AXTEL S.A.B. DE C.V. Blvd. Díaz Ordaz Km. 3.33 L-1 Col. Unidad San Pedro, San Pedro Garza García, N.L. C.P. 66215 +52(81) 8114-0000 www.axtel.mx Ticker: “AXTELCPO” Annual Report presented in accordance to the general provisions that apply to the Issuers of securities and to other participants of the securities market for the year ended on December 31 of 2012 Characteristics of the Securities: The securities that are traded in the Mexican Stock Exchange ( Bolsa Mexicana de Valores ) (“BMV”) are “Ordinary Participation Certificates ” (“CPO’s”), which are non-amortizable securities, issued under the CPO’s Trust (which term is defined below), each of which represents 7 Series B, Class I Shares of the capital stock of Axtel, S.A.B. de C.V. (“Axtel” or the “Company”). As of December 31, 2012, there are 1,238,959,485 CPOs that represent 8,672’716,395 Series B Class I Shares. The capital stock of Axtel is represented by 8,769’353,223 shares of the fixed portion of the capital stock, of which, 96,636,627 are Series A, Class I and 8,672,716,596 are Series B, Class I. As of December 31, 2012, the capital stock of Axtel does not have shares that have been issued or subscribed representing the variable portion of its capital stock. Axtel’s CPOs and the shares that represent its capital stock, are both registered at the National Registry of Securities (“RNV”), and Axtel’s CPOs are traded in the Mexican Stock Exchange. Registration of Axtel’s CPOs and shares at the RNV have informative effects only, and does not imply a certification regarding the quality of the registered securities nor of Axtel's solvency or on the accuracy or reliability of the information contained in the Annual Report or validate the acts, if any, might have been made in contravention of the law. For any questions with regards to this Annual Report, please contact Mr. Adrian de los Santos at the phone number (81) 8114-1128 or via e-mail to [email protected]. This Annual Report is available at Axtel's web page at www.axtel.mx and at the BMV’s web page at www.bmv.com.mx . San Pedro Garza García, N.L. as of April 30, 2013. 1 Page 1) GENERAL INFORMATION 1.1 Glossary of Terms and Conditions 4 1.2 Executive Summary 7 1.3 Risk Factors 9 1.3.1. Risk related to the Company 9 1.3.2. Risks related to the Telecommunications Industry in Mexico 17 1.3.3. Risks related to Mexico 18 1.3.4. Risks related to the CPOs 20 1.3.5. Other Risk Factors 23 1.4 Other Securities 24 1.5 Significant Changes to the Duties of the Registered Shares in the Record Book 24 1.6 Use of Proceeds 24 1.7 Public Domain Documents 24 2) THE COMPANY 2.1 History and Development of The Company 25 2.2 Business Overview 26 2.2.1. General 26 2.2.2. Competitive Strengths 27 2.2.3. Business Strategy 28 2.3 Business Activity 31 2.4 Channels of Distribution. 32 2.5 Patents, Licenses, Trademarks and Other Contracts 35 2.5.1. Company’s Concessions 35 2.5.2. Main Trademarks 36 2.5.3. Interconnection 36 2.6 Main Customers 39 2.6.1. Markets 39 2.7 Applicable Legislation and Tax Law 41 2.7.1. Current Regulatory Environment of the Telecommunications Industry 41 2.7.2. Limitation on capital stock investments by foreign shareholders- 43 Foreign Investment Law 2.7.3. Tax situation; Income Tax (ISR), asset tax (IMPAC), Flat Tax (IETU) and Employee Profit Share (PTU). 44 2.8 Human Resources 46 2.9 Environmental Performance and Social Responsibility 46 2.10 Market Information- Mexican Telecommunications Industry 47 2.11 Corporate Structure 49 2.12 Description of Main Assets – Network of The Company 50 2.12.1. Facilities. 50 2.12.2. Telecommunications Network 50 2.12.3. Network deployment strategy 51 2.12.4. Access Connectivity 51 2.12.5. Local Network 52 2.12.6. Long Distance Network 52 2.12.7. Switching 53 2.12.8. Network Administration 53 2.12.9. Information Technology Systems 53 2.13. Judicial, Administrative and other Legal Proceedings 54 2.14. Capital Stock 56 2.15. Dividends 59 3) FINANCIAL INFORMATION 60 3.1 Selected Financial Information 60 3.2 Financial Information per Line of Business 63 2 3.3 Relevant Finance Agreements 65 3.4 Management´s Discussion and Analysis of Financial Condition and Operation 67 results of the Company 3.4.1. Results of Operations 67 3.4.2. Financial Position, Liquidity and Capital Resources 69 3.4.3. Control and Procedures 83 3.5 Estimates, Provisions, And Critical Accounting Policies 85 3.6 Impacts on the adoption of International Financial Reporting Standards (IFRS) 86 4) MANAGEMENT 89 4.1 External Auditors 89 4.2 Transactions With Related Parties and Conflict of Interests 89 4.3 Senior Management and Shareholders 91 4.4 Company Bylaws and Other Agreements 99 5) STOCK MARKET 106 5.1 Shareholders Structure 106 5.2 Stock Performance in the Stock Market 107 5.3 Market Maker 108 6) AUTHORIZED REPRESENTATIVES 109 - External Auditor Certificate 110 7) ANNEX ANNEX A – Audited Financial Statements as of December 31, 2012, 2011 and January 111 1st 2011 ANNEX B – Annual Report of the Activities of the Audit and Corporate Practices Committee 3 1) GENERAL INFORMATION 1.1) Glossary of Terms and Definitions The following glossary includes the definitions of the main terms and abbreviations used in this Annual Report: “Shares” Ordinary shares, nominative, without par value, representative of the capital stock of the Company. “Series A shares” Ordinary shares of the Series A, Class I, nominative, without par value, representing the fixed portion of the Company’s capital stock, which grant to its holders the exact same rights as the Series B shares “Series B shares” Ordinary shares of the Series B, Class I, nominative, without par value, representing the fixed portion of the Company’s capital stock, which grant to its holders the exact same rights as the Series A shares “America Móvil” América Móvil, S.A.B. de C.V. including subsidiary and affiliate companies. “Accival” Acciones y Valores Banamex, S.A. de C.V., Casa de Bolsa, Integrante del Grupo Financiero Banamex. “ADS” o “ADSs” American Depositary Shares, each one representing 7 CPOs, and each CPO representing 7 Series B Shares. “Alestra” Alestra, S. de R.L. de C.V. “Avantel Concesionaria” Avantel, S. de R.L. de C.V. “Avantel Infraestructura” Avantel Infraestructura, S. de R.L. de C.V. “Avantel” Both, Avantel Concesionaria y Avantel Infraestructura. “Axtel” or the “Company” Means Axtel, S.A.B. de C.V., together with its subsidiaries, except when the context needs that the term Axtel refers only to Axtel, S.A.B. de C.V. “Banamex” Banco Nacional de México, S.A. integrante de Grupo Financiero Banamex and its affiliates. “BMV” Bolsa Mexicana de Valores, S.A.B. de C.V. (Mexican Stock Exchange) . “Cablemás” Cablemás, S.A. de C.V. “Cablevisión” Empresas Cablevisión, S.A.B. de C.V. “Central Switchboard” Equipment that frees voice data and does the pertinent connections, allowing the calls to be realized. “Circular Letter ” Means the general provisions that apply to the Issuers of securities and to other participants of the securities market , issued by the CNBV and published in the Official Federal Gazette on Wednesday March 19, 2003, as updated pursuant to the resolutions issued on the Official Gazette on Tuesday October 7, 2003, Monday September 6, 2004, Friday September 22, 2006, Friday September 19, 2008, Tuesday January 27, 2009, Wednesday July 22, 2009,Tuesday December 29, 2009, Friday December 10, 2010, Monday December 20, 2010, Wednesday March 16, 2011, Wednesday July, 27, 2011, Wednesday August 31, 2011, Wednesday December 28, 2011, Thursday February 16, 2012, and Friday October 12 of 2012 “CNBV” Comisión Nacional Bancaria y de Valores. (Mexican Banking and Securities Commission). 4 “Cofeco” Comisión Federal de Competencia. (Federal Antitrust Commission). “Cofetel” Comisión Federal de Telecomunicaciones (Federal Telecommunications Commission). “CFE” Comisión Federal de Electricidad (Federal Electricity Commission). “DMS Switch” or “ DMS equipment” Nortel Neworks’ Central Switchboard model DMS100. “CPOs” Ordinary Participation Certificates, which are non-amortizable securities, issued under the CPOs Trust, each of which represents, 7 Series B Shares of Axtel’s capital stock. “dollars”, EUA$, “U.S.$”, Dollars or Current currency of the United States of America. “USD” “Financial Statements” The Financial Statements. “Audited Financial Statements” The audited financial statements of the Company for the fiscal years ended on December 31, 2012(reformulated) and 2011 and January 1 st of 2011 (reformulated). “United States” The United States of America. “CPOs Trust” It means the Irrevocable Trust Agreement No. 80471 named AXTEL CPO's, dated November 30, 2005, entered between the Company, as settlor, and Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo, Fiduciary Division, as trustee, the purpose of which is, among others, to establish a mechanism that allows the allocation of the B Series Shares into the trust for the issuance of CPOs that are eligible for trading in the BMV. “Trustee” or “NAFIN” Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo, Fiduciary Division, as trustee of the CPOs Trust. “FTTH” Fiber to the Home. Optical Fiber to home or business. “GHz” Gigahertz (Thousands of millions of cycles per second) Frequency relative to a time unit. “GPON” • Gigabit Passive Optical Network “Indeval” S.D.