##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 Form 20-F
 
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
  Commission File Number 333-11910 
 MAXCOM TELECOMUNICACIONES, S.A. DE C.V.
  MAXCOM TELECOMMUNICATIONS, INC.
(Translation of Registrants name into English) UNITED MEXICAN STATES
(Jurisdiction of incorporation or organization)  
 Guillermo Gonzalez Camarena No. 2000
Colonia Centro de Ciudad Santa Fe
Mexico, D.F. 01210
(Address of principal executive offices)  
 Securities registered or to be registered pursuant to Section 12(b) of the Act: None Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: Senior Step  Up Notes
Due 2009
Senior Notes due 2007
133/4% Series B Senior Notes Due 2007
Series N-2 Ordinary Participation Certificates Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the
period covered by the annual report. Series A shares, no par value, common voting stock
    
    
    4,508,644Series A-1 shares, no par value, common voting stock with preferred liquidation rights
    
    
    6,088,896Series B-1 shares, no par value, common voting stock with preferred liquidation rights
    
    
    10,181,950Series N shares, no par value, without voting rights
    
    
    10,331,670Series N-1 shares, no par value, preferred stock with limited voting rights
    
    
    219,245,038Series N-2 shares, no par value, preferred stock with limited voting rights
    
    
    26,867,820
 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 þ No o
 Indicate by check mark which financial statement item the registrant has elected to follow:
 Item 17 o Item 18 þ




---



TABLE OF CONTENTS PagePART I
    
    
    
    
    1ITEM 1.
    
    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
    
    
    1ITEM 2.
    
    OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3.
    
    KEY INFORMATION
    
    
    1ITEM 4.
    
    INFORMATION ON THE COMPANY
    
    
    13ITEM 5.
    
    OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    37ITEM 6.
    
    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    60ITEM 7.
    
    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    66ITEM 8.
    
    FINANCIAL INFORMATION
    
    
    71ITEM 9.
    
    THE OFFER AND LISTING
    
    
    72ITEM 10.
    
    ADDITIONAL INFORMATION
    
    
    73PART II
    
    
    
    
    103ITEM 11.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    103ITEM 12.
    
    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    104PART III
    
    
    
    
    104ITEM 13.
    
    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    104ITEM 14.
    
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS  AND USE OF PROCEEDS
    
    
    104ITEM 15.
    
    CONTROLS AND PROCEDURES
    
    
    104ITEM 16.
    
    
    
    
    105PART IV
    
    
    
    
    106ITEM 17.
    
    FINANCIAL STATEMENTS
    
    
    106ITEM 18.
    
    FINANCIAL STATEMENTS
    
    
    1ITEM 19.
    
    EXHIBITS
    
    
    1SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
    
    S-IIGLOSSARY OF TELECOMMUNICATIONS TERMS
    
    
    G-1EX-2.B.4: AMENDED AND RESTATED INDENTUREEX-2.B.5: INDENTUREEX-4.X: CREDIT AGREEMENTEX-4.Y: CREDIT AGREEMENTEX-4.X: AMENDMENT TO MASTER AGREEMENTEX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATIONEX-13.1: CERTIFICATIONEX-99.1: COMPUTATION OF EARNINGS PER SHAREEX-99.2: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
   
 Unless otherwise specified, all references to U.S. dollars, dollars, U.S.$ or $ are to
United States dollars, and references to Ps. and pesos are to Mexican pesos. We publish our
financial statements in pesos that i




---



##### Table of Contents



are adjusted to reflect changes in purchasing power due to inflation. Thus, unless otherwise
specified, our financial data is presented in constant pesos of December 31, 2004 purchasing power.
Amounts presented in this annual report may not add up or may be slightly inconsistent due to
rounding. Unless otherwise provided, this annual report contains translations of peso amounts into U.S.
dollars solely for the convenience of the reader based on the exchange rate reported by the Federal
Reserve Bank of New York as its noon buying rate for pesos at December 31, 2004, which was Ps.11.15
per U.S.$1.00. The currency conversions should not be construed as representations that the peso
amounts actually represent such dollar amounts. Additionally, these conversions should not be
construed as representations that these peso amounts have been or could have been converted into
U.S. dollars at those or any other rates of exchange. This annual report contains forward-looking statements. Statements that are not statements of
historical fact, including statements about our beliefs and expectations are forward-looking
statements. The words anticipates, believes, estimates, expects, forecasts, intends,
plans, predicts, projects, targets and similar words are intended to identify these
statements, which necessarily involve known and unknown risks and uncertainties. Accordingly, our
actual results of operations may be different from our current expectations, and the reader should
not place undue reliance on these forward-looking statements. Forward-looking statements speak only
as of the date they are made, and we do not undertake any obligation to update them in light of new
information or future developments. These statements are based on managements assumptions and beliefs in light of the information
currently available to it. These assumptions also involve risks and uncertainties which may cause
the actual results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking statements. Potential
risks and uncertainties include, without limitation:  
    
    competition in local services, data, Internet and VoIP services;
    
    our ability to service our debt;
    
    limitations on our access to sources of financing on competitive terms;
    
    significant economic or political developments in Mexico and the U.S.;
    
    changes in our regulatory environment, particularly developments affecting the
regulation of the telecommunications industry;
    
    our need for substantial capital;
    
    general economic conditions, including the economic slow-down in the U.S.;
    
    the global telecommunications downturn;
    
    performance of financial markets and thus our ability to refinance our financial
obligations when they come due;
    
    our history of operating losses;
    
    the risks associated with our ability to implement our growth strategy;
    
    customer attrition;
    
    technological innovations;
    
    currency exchange rates, including the Mexican Peso  U.S. dollar exchange rate;
    
    changes in the policies of central banks and/or foreign governments. As used in this Form 20-F, unless the context otherwise indicates, the terms we, us,
our, or similar expressions, as well as references to Maxcom, mean Maxcom Telecomunicaciones,
S.A. de C.V. and its consolidated subsidiaries. Please refer to page G-1 of this Form 20-F for a
glossary of telecommunications terms. We will provide without charge to each person to whom this report is delivered, upon written
or oral request, a copy of any or all of the documents incorporated by reference into this annual
report (other than exhibits, unless such exhibits are specifically incorporated by reference in
such documents). Written requests for such copies ii




---



##### Table of Contents



should be directed to Maxcom Telecomunicaciones, S.A. de C.V., Guillermo González Camarena No.
2000, Colonia Centro de Ciudad Santa Fe, México, D.F. 01210, attention: Director, Investor
Relations. Telephone requests may be directed to 011-52-55-5147-1125. iii




---



##### Table of Contents



PART I 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3. KEY INFORMATION A. Selected financial data The following tables present selected consolidated financial information of Maxcom and its
consolidated subsidiaries. We have derived this information from our audited consolidated financial
statements for the years ended December 31, 2000, 2001, 2002, 2003 and 2004, including the audited
consolidated financial statements as of December 31, 2003 and 2004 and for the years
ended December 31, 2002, 2003, and 2004 and accompanying notes appearing elsewhere in this
annual report. This data is qualified in its entirety by reference to, and should be read in
conjunction with, such consolidated financial statements. The consolidated financial statements have been prepared in accordance with Mexican GAAP,
which differs in certain significant respects from U.S. GAAP. Pursuant to Mexican GAAP, we have
prepared the financial statements and the selected financial data presented below in accordance
with Bulletin B-10 of the Mexican Institute of Public Accountants (MIPA), which provides for the
recognition of certain effects of inflation. See note 23 to the consolidated financial
statements for a description of the principal differences, other than inflation accounting, between
Mexican GAAP and U.S. GAAP applicable to us and for a reconciliation of our net income and
stockholders equity to U.S. GAAP. 1




---



##### Table of Contents



As of the year ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2004(3)Thousands of constant December 31, 2004 pesosand thousands of U.S. dollars, except for shares and per share data(2)Statement of Operations Data:Mexican GAAPNet revenues
    
    Ps.
    321,137
    
    
    Ps.
    363,459
    
    
    Ps.
    586,176
    
    
    Ps.
    805,371
    
    
    Ps.
    868,214
    
    
    $
    77,867Operating costs and expenses:Network operating costs
    
    
    130,072
    
    
    
    173,920
    
    
    
    227,590
    
    
    
    289,343
    
    
    
    306,395
    
    
    
    27,479Selling, general and
administrative
    
    
    399,715
    
    
    
    497,055
    
    
    
    468,916
    
    
    
    405,504
    
    
    
    374,393
    
    
    
    33,578Depreciation and amortization
    
    
    242,656
    
    
    
    310,379
    
    
    
    347,330
    
    
    
    353,626
    
    
    
    334,886
    
    
    
    30,034Total operating costs and
expenses
    
    
    772,443
    
    
    
    981,354
    
    
    
    1,043,836
    
    
    
    1,048,473
    
    
    
    1,015,672
    
    
    
    91,093Operating loss
    
    
    (451,306
    )
    
    
    (617,895
    )
    
    
    (457,660
    )
    
    
    (243,102
    )
    
    
    (147,458
    )
    
    
    (13,225
    )Integral cost (income) of financing:Interest expense
    
    
    482,773
    
    
    
    493,598
    
    
    
    227,105
    
    
    
    31,794
    
    
    
    37,483
    
    
    
    2,510Interest income
    
    
    (118,228
    )
    
    
    (88,748
    )
    
    
    (4,891
    )
    
    
    (4,397
    )
    
    
    9,501
    
    
    
    852Gain on repurchase of debt
    
    
    
    
    
    
    (140,175
    )Exchange loss (gain), net
    
    
    12,921
    
    
    
    (104,957
    )
    
    
    225,980
    
    
    
    182,117
    
    
    
    1,404
    
    
    
    127Gain on net monetary position
    
    
    (108,751
    )
    
    
    (95,558
    )
    
    
    (110,050
    )
    
    
    (80,111
    )
    
    
    (86,168
    )
    
    
    (7,728
    )Total integral cost of financing
    
    
    268,715
    
    
    
    64,160
    
    
    
    338,144
    
    
    
    129,403
    
    
    
    (47,281
    )
    
    
    (4,240
    )Nonrecurring charges
    
    
    
    
    
    

    71,925Other income (expense), net
    
    
    (569
    )
    
    
    (206
    )
    
    
    2,891
    
    
    
    156
    
    
    
    792
    
    
    
    (71
    )Asset tax and income tax
    
    
    
    
    
    
    
    
    
    
    8,474
    
    
    
    13,581
    
    
    
    28,035
    
    
    
    2,514Net (loss) gain
    
    
    (720,590
    )
    
    
    (755,052
    )
    
    
    (801,387
    )
    
    
    (386,243
    )
    
    
    (129,004
    )
    
    
    (11,570
    )Net (loss) gain per share, basic
    
    
    (62.86
    )
    
    
    (54.92
    )
    
    
    (57.72
    )
    
    
    (26.36
    )
    
    
    (8.71
    )
    
    
    (0.78
    )Weighted-average shares
outstanding
    
    
    11,463,667
    
    
    
    13,748,445
    
    
    
    13,885,006
    
    
    
    14,654,063
    
    
    
    14,806,980
    
    
    
    14,806,980U.S. GAAPNet (loss) gain
    
    
    (672,749
    )
    
    
    (752,229
    )
    
    
    (381,390
    )
    
    
    (398,376
    )
    
    
    1,182,481
    
    
    
    106,556Net (loss) gain per share
    
    
    (58.69
    )
    
    
    (54.71
    )
    
    
    (27.47
    )
    
    
    (27.19
    )
    
    
    79.86
    
    
    
    7.16Balance Sheet Data:Mexican GAAPCash and cash equivalents
    
    Ps.
    1,294,212
    
    
    Ps.
    199,521
    
    
    Ps.
    126,577
    
    
    Ps.
    43,903
    
    
    Ps.
    60,183
    
    
    $
    5,398Restricted cash
    
    
    686,632
    
    
    
    215,961
    
    
    
    
    
    
    
    
    
    
    
    5,555
    
    
    
    498Working capital(4)
    
    
    (76,950
    )
    
    
    (43,720
    )
    
    
    (19,681
    )
    
    
    13,984
    
    
    
    (194,253
    )
    
    
    (17,422
    )Restricted cash to long term
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,682
    
    
    
    1,137Frequency rights, net
    
    
    128,192
    
    
    
    121,198
    
    
    
    114,207
    
    
    
    101,269
    
    
    
    94,277
    
    
    
    8,455Telephone network systems and
equipment, net
    
    
    1,311,715
    
    
    
    1,582,531
    
    
    
    1,737,057
    
    
    
    1,617,231
    
    
    
    1,726,300
    
    
    
    154,825Preoperating expenses, net
    
    
    291,398
    
    
    
    256,480
    
    
    
    223,536
    
    
    
    188,950
    
    
    
    153,492
    
    
    
    13,766Intangible assets, net
    
    
    390,925
    
    
    
    346,281
    
    
    
    465,848
    
    
    
    411,156
    
    
    
    366,128
    
    
    
    32,837Rent deposits and other assets
    
    
    9,479
    
    
    
    36,197
    
    
    
    32,366
    
    
    
    29,620
    
    
    
    20,915
    
    
    
    1,876Total assets
    
    
    4,204,198
    
    
    
    2,900,135
    
    
    
    2,896,252
    
    
    
    2,600,979
    
    
    
    2,666,766
    
    
    
    239,172Total liabilities
    
    
    3,671,026
    
    
    
    3,120,954
    
    
    
    2,239,525
    
    
    
    2,329,410
    
    
    
    1,082,409
    
    
    
    97,077Capital stock
    
    
    1,391,126
    
    
    
    1,128,451
    
    
    
    1,843,571
    
    
    
    1,843,571
    
    
    
    2,420,295
    
    
    
    217,067Additional paid-in capital
    
    
    148,255
    
    
    
    118,278
    
    
    
    459
    
    
    
    1,544
    
    
    
    866,612
    
    
    
    77,723Accumulated deficit
    
    
    (1,006,209
    )
    
    
    (1,467,548
    )
    
    
    (1,187,303
    )
    
    
    (1,573,546
    )
    
    
    (1,702,550
    )
    
    
    (152,695
    )Shareholders equity (deficit)
    
    
    533,172
    
    
    
    (220,819
    )
    
    
    656,727
    
    
    
    271,569
    
    
    
    1,584,357
    
    
    
    142,095U.S. GAAPShareholders
equity (deficit)
    
    Ps.
    285,811
    
    
    Ps.

    (465,355
    )
    
    Ps.
    (3,030
    )
    
    Ps.
    (400,322
    )
    
    Ps.
    978,144
    
    
    $
    86,659Other Financial Data:Mexican GAAPCapital expenditures(5)
    
    
    817,607
    
    
    
    597,517
    
    
    
    577,651
    
    
    
    131,872
    
    
    
    347,768
    
    
    
    31,190Ratio of earnings to fixed
charges(6)
    
    
    (0.39
    )
    
    
    (0.48
    )
    
    
    (2.25
    )
    
    
    (10.03
    )
    
    
    (3.20
    )
    
    
    (3.20
    )Cash flow
(used in) provided by operating
activities
    
    
    (938,441
    )
    
    
    (389,102
    )
    
    
    (372,026
    )
    
    
    (49,560
    )
    
    
    267,790
    
    
    
    24,016
 2




---



##### Table of Contents



As of the year ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2004(3)Thousands of constant December 31, 2004 pesosand thousands of U.S. dollars, except for shares and per share data(2)Cash flow
provided (used in) by financing
activities
    
    
    2,848,175
    
    
    
    (108,074
    )
    
    
    876,731
    
    
    
    98,760
    
    
    
    96,259
    
    
    
    8,633Cash used in investing
activities
    
    
    (817,607
    )
    
    
    (597,517
    )
    
    
    (577,651
    )
    
    
    (131,872
    )
    
    
    (347,768
    )
    
    
    (31,190
    )U.S. GAAPCash (used
in) provided by operating
activities
    
    Ps.
    (858,422
    )
    
    Ps.
    (420,368
    )
    
    Ps.
    (206,767
    )
    
    Ps.
    17,986
    
    
    Ps.
    119,417
    
    
    $
    10,710Cash
provided (used in) by financing
activities
    
    
    2,973,954
    
    
    
    (42,865
    )
    
    
    667,170
    
    
    
    
    
    
    
    173,377
    
    
    
    15,549Cash used in investing activities
    
    
    (908,588
    )
    
    
    (578,039
    )
    
    
    (443,674
    )
    
    
    (68,429
    )
    
    
    (239,563
    )
    
    
    (21,485
    )
 Notes to Selected Historical Consolidated Financial Information  (1)
    
    We commenced commercial operations on May 1, 1999. In accordance with Mexican GAAP, our
financial statements for that year reflect only eight months of operations.  (2)
    
    Pursuant to Mexican GAAP, financial data for all periods in the financial statements have,
unless otherwise indicated, been restated in constant pesos as of
December 31, 2004.
Restatement into December 31, 2004 pesos is made by multiplying the relevant nominal peso
amount by the inflation index for the period between the end of the period to which such
nominal peso amount relates and December 31, 2004. The inflation index used in this annual
report for 2000 figures is 1.2070 for 2001 figures is 1.1561 for 2002 figures is 1.0937 and for  2003  figures is 1.0519.  (3)
    
    Peso amounts were converted to U.S. dollars at the exchange
rate of Ps.11.15 per U.S.$1.00
reported by the Federal Reserve Bank of New York as its noon buying rate for pesos on
December 31, 2004. Such conversions are for the convenience of the reader and should not be
construed as representations that the peso amounts actually represent such U.S. dollar
amounts or could be converted into U.S. dollars at the rate indicated, or at all.  (4)
    
    Working capital is defined as current assets (excluding cash and cash equivalents and
restricted cash) less current liabilities (excluding current maturities of long-term debt,
which includes interest payable).  (5)
    
    Capital expenditures include frequency rights, telephone network systems and equipment,
intangible assets and other assets. Investing activities in the consolidated statements of
changes in financial position are net of dispositions.  (6)
    
    Our earnings have been insufficient to cover fixed charges since we started incurring debt
in 1998. Fixed charges include interest expense, capitalized interest and the portion of
operating lease rental expense that represents the interest factor. The fixed charge coverage
deficiency for the years ended December 31, 2000, 2001, 2002,
2003 and 2004 amounted to
Ps.819.8 million, Ps.760.7 million, Ps.793.8 million, Ps.372.7 million, and Ps.117.5 million,
respectively. 3




---



##### Table of Contents



EXCHANGE RATES The following table sets forth, for the periods indicated, the period-end, average, high and
low noon buying rates, in each case for the purchase of U.S. dollars, all expressed in nominal
pesos per U.S. dollar. The noon buying rate at June 29, 2005 was Ps.10.75 per U.S.$1.00. Noon Buying Rate(1)Period End
    
    
    Average(2)
    
    
    High
    
    
    Low2000
    
    
    9.62
    
    
    
    9.470
    
    
    
    10.09
    
    
    
    9.182001
    
    
    9.16
    
    
    
    9.326
    
    
    
    9.97
    
    
    
    8.952002
    
    
    10.43
    
    
    
    9.745
    
    
    
    10.43
    
    
    
    9.002003
    
    
    11.24
    
    
    
    10.846
    
    
    
    11.41
    
    
    
    10.112004
    
    
    11.15
    
    
    
    11.309
    
    
    
    11.63
    
    
    
    10.80December 2004
    
    
    
    
    
    
    
    
    
    
    11.33
    
    
    
    11.11January 2005
    
    
    
    
    
    
    
    
    
    
    11.41
    
    
    
    11.17February 2005
    
    
    
    
    
    
    
    
    
    
    11.21
    
    
    
    11.04March 2005
    
    
    
    
    
    
    
    
    
    
    11.33
    
    
    
    10.98April 2005
    
    
    
    
    
    
    
    
    
    
    11.23
    
    
    
    11.04May 2005
    
    
    
    
    
    
    
    
    
    
    11.03
    
    
    
    10.89
 
 (1)
    
    Source: Federal Reserve Bank of New York.(2)
    
    Represents the average rates for each period indicated, calculated by using the average of
the exchange rates on the last day of each month during the period.  B.
    
    Capitalization and indebtednessNot applicable.C.
    
    Reasons for offer and use of proceedsNot applicable.D.
    
    Risk factors Factors relating to Maxcom We anticipate that we will have negative operating cash flow until we develop a sufficiently large
customer base The development of our business and the installation and expansion of our network, services
and customer base require significant expenditures. These expenditures, together with operating
expenses, will adversely impact our cash flow and profitability until an adequate customer base is
established. We have generated negative cash flows from operating activities since our
incorporation in 1996 and until 2003 and expect to generate insufficient cash flows to cover our fixed charges
through 2005. This is so even though our fixed charges have decreased
significantly as we restructured our financial indebtedness in April 2002 and October 2004. We cannot assure you that
we will be able to establish an adequate customer base to generate sufficient positive cash flows
from our core operations. If we cannot generate significant revenues, achieve and sustain profitability or generate
positive cash flows from operating activities in the future, we will not be able to meet our debt
service or working capital requirements, and the value of our securities, as a result, would be
materially reduced. 4




---



##### Table of Contents



We expect to incur net losses through at least 2005 Our cash flow from operations for the year 2004 was insufficient to cover our fixed charges.
We expect to continue to incur net losses through at least 2005. We may need additional financing We may require additional financing in the future to service our indebtedness and fund our
operations. Our budgeted capital expenditures for 2005 of U.S.$35.8 million are premised on our
ability to obtain financing for the majority of such amount. We cannot assure you that we will
have sufficient resources and that, if needed, any financing will be available in the future or on
terms acceptable to us. In addition, our ability to incur additional indebtedness is restricted by
the terms of the indenture governing the Senior Notes due 2007, which we refer to in this report as
the old notes and the terms of the indenture governing the Step-Up Notes due 2009, which we refer
to in this report as the new notes. We may be unable to build out our network in a timely manner or without undue cost Our ability to achieve our strategic objectives will depend, in large part, upon the
successful, timely and cost-effective buildout of our network. Factors that could affect such
buildout include, among other things:  
    
    our inability to obtain permits to use public rights of way;
    
    our inability to obtain future financing necessary for such buildout;
    
    unforeseen delays, costs or impediments relating to the granting of state and
municipal permits for our buildout;
    
    delays or disruptions resulting from physical damage, power loss, defective
equipment or the failure of third-party suppliers or contractors to meet their
obligations in a timely and cost-effective manner; and
    
    regulatory and political risks relating to Mexico, such as the temporary seizure or
permanent expropriation of assets, import and export controls, political instability,
changes in the regulation of telecommunications and any future restrictions on the
repatriation of profits or on foreign investment. Although we believe that our cost estimates and buildout schedule are reasonable, we cannot
assure you that the actual construction costs or time required to complete the buildout will not
substantially exceed current estimates. Any significant cost overrun or delay could materially
affect our cash flow and our ability to repay our debt. We have experienced significant turnover in our executive ranks, which has affected our ability to
develop and execute our business strategies Our operations are managed by a small number of key management personnel, the loss of whom
could materially affect our operations. In June and July 2000, our then chief executive, chief
operations and chief marketing officers resigned. In April 2001, our then chief financial officer
also resigned. We appointed new officers to all these positions during 2001, 2002 and 2003. However, between January and September 2003, our then chief executive officer, chief marketing
officer, chief commercial operations officer and vice president of corporate communications and
public relations and chief financial officer also resigned. We have since appointed a new chief
executive officer who was our former chief operating officer a new chief financial officer who was
our former treasurer and director of investor relations. As part of our cost-reduction efforts and
more efficient operations, we have split the commercial operations areas into two main segments,
one for business and other for residential customers, we have eliminated the office of vice 5




---



##### Table of Contents



presidency of corporate communications and public relations and consolidated the vice
presidencies of operations and information systems into a single vice presidency of operations. In February 2004 our Chief Engineering Officer resigned. We have subsequently consolidated the
responsibilities of this position within the responsibilities of the Chief Operating Officer. In
November 2004 our Human Resources Vicepresident resigned. Ms. Veronica Macias, then head of our
recruiting area, has taken the responsibilities of the director of
human resources. The significant turnover we have experienced in our management has affected our ability to
develop and execute our business strategies. The success of our company depends in part upon our
ability to hire and retain highly skilled and qualified management personnel. The competition for
highly qualified management personnel in the telecommunications industry is intense and,
accordingly, we cannot assure you that we will be able to hire or retain the management personnel
necessary for our success. We may not have sufficient administrative, operational or financial resources to grow as rapidly as
we would like Our expected growth will place a significant strain on our administrative, operational and
financial resources. We anticipate that continued growth will require us to recruit and hire a
significant number of new managerial, finance, sales and marketing, accounting and support
personnel. If we are unable to attract and retain personnel who can manage our growth effectively,
our growth may be limited and the quality of our service may be impaired. This occurrence could
adversely affect our results of operations and financial condition. We depend on Telmex for interconnection Telmex exerts significant influence on all aspects of the telecommunications market in Mexico,
including interconnection agreements. We use Telmexs network to service virtually all of our
customers. In November 2003, we signed an amendment to our interconnection agreement with Telmex
that reduces from 70% to 30% the allowed percentage of imbalance of traffic for the bill and keep
procedure. A new amendment was executed in August 2004 reducing furthermore the allowed percentage
of imbalanced traffic for the bill and keep procedure to 15%. This amendment will be effective
temporarily until we can reach a definitive agreement with Telmex. We cannot assure what percentage
of imbalance of traffic we will finally agree to with Telmex. The interconnection rate remained at
U.S.$0.00975 per minute. If allowed percentage for imbalance of traffic for bill and keep
procedure is exceeded, we cannot assure you that we will be able to offer services at profitable
and competitive rates. Our high leverage could affect our ability to service our debt We are highly leveraged. In 2004, our earnings were insufficient to cover fixed charges by an
amount equal to Ps.117.5 million (U.S.$10.5 million). Our ability to meet our debt service requirements will depend on our future performance, which
is subject to a number of factors, many of which are outside our control. We cannot assure you that
we will generate sufficient cash flows from operating activities to meet our debt service and
working capital requirements. In addition, our high leverage could affect our access to credit or
our ability to pursue business opportunities. The indenture governing the old notes and the new notes limits but does not prohibit our
incurrence of additional indebtedness. We expect to incur additional indebtedness in the future.
However, our significant level of indebtedness may impair our ability to raise additional
indebtedness on commercially reasonable terms when required or with terms that will not limit our
ability to develop our business. Furthermore, our significant leverage could adversely affect:  
    
    our ability to fund capital expenditures, acquisitions or operating losses or to
refinance existing indebtedness;
    
    our flexibility in planning for, or reacting to, changes in our business and market
conditions; and 6




---



##### Table of Contents




    
    our ability to compete in our markets. We are and will be subject to restrictive covenants The terms of the old notes and the new notes, impose significant operating and financial
restrictions. These restrictions affect, and in many respects significantly limit or prohibit, our
ability to, among other things:  
    
    borrow money;
    
    pay dividends on our capital stock;
    
    purchase stock or repay subordinated indebtedness;
    
    make investments;
    
    restrict the ability of our subsidiaries to pay dividends;
    
    use assets as security in other transactions;
    
    sell assets; and
    
    consolidate or merge into other companies. If we do not comply with these restrictions, we could be in default even if we are able to
service our debt. If there were a default, holders of the notes could demand immediate payment of
the aggregate principal amount and accrued interest on the notes outstanding. This could lead to
our bankruptcy or reorganization for the benefit of our creditors or to our inability to pay our
obligations. We may not be able to
finance an exit transaction repurchase We
will be required to offer to repurchase all of the old notes and the
new notes if an exit transaction, as
such term is defined in the indentures governing the old notes and the
new notes occurs (unless certain conditions set forth therein
are satisfied). However,
it is possible that we will not have sufficient funds at the time of the exit transaction to make
the required repurchase. If we do not successfully upgrade and operate accounting, billing, customer service and management
information systems, we may not be able to achieve desired operating efficiencies Sophisticated information and processing systems are vital to our operations and growth and
our ability to monitor costs, render monthly invoices for services, process customer orders,
provide customer service and achieve operating efficiencies. We intend to upgrade the accounting,
information and processing systems necessary to provide services efficiently. However, we cannot
assure you that we will be able to successfully upgrade or operate such systems or that they will
perform as expected. Our operations are dependent upon our ability to protect and maintain our network infrastructure Our operations are dependent upon our ability to protect our network infrastructure against
damage from fire, earthquakes, floods, power loss, and similar events and to construct networks
that are not vulnerable to the effects of such events. The occurrence of a natural disaster or
other unanticipated problem at our facilities or at the sites of our switches could cause
interruptions in the services we provide. The failure of a switch would result in the interruption
of service to the customers served by that switch until necessary repairs are effected or
replacement equipment is installed. The successful operation of our network and its components is
highly dependent upon our ability to maintain the network and its components in reliable enough
working order to provide sufficient quality of service to attract and maintain customers. 7




---



##### Table of Contents



Any damage or failure that causes interruptions in our operations or lack of adequate
maintenance of our network could have a material adverse effect on our business, financial
condition and results of operations. We could be negatively affected by the by-pass traffic Pursuant to regulations of the Federal Telecommunications Commission (Comisión Federal de
Telecomunicaciones), which we refer to as COFETEL, the only legal way to transport international
long distance calls in Mexico is through an authorized international gateway. However, alternative
ways to route and terminate international long distance calls at a lower cost in countries that
exchange a significant amount of traffic with Mexico exist. Some estimates show that, given the
disparity between international settlement rates and domestic interconnection rates that would be
payable under an alternative arrangement, an increasing portion of the long distance market between
Mexico and the United States is being served by entities that by-pass the international
settlement rate system. This practice is deemed illegal by COFETEL. Maxcom complies with all relevant regulations relating to local and long distance services and
cannot confirm whether any of its high-volume customers is engaging in by-pass activities. Under
Mexican legislation, Maxcom is not required to investigate whether any such high-volume customers
are engaged in by-pass activity. Maxcom is required, however, to obey any COFETEL formal order
to disconnect a customer deemed to be engaged in by-pass activity by COFETEL. Mexican regulatory authorities have announced their intention to conduct more rigorous audits
of persons or companies engaging in by-pass activity. In December 2000, some of the major
Mexican long distance carriers signed a cooperation agreement to combat by-pass in Mexico. If,
as a consequence of such actions, the regulatory authorities determine that any of our high-volume
customers are engaged in by-pass activity, Maxcoms revenues could be negatively affected. Our telecommunications network infrastructure has several vulnerabilities and limitations Our telecommunications network is the source of all our revenues. Any problem with or
limitation of our network may result in a reduction in the number of our customers and our
revenues. The development and operation of our network is subject to problems and technological
risks, including:  
    
    physical damage;
    
    power loss;
    
    capacity limitations;
    
    software defects as well as hardware and software obsolescence;
    
    breaches of security, whether by computer virus, break-in or otherwise;
    
    denial of access to our sites for failure to obtain required municipal or other
regulatory approvals; and
    
    other factors which may cause interruptions in service or reduced capacity for our
customers. A failure to achieve current specifications for, or future upgrades of, our network may
materially and adversely affect our results of operations and financial condition. 8




---



##### Table of Contents



Our results are negatively impacted by high levels of churn We experience a high rate of residential and business customer lines attrition, or churn.
Churn may be impacted by:  
    
    our customer delinquency;
    
    our limited coverage area that restricts our ability to continue providing service
when a customer moves;
    
    our failure to meet service levels required by our customers;
    
    promotional and pricing strategies of our competitors; and
    
    economic conditions in Mexico. During 2004, we churned 33,410 voice lines (residential and business customer lines). This
resulted in an average monthly churn rate of 2.0%. See Item 5. Operating and Financial Review
and Prospects for a fuller description of voice and wholesale lines. A high rate of churn increases our cost of operations and reduces our revenues. Factors relating to the Mexican telecommunications industry We face significant increasing competition, which may negatively affect our operating margins The telecommunications industry in Mexico is becoming highly competitive. We compete with our
rivals primarily on the basis of features, pricing and customer service. We face significant
competition from Telmex in all of the areas where we operate. In particular, as the former
state-owned telecommunications monopoly, Telmex has significantly greater financial and other
resources than those available to us, a nationwide network and concession wireless spectrum, and an
established customer base. We also face significant competition from recent entrants, particularly in Mexico City. Some
of these recent entrants may have significantly greater financial and other resources than us. In
addition, we are facing increased competition due to the fact that the Mexican government is
granting local concessions to most of the long distance carriers; or if new, competing
technologies are developed. Competition may limit our ability to grow or maintain our customer
base or to implement price increases to keep pace with inflation. New competition from cable operators as well as from terrestrial microwave TV providers, who
have been recently authorized by the Mexican government to provide bi  directional data and
Internet broadband services and to provide the transport of voice services, including VoIP
services, acting as carriers of carriers, pose a high risk to us. As these cable operators and
terrestrial microwave TV providers have a substantial coverage of the
cities we are already
servicing, and as the cable operators and terrestrial microwave TV providers telephony income may
be seen as incremental revenue, the price reduction and the vast
coverage may prevent us from
continue growing. Additionally, the Mexican government has granted licenses to new companies for the provision
of VoIP telephony services. It is still uncertain how these entrants will affect the local and long
distance telephony services in Mexico. If the Mexican government grants more concessions, the value of our concessions could be severely
impaired The telecommunications industry is regulated by the Mexican government. Our concessions are
not exclusive and the Mexican government is granting concessions covering the same geographic
regions and frequency 9




---



##### Table of Contents



bands to other entrants. We cannot assure you that additional concessions to provide services
similar to those we plan to provide will not be granted and that the value of our concessions will
not be adversely affected as a result. We could lose our concessions if we do not comply fully with their terms The terms of our concessions require us to satisfy a number of technical, buildout and
financial conditions. In September 2002 and November 2003, we notified COFETEL of our failure to
provide coverage in certain towns and cities by such date as required by our local and long
distance concessions. In addition, we believe we will not be able to meet certain buildout
obligations in certain towns and cities along the Mexico City City of Toluca City of Querétaro
City of San Luis Potosi and City of Puebla  City of Veracruz corridors by September 2004. We are
in the process of preparing a request for a modification to the buildout requirements of the
concessions from COFETEL. If granted, this modification would allow us to be once again in
compliance. However, we cannot assure you that COFETEL will agree to such modification. A failure to comply with any of the terms of our concessions or to obtain a waiver or
modification could result in the termination of any of our concessions and the loss of up to
Ps.48.2 million in performance bonds that we previously issued
to the Mexican Ministry of Communications
and Transportation, or SCT (Secretaría de Comunicaciones y Transportes). The Mexican government
would not be required to compensate us in case of such termination. If any of our concessions were
to be terminated, we could be unable to engage in our core business and we would likely be unable
to repay our indebtedness. We failed to provide the SCT with the performance bonds renewal for
2004, and such failure could be construed as a default on the terms of our concessions. We are
currently negotiating with the SCT new terms to secure the performance of our concessions. However,
we cannot assure you what will be the outcome of such negotiations. Fraud increases our expenses The fraudulent use of telecommunications networks imposes a significant cost upon service
providers, who must bear the cost of services provided to fraudulent users. We suffer loss of
revenue as a result of fraudulent use, and also cash costs due to our obligation to reimburse
carriers for the cost of services provided to fraudulent users. Although technology has been
developed to combat this fraudulent use and we are installing it in our operations, this technology
does not eliminate fraud entirely. In addition, since we rely on other long-distance carriers for
interconnection, some of which do not have anti-fraud technology in their network, we are
particularly exposed to this risk in our long distance service and in traffic originated in our
network to mobile users under the mode of calling party pays. In 2004, our expenses for the
prevention and detection of fraud were not significant. Because of cost reduction measures, we may elect not to upgrade our licenses relating to
anti-fraud software or to cover maintenance fees. We have also reduced our fraud monitoring
personnel. This has reduced our ability to detect fraudulent use of our services. See Item 8.
Financial InformationA. Consolidated statements and other financial informationLegal
proceedingsSignificant unpaid receivable. The technology we use may be made obsolete by the technology used by our competitors All companies in the global telecommunications industry must adapt to rapid and significant
changes in technology. While we have been installing what we believe to be a technologically
advanced fiber optic network with a microwave overlay, we cannot assure you that this technology
will not be challenged by competition from new or improved digital or other technologies in the
near future. Technological changes may adversely affect our competitive position, cause an
increase in customer churn, require substantial new capital expenditures and/or require write-downs
of obsolete technology. The Mexican government could temporarily seize or permanently expropriate our assets under certain
circumstances The Mexican government has the authority to temporarily seize all assets related to a
telecommunications concession in the event of natural disaster, war, significant public
disturbance, threats to internal peace, economic events, and for other reasons related to national
security. In addition, the Mexican government has the statutory 10




---



##### Table of Contents



right to permanently expropriate any telecommunications concession and claim any related
assets for reasons of public interest. Mexican law provides for compensation in connection with
losses and damages related to temporary seizure or expropriation. However, we cannot assure you
that the actual compensation paid would be adequate or that such payment would be timely. Factors relating to Mexico If Mexico experiences future political and economic crises, our business could be affected
negatively We are a Mexican company with all of our operations in Mexico. Accordingly, the political and
economic environment within Mexico can have a significant impact on our financial condition and
results of operations. The Mexican government has exercised, and continues to exercise, significant influence over
the Mexican economy. Mexican governmental actions concerning the economy and state-owned
enterprises could have a significant impact on Mexican private sector entities in general and on us
in particular, and on market conditions, prices and returns on Mexican securities, including our
securities. In July 2000, Mexico held national elections, which were won by Vicente Fox, the
candidate of the National Action Party (Partido Acción Nacional). This represents the first time
in over 70 years that the Institutional Revolutionary Party (Partido Revolucionario Institucional)
has not won the Presidency and has not secured the absolute majority of the Mexican Congress. Additionally, the Mexican national elections will be held in July 2006. We cannot predict the
impact that this new political landscape will have on the Mexican 2006 elections, the economy and
particularly on the growth and deregulation of the telecommunications industry. In the past, Mexico has experienced economic crisis, caused by internal and external factors,
characterized by exchange rate instability, high inflation, high domestic interest rates, economic
contraction, a reduction of international capital flows, a reduction of liquidity in the banking
sector and high unemployment. These economic conditions substantially reduced the purchasing power
of the Mexican population and, as a result, the demand for telecommunications services. Crisis such as these could have a material adverse effect on our financial condition and
results of operations and on the market value of our securities. Changes in tax or other regulations could have an adverse impact on our financial condition Effective January 1, 2002, the Mexican Congress expanded the scope of the Special Production
and Services Tax Law (Ley del Impuesto Especial Sobre Producción y Servicios), whereby, among other
things, a new 10% tax was imposed on the rendering of certain telecommunications and supplementary
services an amendment to this law, effective January 1, 2003 confirmed that our core business (the
offering of local and long distances services) is not subject to this special tax. Although we
believe, based on the advice of our tax and regulatory advisors, that certain other services that
are part of our local service offerings, are also not subject to such special tax, we cannot assure
you that the tax authorities may not interpret the law otherwise. In 2002 and 2003 tax years Maxcom
accrued the tax corresponding to the services that might be claimed by the Mexican tax authorities.
As of January 1, 2004, telecommunications and supplementary services are no longer subject to
this tax. The operation of telecommunications systems in Mexico is subject to laws and regulations
administered by the Mexican Ministry of Communications and
Transportation, or SCT (Secretaría de
Comunicaciones y Transportes) and the Mexican Federal Telecommunications Commission (Comisión
Federal de Telecomunicaciones). These governmental agencies may take regulatory actions that could
damage our business. Foreign ownership restrictions limit our ability to raise equity capital Mexican law currently provides that no more than 49% of the full voting stock of a Mexican
corporation holding a concession to provide telecommunications services, other than cellular
services, may be held by non-Mexicans. Non-Mexicans represent 49% of our full voting stock. In
addition, Mexican authorities have mandated 11




---



##### Table of Contents



that our limited voting shares, which are also referred to as neutral investment shares, may
not represent more than 95% of our capital stock. Under our current capital structure, we have limited flexibility to raise equity capital from
non-Mexican investors. As a result, any future sales of equity securities, may require substantial
participation by Mexicans or a waiver or modification of Mexican foreign investment laws and
regulations. We cannot assure you that such a waiver or modification could be obtained. We may lose money because of peso devaluations While our revenues are almost entirely denominated in pesos, the majority of our obligations,
and all of our long-term debt, are denominated in U.S. dollars. In addition, substantially all of
our capital expenditures are denominated in U.S. dollars. We are, and will be, exposed to peso
devaluation risk. The peso has devalued substantially against the U.S. dollar in the past and may
devalue significantly in the future. For example, the noon buying rate rose from Ps.3.45 per
U.S.$1.00 on December 19, 1994 to Ps.5.00 per U.S.$1.00 on December 31, 1994 and Ps.7.74 per
U.S.$1.00 on December 31, 1995, representing a 124.6% devaluation of the peso relative to the U.S.
dollar. In 2003, the peso devalued 7.84% relative to the U.S. dollar, and in 2004, the peso
revalued 0.8%, relative to the U.S. dollar. In the first five months of 2005, the peso revalued
2.2% relative to the U.S. dollar. Further declines in the value of
the peso relative to the U.S. dollar could adversely affect our ability to meet our U.S.
dollar-denominated obligations, including the old notes the new notes and the 133/4% Series B Senior
Notes due 2007, which we refer to in this report as the 133/4% notes. In addition, any further
decrease in the value of the peso may negatively affect the value of Mexican securities such as
ours. The peso-to-dollar exchange rate may experience significant devaluations in the future. Developments in other countries may impact the price of our securities We cannot assure you that the price of our securities will not be adversely affected by events
elsewhere, especially in the United States and in emerging market countries. Mexican financial and
securities markets are, to varying degrees, influenced by economic and market conditions in other
countries. Although economic conditions are different in each country, investor reaction to
developments in one country has had and can have significant effects on the prices of securities of
issuers in other countries, including Mexico. Currently, the economic slow down in the United
States, the military conflict in Iraq, the threat of terrorism as well as political and financial
crisis in certain emerging markets have had a significant negative impact on the financial and
securities markets in many emerging market countries, including Mexico. The effects of these
crises may worsen, or new crises may occur, which may negatively affect the price of our new notes,
the old notes, the 133/4% notes and CPOs or our financial condition and results of operations. Our financial statements do not give you the same information as financial statements prepared
under United States accounting principles We prepare our financial statements in accordance with Mexican GAAP and are reconciled to U.S. GAAP. Mexican GAAP differs in significant
respects from U.S. GAAP, including in the treatment of the amortization of frequency rights, the
capitalization of preoperating expenses, the capitalization of interest, the extinguishment of
debt, the restructuring of troubled debt and deferred income taxes and employees profit sharing,
and in the presentation of cash flow information. In particular, all Mexican companies must
incorporate the effects of inflation directly in their accounting records and in published
financial statements. We cannot assure you that these will be the only differences in the future.
See note 23 to the consolidated financial statements for a description of the principal
differences between Mexican GAAP and U.S. GAAP applicable to us. 12




---



##### Table of Contents



You may suffer a U.S. dollar shortfall if you obtain a judgment against us or a distribution in
bankruptcy In the event you are awarded a judgment from a court enforcing our U.S. dollar-denominated
obligations under either our old or new notes or the liquidation preference under our series N-2
preferred shares, we will have the right to discharge our obligations by paying you in pesos at the
exchange rate in effect on the date of payment of such judgment. Likewise, if we are declared
bankrupt, we will have the right to discharge our obligations by paying our creditors in pesos at
the exchange rate in effect on the date of the declaration of such bankruptcy. The exchange rate is currently determined by the Mexican Central Bank (Banco de México) every
banking day in Mexico and published the following banking day in the Official Gazette of the
Federation (Diario Oficial de la Federación). As a result of such currency conversion, you could
face a shortfall in U.S. dollars. No separate actions exist or are enforceable in Mexico for
compensation for any such shortfall. You should also be aware that in the event we are declared bankrupt by a Mexican court or if
we are subject to a bankruptcy reorganization proceeding (concurso mercantil) in such court, our
debt obligations, including the new notes, the old notes and the 133/4% notes, if any, will cease to
accrue interest and payment of any of our debt obligations would depend on the outcome of the
bankruptcy reorganization proceedings, which are often very lengthy. We may not be able to make payments in U.S. dollars In the past, the Mexican economy has experienced balance of payment deficits and shortages in
foreign exchange reserves. While the Mexican government does not currently restrict the ability of
Mexican or foreign persons or entities to convert pesos to foreign currencies generally, and U.S.
dollars in particular, it has done so in the past and could do so again in the future. We cannot
assure you that the Mexican government will not institute a restrictive exchange control policy in
the future. Any such restrictive exchange control policy could prevent or restrict our access to
U.S. dollars to meet our U.S. dollar obligations and could also have a material adverse effect on
our business, financial condition and results of operations. We cannot predict the impact of any
such measures on the Mexican economy. High inflation rates in Mexico may decrease demand for our services while increasing our costs In recent years, Mexico has experienced high levels of inflation. The annual rate of
inflation, was 9.0%, 4.4%, 5.7%, 4.0% and 5.2% in 2000, 2001, 2002, 2003 and 2004, respectively.
High inflation rates can adversely affect our business and results of operations in the following
ways:  
    
    inflation can adversely affect consumer purchasing power, thereby adversely
affecting consumer demand for our services and products; and
    
    to the extent inflation exceeds our price increases, our prices and revenues
will be adversely affected in real terms. High interest rates in Mexico could increase our financing costs Mexico also has, and is expected to continue to have, high real and nominal interest rates.
The interest rates on 28-day Mexican government treasury securities averaged, 15.2%, 11.3%, 7.1%,
6.2% and 6.8% for 2000, 2001, 2002, 2003 and 2004, respectively. Although we do not currently have
any peso-denominated debt, if we need to incur such debt in the future, it will likely be at high
interest rates. 
 ITEM 4. INFORMATION ON THE COMPANY  A.
    
    History and development of the Company Maxcom Telecomunicaciones, S.A. de C.V. is a limited liability company (sociedad anónima de
capital variable) with indefinite life, organized under the laws of Mexico on February 28, 1996.
We were originally 13




---



##### Table of Contents



organized under the name Amaritel, S.A. de C.V. We changed our legal name to Maxcom
Telecomunicaciones, S.A. de C.V. on February 9, 1999. Our legal name is also our commercial name. Our principal offices are located at Guillermo Gonzalez Camarena No. 2000, Colonia Centro
de Ciudad Santa Fe, Mexico, D.F. 01210 and our general phone number is (52) 55-5147-1111. Our
website address, the contents of which are not part of, or incorporated into, this annual report,
is www.maxcom.com. Our agent in the United States is Puglisi & Associates, 850 Library Avenue,
Suite 204, P.O. Box 885, Newark, Delaware 19715. In February 1997, we were awarded Mexicos first competitive wireline local and long distance
telephony concession, covering the Federal District of Mexico and over 100 cities and towns in the
Gulf region for local service and the whole nation for long distance service. This concession has
a term of 30 years. The local telephony portion of our concession was expanded in September 1999
to cover most of the Greater Mexico City area and a wider area within the Gulf region. In
September 2001, our concession was further expanded to allow us to provide nationwide wireline
local telephony service. In October 1997, we were awarded seven nationwide point-to-point and three regional
point-to-multipoint microwave concessions. Each of these concessions has a term of 20 years. We commenced commercial operations on May 1, 1999. We are currently offering local, long
distance Internet, VoIP services, public telephony, other value-added services and data services
in Mexico City and the cities of Puebla and Querétaro. For the five years ended December 31, 2004, we invested approximately Ps.2,160.6 million in
capital expenditures, primarily for the buildout of our infrastructure. For
2005, we plan to invest approximately U.S.$35.8 million in capital expenditures, mainly to
continue to build out our network. Of this amount, we had already spent approximately Ps.84.1
million (approximately U.S. $7.4 million) by March 31, 2005.  B.
    
    Business overview We are a growing facilities-based telecommunications company operating in the competitive
local exchange carrier market in Mexico. We are focused on developing our network and support
infrastructure required to provide local as well as long distance, data, Internet, public
telephony, VoIP telephony and other value-added services to targeted niched markets, as well as
small and medium-sized businesses and residential customers within our concession areas. In
particular, we believe that the cities of Mexico, Puebla and Querétaro, where we currently operate,
offer opportunities for growth in telecommunications use as a result of the combination of a
relatively large population, low subscriber line penetration by international standards and
economic growth. We anticipate a large and growing demand for telephony services in these regions.
We plan to expand our operations areas to Toluca, Guadalajara and Monterrey during 2005, where we
intend to replicate our business model through our own sales force or through other distribution
channels. We believe that extending our commercial footprint will have a positive effect also in
Mexico City, enabling us to compete in new segments with companies that have several facilities
throughout Mexico. See below Our marketsConcession areas for a fuller description of the
nationwide concession. The construction of our telecommunications network is based on a smart-build, customer-driven,
modular platform that utilizes a combination of fiber optic, copper wire and microwave transmission
technology. This methodology enables us to provide fast service to our target markets, reduces the
time lag between the incurrence of capital expenditures and the generation of revenues and
increases flexibility to accommodate a changing market environment. To operate our network, we
have constructed three central switching offices located in Mexico City, the City of Puebla and the
City of Querétaro. We have a 170-kilometer fiber optic link connecting the cities of Puebla and
Mexico and a 266-kilometer fiber optic link connecting the cities of Querétaro and Mexico, which is
part of our new 2,011-kilometer long fiber optic backbone connecting Mexico City and Laredo, Texas. As of December 31, 2004, we had in service three state-of-the-art Lucent Technologies 5ESS
switches. 14




---



##### Table of Contents



In August 2002, we acquired from Bestel, S.A. de C.V. two strands in a 2,011-kilometer fiber
optic backbone covering the cities located between the cities of Toluca, Puebla, Mexico City,
Queretaro, Celaya, Irapuato, Guadalajara, Leon, Aguascalientes, San Luis Potosi, Saltillo,
Monterrey, Nuevo Laredo and Laredo, Texas. This fiber optic backbone includes a border crossing
with the United States. We believe that the combination of our smart-build network construction strategy, our position
as a customer service-oriented provider, our focus on quality and reliability and our
state-of-the-art network and systems will allow us to benefit from the expected growth of the
Mexican telecommunications industry. We position ourselves as a fully integrated telecommunications provider for our customers. In
addition to our existing local, long distance, VoIP and data services, we offer value-added
products such as broadband (xDSL), high-speed dedicated and dial-up Internet access, domestic and
international dedicated lines and VPN. We are currently expanding our product portfolio by adding
other services, such as web-hosting and network-managed security services (firewalls) through
strategic alliances with third parties. In January 2005 we acquired a platform to deliver VoIP services that will allow us to deliver
significant value-added services to our existing and new customers, such as hosted PBX
functionalities as well as voice virtual private networks. On December 23, 2004 we made a strategic alliance with Telemedia to provide triple play
services in the City of Querétaro, Qro., in which we will provide with Telemedia cable TV, voice
and Internet services using the currently installed infrastructure, including last-mile coaxial
cable access of Telemedia. Triple  play services are provided in conjunction with Telemedia
under Maxcoms trademark. According to our market research, our target customers value highly, among other things,
quality service, accurate billing and competitive pricing. Our marketing strategy focuses on these
key elements:  
    
    prices that are between 5% to 15% below current market levels;
    
    one-stop-shopping service, such as our all-in-one-bill feature (which
allows our customers to receive a single invoice containing all local, long
distance, data and Internet services together); and
    
    state-of-the-art call center equipped with Customer Relationship Management
Program (also known as CRM) application software to receive all customer
inquiries including around-the-clock customer care availability. Strategy We intend to capitalize on our competitive strengths to become a leading telecommunications
provider in Mexico. We have been focused on executing a strategy of growth in our existing markets
and expansion in accordance with our nationwide concession. This strategy includes the following
components: Capture unmet demand for telephony services We seek to capture unmet demand by targeting small and medium-sized businesses and residential
customers that are looking to expand their telecommunications capacity or that do not currently
receive the types of products and services we offer. We believe that the potential for expansion
in the Mexican telecommunications market is significant given the low teledensity rate, which was
17.1 telephone lines per 100 inhabitants as of December 31, 2004 the increasing level of
competition and the development of the Mexican economy. Build our network on a demand-driven, modular basis We build our network based on customer demand. We first identify city areas with the largest
potential for new lines, which we refer to as clusters, in the markets that we serve through
various market research techniques. 15




---



##### Table of Contents



We then carry out the network buildout in tandem with increased sales and promotional efforts
targeted at customers within the cluster. This parallel track minimizes the time lag between the
incurrence of capital expenditures and the generation of revenues, and allows a choice of
technology and construction method based on the particular needs of the cluster. We refer to this
approach as our smart-build strategy. We also build our network on a customer demand basis to support small and medium-sized
enterprises in buildings or locations other than clusters. We refer to these locations as
single sites. When our corporate sales people identify a potential opportunity we analyze its
technical feasibility, the costs associated with providing the service within such locations and
the potential revenues, in order to establish whether it is convenient to offer our services there. From these single sites, in some cases, we are able to deploy cooper wire into an area of
two or three blocks, expanding our coverage with practically the same cost. Differentiate product offerings based on features and price We believe that we can differentiate ourselves from competitors by offering a variety of
quality products that meet the specific needs of our customers. To that end, we seek to develop
customer loyalty and brand awareness by informing consumers about the telecommunications services
that we offer and by helping them to differentiate between the various telecommunications services
available in the market. We also seek to offer our services at prices that are between 5% and 15%
lower than the prevailing market price in order to build our customer base. See Pricing. Deploy cost-efficient technology We use a cost-efficient technology to deploy our network and serve our customers. Our current
network consists of optical fiber, copper lines and microwave technology which we deploy to
particular customers based on deployment cost, time to market, time to revenue, time to
profitability, quality and reliability in our service. Our technology platform allows us to provide xDSL services, dedicated Internet access lines,
POTS and ISDN services, among others. In addition, due to additional duct capacity in our current
facilities we are able to deploy fiber-to-the-home (FTTH) services whenever customer premises
equipment technology is available at reasonable prices. Our microwave rings allow us to reach
customers throughout our market in a cost efficient manner and allow us to build network clusters
that can reach from 1,500 to 6,000 lines. Capitalize on our nationwide local telephony concession In September 2001, our local telephony concession was expanded, allowing us to provide service
to all of Mexico. This provides us with an opportunity to target small and medium-sized businesses
and residential customers within our new concession areas who we believe are willing to evaluate
other alternatives as they look for better service, higher reliability and lower tariffs. In
September 2002, we acquired two strands in a 2,011-kilometer fiber optic backbone from Mexico City
to the city of Laredo, Texas. We believe this acquisition is a key element for our nationwide
expansion using our own independent network. As part of this strategy, we have already expanded
our coverage area to the City of Querétaro, one of Mexicos fastest growing cities. In addition, we believe that the quality of our product and services offerings gives us a
competitive advantage in many regions within our nationwide concession area, as experienced in the
City of Puebla, where in December 2004 our number of lines in service grew by 18.3% and where we
installed 14.5% of net additions in the whole state of Puebla according to COFETEL. In February 2004, we incorporated a wholly owned subsidiary in the State of Delaware, U.S.A.,
under the name of Maxcom U.S.A., Inc. Also in February 2004 Maxcom U.S.A., Inc. applied before the
Federal Communications Commission (FCC) to obtain a license under section 214 of the Communication
Act of 1934, to provide international telecommunications services between the United States and
international points, mainly 16




---



##### Table of Contents



Mexico (also known as a 214 License). The U.S. Federal Communication Commission granted the
license in March 2004. Maxcom U.S.A., Inc. has not yet initiated significant operations in the U.S. In
February 2005, we incorporated Maxcom SF, S.A. de C.V., a wholly owned subsidiary, under the
laws of Mexico. This subsidiary will be used as a special purpose vehicle to finance the
securitization of Maxcoms accounts receivable in the future. Maxcom SF has not yet initiated
operations in Mexico. In
May 2005, we incorporated Maxcom TV, S.A. de C.V., a wholly owned subsidiary, under the laws
of Mexico. Also in May, 2005, this subsidiary has requested a license from the Mexican government
to provide cable television services for the City of Puebla, Pue. Our markets Concession areas In February 1997, we were awarded Mexicos first competitive local and long distance telephony
concession, covering the Federal District of Mexico and over 100 cities and towns in the Gulf
region for local service and nationwide for long distance service. In September 1999, we received
the approval of the SCT and COFETEL to provide local telephony services in several municipalities
contiguous to the Federal District, which are part of Mexico City, as well as in selected
additional cities in the Gulf region. In September 2001, our local service concession was expanded
to cover all of Mexico. Under our concession, we are required to provide services to the cities of
Toluca, Edo. Mex.; Celaya, Gto.; Irapuato, Gto.; Leon, Gto.; Guadalajara, Jal.; Aguascalientes,
Ags.; San Luis Potosi, SLP; Saltillo, Coah.; Monterrey, N.L.; and Nuevo Laredo, Tamps. by the end
of 2014. We started operations in the City of Querétaro in November, 2002. We commenced commercial operations in Mexico City in May 1999. Mexico City has the nations
greatest concentration of service and manufacturing industries and is also the center of Mexicos
public and financial services sectors. In 2000, Mexico City had a population of approximately 16.5
million people, according to INEGI. Although the Federal District, which covers most of Mexico
City, has the highest teledensity rate in Mexico at approximately 39.9 telephone lines per 100
inhabitants as of December 31, 2004, we believe that significant unmet demand for high-quality
local telephony services in Mexico City remains. As of December 31, 2004, we had 87,739 lines in
service in Mexico City. We commenced commercial operations in the City of Puebla in May 1999. Puebla is the fifth
largest city in Mexico, with a population of approximately 1.6 million people in 2000 according to
INEGI. In the City of Puebla we have expanded our market share in local telephony service from
2.5% in 2000 to 7.2% in 2001, to 9.5%, in 2002, and 9.7% in 2003. As of December 31, 2004, we had
70,777 lines in service, as compared to 59,832 lines in service as of December 31, 2003. According
to COFETEL, these new lines represented 11.9% of all the new lines installed in the whole state of
Puebla as of December 31, 2003 and 14.5% of all of the new lines installed in the whole state of
Puebla as of December 31, 2004. We also commenced commercial operations in the City of Querétaro in November 2002. Queretaro
is the seventeenth largest city in Mexico, with a population an estimated population of 787,341
people in 2004 according to the CONAPO or Consejo Nacional de Población (Mexican National
Population Council). As of December 31, 2004 we had 5,887 lines in service as compared to 2,878
lines in service as of December 31, 2003. According to COFETEL, we installed in 2004, 8.0% of all
new lines installed in the whole state of Queretaro. Clusters and single sites We have developed a comprehensive marketing strategy that starts by identifying city areas
with the largest potential for new lines, which we refer to as clusters. We use a variety of
techniques to identify potential clusters, including canvassing, plotting of potential clusters and
database marketing. Once a cluster is identified, a map of the geographic area is produced and the
cluster is defined. A cluster becomes the basis for network design and deployment and for the
launching of focused field sales and marketing one-on-one efforts. 17




---



##### Table of Contents



Our cluster strategy is divided into three stages:  
    
    Identify clustersthrough market research. Our market research is designed
to identify small- and medium-sized businesses and residential customers. Once
we identify potential customers within the clusters, according to the marketing
sales forecast we design the deployment of the access network to cover them.
We perform a return on investment analysis for each cluster to assure that the
investment made in such cluster meets our return benchmarks.
    
    Deploy clustersthrough the implementation of a sales plan for each cluster
based on our network deployment schedule. We promote our services at the same
time that we build our network.
    
    Fill in clustersby offering our services to all customers within the
cluster. We also build our network on a customer demand basis to support small and medium-sized
enterprises in buildings or locations other than clusters. We refer to these locations as single
sites. When our corporate sales people identify a potential opportunity we analyze its technical
feasibility, the costs associated with providing the service within such locations and the
potential revenues, in order to establish whether it is convenient to offer our services there. Our network Buildout strategy We build out our network on a modular basis. Once a cluster has been identified in a joint
effort by our marketing, engineering and sales departments, we build our network in clusters
varying from 1,500 to 6,000 lines. To ensure the highest quality service to our customer, we
install 24-gauge copper wire and limit the distance between our backbone network and the customer
premises to four kilometers. These attributes also allow us to provide to our customers voice
(including VoIP services) and data services, such as xDSL services with bandwidth of up to 4Mbps. We standardize all our Lucent and Advanced Fiber Communications (also known as AFC) equipment
to assure consistent, cost efficient, high quality service and also to enable us to use the same
access equipment for all of our services. Network backbone At December 31, 2004, our network backbone consisted of one owned 170-kilometer 24 strand
fiber optic link between Mexico City and the City of Puebla with three optical regenerators at
halfway points and two strands in a 2,011-kilometer fiber optic link covering cities between Mexico
City and Laredo, Texas. This fiber optic backbone includes 13 cities (Laredo, Nuevo Laredo,
Monterrey, Saltillo, San Luis Potosi, Aguascalientes, Leon, Irapuato, Guadalajara, Celaya,
Queretaro, Mexico and Toluca) and six optical regenerators. We have installed Digital Wavelength
Division Multiplexing (also known as DWDM) equipment, with a maximum growth capacity of 32 Lambdas,
each with 2.5 Gbps capacity. We have three Lambdas already installed and we will install more
Lambdas as needed to meet our customers requirements. We have the capability with this link to
transmit synchrony links, LAN network links, long distance links and dedicated links. We have also
installed three Lucent Technologies 5ESS digital switches in Mexico City and the cities of Puebla
and Queretaro with a total capacity of 141,000 trunks. Our switch in Mexico City is connected to
four different nodes in the citys public switched telephone network, some by our own fiber ring
and some by leased fiber capacity. Our switch in Puebla is connected to four different nodes in
the citys public switched telephone network by our own fiber ring. Our switch in Queretaro is
connected to two different nodes in the citys public switched telephone network by our own fiber.
We also lease capacity to connect to long distance networks. 18




---



##### Table of Contents



In June 2000, we finished constructing a lighted 144-strand, 57-kilometer fiber optic ring in
the City of Puebla. We also acquired six strands of dark fiber for approximately 175 kilometers in
metropolitan rings in Mexico City and obtained an option for additional capacity in future fiber
optic rings also in Mexico City. In addition, the infrastructure is in place to provide local
telephony service to five towns located along our Mexico City-City of Puebla fiber optic link. We use our own fiber optic rings to connect our microwave nodes to the fiber rings in order to
transport the telephone and data communications from our customers to the telephone switch and from
there back to our customers or to the public switched telephone network. We also use this fiber to
provide to our customers dedicated links and dedicated Internet links that we connect through our
fiber and also by leased capacity to the Internet backbone. Last-mile connectivity The last-mile connectivity portion of our network is comprised of a mix of wireline and
wireless access technologies. We use point-to-point microwave transmission technology for fast
deployment to clusters and single site locations. We have point-to-point frequencies in the 15 and
23 GHz band forming a complex microwave network throughout Mexico City and the cities of Puebla and
Queretaro. We use microwave links to connect customers that cannot be immediately connected to our
own fiber network, provided the yield on the capital expenditures required is in accordance to our
investment parameters. We also have a point-to-multipoint concession for the 10.5 GHz band,
covering a portion of the Gulf region. We also use wireline access to provide service to clusters. Clusters generally have an area
ranging between one and four kilometers in diameter. An average of 50 kilometers of cable plant is
required to provide last-mile connectivity within the clusters. We use copper wire feeder and distribution facilities placed from the host or remote site
along rights of way with a mix of aerial and underground construction. Aerial is our preferred and
most used method because of its cost of construction advantage. Underground cable is placed using
either the open trench or directional boring methods of construction. The size of the cable is
based on the anticipated number of customers in each clusters influence area as forecasted by our
marketing research. We also integrate fiber optic and Digital Subscriber Line Access Multiplexer
(also known as DSLAM) facilities in the distribution plant to allow us to provide broadband
services. Switching We have a Lucent Technologies 5ESS digital switch in Mexico City, and in the cities of Puebla
and Querétaro. Our switch in Mexico City is currently equipped for 86,000 trunks, and new switches
will be installed as the maximum capacity of the existing switches is reached. Our switch in the
City of Puebla is equipped for 37,000 trunks. Our switch in the City of Querétaro is equipped for
18,000 trunks. Each trunk can generally carry between one and three lines, depending on whether it
serves a residential or a business customer. Our equipment capacity is scaleable at incremental
costs according to customer demand. The switches are capable of providing analog lines, E1 digital lines, digital high-speed data
services, centrex services and operator-assisted services. In addition, they can provide private
analog lines, private clear-channel digital lines, data transmission and value-added services. Our switches also have a synchrony network that is designed to assure a proper synchronization
of every call that is made in the cities we serve and to assure proper synchronization with the
public switched telephone network as well as any other carriers with whom we connect. We also have
two STPs (Signaling Transfer Point) in Puebla, four in Mexico City
and two in the City of Querétaro, to assure
the proper signaling in our interconnection with all other carriers. 19




---



##### Table of Contents



Operational support systems We have a network operations and control center in Mexico City which oversees, administers and
provides technical support to all service areas. Our center, which uses Hewlett Packard , Sun
Microsystems hardware and Lucent Technologies software controls and monitors, among other systems,
all of our network, microwave, fiber, access equipment, data equipment, synchrony, signaling and
energy systems. Our center allows us to manage a multi-vendor network with the greatest efficiency
possible, and to identify problems early in order to utilize available redundancy and repair the
damaged part of the network. Our operational support systems are designed to allow us to differentiate ourselves in the
marketplace by being able to:  
    
    offer a flexible, large selection of services;
    
    provide tailored service packages;
    
    quickly introduce products and services;
    
    deliver near real-time activation and disconnection;
    
    deliver a high quality of service;
    
    minimize activation errors; and
    
    provide accurate and timely billing services. Our information technology strategy is to implement operational support systems possessing a
high level of functionality and flexibility from the service order to the delivery of customer
invoices. The systems include the following functional features:  
    
    Spanish language support for invoices and documentation;
    
    a high degree of integration between all operational support systems components;
    
    flow-through of information, provisioning and service activation;
    
    capabilities to monitor, manage and resolve network problems;
    
    allowance for growth on a modular scalable basis; and
    
    support of administrative operations for financial controls. Our services Our primary focus of service is local telephony, particularly the provision of high-quality,
flexible last-mile connectivity to small and medium-sized businesses and residential customers. We
offer long distance service as an integrated value-added service for our local telephony customers.
We do not offer our long distance service separately from our local telephony service. We currently provide value-added services such as: voice mail, speed dialing, call waiting,
call forwarding, three-way calling, call blocking, caller identification and multi-line hunting.
We also provide digital high-speed connectivity, dial-up Internet access, dedicated Internet access
and Service Level Agreements (also known as SLA) for both voice and data services. 20




---



##### Table of Contents



Service products We seek to offer high-quality telephony service products combining (1) prices that are between
5% and 15% below current market levels, (2) a wide range of value-added solutions and (3) superior
customer service. The following are the service products we currently offer to our customers.  
    
    LineaMax Residencial. This is a service for residential customers that
provides a high-quality telephone line. The features offered under this
product include voice mail, call waiting, call forwarding, three-way calling,
call blocking, speed dialing and unlisted numbers.
    
    LineaMax Comercial. This service, which is offered to business customers,
is identical to LineaMax Residencial, except that it also includes multi-line
hunting.
    
    CentralMax. This service provides business customers with all the functions
of a private branch exchange using centrex technology, without having to
acquire and maintain equipment. The features offered under this product
include call waiting, call forwarding, three-way calling, direct inward
dialing, direct outward dialing, intercom dialing, call transfer, speed
dialing, call hold, call pick up, outgoing call blocking, single digit access
to attendant and distinctive ringing. Optional solutions include voice mail,
music-on-hold, multi-line hunting and attendant services.
    
    Larga Distancia Max. This service provides domestic and international long
distance. We do not offer our long distance service separately from our local
telephony service. See Supervision and Regulation of the Mexican
Telecommunication IndustryOur concessionsLong distance for a description of
significant special charges we would have to pay Telmex if we decide to provide
long distance service to customers other than our local telephony customers.
    
    TroncalMax Digital. This service provides digital trunks for business
customers that need highly reliable access to and from the public telephone
network through their existing Private Branch Exchange (also known as PBX).
This service is sold in groups of 10, 20 or 30 trunks. The groups can be
configured with direct inward dial (DID), direct outward dial (DOD), caller
identification or main telephone number assignments.
    
    TroncalMax Analógica. This service, which is offered to business customers,
provides connectivity to analog PBX or key systems. The features available
with this product are multi-line hunting, caller identification and call
barring.
    
    Internet Max. This service uses a traditional POTs line and modem to
provide dial-up Internet access allowing users to navigate on the Internet at
speeds of up to 56 Kbps, depending on the number of users accessing the
Internet at the same time, since it is a shared service. We provide this
service to customers, regardless of whether they have a Maxcom line or not.
    
    SpeediMax(ADSL (128, 256 and 512 Kbps and 1 and 2 Mbps)). Asymmetric
Digital Subscriber Line (also known as ADSL) is a transmission service that
turns ordinary telephone lines into high-speed data connections. It is a
digital data service that provides telecommuting capabilities at speeds much
faster than standard modems. With ADSL it is possible to have secure,
dedicated links to the Internet or a companys LAN at a high-speed
transmission.
    
    AsistelMax. This service, which we launched in April 2002, provides basic
telephone medical and home assistance to our residential customers in case of
emergency. 21




---



##### Table of Contents




    
    1-800 Numbers. This service is available for our customers interested in
receiving toll-free calls into their call centers or businesses.
    
    Dedicated Internet Access. This service offers Internet access at high
speed within a clear channel access to the Internet backbone.
    
    Digital private lines. This service provides highly reliable dedicated
circuits between two or more physical locations. Digital private lines are
designed to integrate voice, data and video private networks over a single
physical link. Digital private lines are, in effect, leased lines for
exclusive/private use with no limitations in usage, available 365 days a year,
with no restrictions in amount of traffic.
    
    Hosted PBX. This service provides our business customers with all the
functions of an Internet Protocol PBX (or IP/PBX) using VoIP technology,
without having to acquire and maintain high cost equipment. The features
offered under this product include CentralMax as well as other Internet
Protocol enhanced services such as web portal setup, click to dial, hosted
directory, MS Outlook © integration, etc. As part of our product portfolio strategy, we are developing strategic alliances with third
parties in order to provide new services. These new services include web services such as hosting
web applications, managed network security (firewalls) and domain name administration for small and
medium-sized business. We believe that our products will help us capitalize on the significant data applications
growth expected in Mexico and help us increase our participation in the small and medium-sized
business market. In particular, we believe that the combination of voice and data services
constitutes an attractive set of product services for those customers enabling us to compete more
effectively in such market. Pricing We generally seek to maintain our prices between 5% and 15% below current market levels. We
offer pricing plans that are simple in order to assure customers of the integrity of the billing
process. Our pricing structure rewards long-term commitments by increasing discounts in relation
to the length of the commitment. We also provide discounts to high-usage customers that are likely
to generate a significant outflow of calls. We pay interconnection charges to other carriers on a per minute basis. However, the common
practice in the Mexican market is to charge customers on a per-call basis for local service. We
seek to minimize the risk associated with this mismatch between our revenues and costs; for long
holding time customers, we have, in some cases, implemented a per minute charge plan to be
consistent with our interconnection fees that are on a per minute basis. During the second half of 2002, we introduced voice line and ADSL service that for a fixed
monthly charge includes the rental of the lines, unlimited local calling, a specified amount of
long distance and mobile minutes, and high-speed Internet access. This offering is mainly targeted
to small- and medium-sized businesses. Marketing and sales General We seek to develop brand name recognition by using our corporate name, logo and product names
consistently to portray a unified image. We conduct publicity drives within target clusters to
small-and medium-sized businesses and to residential customers. We seek to differentiate ourselves
from our competitors by our pricing, consistent quality and reliability of first-to-market
technology, one-stop shopping, comprehensive billing and speed of line activation. 22




---



##### Table of Contents



Sales and distribution channels We focus our sales efforts within clusters using door-to-door sales and telemarketing
promotions. We promote our services primarily through advertisements on radio, billboards,
in-building promotions, press and magazines. As we commence the deployment of our network within a
cluster, we intensify our promotion efforts through our direct sales force in such cluster. Our direct sales approach is to assign sales representatives or teams to locations within a cluster
or to single sites. At December 31, 2004, we employed 16 internal salespeople supervisors and 233 external sales
agents. We assign our sales force based on territory, product or market segment, depending on
their background and experience. The compensation structure for our sales force is tailored to
attract and retain high achievers by providing a base salary and a bonus component. Sales
commissions are paid only after the new line is installed. Our sales force is recruited from other telecommunications providers and systems integrators.
Candidates for our sales force undergo extensive training that covers the industry of
telecommunications, our products, our internal procedures and markets and sales. In its sales
effort, our sales force uses, among other things, multimedia presentation, corporate videos and
corporate and product brochures. In addition to our sales force, we are developing other distribution channels, including store
fronts, agents, distributors, outsourcing and telemarketing. Customer service We seek to differentiate ourselves by providing superior and consistent customer service. Our
customer service group is divided into three areas:  
    
    centralized answering point. This area responds to calls to our customer
care telephone numbers in Mexico City and the cities of Puebla and Querétaro 24
hours a day, seven days a week. Many prospective and existing customers use
our centralized answering point for all types of queries, including queries
regarding area codes, rates, billing and line installation and changes.
    
    walk-in center. We have three walk-in centers in Mexico City, three in the
City of Puebla and one in the City of Querétaro for prospective and existing
customers who wish to make inquires in person regarding our services. Our
hours of operation are 9:00 a.m. to 6:00 p.m. on Mondays through Fridays and
from 9:00 a.m. to 2:00 p.m. on Saturdays.
    
    centralized trouble-shooting center. This area responds to calls in Mexico
City and the cities of Puebla and Querétaro. This center is available 24 hours
a day, seven days a week and handles technical problems, inquiries and
complaints. Customers may access their billing statements through our website and link to the websites of
two major Mexican banks to effect payment. In addition, customers may pay their bills through
automatic credit card monthly charges, cash payments at three of the largest Mexican banks, or at
our walk  in centers located in Mexico City and Puebla. We also assist our customers with new
service requests and product information. Credit, billing and collection We carry out credit checks on all our potential business customers that request more than two
lines using a leading Mexican credit bureau. Depending on the result of the credit check, we may
request a deposit, promissory note, bond or standby letter of credit. For business customers with an imperfect credit history we require a one to three-month
deposit, which is calculated based on the number of lines contracted. For call centers and other
high-usage customers we may require 23




---



##### Table of Contents



higher deposits, collect on a prepaid or weekly basis and undertake a closer monitoring of
call activity. We do not perform credit checks for business customers with one or two lines. In addition, we do not perform credit checks for residential customers. Our sales
representatives are required to verify the identity and address of our residential customers. For our billing process, we use state-of-the-art technology including an
Ericsson/Hewlett-Packard billing mediation platform and a Kenan Systems/CSG product billing
platform interfaced with our customer service system. We perform seven billing cycles per month for our business customers and five billing cycles
per month for our residential customers. We invoice customers monthly on a staggered basis, except
in instances that customers represent a greater credit risk in which case we may invoice weekly.
For regular customers we process and print our bills within four days after the close of each
cycle. Customers then have twenty-one days to pay the bill after the cut off date. For customers with one to six lines, if a bill is past-due for more than two days, we leave a
reminder message on their phone. If the bill remains unpaid for five additional days, we restrict
service allowing incoming calls only. If the bill remains unpaid for 7 additional days, we suspend
the service. If the bill remains unpaid for another 7 days, we again allow incoming calls but only
in order to contact our customer through the telephone lien, negotiate and collect the payment.
After 30 days past-due we visit our customers of unpaid and uncollected accounts in their addresses
in order to pursue payment. If no payment is received after 90 days, we disconnect the line and the
receivables are assigned to collection agencies. If the bill remains unpaid past such period, we
may assign the receivables to another collection or legal agency. For our customers with a history of 12 months or more of services we have more flexible terms
and we restrict and suspend their service if their accounts are unpaid 15 days later than for our
newer customers. For customers with more than six lines we use the same process to the one
described above, except that we use a personalized approach where we try to negotiate payment terms
before imposing any restriction, suspension or disconnection of the service. We may suspend service
when an invoice is at least 30 days past due. However, in the case of high-usage customers, we may
suspend service when an invoice is at least one day past due. We have a CRM/Siebel system to support our business growth, which is focused on customer
service, collection, training sales force and enhance marketing. Our initial investment for this
program was U.S.$3.3 million and our strategic partner in this program is Siebel a software
company. Our CRM strategy during 2005 will be to add new business processes related directly with
customers information, within our current architecture. Competition We primarily compete in the local telephony market on the basis of customer service,
value-added products and price. Our direct competitors are wireline and fixed wireless local
telephony operators, although we also face competition indirectly from mobile wireless operators. We do not compete directly in the long distance retail market (offering presubscription).
Although we provide long distance service, we position such service as an integrated value-added
service for our local telephony customers. As a result, in the retail market we do not offer our
long distance service separately from our local telephony service. See Supervision and
Regulation of the Mexican Telecommunications IndustryOur concessionsLong distance for a
description of significant special charges we would have to pay Telmex if we decide to provide long
distance service to customers other than our local telephony customers. However, we will compete directly in the wholesale long distance market in the cities where we
have our fiber optic network, once we have long distance interconnection with Telmex for such
purpose. Our core strategy is to service underserved markets by targeting new customers that do not
currently receive the type of products and services that we offer. In particular, our intention is
to service markets with lower teledensity rates that are also underserved by Telmex. 24




---



##### Table of Contents



Telmex Our main local telephony competitor is Telmex, the incumbent carrier and former
government-owned telecommunications monopoly. Telmex has significantly greater financial and other
resources than those available to us. In addition, Telmex has an established customer base, which
represents substantially all of the wireline local telephony lines in Mexico. Telmex customers
still represent the main destination of outgoing calls from our network, therefore local
interconnection with Telmex is critical to our operations. Other Competitors We also face competition in local telephony from companies that were awarded concessions in
recent years. The more significant of these competitors are Alestra, Avantel Servicios Locales
S.A. (Avantel), Axtel, S.A. de C.V. (Axtel), Megacable Comunicaciones de México, S.A. de C.V.
(Megacable) and Unefon. Avantel, in which MCI International Telecommunications Corp. is a shareholder, was awarded a
long distance service concession in September 1995 and a local telephony concession in April 1999.
Avantel offers nationwide long distance services and local services in several cities, including
Mexico City, Monterrey and Guadalajara. Alestra, in which AT&T Corp. is a shareholder, was awarded a long distance service concession
in December 1995 and a local telephony concession in June 2000. In addition, Alestra has a
point-to-point microwave frequency concession in the 15 and 23 GHz band range, a
point-to-multipoint microwave frequency concession in the 10.5 GHz band range and a point-to-point
national wireless telecommunications concession in the 7 GHz band range. Alestra offers nationwide
long distance services and local service in Mexico City, Puebla, Monterrey and Guadalajara. Alestra and Avantel are using their local telephony concessions to service primarily the
corporate business segment. We believe they have recently started to target the small-and
medium-sized business agreement. Axtel, in which Telinor Telefonía, S. de R.L. de C.V., AIG  GE Capital Latin America
Infrastructure Fund, L.P. The Blackstone Group and a group of other financial and technological
investors, including Nortel Networks, are shareholders, was awarded a nationwide local telephony
and long distance concession in June 1996, and wireless frequencies in the 60 MHz at 10.5 GHz for
point-to-multipoint access, 112 MHz at 15 GHz for point-to-point backhaul access, 100 MHz at 23 GHz
for point-to-point last-mile access and 50 MHz at 3.4 GHz for fixed wireless access. Axtel
commenced commercial services in the northern city of Monterrey in July 1999, in Mexico City in May
2000, and in Guadalajara, Puebla, Toluca and Leon during 2001. It currently serves 12 cities. Axtel
targets the high-end residential and the small-and medium-sized business segments. Axtel strategy
includes packages with unlimited local calls at a fixed rate. Other competitors such as Megacable, Marcatel and MetroRed that have local telephony
concessions have a market approach that is not massive but rather seeks to offer services to
specific customers within specified coverage areas. We believe that Megacable, Marcatel and
MetroRed do not represent strong competition in the short term. Unefon won nationwide concessions for fixed wireless local loop frequencies in the 3.4 to 3.7
GHz band and in the PCS 1.9 GHz band in May 1998. Unefon began commercial operations using the 1.9
GHz band in Toluca in early 2000 and has initiated operations in Mexico City, Puebla, Monterrey and
Guadalajara, among other cities, but it has focused mainly on mobile telephoning. We believe that
Unefon will begin to focus on the fixed wireless telephony market in the near future. 25




---



##### Table of Contents



Overview of the Mexican telecommunications industry General The telecommunications industry involves the transmission of voice, data and video
communications from point of origination to point of termination. The Mexican telecommunications
industry has been undergoing rapid change in the last decade due to the introduction of new
technologies and the construction of additional infrastructure, as well as market liberalization,
which together have resulted in increased competition and demand for telecommunications services. The modernization of the Mexican telecommunications infrastructure began in 1990 with the
privatization of Telmex, the former governmentcontrolled telecommunications monopoly. Since
privatization, Telmex and several concessionaires have begun deploying modern fiber and wireless
networks throughout Mexico. To meet the demand for higher volume and higher quality wireline
services, new copper cables are being installed and backbones are being replaced largely by fiber
optic transmission systems that provide greater capacity at lower cost with higher quality and
reliability. Market liberalization Historically, Telmex has dominated the Mexican telecommunications industry. In December 1990,
the Mexican government initiated the privatization and deregulation of Telmex by selling a
controlling portion of Telmexs equity to a private consortium led by Grupo Carso, S.A. de C.V., a
Mexican conglomerate, as well as to subsidiaries of Southwestern Bell Corporation and France
Telecom S.A. Subsequently, the Mexican government opened the wireless market by granting nine
regional cellular concessions in Band A in order to allow concessionaires to compete with Telmex
and its mobile service provider affiliate, Radiomóvil Dipsa, S.A. de C.V. (also known as Telcel). Local telephony market. In connection with the privatization of Telmex in 1990, the Mexican
government amended Telmexs nationwide concession, which expires in March 2026, and granted Telmex
a six-year implied monopoly over local telephony services. The amended Telmex concession obligated
Telmex to expand and increase local telephony service at a rate of 12% per year beginning in 1992
and to provide basic telephone service to all population centers of 500 or more inhabitants by
1995. The implied local service monopoly was eliminated in mid-1996 when the Mexican Communications
and Transportation Ministry (Secretaría de Comunicaciones y
Transportes), or SCT, published regulations governing the licensing of local services on a competitive basis. In order to promote competition in the local telephony market, the Mexican government granted
several concessions beginning in 1997, including first the regional concession awarded to us for
wireline local telephony service and later expanded to a nationwide concession. Each wireline
local telephony concession granted by the Mexican government generally has a 30-year term, and
authorizes, among other things, the provision of local telephony services and value-added services
in a specified region of the country. In addition, the Mexican government does not permit the unbundling of local loop frequencies,
requiring all telephone companies wishing to offer local telephony service to build their own
last-mile connectivity in order to reach their targeted customers. The Mexican government has also been conducting auctions of spectrum frequencies in the:  
    
    450 MHz, 1.9 GHz (PCS) and 3.4-3.7 GHz (fixed wireless local loop) frequency bands;
    
    7, 15, 23 and 38 GHz frequency band for nationwide point-to-point microwave
transmission links; and
    
    10.5 GHz frequency band for regional point-to-multipoint microwave transmission
service. 26




---



##### Table of Contents



Four companies won nationwide concessions for fixed wireless local loop frequencies, although
one later forfeited its right for failure to pay concession fees. In addition, six companies won
concessions in the 1.9 GHz (PCS) frequencies on either a nationwide or regional basis, although one
also forfeited its right for failure to pay concession fees. See Competition. Long distance telephony market. In connection with the privatization of Telmex in 1990, the
Mexican government granted Telmex an exclusivity period for long distance telephony services of six
years. In August 1996, the exclusivity period expired and competition commenced in January 1997.
According to Pyramid Research, measured in terms of traffic, since the expiration of the
exclusivity period and the subsequent beginning of competition, Telmex has lost 26% and 31% of the
domestic and international long distance telephony market, respectively, to new competitors. In order to promote competition among domestic and international long distance providers, the
Mexican government granted several concessions, including the national concession awarded to us,
for domestic and international long distance services, as well as value-added services. Each
concession generally has a nationwide scope and a 30-year term, and authorizes the provision of
domestic and international long distance services and value-added services. The long distance concessionaires include among others:  
    
    Alestra, S. de R.L. de C.V.;
    
    Avantel, S.A. de C.V.;
    
    Axtel, S.A. de C.V.; and,
    
    Iusatel, S.A. de C.V. International liberalization trends will likely impact the flow of long distance telephone
traffic to and from Mexico. In particular, demand for long distance services may be stimulated by
reforms of domestic access/interconnection charges and international settlement rates and recent
international trade negotiations. As such charges decline, overall demand for international and
local services increases. Mexican market characteristics Population and economic growth. According to the Economic Commission for Latin America and
the Caribbean-CEPAL (Comisión Económica para América Latina y el Caribe), Mexico is the second
largest country in Latin America in terms of population. In 2004, Mexico had an estimated
population of 104.7 million and a population growth rate of approximately 1.3% for the period from
1995 to 2000. In 2005, the projected population by age groups will be
30.8% under the age of 15,
61.5% between the ages of 15 and 59 and only 7.7% over 60. After a decline in 1995, Mexicos real
gross domestic product grew for five straight years, rising by 5.1%
in 1996, 6.8% in 1997, 4.8% in
1998, 3.7% in 1999 and 6.6% in 2000. However in 2001, the real gross domestic product decreased by
0.3%. In 2002, the growth of the real gross domestic product resumed
as it increased by 0.9%, 1.2%
in 2003, and in 2004 it increased in 4.4%, according to the Bank of Mexico. Underserved telephony market. In 2003, The World Bank ranked Mexico as the 10th largest
economy in the world. However, in terms of network readiness, Mexico was ranked 60th in the world
according to the World Economic Forum. This relatively low level of wireline penetration evidences
substantial unmet demand for fixed telephony service. According to Pyramid Research, the wireline local telephony market represents approximately
33.75% of Mexicos total telecommunications market, when measured by revenues, and generated
approximately U.S.$18.6 billion of revenue in 2004. 27




---



##### Table of Contents



Projected growth trends. With the introduction of competition in the Mexican
telecommunications market, teledensity rates and line usage increased substantially. According to
Pyramid Research, between 2004 and 2009 fixed line penetration in service in Mexico is expected to
increase by 25.65%. According to Pyramid Research, local services revenues (including data services) are expected
to experience an annual growth rate of 2.0% from 2004 until 2009. International long distance
services revenues are expected to experience strong price pressure, due to recent changes in the
long distance rules affecting incoming traffic from the U.S., Mexicos main source of international
long distance traffic inflows. Overall volume from the U.S. to Mexico will increase making revenues
from call termination an important component of Mexicos voice services market. In spite of the
sustained growth in switched traffic, revenues from long distance services have fallen. A drop in
tariffs resulting from intense competition has not been compensated by a sufficient increase in
traffic. In the international long distance market, the reduction in termination rates and the
growing proportion of bypass traffic have played a major role in inhibiting growth in revenues. Total local wireline telephony revenues in Mexico are expected to surpass U.S.$11.0 billion by
2009. In contrast, international long distance services revenues are expected to experience a 3.8%
decrease from 2004 until 2009. Supervision and regulation of the Mexican telecommunications industry General The telecommunications industry in Mexico is subject to the Federal Telecommunications Law
(Ley Federal de Telecomunicaciones) which was enacted in 1995. However, certain rules set forth
under the General Means of Communications Law (Ley de Vías Generales de Comunicación), the
Telecommunications Regulation (Reglamento de Telecomunicaciones) and the rules promulgated
thereunder, generally remain effective and are referred to as the Old Telecommunications Law. Under the Federal Telecommunications Law, the Mexican telecommunications industry is regulated
for administrative and operational matters by COFETEL (Comisión Federal de Telecomunicaciones).
COFETEL was created in 1996 as an autonomous entity from the SCT to regulate and promote the
efficient development of the telecommunications industry in Mexico. COFETEL is responsible for,
among other things:  
    
    enacting regulations and technical standards for the telecommunications industry;
    
    ensuring that holders fulfill the terms of their concessions and permits;
    
    suspending operators without concessions;
    
    resolving interconnection controversies between competitors; and
    
    maintaining a registry of applicable rates. The SCT retains the authority to grant all concessions and permits. COFETEL makes
recommendations to the SCT on major issues, such as amending existing telecommunications laws,
allocating spectrum frequencies, granting, transferring, renewing or revoking concessions and
applying penalties for concession violations. The SCT has final decision making power on these
issues. Once a final decision is made, COFETEL implements the related regulations. Concessions and permits General. To provide public telephony services in Mexico through a public network, a service
provider must first obtain a concession from the SCT. Pursuant to the Federal Telecommunications
Law, concessions for public networks may not exceed a term of 30 years, and concessions for
spectrum frequencies may not exceed a term of 20 years. Generally, concessions for public networks
may be extended for a term equivalent to the term for 28




---



##### Table of Contents



which the concession was originally granted. Concessions for spectrum frequencies will be
re-auctioned at least three years prior to their expiration date. Concessions specify, among other
things:  
    
    the type and technical specifications of the network, system or services that may be provided;
    
    the allocated spectrum frequencies, if applicable;
    
    the geographical region in which the holder of the concession may provide the service;
    
    the required capital expenditure program;
    
    the term during which such service may be provided;
    
    the payment, where applicable, required to be made to acquire the concession,
including, where applicable, the participation of the Mexican government in the
revenues of the holder of the concession; and
    
    any other rights and obligations affecting the concession holder. In addition to concessions, the SCT may also grant permits for the following:  
    
    installing, operating or exploiting transmission-ground stations; and
    
    providing telecommunications services as a reseller. There is no legally mandated maximum term for these permits unless specifically stated in the
permit. Under the Federal Telecommunications Law, a company needs to register with COFETEL the
rates for the telecommunications services that it wishes to provide in order to be able to provide
them to the public. In addition, the Mexican Congress modified the Special Production and Services Tax Law
effective January 1, 2002 establishing in it a new tax to services provided by telecommunications
companies, at a rate of 10%. An amendment to this law, effective January 1, 2003, confirmed that
our core business (the offering of local and long distance services) is not subject to the tax.
Although we believe, based on the advice of our tax and regulatory advisors, that certain other
services that are part of our local service offerings are also not subject to such tax, we cannot
assure you that the tax authorities may not interpret the law otherwise. In 2002 and 2003 tax years
Maxcom accrued the tax corresponding to the services that might be claimed by the Mexican tax
authorities. As of January 1, 2004, telecommunications and supplementary services are no longer
subject to this tax. Ownership restrictions. Under the Federal Telecommunications Law and the Mexican Foreign
Investment Law (Ley Federal de Inversión Extranjera), concessions may be granted only to:  
    
    Mexican individuals; and
    
    Mexican corporations in which non-Mexicans own 49% or less of the full voting stock
and that are not otherwise controlled by non-Mexicans. However, in the case of concessions for cellular communications services, foreign investment
participation may exceed 49% of the voting stock with the prior approval of the Mexican Foreign
Investment Bureau of the Mexican Ministry of Economy (Secretaría de Economía). Pursuant to the Foreign Investment Law, the Mexican Ministry of Economy may also authorize the
issuance of non-voting or limited-voting stock (also known as neutral shares) that are not
counted for purposes of determining the foreign investment percentage of a Mexican corporation
under the Mexican Foreign Investment 29




---



##### Table of Contents



Law. Any share transfers resulting in a violation of these foreign ownership requirements are
invalid under Mexican law. Transfer. Concessions are transferable after the first three-year period of the concession,
if the SCT approves the transfer of the concession title, the assignee agrees to comply with the
terms of the concession and such a transfer does not violate the foreign ownership requirements of
the Federal Telecommunications Law and the Mexican Foreign Investment Law. Termination. A concession or a permit may be terminated pursuant to the Federal
Telecommunications Law upon the following events:  
    
    expiration of its term;
    
    resignation by the concession holder or the permit holder;
    
    revocation. A concession or a permit may be revoked prior to the end of its
term under certain circumstances, such as:  <
    
    failure to exercise the rights of the concession within 180 days of the grant;<
    
    failure to provide interconnection services with other holders of
telecommunications concessions and permits without just cause;<
    
    loss of the concession or permit holders Mexican nationality;<
    
    unauthorized assignment, transfer or encumbrance of the concession or permit;<
    
    unauthorized interruption of service;<
    
    taking any action that impairs the rights of other concessionaires or permit holders;<
    
    failure to comply with the obligations or conditions specified in the
concession or permit; and<
    
    failure to pay to the Mexican government its fee for the concession or,
where applicable, its participation in the revenues of the holder of the
concession.  The SCT may revoke a concession for violations in any of the circumstances referred
to in the first four instances above. Under the last four instances above, the SCT
would have to fine the concessionaire at least three times for the same failure
before moving to revoke a concession.  
    
    expropriation. The Mexican government has the statutory right to
permanently expropriate any telecommunications concession and claim any related assets
for reasons of public interest. Under Mexican law, the Mexican government is obligated
to compensate the owner of such assets in the case of a statutory expropriation. The
amount of the compensation is to be determined by appraisers. If the party affected by
the expropriation disagrees with the appraisal amount, such party may initiate judicial
action against the government. In such a case, the relevant judicial authority will
determine the appropriate amount of compensation to be paid. We are not aware of any
instance in which the SCT has exercised its expropriation rights in connection with a
telecommunications company; and
    
    dissolution or bankruptcy of the concession holder or the permit holder. Temporary seizure. The Mexican government, through the SCT, may also temporarily seize all
assets related to a telecommunications concession or permit in the event of a natural disaster,
war, significant public disturbance, threats to internal peace or for economic reasons or for other
reasons related to national security. If the Mexican government temporarily seizes such assets,
except in the event of war, it must indemnify the concession holder for all losses and damages,
including lost revenues. We are not aware of any instance in which the SCT has exercised its
temporary seizure powers in connection with a telecommunications company. 30




---



##### Table of Contents



Rates for telecommunications services Before the Federal Telecommunications Law was amended, the SCTs approval was required for
setting the rates charged for all basic local, long distance and certain value-added local and long
distance telecommunications services. Historically, the SCT permitted rate increases based on the
cost of service, the level of competition, the financial situation of the carrier and certain
macroeconomic factors. Carriers were not allowed to discount the rates authorized by the SCT,
although operators occasionally waived activation fees on a promotional basis. Interconnection
rates also required SCT approval. Rates for private dedicated circuit services through microwave
networks and private networks through satellites were not regulated before the Federal
Telecommunications Law was amended. Under the Federal Telecommunications Law, rates for telecommunications services (including
local, cellular and long distance services) are now freely determined by the providers of such
services, except that such rates may not be set below a service providers long-term incremental
cost. In addition, COFETEL is authorized to impose specific rate, quality and service requirements
on those companies determined by the Mexican Federal Antitrust Commission (Comisión Federal de Competencia)
to have substantial market power pursuant to the provisions of Mexicos antitrust statute. All
rates for telecommunications services (other than value-added services) must be registered with
COFETEL prior to becoming effective. The Federal Telecommunications Law prohibits
telecommunications providers from cross-subsidizing among their services and requires that they
keep separate accounting for each of their services. The Mexican Antitrust Commission has found that Telmex has substantial market power on the
local, long distance and Internet and data transmission markets, as defined under Mexicos
antitrust statute. Based on this finding, COFETEL issued a resolution in September 2000 regulating
Telmex as a dominant carrier, imposing special obligations regarding, among other things, quality
of services, tariffs and disclosure of information. Telmex has obtained an injunction against
potential COFETEL actions that intend to regulate Telmex by imposing special obligations on Telmex
regarding, among other things, quality of services, tariffs and disclosure information. As a
result of this injunction, the Mexican Antitrust Commission must restart the administrative
procedures and prove again that Telmex has substantial power market on certain services. Our concessions Local telephony. We obtained our regional wireline local telephony concession in February
1997. In September 2001, this concession was expanded to a nationwide concession. The concession,
which is not exclusive, grants us the right to provide business, residential and public wireline
local telephony services all over Mexico. Our wireline local telephony concession has a term of 30
years and may be renewable for up to an equivalent period provided we have complied with all its
terms. The concession expressly permits us to provide the following services:  
    
    basic local telephony;
    
    the sale or lease of network capacity for the generation, transmission or reception
of signs, signals, writings, images, voice, sounds or other information of any nature;
    
    the purchase and lease of network capacity from other carriers, including the lease
of digital circuits;
    
    value-added services;
    
    operator services;
    
    data, video, audio and video conference services, except for cable or other
restricted television, continuous music or digital audio; 31




---



##### Table of Contents




    
    credit or debit telephone cards; and
    
    public telephony. The concession does not impose any limitations on the setting of our rates other than the
requirement that we file with COFETEL a notification of any rate change prior to having it take
effect. The concession requires us to comply with service quality specifications and, starting in
September 2001, to install infrastructure on the basis of a yearly schedule. According to this
schedule, we must install at least an aggregate of 376,000 lines in at least 394 cities and towns
in Mexico by the end of 2006. Although we are currently in compliance with the requirement in our concession for the number
of lines installed, we are currently in default with respect to the coverage obligations in certain
cities and towns required by our concession. In addition, we believe we will not be able to meet
certain buildout obligations in certain towns and cities along the City of Querétaro  City of San
Luis Potosí, City of Puebla  City of Veracruz and Mexico City  City of Toluca corridors by
December 2004. We are in the process of preparing a request for a modification to the buildout
requirement of the concession from COFETEL. If granted, this modification would allow us to be
once again in compliance. However, we cannot assure you that COFETEL will agree to such
modification. See Item 3. Key InformationD. Risk FactorsFactors relating to the Mexican
telecommunications industryWe could lose our concessions if we do not comply fully with their
terms. Failure to comply with the terms of the concession or to obtain a waiver or modification could
result in its revocation and the loss of the Ps.14.8 million performance bond that we previously
issued to the SCT. The Mexican government would not be required to compensate us for such
revocation. See Concessions and permitsTermination. We failed to provide the SCT with the
performance bonds renewal for 2004, and such failure could be construed as a default on the terms
of our concessions. We are currently negotiating with the SCT new terms to secure the performance
of our concessions. However, we cannot assure you what will be the outcome of such negotiations. As of January 1, 2005, the level of fines, which are based on a multiple of the Mexican
minimum daily salary, ranged from Ps.93,600 to Ps.4.7 million, depending on the nature of the
infraction. In the case of multiple recurring infractions, these fines may be doubled. Long distance. We obtained our nationwide long distance concession in February 1997,
concurrently with our local telephony concession. Our nationwide long distance concession has a
term of 30 years and may be renewable for up to an equivalent period, provided that we have
complied with all its terms. The concession expressly permits us to provide the following services:  
    
    the carrying of switched traffic between two different local calling areas that
requires the use of a dialing prefix for its routing;
    
    the sale or lease of network capacity for the generation, transmission or reception
of signs, signals, writings, images, voice, sounds or other information of any nature;
    
    the purchase and lease of network capacity from other carriers; and
    
    nationwide and international long distance telephony. The concession expressly prohibits the following services:  
    
    those which require a concession for frequency bands of the radio electric spectrum
for specific uses; 32




---



##### Table of Contents




    
    those which require a concession to occupy and exploit geostationary orbital
positions and satellite orbits assigned to Mexico;
    
    those which require a concession to operate radio or television broadcasting systems; and
    
    cable or other restricted television. The concession does not impose any limitations on our ability to set rates other than the
requirement that we file with COFETEL a notification of any rate change prior to having it take
effect. The concession requires us to comply with service quality specifications and to install
infrastructure on the basis of the schedule for our local telephony concession. According to this
schedule, we must provide nationwide long distance service in the same locations and at the same
time in geographic areas where we provide local telephony services. Of these areas, we must
provide service in 394 cities and towns in Mexico using our own or leased infrastructure by the end
of 2006. Although we are currently in compliance with the requirement in our concession for the number
of lines installed, we are currently in default with respect to the coverage obligations in certain
cities and towns required by our concession. In addition, we believe we will not be able to meet
certain buildout obligations in certain towns and cities along the City of Querétaro  City of San
Luis Potosí, City of Puebla  City of Veracruz and Mexico City  City of Toluca corridors by
December 2004. We are in the process of preparing a request for a modification to the buildout
requirement of the concession from COFETEL. If granted, this modification would allow us to be
once again in compliance. However, we cannot assure you that COFETEL will agree to such
modification. See Item 3. Key InformationD. Risk FactorsFactors relating to the Mexican
telecommunications industryWe could lose our concessions if we do not comply fully with their
terms. The failure to comply with the terms of the concession or to obtain a waiver or modification
could result in its revocation and the loss of the Ps.14.8 million performance bond that we
previously issued to the SCT. The Mexican government would not be required to compensate us for
such revocation. As of January 1, 2005, the level of fines, which are based on a multiple of the Mexican
minimum daily salary, ranged from Ps.93,600 to Ps.4.7 million, depending on the nature of the
infraction. In the case of multiple recurring infractions, these fines may be doubled. We service our long distance concession by reselling our long distance traffic to other
carriers with such capability. We currently do not intend to provide long distance service to
anyone other than our local telephony customers (who use our own infrastructure for call
origination) to avoid having to pay significant special charges to Telmex. According to COFETEL
regulations, any long distance carrier that wishes to interconnect to Telmexs local network must
make a payment to Telmex on account of Telmexs investment to upgrade its local infrastructure to
allow long distance competition. In December 2000, Avantel and Alestra negotiated with Telmex a
one-time payment of U.S.$13.6 million as an infrastructure development charge and an
interconnection fee of U.S.$0.0053 per minute. Telmex adjusts the infrastructure development
charge at a 10% annual rate. COFETEL has implicitly accepted that Telmex may require other long
distance carriers to make similar payments. However, since
most of COFETELs regulation on special charges to Telmex expired in December
2003, we have long distance interconnection with Telmex by September 2004 in 13 cities where
we have long distance fiber optic cable capacity. According to the Mexican telecommunications regulations, all local carriers must offer their
customers the option to select the long distance carrier of their preference; this practice is
known as pre-subscription. However, local carriers may request a waiver of this obligation from
COFETEL. On May 27, 2002, COFETEL granted us a waiver of the pre-subscription requirement. With this
waiver, our local telephony customers who are currently using other long distance carriers may only
change, if they wish to do so, to our long distance service. New local telephony customers must
use our long distance service. This waiver 33




---



##### Table of Contents



is valid through May 2004 for Mexico City and the City of Puebla, and for five years
(calculated from the date we begin to provide service) for anywhere else in Mexico including the
City of Querétaro. Microwave transmissions.Point-to-point. In October 1997, we were awarded seven
nationwide point-to-point microwave concessions. These concessions cover:  
    
    two consecutive frequency segments in the 15 GHz band, with a 56 MHz bandwidth;
    
    three consecutive frequency segments in the 23 GHz band, with a 56 MHz bandwidth; and
    
    two consecutive frequency segments in the 23 GHz band, with a 100 MHz bandwidth. These concessions, which were issued in June 1998, have a term of 20 years. COFETEL will
re-auction the frequencies covered by the concessions at least three years before the expiration
date of the concessions. The concessions require us to provide available capacity to the general
public. We are currently in compliance with all the material terms of the concessions. The failure to comply with the terms of the concessions could result in their revocation and
the loss of up to Ps.13.4 million in performance bonds that we previously issued to the SCT for all
of our seven point-to-point concessions. The Mexican government would not be required to
compensate us for such revocation. As of January 1, 2005, the level of fines, which are based on a
multiple of the Mexican minimum daily salary, ranged from Ps. 93,600 to Ps.4.7 million, depending
on the nature of the infraction. In the case of multiple recurring infractions, these fines may be
doubled. We failed to provide the SCT with the performance bonds renewal for 2004, and such failure
could be construed as a default on the terms of our concessions. We are currently negotiating with
the SCT new terms to secure the performance of our concessions. However, we cannot assure you what
will be the outcome of such negotiations. These concessions do not impose any limitations on the setting of our rates other than the
requirement that we file with COFETEL a notification of any rate change prior to having it take
effect. Point-to-multipoint. In October 1997, we were awarded three regional
point-to-multipoint microwave concessions covering Regions 3, 5 and 8, which include states in the
north and southeast of Mexicos Gulf region in the 10.5 GHz with a 60 MHz bandwidth. These concessions, which were issued in April 1998, have a term of 20 years. COFETEL will
re-auction the frequencies covered by the concessions at least three years before the expiration
date of the concessions. These concessions require us to install a network and offer service to at
least 30% of the population in each region covered by the concessions by the end of the second year
after the issuance of the concession. Until December 2003 we, together with 14 other concessionaires, were unable to start
operations in some of our Regions because of lack of commercially viable technological solutions
and equipment for those frequencies. COFETEL initially granted extensions until April 2000 and
later extended them to October 2001. In November 2001 and again in December 2002, we requested
that COFETEL amend our point-to-multipoint concessions in order to postpone the installation of our
network and the offering of our services until one year after the granting of such request. We
have knowledge that other concessionaires have made similar requests. The COFETEL granted an extension until February 2004. On March 31, 2004, we notified the
COFETEL that we started operation in Puebla, and thus we comply with our initial coverage
obligations for Region 8. We, however, have been unable to start operations in Regions 3 and 5. We
are on the process of testing commercial operations in such Regions in order to fulfill the terms
of our point-to-point concessions. The failure to comply with the terms of the concessions or to
obtain a waiver or modification could result in its revocation and the loss of the Ps.5.2 million
performance bond that we previously issued to the SCT for all of our three point-to-multipoint
concessions. The Mexican government would not be required to compensate us for such revocation.
As of January 1, 2005 the level of fines, which are based on a multiple of the Mexican minimum
daily salary, ranged from Ps. 93,600 to Ps.4.7 34




---



##### Table of Contents



million, depending on the nature of the infraction. In the case of multiple recurring
infractions, these fines may be doubled. We failed to provide the SCT with the performance bonds
renewal for 2004, and such failure could be construed as a default on the terms of our concessions.
We are currently negotiating with the SCT new terms to secure the performance of our concessions.
However, we cannot assure you what will be the outcome of such negotiations. These concessions do not impose any limitations on the setting of our rates other than the
requirement that we file with COFETEL a notification of any rate change prior to having it take
effect. Interconnection In accordance with the Mexican telecommunications laws, all local telecommunications carriers
are required to provide interconnection to each local, long distance and cellular carrier operating
in Mexico. All terms of interconnection (such as point of interconnection) are negotiated between
telecommunications carriers under COFETELs supervision. Should telecommunications carriers be
unable to agree on the terms of interconnection (including rates) after a certain period of
negotiation, either carrier may request COFETEL to resolve any interconnection term at issue.
Telecommunications carriers are prohibited from adopting discriminatory practices in the
application of rates or any other terms of interconnection. Local interconnection. In November 1998, we entered into an interconnection agreement with
Telmex. This agreement calls for reciprocal interconnection rates for local-to-local services. The
interconnection rate was Ps.0.3220, Ps.0.1159, Ps.0.0990, Ps.0.1111, and Ps.0.1096 per minute for
the months of December 2000, 2001, 2002, 2003, and 2004, respectively. This agreement was amended in February 1999 to incorporate a bill and keep feature through
September 15, 2002, provided we maintain a significant percentage of residential users, and again
in November 2000, retroactive to March 2000, to exempt Internet service provider traffic from
interconnection fees. In December 2003, the agreement was once again amended in order to reduce the
percentage of imbalance from 70% to 30% for bill and keep purposes. A new amendment was executed
in August 2004 reducing furthermore the allowed percentage of imbalanced traffic for the imbalanced
traffic for the bill and keep procedure to 15%. This amendment will be effective temporarily
until we can reach a definitive agreement with Telmex. Additionally, the amendments exempts call
centers and new customers traffic from calculation of imbalance. Under the new bill and keep
arrangement, if the imbalance between calls originated by Telmex and terminated by Maxcom and calls
originated by Maxcom and terminated by Telmex during a month does not exceed 15%, then no
interconnection fee amounts are payable by the net user of interconnection services. If the
imbalance exceeds 15% in any given month, the bill and keep feature will not apply for that
month. If we fail to maintain a significant percentage of residential users, then the bill and keep
arrangement will be terminated and asymmetrical interconnection rates may apply. COFETEL has not
yet defined what constitutes a significant percentage of residential users in this case, although
in our local concession and in those granted to Alestra and Avantel it defines it to mean that at
least 50% of the customers are residential. Through
December 31, 2004, no material interconnection fees have been paid. Mobile interconnection. We have also signed reciprocal interconnection agreements with
Telcel, a wholly-owned subsidiary of América Móvil, which is a spin-off of Telmex; with several
subsidiaries of Iusacell and with Operadora Unefon, S.A. de C.V. (Unefon) and Pegaso
Comunicaciones y Sistemas, S.A. de C.V., (now owned by Telefónica Móviles Telefonica Moviles).
Telcel and Telefonica Moviles are the first and second largest mobile telephony service providers
in Mexico, respectively. Telcel and Telefonica Moviles are nationwide cellular operators.
Iusacell provides cellular mobile services in seven of the nine regions covering central Mexico.
Unefon is a nationwide PCS mobile operator. The mobile to wireline interconnection fees with these carriers were Ps.0.3220, Ps.0.1159
Ps.0.0990, Ps.0.1111, and Ps.0.1096 per minute for the months of December 2000, 2001 2002, 2003
and 2004 respectively. 35




---



##### Table of Contents



The wireline to mobile interconnection fees under the calling party pays mode was Ps.1.90
per minute for December 2000, 2001, 2002, 2003 and 2004. There is no interconnection fee for wireline
to mobile interconnection outside of the calling party pays mode. The interconnection agreements
provide that transit from Telmex may be used at a rate per minute which was Ps.0.0626 for the month
of December 2000, Ps.0.0278 for the month of December, 2001 Ps.0.0304 for the month of December
2002, Ps. 0.1111 for the month of December 2003 and Ps.0.0337 for the month of December 2004. Long distance interconnection. Long distance carriers are required to ensure call termination
by providing transit and direct or indirect interconnection. Since we view long distance services
as a complement to our core local telephony business, we started our operations giving our
customers the option to use our long distance services or those of other providers. As a result,
we granted long distance carriers the option to pick up calls at our facilities. However, in May
2002, we obtained a waiver from COFETEL of the obligation to offer such option to our customers See
Our concessionsLong distance. We currently provide our long distance service only to our local telephony customers through
our own network and leased facilities on a reselling basis. Municipal and other regulatory approvals Our transmission antennas and telecommunication sites are located in sites that may require
municipal and federal approvals to operate. See Item 3. Key InformationD. Risk factors relating
to MaxcomOur telecommunications network infrastructure has several vulnerabilities and
limitations.  C.
    
    Organizational structure Maxcom has four Mexican subsidiaries, Corporativo en Telecomunicaciones, S.A. de C.V., Maxcom
Servicios Administrativos, S.A. de C.V., Maxcom SF, S.A. de C.V. and Maxcom TV, S.A. de C.V., each
a Mexican limited liability company (sociedad anónima de capital variable), that provide corporate
services to Maxcom. Maxcom owns all of the capital stock of the subsidiaries, except for one share
of each, which share is owned by Corporativo en Telecomunicaciones, S.A. de C.V. in the case of
Maxcom Servicios Administrativos, S.A. de C.V. and of Maxcom Servicios Administrativos, S.A. de
C.V. for the cases of Corporativo en Telecomunicaciones, S.A. de C.V., Maxcom SF, S.A. de C.V. and
Maxcom TV, S.A. de C.V. This organizational structure is due to the fact that Mexican law requires
that limited liability companies have a minimum of two stockholders. In
February 2004, we incorporated a wholly owned subsidiary in the State of Delaware, U.S.A.,
under the name of Maxcom U.S.A., Inc. Also in February 2004 Maxcom U.S.A., Inc. applied before the
U.S. Federal Communications Commission to obtain a license under section 214 of the Communication
Act of 1934, to provide international telecommunications services between the United States and
international points, mainly Mexico (also known as a 214 License). The U.S. Federal
Communication Commission granted the license in March 2004. Maxcom U.S.A., Inc. has not yet
initiated significant operations in the U.S. In
February 2005, we incorporated Maxcom SF, S.A. de C.V., a wholly owned subsidiary, under the
laws of Mexico. This subsidiary will be used as a special purpose vehicle to finance the
securitization of Maxcoms accounts receivable in the future. Maxcom SF has not yet initiated
operations in Mexico. In
May 2005, we incorporated Maxcom TV, S.A. de C.V., a wholly owned subsidiary, under the laws
of Mexico. Also in May, 2005, this subsidiary has requested a license from the Mexican government
to provide cable television services for the City of Puebla, Pue.  D.
    
    Property, plant and equipment We currently lease the buildings and/or the land where our operations are carried out and our
microwave transmission equipment and switching centers are located. 36




---



##### Table of Contents



We lease space for administrative offices in Mexico City and in the cities of Puebla and
Querétaro. Our main headquarters are located in Santa Fe, Mexico City in a building leased for a
5-year term that expires on February 26, 2007 and that is renewable for two additional 5-year
terms. This building is comprised of l15,110 square feet. In November 2003, we sub-leased 29,870
square feet of our main headquarters until February 26, 2007. This sub  lease agreement is
renewable for two 5  year terms, provided we decide to renew our lease agreement. The price per
square feet on our sub  lease agreement is exactly the same as the one we have for our lease
agreement, therefore we accounted the rent of our sub  lease agreement as a reduction of the rent
rather than as income. In May 2003, we reached an agreement with our landlord at our former headquarters in
Magdalena, Mexico City. Pursuant to this agreement, we retained a leasehold interest through May
2013 on the first floor, where one of our Lucent 5ESS switches is located, and a portion of the
roof-top, where we have microwave transmission antennas. We were also released from lease
obligation on approximately 35,887 square feet plus parking space of the building originally
running through September 30, 2013. In exchange, we agreed to prepay the full, ten-year lease
obligations on the first floor and a portion of the roof-top, which amount to U.S.$2.7 million and
was payable in installments through May 2004. Our offices in the City of Puebla are leased for a 10-year renewable term that expires on
March 25, 2008. These offices in Puebla are comprised of 14,100 square feet and hold one of our
Lucent Technologies 5ESS switch. We have a branch office in Puebla that is leased for a 5-year
term that expires on June 1, 2004, renewable for one similar additional term. This building is
comprised of 1,350 square feet. We cancelled in June 2004, the lease agreement for the parking of
our vehicular fleet in the City of Puebla. This parking space was comprised of 13,185 square feet. Our offices in the City of Queretaro are leased for a 15-year renewable term that expires on
August 1, 2017. These offices in Queretaro are comprised of 12,012 square feet. We have a branch
office in Querétaro that is leased for a 15-year term that expires on June 23, 2017. This branch
office is comprised of 33,947 square feet and holds one of our other Lucent Technologies 5ESS
switch. On August 1, 2003, we leased a warehouse comprised of 28,620 square feet for a 2-year term
that expires on July 31, 2005. In addition we lease approximately 130 other sites that are used as
hosts or single-site buildings and are located throughout Mexico City and the cities of Puebla.
Additionally, we are the owners of five portions of land in the City of Puebla that are used as
part of our infrastructure. We believe that our facilities are adequate for our present needs and
are suitable for their intended purposes. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS All peso amounts discussed in this annual report are presented in constant December 31, 2004
pesos in accordance with Mexican GAAP, except as otherwise indicated. You should read the
following discussion and analysis in conjunction with the consolidated financial statements
included elsewhere in this annual report. Unless otherwise indicated, all financial information in
this annual report is presented in constant pesos as of December 31, 2004. The U.S. dollar
translations provided in this annual report are solely for the convenience of the reader and are,
unless otherwise indicated, calculated utilizing the noon buying rate at December 31, 2004, which
was Ps.11.15 per U.S.$1.00 as reported by the Federal Reserve Bank of New York. Sums may not add
due to rounding. The following discussion and analysis is intended to facilitate an understanding and
assessment of significant changes and trends in our historical consolidated results of operations
and financial condition and factors affecting our financial resources. It should be read in
conjunction with the audited consolidated financial statements as of December 31, 2003 and 2004 and
for the years ended December 31, 2002, 2003 and 2004 and related notes. These consolidated financial statements, which appear elsewhere in this annual report, have
been prepared in accordance with Mexican GAAP, which differs in certain significant respects from
U.S. GAAP. See note 23 to our consolidated financial statements for a description of the principal
differences between Mexican GAAP and U.S. GAAP applicable to us. Note 23 to our financial
statements also provides a reconciliation to U.S. GAAP of our net losses for the years ended
December 31, 2002, 2003 and 2004 and of stockholders equity as of December 31, 2003 and
2004. 37




---



##### Table of Contents



Our financial statements have been prepared in accordance with Bulletin B-10, Recognition of
the Effects of Inflation on Financial Information, as amended, issued by the Mexican Institute of
Public Accountants (MIPA), which provides guidance for the recognition of the effects of
inflation and translation of foreign currency transactions. We restate our income statement to reflect the purchasing power of the peso as of the most
recent reporting date (December 31, 2004), using a restatement factor derived from the change in
the national consumer price index from the month in which the transaction occurred to the most
recent year-end. Except where otherwise indicated, financial data for all periods in the
consolidated financial statements and throughout this annual report have been restated in constant
pesos as of December 31, 2004. References in this annual report to real amounts are to
inflation-adjusted pesos and references to nominal amounts are to unadjusted historical pesos.
In calendar years 2002, 2003 and 2004, the rates of inflation in Mexico, as measured by changes in
the Mexican national consumer price index, were 5.7%, 4.0% and 5.2%, respectively. Bulletin B-12, issued by the MIPA, specifies the appropriate presentation of the statement of
changes in financial position when the financial statements have been restated in constant monetary
units. Bulletin B-12 identifies the sources and applications of resources as the differences
between beginning and ending financial statement balances in constant monetary units. The Bulletin
also requires that monetary and foreign exchange gains and losses not be treated as non-cash items
in the determination of resources provided by operations. Recent developments On
June 20, 2005 we filed before the Banking and Securities
Commission of Mexico (Comisión
Nacional Bancaria y de Valores) a petition to issue a program of securities in Mexican markets for
up to Ps.150,000,000 (approximately U.S.$14 million dollars) in the form of unsecured certificados
bursátiles. These notes will be issued, if authorized, on
short term tranches. We have retained
IXE Banco, S.A., Institución de Banca Múltiple, IXE Grupo Financiero to serve as our financial
agent and lead manager in connection with this program. We are still negotiating the final terms of
this local securities program.  A.
    
    Results of operations Overview of Maxcom We are a growing facilities-based telecommunications company operating in the competitive
local exchange carrier market in Mexico. We are focused on developing our network and support
infrastructure required to provide local as well as long distance and other value-added services to
targeted small and medium-sized business and residential customers within our concession areas. We
position ourselves as a single-source provider of telecommunications services to our customers. We commenced commercial operations on May 1, 1999 and currently provide last-mile connectivity
to small and medium-sized business and residential customers in Mexico City and the cities of
Puebla and Querétaro. In addition to our existing local and long distance services, we offer
value-added services such as digital high-speed data connectivity, dial-up Internet access and
other broadband services. We were incorporated in February 1996 to take advantage of business opportunities arising out
of the liberalization of Mexicos telecommunications industry. In February 1997, we were awarded
Mexicos first competitive wireline local and long distance telephony concession, covering the
Federal District of Mexico and over 100 cities and towns in the Gulf region for local service and
the whole nation for long distance service. This concession has a term of 30 years. Our
concession was expanded in September 1999 to cover most of the greater Mexico City area, and a
wider area within the Gulf region. In September 2001, our wireline local telephony concession was
expanded to cover all of Mexico. We were also awarded seven nationwide point-to-point and three regional point-to-multipoint
microwave concessions in October 1997, each for 20 years. 38




---



##### Table of Contents



Devaluation and inflation On December 20, 1994, the Mexican government responded to exchange rate pressures by
increasing the upper limit of the then existing free market peso/U.S. dollar exchange rate band by
15% and, two days later, by eliminating the band to allow the peso to fluctuate freely against the
U.S. dollar. This resulted in a major devaluation of the peso relative to the U.S. dollar. Where
the noon buying rate had been Ps.3.45 per U.S.$1.00 on December 19, 1994, by December 31, 1994 the
noon buying rate had fallen to Ps.5.00 per U.S.$1.00, representing a 44.9% devaluation. The peso
continued to decline against the U.S. dollar during 1995, closing at a noon buying rate of Ps.7.74
per U.S.$1.00 on December 31, 1995, which represented a 54.8% devaluation relative to the U.S.
dollar for the year. The Mexican economy began to recover in 1996 and 1997, as exchange rates stabilized, inflation
decreased and real gross domestic product grew by 5.3% and 6.8%, respectively. However, the
financial crises in Asia and Russia, together with the weakness in the price of oil in 1998, which
is a significant source of revenue for the Mexican government, contributed to renewed weakness in
the peso, which devalued 22.7% relative to the U.S. dollar. From 1999 to 2000, the peso-to-dollar
exchange rate remained relatively stable. In 2001, the peso-to-dollar exchange rate showed a
slight recovery of 4.8% from Ps.9.62 on December 31, 2000 to Ps.9.16 on December 31, 2001.
However, in 2002 and 2003, the peso devalued 13.9% and 7.8% relative to the U.S. dollar, and in
2004 the peso revalued 0.8% relative to the U.S. dollar. In the first five months of 2005, the
peso reevaluated 2.2% relative to the U.S. dollar. Peso devaluations contributed to sharp increases in inflation. Inflation, which had been 7.1%
in 1994, increased to 52.0% and 27.7% in 1995 and 1996, respectively. After a reduction to 15.7%
in 1997, inflation was 18.6% in 1998. In 1999, 2000, 2001, 2002 and 2003, the inflation rate
decreased to 12.3%, 9.0%, 4.4%, 5.7% and 4.0%, respectively. In 2004, the inflation rate was 5.2%. The general economic conditions in Mexico resulting from a devaluation of the peso and the
resulting inflation may have a negative impact on our results of operations, primarily as a result
of:  
    
    the increase in the peso-carrying costs of our U.S. dollar-denominated debt and
capital expenditure requirements;
    
    the ensuing decrease in the purchasing power of Mexican consumers, which results in
a decrease in the demand for telephony services; and
    
    our inability, due to competitive pressures, to increase our prices in line with
inflation. Capitalization of pre-operating expenses We commenced commercial operations on May 1, 1999. As permitted under Mexican GAAP, during
our pre-operating stage, we capitalized all of our general and administrative expenses and our net
integral cost of financing. We were required to begin to amortize all previously capitalized
pre-operating costs. These capitalized pre-operating expenses, net,
which balance amounted to Ps.256.5
million at December 31, 2001, Ps.223.5 million at
December 31, 2002, Ps.188.9 million at December
31, 2003 and Ps.153.5 million at December 31, 2004, are amortized on a straight-line basis for a
period not exceeding ten years. Voice, data and wholesale revenues In July 2002 we began reporting revenues from data services separately from voice and data
revenue began to grow in significance. Prior to that date, revenues from data services were
included with voice revenues. Voice services are our core business. Revenues from voice services include: 39




---



##### Table of Contents




    
    installation charges of voice lines;
    
    monthly fees for the rental of voice lines, which include, depending on the product,
a certain number of free local calls;
    
    usage charges of voice lines, which can be local calls above those already included
in the monthly fees, long distance minutes, as well as minutes to mobile numbers under
the Calling Party Pays modality;
    
    charges relating to value-added services such as voice mail, call waiting, call
forwarding, three-way calling and caller identification;
    
    interconnection fees; and
    
    the sale of telephone sets. We began to offer data services on a full basis in July 2002. Revenues from data services
include: Internet dial-up access, ADSL, dedicated Internet access, digital private lines and lease
of backbone capacity. We charge for these services on a bandwidth basis. Wholesale service revenues are related basically to the sale of bulk minutes where the cost
per minute depends on the volume of traffic. Customers include high-usage customers, Internet
service providers and carriers with whom we do not have bill & keep agreements (such as long
distance and mobile carriers). We also include in this group other miscellaneous revenues. Results of operations The following table sets forth, for the periods indicated, selected statement of operations
data calculated in accordance with Mexican GAAP and expressed as a percentage of net revenue: Year ended December 312004
    
    
    2003
    
    
    2002Net revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Operating cost and expenses:Network operating costs
    
    
    35
    %
    
    
    36
    %
    
    
    39
    %Selling, general and administrative expenses
    
    
    43
    %
    
    
    50
    %
    
    
    80
    %Depreciation and amortization
    
    
    39
    %
    
    
    44
    %
    
    
    59
    %Total operating cost and expenses
    
    
    117
    %
    
    
    130
    %
    
    
    178
    %Operating loss
    
    
    17
    %
    
    
    30
    %
    
    
    78
    %Integral cost of financing
    
    
    5
    %
    
    
    16
    %
    
    
    58
    %Nonrecurring charges
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Other expense, net
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Taxes
    
    
    3
    %
    
    
    2
    %
    
    
    1
    %Net loss
    
    
    15
    %
    
    
    48
    %
    
    
    137
    %
 Year ended December 31, 2004 compared to year ended December 31, 2003 Net revenues Our net revenues primarily include monthly fees, usage fees, installation charges,
interconnection fees and the sale of telephone sets. See note 3.n to the consolidated financial
statements included in this annual report for an explanation of how we recognize revenues. 40




---



##### Table of Contents



Our net revenues increased 7.8% in 2004 as compared to 2003, from Ps. 805.4 million in 2003 to
Ps.868.2 million in 2004. Voice revenues increased by 7.0%, from Ps.668.9 million in 2003 to Ps.715.5 million in 2004.
This increase was primarily due to 13.3% increase of the number of average voice lines in service
from 125,723 in 2003 to 142,439 in 2004, as we continued the buildout of our network infrastructure
and had more voice lines available. The increase in the number of average voice lines was partially
offset by a 1% decrease in Company ARPU. The increase in voice lines produced a 0.7% increase in
monthly fee revenues (from Ps.309.8 million in 2003 to Ps.312.0 million in 2004) and a 9.0%
increase in overall usage fees (from Ps.333.0 million in 2003 to Ps.363.1 million in 2004). Wholesale revenues increased by 24.0%, from Ps.89.4 million in 2003 to Ps.110.9 million in
2004. This increase was primarily due to a 54.5% increase in traffic from 634.6 thousand minutes
in 2003 to 980.7 thousand minutes in 2004, partially offset by a 13.0% decrease in the average cost
per minute. The following table presents a breakdown of our revenues by source for 2003 and 2004: Year ended December 312004
    
    
    2003(in millions)Voice
    
    Ps.
    715.5
    
    
    Ps.
    668.9Data
    
    
    41.8
    
    
    
    47.1Wholesale
    
    
    110.9
    
    
    
    89.4Total revenues
    
    Ps.
    868.2
    
    
    Ps.
    805.4
 The following table presents a breakdown of our average revenue per line (also known as ARPU)
for 2003 and 2004. ARPU2004
    
    
    2003
    
    
    %(in U.S. dollars)BusinessMonthly charges
    
    $
    21.1
    
    
    $
    24.5
    
    
    
    (14
    )%Usage
    
    
    51.0
    
    
    
    52.1
    
    
    
    (2
    )%Subtotal
    
    
    72.1
    
    
    
    76.6
    
    
    
    (6
    )%Non-recurring
    
    
    3.3
    
    
    
    3.0
    
    
    
    10
    %Total business
    
    $
    75.4
    
    
    $
    79.6
    
    
    
    (5
    )%ResidentialMonthly charges
    
    $
    16.2
    
    
    $
    16.9
    
    
    
    (4
    )%Usage
    
    
    12.5
    
    
    
    12.3
    
    
    
    2
    %Subtotal
    
    
    28.7
    
    
    
    29.2
    
    
    
    (2
    )%Non-recurring
    
    
    1.9
    
    
    
    1.2
    
    
    
    (58
    )%Total residential
    
    $
    30.6
    
    
    $
    30.4
    
    
    
    1
    %CompanyMonthly charges
    
    $
    17.1
    
    
    $
    18.3
    
    
    
    (7
    )%Usage
    
    
    20.1
    
    
    
    19.7
    
    
    
    2
    %Subtotal
    
    
    37.2
    
    
    
    38.0

    
    
    
    (2
    )%Non-recurring
    
    
    2.1
    
    
    
    1.6
    
    
    
    31
    %Total company
    
    $
    39.1
    
    
    $
    39.6
    
    
    
    (1
    )%
 41




---



##### Table of Contents



We calculate ARPU by dividing the total voice revenues for a given period of times by the
average number of voice lines in service during such period. ARPU is a widely utilized standard
measure in the telecommunications industry and is used to evaluate the performance of the voice
business. Revenues from data and wholesale services are reported separately and are not the factor
in calculating ARPU. We calculate voice lines ARPU for our residential and business lines. Overall ARPU is
affected by our business/residential line mix as business lines tend to generate higher ARPU than
residential lines. Total Company ARPU includes Public Telephony revenues and lines. Business ARPU decreased 5% to U.S.$75.4 in 2004 from U.S.$79.6 in 2003, as a result of (i) a
14% decrease in installation charges as we continued waiving installation fees in many cases
during 2004 due to competitive pressures; and (ii) a 2% decrease in usage charges as a result of a
slightly lower number of local outbound calls per line. This decrease was partially offset by a
10% increase in monthly fees related to a change in the product mix, given that each product
generates different rates. Residential
ARPU increased 1% to U.S.$30.6 in 2004 from U.S.$30.4 in 2003. The
increase was mainly due to a 2% increase in usage charges. The following table presents a breakdown of our lines by type of customer at December 31, 2003
and 2004 and the percentage variation: At December 312004
    
    
    2003
    
    
    %Voice lines:Business lines
    
    
    28,249
    
    
    
    24,305
    
    
    
    16
    %Residential lines
    
    
    125,934
    
    
    
    106,389
    
    
    
    18
    %Public Telephony
    
    
    492
    
    
    
    
    
    
    
    N/AWholesale lines
    
    
    10,220
    
    
    
    6,850
    
    
    
    49
    %Total lines
    
    
    164,895
    
    
    
    137,544
    
    
    
    20
    %
 Operating costs and expenses Our operating costs and expenses include:  
    
    network operating costs which, include technical expenses
(comprised of electric power, site leases and maintenance of telecommunications equipment),
installation expenses, when applicable and disconnection expenses;
    
    selling, general and administrative expenses, which primarily included salaries,
wages and benefits; consulting fees, which primarily related to consulting services and
general legal and accounting fees; leasing costs which primarily related to our
headquarters, warehouses, and other facilities; marketing expenses which primarily
related to the implementation of our branding campaign, general advertising and
promotions; and provisioning for bad debt; and
    
    depreciation and amortization mainly related to pre-operating expenses, frequency
rights, telephone network systems and equipment and intangibles. Our operating costs and expenses were Ps.1,015.7 million in 2004, a 3.1% decrease as compared
to Ps.1,048.5 million in 2003. This decrease was primarily due to:  
    
    a Ps.15.2 million, or 7.6%, increase in network operating services resulting mainly
from (i) a Ps.14.0 million increase in local-to-mobile interconnection costs associated
with a significant increase in local-to-mobile traffic, partially offset by a Ps4.4
million decrease in long distance interconnection as a result of lower per-minute rates
obtained from several carriers and improved 42




---



##### Table of Contents



routing of our long distance traffic, (ii) Ps.6.4 million increase in costs related
to the lease of circuits required for our backbone and last mile connectivity as a
result of the growth of our network, and, (iii) Ps.0.8 million lower other costs,
primarily the reduction of internet service costs as a result of lower rates
obtained from new suppliers of internet access.
    
    a Ps17.0 million, or 26.7% increase in technical expenses primarily due to (i) a
46.9% increase, or Ps$10.9 million in maintenance as a result of our larger telephone
network, and (i) a Ps$6.1 million, or 15.1% increase in leases of sites and expenses
related to the operation of our telephone network;
    
    a Ps.18.7 million, or 5.2%, decrease in depreciation and amortization related to the
termination of the depreciation of some assets with short expected life period such as
electronic and computing equipment and software; and
    
    a Ps.15.2 million, or 57.4%, decrease in installation expenses due to waivers of
installation charges granted as a result of competitive pressures (we record
installation expense at the time of installation only when we bill are customers for
installation fees, and during 2003 and 2004 we waived installation fees in many
instances due to competitive pressures). Through December 31, 2002, when we waived
installation costs to our customers, the related installation costs were capitalized
and amortized on a straight-line basis over a period of 20 years. Beginning in 2003,
when we waive installation costs, we capitalize and amortize the installation costs on
a straight-line basis over a period equal to the remaining original term of our
microwave concessions, which expires in October 2017. Selling, general and administrative expenses decreased Ps.31.1 million, or 7.7% primarily due
to (i) Ps.20.4 lower provision for executive bonuses in 2004, (ii) a Ps.10.9 million pesos decrease
in severance expenses as a result of the headcount reduction in 2003, (iii) a Ps.12.9 million
decrease in bad debt provisioning coming mainly from the provision in 2003 of a fraud detected from
a business customer, see Item 8. Financial Information-A. Consolidated statements and other
financial information, Legal proceedings and customer retention plans that have allowed us to
improve collections and hence to reduce bad debt provisioning, (iv) a Ps. 3.1 million or 9.9%
decrease in leases of offices buildings, as we reached an agreement with our landlord at our former
headquarters in 2003 together with sub-leases of office space in our current headquarters to other
companies, (v) a Ps. 2.4 million, or 6.4% reduction in fees paid to external advisors; and, (vi) a
Ps. 2.3 million or 51.8% reduction in insurance expenses. These savings were offset in part by (i) a Ps.10.1 million, or 244.1% increase in advertising
expenses, as we initiated advertising campaigns in new clusters, (ii) a Ps.2.8 million, or 11.0%
increase in sales commissions, as a result of a 16.6% increase in gross installed lines from 53,655
in 2003 to 62,579 in 2004, (iii) Ps. 2.6 million, or .8% increase in reserve for obsolete equipment
as we sold obsolete equipment in 2004, (iv) Ps. 2.6 million, or 8.8% increase in general selling
and administrative expenses, (v) Ps. 1.6 million or 453.1% in market research expenses; and, (iii)
a Ps.1.2 million increase in maintenance expenses. Integral cost of financing Under Mexican GAAP and in accordance with Bulletin B-10, we are required to quantify all
financial effects of operating and financing the business under inflationary conditions. For
presentation purposes, integral cost of financing refers to the combined financial effects of:  
    
    net interest expense and interest income;
    
    net foreign exchange gains or losses; and
    
    net gains or losses on monetary position. Net foreign exchange gains or losses reflect the impact of changes in foreign exchange rates
on assets and liabilities denominated in currencies other than pesos. A foreign exchange loss
arises if a liability is denominated in 43




---



##### Table of Contents



a foreign currency which appreciates relative to the peso between the time the liability is
incurred and the date it is repaid, as the appreciation of the foreign currency results in an
increase in the amount of pesos which must be exchanged to repay the specified amount of the
foreign currency liability. The gain or loss on monetary position refers to the gains and losses realized from holding net
monetary assets or liabilities and reflects the impact of inflation on monetary assets and
liabilities. For example, a gain on monetary position results from holding net monetary
liabilities in pesos during periods of inflation, as the purchasing power of the peso declines over
time. Our integral cost of financing was a negative Ps.47.3 million in 2004, a 136.5% decrease as
compared to positive Ps.129.4 million in 2003. The decrease in integral cost of financing was
primarily due to: (i) a Ps.180.7 million, or 99.2% reduction in exchange loses, as a consequence of the
effect on our dollar-denominated debt of a lower devaluation of the peso as compared to the
dollar during 2004, when compared to the devaluation of the peso
during 2003, as well as lower debt lever due to our October 2004
restructuring; and (ii) a Ps.6.1 million, or 7.6% increase in gain on net monetary position, as a result
of the effect of a higher inflation on our liabilities monetary position in 2004 when
compared to the inflation during 2003. These factors of financing costs were partially offset by (i) a Ps.4.5 million increase in
interest expense associated with financing from vendors and, (ii) a Ps.5.5 million higher bank
commissions, net of interest on cash balances. Asset tax We recorded Ps.26.9 million in asset taxes in 2004 as compared to Ps.12.9 million in asset
taxes in 2003. The difference is primarily due to a significant increase in our asset base in
2000, when we increased the buildout of our network, as compared to 1999, which are the respective
years considered for purposes of computation of the asset tax. Asset taxes are computed on the
asset base existing four years before the current tax year. Year ended December 31, 2003 compared to year ended December 31, 2002 Net revenues Our net revenues increased 37.4% in 2003 as compared to 2002, from Ps.586.2 million in 2002 to
Ps.805.3 million in 2003. This increase was primarily due to 36.1% increase of the average number
of lines in service from 96,521 in 2002 to 125,723 in 2003, as we continued the buildout of our
network infrastructure. The increase in voice lines produced a 33.4% increase in monthly fee
revenues (from Ps.231.5 million in 2002 to Ps.309.8 million in 2003) and a 31.3% increase in
overall usage fees (from Ps.253.6 million in 2002 to Ps.333.0 million in 2003). Wholesale revenues increased by 79.3%, from Ps.49.9 million in 2002 to Ps.89.4 million in
2003. This increase was primarily due to a 138.6% increase in traffic from 266.0 thousand minutes
in 2002 to 634.6 thousand minutes in 2003, partially offset by a 8.6% decrease in the average cost
per minute. The following table presents a breakdown of our revenues by source for 2002 and 2003. Year ended December 312003
    
    
    2002(in millions)Voice(1)
    
    Ps.
    668.9
    
    
    Ps.
    525.7Data
    
    
    47.1
    
    
    
    10.6Wholesale
    
    
    89.4
    
    
    
    49.9Total revenues
    
    Ps.
    805.4
    
    
    Ps.
    586.2
 44




---



##### Table of Contents



(1)
    
    Data service revenues were minimal prior to July 2002 and were included with voice
revenues. The following table presents a breakdown of our average revenue per line (also known as ARPU)
for 2002 and 2003. ARPU2003
    
    
    2002
    
    
    %(in U.S. dollars)BusinessMonthly charges
    
    $
    24.5
    
    
    $
    23.8
    
    
    
    3
    %Usage
    
    
    52.1
    
    
    
    52.5
    
    
    
    (1
    )%Subtotal
    
    
    76.6
    
    
    
    76.3
    
    
    
    0
    %Non-recurring
    
    
    3.0
    
    
    
    4.3
    
    
    
    (31
    )%Total business
    
    $
    79.6
    
    
    $
    80.6
    
    
    
    (1
    )%ResidentialMonthly charges
    
    $
    16.9
    
    
    $
    18.0
    
    
    
    (6
    )%Usage
    
    
    12.3
    
    
    
    12.6
    
    
    
    (2
    )%Subtotal
    
    
    29.2
    
    
    
    30.6
    
    
    
    (4
    )%Non-recurring
    
    
    1.2
    
    
    
    2.9
    
    
    
    (58
    )%Total residential
    
    $
    30.4
    
    
    $
    33.5
    
    
    
    (9
    )%CompanyMonthly charges
    
    $
    18.3
    
    
    $
    19.2
    
    
    
    (5
    )%Usage
    
    
    19.7
    
    
    
    21.0
    
    
    
    (6
    )%Subtotal
    
    
    38.0
    
    
    
    40.2
    
    
    
    (5
    )%Non-recurring
    
    
    1.6
    
    
    
    3.3
    
    
    
    (52
    )%Total company
    
    $
    39.6
    
    
    $
    43.5
    
    
    
    (9
    )%
 Business ARPU decreased 1.6% to U.S.$79.6 in 2003 from U.S.$80.6 in 2002, as a result of (i) a
31.7% decrease in installation charges as we waived installation fees in many cases during 2003 due
to competitive pressures and, (ii) a 1.1% reduction in usage charges as a result of a slightly
lower number of local, long distance and mobile outbound calls per line. This decrease was
partially offset by a 2.7% increase in monthly fees related to a change in the product mix, given
that each product generates different rates. Residential ARPU decreased 9.1% to U.S.$30.4 in 2003 from U.S.$33.5 in 2002. The decrease was
mainly the result of a 58.5% decrease in installation fees due to waivers of such fees granted to
customers as a result of competitive pressures. The following table presents a breakdown of our lines by type of customer at December 31, 2002
and 2003 and the percentage variation: At December 312003
    
    
    2002
    
    
    %Voice lines:Business lines
    
    
    24,305
    
    
    
    22,194
    
    
    
    10
    %Residential lines
    
    
    106,389
    
    
    
    98,557
    
    
    
    8
    %Wholesale lines
    
    
    6,850
    
    
    
    4,480
    
    
    
    53
    %Total lines
    
    
    137,544
    
    
    
    125,231
    
    
    
    10
    %
 45




---



##### Table of Contents



Operating costs and expenses Our operating costs and expenses were Ps.1,048.4 million in 2003, a 0.4% increase as compared
to Ps.1,043.8 million in 2002. This increase was primarily due to:  
    
    a Ps.49.0 million, or 32.7% increase in network operating costs resulting mainly
from (i) a Ps.45.2 million increase in interconnection costs associated with
significant increases in local-to-mobile and long distance traffic and (ii) Ps.3.8
million in costs related to new services launched during 2002 such as AsistelMax and
Internet access, that gave a full year effect in 2003 on a higher line count basis,
when compared to its partial effect in 2002;
    
    a Ps. 17.5 million or 37.7% increase in technical expenses primarily due to (i) a
84.3% increase, or Ps.10.2 million in maintenance as a result of our larger telephone
network, and (ii) a Ps. 6.7 million, or 20.2% increase in leases of sites and expenses
related to the operation of our network;
    
    a Ps.6.3 million, or 1.8% increase in depreciation and amortization related to a
higher fixed asset base in 2003; and.
    
    a Ps.4.7 million, or 15.2% reduction in installation expenses (we record
installation expense at the time of installation only when we bill our customers for
installation fees, and during 2002 and 2003 we waived installation fees in many
instances due to competitive pressures). Through December 31,2002, when we waived
installation costs to our customers, installation costs were capitalized and amortized
on a straight-line basis ever a period of 20 years. Beginning in 2003, when we waive
installation costs, we capitalize and amortize them on a straight-line basis over a
period equal to the remaining original term of the microwave concessions, which expires
in October 2017. The
increases were offset in part by a Ps.63.4 million, or 13.5% decrease in selling, general
and administrative expenses primarily due to the implementation of cost-reduction measures such as
(i) a Ps.28.9 million decrease in severance expenses as a result of the headcount reduction in late
2002, (ii) a Ps.24.6 million, or 10.7% reduction in salaries, wages and benefits as a result of the
above-mentioned headcount reduction, (iii) a Ps. 18.5 million decrease in leases of offices

buildings, as we reached an agreement with our landlord at our former headquarters, (iv) a Ps.14.0
million, or 77.2% reduction in advertising expenses, as we have been selective with our advertising
campaigns; and, (v) a Ps.7.5 million, or 22.8% reduction in sales commissions, as a result of a
35.2% reduction in gross installed lines from 77,411 in 2002 to 53,655 in 2003. These savings were offset in part by (i) a Ps.20.5 million, or 74.4% increase in our bad debt
provision mainly due to our increasing residential customer base and the provision for fraud
detected from a business customer, see Item 8. Financial Information-A, Consolidated statements
and other financial information, Legal proceedings, (ii) a Ps.8.4 million, or 28.8% increase in
fees paid to external advisors, and, (iii) a Ps.1.1 million increase in general, selling and
administrative expenses. Integral cost of financing Our integral cost of financing was Ps.129.4 million in 2003, a 61.7% decrease as compared to
Ps.338.2 million in 2002. The increase in integral cost of financing was primarily due to: (i) a Ps.195.3 million, or 86.0% decrease in interest expense as a result of the
coupon reduction in 95.8% of our outstanding debt, from 13 3/4% to 0%, and (ii) a Ps.43.9 million, or 19.4% reduction in exchange loses, as a consequence of the
effect on our dollar-denominated debt of a lower devaluation of the peso during 2002. These factors of financing costs were partially offset by: (i) a Ps.30.0 million reduction of
gain in net monetary position; and, (ii) a Ps.8.7 million higher bank commissions, net of interest
on cash balances. 46




---



##### Table of Contents



Asset tax We recorded Ps.12.9 million in asset taxes in 2003 as compared to Ps.7.5 million in asset
taxes in 2002. The difference is primarily due to a significant increase in our asset base in
1999, when we increased the buildout of our network, as compared to 1998, which are the respective
years considered for purposes of computation of the asset tax. Asset taxes are computed on the
asset base existing four years before the current tax year. Principal differences between Mexican GAAP and U.S. GAAP The financial information included in this annual report is prepared and presented in
accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. See
note 23 to the consolidated financial statements for a description of the principal differences
between Mexican GAAP and U.S. GAAP applicable to us; for a reconciliation of our net income and
stockholders equity to U.S. GAAP as of December 31, 2003 and 2004 and for each of the two years
then ended; and for a description of the principal differences in classification between the
statements of changes in financial position under Mexican GAAP and the requirements under U.S. GAAP
for statements of cash flows. Recent United States accounting pronouncements In December 2004, and as amended in April 2005, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R),
which replaces SFAS 123 and supersedes APB Opinion No. 25. SFAS
123R, requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The pro forma disclosures previously permitted
under SFAS 123 no longer will be an alternative to financial statement recognition. SFAS 123R is
effective for fiscal years beginning after June 15, 2005. Early application of SFAS 123R is
encouraged, but not required. Public companies are required to adopt the new standard using a modified prospective method
and may elect to restate prior periods using the modified retrospective method. Under the modified
prospective method, companies are required to record compensation cost for new and modified awards
over the related vesting period of such awards prospectively and record compensation cost
prospectively for the unvested portion, at the date of adoption, of previously issued and
outstanding awards over the remaining vesting period of such awards. No change to prior periods
presented is permitted under the modified prospective method. Under the modified retrospective
method, companies record compensation costs for prior periods retroactively through restatement of
such periods using the exact pro forma amounts disclosed in the companies footnotes. Also, in the
period of adoption and after, companies record compensation cost based on the modified prospective
method. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 107, TOPIC 14: Share-based payment (SAB 107). SAB 107 addresses the interaction
between SFAS 123(R) and certain SEC rules and regulations and provides views regarding the
valuation of share-based payment arrangements for public companies. This bulletin is effective
immediately. We have not yet determined the method of adoption to be used and have not completed
our evaluation of the effects of adopting SFAS 123R. In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 153, Exchanges of Nonmonetary Assets (An amendment to APB Opinion No.
29) (SFAS 153). This statement addresses the measurement of exchanges of nonmonetary exchanges of
similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for exchanges that do not have commercial
substance. This statement specifies that a monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the exchange.
The provisions of this statement shall be effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier application is permitted. We are currently
evaluating the potential impact of this statement. In March 2005, the FASB issued Interpretation No. 47 (FIN 47), Accounting for Conditional
Asset Retirement Obligations  an interpretation of FASB Statement No. 143. FIN 47 requires an
entity to recognize a liability for the fair value of a conditional asset retirement obligation if
the fair value can be reasonably estimated. FIN 47 states that a conditional asset retirement
obligation is a legal obligation to perform an asset retirement 47




---



##### Table of Contents



activity in which the timing or method of settlement are conditional upon a future event that
may or may not be within control of the entity. FIN 47 is effective no later than the end of fiscal
years ending after December 15, 2005. We have not quantified the impact of adopting FIN 47, but we
do not expect the adoption to have a material impact on our financial position or results of
operations. Recent Mexican accounting pronouncements The following accounting standards, which were issued by the Mexican Institute of Public
Accountants (IMCP), went into effect on January 1, 2005. Management considers that the adoption of
these standards will not have a significant effect on the financial information: Statement B-7, Acquisitions of Businesses, which establish, among other things, the purchase
method as the only method of accounting for the acquisition of a business, changes to the
accounting treatment of goodwill, eliminating the amortization of goodwill as from the date on
which that statement went into effect and making it subject instead to annual impairment tests.
The statement also provides specific rules for the acquisition of minority interests and the
transfer of assets or the exchange of shares between entities under common control. The amendments to Statement C-2, Financial Instruments. Its provisions require that the
effects of valuing investments available for sale be recorded in stockholders equity and not in
income for the year, and include rules for determining the effects of impairment of financial
instruments. Statement C-10 Derivative Financial Instruments and Coverage Operations. This Statement,
besides detailing recording, valuation and disclosure criteria applicable to all derivative
financial instruments, requires that the effectiveness of hedges of cash flows and of net
investment in subsidiaries located abroad be evaluated and that the effective portion of the gains
or losses on hedging instruments be recognized within comprehensive income. The amendments to Statement D-3, Labor Obligations. These amendments provide additional
valuation and disclosure rules for recognizing severance payments due to causes other than
restructuring. B. Liquidity and capital resources Financing sources and liquidity We financed our start-up costs through capital contributions and vendor financing, as
described below:  
    
    U.S.$100.0 million vendor financing facility from Nissho Iwai American Corporation,
bearing an annual interest rate of three-month LIBOR plus 4.15% due August 12, 2005.
Funds from this facility were used to purchase Lucent Technologies equipment. We used
U.S.$72.3 million of proceeds from the sale of the 133/4% notes on March 17, 2000 to repay
all amounts outstanding in full and terminated this facility.
    
    U.S.$20.0 million vendor financing facility from Nissho Iwai American Corporation,
bearing an annual interest rate of three-month LIBOR plus 4.15% due August 12, 2005.
Funds from this facility were used to purchase NEC equipment. We used U.S.$13.9 million
of proceeds from the sale of the 133/4% notes on March 17, 2000 to repay all amounts
outstanding in full and terminated this facility.
    
    U.S.$18.7 million vendor financing from Hewlett Packard de México, bearing an annual
interest rate of three-month LIBOR plus 4.15% due November 25, 2005. We used U.S.$16.3
million of proceeds from the sale of the 133/4% notes on March 17, 2000 to repay all
amounts outstanding in full and terminated this facility.
    
    U.S.$70.0 million raised from private equity investors since inception through May
1998. 48




---



##### Table of Contents



On March 17, 2000, we sold 133/4% notes due 2007 bearing an annual interest rate
of 133/4% due April 1, 2007 in an aggregate principal amount of U.S.$300.0 million (the 133/4%
notes). Our debt service relating to the 133/4% notes for the first two years was paid with
U.S.$77.9 million of the net proceeds of the offering of the 133/4% notes that was deposited in an
interest escrow account. In September 2000, our principal shareholders invested an aggregate of U.S.$35.0 million of
new capital. This capital contribution was used primarily to fund capital expenditures and working
capital related to the buildout of our network infrastructure. During 2001, we financed our operations and capital expenditures with remaining funds from the
issuance and sale of the 133/4% notes and with the remaining funds from the U.S.$35.0 million capital
contribution completed in September 2000. On April 29, 2002, we consummated a debt restructuring and recapitalization of Maxcom. The
purpose was to reduce our debt service burden, improve our liquidity and attract additional
investment, in order to continue the buildout of our infrastructure and the growth of our business.
The following actions were taken pursuant to the debt restructuring and recapitalization:  
    
    Holders tendered an aggregate of U.S.$259,410,000 in principal amount of 133/4% notes
in exchange for an aggregate of (i) U.S.$165,078,150 in
principal amount of old notes, and (ii) 26,459,820 series N-2
convertible preferred shares, with an
initial liquidation preference of U.S.$0.4927 per share and limited voting rights,
represented by ordinary participation certificates or CPOs, which represented in the
aggregate 15.2% of our then total capital stock;
    
    Existing and new shareholders invested U.S.$66.2 million and received preferred
shares (more fully described in Principal Shareholders), which represented in the
aggregate 77.0% of our then total capital stock; and
    
    Our capital structure was restructured as more fully described in Item 7. Major
Shareholders and Related Party Transactions-A. Major shareholders and share
ownership-The capital restructuring. In April 2002, we cancelled U.S.$25,000,000 in principal amount of 133/4% notes that we had
purchased in the secondary market prior to the 2002 debt restructuring. In addition, on July 25,
2002, we completed an additional exchange of U.S.$4,000,000 in aggregate principal amount of 133/4%
notes under the same terms and conditions of the exchange offer consummated on April 29, 2002.
95.8% of the total 133/4% notes were exchanged and or cancelled, and old notes of an aggregate
principal amount of U.S.$167,623,590 remained outstanding. An aggregate principal amount of
U.S.$11,590,000 of 133/4% notes remained outstanding. On December 17, 2003, we were advised by Bank of America/Nexus that it had purchased an
aggregate amount of old notes with a face value of approximately U.S.$126.4 million, representing
approximately 75% of the principal amount of the then outstanding of the old notes. On April 28, 2004, we executed a working capital credit facility with Banco Santander
Mexicano, S.A. (which we refer to as Banco Santander) for U.S.$2.0 million. We serve interests on a
monthly basis on any outstanding balance, at a rate of LIBOR (London Inter-bank Offered Rate) plus
190 basis points. The original term of the facility was 5 months. Additionally, on August 17, 2004,
we executed a working capital credit facility with Banco Santander for Ps.55.9 million. We serve
interests on a monthly basis on any outstanding balance, at a rate of TIIE (Inter-bank Equilibrium
Interest Rate or Tasa de Interés Interbancaria de Equilibrio) plus 100 basis points. The original
term of the facility was 2 months. Both credit facilities are guaranteed by one of our
shareholders. Before both facilities expired, we negotiated new terms
until October 2004. On October 8, 2004, we consummated an exchange offer and consent solicitation. The purpose
was to improve our leverage and capital structure, in order to attract additional investments and
access multiple 49




---



##### Table of Contents



opportunities for future growth. The following actions were taken pursuant to the debt
restructuring and recapitalization:  
    
    Holders tendered an aggregate of U.S.$162,505,711 in principal amount of old notes
in exchange for an aggregate of (i) U.S.$36,117,789 in principal
amount of new notes due 2009, bearing an annual interest rate of 4.00% from October 8, 2004 through
April 14, 2005, 5.75% from April 15, 2005 through October 14, 2005, 7.75% from October
15, 2005 through April 14, 2006, 8.25% from April 15, 2006 though October 14, 2006,
9.25% from October 5, 2006 through October 14, 2007, 10.25% from October 15, 2007
through October 14, 2008, and 11.25% from October 15, 2008 through October 14, 2009, and (ii) 101,110,338 of our Series N-1 Preferred
shares;
    
    Maxcom received consents to the amendment of certain restrictive covenants of the
indenture governing the old notes representing 92.0% of the total principal amount of
outstanding old notes (other than old notes held by Maxcom or any affiliate of Maxcom),
therefore fulfilling the condition for the adoption of the proposed
amendments. As a result of the October 8, 2004 debt restructuring, debt maturity dates of our debt will be
as follows: DEBT MATURITY DATES(Thousands of U.S. Dollars)March-07
    
    
    April-07
    
    
    October-09
    
    
    TotalBefore the
October 8, 2004 debt restructuring133/4%
notes
    
    
    
    
    
    
    11,590
    
    
    
    
    
    
    
    11,590old notes
    
    
    167,624
    
    
    
    
    
    
    
    
    
    
    
    167,624Total
    
    
    167,624
    
    
    
    11,590
    
    
    
    
    
    
    
    179,214After the
October 8, 2004 debt restructuring133/4%
notes
    
    
    
    
    
    
    11,590
    
    
    
    
    
    
    
    11,590old notes
    
    
    5,118
    
    
    
    
    
    
    
    
    
    
    
    5,118new notes
    
    
    
    
    
    
    
    
    
    
    36,118
    
    
    
    36,118Total
    
    
    5,118
    
    
    
    11,590
    
    
    
    36,118
    
    
    
    52,826
 On November 5, 2004 we obtained a line of credit from Banco Santander of Ps.100,000 million
with a monthly interest rate of TIIE plus 1.2 additional percentage points. The terms require
average monthly principle payments of Ps.5.5 million in accordance with the amortization table set
forth in the contract plus accrued interest. The term of the contract is for 18 months and the due
date is May 10, 2006. There are guarantees in place for payment to Banco Santander under this
contract as follows:  
    
    we must maintain an average monthly cash balance in an operating account, until
of Ps.5.5 million to guarantee the monthly payment under the credit line, and
    
    we created a trust fund whereby Maxcom deposited Ps.12.7 million (equivalent to
the payment of two months of the credit plus a portion of the interest) to
guarantee the payment of two months of principle payments plus accrued interest
through the maturity date of the credit line.
    
    We estimate that funds from operating activities may not be sufficient to meet
our new debt service and our working capital and capital expenditure needs through
2006 and that we may need additional financing to meet these requirements. We are
currently looking for new sources of funds, including commercial bank lending,
asset-backed financing, development banks financing and private equity. However,
we cannot assure you that we will have sufficient resources and that, if needed,
any financing will be available in the future or on terms acceptable to us, in
which case we will be unable to service our debt and operate as a viable company.
In addition, our ability to 50




---



##### Table of Contents



incur additional indebtedness is restricted by the terms of the Indentures governing
the old notes and the new notes. Our future operating performance and ability to service and repay the new notes, the
old notes and the outstanding 133/4% notes will be subject to future economic and competitive
conditions and to financial, business and other factors, many of which are beyond our control. On
June 20, 2005 we filed before the Banking and Securities
Commission of Mexico (Comisión
Nacional Bancaria y de Valores) a petition to issue a program of securities in Mexican markets for
up to Ps.150,000,000 (approximately U.S.$14 million dollars) in the form of unsecured certificados
bursátiles. These notes will be issued, if authorized, on short term trenches. We have retained
IXE Banco, S.A., Institución de Banca Múltiple, IXE Grupo Financiero to serve as our financial
agent and lead manager in connection with this program. We are still negotiating the final terms of
this securities program. Indebtedness Our consolidated debt at December 31, 2004 was Ps.768.4 million (including Ps.1.6 million of
debt discount related to the issuance of detachable warrants), of which Ps.622.9 million was
long-term debt. Ps.595.1 million of our consolidated debt outstanding at December 31, 2004 was
denominated in U.S. dollars and Ps.173.3 million was denominated in Mexican pesos. The U.S.$300 million aggregate principal amount 133/4% notes accrued interest at an annual rate
of 133/4%, representing an interest expense of U.S.$39.8 million per year. In May and June 2001,
Maxcom purchased U.S.$25 million aggregate principal amount of 133/4% notes in the secondary market,
which Maxcom cancelled in April 2002. Pursuant to the
April 29, 2002 debt restructuring, 133/4% notes in an aggregate principal amount of U.S.$259,410,000 were exchanged for old notes in an
aggregate principal amount of U.S.$165,078,150, as well as for certain equity. The old notes bear
0% interest through March 1, 2006 and 10% annual interest in the last year. On July 25, 2002, we
completed an additional exchange of U.S.$4,000,000 of 133/4% notes under the same terms and
conditions of the exchange offer consummated on April 29, 2002. On December 17, 2003, we were
advised by Bank of America/Nexus that it had purchased an aggregate amount of old notes with a face
value of approximately U.S.$126.4 million, representing approximately 75% of the principal amount
of outstanding of the old notes. Pursuant to the October 8, 2004 debt restructuring, old notes in
an aggregate principal amount of U.S.$162,505,711 were exchanged for an aggregate of (i)
U.S.$36,117,789 in principal amount of new notes, bearing an annual interest rate of 4.00%
from October 8, 2004 through April 14, 2005, 5.75% from April 15, 2005 through October 14, 2005,
7.75% from October 15, 2005 through April 14, 2006, 8.25% from April 15, 2006 though October 14,
2006, 9.25% from October 5, 2006 through October 14, 2007, 10.25% from October 15, 2007 through
October 14, 2008, and 11.25% from October 15, 2008 through October 14, 2009, and (ii) 101,110,338
of our Series N-1 Preferred Shares. As of December 31, 2004, new notes in an
aggregate principal amount of U.S.$36,117,789 remained outstanding, old notes in an aggregate
principal amount of U.S.$5,117,879 remained outstanding, and 133/4% notes in an aggregate principal
amount of U.S.$11,590,000 remained outstanding. As a result of the October 8, 2004 debt restructuring, debt maturity dates of our debt will be
as follows: DEBT MATURITY DATES(Thousands of U.S. Dollars)March-07
    
    
    April-07
    
    
    October-09
    
    
    TotalBefore the
October 8, 2004 debt restructuring133/4%
notes
    
    
    
    
    
    
    11,590
    
    
    
    
    
    
    
    11,590new notes
    
    
    167,624
    
    
    
    
    
    
    
    
    
    
    
    167,624Total
    
    
    167,624
    
    
    
    11,590
    
    
    
    
    
    
    
    179,214After the
October 8, 2004 debt restructuring133/4%
notes
    
    
    
    
    
    
    11,590
    
    
    
    
    
    
    
    11,590old notes
    
    
    5,118
    
    
    
    
    
    
    
    
    
    
    
    5,118new notes
    
    
    
    
    
    
    
    
    
    
    36,118
    
    
    
    36,118Total
    
    
    5,118
    
    
    
    11,590
    
    
    
    36,118
    
    
    
    52,826
 51




---



##### Table of Contents



The indenture governing the old notes (the Old Indenture) and the indenture governing the
new notes (the New Indenture) restrict our ability to incur indebtedness. In particular,
in order to be able to incur additional indebtedness, we must comply with a minimum consolidated
leverage ratio of less than 3.75 to 1.00 and a minimum fixed charge coverage ratio of 2.00 to 1.00,
in each case after giving effect to the proposed incurrence of indebtedness.We do not, and are
unlikely in the near future to, meet these ratios. However, pursuant to certain exemptions, we are
still able to incur up to U.S.$100.0 million of indebtedness to finance the cost of acquiring or
constructing or installing telecommunication assets, and up to U.S.$20.0 million for working
capital purposes, in each case at any one time outstanding. However, pursuant to the amendments to
the old indenture, we only have the ability to incur up to an aggregate of $150 million of certain
types of permitted indebtedness outstanding at any one time (including the new notes, old
notes and the 133/4% notes) prior to the consummation of a merger, consolidation or sale of all or
substantially all of our assets. Additionally, pursuant to the amendments to the Old Indenture the
covenants restricting our ability to pledge our assets as security for financings were amended to
allow us to secure up to an additional U.S.$50 million of liens on our assets. The covenant
limiting our restricted payments, permitted investments and affiliate transactions was amended to
allow us to securitize our assets, including our accounts receivable. The covenant restricting our
ability to enter into sale/leaseback transactions was deleted. The Old Indenture and the New Indenture also provide that if certain events of bankruptcy,
insolvency or reorganization of Maxcom occur, the principal and interest on all of the old notes
will become immediately due and payable. In addition, if certain other events of default occur and
are continuing, the trustee appointed under the Old Indenture or our holders representing at least
25.0% in principal amount of the then outstanding old notes may declare all the old notes to be due
and payable immediately. These other events of default include, among others, (i) a failure to pay
interest or any gross-up amount when due for thirty days; (ii) a failure to pay principal when due;
(iii) a failure to comply with certain covenants (including financial, reporting, control, merger
and other covenants), representations, warranties and other agreements in the old indenture; (iv) a
default under other indebtedness or a judgment or decree for the payment of money, in each case in
excess of U.S.$5.0 million; (v) the unenforceability or disaffirmation of any subsidiary guarantee;
and (vi) a failure to disclose an event of default. In some of these events of default, a limited
grace period applies before the trustee or the holders can proceed to accelerate the old notes. The
indenture governing the 133/4% notes provides that the trustee appointed under the indenture or our
holders representing at least 25.0% in principal amount of the then outstanding 133/4% notes, may
declare all the old notes to be due and payable immediately if we fail to (i) pay interest or any
gross-up amount when due for thirty days, (ii) pay principal when due, (iii) comply with certain
conditions in the event of a merger or (iv) observe any covenant, representation or agreement in
the indenture for 60 days after notice by the trustee. Changes in financial position Historically, our cash generated from operating activities has not been sufficient to meet our
debt service, working capital and capital expenditure requirements. We have relied on the capital
markets for private equity, public debt and vendor financing. For the years ended December 31,
2002, 2003 and 2004, our earnings were insufficient to cover our fixed charges by Ps.793.8 million
(U.S.$71.2 million), Ps.372.7 million
(U.S.$33.4 million) and Ps.117.5 million (U.S.$10.5 million),
respectively. Resources used for operating activities For the year ended December 31, 2004, net resources used in operating activities amounted to
Ps.267.8 million compared to a negative Ps.49.6 million for the year ended December 31, 2003. The
increase in 2004 from 2003 was mainly attributable to a Ps.238.5 million decrease in losses from
operations, a Ps.72.5 million increase in restricted cash, liabilities and other assets, mainly
attributable to: 52




---



##### Table of Contents



(i) Ps.18.2 increase in restricted cash under our new Banco Santander financing. See Item 5.
Operating and Financial Review and Prospects  B Liquidity and Capital Resources  Financing
Resources and Liquidity, and (ii) Ps.90.7 increase in short term liabilities, and A Ps.6.6 million decrease in inventory as we improved our inventory management; and, a
Ps.7.0 million reduction in prepaid expenses primarily related to the recognition in 2003 of the
agreement with the landlord at our former headquarters in Magdalena to retain a leasehold interest
through 2013. See Item 7. Major Shareholders and Related Party TransactionsB. Related Party
TransactionsAdvertising. and Item 10. Additional Information-C Material contracts- Lease
termination agreement All of these factors were partially offset by a Ps.7.2 million increase in accounts receivable
as a result of the growth of our operations in 2003. For the year ended December 31, 2003, net resources used in operating activities amounted to
Ps.49.5 million compared to Ps.372.0 million for the year ended December 31, 2002. The decrease in
2003 from 2002 was mainly attributable to a Ps.421.3 million decrease in losses from operations, a
Ps.38.3 million reduction in accounts receivable as a result of a tighter strategy for collections
and allowance for doubtful accounts receivable; and, a Ps$9.6 million reduction in prepaid expenses
primarily related to the advanced purchase of radio advertising time from Operadora Plusgamma in
2002 and the recognition in 2003 of the agreement with the landlord at our former headquarters in
Magdalena to retain a leasehold interest through 2013. See Item 7. Major Shareholders and Related
Party TransactionsB. Related Party TransactionsAdvertising. and Item 10. Additional
Information-C Material contracts- Lease termination agreement. All these factors were partially
offset by a Ps.10.5 million increase in inventory as we reduced the speed of deployment of network
infrastructure during 2003 and a Ps.152.8 million decrease in restricted cash, liabilities and
other assets, mainly attributable to: (i) Ps.205.3 decrease related to the release in 2002 of the escrow account; (ii) Ps.66.4 decrease in short term liabilities, and (iii) Ps.104.7 increase in interest payable basically as a result of the payment in 2002 of
the interest on the old notes. Resources provided by financing activities For the year ended December 31, 2004, net resources generated by financing activities amounted to
Ps.96.3 million, driven by a Ps. 173.4 million increase in bank financing as a result of the
financing obtained from Banco Santander. See Item 5. Operating and Financial Review and Prospects
- B Liquidity and Capital Resources  Financing Resources and Liquidity, partially offset by the
non-cash effect of the October 8 restructure See Item 5. Operating and Financial Review and
Prospects  B Liquidity and Capital resources  Financing Resources and Liquidity comprised by i)
a Ps. 1,923.5 million decrease in old notes, ii) a
Ps.406.9 million increase in new notes;
and, iii) a Ps. 576.7 million and Ps. 865.1 million increase on issuance of capital stock and
additional paid-in capital from the exchange U.S.$ 126.4 million old notes for 96.8 million N-1 and
4.3 million B-1 series shares. This increase in resources generated by financing activities in 2004
compares to resources provided of Ps.98.8 million for the year ended December 31, 2003, due
primarily to the inflationary effect (non-cash). For the year ended December 31, 2003, net resources generated by financing activities amounted
to Ps.98.8 million, mostly driven by inflationary effect (non-cash), compared to resources provided
of Ps.876.8 million for the year ended December 31, 2002. This change was attributable to (i)
Ps.819.0 million lower additional paid-in capital as a consequence of the debt capitalization
resulting from the exchange of 133/4% notes for old notes and equity instruments pursuant to the debt
restructuring completed in April 2002, (ii) Ps.858.9 million lower additional capital stock related
to the U.S.$66.2 million private placement completed in April 2002, and (iii) Ps.900.0 million
higher liabilities mainly attributable to the exchange of the 133/4% notes in 2002. 53




---



##### Table of Contents



Resources used for investing activities For
the year ended December 31, 2004, net resources used for
investing activities amounted to Ps.347.8 million compared to
Ps.131.9 million for the year ended December 31, 2003. The
increase was mainly attributable to a Ps.209.3 million increase
in investment in telephone equipment as a result of Maxcoms
strategy of infrastructure growth during 2003, and a
Ps.6.6 million increase in investment in intangible and other
assets resulting primarily from a non-cash inflationary effect. For the year ended December 31, 2003, net resources used for investing activities amounted to
Ps.131.9 million compared to Ps.577.7 million for the year ended December 31, 2002. The decrease
was mainly attributable to a Ps.285.8 million decrease in investment in telephone equipment as a
result of Maxcoms strategy of prioritizing infrastructure growth at a time of financial
constraints, and a Ps.162.1 million decrease in investment in intangible assets resulting mainly
from our purchase in 2002 of the irrevocable and exclusive right to use two strands in a
2,011-kilometer fiber optic link covering cities between Mexico City and Laredo, Texas. Other contractual obligations In addition to our financial indebtedness, we are committed to make certain payments under
various lease arrangements. All of our peso-denominated leases and some of our dollar-denominated
site leases adjust automatically to reflect any variances experienced by the Mexican and U.S.
consumer price index, respectively. Our new corporate headquarters are leased for a 5-year term, renewable for two additional
5-year terms. Site leases generally run for five, ten or fifteen year terms. In May 2003, we reached an agreement with our landlord at our former headquarters in
Magdalena, Mexico City. Pursuant to this agreement, we retained a leasehold interest through May
2013 on the first floor, where one of our Lucent 5ESS switches is located, and the roof-top, where
we have microwave transmission antennas and a section of the basement, which will be used for
parking and to place some of our electric equipment that supports the switch. We were also
released from our lease obligations on approximately 35,887 square feet plus parking space of the
building originally running through September 30, 2013. In exchange for the new lease and the
releases, we agreed to prepay the full, ten-year lease obligations on the first floor, the roof-top
and basement, as well as pay past-due lease payments dating back from October 2002 through April
2003. All these payments amount in the aggregate to U.S.$2.7 million and were paid in installments
through May 2004. The following table presents our minimum contractual operating lease obligations denominated
in Pesos for the periods indicated: 2009 &2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    thereafter(in thousands of Pesos)Facilities
    
    Ps.
    4,827
    
    
    Ps.
    3,337
    
    
    Ps.
    3,248
    
    
    Ps.
    1,891
    
    
    Ps.
    14,062Sites
    
    
    13,988
    
    
    
    8,170
    
    
    
    5,939
    
    
    
    5,138
    
    
    
    17,358Poles
    
    
    6,693
    
    
    
    6,693
    
    
    
    6,693
    
    
    
    6,693
    
    
    
    60,233Others
    
    
    809
    
    
    
    708
    
    
    
    708
    
    
    
    708
    
    
    
    6,369Total
    
    Ps.
    26,317
    
    
    Ps.
    18,908
    
    
    Ps.
    16,588
    
    
    Ps.
    14,430
    
    
    Ps.
    98,022
 The following table presents our contractual operating lease obligations denominated in
dollars for the periods indicated: 2009 &2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    Thereafter(in thousands of U.S. dollars)Corporate headquarters
    
    $
    2,666
    
    
    $
    2,752
    
    
    $
    472
    
    
    $
    
    
    
    $Sites
    
    
    248
    
    
    
    69
    
    
    
    60
    
    
    
    40
    
    
    
    364PolesOthers
    
    
    591
    
    
    
    285
    
    
    
    35Total
    
    $
    3,505
    
    
    $
    3,106
    
    
    $
    567
    
    
    $
    40
    
    
    $
    364
 54




---



##### Table of Contents



The following table presents our minimum contractual operating maintenance obligations
denominated in Pesos for the periods indicated: 2009 &2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    thereafter(in thousands of Pesos)Corporate equipment(1)
    
    Ps.
    89
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.Network(1)
    
    
    115Total
    
    Ps.
    204
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
 
 (1)
    
    Renewal on an annual basis. The following table presents our contractual operating maintenance obligations denominated in
dollars for the periods indicated: 2009 &2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    thereafter(in thousands of U.S. dollars)Telephone equipment(1)
    
    $
    1,560
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $Fiber optic
    
    
    780
    
    
    
    780
    
    
    
    780
    
    
    
    780
    
    
    
    10,915
    (2)Software(1)
    
    
    1,251Total
    
    $
    3,591
    
    
    $
    780
    
    
    $
    780
    
    
    $
    780
    
    
    $
    10,915
 
 (1)
    
    Renewal on an annual basis.(2)
    
    Included until 2022. Capital expenditures Through December 31, 2004, we have invested Ps.3,427.1 million in the buildout of our network
operating support system and other capital expenditures, excluding cumulative pre-operating
expenses and the expenses related to the issuance of the
133/4% notes, the old notes
and the new notes and the U.S.$66.2 million private equity investment. This amount includes
Ps.139.8 million paid to obtain all of our frequency rights. For
2005, we plan to make capital expenditures of approximately U.S.$35.8 million, mainly to
continue to build out of our network. Of this total amount, we had already spent approximately
Ps.84.1 million (approximately U.S.$7.4 million) by March 31, 2005. Our ability to make the
remaining expenditures hinges on our ability to obtain financing for them. We cannot assure you
that financing will be available or on terms acceptable to us. Dividend policy Our current policy is to reinvest profits into our operations. In addition, the indenture that
governs the terms of the new notes allows us to pay cash dividends only if we meet the following
conditions:  
    
    a minimum consolidated leverage ratio of less than 3.75 to 1.00;
    
    a minimum fixed charge coverage ratio of 2.00 to 1.00; 55




---



##### Table of Contents




    
    no default (as defined in the indenture) must have occurred and be continuing or
result from the payment of the cash dividend; and
    
    the cash dividend payments do not exceed an amount determined in the indenture based
on, among other things, cash flow generated from operations or equity offerings and
consolidated interest expense. Critical accounting policies Applications of critical accounting policies and estimates. We have identified certain key accounting estimates on which our consolidated financial
condition and results of operations are dependent. These key accounting estimates most often
involve complex matters or are based on subjective judgments or decisions that require management
to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. We base our estimates on historical experience, where
applicable, and other assumptions that we believe are reasonable under the circumstances. Actual
results may differ from our estimates under different assumptions or conditions. In the opinion of
our management, our most critical accounting estimates under both Mexican GAAP and U.S. GAAP are
those that require management to make estimates and assumptions that affect the reported amounts
related to the accounting for the allowance for doubtful accounts receivable, revenue recognition,
installation revenues and costs, valuation of long-lived assets, stock-based compensation and fair
value of our common stock, and deferred taxes. For a full description of all of our accounting
policies, see Notes 3 and 23 to the Consolidated Financial Statements included in this Annual
Report. There are certain critical estimates that we believe require significant judgment in the
preparation of our consolidated financial statements. We consider an accounting estimate to be
critical if:  
    
    it requires us to make assumptions because information was not available at the time
or it included matters that were highly uncertain at the time we were making the
estimate, and
    
    changes in the estimate or different estimates that we could have selected would
have had a material impact on our financial condition or results of operations. Allowance of doubtful accounts receivable The allowance for doubtful accounts represents our estimate of losses resulting from the
failure or inability of our customers to make required payments. Determining our allowance for
doubtful accounts receivable requires significant estimates. Due to the large number of customers
that we serve, it is impractical to review the credit-worthiness of each of our customers, although
a credit review is performed for business customers that request more than two lines. We consider a
number of factors in determining the proper level timing for the recognition of and the amount of
allowance, including historical collection experience, customer base, current economic trends and
the aging of the accounts receivable portfolio. From this analysis, our current policy is to
reserve in the amount of 90% and 100% of account receivable balance
due over 90 but less than 119 days, and over 120 days, respectively
except when there is a negotiated agreement with a customer. In such
cases, a reserve is created in the amount of 30% once accounts
receivable balance is 90 days past due and 100% when the balance is
due over 120 days. We
periodically review this policy to ensure that it accurately reflects current collection patterns. In addition, in order to mitigate collections risk, our collection procedures include, but are
not limited to, periodic reminder phone calls once a customer is past due, suspension of service,
use of a collection agency and disconnection of service, if needed. Furthermore, within our
network we have systems to detect fraudulent call activity. If these systems fail to identify any
of this activity, we may have to recognize a higher degree of un-collectable accounts. While we
believe that our estimates are reasonable, changes in our customer trends or any of the factors
mentioned above could materially affect our bad debt expense. 56




---



##### Table of Contents



Revenue recognition The Company recognizes revenues from telephone services provided to customers, the sale of
customer-premise equipment, services provided to other telephone-service companies (such as
interconnection services), and installation charges. Revenues from services provided to customers, including installation and maintenance, are
recognized in the month the service is rendered. When the installation is not charged to the
customer, the cost is amortized on a straight-line basis over a
period equal to the remaining original term of our microwave
concessions, which will expire in October 2017. Revenues from the sale of customer-premise equipment are recognized at the time of the sale and
delivery and installation of such equipment. Revenues from interconnections services are recognized on an accrual basis. The Company has
entered into agreements with several telephone companies under the Bill and Keep compensatory
agreement. Under this arrangement and in most cases, if the imbalance between local calls originated by the
other carrier and terminated by Maxcom and calls originated by Maxcom and terminated by the other
carrier during a month does not exceed a determined percentage, then no interconnection fee amounts
are payable by the net user of interconnection services. If the imbalance exceeds that percentage
in any given month, the net user will be subject to a per minute charge. The percentage of
the aforementioned imbalance was 70% for the period February 25,
1999 to December 31, 2002, 30% for January 1, 2003 to October 31, 2004,
18% for December 1 to 31, 2004 and 15% as of January 2005. In the event that we fail to
maintain a significant percentage of residential users, the compensatory agreement will be
terminated and asymmetric interconnection rates could be applied. The Company also has interconnection agreements for mobile and long distance services with other
carriers, however, they do not incorporate the feature of the compensatory agreement. In 2003 we started a new business line, the lease of transmission capacity through its fiber optic
ring. Revenues from lease of capacity will be recorded in deferred revenue as billed and then
recognized ratably into revenue over the term of the contract. (See Note 23) Advances from customers are classified as current liabilities until they are refunded. When the
contract is rescinded, these deposits are applied to any outstanding balance with the respective
customer. The Company creates a reserve
in the amount of 90% and 100% of account receivable balance due over
90 but less than 119 days, and over 120 days, respectively except
when there is a negotiated agreement with a customer. In such cases,
a reserve is created in the amount of 30% once accounts receivable
balance is 90 days past due and 100% when the balance is due over 120
days. Under U.S. GAAP, customer arrangements that include both equipment and services are evaluated to

determine whether the elements are separable based on objective evidence. If element based on the
relative fair values of the separate elements and the revenue associated with each element is
recognized as earned. If the elements are not deemed separable, total consideration is deferred and
recognized ratably over the longer of the contractual period or the expected customer relationship
period. We believe that the accounting estimates related to customer relationship periods and to
the assessment of whether bundled elements are separable are critical accounting estimates
because: (i) they require management to make assumptions about how long we will retain customers;
(ii) the assessment of whether bundled elements are separable can be subjective; (iii) the impact
of changes in actual retention periods versus these estimates on the revenue amounts reported in
our consolidated statements of operations could be material; and (iv) the assessment of whether
bundled elements are separable may result in revenues being reported in different periods than
significant portions of the related costs. Installation revenues and costs Installation costs include labor, tools and materials. Through December 31, 2002, when we
waived installation costs to our customers, installation costs were capitalized and amortized on a
straight-line basis over a period of 20 years. Beginning in 2003, when we waive installation
costs, we capitalize and amortize them on a 57




---



##### Table of Contents



straight-line basis over a period equal to the remaining original term of the microwave
concessions, which expire in October 2017. When we charge installation fees to our customers, we
recognize this cost as an expense and we do not capitalize or amortize it. Once service with a
customer is terminated, the capitalized installation cost is expensed. Under U.S. GAAP,
installation revenues and the related direct installation costs are deferred and amortized over the
expected customers relationship period. When installation costs are not billed to customers, the
related costs are expensed immediately. We do not track capitalized installation costs on an individual customer basis because to do
so would not be efficient. Based on an analysis of customer history including installation costs
and cancellations, we have determined an estimated average cost per customer and estimated customer
life and we use these estimates to calculate the amount of cost deferred and the amortization
period of such deferred costs and the related installation revenue that is deferred and amortized
over the customer relationship. As we have a limited operating history, past history cannot be
used as the only accurate indicator as the average customer life. Based on our limited operating
history and industry benchmarking, we have determined an average customer relationship period of
four years. Valuation of long-lived assets We
review fixed, definite lived intangible and other long-lived assets
at least annually, under Statement C-15. Impairment reviews
require a comparison of the estimated future undiscounted cash flows to the carrying value of the
asset for U.S. GAAP reporting and discounted cash flows to the carrying value of the asset for
statutory reporting. If the total of the undiscounted cash flows is less than the carrying value
under U.S. GAAP or discounted cash flows is less than the carrying value under statutory reporting,
an impairment charge is recorded for the difference between the estimated fair value and the
carrying value of the asset. In making such evaluations, we estimated the fair value of the
long-lived assets as well as the undiscounted and discounted cash flows. In determining our
undiscounted and discounted cash flows we make significant assumptions and estimates in this
process regarding matters that are inherently uncertain, such as estimating remaining useful lives
and the possible impact that inflation may have in our ability to generate cash flow, as well as
customer growth and the appropriate discount rate. Although we believe that our estimates are
reasonable, different assumptions regarding such remaining useful lives or future cash flows could
materially affect the valuation of our long-lived assets. We also evaluate our operating leases for utilization. Spaces leased in buildings with low
occupancy have been reserved based on the contractual penalty for early termination, which is
calculated as the maximum amount that would be paid upon termination of the contract. Upon adoption of SFAS 142 Goodwill and Other Intangible Assets and Statement C-15
Impairment of the Value of Long Lived Assets and their Disposal we were required to reassess the
useful lives of our intangible assets, which primarily consist of Mexican government
telecommunications concessions and infrastructure rights. Upon reassessment, we concluded that our
concessions would be definite lived intangibles. We will periodically reassess the useful lives of
our concessions. Stock-based compensation and fair value of our common stock We have historically entered into various agreements with third parties and our employees to

exchange our warrants or our stock for services rendered to us. The fair value of such
transactions is based on various assumptions, such as volatility, risk free interest rates and
expected life of the options. We contract a third party to assist in developing said assumptions
and establishing the appropriate valuation model. Different assumptions regarding such estimations
could materially affect our financial position and results of operations. As our common stock is not traded on the open market there is not a readily determinable fair
value. The fair value of our common stock is essential for calculating stock compensation amounts
and in the calculation of the troubled debt restructurings as recorded under U.S. GAAP in 2002 and
2004. To evaluate the fair value of our 58




---



##### Table of Contents



common stock we contracted a third party who used assumptions related to the Mexican
telecommunications industry, general market data, the current state and future operations of
Maxcom, as well as other pertinent factors. Deferred taxes As part of the process of preparing our consolidated financial statements, we are required to
estimate our income tax liability. This process involves estimating actual current tax exposure
together with assessing temporary differences resulting from the different treatment for tax and
accounting purposes of several items, such as depreciation, amortization, and allowance for
doubtful accounts. These differences result in deferred tax assets and liabilities that are
included in our consolidated balance sheet. We must then assess the likelihood that our deferred
tax assets will be recovered from future taxable income and, to the extent we believe that recovery
is not likely to occur, we must include an expense within the tax provision in the statement of
operations. Significant management judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities and any valuation allowance recorded against our net deferred
tax assets. The valuation allowance is based on management projections of future financial
results. Accordingly, we have created a valuation account for the full balance of our deferred tax
asset as we feel it is unlikely we will use our net operating loss carry forwards before they
expire. If actual results differ from these estimates or we adjust the projections in future
periods, we may need to materially adjust the valuation allowance. C. Research and development, patents and licenses, etc. Maxcom does not undertake research and development activities other than market research. D. Trend information The growth of competition has been substantial and we expect it to continue. We are
continuously improving our competitive position by strengthening our voice and data products and
services. The increase in competition negatively affects our profit margins. Our current financial constraints (including the insufficiency of our earnings to cover fixed
charges and the uncertainty as to the availability of financing) has and may continue to negatively
affect our plans for growth, including the buildout of our network. See Item 3. Key
InformationD. Risk FactorsWe may need additional financing. E. Off  balance sheet arrangements Not applicable. F. Tabular disclosure of contractual obligations The following table presents our minimum contractual operating lease obligations denominated
in Pesos for the periods indicated: 2009 &2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    thereafter(in thousands of Pesos)Facilities
    
    Ps.
    4,827
    
    
    Ps.
    3,337
    
    
    Ps.
    3,248
    
    
    Ps.
    1,891
    
    
    Ps.
    14,062Sites
    
    
    13,988
    
    
    
    8,170
    
    
    
    5,939
    
    
    
    5,138
    
    
    
    17,358Poles
    
    
    6,693
    
    
    
    6,693
    
    
    
    6,693
    
    
    
    6,693
    
    
    
    60,233Others
    
    
    809
    
    
    
    708
    
    
    
    708
    
    
    
    708
    
    
    
    6,369Total
    
    Ps.
    26,317
    
    
    Ps.
    18,908
    
    
    Ps.
    16,588
    
    
    Ps.
    14,430
    
    
    Ps.
    98,022
 The following table presents our contractual operating lease obligations denominated in
dollars for the periods indicated: 59




---



##### Table of Contents



2009 &2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    Thereafter(in thousands of U.S. dollars)Corporate headquarters
    
    $
    2,666
    
    
    $
    2,752
    
    
    $
    472
    
    
    $
    
    
    
    $Sites
    
    
    248
    
    
    
    69
    
    
    
    60
    
    
    
    40
    
    
    
    364PolesOthers
    
    
    591
    
    
    
    285
    
    
    
    35Total
    
    $
    3,505
    
    
    $
    3,106
    
    
    $
    567
    
    
    $
    40
    
    
    $
    364
 The following table presents our minimum contractual operating maintenance obligations
denominated in Pesos for the periods indicated: 2009 &2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    thereafter(in thousands of Pesos)Corporate equipment(1)
    
    Ps.
    89
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.Network(1)
    
    
    115Total
    
    Ps.
    204
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
 
 (1)
    
    Renewal on an annual basis. The following table presents our contractual operating maintenance obligations denominated in
dollars for the periods indicated: 2009 &2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    thereafter(in thousands of U.S. dollars)Telephone equipment(1)
    
    $
    1,560
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $Fiber optic
    
    
    780
    
    
    
    780
    

    
    
    780
    
    
    
    780
    
    
    
    10,915
    (2)Software(1)
    
    
    1,251Total
    
    $
    3,591
    
    
    $
    780
    
    
    $
    780
    
    
    $
    780
    
    
    $
    10,915
 
 (1)
    
    Renewal on an annual basis.(2)
    
    Included until 2022. 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management Directors Our board of directors is responsible for the management of our business. The current members
of the board of directors were elected at a shareholders meeting held on August 23, 2004.
Pursuant to the capital restructuring described in Item 7. Major Shareholders and Related Party
TransactionsA. Major shareholders and share ownershipThe capital restructuring, our series A
and A-1 shareholders, voting together as a class, appoint five directors. The remaining four
directors are appointed by our series B and B-1 shareholders, voting together as a class. Pursuant
to the terms of the securityholders agreement described in Item 7. Major Shareholders and Related
Party TransactionsA. Major shareholders and share ownershipSecurityholders agreement, which
became effective upon the consummation of the debt restructuring and recapitalization, the four
series B and B-1 directors 60




---



##### Table of Contents



are now selected from among nominees proposed by Nexus  Maxcom Holdings I, LLP, a major
shareholder which we refer to in this annual report as Nexus. Series N-2 shareholders have the right to appoint an observer to our Board of Directors for so
long as the series N-2 preferred shares represent at least 3% of the outstanding capital stock of
the Company or, so long as any series N-2 preferred shares remain outstanding and at least U.S.$17.5
million aggregate principal amount of the old notes remain outstanding. This observer, who is not a
member of the Board of Directors, has the right to attend meetings of the Board of Directors but is
not entitled to vote. In the event Mexican foreign ownership restrictions are lifted, the series
N-2 shareholders will be entitled to appoint one director, provided the series N-2 shares represent
at least 10% of Maxcoms outstanding capital stock. The
following table presents information concerning our current directors
(ages as of December 31, 2004): Name
    
    Position
    
    AgeAdrián Aguirre Gómez
    
    Series A and A-1 Director and Chairman of the Board
    
    
    54Manuel Rubiralta Diaz
    
    Series A and A-1 Director
    
    
    61María Elena Aguirre Gómez
    
    Series A and A-1 Director
    
    
    52Marco Provencio Muñoz
    
    Series A and A-1 Director
    
    
    46Rodrigo Guerra Botello
    
    Series A and A-1 Director
    
    
    63Roberto Chute
    
    Series B and B-1 Director
    
    
    31Jacques Gliksberg
    
    Series B and B-1 Director
    
    
    47Marco Viola
    
    Series B and B-1 Director
    
    
    39Martin Molina
    
    Series B and B-1 Director
    
    
    28
 Miguel Sepúlveda Martínez, María Guadalupe Aguirre Gómez, Raul Guijarro de Pablo, Gilberto
Solis Silva and María Trinidad Aguirre Gómez serve as alternate Series A and A-1 directors
during the absence of Adrian Aguirre Gómez, Manuel Rubiralta Díaz, Maria Elena Aguirre Gómez,
Rodrigo Guerra Botello and Marco Provencio Muñoz, respectively. Jorge Cervantes Trejo serve as
an alternate Series B and B-1 director during the absence of any one of Roberto Chute, Jacques
Gliksberg, Marco Viola or Martin Molina. Gonzalo Alarcón I. is the secretary of the Board and our
General Counsel. Enrique Boilini was the board observer for the Series N-2 shareholders until July 2003 when he
resigned. As of today such position remains vacant. Adrián, María Guadalupe, María Trinidad and María Elena Aguirre Gómez are siblings. Gilberto
Solís Silva is the spouse of María Elena Aguirre Gómez. Raúl Guijarro de Pablo is the spouse of
María Trinidad Aguirre Gómez. Miguel Sepúlveda Martínez is the spouse of María Guadalupe Aguirre
Gómez. Set forth below is a brief biographical description of our directors: Adrián Aguirre Gómezhas been a series A, and after the capital restructuring a series A and
A-1 director and Chairman of the Board of Maxcom, since Maxcoms incorporation in February 1996.
Mr. Aguirre also sits on the Board of Directors of Corporativo en Telecomunicaciones, S.A. de C.V.,
a subsidiary of Maxcom, Grupo Empresarial de Telecomunicaciones, S.A. de C.V., Operadora Plusgamma,
S.A. de C.V. (formerly known as Recover, S.A. de C.V.) and Fundación Teletón. He has been the
Chairman of the Board since December 1992 for Operadora Plusgamma, S.A. de C.V. In addition, he was
a member of the Consulting Board of UNICEF Mexico from 1997 to 2003. Previously, Mr. Aguirre was
CEO of Grupo Radio Centro, S.A. de C.V. from November 1968 to May 24, 1999 and a Director until May
1999. Mr. Aguirre is a certified public accountant and holds an undergraduate degree in accounting
from the Instituto Tecnológico Autónomo de México (ITAM). Manuel Rubiralta Diazhas been a series A, and after the capital restructuring a series A and
A-1 director of Maxcom since June 2002. Mr. Rubiralta is also the President and Chief Executive
Officer of Bacardí Compañía, S.A. de C.V. Previously, Mr. Rubiralta was the Commercial Director of
Corporate Accounts of Grupo Maseca, S.A. de C.V. from 1999 to 2000 and Vice-president of Grupo
Televisa from 1996 to 1998. Mr. Rubiralta was the President of Pepsico de Mexico from 1993 to
1996. Mr. Rubiralta was the President of FEMSA in the United States from 1982 to 1991 and the
Sales and Marketing Vice-President for FEMSAs brewing operations in Mexico from 61




---



##### Table of Contents



1975 to 1982. Mr. Rubiralta holds an undergraduate degree in business administration from the
Universidad Nacional Autónoma de Mexico (UNAM). María Elena Aguirre Gómezwas a Series A and A-1 alternate director from June 10, 2003 until
August 22, 2004. Prior to that she also served as Series A and A-1 director from 2000 until 2003.
She also sits on the board of MG Radio, S.A. de C.V., Radiocomunicación Enfocada, S.A. de C.V. and
Radiocomunicación de Saltillo, S.A. de C.V. Mrs. Aguirre was also an alternate director of Grupo
Radio Centro, S.A. de C.V. from 1979 to 19999. Marco Provencio Muñozhas been a series A, and after the capital restructuring a series A and
A-1 director of Maxcom, since May 2001. He is also a partner and head of the public relations
practice at the consulting firm MBD: Mexico Business Development. During 2000, Mr. Provencio was
the press secretary and the spokesman for the then Mexican President Mr. Ernesto Zedillo. He served
14 years in the Ministry of Finance and Public Credit where he held various positions, including
Director General for International Financial Affairs. Mr. Provencio worked also for three years for
the Foreign Affairs Ministry, where he was appointed under-secretary for Economic and Multicultural
Affairs. Mr. Provencio holds an undergraduate degree in economics from the Universidad
Iberoamericana and a masters degree in economics and public affairs from the Woodrow Wilson School
at Princeton University. Rodrigo Guerra Botellohas been a series A, and after the capital restructuring a series A and
A-1 director of Maxcom since June 2002. Mr. Guerra is also the President of the Universidad
Regiomontana in Monterrey, Mexico, since September 2001. Mr. Guerra was the Executive President of
CETRO (a private trust for the development of small private business in Mexico), the National
Vice-President of COPARMEX and the General Director and Treasurer of the Businessman Coordination
Council. Mr. Guerra was also Director of Sidek and Situr. Previously, Mr. Guerra worked for AT&T
Mexico from March 1995 to January 1999 and served as President and Chief Executive Officer of IBM
de México from October 1980 to February 1995. Mr. Guerra holds an undergraduate degree in Chemical
Engineering from Universidad Tecnológica de Monterrey. Jacques Gliksbergwas a series N director of Maxcom from May 1998 until April 2002, and has
been a series B and B-1 director since then. He also sits on the board of directors of Bank
America International Investment Corporation, Geoplan Assessoria LTDA. (Brazil), Organizacion
Rescarven, C.A. (Venezuela), Velocom and Difusion Panoramica, S.A. de C.V. Mr. Gliksberg was a managing
partner of Banc of America Equity Partners from 1994 until 2005. He is now the managing partner of
Nexus Partners, LLC. Mr. Gliksberg holds a Bachelor of Arts degree in Economics and Political
Science from the University of Rochester and a masters degree in business administration from the
J. L. Kellogg Graduate School of Management of Northwestern University, Chicago, Illinois. Roberto Chutehas been a series B and B-1 director since April 2002. Mr. Chute sits on the
board of directors of Difusion Panoramica, a Mexican outdoor advertising company, and Eki Discount,
an Argentinean discount store chain. Mr. Chute was an associate and principal of Banc of America Equity Partners
from 2001 to 2005. Mr. Chute is now a principal of Nexus Partners, LLC. Previously, Mr. Chute
worked for Goldman, Sachs, Techint and Strat Management Consulting. Mr. Chute holds an industrial
engineering degree from the Instituto Tecnológico de Buenos Aires, Argentina and a masters degree
in business administration from the J. L. Kellogg Graduate School of Management of Northwestern
University, Chicago, Illinois. Marco Violahas been a series B and B-1 alternate director since June 10, 2003. Mr. Viola
joined Banc of America Equity Partners  Latin America as managing director in 1995 until 2005. He
now is a managing partner at Nexus Partners, LLC. Prior to that, he was a principal in Booz Allen &
Hamiltons Financial Services Group, based in New York. Mr. Viola was active in a variety of
valuation, joint venture, merger and turnaround projects for his clients. Before joining Booz
Allen, Mr. Viola worked in budgeting and planning for Banco Roberts in Argentina and as an internal
consultant for Aeroterra, a satellite technology and image processing company. Viola is currently a
director of Eki Discount and Publicidad Sarmiento (Argentina), Geoplan (Brazil), Organizacion
Rescarven (Venezuela) and BankAmerica International Investment Corporation. He received an MSM from
the M.I.T. Sloan School of Management and a BS from Universidad de Buenos Aires. Martin Molinaholds an Industrial Engineering degree from Instituto Tecnologico de Buenos
Aires and a postgraduate degree in Finance from Universidad Torcuato Di Tella. Before joining Banc
of America Equity 62




---



##### Table of Contents



Partners in 2003, he worked at the corporate finance sector for Tenaris  global producer of
steel pipes, and previously worked at a Fujitsus consulting branch. Executive officers We have experienced significant turnover in our executive ranks over the last years. In
June and July 2000, our then chief executive, chief operations and chief marketing officers
resigned. In April 2001, our then chief financial officer resigned. We appointed new officers to
all these positions during 2001 and 2002. However, between January and September 2003, our then chief executive officer, chief marketing
officer, chief commercial operations officer and vice president of corporate communications and
public relations and chief financial officer also resigned. We have since appointed a new chief
executive officer who was our former chief operating officer a new chief financial officer who was
our former treasurer and director of investor relations. As part of our cost-reduction efforts and
more efficient operations, we have split the commercial operations areas into two main segments,
one for business and other for residential customers, we have eliminated the office of vice
presidency of corporate communications and public relations and consolidated the vice presidencies
of operations and information systems into a single vice presidency of operations. On February 2004 our Chief Engineering Officer resigned. We have consolidated the
responsibilities of this area with the vicepresident of operation. On November 2004 our Human
Resources Vicepresident resigned. These responsibilities have been
assumed by Ms. Verónica Macias, our former
director of recruiting, and now director of human resources. The significant turnover we have experienced in our management has affected our ability to
develop and execute our business strategies. The success of our company depends in part upon our
ability to hire and retain highly skilled and qualified management personnel. The competition for
highly qualified management personnel in the telecommunications industry is intense and,
accordingly, we cannot assure you that we will be able to hire or retain the management personnel
necessary for our success. The following table sets forth our current executive officers (ages as of December 31, 2004): Name
    
    Position
    
    AgeRené Sagastuy
    
    President and Chief Executive Officer
    
    
    44José Antonio Solbes
    
    Chief Financial Officer
    
    
    39Ricardo Arévalo Ruiz
    
    Chief Operating and Information Technology Officer
    
    
    40
 Set forth below is a brief biographical description of each of our executive officers not otherwise
provided above: René Sagastuyhas been the Chief Executive Officer of Maxcom since March 2003. Mr. Sagastuy
was our Chief Operating Officer from May 2001 until March 2003. Prior to joining Maxcom, Mr.
Sagastuy served for one year as Director of Operations for Johnson Controls in Mexico, a U.S.
public company with 19 manufacturing sites in Mexico. Mr. Sagastuy also served as operations,
strategic planning, manufacturing and project manager and director of several companies in Mexico,
including Avex Electronics, AMP de México, S.A. de C.V. and the Jefferson Smurfit Group in Mexico.
Mr. Sagastuy holds a bachelors degree in civil engineering from the Universidad Iberoamericana in
Mexico and a masters degree in Business Administration form the Instituto Tecnológico Autónomo de
México. José Antonio Solbeshas been Chief Financial Officer since October, 2003. Mr. Solbes was our
Treasurer and Director of Investor Relations since March 2000. Prior to that Mr. Solbes held the
positions of Director of Administration and Treasurer. Prior to joining Maxcom, Mr. Solbes was
Corporate Financial Manager at Grupo Empresarial Organizado, S.A. de C.V. Mr. Solbes holds and
accounting degree from the Universidad Anahuac and a Masters degree in Finance from the same
university. Mr. Solbes completed the Corporate Financial Strategy Program at the J.L. Kellog
Graduate School of Management in Northwestern University in Chicago. 63




---



##### Table of Contents



Ricardo
Arévalo Ruizhas been our Chief Operating and Information Technology Officer since
May 2003. Mr. Arévalo was Chief Information Systems Officer from April 2001 to April 2003. Prior
to joining Maxcom, Mr. Arévalo served as Vice-President, Information Systems and Chief Information
Officer of Iusacell from August 1997 to May 2001. Mr. Arévalo also served as Vice President,
Information Systems, as Chief Information Officer and as Director, Systems Development of Grupo
Iusacell Cellular during the previous two years. Before then, Mr. Arévalo served as Director of
Information Systems, Materials, Logistics and Customer Service of AMP de México, S.A. de C.V. from
May 1993 until August 1997. Mr. Arévalo was also the Information Systems Manager for Tequila
Cuervo, S.A. de C.V. from October 1990 until May 1993. Mr. Arévalo has an undergraduate degree in
computer sciences and a diploma in marketing from the Instituto Tecnológico y de Estudios
Superiores de Monterrey. B. Compensation General For the year ended December 31, 2004, our executive officers received an aggregate
compensation (including bonuses and severance payments but excluding options) of approximately
Ps26.2 million. This amount was recognized as selling, general and administrative expenses for
2004, which represent 7.0% of our total selling, general and administrative expenses for 2004. During 2004, members and the Chairman of the Board received options that vest immediately to
purchase up to 2,500 and 5,000 series N-1 shares, respectively, at an exercise price of U.S.$0.01
per share, for each time the member attended a board of directors or any board committee meeting.
We already approved similar options incentives for the year 2004. There were five board of
directors meetings, seven Operating Advisory Committee meetings and two Audit Committee meetings,
during 2004. In 2004, we granted to our directors and committee members options to purchase a
total of up to 187,500 series N-1 shares at an exercise price of U.S.$0.01. At a
extraordinary shareholders meeting held on December 17, 2004, our shareholders decided to
change the underlying value of these options from series N shares to series N-1 shares, which are
preferred shares. Old executive stock option plan We implemented an executive compensation plan that included bonuses and stock options on our
series N shares. We granted 42,250, 383,000 and 131,820 options in 1999, 2000 and 2001, respectively for the
services rendered during the years 1998, 1999 and 2000. Options granted had exercise prices of
U.S.$8.70, U.S.$10.45 and U.S.$12.55, respectively, which were the then estimated fair market
values. Of these options, 304,502 had vested and 252,568 had been
forfeited as of June 29, 2005. New executive stock option plan We implemented a new executive stock plan, covering services rendered during the years 2001,
2002, 2003 and 2004. The plan is divided into four levels, depending on the ranking of the
different members of management. There were initially 80 participants in the plan. Participants
in the top three levels are guaranteed a minimum number of options
for series N-1 shares. The
granting of options for the fourth level, which is comprised of the junior-most management, is
discretionary. The number of options granted depends on certain revenue and operating cash flow targets.
There is a bonus portion of the plan that is allocated to individual executives at the discretion
of management and the board of directors. Vesting is 20% upon allocation and 20% per year for the
next four years. At an extraordinary shareholders meeting held on December 17, 2004, our
shareholders decided to change the underlying value of these options from series N shares to series
N-1 shares, which are preferred shares. Our new chief executive officer, Mr. Rene Sagastuy, received a signing bonus of options to
purchase 100,000 series N shares at an exercise price of U.S.$0.01 per share. These options were
exercised in May, 2004. 64




---



##### Table of Contents



The maximum aggregate number of series N-1 shares that can be distributed under the new
executive stock plan is 17,657,064 million, which is equivalent to about 6.0% of our capital stock
on a fully diluted basis (excluding other options outstanding). C. Board practices The members of our board of directors are elected annually at our ordinary general meeting of
shareholders. All board members hold the positions for one year and may be reelected. The current
members of the board of directors were selected at the general annual ordinary and extraordinary
shareholders meeting held on August 23, 2004. Our board of directors established an Operating Advisory Committee responsible for advising
the Board on, and overseeing, Maxcoms operations. The Operating Advisory Committee is currently
comprised of Adrián Aguirre, Jacques Gliksberg, Roberto Chute and Rene Sagastuy. Mr. Salvatore A.
Grasso, former member of the Operating Advisory Committee resigned in January 2004. His position
remains vacant. Our board of directors established an Audit Committee responsible for advising the Board on,
and overseeing, Maxcoms financial condition and matters regarding accounting, taxation and release
of financial information. The Audit Committee is currently comprised of Marco Provencio, Adrián
Aguirre, and Roberto Chute. Mr. Juan Manuel Ferrón, our statutory auditor, and Gonzalo Alarcón, our
general counsel and secretary of the Board, are required to participate in each meeting, although
they are not formal members of the committee. Mr. Salvatore A. Grasso, former member of the
Operating Advisory Committee resigned in January 2004. His position remains vacant. Under the Mexican Companies Law (Ley General de Sociedades Mercantiles), we are required to
have at least one statutory auditor (comisario), who is elected by our shareholders at the annual
ordinary general shareholders meeting. C.P. Juan Manuel Ferrón is our statutory auditor. Mr.
Ferrón is a partner of PricewaterhouseCoopers, S.C., who are our external auditors. The primary
role of the statutory auditor is to report to our shareholders at the annual ordinary general
shareholders meeting regarding the accuracy, sufficiency and reasonable basis of the financial
information presented to such shareholders by the board of directors. Our executive officers are appointed by the board of directors for an indefinite term and may
be removed by the Board at will, provided the corresponding severance payments are made in
accordance with Mexican labor law and the applicable labor contract. Members of the board of directors are not entitled to any benefits upon termination. D. Employees As of December 31, 2004, we had 683 employees, a 21% increase as compared to the number of
employees one year earlier to a total of 564 at the end of 2003. Of our total employees, 163 are managed through external agencies, 30 are unionized and covered by the terms of a
collective bargaining agreement that we entered into with the National Union of Telecommunications,
Communications, Cybernetics, Electric, Electronic and Similar Products Workers of the Mexican
Republic (Sindicato Nacional de Trabajadores de Telecomunicaciones, Telefonía, Comunicaciones,
Cibernética, Productos Eléctricos, Electrónicos, Similares y Conexos de la República Mexicana).
This agreement is renewable every year and next expires on March 31, 2006. We have not experienced
any strikes or work stoppages and believe that our relations with our employees are satisfactory. We
also had 233 sales representatives as of December 31, 2004, compared to 144 sales
representatives as of December 31, 2003. 65




---



##### Table of Contents



E. Share ownership Messrs. Jacques
Gliksberg, Roberto Chute, Marco Viola and Martin Molina, series B and B-1
Directors, Nexus-Holdings I, LLC, BASCF-Maxcom Holding I, LLC and BAS Capital Funding Corporation, shareholders that hold,
directly and indirectly 71.04% of our capital stock. None of our other directors or officers owns
more than 1% of our shares, except for shares held by the Aguirre Gómez family, which are described
below in Principal Shareholders. The only agreements that we currently maintain for purposes of compensating our employees with our
capital stock our old and new executive stock option plans, described above under B.
Compensation. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major shareholders and share ownership The following table presents the equity structure and the major shareholders of Maxcom as of
the date of this annual report: ShareholdersBanc AmericaAguirre Gómez
    
    
    Equity
    
    
    OtherShares
    
    Family(1)
    
    
    Partners(2)
    
    
    Investors
    
    
    SubtotalSeries A SharesNumber of shares
    
    
    4,508,644
    
    
    
    
    
    
    
    
    
    
    
    4,508,644Percentage owned
    
    
    100.00
    %
    
    
    
    
    
    
    
    
    
    
    100.00
    %Series A-1 SharesNumber of shares
    
    
    6,088,896
    
    
    
    
    
    
    
    
    
    
    
    6,088,896Percentage owned
    
    
    100.00
    %
    
    
    
    
    
    
    
    
    
    
    100.00
    %Series B-1 SharesNumber of shares
    
    
    
    
    
    
    10,089,375
    
    
    
    92,575
    
    
    
    10,181,950Percentage owned
    
    
    
    
    
    
    99.09
    %
    
    
    0.91
    %
    
    
    100.00
    %Series N SharesNumber of shares
    
    
    42,052
    
    
    
    3,505,738
    
    
    
    5,314,044
    (4)
    
    
    8,861,834Percentage owned
    
    
    0.47
    %
    
    
    39.56
    %
    
    
    59.97
    %
    
    
    100.00
    %Series N-1 SharesNumber of shares
    
    
    
    
    
    
    217,207,981
    
    
    
    3,506,893
    (4)
    
    
    220,714,874Percentage owned
    
    
    
    
    
    
    98.41
    %
    
    
    1.59
    %
    
    
    100.00
    %Series N-2 Shares(3)Number of shares
    
    
    
    
    
    
    
    
    
    
    26,867,820
    
    
    
    26,867,820Percentage owned
    
    
    
    
    
    
    
    
    
    
    100.00
    %
    
    
    100.00
    %TotalNumber of shares
    
    
    10,639,592
    
    
    
    230,803,094
    
    
    
    35,781,332
    
    
    
    277,224,018Percentage owned
    
    
    3.84
    %
    
    
    83.26
    %
    
    
    12.91
    %
    
    
    100.00
    %
 
 (1)
    
    The shares of Maxcom controlled by the Aguirre Gómez family are held individually or
through trusts or corporations. As part of the 2004 restructuring, the Aguirre Gómez family
exchanged i) 1,226,373 of our series B common shares for 1,226,373 of our series A common
shares, and ii) 2,055,843 of our series N shares for 2,055,843 of our series A shares.(2)
    
    The shares of Maxcom controlled by Banc America Equity Partners are held through (i)
Nexus-Maxcom Holdings I, LLC, which holds 166,408,377 shares or approximately 60.3% of the
total outstanding capital stock, (ii) BASCF-Maxcom Holding I, LLC which holds 60,888,979
shares or approximately 21.96% of the total outstanding capital stock, (iii) BAS Capital
Funding Corporation, which holds 3,155,164 shares or approximately
1.14%, and (iv) BankAmerica Investment Corporation, which hold
approximately 0.13% of the total
outstanding capital stock. As part of the 2004 66




---



##### Table of Contents



restructuring the entities controlled by Banc America Equity Partners exchanged 4,333,741
of our series N-1 shares for 4,333,741 of our series B-1 shares.(3)
    
    The series N-2 shares were originally issued to the bondholders who participated in our
debt restructuring. During 2003 Nexus  Maxcom Holdings I, LLC acquired an amount of
approximately 75% of the old notes, as well as a similar percentage of series N-2 shares,
which are now beneficially owned by Nexus  Maxcom Holdings I, LLC See Item 5Operating and
Financial Review and ProspectsDebt restructuring and recapitalization. Additionally, during
2003 Nexus  Maxcom Holdings I, LLC acquired Series B-1 and N-1 shares previously held by
Morgan Stanley Asset Management, Caxton International and Credit Suisse First Boston
Corporation.(4)
    
    As part of the agreements made between some of our current officers which also held shares,
in February 2005 Rene Sagastuy Ferrándiz, our Chief Executive Officer, Ricardo Arévalo, our
Chief Operation and Information Technology Officer and, Rogelio Espinosa Cantellano, head of
the Strategic Negotiations Direction exchanged an aggregate amount of 1,469,836 of our series
N shares for 1,469,836 of our series N-1 shares. In addition, we have options authorized for the purchase of up to 3,024,011 series N and
23,010,943 series N-1 shares. See Outstanding options and warrants. The capital restructuring On April 11, 2002 we obtained an authorization from the Mexican Foreign Investment Bureau
(Dirección General de Inversión Extranjera) to increase our ability to issue neutral investment
shares for up to 95% of our total capital stock and to simplify our equity structure. Our capital structure is comprised of the following stock:  
    
    Series A-1 common voting shares with preferred liquidation rights;
    
    Series B-1 common voting shares with preferred liquidation rights;
    
    Series N-1 preferred shares with limited voting rights; and
    
    Series N-2 preferred shares with limited voting rights. The holders of our series A shares and series A-1 preferred shares voting together as a class
have the ability to elect the majority of the board of directors. All series A shares and A-1
preferred shares are beneficially owned, directly or indirectly, by several members of the Aguirre
Gómez family, including Adrián Aguirre Gómez, María Guadalupe Aguirre Gómez, María Elena Aguirre
Gómez, and María Trinidad Aguirre Gómez. Pursuant to our amended by-laws, our amended series A
shares and A-1 preferred shares represent 51% of our voting stock and may only be held by Mexican
nationals. Although the Aguirre Gómez family holds 51.00% of the voting stock through the series A and
A-1 shares, and has the power to elect the majority of the board of directors, its ability to control Maxcom is substantially limited by the terms of the
securityholders agreement described below under Securityholders agreement. The holders of our
series B shares and series B-1 preferred shares voting together have the right to elect four
directors of our nine-member board of directors. However, pursuant to the terms of the
securityholders agreement, the series B and B-1 director are elected from among nominees proposed
by Nexus. The
holders of our series N-2 preferred shares have the right to appoint an observer to the
board of directors for so long as (i) the series N-2 preferred shares represent at least 3% of the
outstanding capital stock of Maxcom or (ii) there is at least one share of series N-2 preferred
shares remain outstanding and at least U.S.$17.5 million aggregate principal amount of
the old notes remain outstanding. This observer, who is not a
member of the board of directors, has the right to attend meetings of
the board of directors but is
not entitled to vote. On October 8, 2004, we consummated an exchange offer and consent solicitation. The purpose
was to improve our leverage and capital structure, in order to attract additional investments and
access multiple opportunities for future growth. The following actions were taken pursuant to the debt
restructuring and recapitalization:  
    
    Holders tendered an aggregate of U.S.$162,505,711 in principal amount of old notes
in exchange for an aggregate of (i) U.S.$36,117,789 in principal
amount of new notes, bearing an annual interest rate of 4.00% from October 8, 2004 through
April 14, 2005, 5.75% from April 15, 2005 through October 14, 2005, 7.75% from October
15, 2005 through April 14, 2006, 8.25% from April 15, 2006 though October 14, 2006,
9.25% from October 5, 2006 through October 14, 2007, 10.25% from October 15, 2007
through October 14, 2008, and 11.25% from October 15, 2008 through October 14, 2009
(the new notes), and (ii) 101,110,338 of our Series N-1 Preferred
shares;
    
    Maxcom received consents to the amendment of certain restrictive covenants of the
indenture governing the old notes representing 92.0% of the total principal amount of
outstanding old notes (other than old notes held by Maxcom or any affiliate of Maxcom),
therefore fulfilling the condition for the adoption of the proposed
amendments. 67




---



##### Table of Contents



Outstanding options and warrants As
of the date of this annual report, we have up to 23,010,943 million series N-1 shares and up to
3,024,011 million series N shares authorized for issuance upon
the exercise of stock options and warrants. Each
option entitles the holder to purchase one series N share or one series N-1 share. The following
table presents shares authorized for issuance upon the exercise of
stock options and warrants as well as information concerning the stock options and warrants authorized and outstanding: ExerciseNumber of
    
    
    Type of
    
    priceName of option holder
    
    options
    
    
    Share
    
    Per share(US$)CT Global Telecommunications, Inc. (operating services) (1)
    
    
    1,105,779
    
    
    N
    
    
    3.06Bachow & Associates, Inc. (strategic assistance services) (2)
    
    
    442,312
    
    
    N
    
    
    3.06Amsterdam Pacific LLC
    
    
    24,426
    
    
    N
    
    
    8.701998-2000 Executive Stock Option Plan
    
    
    575,000
    
    
    N
    
    
    8.70 to 12.502001-2003 Executive Stock Option Plan (9)
    
    
    17,998,500
    
    
    N-1
    
    
    0.50UBS Warburg LLC (3)
    
    
    89,244
    
    
    N
    
    
    0.01Donaldson, Lufkin & Jenrette Securities Corporation (3)
    
    
    22,312
    
    
    N
    
    
    0.01133⁄4%
notes warrantholders (4)
    
    
    764,938
    
    
    N
    
    
    0.01Adrián Aguirre (5)
    
    
    3,626,959
    
    
    N-1
    
    
    0.49Signing bonus reserve for new officers
    
    
    246,215
    
    
    N-1
    
    
    0.01BAS Capital Funding Corporation (management services) (6)
    
    
    249,781
    
    
    N-1
    
    
    0.01BankAmerica
Investment Corporation (management services) (7)
    
    
    27,754
    
    
    N-1
    
    
    0.01Bachow & Associates, Inc. (management services) (8)
    
    
    277,535
    
    
    N-1
    
    
    0.01Directors and committee members compensation
    
    
    584,199
    
    
    N-1
    
    
    0.01Total
    
    
    26,034,954
 
 (1)
    
    We issued options to purchase up to 250,000 series N shares at
U.S.$8.70 per share in May 1998 as compensation for operating services. Pursuant to our 2002
capital restructuring, we issued options to purchase up to an additional
855,779 series N shares at an exercise price of U.S.$3.06 per share
and reduced the exercise
price of the original options to U.S.$3.06 per share as partial anti-dilution protection.(2)
    
    We issued options to purchase up to 100,000 series N shares at U.S.$8.70
per share in May 1998 as compensation for strategic assistance services. Pursuant to our 2002
capital restructuring, we issued options to purchase up to an additional
342,312 series N shares at an exercise price of U.S.$3.06 per share
and reduced the exercise
price of the original options to U.S.$3.06 per share as partial anti-dilution protection.(3)
    
    These warrants were issued in March 2000 as partial compensation for underwriting services
related to the issuance of units comprised of our 133/4% notes and warrants.(4)
    
    These warrants were issued as part of the March 2000 offering of our units comprised of our
133/4% notes and warrants.(5)
    
    We issued options to purchase up to 375,000 series N shares at a strike price varying between
U.S.$8.70 and U.S.$12.50 per share pursuant to the old executive stock option plan described
in ManagementCompensationOld Executive Stock Option Plan. Pursuant to our 2002 capital
restructuring, we issued options to purchase up to 3,251,959 series N
shares at an exercise price of U.S.$0.49 and reduced the exercise price of the original
options to U.S.$0.49 per share as partial anti-dilution protection. Pursuant to a shareholders
meeting held on December 17, 2004 we authorized an amendment to the existing
options and warrants issued in connection with
employee compensation plans or management services to change the underlying value
of the options from N to N-1 preferred shares.(6)
    
    We issued options to purchase up to 42,300 series N shares at U.S.$0.01 per share in May 2001
as compensation for management services provided during 2000. Pursuant to our 2002 capital
restructuring, we issued options to purchase up to an additional 207,481
series N shares at an exercise price of U.S.$0.01 per share as partial 68




---



##### Table of Contents



anti-dilution protection. Pursuant to a
shareholders meeting held on December 17, 2004 we authorized an
amendment to the
existing options and warrants issued in connection with employee compensation plans or
management services to change the underlying value of the options from N to N-1
preferred shares.(7)
    
    We issued options to purchase up to 4,700 series N shares at U.S.$0.01 per share in May 2001
as compensation for management services provided during 2000. Pursuant to our 2002 capital
restructuring, we issued options to purchase up to an additional 23,053
series N shares at an exercise price of U.S.$0.01 per share as partial anti-dilution
protection. Pursuant to a shareholders meeting held on
December 17, 2004 we authorized an amendment the existing options
and warrants issued in connection with employee compensation plans or management
services to change the underlying value of the options from N to N-1 preferred shares.(8)
    
    We issued options to purchase up to 47,000 series N shares at U.S.$0.01 per share in May 2001
as compensation for management services provided during 2000. Pursuant to our 2002 capital
restructuring, we issued of options to purchase up to an additional 230,535
series N shares at an exercise price of U.S.$0.01 per share as partial anti-dilution
protection. Pursuant to a shareholders meeting held on
December 17, 2004 we authorized an amendment to the existing options
and warrants issued in connection with employee compensation plans or management services
to change the underlying value of the options from N to N-1 preferred shares.(9)
    
    The board has authorized that up to three million
options to purchase series N-1 shares be granted to key officers in
connection with a change of control as part of there
severance package agreements. Pursuant
to a shareholders meeting held on December 17, 2004 we
authorized an amendment the existing options and
warrants issued in connection with employee compensation plans or management services
to change the underlying value of the options from N to N-1 preferred shares. On March 24, 2005 the option of Nissho Iwai American Corporation to subscribe up to 337,472
series N shares at a strike price per share of U.S.$8.70 expired in accordance with the Stock
Option Agreement executed by and between Nissho Iwai American Corporation and Maxcom
Telecomunicaciones, S.A. de C.V. on March 24, 1998. Securityholders agreement On August 18, 2000, Maxcom executed an amended and restated securityholders agreement with our
shareholders to, among other things, reflect the restructuring of our capital stock and to provide
that the exchange of series C shares and series N shares for CPOs may not adversely affect in any
manner the rights granted to the holders of the series N shares under the original securityholders
agreement. The securityholders agreement was again amended and restated in connection with our
recapitalization. All of the holders of series A shares, series A-1
preferred shares, series B shares,
series B-1 preferred shares, series N shares and series N-1 preferred
shares are parties to the
securityholders agreement, which sets forth certain corporate governance and the transfer or sale
of such securities. The primary purpose of the securityholders agreement is to confirm the rights
and obligations under the by-laws of each of the parties to such agreement. Accordingly, with
certain limited exceptions, the terms of the new securityholders agreement are substantially the
same as the terms of the by-laws as applicable to the holders of
series A shares, series A-1
preferred shares, series B shares, series B-1 preferred shares,
series N shares and series N-1
preferred shares. In
particular, the new securityholders agreement provides that we are managed by a board of
directors composed of nine members and nine alternate members. Five members are designated by
holders of a majority of the series A shares and the series A-1
preferred shares, voting together as
a single class, and the remaining four members are designated by the
holders of our series B shares
and series B-1 preferred shares voting together. However, the series B and B-1 directors are
selected from among nominees proposed by Nexus. 69




---



##### Table of Contents



Pursuant to the new securityholders agreement, Maxcom is required to deliver to certain
significant holders of series A, B and N shares and series A-1, B-1
and N-1 preferred shares
financial statements and other information reasonably requested by such shareholders. In addition, the new securityholders agreement provides, among other things, approval of key
matters (which will require the affirmative vote of both Nexus and
the board, inclusive the
approval of at least one director designated by Nexus), restrictions on transfers, rights of first
offer, participation rights, and rights and obligations with respect to public offerings. For
further description of corresponding provisions of the proposed by-laws see Item 10. Additional
InformationB. Memorandum and articles of association. B. Related party transactions General policy Our general policy is that we will not, and will not permit our subsidiaries to, enter into
any contract or transaction with or for the benefit of any affiliate (other than transactions
between us and our subsidiary), which is not at a price and on other terms at least as favorable to
Maxcom or our subsidiaries as those which could be obtained on an arms-length basis from an
unaffiliated third party. Operation services On October 17, 1997, we entered into an operating agreement with CT Global Telecommunications,
Inc., one of our series B shareholders. This agreement was amended in May 21, 1998 and October 1,
1999 and was terminated on December 31, 2000. Under this agreement, CT Global was responsible,
among other things, for providing us with advisory consulting and supporting services in our
start-up phase. During the life of this Agreement, CT Global earned options to purchase our shares as
incentive compensation for meeting certain start-up and operational targets. As part of the
proposed capital restructuring described in A. Major shareholders and share ownershipThe capital
restructuring, we authorized the issuance of options in favor of CT Global to purchase up to
855,779 series N shares at an exercise price of U.S.$3.06 per share and to reduce the exercise
price of the original options to U.S.$3.06 per share as partial anti-dilution protection. See A.
Major shareholders and share ownershipOutstanding options and warrants. Strategic assistance services On May 21, 1998, we entered into a strategic assistance agreement with Bachow & Associates,
Inc., an affiliate of one of our current principal shareholders. The agreement provided that Bachow
would help us to:  
    
    develop and implement a budget model template for our annual operating and capital budgets;
    
    evaluate and assist in the choice and implementation of a financial accounting system;
    
    develop a template for the monthly board of directors operational reporting package;
    
    evaluate and assist in the choice and implementation of a customer billing system;
    
    design a sales and marketing plan; and
    
    provide training and guidance to our Chief Financial Officer. This agreement expired on April 1, 1999. Bachow received, in addition to other compensation,
options to purchase 100,000 series N shares at a strike price of U.S.$8.70 per share. In accordance
with the terms of the strategic assistance agreement, Bachow may elect to have the Company finance
up to 95% of the exercise price with a seven-year term non-recourse loan that will be secured by
the stock. Pursuant to the capital restructuring, we authorized the issuance of options to
purchase up to an additional 342,312 series N shares at an exercise price of 70




---



##### Table of Contents



U.S.$3.06 per share and to reduce the exercise price of the original options to U.S.$3.06 per
share as partial anti-dilution protection. Advertising In April 9, 2002 we agreed to purchase U.S.$3.0 million of advertising time over the Grupo
Radio Centro radio network from Operadora Plusgamma, a company controlled by certain members of the
Aguirre Gómez family. Operadora Plusgamma is an operator of a network of radio station located
throughout Mexico. The Aguirre Gómez family used the U.S.$3.0 million proceeds that were received
by Operadora Plusgamma from this agreement to purchase series A-1
shares pursuant to the private
equity investment made at the time of the recapitalization. Management services In May 2001, Bank America International Investment Corporation, Bachow & Associates, Inc. and
LA Strategic Capital Partners II, which are principal shareholders (or affiliates of principal
shareholders in the case of Bachow) received options to purchase an aggregate of 94,000 series N
shares at an exercise price of U.S.$0.01 for management services rendered in 2000, during the term
of vacancies in the offices of Chief Executive Officer, Chief Operating Officer and Chief Marketing
Officer. As part of the proposed capital restructuring described in A. Major shareholders and share
ownershipThe capital restructuring, we authorized the issuance to the same partners of options to
purchase 461,069 series N shares at an exercise price of U.S.$0.01 per share partial anti-dilution
protection. See A. Major shareholders and share ownershipOutstanding options and warrants. C. Interest of experts and counsel Not applicable. 
 ITEM 8. FINANCIAL INFORMATION A. Consolidated statements and other financial information Financial statements See Item 18. Legal proceedings We are not currently party to any material legal proceedings other than as described below. Lease termination agreement In September 2002, we commenced actions before the Lease Courts for the Federal District of
Mexico against Messrs. Zaga Romano, Zaga Buzali and others (collectively, the landlord), seeking
the termination of a 15-year lease (expiring on September 30, 2013) of 70,500 square feet plus
parking space in a building on Magdalena, Mexico City, which was our former headquarters. The
action was based on claims of miscalculation of lease payment amounts and breaches of certain city
compliance regulations. The landlord countersued alleging failure to make lease payments. In May 2003, we reached an agreement with our landlord at our former headquarters in
Magdalena, Mexico City. Pursuant to this agreement, we retained a leasehold interest through May
2013 on the first floor, where one of our Lucent 5ESS switches is located, the roof-top, where we
have three microwave transmission antennas and a section of the basement, which will be used for
parking and to place some of our electric equipment that supports the switch. We were also
released from our lease obligations on approximately 35,887 square feet plus parking space of the
building originally running through September 30, 2013, including past-due lease payments dating
back from 71




---



##### Table of Contents



October 2002. In exchange for the new lease and the releases, we agreed to prepay the full,
ten-year lease obligations on the first floor, the roof-top and basement, which amount to U.S.$2.7
million and will be payable in full by May 2004. Significant unpaid receivable We have initiated criminal and commercial actions against Americana de Sistemas, S.A. de C.V.
for the failure to pay approximately Ps.6.4 million in telecommunications services. This service
usage, which was incurred over several days, was detected by our fraud prevention system but was
not noticed by our monitoring personnel, which has been significantly reduced as a result of our
cost-cutting measures. See Item 3. Key InformationD. Risk factorsFactors relating to the
Mexican telecommunications industryFraud increases our expenses. Fraud on payment of labor quotas
to the Mexican Institute of Social Security (IMSS) We initiated criminal and commercial actions against Banco Santander Serfin, S.A. and Banco
Nacional de México, S.A. (also known as Banamex) for a fraud committed against us in the payment of
the bi  monthly labor quotas to IMSS. We presume the fraud was committed by the personnel of the
abovementioned banks by paying a check issued to the sole beneficiary of the IMSS to another
person. We are no aware still of who the final beneficiary of the funds was, and the banks have
not presented the information arguing bank secrecy regulations. We have obtained favorable judgment
in connection with this case and we will proceed to liquidate the judgment. Dividend policy Our current policy is to reinvest profits into our operations. In addition, the indenture that
governs the terms of the old notes and new notes allows us to pay cash dividends only if we meet the following
conditions:  
    
    minimum consolidated leverage ratio of less than 3.75 to 1.00;
    
    a minimum fixed charge coverage ratio of 2.00 to 1.00;
    
    no default (as defined in the indenture) must have occurred and be continuing or
result from the payment of the cash dividend; and
    
    the cash dividend payments do not exceed an amount determined in the indenture based
on, among other things, cash flow generated from operations or equity offerings and
consolidated interest expense. B. Significant changes Except for the debt restructuring and recapitalization described in Item 5. Operating and
Financial Review and ProspectsDebt restructuring and recapitalization, no significant change has
occurred affecting our results or financial conditions since December 31, 2002. 
 ITEM 9. THE OFFER AND LISTING A. Offer and listing details Not applicable. B. Plan of distribution Not applicable. C. Markets None of Maxcoms securities are traded on any stock exchange. 72




---



##### Table of Contents



D. Selling shareholders Not applicable. E. Dilution Not applicable. F. Expenses of the issue Not applicable. 
 ITEM 10. ADDITIONAL INFORMATION A. Share capital Not applicable. B. Memorandum and articles of association General Maxcom was incorporated on February 28, 1996, under the name Amaritel, S.A. de C.V. as a
variable capital corporation (sociedad anónima de capital variable) established under the laws of
Mexico. Maxcom was registered in the Public Registry of Commerce of the Federal District of Mexico
under folio no. 210585 on June 11, 1996. Amaritel changed its name to Maxcom Telecomunicaciones,
S.A. de C.V. on February 9, 1999. Maxcom was formed for the purpose of installing, operating and exploiting a public
telecommunications network granted by the Mexican federal government for the provision of local and
long distance telephone services. Maxcoms corporate purposes are found under Article Two of its by-laws. The duration of
Maxcoms existence under our by-laws is indefinite. The
following table sets forth our capital structure as of June 29, 2005: % of TotalNumber
    
    
    CapitalClass
of Shares
    

of
Shares
    
    
    StructureSeries A
    
    
    4,508,644
    
    
    
    1.62
    %Series A-1
Preferred Shares
    
    
    6,088,896
    
    
    
    2.19
    %Series B-1
Preferred Shares
    
    
    10,181,950
    
    
    
    3.67
    %Series N
    
    
    8,861,834
    
    
    
    3.19
    %Series N-1
Preferred Shares
    
    
    220,714,874
    
    
    
    79.61
    %Series N-2
Preferred Shares
    
    
    26,867,820
    
    
    
    9.69
    %Total
    
    
    277,224,018
    
    
    
    100.0
    %
 On April 11, 2002 we obtained an authorization from the Mexican Foreign Investment Bureau
(Dirección General de Inversión Extranjera) to increase our ability to issue neutral investment
shares for up to 95% of our total capital stock and to simplify our equity structure. In connection with our capital restructuring held in 2002, we issued four new classes of
shares: the series A-1, B-1, N-1 and N-2 preferred shares. The series
A-1 and B-1 preferred shares
have full voting stock and the series N-1 and N-2 preferred shares have limited voting stock. The
series N-1 and N-2 preferred shares are not computed for purposes of determining the foreign
investment percentage under the Mexican Foreign Investment Law and may be 73




---



##### Table of Contents



subscribed, paid for and held by Mexican and non-Mexican investors. Our series N-2 preferred
shares have been deposited into the CPO trust, which is administered by Banco Nacional de México,
S.A., also known as Banamex who is also the holder of record of the series N-2 preferred shares. The
trust is managed by a technical committee, a majority of the members of which are designated by
Maxcom. The technical committee has the authority to direct the trustee to, among other things,
waive preemptive rights otherwise provided by Mexican law. Each CPO represents one series N-2
preferred shares. Under such capital restructuring, we liquidated the existing C/N CPO trust and cancelled the
corresponding C/N CPOs. Additionally, the series C shares was converted at an exchange ratio of
one-to-one into series N shares. As a result, holders of C/N CPOs have became the direct holders of
two shares of series N shares for each C/N CPO. Our series A shares and series A-1 preferred shares, which may only be subscribed, paid for and
held by Mexican investors, collectively represent about 51% of our voting stock, and all of our
series A and series A-1 shares are held directly or indirectly by members of the Aguirre Gómez
family. The series B-1 preferred shares represent 49% of our voting stock and may be subscribed,
paid for and held by Mexican and non-Mexican investors. In connection with our debt capitalization process held in 2004, at a general annual ordinary
and extraordinary meeting of our shareholders, our shareholders authorized the exchange, subject to
the completion of the restructuring, (1) 1,226,373 outstanding shares of our series B shares held by
Mexicans for 1,226,373 of our series A shares, (2) 4,333,741 of our series N-1 shares
for 4,333,741 of our series B-1 shares and (3) a maximum of 2,005,843 of our series N
shares held by Mexicans for 2,005,843 of our series A shares. Our offer to exchange shares of
our capital stock described in the previous sentence was made to all holders of our series B, N-1
and N shares. This exchange will allow us to issue additional neutral investment shares when
required. Voting rights Under our amended by-laws, the holders of series A shares, series A-1 preferred shares, series B
shares and series B-1 preferred shares are entitled to vote on all matters submitted to a vote of the
shareholders, with each share of series A shares, series A-1 preferred shares, series B shares and
series B-1 preferred shares being entitled to one vote. In addition, under our by-laws, holders of
series N shares have no voting rights and holders of series N-1 and N-2 preferred shares have limited
voting rights. Currently, there are no series B shares outstanding. Holders of series N-1 preferred shares will vote together as a separate class in connection
with:  
    
    any amendment to the by-laws that adversely and disproportionately affects the
economic characteristics (i.e., conversion right, liquidation right and dividend right)
of the series N-1 preferred shares as compared to the series N-2 preferred shares; and
    
    any amendment to the section of the by-laws relating to the voting rights of series
N-1 preferred shares. In addition, holders of series N-2 preferred shares will vote together as a separate class in
connection with:  
    
    determining whether a sale of all or substantially all of the consolidated assets of
Maxcom or a merger, recapitalization, reorganization or consolidation of Maxcom,
immediately after which the shareholders of Maxcom beneficially own less than 50% of
the voting power or equity securities of the surviving entity will not be deemed a
liquidation event with respect to the series N-2 preferred shares;
    
    any amendment to the by-laws that adversely and disproportionately affects the
economic characteristics (i.e., conversion right, liquidation right and dividend right)
of the series N-2 preferred shares as compared to the series N-1 preferred shares; 74




---



##### Table of Contents




    
    any amendment to the by-laws that adversely affects the right of the holders of a
majority of the series N-2 preferred shares to designate an observer (or, in the
circumstance described below, a member) to the board of directors;
    
    any amendment to the by-laws that adversely affects the rights of the observer
designated by the series N-2 preferred shares to receive, subject to any restrictions
imposed by applicable law, copies of any written materials distributed to the holders
of series A and B shares and series A-1 and B-1 preferred shares simultaneously with such
holders;
    
    certain amendments to the by-laws that impose additional transfer restrictions or
conditions on the series N-2 preferred shares, except to the extent necessary to comply
with applicable law;
    
    any amendment to the by-laws that adversely affects the co-sale rights or
obligations of holders of series N-2 preferred shares;
    
    any amendment to the by-laws that adversely affects the forced sale rights or
obligations of holders of series N-2 preferred shares; and
    
    any amendment to the section of the by-laws of Maxcom relating to the voting rights
of series N-2 preferred shares. Shareholders meetings may be called by the board of directors, its Chairman, Vice-Chairman or
Secretary, the statutory auditor or Nexus or, in certain cases, by a Mexican court of competent
jurisdiction. In addition, the board of directors or the statutory auditor must call a
shareholders meeting at the written request of any shareholder if no ordinary general
shareholders meeting has been held for two consecutive years or if the shareholders meetings held
during that period have not considered the items mentioned in Article 181 of the Mexican Companies
Law. Notice of meetings must be published in the Official Gazette of the Federation or in a
newspaper of general circulation in Mexico City or by written notice given to each shareholder of
record at least 15 days prior to the meeting. In order to attend a shareholders meeting, a
shareholder must request and obtain an admission card by depositing, at least 24 hours before the
time set for holding the shareholders meeting, such shares with Maxcoms corporate secretary or
with a Mexican bank or other qualified institution. If entitled to attend the meeting, a
shareholder may be represented by proxy or a power-of-attorney. Shareholders meetings may be ordinary, extraordinary or special. Extraordinary general
meetings are called to consider the matters specified in Article 182 of the Mexican Companies Law,
and principally include increases or reductions of capital stock, amendments to the by-laws,
dissolution, issuance of bonds or preferred stock, merger, spin-off, transformation from one type
of company to another, change in nationality and change of corporate purpose. General meetings called to consider all matters other than those mentioned above are ordinary
meetings. An ordinary general meeting of the shareholders of Maxcom must be held at least annually
during the four months following the end of each fiscal year to consider matters specified in
Article 181 of the Mexican Companies Law, principally including the election of directors, the
report of the board of directors regarding the performance of Maxcom, containing the financial
statements of Maxcom for the preceding fiscal year and the declaration of dividends, if any. Special meetings for each class of stock may be held to elect the members or observers of the
board of directors representing those shareholders and to address other matters relating to the
relevant series. Under our by-laws, the quorum on a first call, and each call thereafter, for an ordinary
general shareholders meeting is at least a majority of the voting shares. The quorum on a first
call for extraordinary shareholders meetings, and each call thereafter, is at least a majority of
the shares having a right to vote at such meetings. Except for purposes of certain key matters to
be voted upon as a separate class by each of the holders of series N-1 and series N-2 preferred
shares, series N shares, and series N-1 and N-2 preferred shares are not considered voting shares for
purposes of determining the quorum at ordinary general or extraordinary shareholders meetings. 75




---



##### Table of Contents



The quorum on a first call for special shareholders meetings, and each call thereafter is at
least a majority of the shares of the respective series for which the special meeting is being
held. Resolutions of ordinary general and special shareholders meetings may be adopted by the
affirmative vote of the majority of shares present at the meeting, except as to certain matters
described below. Resolutions of general extraordinary shareholders meetings held on a first call,
and each call thereafter may be adopted by the affirmative vote of at least a majority of the
shares having a right to vote at such meetings. Under Mexican law, holders of 33% of Maxcoms outstanding capital stock may have any
shareholder action set aside by filing a complaint with a Mexican court of competent jurisdiction
within 15 days after the close of the meeting at which such action was taken, by showing that the
challenged action violates Mexican law or Maxcoms by-laws. Under Mexican law, an action for civil liabilities against a member or members of the board of
directors may be initiated by a shareholders resolution. In the event shareholders decide to bring
an action, the person or persons against whom the action is brought will immediately cease to be
members of the board of directors. Additionally, shareholders representing not less than 33% of the
outstanding shares of Maxcom may directly take such action against members of the board of
directors, provided that:  
    
    such shareholders have not voted in favor of a resolution approved at the relevant
shareholders meeting pursuant to which it was resolved not to take any action against
the directors who are to be sued; and
    
    the claim in question covers the total amount of damages alleged to have been caused
to Maxcom as well as to the individual plaintiffs interests. Any recovery of damages will be for the benefit of Maxcom and not the shareholders bringing
the action. Under Mexican law, any shareholder or director who has a conflict of interests in connection
with any matter must abstain from voting at the relevant shareholders or board of directors
meeting, respectively. Any shareholder or director who votes on a business transaction where its
interests conflict with those of Maxcom may be liable for damages if the transaction would not have
been approved without such shareholders or directors vote. The terms of compensation of the members of the board of directors must be approved at a
shareholders meeting. Approval of key matters Our amended by-laws provide that the approval of each of the key matters described below will
require the approval in advance of both Nexus, solely in its capacity as a shareholder, and the
board of directors; provided that the approval of the board of directors will require the
affirmative vote of at least one director designated by Nexus. Key matters generally include the following:  
    
    the incurrence or assumption by the company and/or any of its subsidiaries of any
indebtedness (including capitalized lease obligations) or other liabilities exceeding
U.S.$10,000,000;
    
    the issuance of any equity securities of the company or any of its subsidiaries;
    
    the sale, transfer, exchange or other disposal of all or a significant portion of
the assets or equity securities of the company or any of its subsidiaries;
    
    any assignment by the company or any of its subsidiaries for the benefit of
creditors or the voluntary commencement of any bankruptcy or insolvency proceedings; 76




---



##### Table of Contents




    
    the establishment by the company or any of its subsidiaries of any
non-wholly-owned-subsidiary or the making by the company or any of its subsidiaries of
any loans or advances to, guarantees for the benefit of, or investments in, any person
or entity other than a wholly-owned subsidiary;
    
    the declaration of dividends on, or the making of any other distributions in respect
of, any of its capital stock, other than dividends and distributions by a direct or
indirect wholly-owned subsidiary of the company to its parent;
    
    the acquisition of any equity securities of the company or any of its subsidiaries;
    
    the entering into any transaction with any restricted persons;
    
    the election, appointment or removal of the Chief Executive Officer, the General
Managers of any business units, the Chief Operating Officer, the Chief Financial
Officer, the Director of Marketing and the Chief Engineer (or any other individual with
a similar or more senior title or position), and the approval of salary, compensation
and benefit or other similar plans for such key executives;
    
    the approval of the companys and its subsidiaries annual business plan and annual
budget for each fiscal year;
    
    the entering by the company or any of its subsidiaries into any new line of business
(other than the main corporate purpose of the company);
    
    any agreement that would restrict the companys or any of its subsidiaries right or
ability to perform the provisions of its by-laws (Estatutos) or any agreements or
instruments to which it is a party;
    
    the manner in which the shares or other interests of any subsidiary or entity owned
by the company shall be voted at shareholders meetings called for key matters;
    
    any amendments to the concessions/licenses granted by the Mexican authorities,
by-laws and certain other specified agreements;
    
    the subdivision or combination, in any manner, of the outstanding shares of one
class or series of shares, unless the outstanding shares of the other class or series
of shares of the company shall also be proportionately subdivided or combined in a
similar manner;
    
    the grant to any person or entity of the right to request the company to register securities; and
    
    any commitment or agreement to do any of the foregoing. Board of Directors Our board of directors is composed of nine members, five of whom are designated by the holders
of series A shares and series A-1 preferred shares and four of whom are designated by the holders of
series B shares and series B-1 preferred shares. Pursuant to the terms of the securityholders
agreement described in Item 7. Major Shareholders and Related Party TransactionA. Major
shareholders and share ownershipSecurityholders agreement, each series B and B-1 director must be
elected from nominees selected by Nexus. One alternate is also designated for each member of the
board of directors. Prior to the consummation of a qualified public offering, the holders of series N-2 preferred
shares or the new class of voting preferred stock into which the series N-2 preferred shares is
convertible are generally entitled to designate one observer to the board of directors. With
certain exceptions, the observer has the right to attend meetings of the board of directors and
receive information distributed to the companys directors and copies of any 77




---



##### Table of Contents



written materials distributed to the holders of series A and B shares and series A-1 and B-1
preferred shares. The observer, who is not a member of the board of directors, is also entitled to
attend meetings of any committee of the board of directors authorized to act on behalf of the full
board of directors. The observer has no right to vote at any meeting of the board of directors or
any committee of the board of directors. The holders of series N-2 preferred shares or the new class
of preferred stock into which such series N-2 preferred shares is converted are permitted to
designate an observer to the board of directors for so long as either:  
    
    the series N-2 preferred shares, or such other voting
preferred stock represents at
least 3% of the issued and outstanding capital stock of Maxcom; or
    
    there are any shares of series N-2 preferred shares outstanding and at least
U.S.$17.5 million principal amount of the old notes outstanding. Upon a change in the applicable laws in Mexico permitting a majority of our board of directors
to be composed of non-Mexicans, the holders of series N-2 preferred shares, or such other voting
preferred stock into which the series N-2 preferred shares is convertible, will be entitled to
designate and elect a full member of the board of directors (in lieu of the observer) for so long
as series N-2 preferred stock, or such voting preferred stock, represents at least 10% of the total
capital stock of the company then outstanding. If the series N-2 preferred shares, or such other
voting preferred stock, declines below this threshold, the class will again be permitted to
designate an observer. Dividends At the annual ordinary general meeting of shareholders of Maxcom, the board of directors will
typically submit the financial statements of Maxcom for the previous fiscal year, together with a
report by the board of directors, to the general ordinary shareholders meeting for their approval.
The holders of series A and B shares and holders of series A-1 and B-1 preferred shares will
determine the allocation of Maxcoms net profits for such fiscal year. At least 5% of such net
profits must be allocated to a legal reserve, which is not available for distribution except as a
stock dividend, until the amount of the legal reserve equals 20% of Maxcoms paid-in capital stock.
Additional amounts may be allocated to other reserve funds as the shareholders determine. The
remaining balance of net profits, if any, is available for distribution as dividends. The series N-2 preferred shares (on an as-converted basis) are entitled to receive dividend
payments, if any, and rank pari passu with the series A-1, B-1 and N-1 preferred shares with respect
to dividend rights. Maxcom will pay no dividends on any class of capital stock that is junior to
the series N-2 preferred shares unless it also pays dividends to holders of series N-2 preferred
shares. Maxcom does not anticipate that it will declare and pay dividends in the foreseeable future. Liquidation rights In the event that we are dissolved or liquidated, one or more liquidators must be appointed at
an extraordinary general shareholders meeting to wind up our affairs. Except as provided below,
all fully paid and outstanding shares of capital stock will be entitled to share ratably in all
assets remaining after payment of liabilities. Partially paid shares will be entitled to
participate in a liquidation, dissolution or winding up in the same manner as they would in a
dividend or distribution. However, under our amended by-laws, upon any liquidation, dissolution or winding up of Maxcom,
holders of series N-2 preferred shares will be entitled to receive liquidation proceeds in
preference to the holders of the series A, B and N shares and pari passu with the holders of series
A-1, B-1 and N-1 preferred shares on a pro rata basis in an amount equal to the greater of:  
    
    U.S.$0.4927 per share, as adjusted for stock splits, stock dividends and similar
events, plus the accretion of such amount at a cumulative rate of 12% per year
compounded semi-annually; and 78




---



##### Table of Contents




    
    the amount that holders of series N-2 preferred shares would have received if they
had converted all of their series N-2 preferred shares into series N shares (or, to the
extent the series N shares has been converted, to the class of stock the series N shares
is converted into) immediately prior to the liquidation event. A sale of all or substantially all of the consolidated assets of Maxcom, or a merger,
recapitalization, reorganization or consolidation of Maxcom, immediately after which the
shareholders of Maxcom beneficially own less than 50% of the voting power or the equity securities
of the surviving entity, will be deemed to be a liquidation event with respect to the series N-2
preferred shares, unless the holders of at least a majority of the series N-2 preferred shares deem
that such event does not constitute a liquidation event with respect to their shares. A waiver of this deemed liquidation event by holders of series N-2 preferred shares will not
impair the liquidation rights of holders of series A-1, B-1 and N-1 preferred shares. The liquidation preference rights will not be retained in the event of an optional conversion
or mandatory conversion into common stock in connection with a qualified public offering. Changes in share capital An increase of our capital stock may be effected through the issuance of new shares for
payment in cash or in kind, by capitalization of indebtedness or by capitalization of certain items
of shareholders equity. No increase of our capital stock may be effected until all
previously-issued shares of capital stock have been fully paid. A reduction of our capital stock
may be effected to absorb losses, to redeem shares, or to release shareholders from payments not
made. Increases in capital may not result in the series N shares and series N-1 and N-2 preferred
shares representing more than 95% in the aggregate of the outstanding
capital stock of Maxcom. The
series N shares and the series N-1 and N-2 preferred shares currently represent 91.8% of our
outstanding capital stock. The fixed portion of our capital stock may only be increased or decreased by resolution of an
extraordinary general meeting of shareholders and an amendment to our by-laws. The variable portion
of our capital stock may be increased or decreased by resolution of an extraordinary general
meeting of shareholders. Preemptive rights In the event of a capital increase through the issuance of new shares for payment in cash or
in kind, as a matter of Mexican law, a holder of shares has a preferential right to subscribe for a
sufficient number of new shares to maintain the holders existing proportion of shares held. Shareholders have a preemptive right to subscribe for shares, except:  
    
    in connection with mergers or spin-offs;
    
    on the conversion of convertible debentures; or
    
    issuances of shares pursuant to a public offering, if a general extraordinary
shareholders meeting called for such purpose so approves and other requirements
specified in Article 81 of the Mexican Securities Law are satisfied, including
obtaining the approval of the Mexican National Banking and Securities Commission. Under Mexican law, preemptive rights may not be waived in advance by a shareholder, and cannot
be represented by an instrument that is negotiable separately from the corresponding share but may
be waived at the moment of issuance of such shares. 79




---



##### Table of Contents



The series N-2 preferred shares are held in a limited purpose trust administered by Banco
Nacional de México, S.A., who is also the holder of record. The CPO trust is managed by a technical
committee, a majority of the members of which is appointed or designated by Maxcom, which has the
authority to direct the trustee to, among other things, waive any applicable preemptive rights. See
Description of the CPO trust below. We may not be able to offer additional shares of capital stock to holders of the CPOs pursuant
to preemptive rights granted to our shareholders in connection with any future issuance of stock,
unless a registration statement under the Securities Act is effective or an exemption from the
registration requirements is available. Whenever we are required to make a preemptive rights
offering to the holders of the series N-2 preferred shares, we will evaluate the costs and potential
liabilities associated with any such registration statement, the benefits to the holders of CPOs,
and any other factors that we consider appropriate and then we will determine whether or not to
file such registration statement. If we determine that we will not be able to offer the holders of
CPOs the right to subscribe for additional shares of capital stock, we will direct the trustee of
the CPO trust to waive its preemptive rights as the holder of record of the series N-2 preferred
shares. Our by-laws and securityholders agreement provide that if the trustee of the CPO trust waives
the preemptive rights in connection with a share issuance, the holders of series N-1 preferred
shares will also waive their preemptive rights with respect to such issuance. Although the holders
of series N-1 preferred shares must waive their statutory preemptive rights, such holders will be
permitted to participate directly in the share subscription or if otherwise permitted to do so. Optional conversion rights The series N-2 preferred shares is convertible, in whole or in part, at the option of the
holder into series N shares at any time prior to the earlier of:  
    
    the consummation of a public offering; and
    
    the elimination of certain foreign ownership restrictions under Mexican law so as to
permit the unrestricted ownership and/or control of Maxcom by non-Mexicans. Upon a public offering, the series N-2 preferred shares (as well as new voting preferred stock
issued pursuant to a mandatory conversion related to the elimination of certain foreign ownership
restrictions under Mexican law) will be convertible, in whole or in part, at the option of the
holder into the same class of equity securities offered in such public offering. In addition, the series A-1, B-1 and N-1 preferred shares are convertible, in whole or in part,
at the option of the holder, at such time, and on such terms, as the series N-2 preferred shares. Mandatory conversion Upon a qualified public offering, all, but not less than all, the series N-2 preferred shares
(as well as new voting preferred stock issued pursuant to a mandatory conversion related to the
elimination of certain foreign ownership restrictions under Mexican law) will be convertible at the
option of Maxcom into the same class of equity securities offered in such qualified public
offering. In addition, all, but not less than all, of the series A-1, B-1 and N-1 preferred shares will
be convertible at the option of Maxcom at such time and on such terms, as the series N-2 preferred
shares. Upon the elimination of certain foreign ownership restrictions under Mexican law so as to
permit the unrestricted ownership and/or control of Maxcom by non-Mexicans, the series N-2
preferred shares will automatically convert into a new voting preferred shares. This new voting
preferred stock will retain the same liquidation preference rights of the series N-2 preferred
shares and the right to appoint either a member of the board of directors or, if such new voting
preferred stock represents less than 10% of the outstanding capital stock of Maxcom, an observer to
the board of directors. 80




---



##### Table of Contents



Anti-dilution protection and conversion price adjustments If Maxcom issues any shares of common equity or securities convertible into common equity
(other than certain permitted issuances) for consideration per share of less than either (i) the
conversion price, which will initially be U.S.$0.4927 per share, in effect immediately prior to
that time or (ii) the then fair market value of the stock sold, then, until December 31, 2002, full
ratchet anti-dilution protection will apply, and, thereafter, institutional weighted average
anti-dilution protection will apply to the preferred stock, as more fully described below. This
anti-dilution protection will no longer be available after the preferred stock is converted into
common stock. Maxcom has not issued any shares of common equity or securities convertible into
common equity since the adoption of this clause. The following permitted issuances will not trigger the anti-dilution protections:  
    
    any rights, options and warrants granted or issued, or authorized to be granted or
issued, to certain employees, directors, consultants and vendors of Maxcom and its
subsidiaries, as of March 5, 2002, or under any management incentive plan approved by
the board of directors, including the affirmative vote of at least one of the directors
selected from Nexus appointees.
    
    any securities issued pursuant to the private equity investment and up to U.S.$3.8
million of securities issued within one year of the consummation of the private equity
investment at or above U.S.$0.4927 per share;
    
    any shares issued upon the exercise or conversion of any of the foregoing; and
    
    any of the capital stock issued in connection with a conversion of any of the series
A-1, B-1, N-1 or N-2 preferred shares. Full-ratchet anti-dilution protection means that the conversion price will be automatically
reduced to the lowest consideration at which any share of capital stock has been issued or sold. Institutional weighted average anti-dilution protection means that the conversion price will
be reduced to the lower of:  
    
    an amount equal to (A) the sum of (i) the product derived by multiplying the
conversion price in effect immediately prior to such issuance or sale by the number of
common shares deemed outstanding, as defined below, immediately prior to such issue
or sale, plus (ii) the aggregate consideration (expressed as a net price per share), if
any received by Maxcom upon such issue or sale, divided by (B) the number of common
shares deemed outstanding immediately after such issue or sale; and
    
    the conversion price determined by multiplying the conversion price in effect
immediately prior to such issuance or sale by a fraction, the numerator of which will
be the sum of (i) the number of the common shares deemed outstanding immediately prior
to such issue or sale multiplied by the then market value of the then fair market value
of the common stock of Maxcom then outstanding as of the date of such issuance or sale
plus (ii) the aggregate consideration, if any, received by Maxcom upon such issuance or
sale and the denominator of which shall be the product derived by multiplying the then
fair market value of the common stock of Maxcom by the number of common shares deemed
outstanding immediately after such issue or sale. For the purposes of the foregoing calculations, the term common shares deemed outstanding
means the currently outstanding capital stock of Maxcom plus all shares of capital stock issuable
upon the exercise of options and warrants or conversion of convertible securities. Whenever Maxcom
grants options or issues securities convertible into the capital stock of the company, the issue
price will be the sum of the per share consideration received by the company upon the grant or
issue of the option or convertible security plus any per share additional consideration that the
company will receive upon exercise or conversion of such option or convertible security. 81




---



##### Table of Contents



Determinations of fair market value will be made in good faith by the board of directors so
long as the issuance is for cash consideration (and without any associated service arrangements)
and at least 70% of the shares issued are to persons who are not then shareholders of Maxcom.
Otherwise, Maxcom at its expense will obtain the opinion of an internationally recognized or
nationally recognized in the United States financial advisory firm or investment bank to be
selected by Maxcom as to the fair value of the shares to be issued and any non-cash consideration
for such shares. The conversion price will also be adjusted for any stock splits or combinations. Following any adjustment of the conversion price of the series N-2 preferred shares, Maxcom
will deliver notice to the CPO trustee of the adjustment setting forth the calculation of the
adjustment. In addition, upon the written request of the CPO trustee, Maxcom will furnish or cause
to be furnished to the CPO trustee a certificate setting forth (i) a summary of all adjustments and
readjustments to the conversion price, (ii) the conversion price for the series N-2 preferred shares
then in effect, and (iii) the number of shares of capital stock into which the series N-2 preferred
shares is then convertible. Right of first refusal Except in connection with a sale of at least 50.1% of the total equity of Maxcom, a public
offering or a transfer to an affiliate or a certain other permitted transferee, if a Maxcom
shareholder other than certain significant shareholders, who we refer to as the investors,
intends to sell its capital stock, then shareholders other than the investors and the holders of
the series N-2 preferred shares (but only with respect to their
series N-2 preferred shares) will
have the right to purchase such capital stock. This right of first refusal will terminate upon the
earlier of:  
    
    a sale or transfer of at least 50.1% of the total capital stock of Maxcom or the
sale of all or substantially all of the consolidated assets of Maxcom in one or more
related transactions to an independent third party or parties, or
    
    the elimination of certain foreign ownership restrictions under Mexican law so as to
permit the unrestricted ownership and/or control of Maxcom by non-Mexicans. Right of first offer Except in connection with a sale of at least 50.1% of the total equity of Maxcom, a public
offering or a transfer to an affiliate or a certain other permitted transferee, in the event any
investor intends to transfer any series A-1, B-1 or N-1 preferred shares, or securities received in
a conversion of such preferred shares, such investor must offer to sell such securities to each
other investor holding more than one percent of the aggregate series A-1, B-1 and N-1 preferred
shares, or securities received in a conversion of such preferred stock, then outstanding. This right
of first offer will terminate upon the earlier of:  
    
    a qualified public offering;
    
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving at
least 50.1% of the total capital stock of Maxcom or a sale of all or substantially all
of the consolidated assets of Maxcom in one or more related transactions to an
independent third party or parties. Co-sale rights and forced sale obligations Co-sale rights If holders of series A-1, B-1 or N-1 preferred shares intend to sell, alone or together with
any other shareholder of Maxcom, at least 50.1% of the total capital stock of Maxcom in one or more
related transactions to an independent third party or parties, then holders of series N-2 preferred
shares will, except in certain circumstances, have the right to participate in any such sale on a
pro rata basis with the sellers. Holders of series N-2 preferred shares 82




---



##### Table of Contents



will be entitled to sell such shares generally on the same terms and conditions as the selling
shareholder. This co-sale right will terminate upon the consummation of the earlier of  
    
    a qualified public offering; or
    
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving a
transfer of at least 50.1% of the total capital stock of Maxcom or a sale of all or
substantially all of the consolidated assets of Maxcom to an independent third party or
parties in one or more related transactions. In connection with any sale or transfer of any of our equity securities, debt securities with
equity features or other securities convertible into equity securities, shareholders other than
holders of series N-2 preferred shares may participate in such sale on a pro rata basis at a price
and on terms substantially the same as the selling securityholder. However, these co-sale rights
will not apply to a sale or transfer of no more than 7,000,000 shares of preferred stock. This
co-sale right will terminate upon the consummation of the earlier of:  
    
    a qualified public offering; or
    
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving a
transfer of at least 50.1% of the total capital stock of Maxcom or a sale of all or
substantially all of the consolidated assets of Maxcom to an independent third party or
parties in one or more related transactions. Forced sale obligations If Nexus desires to transfer at least two-thirds of the beneficial ownership of the total
capital stock of Maxcom then outstanding, in one or more related transactions to an independent
third party or parties, on terms and conditions approved by Nexus, then all shareholders of Maxcom
(including holders of series N-2 preferred shares) may be forced by Nexus to sell a proportionate
share of their series N-2 preferred shares. Such shareholders will be entitled to sell such shares
generally on the same terms and conditions as the selling shareholders. If Nexus desires to sell all or substantially all of the consolidated assets of Maxcom in one
or more related transactions to an independent third party or parties on terms and conditions
approved by Nexus, then all shareholders of Maxcom (including holders of series N-2 preferred
shares) may be forced by Nexus to vote in favor of, consent to and raise no objections against such
asset sale. Holders of series N-2 preferred shares may not be forced to participate in, or vote for, any of
the foregoing transactions unless:  
    
    the consideration for such sale is paid in cash and/or freely tradable,
exchangelisted equity securities; and
    
    the value of such consideration on a per share basis is not less than the then
applicable liquidation preference for each share of series N-2 preferred shares. These forced sale obligations will terminate upon the consummation of the earlier of:  
    
    a qualified public offering; or
    
    the sale or transfer of any series A-1, B-1 or N-1 preferred shares involving a
transfer of at least 50.1% of the total capital stock of Maxcom or a sale of all or
substantially all of the consolidated assets of Maxcom to an independent third party or
parties in one or more related transactions. Other provisions In both the case of a co-sale and a forced sale, the holders of series N-2 preferred shares
will not be required to execute any ancillary documents. However, to the extent the proceeds from
any such sale will be subject to any 83




---



##### Table of Contents



expense, escrow, holdback or indemnification obligation, the selling shareholders assume this
obligation on a pro rata basis. The amount of any such obligation of each shareholder in connection
with a participation in a sale or a forced sale will be limited to the maximum amount of proceeds
that the such holder is entitled to receive. Shareholders participating in a sale or forced to sell
may provide the purchaser with different assurances or collateral for their indemnification
obligations. As a result, some shareholders may be permitted to sign an indemnification agreement
or give a guarantee while others may be subject to a hold back of their sale proceeds. It is possible that both the participation rights and forced sale obligations will be
triggered by a single transaction. In this event, the participation rights will not apply. In the event that the participation rights or forced sale obligations have been triggered, we
will prepare, and to the extent applicable, file with the appropriate regulatory authority, with
the advice of U.S. counsel, any notices or offering material required by our by-laws or applicable
Mexican and U.S. federal and state securities laws to be delivered to the beneficial owners of the
series N-2 preferred shares and to cause such documents to be delivered to the CPO trustee in
sufficient quantities for distribution to the beneficial owners of the series N-2 preferred shares. Rights and obligations with respect to public offerings Registration rights Nexus at any time and from time to time may request that Maxcom take all requisite action, at
its expense, to register one or more series of Maxcoms equity securities under applicable Mexican
securities laws, rules and regulations or applicable U.S. federal and state securities laws.
However, the initial demand by Nexus shall be a public offering that is expected to yield aggregate
net proceeds of at least U.S.$10.0 million. Holders of series N-1 preferred shares and series A-1 and B-1 shares will have the right to
participate (piggyback) in any registration statement filed pursuant to the Securities Act for a
public offering other than an initial public offering. However, the registration rights will be
subject to customary cutback provisions. Cooperation in connection with an underwritten offering During the period commencing on Maxcoms initial public offering that is not a qualified
public offering and ending on the earlier to occur of eighteen months after the consummation of
such initial public offering or the consummation of Maxcoms first qualified public offering, at
the request of one or more holders of series N-2 preferred shares, or of any class of stock into
which the series N-2 preferred shares has been converted, and at such holders expense Maxcom will
cooperate one time only with the efforts of such holders to effect an underwritten offering of
their stock, provided that such offering is for at least U.S.$5.0 million in net proceeds. In
addition, the underwriter must be reasonably acceptable to Maxcom and Maxcom may delay such
underwritten offering for up to six months if it is then separately in the process of preparing a
qualified public offering. Maxcom will not be obligated to prepare any offering memorandum or
registration statement in connection with such offering. Listing rights After a public offering, at the request of any holder of series N-2 preferred shares, or any
class into which the series N-2 preferred shares has been converted, Maxcom will, at its expense,
use commercially reasonable efforts, to cause the shares into which the series N-2 preferred shares
has been converted or is convertible, including any CPOs representing such shares, to be listed on
each securities exchange or the NASD automated quotation system, as applicable, on which similar
securities of Maxcom, including certificates of participation representing the beneficial ownership
of such similar securities are then listed. In connection with any such listing, Maxcom will, if
required, also register such securities with the National Registry of Securities and Intermediaries
of the National Banking and Securities Commission of Mexico. 84




---



##### Table of Contents



Lock-up restrictions We may, under certain circumstances, impose a limitation on the transfer of series N-2
preferred shares, which provides that such stock may not be transferred after notice from Maxcom,
which may not be more than 30 days prior to the expected effective date of Maxcoms first qualified
public offering until the 180th day after such effective date. Maxcom may not impose this
restriction on the transfer of series N-2 preferred shares if more than 20% of the securities being
registered in connection with the qualified public offering are for the account of Maxcoms
shareholders. In addition, this restriction on transfer may not be more restrictive than any
restrictions placed on all other shareholders. Transfer of CPOs and transfer restrictions The series N-2 preferred shares and any shares of capital stock into which series N-2 preferred
shares is converted is deposited in the CPO trust and may not be transferred separate from the CPOs
representing such securities. The CPOs may be transferred without restriction under U.S. federal
securities laws by persons who are not affiliates of Maxcom. However, no market currently exists
for the CPOs and we do not currently plan to list the CPOs on any exchange for trading. In certain
circumstances we may be required to list the CPOs on a securities exchange and to cooperate one
time only with efforts of holders of the CPOs to effect an underwritten offering. We may impose
limitations on the transfer of CPOs for a period after the consummation of a qualified public
offering. See Rights and obligations with respect to public offerings. Until the earlier of a qualified public offering or a sale of the company, no holder of series
A, B or N shares and series A-1, B-1 or N-1 preferred shares may transfer such shares without the
prior approval of both Nexus, solely in its capacity as a shareholder, and the board of directors,
which board of directors approval will require the affirmative vote of at least one Nexus director. Until a qualified public offering, in the event that certain significant holders of series
A-1, B-1 and N-1 preferred shares desire to transfer such shares, such holders will be obligated to
first offer to sell such shares to other holders of series A-1, B-1 or N-1 preferred shares at the
same price, terms and conditions offered to the initial proposed transferees. Upon the effectiveness of changes in certain Mexican regulations, other holders of series A, B
and N shares and series A-1, B-1 and N-1 preferred shares who desire to transfer such shares will be
obligated to first offer to sell such shares to other series A, B and N shares and series A-1, B-1
and N-1 preferred shares at the same price, terms and conditions offered to the initial proposed
transferees. There are certain exceptions to the transfer restrictions in our bylaws. These exceptions
apply to (i) transfers by BAS Capital Funding Corporation or BASCFMaxcom Holdings I, LLC with
respect to any preferred share acquired by them pursuant to our restructuring and private equity
investment, (ii) transfers as a result of inheritance, and (iii) transfers among shareholders and
their qualified affiliates. During our annual ordinary and extraordinary shareholders meeting held on June 10, 2003, we
amended our bylaws to include a new exception to the transfer restrictions that allows Morgan
Stanley Asset Management, one of the shareholders who participated both in the private equity
investment and the exchange offer, to transfer its shares to any of its managed accounts. Under our telecommunications concessions and by-laws, the SCT has 90 days to object to any
transfer, subscription or conveyance of 10% or more of our capital stock with the exception of:  
    
    transfers related to series N shares and N-1 and N-2 shares and any successor stock;
and
    
    subscriptions made pursuant to the exercise of a shareholders preemptive rights, as
long as the percentage participation of the shareholders in our capital stock does not
vary. 85




---



##### Table of Contents



Other provisions Ownership restrictions For a description of the limitations on the right to own securities imposed by Mexican law see
Business Overview  Overview of the Mexican Telecommunications Industry  Ownership Restrictions. Forfeiture of stock Under our amended by-laws, the current or future foreign shareholders of Maxcom firmly
undertake with the Ministry of Foreign Relations (Secretaría de Relaciones Exteriores) to consider
themselves as Mexican nationals with respect to the stock of Maxcom that they may acquire or own,
as well as with respect to the properties, rights, concessions, securities or interests owned by
Maxcom, or the rights and obligations derived from the agreements entered with the Mexican
authorities to which Maxcom is a party. The current or future foreign shareholders of Maxcom firmly
undertake not to invoke the protection of their government, under penalty of forfeiting such shares
to the benefit of the Mexican nation. Dissolution Pursuant to the Mexican Companies Law and our by-laws, we may be dissolved upon the
occurrence, among other things, of any of the following events:  
    
    the impossibility of continuing with our current line of business;
    
    the resolution of our shareholders at an extraordinary general shareholders meeting;
    
    the reduction of the number of our shareholders to fewer than two; and
    
    the loss of two thirds of our capital stock. Shareholder conflicts of interest Under Mexican law, any shareholder that has a conflict of interest in connection with any
transaction must abstain from voting at the relevant shareholders meeting. A shareholder that
votes on a business transaction in which its interest conflicts with that of Maxcom may be liable
for damages if the transaction would not have been approved without such shareholders vote. Director conflicts of interest Under Mexican law, any member of the board of directors who has a conflict of interest with
Maxcom in any transaction must disclose such a fact to the other members of the board of directors
and abstain from voting on such matter at the relevant meeting of the board of directors. Any
member of the board of directors who violates such a provision may be liable for damages caused to
Maxcom. Additionally, members of the board of directors may not represent any shareholders at any
shareholders meeting. Description of the CPO trust General The series N-2 preferred shares have been deposited by Maxcom in a limited purpose trust which
is administered by Banco Nacional de México, S.A. under a trust agreement. We refer to the trust as
the CPO trust and the trustee of the CPO trust as the CPO trustee. The CPO trustee is the
holder of record of the series N-2 preferred shares and any securities into which the series N-2
preferred shares may be converted. 86




---



##### Table of Contents



The CPO trustee issued Certificados de Participación Ordinarios, or CPOs, which are
negotiable instruments under Mexican law that give their holders the economic rights and voting
rights of the series N-2 preferred shares or any other shares of
capital stock into which the series N-2 preferred shares may be converted, which we refer to together as the deposited securities. The CPOs are initially held in book-entry form through DTC, and a nominee of DTC is the holder
of record of a global CPO certificate. Our amended by-laws provide that we will obtain all
governmental approvals required in connection with the conversion of
the series N-2 preferred shares held in the CPO trust to other securities of Maxcom. The following is a description of (i) certain provisions included in the CPO trust agreement
and (ii) applicable provisions of the Law of Negotiable Instruments and Credit Transactions (Ley
General de Títulos y Operaciones de Crédito). This is a summary description and does not purport to
be complete and is qualified in its entirety by reference to the CPO trust agreement and the
provisions of Mexican law referred to in such description. Purpose The main purpose of the CPO trust is to have the CPO trustee, as record holder of the
deposited securities and upon the instructions of the technical committee described below under
Administrator of the CPO trust, waive or not exercise any statutory preemptive rights that it may
have from time to time to subscribe for additional shares of our capital stock. As the record
holder of the deposited securities, the CPO trustee exercises certain rights attached to such
securities in order to preserve to the largest extent possible the economic and voting rights that
would otherwise be held directly by the beneficial owners of the CPOs. Waiver of statutory preemptive rights The trustee of the CPO trust will waive statutory preemptive rights with respect to deposited
securities when, in the sole judgment of the technical committee of the CPO trust, as described
below, the exercise of such preemptive rights would require that the shares so subscribed be
registered pursuant to the Securities Act, unless Maxcom decides to register such shares. If the
exercise of the preemptive rights is possible without registration under the Securities Act (or
Maxcom decides to carry out such registration) and the holders of CPOs provide the CPO trustee with
the necessary funds, the CPO trustee will subscribe for the corresponding number of shares, which
will be held in the CPO trust, and deliver additional CPOs in respect of such additional deposited
securities to the subscribing CPO holders. Under Mexican law preemptive rights may not be
transferred separately from the underlying shares. Voting and economic rights The holders of CPOs are not entitled to directly exercise any voting or economic rights with
respect to the deposited securities. Such voting rights are exercisable only by the CPO trustee
pursuant to the instructions of the holders of CPOs. The holders of CPOs will be entitled to
receive dividend distributions, if any, from Maxcom through the CPO trustee. DTC will receive the
distributions and will make distributions to the beneficial owners of the CPOs. In the event of a
forced sale the trustee of the CPO trust will cause the series N-2 preferred shares to be delivered
in connection with any such sale and will distribute to the record holder of the CPOs the proceeds
from such sale subject to any holdbacks required pursuant to the terms of any such sale. The CPO
trustee will also deliver deposited securities in connection with the exercise of the co-sale
rights and will distribute to the record holders of the CPOs the proceeds from sale subject to any
holdbacks required pursuant to the terms of any such sale. See Co-sale rights and forced sale
obligations above. If a distribution by Maxcom consists of a dividend in shares, such shares will be transferred
to the CPO trustee, and held in the CPO trust, and the CPO trustee will distribute to the holders
of CPOs in proportion to their holdings, additional CPOs to represent the additional deposited
securities received by the CPO trustee as such dividend. 87




---



##### Table of Contents



The holders representing a majority of the outstanding CPOs will be entitled to appoint the
board observer, or in certain circumstances, a member of the board of directors. See Board of
Directors. Administration of the CPO trust The CPO trust is administered by the CPO trustee under the direction of a technical committee,
which consists of three members, two members of which are designated by Maxcom and one by the
holders of CPOs. Common representative The majority of holders of CPOs have the right to appoint a common representative, whose
duties include, among others: verification of the due execution and terms of the CPO trust
agreement; verification of the existence of the deposited securities; authentication, by its
signature, of the certificate evidencing the CPOs, exercise of the rights of the CPO holders in
connection with the payment of any dividend or distribution related to the deposited securities to
which such CPO holders are entitled; and undertaking of any other action required to protect the
rights, actions or remedies to which CPO holders may be entitled to under the CPO trust. Transfer CPO holders may sell their interest in CPOs. Sales of CPOs may be subject to Mexican taxes.
Neither Maxcom nor the CPO trustee will have any liability in connection with any such sale. CPO
holders may not sell the deposited securities separately from the CPOs. Term and termination The maximum term of the CPO trust is thirty years, but it may be terminated at any moment by
recommendation of the technical committee, in which case the deposited securities will be delivered
to the CPO holders. Fees The fees of the CPO trustee for the administration of the CPO trust, and the fees of the
common representative for acting in such capacity, are paid by Maxcom. C. Material contracts Concessions In February 1997, we obtained a concession to provide local telephony services covering Mexico
City and the Gulf region and long distance services nationwide from the Mexican government. We
also obtained a nationwide point-to-point and three regional point-to-multipoint microwave
concessions in October 1997. In September 2001, our local telephony concession was expanded to
cover all of Mexico. For a description of our concessions, see Item 4. Information on the
CompanyB. Business reviewSupervision and regulation of the Mexican telecommunications
industryOur concessions. Interconnection agreements In November 1998, we entered into a local interconnection agreement with Telmex which was
amended and extended on December 2003 and August 5, 2004. We have also signed reciprocal
interconnection agreements with mobile telephony providers Telcel, Grupo Iusacell and Telefonica
Moviles. Finally, we have signed long distance interconnection agreements with Telmex, Alestra,
Bestel, Protel and Iusatel. For a description of these interconnection agreements, see Item 4.
Information on the CompanyB. Business reviewSupervision and regulation of the Mexican
telecommunication industryInterconnection. 88




---



##### Table of Contents



Lucent supply agreement On September 5, 1997, Maxcom executed a purchase and sales agreement with subsidiaries of
Lucent Technologies, Inc. pursuant to which Maxcom may purchase from Lucent products, services and
software. Metro Net capacity sales agreement On April 28, 2000, Maxcom executed a metropolitan network capacity sale agreement with Metro
Net, S.A. de C.V. (which was amended on December 21, 2000) for an aggregate amount of U.S.$7.2
million pursuant to which Maxcom purchased from Metro Net (i) the exclusive and unlimited right to
use certain backbone fiber optic capacity of 6 (six) fiber optic strands of Metro Nets
metropolitan rings in Mexico City, and (ii) an option to acquire the exclusive and unlimited right
to use additional backbone fiber optic capacity of 6 (six) fiber optic strands. Bestel capacity acquisition agreement On August 13, 2002, Maxcom executed an agreement with Bestel, S.A. de C.V. to acquire the
irrevocable right to the exclusive use of two strands in a 2,011-kilometer fiber optic backbone
covering the cities located between Mexico City and Laredo, Texas for U.S.$10.9 million. This
fiber optic backbone includes a border crossing with the United States. Also in 2003 Maxcom exchanged one 2.5 Gbps lambda with another carrier in order to achieve
redundancy in the fiber optic backbone, with this redundancy Maxcom acquires a more competitive
edge in order to provide its customers with redundant services throughout its fiber backbone. Axtel sale of capacity agreement On October 15, 2003, Maxcom executed an agreement with Axtel, S.A. de C.V. to sell capacity in
the form of a STM16 in Maxcoms fiber optic backbone covering the cities located between Mexico
City and Laredo, Texas over a period of 13 years, with the possibility of an extension. CPO trust agreement On April 25, 2002, Maxcom and its shareholders executed an irrevocable trust agreement with
Banco Nacional de México, S.A. acting as trustee for the issuance of ordinary participation
certificates, also known as CPOs, each representing one series N-2 share of the capital stock of
Maxcom with liquidation preference rights. For a description of this agreement, see Item 10.
Additional InformationB. Memorandum and Articles of AssociationDescription of the CPO Trust. Securityholders agreement On April 29, 2002, Maxcom executed an amended and restated securityholders agreement with the
shareholders of the Company to, among other things, reflect the restructuring of the capital stock
of Maxcom. For a description of the securityholders agreement, see Item 7. Major Shareholders
and Related Party TransactionsA. Major shareholders and share ownershipSecurityholders
agreement. Indentures 2000 Indenture On March 17, 2000, Maxcom and its subsidiaries, entered into an Indenture with The Bank of New
York, acting as trustee, which governs the terms and conditions of the issuance by Maxcom of
U.S.$300 million 133/4% notes. The Indenture restricted Maxcoms ability to
incur indebtedness by requiring that Maxcom meet minimum consolidated leverage and fixed charge
coverage ratios. In addition, the Indenture limited our ability to pay dividends, repurchase
subordinated debt, redeem our capital stock, dispose of assets and make 89




---



##### Table of Contents



investments, among other things. All of these restrictions were eliminated as a result of the
exchange offer and U.S.$11,590,000 aggregate amount of
133/4%
notes under this indenture remains
outstanding. Old Indenture On April 29, 2002, Maxcom and its subsidiaries entered into an Indenture with The Bank of New
York acting as a Trustee, which governs the terms and conditions of the issuance by Maxcom of
U.S.$167,623,590 old notes. This indenture has substantially the same restrictions the
2000 Indenture had before they were eliminated pursuant to the
exchange offer. However, as a result of the exchange offer and
consent solicitation we consummated in October 8, 2004:
(i) the covenants restricting our ability to pledge our assets
as security for financings contained in this indenture were amended
to allow us to secure up to an additional U.S.$50 million of
liens on our assets, (ii) the covenant limiting our restricted
payments, permitted investments and affiliate transactions was also
amended to allow us to securitize our assets, including our accounts
receivable and (iii) the covenant restricting our ability to
enter into sale/leaseback transactions was deleted. New Indenture On
October 8, 2004, Maxcom and its subsidiaries, entered into an
Indenture with The Bank of New York, acting as trustee, which governs
the terms and conditions of the issuance by Maxcom of U.S.$36,117,789
in principal amount of new notes, bearing an annual
interest rate of 4.00% from October 8, 2004 through
April 14, 2005, 5.75% from April 15, 2005 through
October 14, 2005, 7.75% from October 15, 2005 through
April 14, 2006, 8.25% from April 15, 2006 though
October 14, 2006, 9.25% from October 5, 2006 through
October 14, 2007, 10.25% from October 15, 2007 through
October 14, 2008, and 11.25% from October 15, 2008 through
October 14, 2009. The New Indenture restricts our ability to
incur indebtedness. In particular, in order to be able to incur
additional indebtedness, we must comply with a minimum consolidated
leverage ratio of less than 3.75 to 1.00 and a minimum fixed charge
coverage ratio of 2.00 to 1.00. However, pursuant to certain
exemptions, we are still able to incur up to U.S.$100.0 million
of indebtedness to finance the cost of acquiring or constructing or
installing telecommunication assets, and up to U.S.$20.0 million
for working capital purposes, in each case at any one time
outstanding. Warrant agreement On March 17, 2000, Maxcom entered into a warrant agreement with The Bank of New York, acting
as warrant agent, pursuant to which Maxcom agreed to issue warrants to purchasers of 133/4% notes for the purchase of up to 764,938 series N shares, convertible into 382,469
CPOs. The exercise price for each warrant, which entitled the purchaser to receive 2.54979 series
N shares, was U.S.$0.01. These warrants were offered as an incentive to the purchasers of the
133/4%
notes. Lease termination agreement In September, 2002, we commenced actions before the Lease Courts for the Federal District of
Mexico against our landlord, seeking the termination of a 15-year lease (expiring on September 30,
2013) of 70,500 square feet plus parking space in a building on Magdalena, Mexico City, which was
our former headquarters. The action was based on claims of miscalculation of lease payment amounts
and breaches of certain city compliance regulations. The landlord countersued alleging failure to
make lease payments. In May 2003, we reached an agreement with our landlord at our former headquarters in
Magdalena, Mexico City. Pursuant to this agreement, we retained a leasehold interest through May
2013 on the first floor, where one of our Lucent 5ESS switches is located, the roof-top, where we
have three microwave transmission antennas and a section of the basement, which will be used for
parking and to place some of our electric equipment that supports the switch. We were also
released from our lease obligations on approximately 35,887 square feet plus parking space of the
building originally running through September 30, 2013, including past-due lease payments dating
back from October 2002. In exchange for the new lease and the releases, we agreed to prepay the
full, ten-year lease obligations on the first floor, the roof-top and basement, which amount to
U.S.$2.7 million and will be payable in full by May 2004. Credit facilities In November 2004, we executed a credit agreement with Banco Santander Mexicano, S.A.,
Institución de Banca Múltiple, Grupo Financiero Santander Serfin for Ps.100,000,000 (approximately
U.S.$10 million dollars). Under this credit facility we must make 18 equal monthly installments of
principal and interest to liquidate the facility. The annual interest rate is equal to the
Inter-banking Equilibrium Interest Rate (Tasa de Interés Interbancaria de Equilibrio), which we
refer as TIIE plus 1.2 additional percentage points. In April 2005, we executed a credit agreement with IXE Banco, S.A., Institución de Banca
Múltiple, IXE Grupo Financiero for Ps.100,000,000 (approximately U.S.$10 million dollars). Under
this credit facility we must make 12 equal monthly installments of principal and interest to
liquidate the facility. The annual interest rate is equal to the Inter-banking Equilibrium Interest
Rate (Tasa de Interés Interbancaria de Equilibrio), which we refer as TIIE plus 3 additional
percentage points. 90




---



##### Table of Contents



D. Exchange controls The peso fluctuates freely against the U.S. dollar. The Mexican Central Bank intervenes
occasionally in the market to stabilize the exchange rate. Mexico had an exchange control system
from 1982 until November 11, 1991. Under this system, Mexican residents and companies were entitled
to purchase, and required to sell, foreign currencies for certain purposes at a controlled rate of
exchange that was established daily by the Mexican Central Bank (Banco de México). Transactions to
which the controlled rate applied included payments for virtually all merchandise imports, revenues
from virtually all merchandise exports, royalty payments and payments of principal, interest and
related expenses with respect to indebtedness to foreign creditors registered with the Mexican
government. For all transactions to which the controlled rate did not apply, foreign currencies
could also be purchased, if they were available, at the then prevailing domestic free market rate
for the type of transaction. From November 11, 1991 to October 20, 1992, the Mexican Central Bank permitted a free market
rate to fluctuate according to supply and demand within a moving band. In late December 1994, the
Mexican government responded to exchange rate pressures first by increasing by 15% the upper limit
of the peso/U.S. dollar exchange rate band and then, two days later, allowing the peso to fluctuate
freely against the U.S. dollar. By December 31, 1994, the peso/U.S. dollar exchange rate, which had
been Ps.3.47 to U.S.$1.00 on December 19, 1994 was Ps.5.00 to U.S.$1.00. The peso continued to
devalue significantly through 1998, closing at Ps.9.901 to U.S.$1.00 at December 31, 1998. After a
period of stability and modest appreciation, in 2002, the peso devalued 12.18% relative to the U.S.
dollar. In the first three months of 2003, the peso devalued 3.82% relative to the U.S. dollar.
Although the peso/U.S. dollar exchange rate has remained relatively stable in the last years, there
may be significant devaluations in the future. Except for the period from September through December 1982 during the Mexican liquidity
crisis, the Mexican Central Bank consistently has made foreign currency available to Mexican
private sector entities to meet their foreign currency obligations. Nevertheless, in the event of a
renewed shortage of foreign currency, we cannot assure you that the Mexican Central Bank would
continue to make foreign currency available to private sector companies or that foreign currency we
need to service foreign currency obligations could be purchased in the open market without
substantial additional cost. Pursuant to the provisions of North American Free Trade Agreement, or NAFTA, Mexico remains
free to impose foreign exchange controls on investments made in Mexico, including those made by
U.S. and Canadian investors E. Taxation United States Federal Income Tax Considerations General The following is a general discussion of the principal U.S. federal income tax consequences
resulting from the beneficial ownership of (1) the old notes and CPOs received in the exchange
consummated on April 29, 2002, (2) the 13 3/4% notes for holders who did not participate in the April
29, 2002 exchange, and (3) the new notes received in the October 2004 exchange (the new notes
collectively with the old notes and the 13 3/4 %, the Notes). In general, the federal income tax
consequences of ownership of the Notes are identical, except where discussed below. This summary
is relevant to you only if you are a U.S. holder holding your Notes and/or your CPOs (for holders
of old notes received in the 2002 exchange) as capital assets within the meaning of Section 1221 of
the Internal Revenue Code of 1986, as amended, or the Code. In general, you will be a U.S. holder
if you are:  
    
    An individual citizen or resident of the United States;  
    
    a corporation or other entity taxable as a corporation created in
or organized under the laws of the United States or of any
political subdivision thereof;  
    
    an estate, the income of which is subject to U.S. federal income
tax without regard to its source; or  
    
    a trust, if a court within the United States is able to exercise
primary supervision over its administration and one or more United
States persons have the authority to control all of the
substantial decisions of such trust. As used in this annual report, the term Non-U.S. holder means a beneficial owner of a Note
or CPO who is not a U.S. holder. In the case of a holder of Notes or CPOs that is a partnership
for U.S. federal income tax purposes, each partner generally will take into account its allocable
share of income or loss from the Notes or CPOs and will take such income or loss into account under
the rules of taxation applicable to such partner, taking into account the activities of the
partnership and the partner. This summary is based upon the Code, its legislative history, existing and proposed
regulations thereunder, published rulings and court decisions, all as currently in effect and all
subject to change at any time, perhaps with retroactive effect. This discussion is for general
information only and does not describe all of the tax consequences that may be relevant to you in
light of your particular circumstances or if you are subject to special tax treatment under the
Code, including, without limitation, because you are:  
    
    a foreign person or entity;  
    
    a tax-exempt organization, a financial institution, an insurance company, a regulated investment company or a dealer or
broker in securities or currencies;  
    
    a trader in securities or commodities that elects mark-to-market treatment;  
    
    a person who holds the Notes, and with respect to a holder of new notes, the CPOs, as part of an integrated investment
such as a straddle, hedge, constructive sale, conversion transaction or other risk reduction transaction;  
    
    a person whose functional currency is not the U.S. dollar;  
    
    a partnership or other flow-through entity (including an S corporation or a limited liability company treated as a
partnership for U.S. federal income tax purposes);  
    
    a person subject to the alternative minimum tax; or  
    
    a person who owns or will own directly, indirectly or by attribution 10% or more (by voting power) of our voting stock
or 10% or more (by value) of our outstanding capital stock. 91




---



##### Table of Contents



The summary does not include any discussion of the tax laws of any state, locality or non-U.S.
government that may be applicable to you. You should note that no rulings have been or will be
sought from the United States Internal Revenue Service (or the IRS) with respect to any of the U.S.
federal income tax consequences discussed below, and we cannot assure you that the IRS will not
take contrary positions. You should consult your own tax advisors concerning the application of
U.S. federal income tax laws to your particular situation as well as any consequences of the
purchase, ownership and disposition of the Notes or CPOs arising under the laws of any other taxing
jurisdiction. For holders who acquired the old notes and the CPOs in the 2002 exchange, the U.S. federal
income tax consequences of certain aspects of the 2002 exchange were unclear. Therefore, the
summary discusses the various alternative tax consequences of the old notes and the CPOs which may
depend in part on the results of the 2002 exchange. For more complete information on the 2002
exchange, we urge you to consult the section entitled, United States Federal Income Tax
Considerations on our Form 20-F for the fiscal year ending December 31, 2001, which was filed on
July 1, 2002. You should also consult your own tax advisors concerning the application of U.S.
federal income tax laws to your particular situation. For holders who acquired the new notes in the 2004 exchange, the U.S. federal income tax
consequences of certain aspects of the 2004 exchange were unclear. Therefore, the summary
discusses the various alternative tax consequences of the new notes which may depend in part on
the results of the 2004 exchange. For more complete information on the 2004 exchange, we urge you
to consult the section entitled, United States Federal Income Tax Considerations in the Offering
Circular with respect to the 2004 exchange. You should also consult your own tax advisors
concerning the application of U.S. federal income tax laws to your particular situation. U.S. federal income tax consequences to U.S. Holders of the Notes Payments of interest and additional amounts.Generally, payments of qualified stated
interest, (as defined below in Original issue discount), including Mexican withholding tax
imposed on such interest, and additional amounts (if any) would be taxable to you as ordinary
income. Payments of qualified stated interest and additional amounts (if any) on the Notes
generally are includible in your income as it accrues or is received, in accordance with your
regular method of accounting for tax purposes. Original issue discount.The treatment of original issue discount in respect of the Notes is
highly complex. You are urged to consult with your tax advisor concerning this issue. In general, original issue discount on a note is equal to the amount by which the stated
redemption price at maturity of a note exceeds its issue price by more than a de minimis amount
(generally, the product of 0.25% of the stated redemption price at maturity and the number of full
years to maturity on the instrument). A notes stated redemption price at maturity equals the
total amount of all principal and interest payments to be made on the note, other than qualified
stated interest. Qualified stated interest generally is stated interest that is unconditionally
payable at least annually at a single fixed rate over the entire term of the note. The new notes.The interest payments with respect to the new notes that exceed 4.00%
do not constitute qualified stated interest because such payments are not made at least annually,
and therefore the new notes will be treated as issued with original issue discount. Your issue price in respect of the new notes received in the exchange will depend on whether
either the old notes surrendered or the new notes received were publicly-traded as of the date of
the 2004 exchange. If as of the date the 2004 exchange offer was consummated, the new notes were
traded on an established securities market within the meaning of the applicable regulations on
or at any time during the sixty day period ending thirty days after the date the 2004 exchange
offer was consummated, then the issue price of such notes would equal the fair market value
established by such trading. If the new notes were not so traded, but the old notes were so traded,
then the issue price of the new notes would equal the fair market value, established by such
trading, of the old notes. If neither the new notes nor the old notes were so traded, the issue
price of the new notes generally would be the stated principal amount of such notes. It could not be determined whether the new notes or the old notes were, at the relevant times,
traded on an established securities market within the meaning of the applicable regulations. The
relevant Treasury Regulations are complex and highly detailed in defining the phrase traded on an
established market. For example, it is possible that the new notes would have been treated as so
traded not only if they are listed on an exchange, but also if transfers of such new notes appear
on a computerized quotation medium. You should consult you own tax advisor with respect to whether
your old notes or new notes may qualify for this purpose as traded on an established market. In the event neither the old notes nor the new notes were treated as traded on an established
securities market, the issue price of a new note would equal its stated principal amount, only if
the interest rate was equal to or greater than the applicable federal rate, or AFR, for the
month in which the new notes were issued. If the interest rate was less than the AFR, the issue
price of a new note would be equal to its imputed principal amount, which generally is the sum of
all payments due under the new note (including qualified stated interest) discounted from the date
of payment to the issue date of the new notes at the AFR. Under these rules, the new notes would
have an issue price equal to their stated principal amount. 92




---



##### Table of Contents



The old notes.The interest payments with respect to the old notes do not constitute
qualified stated interest because such payments are not made at least annually. The determination of the issue price of the old notes will depend on whether the old notes or
the 13 3/4% notes were publicly traded as of the date of the 2002 exchange, and if not publicly
traded, whether the interest rate of the old notes is at least equal to or above the applicable
federal rate, or AFR. If on the date of the 2002 exchange, the old notes were traded on an
established securities market within the meaning of the applicable regulations on or at any time
during the sixty day period ending thirty days after the date the exchange offer is consummated,
then the issue price of such notes would equal the fair market value established by such trading.
If the old notes were not so traded, but the 13 3/4% notes were so traded, then the issue price of
the old notes would equal the fair market value, established by such trading, of the 13 3/4% notes.
Under these rules, if either of the Notes were publicly traded, the old notes will be treated as
containing original issue discount if the stated redemption price at maturity of the old notes
exceeded the issue price (i.e., the fair market value of the old notes) by more than the de minimis
amount. It could not be determined whether the old notes or the 13 3/4% notes were, at the relevant
times, traded on an established securities market within the meaning of the applicable regulations.
The relevant Treasury Regulations are complex and highly detailed in defining the phrase traded
on an established market. For example, it is possible that the old notes would have been treated
as so traded not only if they were listed on an exchange, but also if transfers of such old notes
appear on a computerized quotation medium. You should consult you own tax advisor with respect to
whether your 13 3/4% notes or old notes qualified for this purpose as traded on an established
market. In the event that neither the old notes nor the 13 3/4% notes were traded on an established
securities market, the issue price of the old notes would equal their stated principal amount if
the interest rate on the old notes was equal to or greater than the AFR for the month in which the
old notes were issued. If the interest rate was less than the AFR, then the issue price of a old
note would be equal to its imputed principal amount, which generally is the sum of all payments due
under the old note (including qualified stated interest) discounted from the date of payment to the
issue date of the old notes at the AFR. Under these rules, if the old notes and the 13 3/4% notes
were not traded on an established securities market and, because the interest rate on the old notes
was less than the AFR for April 2002, the issue price of the old notes would be the sum of all
payments due under the note discounted at the AFR from the date of payment to the old notes issue
date. The old notes, therefore, would be treated as having original issue discount because the old
notes stated redemption price at maturity (which is the total amount of all principal and interest
payments made on the note, other than qualified stated interest) would exceed the issue price of
the old notes by more than the de minimis amount. The 13 3/4% notes. The 13 3/4% notes were issued with original issue discount for
U.S. federal income tax purposes. If you were an original purchaser of an 13 3/4% note, you also
acquired a warrant as part of an investment unit for federal income tax purposes. Our company
allocated the issue price of a unit between the 13 3/4% note and the associated warrant in
accordance with our companys determination of their relative fair market values on the issue date.
Our company determined that the issue price of each 13 3/4% note should be U.S. $975.06.
Although our companys allocation is not binding on the IRS, if you were an initial purchaser
of a unit, you had to use our companys determination of the 13 3/4% note issue price for purposes
of calculating original issue discount unless you disclosed on your U.S. federal income tax return
for the year in which you acquired the unit that you planned to use an allocation inconsistent with
our companys allocation. As mentioned above, the stated redemption price at maturity of a note
equals the total amount of all principal and interest payments to be made on the Note, other than
qualified stated interest. However, if the amount of original issue discount determined under this
formula is de minimis original issue discount, then the notes will be treated as if there is no
original issue discount. The 13 3/4% notes will have de minimis original issue discount if the
total amount thereof is less than the product of 0.25% of the stated redemption price at maturity
and the number of full years from the issue date to the maturity date of the note. Inclusion of original issue discount in income. You must include any original issue
discount on your Notes in income as ordinary interest income as it accrues on the basis of a
constant yield to maturity. Original issue discount must be included in income regardless of
whether cash is received in respect of such income. The amount of original issue discount
includible in income by you is the sum of the daily portions of original issue discount with
respect to the Notes for each day during the taxable year or portion of the taxable year on which
you held such Note. The daily portion is determined by allocating to each day in any accrual
period other than the initial short accrual period and the final accrual period an amount equal to
the excess of:  
    
    the product of the Notes adjusted issue price at the beginning of such accrual period and its yield to maturity
(determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the
accrual period) over  
    
    the amount of qualified stated interest payments, if any, allocable to such accrual period. 93




---



##### Table of Contents



The yield to maturity is the discount rate that, when applied to all payments under a Note,
results in a present value equal to the issue price. The amount of original issue discount
allocable to the final accrual period is the difference between the amount payable at maturity and
the adjusted issue price of the Note at the beginning of the final accrual period. The amount of
original issue discount allocable to the initial short period may be computed under any reasonable
method. The adjusted issue price of a Note at the beginning of the first accrual period is equal to
its issue price. A Notes adjusted issue price at the beginning of any subsequent accrual period
is equal to its issue price increased by the amount of accrued original issue discount previously
includible in your gross income (and market discount, as discussed below) for each prior accrual
period and reduced by the amount of any payments previously made on the note to you (other than
payments of qualified stated interest, if any). Generally, upon election, you may use the constant yield to maturity method applicable to
original issue discount to determine the timing of inclusion of all qualified stated interest (if
any) and original issue discount on the old notes, subject to certain limitations. Such an
election will apply to all debt instruments held or acquired by you on or after the beginning of
the first taxable year to which the election applies and may not be revoked without the consent of the
IRS. The above treatment assumes that the stated redemption price at maturity for a Note does not
include any additional amounts payable on the Notes. It is possible that the IRS might disagree
with this treatment and contend that the stated redemption price at maturity should include the
reasonably expected amount of additional amounts payable on the Notes. In such case, the amount of
original issue discount on the Notes would be increased by such amount. With respect to the holders of old notes, the rules discussed below under Premium and
acquisition premium may reduce or eliminate the amount of original issue discount you must include
in your income. For example, if your exchange of the 13 3/4% notes for old notes and CPOs
qualified as a recapitalization, your basis in the old notes may substantially exceed the issue
price of such old notes (depending on your basis in the 13 3/4% notes), and you may be able to
reduce or eliminate the amount of original issue discount includible with respect to such old
notes. You should consult your tax advisor concerning the inclusion in your taxable income of the
original issue discount attributable to the old notes or the 13 3/4% notes.  Premium and acquisition premium. The new notes. If you acquired new notes for an amount (or with a basis) less than or
equal to the sum of all amounts payable on such new notes after the acquisition date (other than
payments of qualified stated interest, if any) but in excess of their adjusted issue price (any
such excess being acquisition premium),you will be considered to have acquired the new notes at an
acquisition premium. If you do not make the election described below, you are permitted to reduce
the daily portions of original issue discount includible in your income by a fraction, (i) the
numerator of which is the excess of your adjusted tax basis in the new notes immediately after
their acquisition over the adjusted issue price of such new notes and(ii) the denominator of which
is the excess of the sum of all amounts payable on such new notes after the acquisition date (other
than payments of qualified stated interest, if any) over the adjusted issue price of such new
notes. If you acquired the new notes for an amount (or with a basis) greater than the sum of all
amounts payable on such new notes after the acquisition date (other than payments of qualified
stated interest, if any) you will be considered to have acquired the new notes at a premium. In
such a case, you will not be required to include any original issue discount in your gross income. The old notes. If you acquired old notes for an amount (or with a basis) less than or
equal to the sum of all amounts payable on such old notes after the acquisition date (other than
payments of qualified stated interest, if any) but in excess of their adjusted issue price (any
such excess being acquisition premium), you will be considered to have acquired the old notes at an
acquisition premium. If you do not make the election described below, you are permitted to reduce
the daily portions of original issue discount includible in your income by a fraction, (i) the
numerator of which is the excess of your adjusted tax basis in the old notes immediately after
their acquisition over the adjusted issue price of such old notes and (ii) the denominator of
which is the excess of the sum of all amounts payable on such old notes after the acquisition
date (other than payments of qualified stated interest, if any) over the adjusted issue price of
such old notes. If you acquired the old notes for an amount (or with a basis) greater than the sum of all
amounts payable on such old notes after the acquisition date (other than payments of qualified
stated interest, if any) you will be considered to have acquired the old notes at a premium. In
such a case, you will not be required to include any original issue discount in your gross income. The 13 3/4% notes. Similarly, if you purchased your 13 3/4% notes for an amount (or
with a basis) greater than the sum of all amounts payable on your 13 3/4% notes after the purchase
date (other than payments of qualified stated interest, if any) you will be considered to have
purchased your 13 3/4% notes at a premium. 94




---



##### Table of Contents



General. You generally may elect to amortize the premium, if any, on the constant
yield method. The amount amortized in any year will be treated as a reduction of your interest
income from the Notes. The election to amortize the premium on a constant yield method, once made,
applies to all debt obligations held or subsequently acquired by you on or after the first day of
the first taxable year to which the election applies and may not be revoked without the consent of
the IRS. If you make this election, you will be required to reduce your basis in the Notes to the
extent that any amortizable bond premium is applied to offset your interest income on the Notes.
If you do not make this election, the premium on your Note, whether on an 13 3/4% note or old note,
will decrease the gain or increase the loss otherwise recognized on disposition or retirement of
the Note. Market discount.If you purchased your Note at a price that is less than its adjusted issue
price, the excess of the adjusted issue price over your purchase price will be treated as market
discount. Such market discount, however, will be considered zero if it does not exceed a de
minimis amount equal to 0.25% of the Notes stated redemption price at maturity multiplied by the
number of complete years to maturity from the date you purchased the Note. General. Under the market discount rules, you generally will be required to treat any
partial principal payment on, and any gain realized on the sale, exchange, retirement or other
disposition of, a Note as ordinary income (generally treated as interest income) to the extent of
the market discount which accrued but was not previously included in income during the period you
held such Note. In addition, you may be required to defer your deduction of all or a portion of
the interest expense on any indebtedness incurred or continued to purchase or carry such Note until
the maturity of the Note or its earlier disposition in a taxable transaction. In general, market discount will be considered to accrue ratably during the period from the
date of acquisition to the maturity date of the Note, unless you make an irrevocable election (on
an instrument-by-instrument basis) to accrue market discount under a constant yield method. You
may also elect to include market discount on the Note in income currently as it accrues (under
either a ratable or constant yield method), in which case the rules described above regarding the
treatment as ordinary income of gain upon the disposition of the Note and upon the receipt of
certain payments and the deferral of interest deductions will not apply. The election to include
market discount in income currently, once made, applies to all market discount
obligations acquired by you on or after the first day of the first taxable year to which the
election applies, and may not be revoked without the consent of the IRS. Such currently included
market discount will increase your tax basis in the Note and generally is treated as ordinary
interest income for U.S. federal income tax purposes. The new notes. If you acquired your new notes as part of the 2004 exchange, whether
the new notes will be treated as having market discount may depend on whether the exchange was
treated as a recapitalization for U.S. federal income tax purposes, which is not entirely clear.
If the 2004 exchange was not treated as a recapitalization, the new notes will be considered to
have been acquired with market discount if the adjusted issue price of the new notes at the time of
the 2004 exchange exceeded your initial tax basis in the new notes by more than a specified de
minimis amount. As discussed below in Adjusted tax basis of the new notes, your initial tax
basis in the new notes will depend on whether the new notes were treated as securities for U.S.
federal income tax purposes. 95




---



##### Table of Contents



The Code provides the authority for regulations to be issued by the Treasury Department that
would provide that any accrued market discount not treated as ordinary income upon an exchange of
market discount bonds in which gain or loss is not recognized in whole or in part, such as the
exchange of the new notes and Series N-1 Preferred Stock for the old notes (if such exchange is
treated as a recapitalization and the old notes are market discount bonds), would carry over to the
nonrecognition property received on the exchange. If such regulations were promulgated and were
applicable to the 2004 exchange, any accrued market discount not treated as ordinary income on the
exchange would carry over to the nonrecognition property received in the exchange (e.g. the Series
N-1 Preferred Stock and/or the new notes if the new notes were treated as securities for U.S.
federal income tax purposes). On disposition of any such new notes or stock, any gain recognized
generally would be treated as ordinary income to the extent of the amount of accrued market
discount carried over thereto (unless, in the case of the new notes, you had previously elected to
include market discount in income as it accrues). Although not free from doubt, it is likely that
the above characterization would be required under the Code even without the promulgation of
regulations. The old notes. If you acquired your old notes as part of the 2002 exchange, whether
the old notes will be treated as having market discount may depend on whether the exchange was
treated as a recapitalization for U.S. federal income tax purposes, which is not entirely clear.
If the exchange was not treated as a recapitalization, your old notes will be considered to have
been acquired with market discount if the adjusted issue price of your old notes at the time of the
exchange exceeded your initial tax basis in the old notes by more than the de minimis amount. As
discussed below in Adjusted tax basis of the old notes and the CPOs, your initial tax basis in
the old notes will depend on whether the old notes were treated as securities for U.S. federal
income tax purposes. The Code provides the authority for regulations to be issued by the Treasury Department that
would provide that any accrued market discount not treated as ordinary income upon an exchange of
market discount bonds in which gain or loss is not recognized in whole or in part, such as the
exchange of the old notes and CPOs for the 13 3/4% notes (assuming: (a) such exchange is treated as
a recapitalization, (b) the 13 3/4% notes are market discount bonds, and (c) the old notes are
treated as securities for U.S. federal income tax purposes), would carry over
to the nonrecognition property received on the exchange. If such regulations were promulgated
and were applicable to the 2002 exchange, any accrued market discount with respect to the 13 3/4%
notes that was not treated as ordinary income on the exchange would carry over to the old notes and
CPOs received in the exchange. On disposition of any such old notes or stock, any gain recognized
generally would be treated as ordinary income to the extent of the amount of accrued market
discount carried over thereto (unless, in the case of the old notes, you had previously elected to
include market discount in income as it accrues, in which case the amount taxable as ordinary
income on disposition would be reduced by the amount of market discount previously included in
income). Although not free from doubt, it is likely that the above characterization would be
required under the Code even without the promulgation of regulations. Sale, exchange or retirement of a Note.General. Upon the sale, exchange or
retirement of a Note, you generally will recognize capital gain or loss equal to the difference
between (i) the amount realized on the sale, exchange or retirement (other than amounts
representing accrued and unpaid interest which are taxable as ordinary income) and (ii) your
adjusted tax basis in the Note, determined under the rules discussed in the following paragraphs.
Such capital gain or loss recognized on the sale, exchange or retirement of the Note generally will
be long-term capital gain or loss and subject to a maximum U.S. federal income tax rate of 15%
(through December 31, 2008) if you held the Note for more than one year before sale. U.S.
corporations, however, are taxed on their net capital gains at the regular corporate income tax
rates. Gain or loss recognized by you in connection with the disposition of the Notes generally
will be treated as U.S. source gain or loss. The adjusted tax bases and the holding periods of the new notes received in the 2004 exchange
depends upon the tax consequences of the 2004 exchange of old notes for new notes. While the issue
is not free from doubt, we believe that the old notes were likely to be treated as securities for
U.S. federal income tax purposes and that there is a reasonable position that the new notes also
should be treated as securities for U.S. federal income tax purposes. You are encouraged to
consult your own tax advisor with regard to this issue. Adjusted tax basis of the new notes. If the 2004 exchange is treated as a
recapitalization for U.S. federal income tax purposes, your aggregate tax basis in the new notes
you received in the exchange will equal your tax basis in your old notes; provided thatthe tax
basis of any new notes treated as received in satisfaction of accrued but unpaid interest should
equal the amount of such accrued interest. Your basis in the new notes will be the same as your
basis in the old notes. Your holding period in the new notes will be the same as your holding
period in the old notes you surrendered in the 2004 exchange; provided thatthe holding period for
holding period of new notes treated as received in satisfaction of accrued but unpaid interest
should not include the holding period in the old notes you surrendered in the exchange. If, alternatively, the 2004 exchange is not treated as a recapitalization because the old
notes surrendered or new notes received were not securities, then your adjusted basis in the new
notes will equal the issue price of the new notes. Your holding period in the new notes will begin
on the day following the date of the 2004 exchange. Adjusted tax basis of the old notes. If you did not tender your old notes in the 2004
exchange, while the issue is not free from doubt, you should not be deemed to have engaged in a
taxable exchange for U.S. federal income tax purposes and you should have the same adjusted
tax basis and holding period in your old notes after the exchange. 96




---



##### Table of Contents



The adjusted tax bases and the holding periods of the old notes, the 13 3/4% notes and the
CPOs depend upon the tax consequences of the 2002 exchange of 13 3/4% notes for old notes and CPOs.
While the issue is not free from doubt, we believe that the 13 3/4% notes are likely to be treated
as securities for U.S. federal income tax purposes and that there is a reasonable position that the
old notes also should be treated as securities for U.S. federal income tax purposes. You are
encouraged to consult your own tax advisor with regard to this issue. Adjusted tax basis of the old notes and the CPOs. If the 2002 exchange is treated as

a recapitalization for U.S. federal income tax purposes and the 13 3/4% notes and the old notes
qualify as securities, your aggregate tax basis in the old notes and the CPOs will equal your tax
basis in your 13 3/4% notes. Although the method for allocating your tax basis in the 13 3/4%
notes between the old notes and the CPOs is unclear, the determination of the portion of your tax
basis in the 13 3/4% notes that should be allocated to the old notes and the CPOs should be based
on the issue price of the old notes (as determined under Original issue discount) and the fair
market value of the CPOs. Your holding period in the old notes and the CPOs will include your
holding period in the 13 3/4% notes you surrender in the exchange. If, however, the old notes do not qualify as securities, your tax basis in the old notes
should equal their issue price, and your tax basis in the CPOs should equal your tax basis in your
13 3/4% notes, less the issue price of the old notes, plus any gain recognized in the exchange. In
addition, your holding period in the old notes will begin on the day following the date of the
exchange and your holding period in the CPOs will include your holding period in the 13 3/4% notes
you surrendered in the exchange. If, alternatively, the exchange is not treated as a recapitalization because the 13 3/4% notes
are not securities, then your adjusted basis in the old notes will equal the issue price of the old
notes, and your adjusted basis in the CPOs will equal the fair market value of the CPOs. Your
holding period in the old notes and the CPOs will begin on the day following the date of the
exchange. Adjusted tax basis of the 13 3/4% notes. If you did not tender your 13 3/4% notes in
the 2002 exchange, while the issue is not free from doubt, you should not be deemed to have engaged
in a taxable exchange for U.S. federal income tax purposes and you should have the same adjusted
tax basis and holding period in your 13 3/4% notes after the exchange. Foreign tax credit.Interest, original issue discount and additional amounts.
Qualified stated interest, original issue discount and additional amounts (if any) paid on the
Notes will constitute income from sources outside the United States, and, with certain exceptions,
generally will be grouped together with other items of passive income, for purposes of computing
the foreign tax credit allowable to you. The availability of a foreign tax credit is subject to
certain conditions and limitation, and the rules governing the foreign tax credit are complex. U.S.
holders should consult their own tax advisors regarding rules governing the foreign tax credit. 97




---



##### Table of Contents



Effect of Mexican withholding taxes. You will be required to include the amount of
Mexican withholding taxes, if any, imposed on payments on a Note (including any additional amounts
payable by our company) in gross income as interest income. Such treatment will be required
regardless of whether, as will generally be true, our company is required to pay additional amounts
so that the amount of Mexican withholding taxes does not reduce the net amount actually received by
you as a holder of a Note. Subject to certain limitations, you may be entitled to a credit against your U.S. federal
income tax liability, or a deduction in computing your U.S. federal taxable income, for the amount
of Mexican taxes withheld by our company (which, as described above, would include amounts withheld
on additional amounts paid by us with respect to Mexican taxes). However, Mexican taxes may be
deducted from your taxable income only if you do not claim a credit for any Mexican or other
foreign taxes paid or accrued in that taxable year. You may be required to provide the IRS with a
certified copy of the receipt evidencing payment of such withholding tax imposed in respect of
payments on the Notes in order to claim a Mexican tax credit in respect of such Mexican withholding
tax. Since you may be required to include in your gross income original issue discount on the Notes
in advance of any withholding of Mexican income taxes from payments relating to the discount (which
would generally occur when such discount is paid in cash), you may not be entitled to a credit or
deduction for these Mexican withholding taxes in the year the original issue discount is included
in your gross income for U.S. federal income tax purposes, and may be limited in your ability to
credit or deduct in full the foreign taxes in the year those taxes are actually withheld by our
company. In addition, under certain U.S. Treasury Department guidance, foreign tax credits will
not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions
in securities or in respect of arrangements in which your expected economic profit, after non-U.S.
taxes, is insubstantial. You should consult your tax advisor concerning the availability and
timing of a foreign tax credit or deduction relating to the payment of Mexican withholding taxes. Certain U.S. federal income tax consequences of holding and disposing of the CPOs Distributions.In general, a holder of CPOs will be treated as the beneficial owner of the
series N2 preferred stock represented by the CPOs. Subject to the passive foreign investment
company rules discussed below, generally, distributions of cash or property with respect to your
CPOs (including the amount of any Mexican taxes withheld on any such distribution) will constitute
ordinary dividend income to the extent of our companys current and accumulated earnings and
profits (as determined for U.S. federal income tax purposes), which generally will be includible in
your income on the day on which the dividends are received by the CPO trustee, and will be treated
as foreign source dividend income (generally passive income) for foreign tax credit limitation
purposes. Any distributions in excess of such earnings and profits will constitute a nontaxable
return of capital and reduce your tax basis in such CPOs. To the extent such distributions exceed
your tax basis in your CPOs, such excess will constitute capital gain. Dividends on the CPOs will
not be eligible for the dividends received deduction allowed to U.S. corporations. Dividends paid in a foreign currency (including the amount of any foreign taxes withheld there
from) will be includible in your income in a U.S. dollar amount calculated by reference to the
exchange rate in effect on the day the dividends are received by the CPO trustee, regardless
whether the dividends are converted into U.S. dollars. In addition, any gain or loss resulting
from currency exchange fluctuations during the period from the date the dividend is includible in
your income to the date such payment is converted into U.S. dollars will be exchange gain or loss
and will be treated as ordinary income or loss. The Jobs Growth Tax Relief Reconciliation Act of 2003 generally lowered to 15% the maximum
full income tax rate imposed on dividends received from U.S. and certain foreign corporations for
years 2003 through 2008. Recipients of dividends from foreign corporations will benefit from these
reduced rates, provided that certain holding period requirements are satisfied, if the dividends
are received from certain qualified foreign corporations, which generally include corporations
located in a jurisdiction with which the United States has an income tax treaty that the Secretary
of the Treasury determines is satisfactory and includes an information exchange program, and such
corporation is eligible for benefits of such income tax treatment. The Secretary of the Treasury
has indicated that the income tax treaty between the United States and Mexico (see Mexican
TaxationUnited States/Mexico and other tax treaties) would qualify under the legislation.
Additionally, dividends paid with respect to stock of a foreign corporation which is readily
tradable on an established securities market in the United States also will be treated as having
been received from a qualified foreign corporation. However, while not completely clear, we
believe that the CPOs will not be treated as readily tradable on an established securities market
in the United States. You are urged to consult your tax advisor regarding this legislative change.
A qualified foreign corporation, however, does not include any foreign corporation which for the
taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a
passive foreign investment company, as discussed below. 98




---



##### Table of Contents



In addition, the legislation also accelerated to January 1, 2003, the reduction in ordinary
income tax rates previously calculated to take effect over the next several years. Sale, redemption or other taxable disposition of the CPOs.Subject to the passive foreign
investment company rules discussed below, generally, you will, upon the sale, redemption or other
taxable disposition of your CPOs, recognize gain or loss for U.S. federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and fair market value of property
received therefore (if the amount received is denominated in foreign currency other than in U.S.
dollars, then its U.S. dollar equivalent determined at the spot rate on the date of the
disposition) and (ii) your tax basis in your CPOs (in U.S. dollars) as determined in Sale,
exchange or retirement of a NoteAdjusted tax basis of the old notes and the CPOs. Capital gain recognized by you generally will be long-term capital gain and subject to a
maximum federal income tax rate of 15% (through December 31, 2008) if you held CPOs for more than
one year before the sale. Recent legislation has reduced the maximum federal income tax rate to
15% for capital gains taken into account from May 6, 2003 through December 31, 2008. U.S.
corporations, however, are taxed on their net capital gains at the regular corporate income tax
rates. Gain or loss recognized by you in connection with the disposition of your CPOs generally
will be treated as U.S. source gain or loss. Generally, you will not recognize any gain or loss upon the conversion of the CPOs into series
N stock or other classes of our stock. Passive foreign investment company considerations.In
general, a foreign corporation will be classified as a passive foreign investment company, or PFIC,
if (i) at least 75% of its gross income for the taxable year consists of passive income or (ii) at
least 50% of the average value of the corporations assets (determined as of the close of each
quarter) in a taxable year is attributable to assets that produce or are held for the production of
passive income. For this purpose, passive income generally includes dividends, interest,
royalties, rents (other than rents and royalties derived from the active conduct of a trade or
business and not derived from a related person), annuities and gains from assets that produce
passive income. The determination of PFIC status is a factual determination that must be made annually at the
close of each taxable year and depends on the sources of our income and the relative values of our
passive assets such as cash and our non-passive assets, including goodwill. Based on the source of
our income and the value of our non-passive assets as compared to our passive assets, in 2004 we
believe we were not a PFIC for U.S. federal income tax purposes and we do not expect to be a PFIC
in future taxable years. However, as noted above, the determination of PFIC status is a factual
determination that must be made annually and our current belief that we were not a PFIC could be
subject to change in the future. We will make the determination of whether we are a PFIC on an
annual basis and intend to notify you within 75 days of the end of any year in which we become a
PFIC. If we were to become a PFIC in any taxable year, a special tax regime would apply to both (a)
any excess distribution by us (generally, your ratable share of distributions in any year that
are greater than 125% of the average annual distributions received by you in the three preceding
years or your holding period, if shorter) and (b) any gain realized on the sale or other
disposition (including a pledge) of your CPOs. Under this regime, any excess distribution and
realized gain will be treated as ordinary income and will be subject to tax as if (a) the excess
distribution or gain had been realized ratably over your holding period in the CPOs, (b) the amount
deemed realized had been subject to tax in each year of that holding period at the highest
applicable tax rate in effect for that year and (c) the interest charge generally applicable to
underpayments of tax had been imposed on the taxes deemed to have been payable in those years. You are urged to consult your own tax advisor as to the effect to you of our company being a
PFIC and the availability, if any, of either the qualified electing fund or mark-to-market
election as defined in the Code and the regulations thereunder. Controlled foreign corporation considerations.If more than 50% of the voting power of all
classes of our capital stock or the total value of our capital stock is owned, directly or
indirectly, by U.S. shareholders, we may be treated as a controlled foreign corporation, or a
CFC, under Subpart F of the Code. U.S. shareholders are defined as citizens or residents of the
United States, United States domestic partnerships and corporations or estates or trusts other than
foreign estates or trusts, each of whom owns 10% or more of the total combined voting power of all
classes of our capital stock. The United States generally taxes a U.S. shareholder of a CFC
currently on its pro rata share of the Subpart F income of the CFC. Such U.S. shareholder is
generally treated as having received a current distribution out of the CFCs Subpart F income and
is also subject to current U.S. tax on its pro rata share of the CFCs earnings invested in U.S.
property. In addition, gain from the sale or exchange of stock in a CFC by a U.S. person who is or
was a U.S. shareholder of the CFC at any time during the five-year period ending with the sale or
exchange is treated as ordinary income to the extent of the CFCs earnings and profits attributable
to the stock sold or exchanged. If a foreign corporation is both a PFIC and a CFC, the foreign
corporation generally will not be treated as a PFIC with respect to U.S. shareholders of the CFC. 99




---



##### Table of Contents



Under the current ownership structure, we believe that we are a CFC for U.S. federal income
tax purposes. You should consult your own tax advisor as to the potential application of these
rules to you based on your particular circumstances. Certain U.S. federal income tax consequences to non-U.S. holders of the Notes and CPOs Subject to the discussion below concerning information reporting and backup withholding,
generally, a non-U.S. holder will not be subject to U.S. federal income or withholding tax on
distributions in respect of the Notes or the CPOs unless such income is effectively connected with
the conduct by the non-U.S. holder of a trade or business in the United States. A non-U.S. holder will generally not be subject to U.S. federal income or withholding tax on
gain realized on the sale or the other disposition of the Notes or the CPOs unless (i) such gain is
effectively connected with the conduct of a United States trade or business by such non-U.S. holder
or (ii) such non-U.S. holder is present in the United States for 183 days or more during the
taxable year of sale or disposition and certain other conditions are met. Information reporting and backup withholding In general, if you are a non-corporate U.S. holder (or do not come within certain other exempt
categories), information reporting requirements will apply to certain payments of principal,
premium and interest on the Notes, or dividends on the CPOs, and to payments of the proceeds of the
sale of the Notes or CPOs made to you. Additionally, if you are a non-corporate U.S. holder (or do not come within certain other
exempt categories), you may be subject to backup withholding at a rate of 28% with respect to such
payments, unless you provide your taxpayer identification number (social security number or
employer identification number), certify that you are not subject to backup withholding and
otherwise comply with applicable requirements of the backup withholding rules. Generally, you will
provide such certification on IRS Form W-9 (Request for Taxpayer Identification Number and
Certification) or a substitute Form W-9. If you do not provide your correct taxpayer identification number, you may be subject to
penalties imposed by the IRS, as well as backup withholding. However, any amount withheld under
the backup withholding rules may be allowable as a credit against your U.S. federal
income tax liability (which might entitle you to a refund), provided that you furnish the
required information to the IRS. A non-U.S. holder generally will be exempt from information reporting requirements and backup
withholding, but may be required to comply with certification and identification procedures in
order to obtain an exemption from information reporting and backup withholding. Mexican taxation The following is a general discussion of the material consequences of the exchange of the old
notes, the investment in the new notes and CPOs and the investment in outstanding old notes under
the Mexican Income Tax Law (Ley del Impuesto sobre la Renta) and rules and regulations thereunder,
as currently in effect based on the advice of PricewaterhouseCoopers, our tax advisors. This
summary of certain Mexican tax considerations deals only with holders of notes and CPOs or of a
beneficial interest therein that are not residents of Mexico for Mexican tax purposes and that do
not conduct a trade or business through a permanent establishment or fixed base in Mexico (a
Foreign Holder). For purposes of Mexican taxation, an individual is a resident of Mexico if he has a permanent
home in Mexico. If it has other permanent home in another country, then it should be analyzed if
its center of vital interests is in Mexico. For these purposes, the center of vital interests will
be deemed to be in Mexico if i) more than 50% of its total income, obtained in a calendar year, is
sourced in Mexico; or ii) its main center of professional activities is located in Mexico. A legal
entity is a resident of Mexico for tax purposes if it has been incorporated under the laws of
Mexico, or has established the principal management of its business or the base of its effective
direction in Mexico. A Mexican citizen is presumed to be a resident of Mexico for tax purposes
unless such person can demonstrate otherwise. If individuals or legal entities changed their tax
residency, they would be obliged to notify the Mexican tax authorities of such change. United States/Mexico and other tax treaties A Convention for the Avoidance of Double Taxation and Prevention of Fiscal Evasion, together
with a related Protocol thereto, between the United States and Mexico entered into force on January
1, 1994 as well as its second protocol entered into force as from July 22, 2003 (collectively, the
Tax Treaty). Provisions of the Tax Treaty that may affect the taxation of certain U.S. holders of
notes or CPOs are summarized below. The United States and Mexico have also entered into an
agreement that covers the exchange of information with respect to tax matters. Mexico has also
entered into and is negotiating several other tax treaties that may reduce the amount of Mexican
withholding tax to which the notes may be subject. Holders of the notes and CPOs should consult
their own tax advisors as to the tax consequences, if any, of such treaties. 100




---



##### Table of Contents



Mexican tax consequences to Foreign Holders of the exchange of old notes for new notes General.A Foreign Holder will not be subject to any Mexican tax upon the exchange of the old
notes for the new notes, since it will be treated by us as additional consideration
for Mexican tax purposes, paid to the Foreign Holders in exchange for their tendered old notes. Other taxes.A Foreign Holder will not be liable for Mexican estate, gift, inheritance or
similar taxes with respect of the exchange of the old notes, nor will such a Foreign Holder be
liable for Mexican stamp, registration or similar taxes. Mexican tax consequences to Foreign Holders of the notes Taxation of interest and principal.Under the Mexican Income Tax Law, payments of interest
made by Maxcom in respect of the new notes (including payments of principal in excess of the issue
price of such notes, which, under Mexican law, are deemed to be interest) to a Foreign Holder will
generally be subject to a Mexican withholding tax assessed at a rate of 4.9% (the Reduced Rate),
provided that:  
    
    the notes are offered through banks or brokerage houses in a country with which
Mexico has a tax treaty in force;
    
    the notes are registered in the Special Section of the National Registry of
Securities (Registro Nacional de Valores); and
    
    certain periodic information requirements by the Mexican Ministry of Finance
(Secretaría de Hacienda y Crédito Público)are complied with.
    
    If these conditions are not met, the applicable withholding tax rate will be 10%. FOREIGN HOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING WHETHER THEY RESIDE IN A COUNTRY THAT
HAS ENTERED INTO SUCH A TREATY WITH MEXICO WHICH IS EFFECTIVE, AND IF SO, THE CONDITIONS AND
REQUIREMENTS FOR OBTAINING BENEFITS UNDER SUCH TREATY. However, if the beneficial owner, either directly or indirectly, individually or jointly with
related parties, of more than 5% of the interest derived from the related securities, is any of the
following:  
    
    a shareholder of the issuer who owns, directly or indirectly, individually or
jointly with related parties, more than 10% of the voting stock of the issuer, or
    
    a legal entity 20% or more of whose stock is owned, directly or indirectly,
individually or jointly with related parties, by the issuer, then, the withholding tax
rate will be 33%. For the following years 2005, 2006 and 2007 the tax rate will be
30%, 29% and 28% respectively. Pursuant to Rule 3.23.8 (the Reduced Rate Rule) issued by the Mexican Ministry of Finance
(Secretaría de Hacienda y Crédito Público) on April 30, 2004 payments of interest with respect to
the notes made by us to Foreign Holders, regardless of the place of residence or the tax regime
applicable to the Foreign Holder recipient of the interest, will be subject to withholding taxes
imposed at the Reduced Rate if:  
    
    the notes are registered with the Special Section of the National Registry of
Securities and Intermediaries and copies of approval of such registration are provided
to the Ministry of Finance;
    
    we timely file with the Ministry of Finance certain information relating to the
issuance of the new notes; 101




---



##### Table of Contents




    
    we timely file with the Ministry of Finance on a quarterly basis information on the
amount and dates of interest payments made during each quarter and information
representing that no party related to us, directly or indirectly, is the effective
beneficiary of more than five percent (5%) of the aggregate amount of each such
interest payment; and
    
    we maintain records that evidence compliance with the conditions set forth above. We will comply with the first two conditions set forth above and expect that the last two
conditions will also be met and, accordingly, expect to withhold Mexican tax from interest payments
on the notes at the Reduced Rate during the effectiveness of such rule. However,
during the fiscal year 2005, the Tax Treaty is not expected, generally, to have any
material effect on the Mexican tax consequences described herein, because, as described above,
under Mexican Income Tax Law and regulations as currently in effect, with respect to a U.S. holder
that meets the Reduced Rate Rule requirements described above, we will be entitled to withhold
taxes in connection with interest payments under the notes at the Reduced Rate. From 2001 and
beyond, holders of the notes should consult their own tax advisors as to the possible application
of the Tax Treaty. Payments of interest we make on the notes to non-Mexican pension or retirement funds will be
exempt from Mexican withholding taxes, if any such fund is:  
    
    the effective beneficiary of the interest;
    
    duly incorporated under the laws of its country of origin;
    
    exempt in its country of origin from income tax on interest income; and
    
    registered with the Ministry of Finance for that purpose. Under existing Mexican law and regulations, a Foreign Holder will not be subject to any
Mexican taxes in respect of payments of principal made by us with respect to the notes. Taxation of additional amounts.We have agreed, subject to specified exceptions and
limitations, to pay Additional Amounts (as such term is defined in Description of the
NotesAdditional amounts) to the holders of the notes in respect of the Mexican withholding taxes
mentioned above. Payments of Additional Amounts with respect to the notes will be subject to
Mexican withholding tax at the same rate applicable to interest paid on the notes. Holders or beneficial owners of the notes may be requested to provide certain information or
documentation necessary to enable us to establish the appropriate Mexican withholding tax rate
applicable to such holders or beneficial owners. In the event that the specified information or
documentation concerning the holder or beneficial owner is requested and is not provided on a
timely basis, our obligation to pay Additional Amounts will be limited. Taxation of accrued interest.Interest accrued that is not due and payable under the terms
applicable to the old notes before the exchange of the old notes for the new notes will not be
subject to a Mexican income tax withholding under the terms described above, but such interest will
be subject to a Mexican income tax withholding when such interest becomes due and payable under the
new notes after the exchange of the old notes for the new notes. Gain on dispositions.Gains resulting from the sale or other dispositions of the notes and by
a Foreign Holder will not be deemed as an income arising from Mexican source, and therefore will
not be subject to Mexican income tax. 102




---



##### Table of Contents



Mexican tax consequences to Foreign Holders of the CPOs The sale or other disposition of the CPOs by a Foreign Holder will not be subject to any
Mexican tax if the sale is carried out through the Mexican Stock Exchange or other securities
market approved by the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito
Público). Sales or other dispositions of the CPOs made in other circumstances would be subject to
Mexican tax, regardless of the nationality or residence of the transferor. However, under the Tax
Treaty, a U.S. holder that is eligible to claim the benefits of the Tax Treaty will be exempt from
Mexican tax on gains realized on a sale or other disposition of the CPOs in a transaction that is
not carried out through the Mexican Stock Exchange or such other approved securities markets, so
long as such holder did not own, directly or indirectly, 25% or more of our outstanding shares
within the twelve-month period preceding such sale or other disposition. Certain tax consequences to Mexican holders on the exchange or disposition of the CPOs. The Mexican income tax effect for a Mexican resident holder on the taxable disposition or
exchange of the CPOs, may vary depending on the conditions of the acquisitions, disposition or
exchange of the CPOs, as well as on the characteristics of the holders. Therefore, such holders
should seek advice from Mexican tax counsel to determine the effects on a case by case basis. F. Dividends and paying agents Not applicable. G. Statement by experts Not applicable. H. Documents on display We file annual reports with and furnish other information to the SEC as may be applicable from
time to time. You may read and copy any documents filed or furnished by Maxcom at the SECs public
reference rooms in Washington, D.C., New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. I. Subsidiary information Not applicable. 
 PART II 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate risk The
133/4%
notes, the old notes, the new notes, the working capital credit
facilities executed on April 28, 2004 and August 17, 2004
with Banco Santander Mexicano, S.A. (which we refer to as Banco
Santander) and the line of credit executed also with Banco Santander
on November 5, 2004, constituted substantially all of our
indebtedness as of December 31, 2004. For a more detailed
description of the Banco Santanders working capital credit
facilities and line of credit, see Item 5. Operating
Review and Financial Prospects  B. Liquidity and Capital
Resources  Financing sources and liquidity. As a result,
we do not currently have any significant interest rate risk. Foreign exchange risk Our primary foreign currency exposure relates to our U.S. dollar-denominated debt. A
substantial portion of this debt is incurred to finance U.S. dollar-denominated capital
expenditures. The majority of our debt obligations at December 31, 2004, were denominated in U.S. dollars.
Therefore, we are exposed to currency exchange rate risks 103




---



##### Table of Contents



that could significantly affect our ability to meet our obligations. We currently do not enter
into hedging transactions with respect to these foreign currency risks, but continue to consider
the appropriateness of this option. The exchange rate of the peso to the U.S. dollar is a freely-floating rate and the peso has
experienced significant devaluations in recent years. Any significant decrease in the value of the
peso relative to the U.S. dollar in the near term may have a material adverse effect on our results
of operations and financial condition, including our ability to repay or repurchase the notes. At
December 31, 2004, an immediate 10% devaluation of the peso relative to the U.S. dollar would have
increased our interest expense by approximately Ps.2.3 million over a one-year period. To the extent capital expenditures are financed with operating cash flows, we are also exposed
to foreign currency fluctuations. Substantially all of our capital expenditures are denominated in
U.S. dollars. In addition, our operating lease for our new headquarters building is denominated in
U.S. dollars. See Item 5. Operating and Financial Review and ProspectsB. Liquidity and capital
resourcesOther contractual obligations for a description of our contractual operating lease
obligations denominated in U.S. dollars. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 
 PART III 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES Maxcom is not in default under any of its obligations nor is any payment of dividends in arrears. 
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Pursuant to the terms of the exchange offer that was consummated on April 29, 2002, the
indenture governing the old notes was amended to, among other things, eliminate:  
    
    all of the covenants restricting the incurrence of indebtedness, the making of
investments, the granting of loans, the payment of dividends, the creation of liens,
the entering into transactions with affiliates, the undertaking of mergers,
consolidation of sales, the disposition of assets or subsidiary stock, a change in
control and any limitations on the transfer of funds from subsidiaries to Maxcom;
    
    the redemption option in the event of a change of control; and
    
    events of default related to the non-compliance with such covenants, cross-defaults,
adverse judgments in excess of U.S.$5.0 million and certain bankruptcy events. The modification of the restrictive covenants permits Maxcom, absent the existence of similar
covenants under other indebtedness, to take actions that could increase the credit risks, with
respect to Maxcom and its subsidiaries, faced by the holders of the old notes or that could
otherwise be adverse to the interest of the holders of the old notes. 
 ITEM 15. CONTROLS AND PROCEDURES (a) As of the date of this report, we performed an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures. Disclosure controls and procedures
are designed to ensure that the material financial and non-financial information required to be
disclosed on Form 20-F and filed with the SEC is recorded, processed, summarized and reported
timely. The evaluation was performed with the participation of our key corporate senior management
and under the supervision of our Chief Executive Officer, Mr. René Sagastuy and 104




---



##### Table of Contents



our Chief Financial Officer, Mr. José Antonio Solbes. Based on the foregoing, our management,
including our Chief Executive Officer and Chief Financial Officer, have concluded that our
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934, as amended) are effective. (b) There have been no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of the evaluation thereof.
Therefore, no corrective actions with regard to significant deficiencies and material weaknesses
were taken. 
 ITEM 16. A. AUDIT COMMITTEE FINANCIAL EXPERT Our board of directors has determined that Mr. Adrián Aguirre Gómez is an audit committee
financial expert as defined under appropriate Securities and Exchange Commission guidelines. Mr.
Aguirre is also Series A and A-1 Director and Chairman of the Board. B. CODE OF ETHICS We have established a code of ethics that applies to our Chief Executive Officer, Chief
Financial Officer, Principal Accounting Officer and other corporate and divisional employees.
However, our board of directors has not made a determination whether modification of our code of
ethics will be required to comply with Securities and Exchange Commission requirements. C. PRINCIPAL ACCOUNTANT FEES AND SERVICES PricewaterhouseCoopers, S.C. served as our auditors for the years ended December 31, 2004,
2003, 2002 and 2001. The following table sets forth the fees paid to Pricewaterhouse Coopers, S.C
for the financial years ended December 31, 2004 and 2003. Year ended December 312004
    
    
    2003(in millions)Audit Fees(1)
    
    Ps.
    2.6
    
    
    Ps.
    1.5Taxes Fees and Other Statutory Audit requirements fees(2)
    
    
    0.7
    
    
    
    0.7Total revenues
    
    Ps.
    3.3
    
    
    Ps.
    2.2
 
  (2) Taxes Fees and Other Statutory Audit requirements fees includes fees associated with
Mexican statutory audit requirements for tax and other purposes. Taxes Fees and Other Statutory
Audit requirements fees also includes fees incurred for assistance with tax planning and compliance
matters. We have introduced procedures for the review and pre-approval of any services performed by
PWC. The procedures require that all proposed engagements of Pricewaterhouse Coopers, S.C. for
audit and permitted non-audit services are submitted to the audit committee for approval prior to
the beginning of any such services. 105




---



##### Table of Contents



PART IV 
 ITEM 17. FINANCIAL STATEMENTS We have responded to Item 18 in lieu of responding to this Item. 106




---



##### Table of Contents



ITEM 18. FINANCIAL STATEMENTS. PageMaxcom Telecomunicaciones, S.A. de C.V. and SubsidiariesReport of
Independent Registered Public Accounting Firm
    
    
    F-2Consolidated
Balance Sheets as of December 31, 2003 and 2004
    
    
    F-3Consolidated Statements of Operations for the years ended
December 31, 2002, 2003 and 2004
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity for the years ended
December 31, 2002, 2003 and 2004
    
    
    F-5Consolidated Statements of Changes in Financial Position for the years
ended December 31, 2002, 2003 and 2004
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-7Financial Statement SchedulesReport of Independent Accountants on Financial Statement Schedules
    
    
    S-IValuation and Qualifying Accounts
    
    
    S-II
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Mexico, City, March 16, 2005, except for Note 22 for which the date is June 27, 2005 To the Board of Directors and Shareholders of
Maxcom Telecomunicaciones, S. A. de C. V. and Subsidiaries We have audited the accompanying consolidated balance sheets of Maxcom Telecomunicaciones, S. A. de
C. V. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of
operations, of changes in stockholders equity and of changes in financial position for the years
ended December 31, 2004, 2003 and 2002. These consolidated financial statements are the
responsibility of the Companys Management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with the Public Accounting Oversight Board (United States)
and auditing standards generally accepted in Mexico. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by
Management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred above, present fairly, in all
material respects, the financial position of Maxcom Telecomunicaciones, S. A. de C. V. and its
subsidiaries at December 31, 2004 and 2003, and the results of its operations, the changes in its
shareholders equity and the changes in its financial position for the years ended December 31,
2004, 2003 and 2002, in conformity with accounting principles generally accepted in Mexico. F-1




---



##### Table of Contents



Accounting principles generally accepted in Mexico differ in certain significant respects from
accounting principles generally accepted in the United States of America. Information relating to
the nature and effect of such differences is presented in Note 23 to the consolidated financial
statements. PricewaterhouseCoopers José S. Oropeza de la Cruz
Audit Partner F-2




---



##### Table of Contents



MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31, 2004 AND 2003
(Notes 1, 2 and 3) In thousands of Mexican pesos (Ps.) in purchasing poweras of December 31, 2004 and thousands of U.S. dollars ($) 2004
    
    
    2003
    
    
    2004(Unaudited)(Note 2b)ASSETSCurrent assets:Cash and cash equivalents (Note 4)
    
    Ps.
    60,183
    
    
    Ps.
    43,903
    
    
    $
    5,398Restricted cash (Note 5)
    
    
    5,555
    
    
    
    
    
    
    
    49865,738
    
    
    
    43,903
    
    
    
    5,896Accounts receivable:Customers, net of allowance of $63,097 and
$65,512 in 2004
and 2003, respectively
    
    
    116,825
    
    
    
    122,732
    
    
    
    10,478Value-added tax refundable
    
    
    2,597
    
    
    
    
    
    
    
    233Other sundry debtors
    
    
    29,538
    
    
    
    10,263
    
    
    
    2,649148,960
    
    
    
    132,995
    
    
    
    13,360Inventory, net of allowance of $342 and $322 in 2004
and 2003,
respectively
    
    
    11,311
    
    
    
    19,409
    
    
    
    1,014Prepaid expenses-net
    
    
    66,963
    
    
    
    56,446
    
    
    
    6,006Total current assets
    
    
    292,972
    
    
    
    252,753
    
    
    
    26,276Restricted cash (Note 5)
    
    
    12,682
    
    
    
    
    
    
    
    1,137Frequency rights net (Note 6)
    
    
    94,277
    
    
    
    101,269
    
    
    
    8,455Telephone network systems and equipment-net (Note 8)
    
    
    1,726,300
    
    
    
    1,617,231
    
    
    
    154,825Preoperating expenses-net (Note 9)
    
    
    153,492
    
    
    
    188,950
    
    
    
    13,766Intangible assets-net (Note 10)
    
    
    366,128
    
    
    
    411,156
    
    
    
    32,837Rent deposits of $16,146 and $24,871 in 2004 and
2003,
respectively and other assets
    
    
    20,915
    
    
    
    29,620
    
    
    
    1,876Total assets
    
    Ps.
    2,666,766
    
    
    Ps.
    2,600,979
    
    
    $
    239,172LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Interest payable (Note 13)
    
    Ps.
    8,509
    
    
    Ps.
    4,951
    
    
    $
    763Bank loans (Note 12)
    
    
    145,591
    
    
    
    
    
    
    
    13,057Accrued expenses and accounts payable (Note 11)
    
    
    226,380
    
    
    
    131,764
    
    
    
    20,303Customer deposits
    
    
    2,590
    
    
    
    2,242
    
    
    
    232Payroll and other taxes payable
    
    
    46,926
    
    
    
    60,855
    
    
    
    4,209Total current liabilities
    
    
    429,996
    
    
    
    199,812
    
    
    
    38,564Long-term liabilities:Senior notes-net (Note 13)
    
    
    593,441
    
    
    
    2,115,908
    
    
    
    53,223Long term bank loans (Note 12)
    
    
    27,785
    
    
    
    
    
    
    
    2,492Notes payable
    
    
    31,187
    
    
    
    13,690
    
    
    
    2,797Total liabilities
    
    
    1,082,409
    
    
    
    2,329,410
    
    
    
    97,076Commitments and contingencies (Notes 12, 13, 14 and 19)Shareholders equity:Capital stock, no par value (Note 15)
    
    
    2,420,295
    
    
    
    1,843,571
    
    
    
    217,067Additional paid-in capital (Notes 15 and 21)
    
    
    866,612
    
    
    
    1,544
    
    
    
    77,723Accumulated deficit (Note 16):Prior years deficit
    
    
    (1,573,546
    )
    
    
    (1,187,303
    )
    
    
    (141,125
    )Net loss for the period
    
    
    (129,004
    )
    
    
    (386,243
    )
    
    
    (11,569
    )(1,702,550
    )
    
    
    (1,573,546
    )
    
    
    (152,694
    )Total shareholders equity
    
    
    1,584,357
    
    
    
    271,569
    
    
    
    142,096Total liabilities and shareholders equity
    
    Ps.
    2,666,766
    
    
    Ps.
    2,600,979
    
    
    $
    239,172
 The accompanying notes are an integral part of these consolidated financial statements. F-3




---



##### Table of Contents



MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Notes 1, 2 and 3) In thousands of Mexican pesos (Ps.) in purchasing poweras of December 31, 2004 and thousands of U.S. dollars ($) 2004
    
    
    2003
    
    
    2002
    
    
    2004(Unaudited)(Note 2b)Net revenues
    
    Ps.
    868,214
    
    
    Ps.
    805,371
    
    
    Ps.
    586,176
    
    
    $
    77,867Operating costs and expenses:Network operating costs
    
    
    306,395
    
    
    
    289,343
    
    
    
    227,590
    
    
    
    27,479Selling, general and
administrative
expenses
    
    
    374,393
    
    
    
    405,504
    
    
    
    468,916
    
    
    
    33,578Depreciation and amortization
    
    
    334,884
    
    
    
    353,626
    
    
    
    347,330
    
    
    
    30,034Total operating costs and expenses
    
    
    1,015,672
    
    
    
    1,048,473
    
    
    
    1,043,836
    
    
    
    91,060Operating loss
    
    
    (147,458
    )
    
    
    (243,102
    )
    
    
    (457,660
    )
    
    
    (13,224
    )Integral cost (income) of financing:Interest expense
    
    
    37,483
    
    
    
    31,794
    
    
    
    227,105
    
    
    
    3,362Interest income
    
    
    
    
    
    
    (4,397
    )
    
    
    (4,891
    )
    
    
    Exchange loss (gain)  net
    
    
    1,404
    
    
    
    182,117
    
    
    
    225,980
    
    
    
    126Gain on net monetary position
    
    
    (86,168
    )
    
    
    (80,111
    )
    
    
    (110,050
    )
    
    
    (7,728
    )(47,281
    )
    
    
    129,403
    
    
    
    338,144
    
    
    
    (4,240
    )Other income (expense)  net
    
    
    792
    
    
    
    157
    
    
    
    (2,891
    )
    
    
    71Loss before taxes
    
    
    (100,969
    )
    
    
    (372,662
    )
    
    
    (792,913
    )
    
    
    (9,055
    )Provisions for:Asset tax (Note 18)
    
    
    26,937
    
    
    
    12,944
    
    
    
    7,461
    
    
    
    2,416Income tax (Note 18)
    
    
    1,098
    
    
    
    637
    
    
    
    1,013
    
    
    
    9828,035
    
    
    
    13,581
    
    
    
    8,474
    
    
    
    2,514Net loss
    
    (Ps.
    129,004
    )
    
    (Ps.
    386,243
    )
    
    (Ps.
    801,387
    )
    
    ($
    11,569
    )
 The accompanying notes are an integral part of these consolidated financial statements. F-4




---



##### Table of Contents



MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITYFOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Notes 1, 2 and 3) In thousands of Mexican pesos (Ps.) in purchasing poweras of December 31, 2004 and thousands of U.S. dollars ($) Additional
    
    
    
    
    
    
    TotalCapital
    
    
    paid-in
    
    
    Accumulated
    
    
    shareholdersstock
    
    
    capital
    
    
    deficit
    
    
    equity(Note 15)
    
    
    
    
    
    
    (Note 16)Balance at December 31, 2002
    
    Ps.
    1,843,571
    
    
    Ps.
    460
    
    
    Ps.
    (1,187,303
    )
    
    Ps.
    656,728Increase in capital stock
    
    
    
    
    
    
    1,084
    
    
    
    
    
    
    
    1,084Comprehensive net loss (Note 3a. iii)
    
    
    
    
    
    
    
    
    
    
    (386,243
    )
    
    
    (386,243
    )Balance at December 31, 2003
    
    
    1,843,571
    
    
    
    1,544
    
    
    
    (1,573,546
    )
    
    
    271,569Increase in capital stock (Note 15)
    
    
    576,724
    
    
    
    865,068
    
    
    
    
    
    
    
    1,441,792Comprehensive net loss (Note 3a. iii)
    
    
    
    
    
    
    
    
    
    
    (129,004
    )
    
    
    (129,004
    )Balance at December 31, 2004
    
    Ps.
    2,420,295
    
    
    Ps.
    866,612
    
    
    Ps.
    (1,702,550
    )
    
    Ps.
    1,584,357U.S. dollars (Note 2)
    
    $
    217,067
    
    
    $
    7,723
    
    
    $
    (152,694
    )
    
    $
    142,096
 The accompanying notes are an integral part of these consolidated financial statements. F-5




---



##### Table of Contents



MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITIONFOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Notes 1,2 and 3) In thousands of Mexican pesos (Ps.) in purchasing power as ofDecember 31, 2004 and thousands of U.S. dollars ($) 2004
    
    
    2003
    
    
    2002
    
    
    2004(Unaudited)(Note 2b)Operating activities:Net loss
    
    (Ps.
    129,004
    )
    
    (Ps.
    386,243
    )
    
    (Ps.
    801,387
    )
    
    $
    11,569
    )Charges to income not affecting resources:Depreciation and amortization
    
    
    334,884
    
    
    
    353,626
    
    
    
    347,330
    
    
    
    30,034(Increase) decrease in:Accounts receivable-net
    
    
    (15,966
    )
    
    
    (8,759
    )
    
    
    (47,050
    )
    
    
    (1,431
    )Inventory-net
    
    
    8,098
    
    
    
    1,525
    
    
    
    12,024
    
    
    
    726Prepaid expenses-net
    
    
    (10,517
    )
    
    
    (17,493
    )
    
    
    (27,041
    )
    
    
    (943
    )Restricted cash, liabilities and
others-net
    
    
    80,295
    
    
    
    7,784
    
    
    
    144,098
    
    
    
    7,201Resources used for operating activities
    
    
    267,790
    
    
    
    (49,560
    )
    
    
    (372,026
    )
    
    
    24,018Financing activities:Issuance of capital stock
    
    
    576,724
    
    
    
    
    
    
    
    858,867
    
    
    
    51,724Additional paid-in capital
    
    
    865,068
    
    
    
    1,085
    
    
    
    820,064
    
    
    
    77,585(Repayments) Proceeds from loans and
notes payable
    
    
    (1,345,533
    )
    
    
    97,675
    
    
    
    (802,200
    )
    
    
    (120,676
    )Resources provided by (used in) financing activities
    
    
    96,259
    
    
    
    98,760
    
    
    
    876,731
    
    
    
    8,633Investing activities:Investment in telephone network systems
and
equipment, net of dispositions
    
    
    (324,203
    )
    
    
    (114,953
    )
    
    
    (400,775
    )
    
    
    (29,077
    )Intangible assets
    
    
    (32,272
    )
    
    
    (16,630
    )
    
    
    (178,725
    )
    
    
    (2,894
    )Other assets
    
    
    8,706
    
    
    
    (289
    )
    
    
    1,849
    
    
    
    781Resources used for investing activities
    
    
    (347,768
    )
    
    
    (131,872
    )
    
    
    (577,651
    )
    
    
    (31,190
    )Cash and cash equivalents:Net increase (decrease) in cash and cash equivalents
    
    
    16,280
    
    
    
    (82,672
    )
    
    
    (72,946
    )
    
    
    1,461Cash and cash equivalents at beginning of year
    
    
    43,903
    
    
    
    126,575
    
    
    
    199,521
    
    
    
    3,937Cash and cash equivalents at end of year
    
    Ps.
    60,183
    
    
    Ps.
    43,903
    
    
    Ps.
    126,575
    
    
    $
    5,398
 The accompanying notes are an integral part of these consolidated financial statements. F-6




---



##### Table of Contents



MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 In thousands of Mexican pesos (Ps.) in purchasing power as ofDecember 31, 2004 and thousands of U.S. dollars ($) NOTE 1  INCORPORATION AND BUSINESS: Maxcom Telecomunicaciones, S. A. de C. V. (Maxcom or the Company), is a Mexican company
incorporated on February 28, 1996. Its main line of business is the construction and operation of
a telephone network, with the purpose of providing local, national and international long-distance,
data and other value-added services, and virtual private network service, within Mexico. The Company started its commercial operations in May 1999. On February 3, 1997, the Ministry of Communications and Transportation (SCT) awarded the Company
a concession to install and operate a public telecommunications network in Mexico. Subsequently,
on December 7, 1999, September 27, 2001, and December 2, 2004, the Company received amendments to
the initial terms and conditions of the concession. This concession is not exclusive. The initial
term of the concession is 30 years and includes certain renewal rights. The concession grants the
Company the right to provide the services granted in the concession in any part of the Republic of
Mexico. Moreover, the last authorization dated December 2, 2004 sets forth future obligations of
the Company (Note 19d). In October 1997, the Company was awarded seven nationwide point-to-point and three regional
point-to-multipoint microwave concessions, each for 20 years. On January 22, 1999, the Company entered into a contract with Telmex through which Maxcom agreed to
provide Telmex with interconnection services for Telmex  ́s long-distance traffic.
Additionally, the Company subscribed an interconnection service agreement with Telmex, which allows
Maxcom, to finish its long distance traffic in Telmex  ́s network. The Company has negotiated the signing of various amending agreements to the Local Interconnection
Services contract (the contract) with Telmex, to extend the original term of that contract,
irrespective of the fact that the contract provides that the interconnection between the two
companies is carried out based on the clause denominated continuous application. That clause sets
forth that upon termination of the first period, the terms and conditions of the contract will
continue in full force and effect until the parties sign a new contract to continue interconnecting
their networks. F-7




---



##### Table of Contents



In addition, this contract was amended on March 23, 1999, in order to apply a compensation
agreement between the parties with respect to the reciprocal debts in local interconnection
traffic. During 2003 and 2002 the Company entered into various interconnection and reselling agreements with
other local and long distance carriers and mobile phone companies. The COFETEL (Federal Telecommunications Commission) in their session of November 28, 2000 issued a
resolution authorizing the Company to operate as an international port, the station located in
Magdalena No. 211, Mexico City. In August 2002, the Company bought a fiber optic system (2,011 Km), which allows the Company to
operate a network that carries traffic from Mexico City to the Nuevo Laredo border crossing. NOTE 2  BASIS OF PRESENTATION: a. Consolidation - The consolidated financial statements include the accounts of Maxcom and its subsidiaries
Corporativo en Telecomunicaciones, S. A. de C. V. (Corporativo), Maxcom Servicios
Administrativos, S. A. de C. V. (MSA), and Maxcom USA, Inc. (Maxcom USA). Corporativo and MSA
are wholly-owned Mexican subsidiaries. Their main business is to render administrative and
technical services mainly to Maxcom. Maxcom holds 99.99% of the capital stock of Maxcom USA, a
subsidiary that was incorporated on February 3, 2004 in accordance with the laws of the State of
Delaware, USA. Its primary operation is to promote telecommunication services such as international
long-distance traffic, data services, and other value added services from the border at Nuevo
Laredo and through Mexican territory. b. Convenience translation - U.S. dollar amounts ($) shown in the consolidated financial statements have been included solely
for the convenience of the reader and were translated from Mexican pesos, as a matter of
arithmetic computation only, at December 31, 2004, noon-buying rate of Ps.11.15 per U.S.$1.00, as
published by The Federal Reserve Bank of New York. Such translation should not be considered as
a representation that the Mexican peso amounts have been or could be converted into U.S. dollars
at this or any other rate. NOTE 3  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accompanying consolidated financial statements are expressed in Mexican pesos, denoted by the
symbol Ps., and have been prepared in accordance with Accounting Principles Generally Accepted in
Mexico (Mexican GAAP). The significant accounting policies used by the Company in the
preparation of its financial statements, including the concepts, methods and criteria related to
the recognition of the effects of inflation on the financial information, are summarized below: F-8




---



##### Table of Contents



a.
    
    Recognition of the effects of inflation - The financial statements of the Company have been prepared in accordance with Statement
B-10 Recognition of the Effects of Inflation on Financial Information, (Integrated Document)
issued by the Mexican Institute of Public Accountants (MIPA), which provides guidance for the
recognition of the effects of inflation.  i.
    
    The Company restates its income statement to reflect the purchasing power of the
Mexican peso as of the most recent reporting date (December 31, 2004), using a restatement
factor derived from the change in the National Consumer Price Index (NCPI) from the
month in which the transaction occurred to the most recent year-end. The financial
statements have been restated to Mexican pesos as of December 31, 2004 purchasing power,
using the NCPI as of that date. The financial statements of the previous years have also
been restated in terms of the purchasing power of the Mexican peso as of the most recent
financial reporting date, thus making them comparable. The restatement is determined by
using a restatement factor derived from the change in the NCPI, which for 2004 and 2003
was 1.0519 and 1.0397, respectively. Therefore, these amounts differ from those
previously reported.ii.
    
    Capital stock, additional paid-in capital and accumulated deficit represent the value
of these items stated in purchasing power as of the most recent balance sheet date, and are
determined by applying factors derived from the NCPI to the historical amounts.iii.
    
    Comprehensive income (loss) is represented by the net income (loss) plus those items
required by specific accounting standards to be reflected in stockholders equity but which
do not constitute capital contributions, reductions or distributions. It is restated on
the basis of NCPI factors.iv.
    
    The gain or loss on monetary position represents the inflation gain or loss, measured in
terms of the NCPI, on net monthly monetary assets and liabilities for the year, expressed in
pesos of purchasing power as of the most recent balance sheet date.v.
    
    Integral income and cost of financing consists of interest income and expense, exchange
gains or losses, and the gain or loss on the net monetary position. Integral income and
cost of financing during the development stage period was capitalized to preoperating
expenses. Once the Company commenced operations, amortization of these costs began over a
ten-year term.vi.
    
    Statement B-12 Statement of Changes in Financial Position, issued by
the MIPA, specifies the appropriate presentation of the statement of
changes in financial position when the financial statements have been
restated in constant monetary units. Statement
B-12 identifies the sources and applications of resources as the
differences between beginning and ending financial statement balances
in constant monetary units. The F-9




---



##### Table of Contents



Statement also requires that monetary and foreign exchange gains and losses not be treated as
non-cash items in the determination of resources provided by operations.  b.
    
    Cash and cash equivalents -The Company considers highly liquid investments with maturities of three months or less from the
date of purchase to be cash equivalents. These investments are stated at cost, which
approximates fair market value.c.
    
    Inventory -Inventories are constituted by necessary equipment to maintain the telephone network systems, and
their cost of sales, are initially recorded at average cost and are subsequently restated based
on factors derived from the NCPI. Amounts so determined do not exceed its fair value.d.
    
    Telephone network systems and equipment -Telephone network systems and equipment are recorded at acquisition cost and restated by applying
factors derived from the change in the NCPI since their acquisition date.Telephone network equipment held for resale is valued at the lower of acquisition cost or net
realization value, where the acquisition cost is determined on the method last in first out
(LIFO).Depreciation is calculated by the straight-line method over the restated cost, based on the
estimated useful lives of the assets. Depreciation is charged to results of operations.The Company constructs certain of its own network systems and related facilities. Internal costs
directly related to the construction of such facilities are capitalized. Such internal costs
capitalized during the year were Ps.43, 222, Ps.36,765 and Ps.36,171 (including Ps.279, Ps.83 and
Ps. 7,397 of integral cost of financing) in 2004, 2003 and 2002, respectively.The Company capitalizes integral cost of financing attributable to assets under construction.
Capitalized integral financing costs include interest costs, gains from monetary position, and
foreign exchange losses and are determined by reference to the Companys average interest cost on
outstanding borrowings.Maintenance and repairs are expensed as incurred. Replacements and improvements are capitalized.
The cost and related reserves of assets sold or retired are removed from the accounts, and any
resulting gain or loss is reflected in results of operations.The telephone network systems and equipment values are subject of an impairment evaluation (Note
8). F-10




---



##### Table of Contents



e.
    
    Concession -On February 3, 1997, the Ministry of Communications and Transportation awarded the Company a
concession to install and operate a public telecommunications network for a 30-year period. That
concession was subsequently amended in 1999, 2001, and 2004, and currently permits the Company
to render basic telephony services with national coverage, long-distance services, data transfer
services, and other value added services (Note 19d).In accordance with Statment C-8 Intangible Assets, this concession was not recognized for
financial reporting puposes and is only disclosed through notes to the financial statements
(Note 1).f.
    
    Frequency rights -Frequency rights are recorded at acquisition cost and restated by applying factors derived from
the change in the NCPI since acquisition date. Amortization is calculated by the straight-line
method over the term of the frequency rights, which is 20 years (Note 6).g.
    
    Preoperating expenses -All expenses incurred during the development stage or in specific projects in progress are
capitalized. Such expenses are amortized on a straight-line basis over 10 years. The
amortization period begins when the corresponding project commences operations.h.
    
    Intangibles -The intangible assets are recognized in the balance sheet as long as these are identifiable,
provide economic benefits and the Company has control over such benefits. Intangible assets with
a definite life are amortized systematically based on the best estimate of their useful life
determined in accordance with the expected future economic benefits.Purchased software and certain activities of developing internal-use software are capitalized and
amortized over their expected useful lives. Other activities, such as training, maintenance and
re-engineering, are expensed as incurred.Intangible assets carrying value is subject to an annual impairment evaluation (Note 3i).Debt issuance costs are amortized on a straight-line basis over the outstanding term of the
related debt.i.
    
    Long-lived assets evaluation - F-11




---



##### Table of Contents



The Company evaluates the ability to recover its long-lived assets when events and
circumstances indicate that such assets might be impaired. The impairment is determined by
comparing the discounted future cash flows estimated to be generated by these assets to their
respective carrying amounts. In the event impairment exists, a loss is recognized based on the
amount by which the carrying value exceeds the fair value of the asset. If quoted market prices
for an asset are not available, the fair market value is determined primarily using the
anticipated future cash flows discounted at a rate commensurate with the risk involved. Losses on
the property and equipment to be disposed of, are determined in a similar manner, unless the fair
market values are reduced for the cost to dispose (Note 22).j.
    
    Transactions and balances in foreign currencies -Transactions in foreign currencies are recorded at the rates of exchange prevailing on the dates
they are entered into and/or settled. Assets and liabilities denominated in such currencies are
stated at the Mexican peso equivalents resulting from applying the rates prevailing on the
balance sheet date. Exchange differences arising from fluctuations in the exchange rates between
the transactions and settlement dates, or the balance sheet date, are charged or credited to
income.k.
    
    Income tax and statutory employees profit sharing -The Company has incurred tax losses since inception and accordingly has not provided for
income taxes and statutory employees profit sharing.Income tax is recorded by the comprehensive asset-and-liability method, which consists of
recognizing deferred tax on all temporary differences between the book and tax values of
assets and liabilities (Note 18).l.
    
    Management estimates -Generally accepted accounting principles require that, in preparing a Companys financial
statements, management make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclose contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimated.m.
    
    Financial instruments -The Companys financial instruments consist principally of cash and cash equivalents,
restricted cash, accounts receivable and payable, and notes payable. The carrying amounts
of such financial instruments with the exception of Senior Notes, as reflected in the
balance sheet, approximate their fair value as of December 31, 2004 and 2003. The following
table represents the book and fair values of those notes:   F-12




---



##### Table of Contents



2004
    
    
    2003Book value
    
    
    Fair value
    
    
    Book value
    
    
    Fair valueSenior Notes
    
    Ps.
    593,441
    
    
    Ps.
    556,656
    
    
    Ps.
    2,115,908
    
    
    Ps.
    1,892,263
  n.
    
    Revenue recognition -The Company recognizes revenues from telephone services provided to customers, the sale of
customer-premise equipment, services provided to other telephone-service companies (such as
interconnection services), and installation charges.Revenues from services provided to customers, including installation and maintenance, are
recognized in the month the service is rendered. When the installation is not charged to
the customer, the cost is deferred and amortized over the remaining term of concession. The
concession expires in October 2017.Revenues from the sale of customer-premise equipment are recognized at the time of the sale and
delivery and installation of such equipment.Revenue from interconnection services is recognized on an accrual basis. The Company entered
into local interconnection contracts with various telephone companies under the bill and
keep compensatory agreement scheme. In accordance with this agreement, if the imbalance
between local calls originated from the other telephony company and completed by Maxcom, and
the calls originated from Maxcom and completed by the other telephony company over the
course of one month do not exceed a determined percentage, there will be no payment of an
interconnection rate charge to the user of the interconnection services. However, if the
imbalance exceeds that percentage in a determined month, the net user will be subject to a
per minute charge. The percentage of imbalance was 70% for the period February 25, 1999 to
December 31, 2002, 30% for January 1, 2003 to October 31, 2004, 18% for December 1 to 31,
2004, and 15% as of January 2005. In the event that the Company fails to maintain a
significant percentage of residential users, the compensatory agreement will be terminated
and asymmetric interconnection rates could be applied.The Company also has interconnection contracts for long-distance mobile services with other
telephony companies. However, they do not include the feature of the compensatory agreement.During 2003, the Company started a new business line, the lease of transmission capacity through
its fiber optic ring. Revenues from lease of capacity are recorded in deferred revenue as billed
and then recognized ratably into revenue over the term of the contract. F-13




---



##### Table of Contents



Advances from customers are classified as current liabilities until they are refunded. When the
contract is rescinded, these deposits are applied to any outstanding balance with the
respective customer.The Company creates a reserve in the amount of 90% and 100% of account receivable balance due
over 90 but less than 119 days, and over 120 days, respectively except when there is a
negotiated agreement with a customer. In such cases, a reserve is created in the amount of 30%
once accounts receivable balance is 90 days past due and 100% when the balance is due over 120
days.o.
    
    Stock-based compensation -The Company accounts for the activity under the employee stock compensation plans under the
intrinsic value method. Accordingly, compensation expense has been recognized for the intrinsic
value of options granted under these plans. If compensation expense had been determined based on
the fair value of the options at the grant dates, the Companys net income and earnings per share
would have decreased or increased to the pro forma amounts indicated below (in thousands, except
per share amounts): 2004
    
    
    2003
    
    
    2002Net loss of year as reported
    
    (Ps.
    129,004
    )
    
    (Ps.

    386,243
    )
    
    (Ps.

    801,387
    )Add: stock-based employee
compensation expense included
in reported net loss
    
    
    
    
    
    
    8
    
    
    
    14,355Deduct: total stock-based
employee compensation expense
determined under fair value based
method for all awards
    
    
    
    
    
    
    (966
    )
    
    
    (36,453
    )Pro-forma net loss of year
    
    
    (129,004
    )
    
    
    (387,201
    )
    
    
    (823,485
    )Earning loss per share (EPS):Basic, as reported
    
    (Ps.
    0.00
    )
    
    (Ps.

    0.02
    )
    
    (Ps.

    0.06
    )Basic, pro-forma
    
    (Ps.

    0.00
    )
    
    (Ps.

    0.02
    )
    
    (Ps.

    0.06
    )
 The fair value of each option is estimated on the date it is granted using the Black-Scholes
option valuation model with the following weighted-average assumptions used for grants during the
year ended December 31, 2004, 2003 and 2002 respectively with the following assumption: 2004
    
    
    2003
    
    
    2002Expected yield
    
    
    
    
    
    
    
    
    
    
    Expected stock price volatility
    
    
    52.03
    %
    
    
    50
    %
    
    
    50
    %
 F-14




---



##### Table of Contents



2004
    
    
    2003
    
    
    2002Risk-free interest rate
    
    
    2.79
    %
    
    
    2.74
    %
    
    
    4.55
    %Expected life of options
    
    
    3
    
    
    
    3
    
    
    
    5
  Based on a third party valuation management determined that the Series N stock and the
related options had an insignificant value for the year ended 2004 and a result no stock based
compensation expense was recorded..p.
    
    Advertising and promotional costs -The Company expenses costs of advertising and promotions as incurred. Advertising and
promotional expenses were Ps.14,223, Ps.4,133 and Ps.18,110 in 2004, 2003 and 2002,
respectively.q.
    
    Segment reporting-The Statement B-5 Financial Information by Segments requires that companies review their
internal organizational structure and internal reporting system for purposes of identifying
segments. For all years presented, the Company operates only one segment and does not have
any particular geographical location. The revenue by geographical location included in Note
20 is a specific disclosure required by the SCT in the Companys concession title.r.
    
    Long-lived assets -The provisions of Statement C-15, Impairment of the Value of Long-Lived Assets and their
Disposal, issued by the IMCP, went into effect on January 1, 2004. Statement C-15 establishes
general criteria for the identification and, if applicable, recording of impairment losses or
decrease in the value of long-lived tangible and intangible assets, including goodwill. No
impairment was identified or recorded during 2004.s.
    
    New accounting standards -The following accounting standards, which were issued by the Mexican Institute of Public
Accountants (MIPA), went into effect on January 1, 2005. Management believes that an adoption
of these standards will not have a material effect on its consolidated balance sheet,
consolidated statement of operations and statement of changes in financial position.Statement B-7, Acquisitions of Businesses:
Establishes among other things, the purchase method as the only method of accounting for the
acquisition of a business, changes to the accounting treatment of goodwill, eliminating the
amortization of goodwill as from the date on which that statement went into effect and making it
instead subject to annual impairment tests. The statement also provides specific rules for the
acquisition of minority interests and the transfer of assets or the exchange of shares between
entities under common control.Amendments to Statement C-2, Financial Instruments: F-15




---



##### Table of Contents



Its provisions require that the effects of valuing investments available for sale be recorded in
stockholders equity and not in income for the year, and includes rules for determining the
effects of impairment of financial instruments.Statement C-10, Derivative Financial Instruments and Coverage Hedging:
This Statement, besides detailing recording, valuation and disclosure criteria applicable to all
derivative financial instruments, requires that the effectiveness of hedges of cash flows and of
net investment in subsidiaries located abroad be evaluated and that the effective portion of the
gains or losses on hedging instruments be recognized within comprehensive income.Amendments to Statement D-3, Labor Obligations:
These amendments provide additional valuation and disclosure rules for recognizing severance
payments due to events other than restructuring. NOTE 4  CASH AND CASH EQUIVALENTS: Cash and cash equivalents at December 31 consists of: 2004
    
    
    2003Cash
    
    Ps.
    11,724
    
    
    Ps.
    6,807Bank of America: $902 and $1,040 in certificates
of deposit and government instruments, bearing
annual interests at variable rate and 0.7%, respectively
    
    
    10,159
    
    
    
    12,292Santander Serfin: money market instruments,
bearing interest at a variable rate
    
    
    38,300
    
    
    
    Banamex: $24,804 in government
instruments, bearing annual interest of 6.1% in 2003
    
    
    
    
    
    
    24,804Ps.
    60,183
    
    
    Ps.
    43,903
 NOTE 5- RESTRICTED CASH: Pursuant to the credit agreement with Banco Santander Mexicano, S. A. (Note 12), the Company
guaranteed the payment of interest related to the Ps. 100,000 loan, as follows:  a.
    
    In accordance with the loan agreement in effect, the Company must maintain a cash balance on
a monthly basis of Ps.5,555 in an account with HSBC, S.A., used for operations, to guarantee
the monthly principal payments under the loan.b.
    
    In addition, the Company is required to maintain Ps. 12,682 in a trust to guarantee the
payment of two months of principal and accrued interest through the maturity of the loan. NOTE 6  FREQUENCY RIGHTS: F-16




---



##### Table of Contents



Frequency rights at December 31 consist of the following: 2004
    
    
    2003Frequency rights
    
    Ps.
    139,846
    
    
    Ps.
    139,846Less  Accumulated amortization
    
    
    (45,569
    )
    
    
    (38,577
    )Ps.
    94,277
    
    
    Ps.
    101,269
 On October 3, 1997, the Mexican Federal Government granted the Company ten concessions to use and
exploit different bands of the radio-electric spectrum and to establish point-to-point and
point-to-multi-point microwave links; seven of them are nation wide point-to-point and three
regional point-to-multipoint microwave concessions. The frequency rights became effective February
28, 1998, and will run through the year 2018. In accordance with the terms of these frequency rights, the Company must provide to the Mexicos
Ministry of Communications and Transportation (the SCT) a guarantee on its operation and renew it
every year (Note 19e). For the years ended December 31, 2004, 2003 and 2002, the Company recorded amortization expense for
these frequency rights in the amount of Ps.6,992, Ps.12,938 and Ps.6,992, respectively. NOTE 7  TRANSACTIONS WITH RELATED PARTIES: For the years ended December 31, related party transactions were as follows: 2004
    
    
    2003
    
    
    2002Office and site lease (1)
    
    Ps.
    264
    
    
    Ps.
    231
    
    
    Ps.
    230Compensation in connection with the operation
agreement and other expenses with CT Global
Telecommunications, Inc. (2)
    
    
    
    
    
    
    
    
    
    
    173Travel expenses to Bachow and Associates (5)
    
    
    31
    
    
    
    273
    
    
    
    159Commissions paid to Francisco Adrián Aguirre
Palme (4)
    
    
    58
    
    
    
    
    
    
    
    Travel expenses to Bank Boston (5)
    
    
    
    
    
    
    
    
    
    
    14Expenses to Bank of America (3)
    
    
    397
    
    
    
    209
    
    
    
    234Advertising and other management services to
Operadora Plusgamma (6)
    
    
    
    
    
    
    306
    
    
    
    3,817Comissions and management services to
Comercializadora Road el Camino (7)
    
    
    37
    
    
    
    48
    
    
    
    579Advertising services provided by Difusión
Panorámica (8)
    
    
    88
    
    
    
    
    
    
    
    Ps.
    875
    
    
    Ps.
    1,067
    
    
    Ps.s
    5,206
 F-17




---



##### Table of Contents



(1)
    
    The Company leases a site, which is located within the premises of Radio Centro Group, which
is controlled by the family of one of the shareholders, Adrian Aguirre Gómez.(2)
    
    It relates to the reimbursement of travel expenses for Board meetings.(3)
    
    2004 expenses include travel expenses reimbursements and expenses relating to the debt
restructuring. The expenses during 2003 and 2002, relate to travel expenses reimbursements
only.(4)
    
    During 2004, the Company paid sales commissions to a family of one of the shareholders,
Adrian Aguirre Gómez.(5)
    
    Reimbursement of travel expenses to certain shareholders.(6)
    
    For the years 2003 and 2002, advertising expense related to an advertising purchase agreement
of $3,000, signed in April 2003, for advertising service that is being provided by Grupo Radio
Centro from its subsidiary Operadora Plusgamma. The Aguirre Gómez family used the $3,000
proceeds from this agreement to purchase Series A1 stock, pursuant to the private equity
investment.(7)
    
    2004 expenses relate to sales commissions paid. Expenses during 2003 and 2004 were related to
administrative services.(8)
    
    Advertising expenses paid to Difusión Panorámica, a company owned by an affiliate of one of
the shareholders. NOTE 8  TELEPHONE NETWORK SYSTEMS AND EQUIPMENT, NET: At December 31 consists of: Useful life (1)2004
    
    
    2003
    
    
    (years)Office furniture
    
    Ps.
    16,624
    
    
    Ps.
    16,066
    
    
    
    10Transportation equipment
    
    
    25,731
    
    
    
    25,150
    
    
    
    4Engineering equipment
    
    
    11,012
    
    
    
    11,000
    
    
    
    10Computer equipment
    
    
    58,751
    
    
    
    52,326
    
    
    
    3.33Telecommunication network and equipment
    
    
    1,259,954
    
    
    
    1,215,864
    
    
    
    10Electronic equipment
    
    
    223,237
    
    
    
    234,561
    
    
    
    3.33Radio equipment
    
    
    273,166
    
    
    
    269,769
    
    
    
    10Leasehold improvements
    
    
    305,284
    
    
    
    289,951
    
    
    
    20
    (2)Other
    
    
    16,729
    
    
    
    15,653
    
    
    
    10
 F-18




---



##### Table of Contents



Useful life (1)2004
    
    
    2003
    
    
    (years)Capitalized internal costs
    
    
    157,224
    
    
    
    113,995Installation costs
    
    
    231,849
    
    
    
    181,415Subtotal
    
    
    2,579,561
    
    
    
    2,425,750Less: Accumulated depreciation and amortization
    
    
    (1,077,341
    )
    
    
    (879,612
    )Plus: Construction in progress
    
    
    224,080
    
    
    
    71,093Ps.
    1,726,300
    
    
    Ps.
    1,617,231
 
 (1)
    
    Useful lives accounted from date of use.(2)
    
    Or life of the lease, whichever is shorter. For the years ended December 31, 2004, 2003 and 2002, the Company recorded depreciation and
amortization expense (including leasehold improvements) of Ps.215,157, Ps.234,431 and Ps.246,250,
respectively. During 2002, the Company wrote-off leasehold improvements related to its vacancy of its previous
corporate building lease of Ps.9,956 net of accumulated amortization of Ps.1,528. NOTE 9  PREOPERATING EXPENSES: For the years ended December 31, 2004, 2003 and 2002, the Company recorded amortization expense of
Ps.35,435, Ps.34,924 and Ps.34,924, respectively. Accumulated amortization as of December 31, 2004
and 2003 was Ps.197,822 and Ps.162,378, respectively. NOTE 10  INTANGIBLE ASSETS: At December 31 consist of: 2004
    
    
    2003Software licenses
    
    Ps.
    133,367
    
    
    Ps.
    120,291Infrastructure rights
    
    
    266,213
    
    
    
    265,367Debt issuance costs
    
    
    256,084
    
    
    
    238,535655,664
    
    
    
    624,193Accumulated amortization
    
    
    (289,536
    )
    
    
    (213,037
    )Ps.
    366,128
    
    
    Ps.
    411,156
 F-19




---



##### Table of Contents



For the years ended December 31, 2004, 2003 and 2002, the Company recorded amortization expense of
Ps.77,299, Ps.71,321 and Ps.66,148, respectively. These amounts include Ps.30,893, Ps.32,710 and
Ps.21,762 of software amortization expense, respectively. NOTE 11  ACCRUED EXPENSES AND ACCOUNTS PAYABLE: As of December 31, 2004 and 2003 the accounts payable consist of: 2004
    
    
    2003Vendors
    
    Ps.
    113,301
    
    
    Ps.
    59,702Suppliers
    
    
    47,407
    
    
    
    20,028Accruals
    
    
    35,171
    
    
    
    26,280Other accounts payable
    
    
    30,501
    
    
    
    25,754Ps.
    226,380
    
    
    Ps.
    131,764
 NOTE 12  BANK LOANS: The Company has three credit lines with Banco Santander Mexicano, S.A.: (a) On April 28, 2004, the Company obtained a line of credit of $1,980 (U.S. dollars), which
generates interest at a monthly LIBOR rate plus 1.9 additional percentage points. The initial term
of the line of credit was for 5 months; subsequently an extension was negotiated through October
15, 2005. (b) On August 17, 2004, the Company obtained a line of credit of Ps.55,941 with a monthly TIIE
interest rate plus 1.0 additional percentage points. The initial term of the line of credit was 2
months, subsequently an extension was negotiated through October 15, 2005. (c) On November 5, 2004, the Company obtained a line of credit from Banco Santander Mexicano, S. A.
of Ps.100,000 with a monthly TIIE interest rate plus 1.2 additional percentage points. The terms of
the line of credit provide for the monthly payment of principal in accordance with the amortization
table set forth in the contract, which considers average monthly payments in the amount of
Ps.5,555, plus accrued interest of the period. The term of the line of is for 18 months and the
maturity date is May 10, 2006. Pursuant to this contract, the Company created a trust that guarantees the payment of the interest
generated by the Ps. 100,000 line of credit (Note 5). F-20




---



##### Table of Contents



NOTE 13  LONG-TERM DEBT: At December 31 consists of: 2004
    
    
    2003$11,590: 133/4% Notes due April, 2007
    
    Ps.
    130,559
    
    
    Ps.
    136,986$5,118 and $167,624 in 2004 and 2003, respectively,
Old Notes, which will bear 0% interest up to March
2006. Effective 2006, interest will be generated at a 10% rate.
    
    
    57,652
    
    
    
    1,981,184$36,118: New Notes that bear interest at a variable
interest rate from 4% to 11.25% up to October 2009.
    
    
    406,860
    
    
    
    Less-Discount (net accumulated amortization)
    
    
    (1,630
    )
    
    
    (2,262
    )Ps.
    593,441
    
    
    Ps.
    2,115,908
 On March 17, 2000, Maxcom issued $300,000 in promissory notes (133/4% Notes) due on April 1, 2007.
Those Original Senior Notes accrued interest at a 133/4% annual rate (14.46% including the
withholding tax effect in accordance with currently enacted tax legislation), payable every
semester on April 1 and October 1 every year. During May and June 2001, the Company spent $10,000
on the repurchase of a portion of the 133/4% Notes outstanding, with a face value amounting to
$25,000. At the beginning of 2002, the Company started a negotiation process with the holders of the 133/4%
Notes to exchange this debt. On April 29, 2002, the Company announced the completion of the
exchange offer of the 133/4% Notes. As a result of this agreement, holders tendered an aggregate of
$259,410 in principal amount of the 133/4%Notes, which represented 94.3% of the outstanding 133/4%
Notes, in exchange for an aggregate of $165,078 in principal amount of Notes due March 1, 2007
(Old Notes), bearing 0% interest through March 1, 2006, and 10% annual interest in the last year.
Additionally, holders who accepted the exchange offer received 26,459,820 series N-2 convertible
preferred stock, with an initial liquidation preference of U.S.$0.4927 per share and limited voting
rights, in the form of Common Participation Certificates (CPOs). In addition, on July 25, 2002, the Company announced the completion of a complement to the exchange
offer of the 133/4% Notes in the amount of $4,000. That transaction was carried out on the same terms
as the offer completed on April 29, 2002. Holders who accepted the exchange offer received $2,545
in principal amount of Old Notes due March 1, 2007, bearing 0% interest through March 1, 2006, and
10% annual interest in the last year, and 408,000 series N-2 convertible preferred stock, with an
initial liquidation preference of U.S.$0.4927 per share and limited voting rights, in the form of
Common Participation Certificates (CPOs). F-21




---



##### Table of Contents



Subsequently, on October 8, 2004, the Company completed an exchange offer and consent solicitation
in the amount of $167,624. Holders tendered an aggregate of $162,506 in principal amount of Old
Notes in exchange for an aggregate of:  i)
    
    $36,118 in principal amount of New Step-Up Notes due 2009, bearing an annual interest
rate of 4.00% from October 8, 2004 through April 14, 2005, 5.75% from April 15, 2005
through October 14, 2005, 7.75% from October 15, 2005 through April 14, 2006, 8.25% from
April 15, 2006 through October 14, 2006, 9.25% from October 5, 2006 through October 14,
2007, 10.25% from October 15, 2007 through October 14, 2008, and 11.25% from October 15,
2008 through October 14, 2009 (the New Notes).ii)
    
    101,110,338 shares of our Series N-1 Preferred Stock, at a conversion price of $1.25
per share, $0.75 was recorded as stock subscription premium and $0.50 as capital stock,
increasing total shareholders equity by $ 126,388. The indenture governing the Old Notes and the New Notes contains restrictive covenants including;
limitations on indebtedness; limitations on investments, the redemption of capital stock,
prepayment of subordinated obligations, and granting of loans; restrictions on distributions from
restricted subsidiaries; limitations on sales of assets and subsidiary stock; limitation on
affiliate transactions; limitation of sale or issuance of capital stock of restricted subsidiaries;
limitations on liens; limitation on sale/leaseback transactions; and restrictions on mergers and
consolidations, among others items. If an event of default occurs and is continuing, the trustee or
the holders of 25% in principal amount of the outstanding notes may declare the principal and any
accrued, but unpaid, interest on all the notes to be due and payable. NOTE 14  LABOR OBLIGATIONS: As of December 31, 2004 and 2003, the Company had the following labor obligations: Seniority premiums, to which employees are entitled upon termination of employment after 15 years
of service, are recorded as a cost of the years in which the respective services are rendered. Statement D-3 Labor Obligations issued by the MIPA requires determining the seniority premiums
based on actuarial studies carried out using the projected unit credit method. During the years
2004 and 2003, the Company did not recognize its labor obligations in accordance with this method. Other compensation based on seniority to which employees may be entitled in the event of dismissal
or death, in accordance with the Federal Labor Law, is recorded in the consolidated statement of
operations in the year in which it becomes payable. As of December 31, 2004 and 2003, these
obligations were insignificant due to lack of seniority of the majority of the Companys employees. NOTE 15  CAPITAL STOCK: F-22




---



##### Table of Contents



Under Mexican Federal Telecommunications Law and Foreign Investment Law, no more than 49% of the
full voting capital stock of a Mexican corporation holding a concession to provide local and
long-distance telecommunication services may be held by foreigners. On April 11, 2002, the Company obtained an authorization from the Mexican Foreign
Investment Bureau (Dirección General de Inversión Extranjera) to increase its ability to
issue limited voting shares up to 95% of its total capital stock and simplify its
equity structure. Under the capital restructuring effective April 29, 2002 (Note 13), tendering holders received an
aggregate of 26,459,820 Series N2 convertible preferred shares, with an initial liquidation
preference of $0.4927 per share and limited voting rights, in the form of CPOs. Private equity
investors paid $59,340 and received 6,088,896 and 5,848,209 shares of Series A1 and B1,
respectively, common voting stock with preferred liquidation rights and 122,468,441 Series N1
preferred shares with limited voting rights. In addition, options to purchase an additional 33.2
million Series N shares were granted. Additionally, the Series C shares were converted at a
1:1 ratio into Series N shares. As a result, the holders of the CPOs have become the direct
holders of Series N shares for each CPO. Additionally, on July 25, 2002, the Company announced a
complement of the restructuring debt issuing an aggregate of 408,000 Series N2 convertible
preferred shares, with an initial liquidation preference of $0.4927 per share and limited voting
rights in the form of CPOs. In connection with the capital restructuring mentioned, the Company issued four new classes of
shares: the Series A1, B1, N1, and N2 preferred shares. The Series A1 and B1 preferred
shares have full voting rights, and the Series N1 and N2 preferred shares have limited voting
rights. The Series N1 and N2 preferred shares are not computed for purposes of determining the
foreign investment percentage under the Mexican Foreign Investment Law and may be subscribed, paid
for, and held by Mexican and non-Mexican investors. Series N2 preferred shares have been
deposited into the CPO trust, which is administered by Banco Nacional de México, S.A. In November, 2002, as previously approved by the Shareholders Meeting held on March 5, 2002, the
Company issued 356,433 Series N, Class II, non par value, limited voting rights, shares of the
capital stock of the Company in connection with the exercise of certain signing bonuses granted to
several officers of the Company as stock options during 2002 and 2001. Additionally, the Company
authorized the grant of a special retention bonus to its officers in connection with the
consummation of the Exchange Offer and Consent Solicitation, in the form of cash and options to
purchase an aggregate amount of 462,936 Series N, Class II, non par value, limited voting rights
shares at a strike price per share of $0.4927. The executive officers used the cash to exercise
the options at the grant date. On December 31, 2002, based on the Mexican Corporate Law (Ley General de Sociedades Mercantiles)
Article 19, the Company compensated its restated additional paid-in capital and the effects of
inflation in capital stock by Ps.937,883 and Ps.143,748, respectively, against Ps.1,081,631 of
accumulated losses. F-23




---



##### Table of Contents



In May 2004, Mr. Rene Sagastuy (New Chief Executive Officer of the Company) received a
contract-signing bonus of 100,000 options for the acquisition of an equal number of Series N
shares at an exercise price per share of $0.01. In accordance with the capital restructuring completed on October 8, 2004 (Note 13) Old Senior
Notes in the amount of $126,388 were exchanged for an aggregate of 101,110,338 shares with no par
value shown, of which 96,776,597 were Series N1 shares and 4,333,741 Series B1 shares at a
subscription price of $1.25 per share, of which $0.75 was recorded as premium on subscription of
stock and $0.5 as capital stock. In addition, an exchange of shares was made as follows (i) the holders of all Series B shares
(1,226,373 shares) exchanged those shares for Series A shares at a 1:1 ratio; (ii) 4,333,741
Series N1 shares were exchanged for Series B1 shares, issuing an equal number of shares at a
1:1 ratio; and 1,905,843 Series N shares were exchanged for Series A shares at a 1:1 ratio.
These exchanges were approved at the Annual General Extraordinary Stockholders Meetings held on
August 23, 2004. At the General Extraordinary Stockholders Meeting held on December 17, 2004, the stockholders
approved the cancellation of the 26,040,990shares of Series N Class II capital stock held in
treasury and the issuance of an equal number of share with no par value, as follows: (i) 3,361,483
Series N shares, Class II and (ii) 22,679,507 Series N1 shares, Class II, to be held in
treasury to meet certain commitments under option and warrant agreements, which have been approved
by the Stockholders and the Board of Directors of the Company. As of December 31, the Companys outstanding shares were as follows: 2004
    
    
    2003
    
    
    2002Capital stock:Series A
    
    
    4,508,644
    
    
    
    1,276,428
    
    
    
    1,276,428Series A 1
    
    
    6,088,896
    
    
    
    6,088,896
    
    
    
    6,088,896Series B
    
    
    
    
    
    
    1,226,373
    
    
    
    1,226,373Series B 1
    
    
    10,181,950
    
    
    
    5,848,209
    
    
    
    5,848,209Series N
    
    
    10,331,670
    
    
    
    12,237,513
    
    
    
    12,065,013Series N 1
    
    
    219,245,038
    
    
    
    122,468,441
    
    
    
    122,468,441Series N 2
    
    
    26,867,820
    
    
    
    26,867,820
    
    
    
    26,867,820Total issued and outstanding
    
    
    277,224,018
    
    
    
    176,013,680
    
    
    
    175,841,180Authorized and not outstanding:Series N
    
    
    3,361,483
    
    
    
    26,603,926
    
    
    
    38,001,255Series N1
    
    
    22,679,507
    
    
    
    
    
    
    
    Total authorized
    
    
    303,265,008
    
    
    
    202,617,606
    
    
    
    213,842,435
 As of December 31, 2004 and 2003, the total outstanding shares, 765,714 Series A shares and
763,113 Series B shares represent the minimum fixed portion, with no withdrawal rights, of F-24




---



##### Table of Contents



Maxcoms capital stock, while the remaining A, A1, B, B1, N, N1 and N2 Series shares
represent the variable portion of the capital stock. As of December 31, the Companys capital stock consists of: 2004
    
    
    2003Capital stock
    
    Ps.
    2,255,565
    
    
    Ps.
    1,773,065Restatement for effects of inflation
    
    
    164,730
    
    
    
    70,506Total capital stock
    
    Ps.
    2,420,295
    
    
    Ps.
    1,843,571
 NOTE 16  ACCUMULATED DEFICIT: Dividends, either in cash or other forms, paid by the Company are subject to income tax in
accordance with the Mexican Income Tax Law if the dividends are paid from earnings that have not
been subject to Mexican income taxes computed on an individual company basis under the provisions
of the Mexican Income Tax Law, as follows: Dividends paid are not subject to income tax if paid from the Net Tax Profit Account and, will be
taxed at a rate that fluctuates between 4.62% and 7.69% if they are paid from the reinvested Net
Tax Profit Account. Any dividends paid in excess of this account are subject to a tax equivalent
to 42.85%, 40.84% or 38.91% depending on whether paid in 2005, 2006 or 2007, respectively. The tax
is payable by the Company and may be credited against its income tax in the same year or the
following two years. Dividends paid from previously taxed profits are not subject to tax
withholding or additional tax payment. In the event of a capital reduction, any excess of stockholders equity over capital contributions,
the latter is restated in accordance with the provisions of the Income Tax Law, is accorded the
same tax treatment as dividends. The Company has never generated distributable profits. Any dividends declared will be paid in
Mexican pesos. NOTE 17  POSITION IN FOREIGN CURRENCY: As of December 31, the Companys foreign-currency position is as follows: 2004
    
    
    2003U.S. dollars:Assets
    
    $
    7,357
    
    
    $
    5,452Liabilities
    
    
    (69,481
    )
    
    
    (190,274
    )Net liabilities in U.S. dollars
    
    ($
    62,124
    )
    
    ($
    184,822
    )Exchange rate at end of the year (Ps. per U.S.$1.00)
    
    Ps.
    11.26
    
    
    Ps.
    11.24
 F-25




---



##### Table of Contents



The Company currently does not hedge any of its foreign-denominated assets or liabilities. The exchange rate at the issuance date of the financial statements was Ps.11.2038 per U.S.$1.00
published by the Official Gazette. NOTE 18  INCOME TAX, ASSET TAX AND TAX-LOSS CARRYFORWARDS: The Company and its subsidiaries are subject separately to the payment of income tax and asset tax,
which are computed by each legal entity. Maxcom Telecomunicaciones, S.A. de C.V. has had tax losses since inception. The difference between
taxable income for income tax and pre-tax income for accounting purposes is due principally to the
inflation adjustments recognized for income tax purposes, translation effects due to the
re-measurement into dollars, the difference between book and tax depreciation and amortization, and
temporary differences for certain items that are reported in different periods for financial
reporting and income tax purposes. For the years ended December 31, 2004, 2003 and 2002, the
Company incurred a tax loss of Ps.15,372 (estimated), Ps.264,840 and Ps. 785,839, respectively. The asset tax presented in the statement of operations corresponds to Maxcom and Corporativo
totaling Ps.26,957, Ps.12,922 and Ps. 7,304 , and Ps.0, Ps.23 and Ps.77 on 2004, 2003 and 2002,
respectively, and the income tax corresponds to Maxcom Servicios Administrativos, S.A. de C.V.
totaling Ps.444, Ps.637 and Ps.1,013 in 2004, 2003 and 2002, respectively. The components of deferred income tax assets (liabilities) at December 31 are as follows: 2004
    
    
    2003CURRENT:Allowance for doubtful accounts
    
    Ps.
    20,191
    
    
    Ps.
    21,619Inventory
    
    
    (3,620
    )
    
    
    (6,405
    )Prepaid expenses
    
    
    (21,866
    )
    
    
    (18,627
    )Accruals
    
    
    70,028
    
    
    
    52,911Total current
    
    
    64,733
    
    
    
    49,498NON-CURRENT:Telephone network equipment and leasehold
 F-26




---



##### Table of Contents



2004
    
    
    2003improvements, frequency rights, intangible
assets and preoperating expenses, net.
    
    
    (295,905
    )
    
    
    (242,166
    )Asset tax payments
    
    
    32,175
    
    
    
    20,718Tax loss carry forwards
    
    
    1,042,500
    
    
    
    1,034,367Total non-current
    
    
    778,770
    
    
    
    812,919Net deferred income tax assets before valuation
allowance
    
    
    843,503
    
    
    
    862,417Valuation allowance
    
    
    (843,503
    )
    
    
    (862,417
    )Net deferred income tax assets (liabilities)
    
    Ps.
    
    
    
    Ps.
    
 In accordance with Mexican Income Tax Law, tax losses are subject to restatement by inflation and
may be carried forward against future taxable profit of the subsequent ten years. As of December 31, 2004, the Companys restated cumulative tax losses were: Incurred for the year
    
    
    
    
    
    
    
    
    
    Expirationended December 31,
    
    
    
    
    
    Amount
    
    
    year1996
    
    
    
    
    
    Ps.
    7,610
    
    
    
    20061997
    
    
    
    
    
    
    27,153
    
    
    
    20071998
    
    
    
    
    
    
    174,569
    
    
    
    20081999
    
    
    
    
    
    
    443,346
    
    
    
    20092000
    
    
    
    
    
    
    595,251
    
    
    
    20102001
    
    
    
    
    
    
    825,613
    
    
    
    20112002
    
    
    
    
    
    
    882,559
    
    
    
    20122003
    
    
    
    
    
    
    278,585
    
    
    
    20132004
    
    
    
    
    
    
    15,372
    
    
    
    2014Ps.
    3,250,058
 NOTE 19  COMMITMENTS AND CONTINGENCIES: At December 31, 2004, the Company had the following commitments: a) Lease agreements: The Company maintains operating leases on buildings, sites, poles and office equipment. The
Company recorded lease expenses of Ps. 58,137, Ps. 58,502 and Ps. 71,660 in 2004, 2003 and 2002,
respectively. The schedule of estimated future minimum lease payments is as follows: F-27




---



##### Table of Contents



20042005
    
    Ps.
    22,7752006
    
    
    18,3182007
    
    
    15,5932008
    
    
    12,7442009 and thereafter
    
    
    88,223Ps.
    157,653
 b) Previous corporate building lease agreement (Magdalena building): In September 2002, the Company commenced actions against the landlord of the Magdalena building,
seeking the termination of a 15-year lease (expiring on September 30, 2013) of 70,500 square feet
plus parking space in that building, which was its former headquarters. The action was based on
claims of miscalculation of lease payment amounts and breaches of certain city compliance
regulations. The landlord counterclaimed alleging failure to make lease payments. In May 2003, the Company reached an agreement with the landlord. Pursuant to this agreement, the
Company retained a leasehold interest through May 2013 on the first floor, where one of its Lucent
5ESS switches is located, the rooftop, where they have three microwave transmission antennas and a
part of the basement, which is used for parking and to place some of the electric equipment that
supports the switch. The Company was also released from its lease obligation for approximately
35,887 square feet plus parking space of the building originally running through September 30,
2013, including past-due lease payments dating back to October 2002. In exchange for the
concessions granted by the landlord and the new lease agreement, Maxcom has agreed to pay $2,700
during the next year, which has been paid in installments from May 2003. c) Current corporate building lease agreement: The Company entered into a new 5-year renewable building lease on July 26, 2001, which is
denominated in U.S. dollars. The schedule of future minimum lease payments on said lease is as
follows: 20042005
    
    $
    2,6382006
    
    
    2,7022007
    
    
    461$
    5,801
 d) Coverage commitment: The amendment agreement to the national concession to install and operate a public
telecommunications network in Mexico, entered into on December 2, 2004, sets forth a capacity F-28




---



##### Table of Contents



installation program to attain a certain number of lines by 2006 year-end. Furthermore, it sets
forth a geographic expansion commitment up to 2014. The Company, among other terms, should comply with the capacity installation and geographic
expansion commitment discussed above in order for the concession to remain in effect. e) Contingency related to frequency fees: The Company has failed to meet its obligation of furnishing the Ministry of Communications and
Transportation (SCT) with the renewal of the surety bond of the year 2004. Management is
currently negotiating the amendment of certain terms to assure performance of the obligations set
forth in the concessions. NOTE 20  REVENUE BY GEOGRAPHICAL LOCATION: The Companys concession title requires a revenue report by geographic location (i.e. regions of
the country) as follows: Mexico City
    
    
    Center-Services
    
    (Metropolitan area)
    
    
    South
    
    
    TotalYear ended December 31, 2004:Local
    
    Ps.
    447,835
    
    
    Ps.
    259,430
    
    
    Ps.
    707,265Long distance
    
    
    88,189
    
    
    
    47,018
    
    
    
    135,207Rent of dedicated links
    
    
    448
    
    
    
    912
    
    
    
    1,360Sale of equipment
    
    
    3,545
    
    
    
    1,954
    
    
    

    5,499Lease of capacity
    
    
    17,707
    
    
    
    
    
    
    
    17,707Other
    
    
    1,176
    
    
    
    
    
    
    
    1,176Ps.
    558,900
    
    
    Ps.
    309,314
    
    
    Ps.
    868,214
 Mexico City
    
    
    Center-Services
    
    (Metropolitan area)
    
    
    South
    
    
    TotalYear ended December 31, 2003:Local
    
    Ps.
    407,495
    
    
    Ps.
    245,265
    
    
    Ps.
    652,760Long distance
    
    
    71,602
    
    
    
    45,213
    
    
    
    116,815Rent of dedicated links
    
    
    3,134
    
    
    
    548
    
    
    
    3,682Sale of equipment
    
    
    15,173
    
    
    
    2,000
    
    
    
    17,173Lease of capacity
    
    
    14,754
    
    
    
    
    
    
    
    14,754Other
    
    
    187
    
    
    
    
    
    
    
    187Ps.
    512,345
    
    
    Ps.
    293,026
    
    
    Ps.
    805,371
 F-29




---



##### Table of Contents



Mexico City
    
    
    Center-Services
    
    (Metropolitan area)
    
    
    South
    
    
    TotalYear ended December 31, 2002:Local
    
    Ps.
    300,865
    
    
    Ps.
    191,328
    
    
    Ps.
    492,193Long distance
    
    
    37,910
    
    
    
    35,735
    
    
    
    73,645Rent of dedicated links
    
    
    4,841
    
    
    
    600
    
    
    
    5,441Sale of equipment
    
    
    4,243
    
    
    
    2,110
    
    
    
    6,353Lease of capacity
    
    
    185
    
    
    
    
    
    
    
    185Other
    
    
    4,165
    
    
    
    4,194
    
    
    
    8,359Ps.
    352,209
    
    
    Ps.
    233,967
    
    
    Ps.
    568,176
 NOTE 21  STOCK OPTION PLANS: a. Employee stock option plans  i.
    
    Executive stock option plan -In May 1998, the Company implemented an executive stock option plan. This plan provided that
the Company grant options, on every April 1, commencing in 1999 through April 2001, to its
executive officers. Under this plan, a technical committee determined the executive officers
to whom options to purchase Series N shares were granted, as well as the terms of those
options. Grants were awarded once certain criteria were met and vested either immediately or
over four years (20% upon grant and 20% each year thereafter). In the event the employee
ceases to be employed by the Company, all unvested options are forfeited. Options expire ten
years from the date of grant.At December 31, 2004, 304,502 options under the plan are outstanding of which 256,094 are
fully vested and are exercisable.ii.
    
    New executive stock option planThe Company implemented a new executive stock plan, for the services
rendered during the years 2004, 2003, 2002 and 2001. The plan is
divided into four levels, depending on the ranking of the different
members of management. There were initially 80 participants in the
plan. Participants in the top three levels are guaranteed a minimum
number of options for series N stock. The granting of options for
the fourth level, which is comprised of the junior management, is
discretionary. Options expire ten years from the date of grant.The number of options authorized for grant depends on certain revenue
and operating cash flow targets and granting of awards is at the
discretion of the management and the Board F-30




---



##### Table of Contents



of Directors. There is a bonus portion of the plan that is allocated to individual
executives at the discretion of management and the Board of Directors. Vesting is 20% upon
grant and 20% per year for the next four years. As of December 31, 2004 no options have been
granted under the new executive stock option plan.iii.
    
    Board of Directors and members of various committeesMembers of the Board and of the various committees of the Company are entitled to receive an
option to purchase 2,500 series N shares at an exercise price of $0.01 per share, each time
the member attends a meeting and the president of the Board is entitled to receive 5,000
options for the attendance of a Board of Directors meeting. As of December 31, 2004 there are
532,500 options granted for the meetings that were held during 2004, 2003, 2002 and 2001
which are exercisable. The right to exercise these options expires after three years counted
from the date of grant and options are exercisable upon grant.iv.
    
    Signing and other bonusesFrom time to time management and the Board of Directors issue signing, special and other bonuses in the form of
stock options. As of December 31, 2004 there are 3,626,959 options for the purchase Series N shares outstanding
of which 1,886,019 options are exercisable.At December 31, 2004 575,000 shares of Series N and 22,455,873 of Series N-1 stock were authorized for issuance
upon exercise of employee stock options. At the December 17, 2004 board meeting series N-1 shares were authorized
for issuance in place of series N shares, however no awards were modified during the year.In connection with the all of the above-described plans, the Company recognized compensation expense of nil, Ps.8
and Ps.14,355 during 2004, 2003 and 2002.A summary of the changes of the stock options for employees for the year ended December 31, 2004 is presented (in
thousands of shares): 2004
    
    
    2003
    
    
    2002Weighed-
    
    
    
    
    
    
    Weighed-
    
    
    
    
    
    
    Weighed-average
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseShares
    
    
    price
    
    
    Shares
    
    
    price
    
    
    Shares
    
    
    priceOutstanding at beginning of year
    
    
    4,377
    
    
    $
    1.16
    
    
    
    15,935
    
    
    $
    0.56
    
    
    
    1,145
    
    
    $
    10.12Granted
    
    
    187
    
    
    
    0.01
    
    
    
    318
    
    
    
    0.27
    
    
    
    16,377
    
    
    
    0.34Exercised
    
    
    100
    
    
    
    0.01
    
    
    
    173
    
    
    
    0.01
    
    
    
    819
    
    
    
    0.28Forfeited
    
    
    0
    
    
    
    0.00
    
    
    
    11,703
    
    
    
    0.33
    
    
    
    768
    
    
    
    0.01Outstanding at the end of the year
    
    
    4,464
    
    
    
    1.14
    
    
    
    4,377
    
    
    
    1.16
    
    
    
    15,935
    
    
    
    0.58Options exercisable at the end of
the year
    
    
    2,675
    
    
    
    1.36
    
    
    
    2,587
    
    
    
    1.41
    
    
    
    14,912
    
    
    
    0.51Weighted-average fair value of
options granted during the year
(expressed in U.S. dollars)
    
    
    
    
    
    $
    0.00
    
    
    
    
    
    
    $
    0.26
    
    
    
    
    
    
    $
    0.19
 F-31




---



##### Table of Contents



The following table summarizes the stock options outstanding for employees (in
thousand of shares): ExercisableOutstanding
    
    
    
    
    
    
    Weighted-averageRange of
    
    
    
    
    
    
    Remaining
    
    
    Exercise
    
    
    
    
    
    
    exercisePrices
    
    
    Number
    
    
    life
    
    
    price
    
    
    Number
    
    
    priceDecember 31, 2004
    
    $
    0.01
    
    
    
    533
    
    
    
    0.41
    
    
    $
    0.01
    
    
    
    533
    
    
    $
    0.010.49
    
    
    
    3,627
    
    
    
    7.32
    
    
    
    0.49
    
    
    
    1,886
    
    
    $
    0.498.70
    
    
    
    33
    
    
    
    4.24
    
    
    
    8.70
    
    
    
    33
    
    
    $
    8.710.45
    
    
    
    191
    
    
    
    5.24
    
    
    
    10.45
    
    
    
    179
    
    
    $
    10.4512.55
    
    
    
    80
    
    
    
    6.24
    
    
    
    12.55
    
    
    
    45
    
    
    $
    12.55December 31, 2003
    
    $
    0.01
    
    
    
    445
    
    
    
    1.59
    
    
    $
    0.01
    
    
    
    445
    
    
    $
    0.010.49
    
    
    
    3,627
    
    
    
    8.33
    
    
    
    0.49
    
    
    
    1,886
    
    
    
    0.498.70
    
    
    
    33
    
    
    
    5.24
    
    
    
    8.70
    
    
    
    33
    
    
    
    8.7010.45
    
    
    
    191
    
    
    
    6.25
    
    
    
    10.45
    
    
    
    179
    
    
    
    10.4512.55
    
    
    
    80
    
    
    
    7.25
    
    
    
    12.55
    
    
    
    45
    
    
    
    12.55December 31, 2002
    
    $
    0.01
    
    
    
    4,273
    
    
    
    8.83
    
    
    $
    0.01
    
    
    
    4,325
    
    
    $
    0.010.49
    
    
    
    11,357
    
    
    
    9.33
    
    
    
    0.49
    
    
    
    10,331
    
    
    
    0.498.70
    
    
    
    33
    
    
    
    6.33
    
    
    
    8.70
    
    
    
    33
    
    
    
    8.7010.45
    
    
    
    191
    
    
    
    7.33
    
    
    
    10.45
    
    
    
    179
    
    
    
    10.4512.55
    
    
    
    80
    
    
    
    8.33
    
    
    
    12.55
    
    
    
    45
    
    
    
    12.55
 b. Non-Employee equity-based compensation From 1998 to 2001 the Company issued warrants to purchase series N stock in exchange for
services of which 1,682,392 are granted and exercisable at December 31, 2004, 2003 and
2002 respectively. These services were all completed and the compensation charges
expensed in prior years. Pursuant to the capital restructuring in April 2002, the Company issued warrants to purchase
up to an additional 1,659,161 series N shares at an exercise price of U.S.$3.06 per
share and to reduce the exercise price of the original warrants issued from 1998 to 2001
to U.S.$3.06 per share as partial anti-dilution protection. All of these warrants are
vested and are exercisable at December 31, 2004, 2003 and 2002, respectively. The fair value of warrants issued to non-employees was determined using the Black
Scholes options pricing model and resulted in a non-cash charge of approximately
Ps.1,839, which was recognized as expense during the years ended December 31, 2002, and
none in 2004 or 2003. F-32




---



##### Table of Contents



At December 31, 2004 2,786,483 and 555,070 shares of Series N shares and Series N-1 shares,
respectively were authorized for issuance upon exercise of non-employee stock warrants. At
the December 17, 2004 board meeting N-1 shares were authorized for issuance in place of series
N shares, however no non-employee awards were modified. A summary of the changes of the stock warrants issued to non-employees is presented
below (in thousands of shares): 2004
    
    
    2003
    
    
    2002Weighed-
    
    
    
    
    
    
    Weighed-
    
    
    
    
    
    Weighed-average
    
    
    
    
    
    
    average
    
    
    
    
    
    averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseShares
    
    
    price
    
    
    Shares
    
    
    price
    
    
    Shares
    
    
    priceOutstanding at beginning of year
    
    
    3,341
    
    
    $
    2.37
    
    
    
    3,341
    
    
    $
    2.37
    
    
    
    1,682
    
    
    $
    3.83Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,659
    
    
    $
    2.36Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3.83Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    0.00Outstanding at the end of the year
    
    
    3,341
    
    
    
    2.37
    
    
    
    3,341
    
    
    
    2.37
    
    
    
    3,341
    
    
    
    2.37Warrants exercisable at the end of
the year
    
    
    3,341
    
    
    
    2.37
    
    
    
    3,341
    
    
    
    2.37
    
    
    
    3,341
    
    
    
    2.37Weighted-average fair value of
warrants granted during the year
(expressed in U.S. dollars)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    0.10
 The following tables summarizes the stock warrants outstanding for-non-employees (in
thousands): Outstanding
    
    
    ExercisableWeighted-average
    
    
    
    
    
    
    Weighted-averageRange of
    
    
    
    
    
    
    Remaining
    
    
    Exercise
    
    
    
    
    
    
    exerciseprices
    
    
    Number
    
    
    life
    
    
    price
    
    
    Number
    
    
    priceDecember 31, 2004
    
    $
    0.01
    
    
    
    1,432
    
    
    
    1.96
    
    
    $
    0.01
    
    
    
    1,432
    
    
    $
    0.013.06
    
    
    
    1,548
    
    
    
    
    
    
    
    3.06
    
    
    
    1,548
    
    
    
    3.068.70
    
    
    
    362
    
    
    
    0.05
    
    
    
    8.70
    
    
    
    362
    
    
    
    8.70December 31, 2003
    
    $
    0.01
    
    
    
    1,432
    
    
    
    2.93
    
    
    $
    0.01
    
    
    
    1,432
    
    
    $
    0.013.06
    
    
    
    1,548
    
    
    
    1.00
    
    
    
    3.06
    
    
    
    1,548
    
    
    
    3.068.70
    
    
    
    362
    
    
    
    1.05
    
    
    
    8.70
    
    
    
    362
    
    
    
    8.70December 31, 2002
    
    $
    0.01
    
    
    
    1,432
    
    
    
    3.93
    
    
    $
    0.01
    
    
    
    1,432
    
    
    $
    0.013.06
    
    
    
    1,548
    
    
    
    2.00
    
    
    
    3.06
    
    
    
    1,548
    
    
    
    3.068.70
    
    
    
    362
    
    
    
    2.05
    
    
    
    8.70
    
    
    
    362
    
    
    
    8.70
 NOTE 22  IMPAIRMENT
OF THE VALUE OF LONG-LIVED ASSETS:: The provisions of Statement C-15 Impairment in the Value
of Long-Lived Assets and their Disposal, issued by the
MIPA, went into effect on January 1, 2004. The statement
sets forth, among other things, the general criteria that
permit, if applicable, impairment losses or write-downs of
long-lived assets to be identified, as well as tangible and
intangible assets, including goodwill. Moreover, this statement
establishes concepts such as net selling price and value in use
for the valuation of long-lived assets. The Company performed
analysis in the fourth quarter of 2004 in accordance with the
provisions of Statement C-15 and determined there was no impairment. NOTE 23  SIGNIFICANT DIFFERENCES BETWEEN MEXICAN AND THE UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES: F-33




---



##### Table of Contents



The Companys consolidated financial statements are prepared in accordance with Mexican GAAP,
which differs in certain significant respects from accounting principles generally accepted in the
United States of America (US GAAP). The Mexican GAAP consolidated financial statements include
the effects of inflation as provided for under Statement B-10, issued by the MIPA. The application
of this Statement represents a comprehensive measure of the effects of price level changes in the
Mexican economy, and is considered to result in a more meaningful presentation than historical
cost-based financial reporting for both Mexican and U.S. accounting purposes. Therefore, the
following reconciliation to US GAAP does not include the reversal of such inflationary effects. The principal differences between Mexican GAAP and US GAAP other than inflation accounting, are
presented in the following pages with an explanation, where appropriate, of the effects on
consolidated net loss and consolidated shareholders equity. Reconciling items are presented net
of any gain or loss from monetary position. The following is a summary of the adjustments to consolidated net loss and consolidated
shareholders equity as of and for the years ended December 31, 2004, 2003 and 2002: Years ended December 31,2004
    
    
    2003
    
    
    2002Net loss under Mexican GAAP
    
    (Ps.
    129,004
    )
    
    (Ps.
    386,243
    )
    
    (Ps.
    801,387
    )Adjustments:Pre-operating expenses (a)
    
    
    
    
    
    
    
    
    
    
    (1,990
    )Amortization of pre-operating expenses (a)
    
    
    35,435
    
    
    
    36,115
    
    
    
    34,934Capitalization of interest (b)
    
    
    (753
    )
    
    
    (484
    )
    
    
    (215
    )Amortization of capitalized interest (b)
    
    
    1,724
    
    
    
    969
    
    
    
    232Amortization of frequency rights (c)
    
    
    
    
    
    
    11,508
    
    
    
    466Installation revenues (d)
    
    
    (19,596
    )
    
    
    (32,375
    )
    
    
    (5,700
    )Installation costs (e)
    
    
    (63,651
    )
    
    
    (50,140
    )
    
    
    (82,216
    )Debt restructuring (f)
    
    
    1,358,208
    
    
    
    22,146
    
    
    
    477,045Capitalized internal compensation cost (g)
    
    
    128
    
    
    
    128
    
    
    
    (2,561
    )Total US GAAP adjustments
    
    
    1,311,495
    
    
    
    (12,133
    )
    
    
    419,995Net income (loss) under US GAAP
    
    Ps.
    1,182,491
    
    
    (Ps.
    398,376
    )
    
    (Ps.
    381,392
    )Weighted-average common shares
outstanding, basic
    
    
    14,806,980
    
    
    
    14,654,063
    
    
    
    13,885,006Weighted-average common shares
outstanding, diluted
    
    
    16,771,543
    
    
    
    16,530,626
    
    
    
    19,641,657Net income (loss) per share under
US GAAP, basic
    
    Ps.
    79.86
    
    
    (Ps.
    27.19
    )
    
    (Ps.
    27.47
    )Net income (loss) per share under
US GAAP, diluted
    
    Ps.
    70.51
    
    
    (Ps.
    24.10
    )
    
    (Ps.
    19.42
    )
 F-34




---



##### Table of Contents



BALANCES AS OF DECEMBER 31, 2004
    
    
    2003Shareholders equity (deficit) under Mexican
GAAP
    
    Ps.
    1,584,357
    
    
    Ps.
    271,569Accumulated adjustments:Preoperating expenses (a)
    
    
    (351,327
    )
    
    
    (351,327
    )Amortization of preoperating expenses (a)
    
    
    199,339
    
    
    
    163,904Capitalization of interest (b)
    
    
    65,576
    
    
    
    66,329Amortization of capitalized interest (b)
    
    
    (14,446
    )
    
    
    (16,170
    )Amortization of frequency rights (c)
    
    
    
    
    
    
    Installation revenues (d)
    
    
    (63,934
    )
    
    
    (44,338
    )Installation costs (e)
    
    
    (215,480
    )
    
    
    (151,830
    )Debt restructuring (f)
    
    
    (223,636
    )
    
    
    (336,026
    )Capitalized internal compensation cost (g)
    
    
    (2,305
    )
    
    
    (2,433
    )Total US GAAP adjustments
    
    (Ps.
    606,213
    )
    
    (Ps.
    671,891
    )Shareholders equity (deficit) under US
GAAP
    
    (Ps.
    978,144
    )
    
    (Ps.
    400,322
    )
 Provided below is an analysis of changes in shareholders equity (deficit) under US GAAP: Year ended December 31,2004
    
    
    2003Balance at the beginning of the year
    
    (Ps.
    400,322
    )
    
    (Ps.
    3,030
    )Net income (loss) under US GAAP
    
    
    1,182,491
    
    
    
    (398,376
    )Increase in capital stock
    
    
    195,975
    
    
    
    Increase in additional paid in capital
    
    
    
    
    
    
    1,076Stock options and warrants
    
    
    
    
    
    
    8Balance at the end of the year
    
    (Ps.
    978,144
    )
    
    (Ps.
    400,322
    )
 a. Preoperating expenses - F-35




---



##### Table of Contents



Under Mexican GAAP, all expenses incurred while a company or a project is in the preoperating or
development stages are capitalized. The Companys operations commenced in May 1999 and capitalized
expenses are being amortized on a straight-line basis for a period not exceeding 10 years. Under US GAAP, such pre-operating expenses are expensed as incurred. b. Capitalization of interest - In accordance with Mexican GAAP, the Company capitalizes integral cost of financing (which is
comprised of interest expense, foreign exchange gains or losses and monetary gain related to the
debt) incurred during the period of construction and installation of an asset. Further, cost
capitalized is limited to the specific financing obtained for the construction of the related
asset. Under US GAAP, capitalization of interest is required for certain qualifying assets that require a
period of time to get them ready for their intended use. The amount of interest to be capitalized
is that portion of the interest cost incurred during the asset acquisition period that
theoretically could have been avoided if expenditures for the assets had not been made, and is not
limited to indebtedness directly attributable to the assets. In an inflationary economy, such as
Mexico, acceptable practice is to capitalize interest net of the monetary gain on the related
Mexican peso debt, but not any monetary gains on U.S. dollar or other stable currency debt. US
GAAP does not allow the capitalization of foreign exchange losses. c. Frequency rights - During 2003,the Company adjusted the amortization expense in Mexican GAAP to be consistent with US
GAAP. Under Mexican GAAP, through December 31, 2003, frequency rights were amortized on a straight-line
method over the term of the concession, from the date the Company commenced its operations. Under US GAAP, such incurred expenses should be amortized over the term of the concession beginning
at the granting date of the concession by the SCT. d. Installation revenues - Under Mexican GAAP, revenue is rcognized and the related expenses are recorded immediately, when
installation is charged to the customers. Under US GAAP, installation revenues and direct installation costs are deferred and amortized over
the expected customer relationship period when installation is charged to the customer. The
Company estimated its customer relationship period to be 4 years. e. Installation costs - F-36




---



##### Table of Contents



Under Mexican GAAP, installation costs not charged to customers are capitalized and amortized on a
straight-line basis over the remaining term of the concession. The
concession term expires in October
2017. Under US GAAP, direct installation costs not charged to customers are expensed as incurred. f. Troubled debt restructuring - Under Mexican GAAP, the difference between the old carrying value and new carrying value of the
debt is taken directly to equity at the time of the restructuring and recorded as capital stock and
additional paid-in capital. Debt issuance costs and the debt discount recorded due to the issuance
of warrants are amortized over the original term of the corresponding debt with which it was
originally issued with no adjustment at the time of restructuring. Under US GAAP the April 2002, July 2002 and October 2004 debt restructurings qualify as troubled
debt restructurings pursuant to the provisions of Statement of Financial Accounting Standards No.
15, Accounting by Debtors and Creditors for Troubled Debt Restructurings (FAS 15). The 2002 debt restructurings are accounted for as a combination of types as stock, warrants, and
Old Senior Notes were exchanged for the 13-3/4% Notes. A gain was recognized in 2002, as the
adjusted carrying value of the 13-3/4% Notes (including unamortized debt issuance costs and warrant
discount) was greater than total future cash payments of the Old Senior Notes at the dates of the
2002 restructurings. To calculate the gain on the 2002 restructurings, the carrying value of the
13-3/4% Notes was reduced by the fair value of the equity interest granted as well as all legal and
other costs in relation to the restructurings, to determine the adjusted carrying value, which was
compared to the gross future cash payments of the Old Senior Notes to determine the gain. For the purposes of applying the provisions of FAS 15 to October 8, 2004 restructuring, the
exchanges of the primary and other holders were recorded as follows:  (a)
    
    The exchange with the primary holder is accounted for as a combination of types as the
primary holder received both New Senior Notes and stock in exchange for the Old Senior
Notes exchanged. A gain was recorded, as the adjusted carrying value of the Old Senior
Notes exchanged was greater than the total future cash payments of the New Senior Notes at
the time of the exchange. To calculate the gain on the restructuring, the carrying value of
the Old Senior Notes was reduced by the fair value of the equity interest granted as well
as all legal and other costs in relation to the restructuring, to determine the adjusted
carrying value, which was compared to the gross future cash payments under the terms of the
New Senior Notes to determine the gain.(b)
    
    The other holders exchanged Old Senior Notes for New Senior Notes, which is accounted
for as a modification of terms under FAS 15 due to the extension of the maturity date and
increase in total interest payments. Since the carrying amount of the Old Senior Notes on F-37




---



##### Table of Contents



October 8, 2004 did not exceed the total future cash payments of the New Senior Notes, no
gain on the exchange with the other holders was recognized.Interest expense on the New Senior Notes provided to other holders is determined using an
effective interest rate that equates the present value of the future cash payments specified
by the New Senior Notes, with the carrying amount of the Old Senior Notes. The following table sets forth the adjustments to reconcile the treatment of the debt
restructurings from that reported under Mexican GAAP to US GAAP: 2004
    
    
    2003
    
    
    2002Amortization of issuance costs (i)
    
    
    30,817
    
    
    
    30,676
    
    
    
    20,453Foreign currency exchange loss (ii)
    
    
    (559
    )
    
    
    (16,284
    )
    
    
    (17,523
    )Interest expense (iii)
    
    
    (531
    )
    
    
    
    
    
    
    Gain on monetary position (iv)
    
    
    24,025
    
    
    
    7,754
    
    
    
    23,141Gain on restructuring (v)
    
    
    1,304,456
    
    
    
    
    
    
    
    450,976Net debt restructuring adjustment
    
    
    1,358,208
    
    
    
    22,146
    
    
    
    477,047
  (i)
    
    Under Mexican GAAP, all debt issuance costs and warrant discount continue to be
amortized over the original term of the respective debt. Under US GAAP, as part of the
2002 restructurings and the exchange with the primary holder in 2004, all unamortized debt
issuance costs were recorded against the gain on restructuring resulting in no amortization
of debt issuance costs under US GAAP. Amortization of debt issuance costs and warrant
discount are classified as an interest expense in the statement of operations.(ii)
    
    Under Mexican GAAP, debt is carried at face, where under US GAAP, subsequent to the
2002 restructurings and the exchange with the primary holder, respectively, the debt is
carried at the amount of total gross future cash payments which includes all future cash
interest payments. The increased U.S. Dollar carrying amount under US GAAP results in a
corresponding foreign currency impact due to U.S. Dollar to Mexican Peso exchange rate
fluctuations.(iii)
    
    Under Mexican GAAP, there was no interest expense recorded from the time of the 2002
restructurings through October 8, 2004 as the Old Notes had a stated interest rate of 0.0%,
and under US GAAP, all future cash payments were recorded as part of the troubled debt
restructuring. Subsequent to October 8, 2004 under Mexican GAAP, interest expense
reflected the stated rate of interest of the New Senior Notes of Ps. 3,805. Under US GAAP,
the interest expense of Ps. 4,336 reflects interest expense of the New Senior Notes
provided to other holders calculated under the effective interest method. F-38




---



##### Table of Contents



(iv)
    
    The gain on monetary position represents the inflation gain, measured in terms of the
NCPI, on the net monthly monetary position difference between US GAAP and Mexican GAAP.(v)
    
    Under US GAAP, gains were recognized from the 2002 restructurings and the exchange with
the primary holder in 2004 in accordance with the provisions of FAS 15. Under Mexican
GAAP, no gains were recognized and any differences in the carrying value of the debt as a
result of the restructurings were recorded directly to capital stock and additional paid-in
capital. g. Capitalized internal compensation cost- Mexican GAAP allows that certain compensation charges directly attributable to capital expenditures
can be capitalized, while under US GAAP, these compensation charges should be expensed. No such
amounts were capitalized during 2004 and 2003. Under Mexican GAAP, during 2002 there were
capitalized compensation expenses of Ps.2,561, where as underUS GAAP, these expenses should have
been expensed. h. Deferred income taxes - For Mexican GAAP purposes, the Company applies revised Statement D-4 and recognizes future tax
consequences based on the difference between the financial statements and tax bases of assets and
liabilities-temporary differences- as of the date of the financial statements. For purposes of the
reconciliation to US GAAP, the Company has applied Statement of Financial Accounting Standards No.
109 Accounting for Income Taxes (FAS 109), for all periods presented. FAS 109 requires an asset and liability method of accounting, whereby, deferred taxes are
recognized for the tax consequences of all temporary differences between the financial statement
carrying amounts and the related tax basis of assets and liabilities. Under US GAAP, the effect on
deferred taxes of a change in tax rate is recognized in income in the period that includes the
enactment date. FAS 109 requires deferred tax assets to be reduced by a valuation allowance if, based on the weight
of available evidence, including cumulative losses in recent years, it is more likely that some
portion or all of the deferred tax assets will not be realized. Accordingly, the Company has
established a valuation allowance for the full amount of the deferred tax assets. Significant components of deferred income taxes under US GAAP are as follows: December 31, 2004SFAS 109
    
    SFAS 109applied to
    
    applied to
 F-39




---



##### Table of Contents



Mexican GAAP
    
    
    US GAAPBalances
    
    
    adjustments
    
    
    TotalDeferred assets:Allowance for doubtful accounts
    
    Ps.
    20,191
    
    
    
    
    
    
    Ps.
    20,191Asset tax payments
    
    
    32,175
    
    
    
    
    
    
    
    32,175Tax loss carryforwards
    
    
    1,042,500
    
    
    
    
    
    
    
    1,042,500Accruals
    
    
    70,028
    
    
    
    
    
    
    
    70,028Installation revenues
    
    
    
    
    
    
    20,459
    
    
    
    20,459Deferred tax assets
    
    
    1,164,894
    
    
    
    20,459
    
    
    
    1,185,353Deferred liabilities:Inventory
    
    
    (3,620
    )
    
    
    
    
    
    
    (3,620
    )Prepaid expenses
    
    
    (21,866
    )
    
    
    
    
    
    
    (21,866
    )Telephone network equipment and
leasehold improvements, frequency rights,
intangible assets and preoperating expenses
    
    
    (295,906
    )
    
    
    33,012
    
    
    
    (262,894
    )Installation costs
    
    
    
    
    
    
    (68,954
    )
    
    
    (68,954
    )Debt issuance costs on restructuring
    
    
    
    
    
    
    (5,232
    )
    
    
    (5,232
    )Deferred tax liabilities
    
    
    (321,392
    )
    
    
    (41,174
    )
    
    
    (362,566
    )Net deferred income tax asset
before valuation allowance
    
    
    843,502
    
    
    
    
    
    
    
    822,787Valuation allowance
    
    
    (843,502
    )
    
    
    
    
    
    
    (822,787
    )Ps.
    
    
    
    
    
    
    
    Ps.
    
 December 31, 2003 SFAS 109
    
    
    SFAS 109applied to
    
    
    applied toMexican GAAP
    
    
    US GAAPBalances
    
    
    adjustments
    
    
    TotalDeferred assets:Allowance for doubtful accounts
    
    Ps.
    21,619
    
    
    
    
    
    
    Ps.
    21,619Asset tax payments
    
    
    20,718
    
    
    
    
    
    
    
    20,718Tax loss carry forwards
    
    
    1,034,367
    
    
    
    
    
    
    
    1,034,367Accruals
    
    
    52,911
    
    
    
    
    
    
    
    52,911Installation revenues
    
    
    
    
    
    
    14,188
    
    
    
    14,188
 F-40




---



##### Table of Contents



SFAS 109
    
    
    SFAS 109applied to
    
    
    applied toMexican GAAP
    
    
    US GAAPBalances
    
    
    adjustments
    
    
    TotalDeferred tax assets
    
    
    1,129,615
    
    
    
    14,188
    
    
    
    1,143,803Deferred liabilities:Inventory
    
    
    (6,405
    )
    
    
    
    
    
    
    (6,405
    )Prepaid expenses
    
    
    (18,627
    )
    
    
    
    
    
    
    (18,627
    )Telephone network equipment and
leasehold improvements, frequency rights,
intangible assets and preoperating expenses
    
    
    (242,166
    )
    
    
    44,703
    
    
    
    (197,463
    )Installation costs
    
    
    
    
    
    
    (48,649
    )
    
    
    (48,649
    )Debt issuance costs on restructuring
    
    
    
    
    
    
    
    
    
    
    Deferred tax liabilities
    
    
    (267,198
    )
    
    
    (3,946
    )
    
    
    (271,144
    )Net deferred income tax asset
before valuation allowance
    
    
    862,417
    
    
    
    
    
    
    
    872,659Valuation allowance
    
    
    (862,417
    )
    
    
    
    
    
    
    (872,659
    )Ps.
    
    
    
    
    
    
    
    Ps.
    
 i. Statement of changes in financial position - Under Mexican GAAP, the Company presents statements of changes in financial position in constant
Mexican pesos. This presentation identifies the generation and application of resources
representing differences between beginning and ending financial statement balances in constant
Mexican pesos. Under US GAAP, pursuant to FAS No. 95 Statement of Cash Flows, a statement of cash flows is a
required component of a complete set of financial statements in lieu of a statement of changes in
financial position. FAS 95 establishes specific presentation requirements and additional
disclosures but does not provide guidance with respect to inflation adjusted financial statements.
Based on requirements of the Securities and Exchange Commission (SEC), the effect of inflation
restatements and foreign exchange gains and losses on cash flow related to financing and operating
activities has been included in the line item, Monetary gain, and the effect of inflation on cash
balances has been included in a separate line item after cash flows from investing activities. Year ended December 31,2004
    
    
    2003
    
    
    2002Operating activities:Net income (loss) under US GAAP
    
    
    1,182,491
    
    
    (Ps.
    398,376
    )
    
    (Ps.
    381,390
    )Adjustments to reconcile net income (loss) to
net cash flow provided by operating activities:Depreciation and amortization
    
    
    323,551
    
    
    
    256,797
    
    
    
    291,096Gain on restructuring of debt
    
    
    (1,304,456
    )
    
    
    
    
    
    
    (477,045
    )Fixed asset write-offs
    
    
    
    
    
    
    8,428
    
    
    
    Allowance for doubtful accounts
    
    
    34,398
    
    
    
    53,540
    
    
    
    27,626
 F-41




---



##### Table of Contents



Year ended December 31,2004
    
    
    2003
    
    
    2002Monetary gain
    
    
    (110,193
    )
    
    
    (87,866
    )
    
    
    (113,504
    )Non recurring charges
    
    
    
    
    
    
    8
    
    
    
    14,273Allowance for inventory obsolescence
    
    
    1,045
    
    
    
    3,673
    
    
    
    1,351Foreign currency exchange loss
    
    
    98,932
    
    
    
    198,405
    
    
    
    243,298225,768
    
    
    
    34,609
    
    
    
    (394,295
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,629
    )
    
    
    (55,232
    )
    
    
    (79,911
    )Inventory
    
    
    6,095
    
    
    
    (2,415
    )
    
    
    10,253Prepaid expenses
    
    
    (13,302
    )
    
    
    (18,536
    )
    
    
    (27,682
    )Accrued interest
    
    
    732
    
    
    
    
    
    
    
    Accrued expenses and other accounts payable
    
    
    (74,941
    )
    
    
    59,470
    
    
    
    68,907Cash flow provided by (used in) operating activities
    
    
    140,723
    
    
    
    17,896
    
    
    
    (422,728
    )Financing activities:Proceeds from issuance of capital stock
    
    
    
    
    
    
    
    
    
    
    667,175Proceeds from loans and notes payable
    
    
    157,921
    
    
    
    
    
    
    
    Cash flow provided by financing activities
    
    
    157,921
    
    
    
    
    
    
    
    667,175Investing activities:Restricted cash
    
    
    (18,237
    )
    
    
    
    
    
    
    215,961Acquisition of fixed assets
    
    
    (239,563
    )
    
    
    (68,139
    )
    
    
    (270,630
    )Other assets
    
    
    
    
    
    
    (290
    )
    
    
    (173,044
    )Cash flow
(used in) investing activities
    
    
    (257,800
    )
    
    
    (68,429
    )
    
    
    (227,713
    )Cash and cash equivalents:Effect of inflation and exchange rate changes
on cash and cash equivalents
    
    
    (24,564
    )
    
    
    (32,141
    )
    
    
    (89,678
    )Net
increase (decrease) in cash and cash equivalents
    
    
    16,280
    
    
    
    (82,674
    )
    
    
    (72,944
    )Cash and cash equivalents at beginning of the year
    
    
    43,903
    
    
    
    126,577
    
    
    
    199,521Cash and cash equivalents at end of the year
    
    
    60,183
    
    
    
    43,903
    
    
    
    126,577
 Year ended December 31,2004

    
    
    2003
    
    
    2002Interest paid
    
    Ps.
    23,235
    
    
    Ps.
    21,721
    
    
    Ps.
    233,717Taxes paid
    
    Ps.
    13,098
    
    
    Ps.
    24,585
    
    
    Ps.
    3,072Supplemental disclosures of non-cash
investing and financing activities:Capital stock issued in exchange for services
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    10,230Capital stock issued in exchange for advertising
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    30,688Reduction of notes payable from troubled
debt restructuring
    
    Ps.
    1,426,836
    
    
    Ps.
    
    
    
    Ps.
    680,474
 F-42




---



##### Table of Contents



j. Accounting for stock based compensation - In accordance with APB 25, the Company recognizes compensation expense for its employee stock
option plan using the intrinsic-value method of accounting. Under the terms of the intrinsic-value
method, compensation cost is the excess, if any, of the market price of the stock at the grant
date, or other measurement date, over the amount an employee must pay to acquire the stock. In accordance with FAS 123, compensation expense for stock options given to non-employees and
warrants was determined based on fair value using the Black Scholes valuation model. In December 2002, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 148 Accounting for Stock-Based Compensation-Transition and Disclosure
(SFAS 148). SFAS 148 amends SFAS 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method used on reported
results. The Company has elected to continue to account for its stock based compensation in accordance
with the provision of APB 25 as interpreted by FIN 44 and present the pro forma disclosures
required by SFAS 123 as amended by SFAS 148. Mexican GAAP has no authoritative standard covering stock based compensation, however the
treatment followed in the preparation of the Mexican GAAP financial statements is in compliance
with the provisions of US GAAP. k. Operating income - Mexican GAAP allows certain non-recurring charges, such as asset write-offs, to be classified as
non-operating. Under US GAAP, such items are considered part of operating income. Under US GAAP, consolidated
operating loss would have been Ps.195,141, Ps.277,866 and Ps.381,404 for the years ended December
31, 2004, 2003 and 2002. l. New US GAAP accounting pronouncements  In December 2004, and as amended in April 2005, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R),
which replaces SFAS 123 and supersedes APB Opinion No. 25. SFAS 123R F-43




---



##### Table of Contents



requires all share-based payments to employees, including grants of employee stock options, to
be recognized in the financial statements based on their fair values. The pro-forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to financial statement
recognition. SFAS 123R is effective for fiscal years beginning after June 15, 2005. Early
application of SFAS 123R is encouraged, but not required. Public companies are required to adopt the new standard using a modified prospective method
and may elect to restate prior periods using the modified retrospective method. Under the modified
prospective method, companies are required to record compensation cost for new and modified awards
over the related vesting period of such awards prospectively and record compensation cost
prospectively for the unvested portion, at the date of adoption, of previously issued and
outstanding awards over the remaining vesting period of such awards. No change to prior periods
presented is permitted under the modified prospective method. Under the modified retrospective
method, companies record compensation costs for prior periods retroactively through restatement of
such periods using the exact pro-forma amounts disclosed in the companies footnotes. Also, in the
period of adoption and after, companies record compensation cost based on the modified prospective
method. In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 107, TOPIC 14: Share-based payment (SAB 107). SAB 107 addresses the interaction
between SFAS 123(R) and certain SEC rules and regulations and provides views regarding the
valuation of share-based payment arrangements for public companies. This bulletin is effective
immediately. We have not yet determined the method of adoption to be used and have not completed
our evaluation of the effects of adopting SFAS 123R. In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 153, Exchanges of Nonmonetary Assets (An amendment to APB Opinion No.
29) (SFAS 153). This statement addresses the measurement of exchanges of nonmonetary exchanges of
similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for exchanges that do not have commercial
substance. This statement specifies that a monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the exchange.
The provisions of this statement shall be effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier application is permitted. We are currently
evaluating the potential impact of this statement. In March 2005, the FASB issued Interpretation No. 47 (FIN 47), Accounting for Conditional
Asset Retirement Obligations  an interpretation of FASB Statement No. 143. FIN 47 requires an
entity to recognize a liability for the fair value of a conditional asset retirement obligation if
the fair value can be reasonably estimated. FIN 47 states that a conditional asset retirement
obligation is a legal obligation to perform an asset retirement activity in which the timing or
method of settlement are conditional upon a future event that may or may not be within control of
the entity. FIN 47 is effective no later than the end of fiscal years ending after December 15,
2005. We have not quantified the impact of adopting FIN 47, but we do not expect the adoption to
have a material impact on our financial position or results of operations. F-44




---



##### Table of Contents



m. Condensed consolidating financial information - As mentioned in Note 13, in March 2000 the Company issued U.S.$300 million of senior unsecured
notes (Series B Notes) as part of its financing program and in April and July 2002, the Company
restructured the majority of the original $ 300 million in debt and issued additional senior,
unsecured notes (Old Notes). In October 2004 the Company then exchanged the majority of the Old
Notes for additional senior, unsecured notes (New Notes). The Series B Notes, the New Old Notes
and the New Notes are joint and severally guaranteed on a senior subordinated, unsecured, full and
unconditional basis, pursuant to a guarantee by the Companys subsidiaries, Corporativo and MSA
(Guarantor Subsidiaries). The subsidiaries guarantee is full and unconditional. The Company has not presented separate financial statement and other disclosures concerning the
Guarantor Subsidiaries because management has determined that such information is not material to
investors. Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedBalance sheet as of December 31, 2004:Cash and cash equivalents
    
    Ps.
    59,304
    
    
    Ps.
    242
    
    
    Ps.
    637
    
    
    Ps.
    
    
    
    Ps.
    60,183Current restricted cash
    
    
    5,555
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,555Accounts receivable  net
    
    
    147,404
    
    
    
    233
    
    
    
    14,311
    
    
    
    (12,987
    )
    
    
    148,961Inventory  net
    
    
    11,311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,311Prepaid expenses
    
    
    66,327
    
    
    
    190
    
    
    
    446
    
    
    
    
    
    
    
    66,963Restricted cash long term
    
    
    12,682
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,682Frequency rights  net
    
    
    94,277
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,277Telephone network system and equipment  net
    
    
    1,726,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,726,300Preoperating expenses  net
    
    
    153,492
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153,492Intangible assets  net
    
    
    366,128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    366,128Other assets
    
    
    20,747
    
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    20,915Total assets
    
    Ps.
    2,663,527
    
    
    Ps.
    832
    
    
    Ps.
    15,394
    
    
    (Ps.
    12,987
    )
    
    Ps.
    2,666,766Total liabilities
    
    Ps.
    1,079,170
    
    
    Ps.
    2,522
    
    
    Ps.
    19,263
    
    
    (Ps.
    18,546
    )
    
    Ps.
    1,082,409Shareholders Equity:Capital stock and additional paid-in-capital
    
    
    3,286,907
    
    
    
    86
    
    
    
    59
    
    
    
    (145
    )
    
    
    3,286,907Accumulated deficit
    
    
    (1,702,550
    )
    
    
    (1,776
    )
    
    
    (3,928
    )
    
    
    5,704
    
    
    
    (1,702,550
    )Total shareholders equity
    
    
    1,584,357
    
    
    
    (1,690
    )
    
    
    (3,869
    )
    
    
    5,559
    
    
    
    1,584,357Total liabilities and shareholders equity
    
    Ps.
    2,663,527
    
    
    Ps.
    832
    
    
    Ps.
    15,394
    
    
    (Ps.
    12,987
    )
    
    Ps.
    2,666,766Total shareholders equity under Mexican
GAAP
    
    Ps.
    1,584,357
    
    
    
    (Ps.1,690
    )
    
    Ps.
    (3,869
    )
    
    Ps.
    5,559
    
    
    Ps.
    1,584,357Preoperating expenses
    
    
    (351,327
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (351,327
    )Amortization of preoperating expenses
    
    
    199,339
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    199,339Capitalization of interest
    
    
    65,576
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,576Amortization of capitalized interest
    
    
    (14,446
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,446
    )Installation revenues
    
    
    (63,934
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63,934
    )
 F-45




---



##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedInstallation costs
    
    
    (215,480
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (215,480
    )Debt restructuring
    
    
    (223,636
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (223,636
    )Bonus capitalization
    
    
    (2,305
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,305
    )Total shareholders equity under US GAAP
    
    Ps.
    978,144
    
    
    (Ps.
    1,690
    )
    
    (Ps.
    3,869
    )
    
    Ps.
    5,559
    
    
    Ps.
    978,144
 Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedStatements of Operations for the year
ended December 31, 2004:Revenues
    
    Ps.
    868,214
    
    
    Ps.
    30,029
    
    
    Ps.
    227,629
    
    
    (Ps.
    257,658
    )
    
    Ps.
    868,214Operating cost and expenses
    
    
    (1,017,111
    )
    
    
    (29,233
    )
    
    
    (226,986
    )
    
    
    257,658
    
    
    
    (1,015,672
    )Integral (cost) income of financing
    
    
    47,096
    
    
    
    (42
    )
    
    
    227
    
    
    
    
    
    
    
    47,281Other income (expenses)
    
    
    (27,203
    )
    
    
    (619
    )
    
    
    (386
    )
    
    
    (619
    )
    
    
    (28,827
    )Net (loss) income
    
    (Ps.
    129,004
    )
    
    Ps.
    135
    
    
    Ps.
    484
    
    
    (Ps.
    619
    )
    
    (Ps.
    129,004
    )Net (loss) income for the year under
Mexican GAAP
    
    
    (Ps.129,004
    )
    
    Ps.
    135
    
    
    Ps.
    484
    
    
    (Ps.
    619
    )
    
    (Ps.
    129,004
    )Amortization of preoperating expenses
    
    
    35,435
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,435Capitalization of interest
    
    
    (753
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (753
    )Amortization of capitalized interest
    
    
    1,724
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,724Installation revenues
    
    
    (19,596
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,596
    )Installation costs
    
    
    (63,651
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63,651
    )Debt restructuring
    
    
    1,358,208
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,358,208Bonus Capitalization
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128Net loss (income) for the year under
US GAAP
    
    Ps.
    1,182,491
    
    
    Ps.
    135
    
    
    Ps.
    484
    
    
    (Ps.
    619
    )
    
    Ps.
    1,182,491Statement of Changes in Financial Position
for the Year Ended December 31, 2004:Net (loss) income
    
    (Ps.
    129,004
    )
    
    Ps.
    135
    
    
    Ps.
    484
    
    
    (Ps.
    619
    )
    
    (Ps.
    129,004
    )Depreciation and amortization
    
    
    334,884
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    334,884Net change in working capital
    
    
    205,880
    
    
    
    135
    
    
    
    484
    
    
    
    (619
    )
    
    
    205,880Resources (used in) provided by operating
activities
    
    
    267,012
    
    
    
    141
    
    
    
    637
    
    
    
    
    
    
    
    267,790Financing activities:Issuance of capital stock
    
    
    576,724
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    576,724Additional paid in capital
    
    
    865,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    865,068Proceeds from loans and notes payable
    
    
    (1,345,533
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,345,533
    )Resources used in financing activities
    
    
    96,259
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,259Investing activities:Telephone network systems and equipment
    
    
    (324,203
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (324,203
    )Intangible assets
    
    
    (32,272
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,272
    )Other assets
    
    
    8,698
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8,706Resources (used in) provided by investing
activities
    
    
    (347,776
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (347,768
    )Cash and cash equivalents:Net increase (decrease) in cash and
cash equivalents
    
    
    15,494
    
    
    
    149
    
    
    
    637
    
    
    
    
    
    
    
    16,280Beginning balances
    
    
    43,810
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    43,903
 F-46




---



##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedEnding balances
    
    Ps.
    59,304
    
    
    Ps.
    242
    
    
    Ps.
    637
    
    
    Ps.
    
    
    
    Ps.
    60,183
 Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedBalance sheet as of December 31, 2003:Cash and cash equivalents and restricted cash
    
    Ps.
    43,810
    
    
    Ps.
    93
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    43,903Accounts receivable  net
    
    
    131,896
    
    
    
    177
    
    
    
    9,672
    
    
    
    (8,750
    )
    
    
    132,995Inventory  net
    
    
    19,409
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,409Prepaid expenses
    
    
    56,207
    
    
    
    115
    
    
    
    125
    
    
    
    
    
    
    
    56,446Frequency rights  net
    
    
    101,269
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,269Telephone network system and equipment  net
    
    
    1,617,231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,617,231Preoperating expenses  net
    
    
    188,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188,950Intangible assets  net
    
    
    411,156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    411,156Other assets
    
    
    29,444
    
    
    
    176
    
    
    
    
    
    
    
    
    
    
    
    29,620Total assets
    
    Ps.
    2,599,372
    
    
    Ps.
    561
    
    
    Ps.
    9,797
    
    
    (Ps.
    8,750
    )
    
    Ps.
    2,600,979Total liabilities
    
    Ps.
    2,327,803
    
    
    Ps.
    2,385
    
    
    Ps.
    14,150
    
    
    (Ps.
    14,928
    )
    
    Ps.
    2,329,410Shareholders Equity:Capital stock and additional paid-in-capital
    
    
    1,845,115
    
    
    
    86
    
    
    
    59
    
    
    
    (145
    )
    
    
    1,845,115Accumulated deficit
    
    
    (1,573,546
    )
    
    
    (1,911
    )
    
    
    (4,412
    )
    
    
    6,323
    
    
    
    (1,573,546
    )Total shareholders equity
    
    
    271,569
    
    
    
    (1,825
    )
    
    
    (4,353
    )
    
    
    6,178
    
    
    
    271,569Total liabilities and shareholders equity
    
    Ps.
    2,599,372
    
    
    Ps.
    561
    
    
    Ps.
    9,797
    
    
    (Ps.
    8,750
    )
    
    Ps.
    2,600,979Total shareholders equity under Mexican
GAAP
    
    Ps.
    271,569
    
    
    (Ps.
    1,825
    )
    
    (Ps.
    4,353
    )
    
    Ps.
    6,178
    
    
    Ps.
    271,569Preoperating expenses
    
    
    (351,327
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (351,327
    )Amortization of preoperating expenses
    
    
    163,904
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,904Capitalization of interest
    
    
    66,329
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,329Amortization of capitalized interest
    
    
    (16,170
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,170
    )Installation revenues
    
    
    (44,338
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44,338
    )Installation costs
    
    
    (151,830
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151,830
    )Debt restructuring
    
    
    (336,026
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336,026
    )Bonus capitalization
    
    
    (2,433
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,433
    )Total shareholders equity under US GAAP
    
    (Ps.
    400,322
    )
    
    (Ps.
    1,825
    )
    
    (Ps.
    4,353
    )
    
    Ps.
    6,178
    
    
    (Ps.
    400,322
    )Statements of Operations for the year
ended December 31, 2003:Revenues
    
    Ps.
    805,371
    
    
    Ps.
    47,840
    
    
    Ps.
    194,129
    
    
    (Ps.
    241,968
    )
    
    Ps.
    805,371Operating cost and expenses
    
    
    (1,049,476
    )
    
    
    (47,893
    )
    
    
    (194,297
    )
    
    
    243,194
    
    
    
    (1,048,473
    )Integral (cost) income of financing
    
    
    (129,698
    )
    
    
    83
    
    
    
    212
    
    
    
    
    
    
    
    (129,403
    )Other income (expenses)
    
    
    (12,439
    )
    
    
    (21
    )
    
    
    (645
    )
    
    
    (633
    )
    
    
    (13,738
    )Net (loss) income
    
    (Ps.
    386,243
    )
    
    Ps.
    9
    
    
    (Ps.
    601
    )
    
    Ps.
    593
    
    
    (Ps.
    386,243
    )
 Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedNet (loss) income for the year under
Mexican GAAP
    
    (Ps.
    386,243
    )
    
    Ps.
    9
    
    
    (Ps.
    601
    )
    
    Ps.
    593
    
    
    (Ps.
    386,243
    )Amortization of preoperating expenses
    
    
    36,115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,115Capitalization of interest
    
    
    (484
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (484
    )Amortization of capitalized interest
    
    
    969
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    969Amortization of frequency rights
    
    
    11,508
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,508Installation revenues
    
    
    (32,375
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,375
    )
 F-47




---



##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedInstallation costs
    
    
    (50,140
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50,140
    )Debt restructuring
    
    
    22,146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,146Bonus capitalization
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    128Net loss (income) for the year under
US GAAP
    
    (Ps.
    398,376
    )
    
    Ps.
    9
    
    
    (Ps.
    601
    )
    
    Ps.
    593
    
    
    (Ps.
    398,376
    )Statement of Changes in Financial Position
for the Year Ended December 31, 2003:Net (loss) income
    
    (Ps.
    386,243
    )
    
    Ps.
    9
    
    
    (Ps.
    601
    )
    
    Ps.
    593
    
    
    (Ps.
    386,243
    )Depreciation and amortization
    
    
    353,626
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    353,626Net change in working capital
    
    
    (32,617
    )
    
    
    9
    
    
    
    (601
    )
    
    
    593
    
    
    
    (32,617
    )Resources (used in) provided by operating
activities
    
    
    (36,794
    )
    
    
    (7,761
    )
    
    
    (5,005
    )
    
    
    
    
    
    
    (49,560
    )Financing activities:Additional paid-in capital
    
    
    1,085
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,085Proceeds from loans and notes payables
    
    
    97,675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,675Resources used in financing activities
    
    
    98,760
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,760Investing activities:Telephone network systems and equipment
    
    
    (114,953
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114,953
    )Intangible assets
    
    
    (16,630
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,630
    )Other assets
    
    
    (297
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (289
    )Resources (used in) provided by investing
activities
    
    
    (131,880
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (131,872
    )Cash and cash equivalents:Net increase (decrease) in cash and
cash equivalents
    
    
    (69,914
    )
    
    
    (7,753
    )
    
    
    (5,005
    )
    
    
    
    
    
    
    (82,672
    )Beginning balances
    
    
    113,725
    
    
    
    7,845
    
    
    
    5,005
    
    
    
    
    
    
    
    126,575Ending balances
    
    Ps.
    43,810
    
    
    Ps.
    93
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    43,903
 Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedBalance sheet as of December 31, 2002:Cash and cash equivalents and
restricted cash
    
    Ps.
    113,726
    
    
    Ps.
    7,846
    
    
    Ps.
    5,005
    
    
    Ps.
    
    
    
    Ps.
    126,577Accounts receivable  net
    
    
    136,244
    
    
    
    293
    
    
    
    16,278
    
    
    
    (16,042
    )
    
    
    136,773Inventory  net
    
    
    20,934
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,934Prepaid expenses
    
    
    38,952
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,952Frequency rights  net
    
    
    114,208
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,208Telephone network system and
equipment  net
    
    
    1,737,058
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,737,058Preoperating expenses  net
    
    
    223,538
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    223,538Intangible assets  net
    
    
    465,847
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    465,847Other assets
    
    
    32,183
    
    
    
    183
    
    
    
    
    
    
    
    
    
    
    
    32,366Total assets
    
    Ps.
    2,882,690
    
    
    Ps.
    8,322
    
    
    Ps.
    21,283
    
    
    (Ps.
    16,042
    )
    
    Ps.
    2,896,253Total liabilities
    
    Ps.
    2,225,962
    
    
    Ps.
    10,156
    
    
    Ps.
    25,035
    
    
    (Ps.
    21,627
    )
    
    Ps.
    2,239,526
 F-48




---



##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedShareholders Equity:Capital stock and additional
paid-in-capital
    
    
    1,844,031
    
    
    
    86
    
    
    
    59
    
    
    
    (146
    )
    
    
    1,844,030Accumulated equity (deficit)
    
    
    (1,187,303
    )
    
    
    (1,920
    )
    
    
    (3,811
    )
    
    
    5,731
    
    
    
    (1,187,303
    )Total shareholders equity (deficit)
    
    
    656,727
    
    
    
    (1,834
    )
    
    
    (3,752
    )
    
    
    5,585
    
    
    
    656,727Total liabilities and shareholders
equity (deficit)
    
    Ps.
    2,882,690
    
    
    Ps.
    8,322
    
    
    Ps.
    21,283
    
    
    (Ps.
    16,042
    )
    
    Ps.
    2,896,253Total shareholders equity (deficit)
under Mexican GAAP
    
    Ps.
    656,728|
    
    
    (Ps.
    1,833
    )
    
    (Ps.
    3,752
    )
    
    Ps.
    5,586
    
    
    (Ps.
    656,729
    )Preoperating expenses
    
    
    (351,327
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (351,327
    )Amortization of preoperating
expenses
    
    
    127,789
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127,789Capitalization of interest
    
    
    66,813
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,813Amortization of capitalized interest
    
    
    (17,139
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,139
    )Amortization of frequency rights
    
    
    (11,508
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,508
    )Installation revenues
    
    
    (11,963
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,963
    )Installation costs
    
    
    (101,690
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101,690
    )Debt restructuring
    
    
    (358,172
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (358,172
    )Bonus capitalization
    
    
    (2,561
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,561
    )Total shareholders equity
(deficit) under
US GAAP
    
    (Ps.
    3,030
    )
    
    (Ps.
    1,833
    )
    
    (Ps.
    3,752
    )
    
    Ps.
    5,586
    
    
    (Ps.
    3,030
    )Statements of operations for the year
ended December 31, 2002:Revenues
    
    Ps.
    586,176
    
    
    Ps.
    99,224
    
    
    Ps.
    213,076
    
    
    (Ps.
    312,300
    )
    
    Ps.
    586,176Operating cost and expenses
    
    
    (1,042,044
    )
    
    
    (99,085
    )
    
    
    (216,480
    )
    
    
    313,773
    
    
    
    (1,043,836
    )Integral income cost of financing
    
    
    (338,604
    )
    
    
    128
    
    
    
    332
    
    
    
    (338,144
    )Other income (expense)
    
    
    (6,913
    )
    
    
    (60
    )
    
    
    (1,007
    )
    
    
    2,397
    
    
    
    (5,582
    )Net (loss) income
    
    (Ps.
    801,385
    )
    
    Ps.
    207
    
    
    (Ps.
    4,079
    )
    
    Ps.
    3,870
    
    
    (Ps.
    801,387
    )
 Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedNet (loss) income for the year under
Mexican GAAP
    
    (Ps.
    801,385
    )
    
    Ps.
    207
    
    
    (Ps.
    4,079
    )
    
    Ps.
    3,870
    
    
    (Ps.
    801,387
    )Preoperating expenses
    
    
    (1,990
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,990
    )Amortization of preoperating
expenses
    
    
    34,934
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,934Capitalization of interest
    
    
    (215
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (215
    )Amortization of capitalized interest
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232Amortization of frequency rights
    
    
    466
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    466Installation revenues
    
    
    (5,700
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,700
    )Installation costs
    
    
    (82,216
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (82,216
    )Debt restructuring
    
    
    477,047
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    477,047Bonus capitalization
    
    
    (2,561
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,561
    )Net (loss) income for the year under
US GAAP
    
    (Ps.
    381,388
    )
    
    Ps.
    207
    
    
    (Ps.
    4,079
    )
    
    Ps.
    3,870
    
    
    (Ps.
    381,390
    )
 F-49




---



##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedStatement of Changes in Financial
Position for the year ended December
31, 2002:Net (loss) income
    
    (Ps.
    801,385
    )
    
    Ps.
    207
    
    
    (Ps.
    4,079
    )
    
    Ps.
    3,870
    
    
    (Ps.
    801,387
    )Gain on repurchase of debt
    
    
    (342
    )
    
    
    
    
    
    
    
    
    
    
    342Depreciation and amortization
    
    
    347,330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    347,332Net change in working capital
    
    
    (454,395
    )
    
    
    207
    
    
    
    (4,079
    )
    
    
    4,212
    
    
    
    (454,055
    )Resources (used in) provided by
operating activities
    
    
    (360,489
    )
    
    
    4,070
    
    
    
    (15,607
    )
    
    
    
    
    
    
    (372,026
    )Financing activities:Issuance of capital stock
    
    
    858,867
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    858,567Repurchase of debt
    
    
    820,064
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    820,064Proceeds from loans and notes payable
    
    
    (802,200
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (802,200
    )Resources provided by financing
activities
    
    
    876,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    876,731Investing activities:Preoperating expenses
    
    
    (1,990
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,990
    )Telephone network systems and
equipment
    
    
    (400,775
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (400,775
    )Intangible assets
    
    
    (178,844
    )
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    (178,724
    )Other assets
    
    
    3,986
    
    
    
    (148
    )
    
    
    
    
    
    
    
    
    
    
    3,838Resources used in investing activities
    
    
    (577,624
    )
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (577,651
    )Cash and cash equivalents:Increase (decrease) during the period
    
    
    (61,381
    )
    
    
    4,042
    
    
    
    (15,607
    )
    
    
    
    
    
    
    (72,946
    )Beginning balances
    
    
    175,106
    
    
    
    3,803
    
    
    
    20,612
    
    
    
    
    
    
    
    199,521Ending balances
    
    Ps.
    113,726
    
    
    Ps.
    7,846
    
    
    Ps.
    5,005
    
    
    Ps.
    
    
    
    Ps.
    126,57
 n. Valuation and Qualifying Accounts  (Amounts expressed in Million of Mexican Pesos (Ps.) with Purchasing Power as of December 31, 2004) F-50




---



##### Table of Contents



Balance at
    
    
    Charged to
    
    
    
    
    
    
    Balance atbeginning
    
    
    cost and
    
    
    
    
    
    
    end ofof period
    
    
    Expenses
    
    
    Deductions
    
    
    periodAllowance for doubtful accounts
    
    
    2004
    
    
    Ps.
    65.5
    
    
    Ps.
    35.3
    
    
    (Ps.
    37.7
    )
    
    Ps.
    63.12003
    
    
    Ps.
    35.1
    
    
    Ps.
    53.5
    
    
    (Ps.
    23.1
    )
    
    Ps.
    65.52002
    
    
    Ps.
    21.5
    
    
    Ps.
    27.6
    
    
    (Ps.
    14.0
    )
    
    Ps.
    35.1Allowance for obsolete and slow-
    
    
    2004
    
    
    Ps.
    0.3
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    0.3moving supply inventories
    
    
    2003
    
    
    Ps.
    0.7
    
    
    Ps.
    
    
    
    (Ps.
    0.3
    )
    
    Ps.
    0.42002
    
    
    Ps.
    0.7
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    0.7Allowance for obsolete and slow-
    
    
    2004
    
    
    Ps.
    10.1
    
    
    Ps.
    
    
    
    (Ps.
    1.1
    )
    
    Ps.
    9.0moving network inventories
    
    
    2003
    
    
    Ps.
    13.8
    
    
    Ps.
    
    
    
    (Ps.
    3.7
    )
    
    Ps.
    10.12002
    
    
    Ps.
    15.3
    
    
    (Ps.
    0.2
    )
    
    (Ps.
    1.4
    )
    
    Ps.
    13.7Allowance for lease penalty
    
    
    2004
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    2003
    
    
    Ps.
    8.3
    
    
    Ps.
    
    
    
    (Ps.
    8.3
    )
    
    Ps.
    2002
    
    
    Ps.
    7.8
    
    
    Ps.
    0.5
    
    
    Ps.
    
    
    
    Ps.
    8.3
 F-51




---



##### Table of Contents



ITEM 19. EXHIBITS Page1.
    
    By-laws (estatutos) of Maxcom Telecomunicaciones, S.A. de C.V. as amended to
June 10, 2003
    
    *****2(a).
    
    Not applicable.2(b).1.
    
    Indenture dated as of March 17, 2000 among Maxcom, Corporativo en
Telecomunicaciones, S.A. de C.V. and The Bank of New York, as Trustee
    
    **2.
    
    Indenture dated as of April 29, 2002 among Maxcom, Corporativo en
Telecomunicaciones, S.A., de C.V., Maxcom Servicios Administrativos, S.A., de
C.V. and The Bank of New York, as Trustee
    
    *3.
    
    Second Supplemental Indenture dated as of April 29, 2002 among Maxcom,
Corporativo en Telecomunicaciones, S.A. de C.V., Maxcom Servicios
Administrativos, S.A. de C.V. and the Bank of New York, as Trustee
    
    *4.
    
    Amended and Restated Indenture,
dated as of October 8, 2004 among Maxcom, Corporativo en
Telecommunicaciones S.A. de C.V., Maxcom Servicios Administrativos,
S.A. de C.V., Maxcom USA, Inc. and the Bank of New York, as Trustee5.
    
    Indenture, dated as of
October 8, 2004 among Maxcom, Corporativo en Telecommunicaciones
S.A. de C.V., Maxcom Servicios Administrativos, S.A. de C.V., Maxcom
USA, Inc. and the Bank of New York, as Trustee2(c).
    
    Not applicable.1.
    
    CPO Trust Agreement effective April 25, 2002 among Maxcom., its shareholders
and Banco Nacional de México, S.A., Institución de Banca Múltiple, Grupo
Financiero Banamex Accival, acting as trustee
    
    *2.
    
    Second amended and Restated Securityholders Agreement entered into as of April
29, 2002 among Maxcom and certain existing and new securityholders
    
    *4(a).
    
    Agreement for the use of infrastructure and installation of fiber optic cable
on the highways between Puebla and Mexico, dated August 18, 1998, between
Amaritel, S.A. de C.V. (the predecessor of Maxcom Telecomunicaciones, S.A. de
C.V.) and Iusatel, S.A. de C.V.
    
    **4(b).
    
    Interconnection Agreement for long distance services, dated January 22, 1999,
between Amaritel and Teléfonos de Mexico (Telmex) valid for a period of two
years between February 1, 1999 and January 1, 2001. The agreement establishes
that it would remain in effect after the expiration date if no further
agreement for its termination or renewal has been entered into, in accordance
with article 42 of the Mexican Telecommunications law
    
    **4(c).
    
    Local Interconnection Service Agreement, dated November 24, 1998, between
Amaritel, S.A. de C.V. and Teléfonos de Mexico, S.A. de C.V.
    
    **4(d).
    
    Amendment to Local Interconnection Service Agreement, dated February 25, 1999,
between Amaritel, S.A. de C.V. and Teléfonos de Mexico, S.A. de C.V.,
originally entered into on November 24, 1998
    
    **4(e).
    
    Metropolitan Network Capacity Sale Agreement, dated April 28, 2000, between
Maxcom Telecomunicaciones, S.A. de C.V. and Metro Net, S.A. de C.V. (including
amendment dated December 21, 2000)
    
    ***4(f).
    
    Telecommunications Service Agreement dated November 15, 1999, between Maxcom
and Teléfonos de México, S.A. de C.V.
    
    **4(g).
    
    Telecommunications Service Agreement dated March 9, 1999, between Maxcom and
Bestel S.A. de C.V., according to which Bestel will provide long distance and
private calls services to Maxcom
    
    **4(h).
    
    Concession for the installation and operation of telecommunications services
granted to Amaritel, S.A. de C.V. by the Secretary of Telecommunications and
Transport on December 20, 1996
    
    **4(i).
    
    Amendment to Concession for the installation and operation of
telecommunications services granted to Amaritel by the Secretary of
Telecommunications and Transport on December 20, 1996, dated September 8,
1999, extending the coverage of such concession to include various additional
municipalities of the State of Mexico
    
    **4(j).
    
    Amendment to Concession for the installation and operation of
telecommunications services granted to Amaritel by the Secretary of
Telecommunications and Transport on December 20, 1996, dated December 7, 1999,
authorizing Maxcom to employ whatever technologies it deems appropriate in
providing telecommunications services to various municipalities
    
    **
 E-1




---



##### Table of Contents



Page4(k)
    
    Amendment to Annex A and B of Concession for the installation and operation of
telecommunications services granted to Amaritel, S.A. de C.V. by the Secretary
of Telecommunications and Transport on December 20, 1996, dated September 27,
2001, extending the coverage of such concession to include all of Mexico
    
    *4(l).
    
    Concession for a public telecommunications network in Regions 3, 5 and 8
granted to Amaritel, S.A. de C.V. by the Secretary of Telecommunications and
Transport on April 29, 1998
    
    **4(m).
    
    Concession for the operation of point-to-multipoint microwave
telecommunications services in Region 5 granted to Amaritel, S.A. de C.V. by
the Secretary of Telecommunications and Transport on April 23, 1998
    
    **4(n)
    
    Concession for the operation of point-to-multipoint microwave
telecommunications services in Region 3 granted to Amaritel, S.A. de C.V. by
the Secretary of Telecommunications and Transport on April 23, 1998
    
    **4(o).
    
    Concession for the operation of point-to multipoint microwave
telecommunications services in Region 8 granted to Amaritel, S.A. de C.V. by
the Secretary of Telecommunications and Transport on April 29, 1998
    
    **4(p).
    
    Concessions for the nationwide operation of point-to-point microwave
telecommunications services using five frequency bands in the 56 MHz
bandwidth, each granted to Amaritel, S.A. de C.V. by the Secretary of
Telecommunications and Transport on June 4, 1998
    
    **4(q).
    
    Concessions for the nationwide operation of point-to-point microwave
telecommunications services using two frequency bands in the 100 MHz
bandwidth, each granted to Amaritel, S.A. de C.V. by the Secretary of
Telecommunications and Transport on June 4, 1998
    
    **4(r).
    
    Amendment to Concession for the operation of point-to-multipoint
telecommunications services in Regions 3, 5, 8 granted to Amaritel, S.A. de
C.V. by the Secretary of Telecommunications and Transport on April 1, 1998,
dated October 12, 1999, regarding the start date for the initiation of
services
    
    **4(s).
    
    Amendment to Concession for the installation and operation of
telecommunications services granted to Amaritel, S.A. de C.V. by the Secretary
of Telecommunications and Transport on December 20, 1996, dated September 24,
1999 eliminating financial restrictions
    
    **4(t).
    
    Warrant Agreement dated as of March 17, 2000 between Maxcom
Telecomunicaciones, S.A. de C.V. and The Bank of New York, acting as warrant
agent.
    
    ***4(u)
    
    Dark fiber optic purchase agreement dated as of August 13, 2002 between Maxcom
Telecomunicaciones, S.A. de C.V. and Bestel S.A. de C.V.
    
    ****4(v)
    
    Transactional Lease Termination Agreement dated as of May20, 2003 among Maxcom
Telecomunicaciones, S.A. de C.V. and Jacobo Zaga Romano, Jacobo Zaga Buzali,
et.al.
    
    ****4(w)
    
    Capacity sale agreement dates as of October 15, 2003, between Maxcom
Telecomunicaciones, S.A. de C.V. and Axtel, S.A. de C.V. [xxx]
    
    *****4(x)
    
    Credit Agreement dated
April 28, 2004 by and among Banco Santander Mexicano, S.A.
Institución de Banca Múltiple Grupo Financiero Santander
Serfin, as Lender, and Maxcom, as Borrower.4(y)
    
    Credit Agreement dated
April 13, 2005 by and among Ixe Banco, S.A.,
Institución de Banca Múltiple, Ixe Grupo Financiero., as Lender, and Maxcom, as Borrower.4(z)
    
    Amendment dated August 5, 2004
to Exhibit B of the Master Agreement to Supply Local
Interconnection Services, dated February 25, 1999 between Maxcom
and Telefonos de Mexico, S.A. de C.V.5.
    
    Not applicable.8.
    
    No significant subsidiaries.9.
    
    Not applicable.10.
    
    None.11.
    
    Maxcoms Code of Ethics
    
    *****12.1
    
    Certification of the Chief
Executive Officer pursuant to Rule 13a-14(a).12.2
    
    Certification of the Chief
Financial Officer pursuant to rule 13a-14(a).13.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 135013.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 135099.1
    
    Computation of earnings per share99.2
    
    Computation of ratio of earnings to fixed charges
 
 *
    
    Previously filed with annual report on Form 20-F, submitted to the SEC on July 1, 2002.**
    
    Previously filed with Registration Statement on Form F-4 No. 333-11910 submitted on May 5,
2000.***
    
    Previously filed with annual report on Form 20-F, as amended, submitted on June 29, 2001 and
on September 28, 2001.****
    
    Previously filed with annual report on Form 20-F, submitted to the SEC on June 30, 2003.*****
    
    Previously filed with annual report on Form 20-F,
submitted to the SEC on June 29, 2004.[xxx]
    
    Certain material has been omitted pursuant to a request for confidential treatment request.
The places in this document where material has been omitted is marked with and asterisk and
brakets [*]. The omitted E-2




---



##### Table of Contents



material has been filed separetly with the SEC pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934. E-3




---



##### Table of Contents



GLOSSARY OF TELECOMMUNICATIONS TERMS ADSL
    
    (Asymetrical Digital Suibscriber Line) ADSL is a
physical-layer protocol that supports up to 8
Mbps bandwidth downstream and up to 1 Mbps
upstream. The asymmetrical aspect of ADSL
technology makes it ideal for Internet browsing,
video on demand, and remote LAN access. Users of
these applications typically download more
information than they send. ADSL also allows
simultaneous voice communication by transmitting
data signals outside of the voice frequency
range.Band
    
    A range of frequencies between two defined limits.Bandwidth
    
    The relative range of analog frequencies or
digital signals that can be passed through a
transmission medium, such as glass fibers,
without distortion. The greater the bandwidth,
the greater the information carrying capacity.
Bandwidth is measured in Hertz (analog) or Bits
Per Second (digital).Capacity
    
    Refers to the ability to transmit voice or data
over telecommunications networksCarrier
    
    A licensed provider of telecommunications
transmission services by fiber, wire or radio.Centrex service
    
    A business telephone service developed originally
by Lucent Technologies which offers private
branch exchange type features directly from the
local telephone company central office, such as
voicemail, call pick-up group, abbreviated
dialing and multi-line hunting.Churn
    
    Refers to customer line attrition and is measured
as the percentage of disconnects from service
relative to the total subscriber base over a
given period of time.COFETEL
    
    Comisión Federal de Telecomunicaciones, the
Mexican Federal Telecommunications Commission.Digital
    
    Describes a method of storing, processing and
transmitting information through the use of
distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital
transmission / switching technologies employ a
sequence of discrete, distinct pulses to
represent information, as opposed to the
continuously variable analog signal.DSLAM
    
    Digital Suscriber Line Access Multiplexer. A
technology to concentrate traffic in ADSL
implementations through time division
multiplexing at the central office.E1
    
    A digital telephony format that carries data at
the rate of 2.048 Mbps (DS-1 level). E-1 is the
European and Latin American version of North
American T-1, though T-1 is 1.544 Mbps.
 Fiber optic technology
    
    Fiber optic systems use laser-generated light to
transmit voice, data and video in digital format
through ultra-thin strands of glass. Fiber optic
systems are characterized by large circuit
capacity, good sound quality, resistance to
external signal interference and direct interface
to digital switching equipment and digital
microwave systems. A pair of fiber optic
 G-1




---



##### Table of Contents



strands
using advanced transmission technologies is
capable of carrying multiple 2.5 or 10 Gbps
communication streams . Because optical signals
disperse over distance, they must be regenerated
/ amplified at sites located along the fiber
optic cable. Fiber optic systems using earlier
eneration fiber require frequent intervals
between regeneration / amplifier sites. Greater
distances between regeneration / amplifier sites
afforded by the use of advanced fiber generally
translate into substantially lower installation
and operating costs and fewer potential points of
failure.Fixed wireless local loop
    
    A wireless local telephony service using the
3.4-3.7 GHz frequency band.FTTH
    
    Fiber-to-the-home, reference to an all
fiber-optic public telephone network design,
where broadband services are delivered to the
customer premises / network interface by fiber
optic.Gbps
    
    Gigabits per second. A measurement of speed for
digital signal transmission expressed in billions
of bits per second (Gbps).Gulf region
    
    115 cities and towns in eleven states in eastern
Mexico, which includes the cities of Puebla,
Tampico, Veracruz, Reynosa, Cancún, Chetumal,
Mérida, Ciudad del Carmen, Campeche,
Coatzacoalcos and Tuxtla Gutiérrez, among others.Hertz
    
    The unit measuring the frequency with which an
alternating electromagnetic signal cycles through
the zero-value state between lowest and highest
states. One hertz (abbreviated Hz) equals one
cycle per second. KHz (kilohertz) stands for
thousands of hertz; MHz (megahertz) stands for
millions of hertz and GHz (gigahertz) stands for
billions of hertz.ISDN
    
    Integrated Services Digital Network. ISDN is an
international standard that provides end-to-end
digital connectivity to support a wide range of
voice, data and video services.Kbps
    
    Kilobits per second, a measurement of speed for
digital signal transmission expressed in
thousands of bits per second.Lambdas
    
    Lambdas are used as the symbol for wavelength in
lightwave systems. Fiber optic systems may use
multiple wavelengths of light, with each range of
wavelengths appearing in a window, roughly
corresponding to a color in the visible light
spectrum.LAN
    
    Local area network, a private data communications
network linking a variety of data devices, such
as computer terminals, personal computer
terminals, personal computers and microcomputers,
all housed in a defined building, plant or
geographic area.Microwave technology
    
    Although limited in capacity compared with fiber
optic systems, digital microwave systems offer an
effective and reliable means of transmitting
lower volume and narrower bandwidths of voice,
data and video signals over short and
intermediate distances. Microwaves are very
high frequency radio waves that can be reflected,
focused and beamed in a line-of-sight
transmission path. As a result of their
electro-physical properties, microwaves can be
used to transmit signals through the air, with
relatively little power. To create a
communications circuit, microwave signals are
 G-2




---



##### Table of Contents



transmitted through a focusing antenna, received
by an antenna at the next station in the network,
then amplified and retransmitted. Because
microwaves disperse as they travel through the
air, this transmission process must be repeated
at repeater stations, which consist of radio
equipment, antennae and back-up power sources,
located on average every 30 kilometers along the
transmission route.Mbps
    
    MegaBits per second. A measurement of speed for
digital signal transmission expressed in millions
of bits per second (Mbps).Multi-line hunting
    
    A value-added service that allows for multiple
calls to be received with a single telephone
number.PCS
    
    Personal Communications Services. PCS has come
to represent two things: first, a digital
wireless communications service operating over
the 1.9 GHz band; and second, more generically, a
wireless communications service utilizing a
digital network that offers typical features such
as voice, video and data applications, short
messaging, voicemail, caller identification, call
conferencing and call forwarding. Generic PCS
suppliers promote this service on the ability of
its features to be customized, or bundled, to
the needs of the individual customers.Point-to-multipoint
microwave transmission
    
    A transmission using microwave technology by
which a single signal goes from one origination
point to many destination points.Point-to-point microwave
transmission
    
    A transmission using microwave technology by
which a signal goes from one point to another,
usually connected by some dedicated transmission
line.POTS
    
    Plain Old Telephone Service. The basic service
supplying standard single line telephones,
telephone lines and access to the public switched
network.SCT
    
    Secretaría de Comunicaciones y Transportes, the
Mexican Communications and Transportation
Ministry.Switch
    
    A device that opens or closes circuits or selects
the paths or circuits to be used for transmission
of information. Switching is the process of
interconnecting circuits to form a transmission
path between users.Teledensity
    
    Teledensity is a measure of telephony service in
a population. It is calculated by dividing the
total subscriber base (number of lines in
service) by the inhabitants and multiplying by
100. It is generally used as a comparative
measure of network development. All teledensity
figures are reported in subscribers per 100
inhabitants.Triple play services
    
    Triple play services consist combination of
voice, data, and video services offered as a
bundled service for a price that is less than the
price of the individual services aquired
individually..VoIP
    
    Voice over Internet Protocol services consist in
the technology that provides telephone compamies
with the ability to carry normal telephony-style
voice over an Internet Protocol-based Internet
with POTS-like functionality, reliability, and
voice quality.
 G-3




---



##### Table of Contents



VPN
    
    Virtual Private Network. A network design
offering the appearance and functionality of a
dedicated private network.Web-hosting
    
    A service performed by Internet service providers
(also known as ISPs) and Internet access
providers (also known as IAPs) consisting in the
hosting of outside companies web pages to be
displayed on the Internet.xDSL
    
    XDSL is a physical-layer protocol that supports
bandwidth downstream and upstream.
 G-4




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the
registrant certifies that it meets all requirements for filing on Form 20-F and has duly caused
this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. MAXCOM TELECOMUNICACIONES, S.A. DE C.V.By:
    /s/ JOSE ANTONIO SOLBESJosé Antonio SolbesChief Financial Officer DATE: June 29, 2005