on March 27, 1998, the Company's shareholders approved the establishment of
a reserve in its stockholders' equity account in the amount of Ps.870 (nominal)
million for the repurchase of its stock, in accordance with rules established by
the CNBV. The Company may purchase its CPOs on the Mexican Stock Exchange and
its ADSs on the New York Stock Exchange at prevailing prices up to the amount in
this reserve account. Any shares so repurchased will not be deemed to be
outstanding for purposes of calculating any quorum or voting at a shareholders'
meeting during the period in which such shares are owned by the Company. As of
May 31, 2003, approximately 109 million CPOs had been repurchased since the
Company initiated repurchases in April 1998.
TRADING ON THE MEXICAN STOCK EXCHANGE
The Mexican Stock Exchange, which was founded in 1894, ceased operations
in the early 1900s, and has operated continuously since 1907, is located in
Mexico City and is Mexico's only stock exchange.
The Mexican Stock Exchange is organized as a corporation with its shares
being held by 32 registered licensed brokerage firms. These firms are
exclusively authorized to trade on the Mexican Stock Exchange through the
electronic trading system implemented by the Mexican Stock Exchange and the
CNBV. Trading of securities registered on Subsection "A" of the RNV, the Mexican
National Securities Registry, is effected on the Mexican Stock Exchange each
business day between 8:30 a.m. and 3:00 p.m., Mexico City time. The size of
trading lots is 1,000 shares. Brokerage firms are permitted to trade in odd lots
only through a parallel computerized odd-lot trading system.
The Mexican Stock Exchange publishes a daily official price list that
includes price information on each listed security. For most issuers, the
Mexican Stock Exchange operates a system of immediate suspension of dealing in
shares of a particular issuer as a means of controlling excessive price
volatility. In accordance with the rules of the Mexican Stock Exchange, trading
of a certain security may be suspended by reason of: (i) material events
affecting the price of such security; (ii) extraordinary fluctuations in the
price of such security; (iii) unusual behavior of such security; and (iv) events
affecting securities listed on the Mexican Stock Exchange's international
quotation system.
Each day a price band is established, with the upper and lower limits
generally being 15% above and below a reference price, which is initially the
day's opening price. If during the day a bid or offer is accepted at a price
outside this band (an extraordinary price fluctuation), trading in the shares is
automatically suspended, and the Mexican Stock Exchange immediately proceeds to
verify whether there is information in the market which explains the price
fluctuation and requires the corresponding issuer or intermediary to immediately
inform the Mexican Stock Exchange whether it knows the cause of the price
fluctuation. When trading resumes, the high point of the previous band generally
becomes the new reference price in the event of a rise in the price of a
security and the low point of the previous band becomes the new reference price
in the event of a fall in the price of a security. Suspension periods in effect
at the close of trading are not carried over to the next trading day.
Notwithstanding the foregoing, in accordance with the rules of the Mexican
Stock Exchange, the CPOs are not subject to this suspension system because they
also trade outside Mexico in the form of ADSs.
Settlement is effected two trading days after a share transaction on the
Mexican Stock Exchange. Deferred settlements, even if by mutual agreement, are
not permitted without the approval of the CNBV. Most securities traded on the
Mexican Stock Exchange are on deposit with S.D. Indeval, S.A. de C.V.,
Institucion para el Deposito de Valores, a central securities depositary owned
by Mexican financial intermediaries that acts as a clearing house, depositary,
custodian, settlement, transfer and registration institution for Mexican Stock
Exchange transactions, eliminating the need for physical transfer of securities.
As of December 31, 2002, 167 Mexican companies, excluding mutual funds,
had equity listed on the Mexican Stock Exchange. According to the Mexican Stock
Exchange, during 2002, the ten most actively traded equity issues traded on the
Mexican Stock Exchange represented approximately 65.81% of the Indice de Precios
y Cotizaciones (the "Mexican Stock Exchange Index") (which is based on the share
prices of 35 major Mexican issuers). Although there is substantial participation
by the public in the trading of securities on the Mexican Stock Exchange, a
major part of such activity reflects transactions by institutional investors.
There is no over-the-counter market for securities in Mexico, but trades in
73
securities listed on the Mexican Stock Exchange can, subject to certain
requirements, also be effected off of the Mexican Stock Exchange. However, due
primarily to Mexican tax considerations relating to capital gains, most
transactions in listed Mexican securities are effected on the Mexican Stock
Exchange.
The Mexican Stock Exchange is Latin America's second largest exchange by
market capitalization, but it remains relatively small and illiquid compared to
major world markets and is subject to significant volatility. During 1994, for
example, the Mexican Stock Exchange Index experienced one-day declines (in peso
terms) of approximately 6% and 15%, respectively, following events in the State
of Chiapas in southern Mexico and the assassination of Luis Donaldo Colosio
Murrieta, the presidential candidate of the Institutional Revolutionary Party.
Furthermore, following the devaluation of the peso in December 1994, the Mexican
Stock Exchange Index declined (in peso terms) by approximately 36% from December
20, 1994 to February 27, 1995, and on several occasions in 1995, the Mexican
Stock Exchange Index declined by more than 5% (in peso terms) in one day.
The market value of securities of Mexican companies is, to varying
degrees, affected by economic and market conditions in other developing
countries. Although economic conditions in such countries may differ
significantly from economic conditions in Mexico, investors' reactions to
developments in any of these other countries may have an adverse effect on the
market value of securities of Mexican companies. The market value of securities
of many Mexican companies declined sharply in 1998. This decline was reflected
in a 24.3% decline in the Mexican Stock Exchange Index (in peso terms) from
January 1, 1998 to December 31, 1998, and was initially a result of declines in
the Hong Kong securities market and persisted as a consequence of economic
crises in Asia, Russia and Brazil. The market value of securities of many
Mexican companies increased in 1999, as a result of an increase in demand for
Mexican companies' securities and the general stability of the Mexican economy.
This increase was reflected in an 86% increase in the Mexican Stock Exchange
Index (in peso terms) from January 4, 1999 to December 31, 1999. There can be no
assurance that the market value of the Company's CPOs would not be adversely
affected by events elsewhere, especially in developing countries. In 2000 there
were presidential elections in Mexico. Historically this kind of event has
caused national and international investors to reduce their risk by selling
shares of Mexican companies. Subsequent to the elections in Mexico, the Mexican
Stock Exchange Index decreased by 20.73%. In addition, trading volume decreased
0.59% as compared with 1999. The war in Iraq precipitated a 27.72% decrease in
the Mexican Stock Exchange Index in the period between April 4 and August 5,
2002. However, the Mexican Stock Exchange recovered from the impact of these
events such that by May 31, 2003, the Mexican Stock Exchange Index had regained
21.04% from its low on August 5, 2002.
On April 1, 1998, the Company's CPOs entered the Mexican Stock Exchange
Index as one of the 35 most important stocks traded on the Mexican Stock
Exchange.
ITEM 10. ADDITIONAL INFORMATION
BYLAWS
Set forth below is a brief description of certain significant provisions
of the Company's bylaws. This description does not purport to be complete and is
qualified by reference to the Company's bylaws, which have been filed as an
exhibit to this registration statement.
Organization and Register
The Company is a corporation (sociedad anonima de capital variable)
organized under the laws of Mexico. The Company's deed of incorporation was
executed on June 2, 1993 and was registered in the Public Registry of Commerce
in Mexico City on July 13, 1992 under the number 167346.
Purpose
Article 4 of the bylaws defines the Company's purpose as the promotion,
incorporation, organization, exploitation and participation in the capital stock
of all types of commercial companies, partnerships, associations or industrial,
74
trading, services or any other type of company, both domestic and foreign, as
well as participation in the administration or liquidation thereof, as well as
other purposes related thereto.
Board of Directors
Management of the Company is vested in its Board of Directors. According
to the bylaws, the Board of Directors is to consist of a minimum of five and a
maximum of twenty members. The Board of Directors is currently composed of 11
members. The Series A shareholders have the power to elect at least seventy
percent of the Company's directors and each holder of ten percent of the
Company's limited-vote capital stock (D-A Shares and D-L Shares, and after
conversion, the L Shares) is entitled to elect one of the Company's directors.
Of the directors appointed, 25 percent must be independent. Among other
obligations, the directors are required to inform the Chairman and the Secretary
of the Board of Directors of any conflict of interest and refrain from voting on
matters related to such conflict and to use the resources of the Company only
for the benefit of the Company and to define clear policies with regard to the
use of Company resources for personal purposes.
Capital Stock
The capital stock is variable. The minimum fixed capital of the Company is
US$1,694,612,147.00, represented by Series A, Series D-A, Series D-L and Series
L shares. Each share is entitled to one vote on those issues for which such
shares have the right to vote. The Series A and Series D-A shares may only be
subscribed by Mexican entities. The variable portion of the capital of the
Company is limited to no more than ten times the value of the minimum fixed
capital stock.
The shares of capital stock of is divided into four Series:
.. Series A shares represent ordinary shares with full voting rights.
.. Series D-A shares represent limited-voting shares, which are entitled to
receive a dividend, but may only vote on (i) transforming the Company from
one type of company to another, (ii) any merger of the Company (including
a merger in which the Company is the surviving entity), (iii) extension of
the Company's existence beyond June 2092, (iv) dissolution of the Company
before June 2092, (v) a change of the Company's corporate purposes and
(vi) a change of the Company's nationality. Series D-A shares will convert
into Series A shares 10 years after their issuance.
.. Series D-L shares represent limited-voting shares, which may be freely
subscribed and are entitled to receive a dividend, but may only vote on
(i) transforming the Company from one type of company to another, (ii) any
merger of the Company (including a merger in which the Company is the
surviving entity), (iii) extension of the Company's existence beyond June
2092, (iv) dissolution of the Company before June 2092, (v) a change of
the Company's corporate purposes and (vi) a change of the Company's
nationality. Series D-L shares will convert into Series L shares 10 years
after their issuance.
.. Series L shares represent limited-voting shares and shall only have the
right to vote on (i) transformation of the Company from one type of
company to another, (ii) any merger in which the Company is not the
surviving entity, and (iii) removal of the L Shares or securities
representing them from listing on the Mexican Stock Exchange or any
foreign stock exchange and cancellation of the registration of such shares
with the RNV. Series L shares may be acquired by any natural or legal
person, national or foreign, provided that the applicable legal provisions
with respect to foreign investment are met. For purposes of the foreign
investment laws, Series L shares are not included in the calculation of
the proportional participation of foreign investors.
Under Mexican law, holders of shares of any series are also entitled to
vote as a class on any action that would prejudice the rights of holders of
shares of such series, and a holder of shares of such series would be entitled
to judicial relief against any such action taken without such a vote. The
determination whether any action requires a class vote on these grounds would
initially be made by the Board of Directors or other party calling for
shareholder action. A negative determination would be subject to judicial
challenge by an affected shareholder, and the necessity for a class vote would
ultimately be determined by a court. There are no other procedures for
determining whether a proposed shareholder
75
action requires a class vote, and Mexican law does not provide extensive
guidance on the criteria to be applied in making such a determination.
Shareholder Meetings
Shareholders' meetings may be general or special, and general meetings may
be ordinary or extraordinary. Extraordinary general meetings are those called to
consider certain matter specified in Article 182 of the General Law of
Commercial Corporations, including, principally, amendment of the bylaws,
liquidation, merger and transformation from one type of company to another, as
well as to consider the removal of the Company's shares from listing, or they
may be called to agree on the amortization of shares with distributable profits.
All other meetings shall be ordinary. Ordinary general shareholders' meetings
shall be held at least once each year, in the four months following the close of
each fiscal year. Special meetings are those that meet to address matters that
could affect the rights of a particular class of shares, and are subject to the
provisions applicable to extraordinary general meetings.
Generally, the Board of Directors or the statutory auditors call
shareholder meetings; however, shareholders representing at least ten percent of
the capital stock of the Company may request in writing, at any time, that the
Board of Directors or the statutory auditors call a meeting of the shareholders
to discuss the matters specified in their request, provided that such
shareholders have the right to vote on the matter. If the Board of Directors
fails to call such meeting, the shareholders may seek judicial intervention.
Notice of meetings must be published in the Diario Oficial de la
Federacion ("Official Gazette") or a newspaper of general circulation in Mexico
City at least 15 days prior to the meeting. Shareholders that are entered into
the shareholder register as holders of one or more shares of the Company must be
admitted to shareholder meetings. The shareholder register will be closed the
day before the date set for a meeting. In order to attend a meeting,
shareholders must deposit their shares in return for an admission card which
will give them access to the meeting.
The quorum for an ordinary general meeting is 50% of the shares with a
right to vote at such meeting. If a quorum is not available a second meeting may
be called pursuant to which action may be taken by a majority of those shares
with a right to vote present, regardless the number of such shares. The quorum
for an extraordinary general meeting at which Series D-A, D-L and/or L shares do
not have the right to vote is 75% of Series A shares. If a quorum is not
available a second meeting may be called pursuant to which action may be taken
50% plus one of the entirety of the Series A shares of the corporation. The
quorum for an extraordinary general meeting at which Series D-A, D-L and/or L
shares have the right to vote, at least a majority of the Series A shares and
seventy-five percent (75%) of the entirety of the shares that comprise the
capital stock of the Company must be present. If a quorum is not available a
second meeting may be called if at least a majority of the Series "A" shares of
the corporation and 50% of the entirety of the shares that comprise the capital
stock are present. When Series D-A, D-L and, where applicable, L shareholders
are called to a Special Meeting to decide on the selection and removal of their
Board Members, the meeting will be deemed legally assembled and its resolutions
valid when they are adopted by a simple majority of the series D-A, D-L and,
where applicable, L shareholders in attendance. When Series D-A, D-L and, where
applicable, L shareholders are called to address any other matter, including the
withdrawal of said shares or, where applicable, of the securities that represent
them, from the Mexican Stock Exchange or any other foreign stock exchange, their
cancellation in the National Register of Securities, the meeting, will be deemed
legally assembled when at least 75% and 50%, for first and second call,
respectively, of said shares are present, and their resolutions shall be valid
when taken by at least 95% of the shares of each series.
Preemptive Rights
In the event of a capital increase, a holder of existing shares of a given
series has a preferential right to subscribe for a sufficient number of shares
of the same series to maintain the holder's existing proportionate holdings of
shares of that series; provided that such right shall not apply in the case of a
capital increase in connection with a merger, conversion obligations,
acquisition of shares in the market by the Company or a public offering.
Preemptive rights must be exercised within the period established by the
shareholders at the meeting authorizing the capital increase, which shall be at
least 15 days following the publication of notice of the capital increase in the
Official Gazette and a newspaper of general circulation in Mexico City.
76
LEGAL PROCEEDINGS
TV AZTECA
Pappas Settlement
In July 2001, Azteca International and Pappas Southern California entered
into an equity option agreement pursuant to which Azteca International was
granted an option to purchase an equity interest in Pappas Southern California.
The equity option was exercised by Azteca International on May 21, 2002. The
acquisition by Azteca International of an equity interest in Pappas Southern
California was not consummated by the parties on the anticipated closing date.
In July 2002, Azteca International filed a lawsuit against Pappas Southern
California in Delaware Chancery Court seeking specific performance of the equity
option agreement. Also, in July 2002, Pappas Southern California and its
wholly-owned subsidiary that holds the FCC license to operate the Los Angeles
station (collectively, the "PSC Entities") filed a lawsuit in California state
court against Azteca International and the Company seeking a declaration that
these parties did not have the right to acquire any portion of the equity of
Pappas Southern California pursuant to the equity option agreement. The parties
later agreed to stay the California action. The trial on the Delaware lawsuit
was scheduled for December 2002.
Pappas also claimed that Azteca International had breached its station
affiliation agreements with its affiliates in the Los Angeles, San Francisco,
Houston and Reno television markets. In response, Azteca International filed a
separate lawsuit in New York state court against Pappas Southern California and
the Pappas affiliates operating the San Francisco, Houston and Reno stations
seeking to prevent the termination of the station affiliation agreements. The
Pappas-controlled entities filed counterclaims against Azteca International
seeking a declaration that they were entitled to terminate the station
affiliation agreements.
On November 27, 2002, the Company and Pappas entered into an agreement in
principle to settle all of the pending lawsuits and all related disputes, and on
February 11, 2003, a definitive settlement agreement was executed. In connection
with settling these pending matters, the Company and Pappas also entered into a
number of agreements that will govern their future relationship. These
agreements include a new promissory note issued by Pappas in favor of the
Company, an LMA governing, under certain circumstances, Azteca International's
operation of its Los Angeles affiliate and a purchase option agreement that
grants Azteca International the right, subject to receipt of all necessary
approvals, to acquire all of the assets of its Los Angeles affiliate. In
addition to these agreements, Pappas and the Company have modified their
existing station affiliation agreements and entered into new station affiliation
agreements. See "Item 4. Information on the Company--Other Operations--Azteca
International--Pappas Station Affiliations" for a discussion of each of these
agreements.
Echostar
On June 25, 2002, Echostar filed a lawsuit against the Company in the U.S.
District Court for the Southern District of New York. This lawsuit alleges that
the Company is in breach of the exclusivity provisions of the Echostar agreement
because Azteca America Programming (which contains portions of Azteca 13
Programming) is re-transmitted by certain of Azteca International's station
affiliates on local cable systems and other satellite systems. Echostar sought a
preliminary and permanent injunction that, among other things, would enjoin the
Company from directly or indirectly distributing any portion of Azteca 13
Programming to cable and satellite operators (other than Echostar) in the U.S.
On July 9, 2002, the Company entered into a voluntary undertaking, pursuant to
which it represented to the Court that any new U.S. affiliates (signed after
July 1, 2002) would not exercise their "must-carry" or "retransmission consent"
rights to broadcast Azteca America Programming on cable or DTH satellite. This
undertaking ceased to be in effect on April 13, 2003 after the Court denied
Echostar's application for a preliminary injunction on April 3, 2003. On
December 20, 2002, the Company filed an answer, denying the allegations of
Echostar's complaint. The Company also filed counterclaims, alleging that if the
Court were to find that Echostar's interpretation of the agreement is correct,
then the agreement should be rescinded due to a unilateral mistake as to the
understanding of the material terms of the agreement, or because there was no
meeting of the minds as to the material terms. There can be no assurance as to
the outcome of this litigation. However, the Company intends to defend itself
vigorously.
77
If the Echostar lawsuit were to be adversely determined for the Company,
this could have an adverse effect on the ability of the Company to provide
Azteca International's station affiliates and cable operators with Azteca
America Programming that contains Azteca 13 Programming and, consequently, on
its ability to expand the Azteca America Network in the U.S. prior to the
expiration of the Echostar agreement on March 17, 2004, or, if extended by
Echostar, March 17, 2005. In certain circumstances, if Echostar obtains an
injunction barring Azteca International from distributing Azteca America
Programming that contains portions of Azteca 13 Programming to over-the-air
broadcasters that retransmit it to U.S. cable operators, then, subject to
certain conditions, certain of Azteca International's station affiliates would
have the right to cancel their affiliation agreements. However, in such event
the Company believes that it will be able to provide alternative TV Azteca
content and thus continue the broadcast of Azteca America Programming over such
affiliate stations. Although Echostar is continuing to seek a permanent
injunction against the Company, the Court denied Echostar's application for a
preliminary injunction on April 3, 2003. An adverse outcome in this lawsuit
could also subject the Company to the payment of damages for lost subscribers
incurred by Echostar.
Channel 40
In December 1998, the Company entered into a joint venture with TVM and
TVM's subsidiary, CNI, for the operation of a television channel that broadcasts
throughout the Mexico City metropolitan area on UHF Channel 40. For a minimum
term of three years and up to 10 years, the Company agreed to pay to CNI, on a
quarterly basis, 50% of the EBITDA, as defined in the agreement governing the
joint venture, generated by Channel 40. The Company advanced US$15.0 million of
this payment to CNI in a series of installments paid in 1998 and 1999. Under the
terms of the joint venture, the Company agreed to provide substantially all of
Channel 40's programming and to sell all of Channel 40's advertising time. The
Company also established a 10 year credit facility of US$10.0 million for CNI,
secured by stock of TVM, with a three-year grace period for payment of principal
and interest. As security for the loan, 51% of the capital stock of TVM owned by
Mr. Javier Moreno Valle, a major shareholder and the sole administrator of TVM,
was pledged as collateral. The Company was also granted an option to purchase up
to 51% of the capital stock of TVM beginning in November 2002, or upon the
earlier termination of the joint venture by CNI or TVM. Under the option to
purchase, the sale price of TVM's capital stock will be based on a valuation of
100% of the stock of TVM that is equal to the greater of US$100.0 million (which
amount increases gradually over time) or 10 times the EBITDA generated by
Channel 40 for the 12 months preceding the exercise of the purchase option, less
any indebtedness owed by TVM or CNI to the Company at the time the option is
exercised. As of December 31, 2002, TVM's and CNI's indebtedness to the Company
totaled approximately US$34.4 million, comprised of US$10.0 million under the
credit facility, a US$15.0 million payment advance and US$9.4 million comprised
of interest on the credit facility and additional operating expenses forwarded
to CNI.
In July 2000, CNI stopped broadcasting the Company's signal as required by
its contractual obligations under the joint venture agreement. In response to
CNI's actions, the Company filed several lawsuits in Mexico against TVM, CNI and
Mr. Moreno Valle, seeking lost profits and the enforcement of its purchase
option right under the joint venture to acquire up to 51% of the capital stock
of TVM.
In July 2001, the 5th Civil Court in Mexico City ordered CNI to pay the
Company US$35.0 million for damages and lost profits. CNI appealed this order,
and, in October 2001, an appeals court decided the Company did not have the
right to receive damages but instructed CNI to return advance payments in the
amount of US$15.0 million. The Company filed an action for relief (amparo)
before a federal circuit court seeking to reverse the appeals court's ruling.
Accepting the Company's action for relief, the federal circuit court instructed
the appeals court to decide whether the Company is entitled to damages arising
from TVM's actions. Following this decision, the appeals court resolved that CNI
committed an illegal act which allows the Company to seek damages, but that such
damages should be pursued pursuant to a different cause of action. The Company
filed an action for relief before the same federal circuit court. This action is
pending.
In July 2002, the Company filed a lawsuit against Mr. Moreno Valle seeking
the foreclosure of the pledge over 51% of the capital stock of TVM. This action,
which is pending before a Mexican court, substituted a legal action that the
Company had commenced to enforce a guaranty trust.
78
In November 2002, the Company requested the bankruptcy of CNI before a
Mexican court. In January 2003, CNI submitted its response. This action is
pending before a bankruptcy court.
In November 2000, the Company filed another action before the
International Court of Arbitration of the International Chamber of Commerce. In
this action, the Company sought to enforce the Company's option to purchase up
to 51% of the capital stock of TVM. TVM and Mr. Moreno Valle filed legal
responses to these claims. In December 2002, an arbitral tribunal issued an
award concluding that the joint venture and the option agreement entered into by
the Company and CNI are valid, in effect and enforceable. The Company believes
this arbitral award confirms the Company's right to operate Channel 40 as
contemplated by the joint venture and to exercise its right to acquire up to 51%
of the capital stock of TVM.
In reliance on the arbitral award issued in December 2002 by the arbitral
tribunal of the International Court of Arbitration, the Company took possession
of certain broadcasting facilities of Channel 40 to restore the Company's signal
on Channel 40. Following this event, the SCT took exclusive control of the
Channel 40 transmission site and signal.
In December 2002, CNI filed criminal complaints against individuals who
took possession of the broadcasting facilities of Channel 40. These complaints,
which resulted in criminal judgments, are currently being appealed before a
federal criminal judge. No director or executive officer of the Company or its
parent is a part of these proceedings.
In January 2003, CNI filed an action for relief (amparo) before a Mexican
federal district court seeking to reverse the SCT's decision to take exclusive
control of the Channel 40 transmission site and signal. The Mexican federal
district court suspended the SCT's decision, but required that TVM place
US$5.0 million bail in respect of such suspension, which TVM placed. On January
27, 2003, CNI regained control of the Channel 40 transmission site and signal.
As of the date of this Annual Report, no TV Azteca signal is being broadcast on
Channel 40.
On February 10, 2003, the SCT imposed a Ps.210,750 (US$21,000) fine on the
Company for having entered the broadcasting facilities of Channel 40 on December
27, 2002.
The Company is actively seeking to enforce its rights to operate Channel
40 and believes that it will be successful in its legal actions against CNI and
Mr. Moreno Valle. However, no assurance can be given as to the outcome of these
actions. If the Channel 40 litigation were to be adversely determined against
the Company, the Company could lose the benefit of all or part of its option to
purchase 51% of the capital stock of TVM, the joint venture agreement that
allows the Company to operate Channel 40 and revenues received therefrom could
be terminated. However, in such event, CNI would continue to be indebted to the
Company for approximately US$34.0 million, which indebtedness would continue to
be secured by the pledge of 51% of TVM's capital stock.
La Academia
On October 16, 2002, Gestmusic Endemol, S.A., or Endemol, filed an
administrative claim before the Instituto Mexicano de la Propiedad Industrial
("IMPI"), the Mexican trademark agency. Endemol alleges that the Company
violated certain provisions of the Ley de la Propiedad Industrial ("Mexican
Industrial Law") because the Company did not obtain authorization from Endemol
to use the trademark La Academia, and that such unauthorized use caused
confusion among the general public. Endemol seeks that the Company refrain from
conducting unfair practices in the future, which it argues includes the use of
La Academia's name and format, and that IMPI impose a penalty on the Company for
its violations. The Company has denied this allegation, asserting that Endemol's
trademark rights do not extend to television programming and that the name is of
such general nature that it is not appropriate for trademark protections. This
administrative action is still pending final resolution before the IMPI. In
addition, The Company has requested that IMPI declare the trademark La Academia
null and void alleging that such trademark is descriptive in nature and of
common public use for the services it was registered.
The Company believes that if the administrative claim were to be adversely
determined to the Company, the Company could be subject to a fine of up to
Ps.873,000 (US$83,982).
79
UNEFON
Unefon and Nortel recently settled disputes over each party's compliance
with the terms and conditions of the finance agreement, letter agreement,
procurement agreement, and other related agreements entered into by the parties
and certain of their shareholders and affiliates.
The dispute began when Unefon asserted that Nortel had not fulfilled its
obligations under the finance agreement, letter agreement and procurement
agreement and, as a result, withheld a US$6.0 million interest payment due to
Nortel in August 2002 and asserted that it was relieved of its payment
obligations under the finance agreement by reason of Nortel's breaches.
On August 28, 2002, Nortel sent Unefon a notice alleging that Unefon was
in default under the finance agreement due to its non-payment of the August 2002
interest payment. Nortel also alleged that the proposed spin-off by the Company
of its 46.5% stake in Unefon would be deemed to be a change in control under the
terms of the finance agreement, which also would constitute a default under the
finance agreement unless Nortel consented to such action. Nortel notified Unefon
on September 9, 2002 that based on its non-payment of the August 2002 interest
payment, Nortel was accelerating all amounts owed by Unefon under the finance
agreement. Nortel also notified Unefon that it was exercising its right to
terminate the procurement agreement as a result of Unefon's alleged default
under the finance agreement.
On September 9, 2002, Unefon filed a lawsuit against Nortel in the Supreme
Court of the State of New York seeking damages and lost profits in the amount of
US$900.0 million. On September 23, 2002, Nortel filed an answer and counterclaim
in which Nortel asserted, among other things, that it had not breached the
finance agreement and related letter agreement and that the remedies sought by
Unefon were not available under the finance agreement, the procurement agreement
or applicable law. Nortel's counterclaim was based on Unefon's non-payment of
the August 2002 interest payment and Nortel sought acceleration and immediate
payment of all amounts allegedly due to Nortel under the finance agreement. The
parties filed additional claims and counterclaims before the New York Supreme
Court and the American Arbitration Association in New York City, in addition to,
among other Mexican actions, a petition by Nortel to a Mexican court for the
bankruptcy of Unefon before the parties reached a settlement on June 16, 2003.
On June 16, 2003, Unefon reached a settlement with Nortel pursuant to which
Unefon and Nortel released each other from all obligations arising out of the
procurement agreement, finance agreement or any related agreements and
terminated all actions and proceedings of any kind between the parties or
involving the parties and their counsel, in the U.S. and Mexico. Unefon and
Nortel also terminated the procurement agreement and entered into a new supply
agreement. In connection with the settlement, Unefon paid an aggregate of
US$43.0 million to Nortel to be applied to accounts receivable and to a
reduction in the total amount of debt owed by Unefon to Nortel to US$325.0
million. Concurrently with the settlement, Codisco purchased the US$325.0
million debt of Unefon from Nortel. Unefon has announced that the term of this
debt between Unefon and Codisco is to be amended to provide for, among other
things, an extension of the maturity date until June 15, 2013. See "Item 4.
Information on the Company--Other Operations--Unefon--Nortel Settlement."
The Company's Obligations
On December 20, 2002, Nortel notified the Company and Mr. Saba of its view
that Unefon's non-payment of the August 2002 interest payment under the Nortel
finance agreement triggered their joint and several obligation to make
additional funds available to Unefon up to an aggregate amount of US$35.0
million as provided in the shareholders' undertaking. The Company and Mr. Saba
disputed Nortel's contention that their funding obligation had been triggered,
asserting that Nortel had materially breached the finance agreement and the
procurement agreement, thereby excusing Unefon from performance of its
obligations under these agreements and, therefore, that the Company and Mr. Saba
are excused from performance of their obligations under the shareholders'
undertaking. The Company and Mr. Saba also asserted that, even if their funding
obligation had been triggered, they had satisfied their obligations under the
shareholders' undertaking by making up to US$35.8 million in additional funds
available to or on behalf of Unefon, US$19.1 million of which was paid by the
Company to Unefon and certain of its creditors. In connection with the
settlement with Nortel, Nortel has released the Company and Mr. Saba from any
obligation or liability in connection with this undertaking.
80
MATERIAL CONTRACTS
The Company's agreements with related parties are described in "Related
Party Transactions" under "Item 7. Major Shareholders and Related Party
Transactions."
Unefon has entered into a new supply agreement with Nortel and has issued
a note to Codisco, to whom Unefon's indebtedness to Nortel was assigned pursuant
to an assignment and assumption agreement between Codisco and Nortel, in
connection with the equipment and working capital needs of its mobile wireless
telecommunications network. See "Item 4. Information on the Company--Other
Operations" for a description of these and related agreements.
Azteca International has entered into a settlement agreement and related
agreements with Pappas affiliates. See "Item 4. Information on the
Company--Other Operations" for a description of these agreements.
EXCHANGE CONTROLS
Since November 11, 1991, Mexico has had a free market for foreign
exchange. Prior to December 21, 1994, the Mexican Central Bank kept the
peso-U.S. dollar exchange rate within a range prescribed by the Mexican
government through intervention in the foreign exchange market. On December 21,
1994, the Mexican government announced its decision to suspend intervention by
the Mexican Central Bank and to allow the peso to float freely against the U.S.
dollar. Factors contributing to the decision included the growing size of
Mexico's current account deficit, the declining level of the Mexican Central
Bank's foreign exchange reserves, rising interest rates for other currencies,
especially the U.S. dollar, and reduced confidence in the Mexican economy on the
part of international investors due to political uncertainty. The Mexican
government's decision caused a significant devaluation of the peso against the
U.S. dollar. The devaluation produced a number of adverse effects on the Mexican
economy that, in turn, adversely affected the financial condition and results of
operations of the Company. Interest rates in Mexico increased substantially,
thus increasing the cost of borrowing. In addition, in response to the adverse
effects of the devaluation, the Mexican government established an economic
recovery program designed to tighten the money supply, increase domestic
savings, discourage consumption and reduce public spending generally. Foreign
investment in Mexico by private sources declined significantly.
In 2000, the peso weakened to Ps.9.650 per U.S. dollar at December 31,
2000, a 1.6% decrease in value from December 31, 1999. In 2001, the peso
strengthened to Ps.9.160 per U.S. dollar at December 31, 2001, a 5.1% increase
in value from December 31, 2000. In 2002, the peso weakened to Ps.10.395 per
U.S. dollar at December 31, 2002, a decrease of 13.5% in value from December 31,
2001. There can be no assurance that the Mexican government will maintain its
current policies with regard to the peso or that the peso will not further
depreciate or appreciate significantly in the future.
LIMITATIONS AFFECTING SECURITY HOLDERS
Ownership by non-Mexicans of shares of Mexican enterprises is regulated in
a general manner by the Reglamento de la Ley de Inversion Extranjera y del
Registro Nacional de Inversiones Extranjeras (the "Foreign Investment
Regulations").
The Foreign Investment Law reserves certain economic activities
exclusively for the Mexican state and reserves certain other activities
(including television and radio broadcasting) exclusively for Eligible Mexican
Holders, consisting of Mexican individuals and Mexican corporations, the
charters of which contain a prohibition on ownership by non-Mexicans of the
corporation's capital stock (a "foreign exclusion clause"). However, the Foreign
Investment Law provides that the General Directorate of Foreign Investment may
authorize the issuance of "neutral" shares or other "neutral" equity securities
("Series N Shares").
Pursuant to the Foreign Investment Law, holders of Series N Shares may or
may not have voting rights; if they have voting rights, they must be limited.
Series N Shares may be owned by domestic or foreign entities. Investment in N
Shares or Securities by foreign entities is not considered to be a foreign
investment, but rather a "neutral" investment.
81
In order to comply with these restrictions, the Company has limited the
ownership of its A Shares and D-A Shares to Eligible Mexican Holders and credit
institutions acting as trustee (such as the CPO Trustee) in accordance with the
Foreign Investment Law and Regulations, and the Company has obtained the
authorization from the General Directorate of Foreign Investment to issue the
D-L Shares, the Series L Shares ("L Shares") and the CPOs, all of which qualify
as Series N Shares. A holder that acquires A Shares in violation of the
restrictions on non-Mexican ownership will have none of the rights of a
shareholder with respect to those A Shares. The D-A Shares are subject to the
same restrictions on ownership as the A Shares. However, the foregoing
limitations do not affect the ability of non-Mexican investors to hold A Shares
and D-A Shares through CPOs, because such CPOs constitute a "neutral investment"
and do not affect control of the Company, pursuant to the exceptions contained
in the Foreign Investment Law.
The Foreign Investment Law and Regulations also require that the Company
register any non-Mexican owner of CPOs, or the applicable depositary with
respect to any ADSs, with the National Registry of Foreign Investment. A
non-Mexican owner of CPOs who has not been registered is not entitled to vote
any shares underlying the CPOs that he otherwise would have the right to vote or
to receive dividends with respect to the shares underlying the CPOs. The Company
has registered the Depositary for this purpose with respect to the ADSs and the
CPOs (and the A Shares, D-A Shares, D-L Shares (and, after conversion, L
Shares), as applicable, represented thereby).
In addition to the limitations established by the Foreign Investment Law,
the Mexican Federal Radio and Television Law provides restrictions on ownership
by non-Mexicans of shares of Mexican enterprises holding concessions for radio
and television such as those held indirectly by the Company. In connection with
the Company's IPO, the Company obtained approval from the CNBV for the
restructuring and subsequent public trading of the CPOs and from the General
Directorate of Foreign Investment for the establishment of the CPO Trust.
Non-Mexican states and governments are prohibited under the Company's by-laws
and Mexican Federal Radio and Television Law from owning shares of the Company
and are, therefore, prohibited from being the beneficial or record owners of A
Shares, D-A Shares, D-L Shares, L Shares, CPOs or ADSs. The Company has been
advised by its Mexican counsel, Jauregui, Navarrete, Nader y Rojas, S.C., that
ownership of A Shares, D-A Shares, D-L Shares, L Shares, CPOs or ADSs by pension
or retirement funds organized for the benefit of employees of non-Mexican
states, municipal or other governmental agencies will not be considered as
ownership by non-Mexican states or governments for the purpose of the Company's
by-laws or Mexican Federal Radio and Television Law.
TAXATION
The following summary contains a description of the principal Mexican and
U.S. federal income tax consequences of the purchase, ownership and disposition
of the Unefon rights, the Cosmofrecuencias rights (together with the Unefon
rights, the "Rights"), the TV Azteca Notes, CPOs or ADSs, but it does not
purport to be a comprehensive description of all of the tax considerations
relating thereto. In particular, this summary deals only with holders that will
hold the Rights, TV Azteca Notes, CPOs or ADSs as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended to the
date hereof (the "Code"), and does not address the tax treatment of a holder
that may be subject to special tax rules, such as banks, tax-exempt
organizations, insurance companies, dealers in securities or currencies, traders
in securities that elect to use the mark-to-market method of accounting for
their securities holdings, persons that will hold the Rights, TV Azteca Notes,
CPOs or ADSs as part of an integrated investment (including a "straddle")
comprised of the Rights, TV Azteca Notes, CPOs or ADSs and one or more other
positions, persons that have a "functional currency" other than the U.S. dollar
or persons that own or are treated as owning 10% or more of the voting shares
(including CPOs) of the Company, nor does it address the tax treatment of
holders of TV Azteca Notes who did not acquire the predecessor TV Azteca Notes
at their issue price as part of the initial distribution.
This summary is based on the tax laws of the U.S. and Mexico in force on
the date of this Annual Report, including the provisions of the income tax
treaty between the U.S. and Mexico (the "Tax Treaty"), which are subject to
change (possibly with retroactive effect). Holders of the Rights, TV Azteca
Notes, CPOs or ADSs should consult their own tax advisors as to the U.S.
federal, Mexican or other tax consequences of the purchase, ownership and
disposition of the Rights, TV Azteca Notes, CPOs or ADSs including, in
particular, the effect of any foreign, state or local tax laws.
As used herein, the term "U.S. Holder" means the beneficial owner of
Rights, TV Azteca Notes, CPOs or ADSs, that is, for U.S. federal income tax
purposes: (i) an individual who is a citizen or resident of the U.S.; (ii) a
corporation or
82
partnership created or organized under the laws of the U.S. or any political
subdivision thereof; (iii) an estate the income of which is subject to U.S.
federal income taxation regardless of its source; or (iv) a trust if (a) a court
within the U.S. is able to exercise primary supervision over the administration
of the trust and (b) one or more U.S. persons have the authority to control all
substantial decisions of the trust. Notwithstanding the preceding sentence, to
the extent provided in the Treasury Regulations, certain trusts in existence on
August 20, 1996, and treated as U.S. persons prior to such date that elect to
continue to be treated as U.S. persons and that are beneficial owners of Rights,
TV Azteca Notes, CPOs or ADSs, will also be U.S. Holders. The term "Non-U.S.
Holder" shall mean the beneficial owner of Rights, TV Azteca Notes, CPOs or ADSs
other than a U.S. Holder.
As used herein, the term "Non-Mexican Holder" means a holder of the
Rights, TV Azteca Notes, CPOs or ADSs that is not a resident of Mexico and that
will not hold the TV Azteca Notes or a beneficial interest therein in connection
with the conduct of a trade or business through a permanent establishment in
Mexico.
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 during a calendar year, whether
consecutive or not (except for public officers or governmental employees), and
can demonstrate that he has become a resident of that country for tax purposes,
and a legal entity is a resident of Mexico either if it was incorporated under
Mexican law or if it has its place of effective management or of effective
administration or direction in Mexico. A Mexican citizen pursuant to Mexican law
is presumed to be a resident of Mexico for tax purposes unless such person or
entity can demonstrate otherwise. If a non-resident has a permanent
establishment in Mexico for tax purposes, all income attributable to such
permanent establishment will be subject to Mexican taxes, in accordance with
relevant tax provisions.
In general, for U.S. federal income tax purposes, holders of ADSs or CPOs
will be treated as the beneficial owners of the A Shares, D-A Shares, D-L Shares
and, after conversion, L Shares represented by those ADSs or CPOs.
TAX CONSIDERATIONS RELATING TO THE RIGHTS TRANSACTION
Mexican Tax Considerations
With respect to Mexican taxation of the grant of the Rights and certain
related transactions, the Company believes that:
.. the transfer of the 3.4 GHz and 7.0 GHz frequencies will not result in a
significant Mexican tax liability to the Company, Unefon, Cosmofrecuencias
or any subsidiary thereof;
.. the grant by the Company of the Rights in respect of the Company's shares
will not result in any Mexican tax liability (including Mexican
withholding taxes) to holders of CPOs or ADSs;
.. the exercise of the Rights by the holders thereof will not result in a
significant Mexican tax liability (including Mexican withholding taxes) to
holders of CPOs or ADSs; and
.. the sale of Unefon and Cosmofrecuencias shares received following the
exercise of the Rights will not result in any Mexican tax liability
(including liability for Mexican withholding taxes) to the Company.
The anticipated Mexican tax consequences described above are based on tax
advice received by the Company from the Company's Mexican tax advisors. The tax
advice received from the Mexican tax advisors is based in part on a
determination by the Company that the value of the Unefon and Cosmofrecuencias
shares underlying the Rights, as of the date the Rights were granted for Mexican
legal purposes, was approximately equal to the aggregate exercise price of the
Rights. In addition, such advice is based on legal advice received from the
Company's Mexican legal counsel that October 19, 2000 (i.e., the date on which
the Company's Board of Directors resolved to grant the Rights (subject to
certain conditions)) is the date on which the Rights were granted for Mexican
legal purposes.
While the anticipated tax consequences to holders of CPOs or ADSs of the
grant of the Rights are based, in part, on the opinions of the Company's Mexican
tax advisors and legal counsel, such opinions may not be shared by the Mexican
83
tax authorities. The Company determined the exercise price of the Rights as of
the date such Rights were granted for Mexican legal purposes based on the
Company's valuation of the shares underlying the Rights. The Company has not
sought an independent valuation of the Rights, or the shares underlying the
Rights, as of October 19, 2000. As in any transaction involving valuation, and
due to the subjectivity of valuation methods, there is the possibility that the
Mexican tax authorities may challenge the Company's determination. The Company
believes, based on the advice of the Company's Mexican tax litigation counsel,
taking into account all relevant facts and circumstances, that in the event the
Mexican tax authorities challenge such valuation, there are sufficient grounds
to sustain the Company's determination of the value of the Rights before a
Mexican tax court. However, in the event the Company's valuation of the Rights
is successfully challenged by the Mexican tax authorities, the Company could be
liable for the payment of both corporate and withholding taxes (including
penalties and interest thereon). The amount of any such tax liability would
likely depend on, among other things, the valuation of the shares underlying the
Rights on the date the Rights are deemed granted for Mexican tax purposes. If
the amount of any such tax liability were substantial, it could have a material
adverse effect on the Company's business, results of operations, prospects and
financial condition.
U.S. Tax Considerations
Taxation of the Distribution of the Rights
The Rights granted to a U.S. Holder of CPOs or ADSs in respect of such
CPOs and ADSs generally should be subject to the U.S. federal income tax rules
applicable to investment options or warrants. The grant of the Rights should be
treated as a taxable distribution of property by the Company to the U.S. Holders
of CPOs and ADSs in an amount equal to the fair market value of the Rights on
the date of the distribution of the Rights for U.S. federal income tax purposes.
The fair market value of the Rights on the date of distribution will be
determined based on all facts and circumstances, including, but not limited to:
.. the terms of such Rights (e.g., the strike price, the restrictions on
transfer and the terms of exercise, among other things); and
.. the fair market value of the shares underlying the Rights on the date of
distribution (which, in the case of the Unefon Shares, based on the
current trading price of the Unefon shares, is in excess of the strike
price of the Unefon Rights).
The distribution of the Rights should be taxable to U.S. Holders, first,
as a dividend to the extent of the Company's current and accumulated earnings
and profits, if any, as of the end of the taxable year in which the distribution
takes place; second, as a non-taxable reduction of the U.S. Holder's basis in
its CPOs or ADSs, to the extent of such basis; and third, as gain recognized as
though there had been a sale or exchange of the CPOs or ADSs. The portion of the
distribution that constitutes a dividend will be includible in the gross income
of a U.S. Holder as ordinary income on the day on which the dividends are
received by the U.S. Holder and will not be eligible for the dividends received
deduction allowed to corporations under the Code. Any such dividend will be
treated as foreign source income for U.S. foreign tax credit purposes. A Rights
holder's basis in a Right subject to these rules will be equal to its fair
market value on the date of distribution, and his holding period in Rights
received will begin on the day after the date of distribution for U.S. federal
income tax purposes.
The date of distribution of the Rights for U.S. federal income tax
purposes should be the date on which the Rights are received or otherwise
unqualifiedly made subject to the demand of the U.S. Holders of the CPOs or
ADSs. The Company's Board of Directors approved the grant of the Rights on
October 19, 2000 and, as described above, the grant of the Rights was made
subject to the consent of the Company's and Azteca Holdings' bondholders as well
as the registration of the shares under U.S. securities laws. Because the grant
of the Rights is subject to the filing and effectiveness of a registration
statement with the U.S. Securities and Exchange Commission that registers the
shares underlying the rights and the receipt of all applicable regulatory
approvals, the grant of the Rights should not be taxable to U.S. Holders of the
CPOs or ADSs until the date such conditions are satisfied.
Holders of Rights should be aware that, in the event Unefon or
Cosmofrecuencias effects a corporate transaction that has the effect of
increasing the proportionate interest of the Rights holders in Unefon or
Cosmofrecuencias, respectively, and at the same time distributes (or is deemed
to distribute) cash or property to Unefon or Cosmofrecuencias shareholders
84
or certain types of creditors of Unefon or Cosmofrecuencias, the Unefon or
Cosmofrecuencias Rights holders, as the case may be, may be deemed to receive a
distribution equal to the value of such increase that will be taxable as a
dividend to the extent of Unefon's or Cosmofrecuencias', as the case may be,
current and accumulated earnings and profits. Such corporate transactions
potentially could include transactions that change Unefon's or Cosmofrecuencias'
capital structure, including, for example, recapitalizations and stock
dividends, a change in the exercise price of the Rights or a failure to adjust
the exercise price of the Rights in the manner required.
Taxation of the Exercise of the Rights
A U.S. Holder of Rights will not recognize any gain or loss on exercise of
the Rights. The U.S. Holder's tax basis in the shares acquired on exercise will
be equal to the sum of the price paid for the shares on exercise of the Right
and its tax basis in the Rights exercised. For U.S. federal income tax purposes,
the U.S. Holder's holding period for the shares acquired on exercise of a Right
will begin on the date of exercise of the Rights.
Taxation of the Sale or Other Disposition of the Rights
Except as described below, upon a sale, exchange or other taxable
disposition of the Rights, the U.S. Holder will recognize capital gain or loss
equal to the difference between the amount realized for the Rights and the U.S.
Holder's tax basis in the Rights. That gain or loss will be capital gain or loss
and, if the Rights are held for more than one year, will be long-term capital
gain or loss.
Taxation of the Lapse of the Rights
If a U.S. Holder of a Right fails to exercise the Right and it lapses
unexercised, the U.S. Holder will recognize a capital loss, on the date the
Right expires, in an amount equal to the U.S. Holder's tax basis in the Right
and, if the Rights are held for more than one year before such lapse, the loss
will be long-term capital loss.
The foregoing rules of the Code also should apply to the distribution of
the Rights with respect to CPOs and ADSs that are held by a U.S. Holder who (in
addition to holding such CPOs or ADSs) (i) holds stock options to acquire shares
of the Company, (ii) holds restricted stock, or (iii) is an employee of the
Company, or a subsidiary thereof. However, it nevertheless is possible, in the
case of such recipients of Rights, that the rules set forth above will not apply
to the Rights they receive in respect of their CPOs or ADSs. A U.S. Holder that
fits within one of these categories of recipients should consult its tax advisor
regarding the consequences of the Rights distribution and the exercise of such
Rights.
Holders of Rights should be aware that, in the event Unefon or
Cosmofrecuencias is considered to be a passive foreign investment company, as
that term is defined in the discussion below under the heading "passive foreign
investment company considerations", gain, if any, on the disposition of the
Unefon or Cosmofrecuencias Rights, as the case may be, would be taxed in a
manner similar to the disposition of shares of a passive foreign investment
company as described below in such discussion. Further, it is unclear whether a
holder of Rights would be eligible to make a mark-to-market election with
respect to the Rights. Each U.S. Holder is urged to consult its own tax advisor
concerning the potential application of the passive foreign investment company
rules to the U.S. Holder's ownership, exercise, disposition and lapse of the
Rights, and the acquisition, ownership and disposition of the underlying shares.
Tax Considerations Relating to the Unefon and Cosmofrecuencias Shares
Subject to the discussion above regarding the taxation of the Rights and
Unefon and Cosmofrecuencias shares in the event either Unefon or
Cosmofrecuencias is considered to be a passive foreign investment company, the
taxation of such shares to a U.S. Holder should be substantially similar to the
taxation of the CPOs and ADSs as described below under the heading "Tax
Considerations Relating to the CPOs and ADSs".
85
TAX CONSIDERATIONS RELATING TO THE TV AZTECA NOTES
Mexican Tax Considerations
Taxation of Interest and Principal
Under the Mexican tax law and the rules promulgated thereunder in effect
for 2003, payments of interest made by the Company in respect of the TV Azteca
Notes to a Non-Mexican Holder will generally be subject to a Mexican withholding
tax assessed at a rate of 4.9%, provided that the TV Azteca Notes have been
placed by a broker in a country that has entered into a treaty for avoidance of
double taxation with Mexico which is effective.
Notwithstanding the foregoing, under Rule 3.25.15 of the general rules
issued by the Mexican Ministry of Finance published in the Official Gazette on
March 31, 2003 (the "Rules"), the tax rate will be 4.9% only if (i) the TV
Azteca Notes continue to be registered in the Special Section of the RNV, (ii)
the company timely files with the Mexican Ministry of Finance within the first
fifteen days after the placement, general information regarding such placement,
(iii) the Company timely files with the Mexican Ministry of Finance within the
first 15 business days of July and October 2003, and January and April 2004,
information regarding the amount of interest paid on the TV Azteca Notes and the
date of such payment, and a statement representing that no party related to the
Company (as such terms are defined in the Rules), jointly or individually,
directly or indirectly, is the effective beneficiary of 5.0% or more of the
aggregate amount of each such interest payment, and (iv) the Company maintains
records which evidence compliance with items (i) and (ii) above. The Company
expects that such conditions will be met during the effectiveness of Rule
3.25.15. If the requirements under Rule 3.25.15 are not complied with, the
withholding tax on payment of interest on the TV Azteca Notes will be assessed
at the rate of 10%. The Rules, together with other tax regulations, are
promulgated on an annual basis. Thus, no assurances can be given that the Rules
will be extended or that equivalent rules will be enacted.
Under the Mexican tax law, payments of interest made by the Company with
respect to the TV Azteca Notes to non-Mexican pension or retirement funds are
exempt from Mexican withholding taxes, provided that the fund (i) is the
effective beneficiary of the interest, (ii) is duly organized pursuant to the
laws of its country of origin (regardless of the type of organization), (iii) is
exempt from income tax in such country and (iv) is duly registered with the
Mexican Ministry of Finance for such purposes.
The Company has agreed, subject to certain exceptions and limitations, to
pay additional amounts in respect of the above-mentioned Mexican withholding
taxes to holders of the TV Azteca Notes.
Holders or beneficial owners of TV Azteca Notes may be requested, subject
to specified exceptions and limitations, to provide certain information or
documentation necessary to enable the Company to establish the appropriate
Mexican withholding tax rate applicable to such holders or beneficial owners in
respect of interest payments under the TV Azteca Notes. In the event that the
specified information or documentation concerning the holder or beneficial
owner, if requested, is not provided prior to the payment of any interest to
such holder or beneficial owner, the Company may withhold Mexican tax from such
interest payment to such holder or beneficial owner at the maximum applicable
rate (currently 10.0%), but its obligation to pay additional amounts under the
TV Azteca Indenture in respect of such withholding taxes will be limited.
Under the Mexican tax law and the Rules thereunder, a Non-Mexican Holder
is not to be subject to any Mexican withholding or similar taxes in connection
with payments of principal made by the Company in connection with the TV Azteca
Notes.
Taxation of Dispositions of Notes
Capital gains resulting from the sale of other disposition of the TV
Azteca Notes by a Non-Mexican Holder will not be subject to Mexican income or
other taxes.
86
Other Taxes
A Non-Mexican Holder will not be liable for Mexican estate, gift,
inheritance or similar taxes with respect to its holding, nor will it be liable
for Mexican stamp, registration or similar taxes.
United States Tax Considerations
Taxation of Interest and Additional Amounts
A U.S. Holder will treat the gross amount of interest and additional
amounts (i.e., without reduction for Mexican withholding taxes) received in
respect of the TV Azteca Notes as ordinary income at the time the interest and
additional amounts are received or accrued, in accordance with the U.S. holder's
method of accounting for U.S. federal income tax purposes.
Mexican withholding taxes paid at the appropriate rate applicable to a
U.S. Holder will be treated as foreign income taxes eligible for credit against
the U.S. Holder's U.S. federal income tax liability, subject to generally
applicable limitations and conditions, or, at the election of such U.S. Holder,
for deduction in computing the U.S. Holder's taxable income. Income from
interest and additional amounts on the TV Azteca Notes will constitute foreign
source income and generally will be treated as "passive income" or, in the case
of certain holders, "financial services income" for U.S. foreign tax credit
purposes. Any such income subject to Mexican withholding tax at a rate of 5% or
more, however, will generally be treated as "high withholding tax interest" for
U.S. foreign tax credit purposes. U.S. Holders that elect to credit foreign
taxes are urged to consider carefully the limitations and conditions that may
affect their ability to credit Mexican withholding taxes against their U.S.
income tax liability. U.S. Holders should consult their own advisors regarding
the availability of foreign tax credits and the implications of these rules in
light of their particular circumstances. Additionally, U.S. Holders that use an
accrual method of accounting for tax purposes should consult their tax advisors
with regard to the proper accrual of additional amounts.
Subject to the discussion below concerning backup withholding and
information reporting, a holder or beneficial owner of the TV Azteca Notes that
is, with respect to the U.S., a foreign corporation or a nonresident alien
individual (a "Non-U.S. Holder") generally will not be subject to U.S. federal
income or withholding tax on interest income or additional amounts earned in
respect of the TV Azteca Notes, unless such income is effectively connected with
the conduct by the Non-U.S. Holder of a trade or business in the U.S.
Taxation of Dispositions of Notes
Upon the sale, exchange, retirement (including a redemption by the
Company) or other disposition of an TV Azteca Note, a U.S. Holder generally will
recognize gain or loss equal to the difference between the amount realized on
the sale, exchange, retirement or other disposition (except to the extent such
amount is attributable to accrued but unpaid interest, which will be taxable as
interest income) and such U.S. Holder's adjusted tax basis in the TV Azteca
Note. A U.S. Holder's adjusted tax basis in an TV Azteca Note generally will
equal the cost of such note to such holder. Such gain or loss will be long-term
capital gain or loss if, at the time of the disposition, the U.S. Holder's
holding period in the TV Azteca Note is more than one year. Long-term capital
gain realized by a U.S. Holder that is an individual generally is subject to a
maximum federal income tax rate of 20%. Any gain a U.S. Holder realizes on the
sale, exchange or retirement of a TV Azteca Note generally will be treated as a
U.S. source for U.S. foreign tax credit purposes. Any loss a U.S. Holder
realizes upon a sale, exchange or retirement of a TV Azteca Note generally will
be allocated against U.S. source income for U.S. foreign tax credit purposes.
Subject to the discussion below concerning backup withholding and
information reporting, a Non-U.S. Holder of the TV Azteca Notes will not be
subject to U.S. federal income or withholding tax on gain realized on the sale
or other disposition of the TV Azteca Note unless (i) such gain is effectively
connected with the conduct by the Non-U.S. Holder of a trade or business in the
U.S. or (ii) in the case of gain realized by an individual Non-U.S. Holder, the
Non-U.S. Holder is present in the U.S. for 183 days or more in the taxable year
of the sale and certain other conditions are met.
87
TAX CONSIDERATIONS RELATING TO CPOS AND ADSS
Taxation of Dividends
Mexican Tax Considerations
Effective January 1, 2002, dividends paid to Non-Mexican Holders with
respect to the Shares represented by ADSs or CPOs are not subject to Mexican
withholding tax.
U.S. Tax Considerations
Subject to the discussion under the heading "Passive Foreign Investment
Company Considerations", the gross amount of any dividends paid with respect to
A Shares, D-A Shares and D-L Shares and, after conversion, L Shares represented
by ADSs or CPOs, generally will be includible in the gross income of a U.S.
Holder as ordinary income on the day on which the dividends are received by the
CPO Trustee (which will be the same date as the date of receipt by the
Depositary) and will not be eligible for the dividends received deduction
allowed to corporations under the Code. Dividends paid in pesos will be
includible in the income of a U.S. Holder in a U.S. dollar amount calculated by
reference to the exchange rate in effect on the day they are received by the CPO
Trustee (whether or not actually converted). U.S. Holders should consult their
own tax advisors regarding the treatment of foreign currency gain or loss, if
any, on any pesos that are converted into U.S. dollars on a date subsequent to
the date of receipt by the CPO Trustee.
Distributions to holders of additional Shares with respect to their ADSs
or CPOs that are made as part of a pro rata distribution to all shareholders of
the Company generally will not be subject to U.S. federal income tax.
Dividends generally will constitute foreign source "passive income" or, in
the case of certain U.S. Holders, "financial services income" for U.S. foreign
credit purposes. U.S. Holders should consult their own advisors regarding the
application of these rules in light of their particular circumstances.
Subject to the discussion below concerning backup withholding and
information reporting, a Non-U.S. Holder of CPOs or ADSs generally will not be
subject to U.S. federal income or withholding tax on dividends received on CPOs
or ADSs, unless such income is effectively connected with the conduct by the
Non-U.S. Holder of a trade or business in the United States.
Taxation of Dispositions of CPOs or ADSs
Mexican Tax Considerations
Deposits of CPOs in exchange for ADSs and withdrawals of CPOs in exchange
for ADSs will not give rise to any Mexican tax or transfer duties.
Gain on the sale of ADSs, CPOs or Shares by Non-Mexican Holders through
the Mexican Stock Exchange or any other stock exchange in Mexico that is
recognized by the Mexican Ministry of Finance will generally be exempt from
Mexican tax. On the other hand, gain on the sale of ADSs, CPOs or Shares made by
Non-Mexican Holders through any other stock exchange shall be subject to Mexican
tax at a rate of 25% on the gross amount of the transaction or 34% on the gain.
Gain on sales or other dispositions of ADSs, CPOs or Shares made in other
circumstances generally would also be subject to Mexican tax, regardless of the
nationality or residence of the transferor.
U.S. Tax Considerations
Upon the sale, exchange or other disposition of ADSs or CPOs, a U.S.
Holder generally will recognize gain or loss in an amount equal to the
difference between the amount realized on the disposition of such ADSs or CPOs
(in U.S. dollars, determined at the spot rate on the date of disposition if the
amount realized is denominated in a foreign currency) and such U.S. Holder's tax
basis in the ADSs or CPOs (in U.S. dollars). U.S. Holders should consult their
own tax advisors regarding the treatment of foreign currency gain or loss, if
any, on foreign currency received by a U.S. Holder that is converted into U.S.
dollars on a date subsequent to receipt. Subject to the discussion under the
heading "Passive
88
Foreign Investment Company Considerations", gain or loss recognized by such U.S.
Holder generally will be long-term capital gain or loss if the U.S. Holder has
held the ADS or CPO for more than one year at the time of disposition. Long-term
capital gain realized by a U.S. Holder that is an individual generally is
subject to a maximum federal income tax rate of 20%. Such gain or loss generally
will be treated as U.S. source gain or loss for U.S. foreign tax credit
purposes.
Deposits and withdrawals of CPOs by U.S. Holders in exchange for ADSs will
not result in the realization of gain or loss for U.S. federal income taxes
purposes.
Subject to the discussion below concerning backup withholding and
information reporting, a Non-U.S. Holder of CPOs or ADSs will not be subject to
U.S. federal income or withholding tax on gain realized on the sale of CPOs or
ADSs, unless (i) such gain is effectively connected with the conduct by the
non-U.S. Holder of a trade or business in the United States or (ii) in the case
of gain realized by an individual non-U.S. Holder, the non-U.S. Holder is
present in the United States for 183 days or more in the taxable year of the
sale and certain other conditions are met.
U.S. PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
In general, the Company will be a passive foreign investment company with
respect to a taxable year if either: (i) 75% or more of the Company's gross
income in such taxable year is passive income; or (ii) the average quarterly
percentage of the value of the Company's assets that produce or are held for the
production of passive income is at least 50%.
For this purpose, if the Company owns (directly or indirectly) at least
25% (by value) of the stock of another corporation, the Company will be treated
as if the Company had directly received the Company's proportionate share of the
gross income of the other corporation and as if the Company directly owned the
Company's proportionate share of the assets of the other corporation. In
addition, the Internal Revenue Service has indicated that cash balances, even if
held as working capital, are considered to be assets that produce passive
income. Although the Company believes that the Company should not be treated as
a passive foreign investment company for the Company's current taxable year, an
actual determination of passive foreign investment company status is
fundamentally factual in nature and generally cannot be made until the close of
the applicable taxable year. Accordingly, there can be no assurance that the
Company will not be or become a passive foreign investment company in the
future.
If the Company were classified as a passive foreign investment company,
unless a U.S. Holder timely makes the mark-to-market election described below, a
special tax regime would apply to both: (i) any "excess distribution," which
would be such U.S. Holder's share of distributions on the Company's CPOs or ADSs
in any year that are greater than 125% of the average annual distributions on
such CPOs or ADSs received by the U.S. Holder in the three preceding years or
the U.S. Holder's holding period for the CPOs or ADSs, if shorter; and (ii) any
gain realized on the sale or other disposition of the CPOs or ADSs held by the
U.S. Holder for more than one taxable year.
Under this regime, any excess distribution and any gain so realized would
be treated as ordinary income and would be subject to tax as if: (i) the excess
distribution or gain had been realized ratably over the U.S. Holder's holding
period; (ii) the amount deemed realized had been subject to tax in each year of
that holding period at the highest applicable tax rate; and (iii) the interest
charge generally applicable to underpayment of tax had been imposed on the taxes
deemed to have been payable in each of those years in which the Company was
classified as a passive foreign investment company.
In addition, the estate of an individual U.S. Holder who dies while owning
CPOs or ADSs may not be eligible to step up the tax basis of the CPOs or ADSs.
The foregoing rules with respect to distributions and dispositions may be
avoided if a U.S. Holder is eligible for and timely makes a valid
"mark-to-market" election. A mark-to-market election may be made only if the
CPOs or ADSs, as the case may be, are treated as "marketable stock." If a
mark-to-market election is made, the U.S. Holder will, in general, include as
ordinary income each year the excess, if any, of the fair market value of its
CPOs or ADSs for that year (measured at the close of the U.S. Holder's taxable
year) over its adjusted tax basis in the CPOs or ADSs. The U.S. Holder will also
be allowed an ordinary loss each year of the excess, if any, of its adjusted tax
basis over the fair market value of its CPOs or ADSs, but only to the extent of
the net amount of income previously included income as a result of
89
the mark-to-market election. The U.S. Holder's tax basis in the CPOs or ADSs
will be adjusted to reflect these income or loss amounts. The mark-to-market
election is made on a shareholder-by-shareholder basis and, once made, can only
be revoked with the consent of the Internal Revenue Service.
Under applicable Treasury regulations, the term "marketable stock"
includes stock of a PFIC that is "regularly traded" on a qualified exchange or
other market. For these purposes, a class of stock is regularly traced on a
qualified exchange or other market for any calendar year during which such class
of stock is traded (other than in de minimis quantities) on at least 15 days
during each calendar quarter. It is unclear whether the CPOs and ADSs will be
treated as marketable stock for these purposes.
Each U.S. Holder is urged to consult its own tax adviser concerning the
potential application of the passive foreign investment company rules to the
U.S. Holder's ownership and disposition of the CPOs and ADSs (and, in
particular, such holder's ability to make a mark-to-market election as described
above).
CONVERSION OF THE D-A SHARES OR D-L SHARES
A U.S. Holder generally will not recognize any income, gain, or loss upon
conversion of a D-A Share or D-L Share into an A Share or L Share, respectively.
Such holder's basis in the A Share or L Share received on conversion of a D-A
Share or D-L Share, as the case may be, at the time of the conversion, and the
holding period for the A Share or L Share received on conversion will generally
include the holding period of the D-A Share or D-L Share converted.
UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, interest (including additional amounts) and dividend payments,
or other taxable distributions, made within the United States, including
payments made by wire transfer from outside the United States to an account
maintained with a fiscal or paying agent in the United States, to U.S. Holders
will be subject to information reporting requirements and backup withholding tax
at a current rate of 30% if such persons are non-corporate U.S. persons that:
.. fail to provide an accurate taxpayer identification number;
.. are notified by the United States Internal Revenue Service that they have
failed to report all interest or dividends required to be shown on their
federal income tax returns; or
.. in certain circumstances, fail to comply with applicable certification
requirements.
If a holder sells the Rights, TV Azteca Notes, CPOs or ADSs outside the
United States through a non-U.S. office of non-U.S. broker, and the sales
proceeds are paid to such holder outside the United States, then U.S. backup
withholding and information reporting requirements generally will not apply to
that payment. However, U.S. information reporting, but not backup withholding,
will apply to a payment of sales proceeds, even if that payment is made outside
the United States, if the holder sells the Rights, TV Azteca Notes, CPOs or ADSs
through a non-U.S. office of a broker that:
.. is a United States person;
.. derives 50% or more of its gross income for a specified three-year period
from the conduct of a trade or business in the United States;
.. is a "controlled foreign corporation" as to the United States; or
.. is a foreign partnership, if at any time during its tax year:
. one or more of its partners are U.S. persons, as defined in U.S.
Treasury regulations, who in the aggregate hold more than 50% of the
income or capital interest in the partnership; or
. at any time during its tax year the foreign partnership is engaged
in a U.S. trade or business.
90
A holder generally may obtain a refund of any amounts withheld under the
U.S. backup withholding rules that exceed its income tax liability by filing a
refund claim with the United States Internal Revenue Service.
OTHER MEXICAN TAXES
There are no inheritance, gift, succession or value added taxes applicable
to the ownership, transfer, exchange or disposition of TV Azteca Notes, ADSs or
CPOs by Non-Mexican Holders, although gratuitous transfers of CPOs may, in
certain circumstances, cause a Mexican federal tax to be imposed upon the
recipient. There are no Mexican stamp, issue, registration or similar taxes or
duties payable by holders of ADSs or CPOs.
Commissions paid in brokerage transactions for the sale of CPOs on the
Mexican Stock Exchange are subject to a value added tax of 15%.
DOCUMENTS ON DISPLAY
The Company files reports and other information with the SEC. You may read
and copy any documents that the Company files at the SEC's public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates. From time to time, the Company assesses its
exposure and monitors opportunities to manage these risks. In the past, the
Company has held risk-sensitive instruments for investment purposes, although
there were no such instruments as of December 31, 2002. See Note 4 to the
Consolidated Financial Statements. The Company had no material derivative or
hedging transactions during 2002.
INTEREST RATE RISK
Interest rate risk exists principally with respect to the Company's
consolidated indebtedness that bears interest at floating rates. At December 31,
2002, the Company had approximately US$592.4 million aggregate principal amount
of outstanding consolidated indebtedness, of which approximately 97% bore
interest at fixed interest rates and approximately 3% bore interest at variable
rates of interest. The interest rate on the Company's variable rate debt is
determined by reference to London inter-bank offer rate ("LIBOR").
An unfavorable change of 100 basis points in the average interest rate
applicable to floating-rate liabilities held at December 31, 2002 would have
increased the Company's interest expense for the year ended December 31, 2002 by
approximately Ps.1.6 million (US$149,000), or 2%.
The Company generally does not hedge or enter into derivative transactions
with respect to its interest rate-sensitive financial instruments.
FOREIGN CURRENCY EXCHANGE RISK
The Company's principal foreign currency exchange risk involves changes in
the value of the peso relative to the U.S. dollar. Provided below is a summary
of the Company's net foreign currency exposure. U.S. dollar denominated assets
represent principally accounts receivable and cash investments, and the U.S.
dollar denominated liabilities represent primarily the TV Azteca Notes, the ATC
Long-Term Credit Facility, bank debt and accounts payable.
AT DECEMBER 31, 2002
--------------------
(in millions)
U.S. dollar denominated assets.......................... US$491.9
U.S. dollar denominated liabilities..................... (US$674.5)
---------
Net liability position.................................. (US$182.6)
=========
91
An unfavorable 10% devaluation in the value of the peso relative to the
dollar would have resulted in an increase in the Company's comprehensive
financing cost of approximately Ps.241 million, reflecting higher interest
expense on U.S. dollar denominated indebtedness and exchange losses based on the
Company's net U.S. dollar liability position at December 31, 2002. A 10%
devaluation during the year ended December 31, 2002 would have resulted in an
approximately Ps.60 million (US$5.8 million) decline in operating profit, as
approximately 2.5% of the Company's net revenue and approximately 22% of its
costs and expenses were denominated in U.S. dollars.
The Company generally does not hedge or enter into derivative transactions
with respect to its foreign currency exchange-sensitive instruments.
See Note 17d to the Consolidated Financial Statements for a discussion of
the fair value of the Company's financial instruments.
PUT OPTION
In October 2002, the Company purchased a put option from a Mexican banking
institution pursuant to which such banking institution agreed to purchase up to
6,500,000 shares of Grupo Elektra (ticker: Elektra* on the Mexican Stock
Exchange) from the Company at a strike price of Ps.36.82 per share, subject to
certain adjustments. The Company paid a premium of Ps.25.1 million (US$2.5
million) on February 26, 2003 in connection with the put option. If there is a
governmentally-imposed prohibition on the ability of a U.K. entity, a U.S.
entity or the Company to exchange pesos for U.S. dollars in connection with the
put option, which prohibition is in force for a period of not less than five
consecutive days during the 30-calendar-day period ending on and including the
settlement date of the put option, then the put option shall be deemed to have
expired without value. Settlement of the put option shall be either cash or
shares of Grupo Elektra, as determined by the Company pursuant to a notice to
the banking institution no less than 10 days prior to the expiration date. The
put option expires on the close of trading on October 25, 2003. As of June 16,
2003, the price per share of Grupo Elektra as quoted on the Mexican Stock
Exchange was Ps.29.73.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not required.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this Annual Report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives, and
management necessarily applies its judgment in assessing the costs and benefits
of such controls and procedures. Based upon and as of the date of the
evaluation, the Company's Chief Executive Officer and its Chief Financial
Officer have concluded that the Company's disclosure controls and procedures
were effective in providing reasonable assurance that information required
92
to be disclosed in the Company's reports under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date the Company's Chief Executive Officer and its Chief Financial Officer
completed their evaluation, nor were there any significant deficiencies or
material weaknesses in the Company's internal controls requiring corrective
actions.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Not required.
ITEM 16B. CODE OF ETHICS
Not required.
PART III
ITEM 17. FINANCIAL STATEMENTS
The Company has responded to Item 18 in lieu of this Item.
ITEM 18. FINANCIAL STATEMENTS
LIST OF FINANCIAL STATEMENTS
Consolidated Financial Statements for TV Azteca, S.A. de C.V. and Subsidiaries
PAGE
----
Report of Independent Auditors.......................................... F-3
Consolidated Balance Sheets as of December 31, 2001 and 2002............ F-5
Consolidated Statements of Results of Operations
for the Years Ended December 31, 2000, 2001 and 2002............... F-6
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2000, 2001 and 2002............... F-7
Consolidated Statements of Changes in Financial Position
for the Years Ended December 31, 2000, 2001 and 2002............... F-8
Notes to Consolidated Financial Statements.............................. F-9
Consolidated Financial Statements for Unefon, S.A. de C.V. and Subsidiaries
Report of Independent Auditors.......................................... F-73
Consolidated Balance Sheets as of December 31, 2001 and 2002............ F-75
Consolidated Statements of Results of Operations
for the Years Ended December 31, 2000, 2001 and 2002............... F-76
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2000, 2001 and 2002............... F-77
Consolidated Statements of Changes in Financial Position
for the Years Ended December 31, 2000, 2001 and 2002............... F-78
Notes to Consolidated Financial Statements.............................. F-79
ITEM 19. EXHIBITS
93
LIST OF EXHIBITS
1.1 Form of By-laws, as amended and restated, of TV Azteca, S.A. de C.V.,
together with an English translation (incorporated by reference to Exhibit
1.1 to the Company's Annual Report on Form 20-F for the year ended
December 31, 2001 (File No. 1-4464)).
2.1 Form of CPO Trust Agreement, between Nacional Financiera, S.N.C., as CPO
Trustee, and TV Azteca, S.A. de C.V., together with an English translation
(incorporated by reference to Exhibit 4.4 to the Company's Registration
Statement on Form F-1 (Registration No. 333-07298)).
2.2 Form of CPO Trust Deed, together with an English translation (incorporated
by reference to Exhibit 4.4.1 to the Registration Statement on Form F-1
(Registration No. 333-07298)).
2.3 Specimen Ordinary Participation Certificate, together with an English
translation (incorporated by reference to Exhibit 4.4.2 to the Company's
Registration Statement on Form F-1 (Registration No. 333-07298)).
2.4 Form of Deposit Agreement, among TV Azteca, S.A. de C.V., The Bank of New
York, all registered holders from time to time of any American Depositary
Receipts, including the form of American Depositary Receipt (incorporated
by reference to Exhibit 4.5 to the Company's Registration Statement on
Form F-1 (Registration No. 333-07298)).
2.5 Indenture, dated as of February 5, 1997, among TV Azteca, S.A. de C.V.,
the Guarantors named therein, and the Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form F-4 (Registration No. 333-6988)).
2.6 Supplemental Indenture, dated as of May 30, 1997, among TV Azteca, S.A. de
C.V., the Guarantors named therein, and the Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.4 to the Company's Registration
Statement on Form F-4 (Registration No. 333-6988)).
2.7 Supplemental Indenture No. 2, dated as of May 17, 1999 to the Indenture
dated as of February 5, 1997 among TV Azteca, S.A. de C.V., the Guarantors
named therein, and the Bank of New York, as Trustee. (incorporated by
reference to Exhibit 4.1 to the Company's Annual Report on Form 20-F for
the year ended December 31, 1998 (File No. 1-4464)).
2.8 Supplemental Indenture No. 3, dated as of May 22, 2000 to the Indenture
dated as of February 5, 1997 among TV Azteca, S.A. de C.V., the Guarantors
named therein, and the Bank of New York, as Trustee (incorporated by
reference to Exhibit 4.1 to the Company's Annual Report on Form 20-F for
the year ended December 31, 1999 (File No. 1-4464)).
2.9 Supplemental Indenture No. 4, dated as of March 27, 2001 to the Indenture
dated as of February 5, 1997 among TV Azteca, S.A. de C.V., the Guarantors
named therein, and the Bank of New York, as Trustee (incorporated by
reference to Exhibit 2.9 to the Company's Annual Report on Form 20-F for
the year ended December 31, 2000 (File No. 1-4464)).
4.1 Shareholders Agreement, dated May 14, 1999, among TV Azteca, S.A. de C.V.,
Ricardo B. Salinas Pliego, Corporacion RBS, S.A. de C.V. and Moises Saba
Masri, together with an English translation (incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form 20-F for the year
ended December 31, 1999 (File No. 1-4464)).
4.2 Agreement, dated February 8, 2001 by and between Azteca Holdings, S.A. de
C.V., Mr. Moises Saba Masri, Mr. Ricardo B. Salinas Pliego, Mrs. Elisa
Salinas Gomez, Grupo
94
Elektra, S.A. de C.V. and TV Azteca, S.A. de C.V., which amends the
Shareholders Agreement, dated May 14, 1999, among TV Azteca, S.A. de C.V.,
Ricardo B. Salinas Pliego, Corporacion RBS, S.A. de C.V. and Moises Saba
Masri, together with an English translation (incorporated by reference to
Exhibit 4.2 to the Company's Annual Report on Form 20-F for the year ended
December 31, 2000 (File No. 1-4464)).
4.3 Equipment Procurement and Services Agreement, dated as of September 7,
1999, among Sistemas Profesionales de Comunicacion, S.A. de C.V., Nortel
Networks Corporation and Nortel Networks de Mexico, S.A. de C.V. Portions
of this exhibit (indicated by asterisks) have been omitted pursuant to a
request for confidential treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 (incorporated by reference to Exhibit 10.2
to the Company's Annual Report on Form 20-F for the year ended December
31, 1999 (File No. 1-4464)).
4.4 Finance Agreement, dated as of September 7, 1999, by and among Sistemas
Profesionales de Comunicacion, S.A. de C.V., Toronto Dominion (Texas),
Inc. and Nortel Networks Corporation. Portions of this exhibit (indicated
by asterisks) have been omitted pursuant to a request for confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934
(incorporated by reference to Exhibit 10.3 to the Company's Annual Report
on Form 20-F for the year ended December 31, 1999 (File No. 1-4464)).
4.5 First Amendment to Finance Agreement dated as of November 15, 1999 by and
among Operadora Unefon, S.A. de C.V. (formerly known as Sistemas
Profesionales de Comunicacion, S.A. de C.V.), Toronto Dominion (Texas),
Inc. and Nortel Networks Corporation (incorporated by reference to Exhibit
1.1 to the Company's Annual Report on Form 20-F for the year ended
December 31, 2001 (File No. 1-4464)).
4.6 Second Amendment to Finance Agreement dated as of March 1, 2000 by and
among Operadora Unefon, S.A. de C.V., Toronto Dominion (Texas), Inc. and
Nortel Networks Corporation (incorporated by reference to Exhibit 1.1 to
the Company's Annual Report on Form 20-F for the year ended December 31,
2001 (File No. 1-4464)).
4.7 Third Amendment to Finance Agreement dated as of April 14, 2000 by and
among Operadora Unefon, S.A. de C.V., Toronto Dominion (Texas), Inc. and
Nortel Networks Corporation (incorporated by reference to Exhibit 1.1 to
the Company's Annual Report on Form 20-F for the year ended December 31,
2001 (File No. 1-4464)).
4.8 Fourth Amendment and Waiver to Finance Agreement dated as of September 18,
2000 by and among Operadora Unefon, S.A. de C.V., Toronto Dominion
(Texas), Inc. and Nortel Networks Limited (formerly known as Nortel
Networks Corporation) (incorporated by reference to Exhibit 1.1 to the
Company's Annual Report on Form 20-F for the year ended December 31, 2001
(File No. 1-4464)).
4.9 Fifth Amendment, Consent and Waiver to Finance Agreement dated as of
December 13, 2000 by and among Operadora Unefon, S.A. de C.V., Toronto
Dominion (Texas), Inc. and Nortel Networks Limited (incorporated by
reference to Exhibit 1.1 to the Company's Annual Report on Form 20-F for
the year ended December 31, 2001 (File No. 1-4464)).
4.10 Sixth Amendment to Finance Agreement dated as of September 20, 2001 by and
among Operadora Unefon, S.A. de C.V., Toronto Dominion (Texas), Inc. and
Nortel Networks Limited. Portions of this exhibit (indicated by asterisks)
have been omitted pursuant to a request for confidential treatment
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934
(incorporated by reference to Exhibit 1.1 to the Company's Annual Report
on Form 20-F for the year ended December 31, 2001 (File No. 1-4464)).
95
4.11 Seventh Amendment to Finance Agreement dated as of January 16, 2002 by and
among Operadora Unefon, S.A. de C.V., Toronto Dominion (Texas), Inc. and
Nortel Networks Limited.
4.12 Conditional Waiver and Consent to Finance Agreement dated as of August 16,
2001 by and among Operadora Unefon, S.A. de C.V., Toronto Dominion
(Texas), Inc. and Nortel Networks Limited (incorporated by reference to
Exhibit 1.1 to the Company's Annual Report on Form 20-F for the year ended
December 31, 2001 (File No. 1-4464)).
4.13 Shareholders' Undertaking dated as of December 13, 2000 among Moises Saba
Masri, TV Azteca, S.A. de C.V., Unefon, S.A. de C.V. and Operadora Unefon,
S.A. de C.V. (incorporated by reference to Exhibit 1.1 to the Company's
Annual Report on Form 20-F for the year ended December 31, 2001 (File No.
1-4464)).
4.14 Supply Agreement, dated June 16, 2003, between Nortel Networks Limited,
Nortel Networks de Mexico, S.A. de C.V. and Operadora Unefon, S.A. de C.V.
4.15 Assignment and Assumption Agreement, dated June 16, 2003, between
Operadora Unefon, S.A. de C.V., Nortel Networks Limited and Codisco
Investment LLC.
4.16 Promissory Note, dated June 16, 2003, between Operadora Unefon, S.A. de
C.V., Nortel Networks Limited, Nortel Networks de Mexico, S.A. De C.V. and
Codisco Investments LLC.
4.17 Services Agreement, dated October 15, 1999, between Television Azteca,
S.A. de C.V., TV Azteca, S.A. de C.V. and Operadora Unefon, S.A. de C.V.,
together with English translation (incorporated by reference to Exhibit
4.5 to the Company's Annual Report on Form 20-F for the year ended
December 31, 2000 (File No. 1-4464)).
4.18 Amendment to Services Agreement, dated December 27, 2000, between TV
Azteca, S.A. de C.V. and Operadora Unefon, S.A. de C.V., together with
English translation (incorporated by reference to Exhibit 1.1 to the
Company's Annual Report on Form 20-F for the year ended December 31, 2001
(File No. 1-4464)).
4.19 Services Agreement, dated February 14, 2000, between TV Azteca, S.A. de
C.V. and Todito.com, S.A. de C.V., together with English translation
(incorporated by reference to Exhibit 4.6 to the Company's Annual Report
on Form 20-F for the year ended December 31, 2000 (File No. 1-4464)).
4.20 Station Affiliation Agreement, dated as of July 21, 2001, between Azteca
International Corporation and Pappas Telecasting of Southern California
LLC (incorporated by reference to Exhibit 4.1 to the Company's report on
Form 6-K filed November 16, 2001 (File No. 1-4464)).
4.21 Rider A to Station Affiliation Agreement, dated as of July 21, 2001,
between Azteca International Corporation and Pappas Telecasting of
Southern California LLC (incorporated by reference to Exhibit 4.2 to the
Company's report on Form 6-K filed November 16, 2001 (File No. 1-4464)).
4.22 Equity Option Agreement, dated as of July 21, 2001, between Azteca
International Corporation and Pappas Telecasting of Southern California
LLC (incorporated by reference to Exhibit 4.3 to the Company's report on
Form 6-K filed November 16, 2001 (File No. 1-4464)).
4.23 Agreement Not to Compete, dated as of July 21, 2001, among TV Azteca, S.A.
de C.V., Harry J. Pappas and Pappas Telecasting Companies (incorporated by
reference to Exhibit 4.4 to the Company's report on Form 6-K filed
November 16, 2001 (File No. 1-4464)).
4.24 Guarantee Agreement, dated as of July 21, 2001, between TV Azteca, S.A. de
C.V. and Pappas Telecasting of Southern California LLC (incorporated by
reference to Exhibit 4.5 to the Company's report on Form 6-K filed
November 16, 2001 (File No. 1-4464)).
96
4.25 Credit Agreement, dated as of July 21, 2001, between TV Azteca, S.A. de
C.V. and Pappas Telecasting of Southern California LLC (incorporated by
reference to Exhibit 4.6 to the Company's report on Form 6-K filed
November 16, 2001 (File No. 1-4464)).
4.26 First Amended and Restated Credit Agreement, amended and restated as of
July 30, 2001, among Pappas Telecasting of Arizona LLC, Pappas Telecasting
of Southern California LLC, TV Azteca, S.A. de C.V., the lenders named
therein, UBS Warburg LLC and UBS AG, Stamford Branch (incorporated by
reference to Exhibit 4.7 to the Company's report on Form 6-K filed
November 16, 2001 (File No. 1-4464)).
4.27 Intercreditor Agreement, dated as of July 30, 2001, among UBS, AG,
Stamford Branch, as lender and as collateral agent, TV Azteca, S.A. de
C.V., Azteca International Corporation, Pappas Telecasting of Arizona LLC,
Pappas Telecasting of Southern California LLC, Pappas Southern California
License LLC, Pappas Telecasting Companies, Harry J. Pappas, Dennis J.
Davis and Lebon G. Abercrombie (incorporated by reference to Exhibit 4.8
to the Company's report on Form 6-K filed November 16, 2001 (File No.
1-4464)).
4.28 First Amended and Restated Security Agreement, amended and restated as of
July 30, 2001, among Pappas Telecasting of Arizona LLC and Pappas
Telecasting of Southern California LLC, the Guarantors Party thereto and
UBS AG, Stamford Branch (incorporated by reference to Exhibit 4.9 to the
Company's report on Form 6-K filed November 16, 2001 (File No. 1-4464)).
4.29 First Amended and Restated Securities Pledge Agreement, amended and
restated as of July 30, 2001, among Pappas Telecasting Companies, Harry J.
Pappas, Dennis J. Davis, Lebon G. Abercrombie and Azteca International
Corporation, and UBS AG, Stamford Branch (incorporated by reference to
Exhibit 4.10 to the Company's report on Form 6-K filed November 16, 2001
(File No. 1-4464)).
4.30 Amended and Restated Subordination Agreement, amended and restated as of
July 30, 2001, among UBS AG, Stamford Branch, as administrative and
collateral agent, and Pappas Telecasting of Sioux City, Pappas Telecasting
Inc., Pappas Telecasting of Concord, Hispanic America Network, LLC and
Harry J. Pappas as subordinated lenders (incorporated by reference to
Exhibit 4.11 to the Company's report on Form 6-K filed November 16, 2001
(File No. 1-4464)).
4.31 First Amended and Restated Subsidiary Guarantee Agreement, amended and
restated as of July 30, 2001, among Pappas Telecasting of Arizona LLC,
Pappas Telecasting of Southern California LLC, TV Azteca, S.A. de C.V.,
each of the subsidiaries of the above companies listed in Schedule 1 and 2
and UBS AG, Stamford Branch (incorporated by reference to Exhibit 4.12 to
the Company's report on Form 6-K filed November 16, 2001 (File No.
1-4464)).
4.32 Amended and Restated Station Affiliation Agreement amended and restated as
of December 31, 2001 between Azteca International Corporation and Pappas
Telecasting of Southern California LLC (incorporated by reference to
Exhibit 4.28 to the Company's Annual Report on Form 20-F for the year
ended December 31, 2001 (File No. 1-4464)).
4.33 Amended and Restated Equity Option Agreement amended as of December 31,
2001, between Azteca International Corporation and Pappas Telecasting of
Southern California LLC (incorporated by reference to Exhibit 4.29 to the
Company's Annual Report on Form 20-F for the year ended December 31, 2001
(File No. 1-4464)).
4.34 Station Affiliation Agreement dated October 31, 2001, between Azteca
International Corporation and Pappas Telecasting of Nevada LLC
(incorporated by reference to Exhibit 4.30 to the Company's Annual Report
on Form 20-F for the year ended December 31, 2001 (File No. 1-4464)).
97
4.35 Station Affiliation Agreement dated December 31, 2001 between Azteca
International Corporation and Hispanic America of San Francisco, LLC
(incorporated by reference to Exhibit 4.31 to the Company's Annual Report
on Form 20-F for the year ended December 31, 2001 (File No. 1-4464)).
4.36 Guaranty Agreement dated December 31, 2001 between TV Azteca, S.A. de C.V.
and Hispanic America of San Francisco, LLC (incorporated by reference to
Exhibit 4.32 to the Company's Annual Report on Form 20-F for the year
ended December 31, 2001 (File No. 1-4464)).
4.37 Agreement Not to Compete dated December 31, 2001 among Hispanic America of
San Francisco, LLC, Pappas Telecasting of Concord, Pappas Telecasting
Companies, Harry J. Pappas and TV Azteca, S.A. de C.V. (incorporated by
reference to Exhibit 4.33 to the Company's Annual Report on Form 20-F for
the year ended December 31, 2001 (File No. 1-4464)).
4.38 Station Affiliation Agreement dated December 31, 2001 between Azteca
International Corporation and Hispanic America of Houston, LLC
(incorporated by reference to Exhibit 4.34 to the Company's Annual Report
on Form 20-F for the year ended December 31, 2001 (File No. 1-4464)).
4.39 Guaranty Agreement dated December 31, 2001 between TV Azteca, S.A. de C.V.
and Hispanic America of Houston, LLC (incorporated by reference to
Exhibit 4.35 to the Company's Annual Report on Form 20-F for the year
ended December 31, 2001 (File No. 1-4464)).
4.40 Agreement Not to Compete dated December 31, 2001 among Hispanic America of
Houston, LLC, Pappas Telecasting of Houston, Pappas Telecasting Companies,
Harry J. Pappas and TV Azteca, S.A. de C.V. (incorporated by reference to
Exhibit 4.36 to the Company's Annual Report on Form 20-F for the year
ended December 31, 2001 (File No. 1-4464)).
4.41 Subscription Agreement dated December 31, 2001 among Hispanic America of
San Francisco, LLC, Hispanic America of Houston, LLC, Pappas Telecasting
of Concord, Pappas Telecasting of Houston, Azteca International
Corporation and TV Azteca, S.A. de C.V. (incorporated by reference to
Exhibit 4.37 to the Company's Annual Report on Form 20-F for the year
ended December 31, 2001 (File No. 1-4464)).
4.42 Settlement Agreement among TV Azteca, S.A. de C.V., Azteca International
Corporation, Pappas Telecasting Companies, Pappas Telecasting of Southern
California LLC, Pappas Southern California License, LLC, Pappas
Telecasting of Houston, Hispanic America of Houston, LLC, Pappas
Telecasting of Concord, Hispanic America of San Francisco, LLC Pappas
Telecasting of Nevada, Pappas Telecasting of Arizona, LLC, and Pappas
Arizona License, LLC, dated as of February 11, 2003 (incorporated by
reference to Exhibit 4.1 to the Company's report on Form 6-K filed March
5, 2003 (File No. 1-4464)).
4.43 Purchase and Sale Agreement among Pappas Telecasting of Southern
California LLC, Pappas Telecasting of Houston, Pappas Telecasting of
Concord, Hispanic America of Houston, LLC, Hispanic America of San
Francisco, LLC and Azteca International Corporation, dated as of February
11, 2003 (incorporated by reference to Exhibit 4.2 to the Company's report
on Form 6-K filed March 5, 2003 (File No. 1-4464)).
4.44 Option Agreement by and between Pappas Telecasting of Southern California
LLC, and Azteca International Corporation, dated as of February 11, 2003
(incorporated by reference to Exhibit 4.3 to the Company's report on Form
6-K filed March 5, 2003 (File No. 1-4464)).
4.45 Local Marketing Agreement among Pappas Telecasting of Southern California
LLC, and Pappas Southern California License LLC, and Azteca International
Corporation and TV Azteca, S.A. de C.V. as guarantor, dated as of February
11, 2003 (incorporated by reference to Exhibit 4.4 to the Company's report
on Form 6-K filed March 5, 2003 (File No. 1-4464)).
4.46 Guarantee Agreement by TV Azteca, S.A. de C.V. in favor of Pappas
Telecasting of Southern California LLC, dated as of February 11, 2003
(incorporated by reference to Exhibit 4.5 to the Company's report on Form
6-K filed March 5, 2003 (File No. 1-4464)).
98
4.47 Amended and Restated Credit Agreement between Pappas Telecasting of
Southern California LLC as debtor and Azteca International Corporation,
dated as of February 11, 2003 (incorporated by reference to Exhibit 4.6 to
the Company's report on Form 6-K filed March 5, 2003 (File No. 1-4464)).
4.48 Amended and Restated Note by Pappas Telecasting of Southern California LLC
to Azteca International Corporation for US$128 million, dated as of
February 11, 2003 (incorporated by reference to Exhibit 4.7 to the
Company's report on Form 6-K filed March 5, 2003 (File No. 1-4464)).
8.1 Significant Subsidiaries.
12.1 Chief Executive Officer Section 906 Certification
12.2 Chief Financial Officer Section 906 Certification
99
AGREEMENT REGARDING CERTAIN DEBT INSTRUMENTS
The Company agrees to furnish to the Securities and Exchange Commission,
upon request, copies of any instruments that define the rights of holders of
long-term debt of the Company that are not filed as exhibits to this annual
report.
100
SIGNATURE
The registrant certifies that it meets all of the requirements for filing
on Form 20-F, and that it has duly caused and authorized the undersigned to sign
this Annual Report on its behalf.
TV AZTECA, S.A. DE C.V.
Date: June 30, 2003 /s/ Pedro Padilla Longoria
---------------------------------
Pedro Padilla Longoria
Chief Executive Officer
Date: June 30, 2003 /s/ Carlos Hesles
---------------------------------
Carlos Hesles
Chief Financial Officer
SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATIONS
I, Pedro Padilla Longoria, certify that:
1. I have reviewed this annual report on Form 20-F of TV Azteca, S.A. de C.V.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
101
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 30, 2003 /s/ Pedro Padilla Longoria
---------------------------------
Pedro Padilla Longoria
Chief Executive Officer
(principal executive officer)
SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATIONS
I, Carlos Hesles, certify that:
1. I have reviewed this annual report on Form 20-F of TV Azteca, S.A. de C.V.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
102
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 30, 2003 /s/ Carlos Hesles
---------------------------------
Carlos Hesles
Chief Financial Officer
(principal financial officer)
103
TV AZTECA, S.A. DE C.V.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
F-1
TV AZTECA, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
INDEX
Page
----
Report of Independent Auditors F-3
Consolidated Balance Sheets as of December 31, 2001 and 2002 F-5
Consolidated Statements of Results of Operations
for the Years Ended December 31, 2000, 2001 and 2002 F-6
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2000, 2001 and 2002 F-7
Consolidated Statements of Changes in Financial Position
for the Years Ended December 31, 2000, 2001 and 2002 F-8
Notes to Consolidated Financial Statements F-9
F-2
REPORT OF INDEPENDENT AUDITORS
Mexico City, February 7, 2003, except for the Pappas Group recent developments
in Note 7, which is as of February 11, 2003, and the subsequent events included
in Note 16, which is as of June 10, 2003
To the Stockholders and Board of Directors
of TV Azteca, S.A. de C.V. and subsidiaries:
We have audited the consolidated balance sheets of TV Azteca, S.A. de C.V. and
its subsidiaries (the "Company") as of December 31, 2001 and 2002, and the
related consolidated statements of results of operations, of changes in
stockholders' equity and of changes in financial position for each of the three
years in the period ended December 31, 2002 all expressed in constant pesos of
December 31, 2002 purchasing power. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Mexico and in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and that they were
prepared in accordance with accounting principles generally accepted in Mexico.
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 aforementioned consolidated financial statements present
fairly, in all material respects, the consolidated financial position of TV
Azteca, S.A. de C.V. and its subsidiaries as of December 31, 2001 and 2002,
and the consolidated results of their operations, and the changes in
stockholders' equity and in their financial position for each of the three years
in the period ended December 31, 2002 in conformity with accounting principles
generally accepted in Mexico.
F-3
Accounting principles generally accepted in Mexico differ in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
consolidated net income, expressed in pesos of December 31, 2002 purchasing
power, for each of the three years in the period ended December 31, 2002 and the
determination of consolidated stockholders' equity and consolidated financial
position as of December 31, 2000, 2001 and 2002 also expressed in pesos of
December 31, 2002 purchasing power to the extent summarized in Note 17 to the
consolidated financial statements.
PricewaterhouseCoopers
Manuel Leyva Vega
Audit Partner
F-4
TV AZTECA, S.A. DE C.V. AND SUBSIDIARIES
(Note 1)
CONSOLIDATED BALANCE SHEETS
(thousands of Mexican pesos of
December 31, 2002 purchasing power)
At December 31,
-----------------------------------------------
2001 2002
------------- ------------------------------
Thousands of
US dollars (*)
ASSETS
Current assets:
Cash and marketable securities (Note 4) Ps 1,650,871 Ps 1,393,273 US$ 134,033
Accounts receivable (Note 5) 4,927,444 4,921,200 473,421
Due from related parties (Note 8) 426,794 484,682 46,626
Exhibition rights 545,151 309,597 29,783
Inventories 136,395 134,269 12,917
------------- ------------- -------------
Total current assets 7,686,655 7,243,021 696,780
Investment in Unefon, S.A. de C.V. ("Unefon") (Note 7) 1,848,485 1,755,942 168,922
Accounts receivable from Unefon (Note 8) 1,931,139 2,009,067 193,272
Exhibition rights 1,043,068 1,379,583 132,716
Property, machinery and equipment - Net (Note 6) 2,304,077 2,231,443 214,665
Television concessions - Net (Note 2l.) 3,742,945 3,741,702 359,953
Other assets (Note 7) 1,201,752 1,182,999 113,804
Investment in Todito.com, S.A. de C.V. ("Todito") (Note 7) 397,883 319,986 30,783
Advance payments to Pappas Telecasting Companies,
through Azteca America (Note 7) 660,031 1,154,479 111,061
Goodwill - Net (Note 7) 679,246 641,603 61,722
------------- ------------- -------------
Total assets Ps 21,495,281 Ps 21,659,825 US$ 2,083,678
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term bank loans (Note 9) Ps 38,418 Ps 47,179 US$ 4,539
Short-term debt (Note 9) 528,455 389,997 37,518
Interest payable 197,979 206,613 19,876
Exhibition rights payable 671,534 598,878 57,612
Accounts payable and accrued expenses 777,150 633,031 60,898
Due to related parties (Note 8) 61,657 81,281 7,819
------------- ------------- -------------
Total current liabilities 2,275,193 1,956,979 188,262
------------- ------------- -------------
Long-term liabilities:
Guaranteed senior notes (Note 9) 4,114,901 4,417,875 425,000
Bank loans (Note 9) 1,507,825 1,302,915 125,341
Advertising advances (Note 2q.) 4,639,819 4,446,264 427,731
Unefon advertising advance (Note 8) 2,258,381 2,167,340 208,498
Todito advertising, programming and services advance (Note 8) 715,446 504,418 48,525
Exhibition rights payable 206,079 246,096 23,674
Deferred income tax payable (Note 12) 25,534 2,456
------------- ------------- -------------
Total long-term liabilities 13,442,451 13,110,442 1,261,225
------------- ------------- -------------
Total liabilities 15,717,644 15,067,421 1,449,487
------------- ------------- -------------
Commitments and contingencies (Note 13)
Subsequent events (Note 16)
Stockholders' equity (Note 11):
Capital stock 2,737,188 2,740,130 263,601
Premium on the issuance of capital stock 1,920,032 1,762,781 169,580
Legal reserve 97,564 172,964 16,639
Reserve for the repurchase of shares 1,041,662 1,013,123 97,463
Retained earnings 1,325,727 2,194,872 211,147
Insufficiency in the restatement of capital (1,352,907) (1,300,183) (125,078)
------------- ------------- -------------
Majority stockholders' equity 5,769,266 6,583,687 633,352
Minority stockholders' equity (Note 1) 8,371 8,717 839
------------- ------------- -------------
Total stockholders' equity 5,777,637 6,592,404 634,191
------------- ------------- -------------
Total liabilities and stockholders' equity Ps 21,495,281 Ps 21,659,825 US$ 2,083,678
============= ============= =============
(*) The US dollar figures represent the Mexican peso amounts as of December 31,
2002 expressed as of December 31, 2002 purchasing power translated at the
exchange rate of Ps10.395 per US dollar and are not covered by the Report
of Independent Accountants.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
TV AZTECA, S.A. DE C.V. AND SUBSIDIARIES
(Note 1)
CONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS
(thousands of Mexican pesos of December 31,
2002 purchasing power, except per share amounts)
Year ended December 31,
-------------------------------------------------------------
2000 2001 2002
------------ ------------ ------------------------------
Thousands of
US dollars (*)
Net revenue Ps 5,986,790 Ps 6,122,805 Ps 6,689,957 US$ 643,575
------------ ------------ ------------ ---------------
Programming, production and transmission costs 2,680,067 2,470,020 2,510,898 241,549
Selling and administrative expenses 939,709 956,657 974,282 93,726
------------ ------------ ------------ ---------------
Total costs and expenses 3,619,776 3,426,677 3,485,180 335,275
------------ ------------ ------------ ---------------
Profit before depreciation and amortization 2,367,014 2,696,128 3,204,777 308,300
Depreciation and amortization (Notes 2h. and 2l.) 626,851 604,239 385,325 37,068
------------ ------------ ------------ ---------------
Operating profit 1,740,163 2,091,889 2,819,452 271,232
------------ ------------ ------------ ---------------
Other expenses - Net (Note 14) (376,217) (243,851) (441,588) (42,481)
------------ ------------ ------------ ---------------
Comprehensive financing cost:
Interest expense (791,033) (743,485) (725,270) (69,771)
Other financing expense (Note 4) (143,456) (27,400) (135,708) (13,055)
Interest income 188,271 239,927 191,950 18,466
Exchange (loss) income - Net (Note 3) (127,912) 197,676 (353,139) (33,973)
Gain (loss) on monetary position 208,910 2,387 (81,729) (7,863)
------------ ------------ ------------ ---------------
Net comprehensive financing cost (665,220) (330,895) (1,103,896) (106,196)
------------ ------------ ------------ ---------------
Income before provision for income tax, deferred
income tax and extraordinary item 698,726 1,517,143 1,273,968 122,555
Provisions for (Note 12):
Income tax (184,479) (209,934) (264,158) (25,412)
Deferred income tax benefit (expense) 204,451 198,905 (25,534) (2,456)
------------ ------------ ------------ ---------------
Income before extraordinary item 718,698 1,506,114 984,276 94,687
Extraordinary item - NBC settlement agreement - net
of income tax (Note 11) (335,929)
------------ ------------ ------------ ---------------
Net income Ps 382,769 Ps 1,506,114 Ps 984,276 US$ 94,687
============ ============ ============ ===============
Net loss of minority stockholders Ps (6,114) Ps (1,892) Ps (235) US$ (23)
============ ============ ============ ===============
Net income of majority stockholders Ps 388,883 Ps 1,508,006 Ps 984,511 US$ 94,710
============ ============ ============ ===============
Net income per share of majority stockholders
(Note 2r.) Ps 0.043 Ps 0.167 Ps 0.109 US$ 0.010
============ ============ ============ ===============
(*) The US dollar figures represent the Mexican peso amounts as of December 31,
2002 expressed as of December 31, 2002 purchasing power translated at the
exchange rate of Ps10.395 per US dollar and are not covered by the Report
of Independent Accountants.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
TV AZTECA, S.A. DE C.V. AND SUBSIDIARIES
(Notes 1, 4 and 11)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(thousands of Mexican pesos of
December 31, 2002 purchasing power, except per share amounts)
Number of Premium
common shares on the Reserve for
outstanding Capital issuance of Legal the repurchase
(thousands) stock capital stock reserve of shares
-------------- -------------- ----------------- ------------- -----------------
Balances at January 1, 2000 8,930,573 Ps 2,715,347 Ps 1,555,439 Ps 97,564 Ps 1,230,772
-------------- -------------- ----------------- ------------- -----------------
Variations in 2000:
Net income (loss)
Cumulative effect of change in method
of accounting for income taxes
Loss from holding non-monetary assets
Minority interest from the sale of
subsidiary
-------------- -------------- ----------------- ------------- -----------------
Comprehensive loss
-------------- -------------- ----------------- ------------- -----------------
Preferred dividend
Repurchase of shares (107,370) (20,066) (296,028)
Exercise of stock options 30,497 5,799 21,417
Capital stock increase 96,000 18,217 267,347
-------------- -------------- ----------------- ------------- -----------------
Balances at December 31, 2000 8,949,700 2,719,297 1,844,203 97,564 934,744
-------------- -------------- ----------------- ------------- -----------------
Variations in 2001:
Net income (loss)
Loss from holding non-monetary assets
Minority interest
-------------- -------------- ----------------- ------------- -----------------
Comprehensive income (loss)
-------------- -------------- ----------------- ------------- -----------------
Preferred dividend
Repurchase of shares (38,674) (6,717) (36,455)
Exercise of stock options 31,215 5,542 75,829
Sale of treasury shares 107,804 19,066 143,373
-------------- -------------- ----------------- ------------- -----------------
Balances at December 31, 2001 9,050,045 2,737,188 1,920,032 97,564 1,041,662
-------------- -------------- ----------------- ------------- -----------------
Variations in 2002:
Net income (loss)
Increase legal reserve 75,400
Gain from holding non-monetary assets
Minority interest
-------------- -------------- ----------------- ------------- -----------------
Comprehensive income 75,400
-------------- -------------- ----------------- ------------- -----------------
Preferred dividend
Repurchase of shares (111,349) (18,883) (150,996)
Exercise of stock options 46,020 7,759 16,122
Sale of treasury shares 82,749 14,066 122,457
Financial instruments (Note 4) (173,373)
-------------- -------------- ----------------- ------------- -----------------
Balances at December 31, 2002 9,067,465 Ps 2,740,130 Ps 1,762,781 Ps 172,964 Ps 1,013,123
============== ============== ================= ============= =================
(Insufficiency)
Retained excess in the Total
earnings restatement Majority Minority stockholders'
(deficit) of capital stockholders stockholders equity
-------------- -------------- ----------------- ------------- -----------------
Balances at January 1, 2000 Ps 209,402 Ps (892,293) Ps 4,916,231 Ps 39,027 Ps 4,955,258
-------------- -------------- ----------------- ------------- -----------------
Variations in 2000:
Net income (loss) 388,883 388,883 (6,114) 382,769
Cumulative effect of change in method
of accounting for income taxes (693,526) 57,854 (635,672) (635,672)
Loss from holding non-monetary assets (241,278) (241,278) (241,278)
Minority interest from the sale of
subsidiary (19,708) (19,708)
-------------- -------------- ----------------- ------------- -----------------
Comprehensive loss (304,643) (183,424) (488,067) (25,822) (513,889)
-------------- -------------- ----------------- ------------- -----------------
Preferred dividend (44,908) (44,908) (44,908)
Repurchase of shares (316,094) (316,094)
Exercise of stock options 27,216 27,216
Capital stock increase 285,564 285,564
-------------- -------------- ----------------- ------------- -----------------
Balances at December 31, 2000 (140,149) (1,075,717) 4,379,942 13,205 4,393,147
-------------- -------------- ----------------- ------------- -----------------
Variations in 2001:
Net income (loss) 1,508,006 1,508,006 (1,892) 1,506,114
Loss from holding non-monetary assets (277,190) (277,190) (277,190)
Minority interest (2,942) (2,942)
-------------- -------------- ----------------- ------------- -----------------
Comprehensive income (loss) 1,508,006 (277,190) 1,230,816 (4,834) 1,225,982
-------------- -------------- ----------------- ------------- -----------------
Preferred dividend (42,130) (42,130) (42,130)
Repurchase of shares (43,172) (43,172)
Exercise of stock options 81,371 81,371
Sale of treasury shares 162,439 162,439
-------------- -------------- ----------------- ------------- -----------------
Balances at December 31, 2001 1,325,727 (1,352,907) 5,769,266 8,371 5,777,637
-------------- -------------- ----------------- ------------- -----------------
Variations in 2002:
Net income (loss) 984,511 984,511 (235) 984,276
Increase legal reserve (75,400)
Gain from holding non-monetary assets 52,724 52,724 52,724
Minority interest 581 581
-------------- -------------- ----------------- ------------- -----------------
Comprehensive income 909,111 52,724 1,037,235 346 1,037,581
-------------- -------------- ----------------- ------------- -----------------
Preferred dividend (39,966) (39,966) (39,966)
Repurchase of shares (169,879) (169,879)
Exercise of stock options 23,881 23,881
Sale of treasury shares 136,523 136,523
Financial instruments (Note 4) (173,373) (173,373)
-------------- -------------- ----------------- ------------- -----------------
Balances at December 31, 2002 Ps 2,194,872 Ps (1,300,183) Ps 6,583,687 Ps 8,717 Ps 6,592,404
============== ============== ================= ============= =================
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
TV AZTECA, S.A. DE C.V. AND SUBSIDIARIES
(Note 1)
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(thousands of Mexican pesos of
December 31, 2002 purchasing power)
Year ended December 31,
------------------------------------------------------------
2000 2001 2002
------------ ------------ -------------------------------
Thousands of
US dollars (*)
Operations:
Net income before extraordinary item Ps 718,698 Ps 1,506,114 Ps 984,276 US$ 94,687
Charges (credits) to results of operations not affecting
resources:
Amortization of concessions and goodwill 154,081 162,454 37,643 3,621
Depreciation 472,770 441,785 347,682 33,447
Equity in loss of affiliates 107,088 67,893 111,160 10,694
Deferred income tax (benefit) expense (204,451) (198,905) 25,534 2,456
Gain on sale of subsidiaries (17,797)
Net change in accounts receivable, inventories, exhibition
rights,
related parties, accounts payable and accrued expenses (642,564) (283,024) (118,731) (11,422)
Advertising advances 753,445 182,316 (193,555) (18,620)
Unefon advertising advance 39,826 (54,541) (91,041) (8,758)
Todito advertising, programming and services advance 911,654 (196,208) (211,028) (20,300)
------------ ------------ ------------ --------------
Resources provided by operations before extraordinary item 2,292,750 1,627,884 891,940 85,805
NBC settlement agreement - net of income tax (335,929)
------------ ------------ ------------ --------------
Resources provided by operations activities 1,956,821 1,627,884 891,940 85,805
------------ ------------ ------------ --------------
Investment:
Acquisition of property, machinery and equipment - Net (201,894) (176,965) (240,761) (23,161)
Investment in Unefon (1,092,120)
Advance payments to Pappas Telecasting Companies, through
Azteca America (660,031) (455,867) (43,854)
Account receivable from Pappas Telecasting of Southern
California, LLC (191,124)
Minority interest (19,708) (2,942) 581 55
------------ ------------ ------------ --------------
Resources used in investing activities (1,313,722) (1,031,062) (696,047) (66,960)
------------ ------------ ------------ --------------
Financing:
Bank loans - Net (166,661) 36,965 (334,607) (32,189)
Guaranteed senior notes (328,410) (410,861) 302,974 29,146
Loan granted to related party (199,044) (19,148)
Preferred dividend paid (44,908) (42,130) (39,966) (3,845)
Stock options exercised 27,216 81,371 23,881 2,297
Sale of treasury shares 162,439 136,523 13,134
Repurchase of shares (316,094) (43,172) (169,879) (16,343)
Financial instruments (173,373) (16,678)
Capital stock increase 18,217
Premium on issuance of capital stock 267,347
------------ ------------ ------------ --------------
Resources used in financing activities (543,293) (215,388) (453,491) (43,626)
------------ ------------ ------------ --------------
Net increase (decrease) in cash and marketable securities 99,806 381,434 (257,598) (24,781)
Cash and marketable securities at beginning of year 1,169,631 1,269,437 1,650,871 158,814
------------ ------------ ------------ --------------
Cash and marketable securities at end of year Ps 1,269,437 Ps 1,650,871 Ps 1,393,273 US$ 134,033
============ ============ ============ ==============
(*) The US dollar figures represent the Mexican peso amounts as of December 31,
2002 expressed as of December 31, 2002 purchasing power translated at the
exchange rate of Ps10.395 per US dollar and are not covered by the Report
of Independent Accountants.
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
TV AZTECA, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
(monetary amounts expressed in thousands of Mexican pesos (Ps)
of December 31, 2002 purchasing power and thousands of
U.S. dollars (US$), except exchange rates and per share amounts)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION:
In July 1993, TV Azteca, S.A. de C.V. (the "Company"), was acquired by the
stockholders for Ps2,000,050 nominal (equivalent to US$642,700 at the date of
acquisition) in connection with the Mexican government's privatization of
certain television stations and related assets. The Company and its subsidiaries
are engaged principally in the broadcasting and production of television
programs, and the sale of advertising time.
The consolidated subsidiaries of the Company as of December 31, 2002 were:
.. Television Azteca, S.A. de C.V.
.. Grupo TV Azteca, S.A. de C.V.
.. Azteca Records, S.A. de C.V.
.. Alta Empresa, S.A. de C.V.
.. Azteca Entertainment, S.A. de C.V.
.. Eventos Deportivos Azteca, S.A. de C.V.
.. Servicios Especializados Taz, S.A. de C.V.
.. Producciones Especializadas, S.A. de C.V.
.. Producciones Exclusivas, S.A. de C.V.
.. Grupo Promotora Empresarial, S.A. de C.V.
.. Producciones Azteca Digital, S.A. de C.V.
.. Azteca Digital, S.A. de C.V.
.. Corporacion de Asesoria Tecnica y de Produccion, S.A. de C.V.
.. Operadora Mexicana de Television, S.A. de C.V.
.. Azteca Publishing, S.A. de C.V.
.. Inversora Mexicana de Produccion, S.A. de C.V.
.. TV Azteca Latinoamerica, S.A. de C.V.
.. Servicios Aereos Noticiosos, S.A. de C.V.
.. SCI de Mexico, S.A. de C.V.
.. Canal 12 de Television, S.A. de C.V.
.. Grupo TV Azteca, S.A. de C.V. (El Salvador)
F-9
.. Servicios Locales de Produccion, S.A. de C.V.
.. Servicios Foraneos de Administracion, S.A. de C.V.
.. Desarrollo de Comunicacion Azteca, S.A. de C.V.
.. Azteca Telecasting, L. P.
.. Alta Empresa Holdings, B. V.
.. Alta Empresa International, B. V.
.. Red Azteca Internacional, S.A. de C.V.
.. Azteca International Corporation
The consolidation of the net assets of Canal 12 de Television, S.A. de C.V.
(acquired in 1997) resulted in minority interest of Ps8,717 (Ps8,371 in 2001).
On February 24, 2000, the Company sold its interest in Tele America, S.A.
(acquired in 1998) for US$2,625 and recognized a gain of US$1,609 (Ps17,797).
The financial statements of the subsidiaries incorporated abroad included in the
consolidation are translated in conformity with the requirements of Statement
B-15 issued by the Accounting Principles Commission of the Mexican Institute of
Public Accountants ("MIPA"). The translation effect was not significant.
All intercompany balances and transactions have been eliminated in
consolidation. The Company consolidates all of its majority-owned subsidiaries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies used in the preparation of the consolidated
financial statements including the concepts, methods and criteria related to the
recognition of the effects of inflation on the financial statements, are
summarized as shown below:
a. Accounting for effects of inflation
The consolidated financial statements and notes are expressed in thousands of
Mexican pesos. They have been prepared in accordance with generally accepted
accounting principles as promulgated by the MIPA. The recognition of the effects
of inflation on the financial information is in accordance with the following
rules and includes the guidelines of the Fifth Amendment to Statement B-10:
.. Inventories, property, machinery and equipment of Mexican origin, television
concessions, exhibition rights of Mexican origin, deferred charges and other
non-monetary assets and liabilities are restated by applying factors derived
from the National Consumer Price Index ("NCPI"), issued by the Banco de
Mexico.
F-10
.. Exhibition rights and machinery and equipment of foreign origin (mainly from
the United States of America and Japan) are restated on the basis of the
devaluation of the Mexican peso against the foreign currencies, and by
applying inflation factors of the countries in which they originate.
.. The components of stockholders' equity are restated using factors derived
from the NCPI.
.. The cumulative gain or loss from holding non-monetary assets which are not
restated using factors derived from the NCPI is included in stockholders'
equity under the caption "Insufficiency in the restatement of capital".
.. The purchasing power gain or loss from holding monetary liabilities and
assets is included in net comprehensive financing income (cost).
All consolidated financial statements presented are expressed in constant pesos
of purchasing power of December 31, 2002.
The NCPI used to recognize the effects of inflation in the financial statements
were 93.248, 97.354 and 102.904 as of December 31, 2000, 2001 and 2002,
respectively.
b. Foreign currency transactions
Transactions in foreign currencies are recorded at the rates of exchange
prevailing on the dates they are entered into and/or settled. Assets and
liabilities denominated in these currencies are stated at the Mexican peso
equivalents resulting from applying exchange rates at the balance sheet dates.
Exchange differences arising from fluctuations in the exchange rates between the
dates on which transactions are entered into and those on which they are
settled, or the balance sheet dates, are charged or credited to income.
c. Cash and cash equivalents
The Company considers all highly liquid investments to be cash equivalents.
d. Financial instruments
The Company recognizes on its balance sheet as assets or liabilities at fair
value all of its contractual rights and obligations under financial instruments
to which the Company is a party. See Note 4.
e. Barter transactions
Barter transactions represent non-cash transactions in which the Company sells
advertising time to a third party or related party in return for assets or
services. These transactions are accounted for on the basis of the fair market
value of the assets or services provided in the barter contracts. During the
years ended December 31, 2000, 2001 and 2002, net revenue derived from barter
transactions amounted to Ps202,308, Ps84,470 and Ps146,243, respectively.
F-11
f. Exhibition rights
Exhibition rights represent primarily the acquired rights to the transmission of
programming and events under license agreements and the cost of internally
produced programming. The rights acquired and the obligations incurred are
recorded as an asset and liability, respectively, when the license agreements
are signed. The cost of exhibition rights acquired is amortized as the
programming and events are broadcast.
At December 31, 2001 and 2002, the allowance for unused exhibition rights
amounted to Ps161,580 and Ps229,466, respectively, which represents management's
estimate of exhibition rights which were not expected to be used prior to their
expiration.
Exhibition rights at December 31, 2001 and 2002 also include Ps369,632 and
Ps329,255, respectively, associated with internally produced programming. Costs
of internally produced programming are expensed when the programs are initially
aired, except in the case of telenovelas, where the costs are amortized over a
maximum of a four-year period.
g. Inventories and costs
Inventories of merchandise, materials and spare parts, and their related costs,
are stated at average cost and are restated by using factors derived from the
NCPI.
h. Property, machinery and equipment
Property, machinery and equipment acquired through December 31, 1996, and the
related depreciation, were stated at net replacement cost determined on the
basis of appraisals performed by independent appraisers registered with the
National Banking and Securities Commission. Property, machinery and equipment
acquired on or after January 1, 1997 are initially stated at cost. Both the
replacement costs of assets of Mexican origin acquired through December 31, 1996
and the costs of assets of Mexican origin acquired on or after January 1, 1997
are restated by applying factors derived from the NCPI. Assets of non-Mexican
origin acquired through December 31, 1996 and thereafter are restated on the
basis of the devaluation of the Mexican peso against the foreign currency and by
applying inflation factors of the countries in which they originate.
Depreciation was calculated by the straight-line method, based on the estimated
useful lives of the net fixed assets as estimated by the Company.
The annual depreciation rates are the following:
Buildings 5%
Machinery and operating equipment 5% and 16%
Furniture and office equipment 10%
Transportation equipment 20%
Other fixed assets 25%
F-12
Effective January 1, 2002, the Company changed the annual depreciation rate of
the transmission towers, from 16% to 5%, based on the remaining useful life of
these assets. This resulted in a decrease in depreciation expense of Ps42,080
for the year ended December 31, 2002.
i. Investment in affiliates
Investment in affiliates is recorded by the equity method and is included in the
balance sheet as other assets. The investment in Unefon reflects the net book
value at the date of the decision to sell this investment. See Note 7.
The investments in Unefon and Todito are presented in the balance sheet as
"Investment in Unefon, S.A. de C.V." and "Investment in Todito.com, S.A. de
C.V.", respectively. See Note 7.
j. Goodwill
The excess of cost over the book value of subsidiaries acquired is amortized
using the straight-line method over 20 years and restated by applying factors
derived from the NCPI to its historical cost. Amortization expense for the years
ended December 31, 2000, 2001 and 2002 amounted to Ps34,789, Ps41,333 and
Ps37,643, respectively. The Company periodically reviews the realization of its
intangible assets based on estimated gross future cash flows from its
operations. To date there has been no indication that such recorded amounts will
not be realized from future operations.
k. Deferred costs
Deferred costs relate primarily to the issuance of guaranteed senior notes (as
defined in Note 9) and are amortized over the life of the notes. See Note 9.
l. Television concessions
The aggregate value of the television concessions was determined based on the
excess of the purchase price paid for the assets of the Company over their book
value at the time of privatization.
On January 1, 2002, the Company adopted Statement C-8, "Intangible Assets",
("Statement C-8"), issued by the MIPA. Under statement C-8, intangible assets
must be recognized on the balance sheet when they meet the following
characteristics: (a) they are identifiable, (b) they have the ability to
generate future economics benefits and (c) there is the ability to control such
future economic benefits. The intangible asset amortization would be allocated
on a systematic basis over the estimated useful lives of the assets, unless the
intangible assets are determinated to have an indefinite useful life based on
their expected future economic benefits. The intangible assets should be tested
for impairment annually and an impairment loss would be recognized in the event
that the carrying amount of the intangible assets is not recoverable based on
estimated cash flows of operating activities. As a result of the adoption of
Statement C-8, the Company determined that its television concessions qualified
as indefinite useful life intangible assets. The Company no longer amortizes its
concessions.
F-13
Prior to January 1, 2002, the Company's television concessions were amortized by
the straight-line method over the relevant concession periods then in existence.
Amortization expense for the years ended December 31, 2000 and 2001 amounted to
Ps119,292 and Ps121,122, respectively.
m. Labor benefits
Seniority premiums to which employees are entitled upon termination of
employment after seven years of service are expensed in the years in which the
services are rendered. The related obligation is determined in accordance with
Statement D-3, "Labor Obligations", issued by the MIPA, based on actuarial
studies. See Note 10.
Other compensation based on length of service, to which employees may be
entitled in the event of dismissal or death, in accordance with the Mexican
Federal Labor Law, is charged to income in the year in which it becomes payable.
n. Income tax and employees' statutory profit sharing
Effective January 1, 2000, the Company adopted the guidelines of Revised
Statement D-4, "Accounting Treatment of Income Tax, Tax on Assets and Employees'
Statutory Profit Sharing" ("Revised Statement D-4"), issued by the MIPA. As a
result of the foregoing, the Company switched from the partial liability method
to the comprehensive assets and liability method for recognition of deferred
income tax, which consists of calculating deferred income tax by applying the
respective income tax rate to the temporary differences between the accounting
and tax values of assets and liabilities at the date of the financial
statements. The cumulative effect of this change on the consolidated balance
sheet as of January 1, 2000 was to increase deferred tax liabilities by
Ps693,526 and reduce stockholders' equity by the same amount.
In 2000, the Company adjusted its investment in Unefon by Ps57,854 as a result
of Unefon's adoption of Revised Statement D-4. The increase was reflected in the
component in stockholders' equity entitled "Insufficiency in the restatement of
capital" for the year ended December 31, 2000.
o. Comprehensive income (loss)
As of January 1, 2001, Statement B-4, "Comprehensive Income", issued by the
MIPA, became effective. This statement requires that the various items making up
the capital gains (losses) during the year be shown in the statements of
stockholders' equity under the heading of comprehensive income (loss).
Therefore, in order that the various lines of the statement of stockholders'
equity could be comparable, this statement was restructured.
p. Revenue recognition
Revenues from advertising contracts are recognized as the contracted advertising
is aired. Net revenue includes revenue from advertisers less sales commissions
paid. During the years ended December 31, 2000, 2001 and 2002 sales commissions
paid amounted to Ps318,044, Ps356,659 and Ps364,874, respectively.
F-14
q. Advertising advances
The Company enters into two principal types of advance advertising agreements
with clients. The Azteca plan generally requires advertisers to pay in full
within four months of the date in which they sign the advertising agreement. The
Mexican plan allows clients to pay for advertising by making cash deposits from
10% to 20% of the advertising commitment, with the balance payable in
installments, which are generally supported by promissory notes, over the period
during which the advertising is aired. The Company records cash or other assets
received and the amounts due and its obligation to deliver advertising under
both types of advance advertising agreements when the contracts are signed. The
amounts represented by such advertising advances are credited to net revenue as
the contracted advertising is aired. Such obligations with respect to
advertising advances are considered non-monetary liabilities and are restated by
applying factors derived from the NCPI.
r. Net income per share applicable to majority stockholders
Net income per share is calculated based on the net income attributable to the
majority stockholders divided by the weighted average number of shares
outstanding during each of the years ended December 31, 2000, 2001 and 2002. See
Note 11. The weighted average number of common shares outstanding during each of
the years ended December 31, 2000, 2001 and 2002 were 8,967 million, 9,025
million and 9,057 million, respectively.
As required by Statement B-14, "Earning per share", issued by the MIPA, net
income per share before and after extraordinary item is provided as follows:
Year ended December 31,
---------------------------------------------
2000 2001 2002
-------- --------- ----------
Net income before extraordinary item per preferred
and common shares (1): Ps 0.080 Ps 0.167 Ps 0.109
Extraordinary item - NBC settlement agreement
- net of income tax (see Note 11d.) (0.037)
-------- --------- ----------
Net income per preferred and common shares Ps 0.043 Ps 0.167 Ps 0.109
======== ========= ==========
(1) Dividend per preferred shares Ps 0.042 Ps 0.042 Ps 0.042
======== ========= ==========
s. Stock option plans for employees
Stock options granted to employees are given effect when the options are
exercised by crediting paid-in capital stock for the amount of cash received.
F-15
t. Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results could
differ from those estimates.
NOTE 3 - FOREIGN CURRENCY POSITION:
Monetary amounts in this note are expressed in U.S. dollars (US$) except
exchange rates, since this is the currency in which most of the Company's
foreign currency transactions are carried out.
In December 1994, the Mexican government devalued the peso and allowed it to
float freely in the foreign exchange market. Since that time the fluctuations in
the foreign exchange market have continued and at December 31, 2002, the
exchange rate used by the Company for financial reporting purposes was Ps10.395
per dollar (Ps9.65 and Ps9.16 at December 31, 2000 and 2001, respectively). As a
result, the Company had net exchange (losses) income of (Ps127,912), Ps197,676
and (Ps353,139) during the years ended December 31, 2000, 2001 and 2002,
respectively, which are shown in the statement of results of operations as a
component of comprehensive financing cost.
At February 7, 2003, date of issuance of the audited financial statements, the
exchange rate was Ps10.96 per dollar.
At December 31, 2001 and 2002, the Company had monetary assets and liabilities
in foreign currencies as shown below:
At December 31,
-------------------------------------
2001 2002
--------------- ---------------
Assets US$ 357,222 US$ 491,936
Liabilities (705,822) (674,511)
--------------- ---------------
Net short position (US$ 348,600) (US$ 182,575)
=============== ===============
At December 31, 2001 and 2002, the Company had no hedge contracts for protection
against foreign exchange risks.
F-16
NOTE 4 - OPERATIONS WITH FINANCIAL INSTRUMENTS:
a. Marketable securities
During 2002, the Company purchased Ps295,988 (nominal) Grupo Elektra, S.A. de
C.V. ("Grupo Elektra") Ordinary Participation Certificate ("CPOs"). During 2002,
the Company recorded a loss against comprehensive financing cost for Ps56,658 to
reflect the decline in the market value of the investment.
In October 2002, the Company entered into a put option agreement with its CPOs
in Grupo Elektra. Pursuant to the option agreement, the Company is required to
pay a premium of 10.5% of the number of options valued at the strike price.
b. Financial instruments
In January 2002, the Company entered into a monthly certificate of deposit with
a rate of return based on the market value of the CPOs, which was recorded
against stockholders' equity. The Company has periodically renewed the
certificate of deposit upon expiration. During 2002, as a result of the decline
in market value of the CPOs, the Company recognized a loss of Ps34,097 against
stockholders' equity. At December 31, 2002, the outstanding balance of the
certificate of deposit was Ps139,276.
NOTE 5 - ACCOUNTS RECEIVABLE:
At December 31,
------------------------------------
2001 2002
--------------- ---------------
Amounts due from advertisers Ps 4,417,170 Ps 4,421,686
Accounts receivable from Unefon
advertising agreement (see Note 8) 80,649
Taxes recoverable 191,842 116,007
Prepaid expenses 60,910 66,731
Other accounts receivable 340,925 325,981
--------------- ---------------
5,010,847 5,011,054
Allowance for bad debts (83,403) (89,854)
--------------- ---------------
Ps 4,927,444 Ps 4,921,200
=============== ===============
Amounts due from barter transactions included in amounts due from advertisers
amounted to Ps345,627 and Ps352,655 as of December 31, 2001 and 2002,
respectively.
F-17
NOTE 6 - PROPERTY, MACHINERY AND EQUIPMENT:
At December 31,
--------------------------------
2001 2002
------------- -------------
Buildings Ps 1,115,490 Ps 1,118,258
Machinery and operating equipment 1,985,774 2,312,350
Furniture and office equipment 223,154 223,154
Transportation equipment 301,264 346,819
Other fixed assets 379,432 530,330
------------- -------------
4,005,114 4,530,911
Accumulated depreciation (2,252,393) (2,857,912)
------------- -------------
1,752,721 1,672,999
Land 545,068 554,883
Construction in progress 6,288 3,561
------------- -------------
Ps 2,304,077 Ps 2,231,443
============= =============
At December 31, 2001 and 2002, property, machinery and equipment amounting to
Ps816,431 and Ps795,865, respectively, have been pledged to guarantee bank
loans. See Note 9.
NOTE 7 - OTHER ASSETS:
At December 31,
----------------------------------
2001 2002
--------------- -------------
Investment in affiliates Ps 135,037 Ps 65,598
Advances to Corporacion de Noticias e Informacion,
S.A. de C.V. 200,773 298,000
Deferred costs related to the issuance of guaranteed
senior notes - Net 98,189 78,895
Account receivable from an affiliate which represents
a reduction in Unefon contributed capital. This amount
was contributed to incorporate Cosmofrecuencias,
S.A. de C.V. ("Cosmofrecuencias") (see Unefon below) 354,964
Investment in 50% equity interest in Cosmofrecuencias
(see Unefon below) 354,746
Account receivable from Pappas Telecasting of Southern
California, LLC (see Azteca America below) 191,124 235,565
Other assets 221,665 150,195
--------------- -------------
Ps 1,201,752 Ps 1,182,999
=============== =============
Investment in Unefon Ps 1,848,485 Ps 1,755,942
=============== =============
Investment in Todito Ps 397,883 Ps 319,986
=============== =============
Advance payments to Pappas Telecasting Companies,
through Azteca America (see Azteca America below) Ps 660,031 Ps 1,154,479
=============== =============
F-18
Corporacion de Noticias e Informacion, S.A. de C.V. ("CNI")
On December 10, 1998, the Company entered into a Joint Venture Agreement with
Televisora del Valle de Mexico, S.A. de C.V. ("TVM"), the owner of the
concession for UHF Channel 40 in Mexico City, and its subsidiary CNI.
The original contract was established with the following terms:
1. The Company agreed to provide advisory services to TVM and CNI regarding the
television operations of Channel 40 for a period of 10 years or until the
expiration of TVM's television concession, whichever is shorter.
2. Under a Programming, Promotion and Commercialization Agreement with TVM, CNI
agreed to cede to the Company the rights and obligations, originally
established in favor of CNI, to program and operate Channel 40. The Company
agreed to pay to CNI 50% of the joint venture's earnings before interest,
taxes, depreciation and amortization ("EBITDA") on a quarterly basis, with an
advance payment of US$15,000 to be applied against future EBITDA generated
from the operation of Channel 40, over a maximum period of ten years. At
December 31, 1999, the Company had made advances of US$15,000.
3. The Company has provided a US$10,000 credit facility in favor of CNI for a
period of ten years with a grace period for the payment of principal and
interest of three years. The interest accrues at an annual interest rate
based on the maximum interest rate paid by the Company plus 25 basis points.
As security for the loan, 51% of the capital stock of TVM owned by Mr. Javier
Moreno Valle was pledged as collateral. At December 31, 2001 and 2002, CNI
had drawn down US$10,000 under this credit facility.
4. Under a purchase option contract, the Company has the right to acquire up to
51% of the capital stock of TVM beginning in November 2002. The sale price of
the capital stock is based on a valuation of 100% of the capital stock of TVM
equal to the greater of US$100,000 (which increases gradually over time) and
ten times the EBITDA generated by Channel 40 for the 12 months preceding the
exercise of the purchase option. This contract also gives Mr. Javier Moreno
Valle and Mr. Hernan Cabalceta Vara the right to put their CNI capital stock
to the Company for the same purchase price per share under certain
circumstances.
5. Under the terms of this agreement, the Company has the right to determine all
Channel 40 programming except for 16 and one-half hours per week that is to
be made up of CNI-determined programming. In return for the transmission
rights of this CNI-determined programming through Channel 40, the Company
agreed to pay CNI, during the first year, US$5.0 for each 60 minute program
or its equivalent broadcast and, after the second year, US$1.65 for each
rating point generated by the broadcast of CNI-determined programming on
Channel 40. During the year ended December 31, 2000, US$3,292 (Ps37,167) were
paid for these services.
F-19
6. To improve the efficiency of Channel 40's operations, the Company has agreed
to provide accounting, administrative, computer, technical or any other
advice that will improve the operations and administration of Channel 40.
In July 2000, CNI stopped broadcasting the Company's signal as required by its
contractual obligation under the joint venture agreement and the Company's
signal has not been broadcast on Channel 40 since this date. In response to
CNI's actions, the Company filed several lawsuits against CNI. At February 7,
2003, date of these financial statements, this matter is in litigation. The
Company is seeking lost profits and the enforcement of its purchase option right
under the joint venture agreement to acquire up to 51% of the capital stock of
TVM. As of December 31, 2001 and 2002, the Company had advanced an aggregate
amount of US$34,000 to CNI, which includes US$9,000 comprised of interest on the
credit facility and additional operating expenses forwarded to CNI in connection
with the joint venture that may be recovered based on future earnings of the
joint venture.
In December 2002, an Arbitral Tribunal of the International Court of Arbitration
of the International Chamber of Commerce issued an award concluding that the
joint venture and the purchase option agreement entered into by the Company and
CNI are valid, in effect and enforceable. As a consequence of this conclusion,
the Company believes that the terms of the arbitral award confirms the Company's
right to operate Channel 40 as contemplated by the joint venture and to exercise
its right to acquired up to 51% of the capital stock of TVM. In reliance on the
arbitral award issued in December 2002, the Company took possession of certain
broadcasting facilities of Channel 40 to restore TV Azteca's signal on Channel
40. Following this event, the Ministry of Communications and Transportation
(Secretaria de Comunicaciones y Transportes, or SCT) took exclusive control of
the Channel 40 transmission site and signal. In January 2003, CNI filed an
action for relief (amparo) before a federal court seeking to reverse SCT's
decision to take exclusive control of the Channel 40 transmission site and
signal. On January 27, 2003, CNI regained control of the Channel 40 transmission
site and signal. On that same day, the Company appealed the decision. Although
no assurance can be given, management of the Company believes it will prevail in
the litigation, and accordingly, no reserve has been established with respect to
these proceedings.
Unefon
On May 14, 1999, the Company signed an agreement (the "Stockholders Agreement")
with Corporacion RBS, S.A. de C.V. ("CRBS"), a Mexican company wholly-owned by
Ricardo B. Salinas Pliego, and Moises Saba Masri to invest in Unefon and its
subsidiaries. Unefon is a personal telecommunications services wireless network
that is a provider of wireless mobile telephone services in Mexico. The
Stockholders' Agreement establishes that Unefon must be operated and managed as
a joint venture, initially between CRBS and Moises Saba Masri. The Stockholders'
Agreement required each of CRBS and Moises Saba Masri to contribute US$186,500
to Unefon's capital, for a total of US$373,000 in capital stock. These capital
contributions to Unefon were completed on June 15, 1999.
F-20
Before signing the Stockholders' Agreement, CRBS made a contribution to Unefon's
capital of approximately US$88,600, which was used to make an advance payment to
the Mexican government for the acquisition of wireless concessions and for
pre-operating expenses. CRBS made the balance of the contribution required by
the Stockholders' Agreement with funds borrowed from Azteca Holdings, S.A. de
C.V. ("AH"), a holding company controlled by Mr. Salinas Pliego. AH obtained
part of the funds for this loan from the sale of 218 million of the CPOs of the
Company owned by AH to a group of private Mexican investors. AH obtained the
remaining funds for the loan from the sale by AH of 44 million TV Azteca CPOs to
AH's wholly-owned subsidiary, Compania Operadora de Teatros, S.A. de C.V.
On October 28, 1999, the Company acquired the interest in Unefon held by CRBS at
a cost (including financial costs) of US$189,793 which was funded through: (i)
proceeds from the issuance of shares; (ii) the payment of US$35,108 in cash and
(iii) the cancellation of debts of US$43,067 owed to the Company by CRBS.
In February 2000, Unefon commenced operations.
At the extraordinary stockholders' meeting held on October 2, 2000, the Unefon
stockholders agreed to reduce the Unefon capital stock by Ps611 million
(nominal). At December 31, 2001, this reduction had not yet been made, and is
shown in the financial statements of the affiliate as an account payable to the
stockholders, bearing interest at an annual rate of 8%. The stockholders will
use the proceeds of said capital reduction to capitalize a newly formed company
owned 50% by the Company and 50% by Moises Saba Masri, Cosmofrecuencias, S.A. de
C.V. ("Cosmofrecuencias"), for which purpose, the Company will contribute
Ps354,964 at December 31, 2001. In June 2002, the Company contributed to
Cosmofrecuencias as a capital contribution its receivable from Unefon, including
the cumulative interests, equivalent to 50% of Cosmofrecuencias' capital stock.
On October 19, 2000, the Board of Directors approved the grant to its
stockholders of the rights to acquire the Company's investment in Unefon and
Cosmofrecuencias shares, a decision which was ratified at the ordinary
stockholders' meeting held on December 4, 2000.
As determined by the Company's Board of Directors, the Company's stockholders
will also have a right to purchase shares in Cosmofrecuencias from October 19,
2001 to October 19, 2006. The total exercise price for this option is
approximately US$32,000.
The grant of the rights ("Rights") to acquire the Unefon shares was subject to
receiving the requisite consent of the holders of the Company and AH Senior
Notes. On March 27, 2001, the Company obtained the consents and paid a fee
totaling Ps115,223 to certain holders of the TV Azteca Notes (as defined in Note
9), which was recorded as part of its total investment in Unefon. The grant of
the Rights is also subject to receiving applicable regulatory approvals, third
party approvals, including the approval of Nortel Networks Corporation
("Nortel"), Unefon's major lender and equipment supplier, and the filing and
effectiveness of a registration statement with the U.S. Securities and Exchange
Commission that registers the Unefon shares underlying the Rights.
F-21
The Rights were exercisable only on December 11, 2002, unless the time of
exercise was extended by the Company or an acceleration event occurred. In
December 2002, the Company's Board of Directors approved the change of the
exercise date to December 11, 2003. Any Rights that are not exercised on the
exercise date will expire and the Company will retain ownership of the shares
underlying the Rights. The Rights may become exercisable prior to December 11,
2003 if the Board of Directors of the Company approves a merger or consolidation
of Unefon, a sale of all or substantially all of Unefon's assets or a sale (by
tender or otherwise) of at least a majority of Unefon's shares or otherwise
determines to accelerate the exercisability of the Rights.
With respect to the Company's investment in Unefon, the Company's stockholders
have the right to acquire those shares subject to the occurrence of certain
conditions, at a price of US$0.15128 per Unefon share owned by the Company, for
a total amount of US$176,998. At December 31, 2001 and 2002, the Company's
investment in Unefon reflects the net book value of the investment at the date
of the decision to sell Unefon. The Company will record any differences between
the book value of the investment and the ultimate sales price once the
stockholders exercise the purchase option and all the legal requirements of the
transaction have been complied with.
In July 2002, the Company announced that its Board of Directors had approved of
seeking the approval of the Company's shareholders in order to authorize the
spin-off of its investment in Unefon in the form of a distribution of all of the
shares of Unefon that the Company owns to the Company's shareholders at no
monetary cost before the end of 2002. However, as a consequence of a dispute
between Unefon and Nortel, the Company's Board of Directors postponed submitting
the proposal to the Company's shareholders.
In December 2000, in connection with certain modifications of Unefon's finance
agreement with Nortel, the Company and Mr. Saba, agreed, jointly and severally,
in a shareholder's undertaking to provide Unefon up to US$35,000 in the
aggregate by way of eaither equity or subordinated debt in the event Unefon had
liquidity shortfalls in 2001 or 2002.
In July 2001, the Company and Moises Saba Masri announced their intention to
provide credit support to Unefon for up to US$80,000 each. The Company has
suspended any further credit support to Unefon in light of Unefon's dispute with
Nortel. At December 31, 2002, the Company had provided US$48,000 of credit
guarantees on behalf of Unefon, of which US$19,100 had become due and had been
paid by the Company. See Note 8.
In September 1999, Unefon entered into a finance agreement and a procurement
agreement with Nortel pursuant to which Nortel agreed to assist Unefon in the
design and construction of its telecommunications network. Unefon and Nortel are
currently engaged in disputes over each party's compliance with the terms and
conditions of the finance agreement, letter agreement, procurement agreement,
and other related agreements entered into by the parties and certain of their
shareholders and affiliates.
F-22
Unefon asserts that Nortel has not fulfilled its obligations under the finance
agreement, letter agreement and procurement agreement. With respect to the
finance and letter agreements, Unefon has asserted, among other things, that
Nortel breached its obligation to make available to Unefon the second loan
tranche under the finance agreement in the amount of US$210,000. Unefon contends
that Nortel's failure to advance this additional financing has limited Unefon's
ability to build out its network, to grow its business in accordance with its
business plan and to realize the revenues and profits related to such growth and
needed to repay the first loan tranche under the finance agreement. With respect
to the procurement agreement, Unefon asserts, among other things, that Nortel
failed to properly design and construct the network and failed to provide
required and appropriate maintenance and support. Unefon also contends that the
settlement agreement signed in July 2002 never became effective because Nortel
failed to perform the pre-conditions to its effectiveness. Even to the extent
that the settlement agreement became effective, Unefon contends that Nortel
failed to perform its obligations thereunder.
As a result of Nortel's alleged breaches, Unefon withheld a US$6,000 interest
payment due to Nortel in August 2002 and has asserted that it is relieved of its
payment obligations under the finance agreement by reason of Nortel's breaches.
On August 28, 2002, Nortel sent Unefon a notice alleging that Unefon was in
default under the finance agreement due to its failure to make the foregoing
interest payment. Nortel also alleged that the proposed spin-off by the Company
of its 46.5% stake in Unefon would be deemed to be a change in control under the
terms of the finance agreement, which also would constitute a default under the
finance agreement unless Nortel consented to such action.
On September 9, 2002, Unefon filed a lawsuit against Nortel in the Supreme Court
of the State of New York seeking damages and lost profits in the amount of
US$900,000. Unefon alleged that Nortel had breached the finance agreement and
related letter agreement by failing to advance the second loan tranche of
US$210,000. Unefon also alleged that Nortel had failed to comply with its
obligation to pursue syndication of the first loan tranche in a diligent and
timely manner, applying its best efforts consistent with standards of commercial
reasonableness. Unefon alleged that Nortel's breach had caused Unefon damages,
including, among others, lost profits and a diminution in equity value of Unefon
and had relieved Unefon of its payment obligations under the finance agreement.
As an alternative remedy, Unefon sought specific performance of Nortel's
obligation to lend Unefon up to US$210,000 from the second loan tranche under
the finance agreement.
Nortel notified Unefon on September 9, 2002 that based on its non-payment of the
August 2002 interest payment, Nortel was accelerating all amounts owed by Unefon
under the finance agreement. As of December 31, 2002, the outstanding principal
amount under the finance agreement was US$349,800. Nortel also notified Unefon
that it was exercising its right to terminate the procurement agreement as a
result of Unefon's alleged default under the finance agreement.
F-23
On September 23, 2002, Nortel filed an answer and counterclaim in the New York
Supreme Court action commenced by Unefon in which Nortel asserted, among other
things, that it had not breached the finance agreement and related letter
agreeement and that the remedies sought by Unefon were not available under the
finance agreement, the procurement agreement or applicable law. Nortel's
counterclaim was based on Unefon's non-payment of the August 2002 interest
payment and Nortel sought acceleration and immediate payment of all amounts
allegedly due to Nortel under the finance agreement. On October 10, 2002, Unefon
answered Nortel's counterclaim and denied the allegations offered in support
thereof.
On November 11, 2002, Unefon filed a demand for arbitration under the
procurement agreement, as well as the July 2002 settlement agreement, before the
American Arbitration Association in New York City. In its demand, Unefon
asserted numerous breaches by Nortel of its obligations under these agreements,
including design and construction flaws, failure to fulfill software
obligations, maintenance failures, failure to provide financing and other
economic benefits and refusal to deliver equipment for which Unefon has paid.
Unefon seeks damages and an order directing Nortel to deliver immediately all
equipment for which Unefon has paid. On December 24, 2002, Nortel filed an
answer denying liability and asserting counterclaims based on alleged breaches
by Unefon of its payment obligations under the procurement agreement and
requested the arbitration tribunal to award damages in the amount of at least
US$47,000.
On November 11, 2002, Nortel moved for summary judgment on its counterclaim
relating to the non-payment of interest. On December 10, 2002, Unefon moved for
partial summary judgment on its claim that Nortel breached the finance
agreement, and moved to amend its complaint to assert claims for fraud and
intentional misrepresentation relating to Nortel's willingness to lend the
second loan tranche, including Nortel's willingness to seek syndication of the
first loan tranche, and to assert two affirmative defenses: (i) that Nortel's
fraudulent inducement bars Nortel from any relief under the finance agreement or
procurement agreement and (ii) that Unefon is excused from performance under the
finance agreement by virtue of Nortel's breaches of the finance agreement and
procurement agreement. Unefon also sought a stay of the action pending
resolution of the arbitration commenced by Unefon against Nortel, as described
above. On January 14, 2003, Nortel filed papers opposing Unefon's motions.
On November 29, 2002, Unefon and certain of its affiliates commenced an action
against Nortel and others in civil court in Mexico City seeking a declaration of
the parties' rights under pledge agreements pursuant to which Unefon's and the
affiliates' stock had been pledged to Nortel as security to the loans made under
the finance agreement. Unefon and its affiliates seek, among other things,
declarations that Nortel is disproportionately collateralized and that certain
provisions of the stock pledge agreements are void under Article 198 of the
Mexican General Commercial Companies Law (which voids any agreement which
restricts the free exercise of shareholders voting rights).
On December 16, 2002, Nortel filed a second, separate lawsuit in the Supreme
Court of the State of New York seeking authorization from the Court, pursuant to
the stock pledge agreement, to sell the shares of Operadora Unefon, S.A. de C.V.
and Servicios SPC, S. A. de C.V. (each wholly-owned subsidiaries of Unefon) that
were pledged to secure its indebtedness, or, in the
F-24
alternative, authorization to take appropriate steps to obtain control over the
management and business of Unefon. Unefon filed a motion to dismiss this action
on jurisdictional grounds and on the basis of the prior Mexican action commenced
by it against Nortel in regard to the pledge agreements. The parties have
stipulated that Nortel will not take any further action to foreclose on the
shares until such motion is decided.
On December 20, 2002, Nortel notified the Company and Mr. Saba of its view that
Unefon's non-payment of the August 2002 interest payment triggered their joint
and several obligation to make additional funds available to Unefon up to an
aggregate amount of US$35,000 as provided in the shareholders' undertaking. The
Company and Mr. Saba dispute Nortel's contention that their funding obligation
has been triggered, asserting that Nortel has materially breached the finance
agreement and the procurement agreement, thereby excusing Unefon from
performance of its obligations under these agreements and, therefore, that the
Company and Mr. Saba are excused from performance of their obligations under the
shareholders' undertaking. The Company and Mr. Saba also assert that, even if
their funding obligation has been triggered, they have satisfied their
obligations under the shareholders' undertaking by making up to US$35,800 in
additional funds available to or on behalf of Unefon.
In January 2003, Nortel petitioned for the bankruptcy of Unefon before a Mexican
court. In response, Unefon filed an action for relief (amparo) before a federal
district court challenging Nortel's request. Unefon believes that Nortel's
bankruptcy petition is insufficient under Mexican law and that it will therefore
prevail in this proceeding. The federal district court suspended Nortel's
bankruptcy claim pending its analysis of the sufficiency of Nortel's petition.
If Unefon losses control over its assets or Unefon is unable to procure
additional equipment from Nortel as it builds-out its network, its business and
results of operations would be significantly and adversely affected. Although no
assurance can be given, Unefon's management believes Unefon will prevail in the
litigation, and accordingly, no reserve has been established by Unefon or the
Company with respect to these proceedings.
Todito
In its meeting held on February 9, 2000, the Company's Board of Directors
approved a US$100,000 investment in Todito. The investment was made on February
14, 2000 through an advertising, programming and services agreement (see Note
8), in exchange for 50% of the capital stock of Todito. The Company has the
ability to exercise significant influence, but not control, over the operations
of Todito. This investment is accounted for by the equity method and is
presented on the balance sheet as "Investment in Todito". This acquisition
resulted in goodwill of Ps543,370. The amortization of goodwill for the years
ended December 31, 2000, 2001 and 2002 was Ps22,643, Ps27,260 and Ps27,260,
respectively.
Todito operates a Spanish-language Internet portal and internet connection
service located at "www.todito.com" that was launched in August 1999 by
Dataflux, S.A. de C.V. ("Dataflux"), a company controlled by the brother of Mr.
Salinas Pliego. Todito's website provides e-commerce and other services to
Mexico and the Hispanic population in the United States.
F-25
Azteca America
In September 2000, the Company and Pappas Telecasting Companies ("Pappas
Group"), a broadcasting company based in the United States, entered into a joint
venture ("Azteca America JV"), with the purpose of creating a new television
broadcast network. Azteca America JV was engaged in the developing a new
television broadcast network focused on the Hispanic market in the United
States.
In accordance with the original Azteca America JV, Azteca America JV was owned
80% by Pappas Group and 20% by the Company. In connection with the creation of
Azteca America JV, the Company also entered into a program license agreement
(the "License") with Azteca America JV in September 2000 for an initial term of
20 years with a renewal for one additional ten-year term at the option of the
Company. The License granted exclusive rights from the date of the agreement to
Azteca America JV and its subsidiaries for the broadcast of Spanish language
programs within the United States. Additionally, the Company agreed to make all
its programming available to Azteca America JV and to make available at least
3000 hours of new programming in each calendar year.
Prior to the launch date, Pappas Group agreed to pay the Company a monthly fee
of approximately US$1,500. During the years ended December 31, 2000 and 2001,
the Company received US$6,436 and US$6,731, respectively, under the terms of
this agreement which was recorded as net revenue in the Company's results of
operations. After the launch date, Azteca America JV was scheduled to receive an
annual fee equal to the greater of US$15,000 or 10% of the annual net revenues
of Azteca America JV which increased 1% every year to a maximum of 15% of net
revenues. Until the Company's subscription obligation was paid, Azteca America
JV agreed to apply the payment of the License fee to the outstanding
subscription obligation. The Company had no outstanding subscription obligation
at December 31, 2000 since Pappas Group had not made its initial capital
contribution.
In June 2001, the Company and Pappas Group agreed to change their strategy, and
as a result of this, the Azteca America JV was terminated as well as the
corresponding license agreement. Also, the Company, through Azteca International
Corporation ("Azteca America"), a wholly-owned subsidiary of the Company, has
entered into station affiliation agreements with various television broadcast
stations, including those owned by the Pappas Group.
In July 2001, the Company launched the Azteca America Network, a new
Spanish-language television broadcast network in the U.S. Through Azteca
America, its wholly-owned subsidiary, the Company establishes affiliate
relationships with television broadcast stations in U.S. markets that have a
significant Hispanic population. In addition, Azteca America may enter into
distribution agreements with cable operators. Through the Azteca America
Network, the Company distributes in the U.S. certain of its programming
including telenovelas, reality programming, sports, news and other general
entertainment programming in the Spanish language, which the Company refers to
as the Azteca America Programming.
F-26
As of December 31, 2002, Azteca America has entered into station affiliation
agreements with the following broadcast television stations, which are
affiliates of Pappas Group:
Los Angeles Station
In July 2001, Azteca America and Pappas Southern California, LLC ("Pappas
California") entered into a station affiliation agreement with respect to
KAZA-TV, NTSC Channel 54, which serves the Los Angeles, California Designated
Market Area (DMA). Pursuant to this agreement, Azteca America granted Pappas
California an exclusive license for over-the-air broadcasting of the Azteca
America Programming in the Los Angeles market. The station affiliation
agreement, which was amended in December 2001, has a term of four years,
commencing in July 2001. This agreement automatically renews for an additional
four-year term, unless terminated by either party. Azteca America has the right
to receive 50% of the net local and national spot advertising revenue generated
by the station.
In connection with entering into the Los Angeles station affiliation agreement,
the Company agreed to become a joint and several obligor under a credit
agreement among Pappas Telecasting of Arizona, LLC ("Pappas Arizona") and Pappas
California, as borrowers, and UBS AG, as lender. Pursuant to this credit
agreement, UBS AG loaned a total of US$31,000 to the borrowers. All loans made
under this credit agreement were repaid by November 2, 2002. UBS AG was granted
a first priority lien on the collateral securing the loans, which included the
entire equity interest in the two Pappas affiliates that hold the U.S. Federal
Communications Commission licenses for the Pappas Arizona and Pappas California
television stations.
The Company and Pappas California also entered into a credit agreement under
which the Company agreed to loan Pappas California up to US$60,000 for, among
other things, repayment of indebtedness, working capital and payment of the
principal and unpaid interest under the UBS credit agreement, as describe above.
The loan was required to be repaid by November 2, 2002 and was subordinate to
the loans made under the UBS credit agreement. The Company was granted a second
priority lien on the collateral securing the loans, subordinate to the liens
securing the UBS credit agreement. However, the Company's ability to acquire the
collateral in the event of foreclosure under the Company credit agreement was
limited by the United States laws limiting foreign ownership of United States
television stations. At December 31, 2001 and 2002, US$18,216 and US$19,667,
respectively, were outstanding under the Company credit agreement.
In July 2001, Azteca America and Pappas California also entered into an equity
option agreement pursuant to which Azteca America was granted an option to
purchase an equity interest in Pappas California. The equity option was to be
exercised by Azteca America on one occasion, in whole or in part, prior to July
27, 2002. Under the terms of the agreement, Azteca America had the right to
acquire up to a 25% equity interest in Pappas California. However, in the event
that Pappas California and Pappas Arizona have outstanding debt obligations
under their respective credit agreements with the Company and affiliates of UBS
AG, Azteca America had the right to acquire a percentage of Pappas California
equal to the greater of 25% or the percentage obtained by dividing: (i) the
amounts then owed under these credit agreements by (ii)
F-27
US$136,000, the value of the Los Angeles affiliate agreed upon by Azteca America
and Pappas California. If Azteca America was not permitted to acquire an equity
interest in Pappas California greater than 25% as a result of the United States
laws limiting foreign ownership of United States television stations, Azteca
America was permitted to transfer the right to acquire the excess equity
interest to an unaffiliated third party. If Azteca America acquired an equity
interest in Pappas California and, thereafter, the term of the station
affiliation agreement was not renewed by Pappas California following the
expiration of the initial four-year term, Azteca America would have the right to
acquire 100% of the equity interests in Pappas California for a cash price equal
to the fair market value of such interests (or to transfer the right to acquire
such additional equity interests to an unaffiliated third party). If the station
affiliation agreement was not renewed by Azteca America, Pappas California would
have the right to acquire all of Azteca America's equity interest in Pappas
California for a cash price equal to its fair market value. Pappas California
would also have the right to acquire Azteca America's interest, and Azteca
America would have the right to cause Pappas California to acquire Azteca
America's interest, in certain other circumstances.
The equity option was exercised by Azteca America on May 21, 2002. In connection
with its effort to exercise the option, the Company paid US$32.8 million to
acquire the UBS AG credit agreement that is secured by the Los Angeles station,
which increased TV Azteca's secured loan to Pappas California to US$53.7
million.
Reno Station
In October 2001, Azteca America and Pappas Telecasting of Nevada ("Pappas
Nevada"), entered into a station affiliation agreement with respect to KUVR-LP,
NTSC, Channels 47 and 68, which serves the Reno-Sparks-Carson City, Nevada DMA.
Pursuant to this agreement, Azteca America granted Pappas Nevada an exclusive
license for over-the-air broadcasting of the Azteca America Programming in such
market. This agreement has a term of two years, commencing in November 2001.
This agreement automatically renews for an additional two-year term, unless
terminated by either party. Azteca America has the right to receive 50% of the
net local and national spot advertising revenue generated by the station.
San Francisco and Houston Stations
In December 2001, Azteca America and Hispanic America of San Francisco, LLC
("Pappas San Francisco") entered into a station affiliation agreement with
respect to KTNC-TV, NTSC Channel 42 and DTV Channel 63, which serves the San
Francisco-Oakland-San Jose, California DMA. Also in December 2001, Azteca
America and Hispanic America of Houston, LLC ("Pappas Houston") entered into a
station affiliation agreement with respect to KAZH-TV, NTSC Channel 57 and DTV
Channel 41, and KVVV-LP, NTSC Channel 53, which serves the Houston, Texas DMA.
Pursuant to these station affiliation agreements, Azteca America granted Pappas
San Francisco and Pappas Houston an exclusive license for over-the-air
broadcasting of the Azteca America Programming in their respectives markets.
These agreements expire on July 21, 2005, and automatically renew for a
four-year term, unless terminated by either party. Azteca America has the right
to receive 50% of the net local and national spot advertising revenue generated
by the stations.
F-28
In connection with the San Francisco station affiliation agreement, Azteca
America acquired a 25% equity interest in Pappas San Francisco for a purchase
price of US$57,250, of which US$55,250 was paid in December 2001 and the
difference was paid in January 2002 and in connection with the Houston station
affiliation agreement, Azteca America acquired a 25% equity interest in Pappas
Houston for a purchase price of US$13,404, of which US$13,000 was paid in
December 2001 and the difference was paid in January 2002. The remaining equity
interests in these stations are owned by Pappas affiliates. If the term of the
station affiliation agreement is not renewed by Pappas San Francisco or Pappas
Houston, as applicable, following the expiration of the initial term, Azteca
America will have the right to acquire 100% of the equity interests therein for
a cash price equal to the fair market value of such interests (or to transfer
the right to acquire such additional equity interests to an unaffiliated third
party). If the station affiliation agreement is not renewed by Azteca America,
Pappas San Francisco or Pappas Houston, as applicable, will have the right to
acquire all of Azteca America's equity interest therein for a cash price equal
to its fair market value. Pappas San Francisco or Pappas Houston, as applicable,
will also have the right to acquire Azteca America's interests, and Azteca
America will have the right to cause Pappas San Francisco or Pappas Houston, as
applicable, to acquire Azteca America's interest, in certain other
circumstances.
Following the exercise of the option by Azteca America to purchase an equity
interest in the Los Angeles station, Pappas Group refused to permit Azteca
America to complete the purchase, claiming that Azteca America had not satisfied
certain conditions to the purchase. Consequently, in July, 2002, Azteca America
filed a lawsuit against Pappas Group in Delaware seeking specific performance of
the equity option agreement. In addition, Pappas Group claimed that Azteca
America had breached the affiliation agreements for the Los Angeles, San
Francisco and Houston stations, as well as an additional affiliation agreement
covering the Reno, Nevada DMA and sought to terminate such agreements. Azteca
America filed a separate lawsuit in New York state court to prevent the
termination of the affiliation agreements. A trial on the Delaware lawsuit was
scheduled for December 2002.
Other affiliation agreements
In addition to Azteca America's arrangements with Pappas Group affiliates,
Azteca America has also entered into station affiliation agreements with
television broadcast companies covering approximately 53% of the U.S. Hispanic
population.
Pursuant to these station affiliation agreements, the stations have been granted
exclusive licenses for over-the-air broadcasting of Azteca America programming
in their respective markets. These agreements have terms ranging from two to
seven years which may be automatically renewed for a specified duration, also
ranging from two to seven years. Azteca America has the right to receive all of
the net advertising revenue that it generates on each of the broadcast stations
other than in the Las Vegas and Orlando markets, where they are only entitled to
50% of the net advertising revenue.
F-29
Pappas Group recent developments
On November 27, 2002, the Company and Pappas Group entered into an agreement in
principle to settle all of the pending lawsuits and all related disputes, and on
February 11, 2003, a definitive settlement agreement was signed. In connection
with settling these pending matters, the Company and Pappas Group also entered
into a number of agreements that will govern their future relationship. These
agreements include a new promissory note issued by Pappas Group in favor of the
Company for US$128,000, a local marketing agreement governing, under certain
circumstances, Azteca America's operation of its Los Angeles affiliate and a
purchase option agreement that grants Azteca America the right, subject to
receipt of all necessary approvals, to acquire all of the assets of its Los
Angeles affiliate. In addition to these agreements, Pappas Group and the Company
have modified their existing station affiliation agreements and entered into new
station affiliation agreements.
NOTE 8 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES:
The Company had the following amounts due from and payable to related parties:
At December 31,
--------------------------------
2001 2002
------------- -------------
Accounts receivable:
Operadora Unefon Ps 19,823 Ps 258,917
Grupo Cotsa 119,696
Azteca Holdings, S.A. de C.V. 103,473 133,109
Biper, S.A. de C.V. 2,536 32,368
Corporacion RBS, S.A. de C.V. 3,628 4,437
Compania Operadora de Teatros, S.A. de C.V. ("COTSA") 63,161
Radio Cel, S.A. de C.V. 9,463
RTC-Cines, S.A. de C.V. 11,281
Corporacion de Comunicacion, S.A. de C.V. 45,688
Aerotaxis Metropolitanos, S.A. de C.V. 5,050
Teleactivos, S.A. de C.V. 16,389
Club Atletico Morelia, S.A. de C.V. 29,494
Others 42,995 9,968
------------- -------------
Ps 426,794 Ps 484,682
============= =============
Accounts payable:
Todito Ps 24,307 Ps 56,355
Grupo Elektra 20,027 17,475
TV Cuscatleca 6,739 7,166
Teleactivos, S.A. de C.V. 5,552
Club Atletico Morelia, S.A. de C.V. 2,814
Others 2,218 285
------------- -------------
Ps 61,657 Ps 81,281
============= =============
F-30
Additionally, the Company has an account receivable with Pappas Southern
California, LLC, related party, which is described in Note 7.
The principal transactions with related parties are as follows:
Advertising revenue
Revenue from airing advertising for related parties amounted to Ps199,485,
Ps268,980 and Ps220,568 during the years ended December 31, 2000, 2001 and 2002,
respectively.
Advertising contracts
In March 1996, the Company entered into a Television Advertising Time Agreement
with Grupo Elektra under which Grupo Elektra (or any company in which Grupo
Elektra has an equity interest) has the right to receive at least 300
advertising spots per week for a period of 10 years. Each spot has a duration of
20 seconds, and the aggregate amount of airtime is not to exceed 5,200 minutes
annually. The spots are to run only in otherwise unsold airtime. In exchange for
the television advertising airtime, the Company will receive US$1,500 per year.
The agreement may not be terminated by the Company but may be terminated by
Grupo Elektra, which may also transfer its rights under this agreement to third
parties.
On May 2, 2001, the Company entered into another advertising agreement with
Grupo Elektra for Ps54,500 (nominal). Pursuant to the agreement, Grupo Elektra
had the right to air advertising spots on Channels 7 and 13 and their national
networks from May 2, 2001 through December 31, 2001. At December 31, 2001 Grupo
Elektra had fully utilized the right to air advertising spots under this
agreement.
Effective September 30, 1996, the Company entered into a Television Advertising
Time Agreement with Productora de Medios, S. A. de C. V. ("Productora") a former
wholly-owned subsidiary of COTSA (the "COTSA Advertising Agreement"), under
which COTSA or any of COTSA's subsidiaries had the right to 42 advertising spots
per week on Channel 7 or 13 for a period of 10 years. Each spot for an average
duration of 20 seconds, totaling 728 minutes annually, but only in otherwise
unsold airtime. In exchange for the advertising time, COTSA agreed to pay the
Company US$210 each year. The agreement may not be terminated by either party
without the consent of the other party.
On November 15, 2001, Productora signed a number of agreements with third
parties, by which Productora ceded its right to use the 7,280 airtime minutes
pertaining to the COTSA Advertising Agreement.
Effective September 30, 1996, the Company entered into a Television Advertising
Time Agreement with Dataflux (the "Dataflux Advertising Agreement") under which
Dataflux or any of its subsidiaries has the right to 480 advertising spots per
month on Channel 7 or 13 for a period of 10 years. Each spot is to have a
duration of 30 seconds. The aggregate amount of airtime provided by the Company
under this agreement is not to exceed 2,880 minutes annually,
F-31
and the advertising spots shall run only in otherwise unsold airtime. In
exchange for the advertising time, Dataflux has agreed to pay the Company US$831
annually, payable in advance each year. The Dataflux Advertising Agreement may
not be terminated by the Company; however, it may be terminated by Dataflux at
any time upon at least 90 days' notice.
In June 1998, the Company signed an advertising agreement with Unefon ("Unefon
Advertising Agreement"), as amended. Under the terms of the Unefon Advertising
Agreement, Unefon has the right to advertising spots on the Channels 13 and 7
networks, as well as any other open television channel operated or
commercialized by the Company, either directly or indirectly through its
affiliates or subsidiaries. The advertising spots that are the subject of the
Unefon Advertising Agreement will total 120,000 GRPs (a GRP is a Gross Rating
Point, which is the number of rating points for the broadcast of a 60-second
commercial or proportional fraction thereof) over a ten-year period.
Each year during the term of the agreement, Unefon will be able to make use of
up to 35,000 GRPs. Unefon must submit a request for air time, specifying dates
and hours of show-time, to the Company in advance.
Unefon is obligated to make use of 100% of the GRPs over a period of ten years.
Any balance remaining after ten years will be automatically cancelled and the
Company will have no further obligations to Unefon. Unefon will pay the Company
3% of its gross revenues up to a maximum of US$200,000 for the advertising
services in installments as advertising is aired. The Company records revenue
under the terms of this agreement as the GRPs are consumed based on a rate
schedule established in the agreement, which provides less expensive GRPs
initially and more expensive GRPs over the term of the agreement. The original
agreement provided that Unefon may defer making payments until the third year of
the agreement, and Unefon must pay interest on any unpaid advertising aired, at
the rate per annum of the average annual Costo Porcentual Promedio de Captacion,
plus three basis points. However, during 2001 Unefon and the Company agreed to
defer payments due in 2000, 2001 and 2002 and to make these payments in four
equal semi-annual installments during 2003 and 2004, with the first payment due
in June 2003. The deferred payments accrue interest at an annual rate of 12%.
Beginning in 2003, Unefon's payments to the Company are due on a current basis.
At December 31, 2002, the aggregate deferred payments equaled US$15,707
(including interest).
The Company's right to payment under the agreement is subject to compliance by
Unefon with its payment obligations under the finance agreement with Nortel.
Unefon's failure to pay advances will not be considered a default by Unefon
under the agreement. However, the Company will be able to suspend provision of
television services to Unefon after a year of Unefon's continued failure to pay.
On February 14, 2000, the Company, together with its subsidiary Grupo TV Azteca,
S. A. de C. V., signed an advertising, programming and services agreement with
Todito. The total amount of the five-year agreement was US$100,000 and consisted
of US$45,000 for advertising services, US$50,000 for programming content and
US$5,000 corresponding to sales services.
F-32
Under the terms of this agreement, the Todito web site has the right to transmit
announcements and advertising messages relating to the Todito Internet web page
on the Azteca 13 and 7 networks, as well as on the satellite signal sent to
other countries by the Company, during advertising spots that do not exceed an
aggregate of 78,000 GRPs.
Todito is required to use the GRPs over a five year period and the Company must
provide a minimum of 14,000 GRPs per year. For the years ended December 31,
2000, 2001 and 2002, the income from advertising services provided under this
agreement amounted to Ps95,530, Ps69,654 and Ps68,409, respectively.
Todito also has the right to display on its web site news programs, telenovelas,
sporting events, and other programming material displayed by the Company on its
web sites ("tvazteca.com.mx" and "tvazteca.com").
The Company currently records the value of the content provided to Todito on a
straight line basis over the life of the agreement. For the years ended December
31, 2000, 2001 and 2002, the Company recognized income of Ps81,786, Ps114,778
and Ps115,240, respectively, relating to programming content provided to Todito.
Under the terms of the agreement, the Company cannot reassign the right to use
and exploit the content obtained from the Company through other web pages on the
internet to third parties.
The Company has also agreed to lend assistance, through its sales department, in
promoting to its clients and to advertising agencies the advertising services
that Todito will provide through its web site. For the years ended December 31,
2000, 2001 and 2002, the income from sales services provided under this
agreement amounted to Ps5,356, Ps8,242 and Ps12,053, respectively.
Interest income
During the years ended December 31, 2000, 2001 and 2002, the Company extended
short-term loans to certain related parties. Interest income under these
arrangements amounted to Ps50,551, Ps117,847 and Ps97,767, respectively.
Donations
In the years ended December 31, 2000, 2001 and 2002, the Company made donations
to a non-profit organization managed by a related party in the amounts of
Ps113,093, Ps102,880 and Ps108,118, respectively. The related party has
permission from tax authorities to collect donations and issue the corresponding
receipts.
Loans granted to stockholder
On December 21, 2001, three loans were granted to Mr. Ricardo Salinas Pliego for
an aggregate amount of US$3,067 with terms of one year. The loans granted in
2000 and in 2001 bore interest at the rate of 12%. per year These loans were
repaid during 2002.
F-33
Building lease income
In May 1998, the Company signed a building lease agreement with Operadora
Unefon, a wholly-owned subsidiary of Unefon. The lease has a term of ten years,
starting June 1998, with a one-time right to renew for an additional ten years
upon notice of at least 180 days prior to expiration. The rent under the lease
is Ps2,072 a month, payable in advance each month. During the years ended
December 31, 2000, 2001 and 2002, the aggregate lease income received by the
Company amounted to Ps23,424, Ps25,400 and Ps25,536, respectively.
Recoverability of accounts receivable from related parties
The Company evaluates periodically, on an arm-length basis, the recoverability
of accounts receivable. When it is determined that such accounts are not
recoverable, they are charged to other expenses.
NOTE 9 - SHORT-TERM AND LONG-TERM BANK LOANS:
At December 31, 2001 and 2002, short-term loans for equipment financing amounted
to Ps528,455 and Ps389,997, respectively, representing unsecured loans in U.S.
dollars with Mexican and foreign banks, with an average annual interest rate of
9.12% and 7.41% at December 31, 2001 and 2002, respectively.
Long-term loans and senior notes at December 31, 2001 and 2002 are summarized as
follows:
At December 31,
------------------------------------
2001 2002
-------------- --------------
Building and equipment financing Ps 386,791 Ps 105,274
Loans from American Tower Corporation ("ATC") 1,159,452 1,244,820
Less-current portion (38,418) (47,179)
-------------- --------------
Long-term bank loans Ps 1,507,825 Ps 1,302,915
============== ==============
Guaranteed senior notes Ps 4,114,901 Ps 4,417,875
============== ==============
Total long-term bank loans and senior notes Ps 5,622,726 Ps 5,720,790
============== ==============
Guaranteed Senior Notes
On February 5, 1997, the Company issued unsecured Series A and Series B
Guaranteed Senior Notes (collectively, the "Notes") in the international markets
in an amount of US$125,000, payable in the year 2004, at an interest rate of
10.125% per year and of US$300,000, payable in the year 2007, bearing an
interest rate of 10.50% per year, respectively.
F-34
Interest on the Notes is payable semi-annually on February 15 and August 15 each
year, commencing on August 15, 1997. Substantially all of the Company's
subsidiaries have fully and unconditionally guaranteed the Notes on a joint and
several basis. The guarantor subsidiaries are all wholly-owned subsidiaries of
the Company. The direct and indirect non-guarantor subsidiaries of the Company
are individually and in the aggregate inconsequential. The parent company is a
non-operating holding company with no assets, liabilities or operations other
than its investments in its subsidiaries.
Building and equipment financing
In 1995, the Company borrowed US$28,000 to finance the acquisition of equipment,
of which approximately US$24,000 was guaranteed by the Export-Import Bank of the
United States of America ("Exim Bank") on January 31, 1996. The Exim Bank
guaranteed funds were comprised of two separate loans for approximately
US$21,500 at an annual interest rate of LIBOR plus 2.25% and approximately
US$2,700 at an annual interest rate of LIBOR plus 4.25% (6.17% and 4.19% during
2002). Both Exim Bank-guaranteed loans were payable in 14 semi-annual payments
beginning in June 1996. At December 31, 2001 the Company had made payments
totaling to US$18,400 and US$2,300, respectively. During 2002, the outstanding
balance of both loans was repaid.
On September 18, 1997, the Company obtained a mortgage loan for the acquisition
of an office building amounting to US$25,854 from Banco Bilbao Vizcaya, S. A.
("BBV"). The Company is required to pay BBV annual interest of 8.5%, payable on
December 31 of each year beginning on December 31, 1997. Payment of the
principal matures on November 30, 2003.
In March 1999, the Company entered into a US$30,200 long-term import credit
facility with Standard Chartered Bank, as lender, and the Exim Bank, as
guarantor. Under this credit facility, TV Azteca was permitted to borrow until
May 2002 all or a portion of the US$30,200 by delivering promissory notes. The
import credit facility was established to finance the Company's purchase of
equipment manufactured in the U.S. In October 1999 and March 2000, the Company
issued two promissory notes, one in the amount of US$12,200 due in October 2004,
which accrues interest at a rate of 7.6% per year, and one in the amount of
US$10,500 due in March 2005, which accrues interest at a rate of 8.45% per year.
At December 31, 2001 and 2002, the aggregate outstanding amounts due under the
outstanding promissory notes were US$14,095 and US$10,128, respectively.
Loans from ATC
On February 11, 2000, the Company entered into a long-term credit facility for
up to US$119,800 with a Mexican subsidiary of ATC (the "ATC Long-Term
Facility"). The ATC Long-Term Facility is comprised of a US$91,800 unsecured
term loan and a US$28,000 working capital loan secured by certain of the
Company's real estate properties. The interest rate on each of the loans is
12.877%. The Company's payment obligations under the ATC Long-Term Facility are
guaranteed by three principal subsidiaries of the Company that also guarantee
the Company's payment obligations under the Guaranteed Senior Notes. The initial
term of the
F-35
unsecured term loan under the ATC Long-Term Facility is 20 years, which term may
be extended, so long as the Global Tower Project Agreement remains outstanding,
for up to an additional 50 years. The term of the working capital loan matures
in February 2004, but may be renewed annually for successive one-year periods so
long as the Global Tower Project Agreement remains outstanding.
On February 11, 2000, the Company drew down US$71,800 of the unsecured term loan
and the full US$28,000 under the working capital loan, and in June 2000, the
Company drew down the remainder of the unsecured term loan. A portion of the
proceeds under the ATC Long-Term Facility was used to repay the ATC Interim
Facility in its entirety. The balance of the proceeds from the ATC Long-Term
Facility was used for general corporate purposes of the Company and its
subsidiaries. At December 31, 2001 and 2002, US$119,800 was outstanding under
the ATC Long-Term Facility.
In February 2000, the Company, together with its subsidiary Television Azteca,
S. A. de C. V., entered into a 70-year Global Tower Project Agreement with a
Mexican subsidiary of ATC regarding space not used by the Company in its
operations on up to 190 of the Company's broadcast transmission towers. In
consideration for the payment of a US$1,500 annual fee and for a loan of up to
US$119,800 provided to the Company under the ATC Long-Term Facility, the Company
granted ATC the right to market and lease the Company's unused tower space to
third parties as well as to the Company's affiliates and to collect for ATC's
account all revenue related thereto. The Company retains full title to the
towers and remains responsible for the operation and maintenance thereof. The
SCT approved the parties' agreement on February 10, 2000. After the expiration
of the initial 20-year term of the ATC Long-Term Facility, the Company has the
right to purchase from ATC at fair market value all or any portion of the
revenues and assets related to the commercialization rights at any time upon the
proportional repayment of the outstanding principal amount under the ATC
Long-Term Facility.
Euro-Commercial Paper Program
On May 14, 1999, the Company entered into a US$75,000 Euro-Commercial Paper
Program (the "ECP Program") with ABN-AMRO Bank, N.V., as the principal arranger
and dealer. The size of the ECP Program was increased to US$130,000 in July
1999. Notes issued under the ECP Program are issued at a discount. The Company's
payment obligations under the ECP Program are guaranteed by the principal
subsidiaries of the Company that also guarantee the Company's payment
obligations under the guaranteed senior notes. The maturity of the notes issued
under the ECP Program may not be more than 365 days. At December 31, 2001, the
aggregate principal amount of the notes outstanding under the ECP Program was
US$20,063, which was paid in a series of installments ending in January 2002. At
December 31, 2002, the amount of the notes outstanding under the ECP Program was
US$5,094, which is payable in a series of installments ending in June 2003.
F-36
Commercial paper with Scotia Inverlat, S. A. ("Scotia")
On December 13, 2001, the Company issued two Ps158,550 commercial paper
promissory notes to Scotia expiring on June 13, 2002 and December 6, 2002. These
promissory notes, issued under the commercial paper program, were issued at a
discount bearing interest rates of 12.20% and 12.40%, respectively. At December
31, 2001, the Company has utilized the entire commercial paper, which amounted
to Ps287,770, net of the respective discount. The commercial paper promissory
notes were repaid in 2002.
Maturity of long-term bank loans and senior notes is as follows:
Year ending at December 31, Amount
--------------------------- ---------------
2004 Ps 1,346,555
2005 10,915
2007 3,118,500
2008 and thereafter 1,244,820
---------------
Total long-term bank loans
and senior notes Ps 5,720,790
===============
NOTE 10 - LABOR OBLIGATIONS:
Below is a summary of the main financial data of the Company's seniority premium
plan:
At December 31,
--------------------------
2001 2002
---------- ----------
Accumulated benefit obligation (same as accumulated liabilities) Ps 3,391 Ps 3,407
Net projected liability 2,665 2,669
---------- ----------
Intangible asset Ps 726 Ps 738
========== ==========
Net cost for the year Ps 643 Ps 1,612
========== ==========
NOTE 11 - STOCKHOLDERS' EQUITY:
a. Capital stock
The capital stock of the Company was comprised of Series "A" shares, Series
"D-A" shares and Series "D-L" shares. Holders of Series "A" shares are entitled
to vote at general meetings of stockholders of the Company. Holders of the
Series "D-A" shares and Series "D-L" shares are entitled to vote only in limited
circumstances. Holders of Series "D-A" shares and Series "D-L" shares are
entitled to a dividend premium and liquidation preference. The rights of holders
of all
F-37
series of capital stock are otherwise identical except for limitations on
ownership of Series "A" shares and Series "D-A" shares by persons other than
eligible Mexican holders. The Series "A" shares are not exchangeable for shares
of any class or equity securities of the Company. The Series "D-A" shares will
be converted for Series "A" shares upon the tenth anniversary of the creation of
the CPO Trust and shall have the same characteristics as the currently
outstanding Series "A" shares of the Company. The Series "D-L" shares will be
converted into Series "L" shares upon the tenth anniversary of their original
issuance. The Series "L" shares that shall be exchanged for Series "D-L" shares
shall entitle its holders to vote only in limited circumstances.
The issued and outstanding capital stock of the Company as of January 1, 2000
consisted of 10,815,834 thousand shares of which 5,408,078 thousand were Series
"A" shares, 2,703,878 thousand were Series "D-A" shares and 2,703,878 thousand
were Series "D-L" shares. The number of authorized shares at January 1, 2000
consisted of 8,930,573 thousand shares of which 4,623,419 thousand were Series
"A" shares, 2,153,577 thousand were Series "D-A" shares and 2,153,577 thousand
were Series "D-L" shares.
As part of the Company's employee stock option plan, during 2000, 2001 and 2002,
the employees exercised their right to buy shares through said plan. As a
result, the Company issued 30,497 thousand shares, 31,215 thousand shares and
46,020 thousand shares, respectively, with a nominal value of Ps5,799, Ps5,542
and Ps7,759, respectively, which resulted in a premium on the issuance of shares
of Ps21,417, Ps75,829 and Ps16,122, respectively.
During 2000, 2001 and 2002, the Company decreased its capital stock by Ps20,066,
Ps6,717 and Ps18,883, respectively, through the repurchase of 107,370 thousand
shares, 38,674 thousand shares and 111,349 thousand shares for Ps316,094,
Ps43,172 and Ps169,879, respectively. In these years, the nominal value of the
repurchased shares was charged to the capital stock and the difference to the
reserve for the repurchase of shares.
During 2001 and 2002, the Company increased its capital stock by Ps19,066 and
Ps14,066, respectively, for the sale of treasury shares of 107,804 thousand
shares and 82,749 thousand shares, respectively. During 2001 and 2002, these
shares had a replacement value of Ps162,439 and Ps136,523, respectively, which
were credited to the capital stock at nominal value, and the difference was
applied to the reserve for the repurchase of shares.
In an ordinary stockholders' meeting held on April 27, 2000, the stockholders
agreed to pay a preferential dividend of Ps44,908 to the Series "D-A" and "D-L"
stockholders. The dividend was paid in September 2000.
In April 2000, the Company and NBC-TVA Holding, Inc., a subsidiary of National
Broadcasting Company ("NBC") ("NBC-TVA") entered into a subscription agreement
pursuant to which NBC-TVA agreed to purchase from the Company 2 million ADSs (96
million shares) for
F-38
Ps285,564. As a result of this purchase, the Company increased the fixed portion
of the capital stock by Ps18,217 plus Ps267,347 for a premium on share
subscription. This increase was made by issuing the following shares:
Type of shares Number
-------------- -------
Series "A" 32,000
Series "D-A" 32,000
Series "D-L" 32,000
In an ordinary stockholders' meeting held on April 26, 2001, the stockholders
agreed to pay a preferential dividend of Ps42,130 to the Series "D-A" and "D-L"
stockholders. The dividend was paid in October 2001.
At the ordinary stockholders' meeting held on April 25, 2002, the stockholders
agreed to apply the Company's income for 2001 amounting to Ps1,508,006 as
follows:
.. Set aside Ps75,400 for the legal reserve, in accordance with the Mexican
Corporations Law.
.. Set aside Ps39,966 for the payment of a preferential dividend to the Series
"D-A" and "D-L" stockholders, which was paid in October 2002.
.. Transfer the reminder of the account of retained earnings.
The authorized, issued and paid-in capital stock of the Company at December 31,
2002 is as follows:
Authorized Paid-in Nominal Restatement
Type of shares shares shares amount adjustment Total
-------------- ------------- ------------ --------------- --------------- ---------------
(thousands) (thousands)
Series "A" 5,408,078 4,669,049 Ps 764,802 Ps 748,690 Ps 1,513,492
Series "D-A" 2,703,878 2,199,208 360,235 253,084 613,319
Series "D-L" 2,703,878 2,199,208 360,235 253,084 613,319
------------- ------------ --------------- --------------- ---------------
10,815,834 9,067,465 Ps 1,485,272 Ps 1,254,858 Ps 2,740,130
============= ============ =============== =============== ===============
b. Retained earnings
1. Legal reserve - The net income for the year is subject to the legal provision
that requires that 5% of the profit of each year be applied to increase the
legal reserve, until the latter equals a fifth of paid-in capital stock.
F-39
2. Tax regime for dividends - Dividends paid are not subject to income tax,
provided they are paid out from the After Tax Earnings Account ("CUFIN"). The
excess is subject to 34% income tax on the amount arrived at from multiplying
the dividend paid by a factor of 1.5151 payable by the Company, which can be
offset against the Company's tax liability of the three immediately following
periods. Dividends paid are not subject to income tax withholding.
c. Employee stock option plan
In the fourth quarter of 1997, the Company adopted an employee stock option plan
pursuant to which options were granted to all current permanent employees who
were employed by the Company as of December 31, 1996. The exercise prices
assigned to these options from 1997 to 2002 range from US$0.29 to US$0.39 per
CPO with a more significant number of options being granted to the Company's
senior management and key actors, presenters and creative personnel.
The options, which relate to an aggregate of 76 million CPOs, were granted in
equal portions in respect of each employee's first five years of employment with
the Company (whether prior to or after adoption of the plans), but these options
may be cancelled, in the case employment years after 1996, if the Company's
operating profit before deducting depreciation and amortization expenses in that
year has not increased by at least 15% as compared to the previous fiscal year.
An employee's options in respect of any employment year become exercisable five
years later, unless the employee is no longer employed by the Company, in which
case those options will be reassigned.
The options expire on the fifth anniversary of the date on which they become
exercisable.
During each of 2000 and 2001, options with respect to 10 million CPOs and during
2002 options with respect to 15 million CPOs were exercised, respectively, under
the general option plan, at a price of US$0.29, US$0.29 and US$0.29 per CPO,
respectively.
The activity of employee stock option plans was as follows:
At December 31,
-------------------
Options 2001 2002
------- ----- -----
(Millions of CPOs)
Granted (cumulative) 116 116
Exercised (cumulative) (71) (86)
----- -----
Outstanding 45 30
===== =====
Available to grant 124 124
===== =====
Total authorized 240 240
===== =====
F-40
d. NBC warrants
In May 1994, the Company and Radiotelevisora del Centro, S. A. entered into an
agreement with NBC, in which the companies agreed to pay NBC, for the license of
specific programs and advisory and other services, a total of US$7,000 over a
three-year period ended June 30, 1997.
As additional consideration for the advisory and other services related to NBC's
association, the Company provided NBC with the right to purchase Series "N-6"
shares (non-voting) of the Company equal to up to 10% of all then fully diluted
outstanding shares of the Company post-exercise (the "Warrants"). The total
Warrant exercise price was US$120,000 before June 30, 1994, and accreted at
2.75% compounded quarterly thereafter until it reached US$160,000 at expiration
of the Warrants. The Warrants were to be exercised, in whole or in part, from
time to time until May 6, 1997. To the extent not exercised during that period,
NBC had the right, during the sixty-day period after the expiration of the
option period, to require the Company to purchase any unexercised portion of the
Warrants for up to US$25,000 and had the right to collect the Warrant put price
at any time during the option period if it was determined that the Warrants
could not, as a legal matter, be exercised.
On April 3, 1997 NBC notified the Company that it would exercise its rights
under the Warrants to purchase Series "N-6" shares of the Company, equivalent to
1% of its total right to purchase 10% of all the fully diluted outstanding
shares of the Company for an amount of US$16,000 which was required to be paid
on May 5, 1997. Subsequently, NBC advised the Company that the Company was
required to purchase the unexercised portion of the warrant for US$22,500 and
owed an additional US$5,552, the balance of the US$7,000 owed by the Company for
unpaid programming as of May 6, 1997, plus accrued interest.
The agreement with NBC also provided that the Company was required to issue to
NBC Series "N-6" shares in an amount equal to 1.5% of all the then fully diluted
outstanding capital stock of the Company upon the first to occur of various
events relating to the achievement of specific market share and capitalization
levels through May 6, 2002.
On April 29, 1997, the Company filed a request for arbitration with the
International Chamber of Commerce ("ICC") in Paris pursuant to the arbitration
clauses in its agreements with NBC and NBC Europe. In its request, the Company
sought the rescission of all of its agreements with NBC, including the
cancellation of its outstanding programming purchase obligations, the
cancellation of the warrants granted to NBC Europe, NBC's right to require the
Company to repurchase the unexercised portion of the warrants, and the return of
all amounts previously paid to NBC, on the grounds that NBC did not fulfill its
obligations under its agreements with the Company.
On July 29, 1997, NBC and NBC Europe filed an amended answer and counterclaim to
the Company's request for arbitration. NBC's principal new claim was that,
notwithstanding the expiration of NBC Europe's warrant, NBC Europe should be
given the right to exercise the entire unexercised portion of the warrant
(representing the right to purchase 9% of the fully-diluted outstanding capital
stock of the Company as of May 6, 1997) or, at NBC Europe's election, to recover
lost profits based on the difference between the fair market value and the
aggregate exercise price in respect of the unexercised portion of NBC Europe's
warrant. NBC
F-41
based this claim on the allegation that the Company misled NBC in order to
dissuade NBC Europe from exercising its warrant in full. NBC also claimed that
NBC Europe has been deprived of the value of an additional equity bonus of 0.5%
of the fully-diluted outstanding capital stock of the Company to which NBC
Europe would have been entitled had it exercised its warrants for more than 5%
of the Company's outstanding stock, rather than for only 1%.
In February 2000, the Company and NBC commenced discussions regarding the
possible settlement of all claims raised in the ICC arbitration proceeding.
Based on the progress of those discussions, on March 21, 2000, the Company and
NBC jointly notified the ICC tribunal that settlement discussions were taking
place and requested that the ICC tribunal withhold any decision in the matter
for a period of 30 days, unless the ICC tribunal was informed by either party
within that 30-day period that settlement discussions had been abandoned. This
30-day period was extended through April 28, 2000.
On April 28, 2000, the Company and NBC entered into a binding settlement
agreement. Pursuant to the settlement agreement, the arbitration proceeding
before the ICC tribunal was terminated and all claims by the Company against NBC
and NBC Europe, and all claims by NBC and NBC Europe against the Company, have
been fully released and discharged. Under the terms of the settlement agreement,
the Company paid NBC the sum of US$46,170 (Ps510,732) in cash. This settlement
was recorded as an extraordinary item net of income tax.
NOTE 12 - TAX MATTERS:
During 2000, the Company commenced consolidating for tax purposes.
During the years ended December 31, 2000, 2001 and 2002, the Company and various
subsidiaries had taxable income, which was partially offset against tax loss
carryforwards. The benefit of the utilization of these tax loss carryforwards
amounted to Ps68,997, Ps414,082 and Ps359,781 during the years ended December
31, 2000, 2001 and 2002, respectively.
F-42
An analysis of the principal differences between the income tax computed at the
statutory rate and the Company's income tax provision for the years ended
December 31, 2000, 2001 and 2002 is shown as follows:
Year ended December 31,
---------------------------------------------------
2000 2001 2002
------------ --------------- ---------------
Income before provision for income tax and
extraordinary item Ps 698,726 Ps 1,517,143 Ps 1,273,968
============ =============== ===============
Income tax expense at statutory rate Ps 244,554 Ps 531,000 Ps 445,889
Effects of B-10 and inflationary components 114,517 40,015 84,622
Amortization of TV concessions and goodwill (98,632) (108,005) (148,447)
Advertising advances 61,015 303,788 195,178
Estimated cost point rating revenues (38,443) (86,244) (72,237)
Non-deductible stock dividends 22,946
Exhibition rights 88,051 (53,033) (64,194)
Depreciation 28,557 46,223 7,994
Benefit on tax consolidation (106,634)
Other (62,455) (49,728) 175,134
Utilization of tax loss carryforwards (68,997) (414,082) (359,781)
------------ --------------- ---------------
Income tax expense - Net Ps 184,479 Ps 209,934 Ps 264,158
============ =============== ===============
As a result of the amendments to the Income Tax Law approved on January 1, 2002,
the income tax rate (35% in 2002) will be reduced by 1% annually beginning in
2003 until it reaches a nominal rate of 32% in 2005. This gradual decrease in
the income tax will be taken into the deferred income tax of each year.
The principal temporary items that gave rise to the recording of deferred tax
(assets) liabilities are summarized as follows:
At December 31,
---------------------------------------
2001 2002
---------------- ---------------
Allowance for bad debts Ps (83,403) Ps (89,854)
Exhibition rights and inventories 1,051,138 1,267,703
Property, machinery and equipment - Net 361,044 352,079
Television concessions 1,000,928 1,490,324
Payment to Corporacion de Noticias e Informacion,
S. A. de C. V. 200,773 200,773
Cost related to the issuance of guaranteed senior notes 98,189 78,895
Advertising advances (576,218) (1,090,081)
Tax loss carryforwards (2,574,032) (1,842,669)
Other (328,919) (292,070)
---------------- ---------------
Tax base before valuation reserve (850,500) 75,100
Applicable income tax rate 35% 34%
---------------- ---------------
(297,675) 25,534
Valuation reserve for tax loss carryforwards 497,805
Deferred income tax asset recorded from the purchase
of subsidiary (200,130)
---------------- ---------------
Deferred income tax payable Ps - Ps 25,534
================ ===============
F-43
At December 31, 2001 and 2002, deferred income tax payable was analyzed as
follows:
At December 31,
---------------------------------------
2001 2002
---------------- ---------------
Deferred income tax payable at beginning of year Ps 416,593 Ps -
Less:
Deferred income tax asset recorded from the
purchase of subsidiary (200,130)
Deferred income tax (benefit) expense for the year (198,905) 25,534
Monetary gain related to deferred income tax
liabilities for the year (17,558)
---------------- ---------------
Deferred income tax payable at end of year Ps - Ps 25,534
================ ===============
At December 31, 2001, the Company incorporated a new wholly-owned subsidiary
with tax loss carryforwards. Cumulative tax losses of the Company at December
31, 2002, and their expiration dates are as follows:
Expiration Tax
date losses
---------- --------------
2005 Ps 405,252
2006 147,101
2007 228,148
2008 735,649
2009 40,361
2010 139,963
2011 16,920
2012 129,275
--------------
Ps 1,842,669
==============
Tax loss carryforwards can be restated by applying factors derived from NCPI
from the year in which they arise to the first-half of the year in which they
are amortized.
NOTE 13 - COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases the use of satellite transponders. Total rent expense under
such leases included in operating costs and expenses was Ps25,382, Ps26,288 and
Ps41,236 during the years ended December 31, 2000, 2001 and 2002, respectively.
Combined rental obligations under these agreements are US$200 per month. Each
lease agreement expires in May 2005 but can be terminated by the supplier any
time for justified cause upon 30 days' notice.
F-44
Other
The Company and its subsidiaries are parties to various legal actions and other
claims in the ordinary course of their business. Management does not believe
that any pending litigation against the Company will, individually or in the
aggregate, have a material adverse effect on its results of operations or
financial condition.
NOTE 14 - OTHER (EXPENSES) INCOME:
Below is a summary of the main items of other (expenses) income:
Year ended December 31,
-----------------------------------------------------
2000 2001 2002
-------------- ------------ ---------------
Equity in loss of affiliates Ps (107,088) Ps (67,894) Ps (111,160)
Donations (See Note 8) (113,093) (102,880) (108,118)
Miscellaneous expenses non-deductible for
tax purposes (29,886) (6,527) (17,754)
Legal advisory services (litigation expenses) (69,137) (79,747) (31,998)
Amortization of installation charges (19,513)
Write-off of other accounts receivable (45,788)
Write-off of investments (32,152)
Others (57,013) 13,197 (75,105)
-------------- ------------- ---------------
Ps (376,217) Ps (243,851) Ps (441,588)
============== ============= ================
NOTE 15 - NEW ACCOUNTING PRONOUNCEMENTS:
The MIPA issued Statement C-9, "Liabilities, Provisions, Assets and Contingent
Liabilities and Commitments" ("Statement C-9"), which went into effect of
January 1, 2003. Statement C-9 establishes specific rules for valuation,
presentation and disclosure of liabilities and provisions, as well as for
valuation and disclosure of assets and contingent liabilities, and for
disclosure of commitments contracted. The Company does not expect the adoption
of this statement will have a material impact on its consolidated financial
statements.
The MIPA issued Statement C-15, "Impairment of Long-Lived Assets and Their
Disposal" ("Statement C-15"), which will be effective as of January 1, 2004,
although early adoption is recommended. Statement C-15 provides specific
criteria in determining when there is an impairment in the value of long-lived
assets, for both tangible and intangible assets. Furthermore, Statement C-15
established a methodology for calculating and recording losses arising from the
impairment of assets and their reversal. Also, Statement C-15 provides
presentation and disclosure requirements for assets whose value has been
impaired and the disclosure in the case that there is subsequent reversal of the
impairment. In addition, Statement C-15 provided guidance for the accounting,
presentation and disclosure for discontinued operations. The Company is
currently evaluating the impact that adoption of this statement will have on its
consolidated financial statements.
F-45
NOTE 16 - SUBSEQUENT EVENTS:
Dispute between Unefon and Nortel
In January 2003, Nortel petitioned for the bankruptcy of Unefon before a Mexican
court. In response, Unefon filed an action for relief (amparo) before a federal
district court challenging Nortel's request. In April 2003, a Mexican federal
district court ruled against Unefon with regard to its action for relief.
However, in May 2003, Unefon appealed the Mexican court's decision. Unefon
believes that Nortel's bankruptcy petition is insufficient under Mexican law and
that it will therefore prevail in this proceeding. Note that the suspension
granted by the federal district Court is and will be effective until this
dispute is fully resolved. Upon the filing of Unefon's initial action for
relief, the federal district court suspended Nortel's bankruptcy claim pending
its analysis of the sufficiency of Nortel's petition, which suspension is still
in effect.
Stockholder meeting
In an ordinary stockholders' meeting held on April 30, 2003, the Company's
stockholders approved the following:
a. Application of the Company's income for 2002, which amounted to Ps984,511, as
follows:
. Setting aside 5% of the income for 2002 in order to increase the Company's
legal reserve, as required by the Mexican Corporations Law.
. Setting aside Ps36,023 for the payment of a preferential dividend to the
Series "D-A" and "D-L" stockholders.
. Transferring the remainder of the Company's income to the account of
accumulated earnings.
b. Decreasing the variable portion of the capital stock by approximately
US$140,000 through a pro rata distribution of the capital. Of this amount,
US$125,000 will be paid on June 30, 2003 and the remaining US$15,000 will be
paid on December 5, 2003.
c. Increasing the reserve for the repurchase of the Company's shares by
Ps230,000, which reserve is limited to a maximum amount of Ps1,100,000.
F-46
NOTE 17 - RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN
MEXICO (MEXICAN GAAP) AND UNITED STATES OF AMERICA (US GAAP):
The Company's consolidated financial statements are prepared in accordance with
Mexican GAAP, which differ in certain significant respects from US GAAP. The
Mexican GAAP consolidated financial statements include the effects of inflation
as provided for under Statement B-10, "Recognition of the Effects of Inflation
on Financial Information" issued by the MIPA. The application of this statement
represents a comprehensive measure of the effects of price level changes in the
Mexican economy, and is considered to result in a more meaningful presentation
for both Mexican and U.S. accounting purposes. Therefore, the following
reconciliation to US GAAP does not include the reversal of such inflationary
effects.
The principal differences between Mexican GAAP and US GAAP are summarized in the
following pages with an explanation, where appropriate, of the effects on
consolidated results of operations and stockholders' equity. The various
reconciling items are presented net of any price level gain (loss).
a. Reconciliation of consolidated results of operations:
Year ended December 31,
--------------------------------------------
Sub note
reference 2000 2001 2002
--------- ---------- ------------- ----------
Majority net income under Mexican GAAP Ps 388,883 Ps 1,508,006 Ps 984,511
Amortization of goodwill i (197,395) (197,395) 2,499
NBC warrant ii 10,841
NBC settlement agreement ii 299,884
Unefon advertising iii 416,093 385,657 (99,588)
Equity in loss of Unefon iv (235,172) (546,546) (358,418)
Reversal of capitalized consent fee for Unefon rights
and other expenses v (115,223) (6,037)
Todito advertising, programming and services agreement vi (175,146) (192,674) (197,492)
Equity in earnings of Todito vi 63,947 91,594 91,852
Amortization of Todito goodwill vi 22,643 27,260 27,260
Amortization of goodwill from Azteca Digital
acquisition vii 7,904 7,904 7,904
Effect of fifth amendment to B-10 viii (273,441) (192,386) (67,160)
Compensation expense from stock options ix (113,964) (35,296) (61,733)
Compensation expense for Unefon stock option plan x (54,413) (3,352)
Deferred income tax xi (208,384) 4,593 261,106
Reversal of capitalized internally produced
programming xiii (226,375) (26,202)
Financial instrument indexed to the Company's own
stock xxii (34,097)
---------- ------------- ----------
Net income under US GAAP Ps 6,693 Ps 464,706 Ps 521,053
========== ============= ==========
Basic and diluted (loss) income per share xx Ps (0.004) Ps 0.047 Ps 0.053
========== ============= ==========
Basic weighted average number of common shares
outstanding (in thousands) 8,966,752 9,025,274 9,057,444
========== ============= ==========
F-47
b. Reconciliation of stockholders' equity:
Year ended December 31,
----------------------------------------------
Sub note
reference 2000 2001 2002
--------- ------------ ------------- ------------
Balance under Mexican GAAP Ps 4,379,942 Ps 5,769,266 Ps 6,583,687
Goodwill i 888,277 690,882 693,381
NBC warrant ii (299,884)
NBC settlement agreement ii 299,884
Unefon advertising iii 416,093 801,750 702,162
Unefon investment iv 192,306 (353,268) (598,789)
Todito advertising, programming and services agreement vi (175,146) (367,820) (565,312)
Amortization of Todito goodwill vi 22,643 49,903 77,163
Equity in earnings of Todito vi 63,947 155,541 247,393
Stockholders' equity of Azteca Digital reflecting
effect of combination of companies under common
control vii (134,383) (126,479) (118,575)
Effect of fifth amendment to B-10 viii 308,323 316,834 97,261
Deferred income taxes xi (340,297) (335,704) (74,598)
Reversal of capitalized internally produced
programming xiii (226,375) (252,577)
Financial instrument indexed to the Company's own
stock xxii 139,276
------------ ------------- ------------
Balance under US GAAP Ps 5,621,705 Ps 6,374,530 Ps 6,930,472
============ ============= ============
c. An analysis of the changes in stockholders' equity under US GAAP is as
follows:
Year ended December 31,
----------------------------------------------
Sub note
reference 2000 2001 2002
--------- ------------ ------------- ------------
Balance at beginning of the year Ps 5,198,570 Ps 5,621,705 Ps 6,374,530
Net income 6,693 464,706 521,053
Preferred dividend (44,908) (42,130) (39,966)
Paid-in capital for Unefon stock option plan iv 39,902 (35,168)
Exercise of stock options 27,216 81,371 23,881
Repurchase of shares (316,094) (43,172) (169,879)
Sale of treasury shares 162,439 136,523
Issuance of common stock 18,217
Premium on issuance of capital 267,347
Effect relating to capital stock increase
of Unefon, net of the loss from dilution iv 350,700
Effects of fifth amendment to B-10 vii 241,278 277,190 52,724
Loss from holding non-monetary assets viii (241,278) (277,190) (52,724)
Compensation expense from stock options ix 113,964 35,296 61,733
Compensation expense for Unefon stock option plan x 54,413 57,765
------------ ------------- ------------
Balance at end of year Ps 5,621,705 Ps 6,374,530 Ps 6,930,472
============ ============= ============
F-48
d. Significant differences between US GAAP and Mexican GAAP:
i. Goodwill
At the effective date of the privatization in 1993 in connection with
which the Company was formed, additional goodwill of Ps2,368,737 was
recorded due to the deferred net income tax liability, relating
primarily to the non-deductibility of the television concessions,
required under US GAAP. Until December 31, 2001, the additional
goodwill was being amortized over 12 years.
For Mexican GAAP purposes, goodwill is being amortized under the
straight-line method over a period of 20 years. For US GAAP purposes,
until December 31, 2001, goodwill was being amortized over its
estimated useful life, not to exceed twenty years. Effective January 1,
2002, the Company adopted SFAS 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), where upon the Company no longer amortizes
goodwill and other intangible assets with an indefinite life, such as
television concessions. SFAS 142 requires the Company to test for
goodwill and indefinite live intangibles annually, or more frequently
if circumstances indicate a possible impairment exists.
The Company performed goodwill impairment tests at the reporting unit
level. The fair value of each reporting unit exceeded its carrying
amount and goodwill related to each reporting unit is considered not
impaired. The Company's impairment tests for the television concessions
compared the carrying amounts of those assets to their fair values. The
fair values of the television concessions exceeded their carrying
amounts.
The following table adjusts previously reported net income to exclude
amortization expense recognized from goodwill and television
concessions as if SFAS 142 had taken effect in 2000:
Year ended December 31,
----------------------------------
2000 2001
------------ -------------
Reported net income Ps 6,693 Ps 464,706
Goodwill amortization 201,636 203,564
Television concessions 119,292 121,122
------------ -------------
Adjusted net income Ps 327,621 Ps 789,392
============ =============
Basic and diluted earnings per share:
Reported net (loss) income Ps (0.004) Ps 0.047
Goodwill amortization 0.022 0.022
Television concessions 0.013 0.013
------------- -------------
Adjusted net income Ps 0.031 Ps 0.082
============ =============
Under US GAAP, the Company reversed Ps2,499 of goodwill amortization
recognized under Mexican GAAP.
F-49
ii. Mandatory redeemable securities
NBC warrant and bonus right
Under US GAAP, the NBC warrant, discussed in Note 11d., would be
considered a mandatory redeemable security and would have been
initially recorded as temporary equity at its estimated fair value, at
the date of the initial agreement, of Ps242,601, based on the present
value of US$25 million payment that the Company would be required to
pay NBC in the event NBC elected not to exercise the warrant, with a
corresponding amount established as deferred operating costs
representing the value of the technical advisory services to be
provided by NBC at the date of the agreement. Under US GAAP, the
Company would have amortized the deferred operating costs over the
agreement period. However, at December 31, 1995, the Company wrote-off
the unamortized deferred operating costs associated with the agreement,
based on management's opinion that there were no future benefits to be
derived under the terms of the agreement.
Due to the nature of the Company's obligations with respect to the
warrant, the related temporary equity would be considered a monetary
liability under US GAAP. The foreign exchange losses, the accretion of
the warrant obligation and monetary gains related to the warrant would
be reflected in results of operations.
The following table summarizes the accumulated deferred costs,
accretion, exchange loss and gain on monetary position related to the
NBC warrant:
At December 31, 2000
--------------------
Deferred operating costs Ps (242,601)
Accretion (116,010)
Exchange loss (365,089)
Gain on monetary position 423,816
--------------------
Accumulated at end of year Ps (299,884)
====================
The terms of the warrant agreement with NBC as discussed in Note 11d.
required the Company to issue 1% of its outstanding shares to NBC upon
attainment of the performance goals consisting of specified market
share levels or the market capitalization of the Company of at least
US$1,400 if a public offering of the Company's stock occurred prior to
1998 and US$1,800 if a public offering occurred after 1998. As a result
of the initial public offering, the Company achieved a market
capitalization in excess of US$2,000.
As part of the arbitration proceedings with NBC, the Company requested
the rescission of all its agreements with NBC including cancellation of
warrants granted to NBC Europe and NBC's rights to require the Company
to repurchase the unexercised portion of the warrants on the grounds
that NBC did not fulfill its obligations under its agreements with the
Company.
F-50
Temporary equity
An analysis of the changes in the temporary equity under US GAAP is as
follows:
Year ended December 31, 2000
----------------------------
Balance at beginning of year Ps 310,725
Foreign exchange loss, net of
monetary gain of NBC warrant (10,841)
NBC settlement agreement (299,884)
----------------------------
Balance at end of year Ps -
============================
As a result of the settlement reached with NBC in April 2000, as
described in Note 11d., the Company paid NBC US$46,170 (Ps510,732) in
cash as settlement for claims relating to the NBC warrants and bonus
right.
Under Mexican GAAP, the settlement paid to NBC was charged against
results of operations as an extraordinary item. The excess over the
amount recorded as temporary equity (Ps210,848) would be charged
against results of operations during the year ended December 31, 2000.
Under US GAAP, however, the net charge would not be reflected as an
extraordinary item.
iii. Unefon advertising advance
The Company recorded the advertising contract signed with Unefon (see
Note 8) in a manner similar to other advertising contracts that the
Company has entered into with related and third parties. See Note 2q.
The Unefon advertising contract is a long-term contract which
originated a long-term account receivable and an advertising advance
for the same amount at inception. At December 31, 2001 and 2002, the
long-term unbilled accounts receivable from Unefon was Ps2,258,381 and
Ps2,167,340, respectively. For US GAAP purposes, this long-term
contract represents an obligation to provide services in the future
that would not be recorded on the balance sheet, and consequently, both
the receivable (except for amounts relating to services provided) and
the advertising advance would not be recorded under US GAAP. Under
Mexican inflation accounting rules, the accounts receivable are US
dollar denominated items that expose the Company to exchange gains and
losses as well as to monetary losses. The advertising advances related
to the Unefon advertising contract are considered non-monetary items
under Mexican GAAP and are restated for the effects of inflation.
F-51
Revenues recognized under Mexican GAAP are based on the indexed value
of the advances recorded as the GRPs are consumed based on a rate
schedule established in the contract. For US GAAP purposes, revenues
would be recognized based on the average cost per GRPs as the GRPs are
consumed.
The following tables illustrate the differences between Mexican and US
GAAP in the method of accounting for the advertising contract with
Unefon:
Year ended December 31, 2000
-----------------------------------------------------
Mexican US
GAAP GAAP Difference
---------------- --------------- --------------
Long term receivable from Unefon Ps 2,123,149 Ps 226,321 Ps (1,896,828)
Unefon advertising advance (2,312,921) 2,312,921
---------------- --------------- --------------
Net (liabilities) assets Ps (189,772) Ps 226,321 Ps 416,093
================ =============== ==============
Revenues Ps 9,521 Ps 237,576 Ps 228,055
Exchange (loss) gain (12,725) (2,117) 10,608
Monetary (loss) gain (186,568) (9,138) 177,430
---------------- --------------- --------------
Total Ps (189,772) Ps 226,321 Ps 416,093
================ =============== ==============
Year ended December 31, 2001
-----------------------------------------------------
Mexican US
GAAP GAAP Difference
---------------- --------------- --------------
Long term receivable from Unefon Ps 1,931,139 Ps 474,508 Ps (1,456,631)
Unefon advertising advance (2,258,381) 2,258,381
---------------- --------------- --------------
Net (liabilities) assets Ps (327,242) Ps 474,508 Ps 801,750
================ =============== ==============
Cumulative:
Revenues Ps 75,844 Ps 528,926 Ps 453,082
Exchange (loss) gain (121,555) (29,869) 91,686
Monetary (loss) gain (281,531) (24,549) 256,982
---------------- --------------- --------------
Total Ps (327,242) Ps 474,508 Ps 801,750
================ =============== ==============
F-52
Year ended December 31, 2002
-----------------------------------------------------
Mexican US
GAAP GAAP Difference
---------------- --------------- --------------
Long term receivable from Unefon Ps 2,076,000 Ps 610,822 Ps (1,465,178)
Unefon advertising advance (2,167,340) 2,167,340
---------------- --------------- --------------
Net (liabilities) assets Ps (91,340) Ps 610,822 Ps 702,162
================ =============== ==============
Cumulative:
Revenues Ps 167,542 Ps 626,800 Ps 459,258
Exchange gain (loss) 132,841 39,427 (93,414)
Monetary (loss) gain (391,723) (55,405) 336,318
---------------- --------------- --------------
Total Ps (91,340) Ps 610,822 Ps 702,162
================ =============== ==============
iv. Unefon investment
The Company acquired a 50% interest in Unefon on October 28, 1999.
Unefon commenced operations in February 2000. The Company's share of
the stockholders' equity of Unefon at the date of acquisition under US
GAAP was Ps105,991 greater than the amount recorded under Mexican GAAP
due to the capitalized monetary gain net of the pre-operating expenses.
This excess would result in an increase in the Company's stockholders'
equity under US GAAP since this was an acquisition of an entity under
common control and the difference between the book value acquired and
the amount paid would be considered as an additional contribution from
the stockholder.
As a result of the Rights granted to the Company's stockholders in
October 2000, the Company stopped recognizing its participation in the
losses of Unefon. Under US GAAP, the Company would continue to
recognize its participation in the losses of Unefon until such Rights
are exercised.
The Company's share of Unefon's net loss for the years ended December
31, 2000, 2001 and 2002 under US GAAP were Ps329,630, Ps546,546 and
Ps358,418 compared to Ps94,458, zero and zero under Mexican GAAP,
respectively. The principal differences were due to pre-operating
expenses, advertising expenses, revenue recognition, recognition of the
participation in the losses mentioned in the preceding paragraph and
capitalized interest and monetary gain.
During 2000, Unefon completed an initial public offering. Net proceeds
received from the offering amounted to Ps991,900. As a result of the
offering, the Company's participation in Unefon decreased from 50% to
46.5%. The increase in Unefon's stockholders' equity would increase the
Company's investment in Unefon with a corresponding increase in
stockholders' equity under US GAAP of Ps350,700.
F-53
The following table illustrates the differences between Mexican and US
GAAP in the method of accounting for the Company's investment in
Unefon.
At December 31,
------------------------------------
2001 2002
---------------- --------------
Investment in Unefon under Mexican GAAP Ps 1,848,485 Ps 1,755,942
---------------- --------------
Equity in loss (789,446) (1,147,864)
Acquisition - excess basis 105,991 105,991
Reversal of capitalized consent fee for Unefon rights
and other expenses (115,223) (121,260)
Paid-in capital for Unefon stock option plan 39,902 57,245
Effect relating to capital stock increase of Unefon,
net of the loss from the dilution 350,700 350,700
Reversal of loss from holding non-monetary
assets for Unefon investment 54,808 156,399
---------------- --------------
(353,268) (598,789)
---------------- --------------
Investment in Unefon under US GAAP Ps 1,495,217 Ps 1,157,153
================ ==============
Summarized financial information at December 31, 2000, 2001 and 2002
and the years then ended for Unefon, stated in Mexican pesos, is as
follows:
At and for the year ended December 31,
-----------------------------------------------------------------------------------------
Under Mexican GAAP Under US GAAP
------------------------------------------ --------------------------------------------
2000 2001 2002 2000 2001 2002
----------- ------------ ------------- ------------ ------------- -------------
Current assets Ps 715,975 Ps 987,066 Ps 1,125,736 Ps 1,024,460
Non-current assets 8,452,660 8,042,853 8,773,292 8,525,591
Current liabilities 1,555,127 2,297,461 1,852,819 2,525,850
Non-current liabilities 4,284,193 4,268,920 4,830,688 4,535,699
Stockholders' equity 3,329,315 2,463,538 3,215,521 2,488,502
Net revenues Ps 317,822 1,748,787 3,038,749 Ps 216,330 1,560,156 3,067,633
Gross margin (311,415) (859,768) (73,665) 802,017 (1,024,916) (7,889)
Net loss (339,462) (1,112,668) (871,762) (659,259) (1,175,368) (770,792)
v. Reversal of capitalized consent fee for Unefon rights and other
expenses
As discussed in Note 7, the Company's Board of Directors granted rights
to certain stockholders of the Company to acquire a pro-rata share of
the Unefon shares currently owned by the Company. The Rights to acquire
the Unefon shares were subject to the receipt of consents from the
Holders of the TV Azteca Notes and Azteca Holdings Senior Secured Notes
2002, which were obtained on March 27, 2001, the receipt of regulatory
approvals and third parties approvals, including the approval of
Nortel. In addition, the Rights are subject to the filing and
effectiveness of a registration statement with the U.S. Securities and
Exchange Commission that registers the Unefon shares underlying the
Rights.
F-54
On March 27, 2001, the Company paid a fee totaling Ps115,223 to certain
holders of the TV Azteca Notes to obtain the required consent for the
grant of the rights to acquire a pro-rata share of the Unefon shares
owned by the Company. Under Mexican GAAP, the Company capitalized the
consent fee as part of its total investment in Unefon. Under US GAAP,
this consent fee would be recognized in earnings during the year.
During 2002, for Mexican GAAP purposes, the Company capitalized
expenses for an amount of Ps6,037 related to a proposed spin-off of its
investment in Unefon mentioned in Note 7. For US GAAP purposes, this
amount was recognized in earnings during the year.
vi. Todito investment
For Mexican GAAP purposes, the investment in Todito (see Note 7) was
accounted for as a purchase and generated goodwill of Ps543,370.
Goodwill amortization recorded under Mexican GAAP during the years
ended December 31, 2000, 2001 and 2002 amounted to Ps22,643, Ps27,260
and Ps27,260, respectively. Prior to the Company's investment, Todito
was a wholly-owned subsidiary of Dataflux, S. A. de C. V., a company
controlled by the brother of Mr. Salinas Pliego. Under US GAAP, the
Company's investment in Todito would be accounted for as a transaction
between companies under common control and would be recorded based on
the historical cost of the advertising, programming and sales services
provided to Todito when such services are provided. Under US GAAP,
there was no cost to the Company associated with providing the
programming to Todito for the years ended December 31, 2000, 2001 and
2002. The cost of providing advertising and sales services were Ps2,170
and Ps5,356 during the year ended December 31, 2000, respectively.
Furthermore, there was no cost to the Company associated with providing
the advertising and sales services during the years ended December 31,
2001 and 2002.
Revenues related to the advertising provided to Todito under the terms
of the agreement are recognized under Mexican GAAP when the advertising
is utilized based on the peso equivalent amount of the advertising at
the date of the agreement, indexed for the effects of inflation.
Revenues related to the content and sales services provided to Todito
under the terms of the agreement are recognized under Mexican GAAP on a
straight line basis over the life of the agreement based on the peso
equivalent amount of the programming and services at the date of the
agreement indexed for the effects of inflation.
Revenues recognized in connection with the Todito agreement under
Mexican and US GAAP were as follows:
Year ended December 31, 2000
----------------------------------------------
Mexican US
GAAP GAAP Difference
--------------- ------------- --------------
Revenues recognized for:
Advertising Ps 95,530 Ps 2,170 Ps (93,360)
Programming 81,786 (81,786)
Services 5,356 5,356 -
--------------- ------------- --------------
Ps 182,672 Ps 7,526 Ps (175,146)
=============== ============= ==============
F-55
Year ended December 31, 2001
----------------------------------------------
Mexican US
GAAP GAAP Difference
--------------- ------------- --------------
Cumulative revenues recognized for:
Advertising Ps 165,184 Ps 2,170 Ps (163,014)
Programming 196,564 (196,564)
Services 13,598 5,356 (8,242)
--------------- ------------- --------------
Ps 375,346 Ps 7,526 Ps (367,820)
=============== ============= ==============
Year ended December 31, 2002
----------------------------------------------
Mexican US
GAAP GAAP Difference
--------------- ------------- --------------
Cumulative revenues recognized for:
Advertising Ps 233,593 Ps 2,170 Ps (231,423)
Programming 313,594 (313,594)
Services 25,651 5,356 (20,295)
--------------- ------------- --------------
Ps 572,838 Ps 7,526 Ps (565,312)
=============== ============= ==============
The following table illustrates the differences between Mexican and US
GAAP in the method of accounting for the Company's investment in
Todito:
At December 31, 2000 At December 31, 2001 At December 31, 2002
------------------------- ------------------------ ------------------------
Investment Goodwill Investment Goodwill Investment Goodwill
in Todito in Todito in Todito in Todito in Todito in Todito
------------ ----------- ----------- ----------- ----------- -----------
Amounts under Mexican GAAP Ps 482,491 Ps 520,727 Ps 397,883 Ps 493,467 Ps 319,986 Ps 466,207
Reverse investment in Todito (543,430) (543,370) (539,901) (543,370) (538,103) (543,370)
Equity in earnings 63,947 155,541 247,393
Amortization of goodwill 22,643 49,903 77,163
------------ ----------- ----------- ----------- ----------- -----------
Amounts under US GAAP Ps 3,008 Ps - Ps 13,523 Ps - Ps 29,276 Ps -
============ =========== =========== =========== =========== ===========
Under US GAAP, the Company's share of Todito's net (loss) earnings for
the years ended December 31, 2000, 2001 and 2002 were (Ps53), Ps6,051
and Ps14,003, respectively, compared to a net loss of Ps64,000,
Ps85,543 and Ps77,849, respectively, under Mexican GAAP. The difference
is due to the pre-operating expenses and the cost of advertising and
programming services provided by the Company that have been capitalized
and expensed for Mexican GAAP purposes, respectively.
vii. Acquisition of Azteca Digital
The Company acquired Azteca Digital, S. A. de C. V. on December 31,
1997. Under Mexican GAAP, this acquisition was accounted by the
purchase method; however, under US GAAP, this acquisition is considered
to be of a company under common control and accordingly, it would have
been accounted for retroactively in a manner having a similar effect as
a pooling of interests. The annual goodwill amortization relating to
the Azteca Digital acquisition under Mexican GAAP in 2000, 2001 and
2002 amounted to Ps7,904.
F-56
viii. Effects of fifth amendment to Statement B-10
As mentioned in Note 2a., the Company restates its exhibition rights
and equipment of foreign origin based on the devaluation of the Mexican
peso against the foreign currencies of, and by applying inflation
factors of the countries in which they originate. This methodology does
not comply with Rule 3-20 of the SEC's Regulation S-X for presenting
price level financial statements, and consequently the Company has
determined the effects on exhibition rights and equipment of foreign
origin and current year depreciation and amortization and reflected
them in its results of operations and financial position under US GAAP.
ix. Employee stock option plans
The granting of stock options in the fourth quarter of 1997 by the
Company at exercise prices below the then current market prices of CPOs
would result in non-cash compensation cost under US GAAP of
approximately Ps113,964, Ps35,296 and Ps61,733 for 2000, 2001 and 2002,
respectively, as determined under Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees". The majority of the
options granted were pursuant to plans which would be considered
variable plans under US GAAP, since the number of shares exercisable is
contingent upon the Company achieving specified financial goals and
employees' performance. The Company expects to record non-cash
compensation expense in future periods in connection with these plans.
Had compensation cost for the Company's employees stock option plans
been determined based on the fair value at the grant dates for awards
under those plans consistent with Statement of Financial Accounting
Standard ("SFAS") No. 123, "Accounting for Stock Based Compensation",
the Company's compensation expense would have been Ps40,510, Ps17,869
and Ps7,550 for 2000, 2001 and 2002, respectively, and the net income
and net income per share would have been reduced to the pro forma
amounts indicated as follows:
Year ended December 31,
-------------------------------------------------
2000 2001 2002
----------- ------------ ------------
Net income as reported Ps 6,693 Ps 464,706 Ps 521,053
=========== ============ ============
Net income pro forma Ps 80,147 Ps 482,133 Ps 575,236
=========== ============ ============
Net income per share as reported Ps 0.001 Ps 0.051 Ps 0.057
=========== ============ ============
Net income per share pro forma Ps 0.008 Ps 0.053 Ps 0.063
=========== ============ ============
F-57
The effect on net income and net income per share is not expected to be
indicative of the effects in future years. The fair value of each
option granted is estimated on the date of grant using the weighted
average of the Black-Scholes option pricing model and simple binomial
model with the following assumptions:
Year ended December 31,
-------------------------------
2000 2001 2002
------- ------- -------
Expected volatility 0.353 0.391 0.423
Risk-free interest rate 18% 10% 8%
Expected life of options (in years) 5 5 5
Expected dividend yield 10% 10% 10%
The Black-Scholes option valuation model and simple binomial model were
developed for use in estimating the fair value of traded options. In
addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
The following table summarizes activity under the Company's stock
option plans during the years ended December 31, 2000, 2001 and 2002:
Number of options Weighted-average
(thousands of CPOs) exercise price
------------------- ----------------
Outstanding at January 1, 2000 68,712 0.32
Granted 1,886 0.29
Exercised (15,652) 0.29
-------------------
Outstanding at December 31, 2000 54,946 0.32
Granted 0.29
Exercised (10,405) 0.29
-------------------
Outstanding at December 31, 2001 44,541
Granted - 0.29
Exercised (15,340) 0.29
-------------------
Outstanding at December 31, 2002 29,201
===================
Outstanding options exercisable at
December 31,
2000 14,000 0.32
===================
2001 18,651 0.32
===================
2002 18,297 0.32
===================
F-58
x. Compensation expense for Unefon stock option plan
On November 15, 2000, the Board of Directors of Unefon initiated a
stock option plan (the "Unefon Stock Option Plan") for its employees
and stockholders. Pursuant to the Unefon Stock Option Plan, the Company
has the right to receive or designate the beneficiaries of the option
to purchase 120,152,229 shares at US$0.1507 per share. The Unefon Stock
Option Plan has a vesting period of five years as follows: 10% during
2001, 10% during 2002, 20% during 2003, 30% during 2004, and 30% during
2005. The Company designated certain employees as the sole
beneficiaries of the Unefon Stock Option Plan.
Under US GAAP, the Company would recognize as compensation expense the
vested options since the Company is designating certain employees as
the sole beneficiaries of the Unefon Stock Option Plan. At December 31,
2001 and 2002, the Company recognized Ps54,413 and Ps3,352,
respectively, as compensation expense related to the Stock Option Plan.
xi. Deferred income tax
As stated in Note 2n., income tax expense was recorded under Mexican
GAAP through December 31, 1999 following inter-period allocation
procedures under the partial liability method. Under this method,
deferred income tax is recognized only in respect of identifiable,
non-recurring timing differences between taxable and book income. This
substantially eliminated all deferred taxes under Mexican GAAP. Also,
under Mexican GAAP through December 31, 1999 the benefit from utilizing
tax loss carry-forwards and asset tax credits was not recognized until
utilized, at which time it was presented as an extraordinary item. This
substantially eliminated all deferred taxes under Mexican GAAP.
Effective January 1, 2000, the Company adopted the provisions of
Revised Statement D-4 "Accounting Treatment of Income Tax, Assets Tax
and Employees' Profit Sharing". Under this method, deferred tax assets
or liabilities are recognized for all differences between the book
value and the tax value of assets and liabilities. The cumulative
effect of adopting Statement D-4 as of January 1, 2000 was a net
deferred tax liability of Ps693,526, which was charged directly to
stockholders' equity.
There would be no effect of adoption Revised Statement D-4 under US
GAAP relating to the Company's investment in Unefon.
Under US GAAP, the Company follows SFAS No. 109 "Accounting for Income
Taxes" ("SFAS 109"). This statement requires an asset and liability
approach for financial accounting and reporting for income tax under
the following basic principles: (a) a current tax liability or asset is
recognized for the estimated taxes payable or refundable on tax returns
for the current year, (b) a deferred tax liability or asset is
recognized for the estimated future tax effects attributable to
temporary differences and tax loss and tax credit carry-forwards, (c)
the measurement of current and deferred tax liabilities and assets is
based on provisions of the enacted tax law and the effects of future
changes in tax laws or rates are not anticipated, (d)
F-59
the measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that, based on available evidence, are not
expected to be realized. Under this method, deferred tax is recognized
with respect to all temporary differences, and the benefit from
utilizing tax loss carry-forwards and asset tax credits is recognized
in the year in which the loss or credits arise (subject to a valuation
allowance with respect to any tax benefits not expected to be
realized). The subsequent realization of this benefit does not affect
income.
The temporary differences under SFAS 109 are determined based on the
difference between the indexed tax basis amount of the asset or
liability and the related stated amount reported in the financial
statements. Except as indicated in the following paragraph the deferred
tax expense or benefit should be calculated as the difference between:
(a) deferred tax assets and liabilities reported at the end of the
current year determined as indicated above, and (b) deferred tax assets
and liabilities reported at the end of the prior year, remeasured to
units of current general purchasing power at the end of the current
period.
Gains and losses from holding non-monetary assets are recorded in
stockholders' equity. It is the Company's policy to reflect in results
of operations the deferred income taxes that arise as a result of such
gains (losses) from holding non-monetary assets. The significant
components of income tax expense (benefit) under US GAAP were as
follows:
Year ended December 31,
--------------------------------------------------
2000 2001 2002
------------ ------------ ------------
Current Ps 9,677 Ps 209,934 Ps 264,158
Deferred (68,549) (221,058) (235,572)
------------ ------------ ------------
Total (benefit) expense Ps (58,872) Ps (11,124) Ps 28,586
============ ============ ============
The following items represent the principal differences between income
tax computed under US GAAP at the statutory rate and the Company's
provision for income tax in each period:
Year ended December 31,
--------------------------------------------------
2000 2001 2002
------------- ------------ -------------
(Loss) income before income tax
benefit Ps (52,179) Ps 453,582 Ps 549,639
============= ============ =============
Income tax (benefit) expense at statutory rate Ps (18,263) Ps 158,754 Ps 192,374
Non-deductible stock dividends 22,946
Effects of inflationary components 117,716 10,149 44,800
Miscellaneous expenses non-deductible
for tax purposes 24,805 14,811 66,697
Benefit of tax consolidation (106,634) (120,284) (147,597)
Other (99,442) (74,554) (127,688)
------------- ------------ -------------
Net income tax benefit Ps (58,872) Ps (11,124) Ps 28,586
============= ============ =============
F-60
During 1999, the Company and its external legal and tax advisers
evaluated the deductibility of the concession rights and concluded that
such rights are deductible for tax purposes, over the period granted by
such concessions. Based on this conclusion and a confirmation received
from the Mexican tax authorities in March 2000, the Company adjusted
the previously recorded deferred tax liability.
The income tax effects of significant items comprising the Company's
net deferred tax assets and liabilities under US GAAP are as follows:
At December 31,
--------------------------------------------------------
2000 2001 2002
-------------- -------------- -------------
Deferred income tax assets:
---------------------------
Current
Advertising advances and other Ps 212,183 Ps 68,531 Ps 245,028
-------------- -------------- -------------
Non-current
Tax loss carryforwards and other 143,767 900,910 626,507
Deferred income tax asset recorded
from the purchase of subsidiary 200,130
Valuation reserve for tax loss
carryforwards (497,805)
-------------- -------------- -------------
Total non-current 143,767 603,235 626,507
-------------- -------------- -------------
355,950 671,766 871,535
-------------- -------------- -------------
Deferred income tax liability:
------------------------------
Current
Inventories and provisions (513,588) (306,054) (201,053)
-------------- -------------- -------------
Non-current
Television concessions (210,547) (350,325) (506,710)
Property, machinery and equipment
and other (388,705) (351,091) (263,904)
-------------- -------------- -------------
Total non-current (599,252) (701,416) (770,614)
-------------- -------------- -------------
(1,112,840) (1,007,470) (971,667)
-------------- -------------- -------------
Net deferred tax liabilities:
Under US GAAP (756,890) (335,704) (100,132)
Under Mexican GAAP (416,593) (25,534)
-------------- -------------- -------------
US GAAP adjustment Ps (340,297) Ps (335,704) Ps (74,598)
============== ============== =============
The difference between net deferred tax liabilities under Mexican and
US GAAP at December 31, 2002, 2001 and 2002, relates primarily to the
effects of the Fifth Amendment to Statement B-10, the cancellations of
the deferred tax asset related to the option for sale of an affiliate
and the amortization of the goodwill of Azteca Digital.
F-61
During the year ended December 31, 2001, the Company acquired a company
with tax loss carryforwards. Under Mexican and US GAAP, the Company
recorded a tax asset of Ps939,616 and an income tax benefit of
Ps328,865.
xii. Exhibition rights
Under US GAAP, a license agreement for program material is reported as
an asset and a liability, when the license period begins and all of the
following conditions are met: the cost of each program is known or
reasonably determinable, the program material has been accepted by the
license and the program is available for its first showing or telecast.
Under Mexican GAAP, the rights acquired and obligations incurred are
recorded when the license agreements are signed. At December 31, 2000,
2001 and 2002, Ps195,413, Ps382,332 and Ps363,341, respectively, of
deferred exhibition rights would not be recorded under US GAAP, since
the related program material was not yet available to the Company.
Since the Company's obligations under the license agreements and the
deferred exhibition rights are considered monetary and non-monetary
items, respectively, under the Mexican inflation accounting rules, the
early recognition of the Company's obligations, prior to the period in
which the program material is available for its first showing,
overstates the monetary gain and exchange losses related to these
obligations under US GAAP. However, since the obligations are US dollar
denominated, the net effect of the related exchange losses and monetary
gains, under US GAAP, are immaterial during the periods presented.
xiii. Production costs of internally produced programming
Under Mexican GAAP, the Company expensed production costs of internally
produced programming when the programs are initially aired, except in
the case of telenovelas, where some of the production costs are
amortized over a period of four-years based on estimates of secondary
market revenue.
Under US GAAP, on January 1, 2001, the Company adopted the American
Institute of Certified Public Accountants Statement of Position No.
00-2, "Accounting by Producers and Distributors of Films" ("SOP 00-2"),
which replaced SFAS No. 53, "Financial Reporting by Producers and
Distributors of Motion Picture Films". SOP 00-2 provides that film
costs should be accounted for under an inventory model and discusses
various topics such as revenue recognition and accounting for
exploitation costs and impairment assessment. In addition, SOP 00-2
establishes criteria for which revenues should be included in the
Company's ultimate revenue projections. As discussed in Note 7, during
2001 and 2002, the Company renegotiated its contract with Azteca
America. Pursuant to SOP 00-2, given its limited experience with Azteca
America, at December 31, 2001 and 2002, the Company reversed
capitalized production costs of internally produced programming
totaling Ps226,375 and Ps252,577, respectively.
F-62
xiv. Cash and marketable securities
Under Mexican GAAP, temporary investments and marketable securities,
expected to be held less than one year, are considered to be cash
equivalents. Under US GAAP, temporary investments and marketable
securities with original maturities greater than 90 days but less than
one year are considered to be short-term investments and, accordingly,
are shown separately from cash in the balance sheet and cash flow
statement. As of December 31, 2002, the Company reclassified Ps307,814
as short-term investments.
xv. Revenue recognition
Under Mexican GAAP revenues from advertisers are presented net of sales
commissions paid. Under US GAAP, revenues are presented based on the
gross amount billed to the customers and sales commission paid are
presented as cost of sales.
xvi. Comprehensive income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). During the periods presented, the
Company had no change in equity from transactions or other events and
circumstances from non-owner sources under US GAAP. Accordingly, a
statement of comprehensive income (loss) has not been provided as
comprehensive income (loss) equals net income (loss) for all periods
presented.
xvii. Fair value information
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No.
107, "Disclosures about Fair Value of Financial Instruments". The
estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data
to develop estimates of fair value.
Cash and cash equivalents, accounts receivable, and accounts payable.
The carrying value of these items is a reasonable estimate of their
fair value.
Bank loans. The Company's bank loans bear interest at variable rates
and their terms are generally representative of those which are
currently available to the Company at December 31, 2001 and 2002 for
the issuance of debt with similar terms and remaining maturities, and
therefore the carrying values of these loans are a reasonable estimate
of their fair value.
Guaranteed senior notes. The carrying value of the Company's guaranteed
senior notes and the related fair value base on the quoted market
prices for the same or similar issues at December 31, 2002 were
Ps4,417,875 and Ps4,069,643, respectively, (Ps4,114,901 and
Ps4,066,190, respectively, in 2001).
F-63
xviii. Property, machinery and equipment
Under US GAAP, advances for the acquisition of machinery and equipment
would be classified as prepayments. As of December 31, 2001 and 2002,
the Company had advances of Ps74,568 and Ps125,716, respectively.
xix. Other employee benefits
The Company has no post-retirement health care insurance or other
benefit plans. Therefore, SFAS No. 106, "Employers' Accounting for
Post-retirement Benefits other than Pensions", SFAS No. 112,
"Employers' Accounting for Post-employment Benefits" and SFAS No. 132,
"Employers' Disclosure about Pension and other Post-retirement
Benefits", would have no effect on the Company's financial position.
xx. Earnings per share ("EPS")
For US GAAP purposes, the Company applies SFAS No. 128, "Earnings per
Share". This statement simplifies the method of computing earnings per
share by replacing the primary earnings per share computation with a
basic earnings per share computation. The basic earnings per share
excludes dilution and is computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding for the period. The diluted earnings per share will reflect
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then share in
the earnings of the entity.
Year ended December 31,
----------------------------------------------------
2000 2001 2002
-------------- -------------- ----------------
Net income Ps 6,693 Ps 464,706 Ps 521,053
Preferred stock dividends (44,908) (42,130) (39,966)
-------------- -------------- ----------------
(Loss) income corresponding to
common stockholders Ps (38,215) Ps 422,576 Ps 481,087
============== ============== ================
Basic weighted average number
of common shares outstanding 8,966,752 9,025,274 9,057,444
Effect of dilutive securities:
Stock options pending to exercise 42,215 56,169 55,105
-------------- -------------- ----------------
Diluted number of common shares 9,008,967 9,081,443 9,112,549
============== ============== ================
Basic (loss) income per share Ps (0.004) Ps 0.047 Ps 0.053
============== ============== ================
Diluted (loss) income per share Ps (0.004) Ps 0.047 Ps 0.053
============== ============== ================
F-64
xxi. Effect of recently issued accounting standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement
of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset, except
for certain obligations of lessees. SFAS 143 requires that the fair
value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair
value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset.
SFAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company does not expect the adoption
of SFAS 143 will have a material impact on the consolidated financial
statements.
In April 2002, the FASB issued SFAS 145, "Rescission of SFAS Nos. 4,
44, and 64, Amendment of SFAS No. 13, and Technical Corrections as of
April 2002" ("SFAS 145"), SFAS 145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," SFAS 44, "Accounting for
Intangible Assets of Motor Carriers," and SFAS 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." As a result, gains and
losses from extinguishment of debt will no longer be classified as
extraordinary items unless they meet the criteria of unusual or
infrequent as described in Accounting Principles Boards Opinion 30,
"Reporting the Results of Operations -Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." In addition, SFAS 145 amends SFAS
No. 13, "Accounting for Leases," to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS 145 also
amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their
applicability under changed conditions. SFAS 145 is effective for
fiscal years beginning after May 15, 2002. The Company does not expect
the adoption of SFAS 145 will have a significant impact on the
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). The issuance
of SFAS 146 nullifies the former guidance provided by the Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring" ("EITF
94-3"). SFAS 146 requires the recognition of a liability for costs
associated with exit or disposal activity when the liability is
incurred, rather than on the date commitment to an exit or disposal
plan. SFAS 146 is effective for liabilities, related to exit or
disposal activities, which are incurred after December 31, 2002, while
earlier application is encouraged. The Company does not expect the
adoption of SFAS 146 will have a significant impact on the consolidated
financial statements.
F-65
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
SFAS 123" ("SFAS 148"). SFAS 148 continues to permit entities to apply
the intrinsic method of APB 25, "Accounting for Stock Issued to
Employees", however, SFAS 148 is intended to encourage companies to
adopt the accounting provisions of SFAS 123, "Accounting for
Stock-Based Compensation". SFAS 148 provides three transition methods
for companies who choose to adopt the provisions of SFAS 123, the
prospective method, the modified prospective method and the retroactive
restatement method. In addition, SFAS 148 mandates certain new
disclosures. SFAS 148 is effective for fiscal years ending after
December 15, 2002, with early adoption permitted. The Company does not
expect the adoption of SFAS 148 will have a significant impact on the
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (an
interpretation of FASB Statements No. 5, 57, and 107 and rescission of
Interpretation No. 34)." FIN 45 clarifies the requirements of SFAS 5,
"Accounting for Contingencies, relating to a guarantor's accounting
for, and disclosure of, the issuance of certain types of guarantees.
FIN 45 requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes
under that guarantee. FIN 45's provisions for initial recognition and
measurement should be applied on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The guarantor's previous accounting for
guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The
disclosure requirements are effective for financial statements of both
interim and annual periods that end after December 15, 2002. The
adoption of FIN 45 did not have a material impact on the consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an interpretation of ARB
51." The primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved through means
other than through voting rights ("variable interest entities" or
"VIEs") and how to determine when and which business enterprise should
consolidate the VIE (the "primary beneficiary"). This new model for
consolidation applies to an entity which either (1) the equity
investors (if any) do not have a controlling financial interest or (2)
the equity investment at risk is insufficient to finance that entity's
activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. FIN 46 applies
immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains
an
F-66
interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 applies to public enterprises
as of the beginning of the applicable interim or annual period, and it
applies to nonpublic enterprises as of the end of the applicable annual
period. The Company is currently evaluating the impact that the
adoption of FIN 46 will have on the consolidated financial statements.
xxii. Financial instrument indexed to the Company's own stock
As stated in Note 4b., the Company entered into a monthly certificate
of deposit with a rate of return based on the market value of the
Company's CPOs. For Mexican GAAP purposes, the principal amount of the
certificate of deposit and the loss derived of the decline in market
value of the Company's CPOs were recorded against stockholders' equity.
For US GAAP purposes, the certificate of deposit would be accounted as
a short-term investment and its return based on the Company's CPO would
be recorded against earnings for the year.
xxiii. Cash flow information
Under US GAAP, a statement of cash flows is prepared based on
provisions of SFAS 95, "Statement of Cash Flows". This statement does
not provide specific guidance for the preparation of cash flow
statements for price level adjusted financial statements. Cash flows
from operating, investing and financing activities have been adjusted
for the effects of inflation on monetary items.
The Company has further segregated the effects of exchange rate changes
and inflationary effect on cash from other cash flow activities as
provided in the following condensed cash flow statement:
F-67
Year ended December 31,
---------------------------------------------
2000 2001 2002
------------ ------------ ------------
Cash flows from operating activities:
Net income Ps 6,693 Ps 464,706 Ps 521,053
Adjustments:
Gain on sale of subsidiary (17,797)
Minority interest (25,825) (1,892) 346
Compensation expense from stock options 113,964 35,296 61,733
Amortization and depreciation 870,846 863,362 427,295
NBC settlement agreement 210,848
Equity in loss of affiliates 278,312 522,845 376,644
Unefon stock option plan 54,413 3,352
Deferred income tax (68,549) (221,058) (235,572)
Foreign exchange loss, net of monetary gain
on NBC warrant (10,841)
Unrealized foreign exchange loss 101,920 (294,411) 547,511
Monetary gain on financing activities (325,907) (56,947) (982)
Net changes in working capital 34,693 252,217 310,097
------------ ------------ ------------
Net cash provided by operating activities 1,168,357 1,618,531 2,011,477
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of machinery and equipment (169,740) (170,185) (194,242)
Exhibition rights purchased (413,700) (648,594) (884,736)
Short-term investments (307,814)
Investment in affiliates of Pappas Telecasting Companies,
through Azteca America (660,031) (455,867)
Loan granted to Pappas Southern California, LLC (191,124)
------------ ------------ ------------
Net cash used in investing activities (583,440) (1,669,934) (1,842,659)
------------ ------------ ------------
Cash flows from financing activities:
Debt received 650,864 337,422 326,115
Debt paid (668,009) (116,594) (761,609)
Loan granted to a related party (199,044)
Preferred dividend paid (44,908) (42,130) (39,966)
Proceeds from stock options exercised 27,216 81,371 23,881
Sale of treasury shares 162,439 136,523
Repurchase of shares (316,094) (43,172) (169,879)
Proceeds from capital stock increase 18,217
Premium on issuance of capital stock 267,347
Payment to NBC as settlement for warrant and bonus right (510,732)
------------ ------------ ------------
Net cash (used in) provided by financing activities (576,099) 379,336 (683,979)
------------ ------------ ------------
Effects of inflation and exchange rate changes on cash 90,988 53,501 89,025
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 99,806 381,434 (426,136)
------------ ------------ ------------
Cash and cash equivalents at beginning of period 1,169,631 1,269,437 1,650,871
------------ ------------ ------------
Cash and cash equivalents at end of period Ps 1,269,437 Ps 1,650,871 Ps 1,224,735
============ ============ ============
Supplemental disclosure:
Cash paid during the period for:
Interest Ps 731,025 Ps 669,426 Ps 640,441
============ ============ ============
Income tax Ps 252,664 Ps 81,142 Ps 145,497
============ ============ ============
F-68
e. Condensed balance sheets and results of operations:
The following condensed balance sheets and results of operations
reflect the effects of the principal differences between Mexican GAAP
and US GAAP:
CONDENSED BALANCE SHEET
---------------------------------------
At December 31,
---------------------------------------
2001 2002
----------------- ----------------
Current assets Ps 7,755,187 Ps 7,627,325
Property, machinery and equipment - Net 2,496,652 2,263,578
Television concessions - Net 3,742,945 3,741,702
Investment in Unefon 1,495,216 1,157,153
Investment in affiliates of Pappas Telecasting
Companies, through Azteca America 660,031 1,154,479
Goodwill - Net 750,182 746,540
Other assets 2,248,407 2,585,091
Deferred income tax assets 603,235 626,507
----------------- ----------------
Total assets Ps 19,751,855 Ps 19,902,375
================= ================
Short-term debt Ps 566,872 Ps 643,789
Advertising advances 4,639,819 4,430,861
Deferred income tax payable 306,054 201,053
Other current liabilities 1,325,988 949,983
----------------- ----------------
Total current liabilities 6,838,733 6,225,686
----------------- ----------------
Long-term debt 5,622,726 5,720,790
Exhibition rights payable 206,079 246,096
Deferred income tax payable 701,416 770,614
----------------- ----------------
Total long-term liabilities 6,530,221 6,737,500
----------------- ----------------
Minority interest 8,371 8,717
Stockholders' equity 6,374,530 6,930,472
----------------- ----------------
Total liabilities and stockholders' equity Ps 19,751,855 Ps 19,902,375
================= ================
F-69
CONDENSED RESULTS OF OPERATIONS
----------------------------------------------------
Year ended December 31,
----------------------------------------------------
2000 2001 2002
-------------- ------------- --------------
Net revenue Ps 6,357,743 Ps 6,522,546 Ps 6,871,509
Costs and expenses:
Programming and transmission costs 3,194,404 3,148,548 2,524,476
Selling and administrative expenses 1,053,674 1,046,367 1,404,241
Depreciation and amortization 870,846 863,362 427,295
NBC settlement agreement 210,848
Other expense - Net 547,442 814,027 714,323
-------------- ------------- --------------
Operating income 480,529 650,242 1,801,174
-------------- ------------- --------------
Comprehensive financing cost:
Interest expense (934,488) (770,885) (942,910)
Interest income 188,271 239,927 191,950
Exchange (loss) income - Net (118,511) 275,458 (501,792)
Gain on monetary position 325,906 56,948 982
-------------- ------------- --------------
Net comprehensive financing cost (538,822) (198,552) (1,251,770)
-------------- ------------- --------------
(Loss) income before minority interest and
income tax benefit (58,293) 451,690 549,404
Minority interest 6,114 1,892 235
Income tax benefit (expense) 58,872 11,124 (28,586)
-------------- ------------- --------------
Net income Ps 6,693 Ps 464,706 Ps 521,053
============== ============= ==============
F-70
UNEFON, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
F-71
UNEFON, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 2001 AND 2002
INDEX
Contents Page
-------- ----
Report of Independent Auditors F-73
Consolidated Balance Sheets as of December 31, 2001 and 2002 F-75
Consolidated Statements of Results of Operations
for the Years Ended December 31, 2000, 2001 and 2002 F-76
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 2000, 2001 and 2002 F-77
Consolidated Statements of Changes in Financial Position
for the Years Ended December 31, 2000, 2001 and 2002 F-78
Notes to Consolidated Financial Statements F-79
F-72
REPORT OF INDEPENDENT AUDITORS
Mexico City, February 24, 2003, except for the subsequent event included in Note
17 which is as of June 10, 2003
To the Stockholders of
Unefon, S. A. de C. V. and subsidiaries
We have audited the accompanying consolidated balance sheets of Unefon, S. A. de
C. V. and its subsidiaries as of December 31, 2001 and 2002, and the related
consolidated statements of results of operations for the period from February 1,
2000 (commencement of operations) through December 31, 2000 and for the years
ended December 31, 2001 and 2002, of changes in stockholders' equity and of
changes in financial position for the years ended December 31, 2000, 2001 and
2002, expressed in constant pesos of December 31, 2002 purchasing power. These
consolidated financial statements are the responsibility of the Company's
Management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Mexico and in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and that they were
prepared in accordance with accounting principles generally accepted in Mexico.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures contained 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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 10 to
these consolidated financial statements, the Company is currently engaged in
several legal disputes with its main technology supplier and financial creditor
which could significantly affect the Company's operations and its ability to
repay its debt, and therefore raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
F-73
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the consolidated financial position of Unefon,
S. A. de C. V. and its subsidiaries as of December 31, 2000, 2001 and 2002, and
the consolidated results of their operations for the period from February 1,
2000 (commencement of operations) through December 31, 2000 and for the years
ended December 31, 2001 and 2002, and the changes in consolidated stockholders'
equity and in their consolidated financial position for the years ended December
31, 2000, 2001 and 2002, in conformity with accounting principles generally
accepted in Mexico.
Accounting principles generally accepted in Mexico differ in certain important
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
the consolidated net loss, expressed in pesos of December 31, 2002 purchasing
power, for the years ended December 31, 2000, 2001 and 2002 and the
determination of the consolidated stockholders' equity and consolidated
financial position as of December 31, 2000, 2001 and 2002, also expressed in
pesos of December 31, 2002 purchasing power, to the extent summarized in Note 17
to the consolidated financial statements.
PricewaterhouseCoopers
Alberto Del Castillo V. Vilchis
Audit Partner
F-74
UNEFON, S.A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Mexican pesos of December 31, 2002 purchasing power)
December 31,
----------------------------------------------
2001 2002
------------- ------------------------------
Thousands of
US dollars (*)
Assets
Current:
Cash and cash equivalents Ps 130,955 Ps 203,869 US$ 19,529
Restricted cash (Note 10) 164,613 159,492 15,278
Accounts receivable 155,111 250,218 23,969
Recoverable value added tax 87,441 12,604 1,207
Related parties (Note 9) 6,651 206,054 19,738
Handset inventories 133,760 149,204 14,293
Other assets (Note 7) 38,757 5,625 539
------------- ------------- --------------
Total current assets 717,288 987,066 94,553
Property and equipment - Net (Note 4) 3,584,539 3,406,730 326,337
Concession rights - Net (Note 5) 4,038,578 3,881,338 371,801
Pre-operating expenses - Net (Note 6) 656,684 580,405 55,598
Other assets - Net (Note 7) 188,368 174,380 16,704
------------- ------------- --------------
Total assets Ps 9,185,457 Ps 9,029,919 US$ 864,993
============= ============= ==============
Liabilities:
Bank loans (Note 8) Ps 465,281 Ps 217,962 US$ 20,879
Nortel Networks Corporation (Note 10) 67,333 357,859 34,280
Deferred revenue 80,277 222,205 21,285
Accounts payable and accrued expenses 628,580 701,628 67,210
Related parties (Note 9) 316,630 797,807 76,423
------------- ------------- --------------
Total current liabilities 1,558,101 2,297,461 220,077
Long-term bank loans (Note 8) 100,327 9,611
Capital reduction payable to stockholders (Note 12) 707,299 695,648 66,637
Long-term financing from Nortel Networks
Corporation (Note 10) 3,396,494 3,293,759 315,518
Related parties (Note 9) 130,506 158,868 15,218
Other non-current liabilities 57,757 20,318 1,946
------------- ------------- --------------
Total liabilities 5,850,157 6,566,381 629,007
------------- ------------- --------------
Stockholders' equity (Notes 1 and 12):
Capital stock authorized 3,769,091 3,769,091 361,048
Capital stock authorized but unpaid (538,040) (538,040) (51,540)
------------- ------------- --------------
3,231,051 3,231,051 309,508
Premium on share subscription 1,561,096 1,561,096 149,540
Deficit (1,456,847) (2,328,609) (223,062)
------------- ------------- --------------
Total stockholders' equity 3,335,300 2,463,538 235,986
------------- ------------- --------------
Contingencies and subsequent event (Notes 10, 14
and 16)
------------- ------------- --------------
Total liabilities and stockholders' equity Ps 9,185,457 Ps 9,029,919 US$ 864,993
============= ============= ==============
(*) The US dollar figures represent the Mexican peso amounts as of December 31,
2002 expressed in pesos of December 31, 2002 purchasing power translated at
the exchange rate of Ps10.4393 per US dollar and are not covered by the
Report of Independent Accountants.
The accompanying seventeen notes are an integral part of these consolidated
financial statements.
F-75
UNEFON, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS
(Notes 1 and 9)
(Thousands of Mexican pesos of December 31, 2002 purchasing power,
except per share amounts)
Year ended December 31,
-------------------------------------------------------------------
Thousands of
2000 (*) 2001 2002 US dollars (**)
------------- -------------- ------------- ---------------
Revenue:
Sale of handsets Ps 303,110 Ps 603,910 Ps 597,900 US$ 57,274
Service revenue 34,094 607,766 1,525,517 146,132
Interconnection revenue 32,779 486,718 986,596 94,508
Other revenue 5,577 53,602 99,835 9,563
------------- -------------- ------------- ---------------
Total gross revenue 375,560 1,751,996 3,209,848 307,477
Less discounts on handsets (55,173) (203,808) (171,099) (16,390)
------------- -------------- ------------- ---------------
Total net revenue 320,387 1,548,188 3,038,749 291,087
------------- -------------- ------------- ---------------
Costs and expenses:
Cost of handsets 324,313 874,405 891,171 85,367
Cost of interconnection and resale of long
distance 28,636 218,652 367,984 35,250
------------- -------------- ------------- ---------------
Total costs 352,949 1,093,057 1,259,155 120,617
------------- -------------- ------------- ---------------
General and administrative expenses 66,832 289,929 579,970 55,555
Rentals 53,157 236,695 296,903 28,442
Other operating expenses 59,505 316,675 267,459 25,620
------------- -------------- ------------- ---------------
Total expenses 179,494 843,299 1,144,332 109,617
------------- -------------- ------------- ---------------
(Loss) income before depreciation and
amortization (212,056) (388,168) 635,262 60,853
Depreciation and amortization 101,863 473,178 708,927 67,909
------------- -------------- ------------- ---------------
Loss from operations (313,919) (861,346) (73,665) (7,056)
------------- -------------- ------------- ---------------
Other income - Net (Notes 9 and 11) 41,649 22,049 44,770 4,288
------------- -------------- ------------- ---------------
Comprehensive financing result:
Interest income (6,359) (21,752) (5,453) (522)
Interest expense (include US$8,111 of
interest accrued since August, 16 to
December, 31 2002 of Nortel Networks
Corporation debt, see Note 10) 53,023 596,350 554,848 53,150
Amortization of debt fees and political risk
insurance (Note 10) 19,659 40,749 33,154 3,176
Exchange loss (gain) - Net 26,217 (132,953) 565,464 54,167
Gain on monetary position (22,673) (206,981) (305,146) (29,231)
------------- -------------- ------------- ---------------
69,867 275,413 842,867 80,740
------------- -------------- ------------- ---------------
Net loss for the period Ps (342,137) Ps (1,114,710) Ps (871,762) US$ (83,508)
============= ============== ============= ===============
Net loss for the period per share (Note 2p.) Ps (0.146) Ps (0.443) Ps (0.346) US$ (0.032)
============= ============== ============= ===============
(*) The Company commenced operations on February 1, 2000 and all income, costs
and expenses incurred during the period prior to February 1, 2000 were
capitalized.
(**) The US dollar figures represent the Mexican peso amounts as of December 31,
2002 expressed in pesos of December 31, 2002 purchasing power translated at
the exchange rate of Ps10.4393 per US dollar and are not covered by the
Report of Independent Accountants.
The accompanying seventeen notes are an integral part of these consolidated
financial statements.
F-76
UNEFON, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(Note 12)
(Thousands of Mexican pesos of December 31, 2002 purchasing power,
except per share amounts)
Number of Capital stock Premium
common shares ------------------------------ on share
outstanding * Authorized Unpaid subscription Deficit Total
------------- ------------- ------------- ------------- -------------- -------------
(thousands)
Balances at December 31, 1999 2,340,000 Ps 4,309,012 Ps (582,647) Ps 755,622 Ps 4,481,987
Capital stock decrease of
October 2, 2000 (582,647) 582,647
Capital stock reduction of
October 2, 2000 (689,858) (689,858)
Capital stock increase of
November 15, 2000 538,040 (538,040)
Issuance of capital stock
for initial public offering 176,129 194,544 805,474 1,000,018
Comprehensive loss for the
period Ps (342,137) (342,137)
------------- ------------- ------------- ------------- -------------- -------------
Balances at December 31, 2000 2,516,129 3,769,091 (538,040) 1,561,096 (342,137) 4,450,010
Comprehensive loss for the
period (1,114,710) (1,114,710)
------------- ------------- ------------- ------------- -------------- -------------
Balances at December 31, 2001 2,516,129 3,769,091 (538,040) 1,561,096 (1,456,847) 3,335,300
Comprehensive loss for the
period (871,762) (871,762)
------------- ------------- ------------- ------------- -------------- -------------
Balances at December 31, 2002 2,516,129 Ps 3,769,091 Ps (538,040) Ps 1,561,096 Ps (2,328,609) Ps 2,463,538
============= ============= ============= ============= ============== =============
* The number of shares has been retroactively adjusted for a 6,500 for one
stock split which occurred on November 15, 2000 (see Note 12).
The accompanying seventeen notes are an integral part of these consolidated
financial statements.
F-77
UNEFON, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Thousands of Mexican pesos of December 31, 2002 purchasing power)
Year ended December 31,
-----------------------------------------------------------------------
2000 2001 2002
--------------- ----------------- -------------------------------
Thousands of
US dollars (*)
Operation:
Net loss for the period Ps (342,137) Ps (1,114,710) Ps (871,762) US$ (83,508)
Charges to results of operations not
requiring the use of resources:
Depreciation and amortization 101,863 473,178 708,927 67,909
Interest accrued since August 1 to December
31, 2002 of Nortel Networks Corporation
debt (see Note 10) 84,673 8,111
Net changes in restricted cash, accounts
receivable, pre-operating expenses, other
assets, accounts payable and accrued expenses (200,209) 172,804 460,396 44,102
--------------- ----------------- ------------- --------------
Resources (used in) provided by operating
activities (440,483) (468,728) 382,234 36,614
--------------- ----------------- ------------- --------------
Financing:
Bank loans obtained (paid) 465,281 (146,992) (14,081)
Capital stock reduction (689,858)
Capital stock increase 194,544
Premium on share subscription 805,474
Debt to related parties 13,207 461,119 310,137 29,709
Financing from Nortel - Net 2,191,959 158,557 187,792 17,988
Capital stock reduction payable to
shareholders 692,607 14,692 (11,650) (1,116)
--------------- ----------------- ------------- --------------
Resources provided by financing activities 3,207,933 1,099,649 339,287 32,500
--------------- ----------------- ------------- --------------
Investment:
Acquisition of property and equipment - Net (2,030,329) (1,079,038) (648,607) (62,130)
Comprehensive financing cost capitalized (32,865)
Pre-operating expenses (310,434) (11,063)
--------------- ----------------- ------------- --------------
Resources used in investment activities (2,373,628) (1,090,101) (648,607) (62,130)
--------------- ----------------- ------------- --------------
Increase (decrease) in cash and cash
equivalents 393,822 (459,180) 72,914 6,984
Cash and cash equivalents at beginning of the
year 196,313 590,135 130,955 12,545
--------------- ----------------- ------------- --------------
Cash and cash equivalents at end of the year Ps 590,135 Ps 130,955 Ps 203,869 US$ 19,529
=============== ================= ============= ==============
(*) The US dollar figures represent the Mexican peso amounts as of December 31,
2002 expressed in pesos of December 31, 2002 purchasing power translated at
the exchange rate of Ps10.4393 per US dollar and are not covered by the
Report of Independent Accountants.
The accompanying seventeen notes are an integral part of these consolidated
financial statements.
F-78
UNEFON, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(Thousands of Mexican pesos of December 31, 2002
purchasing power, except exchange rates and
number of shares)
NOTE 1 - THE COMPANY:
Unefon, S. A. de C. V. ("Unefon" or "Company") was incorporated under the laws
of Mexico on January 19, 1998.
The Company is mainly engaged in the installation, operation and exploitation of
a public, wireless, digital network of telecommunications services under
concession rights granted by the Ministry of Communications and Transport
("SCT") (see Note 5).
At an Extraordinary Stockholder's Meeting held on August 16, 2001, the
stockholders agreed to spin-off part of the assets and liabilities pertaining to
the 3.4 GHz, 7.1-7.7 GHz and 37.0-38.6 GHz frequencies, with the authorization
of the SCT and consent from Nortel Networks Corporation ("Nortel"), from
Operadora Unefon, S. A. de C. V., to three newly incorporated wholly owned
subsidiaries of Unefon, S. A. de C. V.: Operadora de Comunicaciones, S. A. de C.
V., Unefrecuencias, S. A. de C. V. and Frecuencia Movil, S. A. de C. V.,
respectively.
Unefon is a holding company, with no material assets or operations other than
its investment in its subsidiaries described below:
% of participation
------------------
Company Operating activity Direct Indirect
----------------------------------------------- ---------------------------------------- ------- --------
Operadora Unefon, S. A. de C. V. ("Operadora"), Concessionaire for radio-electric
formerly Sistemas Profesionales de frequency bands for fixed or mobile
Comunicacion, S. A. de C. V. wireless access services 99.9%
Servicios SPC, S. A. de C. V. ("Servicios") Personal service company 99.9%
Operadora SPC, S. A. de C. V. ("Operadora SPC") Administrative personal service company
(in pre-operating stage) 99.9%
Operadora de Comunicaciones, S. A. de C. V. Concessionaire for radio-electric 99.9%
("Operadora de Comunicaciones") frequency band
F-79
% of participation
------------------
Company Operating activity Direct Indirect
----------------------------------------------- ---------------------------------------- ------- --------
Unefrecuencias, S. A. de C. V. Concessionaire for radio-electric 99.9%
("Unefrecuencias") frequency band (in pre-operating stage)
Frecuencia Movil, S. A. de C. V. Concessionaire for radio-electric 99.9%
frequency band (in pre-operating stage)
Torres y Comunicaciones, S. A. de C. V. In pre-operating stage 99.9%
("Torres") (a wholly-owned subsidiary of
Operadora)
On February 1, 2000, the Company began operations in the city of Toluca. At
December 31, 2002 the Company had operations in fifteen cities (Toluca, Torreon,
San Luis Potosi, Aguascalientes, Puebla, Leon, Guadalajara, Monterrey,
Queretaro, Acapulco, Mexico City, Morelia, Tampico, Saltillo and Tuxtla
Gutierrez).
The Company 's revenues are dependent on providing reliable service to customers
at competitive rates, the general economic conditions in the geographic regions
served and the ability to effectively compete against alternative forms of
telecommunications services, such as cellular and fixed line services.
The Company is highly leveraged and may, depending on the outcome of the
litigation with Nortel need to generate significant cash flows from operations
to meet its obligations on its indebtedness to Nortel (see Note 10).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's consolidated financial statements have been prepared in accordance
with Accounting Principles Generally Accepted in Mexico ("Mexican GAAP"), which
differ in certain material respects from those under Accounting Principles
Generally Accepted in the United States of America ("US GAAP") (see Note 17).
Mexican GAAP requires that the financial statements be expressed in constant
pesos of purchasing power as of the date of the most recent balance sheet
presented, in this case, December 31, 2002, based on factors derived from the
National Consumer Price Index ("NCPI") issued by the Banco de Mexico.
Following is a summary of the most significant accounting policies followed by
the Company in preparing its consolidated financial statements:
a. Consolidation basis
The Company consolidates all of its subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
F-80
b. Cash and cash equivalents
Cash and cash equivalents represent highly liquid interest-bearing deposits and
investments with an original maturity of less than three months. Cash and cash
equivalents are stated at cost, plus interest earned during the period.
c. Handset inventories
Inventories are stated at net replacement cost. Values so determined do not
exceed market value.
d. Property and equipment
Property and equipment are expressed at restated value determined by applying
factors derived from the NCPI to acquisition costs, which include capitalized
comprehensive financing costs. Depreciation is calculated using the
straight-line method, based on the estimated useful lives of the assets (see
Note 4). Property and equipment includes Ps87,497, Ps19,876 and Ps22,011 of
comprehensive financing cost capitalized in 2000, 2001 and 2002, respectively.
e. Concession rights
Concession rights are expressed at restated value determined by applying factors
derived from the NCPI to acquisition costs, which include capitalized
comprehensive financing costs. Amortization is calculated using the
straight-line method over the term of the concession rights (20 years), starting
from the date on which wireless telephone services commence in the cities in
which the Company operates.
Concession rights include Ps32,865 of capitalized comprehensive financing costs
in 2000 (see Note 5).
f. Pre-operating expenses
Pre-operating expenses include costs and expenses associated with the
commencement of operations in the cities in which the Company will provide
services, and are expressed at restated value determined by applying factors
derived from the NCPI to original cost. Amortization is calculated using the
straight-line method over a period of 10 years, starting from the date on which
operations commence (see Note 6).
g. Income tax and employees' statutory profit sharing
Income tax is recorded by the comprehensive assets and liability method, which
consists of recognizing deferred income tax on all temporary differences between
the book and tax values of assets and liabilities at the date of the financial
statements (see Note 13).
F-81
Deferred employees' statutory profit sharing is recorded only in respect of
those temporary differences between book income and income adjusted for profit
sharing purposes which it may reasonably be presumed will result in a future
liability or benefit.
h. Comprehensive income
As of January 1, 2001, Statement B-4 "Comprehensive Income", entered into
effect, this statement requires that the various items making up the capital
gains (losses) during the year be shown in the statement of stockholders' equity
under the item of comprehensive income. Therefore, in order that the various
lines of the statement of stockholders' equity could be comparable, said
statement was restructured. Comprehensive loss is represented by the net loss
plus the gain or loss from holding non-monetary assets, the translation
adjustment arising in connection with foreign subsidiaries, and items required
by specific accounting standards to be reflected in stockholders' equity but
which do not constitute capital contributions, reductions or distributions. It
is restated on the basis of NCPI factors. As of December 31, 2001 and 2002,
comprehensive loss is integrated by the net loss for the period.
i. Labor benefits
Seniority premiums to which employees are entitled upon termination of
employment after 15 years of service are recognized as cost for the years in
which their services are rendered. At December 31, 2001 and 2002, these labor
liabilities were not significant, as most employees had not accumulated much
seniority.
Other compensations based on length of service to which employees may be
entitled in the event of dismissal or death, in accordance with the Mexican
Federal Labor Law, are charged to results of operations in the year in which
they become payable.
j. Foreign currency transactions
Transactions in foreign currencies are recorded at the rates of exchange
prevailing on the dates they are entered into and/or settled. Assets and
liabilities denominated in these currencies are stated at the Mexican peso
equivalents resulting from applying exchange rates at the balance sheet date.
Exchange differences arising from fluctuations in the exchange rate between the
dates on which transactions are entered into and those on which they are
settled, or the balance sheet date, are charged or credited to results of
operations.
k. Capital stock, premium on share subscription and result on monetary position
Capital stock is stated in terms of year-end purchasing power, and is determined
by applying factors derived from the NCPI to the historical amounts.
The premium on share subscription represents the difference between the payment
for the shares subscribed and the nominal value of those shares, and is restated
by applying NCPI factors.
F-82
The result on monetary position shown in concession rights, property, furniture
and equipment, pre-operating expenses and results of operations represents the
effects of inflation, measured in terms of the NCPI, on net monthly monetary
assets and liabilities.
l. Revenue recognition
The Company sells wireless telephone services through pre-paid phone cards.
Revenue from the sale of handsets and accessories is recognized when the
equipment is delivered to distributors. No revenue is recorded for the free
minutes of wireless service provided to customers upon acquisition of handsets.
Clients do not pay any activation fees.
Pre-paid wireless telephone services must be used in a maximum period of 30 days
after prepayment, after which the right expires, except when prior to the
expiration date, the client purchases at least Ps150 of additional services, at
which time the latest purchase is accumulated to the unused balance, and the
term is renewed for an additional 30 days.
Service revenue (including revenue recorded from pre-paid phone cards),
interconnections revenue, resale of long distance, and other revenue are
recognized when the related services are provided or when unused wireless
services (minutes) expire.
m. Advertising costs
Advertising expenses are recorded as they accrued.
n. Stock option plan
Stock options granted to participants are given effect when the options are
exercised by crediting paid-in capital stock, based on the cash received.
o. Intangible and long-lived assets
Intangible and long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable.
p. Net loss per share
Net loss per share is calculated based on the weighted average number of shares
outstanding during the period. The weighted average number of shares has been
retroactively adjusted for 6,500 for a stock split that occurred on November 15,
2000 (see Note 12). The weighted average number of shares outstanding for the
period from February 1, 2000 (commencement of operations) through December 31,
2000 was 2,347,339 (thousands). As of December 2001 and 2002, the weighted
average number of shares outstanding was 2,516,129 (thousands).
F-83
q. Fair value of financial instruments
The market value of cash and cash equivalents, accounts receivable, short-term
debt and accounts payable is not substantially different from their book value
due to the variable interest rates and short-term maturity of the financial
instruments.
The Company's long-term debt financing from Nortel is subject to interest at
variable rates, and the terms are generally representative of those to which the
Company had access at December 31, 2001 and 2002 for debt issuances under
similar conditions and maturities (see Note 10).
r. Use of estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires Management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements. Actual results could differ from those estimates.
s. New accounting principles
In 2001, the Mexican Institute of Public Accountants (MIPA) issued new Statement
C-9 "Liabilities, Provisions, Contingent Assets and Liabilities and
Commitments", which replaces original Statements C-9 and C-12, both dating back
to 1974, and supersedes Circulars 46, 47 and 48. Statement C-9 is compulsory for
periods beginning after January 1, 2003. However, early adoption is recommended.
The purposes of the statement is to establish particular rules for valuation,
presentation and disclosure of liabilities, as well as provisions to determine
special rules for valuation, as well as disclosure of contingent assets and
liabilities and provide rules for the disclosure of commitments acquired by the
Company as part of its daily operations.
In January 2002, the MIPA issued new Statement C-8 "Intangible Assets", which
replaces original Statement C-8, in effect from 1976. The provisions of this
statement are compulsory for financial statements for years beginning after
January 1, 2003. However, early adoption is recommended. The most relevant
aspects of this statement are that: i) specific guidelines and criteria are
established for accounting treatment of research and development costs; ii)
preoperating expenses fully identifiable as research must be recorded as
expenses for the period, and iii) valuation rules are based on a logical
sequence of the life cycle of the asset, considering the initial recognition and
valuation of the intangible assets, recognition of an expense, subsequent
disbursements and valuation following initial recognition.
Additionally, the MIPA issued Statement C-15 "Deterioration in the Value of
Long-Lasting Assets and Their Disposal", which will be effective as of January
1, 2004, although early adoption is recommended. This statement: a) provides
criteria that allow the identification of situations showing evidence of
deterioration in the value of long-lasting assets, both tangible and intangible;
b) defines the rule for calculating and recording of losses arising from the
deterioration of assets and their reversion; c) establishes the rules for
presentation and disclosure of assets whose value has deteriorated of whose
deterioration has reversed, and d) rules are provided for the presentation and
disclosure applicable to the discontinuation of operations.
F-84
Management is currently evaluating the impact that the adoption of these
statements will have on its consolidated financial statements.
t. Reclassifications
Some 2000 and 2001 figures were reclassified to conform to 2002 classifications.
NOTE 3 - FOREIGN CURRENCY POSITION:
At December 31, 2001 and 2002, the Company had the following monetary assets and
liabilities denominated in thousands of US dollars, valued at the exchange rates
of Ps9.17 and Ps10.439 per US dollar, respectively:
December 31,
----------------------------------
2001 2002
--------------- ---------------
Assets US$ 16,779 US$ 24,903
Liabilities (468,935) (629,005)
--------------- ---------------
Net short position US$ (452,156) US$ (604,102)
=============== ===============
At February 24, 2003, date of issuance of these consolidated financial
statements, the exchange rate was Ps10.98 per US dollar.
Below is a summary of the Company's principal foreign currency transactions,
expressed in thousands of US dollars:
For the year ended
December 31,
---------------------------------------------------
2000 2001 2002
--------------- ------------- ---------------
Fees US$ 920 US$ 1,367 US$ 395
=============== ============= ===============
Interest expense US$ 27,064 US$ 46,693 US$ 19,442
=============== ============= ===============
Inventory purchases US$ 271,766 US$ 85,697 US$ 64,103
=============== ============= ===============
Property and equipment acquisitions US$ 198,794 US$ 70,232 US$ 151,664
=============== ============= ===============
F-85
NOTE 4 - PROPERTY AND EQUIPMENT:
December 31,
--------------------------------
Estimated
2001 2002 useful life
-------------- -------------- -----------
(years)
Buildings Ps 254,034 Ps 254,036 20
Leasehold improvements 90,543 95,850 10
Communication equipment 83,367 102,245 3
Office furniture and equipment 73,153 75,038 10
Transportation equipment 19,151 17,962 4
Computer equipment and software 265,653 373,776 3
Transmission equipment 1,952,629 2,973,164 10
Machinery and equipment 84,357 94,925 10
-------------- --------------
2,822,887 3,986,996
Accumulated depreciation (339,620) (810,418)
-------------- --------------
2,483,267 3,176,578
Land 39,691 39,598
Transmission equipment on installation
process - Nortel 923,428
Construction in progress others 138,153 190,554
-------------- --------------
Ps 3,584,539 Ps 3,406,730
============== ==============
On September 7, 1999, the Company signed a procurement agreement, a finance
agreement, a letter agreement, and certain other related agreements with Nortel
(see Note 10). Under the terms of the procurement agreement, 15% of the purchase
price was due at the time the purchase orders were issued, 55% when the goods
were shipped, 20% at the time of provisional acceptance, and the remaining 10%
when the final written acceptance was issued. Title of equipment was to be
transferred upon receipt of the final written acceptance.
Under the terms of the financing and other related agreements, which are under
dispute and may or may not be in force, Nortel has a first priority security
interest in all property of the Company and its subsidiaries and a pledge on
Unefon's shares in Operadora de Comunicaciones, Unefrecuencias and Torres (see
Note 10).
NOTE 5 - CONCESSION RIGHTS:
On May 18, 1998, the Company received formal notification from the Federal
Telecommunications Commission ("COFETEL") granting the Company national
concessions for the use of 80 MHz of radio frequencies. These concessions give
the Company the right to use a bandwidth of 30 MHz within the 1.9 GHz frequency
range, and two bandwidths of 25 MHz within the 3.4 GHz frequency range in each
of the nine regions of Mexico (jointly referred to as "wireless concessions").
Additionally, on June 23, 1998, the SCT issued the Company a concession for the
installation, operation and exploitation of a public telecommunications network
(the "network concession").
F-86
Wireless concessions allow the Company to exclusively use bandwidth blocks for
which it is licensed to provide mobile or fixed telephone services. The network
concession allows the Company to operate a public telephone network. The Company
may provide specific services indicated in the network concession and the
wireless concessions, which include i) local telephone services; ii) marketing,
reception and transmission of any kind of information, and iii) access to
videoconferencing, audio, video and information networks.
The Company paid the equivalent of 20% of the concession value on June 30, 1998,
and was given an extension to June 15, 1999 to pay the remaining 80%. On June
14, 1999, the Company paid the Mexican Government the remaining 80% of the
concession cost plus interest accruing through that date.
In April 1999 and October 1999, the Company acquired concessions for the use of
a bandwidth of 112 MHz within the 37.0-38.6 GHz frequencies and the 7.1-7.7 GHz
frequencies, amounting to Ps39,373 (Ps30,573 historical).
The Company's concessions were granted for a period of twenty years and are
renewable if certain requirements are complied with.
Under the provisions of the 1995 Federal Telecommunications Law and the Foreign
Investments Law, telecommunications concessions may only be granted to Mexican
individuals or entities, in which foreign investment may not exceed 49% of the
capital stock, or which are not controlled by foreign entities, except, in the
case of concessions for cellular communication services, where foreign
investment may exceed 49% of the capital stock, and there is approval from the
National Foreign Investments Commission.
Under the 1995 Federal Telecommunications Law, a concession may be terminated in
the following cases: i) when the term expires; ii) when the concessionaire
cancels the concession; iii) when the concession is terminated due to
noncompliance with the terms of the concessions and applicable law; iv)
expropriation, or v) when there is dissolution or bankruptcy of the concession
holder.
F-87
Below is a breakdown of the concession rights:
December 31,
------------------------------
2001 2002
------------- -------------
Concession for 1.9 GHz frequency Ps 2,302,780 Ps 2,302,780
Capitalized interest net of result on
monetary position 158,097 158,097
Effect of restatement 1,033,442 1,033,442
------------- -------------
3,494,319 3,494,319
Less - accrued amortization:
Concession for 1.9 GHz frequency (172,265) (329,505)
------------- -------------
3,322,054 3,164,814
------------- -------------
Concession for 3.4 GHz frequency 450,482 450,482
Capitalized interest net of result on
monetary position 24,857 24,857
Effect of restatement 201,810 201,810
------------- -------------
677,149 677,149
------------- -------------
Concessions for 37.0-38.6 GHz frequencies 16,639 16,639
Capitalized interest net of result on
monetary position 477 477
Effect of restatement 3,561 3,561
------------- -------------
20,677 20,677
------------- -------------
Concessions for 7.1-7.7 GHz frequencies 15,478 15,478
Capitalized interest net of result on
monetary position 431 431
Effect of restatement 2,789 2,789
------------- -------------
18,698 18,698
------------- -------------
Ps 4,038,578 Ps 3,881,338
============= =============
Under the concessions rights, the Company is subject to certain coverage
commitments (mainly the provision of services in all 9 regions into which the
concession titles are divided into). The coverage commitments are divided into
five phases, all of which must be completed during a term of three through five
years. As of December 31, 2002, the Company had not met the coverage
commitments, however it is in process of obtaining an extension.
In September 2000, the SCT awarded the Company a concession (at no cost) to
install, operate and exploit the public telecommunications network to provide
national and international long distance telephone service. Until the public
telecommunications network is in operation, the Company is able to provide
national long distance services through agreements with other service providers.
This concession is for a 30 years period and can be extended for an additional
30 year period at the SCT's discretion, and assuming compliance by the Company
with the conditions of the concession.
F-88
During December 1999, Radiocel, S. A. de C. V. ("Radiocel") made an advance
payment of Ps19,285 to purchase the 37.0-38.6 GHz concessions. In November 2000
Radiocel transferred its right to acquire the concessions to 38 GHTZ, S. A. de
C. V. ("38 GHTZ"). Both Radiocel and 38 GHTZ are related parties.
In October 2000 and November 2000, the Company entered into: i) promissory sale
agreements with Telefrecuencias, S. A. de C. V. ("Telefrecuencias") and
Transmisiones y Frecuencias, S. A. de C. V. ("Transmisiones y Frecuencias")
(related parties), for the transfer of the concessions relating to Operadora's
right to use the 3.4 GHz and 7.1-7.7 GHz frequencies, respectively; (ii)
operations agreements with Telefrecuencias and Transmisiones y Frecuencias; and
(iii) distribution agreements with 38 GHTZ. Each of these agreements will be
terminated when the final transfers mentioned in the promissory sale agreement
are realized.
During the year ended December 31, 2000, the Company recognized Ps13,678 as
revenue for the operating and distribution agreements described above. This
revenue was canceled in 2001.
During 2001, the Company and Telefrecuencias, Transmisiones y Frecuencias and 38
GHTZ, decided to terminate the promissory sale and operation agreements without
obligation or penalty for any of them.
NOTE 6 - PRE-OPERATING EXPENSES:
December 31,
-----------------------------
2001 2002
------------- ------------
Administrative expenses Ps 239,027 Ps 239,027
Leasing 66,444 66,444
Fees 195,015 195,015
Advertising expenses 32,051 32,051
Depreciation 28,941 28,941
Political risk insurance 33,177 33,177
Exchange loss - Net 21,259 21,259
Interest expense - Net 157,858 157,858
Commissions 54,808 54,808
Gain on monetary position (68,441) (68,441)
Other expenses (income) - Net (14,441) (14,441)
------------- ------------
745,698 745,698
Less - Accumulated amortization (89,014) (165,293)
------------- -------------
Ps 656,684 Ps 580,405
============= ============
F-89
NOTE 7 - OTHER ASSETS:
December 31,
------------------------------
2001 2002
------------ --------------
Current balances:
Pre-paid political risk insurance (Note 10) Ps 19,504 Ps -
Advance payments 17,479 788
Other accounts receivable 1,774 4,837
------------ --------------
Ps 38,757 Ps 5,625
============ ==============
Long-term balances:
Arrangement fee (Note 10) Ps 90,306 Ps 63,150
Prepaid expenses 45,542 50,099
SCT fees for assigned telephone numbers 23,660 21,030
Guarantee deposits 4,807 17,330
Other 24,053 22,771
------------ --------------
Ps 188,368 Ps 174,380
============ ==============
NOTE 8 - BANK LOANS:
At December 31, 2002 the Company had the following direct bank loans:
Bank Amount Interest rate Due date
-------------------- ------------- ------------- --------------
(thousands)
Short term
Banco Inbursa, S. A. US$ 3,921 11% June, 2003
Banco Inbursa, S. A. 8,180 11% June, 2003
STC Capital Corp. 8,778 20% February, 2003
-------------
20,879
-------------
Long term
STC Capital Corp. 8,000 20% August, 2004
Others 1,611
-------------
9,611
-------------
Total US$ 30,490
=============
In December 2000, Unefon's principal shareholders, TV Azteca and Mr. Saba,
agreed in a shareholders' undertaking to provide Unefon up to US$35.0 million in
the aggregate by way of either equity or subordinated debt in the event Unefon
had liquidity shortfalls in 2001 or 2002. In such event, TV Azteca and Mr. Saba
would be jointly and severally obligated to make additional funds available to
Unefon. On December 20, 2002, Nortel notified TV Azteca and Mr. Saba of its view
that Unefon's non-payment of the August 2002 interest payment triggered their
joint and several obligations to make additional funds available to Unefon up to
an
F-90
aggregate amount of US$35.0 million as provided in the shareholders'
undertaking. TV Azteca and Mr. Saba dispute Nortel's contention that their
funding obligation has been triggered, asserting that Nortel has materially
breached the finance agreement and the procurement agreement, thereby excusing
Unefon from performance of its obligations under these agreements and,
therefore, that TV Azteca and Mr. Saba are excused from performance of their
obligations under the shareholders' undertaking. TV Azteca and Mr. Saba also
assert that, even if their funding obligation has been triggered, they have
satisfied their obligations under the shareholders' undertaking by making up to
US$35.8 million in additional funds available to or on behalf of Unefon.
In July 2001, TV Azteca and Mr. Saba announced their intention to provide credit
support to Unefon for up to US$80.0 million cash. As of January 31, 2003, TV
Azteca had paid US$17.7 million to certain creditors of Unefon pursuant to this
credit support and it had outstanding credit support obligations in the amount
of US$12.1 million. TV Azteca has suspended any further credit support to Unefon
in light of Unefon's dispute with Nortel (see Note 10).
NOTE 9 - RELATED PARTY BALANCES AND TRANSACTIONS:
December 31,
-------------------------------
2001 2002
------------ ------------
Short-term balances:
Accounts receivable:
Elektra, S. A. de C. V. ("Elektra") Ps 109,102
Grupo Hecali, S. A. de C. V. Ps 6,553
TV Azteca 78,198
Grupo Telecosmos 18,754
Others 98
------------ ------------
Ps 6,651 Ps 206,054
============ ============
Accounts payable:
Stockholders Ps 384,166
Grupo Alsavision, S. A. de C. V. ("Grupo Alsavision") Ps 175,533 143,060
Elektra 116,895 240,095
TV Azteca 21,484 16,692
Others 2,718 13,794
------------ ------------
Ps 316,630 Ps 797,807
============ ============
Long-term balances:
Accounts payable:
Elektra Ps 21,970 Ps 65,429
TV Azteca 88,114 74,154
38 GHTZ (Note 5) 20,422 19,285
------------ ------------
Ps 130,506 Ps 158,868
============ ============
F-91
The most important transactions with related parties are summarized as follows:
For the year ended
December 31,
--------------------------------------------------
2000 2001 2002
------------- ------------- -------------
Sales of handsets and accessories Ps 187,746 Ps 140,477 Ps 281,532
============= ============= =============
Other income - Net (Note 5) Ps 13,678
=============
Administrative expenses Ps 11,908
=============
Rental expense Ps 21,900 Ps 23,165 Ps 24,865
============= ============= =============
Interest expense (*) Ps 8,411 Ps 16,884 Ps 79,547
============= ============= =============
Advertising expenses Ps 11,125 Ps 65,100 Ps 65,742
============= ============= =============
Commissions on prepaid cards Ps 2,162 Ps 14,815 Ps 55,357
============= ============= =============
Purchases of telephone handsets Ps 89,100 Ps 127,627 Ps 244,267
============= ============= =============
Sale of handsets commission Ps 52,080 Ps 57,034
============= =============
(*) This interest was accrued during 2000, 2001 and Ps48,843 in 2002 in
connection with the capital reduction payable to stockholders (see Note
12).
Marketing, Distribution and Lease agreements - Grupo Elektra:
In June 1998, the Company entered into a 10 year agreement with Elektra
Comercial, S. A. de C. V., T.H.E.O.N.E, S. A. de C. V., Salinas y Rocha, S. A.
de C. V. and Grupo Hecali, S. A. de C. V. (collectively "Grupo Elektra") for the
marketing and distribution of Unefon's services in Grupo Elektra's national
network of stores in Mexico. This agreement was amended in October 1999,
November 2000 and December 2000. The current agreement with Grupo Elektra
compensates Grupo Elektra based on the percentage of revenues generated from the
sales of handsets, airtime sold in its stores and net interconnection from
customers acquires by Unefon through Grupo Elektra.
As compensation for Grupo Elektra services, the Company has agreed to pay Grupo
Elektra:
.. The greatest of a 20% discount of the value of the handset or 150 pesos
discount per handset (indexed annually by the NCPI).
F-92
.. 5.8% of airtime sold at Grupo Elektra stores for use on Unefon's network
through prepaid cards. During the year ended December 31, 2000, 2001 and
2002, the Company accrued commissions of Ps2,162, Ps14,815 and Ps19,196,
respectively.
.. 5.8% of the net interconnection revenue from "calling party pays"
subscribers signed-up through Grupo Elektra stores. Net interconnection
revenue is defined as interconnection revenue minus cost of
interconnection. During 2000, 2001 and 2002, the Company accrued
commissions of Ps28, Ps6,040 and Ps8,830, respectively.
In accordance with a ten-year lease agreement dated November 3, 2000, Grupo
Elektra receives an annual fee payment of US$3,000 for each of the Grupo Elektra
stores at which the Company installs a transmission base or any other equipment.
The Company recorded Ps246, Ps265 and Ps282 for fees of this nature during the
year ended December 31, 2000, 2001 and 2002, respectively.
Under the terms of the agreements, the Company will defer payment of amounts
related to airtime, interconnection and lease space accrued in 2000, 2001 and
2002 until the end of 2004. Amounts accrued in 2003 and 2004 will be payable in
2005. All amounts deferred under these agreements accrue interest at a rate
equivalent to Grupo Elektra's average annual interest rate on its peso
denominated debt. Starting in 2005, these payments will be made as they accrue.
"Credito Plus":
In November 1, 2000 the Company entered a 5 year agreement with Grupo Elektra,
as alternative to promote and sell handsets and airtime through "Credito Plus",
these agreement do not imply novation, switch, modification or cancellation of
the Grupo Elektra agreement mentioned above.
Unefon will pay a 16.5% commission on prepaid airtime sold inside Elektra
stores, to use it on Unefon's Network. The commissions will pay on an accrued
basis. During 2000 the amount was no significant, in 2001 and 2002 Operadora
paid Ps9,096 and Ps17,263, respectively.
Advertising Agreement - TV Azteca:
In June 1998, the Company entered into a 10 year agreement with TV Azteca under
which TV Azteca is to provide the Company with airtime on its two national
television channels, Azteca 7 and Azteca 13, in Mexico for Unefon's advertising
campaigns. The agreement with TV Azteca was amended in October 1999 and in March
2001.
The principal terms and conditions of the TV Azteca agreement include:
.. TV Azteca will supply Unefon with advertising spots totaling an aggregate
of 120,000 Gross Rating Points ("GRPs") over the term of the agreement, up
to a maximum of 35,000 GRPs per year. For purposes of the agreement, GRPs
equal the number of total rating points obtained in 60 second transmission
of commercial messages. Up to 30% of these GRPs may be used
F-93
during prime-time, which is defined in the agreement as 7:00 p.m. to 11:00
p.m., Monday through Friday, and 6:00 p.m. to 11:00 p.m., Saturday and
Sunday. Unefon can only use the GRPs through December 2009;
.. Unefon will pay TV Azteca 3.0% of its gross revenues up to maximum of
US$200.0 million. GRPs used by the Company are billed by TV Azteca in
accordance with the terms of the agreement as the GRPs are consumed on a
rate schedule set forth in the agreement, which provides less expensive
GRPs initially and more expensive GRPs over the term of the agreement.
Pursuant to the agreement, Unefon has elected to defer payments due in
2000, 2001 and 2002 and to make these payments in four equal semi-annual
installments during 2003 and 2004, with the first payment due in June 2003.
The deferred payments accrued interest at an annual interest rate of 12%.
Starting in 2003, Unefon's payments to TV Azteca are due on a current
basis. At December 31, 2002, the aggregate deferred payments equaled
US$15.7 million (including interest);
.. TV Azteca's right to payment under the agreement is subject to compliance
by Unefon with its payment obligations under the finance agreement with
Nortel; and
.. Pursuant to the advertising agreement, Unefon's failure to pay advances
will not be considered a default by Unefon under the agreement. However, TV
Azteca will be able to suspend the provision of television services to
Unefon after Unefon's continued failure to pay for one year.
During the year ended December 31, 2000, 2001 and 2002, the Company received
Ps11,009 Ps70,010 and Ps80,357, respectively, in advertising under the terms of
this agreement. Of the 2000 amount Ps4,530 was recorded as preoperating expenses
and Ps6,479 in results of operations. The amounts for 2001 and 2002 were
recorded in results of operations.
TV Azteca lease agreement:
On May 22, 1998, the Company signed a building lease agreement with TV Azteca
for its headquarters in Mexico City for a term of ten years with a one-time
right to renew for an additional ten year term. The lease building consists of
8,607, square meters of office space and 300 parking spaces, for which the
Company pays Ps2,072 plus value added tax monthly. The lease payment is adjusted
monthly by applying NCPI factors.
Alsavision loan
During 2001 and 2002, the Company entered into promissory notes payable to Grupo
Alsavision. As of December 31, 2001 and 2002, the Company had outstanding
balances of US$19.0 million and US$13.0 million, respectively.
F-94
Stockholder loans
As of December 31, 2002 the Company had received short-term stockholder loans in
an aggregate amount of US$36.8 million.
NOTE 10 - LONG-TERM FINANCING FROM NORTEL:
Operadora signed a finance agreement with Nortel for a total of up to US$618.0
million, available in two tranches. Tranche "A" was for US$408 million (of which
US$135.0 million was to finance working capital requirements) and was available
from November 15, 1999 through May 15, 2002. Tranche "B" was for US$210.0
million (of which US$35 million was to finance working capital requirements) and
was suppose to be available from May 15, 2002 through May 15, 2003, or earlier
in the event that Tranche "A" had been utilized. Tranche "B" was available, on a
dollar-by-dollar basis as Tranche "A" was syndicated.
As of December 31, 2002, Operadora drew down US$382.9 million from Tranche "A"
and US$14.5 million of Tranche "B", totaling US$397.4 million. On December 27,
2000, Operadora made a mandatory prepayment amounting to US$22.6 million. The
prepayment was required as a result of the proceeds received from the Company's
initial public offering (see Note 12).
On September 21, 2001, Operadora made another prepayment amounting to US$25.0
million, in order to make available Tranche "B".
At December 31, 2001 and 2002, long-term debt related to this agreement was
Ps3,396,494 and Ps3,293,759, respectively (US$349.8 million and US$315.5
million, respectively).
The interest rate on this agreement is defined as LIBOR plus a sovereign spread,
plus an applicable margin. In general terms, the sovereign spread is the
difference between the interest rate paid on the sovereign debt issued by the
Mexican Government and the debt issued by the US Treasury Department. At
December 31, 2001 and 2002, the interest rate was 7.8% and 6.8%, respectively.
Given the legal dispute between Unefon and Nortel, the Company has decided to
record an interest provision amounted to US$8.1 million equivalent to the
interest that would have accrued from August 15 to December 31, 2002. Such
provision has been created due to the possibility that exists of Unefon becoming
obligated to pay such amounts, in the event that a judicial ruling relative to
the aforementioned dispute is issued by a competent authority.
The agreement required Operadora to refrain from: i) incurring any debt not
expressly permitted in the terms of the agreement; ii) disposing of assets
outside the ordinary course of business; iii) granting liens without the
previous consent of the creditors; iv) making restricted payments dividend and
other payments; v) merging or investing in other companies without the previous
consent of Nortel, and vi) entering into certain operations with related
parties, unless previously authorized by Nortel.
F-95
Under the financing agreement, an event of default would occur and the financing
agreement would become due in the event of the occurrence of any of the
following events: a) failure to pay the principal within a grace period of five
calendar days; b) failure to pay any other amount within a period of grace of
ten calendar days; c) any statement made by Unefon which is not corrected or
false or which is not corrected within a period of 30 calendar days; d) any
event of noncompliance with the obligations for investment of capital; e)
noncompliance with the requirement to keep certain amounts of money in the "debt
service reserve account"; f) when the political risk insurance ceases to be in
effect; g) noncompliance with any of the requirements, and failure to resolve
said noncompliance in a period of 30 calendar days; h) when any concession is
revoked, suspended, etc.; i) noncompliance in connection with any other debt in
an amount exceeding US$10 million dollars; j) any change in shareholding
control, and k) advance termination of the TV Azteca or Grupo Elektra
agreements.
On November 14, 2000, Operadora obtained the consent of Nortel with respect to
the capital reduction of the 25,000 Series "A" and 25,000 Series "B" shares
approved by the Operadora's shareholders in October 2, 2000 (see Note 12), and
the timing of the Company's proposed initial public offering (see Note 12).
An arrangement fee of US$11,700 payable on May 15, 2001 was required for
obtaining the Tranche "A" loan. The arrangement fee accrues interest at the
LIBOR plus 200 base points. The arrangement fee plus interest accrued was paid
on June 2001. The arrangement fee on the Tranche "B" was payable wherever the
facility became available.
Operadora was also required to pay a commitment fee: i) on the unutilized
amounts of Tranche "A", and ii) on Tranche "B" as from the date on which the
amounts in question become available. At December 31, 2002 Operadora paid
US$355,000 related to Tranche "A" (US$545,000 related to Tranche "A" at December
31, 2001 and US$3.6 million at December 31, 2000).
The financing agreement required the Company to pay on behalf of Nortel the
costs incurred by Nortel in the acquisition of political risk insurance.
Payments were due on a semi-annually basis. Those amounts are amortized using
the straight-line method over the term specified in the insurance contract.
The financing agreement requires the Company to make quarterly deposits
beginning from December 31, 1999 into a debt service reserve account in order to
guarantee principal and interest payments. At December 31, 2001 and 2002, the
balance of such account was Ps164,613 and Ps159,492, respectively, and is
presented as restricted cash in the balance sheet.
F-96
According to the financing agreement the future maturities of the long-term
financing from Nortel at December 31, 2001 and 2002 are as follows:
December 31,
------------------------------------
2001 2002
--------------- --------------
2003 Ps 332,856
2004 658,920 Ps 708,414
2005 2,404,718 2,585,345
--------------- --------------
Ps 3,396,494 Ps 3,293,759
=============== ==============
The balance of the long term financing with Nortel as of December 31, 2002 has
been included as a long-term liability in the consolidated balance sheet based
on the original repayment terms of the financing agreement. It is possible,
however, that as part of the resolution of the legal disputes with Nortel
described below, these amounts might have to be repaid within a year from the
balance sheet date. Management is not in a position to anticipate the final
outcome of this litigation.
At December 31, 2001 and 2002, the Company had no financial derivative
instruments to protect itself against exchange and interest rate fluctuations.
The Nortel financing agreement includes certain affirmative and negative
covenants and maintenance of certain financial conditions, with which Operadora
and its subsidiaries were in compliance until December 31, 2001.
Legal dispute
Unefon and Nortel are currently engaged in disputes over each party's compliance
with the terms and conditions of the finance agreement, letter agreement,
procurement agreement, and other related agreements entered into by the parties
and certain of their shareholders and affiliates.
Unefon asserts that Nortel has not fulfilled its obligations under the finance
agreement, letter agreement and procurement agreement. With respect to the
finance and letter agreements, Unefon has asserted, among other things, that
Nortel breached its obligation to make available to Unefon the second loan
tranche under the finance agreement in the amount of US$210.0 million. Unefon
contends that Nortel's failure to advance this additional financing has limited
Unefon's ability to build out its network, to grow its business in accordance
with its business plan and to realize the revenues and profits related to such
growth and needed to repay the first loan tranche under the finance agreement.
With respect to the procurement agreement, Unefon asserts, among other things,
that Nortel failed to properly design and construct the network and failed to
provide required and appropriate maintenance and support. Unefon also contends
that the settlement agreement signed in July 2002 never became effective because
Nortel failed to perform the pre-conditions to its effectiveness. Even to the
extent that the settlement agreement became effective, Unefon contends that
Nortel failed to perform its obligations thereunder.
F-97
As a result of Nortel's alleged breaches, Unefon withheld a US$6.0 million
interest payment due to Nortel in August 2002 and has asserted that it is
relieved of its payment obligations under the finance agreement by reason of
Nortel's breaches.
On August 28, 2002, Nortel sent Unefon a notice alleging that Unefon was in
default under the finance agreement due to its failure to make the foregoing
interest payment. Nortel also alleged that the proposed spin-off by TV Azteca of
its 46.5% stake in Unefon would be deemed to be a change in control under the
terms of the finance agreement, which also would constitute a default under the
finance agreement unless Nortel consented to such action.
On September 9, 2002, Unefon filed a lawsuit against Nortel in the Supreme Court
of the State of New York seeking damages and lost profits in the amount of
US$900.0 million. Unefon alleged that Nortel had breached the finance agreement
and related letter agreement by failing to advance the second loan tranche of
$210.0 million. Unefon also alleged that Nortel had failed to comply with its
obligation to pursue syndication of the first loan tranche in a diligent and
timely manner, applying its best efforts consistent with standards of commercial
reasonableness. Unefon alleged that Nortel's breach had caused Unefon damages,
including, among others, lost profits and a diminution in equity value of Unefon
and had relieved Unefon of its payment obligations under the finance agreement.
As an alternative remedy, Unefon sought specific performance of Nortel's
obligation to lend Unefon up to US$210.0 million from the second loan tranche
under the finance agreement.
On September 9, 2002, Nortel notified Unefon that based on Unefon's alleged
default, Nortel was accelerating all amounts owed by Unefon under the finance
agreement, which as of the date of the letter were US$356.0 million in principal
and interest. In addition, Nortel informed Unefon that it was terminating the
procurement agreement as a result of Unefon's alleged default under the finance
agreement.
On September 20, 2002, Nortel filed an answer and counterclaim in the New York
Supreme Court action commenced by Unefon in which Nortel asserted, among other
things, that it had not breached the finance agreement and related letter
agreement and that the remedies sought by Unefon were not available under the
finance agreement, the procurement agreement or applicable law. Nortel's
counterclaim was based on Unefon's non-payment of the August 2002 interest
payment and Nortel sought acceleration and immediate payment of all amounts
allegedly due to Nortel under the finance agreement. On October 1, 2002, Unefon
answered Nortel's counterclaim and denied the allegations offered in support
thereof.
On November 11, 2002, Unefon filed a demand for arbitration under the
procurement agreement, as well as the July 2002 settlement agreement, before the
American Arbitration Association in New York City. In its demand, Unefon
asserted numerous breaches by Nortel of its obligations under these agreements,
including design and construction flaws, failure to fulfill software
obligations, maintenance failures, failure to provide financing and other
economic benefits and refusal to deliver equipment for which Unefon has paid.
Unefon seeks damages and an order
F-98
directing Nortel to deliver immediately all equipment for which Unefon has paid.
On December 24, 2002, Nortel filed an answer denying liability and asserting
counterclaims based on alleged breaches by Unefon of its payment obligations
under the procurement agreement and requested the arbitration tribunal to award
damages in the amount of at least US$47.0 million.
On November 11, 2002, Nortel moved for summary judgment on its counterclaim
relating to the non-payment of interest. On December 11, 2002, Unefon moved for
partial summary judgment on its claim that Nortel breached the finance
agreement, and moved to amend its complaint to assert claims for fraud and
intentional misrepresentation relating to Nortel's willingness to lend the
second loan tranche, including Nortel's willingness to seek syndication of the
first loan tranche, and to assert two affirmative defenses: i) that Nortel's
fraudulent inducement bars Nortel from any relief under the finance agreement or
procurement agreement, and ii) that Unefon is excused from performance under the
finance agreement by virtue of Nortel's breaches of the finance agreement and
procurement agreement. Unefon also sought a stay of the action pending
resolution of the arbitration commenced by Unefon against Nortel, as described
above. On January 14, 2003, Nortel filed papers opposing Unefon's motions.
Unefon's reply on its cross motions was presented on February 24, 2003.
On November 29, 2002, Unefon and certain of its affiliates commenced an action
against Nortel and others in civil court in Mexico City seeking a declaration of
the parties' rights under pledge agreements pursuant to which Unefon's and the
affiliates' stock had been pledged to Nortel as security to the loans made under
the finance agreement. Unefon and its affiliates seek, among other things,
declarations that Nortel is disproportionately collateralized and that certain
provisions of the stock pledge agreements are void under Article 198 of the
Mexican General Commercial Companies Law (which voids any agreement which
restricts the free exercise of shareholder voting rights).
On December 12, 2002, Nortel filed a second, separate lawsuit in the Supreme
Court of the State of New York seeking authorization from the Court, pursuant to
the stock pledge agreement, to sell the shares of Operadora Unefon and Servicios
that were pledged to secure its indebtedness, or, in the alternative,
authorization to take appropriate steps to obtain control over the management
and business of Unefon. On January 3, 2003 Unefon filed a motion to dismiss this
action on jurisdictional grounds and on the basis of the prior Mexican action
commenced by it against Nortel in regard to the pledge agreements. The parties
have stipulated that Nortel will not take any further action to foreclose on the
shares until such motion is decided.
In January 2003, Nortel requested the bankruptcy of Unefon before a Mexican
court. Unefon has challenged this request and Nortel's bankruptcy claim has been
suspended pending resolution of this dispute.
F-99
NOTE 11 - AGREEMENTS WITH MATC DIGITAL:
In October 1999, Torres and MATC Digital, S. de R. L. de C. V. ("MATC") entered
into a construction agreement with Operadora in which Operadora agreed to build
a certain number of communication towers.
In May 2000, Unefon, Operadora and Torres entered into the following agreements
with MATC and American Tower Corporation ("ATC"), the parent company of MATC:
.. Build-to-Suit agreement between MATC and Operadora. Pursuant to this
agreement, the parties agreed that MATC would find and/or build tower sites
for Operadora in specifically designated locations in Mexico.
.. Master Lease agreement between Torres and Operadora. Pursuant to this
agreement, the parties agreed that Operadora would lease space from MATC
within tower sites built (under the terms of the Build-to-Suit agreement) or
owned or managed by MATC.
.. Co-ownership agreement between MATC and Torres. Pursuant to this agreement,
the parties agreed to co-own, on an equal 50%-50% basis, tower sites built by
MATC and requested by Operadora under the terms of the Build-to-Suit
agreement.
In December 2000 the Company and MATC entered into amended and restated
Build-to-Suit and Master Lease agreements and into a Termination agreement to
terminate and unwind the Co-ownership agreement.
Termination agreement:
In connection with the termination and unwinding of the Co-ownership agreement
the parties agreed to treat all build-to-suit sites and single tenant rooftop
sites constructed pursuant to the original Build to Suit agreement as if they
had originally been designated as excluded build to Suit sites. As a result MATC
became the sole owner of all rights, title and interest in and to the
Co-ownership rights and the Co-ownership assets.
The consummation of the termination of the Co-ownership agreement and the
Amended and Restated Build-to-Suit and Master Lease agreements was scheduled to
occur in two closings. At the initial closing on December 8, 2000, MATC paid
US$10.4 million to the Operadora which consisted of the termination fee of
US$4.5 million plus US$7.0 million representing Unefons' good faith estimate of
the reimbursable costs less US$1.1 million representing MATC's good faith
estimate of the aggregate prior rent. The termination fee received was recorded
as other income in the results of operations.
At the final closing, the parties will deliver any amounts due relating to the
reimbursable cost adjustment and the aggregate prior rent adjustment.
F-100
Through December 31, 2001 and 2002, the Company had incurred costs of
approximately Ps206 million and Ps173 million in connection with the
construction of the communications towers. The amount received from MATC as
payment for reimbursable costs plus accrued rents (Ps238 million and Ps201
million) has been offset against the amount incurred by the Company in its
balance sheet included in accounts payable and accrued expenses at December 31,
2001 and 2002, respectively.
Amended and Restated Build-to-Suit and Master Lease Agreements:
The Amended and Restated Build-to-Suit agreement states that MATC: a) will
acquire, develop and/or build within search rings identified by the Company all
new build-to-suit sites during the term of the agreement and that the Company
shall lease certain space from MATC pursuant to terms provided in the Amended
and Restated Master Lease agreement; b) identify space on third party existing
sites within the search rings identified by the Company; c) identify,
investigate and develop space on MATC existing sites within search rings
identified by the Company and if such site is selected lease certain space from
MATC, and d) perform the searches as set forth in the agreement, as applicable
to each site.
The Company is obligated to request at least 400 build-to-suit sites during the
term of the agreement. Under the terms of the Amended and Restated Build-to-Suit
agreement the Company, ATC and MATC agreed to increase the maximum obligation,
as defined in the agreement, to 600 build-to-suit sites.
MATC has the exclusive right to perform services for the Company and its
subsidiaries until the earlier of the expiration of the agreement (December 31,
2005) or the date upon which the Company has requested from MATC the 1000th
Build-to-Suit site that will be credited toward the maximum obligation.
Under the Amended and Restated Master Lease agreement, the Company agreed to
lease space from MATC within equipment shelters constructed and owned by MATC in
accordance with the Amended and Restated Build-to-Suit agreement, ground space
for the installation of the Company's equipment and space on MATC towers. Each
of the site leases is governed by the Amended and Restated Master Lease
agreement.
The initial term of each site lease begins on the commencement date of such site
lease and will continue for eleven years and may be extended automatically
beyond its initial term unless the Company notifies MATC in writing at least 90
days before the renewal period that it does not wish to extend the term. The
rent payable to MATC by the Company under each site lease is equal to the base
rent plus any additional rent as provided under the terms of the agreement.
At December 31, 2001 and 2002 the Company had leased 467 and 556 sites,
respectively. These leases are accounted for as operating leases. The lease
expense during the period ended December 31, 2001 and 2002 amounted to Ps154
million and Ps203 million, respectively. The total future minimum lease
obligations based on the base rent of 556 sites, under the terms of the contract
is approximately US$90.0 million as shown on the following page.
F-101
Year ended Millions of
December 31, US dollars
----------- ----------
2003 US$ 11
2004 11
2005 11
2006 11
2007 11
2008 and next year 35
NOTE 12 - STOCKHOLDERS' EQUITY:
At the Extraordinary Stockholders' Meeting held on October 2, 2000, the
Company's stockholders agreed to:
.. Decrease the capital stock by Ps582,647 through canceling the 25,000 Series
"A" and 25,000 Series "B" subscribed but unpaid shares owned by TV Azteca and
Mr. Moises Saba, respectively, and
.. Reduce the capital stock by Ps689,858 through recording liabilities in favor
of Mr. Moises Saba and TV Azteca. This account payable to stockholders
accrues interest at the rate of 8% annually.
At an extraordinary stockholders' meeting held on November 15, 2000 the
stockholders agreed to:
Approve a new capital structure consisting only of Series "A" shares. As a
result of this new structure, the Company effected a 6,500 for one stock split
and converted its 180,000 Series "A" and 180,000 Series "B" shares into one
class of 2,340,000,000 new Series "A" shares, which were divided equally between
Mr. Moises Saba and TV Azteca, and
Increase the number of authorized capital stock by Ps538,040 through the
issuance of 487,111,272 Series "A" ordinary shares without par value of which:
.. 176,129,032 shares will be sold through a public offering in the Mexican
stock market, and
.. 310,982,240 shares will be sold through a stock options plan.
On December 19, 2000, the Company completed its initial public offering in the
Mexican stock market and issued 176,129,032 Series "A" shares at Ps5.67 per
share. Net proceeds amounted to approximately Ps1,000 million, of which Ps805
million was recorded as a premium on share subscription.
F-102
After giving effect to the transactions described above, the capital stock is
variable with a fixed minimum of Ps2,807,128 (historical) and unlimited maximum.
The capital stock is composed of Series "A" common shares, ordinary, without par
value, as shown below:
December 31, 2002
-----------------
Number of
Stockholder shares Amount
----------- ------ ------
(thousands)
TV Azteca 1,170,000 Ps 1,161,730
Moises Saba Masri 1,170,000 1,161,730
Various (public) 176,129 174,884
Stock options plan 310,983 308,784
--------- ------------
Total authorized 2,827,112 2,807,128
Capital stock authorized but not paid (310,983) (308,784)
--------- ------------
Total outstanding 2,516,129 2,498,344
=========
Restatement increment 732,707
------------
Ps 3,231,051
============
In the event of a capital reduction, income tax will be payable by the Company
equivalent to 53.85% of the excess of stockholders' equity over the sum of the
capital contributions account, as per the procedures established in the Mexican
Income Tax Law.
Stock option plan
On November 17, 2000, the Company established a stock option plan that provides
for the issuance of stock options to: a) the persons designated by TV Azteca; b)
Mr. Moises Saba or his designee, and c) certain current employees of the Company
who will be designated by the Board of Directors.
The stock option plan, which relates to an aggregate of 310,982,240 Series "A"
shares, authorizes the issuance of options to acquire capital stock of the
Company as follows:
.. 4.25% of the Company's fully diluted capital stock, or 120,152,229 Series "A"
shares, to persons designated by TV Azteca (at an exercise price of US$0.1507
per share).
F-103
.. 4.25% of the Company's fully diluted capital stock, or 120,152,229 Series "A"
shares, to Mr. Moises Saba or to persons whom he will designate (at an
exercise price of US$0.1507 per share).
.. 0.5% of the Company's fully diluted capital stock, or 14,135,556 Series "A"
shares, to Mr. Moises Saba or to persons whom he will designate (at an
exercise price of US$0.3537 per share).
.. 2.0% of the Company's fully diluted capital stock, or 56,542,226 Series "A"
shares, to the employees designated by the Board of Directors (at an exercise
price of US$0.3537 per share).
A trust has been created to administer the stock option plan. The trust is
managed by a committee consisting of two members. The duties of the trust
include maintaining a record of:
.. Participants in the stock option plan, trustees and their beneficiaries;
.. The number of option shares granted to each;
.. The exercise price of the option, and
.. The governing terms and conditions of the plan.
Under the terms of plan the options will be granted on specified anniversary
dates as provided below:
% of options
Anniversary date to be granted
---------------- -------------
January 1, 2001 10
2002 10
2003 20
2004 30
2005 30
These grants are contingent on the achievement of specific goals determined by
the Technical Committee. The options will be considered granted once they are
approved by the Technical Committee. If the Technical Committee does not take
action, the options will be considered granted 90 days after the anniversary
dates of the conditional assignment. Once the options have been granted there is
a one year vesting period after which the participants have up to five years in
which to exercise the options.
The Technical Committee has the authority to accelerate all or part of the
options granted to any participant in the plan, provided that the right to
accelerate is extended proportionally to the rest of the participants in the
plan. Upon termination participants may retain options vested through the date
of their termination.
F-104
Beneficiaries of the participants will automatically acquire the right to
exercise the vested options in the case of death or permanent disability of any
of the participants.
In 2001, the Technical Committee completed the final assignment of the options
to be awarded under the plan and had notified the participants of the number of
options that they would be eligible to be granted at the various anniversary
dates.
At December 31, 2001 and 2002, the total number of shares formally assigned were
54,895,508 and 54,826,383, respectively.
Principal shareholder
In October 2000, TV Azteca granted rights to acquire all of the shares of Unefon
that it owns on a pro-rata basis to the holders of all of TV Azteca's
outstanding shares and to certain other of TV Azteca's securities. The grant of
the rights to acquire the Unefon Series "A" shares was subject to receiving the
consent of the holders of the TV Azteca notes and Azteca Holdings' 11% Senior
Secured Notes due 2002, or Azteca Holdings' 11% notes. On March 27, 2001, TV
Azteca and Azteca Holdings obtained these consents and paid a fee totaling
Ps121,328 (nominal) to certain holders of the Azteca Holdings 11% notes and TV
Azteca notes. The grant of the rights remains subject to the filing and
effectiveness of a registration statement with the SEC that registers the Unefon
Series "A" shares underlying the rights and the receipt of all applicable
regulatory and third-party approvals, including the consent of Nortel (see Note
10). The rights to acquire the Unefon Series "A" shares were originally only
exercisable on December 11, 2002. However, in December 2002, TV Azteca approved
the change of the exercise date to December 12, 2003.
NOTE 13 - TAX MATTERS:
Income tax ("IT")
Unefon and its subsidiaries do not consolidate for tax purposes.
For the year ended December 31, 2000, 2001 and 2002, Unefon determined combined
losses for IT purposes of Ps566,710, Ps729,484 and Ps207,121, respectively,
which can be amortized against future income, and restated by applying factors
derived from the NCPI.
The difference between book and tax results is mainly due to effects of
inflation; non-deductible expenses; the difference between book and tax
depreciation and amortization; capitalization of certain expenses, interest and
exchange losses for book purposes and timing differences for certain items that
are reported in different periods for financial reporting and IT purposes.
F-105
The components of deferred tax assets and (liabilities) are comprised of the
following:
December 31,
------------
2001 2002
---- ----
Deferred revenue Ps 72,487 Ps 224,607
Inventories (128,157) (149,204)
Property, furniture and equipment - Net (54,475) (1,855)
Pre-operating expenses (286,554) (179,046)
Advance payments (243,035) (112,921)
Accrued expenses 143,839 277,853
Concession rights (3,999,245) (3,450,456)
Tax loss carryforwards 5,177,165 5,542,659
Capitalization of comprehensive financing
cost (19) -
--------------- ---------------
682,006 2,151,637
Statutory IT rate 35% 34%
--------------- ---------------
Deferred IT asset 238,702 731,557
Valuation reserve (238,702) (731,557)
--------------- ---------------
Net deferred IT Ps - Ps -
=============== ===============
At December 31, 2002, the Company had the following combined tax loss
carryforwards, which under the Mexican Income Tax Law (IT Law) are
inflation-indexed through the date of utilization:
Year of expiration Amount
------------------ ------
2008 Ps 1,517,621
2009 2,521,723
2010 566,710
2011 729,484
2012 207,121
---------------
Ps 5,542,659
===============
Asset tax
The Asset Tax Law establishes a tax of 1.8% on the average of assets, less
certain liabilities, which is payable when it exceeds the IT due.
F-106
In 2001 and 2002, the Company and its subsidiaries were not subject to asset
tax, under current tax provisions.
Employees' statutory profit sharing
Employees' statutory profit sharing is determined by Servicios SPC at the rate
of 10% on taxable income, adjusted as prescribed by the Mexican IT Law. For the
year ended December 31, 2000, 2001 and 2002 Servicios determined an employee'
statutory profit sharing of Ps41, Ps133 and Ps99, respectively.
NOTE 14 - CONTINGENCIES:
Midicel, a Mexican wireless telecommunication company' has commenced legal
proceedings ("amparo") in the Mexican Federal Ninth District Court for
Administrative Matters in order to nullify the granting (in general) of the
concessions for the use and exploitation of the bandwidths of frequencies of the
radio-electric spectrum, of seven telecommunication companies including Unefon.
Although the Company has been successful in defending itself in similar disputes
and litigation, the Company cannot assure that it will be successful in
defending claims of this nature in the future. Management believes that
Midicel's claims lack a legal basis for annulment of Unefon concessions.
NOTE 15 - SEGMENT INFORMATION:
The Company evaluates and assesses its performance on a city-by-city basis. All
of the cities provide substantially the same services to their customers.
Summarized financial information concerning the Company's reportable segments is
shown in the following table (figures in this note are in millions of Mexican
pesos of December 31, 2002 purchasing power).
Period from February 1, 2000
(commencement of operations) Others
to December 31, 2000 Toluca Acapulco Mexico (2) Total
-------------------- ------ -------- ------ --- -----
Total net revenue Ps 28 Ps 42 Ps 139 Ps 111 Ps 320
----- ----- ------- ------- -------
Segment costs and expenses (1) (32) (44) (159) (297) (532)
----- ----- ------- ------ -------
Segment loss Ps (4) Ps (2) Ps (20) Ps (186) (212)
===== ===== ======= ======= -------
Unalocated costs, expenses and income (130)
-------
Net loss for the period Ps (342)
=======
F-107
Period from January 1, 2001 Others
to December 31, 2001 Toluca Acapulco Mexico (2) Total
-------------------- ------ -------- ------ --- -----
Total net revenue Ps 90 Ps 113 Ps 757 Ps 588 Ps 1,548
Segment costs and expenses (1) (70) (84) (686) (1,096) (1,936)
------ ------ ------ ------ --------
Segment income (loss) Ps 20 Ps 29 Ps 71 Ps (508) (388)
====== ====== ====== ======
Unallocated costs, expenses and income (727)
--------
Net loss for the period Ps (1,115)
========
Period from January 1, 2002
to December 31, 2002
Total net revenue Ps 147 Ps 177 Ps1,542 Ps1,173 Ps 3,039
Segment costs and expenses (1) (68) (79) (721) (1,536) (2,404)
------ ------ ------- ------- --------
Segment income (loss) Ps 79 Ps 98 Ps 821 Ps (363) 635
====== ====== ======= =======
Unallocated costs, expenses and income (1,507)
--------
Net loss for the period Ps (872)
========
(1) Do not include depreciation and amortization.
(2) Includes the cities of Torreon, San Luis Potosi, Aguascalientes, Puebla,
Leon, Guadalajara, Monterrey, Queretaro, Morelia, Tampico, Saltillo and
Tuxtla Gutierrez.
The Company does not report assets by segments.
NOTE 16 - SUBSEQUENT EVENT:
Dispute between Unefon and Nortel
In January 2003, Nortel petitioned for the bankruptcy of Unefon before a Mexican
court. In response, Unefon filed an action for relief (amparo) before a federal
district court challenging Nortel's request. In April 2003, a Mexican federal
district court ruled against Unefon with regard to its action for relief.
However, in May 2003, Unefon appealed the Mexican court's decision. Unefon
believes that Nortel's bankruptcy petition is insufficient under Mexican Law and
that it will therefore prevail in this proceeding. Upon the filing of Unefon's
initial action for relief, the federal district court suspended Nortel's
bankruptcy claim pending its analysis of the sufficiency of Nortel's petition,
which suspension is still in effect.
NOTE 17 - RECONCILIATION OF DIFFERENCES BETWEEN MEXICAN GAAP AND US GAAP:
The Company's consolidated financial statements are prepared in accordance with
Mexican GAAP, which differ in certain significant respects from US GAAP. The
Mexican GAAP consolidated financial statements include the effects of inflation
as provided for under Statement B-10 "Recognition of the Effects of Inflation on
Financial Information". The application of this
F-108
statement represents a comprehensive measure of the effects of price level
changes in the Mexican economy, and is considered to result in a more meaningful
presentation for both Mexican and US accounting purposes. Therefore, the
following reconciliation to US GAAP does not include the reversal of such
inflationary effects.
The principal differences between Mexican GAAP and US GAAP are summarized in the
following pages with an explanation, where appropriate, of the effects on
consolidated results of operations and stockholders' equity. The various
reconciling items are presented net of any price level gain (loss).
a. Reconciliation of consolidated results of operations:
Year ended December 31,
-----------------------
Sub-note
reference 2000 2001 2002
--------- ---- ---- ----
Net loss under Mexican GAAP Ps ( 342,137) Ps (1,114,710) Ps ( 871,762)
Revenue recognition:
- Sales of handsets and service revenue i. (20,781) 8,591 (3,389)
- Operating and distribution fee (13,898) 13,898 -
Capitalized comprehensive financing cost - Net ii. 255,977 111,036 80,060
Advertising costs iii. (218,095) (204,501) (13,982)
Pre-operating expenses iv. (299,974) 67,490 76,279
Deferred income taxes v. (25,616) - -
Stock option plan vi. - (59,329) -
------------ ------------- ------------
Net loss under US GAAP Ps (664,524) Ps (1,177,525) Ps (732,794)
============ ============= ============
Basic and diluted net loss per share Ps (0.283) Ps (0.467) Ps (.291)
============ ============= ============
Weighted average number of shares outstanding
(thousands) 2,347,339 2,516,129 2,516,129
============ ============= ============
b. Reconciliation of stockholders' equity:
Year ended December 31,
-----------------------
Sub-note
reference 2000 2001 2002
--------- ---- ---- ----
Balance under Mexican GAAP Ps4,450,010 Ps3,335,300 Ps2,463,538
Revenue recognition:
- Sales of handsets and service revenue i. (20,781) (12,190) (15,579)
- Operating and distribution fee (13,898) - -
Capitalized comprehensive financing cost - Net ii. 866,421 977,457 1,057,517
Advertising costs iii. (218,095) (422,596) (436,578)
Pre-operating expenses iv. (724,165) (656,675) (580,396)
------------ ------------- ------------
Balance under US GAAP Ps 4,339,492 Ps 3,221,296 Ps 2,488,502
============ ============= ============
F-109
c. An analysis of the changes in stockholders' equity under US GAAP is as
follows:
2000 2001 2002
---- ---- ----
Balance at beginning of the year Ps 4,693,856 Ps 4,339,492 Ps 3,221,296
Capital stock cancelled (689,858) - -
Capital stock increase 1,000,018 - -
Net loss (664,524) (1,177,525) (732,794)
Stock option plan - 120,516 30,083
Stock option plan dividends - (61,187) (30,083)
------------ ------------ ------------
Balance at end of the year Ps 4,339,492 Ps 3,221,296 Ps 2,488,502
============ ============ ============
d. Significant differences between US GAAP and Mexican GAAP:
i. Revenue recognition
Sales of handsets and service revenue -
Under Mexican GAAP, revenue from the sale of handsets is recognized when
the equipment is delivered to distributors and when the legal title to
handsets passes. Since the Company has effective control over the
pricing and marketing of the handsets sold to the ultimate customers and
provides the distributors with a guaranteed margin on the sale of the
handsets, revenue, for US GAAP purposes, is recognized upon the sale of
the handsets to the ultimate customer and customer activation. Based on
interpretations of Staff Accounting Statement No. 101 provided by the
SEC staff the Company considers that the sale of handsets and free
wireless service offered on customer service activation represents a
multiple-element arrangement that involves product sale and a future
service contract for US GAAP purposes.
Since the handsets have value apart from the future service contract,
proceeds from the sale of handsets to the distributors are recognized
under US GAAP as revenue from the sale of handsets and deferred revenue
to be derived from future wireless service base on the relative fair
value of the handsets and future services. Revenue allocated to the sale
of handsets is recognized when the handsets are sold to the final
customers, the deferred revenue allocated to wireless service is
recognized as the services are provided.
F-110
Provided below is a summary of deferred costs/deferred revenue, revenue
on the sale of handsets, service revenue and cost of handsets under
Mexican and US GAAP as of and for the years ended December 31, 2000,
2001 and 2002.
December 31, 2000
------------------------------------------
Mexican GAAP US GAAP Difference
------------ ------- ----------
Balance sheet:
Deferred cost Ps - Ps 81,531 Ps 81,531
Deferred revenue - (102,312) (102,312)
------------ ------------- -----------
Net amounts - Ps (20,781) Ps (20,781)
============ ============= ===========
Results of operations:
Revenue on sale of handsets - Net Ps 247,935 Ps 113,103 Ps (134,832)
Service revenue 34,094 66,613 32,519
Cost of handsets (324,313) (242,781) 81,532
------------ ------------- -----------
Net loss Ps (42,284) Ps (63,065) Ps (20,781)
============ ============= ===========
December 31, 2000
------------------------------------------
Mexican GAAP US GAAP Difference
------------ ------- ----------
Balance sheet:
Deferred cost Ps - Ps 6,239 Ps 6,239
Deferred revenue - (14,830) (14,830)
------------ ------------- -----------
Net amounts Ps - Ps (8,591) Ps (8,591)
============ ============= ===========
Results of operations:
Revenue on sale of handsets - Net Ps 400,102 Ps 371,470 Ps (28,632)
Service revenue 607,766 651,231 43,465
Cost of handsets (874,405) (880,647) (6,242)
------------ ------------- -----------
Net income Ps 133,463 Ps 142,054 Ps 8,591
============ ============= ===========
F-111
December 31, 2002
------------------------------------------
Mexican GAAP US GAAP Difference
------------ ------- ----------
Balance sheet:
Deferred cost Ps - Ps 32,273 Ps 32,273
Deferred revenue - (28,884) (28,884)
------------ ------------- -----------
Net amounts Ps - Ps 3,389 Ps 3,389
============ ============= ===========
Results of operations:
Revenue on sale of handsets - Net Ps 426,801 Ps 441,450 Ps 14,649
Service revenue 1,525,517 1,539,752 14,235
Cost of handsets (891,171) (923,444) (32,273)
------------ ------------- -----------
Net income Ps 1,061,147 Ps 1,057,758 Ps (3,389)
============ ============= ===========
ii. Comprehensive financing cost - net
Capitalized interest -
In 1999, under Mexican GAAP the Company did not elect to capitalize
interest expense associated with its long-term debt, while under US
GAAP, the Company capitalized interest. Beginning in 2000, the Company
began to capitalize interest under Mexican GAAP, which is permitted but
not required. The difference in the amount of interest capitalized under
Mexican and US GAAP is due to the determination of eligible assets and
qualifying interest.
Net monetary gain -
Under Mexican GAAP, the Company capitalized gain on monetary position
related to the indebtedness used to finance the concession rights and
equipment acquired from Nortel. Under US GAAP, the gain on monetary
position may not be capitalized, and consequently under US GAAP the
Company must recognize an additional depreciation and amortization
expense.
Exchange loss -
For Mexican GAAP purposes, the Company capitalized currency exchange
fluctuations from the loan used to acquire equipment from Nortel. Under
US GAAP, exchange gains and losses may not be capitalized, and
consequently the Company recognized on additional depreciation and
amortization expense.
F-112
Provided below is a summary of capitalized comprehensive financing cost
- net under Mexican and US GAAP:
At December 31,
---------------
2000 2001 2002
---- ---- ----
Mexican GAAP:
Capitalized interest on fixed assets and
concessions Ps 224,270 Ps 260,686 Ps 282,697
Capitalized exchange loss on fixed assets 30,362 19,651 53,567
Capitalized net monetary gain on fixed
assets and concessions (738,053) (743,880) (758,575)
--------------- --------------- ---------------
(483,421) (463,543) (422,311)
Accumulated depreciation and amortization 5,672 17,289 22,965
--------------- --------------- ---------------
Net capitalized comprehensive financing
costs under Mexican GAAP (477,749) (446,254) (399,346)
--------------- --------------- ---------------
US GAAP:
Capitalized interest on fixed assets and
concessions 406,141 576,285 690,711
Accumulated depreciation and amortization (17,469) (45,082) (32,540)
--------------- --------------- ---------------
Net capitalized interest under US GAAP 388,672 531,203 658,171
--------------- --------------- ---------------
Net adjustment Ps (866,421) Ps (977,457) Ps (1,057,517)
=============== =============== ===============
iii. Advertising costs
Under both Mexican and US GAAP, television advertising costs related to
TV Azteca agreement are expensed when the airtime is used. Under Mexican
GAAP, television advertising costs are expensed in accordance with the
rates established in the advertising agreement, while under US GAAP
advertising costs are accrued in such a manner so to result in a
constant periodic rate per gross rating point.
December 31,
------------
2000 2001 2002
---- ---- ----
Advertising cost under Mexican GAAP $ 11,009 $ 70,010 $ 80,357
Advertising cost under US GAAP (229,104) (274,511) (94,339)
------------- ------------- -----------
Net adjustment $ (218,095) $ (204,501) $ (13,982)
============= ============= ===========
F-113
iv. Pre-operating expenses
According to Mexican GAAP, expenses incurred during the pre-operating
stage are capitalized, while under US GAAP, they are expensed when
incurred.
v. Deferred income tax
Under Mexican GAAP income tax is recorded by the comprehensive assets
and liability method, which consists of recognizing deferred income tax
on all differences between the book value and tax value of assets and
liabilities.
The Company follows Statement of Financial Accounting Standards ("FAS")
No. 109 for US GAAP reconciliation purposes. This statement requires an
asset and liability approach to financial accounting and reporting
income tax under the following basic principles: a) a current tax
liability or asset is recognized for the estimated taxes payable or
refundable on tax returns for the current year; b) a deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences and tax loss and tax credit
carryforwards; c) the measurement of current and deferred tax
liabilities and assets is based on provisions of the enacted tax law and
the effects of future changes in tax laws or rates are not anticipated,
and d) the measurement of deferred asset tax is reduced, if necessary,
by the amount of any tax benefits that, based on available evidence, are
not expected to be realized. Under this method, deferred tax is
recognized with respect to all temporary differences, and the benefit
from utilizing tax loss carryforwards and asset tax credits is
recognized in the year in which the loss or credits arise (subject to a
valuation reserve with respect to any tax benefits not expected to be
realized). The subsequent realization of this benefit does not affect
income. Consequently, there are no extraordinary items of this nature
for US GAAP purposes.
The temporary differences under FAS No. 109 are determined based on the
difference between the indexed tax basis amount of the asset or
liability and the related stated amount reported in the consolidated
financial statements.
Deferred tax expense or benefit is calculated as the difference between:
a) deferred assets and liabilities reported at the end of the current
year, and b) deferred tax assets and liabilities reported at the end of
the prior year, remeasured to units of current general purchasing power
at the end of the current period.
For financial statement purposes, based on the weight of available
evidence as of the balance sheet dates, valuation allowances were
recognized for the amount of the net deferred income tax asset as of
December 31, 2000, 2001 and 2002, that more likely than not will be
realized.
F-114
The income tax effects of significant items comprising the Company's net
deferred tax assets and liabilities under US GAAP are as shown:
December 31,
------------
2000 2001 2002
---- ---- ----
Deferred income tax assets:
Current:
Deferred cost/revenue - Net Ps 7,273 Ps 2,921 Ps 1,152
Accrued expenses 88,421 60,587 154,283
--------------- ------------- -------------
95,694 63,508 155,435
--------------- ------------- -------------
Non current:
Pre-operating expenses Ps 212,614
Property, furniture and equipment 17,233 Ps 160,585 Ps 148,425
Tax loss carryforwards 392,693 1,787,992 1,884,504
--------------- ------------- -------------
622,540 1,948,577 2,032,929
--------------- ------------- -------------
Deferred income tax liabilities:
Current:
Inventories Ps (52,657) Ps (46,814) Ps (50,729)
Advance payments (8,941) (60,679) (20,396)
--------------- ------------- -------------
(61,598) (107,493) (71,125)
--------------- ------------- -------------
Non current:
Concessions and capitalized interest (390,465) (1,762,511) (2,018,571)
--------------- ------------- -------------
(390,465) (1,762,511) (2,018,571)
--------------- ------------- -------------
Net deferred IT assets before valuation
reserve 266,171 142,081 98,668
Valuation reserve (266,171) (143,616) (98,668)
--------------- ------------- -------------
Net deferred tax Ps - Ps - Ps -
=============== ============= =============
F-115
The following provides an analysis of the principal difference between
IT computed at the statutory rate and the Company's IT provision for the
year ended December 31, 2000, 2001 and 2002.
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Loss before deferred IT Ps (638,908) Ps (1,177,525) Ps (770,792)
============ =============== =============
IT benefit at statutory rate Ps 223,618 Ps 412,133 Ps 262,069
Add (deduct):
Differences between comprehensive
financing cost - Net of inflationary gains
or losses 17,554 (239,676) (319,841)
Non deductible expenses (639) (2,500) (3,786)
Others (15,766) (47,402) 87,736
Change in valuation reserve (250,383) (122,555) (26,178)
------------ --------------- -------------
Income tax expense Ps (25,616) Ps - Ps -
============ =============== =============
vi. Stock option plan
Under Mexican GAAP, stock options granted are given effect only when the
options are exercised by crediting capital stock for cash received. For
US GAAP purposes, options granted to employees at exercise prices below
the market price at the measurement date will result in non-cash
compensation cost under US GAAP over the vesting period as determined
under Accounting Principles Board Opinion No. 25. Options granted to
non-employees of the Company, but employees of the Company within the
some controlling group will be accounted as dividends to the controlling
entity under US GAAP based on the fair value of the options at the date
of grant as determined under SFAS No. 123 "Accounting for Stock-based
Compensation". No options were granted in 2000, the Company recorded
compensation expense for Ps59,329 and dividends to the controlling
entities for Ps61,187 in the year ended December 31, 2001. In 2002, the
quoted market price of the stock at the measurement date was lower than
the exercise price accordingly the Company did not recognize
compensation cost for the options granted to employees. In 2002 the
Company recorded dividends to the controlling entities for Ps30,083.
vii. Earnings per share ("EPS")
Under Mexican GAAP, diluted EPS is not required for companies with
operating and net losses. Under US GAAP, fully diluted EPS will reflect
the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then share in the earnings
of the entity. At December 31, 2000, 2001 and 2002 there were no
outstanding dilutive securities.
F-116
viii. Comprehensive loss
Comprehensive loss determined in accordance with SFAS No. 130 "Reporting
Comprehensive Income" includes certain changes to stockholder' equity
not affecting net income (loss) and not related to capital payments,
dividend payments or similar transactions with the shareholders. The
comprehensive loss for the Company is equal to the net loss, as there
are no items of comprehensive loss for the years presented under US GAAP
other than the net loss.
ix. Effect of recently issued accounting standards as they relate to the
Company
On August 15, 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 "Accounting for Asset Retirement Obligations" ("SFAS
143"). This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of
lessees.
This statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made; the
associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. This statement is effective for
financial statements issued for fiscal years beginning after June 15,
2002. The Company does not expect the adoption of SFAS 143 to have a
material impact on its financial condition and results of operations.
In April 2002, the FASB issued SFAS No. 145 "Rescission of SFAS Nos. 4,
44 and 64, Amendment of SFAS No. 13, and Technical Corrections as of
April 2002". SFAS No. 145 rescinds SFAS No. 4 "Reporting Gains and
Losses from Extinguishment of Debt", SFAS No. 44 "Accounting for
Intangible Assets of Motor Carriers", and SFAS No. 64 "Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements". As a result, gains
and losses from extinguishment of debt will no longer be classified as
extraordinary items unless they meet the criteria of unusual or
infrequent as described in APB Opinion No. 30 "Reporting the Results of
Operations -Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions". In addition, SFAS No. 145 amends SFAS No. 13
"Accounting for Leases", to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. SFAS No. 145 also
amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability
under changed conditions. SFAS No. 145 is effective for fiscal years
beginning after May 15, 2002. Management is currently evaluating the
impact that the adoption of SFAS No. 145 will have on the consolidated
financial statements.
F-117
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities", or SFAS 146. The issuance
of SFAS No. 146 nullifies the former guidance provided by the Emerging
Issues Task Force, or EITF, Issued No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring", or EITF
94-3). SFAS No. 146 requires the recognition of a liability for costs
associated with exit or disposal activity when the liability is
incurred, rather than on the date commitment to an exit or disposal
plan. SFAS No. 146 is effective for liabilities, related to exit or
disposal activities, which are incurred after December 31, 2002, while
earlier application is encouraged.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation -Transition and Disclosure- an amendment of FAS
123," or SFAS 148. SFAS No. 148 continues to permit entities to apply
the intrinsic method of APB 25 "Accounting for Stock Issued to
Employees". However, SFAS 148 is intended to encourage companies to
adopt the accounting provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation", or SFAS 123. SFAS No. 148 provides three
transition methods for companies who choose to adopt the provisions of
SFAS 123, the prospective method, the modified prospective method and
the retroactive restatement method. In addition, SFAS No. 148 mandates
certain new disclosures. SFAS 148 is effective for fiscal years ending
after December 15, 2002, with early adoption permitted.
In November 2002, the FASB issued Interpretation No. 45 or FIN 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45
clarifies the requirements of SFAS No. 5 "Accounting for Contingencies,
relating to a guarantor's accounting for, and disclosure of, the
issuance of certain types of guarantees". FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for
the fair value of the obligation it assumes under that guarantee. FIN
45's provisions for initial recognition and measurement should be
applied on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
guarantor's previous accounting for guarantees that were issued before
the date of FIN 45's initial application may not be revised or restated
to reflect the effect of the recognition and measurement provisions of
the Interpretation. The disclosure requirements are effective for
financial statements of both interim and annual periods that end after
December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, or FIN 46
"Consolidation of Variable Interest Entities, an interpretation of ARB
51". The primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved through means
other than through voting rights ("variable interest entities" or
"VIEs") and how to determine when and which business enterprise should
consolidate the VIE (the "primary beneficiary"). This new model for
consolidation applies to an entity which either: 1) the equity investors
(if any) do not have a controlling financial interest or
F-118
2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial
support from other parties. In addition, FIN 46 requires that both
primary beneficiary and all other enterprises with a significant
variable interest in a VIE make additional disclosures. FIN 46 applies
immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains
an interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest
entities in which enterprise holds a variable interest that it acquired
before February 1, 2003. FIN 46 applies to public enterprises as of the
beginning of the applicable interim or annual period, and it applies to
nonpublic enterprises as of the end of the applicable annual period.
x. Long term financing from Nortel
As mentioned in Note 10, for Mexican GAAP purposes the balance of the
long term financing with Nortel as of December 31, 2002 has been
included as a long-term liability in the consolidated balance sheet. For
US GAAP purposes, current classification is required when the debtor is
in violation of a provision of a debt agreement at the balance sheet
date and the violation makes the obligation callable within one year
from the balance sheet date. Thus, at December 31, 2002, the total
indebtedness to Nortel for $3,293,759 is considered as current for US
GAAP purposes.
xi. Cash flow information
Under US GAAP, a statement of cash flows is prepared based on the
provisions of FAS No. 95 "Statement of Cash Flows" in lieu of a
statement of changes in financial position under Mexican GAAP. FAS No.
95 establishes specific presentation requirements and requires
additional disclosures, such as the amount of interest and income taxes
paid and non-cash items. This statement does not provide specific
guidance for the preparation of cash flows statements for price level
adjusted financial statements. Cash flows from operating, investing and
financing activities have been adjusted for the effects of inflation on
monetary items.
F-119
The condensed consolidated statement of cash flows prepared under US
GAAP is as follows:
Year ended December 31,
---------------------
Cash flows from operating activities: 2000 2001 2002
---- ---- ----
Net loss Ps (664,524) Ps (1,177,525) Ps (732,794)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Interest accrued since August 16 to December
31, 2002 of Nortel Networks Corporation debt 84,673
Stock option plan 59,329
Deferred income taxes 25,616
Depreciation and amortization 140,462 433,108 697,937
Unrealized exchange loss on debt 42,133
Monetary gain relating to financing activities (167,676) (167,970) (200,186)
Changes in assets and liabilities:
Restricted cash (165,048) (16,952) 5,121
Accounts receivable (50,474) (104,636) (95,107)
Recoverable value added tax (61,680) (48,433) 76,612
Related parties 194,915 377,210 324,118
Handset inventories (161,820) 28,061 (15,444)
Net changes in other assets, accounts
payable and accrued expenses 182,486 798,311 385,977
------------- ------------- -------------
Net cash flows (used in) provided by
operating activities (685,610) 180,503 530,907
------------- ------------- -------------
Cash flows from investing activities:
Acquisition of property furniture and equipment (735,945) (1,183,033) (410,561)
Capitalized interest in concession rights (252,347) (45,119) (31,937)
------------- ------------- -------------
Net cash flows used in investing activities (988,292) (1,228,152) (442,498)
------------- ------------- -------------
Cash flows from financing activities:
Bank loans 465,281 (146,992)
Proceeds from long-term financing from Nortel 1,186,046 149,661 131,497
Payments under long-term financing from Nortel (240,971) (26,473)
Proceed from short-term vendor financing 106,897
Premium on share subscription 805,474
Capital stock increase 194,544
------------- ------------- -------------
Net cash flows provided by (used in)
financing activities 2,051,990 588,469 (15,495)
------------- ------------- -------------
Effects of inflation in cash 15,734 28,370 7,289
------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents 393,822 (430,810) 80,203
Cash and cash equivalents at beginning of
period 196,313 561,765 123,666
------------- ------------- -------------
Cash and cash equivalents at end of period Ps 590,135 Ps 130,955 Ps 203,869
============= ============= =============
Supplemental cash flows disclosure:
Cash paid during the year for interest Ps 317,942 Ps 387,361 Ps 159,795
============= ============= =============
Other non-cash activities:
Capital reduction payable to stockholders Ps 692,607 Ps - Ps -
============= ============= =============
Construction in process - Nortel Ps 1,372,422 Ps 693,142 Ps -
============= ============= =============
Pre-paid political risk insurance Ps 25,549 Ps 19,504 Ps 32,290
============= ============= =============
F-120
e. Condensed consolidated balance sheets and consolidated results of operations
The following condensed consolidated balance sheets and consolidated results
of operations reflect the effects of the principal differences between
Mexican GAAP and US GAAP:
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31,
------------
2000 2001 2002
---- ---- ----
Total current assets Ps 1,397,320 Ps 1,127,801 Ps 1,024,460
Property, furniture and equipment - Net 2,845,225 3,751,426 3,658,767
Concession rights - Net 4,960,503 4,849,597 4,686,817
Others non-current assets 19,866 188,368 180,007
--------------- --------------- ---------------
Total assets Ps 9,222,914 9,917,192 Ps 9,550,051
=============== =============== ===============
Total current liabilities Ps 680,406 Ps 1,856,343 Ps 5,819,609
Capital reduction payable to stockholders 692,607 707,299 695,648
Long-term financing from Nortel 3,255,803 3,396,494
Long-term payables to related parties 254,606 735,760 546,292
--------------- --------------- ---------------
Total liabilities 4,883,422 6,695,896 7,061,549
--------------- --------------- ---------------
Capital stock 3,231,051 3,231,051 3,231,051
Premium on share subscription 1,561,096 1,561,096 1,561,096
Deficit (452,655) (1,630,180) (2,362,974)
Stock option plan 59,329 59,329
--------------- --------------- ---------------
Total stockholders' equity 4,339,492 3,221,296 2,488,502
--------------- --------------- ---------------
Total liabilities and stockholders' equity Ps 9,222,914 Ps 9,917,192 Ps 9,550,051
=============== =============== ===============
CONDENSED CONSOLIDATED RESULTS OF
OPERATIONS
Year ended December 31,
-----------------------
2000 2001 2002
---- ---- ----
Net revenue Ps 218,068 Ps 1,563,019 Ps 3,067,633
Total costs and expenses (1,026,560) (2,649,145) (3,075,522)
--------------- --------------- ---------------
Loss from operations (808,492) (1,086,126) (7,889)
--------------- --------------- ---------------
Other income - Net 58,779 34,493 44,770
--------------- --------------- ---------------
Interest income 14,377 21,752 5,453
Interest expense (463,367) (462,434)
Amortization of political risk insurance (21,616) (40,749) (33,155)
Exchange (loss) gain - Net (54,149) 143,664 (599,380)
Gain on monetary position 172,193 212,808 319,841
--------------- --------------- ---------------
Net comprehensive financing income (cost) 110,805 (125,892) (769,675)
--------------- --------------- ---------------
Loss before IT (638,908) (1,177,525) (732,794)
IT expense (25,616)
--------------- --------------- ---------------
Net loss Ps (664,524) Ps (1,177,525) Ps (732,794)
=============== =============== ===============
F-121