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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 1934
 OR þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003
OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 for the transition period from            to
Commission File Number 333-11910   MAXCOM TELECOMUNICACIONES, S.A. DE C.V.  MAXCOM TELECOMMUNICATIONS, INC.  UNITED MEXICAN STATES
(Jurisdiction of incorporation or organization)    Guillermo Gonzalez Camarena No. 2000
Colonia Centro de Ciudad Santa Fe
Mexico, D.F. 01210   Securities registered or to be registered pursuant to Section 12(b) of the Act:   Securities registered or to be registered pursuant to Section 12(g) of the Act:   Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 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
    
    
    1,276,428Series A1 shares, no par value, common voting stock with preferred liquidation rights
    
    
    6,088,896Series B shares, no par value, common voting stock
    
    
    1,226,373Series B1 shares, no par value, common voting stock with preferred liquidation rights
    
    
    5,848,209Series N shares, no par value, without voting rights
    
    
    12,337,513Series N1 shares, no par value, preferred stock with limited voting rights
    
    
    122,468,441Series N2 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




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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
    
    
    36ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    58ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    64ITEM 8. FINANCIAL INFORMATION
    
    
    69ITEM 9. THE OFFER AND LISTING
    
    
    70ITEM 10. ADDITIONAL INFORMATION
    
    
    71PART II
    
    
    101ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    101ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    101PART III
    
    
    101ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    101ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
    
    
    101ITEM 15. CONTROLS AND PROCEDURES
    
    
    102ITEM 16.
    
    
    102PART IV
    
    
    104ITEM 17.FINANCIAL STATEMENTS
    
    
    104ITEM 18.FINANCIAL STATEMENTS
    
    
    1ITEM 19.EXHIBITS
    
    
    1SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
    
    S-IIGLOSSARY OF TELECOMMUNICATIONS TERMS
    
    
    G-1CAPACITY SALE AGREEMENTCOMPUTATION OF EARNINGS PER SHARECOMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESCODE OF ETHICSCERTIFICATIONCERTIFICATIONCERTIFICATIONCERTIFICATION
    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




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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, 2003 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, 2003, which was Ps.11.24 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 and Internet;
    
    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




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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




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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, 1999, 2000, 2001, 2002 and 2003, including the audited consolidated
financial statements as of December 31, 2001, 2002 and 2003 and for the years
ended December 31, 2000, 2001, 2002 and 2003 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 21 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




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As of the year ended December 31,1999(1)
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(3)Thousands of constant December 31, 2003 pesosand thousands of U.S. dollars, except for shares and per share data(2)Statement of Operations Data:Mexican GAAPNet revenues
    
    Ps.
    110,267
    
    
    Ps.
    305,290
    
    
    Ps.
    345,524
    
    
    Ps.
    557,251
    
    
    Ps.
    765,630
    
    
    $
    68,117Operating costs and expenses:Network operating costs
    
    
    54,788
    
    
    
    123,653
    
    
    
    165,337
    
    
    
    216,359
    
    
    
    275,066
    
    
    
    24,472Selling, general and
administrative
    
    
    201,992
    
    
    
    379,989
    
    
    
    472,526
    
    
    
    445,776
    
    
    
    385,493
    
    
    
    34,297Depreciation and amortization
    
    
    92,849
    
    
    
    230,681
    
    
    
    295,062
    
    
    
    330,192
    
    
    
    336,174
    
    
    
    29,909Total operating costs and
expenses
    
    
    349,629
    
    
    
    734,323
    
    
    
    932,925
    
    
    
    992,327
    
    
    
    996,733
    
    
    
    88,678Operating loss
    
    
    (239,362
    )
    
    
    (429,033
    )
    
    
    (587,401
    )
    
    
    (435,076
    )
    
    
    (231,103
    )
    
    
    (20,561
    )Integral cost (income) of financing:Interest expense
    
    
    57,887
    
    
    
    458,949
    
    
    
    469,241
    
    
    
    215,898
    
    
    
    30,225
    
    
    
    2,689Interest income
    
    
    (12,559
    )
    
    
    (112,393
    )
    
    
    (84,369
    )
    
    
    (4,650
    )
    
    
    (4,180
    )
    
    
    (372
    )Gain on repurchase of debt
    
    
    
    
    
    
    
    
    
    
    (133,257
    )Exchange loss (gain), net
    
    
    11,935
    
    
    
    12,284
    
    
    
    (99,778
    )
    
    
    214,828
    
    
    
    173,134
    
    
    
    15,404Gain on net monetary position
    
    
    (24,935
    )
    
    
    (103,385
    )
    
    
    (90,842
    )
    
    
    (104,619
    )
    
    
    (76,159
    )
    
    
    (6,776
    )Total integral cost of financing
    
    
    32,328
    
    
    
    255,455
    
    
    
    60,995
    
    
    
    321,457
    
    
    
    123,020
    
    
    
    10,945Nonrecurring charges
    
    
    
    
    
    
    
    
    
    
    68,376Other income (expense), net
    
    
    164
    
    
    
    (541
    )
    
    
    (195
    )
    
    
    2,748
    
    
    
    (148
    )
    
    
    (13
    )Asset tax and income tax
    
    
    
    
    
    
    
    
    
    
    824
    
    
    
    8,054
    
    
    
    12,912
    
    
    
    1,149Net loss
    
    
    (271,526
    )
    
    
    (685,029
    )
    
    
    (717,791
    )
    
    
    (761,839
    )
    
    
    (367,183
    )
    
    
    (32,668
    )Net loss per share, basic
    
    Ps.
    (26.45
    )
    
    Ps.
    (59.76
    )
    
    Ps.
    (52.21
    )
    
    Ps.
    (5.65
    )
    
    Ps.
    (2.09
    )
    
    $
    (0.19
    )Weighted-average shares
outstanding
    
    
    10,264,827
    
    
    
    11,463,667
    
    
    
    13,748,445
    
    
    
    134,738,030
    
    
    
    175,927,429
    
    
    
    175,927,429U.S. GAAPNet loss
    
    Ps.
    (333,971
    )
    
    Ps.
    (639,551
    )
    
    Ps.
    (715,109
    )
    
    Ps.
    (362,570
    )
    
    Ps.
    (378,717
    )
    
    $
    (33,694
    )Net loss per share
    
    Ps.
    (32.54
    )
    
    Ps.
    (55.79
    )
    
    Ps.
    (52.01
    )
    
    Ps.
    (2.69
    )
    
    Ps.
    (2.15
    )
    
    $
    (0.19
    )Balance Sheet Data:Mexican GAAPCash and cash equivalents
    
    Ps.
    192,115
    
    
    Ps.
    1,230,347
    
    
    Ps.
    189,675
    
    
    Ps.
    120,331
    
    
    Ps.
    41,736
    
    
    $
    3,713Restricted cash
    
    
    23,348
    
    
    
    652,749
    
    
    
    205,304Working capital(4)
    
    
    6,302
    
    
    
    (73,153
    )
    
    
    (41,563
    )
    
    
    (18,711
    )
    
    
    13,296
    
    
    
    1,183Frequency rights, net
    
    
    128,514
    
    
    
    121,866
    
    
    
    115,219
    
    
    
    108,572
    
    
    
    96,272
    
    
    
    8,565Telephone network systems and
equipment, net
    
    
    959,002
    
    
    
    1,246,986
    
    
    
    1,504,438
    
    
    
    1,651,338
    
    
    
    1,537,430
    
    
    
    136,782Preoperating expenses, net
    
    
    310,227
    
    
    
    277,018
    
    
    
    243,824
    
    
    
    212,506
    
    
    
    179,626
    
    
    
    15,981Intangible assets, net
    
    
    46,381
    
    
    
    371,634
    
    
    
    329,193
    
    
    
    442,860
    
    
    
    390,866
    
    
    
    34,775Rent deposits and other assets
    
    
    29,886
    
    
    
    9,012
    
    
    
    34,411
    
    
    
    30,769
    
    
    
    28,158
    
    
    
    2,505Total assets
    
    
    1,795,313
    
    
    
    3,996,734
    
    
    
    2,757,022
    
    
    
    2,753,331
    
    
    
    2,472,630
    
    
    
    219,985Total liabilities
    
    
    1,100,482
    
    
    
    3,489,872
    
    
    
    2,966,944
    
    
    
    2,129,011
    
    
    
    2,214,462
    
    
    
    197,016Capital stock
    
    
    929,754
    
    
    
    1,322,478
    
    
    
    1,072,765
    
    
    
    1,752,596
    
    
    
    1,752,596
    
    
    
    155,925Additional paid-in capital
    
    
    36,606
    
    
    
    140,939
    
    
    
    112,441
    
    
    
    437
    
    
    
    1,468
    
    
    
    131Accumulated deficit
    
    
    (271,526
    )
    
    
    (956,556
    )
    
    
    (1,395,129
    )
    
    
    (1,128,713
    )
    
    
    (1,495,896
    )
    
    
    (133,087
    )Shareholders equity (deficit)
    
    
    694,834
    
    
    
    506,862
    
    
    
    (209,922
    )
    
    
    624,320
    
    
    
    258,168
    
    
    
    22,969U.S. GAAPShareholders equity
    
    Ps.
    414,235
    
    
    Ps.
    271,707
    
    
    Ps.
    (442,391
    )
    
    Ps.
    (2,881
    )
    
    Ps.
    (380,567
    )
    
    $
    (33,858
    )Other Financial Data:Mexican GAAPCapital expenditures(5)
    
    
    889,111
    
    
    
    777,261
    
    
    
    568,031
    
    
    
    549,147
    
    
    
    125,365
    
    
    
    11,153Ratio of earnings to fixed
charges(6)
    
    
    (2.45
    )
    
    
    (0.39
    )
    
    
    (0.48
    )
    
    
    (2.25
    )
    
    
    (10.03
    )
    
    
    (10.03
    )Cash flow used in operating
activities
    
    
    (160,254
    )
    
    
    (892,132
    )
    
    
    (369,901
    )
    
    
    (353,664
    )
    
    
    (47,116
    )
    
    
    (4,193
    )Cash flow provided by financing
activities
    
    
    757,444
    
    
    
    2,707,627
    
    
    
    (102,741
    )
    
    
    833,467
    
    
    
    93,886
    
    
    
    8,353
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As of the year ended December 31,1999(1)
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(3)Thousands of constant December 31, 2003 pesosand thousands of U.S. dollars, except for shares and per share data(2)Cash used in investing
activities
    
    
    (889.135
    )
    
    
    (777,261
    )
    
    
    (568,031
    )
    
    
    (549,147
    )
    
    
    (125,365
    )
    
    
    (11,153
    )U.S. GAAPCash used in operating
activities
    
    Ps.
    (255,923
    )
    
    Ps.
    (816,062
    )
    
    Ps.
    (399,624
    )
    
    Ps.
    (196,564
    )
    
    Ps.
    6,814
    
    
    $
    606Cash provided by financing
activities
    
    
    982,548
    
    
    
    2,827,199
    
    
    
    (40,749
    )
    
    
    634,252Cash used in investing activities
    
    
    (859,661
    )
    
    
    (863,752
    )
    
    
    (549,515
    )
    
    
    (421,780
    )
    
    
    (65,053
    )
    
    
    (5,788
    )
 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, 2003. Restatement into December 31,
2003 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, 2003. The inflation
index used in this annual report for 1999 figures is 1.2502 for 2000
figures is 1.1474 for 2001 figures is 1.0990 and for 2002 figures is
1.0397.(3)
    
    Peso amounts were converted to U.S. dollars at the exchange rate of
Ps.11.24 per U.S.$1.00 reported by the Federal Reserve Bank of New York
as its noon buying rate for pesos on December 31, 2003. 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, 1999, 2000, 2001, 2002 and 2003 amounted
to Ps.290.5 million, Ps.779.4 million, Ps.723.2 million, Ps.754.6
million, and Ps.354.4 million, respectively. 3




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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 23, 2004 was Ps.11.345 per U.S.$1.00. Noon Buying Rate(1)Period End
    
    Average(2)
    
    High
    
    Low1999
    
    
    9.48
    
    
    
    9.561
    
    
    
    10.60
    
    
    
    9.242000
    
    
    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
    
    
    
    10.11December 2003
    
    
    
    
    
    
    
    
    
    
    11.41
    
    
    
    11.17January 2004
    
    
    
    
    
    
    
    
    
    
    11.24
    
    
    
    10.81February 2004
    
    
    
    
    
    
    
    
    
    
    11.25
    
    
    
    10.91March 2004
    
    
    
    
    
    
    
    
    
    
    11.23
    
    
    
    10.92April 2004
    
    
    
    
    
    
    
    
    
    
    11.43
    
    
    
    11.16May 2004
    
    
    
    
    
    
    
    
    
    
    11.64
    
    
    
    11.38
   (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 indebtedness Not applicable. C. Reasons for offer and use of proceeds Not 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 expect to generate insufficient cash flows to cover our fixed
charges through 2004. This is so even though our fixed charges have decreased
significantly as we restructured our financial indebtedness in April 2002 and
do not have to make any interest payments on such indebtedness until September
1, 2006. 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




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Our auditors have indicated in their report that there is substantial doubt
about our ability to continue as a going concern under current conditions PricewaterhouseCoopers, S.C. in its Report of Independent Registered
Public Accounting Firm dated February 27, 2004 has stated that we are highly
leveraged and have suffered recurring losses from operations that raises
substantial doubt about our ability to continue as a going concern. We believe
that if our financial situation does not improve and we do not attract new
capital, we will be unable to service our debt and operate as a viable company
and we may qualify for dissolution or liquidation under Mexican corporate law. In 2003, our accumulated losses were nearly the equivalent of two-thirds
of our capital stock. In the first quarter of 2004, our accumulated losses
exceeded such threshold. According to the Mexican Companies Law (Ley General
de Sociedades Mercantiles), an interested party may file a claim for
dissolution and force us to liquidate our assets if the accumulated losses
exceed two-thirds of our contributed capital during any fiscal year. We expect to incur net losses through at least 2004 Our cash flow from operations for the year 2003 was insufficient to cover
our fixed charges. We expect to continue to incur net losses through at least
2004. 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
2004 of U.S. $37.1 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 will be restricted by the terms of the indenture governing the
Senior Notes due 2007, 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. 5




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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 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. 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. The interconnection rate remained at USD $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 2003, our earnings were insufficient to cover
fixed charges by an amount equal to Ps.354.4 million (U.S.$31.5 million), even
though we do not have to make any interest payments on our financial
indebtedness until September 1, 2006 due to our April 2002 debt restructuring. 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. 6




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The indenture governing the new notes issued pursuant to the exchange
offer 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
    
    our ability to compete in our markets. We are and will be subject to restrictive covenants The terms of the new notes, impose significant operating and financial
restrictions. These restrictions will 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 a change of control offer We will be required to offer to repurchase all of the new notes if a
change of control, as such term is defined in the indenture governing the new
notes, occurs. However, it is possible that we will not have sufficient funds
at the time of the change of control 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. 7




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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. 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 the international settlement rate system. 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 8




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
    
    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. 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 2003, we churned 40,242 voice lines (residential and business
customer lines). This resulted in an average monthly churn rate of 2.6%. 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. The Mexican government is analyzing granting licenses to cable operators
to allow them to provide local telephony service. As these cable operators have
a substantial coverage of the cities Maxcom is already servicing, and as the
cable operators telephony income may be seen as incremental revenue, the price
reduction and the vast coverage may prevent Maxcom from continue growing. 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 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. 9




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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.44.6 million in performance bonds that we
previously issued to the 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 2003, 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 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 10




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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. We cannot predict the impact that this new political landscape will
have on the Mexican economy, particularly on the growth and deregulation of the
telecommunications industry. In the first 3 years of this new government regulation has been static and
no significant progress has been made to increase competition or to reduce the
prerogatives Telmex has in the market, we see no possibility of improvement in
this issue for the next 3 years. 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 from 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 (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




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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. In the first five
months of 2004, the peso devalued 1.5% relative to the U.S. dollar. We do not currently have, nor do we expect to have, hedging arrangements
with respect to this risk because we do not believe them to be cost effective
for us. Further declines in the value of the peso relative to the U.S. dollar
could adversely affect our ability to meet our U.S. dollar-denominated
obligations, including the new notes and the 13 3/4% Series B Senior Notes due
2007, which we refer to in this report as the old 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 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 interim financial statements in accordance with Mexican
GAAP and only our annual financial statements 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 21 to the consolidated financial statements for a description of the
principal differences between Mexican GAAP and U.S. GAAP applicable to us. 12




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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 N2 preferred stock, 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 and the old 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 12.3%, 9.0%, 4.4%, 5.7% and 4.0% in 1999, 2000,
2001, 2002 and 2003, 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, 21.4%, 15.2%, 11.3%, 7.1% and 6.2% for 1999,
2000, 2001, 2002 and 2003, 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




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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 and data services in Mexico City and the cities
of Puebla and Querétaro. For the four years ended December 31, 2003, we invested approximately
Ps.1,773.6 million in capital expenditures, primarily for the buildout of our
infrastructure. For 2004, we plan to invest approximately U.S.$37.1 million in capital
expenditures, mainly to continue to build out our network. Of this amount, we
had already spent approximately Ps.23.0 million (approximately
U.S. $2.1 million) by March 31, 2004. 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 and other value-added services to targeted 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, and certain other cities where we are planning to operate
in accordance with our nationwide concession, 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. 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, 2003, we had in service three state-of-the-art Lucent
Technologies 5ESS switches. 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. 14




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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 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. 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 a
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 15.7 telephone lines per 100 inhabitants as of December 31,
2003 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. 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. 15




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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 2003 our number of lines in service grew by 12.12% and where we
installed 11.9% 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 USA, 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 Communications 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. 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 start providing service to the cities of Queretaro during
2003; San Luis Potosi, Veracruz and Toluca by 2004; Leon, Guadalajara and 16




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Tehuacan by 2005 and Oaxaca and Aguascalientes by 2006. 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
39.5 telephone lines per 100 inhabitants as of December 31, 2003, we believe
that significant unmet demand for high-quality local telephony services in
Mexico City remains. As of December 31, 2003, we had 74,834 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 acording 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 and to 9.5% in 2002. As of December 31, 2003, we had 59,832 lines in
service, as compared to 53,362 lines in service as of December 31, 2002.
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. We also commenced commercial operations in the City of Querétaro in
November 2002. Querétaro is the twenty fourth largest city in Mexico, with a
population of 787,341 people in 2000 according to INEGI. As of December 31,
2003 we had 2,878 lines in service as compared to 2,074 lines in service as of
December 31, 2002. According to COFETEL, we installed in 2003, 3.8% of all new
lines installed in the whole state of Querétaro. 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. 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. 17




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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 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, 2003, 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. 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. 18




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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 Querétaro,
to assure the proper signaling in our interconnection with all other carriers. 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. 19




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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. 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 20




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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.
    
    Speedy Max(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.
    
    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. 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 21




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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. 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, 2003, we employed 6 internal salespeople and 144 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. 22




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
    
    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
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 23




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and our strategic partner in this program is Siebel a software company.
Our CRM strategy during 2004 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. 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 WorldCom Inc. 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 Bell Canada International is a shareholder, was awarded a
nationwide local telephony and long distance concession in June 1996, and fixed
wireless local loop frequencies in the 3.4 to 3.7 GHz band in May 1998. 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. Axtel targets the high-end residential and the 24




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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. 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), which we refer to as the SCT,
published regulations governing the licensing of local services on a
competitive basis. In order to promote competition in the local telephony market, the Mexican
government granted several concessions beginning in 1997, including 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. 25




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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. 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., in which AT&T Corp. is a shareholder;
    
    Avantel, S.A. de C.V., in which MCI WorldCom Inc. is a shareholder;
    
    Axtel, S.A. de C.V., in which Bell Canada International is a shareholder; 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 2003, Mexico had an estimated population of 104.2 million and a
population growth rate of approximately 1.3% for the period from 1995 to 2000.
In 2003, 31.4% of the population was under the age of 15, 61.27% was between
the ages of 15 and 59 and only 7.3% was 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 26




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2002, the growth of the real gross domestic product resumed as it
increased by 0.9%, and in 2003 it increased in 2%, according to the Bank of
Mexico. Underserved telephony market. In 2002, 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.$21.3 billion of
revenue in 2003. Projected growth trends. With the introduction of competition in the
Mexican telecommunications market, teledensity rates and line usage increased
substantially. According to Pyramid Research, between 2003 and 2007 fixed line
penetration in service in Mexico is expected to increase by 18.75%. According to Pyramid Research, local and domestic long distance services
revenues are expected to experience 9.65%, and 1.9% average annual growth rates
between 2003 and 2007, respectively. In contrast, international long distance
services revenues are expected to experience a 0.2% average annual growth rate
over the same period. In spite of the sustained growth in switched traffic,
revenues from long distance services have fallen. A drop in tariffs resulting
from intense competition has not been compensated by a sufficient increase in
traffic. In the international long distance market, the reduction in
termination rates and the growing proportion of bypass traffic have played a
major role in inhibiting growth in revenues. Total local wireline telephony revenues in Mexico are expected to increase
from U.S.$ 7.2 billion in 2003 to U.S.$9.2 billion in 2007. In contrast,
international long distance services revenues are expected to experience a 0.7%
increase over the same period. 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, 27




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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 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 from January 1, 2004, telecommunications and
supplementary sevices 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 28




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
    
    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 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 29




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
    
    dissolution or bankruptcy of the concession holder or the
permit holder. Temporary seizure. The Mexican government, through the SCT, may also
temporarily seize all assets related to a telecommunications concession or
permit in the event of a natural disaster, war, significant public disturbance,
threats to internal peace or for economic reasons or for other reasons related
to national security. If the Mexican government temporarily seizes such
assets, except in the event of war, it must indemnify the concession holder for
all losses and damages, including lost revenues. We are not aware of any
instance in which the SCT has exercised its temporary seizure powers in
connection with a telecommunications company. Rates for telecommunications services 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 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; 30




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
    
    the purchase and lease of network capacity from other
carriers, including the lease of digital circuits;
    
    value-added services;
    
    operator services;
    
    data, video, audio and video conference services, except for
cable or other restricted television, continuous music or digital
audio;
    
    credit or debit telephone cards; and
    
    public telephony. The concession does not impose any limitations on the setting of our rates
other than the requirement that we file with COFETEL a notification of any rate
change prior to having it take effect. The concession requires us to comply with service quality specifications
and, 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.13.5
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, 2004, the level of fines, which are based on a multiple of the
Mexican minimum daily salary, ranged from Ps.90,480 to Ps.4.5 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; 31




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
    
    the purchase and lease of network capacity from other carriers; and
    
    nationwide and international long distance telephony. The concession expressly prohibits the following services:  
    
    those which require a concession for frequency bands of the
radio electric spectrum for specific uses;
    
    those which require a concession to occupy and exploit
geostationary orbital positions and satellite orbits assigned to
Mexico;
    
    those which require a concession to operate radio or television broadcasting systems; and
    
    cable or other restricted television. The concession does not impose any limitations on 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.13.5 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, 2004, the level of fines, which are based on a multiple
of the Mexican minimum daily salary, ranged from Ps.90,480 to Ps.4.5 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. 32




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However, since most of Cofetels regulation on special charges to Telmex
expired in December 2003, we will 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 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.12.8 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, 2004, the level of fines, which are based on
a multiple of the Mexican minimum daily salary, ranged from Ps. 90,480 to
Ps.4.5 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 33




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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.4.7 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, 2004 the level of fines, which are based on
a multiple of the Mexican minimum daily salary, ranged from Ps. 90,480 to
Ps.4.5 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 and Ps.0.1111 per minute for the months of
December 2000, 2001, 2002, and 2003 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.
Additionally, the amendment 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 30%, then no interconnection fee amounts are payable by the net user of
interconnection services. If the imbalance exceeds 30% 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, 2003, 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 34




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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 and Ps.0.1111 per minute for the months of
December 2000, 2001 2002 and 2003 respectively. The wireline to mobile
interconnection fees under the calling party pays mode was Ps.1.90 per minute
for December 2000, 2001, 2002, and 2003. 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 and
Ps.0.1111 for the month of December 2003. 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 only two Mexican subsidiaries, Corporativo en
Telecomunicaciones, S.A. de C.V. and Maxcom Servicios Administrativos, 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 the other subsidiary. 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 USA, 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, mainlly Mexico (also known as a 214 License). The U.S.
Federal Communication Commision granted the license in March 2004. Maxcom
U.S.A., Inc. has not yet initiated significant operations in the U.S.  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. 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. 35




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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 will be 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 also have a space leased for the parking of
our vehicular fleet for a 5-year that expires on September 17, 2007. This
parking space in 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. In
July 2003, the lease agreement for 96,900 square feet industrial
warehouse in Mexico City expired and we did not renew such lease. On August 1,
2003, we lease a smaller warehouse comprised of 28,620 square feet for a 2-year
term tha expires on July 31, 2005. In addition we lease approximately 102 other
sites that are used as hosts or single-site buildings and are located
throughout Mexico City and the cities of Puebla. 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, 2003 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, 2003. 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, 2003, which was Ps.11.24 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, 2002 and
2003 and for the years ended December 31, 2001, 2002 and 2003 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 21 to our
consolidated financial statements for a description of the principal
differences between Mexican GAAP and U.S. GAAP applicable to us. Note
21 to
our financial statements also provides a reconciliation to U.S. GAAP of our net
losses for the years ended December 31, 2001, 2002 and 2003 and of
stockholders equity as of December 31, 2001, 2002 and 2003. 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 36




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(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, 2003), 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, 2003. 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 2001,
2002 and 2003, the rates of inflation in Mexico, as measured by changes in the
Mexican national consumer price index, were 4.4%, 5.7% and 4.0%, 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 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.  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. 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 37




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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. In the
first five months of 2004, the peso devalued 1.5% 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 and 2002, the inflation rate decreased to 12.3%, 9.0%,
4.4% and 5.7%, respectively. In 2003, the inflation rate was 4.0%. 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.
Accordingly, our financial statements do not include consolidated statements of
operations for the periods from February 28, 1996 (our date of incorporation)
to April 30, 1999. Beginning on May 1, 1999, we were required to begin to amortize all
previously capitalized pre-operating costs. These capitalized pre-operating
expenses, net, which amounted to Ps.243.8 million at December 31, 2001,
Ps.212.5 million at December 31, 2002 and Ps.179.6 million at December 31,
2003, 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:  
    
    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; 38




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
    
    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 312001
    
    2002
    
    2003Net revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Operating cost and expenses:Network operating costs
    
    
    48
    %
    
    
    39
    %
    
    
    36
    %Selling, general and administrative expenses
    
    
    137
    %
    
    
    80
    %
    
    
    50
    %Depreciation and amortization
    
    
    85
    %
    
    
    59
    %
    
    
    44
    %Total operating cost and expenses
    
    
    270
    %
    
    
    178
    %
    
    
    130
    %Operating loss
    
    
    170
    %
    
    
    78
    %
    
    
    30
    %Integral cost of financing
    
    
    18
    %
    
    
    58
    %
    
    
    16
    %Nonrecurring charges
    
    
    20
    %
    
    
    0
    %
    
    
    0
    %Other expense, net
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Taxes
    
    
    0
    %
    
    
    1
    %
    
    
    2
    %Net loss
    
    
    208
    %
    
    
    137
    %
    
    
    48
    %
 Year ended December 31, 2003 compared to year ended December 31, 2002 Net revenues Our net revenues primarily include monthly fees, usage fees, installation
charges, interconnection fees and the sale of telephone sets. See note 4.m. to
the consolidated financial statements included in this annual report for an
explanation of how we recognize revenues. Our net revenues increased 37.4% in 2003 as compared to 2002, from Ps.
557.3 million in 2002 to Ps.765.6 million in 2003. 39




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Voice revenues increased by 27.2%, from Ps.499.8 million in 2002 to
Ps.635.9 million in 2003. This increase was primarily due to 36.1% increase of
the number of average voice lines in service from 96,521 in 2002 to 125,723 in
2003, 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 9.2% decrease in Company ARPU. The increase in voice
lines produced a 33.4% increase in monthly fee revenues (from Ps.220.1 million
in 2002 to Ps.294.5 million in 2003) and a 31.3% increase in overall usage fees
(from Ps.241.1 million in 2002 to Ps.316.6 million in 2003). Wholesale revenues increased by 79.3%, from Ps.47.4 million in 2002 to
Ps.85.0 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 312002
    
    2003(in millions)Voice(1)
    
    Ps
    .
    
    
    
    499.8
    
    
    Ps
    .
    
    
    
    635.9Data
    
    
    
    
    
    
    10.1
    
    
    
    
    
    
    
    44.7Wholesale
    
    
    
    
    
    
    47.4
    
    
    
    
    
    
    
    85.0Total revenues
    
    Ps
    .
    
    
    
    557.3
    
    
    Ps
    .
    
    
    
    765.6
   (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. ARPU2002
    
    2003
    
    %(in U.S. dollars)BusinessMonthly charges
    
    $
    22.7
    
    
    $
    23.3
    
    
    
    3
    %Usage
    
    
    50.0
    
    
    
    49.5
    
    
    
    (1
    )%Subtotal
    
    
    72.7
    
    
    
    72.8
    
    
    
    0
    %Non-recurring
    
    
    4.1
    
    
    
    2.8
    
    
    
    (32
    )%Total business
    
    $
    76.8
    
    
    $
    75.6
    
    
    
    (2
    )%ResidentialMonthly charges
    
    $
    17.1
    
    
    $
    16.1
    
    
    
    (6
    )%Usage
    
    
    12.0
    
    
    
    11.7
    
    
    
    (2
    )%Subtotal
    
    
    29.1
    
    
    
    27.8
    
    
    
    (4
    )%Non-recurring
    
    
    2.8
    
    
    
    1.2
    
    
    
    (58
    )%Total residential
    
    $
    31.9
    
    
    $
    29.0
    
    
    
    (9
    )%CompanyMonthly charges
    
    $
    18.3
    
    
    $
    17.4
    
    
    
    (5
    )%Usage
    
    
    20.0
    
    
    
    18.7
    
    
    
    (6
    )%Subtotal
    
    
    38.3
    
    
    
    36.1
    
    
    
    (6
    )%Non-recurring
    
    
    3.1
    
    
    
    1.5
    
    
    
    (52
    )%Total company
    
    $
    41.4
    
    
    $
    37.6
    
    
    
    (9
    )%
 40




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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. Business ARPU decreased 1.6% to U.S.$75.6 in 2003 from U.S.$76.8 in 2002,
as a result of (i) a 31.7% decrease in in installation charges as we waived
installation fees in many cases during 2003 due to competitive pressures; and
(ii) a 1.1% decrease 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: (i) 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.$29.0 in 2003 from U.S.$31.9 in
2002. The decrease was mainly due to a 58.5% decrease in installation fees due
to waivers of such fees granted 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 312002
    
    2003
    
    %Voice lines:Business lines
    
    
    22,194
    
    
    
    24,305
    
    
    
    10
    %Residential lines
    
    
    98,557
    
    
    
    106,389
    
    
    
    8
    %Wholesale lines
    
    
    4,480
    
    
    
    6,850
    
    
    
    53
    %Total lines.
    
    
    125,231
    
    
    
    137,544
    
    
    
    10
    %
 Operating costs and expenses Our operating costs and expenses include:  
    
    network operating costs which, include network technical
expenses, 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 temporary management and consulting services,
executive recruiting consultants 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.996.7 million in 2003, a 0.4%
increase as compared to Ps.992.3 million in 2002. This increase was primarily
due to:  
    
    a Ps.46.6 million, or 32.7%, increase in network operating
services resulting mainly from (i) a Ps.43.0 million increase in
interconnection costs associated with significant increases in
local-to-mobile and long distance traffic and, (ii) Ps.3.6 million
increase in costs related to services such as AsistelMax and
Internet access launched during 2002, that gave a full year effect
in 2003 on a higher line count basis, when compared to its partial
effect in 2002; 41




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
    
    a Ps16.6 million, or 37.7% increase in technical expenses
coming basically from (i) a 84.3% increase, or Ps$10.2 million in
maintenance as a result of our larger telephone network, and (i) a
Ps$6.4 million, or 20.2% increase in leases of sites and expenses
related to the operation of our telephone network;  
    
    a Ps.6.0 million, or 1.8%, increase in depreciation and
amortization related to a higher fixed asset base in 2003; and  
    
    a Ps.4.5 million, or 15.2%, decrease in installation expenses
due to waivers of installation charges granted as a result of
competitive pressures (we record installation expense only when we
bill the charge on 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 over 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
expire in October 2017. These increases were offset in part by a Ps.60.3 million, or 13.5%,
decrease in selling, general and administrative expenses primarily due to the
continued implementation of cost-reduction measures such as (i) a 27.5 million
pesos decrease in severance expenses as a result of the headcount reduction in
late 2002, (ii) a Ps.23.4 million, or 10.7%, reduction in salaries, wages and
benefits as a result of the above-mentioned headcount reduction, (iii) a
Ps.17.6 million decrease in leases of offices buildings, as we reached an
agreement with our landlord at our former headquarters, (iv) a Ps13.3 million,
or 77.2% reduction in advertising expenses, as we have been selective with our
advertising campaigns and, (v) a Ps7.1 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 50,185 in 2003. These savings were offset in part by (i) a Ps.19.5 million, or 74.4%
increase in bad debt provisioning coming mainly from our increasing residential
customer base and the provision of a fraud detected from a business customer,
see Item 8. Financial Information-A. Consolidated statements and other
financial information, Legal proceedings, (ii) a Ps.8.0 million, or 28.8% in
fees paid to external advisors; and, (iii) a Ps.1.1 million increase in general
selling and administrative 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 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. 42




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Our integral cost of financing was Ps.123.0 million in 2003, a 61.7%
decrease as compared to Ps.321.5 million in 2002. The decrease in integral
cost of financing was primarily due to: (i) a Ps.185.7 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.41.7 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 as compared to the dollar during 2003, when
compared to the devaluation of the peso during 2002. These factors of financing costs were partially offset by (i) a Ps.28.5
million reduction of gain in net monetary position and, (ii) a Ps.8.3 million
higher bank commissions, net of interest on cash balances. Asset tax We recorded Ps.12.3 million in asset taxes in 2003 as compared to Ps.7.1
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. Year ended December 31, 2002 compared to year ended December 31, 2001 Net revenues Our net revenues increased 61.3% in 2002 as compared to 2001, from
Ps.345.5 million in 2001 to Ps.557.3 million in 2002. This increase was
primarily due to a more than doubling of the average number of lines in service
from 45,701 in 2001 to 96,521 in 2002, as we continued the buildout of our
network infrastructure. The increase in voice lines produced a 132.3% increase
in monthly fee revenues (from Ps.94.2 million in 2001 to Ps.220.8 million in
2002) and a 132.0% increase in overall usage fees (from Ps.104.0 million in
2001 to Ps.241.2 million in 2002). Wholesale revenues decreased by 61.8%, from Ps.123.9 million in 2001 to
Ps.47.4 million in 2002. This decrease was primarily due to (i) a reduction in
per-minute tariffs as a result of competitive pressures and (ii) a 24.6%
decrease in the number of average wholesale lines (from 6,745 lines in 2001 to
5,085 lines in 2002) as a result of our strategy of focusing our sales efforts
in our core business rather than giving in to competitive pressures in this
market. We started reporting revenues from data services in July 2002, when this
business became more relevant. Prior to that date, revenues from data services
were included under voice revenues. The following table presents a breakdown of
our revenues by source for 2001 and 2002. Year ended December 312001
    
    2002(in millions)Voice(1)
    
    Ps
    .
    
    
    
    221.6
    
    
    Ps
    .
    
    
    
    499.8Data
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    10.1Wholesale
    
    
    
    
    
    
    123.9
    
    
    
    
    
    
    
    47.4Total revenues
    
    Ps
    .
    
    
    
    345.5
    
    
    Ps
    .
    
    
    
    557.3
   (1)
    
    Includes revenues only from July 2002. Data service revenues
were minimal before such date and were recorded under voice service
revenues. The following table presents a breakdown of our average revenue per line
(also known as ARPU) for 2001 and 2002. 43




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ARPU2001
    
    2002
    
    %(in U.S. dollars)BusinessMonthly charges
    
    $
    24.5
    
    
    $
    22.7
    
    
    
    (8
    )%Usage
    
    
    42.1
    
    
    
    50.0
    
    
    
    19
    %Subtotal
    
    
    66.6
    
    
    
    72.7
    
    
    
    9
    %Non-recurring
    
    
    5.3
    
    
    
    4.1
    
    
    
    (23
    )%Total business
    
    $
    71.9
    
    
    $
    76.8
    
    
    
    7
    %ResidentialMonthly charges
    
    $
    17.3
    
    
    $
    17.1
    
    
    
    (1
    )%Usage
    
    
    12.4
    
    
    
    12.0
    
    
    
    (4
    )%Subtotal
    
    
    29.7
    
    
    
    29.1
    
    
    
    (2
    )%Non-recurring
    
    
    5.7
    
    
    
    2.8
    
    
    
    (51
    )%Total residential
    
    $
    35.4
    
    
    $
    31.9
    
    
    
    (10
    )%CompanyMonthly charges
    
    $
    19.6
    
    
    $
    18.3
    
    
    
    (7
    )%Usage
    
    
    21.6
    
    
    
    20.0
    
    
    
    (7
    )%Subtotal
    
    
    41.2
    
    
    
    38.3
    
    
    
    (7
    )%Non-recurring
    
    
    5.6
    
    
    
    3.1
    
    
    
    (45
    )%Total company
    
    $
    46.8
    
    
    $
    41.4
    
    
    
    (12
    )%
 Business ARPU increased 6.8% to U.S.$76.8 in 2002 from U.S.$71.9 in 2001,
as a result of a 17.5% increase in usage charges as a consequence of a higher
number of local, long distance and mobile outbound calls per line. This
increase was partially offset by: (i) a 23.8% reduction in installation fees
per lines, as we waived installation fees in many cases during 2002 due to
competitive pressures, and (ii) an 8.6% decrease in monthly fees related to a
change in product mix, given that each product has different rates. Residential ARPU decreased 9.9% to U.S.$31.9 in 2002 from U.S.$35.4 in
2001. The decrease was mainly due to a 51.1% decrease in installation fees due
to waivers of such fees granted as a result of competitive pressures. The following table presents a breakdown of our lines by type of customer
at December 31, 2001 and 2002 and the percentage variation: At December 312001
    
    2002
    
    %Voice lines:Business lines
    
    
    16,754
    
    
    
    22,194
    
    
    
    32.5
    %Residential lines
    
    
    55,537
    
    
    
    98,557
    
    
    
    77.5
    %Wholesale lines
    
    
    5,690
    
    
    
    4,480
    
    
    
    (21.3
    )%Total lines
    
    
    77,981
    
    
    
    125,231
    
    
    
    60.6
    %
 Operating costs and expenses Our operating cost and expenses were Ps.992.3 million in 2002, a 6.4%
increase as compared to Ps.932.9 million in 2001. This increase was primarily
due to:  
    
    a Ps.51.1 million, or 30.9% increase in network operating
costs resulting mainly from (i) a Ps.43.7 million increase in
interconnection costs associated with significant increases in
local-to-mobile 44




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and long distance traffic, even as interconnection tariffs for long
distance decreased by an average of 23.3% and (ii) Ps.7.0 million
in costs related to new services launched during 2002 such as
AsistelMax and Internet access. These increases were partially
offset by a Ps.10.7 million, or 26.5% reduction in installation
expenses (we record installation expense only when we bill the
charge on installation fees, and during 2002 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 expire in October
2017; and,  
    
    a Ps.35.1 million, or 11.9% increase in depreciation and
amortization related to a higher fixed asset base in 2002. The increases were offset in part by a Ps.26.7 million, or 5.7% decrease
in selling, general and administrative expenses primarily due to the
implementation of cost-reduction measures such as (i) a Ps.39.2 million, or
15.2% reduction in salaries, wages and benefits through a reduction in
headcount, (ii) a Ps.11.1 million decrease in general expenses and (iii) a
Ps.2.3 million reduction in advertising expenses. We also experienced a Ps.34.4
million reduction in external advisors expenses due to the fact that in 2001 we
had significant executive recruiting fees and had to rely on external advisors
while certain executive offices were vacant. These savings were offset in part by (i) Ps.27.5 million in costs related
to severance payments related to the reduction in headcount, (ii) a Ps.19.4
million increase in office and warehouse leasing costs, (iii) a Ps.7.6 million
increase in sales commissions and (iv) a Ps.4.2 million increase in bad debt
provisioning. Integral cost of financing Our integral cost of financing was Ps.321.5 million in 2002, a 427.0%
increase as compared to Ps.61.0 million in 2001. The increase in integral cost
of financing was primarily due to: (i) a Ps.314.6 million increase in foreign exchange loss as a
consequence of the effect of the devaluation of the peso as compared to
the dollar in 2002 on our dollar-denominated debt; (ii) a Ps.133.3 million gain associated with the early
extinguishment of U.S.$25.0 million of debt in 2001; and (iii) a Ps.79.8 million decrease in interest income as a result of a
lower average cash position and lower interest rates during 2002. These factors of financing costs were partially offset by a Ps.13.8
million gain in net monetary position. Asset tax We recorded Ps.7.1 million in asset taxes in 2002 as compared to Ps.0.8
million in asset taxes in 2001. The difference is primarily due to a
significant increase in our asset base in 1998, when we increased the buildout
of our network, as compared to 1997, 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 differ in certain significant
respects from U.S. GAAP. See note 21 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, 2002 and 2003 and for each of the two
years then ended; and for a description of the principal differences in 45




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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 January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB 51.
The primary objectives of FIN 46 are to provide guidance on the identification
of entities for which control is achieved through means other than through
voting rights (variable interest entities or VIEs) and how to determine
when and which business enterprise should consolidate the VIE (the primary
beneficiary). This new model for consolidation applies to an entity which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entitys activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest
in a VIE make additional disclosures. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. FIN 46 applies to public
enterprises as of the beginning of the applicable interim or annual period, and
it applies to nonpublic enterprises as of the end of the applicable annual
period. In December 2003 the FASB redeliberated certain proposed modifications
and revised FIN 46 (FIN 46-R). The revised provisions are applicable no later
than the first reporting period ending after March 15, 2004. The Company does
not expect that the adoption of FIN 46 and FIN 46-R will have a material impact
on its financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No.133 on the
Derivative Instruments and Hedging Activities (SFAS 149). This statement
amends and clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133, Accounting for the Derivative Instruments and
Hedging Activities. SFAS 149 it generally effective for contracts entered into
or modify after June 30, 2003 and for hedging relationships designed after June
30, 2003. The adoption of SFAS 149 did not have a material impact on the
consolidated financial statements. In February 2003, the FASB issued Emerging Issues Task Force 00-21 (EITF
00-21), Revenue Arrangements with Multiple Deliverables. EITF 00-21 requires
revenue arrangements with multiple deliverables to be divided into separate
units of accounting. If the deliverables in the arrangement meet certain
criteria, arrangement consideration should be allocated among the separate
units based on their relative fair values. Applicable revenue recognition
criteria should be considered separately for each unit. The guidance in EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company is evaluating the impact that the
adoption of EITF 00-21 will have on its financial statements. Recent Mexican accounting pronouncements In 2003, the Mexican Institute of Public Accountants (MIPA) issued new
Statement C-12, Financial Instruments with Characteristics of Liabilities,
Capital or Both, which highlights the differences between liabilities and
capital from the viewpoint of the issuer, as a basis for identifying,
classifying and accounting for the liability and capital components of combined
financial instruments at the date of issuance. The new Statement establishes the methodology for separating the
liabilities and capital components from the proceeds of the issuance of
combined financial instruments. That methodology is based on the residual
nature of stockholders equity and avoids the use of fair values affecting
stockholders equity in initial transactions. Additionally, it establishes
that beginning on January 1, 2004, the initial costs incurred in connection
with the issuance of combined instruments should be assigned to liabilities and
stockholders equity in proportion to the amounts of the components recognized
as liabilities and stockholders equity; that the profits and losses related to 46




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financial instrument components classified as liabilities should be
recorded in comprehensive financing cost and that distributions to owners of
financial instrument components classified as capital should be charged
directly to a stockholders equity account other than the net income for the
year. Although this Statement became effective on January 1, 2004, there is no
requirement to restate information of prior periods or recognize an initial
effect of adopting in the income for the year it is adopted, accordance with
the transitory provisions of the Statement. The adoption of this Statement is
not expected to have an impact on the Companys financial statements. Beginning on January 1, 2003, the Company adopted the provision of the
revised Statement C-9, Liabilities, Provisions, Contingent Assets and
Liabilities and Commitments (Statement C-9), which establishes a methodology
for valuation, presentation and disclosure of liabilities and provisions, as
well as for valuation and disclosure of contingent assets and liabilities, and
for disclosure of commitments. The revised Statement C-9 states that: (i) all
contingent assets that have a practically true realization must be accounted
and disclosed in the financial statements; (ii) contingent assets that have a
probable realization cannot be accounted for in the financial statements, but
must be disclosed; and (iii) contingent assets that do not have a probable
realization cannot be accounted for in the financial statements and are not
required to be disclosed. Statement C-9 requires disclosure of committed
amounts when it represents significant fixed asset additions. The impact of the
adoption of this statement was not material. In addition, beginning on January 1, 2003, the Company adopted the
provisions of revised Statement C-8, Intangible Assets (Bulletin C-8),
which defines intangible assets as costs incurred and rights or privileges
acquired that will generate a future economic benefit. Revised Bulletin C-8
states that preoperating costs should be expensed as a period cost, unless they
could be classified as development costs. Statement C-8 requires that goodwill
and intangible assets, including previously existing goodwill and intangible
assets, with indefinite useful lives should not be amortized, but should be
tested for impairment annually. Goodwill and intangible assets with finite
useful lives should be amortized over its useful life. The impact of the
adoption of this statement was not material. On March 14, 2003, the MIPA, issued the Statement B-5 Financial
Information by Segments, leaving without effect the provisions stated in
Statement A-8 Supplementary Application of International Standards which
allowed the Company to apply the International Accounting Standard No.14 (IAS
14) Financial Information by Segment. This new pronouncement establish among
other things: (i) the rules to identify and disclose operative segments for
those Companies that are held to this pronouncement, (ii) it considers the need
of a Management focus to define the financial information by segments to be
disclosed, (iii) qualitative and quantitative criteria to determine economic
segments by geographical location, (iv) it settle the detailed information that
has to be disclose for operative segment, (v) criteria to disclose general
information of products and services, geographical locations and groups of
clients, (vi) the particular information to be disclose in interim periods.
The adoption of this statement did not have an impact on the Company  ́s
financial statements. The provision of Statement C-15 Impairment of the Value of Long Lived Assets
and their Disposal, issued by the MIPA, went in to effect on January 1, 2004.
That Statement established general criteria for the identification and, if
applicable, recording of losses from imperment of decrease in value of
long-lived tangible and intangible assets, including goodwill. Aditionally, it
defines concepts such as net sales prices and value in use for the valuation of
log-lived assets. That study identified a Ps. 56,885 (U.S.$5.1 million)
impairment loss, wich will be recorded after extraordinary items in the income
statement for the period commencing January 1, 2004, net of the corresponding
deferred income tax. B. Liquidity and capital resources Financing sources and liquidity We financed our start-up costs through capital contributions and vendor
financing, as described below: 47




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
    
    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 old 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 old 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 old 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. On March 17, 2000, we sold the old notes bearing an annual interest rate
of 13 3/4% due April 1, 2007 in an aggregate principal amount of U.S.$300.0
million. Our debt service relating to the old notes for the first two years was
paid with U.S.$77.9 million of the net proceeds of the offering of the old
notes that were deposited in the 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 old 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 old notes in exchange for an aggregate of (i)
U.S.$165,078,150 in principal amount of new notes bearing 0%
interest through March 1, 2006, and 10% annual interest in the last
year, and (ii) 26,459,820 series N2 convertible preferred stock,
with an initial liquidation preference of U.S.$0.4927 per share and
limited voting rights, in the form of 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 stock (more fully described in Item 7. Major
Shareholders and Related Party TransactionsA. Major shareholders
and share ownershipThe capital restructuring), which represented
in the aggregate 77.0% of our then total capital stock;  
    
    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 old
notes we had purchased in the secondary market prior to the debt restructuring.
In addition, on July 25, 2002, we completed an additional 48




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exchange of U.S.$4,000,000 in aggregate principal amount of old notes
under the same terms and conditions of the exchange offer consummated on April
29, 2002. As of December 31, 2002, 95.8% of the total old notes were exchanged
and or cancelled, and new notes on an aggregate principal amount of
U.S.$167,623,590 remained outstanding. Old notes representing an aggregate
principal amount of U.S.$11,590,000 remained outstanding as of the same date. As a result of the debt restructuring, we will save U.S.$38.1 million in
interest expense on an annualized basis from the date of issuance of the new
notes through February 28, 2006. From March 1, 2006 until March 1, 2007, which
is the maturity date of the new notes, we will save U.S.$20.5 million in
interest expense. We estimate that funds from operating activities may not be sufficient to
meet our new, reduced 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 constantly 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
incur additional indebtedness is restricted by the terms of the indenture
governing the new notes. Our future operating performance and ability to service and repay the new
notes and the outstanding old notes, will be subject to future economic and
competitive conditions and to financial, business and other factors, many of
which are beyond our control. Indebtedness Our consolidated debt at December 31, 2003 was Ps.2,013.6 million
(including Ps.2.2 million of debt discount related to the issuance of
detachable warrants), of which all was long-term debt. All of our consolidated
debt outstanding at December 31, 2003 was denominated in U.S. dollars. The U.S.$300 million aggregate principal amount old notes accrued interest
at an annual rate of 13 3/4%, 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 old notes in the secondary market, which Maxcom
cancelled in April 2002. Pursuant to the April 29, 2002 debt restructuring,
old notes in an aggregate principal amount of U.S.$259,410,000 were exchanged
for new notes in an aggregate principal amount of U.S.$165,078,150, as well as
for certain equity. The new 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 old notes under the same terms and
conditions of the exchange offer consummated on April 29, 2002. As of December
31, 2003, new notes in an aggregate principal amount of U.S.$167,623,590
remained outstanding while old notes in an aggregate principal amount of
U.S.$11,590,000 remained outstanding. As a result of this debt restructuring, we will save U.S.$38.1 million in
interest expense on an annualized basis from the date of issuance of the new
notes through February 28, 2006. From March 1, 2006 until March 1, 2007, which
is the maturity date of the new notes, we will save U.S.$20.5 million in
interest expense. The indenture governing the terms of the new notes 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, in
each case after giving effect to the proposed incurrence of indebtedness. We do
not, and are unlikely in the foreseeable 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. The indenture
governing the old notes no longer has covenants restricting our ability to
incur indebtedness. The indenture governing the terms of the new notes also provides that if
certain events of bankruptcy, insolvency or reorganization of Maxcom occur, the
principal and interest on all of the new notes will become 49




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immediately due and payable. In addition, if certain other events of
default occur and are continuing, the trustee appointed under the indenture or
our holders representing at least 25.0% in principal amount of the then
outstanding new notes, may declare all the new 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 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 new
notes. The indenture governing the old notes provides that the trustee
appointed under the indenture or our holders representing at least 25.0% in
principal amount of the then outstanding old notes, may declare all the new
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 sixty days after
notice by the trustee. On December 17, 2003, the Company was advised by Banc of America Equity
Partners, its major shareholder, that Banc of America Equity Partners has
purchased through Nexus Maxcom Holding I, L.L.C., an aggragate amount of
Maxcoms new notes with face value of U.S.$126.4 million, representing
approximately 75% of the total amount outstanding of such new notes. 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, 2001, 2002 and
2003, our earnings were insufficient to cover our fixed charges by Ps.723.2
million (U.S.$64.4 million), Ps.754.6 million (U.S.$67.2 million) and Ps.354.4
million (U.S.$31.5 million), respectively. Resources used for operating activities For the year ended December 31, 2003, net resources used in operating
activities amounted to Ps.62.8 million compared to Ps.353.7 million for the
year ended December 31, 2002. The decrease in 2003 from 2002 was mainly
attributable to a Ps.400.6 million decrease in losses from operations, a
Ps.36.4 million reduction in accounts receivable as a result of a tighter
strategy for collections and allowance for doubtful accounts receivable; and, a
Ps$9.1 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.10.0 million increase in inventory as we reduced the speed of
deployment of network infrastructure during 2003 and a Ps.145.3 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.63.1 decrease in short term liabilities. (iii) Ps.104.7 increase in interest payable basically as a result of the
payment in 2002 of the interest on the old notes. Net resources used in operating activities in 2002 were Ps.353.7 million
compared to Ps.369.9 million for 2001. This decrease was mainly attributable
to a Ps.55.9 million decrease in losses from operations and a Ps.32.4 million
reduction in inventory as we used it in building out our infrastructure. These
two factors were offset by a Ps.26.8 increase in prepaid expenses primarily
related to the advanced purchase of radio advertising time from Operadora
Plusgamma, a Ps.25.5 million increase in accounts receivable due to a higher
customer base and a 50




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Ps.19.9 million decrease in short-term liabilities. See Item 7. Major
Shareholders and Related Party Transactions-B. Related Party
Transactions-Advertising. Resources provided by financing activities For the year ended December 31, 2003, net resources generated by financing
activities amounted to Ps.93.9 million, mostly driven by inflationary effect
(non-cash), compared to resources provided of Ps.833.5 million for the year
ended December 31, 2002. This change was attributable to (i) Ps.778.6 million
lower additional paid-in capital as a consequence of the debt capitalization
resulting from the exchange of old notes for new discounted debt and equity
instruments pursuant to the debt restructuring completed in April 2002, (ii)
Ps.816.5 million lower additional capital stock related to the U.S.$66.2
million private placement completed in April 2002, and (iii) Ps.858.5 million
higher liabilities mainly attributable to the exchange of the old notes in
2002. For the year ended December 31, 2002, net resources generated by financing
activities amounted to Ps.833.5 million compared to resources used of Ps.102.7
million for the year ended December 31, 2001. The change came from (i)
Ps.779.6 million of additional paid-in capital recorded in connection with the
debt capitalization pursuant to the debt restructuring completed in April 2002,
and (ii) Ps.815.4 million of additional capital stock related to the U.S.$66.2
million private placement completed in April 2002. These two factors were offset in part by the use of (i) Ps.762.6 million
as reduction of liabilities due to the exchange of the old notes in 2002, and
(ii) Ps.103.7 million for the repurchase of old notes with an aggregate face
amount of U.S.$25 million in 2001. Resources used for investing activities For the year ended December 31, 2003, net resources used for investing
activities amounted to Ps.125.4 million compared to Ps.549.2 million for the
year ended December 31, 2002. The decrease was mainly attributable to a
Ps.271.7 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.154.1 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. For the year ended December 31, 2002, net resources used for investing
activities amounted to Ps.549.2 million compared to Ps.568.0 million for the
year ended December 31, 2001. The decrease was mainly attributable to a
Ps.138.5 million decrease in investment in telephone equipment and Ps.44.2
million decrease in investment in other assets. These two factors were offset
in part by a Ps.153.8 million increase in investment in intangible assets
resulting mainly from the purchase of the fiber optic link mentined above. 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- 51




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##### Table of Contents



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 will be payable
in installments though May 2004. The following table presents our minimum contractual operating lease
obligations denominated in Pesos for the periods indicated: 2008 &2004
    
    2005
    
    2006
    
    2007
    
    thereafter(in thousands of Pesos)Facilities
    
    Ps
    . 4,911
    
    
    Ps
    . 4,174
    
    
    Ps
    . 3,243
    
    
    Ps
    . 3,154
    
    
    Ps
    . 15,466Sites
    
    
    18,367
    
    
    
    11,727
    
    
    
    8,066
    
    
    
    5,853
    
    
    
    29,006Poles
    
    
    4,295
    
    
    
    4,295
    
    
    
    4,295
    
    
    
    4,295
    
    
    
    42,947Others
    
    
    649
    
    
    
    708
    
    
    
    708
    
    
    
    708
    
    
    
    7,077Total
    
    Ps
    .28,222
    
    
    Ps
    .   20,904
    
    
    Ps
    .16,312
    
    
    Ps
    . 14,009
    
    
    Ps
    . 94,497
 The following table presents our contractual operating lease obligations
denominated in dollars for the periods indicated: 2008 &2004
    
    2005
    
    2006
    
    2007
        
    Thereafter(in thousands of U.S. dollars)Corporate headquarters
    
    $
    2,575
    
    
    $
    2,638
    
    
    $
    2,702
    
    
    $
    461
    
    
    $SitesPolesOthersTotal
    
    $
    2,575
    
    
    $
    2,638
    
    
    $
    2,702
    
    
    $
    461
    
    
    $
 The following table presents our minimum contractual operating maintenance
obligations denominated in Pesos for the periods indicated: 2008 &2004
    
    2005
    
    2006
    
    2007
    
    thereafter(in thousands of Pesos)Corporate equipment(1)
    
    Ps.
    242
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.Network(1)
    
    
    275Total
    
    Ps
    . 517
    
    
    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: 2008 &2004
    
    2005
    
    2006
    
    2007
    
    thereafter(in thousands of U.S. dollars)Telephone equipment(1)
    
    $
    1,560
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $Fiber optic
    
    
    844
    
    
    
    844
    
    
    
    844
    
    
    
    844
    
    
    
    12,664
    (2)Software(1)
    
    
    1,281Total
    
    $
    3,685
    
    
    $
    844
    
    
    $
    844
    
    
    $
    844
    
    
    $
    12,664
 52




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##### Table of Contents



(1)
    
    Renewal on an annual basis.(2)
    
    Included until 2022. Capital expenditures Through December 31, 2003, we have invested Ps.2,953.5 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 old notes and the new notes and the U.S.$66.2
million private equity investment. This amount includes Ps.132.9 million paid
to obtain all of our frequency rights. For 2004, we plan to make capital expenditures of approximately U.S.$37.1
million, mainly to continue to build out of our network. Of this total amount,
we had already spent approximately Ps.23.0 million
(approximately U.S.$2.1 million) by March 31, 2004. 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;
    
    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 4 and 22 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 53




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##### Table of Contents




    
    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 90% of the outstanding balance of a customer with at least one bill
past due 90 days and 100% of the outstanding balance of a customer with at
least one bill past due 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 uncollectable
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. 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 during the
expected life of the customer line. 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 carriers with a
bill and keep feature. 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
70%, then no interconnection fee amounts are payable by the net user of
interconnection services. If the imbalance exceeds 70% in any given month, the
net user incurs a liability per minute. If the Company fails to maintain a
significant percentage of residential users, then the bill and keep
arrangement will be terminated and asymmetrical interconnection rates may
apply. The Company also has interconnection agreements for mobile and long distance
services with other carriers, however, they do not incorporate a bill and keep
feature. During the year, the Company started a new business line, the lease of
transmission capacity through its fiber optic ring. The term of the contract is
13 years beginning from the delivery date of the first phase of the project to
the client. At December 31, 2003 delivery had not yet occurred. 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 22 c.) 54




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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 for 90% of any receivable due over 90 days,
except for high volume customers, whose accounts are 100% reserved once they
reach 30 days past due. 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 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
whenever events or changes indicate that the carrying amount of an asset may
not be recoverable. Impairment reviews require a comparison of the estimated
future undiscounted cash flows to the carrying value of the asset. If the
total of the undiscounted cash flows is less than the carrying value, 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
cash flows. In determining our undiscounted 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, aswell as
customer growth 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 we were required to reassess the useful lives of
our intangible assets, which primarily consist of Mexican government
telecommunications concessions. Upon reassessment, we concluded that our
concessions would be definite lived intangibles. We will periodically reassess
the useful lives of our concessions. The provisions of Statement C-15 Impairment of the Value of Long Lived
Assets and their Disposal, issued by the Accounting Principles Board of the
Mexican Institute of Public Accountants, went into effect on January 1, 2004.
That Statement establishes general criteria for the identification and, if
applicable, recording of losses from impairment of decrease in value of
long-lived tangible and intangible assets, including goodwill. Additionally,
it defines concepts such as net sales price and value in use for the valuation
of long-lived assets. That 55




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##### Table of Contents



study identified a Ps.56,885 (U.S.$5.1 million)
impairment loss, which will be recorded after extraordinary items in the income
statement for the period commencing January 1, 2004, net of the corresponding
deferred income tax. 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 apropiate 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 restructuring as recorded under U.S. GAAP in 2002. To
evaluate the fair value of our 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 aplicable. 56




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##### Table of Contents



F. Tabular disclosure of contractual obligations The following table presents our minimum contractual operating lease
obligations denominated in Pesos for the periods indicated: 2008 &2004
    
    2005
    
    2006
    
    2007
    
    thereafter(in thousands of Pesos)Facilities
    
    Ps.
    4,911
    
    
    Ps.
    4,174
    
    
    Ps.
    3,243
    
    
    Ps.
    3,154
    
    
    Ps.
    15,466Sites
    
    
    18,367
    
    
    
    11,727
    
    
    
    8,066
    
    
    
    5,853
    
    
    
    29,006Poles
    
    
    4,295
    
    
    
    4,295
    
    
    
    4,295
    
    
    
    4,295
    
    
    
    42,947Others
    
    
    649
    
    
    
    708
    
    
    
    708
    
    
    
    708
    
    
    
    7,077Total
    
    Ps.
    28,222
    
    
    Ps.
    20,904
    
    
    Ps.
    16,312
    
    
    Ps.
    14,009
    
    
    Ps.
    94,497
 The following table presents our contractual operating lease obligations
denominated in dollars for the periods indicated: 2008 &2004
    
    2005
    
    2006
    
    2007
    
    Thereafter(in thousands of U.S. dollars)Corporate headquarters
    
    $
    2,575
    
    
    $
    2,638
    
    
    $
    2,702
    
    
    $
    461
    
    
    $SitesPolesOthersTotal
    
    $
    2,575
    
    
    $
    2,638
    
    
    $
    2,702
    
    
    $
    461
    
    
    $
 The following table presents our minimum contractual operating maintenance
obligations denominated in Pesos for the periods indicated: 2008 &2004
    
    2005
    
    2006
    
    2007
    
    thereafter(in thousands of Pesos)Corporate equipment(1)
    
    Ps.
    242
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.Network(1)
    
    
    275Total
    
    Ps.
    517
    
    
    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: 2008 &2004
    
    2005
    
    2006
    
    2007
    
    thereafter(in thousands of U.S. dollars)Telephone equipment(1)
    
    $
    1,560
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $Fiber optic
    
    
    844
    
    
    
    844
    
    
    
    844
    
    
    
    844
    
    
    
    12,664
    (2)Software(1)
    
    
    1,281Total
    
    $
    3,685
    
    
    $
    844
    
    
    $
    844
    
    
    $
    844
    
    
    $
    12,664
   (1)
    
    Renewal on an annual basis.(2)
    
    Included until 2022. 57




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##### Table of Contents



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 June 10, 2003. 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
A1 shareholders, voting together as a class, appoint five directors. The
remaining four directors are appointed by our series B and B1 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 B1 directors are now
selected from among nominees proposed by Nexus  Maxcom Holdings I, L.L.P., a
major shareholder which we refer to in this annual report as Nexus. Series N2 shareholders have the right to appoint an observer to our Board
of Directors for so long as the series N2 preferred shares represent at least
3% of the outstanding capital stock of the Company or, so long as any series N2
preferred stock remain outstanding and at least U.S.$17.5 million aggregate
principal amount of the new 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 N2 shareholders will be entitled
to appoint one director, provided the series N2 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, 2003): Name
    
    Position
    
    AgeAdrián Aguirre Gómez
    
    Series A and A1 Director and Chairman of the Board
    
    
    53Manuel Rubiralta Diaz
    
    Series A and A1 Director
    
    
    58María Trinidad Aguirre Gómez
    
    Series A and A1 Director
    
    
    43Marco Provencio Muñoz
    
    Series A and A1 Director
    
    
    44Rodrigo Guerra Botello
    
    Series A and A1 Director
    
    
    60Roberto Chute
    
    Series B and B1 Director
    
    
    29Jacques Gliksberg
    
    Series B and B1 Director
    
    
    44Jorge Cervantes1
    
    Series B and B1 Director
    
    
    35Roberto Engels2
    
    Series B and B1 Director
    
    
    45
 Miguel Sepúlveda Martínez, María Guadalupe Aguirre Gómez, María Elena
Aguirre Gómez, Gilberto Solis Silva and Raúl Guijarro de Pablo are alternate
series A and A1 directors. Marco Viola, Michael Hajjar Jorge Cervantes and
Roberto Engels are alternate series B and B1 directors. Gonzalo Alarcón
Iturbide is the secretary of the Board. Enrique Boilini was the board observer for the Series N2 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.   1
    
    Mr. Jorge Cervantes is an Alternate series B and B1 Director, substituting
for Mr. Pedro Querio who resigned in March, 20042
    
    Mr. Roberto Engels is and Alternate series B and B1 Director, substituting
for Mr. Salvatore A. Grasso who resigned in January, 2004 58




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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 A1 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 A1 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 1975 to
1982. Mr. Rubiralta holds an undergraduate degree in business administration
from the Universidad Nacional Autónoma de Mexico (UNAM). María Trinidad Aguirre Gómezhas been a series A, and after the capital
restructuring a series A and A1 director of Maxcom, since May 1998. She also
sits on the Board of Directors of Talento Arte Visual, S.A. de C.V., Promotora
de Radiodifusión del Sureste, S.A. de C.V., Promotora de Publicidad del
Sureste, S.A. de C.V. and Publicidad y Promoción del Sureste, S.A. de C.V.
Previously, Ms. Aguirre was an Alternate Director of Grupo Radio Centro, S.A.
de C.V. from March 1997 to May 1999. Ms. Aguirre holds an undergraduate degree
in communications from the Universidad Iberoamericana. Marco Provencio Muñozhas been a series A, and after the capital
restructuring a series A and A1 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 A1 director of Maxcom since June 2002. Mr. Guerra
is also the Head Dean 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,
Structured Intelligence Inc., Organizacion Rescarven, C.A. (Venezuela), Velocom
and Difusion Panoramica, S.A. de C.V. Mr. Gliksberg has been a managing partner
of Banc of America Equity Partners since 1994. Mr. Gliksberg holds a Bachelor
of Arts degree in Economics and Political Science from the University of
Rochester and a masters degree in business administration from the J. L.
Kellogg Graduate School of Management of Northwestern University, Chicago,
Illinois. 59




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Roberto Engelshas been a series B and B-1 alternate director since June
2003. As of January, 2004, Mr. Engels is acting as Series B and B-1 director in
the absence of Mr. Salvatore A. Grasso. Mr. Engels is an officer of Banc of
America Equity Partners  Latin America as principal in the Sao Paulo office
since 1999. Mr. Engels was a founding partner in a media and communications
company in Argentina. Previously, Mr. Engels held a variety of senior
management positions with YPF, including general manager for YPF in Peru, where
he was responsible for the start  up of YPFs operations and implementation of
its business plan. Mr. Engels is a director of Care Plus, a healsh service
company in Brazil, Geoplan Holding Company, a water supply and wastewater
treatment solutions provider to private and public entities in Brazil and for
Structured Intelligence, LLC a regional solutions integrator for Latin America.
Mr. Engels earned and MBA from the Harvard Graduate School of Business
Administration and a BS in mechanical engineering from the Massachuset
Institute of Technology. Jorge Cervanteshas been a series B and B-1 alternate director since June
2003. Mr. Cervantes is a partner at the Mexico City law firm of Gonzalez
Calvillo, S.C.. He has over 18 years of experience providing legal and business
advice and counseling to multinational and Mexican companies. His work has
included active representation of diverse clients involved in a wide variety of
corporate, contractual and commercial projects, including multimillion dollar
transactions, equity and debt financings, restructurings, project finance and
investments in the areas of telecommunications, real estate, antitrust,
electricity, oil, petrochemicals, natural gas, services industries, etc. Mr.
Cervantes holds a law degree from the Escuela Libre de Derecho and a LL.M. from
Georgetown University. Mr. Cervantes is a member of the Board of Trustees of
the John Langdown Down Fundation, Chairman of the Georgetown University Alumni
Admissions Program in México City and member of the Mexican Bar Association Roberto Chutehas been a series B and B1 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 has been an associate of Banc of America Equity Partners since September
2001. 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. Executive officers We have experienced significant turnover in our executive ranks over the
last three 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. 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, 2003): 60




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Name
    
    Position
    
    AgeRené Sagastuy
    
    President and Chief Executive Officer
    
    
    43José Antonio Solbes
    
    Chief Financial Officer
    
    
    38Ricardo Arévalo Ruiz
    
    Chief Operating and Information Technology Officer
    
    
    39Carlos Castro Paniagua
    
    Vice-President, Human Resources
    
    
    53
 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, when he replaced Mr. Fulvio del Valle. 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,
when he replaced Mss. Eloisa Martinez. 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. Ricardo Arévalo Ruizhas been our Chief Operation and Information
Technology Officer since April 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. Carlos Castro Paniaguahas been our Vice-President of Human Resources
since March 2001. Prior to joining Maxcom, Mr. Castro served as Director of
Human Resources at Gillette de México for twelve years and as Director of
Corporate Human Resources at Phillips Mexicana for two years. Mr. Castro also
served at Gillette de México as engineering manager and production manager. Mr.
Castro holds an industrial degree from the Centro Nacional de Enseñanza Técnico
Industrial. B. Compensation General For the year ended December 31, 2003, our executive officers received an
aggregate compensation (including bonuses and severance payments but excluding
options) of approximately Ps.30.1 million. This amount was recognized as
selling, general and administrative expenses for 2003, which represent 7.8% of
our total selling, general and administrative expenses for 2003. Our executive officers also received options to acquire an aggregate of up
to 356,433 series N shares at U.S.$0.01 per share. We recorded in 2002 Ps.1.7
million in selling, general and administrative expenses in connection with such
options. 61




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During 2002, members and the Chairman of the Board received options that
vest immediately to purchase up to 2,500 and 5,000 series N 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 2003. There were
eight Board
of Directors meetings, five Operating Advisory Committee meetings and two
Audit Committee meetings, during 2003. In 2003, we granted to our directors
and committee members options to purchase a total of up to 217,500 series N
shares at an exercise price of U.S.$0.01. Old executive stock option plan We implemented an executive compensation plan that included bonuses and
stock options on our C/N CPOs. Upon the completion of the capital
restructuring described in Item 7. Major Shareholders and Related Party
TransactionsA. Major shareholders and share ownershipThe capital
restructuring, beneficiaries under the plan will now receive series N shares
in exchange for their series C shares. We granted 142,250, 583,000 and 206,820 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, 262,483 had vested and 223,069 had been forfeited at December 31,
2003. New executive stock option plan We implemented a new executive stock plan, covering services rendered
during the years 2001, 2002 and 2003. 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-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. Options were granted during the second quarter of 2002, second quarter
of 2003, and will be granted during the second quarter of 2004 at exercise
prices of U.S.$0.4927, U.S.$0.5912 and U.S.$0.7094, respectively. The number of options granted under the stock option plan for our former
Chief Executive Officer, Mr. Fulvio del Valle depended on revenue and cash flow
targets, and other factors such as the success of the debt restructuring,
additional capital raising and the obtainment of certain regulatory approvals.
There was a vesting period of two years from the grant date with an exercise
price of U.S.$0.4927 per share for all shares. As part of his severance
arrangement, Mr. del Valle agreed to forego all rights to receive stock under
the plan. 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 excercised in May, 2004. The maximum aggregate number of shares of series N stock that can be
distributed under the new executive stock plan is 17,657,064 million shares of
series N stock, which is equivalent to about 9.3% 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 June 10, 2003. 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 62




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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, 2003, we had 564 employees, a 13.7% increase as
compared to the number of employees one year earlier to a total of 496 at the
end of 2002. Of our total employees, 146 were hired and are managed through an
external agency, 31 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, 2004. We have not experienced any strikes or work stoppages and believe
that our relations with our employees are satisfactory. We also had 144 sales representatives as of December 31, 2003, compared
to182 sales representatives as of December 31, 2002. E. Share ownership Messrs. Jacques Gliksberg, Roberto Chute and Pedro Querio, a series B and
B1 Directors, are officers of Banc of America Equity Partners, manager of
Nexus-Maxcom 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. 63




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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: ShareholdersAguirre Gómez
    
    Banc America
    
    OtherShares
    
    Family(1)
    
    Equity Partners(2)
    
    Investors
    
    SubtotalSeries A SharesNumber of shares
    
    
    1,276,428
    
    
    
    
    
    
    
    
    
    
    
    1,276,428Percentage owned
    
    
    100.00
    %
    
    
    
    
    
    
    
    
    
    
    100.00
    %Series A1 SharesNumber of shares
    
    
    6,088,896
    
    
    
    
    
    
    
    
    
    
    
    6,088,896Percentage owned
    
    
    100.00
    %
    
    
    
    
    
    
    
    
    
    
    100.00
    %Series B
Shares(3)Number of shares
    
    
    1,226,373
    
    
    
    
    
    
    
    
    
    
    
    1,226,373Percentage owned
    
    
    100.00
    %
    
    
    
    
    
    
    
    
    
    
    100.00
    %Series B1 SharesNumber of shares
    
    
    
    
    
    
    5,848,209
    
    
    
    
    
    
    
    5,848,209Percentage owned
    
    
    
    
    
    
    100
    %
    
    
    
    
    
    
    100.00
    %Series N SharesNumber of shares
    
    
    2,047,895
    
    
    
    3,155,164
    
    
    
    7,134,454
    
    
    
    12,337,513Percentage owned
    
    
    16.60
    %
    
    
    25.57
    %
    
    
    57.83
    %
    
    
    100.00
    %Series N1 SharesNumber of shares
    
    
    
    
    
    
    122,368,441
    
    
    
    100,000
    
    
    
    122,468,441Percentage owned
    
    
    
    
    
    
    99.92
    %
    
    
    0.08
    %
    
    
    100.00
    %Series N2 Shares(4)Number of shares
    
    
    
    
    
    
    
    
    
    
    26,867,820
    
    
    
    26,867,820Percentage owned
    
    
    
    
    
    
    
    
    
    
    100.00
    %
    
    
    100.00
    %TotalNumber of shares
    
    
    10,639,592
    
    
    
    131,371,814
    
    
    
    34,102,274
    
    
    
    176,113,680Percentage owned
    
    
    6.04
    %
    
    
    74.59
    %
    
    
    19.36
    %
    
    
    100.00
    %
   (1)
    
    The shares of Maxcom controlled by the Aguirre Gómez family are held
individually or through trusts or corporations.(2)
    
    The shares of Maxcom controlled by Banc America Equity Partners are
held through (i) Nexus-Maxcom Holdings I, L.L.C., which holds 67,327,671
shares, (ii) BASCF-Maxcom Holding I, which holds 60,888,979 shares, and
(iii) BAS Capital Funding Corporation, which holds 3,155,164 shares.(3)
    
    The series B shares represent 8.49% of the voting stock of Maxcom and
are controlled by the Aguirre Gómez family also.(4)
    
    The series N2 shares were originally issued to the bondholders who
participated in our debt restructuring. During 2003 Nexus  Maxcom
Holdings I, L.L.C. acquired an amount of approximately 75% of the new
notes, as well as a similar percentage of series N2 shares, which are now
beneficially owned by Nexus  Maxcom Holdings I, L.L.C. See Item
5Operating and Financial Review and ProspectsDebt restructuring and
recapitalization. Additionally, during 2003 Nexus  Maxcom Holdings I,
L.L.C. acquired Series B-1 and N-1 shares previously held by Morgan
Stanley Asset Management, Caxton International and Credit Suisse First
Boston Corporation. In addition, we have options outstanding for the purchase of up to
26,040,990 series N shares. See Outstanding options and warrants. 64




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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. Under the capital restructuring, we liquidated the existing C/N CPO trust
and cancelled the corresponding C/N CPOs. Additionally, the series C stock was
converted at an exchange ratio of onetoone into series N stock. As a result,
the holders of the C/N CPOs have become the direct holders of two shares of
series N stock for each C/N CPO. Series N shares are represented by common
stock without voting rights. Additionally, we issued the following series of stock:  
    
    Series A1 common voting stock with preferred liquidation rights;
    
    Series B1 common voting stock with preferred liquidation rights;
    
    Series N1 preferred stock with limited voting rights; and
    
    Series N2 preferred stock with limited voting rights. The holders of our series A stock and series A1 preferred stock voting
together as a class have the ability to elect the majority of the Board of
Directors. All series A stock and A1 preferred stock 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 stock and A1 preferred stock represent 51% of our
voting stock and may only be held by Mexican nationals. Although the Aguirre Gómez family holds 59.50% of the voting stock through
the series A stock and A1 preferred stock and series B stock, and has the power
to elect the majority of the Board of Directors, its ability to control Maxcom
is preferred stock, and has the power to elect the majority of the Board of
Directors, its ability to control Maxcom is substantially limited by the
terms of the securityholders agreement described below under Securityholders
agreement. The holders of our series B stock and series B1 preferred stock
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 B1 director are elected from among nominees proposed by Nexus. The holders of our series N2 preferred stock have the right to appoint an
observer to the Board of Directors for so long as (i) the series N2 preferred
shares represent at least 3% of the outstanding capital stock of Maxcom or (ii)
there is at least one share of series N2 preferred stock remain outstanding and
at least U.S.$17.5 million aggregate principal amount of the new 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. Outstanding options and warrants As of the date of this annual report, we have options and warrants
outstanding for the purchase of up to 26.3 million series N shares. Each option
entitles the holder to purchase one series N share or a C/N CPO. The following
table presents information concerning the stock options and warrants authorized
and outstanding: PercentageNumber of
    
    Exercise price
    
    of optionsName of option holder
    
    options
    
    per share
    
    vested %Nissho Iwai American Corporation(1)
    
    
    337,472
    
    
    
    U.S.$8.70
    
    
    
    100CT Global Telecommunications, Inc. (operating services)(2)
    
    
    1,105,779
    
    
    
    3.06
    
    
    
    100Bachow & Associates, Inc. (strategic assistance services)(3)
    
    
    442,312
    
    
    
    3.06
    
    
    
    100Amsterdam Pacific LLC
    
    
    24,426
    
    
    
    8.70
    
    
    
    100
 65




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PercentageNumber of
    
    Exercise price
    
    of optionsName of option holder
    
    options
    
    per share
    
    vested %1998-2000 Executive Stock Option Plan
    
    
    575,000
    
    
    
    8.70 to 12.50
    
    
    
    45.972001-2003 Executive Stock Option Plan
    
    
    17,657,064
    
    
    
    0.49 to 0.71
    
    
    
    17.74UBS Warburg
LLC(4)
    
    
    89,244
    
    
    
    0.01
    
    
    
    100Donaldson, Lufkin & Jenrette Securities Corporation(4)
    
    
    22,312
    
    
    
    0.01
    
    
    
    100Predecessor old notes warrantholders(5)
    
    
    764,938
    
    
    
    0.01
    
    
    
    100Gian Carlo Pecchioni(6)
    
    
    10,000
    
    
    
    0.01
    
    
    
    100Adrián Aguirre(7)
    
    
    3,626,959
    
    
    
    0.49
    
    
    
    52Signing bonus reserve for new officers
    
    
    246,215
    
    
    
    0.01
    
    
    
    0BankAmerica International Investment Corporation
(management services)(8)
    
    
    249,781
    
    
    
    0.01
    
    
    
    100LA Strategic Capital Partners II (management services)(9)
    
    
    27,754
    
    
    
    0.01
    
    
    
    100Bachow & Associates, Inc. (management services)(10)
    
    
    277,535
    
    
    
    0.01
    
    
    
    100Directors and committee members compensation(12)
    
    
    584,199
    
    
    
    0.01
    
    
    
    55.89Rene Sagastuy(11)
    
    
    100,000
    
    
    
    0.01
    
    
    
    100Total
    
    
    26,140,990
   (1)
    
    These options were issued in 1998 as partial compensation for vendor
financing.(2)
    
    We authorized the issuance of 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 the capital restructuring, we authorized the
issuance of options to purchase up to an additional 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 B. Related party transactionsOperation
services and Option grants to shareholders.(3)
    
    We authorized the issuance of 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 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 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 B. Related party transactionsStrategic
assistance services and B. Related party transactionsManagement
services.(4)
    
    These warrants were issued in March 2000 as partial compensation for
underwriting services related to the issuance of units comprised of our
predecessor old notes and warrants.(5)
    
    These warrants were issued as part of the March 2000 offering of our
units comprised of our predecessor old notes and warrants.(6)
    
    Mr. Pecchioni is a former Chief Executive Officer of Maxcom. These
options, which are partial compensation for his services, have been
exercised; however, the issuance of the underlying shares is subject to
certain corporate and regulatory approvals.(7)
    
    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 Item 6. Directors, Senior
Management and EmployeesB. CompensationOld executive stock option
plan. Pursuant to the capital restructuring, we authorized the issuance
of options to purchase up to 3,251,959 series N shares at an exercise
price of U.S.$0.49 and to reduce the exercise price of the original
options to U.S.$0.49 per share as partial anti-dilution protection.(8)
    
    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 the capital restructuring, we authorized the
issuance of options to purchase up to an additional 207,481 series N
shares at an exercise 66




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price of U.S.$0.01 per share as partial anti-dilution protection. See
"B. Related party transactionsManagement services.(9)
    
    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 the capital restructuring, we authorized the
issuance of 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. See B. Related party transactionsManagement
services.(10)
    
    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 the capital restructuring, we authorized the
issuance 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. See B. Related party transactionsManagement
services.(11)
    
    We issued options to purchase up to 100,000 series N shares at
U.S.$0.01 per share in March 19,2003 as part of Mr. Sagastuys new
compensation package in connection with his appointment as our new chief
executive officer. Mr. Sagastuy exercised these options in May 2004.(12)
    
    During 2003 members of the board of directors from the Aguirre Gómez
family decided to exercise their options to purchase 172,500 series N
shares at U.S.$0.01 per share as part of their compensation package for
participating in the board of directors meetings as well as audit
committee and operating advisory committee meetings. As part of his severance arrangement, Mr. Fulvio del Valle, our former
Chief Executive Officer, who resigned in March 2003 agreed to forego all rights
he had to options issued under the new executive stock option plan and in
connection with certain bonuses. These options had entitled Mr. Del Valle to
receive up to 11,687,765 series N shares at an exercise price ranging from
U.S.$0.01 to U.S.$0.49. 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 stock and series N stock for CPOs may not adversely affect in any
manner the rights granted to the holders of the series N stock 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 stock, series A1
preferred stock, series B stock, series B1 preferred stock, series N stock and
series N1 preferred stock 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 stock, series A1 preferred
stock, series B stock, series B1 preferred stock, series N stock and series N1
preferred stock. 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
stock and the series A1 preferred stock, voting together as a single class, and
the remaining four members are designated by the holders of our series B stock
and series B1 preferred stock voting together. However, the series B and B1
directors are selected from among nominees proposed by Nexus. Pursuant to the new securityholders agreement, Maxcom is required to
deliver to certain significant holders of series A, B and N stock and series
A1, B1 and N1 preferred stock financial statements and other information
reasonably requested by such shareholders. 67




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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 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. 68




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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 A1 stock
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
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. 69




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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 commited against us in the payment of the bi  monthly labor quotas to
IMSS. We presume the fraud was commited 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 arguning bank secrecy
regulations. 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:  
    
    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. D. Selling shareholders Not applicable. 70




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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 31, 2004: % of TotalNumber
    
    CapitalClass of Stock
    
    of Stock
    
    StructureSeries A
    
    
    1,276,428
    
    
    
    0.7
    %Series A1 Preferred Stock.
    
    
    6,088,896
    
    
    
    3.5
    %Series B
    
    
    1,226,373
    
    
    
    0.7
    %Series B1 Preferred Stock.
    
    
    5,848,209
    
    
    
    3.3
    %Series N
    
    
    12,337,513
    
    
    
    7.0
    %Series N1 Preferred Stock.
    
    
    122,468,441
    
    
    
    69.5
    %Series N2 Preferred Stock.
    
    
    26,867,820
    
    
    
    15.3
    %Total
    
    
    176,113,680
    
    
    
    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, we issued four new classes
of stock: the series A1, B1, N1 and N2 preferred stock. The series A1 and B1
preferred stock have full voting stock and the series N1 and N2 preferred stock
have limited voting stock. The series N1 and N2 preferred stock 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. Our series N2 preferred stock have been
deposited into the CPO trust, which is administered by Banco Nacional de
México, S.A. who is also the holder of record of the series N2 preferred stock.
The trust is managed by a technical committee, a majority of the members of
which are designated 71




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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 N2 preferred stock. Under the capital restructuring, we liquidated the existing C/N CPO trust
and cancelled the corresponding C/N CPOs. Additionally, the series C stock was
converted at an exchange ratio of one-to-one into series N stock. As a result,
holders of C/N CPOs have became the direct holders of two shares of series N
stock for each C/N CPO. Our series A stock and series A1 preferred stock, 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 A1 stock are
held directly or indirectly by members of the Aguirre Gómez family. The series
B stock and the series B1 preferred stock represent 49% of our voting stock and
may be subscribed, paid for and held by Mexican and non-Mexican investors. Voting rights Under our amended by-laws, the holders of series A stock, series A1
preferred stock, series B stock and series B1 preferred stock are entitled to
vote on all matters submitted to a vote of the shareholders, with each share of
series A stock, series A1 preferred stock, series B stock and series B1
preferred stock being entitled to one vote. In addition, under our by-laws,
holders of series N stock have no voting rights and holders of series N1 and N2
preferred stock have limited voting rights. Holders of series N1 preferred stock 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 N1 preferred stock as compared to the series N2 preferred
stock; and
    
    any amendment to the section of the by-laws relating to the
voting rights of series N1 preferred stock. In addition, holders of series N2 preferred stock 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 N2
preferred stock;
    
    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 N2 preferred stock as compared to the series N1 preferred
stock;
    
    any amendment to the by-laws that adversely affects the right
of the holders of a majority of the series N2 preferred stock 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 N2 preferred stock
to receive, subject to any restrictions imposed by applicable law,
copies of any written materials distributed to the holders of series
A and B stock and series A1 and B1 preferred stock simultaneously
with such holders;
    
    certain amendments to the by-laws that impose additional
transfer restrictions or conditions on the series N2 preferred
stock, except to the extent necessary to comply with applicable law; 72




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
    
    any amendment to the by-laws that adversely affects the
co-sale rights or obligations of holders of series N2 preferred
stock;
    
    any amendment to the by-laws that adversely affects the
forced sale rights or obligations of holders of series N2 preferred
stock; and
    
    any amendment to the section of the by-laws of Maxcom
relating to the voting rights of series N2 preferred stock. 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 N1 and
series N2 preferred stock, series N stock, and series N1 and N2 preferred stock
are not considered voting shares for purposes of determining the quorum at
ordinary general or extraordinary shareholders meetings. 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. 73




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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;
    
    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; 74




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
    
    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 stock and series A1 preferred stock and
four of whom are designated by the holders of series B stock and series B1
preferred stock. 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 B1 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 N2 preferred stock or the new class of voting preferred stock into which
the series N2 preferred stock 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 written
materials distributed to the holders of series A and B stock and series A1 and
B1 preferred stock. 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 N2 preferred stock
or the new class of preferred stock into which such series N2 preferred stock
is converted are permitted to designate an observer to the Board of Directors
for so long as either:  
    
    the series N2 preferred stock, 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 N2 preferred stock outstanding
and at least U.S.$17.5 million principal amount of the new notes
outstanding. 75




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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 N2
preferred stock, or such other voting preferred stock into which the series N2
preferred stock 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 N2 preferred stock, or such voting preferred stock, represents at least
10% of the total capital stock of the company then outstanding. If the series
N2 preferred stock, 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 stock and holders of series A1 and B1 preferred stock 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 N2 preferred stock (on an as-converted basis) are entitled to
receive dividend payments, if any, and rank pari passu with the series A1, B1
and N1 preferred stock with respect to dividend rights. Maxcom will pay no
dividends on any class of capital stock that is junior to the series N2
preferred stock unless it also pays dividends to holders of series N2 preferred
stock. 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 N2 preferred stock will be entitled to
receive liquidation proceeds in preference to the holders of the series A, B
and N stock and pari passu with the holders of series A1, B1 and N1 preferred
stock 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
    
    the amount that holders of series N2 preferred stock would
have received if they had converted all of their series N2 preferred
stock into series N stock (or, to the extent the series N stock has
been converted, to the class of stock the series N stock 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 N2 preferred
stock, unless the holders of at least a majority of the series N2 preferred
stock 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 N2
preferred stock will not impair the liquidation rights of holders of series A1,
B1 and N1 preferred stock. 76




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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 stock and series N1
and N2 preferred stock representing more than 95% in the aggregate of the
outstanding capital stock of Maxcom. The series N stock and the series N1 and
N2 preferred stock 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. The series N2 preferred stock 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 N2 preferred stock, 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 N2 preferred stock. 77




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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 N1 preferred stock will also waive their preemptive
rights with respect to such issuance. Although the holders of series N1
preferred stock 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 N2 preferred stock is convertible, in whole or in part, at the
option of the holder into series N stock 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 N2 preferred stock (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 A1, B1 and N1 preferred stock are convertible, in
whole or in part, at the option of the holder, at such time, and on such terms,
as the series N2 preferred stock. Mandatory conversion Upon a qualified public offering, all, but not less than all, the series
N2 preferred stock (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 A1, B1 and N1
preferred stock will be convertible at the option of Maxcom at such time and on
such terms, as the series N2 preferred stock. 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 N2 preferred stock will automatically convert into
a new voting preferred stock. This new voting preferred stock will retain the
same liquidation preference rights of the series N2 preferred stock 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. 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: 78




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
    
    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 A1, B1, N1 or N2 preferred stock. 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. 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 N2
preferred stock, 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 79




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setting forth (i) a summary of all adjustments and readjustments to the
conversion price, (ii) the conversion price for the series N2 preferred stock
then in effect, and (iii) the number of shares of capital stock into which the
series N2 preferred stock 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
N2 preferred stock (but only with respect to their series N2 preferred stock)
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
A1, B1 or N1 preferred stock, or securities received in a conversion of such
preferred stock, such investor must offer to sell such securities to each other
investor holding more than one percent of the aggregate series A1, B1 and N1
preferred stock, 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 A1, B1 or N1 preferred
stock 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 A1, B1 or N1 preferred stock 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 N2 preferred stock 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 N2 preferred stock 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 A1, B1 or N1 preferred
stock 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
stock may participate in such sale on a pro rata basis at a price and on terms
substantially the same as the selling securityholder. 80




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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 A1, B1 or N1 preferred
stock 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 N2 preferred stock) may be forced by Nexus to sell a
proportionate share of their series N2 preferred stock. 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 N2 preferred stock) may be
forced by Nexus to vote in favor of, consent to and raise no objections against
such asset sale. Holders of series N2 preferred stock 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
tradeable, 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 N2 preferred stock. 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 A1, B1 or N1 preferred
stock 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 N2
preferred stock will not be required to execute any ancillary documents.
However, to the extent the proceeds from any such sale will be subject to any
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 81




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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 N2 preferred stock and to cause such documents to be delivered to
the CPO trustee in sufficient quantities for distribution to the beneficial
owners of the series N2 preferred stock. 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 N1 preferred stock and series A1 and B1 stock 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 N2 preferred stock, or of any class of stock into
which the series N2 preferred stock 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 N2
preferred stock, or any class into which the series N2 preferred stock has been
converted, Maxcom will, at its expense, use commercially reasonable efforts, to
cause the shares into which the series N2 preferred stock 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. Lock-up restrictions We may, under certain circumstances, impose a limitation on the transfer
of series N2 preferred stock, 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 N2 preferred stock 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 N2 preferred stock and any shares of capital stock into which
series N2 preferred stock 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 82




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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 stock and series A1, B1 or N1 preferred stock 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 A1, B1 and N1 preferred stock desire to transfer such shares,
such holders will be obligated to first offer to sell such shares to other
holders of series A1, B1 or N1 preferred stock 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 stock and series A1, B1 and N1 preferred stock who
desire to transfer such shares will be obligated to first offer to sell such
shares to other series A, B and N stock and series A1, B1 and N1 preferred
stock 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 stock and N1 and N2 stock 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. 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. 83




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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 N2 preferred stock 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 N2 preferred stock and any securities into which the series N2
preferred stock may be converted. 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 N2 preferred stock
or any other shares of capital stock into which the series N2 preferred stock
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 N2 preferred stock 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. 84




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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 N2 preferred stock 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. 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. 85




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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. 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. 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. Through December 31, 2002, Maxcom
has purchased approximately U.S.$62.6 million. 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 86




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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 ordfer 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 N2 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 Old 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% senior notes
due April 1, 2007. 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 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 notes under this indenture remains
outstanding. New 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 senior notes due 2007.
This Indenture has substantially the same restrictions the old indenture had
before they were eliminated pursuant to the exchange offer. 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% senior notes due April 1, 2007 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 notes. 87




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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.  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. 88




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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 new notes
and CPOs received in the exchange consummated on April 29, 2002, and (2) the
old notes (the old notes collectively with the new notes, the Notes) for
holders who did not participate in the exchange. In general, the federal
income tax consequences of ownership of the new notes and the old 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 your CPOs (for holders of the
new notes) 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 89




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
    
    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. 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 new 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 new 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. 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 do not
constitute qualified stated interest because such payments are not made at
least annually. The determination of the issue price of the new notes will depend on
whether the new notes or the old notes were publicly traded as of the date of
the 2002 exchange, and if not publicly traded, whether the interest rate of the
new notes is at least equal to or above the applicable federal rate, or AFR.
If on the date of the 2002 exchange, 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 exchange offer is 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. Under these rules, if either of the Notes were publicly traded,
the new notes will be treated as containing original issue discount if the
stated redemption price at maturity of the new notes exceeded the issue price
(i.e., the fair market value of the new notes) by more than the de minimis
amount. 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 were listed on an exchange, but 90




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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 qualified for this purpose as traded on an established
market. In the event that neither the new notes nor the old notes were traded on
an established securities market, the issue price of a new notes would equal
its stated principal amount if the interest rate on the new notes was equal to
or greater than the AFR for the month in which the new notes were issued. If
the interest rate was less than the AFR, then 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, if the new notes and the old notes were not traded on
an established securities market and, because the interest rate on the new
notes was less than the AFR for April 2002, the issue price of the new notes
would be the sum of all payments due under the note discounted at the AFR from
the date of payment to the new notes issue date. The new notes, therefore,
would be treated as having original issue discount because the new 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 new notes by more than the de minimis
amount. The old notes. The old notes were issued with original issue discount for
U.S. federal income tax purposes. If you were an original purchaser of an old
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 old 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 old 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 old 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 old 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. 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 91




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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 new 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 new 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 old notes for new notes and CPOs qualified as a
recapitalization, your basis in the new notes may substantially exceed the
issue price of such new notes (depending on your basis in the old notes), and
you may be able to reduce or eliminate the amount of original issue discount
includible with respect to such new notes. You should consult your tax advisor concerning the inclusion in your
taxable income of the original issue discount attributable to the new notes or
the old notes. Premium and acquisition premium.The new notes. If you acquire 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 acquire 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. Similarly, if you purchased your old notes for an amount
(or with a basis) greater than the sum of all amounts payable on your old notes
after the purchase date (other than payments of qualified stated interest, if
any) you will be considered to have purchased your old notes at a premium. 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 old note or new 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, 92




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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 2002
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 exchange was
not treated as a recapitalization, your new notes will be considered to have
been acquired with market discount if the adjusted issue price of your new
notes at the time of the exchange exceeded your initial tax basis in the new
notes by more than the de minimis amount. As discussed below in Adjusted
tax basis of the Notes and the CPOsThe new notes and CPOs, your initial tax
basis in the new notes will depend on whether the new notes are 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
new notes and CPOs for the old notes (assuming: (a) such exchange is treated as
a recapitalization, (b) the old notes are market discount bonds, and (c) the
new 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 are promulgated and are applicable to this exchange, any
accrued market discount with respect to the old notes that was not treated as
ordinary income on the exchange would carry over to the new notes and CPOs
received in the exchange. 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, 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% 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. 93




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The adjusted tax bases and the holding periods of the new notes, the old
notes and the CPOs depend upon the tax consequences of the exchange of old
notes for new notes and CPOs. While the issue is not free from doubt, we
believe that the old notes are 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 and the CPOs. If the 2002 exchange is
treated as a recapitalization for U.S. federal income tax purposes and the old
notes and the new notes qualify as securities, your aggregate tax basis in the
new notes and the CPOs will equal your tax basis in your old notes. Although
the method for allocating your tax basis in the old notes between the new notes
and the CPOs is unclear, the determination of the portion of your tax basis in
the old notes that should be allocated to the new notes and the CPOs should be
based on the issue price of the new notes (as determined under Original issue
discount) and the fair market value of the CPOs. Your holding period in the
new notes and the CPOs will include your holding period in the old notes you
surrender in the exchange. If, however, the new notes do not qualify as securities, your tax basis in
the new notes should equal their issue price, and your tax basis in the CPOs
should equal your tax basis in your old notes, less the issue price of the new
notes, plus any gain recognized in the exchange. In addition, your holding
period in the new 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 old notes you surrendered in the exchange. If, alternatively, the exchange is not treated as a recapitalization
because the old notes are not securities, then your adjusted basis in the new
notes will equal the issue price of the new notes, and your adjusted basis in
the CPOs will equal the fair market value of the CPOs. Your holding period in
the new notes and the CPOs will begin on the day following the date of the
exchange. Adjusted tax basis of the old notes. If you did not tender your old 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 old 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, will be grouped together with
other items of passive income, for purposes of computing the foreign tax credit
allowable to you. If the payments of qualified stated interest, original issue
discount and additional amounts (if any) were to become subject to a
withholding tax imposed by a foreign country at a rate of 5% or more, the
qualified stated interest, original issue discount and additional amounts (if
any) may be considered high withholding tax interest for purposes of
computing the foreign tax credit. If you are predominantly engaged in the
active conduct of a banking, insurance, financing or similar business, the
payments of qualified stated interest, original issue discount and additional
amounts (if any) may be considered financial services income for purposes of
computing the foreign tax credit, provided that such amounts do not constitute
high withholding tax interest, as described above. Effect of Mexican withholding taxes. 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. 94




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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 elegible 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 foreing investment
company, as discussed below. 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 95




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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 new 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 20% 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 2003
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 96




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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. Under the current ownership structure, we believe that we are not a CFC
for U.S. federal income tax purposes. However, because of the complexity of
the CFC rules, 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 97




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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. Mexican tax consequences to Foreign Holders of the exchange of old notes for new notes and CPOs General.A Foreign Holder will not be subject to any Mexican tax upon the
exchange of the old notes for the new notes and the CPOs, 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: 98




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
    
    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% . 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;
    
    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 2004, 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 99




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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. 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. 100




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I. Subsidiary information Not applicable. 
 PART II 
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate risk The
old notes which are payable at a fixed annual rate of 13 3/4% and the
new notes constituted substantially all of our outstanding indebtedness at
December 31, 2003. The new notes will not accrue or pay interest until March 1,
2006, and after March 1, 2006, the new notes will accrue interest at a fixed
annual rate of 10%. 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. All of our debt
obligations at December 31, 2003, were denominated in U.S. dollars. Therefore,
we are exposed to currency exchange rate risks that could significantly affect
our ability to meet our obligations. We currently do not enter into hedging
transactions with respect to these foreign currency risks, but continue to
consider the appropriateness of this option. The exchange rate of the peso to the U.S. dollar is a freely-floating rate
and the peso has experienced significant devaluations in recent years. Any
significant decrease in the value of the peso relative to the U.S. dollar in
the near term may have a material adverse effect on our results of operations
and financial condition, including our ability to repay or repurchase the
notes. At December 31, 2003, an immediate 10% devaluation of the peso relative
to the U.S. dollar would have increased our interest expense by approximately
Ps.1.9 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 101




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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 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 A1 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. An English translation of our code of ethics has been added as an exhibit
to this report. C. PRINCIPAL ACCOUNTANT FEES AND SERVICES PricewaterhouseCoopers, S.C. served as our auditors for the years ended
December 31, 2003, 2002 and 2001. The following table sets forth the fees paid
to Pricewaterhouse Coopers, S.C for the financial years ended December 31,
2003 and 2002. 102




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Year ended December 312003
    
    2002(in millions)Audit Fees(1)
    
    Ps.
    1.2
    
    
    Ps.
    1.3Taxes Fees and Other Statutory Audit requirements fees(2)
    
    
    0.7
    
    
    
    0.7Total revenues
    
    Ps.
    1.9
    
    
    Ps.
    2.0
   (1)
    
    Audit Fees includes fees associated with the annual audit of our
consolidated financial statements. Audit fees also include fees associated with
Securities and Exchange Commission statutory quarterly and annual reporting
audit requirements.(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. 103




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PART IV 
 ITEM 17. FINANCIAL STATEMENTS We have responded to Item 18 in lieu of responding to this Item. 104




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ITEM 18. FINANCIAL STATEMENTS. PageMaxcom Telecomunicaciones, S.A. de C.V. and SubsidiariesReport of Independent Accountants
    
    
    F-1Consolidated Balance Sheets as of December 31, 2002 and 2003
    
    
    F-3Consolidated Statements of Operations for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity for the years ended
December 31, 2001, 2002 and 2003
    
    
    F-5Consolidated Statements of Changes in Financial Position for the years
ended December 31, 2001, 2002 and 2003
    
    
    F-6Notes to the Consolidated Financial Statements
    
    
    F-7
 F1




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MAXCOM TELECOMUNICACIONES, S. A. DE C. V.
AND SUBSIDIARIES AUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001




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MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES AUDITED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31 2003, 2002 AND 2001 INDEX Contents
    
    PageReport of Independent Registered Public Accounting Firm
    
    1 and 2Consolidated financial statements:Balance sheets
    
    
    3Statements of operations
    
    
    4Statements of changes in shareholders equity
    
    
    5Statements of changes in financial position
    
    
    6Notes to the audited consolidated financial statements
    
    
    7 to 55




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Report of Independent Registered Public Accounting Firm Mexico, City, February 27, 2004. 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 its subsidiaries as of December 31, 2003
and 2002, and the related consolidated statements of operations, of changes in
shareholders equity and of changes in financial position for each of the three
years ended December 31, 2003. 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 standards of the Public Company
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 financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Maxcom
Telecomunicaciones, S.A. de C.V. and its subsidiaries at December 31, 2003 and
2002, and the results of its operations, the changes in its shareholders
equity and the changes in its financial position for each of the three years ended December 31, 2003, in conformity with accounting principles
generally accepted in Mexico. F-1




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The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is highly leveraged, is experiencing
liquidity problems and has suffered recurring losses from operations that
raises substantial doubt about its ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. Accounting principles generally accepted in Mexico vary 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 21 to the consolidated financial statements. PricewaterhouseCoopers Juan Manuel Ferrón Solís
Audit Partner F-2




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MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2002
(Notes 1, 2, 3 and 4) In thousands of Mexican pesos (Ps.) in purchasing power
as of December 31, 2003 and thousands of U.S. dollars ($) ASSETS
    
    2003
    
    2002
    
    2003(Note 3)Current assets:Cash and cash equivalents (Note 5)
    
    Ps.
    41,736
    
    
    Ps.
    120,331
    
    
    $
    3,713Accounts receivable:Customers, net of allowance of Ps.62,279 and Ps.33,384 in 2003
and 2002, respectively
    
    
    116,675
    
    
    
    108,348
    
    
    
    10,380Value-added tax refundable
    
    
    
    
    
    
    13,298
    
    
    
    Other sundry debtors
    
    
    9,756
    
    
    
    8,378
    
    
    
    868126,431
    
    
    
    130,024
    
    
    
    11,248Inventory, net of allowance of Ps.306 and Ps.631 in 2003 and 2002,
respectively
    
    
    18,451
    
    
    
    19,901
    
    
    
    1,642Prepaid expenses, net
    
    
    53,660
    
    
    
    37,030
    
    
    
    4,774Total current assets
    
    
    240,278
    
    
    
    307,286
    
    
    
    21,377Frequency rights, net (Note 6)
    
    
    96,272
    
    
    
    108,572
    
    
    
    8,565Telephone network systems and equipment, net (Note 8)
    
    
    1,537,430
    
    
    
    1,651,338
    
    
    
    136,782Preoperating expenses, net (Note 9)
    
    
    179,626
    
    
    
    212,506
    
    
    
    15,981Intangible assets, net (Note 10)
    
    
    390,866
    
    
    
    442,860
    
    
    
    34,775Rent deposits of Ps.23,644 and Ps.26,531 in 2003 and 2002
respectively and other assets
    
    
    28,158
    
    
    
    30,769
    
    
    
    2,506Total assets
    
    Ps.
    2,472,630
    
    
    Ps.
    2,753,331
    
    
    $
    219,986LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Interest payable (Note 11)
    
    Ps.
    4,707
    
    
    Ps.
    4,492
    
    
    $
    419Accrued expenses and accounts payable (Note 12)
    
    
    125,262
    
    
    
    170,794
    
    
    
    11,144Customer deposits
    
    
    2,132
    
    
    
    1,766
    
    
    
    190Payroll and other taxes payable
    
    
    57,852
    
    
    
    33,106
    
    
    
    5,147Total current liabilities
    
    
    189,953
    
    
    
    210,158
    
    
    
    16,900Long-term liabilities:Senior notes, net (Note 11)
    
    
    2,011,494
    
    
    
    1,918,853
    
    
    
    178,959Notes payable
    
    
    13,015
    
    
    
    
    
    
    
    1,158Total long term liabilities
    
    
    2,024,509
    
    
    
    1,918,853
    
    
    
    180,117Total liabilities
    
    
    2,214,462
    
    
    
    2,129,011
    
    
    
    197,017Commitments and contingencies (Notes 11, 13, 18 and 19)Shareholders equity:Capital stock, no par value (Note 14)
    
    
    1,752,596
    
    
    
    1,752,596
    
    
    
    155,925Additional paid-in capital (Notes 14 and 20)
    
    
    1,468
    
    
    
    437
    
    
    
    131Accumulated deficit (Note 15):Prior years deficit
    
    
    (1,128,713
    )
    
    
    (366,874
    )
    
    
    (100,419
    )Net loss for the period
    
    
    (367,183
    )
    
    
    (761,839
    )
    
    
    (32,668
    )(1,495,896
    )
    
    
    (1,128,713
    )
    
    
    (133,087
    )Total shareholders equity
    
    
    258,168
    
    
    
    624,320
    
    
    
    22,969Total liabilities and shareholders equity
    
    Ps.
    2,472,630
    
    
    Ps.
    2,753,331
    
    
    $
    219,986
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Notes 1, 2, 3 and 4) In thousands of Mexican pesos (Ps.) in purchasing power as of December 31, 2003
and thousands of U.S. dollars ($) 2003
    
    2002
    
    2001
    
    2003(Note 3)Net revenues
    
    Ps.
    765,630
    
    
    Ps.
    557,251
    
    
    Ps.
    345,524
    
    
    $
    68,117Operating costs and expenses:Network operating costs
    
    
    275,066
    
    
    
    216,357
    
    
    
    165,337
    
    
    
    24,472Selling, general and administrative
expenses
    
    
    385,493
    
    
    
    445,776
    
    
    
    472,526
    
    
    
    34,297Depreciation and amortization
    
    
    336,174
    
    
    
    330,191
    
    
    
    295,062
    
    
    
    29,909Total operating costs and expenses
    
    
    996,733
    
    
    
    992,324
    
    
    
    932,925
    
    
    
    88,678Operating loss
    
    
    (231,103
    )
    
    
    (435,073
    )
    
    
    (587,401
    )
    
    
    (20,561
    )Integral cost (income) of financing:Interest expense
    
    
    30,225
    
    
    
    215,898
    
    
    
    469,241
    
    
    
    2,689Interest income
    
    
    (4,180
    )
    
    
    (4,651
    )
    
    
    (84,369
    )
    
    
    (372
    )Gain on repurchase of debt (Note 11)
    
    
    
    
    
    
    
    
    
    
    (133,257
    )
    
    
    Exchange loss (gain), net
    
    
    173,134
    
    
    
    214,833
    
    
    
    (99,778
    )
    
    
    15,404Gain on net monetary position
    
    
    (76,159
    )
    
    
    (104,619
    )
    
    
    (90,842
    )
    
    
    (6,776
    )123,020
    
    
    
    321,461
    
    
    
    60,995
    
    
    
    10,945Nonrecurring charges
    
    
    
    
    
    
    
    
    
    
    (68,376
    )
    
    
    Other income (expense), net
    
    
    (148
    )
    
    
    2,748
    
    
    
    (195
    )
    
    
    (13
    )Loss before taxes
    
    
    (354,271
    )
    
    
    (753,786
    )
    
    
    (716,967
    )
    
    
    (31,519
    )Provisions for:Asset tax (Note 17)
    
    
    12,306
    
    
    
    7,091
    
    
    
    824
    
    
    
    1,095Income tax (Note 17)
    
    
    606
    
    
    
    962
    
    
    
    
    
    
    
    5412,912
    
    
    
    8,053
    
    
    
    824
    
    
    
    1,149Net loss
    
        (Ps.
    367,183
    )
            
            (Ps.
    761,839
    )
                    

                    (Ps.

    717,791
    )
                    

    $
    (32,668
    )
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Notes 1, 2, 3 and 4) In thousands of Mexican pesos (Ps.) in purchasing power
as of December 31, 2003 and thousands of U.S. dollars ($) Additional
    
    
    
    
    
    TotalCapital
    
    paid-in
    
    Accumulated
    
    shareholdersstock
    
    capital
    
    deficit
    
    equity(Note 14)
    
    
    
    
    
    (Note 15)Balance at December 31, 2000
    
    Ps.
    1,322,478
    
    
    Ps.
    140,939
    
    
    (Ps.
    956,556
    )
            
    Ps.
    506,861Increase in capital stock
    
    
    28,498
    
    
    
    (28,498
    )
    
    
    
    
    
    
    Losses absorbed
    
    
    (279,218
    )
    
    
    
    
    
    
    279,218
    
    
    
    New paid-in capital
    
    
    1,008
    
    
    
    
    
    
    
    
    
    
    
    1,008Net loss
    
    
    
    
    
    
    
    
    
    
    (717,791
    )
    
    
    (717,791
    )Balance at December 31, 2001
    
    
    1,072,766
    
    
    
    112,441
    
    
    
    (1,395,129
    )
    
    
    (209,922
    )Increase in capital stock
    
    
    816,484
    
    
    
    779,597
    
    
    
    
    
    
    
    1,596,081Losses absorbed
    
    
    (136,654
    )
    
    
    (891,601
    )
    
    
    1,028,255
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    (761,839
    )
    
    
    (761,839
    )Balance at December 31, 2002
    
    
    1,752,596
    
    
    
    437
    
    
    
    (1,128,713
    )
    
    
    624,320Increase in capital stock
    
    
    
    
    
    
    1,031
    
    
    
    
    
    
    
    1,031Net loss
    
    
    
    
    
    
    
    
    
    
    (367,183
    )
    
    
    (367,183
    )Balance at December 31, 2003
    
    Ps.
    1,752,596
    
    
    Ps.
    1,468
    
            
    (Ps.
    1,495,896
    )
                    
    Ps.
    258,168U.S. dollars (Note 3)
    
    $
    155,925
    
    
    $
    131
    
    
    $
    (133,087
    )
    
    $
    22,969
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Notes 1, 2, 3 and 4) In thousands of Mexican pesos (Ps.) in purchasing power as of
December 31, 2003 and thousands of U.S. dollars ($) 2003
    
    2002
    
    2001
    
    2003(Note 3)Operating activities:Net loss
    
    (Ps.
    367,183
    )
            

            (Ps.
    761,839
    )
                    
                    (Ps.
    717,791
                    )
    
    $
    (32,668
    )Adjustments to reconcile net loss to resources provided
by (used for) operating activities:Depreciation and amortization
    
    
    336,174
    
    
    
    330,192
    
    
    
    295,062
    
    
    
    29,909Non-recurring charges
    
    
    
    
    
    
    
    
    
    
    68,377
    
    
    
    Gain on repurchase of debt
    
    
    
    
    
    
    
    
    
    
    (133,257
    )
    
    
    Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable, net
    
    
    (8,327
    )
    
    
    (44,728
    )
    
    
    (19,266
    )
    
    
    (741
    )Inventory, net
    
    
    1,450
    
    
    
    11,431
    
    
    
    (20,998
    )
    
    
    129Prepaid expenses, net
    
    
    (16,630
    )
    
    
    (25,707
    )
    
    
    1,106
    
    
    
    (1,480
    )(Decrease) increase in:Restricted cash, liabilities and others, net
    
    
    7,400
    
    
    
    136,987
    
    
    
    156,866
    
    
    
    658Resources used for operating activities
    
    
    (47,116
    )
    
    
    (353,664
    )
    
    
    (369,901
    )
    
    
    (4,193
    )Financing activities:Issuance of capital stock
    
    
    
    
    
    
    816,485
    
    
    
    1,008
    
    
    
    Additional paid-in capital
    
    
    1,031
    
    
    
    779,596
    
    
    
    
    
    
    
    92Repurchase of debt
    
    
    
    
    
    
    
    
    
    
    (103,749
    )
    
    
    Proceeds from loans and notes payable
    
    
    92,855
    
    
    
    (762,614
    )
    
    
    
    
    
    
    8,261Resources provided by (used in) financing activities
    
    
    93,886
    
    
    
    833,467
    
    
    
    (102,741
    )
    
    
    8,353Investing activities:Preoperating expenses
    
    
    
    
    
    
    (1,892
    )
    
    
    
    
    
    
    Investment in telephone network systems and
equipment, net of dispositions
    
    
    (109,280
    )
    
    
    (380,998
    )
    
    
    (519,448
    )
    
    
    (9,722
    )Intangible assets
    
    
    (15,809
    )
    
    
    (169,905
    )
    
    
    (8,031
    )
    
    
    (1,406
    )Other assets
    
    
    (276
    )
    
    
    3,648
    
    
    
    (40,552
    )
    
    
    (25
    )Resources used for investing activities
    
    
    (125,365
    )
    
    
    (549,147
    )
    
    
    (568,031
    )
    
    
    (11,153
    )Cash and cash equivalents:Net increase (decrease) in cash and cash equivalents
    
    
    (78,595
    )
    
    
    (69,344
    )
    
    
    (1,040,673
    )
    
    
    (6,993
    )Beginning balance
    
    
    120,331
    
    
    
    189,675
    
    
    
    1,230,348
    
    
    
    10,706Ending balance
    
    Ps.
    41,736
    
    
    Ps.
    120,331
    
    
    Ps.
    189,675
    
    
    $
    3,713
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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MAXCOM TELECOMUNICACIONES, S. A. DE C. V. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 In thousands of Mexican pesos (Ps.) in purchasing power as of
December 31, 2003 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. Effective February 3, 1997 (as amended December 7, 1999 and September 27,
2001), Mexicos Ministry of Communications and Transportation (the SCT)
awarded the Company a concession to install and operate a public
telecommunication network in Mexico. This concession is non-exclusive; its
initial term is for 30 years, and it contains certain renewal rights. The
concession grants the Company the right to provide local telephone services in
the Federal District of Mexico and in 13 states. It also grants the Company
the right to provide long-distance, data and other value-added services
nationwide, although it is not currently providing long-distance service
outside their current customer base. In September 2001, the SCT awarded the
Company an amendment to its concession to provide nationwide services of basic
telephony for 30 years. The Company must meet certain conditions in order for
the concession to remain effective, such as building certain networks and
providing certain services by predetermined dates, among other things. 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 November 24, 1998 (as amended March 23, 1999), the Company entered into an
agreement with Teléfonos de México, S. A. de C. V. (Telmex), through which
both parties agreed to provide interconnection services to each others local
telecommunications network. This agreement calls for reciprocal
interconnection rates for local-to-local services through September 15, 2002. F-7




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On January 22, 1999, the Company entered into another agreement with Telmex
through which Maxcom agreed to provide Telmex with interconnection services for
Telmexs long-distance traffic. The Company is renegotiating the terms and
conditions of this contract. The Company negotiated with Telmex an amendment of the original Local
Interconnection Service Agreement (the Agreement), for the extension of the
Agreement which was valid through September 15, 2003, meanwhile the physical
interconnection remains in place between the companies as stipulated in the
contract clause, continued application which contracted that upon the
conclusion of the initial term, the terms and conditions of the Agreement would
continue in full effect until the parties signed a new agreement to continue
with the interconnection of their networks. As of December 31, 2003 the Company
has renegotiated the terms of this agreement, however the renegotiated terms
have not yet been contracted. 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 is 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  GOING CONCERN: From the beginning of its commercial operations, the Company has had negative
cash flow from operations and losses from operations due to its recent
establishment and the Companys initial investment in telephone network systems
and equipment, preoperating expenses and frequency rights. The recoverability
of this investment will depend on the ability of the Company to obtain
financing to complete development and on the future profitable commercial
exploitation of the telephone network. The Company has incurred net losses of Ps.367,183, Ps.761,839 and Ps.717,791
for the years ended December 31, 2003, 2002 and 2001, respectively. The losses
were due to high costs of borrowing and lower-than-expected sales growth. During 2000, the Company
issued 13 3/4% Senior Notes with a principal amount
of $300,000, maturing on April 1, 2007. During 2001, the Company bought back a
principal amount of $25,000 in the open markets. On April 29, 2002, the Company
consummated an exchange offer for its 13 3/4% Series B Senior Notes due 2007.
Holders tendered $259,410 in principal amount of Series B of New Senior Notes,
representing 94.33% of all such notes outstanding. Additionally, on July 25,
2002, the Company completed an additional exchange of $4,000 in aggregate F-8




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##### Table of Contents



principal of 13 3/4% Series B of New Senior Notes due 2007 with the same terms
and conditions of the exchange offer consummated on April 29, 2002. The holders received in exchange an aggregate of $167,624 principal amount New
Senior Notes due March 1, 2007. Tendering holders also received an aggregate
of 26,867,820 Series N2 convertible preferred shares, with an initial
liquidation preference of $0.4927 per share and limited voting rights, in the
form of Mexican Trust Certificates known as CPOs. On December 17, 2003, the Company was advised by Banc of America Equity
Partners, its major shareholder, that Banc of America Equity Partners has
purchased through Nexus-Maxcom Holdings I, L.L.C., an aggregate amount of
Maxcoms New Senior Notes due March 1, 2007 with face value of $126,400,
representing approximately 75% of the total amount outstanding of such New
Senior Notes. Through 2003, 2002 and 2001, The Company experienced a significant turnover of
key executive officers. The Companys administration has worked to mitigate its
financial difficulties, and has implemented the following actions:  a.
    
    Corporate debt restructuring -As mentioned in Note 11, the Company carried out a restructuring of the
Senior Notes. As a result of these negotiations, the Company was able to
exchange a significant portion of the Senior Notes for a combination of
preferred stock and new notes with more favorable terms, such as: i)
interest free debt for a period of four years, and ii) a lower interest rate
once interest accrual begins.b.
    
    Private equity investment -During 2002 the Company received a capital infusion of $66,200 million from
some of its existing shareholders, bondholders and certain new investors.c.
    
    Improvement in operations -As a result of the operations improvement programs put in place by the
Company including management restructuring, cost and expenses efficiencies
and headcount reduction, during 2003 and 2002 the Company has reduced its
administrative expenses.d.
    
    Management plans -Managements plans to mitigate its financial difficulties include, but are
not limited to, the following:  i)
    
    Obtain additional financing through bank, private and vendor
financing, as well as private investment to grow the network
infrastructure and improve revenues. F-9




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ii)
    
    The launch of new products within its core business, as well as the
data segment, allowing the Company to maximize the use of its network
infrastructure and increase revenues.iii)
    
    Extensive campaigns to increase cost efficiencies through the
optimization of links leased from third parties, improved routing of
long distance traffic and intensive monitoring of traffic termination
from and to other carriers.iv)
    
    Continued implementation of tight expense controls including but
not limited to restriction of headcount, of commissions and of general
expenses.  The consolidated financial statements do not give effect to any adjustments
which would be necessary if the Company is not able to continue as a going
concern. NOTE 3  BASIS OF PRESENTATION:  a.
    
    Consolidation -The accompanying consolidated financial statements include the accounts of
Maxcom and subsidiaries Corporativo en Telecomunicaciones, S. A. de C. V.
(Corporativo) and Maxcom Servicios Administrativos, S. A. de C. V. (MSA).
Both are wholly-owned Mexican subsidiaries, whose main line of business is
the rendering of administrative and technical services, mainly to Maxcom.
All intercompany balances and transactions have been eliminated in
consolidation.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, 2003, noon-buying rate of Ps.11.24 per U.S.$1.00, as published by The
Federal Reserve Bank of New York. Such translation should not be construed
as a representation that the Mexican peso amounts have been or could be
converted into U.S. dollars at this or any other rate. NOTE 4  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-10




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##### 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, as
amended, 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, 2003), 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. Financial
statements have been restated to Mexican pesos as of December 31, 2003
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
reporting date, thus
making them comparable, by using a restatement factor derived from the
change in the NCPI, which for 2002 and 2001 was 1.0397 and 1.0570,
respectively. Therefore, these amounts differ from those previously
reported.ii.
    
    Shareholders equity accounts are restated to be expressed in terms
of constant pesos. The restated amounts are determined by applying
factors derived from the NCPI for historical balances.iii.
    
    The result on the net monetary position represents the inflationary
gain or loss, as determined by applying factors derived from the NCPI,
on the Companys monthly net monetary assets and liabilities during the
period.iv.
    
    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.v.
    
    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 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 -Cash equivalents include highly liquid short-term investments recorded at
market value. F-11




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##### Table of Contents



c.
    
    Inventory -Materials and supplies are valued at the lower of acquisition cost on a
weighted-average basis or net realizable value (NRV).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 on a LIFO basis or NRV.Depreciation is calculated by the straight-line method on 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.34,951, Ps.34,386 and Ps.26,206 (including Ps.79, Ps.7,032 and Ps.5,729 of
integral cost of financing) in 2003, 2002 and 2001, 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.e.
    
    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
concession [20 years] (see Note 6).f.
    
    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. F-12




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##### Table of Contents



g.
    
    Intangibles -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.Debt issuance costs are amortized on a straight-line basis over the
outstanding term of the related debt.h.
    
    Evaluation of long  lived assets -The Company evaluates the recoverability of its long-lived assets when
events and circumstances indicate that such assets might be impaired. The
Company determines impairment by comparing the undiscounted future cash
flows estimated to be generated by these assets to their respective carrying
amounts.In the event an 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, fair market value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on property and equipment to be
disposed of are determined in a similar manner, except that fair market
values are reduced for the cost to dispose. (See Note 22a.)i.
    
    Transactions and balances in foreign currencies -Transactions in foreign currencies are recorded at the rates of exchange
prevailing on the dates they are entered into or settled. Monetary assets
and liabilities of Mexican companies denominated in those currencies are
stated in Mexican pesos at the year-end closing rate published in Mexicos
Official Gazette. Exchange gains or losses are applied as an integral cost
of financing.j.
    
    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. (See
Note 17)k.
    
    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 F-13




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##### Table of Contents



assets and liabilities
and disclose contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.  l.
    
    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, 2003 and 2002. The
following table represents the book and fair values of those notes: 2003
    
    2002Book value
    
    Fair value
    
    Book value
    
    Fair valueSenior Notes
    
    Ps
    .2,011,494
    
    
    $
    1,798,886
    
    
    Ps
    .1,918,853
    
    
    $
    1,674,645
  m.
    
    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
during the expected life of the customer line.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 carriers
with a bill and keep feature.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 70%, then no interconnection fee amounts are payable by
the net user of interconnection services. If the imbalance exceeds 70%
in any given month, the net user incurs a liability per minute. If the
Company fails to maintain a significant percentage of residential users,
then the bill and keep arrangement will be terminated and asymmetrical
interconnection rates may apply.The Company also has interconnection agreements for mobile and long
distance services with other carriers, however, they do not incorporate
a bill and keep feature. F-14




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##### Table of Contents



During the year, the Company started a new business line, the lease of
transmission capacity through its fiber optic ring. The term of the contract
is 13 years beginning from the delivery date of the first phase of the
project to the client. At December 31, 2003 delivery had not yet occurred.
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 22 c.)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 for 90% of any receivable due over 90 days,
except for high volume customers, whose accounts are 100% reserved once they
reach 30 days past due.n.
    
    Stock-based compensation -At December 31, 2003, 2002 and 2001, the Company had various stock option
awards outstanding (see Note 20).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.Compensation expense for stock options given to non-employees and
warrants was determined based on fair value using the Black Scholes valuation
model.The Company accounts for the activity under the employee stock
compensation plans under the intrinsic value method. Accordingly,
compensation expense has been recognized of 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): 2003
    
    2002
    
    2001Net income available to common
Stockholders as reported
    
    (Ps.
    367,183
    )
    
    (Ps.
    761,839
    )
    
    (Ps.
    717,791
    )Add: stock-based employee
compensation expense included
in reported net income
    
    
    8
    
    
    
    13,647
    
    
    
    1,446Deduct: total stock-based
employee compensation expense
determined under fair value based
method for all awards
    
    
    (1,189
    )
    
    
    (34,654
    )
    
    
    (2,328
    )
 F-15




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##### Table of Contents



2003
    
    2002
    
    2001Pro forma net income available to
common stockholders
    
    
    (368,364
    )
    
    
    (782,846
    )
    
    
    (718,673
    )Earning per share (EPS):Basic, as reported
        
    (Ps.
    0.02
    )
    
    (Ps.
    0.06
    )
    
    (Ps.
    50.21
    )Basic, pro forma
    
    
    (0.02
    )
    
    
    (0.06
    )
    
    
    (50.17
    )
  The fair value of each option is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 2003, 2002 and
2001 respectively with the following assumption: 2003
    
    2002
    
    2001Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Expected stock price volatility
    
    
    50
    %
    
    
    50
    %
    
    
    50
    %Risk-free interest rate
    
    
    2.92
    %
    
    
    4.55
    %
    
    
    4.67
    %Expected life of options
    
    
    5
    
    
    
    5
    
    
    
    5
  A portion of the proceeds from the issuance of such debt is allocated to
additional paid-in capital against debt discount. The allocation is based on
the relative fair value of the debt versus the warrants. The debt discount
is subsequently amortized over the outstanding term of the debt on a
straight-line basis, which does not materially differ from the effective
interest rate method. Amortization expense recognized for the years ended
December 31, 2003, 2002 and 2001 was Ps.629, Ps.4,820, and Ps.2,486,
respectively.o.
    
    Advertising and promotional costs -The Company expenses costs of advertising and promotions as incurred.
Advertising and promotional expenses were Ps.3,929, Ps.17,216 and
Ps.22,767 in 2003, 2002 and 2001, respectively.p.
    
    Segment reporting -The Statement B-5 Financial Information by Segments requires that
companies look to 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.
(See Note 4q.)q.
    
    New accounting standards -  In 2003, the Mexican Institute of Public Accountants issued new
Statement C-12, Financial Instruments with Characteristics of
Liabilities, Capital or Both, which highlights the differences between
liabilities and capital from the viewpoint of the issuer, as a basis for F-16




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identifying, classifying and accounting for the liability and capital
components of combined financial instruments at the date of issuance.The new Statement establishes the methodology for separating the
liabilities and capital components from the proceeds of the issuance of
combined financial instruments. That methodology is based on the
residual nature of stockholders equity and avoids the use of fair
values affecting stockholders equity in initial transactions.
Additionally, it establishes that beginning on January 1, 2004, the
initial costs incurred in connection with the issuance of combined
instruments should be assigned to liabilities and stockholders equity
in proportion to the amounts of the components recognized as liabilities
and stockholders equity; that the profits and losses related to
financial instrument components classified as liabilities should be
recorded in comprehensive financing cost and that distributions to
owners of financial instrument components classified as capital should
be charged directly to a stockholders equity account other than the net
income for the year.Although this Statement became effective on January 1, 2004, there is no
requirement to restate information of prior periods or recognize an
initial effect of adopting in the income for the year it is adopted,
accordance with the transitory provisions of the Statement. The
adoption of this Statement is not expected to have an impact on the
Companys financial statements.Beginning on January 1, 2003, the Company adopted the provision of the
revised Statement C-9, Liabilities, Provisions, Contingent Assets and
Liabilities and Commitments (Statement C-9), which establishes a
methodology for valuation, presentation and disclosure of liabilities and
provisions, as well as for valuation and disclosure of contingent assets and
liabilities, and for disclosure of commitments. The revised Statement C-9
states that: (i) all contingent assets that have a practically true
realization must be accounted and disclosed in the financial statements; (ii)
contingent assets that have a probable realization cannot be accounted for in
the financial statements, but must be disclosed; and (iii) contingent assets
that do not have a probable realization cannot be accounted for in the
financial statements and are not required to be disclosed. Statement C-9
requires disclosure of committed amounts when it represents significant fixed
asset additions. The impact of the adoption of this statement was not
material.In addition, beginning on January 1, 2003, the Company adopted the provisions
of revised Statement C-8, Intangible Assets (Bulletin C-8), which defines
intangible assets as costs incurred and rights or privileges acquired that
will generate a future economic benefit. Revised Bulletin C-8 states that
preoperating costs should be expensed as a period cost, unless they could be
classified as development costs. Statement C-8 requires that goodwill and
intangible assets, including previously existing goodwill and intangible
assets, with indefinite useful lives should not be amortized, but should be
tested for impairment annually. Goodwill
and intangible assets with finite useful lives should be amortized over its
useful life. The impact of the adoption of this statement was not material. F-17




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##### Table of Contents



On March 14, 2003, the Mexican Institute of Public Accountants, A. C.
(MIPA), issued the Statement B-5 Financial Information by Segments,
leaving without effect the provisions stated in Statement A-8
Supplementary Application of International Standards which allowed the
Company to apply the International Accounting Standard No.14 (IAS 14)
Financial Information by Segment. This new pronouncement establish
among other things: (i) the rules to identify and disclose operative
segments for those Companies that are held to this pronouncement, (ii)
it considers the need of a Management focus to define the financial
information by segments to be disclosed, (iii) qualitative and
quantitative criteria to determine economic segments by geographical
location, (iv) it settle the detailed information that has to be
disclose for operative segment, (v) criteria to disclose general
information of products and services, geographical locations and groups
of clients, (vi) the particular information to be disclose in interim
periods. The adoption of this statement did not have an impact on the
Companys financial statements. NOTE 5  CASH AND CASH EQUIVALENTS: Investments maturing within 30 days at December 31 consist of: 2003
    
    2002Cash
    
    Ps.
    6,471
    
    
    Ps.
    5,631Bank of America: $1,040 and $7,740 in government
instruments and certificates of deposit, bearing
annual interests at 0.7% and 1.06%, respectively
    
    
    11,685
    
    
    
    82,993Paine Webber Incorporated: $1 in money market
instruments, bearing interest at a variable rate
    
    
    
    
    
    
    20Banamex: Ps.23,580 and Ps.31,687 in government
instruments, bearing annual interest of 6.1% and 7.05%
    
    
    23,580
    
    
    
    31,687Ps.
    41,736
    
    
    Ps.
    120,331
 NOTE 6  FREQUENCY RIGHTS: Frequency rights at December 31 consist of the following: 2003
    
    2002Frequency rights
    
    Ps.
    132,945
    
    
    Ps.
    132,945Less  Accumulated amortization
    
    
    (36,673
    )
    
    
    (24,373
    )Ps
    .96,272
    
    
    Ps
    .108,572
 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 concessions became effective February 28, 1998, and will run through to the
year 2018. F-18




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##### Table of Contents



In accordance with the terms of its concessions the Company has to provide the
Mexican Telecommunications Minestry (SCT) a performance bond and renew it
every year.
(See Note 22 d.) For the years ended December 31, 2003, 2002 and 2001, the Company recorded for
these rights amortization expense of Ps.12,300, Ps.6,647 and Ps.6,647,
respectively. NOTE 7  TRANSACTIONS WITH RELATED PARTIES: For the period ended December 31, related party expense transactions were as
follows: 2003
    
    2002
    
    2001Transactions:Office and site lease (1)
    
    Ps.
    220
    
    
    Ps.
    219
    
    
    Ps.
    219Compensation in
connection with the operation
agreement and other expenses with CT Global
Telecommunications, Inc. (2)
    
    
    
    
    
    
    164
    
    
    
    1,342Strategic assistance agreement and other expenses
to Bachow and Associates (3)
    
    
    259
    
    
    
    151
    
    
    
    509Advisory fee and other expenses to certain
shareholders (4)
    
    
    
    
    
    
    
    
    
    
    252Travel expenses to Bank Boston (5)
    
    
    
    
    
    
    14
    
    
    
    270Travel expenses to Bank of America (5)
    
    
    199
    
    
    
    223
    
    
    
    Advertising and other management services to
Operadora Plusgamma (6)
    
    
    291
    
    
    
    3,629
    
    
    
    6,919Management services to Comercializadora
Road el Camino (7)
    
    
    45
    
    
    
    550
    
    
    
    Ps.
    1,014
    
    
    Ps.
    4,950
    
    
    Ps.
    9,511
 Related party payables, classified within accrued expenses and other accounts
payable, as of December 31 consist of: 2003
    
    2002CT Global Telecommunications, Inc., travel expenses.
    
    Ps.
    
    
    
    Ps.
    72Bank of America, travel expenses
    
    
    
    
    
    
    44Advertising and other management services expense to
Road el Camino (7)
    
    
    
    
    
    
    49Ps.
    
    
    
    Ps.
    165
  (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.(2)
    
    For the year 2001 the expense relates to operative consulting services provided from warrant holders. During 2002, the expense relates to the refund of travel expenses for board meetings. F-19




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##### Table of Contents



(3)
    
    During 2002 and 2001, the Company entered into an agreement in which
Bachow and Associates, a shareholder, provided it with strategic advisory
services. The 2003 and 2002 activity represents travel expenses.(4)
    
    Services provided during 2001 by Bachow and Associates, Bank of America
International Investment Corporation and L.A. Strategic Capital Partners
II LP, all of which were shareholders.(5)
    
    Refund of travel expenses to certain shareholders.(6)
    
    For the years 2001 the expense relates to advertising paid to a Company
owned by the family of one of the shareholders. For the years 2003 and
2002, advertising expense related to an advertising purchase agreement of
$3,000, signed in April 2003, for advertising time that is being received
from Grupo Radio Centro radio network from 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)
    
    Management services paid to a owned by one of the shareholders. NOTE 8  TELEPHONE NETWORK SYSTEMS AND EQUIPMENT, NET: Telephone network systems and equipment, net at December 31 consists of: Useful life *2003
    
    2002
    
    (years)Office furniture
    
    Ps.
    15,273
    
    
    Ps.
    15,183
    
    
    
    10Transportation equipment
    
    
    23,909
    
    
    
    31,480
    
    
    
    4Engineering equipment
    
    
    10,457
    
    
    
    10,460
    
    
    
    10Computer equipment
    
    
    49,744
    
    
    
    56,352
    
    
    
    3.33Telecommunication network and equipment
    
    
    1,155,868
    
    
    
    1,116,016
    
    
    
    10Electronic equipment
    
    
    222,986
    
    
    
    215,010
    
    
    
    3.33Radio equipment
    
    
    256,457
    
    
    
    260,323
    
    
    
    10Leasehold improvements
    
    
    275,643
    
    
    
    274,461
    
    
    
    20
    (1)Other
    
    
    14,881
    
    
    
    14,008
    
    
    
    102,025,218
    
    
    
    1,993,293Construction in progress
    
    
    67,585
    
    
    
    76,280Capitalized internal costs
    
    
    108,370
    
    
    
    61,494Installation costs
    
    
    172,463
    
    
    
    141,1482,373,636
    
    
    
    2,272,215Less: Accumulated depreciation and amortization
    
    
    (836,206
    )
    
    
    (620,877
    )Ps.
    1,537,430
    
    
    Ps.
    1,651,338
   *
    
    Useful lives accounted from date of use.(1)
    
    Or life of the lease, whichever is shorter. F-20




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##### Table of Contents



For the years ended December 31, 2003, 2002 and 2001, the Company recorded
depreciation and amortization (including leasehold improvements) expense of
Ps.222,863, Ps.234,098 and Ps.204,761, respectively. During 2002, the Company wrote-off leasehold improvements related to its
vacancy of its previous corporate building lease of Ps.9,465 net of accumulated
amortization of Ps.1,453. NOTE 9  PREOPERATING EXPENSES: For the years ended December 31, 2003, 2002 and 2001, the Company recorded
amortization expense of Ps.33,210, Ps.33,210 and Ps.33,210, respectively.
Accumulated amortization was Ps.154,365 and Ps.121,484 as of December 31, 2003
and 2002, respectively. NOTE 10  INTANGIBLES: Intangibles as of December 31 consist of: 2003
    
    2002Software licenses
    
    Ps.
    114,355
    
    
    Ps.
    103,733Infrastructure rights
    
    
    252,271
    
    
    
    247,255Debt issuance costs
    
    
    226,764
    
    
    
    226,293593,390
    
    
    
    577,281Accumulated amortization
    
    
    (202,524
    )
    
    
    (134,421
    )Ps.
    390,866
    
    
    Ps.
    442,860
 For the years ended December 31, 2003, 2002 and 2001, the Company recorded
amortization expense of Ps.67,802, Ps.62,884 and Ps.50,473, respectively. This
included Ps.31,096, Ps.20,688 and Ps.7,030 of software amortization expense,
respectively. F-21




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##### Table of Contents



NOTE 11  LONG-TERM DEBT: Long-term debt as of December 31 consists of: 2003
    
    2002$11,590: 13.75% Old Senior Notes
due April, 2007.
    
    Ps.
    130,225
    
    
    Ps.
    124,275$167,624: New Senior Notes bear 0% interest through
March, 2006, and 10% annual interest in the last year
    
    
    1,883,419
    
    
    
    1,797,357Detachable warrants, net in 2003 and discount net of
detachable warrants in 2002.
    
    
    (2,150
    )
    
    
    (2,779
    )Ps.
    2,011,494
    
    
    Ps.
    1,918,853
 On March 17, 2000, Maxcom issued $300,000 Senior Notes, maturing on April 1,
2007. These notes accrue interest at the rate of 13.75% per annum (14.46%
including the withholding tax effect according to prevailing tax regulations in
the years 2003 and 2002) and are payable semiannually in arrears on April 1 and
October 1, commencing on October 1, 2000. During May and June of 2001, the
Company spent U.S.$10,000 for the repurchase in the open market of U.S.$25,000
of notes. As a result the Company recognized a pre-tax gain of Ps.133,257. On April 29, 2002, the Company consummated the exchange offer for its 13 3/4%
Series B Senior Notes due 2007. Holders tendered an aggregate of $259,410 in
principal amount of Series B Senior Notes, representing 94.3% of all such notes
outstanding. These holders received in exchange an aggregate of $165,078 in
principal amount of New Senior Notes due March 1, 2007, bearing 0% interest
through March 1, 2006, and 10% annual interest in the last year. Tendering
holders also received an aggregate of 26,459,820 Series N 2 convertible
preferred stock, with an initial liquidation preference of $0.4927 per share
and limited voting rights, in the form of Mexican Trust Certificates known as
CPOs. Additionally, on July 25 2002, the Company completed an additional exchange of
U.S.$4,000 in aggregate principal of 13 3/4% Series B Senior Notes due 2007
with the same terms and conditions of the exchange offer consummated on April
29, 2002. These holders received in exchange an aggregate of $2,545 in
principal amount of New Senior Notes due March 1, 2007. Tendering holders also
received an aggregate of 408,000 Series N 2 convertible preferred shares,
with an initial liquidation preference of $0.4927 per share and limited voting
rights, in the form of CPOs.
Series N2 preferred stock is convertible at the option of the holder into
Series N common stock. Senior B Senior Notes in an aggregate principal amount of $11,590 remain
outstanding at December 31, 2003 and 2002. F-22




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##### Table of Contents



The main characteristics of the New Senior Notes due March 1, 2007 are as
follows: a) unsecured senior obligations of the Company; b) pari passu in right
of payment to all existing and future senior indebtedness of the Company; c)
senior in right of payment to any future subordinated obligations of the
Company; d) subject to registration with the Securities and Exchange Commission
(SEC), pursuant to a Registration Rights Agreement; and e) unconditionally
guaranteed by Corporativo and MSA. The indenture 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 other 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. As of December 31, 2003, the Company had complied with all of the related
covenants. NOTE 12  ACCRUED EXPENSES AND ACCOUNTS PAYABLE: As of December 31, 2003 and 2002, the accounts payable consist of: 2003
    
    2002Vendors
    
    Ps.
    56,756
    
    
    Ps.
    103,468Suppliers
    
    
    19,040
    
    
    
    28,277Accruals
    
    
    24,983
    
    
    
    23,904Other accounts payable
    
    
    24,483
    
    
    
    15,145Ps.
    125,262
    
    
    Ps.
    170,794
 NOTE 13  LABOR OBLIGATIONS: As of December 31, 2003 and 2002, the Company had the following labor obligations:  a.
    
    Indemnities to employees -Employees who are dismissed without cause are entitled to severance
compensation determined in accordance with the provisions of Mexican Federal
Labor Law. F-23




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##### Table of Contents



b.
    
    Seniority premiums -In the event of dismissal without cause, retirement after 15 years of service
or death, employees are entitled to a seniority premium determined in
accordance with the provisions of Mexican Federal Labor Law.As of December 31, 2003 and 2002, these items were not significant because
the seniority of the majority of the Companys employees was less than two
years. NOTE 14  CAPITAL STOCK: 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 to simplify its
equity structure. Under the capital restructuring effective April 29, 2002 (See Note 12),
tendering holders received an aggregate of 26,459,820 Series N 2 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 A 1 and B 1,
respectively, common voting stock with preferred liquidation rights and
122,468,441 Series N 1 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 an exchange
ratio of one to one into Series N shares. As a result, the holders of the
CPOs have become the direct holders of two 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 N 2 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 A 1, B 1, N 1, and N 2 preferred
shares. The Series A 1 and B 1 preferred shares have full voting rights,
and the Series N 1 and N 2 preferred shares have limited voting rights.
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 subscribed, paid for, and held by Mexican and
non-Mexican investors. Series N 2 preferred shares have been deposited into
the CPO trust, which is administered by Banco Nacional de México, S.A. de C.V. 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 F-24




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##### Table of Contents



bonuses granted to several officers of the Company as stock options during 2001 and 2002. 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 option 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. As of December 31, 2001 the capital stock was represented by registered shares
with no par value, which are divided into Series A, B and C common shares
and Series N limited-voting shares. Series A shares may only be subscribed
to, acquired or owned by Mexicans, Series B shares may be freely subscribed
to and Series C shares can only be subscribed to, acquired, or owned by the
agent acting as trustee of a Neutral Investment Trust. Series
N shares,
which may also be freely subscribed to, are limited-voting shares. Series
C and N shares are deposited in the Neutral Investment Trust, which in turn
issues CPOs. Series C and N shares may not be computed for purposes of
determining the foreign-investment percentage under the terms of the Foreign
Investment Law. In compliance with a ruling of the Mexican Foreign Investment
Authorities, in accordance with the Foreign Investment Law and the Company
bylaws, Series B shares may not represent more than 49% of the voting right
shares; Series C shares may not represent more than 44.5% of the Companys
total outstanding capital stock; and Series N shares may not represent more
than 44.5% of the Companys total outstanding capital stock. A resolution of the Extraordinary Shareholders Meeting, held on February 21,
2000, modified the equity structure of the Company by converting 50% of Series
N shares into new shares of Series C shares, at a rate of 1:1. The new
Series C shares have full voting and economic rights. They can only be
subscribed by the agent acting as trustee of a Neutral Investment Trust
incorporated in accordance with Mexican Foreign Investment Law. The trust in
turn issues CPOs. Statutorily, the Trustee must vote the Series Cshares in
the same manner as the majority of the Series A shares are voted. The
corporate governance of the Company was not affected. At the same
Shareholders Meeting the conversion of 255,000 Series
A shares into 127,500
Series C shares and 127,500 Series N shares and the conversion of 245,000
Series B shares into 122,500 Series C shares
and 122,500 Series N shares
was also approved. As of December 31, the Companys outstanding shares were: 2003
    
    2002
    
    2001Capital stock:Series A
    
    
    1,276,428
    
    
    
    1,276,428
    
    
    
    1,276,428Series A 1
    
    
    6,088,896
    
    
    
    6,088,896
    
    
    
    Series B
    
    
    1,226,373
    
    
    
    1,226,373
    
    
    
    1,226,373Series B 1
    
    
    5,848,209
    
    
    
    5,848,209
    
    
    
    Series C
    
    
    
    
    
    
    
    
    
    
    5,622,822Series N
    
    
    12,237,513
    
    
    
    12,065,013
    
    
    
    5,622,822Series N 1
    
    
    122,468,441
    
    
    
    122,468,441
    
    
    
    Series N 2
    
    
    26,867,820
    
    
    
    26,867,820
    
    
    
    Total issued and outstanding
    
    
    176,013,680
    
    
    
    175,841,180
    
    
    
    13,748,445
 F-25




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##### Table of Contents



2003
    
    2002
    
    2001Authorized and not outstanding:Series C
    
    
    
    
    
    
    
    
    
    
    1,679,866Series N
    
    
    26,603,926
    
    
    
    38,001,255
    
    
    
    1,679,866Total authorized
    
    
    202,617,606
    
    
    
    213,842,435
    
    
    
    17,108,177
 As of December 31, 2003 and 2002, 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 Maxcoms capital stock, while the remaining A,
A-1, B, B-1, N, N-1 and N-2 Series shares represent the variable
portion of the capital stock. Under the May 1998 Security holders Agreement, as amended and restated on
August 18, 2000, if the Company registered any equity securities for a primary
or secondary public offering prior to May 21, 2002, it must have permitted
parties to the Security holders Agreement to include their shares in such an
offering. The Company will bear all expenses of any primary or secondary
public offering, other than the fees of counsel to the holders of the
registration rights and any underwriting commission or discounts. If the
Company does not register the equity securities in a primary or secondary
public offering prior to May 21, 2005, the Series N shareholders will have
the right to retain an investment banker to: (a) sell substantially all of the
assets of the Company; (b) merge or consolidate into another company, or (c)
require parties to the Shareholders Agreement to sell their shares and
distribute the proceeds to the shareholders. These rights were eliminated from
the new Amended and Restated Security holders Agreement executed on April 29,
2002. However, certain shareholders of the Company maintain the right to
request the Company, from time to time, to make the Company to register its
securities in order to have a public offering. As of December 31, the Companys
capital stock consists of: 2003
    
    2002Capital stock
    
    Ps.
    1,685,569
    
    
    Ps.
    1,685,569Restatement for effects of inflation
    
    
    67,027
    
    
    
    67,027Total capital stock
    
    Ps.
    1,752,596
    
    
    Ps.
    1,752,596
 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.891,601 and Ps.136,654, respectively, against Ps.1,028,255 of accumulated
losses. F-26




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##### Table of Contents



NOTE 15  ACCUMULATED DEFICIT: Dividends, either in cash or other forms, paid by the Company will be 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 to companies, resident in Mexico, will be
subject to a 35% income tax to be paid by the companies paying
the dividend and applied to the result of multiplying the
dividends paid by a factor of 1.5385.  
    
    Dividends paid to individuals or foreign residents will be
subject to a withholding tax of 5% applied to the result of
multiplying the dividends paid by a factor of 1.5385 (1.5150 if
dividends are paid to Mexican individuals from earnings that
have been subject to Mexican income taxes). The Company has never generated distributable profits. Any dividends declared
will be paid in Mexican pesos. NOTE 16  POSITION IN FOREIGN CURRENCY: As of December 31, the Companys foreign-currency position is as follows: 2003
    
    2002U.S. dollars:Assets
    
    $
    5,452
    
    
    $
    10,244Liabilities
    
    
    (190,274
    )
    
    
    (187,640
)Net liabilities in U.S. dollars
    
    
    ($184,822
    )
    
    
    ($177,396
    )Exchange
rate at end of the year (Ps. per U.S.$1.00)
    
    Ps.
    11.24
    
    
    Ps.
    10.43
 The Company currently does not hedge any of its foreign-denominated assets or
liabilities. NOTE 17  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 has had tax losses since inception and accordingly has not been subject
to current income taxes or provided for deferred income taxes. The difference
between taxable income for F-27




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##### Table of Contents



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. The income tax showed in the
statement of operations corresponds to Maxcom Servicios Administrativos, S.A.
de C.V. (MSA). Asset tax is calculated at a 1.8% rate on the net value of certain assets and
liabilities and is due only when the asset tax exceeds the income tax amount
payable. The asset tax paid can be recovered over the following 10 years, if
and when income taxes exceed asset tax during such year. The Mexican
government waives this tax for the first two years of a companys operations.
The asset tax reflected in the statement of operations corresponds to Maxcom
and Corporativo by Ps.12,284 and Ps.22, respectively. The components of deferred income tax assets (liabilities) at December 31 are
as follows: 2003
    
    2002CURRENT:Allowance for doubtful accounts
    
    Ps.
    20,552
    
    
    Ps.
    11,350Inventory
    
    
    (6,089
    )
    
    
    (6,767
    )Prepaid expenses
    
    
    (17,708
    )
    
    
    (12,591
    )Accruals
    
    
    50,300
    
    
    
    Total current
    
    
    47,055
    
    
    
    (8,007
    )NON-CURRENT:Telephone network equipment and leasehold
improvements, frequency rights, intangible
assets and preoperating expenses, net.
    
    
    (230,216
    )
    
    
    (333,527
    )Asset tax payments
    
    
    19,696
    
    
    
    6,849Tax loss carryforwards
    
    
    983,324
    
    
    
    835,707Total non-current
    
    
    772,804
    
    
    
    509,030Net deferred income tax assets before valuation
allowance
    
    
    819,859
    
    
    
    501,022Valuation allowance
    
    
    (819,859
    )
    
    
    (501,022
    )Net deferred income tax assets (liabilities)
    
    Ps.
    
    
    
    Ps.
    
 F-28




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##### Table of Contents



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, 2003, the Companys
restated cumulative tax losses were: Fiscal
    
    
    
    
    
    Expirationyear incurred
    
    Amount
    
    year1996
    
    Ps.
    7,235
    
    
    
    20061997
    
    
    25,814
    
    
    
    20071998
    
    
    165,956
    
    
    
    20081999
    
    
    421,471
    
    
    
    20092000
    
    
    565,881
    
    
    
    20102001
    
    
    784,878
    
    
    
    20112002
    
    
    839,158
    
    
    
    20122003
    
    
    262,493
    
    
    
    2013Ps.
    3,072,886
 NOTE 18  COMMITMENTS AND CONTINGENCIES: At December 31, 2003, the Company had the following commitments:  a)
    
    Lease agreements: The Company maintains operating leases on buildings, sites, poles and office
equipment. The Company recorded leasing expense of Ps.55,615, Ps.68,124 and
Ps.69,850 in 2003, 2002 and 2001. The schedule of estimated future minimum
lease payments is as follows: 20032004
    
    Ps.
    28,2222005
    
    
    20,9042006
    
    
    16,3112007
    
    
    14,0092008 and thereafter
    
    
    94,497Ps.
    173,943
 F-29




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##### Table of Contents



b)
    
    Previous corporate building lease agreement (Magdalena building): In September 2002, the Company commenced actions before the Lease Courts for
the Federal District of Mexico 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 a building on Magdalena, Mexico City,
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 countersued 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
roof-top, 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, which has been paid in installments from May 2003 to May 2004.  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: 20032004
    
    $
    2,5752005
    
    
    2,6382006
    
    
    2,7022007
    
    
    461$
    8,376
  d)
    
    Contingency regarding Concessions: The terms of the concessions require that the Company satisfy a number of
technical, build out and financial conditions. In January 2003 the Company
requested an extension from the COFETEL, to comply with its obligations to
provide coverage in certain towns and cities in accordance with the terms of
its local and long distance concessions. In August 2003, the Company received a
notification in which the COFETEL granted an extension of six months to comply
with the respective requirements. The extension expired on February 5, 2004 and
the Company is currently preparing a communication to the COFETEL in which the
Company will demonstrate its compliance with the technical, build out, and
financial conditions. A failure to comply with any of the terms of the
concessions or to obtain a waiver or extension could result in F-30




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##### Table of Contents



the early termination of any of the concessions. The Mexican government would
not be required to compensate the Company in case of such termination. If any
of the concessions were to be terminated, the Company could be unable to engage
in its core business. NOTE 19  REVENUE BY GEOGRAPHICAL LOCATION: The Companys concession title requires a revenue report by geographic location
as follows: Center-Services
    
    Metropolitan
    
    South
    
    TotalYear ended December 31, 2003:Local
    
    Ps.
    387,386
    
    
    Ps.
    233,164
    
    
    Ps.
    620,550Long distance
    
    
    68,069
    
    
    
    42,982
    
    
    
    111,051Rent of dedicated links
    
    
    2,979
    
    
    
    521
    
    
    
    3,500Sales of customer premise equipment
    
    
    14,424
    
    
    
    1,901
    
    
    
    16,325Lease of capacity
    
    
    14,026
    
    
    
    
    
    
    
    14,026Other
    
    
    178
    
    
    
    
    
    
    
    178Ps.
    487,062
    
    
    Ps.
    278,568
    
    
    Ps.
    765,630
 Center-Services
    
    Metropolitan
    
    South
    
    TotalYear ended December 31, 2002:Local
    
    Ps.
    286,019
    
    
    Ps.
    181,887
    
    
    Ps.
    467,906Long distance
    
    
    36,039
    
    
    
    33,971
    
    
    
    70,010Rent of dedicated links
    
    
    4,602
    
    
    
    571
    
    
    
    5,173Sales of customer premise equipment
    
    
    4,033
    
    
    
    2,006
    
    
    
    6,039Lease of capacity
    
    
    177
    
    
    
    
    
    
    
    177Other
    
    
    3,959
    
    
    
    3,987
    
    
    
    7,946Ps.
    334,829
    
    
    Ps.
    222,422
    
    
    Ps.
    557,251
 Center-Services
    
    Metropolitan
    
    South
    
    TotalYear ended December 31, 2001:Local
    
    Ps.
    201,793
    
    
    Ps.
    84,316
    
    
    Ps.
    286,109Long distance
    
    
    21,757
    
    
    
    16,635
    
    
    
    38,392Rent of dedicated links
    
    
    2,495
    
    
    
    
    
    
    
    2,495Sales of customer premise equipment
    
    
    3,955
    
    
    
    1,907
    
    
    
    5,862Lease of capacity
    
    
    207
    
    
    
    
    
    
    
    207Other
    
    
    11,093
    
    
    
    1,366
    
    
    
    12,459Ps.
    241,300
    
    
    Ps.
    104,224
    
    
    Ps.
    345,524
 F-31




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##### Table of Contents



NOTE 20  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.Generally, options 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, 2003, 256,094 options under the plan are fully vested and
exercisable.ii.
    
    New executive stock option plan.The Company implemented a new executive stock plan, covering services
rendered during the years 2001, 2002 and 2003. 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 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 grant and
20% per year for the next four years. Options were granted during
the second quarters of 2003 and 2002 of 1,098,553 and 1,571,388 and
exercise prices of U.S.$0.4927 and U.S.$0.5912, respectively. Options
will be granted during the second quarter of 2004 at an exercise
price of U.S.$0.7094 per share. Options expire ten years from the
date of grant.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. The Chairman of the Board is entitled to receive 5,000 shares each time(s) he attends a meeting. At December 31, 2003,
there are 665,003 options granted and outstanding for meetings
attended during 2001, 2002 and F-32




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##### Table of Contents



2003. The options are immediately vested and non-forfeitable, expiring in
3 years after the date of grant.iv.
    
    Signing and other bonusesDuring the years 2000, 2001 and 2002 the Company granted to its top officers signing bonuses totalling 366,433
options to purchase series N shares at an exercise price of $0.01 per share. On November 2002, the executives
exercised 356,433 of these options, the remaining 10,000 options had expired as of December 31, 2003.In November 2002, the Company granted various officers a special bonus in the form of options to purchase 462,936
series N shares at a strike price of U.S.$0.4927 per share. The executives exercised these options at the time of
granting.On April 29, 2002, the former chief executive officer was granted 7,730,177 stock options with an exercise price
of $0.4927 per share, and 3,957,588 stock options with an exercise price of $0.01 per share. Most of these
options were vested on the date of grant. Since these options were not exercised before year-end, they were
recorded as outstanding at December 31, 2002. On March 19, 2003, the chief executive officer resigned. As per
the terms of the severance agreements, the chief executive officer forfeited all rights he had to these options.Additionally, on April 29, 2002 an officer was granted 3,626,959 options with an exercise price of $0.049 per
share. At December 31, 2003, 1,886,019 of these share are vested and excercisable.During 2003 a signing bonus to a new executive was granted of 100,000 options with an exercise of $0.01 per share.Compensation expense is determined based on the market or fair-value price of the stock at the measurement date
less the amount, if any, that the employee is required to pay for the stock.In connection with the all of the above described plans, the Company recognized compensation expense of Ps.8,
Ps.13,647 and Ps.1,446 during 2003, 2002 and 2001.A summary of the changes of the stock options for employees for the year ended December 31, is presented in the
next page (in thousands of shares): F-33




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##### Table of Contents



2003
    
    2002
    
    2001Weighed-
    
    
    
    
    
    Weighed-
    
    
    
    
    
    Weighed-average
    
    
    
    
    
    average
    
    
    
    
    
    averageexercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseShares
    
    price
    
    Shares
    
    price
    
    Shares
    
    priceOutstanding at beginning of year
    
    
    17,413
    
    
    $
    0.57
    
    
    
    1,721
    
    
    $
    10.12
    
    
    
    714
    
    
    $
    10.12Granted
    
    
    1,441
    
    
    
    0.27
    
    
    
    17,832
    
    
    
    0.34
    
    
    
    1,008
    
    
    
    13.25Exercised
    
    
    173
    
    
    
    0.01
    
    
    
    829
    
    
    
    0.28
    
    
    
    
    
    
    
    Forfeited
    
    
    11,688
    
    
    
    0.33
    
    
    
    1,311
    
    
    
    5.43
    
    
    
    1
    
    
    
    11.01Outstanding at the end of the year
    
    
    6,993
    
    
    
    0.97
    
    
    
    17,413
    
    
    
    0.57
    
    
    
    1,721
    
    
    
    11.95Options exercisable at the end of
the year
    
    
    3,874
    
    
    
    1.09
    
    
    
    15,172
    
    
    
    0.51
    
    
    
    447
    
    
    
    8.28Weighted-average fair value of
options granted during the year
(expressed in U.S. dollars)
    
    
    
    
    
    $
    0.12
    
    
    
    
    
    
    $
    0.19
    
    
    
    
    
    
    $
    0.21
 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, 2003
    
    $
    0.01
    
    
    
    593
    
    
    
    1.55
    
    
    $
    0.01
    
    
    
    593
    
    
    $
    0.010.49
    
    
    
    4,967
    
    
    
    8.30
    
    
    
    0.49
    
    
    
    2,806
    
    
    
    0.490.59
    
    
    
    1,099
    
    
    
    9.25
    
    
    
    0.59
    
    
    
    220
    
    
    
    0.598.7
    
    
    
    33
    
    
    
    5.24
    
    
    
    8.70
    
    
    
    33
    
    
    
    8.7010.45
    
    
    
    190
    
    
    
    6.25
    
    
    
    10.45
    
    
    
    179
    
    
    
    10.4512.55
    
    
    
    112
    
    
    
    7.25
    
    
    
    12.55
    
    
    
    45
    
    
    
    12.55December 31, 2002
    
    $
    0.01
    
    
    
    4,380
    
    
    
    8.67
    
    
    $
    0.01
    
    
    
    4,380
    
    
    $
    0.010.49
    
    
    
    12,697
    
    
    
    9.33
    
    
    
    0.49
    
    
    
    10,536
    
    
    
    0.498.7
    
    
    
    33
    
    
    
    6.33
    
    
    
    8.70
    
    
    
    33
    
    
    
    8.7010.45
    
    
    
    190
    
    
    
    7.33
    
    
    
    10.45
    
    
    
    179
    
    
    
    10.4512.55
    
    
    
    112
    
    
    
    8.33
    
    
    
    12.55
    
    
    
    45
    
    
    
    12.55December 31, 2001
    
    $
    0.01
    
    
    
    87
    
    
    
    9.41
    
    
    $
    0.01
    
    
    
    87
    
    
    $
    0.018.7-10.45
    
    
    
    713
    
    
    
    8.06
    
    
    
    10.12
    
    
    
    319
    
    
    
    9.9812.55-15.06
    
    
    
    921
    
    
    
    9.28
    
    
    
    14.50
    
    
    
    41
    
    
    
    12.55
  b.
    
    Warrants for services rendered  i.
    
    Nissho Iwai American Corp. stock options:On March 24, 1998, the Company granted options to Nissho Iwai
337,471 Series N shares at fixed exercise prices per share of
$10.87, vesting immediately and expiring March 2005. These options
were issued in connection with a financing agreement and their cost
was to be amortized over the 7-year life of the financing. However,
as the financing agreement was terminated in March of 2000, the
remaining unamortized balance was expensed in 2000. All of these
options are vested and are exercisable at December 31, 2003. F-34




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##### Table of Contents



ii.
    
    CT Global Telecommunications, Inc. (CTGT) stock options:On May 21, 1998, the Company granted options to CTGT for up to 250,000 Series N
shares at an exercise price of $8.70. In return, CTGT agreed to manage the
construction of the Companys telephone network, provide engineering services, and
run their day-to-day telephone operations. These services were all completed and
the compensation charges expensed in prior years. The options expire 2 years after
CTGT disposes of their equity participation in Maxcom. The right to these options
is based on certain performance criteria. The cost of the options was valued using
the Black Scholes model and was expensed as the options were earned.Pursuant to the capital restructuring in April 2002, the Company authorized the
issuance of options to purchase up to an additional 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. All
of these options are vested and are exercisable at December 31, 2003.iii.
    
    Bachow and Associates (Bachow) stock options:On May 21, 1998, Bachow was given the opportunity to earn up to 100,000
series N shares at an exercise price of $8.70 expiring two years after
Bachow Investment Partners III L. P. disposes of its current equity
participation in Maxcom. Bachows right to exercise the options was
subject to performance objectives which were met as of December 31, 2000
providing Bachow the right to exercise all of the options at that date. The shares subject to this option agreement are limited to a maximum gain of
$40.00 per share. Bachow may elect to have the Company finance up to 95% of
the exercise price with a 7-year term non-recourse loan that will be
secured by the shares upon exercise.Pursuant to the capital restructuring of the Company consummated during
April 2002, the Company authorized the issuance of options to purchase
additional 342,312 series N shares at an exercise price of U.S.$3.06
per share and reduce the original strike price of the 100,000 options
to U.S. $3.06 per share, as partial anti-dilution protection.In addition, on April 28, 2000, the Company issued options to
purchase 94,000 shares at an exercise price of $0.01 for management
services rendered from Bachow, L. A. Strategic Partners II LLP and
BancAmerica International Investment Corporation. The cost of these
options was also expensed as incurred.Pursuant to the capital restructuring, the Company authorized the issuance
of options to purchase up to an additional 342,312 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. F-35




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##### Table of Contents



iv.
    
    Warrants in connection with the offering of the Notes:During the year ended December 31, 2000, the Company granted to the
bondholders, initial purchasers and underwriters of the Senior Notes
up to 876,491 warrants to purchase an equivalent amount of Series N shares at an exercise price of $0.01 per share (or $0.02 per CPO).
These warrants were valued at approximately $9,300 which was recorded
as a discount on the notes based on a proportionate calculation. This
discount is being amortized as additional interest expense over the
original life of the Senior Notes. The warrants vested immediately
upon grant and have a 7 year term.v.
    
    Amsterdam PacificOn May 21, 1998, the Company granted options to Amsterdam for
advisory services rendered for up to 24,425 Series N shares at an
exercise price of $8.70, expiring May 21, 2003. These services were
all completed and the compensation charges expensed in prior years.vi.
    
    BancAmerica International Investment CorporationThe Company 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 the capital
restructuring, the Company authorized the issuance of 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 anti-dilution protection.vii.
    
    LA Strategic Capital Partners IIThe Company 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 the capital
restructuring, the Company authorized the issuance of 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.viii.
    
    Bachow & Associates, Inc.The Company 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 the capital
restructuring, the Company authorized the issuance 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.The fair value of options for services rendered was determined using
the Black Scholes options pricing model and resulted in a non-cash
charge of approximately Ps.1,681, Ps.1,541 and Ps.4,813, which was
recognized as expense during the years ended December 31, 2002, 2001
and 2000. F-36




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##### Table of Contents



A summary of the changes of the stock options for non-employees for the years
ended December 31 is presented below (in thousands of shares): 2003
    
    2002
    
    2001Weighed-
    
    
    
    
    
    Weighed-
    
    
    
    
    
    Weighed-average
    
    
    
    
    
    average
    
    
    
    
    
    averageexercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseShares
    
    price
    
    Shares
    
    price
    
    Shares
    
    priceOutstanding at beginning of year
    
    
    3,241
    
    
    $
    2.36
    
    
    
    1,582
    
    
    $
    3.83
    
    
    
    1,582
    
    
    $
    3.83Granted
    
    
    
    
    
    
    
    
    
    
    2,103
    
    
    
    2.26
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    444
    
    
    
    2.42
    
    
    
    
    
    
    
    Outstanding at the end of the year
    
    
    3,241
    
    
    
    2.36
    
    
    
    3,241
    
    
    
    2.36
    
    
    
    1,582
    
    
    
    3.83Options exercisable at the end of
the year
    
    
    3,241
    
    
    
    2.36
    
    
    
    3,241
    
    
    
    2.36
    
    
    
    1,582
    
    
    
    3.83Weighted-average fair value of
options granted during the year
(expressed in U.S. dollars)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    0.12
    
    
    
    
    
    
    $
    
 The following tables summarizes the stock options outstanding for-non-employees
(in thousands): Outstanding
    
    ExercisableWeighted-average
    
    
    
    
    
    Weighted-averageRange of
    
    
    
    
    
    Remaining
    
    Exercise
    
    
    
    
    
    exerciseprices
    
    Number
    
    life
    
    price
    
    Number
    
    priceDecember 31, 2003
    
    $
    0.01
    
    
    
    1,338
    
    
    
    2.96
    
    
    $
    0.01
    
    
    
    1,338
    
    
    $
    0.013.06
    
    
    
    1,198
    
    
    
    1.00
    
    
    
    3.06
    
    
    
    1,198
    
    
    
    3.068.70
    
    
    
    362
    
    
    
    1.05
    
    
    
    8.70
    
    
    
    362
    
    
    
    8.70December 31, 2002
    
    $
    0.01
    
    
    
    1,338
    
    
    
    3.96
    
    
    $
    0.01
    
    
    
    1,338
    
    
    $
    0.013.06
    
    
    
    1,198
    
    
    
    2.00
    
    
    
    3.06
    
    
    
    1,198
    
    
    
    3.068.70
    
    
    
    362
    
    
    
    2.05
    
    
    
    8.70
    
    
    
    0.362
    
    
    
    8.70December 31, 2001
    
    $
    0.01
    
    
    
    970
    
    
    
    5.51
    
    
    $
    0.01
    
    
    
    970
    
    
    $
    0.018.70-10.87
    
    
    
    612
    
    
    
    3.79
    
    
    
    9.90
    
    
    
    612
    
    
    
    9.90
 NOTA 21  SIGNIFICANT DIFFERENCES BETWEEN MEXICAN AND U.S. GAAP: 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 (U.S. 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 U.S. GAAP does not include the reversal of such inflationary effects. F-37




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##### Table of Contents



The principal differences between Mexican GAAP and U.S. GAAP other than
inflation accounting, are presented in the following pages with an explanation,
where appropriate, of the effects on consolidated net income 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,
2001, 2002 and 2003: Years ended December 31,2003
    
    2002
    
    2001Net loss under Mexican GAAP
    
    (Ps.
    367,183
    )
    
    (Ps.
    761,839
    )
    
    (Ps.
    717,791
    )Adjustments:Pre-operating expenses (a)
    
    
    
    
    
    
    (1,892
    )
    
    
    Amortization of pre-operating expenses (a)
    
    
    34,333
    
    
    
    33,210
    
    
    
    33,181Capitalization of interest (b)
    
    
    (460
    )
    
    
    (204
    )
    
    
    (100
    )Amortization of capitalized interest (b)
    
    
    921
    
    
    
    221
    
    
    
    (6,375
    )Amortization of frequency rights (c)
    
    
    10,940
    
    
    
    443
    
    
    
    443Installation revenues (d)
    
    
    (30,777
    )
    
    
    (5,419
    )
    
    
    (5,954
    )Installation costs (e)
    
    
    (47,666
    )
    
    
    (78,159
    )
    
    
    (18,513
    )Debt restructuring (g)
    
    
    21,053
    
    
    
    453,504
    
    
    
    Capitalized internal compensation cost (h)
    
    
    122
    
    
    
    (2,435
    )
    
    
    Total U.S. GAAP adjustments
    
    
    (11,534
    )
    
    
    399,269
    
    
    
    2,682Net loss under U.S. GAAP
    
    (Ps.
    378,717
    )
    
    (Ps.
    362,570
    )
    
    (Ps.
    715,109
    )Weighted-average common shares
outstanding, basic
    
    
    175,927,429
    
    
    
    134,738,030
    
    
    
    13,748,445Weighted-average common shares
outstanding, diluted
    
    
    176,013,680
    
    
    
    136,597,574
    
    
    
    15,176,173Net loss per share under U.S. GAAP, basic
    
    (Ps.
    2.15
    )
    
    (Ps.
    2.69
    )
    
    (Ps.
    52.01
    )Net loss per share under U.S. GAAP, diluted
    
    (Ps.
    2.15
    )
    
    (Ps.
    2.65
    )
    
    (Ps.
    47.12
    )
 F-38




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##### Table of Contents



BALANCES AS OF DECEMBER 31, 2003
    
    2002
    
    2001Shareholders equity (deficit) under Mexican
GAAP
    
    Ps.
    258,168
    
    
    Ps.
    624,320
    
    
    (Ps.
    209,922
    )Accumulated adjustments:Preoperating expenses (a)
    
    
    (333,990
    )
    
    
    (333,990
    )
    
    
    (332,098
    )Amortization of preoperating expenses (a)
    
    
    155,816
    
    
    
    121,483
    
    
    
    88,273Capitalization of interest (b)
    
    
    63,056
    
    
    
    63,516
    
    
    
    63,720Amortization of capitalized interest (b)
    
    
    (15,372
    )
    
    
    (16,293
    )
    
    
    (16,514
    )Amortization of frequency rights (c)
    
    
    
    
    
    
    (10,940
    )
    
    
    (11,383
    )Installation revenues (d)
    
    
    (42,150
    )
    
    
    (11,373
    )
    
    
    (5,954
    )Installation costs (e)
    
    
    (144,338
    )
    
    
    (96,672
    )
    
    
    (18,513
    )Debt restructuring (g)
    
    
    (319,444
    )
    
    
    (340,497
    )
    
    
    Capitalized internal compensation cost (h)
    
    
    (2,313
    )
    
    
    (2,435
    )
    
    
    Total U.S. GAAP adjustments
    
    (Ps.
    638,735
    )
    
    (Ps.
    627,201
    )
    
    (Ps.
    232,469
    )Shareholders deficit under U.S.
GAAP
    
    (Ps.
    380,567
    )
    
    (Ps.
    2,881
    )
    
    (Ps.
    442,391
    )
 Provided below is an analysis of changes in shareholders equity (deficit)
under U.S. GAAP: Year ended December 31,2003
    
    2002
    
    2001Balance at the beginning of the year
    
    (Ps.
    2,881
    )
    
    (Ps.
    442,391
    )
    
    Ps.
    271,710Net loss under U.S. GAAP
    
    
    (378,717
    )
    
    
    (362,570
    )
    
    
    (715,109
    )Increase in capital stock
    
    
    
    
    
    
    656,905
    
    
    
    Increase in additional paid in capital
    
    
    1,023
    
    
    
    131,607
    
    
    
    1,008Contributions for future increases
of capital
    
    
    
    
    
    
    
    
    
    
    Stock options and warrants
    
    
    8
    
    
    
    13,568
    
    
    
    Balance at the end of the year
    
    (Ps.
    380,567
    )
    
    (Ps.
    2,881
    )
    
    (Ps.
    442,391
    )
 F-39




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##### Table of Contents



a. Preoperating expenses - Under Mexican GAAP, all expenses incurred while a company or a project is in
the preoperating or development stages are capitalized. Such capitalized
expenses are amortized on a straight-line basis after operations commence (May
1999) for a period not exceeding 10 years. Under U.S. GAAP, such pre-operating
expenses are expensed as incurred. b. Capitalization of interest - In accordance with Mexican GAAP, capitalization of the 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 is optional. Further, cost
capitalized is limited to the specific financing obtained for the construction
of the related asset. Under U.S. GAAP, capitalization of interest is required for certain qualifying
assets that require a period of time to get them ready for their intended use.
The amount of interest to be capitalized is that portion of the interest cost
incurred during the 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 on U.S. dollar or other
stable currency debt. U.S. 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 U.S. GAAP, this difference will not exist in future periods. Under U.S. GAAP, this item should be amortized during the term of the
concession beginning at the granting date of the concession by the SCT. Under Mexican GAAP, through December 31, 2002, frequency rights were amortized
on a straight-line method over the term of the concession, from the date the
Company commenced operations. d. Installation revenues- Mexican GAAP allows, through 2002 where installation is charged to customers,
for revenue to be recognized and the related expenses recorded immediately when
the service is rendered. In 2003 they are amortized over the remaining
concession period (Year 2017) Under U.S. GAAP, installation revenues and direct installation costs are
deferred and amortized over the expected customer relationship period. F-40




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##### Table of Contents



e. Installation costs - Under Mexican GAAP, installation costs not charged to customers are capitalized
and amortized on a straight-line basis over 20 years. Under U.S. GAAP, direct installation costs not charged to customers are
expensed as incurred. Prior to 2001, installation costs were not material. f. Operating income - Mexican GAAP allows certain nonrecurring charges, such as asset write-offs, to
be classified as non-operating. Under U.S. GAAP, such items are considered part of operating income. Under
U.S. GAAP, consolidated operating loss would have been Ps.233,827, Ps.362,583
and Ps.584,635 for the years ended December 31, 2003, 2002 and 2001. g. Troubled debt restructuring Mexican GAAP allows any gain or loss on restructuring to be taken directly to
equity at the time of the restructuring and recorded as additional paid in
capital. Debt issuance costs from the original issuance of debt continues to
be amortized over their original term. Under U.S.GAAP the debt restructuring qualifies as a troubled debt
restructuring pursuant to the provisions of Statement of Financial Accounting
Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt
Restructurings. The debt restructuring was accounted for as a combination of
types that includes a combination of both a granting of equity interest in the
form of warrants and common stock, and a modification of the debt terms where
both the principal and interest payments have been reduced. A gain is
recognized where the carrying value of the old debt is greater than total
future cash payments. To calculate the gain on the restructuring, the carrying
value of the old debt is reduced by the fair value of the equity interest
granted as well as all legal and other costs in relation to the restructuring,
and compared against the gross future cash gain. The Company has recognized a
gain of Ps.428,722 as the total income statement effect at the date of the
restructuring. The payable note recorded under Mexican GAAP represents only the principal of
the debt. Under U.S. GAAP the liability represents the principal balance plus
all future gross cash payments. The additional loan carrying value for USGAAP
reporting purposes results in an additional Ps.15,480 and Ps.16,658 foreign
currency loss for the year ended December 31, 2003 and 2002, respectively. Legal fees and other direct costs incurred by a creditor to effect a troubled
debt restructuring are deducted in measuring the gain on the restructuring of
payables. Ps.85,425 of debt issuance costs of the restructured debt and
Ps.61,382 of direct costs were recorded as part of the restructuring. This
reduced the balance of the other assets compared to that recorded under Mexican
GAAP. F-41




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##### Table of Contents



Ps.29,162 and Ps.19,247 of amortization during the years ended December 31,
2003 and 2002, respectively, has been recognized under Mexican GAAP related to
the old debt issuance costs. The effect of inflation on the combined transaction is a benefit of Ps.7,371
and Ps.21,999 during the years ended December 31, 2003 and 2002, respectively. h. Capitalized internal compensation cost- Mexican GAAP allows that certain compensation charges directly attributable to
capital expenditures can be capitalized, while under U.S. GAAP, these
compensation charges should be expensed. No such amounts were capitalized
during 2003.During 2002 there were capitalized Ps.2,435 of compensation
charges under Mexican GAAP that should be expensed under U.S. GAAP. i. 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 U.S. 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 U.S. 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. F-42




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##### Table of Contents



Significant components of deferred income taxes under U.S. GAAP are as follows: December 31, 2003 SFAS 109
    
    
    SFAS 109applied to
    
    
    applied toMexican GAAP
    
    
    U.S. GAAPBalances
    
    
    adjustments
    
    
    TotalDeferred assets:Allowance for doubtful accounts
    
    Ps.
    20,552
    
    
    
    
    
    
    Ps.
    20,552Asset tax payments
    
    
    19,696
    
    
    
    
    
    
    
    19,696Tax loss carryforwards
    
    
    983,324
    
    
    
    
    
    
    
    983,324Accruals
    
    
    50,300
    
    
    
    
    
    
    
    50,300Installation revenues
    
    
    
    
    
    
    13,488
    
    
    
    13,488Deferred tax assets
    
    
    1,073,872
    
    
    
    13,488
    
    
    
    1,087,360Deferred liabilities:Inventory
    
    
    (6,089
    )
    
    
    
    
    
    
    (6,089
    )Prepaid expenses
    
    
    (17,708
    )
    
    
    
    
    
    
    (17,708
    )Telephone network equipment and
leasehold improvements, frequency rights,
intangible assets and preoperating expenses
    
    
    (230,216
    )
    
    
    42,497
    
    
    
    (187,719
    )Installation costs
    
    
    
    
    
    
    (46,248
    )
    
    
    (46,248
    )Debt issuance costs on restructuring
    
    
    
    
    
    
    
    
    
    
    Deferred tax liabilities
    
    
    (254,013
    )
    
    
    
    
    
    
    (257,764
    )Net deferred income tax asset
before valuation allowance
    
    
    819,859
    
    
    
    
    
    
    
    829,596Valuation allowance
    
    
    (819,859
    )
    
    
    
    
    
    
    (829,596
    )Ps.
    
    
    
    
    
    
    
    Ps.
    
 F-43




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##### Table of Contents



December 31, 2002 SFAS 109
    
    
    SFAS 109applied to
    
    
    applied toMexican GAAP
    
    
    U.S. GAAPBalances
    
    
    adjustments
    
    
    TotalDeferred assets:Allowance for doubtful accounts
    
    Ps.
    10,683
    
    
    
    
    
    
    Ps.
    10,683Asset tax payments
    
    
    6,849
    
    
    
    
    
    
    
    6,849Tax loss carryforwards
    
    
    786,548
    
    
    
    
    
    
    
    786,548Accruals
    
    
    Installation revenues
    
    
    
    
    
    
    3,639
    
    
    
    3,639Deferred tax assets
    
    
    804,080
    
    
    
    3,639
    
    
    
    807,719Deferred liabilities:Inventory
    
    
    (6,767
    )
    
    
    
    
    
    
    (6,767
    )Prepaid expenses
    
    
    (12,591
    )
    
    
    
    
    
    
    (12,591
    )Telephone network equipment and
leasehold improvements, frequency rights,
intangible assets and preoperating expenses
    
    
    (313,907
    )
    
    
    56,392
    
    
    
    (257,515
    )Installation costs
    
    
    
    
    
    
    (30,935
    )
    
    
    (30,935
    )Debt issuance costs on restructuring
    
    
    
    
    
    
    (51,292
    )
    
    
    (51,292
    )Deferred tax liabilities
    
    
    (333,265
    )
    
    
    (25,835
    )
    
    
    (359,100
    )Net deferred income tax asset
before valuation allowance
    
    
    470,815
    
    
    
    
    
    
    
    448,619Valuation allowance
    
    
    (470,815
    )
    
    
    
    
    
    
    (448,619
    )Ps.
    
    
    
    
    
    
    
    Ps.
    
 j. 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 U.S. 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 F-44




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##### Table of Contents



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 31,2003
    
    
    2002
    
    
    2001Operating activities:Net loss under U.S. GAAP
    
    (Ps.
    378,717
    )
    
    (Ps.
    362,570
    )
    
    (Ps.
    715,109
    )Adjustments to reconcile net loss to
net cash flow provided by operating activities:Depreciation and amortization
    
    
    244,125
    
    
    
    276,731
    
    
    
    267,811Gain on repurchase of debt
    
    
    
    
    
    
    
    
    
    
    (133,257
    )Gain on restructuring of debt
    
    
    
    
    
    
    (453,504
    )
    
    
    Fixed asset write-offs
    
    
    8,012
    
    
    
    
    
    
    
    42,545Allowance for doubtful accounts
    
    
    50,898
    
    
    
    26,263
    
    
    
    11,349Monetary gain
    
    
    (83,530
    )
    
    
    (107,903
    )
    
    
    (85,272
    )Non recurring charges
    
    
    8
    
    
    
    13,569
    
    
    
    25,832Allowance of inventory obsolescence
    
    
    3,492
    
    
    
    1,284
    
    
    
    580Foreign currency exchange loss
    
    
    188,614
    
    
    
    231,292
    
    
    
    56,70732,902
    
    
    
    (374,838
    )
    
    
    (528,814
    )Changes in operating assets and liabilities:Restricted cash
    
    
    
    
    
    
    205,304
    
    
    
    211,675Accounts receivable
    
    
    (52,506
    )
    
    
    (75,968
    )
    
    
    (34,062
    )Inventory
    
    
    (2,296
    )
    
    
    9,747
    
    
    
    (21,638
    )Prepaid expenses
    
    
    (17,621
    )
    
    
    (26,316
    )
    
    
    (584
    )Accrued expenses and other accounts payable
    
    
    56,535
    
    
    
    65,507
    
    
    
    (27,369
    )Cash flow (used in) provided by operating activities
    
    
    6,814
    
    
    
    (196,564
    )
    
    
    (399,624
    )Financing activities:Proceeds from debt and notes payable
    
    
    
    
    
    
    
    
    
    
    63,000Proceeds from issuance of capital stock
    
    
    
    
    
    
    634,252
    
    
    
    Repurchase of debt
    
    
    
    
    
    
    
    
    
    
    (103,749
    )Cash flow provided by (used in) financing activities
    
    
    
    
    
    
    634,252
    
    
    
    (40,749
    )Investing activities:Acquisition of fixed assets
    
    
    (64,777
    )
    
    
    (257,275
    )
    
    
    (500,932
    )Other assets
    
    
    (276
    )
    
    
    (164,505
    )
    
    
    (48,583
    )Cash flow used in investing activities
    
    
    (65,053
    )
    
    
    (421,780
    )
    
    
    (549,515
    )Cash and cash equivalents:Effect of inflation and exchange rate changes
on cash and cash equivalents
    
    
    (20,354
    )
    
    
    (85,252
    )
    
    
    (50,786
    )Net (decrease) increase in cash and cash equivalents
    
    
    (78,595
    )
    
    
    (69,344
    )
    
    
    (1,040,674
    )Cash and cash equivalents at beginning of the year
    
    
    120,331
    
    
    
    189,675
    
    
    
    1,230,349Cash and cash equivalents at end of the year
    
    
    41,736
    
    
    
    120,331
    
    
    
    189,675
 F-45




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##### Table of Contents



Year ended December 31,2003
    
    
    2002
    
    
    2001Interest paid
    
    Ps.
    20,649
    
    
    Ps.
    222,184
    
    
    Ps.
    435,673Taxes paid
    
    Ps.
    23,372
    
    
    Ps.
    2,920
    
    
    Ps.
    826Supplemental disclosures of non-cash
investing and financing activities activitiesCapital stock issued in exchange for services
    
    Ps.
    
    
    
    Ps.
    9,725
    
    
    Ps.
    Capital stock issued in exchanged for advertising
    
    Ps.
    
    
    
    Ps.
    29,174
    
    
    Ps.
    Reduction of notes payable from troubled
debt restructuring
    
    Ps.
    
    
    
    Ps.
    646,895
    
    
    Ps.
    
 k. 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. SFAS 148 is effective for financial
statements for fiscal years ending after December 15, 2002. 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. F-46




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##### Table of Contents



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 U.S. GAAP. l. Recent U.S. accounting pronouncements - In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB 51.
The primary objectives of FIN 46 are to provide guidance on the identification
of entities for which control is achieved through means other than through
voting rights (variable interest entities or VIEs) and how to determine
when and which business enterprise should consolidate the VIE (the primary
beneficiary). This new model for consolidation applies to an entity which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entitys activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest
in a VIE make additional disclosures. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. FIN 46 applies to public
enterprises as of the beginning of the applicable interim or annual period, and
it applies to nonpublic enterprises as of the end of the applicable annual
period. In December 2003 the FASB redeliberated certain proposed modifications
and revised FIN 46 (FIN 46-R). The revised provisions are applicable no later
than the first reporting period ending after March 15, 2004. The Company does
not expect that the adoption of FIN 46 and FIN 46-R will have a material impact
on its financial statements. In April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities (SFAS 149). This statement
amends and clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS 149 is generally effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designed after June
30, 2003. The adoption of SFAS 149 did not have a material impact on the
consolidated financial statements. In February 2003, the FASB issued Emerging Issues Task Force 00-21 (EITF
00-21), Revenue Arrangements with Multiple Deliverables. EITF 00-21 requires
revenue arrangements with multiple deliverables to be divided into separate
units of accounting. If the deliverables in the arrangement meet certain
criteria, arrangement consideration should be allocated among the
separate units based on their relative fair values. Applicable revenue
recognition criteria should be considered separately for each unit. The
guidance in EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company is evaluating the
impact that the adoption of EITF 00-21 will have on its financial statements. F-47




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##### Table of Contents



m. Condensed consolidating financial information - As mentioned in Note 12, in March 2000 the Company issued U.S.$300 million of
senior unsecured notes (Old 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 (New
Notes). The 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, 2003:Cash and cash equivalents and restricted cash
    
    Ps.
    41,648
    
    
    Ps.
    88
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    41,736Accounts receivable  net
    
    
    125,386
    
    
    
    168
    
    
    
    9,195
    
    
    
    (8,318
    )
    
    
    126,431Inventory  net
    
    
    18,451
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,451Prepaid expenses
    
    
    53,432
    
    
    
    109
    
    
    
    119
    
    
    
    
    
    
    
    53,660Frequency rights  net
    
    
    96,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,272Telephone network system and equipment  net
    
    
    1,537,430
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,537,430Preoperating expenses  net
    
    
    179,626
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,626Intangible assets  net
    
    
    390,866
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    390,866Other assets
    
    
    27,991
    
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    28,158Total assets
    
    Ps.
    2,471,102
    
    
    Ps.
    532
    
    
    Ps.
    9,314
    
    
    (Ps.
    8,318
    )
    
    Ps.
    2,472,630Total liabilities
    
    Ps.
    2,212,934
    
    
    Ps.
    2,267
    
    
    Ps.
    13,452
    
    
    (Ps.
    14,191
    )
    
    Ps.
    2,214,462Shareholders Equity:Capital stock and additional paid-in-capital
    
    
    1,754,064
    
    
    
    82
    
    
    
    56
    
    
    
    (138
    )
    
    
    1,754,064Accumulated deficit
    
    
    (1,495,896
    )
    
    
    (1,817
    )
    
    
    (4,194
    )
    
    
    6,011
    
    
    
    (1,495,896
    )Total shareholders equity
    
    
    258,168
    
    
    
    (1,735
    )
    
    
    (4,138
    )
    
    
    5,873
    
    
    
    258,168Total liabilities and shareholders equity
    
    Ps.
    2,471,102
    
    
    Ps.
    532
    
    
    Ps.
    9,314
    
    
    (Ps.
    8,318
    )
    
    Ps.
    2,472,630Total shareholders equity under Mexican
GAAP
    
    Ps.
    258,168
    
    
    (Ps.
    1,735
    )
    
    (Ps.
    4,138
    )
    
    Ps.
    5,873
    
    
    Ps.
    258,168Preoperating expenses
    
    
    (333,990
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (333,990
    )Amortization of preoperting expenses
    
    
    155,816
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155,816Capitalization of interest
    
    
    63,056
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,056Amortization of capitalized interest
    
    
    (15,372
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,372
    )Installation revenues
    
    
    (42,150
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42,150
    )Installation costs
    
    
    (144,338
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144,338
    )Debt restructuring
    
    
    (319,444
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (319,444
    )Bonues capitalization
    
    
    (2,313
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,313
    )Total shareholders equity under U.S. GAAP
    
    (Ps.
    380,567
    )
    
    (Ps.
    1,735
    )
    
    (Ps.
    4,138
    )
    
    Ps.
    5,873
    
    
    (Ps.
    380,567
    )
 F-48




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##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedStatements of Operations for the year
ended December 31, 2003:Revenues
    
    Ps.
    765,630
    
    
    Ps.
    45,479
    
    
    Ps.
    184,549
    
    
    (Ps.
    230,028
    )
    
    Ps.
    765,630Operating cost and expenses
    
    
    (997,688
    )
    
    
    (45,530
    )
    
    
    (184,709
    )
    
    
    231,194
    
    
    
    (996,733
    )Integral (cost) income of financing
    
    
    (123,301
    )
    
    
    79
    
    
    
    202
    
    
    
    
    
    
    
    (123,020
    )Other (income) expenses
    
    
    (11,824
    )
    
    
    (20
    )
    
    
    (613
    )
    
    
    (603
    )
    
    
    (13,060
    )Net (loss) income
    
    (Ps.
    367,183
    )
    
    Ps.
    8
    
    
    (Ps.
    571
    )
    
    Ps.
    563
    
    
    (Ps.
    367,183
    )Net (loss) income for the year under
Mexican GAAP
    
    (Ps.
    367,183
    )
    
    Ps.
    8
    
    
    (Ps.
    571
    )
    
    Ps.
    563
    
    
    (Ps.
    367,183
    )Amortization of preoperating expenses
    
    
    34,333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,333Capitalization of interest
    
    
    (460
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (460
    )Amortization of capitalized interest
    
    
    921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    921Amortization of frequency rights
    
    
    10,940
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,940Installation revenues
    
    
    (30,777
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,777
    )Installation costs
    
    
    (47,666
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,666
    )Debt restructuring
    
    
    21,053
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,053Bonus Capitalization
    
    
    122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    122Net loss (income) for the year under
U.S. GAAP
    
    (Ps.
    378,717
    )
    
    Ps.
    8
    
    
    (Ps.
    571
    )
    
    Ps.
    563
    
    
    (Ps.
    378,717
    )Statement of Changes in Financial Position
for the Year Ended December 31, 2003:Net (loss) income
    
    (Ps.
    367,183
    )
    
    Ps.
    8
    
    
    (Ps.
    571
    )
    
    Ps.
    563
    
    
    (Ps.
    367,183
    )Depreciation and amortization
    
    
    336,174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    336,174Net change in working capital
    
    
    (3,971
    )
    
    
    (7,386
    )
    
    
    (4,187
    )
    
    
    (563
    )
    
    
    (16,107
    )Resources (used in) provided by operating
activities
    
    
    (34,980
    )
    
    
    (7,378
    )
    
    
    (4,758
    )
    
    
    
    
    
    
    (47,116
    )Financing activities:Additional paid in capital
    
    
    1,031
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,031Proceeds from loans and notes payable
    
    
    92,855
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92,855Resources used in financing activities
    
    
    93,886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,886Investing activities:Telephone network systems and equipment
    
    
    (109,280
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (109,280
    )Intangible assets
    
    
    (15,809
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,809
    )Other assets
    
    
    (284
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (276
    )Resources (used in) provided by investing
activities
    
    
    (125,373
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (125,365
    )Cash and cash equivalents:Net increase (decrease) in cash and
cash equivalents
    
    
    (66,467
    )
    
    
    (7,370
    )
    
    
    (4,758
    )
    
    
    
    
    
    
    (78,595
    )Beginning balances
    
    
    108,115
    
    
    
    7,458
    
    
    
    4,758
    
    
    
    
    
    
    
    120,331Ending balances
    
    Ps.
    41,648
    
    
    Ps.
    88
    
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    41,736
 F-49




---



##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedBalance sheet as of December 31, 2002:Cash and cash equivalents and restricted cash
    
    Ps.
    108,114
    
    
    Ps.
    7,459
    
    
    Ps.
    4,758
    
    
    Ps.
    
    
    
    Ps.
    120,331Accounts receivable  net
    
    
    129,521
    
    
    
    279
    
    
    
    15,475
    
    
    
    (15,250
    )
    
    
    130,024Inventory  net
    
    
    19,901
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,901Prepaid expenses
    
    
    37,030
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,030Frequency rights  net
    
    
    108,572
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,572Telephone network system and equipment  net
    
    
    1,651,338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,651,338Preoperating expenses  net
    
    
    212,506
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212,506Intangible assets  net
    
    
    442,860
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    442,860Other assets
    
    
    30,595
    
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    30,769Total assets
    
    Ps.
    2,740,437
    
    
    Ps.
    7,912
    
    
    Ps.
    20,233
    
    
    (Ps.
    15,250
    )
    
    Ps.
    2,753,331Total liabilities
    
    Ps.
    2,116,117
    
    
    Ps.
    9,655
    
    
    Ps.
    23,800
    
    
    (Ps.
    20,560
    )
    
    Ps.
    2,129,011Shareholders Equity:Capital stock and additional paid-in-capital
    
    
    1,753,033
    
    
    
    82
    
    
    
    56
    
    
    
    (138
    )
    
    
    1,753,033Accumulated deficit
    
    
    (1,128,713
    )
    
    
    (1,825
    )
    
    
    (3,623
    )
    
    
    5,448
    
    
    
    (1,128,713
    )Total shareholders equity
    
    
    624,320
    
    
    
    (1,743
    )
    
    
    (3,567
    )
    
    
    5,310
    
    
    
    624,320Total liabilities and shareholders equity
    
    Ps.
    2,740,437
    
    
    Ps.
    7,912
    
    
    Ps.
    20,233
    
    
    (Ps.
    15,250
    )
    
    Ps.
    2,753,331Total shareholders equity under Mexican
GAAP
    
    Ps.
    624,320
    
    
    (Ps.
    1,743
    )
    
    (Ps.
    3,567
    )
    
    Ps.
    5,310
    
    
    Ps.
    624,320Preoperating expenses
    
    
    (333,990
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (333,990
    )Amortization of preoperating expenses
    
    
    121,483
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    121,483Capitalization of interest
    
    
    63,516
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,516Amortization of capitalized interest
    
    
    (16,293
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,293
    )Amortization of frequency rights
    
    
    (10,940
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,940
    )Installation revenues
    
    
    (11,373
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,373
    )Installation costs
    
    
    (96,672
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96,672
    )Debt restructuring
    
    
    (340,497
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (340,497
    )Bonus capitalization
    
    
    (2,435
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,435
    )Total shareholders equity under U.S. GAAP
    
    (Ps.
    2,881
    )
    
    (Ps.
    1,743
    )
    
    (Ps.
    3,567
    )
    
    Ps.
    5,310
    
    
    (Ps.
    2,881
    )Statements of Operations for the year
ended December 31, 2002:Revenues
    
    Ps.
    557,251
    
    
    Ps.
    94,328
    
    
    Ps.
    202,561
    
    
    (Ps.
    296,889
    )
    
    Ps.
    557,251Operating cost and expenses
    
    
    (990,623
    )
    
    
    (94,195
    )
    
    
    (205,797
    )
    
    
    298,289
    
    
    
    (992,324
    )Integral
(cost) income of financing
    
    
    (321,895
    )
    
    
    122
    
    
    
    316
    
    
    
    
    
    
    
    (321,461
    )Other
    
    
    (6,572
    )
    
    
    (57
    )
    
    
    (957
    )
    
    
    2,279
    
    
    
    (5,305
    )Net (loss) income
    
    (Ps.
    761,839
    )
    
    Ps.
    198
    
    
    (Ps.
    3,877
    )
    
    Ps.
    3,679
    
    
    (Ps.
    761,839
    )
 F-50




---



##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedNet (loss) income for the year under
Mexican GAAP
    
    (Ps.
    761,839
    )
    
    Ps.
    198
    
    
    (Ps.
    3,877
    )
    
    Ps.
    3,679
    
    
    (Ps.
    761,839
    )Preoperating expenses
    
    
    (1,892
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,892
    )Amortization of preoperating expenses
    
    
    33,210
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,210Capitalization of interest
    
    
    (204
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (204
    )Amortization of capitalized interest
    
    
    221
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    221Amortization of frequency rights
    
    
    443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    443Installation revenues
    
    
    (5,419
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,419
    )Installation costs
    
    
    (78,159
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78,159
    )Debt restructuring
    
    
    453,504
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    453,504Bonus capitalization
    
    
    (2,435
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,435
    )Net loss
(income) for the year under
U.S. GAAP
    
    (Ps.
    362,570
    )
    
    Ps.
    198
    
    
    (Ps.
    3,877
    )
    
    Ps.
    3,679
    
    
    (Ps.
    362,570
    )Statement of Changes in Financial Position
for the Year Ended December 31, 2002:Net (loss) income
    
    (Ps.
    761,839
    )
    
    Ps.
    198
    
    
    (Ps.
    3,877
    )
    
    Ps.
    3,679
    
    
    (Ps.
    761,839
    )Gain on repurchase of debt
    
    
    (325
    )
    
    
    
    
    
    
    
    
    
    
    325Depreciation and amortization
    
    
    330,192
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330,192Net change in working capital
    
    
    (89,273
    )
    
    
    3,673
    
    
    
    (10,959
    )
    
    
    4,004
    
    
    
    (77,983
    )Resources (used in) provided by operating
activities
    
    
    (342,699
    )
    
    
    3,871
    
    
    
    (14,836
    )
    
    
    
    
    
    
    (353,664
    )Financing activities:Issuance of capital stock
    
    
    816,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    816,485Additional paid-in capital
    
    
    779,596
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    779,596Proceeds from loans and notes payables
    
    
    (762,614
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (762,614
    )Resources used in financing activities
    
    
    833,467
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    833,467Investing activities:Preoperating expenses
    
    
    (1,892
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,892
    )Telephone network systems and equipment
    
    
    (380,998
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (380,998
    )Intangible assets
    
    
    (170,019
    )
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    (169,905
    )Other assets
    
    
    3,789
    
    
    
    (141
    )
    
    
    
    
    
    
    
    
    
    
    3,648Resources (used in) provided by investing
activities
    
    
    (549,120
    )
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    (549,147
    )Cash and cash equivalents:Net increase (decrease) in cash and
cash equivalents
    
    
    (58,352
    )
    
    
    3,844
    
    
    
    (14,836
    )
    
    
    
    
    
    
    (69,344
    )Beginning balances
    
    
    166,467
    
    
    
    3,614
    
    
    
    19,594
    
    
    
    
    
    
    
    189,675Ending balances
    
    Ps.
    108,115
    
    
    Ps.
    7,458
    
    
    Ps.
    4,758
    
    
    Ps.
    
    
    
    Ps.
    120,331
 F-51




---



##### Table of Contents



Maxcom
    
    
    Corporativo
    
    
    Servicios
    
    
    Elimination
    
    
    ConsolidatedBalance sheet as of December 31, 2001:Cash and cash equivalents and
restricted cash
    
    Ps.
    166,467
    
    
    Ps.
    3,614
    
    
    Ps.
    19,594
    
    
    Ps.
    
    
    
    Ps.
    189,675Short and long term restricted cash
    
    
    205,303
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205,303Accounts receivable  net
    
    
    98,951
    
    
    
    723
    
    
    
    481
    
    
    
    (7,857
    )
    
    
    92,298Inventory  net
    
    
    31,337
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,337Prepaid expenses
    
    
    11,323
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,323Frequency rights  net
    
    
    115,219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115,219Telephone network system and
equipment  net
    
    
    1,504,438
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,504,438Preoperating expenses  net
    
    
    243,824
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    243,824Intangible assets  net
    
    
    329,085
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    329,192Other assets
    
    
    34,381
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    34,412Total assets
    
    Ps.
    2,740,328
    
    
    Ps.
    4,475
    
    
    Ps.
    20,075
    
    
    (Ps.
    7,857
    )
    
    Ps.
    2,757,021Total liabilities
    
    Ps.
    2,950,251
    
    
    Ps.
    6,416
    
    
    Ps.
    19,765
    
    
    (Ps.
    9,488
    )
    
    Ps.
    2,966,944Shareholders Equity:Capital stock and additional
paid-in-capital
    
    
    1,185,207
    
    
    
    82
    
    
    
    56
    
    
    
    (138
    )
    
    
    1,185,207Accumulated equity (deficit)
    
    
    (1,395,130
    )
    
    
    (2,023
    )
    
    
    254
    
    
    
    1,769
    
    
    
    (1,395,130
    )Total shareholders equity (deficit)
    
    
    (209,922
    )
    
    
    (1,941
    )
    
    
    310
    
    
    
    1,631
    
    
    
    (209,922
    )Total liabilities and shareholders
equity (deficit)
    
    Ps.
    2,740,328
    
    
    Ps.
    4,475
    
    
    Ps.
    20,075
    
    
    Ps.
    (7,857
    )
    
    Ps.
    2,757,021Total shareholders equity (deficit)
under Mexican GAAP
    
    (Ps.
    209,922
    )
    
    (Ps.
    1,941
    )
    
    Ps.
    310
    
    
    Ps.
    1,631
    
    
    (Ps.
    209,922
    )Preoperating expenses
    
    
    (332,098
    )
    
    

    
    
    
    
    
    
    
    
    
    
    
(332,098
    )Amortization of preoperting
expenses
    
    
    88,273
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,273Capitalization of interest
    
    
    63,720
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,720Amortization of capitalized interest
    
    
    (16,514
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,514
    )Amortization of frequency rights
    
    
    (11,383
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,383
    )Installation revenues
    
    
    (5,954
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,954
    )Installation costs
    
    
    (18,513
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,513
    )Total shareholders equity (deficit) under
U.S. GAAP
    
    (Ps.
    442,391
    )
    
    (Ps.
    1,941
    )
    
    Ps.
    310
    
    
    Ps.
    1,631
    
    
    (Ps.
    442,391
    )Statements of operations for the year
ended December 31, 2001:Revenues
    
    Ps.
    345,524
    
    
    Ps.
    146,683
    
    
    Ps.
    113,283
    
    
    (Ps.
    259,966
    )
    
    Ps.
    345,524Operating cost and expenses
    
    
    (933,364
    )
    
    
    (146,445
    )
    
    
    (113,082
    )
    
    
    259,966
    
    
    
    (932,925
    )Integral income cost of financing
    
    
    (60,845
    )
    
    
    (200
    )
    
    
    50
    
    
    
    
    
    
    
    (60,995
    )Other income (expense)
    
    
    (69,107
    )
    
    
    481
    
    
    
    3
    
    
    
    (772
    )
    
    
    (69,395
    )Net (loss) income
    
    (Ps.
    717,791
    )
    
    Ps.
    519
    
    
    Ps.
    254
    
    
    (Ps.
    772
    )
    
    (Ps.
    717,791
    )
 F-52




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##### Table of Contents



Maxcom
    
    Corporativo
    
    Servicios
    
    Elimination
    
    ConsolidatedNet (loss) income for the year under
Mexican GAAP
    
    (Ps.
    717,791
    )
            
    Ps.
    519
    
    
    Ps.
    254
    
            
    (Ps.
    772
    )
                    
            (Ps.
    717,791
                    )Preoperating expenses
    
    
    33,181
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,181Capitalization of interest
    
    
    (100
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    )Amortization of preoperating
expenses
    
    
    (6,375
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,375
    )Amortization of frequency rights
    
    
    443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    443Installation revenues
    
    
    (5,954
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,954
    )Installation costs
    
    
    (18,513
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,513
    )Net (loss) income for the year under
U.S. GAAP
    
            (Ps.
    715,109
    )
            
    Ps.
    519
    
    
    Ps.
    254
    
            
    (Ps.
    772
    )
            
        (Ps.
    715,109
                    )Statement of Changes in Financial
Position for the year ended December
31, 2001:Net (loss) income
    
            (Ps.
    717,791
    )
            
    Ps.
    519
    
    
    Ps.
    254
    
    
            (Ps.
    772
    )
            
                    (Ps.
    717,791
            )Non recurring charges
    
    
    68,377
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    68,377Gain of repurchase of debt
    
    
    (133,257
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (133,257
    )Depreciation and amortization
    
    
    295,062
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    295,062Net change in working capital
    
    
    (487,610
    )
    
    
    519
    
    
    
    254
    
    
    
    (772
    )
    
    
    (487,609
    )Resources (used in) provided by
operating activities
    
    
    (392,053
    )
    
    
    2,614.
    
    
    
    19,538
    
    
    
    
    
    
    
    (369,901
    )Financing activities:Issuance of capital stock
    
    
    1,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,008Repurchase of debt
    
    
    (103,749
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103,749
    )Resources provided by financing
activities
    
    
    (102,741
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (102,741
    )Investing activities:Telephone network systems and
equipment
    
    
    (519,448
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (519,448
    )Intangible assets
    
    
    (8,031
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,031
    )Other assets
    
    
    (40,608
    )
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    (40,552
    )Resources used in investing activities
    
    
    (568,087
    )
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    (568,031
    )Cash and cash equivalents:Increase (decrease) during the period
    
    
    (1,062,881
    )
    
    
    2,614
    
    
    
    19,594
    
    
    
    
    
    
    
    (1,040,673
    )Beginning balances
    
    
    1,229,348
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    1,230,348Ending balances
    
    Ps.
    166,467
    
    
    Ps.
    3,614
    
    
    Ps.
    19,594
    
    
    Ps.
    
    
    
    Ps.
    189,675
 F-53




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##### Table of Contents



m. Valuation and Qualifying Accounts - (Amounts expressed in Million of Mexican Pesos (Ps.) with Purchasing Power as
of December 31, 2003) Balance at
    
    Charged to
    
    
    
    
    
    
    
    
    
    Balance atbeginning
    
    cost and
    
    
    
    
    
    
    
    
    
    end ofof period
    
    Expenses
    
    Deductions
    
    periodAllowance for doubtful accounts
    
    
    2003
    
    
    Ps
    .
    
    
    
    33.4
    
    
    Ps
    .
    
    
    
    50.9
    
    
    (Ps
    .
    
    
    
    22.0
    )
    
    Ps
    .
    
    
    
    62.32002
    
    
    Ps
    .
    
    
    
    20.5
    
    
    Ps
    .
    
    
    
    26.3
    
    
    (Ps
    .
    
    
    
    13.4
    )
    
    Ps
    .
    
    
    
    33.42001
    
    
    Ps
    .
    
    
    
    9.5
    
    
    Ps
    .
    
    
    
    18.4
    
    
    (Ps
    .
    
    
    
    7.4
    )
    
    Ps
    .
    
    
    
    20.5Allowance for obsolete and slow-
    
    
    2003
    
    
    Ps
    .
    
    
    
    0.6
    
    
    Ps
    .
    
    
    
    
    
    
    (Ps
    .
    
    
    
    0.3
    )
    
    Ps
    .
    
    
    
    0.3moving supply inventories
    
    
    2002
    
    
    Ps
    .
    
    
    
    0.6
    
    
    Ps
    .
    
    
    
    
    
    
    Ps
    .
    
    
    
    
    
    
    Ps
    .
    
    
    
    0.62001
    
    
    Ps
    .
    
    
    
    
    
    
    Ps
    .
    
    
    
    0.6
    
    
    Ps
    .
    
    
    
    
    
    
    Ps
    .
    
    
    
    0.6Allowance for obsolete and slow-
    
    
    2003
    
    
    Ps
    .
    
    
    
    13.1
    
    
    Ps
    .
    
    
    
    
    
    
    (Ps
    .
    
    
    
    3.5
    )
    
    Ps
    .
    
    
    
    9.6moving network inventories
    
    
    2002
    
    
    Ps
    .
    
    
    
    14.6
    
    
    (Ps
    .
    
    
    
    0.2
    )
    
    (Ps
    .
    
    
    
    1.3
    )
    
    Ps
    .
    
    
    
    13.12001
    
    
    Ps
    .
    
    
    
    
    
    
    Ps
    .
    
    
    
    14.6
    
    
    Ps
    .
    
    
    
    
    
    
    Ps
    .
    
    
    
    14.6Allowance for lease penalty
    
    
    2003
    
    
    Ps
    .
    
    
    
    7.9
    
    
    Ps
    .
    
    
    
    
    
    
    (Ps
    .
    
    
    
    7.9
    )
    
    Ps
    .
    
    
    
    2002
    
    
    Ps
    .
    
    
    
    7.4
    
    
    Ps
    .
    
    
    
    0.5
    
    
    Ps
    .
    
    
    
    
    
    
    Ps
    .
    
    
    
    7.92001
    
    
    Ps
    .
    
    
    
    
    
    
    Ps
    .
    
    
    
    7.4
    
    
    Ps
    .
    
    
    
    
    
    
    Ps
    .
    
    
    
    7.4
 NOTE  22 SUBSEQUENT EVENTS: a) Statement C-15: The provisions of Statement C-15 Impairment of the Value of Long Lived Assets
and their Disposal, issued by the Accounting Principles Board of the Mexican
Institute of Public Accountants, went into effect on January 1, 2004. That
Statement establishes general criteria for the identification and, if
applicable, recording of losses from impairment of decrease in value of
long-lived tangible and intangible assets, including goodwill. Additionally,
it defines concepts such as net sales price and value in use for the valuation
of long-lived assets. That study identified a Ps.56,885 ($5,101) impairment
loss, which will be recorded after extraordinary items in the income statement
for the period commencing January 1, 2004, net of the corresponding deferred
income tax. b) New subsidiary: On February 3, 2004, Maxcom USA, Inc. was incorporated in accordance with the
laws of the State of Delaware, U.S.A. This Company is a wholly-owned
subsidiary, whose main line of business will be to promote telecommunications
services such as international long-distance, data and other value-added
services, etc. from Nuevo Laredo border crossing through Mexico. F-54




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##### Table of Contents



c) Lease of capacity: During January 2004 the Company finalized and delivered phase one of the
project and billed
$2,000 which was recorded in deferred revenue and will be recognized into
revenue over the term of the contract. (See Note 4 m.) d) Default on the terms of the SCT concessions: The Company has failed to provide the Mexican Telecommunications Minestry
(SCT) with the performance bonds renewal for 2004, and such failure could be
construed as a default on the terms of its concessions. The Management is
currently negotiating new terms with the SCT to secure the performance of the
concessions.    F-55




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##### Table of Contents



ITEM 19. EXHIBITS Page1.
    
    
    By-laws (estatutos) of Maxcom Telecomunicaciones, S.A. de C.V. as amended to
June 10, 2003.
    
    E-32(a).
2(b).
    
    
    Not applicable.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.
    
    *2(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




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##### 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]5.
    
    
    Not applicable.6.
    
    
    Computation of earnings per share.7.
    
    
    Computation of ratio of earnings to fixed charges.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 1350
   *
    
    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.[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




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##### 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




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##### 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




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##### 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
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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.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.
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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 SolbesJune 24, 2004
    
    Chief Financial Officer
DATE: