FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the month of March 2003
Commission File Number 1-14464
TV Azteca, S.A. de C.V.
(Translation of registrant's name into English)
Periferico Sur, No. 4121, Col. Fuentes del Pedregal, 14141 Mexico D.F., Mexico
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): ____
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a
Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): ____
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a
Form 6-K if submitted to furnish a report or other document that the registrant
foreign private issuer must furnish and make public under the laws of the
jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether by furnishing the information contained in this
Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- ________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TV Azteca, S.A. de C.V.
-----------------------
(Registrant)
Date: March 5, 2003 By: /s/ Othon Frias Calderon
--------------------------------------
Name: Othon Frias Calderon
Title: Attorney-in-fact
Our parent, Azteca Holdings, S.A. de C.V., or Azteca Holdings, is offering to
exchange its new 10 3/4% Senior Secured Amortizing Notes due 2008, for all of
its outstanding 10 1/2% Senior Secured Notes due 2003, or the 10 1/2% notes. In
addition, Azteca Holdings is requesting consents from holders of the 10 1/2%
notes to make certain amendments to the indenture governing the 10 1/2% notes.
The new notes being offered have not been registered under Securities Act of
1933, as amended (the "Securities Act") and, until the registration of the new
notes becomes effective, the new notes may not be offered or sold in the United
States absent registration or an applicable exemption from the registration
requirements.
Included in this report is the following information that has not been
previously publicly reported: (i) certain disclosure regarding the business and
operations of us, Azteca Holdings and certain of our affiliates, including
Azteca International Corporation, or Azteca International, and Unefon, S.A. de
C.V., or Unefon, (ii) disclosure about ongoing legal proceedings and disputes
involving our company and/or our affiliates, (iii) certain financial statements
of our company, and Unefon. The foregoing information is provided below. We have
also offered as exhibits to this report the settlement agreement and related
ancillary documents entered into between our company, Azteca International
Corporation and Pappas Telecasting Companies and its affiliates.
No assurance can be made that the exchange offer and consent solicitation will
be completed. This report does not constitute an offer to exchange, or the
solicitation of an offer to exchange, any security and shall not constitute an
offer, solicitation or sale of any securities in any jurisdiction in which such
offering and sale would be unlawful.
This 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 our 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 describe our 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
our actual results, performance or achievements to be different from any future
results, performance or achievements expressed or implied by these statements.
You should review carefully all information, including the financial statements
and the notes to the financial statements, included in this report.
The following important factors could affect future results, causing these
results to differ materially from those expressed in our forward-looking
statements:
.. our ability to service our debt;
.. the outcome of pending disputes and legal proceedings involving our company
and our affiliates;
.. competitive factors affecting our company and our subsidiaries in Mexico and
the United States, or the U.S.;
.. cancellations of significant advertising contracts of our company;
.. limitations on our 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 are not necessarily all of the important factors that could cause
actual results to differ materially from those expressed in any of our
forward-looking statements. Other unknown or unpredictable factors also could
harm our future results. The forward-looking statements included in this
1
report are made only as of the date of this report and we cannot assure you that
projected results or events will be achieved. We disclaim any obligation to
update or revise any of these forward-looking statements, whether as a result of
new information, future events or otherwise.
This 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 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
Mexican Central Bank (Banco de Mexico). On February 27, 2003, this exchange rate
was Ps.11.026 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 in the
wholesale foreign exchange market for operations payable in 48 hours as reported
by the Mexican Central Bank. On February 27, 2003, this exchange rate was
Ps.11.0329 to US$1.00.
Advertising Sales
Our company's share of broadcast television advertising sales in Mexico was 34%
for the year ended December 31, 2002, compared to 31% for the year ended
December 31, 2001.
Pre-sales of advertising time
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.
Unefon Advertising Advances
In June 1998, Unefon and our company entered into a 10-year advertising
agreement, as amended, pursuant to which our company agreed to supply Unefon
with advertising spots totaling an aggregate of 120,000 gross rating points, or
GRPs, over the life of the agreement, up to a maximum of 35,000 GRPs per year.
Unefon agreed to pay our company 3.0% of its gross revenues up to a maximum of
US$200.0 million. As of December 31, 2002, our company had broadcast Unefon
advertisements having an aggregate value of Ps.147 million (US$14.1 million)
pursuant to this advertising agreement. Starting in 2003, Unefon's payments to
our company are due on a current basis. At December 31, 2002, the aggregate
deferred payments equaled US$15.7 million (including interest).
Critical accounting policies and estimates
The preparation of our financial statements requires us 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, we evaluate our 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. We base our estimates on historical experience
and on various other assumptions that we believe 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.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition
Revenue for our company is derived primarily from the sale of advertising time
on a national, spot and local basis and is net of commissions. Our 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 contacts are commitments for advertising over a
period of approximately one year. From time to time, our 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
our company's operations. With respect to barter transactions, our company
values these transactions based on the estimated fair market value of the goods,
services or other assets received by our company. Such transactions accounted
for approximately 2% of our company's net revenue for the year ended December
31, 2002.
On the date the advertising contract is signed, our 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.
Our 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 our
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: (1) 70% is amortized when the
telenovela is first aired and (2) 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. Our 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
our company's financial results.
Intangible Assets and Goodwill
In December 2001, the Accounting Principles Commission of the MIPA issued
Statement C-8 "Intangible Assets," or Statement C-8, which went into effect
January 1, 2003. On January 1, 2002, our 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, our company determined that its
television concessions qualified as indefinite useful life intangible assets.
Accordingly, our company no longer amortizes these concessions. Prior to January
1, 2002, our 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 our consolidated financial statements, we
are required to estimate our income taxes. This process involves estimating our
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 our consolidated balance sheet. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax provision in
the statement of operations. Significant management judgment is required in
determining our provision for income taxes, our company's deferred tax assets
and liabilities and any valuation allowance recorded against our net deferred
tax assets.
Unefon Investment
In October 2000, our company granted rights to acquire all of the Unefon Series
A shares that it owns pro rata to the holders of all of our company's
outstanding shares and to certain other of our 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 our company notes and Azteca Holdings' 11% Senior Secured Notes due 2002, or
11% notes. On March 27, 2001, our company and Azteca Holdings obtained these
consents and paid a fee totaling Ps.121,328 (nominal) to certain holders of the
11% notes and our company notes, of which Ps.109,009 (nominal) was recorded as
part of our 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, including the
consent of Nortel Networks Corporation, Unefon's primary equipment supplier. The
rights to acquire the Unefon Series A shares were originally only exercisable on
December 11, 2002. However, in December 2002, our company approved the change of
the exercise date to December 12, 2003.
As a result of the grant of the rights to acquire the Unefon Series A shares in
October 2000, our company stopped recognizing its participation in the losses of
Unefon. Accordingly, at December 31, 2002, our 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, our 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 our
company's recognition of additional losses. For example, if this adjustment had
been made at December 31, 2002, our company would have recognized additional
losses equal to Ps.405 million (US$39.0 million).
Operating results
The following disclosure was taken from the management's discussion an analysis
section of the Azteca Holdings Offering Memorandum and Consent Solicitation
statement and relates to the financial statements of Azteca Holdings.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net revenue for the year ended December 31, 2002 increased by 10% to Ps.6,743
million (US$648.7 million) from Ps.6,127 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
Soccer Championship and our 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, exhibition and transmission costs for the year ended
December 31, 2002 increased by 2% to Ps.2,511 million (US$241.5 million) from
Ps.2,472 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.991 million (US$95.3 million) from Ps.973 million for the
year ended December 31, 2001. This difference resulted from the increase in our
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
34% to Ps.447 million (US$43.0 million) from Ps.676 million for the year ended
December 31, 2001. This decrease reflects the effects of our 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 our company's television
concessions. Also effective January 1, 2002, our 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 39% to Ps.2,794 million (US$268.8 million) from Ps.2,006
million for the year ended December 31, 2001.
Other expenses--Net for the year ended December 31, 2002 decreased by 9% to
Ps.202 million (US$19.4 million) from Ps.221 million for the year ended December
31, 2001. This decrease was primarily due to lower legal and advisory expenses.
Net comprehensive financing cost for the year ended December 31, 2002 increased
by 297% to Ps.1,728 million (US$166.2 million) from Ps.435 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 our indebtedness and all of our subsidiaries' 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.697 million (US$67.0 million) which reflected a 13.5% depreciation of
the peso against the U.S. dollar since December 31, 2001 compared with a foreign
exchange gain of Ps.345 million for the year ended December 31, 2001. Interest
income for the year ended December 31, 2002 decreased by 25% to Ps.171 million
(US$16.4 million) from Ps.228 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 increased by 1% to Ps.1,080 million (US$103.9 million) from
Ps.1,065 million for the year ended December 31, 2001. Other financing expense
for the year ended December 31, 2002 increased 192% to Ps.187 million (US$18.0
million) from Ps.64 million for the year ended December 31, 2001. This increase
was primarily due to a significant decline in the market value of our company's
portfolio investments. Gain on monetary position decreased by 46% for the year
ended December 31, 2002 to Ps.66 million (US$6.3 million) from Ps.121 million
for the year ended December 31, 2001 as a result of the decrease in our
company's net monetary liability position in the year ended December 31, 2002.
Income before provision for income tax, deferred income tax benefit
(extraordinary item) for the year ended December 31, 2002 decreased by 36% to
Ps.864 million (US$83.1 million) from Ps.1,349 million for the year ended
December 31, 2001.
Provision for income tax for the year ended December 31, 2002 increased by 37%
to Ps.265 million (US$25.4 million) from Ps.211 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.44 million (US$4.2 million) compared with a deferred
income tax benefit of Ps.220 million for the year ended December 31, 2001. As of
December 31, 2002, we have recorded a valuation allowance due to uncertainties
related to our ability to utilize some of our deferred tax assets before they
expire, primarily certain net operating losses carried forward due to our tax
loss carryforwards.
As a result of the foregoing, we had net income of Ps.556 million (US$53.5
million) for the year ended December 31, 2002, as compared with a net income of
Ps.1,358 million for the year ended December 31, 2001. Ps.436 million (US$41.9
million) of the net income for the year ended December 31, 2002 represented net
income of minority stockholders and Ps.120 million (US$12.0 million) represented
net income of majority stockholders compared with a Ps.669 million net income of
minority stockholders and Ps.688 million net income of majority stockholders for
the year ended December 31, 2001.
Liquidity
The following disclosure was taken from the management's discussion and analysis
section of the Azteca Holdings Offering Memorandum and Consent Solicitation
statement and relates to the financial statements of Azteca Holdings.
Azteca Holdings
Azteca Holdings has no independent business or significant source of revenue.
TV Azteca
Our principal sources of liquidity include cash on hand, advance sales of
advertising time and uncommitted sources of short-term financing. Our short term
financing sources include a US$130.0 million Euro-commercial paper program, or
the ECP Program. Under the ECP Program, our company periodically issues notes
with maturities not exceeding 365 days.
--------------------------------------------------------------------------------
2
Cash and cash equivalents were Ps.1,718 million and Ps.1,434 million (US$138.0
million) for the years ended December 31, 2001 and 2002, respectively.
Resources generated from operating activities were Ps.1,847 million and Ps.460
million (US$44.3 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 our comprehensive
financing cost. A significant portion of our cash flows are generated by our
television broadcast operations. Because operating results may fluctuate
significantly as a result of a decline in the advertising environment or pricing
structure, our ability to generate positive cash flow from our television
broadcast operations may be negatively impacted.
Resources used in investing activities were Ps.1,036 million and Ps.736 million
(US$70.8 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.459 million and Ps.8 million
(US$0.8 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 our indebtedness is dollar-denominated and (iii) increases
or decreases in the capital stock of our company, the sale of treasury shares,
repurchases of capital stock and the exercise of employee stock options of our
subsidiaries. For the year ended December 31, 2001, there was Ps.210 million of
indebtedness compared to indebtedness paid in the amount of Ps.214 million
(US$20.6 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.842 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.614 million (US$59.1 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.183 million (US$17.6 million) for the year ended December 31, 2002.
Sources of payment for the 10 1/8% notes
On February 15, 2004, our 10 1/8% Guaranteed Series Notes due 2004, or 10 1/8%
notes, mature. As of December 31, 2002, the outstanding aggregate principal
amount of these notes was US$125.0 million. Our company expects to partially or
entirely repay the principal amount of these notes with its internally generated
cash. In the event that our company does not have the cash on hand to repay the
principal amount of these notes in full, our company will evaluate alternative
refinancing strategies.
--------------------------------------------------------------------------------
3
Indebtedness
The following chart sets forth our outstanding principal amount of indebtedness:
(in millions of U.S. dollars) As of December 31, 2002
--------------------------------------------------------------------------------
Banco Bilbao Vizcaya Mortgage Loan...................... 25.9
Standard Chartered Bank Long-Term Import Credit Facility 10.1
ABN-AMRO Bank Euro-Commercial Paper Program............. 5.1
ATC Long-Term Credit Facility........................... 119.8
TV Azteca 10 1/8% Guaranteed Senior Notes due 2004...... 125.0
TV Azteca 10 1/2% Guaranteed Senior Notes due 2007...... 300.0
Other Indebtedness...................................... 6.6
-----
Total............................................... 592.5
=====
On September 18, 1997, our company obtained a US$25.9 million mortgage loan from
Banco Bilbao Vizcaya, S.A., for the acquisition of an office building located
adjacent to our 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, our 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, our 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 purchase of equipment manufactured in the U.S. In October 1999 and
March 2000, our 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. As of December 31, 2002, the
aggregate outstanding amount due under the outstanding promissory notes was
US$10.1 million.
In May 1999, our company entered into a US$75.0 million Euro-commercial paper
program, or 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
--------------------------------------------------------------------------------
4
ECP Program permits our company to issue and have outstanding up to US$130.0
million in notes at any time. The aggregate principal amount of notes
outstanding under the ECP Program as of December 31, 2002 was US$5.1 million.
In February 2000, our company entered into a long-term credit facility for up to
US$119.8 million with a Mexican subsidiary of American Tower Corporation, or
ATC. 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 our
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 70-year tower
project agreement entered into by the parties in February 2000 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 project agreement remains in effect.
In February 1997, our company issued US$125.0 million aggregate principal amount
of our 10 1/8% notes, and US$300.0 million aggregate principal amount of 10 1/2%
Series B guaranteed senior notes due 2007, or our 10 1/2% notes. Our 10 1/8%
notes mature on February 15, 2004, while our 10 1/2% notes mature on February
15, 2007. Interest on our notes is paid semi-annually on February 15 and August
15. Our notes are jointly and severally guaranteed by each of our material
subsidiaries. Our company has the option to redeem our 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 indenture governing
the TV Azteca notes) plus 50 basis points, plus interest accrued but unpaid on
the date our company redeems the 10 1/8% notes. Our Company has the option to
redeem our 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 our company
redeems our 10 1/2% notes.
--------------------------------------------------------------------------------
5
Capital Expenditures
For the years ended December 31, 2001 and 2002, capital expenditures were Ps.185
million and Ps.194 million (US$18.7 million), respectively. These capital
expenditures were primarily related to the expansion of, and improvements to,
our broadcasting and television production facilities. For the years ended
December 31, 2001 and 2002, our company paid approximately Ps.13 million and
Ps.23 million (US$2.2 million), respectively, to acquire transmitters that we
used to expand the national coverage of our networks and to improve the quality
and operation of our transmission signal. For the years ended December 31, 2001
and 2002, our company made purchases of production equipment and expenditures
related to the refurbishment of our production facilities amounting to Ps.51
million and Ps.98 million (US$9.4 million), respectively. Our capital
expenditures are primarily made in U.S. dollars. For the years ended December
31, 2001 and 2002, our 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, our 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 July 2001, our company and Mr. Moises Saba Masari announced their intention
to provide credit support to Unefon for up to US$80.0 million each. As of
January 31, 2003, our company had paid US$17.7 million to certain creditors of
Unefon pursuant to this credit support and we had outstanding credit support
obligations in the amount of US$12.1 million. Our company has suspended any
further credit support to Unefon in light of Unefon's dispute with Nortel
Networks Corporation, or Nortel.
Our Company's 2003 Budgeted Capital Expenditures
Our company has an aggregate of approximately US$26.0 million budgeted for
capital expenditures in 2003, primarily to be used for the maintenance and
expansion of, and improvements to, our television production and broadcasting
facilities and the acquisition of equipment and expansion. Our company expects
to use cash from our operations to fund these capital expenditures. As a result
of our operating strategy, our company will not, for the foreseeable future,
make major capital expenditures outside the scope of our core television
broadcasting business, which would include loans, credit support and capital
investments in Unefon and affiliates in the Azteca America Network.
Our Company's Dividend Policy/Debt Reduction Strategy
Our company's board of directors has approved a six year debt reduction strategy
pursuant to which our company will use our annual free cash flow to reduce our
outstanding debt, which as of December 31, 2002, was US$592.5 million, and to
make annual distributions to our shareholders. However, there is no assurance
that our company's financial results will permit us to make such anticipated
distributions or that our company will not modify or terminate this dividend
policy in its entirety.
--------------------------------------------------------------------------------
6
Azteca International
Station Affiliations
Azteca International has station affiliation agreements with over-the-air
television broadcast stations in markets that cover approximately 53% of the
U.S. Hispanic population, including stations in the Los Angeles, New York,
Miami, Houston 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
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 in the Los Angeles, San Francisco, Houston and Reno
television markets. When our company entered into station affiliation agreements
with Pappas Telecasting of Southern California LLC, or Pappas Southern
California, operator of its Los Angeles affiliate, our company became a party to
credit agreements and an equity option agreement that gave us the right to
acquire an
--------------------------------------------------------------------------------
7
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 our company and Pappas regarding the
exercise of the purchase option for the Los Angeles station. In addition, Pappas
alleged that our company was in breach of certain of our obligations under the
station affiliation agreements governing the Los Angeles, San Francisco, Houston
and Reno television stations. On February 11, 2003, our company announced that a
definitive settlement agreement that resolved all of the outstanding litigation
and disputes between our company and Pappas had been signed.
In connection with the settlement agreement, our company and Pappas entered into
a number of agreements that will govern our future relationship. These
agreements include a new promissory note issued by Pappas in favor of our
company, a local marketing agreement governing, or LMA, 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 the Los
Angeles station. In addition to these agreements, Pappas and our company
modified the 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 our company by Pappas Southern
California was cancelled, together with our company'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, or
the New Pappas Promissory Note that is secured by the assets of the Los Angeles
station. The maturity date of the New Pappas Promissory Note is May 31, 2003,
with a conditioned grace period of up to June 30, 2003. However, if Pappas does
not repay the New Pappas Promissory Note prior to April 30, 2003, the principal
amount will be increased to US$129.0 million. The New Pappas Promissory Note may
be prepaid, in whole or in part, at any time. If the New Pappas Promissory Note
is not paid on or prior to April 30, 2003, the New Pappas Promissory Note will
bear interest for the month of May 2003 at the rate of US$20,161.29 per day. The
New Pappas Promissory Note will bear interest at an annual rate of 11.6279% from
and after the applicable maturity date, except as indicated below.
The maturity date of the New Pappas Promissory Note will be extended for a
period of one year in the event that (i) Echostar obtains an injunction prior to
the applicable maturity date that prohibits our company from directly or
indirectly distributing any portion of our Azteca 13 Programming to Pappas
Southern California for cable retransmission in the U.S. or (ii) Azteca
International fails to comply with certain governmental filing requirements in
connection with the acquisition of the assets of the Los Angeles station. In the
event an Echostar injunction is imposed, the New Pappas Promissory Note will
bear interest at an annual rate of 9.8%.
--------------------------------------------------------------------------------
8
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 then scheduled 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.
Local Marketing Agreement
Azteca International and Pappas also agreed that, if the New Pappas Promissory
Note is not repaid on or prior to its applicable maturity date, then starting on
June 1, 2003 or July 1, 2003, as applicable, the operation of the Los Angeles
station will be subject to the terms and conditions specified in the LMA.
However, the LMA will not become effective if (i) an Echostar injunction is
issued prior to the applicable maturity date that prohibits our company from
directly or indirectly distributing any portion of our programming broadcast on
our Azteca 13 network, or the Azteca 13 Programming, to Pappas Southern
California for cable retransmission in the U.S., or (ii) Azteca International
fails to comply with certain governmental filing requirements in connection with
the acquisition of the assets of the Los Angeles station.
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 relating to
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 our 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 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 applicable maturity date, (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
--------------------------------------------------------------------------------
9
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 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. 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.
The consummation of the purchase option transaction is subject to receipt of all
necessary antitrust and FCC approvals. 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 become 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 May or 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.
If the Echostar injunction has been issued prior to the applicable maturity date
of the New Pappas Promissory Note, that prohibits our company from directly or
indirectly distributing any portion of our Azteca 13 Programming to Pappas
Southern California for cable retransmission in the U.S., the sole remedy of the
Pappas station affiliates is termination of the respective station affiliation
agreements. In addition, 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.
--------------------------------------------------------------------------------
10
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 May 31, 2004 or June 30, 2004, as applicable,
either party may terminate the agreement on 90 days notice effective as of May
31, 2004 or June 30, 2004, as applicable, 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.
Legal proceedings
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 our 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.
--------------------------------------------------------------------------------
11
On November 27, 2002, our 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 signed. In connection
with settling these pending matters, our 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 our
company, a local marketing agreement 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 our company have modified
their existing station affiliation agreements and entered into new station
affiliation agreements.
Channel 40
In December 1998, our company entered into a joint venture with Televisore del
Velle de Mexico, S.A. de C.V., or TVM, and TVM's subsidiary, Corporacion de
Noticias e Informacion, S.A. de C.V., or 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, our 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. Our 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, our company agreed to
provide substantially all of Channel 40's programming and to sell all of Channel
40's advertising time. Our 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. Our 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 our company at the
time the option is exercised. As of December 31, 2002, TVM's and CNI's
indebtedness to our 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 our company's signal as required by its
contractual obligations under the joint venture agreement. In response to CNI's
actions, our company filed several lawsuits in Mexico against TVM, CNI and Mr.
Moreno Valle, seeking lost profits and the enforcement of our 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 our company
US$35.0 million for damages and lost profits. CNI appealed this order, and, in
October 2001, an appeals court decided our company did not have the right to
receive damages but instructed CNI to return advance payments in the amount of
US$15.0 million. Our company filed an action for relief (amparo) before a
federal circuit court seeking to reverse the appeals court's ruling. Accepting
our company's action for relief, the federal circuit court instructed the
appeals court to decide whether our 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 our company to seek damages, but that such
damages should be pursued pursuant to a different cause of action. Our company
filed an action for relief before the same federal circuit court. This action is
pending.
In July 2002, our 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 our
company had commenced to enforce a guaranty trust.
In November 2002, our 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.
--------------------------------------------------------------------------------
12
In November 2000, our company filed another action before the International
Court of Arbitration of the International Chamber of Commerce. In this action,
our company sought to enforce our 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 our company and CNI are valid,
in effect and enforceable. Our company believes this arbitral award confirms our
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, our company took possession
of certain broadcasting facilities of Channel 40 to restore our 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 our company is a part of
these proceedings.
In January 2003, CNI filed an action for relief (amparo) before a federal
district court seeking to reverse the SCT's decision to take exclusive control
of the Channel 40 transmission site and signal. The federal district court
suspended the SCT's decision, but required that TVM place a 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 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 our
company for having entered the broadcasting facilities of Channel 40 on December
27, 2002.
Our company is actively seeking to enforce our rights to operate Channel 40 and
believes that we will be successful in our 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
our company, our company could lose the benefit of all or part of our option to
purchase 51% of the capital stock of TVM, the joint venture agreement that
allows our company to operate Channel 40 and revenues received therefrom could
be terminated. However, in such event, CNI would continue to be indebted to our
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 Mexican trademark agency (Instituto Mexicano de
la Propiedad Industrial), or IMPI. Endemol alleges that our company violated
certain provisions of the Mexican Industrial Law (Ley de la Propiedad
Industrial) because our 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 our 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 our company for
our alleged violations. Our 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, our 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.
--------------------------------------------------------------------------------
13
Our company believes that if the administrative claim were to be adversely
determined to us, our company could be subject to a fine of up to
Ps.873,000 (US$83,982).
Unefon
Unefon and Nortel Networks Corporation, Unefon's primary equipment supplier,
are currently engaged in disputes over each party's compliance with the terms
and conditions of the finance agreement, letter agreement, the procurement
agreement, and other related agreements entered into by the parties and certain
of their shareholders and affiliates.
Unefon asserts that Nortel Networks Corporation, or 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.
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 non-payment of the August 2002
interest payment. Nortel also alleged that the proposed spin-off by our company
of our 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
US$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.
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$349.8 million. 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 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
--------------------------------------------------------------------------------
14
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 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$47.0 million.
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.
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 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 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. 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 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.
--------------------------------------------------------------------------------
15
Our Company's Obligations
On December 20, 2002, Nortel notified our company and Mr. Saba of its view that
Unefon's non-payment of the August 2002 interest payment triggered our 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. Our 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 our company and Mr. Saba are excused from performance of our and
their obligations under the shareholders' undertaking. Our company and Mr. Saba
also assert that, even if our funding obligation has been triggered, we have
satisfied our obligations under the shareholders' undertaking by making up to
US$35.8 million in additional funds available to or on behalf of Unefon.
If Unefon is found by a final court or arbitral decision to be in default under
its agreements with Nortel and Unefon is not able to satisfy its financial
obligations under these agreements, our company's financial exposure in
connection with Unefon would consist of all or part of the following:
.. the potential payment under credit guarantees issued in connection with the
outstanding obligations of Unefon, which as of January 31, 2003 were US$12.1
million;
.. the potential loss of US$19.1 million which represents the aggregate amount
of Unefon's indebtedness to our company as of December 31, 2002;
.. the potential joint and several liability with Mr. Saba for up to US$35.0
million under their December 2000 shareholders' undertaking (less such
portion, if any, of the funding made available by our company and Mr. Saba to
or on behalf of Unefon that is credited against such undertaking);
.. the potential loss of revenue under our company's advertising agreement with
Unefon (including payment of the deferred amount of US$15.7 million
(including interest));
.. the potential loss of revenue under Unefon's real property lease with our
company, which for the year ended December 31, 2002 amounted to approximately
US$2.5 million; and
.. the potential loss of our company's 46.5% equity interest in Unefon, which is
valued on our company's books at US$168.9 million as of December 31, 2002.
--------------------------------------------------------------------------------
16
TV AZTECA, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Report of independent accountants
Mexico City, February 7, 2003, except for the Pappas Group recent developments
in Note 7, which is as of February 11, 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. 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.
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 two years in the period ended December
31, 2001 and the determination of consolidated stockholders' equity and
consolidated financial position as of December 31, 2000 and 2001 also expressed
in pesos of December 31, 2002 purchasing power to the extent summarized in Note
16 to the consolidated financial statements.
PricewaterhouseCoopers
Manuel Leyva Vega
Audit Partner
--------------------------------------------------------------------------------
F-59
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
(Note 1)
CONSOLIDATED BALANCE SHEETS
At December 31,
-----------------------------------------
2001 2002
-------------------------------------------------------------------------------------------------------------
Thousands of Mexican pesos
of December 31, 2002 Thousands of
purchasing power 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................................................ Ps21,495,281 Ps21,659,825 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)
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.................. Ps21,495,281 Ps21,659,825 US$2,083,678
============ ============ ============
--------
(*) The US dollar figures represent the Mexican peso amounts as of December 31,
2002 expressed as of December 31, 2002 purchasing power translated at the
exchange rate of Ps10.395 per US dollar and are not covered by the Report
of Independent Accountants.
The accompanying notes are an integral part of these consolidated financial
statements.
--------------------------------------------------------------------------------
F-60
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
(Note 1)
CONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS
Year ended December 31,
--------------------------------------------------------------
2000 2001 2002
-------------------------------------------------------------------------------------------------------
Thousands of Mexican pesos of December 31, Thousands of US
2002 purchasing power, except per share amounts Dollars (*)
Net revenue............................ Ps5,986,790 Ps6,122,805 Ps 6,689,957 US$ 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 Ps1,506,114 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 Ps1,508,006 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-61
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
Number of Premium
common on the
shares issuance of
outstanding Capital capital Legal
(thousands) stock stock reserve
---------------------------------------------------------------------------------------------------------
Balances at January 1, 2000............................. 8,930,573 Ps2,715,347 Ps1,555,439 Ps 97,564
--------- ----------- ----------- ---------
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)
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
--------- ----------- ----------- ---------
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)
Exercise of stock options............................ 31,215 5,542 75,829
Sale of treasury shares.............................. 107,804 19,066
--------- ----------- ----------- ---------
Balances at December 31, 2001........................... 9,050,045 2,737,188 1,920,032 97,564
--------- ----------- ----------- ---------
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)
Exercise of stock options............................ 46,020 7,759 16,122
Sale of treasury shares.............................. 82,749 14,066
Financial instruments (Note 4)....................... (173,373)
--------- ----------- ----------- ---------
Balances at December 31, 2002........................... 9,067,465 Ps2,740,130 Ps1,762,781 Ps172,964
========= =========== =========== =========
Reserve (Insufficiency)
for the Retained excess in the
repurchase earnings restatement Majority Minority
of shares (deficit) of capital stockholders stockholders
-----------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 2000............................. Ps1,230,772 Ps 209,402 (Ps 892,293) Ps4,916,231 Ps 39,027
----------- ----------- ------------- ----------- ---------
Variations in 2000:
Net income (loss).................................... 388,883 388,883 (6,114)
Cumulative effect of change in method of accounting
for income taxes.................................... (693,526) 57,854 (635,672)
Loss from holding non-monetary assets................ (241,278) (241,278)
Minority interest from the sale of subsidiary........ (19,708)
----------- ----------- ------------- ----------- ---------
Comprehensive loss................................... (304,643) (183,424) (488,067) (25,822)
----------- ----------- ------------- ----------- ---------
Preferred dividend................................... (44,908) (44,908)
Repurchase of shares................................. (296,028) (316,094)
Exercise of stock options............................ 27,216
Capital stock increase............................... 285,564
----------- ----------- ------------- ----------- ---------
Balances at December 31, 2000........................... 934,744 (140,149) (1,075,717) 4,379,942 13,205
----------- ----------- ------------- ----------- ---------
Variations in 2001:
Net income (loss).................................... 1,508,006 1,508,006 (1,892)
Loss from holding non-monetary assets................ (277,190) (277,190)
Minority interest.................................... (2,942)
----------- ----------- ------------- ----------- ---------
Comprehensive income (loss).......................... 1,508,006 (277,190) 1,230,816 (4,834)
----------- ----------- ------------- ----------- ---------
Preferred dividend................................... (42,130) (42,130)
Repurchase of shares................................. (36,455) (43,172)
Exercise of stock options............................ 81,371
Sale of treasury shares.............................. 143,373 162,439
----------- ----------- ------------- ----------- ---------
Balances at December 31, 2001........................... 1,041,662 1,325,727 (1,352,907) 5,769,266 8,371
----------- ----------- ------------- ----------- ---------
Variations in 2002:
Net income (loss).................................... 984,511 984,511 (235)
Increase legal reserve............................... (75,400)
Gain from holding non-monetary assets................ 52,724 52,724
Minority interest.................................... 581
----------- ----------- ------------- ----------- ---------
Comprehensive income................................. 909,111 52,724 1,037,235 346
----------- ----------- ------------- ----------- ---------
Preferred dividend................................... (39,966) (39,966)
Repurchase of shares................................. (150,996) (169,879)
Exercise of stock options............................ 23,881
Sale of treasury shares.............................. 122,457 136,523
Financial instruments (Note 4)....................... (173,373)
----------- ----------- ------------- ----------- ---------
Balances at December 31, 2002........................... Ps1,013,123 Ps2,194,872 (Ps 1,300,183) Ps6,583,687 Ps 8,717
=========== =========== ============= =========== =========
Total
stockholders'
equity
----------------------------------------------------------------------
Balances at January 1, 2000............................. Ps4,955,258
-----------
Variations in 2000:
Net income (loss).................................... 382,769
Cumulative effect of change in method of accounting
for income taxes.................................... (635,672)
Loss from holding non-monetary assets................ (241,278)
Minority interest from the sale of subsidiary........ (19,708)
-----------
Comprehensive loss................................... (513,889)
-----------
Preferred dividend................................... (44,908)
Repurchase of shares................................. (316,094)
Exercise of stock options............................ 27,216
Capital stock increase............................... 285,564
-----------
Balances at December 31, 2000........................... 4,393,147
-----------
Variations in 2001:
Net income (loss).................................... 1,506,114
Loss from holding non-monetary assets................ (277,190)
Minority interest.................................... (2,942)
-----------
Comprehensive income (loss).......................... 1,225,982
-----------
Preferred dividend................................... (42,130)
Repurchase of shares................................. (43,172)
Exercise of stock options............................ 81,371
Sale of treasury shares.............................. 162,439
-----------
Balances at December 31, 2001........................... 5,777,637
-----------
Variations in 2002:
Net income (loss).................................... 984,276
Increase legal reserve...............................
Gain from holding non-monetary assets................ 52,724
Minority interest.................................... 581
-----------
Comprehensive income................................. 1,037,581
-----------
Preferred dividend................................... (39,966)
Repurchase of shares................................. (169,879)
Exercise of stock options............................ 23,881
Sale of treasury shares.............................. 136,523
Financial instruments (Note 4)....................... (173,373)
-----------
Balances at December 31, 2002........................... Ps6,592,404
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-62
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
(Note 1)
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Year ended December 31,
------------------------------------------------------
2000 2001 2002
-----------------------------------------------------------------------------------------------------------------------
Thousands of Mexican pesos of Thousands of
December 31, 2002, purchasing power 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........................... 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 Ps1,393,273 US$134,033
============ ============ =========== ==========
--------
(*) The US dollar figures represent the Mexican peso amounts as of December 31,
2002 expressed as of December 31, 2002 purchasing power translated at the
exchange rate of Ps10.395 per US dollar and are not covered by the Report
of Independent Accountants.
The accompanying notes are an integral part of these consolidated financial
statements.
--------------------------------------------------------------------------------
F-63
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
Notes to the consolidated financial statements
December 31, 2000, 2001 and 2002
(monetary amounts expressed in thousands of Mexican pesos (Ps) of December 31,
2002 purchasing power and thousands of U.S. dollars (US$), 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)
.. 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 International, 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)
and in goodwill of Ps34,876 (Ps37,851 in 2001).
--------------------------------------------------------------------------------
F-64
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
.. 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
--------------------------------------------------------------------------------
F-65
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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. 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
--------------------------------------------------------------------------------
F-66
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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%
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.
--------------------------------------------------------------------------------
F-67
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 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 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.
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 Employee
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, Bulletin B-4, "Comprehensive Income", issued by the
MIPA, became effective. This bulletin 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.
--------------------------------------------------------------------------------
F-68
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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 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 Ps0.167 Ps0.109
Extraordinary item--NBC settlement agreement--net
of income tax (see note 11d.)....................... (0.037)
-------- ------- -------
Net income per preferred and common shares............ Ps 0.043 Ps0.167 Ps0.109
======== ======= =======
--------
(1) Dividend per preferred shares..................... Ps 0.042 Ps0.042 Ps0.042
======== ======= =======
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.
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.
--------------------------------------------------------------------------------
F-69
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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, the 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.
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.
--------------------------------------------------------------------------------
F-70
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
Note 5--Accounts receivable:
At December 31,
------------------------
2001 2002
---------------------------------------------------------------------
Amounts due from advertisers............... Ps4,417,170 Ps4,421,686
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)
----------- -----------
Ps4,927,444 Ps4,921,200
=========== ===========
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.
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.
--------------------------------------------------------------------------------
F-71
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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
----------- -----------
Ps1,201,752 Ps1,182,999
=========== ===========
Investment in Unefon................................... Ps1,848,485 Ps1,755,942
=========== ===========
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 Ps1,154,479
=========== ===========
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 ten 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.
--------------------------------------------------------------------------------
F-72
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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, the 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 Comunicacones 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
--------------------------------------------------------------------------------
F-73
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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.
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
--------------------------------------------------------------------------------
F-74
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 net 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 either 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 in to 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$210,000. 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
--------------------------------------------------------------------------------
F-75
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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
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 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.
--------------------------------------------------------------------------------
F-76
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 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.
--------------------------------------------------------------------------------
F-77
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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 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
--------------------------------------------------------------------------------
F-78
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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) 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
--------------------------------------------------------------------------------
F-79
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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
--------------------------------------------------------------------------------
F-80
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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.
--------------------------------------------------------------------------------
F-81
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 Ps258,917
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
--------- ---------
Ps426,794 Ps484,682
========= =========
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
========= =========
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
--------------------------------------------------------------------------------
F-82
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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, 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 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
--------------------------------------------------------------------------------
F-83
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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. 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.
--------------------------------------------------------------------------------
F-84
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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 in 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......................... Ps1,507,825 Ps1,302,915
=========== ===========
Guaranteed Senior Notes...................... Ps4,114,901 Ps4,417,875
=========== ===========
Total long-term bank loans and senior notes.. Ps5,622,726 Ps5,720,790
=========== ===========
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 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.
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
--------------------------------------------------------------------------------
F-85
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 million 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 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.
--------------------------------------------------------------------------------
F-86
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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....................................... Ps1,346,555
2005....................................... 10,915
2007....................................... 3,118,500
2008 and thereafter........................ 1,244,820
-----------
Total long-term bank loans and senior notes Ps5,720,790
===========
--------------------------------------------------------------------------------
F-87
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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) Ps3,391 Ps3,407
Net projected liability......................................... 2,665 2,669
------- -------
Intangible asset................................................ Ps 726 Ps 738
======= =======
Net cost for the year........................................... Ps 643 Ps1,612
======= =======
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 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,
--------------------------------------------------------------------------------
F-88
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 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 Ps1,513,492
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 Ps1,485,272 Ps1,254,858 Ps2,740,130
========== ========= =========== =========== ===========
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.
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,
--------------------------------------------------------------------------------
F-89
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 of 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
=== ===
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
--------------------------------------------------------------------------------
F-90
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 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
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.
--------------------------------------------------------------------------------
F-91
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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 items...................... Ps 698,726 Ps1,517,143 Ps1,273,968
========== =========== ===========
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%) 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.
--------------------------------------------------------------------------------
F-92
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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
============= =============
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 -- Ps25,534
========== ========
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 date Tax 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
-----------
Ps1,842,669
===========
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.
--------------------------------------------------------------------------------
F-93
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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 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,
--------------------------------------------------------------------------------
F-94
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
Note 16--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
-------------------------------------------------------------------------------------
Majority net income under Mexican GAAP........... Ps 388,883 Ps1,508,006
Amortization of goodwill......................... i (197,395) (197,395)
NBC warrant...................................... ii 10,841
NBC settlement agreement......................... ii 299,884
Unefon advertising............................... iii 416,093 385,657
Equity in loss of Unefon......................... iv (235,172) (546,546)
Consent fee for Unefon rights.................... v (115,223)
Todito advertising, programming and services
agreement...................................... vi (175,146) (192,674)
Equity in earnings of Todito..................... vi 63,947 91,594
Amortization of Todito goodwill.................. vi 22,643 27,260
Amortization of goodwill from Azteca Digital
acquisition.................................... vii 7,904 7,904
Effect of fifth amendment to B-10................ viii (273,441) (192,386)
Compensation expense from stock options.......... ix (113,964) (35,296)
Compensation expense for Unefon stock option plan x (54,413)
Deferred income taxes............................ xi (208,384) 4,593
Reversal of capitalized internally produced
programming.................................... xiii (226,375)
----------- -----------
Net income under US GAAP......................... Ps 6,693 Ps 464,706
=========== ===========
Basic and diluted income per share............... xviii Ps 0.004 Ps 0.047
=========== ===========
Basic weighted average number of common shares
outstanding (in thousands)..................... 8,966,752 9,025,274
=========== ===========
--------------------------------------------------------------------------------
F-95
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
b. Reconciliation of stockholders' equity:
At December 31,
------------------------
Sub note
reference 2000 2001
--------------------------------------------------------------------------------------------
Balance under Mexican GAAP.............................. Ps4,379,942 Ps5,769,266
Goodwill................................................ i 888,277 690,882
NBC warrant............................................. ii (299,884)
NBC settlement agreement................................ ii 299,884
Unefon advertising...................................... iii 416,093 801,750
Unefon investment....................................... iv 192,306 (353,268)
Todito advertising, programming and services
agreement............................................. vi (175,146) (367,820)
Amortization of Todito goodwill......................... vi 22,643 49,903
Equity in earnings of Todito............................ vi 63,947 155,541
Stockholders' equity of Azteca Digital reflecting effect
of combination of companies under common control...... vii (134,383) (126,479)
Effect of fifth amendment to B-10....................... viii 308,323 316,834
Deferred income taxes................................... xi (340,297) (335,704)
Reversal of capitalized internally produced
programming........................................... xiii (226,375)
----------- -----------
Balance under US GAAP................................... Ps5,621,705 Ps6,374,530
=========== ===========
c. An analysis of the changes in stockholders' equity under US GAAP is as
follows:
Year ended December 31,
------------------------
Sub note
reference 2000 2001
-------------------------------------------------------------------------------------
Balance at beginning of the year................. Ps5,198,569 Ps5,621,705
Net income....................................... 6,693 464,706
Preferred dividend............................... (44,908) (42,130)
Paid-in capital for Unefon stock option plan..... iv 39,902
Exercise of stock options........................ 27,216 81,371
Repurchase of shares............................. (316,094) (43,172)
Sale of treasury shares.......................... 162,439
Issuance of common stock......................... 18,217
Premium on issuance of capital................... 267,347
Unefon acquisition--excess basis................. iv
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
Loss from holding non-monetary assets............ viii (241,278) (277,190)
Compensation expense from stock options.......... ix 113,965 35,296
Compensation expense for Unefon stock option plan x 54,413
----------- -----------
Balance at end of year........................... Ps5,621,705 Ps6,374,530
=========== ===========
--------------------------------------------------------------------------------
F-96
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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. The additional goodwill
will be amortized over 12 years.
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-97
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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) loss 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 2r.
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, 2000 and 2001, the long-term unbilled accounts
receivable from Unefon was Ps2,312,922 and Ps2,258,381, 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.
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.
--------------------------------------------------------------------------------
F-98
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 GAAP US GAAP Difference
------------------------------------------------------------------------
Long term receivable from Unefon Ps 2,123,149 Ps226,321 (Ps1,896,828)
Unefon advertising advance...... (2,312,921) 2,312,921
------------- --------- ------------
Net (liabilities) assets........ (Ps 189,772) Ps226,321 Ps 416,093
============= ========= ============
Revenues........................ Ps 9,521 Ps237,576 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) Ps226,321 Ps 416,093
============= ========= ============
Year ended December 31, 2001
--------------------------------------
Mexican GAAP US GAAP Difference
------------------------------------------------------------------------
Long term receivable from Unefon Ps 1,931,139 Ps474,508 (Ps1,456,631)
Unefon advertising advance...... (2,258,381) 2,258,381
------------- --------- ------------
Net (liabilities) assets........ (Ps 327,242) Ps474,508 Ps 801,750
============= ========= ============
Cumulative:
Revenues..................... Ps 75,844 Ps528,926 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) Ps474,508 Ps 801,750
============= ========= ============
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 years ended December 31, 2000 and
2001 under US GAAP were Ps329,630 and Ps546,546 compared to Ps94,458 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
Ps350,701.
--------------------------------------------------------------------------------
F-99
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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,
------------------------
2000 2001
-------------------------------------------------------------------------------------
Investment in Unefon under Mexican GAAP.................... Ps1,809,528 Ps1,848,485
----------- -----------
Equity in loss............................................. (242,900) (789,446)
Acquisition--excess basis.................................. 105,991 105,991
Reversal of capitalized consent fee for Unefon Rights...... (115,223)
Paid-in capital for Unefon stock option plan............... 39,902
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........................................ (21,485) 54,808
----------- -----------
192,306 (353,268)
----------- -----------
Investment in Unefon under US GAAP......................... Ps2,001,834 Ps1,495,217
=========== ===========
Summarized financial information at December 31, 2000 and 2001 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 2000 2001
-----------------------------------------------------------------------------
Current assets......... Ps1,327,481 Ps 715,975 Ps1,386,186 Ps 1,125,736
Non-current assets..... 7,725,254 8,452,660 7,763,189 8,773,292
Current liabilities.... 685,057 1,555,127 674,990 1,852,819
Non-current liabilities 3,953,028 4,284,193 4,169,368 4,830,688
Stockholders' equity... 4,414,650 3,329,315 4,305,017 3,215,521
Revenues............... 317,822 1,748,787 216,329 1,560,156
Gross margin........... (311,415) (859,768) (802,017) (1,024,916)
Net loss............... (339,462) (1,112,668) (659,259) (1,175,368)
v. Unefon Rights
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.
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.
--------------------------------------------------------------------------------
F-100
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 and 2001
amounted to Ps22,643 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 and 2001. 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 year ended December 31,
2001.
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 Ps2,170 (Ps 93,360)
Programming.......... 81,786 (81,786)
Services............. 5,356 5,356 --
--------- ------- ----------
Ps182,672 Ps7,526 (Ps175,146)
========= ======= ==========
Year ended December 31, 2001
-----------------------------
Mexican US
GAAP GAAP Difference
------------------------------------------------------------------
Cumulative revenues recognized for:
Advertising..................... Ps165,184 Ps2,170 (Ps 163,014)
Programming..................... 196,564 (196,564)
Services........................ 13,598 5,356 (8,242)
--------- ------- -----------
Ps375,346 Ps7,526 (Ps 367,820)
========= ======= ===========
--------------------------------------------------------------------------------
F-101
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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
---------------------- ----------------------
Investment Goodwill in Investment Goodwill in
in Todito Todito in Todito Todito
----------------------------------------------------------------------------
Amounts under Mexican GAAP.. Ps 482,491 Ps 520,727 Ps 397,883 Ps 493,467
Reverse investment in Todito (543,430) (543,370) (539,901) (543,370)
Equity in earnings.......... 63,947 155,541
Amortization of goodwill.... 22,643 49,903
---------- ---------- ---------- ----------
Amounts under US GAAP....... Ps 3,008 Ps -- Ps 13,523 Ps --
========== ========== ========== ==========
Under US GAAP, the Company's share of Todito's net gain for the years ended
December 31, 2000 and 2001 were Ps53 and Ps6,051, respectively, compared to a
net loss of Ps64,000 and Ps85,543, 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 and 2001 amounted to Ps7,904.
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 and
Ps35,296 for 2000 and 2001, 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
--------------------------------------------------------------------------------
F-102
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
Accounting Standard ("SFAS") No. 123, "Accounting for Stock Based
Compensation", the Company's compensation expense would have been Ps40,510 and
Ps17,869 for 2000 and 2001, 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
--------------------------------------------------------
Net income as reported.......... Ps 6,693 Ps464,706
======== =========
Net income pro forma............ Ps80,148 Ps482,134
======== =========
Net income per share as reported Ps 0.001 Ps 0.052
======== =========
Net income per share pro forma.. Ps 0.008 Ps 0.053
======== =========
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
-------------------------------------------------
Expected volatility................ 0.353 0.391
Risk-free interest rate............ 18% 10%
Expected life of options (in years) 5 5
Expected dividend yield............ 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 and 2001.
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
=======
Outstanding options exercisable at December 31,
2000........................................ 14,000 0.32
=======
2001........................................ 18,651 0.32
=======
--------------------------------------------------------------------------------
F-103
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 fair value of the options granted to the Company
totaled US$56,201. 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, the
Company recognized Ps54,413 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) 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
--------------------------------------------------------------------------------
F-104
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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
--------------------------------------
Current...... Ps 9,677 Ps 209,934
Deferred..... (68,549) (221,058)
---------- -----------
Total benefit (Ps 58,872) (Ps 11,124)
========== ===========
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
--------------------------------------------------------------------------------
(Loss) income before income tax benefit............... (Ps 52,179) Ps 453,582
=========== ===========
Income tax (benefit) expense at statutory rate........ (Ps 18,263) Ps 158,754
Non-deductible stock dividends........................ 22,946
Effects of inflationary components.................... 117,716 10,149
Miscellaneous expenses non-deductible for tax purposes 24,805 14,811
Benefit of tax consolidation.......................... (106,634) (120,284)
Other................................................. (99,442) (74,554)
----------- -----------
Net income tax benefit................................ (Ps 58,872) (Ps 11,124)
=========== ===========
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.
--------------------------------------------------------------------------------
F-105
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
Deferred income tax assets:
Current
Advertising advances and other....................... Ps212,183 Ps 68,531
Non-current
Tax loss carryforwards and other..................... 143,767 900,910
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
---------- ----------
355,950 671,766
---------- ----------
Deferred income tax liability:
Current..............................................
Inventories and provisions........................... (513,588) (306,054)
---------- ----------
Non-current
Television concessions............................... (210,547) (350,325)
Property, machinery and equipment and other.......... (388,705) (351,091)
---------- ----------
Total non-current................................ (599,252) (701,416)
---------- ----------
(1,112,840) (1,007,470)
---------- ----------
Net deferred tax liabilities:
Under US GAAP........................................ (756,890) (335,704)
Under Mexican GAAP................................... (416,593)
---------- ----------
US GAAP adjustment................................... (Ps340,297) (Ps335,704)
========== ==========
The difference between net deferred tax liabilities under Mexican and US GAAP
at December 31, 2000 and 2001, 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.
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 and 2001,
--------------------------------------------------------------------------------
F-106
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
Ps195,413 and Ps382,332, 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, the Company
renegotiated its contract with Azteca America. Pursuant to SOP 00-2, given its
limited experience with Azteca America, the Company reversed capitalized
production costs of internally produced programming totaling Ps226,375.
xiv. 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.
xv. 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, 2000 and 2001 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.
--------------------------------------------------------------------------------
F-107
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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, 2001 were Ps4,114,901 and Ps4,066,190,
respectively.
xvi. Property, machinery and equipment
Under US GAAP, advances for the acquisition of machinery and equipment would be
classified as prepayments. As of December 31, 2000 and 2001, the Company had
advances of Ps66,659 and Ps74,568, respectively.
xvii. 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.
xviii. 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
-----------------------------------------------------------------------------
Net income........................................ Ps 6,693 Ps 464,706
Preferred stock dividends......................... (44,908) (42,130)
------------ -----------
(Loss) income corresponding to common stockholders (Ps 38,215) Ps 422,576
============ ===========
Basic weighted average number of common shares
outstanding..................................... 8,966,752 9,025,274
Effect of dilutive securities:
Stock options pending to exercise.............. 42,215 56,169
------------ -----------
Diluted number of common shares................ 9,008,967 9,081,443
============ ===========
Basic (loss) income per share..................... (Ps 0.004) Ps 0.047
============ ===========
Diluted (loss) income per share................... (Ps 0.004) Ps 0.047
============ ===========
xix. Effect of recently issued accounting standards
In June 2000, the FASB issued SFAS No. 139, "Rescission of SFAS 53 and
Amendments to SFAS 63, 89 and 121 and SOP 00-2" ("SFAS 139") which rescinds
SFAS 53 on financial reporting by motion picture film producers or
distributors. SFAS 139 requires public companies to follow the guidance
provided by SOP 00-2.
--------------------------------------------------------------------------------
F-108
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
Effective January 1, 2001, the Company adopted the SOP 00-2. SOP 00-2
supersedes SFAS 53, "Financial Reporting by Producers and Distributors of
Motion Picture Films". SOP 00-2 provides additional guidance in the areas of
revenue recognition, costs for abandoned projects, limitations on ultimate
revenues used, impairment guidance and advertising costs. The adoption of the
statement did not have a material impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141"). SFAS 141 supersedes APB opinion No. 16, "Business Combinations" and
amends or supersedes a number of related interpretations of APB 16. SFAS 141
eliminates the pooling-of-interests method of accounting for business
combinations, and changes the criteria to recognize intangible assets apart
from goodwill. SFAS 141 is required to be adopted for all business combinations
initiated after June 30, 2001. The adoption of SFAS 141 did not have a material
impact in the consolidated financial statements of the Company.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 supersedes APB opinion No. 17, "Intangible
Assets". Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually, or more frequently if impairment
indicators arise, for impairment. SFAS 142 is required to be applied at the
beginning of an entity's fiscal year and to be applied to all goodwill and
other intangible assets recognized in its financial statements at that date.
The Company is currently evaluating the impact that adoption of SFAS 142 will
have on its consolidated financial statements.
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 August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and
reporting provisions of 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", for
the disposal of a segment of a business. The provisions of SFAS 144 are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, with early application encouraged and generally are to be
applied prospectively. The Company does not expect the adoption of SFAS 144
will have a material impact on the consolidated financial statements.
xx. 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.
--------------------------------------------------------------------------------
F-109
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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:
Year ended December 31,
------------------------
2000 2001
------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income................................................... Ps6,693 Ps464,706
Adjustments:
Gain on sale of subsidiary................................... (17,797)
Minority interest............................................ (25,825) (1,892)
Compensation expense from stock options...................... 113,964 35,296
Amortization and depreciation................................ 870,846 863,362
NBC settlement agreement..................................... 210,848
Equity in loss of affiliates................................. 278,312 522,845
Unefon stock option plan..................................... 54,413
Deferred income tax.......................................... (68,549) (221,058)
Foreign exchange loss, net of monetary gain on NBC warrant... (10,841)
Unrealized foreign exchange loss............................. 101,920 (294,411)
Monetary gain on financing activities........................ (325,907) (56,947)
Net changes in working capital............................... 34,693 252,217
----------- -----------
Net cash provided by operating activities................. 1,168,357 1,618,531
----------- -----------
Cash flows from investing activities:
Acquisition of machinery and equipment....................... (169,740) (170,185)
Exhibition rights purchased.................................. (413,700) (648,594)
Investment in affiliates of Pappas Telecasting Companies,
through Azteca America..................................... (660,031)
Loan granted to Pappas Southern California, LLC.............. (191,124)
----------- -----------
Net cash used in investing activities..................... (583,440) (1,669,934)
----------- -----------
Cash flows from financing activities:
Debt received................................................ 650,864 337,422
Debt paid.................................................... (668,009) (116,594)
Preferred dividend paid...................................... (44,908) (42,130)
Proceeds from stock options exercised........................ 27,216 81,371
Sale of treasury shares...................................... 162,439
Repurchase of shares......................................... (316,094) (43,172)
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
----------- -----------
Effects of inflation and exchange rate changes on cash.... 90,988 53,501
----------- -----------
Increase in cash and cash equivalents..................... 99,806 381,434
----------- -----------
Cash and cash equivalents at beginning of period.......... 1,169,631 1,269,437
----------- -----------
Cash and cash equivalents at end of period................ Ps1,269,437 Ps1,650,871
=========== ===========
Supplemental disclosure:
Cash paid during the period for:
Interest..................................................... Ps731,025 Ps669,426
=========== ===========
Income tax................................................... Ps252,664 Ps81,142
=========== ===========
--------------------------------------------------------------------------------
F-110
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------
Current assets........................................... Ps7,755,187
Property, machinery and equipment--Net................... 2,496,652
Television concessions--Net.............................. 3,742,945
Investment in Unefon..................................... 1,495,216
Investment in affiliates of Pappas Telecasting Companies,
through Azteca America................................. 660,031
Goodwill--Net............................................ 750,182
Other assets............................................. 2,248,407
Deferred income tax assets............................... 603,235
------------
Total assets.......................................... Ps19,751,855
============
Short-term debt.......................................... Ps566,872
Advertising advances..................................... 4,639,819
Deferred income tax payable.............................. 306,054
Other current liabilities................................ 1,325,988
------------
Total current liabilities............................. 6,838,733
------------
Long-term debt........................................... 5,622,726
Exhibition rights payable................................ 206,079
Deferred income tax payable.............................. 701,416
------------
Total long-term liabilities........................... 6,530,221
------------
Minority interest........................................ 8,371
Stockholders' equity..................................... 6,374,530
------------
Total liabilities and stockholders' equity............ Ps19,751,855
============
--------------------------------------------------------------------------------
F-111
TV Azteca, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
CONDENSED RESULTS
OF OPERATIONS
------------------------
Year ended December 31,
------------------------
2000 2001
-------------------------------------------------------------------------------------------
Net revenue...................................................... Ps6,039,699 Ps6,165,887
Costs and expenses:
Programming and transmission costs............................ 2,876,360 2,791,889
Selling and administrative expenses........................... 1,053,674 1,046,367
Depreciation and amortization................................. 870,846 863,362
NBC settlement agreement...................................... 210,848
Other expense--Net............................................ 547,442 814,027
----------- -----------
Operating income.............................................. 480,529 650,242
----------- -----------
Comprehensive financing cost:
Interest expense.............................................. (934,488) (770,885)
Interest income............................................... 188,271 239,927
Exchange (loss) income--Net................................... (118,511) 275,458
Gain on monetary position..................................... 325,906 56,948
----------- -----------
Net comprehensive financing cost.............................. (538,822) (198,552)
----------- -----------
(Loss) income before minority interest and income tax benefit. (58,293) 451,690
Minority interest............................................. 6,114 1,892
Income tax benefit............................................ 58,872 11,124
----------- -----------
Net income.................................................... Ps6,693 Ps464,706
=========== ===========
--------------------------------------------------------------------------------
F-112
UNEFON, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Report of independent accountants
Mexico City, February 24, 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. 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.
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 and 2001 and the determination of
the consolidated stockholders' equity and consolidated financial position as of
December 31, 2000 and 2001, also expressed in pesos of December 31, 2002
purchasing power, to the extent summarized in Note 16 to the consolidated
financial statements.
PricewaterhouseCoopers
Alberto Del Castillo V. Vilchis
Audit Partner
--------------------------------------------------------------------------------
F-114
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------------------
2001 2002
----------------------------------------------------------------------------------------------------
(Thousands of Mexican pesos of
December 31, 2002 Thousands of
purchasing power) US dollars (*)
Assets:
Current:
Cash and cash equivalents.......................... Ps130,955 Ps203,869 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................................... Ps9,185,457 Ps9,029,919 US$ 864,993
=========== =========== ===========
Liabilities:
Bank loans (Note 8)................................... Ps465,281 Ps217,962 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 (Notes 10 and 14)................
----------- ----------- -----------
Total liabilities and stockholders' equity..... Ps9,185,457 Ps9,029,919 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 sixteen notes are an integral part of these consolidated
financial statements.
--------------------------------------------------------------------------------
F-115
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RESULTS OF OPERATIONS
(Notes 1 and 9)
Year ended December 31,
---------------------------------------------------------------
2000(*) 2001 2002
-------------------------------------------------------------------------------------------------------------
(Thousands of Mexican pesos of December 31, 2002 Thousands of
purchasing power, except per share amounts) 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$8,146 of
interest accrued since August, 16 to
December, 31 2002 of Nortel Networks
Corporation debt, see Note 10)............ 53,023 596,350 554,848 53,150
Amortization of debt fees and political risk
insurance (Note 10)....................... 19,659 40,749 33,154 3,176
Exchange loss (gain)--Net................... 26,217 (132,953) 565,464 54,167
Gain on monetary position................... (22,673) (206,981) (305,146) (29,231)
----------- ------------ ------------ -----------
69,867 275,413 842,867 80,740
----------- ------------ ------------ -----------
Net loss for the period..................... (Ps 342,137) (Ps1,114,710) (Ps 871,762) (US$ 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 dollar and are not covered by
the Report of Independent Accountants.
The accompanying sixteen notes are an integral part of these consolidated
financial statements.
--------------------------------------------------------------------------------
F-116
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)
Number of
common
shares Capital stock Premium
outstanding* ------------------------ on share
(thousands) Authorized Unpaid subscription Deficit Total
---------------------------------------------------------------------------------------------------------------------
(Thousands of Mexican pesos of December 31, 2002 purchasing power)
Balances at December 31, 1999........ 2,340,000 Ps4,309,012 (Ps 582,647) Ps 755,622 Ps4,481,987
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 Ps3,769,091 (Ps 538,040) Ps1,561,096 (Ps 2,328,609) Ps2,463,538
========= =========== =========== =========== ============= ===========
--------
* 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 sixteen notes are an integral part of these consolidated
financial statements.
--------------------------------------------------------------------------------
F-117
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Year ended December 31,
--------------------------------------------------------------
2000 2001 2002
-----------------------------------------------------------------------------------------------------------------
(Thousands of Mexican pesos of December 31, 2002 Thousands of
purchasing power) 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 sixteen notes are an integral part of these consolidated
financial statements.
--------------------------------------------------------------------------------
F-118
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 Stockholders' 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. Concessionaire for radio-electric
("Operadora"), formerly Sistemas frequency bands for fixed or mobile
Profesionales de Comunicacion, S. A. wireless access services
de C. V. 99.9%
Servicios SPC, S. A. de C. V. ("Servicios") Personal service company 99.9%
Operadora SPC, S. A. de C. V. Administrative personal service
("Operadora SPC") company (in pre-operating stage) 99.9%
Operadora de Comunicaciones, S. A. de C. V. Concessionaire for radio-electric
("Operadora de Comunicaciones") frequency band 99.9%
Unefrecuencias, S. A. de C. V. Concessionaire for radio-electric
("Unefrecuencias") frequency band (in pre-operating
stage) 99.9%
Frecuencia Movil, S. A. de C. V. Concessionaire for radio-electric
frequency band (in pre-operating
stage) 99.9%
Torres y Comunicaciones, S. A. de C. V. In pre-operating stage
("Torres") (a wholly-owned subsidiary of
Operadora) 99.9%
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).
--------------------------------------------------------------------------------
F-119
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 16). 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.
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.
--------------------------------------------------------------------------------
F-120
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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).
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.
--------------------------------------------------------------------------------
F-121
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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 accrue.
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 a 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-122
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 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, 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.
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.
--------------------------------------------------------------------------------
F-123
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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
========== ========= ==========
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
----------- -----------
Ps3,584,539 Ps3,406,730
=========== ===========
--------------------------------------------------------------------------------
F-124
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
On September 7, 1999, the Company signed a procurement agreement, a financing
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.
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").
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-125
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
Below is a breakdown of the concession rights:
December 31,
------------------------
2001 2002
---------------------------------------------------------------------------------
Concession for 1.9 GHz frequency....................... Ps2,302,780 Ps2,302,780
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
----------- -----------
Ps4,038,578 Ps3,881,338
=========== ===========
Under the concession 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 the 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.
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.
--------------------------------------------------------------------------------
F-126
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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................. Ps239,027 Ps239,027
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)
--------- ---------
Ps656,684 Ps580,405
========= =========
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
=========== ===========
--------------------------------------------------------------------------------
F-127
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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$35,000 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 obligation to make additional funds available to Unefon
up to an aggregate amount of US$35,000 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$35,800 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$80,000 cash. As of January 31, 2003, TV
Azteca had paid US$17,700 to certain creditors of Unefon pursuant to this
credit support and it had outstanding credit support obligations in the amount
of US$12,100 . TV Azteca has suspended any further credit support to Unefon in
light of Unefon's dispute with Nortel.
--------------------------------------------------------------------------------
F-128
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
Note 9--Related party balances and transactions:
December 31,
-------------------
Short-term balances: 2001 2002
-----------------------------------------------------------------------------
Accounts receivable:
Elektra, S. A. de C. V. ("Elektra")................... Ps109,102
Grupo Hecali, S. A. de C. V........................... Ps 6,553
TV Azteca............................................. 78,198
Grupo Telecosmos...................................... 18,754
Others................................................ 98
--------- ---------
Ps 6,651 Ps206,054
========= =========
Accounts payable:
Stockholders.......................................... Ps384,166
Grupo Alsavision, S. A. de C. V. ("Grupo Alsavision"). Ps175,533 143,060
Elektra............................................... 116,895 240,095
TV Azteca............................................. 21,484 16,692
Others................................................ 2,718 13,794
--------- ---------
Ps316,630 Ps797,807
========= =========
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
--------- ---------
Ps130,506 Ps158,868
========= =========
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......... Ps187,746 Ps140,477 Ps281,532
========= ========= =========
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 Ps127,627 Ps244,267
========= ========= =========
Sale of handsets commission............... Ps 52,080 Ps 57,034
========= =========
--------
(*) This interest was accrued during 2000, 2001 and Ps 48,843 in 2002 in
connection with the capital reduction payable to stockholders (see Note 12).
--------------------------------------------------------------------------------
F-129
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 a percentage of revenues generated from the
sales of handsets, airtime sold in its stores and net interconnection from
customers acquired by Unefon through Grupo Elektra.
As compensation for Grupo Elektra services, the Company has agreed to pay Grupo
Elektra:
.. The greater of a 20% discount of the value of the handset or 150 pesos
discount per handset (indexed annually by the NCPI).
.. 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 an alternative to promote and sell handsets and airtime through "Credito
Plus". These agreements do not imply novation, switch, modification or
cancellation of the Grupo Elektra agreement mentioned above.
Unefon will pay a 16.5% commission on prepaid air time sold inside Elektra
stores to be used on Unefon's Network. The commissions will be paid on an
accrued basis. During 2000, the amount was not 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.
--------------------------------------------------------------------------------
F-130
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 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$200,000. 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 accrue 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$15,700 (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 leased 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.
Grupo 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$19,000 and US$13,000, respectively.
Stockholder loans
As of December 31, 2002, the Company had received short-term stockholder loans
in an aggregate amount of US$36,800.
--------------------------------------------------------------------------------
F-131
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
Note 10--Long-term financing from Nortel:
Operadora signed a financing agreement with Nortel for a total of up to
US$618,000 available in two tranches. Tranche "A" was for US$408 million (of
which US$135,000 was to finance working capital requirements) and was available
from November 15, 1999 through May 15, 2002. Tranche "B" was for US$210,000 (of
which US$35,000 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$382,900 from Tranche "A" and
US$14,500 of Tranche "B", totaling US$397,400. On December 27, 2000, Operadora
made a mandatory prepayment amounting to US$22,600. 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$25,000, 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$349,800 and US$315,500,
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 amounting to US$8,111 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.
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 incorrect 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
--------------------------------------------------------------------------------
F-132
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 whenever 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$3,600 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 required 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.
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
----------- -----------
Ps3,396,494 Ps3,293,759
=========== ===========
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$210,000. Unefon
contends that Nortel's failure to advance this additional financing has limited
Unefon's ability to build out its network, to grow
--------------------------------------------------------------------------------
F-133
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 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$210,000 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$356,000 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 directing Nortel to deliver immediately all
--------------------------------------------------------------------------------
F-134
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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.
--------------------------------------------------------------------------------
F-135
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
.. 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$10,400 to the Operadora which consisted of the termination fee of US$4,500
plus US$7,000 representing Unefon's good faith estimate of the reimbursable
costs less US$1,100 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.
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.
--------------------------------------------------------------------------------
F-136
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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$90,000 as follows:
Millions of
Year ended 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.
--------------------------------------------------------------------------------
F-137
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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 on the next page.
December 31, 2002
-----------------------
Number of
Stockholder shares Amount
-----------------------------------------------------------------
(thousands)
TV Azteca............................... 1,170,000 Ps1,161,730
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
-----------
Ps3,231,051
===========
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).
.. 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;
--------------------------------------------------------------------------------
F-138
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
.. 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.
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, S. A. de C. V. 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.
--------------------------------------------------------------------------------
F-139
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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.
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.......................... Ps1,517,621
2009.......................... 2,521,723
2010.......................... 566,710
2011.......................... 729,484
2012.......................... 207,121
-----------
Ps5,542,659
===========
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.
In 2001 and 2002, the Company and its subsidiaries were not subject to asset
tax, under current tax provisions.
--------------------------------------------------------------------------------
F-140
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 telecommunications 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)
to December 31, 2000 Toluca Acapulco Mexico Others(2) Total
-----------------------------------------------------------------------------------
Total net revenue..................... Ps28 Ps42 Ps139 Ps109 Ps320
Segment costs and expenses(1)......... (32) (44) (159) (298) (533)
----- ----- ------- ------- --------
Segment loss.......................... (Ps4) (Ps2) (Ps20) (Ps189) 213
===== ===== ======= =======
Unallocated costs, expenses and income (129)
--------
Net loss for the period............... (Ps342)
========
Period from January 1, 2001
to December 31, 2001 Toluca Acapulco Mexico Others(2) Total
-----------------------------------------------------------------------------------
Total net revenues.................... Ps90 Ps113 Ps757 Ps588 Ps1,548
Segment costs and expenses(1)......... (70) (84) (686) (1,096) (1,936)
----- ----- ------- ------- --------
Segment income (loss)................. Ps20 Ps29 Ps71 (Ps508) (388)
===== ===== ======= =======
Unallocated costs, expenses and income (727)
--------
Net loss for the period............... (Ps1,115)
========
Period from January 1, 2002
to December 31, 2002 Toluca Acapulco Mexico Others(2) Total
-----------------------------------------------------------------------------------
Total net revenues.................... Ps147 Ps177 Ps1,542 Ps1,173 Ps3,039
Segment costs and expenses(1)......... (68) (79) (721) (1,536) (2,404)
----- ----- ------- ------- --------
Segment income (loss)................. Ps79 Ps98 Ps821 (Ps363) 635
===== ===== ======= =======
Unallocated costs, expenses and income (1,507)
--------
Net loss for the period............... (Ps872)
========
--------
(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 cities.
The Company does not report assets by segments.
--------------------------------------------------------------------------------
F-141
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
Note 16--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 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:
Sub-note Year ended December 31,
reference ---------------------------
--------- 2000 2001
---------------------------------------------- ---------------------------
Net loss under Mexican GAAP.................. (Ps 342,137) (Ps1,114,710)
Revenue recognition:
--Sales of handsets and service revenue... i. (20,781) 8,591
--Operating and distribution fee.......... (13,898) 13,898
Capitalized comprehensive financing cost--Net ii. 255,977 111,036
Advertising costs............................ iii. (218,095) (204,501)
Pre-operating expenses....................... iv. (299,974) 67,490
Deferred income taxes........................ v. (25,616) --
Stock option plan............................ vi. -- (59,329)
------------ ------------
Net loss under US GAAP....................... (Ps 664,524) (Ps1,177,525)
============ ============
Basic and diluted net loss per share......... (Ps 0.283) (Ps 0.467)
============ ============
Weighted average number of shares outstanding
(thousands)................................ 2,347,339 2,516,129
============ ============
b. Reconciliation of stockholders' equity:
Year ended December 31,
-------------------------
Sub-note
reference 2000 2001
--------------------------------------------------------------------------------------
Balance under Mexican GAAP........................ Ps4,450,010 Ps3,335,300
Revenue recognition:
--Sales of handsets and service revenue........ i. (20,781) (12,190)
--Operating and distribution fee............... (13,898) --
Capitalized comprehensive financing cost--Net..... ii. 866,421 977,457
Advertising costs................................. iii. (218,095) (422,596)
Pre-operating expenses............................ iv. (724,165) (656,675)
----------- -----------
Balance under US GAAP............................. Ps4,339,492 Ps3,221,296
=========== ===========
--------------------------------------------------------------------------------
F-142
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
c. An analysis of the changes in stockholders' equity under US GAAP is as
follows:
2000 2001
-----------------------------------------------------------------------------
Balance at beginning of the year.................. Ps4,693,856 Ps 4,339,492
Capital stock cancelled........................... (689,858) --
Capital stock increase............................ 1,000,018 --
Net loss.......................................... (664,524) (1,177,525)
Stock option plan................................. 120,516
Stock option plan dividends....................... (61,187)
----------- ------------
Balance at end of the year........................ Ps4,339,492 Ps 3,221,296
=========== ============
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 recent 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.
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 and 2001.
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 -- (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 amounts........................... (Ps 42,284) (Ps 63,065) (Ps 20,781)
=========== =========== ===========
--------------------------------------------------------------------------------
F-143
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
December 31, 2001
-----------------------------------
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
========== =========== ==========
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-144
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
Provided below is a summary of capitalized comprehensive financing cost--net
under Mexican and US GAAP:
At December 31,
------------------------
2000 2001
-------------------------------------------------------------------------------------------
Mexican GAAP:
Capitalized interest on fixed assets and concessions.......... Ps 224,270 Ps 260,686
Capitalized exchange loss on fixed assets..................... 30,362 19,651
Capitalized net monetary gain on fixed assets and concessions. (738,053) (743,880)
----------- -----------
(483,421) (463,543)
Accumulated depreciation and amortization..................... 5,672 17,289
----------- -----------
Net capitalized comprehensive financing costs under
Mexican GAAP............................................ (477,749) (446,254)
----------- -----------
US GAAP:
Capitalized interest on fixed assets and concessions.......... 406,141 576,285
Accumulated depreciation and amortization..................... (17,469) (45,082)
----------- -----------
Net capitalized interest under US GAAP.................... 388,672 531,202
----------- -----------
Net adjustment............................................ (Ps 866,421) (Ps 977,457)
=========== ===========
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
-----------------------------------------------------------
Advertising cost under Mexican GAAP $ 11,009 $ 70,010
Advertising cost under US GAAP..... (229,104) (274,511)
---------- ----------
Net adjustment..................... ($ 218,095) ($ 204,501)
========== ==========
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
liabilities 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
--------------------------------------------------------------------------------
F-145
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 and 2001, the more
likely than not will be realized.
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
-------------------------------------------------------------------------------------
Deferred income tax assets:
Current:
Deferred cost/revenue--Net.......................... Ps 7,273 Ps 4,456
Accrued expenses.................................... 88,421 60,587
---------- ------------
95,694 65,043
---------- ------------
Non current:
Pre-operating expenses.............................. Ps 212,614
Property, furniture and equipment................... 17,233 Ps 160,585
Tax loss carryforwards.............................. 392,693 1,787,992
---------- ------------
622,540 1,948,577
---------- ------------
Deferred income tax liabilities:
Current:
Inventories......................................... Ps (52,657) Ps (46,814)
Advance payments.................................... (8,941) (60,679)
---------- ------------
(61,598) (107,493)
---------- ------------
Non current:
Concessions and capitalized interest................ (390,465) (1,762,511)
---------- ------------
(390,465) (1,762,511)
---------- ------------
Net deferred IT assets before valuation reserve..... 266,171 143,630
Valuation reserve................................... (266,171) (143,630)
---------- ------------
Net deferred tax.................................... Ps Ps --
========== ============
--------------------------------------------------------------------------------
F-146
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 and 2001.
Year ended
December 31,
-------------------------
2000 2001
------------------------------------------------------------------------------------------------
Income (loss) before deferred IT..................................... Ps(638,908) Ps(1,177,525)
=========== ============
IT (expense) benefit at statutory Rate............................... Ps 223,618 Ps412,133
Add (deduct):
Differences between comprehensive financing cost--Net of inflationary
gains or losses.................................................... 17,554 (239,676)
Non deductible expenses.............................................. (639) (2,500)
Others............................................................... (15,766) (47,402)
Change in valuation reserve.......................................... (250,383) (122,555)
----------- ------------
Income tax expense................................................... Ps (25,616) 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 According 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, however, the
Company recorded compensation expense for Ps59,329 and Ps37,998 and dividends
to the controlling entities for Ps61,187 and Ps30,083 in the year ended
December 31, 2001 and 2002 respectively.
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.
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 U.S. GAAP other than the net
loss.
ix. Effect of recently issued accounting standards
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
141"). SFAS 141 supersedes APB opinion No. 16, "Business Combinations" and
amends or supersedes a number of related interpretations of APB 16. SFAS 141
eliminates the pooling-of-interests method of accounting for business
combinations, and changes the criteria to recognize intangible assets apart
from goodwill. SFAS 141 is required to be adopted for all business combinations
initiated after June 30, 2001. The adoption of SFAS 141 did not have material
import in the consolidated financial statements of the Company.
--------------------------------------------------------------------------------
F-147
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 supersedes APB opinion No. 17, "Intangible
Assets". Under SFAS 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually, or more frequently if impairment
indicators arise, for impairment. SFAS 142 is required to be applied at the
beginning of an entity's fiscal year and to be applied to all goodwill and
other intangible assets recognized in its financial statements at that date.
The Company is currently evaluating the impact that adoption of SFAS 142 will
have on its consolidated financial statements.
On August 15, 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("FAS 143") "Accounting for Asset Retirement Obligations". 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 form 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 August, 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("FAS 144") "Accounting for the Impairment or Disposal of Long-Lived
Assets". This Statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes FASB
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of 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", for
the disposal of a segment of a business (as previously defined in that
Opinion). The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
adoption of this standard did not have any effect on the Company's consolidated
financial statements.
x. 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-148
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
The condensed statement of cash flows prepared under US GAAP is as follows:
Year ended December 31,
-------------------------
2000 2001
--------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss........................................................................ Ps(664,524) Ps(1,177,525)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Stock option plan........................................................... 59,329
Deferred income taxes....................................................... 25,616
Depreciation and amortization............................................... 140,462 433,108
Unrealized exchange loss on debt............................................ 42,133
Monetary gain relating to financing activities.............................. (167,676) (167,970)
Changes in assets and liabilities:
Restricted cash.......................................................... (165,048) (16,952)
Accounts receivable...................................................... (50,474) (104,636)
Recoverable value added tax.............................................. (61,680) (48,433)
Related parties.......................................................... 194,915 377,210
Handset inventories...................................................... (161,820) 28,061
Net changes in others assets, accounts payable and accrued
expenses............................................................... 182,486 798,313
----------- ------------
Net cash flows (used in) provided by operating activities............ (685,610) 180,505
----------- ------------
Cash flows from investing activities:
Acquisition of property furniture and equipment................................. (735,945) (1,183,033)
Capitalized interest in concession rights....................................... (252,347) (45,119)
----------- ------------
Net cash flows used in investing activities.......................... (988,292) (1,228,152)
----------- ------------
Cash flows from financing activities:
Bank loans...................................................................... 465,281
Proceeds from long-term financing from Nortel................................... 1,186,046 149,661
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 financing activities................................. 2,051,990 588,469
----------- ------------
Effects of inflation in cash.................................................... 15,734 28,368
----------- ------------
Increase (decrease) in cash and cash equivalents................................ 393,822 (430,810)
Cash and cash equivalents at beginning of period................................ 196,313 561,765
----------- ------------
Cash and cash equivalents at end of period...................................... Ps590,135 Ps130,955
=========== ============
Supplemental cash flows disclosure:
Cash paid during the year for interest.......................................... Ps317,942 Ps387,361
=========== ============
Other non-cash activities:
Capital reduction payable to stockholders....................................... Ps692,607 Ps --
=========== ============
Construction in process--Nortel................................................. Ps1,372,422 Ps693,142
=========== ============
Pre-paid political risk insurance............................................... Ps25,549 Ps19,504
=========== ============
--------------------------------------------------------------------------------
F-149
Unefon, S. A. de C. V. and Subsidiaries
--------------------------------------------------------------------------------
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 SHEETS
December 31,
----------------------------
2000 2001
--------------------------------------------------------------------------------
Total current assets.............................. Ps 1,397,320 Ps 1,127,801
Property, furniture and equipment--Net............ 2,845,225 3,751,426
Concession rights--Net............................ 4,960,503 4,849,597
Others non-current assets......................... 19,866 188,368
------------- -------------
Total assets................................... Ps 9,222,914 Ps 9,917,192
============= =============
Total current liabilities......................... Ps 680,406 Ps 1,856,343
Capital reduction payable to stockholders......... 692,607 707,299
Long-term financing from Nortel................... 3,255,803 3,396,494
Long-term payables to related parties............. 254,606 735,760
------------- -------------
Total liabilities.............................. 4,883,422 6,695,896
------------- -------------
Capital stock..................................... 3,231,051 3,231,051
Premium on share subscription..................... 1,561,096 1,561,096
Retained earnings (deficit)....................... (452,655) (1,630,180)
Stock option plan................................. 59,329
------------- -------------
Total stockholders' equity..................... 4,339,492 3,221,296
------------- -------------
Total liabilities and stockholders' equity..... Ps 9,222,914 Ps 9,917,192
============= =============
CONDENSED RESULTS OF OPERATIONS
Year ended December 31,
----------------------------
2000 2001
--------------------------------------------------------------------------------
Net revenues...................................... Ps 218,068 Ps 1,563,019
Total costs and expenses.......................... (1,026,560) (2,589,816)
------------- -------------
Loss from operations.............................. (808,492) (1,026,797)
------------- -------------
Other income--Net................................. 58,779 34,493
------------- -------------
Interest income................................... 14,377 21,752
Interest expense.................................. (463,367)
Amortization of political risk insurance.......... (21,616) (40,749)
Exchange gain (loss)--Net......................... (54,149) 143,664
Gain on monetary position......................... 172,193 212,808
------------- -------------
Net comprehensive financing income (cost)......... 110,805 (125,892)
------------- -------------
Stock option plan................................. (59,329)
------------- -------------
Income (loss) before IT........................... (638,908) (1,177,525)
IT benefit (expense).............................. (25,616)
------------- -------------
Net income (loss).............................. (Ps 664,524) (Ps 1,177,525)
============= =============
--------------------------------------------------------------------------------
F-150
EXHIBIT INDEX
4.1 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
4.2 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
4.3 Option Agreement by and between Pappas Telecasting of Southern California
LLC, and Azteca International Corporation, dated as of February 11, 2003
4.4 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
4.5 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
4.6 Amended and Restated Credit Agreement between Pappas Telecasting of
Southern California LLC as debtor and Azteca International Corporation,
dated as of February 11, 2003
4.7 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