1000000000 Due from 360 TV AZTECA, SAB DE CV
TV AZTECA, S.A.B. DE C.V. $1,000,000,000 Medium-Term Note Programme Due from 360 Days to 10 Years from the Date of Issue Azteca may from time to time issue medium-term notes (the "Notes") under the programme (the "Programme") described in this offering circular (the "Offering Circular"). All Notes having the same interest payment dates, issue price and maturity date, bearing interest at the same rate and the terms of which are otherwise identical constitute a "Series." The Notes will have the following characteristics: The Notes may be issued in any currency. The Notes will have maturities of not less than 360 days nor more than 10 years. The maximum principal amount of all Notes from time to time outstanding under the Programme will not exceed $1,000,000,000 (or its equivalent in other currencies calculated as described in the Programme Agreement (as defined below)). The Notes may be issued at their nominal amount or at a premium over or discount to their nominal amount and/or may bear interest at a fixed rate or floating rate. The Notes will be issued in either registered or bearer form. The Notes will be fully, unconditionally and jointly and severally guaranteed by Televisión Azteca, S.A. de C.V., Azteca International Corporation, Inversora Mexicana de Producción, S.A. de C.V., Estudios Azteca, S.A. de C.V., Azteca Novelas, S.A. de C.V., and Operadora Mexicana de Televisión, S.A. de C.V. (the "Guarantors" and each a "Guarantor"). See "The Guarantors." The Notes may be issued as unsecured Notes or as secured Notes. Any terms and conditions that differ from those contained herein which are applicable to a particular Series of Notes, including the interest rate, if any, applicable to such Series, will be set forth in a pricing supplement relating to such Series (a "Pricing Supplement"), which for the purposes of listing and trading, shall be deemed to be incorporated in, and to form part of, the Series Listing Particulars (as defined in such Pricing Supplement). The applicable Pricing Supplement relating to a particular Series of Notes may specify other terms and conditions which shall, to the extent so specified, replace or modify the terms and conditions set forth in this Offering Circular with respect to such Series of Notes. Notes issued under the Programme may at any time, but are not required to, be listed on one or more stock exchanges. Application has been made for this Offering Circular to be approved by the Irish Stock Exchange. Azteca may apply for any Series of Notes to be issued under the Programme to be admitted to the Official List of the Irish Stock Exchange and trading on its Global Exchange Market, as set forth in the applicable Pricing Supplement. This Offering Circular constitutes "Base Listing Particulars" for the purpose of any such listing and trading. THE NOTES HAVE NOT BEEN AND WILL NOT BE REGISTERED WITH THE REGISTRO NACIONAL DE VALORES (THE "NATIONAL SECURITIES REGISTRY") MAINTAINED BY THE COMISION NACIONAL BANCARIA Y DE VALORES (THE NATIONAL BANKING AND SECURITIES COMMISSION, OR "CNBV"), AND MAY NOT BE OFFERED OR SOLD PUBLICLY, OR OTHERWISE BE THE SUBJECT OF BROKERAGE ACTIVITIES, IN MEXICO, EXCEPT PURSUANT TO A PRIVATE PLACEMENT EXEMPTION SET FORTH UNDER ARTICLE 8 OF THE LEY DEL MERCADO DE VALORES, AS AMENDED (THE "MEXICAN SECURITIES MARKET LAW," OR "LMV"). AS REQUIRED UNDER THE LMV, AZTECA WILL NOTIFY THE CNBV OF THE ISSUANCE OF THE NOTES INCLUDING THE PRINCIPAL CHARACTERISTICS OF THE NOTES AND THE OFFERING OF THE NOTES OUTSIDE OF MEXICO. SUCH NOTICE WILL BE DELIVERED TO THE CNBV TO COMPLY WITH A LEGAL REQUIREMENT AND FOR INFORMATION PURPOSES ONLY, AND THE DELIVERY TO AND THE RECEIPT BY THE CNBV OF SUCH NOTICE, DOES NOT CONSTITUTE OR IMPLY ANY CERTIFICATION AS TO THE INVESTMENT QUALITY OF THE NOTES, THE SOLVENCY, LIQUIDITY OR CREDIT QUALITY OF THE ISSUER OR THE GUARANTORS OR THE ACCURACY OR COMPLETENESS OF THE INFORMATION PROVIDED IN THIS OFFERING CIRCULAR. THE INFORMATION CONTAINED IN THIS OFFERING CIRCULAR IS EXCLUSIVELY THE RESPONSIBILITY OF THE ISSUER AND HAS NOT BEEN REVIEWED OR AUTHORIZED BY THE CNBV. IN MAKING AN INVESTMENT DECISION, ALL INVESTORS, INCLUDING ANY MEXICAN INVESTORS WHO MAY ACQUIRE NOTES FROM TIME TO TIME, MUST RELY ON THEIR OWN REVIEW AND EXAMINATION OF THE ISSUER AND THE GUARANTORS. The Notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act"), or with any securities regulatory authority of any state or other jurisdiction of the United States. The Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the Securities Act ("Regulation S")). This Offering Circular has been prepared by the Issuer for use in connection with the offer and sale of the Notes outside the United States to non-U.S. persons pursuant to Regulation S. For a description of these and certain further restrictions on offers and sales of the Notes and distribution of this Offering Circular, see "Selling Restrictions."
The date of this Offering Circular is September 4, 2013 CPAM: 5509473.22 TABLE OF CONTENTS
Page
IMPORTANT NOTICE ...... 1 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS ...... 3 PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION ...... 4 SUMMARY OF THE PROGRAMME ...... 6 FORM OF PRICING SUPPLEMENT ...... 9 RISK FACTORS ...... 12 USE OF PROCEEDS ...... 22 THE BUSINESS ...... 23 EXCHANGE RATES...... 44 FINANCIAL INFORMATION...... 45 GOVERNANCE...... 62 RELATED PARTY TRANSACTIONS AND CONFLICTS OF INTEREST...... 67 THE GUARANTORS ...... 69 TERMS AND CONDITIONS...... 71 SELLING RESTRICTIONS ...... 85 TAXATION ...... 90 AVAILABLE INFORMATION ...... 93 LISTING AND GENERAL INFORMATION...... 94 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...... F-1
i IMPORTANT NOTICE In this Offering Circular, unless otherwise specified or the context otherwise requires, all references to "Azteca" and the "Issuer" mean TV Azteca, S.A.B. de C.V. together with its consolidated subsidiaries. The information contained in this Offering Circular relating to the Issuer, the Guarantors and their subsidiaries and affiliates has been obtained from the Issuer and the Guarantors and is solely the responsibility of Azteca. Azteca, having taken all reasonable care, confirms that the information contained in this Offering Circular is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import. This Offering Circular contains summary information provided by the Issuer and the Guarantors in connection with the Programme under which the Issuer may issue Notes from time to time, provided that the aggregate principal amount of Notes outstanding at any time under the Programme will not exceed $1,000,000,000 (or its equivalent in other currencies calculated as described in the Programme Agreement). The amount of the Programme may be increased from time to time. The Trustee has not independently verified the information contained herein. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Trustee as to the accuracy or completeness of this Offering Circular or any supplement hereto. The Issuer and the Guarantors may at any time and from time to time appoint one or more dealers to act as such with respect to Notes issued under the Programme (the "Dealers"), and authorise and request them to circulate this Offering Circular in connection therewith. This Offering Circular is not intended to provide the basis of any credit, taxation, legal, investment or other evaluation and should not be considered as a recommendation by the Issuer or any of the Guarantors that any recipient of this Offering Circular should purchase any of the Notes. Each recipient contemplating the purchase of any of the Notes is advised to consult its own tax adviser, attorney and business adviser as to tax, legal, business and related matters concerning the purchase of Notes and to make, and shall be deemed to have made, its own independent investigation in relation to the Programme, the Notes and the financial condition and affairs of, and its own appraisal of the creditworthiness of, the Issuer and each of the Guarantors. None of the Issuer, any of the Guarantors or the Trustee makes any comment about the treatment for taxation purposes of payments or receipts in respect of the Notes to or by a holder of Notes or the legality of the purchase of Notes by an investor under applicable investment or similar laws. The Trustee accepts no responsibility, express or implied, for updating this Offering Circular. Neither the delivery of this Offering Circular nor the offering, sale or delivery of any Notes shall, in any circumstances, create any implication that the information contained herein is true subsequent to the date hereof or the date upon which this Offering Circular has been most recently amended or supplemented or that there has been no adverse change in the financial situation of the Issuer or any of the Guarantors since the date hereof or, as the case may be, the date upon which this Offering Circular has been most recently amended or supplemented or that any other information supplied in connection with the Programme is correct at any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same. No person has been authorised to give any information or to make any representation not contained in this Offering Circular or any supplement hereto, and if given or made, such information or representation must not be relied upon as having been authorised. This Offering Circular does not, and is not intended to, constitute or contain an offer or invitation to any person to subscribe for or purchase the Notes. This Offering Circular does not obligate the Issuer to accept any offer to subscribe for or purchase the Notes. The distribution of this Offering Circular and the offering, sale and delivery of the Notes in certain jurisdictions is restricted by law. Any persons into whose possession this Offering Circular or any Notes come must inform themselves of, and to observe, any such restrictions. In particular, such persons are required to comply with the restrictions on offers or sales of Notes and on distribution of this Offering Circular and other information in relation to the Notes set out under "Selling Restrictions" below. No person or entity shall have authority to make any offer or invitation to subscribe for or purchase Notes in any jurisdiction in which such offer or invitation is not authorised. Unless otherwise noted, market data and other information used throughout this Offering Circular are based on the Issuer's estimates, which are derived from its review of internal surveys and independent industry publications, government publications, and reports by market research firms or other published independent sources. Although the Issuer believes that its sources, including its estimates, are reliable, it has not independently verified the information and cannot guarantee its accuracy or completeness. Any information contained in this Offering Circular that has been
1 sourced from a third party has been accurately reproduced and as far as the Issuer or the Guarantors are aware or able to ascertain from information published by such third parties, no facts have been omitted which would render the reproduced information inaccurate or misleading. Any information that is identified with its source in this Offering Circular is third-party information. NOTICE TO PROSPECTIVE INVESTORS IN THE EUROPEAN ECONOMIC AREA This Offering Circular has been prepared on the basis that, except to the extent sub-paragraph (ii) below may apply, any offer of Notes in any Member State of the European Economic Area which has implemented the Prospectus Directive (2003/71/EC) (each, a "Relevant Member State") will be made pursuant to an exemption under the Prospectus Directive, as implemented in that Relevant Member State, from the requirement to publish a prospectus for offers of Notes. Accordingly, any person making or intending to make an offer in that Relevant Member State of Notes which are the subject of a placement contemplated in this Offering Circular as completed by final terms in relation to the offer of those Notes may only do so (i) in circumstances in which no obligation arises for the Issuer, any Guarantor or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive, in each case, in relation to such offer, or (ii) if a prospectus for such offer has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State and (in either case) published, all in accordance with the Prospectus Directive, provided that any such prospectus has subsequently been completed by final terms which specify that offers may be made other than pursuant to Article 3(2) of the Prospectus Directive in that Relevant Member State and such offer is made in the period beginning and ending on the dates specified for such purpose in such prospectus or final terms, as applicable. Except to the extent sub-paragraph (ii) above may apply, no offer of Notes in circumstances in which an obligation arises for the Issuer, any Guarantor or any Dealer to publish or supplement a prospectus for such offer, has been or is authorised. The summary of the Programme included under "Summary of the Programme" must be read as an introduction to this Offering Circular and any decision to invest in the Notes should be based on a consideration of the Offering Circular as a whole. Following the implementation of the relevant provisions of the Prospectus Directive (Directive 2003/71/EC) in each Member State of the European Economic Area no civil liability will attach to the Responsible Persons in any such Member State solely on the basis of such summary, including any translation thereof, unless it is misleading, inaccurate or inconsistent when read together with the other parts of this Offering Circular. Where a claim relating to the information contained in this Offering Circular is brought before a court in a Member State of the European Economic Area, the plaintiff may, under the national legislation of the Member State where the claim is brought, be required to bear the costs of translating the Offering Circular before the legal proceedings are initiated. NOTICE TO PROSPECTIVE INVESTORS IN THE UNITED KINGDOM This document is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) to investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order") or (iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant persons"). The Notes are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such Notes will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents. NOTICE TO PROSPECTIVE INVESTORS IN MEXICO The Notes have not been and will not be registered with the National Securities Registry maintained by the CNBV, and may not be offered or sold publicly, or otherwise be the subject of brokerage activities, in Mexico, except pursuant to a private placement exemption set forth under Article 8 of LMV. As required under the LMV, the Issuer will notify the CNBV of the issuance of the Notes including the principal characteristics of the Notes and the offering of the Notes outside of Mexico. Such notice will be delivered to the CNBV to comply with a legal requirement and for information purposes only, and the delivery to and the receipt by the CNBV of such notice, does not constitute or imply any certification as to the investment quality of the Notes, the Issuer's solvency, liquidity or credit quality or the accuracy or completeness of the information provided in this Offering Circular. The information contained in this Offering Circular is exclusively the responsibility of the Issuer and has not been reviewed or authorized by the CNBV. In making an investment decision, all investors, including any Mexican investors who may acquire Notes from time to time, must rely on their own review and examination of the Issuer and the Guarantors.
2 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Offering Circular includes forward-looking statements. These forward-looking statements include, without limitation, those regarding the Issuer's future financial position and results of operations, its strategy, plans, objectives, goals and targets, future developments in the markets in which the Issuer participates or are seeking to participate or anticipated regulatory changes in the markets in which it operates or intends to operate. In some cases, forward-looking statements can be identified by terminology such as "aim," "anticipate," "believe," "continue," "could," "estimate," "expect," "forecast," "guidance," "intend," "may," "plan," "potential," "predict," "project," "should" or "will" or the negative of such terms or other comparable terminology. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. The Issuer cautions potential investors that forward looking statements are not guarantees of future performance and are based on numerous assumptions and that its actual results of operations, including its financial condition and liquidity and the development of the Mexican media industry, may differ materially from (and be more negative than) those made in, or suggested by, the forward-looking statements contained in this Offering Circular. In addition, even if its results of operations, including its financial condition and liquidity and the development of the industry in which it operates, are consistent with the forward-looking statements contained in this Offering Circular, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause these differences include, but are not limited to: risks related to its competitive position; risks related to the renewal of broadcast concessions; changes in regulatory, administrative or economic conditions affecting the media industry; risks related to the development of new technologies; risks related to its business, strategy, expectations about growth in demand for its products and services and business operations, financial condition and results of operations; its ability to enter and integrate into new markets; the termination of material advertising agreements; the result of pending litigation involving it; its ability to repay debt; foreign currency exchange fluctuations relative to the U.S. dollar against the peso; risks related to Mexico's social, political or economic environment; risks associated with market demand for and liquidity of the Notes; and risks related to the use of proceeds from this offering. Potential investors should read the sections of this Offering Circular entitled "Risk Factors" and "The Business" for a more complete discussion of the factors that could affect the Issuer's future performance and the markets in which it operates. In light of these risks, uncertainties and assumptions, the forward-looking events described in this Offering Circular may not occur. The Issuer undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information or future events or developments.
3 PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION In this Offering Circular, all references to "$" and "U.S. dollars" refer to the lawful currency of the United States of America (the "United States" or the "U.S."). All references to "Ps." or "pesos" refer to the lawful currency of the United Mexican States ("Mexico"). This Offering Circular contains Azteca's unaudited consolidated financial statements as of and for the six months ended June 30, 2013 and 2012, including the notes thereto and Azteca's audited consolidated financial statements as of and for the years ended December 31, 2012 and 2011, including the notes thereto. Azteca's consolidated financial statements as of and for the years ended December 31, 2012 and 2011 have been audited by its independent auditors, Salles, Sáinz-Grant Thornton, S.C. ("Salles"), a member of Grant Thornton International. Salles is a member of the Association of Public Accountants of Mexico (Colegio de Contadores Públicos de México, A.C., or "CCPM"). Pursuant to the General Provisions Applicable to Securities Issuers and Other Participants in the Securities Market (Disposiciones de Carácter General Aplicables a las Emisoras de Valores y a Otros Participantes del Mercado de Valores), beginning with the year ending December 31, 2012, Mexican companies with securities listed on the BMV were required to prepare and present their financial information in accordance with International Financing Reporting Standards ("IFRS"), as adopted by the International Accounting Standards Board (the "IASB"). Accordingly, Azteca's consolidated financial statements as of and for the years ended December 31, 2012 and 2011 were its first annual financial statements prepared in accordance with IFRS. Azteca's transition date to IFRS was January 1, 2011, and therefore, the year ended December 31, 2011 was the comparative period established by IFRS 1, First Time Adoption of International Financial Reporting Standards. In accordance with IFRS 1, Azteca has applied applicable mandatory exceptions and certain optional exemptions to the retroactive application of IFRS to the financial statements as of and for the year ended December 31, 2011 and 2010 that had been prepared in accordance with Mexican Financial Reporting Standards (Normas de Información Financiera, or "MFRS"), as issued by the Mexican Board of the Financial Reporting Standards (Consejo Mexicano de las Normas de Información Financiera, A.C., or "CINIF") (see "Financial InformationManagement's OverviewCritical Accounting Policies and EstimatesCritical Accounting PoliciesAdoption of IFRS" and Note 27 to Azteca's audited consolidated financial statements as of and for the years ended December 31, 2012 and 2011 beginning on page F-16). Azteca's consolidated financial statements are stated in pesos. U.S. dollar amounts presented in this Offering Circular have been translated from peso amounts solely for the convenience of the reader. Unless otherwise indicated, the exchange rate used in converting pesos into U.S. dollars for amounts derived from the balance sheet and cash flow statement as of June 30, 2013 and 2012 was determined by reference to the period end exchange rate of Ps.13.0235 and Ps.13.6530 per U.S. dollar, respectively. Unless otherwise indicated, the exchange rate used in converting pesos into U.S. dollars for amounts derived from the income statement for the six months ended June 30, 2013 and 2012 was determined by reference to the average of the daily exchange rate of Ps.12.5612 and Ps.13.2674 per U.S. dollar, respectively. Unless otherwise indicated, the exchange rate used in converting pesos into U.S. dollars for amounts derived from the balance sheet and cash flow statement as of December 31, 2012 and 2011 was determined by reference to the period end exchange rate of Ps.13.0101 and Ps.13.9787 per U.S. dollar, respectively. Unless otherwise indicated, the exchange rate used in converting pesos into U.S. dollars for amounts derived from the income statement for the years ended December 31, 2012 and 2011 was determined by reference to the average of the daily exchange rate of Ps.13.1685 and Ps.12.4273 per U.S. dollar, respectively. The exchange rates used are those published by the Banco de México in the Official Gazette as the rate for the payment of obligations denominated in non-Mexican currency payable in Mexico. For additional information see "Exchange Rates." No representation is being made that the peso or dollar amounts shown in this Offering Circular could have been or could be converted into U.S. dollars or pesos at the rates shown in this Offering Circular or at any other rate. Note Regarding Non-GAAP Financial Measures
A body of generally accepted accounting principles is commonly referred to as "GAAP." For this purpose, a non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. Azteca discloses in this Offering Circular certain non-GAAP financial measures, including EBITDA. Azteca believes that EBITDA is useful for the purpose of understanding its financial performance as well as its
4 ability to satisfy principal and interest obligations under its indebtedness and to fund capital expenditures and operations requirements. Even though commonly used as a financial indicator in Mexico and abroad, EBITDA is not a measure of financial performance under IFRS. Azteca calculates EBITDA by adding (i) depreciation and amortization and (ii) other expenses, net, to operating income. Other expenses, net, may include legal expenses, charitable contributions and costs associated with the impairment of assets. Azteca's calculation of EBITDA may include or exclude certain items that may be included or excluded in calculations of EBITDA provided by other companies. Azteca's calculation of EBITDA does not include any adjustments to exclude the impact of unusual or non-recurring events, restructuring or other one-time charges or discontinued operations. EBITDA is provided for information purposes only and should not be considered in isolation, or as a substitute for net income, as a measure of operating performance, as a substitute for cash flows from operations or as a measure of liquidity. EBITDA has material limitations that impair its value as a measure of a company's overall profitability since it does not address certain financial figures. EBITDA and other non-GAAP financial measures included in this Offering Circular are not a substitute for IFRS measures of financial performance.
5 SUMMARY OF THE PROGRAMME The following summary of the Programme is only an introduction to this Offering Circular and any decision to invest in the Notes should be based on a consideration of the Offering Circular as a whole.
1. Issuer: TVAzteca,S.A.B.deC.V.
2. Description: Medium-TermNoteProgramme.
3. Guarantors: (1) Televisión Azteca, S.A. de C.V., (2) Azteca International Corporation, (3) Inversora Mexicana de Producción, S.A. de C.V., (4) Estudios Azteca, S.A. de C.V., (5) Azteca Novelas, S.A. de C.V., and (6) Operadora Mexicana de Televisión, S.A. de C.V.
4. Trustee: TheBankofNewYorkMellon.
5. Principal Paying Agent, The Bank of New York Mellon, London Branch. Calculation Agent and Registrar:
6. Amount of Programme: Azteca may issue Notes from time to time under the Programme, provided that the aggregate principal amount outstanding thereof at any time will not exceed $1,000,000,000 (or its equivalent in other currencies calculated as described in the Amended and Restated Programme Agreement dated May 19, 2011 (as amended, supplemented and/or restated from time to time, the "Programme Agreement"), by and among the Issuer, TV Azteca Comercializadora, S.A. de C.V., Red Azteca Internacional, S.A. de C.V., the Guarantors, Geronimo Capital Markets, Ltd., BCP Securities, LLC, and Jefferies LLC). The amount of the Programme may be increased from time to time.
7. Currency: Subject to any applicable or regulatory restrictions, the Notes may be issued in any currency specified in the relevant Pricing Supplement (the "Specified Currency").
8. Form and Delivery: The Notes may be issued in bearer or fully registered form as a global note, without coupons or receipts ("Global Note"), or as definitive Notes ("Definitive Notes"), with Coupons (if in bearer form) attached thereto (except in the case of Zero Coupon Notes) and, in the case of bearer Definitive Notes repayable in instalments, with Receipts at the time of issue attached thereto, in the denominations specified in the applicable Pricing Supplement.
Interests in a Global Note may be exchanged for Definitive Notes in registered or bearer form only on the terms and conditions specified in the relevant Global Note.
9. Maturity of the Notes: The Notes will have maturities of not less than 360 days nor more than 10 years.
10. Issue Price: The Notes may be issued (i) at a discount and not bear interest (zero coupon), (ii) at a discount and bear interest, payable on the interest payment dates specified in the applicable Pricing Supplement, (iii) at par and bear interest payable on the interest payment dates specified in the applicable Pricing Supplement or (iv) at a premium and bear interest payable on the interest payment dates specified in the applicable Pricing Supplement.
11. Ranking of the Notes: If the Pricing Supplement specifies that the Notes are unsecured Notes, the Notes will constitute direct, unsecured and unsubordinated obligations of
6 the Issuer and will rank pari passu with all other unsecured and unsubordinated indebtedness of the Issuer, including any guarantees given by the Issuer, other than obligations preferred by mandatory law. If the Pricing Supplement specifies that the Notes are secured Notes, the Notes will constitute direct and unsubordinated obligations of the Issuer that are secured by the collateral identified in the Pricing Supplement (the "Collateral").
12. Ranking of the Guarantees: The Notes will benefit from the guarantees of each of the Guarantors (the "Guarantees"), which will constitute full, unconditional, joint and several, direct, unsecured and unsubordinated obligations of the Guarantors and will rank pari passu with all other unsecured and unsubordinated obligations of the Guarantors, other than obligations preferred by mandatory law.
13. Redemption: Issuer Call. If the terms of a particular Note and the applicable Pricing Supplement so provide, such Note shall be redeemable at the option of the Issuer, on the date or dates, and on such terms, as are specified in such Note and in such Pricing Supplement.
Noteholder Put. If the terms of a particular Note and the applicable Pricing Supplement so provide, such Note shall be redeemable at the option of the holder of such Note, on the date or dates, and on such terms, as are specified in such Note and in such Pricing Supplement.
14. Denomination: Notes will be issued in such denominations as may be specified in the applicable Pricing Supplement save that the minimum denomination of each Note will be such as may be allowed or required from time to time by the relevant governmental authority or any laws, regulations or listing rules applicable to the relevant Specified Currency.
15. Withholding Tax: All payments under the Notes and the Guarantee will be subject to Mexican withholding taxes, except as stated in the Notes. See "Taxation."
16. Additional Amounts: The Issuer, or as the case may be, the Guarantors will pay such amounts as may be necessary in order to ensure that the net amounts received by the holders of Notes after any withholding or deduction for or on account of any present or future taxes or duties of whatever nature imposed or levied by Mexico or any authority in Mexico shall equal the respective amounts of principal and interest which would have been received in respect of the Notes in the absence of such withholding or deduction, subject to certain exceptions. See "Terms and Conditions."
17. Events of Default: The Notes contain certain events of default, including the failure by the Issuer to pay any principal of or interest on the Notes (which in the case of failure to pay any instalment of interest continues for a period of 3 days). See "Terms and Conditions."
18. Listing: Notes issued under the Programme may at any time, but are not required to, be listed on one or more stock exchanges. Application has been made for this Offering Circular to be approved by the Irish Stock Exchange. Azteca may apply for any Series of Notes to be issued under the Programme to be admitted to the Official List of the Irish Stock Exchange and trading on its Global Exchange Market, as set forth in the applicable Pricing Supplement. This Offering Circular constitutes "Base Listing Particulars" for the purpose of any such listing and trading.
7 19. Rating: The Notes issued under the Programme may, but are not required to be, rated. Except as stated in a Pricing Supplement, Notes issued under the Programme will not be rated.
20. Selling Restrictions: The Notes have not been and will not be registered under the Securities Act, or with any securities regulatory authority of any state or other jurisdiction of the United States. The Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S). This Offering Circular has been prepared by the Issuer for use in connection with the offer and sale of the Notes outside the United States to non-U.S. persons pursuant to Regulation S. For a description of these and certain further restrictions on offers and sales of the Notes and distribution of this Offering Circular, see "Selling Restrictions."
If a Note, Receipt, Talon or Coupon is held for the account or benefit of U.S. persons (as defined in Regulation S under the U.S. Securities Act of 1933, as amended) or, for so long as any of the Notes are represented by a Global Note, any person who is for the time being shown in the records of Euroclear or of Clearstream, Luxembourg as the holder of a particular nominal amount of Notes, holds such interest for the account or benefit of U.S. persons, the Issuer may give notice to the holder(s) of the relevant Note, Receipt, Talon or Coupon (or, in the case of a Global Note, the holder of the relevant particular, nominal amount of Notes) that it requires the relevant Note, Receipt, Talon, and/or Coupon (and/or, in the case of a Global Note, the relevant particular interest in the nominal amount of Notes), as the case may be, to be transferred provided however that the relevant Note, Receipt, Talon or Coupon (or, in the case of a Global Note, the relevant particular interest in the nominal amount of Notes) may not be transferred to, or for the account or benefit of, U.S. persons. The relevant holder(s) of the Note, Receipt, Talon or Coupon (or, in the case of a Global Note, the relevant holder of the particular interest in the nominal amount of Notes) shall be obligated to make the transfer referred to in the notice referred to in this paragraph within 30 days after receipt of such notice if the relevant Note, Receipt, Talon or Coupon (or, in the case of a Global Note, the relevant particular nominal amount of Notes) is held for the account or benefit of U.S. persons.
21. GoverningLaw: EnglandandWales.
8 FORM OF PRICING SUPPLEMENT 1. SeriesNumber:
2. TrancheNumber:
(If fungible with an existing Series, details of that Series, including the date on which the Notes become fungible)
3. SpecifiedCurrencyorCurrencies:
4. Principal Amount:
5. Form: [Global Note in bearer form exchangeable for Definitive Notes in the limited circumstances specified in the Global Note]
[Registered Notes]
6. IssuePrice: %ofthePrincipalAmount
7. InterestRate: [If the Interest Rate is a Floating Rate, a Floating Rate Annex is to be attached to the Pricing Supplement setting forth the interest rate formula and other terms relating to such Floating Rate, and in such event, such Annex is to be referenced here with the notation "See attached Floating Rate Annex".]
7. Day Count Fraction:
8. Floating Rate Interest calculation for For a period ofotherthan afull year: [ ] a period of other than a full year: Inthecaseofanincompletemonth: [ ]
9. InterestPaymentDates:
10. IssueDate:
The Issue Date must:
(a) bea day onwhich commercial banks and foreign exchange markets are open for business and carrying out transactions in London, any Additional Business Centre specified in the applicable Pricing Supplement and the city where each of the Agents is located;
(b) a dayon which Euroclearand Clearstream, Luxembourg are open for business; and
(c) either (1)inrelationto any sum payable in a Specified Currency other than euro, a day on which commercial
9 banks and foreign exchange markets are open for business and carrying out transactions in the principal financial centre of the country of the relevant Specified Currency or (2) in relation to any sum payable in euro, a day on which the TARGET System is open.
11. Additional Business Centres:
12. Net Proceeds:
13. Redemption/Payment Basis:
14. MaturityDate:
15. Time and Date of Delivery:
16. NameofDealerorDealers:
17. NameofRelevantLeadDealer:
18. Denominations of Notes:
Notes (including Notes denominated in Sterling) in respect of which the issue proceeds are to be accepted by the Issuer in the United Kingdom or whose issue otherwise constitutes a contravention of section 19 of the Financial Services and Markets Act 2000 and which must be redeemed before the first anniversary of the date issue must have a minimum denomination of £100,000 (or its equivalent in other currencies).
19. ZeroCouponNotes:[Yes/No] [If the Notes are Zero Coupon Notes, a Zero Coupon Annex is to be attached to the Pricing Supplement setting forth the terms applicable thereto, and in such event, such Annex is to be referenced here with the notation "See attached Zero Coupon Annex".]
20. Additional Selling Restrictions (if any):
21. UseofProceeds:
22. Paying Agents:
23. Specified Principal Amount for the purposes of Condition 5(a):
10 24. Euroclear/Clearstream, Luxembourg Common Code:
25. ISIN Number:
26. Issuer Call Applicable: [Yes/No] [If Issuer Call and/or Noteholder Put is applicable, an Optional Noteholder Put Applicable: [Yes/No] Redemption Annex is to be attached to the Pricing Supplement setting forth the terms applicable thereto, and in such event, such Annex is to be referenced here with the notation "See attached Optional Redemption Annex".]
27. NotesSecured:[Yes/No] [If Notes are secured a Security Annex is to be attached to the Pricing Supplement setting forth the terms applicable thereto, and in such event, such Annex is to be referenced here with the notation "See attached Security Annex" and a description of the security documents referred to as "Security Documents" should be included.]
28. Other Terms and Conditions: [If there are other terms and conditions, an Other Terms and [Yes/No] Conditions of Notes—Annex to Pricing Supplement is to be attached to the Pricing Supplement setting forth such other terms and conditions, and in such event, such Annex is to be referenced here with the notation "See attached Other Terms and Conditions of Notes—Annex to Pricing Supplement".]
29. Redenominationapplicable: Redenomination[not]applicable.
30. Additional events (if any) in which [If there are other additional exchange events, an Additional the Global Note may be exchanged Exchange Events Annex is to be attached to the Pricing in whole for Definitive Notes and (if Supplement setting forth such other events, and in such event, applicable) Coupons: such Annex is to be referenced here with the notation "See attached Additional Exchange Events Annex".]
31. Additional Events of Default: [If there are additional Events of Default, an Additional Events of [Yes/No] Default Annex is to be attached to the Pricing Supplement setting forth such additional Events of Default, and in such event, such Annex is to be referenced here with the notation "See attached Additional Events of Default Annex".]
32. Delivery: Delivery[against/freeof]payment.
11 RISK FACTORS Following are certain risks associated with Azteca's business and an investment in the Notes. The risks and uncertainties described below are not the only risks that Azteca faces but represent some of the risks that Azteca's management considers important. Should any of the following risks materialize, they may materially and adversely affect Azteca's operations, financial condition or operating results and Azteca's ability to repay the Notes. If this occurs investors may lose their investment in the Notes in whole or in part. Risks Related to Azteca's Operations Television broadcasting in Mexico is highly competitive.
Television broadcasting in Mexico is highly competitive and the popularity of television shows, an important factor in advertising sales, is readily susceptible to change. Azteca faces competition from Televisa, Azteca's principal competitor and the only other commercial broadcaster in Mexico, and other state-sponsored television networks. Televisa is one of the leading producers of Spanish-language television programming in the world and generated the majority of the Mexican television advertising sales in each of the last three years. Televisa also has significant interests in other media, including pay television, publishing, radio, movies, soccer, music, Internet, lotteries and gaming, which enable Televisa to offer its advertising clients competitive packages combining advertising in various media.
While the current Mexican television market only has two commercial broadcasters, Azteca and Televisa, a recently passed constitutional amendment relating to anti-trust issues in the radio, television and telecommunications sectors (the "Telecom and Antitrust Bill") provides for the establishment of at least two new national over-the-air television networks. The networks will be established pursuant to a public tender bid for the concessions, and Azteca, as a current concession holder, will be ineligible from participating in the bid. These new television networks, if established, and any other new entrants into the over-the-air broadcasting, cable, broadband and/or telephony markets will compete with Azteca's business. See "The Business—Competition—Potential New Networks."
Azteca cannot assure you that it will be able to maintain or improve its share of the Mexican television advertising or viewing markets, nor can it assure you that the costs of acquiring or producing programming and, or the prices at which it sells advertising time, will not be adversely affected by competition. In addition to competing with conventional, over-the-air television stations, including certain government-run stations and those owned by or affiliated with Televisa, Azteca also competes for Mexican television viewers with cable television providers. Cable television, multi-channel multipoint distribution systems ("MMDS") and direct-to-home ("DTH") satellite services represent a potential source of competition for Azteca's advertising sales, audiences and program rights. According to data from the Federal Telecommunications Commission (Comisión Federal de Telecomunicaciones or "COFETEL") and the projected population census from the National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía or "INEGI"), the penetration of cable television as of December 31, 2012 was approximately 42.6% of all television households in Mexico (though COFETEL does not distinguish between residential and commercial customers). Azteca cannot assure you that cable television services will not continue to secure a more significant share of the Mexican television audience and television advertising market in the future.
Azteca's business is regulated by the Mexican government and its business would be harmed if its broadcast concessions were not renewed or were taken away or applicable regulations are changed.
To broadcast commercial television in Mexico, a broadcaster must have a license from the Ministry of Communications and Transportations (Secretaría de Comunicaciones y Transportes) ("SCT"). The SCT grants concessions comprised of one or more transmission channels. These concessions must be renewed upon expiration and may be revoked in very limited circumstances. Azteca does not expect any of its concessions to be revoked. The Telecom and Antitrust Bill requires each expiring concession to be subject to a public tender bid process with the incumbent concessionaire enjoying a preference over other bid participants, however the SCT has not yet released specific information about the renewal process. Azteca has eleven concessions granting it the right to broadcast on 179 channels throughout Mexico. All of these concessions expire on December 31, 2021. If the SCT, or if established, the IFETEL (as defined below), fails to renew one or more of Azteca's concessions, Azteca will not be able to operate the channels covered by the unrenewed concessions.
12 In September 2010, a decree was published in the Official Gazette of the Federation (Diario Oficial de la Federación or the "Official Gazette") announcing the mandatory transition from analog to digital television and radio broadcasting by the end of 2015. A subsequent decree released on June 11, 2013, along with the Telecom and Antitrust Bill which became effective on June 12, 2013, re-affirmed this transition deadline. The Federal Telecommunications Commission (Comisión Federal de Telecomunicaciones or "COFETEL") may make certain adjustments to the analog to digital transition plan based on a pilot program that it is conducting in Baja California. Azteca can provide no assurances that the transition from analog to digital broadcasting will be seamless, that the transition will occur by the statutory deadline and that there is no risk of a broadcasting blackout for some or all of its customers if Azteca or the third parties on which it relies fails to successfully implement the transition. See "The Business—Regulation—Mexico—The Telecom and Antitrust Bill."
The new regulatory agency overseeing telecommunications and broadcasting may have an effect on Azteca's operations.
The Telecom and Antitrust Bill that became effective on June 12, 2013 requires the creation of the Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones, or "IFETEL"), an independent regulatory agency established with broad powers to oversee all matters relating to the Mexican telecommunications and broadcasting industries, including antitrust matters. The Telecom and Antitrust Bill also provides that while IFETEL rulings may be challenged in court and reversed by a final court order, temporary injunctions and other interim judicial rulings are unenforceable against them.
The autonomy and authority granted to the IFETEL under the Telecom and Antitrust Bill may adversely affect some of Azteca's activities, including its ability to introduce new products and services, enter into new or complementary businesses, and complete acquisitions or joint ventures, and may adversely affect its ability to determine the rates it charges for its services and products. IFETEL would also be authorized to impose limits on the concentration of national and regional frequencies and the cross-ownership of telecommunications, television or radio businesses that serve the same market or geographical region and may order the divestment of assets, rights or investments. However, because these limits have not yet been established it is uncertain how they would affect Azteca. See "The Business—Regulation—Mexico—The Telecom and Antitrust Bill."
The Telecom and Antitrust Bill and IFETEL, if established, may increase Azteca's cost of doing business and may interfere with its ability to offer, or prevent it from offering, its current or future services.
Changes in consumer expectations and behavior driven by new technologies may adversely affect Azteca's business.
Azteca operates in a highly competitive, consumer-driven and rapidly changing environment. New technologies, including alternative methods for the distribution, sale and viewing of content, many of which have been beneficial to Azteca's business, have nonetheless increased the number of entertainment and information delivery choices available to consumers and intensified the challenges posed by audience fragmentation. Furthermore, due to consumer electronics innovations, consumers are more readily able to watch Internet-delivered content on computers, television sets and mobile devices. The increasing number of choices available to audiences, including low-cost or free choices, could negatively impact not only consumer demand for Azteca's products and services, but also advertisers' willingness to purchase advertising from Azteca. Azteca's failure to effectively anticipate or adapt to new technologies and changes in consumer expectations and behavior could have an adverse effect on Azteca's competitive position and its business and results of operations. A decline in advertising expenditures or changes in advertising markets could negatively impact Azteca's business.
According to the Mexican Media Agencies Association (Asociación de Agencias de Medios), for the year 2012, approximately 58% of total advertising expenditures in Mexico were allocated to broadcast television, a large proportion compared with other countries. Azteca's business derives substantial revenue from the sale of advertising on a variety of platforms, and a decline in advertising expenditures could negatively impact its results of operations. Declines can be caused by the economic prospects of specific advertisers or industries, by increased competition for the leisure time of audiences and increased audience fragmentation, by the growing use of new technologies, or by the economy in general, any of which may cause advertisers to alter their spending priorities. In addition, advertisers' willingness to purchase advertising from Azteca may be adversely affected by lower audience ratings. The amount of advertising Azteca sells and the rates it is able to charge also depend on audience measurement,
13 which could be negatively affected by changes in audience measurement methodologies. For example, newer methods of viewing content (such as viewing content on computers or smartphones) might not be counted in audience measurements or may generate lower, if any, revenues than traditional distribution methods, which could have an adverse effect on Azteca's advertising revenue. Further, natural disasters, wars, acts of terrorism or other significant adverse news events could lead to a reduction in broadcast advertising revenue as a result of uninterrupted news coverage and general economic uncertainty. Reductions in advertising expenditures could adversely affect Azteca's businesses. If Azteca loses one or more of its key advertisers, it could lose a significant amount of its revenues.
As of June 30, 2013, Azteca's ten largest advertisers, together with their subsidiaries, accounted for 21% of Azteca's revenue, and its largest advertiser accounted for approximately 3% of its revenue. The termination of Azteca's relationship with any one of its principal advertisers could negatively affect its operating results. The seasonal and cyclical nature of Azteca's business affects Azteca's revenue and could impact Azteca's results of operations.
Azteca's business has experienced and is expected to continue to experience seasonality due to, among other things, seasonal advertising patterns and seasonal influences on people's viewing, reading, attendance and listening habits, as well as cyclical patterns for certain events that attract significant audiences, such as the World Cup, the Olympic Games and political elections. Azteca typically recognizes a disproportionately large percentage of its revenue from advertising sales in the fourth quarter because of the high level of advertising during the holiday season. The effects of such seasonality and cyclicality are expected to continue and make it difficult to estimate future operating results, which may have an adverse impact on its business. Azteca's revenue and profitability are affected by major broadcast events.
In the past, Azteca has generated substantial advertising revenue from broadcasting infrequently recurring major broadcast events. Azteca's broadcast of the FIFA World Cup, the UEFA Champions League, the Mexican national soccer team games, boxing world championships and La Academia (Azteca's reality musical television show) substantially increased net sales for the applicable financial period. In addition, Azteca has experienced increased revenue from government advertising during election seasons. The absence or cancellation of major broadcast events, or Azteca's inability to obtain broadcast rights to any such event, may negatively affect Azteca's financial condition and results of operations. Azteca's failure to obtain, create or retain the rights related to popular programming could adversely affect its revenues.
Azteca's revenue from its television business is partially dependent on its continued ability to anticipate and adapt to changes in consumer tastes and behavior on a timely basis. Moreover, Azteca derives a portion of its revenues from the exploitation of its extensive library of television programming. If the content of its television programming library ceases to be widely accepted by audiences or is not continuously replenished with popular content, its revenues could be adversely affected. Azteca obtains a significant portion of its popular programming from third parties. For example, some of Azteca's most widely viewed broadcasts, including the FIFA World Cup, the UEFA Champions League, the Mexican national soccer team games, boxing world championships and La Academia are made available based upon programming rights of varying duration that Azteca has negotiated with third parties. Competition for popular programming that is licensed from third parties is intense, and Azteca may be outbid by its competitors for the rights to new popular programming or subsequent seasons of popular programming currently licensed by Azteca. Azteca's failure to obtain or retain rights to popular content could adversely affect its revenues. Azteca creates and produces its telenovelas and certain other content well in advance of broadcasting. If such content does not meet expected viewership levels, it may be cancelled, which would reduce or eliminate the value of Azteca’s investment.
Azteca creates and produces its telenovelas and certain other content, the success of which depends substantially on Azteca’s ability to meet both domestic and international consumer tastes and preferences that change in often unpredictable ways. Azteca has invested, and will continue to invest, substantial amounts in the production of original content before learning the extent to which it would earn consumer acceptance. If Azteca's
14 content does not achieve sufficient consumer acceptance and viewership levels, it may be cancelled, which would reduce or eliminate the value of its investment, and its business may be adversely affected.
The cost of producing and acquiring Azteca's programming may increase.
Azteca's variable operating costs include the production and acquisition of programming. The cost of producing original programming varies considerably depending on the type of program, and is generally more expensive than acquiring broadcast rights to externally produced programming. In general, the production of telenovelas is more expensive relative to the production of other types of programming. If Azteca fails to effectively anticipate and manage the costs of producing its original programming or of acquiring broadcast rights for externally produced programming, its programming costs may increase at a rate higher than its advertising revenue. If high cost programming does not result in high audience ratings and attract advertising revenue, Azteca's results of operations may be negatively affected. Azteca is dependent on key personnel.
Azteca has no direct employees; all personnel in the administration and operations of Azteca's business are supplied by Azteca's subsidiaries. Azteca's success depends in large part upon the abilities and efforts of the senior management and key employees of its subsidiaries. Azteca's future success depends on its continuing ability to identify, train and retain qualified management personnel. There is significant competition for qualified personnel and there are no assurances that Azteca will be able to attract, integrate or retain them.
In addition, Azteca's broadcast business depends on the abilities and expertise of its on-air and creative talent. Azteca operates the Center for Acting Studies and Development (Centro de Estudios y Formación Actoral) whose graduates often become prominent media personalities in Mexico. Approximately 90% of the graduates of this drama school have worked in Azteca's original productions. In recent years talented media personalities have begun to relocate to the U.S. to produce programming for broadcasters focused on U.S. Hispanic audiences. If Azteca fails to retain on-air or creative talent, if the costs to retain such talent increase materially, or if these individuals lose their current appeal, Azteca's business may be adversely affected.
There is a risk that Azteca's U.S. television network fails to achieve profitability, which may have a negative effect on Azteca's operating results.
Azteca develops specialized content aimed at U.S. Hispanic viewers of its Azteca America network, which is operated by Azteca's subsidiary Azteca International Corporation. While Azteca's programming is broadcast in markets throughout the U.S., it is generally broadcast on low-powered stations. These stations are generally located significantly higher in the channel line up than other similar Spanish language channels such as Telemundo and Univision, which are typically located lower in the channel line up and closer to each other. While Azteca has attracted high viewership for major programming events, such as La Academia or certain soccer games, its location in the channel line up makes it more difficult to attract casual television viewers who are browsing Spanish language television channels. Azteca continues to negotiate distribution arrangements with U.S. cable providers in order to achieve a more desirable location in the channel line up, and has recently succeeded in securing such contracts in several important markets. However, if it fails to secure additional distribution agreements or otherwise fails to attract or sustain viewership, Azteca International Corporation's profitability and Azteca's overall financial results may be negatively affected.
Azteca's business depends on using and protecting certain intellectual property rights and on not infringing the intellectual property rights of others.
Azteca relies on its intellectual property, such as patents, copyrights, trademarks and trade secrets, as well as licenses and other agreements with its vendors and other third parties, to use various technologies, conduct its operations and sell its products and services. Legal challenges to its intellectual property rights and claims of intellectual property infringement by third parties could require Azteca to enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability, be temporarily or permanently barred from further use of the intellectual property in question or change how it conducts business. Azteca may need to change its business practices if any of these events occur, which may limit its ability to compete effectively and could have an adverse effect on its results of operations. Even if Azteca believes any such challenges or claims are without merit, they can
15 be time-consuming and costly to defend and divert management's attention and resources away from its business. Moreover, if Azteca is unable to obtain or continue to obtain licenses from its vendors and other third parties on reasonable terms, its business could be adversely affected.
In addition, intellectual property constitutes a significant part of the value of Azteca's business, and its success is highly dependent on protecting intellectual property rights in the content it creates or acquires against third-party misappropriation, reproduction or infringement. The unauthorized reproduction, distribution or display of copyrighted material negatively affects Azteca's ability to generate revenue from the authorized use of its content, as well as from the sale of advertising on its content, and increases its costs due to its active enforcement of protecting its intellectual property rights. Piracy and other unauthorized uses of content are made easier, and the enforcement of intellectual property rights more challenging, by technological advances allowing the conversion of programming, films and other content into digital formats, which facilitates the creation, transmission and sharing of high-quality unauthorized copies. In particular, piracy of programming and films through unauthorized distribution on peer-to- peer computer networks and other platforms continues to present challenges for its cable networks, broadcast television and filmed entertainment businesses. If any laws intended to combat piracy and protect intellectual property rights are repealed or weakened or are not adequately enforced, or if the legal system fails to adapt to new technologies that facilitate piracy, Azteca may be unable to effectively protect its rights, the value of its intellectual property may be negatively impacted and the costs of enforcing its rights may increase.
Possible conflicts of interest could adversely affect Azteca's business, results of operations and financial condition.
As of June 30, 2013, Azteca is 56.4% owned by Azteca Holdings, which is part of the Salinas Group and is controlled by Ricardo B. Salinas Pliego and his family. Consequently, Mr. Salinas Pliego has the power to elect a majority of Azteca's directors and determine the outcome of actions that require stockholder approval. Azteca has engaged, and will likely continue to engage in the future, in a variety of transactions with Grupo Elektra, S.A.B. de C.V. (hereinafter "Grupo Elektra"), Banco Azteca, S.A., Institución de Banca Múltiple (hereinafter "Banco Azteca"), Iusacell, S.A. de C.V. (hereinafter, "Iusacell"), Arrendadora Internacional Azteca, S.A. de C.V. (hereinafter "Arrendadora Internacional Azteca") and other entities it controls or in which Ricardo B. Salinas Pliego and other shareholders who control Azteca holds shares. Pursuant to Azteca's by-laws, which were amended to incorporate provisions required by the LMV and adopted by Azteca's shareholders on August 19, 2010, Azteca's board of directors established an audit committee to conduct an independent review of transactions with affiliates and determine whether these transactions are (i) related to Azteca's business and (ii) consummated on terms that are at least as favorable to Azteca as terms that would be obtained in a similar transaction entered into on an arm's-length basis with an unrelated third party. The audit committee is required to make recommendations to the board of directors regarding transactions with related parties that have a value equal to or greater than five percent of Azteca's consolidated assets, based on figures for the immediately preceding quarter. Although it is not required by the LMV or Azteca's by-laws, Azteca's management provides annual reports to the audit committee with respect to all related party transactions, whether or not they have a value equal to or greater than five percent of Azteca's consolidated assets. There is no requirement under Mexican law, listing rules or Azteca's governing documents that the audit committee or the board of directors review and approve non-material transactions with related parties (defined in Azteca's by-laws as having a value equal to or less than five percent of Azteca's consolidated assets). The LMV requires the audit committee to report all related party transactions to the board of directors and requires that it obtain a fairness opinion from an independent advisor with respect to certain related party transactions (for example, purchases or sales of assets, granting of guaranties or incurrence of debt) that have a value that is equal to or greater than 10 percent of a company's consolidated assets prior to board approval of such transaction. If the board of directors does not follow the audit committee's recommendation with respect to any related party transaction, the LMV requires Azteca to publicly disclose this information through the Mexican Stock Exchange. See "Related Party Transactions." Although the LMV and Azteca's by-laws provide the foregoing protections, there can be no assurance that Azteca will not be adversely affected by any related party transactions it may enter into. Azteca faces risks arising from the outcome of various litigation matters.
Azteca is subject to a dispute relating to its majority shareholding of an entity that owns the concession to Proyecto 40. See "The Business–Description of the Business–Azteca's Mexican Television Networks–Proyecto 40"
16 and "The Business—Legal Proceedings—Proyecto 40." While Azteca operates Proyecto 40 pursuant to an operating agreement that is not currently in dispute, if Azteca does not prevail in this case it may lose its majority ownership in the entity owning the Proyecto 40 concession. Azteca is also subject to various legal proceedings and claims, including those referred to in "The Business—Legal Proceedings," and those arising in the ordinary course of business, including regulatory and administrative proceedings, claims and audits. While it does not expect that the final disposition of any of these litigation matters will have a material effect on its financial condition, an adverse outcome in one or more of these matters could be material to its consolidated results of operations and cash flows for any one period, and any litigation resulting from any such legal proceedings could be time-consuming, costly and injure Azteca's reputation. Further, no assurance can be given that any unfavorable outcome would not have an adverse effect on its business. The failure or destruction of satellites, transmitter facilities and network and information systems and other technology that Azteca operates or depends upon to distribute its programming could materially adversely affect its businesses and results of operations.
Azteca uses satellite systems to transmit its broadcast and cable networks to affiliates. The distribution facilities include uplinks, communications satellites and downlinks. Transmissions may be disrupted as a result of local disasters including extreme weather that impairs on-ground uplinks or downlinks, or as a result of an impairment of a satellite. Currently, there are a limited number of communications satellites available for the transmission of programming. If a disruption occurs, Azteca may not be able to secure alternate distribution facilities in a timely manner. Failure to secure alternate distribution facilities in a timely manner could have a material adverse effect on its businesses and results of operations. Each of Azteca's television and radio stations and cable networks uses studio and transmitter facilities that are subject to damage or destruction. Failure to restore such facilities in a timely manner could have a material adverse effect on its businesses and results of operations. In addition, network and information systems and other technologies are important to Azteca's business activities. Network and information systems-related events, such as computer hacks, cyber attacks, computer viruses, worms or other destructive or disruptive software, process breakdowns, malicious or other activities, power outages, natural disasters, terrorist attacks or other similar events, or any combination of the foregoing, could result in the degradation or disruption of Azteca's services and operations, damage to Azteca's property and equipment or the improper disclosure of personal data or confidential information. These events also could result in large expenditures to repair or replace the damaged properties, networks or information systems or to protect them from similar events in the future. Further, any security breaches, such as misappropriation, misuse, leakage, falsification or accidental release or loss of information maintained in our information technology systems, including customer, personnel and vendor data, could damage our reputation and require us to expend significant capital and other resources to remedy any such security breach. The occurrence of any of such network or information systems- related events or security breaches could have a material adverse effect on Azteca's business and results of operations.
Risks Related to Doing Business in Mexico Depreciation of the peso relative to the U.S. dollar could adversely affect its financial condition, its ability to repay debt and other obligations and results of operations.
As of June 30, 2013, Azteca had approximately $430 million of monetary liabilities denominated in U.S. dollars, which accounted for approximately 52% of its total debt (see "Financial InformationManagement's Overview IndebtednessCritical Accounting Policies and EstimatesCritical Accounting PoliciesEffects of the Devaluation of the Peso and Inflation" and Note 18 to the consolidated financial statements as of and for the years ended December 31, 2012 and 2011). Declines in the value of the peso relative to the U.S. dollar will increase the interest and repayment costs in pesos of Azteca's existing U.S. dollar-denominated indebtedness, including the indebtedness incurred in this offering, and increase the cost in pesos of Azteca's other dollar-denominated expenditures. Such declines could also cause Azteca to recognize foreign exchange losses and could adversely affect its ability to meet its interest and principal obligations on its indebtedness. A significant portion of Azteca's operating costs and other expenditures are dollar-denominated. These costs include the payments Azteca makes for the programming broadcast rights, for the leasing of satellite transponders and for purchases of capital equipment. Since nearly all of Azteca's revenue is denominated in pesos, the increased costs are not offset by any exchange- related increase in revenue.
17 Furthermore, a severe devaluation or depreciation of the peso may also result in disruption of the international foreign exchange markets and may limit Azteca's ability to transfer or to convert pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on its indebtedness. While the Mexican government does not currently restrict, and for many years has not restricted, the right or ability of Mexican or foreign persons or entities to convert pesos into U.S. dollars or to transfer other currencies out of Mexico, the government could institute restrictive exchange rate policies in the future. Any such restrictive exchange control policy could prevent or restrict access to U.S. dollars and limit Azteca's ability to service its debt. To the extent that there are currency fluctuations, they are likely to continue to have an effect on Azteca's financial condition, results of operations and cash flows in future periods. Due to the significant economic relationship between Mexico and the U.S., the value of the peso has been subject to significant fluctuations with respect to the U.S. dollar in the past and may be subject to significant fluctuations in the future. Any future devaluations of the peso could adversely affect Azteca's results of operations. Fluctuations in interest rates and inflation may adversely affect Azteca's business.
Any negative fluctuation in interest rates could have an adverse effect on Azteca's financial condition because the amount of interest it owes may increase with regard to its present liabilities and indebtedness or any liabilities and indebtedness incurred in the future. See "Financial InformationManagement's Overview IndebtednessCritical Accounting Policies and EstimatesCritical Accounting PoliciesEffects of the Devaluation of the Peso and Inflation." According to Banco de México, annual inflation was 4.1%, 3.6% and 3.8% for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, respectively. Any significant increase in the inflation rate in Mexico could adversely affect Azteca's financial condition and results of operations because inflation can adversely affect consumer purchasing power, which may affect Azteca's advertisers and the sale by Azteca of advertising time on its networks. Azteca's financial results are dependent on the Mexican economy.
A decline in economic growth, high rates of inflation and high interest rates in Mexico generally have an adverse effect on Azteca's operations. Slower growth in the Mexican economy will generally result in reduced advertising spending. In the event that inflation returns to high levels while economic growth slows, Azteca's results of operations, its financial condition and the market price of its securities will all be affected. In addition, high interest rates and economic instability could increase Azteca's costs of financing. Fluctuations in the U.S. economy or the global economy in general may adversely affect Mexico's economy and Azteca's business.
Mexico's economy is vulnerable to market downturns and economic slowdowns in the U.S. and elsewhere in the world. Financial problems or an increase in risk related to investment in emerging economies could limit foreign investment in Mexico and adversely affect the Mexican economy. Mexico has historically experienced uneven periods of economic growth and was adversely affected by the recent global economic crisis that started in the late-2000s. Although Mexico, the U.S. and other governments have taken steps to increase liquidity in the financial markets, there can be no assurance that such measures will lead to sustained growth of the overall business environment in which Azteca operates, any future economic downturn in the U.S. or global economy could adversely affect Azteca's results of operations and financial condition. The Mexican government exercises significant influence over the economy.
The Mexican federal government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican federal governmental actions and policies concerning the economy, state- owned enterprises and state controlled, funded or influenced financial institutions could have a significant impact on private sector entities in general and on Azteca in particular. The Mexican federal government occasionally makes significant changes in policies and regulations, and may do so again in the future. Actions to control inflation and other regulations and policies have involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on imports. Tax legislation, in particular, is subject to continuous change and Azteca cannot provides assurances regarding whether the Mexican government
18 may maintain existing political, social, economic or other policies, or whether changes may have a material adverse effect on its financial performance. Enrique Peña Nieto, a member of the Partido Revolucionario Institucional, or PRI party, became president of Mexico on December 1, 2012. As with any governmental change, this change to the country's government may lead to significant changes in governmental policies, may contribute to economic uncertainty and to heightened volatility of the Mexican economy. Azteca's hedging strategies may not be successful in mitigating its risks associated with interest rates.
As of June 30, 2013, Azteca has interest-rate hedging arrangements extending through December 2016. Azteca uses derivative financial instruments to provide a level of protection against interest rate fluctuation risks, but no hedging strategy can provide complete protection. Hedging instruments involve risks, such as the risk that the counterparties may fail to honor their obligations under these arrangements and that these arrangements may not be effective in reducing Azteca's exposure to interest rate changes. In addition, the nature and timing of hedging transactions may influence the effectiveness of its hedging strategies. Poorly designed strategies or improperly executed transactions could instead have the effect of increasing risk and losses. Moreover, hedging strategies involve transaction and other costs. Azteca cannot provide assurances that its hedging strategy and the derivatives that it uses will adequately offset the risk of interest rate volatility. Mexico is experiencing high levels of criminal activity, which could affect the economy and Azteca's financial performance.
Mexican drug related violence and other organized crime have escalated since 2006, when the Mexican federal government began increasing the use of the army and police to fight drug trafficking. Drug cartels have carried out attacks largely directed at competing drug cartels and law enforcement agents; however, they also target companies and their employees through extortion, theft from trucks or industrial sites, kidnapping and other forms of crime and violence. This increase in violence and criminal activity has led to increased costs for companies in the form of stolen products and added security and insurance. These activities, their possible escalation and the violence associated with them, over which Azteca has no control, may have a negative impact on the business environment in locations in which Azteca operates and therefore may adversely affect its financial performance. Risks Related to the Notes Payment on the Notes may not be made or may be limited if Azteca or one or more of the Guarantors is declared bankrupt or if Azteca divests from one or more of the Guarantors.
If Azteca or any of the Guarantors is declared bankrupt by a Mexican Court or becomes subject to a reorganization or concurso mercantil proceeding in a Mexican court, the obligations of Azteca or such Guarantor (as the case may be) under the Notes would: except in the case of secured Notes, be converted into pesos at the exchange rate prevailing at the time of a declaration of bankruptcy or reorganization or concurso mercantil and from pesos into inflation indexed units at the exchange rate prevailing at that time and would not be adjusted to take into account any devaluation of the peso to the U.S. dollar after such conversion; be dependent upon the outcome of the bankruptcy or reorganization proceedings, and payment, if any, would be made after all of its unsecured creditors have properly filed claims and to the extent funds are sufficient; cease to accrue interest against the Issuer or the relevant Guarantor, as the case may be, except that in the case of secured Notes, interest may accrue up to the value of the collateral; and be subject to certain statutory preferences including tax, social security and labor claims and, except that in the case of secured Notes, claims of secured creditors. There is a limited market for the Notes.
There is currently no active secondary market for the Notes and such a market may not develop once the offer has been made. The price at which the Notes are traded may be subject to various factors, such as interest rates, market conditions for similar instruments, macroeconomic conditions in Mexico and abroad and Azteca's and the
19 Guarantors' financial situation. If this secondary market does not develop, the liquidity of the Notes may be negatively affected, the holders of the Notes may not be able to sell the Notes in the market and either (i) may be unable to recover all or part of the price initially paid for the Notes or (ii) may have to sell the Notes at prices far below the price initially paid. Azteca is leveraged and its leverage and debt service obligations could adversely affect its business.
Azteca has refinanced most of its debt by issuing (i) in the last quarter of 2006, Ps.6,000 million ($551.7 million) of certificados bursátiles fiduciaries (securitized Mexican debt instruments) due in 2020, and (ii) in the second quarter of 2011, $300 million 7.5% Senior Notes due in 2018 under the Programme (see "Financial InformationManagement's OverviewIndebtedness"). As of June 30, 2013, Azteca had Ps.10,341 million ($799.5 million) of indebtedness. Azteca may not be able to generate enough cash to pay the principal, interest and other amounts due under its new indebtedness, and there is no assurance that market conditions will permit Azteca to repay or refinance its existing indebtedness at maturity. Azteca's leverage could have negative consequences, including: requiring the dedication of a substantial portion of its cash flow from operations to service indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures, marketing efforts, future growth plans and distributions payable to its shareholders; limiting its ability to obtain additional financing or to refinance its existing indebtedness; placing it at a possible competitive disadvantage relative to less leveraged competitors and competitors with greater access to capital resources; increasing its vulnerability to downturns in its business or the Mexican economy generally; and limiting its ability to make cash distributions to its shareholders. Service of process must be effected in person.
In connection with the Notes to be issued under the Programme, Law Debenture Corporate Services Limited has been appointed, designated and empowered as agent for service of process to be notified of any legal action related to the issuance of the Notes. This type of notification must be made in person to be valid under Mexican law. Notice of legal action by mail does not constitute personal notification under Mexican law. Therefore, if any notification of legal action is made by mail or other means, other than in person, a final judgment rendered in the legal action may not be enforced in the courts of Mexico. Payment of judgments may be made in pesos.
Under the Mexican Monetary Law (Ley Monetaria de los Estados Unidos Mexicanos), in the event that any proceedings are brought in Mexico seeking performance of Azteca's obligations under the Notes Azteca may discharge its obligations denominated in any currency, other than pesos, by paying pesos converted at the prevailing exchange rate on the date payment is made. This rate is currently determined by Banco de México and published in the Official Gazette. If payment is made in Mexico and Azteca elects to make payments due on the Notes in pesos in accordance with the Mexican Monetary Law, the amounts paid may be converted by the payee into the U.S. dollars or any other currency and, if converted, such amounts may not be sufficient at such time to purchase U.S. dollars or any other currency equal to the amount of the principal, interest or additional amounts due on the Notes. As a result, there may be a shortfall for judgments obtained in Mexico. No separate action exists or is enforceable in Mexico for compensation of any shortfall. It may be difficult to enforce civil liabilities against Azteca, the Guarantors or Azteca's or the Guarantors' directors, officers and controlling persons.
Azteca and the Guarantors other than Azteca International Corporation (a wholly owned Delaware subsidiary of the Issuer) ("Azteca International") are organized under the laws of Mexico, and most of Azteca's and the Guarantors' directors, officers and controlling persons reside in Mexico. In addition, a substantial portion of the assets of Azteca, the Guarantors and the directors, officers and controlling persons of Azteca and the Guarantors, are located outside of the United Kingdom. As a result, it may not be possible for investors to effect service of process within the United Kingdom on such persons or to enforce any judgments rendered against them. There is doubt as to
20 the enforceability against such persons in original actions in Mexican courts, of liabilities predicated solely on English law and as to the enforceability in Mexican courts of judgments obtained in courts of England. To the extent any particular Series of Notes includes the requirement of Azteca to make an offer to purchase such Notes upon a change of control, Azteca may not be able to pay its indebtedness payable upon change of control.
To the extent any particular Series of Notes includes the requirement of Azteca to make an offer to purchase such Notes upon a change of control, Azteca will be required to offer to repurchase all such outstanding Notes upon a change of control. A change of control could result in non-compliance under existing or future debt of Azteca or its subsidiaries, if the debt matured and were payable. The source of funds for any payment will be Azteca's available cash or cash generated from other sources, including borrowings, sales of assets or sales of equity. However, Azteca cannot guarantee that it will have sufficient funds to pay all of the debts that may be due and payable at that time. Azteca may not be able to repurchase the Notes upon a change of control because it may not have sufficient financial resources to purchase all of the Notes that are tendered upon a change of control. There can be no assurance that sufficient funds will be available when necessary to make the required purchase of the Notes. Azteca's failure to repurchase the Notes upon a change of control would be a default under the Notes. The Notes and the guarantees by the Guarantors will be effectively subordinated to Azteca's secured debt and to certain claims preferred by statute.
Azteca's obligations under the Notes and the obligations of the Guarantors under the guarantees are unsecured. As a result, the Notes and the guarantees will be effectively subordinated to all of Azteca's and the Guarantors' secured debt to the extent of the value of the collateral securing such debt. Further, the terms of the Programme permit Azteca to incur additional secured debt in the future. In the event that Azteca or the Guarantors are not able to repay amounts due under any existing or future secured debt obligations, creditors could proceed against the collateral guaranteeing such indebtedness. In that event, any proceeds upon a realization of the collateral would be applied first to amounts due under the secured debt obligations before any proceeds would be available to make payments on the Notes. If there is a default, the value of this collateral may not be sufficient to repay both Azteca's secured creditors and the holders of the Notes. To the extent that certain of Azteca's subsidiaries are not Guarantors, Azteca's obligations with respect to the Notes will be effectively subordinated to all liabilities of these non-guarantor subsidiaries.
Currently, not all of Azteca's subsidiaries are Guarantors. To the extent Azteca acquires other subsidiaries that are not Guarantors or Azteca's current Guarantors are released from their guarantees, any right that Azteca or the Guarantors have to receive assets of any of the non-guarantor subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of holders of Notes to realize proceeds from the sale of any of those subsidiaries' assets, will be effectively subordinated to the claims of that subsidiary's creditors, including trade creditors and holders of debt of that subsidiary. The guarantees may not be enforceable.
The guarantees provide a basis for a direct claim against the Guarantors; however, it is possible that the guarantees may not be enforceable. In the event that a Guarantor becomes subject to a reorganization or concurso mercantil or similar proceeding or to bankruptcy, the relevant guarantee may be deemed to have been a fraudulent transfer and declared void, based upon the Guarantor being deemed not to have received fair consideration or a direct benefit in exchange for such guarantee, or similar principles.
21 USE OF PROCEEDS Azteca expects to use the net proceeds from the sale of Notes issued under the Programme for general corporate purposes, unless otherwise specified in the applicable Pricing Supplement. General corporate purposes may include the repayment of existing indebtedness, additions to working capital, capital expenditures, investments in subsidiaries and the financing of possible acquisitions.
22 THE BUSINESS General Azteca is one of the two largest producers of Spanish-language television content in the world and the second largest television broadcasting company in Mexico based on broadcast advertising market share.
Azteca's owns and operates two national television networks, Azteca 7 and Azteca 13, which together broadcast over-the-air programming that reaches an average of 96% of the Mexican population across 179 channels and captures 32% of the Mexican television broadcast advertising market. Azteca also operates Proyecto 40, a local channel that is broadcast over-the-air in Mexico City, and six other non-broadcast cable channels that are available for distribution to cable television subscribers domestically and internationally.
Azteca is widely recognized for its high quality original content, which represents approximately 64% of its total programming. It owns 20 television studios, seven of which are state-of-the-art multi-level television studios, and produces more than 13,000 hours of television content each year, including soap operas (telenovelas), reality shows, talk shows and news, sports, music and variety programs. Azteca's original content is aired on its networks in the United States and Guatemala and is also exported to more than 70 countries in the Americas, Europe, Asia and Africa.
In addition to its content and broadcasting operations, Azteca owns a drama school, a soccer team, a musical production company and a website. Azteca is also engaged in other businesses through joint ventures or strategic partnerships, including a project in Colombia to build and operate the largest fiber optic network in Latin America. The project is currently on budget and ahead of its construction schedule and is expected to be complete and operational by late 2014 or early 2015.
Corporate Structure
The following select structure chart shows Azteca's organizational structure as of June 30, 2013, including its main subsidiaries, all of which are Guarantors and wholly owned by Azteca, and a description of their main business activities:
Controlling Shareholders Public Float 65% 35%
Televisión Azteca Inversora Estudios Azteca, Azteca Novelas, Operadora Mexicana Azteca, S.A. de International Mexicana de S.A. de C.V. S.A. de C.V. de Televisión, S.A. de C.V. Corporation Producción, S.A. C.V. de C.V. Operates and is Owns orleases OwnsAzteca’s Operates the the principal facilities and Operates and is the television Azteca Provides advertising sales equipment for the principal advertising concessions and America technical, legal, agent for the production of sales agent for Proyecto operates network administrative, Azteca 7 and Azteca’s original 40 transmission financial and Azteca 13 programming equipment treasury services networks to Azteca
23 Business Strengths
One of the Most Recognized Brands in Mexico, with a Strong, Stable Market Position
Azteca has one of the most recognized brands in Latin America. Azteca believes it is a leading producer of some of the most popular soap operas (telenovelas) in the world and the second largest television broadcasting company in Mexico for at least the last five years, based on broadcast advertising market share. Azteca believes its popular programming helps it cultivate large and loyal audiences and attract diverse advertisers, which will continue to bolster its brand throughout the world and help it maintain its strong, stable position in the market.
One of the Two Largest Spanish-Language Content Producers in the World
Azteca is one of the two largest content producers of Spanish-language television content in the world. It produces a variety of programs, including telenovelas, reality shows, talk shows and news, sports, music and variety programs. In the twelve months ended June 30, 2013, Azteca produced approximately 14,229 hours of original content. In each of 2012 and 2011, Azteca produced approximately 64% of the national weekday primetime program hours aired on its networks, including its ten highest rated, regularly scheduled weekday programs. In 2012 and 2011, Azteca sold approximately 13,346 and 12,461 hours, respectively, of originally produced content.
Large Scale and Geographically Diversified Infrastructure
Azteca's 346 transmission sites located throughout Mexico allow it to reach approximately 96% of the Mexican population at least 23.5 hours a day, seven days a week. Unlike any of its competitors in the Mexican market, Azteca dedicates 101 of its 509 television transmitters to the transmission of mixed national and local advertising. This technology allows Azteca to offer local advertisers the option to target the transmission of its advertisements to a particular city or cities, or within a particular region. No other television competitor in Mexico is able to offer its advertisers the same level of geographic customization of its target audience.
In addition to its extensive and sophisticated transmission technology, Azteca also has 20 television studios in Mexico City, including seven state-of the-art multilevel sound stages custom-designed for high definition television production, and 35 additional studios located in other cities throughout Mexico, which enables Azteca to produce a high volume of quality programming efficiently.
Dynamic Industry Structure with Substantial Barriers to Entry
The media and broadcasting industries require significant capital investment and technical expertise, which makes it difficult for new competitors to enter these businesses. Barriers to entry for potential broadcasters include an already-established and extensive infrastructure, the limited availability of land to construct transmission sites, the existence of highly customized station facilities and a scarcity of engineers to design, operate and maintain television broadcast facilities. In addition, Azteca's position as one of the world's leading producers of Spanish- language programming, its over 300 exclusive contracts with creative talent and other long-term contractual relationships with major content providers such as Fox, Sony, Disney the Mexican national soccer team and Mexican Soccer League, create significant obstacles for potential content providers. Azteca benefits from a strong brand and an established operating history, which enable it to work effectively within the complex regulatory framework of the telecommunications industry.
Fully Integrated Company
Azteca is a fully integrated telecommunications company with a complete array of resources to source, produce and distribute television content. Azteca has resources dedicated to every stage of the television business. From the cultivation of creative talent at its drama school to the production of national and local original content at its television studios throughout Mexico, to the broadcast of its networks to viewers through its transmission infrastructure, Azteca is able to cost effectively control each stage of the television production, sale and distribution process.
24 Large, Diversified Client Base
Azteca's client base is large, diverse and distributed across a wide range of industries, allowing it to better withstand downward swings in the economy. As of June 30, 2013, Azteca's ten largest clients accounted for approximately 21% of its advertising revenues. See "The BusinessDescription of the BusinessTelevision Advertising Sales."
Strong Financial and Liquidity Profile
Azteca maintains significant cash positions and a preference for long-term over short-term debt, which allows it to maintain financial stability while being nimble in a fast moving market. Its liquidity allows it to capture market opportunities that arise and create market opportunities that may require an initial cash investment, such as promotional packages for its advertising clients. As of the twelve months ended June 30, 2013 and the years ended Decembers 31, 2012 and 2011, Azteca's net debt to EBITDA ratio was 1.0x, 0.9x and 0.7x, respectively, and its total debt to EBITDA ratio was 2.5x, 2.4x and 2.5x, respectively.
Proven and Experienced Management Team
Over the last 20 years, Azteca's management has helped guide the company to a leading market position in Mexico and throughout the Spanish-speaking world. Azteca's senior management is comprised of professionals with an average of ten years of experience in the telecommunications industry. While Azteca actively recruits lateral talent to manage the business, it also focuses on cultivating in-house talent by training and mentoring Azteca personnel to meet Azteca's future management needs.
Business Strategies
Assert Azteca's Identity as an Integrated and Multifaceted Telecommunications Company
Azteca continues to broaden its media business and changed its brand name from "TV Azteca" to "Azteca" in 2012. This new public identity presents Azteca as a diversified, integrated and multifaceted telecommunications company becoming a major provider of a variety of telecommunications services, including television, internet and telephone, and a major content producer for a variety of media platforms, including television, personal computers and mobile devices.
Focus on High Quality Television Content
Azteca believes the key to revenue generation in the television industry is a combination of the ability to anticipate and adapt to changes in consumer preferences and behavior on a timely basis and to consistently carry high quality content that is responsive to consumer tastes and behavior. Azteca's driving strategy to maintain and increase revenues is to produce and purchase the highest quality content.
In 2012, Azteca built seven state-of the-art multilevel sound stages custom-designed for high definition television production, which enable it to produce large volumes of high quality and cost-efficient content. As a component of its strategy to produce high quality television content and to increase its market share, Azteca operates the Center for Acting Studies and Development (Centro de Estudios y Formación Actoral), whose graduates often become prominent media personalities in Mexico. Approximately 90% of the graduates from this drama school have participated in Azteca productions.
Azteca's content strategy also includes a focus on acquiring the broadcast rights to television blockbusters and major special events, such as the FIFA World Cup and other soccer championships, Mexican national soccer team games and Mexican Soccer League games. Azteca also has long-term agreements with major content providers such as Sony, Fox and Disney, which grant the right to broadcast film and television programs that have proven popular outside Mexico. Azteca believes it can improve profit margins by making partial purchases of certain sports broadcast rights at reduced rates and producing innovative and cost-efficient programming that is appealing to viewers.
25 Expand its International Footprint through the Sale of Content and Cable Networks
Azteca licenses its content and cable networks in over 70 countries in the Americas, Europe, Asia and Africa, however, this constitutes only 1% of its aggregate revenues. Azteca aims to increase its content sales, both of full season programming and show concepts, throughout the world. Its La Academia show concept, for example, has been licensed to producers in Asia and elsewhere in Latin America, and Azteca believes it can continue to develop innovative content that appeals to broad and diverse audiences. Azteca plans to capitalize on its facilities, talent and other resources to grow its cable network options, which it plans to make available to cable distributors around the world. Lastly, in countries such as Guatemala or the United States where Azteca has a local presence, it plans to continue to develop compelling content produced locally and tailored to local audiences in order to attract a loyal brand following and diverse advertising clients.
Improve Margins by Increasing Local Advertising Sales in Mexico
Local and regional advertising markets in Mexico are smaller and less competitive than the national market. Azteca is able to charge higher rates to clients that advertise locally compared to clients that advertise nationally. In spite of the price differentiation, Azteca typically still offers local advertisers the most economical way to reach the largest number of potential customers. Azteca plans to increase local advertising sales by leveraging both its local presence in cities and towns across Mexico to produce popular local content and its technological capability to geographically customize the transmission of local programming and advertisements.
Expand its Telecommunications Infrastructure Business
Azteca's construction and operation of Colombia's national fiber optic network, which is expected to be complete and operational by late 2014 or early 2015, represents the launch of a significant new line of business for Azteca in line with its strategy of becoming an integrated and multifaceted telecommunications company. Azteca expects to leverage its experience and the high profile of its operation in Colombia to expand this line of business into other countries throughout Latin America.
Develop Networks that Complement Rather than Compete
Azteca's concessions grant it broadcasting rights to 179 different over-the-air channels across Mexico, yet it continues to maintain only two national networks, Azteca 7 and Azteca 13, and one Mexico City network, Proyecto 40, each of which focus on a different audience demographic. Azteca believes it should continue to focus its resources on developing, maintaining and improving the high quality of its core over-the-air networks rather than diluting their market share by dividing the attention of Mexican television audiences. While Azteca has the talent, production and other resources to develop substantially more content than can be broadcast on Azteca 7 and Azteca 13, it expects to use those resources for the development of specialized cable networks such as Azteca Novelas, the 24-hour telenovelas channel, or Azteca Mexico News, its 24-hour news channel, which can attract loyal audiences and advertising revenues without diverting the viewership of its core over-the-air networks.
Description of the Business Azteca's Mexican Television Networks
Azteca's core business in Mexico is the production and operation of its over-the-air television networks, which are broadcast on 179 channels throughout Mexico.
Azteca 7
Azteca 7 primarily targets young adults across Mexico with programming consisting mainly of telenovelas, news, entertainment and sports programs. In 2012, Azteca produced 29.4% of the Azteca 7 network's weekday primetime programming hours and 23.1% of its total programming hours.
Azteca 13
Azteca 13 is a family channel that carries more original content than any of Azteca's other networks. In 2012, Azteca produced all of Azteca 13's weekday primetime programming hours and 71.1% of its total
26 programming hours. The network's programming consists primarily of telenovelas, reality shows, news programs, talk shows, musical variety programs and sports broadcasts, principally soccer.
Proyecto 40
Azteca operates Proyecto 40, which primarily targets middle and upper income adults in the Mexico City metropolitan area, where a majority of Mexico's wealthy and educated elite reside. Azteca produces a majority of the content on Proyecto 40, which consists primarily of educational, cultural, documentary and interview programming.
Non-Broadcast Networks
In addition to its over-the-air television networks, Azteca produces two non-broadcast cable networks that are available in Mexico. Cable distributors can acquire the broadcast rights to include any of these 24-hour networks in its channel lineup, but Azteca does not broadcast them on any of its channels. These networks are Az Mix, a 24-hour music channel, Azteca Mexico News, a 24-hour news channel, and Azteca Novelas, a 24-hour soap opera channel that carries Azteca telenovelas. While Az Mix and Azteca Mexico News are only available in Mexico, Azteca Novelas is also available in Latin America and Spain. Azteca only licenses broadcast rights for its cable networks on terms that require the cable distributor to broadcast the full schedule of 24-hour programming on the licensed channel, including all Azteca's advertisements. The cable distributor is also not permitted to edit, supplement or otherwise alter the programming or advertisements.
Local Stations
Of the 179 channels Azteca has to broadcast its networks throughout Mexico, 35 channels also carry local programming and advertisements. Each of these local channels carry Azteca 7 or Azteca 13 programming, including national advertisements, with certain time slots designated for local programming. Approximately 20% of the programming on these channels is local, including programs that are produced and financed by Azteca's local stations or by local producers. Locally produced programs include news programs, game shows and sporting events. In 2012 and 2011, Azteca's local television stations produced approximately 9% and 8%, respectively, of the local programming broadcast on local channels, respectively.
Azteca's Mexican television networks provided Azteca with revenues of Ps.10,873 million ($848.2 million) and Ps.11,448 million ($869.3 million) in the twelve months ended June 30, 2013 and the year ended December 31, 2012, respectively.
Azteca's International Television Networks
Azteca exports its programming to countries outside of Mexico in three different ways. In Guatemala, for example, Azteca has a television concession through which it operates three television networks. Azteca also produces cable networks that are available for distribution by cable providers throughout the world. Azteca also licenses original content and related intellectual property relating to specific programs such as La Academia to television producers throughout the world.
United States
Azteca operates the Azteca America network through its subsidiary, Azteca International Corporation. Azteca America is a Spanish-language over-the-air television network broadcast throughout the United States. The network broadcasts telenovelas, reality programs, sports and news broadcasts, and other entertainment programming, including specialized content aimed at U.S. Hispanic audiences. Azteca America is available over- the-air through television broadcast stations and cable and satellite television distributors that operate in 72 markets throughout the United States, reaching an aggregate of 90% of the U.S. Hispanic population in 2012.
While Azteca's programming is broadcast in markets throughout the United States, it is generally broadcast on low-powered stations located significantly higher in the channel lineup compared to other similar Spanish language channels such as Telemundo and Univision, which are typically located lower in the channel lineup and closer to each other. While Azteca has attracted high viewership for major programming events such as La
27 Academia or certain soccer games, its location in the channel lineup makes it more difficult to attract casual television viewers who are browsing the Spanish language television channels. Azteca continues to negotiate distribution arrangements with U.S. cable providers in order to achieve a more desirable location in the channel lineup, and has recently succeeded in securing such contracts in several important markets, such as Los Angeles, Houston, Dallas and San Francisco.
Azteca also operates Azteca Mexico Canal, a cable channel that reaches 2.1 million viewers and is available by subscription through Direct TV.
Guatemala
Azteca has a television concession in Guatemala through which it operates three networks broadcast in several cities throughout Guatemala. The three channels, 31 Azteca Guate, Canal 35 and Canal 22, each broadcast local programming produced by Azteca, including La Academia Guatemala.
Other International Operations
Azteca operates three cable networks that are available for distribution by cable providers throughout the world. Azteca Internacional is Azteca's most widely distributed network, reaching nine million subscribers on more than 780 cable networks in over 70 countries in the Americas, Europe, Asia and Africa. Azteca Novelas, a 24-hour soap opera channel broadcasting Azteca telenovelas exclusively, reaches seven million subscribers on more than 704 cable systems in Mexico, Latin America and Spain. In June 2012, Azteca launched Azteca Internacional HD, which broadcasts high definition programming throughout Latin America. In 2012, these cable networks provided Azteca with revenues of Ps.45 million ($3.4 million).
In addition to selling broadcast rights to its television networks around the world, Azteca licenses original content and related intellectual property, such as the La Academia show concept, to television producers in over 100 countries throughout the world. The sale of the rights to broadcast or develop its original content allows Azteca to leverage its library of programming already broadcast in Mexico. In 2012 and 2011, Azteca exported 6,879 and 5,994 hours of programming, respectively.
Television Content
Programming
Azteca is one of the two largest producers of Spanish-language television content in the world. Azteca believes that its ability to provide a diverse mixture of quality programs has been and will continue to be one of the principal factors in maintaining and increasing its global ratings. Azteca focuses on producing and acquiring programs that appeal to its different target audiences. Azteca also believes that developing separate identities for its networks has helped it capture a growing share of Mexican television viewers and has provided its advertisers with the opportunity to tailor their advertising to specific demographic groups.
To maintain the high quality of its programs, Azteca convenes focus groups and conducts surveys to assess the expected popularity of new program ideas. Azteca also uses portions of its unsold advertising time to aggressively market programs produced in-house, and uses purchased programs to create and sustain viewer interest.
Programs Produced by Azteca
Azteca produces a variety of programs, including telenovelas, reality shows, news, sports, music, contests, talk shows and variety programs. In each of 2012 and 2011, Azteca produced approximately 64%, of the weekday primetime program hours aired on its networks (excluding programs produced by its local stations), including its 10 highest rated regularly scheduled weekday programs broadcast in 2012 and 2011.
28 Below is a chart showing the type of content Azteca produced in the twelve months ended June 30, 2013. Telenovelas 11%
Sports 13% News 44%
Entertainment 32%
On average, Azteca's original programming costs more per program than its purchased programs. Azteca seeks to offset its production costs by selling its original content outside of Mexico. In the twelve months ended June 30, 2013, Azteca produced approximately 14,229 hours of original content.
Azteca and its subsidiaries are the sole owners of all copyrights and trademarks relating to its original content. However, Azteca does obtain the license to some third party content production and/or broadcasting. In this case, Azteca may develop original derivative works, including program scripts, designs and formats, to which it will retain certain intellectual property rights alongside the rights of the original intellectual property owner.
Azteca has been producing telenovelas since 1996. This program genre is the most popular in Mexico and in all of Latin America. In 2012 and 2011, Azteca invested an aggregate of approximately Ps.206 million ($16.1 million) in production equipment mainly dedicated to producing telenovelas. Azteca produced five telenovelas in 2012, representing 645 hours of programming and six telenovelas in 2011 representing 719 hours of programming.
In 2002, Azteca launched its first reality show, La Academia (The Academy), a musical reality television show. This show features a competition among Mexican and Mexican-American contestants who are trained by a professional team of music producers and based on their performance, and are gradually eliminated from the show by votes of the broadcast viewers. During the show's run, live concerts are aired every Sunday. In 2012 La Academia premiered its tenth season with an anniversary edition named La Academia 10 Años (10 Years of the Academy).
Azteca's news programming includes broadcasts during the evening primetime schedule. The daily news program News at Seven on the Azteca 7 network includes a dynamic summary of national and international news in a format targeted primarily at young adults. The Azteca 7 network also transmits an interview program with questions for high profile political figures, businessmen and journalists about issues that affect Mexico. The program Events in the News on Azteca 13 presents a more in-depth analysis of daily national and international news.
Sports programming produced in-house by Azteca consists mainly of broadcasts of Mexico First Division soccer games, as well as sports commentary programs and programs of different sporting events such as international soccer games and the Olympics, among others. Soccer is the most popular sport in Mexico and the broadcasts of First Division games generate ratings at a level comparable with Azteca's highest ratings. During both
29 the 2012 opening and closing seasons, Azteca had the broadcast rights for the home games of seven teams in the First Division, including Monarcas Morelia, the soccer team owned by Azteca. During both the 2011 opening and closing seasons, Azteca had broadcast rights for the home games of eight teams in the First Division.
Purchased Programs
Azteca has various licenses, the most significant of which are for sports programming, including the FIFA World Cup, other FIFA tournaments, Mexican national soccer team games, Mexican Soccer First Division League games, U.S. National Football League games and WWE wrestling events such as Smackdown.
Azteca also has broadcast rights to films and television series programs from approximately 81 different distributors. However, a substantial part of its acquired programming comes from major studios, such as The Walt Disney Company, 20th Century Fox, Sony Pictures, and independent suppliers, such as Gussi, Telemovies, Morgan Creek. Azteca focuses on acquiring the broadcast rights to films and television series that have been widely viewed in one or more markets outside Mexico. Programs not produced in Spanish are dubbed prior to delivery to Azteca. Azteca pays the distributor an additional fee for this service.
Acquired programs account for an aggregate of approximately 36% of combined weekday primetime hours of programming aired on Azteca's two networks in 2012 and 2011.
Television Advertising Sales
General
In the twelve months ended June 30, 2013, approximately 79% of Azteca's revenues was derived from the sale of national advertising in Mexico, approximately 8% from the sale of local advertising in Mexico, approximately 10% from the sale of advertising in the U.S. and approximately 3% from barter arrangements, which are discussed in further detail below. In setting advertising rates, Azteca considers, among other factors, the rates offered by its competitors and the likely effect of rate increases on advertising volume.
National Advertising
Azteca sold an aggregate of 91% and 92% of the total available advertising time on its networks during primetime in 2012 and 2011, respectively. Azteca utilizes unsold advertising time in a variety of ways. Azteca has entered into advertising contracts with some of its affiliates under which Azteca agreed to make a certain amount of otherwise unsold advertising time available to these affiliates each year. In addition, in order to improve its operating results and cash flow, Azteca sells a portion of otherwise unsold advertising time to shared-risk advertisers and to companies that produce infomercials. Azteca also uses the unsold advertising time to broadcast promotional spots for its programming and to broadcast government and public service announcements.
As of June 30, 2013, Azteca's ten largest advertisers, together with their subsidiaries, accounted for 21% of Azteca's revenue, and its largest advertiser accounted for approximately 3% of its revenue. The percentage that each industry represents in Azteca's advertising revenues is set forth in the chart below.
Industry 2012 2011 2010 2009 2008 CommercialConsumption 29.8% 30.6% 31.9% 35.0% 35.0% Government 18.9% 15.1% 8.7% 9.8% 7.8% Food 15.8% 12.6% 12.8% 12.5% 14.8% Beverages 9.1% 8.9% 10.8% 8.8% 9.8% ChemicalPharmaceutical 7.5% 14.9% 12.0% 11.1% 8.5% Telecommunications/Media 6.0% 5.6% 11.4% 9.2% 10.0% Telemarketing 4.2% 2.2% 1.7% 1.7% 1.5% Insurances/Financial 3.8% 4.4% 4.4% 4.8% 3.8% Automotive 3.5% 4.0% 2.8% 4.0% 4.8% Education 0.7% 0.5% 1.5% 1.3% 1.0% FootwearandClothing 0.3% 0.6% 1.0% 0.8% 1.0% TourismandTransporation 0.4% 0.6% 1.0% 1.0% 1.0%
30 Others 0.0% 0.0% 0.0% 0.0% 1.0% Total 100.0% 100.0% 100.0% 100.0% 100.0%
Advertising Advances and Spot Sales
A significant component of Azteca's advertising sales consists of pre-sales for advertising slots in the following calendar year, for which Azteca usually collects advertising advances during the fourth quarter of each calendar year. These advertising advances are recognized as revenue only when and if the commercials are aired (see "Financial InformationManagement's OverviewCritical Accounting Policies and EstimatesCritical Accounting PoliciesRecognition of Revenue"). Azteca's remaining advertising time is sold in spot sales. At December 31, 2012, Azteca's balance of advertising advances was Ps.5,421 million ($416.7 million), substantially all of which is to be aired in 2013. At December 31, 2011, Azteca's balance of advertising advances was Ps.7,534 million ($538.9 million), which represents approximately 63% of its net advertising revenue in 2012.
Payment Plans
Azteca offers two basic advertising payment plans: the Azteca Plan and the Mexican Plan. Under the Azteca Plan, advertisers generally are required to pay in full within four months of the date they sign an advertising contract. Alternatively, the Mexican Plan offers flexibility by allowing advertisers to pay for advertising by making a cash deposit ranging from 10% to 20% of the advertising commitment, with the balance payable in installments over the term of the advertising contract, which is typically one year. Advertising rates offered to advertisers are lower under the Azteca Plan than under the Mexican Plan. No adjustments are made for inflation during the term of a contract.
Once deposited, Azteca has full use of funds advanced under the Mexican Plan and the Azteca Plan. Azteca generally requires advertisers paying under the Mexican Plan to deliver non-interest bearing, short-term notes in respect of each installment payment. Any Azteca advertiser is able to choose during which television programs and at what times, based on availability, its advertisements will appear. With the exception of infomercial contracts, no unused advertising commitments are carried beyond the expiration of the period covered by the contract.
The following tables set forth the percentage of Azteca's advertising sales and pre-sales under the Azteca Plan and the Mexican Plan for the years ended December 31, 2012 and 2011.
Percentage of Total Advertising Sales Year Ended December 31 2012 2011 Azteca Plan 53% 55% Mexican Plan 47% 45%
Percentage of Total Pre-Sales Year Ended December 31 2012 2011 Azteca Plan 50% 35% Mexican Plan 50% 65%
Local Sales
Azteca's local channels carry local advertisements that are primarily sourced by Azteca. However, Azteca also sells blocks of local time to local partners during which the local partner may broadcast programming of its choice, including local advertisements, for which it collects all revenue. National advertisers are restricted from advertising during these time slots.
Because the local advertising market is a niche market with little competition, Azteca is able to generate higher returns from its clients in comparison to the returns generated from national advertisers. In addition, Azteca, unlike any of its competitors in the Mexican market, is currently able to offer local advertisers the option to transmit
31 their advertisements in a particular city or within a particular region. Television advertising, particularly with the customized options that Azteca offers, is typically the most economical way for local advertisers to reach the largest number of people in their markets.
Infomercials, Shared-Risk Advertisements and Integrated Advertising
Azteca sells a portion of otherwise unsold advertising time to producers of infomercials and to shared-risk advertisers. With respect to infomercials, Azteca charges a fee for the time slot in which the advertisement runs. Azteca does not, however, receive any proceeds from the sale of the products shown during the infomercial. With shared-risk advertisements, however, Azteca does not receive any advertising fees up-front to broadcast the advertisement, but instead receives a percentage of the gross sales of the advertised product over a negotiated period of time. For example, Azteca airs advertisements for music recordings at little or no up-front charge pursuant to agreements that entitle Azteca to receive a share of the sales of the recordings for a number of months following the airing of the advertisements.
Azteca also receives revenue from integrated advertising in the form of product placements during the broadcast of Azteca's internally produced programming.
Revenue from Shared-Risk Advertisements, Infomercials and Integrated Advertising for the Year Ended December 31 (in millions) 2012 2011 (Ps.) ($) (Ps.) ($) Shared Risk - - 1 0.1 Infomercials 164 12.4 157 12.6 Integrated Advertising 2,527 192.3 2,146 172.7 Total 2,691 204.7 2,304 185.4
Total advertising revenues from shared risk advertising, infomercials and integrated advertising accounted for approximately 21% and 19% in 2012 and 2011, respectively.
Advertising Barter Arrangements
From time to time, Azteca enters into transactions with third parties pursuant to which it exchanges advertising time for goods and services, a substantial portion of which it uses in its operations. These types of advertising sales accounted for approximately 3% of Azteca's revenues for each of the years ended December 31, 2012 and 2011, respectively. Azteca has engaged in advertising exchanges, particularly with some of its affiliates, in order to realize value from otherwise unsold advertising time.
Advertising Sales on Cable Networks
Azteca requires cable distributors licensing its cable networks to broadcast the full schedule of 24-hour programming of the licensed channel, including all Azteca's advertisements. The cable distributor is also not permitted to edit, supplement or otherwise alter the programming. Advertising revenues on Azteca's cable networks grew 30% from 2010 to 2012.
Advertising Sales on Azteca America
For every hour of programming on Azteca America, there are 12 minutes of advertising time. Azteca's distribution and licensing agreements to broadcast Azteca America provide that six minutes of that advertising time may be sold by Azteca and the other six minutes may be sold by the local distributor. In the years ending December 31, 2012 and 2011, revenues from advertising sales on Azteca America was $58 million and $59 million, respectively.
32 Other Operations
Azteca operates several other businesses, including an internet business called Azteca Web, a record company called Azteca Records. S.A. de C.V. ("Azteca Records") and an events planning and production company called Multimedia, Espectáculos y Atracciones, S.A. de C.V. ("Multimedia"). Azteca also owns Monarcas Morelia, a Mexican professional First Division soccer team and operates the Centro de Estudios y Formación Actoral drama school.
Azteca Web
Azteca Web is a business that sells and produces advertising content primarily on Azteca's website, located at www.azteca.com with over six million unique visitors every month. Azteca Web also sells Azteca–branded products, such as images and ring tones, to customers on mobile devices and personal computers.
Music
Azteca's record label, Azteca Records and Multimedia Espectaculos y Atracciones S.A. de C.V., promotes new artistic talent through concerts, producing records and incorporating talent in advertising and Azteca's original programming.
Centro de Estudios y Formación Actoral
As a component of its strategy to produce high-quality television content in order to increase its market share, Azteca operates the Centro de Estudios y Formación Actoral drama school, whose graduates often become prominent media personalities in Mexico. Approximately 90% of the graduates from this drama school have participated in Azteca's productions.
The Soccer Team
In May 1996, Azteca acquired a majority shareholding interest in Monarcas Morelia, a soccer team in the First Division of the professional league in Mexico, which gives Azteca sole ownership of the team's broadcasting rights. In ten of the last twenty tournaments, Monarcas Morelia reached the final round; the team won the league championship for the first time in its history in the Winter 2000 tournament. Monarcas Morelia played in two additional finals, the Opening 2002, Closing 2003 and the Closing 2011. It was the runner-up in the CONCACAF Champions' Cup in 2002 and 2003. In 2002 it reached the quarter-finals in the Libertadores de América Cup. In April 2002 the FIFA Statistical and Historical Institute named it the Best Team in the Month. In April 2004, it achieved ISO 9001:2000 certification for the fields of Administration and Finance, the Morelos Stadium, Basic Strengths, Marketing and Communication and First Team, achieving re-certification in September 2009. The most recent achievement of this team was winning the Super League Championship (campeonato de superliga) in 2010.
Fiber Optic Project in Colombia
In November 2011, the Unión Temporal Fibra Óptica Colombia ("UT"), a joint venture of Azteca and Total Play Telecomunicaciones, S.A. de C.V., entered into an agreement with the Ministry of Information of Technologies and Communications of the Republic of Colombia (Ministerio de Tecnologías de la Informacíon y las Comunicaciones de Colombia, or "MINTIC") to build (over a 30 month period) and operate (for a 15 year period) a fiber optic network that would cover 753 municipalities and 2,000 institutions. It is expected that once construction is complete, it will cover almost 80% of Colombia and will be the largest fiber optic network in Latin America. Pursuant to the agreement, the government of Colombia is required to commit $235 million for construction of the network, and UT will be responsible for all maintenance and other capital expenditures relating to the network during the 15 years that UT operates it. Upon completion, Azteca expects to offer a variety of services including both lit and dark fiber communication transport services to telecommunications carriers and government agencies. In addition, the network will potentially allow UT to expand in the future and offer cable television, broadband internet and basic telephone services. In many of the areas where Azteca plans to offer these three services, only one of these services is currently available on the existing infrastructure. As of June 2013, UT has completed construction in 452 out of a total of 753 municipalities in accordance with the construction schedule. Azteca expects the network
33 to be complete and operational by late 2014 or early 2015. Azteca also operates Azteca Comunicaciones, S.A.S. in connection with services related to its concession in Colombia.
Competition General Information
Broadcast television stations compete for advertising revenue and viewers with other television stations in their markets and other advertising media, such as radio, newspapers, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, the Internet and home entertainment systems (including videocassette recorders, DVDs and television game devices). Broadcast television stations also face competition from cable television, MMDS and DTH satellite services. These other programming, entertainment and video distribution systems can increase competition for broadcast television stations by bringing into their market distant broadcast signals not otherwise available to a station's audience.
Televisa
Azteca's principal competitor in Mexico is Televisa. Televisa owns and operates Channels 2, 4, 5 and 9 in Mexico City, each of which, to varying degrees of coverage, is broadcast throughout Mexico. Televisa is one of the leading producers of Spanish-language television programming worldwide and has over 30 years of experience producing telenovelas and other entertainment shows. Televisa also has significant interests in other media, including pay television, publishing, radio, movies, soccer, music, Internet, lotteries and gaming, which enable Televisa to offer its customers attractive rates for packages combining advertising in various media.
Direct-to-Home ("DTH") Providers
Pay television services generally require an initial connection fee, as well as a periodic subscription fee, but offer both a higher quality picture than traditional, over-the-air television broadcasts and a larger number of channels to choose from. Under current Mexican law, cable television services, but not DTH or wireless cable services, are required to include over-the-air television channels in a basic package of channels offered to subscribers. SKY, a DTH service provider, carries the signals of the Azteca 7 and Azteca 13 networks throughout Mexico pursuant to an arrangement with Azteca. Many pay television services are offered by companies that are affiliated with large multinational media conglomerates. Televisa is a partner in a multinational company to provide DTH services in Mexico and elsewhere. According to data provided by COFETEL and INEGI, the penetration of pay television as of December 31, 2012 was approximately 43% of all television households in Mexico. Azteca believes most customers of DTH services are in the Mexico City metropolitan area, and the states located on the border between Mexico and U.S.
Univision and Telemundo
Univision and Telemundo are the main competitors to the Azteca America network in the U.S. Spanish- language television market. Both Univision and Telemundo have already established networks in the U.S. television markets that Azteca America targets or intends to target. In addition, in January 2002, Univision launched the Telefutura network, a Spanish-language network which can be seen on many over-the-air television broadcast stations in addition to cable systems nationwide.
In 2002, NBC acquired Telemundo. As part of the acquisition, NBC provides Telemundo with the rights to broadcast certain NBC programming in the U.S. Spanish-language television market. Univision has long-term program license agreements with Televisa and Corporación Venezolana de Televisión, C.A., another prominent producer of Spanish-language programming. These agreements provide Univision with a significant amount of quality programming that can be used to attract and retain U.S. Hispanic viewers.
Azteca America also competes with some English-language networks that broadcast in Spanish and simulcast certain programming in English and Spanish for their U.S. Hispanic viewers.
34 Potential New Networks
The Telecom and Antitrust Bill, a recently approved Mexican constitutional amendment relating anti-trust issues in the radio, television and telecommunications sectors, provides for the establishment of at least two new national over-the-air television networks. The networks will be established pursuant to a public tender bid for the concessions, and Azteca, as a current concession holder, will be ineligible from participating in the bid. These new networks, if established, and any other new entrants into the over-the-air broadcasting, cable, broadband and/or telephony markets, will at least double the number of commercial television broadcasters in Mexico, and will compete with Azteca's business.
Azteca is one of the two largest producers of Spanish language television content in the world and believes it will take significant time and resources for any new entrants into the market to establish a network of the same scale, content and success as its networks.
The experience, talent and programming resources that Azteca has built over the last 20 years have provided a strong foundation for its continued market dominance and will be difficult to replicate. It has strong brand recognition, a robust pipeline of high quality original and third party content, and a large and diverse network of on-the-air talent, many of whom are party to long term exclusivity agreements with Azteca. Azteca also has an extensive transmission network that will be difficult to replicate over a short period of time. One of the barriers to the construction of a transmission infrastructure is the scarcity of land suitable for transmission towers. The mountainous terrain of Mexico's most populous regions requires transmission towers that are strategically placed to overcome signal disruptions. As long as most Mexicans continue to receive television broadcasting over-the-air and Azteca and Televisa continue to be the dominant television networks, a majority of television viewers' antennas will be directed towards Azteca's and Televisa's signals, most of which are broadcast from towers that are intentionally located close to each another. Television broadcast signals travel in a straight line, and the transmission can only be received by an antenna directly within the line of the signal. Even if the tower of a new entrant is properly transmitting its signal, if the signal is not being transmitted in the same direction as the Azteca and Televisa signals, fewer viewers are likely to receive the signal and it will be difficult for the new entrant to gain viewers. See "Risk Factors—Risks Related to Azteca's Operations Television broadcasting in Mexico is highly competitive" and "The BusinessRegulation—Mexico—The Telecom and Antitrust Bill."
Regulation Mexico
The Telecom and Antitrust Bill
The Telecom and Antitrust Bill became effective on June 12, 2013 and, among other things,
allows foreign ownership of businesses relating to the public telecommunications networks, frequencies of the radio electric spectrum and satellite transmission;
restricts the participation of foreign investments over 49% in radio broadcasting, subject to the reciprocity of the originating foreign investment country (for example, if the foreign investor's country of origin were to restrict foreign investments over 20% in radio broadcasting, then a reciprocal 20% restriction will apply);
re-affirms the 2015 deadline for the transition from analog to digital television broadcasting;
expands the applicability of the constitutional right of free speech from print media to all forms of media; and
provides for the creation of a state-owned national broadband internet network.
The Mexican Congress is required to pass derivative legislation containing specific information about the implementation of the Telecom and Antitrust Bill by December 9, 2013. Until then, there is uncertainty about how the Telecom and Antitrust Bill will be interpreted and applied.
35 The Telecom and Antitrust Bill contemplates the creation of a new independent regulatory agency, the Federal Telecommunications Institute (Instituto Federal de Telecomunicaciones or "IFETEL"), with oversight over, among other things, the efficient development of telecommunications and radio broadcasting and the regulation of concessions and licenses. IFETEL would also have exclusive discretionary power to decide antitrust and competition matters in telecommunications and broadcasting.
IFETEL, if established, may also be empowered to set limits on the use of national and regional frequencies by a concession holder, set limits on the cross-ownership of telecommunications, television or radio businesses that serve the same market or geographical zone, revoke concessions and order the divestment of certain assets to foster competition. IFETEL may also implement measures to prevent spectrum concentration by one person or group of affiliated persons.
The Telecom and Antitrust Bill provides for the creation of specialized federal courts empowered to review all matters relating to telecommunications, radio and broadcasting matters, including rulings, actions and omissions of the IFETEL. These rulings would not be able to be suspended by any stays or injunctions from other courts.
The Telecom and Antitrust Bill creates a "must-offer" rule, whereby holders of concessions authorized to broadcast over-the-air TV signals will be required to offer use of their transmissions to certain cable television concession holders on a nondiscriminatory basis and free of charge. It further creates a "must-carry" rule, whereby holders of cable television concessions must carry certain over-the-air TV signals broadcast in their region on a nondiscriminatory basis and free of charge and DTH cable television concession holders must carry over-the-air TV signals broadcast in at least 50% of Mexico. The must-offer and must-carry obligations will cease to free when IFETEL declares that competitive conditions have been met in the telecommunications and broadcasting markets.
Until legislation is enacted to implement the Telecom and Antitrust Bill, the COFETEL and the Federal Antitrust Commission (Comisión Federal de Competencia) will continue to oversee broadcasting and telecommunication and related antitrust matters pursuant to existing legislation.
Applicable Law Until Enabling Legislation for the Telecom and Antitrust Bill is Passed
Concessions
The television broadcast concessions of Azteca were granted by the SCT pursuant to the Federal Law on Radio and Television (Ley Federal de Radio y Televisión) ("LFRT"), which will continue to be in effect until the enactment of the new legislation resulting from the Telecom and Antitrust Bill.
Generally, concessions are made up of one or more channels for broadcasting, each of which gives the licensee the right to operate television transmitters in a particular location. Each concession specifies, among other things, the assigned channel, the power of the broadcasting signal authorized and the main areas covered by the broadcasting signal. Furthermore, the COFETEL may grant to the licensee, additional separate authorizations to operate transmitters within areas covered by the assigned channels in the concession. These additional authorizations allow the licensee to broadcast its signal to areas that may not be reached by transmitters located where the channels assigned in the concession require them. Additional authorization is also granted upon a request from local residents in an area within the concession area.
Azteca has 11 concessions for 179 channels. Nine of these concessions are part of the Azteca 7 network and consist of a set of 88 channels for primary broadcasting locations throughout Mexico. Azteca has also obtained 125 additional authorizations related to the Azteca 7 network. For the Azteca 13 network, Azteca has a single concession comprised of 90 licenses for primary broadcasting locations throughout Mexico and has 171 additional related licenses. Azteca also has one separate concession for a single primary broadcasting location in the state of Chihuahua.
The SCT granted Azteca authorizations to install secondary digital broadcasting channels, as ancillary to the primary concessions, to comply with the policy for transitioning from analog to digital television in Mexico.
36 Television channel concessions are granted by means of public tender bids. The term of a concession may be for up to twenty years and may be given to the same concession holder, which is ranked preferentially over third parties.
Concessions may be revoked if the concessionaire:
transfers, pledges or assigns to the benefit of any foreign person in any manner, in full or in part, the concession or any rights arising thereunder or any broadcasting equipment relating thereto; provides goods or services related to the concession to enemies in time of war; changes its jurisdiction to a foreign jurisdiction, or solicits the protection of a government or foreign individual or legal entity; changes the location of its equipment without COFETEL's approval; broadcasts on a frequency other than the one assigned to it, without COFETEL's approval; transfers or assigns the concession or rights arising thereunder or any broadcasting equipment relating thereto without COFETEL's approval; suspends broadcasting from its principal station for a period greater than 60 days; changes its by-laws without COFETEL's approval or breaches the LFRT; does not regularly provide the service for which the concession was granted; transfers shares of its capital stock and enters into contracts that affect or encumber the concession, without prior approval from COFETEL; unjustifiably refuses to effectuate broadcasts of the Mexican government's allocated airtime; denies without justifiable cause to allow access to its facilities by COFETEL inspectors and the Department of the Interior (Secretaría de Gobernación) ("SEGOB"); is sanctioned three times for failure to: (i) cover social matters pursuant to condition Three of the Legal Instrument of Concession; (ii) transition to digital television in accordance with ATSC standard A/53; (iii) contribute to research and development work in the country; (iv) give the SCT and SEGOB within the time limits specified under law, all data, reports and documents that are requested by the SCT and SEGOB; (v) maintain in good condition the equipment needed to run the stations or abide by SCT arrangements for the elimination of interference with other systems or (vi) use signal carrier systems authorized by the SCT for sending and receiving radio broadcasting signals; is sanctioned three times in one year for breaches of the same obligation, in the following cases: (i) failure to facilitate station inspection by SEGOB and COFETEL inspectors; (ii) failure to transmit official government broadcasts using its allotted time with the same quality as that of its normal broadcasts; (iii) selling/marketing in any way the government's broadcasting time, or in the election area, failure to abide by the provisions of the Federal Code on Electoral Institutions and Procedures (Código Federal de Instituciones y Procedimientos Electorales) ("COFIPE"); (iv) failure to broadcast government announcements during its "fiscal airtime" ("tiempo fiscal") or pay the 12.5% tax on revenues; (v) in the event of a disaster, failure to coordinate broadcasts with the competent authorities for the purpose of preventing greater damage or remedying what has already been caused; (vi) broadcasting of programs or advertising inappropriate for children or young people without announcing them as such when broadcasted; (vii) broadcasting publicity regulated by the General Health Law without prior authorization from the Department of Health; (viii) broadcasting religious advertising or programs without authorization from SEGOB; (ix) broadcasting advertising or programs constituting discrimination that violates human dignity and the purpose of which is to do away with or diminish personal rights and liberties or (x) failure to grant a right to respond. If a concession is revoked on the grounds of the first three reasons mentioned above, the concessionaire legally forfeits all of its assets to the Mexican government. If a concession is revoked for any other reason, the concessionaire must disable and remove all of its transmission assets, and the Mexican government will become
37 entitled to purchase all such assets at a fair value determined by an independent appraiser. None of Azteca's concessions has ever been revoked. In order to facilitate the transition to digital television, the SCT through the COFETEL has granted each concessionaire an additional channel to broadcast digital transmissions simultaneously with analog ones, and at the end of transition to digital, the concessionaire shall return the analog channel to the Mexican government. Azteca shall also be entitled to 179 additional anchor channels to transmit the digital broadcasts in areas with poor reception. Regulatory Oversight
COFETEL and the SEGOB may perform inspections for broadcasting operations of a concessionaire. Television programming is not subject to judicial or administrative censorship in Mexico. Nevertheless, Mexican law and regulations prohibit programs that: are offensive to civic life; are discriminatory on the basis of race; cause corruption of language; are contrary to civility; constitute an apology for violence or crime; or threaten national security or public order, or cause an audience to panic or be alarmed. According to Mexican regulations, the Office for Radio, Television and Cinematography (Dirección General de Radio, Televisión y Cinematografía), a department of SEGOB, reviews all television programming (except live broadcasts) prior to broadcast and classifies the programs by age group appropriateness. Unless otherwise authorized by SEGOB, programs classified as adult programs may only be broadcast after 10:00 p.m.; programs classified as teen and adult programs may only be broadcast after 9:00 p.m.; programs classified as programs for teens over the age of fifteen may be broadcast after 8:00 pm; and programs classified as appropriate for all audiences (including children) may be broadcast at any time. Breaches of these regulations are punishable by fines that vary from 20 to 5,000 days-worth of minimum wage in force in Mexico City on the day of the violation. Mexican regulations also require that broadcasts in foreign languages be approved in advance by SEGOB. Every concessionaire must broadcast up to 30 minutes of government programming per day and that contains educational, cultural, social and socially-oriented subjects. During political campaigns, under the administration of the Federal Electoral Institute (Instituto Federal Electoral) ("IFE"), all registered political parties are entitled to use the government's allotted time to broadcast political messages. Restrictions on Advertising
Mexican law regulates the type and quantity of advertising that may be broadcast on television. The concessionaires are prohibited from broadcasting deceptive commercials. Commercials for alcoholic beverages (except beer) may only be broadcast after 10:00 p.m. and commercials for tobacco products are forbidden by the General Law on Health. The advertising of alcoholic beverages must not be excessive in amount, submit to minors or present real or apparent consumption of alcoholic beverages, and must be balanced by public service announcements that promote good nutrition and hygiene. Commercials for certain products and services, including medications, medical equipment and services, foodstuffs, food supplements, and personal hygiene and beauty products, require the approval of the Mexican government prior to being broadcast, and when broadcast, must include captions indicating the federal authority. Furthermore, the Mexican government must approve all contests, drawings and other games-of-chance programs. Religious programs also require approval. The COFIPE prohibits (i) the contracting of radio and television advertising for the purpose of influencing the electoral preference of citizens, (ii) the contracting of radio and television advertising from political parties, candidates, pre-candidates and others who aspire to political office through elections and (iii) the promotion of public servants in institutional advertising for the government. The COFIPE also provides that during election times, the IFE has 30 minutes per day of government airtime and 18 minutes of government fiscal time ("tiempo fiscal") for political announcement.
38 Mexican law also regulates the quantity of advertising that a concessionaire may broadcast. No more than 18% of broadcast time may be used for commercials on any one day, there being a stimulus that makes it possible to increase this advertising broadcasting time by 5% if domestic production accounts for 20% of what is broadcast. Station identification lasts a maximum of two minutes and may only appear every half hour, except during events the interruption of which would inconvenience television viewers. A concessionaire may obtain a limited authorization from the SEGOB to extend the duration of commercial breaks. In the past, Azteca has obtained this authorization for broadcasts during the Christmas season. COFETEL establishes minimum advertising rates. There are no restrictions on maximum advertising rates. There is an obligation to comply with information requests from the IFE. All radio and television stations in the country are obligated to bind when transmitting information that is important for the country in the judgment of SEGOB. Applicable law prohibits broadcasts that lead to corruption of language and are contrary to civility, whether through the use of malicious expressions, words or shameless images, phrases or scenes with two meanings, apologies for violence or crimes. Also prohibited is anything that denigrates or is offensive to civic admiration of heroes and religious beliefs or is racially discriminatory. The use of resources of low comic level and offensive sound are also prohibited. In addition, news, messages or propaganda of any type that are contrary to the security of the state or public order are prohibited. The rebroadcast of programs developed abroad and received by any means by the broadcasting stations, or the broadcast of programs that sponsor a foreign government or international body, may only occur with prior authorization from the SEGOB. With respect to commercial advertising, applicable law prohibits advertising of vice centers of any nature; advertising or commercials about industrial or commercial products or activities that deceive the public or cause it harm through exaggeration or falsehood regarding the indication of their uses, application or properties. Additionally, programs that incite violence, as well as programs relating to food products that distort good nutritional habits, should not be broadcast during children's programming times. Even where the law establishes that broadcasting stations must make use of the national language, SEGOB may authorize, in special cases, the use of other languages, so long as a long or short Spanish version is shown. Broadcasting Tax
In addition to paying income tax, all concessionaires are subject to a tax that is payable by giving the Mexican government the right to use up to 18 minutes daily of the concessionaire's broadcast time. If the government does not use all its airtime in a particular day, that airtime expires and ceases to be available for future use. In any event, the use of this time must be distributed proportionately throughout the daily programming of the concessionaire, but it should not have a significantly adverse effect on the concessionaire's operations. Stations on the Border
Broadcasts from television stations located on the Mexican-United States border are governed by a bilateral treaty signed by the governments of both countries. The Agreement Relating to Assignments and Usage of Television Broadcasting Channels in the Frequency Range 470-806 MHz Along the United States-Mexico Border established criteria that all stations on the border must comply with regarding broadcasting power, antenna height and the allowable distance from the border. Azteca believes that it is in compliance with all aspects of the treaty. United States
The U.S. communications industry, including the operation of broadcast television networks and stations, is subject to federal regulation, particularly pursuant to the Communications Act of 1934, as amended, and the rules and regulations promulgated thereunder by the FCC (the "Communications Act"). This Communications Act empowers the FCC to, among other things, regulate certain aspects of broadcast programming and the relationship between broadcast television networks and their affiliated broadcast television stations.
39 Foreign Ownership of Broadcast Television Stations in the United States
The Communications Act prohibits the issuance of a broadcast license to, or the holding of a broadcast license by, a foreign corporation, which is any corporation of which more than 20% of the capital stock is beneficially or nominally owned or voted by non-U.S. citizens or their representatives or by a foreign government or a representative thereof, or by any corporation organized under the laws of a foreign country. The Communications Act also authorizes the U.S. Federal Communications Commission (the "FCC"), if the FCC determines that it would be in the public interest, to prohibit the issuance of a broadcast license to, or the holding of a broadcast license by, any corporation directly or indirectly controlled by any other corporation of which more than 25% of the capital stock is beneficially or nominally owned or voted by foreign entities. The FCC has issued interpretations of existing law under which these restrictions in modified form apply to other forms of business organizations, including partnerships. Other Broadcast Television Regulation in the United States
The FCC regulates television broadcast stations, which generally must apply to the FCC for renewal of their licenses every eight years. Renewal will be granted to the extent that the FCC finds that (i) the station has served the public interest; (ii) there have been no serious violations by the licensee under the Communications Act described above or the FCC rules; and (iii) there have been no other violations by the licensee of the Communications Act or the FCC rules which, taken together, indicate a pattern of abuse. The FCC also administers other aspects of broadcast television regulation, including the following: restrictions on the ownership of multiple media outlets in one market, or on a national basis; limits on the amount of commercial advertising during children's programming; requirements that stations air a certain amount of informational or educational programming directed at children; restrictions on "indecent" programming; and requirements affecting the availability and cost of political advertising time. In addition, FCC rules governing network affiliation agreements mandate that a television broadcast station licensee retain the right to reject or refuse network programming under certain circumstances, or substitute programming that the licensee reasonably believes to be of greater local or national importance. Violations of FCC rules and regulations can result in substantial monetary forfeitures, periodic reporting conditions, short-term license renewal and, in egregious cases, denial of license renewal or revocation of license. Other Regulatory Considerations in the United States
The foregoing does not purport to be a complete discussion of all provisions of the Communications Act referenced or other acts of the U.S. Congress or of the rules, regulations and policies of the FCC. For further information, reference should be made to the Communications Act itself, to other congressional acts, and rules, regulations and public notices promulgated periodically by the FCC. There are additional regulations and policies of the FCC and other federal agencies that govern political broadcasts, public affairs programming, broadcast advertising and other matters affecting Azteca's U.S. business and operations. Property
Azteca's properties include two television stations in Mexico City and 35 television stations in other urban areas throughout Mexico, including Monterrey, Guadalajara and Veracruz, where it produces and broadcasts television content. Azteca's national networks are broadcast from one of the two Mexico City television stations through satellite transponders and then to Azteca's 346 transmission sites (each of which is comprised of a transmission tower, antennas and transmitters) located throughout Mexico. These transmission sites in turn broadcast the signals to viewers nationwide.
Television Stations
Azteca owns its two Mexico City television stations: the Ajusco station and the Azteca Novelas station, which are comprised of offices and production facilities. The Ajusco station includes Azteca's corporate offices, eight television studios that are mainly used for the production of live content and the transmission facilities where national content is broadcast from. The Azteca Novelas station includes a total of 12 television studios seven of which are new state-of the-art television studios with multilevel sound stages for high definition television production, which were constructed in 2012.
40 The Ajusco and Azteca Novelas stations comprise an aggregate of approximately 72,595 square meters of land and 96,119 square meters of constructed space. Most of Azteca's other 35 television stations in other urban areas are leased for terms ranging from three to five years. Transmission Sites
Azteca owns and operates all of its 346 transmission sites (each of which is comprised of a transmission tower, antennas and transmitters). Approximately 28% of the property on which these transmission sites are located is owned by Azteca. Approximately 60% are used by Azteca pursuant to leases with terms ranging from five to ten years. The remaining are used by Azteca pursuant to easements granted by owners of the land. On each of Azteca's 346 transmission sites is one transmission tower. Of these towers, 275 have a total of 464 analog transmitters installed on them and 23 have a total of 45 digital transmitters installed on them. All of these towers and transmitters are owned and operated by Azteca. In accordance with Mexican law, Azteca began the transition from analog to digital in 2004 and from 2004-2012 has invested approximately Ps.286 million ($21.9 million) in the acquisition of digital transmitters and other related equipment. Azteca expects to complete the transition to digital technology by 2015, and has budgeted $150 million for related capital expenditures. In February 2000, Azteca entered into a transmission tower space lease agreement (the "ATC Towers Lease") with a Mexican subsidiary of American Tower Company ("ATC"). Pursuant to the ATC Towers Lease, Azteca has leased unused space in its transmission towers to ATC (which ATC then rents to third-parties, including, on occasions, Azteca or its affiliates) for a 20-year term that expires in 2020. Unless the lease is terminated by the parties, it will automatically be extended for an additional 50-year term. In consideration for the lease, ATC is required to make annual payments of $1.5 million to Azteca. ATC also granted Azteca a $91.8 million unsecured loan (see "Financial InformationManagement OverviewLiquidityATC Long-Term Credit Facility"), under which Azteca must make yearly principal payments of $1.5 million, that are offset with the payments due by ATC to Azteca under the ATC Towers Lease. The loan is due in 2020 and will automatically be extended for an additional 50-year term, to the extent that the ATC Towers Lease remains in effect. If Azteca terminates the lease, in whole or in part after 2020, the termination triggers a mandatory prepayment (total or partial, as the case may be) under the loan agreement. Satellites
To broadcast content from its Mexico City television station to its transmission sites throughout Mexico, Azteca uses satellite transponders which receive the signal from the Mexico City television station and reroute it to the transmission sites. Azteca has entered satellite capacity agreements with two satellite operators, Panamsat de México, S. de R.L., de C.V. ("Panamsat") and Satelites Mexicanos, S.A. de C.V. ("SatMex"). Under the agreement with Panamsat, Azteca has access to signal line services through two satellite transponders: a 15 MHz satellite transponder for a term that expires in April 2015 and a 36 MHz satellite transponder for a term that expires in August 2024. In 2012, Azteca paid approximately $1.7 million for these services. Under the agreement with SatMex, Azteca has access to signal line services through a 7 MHz satellite transponder. The agreement expires in January 2021. In 2012, Azteca paid approximately $0.9 million for this service. Upon expiration of these agreements, Azteca will either negotiate an extension or find another satellite capacity services provider in its ordinary course of business. Patents, Licenses, Brands and Other Contracts
Azteca owns a large number of brands. Among those that Azteca considers the most important are the institutional brands such as Azteca, Azteca Novelas, Azteca Trece, Azteca Siete, Fundacion Azteca, Azteca Internet, Proyecto 40, Grupo Salinas and Monarcas Morelia.
41 Likewise, Azteca owns diverse reservations of rights of exclusive use of television program titles and fictional characters, as well as musical works and television programs. Additionally, all the programs and telenovelas produced by Azteca have their own brands and music. Employees As of December 31, 2012, 5,193 persons provided services to Azteca. Of these, 1,826 were independent contractors, of whom 1,649 worked in production. 2,005 of Azteca's personnel performed administrative duties, 286 were managers or executive managers, 381 worked in sales and 695 were union members. Approximately 41% of new hires in 2012 were hired as independent contractors. Approximately 13% of Azteca's employees are represented by a television union, with a smaller number represented by the actors' guild or musicians' union. According to Mexican law, the terms of compensation for contracts entered into by Azteca and its unionized employees are subject to annual renegotiation. All other contract terms are renegotiated every two years. Azteca has not experienced any labor strikes and it maintains good relationships with the unions representing its employees. Environmental Performance Azteca's business operations and activities are not materially subject to environmental regulations. Legal Proceedings Proyecto 40
Azteca has engaged in a number of disputes with Mr. Javier Moreno Valle ("Moreno Valle"), Corporación de Noticias e Información, S.A. de C.V. ("CNI") and Televisora del Valle de México ("TVM") , the company that holds the Proyecto 40 concession, in connection with the operation of Proyecto 40 and various shareholders meetings of TVM.
Azteca currently operates Proyecto 40 pursuant to an operating agreement dated December 10, 1998, among Azteca, CNI and TVM.
In 2000, CNI suspended Azteca´s broadcasting rights on Proyecto 40. Azteca sued CNI, TVM and Moreno Valle for breach of the operating agreement. In 2005, a final and non-appealable ruling was made in favor of Azteca. Azteca currently operates Proyecto 40 pursuant to the operating agreement.
In connection with a credit agreement entered into in 1998 between Azteca as creditor and CNI as borrower, Moreno Valle pledged over 51% of the shares of TVM capital stock to Azteca.
When TVM failed to hold an annual shareholders’ meeting for four consecutive years, Azteca sued for the right, as creditor of CNI and potential future shareholder of TVM, to convene a TVM shareholders’ meeting. A court ruled in favor of Azteca, and in one of the TVM shareholders’ meetings, shareholders authorized a capital increase by means of which Azteca acquired a controlling interest in TVM.
In 2007, TVM, CNI and Moreno Valle sued Azteca and other individuals and entities in an ordinary commercial proceeding (juicio ordinario mercantil) seeking the nullification of certain of TVM's shareholders’ meetings. To date, the case has not been set for trial because not all of the defendants have been served.
Although there can be no assurance that Azteca will prevail in its disputes with CNI, TVM and Moreno Valle regarding Azteca’s controlling interest in TVM, Azteca's management believes that its position will ultimately be upheld and therefore, Azteca has not set aside any related reserves.
IBOPE
In 2012, Azteca filed two lawsuits against IBOPE AGB Mexico, SA de CV ("IBOPE"). IBOPE and Azteca had entered into an agreement pursuant to which IBOPE provided Azteca with ratings services of Azteca programming.
42 The agreement required IBOPE to provide and maintain ratings information that was impartial, objective, accurate, timely and representative. However in June 2012, IBOPE widely disseminated two emails containing the identity of a significant number of participants in Azteca's ratings panels, which should have remained confidential.
Azteca filed an initial claim with Mexican authorities requesting the criminal investigation and prosecution of IBOPE for the disclosure of this confidential information. Azteca also filed a civil suit against IBOPE seeking damages arising from this disclosure and other breaches by IBOPE of its agreement with Azteca and an injunction requiring IBOPE to continue to provide ratings services pursuant to the agreement.
IBOPE countersued, seeking to terminate the contract with Azteca and damages arising from Azteca’s claims. The Sixty Second Civil Court is conducting evidentiary hearings on this case.
IFE Fines
The IFE, the regulatory agency overseeing government and electoral campaign advertising, imposed several fines on Azteca for alleged breaches of the COFIPE, all of which Azteca has appealed. During certain blackout periods, only political advertisements authorized by the IFE may be broadcast and television broadcasters must air certain political advertising authorized by the IFE. The fees imposed by the IFE relate to Azteca's (i) failure to broadcast on its over the air networks mandatory government and campaign advertising due to technical issues, resulting in a fine of Ps.200 million ($15.4 million), (ii) alleged unauthorized campaign advertising through the broadcasting of an advertisement for a political magazine that featured campaign advertising on its cover, resulting in a fine of Ps.16.5 million ($1.3 million), (iii) alleged failure to broadcast on its cable networks mandatory government and campaign advertising, resulting in a fine of Ps.22 million ($1.7 million) and (iv) other alleged violations resulting in fines totaling Ps.1.7 million ($0.1 million). While Azteca cannot predict the outcome of its appeals, it does not believe that the aggregate amount of fines on appeal is materially adverse to its results of operations.
43 EXCHANGE RATES Mexico has a free market for foreign exchange, and the Mexican government allows the peso to float freely against the U.S. dollar. There can be no assurance that the Mexican government will maintain its current policies with regard to the peso or that the peso will not depreciate or appreciate significantly in the future. The following table sets forth, for the periods indicated, the period-end and average exchange rate published by Banco de México expressed in pesos per U.S. dollar. The rates shown below are in nominal pesos that have not been restated in constant currency units. No representation is made that the peso amounts referred to in this Offering Circular could have been or could be converted into U.S. dollars at any particular rate or at all. Exchange Rate (1) Period End Average (2) Year Ended December 31 2010...... 12.3571 12.6367 2011...... 13.9787 12.4273 2012...... 13.0101 13.1685
Six Months Ended June 30, 2012...... 13.6530 13.2674 June 30, 2013...... 13.0235 12.5612
12 Months Ended June 30, 2012...... 13.6530 13.1016 June 30, 2013...... 13.0235 12.8181
Monthly March, 2013...... 12.3546 12.5490 April, 2013...... 12.1550 12.2156 May, 2013...... 12.6328 12.2394 June, 2013...... 13.0235 12.9502 July, 2013 ...... 12.7321 12.7692 August, 2013...... 13.3104 12.8835 ______(1) The exchange rates are the exchange rates published by the Banco de México in the Official Gazette as the rate for the payment of obligations denominated in non-Mexican currency payable in Mexico. The exchange rate is determined by Banco de México on banking days, by an average of quotations of the exchange market of wholesale operations to be settled on the second banking day of its determination. Banco de México announces the F/X exchange rate after 12 noon Mexico City time on each banking day. Each listed exchange rate is published by Banco de México in the Official Gazette of the Federation on the next banking day of its determination as a reference to settle operations the second working day following the settlement date. (2) The average rate means the average of the daily exchange rate during the relevant period.
44 FINANCIAL INFORMATION Selected Financial and Other Information The following tables present Azteca's selected consolidated financial and other information as of the dates and for the periods indicated. The selected consolidated financial information as of and for the six months ended June 30, 2013 and 2012 has been derived from Azteca's unaudited consolidated financial statements as of and for the six months ended June 30, 2013 and 2012. The selected consolidated financial information as of and for the years ended December 31, 2012 and 2011 has been derived from Azteca's audited consolidated financial statements as of and for the years ended December 31, 2012 and 2011. See Azteca's consolidated financial statements beginning on page F-1. The selected consolidated financial information on Azteca's consolidated income statement for the year ended December 31, 2010 has been derived from Azteca's audited consolidated financial statements as of and for the year ended December 31, 2011 and 2010, which have been prepared in accordance with MFRS, and is provided for information purposes only. Azteca's consolidated financial statements as of and for the years ended December 31, 2012 and 2011 have been audited by its independent auditors, Salles, a member of Grant Thornton International. Salles is a member of the CCPM. Pursuant to the General Provisions Applicable to Securities Issuers and Other Participants in the Securities Market (Disposiciones de Carácter General Aplicables a las Emisoras de Valores y a Otros Participantes del Mercado de Valores), beginning with the year ending December 31, 2012, Mexican companies with securities listed on the BMV were required to prepare and present their financial information in accordance with IFRS, as adopted by the IASB. Accordingly, Azteca's consolidated financial statements as of and for the years ended December 31, 2012 and 2011 were its first annual financial statements prepared in accordance with IFRS. Azteca's transition date to IFRS was January 1, 2011, and therefore, the year ended December 31, 2011 was the comparative period established by IFRS 1, First Time Adoption of International Financial Reporting Standards. In accordance with IFRS 1, Azteca has applied applicable mandatory exceptions and certain optional exemptions to the retroactive application of IFRS to the financial statements as of and for the year ended December 31, 2011 and 2010 that had been prepared in accordance with MFRS, as issued by the CINIF (see "Financial InformationManagement's OverviewCritical Accounting Policies and EstimatesCritical Accounting PoliciesAdoption of IFRS" and Note 27 to Azteca's audited consolidated financial statements as of and for the years ended December 31, 2012 and 2011 beginning on page F-16).
Azteca's consolidated financial statements are stated in pesos. U.S. dollar amounts presented in this Offering Circular have been translated from peso amounts solely for the convenience of the reader. Unless otherwise indicated, the exchange rate used in converting pesos into U.S. dollars for amounts derived from the balance sheet and cash flow statement as of June 30, 2013 and 2012 was determined by reference to the period end exchange rate of Ps. 13.0235 and Ps. 13.6530 per U.S. dollar, respectively. Unless otherwise indicated, the exchange rate used in converting pesos into U.S. dollars for amounts derived from the income statement for the six months ended June 30, 2013 and 2012 was determined by reference to the average of the daily exchange rate of Ps.12.5612 and Ps.13.2674 per U.S. dollar, respectively. Unless otherwise indicated, the exchange rate used in converting pesos into U.S. dollars for amounts derived from the balance sheet and cash flow statement as of December 31, 2012 and 2011 was determined by reference to the period end exchange rate of Ps.13.0101 and Ps.13.9787 per U.S. dollar, respectively. Unless otherwise indicated, the exchange rate used in converting pesos into U.S. dollars for amounts derived from the income statement for the years ended December 31, 2012 and 2011 was determined by reference to the average of the daily exchange rate of Ps.13.1685 and Ps.12.4273 per U.S. dollar, respectively. The exchange rates used are those published by the Banco de México in the Official Gazette as the rate for the payment of obligations denominated in non-Mexican currency payable in Mexico. For additional information see "Exchange Rates." No representation is being made that the peso or dollar amounts shown in this Offering Circular could have been or could be converted into U.S. dollars or pesos at the rates shown in this Offering Circular or at any other rate. For additional information regarding financial information presented in this Offering Circular, see "Presentation of Certain Financial and Other Information." The selected financial and other information included herein is qualified in its entirety and should be read together with the other sections of this Offering Circular and the financial statements included herein and their related notes.
45 The following tables present selected consolidated financial and other information of Azteca as of and for the periods indicated: Six months ended Year ended June 30 December 31 2013 2013 2012 2012 2012 2011 2010 (IFRS (IFRS (MFRS Unaudited) Audited) Audited) ($) (Ps.) (Ps.) ($) (Ps.) (Ps.) (Ps.) (in millions, except as otherwise indicated) Income Statement: Revenues ...... 416.8 5,236 5,745 954.6 12,570 12,199 11,554 Costs of programming, production and broadcasting ...... 240.6 3,022 3,205 499.4 6,577 6,056 5,646 Selling and administrative expenses...... 60.0 754 724 114.7 1,510 1,466 1,185 Depreciation and amortization...... 23.2 292 269 42.2 556 509 528 Other expenses, net (1) ...... 16.6 209 152 25.2 332 289 - Operating income ...... 76.3 959 1,395 273.0 3,595 3,879 4,196 Other expenses, net (1) ...... ------621 Share of profit from equity accounted investments...... (0.7) (9) 1 2.7 36 57 - Comprehensive gain or loss on financing...... (36.5) (459) (500) (54.3) (715) (1,206) (768) Income before taxes on earnings ...... 39.1 491 896 221.4 2,916 2,730 2,807 Taxes on earnings ...... (34.4) (432) (425) (47.0) (619) (548) (489) Net income ...... 4.7 59 471 174.4 2,297 2,182 2,318
Balance Sheet: Current Assets: Cash and cash equivalents...... 464.6 6,051 7,764 495.5 6,446 8,318 - Trade and other receivables ...... 432.5 5,633 5,327 409.8 5,331 5,970 - Performance rights...... 170.8 2,225 1,990 139.1 1,810 1,601 - Other current assets (2) ...... 121.0 1,576 782 97.8 1,272 364 - Total current assets...... 1,189.0 15,485 15,863 1,142.1 14,859 16,253 - Non-current Assets: Trade long-term ...... 37.7 491 1,622 36.9 480 1,432 - Performance rights...... 137.6 1,792 1,367 115.7 1,505 1,328 - Property and equipment, net ...... 261.9 3,411 3,480 266.3 3,465 3,339 - Television concessions, net...... 592.9 7,721 7,721 593.5 7,721 7,721 - Deferred tax assets...... 358.7 4,672 4,286 359.1 4,672 4,286 - Other non-current assets (3) ...... 137.6 1,792 1,211 113.8 1,481 1,022 - Total non-current assets ...... 1,526.4 19,879 19,687 1,485.3 19,324 19,128 - Total assets...... 2,715.4 35,364 35,550 2,627.4 34,183 35,381 - Short-term liabilities Trade and other payables ...... 144.2 1,878 1,897 142.5 1,854 1,492 - Financial debt...... 51.2 667 667 51.3 667 667 - Deferred revenue (4) ...... 466.8 6,079 5,809 378.7 4,927 5,934 - Other short-term liabilities (5)...... 45.7 595 634 39.0 507 632 - Total short-term liabilities...... 707.9 9,219 9,007 611.4 7,955 8,725 - Long-term liabilities Stock exchange certificates...... 328.5 4,278 4,944 354.5 4,612 5,246 - Loans from American Tower Corporation -ATC- ...... 119.8 1,560 1,635 119.8 1,558 1,674 - Medium Term Note Program -MTN-...... 294.5 3,836 4,010 294.0 3,825 4,116 - Deferred revenue (4) ...... 66.9 871 1,856 38.0 494 1,600 - Deferred tax liabilities...... 265.9 3,463 3,106 266.2 3,463 3,106 - Employee benefits ...... 12.7 166 141 12.8 166 141 - Total long-term liabilities...... 1,088.3 14,174 15,692 1,085.2 14,118 15,883 - Total liabilities...... 1,796.2 23,393 24,699 1,696.6 22,073 24,608 - Total stockholders' equity ...... 919.2 11,971 10,851 930.8 12,110 10,773 -
Cash Flow: Net cash from/(used) in: Operating activities...... 74.5 970 928 138.1 1,797 3,007 - Investing activities (6) ...... (33.9) (441) (495) (80.6) (1,049) (586) - Financing activities...... (70.9) (924) (987) (137.9) (1,794) 895 -
46 Twelve months ended Year ended June 30(7) December 31 2013 2013 2012 2012 2012 2011 (IFRS Unaudited) (IFRS Audited) ($)(8) (Ps.) (Ps.) ($) (Ps.) (Ps.)
Other Information: EBITDA (9) ...... 322.0 4,128 4,815 340.4 4,483 4,677 Total debt (10) ...... 799.5 10,341 11,256 819.5 10,662 11,703 Net debt (11) ...... 334.9 4,290 3,492 324.1 4,216 3,385 Interest expense ...... 74.0 949 1,013 74.0 974 931 Total debt / EBITDA...... - 2.5 2.3 - 2.4 2.5 Net debt / EBITDA ...... - 1.0 0.7 - 0.9 0.7 EBITDA / interest expense...... - 4.3 4.8 - 4.6 5.0
Reconciliation of EBITDA: Operating income ...... 246.5 3,160 3,951 273.0 3,595 3,879 (+) Depreciation and amortization ...... 45.2 579 529 42.2 556 509 (+) Other expenses, net ...... 30.3 389 335 25.2 332 289 EBITDA...... 322.0 4,128 4,815 340.4 4,483 4,677
______(1) Under MFRS, the line item "other expenses, net" is not included in the calculation of operating income, whereas under IFRS it is included. (2) Amounts listed for "other current assets" are the sum of the following line items on Azteca's balance sheet: (i) current tax assets, (ii) related parties, (iii) other financial assets, and (iv) inventories. (3) Amounts listed for "other non-current assets" are the sum of the following line items on Azteca's balance sheet: (i) other intangible assets, and (ii) investments accounted for using the equity method and other. (4) Figures included herein correspond to advertising advances. See "Management's OverviewCritical Accounting Policies and EstimatesCritical Accounting PoliciesRecognition of Revenue" and "Management's OverviewAdvertising Advances." (5) Amounts listed for "other short-term liabilities" are the sum of the following line items on Azteca's balance sheet: (i) performance rights, (ii) related parties, and (iii) current tax liabilities. (6) Includes net cash used for the acquisition of property, furniture and equipment as of June 30, 2013 and 2012, and December 31, 2012 and 2011, of Ps. 152 million ($11.7 million), Ps. 290 million, Ps.562 million ($43.2 million) and Ps. 518 million, respectively. (7) Figures as of and for the twelve months ended June 30, 2013 and 2012 have been derived from Azteca's internal unaudited financial data. (8) The exchange rate used in converting pesos into U.S. dollars for amounts derived from the income statement for the twelve months ended June 30, 2013 and the balance sheet as of June 30, 2013 included herein was determined by reference to the average of the daily exchange rate of Ps.12.8181 per U.S. dollar and Ps.13.0235 per U.S. dollar, respectively, except for "total debt" and "net debt," which amounts includes the face value of the Series I Notes ($300 million). The exchange rates used are those published by the Banco de México in the Official Gazette as the rate for the payment of obligations denominated in non-Mexican currency payable in Mexico. (9) EBITDA is provided for information purposes only and should not be considered in isolation, or as a substitute for net income, as a measure of operating performance, as a substitute for cash flows from operations or as a measure of liquidity. Azteca calculates EBITDA by adding depreciation and amortization to operating income. (10) Amounts listed for "total debt" in U.S. dollars are the sum of (a) the following line items on Azteca's balance sheet: (i) financial debt, (ii) stock exchange certificates and (iii) loans from American Tower Corporation -ATC-, and (b) the face value in U.S. dollars of the Series I Notes ($300 million). Amounts listed for "total debt" in pesos are the sum of the following line items on Azteca's balance sheet: (i) financial debt, (ii) stock exchange certificates, (iii) loans from American Tower Corporation ("ATC"), and (iv) Medium Term Note Program ("MTN"). (11) Amounts listed for "net debt" are equal to the result of netting total debt (see footnote 10 above) with the cash and cash equivalents on Azteca's balance sheet.
47 Management's Overview Critical Accounting Policies and Estimates
Azteca's critical accounting policies and estimates are described in detail in the notes to its financial statements (see Note 6 to the consolidated financial statements as of and for the years ended December 31, 2012 and 2011).
Critical Accounting Policies
Azteca believes that the following are some of the most critical accounting policies applied in the preparation of its consolidated financial statements.
Adoption of IFRS Beginning January 1, 2012, Azteca adopted IFRS for the preparation of its financial statements, to comply with the regulations established by the CNBV. Accordingly, Azteca's consolidated financial statements as of and for the years ended December 31, 2012 and 2011 were its first annual financial statements prepared in accordance with IFRS. The use of the IFRS has an impact on Azteca's critical accounting policies and estimates.
Azteca's transition date to IFRS was January 1, 2011, and therefore, the year ended December 31, 2011 was the comparative period established by IFRS 1, First Time Adoption of International Financial Reporting Standards. In accordance with IFRS 1, Azteca has applied applicable mandatory exceptions and certain optional exemptions to the retroactive application of IFRS to the financial statements prepared in accordance with MFRS (see "Presentation of Certain Financial and Other Information" and Note 27 to the audited consolidated financial statements as of and for the years ended December 31, 2012 and 2011). As a result, figures as of and for the year ended December 31, 2011 included in Azteca's consolidated financial statements as of and for the years ended December 31, 2012 and 2011, have been modified from those included in the consolidated financial statements as of and for the year ended December 31, 2011 and 2010, to reflect the corresponding results.
Recognition of Revenue Azteca's revenue is derived primarily from the sale of advertising time at the national and local levels minus sales commissions.
Most advertising agreements are entered into during the last quarter of each year for commercials to be broadcasted in the next year. Upon signing (or tacit acceptance by the clients, as the case may be) of the advertising agreements, Azteca records the cash or other assets, as the case may be, received as advertising advances (see "The BusinessDescription of the BusinessTelevision Advertising Sales" and "Results of OperationsAdvertising Advances") as an asset in its balance sheet, and its obligation to broadcast the advertisement as deferred revenue in its balance sheet. Advertising advances are non-monetary liabilities, as they represent Azteca's obligation to provide services in the future.
The advertising advances registered in the balance sheet as deferred revenue at the end of each year, are recognized as revenue in the income statement for the following year, only when, and to the extent that, the commercials are broadcasted.
Azteca maintains reserves for doubtful accounts that are the result of clients' inability to make the required payments. Each client is analyzed individually. If the financial condition of Azteca's clients worsens, thus affecting their ability to make payments, additional estimates may be required.
For the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, approximately 66%, 63%, and 38%, respectively, of Azteca's net income, was attributable to advertising advances made before the relevant year.
Broadcast Rights The cost of broadcast rights is amortized in different ways, depending on the license period, the use of the programs, and management's estimate of revenues that will be re-obtained by each on-air broadcast of the programs.
48 The cost of acquired broadcast rights is amortized as the program and events are aired, and in advance when the rights pertain to multiple broadcasts. Until August 2011, the costs of internally produced contents, including programming of reality shows, were amortized in their entirety when the programs first aired, except in the case of the costs of soap operas, which were amortized as follows: (a) 70% when the soap opera was aired for the first time, (b) 20% when it was aired in the United States or within a maximum six-month period, and (c) 10% when it was sold to other countries. Since September 2011, broadcast rights for internally produced contents are amortized in their entirety as they are broadcasted, except in the case of soap operas, which are amortized 90% when they air in Mexico and the remaining 10% when they are sold in other countries, and specials, which are amortized 80% when they air in Mexico and 20% when they are sold in the United States. See "The BusinessDescription of the Business Principal Business, Distribution Channels."
Intangible Assets Initial recognition. The costs attributed directly to the development phase of a project are recorded as intangible assets, to the extent that they meet the following requirements for recognition:
the costs can be measured reliably;
the project is technically and commercially viable;
there are sufficient resources to complete the project;
the intangible asset can be used or sold; and
the intangible asset is likely to produce future economic benefits.
Development costs that do not meet these criteria for capitalization are recorded as costs of programming, production and broadcasting as they are incurred.
Costs directly attributable to the development phase include employee costs incurred during software development, in addition to the appropriate percentage of overhead expenses and the cost of loans.
Subsequent calculations. Intangible assets with a definite life are amortized over the course of the period in which future economic benefits are expected to be obtained, using the straight-line method. The residual value and the estimated useful life are reviewed annually. Intangible assets with an undefined shelf life are not amortized, given that it is not possible to specify when future economic benefits will end. These assets are subject to evaluation for potential impairment on an annual basis or earlier if circumstances warrant it.
Deferred Taxes As part of the process of preparing the consolidated financial statements, both the assessed and deferred income tax, and the single-rate corporate tax, anticipated or deferred, need to be determined. This process is conducted by applying the relevant tax rate to all the time differences between the accounting and tax balances of assets and liabilities expected to be materialized in the future. These differences produce deferred tax assets and liabilities that are included in the consolidated balance sheet. Azteca must then determine the possibility that its deferred tax assets may be recovered from future taxable income and, to the extent recovery is not deemed possible, establish a valuation reserve. As a valuation reserve is established or increased during a period, an expenditure within the reserve for deferred tax income must be included in the income statement.
Contingent Liabilities Contingent liabilities may not evolve as expected. Therefore, they are subject to constant assessment in order to determine the likelihood of an actual future expense. If it is likely that resources will be spent on an item treated as a contingent liability, the corresponding provision must be recorded in the financial statements for the period in which the change in likelihood of occurrence has occurred.
Azteca is a party in various legal proceedings and lawsuits during the normal course of its operations. Based on the legal advice that Azteca has received from its legal counsel, as well as from additional information,
49 Azteca has not identified any provision in its financial statements as a result of the aforementioned legal proceedings.
Effects of the Devaluation of the Peso and Inflation General Information. Inflation for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011 was 4.1%, 3.6% and 3.8%, respectively.
In 2011, the peso depreciated by 13.1% with respect to the U.S. dollar. In 2012, the peso appreciated by 6.9% with respect to the U.S. dollar. As of June 30, 2013, the peso depreciated by 0.1% with respect to the U.S. dollar.
Operating Costs in U.S. Dollars. Azteca has significant operating costs in U.S. dollars, attributable largely to the cost of purchased programming and the rental of satellite transponder capabilities, which for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, accounted for approximately 18%, 21%, and 19%, respectively, of Azteca's total costs and expenses.
Comprehensive gain or loss on financing. Azteca registers a foreign exchange gain or loss on its monetary assets and liabilities denominated in U.S. dollars when the peso appreciates or depreciates in relation to the U.S. dollar. As of June 30, 2013 and December 31, 2012 and 2011, Azteca had approximately $430 million, $430 million and $435 million, respectively, of monetary liabilities denominated in U.S. dollars, which accounted for approximately 52%, 50% and 49%, respectively, of its total debt. See note 18 to the consolidated financial statements as of and for the years ended December 31, 2012 and 2011.
Azteca's interest income is positively affected by inflation, as Azteca receives higher returns on its temporary investments, which are primarily short-term fixed deposits in pesos at Mexican banks.
Other Sales Advertising barter arrangements. Advertising barter arrangements (see "The BusinessDescription of the BusinessTelevision Advertising Sales") are accounted for in the same way as other advertising advances, and the amounts owed to Azteca are determined based on the fair market value of the goods, services, or other assets received by Azteca. For the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, revenue from advertising barter arrangements represented Ps.84 million, Ps.314 million, and Ps.397 million, respectively, which represented approximately 2% of Azteca's net sales for the same periods.
Infomercials, Shared-Risk Advertisements and Integrated Advertising. Azteca sells part of the unsold advertising time to infomercial producers and shared-risk advertisers (see "The BusinessDescription of the BusinessTelevision Advertising Sales"). In the case of infomercials, Azteca charges a fee for the advertisement air time but does not participate in the proceeds of the sale of the products shown during the infomercial; whereas in the case of shared-risk advertising, Azteca charges no (or a minimum) advertising fee, but instead receives a percentage of the gross sales of the product or products offered occurred within a specific period after the advertisement is aired. Azteca also receives revenues from "integrated advertising," which consists in the exhibition of products during the transmission of internally produced contents.
Infomercials, shared-risk advertisements and integrated advertising accounted, on an aggregate basis, for approximately 16%, 21% and 19% of Azteca's net income for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, respectively.
Seasonality of Sales Azteca's television broadcasting operations are seasonal. Advertising revenues, which are accrued when the advertising airs, are usually higher in the fourth quarter due to the high level of advertising that is broadcasted as a result of the Christmas season.
Regularity of Important Broadcast Events Azteca's net income fluctuates as a result of the frequency with which Azteca broadcasts important events. Historically, the broadcasting of important events by Azteca has increased advertising sales during the period in
50 which these were on air. This reflects the larger audiences during the hours that these important events are broadcast and the fact that advertisers pay a premium related to these important broadcast events.
Critical Accounting Estimates
The preparation of its consolidated financial statements requires Azteca to make critical estimates that affect the amount of assets, liabilities, income, and expenditures reported, as well as disclosure related to contingent assets and liabilities. Azteca considers an accounting estimate critical if:
it requires to make assumptions about the information, due to the fact that the relevant information was not available on time or because it included matters that were highly uncertain at the time that it was made; and
there are changes in the estimates or there are different estimates that could have been selected and that would have had a material impact on the financial condition or results of operations.
Azteca makes estimates in order to calculate, for example, internally generated costs of software and development, deferred taxes on earnings, impairment, useful lives of depreciable assets, broadcast rights, business combinations, allowances for doubtful accounts, defined benefit obligations, fair value of financial instruments, and fair value of derivative financial instruments. Azteca continually evaluates its estimates based on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ, perhaps significantly, from these estimates under different assumptions or conditions.
Key Factors Affecting Azteca's Results of Operations
Revenue Generation
Azteca's revenue is mainly generated by its sales of advertising air time and its exports of original programming.
The following chart depicts Azteca's revenue generation breakdown for the six months ended June 30, 2013:
Television Advertising Sales 92%
Television Content Sales 3% Other Sources 5%
Advertising sales accounted for 92%, 93% and 95% of Azteca's consolidated revenues for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, respectively.
Television content sales accounted for 3%, 5% and 2% of Azteca's consolidated revenues for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, respectively.
51 Other sources of revenue for Azteca accounted, on an aggregate basis, for 5%, 2% and 3% of Azteca's consolidated revenues for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, respectively. See "The BusinessDescription of the BusinessOther Operations"
Key Factors Affecting Azteca's Revenue Generation
Key factors affecting Azteca's revenue generation include content quality and programming decisions and strategies. High-quality contents combined with effective programming strategies generally translate into higher ratings and therefore, increased revenue generation. Conversely, if Azteca's television contents cease to be widely accepted by audiences or are not continuously replenished with popular content, Azteca's revenues could be adversely affected. In addition, Azteca's business has experienced and is expected to continue to experience seasonality due to, among other things, seasonal advertising patterns and seasonal influences on people's viewing, reading, attendance and listening habits. Azteca typically recognizes a disproportionately large percentage of its revenue from advertising sales in the fourth quarter because of the high level of advertising during the holiday season.
Azteca's revenue generation is also affected by infrequently recurring major broadcast events, such as the FIFA World Cup, the UEFA Champions League, the Mexican national soccer team games and boxing world championships, major political events such as elections and other extraordinary events. These events tend to have a positive effect on Azteca's revenue generation during the period in which they occur, to the extent that Azteca is able to acquire the relevant broadcast rights. On the other hand, the lack of special events in a given period or the inability to acquire the relevant broadcast rights may translate into decreased revenue generation. In order to increase revenue generation during periods where there are no major special events or when Azteca is not able to avail itself of the relevant broadcast rights, Azteca manages programming strategies by introducing alternative new high-quality content, including telenovelas, series, blockbuster movies and reality shows.
Azteca's revenues are affected by competition for advertising revenues with other television broadcasters and other advertising media. Azteca's principal competitor in Mexico is Televisa. Azteca's revenues are also affected by changes in clients' advertising expenditures related to economic prospects of advertisers or industries, increased competition for the leisure time of audiences and audience fragmentation, the growing use of new technologies, or the economy in general. Any of these or other factors may cause advertisers to alter their spending priorities. In addition, advertisers' willingness to purchase advertising from Azteca may be adversely affected by lower audience ratings. Advertising sales and rates also are dependent on audience measurement and could be affected by changes in audience measurement methodologies.
Cost of Operations
For the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, cost of programming, production and broadcasting accounted for 80%, 81% and 81% of Azteca's consolidated total operating costs and expenses.
Azteca's most significant variable operating costs relate to the production and acquisition of content.
52 The following chart depicts Azteca's cost of programming, production and broadcasting for the six months ended June 30, 2013:
Production Costs 78%
Broadcasting Costs 1%
Content Purchases 21%
Costs related to content production accounted for 78%, 74% and 77% of Azteca's consolidated total costs of programming, production and broadcasting for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, respectively.
Costs related to acquisition content accounted for 21%, 25% and 22% of Azteca's consolidated total cost of programming, production and broadcasting for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, respectively.
Costs related to broadcasting accounted for 1% of Azteca's consolidated total cost of programming, production and broadcasting in each of the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011.
Key Factors Affecting Azteca's Costs of Operations
The cost of producing original programming varies considerably depending on the type of program, and is generally more expensive than acquiring broadcast rights to externally produced programming. In addition, producing telenovelas is more expensive than other types of programming. Increased competition for talent translates into increased contracting costs. Azteca manages the impact of these production costs on its operating margin mainly by increasing sales efforts to ensure sufficient advertising revenue for costly productions and reducing its production costs on other productions.
With respect to content purchased from other producers, even if Azteca is not outbid by its competitors for the rights to new, popular programming or in connection with the renewal of popular programming currently licensed by Azteca, intense competition for popular programming licensed from third parties puts pressure on license prices which increases costs.
53 Results of Operations
The following table sets forth, for the periods indicated, results of operations data for Azteca as a percentage of Azteca's revenues.
Six months ended Year ended June 30 December 31 2013 2012 2012 2011 (IFRS Unaudited) (IFRS Audited)
Revenues ...... 100% 100% 100% 100% Costs of programming, production and broadcasting...... 58% 56% 52% 50% Selling and administrative expenses...... 14% 13% 12% 12% Total costs and expenses ...... 76% 71% 60% 60% Depreciation and amortization...... 6% 5% 4% 4% Operating income...... 18% 24% 29% 32%
Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012
Revenues
Revenues for the six months ended June 30, 2013 decreased by 9% or Ps.509 million ($16.2 million), to Ps.5,236 million ($416.8 million) from Ps.5,745 million ($433.0 million) for the same period in 2012. The decrease was mainly due to the fact that 2012 was an election year in Mexico (where Enrique Peña Nieto was elected President for a six year term), and governmental advertising for Mexican presidential elections resulted in higher revenues for the six months ended June 30, 2012. In line with historical tendencies in Mexico, Azteca believes that revenues derived from political advertising will increase during the rest of 2013 and subsequent periods, as the government approves official advertising expenses and the private sector gains confidence in future political stability.
Costs of programming, production and broadcasting
Costs of programming, production and broadcasting for the six months ended June 30, 2013 decreased by 6% or Ps.183 million ($1.0 million), to Ps.3,022 million ($240.6 million) from Ps.3,205 million ($241.6 million) for the same period in 2012. This reduction in costs was achieved by the use of less expensive programs and contents, as a result of an effective cost efficiency strategy implemented by Azteca to face a period with an expected decrease in revenues.
Selling and administrative expenses
Selling and administrative expenses for the six months ended June 30, 2013 increased by 4% or Ps.30 million ($5.4 million), to Ps.754 million ($60.0 million) from Ps.724 million ($54.6 million) for the same period in 2012. This increase was mainly due to an increase in payroll after March 31, 2012, required to cover special events such as presidential elections in Mexico, the change of Pope and the Olympic Games, which continued through the beginning of 2013.
Depreciation and amortization
Depreciation and amortization for the six months ended June 30, 2013 increased by 9% or Ps.23 million ($2.9 million), to Ps.292 million ($23.2 million) from Ps.269 million ($20.3 million) for the same period in 2012, due largely to acquisitions of equipment necessary to migrate from analog to high-definition technology during 2012 and the construction of 15 television production studies that were capitalized in May 2012.
Other expenses, net
Other expenses, net for the six months ended June 30, 2013 increased by 38% or Ps.57 million ($5.1 million), to Ps.209 million ($16.6 million) from Ps.152 million ($11.5 million) for the same period in 2012, due
54 primarily to the sale of the franchise of the first division soccer team, Toros Neza, at a sale price lower than the acquisition price.
Operating income
Azteca's operating income for the six months ended June 30, 2013 decreased by 31% or Ps.436 million ($28.8 million), to Ps.959 million ($76.3 million) from Ps.1,395 million ($105.1 million) for the same period in 2012.
Comprehensive gain or loss on financing
Comprehensive financing loss for the six months ended June 30, 2013 decreased by 8% or Ps.41 million ($1.2 million), to a Ps.459 million ($36.5 million) loss from a Ps.500 million ($37.7 million) loss for the same period in 2012. This change was mainly due to a Ps.24 million ($0.1 million) decrease in interest paid and a Ps.62 million ($4.4 million) decrease in other financial expenses which was offset by a Ps.33 million ($2.1 million) decrease in interest earned due to a period-to-period decrease in cash and cash equivalents, a Ps.12 million ($1.0 million) increase in net foreign exchange losses derived from a net liability position in U.S. dollars and a depreciation of the peso against the U.S. dollar at the end of June 2013 (see "Critical Accounting Policies and EstimatesCritical Accounting PoliciesEffects of the Devaluation of the Peso and Inflation").
Income before taxes on earnings
Income before taxes on earnings for the six months ended June 30, 2013 decreased by 45% or Ps.405 million ($28.4 million), to Ps.491 million ($39.1 million) from Ps.896 million ($67.5 million) for the same period in 2012.
Taxes on earnings
Taxes on earnings for the six months ended June 30, 2013, increased by 2% or Ps.7 million ($2.4 million), to Ps.432 million ($34.4 million) from Ps.425 million ($32.0 million) for the same period in 2012. See "Critical Accounting Policies and EstimatedCritical Accounting PoliciesDeferred Taxes."
Net income
Azteca's net income for the six months ended June 30, 2013 decreased by 87% or Ps.412 million ($30.8 million), to Ps.59 million ($4.7 million) from Ps.471 million ($35.5 million) for the same period in 2012.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenues
Revenues for the year ended December 31, 2012 increased by 3.0% or Ps.371 million ($27.1 million), to Ps.12,570 million ($954.6 million) from Ps.12,199 million ($981.6 million) for 2011. The increase was due mainly to the fact that 2012 was an election year in Mexico (where Enrique Peña Nieto was elected President for a six year term), and governmental advertising for Mexican presidential elections resulted in higher than usual revenues for the year ended December 31, 2012. To a lesser extent, major sport events such as the Olympic Games in London, a number of soccer tournaments and new entertainment content ("La Isla" and "La Teniente"), also contributed to this increase in revenues in 2012.
Costs of programming, production and broadcasting
Costs of programming, production and broadcasting for the year ended December 31, 2012 increased by 8.6% or Ps.521 million ($12.1 million), to Ps.6,577 million ($499.4 million) from Ps.6,056 million ($487.3 million) for 2011. The increase was mainly due to the incurrence of significant costs in 2012 in connection with broadcast rights for the abovementioned sports events, as well as production costs for the coverage of those events and the presidential elections in Mexico.
55 Selling and administrative expenses
Selling and administrative expenses for the year ended December 31, 2012 increased by 2.9% or Ps.44 million ($3.3 million), to Ps.1,510 million ($114.7 million) from Ps.1,466 million ($118.0 million) for the year ended December 31, 2011. This increase was mainly due to an increase in payroll during 2012 required to cover a number of events including, among others, presidential elections in Mexico and the Olympic Games in London. In addition, the coverage of many of the aforementioned events increased related expenses, such as travel expenses. Administrative costs incurred for the adoption of IFRS also contributed to this increase in selling and administrative expenses.
Depreciation and amortization
Depreciation and amortization for the year ended December 31, 2012 increased by 9.2% or Ps.47 million ($1.3 million), to Ps.556 million ($42.2 million) from Ps.509 million ($41.0 million) for 2011, due largely to the acquisition of equipment necessary to migrate from analog to high-definition technology during 2012 and to the construction of 15 television production studies that were capitalized in May 2012.
Other expenses, net
Other expenses, net for the year ended December 31, 2012 increased by 14.8% or Ps.43 million ($2 million), to Ps.332 million ($25.2 million) from Ps.289 million ($23.3 million) for 2011, primarily due to impairment losses recognized on transfer rights (cartas-pase) of players of the Monarcas Morelia squad as a result of differences between the nominal value of the transfer right and the actual market price of the players.
Operating income
Azteca's operating income for the year ended December 31, 2012 decreased by 7.3% or Ps.284 million ($39.1 million), to Ps.3,595 million ($273.5 million) from Ps.3,879 million ($312.1 million) for 2011.
Comprehensive gain or loss on financing
Comprehensive loss on financing for the year ended December 31, 2012 decreased by 41% or Ps.491 million ($42.7 million), to a Ps.715 million ($54.3 million) loss from a Ps.1,206 million ($97.0 million) loss for 2011. This change was primarily due to a foreign exchange gain of Ps.132 million ($10.0 million) in 2012, compared to a foreign exchange loss of Ps.328 million ($26.4 million) in 2011, derived from a net liability position in U.S. dollars and an appreciation of the peso against the dollar at the end of 2012 (see "Critical Accounting Policies and EstimatesCritical Accounting PoliciesEffects of the Devaluation of the Peso and Inflation"). The change was also attributable, to a lesser extent, to a positive period-to-period net interest result due to increased cash and cash equivalents and other financial assets through most part of 2012 compared to 2011.
Income before taxes on earnings
Income before taxes on earnings for the year ended December 31, 2012 increased by 6.8% or Ps.186 million ($1.7 million), to Ps.2,916 million ($221.4 million) from Ps.2,730 million ($219.7 million) for 2011.
Taxes on earnings
Taxes on earnings for the year ended December 31, 2012 increased by 13% or Ps.71 million ($2.9 million), to Ps.619 million ($47.0 million) from Ps.548 million ($44.1 million) for the year ended December 31, 2011.
Net income
Azteca's net income for the year ended December 31, 2012 increased by 5.3% or Ps.115 million ($1.2 million), to Ps.2,297 million ($174.4 million) from Ps.2,182 million ($175.6 million) for 2011.
56 Liquidity and Capital Resources
Factors that may influence Azteca's liquidity and capital resources as discussed below include: Azteca's ability to generate sufficient free cash flow;
the ability of Azteca's subsidiaries to make distributions;
factors that affect the results of operations of Azteca, including general economic conditions, demand for commercial advertising, the competitive environment, the relative popularity of Azteca's programs, demographic changes in Azteca's market areas and regulation; and
factors that affect Azteca's access to bank financing and capital markets, including interest rate fluctuations, availability of credit and operational risks of Azteca.
Liquidity
Azteca's principal sources of liquidity include cash and marketable securities on hand, advance sales of advertising time (see "Advertising Advances") and uncommitted sources of short-term financing. Since 2011, Azteca has covered its short-term and medium-term financing requirements through the MTN Programme to which this Offering Circular relates (see "MTN Programme") and the Certificates Programme (see "Certificates Programme"), and its long-term financing requirements through the ATC Long-Term Credit Facility (see "ATC Long-Term Credit Facility"). The following chart sets forth Azteca's generation and application of cash for the periods indicated: Six months ended Year ended June 30 December 31 2013 2013 2012 2012 2012 2012 2011 2011 (IFRS Unaudited) (IFRS Audited) ($) (Ps.) ($) (Ps.) ($) (Ps.) ($) (Ps.) Net cash provided by (used in): (in millions) Operating activities ...... 74.5 970 68.0 928 138.1 1,797 215.1 3,007 Investing activities...... (33.9) (441) (36.3) (495) (80.6) (1,049) (41.9) (586) Financing activities ...... (70.9) (924) (72.3) (987) (137.9) (1,794) 64.0 895 Cash and cash equivalents at period end...... 464.6 6,051 568.7 7,764 495.5 6,446 595 8,318
Net cash provided by operating activities for the six months ended June 30, 2013 increased by 4.6% or Ps.42 million ($6.5 million), to Ps.970 million ($74.5 million) from Ps.928 million ($68.0 million) for the same period in 2012. This increase was mainly due to the combination of an increase in advertising advances (most of which, although usually received during the last quarter of each year, were received during the first half of 2013 as a result of the general decrease in commercial activity that usually follows presidential elections). Net cash used in investing activities for the six months ended June 30, 2013 decreased by 10.9% or Ps.54 million ($2.4 million), to Ps.441 million ($33.9 million) from Ps.495 million ($36.3 million) for the same period in 2012. This decrease was mainly due to expenditures made during 2012 for the construction of 15 television production studios during May 2012 and, to a lesser extent, to less acquisitions of equipment necessary to migrate from analog to high-definition technology in 2013. Net cash used in financing activities for the six months ended June 30, 2013 decreased by 6.4% or Ps.63 million ($1.4 million), to Ps.924 million ($70.9 million) from Ps.987 million ($72.3 million) for the same period in 2012. This decrease was mainly due to a decrease in interest payments for the six months ended June 30, 2013, as a result of principal amortization payments made under the stock exchange certificates during 2012 (see "Stock Exchange Certificates Programme"). Net cash provided by operating activities for the year ended December 31, 2012 decreased by 40% or Ps.1,210 million ($77.0 million), to Ps.1,797 million ($138.1 million) from Ps.3,007 million ($215.1 million) for 2011. This decrease was mainly due to the combination of a decrease in advertising advances (which are usually received during the last quarter of the year) as a result of the general decrease in commercial activity that usually
57 follows presidential elections, and an increase in total costs and expenses related to, among other, broadcasting rights, production costs and increases in payroll, incurred during 2012 to cover special events such as the presidential elections and the Olympic Games. Net cash used in investing activities for the year ended December 31, 2012 increased by 79% or Ps.463 million ($38.7 million), to Ps.1,049 million ($80.6 million) from Ps.586 million ($41.9 million) for 2011. This increase was mainly due to the acquisition of equipment necessary to migrate from analog to high-definition technology, the construction of 15 television production studios during 2012 and the development of the Fiber Optic Project in Colombia (see "The BusinessDescription of the BusinessOther OperationsColombia"). Net cash from financing activities for the year ended December 31, 2012 decreased to a Ps.1,794 million ($137.9 million) net cash use from a Ps.895 million ($64.0 million) generation for 2011. This change was mainly due to a decrease in proceeds from borrowings as no additional indebtedness was incurred during 2012 whereas in 2011 Azteca borrowed $300 million in Series I Notes (see "MTN Programme"), and repaid $147.8 million of existing indebtedness with the proceeds of such borrowing. For more detail, see "Consolidated Statements of Cash Flows" set forth in Azteca's consolidated financial statements. Advertising Advances
Under Azteca's Azteca Plan, advertisers generally are required to pay their advertising commitment in full within four months of the date they sign an advertising contract. Azteca's Mexican Plan, on the other hand, generally allows advertisers to pay for advertising by making a cash deposit ranging from 10% to 20% of their advertising commitment, with the balance payable in instalments over the term of the advertising contract, typically one year. Advertising rates are generally lower under the Azteca Plan than under the Mexican Plan. Since pre-sales of advertising time are generally made in the last quarter of the year, Azteca's cash and marketable securities are normally at their highest level in December. Generally, as the proceeds generated from pre-sales of advertising time are depleted (together with other sources of cash flow), Azteca relies upon sources of short-term financing, which are subsequently repaid, typically in the fourth quarter of a calendar year with the proceeds from the pre-sales of advertising time for the following year. As of December 31, 2012, Azteca had generated Ps.4,927 million ($378.7 million) in pre-sales of advertising time to be aired in 2013, of which 50% were made under the Azteca Plan, and the remainder under the Mexican Plan. Indebtedness
The following chart sets forth Azteca's indebtedness as of June 30, 2013: Azteca Indebtedness as of June 30, 2013 (1) Description ($) (Ps.) Rate Maturity (in millions) Stock Exchange Certificates 379.7 4,945 TIIE(2) +145bps Nov-16-2020 Series I Notes 300.0 3,836(3) 7.5% May-25-2018 ATC Long-Term Credit Facility 119.8 1,560 13.1 US% Feb-11-2069 Total Indebtedness 799.5 10,341 ______(1) The exchange rate used in converting pesos into U.S. dollars for amounts derived from the balance sheet as of June 30, 2013 was determined by reference to the exchange rate for the end of such period of Ps.13.0235 per U.S. dollar, except for the Series I Notes, which are presented at face value ($300.0 million), and Total Indebtedness, which includes the face value of the Series I Notes ($300.0 million).
(2) TIIE is the 28-day Mexican interbank rate, or Tasa de Interés Interbancario.
(3) The aggregate principal amount of the Series I Notes is $300.0 million. In accordance with IFRS, Azteca's balance sheet includes Ps.3,836 million ($294.5 million) for the Series I Notes, which is the principal amount, net of unamortized financing costs of $5.5 million.
58 Azteca's total debt as of June 30, 2013 matures on the dates set forth below:
Total Azteca Indebtedness as of June 30, 2013 (1) Date Due ($) (Ps.) (in millions) 2013 25.0 326 2014 50.1 652 2015 50.1 652 2016 50.1 652 2017 50.1 652 2018 356.2 4,569 2019 51.2 667 2020 46.9 611 2069 119.8 1,560 Total 799.5 10,341
(1) The exchange rate used in converting pesos into U.S. dollars for amounts derived from the balance sheet as of June 30, 2013 was determined by reference to the exchange rate for the end of such period of Ps. 13.0235 per U.S. Dollar, except for Total Azteca Indebtedness due 2018, which amount reflects the face value of the Series I Notes ($300.0 million).
MTN Programme
On June 1, 2005, Azteca established the Programme. The initial amount of the Programme was $200 million and was increased to $500 million in May 2011. The current amount of the Programme is $1 billion.
According to the terms of the Programme, Azteca may issue additional Notes from time to time, provided that the aggregate principal amount of Notes outstanding at any time under the Programme will not exceed $1 billion (or its equivalent in other currencies calculated as described in the Programme Agreement), with due dates varying from 365 days to 10 years.
As of June 30, 2013, Azteca had issued an aggregate principal amount of $300 million 7.5% senior unsecured Notes due 2018 (the "Series I Notes") under the Programme, which are currently outstanding. The Series I Notes accrue interest at a 7.5% per annum rate, which is payable on May 25 and November 25 of each year until the maturity date. Principal on the Series I Notes is payable in one full payment on the maturity date (May 25, 2018). Pursuant to the terms and conditions of the Series I Notes, Azteca shall comply with certain restrictive covenants, among others, in connection with: (i) limitations with respect to the incurrence of additional indebtedness, (ii) limitations on guarantees, (iii) limitations on certain restricted payments, (iv) limitations on the sale of assets or capital stock of its subsidiaries, (v) limitations on the establishment of liens or other encumbrances on its assets, (vi) limitations on mergers, spin-offs or the transfer of all or a substantial part of its assets, and (vii) limitations on transactions with related parties. In addition, the terms of the Series I Notes prevent Azteca from engaging in business activities that are not similar or complementary to those conducted before the issuance.
ATC Long-Term Credit Facility
In February 2000, Azteca entered into a credit agreement with a Mexican subsidiary of ATC (the "ATC Long-Term Credit Facility"), pursuant to which Azteca was granted two long-term loans for an aggregate amount of $119.8 million.
The ATC Long-Term Credit Facility consists of a $91.8 million unsecured loan and a $28.0 million loan secured by certain Azteca properties, including five Azteca Novelas television studios and two local television stations (Cancun and Monterrey). Both facilities accrue interest at a 13.109% per year and are guaranteed by certain subsidiaries of Azteca.
The unsecured loan is due in 2020 and will automatically be extended for an additional 50-year term to the extent that the ATC Towers Lease remains in effect (see "The BusinessPropertyTransmission Sites"). Azteca may only prepay the loan after 2020, in whole or in part, and with no applicable penalty. The loan is subject to a
59 total or partial mandatory prepayment in the event Azteca terminates all or some of the leases under the ATC Towers Lease.
The secured loan has a one year maturity that can be extended by Azteca for additional one year terms. In the event Azteca chooses not to extend the maturity date at any time within the first 20 years of the loan, the loan becomes due and payable and the following penalties apply on the outstanding principal: (i) a 35% penalty if the loan's final maturity date occurs within the first ten years of the loan term, (ii) a 17.5% penalty if the loan's final maturity date occurs within years 11 through 15 of the loan term and (iii) a 10% penalty if the loan's final maturity date occurs within years 16 through 20 of the loan term.
Stock Exchange Certificates Programme
Azteca established a stock exchange certificates (certificados bursátiles fiduciarios or "CEBURES") programme (the "Certificates Programme") with Banco Invex, SA, as Trustee, which allowed Azteca to structure trusts backed by a variety of assets and issue stock exchange certificates thereunder for up to an aggregate principal amount of Ps.6,000 million.
On November 16, 2006, Azteca structured the La Fiduciaria 2006 trust under the Certificates Programme, the underlying assets of which were certain collection rights of Azteca through Banco Invex, S.A. (the "2006 Trust"). Under the 2006 Trust, Azteca issued two tranches of trust certificates for an aggregate principal amount of Ps.6,000 million.
The certificates are due in 2020. Interest thereon is payable monthly at an interest rate equal to TIIE plus 145 bps. Principal is payable monthly, and the first scheduled amortization payment was made on December 2011. As of June 30, 2013, Ps.1,055 million ($81.0 million) in principal had been paid.
Azteca may not issue additional certificates under the Certificates Programme, as the maximum amount authorized thereunder has already been issued.
Capital Expenditures
Capital expenditures for the six months ended June 30, 2013 was Ps.253 million ($19.4 million), and for the years ended December 31, 2012 and 2011 was Ps.926 million ($71.2 million) and Ps.710 million ($50.8 million), respectively. Such capital expenditures were primarily related to the expansion and improvements made to the television production and broadcasting facilities of Azteca (see "The BusinessProperty"). Most of the capital expenditures made by Azteca are payable in U.S. dollars.
Budgeted Capital Expenditures for 2013
Azteca had an approximate Ps.390 million ($29.9 million) budget for capital expenditures as of June 30, 2013, of which Ps.211 million ($16.2 million) have been expended through June 30, 2013, primarily for the maintenance, expansion and improvements on Azteca's television production and broadcasting facilities, and the acquisition of equipment, mainly in connection with the transition from analog to digital technology required by Mexican law (see "The BusinessPropertyTransmission Sites"). Azteca expects to use cash from its operations to fund these capital expenditures. As a result of Azteca's operating strategy, Azteca will not, for the foreseeable future, make major capital expenditures outside the scope of its core television broadcasting business, which would include loans, credit support and capital investments in its affiliates.
60 Contractual and Other Obligations
The following summarises Azteca's contractual obligations as of June 30, 2013, and the effect such obligations are expected to have on its liquidity and cash flows in future periods (dollars in millions): Contractual Obligations Payments due by year Description Total 2013 2014 2015 2016 (Ps.) ($) (Ps.) ($) (Ps.) ($) (Ps.) ($) (Ps.) ($) (in millions) Principal amount of indebtedness 2,282 175.3 326 25.0 652 50.1 652 50.1 652 50.1 Interest payable 2,492 191.3 386 29.6 741 56.9 702 53.9 663 50.9 Satellite transponders 116 8.9 17 1.3 35 2.7 35 2.7 29 2.2 Equipment lease 11 0.7 3 0.2 1 0.1 2 0.2 2 0.2 Exhibition rights 334 25.7 65 5.0 108 8.3 127 9.8 34 2.6 Total 5,235 401.9 797 61.1 1,537 118.1 1,518 116.7 1,380 106.0
61 GOVERNANCE Board of Directors
Azteca's board of directors (the "Board") is comprised of 12 members who are elected for one-year terms by Azteca's annual ordinary shareholders' meeting. The current term of office of each director will expire on April 29, 2014. The address of each director is Periférico Sur 4121, Col. Fuentes del Pedregal, Tlalpan, 14141, Mexico City, Mexico. The following table sets forth the names of Azteca's current directors, their ages as of June 30, 2013 and their positions and year of appointment: Director Name Age Position Since Ricardo B. Salinas Pliego (1)(2) 57 Chairman of the Board/Non-independent 1993 Director/Significant Shareholder Pedro Padilla Longoria (1) 47 Non-independent Director 1993 Guillermo E. Salinas Pliego (2) 53 Non-independent Director 1998 Mario San Román Flores (1) 54 Non-independent Director/Director General 2004 Luis Jorge Echarte Fernández (1) 68 Non-independent Director 1999 Joaquín Arrangoiz Orvañanos (1) 56 Non-independent Director 1998 Francisco X. Borrego Hinojosa Linage (1) 48 Non-independent Director 2004 Francisco Murguía Díaz 73 Independent Director 2004 Ignacio Cobián Villegas 49 Independent Director 2006 Luis Francisco Arteaga González de la Vega 52 Independent Director 2006 Sergio Gutiérrez Muguerza 62 Independent Director 2000 José Ignacio Sánchez Conde 58 Independent Director 2010 ______(1) Alternate directors for these persons are: Carlos Díaz Alonso and Rodrigo Fernández Capdevielle. (2) Ricardo B. Salinas Pliego and Guillermo E. Salinas Pliego are brothers.
The following provides biographical information about the directors of Azteca. Ricardo B. Salinas Pliego. Mr. Salinas Pliego has been Chairman of the Board of Azteca since 1993 and Chairman of the Board of Grupo Elektra since 1993. Mr. Salinas Pliego also serves on the board of directors of numerous other Mexican companies including GSF Telecom Holdings, S.A.P.I. de C.V. ("GSF") the parent company of Iusacell, Azteca Holdings, Universidad CNCI (formerly Grupo Dataflux, a Mexican public company) and Salinas y Rocha. Mr. Salinas Pliego received a degree in accounting from the Instituto Tecnológico de Estudios Superiores de Monterrey and received an MBA from the Freeman School of Business at Tulane University. Pedro Padilla Longoria. Mr. Padilla has served as a director of Azteca since 1993 and was the Chief Executive Officer of Grupo Elektra between 1993 and 2000. Mr. Padilla served as Chief Executive Officer of Azteca from October 2001 to July 2004, and from July 14, 2004 as Chief Executive Officer of Grupo Salinas. Mr. Padilla also serves on the board of directors of Azteca Holdings, Grupo Elektra and GSF. Mr. Padilla received a degree in law from the Universidad Nacional Autónoma de Mexico. Guillermo E. Salinas Pliego. Mr. Salinas has served as director of Azteca since 1998. He also co-founded the Universidad CNCI (formerly Grupo Dataflux, a Mexican public company) and has been its President since 1982. He also sits on the board of directors of Grupo Elektra. Mr. Salinas is a Certified Public Accountant, holding an undergraduate degree in accounting from the Instituto Tecnológico de Estudios Superiores de Monterrey in Monterrey, Mexico.
62 Mario San Román Flores. Mr. San Román has been the Chief Executive Officer of Azteca since July 14, 2004. Mr. San Román previously served as Operations Director of Azteca from 2002 to July 2004, as Marketing Vice President from August 1998 to March 1999, as Director of Azteca 13 from March 1999 to June 2000 and as Director of Channels from June 2000 to 2002. Mr. San Román received a bachelor's degree in communication sciences from the Universidad Iberoamericana. Luis Jorge Echarte Fernández. Mr. Echarte has served as a director of Azteca since November 1999. Prior to joining Azteca as Chief Financial Officer, he was Vice President of Finance and Administration at Grupo Elektra, which he joined in 1994. He is Director of International Relations for Grupo Salinas, Chairman of the Board of Azteca International and Director of the Fundación Azteca America. Mr. Echarte holds undergraduate degrees from Memphis State University and the University of Florida and has completed the Executive Management Program at Stanford University. Joaquín Arrangoiz Orvañanos. Mr. Arrangoiz has served as a director of Azteca since 1998 and as Azteca's Co-Director of Sales since 1993. Mr. Arrangoiz received a degree in administration from Anáhuac University. Francisco X. Borrego Hinojosa Linage. Mr. Borrego has served as the General Counsel and Legal Director of Azteca since August 1993. Mr. Borrego also serves on the board of directors of Azteca Holdings. Mr. Borrego received a degree in law from the Escuela Libre de Derecho. Francisco Murguía Díaz. Mr. Murguía has served as a director of Azteca since April 2004. Mr. Murguía is a leading producer of commercial and short-length films in Latin America, and has served as President of the Mexican Association of Filmmakers, the National Council of Advertising and the Mexican Association of Advertising. Luis Francisco Arteaga González de la Vega. Mr. Arteaga has served as an independent director of the Board since 1999. Mr. Arteaga previously served as Deputy Chief Executive Officer at Bancrecer from 1996 until 1999, as Managing Partner at Somoza, Cortina y Asociados, S.A. de C.V., a securities company, from 1995 until June 1996 and as Deputy Director General of the Banco de México from 1992 until 1995. Mr. Arteaga received a degree in Industrial Engineering from the Universidad Anáhuac and studied for a Diploma in Finance at the Instituto Tecnológico Autónomo de México. Ignacio Cobián Villegas. Mr. Cobián is the founding member and has been Chief Executive Officer of TIMBERMART, S.A., a company specializing in marketing timber products, from 1999 to the present. Mr. Cobián formerly served as founding member and Chief Executive Officer of CORTEZA, S.A. de C.V., a company specialising in producing and marketing timber furniture and other timber products from 1998 to 1999. Mr. Cobián received a bachelor's degree in Business Administration from the Universidad de las Américas and obtained a professional certificate in Business Administration from the University of California in San Diego. Sergio Gutiérrez Muguerza. Mr. Gutiérrez has served as a director of Azteca since April 2000. He has served as Chief Executive Officer of Deacero, S.A., a steel and wire company, since 1981. Mr. Gutiérrez has also served as a director of Alpek, S.A. de C.V., a petrochemical company, and ING Comercial América, an insurance company, since 1997. Mr. Gutiérrez received a degree in Industrial Engineering from Purdue University. José Ignacio Sánchez Conde. Mr. Sánchez Conde is Chief Executive Officer of the lighting company Sánchez Conde Iluminación; he formerly served as Director of Advertising and Marketing for the Grupo CIFRA (Aurrera) from 1979 to 1982, as Chief Executive Officer General of LSI de Mexico, a lighting company, from 1982 to 1991 and as Finance Officer for Grupo ARSACO from 1992 to 2001. He is currently a member of the board of GMD Resorts and the Grupo Mexicano de Desarrollo. Mr. Sánchez Conde has a bachelor's degree in Communication Sciences from the Universidad Anáhuac, with Advertising and Television as his special subject. Board Practices
Azteca's by-laws require at least 25% of the Board to be independent directors who are not employed by or affiliated with Azteca's controlling shareholders. Mr. Sergio Gutiérrez Muguerza, Francisco Murguía Díaz, Ignacio Cobián Villegas, Luis Francisco Arteaga González de la Vega and José Ignacio Sánchez Conde are Azteca's current independent directors. Holders of Azteca's A Shares are entitled to elect at least 60% of Azteca's directors and each holder or group of holders of 10% of Azteca's limited vote capital stock (class D-A shares and class D-L shares, and after conversion, the class L shares) is entitled to appoint one director to the Board.
63 Azteca's by-laws require the Board to maintain committees comprised of at least three directors, a majority of whom must be independent, to cover each of the following matters: related party transactions, capital transactions, audit and compensation. All members of the audit committee must be independent. The audit committee operates independently from any other committee that the Board may decide to form. In addition to any functions granted to it by the Board, Azteca's by-laws and the LMV, it has, among others, the following functions: Opining on all transactions that require Board approval, provided that the value of each transaction under review is equal to or greater than five percent of Azteca's consolidated assets, as reported in the immediately previous quarter. Recommending the appointment of independent experts as and when it is considered appropriate, for their opinion on transactions that require Board approval, provided that the value of each transaction under review is equal to or greater than five percent of Azteca's consolidated assets. Reviewing the financial statements and the internal control and internal audit systems, as well as the work and independence of the external auditors and the work of the Committee itself. Referring to Azteca's Legal Director any legal proceedings of which they have knowledge that may have been initiated against Azteca's employees. Recommending to the Board the appointment, compensation and maintenance of an accounts department, supervising such accounts department and establishing procedures to resolve any disputes between Azteca's Board and its external auditors about the preparation of Azteca's financial statements. Notifying the Board of material irregularities detected relating to the exercise of their functions and, if applicable, of the appropriate corrective action, or recommending the action to be taken. Ensuring that the Chief Executive Officer carries out the resolutions passed at the shareholders' meetings and the Board meetings, in accordance with any instructions provided by such resolutions. Preparing an annual report on its work, to be submitted to the Board and circulated to the Azteca shareholders at the general ordinary shareholders' meeting. The members of the audit committee are Mr. Luis Francisco Arteaga González de la Vega, Ignacio Cobián Villegas and Francisco Murguía Díaz. Oversight
Oversight of management and the conduct and performance of Azteca's business is the responsibility of the audit committee and the third party auditor that conducts Azteca's external audit.
64 Executive Officers
The following table sets forth the names of Azteca's executive officers, their ages as of June 30, 2013 and their positions and year of appointment as an executive officer: Executive Name Age Position Officer Since Ricardo B. Salinas Pliego 57 Chairman 1993 Mario San Román Flores 54 Chief Executive Officer 2004 Carlos Hesles Flores 47 Chief Financial Officer 2002 Luis Ontiveros Sandoval 45 Director of Finance 2000 Rafael Rodríguez Sánchez 37 General Counsel and Legal Director 2013 Joaquín Arrangoiz Orvañanos 56 Co-Director of sales 1997 Carlos Díaz Alonso 47 Director of Sales 2004
The following provides biographical information about Azteca's executive officers. See "Directors" for biographical information on Ricardo B. Salinas Pliego, Joaquín Arrangoiz and Mario San Román. Carlos Hesles Flores. Mr. Hesles has served as Azteca's Chief Financial Officer since 2002. Mr. Hesles received a bachelor's degree in public accounting with a specialization in finance from the Instituto Tecnológico Autónomo de Mexico. Luis Ontiveros Sandoval. Mr. Ontiveros has served as Azteca's Director of Finance since 2000. Prior to that, he worked as an investment banker in Grupo Financiero INVEX and Casa de Bolsa Invelat in Mexico City. Mr. Ontiveros received his accounting degree from Universidad La Salle. He also completed an MBA program at Instituto Panamericano de Alta Dirección de Empresas in Mexico City. Rafael Rodríguez Sánchez. Mr. Rodríguez has served as Azteca's General Counsel since May 1, 2013. From July 2003 until April 2013, he served as legal counsel for corporate, regulatory and special projects at Grupo Iusacell. From December 2000 to July 2003, Mr. Rodríguez was a legal manager for Azteca's Sports, news and entertainment division. Prior to that, he worked in the area of corporate law at PricewaterhouseCoopers in Mexico City. Mr. Rodríguez received his Law degree from the Universidad La Salle. He also completed a seminar program on telecommunications at the Instituto Tecnológico Autónomo de México in Mexico City and a seminar program on International Sports Law at the Institute of Directors in London, UK. Carlos Díaz Alonso. Mr. Díaz has served as Azteca's Director of Sales since 2004. Mr. Díaz received a bachelor's degree in business administration from the Universidad Anáhuac. Capital Stock Azteca's capital stock is comprised of class A shares, class D-A shares and class D-L shares. Holders of class A shares have voting rights at Azteca's general shareholders' meetings. Holders of classes D-A and D-L shares have voting rights only in limited circumstances, and have a preferential dividend right. The rights of all holders of all classes of capital stock are identical, except for the limitations with respect to class A and D-A shares held by persons other than eligible Mexican holders. In August 2017, class D-A shares will become eligible to be exchanged for class A shares, and class D-L shares will become eligible to be exchanged for class L shares. Class L shares will be granted voting rights under limited circumstances.
65 Authorized, issued, and paid-in capital stock of Azteca as of December 31, 2012 is summarized as follows: Shares Authorized Paid Total class (in thousands) (in thousands) ($) A 5,318,079 4,630,353 355,904 D-A 2,613,878 2,160,471 166,061 D-L 2,613,878 2,160,471 166,061 Total 10,545,835 8,951,295 688,026
As of December 31, 2012, Azteca's shares were listed on the following securities exchanges: Country of Stock Characteristics of the securities Exchange Ticker symbol Stock Exchange Class A, class D-A, class D-L and Mexico TVAZTCA Mexican Stock Certificates of Common Participation Exchange (CPOs), each one represents one A Share, one D-A share, and one D-L share. Class A, class D-A, class D-L, CPOs and 10 Spain XTZA Latin American CPO Units. Securities Market
Dividends The declaration, amount and payment of dividends are approved by shareholders at Azteca's general shareholders' meeting. Resolutions shall be valid only if adopted by the affirmative vote of the majority of the class A shares. Resolutions are generally, but not necessarily, proposed based on the recommendation of the Board. Dividends are declared in the second quarter of each fiscal year based on the audited financial statements of Azteca for the preceding fiscal year. The amount of any such dividend would depend on, among other things, Azteca's operating results, financial condition and capital requirements, and on general business conditions. Under Azteca's by-laws and the LGSM, the gross profits of Azteca are applied as described below. At the annual general ordinary shareholders' meeting of Azteca, the Board submits the financial statements of Azteca for the previous fiscal year, together with the report thereon by the Board, to the holders of the class A shares that are represented at the annual general ordinary shareholders' meeting for approval. If the annual general ordinary shareholders' meeting approves the financial statements, then it will determine the allocation of Azteca's net profits for the preceding year. Azteca is required by law to allocate at least 5% of such net profits to a legal reserve, which is not thereafter available for distribution except as a stock dividend, until the amount of the legal reserve equals 20% of Azteca's historical capital stock. Thereafter, the annual general ordinary shareholders' meeting may determine and allocate a certain percentage of net profits to any general or special reserve, including a reserve for open-market purchases of Azteca's shares. The remainder of net profits is available for distribution in the form of dividends to all the shareholders. Holders of class D-A shares and class D-L shares are entitled to receive an annual, cumulative preferential dividend. Following payment in full of this preferential dividend, dividends are paid on a pro rata basis to holders of class A shares, class D-A shares and class D-L shares. After the conversion of the class D-A shares into class A shares and the class D-L shares into class L shares, all shares of Azteca will participate on a pro rata basis in dividend distributions.
66 RELATED PARTY TRANSACTIONS AND CONFLICTS OF INTEREST Historically, Azteca has engaged, and expects to continue to engage, in a variety of transactions with its affiliates, including entities owned or controlled by Azteca or its controlling shareholders. Azteca has an audit committee comprised of three independent directors who review certain of its proposed transactions, including transactions with affiliates, to determine whether these transactions are related to its business and, in the case of a transaction with an affiliate, to determine whether such transaction is consummated on terms that are at least as favorable to Azteca as terms that would be obtainable at the time for a comparable transaction or series of similar transactions in arm's-length dealings with an unrelated third person. The LMV requires the audit committee to review and make recommendations on any transaction with an affiliate with the exception of (i) transactions that do not involve a material amount, (ii) transactions entered into in the ordinary course of business and (iii) transactions made on an arm's-length basis. Notwithstanding the foregoing, the transactions described in (i) to (iii) require audit committee and Board approval if they relate to the purchase or sale of assets, granting of a guarantee or incurrence of debt involving an amount equal to or greater than 5% of Azteca's consolidated assets. For further information on the role of the audit committee, see "Governance—Board of Directors—Board Practices." In addition, the provisions of the LMV require that prior to Board approval of the transaction, a fairness opinion must be delivered with respect to the purchase or sale of assets, granting of a guarantee or incurrence of debt involving an amount equal to or greater than 10% of its consolidated assets. The fairness opinion must be provided by an independent advisor that meets the criteria set forth in the LMV, which includes being financially and economically independent from Azteca, providing no other services except audit services to Azteca and other criteria that generally result in a requirement that the advisor to be a partner of a recognized audit firm. If the Board does not follow the recommendations of the audit committee with regard to a related party transaction, the LMV requires Azteca to disclose this information to the public through the Mexican Stock Exchange. The LMV also requires a majority shareholder approval of any transaction valued at 20% or more of its consolidated assets, regardless of whether the transaction is with an affiliate. Azteca has outstanding receivables and payables, and undertook transactions with related parties as described below: Six months ended Year ended June 30 December 31 2013 2012 2012 2011 ($) (Ps.) ($) (Ps.) ($) (Ps.) ($) (Ps.) (in millions) Accounts Receivable: Azteca Holdings, S.A. de C.V. (Holding Company) (1) ...... 13.5 176 12.2 167 12.8 167 11.5 161 Fórum Per Terra, S.A. de C.V. and Subsidiary (2)...... 4.6 60 4.3 58 4.5 59 4.1 57 Grupo Elektra and Subsidiaries (3) ...... 6.9 90 5.7 78 1.2 16 2.1 29 GSF Telecom Holdings, S.A.P.I de C.V. and subsidiaries ...... 2.1 27 1.5 20 1.2 15 0.3 4 Comunicaciones Avanzadas, S.A. de C.V...... 0.2 3 0.2 3 0.2 3 0.1 2 Other...... 2.8 36 3.7 50 0.6 7 1.6 23 Total...... 30.1 392 27.6 376 20.5 267 19.7 276
Accounts Payable: Grupo Elektra (3)...... ------Arrendadora Internacional Azteca, S.A. de C.V...... 0.2 2 0.9 12 0.4 5 1.1 16 Globo Re, S.A. (4)...... 9.5 123 11.6 158 9.5 124 8.9 124 Other related parties ...... 2.8 36 - - 3.0 39 1.0 14 Total...... 12.4 162 12.5 170 12.9 168 11.0 154 ______(1) During 2012 and 2011, Azteca advanced certain amounts for the purchase of financial assets (activos financieros). These amounts as of December 31 were Ps.98 million ($7.5 million) and Ps $.98 million ($7.0 million), respectively. Additionally, loans were made to it in the amounts of Ps.69 million ($5.3 million) and Ps.63 million ($4.5 million), respectively. (2) These amounts correspond to loans granted as of December 31, 2012 and 2011 in amounts of Ps.59 million ($4.5 million) and Ps $57 million ($4.1 million), respectively. (3) In 2012 and 2011, the balance corresponded mainly to administrative services. (4) As of December 31, 2012 and 2011, these amounts are comprised mainly of loans granted by Azteca.
67 Azteca's most significant related party transactions are described below: Advertising revenue
Azteca's advertising revenue from related parties amounted to Ps.584 million ($44.3 million) and Ps.531 million ($42.7 million) for the years ending December 31, 2012 and 2011, respectively. Grupo Elektra
Azteca and Grupo Elektra have annual advertising contracts; the rights under these contracts may not be assigned by Grupo Elektra to third parties. At December 31, 2012 and 2011 revenue from Grupo Elektra amounted to Ps.453 million ($34.4 million) and Ps.399 million ($32.1 million), respectively. GSF Telecom Holdings, S.A.P.I. de C.V. and subsidiaries ("GSF")
In each of 2012 and 2011, Azteca and GSF had one year advertising contracts on terms that were negotiated on an arm's-length basis. As of December 31, 2012 and 2011, income from Iusacell amounted to Ps.132 million ($10.0 million) and Ps.132 million ($10.6 million), respectively. Banco Azteca
Azteca and Banco Azteca are party to an agreement pursuant to which Azteca produces non-television advertising for Banco Azteca. As of December 31, 2012 and 2011 revenue from these contracts was Ps.7 million ($0.5 million) and Ps.0.4 million ($0.03 million), respectively. Interest Income
In the years ended December 31, 2012 and 2011, Azteca made short-term loans to related parties. At year end, interest income for these loans amounted to Ps.8 million ($0.6 million) and Ps.11 million ($0.9 million), respectively. Income on Property Leasing
Azteca has leased property to Operadora Unefon, a subsidiary of GSF, pursuant to a lease agreement that expires in 2018. As of December 31, 2012 and 2011, income from leased property amounted to Ps.24 million ($1.8 million) and Ps.18 million ($1.4 million), respectively. Equipment Leasing Contracts
Azteca has leased from Arrendadora Internacional Azteca transportation and computing equipment with an option to buy. Most of the terms of the lease agreements are three to four years. At the end of the term, Azteca may opt to acquire the leased goods, extend the leasing term or return the leased goods, by notification at least 90 days prior to the expiration of the contract. For the years ended December 31, 2012 and 2011, assets acquired under these contracts amounted to Ps.3 million ($0.2 million) and Ps.3 million ($0.2 million), respectively. Donations
In the years ended December 31, 2012 and 2011, Azteca donated funds to the Fundación TV Azteca, A. C., a related party, in the amount of Ps.144 million ($10.9 million) and Ps.103 million ($8.3 million), respectively.
68 THE GUARANTORS Guarantors The Notes will be fully, unconditionally and jointly and severally guaranteed by Televisión Azteca, S.A. de C.V., Azteca International Corporation, Inversora Mexicana de Producción, S.A. de C.V., Estudios Azteca, S.A. de C.V., Azteca Novelas, S.A. de C.V., and Operadora Mexicana de Televisión, S.A. de C.V. As of and for the year ended December 31, 2012, Azteca, together with the Guarantors, accounted for approximately 89% of Azteca's total consolidated net assets of Ps.12,110 million ($930.8 million) and 94% of its total consolidated EBITDA of Ps.4,483 million ($340.4 million), as indicated in the table below. Inversora Operadora Azteca Mexicana Mexicana Azteca and Televisión International de Estudios Azteca de Guarantor Non- Azteca Corporation Producción Azteca Novelas Televisión Azteca Total Guarantors (Ps. in millions) Net assets 5,565 3,094 1,112 -955 1,103 269 554 10,742 1,368 % of total consolidated 46% 26% 9% -8% 9% 2% 5% 89% 11% net assets
EBITDA 244 369 0 837 80 278 2,415 4,223 260 % of total consolidated 5% 8% 0% 19% 2% 6% 54% 94% 6% EBITDA
Televisión Azteca, S.A. de C.V.
Televisión Azteca is a corporation with variable capital (sociedad anónima de capital variable) organized under the laws of Mexico. The public deed containing Televisión Azteca's deed of incorporation was executed on September 7, 1992, and was registered with the Public Registry of Commerce (Registro Público de Comercio) of Mexico City on September 24, 1992 under the commercial file 165577. Televisión Azteca's deed has a duration of ninety-nine years beginning as of the date on the legal instrument creating it. The headquarters (main offices) of Televisión Azteca are located at Periférico Sur 4121, Colonia Fuentes del Pedregal, Delegación Tlalpan, C.P. 14141, Mexico City The telephone number of Televisión Azteca is (5255) 1720-1313. Televisión Azteca is a 99.99% owned subsidiary of Azteca. Televisión Azteca owns Azteca's television concessions and operates Azteca's transmission equipment. Azteca International Corporation
Azteca International Corporation is a corporation organized under the laws of Delaware, U.S. The certificate of incorporation of Azteca International Corporation is dated June 21, 2001, and was registered with the Secretary of the State of Delaware on June 22, 2001. Azteca International Corporation's identification number is 74- 3009452. Azteca International Corporation's certificate of incorporation has an indefinite duration as of the date on the legal instrument creating it. The headquarters (main offices) of Azteca International Corporation are located at 1139 Grand Central Ave., Glendale, CA 91201. The telephone number of Azteca International Corporation is (818) 241-5400. Azteca International Corporation is a wholly-owned (100%) subsidiary of Azteca. Azteca International Corporation operates the Azteca America channel. Inversora Mexicana de Producción, S.A. de C.V.
Inversora Mexicana de Producción is a corporation with variable capital (sociedad anónima de capital variable) organized under the laws of Mexico. The public deed containing Inversora Mexicana de Producción's deed of incorporation was executed on February 25, 1997, and was registered with the Public Registry of Commerce (Registro Público de Comercio) of Mexico City on March 17, 1997 under the commercial file 219244. Inversora Mexicana de Producción's deed has a duration of ninety-nine years beginning as of the date on the legal instrument
69 creating it. The headquarters (main offices) of Inversora Mexicana de Producción are located at Periférico Sur 4121, Colonia Fuentes del Pedregal, Delegación Tlalpan, C.P. 14141, Mexico City The telephone number of Inversora Mexicana de Producción is (5255) 1720-1313. Inversora Mexicana de Producción is a 99.99% directly or indirectly owned subsidiary of Azteca. Inversora Mexicana de Producción provides technical, legal, administrative, financial and treasury services to Azteca. Estudios Azteca, S.A. de C.V.
Estudios Azteca is a corporation with variable capital (sociedad anónima de capital variable) organized under the laws of Mexico. The public deed containing Estudios Azteca's deed of incorporation was executed on November 3, 2003, and was registered with the Public Registry of Commerce (Registro Público de Comercio) of Mexico City on March 24, 2004 under the commercial file 316090. Estudios Azteca's deed has an indefinite duration as of the date on the legal instrument creating it. The headquarters (main offices) of Estudios Azteca are located at Calz. de Tlalpan No. 2818, Col. San Pablo Tepetlapa, C.P. 04840, Distrito Federal, Mexico. The telephone number of Estudios Azteca is (5255) 1720-1313. Estudios Azteca is a 99.99% directly or indirectly owned subsidiary of Azteca. Estudios Azteca operates and is the principal advertising sales agent of the Azteca 7 network and the Azteca 13 network. Azteca Novelas, S.A. de C.V.
Azteca Novelas is a corporation with variable capital (sociedad anónima de capital variable) organized under the laws of Mexico. The public deed containing Azteca Novelas' deed of incorporation was executed on January 18, 1996, and was registered with the Public Registry of Commerce (Registro Público de Comercio) of Mexico City on February 4, 1997 under the commercial file 218450. Azteca Novelas' deed has a duration of ninety- nine years beginning as of the date on the legal instrument creating it. The headquarters (main offices) of Azteca Novelas are located at Calz. de Tlalpan No. 2818, Col. San Pablo Tepetlapa, C.P. 04840, Distrito Federal, Mexico. The telephone number of Azteca Novelas is (5255) 1720-1313. Azteca Novelas is a 99.99% directly or indirectly owned subsidiary of Azteca. Azteca Novelas owns or leases facilities and equipment for the production of Azteca's original programming. Operadora Mexicana de Televisión, S.A. de C.V.
Operadora Mexicana de Televisión is a corporation with variable capital (sociedad anónima de capital variable) organized under the laws of Mexico. The public deed containing Operadora Mexicana de Televisión's deed of incorporation was executed on June 2, 1993, and was registered with the Public Registry of Commerce (Registro Público de Comercio) of Mexico City on July 13, 1993 under the commercial file 167344. Operadora Mexicana de Televisión's deed has a duration of ninety-nine years beginning as of the date on the legal instrument creating it. The headquarters (main offices) of Operadora Mexicana de Televisión are located at Periférico Sur 4121, Colonia Fuentes del Pedregal, Delegación Tlalpan, C.P. 14141, Mexico City The telephone number of Operadora Mexicana de Televisión is (5255) 1720-1313. Operadora Mexicana de Televisión is a 99.99% owned subsidiary of Azteca. Operadora Mexicana de Televisión operates and is the principal advertising sales agent of Proyecto 40. Additional Information Prospective investors in the Notes may obtain additional information regarding the Guarantors by contacting: Periférico Sur 4121, Col. Fuentes del Pedregal, Mexico City 14141, Mexico (Attention: Luis Ontiveros Sandoval) Tel: (52) 55 1720-9122.
70 TERMS AND CONDITIONS The following are the terms and conditions (the "Conditions") of the Notes which (subject to completion and amendment) will be attached to or incorporated by reference into each of the Notes, provided that the relevant Pricing Supplement (the "Pricing Supplement") in relation to a particular Series of Notes may specify other terms and conditions which shall, to the extent so specified, replace or modify the following Conditions for the purpose of such Series of Notes. The Notes to which these Conditions pertain are issued and will be issued in one or more Series with the benefit of an amended and restated trust deed dated 25 May 2011 (such trust deed as amended and/or supplemented and/or restated from time to time the "Trust Deed"), by and among the Issuer, the Guarantors and The Bank of New York Mellon, as trustee (the "Trustee" which term includes any additional or successor trustee under the Trust Deed). The Notes are constituted by, and in accordance with, the Trust Deed and have the benefit of an amended and restated agency agreement dated 25 May 2011 (such agency agreement as amended and/or supplemented and/or restated from time to time the "Agency Agreement") by and among the Issuer, the Guarantors, the Trustee and The Bank of New York Mellon as issuing and principal paying agent (the "Principal Paying Agent" which term includes any additional or successor principal paying agent appointed under the Agency Agreement) and as calculation agent and, where applicable, registrar. Notes having the same Interest Payment Dates, Issue Price and Maturity Date, bearing interest at the same rate and the terms of which are otherwise identical, are hereinafter together referred to as a "Series" of Notes, and the particular Note to which these Conditions are attached or incorporated by reference is referred to herein as this "Note," and this Note, together with the other Notes of the same Series, are hereinafter together referred to as "this Series" or the "Notes of this Series." The Pricing Supplement applicable to a Series of Notes may specify other terms and conditions which shall, to the extent so specified or to the extent inconsistent with these Conditions, amend, vary, replace, add to or modify these Conditions for the purposes of such Series of Notes, in which event, these Conditions as so amended, varied, replaced, added to or modified by such Pricing Supplement shall be referred to herein as the or these "Conditions" with respect to such Series of Notes. Copies of the Trust Deed, the Agency Agreement and the Pricing Supplement are on file and available for inspection at the offices of the Trustee and the Principal Paying Agent, being as of the date hereof One Canada Square, London E14 5AL, England. The holders of the Notes and the holders of any Coupons (if any) appertaining to the Notes and the holders of any Receipts (if any) appertaining to the Notes (the "Noteholders") are deemed to have notice of, and are entitled to the benefit of, all the provisions of the Trust Deed and the Agency Agreement. Words and expressions defined in the Trust Deed or used in the applicable Pricing Supplement shall have the same meanings where used in these Conditions unless the context otherwise requires or unless otherwise stated. 1. Form and Title of Notes The Notes are issuable in bearer or fully registered form ("Notes") as a global note, without coupons or receipts ("Global Note"), or as definitive notes ("Definitive Notes"), with Coupons (if in bearer form) at the time of issue attached thereto (except in the case of Zero Coupon Notes (as defined below)) and, in the case of bearer Definitive Notes repayable in instalments, with Receipts at the time of issue attached thereto, in the denominations specified in the applicable Pricing Supplement (the "Authorised Denominations"). The Definitive Notes will be serially numbered. The Notes may be issued (a) to bear interest on a fixed rate basis ("Fixed Rate Notes"), (b) to bear interest on a floating rate basis ("Floating Rate Notes"), or (c) on a non-interest bearing basis ("Zero Coupon Notes") or any combination, in each case as specified in the applicable Pricing Supplement. Each Definitive Note in bearer form will be issued with Coupons attached unless it is a Zero Coupon Note, in which case reference to interest (other than in relation to interest due after the Maturity Date) and Coupons in these Conditions are not applicable. Title to Notes, Receipts, Talons and Coupons in bearer form shall pass by delivery. The Issuer, the Trustee, the Principal Paying Agent and any agent of the Issuer or the Trustee or the Principal Paying Agent except as required by law shall deem and treat the bearer of a Note, Receipt, Talon or Coupon in bearer form as the owner thereof for all purposes, whether or not such Note or, in the case of a Definitive Note, such Receipt, Talon or Coupon, be overdue, and neither the Issuer nor the Trustee nor the Principal Paying Agent nor any such agent shall be affected by notice to the contrary, any writing on it, or its theft or loss and shall incur no liability for so doing.
71 Title to Notes in registered form passes upon registration of transfers in the Register in accordance with the provisions of the Agency Agreement and the Trust Deed. Notes in registered form will be transferable only on the books of the Issuer and the Agents. The registered holder of any Note in registered form will (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it, any writing on it, or its theft or loss) and no person will be liable for so treating the holder. If a Note, Receipt, Talon or Coupon is held for the account or benefit of U.S. persons (as defined in Regulation S under the U.S. Securities Act of 1933, as amended) or, for so long as any of the Notes are represented by a Global Note, any person who is for the time being shown in the records of Euroclear or of Clearstream, Luxembourg as the holder of a particular nominal amount of Notes, holds such interest for the account or benefit of U.S. persons, the Issuer may give notice to the holder(s) of the relevant Note, Receipt, Talon or Coupon (or, in the case of a Global Note, the holder of the relevant particular, nominal amount of Notes) that it requires the relevant Note, Receipt, Talon, and/or Coupon (and/or, in the case of a Global Note, the relevant particular interest in the nominal amount of Notes), as the case may be, to be transferred provided however that the relevant Note, Receipt, Talon or Coupon (or, in the case of a Global Note, the relevant particular interest in the nominal amount of Notes) may not be transferred to, or for the account or benefit of, U.S. persons. The relevant holder(s) of the Note, Receipt, Talon or Coupon (or, in the case of a Global Note, the relevant holder of the particular interest in the nominal amount of Notes) shall be obligated to make the transfer referred to in the notice referred to in this paragraph within 30 days after receipt of such notice if the relevant Note, Receipt, Talon or Coupon (or, in the case of a Global Note, the relevant particular nominal amount of Notes) is held for the account or benefit of U.S. persons. 2. Status of Notes and Guarantee (a) Status of Notes If the Pricing Supplement specifies that the Notes are unsecured Notes, the Notes and the relevant Receipts (if any) and the relevant Coupons (if any) are unsecured, unsubordinated and unconditional obligations of the Issuer ranking pari passu with all other outstanding unsubordinated and unsecured obligations of the Issuer, and constitute valid and legally binding obligations of the Issuer, enforceable in accordance with their respective terms (subject to general equitable principles and bankruptcy, concurso mercantil and insolvency laws and other similar laws affecting creditors' rights generally), and are entitled to the benefits provided by the Trust Deed and the Agency Agreement. If the Pricing Supplement specifies that the Notes are secured Notes, the Notes will constitute direct and unsubordinated obligations of the Issuer that are secured by the collateral identified in the Pricing Supplement. (b) Status of the Guarantee The payment of principal and interest in respect of the Notes, the Receipts and the Coupons and all other monies payable by the Issuer under or pursuant to the Trust Deed has been unconditionally and irrevocably guaranteed by the Guarantors in the Trust Deed (the "Guarantee"). The obligations of the Guarantors under the Guarantee are unsecured, unsubordinated and unconditional obligations of the Guarantors ranking pari passu with all other outstanding unsubordinated and unsecured obligations of the Guarantors, and constitute valid and legally binding obligations of the Guarantors, enforceable in accordance with their respective terms (subject to general equitable principles and bankruptcy, concurso mercantil and insolvency laws and other similar laws affecting creditors' rights generally). 3. Interest (a) Interest on Fixed Rate Notes (i) Each Fixed Rate Note bears interest from and including the Issue Date, at the Interest Rate(s) per annum specified in the applicable Pricing Supplement payable in arrears on the Interest Payment Date(s) in each year and on the Maturity Date so specified if such Maturity Date does not fall on an Interest Payment Date. The first payment of interest will be made on the Interest Payment Date next following the Issue Date. (ii) Interest will be paid, in respect of Fixed Rate Notes subject to and in accordance with the provisions of Condition 5 of these Conditions. (iii) If Interest is required to be computed for a period of other than a full year, such interest shall be computed on the basis specified in the applicable Pricing Supplement.
72 (iv) Interest will cease to accrue on each Fixed Rate Note on the due date for payment thereof unless, upon due presentation thereof, payment of principal is improperly withheld or refused, in which event interest will continue to accrue (as well after as before any judgment) as provided in the Trust Deed. (b) Interest on Floating Rate Notes Interest on each Floating Rate Note will be determined by such interest rate formula as may be agreed to by the Relevant Lead Dealer for the relevant Series and the Issuer and specified in the applicable Pricing Supplement. The amount of interest payable in respect of any Floating Rate Note for any period shall be calculated by multiplying the product of the Interest Rate(s) per annum as specified in the applicable Pricing Supplement and the outstanding principal amount thereof by the Day Count Fraction. "Day Count Fraction" means, in respect of the calculation of an amount for any period of time ("Calculation Period"), such day count fraction as may be specified in the Pricing Supplement and: (i) if "Actual/365 (Fixed)" is so specified, means the actual number of days in the Calculation Period divided by 365; (ii) if "Actual/360" is so specified, means the actual number of days in the Calculation Period divided by 360; (iii) if "Actual/365" or "Actual/Actual" is so specified, means the actual number of days in the Calculation Period divided by 365 (or, if any portion of that Calculation Period falls in a leap year, the sum of (A) the actual number of days in that portion of the Calculation Period falling in a leap year divided by 366 and (B) the actual number of days in that portion of the Calculation Period falling in a non-leap year divided by 365); (iv) if "Actual/365 (Sterling)" is so specified, means the actual number of days in the Calculation Period divided by 365, or in the case of a Calculation Period falling in a leap year, 366. 4. Redemption And Purchase The Notes shall not be subject to redemption by the Issuer or the holder of a Note except as specified in the Pricing Supplement and as provided in this Condition 4. (a) At Maturity Unless otherwise specifically specified in the applicable Pricing Supplement and unless previously redeemed or purchased and cancelled, each Note will be redeemed by the Issuer at its final redemption amount on the Maturity Date specified in the applicable Pricing Supplement (which final redemption amount shall, if not otherwise specified in the Pricing Supplement, be the nominal amount of such Note). (b) Redemption for Tax Reasons Unless otherwise specifically indicated in the applicable Pricing Supplement, if as a result of any change in or amendment to the laws (or any regulations or rulings promulgated thereunder) of Mexico or of any political subdivision or taxing authority thereof or therein affecting taxation, or any change in official position regarding application or interpretation of such laws, regulations or rulings (including a holding by a court of competent jurisdiction), which change or amendment becomes effective on or after the relevant Issue Date, the Issuer has or will become obligated to pay additional amounts as described under Condition 6 of these Conditions in excess of the additional amounts the Issuer would be obligated to pay if payments made on the Notes were subject to withholding or deduction at a rate of 4.9 per cent. as a result of the taxes, duties, assessments and other governmental charges described under Condition 6 of these Conditions or if a Guarantor would be unable for reasons outside of its control to procure payment by the Issuer and in making payment itself would be obligated to pay additional amounts as described under Condition 6 of these Conditions in excess of the additional amounts that Guarantor would be obligated to pay if payments made on the Notes were subject to withholding or deduction at a rate of 4.9 per cent. as a result of the taxes, duties, assessments and other governmental charges described under Condition 6 of these Conditions, such Note will be subject to a one-time redemption by the Issuer, in whole but not in part, at any time thereafter, upon giving of irrevocable notice in accordance with Condition 13 of these Conditions, on such redemption date as the Issuer shall select but which shall in the case of Floating Rate Notes be an Interest Payment Date, at a redemption price equal to 100 per cent. of the outstanding principal amount thereof together with accrued and unpaid interest. Moreover, the Issuer shall not have the right to redeem the Notes pursuant to the provisions set forth in this Condition 4(b) unless the Issuer or, as the case may be, the relevant Guarantor has taken all reasonable
73 measures (to the extent permitted by applicable law) to avoid the obligation to pay additional amounts described under Condition 6 of these Conditions. In the event that the Issuer elects to redeem Notes pursuant to the provisions set forth in this Condition 4(b), the Issuer will deliver to the Trustee and the Principal Paying Agent (i) a certificate, signed by an authorised representative, stating that the Issuer is entitled to redeem such Notes pursuant to their terms in accordance with the terms of the Agency Agreement and specifying the date of redemption and the principal amount of Notes to be redeemed (and the Trustee shall be entitled to accept such certificate delivered with an opinion as referred to in (ii) below as sufficient evidence of the satisfaction of the conditions precedent set out above (without liability to any person) in which event it shall be conclusive and binding on the Trustee, Noteholders, Receiptholders and the Couponholders that the Issuer is entitled to effect such redemption) and (ii) an opinion of independent legal advisors of recognised standing to the effect that the Issuer or, as the case may be, the relevant Guarantor has or will become obligated to pay any amounts as described under Condition 6 of these Conditions such that the Issuer has the right to redeem such Notes. In rendering such opinion, such independent legal advisors shall be entitled to rely on certificates of the Issuer, the relevant Guarantor, the Issuer's independent accountants and the relevant Guarantors' independent accountants as to factual matters and as to calculations relating to such additional amounts. The foregoing provisions in this paragraph are applicable regardless of whether "Issuer Call" is indicated as being applicable in the Note or the relevant Pricing Supplement. (c) Redemption at the Option of Issuer (Issuer Call) If Redemption at the Option of the Issuer (i.e., Issuer Call) is specified in the applicable Pricing Supplement, the Issuer may, having given not more than 60 nor less than 30 days notice (or such other notice period as may be specified in the applicable Pricing Supplement) to the Trustee and the Principal Paying Agent, and, in accordance with Condition 13 of these Conditions, to the holders of the Notes of the Series to be redeemed, redeem all or some only of the Notes of such Series then outstanding on any Optional Redemption Date and at the Optional Redemption Amount(s) specified in, or determined in the manner specified in, the applicable Pricing Supplement together, if appropriate, with interest accrued to (but excluding) the relevant Optional Redemption Date. Any such redemption must be of a nominal amount not less than the Minimum Redemption Amount or not more than a Higher Redemption Amount, in each case as may be specified in the applicable Pricing Supplement. In the case of a partial redemption of Notes of a Series, the Notes of the Series to be redeemed ("Redeemed Notes") will be selected by the Issuer individually by lot, in the case of Redeemed Notes represented by definitive Notes of the Series, and in accordance with the rules of Euroclear and/or Clearstream, Luxembourg, in the case of Redeemed Notes represented by a Global Note, not more than 30 days prior to the date fixed for redemption. In the case of Redeemed Notes represented by definitive Notes, a list of the serial numbers of such Redeemed Notes will be published in accordance with Condition 13 not less than 15 days prior to the date fixed for redemption. (d) Notices to Redeem Notices to redeem Notes pursuant to Condition 4(b) or 4(c) of these Conditions shall be published in accordance with the provisions of Condition 13 of these Conditions and shall specify the date fixed for redemption, which shall be not less than 30 nor more than 60 days after such notification, the applicable redemption price, the place or places of payment, that payment will be made upon presentation and surrender of the Notes to be redeemed in the case of bearer Notes, that interest accrued to the date fixed for redemption will be paid as specified in such notice, and that on and after such date interest thereon will cease to accrue. With respect to notices relating to redemption pursuant to Condition 4(b), such notice shall also state that the conditions precedent to such redemption have occurred and state that the Issuer has elected to redeem all the Notes in accordance with Condition 4(b) of these Conditions. (e) Redemption at the Option of the Noteholders (Noteholder Put) If Redemption at the Option of the Noteholder (i.e., Noteholder Put) is specified in the applicable Pricing Supplement, upon a Noteholder giving to the Issuer not more than 60 nor less than 30 days' notice (or as otherwise specified in the Pricing Supplement) (which notice shall be irrevocable) the Issuer will redeem subject to, and in accordance with, the terms specified in the applicable Pricing Supplement in whole, but not in part, a Definitive Note or Global Note on an Optional Redemption Date at the Optional Redemption Amount each specified and defined in the applicable Pricing Supplement with respect to such a redemption, together with any accrued interest. (f) Cancellation All Notes which are redeemed will forthwith be cancelled (together with all unmatured Receipts, Coupons and Talons attached thereto or surrendered therewith at the time of redemption). All Notes so cancelled (together
74 with all unmatured Receipts, Coupons and Talons cancelled therewith) shall be forwarded to the Principal Paying Agent and cannot be reissued or resold. (g) Purchase of Notes by the Issuer and the Guarantors The Issuer, any of the Guarantors, any of the Issuer's Subsidiaries and any of the Guarantors' Subsidiaries may, directly or indirectly, to the extent permitted by applicable law, purchase Notes (provided that, in the case of Definitive Notes in bearer form, all unmatured Receipts, Coupons and Talons appertaining thereto are purchased therewith) in the open market or by tender at any price and at any time. Any Note purchased by the Issuer, any Guarantor, any of the Issuer's Subsidiaries or any of the Guarantors' Subsidiaries, directly or indirectly, shall be surrendered to the Principal Paying Agent for cancellation. Any Notes surrendered as aforesaid may not be reissued or resold and will be cancelled promptly. "Issuer's Subsidiaries" means any corporation or other entity of which at least a majority of the outstanding securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation or other entity (irrespective of whether or not at the time securities or the ownership interests of any other class or classes of such corporation or entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the Issuer and/or one or more of the Issuer's Subsidiaries. "Guarantors' Subsidiaries" means any corporation or other entity of which at least a majority of the outstanding securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation or other entity (irrespective of whether or not at the time securities or the ownership interests of any other class or classes of such corporation or entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by a Guarantor and/or one or more of the Guarantors' Subsidiaries. 5. Payments (a) Method of Payment Subject as provided below, payments in respect of the Notes will be made in the Specified Currency by cheque. Holders of at least the Specified Principal Amount of Notes, upon receipt by the Paying Agent of appropriate wiring instructions at least 10 days prior to the relevant payment date, may receive payment by wire transfer to a Specified Currency account located outside of the United States and its possessions specified by the holder. Payments will be subject in all cases to any fiscal or other laws and regulations applicable thereto in the place of payment, but without prejudice to the provisions of Condition 6 of these Conditions. (b) Payments (i) Payments of principal and interest (if any) in respect of the Definitive Notes in bearer form (if issued) will (subject as provided below) be made against presentation or surrender of such Notes, Receipts or Coupons, as the case may be, at any specified office of any Paying Agent outside the United States and its possessions. If any Definitive Notes in bearer form are redeemed or become repayable prior to the Maturity Date in respect thereof, principal will be payable on surrender of each such Note together with all unmatured Coupons appertaining thereto. All payments of interest and principal with respect to Definitive Notes in bearer form will be made to accounts located outside the United States and its possessions except as otherwise provided below. Payments of instalments of principal (if any) in respect of Definitive Notes in bearer form, other than the final instalment, will (subject as provided below) be made in the manner provided in accordance with this paragraph against presentation and surrender (or, in the case of part payment of any sum due, endorsement) of the relevant Receipt in accordance with this paragraph. Payment of the final instalment will be made in the manner provided in this paragraph only against presentation and surrender (or, in the case of part payment of any sum due, endorsement) of the relevant Definitive Note in bearer form in accordance with this paragraph. Each Receipt must be presented for payment of the relevant instalment together with the Definitive Note in bearer form to which it appertains. Receipts presented without the Definitive Note in bearer form to which they appertain do not constitute valid obligations of the Issuer. Upon the date on which any Definitive Note in bearer form becomes due and repayable, unmatured Receipts (if any) relating thereto (whether or not attached) shall become void and no payment shall be made in respect thereof. (ii) Payments of principal and interest (if any) in respect of the Definitive Notes in registered form (if issued) will (subject as provided below) be made by cheque in the Specified Currency and posted on the Business Day immediately preceding the relevant due date to the holder (or to the first named of joint holders) of the Definitive Note in registered form appearing on the Register at the close of business on the Business Day prior to the
75 relevant date for the payment of principal and interest (the "Record Date") at his address shown on the Register on the Record Date. (iii) Payments of principal and interest (if any) in respect of Notes represented by any Global Note will (subject as provided below) be made in the manner specified above and otherwise in the manner specified in the relevant Global Note. A record of each payment made on such Global Note distinguishing between any payment of principal and any payment of interest, will be made, or caused to be made, on such Global Note by the Paying Agent to which such Global Note is presented for the purpose of making such payment or on the Register applicable to such Global Note, and such record shall be prima facie evidence that payment in question has been made. (iv) No payment of principal or interest in respect of Global Notes and Definitive Notes shall be made at an office or agency of the Issuer in the United States or its possessions and no cheque in payment thereof which is mailed shall be mailed to an address in the United States or its possessions, nor shall any transfer made in lieu of payment by cheque be made to an account maintained by the payee with a bank in the United States or its possessions. Notwithstanding the foregoing, such payments may be made at an office or agency located in the United States or its possessions (a) if such payments are to be made in U.S. dollars and if payment of the full amount so payable at the office of any Paying Agent outside the United States and its possessions appointed and maintained pursuant to the Agency Agreement is illegal or effectively precluded because of the imposition of exchange controls or other similar restrictions on the full payment or receipt of such amount in U.S. dollars, and (b) at the option of the relevant holder, if such payments are then permitted under United States law without involving, in the opinion of the Issuer, any adverse tax consequences to the Issuer. (v) The bearer or registered holder of the relevant Global Note shall be the only person entitled to receive payments in respect of Notes represented by such Global Note and the Issuer, or as the case may be, the Guarantors will be discharged by payment to, or to the order of, the bearer or registered holder of such Global Note in respect of each amount so paid. No person, other than the bearer or registered holder of the relevant Global Note, shall have any claim against the Issuer in respect of any payments due on that Global Note. (vi) If notice of redemption has been given in accordance with Condition 13 of these Conditions, the Notes shall be paid and redeemed by the Issuer at the places and in the manner herein specified, together with accrued interest on the Notes to the redemption date; provided, however, that interest due on or prior to the redemption date on Definitive Notes in bearer form shall be payable only upon the presentment and surrender of Coupons for such interest. If any Definitive Note in bearer form surrendered for redemption shall not be accompanied by all appurtenant Coupons maturing after the redemption date, such Note may be paid after deducting from the amount otherwise payable an amount equal to the face amount of all such missing Coupons, or the surrender of such missing Coupon or Coupons may be waived by the Issuer if they are furnished with such security or indemnity as they may require. From and after the redemption date, if monies for the redemption of Notes called for redemption shall have been made available at the main office of the Principal Paying Agent for redemption on the redemption date, the Notes called for redemption shall cease to bear interest, the Coupons appertaining to the Definitive Notes in bearer form maturing subsequent to the redemption date shall be void, and the only right of the holders of such Notes shall be to receive payment of the appropriate redemption amount, together with accrued interest on the Notes to the redemption date as aforesaid. If monies for the redemption of the Notes are not made available for payment until after the redemption date, the Notes called for redemption shall not cease to bear interest until such monies have been so made available. (c) Payment Business Day If the date for payment on any amount in respect of any Note is not a Payment Business Day (as defined below), the holder thereof shall not be entitled to payment until the next following Payment Business Day and shall not be entitled to further interest or other payment in respect of such delay if such payment is made on such next succeeding Payment Business Day. For these purposes unless otherwise specified in the applicable Pricing Supplement, "Payment Business Day" means any day which is a day on which banks and foreign exchange markets are open for business in London and any Additional Business Centre specified in the applicable Pricing Supplement, and on which Euroclear and Clearstream, Luxembourg are open for business. (d) Applicable Laws All payments are subject in all cases to any applicable fiscal or other laws and regulations, but without prejudice to the provisions of Condition 6 of these Conditions. No commissions or expenses shall be charged to the Noteholders, Receiptholders or Couponholders in respect of such payments.
76 6. Taxation (a) The Issuer, or as the case may be, the Guarantors will pay such amounts ("Additional Amounts") as may be necessary in order to ensure that the net amounts received by the holders of Notes, Receipts and Coupons after any withholding or deduction for or on account of any present or future taxes or duties of whatever nature imposed or levied by Mexico or any authority in Mexico shall equal the respective amounts of principal and interest which would have been received in respect of the Notes, Receipts and Coupons in the absence of such withholding or deduction, and the delivery by the Issuer or, as the case may be, the Guarantors of any such Additional Amounts to the appropriate Mexican authorities shall constitute receipt by the relevant Noteholders of such Additional Amounts so delivered; except that no such Additional Amounts shall be payable with respect to: (i) taxes or duties with respect to any Note, Receipt or Coupon presented for payment by or on behalf of a holder who is liable for such taxes or duties by reason of such holder having some connection with Mexico other than the mere holding of such Note, Receipt or Coupon; (ii) any Note, Receipt or Coupon presented for payment more than 15 days after the Relevant Date (as defined herein) except to the extent that the holder would have been entitled to such Additional Amounts on presenting such Note for payment on the last day of such 15-day period (as used in this Condition 6 "Relevant Date" in respect of any payment means the date on which such payment first becomes due except that, if the full amount of the monies payable has not been received by the Principal Paying Agent on or prior to such due date, it means the date on which, the full amount of such monies having been so received, notice to that effect is duly given to the Noteholders in accordance with Condition 13); (iii) any tax or duty required to be deducted or withheld by any Paying Agent from a payment on a Note, Receipt or Coupon if such payment can be made without such deduction or withholding by any other Paying Agent who can make such payment in accordance with the terms of the Agency Agreement and these Conditions; (iv) any tax, assessment or other governmental charge which is payable otherwise than by withholding from payments on or in respect of any Note, Receipt or Coupon (other than stamp, transfer or other similar taxes); (v) any estate, inheritance, gift, sales, stamp, transfer or personal property tax; (vi) any taxes imposed on, or withheld or deducted from, payments made to a holder or beneficial owner of a Note at a rate in excess of the 4.9 per cent. rate of tax in effect on the date hereof and uniformly applicable in respect of payments made by the Issuer to all holders or beneficial owners eligible for the benefits of a treaty for the avoidance of double taxation to which Mexico is a party without regard to the particular circumstances of such holders or beneficial owners (provided that, upon any subsequent change in the rate of tax that would be applicable to payments to all such holders or beneficial owners without regard to their particular circumstances, such changed rate shall be substituted for the 4.9 per cent. rate for purpose of this clause (vi)), but only to the extent that (x) such holder or beneficial owner has failed to provide on a timely basis, at the reasonable request of the Issuer or, as the case may be, the relevant Guarantor (subject to the conditions set forth below), information, documentation or other evidence concerning whether such holder or beneficial owner is eligible for benefits under a treaty for the avoidance of double taxation of which Mexico is a party if necessary to determine the appropriate rate of deduction or withholding of taxes under such treaty or under any statute, regulation, rule, ruling or administrative practice, and (y) at least 60 days prior to the payment date with respect to which the Issuer or, as the case may be, the relevant Guarantor shall make such reasonable request, the Issuer or, as the case may be, the relevant Guarantor shall have notified the holders of the Notes, in writing, that such holders or beneficial owners of the Notes will be required to provide such information, documentation or other evidence; (vii) any taxes that are imposed on, or withheld or deducted from, payments made to the holder or beneficial owner of a Note to the extent such taxes would not have been so imposed, deducted or withheld but for the failure by such holder or beneficial owner to comply with any certification, identification, information, documentation or other reporting requirement concerning the nationality, residence, identity or connection with Mexico (or any political subdivision or territory or possession thereof or area subject to its jurisdiction) of such holder or beneficial owner if (x) such compliance is required or imposed by a statute, treaty, regulation, rule, ruling or administrative practice in order to make any claim for exemption from, or reduction in the rate of, the imposition, withholding or deduction of any taxes, and (y) at least 60 days prior to the first payment date with respect to which the Issuer or a Guarantor shall apply this clause, the Issuer or, as the case may be, the relevant Guarantor shall have notified the holder of such Note, in writing, that such holder or beneficial owner will be required to provide such information or documentation;
77 (viii) any taxes that are payable otherwise than by deduction or withholding from a payment on a Note; (ix) any payment on a Note to any holder who is a fiduciary or partnership or other than the sole beneficial owner of any such payment, to the extent that a beneficiary or settlor with respect to such fiduciary, a member of such a partnership or the beneficial owner of such payment would not have been entitled to the Additional Amounts had such beneficiary, settlor, member or beneficial owner been the holder of such Note; or (x) any combination of the aforementioned. (b) Any reference in the Notes to principal and/or interest shall be deemed also to refer to any Additional Amounts which may be payable under the undertakings referred to in this Condition 6. (c) The Issuer shall pay all stamp and other duties, if any, which may be imposed by Mexico or any political subdivision thereof or taxing authority of or in the foregoing with respect to the execution and delivery of the Trust Deed, the Agency Agreement or the issuance of this Note. (d) Any reference in these Conditions to principal, premium and/or interest shall be deemed to include any additional amounts which may be payable under this Condition or any undertaking given in addition to or substitution for it under these presents. 7. Events of Default If any of the following events shall occur while any Notes of this Series issued pursuant to the Programme are outstanding: (i) default by the Issuer in the payment of any principal due on any Note of this Series on the due date for payment thereof; or (ii) default by the Issuer in the payment of any interest due on any Note of this Series for a period of more than three (3) days after the due date for payment thereof; or (iii) default in the performance of any other covenant of the Issuer or any of the Guarantors in the Trust Deed, the Agency Agreement or in the Notes, which, if (in the opinion of the Trustee) capable of being remedied, continues for 45 days after written notice of such default has been given, by the Trustee, to the Issuer or the relevant Guarantor (as the case may be); or (iv) the validity of the Notes of any Series or the Trust Deed or the Agency Agreement is contested by the Issuer or any of the Guarantors, or any final decision by any court having jurisdiction from which no appeal (which term "appeal" shall include the bringing of an action in the form of a juicio de amparo with respect to such final decision) may be or is taken shall purport to render any material (in the opinion of the Trustee) provision of the Notes of any Series or any material (in the opinion of the Trustee) provision of the Trust Deed or the Agency Agreement invalid or unenforceable or purport to prevent or materially (in the opinion of the Trustee) delay the performance or observance by the Issuer or any of the Guarantors of any of its obligations under such Notes or any of its material (in the opinion of the Trustee) obligations under the Trust Deed or the Agency Agreement; or (v) a decree or order by a court having jurisdiction shall have been entered adjudging the Issuer or any of the Guarantors as bankrupt, or in concurso mercantil or otherwise insolvent, or approving as properly filed a petition seeking reorganisation or concurso mercantil of the Issuer or any of the Guarantors and such decree or order shall have continued unanswered by the Issuer or the relevant Guarantor (as the case may be) for a period of nine (9) days after notice is delivered to the Issuer or the relevant Guarantor (as the case may be) or undischarged for a period of 120 days from the date of such decree or order; or a decree or order of a court having jurisdiction for the appointment of a receiver, liquidator, síndico, interventor or trustee or assignee in bankruptcy, concurso mercantil or insolvency of the Issuer or any of the Guarantors or in relation to the property of the Issuer or any of the Guarantors or for the winding up or liquidation of the affairs of the Issuer or any of the Guarantors shall have been entered, and such decree or order shall have continued unanswered by the Issuer or the relevant Guarantor (as the case may be) for a period of nine (9) days after notice is delivered to the Issuer or the relevant Guarantor (as the case may be) or undischarged for a period of 120 days from the date of such decree or order; or (vi) the Issuer or any of the Guarantors shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganisation or concurso mercantil, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator, síndico, interventor or trustee or assignee in bankruptcy,
78 concurso mercantil or insolvency of it or its property, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due; or (vii) all or a substantial (in the opinion of the Trustee) part of the assets of the Issuer and the Issuer's Subsidiaries taken as a whole or any of the Guarantors and the relevant Guarantors' Subsidiaries taken as a whole or substantially all of the shares of the Issuer or any of the Guarantors shall be nationalised or expropriated by any governmental authority, or any license, permit or other authorisation material (in the opinion of the Trustee) to the conduct of the business of the Issuer or any of the Issuer's Subsidiaries or any of the Guarantors or any of the Guarantors' Subsidiaries shall have been revoked and not reinstated within 120 days; or (viii) any other event specified as an "Additional Event of Default" in the applicable Pricing Supplement; then the Trustee at its discretion may, and if so requested in writing by the holders of at least one-quarter in aggregate principal amount of the Outstanding Notes of the relevant Series or if so directed by an Extraordinary Resolution of the Noteholders of such Series shall (subject in any such case to being secured and/or indemnified and/or prefunded to its satisfaction), give notice to the Issuer that the Notes of such Series are, and they shall accordingly immediately become, due and payable at 100 per cent. of the outstanding principal amount thereof together with accrued and unpaid interest thereon. At any time after the Notes become due and payable, the Trustee may, at its discretion and without further notice, institute such actions, steps or proceedings against the Issuer and/or the Guarantors as it may think fit to enforce the terms of the Trust Deed, the Notes, the Receipts and the Coupons, but it need not take any such proceedings unless (a) it shall have been so directed by an Extraordinary Resolution or so requested in writing by Noteholders holding at least one-quarter in aggregate principal amount of the Outstanding Notes of the relevant Series and (b) it shall have been indemnified and/or secured and/or prefunded to its satisfaction. No Noteholder, Receiptholder or Couponholder may proceed directly against the Issuer or the Guarantor unless the Trustee, having become bound so to proceed, fails to do so within a reasonable time and such failure is continuing. The Trustee shall not be obliged to take any action in relation to the enforcement or realisation of any security or collateral or security or collateral document unless an Event of Default or Potential Event of Default has occurred and directed to do so by the holders of at least one quarter in aggregate principal amount of the Outstanding Notes and indemnified and/or secured and/or prefunded to its satisfaction. 8. Meetings of Noteholders The Trust Deed contains provisions for convening meetings of Noteholders to consider any matter affecting their interests, including the modification by Extraordinary Resolution of these Conditions or other provisions of the Trust Deed. The quorum at any such meeting for passing an Extraordinary Resolution will be one or more persons holding or representing not less than 75 per cent. in principal amount of the Outstanding Notes of the relevant Series, or at any adjourned such meeting one or more persons being or representing Noteholders whatever the principal amount of the Notes of the relevant Series so held or represented. An Extraordinary Resolution passed at any meeting of Noteholders will be binding on all Noteholders, whether or not they are present at the meeting, and, if applicable, on all Receiptholders and Couponholders. The Trust Deed provides that meetings of more than one Series may be held where in the opinion of the Trustee there is no conflict of interests between the holders of the Notes of such Series. Except as may be provided in the Conditions of a particular Series of Notes in respect of such Series of Notes and subject always to such Conditions in respect of such Series of Notes, in relation to each Series, the Trustee may agree, without the consent of the Noteholders to (i) any modification of, or to any waiver or authorisation of any breach or proposed breach of, any of these Conditions or any provision of the Trust Deed or, in the case of modification, the Agency Agreement which, in the opinion of the Trustee, is not materially prejudicial to the interests of the Noteholders, or (ii) any modification to any of the same which is of a formal, minor or technical nature or to correct a manifest error. Any such modification, waiver, authorisation or substitution shall be binding on all Noteholders and, if applicable, all Receiptholders and all Couponholders and any such modification or substitution shall be notified to the Noteholders by the Issuer in accordance with Condition 13 as soon as practicable thereafter unless, in the case of modification, the Trustee agrees otherwise. In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including, without limitation, any modification, waiver, authorisation, determination or substitution), the Trustee shall have
79 regard to the interests of the Noteholders as a class (but shall not have regard to any interests arising from circumstances particular to individual Noteholders, Receiptholders or Couponholders of the relevant Series whatever their number) and, in particular but without limitation, shall not have regard to the consequences of any such exercise for individual Noteholders, Receiptholders or Couponholders of the relevant Series (whatever their number) resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory or any political sub-division thereof and the Trustee shall not be entitled to require, nor shall any Noteholder, Receiptholder or Couponholder of the relevant Series be entitled to claim, from the Issuer, any Guarantor, the Trustee or any other person any indemnification or payment in respect of any tax consequences of any such exercise upon individual Noteholders, Receiptholders or Couponholders of the relevant Series. The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility including for the exercise of any voting rights in respect of any collateral and for the validity, sufficiency and enforceability (which the Trustee has not investigated) of any security which may be granted in respect of any Series. The Trustee is exempted from liability with respect to any loss or theft or reduction in value of any collateral, from any obligation to insure or to procure the insuring of any collateral and from any claim arising from the fact that any collateral will be held in safe custody by any custodian selected by the Trustee. The Trustee is not responsible for supervising the performance by any other person of its obligations to the Issuer or any of the Guarantors. 9. Covenants of the Issuer The Issuer agrees to comply with the following covenants for so long as any Note issued under the Programme remains outstanding: (i) Payment of Principal and Interest. It will duly and punctually pay or cause to be paid the principal of and interest (and any Additional Amounts) on each of the Notes and any other payments to be made by the Issuer under the Notes, the Trust Deed and the Agency Agreement, at the place or places, at the respective times and in the manner provided in the Notes, the Trust Deed and the Agency Agreement. (ii) Authorisation and Consents. It will forthwith take, fulfil or do any action, condition or thing (including the obtaining or effecting of any necessary consent, approval, authorisation, exemption, filing, license, order, recording, registration or translation) at any time required to be taken, fulfilled or done in order (1) to enable the Issuer lawfully to enter into, exercise its rights and perform and comply with its obligations under the Trust Deed, the Agency Agreement or the Programme Agreement, (2) to ensure that those obligations are legally binding and enforceable and (3) to enable a Spanish translation, prepared by a court approved translator, of the Trust Deed, the Agency Agreement, the Programme Agreement and the Notes to be admissible in evidence in the courts of Mexico. (iii) Payment of Taxes. It will pay all stamp and other duties, if any, which may be imposed by Mexico, the United States, Luxembourg, Belgium or any political subdivision thereof or taxing authority of or in the foregoing with respect to the execution and delivery of the Trust Deed or the Agency Agreement or the issuance of the Notes (other than taxes on income imposed in the jurisdiction where the relevant taxpayer is incorporated or qualified to do business). (iv) Continued Existence of the Issuer. It shall not dissolve or liquidate in whole or in part, except as permitted under the Trust Deed. 10. Replacement of Notes, Exchange and Transfer Subject to the succeeding paragraph, if any mutilated Note is surrendered to the Principal Paying Agent, the Issuer shall execute, and the Principal Paying Agent shall authenticate and deliver in exchange therefor, a new Note of like tenor and principal amount, bearing (with respect to Definitive Notes) a serial number not contemporaneously outstanding. If there be delivered to the Issuer and the Principal Paying Agent (i) evidence to their reasonable satisfaction of the destruction, loss or theft of any Note, and (ii) such security or indemnity as may be reasonably required by them, then, in the absence of notice to the Issuer or the Principal Paying Agent (with respect to Notes) that such Note has been acquired by a bona fide purchaser, the Issuer shall execute, and upon its request the Principal Paying Agent shall authenticate and deliver in lieu of any such destroyed, lost or stolen Note, a new Note of like tenor and principal amount, bearing a serial number not contemporaneously outstanding.
80 Upon the issuance of any new Note under this Condition 10, the Issuer may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and the expenses of the Trustee or the Principal Paying Agent, as the case may be) connected therewith. Every new Note issued pursuant to this Condition 10 in lieu of any destroyed, lost or stolen Note shall constitute an original contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Note shall be at any time enforceable by anyone. Any new Note delivered pursuant to the provisions of this Condition 10 shall be so dated that neither gain nor loss of interest shall result from such exchange. The provisions of this Condition 10 and the provisions of the Agency Agreement regarding the replacement or payment of mutilated, destroyed, lost or stolen Notes are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes, and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. 11. Paying Agents The names of the initial Paying Agents and their initial specified offices are set out below. The Issuer and the Guarantors (acting together) are entitled, with the prior written consent of the Trustee, to vary or terminate the appointment of any Paying Agent and/or appoint additional or other Paying Agents and/or approve any change in the specified office through which any Paying Agent acts, provided that the Issuer and the Guarantors will at all times appoint at least one Paying Agent in a Member State of the European Union that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to such Directive. In addition, the Issuer and the Guarantors (acting together) shall forthwith appoint a Paying Agent having a specified office in New York City in the circumstances described in Condition 5(b)(iii). Any variation, termination, appointment or change shall only take effect (other than in the case of insolvency, when it shall be of immediate effect) after not less than 30 nor more than 45 days' prior notice thereof shall have been given to the Noteholders in accordance with Condition 13. In acting under the Agency Agreement, the Paying Agents act solely as agents of the Issuer and the Guarantors and, in certain circumstances specified therein, the Trustee, and do not assume any obligation to, or relationship of agency or trust with, any Noteholders, Receiptholders or Couponholders. The Agency Agreement contains provisions permitting any entity into which any Paying Agent is merged or converted or with which it is consolidated or to which it transfers all or substantially all of its assets to become the successor paying agent. 12. Prescription The Notes, Receipts and Coupons shall be prescribed and become void unless presented for payment within a period of 10 years (in the case of principal) and five years (in the case of interest) after the Relevant Date therefor. "Relevant Date" means the date on which payment of principal and interest first becomes due, except that, if the full amount of the moneys payable has not been duly received by the Trustee or the Principal Paying Agent, as the case may be, on or prior to such due date, it means the date on which, the full amount of such moneys having been so received, notice to that effect is duly given to the Noteholders in accordance with Condition 13. 13. Notices All notices regarding the Notes shall be given to holders of Definitive Notes and interests in a Global Note by publication at least once in a leading daily newspaper in the English language of general circulation in London. It is expected that such publication will be made in the Financial Times in London. Neither the failure to give notice nor any defect in any notice to any particular Noteholder shall affect the sufficiency of any notice with respect to other Notes. Such notices will be deemed to have been given on the date of such publication or, if published in such newspapers on different dates, on the date of the first such publication. Notice to be given by any Noteholder shall be in writing and given by forwarding the same, together (in the case of Definitive Notes) with the relative Note or Notes, to the Principal Paying Agent. While any Notes are represented by a Global Note, such notice may be given by any holder of an interest in such Global Note to the Principal Paying Agent via Euroclear and/or Clearstream, Luxembourg, as the case may be, in such manner as the Principal Paying Agent and Euroclear and/or Clearstream, Luxembourg, as the case may be, may approve for this purpose.
81 14. Currency Indemnity The relevant Specified Currency is the sole currency of account and payment for all sums payable by the Issuer or the Guarantors under or in connection with the Notes, including damages. Any amount received or recovered in a currency other than in the relevant Specified Currency (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction, in the winding-up or dissolution of the Issuer or the Guarantors or otherwise) by any Noteholder in respect of any sum expressed to be due to it from the Issuer or the Guarantors shall only constitute a discharge of the Issuer or the Guarantors to the extent of the relevant Specified Currency amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the first date on which it is practicable for such Noteholder to so purchase the relevant Specified Currency with the amount so received or recovered in that other currency (such date with respect to such a receipt or recovery by a Noteholder in a currency other than the relevant Specified Currency being referred to herein as the "First Practicable Conversion Date"). If that relevant Specified Currency amount is less than the relevant Specified Currency amount expressed to be due to the recipient under any Note, the Issuer or the Guarantors shall indemnify such recipient against any loss sustained by it as a result. In any event, the Issuer or the Guarantors shall indemnify the recipient against the cost of making any such purchase. For the purposes of this Condition 14, it will be sufficient for the Noteholder to demonstrate that it would have suffered a loss had an actual purchase been made on the First Practicable Conversion Date. These indemnities constitute a separate and independent obligation from the Issuer's and/or the Guarantors' other obligations, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by any Noteholder and shall continue in full force and effect despite any other judgment, order, claim or proof for a liquidated amount in respect of any sum due under any Note or any other judgment or order. If any amount is received or recovered by a Noteholder in a currency other than the relevant Specified Currency and if the actual conversion of such amount to the relevant Specified Currency by such Noteholder results in a net surplus (after deductions of all costs and expenses of such conversion), such surplus must be returned to the Issuer within 30 days of such conversion. 15. Governing Law The Trust Deed, the Agency Agreement, the Notes, the Receipts and the Coupons and any non-contractual obligations arising out of or in connection with the Trust Deed, the Agency Agreement, the Notes, the Receipts and the Coupons are governed by, and shall be construed in accordance with, English law. 16. Jurisdiction The Issuer irrevocably agrees for the benefit of the holders of the Notes that the courts of England shall have jurisdiction to hear and determine any suit, action or proceedings, and to settle any disputes, which may arise out of or in connection with the Notes (respectively, "Proceedings" and "Disputes") and, for such purposes, irrevocably submits to the jurisdiction of such courts. The Issuer irrevocably waives any objection which it might now or hereafter have to the courts of England being nominated as the forum to hear and determine any Proceedings and to settle any Disputes and agrees not to claim that any such court is not a convenient or appropriate forum. Nothing contained in this Condition 16 shall limit any right to take Proceedings against the Issuer in any court of competent jurisdiction, nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdiction, whether concurrently or not. The Issuer appoints, designates and empowers Law Debenture Corporate Services Limited at its office at 100 Wood Street, Fifth Floor, London EC2V 7EX as its agent for service of process, and undertakes that, in the event of such person ceasing so to act or ceasing to be domiciled in England, it will appoint, designate and empower another person domiciled in England as its agent for service of process in England in respect of any Proceedings. Nothing herein shall affect the right to serve process in any other manner permitted by law. 17. Descriptive Headings The descriptive headings appearing in these Conditions are for convenience of reference only and shall not alter, limit or define the provisions hereof.
82 18. Further Issues of Notes The Issuer may from time to time without the consent of the Noteholders create and issue further notes, bonds or Notes having the same terms and conditions as the Notes of a Series in all respects (or in all respects except for the payment of interest on the Notes (i) scheduled and paid prior to the date of issuance of such notes, bonds or Notes or (ii) payable on the first Interest Payment Date following such date of issuance) so that such further issue shall be consolidated and form a single Series with the outstanding Notes of such Series; provided that nothing in this Condition shall prevent the Issuer from creating and issuing further notes, bonds or Notes that do not have the same terms and conditions as the Notes and which are not consolidated with any of the Notes to form a single Series. Any further notes, bonds or Notes forming a single Series with the outstanding Notes of any Series constituted by the Trust Deed shall, and any other notes, bonds or Notes may (with the consent of the Trustee), be constituted by the Trust Deed. 19. Contracts (Rights of Third Parties) Act 1999 No person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act 1999, but this does not affect any right or remedy of any person which exists or is available apart from the Contracts (Rights of Third Parties) Act 1999. 20. Redenomination
Where redenomination is specified in the applicable Pricing Supplement as being applicable, the Issuer may, without the consent of the Noteholders, the Receiptholders and the Couponholders, on giving at least 30 days' prior notice to the Principal Paying Agent, the Trustee, Euroclear and Clearstream, Luxembourg and to the Noteholders in accordance with Condition 13 elect that, with effect from the Redenomination Date specified in the notice, the Notes shall be redenominated in euro.
The election will have effect as follows:
(i) the Notes and the Receipts shall be deemed to be redenominated into euro in the denomination of EUR 0.01 with a principal amount for each Note and Receipt equal to the principal amount of that Note or Receipt in the Specified Currency, converted into euro at the Established Rate, provided that, if the Issuer determines, with the agreement of the Principal Paying Agent that the then market practice in respect of the redenomination into euro of internationally offered securities is different from the provisions specified above, such provisions shall be deemed to be amended so as to comply with such market practice and the Issuer shall promptly notify to the Noteholders, the Trustee and the Agents of such deemed amendments;
(ii) save to the extent that an Exchange Notice has been given in accordance with paragraph (iv) below, the amount of interest due in respect of the Notes will be calculated by reference; (x) in the case of Notes in bearer form, to the aggregate principal amount of Notes presented (or, as the case may be, in respect of which Coupons are presented) for payment by the relevant holder; or (y) in the case of Notes in registered form, the Outstanding Notes, and the amount of any such payment shall be rounded down to the nearest EUR 0.01;
(iii) if definitive Notes are required to be issued after the Redenomination Date, they shall be issued at the expense of the Noteholders in the denominations of EUR 1,000, EUR 10,000, EUR 100,000 and (but only to the extent of any remaining amounts less than EUR 1,000 or such smaller denominations as the Principal Paying Agent may approve) EUR 0.01 and such other denominations as the Principal Paying Agent shall determine after consultation with Euroclear and Clearstream, Luxembourg and notify the Noteholders but subject to any requirement for minimum denomination under applicable law;
(iv) if issued prior to the Redenomination Date, all unmatured Coupons denominated in the Specified Currency (whether or not attached to the Notes) will become void with effect from the date on which the Issuer gives notice (the "Exchange Notice") that replacement euro-denominated Notes, Receipts and Coupons are available for exchange (provided that such securities are so available) and no payments will be made in respect of them. The payment obligations contained in any Notes and Receipts so issued will also become void on that date although those Notes and Receipts will continue to constitute valid exchange obligations of the Issuer. New certificates in respect of euro-denominated Notes, Receipts and Coupons will be issued in exchange for Notes, Receipts and Coupons denominated in the Specified Currency in such manner as the Principal Paying Agent may specify and as
83 shall be notified to the Noteholders in the Exchange Notice. No Exchange Notice may be given less than 15 days prior to any date for payment of principal or interest on the Notes;
(v) after the Redenomination Date, all payments in respect of the Notes, the Receipts and the Coupons, other than payments of interest in respect of periods commencing before the Redenomination Date, will be made solely in euro as though references in the Notes to the Specified Currency were to euro. Payments will be made in euro by credit or transfer to a euro account (or any other account to which euro may be credited or transferred) specified by the payee or, at the option of the payee, by a euro cheque;
(vi) if the Notes are Fixed Rate Notes and interest for any period ending on or after the Redenomination Date is required to be calculated for a period ending other than on an Interest Payment Date, it will be calculated by applying the Interest Rate to each Specified Denomination, multiplying such sum by the applicable Day Count Fraction, and rounding the resultant figure to the nearest sub-unit of the relevant Specified Currency, half of any such sub-unit being rounded upwards or otherwise in accordance with applicable market conventions;
(vii) if the Notes are Floating Rate Notes, the applicable Pricing Supplement will specify any relevant changes to the provisions relating to interest; and
(viii) such other changes shall be made to these Conditions as the Issuer may decide, with the consent of the Trustee and the Principal Paying Agent, and as may be specified in the notice, to conform them to conventions then applicable to instruments denominated in euro.
In this Condition 20, the following expressions have the following meanings:
"Established Rate" means the rate for the conversion of the Specified Currency (including compliance with rules relating to roundings in accordance with applicable European Community regulations) into euro established by the Council of the European Union pursuant to Article 123 of the Treaty;
"euro" and "EUR" mean the currency introduced at the start of the third stage of economic and monetary union pursuant to the Treaty;
"Redenomination Date" means (in the case of interest-bearing Notes) any date for payment of interest under the Notes or (in the case of Zero Coupon Notes) any date, in each case specified by the Issuer in the notice given to the Noteholders pursuant to paragraph (i) above and which falls on or after the date on which the country of the Specified Currency first participates in the third stage of European economic and monetary union or otherwise participates in European economic and monetary union in a manner with similar effect to such third stage; and
"Treaty" means the Treaty establishing the European Community, as amended.
84 SELLING RESTRICTIONS General No action has been or will be taken in any jurisdiction that would permit a public offering of the Notes, or the possession, circulation or distribution of this Offering Circular or any other material relating to the Issuer, the Guarantors or the Notes in any jurisdiction where action for that purpose is required. Accordingly, the Notes may not be offered or sold, directly or indirectly, and neither this Offering Circular, nor any other offering material or advertisement in connection with the Notes, may be distributed or published in, or from, any country or jurisdiction, except under circumstances that will result in compliance with any applicable rules and regulations of any such country or jurisdiction. Purchasers of Notes may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the purchase price. United States The Notes have not been and will not be registered under the Securities Act, or with any securities regulatory authority of any state or other jurisdiction of the United States. The Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S). Each purchaser of Notes outside the United States pursuant to Regulation S and each subsequent purchaser of such Notes, by accepting delivery of this Offering Circular and the Notes, will be deemed to have represented, agreed and acknowledged that: 1. it is, or at the time Notes are purchased will be, the beneficial owner of such Notes and (a) it is not a U.S. person and it is located outside the United States (within the meaning of Regulation S) and (b) it is not an affiliate of the Issuer or a person acting on behalf of one of the Issuer's affiliates; 2. it understands that such Notes have not been registered under the Securities Act and that, prior to the expiration of the distribution compliance period, it will not offer, sell, pledge or otherwise transfer such Notes except (a) to us, (b) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S or (c) if such Notes have been registered pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any State of the United States; 3. it understands that such Notes, unless the Issuer determines otherwise in accordance with applicable law, will bear a legend to the following effect: THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES EXCEPT (A) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR (B) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT; 4. it understands that the Issuer, the Registrar, the Dealers and the Issuer's and their affiliates, and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements; and 5. (a) either (i) it is not, and is not acting on behalf of, an employee benefit plan (as defined in Section 3(3) of ERISA) or other plan (as defined in Section 4975(e)(1) of the Code) subject to the prohibited transaction provisions of ERISA, or Section 4975 of the Code, or any entity which may be deemed to hold assets of any such employee benefit plan or plan, or a governmental, church or non-U.S. plan which is subject to any federal, state, local or non-U.S. law that is substantially similar to the prohibited transaction provisions of Section 406 of ERISA or Section 4975 of the Code, and no part of the assets to be used by it to purchase or hold the Notes or any interest therein constitutes the assets of any such employee benefit plan or plan, or (ii) its acquisition, holding and disposition of the Notes or any interest therein does not and will not constitute or otherwise result in a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code (or, in the case of a governmental, church or non-U.S. plan, a violation of any substantially similar federal, state, local or non-U.S. law); and (b) it agrees not to sell or otherwise transfer any interest in the Notes otherwise than to a purchaser or transferee that is deemed to make these same representations, warranties and agreements with respect to its acquisition and holding of such Notes.
85 THE ISSUER, THE GUARANTORS AND THE DEALERS WILL RELY UPON THE TRUTH AND ACCURACY OF THE FOREGOING ACKNOWLEDGMENTS, REPRESENTATIONS AND AGREEMENTS. Mexico The Notes may not be publicly offered or traded in Mexico unless the same are offered or traded pursuant to the provisions of Article 8 of the LMV and regulations issued thereunder. The information contained in this Offering Circular is solely the responsibility of the Issuer and the Guarantors and has not been reviewed or authorized by the CNBV. The terms of the offering have been notified to the CNBV for information purposes only which does not constitute a certification as to the investment quality of the Notes or of the solvency of the Issuer or the Guarantors. United Kingdom Each Dealer has represented and agreed that: (i) in relation to any Notes which have a maturity of less than one year, (a) it is a person whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of its business and (b) it has not offered or sold and will not offer or sell any Notes other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of the Notes would otherwise constitute a contravention of Section 19 of the Financial Services and Markets Act 2000 ("FSMA") by TV Azteca; (ii) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which Section 21(1) of the FSMA would not apply to TV Azteca; and (iii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any Notes in, from or otherwise involving the United Kingdom. European Economic Area In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a "Relevant Member State"), each Dealer has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) it has not made and will not make an offer of Notes which are the subject of the offering contemplated by this Offering Circular as completed by the final terms in relation thereto to the public in that Relevant Member State except that it may, with effect from and including the Relevant Implementation Date, make an offer of such Notes to the public in that Relevant Member State: (i) if the final terms in relation to the Notes specify that an offer of those Notes may be made other than pursuant to Article 3(2) of the Prospectus Directive in that Relevant Member State (a Non-exempt Offer), following the date of publication of a prospectus in relation to such Notes which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, provided that any such prospectus has subsequently been completed by the final terms contemplating such Non-exempt Offer, in accordance with the Prospectus Directive, in the period beginning and ending on the dates specified in such prospectus or final terms, as applicable; (ii) at any time to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; (iii) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000; and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; (iv) at any time to fewer than100 or, if the Relevant Member State has implemented the relevant provisions of the 2010 PD Amending Directive, 150 natural or legal persons (other than qualified
86 investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the relevant Dealer nominated by TV Azteca for any such offer; or (v) at any time in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of Notes referred to in (ii) to (v) above shall require TV Azteca or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive. For the purposes of this provision, the expression an offer of Notes to the public in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression "Prospectus Directive" means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State) and includes any relevant implementing measure in each Relevant Member State and the expression2010 PD Amending Directive means Directive 2010/73/EU. Hong Kong No Notes have been offered or sold, and no Notes may be offered or sold, in Hong Kong, by means of any document, other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent; or to "professional investors" as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or in other circumstances which do not result in the document being a "prospectus" as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32) of Hong Kong. No document, invitation or advertisement relating to the Notes has been issued or may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted under the securities laws of Hong Kong) other than with respect to Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to "professional investors" as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance. This Offering Circular has not been registered with the Registrar of Companies in Hong Kong. Accordingly, this Offering Circular may not be issued, circulated or distributed in Hong Kong, and the Notes may not be offered for subscription to members of the public in Hong Kong. Each person acquiring the Notes will be required, and is deemed by the acquisition of the Notes, to confirm that he is aware of the restriction on offers of the Notes described in this Offering Circular and the relevant offering documents and that he is not acquiring, and has not been offered any Notes in circumstances that contravene any such restrictions. Singapore This Offering Circular has not been and will not be lodged or registered with the Monetary Authority of Singapore. Accordingly, this Offering Circular and any other document or material in connection with the offer or sale, or the invitation for subscription or purchase of the Notes, may not be issued, circulated or distributed, nor may the Notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the "SFA"), (ii) to a relevant person as defined under Section 275(2), or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions, specified in Section 275 of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of any other applicable provision of the SFA. Where the Notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is: (a) a corporation (which is not an accredited investor as defined under Section 4A of the SFA) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor,
87 shares, debentures and units of shares and debentures of that corporation or the beneficiaries' rights and interest in that trust shall not be transferable for six months after that corporation or that trust has acquired the Offer Shares under Section 275 of the SFA except: (i) to an institutional investor under Section274 of the SFA or to a relevant person defined in Section275(2) of the SFA, or to any person pursuant to an offer that is made on terms that such shares, debentures and units of shares and debentures of that corporation or such rights and interest in that trust are acquired at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets, and further for corporations, in accordance with the conditions, specified in Section 275 of the SFA; (ii) where no consideration is given for the transfer; or (iii) where the transfer is by operation of law. Switzerland This Offering Circular as well as any other material relating to the Notes does not constitute an issue prospectus pursuant to Articles 652a and/or 1156 of the Swiss Code of Obligations. The Notes will not be listed on the SIX Swiss Exchange and, therefore, the documents relating to the Notes, including, but not limited to, this document, do not claim to comply with the disclosure standards of the listing rules of the SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange. The Notes are being offered in Switzerland by way of a private placement, i.e. to a small number of selected investors only, without any public offer and only to investors who do not purchase the Notes with the intention to distribute them to the public. The investors will be individually approached by TV Azteca from time to time. This Offering Circular as well as any other material relating to the Notes are personal and confidential and do not constitute an offer to any other person. This Offering Circular may only be used by those investors to whom it has been handed out in connection with the offering described herein and may neither directly nor indirectly be distributed or made available to other persons without the express consent of TV Azteca. It may not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in (or from) Switzerland. Argentina The Notes will not be marketed in Argentina by means of a public offer of securities, as such term is defined under Section 2 of Argentine Law No. 26,831, as amended. No application has been or will be made with the Argentine Comisión Nacional de Valores, the Argentine securities governmental authority, to offer the Notes in Argentina. Brazil The offering of the Notes will not be carried out by any means that would constitute a public offering in Brazil under Law 6,385 of December 7, 1976, as amended, and under CVM Rule No. 400 of December 29, 2003, as amended. Accordingly, this Offering Circular and any supplements thereto have not been, and will not be, delivered for registration to the Comissão de Valores Mobiliários ("CVM"), the Brazilian Central Bank ("BCB") or other Brazilian authorities and the issue of the Notes has not been authorized by the CVM, BCB or any other Brazilian authority and this Offering Circular and any supplement thereto shall not be construed as being a public offering of securities or an offering in the financial and capital markets in Brazil. Documents relating to the offering, as well as the information contained herein and therein, may not be supplied or distributed to the public in Brazil, as the offering of the Notes pursuant to this Offering Circular and any supplements thereto will not be a public offering of securities in Brazil, nor be used in connection with any offer for subscription or sale of Notes to the public in Brazil. Any public offering or distribution, as defined under Brazilian laws and regulations, of the Notes in Brazil is not legal without prior registration with the CVM. Chile The Notes have not and will not be registered with the Chilean Securities Commission (Superintendencia de Valores y Seguros) under Law 18,045, as amended, of Chile, and, accordingly, may not be offered to persons in Chile except in circumstances that do not constitute a public offering under Chilean law.
88 Colombia Neither this Offering Circular nor any supplement thereto will be delivered for registration to the National Registry of Securities and Issuers ("NRSI") in Colombia and the issue of the Notes will not be authorized by the Colombian Superintendence of Finance, and neither this Offering Circular nor any supplement thereto shall be construed as being a public offering of securities in Colombia. Accordingly, this document and accompanying supplements may not be issued, circulated or distributed in Colombia, nor may the Notes be marketed, offered or sold, other than in circumstances which do not constitute an offer of the Notes to the public in Colombia pursuant to Decree 2555 of 2010 issued by the Ministry of Finance and other applicable and concordant regulations. Furthermore, the terms Decree 2555 of 2010 must be abided to offer privately and to market the Notes in Colombia or to Colombian residents. Panama The Notes will not be registered with the National Securities Commission of the Republic of Panama under Decree Law No. 1 of July 8, 1999 (the "Panamanian Securities Act") and may not be publicly offered or sold within Panama, except in certain limited transactions exempt from the registration requirements of the Panamanian Securities Act. The Notes do not benefit from the tax incentives provided by the Panamanian Securities Act and are not subject to regulation or supervision by the National Securities Commission of the Republic of Panama. Peru The Notes will not be subject to a public offering in the Republic of Peru. Therefore, this Offering Circular has not been, and will not be, registered with the Peruvian Superintendency of Securities Market (Superintendencia del Mercado de Valores or "SMV"). This Offering Circular and other offering materials relating to the offer of the Notes may be supplied only to those Peruvian Institutional Investors who expressly requested it. They are strictly confidential and may not be distributed to any person or entity other than the recipients hereof. The Notes may be offered in Peru only to Institutional Investors as a private offering in accordance with Peruvian Law and are subject to limitations as to their transferability as detailed therein and in this Offering Circular. In order for Peruvian pension funds to invest in the Notes, all necessary registrations with the Superintendency of Banking, Insurance and Peruvian Private Pension Funds Administrators (Superintendencia de Banca, Seguros y Administradoras Privadas de Fondos de Pensiones or "SBS") have been made or will have to be made. Other Institutional Investors, as defined by Peruvian legislation, must rely on their own examination of the Issuer and the terms of the offering of the Notes in order to determine their legal ability to invest in them. The Issuer strongly recommends that each investor seeks independent advice from local counsel in connection with the acquisition of the Notes. Uruguay In Uruguay the Notes are being placed relying in a private placement ("oferta privada") pursuant to Section 2 of Law N° 18,627. The Notes are not and will not be registered with the Financial Services Superintendence of the Central Bank of Uruguay to be publicly offered in Uruguay. Bermuda The Notes being offered in this offering memorandum may be offered or sold in Bermuda only in compliance with the provisions of the Investment Business Act 2003 of Bermuda (as amended). Additionally, non- Bermudian persons may not carry on or engage in any trade or business in Bermuda unless such persons are authorized to do so under applicable Bermuda legislation. Engaging in the activity of offering or marketing the Notes offered hereby to persons in Bermuda may be deemed to be carrying on business in Bermuda.
89 TAXATION This summary is general information only. Prospective purchasers of Notes should consult their tax advisors as to the Mexican or other tax consequences of the purchase, ownership and disposition of the Notes, including the effect of any foreign, state or local tax laws to which they are subject. Mexican Taxation This summary of certain Mexican tax considerations deals only with holders of the Notes that are not residents of Mexico for Mexican tax purposes and that do not conduct a trade or business through a permanent establishment in Mexico (a "Foreign Holder"), but does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase the Notes. This summary is based on the federal tax laws of Mexico as in effect on the date of this Offering Circular (including the Tax Treaty described below), as well as on rules and regulations of Mexico and regulations available on or before such date and now in effect. All of the foregoing are subject to change, which change could apply retroactively and could affect the continued validity of this summary. For purposes of Mexican taxation, an individual is a resident of Mexico if he has established his domicile in Mexico, unless he has another domicile in a foreign country and his personal and economic relations (centre of vital interest) are not in Mexico (except for Mexican public officers or governmental employees). Under the Código Fiscal de la Federación (the Mexican Tax Code, or "MTC"), the centre of vital interest of an individual is deemed to be located in Mexico if: (i) the source of wealth of more than 50% of the total income obtained by the individual in a calendar year comes from Mexico, or (ii) the individual's principal place of business is located within Mexican territory. An individual of Mexican nationality is presumed to be a resident of Mexico for tax purposes unless such person demonstrates otherwise. A legal entity is a resident of Mexico if its main administration or effective management is located in Mexico. If a non-Mexican tax resident has a permanent establishment (i.e., a place of business) in Mexico, such permanent establishment shall be required to pay taxes in Mexico on taxable income attributable to such permanent establishment in accordance with relevant Mexican tax provisions. Taxation of Interest and Principal Under the Ley del Impuesto Sobre la Renta (the Mexican Income Tax Law, or "MITL"), payments of interest made by TV Azteca or any Guarantor in respect of the 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 Mexican Income Tax (the "Withholding Tax") assessed at a rate of 4.9% if (i) the relevant Notes are placed among the public-at-large or (ii) the Notes are placed, through banks or brokerage houses, in a country which has entered into a treaty to avoid double taxation with Mexico and provided that (x) the notice set forth in Article 7, paragraph two, of the LMV has been filed with the CNBV describing the most relevant terms and conditions of the offer of the Notes (the "CNBV Notice") and (y) the relevant requirements set forth by the Servicio de Administración Tributaria (the Mexican Tax Administration Service, or "SAT") through general rules (the "Rules") are complied with. The requirements established by the SAT are as follows: (i) TV Azteca must file before the SAT a copy of the CNBV Notice, (ii) TV Azteca must file before the SAT within the first 15 business days after the placement date of the Notes, a tax notice describing certain tax information relating to TV Azteca and financial information relating to the Notes; (iii) TV Azteca must file before the SAT within the first 15 business days of each July, October, January and April of the following year, information regarding the amount of interest paid on the Notes and the date of such payment, and a statement representing that the persons or entities referred to in sections (x) and (y) below are not the effective beneficiaries of 5.0% or more of the aggregate amount of each such interest payment, and (iv) TV Azteca maintains such notices and records required by the Rules. TV Azteca and each Guarantor expects that such requirements will be met. If the requirements under such Rules are not complied with, withholding tax on the payment of interest on the Notes will be assessed at a rate of 10% for holders other than parties related to TV Azteca or the relevant Guarantor, as the case may be, as defined above, in which case payments of interest will be assessed at a rate of 30%. The Rules, together with other tax regulations, are enacted on an annual basis, and therefore, no assurances can be given that the Rules will be extended or that equivalent Rules will be enacted. The withholding tax rates of 4.9% and 10% above mentioned will not be applicable if the effective beneficiaries receive, either directly or indirectly, individually or in conjunction with related parties, more than 5% of the interest derived from the Notes and such beneficiaries are: (x) shareholders of TV Azteca or the relevant
90 Guarantor, as the case may be, that own, directly or indirectly, individually or collectively, with related persons more than 10% of TV Azteca's or the relevant Guarantor's, as the case may be, voting stock or (y) corporations more than 20% of the stock of which is owned, directly or indirectly, individually or collectively, with related persons of TV Azteca or the relevant Guarantor, as the case may be. For such purposes, parties are considered to be related parties when one of them holds interest in the business of the other, when they have common interests, or when a third person has an interest in their business or assets. In this case, the interest will be subject to Withholding Tax at a general tax rate of 30%. Payments of interest made by TV Azteca or any Guarantor with respect to the Notes to non-Mexican pension or retirement funds will be exempt from Mexican withholding taxes, provided that any such fund (i) is the effective beneficiary of the interest, (ii) is duly incorporated pursuant to the laws of its country of origin (regardless of the type of organization), (iii) is exempt from income tax in such country, and (iv) is registered at the Registry of Foreign Banks, Financing Entities, Pension, Retirement Funds and Investment Funds in accordance with the Rules issued by the SAT. TV Azteca and the Guarantors have agreed, subject to specified exceptions and limitations, to pay additional amounts to the holders of the Notes in respect of the Withholding Tax mentioned above. 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 TV Azteca or any Guarantor with respect to the Notes (except to the extent such payments of principal are in excess of the issue price of the Notes). Taxation of Dispositions of Notes Payments in excess of the issue price of the Notes resulting from the sale made by Foreign Holders of the Notes, are deemed to be interest for Mexican tax purposes to the extent the purchaser of the Notes is a Mexican resident or a foreign resident with a permanent establishment in Mexico. The corresponding withholding tax rate would depend on the beneficial owner of the gain. In addition, purchases of the Notes by a non-Mexican tax resident below par value may be subject to Withholding Tax if the seller of the Notes is either a Mexican individual or a Mexican company. Capital gains resulting from the sale or other disposition of the Notes by a Foreign Holder to another Foreign Holder will not be subject to Mexican income or other similar taxes. Transfer and Other Taxes There are no Mexican stamp, registration of similar taxes payable by a Foreign Holder in connection with the purchase, ownership or disposition of any Notes. A Foreign Holder of Notes will not be liable for Mexican estate, gift, inheritance or similar tax with respect to the Notes. Payments of Interest Under Council Directive 2003/48/EC on the taxation of savings income (the "Savings Directive"), each Member State of the European Union, or EU, is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a person within its jurisdiction to, or secured by such a person for, an individual beneficial owner resident in, or certain limited types of entities established in, that other Member State; however, for a transitional period, Austria and Luxembourg will (unless during such period they elect otherwise) instead apply a withholding system in relation to such payments. Under such withholding system, the beneficial owner of the interest payment must be allowed to elect that certain provision of information procedures should be applied instead of withholding. The current rate of withholding is 35%. The transitional period is to terminate at the end of the first full fiscal year following the conclusion of agreements by certain non-EU countries to exchange of information procedures relating to interest and other similar income. A number of non-EU countries, and certain dependent or associated territories of certain Member States, have adopted or agreed to adopt similar measures (either provision of information or transitional withholding) in relation to payments made by a person within its jurisdiction to, or secured by such a person for, an individual beneficial owner resident in, or certain limited types of entities established in, a Member State. In addition, the Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a Member State to, or secured by such a person for, an individual beneficial owner resident in, or certain limited types of entities established in, one of those countries or territories.
91 A proposal for amendments to the Savings Directive has been published, including a number of suggested changes which, if implemented, would broaden the scope of the rules described above. No Additional Amounts will be payable with respect to a note where withholding or deduction is imposed or levied on a payment pursuant to the Savings Directive or any other EU directive implementing the conclusions of the ECOFIN Council meeting of November 26-27, 2000 on the taxation of savings income, or any law implementing or complying with, or introduced in order to conform to, such a directive. If any Definitive Notes are issued, the Issuer will, to the extent permitted by law, maintain a paying agent in a Member State that will not be obliged to withhold or deduct tax pursuant to the Savings Directive or any such directive or law. Holders should consult their tax advisors regarding the implications of the Savings Directive in their particular circumstances.
92 AVAILABLE INFORMATION For so long as Notes are listed on the Global Exchange Market of the Irish Stock Exchange, copies of the following items will be available in physical form at the offices of Azteca, located at Periférico Sur 4121, Col. Fuentes del Pedregal, Mexico City, C.P. 14141, Mexico: this Offering Circular; the applicable Pricing Supplement(s); the constitutional documents of Azteca; consolidated audited financial statements of Azteca and its subsidiaries as of and for the years ended December 31, 2012 and 2011, in each case together with the audit reports prepared in connection therewith; consolidated unaudited interim financial statements of Azteca and its subsidiaries as of and for the six months ended June 30, 2013 and 2012; the most recently published audited consolidated financial statements (if any) of Azteca and its subsidiaries, in each case together with any audit reports prepared in connection therewith; the most recently published unaudited interim financial statements (if any) of Azteca and its subsidiaries, in each case together with any review reports prepared in connection therewith; a copy of the trust deed and agency agreement governing the Notes; and any other documents relating to the offering of Notes referred to herein.
93 LISTING AND GENERAL INFORMATION The information contained in this Offering Circular is solely the responsibility of Azteca. Azteca, having taken all reasonable care, confirms that the information contained in this Offering Circular is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import. Since June 30, 2013, there has been no significant change in the financial or trading position of Azteca or Azteca and its consolidated subsidiaries (including each of the Guarantors) ("Azteca's Group") and since December 31, 2012 there has been no material adverse change in the financial position or prospects of Azteca or Azteca's Group which is not otherwise disclosed in this Offering Circular or any supplemental offering circular. Notes issued under the Programme may at any time, but are not required to, be listed on one or more stock exchanges. Application has been made for this Offering Circular to be approved by the Irish Stock Exchange. Azteca may apply for any Series of Notes to be issued under the Programme to be admitted to the Official List of the Irish Stock Exchange and trading on its Global Exchange Market, as set forth in the applicable Pricing Supplement. This Offering Circular constitutes "Base Listing Particulars" for the purpose of any such listing and trading.
The Global Notes will be deposited upon issuance with a common depositary for Euroclear and Clearstream, Luxembourg. Azteca estimates that it will incur approximately 1,940 euros in costs related to the approval of this Offering Circular by the Irish Stock Exchange. Except as disclosed in this Offering Circular, within the 12 months preceding the date of this Offering Circular neither Azteca nor Azteca's Group is or has been involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which Azteca or Azteca's Group is aware) which may have, or have in such period had, significant effects on the financial position or profitability of Azteca and/or Azteca's Group. Except as disclosed herein, there are no potential conflicts of interest between any duties of any of the members of the administrative, management or supervisory bodies of Azteca towards Azteca and their private interests and/or other duties. The price and amount of Notes to be issued under the Programme will be determined by Azteca and the relevant Dealers at the time of issue in accordance with prevailing market conditions. Azteca has obtained all necessary consents, approvals and authorisations in connection with the Programme. Azteca's financial information (including the financial statements included in the Base Listing Particulars) is presented on a consolidated basis and includes both Guarantor and non-Guarantor subsidiaries. Azteca's consolidated financial statements as of and for the years ended December 31, 2012 and 2011 have been audited by its independent auditors, Salles, a member of Grant Thornton International. Salles is a member of the CCPM and its address is Periférico Sur 4348, Colonia Jardines del Pedregal, 04500, Mexico, D.F. Azteca is a publicly held corporation with variable capital (sociedad anónima bursátil de capital variable) organized under the laws of Mexico. The public deed containing Azteca's deed of incorporation was executed on June 2, 1993 and the same was registered in the Public Registry of Commerce (Registro Público de Comercio) of Mexico City on July 13, 1993 under the commercial file 167346. The term of Azteca's incorporation is 99 years beginning on the date of Azteca's incorporation. Azteca's principal executive offices are located at Av. Periférico Sur 4121, Col. Fuentes del Pedregal, Mexico D.F. 14141. Azteca's telephone number at that location is +5255-3099- 1313. Azteca's Internet addresses are www.irtvazteca.com and www.tvazteca.com. Information available on Azteca's websites is not a part of, nor is it incorporated by reference into, this Offering Circular.
94 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Unaudited Condensed Consolidated Financial Statements of Azteca as of June 30, 2013 and 2012 Condensed consolidated balance sheets as of June 30, 2013 and 2012...... F-2 Condensed consolidated statements of income for the six months ended June 30, 2013 and 2012 ...... F-3 Condensed consolidated statements of changes in stockholders' equity for the six months ended June 30, 2013 and 2012 ...... F-4 Condensed consolidated statements of cash flows for the six months ended June 30, 2013 and 2012...... F-5 Notes to condensed consolidated financial statements ...... F-6
Audited Consolidated Financial Statements of Azteca as of December 31, 2012 and 2011...... F-16 Consolidated balance sheets as of December 31, 2012 and 2011 ...... F-21 Consolidated statements of income for the years ended December 31, 2012 and 2011 ...... F-22 Consolidated statements of changes in stockholders' equity for the years ended December 31, 2012 and 2011 ...... F-23 Consolidated statements of cash flows for the years ended December 31, 2012 and 2011...... F-24 Notes to consolidated financial statements ...... F-25
F-1 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
Consolidated balance sheets As of June 30, 2013 and 2012 (Stated in thousands of Mexican pesos) Junio Ju nio Diciembre 2013 2012 2012 Assets Current Assets Cash and cash equivalents $ 6,050,582 $ 7,764,156 $ 6,446,077 Trade and other receivables 5,633,363 5,326,803 5,330,736 Current tax assets 222,210 321,773 82,984 Related parties 391,934 376,356 266,551 Other financial assets 919,239 68,540 889,457 Perfomance rights 2,225,485 1,989,763 1,809,681 Inventories 42,302 15,204 33,711 Total current assets 15,485,115 15,862,595 14,859,197
Trade long-term 491,475 1,621,845 480,000 Perfomance rights 1,791,532 1,367,104 1,505,385 Property and equipment, net 3,411,317 3,479,792 3,465,097 Television concessions, net 7,720,810 7,720,810 7,720,810 Other assets 1,488,936 996,877 1,167,903 Investments accounted for using the equity method and other 303,361 215,038 312,785 Deferred income tax 4,671,868 4,285,989 4,671,868 Total non-current assets 19,879,299 19,687,455 19,323,848 Total ass et s $ 35,364,414 $ 35,550,050 $ 34,183,045
Liabilities Current liabilities Trade and other payables $ 1,878,402 $ 1,897,332 $ 1,853,714 Perfomance rights 89,653 92,900 136,770 Related parties 161,951 170,229 167,507 Current tax liabiities 343,620 371,130 203,655 Financial debt 666,648 666,648 666,648 Deferred revenue 6,079,458 5,808,667 4,926,883 Total short-term liabilities 9,219,732 9,006,906 7,955,177
Long term financial debt Stock exchange certificates 4,277,826 4,944,474 4,611,580 Loans from American Tower Corporation -ATC- 1,559,588 1,634,972 1,557,983 Medium Term Note Program -MTN 3,836,221 4,010,089 3,824,666 Deferred revenue 871,424 1,855,837 494,451 Employee benefits 165,461 141,237 165,461 Deferred income tax 3,463,473 3,105,941 3,463,473 Total long term liabilities 14,173,993 15,692,550 14,117,614 Total liabilities 23,393,725 24,699,456 22,072,791
Shareholders Equity Controlling share Capital stock 715,122 715,335 715,080 Premium on stock issued 207,418 207,418 207,419 Leg al res er ve 83,229 83,229 83,229 Reserve for stock repurchases 594,983 603,232 594,175 Other components of equity (724,227) (285,332) (842,859) Retained earnings 11,027,725 9,450,421 11,279,535 Controlling interest 11,904,250 10,774,303 12,036,579 Non controlling interest 66,439 76,291 73,675 Total shareholder's equity 11,970,689 10,850,594 12,110,254 Total liabilities and shareholder´s equity $ 35,364,414 $ 35,550,050 $ 34,183,045
F-2 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
Consolidated incomes statements For the periods ended June 30, 2013 and 2012 (Stated in thousands of Mexican pesos)
2013 2012
Revenue $ 5,236,496 $ 5,744,931
Cost of programming, production and broadcasting 3,022,350 3,204,886 Selling and administrative expenses 753,926 724,149 Total costs and expenses 3,776,276 3,929,035
Operating income before depreciation and amortization 1,460,220 1,815,896
Other expenses, net 208,957 151,601 Depr eci ati on and am or tization 292,379 269,543 Operating Income 958,884 1,394,752
Integral cost of financing Interest paid (464,455) (488,834) Other financial expenses (60,477) (122,342) Interest earned 86,742 120,069 Exchange (loss) gain, net (20,496) (8,778) (458,686) (499,885)
Equity in unconsolidated subsidiaries and associates ( 8,860) 572 Income before provision for income tax 491,338 895,439
Provision for income tax (431,942) (424,532)
Net income of the year $ 59,396 $ 470,907
Other comprehensive (loss) income: Effect from translation 166,651 (43,892) Loss on financial assets available-for-sale (48,019) - Other comprehensive (loss) for the year 118,632 (43,892) Total comprehensive income for the year $ 178,028 $ 427,015
Non-controlling income participation $ ( 7,234) $ (7,131) Controlling income participation 66,630 478,038 $ 59,396 $ 470,907
Total comprehensive income for the year attributable to: Non-controlling interest $ ( 7,234) $ (7,131) Owners of the parent 185,262 434,146 $ 178,028 $ 427,015
F-3 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
Consolidated statements of changes in equity For the periods ended June 30, 2013 and 2012 (Stated in thousands of Mexican pesos)
Total Reserve for Oth er attributable to non- Premium on Legal stock components Retained owners of controlling Capital stock stock issued Reserve repu rchases of equity earning parent interest Total equity
Balances as of January 1, 2012 $ 715,486 $ 207,418 $ 83,229 $ 609,227 $ (241,439) $ 9,315,825 $ 10,689,746 $ 83,421 $ 10,773,167 Preferred dividends paid - - - - - (343,442) (343,442) - (343,442) Sale of treasury stock 356 - - 10,523 - - 10,879 - 10,879 Stock repurchase (507) - - (16,518) - - (17,025) - (17,025) Non-controlling interest ------Transactions with owners (151) - - (5,995) -- 343,442.00 (349,588) - (349,588)
Net income for the period - - - - - 478,038 478,038 (7,131) 470,907 Other comprehensive loss - - - - (43,892) - (43,892) - (43,892) Total comprehensive income for the period - - - - (43,892) 478,038 434,146 (7,131) 427,015 Balances as of June 30, 2012 $ 715,335 $ 207,418 $ 83,229 $ 603,232 $ (285,331) $ 9,450,421 $ 10,774,304 $ 76,290 $ 10,850,594
Balances as of January 1, 2013 $ 715,080 $ 207,418 $ 83,229 $ 594,175 $ (842,859) $ 11,279,539 $ 12,036,582 $ 73,673 $ 12,110,255
Preferred dividends paid - - - - - (318,444) (318,444) - (318,444) Sale of treasury stock 211 - - 7,377 - - 7,588 - 7,588 Stock repurchase (169) - - (6,569) - - (6,738) - (6,738) Transactions with owners 42 - - 808 -- 318,444.00 (317,594) - (317,594)
Net income for the period - - - - 66,630 66,630 (7,234) 59,396 Other comprehensive loss - - - - 118,632 118,632 - 118,632 Total comprehensive income for the period - - - - 118,632 66,630 185,262 (7,234) 178,028 Balances as of June 30, 2013 $ 715,122 $ 207,418 $ 83,229 $ 594,983 $ (724,227) $ 11,027,725 $ 11,904,250 $ 66,439 $ 11,970,689
F-4 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
Consolidated statements of cash flows For the periods ended June 30, 2013 and 2012 (Stated in thousands of Mexican pesos)
2013 2012 Operating activities: Income before taxes on earnings $ 491,338 $ 895,439
Related parties with investing activities: Depr eci ati on and am or tiza tion 292,379 269,543 Equity in unconsolidated subsidiaries and associates 8,860 (572) Provision and estimates (84,689) 82,844 Loss and sale on property, furniture and equipment (11,438) (2,932) Net unrealized foreign exchange gain 62,032 (180,273) Interest payable 464,455 488,834 1,222,937 1,552,883
Accounts receivable 339,052 316,308 Related parties (130,939) (83,417) Inventories (8,591) (3,674) Perfomance rights (749,068) (531,217) Accounts payable and accrued expenses 282,548 82,279 Advances from advertisers 658,126 130,901 Taxes on earnings (643,815) (536,185) Net cash flow from operating activities 970,250 927,878
Investing activities: Acquisition of property, furniture and equipment (151,785) (289,778) Proceeds from sale property, furniture and equipment 14,188 22,483 Other assets (303,434) (227,475) Net cash flows from investing activities (441,031) (494,770)
Financing activities: Bank loans paid, net (333,324) (333,324) Interest paid (431,250) (475,582) Stock repurchases - (6,141) Sale of treasury stock 42 - Preferred dividends paid (159,222) (171,721) Net cash flows from financing activities (923,754) (986,768)
Increase in cash and cash equivalents (394,535) (553,660) Cash and cash equivalents at begining of year 6,446,077 8,317,816 Available for sale investments (960) - Cash and cash equivalents at end of period $ 6,050,582 $ 7,764,156
F-5 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) TV. Azteca, S. A. B. de C. V. and subsidiaries (subsidiary of Azteca Holdings, S. A. de C. V.) Notes to the interim consolidated condensed financial statements June 30, 2013 and 2012 (monetary amounts stated in thousands of pesos and US dollars) except exchange rates and values per shares)
Note 1 - Nature of operations
TV Azteca, S. A. de C. V. (the Company) was acquired by its present stockholders in July 1993, pursuant to the executive order of the Mexican Government for the privatization of certain television stations and their respective assets.
The main business of TV Azteca, S.A.B. de C. V. and its subsidiaries (the Group) includes: (i) the transmission and production of television programs; (ii) sale of advertising time; and (iii) operating an optic fiber network in Colombia.
Note 2 - General Information and basis of preparation
The interim consolidated condensed financial statements ("the interim financial statements") apply to the six months ended at June 30, 2013 and presented in Mexican pesos, the Company's functional currency. These interim financial statements have been prepared in accordance with International Accounting Standard (IAS) 34 "Interim Financial Reporting" and do not include all the information required for annual financial statements, in accordance with International Financial Reporting Standards (IFRS). They should be taken as a whole with the consolidated financial statements ended at December 31, 2012.
TV Azteca, S.A.B.de C.V. is the parent of the Group in the final analysis. The Company is a publicly held company (S.A.B. de C.V.). Its main offices are located at: Periferico Sur 4121 Colonia Fuentes del Pedregal, Mexico City, Mexico Postal Code 14141.
The interim financial statements are unaudited and have been approved and authorized to be issued by the Board of Directors on July 18, 2013.
Note 3 - Significant accounting policies
The interim financial statements have been prepared in accordance with the accounting policies described in Note 5 to the financial statements at December 31, 2012, except for the following standards beginning January 1, 2013:
x IFRS 10 Consolidated financial statements (IFRS 10) x IFRS 11 Joint arrangements (IFRS 11) x IFRS 13 "Fair value measurements" (IFRS 13) x Amendments to IAS 19 "Employee benefits" (Amendments to IAS 19) x 2009 - 11 Annual Improvements (Annual Improvements)
Adoption of the above exceptions had no impact on the consolidated financial statements of the Group.
F-6 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
Note 4 - Estimates
Upon preparing the financial statements, Management realizes several judgments, estimates, and assumptions for the recognition and measurement of assets, liabilities, revenues, and expenses. Actual results can differ from judgments, estimates, and assumptions made by Management, and they will seldom be equal to estimated results.
The judgments, estimations, and assumptions used in the interim financial statements are the same criteria used by Management in applying accounting policies and uncertainty in estimates in the annual financial statements ended at December 31, 2012, except for those used in the estimate of the provision of taxes on earnings, which were determined in the interim financial statements using the best information available for their calculation.
Note 5- Main events and transactions
During the first semester, net sales decreased 9% with respect to the prior semester, which was due mainly to the change of government that redefines communication projects. the Company foresees that those projects will be recovered during 2013.
Moreover, there was a 4% decrease in costs and expenses, resulting from increasing efficiency the production of successful content, derived from solid strategies that effectively control disbursements, whereas the performance of selling and administrative expenses is largely related to operating and personnel expenses in the period.
Note 6 - Accounts receivable
Accounts receivable at June 30:
2013 2012
Trade and other receivables $ 5,633,363 5,326,803 Related parties 391,934 376,356 Taxes recoverable 222,210 321,773 Total $ 6,247,507 6,024,932
Note 7 - Summary of related party balances 2013 2012 Accounts receivable at June 30:
Azteca Holdings S.A. de C.V.(Parent) $ 175,807 $ 167,012 Fundacion Azteca S.C. 32,192 28,071 Grupo Elektra SA de C.V. and subsidiary companies 89,707 78,536 Grupo Iusacell, S.A. de C.V. 27,116 20,056 Grupo Desarrollo Inmobiliario, S.A. de C.V. 59,857 58,194 Comunicaciones Avanzadas S.A. de C.V. 2,766 2,630 Others 4,489 21,857 Total $ 391,934 $ 376,356
F-7 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
2013 2012 Accounst payable:
Globo Re $ 123,243 $ 157,963 Arrendadora Internacional Azteca, S.A. de C.V. 2,344 12,266 Other 36,364 - Total $ 161,951 $ 170,229
Note 8 - Summary of property and equipment
At June 30, 2013 and December 31, 2012, property and equipment are summarized as follows:
Balances at depreciation balances at 31-Dec-12 additions retirements for the year 30-June-13
Land 675,011 1,302 - - 676,313 Bldgs and construc 1,211,599 46,914 (990) (35,818) 1,221,705 Mach. equip operation 899,438 114,530 (265) (152,068) 861,635 Furn. office equip 42,965 9,057 - (3,810) 48,212 Transportation equipment 366,766 61,800 (18,697) (43,973) 365,896 Computer equipment 167,383 38,462 (4,256) (41,956) 159,633 Investment in progress 101,935 - (24,012) - 77,923 Total 3,465,097 272,065 (48,220) (277,625) 3,411,317
Note 9 - Equity
-Stockholders resolutions-
At the general annual ordinary stockholders' meeting held on April 30, 2013, the stockholders resolved to approve the consolidated financial statements as of December 31, 2012. Further, a preferential dividend was declared for series D-A and series D-L stockholders. That dividend represents a total amount of $318,445, which was paid on May 31, 2013, in the amount of $159,223, and on November 31, 2013, payment will be made in the amount of $159,222.
At the general annual ordinary stockholders' meeting held on April 27, 2012, the stockholders resolved to approve the consolidated financial statements as of December 31, 2011. Further, a preferential dividend was declared for series D-A and series D-L stockholders. That dividend represents a total amount of $343,442, which was paid on May 31, 2012, in the amount of $171,721, and on December 7, 2012, payment was made in the amount of $171,721.
At the annual ordinary stockholders meeting held on April 29, 2011, the consolidated financial statements as of Friday, December 31, 2010 were approved. In addition, a unit preferential dividend was declared for Series D-A shares and Series D-L shares. That dividend accounts for a total amount of $18,590, which was paid on May 28, 2011.
F-8 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
At June 30, 2013, capital stock, premium on stock issued, legal reserve, reserve for stock repurchases, and retained earnings in the restatement of capital are summarized as shown below:
Total
Share capital $ 715,122 Premium on stock issued 207,418 Legal reserve 83,229 Reserve for stock repurchases- 594,983 Cumulative effect on translation (166,866) Retained earnings 10,961,095 Income for the year 66,630 Other comprehensive income (557,361) Total capital of the parent $ 11,904,250
Stock repurchase For the period ended June 30, 2013, the company decreased its capital stock in the amount of 169 for the repurchase of 48 shares, which were purchased for $6,569. The par value thereof was charged to share capital and the difference to the reserve for stock repurchases.
As of June 30, 2013, the company increased its capital stock in the amount of $211, pursuant to the sale of 2,466 shares, which had a selling value of $7,377.Share capital was credited at original value, and the difference was restored to the reserve for stock repurchases.
Note 10 - Segment information
As of June 30, 2013 and 2012, information on income and assets by operating segments of the Company is summarized as follows:
National television These segments are comprised of television services in Mexican territory, including local stations. Income is derived mainly from the sale of time on screen nationwide and locally, less- commissions on sales.
Azteca America This segment consists of television services in the territory of the United States of America, directed primarily for the Hispanic community that resides in that territory.
Programming rights This segment is comprised mainly of the exports of programs that were of wide interest for global audiences primarily in the countries of Latin America and Europe.
Other segments This segment consists mainly of operations relative to the promotion of billboard advertisements, soccer teams, concerts, and Internet, among other things.
F-9 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
At June 30, 2013
National Azteca Programming Others Total television America rights segments consolidated
Net sales $4,342,643 $461,987 $143,722 $288,144 $5,236,496 Cost and expense 3,366,568 304,471 25,269 288,925 3,985,233 Dep and amort 267,741 8,259 5,403 10,976 292,379 Operating income 708,334 149,257 113,050 (11,757) 958,884
At June 30, 2012
National Azteca Programming Others Total television America rights segments consolidated
Net sales $4,812,698 $489,849 $176,931 $265,454 $5,744,931 Cost and expense 3,492,300 313,589 26,186 248,561 4,080,636 Dep and amort 256,411 5,799 4,668 2,665 269,543 Operating income 1,063,987 170,461 146,077 14,228 1,394,752
Note 11 - Discontinued operations
No discontinued operations were recognized for the twelve months ended June 30, 2013 and 2012.
Note 12 - Seasonality and semiannual net results
The Company's television transmission operations are seasonal. Advertising revenues, which are recognized when the advertisement comes out on the air, are generally higher in the fourth quarter, due to the high level of advertising that comes out on the air as a result of the Christmas season.
The Company's revenues fluctuate as a result of the frequency with which the Company transmits significant events (Olympic Games, World Soccer Cups, presidential elections, among other things).
Historically, the transmission of significant events by the Company has increased advertising sales during the periods in which they came out on the air. This reflects higher audiences during the hours in which those significant events were transmitted, and the fact that advertisers pay a premium related to those significant transmission events.
F-10 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
Note 13 - Financial assets and liabilities
The fair values of financial instruments, which were determined by the Company using information available on the market and other valuation techniques that require judgment by Management, are shown below: Moreover, the use of different assumptions and valuation methods can have a material effect on the estimated amounts of fair value.
The financial instruments which, after their initial recognition, are quantified at their fair value are grouped in Levels from1 to 3 based on the degree to which fair value is observed, as shown below:
x Level 1 – valuation based on prices quoted on the market (unadjusted) for identical assets or liabilities;
x Level 2 – valuation with indicators other than the quoted prices included in Level 1, but include observable indicators for an asset or liability, either directly (quoted prices) or indirectly (derivations of these prices); and
x Level 3 – valuation techniques are applied that include indicators for assets and liabilities that are not based on observable market information (unobservable indicators).
a. Financial assets and liabilities are classified as follows:
Loans and Derivatives accounts Available- for trading receivable Total for-sale purposes and other liabilities at amortized at fair value cost
At June 30, 2013
Financial Assets: Cash and cash equivalents. $ _ $ – $ 6,050,582 $ 6,050,582 Trade and other receivables – – 5,995,078 5,995,078 Related parties – – 229,983 229,983 Available-for-sale assets 826,179 – – 826,179 Derivative financial instruments – 93,060 – 93,060 $ 826,179 $ 93,060 $ 12,275,643 $ 13,194,882
Financial liabilities: Short-term debt – – 666,648 666,648 Accounts payable – – 1,968,055 1,968,055 Long-term debt – – 9,673,635 9,673,635 $ – $ – $ 12,308,338 $ 12,308,338
F-11 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
b. Derivative financial instruments
At June 30, 2013 and 2012, the Company had interest rate caps as follows:
Type of Notional Strike Fair Value at june 30 Due dates derivative Underlying amount price 2013 2012 Amount Year Interest rate cap EIIR at 28 days $5,222,244 7.50% $ 1,781 $ 5,084 $5,222,244 2013 Interest rate cap EIIR at 28 days 4,555,596 6.75% 19,298 23,849 4,555,596 2014 Interest rate cap EIIR at 28 days 3,888,948 5.50% 37,245 39,607 3,888,948 2,015 Interest rate cap EIIR at 28 Days 3,222,300 5.50% 34,736 - 3,222,300 2016 $ 93,060 $ 8,540
These instruments do not require "margin" calls. Exercising the derivative is the Company's power and a early premium is paid.
c. Financial Debt
Loans include the following short and long term financial liabilities:
Short-term Long-term 2013 2012 2013 2012 Financial liabilities: Stock Exchange Certificates $ 666,648 $ 666,648 $ 4,277,826 $ 4,944,474 American Tower Corporation -ATC- - - 1,559,588 1,634,972 Program Medium Term Note -MTN- - - 3,836,221 4,010,089 Total carrying value $ 666,648 $ 666,648 $ 9,673,635 $ 10,589,535
The fair values have been determined of the long-term financial liabilities by calculating their present values at the reporting date, by using fixed effective market interest rates available to the Group. Changes in fair value in income or losses for the period have not been included since financial assets are carried at amortized cost in the balance sheets.
Note 14 - Earnings per share
Earnings per share All basic earnings per share such as diluted shares have been calculated by using earnings attributable to the stockholders of the parent (TV Azteca, S.A.B. de C.V.) as the numerator, that is, it was not necessary to make adjustments to earnings in 2013 or 2012.
The weighted average number of shares for purposes of diluted earnings per share can be reconciled with the weighted number of ordinary shares used in the calculation of basic earnings per share as follows:
F-12 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
2013 2012 Amounts stated in thousands of shares: Weighted average of the number of shares used in the $ 8,950,891 $ 8,954,286 base of earnings per share Shares considered issued without taking into account 1,594,943 1,591,548 stock based payments Weighted average of the number of shares used in $ 10,545,834 $ 10,545,834 diluted earnings per share
Twelve months ended June 30 2013 2012
Net earnings per common share 0.21 0.24 Net earnings per diluted share 0.18 0.20
Note 15 - Commitments and contingencies
Commitments:
a) Leases The company rents the use of satellite transponders. The total expense for the rent of these satellites amounted to $44,573 and $42,349, which are included in operating costs and expenses for the period ended Sunday, June 30, 2013 and 2012, respectively. Expenses include a monthly fixed payment and others based on the use thereof. The lease agreement has a duration of mandatory year, automatically renewable and successively for identical periods up to June 21, 2014.
b) Performance rights The Company has entered into license agreements with its performance rights suppliers for the long-term acquisition of materials of programs when such programs are available for their first broadcast. As of June 30, 2013, the commitments for the acquisition of materials amount to $ 5, with due dates in 2013 and $25 US dollars with due dates in 2018.
c) Advertising rights
In June 2010, the Company entered into an advertising rights assignment contract with Super Publicidad, S. A. de C. V., which sets forth that effective 2012 and up to 2022, the rights of spaces are obtained for exhibiting advertising, as well as the use of part of the facilities of the Mexico City Arena. The total value of the consideration amounts to 3,500 US dollars, which have been paid in their entirety at the date of this report.
d) COFECO On April 7, 2011, GSF Telecom Holdings, S.A.P.I. de C.V. (“GSF”), which is the majority stockholder of Grupo Iusacell, S.A. de C.V. and related party of TV Azteca, S.A.B. de C.V., together with Grupo Televisa, S.A.B. (“GTV”) and Corporativo Vasco de Quiroga, S.A. de C.V. (“CVQ”) petitioned the Federal Commission of Competence (“CFC”) for its authorization to have CVQ become the holder of 50.00% of the voting shares of GSF. The CFC resolved to deny the authorization on January 24, 2012, upon considering that the concentration might decrease, damage or impede competition and free concurrence on the television and restricted
F-13 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) audio markets, as well as on the markets related to content/programming (open TV channels) and advertising on open television.
Pursuant to the foregoing, both GSF and CVQ filed the necessary motions for reconsideration provided for in the Federal Law of Economic Competition to process the authorization of the notified concentration.
On June 13, 2012, the CFC resolved the motions for reconsideration filed in the sense of authorizing the notified concentration subject to the realization of various conditionings.
As a consequence of the foregoing, the CFC established various conditionings for the parties involved, applicable to TV Azteca, S. A. B. de C. V. ("TVA") the obligation of indiscriminately offering its open TV and restricted TV signals (if any), as well as offering advertising spaces in terms and market conditions to the concessionaires of telecommunications of public networks. Those conditionings have been complied with in conformity with the resolution referred to above as of the issue date of this report.
e) Colombia Project
In September 2011, the Ministry of Information Technology and Communications of Colombia (MINTIC) published the terms of reference of the National Optic Fiber Project (“the Project”). The purpose of this technology is to spread or extend this technology to at least 400 municipalities of that country, in order to reach the goal of 700 municipalities connected to 2014. The Project will have an investment in the amount of $415 billion Colombian pesos (equivalent to approximately $2 billion Mexican pesos) by the government of Colombia.
In order to participate in that bidding, the Company, together with its related party Total Play Telecomunicaciones, S. A. de C. V., formed the Union Temporal Fibra Optica Colombia (the UT). On November 4, 2011, the MINTIC decided to award the contract to the UT to undertake the Project.
The characteristics of that contract are the following:
1. Signatories: UT and the Information Technology and Telecommunications Fund (TIC Fund).
2. Subject matter of the contract: The UT will develop an optic fiber network, operate it, maintain, and assume the management of the services in at least seven hundred and fifty-three (753) municipalities and 2,000 public institutions group into 4 groups. Toward that end, the TIC Fund will contribute certain resources (“Development Resources”) .
3. Value of the Contract: Co$415,837,649,402 (four hundred and fifteen billion eight hundred and thirty-seven million six hundred and forty-nine thousand four hundred and two Colombian pesos, including Value Added Tax). The budget items allocated by the Colombian government are distributed as follows:
F-14 TV Azteca, S.A.B. de C.V. and Subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.)
Year Maximum amount (billions of Colombian pesos) 2011 Co$196.2 2012 109.6 2013 99.6 2014 29.9
4. Term: Seventeen years and six months.
5. Trust: Trust: A management and payment trust was created between the MINTIC (trustor and primary beneficiary), the UT (secondary beneficiary), and Bancolombia S.A. (trustee). The purpose of the trust agreement is to create an autonomous patrimony for the management and administration of: (i) the Development Resources that the TIC Fund allocated to the UT in the conditions and for the purposes related to the execution of the agreement and the Project Documents; and (ii) the assets acquired with the Development Resources or with proprietary resources of the trustor for the execution of the contract.
6. General scheme of the project: The construction will last 30 months (2.5 years), and the network will operate for 180 months (15 years). During the construction stage, the trust will reimburse the UT for the amount of the costs and expenses incurred, subject to the authorization of the inspector designated by the MINTIC.
7. Stages and Time Schedule of the Project: The Project will be executed in three stages, with three groups of municipalities for its execution that will determine the maximum performance terms of the stages included in the Project Time Schedule.
At June 30, 2013, the Company still is in the construction stage, and there is no knowledge of any nonperformance of its obligations derived from the Project.
f) Contingencies:
For the periods ended at June 30, 2013 and 2012, there have been no significant changes in the legal course of the litigations.
Note 16 - Events subsequent to the date of the report
There has been no event that requires an adjustment or that does not require an adjustment, but is significant between the date of the report and date of authorization.
F-15
Consolidated Financial Statements and Independent Auditor’s Report
TV Azteca, S.A.B. de C.V. and subsidiaries
(Subsidiary of Azteca Holdings, S.A. de C.V.)
December 31, 2012 and 2011 (Translation of the independent auditor’s report and the financial statements originally issued in Spanish)
F-16
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Table of Contents
Independent auditor’s report 1
Consolidated statements of financial position 3
Consolidated statements of comprehensive income 4
Consolidated statements of changes in equity 5
Consolidated statements of cash flows 6
Notes to the consolidated financial statements 7
1 Method of presentation and translation into English 7
2 Nature of operations 7
3 General Information 7
4 Basis of preparation and statement of compliance with IFRS 8
5 Changes in accounting policies 8
6 Summary of accounting policies 13
7 Cash and cash equivalents 32
8 Trade and other receivables 32
9 Property and equipment 33
10 Other intangible assets 34
11 Investments accounted for using the equity method and other permanent investments 37
12 Trade and other payables 37
13 Related parties balances and transactions 38
14 Financial debt 40
15 Employee benefits 42
16 Income Tax 43
17 Financial assets and liabilities 47
18 Financial instrument risk 49
19 Equity 51
20 Earnings per share and dividends 54
21 Capital management policies and procedures 55
22 Finance income and costs 55
23 Other expenses, net 55
F-17
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
24 Financial information by segment 56
25 Contingent liabilities 57
26 Commitments 60
27 Adoption of International Financial Reporting Standards (IFRS) 63
28 Seasonality 66
29 Post-reporting date events 66
F-18 F-19 F-20 TV Azteca, S.A.B. de C.V. and subsidiaries 3 (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated statements of financial position As of December 31, 2012 and 2011, and January 1, 2011 (Stated in thousands of Mexican pesos)
Notes 2012 2011 January 1, 2011 Assets Current Cash and cash equivalents 7 $ 6,446,077 $ 8,317,817 $ 5,002,401 Trade and other receivables 8 5,330,736 5,970,433 4,397,340 Current tax assets 82,984 40,045 100,750 Related parties 13 266,551 276,744 252,854 Other financial assets 17 889,457 36,062 36,971 Performance rights 1,809,681 1,601,030 1,404,532 Inventories 33,711 11,357 170,371 Total current assets $ 14,859,197 $ 16,253,488 $ 11,365,219
Non-current Trade long-term 8 480,000 1,431,857 320,500 Performance rights 1,505,385 1,328,304 865,093 Property and equipment, net 9 3,465,097 3,338,583 2,990,922 Television Concessions, net 7,720,810 7,720,810 7,720,810 Other intangible assets 10 1,167,903 743,673 284,559 Goodwill, net - - 19,397 Investments accounted for using the equity method and other 11 312,785 278,043 493,809 Deferred tax assets 16 4,671,868 4,285,989 4,455,496 Total non-current assets $ 19,323,848 $ 19,127,259 $ 17,150,586 Total assets $ 34,183,045 $ 35,380,747 $ 28,515,805
Liabilities Short-term Trade and other payables 12 $ 1,853,714 $ 1,491,689 $ 1,574,942 Performance rights 6l 136,770 148,620 124,278 Related parties 13 167,507 154,189 213,714 Current tax liabiities 203,655 330,212 430,220 Financial debt 14 666,648 666,648 1,769,201 Deferred revenue 4,926,883 5,933,767 4,079,646 Total short-term liabilities $ 7,955,177 $ 8,725,125 $ 8,192,001
Long-term Stock exchange certificates 14 4,611,580 5,245,860 5,865,202 Loans from American Tower Corporation -ATC- 14 1,557,983 1,673,975 1,479,785 Medium Term Note Program -MTN 14 3,824,666 4,115,610 - Bank loans - - 266,331 Deferred revenue 494,451 1,599,837 321,000 Employee benefits 15 165,461 141,237 119,277 Deferred tax liabilities 16 3,463,473 3,105,941 3,549,837 Total long-term liabilities $ 14,117,614 $ 15,882,460 $ 11,601,432 Total liabilities $ 22,072,791 $ 24,607,585 $ 19,793,433
Equity Capital stock 19 715,080 715,486 719,298 Premium on stock issued 19 207,419 207,419 207,419 Legal reserve 19 83,229 83,229 83,229 Reserve for stock repurchases 19 594,175 609,227 712,769 Other components of equity 19 (842,859) (241,439) (236,167) Retained earnings 11,279,535 9,315,817 7,135,755 Equity attributable to owners of the parent $ 12,036,579 $ 10,689,739 $ 8,622,303 Non-controlling interest 73,675 83,423 100,069 Total Equity $ 12,110,254 $ 10,773,162 $ 8,722,372 Total liabilities and equity $ 34,183,045 $ 35,380,747 $ 28,515,805
The accompanying notes are an integral part of these consolidated financial statements.
F-21 TV Azteca, S.A.B. de C.V. and subsidiaries 4 (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated statements of comprehensive income
For the years ended December 31, 2012 and 2011 (Stated in thousands of Mexican pesos, except per share amounts)
Notes 2012 2011
Revenue $ 12,570,400 $ 12,199,196
Cost of programming, production, and broadcasting 6,577,122 6,055,832 Selling and administrative expenses 1,509,634 1,466,523 Total costs and expenses 8,086,756 7,522,355
Operating income before amortizations and other expenses 4,483,644 4,676,841
Depreciation and amortization 556,389 508,931 Other expenses, net 23 331,754 289,336 Operating income 3,595,501 3,878,574
Share of profit from equity accounted investments 11 36,062 57,450
Comprehensive gain or loss on financing: Interest expense 22 (973,610) (931,408) Interest earned 22 223,961 149,359 Other financial items 22 (98,278) (96,532) Exchange gain(loss), net 132,431 (327,737) (715,496) (1,206,318) Income before taxes on earnings 2,916,067 2,729,706 Taxes on earnings 16 (618,655) (547,948) Net income for the year $ 2,297,412 $ 2,181,758
Other comprehensive (loss) income: Effect from translation 19 (92,078) (5,272) Loss on financial assets available-for-sale 19 (509,342) - Other comprehensive loss for the year (601,420) (5,272) Total comprehensive income for the year 1,695,992 2,176,486
Net income for the year attributable to: Non-controlling interest (9,748) (16,894) Owners of the parent 2,307,160 2,198,652 $ 2,297,412 $ 2,181,758
Total comprehensive income for the year attributable to: Non-controlling interest (9,748) (16,894) Owners of the parent 1,705,740 2,193,380 $ 1,695,992 $ 2,176,486
Earnings per share Mexican Basic earnings per share Pesos Pesos Income from continuing operations 20 $ 0.26 $ 0.24
Diluted earnings per share Income from continuing operations 20 $ 0.22 $ 0.21
The accompanying notes are an integral part of these consolidated financial statements.
F-22 TV Azteca, S.A.B. de C.V. and subsidiaries 5 (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated statements of changes in equity For the years ended December 31, 2012 and 2011 (Stated in thousands of Mexican pesos)
Total Reserve for Other attributable to Non- Premium on Legal stock components Retained owners of controlling Notes Capital stock stock issued reserve repurchases of equity earnings parent interest Total equity
Balances as of January 1, 2011 $ 719,298 $ 207,419 $ 83,229 $ 712,769 $ (236,167) $ 7,135,755 $ 8,622,303 $ 100,069 $ 8,722,372 Preferred dividends paid 19 - - - - - (18,590) (18,590) - (18,590) Sale of treasury stock 1,164 - - 37,431 - - 38,595 - 38,595 Stock repurchase (4,976) - - (140,973) - - (145,949) - (145,949) Non-controlling interest ------248 248 Transactions with owners (3,812) - - (103,542) - (18,590) (125,944) 248 (125,696)
Net income for the year - - - - 2,198,652 2,198,652 (16,894) 2,181,758 Other comprehensive loss 19 - - - - (5,272) - (5,272) - (5,272) Total comprehensive income for the year - - - - (5,272) 2,198,652 2,193,380 (16,894) 2,176,486 Balances as of December 31, 2011 $ 715,486 $ 207,419 $ 83,229 $ 609,227 $ (241,439) $ 9,315,817 $ 10,689,739 $ 83,423 $ 10,773,162
Balances as of January 1, 2012 $ 715,486 $ 207,419 $ 83,229 $ 609,227 $ (241,439) $ 9,315,817 $ 10,689,739 $ 83,423 $ 10,773,162 Preferred dividends paid 19 - - - - - (343,442) (343,442) - (343,442) Sale of treasury stock 1,153 - - 36,080 - - 37,233 - 37,233 Stock repurchase (1,559) - - (51,132) - - (52,691) - (52,691) Transactions with owners (406) - - (15,052) - (343,442) (358,900) - (358,900)
Net income for the year - - - - 2,307,160 2,307,160 (9,748) 2,297,412 Other comprehensive loss 18 - - - - (601,420) (601,420) - (601,420) Total comprehensive income for the year - - - - (601,420) 2,307,160 1,705,740 (9,748) 1,695,992 Balances as of December 31, 2012 $ 715,080 $ 207,419 $ 83,229 $ 594,175 $ (842,859) $ 11,279,535 $ 12,036,579 $ 73,675 $ 12,110,254
The accompanying notes are an integral part of these consolidated financial statements.
F-23 TV Azteca, S.A.B. de C.V. and subsidiaries 6
(Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated statements of cash flows For the years ended December 31, 2012 and 2011 (Stated in thousands of Mexican pesos)
2012 2011 Operating activities: Income before taxes on earnings $ 2,916,067 $ 2,729,706
Items related to investing activities: Depreciation and amortization 556,389 512,931 Share of profit from equity accounted investments (36,062) (57,450) Provisions and estimates 357,866 491,967 Income on sale of property and equipment 21,662 21,573 Net unrealized foreign exchange gain (405,230) (182,190) Goodwill - 19,397 Other comprehensive (loss) income (601,420) 370,164 Items related to financing activities: Interest paid 972,424 898,636 3,781,696 4,804,734
Accounts receivable 1,186,864 (1,598,634) Related parties 23,511 (63,904) Inventories (22,354) 159,525 Performance rights (397,582) (587,403) Accounts payable and accrued expenses. (377,790) (252,265) Deferred revenue (1,632,272) 1,482,321 Taxes on earnings (708,686) (545,268) Other assets (56,877) (392,121) Net cash flows from operating activities 1,796,510 3,006,985
Investing activities: Acquisitions of property and equipment (562,373) (518,323) Investments accounted for using the equity method and other 1,320 - Proceeds from disposals of property and equipment 42,445 81,822 Investments in intangibles (530,334) (149,662) Net cash flows from investing activities (1,048,942) (586,163)
Financing activities: Proceeds from borrowings - 4,239,894 Repayment of borrowings, net (666,648) (2,063,646) Interest paid (768,541) (845,973) Stock repurchases (52,691) (145,949) Sale of treasury stock 37,233 38,595 Capital reimbursements paid - (309,986) Preferred dividends paid (343,442) (18,590) Incorporation of the consolidation effect of non-controlling interest - 249 Net cash flows from financing activities (1,794,089) 894,594
(Decreaset) Increase in cash and cash equivalents (1,046,521) 3,315,416 Cash and cash equivalents at beginning of year 8,317,817 5,002,401 Available-for-sale investments (825,219) - Cash and cash equivalents at end of year $ 6,446,077 $ 8,317,817
The accompanying notes are an integral part of these consolidated financial statements.
F-24 7
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
(Translation of the notes to the consolidated financial statements originally issued in Spanish)
Notes to the consolidated financial statements As of December 31, 2012 and 2011 (Stated in thousands of Mexican pesos and thousands of U.S. dollars, except where stated otherwise, as well as per share amounts and exchange rates)
1. Method of presentation and translation into English: The accompanying consolidated financial statements were originally issued in Spanish for use in Mexico. They have been translated into English for convenience of users in certain other countries. As indicated in note 4 below, these financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), and certain accounting practices do not conform with generally accepted accounting principles in the United States or other countries.
2. Nature of operations: TV Azteca, S.A.B. de C.V. (the Company) was acquired by its present stockholders in July 1993, upon the executive order of the Mexican Government for the privatization of certain television stations and their respective assets.
The main business of TV Azteca, S.A.B. de C. V. and its subsidiaries (the Group) include: (i) the transmission and production of television programs; (ii) sale of advertising time; and (iii) operating an optic fiber network in Colombia.
3. General information: Azteca, S.A.B. de C.V. (the Company) is the holding company of the Group ultimately. The Company is a publicly held company (S.A.B. de C.V.). Its main offices are located at: Periferico Sur 4121, Colonia Fuentes del Pedregal, Mexico City, Mexico Postal Code 14141.
F-25 8
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
The common shares of the Company (AZTECA.CPO) are listed on the Mexican Stock Exchange (BMV) and on Latibex, an international market dedicated to Latin American shares in Euros, regulated by the currently enacted laws of the Spanish Stock Market.
4. Basis of preparation and statement of compliance with IFRS: The accompanying consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB). These are the first consolidated financial statements of the Group prepared in conformity with IFRS.
The Companies registered on the Mexican Stock Exchange are required to present their financial statements under IFRS beginning 2012. The Group adopted them beginning that date. (See Note 27)
IFRS are comprised of: a) IFRS and International Accounting Standards (IAS), their Improvements and Interpretations of IFRS and IAS (IFRIC and SIC).
The consolidated financial statements for the year ended December 31, 2012 (including comparative financial statements) were approved and authorized to be issued by the Board of Directors on February 21, 2013.
The General Corporate Law and the by-laws of the Company, grant stockholders the possibility to amend the financial statements after issuing them. The accompanying consolidated financial statements will be submitted for approval at the General Stockholders’ Annual Meeting.
5. Changes in accounting policies: a. New standards, interpretations, and amendments that went into effect beginning January 1, 2012
IAS 12 “Taxes on earnings" currently requires an entity to measure deferred taxes relative to an asset, based on whether the entity expects to recover the book amount of the asset by using or selling it. It can be difficult and subject to assess whether recovery will be through use or sale when it is measured by using the fair value model in IAS 40 "Investment property". Therefore, this amendment introduces an exception to the principle of the current standard by its fair value. As a result of the amendments, IAS 21 "Taxes on earnings - recovery of non-depreciable assets" will no longer be applied to investment values by their fair value. The amendments also incorporate the remaining orientations into IAS 12 that appeared previously in IAS 21. Application of this standard is mandatory, beginning January 1, 2012. This amendment has not had a significant effect on the Group's consolidated financial information.
b. Adoption of "Presentation of items of Other Comprehensive Income" (Amendments to IAS 1)
The Group has early adopted “Presentation of Items of Other Comprehensive Income" (Amendments to IAS 1). The amendment requires entities to separate the elements presented in other items of comprehensive income into two groups, based on whether or not they can be reclassified to income in the future. The entities that decide to present the elements of other items of comprehensive income before
F-26 9
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
taxes should disclose the taxes related to the two groups separately. The amendment is is effective for annual periods beginning on or after July 1, 2012.
c. New standards and amendments and interpretations to existing standards that are not in effect yet and have not been adopted early by the Group.
As of the authorization date of these consolidated financial statements, some new standards and amendments and interpretations of existing standards have been issued by the IASB, but they are not in effect yet, and they have not been adopted early by the Group (except for the Modifications to IAS 1 referred to in paragraph b above). Management anticipates that all significant pronouncements will be adopted in the Group's accounting policies in the first period after the date on which that pronouncement goes into effect. Information about the new standards, amendments, and interpretations expected to be relevant to the Group's consolidated financial statements is provided in detail below. Other new standards and interpretations have been issued, but are not expected to have a material impact on the Group's consolidated financial statements.
d. IFRS 9 Financial Instruments (IFRS 9)
IFRS 9 "Financial instruments" requires financial assets to be classified in either of the two following categories: those assets measured at fair value and those measured at amortized cost. The determination must be made at the time of the initial recognition of those assets. The classification is dependent upon the entity's business model for handling its financial instruments and contractual characteristics of the cash flows of the instruments. For financial liabilities, the main change is that in the event the fair value option is used, the effect of revaluation related to the inherent credit risk should be recognized as part of comprehensive income, unless an accounting mismatch is caused. Adoption of this standard is mandatory beginning January 1, 2015.
e. Consolidation standards
The IASB issued a package of new consolidation standards effective for annual periods beginning on or after January 1, 2013. The information about those new standards is presented below: Management has not completed its evaluation of the impact of these new, reviewed standards in the Group's consolidated financial standards.
i. IFRS 10 Consolidated financial statements (IFRS 10)
IFRS 10 "Consolidated financial statements", revises the definition of control and provides extensive new guidance for the determination of control in more complex situations. The standard supersedes IAS 27 "Consolidated and separate financial statements" and SIC 12 "Consolidation - special purpose entities". Management's provisional analysis is that IFRS 10 will not change the classification (as subsidiaries or otherwise) of the existing investees of the Group as of December 31, 2012.
F-27 10
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
ii. IFRS 11 Joint arrangements (IFRS 11)
IFRS 11 "Joint arrangements" is a more realistic reflection that centers on the rights and obligations of the arrangement instead of its legal form. Joint operations arise when a co-organizer has the right to net assets of the disposition and, therefore, the capital accounts for its interests. Proportionate consolidation of mixed companies is no longer permitted. IFRS 11 now requires the use of the equity method that is currently used for investments in associates. Management does not expect a material impact on net assets and earnings of the Group.
iii. IFRS 12 "Disclosure of Interests in Other Entities" (IFRS 12)
The objective of IFRS 12 "Disclosure of Interests in Other Entities" is to require the disclosure of information that permits users of financial information to evaluate the nature and risk associated with their interests in other entities (structured entities), including joint arrangements, associates, special purpose entities, and other off-balance sheet vehicles, in addition to the effects of those interests on their position and financial performance, as well as on their cash flows.
iv. Transition guidance for IFRS 10, 11 and 12
Subsequent to issuing the new standards, the ISAB made some changes to the transitional provisions in IFRS 10, IFR 11, and IFRS 12. The guidance confirms that the entity is not required to apply IFRS 10 retrospectively in certain circumstances, and clarifies the requirements to present adjusted comparatives. The guidance also makes changes to IFRS 11 and IFRS 12, which provide similar relief to the presentation or adjustment of comparative information for periods prior to the immediately preceding period. Further, it provides additional relief by removing the requirement of present comparatives for the disclosures relating to unconsolidated structured entities for any period before the first annual period for which IFRS 12 is applied. The new guidance is also effective for annual periods beginning on or after January 1, 2013.
v. Amendments consistent with IAS 27 “Separate financial statements” (IAS 27) and IAS 28 “Investments in associates and joint ventures” (IAS 28)
Amendments to IAS 27 “Separate financial statements” are intended to establish standards applicable to accounting for investments in subsidiaries, associates, and joint ventures when an entity elects or is required by local regulations to present unconsolidated financial statements. Separate financial statements are those presented by a holding company, an investor with joint control or significant influence in which investments are accounted for at cost, in accordance with IFRS 9 “Financial instruments”.
Amendments to IAS 28 “Investments in associates and joint ventures” are intended to prescribe the requirements for the application of the equity method for investments in associates and joint ventures. The Standard supersedes the prior version of IAS 28 “Investment in associates” and its application is mandatory beginning January 1, 2013.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
vi. IFRS 13 “Fair value measurements” (IFRS 13)
The objective of IFRS 13 “Fair value measurement” is to define fair value and establish a conceptual framework in a single standard for measuring that fair value and the disclosure requirements about those measurements. This standard applies when other IFRS require or permit measuring fair value, but it is not considered as such, as well as the net realization value under the scope of IAS 2 “Inventories” or the value in use of IAS 36 “Impairment of long-lived assets”.
f. Amendments to IAS 19 “Employee benefits” (Amendments to IAS 19)
Amendments to IAS 19 include a number of targeted improvements throughout the standard.
The main changes relate to defined benefit plans, among other things:
• It eliminates the “corridor method”, requiring entities to recognize all actuarial profit or loss arising in the reporting period. • Past service for modification or introduction of the plan will be recognized in income for the year in which it is generated. • There will no longer be an unamortized item. • The use of the expected rate of return of the fund disappears and only the discount rate will be considered for estimated expected return on assets. • Changes to measurement and presentation of certain components of the defined cost of benefits. It improves disclosure requirements, including information about the characteristics of defined benefit plans and the risks to which entities are exposed through equity therein.
Amendments to IAS 19 are effective for annual periods beginning on or after January 1, 2013. Early application is permitted and should be disclosed in this case. The application of these amendments must be retrospective, in terms of IAS 8. At the date of the independent auditor’s opinion, Management is working with its actuarial consultants to quantify the impact of these changes on the Group's consolidated financial statements.
g. Offsetting of Financial Assets and Liabilities (Amendments to IAS 32)
IAS 32 “Financial instruments”, the amendments do not change the current offsetting model of the Standard to offset a financial asset and a financial liability in the statement of financial position when the entity currently has a legal right to offset and the intent to liquidate the asset and liability in net terms or to realize the asset and write off the liability simultaneously. The amendments clarify that the right to offset must be available at present, that is, it is not dependent upon a future financial event. It must also be legally binding for all the counterparties in the normal course of business, as well as in the event of nonpayment, insolvency or bankruptcy. Application of this amended standard is mandatory, beginning January 1, 2014, and early application is required. Management does not expect a material effect on the Group's consolidated financial statements due to these amendments.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
h. 2009 - 2011 Annual Improvements (Annual Improvements)
The 2009 - 2011 Annual Improvements (Annual Improvements) make various minor amendments to various IFRS. The relevant amendments to the Group are summarized below:
Clarifications about the requirements of the opening statement of financial position: • It clarifies that the appropriate date for the opening statement of financial position is the beginning of the prior period. • It considers comparative requirements for an opening statement of financial position when an entity changes accounting policies or makes retrospective reissuances or reclassifications, in conformity with IAS 8.
The Annual Improvements described above are effective for annual periods beginning on or after January 1, 2013. The Company has considered applying the Annual Improvement early, thus not presenting the notes to the statement of financial position as of January 1, 2011, due to the retrospective application of the accounting change.
Clarifications of the comparative information requirements that furnish additional minimum requirements: • It clarifies that additional information to the financial statements need not be presented in the form of a complete set of financial statements for periods beyond minimum requirements. • It requires that any additional information presented should be in conformity with IFRS, and that the entity must present comparative information in the notes related for that additional information.
Tax effect on distributions to holding companies of capital instruments: • It corrects the inconsistency perceived between IAS 12 “Tax on earnings” (IAS 12) and IAS 32 “Financial Instruments: Presentation” (IAS 32) in connection with the recognition of the effects of tax on earnings related to distributions to holders of capital instruments and transaction costs of a capital transaction. • It clarifies that the intent of IAS 32 is to follow the requirement of IAS 12 in order to account for income tax related to distributions to holders of capital instruments and transaction costs of a capital transaction.
Segment information for total assets and liabilities • It clarifies that the total assets and liabilities of a particular reportable segment is required to be disclosed if and only if: (i) a measurement of the total assets and total liabilities (or both) is regularly furnished to the director of operations who makes the decisions; (ii) there has been a material change in the measurements disclosed in the last financial statements of that reportable segment.
The Annual Improvements described above are effective for annual periods beginning on or after January 1, 2013. Management does not expect a material impact on the Group's consolidated financial statements due to these improvements.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
6. Summary of accounting policies: a. General considerations
The significant accounting policies used by the Company to prepare these consolidated financial statements are summarized below: They were used in all the periods presented in the financial statements, except when the Group has applied certain accounting policies and exemptions in the transition to IFRS (See Note 27).
An overview of the standards, amendments and interpretations of the IFRS issued, but not yet effective that have not been adopted early by the Company is presented in note 5.
b. Basis for consolidation
The Group's financial statements consolidate those of the holding company and all its subsidiaries as of December 31, 2012 and 2011. Subsidiaries are all those entities on which the Group has control power over the financial and operating policies. The Group obtains and exercises control through more than half of the voting power. All the subsidiaries present their financial information for consolidation purposes as of December 31, 2012 and 2011, in compliance with the policies adopted by the Group.
All significant transactions and balances of the Group are eliminated in consolidation, including unrealized profit or loss in operations between them. In the cases in which there are unrealized losses on the sale of assets between the Group, consolidation is reversed so that the asset involved is also tested for impairment from a Group perspective. The amounts reported in the financial statements of the subsidiaries have been adjusted when necessary to assure consistency with the Group's accounting policies.
The profit or loss and other comprehensive income items of the subsidiaries acquired or sold during the year are recognized as of the effective date of the acquisition or up to the effective date of the disposition, as applicable.
Non-controlling interests, presented as part of equity, represent the portion of a subsidiary’s profit or loss and net assets that is not held by the Group. The Group attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests based on their respective ownership interests.
The main subsidiaries included in the consolidated financial statements are as follows:
Televisión Azteca, S.A. de C.V. TV Azteca Comercializadora, S.A. de C.V. Red Azteca Internacional, S.A. de C.V. Estudios Azteca, S.A. de C.V. Atlético Morelia, S.A de C.V. Comerciacom, S.A. de C.V. Comercializadora en Medios de Comunicación de TV Azteca, S.A. de C.V. Azteca Novelas, S.A. de C.V.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Servicios Especializados TAZ, S.A. de C.V. Producciones Especializadas, S.A. de C.V. Corporación de Asesoría Técnica y de Producción, S.A. de C.V. Operadora Mexicana de Televisión, S.A. de C.V. Comercialización y Desarrollo Azteca, S.A. de C.V. Inversora Mexicana de Producción, S.A. de C.V. Servicios Aéreos Noticiosos, S.A. de C.V. SCI de México, S.A. de C.V. Servicios Locales de Producción, S.A. de C.V. Servicios Foráneos de Administración, S.A. de C.V. Servicios y Mantenimiento del Futuro en Televisión, S.A. de C.V. Lasimex, S.A. de C.V. Azteca International Corporation (foreign subsidiary) KAZA Azteca America, Inc. (foreign subsidiary) TVA Guatemala (foreign subsidiary) Incotel (foreign subsidiary) TV Azteca Global, S. L. U. (foreign subsidiary) Televisora del Valle de México, S.A. de C.V.
c. Business combinations
Business acquisitions are recognized by using the acquisition method. The acquisition method requires evaluating that a business is being acquired, identifying the acquirer, determining the date of acquisition, valuing the identifiable assets and liabilities assumed of the acquired business in the initial recognition, as well as non-controlling equity, valuing the consideration at its fair value and recognizing goodwill acquired or unusually recognizing a gain on a bargain purchase.
Goodwill represents the excess of the consideration transferred over the amount of the net assets of the business acquired.
When the net assets of the acquired business exceed the value of the consideration paid, those net assets of the acquired business are adjusted in the following order: a) values of intangible assets; b) the value of property, machinery and equipment, by applying the prorated adjustment to the assigned values, except for assets available-for-sale; and (c) the value of permanent investments. Once the above assets have been exhausted, the remaining balance, if any, is recognized as a gain on the purchase, as a not ordinary item in the statement of comprehensive income.
If the business combination is realized in stages, the carrying value of the prior interest of the acquirer in the acquiree as of the date of acquisition is adjusted to fair value as of the date of acquisition, and any difference is recognized in income.
At the date of acquisition, the acquired identifiable assets and assumed liabilities are recognized at fair value, except for:
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
- Deferred tax assets or liabilities and assets or liabilities related to employee benefit agreements, which are recognized and measured in accordance with IAS 12 and IAS 19, respectively.
- A liability or equity instrument related to transactions with share based payments of the acquiree or substitution of transactions with share based payments of the acquiree for share based transactions of the acquirer, which will be measured based on the method established by IFRS 2 “Share based payments” on the date of acquisition; and
- A noncurrent asset acquired (or a group of assets for their disposition) classified as held for sale as of the date of acquisition will be measured in accordance with IFRS 5 “Noncurrent assets held for sale and discontinued operations”.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non- controlling equity in the acquiree and the fair value on the date of acquisition of the equity formerly held by the acquirer in the equity of the acquiree, on the net of the amounts on the date of the acquisition of the acquired identifiable assets and assumed liabilities. If the net of the amounts of the acquired identifiable assets and assumed liabilities exceeds the sum of the consideration transferred, the amount of any non- controlling equity in the acquiree and the fair value of the equity formerly held by the acquirer in the equity of the acquiree, the resulting gain will be recognized in income as of the date of acquisition for a bargain purchase at a bargain price.
When the consideration transferred by the Company in a business combination includes any asset or liability derived from a contingent consideration agreement, the fair value of the contingent consideration will be recognized at the date of acquisition. The changes in fair value of the contingent consideration that qualify as adjustments of the measurement period will be adjusted retroactively with the applicable adjustment against goodwill. The measurement period will end when the acquirer receives the information about events and circumstances existing on the date of acquisition or conclude that more information can not be obtained. However, the measurement period will not exceed one year, as of the date of acquisition.
Changes in fair value of a contingent consideration that do not qualify as adjustments of the measurement period will be accounted for dependent upon how they have been classified, since they are derived from evens occurred prior to the date of acquisition. The contingent consideration classified as equity should not be measured again, and its subsequent liquidation should be accounted for in patrimony. The contingent consideration classified as an asset or liability should be measured at fair value, and any resulting gain or loss should be recognized in income for the period or in other comprehensive income, in accordance with IFRS 9 or IAS 37, as applicable.
As of December 31, 2012 and 2011, the Company did not realize any business acquisitions.
d. Investments accounted for using the equity method and other permanent investments
Associates are those entities on which the company can exercise significant influence, but they are neither subsidiaries nor joint ventures.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Investments in associates are initially recognized based on the amount invested. Those investments are subsequently valued under the equity method, which consists of adjusting the value of the investment, determined based on the purchase method for the proportionate part of comprehensive income or losses, and the distribution of earnings for capital reimbursements subsequent to the date of acquisition. Losses in associates that are not derived from decreases in the percentage of equity are recognized in the applicable proportion as follows: a) in the permanent investment until it shows a zero balance; b) if there is any excess after applying the issue described in the preceding paragraph a), it is recognized in asset accounts until they show a zero balance; c) if there is any excess, it is recognized as a liability for legal obligations or those assumed in the name of the company; and d) any excess of losses not recognized in accordance with the foregoing is not recognized by the parent.
Other permanent investments in which there is no significant influence for decision-making are valued at their cost of acquisition, including those investments in which despite having an interest exceeding twenty- five percent of the voting power or potential voting power, there is no significant influence.
In the event that there is objective evidence that the investment of an associated has been impaired, the carrying amount of the investment is subject to impairment tests. Impairment is defined as the difference between the recovery value and the carrying value of an investment, and it is recognized jointly with the equity in earnings (loss) of the associates.
e. Translation of foreign currency
Functional and presentation currency The consolidated financial statements are presented in the “peso” currency, which is also the functional currency of the holding company.
Foreign currency balances and transactions Foreign currency operations are translated into the entity's functional currency, in this case, that of the Group, by using the exchange rates prevailing at the dates of the transactions (spot exchange rate). Foreign exchange profit or loss resulting from the liquidation of such transactions and valuation of monetary items at the year-end exchange rate are recognized in income.
Nonmonetary captions are measured at historical cost (translated by using the exchange rates at the date of the transaction), except for nonmonetary captions measured at fair value, which are translated by using the exchange rates as of the date on which fair value was determined.
Foreign transactions In the Group's financial statements, all assets, liabilities, and transactions of the entities of the Group realized with a functional currency other than the peso (Group's presentation currency) are translated into pesos at the time of consolidation. The functional currency of the entities of the Group has remained unchanged during the reporting period.
At the time of consolidation, assets and liabilities have been translated into pesos at the closing exchange rate at the date of the report. Revenues and expenses have been translated into the Group's presentation currency at an average exchange rate during the reporting period. Foreign exchange differences are
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
charged /credited to other items of comprehensive income, and they are recognized as an effect of translation in other capital accounts. At the time of disposing of a foreign currency operation, the cumulative effects of translation recognized in capital are reclassified to income and recognized as part of the gain or loss on disposal. Goodwill and adjustments to fair value arising from the acquisition of a foreign entity have been treated as assets and liabilities of the foreign entity, and have been translated into pesos at the closing exchange rate.
f. Financial information by segment
Operating segments are defined as the components of an entity, geared toward developing business activities on which revenues, costs, and expenses are generated. Moreover, its operating income or loss is reviewed regularly by the entity's maximum governing body to decide on the resources that should be allocated to the segment and evaluate their performance in connection with the segment itself by using specific financial information.
In connection with the years in which they are presented, the Company has operated in the following business segments: National television, Azteca America, Performance rights, and others. (See Note 24)
g. Cash and cash equivalents.
Cash and cash equivalents comprise cash on hand and bank deposits in checking accounts and investments available, highly liquid that are readily convertible into cash and which are subject to an insignificant risk of changes in value.
h. Trade and other receivables
Trade receivables Accounts receivable represent amounts owed by customers, derived mainly from sales of advertising services rendered in the normal course of the Group's operations. When they are expected to be collected in a period of one year or less from the closing date (or in the normal cycle of business operations in the event that this cycle should exceed this period), are presented as current assets. In the event that the above should not be complied with, they are presented as noncurrent assets.
Other receivables Other receivables apply mainly to loans and others that give the right to collect fixed or determinable amounts that are not listed on an active market. The assets of this category are classified as current assets; except if they are expected to be collected after a year has elapsed from the closing date. In that case, they are classified as noncurrent assets.
i. Financial instruments
Recognition, initial measurement and de-recognition Financial assets and liabilities are recognized at the trading date, which is the date on which the Group commits itself to buy or sell the financial asset of liability. They are initially measured at fair value adjusted for operating costs, except financial assets and financial liabilities carried at fair value through profit or loss (FVTPL) that are initially measured at fair value.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Financial assets are de-recognized when contractual rights to the cash flows of a financial asset expire or when the financial asset and all the substantial risks and benefits have been transferred.
A financial asset is de-recognized when it is extinguished, discharged, written off or it expires. Financial assets and financial liabilities are potentially measured as described below:
Classification and subsequent measurement of financial assets For purposes of subsequent measurements, financial assets that are not those designated and effective as hedging instruments are classified in the following categories, at the time of their initial recognition:
• loans and receivables • financial assets at fair value through profit or loss • investments held-to-maturity • available-for-sale financial assets
The category determines the subsequent measurement, as well as if any resulting revenue or expense is recognized in income or other items of comprehensive income.
All financial assets except those that are carried at fair value through income or losses are subject to an impairment test at least on every report date. Financial assets become impaired when there is objective evidence that the financial asset or the group of financial assets has become impaired. Different criteria are applied to determine the impairment of each category of financial assets, as described below:
All revenues and expenses related to financial assets recognized in income are presented in 'financial costs', 'financial revenues' or 'other financial items', except for the impairment of trade accounts receivable which is presented in 'other expenses'.
Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not listed on an active market. After the original recognition, they are assessed at amortized cost, by using the effective interest method, less the provision for impairment. The discount is omitted in the cases in which the effect of the discount is immaterial. The Group's cash and cash equivalents, as well as trade accounts receivable and most of the other accounts receivable are placed in this category of financial instruments.
Significant accounts receivable are considered individually for impairment when they are past due or when there is objective evidence that a specific payment will fall into non-performance. Accounts receivable not considered impaired individually are reviewed for impairment in groups, which are determined by reference to the industry and region of the counterparty and other shared credit risk characteristics. The estimate of the impairment loss is then determined based on recent historical non-performance rates of the counterparty for each group identified.
Financial assets at fair value through profit or loss (FVTPL) Financial assets at fair value through profit or loss include financial assets that are classified as held for trading or that meet certain conditions and are designated to FVTPL at the time of the initial recognition.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
All derivative financial instruments enter into this category, except those designated and effective as hedging instruments, to which hedge accounting requirements are applied.
Assets in this category are measured at fair value with the profit or loss recognized in the statement of income. Fair values of derivative financial instruments are determined by reference to active market operations or by using a valuation technique when there is no active market.
Investments held-to-maturity Investments held-to-maturity are non-derivative financial assets with fixed or determinable payments, and fixed maturities other than loans and accounts receivable. Investments are classified as held-to-maturity if the Group has the intent and capacity to hold them to maturity. As of December 31, 2012 and 2011, the Group has no investments classified with these characteristics.
Investments held-to-maturity are subsequently measured at amortized cost by using the effective interest method. In the event that there should be objective evidence that the investment is impaired, determined by reference to external credit classifications, the financial asset is measured at the present value of estimated future cash flows. Any change in the carrying amount of the investment including impairment losses is recognized in income or loss.
Available-for-sale financial assets Financial assets available-for-sale are non-derivative financial assets that are designated in this category and do not qualify for being included in any of the other categories of financial assets.
All other financial assets available-for-sale are measured at fair value. Profit or loss are recognized in other items of comprehensive income, and they are reported in other capital accounts, except for impairment losses and foreign exchange differences in monetary assets, which are recognized in profit or loss. When an asset is disposed of or it is determined to be impaired, the accrued gain or loss that was recognized in other items of comprehensive income is reclassified from equity to income, and it is presented as a reclassification adjustment in other items of comprehensive income. Interest is calculated by using the effective interest method, and dividends are recognized in income under 'financial revenues' (see Note 6aa).
The reversal of impairment losses is recognized in other items of comprehensive income, except financial assets that are debt securities, whose recognition in income is realized only if the reversal can be objectively related to an event that occurs after having recognized the impairment loss.
As of December 31, 2012 and 2011, the Group maintains investments in securities listed on the stock exchange as discussed in Note 17. The effects of the changes in fair value of these investments are presented in other comprehensive income.
Classification and subsequent measurement of financial liabilities The Group's financial liabilities include loans, trade payables, and other payables and derivative financial instruments.
Financial liabilities are subsequently measured at amortized cost by using the effective interest method, except financial liabilities that are held for trading or have been designated at fair value through profit or
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
loss, which are subsequently kept in books at fair value with the profit or loss recognized in income. As of December 31, 2012 and 2011, the Group does not maintain financial liabilities for trading or subsequently measured at fair value.
All derivative financial instruments not designated or ineffective as hedging instruments are accounted for at fair value through profit or loss. The effects of evaluation and assessment of the hedged item in fair value hedges are recorded in the statement of financial position in assets or liabilities, as applicable.
All charges related to interest and, if applicable, any change in the fair value of an instrument are reported in income and included in 'financial costs' or 'financial revenues'.
Derivative financial instruments A specific accounting treatment is required for derivatives designated as hedging instruments in all cash flow hedges. In order to qualify as hedge accounting, the hedge must meet certain strict conditions, with respect to the documentation, likelihood of occurrence of the hedge operation and hedge effectiveness. The remaining derivative financial instruments are accounted for at fair value through profit or loss.
As of December 31, 2012 and 2011, the Group maintains interest rate hedging contracts in order to hedge cash flow risks due to the increases in the equilibrium interbank interest rate (EIIR) derived from the financing program, by placing trust securities exchange certificates (CBF). These financial instruments were classified for trading purposes and are measured at their fair value through profit or loss. Fair value is presented in the caption of other financial assets.
j. Bank loans and other loans
Net fair value is initially recognized net of any operating cost attributable directly to the issue of the instrument. Interest generating liabilities are subsequently calculated at amortized cost, by using the effective interest rate method, which assures that any interest expense during the period up to the complete payment is at a constant rate on the balance of the liability recorded in the statement of financial position. Interest expense includes initial operating costs and premiums payable at the time when they are amortized, as well as any interest or coupon payable while the liability is unpaid.
k. Costs on loans
The costs on loans directly attributable to the acquisition, construction or production of an asset that qualifies are capitalized during the time period required to complete and prepare the asset for its intended use or sale. Other loan costs are expensed in the period in which they occur and reported in 'financial costs' (See Notes 14 and 22). During fiscal years 2012 and 2011, the Group has not capitalized costs since they are not identified directly with the acquisition of assets.
l. Performance rights
Performance rights represent the right acquired for broadcasting programs and events under license agreements, as well as the cost of internal productions.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Performance rights and obligations are originally recorded as an asset at their cost of acquisition when contracts are signed and the material is available. A liability is recognized on the unpaid part, if applicable. The portion of performance rights that is going to be used in the next twelve months is classified as a current asset. The cost of performance rights is amortized as programs and events are broadcasted.
As of December 31, 2012 and 2011 the provision for performance rights that will not be used prior to their expiration amounts to $25,360 and $22,494, respectively.
As of December 31, 2012 and 2011, the balances of performance rights include internal productions in the amount of $419,739 and $540, 223, respectively, as well as advances for performance rights in the amount of $1,954,687 and $1,843,659, respectively. Third party rights are amortized at the time they are used which normally occurs in the current month. Performance rights of internal productions are amortized as broadcasted for the first time, except in the case of soap operas, of which 70% are amortized as broadcasted in Mexico, 20% as broadcasted in the United States or over a maximum six-year term, and the remaining 10% as sold in other countries. Effective September 2011, performance rights of internal productions are amortized totally, except in the case of soap operas, of which 90% are amortized as broadcasted in Mexico, and the remaining 10% as sold in other countries.
m. Inventories
Inventories of merchandise and materials are originally valued at the lower of their acquisition cost or their net realization value. The costs of exchangeable items are ordinarily assigned by using the average cost formula. The net realization value is the estimated selling price in the normal course of business, less any applicable selling expense.
n. Property and equipment
Buildings, computer equipment and other operating equipment Buildings, computer equipment and other operating equipment (including accessories and furniture) are recorded at the cost of acquisition or manufacturing cost, including any cost directly attributable for transferring the assets to the location and necessary conditions for operating in the manner provided for by Group Management. All other repair and maintenance costs are recognized in the statement of comprehensive income during the period in which they are incurred.
Computer equipment and other equipment that are owned under leases are also included in property and equipment if the Group has them as part of a financial lease agreement. (See Note 6o)
These assets are measured by using the cost model that consists of cost less accumulated depreciation and impairment losses.
Depreciation is recognized on a straight-line basis to write off the cost less the estimated residual value of property and equipment. Depreciation percentages based on estimated useful lives are:
• Buildings 3% • Operating equipment 5% y 16%
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
• Furniture and office equipment 10% • Transportation equipment 20% • Computer equipment 25%
Significant residual values and estimated useful lives are restated as required at least once a year.
Gains or losses derived from the disposal of property, plant and equipment are determined as differences between the proceeds of the disposal and the recorded value of assets, and recognized in income as part of 'other revenues and expenses', as the case may be.
o. Leased assets
Finance leases The economic ownership of the leased asset is transferred to the lessee if the lessee substantially assumes all the risks and compensations related to the ownership of the leased asset. The pertinent asset is recognized in the statement of financial position as an asset and a liability in the same amount, the lower between the fair value of the leased asset and the present value of the minimum lease payments. Payments are distributed in two parts, financial charges and debt reduction. That financial cost will be distributed among the periods comprising the lease term, so that a consistent interest rate is obtained in each period on the balance of the unamortized debt.
The Group maintains computer and transportation equipment under financial lease agreements entered into with related companies as described in Note 13. As of December 31, 2012 and 2011, the net carrying value of such equipment amounts to $1,330 and $15,026, respectively. Equipment is depreciated during the lower between the useful life of the asset and the lease term.
Operating Leases Payments of operating lease agreements are recognized as an expense based on the straight-line method over the term of the lease. The associated costs such as maintenance and insurance are expensed as incurred.
During 2012 and 2011, payments were made on this item in the amount of $293,014 y $284,074, which are included in the caption of cost of programming, production, and transmission of the accompanying consolidated statement of comprehensive income.
p. Television concessions
For purposes of applying IFRS 1 “First-time adoption”, the Group took the option of using the fair value of concessions as a deemed cost in the statement of financial position, in conformity with IFRS 1.30. That fair value was determined by independent experts. (See Note 27)
As a result of the analysis performed, “Intangible assets”, which television concessions qualify as indefinite useful life intangible assets, were determined in conformity with IAS 38. Accordingly, they are not subject to amortization. Instead, concessions are subject to impairment tests if there are indicators that such impairment exists.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Red Azteca Concession; channels 7 and 13
In complying with the provisions set forth in the Mexican Federal Radio and Television Law and through the Ministry of Communications and Transportation (SCT), on August 25, 2004, all television concessions were extended through certificates of concession renewal for transmission of frequencies, which expire on December 31, 2021.
These certificates of renewal set forth the obligation of implementing land digital technology at television stations in an equal number to analogical stations, in conformity with the standards and policies set forth by the SCT, and in the period, terms and conditions set forth in those certificates of renewal, as part of the transition process of analogous transmissions to those of high definition. That term expires on December 31, 2021. The certificates of renewal include calendars for the implementation described above, which have been complied with by the Company as of December 31, 2012. As discussed in Note 25 below, this term has been extended to 2015.
Azteca America Concession
The ownership, operation, and sale of television stations are subject to the jurisdiction of the Federal Communications Commission (FCC) of the United States of America, which acts under the authority granted by the Communications Act of 1934 (the “Communications Act”).
Television stations are governed by the broadcast licenses granted by the FCC for maximum eight year terms and are subject to renewal, upon petition filed with the FCC. During certain periods in which applications for renewal are in the pipeline, petitions can be filed by interested parties, including members of the public, to deny the renewal of licenses. The FCC will generally grant one application for renewal if it is proven: (i) that the station has served the public interest, advisability, and need; (ii) that there have been no serious violations by the licensee of the Communications Act or the standards and regulations of the FCC; and (iii) that there have been no other violations by the licensee of the Communications Act or the overall standards and regulations of the FCC, that constitute a pattern of bad behavior.
The Communications Act prohibits the assignment of a broadcast license or transfer of control of a broadcast license without prior approval of the FCC. In order to determine if the assignment or transfer of control is permitted of the concession or renewal of a broadcasting license, the FCC considers a series of factors related to the licensee, including the performance of various standards that limit the common ownership of means of communication assets, the “character” of the licensee and those persons who hold attributable interests in this licensee and the performance of the limitations of the Communications Act to unrelated ownership. The Communications Act prohibits the issuance of a broadcast license or holding a broadcast license by any company of which more than 20% of the capital stock belongs to non US citizens, a foreign government or any company organized under the laws of a foreign country.
As of December 31, 2012, there is no knowledge of any violation of the Communications Act.
Management considers concessions as a single cash generating unit. The value amounts to $8,095,000 and consists of the concessions of channel 7, 13, Guatemala and Azteca America in the amount of $7,720,000 and disbursements in the acquisition of channel 40 amounting to $375,000.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
In the opinion of the Company's legal advisors, the right of expropriation of the Concession of Channel 40 is owned by the Company. Pursuant to the foregoing, the disbursements realized to acquire Channel 40 were considered as part of the value of the Concessions. Pursuant to the issue described in Note 10, the disbursements in the amount of $375,000 made for the acquisition of Channel 40 are presented as part of other intangible assets.
q. Government Subsidies
Government subsidies are initially recognized as deferred income when there is reasonable certainty that they will be received and that the Company will meet the obligations associated with the subsidy. The subsidies that offset expenses incurred by the Company are recognized in income systematically in the same period in which expenses were recognized. Subsidies whose primary condition is for the Company to build or acquire noncurrent assets are recognized as deferred income and transferred to income systematically and rationally over the useful life of the assets.
Subsidies related to assets are presented as deductions of the carrying amount of the asset in the statement of financial position. By the same token, the recognition of deferred revenue from subsidies is shown as a decrease in the depreciation expense of the asset in the statement of comprehensive income.
r. Other intangible assets
Initial recognition Costs attributed directly to the development stage of a project are recognized as intangible assets as they meet the following recognition requirements:
• costs can be measured reliably • the project is technically and commercially viable • the Group intends and has sufficient resources to complete the project • the Group has the capacity to use or sell the intangible asset • the intangible asset will generate probable future economic benefits
Development costs that do not meet these criteria for capitalization are expensed as incurred.
Costs directly attributable to the development stage include employee costs incurred in the development of software, in addition to the adequate portion of the pertinent fixed expenses and costs of loans.
Optic fiber Colombia Costs and expenses incurred for the development of the project not reimbursable by the optic fiber Trust directly attributable to the preparation of the asset for its use in accordance with Management's expectations are capitalized. As of December 31, 2012, the project is in progress and is expected to be concluded in 2014. It will be amortized when expected future economic benefits start to be received.
Letters from players Letters from players are recorded as a noncurrent asset at their acquisition cost. As of December 31, 2012 and 2011 a valuation allowance was recognized in the amount of $54,000 and $11,000, respectively which is presented in the statement of comprehensive income line of other expenses.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Letters from players whose acquisition is considered final are amortized in accordance with the time that comprises the duration of their contract, when the offer of their services on the domestic soccer market merits it as such, and the estimated time of the “Professional Life” of the player, which in no case exceeds the duration of the contract. This is why the latter is the maximum amortization time. Letters from players acquired on loan (temporary) are amortized during the time comprising that loan. The cost for transferring players is not recognized until the time of the sale or retirement thereof.
Affiliation rights The right of affiliation with the Mexican Soccer Federation (Federacion Mexicana de Futbol) by franchise of the First Division “A” was recognized at its acquisition cost. As of December 31, 2012 and 2011, the value of the right of affiliation does not exceed its recovery value. These affiliation rights are not amortized due to the impossibility of defining the termination of future economic benefits accurately. Those assets are subject to an annual assessment for possible impairment or before if merited by circumstances.
Acquisition of software Software licenses acquired are capitalized on a cost incurred basis for acquiring and installing specific software.
Software developed internally Expenses of the research stage for computer and telecommunications systems are recognized as an expense when incurred, and expenses identified in the development stage are capitalized.
Subsequent measurement Intangible assets including capitalized software developed internally are accounted for by using the cost model whereby capitalized costs are amortized on a straight-line basis over their estimated useful lives, since these assets are considered definite-lived assets. Residual values and useful lives are reviewed on each reporting date. They are currently subject to impairment tests as described in the following paragraph.
s. Impairment of the value of assets
The Group periodically evaluates the recovery value of tangible and long-lived intangible assets, including goodwill to determine the existence of indicators that those values exceed their recovery value.
For purposes of evaluating impairment, assets are grouped on the lowest levels for which there is an independent adequate cash inflow (cash generating units). As a result, assets are tested individually for impairment and some are tested at a cash generating unit level.
Cash generating units to which goodwill is assigned are tested for impairment at least once a year. The rest of the individual assets or cash generating units are tested for impairment, provided that there is an event or change in circumstances which indicates that the amount recorded cannot be recovered.
An impairment loss is recognized in the amount in which the recorded value of the asset or cash generating unit exceeds its recovery value, which applies to the higher amount between fair value less cost to sell and value in use. To determine the value in use, Management estimates the expected future cash flows of each cash generating unit and determines an adequate interest rate to be able to calculate the present value of
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
those cash flows. The data used for impairment testing procedures are directly linked to the most recent budget approved by the Group, adjusted as necessary to exclude the effects of future reorganizations and improvements of assets. Discount factors are determined individually for each cash generating unit and reflect their respective risk profiles, as evaluated by Management.
Impairment losses for cash generating units reduce the amount recorded first of any goodwill assigned to that cash generating unit. The remaining impairment loss is charged to other long-lived assets on a prorated basis in the cash generating unit. Except for goodwill, all assets are evaluated subsequently to identify events that any impairment loss that has been previously recognized no longer exists. An impairment charge is reversed if the recoverable value of the cash generating unit exceeds the carrying book value.
As of December 31, 2012, the Company shows no signs of impairment in its assets of property and equipment and intangibles.
t. Income tax
In conformity with the provisions in effect set forth in IAS 12 “Taxes on earnings”, the tax due is determined based on currently enacted tax legislation and is recorded in income for the period to which it is attributable. The effects of deferred taxes consist of applying the tax rate applicable to all those temporary differences between book and tax balances of assets and liabilities that are expected to materialize in the future, related to: (i) deductible and taxable temporary differences; (ii) the offsetting of prior period tax loss carryforwards; and (iii) the offsetting of unused prior year credits (unused tax credit carryforwards).
Deferred income tax assets are recognized if it is likely that future tax benefits will be obtained against those that can be offset.
Deferred income tax liabilities derived from investments in subsidiaries and associates are recognized except when the investment of those temporary differences can be controlled by the Group, and it is likely that the temporary difference will be reversed in the foreseeable future.
u. Noncurrent assets and liabilities classified as held for sale and discontinued operations
When the Group intends to sell a noncurrent asset or a group of assets (a group for disposal), and if the sale is highly likely in the next 12 months, the assets or group for disposal are classified as 'held for sale' and they are presented separately in the statement of financial position. Liabilities are classified as 'held for sale' and presented as such in the statement of financial position if they are directly associated with a group for disposal.
Assets classified as 'held for sale' are measured at their carrying value immediately before their classification as the lower of held for sale or their fair value, less their cost to sell. However, some assets 'held for sale' such as financial assets of deferred tax assets continue to be measured in conformity with the Group's accounting policy for those assets. No asset classified as 'held for sale' is subject to depreciation or amortization after they are classified as 'held for sale'.
As of December 31, 2012, the Group does not intend to dispose of any asset or set of assets.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
v. Employee benefits
Termination and retirement benefits The Group grants a benefit to personnel after their employment relationship is terminated either by dismissal or voluntary separation. In accordance with IAS 19 “Employee benefits”, this practice constitutes an obligation assumed by the Company with its personnel, which is recorded based on annual calculations prepared by independent actuaries.
Benefits for seniority bonuses and pensions The Group does not operate pension plans and seniority bonuses. However, it has a provision that is recognized as a cost during the years of service of personnel, which was determined based on actuarial calculations.
The liability also considers the Group's specific expectation of future salary increases. Discount factors are determined close to every fiscal year end in reference to the high quality government paper that is denominated in the currency in which benefits will be paid.
The liability also considers the Group's specific expectation of future salary increases. Discount factors are determined close to every fiscal year end in reference to the high quality government paper that is denominated in the currency in which benefits will be paid.
These assumptions were developed by Management considering the expert advice furnished by independent actuarial appraisers. Other assumptions are based on Management's experience.
Actuarial gains and losses are not recognized as an expense, unless the total unrecognized gain or loss exceeds 10% of the majority of the obligation and related plan assets. The amount exceeding this 10% margin is charged or credited to income or losses over the remaining expected productive life of employees. Actuarial gains or losses in this 10% margin are disclosed separately. The prior service balance has been amortized on a 5 year basis up to 2012 year end. Beginning 2013, recognition is immediate.
w. Provisions, contingent liabilities, and contingent assets
Provisions are recognized when current obligations as a result of a past event are likely to lead to an outflow of economic resources by the Group and the amounts can be estimated with certain reliability. The time or amount of that outflow can still be uncertain. A current obligation is derived from the presence of any legal or constructive commitment that has resulted from past events, for example, product warranties granted, legal disputes or onerous contracts.
Provisions are measured based on the estimated expense required to cancell the current obligation, pursuant to the most reliable evidence available at the date of presentation of the financial statements, including risks and uncertainties associated with the current obligation. In the cases in which there is a similar number of obligations, the possibility that a disbursement may be required for cancellation is determined through the consideration of that type of obligations as a whole. Provisions are discounted at their present values in the cases in which the value in time of the money is material.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Any reimbursements that the Group considers that it is going to be collected from a third party in connection with an obligation are recognized as an asset separately. However, this asset cannot exceed the amount of the relative provision.
In those cases in which an outflow of economic resources is considered unlikely or remotely probable as a result of current obligations, no liability is recognized unless it is presumed in the course of a business combination (See Note 6c). Contingent liabilities are recognized in a business combination at the date of acquisition when there is a current obligation that is derived from past events, and fair value can be recognized reliably, even if the outflow of economic resources is unlikely. They are subsequently measured based on the higher amount between a comparable provision as described above and the amount recognized at the date of acquisition, less any amortization.
x. Equity, capital reserves and dividends payment
Capital stock represents the par value of shares issued.
The premium on stock issued includes any premium received for the issue of share capital. Any operating cost associated with the issue of shares is deducted from the premium on stock issued, net of any benefit from the related tax on earnings.
Other components of capital include the following:
• Effects of translation - these include the effect of translation of currencies from the Group's foreign entities into pesos (See Note 6e). • The reserve for financial assets and liabilities available-for-sale and cash flow hedges -these include gains and losses related to this type of financial instruments (See Note 6i).
Retained earnings include all current and prior period earnings reduced by dividends paid and transfers to other capital accounts.
All operations with owners of the parent are recorded separately in equity.
Distributions of dividends payable to stockholders are charged to retained earnings and included in 'other liabilities' when dividends have been declared, but have not been paid at the reporting date. As of December 31, 2012 and 2011, dividends declared were fully paid.
Reserve for stock repurchases In accordance with the Securities Market Law, the Company created a capital reserve by appropriating a Reserve for stock repurchases from retained earnings, in order to strengthen the offer and demand for its shares on the Securities Market. Shares acquired and temporarily withdrawn from the market are considered as treasury sotck that are presented as a capital stock decrease, until placed again on the market.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
y. Revenue recognition
Revenues are measured by reference to the fair value of the payment received or receivable by the Group of goods provided or services rendered, without counting sales taxes, rebates and commercial discounts.
Revenues on advertising contracts are recognized as the advertising contracted is broadcasted. Revenue consists of revenues obtained from advertisers less sales commissions. Sales commissions amounted to $761,211 and $771,600, for the years ended December 31, 2012 and 2011, respectively.
Revenues from advertising contracts Revenues from advertising contracts are recognized as the advertising contracted is broadcasted.
Income from unsold advertising time The Company recurrently markets unsold advertising time to infomercials, shared risk advertisers, and through integrated advertising. Infomercials are charged at a fee contracted for the time that the advertisement lasts. For shared risk advertisements, a percentage is received of gross sales of the products offered during the period of time negotiated after the advertisement is broadcasted. Integrated advertising revenue applies to the presentation and use of products during the broadcasting of internal programming. Revenue for these items accounted for 21.41% and 19.35% of net sales as of December 31, 2012 and 2011, respectively.
Deferred income from advertising time The Group essentially handles two types of advertising advance contracts with its customers. The Plan Azteca (Aztec Plan) generally requires payment in full within four months following the date on which the contract is signed. The Plan Mexicano (Mexican Plan) permits customers to make payments in installments, which are generally supported by notes over the period in which advertising is broadcasted. In both plans, the Company enters into some contracts with its customers for terms exceeding one year.
The Company records cash or other assets received and the balance due from customers, as well as the obligation to provide advertising under either of the two types of contracts referred to above, when those contracts are signed or the customer has tacitly accepted. Advertising advances or deferred obligations are credited to revenue when the advertising contracted is broadcasted. Revenue recognition is based on systems that are fed with programming data that is transferred daily, as well as audience measurements, amounts of contracts, and other information.
Advances from advertisers or deferred obligations are valued at selling prices of services. Company’s Management estimates that approximately 54% of those obligations represent the cost of the service to be rendered.
Barter transactions Barter operations represent transactions that do not imply any cash flow in which the Company sells advertising time to third or related parties, in exchange for certain assets or services. These transactions are originally recorded at the market value of the assets or services agreed upon in barter contracts in the caption of receivables from advertisers. In the years ended December 31, 2012 and 2011, net revenue derived from barter transactions amounted to $313,609 and $396,856, respectively.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
z. Operating expenses
Operating expenses are recognized in income at the time services are rendered.
aa. Interest and dividends received
Interest income and expenses are reported on an accrual basis, by using the effective interest method. Dividend income that is not from investments in associates is recognized at the time at which the Group is eligible to receive the payment.
bb. Earnings per share
Ordinary basic earnings per share are calculated by dividing the Holding Company's equity by the weighted average of ordinary shares outstanding during the fiscal year. Diluted earnings per share are determined by adjusting the Holding Company's equity, under the assumption that the entity's commitments would be realized to issue or exchange its own shares. Basic earnings are equal to diluted earnings, since there are no transactions that might potentially dilute the earning.
cc. Comprehensive income
Comprehensive income consists of net income, the effects of translation, the effects of valuation of financial instruments available-for-sale, which are reflected in equity and do not represent capital contributions, reductions and distributions. The amounts of comprehensive income of 2012 and 2011 are stated in historical pesos. Comprehensive income includes net income for the year, plus items which, in accordance with IFRS, are required to be recorded directly in equity, and they are neither capital contributions nor capital decreases.
dd. Management's significant criteria upon applying accounting policies and uncertainty in estimates
Upon preparing the financial statements, Management realizes several judgments, estimates, and assumptions for the recognition and measurement of assets, liabilities, revenues, and expenses.
Management's significant criteria Internally generated costs of software and development Significant judgment is required to distinguish the research stage from the development stage and determine if they meet the capitalization requirements of development costs. After capitalization, Management monitors to see if those requirements continue to be met and if there are indicators that such capitalized costs can be impaired.
Deferred tax assets The amount on which a deferred tax asset can be recognized is based on the evaluation of the likelihood of having future taxable income, on which the Group's deferred tax assets can be used. Significant judgment can further be required upon evaluating the impact of certain legal or economic limits or uncertainty in different tax jurisdictions.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Uncertainty of estimate Information on significant judgements, estimates and assumptions that have more significance on the recognition and measurement of assets, liabilities, revenues, and expenses is provided below. Actual results can be substantially different.
Impairment In the evaluation of impairment, Management determines the recoverable value of each asset or cash generating unit, based on the expected cash flows and determines an adequate interest rate to be able to calculate the present value of those cash flows. Uncertainty of the estimate is related to the assumptions on future operating income and the determination of an adequate discount rate.
Useful lives of depreciable assets Management reviews the useful lives of depreciable assets on each reporting date, based on the expected use of each asset. Uncertainty in these estimates is derived from the technical obsolescence that can modify the expected use of the asset, including software and computer equipment.
Performance rights Management periodically evaluates the validity of the licenses of the titles for transmission.
Inventories Management estimates the net realizable values of inventories, taking into consideration the most reliable evidence available at the reporting date. Future realization of these inventories can be affected by future technology or other changes on the market that can reduce selling prices.
Business combinations Management uses valuation techniques to determine the fair values of the elements of a business acquisition. The fair value of the contingent payment is particularly dependent upon various results that can affect future earnings.
Allowance for doubtful accounts The Company determines the allowance for doubtful accounts by studying factors such as: (i) the customer's financial position; (ii) the delay in collection; (iii) guarantees or warranties granted by the customer; and (iv) historical uncollectibility trends. This implies that Management makes allowances for uncollectibility at the date of preparation of the financial statements that will not necessarily behave as such in reality.
Defined benefit obligation Management determines the DBO based on the number of critical assumptions, such as standard inflation rates, trends of health care service costs and mortality, discount rates, and future increases in expected salaries. There is uncertainty, especially with respect to the trends of medical service costs. Variations of these assumptions can impact the amount of the DBO and the pertinent annual expense on defined benefits (the analysis is furnished in Note 15).
Fair value of financial instruments Management uses valuation techniques to measure the fair value of financial instruments in which there are no active market quotes available. Consequently, Management considers estimates and assumptions based
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
on market information and observable data that might be used by market participants upon setting a price on the instrument. In the cases in which there are no observable data, Management uses the best estimate on the assumptions that might be made by market participants. These fair value estimates of financial instruments can vary from actual prices that can be reached in arm's length transactions at the date of the report (See Note 17).
Fair value of derivative financial instruments The Group has entered into operations with derivative financial instruments, which are used mainly to reduce exposure to the primary position in dealing with adverse changes in interest rates and exchange rates that affect it. There are also trading operations whose objective is to take advantage of the possibilities of arbitration that arise on the main financial markets within the authorized global risk limits.
In some cases, there is an observable market that provides estimated fair value. In the absences of that market, the value is determined through valuation techniques such as the present net value of cash flow projections or mathematical valuation models.
Estimated fair values of derivative instruments are supported by confirmations of those values received by the Group from the counterparties of those financial instruments. Notwithstanding the foregoing, an in- depth evaluation is required to account for the effects of derivative operations appropriately in the financial statements.
7. Cash and cash equivalents: Cash and cash equivalents are summarized as follows:
2012 2011 Cash in hand and in banks $ 1,574,420 $ 1,468,223 Short-term investments 4,871,657 6,849,594 $ 6,446,077 $ 8,317,817
As of December 31, 2012 and 2011, due to the stock exchange certificate issue program discussed in Note 14, the cash subject to restrictive covenants and applicable to that program amounts to $844,085 and $723,815, respectively.
8. Trade and other receivables: Trade and other receivable balances are summarized as follows:
a. Classification of financial and non-financial reports
2012 2011 Trade receivables $ 4,960,986 $ 6,947,042 Estimate for uncollectible accounts (323,685) (264,428) Trade receivables, net 4,637,301 6,682,614
Other receivables 1,071,183 661,469 Financial assets 5,708,484 7,344,083
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Prepaid expenses 102,252 58,207 Non-financial assets 102,252 58,207
Trade and other receivables $ 5,810,736 $ 7,402,290
The net carrying value of short-term and long term receivables is considered to approximate their fair value.
Trade accounts receivable include barter transactions in the amounts of $262,462 and $248,888 as of December 31, 2012 and 2011, respectively.
As of December 31, 2012 and 2011 future flows of advertising sales are secured by the stock exchange certificates issued by the Company (See Note 14).
Changes in the allowance for doubtful accounts were as follows:
2012 2011 Opening balance January 1 $ 264,428 $ 319,369 Increases 78,157 93,135 Applications (18,900) (148,076) Ending balance December 31 $ 323,685 $ 264,428
All trade accounts receivable and other receivables have been reviewed with respect to impairment indicators. Certain accounts receivable were found to be impaired. Consequently, an allowance for doubtful accounts has been recorded in the amount of $78,157 in net revenues of the Company.
As of December 31, 2012, the non-performing portfolio is adequately covered by the allowance for doubtful accounts. (See Note 18)
9. Property and equipment: Property and equipment are summarized as follows:
2012 2011 Buildings $ 2,237,350 $ 1,951,990 Operating equipment 5,418,393 5,148,175 Furniture and office equipment 341,579 343,463 Transportation equipment 912,047 864,214 Other fixed assets 1,001,049 942,344 9,910,418 9,250,186 Less – Accumulated depreciation (7,222,266) (6,893,933) 2,688,152 2,356,253 Land 675,011 656,563 Construction-in-progress 101,934 325,767 $ 3,465,097 $ 3,338,583
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Reconciliation as of December 31, 2012 Balance at Balance at beginning of end of year, year, net of net of Estimated accumulated Depreciation accumulated useful life depreciation Additions Retirements for the year depreciation (years)
Buildings $ 997,116 $ 292,577 $ 3,894 $ 74,200 $1,211,599 33 Operating equipment 802,421 373,647 16,321 260,309 899,438 6 y 20 Furniture and Office Equipment 43,911 7,270 430 7,786 42,965 10 Transportation Equipment 356,088 149,327 53,940 84,709 366,766 5 Other fixed assets 156,716 95,956 6,345 78,944 167,383 4 Land 656,563 18,848 400 - 675,011 - Construction-in-progress 325,768 673,673 897,506 - 101,935 - $3,338,583 $1,611,298 $ 978,836 $ 505,948 $3,465,097
Reconciliation as of December 31, 2011 Balance at Balance at beginning of end of year, year, net of net of Estimated accumulated Depreciation accumulated useful life depreciation Additions Retirements for the year depreciation (years)
Buildings $ 937,305 $ 118,219 $ - $ 58,408 $ 997,116 33 Operating equipment 695,940 388,747 6,132 276,134 802,421 6 y 20 Furniture and Office Equipment 44,020 11,729 228 11,610 43,911 10 Transportation Equipment 414,219 96,407 64,741 89,797 356,088 5 Other fixed assets 103,662 106,934 34,058 19,822 156,716 4 Land 648,386 8,177 - - 656,563 - Construction in progress 147,390 213,949 35,571 - 325,768 - $2,990,922 $ 944,162 $ 140,730 $ 455,771 $3,338,583
Components under construction:
In June 2012, the new forums of Azteca were inaugurated which are considered to be the most modern of Latin America. The investment thereof amounted to $263,488.
All charges for depreciation and impairment are included as part of depreciation, amortization, and impairment of non-financial assets.
10. Other intangible assets:
As of December 31, 2012 and 2011, this caption is summarized as follows:
2012 2011 Payments to Corporación de Noticias e Información, S.A. de C.V. $ 374,852 $ 337,254 Letters from players and affiliation rights 213,684 246,999 Optic fiber Colombia 322,722 - Other assets, net 256,645 159,420 $ 1,167,903 $ 743,673 The reconciliation of operations is as follows
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Optic Fiber Letter from CNI Total Colombia players Others Gross carrying amount Balance as of January 1, 2011 $ 321,482 $ - $ - $ 111,303 $ 432,785 Transfers - - 397,035 - 397,035 Increases 15,772 - 55,227 73,080 144,079 Sale of players - - (9,708) - (9,708) Balance as of December 31, 2011 337,254 - 442,554 184,383 964,191
Amortization and impairment Balance as of January 1, 2011 - - (148,226) - (148,226) Amortization - - (47,329) (24,963) (72,292) Balance as of December 31, 2011 - - (195,555) (24,963) (220,518) Book balance as of December 31, 2011 $ 337,254 $ - $ 246,999 $ 159,420 $ 743,673
Gross carrying amount Balance as of January 1, 2012 $ 337,254 $ - $ 442,554 $ 184,383 $ 964,191 Increases 37,598 322,722 136,674 136,015 633,009 Sale of players - - (102,675) - (102,675) Balance as of December 31, 2012 374,852 322,722 476,553 320,398 1,494,525
Amortization and impairment Balance as of January 1, 2012 - - (195,555) (24,963) (220,518) Amortization - - (51,029)) (38,790) (89,819) Transfers - - (45,246) - (45,246) Applications - - 28,961 - 28,961 Balance as of December 31, 2012 - - (262,869) (63,753) (326,622) Book balance as of December 31, 2012 $ 374,852 $ 322,722 $ 213,684 $ 256,645 $ 1,167,903
Corporacion de Noticias e Informacion, S. A. de C. V. (CNI)
On December 10, 1998, the Company and its subsidiary Operadora Mexicana de Television, S. A. de C. V. (OMT) signed a Joint Venture Agreement with CNI and Televisora del Valle de Mexico, S. A. de C. V. (TVM), which establishes the bases for: (i) the possible acquisition by TVA of shares issued by TVM; (ii) the operation and marketing of Channel 40 by OMT; (iii) the programming of Channel 40; and (iv) a credit granted by TVA to CNI and the documents discussed below, among other things, were signed:
a) A Loan Agreement signed on October 9, 1998, whereby the Company granted a loan in the amount of 10,000 US dollars in favor of CNI over a ten year term, with a 3-year grace period as of the drawdown of the loan. Interest accrued will bear the highest rate paid by the Company plus 0.25 points. To secure the loan, a pledge was created applicable to 51% of the shares representative of the capital stock of TVM, held by Mr. Javier Moreno Valle Suarez. Those shares will be pledged until the loan and its related costs are paid in full. As of July 2000, CNI had drawn down 10,000 dollars of this loan.
b) The Company entered into an assignment of rights and obligations contract (the “Assignment Contract”) with CNI that CNI had with TVM under which the Company would market, program, and operate television Channel 40. Under that Contract, TVA delivered 15,000 US dollars to CNI, which were considered as a 50% prepayment of the EBITDA for the first three years of the Contract. As of December 31, 1999, the Company delivered the total 15,000 dollars described, which will be amortized against the EBITDA generated in operating Channel 40 over a maximum 10-year period.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
In July 2000, CNI suspended the transmission of the Company's signal, which was an obligation set forth in the joint venture agreement. As an answer to this and other actions, the Company has filed various lawsuits against CNI, TVM, and Mr. Moreno Valle.
In September 2005, the Seventh Civil Court handed down a ruling whereby; a) TVM and CNI nonperformed the Assignment Contract; b) TVM and CNI were ordered to perform the Assignment Contract; and c) TVM and CNI were ordered to pay damages and harm, as well as (legal) expenses and costs. The Fourth Civil Court confirmed the ruling handed down by the court of original jurisdiction, TVM and CNI filed appeals for constitutional relief against the rulings handed down by the fourth division in the appeal filed by the defendant, on which the final ruling was handed down by the First Civil Three-Judge Court, in the sense of confirming the judgment for the plaintiff that sentenced TVM and CNI, except for the sentence of the payment of expenses and costs.
In execution and performance of the final ruling handed down by the Seventh Civil Judge, Channel 40 again started to broadcast the programming furnished by the Company, in reliance on the contracts signed between TVM and the Company in 1998, which were restored and recognized by the person who acts as sole Director.
In spite of a lack of certainty, the Company’s Management considers that it will prevail in the various disputes it has with CNI, TVM, and Mr. Moreno Valle and, therefore, no provision has been made for this matter.
Optic fiber Colombia During fiscal 2011, the branch in Colombia was awarded the bid for the construction of an optic fiber network in 753 municipalities and 2,000 public institutions in Colombia (the Network). The objective of this company is to design, install, put into service, operate, manage, and maintain that telecommunications network. The Colombian Subsidiary has a 2.5 year period to build the Network, and it has the concession to be operated for a 15 year period.
It is estimated that the project will represent an investment amounting to USD 216,843. The resources for the construction of the Network are from a subsidy granted by the Government of Colombia, complemented by the Group's own resources. The Colombian branch is subject to certain conditions for obtaining the subsidy, among other things, is highlighted by the free service rendered for the use of the optic fiber network to 2,000 public institutions of the government of Colombia for a five year period, the construction in due time and proper form of the network and the operation thereof for fifteen years.
All the stipulated conditions have been complied with during the validity of the contract.
As of December 31, 2012, the subsidy received for the construction of the optic fiber network is recorded net in the statement of financial position between the asset related to the construction of the optic fiber network and the applicable deferred revenue.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
11. Investments accounted for using the equity method and other permanent The balance of the investment in associated companies is summarized as shown below:
2012 2011 Súper Espectáculos, S.A. de C.V. (Arena Monterrey) $ 147,969 $ 117,522 Globo Re, S.A. (foreign resident) 104,721 104,045 Other investments 60,095 56,476 $ 312,785 $ 278,043
The equity of TV Azteca in earnings of its main associates and its equity in assets and liabilities are as follows:
Income/ Name Assets Liabilities Revenues (Loss) % of equity December 31, 2012 Súper Espectáculos, S.A. de C.V.
(Arena Monterrey) $ 3,716,892 $ 2,947,542 $ 1,197,343 $ 158,183 20%
Globo Re, S.A. (Foreign resident) 527,943 133,530 527,943 16,453 27%
December 31, 2011 Súper Espectáculos, S.A. de C.V.
(Arena Monterrey) $ 3,094,616 $ 2,483,450 $ 576,129 $ 207,236 20%
Globo Re, S.A. (Foreign resident) 722,134 345,569 251,412 59,270 27%
Globo Re, S.A. (Associated Company) –
As of December 31, 2011, the Company holds the 27% interest in Globo Re, S. A. de C. V. The income or loss thereof is recognized by using the equity method.
As of December 31, 2012 and 2011, the Group holds other investments where it has no significant influence with a net book value amounting to $60,095 and $56,476, whose carrying value is substantially similar to fair value.
12. Trade and other payables: Trade and other payables recognized in the statement of financial position are summarized as follows
2012 2011 Trade payables and creditors $ 596,863 $ 666,956 Interest payable 51,245 58,105 Operating costs and expenses 668,634 648,411 Provisions 43,867 30,000 Other payables 493,105 88,217 Total other payables $ 1,853,714 $ 1,491,689
F-55 38
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
The provisions apply to production costs.
13. Related parties balances and transactions: The main related party balances as of December 31, 2012 and 2011 are as follows:
2012 2011 Accounts receivable: Azteca Holdings, S.A. de C.V. (Parent) $ 167,165 $ 160,761 Fórum Per Terra, S.A. de C.V. and subsidiaries 59,051 57,314 Grupo Elektra, S.A.B. de C.V. and subsidiaries 15,715 28,810 GSF Telecom Holdings, S.A.P.I. de C.V. and subsidiaries 15,070 3,819 Comunicaciones Avanzadas, S.A. de C.V. 2,766 2,631 Others 6,784 23,409 $ 266,551 $ 276,744
Accounts payable: Globo Re, S.A. $ 123,460 $ 123,990 Arrendadora Internacional Azteca, S.A. de C.V. 4,865 15,790 Others 39,182 14,409 $ 167,507 $ 154,189
During the years ended December 31, 2012 and 2011, the following related party transactions were carried out as if the terms of the considerations for related party transactions were equivalent to similar transactions carried out with independent third parties. The most significant transactions carried out are described below:
Advertising income Income from advertising broadcasted contracted with related parties amounted to $584,478 and $530,928 for the years ended December 31, 2012 and 2011, respectively.
Grupo Elektra, S.A.B. de C.V. and subsidiaries (Grupo Elektra) During 2012 and 2011, the Company and Grupo Elektra entered into annual advertising; the rights under the terms of these contracts cannot be assigned by Electra to third parties. As of December 31, 2012 and 2011, revenues from Grupo Elektra amounted to $452,850 and $399,326, respectively.
GSF Telecom Holdings, S.A.P.I. de C.V. and subsidiaries (GSF) During 2012 and 2011, the Company and GSF entered into annual advertising contracts; the contracts generally have an annual duration, and they are signed in conditions similar to those of unrelated customers. As of December 31, 2012 and 2011, income from Iusacell amounted to $131,628 and $131,602, respectively.
Service income 01 900 The Company and a subsidiary of GSF offer services of controlling and identifying telephone calls through the 01 900 service of television viewers who participate in the contests conducted by the Company. As of December 31, 2012 and 2011, under the terms of the contracts for that service, net revenues amounted to $101 and $20,636, respectively. During 2012 the Company became the sole provider of these services.
F-56 39
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Revenues on productions and promotions
Banco Azteca, S.A. (Affiliated Company, subsidiaries of Grupo Elektra) The Company and Banco Azteca have entered into various production and promotion contracts of the products and services of Banco Azteca on open television channels 7 and 13. As of December 31, 2012 and 2011, revenues from these contracts amounted to $6,557 and $441, respectively.
Interest earned During the years ended December 31, 2012 and 2011, the Company granted short-term loans to related parties. In the years then ended, interest earned pursuant to these loans amounted to $7,863 and $10,677, respectively.
Income from leasing property The Company (as a lessor), entered into a lease agreement of real property with a subsidiary of GSF, which has a duration of 10 compulsory years for both parties, effective June 1998. On September 1, 2008, that contract was renewed and the amount of the rent is increased based on inflation, every year. As of December 31, 2012 and 2011, the lease revenue set forth in this agreement amounted to $23,535 and $17,965, respectively.
Leased equipment under operating leases The Company has entered into true leasing agreements with an option to purchase with Arrendadora Internacional Azteca, S. A. de C. V. (AIA), an affiliated company. The Company is the lessee and AIA is the lessor. To date exhibits have been signed for leasing transportation equipment and computer equipment. Those agreements will be in effect over the terms set forth in each one of the exhibits of the equipment leased, which are generally from 3 to 4 years. The terms computed in those exhibits will be binding for both parties, except in the event that the lessor should terminate those agreements early if any of the assumptions set forth in the agreements should occur. At the end of the duration of every exhibit, the Company may choose to acquire the assets under lease agreements, extend the term or return the leased assets, with a notification of at least 90 calendar days prior to its expiration. The monthly rent under the terms of the agreement is fixed, in conformity with each one of the exhibits.
Pursuant to the characteristics of the lease agreements discussed above and in conformity with currently enacted standards, they may be capitalized. For the years ended December 31, 2012 and 2011, the assets acquired under these agreements amounted to $3,498 and $2,945 respectively. The net balances payable to AIA as of December 31, 2012 and 2011, shown above include the amounts of $6,333 and $18,530.
Donations In the years ended December 31, 2012 and 2011, the Company delivered donations to Fundacion TV Azteca, A. C., a related party, in the amounts of $144,316 and $102,699, respectively. This related party is authorized by the tax authorities to receive donations and issue the respective supporting documentation (receipts).
Recovery of other receivables from related parties The Company periodically evaluates the recoverability of other receivables from related parties; when it is determined that these accounts which not derived from operation, are not recoverable they are charged to
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
other expenses. As of December 31, 2012 and 2011, it has not been necessary to create an allowance for this item.
Employee benefits granted to key management personnel The benefits granted to the Company’s executive personnel amounted to $65,000 in 2012 and 2011.
14. Financial debt As of December 31, 2012 and 2011, the company had the following bank loans:
2012 2011 Current portion of Stock Exchange Certificates $ 666,648 $ 666,648 Long-term trust certificates 4,611,580 5,245,860 Long-term line of credit with ATC 1,557,983 1,673,975 Program MTN 3,824,666 4,115,610 Total debt $ 10,660,877 $ 11,702,093
Stock Exchange Certificates During the third quarter of 2006, the Company established a structural Trust Stock Exchange Certificates (2006 Certificates) based on the collection rights of the Company and its subsidiaries, Red Azteca with Banco Invex, S.A. Institucion de Banca Multiple, Invex Grupo Financiero as a Trustee, in the amount of up to $6,000,000 (nominal). a) First 2006 tranche On November 16, 2006, the Company realized the first tranche of 2006 Certificates up to the amount of $4,000,000 (nominal), in reliance on the 2006 Certificate program. The duration of the Certificates is of 5,114 days, equivalent to approximately 14 years, counted as of the issuance date. The amortization of the certificates will be every month beginning December 2011, through the cancellation of certificates. The amortizations of fiscal years 2012 and 2011 amounted to $444,432 and $37,036, respectively. Accrued interest is liquidated monthly at a rate equivalent to EIIR plus 1.48 points
At December 31, 2012 and 2011, the balance outstanding of this issuance amounts to $3,518,883 and $3,962,964, respectively. b) Second 2006 tranche On December 11, 2006, the Company realized the second tranche of 2006 Certificates through the Trustee up to the amount of $2,000,000 (nominal), in reliance on the 2006 Certificate program. The duration of the Certificates is of 5,089 days, equivalent to approximately 14 years, counted as of the issuance date. The certificates will be redeemed every month starting on December 2011. Accrued interest will be paid on a monthly basis. The amortizations of fiscal years 2012 and 2011 amounted to $222,216 and $18,581, respectively. Accrued interest is liquidated monthly at a rate equivalent to EIIR plus 1.38.
At December 31, 2012 and 2011, the balance outstanding of this issuance amounts to $1,759,345 and $1,949,544, respectively.
In accordance with this trust certificate program, the amounts generated on the assigned collection rights for the year should be deposited in the account of the Trust Issuer to make the payment on principal and
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
interest of those certificates. As of December 31, 2012 and 2011, restricted cash applicable to this program amounts to $844,085 and $723,815, respectively.
Loans from ATC On February 11, 2000, the Company entered into a long-term loan agreement up to 119,800 US dollars with a Mexican company, subsidiary of ATC (“ATC Long-Term Loan”). The loan is comprised of 91,752 US dollars with no guarantee, and 28,000 US dollars for working capital, secured by certain real property owned by the Company. In June 2003, the Company and the Mexican Subsidiary ATC amended the original agreement. Pursuant to the terms of the amended agreement, the annual interest rate of each of the loans is 13.109%. The Company’s payment obligations pursuant to the ATC Long-Term Loan are secured by three of the main subsidiaries of the Company. The initial maturity of the 91,752 US dollar loan, pursuant to the ATC Long-Term Loan is February 11, 2020, which can be extended while the contract of the overall tower project (which is described herein below) remains in effect. The maturity of the 28,000 US dollars is on February 11, 2069.
As of December 31, 2012 and 2011, the balance of the ATC Long-Term Loan amounts to 119,752 US dollars.
In February 2000, the Company, together with Television Azteca, S. A. de C. V., a subsidiary company, signed an overall tower project contract with a Mexican subsidiary company of ATC for duration of 70 years, for renting space not used by the Company in its operations up to 190 broadcasting towers of the Company. As a consideration of the payment of 1,500 US dollars as an annual lease and, in turn, the Company granted ATC the right to market and lease the unused space in the Company’s broadcasting towers to third parties, as well as to the Company’s affiliated companies, and guaranteed the collection of all the relative revenues for account of ATC. The Company has the title deeds of the towers and is responsible for its operation and maintenance. The SCT approved this contract on February 10, 2000. After the expiration of the 20 initial years of the ATC Long-Term Loan, the Company has the right to purchase the total or a portion of the revenues and assets relative to marketing the rights at any time from ATC at fair market value, with the proportionate amount of the remaining principal of the ATC Long-Term Loan
MTN Program: On June 1, 2005, TV Azteca established the Medium Term Notes Program (MTN) in the amount of 200 million US dollars with Geronimo Capital Markets Ltd. as the arranger and main operator. The MTN Program permitted TV Azteca to issue and have unpaid balances up to 200 million US dollars in promissory notes at any date with a duration from one to seven years.
On May 25, 2011, TV Azteca amended the MTN Program existing, among other things, to increase its capacity up to 500 million US dollars and include BCP Securities, LLC and Jefferies and Company, INC. as arrangers and operators together with Geronimo Capital Markets, Ltd. On the same day, TV Azteca made an issuance under the Program in the amount of 300 million US dollars at a 7.5% annual rate, whose dates of interest payments are May 25 and November 25 every year up to its maturity on May 25, 2018.
The maturities of portions of loans contracted by the Group as of December 31, 2012 are shown below:
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
2012 2013 $ 666,648 2014 666,648 2015 666,648 2016 666,648 2017 onwards 7,994,285 $ 10,660,877
15. Employee benefits:
a. Employee benefits expense
The expense recognized for employee benefits are as follows:
2012 2011 Production cost: Employee benefits expense $ 1,062,700 $ 982,197 Selling and administrative expense: Employee benefits expense 746,577 695,679 Total employee benefit plan expense $ 1,809,277 $ 1,677,876
b. Seniority premium 2012 2011
Defined benefit obligations (DBO) $ 52,103 $ 45,828 Projected net liability 52,103 45,828
Labor cost of present service 4,045 3,877 Financial cost 3,300 3,107 Prior service recognized in the period 369 228 Actuarial immediate recognition (gains/losses) 1,670 (1,866) Net cost for the period $ 9,384 $ 5,346
c. Separation upon retirement
2012 2011 Defined benefit obligations (DBO) $ 101,147 $ 104,248 Unamortized items ( 12,211) 8,839 Projected net liability 113,358 95,409
Labor cost of present service 8,781 8,000 Financial cost 7,616 6,774 Amortizations 4,350 4,418 Early decreases and liquidations (2,869) -
F-60 43
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Prior Service recognized in the period 4,175 2,273 Actuarial immediate recognition (gains/losses) - 24 Net cost for the period $ 22,053 $ 21,489
The projected net liability is summarized below:
2012 2011 Seniority Premium $ 52,103 $ 45,828 Separation upon retirement 113,358 95,409 Employee benefits $ 165,461 $ 141,237
As of December 1, 2012, the amendments to the new Federal Labor Law went into effect in Mexico. These reforms contemplate the following aspects:
The concept of subcontracting and conditions that should be met therefor is incorporated, and further sets forth, among other aspects, that subcontracting should not cover the total activities undertaken at the workplace. In the event that all the above conditions should fail to be met, the contractor will be considered as an employer for all purposes of the Law, including social security obligations.
On the other hand, the workers of the establishment of a company are considered to form part thereof for purposes of employee profit sharing.
As of December 31, 2012 and as of the date of the independent auditor's opinion, the Group is in the process of analyzing these reforms to determine their possible effects.
16. Tax on earnings:
a. Income tax:
Tax consolidation:
The Company is authorized to determine Income Tax under the tax consolidation regime, together with its direct and indirect subsidiaries, in accordance with the authorization of the Ministry of Finance and Public Credit, beginning the year ended December 31, 2000, in accordance with the provisions set forth in the law on that subject.
During the year ended December 31, 2012, the Company generated consolidated taxable income in the amount of $1,304,665 (consolidated taxable income in the amount of $1,830,343 in 2011). Consolidated taxable income differs from book income, due mainly to those items that accrue over time and are deducted differently for book and tax purposes for the recognition of the impact of inflation for tax purposes, as well as those items that only affect book or taxable income.
Companies that do not consolidate for tax purposes are not subject to taxes on earnings for fiscal 2012, whereas in 2011 they were subject to taxes on earnings in the amount of $2,213.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
As of December 31, 2012 and 2011, the provision for taxes on earnings is summarized as follows:
2012 2011 Income tax due $ 391,399 $ 551,316 Deferred taxes on earnings (145,438) (9,000) Taxes on earnings due to Reform 372,694 - IETU due in subsidiary companies - 5,632 Taxes on earnings $ 618,655 $ 547,948
Deferred income tax: As of December 31, 2012 and 2011, the asset on cumulative deferred income tax effect is summarized as follows:
2012 2011 Excess of tax over book value of assets and liabilities, net $ 4,060,280 $ 2,483,081 Add - Tax loss carryforwards 1,287,558 2,048,999 5,347,838 4,532,090 Income tax rate 30% 30% Deferred income tax asset 1,604,351 1,359,627 Less - Valuation allowance (281,081) (146,188) 2010 Tax reform - - Deferred income tax asset $ 1,323,270 $ 1,1213,439
This deferred Income Tax asset is due basically to accumulated tax loss carryforwards, the net effect of advances from advertisers, and the excess of tax over book value of property and equipment. Due to the uncertainty that part of the total of this deferred asset may not be recovered in its entirety, the Company has assumed a conservative position and has decided to create a valuation allowance of the deferred income tax asset, as shown in the above chart.
As of December 31, 2012 and 2011, the effective tax rate is as follows:
2012 2011 % % Income tax rate 30 30 Expenses and other nondeductible items (18) (11) Differences between book and tax inflation 8 2 Equity in earnings (losses) of associated companies 1 2 Effective tax rate 21 22
Tax loss carryforwards for income tax purposes: For income tax purposes, tax loss carryforwards can be offset in the following ten fiscal years against taxable income related to income tax. Those tax loss carryforwards may be restated by using the National Consumers Price Index (NCPI), as of the first month of the second half of the fiscal year in which the loss was incurred and up to the last month of the first half of the fiscal year in which the tax loss carryforward is realized.
F-62 45
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Based on its financial and tax projections, the company has determined that the tax that will essentially be paid by the Company in the future will be Income Tax; therefore, it has recognized deferred income tax.
The tax loss carryforwards of the controlled Companies obtained before being incorporated into the tax consolidated regime with TV Azteca as the holding company can be reduced from consolidated taxable income for the year, up to the amount of the taxable income obtained in the same controlled company involved. As of December 31, 2012, the tax loss carryforwards that some controlled Companies have, restated at that date and obtained prior to being incorporated into the tax consolidation regime, are summarized as shown below:
Year incurred Restated amount Year of expiration 2003 $ 270 2013 2004 17,838 2014 2006 178,186 2016 2007 101,315 2017 2008 755,114 2018 2009 88,236 2019 2010 73,817 2020 2011 68,152 2021 2012 4,630 2022 $ 1,287,558
Recognition of the effects of the Fiscal Reform in Taxes on earnings
The executive order that amends, aggregates and repeals various tax provisions was published on December 7, 2009, and it went into effect on January 1, 2010
The 2010 Fiscal Reform amends the tax consolidation scheme to set forth that the payment of Income Tax related to the benefits of tax consolidation gained effective 1999 should be paid in partial payments during the sixth to the tenth year, subsequent to the year in which those benefits were used.
The benefits of prior year consolidation are derived from:
- Tax losses used in tax consolidation.
- Losses on sales of shares not yet deducted individually by the entity that incurred them.
- Special consolidation items derived from transactions carried out between companies that consolidate.
- Dividends paid by the subsidiaries that consolidate that were not paid out of the CUFIN balance distributed effective 1999.
This provision should be applied to the benefits accumulated from the tax consolidations from 1999 to 2004 for the first time in 2010. The payment of the pertinent tax is required to be paid from 2010 up to 2015.
F-63 46
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
At 2009 year end, the Company has made estimated calculations of the Income Tax liability generated by the benefits of consolidation, thereby determining a net Income Tax liability as of December 31, 2009 in the amount of $248,560, out of which a partial payment has been made applicable to fiscal 2010 and 2012
Reconciliation of deferred income tax assets and liabilities due to the 2010 tax reform
2012 2011 Assets: Opening balance $ 3,072,550 $ 3,365,166 ( + ) Effect of restated losses subject to tax 648,742 - ( - ) Credit of CUFIN (51,111) - ( - ) Tax loss carryforwards realized (321,583) (292,616) Ending balance $ 3,348,598 $ 3,072,550
Liabilities: Opening balance $ 3,105,941 $ 3,549,837 ( + ) Effect of restated losses subject to tax 648,742 - ( - ) Loss carryforwards realized - (298,789) ( - ) Payments realized (291,210) (145,107) Ending balance 3,463,473 3,105,941 Net effect $ 114,875 $ 33,391
b. Corporate flat tax (IETU):
The Corporate Flat Tax (IETU for its Spanish acronym) for the period is calculated using the rate of 17.5% to income determined based on cash flows, which is calculated by reducing authorized deductions from the total revenue received from qualifying activities. The so-called IETU credits are reduced from the above income, as provided for in currently enacted legislation.
IETU credits are amounts that can be reduced from the IETU itself, which include, among other things, IETU loss carry forwards, credits on salaries, social security contributions, and deductions of some assets such as inventories and fixed assets, during the transition period as a result of the effectiveness of the IETU.
The IETU is a tax that co-exists with Income Tax; therefore, it will be subject to the following:
i. If the IETU exceeds Income Tax of the same period, the Company will pay IETU. Pursuant to the foregoing, the Company will reduce Income Tax paid in the same period from the IETU of the period
ii. If the IETU is less that Income Tax of the same period, the company will not pay IETU in the period.
iii. If the IETU base is negative due to deductions that exceed taxable income, there will be no IETU due. The amount of that base multiplied by the IETU rate will be the amount of the applicable tax credit, in terms of the Corporate Flat Tax Law. Effective fiscal 2010, the credit of the negative base can only be credited against IETU of the immediately subsequent ten fiscal years.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
During the year ended December 31, 2012 and 2011 the Company was subject to IETU in the amount of $54,002 and $175,106, respectively which was lower than income tax for the year. Consequently, Income Tax was considered as the final tax.
Further, some subsidiary companies paid IETU in the amount of $1,004 and $5,632 for the years referred to in the above paragraph.
On February 11, 2008, the Company filed an appeal for constitutional applications with the proper authorities against the IETU Law. On October 22, 2008, the proper authorities, through a ruling, decided to deny the company the appeal for constitutional relief and protection of Federal Justice against that ruling. The Company filed an appeal for review which is in the process of being reviewed at the date of the external auditors’ opinion.
c. Assets Tax:
Effective January 1, 2008, the assets tax was abrogated.
During 2007, the Company filed an appeal for constitutional relief with the authorities with competent jurisdiction, the Asset Tax Law discussed above. At the date of the external auditors’ report, this litigation continues in process. Company’s Management estimates that the result of this litigation will not have adverse effects thereon.
17. Financial assets and liabilities: The fair values of financial instruments, which were determined by the Company using information available on the market and other valuation techniques that require judgment by Management, are shown below: Moreover, the use of different assumptions and valuation methods can have a material effect on the estimated amounts of fair value.
The financial instruments which, after their initial recognition, are quantified at their fair value are grouped in Levels from1 to 3 based on the degree to which fair value is observed, as shown below:
• Level 1 – valuation based on prices quoted on the market (unadjusted) for identical assets or liabilities;
• Level 2 – valuation with indicators other than the quoted prices included in Level 1, but include observable indicators for an asset or liability, either directly (quoted prices) or indirectly (derivations of these prices); and
• Level 3 – valuation techniques are applied that include indicators for assets and liabilities that are not based on observable market information (unobservable indicators).
F-65 48
TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
a. Financial assets and liabilities are classified as follows:
Loans and Derivatives accounts Available-for- Note for trading receivable Total sale purposes and other liabilities at fair value at amortized cost As of December 31, 2012
Financial Assets: Cash and cash equivalents 7 $ _ $ – $ 6,446,077 $ 6,446,077 Trade and other receivables 8 – – 5,708,484 5,708,484 Related parties 13 – – 99,044 99,044 Available-for-sale assets 6i 825,219 – – 825,219 Derivative financial instruments 6i y17b – 64,238 – 64,238 $ 825,219 $ 64,238 $ 12,253,605 $ 13,143,062
Financial liabilities: Short-term debt 14 – – 666,648 666,648 Accounts payable 12 y 6l – – 1,990,484 1,990,484 Long-term debt 14 – – 9,994,229 9,994,229 $ – $ – $ 12,651,361 $ 12,651,361
Loans and Derivatives accounts Available-for- Note for trading receivable Total sale purposes and other liabilities at fair value at amortized cost As of December 31, 2011
Financial Assets: Cash and cash equivalents 7 $ – $ – $ 8,317,817 $ 8,317,817 Trade and other receivables 8 – – 7,344,083 7,344,083 Related parties 13 – – 122,555 122,555 Derivative financial instruments 6i y 17b – 36,062 – 36,062 $ – $ 36,062 $ 15,784,455 $ 15,820,517
Financial liabilities: Short-term debt 14 – – 666,648 666,648 Accounts payable 12 y 6l – – 1,640,309 1,640,309 Long-term debt 14 – – 11,035,445 11,035,445 $ – $ – $ 13,342,402 $ 13,342,402
b. Derivative financial instruments As of December 31, 2012 and 2011, the Company had interest rate layers as follows:
Fair Value as of December Type of Underlying Notional 31 Maturities derivative asset amount strike price 2012 2011 Amount Year Interest rate EIIR at 28 $5,222,244 7.50% $ 5,115 $ 8,695 $5,222,244 2013 cap days Interest rate EIIR at 28 4,555,596 6.75% 20,190 24,924 4,555,596 2014 cap days Interest rate EIIR at 28 3,888,948 5.50% 38,933 2,443 3,888,948 2015 cap days $ 64,238 $ 36,062
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
These instruments do not require "margin" calls. Exercising the derivative is the Company's power and an early premium is paid.
c. Financial Debt
Loans include the following short and long term financial liabilities:
Short-term Long-term
2012 2011 2012 2011 Financial liabilities: Securities Exchange Certificates $ 666,648 $ 666,648 $ 4,611,580 $ 5,245,860 American Tower Corporation -ATC- 1,557,983 1,673,975 Program Medium Term Note -MTN- - - 3,824,666 4,115,610 Total carrying value $ 666,648 $ 666,648 $ 9,994,229 $ 11,035,445
The fair values have been determined of the long-term financial liabilities by calculating their present values at the reporting date, by using fixed effective market interest rates available for the Group. Changes in fair value in income or losses for the period have not been included since financial assets are carried at amortized cost in the statement of financial position.
18. Financial Instrument Risk: Activities with financial instruments presume the assumption or transfer of one or various types of risks by the entities that trade with them. The main risks associated with financial instruments are:
• Credit risk: likelihood that one of the parties to the financial instrument contract fails to meet his contractual obligations due to reasons of insolvency of inability to pay and results in a financial loss for the other party.
• Market risk: likelihood that losses are generated in the value of the positions maintained, as a result of changes in the market prices of financial instruments. In turn, it includes three types of risks:
- Interest rate risk: this arises as a consequence of variations in market interest rates. - Interest rate risk: this arises as a consequence of variations in exchange rates between currencies. - Price risk: this arises as a consequence of changes in market prices, or due to specific factors of the instrument itself, or due to factors that affect all instruments traded on a concrete market.
• Liquidity risk: likelihood that an entity cannot meet its payment commitments or, in order to meet them, it has to resort to obtaining funds in encumbering conditions or placing its image and reputation at risk.
a. Credit risk management – it is caused mainly by liquid funds and trade accounts receivable.
The Company's policy is to operate with banks and financial institutions with the highest credit ratings granted by credit rating agencies to reduce the possibility of counterparty non-performance. With respect to trade accounts receivable, the Company grants commercial credit to companies or
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
governmental entities that are financially sound, have a good reputation on the market, and many of them are recurring customers.
The Company periodically evaluates the financial conditions of its customers and does not believe that there is a significant risk of loss, due to a concentration of credit in its customer portfolio. The allowance for doubtful accounts is considered to cover its potential credit risk adequately, which represents a calculation of losses incurred due to impairment of its accounts receivables. As of December 31, 2012, the receivables more than 90 days old amounts to $139,160, which is covered by the allowance for doubtful accounts.
b. Market risk management
i. Interest rate risk - the Company is exposed to risks due to fluctuations in the interest rates of the debt contracted at variable EIIR rates. The risk is managed through caps (the variable rate to liquidate is limited; the premium is paid at the time of contracting).
ii. Exchange rate risk management - the Company realizes foreign currency transactions; therefore, it is exposed to fluctuations in the different exchange rates with which it operates. As of December 31, 2012 and 2011, the Company had not contracted hedging instruments against foreign exchange risks.
At December 31, the company had the following US dollar denominated assets and liabilities:
Short-term Long-term December 31, 2012 Financial assets $ 243,488 $ 18,810 Financial liabilities 22,761 419,752 Total Exposure $ 220,727 $ (400,942)
December 31, 2011 Financial assets $ 298,754 $ 168,876 Financial liabilities 18,203 419,752 Total Exposure $ 280,551 $ (250,876)
As of February 21, 2013, date of the independent auditor’s opinion, the unaudited foreign currency position is similar to the position held as of December 31, 2012.
As of December 31, 2012 and 2011, and as of February 21, 2013, the exchange rates for the US dollar were $13.0101, $13.9787 y $12.6694, respectively.
As of December 31, 2012, the Company presents a net short position in dollars; therefore, if the peso had strengthened (weakened) 10% against the dollar, and the rest of the variables had remained constant, after income tax for the year, would have increased (decreased) in the amount of $ 234,279 as a result of the net exchange gain (loss) in the translation of monetary assets and liabilities in dollars not hedged in a derivative financial instrument.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
c. Liquidity risk management - The Company has established appropriate policies to mitigate the liquidity risk through: (i) the follow-up on working capital; (ii) the review of their real and projected cash flows; and (iii) the reconciliation of profiles of maturities of their financial assets and liabilities. This allows the Group’s Management to manage short and long-term financing requirements, by maintaining reserves of cash and the disposition of credit lines.
19. Equity
a. Capital stock
The Company’s capital stock is comprised of Series “A” shares, Series “D-A” shares, and Series “D-L” shares. Holders of Series “A” shares have voting rights at the Company’s General Stockholders’ Meetings. Holders of Series “D-A-” and “D-L” have voting rights only in limited circumstances, and have a preferential dividend right. The rights of all holders of all series of capital stock are identical, except for the limitations with respect to Series “A” and “D-A” shares held by persons other than eligible Mexican holders. Series “A” shares cannot be exchanged for any other type of securities of the Company. Series “D- A” shares may be exchanged for Series “A” shares on the tenth anniversary of their original issue, and will have the same characteristics of current Series “A” shares outstanding. Series “D- L” shares may be exchanged for Series “L” shares on the tenth anniversary of their original issue. Series “L” shares, which will be exchanged for Series “D-L” shares, will grant voting rights to their holders, only in limited circumstances.
The tenth anniversary for the exchange or swap of Series “D-A” and “D-L” shares for Series “A” and “L” shares, respectively, was completed in August 2007. However, on April 30, 2007, at the General Extraordinary Stockholders’ Meeting, the stockholders resolved to extend the term referred to above to 20 years, as of their issuance date. Consequently, the date for the exchange or swap of stock will be in August 2017. This extension was authorized by the NBSC on November 9, 2007, subject to meeting all the pertinent requirements.
Authorized, issued, and paid-in capital stock of the Company as of December 31, 2012 and 2011 is summarized as follows: Shares Authorized shares paid Capital (thousands) (thousands) Stock Serie “A” 5,318,079 4,630,353 $ 371,356 Serie “D-A” 2,613,878 2,160,471 171,862 Serie “D-L” 2,613,878 2,160,471 171,862 10,545,835 8,951,295 $ 715,080
As of December 31, 2012, the Company’s shares are listed on the following securities exchanges:
Characteristics of the securities Country listed in Ticker symbol Stock Exchange Certificates of common Mexico AZTECACPO Mexican Stock participation (CPOs), each one Exchange represents one A Share, one D- A Share, and one D-L Share
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
10 CPO Units Spain XTZA Latin American Securities Market
Resolutions adopted on the year ended December 31, 2012 At the General Annual Ordinary Stockholder’s Meeting held on April 27, 2012, the stockholders resolved to approve the consolidated financial statements as of December 31, 2011. A preferential dividend was declared for series D-A and series D-L stockholders. That dividend represents a total amount of $343,442, which was paid on May 31, 2012, in the amount of $171,721, and on December 7, 2012, payment was made in the amount of $171,721.
Resolutions adopted on the year ended December 31, 2011 At the Annual Ordinary Stockholders’ Meeting held on April 29, 2011, the consolidated financial statements as of December 31, 2010 were approved. Moreover, a unit preferential dividend was declared for Series D-A shares and Series D-L shares. That dividend accounts for a total amount of $18,590, which was paid on May 28, 2011.
Resolutions adopted on the year ended December 31, 2010 On April 30, 2010, a cash reimbursement was approved in proportion to the stockholdings of each stockholder at the General Extraordinary Stockholders’ Meeting, up to the amount of $322,000, payable in the amounts and on the dates determined by Management, in accordance with the Company’s economic capacity. This reimbursement implied a fixed minimum capital stock decrease of the Company in the amount of $9,944. As of December 31, 2011, the balance payable of this reimbursement amounts to $238,358, and it is presented in the consolidated balance sheet in accounts payable and accrued liabilities.
Resolutions adopted in the year ended December 31, 2007 At the General Extraordinary Stockholders’ Meeting held on September 27, 2007, a cash reimbursement was approved proportionately on the shareholdings of every stockholder up to the amount of $761,325 ($750,000 at par value). This reimbursement implied a fixed minimum capital reduction of the Company in the amount of $61,743 ($60,825 at par value). As December 31, 2010, the unpaid balance of such repayment amounts to $ 226,344, and is presented in the consolidated balance sheet under the heading of accounts payable and accrued expenses. This was paid entirely in May 2011.
b. Stock repurchase
During the year ended December 31, 2012, the Company decreased its capital stock in the amount of $1,559 for the repurchase of 18,261 thousand shares. Shares were repurchased in the amount of $52,691. The value thereof was charged to capital stock, and the difference was charged to the reserve for stock repurchases.
During the year ended December 31, 2011, the Company decreased its capital stock in the amount of $4,976 for the repurchase of 58,290 thousand shares. Shares were repurchased in the amount of $145,949. The value thereof was charged to capital stock, and the difference was charged to the reserve for stock repurchases.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
As of December 31, 2011, the Company increased its capital stock in the amount of $1,164, pursuant to the sale of 13,650 thousand treasury shares, which had a selling value of $38,595. Capital stock was credited at original value, and the difference was restored to the reserve for stock repurchases.
c. Legal Reserve
Net income for the year is subject to the legal provision which requires that 5% of such income be appropriated to a legal reserve until that reserve equals 20% of the capital stock. As of December 31, 2012, the balance of the legal reserve accounts for 22% of capital stock. The balance of the legal reserve may not be distributed to the stockholders during the existence of the Company, except as stock dividends.
d. Distribution of earnings
Net taxable income account (CUFIN): As of December 31, 2012, the restated balance of the “consolidated net taxable income account” (CUFINCO) amounts to $2,498,945.
No income tax will be assessed in connection with the distribution of dividends or earnings to stockholders up to the CUFINCO amount. Legal entities that distribute dividends or earnings that are not paid out of the CUFIN should calculate and pay the applicable tax. Toward that end, the tax that should be paid on dividends or earnings distributed should be aggregated thereto.
The tax that should be aggregated in terms of the foregoing paragraph will be determined by multiplying the amount of the dividends or earnings by the 1.4286 factor, and a 30% tax rate will be applied to the result. The tax determined is considered final and it may be credited against income tax for the year in which such a tax is paid and in the two following fiscal years. This balance may be restated up to the date earnings are distributed by using the NCPI.
During 2012 and 2011, the Company declared annual preferential dividends in the amount of $343,442 and $18,590, respectively. Dividends paid in 2012 were subject to tax in the amount of $147,182, since they were not paid out of the CUFIN. Dividends paid in 2011 are tax free, since they were paid out of the CUFIN.
e. Capital reductions
As of December 31, 2012, the restated balance of the “restated contributed capital account” (CUCA) amounts to $4,544,827. In the case of a reimbursement or capital decreases in favor of the stockholders, the excess of that reimbursement over this amount will be treated as a distributed earning for tax purposes.
Likewise, in the event that stockholders’ equity should exceed the balance of the CUCA, the spread will be considered as a dividend or distributed earning subject to the payment of income tax. If the earnings referred to above are paid out of the CUFIN, there will be no corporate tax payable due to the capital decrease or reimbursement. Otherwise, it should be treated as dividends or earnings distributed, as set forth in the Income Tax Law.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
f. Employee stock option plan
Effective the fourth quarter of 1997, the Company adopted an employee stock option plan (ESOP) that was granted to employees who render their services to the Company and its subsidiaries, whereby options were granted to all employees contracted as of December 31, 1996. Prices set fluctuated from 0.29 US dollars to 0.39 US dollars per CPO, with a higher number of options for executive level employees, as well as the most creative actors, presenters, and creative personnel.
No options were exercised for this plan during fiscal years 2012 and 2011. As of December 31, 2012, options not yet exercised amount to 19 million CPOs of the 241 authorized.
g. Other capital components
An analysis of other capital components is shown below:
Available-for-sale Effect on translation Total financial assets Balance as of January 1, 2012 $ (241,439) $ - $ (241,439)
Exchange differences on translating foreign
operations $ (92,078) $ - $ (92,078) Loss on investment available-for-sale – (509,342) (509,342) Balance as of December 31, 2012 $ (335,517) $ (509,342) $ (842,859)
Available-for-sale Effect on translation Total financial assets Balance as of January 1, 2011 $ (236,167) $ - $ (236,167)
Exchange differences on translating foreign
operations $ (5,272) $ - $ (5,272) Loss on investment available-for-sale - - - Balance as of December 31, 2011 $ (241,439) $ - $ (241,439)
20. Earnings per share and dividends: Earnings per share Both basic and diluted earnings per share have been calculated by using earnings attributable to the stockholders of the parent company (TV Azteca, S.A.B. de C.V.) as the numerator, that is, it was not necessary to make adjustments to earnings in 2011 or 2012.
The weighted average number of shares for purposes of diluted earnings per share can be reconciled with the weighted number of ordinary shares used in the calculation of basic earnings per share as follows:
2012 2011 Amounts stated in thousands of shares: Weighted average of the number of shares used in the base of 8,951,295 8,983,407 earnings per share Shares considered issued without taking into account share based 1,594,539 1,589,777 payments Weighted average of the number of shares used in diluted 10,545,834 10,545,843 earnings per share
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Dividends During 2012, TV Azteca, S. A. B. de C. V. paid dividends in the amount of $ 343,442 to its stockholders (2011: $18,590), which represented a payment of $ 0.00427 per D-A and D-L share, respectively.
21. Capital management policies and procedures: The objectives of the Group's capital management are to:
• guarantee the Group's ability to continue as a going concern • provide an adequate return to stockholders by setting prices on products and services commensurate with the level of risk.
The Group's objective in capital management is to maintain a financial proportion of capital to financing.
The Group establishes the amount of capital in proportion with its general financial structure, that is, equity and financial liabilities that are not a loan. The Group manages capital structure and makes adjustments thereto, due to changes in economic conditions and risk characteristics of the assets involved. In order to be able to maintain or adjust capital structure, the Group can adjust the amount of dividends paid to the stockholders, return capital to the stockholders, issue new shares or sell assets to reduce the debt.
22. Financial income and costs:
Interest paid applies to amortizations of the financial debt. Interest income applies to investments in marketable securities listed on the stock exchange.
The caption of other expenses is summarized as shown below:
2012 2011 Placement expenses of Stock Exchange Certificates (Cebures) and ATC $ 17,606 $ 65,761 Administration (Cebures, Trusts) 16,402 13,118 Fees on Financial Operations 13,366 2,525 MTN (Issue of bonds) 8,759 6,024 Others 42,145 9,104 Total financial expenses and income $ 98,278 $ 96,532
23. Other expenses, net:
This caption is summarized as shown below:
2012 2011 Legal advisory services (lawsuit expenses) $ 121,573 $ 124,955 Donations 124,371 155,714 Other 85,810 8,667 $ 331,754 $ 289,336
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
24. Financial information by Segment: Management currently identifies three lines of service of the Group as operating segments (See Note 6f). These operating segments are supervised by the person who makes strategic decisions, which are made based on the adjusted operating results of the segment.
National Television These segments are comprised of television services in Mexican territory, including local stations. Income is derived mainly from the sale of time on screen nationwide and locally, less commissions on sales.
Azteca America This segment consists of television services in the territory of the United States of America, directed primarily for the Hispanic community that resides in that territory.
Programming rights This segment is comprised mainly of the exports of programs that were of wide interest for global audiences primarily in the countries of Latin America and Europe.
Other segments This segment consists mainly of operations relative to the promotion of billboard advertisements, soccer teams, concerts, and Internet, among other things.
As of December 31, 2012 National Azteca Programming Other Consolidated
Television America rights segments total Net Sales $ 10,648,770 $ 973,666 $ 648,767 $ 263,197 $ 12,570,400 Costs and 7,277,233 604,852 494,622 41,802 8,418,509 Expenses Depreciation and amortization 506,883 12,863 5,227 31,416 556,389 Operating
income 2,900,654 355,951 148,918 189,979 3,595,502
As of December 31, 2011 National Azteca Programming Other Total Television America rights segments Consolidated Net Sales $ 10,560,563 $ 1,001,496 $ 274,992 $ 362,145 $ 12,199,196 Costs and 6,681,921 511,974 200,671 417,125 7,811,691 Expenses
Depreciation
and 480,084 24,170 - 4,677 508,931 amortization Operating
income 3,398,558 465,352 74,321 (59,657) 3,878,574
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25. Contingent liabilities: Various legal lawsuits and guarantee proceedings were filed against the Group during the year. Unless it has been recognized as a provision (See Note 23), management considers that these lawsuits are unjustified and that the likelihood that they will require a liquidation to be made by the Group is remote. This evaluation is consistent with the independent advice of external advisors. The main contingencies are described below:
a Servicio Hi-Tv
On May 2009, the Ministry of Communications and Transportation (SCT) notified TV Azteca of the beginning of an administrative proceeding, since the service denominated Hi-Tv (understanding Hi-Tv as new programming options by using part of the capacity of channels for the transmission of Land Digital Television (hereinafter Hi-Tv)), is supposedly a telecommunications service, which is rendered without having the pertinent concession, permit or authorization, in conformity with the provisions of the Federal Telecommunications Law.
In contrast with the issue sustained by the SCT, the Federal Telecommunications Commission handed down a ruling on December 2009, whereby it considered Hi-Tv as a radio broadcasting service, which is permitted in the Title Concession of TV Azteca.
In spite of the foregoing, on February 2010, the resolution issued by the SCT was notified in the sense of considering the Hi-Tv service as a telecommunications services different from broadcasting. Rendering that service would require a telecommunications concession. Consequently, various sanctions and a penalties were imposed on TV Azteca.
Azteca filed appeals for constitutional relief against those resolutions. Final rulings were handed down in the review of the appeal for constitutional relief in July and August 2012, whereby the Federal Judicial Branch determined to grant constitutional protection and relief to Azteca against the rulings handed down by the SCT, thereby rendering the rulings that impose sanctions null and void.
b Federal Electoral Institute (IFE)
Legal actions and proceedings filed against the Federal Code of Electoral Institutions and Procedures
The Executive Order whereby the Federal Code of Electoral Institutions and Procedures (COFIPE), amended in 2007, was published in the Official Daily Gazette in January 2008.
The Company filed a series of appeals for constitutional relief against various provisions of that Code, for considering that it affected its legal jurisdiction by violating a series of individual guarantees, as well as imposing additional charges on the Company which it has maintained and operated as a radio and television licensee. The Supreme Court of Justice resolved to dismiss those appeals for constitutional relief.
Subsequently, the IFE filed special punishable special proceedings against the Company for presumed nonperformances in the transmission of various promotional spots of political parties and Electoral
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Authorities which, at the issue date of these financial statements, amount to approximately $200 million. These fines were confirmed by the Federal Electoral Court, the Supreme Court, and District Courts.
On the other hand, the IFR has imposed two sanctions on the Company in punishable special proceedings that amount to a total of $16,5 million approximately, for considering that they violated various provisions of the COFIPE by telecasting spots advertised in political magazines on television and for considering that those spots contained political propaganda. These fines were confirmed by the Federal Electoral Court.
Further, the IFE imposed a sanction in the amount of $22 million approximately for considering that the COFIPE was being violated for not telecasting promotion of political parties and electoral authorities in the restricted television systems of SKY and Cablevision. These fines were challenged in an appeal for constitutional relief and the complaints were dismissed by those Judges.
Finally, the IFE has imposed sanctions on Azteca in special sanctioning proceedings in an amount approximating $1.7 million, for various behaviors considered as violations in the COFIPE. These resolutions were confirmed by the Electoral Court of the Federal Judicial Branch.
Due to the nature of the matters that have been discussed, it is not possible to anticipate the final result. However, Azteca Management and its legal advisors estimate that they do not represent an adverse economic effect for the company with the legal elements and means of defense that Azteca has for bringing action. Therefore no provision has been created for these items.
c News and Information Cooperation.
The Company has filed various lawsuits against CNI, TVM and Mr. Moreno Valle. In spite of a lack of certainty, Company’s Management considers that it will prevail in the various disputes it has with CNI, TVM and Mr. Moreno Valle and, therefore, no provision has been made for this matter.
d Ibope AGB México
On May 9, 2008, TVA and IBOPE AGB MEXICO, S.A. DE C.V. (IBOPE) signed Ratings Database Use and Advertising Investment and Computer Programs License, retroactively effective as of January 1, 2006.
Pursuant to this contract, IBOPE supplied TVA, among other data bases and software licenses, the ratings databases.
IBOPE was contractually bound to have the information that it produces comply with principles of impartiality, accuracy, opportunity, and representativeness.
It is the case that factors and dependents of TVA and other television companies, radio, advertising agencies, and advertising customers of the industry to which TVA belongs were disclosed to various addressees through two e-mails in 2012, which disclosed the identity of a significant number of participants on the ratings measurement panel in 28 cities of Mexico.
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Due to these events, in the judgment of TVA, the ratings measurements generated by IBOPE cease to be objective, accurate, impartial, timely, and reliable. By making the related information public and losing the anonymity of the participants of the panel, it became vulnerable and exposed to the intervention of third parties, to the degree that a significant number of the sample has been contacted, as recognized by the IBOPE itself. This, in addition to the fact that since January 2012, TVA has considered that the television audience reports generated by IBOPE stopped complying with the principle of representativeness.
Due to such reasons, TVA has filed various lawsuits:
a) During the same month of June, it filed a criminal complaint against IBOPE, in which it reports the events occurred and asks to have an investigation performed of a possible crime committed to the detriment of TVA, which continues in proceedings; and
b) In December 2012, it demanded specific performance from IBOPE through ordinary mercantile proceedings, in order for IBOPE to continue to license the audience measurement databases or "ratings" to us that contain reliable, timely, accurate, objective, representative, and relevant information, obtained from a panel of participants whose data is confidential, anonymous, and secret. Accordingly, IBOPE must carry out various actions that guarantee a methodological rigor and comply with the characteristics referred to above, as well as the payment of damages.
In the proceedings, IBOPE filed a responsive pleading to the lawsuit on January 31, 2013, and filed a counterclaim against TVA, whereby it demanded a rescission of the contract and presumed pain and suffering (non-monetary damage) for the presumed disclosure of false information about IBOPE. The trial is being decided before the sixty-second civil court of ordinary jurisdiction.
e Transition to Digital Television
In November 2010, both Television Azteca, S. A. de C. V. and Televisora del Valle de Mexico, S. A.P.I de C. V. (formerly S.A. de C.V.) (Subsidiary Company) filed Appeals for Annulment with the Federal Court of Tax and Administrative Justice against the Decree, which set forth the actions that should be carried out by the Federal Public Administration to complete the transition to Land Digital Television (2010 TDT Decree) published in the Official Daily Gazette on September 2, 2010.
At the date of the financial statements, these appeals do not represent a contingency for the Company, since the process for transition to Land Digital Television is in the process of being carried out at present, in compliance with the Agreement whereby the land digital television technological standard is adopted, and a policy is set forth for the transition to Land Digital Television in Mexico (2004 TDT Agreement), taking into consideration the calendar established in the Agreement published in the Official Daily Gazette on May 4, 2012, whereby various provisions of the Agreement are amended, aggregated, and repealed, on which the technological land digital television standard is adopted, and it sets forth the policy for the transition to land digital television in Mexico, published in the Official Daily Gazette on July 2, 2004 (TDT Agreement 2012), and the official letter of re-programming of stations by which the Federal Telecommunications Commission notified Television Azteca, S. A. de C. V. on January 13, 2013 (Official Letter of Re-Programming).
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Both the Federal Chamber of Deputies and Senate filed constitutional challenges against Executive Order TDT 2010. On November 15, 2011, the Supreme Court (SCJN) dismissed both challenges and declared Executive Order TDT 2010 in effect. As soon as the SCJN notifies the TFJFA of its ruling, the administrative proceedings filed will be reactivated and will be in a stage of admission.
On June 6, 2012, Television Azteca, S.A. de C.V. filed petition for annulment with the Federal Court of Tax and Administrative Justice of some points of the TXT 2012 Agreement, which is in the evidentiary stage. As of the date of the financial statements, this legal proceeding does not represent any contingency for the Company, and it does not affect the transition process to Land Digital Television, since it is complying with the calendar set forth in the TDT 2012 Agreement and in the Official Letter of Re-programming.
f Other litigations and lawsuits
The Company and its subsidiaries are parties to various legal actions and lawsuits during the normal course of their operations. The Company’s legal advisors indicate that there are various trials and contingent demands at the issue date of these financial statements, whose related amounts cannot be reasonable estimated to date.
The proceedings and litigations involved that are quantified amount to $1,811,400. The Company’s Management and its legal advisors consider that none of these legal actions against the Company, including those not quantifiable individually or on a consolidated basis, will have any significant adverse impact on their businesses or financial position. Consequently, no provision has been made for these purposes.
26. Commitments:
a Leases
The Company rents the use of satellite transponders for the service of receipt and conduction of the satellite signal. It has the commitment of paying US$25 thousand (IS21 satellite), US45 thousand (Galaxy25 satellite), and US$74 thousand (Galaxy 19 satellite) every month, for the three contracts entered into with Panamsat de Mexico, S. de R. L. de C. V.. The expenses include a monthly fixed payment and others based on the use thereof. The lease agreements have a one year mandatory duration, automatically and successively renewable for identical periods up to 2015, 2021, and 2024, respectively.
The Company has entered into a contract with Satelites Mexicanos, S. A. de C. V., for the rental and use of satellite transponders (Satmex 6 satellite) for the service of receipt and conduction of the signal. It has the commitment of paying a monthly amount of US$72 thousand every month. This amount will increase 5% annually up to the date of expiration of the contract which is not until 2021.
As of December 31, 2012, the Group had the following minimum annual commitments for the use of satellite transponders: Thousands of dollars 2013 US$ 2,608 2014 2,651 2015 2,334
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2016 2,198 2017 and thereafter 14,192 US$ 23,983
b Performance rights
The Company has entered into license agreements with its performance rights suppliers for the long-term acquisition of materials of programs when such programs are available for their first broadcast. As of December 31, 2012, the commitments for the acquisition of materials amount to 12,399 US dollars, with due dates in 2013 and 18,300 US dollars with due dates in 2018.
c Advertising rights
In June 2010, the Company entered into an advertising rights assignment contract with Super Publicidad, S.A. de C.V., which sets forth that effective fiscal 2012 and up to 2022, the rights of spaces are obtained for exhibiting advertising, as well as the use of part of the facilities of the Mexico City Arena. The total value of the consideration amounts to 3,500 US dollars, which have been paid in their entirety at the date of the opinion on the financial statements.
d COFECO
On April 7, 2011, GSF Telecom Holdings, S.A.P.I. de C.V. (“GSF”), which is the majority stockholder of Grupo Iusacell, S.A. de C.V. and related party of TV Azteca, S.A.B. de C.V., together with Grupo Televisa, S.A.B. (“GTV”) and Corporativo Vasco de Quiroga, S.A. de C.V. (“CVQ”) petitioned the Federal Commission of Competence (“COFECO”) for its authorization to have CVQ become the holder of 50.00% of the voting shares of GSF. The COFECO resolved to deny the authorization on January 24, 2012, upon considering that the concentration might decrease, damage or impede competition and free concurrence on the television and restricted audio markets, as well as on the markets related to content/programming (open TV channels) and advertising on open television.
Pursuant to the foregoing, both GSF and CVQ filed the necessary motions for reconsideration provided for in the Federal Law of Economic Competition to process the authorization of the notified concentration.
On June 13, 2012, the CFE resolved the motions for reconsideration filed in the sense of authorizing the notified concentration subject to the realization of various conditionings.
As a consequence of the foregoing, the CFE established various conditionings for the parties involved, applicable to TV Azteca, S. A. B. de C. V. ("TVA") the obligation of indiscriminately offering its open TV and restricted TV signals (if any), as well as offering advertising spaces in terms and market conditions to the concessionaires of telecommunications of public networks. Those conditionings have been complied with in conformity with the resolution referred to above as of the issue date of this report.
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
e Colombia Project
In September 2011, the Ministry of Information Technology and Communications of Colombia (MINTIC) published the terms of reference of the National Optic Fiber Project (“the Project”). The purpose of this technology is to spread or extend this technology to at least 400 municipalities of that country, in order to reach the goal of 700 municipalities connected to 2014. The Project will have an investment in the amount of $415 billion Colombian pesos (equivalent to approximately $2 billion Mexican pesos) by the government of Colombia.
In order to participate in that bidding, the Company, together with its related party Total Play Telecomunicaciones, S. A. de C. V., formed the Union Temporal Fibra Optica Colombia (the UT). On November 4, 2011, the MINTIC decided to award the contract to the UT to undertake the Project.
The characteristics of that contract are the following:
1. Signatories: UT and the Information Technology and Telecommunications Fund (TIC Fund).
2. Subject matter of the contract: The UT will develop an optic fiber network, operate it, maintain, and assume the management of the services in at least seven hundred and fifty-three (753) municipalities and 2,000 public institutions forming 4 groups. Toward that end, the TIC Fund will contribute certain resources (“Development Resources”).
3. Value of the Contract: Co$415,837,649,402 (four hundred and fifteen billion eight hundred and thirty-seven million six hundred and forty-nine thousand four hundred and two Colombian pesos, including Value Added Tax). The budget items allocated by the Colombian government are distributed as follows:
Year Maximum amount (billions of Colombian pesos) 2011 196.2 2012 109.6 2013 99.6 2014 29.9
4. Term: Seventeen years and six months.
5. Trust: A management and payment trust was created between the MINTIC (trustor and primary beneficiary), the UT (secondary beneficiary), and Bancolombia S.A. (trustee). The purpose of the trust agreement is to create an autonomous patrimony for the management and administration of: (i) the Development Resources that the TIC Fund allocated to the UT in the conditions and for the purposes related to the execution of the agreement and the Project Documents; and (ii) the assets
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acquired with the Development Resources or with proprietary resources of the trustor for the execution of the contract.
6. General scheme of the project: The construction will last 30 months (2.5 years), and the network will operate for 180 months (15 years). During the construction stage, the trust will reimburse the UT for the amount of the costs and expenses incurred, subject to the authorization of the inspector designated by the MINTIC.
7. Stages and Time Schedule of the Project: The Project will be executed in three stages, with three groups of municipalities for its execution that will determine the maximum performance terms of the stages included in the Project Time Schedule.
As of June 30, 2012, the Company still is in the construction stage, and there is no knowledge of any nonperformance of its obligations derived from the Project.
27. Adoption of International Financial Reporting Standards (IFRS) The first financial statements in accordance with IFRS are issued as of December 31, 2012, as discussed in Note 4.
The accounting policies described in Note 6 have been applied consistently in the preparation of the consolidated financial statements to fiscal years ended as of December 31, 2012 and 2011. The Group has applied IFRS 1 First-Time adoption of International Financial Reporting Standards in the preparation of its first consolidated financial statements, whose transition date is January 1, 2011.
In preparing the opening statement of financial position, the Group adjusted the amounts previously reported in the financial statements prepared in accordance with Mexican FRS. The following charts and notes explain the impacts of the transition from Mexican FRS to IFRS in the Group's statement of financial position, the statement of comprehensive income, and in the statement of cash flows.
Mandatory exceptions:
The following mandatory obligations were applicable to the Company:
1. Calculation of estimates - Estimates made under IFRS at the date of transition are consistent with the estimates at that same date under Mexican Financial Reporting Standard (MFRS).
2. Non-controlling participations – The Company prospectively applied certain requirements of IAS 27 (2008) “Investment in Associates” beginning as of the transition date.
Optional exemptions:
The Company has selected the following optional exemptions to the retrospective application of IFRS as follows:
1. Exemptions referring to business combinations – IFRS 1 gives the option of applying IFRS 3 “Business Combinations” prospectively from the transition date or from the specific date prior to
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
the transition date. The Group will apply the business combinations exemption. Therefore, it has not reissued the business combinations that occurred prior to the transition date.
2. Deemed cost – The Group used the values that it had been reporting in accordance with Mexican FRS as deemed cost of property and operating equipment.
3. Employee benefits – IFRS 1 provides the option of applying IAS 19 "Employee benefits" retrospectively, for the recognition of actuarial losses and gains. The Company applied the employee benefits exemption. Therefore, it recognizes all the accumulated actuarial gains and losses at the transition date.
4. Accumulated differences from the effect of conversion – The Group applied the exemption for cumulative translation differences. Therefore, it adjusts the effect from conversion to zero as of the transition date. This exemption will be applied to all the subsidiaries, in accordance with IFRS 1.
5. Assets and liabilities of subsidiaries, associates and joint ventures – The exemption of assets and liabilities of subsidiaries, associates, and joint ventures was applied by the Group, since some subsidiaries have already adopted IFRS prior to the Company's transition date.
6. Costs of loans – The Group decided to apply certain requirements of IAS 23 cost of loans prospectively, beginning as of the transition date.
7. Reconciliation between IFRS and MFRS- The following reconciliation provides the quantification of the effects of transition and impact on equity as of the transition date (January 1, 2011) and December 31, 2011.
The main effects as of January 1, 2011 are presented below:
• Concession at fair value In accordance with MFRS C-8 "Intangible Assets", the concession is classified as an indefinite-lived intangible asset, which is subject to impairment tests in the event of presenting impairment indicators, in accordance with Bulletin C-15 "Impairment of long-lived assets and their disposition". In accordance with IFRS 1, the entity used fair value as a cost attributed to the concession in its opening statement of financial position on the transition date. Based on IAS 38 "Intangible assets", the concession is considered as an indefinite-lived asset and recognized subsequent to the cost model. In accordance with IAS 36 "Impairment of asset value", the concession is subject to reviewing its recovery value annually or at any time there is an impairment indicator. The amount recognized for the fair value of the concession as of the transition date amounts to $1,037,436. As a result of the above, as of December 31, 2011, the effect of the exchange rate of the concession of Azteca America was written off in the amount of $375,436.
• Elimination of the effects of hyperinflation: For purposes of MFRS B-10, "Impact of inflation", the environment is considered to be inflationary when accumulated inflation of the three prior annual fiscal years equals or exceeds 26%. In addition, and in accordance with the economic forecasts of official agencies, a trend is expected in this same sense. Of the various characteristics presented in IAS 29, "Financial information in hyperinflationary economies", the most objective parameter considered for rating an economy as hyperinflationary is when accumulated inflation approximates
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
or exceeds 100% in three years. Inflation recorded as of fiscal 2007 in accordance with the Mexican standard was reversed up to fiscal 1998, since this last period was considered as hyperinflationary in accordance with the international standard. The reversal of the impact of inflation of consolidated assets against retained earnings amounted to approximately $227,784. Moreover, the impact of inflation of various equity accounts was reclassified to retained earnings in the amount of $807,921.
• Pursuant to MFRS, derivative financial instruments were recognized at their cost of acquisition and subsequently measured at their amortized cost. IFRS 39 "Financial instruments" requires that derivative financial instruments held for trading purposes are measured at their fair value. The Group recognized fair value as of the transition date, thereby generating effects on retained earnings and the statement of financial position in the amount of $139,000.
• In accordance with IAS 19, "Employee benefits", a liability is recognized and, therefore, the relative expense for employee benefits for termination of the employer-employee relationship prior to the date of retirement until the entity has a demonstrable commitment for terminating the relationship with the employee or having made an offer to encourage voluntary retirement. With respect to MFRS D-3, "Employee benefits", a provision and the applicable expense are recorded when the entity estimates that it will terminate the employer-employee relationship prior to the date of retirement or estimates that it will pay benefits as a result of an offer made to employees to encourage voluntary separation. Prior existence of a formal plan is not required as set forth in IAS 19. Likewise, there are other differences that jointly show a decrease in the consolidated liability and an increase in retained earnings in an amount approximating $7,091.
• Reclassification of debt placement expenses. Bulletin C-9, "Liabilities, provisions, contingent assets and liabilities", sets forth that the amount of issuance expenses, such as legal fees, issuance costs, printing, placement expenses, etc., should be recognized as a deferred charge and amortized in the period in which the obligations will be outstanding. IAS 39 sets forth that at the time of the opening recognition of the financial instrument (lending or borrowing), the entity should measure it at its fair value, as well as considering the costs of the transaction that are directly attributable to the acquisition of the asset or issuance of the liability. Accordingly, the Group reclassified the foregoing against its liabilities with a cost approximating $78,364 that were presented previously as an asset.
• Upon having changed the book balances, the recalculation of deferred taxes shows an increase in consolidated assets and equity in an amount approximating $26,608.
• The Group changed the presentation of the statement of comprehensive income to include the caption of other expenses, net, in its operating income, in accordance with IAS 1, "Presentation of financial statements".
There are also various provisions that expanded the disclosures in the Group's financial statements.
The summary of the effects of adoption in the statement of financial position is shown below:
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TV Azteca, S.A.B. de C.V. and subsidiaries (Subsidiary of Azteca Holdings, S.A. de C.V.) Consolidated Financial Statements December 31, 2012 and 2011
Date of transition IFRS (January 1, Year ended Item 2011) December 31, 2011
Stockholders' equity under MFRS $ 8,018,021 $ 10,464,247 Concession at fair value 1,037,436 1,037,436 Impact of inflation (227,784) (223,784) Effect of foreign currency translation - (375,436) Financial instruments (139,000) (172,000) Labor Obligations 7,091 7,091 Deferred taxes 26,608 35,608 Equity under IFRS $ 8,722,372 $ 10,773,162
The summary of the effects of adoption in the statement of income is shown below:
Net income of Comprehensive Item 2011 income of 2011
Book income under MFRS $ 2,201,757 $ 2,571,921 Impact of inflation 4,001 4,001 Effect of foreign currency translation - (375,436) Financial instruments (33,000) (33,000) Deferred taxes 9,000 9,000 Book income under IFRS $ 2,181,758 $ 2,176,486
28. Seasonality: The Company's television transmission operations are seasonal. Advertising revenues, which are recognized when the advertisement comes out on the air, are generally higher in the fourth quarter, due to the high level of advertising that comes out on the air as a result of the Christmas season.
The Company's revenues fluctuate as a result of the frequency with which the Company transmits significant events (Olympic Games, World Soccer Cups, among other things). Historically, the transmission of significant events by the Company has increased advertising sales during the periods in which they came out on the air. This reflects higher audiences during the hours in which those significant events were transmitted, and the fact that advertisers pay a premium related to those significant transmission events.
29. Events subsequent to the reporting date: There has been no event that requires any adjustment or that does not require an adjustment, but is significant between the reporting date and authorization date.
F-84 ISSUER TV Azteca, S.A.B. de C.V. Periférico Sur 4121 Col. Fuentes del Pedregal Tlalpan, 14141, Mexico City, Mexico
GUARANTORS Azteca International Corporation Azteca Novelas, S.A. de C.V. Estudios Azteca, S.A. de C.V. 1139 Grand Central Ave. Calz. de Tlalpan No. 2818 Calz. de Tlalpan No. 2818 Glendale, CA 91201, United States Col. San Pablo Tepetlapa Col. San Pablo Tepetlapa 04840, Mexico City, Mexico 04840, Mexico City, Mexico
Inversora Mexicana de Produccción, Operadora Mexicana de Televisión, Televisión Azteca, S.A. de C.V S.A. de C.V. S.A. de C.V. Periférico Sur 4121 Periférico Sur 4121 Periférico Sur 4121 Col. Fuentes del Pedregal Col. Fuentes del Pedregal Col. Fuentes del Pedregal Tlalpan 14141, Mexico City, Mexico Tlalpan 14141, Mexico City, Mexico Tlalpan 14141, Mexico City, Mexico
PRINCIPAL PAYING AGENT, CALCULATION AGENT AND REGISTRAR The Bank of New York Mellon, London Branch One Canada Square, Canary Wharf London E14 5AL, United Kingdom TRUSTEE The Bank of New York Mellon 101 Barclay Street 4 E New York, NY 10286, United States
LEGAL ADVISERS To the Issuer To the Trustee Chadbourne & Parke LLP Linklaters LLP 30 Rockefeller Plaza One Silk Street New York, NY 10112, United States London EC2Y 8HQ, United Kingdom
To the Issuer and the Guarantors as to Mexican Law Jáuregui, Navarrete y Del Valle, S.C. Paseo de los Tamarindos 400 B, Bosques de las Lomas Cuajimalpa, 05120 Mexico City, Mexico