Annual Reports

  • 20-F (Apr 30, 2014)
  • 20-F (Sep 5, 2013)
  • 20-F (Apr 30, 2013)
  • 20-F (Apr 30, 2012)
  • 20-F (May 13, 2011)
  • 20-F (May 25, 2010)

 
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AMERICA MOVIL SAB DE CV 20-F 2005
Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on June 30, 2005

 


SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 20-F

 


 

Annual Report Pursuant to Section 13

of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2004

 

Commission file number for securities registered

pursuant to Section 12(b) of the Act: 0-32245

 

Commission file number for securities registered

pursuant to Section 12(g) of the Act: 1-16269

 


 

AMÉRICA MÓVIL, S.A. DE C.V.

(exact name of registrant as specified in its charter)

 

America Mobile

(translation of registrant’s name into English)

 


 

United Mexican States

(jurisdiction of incorporation)

 

Lago Alberto 366, Colonia Anáhuac, 11320 México, D.F., México

(address of principal executive offices)

 


 

Securities registered pursuant to

Section 12(b) of the Act:


 

Name of each exchange

on which registered:


American Depositary Shares, each representing   New York Stock Exchange
20 Series L Shares, without par value    
Series L Shares, without par value   New York Stock Exchange
    (for listing purposes only)

 

Securities registered pursuant to Section 12(g) of the Act:

 

American Depositary Shares, each representing 20 Series A Shares, without par value

 

Series A Shares, without par value

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

U.S.$500,000,000 4.125% Senior Notes due 2009

U.S.$800,000,000 5.500% Senior Notes due 2014

U.S.$300,000,000 Floating Rate Senior Notes due 2007

U.S.$500,000,000 5.750% Senior Notes due 2015

U.S.$1,000,000,000 6 3/8% Senior Notes due 2035

 

The number of outstanding shares of each of the registrant’s classes of capital or common stock as of December 31, 2004:

 

3,647 million     AA Shares
    265 million       A Shares
  8,352 million       L Shares

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

    Yes  x    No  ¨

 

Indicate by check mark which financial statement item the registrant has elected to follow.

 

 

    Item 17  ¨    Item 18  x



Table of Contents

TABLE OF CONTENTS

 

Items 1-2. Not Applicable.     
Item 3. Key Information    1
    

Selected Financial Data

   1
    

Exchange Rates

   4
    

Forward-Looking Statements

   5
    

Risk Factors

   6
Item 4. Information on the Company    15
    

General

   15
    

Mexican Operations

   19
    

Non-Mexican Operations

   33
    

Other Investments

   45
    

Capital Expenditures

   46
Item 5. Operating and Financial Review and Prospects    47
Item 6. Directors, Senior Management and Employees    66
    

Management

   66
    

Employees

   73
Item 7. Major Shareholders and Related Party Transactions    74
    

Major Shareholders

   74
    

Related Party Transactions

   76
Item 8. Financial Information    78
    

Dividends

   78
    

Legal Proceedings

   78
Item 9. The Offer and Listing    84
    

Trading Markets

   84
    

Trading on the Mexican Stock Exchange

   87
Item 10. Additional Information    88
    

Bylaws

   88
    

Certain Contracts

   94
    

Exchange Controls

   95
    

Corporate Governance Practices

   96
    

Taxation

   103
    

Documents on Display

   108
Item 11. Quantitative and Qualitative Disclosures about Market Risk    108
    

Exchange Rate and Interest Rate Risks

   108
    

Sensitivity Analysis Disclosures

   108
Items 12-14. Not Applicable.     
Item 15. Controls and Procedures    109
Item 16A. Audit Committee Financial Expert    109
Item 16B. Code of Ethics    109
Item 16C. Principal Accountant Fees and Services    110
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers    110
Item 17. Not Applicable.     
Item 18. Financial Statements    113
Item 19. Exhibits    113

 

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PART I

 

Item 3. Key Information

 

SELECTED FINANCIAL DATA

 

This annual report includes our audited consolidated financial statements as of December 31, 2003 and 2004 and for each of the three years ended December 31, 2002, 2003 and 2004. Our financial statements have been prepared in accordance with Mexican GAAP and are presented in Mexican pesos. The financial statements of our non-Mexican subsidiaries have been adjusted to conform to Mexican GAAP and translated to Mexican pesos. See Note 2(g) to our audited consolidated financial statements.

 

Mexican GAAP differs in certain respects from U.S. GAAP. Note 22 to the audited consolidated financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP, as they relate to us, a reconciliation to U.S. GAAP of operating income, net income and total stockholders’ equity and a condensed statement of cash flows under U.S. GAAP.

 

Pursuant to Mexican GAAP, in our financial statements and the selected financial information set forth below:

 

    nonmonetary assets (including plant, property and equipment of Mexican origin) and stockholders’ equity are restated for inflation based on the Mexican National Consumer Price Index; plant, property and equipment of non-Mexican origin are restated based on the rate of inflation in the country of origin and converted into Mexican pesos using the prevailing exchange rate at the balance sheet date;

 

    gains and losses in purchasing power from holding monetary liabilities or assets are recognized in income; and

 

    all financial statements are restated in constant pesos as of December 31, 2004.

 

The effect of inflation accounting under Mexican GAAP has not been reversed in the reconciliation to U.S. GAAP of operating income, net income and total stockholders’ equity, except with respect to the methodology for restatement of imported telephone plant. See Note 22 to our audited consolidated financial statements.

 

References herein to “U.S.$” are to U.S. dollars. References herein to “pesos,” “P.” or “Ps.” are to Mexican pesos.

 

This annual report contains translations of various peso amounts into U.S. dollars at specified rates solely for your convenience. You should not construe these translations as representations by us that the nominal peso or constant peso amounts actually represent the U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, we have translated U.S. dollar amounts from constant pesos at the exchange rate of Ps. 11.2648 to U.S.$1.00, which was the rate reported by Banco de México for December 31, 2004.

 

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The selected financial and operating information set forth below has been derived in part from our audited consolidated financial statements, which have been reported on by Mancera S.C., a member practice of Ernst & Young Global, an independent, registered public accounting firm. The selected financial and operating information should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements.

 

     As of and for the year ended December 31,

 
     2000

    2001

    2002

   2003

    2004

    2004

 
     (millions of constant pesos as of December 31, 2004)(1)     (millions of
U.S. dollars)(1)
 

Income Statement Data:

                                     

Mexican GAAP

                                     

Operating revenues

   Ps. 34,789     Ps. 47,816     Ps. 62,843    Ps. 90,401     Ps. 134,747     U.S.$  11,962  

Operating costs and expenses

   31,431     40,796     49,189    71,509     111,253       9,876  

Depreciation and amortization

   3,571     5,175     9,053    14,598     18,595       1,651  

Operating income

   3,358     7,020     13,654    18,892     23,494       2,086  

Comprehensive financing cost (income)

   (1,258 )   700     1,076    (2,233 )   (1,908 )     (169 )

Net income (loss)

   1,046     (957 )   5,032    15,812     16,513       1,466  

Net income (loss) per share:

                                     

Basic(2)

   0.07     (0.07 )   0.38    1.22     1.32       0.12  

Diluted(3)

   0.07     (0.07 )   0.38    1.22     1.32       0.12  

Dividends declared per share(4)

   —       0.040     0.044    0.060     0.120       0.011  

Dividends paid per share(5)

   —       0.030     0.043    0.056     0.105       0.009  

Weighted average number of shares outstanding (millions):

                                     

Basic

   —       13,199     13,123    12,912     12,502       —    

Diluted

   —       13,199     13,123    12,914     12,506       —    

U.S. GAAP

                                     

Operating revenues(6)

   Ps. 31,559     Ps. 43,095     Ps. 58,589    Ps. 86,058     Ps. 126,696     U.S.$ 11,247  

Operating costs and expenses

   29,264     36,635     44,586    66,560     104,417       9,269  

Depreciation and amortization

   3,888     5,781     8,560    14,282     18,250       1,620  

Operating income

   2,295     6,460     14,003    19,498     22,279       1,978  

Comprehensive financing cost (income)

   (1,559 )   765     749    (2,075 )   (2,364 )     (210 )

Net income (loss)

   (494 )   (705 )   6,350    15,672     16,663       1,479  

Net income (loss) per share:

                                     

Basic(2)

   (0.03 )   (0.05 )   0.48    1.21     1.33       0.12  

Diluted(3)

   (0.03 )   (0.05 )   0.48    1.21     1.33       0.12  

 

(see footnotes on following page)

 

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     As of and for the year ended December 31,

     2000

   2001

    2002

    2003

    2004

    2004

     (millions of constant pesos as of December 31, 2004)(1)     (millions of
U.S. dollars)(1)

Balance Sheet Data:

                                   

Mexican GAAP

                                   

Property, plant and equipment, net

   Ps. 39,506    Ps. 46,214     Ps. 66,263     Ps. 74,855     Ps. 84,913     U.S.$ 7,538

Total assets

   106,091    107,118     123,638     157,762     194,621       17,277

Short-term debt and current portion of long-term debt

   8,032    7,288     11,189     12,737     5,392       479

Long-term debt

   1,410    17,539     39,340     39,135     56,067       4,977

Total stockholders’ equity(7)

   79,036    65,463     53,800     72,804     77,568       6,885

Capital stock

   32,845    32,820     32,812     32,810     32,795       2,911

Number of outstanding shares (millions):

                                   

Series AA

   3,266    3,807     3,647     3,647     3,647       —  

Series A

   339    315     291     279     265       —  

Series L

   10,405    9,077     8,978     8,910     8,352       —  

U.S. GAAP

                                   

Property, plant & equipment, net

   Ps. 39,611    Ps. 49,563     Ps. 67,468     Ps. 80,884     Ps. 95,116     U.S.$ 8,444

Total assets

   108,214    111,494     126,871     166,817     208,166       18,479

Short-term debt and current portion of long-term debt

   8,133    7,288     11,189     12,737     5,392       479

Long-term debt

   1,427    17,539     39,340     39,135     56,067       4,977

Minority interest

   2,553    865     1,288     5,363     1,659       147

Total stockholders’ equity

   74,716    65,865     53,004     74,861     85,145       7,558

Capital stock

   33,258    33,234     33,226     33,224     33,209       2,948

Subscriber Data:

                                   

Number of subscribers (in thousands)

   17,124    26,594     31,600     43,725     61,107       —  

Subscriber growth

   —      55.3 %   18.8 %   38.4 %   39.8 %     —  

(1) Except per share, share capital and subscriber data.
(2) For 2000, assumes 14,485 million shares outstanding for the period prior to September 25, 2000, the date América Móvil was established. We have not included net income or dividends on a per ADS basis. Each L Share ADS represents 20 L Shares and each A Share ADS represents 20 A Shares.
(3) For 2000, assumes 14,485 million diluted shares outstanding for the period prior to September 25, 2000, the date América Móvil was established. We have not included net income or dividends on a per ADS basis. Each L Share ADS represents 20 L Shares and each A Share ADS represents 20 A Shares.
(4) Nominal amounts. Figures provided represent the annual dividend declared at the general shareholders’ meeting.
(5) Nominal amounts. For more information on dividends paid per share translated into U.S. dollars, see “Financials – Dividends” under Item 8. Amount in U.S. dollars translated at the exchange rate on each of the respective payment dates.
(6) The differences between our Mexican and U.S. GAAP operating revenues include (1) the application of EITF 01-9, “Accounting Consideration Given by a Vendor to a Customer”, which we have applied to all periods presented in this table and which resulted in a reclassification of certain commissions paid to distributors from commercial, administrative and general expenses under Mexican GAAP to reductions in operating revenues under U.S. GAAP, and (2) the application in 2004 of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables,” which addresses certain aspects of accounting for sales that involved multiple revenue generating products and/or services sold under a single contractual agreement. See note 22 to our audited consolidated financial statements.
(7) Includes minority interest.

 

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EXCHANGE RATES

 

Mexico has a free market for foreign exchange, and the Mexican government allows the peso to float freely against the U.S. dollar. The peso was relatively stable from 1999 until 2001. From 2002 to 2004, the peso generally declined in value against the U.S. dollar. There can be no assurances that the government will maintain its current policies with regard to the peso or that the peso will not further depreciate or appreciate significantly in the future.

 

The following table sets forth, for the periods indicated, the high, low, average and period-end noon buying rate in New York City for cable transfers in pesos published by the Federal Reserve Bank of New York, expressed in pesos per U.S. dollar. The rates have not been restated in constant currency units and therefore represent nominal historical figures.

 

Period


   High

   Low

   Average(1)

   Period End

2000

   9.1830    10.0870    9.4717    9.6180

2001

   8.9500    9.9700    9.3300    9.1560

2002

   9.0000    10.4250    9.6630    10.4250

2003

   10.1130    11.4060    10.8463    11.2420

2004

   10.8050    11.6350    11.3095    11.1540

2004:

                   

January

   10.8050    11.0970          

February

   10.9095    11.2450          

March

   10.9180    11.2290          

April

   11.1570    11.4315          

May

   11.3815    11.6350          

June

   11.3030    11.5380          

July

   11.3790    11.5350          

August

   11.3450    11.4550          

September

   11.2415    11.6030          

October

   11.2415    11.5150          

November

   11.2411    11.5290          

December

   11.1110    11.3285          

2005:

                   

January

   11.1715    11.4110          

February

   11.0430    11.2060          

March

   10.9755    11.3295          

April

   11.0360    11.2298          

May

   10.8850    11.0330          

(1) Average of month-end rates.

 

On June 28, 2005, the noon buying rate was Ps. 10.8415 to U.S.$1.00.

 

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FORWARD-LOOKING STATEMENTS

 

This annual report contains forward-looking statements. We may from time to time make forward-looking statements in our periodic reports to the Securities and Exchange Commission on Forms 20-F and 6-K, in our annual report to shareholders, in offering circulars and prospectuses, in press releases and other written materials, and in oral statements made by our officers, directors or employees to analysts, institutional investors, representatives of the media and others. Examples of such forward-looking statements include:

 

    projections of operating revenues, net income (loss), net income (loss) per share, capital expenditures, dividends, capital structure or other financial items or ratios;

 

    statements of our plans, objectives or goals, including those relating to acquisitions, competition, regulation and rates;

 

    statements about our future economic performance or that of Mexico or other countries in which we operate;

 

    competitive developments in the telecommunications sector in each of the markets where we currently operate;

 

    other factors or trends affecting the telecommunications industry generally and our financial condition in particular; and

 

    statements of assumptions underlying the foregoing statements.

 

We use words such as “believe,” “anticipate,” “plan,” “expect,” “intend,” “target,” “estimate,” “project,” “predict,” “forecast,” “guideline,” “should” and other similar expressions to identify forward-looking statements, but they are not the only way we identify such statements.

 

Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors, some of which are discussed under “Risk Factors,” include economic and political conditions and government policies in Mexico, Brazil or elsewhere, inflation rates, exchange rates, regulatory developments, technological improvements, customer demand and competition. We caution you that the foregoing list of factors is not exclusive and that other risks and uncertainties may cause actual results to differ materially from those in forward-looking statements.

 

Forward-looking statements speak only as of the date they are made. We do not undertake any obligation to update such statements in light of new information or future developments.

 

You should evaluate any statements made by us in light of these important factors.

 

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RISK FACTORS

 

Risks Relating to Our Businesses

 

Substantial and increasing competition in the wireless industry could adversely affect the revenues and profitability of our business

 

Our wireless businesses face substantial competition, typically from at least one other wireless provider, and increasingly from multiple providers. We also face competition from fixed-line telephone companies and, increasingly, other service providers such as cable, paging and Internet companies. Competition in our markets has intensified in recent periods.

 

We expect that competition will continue to intensify in the future as a result of the entry of new competitors, the development of new technologies, products and services, and the auction of additional spectrum. We also expect the current consolidation trend in the wireless industry to continue, as companies respond to the need for cost reduction and additional spectrum. This trend may result in larger competitors with greater financial, technical, promotional and other resources to compete with our businesses. In January 2005, Telefónica Móviles completed the acquisition from BellSouth of wireless operators in Venezuela, Colombia, Argentina, Chile, Ecuador, Panama, Peru, Guatemala, Uruguay and Nicaragua. With this acquisition, Telefónica Móviles, which has important operations in Mexico and Brazil, as well as other of our markets, consolidated its position as our largest regional competitor.

 

Among other things, our competitors could:

 

    provide increased handset subsidies;

 

    offer higher commissions to retailers;

 

    provide free airtime or other services (such as Internet access);

 

    expand their networks faster; or

 

    develop and deploy improved wireless technologies faster.

 

We anticipate that competition will lead to increases in advertising and promotional spending and reductions in prices for services and handsets. In addition, portability requirements, which enable customers to switch wireless providers without changing their wireless numbers, have been introduced in some of our markets and may be introduced in other markets in the near future. These developments may lead to smaller operating margins, greater choices for customers, possible consumer confusion and increasing movement of customers among competitors, which may make it difficult for us to retain customers or add new customers. The cost of adding new customers may also continue to increase, reducing profitability even if customer growth continues.

 

Our ability to compete successfully will depend on customer service, on marketing and on our ability to anticipate and respond to various competitive factors affecting the telecommunications industry, including new services and technologies, changes in consumer preferences, demographic trends, economic conditions and discount pricing strategies by competitors. If we are unable to respond to competition and compensate for declining prices by adding new customers, increasing usage and offering new services, our revenues and profitability could decline.

 

Changes in government regulation could hurt our businesses

 

Our businesses are subject to extensive government regulation and can be adversely affected by changes in law, regulation or regulatory policy. The licensing, construction, operation, sale, resale and interconnection arrangements of wireless telecommunications systems in Latin America and elsewhere are regulated to varying degrees by government or regulatory authorities. Any of these authorities having

 

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jurisdiction over our businesses could adopt or change regulations or take other actions that could adversely affect our operations. In particular, the regulation of prices operators may charge for their services could have a material adverse effect on us by reducing our profit margins. In Mexico, Telcel’s business is subject to extensive government regulation, principally by the Comisión Federal de Telecomunicaciones (Federal Telecommunications Commission, or “Cofetel”) the Comisión Federal de Competencia (Federal Competition Commission, or “Cofeco”) and the Procuraduría Federal del Consumidor (Federal Consumer Bureau, or “Profeco”), and may be adversely affected by changes in law or by actions of Mexican regulatory authorities.

 

The Mexican Communications Ministry is authorized to impose specific rate and other requirements on any wireless operator that is determined by Cofeco to have substantial market power. While no such determination has been made with respect to the wireless market in Mexico, we can provide no assurances that the regulatory authorities will not make such a determination with respect to Telcel and impose specific rate requirements or other special regulations on us, such as additional requirements regarding disclosure of information or quality of service. Any such new regulation could have a material adverse effect on our operations.

 

Cofetel is currently considering adopting regulations that would extend the “calling party pays” system to all calls terminating in mobile phones in Mexico. Currently, the “calling party pays” system applies to calls within a local area. Under the proposal, all airtime regardless of the location within Mexico of the recipient of the call would be paid by the calling party. It is unclear how these regulations, if adopted, would affect our business and results. The regulations could increase usage and number of subscribers, but could reduce revenues per call.

 

Many Latin American countries have recently deregulated and privatized the provision of communications services, including wireless services, and many of the laws, regulations and licenses that regulate our businesses, including in Argentina, Brazil, Colombia, Ecuador, Uruguay, El Salvador, Guatemala, Honduras and Nicaragua, became effective only recently. Consequently, there is only a limited history that would allow us to predict the impact of these legal regulations on our future operations. Furthermore, the Brazilian national telecommunications agency (ANATEL) has initiated hearings to discuss the possible adoption of cost-based methods for determining interconnection fees charged by operators belonging to an economic group with significant market power. It is not yet clear how the determination of whether an operator belongs to an economic group with significant market share would be made for purposes of this proposed regulation. Given the size of our operations in Brazil, we may be deemed to belong to an economic group with significant market power. If these methods are ultimately adopted and we are deemed to be an economic group with significant market power, the revenues and results of operations of our Brazilian operations may be affected. In addition, changes in political administrations could lead to the adoption of policies concerning competition, privatization and taxation of communications services that may be detrimental to our operations throughout Latin America. These restrictions, which may take the form of preferences for local over foreign ownership of communications licenses and assets, or for government over private ownership, may make it impossible for us to continue to develop our businesses. These restrictions could result in our incurring losses of revenues and require capital investments all of which could materially adversely affect our businesses and results of operations.

 

We will, in the future, either have to acquire additional radio spectrum capacity or build more cell and switch sites in Mexico in order to expand our customer base and maintain the quality of our services

 

Licensed radio spectrum is essential to our growth and the quality of our services, particularly for GSM services. In order to utilize less spectrum, we could increase the density of our network by building more cell and switch sites, but such measures could be costly and would be subject to local restrictions and approvals.

 

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In 2005, we acquired 10 megahertz in the 1900 megahertz spectrum in each of Mexico’s nine regions, through a public auction. We also bid for and were awarded an additional 10 megahertz of capacity in three principal regions, but that additional capacity has not been delivered to us due to restrictions imposed by Cofeco on the amount of overall spectrum that could be awarded to bidders. We have challenged this restriction in court. We cannot assure you that we will be able to acquire this additional spectrum. In addition, Cofeco or other third parties may seek annulment of the results of the overall bidding process if these restrictions are not upheld by the courts.

 

Participation in spectrum auctions requires prior governmental authorization. Any restrictions on our ability to acquire or use spectrum may have a material effect on our business.

 

Our concessions and licenses are subject to termination

 

The terms of our concessions and licenses typically require the operator to meet specified network build-out requirements and schedules, as well as to maintain minimum quality, service and coverage standards. If we fail to comply with these and other criteria, the result could be revocation of our concessions or licenses, the imposition of fines or other government actions. Our ability to comply with these criteria is subject in certain respects to factors beyond our control. We cannot assure you that our international businesses will be able to comply fully with the terms of their concessions or licenses.

 

In Mexico, the Mexican telecommunications law and Telcel’s concessions include various provisions under which the concessions may be terminated by the Mexican Communications Ministry before their scheduled expiration dates. Among other things, these concessions may be terminated if we fail to meet specified network build-out requirements and schedules or to maintain minimum quality, service and coverage standards by, for example, interrupting service without justified cause or failing to meet interconnection requirements. Also, the Mexican telecommunications law gives certain rights to the Mexican government, including the right to revoke the concessions pursuant to an expropriation or to take over the management of Telcel’s networks, facilities and personnel in cases of imminent danger to national security, internal peace or the national economy, natural disasters and public unrest. The loss of any one concession could have a material adverse effect on our business and results of operations.

 

We have invested in countries in which we have limited experience, and we may be unsuccessful in addressing the new challenges and risks they present

 

We have invested in a growing number of telecommunications businesses outside our historical activity of providing wireless telecommunications services in Mexico, and we plan to continue to do so in the rest of Latin America. Whereas Mexico accounted for 63.5% of our total wireless subscribers as of December 31, 2002 and 71% of our consolidated revenues during 2002, it accounted for 47.2% of our total wireless subscribers as of December 31, 2004 and 52.6% of our consolidated revenues during 2004. During that period, Brazil, as a result of rapid subscriber growth and the acquisitions of BSE and BCP, increased its share of our total wireless subscribers from 16.4% as of December 31, 2002 to 22.3% as of December 31, 2004, and it accounted for 17.1% of our consolidated revenues during 2004. These investments outside Mexico have been made in some countries in which we have little experience and may involve risks to which we have not previously been exposed. Some of the investments are in countries that may present different or greater risks, including from competition, than Mexico. We cannot assure you that these investments will be successful.

 

We are subject to significant litigation

 

Some of our subsidiaries are subject to significant litigation, which if determined adversely to our interests may have a material adverse effect on our business, results of operations, financial condition or prospects. In Mexico, Telcel is subject to proceedings for alleged antitrust practices. We cannot predict how these proceedings will be resolved and, if resolved contrary to our interests, what fines or

 

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restrictions may be imposed on our Mexican operations. These restrictions, which could be imposed by means of special regulations, may include significant limitations on our ability to conduct business as currently conducted. Telcel is also subject to proceedings regarding the calculation of interconnection fees. Our significant litigation is described in “Legal Proceedings” under Item 8.

 

A system failure could cause delays or interruptions of service, which could cause us to lose customers and revenues

 

We will need to continue to provide our subscribers with reliable service over our network. Some of the risks to our network and infrastructure include the following:

 

    physical damage to access lines;

 

    power surges or outages;

 

    limitations on the use of our radiobases;

 

    software defects; and

 

    disruptions beyond our control.

 

Disruptions may cause interruptions in service or reduced capacity for customers, either of which could cause us to lose subscribers and incur additional expenses.

 

If our current churn rate increases, our business could be negatively affected

 

The cost of acquiring a new subscriber is much higher than the cost of maintaining an existing subscriber. Accordingly, subscriber deactivations, or churn, could have a material negative impact on our operating income, even if we are able to obtain one new subscriber for each lost subscriber. Because a substantial majority of our subscribers are prepaid, we do not have long-term contracts with those subscribers. Our weighted monthly average churn rate on a consolidated basis for the twelve-month periods ended December 31, 2004 and 2003 was 2.9%. If we experience an increase in our churn rate, our ability to achieve revenue growth could be materially impaired. In addition, a decline in general economic conditions could lead to an increase in churn, particularly among our residential subscribers.

 

Risks Relating to the Wireless Industry Generally

 

Changes in the wireless industry could affect our future financial performance

 

The wireless communications industry is experiencing significant change. These changes include, among others, regulatory changes, the increasing pace of digital upgrades in existing analog wireless systems, evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new products, and changes in end-user needs and preferences. In Mexico and in the other countries in which we conduct business, there is uncertainty as to the pace and extent of growth in subscriber demand, and as to the extent to which prices for airtime and line rental may continue to decline.

 

There are three existing digital technologies for wireless communications, none of which is compatible with the others. In the past, Telcel and certain of our international businesses used time division multiple access (TDMA) technology for their digital networks, while certain of our other international businesses used code division multiple access (CDMA) as their digital wireless technology. We are introducing global system for mobile communications (GSM) technology in all of our markets. Telcel launched GSM services in Mexico in October 2002, and we have since launched GSM services in Argentina, Brazil, Colombia, Ecuador, Guatemala, Uruguay, Honduras, Nicaragua and El Salvador. If future wireless technologies that gain widespread acceptance are not compatible with the technologies we use, we may be required to make capital expenditures in excess of our current forecasts in order to upgrade and replace our technology and infrastructure.

 

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We may incur significant losses from wireless fraud and from our failure to successfully manage collections

 

Our wireless businesses incur losses and costs associated with the unauthorized use of these wireless networks, particularly their analog cellular networks. These costs include administrative and capital costs associated with detecting, monitoring and reducing the incidence of fraud. Fraud also affects interconnection costs, capacity costs, administrative costs and payments to other carriers for unbillable fraudulent roaming. In the year ended December 31, 2004, Telcel refunded to its customers approximately Ps. 5 million due to wireless fraud. Although we seek to combat this problem through the deployment of anti-fraud technologies and other measures, we cannot assure you that these efforts will be effective or that fraud will not result in material costs for us in the future.

 

Cloning, which is one form of wireless fraud, involves the use of scanners and other electronic devices to obtain illegally telephone numbers and electronic serial numbers during cellular transmission. Stolen telephone and serial number combinations can be programmed into a cellular phone and used to obtain improper access to cellular networks. Roaming fraud occurs when a phone programmed with a number stolen from one of our subscribers is used to place fraudulent calls from another carrier’s market, resulting in a roaming fee charged to us that cannot be collected from the subscriber.

 

Concerns about health risks relating to the use of wireless handsets and base stations may adversely affect our business

 

Media and other reports have linked radio frequency emissions from wireless handsets and base stations to various health concerns, including cancer, and to interference with various electronic medical devices, including hearing aids and pacemakers. Although we do not know of any definitive studies showing that radio frequency emissions raise health concerns, concerns over radio frequency emissions may discourage the use of wireless handsets, which could have a material adverse effect on our results of operations. Government authorities could also increase regulation of wireless handsets and base stations as a result of these concerns. In addition, lawsuits have been filed in the United States against certain participants in the wireless industry alleging various adverse health consequences as a result of wireless phone usage, and our businesses may be subject to similar litigation in the future. Research and studies are ongoing, and there can be no assurance that further research and studies will not demonstrate a link between radio frequency emissions and health concerns. Any negative findings in these studies could adversely affect the use of wireless handsets and, as a result, our future financial performance.

 

Risks Relating to Our Controlling Shareholders, Capital Structure and Transactions with Affiliates

 

We are controlled by one shareholder

 

As of May 31, 2005, 65.9% of our voting shares were directly or indirectly owned by América Telecom, S.A. de C.V. According to reports of beneficial ownership of our shares filed with the SEC, Carlos Slim Helú and certain members of his immediate family, including his son and member of our Board of Directors, Patrick Slim Domit, together own a majority of the voting stock of América Telecom. América Telecom is able to elect a majority of the members of our board of directors and to determine the outcome of other actions requiring a vote of our shareholders, except in very limited cases that require a vote of the holders of L Shares. We cannot assure you that América Telecom will not take actions that are inconsistent with your interests.

 

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We have significant transactions with affiliates

 

We engage in transactions with Teléfonos de México, S.A. de C.V., or “Telmex,” and certain subsidiaries of Grupo Carso, S.A. de C.V. and Grupo Financiero Inbursa, S.A. de C.V., all of which are affiliates of América Móvil. Many of these transactions occur in the ordinary course of business and, in the case of transactions with Telmex, are subject to applicable telecommunications regulations in Mexico. Transactions with affiliates may create the potential for conflicts of interest.

 

The protections afforded to minority shareholders in Mexico are different from those in the United States

 

Under Mexican law, the protections afforded to minority shareholders are different from those in the United States. In particular, the law concerning fiduciary duties of directors is not as fully developed as in other jurisdictions, there is no procedure for class actions or shareholder derivative actions, and there are different procedural requirements for bringing shareholder lawsuits. As a result, in practice it may be more difficult for minority shareholders of América Móvil to enforce their rights against us or our directors or controlling shareholder than it would be for shareholders of a company incorporated in another jurisdiction, such as the United States.

 

Holders of L Shares and L Share ADSs have limited voting rights, and holders of ADSs may vote only through the depositary

 

Our bylaws provide that holders of L Shares are not permitted to vote except on such limited matters as the transformation or merger of América Móvil or the cancellation of registration of the L Shares with the Mexican National Banking and Securities Commission or any stock exchange on which they are listed. If you hold L Shares or L Share ADSs, you will not be able to vote on most matters, including the declaration of dividends, that are subject to a shareholder vote in accordance with our bylaws.

 

Holders of ADSs are not entitled to attend shareholders’ meetings, and they may only vote through the depositary

 

Under Mexican law, a shareholder is required to deposit its shares with a Mexican custodian in order to attend a shareholders’ meeting. A holder of ADSs will not be able to meet this requirement, and accordingly is not entitled to attend shareholders’ meetings. A holder of ADSs is entitled to instruct the depositary as to how to vote the shares represented by ADSs, in accordance with procedures provided for in the deposit agreements, but a holder of ADSs will not be able to vote its shares directly at a shareholders’ meeting or to appoint a proxy to do so.

 

You may not be entitled to participate in future preemptive rights offerings

 

Under Mexican law, if we issue new shares for cash as part of a capital increase, we generally must grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage in América Móvil. Rights to purchase shares in these circumstances are known as preemptive rights. We may not legally be permitted to allow holders of ADSs or holders of L Shares or A Shares in the United States to exercise any preemptive rights in any future capital increase unless we file a registration statement with the U.S. Securities and Exchange Commission, or SEC, with respect to that future issuance of shares. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC and any other factors that we consider important to determine whether we will file such a registration statement.

 

We cannot assure you that we will file a registration statement with the SEC to allow holders of ADSs or U.S. holders of L Shares or A Shares to participate in a preemptive rights offering. As a result, the equity interest of such holders in América Móvil may be diluted proportionately. In addition, under current Mexican law, it is not practicable for the depositary to sell preemptive rights and distribute the proceeds from such sales to ADS holders.

 

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Our bylaws restrict transfers of shares in some circumstances

 

Our bylaws provide that any acquisition or transfer of more than 10% of our capital stock by any person or group of persons acting together requires the approval of our Board of Directors. If you acquire or transfer more than 10% of our capital stock, you will not be able to do so without the approval of the Board of Directors.

 

Mexican law and our bylaws restrict the ability of non-Mexican shareholders to invoke the protection of their governments with respect to their rights as shareholders

 

As required by Mexican law, our bylaws provide that non-Mexican shareholders shall be considered as Mexicans in respect of their ownership interests in América Móvil and shall be deemed to have agreed not to invoke the protection of their governments in certain circumstances. Under this provision, a non-Mexican shareholder is deemed to have agreed not to invoke the protection of his own government by asking such government to interpose a diplomatic claim against the Mexican government with respect to the shareholder’s rights as a shareholder, but is not deemed to have waived any other rights it may have, including any rights under the U.S. securities laws, with respect to its investment in América Móvil. If you invoke such governmental protection in violation of this agreement, your shares could be forfeited to the Mexican government.

 

Our bylaws may only be enforced in Mexico

 

Our bylaws provide that legal actions relating to the execution, interpretation or performance of the bylaws may be brought only in Mexican courts. As a result, it may be difficult for non-Mexican shareholders to enforce their shareholder rights pursuant to the bylaws.

 

It may be difficult to enforce civil liabilities against us or our directors, officers and controlling persons

 

América Móvil is organized under the laws of Mexico, with its principal place of business (domicilio social) in Mexico City, and most of our directors, officers and controlling persons reside outside the United States. In addition, all or a substantial portion of our assets and their assets are located outside of the United States. As a result, it may be difficult for investors to effect service of process within the United States on such persons or to enforce judgments against them, including in any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.

 

Risks Relating to Developments in Mexico and Other Countries

 

Latin American economic, political and social conditions may adversely affect our business

 

Our financial performance may be significantly affected by general economic, political and social conditions in the countries where we operate, particularly Mexico, Brazil and countries in Central America. Many countries in Latin America, including Mexico and Brazil, have suffered significant economic, political and social crises in the past, and these events may occur again in the future. Instability in the region has been caused by many different factors, including:

 

    significant governmental influence over local economies;

 

    substantial fluctuations in economic growth;

 

    high levels of inflation;

 

    changes in currency values;

 

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    exchange controls or restrictions on expatriation of earnings;

 

    high domestic interest rates;

 

    wage and price controls;

 

    changes in governmental economic or tax policies;

 

    imposition of trade barriers;

 

    unexpected changes in regulation; and

 

    overall political, social and economic instability.

 

Adverse economic, political and social conditions in Latin America may inhibit demand for wireless services and create uncertainty regarding our operating environment, which could have a material adverse effect on our company.

 

Our business may be especially affected by conditions in Mexico and Brazil, our two principal markets. Mexico has experienced a prolonged period of slow growth since 2001, primarily as a result of the downturn in the U.S. economy. According to preliminary data, during 2004, Mexico’s gross domestic product, or “GDP,” grew by 4.4% in real terms. In 2003, GDP grew by 1.3%. Mexico has also experienced high levels of inflation and high domestic interest rates. The annual rate of inflation, as measured by changes in the National Consumer Price Index as published by the Banco de México, was 5.2% for 2004.

 

Brazil has also experienced slow economic growth over the past several years, although Brazil’s GDP grew by an estimated 5.2% in real terms in 2004, compared to a growth rate of 0.5% in 2003. Brazil has in the past experienced extremely high rates of inflation, with annual rates of inflation during the last ten years reaching as high as 2,489% in 1993 and 929% in 1994, as measured by the Brazilian National Consumer Price Index. More recently, Brazil’s rates of inflation were 14.7% in 2002, 9.3% in 2003 and an estimated 7.6% in 2004. Inflation, governmental measures to combat inflation and public speculation about possible future actions have in the past had significant negative effects on the Brazilian economy.

 

Depreciation or fluctuation of the currencies in which we conduct operations relative to the U.S. dollar could adversely affect our financial condition and results of operations

 

We are affected by fluctuations in the value of the currencies in which we conduct operations compared to the U.S. dollar, in which a substantial portion of our indebtedness is denominated. Changes in the value of the various currencies in which we conduct operations against the Mexican peso, which we use as our reporting currency in our financial statements, and against the U.S. dollar may result in exchange losses or gains on our net U.S. dollar-denominated indebtedness and accounts payable. In 2004 and 2003, changes in currency exchange rates led us to report foreign exchange gains of Ps. 2,444 million (an amount that is equal to 10.4% of our operating income in 2004) and Ps. 1,425 million, respectively. In 2002, however, we reported foreign exchange losses of Ps. 1,605 million. In addition, currency fluctuations between the Mexican peso and the currencies of our non-Mexican subsidiaries affect our results as reported in Mexican pesos. Currency fluctuations are expected to continue to affect our financial income and expense.

 

Major devaluation or depreciation of any such currencies may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert such currencies into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our indebtedness. The Mexican government does not currently restrict, and for many years has not restricted, the right or ability of Mexican or foreign persons or entities to convert pesos into U.S. dollars or to transfer other currencies out of Mexico. The government could, however, institute restrictive exchange rate policies in the future.

 

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Additional Mexican taxes and contributions levied on services we offer and on the exploitation of frequencies could affect our results of operations

 

Taxes applicable to certain telecommunications services, as well as taxes and contributions on the exploitation of frequencies, have been enacted from time to time in Mexico, including changes to previously established fiscal regimes. Taxes or contributions of this nature could adversely affect our business and our results of operations.

 

Currently in Mexico, concessionaires for the 800 megahertz (Band B) radio spectrum are required to pay the Mexican government an annual fee (aprovechamiento) ranging from 5% to 10% of the gross revenues under such concessions, whereas concessionaires for the 1900 megahertz (Bands A and D) radio spectrum are not required to pay annual fees. Pursuant to amendments to the Federal Contributions Law (the Ley Federal de Derechos) enacted in 2003, owners of concessions in Mexico granted or renewed on or after January 1, 2003 are required to pay annual fees (derechos) for the use and exploitation of radio spectrum bands. The amount of annual fees payable could be significant and vary depending on the relevant region and radio spectrum band. These annual fees would be payable in respect of all spectrum bands, including bands, such as Band B, that are already subject to the payment of annual fees based on gross revenues (aprovechamientos). Currently, we are not required to pay derechos in respect of our Bands A, B and D concessions since they were awarded prior to 2003, but we are required to pay fees in respect of the additional 10 megahertz of capacity in the 1900 megahertz spectrum (Band F) acquired during 2005. Based on the current terms of the law, these fees amount to Ps. 255 million annually for 20 years.

 

The application of this fee (derechos) to renewals of concessions granted prior to 2003 is the subject of debate in Mexico, as it could affect competitors differently and impact competition. Currently we do not expect to renew any of our concessions until 2010, but, if permitted, we intend to participate in any auctions for the acquisition of additional spectrum in Mexico. See “—Risks Relating to Our Business—We will, in the future, either have to acquire additional radio spectrum capacity or build more cell and switch sites in Mexico in order to expand our customer base and maintain the quality of our services.”

 

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Item 4. Information on the Company

 

GENERAL

 

We are the largest provider of wireless communications services in Latin America based on equity subscribers. As of December 31, 2004, we had 61.1 million subscribers in eleven countries, compared to 43.9 million at year-end 2003. On an equity basis (representing our economic interest in our subsidiaries’ subscribers), we had 60.6 million subscribers as of December 31, 2004. Because our focus is on Latin America, a substantial majority of our wireless subscribers are prepaid customers. We also had approximately 1.9 million fixed lines in Guatemala, Nicaragua and El Salvador at December 31, 2004, making us the largest fixed-line operator in Central America. In recent years, we have deployed or upgraded GSM networks in Mexico, Brazil, Colombia, Ecuador, Guatemala, El Salvador, Nicaragua, Argentina, Uruguay and Honduras.

 

Our principal operations are:

 

    Mexico. Through Radiomóvil Dipsa, S.A. de C.V., which operates under the name “Telcel,” we provide cellular telecommunications service in all nine regions in Mexico. At December 31, 2004, Telcel had 28.9 million subscribers, and Telcel is the largest provider of wireless telecommunications services in Mexico.

 

    Argentina. In 2003, we acquired CTI, which provides nationwide wireless services in Argentina. CTI operates under the “CTI Móvil” brand.

 

    Brazil. With approximately 13.7 million subscribers at December 31, 2004, we are one of the three largest providers of wireless telecommunications services in Brazil based on the number of subscribers. We operate in Brazil through our subsidiary, Telecom Americas, and a number of operating companies, under a unified brand name, “Claro.” Our network covers the principal cities in Brazil (including São Paulo and Rio de Janeiro).

 

    Central America. We provide fixed-line and wireless services in Guatemala, El Salvador and Nicaragua, through our subsidiaries Telgua, CTE and ENITEL. We provide wireless services in Nicaragua through our subsidiary Sercom Nicaragua and in Honduras through our subsidiary Sercom Honduras. The wireless business of Telgua and Sercom Nicaragua operate under the “PCS Digital” and, for prepaid services, “Alo” brands. We acquired a controlling interest in CTE in 2003 and increased our interest to 94.9% in December 2004. CTE operates under the “Telecom” brand for fixed line services and “Personal” for wireless services. We acquired ENITEL in two transactions that closed in January and August 2004 and Sercom Honduras in a transaction that closed in June 2004.

 

    Colombia. We provide wireless telecommunications service in Colombia through Comcel, S.A. under the “Comcel” brand. We are the largest wireless operator in the country measured by the number of subscribers.

 

    Ecuador. Conecel, our subsidiary in Ecuador, is the largest wireless operator in Ecuador measured by the number of subscribers. Conecel operates under the “Porta” brand.

 

    United States. Our U.S. subsidiary, TracFone, is engaged in the sale and distribution of prepaid wireless services and wireless phones throughout the United States, Puerto Rico and the U.S. Virgin Islands.

 

In March 2005, we acquired a 20-year license to provide nationwide wireless services in Peru, and in May 2005, we reached an agreement with Hutchison Telecommunications International Ltd. to purchase its wireless operations in Paraguay, which operate under the brand name “Porthable.” The consummation of this agreement is subject to certain conditions.

 

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América Móvil, S.A. de C.V. is a corporation (sociedad anónima de capital variable) organized under the laws of Mexico with its principal executive offices at Lago Alberto 366, Edificio Telcel I, Piso 2, Colonia Anáhuac, 11320, México D.F., México. Our telephone number at this location is (5255) 2581-4411.

 

Our Markets

 

We operate pursuant to concessions, licenses or authorizations to provide wireless telecommunications services in each of the countries in which we operate. We seek to provide a full range of wireless telecommunications services in each of our markets. Our networks are consistently optimized to try to ensure maximum coverage and high quality service. In recent years, we have deployed or upgraded GSM networks in Mexico, Brazil, Colombia, Ecuador, Guatemala, Nicaragua, Argentina, Uruguay, El Salvador and Honduras. In 2004, we invested Ps. 22.4 billion in our networks in capital expenditures. We have recently begun providing in our markets many of the voice and data services supported by GSM technology, such as SMS, CSD, high-speed CSD and GPRS. We also seek to expand market share by exploring strategic acquisition opportunities in Latin America.

 

Our principal markets of operations are Mexico and Brazil, the two largest economies in Latin America. We are the largest provider of wireless communication services in Mexico and one of the three largest in Brazil, based on the number of subscribers at December 31, 2004. In contrast to U.S. practices, both of these markets operate under a form of “calling party pays” billing system, under which the person who initiates the call is billed for that call. Telcel and Telecom Americas combined represented 70% of our operating revenues in 2004.

 

We believe our countries of operation offer considerable growth potential. Our markets are characterized by relatively low fixed line and wireless penetration rates as compared to the United States and Europe.

 

In most of our markets, the regulatory environment has become increasingly more open and flexible over the past decade. These changes have increased competition as markets have become more open to new entrants. In Mexico, these changes have exposed us to competition from domestic competitors and from international operators. In other markets, these changes have allowed us an opportunity to enter as a competitor and capture market share from local providers.

 

Our Strategy

 

We intend to capitalize on our position as the leader in wireless telecommunications in Latin America to continue to expand our subscriber base, both by development of our existing businesses and selected strategic acquisitions in the region. We seek to become a leader in each of our markets by providing better coverage and services and benefiting from economies of scale. We closely monitor our costs and expenses, and we will continue to explore alternatives to further improve our operating margins.

 

Operating Information

 

We count our wireless subscribers by the number of lines activated. We continue to count post-paid subscribers for the length of their contracts. We continue to count prepaid subscribers for so long as they continue to use our service, and then for a prescribed period of time thereafter, which differs according to the particular market. When a subscriber voluntarily disconnects his service, or there is a payment default, the subscriber is cancelled or “churned,” and we no longer count the subscriber. We calculate our subscriber market share by dividing our own subscriber figures into the total market subscriber figures periodically reported by the regulatory authorities in the markets in which we operate. We understand that these regulatory authorities compile total market subscriber figures based on subscriber figures provided to them by market participants, and we do not independently verify these figures.

 

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Throughout this annual report, we make reference to certain operating data, such as average revenues per subscriber (also referred to as “ARPUs”), average minutes of use per subscriber (also referred to as average “MOUs” per subscriber) and churn rate, that are not included in our financial statements. We calculate ARPUs for a given period by dividing service revenues for such period by the average number of subscribers for such period. The figure includes both prepaid and postpaid customers. We calculate churn rate as the total number of customer deactivations for a period divided by the average total subscribers for such period.

 

We provide this operating data because it is regularly reviewed by management and because management believes it is useful in evaluating our performance from period to period. We believe that presenting information about ARPUs and MOUs is useful in assessing the usage and acceptance of our products and services, and that presenting churn rate is useful in assessing our ability to retain subscribers. This additional operating information may not be uniformly defined by our competitors. Accordingly, this additional operating information may not be comparable with similarly titled measures and disclosures by other companies.

 

History

 

We were established in September 2000 in a spin-off from Teléfonos de México, S.A. de C.V., also known as Telmex, the largest provider of local and long-distance telephone services in Mexico. The spin-off was implemented using a procedure under Mexican corporate law called escisión or “split-up.” The shares of our company were delivered to Telmex shareholders on February 7, 2001.

 

Our wireless business in Mexico is conducted through our wholly-owned subsidiary Telcel, which traces its history to the establishment in 1956 of Publicidad Turística, S.A., an affiliate of Telmex that published telephone directories. In 1981, the Mexican Ministry of Communications and Transportation granted Publicidad Turística a concession for the installation and operation of a wireless telephone system in Mexico City. In 1984, Publicidad Turística changed its name to Radiomóvil Dipsa, S.A. de C.V., and in 1989, the company began operating under the trademark “Telcel.”

 

Between 1988 and 1990, Telcel expanded its cellular network on the 800 megahertz (Band B) frequency spectrum to cover the Mexico City metropolitan area and the cities of Cuernavaca, Guadalajara, Monterrey, Tijuana and Toluca, and in 1990, Telcel began offering cellular services in all nine geographic regions of Mexico. Telcel launched a PCS system in Mexico City in 1999 and currently offers the service in all nine geographic regions of Mexico. In October 2002, Telcel launched its GSM network. Since December 2002, Telcel has been authorized to provide long-distance services.

 

In 1999, we began acquiring our international subsidiaries and investing in Telecom Americas and our other international affiliates. We made significant acquisitions in Latin America during the past 5 years, and our non-Mexican operations have generally experienced higher subscriber growth rates in recent periods than our Mexican operations. As a result, as of December 31, 2004, more than half of our wireless subscribers were located outside Mexico.

 

See “—Mexican Operations,” “—Non-Mexican Operations” and “—Other Investments.”

 

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Major Subsidiaries

 

The table below sets forth our principal subsidiaries, our percentage ownership in each such entity and the main activity of such entity as of the date of this annual report.

 

Name of Company


   Jurisdiction

   Ownership
Interest(1)


  Main Activity

Sercotel, S.A. de C.V.

   Mexico        100.0%   Holding company

Telcel (Radiomóvil Dipsa, S.A. de C.V.)

   Mexico    100.0   Wireless

SubDipsa Treasury LLC

   Delaware    100.0   Treasury

CTI Holdings, S.A.

   Argentina    100.0   Holding company

CTI PCS, S.A.

   Argentina    100.0   Wireless

CTI Compañía de Teléfonos del Interior, S.A.

   Argentina    100.0   Wireless

AM Wireless Uruguay, S.A.

   Uruguay    100.0   Wireless

AM Latin America LLC

   Delaware    100.0   Holding company

Telecom Americas Ltd.

   Bermuda    98.9   Holding company

ATL-Algar Telecom Leste S.A.

   Brazil    98.9   Wireless

Tess S.A.

   Brazil    98.9   Wireless

Americel S.A.

   Brazil    97.4   Wireless

Telet S.A.

   Brazil    97.9   Wireless

BSE S.A.

   Brazil    98.9   Wireless

BCP S.A.

   Brazil    98.9   Wireless

Stemar Telecomunicações Ltda.

   Brazil    98.9   Wireless

Alecan Telecomunicações Ltda

   Brazil    98.9   Wireless

Telecomunicaciones de Guatemala, S.A.

   Guatemala    99.1   Fixed-line

Servicios de Comunicaciones Personales Inalámbricas, S.A.

   Guatemala    99.1   Wireless

Servicios de Comunicaciones de Nicaragua, S.A

   Nicaragua    99.1   Wireless

Compañía de Telecomunicaciones de El Salvador (CTE)

   El Salvador    95.7   Fixed-line/Wireless

Empresa Nicaragüense de Telecomunicaciones, S.A. (ENITEL)

   Nicaragua    99.2   Fixed-line/Wireless

Servicios de Comunicaciones de Honduras, S.A. de C.V

   Honduras    100.0   Wireless

Comunicación Celular S.A. (Comcel)

   Colombia    99.2   Wireless

Consorcio Ecuatoriano de Telecomunicaciones, S.A. (CONECEL)

   Ecuador    100.0   Wireless

TracFone Wireless, Inc.

   Florida    98.2   Wireless

AMOV Perú, S.A.

   Peru    100.0   Wireless

(1) Percentage of equity owned by América Móvil directly or indirectly through subsidiaries or affiliates.

 

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MEXICAN OPERATIONS

 

Our subsidiary Telcel is the leading provider of wireless communications services in Mexico. As of December 31, 2004, Telcel’s cellular network covered 36% of the geographical area of Mexico, including all major cities, and 86% of Mexico’s population. Telcel holds concessions to operate a wireless network in all nine geographic regions in Mexico using both the 800 megahertz (Band B) and 1900 megahertz (Bands A, D and F) radio spectrums. As of December 31, 2004, Telcel had approximately 28.9 million cellular subscribers and, according to Cofetel, as of December 2004, an approximately 75% share of the Mexican wireless market. Approximately 93.7% of Telcel’s cellular subscribers as of December 31, 2004 were prepaid customers.

 

In 2004, Telcel had revenues of Ps. 70,822 million (U.S.$ 6,287 million), representing 52.6% of our consolidated revenues for such period. As of December 31, 2004, Telcel accounted for approximately 47.2% of our total wireless subscribers.

 

The following table sets forth information on our Mexican operations’ financial results, subscriber base, coverage and related matters at the dates and for the periods indicated:

 

     December 31,

 
     2000

    2001

    2002

    2003

    2004

 
     (peso amounts in constant Mexican pesos as of December 31, 2004)  

Operating revenues (millions)

   Ps. 27,203     Ps. 37,301     Ps. 44,609     Ps. 55,189     Ps. 70,822  

Average monthly revenues per subscriber during preceding 12 months(1)

   Ps. 257     Ps. 211     Ps. 174     Ps. 186     Ps. 194  

Operating income (millions) (2)

   Ps. 6,275     Ps. 10,349     Ps. 12,928     Ps. 18,614     Ps. 25,537  

Cellular lines in service (thousands)

     10,462       16,965       20,067       23,444       28,851  

Subscriber growth during preceding 12 months

     98.4 %     62.2 %     18.3 %     16.8 %     23.1 %

Company penetration(3)

     10.7 %     16.9 %     19.7 %     22.1 %     27.3 %

Average monthly minutes of use per subscriber during preceding 12 months

     86       73       67       81       99  

Churn rate (4)

     2.4       3.1       3.5       3.9       3.0  

Employees

     6,452       7,644       7,943       8,624       9,354  

(1) Average for the year of the amount obtained each month by dividing service revenues by the average number of customers during such month. The figure includes both prepaid and postpaid customers.
(2) See Note 21 to our audited consolidated financial statements.
(3) Number of Telcel cellular lines in service divided by the population of Mexico based on the latest census data available.
(4) Total number of customer deactivations for the period divided by average total subscribers for such period.

 

The business of Telcel is subject to comprehensive regulation and oversight by the Mexican Communications Ministry, Cofetel, Cofeco and Profeco. The Communications Ministry is part of the executive branch of the Mexican federal government, and Cofetel is an independent agency of the Communications Ministry. Cofeco and Profeco are independent agencies of the Ministry of Economy. Regulation and oversight are governed by the General Communications Law, the Federal Law of Telecommunications, the Telecommunications Regulations adopted under both the General Communications Law and the Federal Law of Telecommunications, the Federal Economic Competition Law, the Federal Customer Protection Law and the concessions and license agreements granted by the Communications Ministry. See “—Regulation.”

 

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Services and Products

 

Voice services

 

Telcel offers voice services under a variety of rate plans to meet the needs of different user segments. The rate plans are either “postpaid,” where the customer is billed monthly for the previous month or “prepaid,” where the customer pays in advance for a specified volume of use over a specified period.

 

Telcel’s postpaid plans include the following charges:

 

    monthly charges, which usually include a number of minutes of use and short text messages that are included in the monthly service change;

 

    usage charges, for usage in excess of the specified number of minutes or short text messages included in the monthly charge; and

 

    additional charges, including charges for data services, voicemail and general information.

 

Certain plans include the cost of national roaming and long-distance in the price per minute so that all calls within Mexico cost the same amount per minute. Some postpaid plans are designed for high and moderate usage subscribers, who are typically willing to pay higher monthly fees in exchange for larger blocks of minutes that are included in the monthly service charge, services such as voicemail, call forwarding, call waiting, caller ID and three-way calling, and lower per minute airtime charges under a single contract. To satisfy the more limited needs of low-usage postpaid subscribers, Telcel also offers plans which provide a moderately priced, fixed monthly charge coupled with a high per minute airtime charge and relatively few included minutes. As part of postpaid plans, Telcel typically offers additional digital services such as voicemail, call forwarding, call waiting, caller ID and three-way calling, which are all included in the monthly fee. In addition, Telcel offers its postpaid customers the flexibility to manage their additional usage costs by contracting additional minutes of use under the prepaid system. Telcel also offers customized services to its corporate clients. The minimum term of our postpaid plans is one year.

 

Telcel adjusts its rates based on competitive conditions, inflation rates and international standards. In July 1998, Telcel increased its nominal rates for monthly charges by 7% and usage charges by 5%, and in April 1999, it increased its nominal rates for monthly charges by 12%. Rates for postpaid plans have not increased since April 1999 and are expected to remain stable as long as the Mexican economic environment remains stable. Telcel offers discounts that reduce the effective rates paid by its customers based on the time of use, so that calls made during off-peak hours (10:00 p.m. to 7:00 a.m. during the week or anytime on weekends) are less expensive than calls made during the remaining, or peak, hours. During 2003 and 2004, Telcel offered promotions that included effective price-per-minute reductions.

 

Telcel also offers several prepaid plans, none of which includes activation or monthly charges. Prepaid customers purchase a prepaid card for a specific amount of airtime and also receive additional services such as voicemail and caller ID, although these services are less comprehensive than those available under postpaid plans. Telcel began to offer cellular digital packet data (CDPD) services to prepaid customers in October 2001, short message services (SMS) to its own customers (prepaid and postpaid) in January 2002 and GSM data services over circuit switched technology (CSD) in October 2002 and to exchange SMS services with other cellular operators in December 2003. In 2004, Telcel began to offer push-to-talk services over its GSM network.

 

Prepaid customers typically generate low levels of cellular usage and are often unwilling to make a fixed financial commitment or do not have the credit profile to purchase postpaid plans. Prepaid plans serve the needs of distinct consumer segments such as the youth market, families, customers with

 

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variable income who otherwise would not be able to obtain service due to their credit profile, and customers who prefer to pay in cash. Prepaid customers also include parents who wish to control costs for their children.

 

Telcel believes the prepaid market represents a large and growing under-penetrated market in Mexico and an opportunity to improve margins because, compared to the average postpaid plan, prepaid plans involve higher average per minute airtime charges, lower customer acquisition costs and no billing expenses, credit or payment risk. However, prepaid customers on average have substantially lower minutes of use than postpaid customers and do not pay monthly fees and, as a result, generate substantially lower average monthly revenues per customer.

 

Mexico uses the “calling party pays” system for cellular calls within a local area, under which subscribers only pay for outgoing calls. This replaced “mobile party pays,” under which subscribers also paid for incoming calls, in May 1999. Subscribers have the option of retaining the “mobile party pays” system but must change their cellular telephone number to do so. Cofetel is considering regulations that would extend the “calling party pays” system to all calls within Mexico. Under the proposal, all airtime fees regardless of the recipient’s location within Mexico would be paid by the calling party.

 

Data services

 

Short Message Services (SMS)

 

In January 2002, Telcel began to offer two-way SMS to its customers as part of its value-added services. Since the launch of two-way SMS, Telcel has experienced significant growth in traffic. Through arrangements with other operators, Telcel began to offer to its customers the ability to send and receive short messages to and from users of networks of other carriers throughout Mexico in the fourth quarter of 2003.

 

Multimedia Messaging Service (MMS)

 

As an enhanced version of SMS, MMS allows customers the capability to send, in a single message, multiple color images, sounds and different size text to another mobile phone or e-mail account. Telcel began to offer MMS through GSM technology to postpaid and prepaid customers in March 2003.

 

Premium SMS and Content Community

 

In April 2002, Telcel became the first Mexican operator to offer premium information services through its SMS capabilities, including weather reports, financial quotes and entertainment news. Other premium services include personalized ring tones and games. To further enhance its premium SMS offerings with well-known brands and content, Telcel has built a “Content Community” through agreements and special alliances with other companies, such as MTV, Universal Music, the Cartoon Network and the Discovery Channel.

 

Internet

 

Wireless application protocol (WAP) is a global standard designed to make Internet services available to mobile telephone users. At present, Telcel offers WAP including e-mail, data and information services and electronic commerce transactions. The standard allows a micro “browser” in a mobile phone to link into a gateway service in Telcel’s network enabling users to scroll through different pages of information on the Internet.

 

Telcel launched its WAP gateway in September 2000, enabling its prepaid and postpaid users in those regions to access e-mail, banking, and a variety of reservation and other types of electronic commerce services.

 

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Data transmission

 

Telcel offers circuit switch data (CSD) to all its users and general packet radio services (GPRS) to its postpaid users through its GSM network. Telcel is in the process of making certain GPRS services, such as MMS services, available to its prepaid customers as well.

 

GPRS is a non-voice value added service that allows information to be sent and received across a mobile telephone network. GPRS radio resources are used only when users are actually sending or receiving data. Rather than dedicating a radio channel to a mobile data user for a fixed period of time, the available radio resource can be concurrently shared between several users. This efficient use of scarce radio resources means that large numbers of GPRS users can share the same bandwidth and be served from a single cell. The number of users supported depends on the application being used and how much data is being transferred. Because of the spectrum efficiency of GPRS, there is less need to build in idle capacity that is only used during peak hours. GPRS therefore lets Telcel maximize the use of its network resources.

 

GPRS facilitates faster connections than previous technologies, such as CSD. No dial-up modem connection is necessary. The speed of GPRS is an important feature for time critical applications, and Telcel’s GPRS services are able to accommodate corporate applications such as:

 

    Transmission of Still Images – Still images such as photographs, pictures, postcards, greeting cards and presentations and static web pages can be sent and received over the mobile network as they are across fixed telephone networks. GPRS permits users to post images from a digital camera connected to a GPRS radio device directly to an Internet site, allowing near real-time desktop publishing.

 

    Transmission of Moving Images – The capacity of GPRS to facilitate transmission of moving images has market applications such as monitoring parking lots or building sites for intruders and sending images of patients from ambulances to hospitals.

 

    Web Browsing – GPRS permits more rapid web browsing and enhanced access to web images.

 

    Document Sharing – GPRS facilitates document sharing and remote collaboration, permitting people in different locations to work on the same document at the same time.

 

    Job Dispatch – GPRS can be used to communicate assignments from office-based staff to mobile field staff. These job dispatch applications can then be combined with vehicle positioning applications to allow the nearest available suitable personnel to be deployed to serve a customer.

 

    Corporate Email and Remote LAN Access – GPRS facilitates the extension of corporate email systems beyond an employee’s office PC. Remote LAN applications provide an employee with remote access to desk-top applications, such as intranet, corporate e-mail and database applications.

 

    Internet Email – Users of internet e-mail can receive direct notification on their mobile phone of incoming mail.

 

    Vehicle Positioning – Vehicle positioning applications integrate satellite positioning systems with nonvoice mobile services. These applications can be used to deliver services including remote vehicle diagnostics and ad-hoc stolen vehicle tracking.

 

    File Transfer – Users can download large files from the mobile network, such as presentation documents, appliance manuals or software applications.

 

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    Home Automation – Home automation applications will permit customers to monitor home security from outside of the office and perform other functions, such as operating certain home appliances.

 

Products

 

Telcel offers a variety of products as complements to its wireless service, including handsets and accessories such as chargers, headsets, belt clips and batteries. As part of its basic prepaid service offering, Telcel provides new customers with an “Amigo Kit,” which includes a handset, a charger and other accessories at a discounted price. New postpaid customers also receive a handset at a discounted price, if they enter into a long-term contract with Telcel.

 

In the past, Telcel has offered a variety of handset types, including analog, digital and dual-mode dual-band devices. Most of the handsets that Telcel currently offers are either dual-mode dual-band, which can operate in both analog and digital modes and can switch between the 800 and 1900 megahertz radio spectrums or tri-band, which can also operate in the 900 megahertz radio spectrum.

 

Interconnection

 

Telcel earns interconnection revenues from calls to any of its subscribers, or to an international roaming subscriber of another cellular service provider located within the region covered by Telcel, that originates with another service provider (cellular or fixed). Telcel charges the service provider from whose network the call originates an interconnection charge for every minute Telcel’s network is used in connection with the call. The current interconnection charge in Mexico for calls made from either a fixed line or a cellular line to another cellular line is Ps. 1.71 per minute. Some fixed-line operators have challenged this fee and are seeking a reduction. See “—Regulation—Interconnection” under this Item 4 and “Legal Proceedings—Telcel—Interconnection Fees” under Item 8. The current interconnection charge for calls made from a cellular line to a fixed line, which Telcel pays to Telmex, is U.S.$0.00975 per minute.

 

Telcel has interconnection agreements with Telmex and other service providers. The interconnection agreements specify a number of connection points, locations of interconnection points, the method by which signals must be transmitted and received and the costs and fees of interconnection. See “—Regulation—Interconnection.”

 

Roaming

 

Telcel offers international roaming services to its subscribers. Subscribers paying the international roaming fees are able to roam outside of Mexico, using the networks of cellular service providers with which Telcel has entered into roaming agreements. Telcel has entered into approximately 325 such agreements covering GSM and TDMA networks around the world. As of the date of this annual report, Telcel had roaming agreements covering 119 countries. Roaming payments are channeled through Telecommunication Services International for TDMA and Electronic Data Systems Corporation for GSM, which function as central international clearing houses that collect and redistribute roaming fees from and to the participating providers.

 

Marketing

 

Telcel develops customer and brand awareness through its marketing and promotion efforts and high-quality customer care. It builds upon the strength of its well-recognized brand name to increase consumer awareness and customer loyalty, employing continuous advertising efforts through print, radio, television, sponsorship of sports events and other outdoor advertising campaigns. In addition, Telcel employs concentrated advertising efforts to promote specific products and services such as the Amigo Kit, its Internet services and certain value-added services such as SMS. In October 2003, Telcel launched a loyalty awards program for its postpaid customers, called Círculo Azul.

 

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Telcel targets groups of customers who share common characteristics or have common needs. Telcel then assembles a packet of services that meets the particular needs of that targeted group through one of its various pricing plans. As part of its promotional efforts, Telcel offers its new prepaid and postpaid subscribers either a complimentary handset or a handset at a discounted price when they subscribe, which the postpaid customers may keep when their service agreement expires in accordance with its terms.

 

Telcel has designed promotional packages, including free handsets and low monthly fees, to encourage new customers and current prepaid customers to subscribe to postpaid plans that include services such as voicemail, call waiting and caller ID.

 

Sales and Distribution

 

Telcel markets its wireless services primarily through exclusive distributors located throughout Mexico. In the year ended December 31, 2004, approximately 90% of Telcel’s sales of handsets were generated by cellular distributors, with approximately 9% from sales in company-owned stores, and approximately 1% from direct sales to corporate accounts. Telcel also sells and distributes its products and services over the Internet.

 

Telcel has relationships with a network of approximately 1,000 exclusive distributors, who sell Telcel’s services and products through approximately 33,000 points of sale and receive commissions. Telcel operates permanent training and evaluation programs for distributors to help maintain the level of service quality.

 

Telcel’s company-owned retail stores offer one-stop shopping for a variety of cellular services and products. Walk-in customers can subscribe for postpaid plans, purchase prepaid cards and purchase handsets and accessories. Company-owned stores also serve as points of customer service, technical support and payment centers. Telcel owns and operates 154 customer sales and service centers throughout the nine regions of Mexico and will continue to open new service centers as necessary in order to offer its products directly to subscribers in more effective ways.

 

Telcel also distributes prepaid cards and handsets, the latter as part of the Amigo Kit consisting of handsets and free airtime ranging from 25 to 250 minutes, through distributors that include Telmex, Sears, Sanborns and its network of retail outlets. Telmex purchases the Telcel prepaid cards and handsets on the same or similar commercial terms offered to other cellular distributors. We estimate that pre-paid cards are available through approximately 127,000 points of sale in Mexico.

 

To service the needs of its large corporate and other high-usage customers, Telcel has a dedicated corporate sales group.

 

Billing and Collection

 

Telcel bills its postpaid customers through monthly invoices, which detail itemized charges such as usage, services such as voicemail, call forwarding, call waiting, caller ID and three-way calling, and long-distance and roaming charges, in addition to applicable taxes. Customers may pay their bills with a credit card, through a bank (including its Internet website), in person at Telcel retail stores and, since July 2001, through Telcel’s Internet website.

 

If a postpaid customer’s payment is overdue, service may be suspended until full payment for all outstanding charges is received. If the subscriber’s payment is more than 60 days past due, service may be discontinued. Accounts that are more than 90 days past due are considered doubtful accounts.

 

A prepaid customer who purchases a prepaid card has 60 days from the date of activation of the card to use the airtime. After 60 days, the customer can no longer use that airtime for outgoing calls unless the customer activates a new card. After 180 days, unless the customer activates a new card, the service is discontinued and the balance on the card, if any, is recognized as revenue.

 

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Customer Service

 

Telcel places a high priority on providing its customers with quality customer care and support. Approximately 48.9% of Telcel’s employees are dedicated to customer service. Customers may call a toll-free telephone number or go to one of the customer sales and service centers located throughout the nine regions for inquiries regarding their service or plan options. In addition, using Telcel’s website, subscribers may learn about the various offered rate plans, products and promotions, as well as subscribe for additional services and pay bills on line.

 

Wireless Network

 

Telcel’s wireless networks use principally digital technologies. As a proportion of total traffic, digital traffic measured 89.3% in December 2004. Over the last several years, Telcel has converted its network from analog to digital, and most of its customers have migrated to digital service. Telcel uses time division multiple access (TDMA) digital technology in the 800 megahertz frequency spectrum. TDMA is a digital technology that divides radio spectrum into assigned time slots to transmit signals. In October 2002, Telcel launched a new network using global system for mobile communications (GSM) digital technology in the 1900 megahertz frequency spectrum. GSM is a digital standard used in Europe, North America and elsewhere. Because it is so widely used, it provides higher quality and faster availability of new products and services and a wider variety of suppliers than TDMA technology. In addition, GSM provides access to a better developed path toward third generation wireless technologies.

 

An alternative digital technology, CDMA, divides radio spectrum using codes rather than time slots. Compared to TDMA and GSM, it permits more subscribers to use the same spectrum but is less mature and less well supported by suppliers. Because of GSM’s advantages over both TDMA and CDMA technologies, Telcel considers developing a GSM network to be the logical step to maintaining its leadership in the wireless market in Mexico.

 

TDMA network

 

Telcel has a nationwide TDMA network. TDMA permits the use of advanced dual-mode dual-band handsets that allow for roaming across analog and digital systems and across 800 megahertz and 1900 megahertz spectrums. TDMA digital technology also allows for enhanced services and features, such as short alphanumeric message service, extended battery life, added call security and improved voice quality. TDMA equipment is available from leading telecommunications vendors such as Lucent, Ericsson and Nortel.

 

GSM network

 

Telcel has built and installed a GSM network in the 1900 megahertz frequency spectrum in all nine regions in Mexico, which began commercial operation in October 2002. Telcel continues with the expansion of its GSM network. The GSM network allows Telcel to augment its digital capacity and progress in its evolution toward the third generation of wireless technology. GSM technology supports a wide range of voice and data services, including SMS, CSD, high-speed CSD and GPRS, and is currently the most widely used and tested wireless system in the world. GSM technology, which is used in all nine regions, is expected to yield global economies of scale in developing network equipment and handsets, as well as seamless global roaming capabilities.

 

Currently, Telcel’s GSM network offers service in all nine regions in Mexico, but does not provide coverage in all cities in those regions. As of December 31, 2004, Telcel covered approximately 660 cities with the GSM network, and Telcel’s GSM subscriber base accounted for approximately 38.9% of Telcel’s total subscribers as of December 31, 2004. As Telcel continues to roll out the GSM network, it plans to expand GSM coverage throughout the nine regions. Telcel expects that many customers will choose GSM equipment when they replace their existing TDMA equipment.

 

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CSD and HSCSD technology

 

Circuit switch data (CSD) is an alternative system based on circuit switch platforms that provides data services by integrating the existing voice infrastructure. Like CDPD, CSD is considered to be the first level of 2.5G technology.

 

High-speed CSD (HSCSD) offers the same service as CSD, using voice channels for data transmission, but by joining several slots of information, it offers increased capacity and speed, making it better suited to the needs of users transmitting large amounts of information. Telcel plans to offer CSD as well as HSCSD services in all nine regions through its new GSM network.

 

Third generation development strategy

 

Third generation technologies will provide high-speed wireless packet data services and ultimately voice services over the Internet. Any successful third generation strategy must allow the wireless provider to achieve a pervasive footprint quickly and cost effectively and on a global scale through international roaming capacities. While third generation networks are currently under development and evaluation, transitional technologies including CDPD, CSD and GSM/GPRS have begun to bridge the gap between second and third generation technologies by offering enhanced high-speed data services.

 

Telcel is currently in the process of upgrading the GSM/GPRS network with Enhanced Data Rates for Global Evolution (EDGE) technology. It has already implemented EDGE technology in the capital city of each of the nine regions in Mexico and Ciudad Juarez. Telcel plans to cover 47 additional cities during 2005. Telcel expects that EDGE will facilitate the ultimate deployment of third generation technology. One benefit of EDGE is that it can be deployed in existing spectrum. As customers upgrade their equipment to EDGE, Telcel expects that all the applications developed and deployed today will be able to operate at significantly higher speeds and in more places.

 

The evolution from 2.5G to third generation technology is expected to make wireless networks capable of transmitting voice, data and video over a single network. The wireless industry has agreed to converge towards a common standard called wideband CDMA (W-CDMA) for the development of third generation technology. W-CDMA offers configurations that allow multifaceted processing and enable the transmission of large volumes of data, such as video data, at high speeds.

 

As part of its strategic evaluation concerning the deployment of EDGE technology, Telcel is engaged in discussions with suppliers and plans to test the technology with heavy-use consumers or corporate users. Telcel is launching EDGE with the existing cellular or PCS technologies and migrate to the W-CDMA third generation technology once a new set of broadband frequencies is made available by Cofetel and there is demand in Mexico for services requiring this technology.

 

Spectrum

 

Telcel currently holds concessions in each of the nine regions of Mexico in both the 800 megahertz and 1900 megahertz radio spectrums and has a functioning nationwide network. Three other companies also hold concessions for nationwide service using the 1900 megahertz spectrum.

 

Telcel currently holds 28.4 megahertz of capacity in the 1900 megahertz spectrum in each of Mexico’s nine regions. It acquired 10 megahertz of this capacity in 1998 and 10 megahertz in 2005, in each case through public auctions. Telcel acquired 8.4 megahertz as a result of the assignment of capacity from Unefon during 2005. This assignment, which was approved by Cofeco and the Ministry of Communications, cancelled the 16-year term service agreement entered into with Unefon in September 2003. No consideration – in addition to the U.S.$267.7 million paid to Unefon in 2003 for the service agreement – was paid for the assignment.

 

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As part of the late 2004 / early 2005 auction process, we also bid for and were awarded an additional 10 megahertz of capacity in three regions, but that additional capacity has not been delivered to us due to restrictions imposed by Cofeco on the amount of overall spectrum that could be awarded to bidders. We are challenging this restriction in court. We cannot assure you that we will be able to acquire this additional spectrum.

 

Fixed wireless

 

Fixed wireless technology provides wireline quality voice telephony available over cellular networks. Voice channels are delivered over the existing telephone wiring within the residence or small business premises, allowing customers to utilize their existing telephones.

 

Telcel provides fixed wireless voice services to, among others, Telmex’s Ladafon shared telephone network, under which a line is available for public use by the residents of multi-unit dwellings. Telephone service is provided at a discount through existing wire lines within the residential premises, which are then connected to Telcel’s cellular network. Telcel also provides fixed wireless service to Telmex’s Ladatel public telephone network.

 

Property

 

Telcel’s wireless network includes transport and computer equipment, as well as exchange and transmission equipment consisting primarily of switches (which set up and route telephone calls either to the number called or to the next switch along the path, and which may also record information for billing and control purposes), cellular base stations (radio transmitters or receivers that maintain communications with the cellular telephones within given geographical areas or “cells”), microcells (small cells covered by low-power base stations), and local links and repeaters (equipment for radio or fiberoptic transmission between network elements). Telcel owns all of its network routing and switching equipment. During 2003 and 2004, Telcel sold its reception and transmission equipment for Ps. 4,484 million to unrelated financial institutions and subsequently leased back this property for periods of three to four years. Telcel has the option to reacquire this property at the end of the lease period. Telcel owns certain properties for commercial and administrative offices, the installation of some of its equipment, and 154 customer sales and service centers, while it leases other locations. Telcel operates certain equipment on Telmex property under a co-location agreement. See “Related Party Transactions” under Item 7.

 

Telcel currently relies on Ericsson for the supply of more than 71% (measured in terms of cost) of its switch and cell site equipment. Telcel purchases handsets and other customer equipment primarily from the major vendors, including Nokia, Sony-Ericsson, Motorola, Siemens and Samsung.

 

Competition

 

Telcel faces competition from other cellular providers using the 800 megahertz spectrum and from providers with PCS licenses that have developed and continue to develop wireless service on the 1900 megahertz spectrum. Telcel’s competitors in Mexico include Grupo Iusacell, S.A. de C.V., which is controlled by Movil@ccess, an affiliate of Grupo Salinas, S.A. de C.V., Telefónica Móviles and Unefon, which is an affiliate of Grupo Iusacell, S.A. de C.V. We also compete with Nextel in certain segments. According to Cofetel, Telcel’s share of the Mexican cellular market was approximately 75% in 2004.

 

The effects of competition on Telcel depend, in part, on the business strategies of its competitors and the general economic and business climate in Mexico, including demand growth, interest rates, inflation and exchange rates. The effects could include loss of market share and pressure to reduce rates. Telcel believes that its strategies to meet competition will continue to help limit its loss of market share and that any loss of market share will be partly offset by increasing demand.

 

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Regulation

 

The following is a summary of certain provisions of the General Communications Law, the Telecommunications Law and the Telecommunications Regulations applicable to Telcel and of the various concessions held by Telcel.

 

General

 

The General Communications Law, the Telecommunications Law and the Telecommunications Regulations provide the general legal framework for the regulation of telecommunications services in Mexico. The Telecommunications Law replaced certain provisions of the General Communications Law and established that only those provisions of the General Communications Law not opposed to the Telecommunications Law would remain in effect. Other regulations implementing particular provisions of the Telecommunications Law have been adopted or are pending. The main objectives of the Telecommunications Law are to promote the efficient development of the telecommunications industry, to encourage fair competition in the provision of quality, low-priced services and to assure satisfactory breadth of coverage of the Mexican population.

 

Under the Telecommunications Law, an operator of public telecommunications networks, such as Telcel, must operate under a concession granted by the Communications Ministry. Such a concession may only be granted to a Mexican citizen or corporation and may not be transferred or assigned without the approval of the Communications Ministry. A concession to provide services which utilize electro-magnetic frequencies, such as cellular telecommunications services, may have a term of up to twenty years and may be extended for additional terms of equal duration.

 

The Telecommunications Law requires public telecommunications concessionaires to establish open network architecture which permits interconnection and interoperability. Operators of private networks that do not use electro-magnetic frequencies or provide services to the public are not required to obtain a concession, permit or registration.

 

The Mexican Congress is in the process of considering a new Telecommunications Law. Some of the draft proposals for this new law include provisions aimed at strengthening the regulatory power of Cofetel, stimulating increased investment in telecommunications and increasing competition. If passed, the new Telecommunications Law could have a material effect on our operations. We are unable to predict whether or when such new law may be enacted and its effect on our business. As of the date of this annual report, a new Telecommunications Law has not been enacted.

 

Furthermore, the executive branch of the Mexican government also is considering the enactment of a new decree and regulations pertaining to Cofetel. If enacted, the provisions of this proposed decree and these regulations would limit Cofetel’s current authority and transfer some of Cofetel’s oversight to the Communications Ministry.

 

Regulatory oversight

 

The Mexican Communications Ministry, through Cofetel, is the government agency principally responsible for regulating telecommunications services. The Ministry’s approval is required for any change in Telcel’s bylaws. It also has broad powers to monitor Telcel’s compliance with the concessions, and it can require Telcel to supply it with such technical, administrative and financial information as it may request. Telcel is required to publish its annual network expansion program and must advise the Ministry of the progress of its expansion and modernization program on a quarterly basis.

 

Cofetel is an independent agency within the Communications Ministry, with four commissioners appointed by the Communications Ministry on behalf of the President of Mexico, one of whom is appointed as chairman. Cofetel’s mandate is to regulate the Mexican telecommunications sector. Many of the powers and obligations of the Communications Ministry under the Telecommunications Law and the Telecommunications Regulations have been delegated to Cofetel.

 

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The Telecommunications Law gives certain rights to the Mexican government in its relations with concessionaires, including the right to take over the management of an operator’s networks, facilities and personnel in cases of imminent danger to national security, internal peace or the national economy, natural disasters and public unrest. The Telecommunications Law also provides that at the expiration of Telcel’s concessions, the Mexican government has a right of first refusal to acquire Telcel’s assets. See “—Termination of the Concessions.”

 

The Telecommunications Law provides that if a company is determined to be dominant in a relevant market according to the Federal Law of Economic Competition, the Communications Ministry has the power to adopt specific regulations on rates, quality of service and information provided by a dominant provider. To date, Telcel has not been declared a dominant provider, although there can be no assurance that such a determination will not be made in the future.

 

In addition, we are subject to regulation from Profeco under the Federal Consumer Protection Law. This law regulates the quality of services required to be provided to consumers and provides a mechanism to address consumer complaints. Profeco has the authority to impose fines, which can be significant.

 

Rates

 

The Telecommunications Law provides that concessionaires may freely determine the rates for telecommunications services. Cellular rates are not subject to a price cap or any other form of price regulation. However, Telcel and other cellular carriers operating in Mexico are required to disclose to, and register with, Cofetel their rates for cellular service prior to implementing such rates. The Communications Ministry is authorized to impose specific rate requirements on any operator that is determined to have substantial market power under the Federal Law of Economic Competition. Although no such determination has been made with respect to the market for cellular telecommunications services, there can be no assurance that such a determination will not be made in the future.

 

Concessions

 

Telcel operates under several different concessions covering particular frequencies and regions. It holds nine separate regional concessions, which together cover all of Mexico, to provide cellular telecommunications services using the 800 megahertz (Band B) radio spectrum. It also holds nationwide concessions to use the 1900 megahertz (Bands A, D and F) radio spectrum and a related concession to provide cellular telecommunications services on that frequency. The 800 megahertz (Band B) concessions require Telcel to pay continuing fees (aprovechamientos) determined as a percentage of gross revenues derived from the concessioned services. The percentage is 5% for the Mexico City area and the states of Mexico, Morelos and Hidalgo and between 5% and 10% in other regions. The 1900 megahertz (Band D) concessions, which were purchased for a fixed amount in 1998, and the 1900 megahertz (Band A) concessions, which were acquired by assignment from Unefon, do not require Telcel to pay continuing fees (aprovechamientos).

 

Pursuant to the Federal Contributions Law (Ley Federal de Derechos), owners of concessions granted or renewed on or after January 1, 2003 are required to pay annual fees (derechos) for the use and exploitation of radio spectrum bands. The amount of annual fees (derechos) charged depend on the relevant region and radio spectrum band. These annual fees (derechos) can be high and are payable irrespective of the amount of fees (aprovechamientos) paid. The 1900 megahertz (Band F) concessions, which we acquired during 2005, require the payment of annual fees (derechos) of Ps. 255 million annually for 20 years, but do not require the payment of fees (aprovechamientos).

 

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The eight Band B concessions covering regions other than the Mexico City area were granted for initial terms of twenty years that will expire in 2010 or 2011. The Band B concession covering the Mexico City area (Region 9) was renewed effective October 2000 for a term of fifteen years that will expire in October 2015. The Band D concessions will expire in 2018, the Band A concessions in 2019 and the Band F concessions in 2025. All of these concessions are subject to renewal for additional 20-year terms.

 

In December 2002, the Communications Ministry granted Telcel a new concession to install, operate and exploit a telecommunications network to provide national and international long distance services, as well as data transmission services. The concession was granted for an initial term of 15 years, and it is subject to extension for an additional 15-year period. The concession limits Telcel to provide these services only to its wireless subscribers until December 2005, which term can be extended by Cofetel.

 

Expansion and modernization requirements

 

Telcel’s concessions impose a number of requirements for expansion and modernization of its network. The concessions establish certain minimum network capacities that Telcel must achieve, to extend service coverage to a targeted percentage of population. Telcel is in compliance with these requirements.

 

Service quality requirements

 

The concessions also set forth extensive requirements for the quality and continuity of Telcel’s service, including, in some cases, maximum rates of incomplete and dropped calls and connection time. In May 2003, Cofetel issued the Fundamental Technical Plan for Quality of Local Mobile Services Networks, applicable to all operators, including Telcel. Due to the fast growth in cellular services, Telcel, like all Mexican cellular carriers, has faced some service problems. Service problems have not, however, had any material adverse regulatory impact. Telcel monitors service quality for compliance with the requirements of the concessions and has shown marked improvement according to recent measurements conducted by Cofetel. Telcel has filed an injunction against the application to it of the Fundamental Technical Plan for Quality of Local Mobile Services and other related laws and acts promulgated by Cofetel, seeking protection from the provisions of this Technical Plan. It remains uncertain that Telcel will succeed in obtaining an injunction, and currently, Telcel remains subject to the provisions of the Technical Plan.

 

Competition

 

The Telecommunications Regulations and the concessions contain various provisions designed to introduce competition in the provision of communications services. In general, the Mexican Communications Ministry is authorized to grant concessions to other parties for the provision of any of the services provided by Telcel under the concessions.

 

Interconnection

 

Terms of interconnection (including fees) are negotiated between Telcel and other public telecommunications providers. In the event they are unable to agree, Cofetel may impose terms on Telcel and the other public telecommunications networks. The current interconnection charge payable to us by another operator for a call from its customer to our network is Ps. 1.71 per minute. This charge is scheduled to decrease to Ps. 1.54 in 2006 and Ps. 1.39 in 2007. These charges have been agreed with all cellular operators and three fixed-line operators, including Telmex. The remaining four fixed-line operators have challenged these charges, seeking to reduce them. See “Legal Proceedings—Telcel—Interconnection Fees” under Item 8. In addition, Telmex and the other cellular operators have agreed to apply the Ps. 1.39 per minute charge through 2010. The current interconnection charge for calls made from a cellular line to a fixed line, which Telcel pays to Telmex, is U.S.$0.00975 per minute.

 

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Termination of the concessions

 

The General Communications Law, the Telecommunications Law and the concessions include various provisions under which the concessions may be terminated before their scheduled expiration dates. Under the Telecommunications Law, the Communications Ministry may cause early termination of any of the concessions in certain cases, including:

 

    failure to exercise rights under a concession during the 180 days after that concession is granted;

 

    failure to expand telephone services at the rate specified in the concession;

 

    interruption of all or a material part of the services provided by Telcel;

 

    acts by Telcel with the effect of impeding the operations of other concessionaires;

 

    refusing interconnection arrangements with other concessionaires;

 

    change of jurisdiction by Telcel;

 

    transfer, assignment of, or grant of liens to, Telcel’s concessions or any asset used to provide service without Ministry approval;

 

    failure to pay certain government fees;

 

    violation of the prohibition against ownership of shares of Telcel by foreign states;

 

    any material modification of the nature of Telcel’s services without prior Ministry approval; and

 

    breach of certain other obligations under the General Communications Law.

 

In addition, the concessions provide for early termination by the Communications Ministry following administrative proceedings in the event of:

 

    a material and continuing violation of any of the conditions set forth in the concessions;

 

    material failure to meet any of the service expansion requirements under the concessions;

 

    material failure to meet any of the requirements under the concession for improvement in the quality of service;

 

    engagement in any telecommunications business not authorized under the concession and requiring prior approval of the Communications Ministry;

 

    following notice and a cure period, failure without just cause to allow other concessionaires to interconnect their networks to Telcel’s network; or

 

    bankruptcy of Telcel.

 

The General Communications Law and all but one of Telcel’s 800 megahertz concessions provide that in the event of early termination of Telcel’s cellular concessions, all assets that are the subject of such concession would revert to the Government without compensation to Telcel. In the event of early termination of any of Telcel’s PCS concessions, the Government would have the option to purchase the equipment, installations and other assets used directly for the exploitation of the frequencies which are the subject of such concession. The latter regime also applies to one of Telcel’s 800 megahertz concessions. There is doubt as to whether the provisions of the concessions and the Telecommunications Law regarding the consequences of expiration of the concessions would apply to

 

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mitigate the provisions of the General Communications Law in the event of early termination. In the case of foreign investors, NAFTA and other similar international treaties may require compensation as mitigation for provisions of the General Communications Law that could result in measures tantamount to expropriation.

 

Speedy Móvil

 

Speedy Móvil, S.A. de C.V. is a Mexican company that develops mobile data solutions for SMS, wireless Internet (WAP) and voice-activated data applications for Telcel and our other subsidiaries and investments.

 

In addition to developing mobile data applications, Speedy Móvil evaluates content and application providers and enters into contracts with them in order to provide our wireless providers with content and applications. No concessions or licenses are necessary for Speedy Móvil’s operations.

 

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NON-MEXICAN OPERATIONS

 

We have subsidiaries or businesses in the telecommunications sector in Argentina, Brazil, Central America (El Salvador, Guatemala, Honduras and Nicaragua), Colombia, Ecuador, Uruguay and the United States. Our principal subsidiaries outside Mexico are described below. The revenues of our subsidiaries other than Telcel represented 47.4% of our consolidated revenues for 2004.

 

In addition, we expect to have opportunities to invest in other telecommunications companies outside Mexico, especially in Latin America, because we believe that the telecommunications sector will continue to be characterized by growth, technological change and consolidation. We may take advantage of these opportunities through direct investments or other strategic alliances. We can give no assurance as to the extent, timing or cost of future international investments, and such investments may involve risks to which we have not previously been exposed.

 

The following table sets forth financial and operating information for certain of our non-Mexican operations for the periods indicated. For some countries, as specified in the notes to the table, we have included data for periods prior to dates on which we acquired these operations. We provide this information to show the trends in these businesses, but it is not reflected in our financial statements, which consolidate each operation from the date on which we acquired it.

 

     December 31,

 
     2002

    2003

    2004

 
    

(in constant Mexican pesos as of December 31, 2004,

except lines in service, minutes of use and churn)

 

ARGENTINA

                        

CTI(1)

                        

Operating revenues (millions)

     —       Ps. 2,840     Ps. 5,573  

Average monthly revenues per subscriber during preceding 12 months(2)

     —       Ps. 191     Ps. 169  

Operating income (loss) (millions)

     —       Ps. 712     Ps. (403 )

Cellular lines in service (thousands)

     —         1,411       3,587  

Average monthly minutes of use per subscriber during preceding 12 months

     —         144       163  

Churn rate (3)

     —         1.5 %     2.0 %

BRAZIL

                        

Telecom Americas(4)

                        

Consolidated operating revenues from continuing operations (millions)

   Ps. 7,721     Ps. 11,989     Ps. 22,988  

Average monthly revenues per subscriber during preceding 12 months(2)

   Ps. 129     Ps. 143     Ps. 119  

Operating income (loss) from continuing operations (millions)

   Ps. (207 )   Ps. (2,245 )   Ps. (6,580 )

Cellular lines in service (thousands)

     5,192       9,521       13,657  

Average monthly minutes of use per subscriber during preceding 12 months

     95       91       98  

Churn rate (3)

     1.8 %     2.3 %     2.7 %

CENTRAL AMERICA(5)

                        

Telgua (Guatemala and Sercom Nicaragua)

                        

Combined operating revenues (millions)

   Ps. 4,860     Ps. 5,957     Ps. 7,168  

Average monthly revenues per subscriber during preceding 12 months(2)

   Ps. 160     Ps. 195     Ps. 181  

Operating income (millions)

   Ps. 1,166     Ps. 1,795     Ps. 2,355  

Lines in service (thousands):

                        

Fixed

     804       930       933  

Cellular

     628       970       1,526  

Average monthly minutes of use per subscriber during preceding 12 months

     219       209       202  

Churn rate (3)

     1.5 %     1.4 %     1.6 %

CTE (El Salvador)(6)

                        

Combined operating revenues (millions)

     —       Ps. 4,461     Ps. 4,720  

Average monthly revenues per subscriber during preceding 12 months(2)

     —       Ps. 234     Ps. 189  

Operating income (millions)

     —       Ps. 1,198     Ps. 1,610  

Lines in service (thousands):

                        

Fixed

     —         704       781  

Cellular

     —         216       518  

Average monthly minutes of use per subscriber during preceding 12 months

     —         128       127  

Churn rate(3)

     —         2.4 %     2.6 %

COLOMBIA

                        

Comcel(7)

                        

Combined operating revenues (millions)

   Ps. 3,932     Ps. 6,069     Ps. 9,338  

Average monthly revenues per subscriber during preceding 12 months(2)

   Ps. 155     Ps. 130     Ps. 142  

Operating income (millions)

   Ps. 267     Ps. 623     Ps. 612  

Cellular lines in service (thousands)

     2,822       3,674       5,814  

Average monthly minutes of use per subscriber during preceding 12 months

     78       82       114  

Churn rate (3)

     2.1 %     3.1 %     2.9 %

ECUADOR

                        

Conecel

                        

Operating revenues (millions)

   Ps. 1,369     Ps. 2,858     Ps. 4,287  

Average monthly revenues per subscriber during preceding 12 months(2)

   Ps. 122     Ps. 170     Ps. 145  

Operating income (loss) (millions)

   Ps. (116 )   Ps. 577     Ps. 885  

Cellular lines in service (thousands)

     923       1,537       2,326  

Average monthly minutes of use per subscriber during preceding 12 months

     61       54       50  

Churn rate (3)

     3.3 %     3.4 %     3.7 %

UNITED STATES

                        

TracFone

                        

Operating revenues (millions)

   Ps. 4,462     Ps. 6,570     Ps. 8,959  

Average monthly revenues per subscriber during preceding 12 months(2)

   Ps. 176     Ps. 180     Ps. 164  

Operating income (loss) (millions)

   Ps. (270 )   Ps. 210     Ps. 318  

Cellular lines in service (thousands)

     1,968       2,952       4,394  

Average monthly minutes of use per subscriber during preceding 12 months

     43       54       59  

Churn rate (3)

     5.4 %     4.0 %     4.2 %

(1) Although we began consolidating the results of CTI in our financial statements in November 2003, data provided for 2003 is for the full year.

 

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(2) Average for the year of the amount obtained each month by dividing service revenues by the average number of customers during such month. The figure includes both prepaid and postpaid customers.
(3) Total number of customer deactivations for a period divided by average total subscribers for such period.
(4) All assets transferred by Telecom Americas pursuant to the 2002 restructuring are treated as discontinued operations. Accordingly, continuing operations consist of Tess, ATL, Telet and Americel, and starting in 2003, include BSE (as from May 2003), BCP (as from December 2003) and new operations started in the states of Santa Catarina, Paraná (excluding the municipalities of Londrina and Tamarana), Bahia and Sergipe. Although we began consolidating the results of Telecom Americas in our financial statements in July 2002, data provided for 2002 is for the full year.
(5) For our operations in Central America, average monthly revenues per subscriber, average monthly minutes of use per subscriber and churn rate are presented only with respect to our wireless services in these countries and do not take into consideration our fixed-line services.
(6) Although we began consolidating the results of CTE in our financial statements in November 2003, data provided for 2003 is for the full year.
(7) Although we began consolidating the results of Comcel in our financial statements in February 2002, data for 2002 is for the full year. In February 2003, Comcel began consolidating the results of Celcaribe.

 

As from 2004, we also have operations in Nicaragua (ENITEL), Honduras and Uruguay, which are not presented in the table above. The operations are presented under the caption “Others” in our segment information included in note 21 to our audited consolidated financial statements. We own, directly or indirectly, a substantial majority of the telephone plant of our non-Mexican operations.

 

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Argentina (CTI)

 

CTI Holdings provides nationwide PCS wireless service in Argentina under the “CTI Móvil” brand name, through its wholly-owned subsidiaries CTI Compañía de Teléfonos del Interior, S.A. (CTI Interior) and CTI PCS, S.A. (CTI PCS). We own a 100% interest in CTI, which we acquired through a series of transactions in 2003 and 2004. We began including the results of CTI in our audited consolidated financial statements in November 2003. Since the acquisition, CTI’s subscriber base has grown significantly, from 1.3 million in October 2003 to 3.6 million at December 31, 2004.

 

We paid approximately U.S.$238.6 million for the acquisition of our interests in CTI Holdings. In a series of transactions in 2003, we acquired a 92% in interest in CTI and approximately U.S.$600 million in principal amount of secured indebtedness of CTI’s operating subsidiaries. At the time of the acquisition, CTI had U.S.$263 million in principal amount of senior notes due 2008, which were in default. These notes were subject to an out-of-court reorganization agreement (Acuerdo Preventivo Extrajudicial, or “APE”) in Argentina, which was approved by the court in December 2003. Pursuant to the APE, the notes were cancelled in exchange for an aggregate cash payment of approximately U.S.$37.1 million. In July 2004, we acquired the remaining 8% interest in CTI from Techint Compañía Técnia Internacional S.A.C.I., or the “Techint Group.”

 

At December 31, 2004, CTI had approximately a 26% share of the Argentine wireless market. Approximately 67% of CTI’s subscribers at December 31, 2004 resided in the interior of Argentina and the balance in the greater Buenos Aires region.

 

CTI began providing services in the interior of Argentina in 1994 and in Greater Buenos Aires in 2000. CTI offers basic cellular service through a variety of rate plans and also offers prepaid services. Prepaid customers represented 85% of CTI’s total subscribers as of December 31, 2004. In addition, CTI offers long distance and value added services.

 

CTI’s cellular network uses GSM, AMPS and CDMA technology and covers approximately 95% of Argentina’s population. CTI is deploying a nationwide GSM network in Argentina. The GSM network, when completed, is expected to cover approximately 98% of Argentina’s population. At December 31, 2004, CTI had 1,717 employees.

 

CTI’s principal competitors are: Telecom Personal, a subsidiary of Telecom Argentina, the principal telecom operator in Argentina, which is controlled by Telecom Italia; Unifon, a subsidiary of Telefónica Móviles of Spain; and Movicom. Movicom was acquired by Telefónica Móviles from Bell South in January 2005. Telefónica Móviles has announced that it plans to combine the operations of Unifon and Movicom, creating the largest wireless operator in Argentina.

 

CTI Interior and CTI PCS hold licenses covering the entire Argentine territory. These licenses contain coverage, reporting and service requirements, but do not have a fixed expiration date. The Communications Ministry (Secretaría de Comunicaciones de la Nación) is in charge of supervising the telecommunications industry in Argentina. It is authorized to foreclose and sell the shares of a licensee in case of specified breaches of the terms of a license.

 

Brazil (Telecom Americas)

 

General

 

Telecom Americas is one of the three largest providers of wireless telecommunication services in Brazil, with an estimated nationwide market share in Brazil at December 31, 2004, of approximately 21%. Brazil is the largest market in Latin America in terms of wireless customers.

 

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Telecom Americas provides services in Brazil under a unified brand name, “Claro,” and it offers a variety of rate plans to its postpaid customers and offers prepaid services in all of its markets. At December 31, 2004, Telecom Americas served approximately 13.7 million subscribers compared to 9.5 million subscribers at December 31, 2003 and covered approximately 144 million licensed points of presence (POPs). At December 31, 2004, approximately 82.4% of Telecom Americas’ subscribers were prepaid customers.

 

Telecom Americas owns and operates cellular networks using both GSM and TDMA digital technology. It launched its GSM network in 2003 in certain major urban areas, and as of December 31, 2004, the GSM network covered more than 1,520 cities and was used by 34% of Telecom Americas’ wireless subscribers. We continue rolling out the GSM network in 2003 with the goal of providing similar coverage as the Band A incumbent providers in the major markets. We intend to focus our commercial and marketing efforts towards encouraging use of GSM technology by new subscribers and existing subscribers renewing their contracts. We expect GSM to gradually become our principal wireless technology.

 

Telecom Americas has owned companies with operations in Brazil since shortly after Brazil allowed competition in the wireless industry in 1997 and 1998 and recently began to operate in the metropolitan region of São Paulo and in the states of Bahia, Sergipe and Paraná (except for the cities of Londrina and Tamarana). As discussed further below, Telecom Americas built its operations through a number of transactions commencing in 2000 and ending with the acquisitions of BSE and BCP during 2003 and the acquisition of a license in the Minas Gerais region in 2004.

 

Telecom Americas’ wireless properties in Brazil include ATL, Tess, Telet, Americel, BSE, BCP and Stemar Telecomunicações. All of these companies are licensed to operate under the PCS (Serviço Móvel Pessoal) regime. ATL operates in the states of Rio de Janeiro and Espírito Santo; Tess operates in the state of São Paulo (other than the city and metropolitan region of São Paulo); Telet operates in the states of Rio Grande do Sul, Santa Catarina and Paraná (except for the cities of Londrina and Tamarana; Americel operates in seven states in the central-west and northern regions of Brazil; BSE operates in the states of Ceará, Piauí, Rio Grande do Norte, Paraiba, Pernambuco and Alagoas; and BCP operates in the metropolitan area of São Paulo. In addition, in 2003, Telecom Americas, through its subsidiary Stemar Telecomunicações Ltda., began operating in the states of Bahia and Sergipe pursuant to PCS licenses acquired in November 2002. BCP is the second largest wireless provider in the metropolitan region of São Paulo. In July 2004, Telecom Americas’ subsidiary Stemar Telecomunicações was awarded a license to operate wireless services in the Minas Gerais region. Until the fall of 2003, these companies were required to operate under different brands, but they now operate under the unified “Claro” brand. At December 31, 2004, the Telecom Americas operating companies had approximately 6,432 employees. We own all of our network equipment in Brazil.

 

All of these companies are wholly-owned and controlled subsidiaries of Telecom Americas, except for each of Americel and Telet in which BNDESPar (the private equity arm of BNDES, the Brazilian development bank) holds in the aggregate approximately 1.5% and 1.0% of the share capital, respectively. In November 2003, the National Telecommunications Agency of Brazil, or “ANATEL,” approved the acquisition of voting control by Telecom Americas of ATL, Tess, Americel and Telet, and Telecom Americas has by now acquired voting control of all these companies. Prior to that time, Telecom Americas owned substantially all of their economic interests (other than certain minority interests in each of Americel and Telet), but was not permitted to acquire control of the majority of their voting shares.

 

We currently own approximately 98.9% of Telecom Americas. Telecom Americas was organized in November 2000 as a joint venture among us, Bell Canada International Inc. (“BCI”) and SBC International, Inc. (“SBCI”). Telecom Americas was initially organized to hold certain of the partners’ telecom interests throughout South America, but was reorganized in February 2002 to focus on

 

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the Brazilian wireless sector. In July 2002, we acquired all of BCI’s shares of Telecom Americas. We paid approximately U.S.$370 million for the shares, of which U.S.$194 million was paid in 2002 and the remainder was paid in March 2003. Also in July 2002, we acquired SBCI’s interest in Telecom Americas pursuant to a transaction in which we also sold our 50% interest in Cellular Communications of Puerto Rico, Inc. to SBCI.

 

In April 2002, Telecom Americas issued to a financial investor 1,844 nonvoting convertible preferred shares, representing approximately 2% of the capital stock of Telecom Americas. We acquired half of these preferred shares in March 2005. The remaining shares have been converted into common shares, and the holder has the right to sell these shares to us beginning in 2006 for U.S.$150 million plus interest.

 

Sales and Distribution

 

Claro markets its wireless services primarily through retail chains (approximately 4,325 points of sale) and exclusive distributors (dealers) (approximately 2,765 points of sale) located throughout the regions where it operates in Brazil. In the year ended December 31, 2004, approximately 60% of Claro’s sales of handsets were generated by retail chains, 30% by exclusive distributors (dealers) and approximately 10% from sales in company-owned stores, of which there are approximately 120. Claro also sells and distributes its products and services over the internet.

 

Claro has implemented permanent training and evaluation programs for dealers to help maintain the level of service quality.

 

Claro’s company-owned retail stores offer one-stop shopping for a variety of cellular services and products. Walk-in customers can subscribe for postpaid plans, prepaid plans, purchase prepaid cards and purchase handsets. Claro’s stores serve as customer sales and service centers and Claro expects to continue to open new service centers as necessary in order to offer its products directly to subscribers in more effective ways.

 

Claro has a corporate sales group to service the needs of its large corporate and other high-usage customers.

 

Billing and Collection

 

Claro bills its postpaid customers through monthly invoices, which detail itemized charges such as usage, services such as voicemail, and long-distance and roaming charges, in addition to applicable taxes. Customers may pay their bills with a credit card, through online banking, or in person at the post office, outlets of Casas Lotéricas (federal lottery houses) or some of Claro’s stores.

 

If a postpaid customer’s payment is overdue, service may be suspended until the payment for outstanding charges is received. If the subscriber’s payment is more than 60 days past due, service may be discontinued. Accounts that are more than 90 days past due are categorized as doubtful accounts.

 

Depending on the value of a prepaid card, a prepaid customer who purchases a card has between 30 and 90 days from the date of activation of the card to use the airtime. After such time, the customer can no longer use that airtime for outgoing calls unless the customer activates a new card. Sixty days after the card expires, unless the customer activates a new card, the balance on the card, if any, is recognized as revenue.

 

Competition

 

Although the number of competitors has decreased primarily as a result of consolidation, competition in the Brazilian wireless industry is substantial and varies by region. In addition to us, there are four other groups in Brazil with significant nationwide coverage. The largest is Vivo, a joint venture between Telefónica Móviles of Spain and Portugal Telecom. The joint venture or one of its partners owns interests in some of the wireless companies that were created upon the breakup of Telebrás. The

 

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others are Telecom Italia Mobile (TIM), Oi, and TeleAmazônia Celular and Telemig Celular. We also face competition from Nextel, a joint venture between Motorola and Nextel Communications, Inc., for trunking services to the corporate segment in urban areas.

 

Recent acquisitions

 

Telecom Americas acquired its interests in ATL, Americel and Telet primarily through contributions from us and our former partners in transactions that were undertaken in 2000 and 2002. Telecom Americas acquired its interests in Tess from Telia Overseas AB, Telia AB and Algar Telecom S.A. in 2001 for U.S.$950.0 million, consisting of U.S.$318.7 million in cash and U.S.$631.3 million in promissory notes. Telecom Americas made the final payment of principal under the promissory notes in March 2004.

 

In May 2003, Telecom Americas acquired 97.5% of the shares of BSE S.A. from a subsidiary of BellSouth Corporation and from holding companies of the Safra family. The purchase price was based on a net enterprise value of BSE of U.S.$180 million. Later in 2003, Telecom Americas acquired the remaining interests in BSE held by minority investors, thereby increasing its interest to 100%. We began including the results of BSE in our audited consolidated financial statements in May 2003. BSE had approximately one million subscribers at the time of the acquisition.

 

In November 2003, Telecom Americas acquired 100% of the shares of BCP S.A. from certain lenders to BCP, who had acquired the shares formerly held by affiliates of BellSouth and the Safra family and local minority investors. The purchase price was U.S.$643.3 million. All of BCP’s outstanding long-term indebtedness prior to the acquisition was cancelled or acquired by us in connection with the transaction. We began including the results of BCP in our audited consolidated financial statements in December 2003. BCP had approximately 1.7 million subscribers at the time of the acquisition. In connection with our bid for BCP, we granted Telemar an option to acquire a minority interest in BCP, subject to certain conditions. In October 2003, the option was cancelled, and we paid Telemar U.S.$35 million during the second quarter of 2004.

 

Regulatory environment

 

In conjunction with the breakup and privatization of the Telecomunicações Brasileiras S.A.—Telebrás telecommunications monopoly, Brazil opened its cellular mobile telephone service industry to private enterprises. Starting in 1997, ten cellular licenses covering all of Brazil were auctioned to wireless operators to compete against the eight incumbent providers that emerged from the Telebrás breakup and that were subsequently auctioned to private enterprises. Accordingly, there were two cellular service providers in all markets in Brazil, including the city of São Paulo, one operating in subfrequency Band A and another in subfrequency Band B. Starting in 1999, the entire Brazilian telecommunications sector has been open to competition.

 

In 1997, Brazil enacted the General Telecommunications Law (Lei Geral de Telecomunicações) to promote competition among service providers and establish an independent regulatory agency, ANATEL, to regulate its telecommunications industry. ANATEL has the authority to grant concessions and licenses for all telecommunications services, except for broadcasting services.

 

In September 2000, ANATEL published guidelines for the implementation of PCS (Serviço Móvel Pessoal) operations in Brazil. Under the guidelines, Brazil is divided into three regions for PCS operation within the 1800 megahertz frequency, as opposed to ten regions for the cellular service providers. Under the September 2000 guidelines, the Band A and Band B cellular providers have the option to switch to PCS, and migration to PCS is a condition for the extension of their concessions. All concessionaires in Brazil have migrated to the PCS regime. Upon migration to PCS, the Band A and Band B cellular providers have the right to apply for long distance services licenses and are no longer subject to cellular regulations that restricted them from operating in more than two regions per Band.

 

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Regulations require that migrating companies adopt PCS service plans and provide for the establishment of charges for the use of one operator’s network by another. During 2003, all of the Telecom Americas operating companies exchanged their original concessions for 15-year PCS authorizations. The 15-year period started from the time the original concessions were granted, generally in 1997 or 1998. This change will allow the operating companies to extend the life of the license for an additional 15 years, upon the payment of a fee.

 

The September 2000 guidelines also established rules regarding the selection of up to three additional wireless providers per region, corresponding to Bands C, D and E. Any company organized and based in Brazil, even if foreign-owned, was allowed to bid for a PCS license. Interested companies were permitted to bid for PCS licenses in each of the three regions, and were permitted to acquire PCS licenses for all three regions. However, each provider, whether cellular or PCS, is limited to only one license per service area.

 

Beginning in February 2001, ANATEL initiated a series of auctions through which it sold rights to D-Band and E-Band licenses. After canceling the auction of new licenses under the C-Band, ANATEL implemented procedures in May 2002 for the sale of C-Band bandwidth in installments not to exceed 45 megahertz per service provider, through which each of Telecom Americas’ principal operating companies acquired bandwidth.

 

In Brazil, rates for telecommunications services are regulated by ANATEL. In general, PCS licensees are authorized to increase basic plan rates only for inflation and on an annual basis. However, operators are allowed to create non-basic plans and modify them, without prior ANATEL approval. Discounts from existing service plans, both basic and non-basic, are allowed without ANATEL approval.

 

ANATEL has called for public hearings on possible new regulations regarding the method of determining interconnection fees by cellular providers. Currently, operators determine interconnection fees by agreement, subject to ANATEL intervention only in case of disputes. The proposed new regulations would provide for a fully allocated cost-based method of determining interconnection fees charged by operators belonging to an economic group with significant market power, and would include a transition period for such operators. It is not yet clear how the determination of whether an operator belongs to an economic group with significant market share would be made for purposes of these proposed regulations. Given the size of our operations in Brazil, we may be deemed to belong to an economic group with significant market power.

 

Another change in the interconnections regime is expected for 2005-2006, relating to the introduction of bill and keep for the settlement of interconnection fees between mobile operators with respect to local calls. Current regulations provide for the effectiveness of the new regime by July 1, 2005, but it is expected that ANATEL may postpone this date to January 2006 or even retain the current regime as a result of objections by industry participants during ANATEL’s public hearings regarding the matter.

 

Central America

 

Guatemala (Telgua)

 

Telecomunicaciones de Guatemala, S.A. (Telgua) is a fixed-line telecommunications operator in Guatemala that was privatized in November 1998. Subsidiaries of Telgua also provide wireless, Internet, cable television, paging, data transmission and other services in Guatemala. We own approximately 99% of the stock of Telgua. We acquired a portion of our interest in the subsidiaries in May 1999. We acquired the majority of our interest in Telgua and the balance of our interest in the subsidiaries in March 2000 and increased these interests to their present levels through a series of acquisitions of shares from minority shareholders during 2001, 2002, 2003 and 2004. We use the term “Telgua” below to refer to Telgua and the affiliates together.

 

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At December 31, 2004, Telgua had approximately 933,000 fixed-line subscribers compared to approximately 930,000 at December 31, 2003, a market share of approximately 94%.

 

Telgua’s wireless business is operated by its affiliate Servicios de Comunicaciones Personales Inalámbricas, S.A. (Sercom). Sercom’s cellular network uses CDMA digital technology and, as of October 2003, overlaid GSM technology. Telgua’s network covers approximately 63% of its population. At December 31, 2004, Sercom had approximately 1.3 million wireless subscribers, representing a market share of approximately 48%.

 

Telgua offers a variety of services through its fixed-line and wireless networks, including Internet access, data transmission, cable television, two-way communication systems used mainly for group communication, and dispatch applications, or “trunking,” and also sells handsets and related products. Telgua markets and distributes its services and products directly to customers and also employs a network of independent distributors for services and products other than basic fixed-line telephony, such as prepaid calling cards and handsets.

 

Telgua continues to be the principal provider of fixed-line and mobile services in Guatemala. Telgua’s principal competitors in the wireless sector are Millicom (Comcel), and Telefónica Móviles.

 

Telgua’s business is subject to comprehensive regulation and oversight by the Guatemalan Telecommunications Agency (Superintendencia de Telecomunicaciones de Guatemala) under the General Telecommunications Law (Ley General de Telecomunicaciones). Telgua holds a license from the Guatemalan government to operate its nationwide fixed-line network and numerous licenses to operate its cellular network on different frequencies and in different regions. See “Legal Proceedings” under Item 8 for a discussion of certain proceedings that the Guatemalan government has commenced against Telgua.

 

Nicaragua (Sercom and ENITEL)

 

We own a 99% interest in Servicios de Comunicaciones de Nicaragua, S.A. (Sercom Nicaragua) and launched wireless services in Nicaragua in December 2002. Sercom’s cellular network uses GSM technology to provide service to its customer base. At December 31, 2004, Sercom Nicaragua had approximately 221,234 wireless subscribers, representing approximately 30.7% of the wireless market in Nicaragua.

 

In December 2003, the Nicaraguan Government accepted our bid to acquire a 49% interest in Empresa Nicaragüense de Telecomunicaciones, S.A. (ENITEL) for a price of U.S.$49.6 million. We consummated this acquisition in January 2004. ENITEL provides fixed, mobile and other telecommunications services in Nicaragua. In June 2004, we signed an agreement to acquire an additional 50.03% interest in ENITEL from Megatel LLC and certain other investors for a price of U.S.$128 million. We consummated this acquisition in August 2004.

 

At December 31, 2004, ENITEL had approximately 231,266 wireless subscribers, which we estimate represents approximately 32% of the wireless market in Nicaragua, and approximately 214,000 fixed-line subscribers, which represents 100% of the fixed-line market in Nicaragua.

 

ENITEL’s wireless network uses GSM digital technology and covers approximately 48% of the Nicaraguan population. ENITEL is also a major provider of fixed-line services in Nicaragua. ENITEL offers a variety of services through its fixed-line and wireless networks, including Internet access and data transmission, and also sells handsets and related products. ENITEL markets and distributes its services and products directly to customers and also employs a network of independent distributors for services and products other than basic telephony, such as prepaid calling cards and handsets. At December 31, 2004, ENITEL had 1,828 employees.

 

The principal competitor of Sercom Nicaragua and ENITEL in the Nicaraguan wireless sector is Telefónica Movistar, which has a market share of approximately 37%.

 

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Sercom Nicaragua’s and ENITEL’s business is subject to comprehensive regulation and oversight by the Nicaraguan Telecommunications Agency (Instituto Nicaragüense de Telecommunicaciones y Correos) under the General Telecommunications and Postal Services Law (Ley General de Telecomunicaciones y Servicos Postales).

 

El Salvador (CTE)

 

Compañía de Telecomunicaciones de El Salvador (CTE) provides fixed, mobile and other telecommunications services in El Salvador. We acquired a 51% interest in CTE from France Telecom and certain other investors in October 2003 for an aggregate purchase price of U.S.$417 million. In December 2004, we acquired an additional 41.54% interest in CTE from the government of El Salvador for approximately U.S.$294.9 million. As a result of the two transactions and a number of public market transactions in El Salvador, we had a 94.9% interest in CTE at December 31, 2004. We began including the results of CTE in our audited consolidated financial statements in November 2003.

 

At December 31, 2004, CTE had approximately 781,000 fixed-line subscribers and a market share of approximately 89%.

 

CTE’s wireless business is operated by its wholly-owned subsidiary CTE Telecom Personal S.A. de C.V. Personal’s cellular network uses GSM digital technology and covers approximately 86% of the Salvadorean population. At December 31, 2004, Personal had approximately 518,000 wireless subscribers, which we estimate represents a market share of approximately 33%. Personal offers both prepaid and postpaid plans.

 

CTE offers a variety of services through its fixed-line and wireless networks, including Internet access, data transmission and satellite television, and also sells handsets and related products. CTE also operates a telephone directory business in El Salvador and offers fixed-line services in Guatemala. CTE markets and distributes its services and products directly to customers and also employs a network of independent distributors for services and products other than basic telephony, such as prepaid calling cards and handsets. At December 31, 2004, CTE and its subsidiaries had approximately 2,482 employees.

 

CTE is the principal provider of fixed-line services in El Salvador. CTE’s principal competitor in the wireless sector is Telemovil, an affiliate of Millicom International, with a market share of approximately 34%. CTE also competes with Telefónica de El Salvador, an affiliate of Telefónica Móviles of Spain, and Digicel, which is owned by a consortium of international investors.

 

CTE’s business is subject to comprehensive regulation and oversight by the Salvadorean Energy and Telecommunications Agency (Superintendencia General de Electricidad y Telecomunicaciones). CTE holds a concession from the Salvadorean government to operate its nationwide fixed-line network and a nationwide PCS 1900 license to operate its cellular network.

 

Honduras (Sercom Honduras)

 

In the same transaction in which we agreed to purchase the additional 50.03% of ENITEL, we also agreed to acquire all of the shares of Megatel de Honduras, S.A. de C.V., now called Servicios de Comunicaciones de Honduras, S.A. de C.V. (Sercom Honduras), which provides wireless and other telecommunications services in Honduras. The acquisition of Megatel de Honduras, S.A. de C.V. closed in June 2004.

 

At December 31, 2004, Sercom Honduras had approximately 198,000 wireless subscribers, representing approximately 28% of the wireless market in Honduras. The Company uses GSM technology to provide service to its customer base. At December 31, 2004, Sercom Honduras had approximately 251 employees.

 

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The principal competitor of Sercom Honduras in the Honduran wireless sector is Celtel, an affiliate of Millicon International, which has a market share of approximately 72%.

 

Sercom Honduras’ business is subject to comprehensive regulation and oversight by the Honduran Telecommunications Agency (Comisión Nacional de Telecomunicaciones (CONATEL)) under the Telecommunications Law (Ley Marco del Sector de Telecomunicaciones).

 

Colombia (Comcel)

 

Comunicación Celular S.A. (Comcel) provides wireless telecommunications services in the eastern, western and Caribbean regions of Colombia. We have operated in the eastern and western regions of Colombia since 2002 and in the Caribbean region since February 2003. As of December 31, 2004, following the purchase of a 3.84% interest in August 2004 for U.S.$25.1 million, we had a 99.92% interest in Comcel.

 

Comcel’s network uses GSM and TDMA technology and covers approximately 79% of Colombia’s population. In late 2003, Comcel completed the overlay of a GSM network and can now offer GSM services nationwide. At December 31, 2004, Comcel had approximately 5.8 million subscribers, compared to 3.7 million subscribers at December 31, 2003, and believed it had a 56.5% share of the wireless market.

 

Comcel offers basic cellular service through a variety of rate plans and also offers prepaid service. Prepaid customers represented 75.4% of Comcel’s total subscribers as of December 31, 2004. Purchasers of Comcel’s “Amigo” kit for prepaid service receive a cellular phone together with airtime included, enabling the customer to activate wireless service without contracts, monthly fees or credit checks. Comcel markets its services through independent local distributors and a direct sales force. In addition, Comcel and its distributors have arrangements with various supermarkets for the distribution of all of Comcel’s basic services and products as well as the provision of technical service and assistance. The Amigo prepaid card is available in more than 90,000 locations nationwide. Comcel’s strategy is to continue to expand its customer base through the build-out of its network.

 

In each of the three regions of Colombia, we compete with Telefónica Móviles (which bought the BellSouth properties in Colombia in 2004) and Colombia Móvil, a consortium of two Colombian public-sector, fixed-line operators. Colombia Móvil started nationwide commercial operations in November 2003. Comcel also competes with traditional fixed-line telephone service operators. In addition, Comcel faces competition from alternative wireless services, including mobile radio and paging services, rural wireless operators and trunking services. These competing wireless services are widely used in Colombia as a substitute for fixed-line services.

 

In 2004, as part of an internal reorganization, we merged all our operating subsidiaries in Colombia into Comcel.

 

The Ministry of Communications of Colombia and the Telecommunications Regulation Commission are responsible for regulating and overseeing the telecommunications sector, including cellular operations. The Ministry of Communications, which granted the cellular concessions in 1994, supervises and audits the performances of the concessionaires’ legal and contractual obligations. The activities of Comcel are also supervised by the Colombian Superintendency of Industry and Commerce, which enforces antitrust regulations, promotes free competition in the marketplace and protects consumer rights.

 

Comcel holds ten-year concessions, acquired in 1994, to provide wireless telecommunications services in the eastern, western and Caribbean regions of Colombia. Under the terms of the concessions, each of Comcel is required to make quarterly royalty payments to the Ministry of Communications based on its revenues. Under the terms of an agreement entered into in March 2004, the Ministry of Communications has agreed to renew Comcel’s concessions through 2014.

 

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Ecuador (Conecel)

 

Consorcio Ecuatoriano de Telecomunicaciones, S.A. CONECEL (Conecel) is a wireless telecommunications operator in Ecuador. We acquired a 60% interest in Conecel in March 2000 and gave the other investors certain rights to sell us their shares. In April 2002, the other investors exercised their first put rights, and we paid approximately U.S.$70.3 million to increase our interest to 80.6%. In July 2003, we acquired the remaining interests in Conecel for an identical amount, increasing our interest in Conecel to 100%.

 

At December 31, 2004, Conecel had approximately 2.3 million subscribers, compared to approximately 1.5 million at December 31, 2003, representing a 65.4% share of the Ecuadorian wireless market. Prepaid customers represented 91.2% of Conecel’s total subscribers as of December 31, 2004.

 

Conecel owns and operates a cellular network that uses TDMA digital technology, and in May 2003, it launched a new GSM network. The two networks cover the same areas, which account for approximately 93% of Ecuador’s population. Conecel is focusing its commercial and marketing efforts towards encouraging use of GSM technology by new subscribers and existing subscribers renewing their contracts and expects GSM to become its principal wireless technology within the next five to ten years.

 

Conecel’s principal competitor is Telefónica Móviles, which following the purchase of the Bell South properties in Ecuador in 2004 offers wireless local, national and international long-distance and public telephone services in Ecuador.

 

Conecel is subject to regulation from:

 

    the National Telecommunications Counsel (Consejo Nacional de Telecomunicaciones, or Conatel), which is responsible for policy-making in the telecommunications area;

 

    the National Telecommunications Secretariat (Secretaría Nacional de Telecomunicaciones), which is responsible for executing Conatel’s resolutions; and

 

    the Telecommunications Agency (Superintendencia de Telecomunicaciones), which monitors the use of authorized frequencies and compliance with concession provisions.

 

Conecel holds nationwide concessions, which have been fully paid, to operate its wireless network on the 800 megahertz (Band A) radio spectrum. These include a concession for cellular telephone service that expires in 2008, and concessions for data transmission and Internet services that expire in 2017.

 

United States (TracFone)

 

TracFone Wireless, Inc. is engaged in the sale and distribution of prepaid wireless service and wireless phones throughout the United States, Puerto Rico and the U.S. Virgin Islands. We own 98.2% of the capital stock of TracFone. We first acquired a controlling interest in TracFone in February 1999.

 

TracFone currently offers its prepaid wireless service and wireless handsets throughout the United States using an extensive distribution network. At December 31, 2004, TracFone had approximately 4.4 million subscribers, all of which are prepaid subscribers, and is one of the three largest operators in the U.S. prepaid cellular market. TracFone’s subscriber base increased by approximately 49% in 2004.

 

TracFone does not own any wireless telecommunications facilities or hold any licenses. Instead, it purchases airtime through agreements with approximately 40 wireless service providers and resells airtime to customers. Through these agreements, TracFone has a nationwide network covering virtually all areas in which wireless services are available. Customer usage is monitored using patented, proprietary software installed in each phone TracFone sells, and TracFone provides customer service and manages customers as though it were a network-based carrier. TracFone has entered into agreements

 

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with Nokia and Motorola to enable them to include TracFone’s software in various handsets they produce. TracFone’s business model does not require any significant recurring capital expenditures. TracFone sells handsets through a variety of U.S. retail stores and sells its prepaid airtime through a large number of independent retailers throughout the United States.

 

TracFone competes with the major U.S. wireless operators and other mobile virtual network operators. TracFone expects that many of these entities will increase their focus on prepaid wireless services in the future. TracFone is subject to the jurisdiction of the U.S. Federal Communications Commission, or “FCC,” and to U.S. telecommunications laws and regulations. TracFone is not required to procure licenses to carry out its business.

 

AM Wireless Uruguay

 

In June 2004, we acquired a 20-year license to operate three broad-band PCS frequencies in Uruguay at a cost U.S.$13.6 million. We began providing wireless services in Uruguay in December 2004, through AM Wireless Uruguay, a subsidiary of CTI. AM Wireless Uruguay uses GSM technology to provide service to its customer base. As of December 31, 2004, AM Wireless Uruguay had approximately 5,000 wireless subscribers.

 

Other

 

In March 2005, we paid U.S.$21.1 million in a government auction for a 20-year license to provide nationwide wireless services in Peru, and in May 2005, we reached an agreement with Hutchison Telecommunications International Ltd. to purchase for U.S.$25 million its wireless operations in Paraguay, which operate under the brand name “Porthable.” Porthable operates a GSM network and has a 2% share of the Paraguayan wireless market. The closing of the Porthable acquisition is subject to various conditions, including receipt of regulatory authorizations.

 

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OTHER INVESTMENTS

 

Our principal investments in affiliates other than our subsidiaries are described below. Financial information provided for these affiliates has been prepared in accordance with local accounting principles and restated in constant pesos as of December 31, 2004. We can give no assurance as to the extent, timing or cost of future international investments, and such investments may involve risks to which we have not previously been exposed.

 

Techtel (Argentina)

 

Pursuant to the February 2002 reorganization of Telecom Americas, we acquired a 60% interest in Techtel-LMDS Comunicaciones Interactivas, S.A., which operates a local multipoint distribution services (LMDS) and fiber optic network in Argentina, providing voice, data and video transfer services and other related telecommunications services. LMDS is a wireless broadband technology that uses radio signals to transmit voice, video and data. Techtel began providing long-distance fixed-line voice services and call center support in December 2000 and launched local fixed-line voice services in August 2001. In April 2004, we sold our interests in Techtel to Telmex. See “Related Party Transactions” under Item 7.

 

Telstar (Uruguay)

 

We acquired a majority interest in Telstar S.A. pursuant to the February 2002 reorganization of Telecom Americas. Telstar has completed an LMDS network to provide data transmission services in Montevideo, Uruguay. In April 2004, we sold our interests in Telstar to Telmex. See “Related Party Transactions” under Item 7.

 

U.S. Commercial Corp.—CompUSA

 

We acquired a 49% interest in CompUSA, Inc. in March 2000. In December 2003, as a result of a series of transactions, we exchanged our 49% interest in CompUSA for a 29.7% interest in US Commercial Corp., S.A. de C.V. and Ps. 189 million. U.S. Commercial Corp. is a Mexican company with shares listed on the Mexican stock exchange. Its principal asset is 100% of the shares of CompUSA. We recorded a loss of Ps. 293 million on the transaction. In 2004, we reclassified our investment in U.S. Commercial Corp. as available for sale. The controlling shareholder of US Commercial Corp. is an affiliate of América Telecom, our controlling shareholder. See “Related Party Transactions” under Item 7.

 

CompUSA is a provider of technology solutions and a retailer of personal computing equipment, based in Dallas, Texas, and operates a number of CompUSA Computer Superstores throughout the United States. CompUSA competes with a variety of resellers of personal computers and related products and services, including large format computer retailers, Internet-based retailers, manufacturers and distributors that sell directly to the public, and other personal computer retailers. In addition, CompUSA has numerous competitors in its training and technical service businesses.

 

Telvista

 

We own an indirect 45.0% interest in Telvista, which we acquired in June 2001 from Technology and Internet Holding Co., a company in which we, Telmex and Grupo Carso have a joint interest. Telvista is a Delaware corporation that operates call centers in the United States.

 

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CAPITAL EXPENDITURES

 

The following table sets forth our consolidated capital expenditures for each year in the three-year period ended December 31, 2004.

 

     Year ended December 31,

     2002

   2003

   2004

     (millions of constant pesos as of December 31, 2004)

Transmission and switching equipment

   Ps. 9,866    Ps. 12,291    Ps. 20,175

Other

     1,968      2,070      2,242
    

  

  

Total capital expenditures

   Ps. 11,834    Ps. 14,362    Ps. 22,417
    

  

  

 

Our capital expenditures during 2004 related primarily to the rollout of a new GSM network in Argentina and the expansion of GSM coverage in Mexico and Brazil. We have budgeted capital expenditures of approximately U.S.$2.4 billion for the year ending December 31, 2005, but this budgeted amount could change as we re-evaluate our expenditure needs during the year. This amount does not include expenditures necessary to build or expand networks in Peru or Paraguay or in connection with any acquisition that we may decide to pursue. We estimate that we would need to spend approximately U.S.$200 million to build a network in Peru over the next three years. This estimate is preliminary, and we have not yet determined how this amount would be allocated among periods. We expect that our capital expenditures during 2005 will primarily relate to the expansion and upgrading of our GSM networks. We expect to spend approximately 55% of our 2005 budgeted capital expenditures in South America, 32% in North America (principally Mexico) and 13% in Central America.

 

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Item 5. Operating and Financial Review and Prospects

 

The following discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in this annual report. Our financial statements have been prepared in accordance with Mexican GAAP, which differs in certain respects from U.S. GAAP. Note 22 to the audited consolidated financial statements provides a description of the principal differences between Mexican GAAP and U.S. GAAP, as they relate to us, a reconciliation to U.S. GAAP of operating income, net income and total stockholders’ equity and a condensed statement of cash flows under U.S. GAAP.

 

Pursuant to Mexican GAAP, in our financial statements:

 

    nonmonetary assets (including plant, property and equipment of Mexican origin) and stockholders’ equity are restated for inflation based on the Mexican National Consumer Price Index; plant, property and equipment of non-Mexican origin are restated based on the rate of inflation in the country of origin and converted into Mexican pesos using the prevailing exchange rate at the balance sheet date;

 

    gains and losses in purchasing power from holding monetary liabilities or assets are recognized in income; and

 

    all amounts are restated in constant pesos as of December 31, 2004.

 

The following discussion analyzes certain operating data, such as average revenues per subscriber (also referred to as “ARPUs”), average minutes of use per subscriber (also referred to as average “MOUs” per subscriber) and churn rate, that is not included in our financial statements. We calculate ARPUs for a given period by dividing service revenues for such period by the average number of subscribers for such period. The figure includes both prepaid and postpaid customers. We calculate churn rate as the total number of customer deactivations for a period divided by the average total subscribers for such period.

 

We provide this operating data because it is regularly reviewed by management and because management believes it is useful in evaluating our performance from period to period. We believe that presenting information about ARPUs and MOUs is useful in assessing the usage and acceptance of our products and services, and that presenting churn rate is useful in assessing our ability to retain subscribers. This additional operating information may not be uniformly defined by our competitors. Accordingly, this additional operating information may not be comparable with similarly titled measures and disclosures by other companies.

 

We count our wireless subscribers by the number of lines activated. We continue to count post-paid subscribers for the length of their contracts. We continue to count prepaid subscribers for so long as they continue to use our service, and then for a prescribed period of time thereafter, which differs according to the particular market. When a subscriber voluntarily disconnects his service, or there is a payment default, the subscriber is cancelled or “churned,” and we no longer count the subscriber. We calculate our subscriber market share by dividing our own subscriber figures into the total market subscriber figures periodically reported by the regulatory authorities in the markets in which we operate. We understand that these regulatory authorities compile total market subscriber figures based on subscriber figures provided to them by market participants, and we do not independently verify these figures.

 

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Overview

 

Trends in Operating Results

 

We have experienced significant growth in our operating revenues (49.1% in 2004 and 43.9% in 2003) and operating income (24.4% in 2004 and 38.4% in 2003) in recent years. Besides acquisitions, the principal factors affecting our operating revenues and operating income relate to growth in subscribers and traffic. Traffic can grow as a result of increased usage by existing customers or as a result of subscriber growth or both. We have generally experienced both increased usage and subscriber growth in recent periods. Due to competitive pressures, we have not increased prices in recent periods.

 

At December 31, 2004, we had approximately 61.1 million wireless subscribers, as compared to 43.9 million at December 31, 2003, a 39.3% increase. Subscriber growth during 2004 was substantially attributable to organic growth by our existing subsidiaries rather than acquisitions. During 2003, we experienced a 12.1 million or 38.4% increase in wireless subscribers, but almost one third of that increase was attributable to acquisitions of operating companies.

 

We believe that the markets we serve provide opportunities for continued growth, and as subscribers and traffic increase, we generally expect to report higher revenue and operating income (before depreciation and amortization) as a result of economies of scale. These effects can be partly or wholly offset, however, by the effects of competition on prices and on subscriber acquisition costs. Our operating margins, particularly in certain geographic segments, have tended to decline during periods of accelerated subscriber growth because of the costs of acquiring new subscribers, which include subsidies for equipment purchases and activation commissions. Each of our markets has different competitive and economic conditions. The market and competitive conditions are independent in the different markets in which we operate, and they are sometimes subject to rapid change.

 

Effects of Recent Acquisitions

 

During the last three years, we acquired a total of nine companies throughout Latin America. The consolidation of these companies affects the comparability of our recent results. We recorded all of these acquisitions using the purchase method, and the results of each acquired company were consolidated in our financial statements as from the month following the consummation of its acquisition. Our audited consolidated financial statements reflect the consolidation of these companies as follows:

 

    Comcel (as from February 2002);

 

    Telecom Americas (as from July 2002);

 

    Celcaribe (as from February 2003);

 

    BSE (as from May 2003);

 

    CTE (as from November 2003);

 

    CTI (as from November 2003);

 

    BCP (as from December 2003);

 

    Sercom Honduras (as from July 2004); and

 

    ENITEL (as from August 2004).

 

Prior to the consolidation of Comcel and Telecom Americas in 2002, our 2002 audited consolidated financial statements reflected their net results under the equity method. We acquired control of Comcel in February 2002, and of Telecom Americas in July 2002.

 

The following table sets forth the full-year revenues of the companies acquired during the last three years in millions of constant pesos as of December 31, 2004, as well as the percentage of those revenues that are included in our consolidated revenues. The table does not include results of these

 

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companies for years prior to the year during which we consummated the respective acquisitions. Revenues for periods prior to the date on which we acquired these companies are not reflected in our audited consolidated financial statements.

 

     Annual Revenues

 
     2002

   %
consolidated


    2003

   %
consolidated


    2004

   %
consolidated


 

Comcel(1)

   Ps. 4,525    91.6 %   Ps. 6,069    100.0 %   Ps. 9,338    100.0 %

Telecom Americas(2)

   7,397    46.8     11,989    100.0     22,988    100.0  

Celcaribe

   —      —       577    92.5     908    100.0  

BSE

   —      —       2,364    70.0     2,703    100.0  

CTE

   —      —       4,461    19.0     4,720    100.0  

CTI

   —      —       2,840    19.8     5,573    100.0  

BCP

   —      —       5,223    9.0     4,946    100.0  

Sercom Honduras

   —      —       —      —       474    65.0  

ENITEL

   —      —       —      —       1,686    43.8  

(1) Includes Celcaribe (as from February 2003).
(2) Includes BSE (as from February 2003) and BCP (as from December 2003).

 

The comparability of our results during the periods discussed below is particularly affected by our 2003 acquisitions. As a result of the acquisitions, we obtained 4.2 million new wireless subscribers during 2003, representing approximately 35% of our subscriber growth during 2003. The most significant of the 2003 acquisitions were consummated during the last quarter of 2003. As a result, our 2003 financial statements only include the results of these acquired companies for a limited number of months, whereas our 2004 financial statements include them for the full year.

 

Geographic Segments

 

We have operations in eleven countries, which are grouped for financial reporting purposes in nine geographic segments. Segment information is presented in Note 21 to our audited consolidated financial statements included in this annual report. Mexico has traditionally been our principal geographic market, accounting for 52.6% of our total operating revenues in 2004 and 47.2% of our total wireless subscribers at December 31, 2004. The percentage of our total operating revenues represented by Mexico has decreased in recent periods (71.0% in 2002 and 61.0% in 2003) principally as a result of acquisitions outside Mexico. We expect Mexico to remain our principal geographic market in the near future but expect that our non-Mexican operations will continue to grow in importance. During 2004, we experienced faster subscriber growth from our non-Mexican operations than from our Mexican operations. We believe this reflects to a large extent the economic recovery in South America during recent years.

 

Brazil is our second most important market in terms of revenues and subscribers, accounting for 17.1 % of our total operating revenues in 2004 and 22.3% of our total wireless subscribers at December 31, 2004. We have made significant investments in Brazil in recent periods, through acquisitions and expansions of our networks, and the importance of our Brazilian operations has increased significantly with respect to our overall results. The table below sets forth the percentage of our revenues and total wireless subscribers represented by each of our operating segments for the periods indicated.

 

     2002

    2003

    2004

 
     %
Revenues 


    %
Subscribers(1)


    %
Revenues 


    %
Subscribers(1)


    %
Revenues 


    %
Subscribers(1)


 

Argentina

   —       —       1.0 %   3.2 %   4.1 %   5.9 %

Brazil

   5.6 %   16.4 %   13.3     21.7     17.1     22.3  

Guatemala(2)

   7.7     2.0     6.6     2.0     5.3     2.1  

Colombia

   6.4     8.9     6.7     8.4     6.9     9.5  

Ecuador

   2.2     2.9     3.2     3.5     3.2     3.8  

El Salvador

   —       —       0.9     0.5     3.5     0.8  

Mexico

   71.0     63.5     61.0     53.4     52.6     47.2  

United States

   7.1     6.3     7.3     6.7     6.6     7.2  

Other(3)

   —       —       —       0.7     0.7     1.1  

(1) As of December 31.

 

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(2) Includes Sercom Nicaragua.
(3) Includes Honduras, Nicaragua (ENITEL) and Uruguay.

 

Our subsidiaries report significantly different operating margins, with Mexico, Central America and Ecuador showing margins higher than or similar to our consolidated operating margin in 2004 and the remainder showing lower margins or, in the case of Argentina and Brazil, operating losses.

 

The factors that drive financial performance can differ for our operations in different countries, depending on the business model, competitive situation, regulatory environment, economic factors, capital expenditures requirements, debt profile and many other factors. Accordingly, our results of operations in each period reflect a combination of different effects in the different countries.

 

Effects of Economic Conditions and Exchange Rates

 

Our results of operations are affected by economic conditions in Mexico, Brazil and in the other countries in which we operate. In periods of slow economic growth, demand for telecommunications services tends to be adversely affected.

 

Our results of operations are also affected by changes in currency exchange rates. Changes in the value of the various operating currencies of our subsidiaries against the U.S. dollar may result in exchange losses or gains on our net U.S. dollar-denominated indebtedness and accounts payable. We recorded a foreign exchange gain of Ps. 2,444 million in 2004, principally as a result of the appreciation of the Brazilian real and the Colombian peso relative to the U.S. dollar. We also reported a foreign exchange gain in 2003 (Ps. 1,425 million), but reported a foreign exchange loss (Ps. 1,606 million) in 2002. Foreign exchange results have had and may continue to have an important effect on our net income.

 

In addition, currency fluctuations between the Mexican peso and the currencies of our non-Mexican subsidiaries affect our results of operations as reported in Mexican pesos. Our non-Mexican subsidiaries and affiliates accounted for approximately 47.4% of our 2004 operating revenues and 65% of our year-end 2004 assets, as compared to 39% and 65%, respectively, in 2003.

 

We record monetary gains or losses reflecting the effects of inflation on our net monetary assets or liabilities. During the past three years, our monetary liabilities have exceeded our monetary assets, and as a result, we have reported net gains from monetary position. Our levels of net monetary liabilities and inflation have been relatively stable during the last three years, and accordingly, our gains from monetary position have not fluctuated significantly from year to year. This may change, however, if inflation or our level of net monetary liabilities fluctuates significantly in the future.

 

Composition of Operating Revenues

 

Most of our operating revenues (82.2% in 2004) come from the sale of airtime and other services. Of our service revenues, the largest portion is from usage charges, which include airtime charges for outgoing calls and interconnection charges billed to other service providers for calls completed on our network. The primary driver of usage charges is traffic, which, in turn, is driven by the number of customers and by their average usage. Postpaid customers generally have an allotment of airtime each month for which they are not required to pay usage charges. Service revenues also include (1) monthly subscription charges paid by postpaid customers, (2) long-distance charges and (3) charges for other services, such as roaming, call forwarding, call waiting, call blocking and short text messaging.

 

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Revenues from sales of prepaid services are deferred and recognized as airtime is used or when it expires, and are included under usage charges. For postpaid service, monthly fees are billed in the month prior to service, and are deferred and recognized in the month that service is provided. Revenues from airtime used by postpaid subscribers above the amount covered by their monthly fees are recognized as airtime is used.

 

We also have sales revenues from selling handsets and other equipment. Most of our new subscribers purchase a handset, and although we also sell new handsets to existing customers, changes in sales revenues are driven primarily by the number of new customers. The pricing of handsets is not geared primarily to making a profit from handset sales, because it also takes account of the service revenues that are expected to result when the handset is used.

 

Seasonality of our Business

 

Our business has been subject to a certain degree of seasonality, characterized by a higher number of new clients during the fourth quarter of each year. We believe this is driven by the Christmas shopping season.

 

Consolidated Results of Operations

 

The discussion below includes the results of our transactions with affiliates, including Telmex. Affiliate transaction information is presented in Note 16 to our audited consolidated financial statements included in this annual report.

 

Operating Revenues

 

Operating revenues increased by 49.1% in 2004 and by 43.9% in 2003. The Ps. 44,345 million increase in revenues in 2004 reflects principally subscriber growth, as well as acquisitions. We experienced subscriber growth in all of our markets during 2004. The rate of subscriber growth in Mexico during 2004 (23.1%) was lower than that in the rest of our principal markets, reflecting higher overall penetration in the Mexican cellular market by Telcel and its competitors.

 

We made important acquisitions during the second half of 2003 (CTE, CTI and BCP). These companies were not consolidated until the latter part of 2003. If the companies acquired during 2003 had been consolidated for the full year 2003, we estimate that our revenue growth for 2004 would have been approximately 32%.

 

In 2004, and to a lesser extent in 2003, we lowered the effective price of our services in some of our markets. This contributed to our ability to attract new subscribers and to an increase in usage, but had an adverse impact on average revenues per subscriber in some of our markets. For example, in Mexico, average MOUs per subscriber increased by 22.2% in 2004, while ARPUs increased by only 4.3%.

 

Service revenues accounted for Ps, 33,016 million of the Ps. 44,345 million increase in operating revenues in 2004. This represents a 42.5% increase in service revenues between 2003 and 2004. We have seen an increase in revenues from data-services, such as SMS messaging, and other value-added services. Revenues from other services increased by 84% in 2004 to Ps. 11,611 million, and as a percentage of service revenues increased to 10.4% in 2004 from 8.1% in 2003.

 

The increase in operating revenues in 2004 includes a Ps. 11,330 million, or 89.2%, increase in equipment revenues reflecting subscriber growth and the migration of customers to GSM services. Subscribers need to purchase a new handset in order to migrate to GSM. Equipment revenues as a percentage of total revenues increased from 14.0% in 2003 to 17.8% in 2004.

 

In 2003, our operating revenues increased by Ps. 27,558 million, or 43.9% compared to 2002. This increase reflects organic growth in all of our geographic segments, the consolidation of the results of the five companies acquired during 2003, which accounted for approximately 15% of the increase, and the full-year consolidation of the results of Telecom Americas and Comcel, which also accounted for approximately 15% of the increase.

 

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Operating Costs and Expenses

 

Cost of services and equipment—Cost of services and equipment represented 48.5% of operating revenues in 2004, 43.6% of operating revenues in 2003 and 42.5% of operating revenues in 2002. Cost of services and equipment increased by 66.0% in 2004 and by 47.6% in 2003. This increase in 2004 reflects primarily increased subscriber acquisition costs, particularly equipment costs. Our organic subscriber growth greatly accelerated during 2004. This impacts our margins since we incur costs, such as equipment subsidies, activation commissions and marketing expenses, when we acquire new subscribers.

 

Cost of equipment was Ps. 39,007 million in 2004, and primarily represents the cost of handsets sold to subscribers. The 92.1% increase in equipment costs in 2004 slightly outpaced the 89.2% increase in equipment revenues for the same period. This reflects our practice of subsidizing the cost of equipment for new subscribers. Cost of equipment increased by 59.5% in 2003 as compared to 2002, and equipment revenues increased 67.7% for the same period. We have centralized our equipment purchases, which has helped us contain equipment unit costs in recent periods.

 

Cost of services increased by 37.5% in 2004, to Ps. 26,409 million. This increase in cost of services was slower than the growth in service revenues, which increased by 42.5% in 2004. These costs have increased more slowly than our service revenues because of increasing scale, cost control measures and higher usage of GSM services. Cost of services increased by 36.7% in 2003 as compared to 2002.

 

Commercial, administrative and general—Commercial, administrative and general expenses represented 20.2% of operating revenues in 2004, 19.3% of operating revenues in 2003 and 21.3% of operating revenues in 2002. On an absolute basis, commercial, administrative and general expenses increased by 55.7% in 2004 and 30.6% in 2003. Notwithstanding our cost control measures and increasing scale, these expenses outpaced revenue growth in 2004 due to increased subscriber acquisition costs, including commissions and marketing expenses.

 

Depreciation and amortization—Depreciation and amortization represented 13.8% of operating revenues in 2004 and 16.1% of operating revenues in 2003. Depreciation and amortization increased by 27.4% in 2004 and by 61.3% in 2003. Apart from the consolidation of our acquired companies in 2003, the increases in depreciation and amortization in 2004 and 2003 reflect the substantial investments made in our networks, particularly in connection with the launch of GSM services in Mexico, Brazil, Argentina, Colombia, Ecuador, Guatemala and elsewhere.

 

Under a recent change in Mexican GAAP, we will no longer amortize goodwill beginning in 2005. In 2004, the amortization of goodwill was Ps. 1,100 million.

 

Operating Income

 

Operating income increased by 24.4% in 2004 and 38.4% in 2003, reflecting principally the growth in our operating revenues. With the exception of Telecom Americas and CTI, all of our subsidiaries reported operating income in 2004. In 2003, all of our subsidiaries other than Telecom Americas reported operating income.

 

Operating margin (operating income as a percentage of operating revenues) was 17.4% in 2004, 20.9% in 2003 and 21.7% in 2002. The significant increases in our cost of equipment and our commercial, administrative and general expenses (as explained above) caused our operating margin to decrease in 2004. The decrease in our operating margin in 2003 resulted primarily from the significant increase in our depreciation and amortization expenses during that year.

 

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Comprehensive Financing (Income) Cost

 

Under Mexican GAAP, comprehensive financing cost reflects interest income, interest expense, foreign exchange gain or loss, gain or loss attributable to the effects of inflation on monetary assets and liabilities, and other financing costs.

 

We had comprehensive financing income of Ps. 1,908 million in 2004 and Ps. 2,234 million in 2003 and comprehensive financing cost of Ps. 1,076 million in 2002. The decrease in comprehensive financing income between 2004 and 2003 reflects increases in net interest and other financial expenses, which were partially offset by higher foreign exchange gains and gains from monetary position. The change between 2003 and 2002 reflects a combination of factors – principally, a foreign exchange gain in 2003 as opposed to a foreign exchange loss in 2002 and a decline in other financing costs.

 

For 2004 and 2003, changes in the components of comprehensive financing cost were as follows:

 

    In 2004 and 2003, we had interest income of Ps. 2,316 million and Ps. 2,506 million, respectively.

 

    In 2004 and 2003, we had interest expense of Ps. 4,594 million and Ps. 3,971 million, respectively. The increase was primarily a result of a higher percentage of our total average debt represented by longer-term debt, fixed rate debt and non-U.S. dollar-denominated variable rate debt in 2004 as compared to 2003.

 

    We had a foreign exchange gain of Ps. 2,444 million in 2004, as compared to a gain of Ps. 1,425 million in 2003. The foreign exchange gain in 2004 was primarily due to the appreciation of the Brazilian real and the Colombian peso relative to the U.S. dollar, whereas the gain in 2003 was principally attributable to the appreciation of the Brazilian real relative to the U.S. dollar. During both 2004 and 2003, the Mexican peso depreciated against the U.S. dollar, albeit at a higher rate in 2003 than in 2004. Our foreign exchange results are determined on the basis of the exchange exposures faced by our different operating currencies against the U.S. dollar, and not just on the basis of changes between the Mexican peso and the U.S. dollar. During 2002, we reported a foreign exchange loss of Ps. 1,606 million mainly as a result of the depreciation of the Mexican peso and the Brazilian real relative to the U.S. dollar.

 

    Since 2002, our average monetary liabilities have exceeded our average monetary assets, resulting in net gains from monetary position. The increase in net gain from monetary position of Ps. 479 million to Ps. 2,952 million during 2004 resulted primarily from an increase in our average level of net monetary liabilities.

 

    We reported a net other financing cost of Ps. 1,210 million in 2004 and of Ps. 199 million in 2003. Net other financing costs include commissions, fair-value gains and losses on investments, and gains and losses on the sale of investments. Our net financing costs in 2004 are principally attributable to a combination of factors, including commissions paid in connection with our offerings of senior notes and fair value losses.

 

Income Tax and Employee Profit-Sharing

 

The statutory rate of Mexican corporate income tax was 33% in 2004, 34% in 2003 and 35% in 2002. Our effective rates of provisions for corporate income tax as a percentage of pretax income were 31.4%, 17.2% and 26.3% for 2004, 2003 and 2002, respectively. The increase in our effective tax rate in 2004 reflects principally an increase in deferred taxes relating mainly to our operations in Mexico. These deferred taxes recognized in Mexico were recorded principally in connection with losses or expenses arising from the sale and leaseback of telephone plant in December 2004, licensing payments made in respect of our trademarks and an increase in inventories. In 2003 and 2002, our effective tax rate was

 

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below the corporate income tax rate primarily because our non-Mexican operators reported improved results, and some of them enjoyed benefits from net loss carryforwards. The Mexican corporate income tax rate is scheduled to decrease to 30% in 2005, 29% in 2006 and 28% in 2007.

 

Telcel, like other Mexican companies, is required by law to pay to its employees, in addition to their agreed compensation and benefits, profit sharing in an aggregate amount equal to 10% of Telcel’s taxable income. The amount payable increased by 107% to Ps. 540 million in 2004 and increased by 22.6% in 2003.

 

Equity in Results of Affiliates

 

Our proportionate share of the results of equity-method affiliates resulted in net losses of Ps. 93 million in 2004, Ps. 136 million in 2003 and Ps. 4,386 million in 2002. The net losses in 2004 reflect our share of the net losses reported by Televista. The net losses in 2003 reflect principally our share of net losses in CompUSA, which we reported under the equity method until the exchange of our interest in CompUSA for an interest in U.S. Commercial Corp. in December 2003. The net losses in 2002 resulted primarily from the impairment of goodwill recognized by CompUSA and the losses incurred by Telecom Americas before we began to consolidate it in July 2002.

 

Other Income (Loss), Net

 

In 2004, we recorded other net income of Ps. 89 million, compared to other net loss of Ps. 1,099 million in 2003. The loss in 2003 reflects primarily losses recorded in connection with the exchange of our interest in CompUSA for an interest in U.S. Commercial Corp., and cash. See “Related Party Transactions” under Item 7.

 

Net Income

 

We had net income of Ps. 16,513 million in 2004, Ps. 15,812 million in 2003, and Ps. 5,032 million in 2002. The increase in net income in 2004 principally reflects the increase in revenues, which offset the increase in operating expenses and income taxes. The increase in net income in 2003 reflected increased revenues and operating income, as well as improved comprehensive financing income and equity in results of affiliates.

 

Results of Operations by Geographic Segment

 

We discuss below the operating results of our subsidiaries that provide telecommunication services in our principal markets. All amounts discussed below are presented in accordance with Mexican GAAP. Note 2(g) to our audited consolidated financial statements included in this annual report describes how we translate the financial statements of our non-Mexican subsidiaries. We restate the financial statements of our foreign subsidiaries for inflationary effects using restatement factors of the relevant country and then convert foreign currency amounts into Mexican pesos, using, for items from the statement of operations, the exchange rate between the Mexican peso and the local currency at the end of the applicable year. Accordingly, changes in the rates of inflation in our markets and exchange rate changes between the Mexican peso and those currencies could significantly affect reported results in Mexican pesos and the comparability of reported results with those of prior years. Financial statements for 2002 and 2003 are restated at constant pesos as of December 31, 2004 based on the annual rate of inflation in Mexico. The data reported for the year ended December 31, 2003 was restated in constant pesos as of December 31, 2004 by applying a factor of 1.0519.

 

The following table sets forth the exchange rate used to translate the results of our significant non-Mexican operations, as expressed in Mexican pesos per foreign currency unit, and the change from the rate used in the prior year.

 

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     Mexican pesos per foreign currency unit

 
     2002

   2003

   % Change

    2004

   % Change

 

Guatemalan quetzal

   1.3498    1.3975    3.5 %   1.4525    3.9 %

U.S. dollar(1)

   10.3125    11.2360    9.0     11.2648    0.3  

Brazilian real

   2.9161    3.8890    33.4     4.2438    9.1  

Colombian peso

   0.0035    0.0040    14.3     0.0047    17.5  

Argentine peso

   —      3.8300    —       3.7814    (1.3 )

El Salvador colones

   —      1.2841    —       1.2874    0.3  

(1) The U.S. dollar is the sole monetary instrument and unit of account and the main currency for transaction purposes in Ecuador.

 

Note 21 to our audited consolidated financial statements includes certain financial information of our operations by country. Except as discussed below, the following discussion is based on the segment data included in that note.

 

Mexico

 

Telcel’s operating revenues increased by 28.3% in 2004 and by 23.7% in 2003, benefiting from subscriber growth and increases in average MOUs per subscriber and, to a lesser extent, ARPUs during both periods. We experienced an acceleration in subscriber growth in 2004 after declining rates of subscriber growth in previous years. In 2004, the number of Telcel subscribers increased by 23.1% to approximately 28.9 million, compared to an increase of approximately 16.8% to approximately 23.4 million in 2003. We do not expect this acceleration to continue in the future as penetration rates increase in Mexico.

 

We experienced increases in average MOUs per subscriber of approximately 22.2% in 2004 and approximately 20.9% in 2003, and increases in ARPUs of approximately 4.3% in 2004 and approximately 6.9% in 2003. During 2003 and 2004, we lowered the effective price of some of our services in Mexico, which contributed to the increase in subscribers and MOUs but had a negative impact on ARPUs. Telcel’s churn rate dropped during 2004, from approximately 3.9% in 2003 to 3.0% in 2004.

 

Operating income increased by 37.2% in 2004 and by 44.0% in 2003. Our operating margin was 36.1% in 2004 and 33.7% in 2003. The increase in operating margin in 2004 reflects a combination of factors, including greater efficiency resulting from increasing scale. During 2004, we won a judicial claim challenging the application of a 10% gross revenue tax on certain of our services, and as a result, reversed the charges that we had accrued in 2003 in respect of this tax. We estimate that the reversal accounted for approximately one third of the increase in operating margins during 2004. GSM traffic is an increasing component of our total traffic in Mexico, and GSM traffic is not subject to the royalties (aprovechamientos) payable in respect of services under our 800 megahertz (Band B) concessions.

 

Reductions in interconnection fees for calls between fixed and mobile phones became effective in Mexico as of January 2005. The reduction is of 10% in 2005, increasing to 19% in 2006 and 27.1% in 2007, in each case as compared to 2004 rates. Telcel has typically received more revenue from such fees than it has had to pay to fixed line operators for interconnection services. We do not expect, however, that this reduction will have a material adverse impact on our or Telcel’s results of operations, in part because we expect that the planned fee reduction should result in higher usage.

 

Brazil

 

Telecom Americas’ operating revenues from continuing operations increased by 91.7% in 2004 and by 55.3% in 2003. To calculate the increase in 2003, we have used the full-year results for Telecom Americas for 2002, even though we did not begin consolidating the results of Telecom Americas until July 2002 (except for our equity in the net results of Telecom Americas). In addition, the 2003 results include BSE from May 2003 and BCP from December 2003. If we had consolidated BCP and BSE for the full year 2003, our operating revenues in 2004 would have increased by 29.3%. Approximately 50% of the increase in 2003 operating revenues resulted from the consolidation of BSE and BCP.

 

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Apart from acquisitions, the increases in operating revenues in 2004 and 2003 were attributable primarily to subscriber growth. In addition, the relative appreciation of the Brazilian real against the Mexican peso in 2004 compared to 2003 contributed to the increase in operating revenues in 2004, accounting for approximately 10% of the increase. In 2004, the number of Telecom Americas subscribers increased by 4.1 million subscribers, to approximately 13.7 million subscribers. In 2003, the number of Telecom Americas subscribers increased by 4.3 million subscribers, to approximately 9.5 million subscribers. Of the increase in subscribers in 2003, approximately 1.6 million resulted from organic growth and approximately 2.7 million from the acquisition of BCP and BSE. Average monthly MOUs per subscriber increased by 7.7% in 2004 (reversing a slight decline in 2003), while ARPUs declined by 16.8% in 2004 and we experienced an increase in our churn rate, from 2.3% in 2003 to 2.7% in 2004. The decline in ARPUs during 2004 was primarily attributable to subscriber growth, a change in the accounting for interconnection fees and lower revenues per subscriber from long-distance services. New subscribers generally generate lower average revenues than existing subscribers as a result of traffic subsidies and lower usage. As from July 2003, as a result of new regulations in Brazil, we started recognizing interconnection revenues on a net basis (after deducting interconnection fees paid to other carriers), whereas before such date, interconnection revenues were recognized on a gross basis. Also beginning in July 2003, customers in Brazil have been able to select their long-distance provider, which bills them directly for the service.

 

Telecom Americas reported an operating loss of Ps. 6,580 million in 2004, as compared to a Ps. 2,245 million operating loss in 2003. The increased operating loss in 2004 reflects higher subscriber acquisition costs. High subscriber acquisition costs resulting from rapid subscriber growth and competition continue to adversely impact our margins in Brazil.

 

Argentina

 

We began consolidating the results of CTI in November 2003, such that our audited consolidated financial statements do not reflect revenues or operating income from Argentina prior to that date. To measure the operating performance of CTI, we compare its operating revenues and operating income for continuing operations using its full-year 2003 results. On that basis, CTI’s operating revenues from continuing operations increased by 96.2% in 2004. The increase in 2004 was attributable primarily to subscriber growth. In 2004, the number of CTI subscribers increased by 2.2 million subscribers, to approximately 3.6 million subscribers. Average monthly MOUs per subscriber increased by 13.2% in 2004 compared to 2003, while ARPUs declined by 11.5% during the same period, and we experienced an increase in our churn rate, from 1.5% in 2003 to 2.0% in 2004. The decline in ARPUs in 2004 principally reflects subscriber growth. New subscribers generally generate lower average revenues than existing subscribers as a result of traffic subsidies and lower usage.

 

CTI reported an operating loss of Ps. 403 million in 2004, as compared to operating income in 2003 of Ps. 712 million. The operating loss in 2004 resulted principally from higher subscriber acquisition costs.

 

Central America—Guatemala (Telgua) and Sercom Nicaragua

 

Operating revenues for Telgua and Sercom Nicaragua increased by 20.3% in 2004 and by 22.5% in 2003. In 2004, the number of wireless subscribers for Telgua and Sercom Nicaragua increased by 57.3%, to approximately 1.5 million, and the number of fixed line subscribers increased to approximately 933 thousand from 930 thousand as of December 31, 2003. In 2003, the number of wireless subscribers for Telgua and Sercom Nicaragua increased by 54.4%, to approximately 970 thousand and the number of fixed-line subscribers increased by 15.7%, to approximately 930 thousand. For the year ended December 31, 2004, wireless services accounted for approximately 43.3% of our operating revenues for Telgua and Sercom Nicaragua, and fixed-line and other services for approximately 56.7%.

 

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Operating income for Telgua and Sercom Nicaragua increased by 31.2% in 2004 and by 36.5% in 2003. The region’s operating margin was 32.9% in 2004 and 30.1% in 2003. The increase in operating margin is attributable principally to the fixed line business.

 

Central America—El Salvador

 

We began consolidating the results of CTE in November 2003, such that our audited consolidated financial statements do not reflect revenues or operating income from El Salvador prior to that date. To measure the operating performance of CTE, we compare its operating revenues and operating income for continuing operations using its full-year 2003 results. On that basis, CTE’s operating revenues from continuing operations increased by 5.8% in 2004. The increase in 2004 was attributable primarily to subscriber growth. In 2004, the number of CTE wireless subscribers increased by 302 thousand subscribers, to approximately 518 thousand subscribers, and the number of fixed-line subscribers increased by 77 thousand subscribers, to approximately 781 thousand subscribers. For the year ended December 31, 2004, wireless services accounted for approximately 17.4% of CTE’s operating revenues, and fixed-line and other services for approximately 82.6%.

 

CTE reported an operating income of Ps. 1,610 million in 2004, a 34.4% increase compared to operating income of Ps. 1,198 million in 2003. CTE’s operating margin was 34.1% in 2004. CTE’s operating margin in 2004 remained relatively stable as compared to 2003.

 

Colombia

 

Comcel’s operating revenues from continuing operations increased by 53.9% in 2004 and by 54.4% in 2003. The relative appreciation of the Colombian peso compared to the Mexican peso in 2004 compared to 2003 contributed to the increase in operating revenues in 2004, accounting for approximately 33% of the increase. To calculate the increase in 2003, we have used the full-year results for Comcel for 2002, even though we didn’t begin consolidating the results of Comcel until February 2002.

 

Apart from exchange effects, the increase in operating revenues from continuing operations in 2004 and 2003 was attributable principally to subscriber growth and increased traffic. In 2004, the number of Comcel subscribers increased by 58.2% to approximately 5.8 million, and total traffic increased by 79%. In 2003, the number of Comcel subscribers increased by 30.2%, to approximately 3.7 million, and total traffic increased by 54.6%. The consolidation of Celcaribe accounted for approximately 25% of Comcel’s subscriber growth in 2003. Comcel’s operating revenue in 2004 benefited from an increase in average MOUs per subscriber of approximately 39.0% after remaining relatively flat in 2003. ARPUs (in local currency) decreased slightly in 2004 compared to 2003, and we experienced a decrease in our churn rate, from 3.1% in 2003 to 2.9% in 2004. The decline in ARPUs in 2004 principally reflects subscriber growth. New subscribers generally generate lower average revenues than existing subscribers as a result of traffic subsidies and lower usage.

 

Comcel’s operating income decreased by 1.8% in 2004. Comcel’s operating income was Ps. 612 million in 2004, Ps. 623 million in 2003, and Ps. 267 million in 2002. Comcel’s operating margin was 6.6% in 2004 and 10.3% in 2003. The decrease in operating income during 2004 resulted from an increase in subscriber acquisition costs resulting from faster subscriber growth.

 

Ecuador

 

Conecel’s operating revenues increased by 50.0% in 2004 and by 108.9% in 2003. The increase in 2004 was attributable principally to increases in subscriber growth and traffic. Equipment revenues were the fastest growing part of revenues. In 2004, the number of Conecel subscribers increased by 51.3%, to approximately 2.3 million, and there was an increase in total traffic of 43%. In 2003, the

 

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number of Conecel subscribers increased by 66.5%, to approximately 1.5 million, and there was an increase in total traffic of 35.0%. Both ARPUs and MOUs per subscriber decreased during 2004, by approximately 14.7% (10% in local currency) and 7%, respectively. Our churn rate increased from 3.4% in 2003 to 3.7% in 2004. The decline in ARPUs reflects a combination of factors, including the recognition in 2003 of interconnection fees in respect of prior years as a result of an agreement with certain operators, a decrease in interconnection revenues per subscriber resulting from lower interconnection rates and subscriber growth, as well as exchange rate differences. The negotiation of interconnection fees with certain operators is ongoing, and some operators are seeking to reduce fees even further from current levels.

 

Conecel’s operating income was Ps. 885 million in 2004 and Ps. 577 million in 2003, as compared to an operating loss of Ps. 116 million in 2002. Our operating margin was 20.6% in 2004 and 20.2% in 2003.

 

United States

 

Tracfone’s operating revenues increased by 36.3% in 2004 and by 47.3% in 2003. The increase in operating revenues in 2004 was attributable principally to subscriber growth and an increase in total traffic. In 2004, the number of TracFone subscribers increased by 48.9%, to approximately 4.4 million, and total traffic increased by 62.7%. In 2003, the number of TracFone subscribers increased by 50%, to approximately 3.0 million, and total traffic increased by 60.4%. Although average MOUs per subscriber increased in 2004 as compared to 2003, ARPUs declined by approximately 8.8% in 2004 (5% in local currency) compared to 2003. The churn rate increased from 4.0% in 2003 to 4.2% in 2004. This decline in ARPUs in 2004 principally reflected the increasing portion of Tracfone’s traffic that is comprised of digital traffic, which generates lower revenues per minute than analog traffic.

 

Tracfone’s operating income was Ps. 318 million in 2004 and Ps. 210 million in 2003, as compared to an operating loss of Ps. 270 million in 2002. Tracfone’s operating margin increased from 3.2% in 2003 to 3.5% in 2004. The improved operating margin principally reflected the increasing portion of Tracfone’s traffic that is comprised of digital traffic, which is more profitable than analog traffic.

 

Liquidity and Capital Resources

 

Capital Requirements

 

Our capital requirements are primarily for the following purposes:

 

    We must make substantial capital expenditures to continue expanding and improving our networks in each country in which we operate. In 2004 and 2003, we invested approximately Ps. 22.4 billion and Ps. 14.3 billion in plant, property and equipment. We have budgeted capital expenditures for 2005 to be approximately U.S.$2.4 billion (Ps. 27.0 billion). See “Capital Expenditures” under Item 4.

 

    We pay dividends, and we also repurchase our own shares from time to time. We paid Ps. 1,572 million in dividends in 2004 and Ps. 835 million in 2003, and we are paying dividends quarterly in 2005. We also spent (including commissions and value-added taxes) Ps. 12,428 million repurchasing our own shares in the open market in 2004 and Ps. 1,026 million in 2003. Our shareholders have authorized additional repurchases, and whether we do so will depend on considerations including market price and our other capital requirements. We have made additional repurchases in 2005. In a shareholders’ meeting held in April 2005, our shareholders resolved to declare a dividend of Ps. 0.21 per share (a significant increase over the Ps. 0.12 dividend per share declared in 2004) and authorized a Ps. 5,000 million increase in our reserve for the repurchase of additional shares, thereby increasing our reserve to Ps. 30,000 million.

 

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    During 2004 and 2003, we spent approximately Ps. 6.1 billion and Ps. 19.1 billion, respectively, in order to acquire new companies and licenses and increase our interest in some of our subsidiaries.

 

    We must repay indebtedness at maturity, and we may elect to repay debt before maturity. As explained below, during 2004 we refinanced a significant portion of our indebtedness. During 2004, we used Ps. 35,405 million to repay debt, as compared to Ps. 20,995 million in 2003.

 

The following table summarizes certain contractual liabilities as of December 31, 2004. Our purchase obligations and approximately 65% of our debt described below are denominated in U.S. dollars. The table does not include accounts payable or pension liabilities:

 

     Payments Due by Period

     Total

   Less than 1
year


   1-3 years

   4-5 years

   After 5 years

     (millions of constant pesos as of December 31, 2004)

Contractual obligations as of December 31, 2004:

                                  

Equipment leases

   Ps. 4,906    Ps. 861    Ps. 1,386    Ps. 2,659    Ps. —  

Real estate leases

     15,185      1,837      6,464      2,753      4,131

Long-term debt

     59,029      2,961      25,828      14,851      15,389

Short-term debt

     2,431      2,431      —        —        —  

Purchase obligations(1)

     5,771      4,814      957      —        —  
    

  

  

  

  

Total

     Ps.87,322      Ps. 12,904      Ps. 34,635      Ps. 20,263      Ps. 19,520
    

  

  

  

  


(1) See discussion below.

 

We have entered into agreements to purchase equipment for the expansion of our GSM networks. Total amounts payable under those contracts that are not reflected in our accounts payable or paid are approximately U.S.$512 million (Ps. 5,771 million). We recognize a liability in our financial statements under these agreements when we have tested and accepted the equipment. Our payment obligations under these agreements are contingent on the suppliers’ compliance with their terms. América Móvil guarantees amounts payable by our subsidiaries under these agreements. Other than the amounts described in the table above, we had no other outstanding material purchase commitments as of December 31, 2004. We enter into a number of supply, advertising and other contracts in the ordinary course of business, but we do not believe that any of those contracts are material to our liquidity.

 

Under many of our concessions and licenses, we are required to make annual royalty payments in order to continue using such concessions and licenses. These payments are typically calculated as a percentage of gross revenues generated under such concessions and licenses. In the case of the 1900 megahertz spectrum (Band F) concessions acquired in Mexico during 2005, however, we are required to pay Ps. 255 million annually for 20 years.

 

We could have opportunities in the future to invest in other telecommunications companies outside Mexico, especially in Latin America, because we believe the telecommunications sector in Latin America will continue to undergo consolidation. We can give no assurance as to the extent, timing or cost of such investments. Some of the assets that we acquire may require significant funding for capital expenditures.

 

Capital Resources

 

We generate substantial resources from our operations. On a consolidated basis, operating activities provided Ps. 37,836 million in 2004 and Ps. 30,545 million in 2003. We were able to satisfy our capital requirements during 2003 and 2004 without significantly increasing our net debt (total debt minus cash and cash equivalents) by relying principally on resources generated from operations to fund our capital expenditures.

 

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In addition to funds generated from operations, we have used new borrowings to fund acquisitions and investments and refinance debt. We have traditionally relied on a combination of equipment financings, borrowings from international banks and borrowings in the Mexican capital market. In 2004, as further discussed below, we accessed for the first time the international dollar debt markets, with offerings totaling U.S.$2.1 billion, and in December 2004, we established a shelf registration for up to U.S.$2.0 billion of debt securities with the U.S. Securities and Exchange Commission, which we first used in February 2005.

 

If we seek to raise funds by issuing capital stock, our bylaws require that we issue capital stock of each class in the same proportion. This would limit our ability to issue more L Shares, which are the most liquid class of our capital stock, unless we issue more AA Shares, which are an unlisted class of voting shares currently held only by América Telecom and SBCI.

 

Outstanding Indebtedness

 

At December 31, 2004, we had total consolidated indebtedness of Ps. 61,460 million, as compared to Ps. 51,872 million at December 31, 2003. Cash and cash equivalents amounted to Ps. 16,518 million at December 31, 2004 and Ps. 9,769 million at December 31, 2003. Approximately 72% of our indebtedness at December 31, 2004 was denominated in currencies other than Mexican pesos (approximately 65% in U.S. dollars and 7% in other currencies, principally in Brazilian reais and Colombian pesos), and approximately 57.3% of our consolidated debt obligations bore interest at floating rates.

 

During 2004, taking advantage of a favorable interest rate environment, we refinanced a significant portion of our indebtedness (including a significant portion of our dollar-denominated bank financings) with the proceeds from the offerings of four different tranches of U.S. dollar denominated senior notes in the international capital markets. The total principal amount of these offerings was U.S.$2.1 billion, and approximately 86% of these notes bear interest at fixed rates. As a result, we were able to extend the average life of our indebtedness at attractive rates. Our ability to access the international debt capital markets on these terms has been largely a function of the credit ratings given to our debt. As of the date of this annual report, our dollar-denominated senior notes are rated BBB by Standard and Poor’s Rating Group and A3 by Moody’s Investors Service, which ratings are generally considered to connote “investment grade” debt with moderate to low credit risk. Adverse economic conditions or changing circumstances may, however, cause our ratings to be downgraded. There are only a few Mexican companies with an investment grade rating, and the ability of those companies, including us, to maintain an investment grade rating is in large part contingent on Mexico maintaining its investment grade rating which it attained in 2000. We believe that the new maturity profile of our indebtedness is compatible with our cash flow generation, and that as a result, we have significantly mitigated our exposure to refinancing risks. Our assessment may change in the future as a result of, among other things, changed economic, market or monetary conditions or new transactions. The weighted average cost of all our third-party debt at December 31, 2004 (excluding commissions and reimbursement of certain lenders for Mexican taxes withheld) was approximately 7.05%, as compared to 5.19% at December 31, 2003. This increase reflects that a higher percentage of our debt at December 31, 2004 as compared to December 31, 2003 was represented by longer-term debt, fixed rate debt and non-U.S. dollar denominated variable rate debt, as well as increases in short-term interest rates during 2004.

 

Our major categories of indebtedness at December 31, 2004 are as follows:

 

    U.S. dollar-denominated senior notes. At December 31, 2004, we had approximately U.S.$2.1 billion (Ps. 23,577 million) outstanding under several series of U.S. dollar-denominated senior notes issued in the international capital markets during 2004:

 

    U.S.$498 million (Ps. 5,610 million) senior notes due 2009, bearing interest at a fixed rate of 4.125%;

 

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    U.S.$795 million (Ps. 8,956 million) senior notes due 2014, bearing interest at a fixed rate of 5.500%;

 

    U.S.$500 million (Ps. 5,632 million) senior notes due 2015, bearing interest at a fixed rate of 5.750%; and

 

    U.S.$300 million (Ps. 3,379 million) senior notes due 2007, bearing interest at a floating rate of LIBOR plus 0.625%.

 

The senior notes are all guaranteed by Telcel and limit our ability to incur secured debt and prohibit us from selling control of Telcel.

 

    Mexican peso-denominated notes. At December 31, 2004, we had Ps. 13.0 billion in senior notes that had been sold in the Mexican capital markets. These senior notes were issued by us with a guarantee from Telcel, between 2002 and 2004, and have varying maturities, ranging from 2005 through 2010. Some bear interest at fixed rates, and others at variable rates based on Cetes (a rate based on the cost of Mexican treasuries) or TIIE (a Mexican interbank rate).

 

    Equipment financing facilities with support from export development agencies. We have a number of equipment financing facilities, under which export development agencies provide support for financing to purchase exports from their respective countries. These facilities are generally medium- to long-term, with periodic amortization and interest at a spread over LIBOR. They are extended to us or to operating subsidiaries, usually with guarantees from one or more of América Móvil or Telcel. The aggregate amount outstanding under equipment financing facilities at December 31, 2004 was U.S.$653 million (Ps. 7,358 million). We have repaid substantially all of this debt during 2005.

 

    Bank loans. At December 31, 2004, we had approximately U.S.$795 million (Ps. 8,958 million) outstanding under a number of dollar-denominated bank facilities bearing interest at LIBOR plus a spread. We have repaid substantially all of this debt during 2005.

 

    Sale and leasebacks. During 2003 and 2004, Telcel entered into sale and leaseback transactions with respect to a portion of its telephone plant. At December 31, 2004, lease payment obligations under these contracts amounted to Ps. 4,484 million. Payments are due on a monthly basis through 2008 and bear interest at a variable rate based on TIIE plus a spread. In addition, in December 2004, Conecel entered into a sale and leaseback transaction with respect to a portion of its telephone plant. At December 31, 2004, lease payment obligations under the contract amounted to U.S.$35.6 million (Ps. 401.0 million). Payments are due on a monthly basis through 2008 and bear interest at a fixed rate.

 

    Colombian peso-denominated notes. In 2003 and 2004, Comcel issued Colombian peso-denominated notes in the Colombian capital markets in three different series. At December 31, 2004, the aggregate principal amount outstanding was Ps. 2,121 million. These notes bear interest at a variable rate based on the IPC (the Colombian consumer price index rate) plus a spread, and mature in 2010 and 2013. These notes are guaranteed by América Móvil.

 

    BNDES. ATL, Tess and Americel have outstanding syndicated loans provided with resources of the Banco Nacional de Desenvolvimento Econômico e Social, or “BNDES”, the Brazilian federal development bank. These loans are principally denominated in reais, with a portion indexed to U.S. dollars. At December 31, 2004, the aggregate principal amount of these loans was approximately R$250 million plus the equivalent in reais of approximately U.S.$10 million in foreign currencies. We have repaid all of this debt during 2005.

 

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At December 31, 2004, Telcel had, on an unconsolidated basis, unsecured and unsubordinated obligations under indebtedness and guarantees of parent company and subsidiary indebtedness of approximately Ps. 54,646 million (U.S.$4,851 million), excluding subordinated debt owed to us or our other subsidiaries. At such date, Sercotel, our wholly-owned subsidiary that holds directly or indirectly the shares of all our operating subsidiaries, had, on an unconsolidated basis, unsecured and unsubordinated obligations under indebtedness and guarantees of parent company and subsidiary indebtedness of approximately Ps. 10,217 million (U.S.$907 million). In addition, at December 31, 2004, our operating subsidiaries other than Telcel had indebtedness of Ps. 6,815 million (U.S.$605 million).

 

On February 25, 2005, we issued U.S.$1,000 million in principal amount of 6 3/8% senior notes due 2035. These notes are guaranteed by Telcel and have terms as to covenants similar to those of our other U.S. dollar-denominated senior notes. We used the net proceeds from this offering to repay indebtedness.

 

Risk Management

 

We regularly assess our interest rate and currency exchange exposures in order to determine how to manage the risk associated with these exposures. We use derivative instruments to hedge or adjust our exposures. We have also used derivative instruments from time to time to seek to reduce our costs of financing. Our practices vary from time to time depending on our judgment of the level of risk, expectations as to exchange or interest rate movements and the costs of using derivative instruments. We may stop using derivative instruments or modify our practices at any time. As of December 31, 2004, after taking into account derivative transactions, approximately 52.1% of our total debt was effectively denominated in U.S. dollars and approximately 35.2% was effectively subject to floating rates.

 

As of December 31, 2004, we had entered into U.S. dollar-Mexican peso cross currency swaps in respect of U.S.$650 million of our total U.S. dollar-denominated debt. Under these swaps, we have effectively replaced our obligation to make payment in U.S. dollars with an obligation to make payment in Mexican pesos.

 

As of December 31, 2004, we had entered into Mexican peso-U.S. dollar cross currency swaps in respect of Ps.$1,000 million of our total Mexican peso-denominated debt. Under these swaps we have effectively replaced our obligation to make payment in Mexican pesos with an obligation to make payment in U.S. dollars.

 

A substantial portion of our peso-denominated indebtedness bears interest at floating rates. We have entered into interest rate coverage transactions to reduce our exposure to changes in Mexican interest rates. Specifically, we have entered into interest rate swaps in which we pay interest at a fixed rate and receive interest on a floating rate, on a notional amount in Mexican pesos. As of December 31, 2004, the aggregate notional amount of domestic interest rate swaps was Ps. 5,000 million.

 

We have also covered part of our exposure to U.S. dollar debt that bears interest at floating rates. The aggregate notional amount of U.S. dollar interest rate swaps as of December 31, 2004 was approximately U.S.$489 million. The general effect of these swaps is to replace an obligation to pay floating-rate interest on our debt with an obligation to pay fixed-rate interest.

 

We have also entered into interest rate swaps with respect to some of our Mexican peso indebtedness that modify the periodicity of interest payments under this indebtedness. As of December 31, 2004, the aggregate notional amount of interest rate swaps with respect to such indebtedness was Ps. 1,000 million.

 

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All of our derivative instruments described served as hedges to specific liabilities, and were valued using the same criteria applied to the hedged liability. The net effect of such instruments was recorded as part of interest expense or foreign exchange, depending on the hedged liability.

 

In addition, as of December 31, 2004, we had U.S. dollar-Mexican peso cross currency and interest rate swaps with an aggregate notional amount of U.S.$350.9 million that were not at the time hedging any underlying liability. We had originally entered into these instruments to hedge underlying risks arising from debt, but during 2004 we repaid the underlying debt as part of the refinancings described above under “Outstanding Indebtedness” and decided to maintain the derivative instruments. We record any fair value gains or losses from these instruments on our income statement, under the caption “other financing cost, net.”

 

The aggregate effect of all of our derivative instruments during 2004 was a gain of Ps.125.1 million reflected as part of our comprehensive financing income, as compared to a gain of Ps.79.8 million in 2003.

 

Off-Balance Sheet Arrangements

 

We have an obligation to purchase additional shares of our subsidiary Telecom Americas from its minority shareholder. The minority shareholder has the right to sell its shares to us beginning in 2006 for U.S.$150 million plus interest.

 

Except for the obligation described above, as of December 31, 2004, we had no off-balance sheet arrangements that require disclosure under applicable SEC regulations.

 

U.S. GAAP Reconciliation

 

We had net income under U.S. GAAP of Ps. 16,663 million in 2004, Ps. 15,672 million in 2003, and Ps. 6,351 million in 2002. Compared to Mexican GAAP, net income under U.S. GAAP was 0.90% higher in 2004 and 0.88% lower in 2003.

 

There are several differences between Mexican GAAP and U.S. GAAP that significantly affect our net income and stockholders’ equity. The most significant differences in their effect on 2004 net income related to the reversal of the amortization of goodwill reported under Mexican GAAP and the recording of deferred employee profit sharing. In 2002, for U.S. GAAP purposes, we adopted Statement of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. As a result, for U.S. GAAP purposes we no longer amortize goodwill and other intangible assets with indefinite useful lives. Under Mexican GAAP, we only record deferred employee profit sharing in respect of certain temporary differences in assets and liabilities between fiscal and financial reporting, whereas under U.S. GAAP we record deferred employee profit sharing on all such differences. In 2004, we recorded a significant loss for fiscal purposes, but not for financial reporting purposes, in respect of certain sale and leaseback transactions. Other differences that had a significant effect on 2004 net income relate to capitalized interest on assets under construction, net gains (losses) on sales to affiliates, the presentation of minority interests, the adoption of EITF 00-21 (relating to revenue arrangements with multiple deliverables), the effect of inflation accounting on U.S. GAAP adjustments and how the carrying value of plant, property and equipment is restated to reflect effects of inflation. The differences in stockholders’ equity under Mexican GAAP and U.S. GAAP reflect principally these same matters, as well as the recording of deferred income taxes. For a discussion of the principal differences between Mexican GAAP and U.S. GAAP, see Note 22 to our audited consolidated financial statements.

 

Use of Estimates in Certain Accounting Policies

 

In preparing our financial statements, we make estimates concerning a variety of matters. Some of these matters are highly uncertain, and our estimates involve judgments we make based on the information available to us. In the discussion below, we have identified several of these matters for

 

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which our financial presentation would be materially affected if either (1) we used different estimates that we could reasonably have used or (2) in the future we change our estimates in response to changes that are reasonably likely to occur.

 

The discussion addresses only those estimates that we consider most important based on the degree of uncertainty and the likelihood of a material impact if we used a different estimate. There are many other areas in which we use estimates about uncertain matters, but the reasonably likely effect of changed or different estimates is not material to our financial presentation.

 

Purchase accounting – purchase price allocation

 

During 2004, 2003 and 2002, we made a number of acquisitions applying the purchase method of accounting. Accounting for the acquisition of a business under the purchase method requires the allocation of the purchase price to the various assets and liabilities of the acquired business. For most assets and liabilities, purchase price allocation is accomplished by recording the asset or liability at its estimated fair value. The most difficult estimations of individual fair values are those involving properties, plants and equipment and identifiable intangible assets, such as our licenses and trademarks. We use all available information to make these fair value determinations, including the retention of independent experts to determine the fair value of trademarks and an examination of the market value of licenses with similar characteristics to determine the fair value of licenses.

 

Estimated useful lives of plant, property and equipment

 

We estimate the useful lives of particular classes of plant, property and equipment in order to determine the amount of depreciation expense to be recorded in each period. Depreciation expense is a significant element of our costs and expenses, amounting in 2004 to Ps. 12,257 million, or 11.0% of our operating costs and expenses. See Note 7 to our audited consolidated financial statements.

 

The estimates are based on our historical experience with similar assets, anticipated technological changes and other factors, taking into account the practices of other telecommunications companies. We review estimated useful lives each year to determine whether they should be changed, and at times, we have changed them for particular classes of assets. We may shorten the estimated useful life of an asset class in response to technological changes, changes in the market or other developments. This results in increased depreciation expense, and in some cases, it can result in our recognizing an impairment charge to reflect a write-down in value.

 

Impairment

 

We carry substantial balances on our balance sheet for long-lived assets, including plant, property and equipment, licenses and trademarks and goodwill. These balances are based on historical costs net of accumulated depreciation and amortization and are restated for inflation. We are required to evaluate each year whether these assets are impaired, that is, whether their future capacity to generate cash does not justify maintaining them at their carrying values. If they are impaired, we are required to recognize a loss by writing off part of their value. Recoverability for assets identifiable to individual locations, such as plant, property and equipment and licenses and trademarks, is determined by comparing the forecasted undiscounted cash flows generated by these assets to the assets’ net carrying value. The amount of impairment loss, if any, is measured as the difference between net book value of the assets and their estimated market value. Because the analysis we perform requires that we estimate the future cash flows attributable to these assets, we are required to make a variety of judgments about our future operations. Changes in these judgments could require us to recognize impairment losses in future periods. Our evaluations in 2004 and 2003 did not result in any significant impairment of our plant, property and equipment or consolidated goodwill.

 

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Deferred Taxes

 

We are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves the jurisdiction-by-jurisdiction estimation of actual current tax exposure and the assessment of temporary differences resulting from the differing treatment of certain items, such as accruals and amortization, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must assess in the course of our tax planning procedures the fiscal year of the reversal of our deferred tax assets and liabilities, and if there will be future taxable profits in those periods. We reverse in the current year deferred tax assets and liabilities for timing differences that have been recorded if we anticipate that the future reversal will take place in a tax-loss year. If we estimate that timing differences of a current year will be reversed in a later tax-loss year, we do not record deferred tax assets and liabilities for those timing differences. Significant management judgment is required in determining our provisions for income taxes, deferred tax assets and liabilities. The analysis is based on estimates of taxable income in the jurisdictions in which the group operates and the period over which the deferred tax assets and liabilities will be recoverable. If actual results differ from these estimates, or we adjust these estimates in future periods, our financial position and results of operations may be materially affected.

 

We record a valuation allowance to reduce the deferred tax assets to an amount that we believe is more likely than not to be realized. In assessing the need for the valuation allowance, we considered future taxable income and ongoing tax planning strategies. In the event that our estimates of projected future taxable income and benefits from tax planning strategies are lowered, or changes in current tax regulations are enacted that would impose restrictions on the timing or extent of our ability to utilize the tax benefits of net operating loss carry-forwards in the future, an adjustment to the recorded amount of net deferred tax assets would be made, with a related charge to income. As of December 31, 2004, we had a valuation allowance covering approximately 90.0% of our deferred tax assets of Ps. 22.1 million.

 

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Item 6. Directors, Senior Management and Employees

 

MANAGEMENT

 

Directors

 

Management of our business is vested in our Board of Directors. The Board of Directors has broad authority to manage our company. Actions requiring the approval of our board of directors include:

 

    a change of control of the company;

 

    transactions with related parties (as defined in the Mexican Securities Market Law);

 

    acquisitions or sales of assets equal in value to, or greater in value than, 10% of the value of the company’s assets;

 

    guarantees of amounts exceeding 30% of the value of the company’s assets; and

 

    any other transaction in an amount greater than 1% of the value of the company’s assets.

 

Our bylaws provide for the Board of Directors to consist of between five and 20 directors and allow for the appointment of an equal number of alternate directors. Directors need not be shareholders. A majority of our directors and a majority of the alternate directors must be Mexican citizens and elected by Mexican shareholders. A majority of the holders of the AA Shares and A Shares voting together elect a majority of the directors and alternate directors, provided that any holder or group of holders of at least 10% of the total AA Shares and A Shares is entitled to name one director. Two directors and two alternate directors, if any, are elected by a majority vote of the holders of L Shares. Each alternate director may attend meetings of the Board of Directors and vote in the absence of a corresponding director. Directors and alternate directors are elected or ratified at each annual ordinary general meeting of shareholders and each annual ordinary special meeting of holders of L Shares, and each serves until a successor is elected and takes office. Pursuant to our bylaws and Mexican law, at least 25% of our directors and 25% of our alternate directors must be independent, as defined under the Mexican Securities Market Law. In order to have a quorum for a meeting of the Board of Directors, a majority of those present must be Mexican nationals.

 

All of the current members of the Board of Directors and of the Executive, Audit and Compensation Committees were elected or ratified at a shareholders’ meeting held on April 27, 2005, with ten directors elected by the AA Shares and A Shares voting together and two directors elected by the L Shares. No alternate directors were appointed. América Telecom and SBC International have agreed to vote for the number of directors and alternate directors named by each of them in proportion to their respective share ownership.

 

Our bylaws provide that the members of the Board of Directors are appointed for terms of one year. Pursuant to Mexican law, members of the Board continue in their positions after the expiration of their terms if new members are not appointed. The names and positions of the current members of the Board, their year of birth, and information concerning their committee membership and principal business activities outside América Móvil are as follows:

 

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Carlos Slim Helú

    Honorary Lifetime Chairman

  

Born:

First elected:

Term expires:

Principal occupation:

  

1940

2000

2006

Honorary Chairman of the Board of Directors of Grupo Carso, S.A. de C.V.

     Other directorships and business experience:    Chairman of the Board of Directors of Telmex and Grupo Financiero Inbursa, S.A. de C.V.

Patrick Slim Domit

    Chairman and Member of the Executive Committee

  

Born:

First elected:

Term expires:

Other directorships:

  

1969

2004

2006

Director of Carso Global

Telecom, S.A., América

Telecom, S.A., U.S. Commercial Corp.,

S.A. de C.V. and Grupo Sanborns, S.A. de C.V.

     Business experience:    Chief Executive Officer of Grupo Carso, S.A. de C.V.

Daniel Hajj Aboumrad

    Director and Member of the Executive Committee

  

Born:

First elected:

Term expires:

Principal occupation:

  

1966

2000

2006

Chief Executive Officer of América Móvil

     Other directorships:    Director of Carso Global Telecom, América Telecom and Grupo Carso, S.A. de C.V.
     Business experience:    Chief Executive Officer of Hulera Euzkadi, S.A. de C.V.

Jaime Chico Pardo

    Director

  

Born:

First elected:

Term expires:

Principal occupation:

Other directorships:

  

1950

2000

2006

Chief Executive Officer of Telmex

Vice-chairman of the Board of Directors of Telmex; Director of América Telecom, S.A. de C.V., Carso Global Telecom, S.A. de C.V., Grupo Carso, S.A. de C.V. and Honeywell International

     Business experience:    Chief Executive Officer of Grupo Condumex, President of Corporación Industrial Llantera (Euzkadi General Tire de Mexico)

Alejandro Soberón Kuri

    Director and Chairman of the Audit Committee

  

Born:

First elected:

Term expires:

Principal occupation:

  

1960

2000

2006

Chairman and Chief Executive Officer of Corporación Interamericana de Entretenimiento, S.A. de C.V.

     Other directorships:    Director of Telmex, Bolsa Mexicana de Valores, S.A. de C.V. and Corporación Interamericana de Entretenimiento, S.A. de C.V.

 

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María Asunción Aramburuzabala Larregui

        Director

  

Born:

First elected:

Term expires:

Principal occupation:

  

1963

2000

2006

Chief Executive Officer of Tresalia Capital

     Other directorships:    Director of Grupo Modelo, S.A. de C.V., Grupo Televisa, S.A., Grupo Financiero Banamex-Accival, S.A. de C.V. and KIO Networks
     Business experience:    President of Tresalia Capital

Rafael Robles Miaja

    Director and Corporate Secretary

  

Born:

First elected:

Term expires:

  

1965

2000

2006

     Principal occupation:    Partner, Franck, Galicia y Robles, S.C.
     Other directorships:    Corporate Secretary of Carso Global Telecom, S.A. de C.V., Sears Roebuck de México, S.A. de C.V., América Telecom, S.A. de C.V. and Parras Cone de México, S.A. de C.V.

Rayford Wilkins

    Director and Member of the Executive Committee

  

Born:

First elected:

Term expires:

Principal occupation:

  

1951

2005

2006

Group President SBC Communications, Inc. International operations.

     Other directorships:    Various positions in the wireless industry at SBC Group.

John Stephens

    Director

  

Born:

First elected:

Term expires:

Principal occupation:

  

1959

2005

2006

Vice President and comptroller of SBC Communications, Inc.

Claudio X. González Laporte

    Director and Member of the Compensation Committee

  

Born:

First elected:

Term expires:

Principal occupation:

  

1934

2000

2006

Chief Executive Officer of Kimberly Clark de México, S.A. de C.V.

     Other directorships:    Director of the Kimberly Clark Corporation, Kellogg Company, IBM Latin America and Grupo Carso, S.A. de C.V.
     Business experience:   

Various positions at the Kimberly Clark

Corporation

David Ibarra Muñoz

    Director and Member of the Audit Committee and the Compensation Committee

  

Born:

First elected:

Term expires:

Other directorships:

  

1930

2000

2006

Director of Grupo Financiero Inbursa, S.A. de C.V.

     Business experience:    Chief Executive Officer of Nacional Financiera, served in the Mexican Ministry of Finance and Public Credit

 

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Carlos Bremer Gutiérrez

Director and Member of the Audit Committee

   Born:
First elected:
Term expires:
Other directorships:
Business experience:
  

1960

2004

2006

Director of Grupo Financiero Value, S.A. de C.V.

Chief Operating Officer of Abaco

Casa de Bolsa, S.A. de C.V.

 

Daniel Hajj Aboumrad is the son-in-law of Carlos Slim Helú, and Patrick Slim Domit is the son of Carlos Slim Helú.

 

Executive Committee

 

Our bylaws provide that the Executive Committee may generally exercise the powers of the Board of Directors, with certain exceptions. In addition, the Board of Directors is required to consult the Executive Committee before deciding on certain matters set forth in the bylaws, and the Executive Committee must provide its views within ten calendar days following a request from the Board of Directors, the Chief Executive Officer or the Chairman of the Board of Directors. If the Executive Committee is unable to make a recommendation within ten calendar days or if a majority of the Board of Directors or any other corporate body duly acting within its mandate determines in good faith that action cannot be deferred until the Executive Committee makes a recommendation, the Board of Directors is authorized to act without such recommendation. The Executive Committee may not delegate its powers to special delegates or attorneys-in-fact.

 

The Executive Committee is elected from among the directors and alternate directors by a majority vote of the holders of common shares (AA Shares and A Shares). The Executive Committee is currently comprised of three members. The majority of its members must be Mexican citizens and elected by Mexican shareholders. Our controlling shareholders have agreed that two of its members shall be named by Mexican controlling shareholders and one member by SBC International, Inc. See “Major Shareholders” under Item 7. The current members of the Executive Committee are Messrs. Patrick Slim Domit and Daniel Hajj Aboumrad, named by the Mexican controlling shareholders, and Mr. Rayford Wilkins, named by SBC International, Inc.

 

Audit Committee

 

The Audit Committee consists of Messrs. Alejandro Soberón Kuri, chairman, David Ibarra Muñoz and Mr. Carlos Bremer Gutiérrez. The mandate of the Audit Committee is to establish and monitor procedures and controls in order to ensure that the financial information we distribute is useful, appropriate and reliable and accurately reflects our financial position. In particular, the Audit Committee is required to, among other things:

 

    select our auditors, review the scope and terms of their engagement, and determine their compensation;

 

    monitor the performance of our auditors and re-evaluate the terms of their engagement;

 

    recommend procedures for preparing financial statements and internal controls;

 

    monitor internal controls and accounting for specified types of matters;

 

    propose procedures for the preparation of financial statements for internal use that are consistent with the published financial statements;

 

    review with the auditors the annual financial statements and the accounting principles being applied in the annual and the interim financial statements;

 

    resolve disagreements between our management and auditors relating to our financial statements;

 

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    pre-approve services to be provided by our auditors, or establish policies and procedures for the pre-approval of services by our auditors;

 

    obtain from our auditors an audit report that includes a discussion of critical accounting policies used by the Company, any alternative treatments within generally accepted accounting principles for material items that have been discussed by management with our auditor, and any other written communications between our auditors and management;

 

    report to the Board of Directors on its activities;

 

    opine on transactions with related parties as defined in the Securities Market Law and propose consulting independent specialists to opine on such transactions;

 

    develop procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls or auditing matters, including for the confidential submission of concerns regarding such matters by employees;

 

    perform any other functions the Board of Directors may delegate to the Audit Committee.

 

In addition, pursuant to our bylaws and Mexican law, the Audit Committee is required to submit an annual report to the Board of Directors and to our shareholders, and the Board must seek the opinion of the Audit Committee regarding any transaction with a related party that is outside the ordinary course of our business. Each member of the Audit Committee is independent, as independence is defined in the Mexican Securities Market Law and under Rule 10A-3 of the U.S. Securities and Exchange Act of 1934.

 

Compensation Committee

 

The Compensation Committee consists of Messrs. David Ibarra Muñoz and Claudio X. González Laporte. The mandate of the Compensation Committee is to assist the Board of Directors in evaluating and compensating our senior executives. In particular, the Compensation Committee is required to:

 

    recommend to the Board of Directors procedures for the selection and succession of our chief executive officer and our principal executives;

 

    propose criteria for evaluating executive performance;

 

    analyze the proposals of the chief executive officer concerning the structure and amount of compensation for our senior executive and raise them with the Board of Directors;

 

    review new executive compensation programs and the operations of existing programs;

 

    establish contracting practices to avoid excessive payments to executives;

 

    assist the Board of Directors in developing appropriate personnel policies;

 

    participate with the Board of Directors in developing a plan for employees to invest in our L Shares and review the implementation of such plan;

 

    report to the Board of Directors on its activities; and

 

    perform any other functions the Board of Directors may delegate to the Compensation Committee.

 

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Senior Management

 

The names, responsibilities and prior business experience of our senior officers are as follows:

 

Daniel Hajj Aboumrad

        Chief Executive Officer

   Appointed:
Business experience:
  

2000

Director of Telmex’s Mexican subsidiaries, Chief Executive Officer of Companía Hulera Euzkadi, S.A. de C.V.

Carlos José García Moreno Elizondo

        Chief Financial Officer

   Appointed:
Business experience:
  

2001

General Director of Public Credit at Mexican Ministry of Finance and Public Credit, Managing Director of UBS Warburg, Associate Director of financing at Petróleos Mexicanos, S.A. de C.V. (Pemex)

Carlos Cárdenas Blásquez

        Latin American Operations

   Appointed:
Business experience:
  

2000

Various positions at Telmex, including Operating Manager for the paging service Company Buscatel, S.A. de C.V. and Vice-President of operations for Telmex USA, Manager at Grupo Financiero Inbursa, S.A. de C.V.

José Elias Briones Capetillo

        Administration and Finance

   Appointed:
Business experience:
  

2001

Comptroller of Telcel

Alejandro Cantú Jiménez

        General Counsel

   Appointed:
Business experience:
  

2001

Mijares, Angoitia, Cortés y Fuentes, S.C.

 

Mr. Carlos Cárdenas Blásquez is the son-in-law of Jaime Chico Pardo, one of our directors.

 

Statutory Auditors

 

Under our bylaws, the holders of a majority of our outstanding common shares (AA Shares and A Shares) may elect one or more statutory auditors (comisarios) and corresponding alternate statutory auditors, who serve until a successor is elected. Statutory auditors are normally elected or ratified at the annual general shareholders’ meetings. The primary role of the statutory auditors is to report to the shareholders at the annual ordinary general meeting regarding the accuracy of the financial information presented to such holders by the Board of Directors. The statutory auditors are also authorized to:

 

    call ordinary or extraordinary general meetings;
    place items on the agenda for meetings of shareholders or the Board of Directors;
    attend meetings of shareholders, the Board of Directors or the Executive Committee; and
    generally monitor our affairs.

 

The statutory auditors also receive monthly reports from the Board of Directors regarding material aspects of our affairs, including our financial condition. The current statutory auditor and alternate statutory auditor are: Francisco Álvarez del Campo and Agustín Aguilar Laurents, respectively.

 

According to our bylaws and Mexican law, any holder or group of holders of at least 10% of our capital stock is entitled to name one statutory auditor. The appointment of statutory auditors elected as described above may only be revoked if the appointment of statutory auditors elected by the majority of the holders of our common shares is also revoked.

 

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Compensation of Directors and Senior Management

 

The aggregate compensation paid to our directors and senior management in 2004 was approximately Ps. 2.6 million and Ps. 106 million, respectively. Provisions to provide pension, retirement or similar benefits for management totaled approximately Ps. 2.2 million.

 

During 2001, we established a stock option plan for our most senior executives. Our Compensation Committee and Board of Directors authorized the plan, reserving a total of 3,215,000 L Shares from our treasury. The subscription price for the 2001 plan was Ps. 1.00 per share. Participants under the plan were entitled to exercise 25% of the options during 2001, 25% during 2002, 25% during 2003, and the remaining 25% during 2004. During 2002 and 2003, we established second and third plans, respectively, each of which functions under the same rules as the 2001 plan, except that the second plan has a one-year lag and the third plan has a two-year lag and a subscription price of Ps. 7.00 per share. In 2002, 2,939,000 additional L Shares, and in 2003 2,565,000 additional L Shares, were reserved from our treasury for such plans. No options were awarded during 2004, and in December 2004, as a result of certain changes in Mexican regulations, we allowed all participants to exercise all outstanding options, whether or not vested under the original terms of the plans. As of December 31, 2004, a total of 8,621,500 L Shares have been acquired by our employees under our stock option plans.

 

Share Ownership

 

According to beneficial ownership reports filed with the SEC, Carlos Slim Helú, the chairman of our Board of Directors, and certain members of his immediate family, including his son and member of our Board of Directors, Patrick Slim Domit, together own a majority of the voting stock of América Telecom, S.A. de C.V., our controlling shareholder. See “Major Shareholders.” In addition, according to beneficial ownership reports filed with the SEC, Carlos Slim Helú holds 40,000 of our A Shares and 100,000 of our L Shares directly, and Patrick Slim Domit holds 8,134 of our L Shares directly. To our knowledge, none of our other directors, alternate directors or executive officers is the beneficial owner of more than 1% of any class of our capital stock.

 

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EMPLOYEES

 

The following table sets forth the number of employees and a breakdown of employees by main category of activity and geographic location as of the end of each year in the three-year period ended December 31, 2004:

 

     December 31,

     2002

   2003

   2004

Number of employees

   17,553    24,860    23,303

Category of activity:

              

Wireless

   14,949    20,165    16,624

Fixed

   2,604    4,695    6,679

Geographic location:

              

Mexico

   7,943    8,624    9,354

United States

   466    356    428

Other Latin America

   9,144    15,880    13,521

 

As of December 31, 2004, the Sindicato Progresista de Trabajadores de Comunicación y Transporte de la República Mexicana (Progressive Union of Communication and Transport Workers of the Mexican Republic) represented approximately 83% of the employees of Telcel. All management positions at Telcel are held by non-union employees. Salaries and certain benefits are renegotiated every year. In May 2005, Telcel and the union agreed to a 4.5% nominal increase in basic wages, retroactive to March 2005.

 

Under our labor agreements and Mexican labor law, we are obligated to pay seniority premiums to retiring employees and pension and death benefits to retired employees. Retirees will be entitled to receive pension increases whenever salary increases are granted to current employees.

 

Some of our foreign subsidiaries, including Telecom Americas, Telgua, ENITEL, CTE and CTI, also have active employee unions.

 

We believe that we have good current relations with our workforce.

 

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Item 7. Major Shareholders and Related Party Transactions

 

MAJOR SHAREHOLDERS

 

The following table sets forth our capital structure as of May 31, 2005:

 

Class


   Number of
Shares
(millions)


   Percent of
Capital


    Percent of
Voting
Shares(*)


 

L Shares (no par value)

   8,291    67.96 %   —    

AA Shares (no par value)

   3,647    29.89     93.33 %

A Shares (no par value)

   260    2.13     6.66  
    
  

 

Total

   12,199    100.00 %   100.00 %
    
  

 


(*) Except on limited matters for which L Shares have voting rights.

 

The AA Shares represented 93.33% of the full voting shares (AA Shares and A Shares) and 29.89% of the total capital stock of América Móvil as of May 31, 2005. The AA Shares are owned by América Telecom, S.A. de C.V., SBC International Inc. (a subsidiary of the U.S. telecommunications company SBC Communications, Inc.) and certain other Mexican investors. The following table sets forth their respective ownership amounts and percentages of AA Shares as of May 31, 2005.

 

Shareholder


   AA Shares
Owned
(millions)


   Percent of
Class


    Percent of
Voting
Shares(*)


 

América Telecom

   2,529    69.34 %   64.72 %

SBC International

   956    26.22     24.47  

Other Mexican holders of AA shares

   162    4.44     4.14  
    
  

 

Total

   3,647    100.00 %   93.33 %
    
  

 


(*) Except on limited matters for which L Shares have voting rights.

 

América Telecom was established in November 2001 in a spin-off from Carso Global Telecom using a procedure under Mexican corporate law called escisión or “split-up.” According to reports of beneficial ownership of our shares filed with the SEC, Carlos Slim Helú and certain members of his immediate family, including his son and member of our Board of Directors, Patrick Slim Domit, together own a majority of the voting stock of América Telecom.

 

América Telecom and SBCI are parties to an agreement relating to their ownership of AA Shares. Among other things, the agreement subjects certain transfers of AA Shares by either party to a right of first offer in favor of the other party, although the right of first offer does not apply to the conversion of AA Shares to L Shares, as permitted by our bylaws, or the subsequent transfer of L Shares. The agreement also provides for the composition of the Board of Directors and the Executive Committee and for each party to enter into a Management Services Agreement with us. See “Directors” and “Executive Committee” under Item 6 and “Related Party Transactions.”

 

The following table identifies each owner of more than 5% of any class of our shares as of May 31, 2005. Except as described in the table below and the accompanying notes, we are not aware of any holder of more than 5% of any class of our shares.

 

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     AA Shares

    A Shares

    L Shares

   

Percent
of

Voting
Shares(*)


 

Shareholder(1)


   Shares
Owned
(millions)


   Percent
of
Class


    Shares
Owned
(millions)


   Percent
of
Class


    Shares
Owned
(millions)


   Percent
of
Class


   

América Telecom(2)

   2,529    69.3 %   48    18.4 %   2,362    28.49 %   64.72 %

SBC International

   956    26.2     —      —       —      —       24.4  

(*) Except on limited matters for which L Shares have voting rights.
(1) Based on beneficial ownership reports on Schedule 13G filed with the SEC, we believe that as of December 31, 2004, Brandes Investment Partners, LP and J.P. Morgan Chase & Co. were the beneficial owners of ADSs representing approximately 1,070.2 million and 628.5 million of our L Shares, respectively. These holdings would have represented approximately 12.9% and 7.6% of our outstanding L Shares as of May 31, 2005. We do not know whether these institutions have changed their investments in our L shares since December 31, 2004.
(2) According to beneficial ownership reports filed with the SEC, América Telecom has the obligation to purchase approximately 1,218.8 million additional L Shares under forward share purchase transactions maturing between October 2005 and September 2009. As of August 30, 2004, according to beneficial ownership reports filed with the SEC, América Telecom was deemed a beneficial owner of 36.1% (including L Shares under the forward share purchase agreements described above) of our L Shares.

 

As of May 31, 2005, 77.29% of the outstanding L Shares were represented by L Share ADSs, each representing the right to receive 20 L Shares, and 99.99% of the L Share ADSs were held by 13,234 holders (including The Depositary Trust Company) with registered addresses in the United States. As of such date, 24.79% of the A Shares were held in the form of A Share ADSs, each representing the right to receive 20 A Shares, and 99.83% of the A Share ADSs were held by 5,234 holders with registered addresses in the United States. Each A Share may be exchanged at the option of the holder for one L Share.

 

We may repurchase our shares on the Mexican Stock Exchange from time to time up to a specified maximum aggregate value authorized by the holders of AA Shares and A Shares and our Board of Directors. In March 2001, we were authorized by our shareholders to repurchase shares with an aggregate value of up to Ps. 5,000 million; in July 2001, we were authorized to repurchase an additional Ps. 5,000 million; in April 2003, we were authorized to repurchase an additional Ps. 5,000 million; in April 2004, we were authorized to repurchase an additional Ps. 10,000 million; and in April 2005, we were authorized to repurchase an additional Ps. 5,000 million; for a total aggregate value of Ps. 30,000 million. As of May 31, 2005, we had repurchased 1,780 million L Shares and 9 million A Shares, with an aggregate value of approximately Ps. 23,772 million.

 

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RELATED PARTY TRANSACTIONS

 

Transactions with Telmex

 

We have, and expect to continue to have, a variety of contractual relationships with Telmex and its subsidiaries. These relationships include agreements arising out of the spin-off and certain transitional arrangements.

 

According to beneficial ownership reports filed with the SEC, Telmex is under common control with our controlling shareholder América Telecom.

 

Continuing Commercial Relationships

 

Because Telmex and Telcel provide telecommunications services in the same geographical markets, they have extensive operational relationships. These relationships include interconnection between their respective networks; use of facilities, particularly for the co-location of equipment on premises owned by Telmex; use by Telcel of Telmex’s private circuits; and use by each of the services provided by the other. These relationships are subject to a variety of different agreements. Many of them are also subject to specific regulations governing all telecommunications operators. The terms of these agreements are similar to those on which each company does business with other, unaffiliated parties.

 

These operational relationships between Telcel and Telmex are material to our financial performance. In 2004, 15.9% of Telcel’s total operating revenues (Ps. $70,822 million) was attributable to interconnection with Telmex, primarily representing payments under the calling party pays system arising from fixed-to-mobile calls. We had Ps. 704 million in accounts receivable from Telmex and subsidiaries at December 31, 2004. Also in 2004, Ps. 4,269 million of our cost of sales was attributable to payments to Telmex, primarily representing interconnection payments for long-distance calls carried by Telmex and use of facilities under leases and collocation agreements with Telmex.

 

Telmex distributes Telcel handsets and prepaid cards on commercial terms similar to those given to other cellular distributors. See “Mexican Operations—Sales and Distribution” under Item 4.

 

Implementation of Spin-off

 

The creation of América Móvil and the transfer of assets and liabilities to us were effected by the action of an extraordinary shareholders’ meeting of Telmex held on September 25, 2000. Neither we nor Telmex made any promises to the other regarding the value of any of the assets we received in the spin-off. Under the shareholder resolutions adopted at the meeting, we are obligated to indemnify Telmex against any liability, expense, cost or contribution asserted against Telmex that arises out of the assets owned directly or indirectly by Sercotel, S.A. de C.V., the subsidiary whose shares were transferred to us in the spin-off.

 

We have entered into an agreement with Telmex to ensure that the purposes of the spin-off are fully achieved. Among other things, this agreement provides in general terms as follows:

 

    we agree to indemnify Telmex against any loss or expense resulting from the assertion against Telmex of any liabilities or claims that were transferred to us in the spin-off or that relate to the businesses transferred to us in the spin-off;

 

    Telmex agrees to indemnify us against any loss or expense resulting from the assertion against us of any liabilities or claims that were retained by Telmex in the spin-off or that relate to the businesses retained by Telmex in the spin-off;

 

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    each party agrees to maintain the confidentiality of any information concerning the other that it obtained prior to the spin-off or that it obtains in connection with the implementation of the spin-off;

 

    each party agrees that it will not take any action that could reasonably be expected to prevent the spin-off from qualifying as tax-free under Mexican or U.S. federal tax laws;

 

    each party releases the other from certain claims arising prior to the spin-off—Telmex makes no representations concerning the assets transferred directly or indirectly in the spin-off.

 

Other Transactions

 

In April 2004, we sold our interests in Techtel and Telstar to Telmex for U.S.$75 million in the aggregate. See “Other Investments” under Item 4.

 

Transactions with Other Affiliates

 

In December 2003, as a result of a series of transactions, we exchanged our 49% interest in CompUSA, which we had acquired in March 2000, for a 29.69% interest in US Commercial Corp., S.A. de C.V. (whose controlling shareholder is an affiliate of América Telecom, our controlling shareholder) and approximately Ps. 189 million. We recorded a loss of Ps. 296.9 million on the transaction.

 

Certain affiliates of América Telecom purchased approximately U.S.$316 million in principal amount of the notes used to finance the acquisition of Tess by Telecom Américas in 2001. Telecom Americas made final payment of principal outstanding under the notes in March 2004.

 

Telcel purchases materials or services from a variety of companies that, according to beneficial ownership reports filed with the SEC, are under common control with our controlling shareholder América Telecom. These services include insurance and banking services provided by Grupo Financiero Inbursa and its subsidiaries. In addition, we sell products in Mexico through the Sanborns and Sears store chains. Telcel purchases these materials and services on terms no less favorable than it could obtain from unaffiliated parties, and would have access to other sources if our affiliates ceased to provide them on competitive terms.

 

We have agreements to receive consulting services from each of América Telecom and SBC. In 2003, we paid U.S.$10.0 million to América Telecom and U.S.$1.0 million to SBC in compensation for their respective services. In 2004, we paid U.S.$15 million to América Telecom and U.S.$10 million to SBC in compensation for their respective services. Our board of directors has approved the payment of U.S.$30 million in fees to América Telecom during 2005 for consulting services.

 

In June 2005, we sold our 40.3% interest in Technology and Internet, LLC and 25.0% interest in Technology Fund I, LLC to Grupo Condumex, S.A. de C.V. (whose controlling shareholder is an affiliate of América Telecom, our controlling shareholder), for an aggregate amount of U.S.$3.0 million. We recorded a loss of Ps. 139 million on the transaction.

 

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Item 8. Financial Information

 

See “Item 18—Financial Statements” and pages F-1 through F-64.

 

DIVIDENDS

 

We have paid cash dividends on our shares each year since 2001. The table below sets forth the nominal amount of dividends paid per share in each year indicated, in pesos and translated into U.S. dollars at the exchange rate on each of the respective payment dates.

 

Year ended

December 31,


   Pesos per Share

   Dollars per Share

2004

   Ps. 0.105    U.S.$  0.009

2003

     0.056      0.005

2002

     0.043      0.004

 

The declaration, amount and payment of dividends by América Móvil is determined by majority vote of the holders of AA Shares and A Shares, generally on the recommendation of the Board of Directors, and depends on our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the holders of AA Shares and A Shares. We declared a dividend in April 2002 of Ps.0.044 per share, payable in four equal installments of Ps.0.011 per share in June, September and December 2002 and March 2003. We declared a dividend in April 2003 of Ps.0.06 per share, payable in four installments of Ps.0.015 per share in June, September and December 2003 and March 2004. We declared a dividend in April 2004 of Ps. 0.12 per share, payable in four installments of Ps. 0.030 per share in June, September and December 2003 and March 2004. In an ordinary shareholders meeting held in April 27, 2005, our shareholders resolved to pay a dividend of Ps. 0.21 per share, payable in four installments of Ps. 0.0525 per share, for each AA, A and L Share outstanding on the payment dates of June 24, 2005, September 23, 2005, December 23, 2005 and March 23, 2006.

 

Our bylaws provide that holders of AA Shares, A Shares and L Shares participate on a per-share basis in dividend payments and other distributions, subject to certain preferential dividend rights of holders of L Shares. See “Bylaws—Dividend Rights” and “Bylaws—Preferential Rights of L Shares” under Item 10.

 

LEGAL PROCEEDINGS

 

In each of the countries in which we conduct operations, we are party to various legal proceedings in the ordinary course of business. These proceedings include, without limitation, tax, labor, antitrust and contractual claims and claims regarding interconnection practices or agreements. Our concessions are generally subject to early termination for violations of certain service, quality and coverage standards and in the case of our fixed-line operations, of certain interconnection obligations. We are also party to a number of proceedings regarding our compliance with concession standards. As of the date of this annual report, we believe that none of these proceedings is likely to result in the revocation of any of our material concessions. Below is a summary of the most significant legal proceedings in which we are currently involved.

 

Telcel

 

Cofeco

 

Administrative proceedings were commenced in January and June 2001 by Cofeco against Telcel for alleged anti-competitive behavior in connection with actions by certain distributors of Telcel in 2001. In May 2002, Cofeco ruled against Telcel in connection with the proceeding begun

 

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in January. Telcel appealed this ruling in June 2002. In September 2002, Cofeco ruled against this appeal. Telcel filed a lawsuit (demanda de nulidad) against this ruling in January 2003, the resolution of which is still pending. With respect to the administrative proceedings commenced in June 2001, Cofeco ruled against Telcel in December 2002, and Telcel appealed this ruling. In May 2003, Cofeco ruled against this appeal. In August 2003, Telcel filed a lawsuit (demanda de nulidad) against this ruling, which is pending. In December 2004, Telcel was notified of the initiation of further administrative proceedings in connection with the alleged anti-competitive behavior by certain distributors. The same month, Telcel filed a lawsuit (demanda de amparo) challenging Cofeco’s rights to initiate these proceedings. If we are unsuccessful in challenging any of the aforementioned proceedings, they may result in fines or specific regulations applicable to Telcel. We have not made provisions in our financial statements for these potential liabilities because at the time our most recent financial statements were published, we could not reasonably determine the amount of such contingencies.

 

Interconnection Fees

 

In December 2004, Telcel reached an agreement with various other telecommunications service providers as to the interconnection fees applicable under the “calling party pays” system for the period from January 1, 2005 until December 31, 2007. The agreement called for a gradual reduction in interconnection fees charged under the “calling party pays” system from the 2004 rate of U.S.$1.90 per minute to U.S.$1.39 by the end of 2007. The agreement also contemplated that these reductions would be reflected in the tariffs charged by fixed operators to their users. The new framework was approved by Cofetel. Certain telecommunications service providers have since challenged the new framework, arguing that the proposed interconnection fees do not properly take into account costs associated with providing interconnection services, and have initiated proceedings with Cofetel to obtain their intervention in resolving the matter.

 

These proceedings have not yet been resolved, and we cannot determine with reasonable certainty the impact these proceedings would have if they were not resolved in our favor. Interconnection fees may decrease further as a result of these actions, which may affect our revenues since we have traditionally received more revenues from such fees than we have had to pay to other operators for interconnection services.

 

CNBV

 

During 2003, we received requests for information from the Mexican Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or the CNBV) and the SEC regarding Telcel’s entry into a capacity services agreement with Operadora Unefon in September 2003. To our knowledge, the investigation regards the alleged use by Operadora Unefon of the U.S.$267.7 million paid by Telcel to Operadora Unefon under the agreement and related public disclosures made by an affiliate of Operadora Unefon. The SEC has publicly stated that it has filed charges against certain affiliates of Operadora Unefon. We cooperated with the authorities.

 

Short Message Services (SMS)

 

Under the terms of its concessions for the 800 megahertz spectrum, Telcel must pay a royalty on gross revenues from concessioned services. The royalty is levied at rates that vary from region to region but average approximately 6%. We believe that short message services are value-added services, which are not concessioned services, and that revenues from short message services should not be subject to this royalty. In related proceedings, Cofetel has ruled that short text messages are subject to the interconnection regulatory regime and that such services do not constitute value-added services. We are currently disputing these issues in an administrative proceeding, but have made provisions in our financial statements with respect to this potential liability.

 

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Telgua

 

Reversal of the Privatization (Lesividad)

 

In June 2000, the executive branch of the Guatemalan government issued declarations concerning Empresa Guatemalteca de Telecomunicaciones (Guatel), a Guatemalan state agency that conducted the privatization of Telgua. The declarations stated that certain actions of Guatel relating to the privatization of Telgua were contrary to the interests of the Guatemalan State. In September 2000, the Guatemalan government commenced judicial proceedings against Guatel, Telgua and certain other parties involved in the privatization of Telgua seeking reversal of the privatization.

 

In October 2001, the Guatemalan State announced a governmental accord issued by the President of Guatemala and the Cabinet Ministers establishing the principal terms and conditions of a settlement agreement among the Guatemalan State, Telgua, Guatel and America Central Tel S.A. (ACT), and ordering the Attorney General of Guatemala to enter into such agreement in the name and on behalf of the Guatemalan State. Under the terms of the settlement agreement, Telgua agreed, among other things, to invest approximately U.S.$246 million in certain plant and equipment by 2004, which investments have been completed. This settlement was challenged in 2002 by certain former government officials, but the challenge was withdrawn in June 2004. Following this withdrawal, an order of the administrative court approving the settlement and terminating all related litigation became final and non appealable.

 

ITI-Gedo

 

In addition, judicial proceedings were commenced in the United States District Court for the Southern District of New York (the “District Court”) in March 2001 by International Telecom, Inc. (ITI) against Generadora Eléctrica de Oriente, S.A. (GEDO), Antonio Jorge Álvarez and Telgua, alleging breach of contract, tortious interference with contract and fraud in connection with an international telecommunications service agreement. In March 2002, the court granted Telgua’s motion to dismiss the case against it for lack of personal jurisdiction, holding that Telgua had insufficient contacts with New York to subject it to jurisdiction in that forum. A final decision awarding ITI over U.S.$900,000 in damages against defendants GEDO and Álvarez was rendered by the District Court in April 2004. In June 2004, ITI filed an appeal with the United States Court of Appeals for the Second Circuit challenging, among other things, the District Court’s March 2002 decision to dismiss Telgua from the action for lack of personal jurisdiction. Oral arguments were heard in March 2005, and the parties are awaiting a decision from the Appeals Court. We cannot assure you that the Appeals Court will affirm the District Court’s dismissal of Telgua. We have not made provisions in our financial statements for these potential liabilities.

 

Comcel

 

Voice over IP

 

In March 2000, the Colombian Superintendencia de Industria y Comercio (SIC) issued Resolution No. 4954, requiring Comcel to pay a fine of approximately U.S.$100 thousand (Colombian Ps. 234 million) for alleged anti-competitive behavior. In addition to this administrative fine, the SIC ordered Comcel to pay damages to other long distance operators. The long distance operators estimated their damages to be U.S.$70 million. Comcel requested an administrative review of the damages decision, which was denied in June 2000. Comcel appealed, and the appeal was rejected in November 2000. Comcel resubmitted the appeal in February 2001. Comcel also filed a special action in court challenging the denial of the administrative review. Following a series of court proceedings, a Colombian appeals court in June 2002 ordered that Comcel’s February 2001 appeal be granted and that the administrative decision against Comcel be reviewed. After additional proceedings, the Constitutional Court revoked the previous decision and ordered the continuance of the procedure for the determination of damages to the other operators.

 

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In the opinion of counsel representing Comcel in this matter, in the event the SIC decides to award damages to the long distances service providers, the amount of such damages should not exceed the income received by Comcel from the provision of Voice over IP services, which amount is substantially than the amount estimated by the long distance service providers. We have made provisions in our financial statements with respect to this potential liability on the basis of our counsel’s opinion. There can be no assurance that the amount of damages ultimately determined by the SIC will be consistent with our counsel’s opinion. Comcel expects to continue pursuing all available legal actions after a decision on damages is rendered.

 

Distributors

 

In January 2005, Comcel was notified of an arbitration proceeding initiated against it by Celcenter Ltda. (Celcenter) and Concelular, S.A. (Concelular), which are distributors of Comcel. The proceeding relates to Comcel’s decision to reduce the commissions paid to distributors. In the proceeding, the distributors allege: (i) abuse of dominant position on Comcel’s part; (ii) the existence of an agency relationship between Comcel and the distributors; and (iii) breach of contract and commercial liability on the part of Comcel. Claimants seek to recover approximately U.S.$30 million from Comcel. We have made provisions in our financial statements with respect to this potential liability.

 

Telecom Americas

 

Anatel Inflation-Related Adjustments

 

ANATEL has challenged each of Tess and ATL regarding the calculation of inflation-related adjustments due under these companies’ concession agreements with ANATEL. Forty percent of the concession price under each of these agreements was due upon execution and 60% was due in three equal annual installments (subject to inflation-related adjustments and interest) beginning in 1999. Both companies have made these concession payments, but ANATEL has rejected the companies’ calculation of the inflation-related adjustments and requested payment of the alleged deficiencies. The companies have filed declaratory and consignment actions in Brazilian courts seeking resolution of the disputes. The court of first instance ruled against ATL’s filing for declaratory action in October 2001 and ATL’s filing for consignment action in September 2002. Subsequently, ATL filed appeals, which are pending. In September 2003, the court of first instance ruled against Tess’ filing for consignment action. Subsequently, Tess filed an appeal, which is still pending. No ruling has been made to date in respect of the declaratory action filed by Tess. The aggregate contested amounts were approximately Reais 486 million (including potential penalties and interest) (U.S.$183 million) at December 31, 2004. We have made provisions in our financial statements for these potential liabilities.

 

BNDESPar

 

Prior to our acquisition of Telet and Americel, BNDESPar, a subsidiary of BNDES, the Brazilian development bank, had entered into investment and other shareholder agreements with Americel, Telet and certain of their significant shareholders. Under these agreements, BNDESPar had the right, among others, to participate in the sale of shares of Telet and Americel in the event of certain transfers of control, for so long as BNDESPar held 5% of the share of capital in those companies. In October 2003, we increased the capital of each of Telet and Americel and BNDESPar’s ownership fell below 5% from approximately 20% in each as it elected not to exercise its preemptive rights. Subsequently, BNDESPar sent official notices to Telet and Americel reserving its rights under the agreements in respect of certain past transfers of shares. In November 2004, BNDESPar filed a lawsuit with the competent court of Rio de Janeiro claiming that BNDESPar is entitled to sell its shares in Telet and Americel to Telecom Americas for approximately U.S.$164 million. We do not believe that BNDESPar has valid grounds for its claims against Telecom Americas, and Telecom Americas will defend itself vigorously against these claims. There can be no assurance, however, that we will ultimately prevail. We have not made provisions in our financial statements for these potential liabilities.

 

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Lune Patent Case

 

A Brazilian company claims that wireless operators in Brazil have infringed its patent over certain caller id technology. The plaintiff first brought a patent infringement case in a state court in Brasília, Federal Capital of Brazil, against Americel and later brought cases, as part of two separate proceedings, against other 23 defendants, including all of our other operating subsidiaries in Brazil. Although we believe that the patent does not cover the technology that is used by Americel to provide caller id services, Americel lost the case at the trial level and on first appeal. After the judgment against Americel was rendered, a federal court in Rio de Janeiro, Brazil, rendered a preliminary injunction decision suspending the effects of the patent, in an action filed by a supplier of caller id technology. Americel filed three special appeals against the decision of the state court in Brasília, seeking review at the Superior Court of Justice (which is the highest court in Brazil to decide on questions of federal law) and Supreme Court (the highest court in Brazil to decide on questions of constitutional law) The Court of Appeals has determined that two of our special appeals will be heard by the Superior Court of Justice. Our request for a special appeal before the Supreme Court has been denied. Americel may still file a motion requesting the reversal of this decision. Americel intends to continue vigorously defending itself against this claim.

 

The cases against the other operators are still on their initial stages. Plaintiff has brought these other cases in the same state trial court that heard the case against Americel, but defendants have requested that the cases be removed on jurisdictional grounds. The Americel judgment does not bind other state courts or the federal courts of Brazil. We intend to vigorously defend ourselves from these claims, and do not expect that there will be a resolution of these other cases within the next couple of years.

 

At this time, it is not possible for us to estimate with a reasonable degree of certainty the damages that may result from these proceedings, if ultimately resolved against our interests. The plaintiff in the Americel case is now required to request the commencement of proceedings for execution of the judgment, seeking to prevent Americel from providing caller id services and to determine monetary damages for alleged past infringements. At this time, Americel does not know how the plaintiff intends to request that damages be determined. Americel intends to request that the effects of any execution order be suspended pending resolution of the appeals. In addition, Americel benefits from a limited contractual indemnity from its equipment supplier, and it is currently analyzing how and to what extent it could recover any eventual damages from this supplier. We have not made any provisions in the financial statements in respect of these proceedings since the amount of potential damages cannot be reasonably determined.

 

CompUSA

 

In January 2000, a lawsuit was filed in Texas against CompUSA on behalf of COC Services, Ltd. (“COC”) alleging, among other things, breach of contract, tortious interference and conspiracy in connection with a letter of intent for the franchising of retail stores in Mexico. The lawsuit also named as defendants James Halpin, CompUSA’s former chief executive officer, Mr. Carlos Slim Helú, our chairman, and certain other persons. The jury trial concluded in February 2001 with a jury verdict against CompUSA in the amount of U.S.$90 million in actual damages. The verdict also awarded punitive damages in the amount of U.S.$94.5 million against CompUSA and U.S.$175.5 million against Mr. Halpin. Damages were also awarded against the remaining defendants.

 

In March 2001, CompUSA and the other defendants filed a motion with the trial court for judgment notwithstanding the verdict. In May 2001, the trial court granted the motion for judgment notwithstanding the verdict, vacating the award against CompUSA and Mr. Halpin and reducing significantly the amount of damages. Despite the significant reduction in damages,

 

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Mr. Slim Helú and the other defendants appealed seeking discharge from all claims. In August 2004, the Dallas Court of Appeals reversed the February 2001 judgment in full, releasing the defendants from the obligation to pay any damages. COC has appealed this decision and the appeal is pending.

 

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Item 9. The Offer and Listing

 

TRADING MARKETS

 

Our shares and ADSs are listed or quoted on the following markets:

 

L Shares   

Mexican Stock Exchange—Mexico City

Mercado de Valores Latinoamericanos en Euros

(LATIBEX)—Madrid, Spain

L Share ADSs   

New York Stock Exchange—New York

Frankfurt Stock Exchange—Frankfurt

A Shares    Mexican Stock Exchange—Mexico City
A Share ADSs    NASDAQ National Market—New York

 

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The following table sets forth, for the periods indicated, the reported high and low sales prices for the L Shares on the Mexican Stock Exchange and the reported high and low sales prices for the L Share ADSs on the New York Stock Exchange. Prices have not been restated in constant currency units.

 

     Mexican Stock Exchange

   New York Stock Exchange

     High

   Low

   High

   Low

     (pesos per L Share)    (U.S. dollars per L Share ADS)

Annual highs and lows

                       

2002

   Ps. 9.23    Ps. 5.72    U.S.$ 20.39    U.S.$ 11.54

2003

     15.46      6.99    27.34    12.50

2004

     29.46      15.72    52.46    28.32

Quarterly highs and lows

                       

2003:

                       

First quarter

   Ps. 8.12    Ps. 6.99    U.S.$ 15.62    U.S.$ 12.50

Second quarter

     9.84      7.29    18.80    13.61

Third quarter

     12.99      9.99    23.68    19.16

Fourth quarter

     15.46      12.40    27.34    22.20

2004:

                       

First quarter

   Ps. 21.85    Ps. 15.72    U.S.$ 39.08    U.S.$ 28.32

Second quarter

     22.28      18.29    39.73    31.35

Third quarter

     22.25      18.64    39.03    32.68

Fourth quarter

     29.46      21.95    52.46    38.51

Monthly highs and lows

                       

2004:

                       

January

   Ps. 18.23    Ps. 15.72    U.S.$ 33.48    U.S.$ 28.32

February

     20.09      17.85    26.89    31.95

March

     21.85      19.43    39.08    34.99

April

     22.28      19.30    39.73    33.80

May

     20.66      18.29    36.37    31.35

June

     21.34      19.60    37.73    34.26

July

     21.03      20.15    36.78    35.00

August

     20.56      18.64    36.06    32.68

September

     22.25      19.63    39.03    34.00

October

     25.47      21.95    44.00    38.51

November

     26.11      24.62    46.71    43.10

December

     29.46      25.91    52.46    46.47

2005:

                       

January

   Ps. 30.05    Ps. 26.82    U.S.$ 53.45    U.S.$ 47.89

February

     32.67      30.32    58.90    54.41

March

     32.59      28.54    58.50    50.55

April

     29.42      26.71    52.98    48.44

May

     31.31      27.51    57.70    49.95

 

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The table below sets forth, for the periods indicated, the reported high and low sales prices for the A Shares on the Mexican Stock Exchange and the high and low bid prices for A Share ADSs published by NASDAQ. Bid prices published by NASDAQ for the A Share ADSs are inter-dealer quotations and may not reflect actual transactions. Prices have not been restated in constant currency units.

 

     Mexican Stock Exchange

   NASDAQ

     High

   Low

   High

   Low

     (pesos per A Share)    (U.S. dollars per A Share ADS)

Annual highs and lows

                           

2002

   Ps. 9.20    Ps. 5.60    U.S.$ 20.20    U.S.$  11.60

2003

     15.35      6.94      27.05      12.57

2004

     29.30      15.45      52.04      28.00

Quarterly highs and lows

                           

2003:

                           

First quarter

   Ps. 8.02    Ps. 6.94    U.S.$ 15.50    U.S.$ 12.57

Second quarter

     9.84      7.29      19.10      13.50

Third quarter

     12.92      9.99      23.44      18.83

Fourth quarter

     15.35      12.72      27.05      22.00

2004:

                           

First quarter

   Ps. 21.75    Ps. 15.45    U.S.$ 40.00    U.S.$ 28.00

Second quarter

     22.20      19.00      39.75      31.02

Third quarter

     22.23      18.60      38.58      31.51

Fourth quarter

     29.30      22.00      52.04      38.01

Monthly highs and lows

                           

2004:

                           

January

   Ps. 18.60    Ps. 15.45    U.S.$ 34.50    U.S.$ 28.00

February

     20.03      17.80      37.00      31.26

March

     21.75      19.20      40.00      34.92

April

     22.20      19.80      39.75      33.91

May

     20.60      19.00      35.95      31.02

June

     21.10      19.85      37.50      33.42

July

     21.00      20.00      38.00      35.00

August

     20.25      18.60      35.36      31.51

September

     22.23      19.55      38.58      34.11

October

     25.25      22.00      43.97      38.01

November

     26.20      24.50      47.00      43.07

December

     29.30      25.80      52.04      45.25

2005:

                           

January

   Ps. 30.00    Ps. 27.50    U.S.$ 53.37    U.S.$ 47.51

February

     32.60      30.30      59.89      54.25

March

     32.50      28.50      58.84      50.00

April

     29.40      27.00      52.50      48.05

May

     31.23      27.40      57.50      49.90

 

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TRADING ON THE MEXICAN STOCK EXCHANGE

 

The Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A. de C. V.), located in Mexico City, is the only stock exchange in Mexico. Founded in 1907, it is organized as a corporation and operates under a concession from the Ministry of Finance and Public Credit. Its shares are held by 30 brokerage firms, which are exclusively authorized to trade on the Exchange. Trading on the Mexican Stock Exchange takes place principally through automated systems between the hours of 8:30 a.m. and 3:00 p.m. Mexico City time, each business day. The Mexican Stock Exchange operates a system of automatic suspension of trading in shares of a particular issuer as a means of controlling excessive price volatility, but under current regulations this system does not apply to securities such as the A Shares or the L Shares that are directly or indirectly (for example, through ADSs) quoted on a stock exchange (including for these purposes NASDAQ) outside Mexico.

 

Settlement is effected two business days after a share transaction on the Mexican Stock Exchange. Deferred settlement, even by mutual agreement, is not permitted without the approval of the Mexican National Securities Commission (CNBV). Most securities traded on the Mexican Stock Exchange, including those of América Móvil, are on deposit with Institución para el Depósito de Valores, S.A. de C.V. (Indeval), a privately owned securities depositary that acts as a clearinghouse for Mexican Stock Exchange transactions.

 

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Item 10. Additional Information

 

BYLAWS

 

Set forth below is a brief summary of certain significant provisions of our bylaws and Mexican law. This description does not purport to be complete and is qualified by reference to our bylaws, which have been filed as an exhibit to this annual report. For a description of the provisions of our bylaws relating to our Board of Directors, Executive and Audit Committees and statutory auditors, see “Item 6—Directors, Senior Management and Employees.”

 

We amended our bylaws in July 2001 in order to comply with the amendments to the Securities Market Law and the National Banking and Securities Commission Law published on June 1, 2001 in the Diario Oficial (Official Gazette), which are designed, among other things, to protect the rights of minority shareholders.

 

On March 19, 2003, the CNBV published new general rules, the New Rules, for Mexican issuers, which codify the principal rules applicable to issuers and public offerings. The New Rules increased the obligations and responsibilities of the Audit Committee by requiring the committee’s opinion to delist or cancel the registration of the shares of a company and to authorize any changes to the accounting policies and practices, among other important provisions.