20-F 1 a13-9686_120f.htm 20-F

Table of Contents

 

As filed with the Securities and Exchange Commission on April 15, 2013.

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 20-F

 


 

(Mark One)

 

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to          

 

 

OR

 

 

o

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

For the transition period from                      to                        

 

Commission file number: 1-14270

 

NORTEL INVERSORA S.A.

(Exact name of Registrant as specified in its charter)

 

NORTEL INVESTMENTS S.A.

(Translation of Registrant’s name into English)

 

Republic of Argentina

(Jurisdiction of incorporation or organization)

 

Alicia Moreau de Justo 50

Piso 11

C1107AAB—Buenos Aires

Argentina

(Address of principal executive offices)

 

Jorge Alberto Firpo

Tel: +54-11-4968-3631, Fax: +54-11-4313-1298

jfirpo@ta.telecom.com.ar

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, representing Series B Preferred Shares

 

New York Stock Exchange

 

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

 

None

 



Table of Contents

 

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

 

None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Series B Preferred Shares

1,470,455

Shares of common stock

5,330,400

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes   x No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes   x No

 

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

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)

o Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

US GAAP o

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
x

 

Other o

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17   o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

CERTAIN DEFINITIONS

2

 

 

PRESENTATION OF FINANCIAL INFORMATION

2

 

 

FORWARD-LOOKING STATEMENTS

3

 

 

 

PART I

 

5

 

 

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

5

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

5

ITEM 3.

KEY INFORMATION

5

ITEM 4.

INFORMATION ON THE COMPANY

23

ITEM 4A.

UNRESOLVED STAFF COMMENTS

27

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

27

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

74

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

81

ITEM 8.

FINANCIAL INFORMATION

88

ITEM 9.

THE OFFER AND LISTING

90

ITEM 10.

ADDITIONAL INFORMATION

91

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

105

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

105

 

 

 

PART II

 

105

 

 

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

105

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

105

ITEM 15.

CONTROLS AND PROCEDURES

105

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

106

ITEM 16B.

CODE OF ETHICS

106

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

107

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

107

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE COMPANY AND AFFILIATED PURCHASERS

107

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

107

ITEM 16G.

CORPORATE GOVERNANCE

108

ITEM 16H.

MINE SAFETY DISCLOSURE

108

 

 

 

PART III

 

109

 

 

 

ITEM 17.

FINANCIAL STATEMENTS

109

ITEM 18.

FINANCIAL STATEMENTS

109

ITEM 19.

EXHIBITS

109

 

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CERTAIN DEFINITIONS

 

Nortel Inversora S.A. (“Nortel” or the “Company”) is a company incorporated under the laws of Argentina. Capitalized terms used but not defined in this Annual Report on Form 20-F for the year ended December 31, 2012 of Nortel (File No. 1-14270) (the “Form 20-F” or the “Annual Report”) have the meaning assigned to them in the Annual Report on Form 20-F for the year ended December 31, 2012 of Telecom Argentina S.A. (“Telecom”) (File No. 1-13464) (the “Telecom Form 20-F”) included as an exhibit hereto.

 

The term “Nortel Inversora” refers to Nortel Inversora S.A. excluding its consolidated subsidiaries, unless otherwise indicated.

 

PRESENTATION OF FINANCIAL INFORMATION

 

In this Annual Report on Form 20-F (the “Form 20-F” or “Annual Report”), the terms, “we,” “us,” “our,” “the Company” and “Nortel” refer to Nortel Inversora S.A. and its consolidated subsidiaries as of December 31, 2012, unless otherwise indicated.

 

The term “Telecom Argentina” refers to Telecom Argentina S.A. excluding its subsidiaries, as of December 31, 2012, Telecom Personal S.A., Núcleo S.A., Springville S.A., Telecom Argentina USA, Inc. and Micro Sistemas S.A. The terms “Telecom Group” or “Telecom” refer to Telecom Argentina S.A. and its consolidated subsidiaries. Unless otherwise stated, references to the financial results of “Telecom” are to the consolidated financial results of Telecom Argentina and its consolidated subsidiaries.

 

The terms “Telecom Personal” or “Personal” refer to Telecom Personal S.A., Telecom Argentina’s subsidiary engaged in the provision of mobile telecommunication services in Argentina. The term “Núcleo” refers to Núcleo S.A., Telecom Personal’s consolidated subsidiary engaged in the provision of mobile telecommunication services in Paraguay.

 

Our Consolidated Financial Statements as of December 31, 2012 and 2011 and for the years ended December 31, 2012, 2011 and 2010, and the notes thereto, as included in this report, have been audited by our independent registered public accounting firm (the “Consolidated Financial Statements”) and are set forth on pages F-1 through F-66 of this Annual Report.

 

Our Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and have been approved by resolution of the Board of Directors’ meeting held on February 28, 2013.

 

Nortel maintains its accounting records and prepares its financial statements in Argentine Pesos, its functional currency.

 

Telecom Argentina and its Argentine subsidiaries maintain their accounting records and prepare their financial statements in Argentine Pesos, which is their functional currency. The subsidiaries Núcleo, Telecom USA and Springville, however, maintain their accounting records and prepare their financial statements in Guaraníes, U.S. dollars and Uruguayan pesos, respectively. Our Consolidated Financial Statements include the results of these subsidiaries translated into Argentine Pesos. Assets and liabilities are translated at year-end exchange rates and revenue and expense accounts at average exchange rates for the year.

 

Certain financial information contained in this Annual Report has been presented in U.S. dollars. This Annual Report contains translations of various Argentine Peso amounts into U.S. dollars at specified rates solely for convenience of the reader. You should not construe these translations as representations by us that the Argentine Peso amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated. Except as otherwise specified, all references to “US$,” “U.S. dollars” or “dollars” are to United States dollars and references to “P$,” “Argentine Pesos” or “pesos” are to Argentine Pesos. Unless otherwise indicated, we have translated the Argentine Peso amounts using a rate of P$4.918 = US$1.00, the U.S. dollar ask rate published by the Banco de la Nación Argentina (Argentine National Bank) on December 31, 2012. On April 12, 2013, the exchange rate was P$5.15= US$1.00.

 

For the purpose of this Annual Report, “billion” means a thousand million.

 

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Certain amounts and ratios contained in this Annual Report (including percentage amounts) have been rounded up or down to facilitate the summation of the tables in which they are presented. The effect of this rounding is not material. These rounded amounts are also included within the text of this Annual Report.

 

The contents of our website and other websites referred to herein are not part of this Annual Report.

 

FORWARD-LOOKING STATEMENTS

 

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information included in this Annual Report or incorporated by reference from the Telecom Form 20-F contains information that is forward-looking, including, but not limited to:

 

·                  Telecom’s expectations for its future performance, revenues, income, earnings per share, capital expenditures, dividends, liquidity and capital structure;

 

·                  the implementation of our and Telecom’s business strategy;

 

·                  the discussion of the changing dynamics and growth in the telecommunications market;

 

·                  Telecom’s outlook for new and enhanced technologies;

 

·                  the effects of operating in a competitive environment;

 

·                  industry conditions;

 

·                  the outcome of certain legal proceedings;

 

·                  the impact of the emergency laws and subsequent related laws enacted by the Argentine government;

 

·                  regulatory and legal developments; and

 

·                  other factors identified or discussed under “Item 3—Key Information—Risk Factors.”

 

This Annual Report contains certain forward-looking statements and information relating to the Company and the Telecom Group that are based on current expectations, estimates and projections of our Management and that of the Telecom Group and information currently available to the Company and the Telecom Group. These statements include, but are not limited to, statements made in “Item 3—Key Information—Risk Factors,” Item 5—Operating and Financial Review and Prospects” under the captions “Critical Accounting Policies” and “Trend Information,” “Item 8—Financial Information—Legal Proceedings” and other statements about our and the Telecom Group’s strategies, plans, objectives, expectations, intentions, capital expenditures, and assumptions and other statements contained in this Annual Report that are not historical facts. When used in this document, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “will” and “should” and other similar expressions are generally intended to identify forward-looking statements.

 

These statements reflect the current views of the Management of Nortel or Telecom with respect to future events. They are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. In addition, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.

 

Many factors could cause our actual results, performance or achievements, or those of the Telecom Group to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. These factors include, among others:

 

·                  Telecom’s ability to successfully implement its business strategy;

 

·                  Telecom’s ability to introduce new products and services that enable business growth;

 

·                  uncertainties relating to political and economic conditions in Argentina;

 

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·                  inflation, the devaluation of the peso and exchange rate risks;

 

·                  restrictions on the ability to exchange pesos into foreign currencies and transfer funds abroad;

 

·                  the final results of the contract renegotiation process with the Argentine government regarding the adjustment to Telecom’s regulated rates in the fixed services;

 

·                  the creditworthiness of Telecom’s actual or potential customers;

 

·                  nationalization, expropriation and/or increased government intervention in companies;

 

·                  technological changes;

 

·                  the lack of additional mobile frequency bands;

 

·                  the impact of legal or regulatory matters , changes in the interpretation of current or future regulations or reform and changes in the legal or regulatory environment in which we and Telecom operate; and

 

·                  the effects of increased competition

 

Many of these factors are macroeconomic in nature and therefore beyond the control of our Management or that of the Telecom Group. Should one or more of these risks or uncertainties materialize, or underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. The Company does not intend, and does not assume any obligation, to update the forward-looking statements contained in this Annual Report.

 

These forward-looking statements are based upon a number of assumptions and other important factors that could cause our actual results, performance or achievements to differ materially from our future results, performance or achievements expressed or implied by such forward-looking statements. Readers are encouraged to consult filings made by Nortel and Telecom on Form 6-K, which are periodically filed with or furnished to the United States Securities and Exchange Commission.

 

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PART I

 

ITEM 1.                        IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.                        OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.                        KEY INFORMATION

 

Selected Financial Data

 

The following table presents our summary financial data for each of the years in the four-year period ended December 31, 2012.

 

The selected consolidated income statement data for the years ended December 31, 2012, 2011 and 2010 and the selected consolidated financial position data as of December 31, 2012 and 2011 have been prepared in accordance with IFRS as issued by the IASB (“IFRS”) and have been derived from our Consolidated Financial Statements included elsewhere in this Annual Report. The selected consolidated income statement data for the year ended December 31, 2009 and the selected consolidated financial position data as of December 31, 2010 prepared in accordance with IFRS have been derived from our consolidated financial statements as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 included in our Annual Report on Form 20-F for the year ended December 31, 2011, filed on April 30, 2012. The selected consolidated financial position data as of December 31, 2009 prepared in accordance with IFRS have been derived from our consolidated financial statements as of December 31, 2010 and 2009 and for the years then ended included in our Annual Report on Form 20-F for the year ended December 31, 2010, filed on June 30, 2011.

 

Our audited consolidated financial statements as of December 31, 2010 and for the year then ended were our first annual audited financial statements that are fully compliant with IFRS, as issued by the IASB. Before December 31, 2010, our consolidated financial statements were prepared in accordance with Argentine GAAP. Our financial statements as of December 31, 2009 and for the year then ended, originally prepared in accordance with Argentine GAAP, have been adjusted to fully comply with IFRS as issued by the IASB, and all of our subsequent audited consolidated financial statements fully comply with IFRS as issued by the IASB.

 

The mandatory adoption of IFRS for public companies in Argentina was effective for fiscal years beginning January 1, 2012. Therefore, our consolidated financial statements as of December 31, 2011 and 2010 for filing with the Argentine National Securities Commission (“CNV”) were prepared in accordance with Argentine GAAP, which differs in certain respects from IFRS. According to CNV regulations, financial statements under IFRS for the years 2011 and 2010 were presented as “additional information” to the consolidated financial statements prepared under Argentine GAAP.

 

You should read the information below in conjunction with our Consolidated Financial Statements and the notes thereto, as well as “Presentation of Financial Information” and “Item 5—Operating and Financial Review and Prospects.”

 

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CONSOLIDATED SELECTED INCOME STATEMENT AND FINANCIAL POSITION DATA

 

 

 

2012(1)

 

 

 

 

 

 

 

 

 

 

 

(US$ millions,
except per
share and per

 

2012

 

2011

 

2010

 

2009

 

 

 

ADS data in
US$)

 

(P$ millions, except per
share and per ADS data in P$)

 

INCOME STATEMENT DATA

 

 

 

 

 

 

 

 

 

 

 

Total revenues and other income

 

4,513

 

22,196

 

18,528

 

14,652

 

12,191

 

Operating expenses (without depreciation and amortization)

 

(3,180

)

(15,640

)

(12,559

)

(9,794

)

(8,052

)

Operating expenses - depreciation and amortization

 

(531

)

(2,612

)

(2,158

)

(1,712

)

(1,545

)

Gain on disposal of PP&E

 

2

 

8

 

22

 

7

 

13

 

Operating income

 

804

 

3,952

 

3,833

 

3,153

 

2,607

 

Other, net (2)

 

38

 

187

 

 

(292

)

(520

)

Income tax expense

 

(298

)

(1,464

)

(1,394

)

(1,076

)

(798

)

Net income

 

544

 

2,675

 

2,439

 

1,785

 

1,289

 

Net income attributable to Nortel (Controlling company)

 

287

 

1,413

 

1,273

 

895

 

642

 

Net income attributable to Non-controlling Interest

 

257

 

1,262

 

1,166

 

890

 

647

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares of common stock outstanding at year-end

 

5,330,400

 

5,330,400

 

5,330,400

 

5,330,400

 

5,330,400

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share of common stock (3)

 

27.52

 

135.32

 

121.91

 

85.71

 

61.48

 

Number of Series B preferred shares outstanding at year-end

 

1,470,455

 

1,470,455

 

1,470,455

 

1,470,455

 

1,470,455

 

Net income per Series B Preferred Shares (4)

 

95.65

 

470.39

 

423.79

 

297.95

 

213.72

 

Number of shares outstanding at year-end of Telecom Argentina

 

984,380,978

 

984,380,978

 

984,380,978

 

984,380,978

 

984,380,978

 

Net income per share (basic and diluted) (5)

 

0.56

 

2.73

 

2.55

 

1.97

 

1.43

 

Net income per ADS (6)

 

2.77

 

13.64

 

12.76

 

9.83

 

7.14

 

Dividends per share of Telecom Argentina (7)

 

0.17

 

0.82

 

0.93

 

1.07

 

 

Dividends per ADS of Telecom Argentina (7)

 

0.83

 

4.10

 

4.65

 

5.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL POSITION DATA

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

1,423

 

7,000

 

5,516

 

3,837

 

2,927

 

PP&E and intangible assets

 

2,145

 

10,549

 

9,735

 

8,598

 

7,839

 

Other non-current assets

 

56

 

277

 

139

 

104

 

77

 

Total assets

 

3,624

 

17,826

 

15,390

 

12,539

 

10,843

 

Current liabilities

 

1,199

 

5,895

 

5,958

 

5,160

 

4,208

 

Non-current liabilities

 

359

 

1,768

 

1,635

 

1,634

 

2,217

 

Total liabilities

 

1,558

 

7,663

 

7,593

 

6,794

 

6,425

 

Total equity

 

2,066

 

10,163

 

7,797

 

5,745

 

4,418

 

Equity attributable to Nortel (Controlling company)

 

1,110

 

5,457

 

4,022

 

2,739

 

1,837

 

Non-controlling Interest

 

956

 

4,706

 

3,775

 

3,006

 

2,581

 

Capital Stock

 

13,828,497

 

68,008,550

 

72,076,490

 

78,633,050

 

78,633,050

 

 


(1)         Argentine Peso amounts were translated into U.S. dollars using exchange rate published by the Banco de la Nación Argentina (National Bank of Argentina) on December 31, 2012 (P$4.92 = US$1.00).

 

(2)         Other, net includes Other income from investments and Finance income and expense.

 

(3)         Calculated based on the weight average number of shares of common stock outstanding during the period; excludes from net income amounts accrued for the payment of dividends to holders of preferred stock.

 

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(4)         Calculated based on the weight average number of Series B Preferred Shares outstanding during each year. In April 1997, Nortel’s shareholders decided in an extraordinary meeting to amend the right to dividends, reducing the formula for the calculation of dividends on Series B Preferred Shares from 49.46% to 48.96% beginning June 16, 1997.

 

(5)         Calculated based on Telecom Argentina’s weighted average number of shares of common stock outstanding during the period.

 

(6)         Calculated based on Telecom Argentina’s 196,876,196 ADSs equivalent to the weighted average number of shares of common stock outstanding during the period.

 

(7)         U.S. dollar amount was calculated based on the exchange rate prevailing on the dividend payment date.

 

OTHER SELECTED DATA

 

 

 

2012

 

2011

 

2010

 

2009

 

Number of installed fixed lines (thousands) (1)

 

4,851

 

4,793

 

4,689

 

4,595

 

Number of fixed lines in service (thousands) (2)

 

4,128

 

4,141

 

4,107

 

4,060

 

Fixed lines in service per 100 inhabitants (3)

 

21

 

21

 

21

 

21

 

Lines in service per employee

 

371

 

373

 

379

 

366

 

ARBU (in P$/month) (national + international)

 

48.2

 

45.7

 

42.8

 

40.9

 

Fixed Internet access lines (thousands)

 

1,629

 

1,550

 

1,380

 

1,214

 

Arnet subscribers (thousands)

 

1,622

 

1,540

 

1,377

 

1,184

 

ARPU/ADSL (access + ISP) (in P$/month)

 

102.3

 

87.0

 

76.1

 

66.7

 

Mobile subscribers in Argentina (thousands)

 

18,975

 

18,193

 

16,333

 

14,475

 

Subscribers at year-end per employee

 

3,612

 

3,774

 

3,738

 

3,810

 

ARPU (in P$/month)

 

57.7

 

51.4

 

44.4

 

40.7

 

Mobile subscribers in Paraguay (thousands) (4)

 

2,301

 

2,149

 

1,878

 

1,806

 

Subscribers at year-end per employee

 

5,226

 

4,944

 

4,512

 

4,251

 

ARPU (in P$/month)

 

31.6

 

26.3

 

22.2

 

19.5

 

Telecom Group Headcount (5)

 

16,808

 

16,346

 

15,647

 

15,330

 

 


(1)         Reflects total number of lines available in Switches.

 

(2)        Includes lines customers, own usage, public telephony and ISDN channels.

 

(3)         Corresponds to the Northern Region of Argentina.

 

(4)         Includes Wi-Max Internet customers.

 

(5)         Includes temporary employees.

 

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Exchange Rates

 

The following tables show, for the periods indicated, certain information regarding the exchange rates for U.S. dollars, expressed in nominal pesos per dollar (ask price). See: “Item 10—Additional Information—Foreign Investment and exchange controls in Argentina.”

 

 

 

High

 

Low

 

Average(1)

 

End of Period

 

Year Ended December 31, 2008

 

3.45

 

3.03

 

3.18

 

3.45

 

Year Ended December 31, 2009

 

3.85

 

3.49

 

3.75

 

3.80

 

Year Ended December 31, 2010

 

3.99

 

3.84

 

3.92

 

3.98

 

Year Ended December 31, 2011

 

4.30

 

3.97

 

4.15

 

4.30

 

Year Ended December 31, 2012

 

4.92

 

4.30

 

4.55

 

4.92

 

Month Ended October 31, 2012

 

4.77

 

4.70

 

4.73

 

4.77

 

Month Ended November 30, 2012

 

4.84

 

4.77

 

4.80

 

4.84

 

Month Ended December 31, 2012

 

4.92

 

4.84

 

4.88

 

4.92

 

Month Ended January 31, 2013

 

4.98

 

4.93

 

4.95

 

4.98

 

Month Ended February 28, 2013

 

5.05

 

4.98

 

5.01

 

5.05

 

Month Ended March 31, 2013

 

5.12

 

5.05

 

5.09

 

5.12

 

Month Ended April 30, 2013 (through April 12, 2013)

 

5.15

 

5.13

 

5.14

 

5.15

 

 


(1)         Yearly data reflect average of month-end rates.

 

SourcesBanco de la Nación Argentina

 

On April 12, 2013, the exchange rate was P$5.15=US$1.00.

 

Capitalization and Indebtedness

 

Not applicable.

 

Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

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Risk Factors

 

This section is intended to be a summary of more detailed discussions contained elsewhere in this Annual Report. The risks described below are not the only ones that we face. Additional risks that we do not presently consider material, or of which we are not currently aware, may also affect us. Our business, results of operations, financial condition and cash flows could be harmed if any of these risks materialize and, as a result, the market price of our shares and our ADSs could decline. You should consider these risks with respect to an investment in Nortel and investments in Argentine corporations that are not normally associated with investments in the securities of issuers in the United States and other jurisdictions.

 

Risks Relating to Argentina

 

Overview

 

Nortel’s single largest investment, Telecom Argentina, has all of its property, operations and customers located in Argentina, and a portion of Telecom Argentina’s assets and liabilities are denominated in foreign currencies. Accordingly, Telecom Argentina’s financial condition, results of operations and cash flows depend to a significant extent on economic and political conditions prevailing in Argentina and on the exchange rates between the peso and foreign currencies. In 2001 and 2002, the Argentine economy experienced a severe recession as well as a political crisis. The abandonment of dollar-peso parity in 2002 led to the significant devaluation of the peso against major international currencies. Although Argentina has experienced economic growth and political conditions have shown improvement in the last decade, uncertainty remains as to whether the growth is sustainable, as well as how several factors would impact the Argentine economy including among others inflation rates, exchange rates, commodity prices and maintain healthy trade and fiscal balances.

 

Devaluation of the peso may adversely affect Telecom’s results of operations, its capital expenditure program and the ability to service its liabilities and transfer funds abroad.

 

Since Telecom realizes a substantial portion of its revenues in Argentina in pesos (our functional currency), any devaluation in the peso may negatively affect the U.S. dollar value of its earnings while increasing, in peso terms, its expenses and capital costs denominated in foreign currency. A depreciation in the Argentine Peso against major foreign currencies may also have an adverse impact on Telecom’s capital expenditure program and increase the peso amount of its trade liabilities denominated in foreign currencies. Telecom seeks to manage the risk of devaluation of the peso by entering from time to time into certain NDF contracts to purchase U.S. dollars at a fixed rate to partially hedge its exposure to foreign currency fluctuations caused by its liabilities denominated in foreign currencies. Telecom also has cash and cash equivalents denominated in U.S. dollars that contribute to reduce the exposure to trade payables in foreign currencies. See “Item 11—Quantitative and Qualitative Disclosures About Market Risk.”

 

The Argentine Peso has been subject to significant devaluation in the past and may be subject to fluctuations in the future. In the three-month period ended March 31, 2013, the devaluation of the peso against the U.S. dollar was 4%, according to the exchange rate published by the Banco de la Nación Argentina.

 

In order to ensure the level of reserves of the Banco Central de la República Argentina (“BCRA”) that are often used to fulfill payment obligations of public debt, the Argentine government implemented in late 2011 a series of measures aimed at maintaining the level of the BCRA reserves. To that effect, during the last quarter of 2011 and 2012, new measures were implemented to limit the purchase of foreign currency made by private companies and individuals; the need for an authorization of the tax authorities to access the foreign exchange market became required, among other restrictions. As a result, the implied exchange rate in the quotation of Argentine securities that trade in foreign markets and in the local market increased significantly. Given the economic and political conditions in Argentina, we cannot predict whether, and to what extent, the value of the peso may depreciate or appreciate against the U.S. dollar, the euro or other foreign currencies, which could partially or totally reduce the current gap between the exchange rate published by the Banco de la Nación Argentina and the implied exchange rate. We cannot predict how these conditions will affect the consumption of services provided by the Telecom Group or its ability to meet our liabilities denominated in currencies other than the peso. Moreover, we cannot predict whether the Argentine government will further modify its monetary, fiscal, and exchange rate policy and, if so, what impact any of these changes could have on the value of the peso and, accordingly, on Telecom’s financial condition, results of operations and cash flows, and on its ability to transfer funds abroad in order to comply with commercial or financial obligations or dividend payments to shareholders located abroad.

 

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Inflation could accelerate, causing adverse effects on the economy and negatively impacting Telecom’s margins.

 

In the past, Argentina has experienced periods of high inflation. Inflation has increased since 2005 and remained relatively high since then.

 

The Instituto Nacional de Estadística y Censos (the Argentine National Statistics and Census Institute or “INDEC”) estimates that the Argentine consumer price increased by 7.7% in 2009, 10.9% in 2010, 9.5% in 2011and 10.8% in 2012; and the wholesale price index increased 10.0% in 2009, 14.6% in 2010, 12.7% in 2011 and 13.1% in 2012. In the two months ending February 28, 2013, the consumer price index in Argentina increased 1.6% and the wholesale price index increased 2.1%. There is a substantial disparity between the inflation indexes published by the INDEC and those higher estimated by private consulting firms.

 

The Argentine government continued implementing several actions to monitor and control prices for the most relevant goods and services. Despite such actions, the Argentine economy continues to experience consumer inflation above 10%, according to the INDEC. If the BCRA issues significant amounts of currency to finance public sector spending, to service public debt, to intervene in the foreign exchange market or to assist any financial institutions in distress, or if the value of the peso cannot be stabilized through fiscal and monetary policies, a significant increase in inflation rates could be expected.

 

Moreover, high inflation may undermine Argentina’s foreign competitiveness in international markets, negatively affecting the level of economic growth, exports, balance of payments and employment. In addition, public sector spending has increased over the past years, which will continue reducing the fiscal surplus causing a fiscal deficit and leading to higher inflation.

 

Since the majority of Telecom’s revenues are denominated in pesos, any further increase in the rate of inflation not accompanied by a parallel increase in its prices would decrease its revenues in real terms and adversely affect its results of operations. As discussed below under “—Risks Associated with Telecom and its Operations,” Telecom Argentina’s ability to increase its regulated rates is subject to approval of regulatory authorities and Personal’s ability to increase its rates could also be negatively impacted by the governmental policy of freezing of prices that was extended to non-regulated sectors. We cannot guarantee that any possible rate increase will be sufficient to counter the effect of inflation and we cannot assure you that the results of any future regulated rate negotiations of Telecom Argentina will be favorable to them and to their financial condition.

 

Also, higher inflation leads to a reduction in the purchasing power of the population, mainly those unemployed and with low salary levels, thus increasing the risk of a lower level of service consumption from our fixed and mobile customers in Argentina.

 

Future policies of the Argentine government may affect the economy as well as the operations of the telecommunications industry.

 

The Argentine government has historically exercised significant influence over the economy, and telecommunications companies in particular have operated in a highly regulated environment. Due to the Argentine economic crisis of 2001 and 2002, the Argentine government promulgated numerous, far-reaching regulations affecting the economy and telecommunications companies in particular. In this context, the Argentine National Communications Commission (Comisión Nacional de Comunicaciones or “CNC”) adopted new interpretations of applicable regulations and imposed fines on telecommunications companies, particularly incumbent operators such as Telecom Argentina. See “Item 8—Financial Information—Legal Proceedings—Regulatory Proceedings” in the Telecom Argentina Form 20-F incorporated herein by reference for more information. In addition, local municipalities in the regions where Telecom Argentina operates have also introduced regulations and proposed various taxes and fees for the installation of infrastructure, equipment and expansion of fixed-line and mobile networks. Provinces have increased, and are continuing to increase, their tax rates, particularly the turnover tax rates, resulting in the highest rates in history. Municipal, provincial and federal tax authorities have also brought an increasing number of claims against Telecom Argentina. Telecom Argentina disagrees with these proceedings and is contesting them. See “Item 8—Financial Information—Legal Proceedings” in the Telecom Argentina Form 20-F incorporated herein by reference. However, we cannot assure you that the laws and regulations currently governing the economy or the telecommunications industry will not change, that the claims will be resolved in Telecom’s favor, or that any changes to the existing laws and regulations will not adversely affect Telecom’s business, financial condition, results of operations and cash flows.

 

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In particular, in recent years the Argentine government has taken several actions to re-nationalize concessions and public services companies that were privatized in the 1990’s, such as Aguas Argentinas S.A. and Aerolíneas Argentinas S.A. Additionally, in May 2012, Law No. 26,741, established the expropriation of the 51% of the capital stock of YPF S.A. and the 51 % of the capital stock of YPF GAS S.A., which were directly or indirectly owned by Repsol YPF S.A. (Repsol). To date, the Argentine Government has not compensated any of the expropriated investors. These actions had a negative effect on the markets. We cannot provide any assurance that similar actions of the Argentine government will not be extended to other private companies or other sectors in the near future.

 

The Argentine government may exercise greater intervention in private sector companies, including Telecom Argentina.

 

The global economic and financial crisis in the recent years has resulted in a significant reduction in global GDP growth and a loss in consumer confidence in the financial sectors of many countries. To improve the countries’ financial condition and assist certain troubled industries, certain governments have responded with extraordinary intervention in the private sector. Certain governments of the leading industrialized nations have implemented various financial rescue plans outlining new regulatory frameworks that would be expected to remain in effect at least until market conditions and investor and consumer confidence have stabilized.

 

In November 2008, Argentina nationalized, through Law No. 26,425, its private pension and retirement system, which had been previously administered by the AFJP, and appointed ANSES as its administrator. Argentina’s nationalization of its pension and retirement system constituted a significant change in the government’s approach to exercising influence over Argentina’s main publicly-traded companies. A significant portion of the public float of these companies was owned by the AFJP and is currently held by ANSES.

 

The government could exercise influence over corporate governance decisions of companies in which it owns shares by combining its ability to exercise its shareholder voting rights to designate board and supervisory committee members with its ability to dictate tax and regulatory matters. Additionally, since the AFJP were significant institutional investors in Argentina, the nationalization of the private retirement system affected the way to access financing in capital markets for publicly-traded companies.

 

On April 13, 2011, the Presidential Decree No. 441/11 was published in the Argentine Official Bulletin annulling Article 76(f) of Law No. 24,241, which limited ANSES’ voting power to 5% of the company’s total voting shares, even if ANSES held a greater ownership position. Consequently, ANSES would be able to exercise the total voting power corresponding to its shares in all resolutions to be adopted at those companies’ shareholders meetings where it has share participation, including decisions related to the allocation of retained earnings and the election of directors and Supervisory Committee members, among others.

 

In addition during 2012, Decree No. 1,278/12 stated that the Secretary of Economic Policy and Development Planning of the Ministry of Economy and Public Finance is now responsible for the implementation of policies and actions regarding the exercise of shareholder rights of the equity shares of companies where the Argentine Government is a minority shareholder and approved for that purpose a Regulation of officers and directors appointed by the shares or equity interests of the Argentine government, establishing the rules that they must follow in performing their duties.

 

Subsequently, the Secretary of Economic Policy and Development Planning approved Resolution No. 110/12 which assigns the responsibilities, powers and duties set forth in Decree No. 1,278/12 to the National Department of Companies whenever the Government is a shareholder.

 

In January 2013, a new Capital Market Act (No. 26,831) came into effect, granting new intervention powers to the CNV. See “Item 9—The Offer and Listing—The Argentine Securities Market—New Capital Market Act No. 26,831” in the Telecom Form 20-F.

 

These matters could create uncertainties for investors of public companies in Argentina, including Telecom Argentina.

 

Argentina’s economy may contract in the future due to international and domestic conditions.

 

The effects of the global economic and financial crisis in recent years and the general weakness in the global economy may negatively affect emerging economies like Argentina’s. Although Argentina has experienced economic growth in recent years, current global financial instability has impacted and may continue to impact the

 

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Argentine economy and cause Argentina a slowdown of the growth rate or could led to a recession, generating fiscal deficit and increased unemployment.

 

Several international economic, social and political factors could affect the global financial markets, such as, among other factors, a growing concern regarding government deficits, governments’ abilities to honor their respective sovereign debts, social unrest and general uncertainty about the global economic recovery.

 

Moreover, the growth trend that the Argentine economy has experienced in the most recent years might be negatively affected by several domestic factors such as an appreciation of the real exchange rate, which could affect its competitiveness, diminishing or even reversing the country’s positive trade balance and, if coupled with an increase in capital outflows, might reduce consumption and investment levels as a result of increased pressure on the foreign exchange rates. Additionally, abrupt changes in monetary and fiscal policies or foreign exchange regime could rapidly affect local economic output, while lack of appropriate levels of investment in certain economy sectors could reduce long term growth. Because access to the international financial market could be limited, an increase in public spending not correlated with an increase in public revenues could affect the country’s fiscal results and generate uncertainties that might affect the economy’s level of growth.

 

If international and domestic economic conditions for Argentina were to worsen, Argentina could be negatively affected as a result of lower international demand and lower prices for its products and services, higher international interest rates, lower capital inflows and higher risk aversion, which may also adversely affect our business, results of operations, financial condition and cash flows.

 

Economic and legal conditions in Argentina could be uncertain.

 

Although general economic conditions have shown improvement, and political protests and social disturbances have diminished considerably since the economic crisis of 2001 and 2002, the nature of the changes in the Argentine political, economic and legal environment over the past several years has given rise to uncertainties about the country’s business environment.

 

In the event of any economic, social or political crises, companies in Argentina may face the risk of strikes, expropriation, nationalization, forced modification of existing contracts, and changes in taxation policies including tax increases and retroactive tax claims. In addition, Argentine courts have issued rulings changing existing jurisprudence on labor matters and requiring companies to assume increasing responsibility for and assumption of costs and risks associated with utilizing sub-contracted labor and how to calculate salaries, severance payments and social security contributions. Also, there was an increase in claims regarding compensations for work accidents over the cap established by the current relevant legislation. Since Telecom operates in a context in which the governing law and applicable regulations change frequently, it is difficult to predict whether its commercial activities will be affected positively, negatively or at all by such changes.

 

Substantially all of Telecom’s operations, properties and customers are located in Argentina, and, as a result, its business is, to a large extent, dependent upon economic conditions prevailing in Argentina. If economic conditions in Argentina were to deteriorate, they would be expected to have an adverse effect on Telecom’s and our financial condition, results of operations and cash flows.

 

Argentina’s past fiscal problems and the incomplete restructuring of Argentina’s sovereign debt may negatively affect the macroeconomic environment.

 

Although Argentina has shown improved fiscal results in recent years, it has a history of fiscal deficits. Since almost all of the financial obligations of the Argentine government were denominated in foreign currencies at the time the dollar-peso parity was eliminated in early 2002, there was an increase in the cost of financial services (in terms of Argentine Pesos) of the debt of the Argentine government. Also, since the Argentine government’s fiscal revenues were denominated in large part in Argentine Pesos, the Argentine government was severely affected in its ability to carry out its payment obligations using foreign currency and defaulted on a significant part of its public debt in 2002. The Argentine government’s sovereign debt default and its consequences may continue to negatively affect the ability of private companies, including Telecom, to access the capital markets or other forms of financing.

 

The Argentine government implemented a debt restructuring effort mainly through two debt exchange offers. The first and largest was closed on February 25, 2005 and the second took place in 2010. Nonetheless, a number of bondholders who held out from the exchange offers have initiated legal actions against the Argentine government. In late 2012, further rulings favoring the holdout positions and putting into risk the ability to service its debt under

 

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foreign legislation. This has exacerbated uncertainties and increased sovereign risk. A judgment against the Argentine government in these pending cases could lead to a default of its public debt and reduce the sources of funding and investment capital and could potentially impact the government’s ability to adopt measures that promote economic growth.

 

After the economic crisis in 2002, the Argentine government has maintained a policy of fiscal surplus. To be able to repay its debt, the Argentine government may be required to continue adopting austere fiscal measures that could adversely affect economic growth.

 

As of June 30, 2012, the outstanding principal amount of Argentina’s public debt was equivalent to US$175.5 billion (of which approximately 61% was denominated in foreign currency) of which US$11.1 billion were not presented to the exchange offers and are still pending for restructuring.

 

There can be no assurance that the Argentine government will not default on its obligations under its bonds if it experiences another economic crisis. A new default by the Argentine government could lead to a new recession, higher inflation, restrictions on Argentine companies to access financing and funds, limit the operations of Argentine companies in the international markets, higher unemployment and social unrest, which would negatively affect our financial condition, results of operations and cash flows.

 

The Argentine banking system may be subject to instability.

 

The Argentine banking system collapsed in 2001 and 2002, when the Argentine government restricted bank withdrawals and required mandatory conversion of dollar deposits to pesos. From 2005 to 2007, a period of economic growth coupled with relative stability of the country’s exchange rate and inflation resulted in the restoration of public confidence, a gradual accumulation of deposits in Argentine financial institutions, and improved liquidity of the financial system. However, since 2008 certain events like internal conflicts with certain sectors of the economy, the international financial crisis and the increased regulation on the foreign exchange market decreased depositors’ confidence. These events led to a slowdown in the growth of deposits, initially increased the dollarization of private deposits and were followed by substantial withdrawals of the dollarized deposits. Despite improvements in stability since 2002, we cannot be certain that another collapse will not occur in the future.

 

Financial institutions are particularly subject to significant regulation from multiple regulatory authorities, all of which may, amongst other things, establish limits on commissions and impose sanctions on the institutions. The lack of a stable regulatory framework could impose significant limitations on the activities of the financial institutions and could create uncertainty with respect to the financial system’s stability.

 

A new crisis of the Argentine banking system or the consequent instability of one or more of the larger banks, public or private, could have a material adverse effect on the prospects for economic growth and political stability in Argentina, resulting in a loss of consumer confidence, lower disposable income and fewer financing alternatives for consumers. These conditions would have a material adverse effect on us by resulting in lower usage of our services and the possibility of a higher level of uncollectible accounts or increase the credit risk of the counterparties regarding the Company investments in local financial institutions.

 

Shareholders may be liable under Argentine law for actions that are determined to be illegal or ultra vires.

 

Under Argentine law, a shareholder’s liability for losses of a company is limited to the value of his or her shareholdings in the company. Under Argentine law, however, shareholders who vote in favor of a resolution that is subsequently declared void by a court as contrary to Argentine law or a company’s bylaws (or regulations, if any) may be held jointly and severally liable for damages to such company, to other shareholders or to third parties resulting from such resolution. In connection with recommending any action for approval by shareholders, Nortel’s Board of Directors occasionally obtains and plans to obtain opinions of counsel concerning the compliance of its actions with Argentine law and Nortel’s bylaws (or regulations if any). Although the issue is not free from doubt, based on advice of counsel, Nortel believes that a court in Argentina in which a case has been properly presented would hold that a non-controlling shareholder voting in good faith and without a conflict of interest in favor of such a resolution and based on the advice of counsel that such resolution is not contrary to Argentine law or the Company’s bylaws or regulations, would not be liable under this provision.

 

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Delays in the attribution and allocation of radio spectrum can adversely affect Argentina’s mobile industry.

 

The SC is the authority responsible for administering the use of radio electric spectrum and, consequently, for the attribution of new segments of frequencies and the reallocation of the existing ones for the mobile service. Additionally, the regulation of administration, management and control of radio spectrum provides for the prior intervention of the CNDC, and for a joint performance with the SC, in certain circumstances, for example, in determining the safeguards designed to prevent the concentration of spectrum and the occurrence of a dominant position. Delays in the allocation of new frequencies, the reallocation of the existing ones and their subsequent auction could affect the quality of services, the future development of the sector and the implementation and commercialization of new advanced services, among others, such as mobile broadband and its applications.

 

Risks Relating to Nortel

 

As a holding company, Nortel’s ability to meet its financial obligations and to pay dividends is dependent upon the receipt of cash and other distributions paid on the common stock of Telecom that it owns. We did not pay any dividends during the period of 2001 to 2009.

 

Nortel is a holding company which owns shares of common stock of Telecom Argentina, Nortel’s sole substantial asset. As a holding company, Nortel’s ability to meet its financial obligations and to pay dividends on its Series B Preferred Shares is dependent upon the receipt of cash dividends and other distributions paid on the common stock of Telecom Argentina that it owns. Due to Telecom Argentina not paying dividends for the years ended December 31, 2001 to December 31, 2008, Nortel did not pay any dividends for the years 2001 to 2009. In each year from 2010 to 2012, Telecom paid dividends in respect of the prior fiscal year. This allowed Nortel to make dividends available to some or all of its shareholders for the fiscal years ended December 31, 2010 and 2011, which were paid in 2011 and 2012, respectively.

 

Until June 14, 2012, when all of Nortel’s outstanding Series A Preferred Shares were finally redeemed, the declaration and payment of dividends on Series B Preferred Shares was subject to the dividend and redemption payments on the Series A Preferred Shares. In 2010 and 2011 Nortel was able to make certain amortization, dividend and other payments on the Series A Preferred Shares, but did not pay any dividends on the Series B Preferred Shares. In 2012, Nortel redeemed all outstanding Series A Preferred Shares. In addition, in 2012 Nortel paid (i) to the holders of Series B Preferred Shares, a dividend for the year ended December 31, 2011 of approximately P$5.4 million, and (ii) to the holders of shares of common stock, a dividend for the year ended December 31, 2011 of approximately P$5.6 million. For further information on the dividend payments received from Telecom Argentina and paid to Nortel shareholders, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources”. For further information on the terms of the Series A and Series B Preferred Shares, see “Item 10. Additional Information—Bylaws and Terms and Conditions of Issuance of Series A and Series B Preferred Shares”.

 

On March 18, 2013, Telecom Argentina’s Board of Directors called a shareholders’ meeting to be held on April 23, 2013, to consider among other issues the allocation of Telecom Argentina’s non-appropriated retained earnings as of December 31, 2012. Telecom Argentina’s Board proposed to allocate P$1,000 million as a Reserve for Future Dividends in Cash and to authorize the Board of Directors to approve the reduction of such Reserve for the purpose of distributing dividends in cash. On the same day, Nortel’s Board of Directors called a shareholders’ meeting to be held on April 26, 2013, to consider among other issues the allocation of Nortel’s non-appropriated retained earnings as of December 31, 2012. Nortel’s Board proposed to allocate P$1,466 million as a Voluntary Reserve for the Future Dividends and to authorize the Board of Directors to approve the timing and amounts to be deducted from such Reserve for the purpose of distributing dividends, taking into account Nortel’s future liquidity.

 

Nortel is unable to predict whether Telecom Argentina will make any dividend payments in future periods.

 

The ability of Telecom Argentina and consequently Nortel, to pay dividends is subject to Telecom’s ability to generate sufficient cash from operations and its expectation of future cash needs, and is also subject to limits imposed by applicable Argentine law. In particular, under Argentine Corporations Law, Telecom Argentina and Nortel may only declare dividends out of liquid and realized profits determined in accordance with GAAP effective in Argentina (IFRS in the case of listed companies such as Nortel) and other applicable regulations and must allocate 5% of each year’s net income to a legal reserve until the total amount of such reserve reaches 20% of capital (capital stock plus inflation adjustment to capital stock).

 

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As provided-by CNV Resolution No. 609/12, positive retained earnings generated by the mandatory adoption of IFRS as from January 1, 2012, should be reassigned to a Special Reserve that can only be utilized for its capitalization or to absorb negative retained earnings. As a result, a total of P$204 million of positive retained earnings generated by the application of IFRS in Nortel’s 2012 statutory financial statements have to be assigned to the Special Reserve. Such constitution shall be approved by the Ordinary and Extraordinary Annual Shareholders’ Meeting to consider the Consolidated Financial Statements for 2012 which is appointed to be held April 26, 2013.

 

On January 6, 2002, the Convertibility Law, which established a P$1.00 to US$1.00 exchange rate, was partially repealed and, since that date, the Argentine Peso has experienced significant devaluation. Since Nortel’s dividends are paid in Argentine Pesos, such dividends, if and when paid, will have a lower U.S. dollar value. Nortel’s ability to pay dividends may also be affected by imposition of monetary and currency exchange restrictions on the transfer of funds outside of Argentina. See also “—Risks Associated with Telecom and its Operations—The BCRA has imposed restrictions on the transfer of funds outside of Argentina in the past; some restrictions currently exist and may increase in the future, which could prevent Telecom Argentina and Nortel from making payments on dividends and liabilities”.

 

Sofora, as the principal shareholder of Nortel, exercises significant control over matters affecting Nortel.

 

Sofora is Nortel’s principal shareholder. Sofora owns 100% of the shares of common stock of Nortel, which currently represents 78.38% of the capital stock of Nortel. Sofora is 68% owned by Telecom Italia Group and 32% owned by W de Argentina — Inversiones.

 

Through their ownership of Sofora and the Shareholders’ Agreement between them, the Telecom Italia Group and W de Argentina — Inversiones have, as a general matter, the ability to determine the outcome of any action requiring our shareholders’ approval, including the ability to elect a majority of directors and members of the Supervisory Committee. In addition, we have been informed that, pursuant to the shareholders’ agreement entered into between the Telecom Italia Group and the Werthein Group, the Telecom Italia Group and W de Argentina — Inversiones have agreed among themselves to certain matters relating to the election of directors of Nortel, Telecom and Sofora and have given W de Argentina — Inversiones veto power with respect to certain matters relating to us. See “Item 7—Major Shareholders and Related Party Transactions—Shareholders’ Agreement.”

 

Telecom Argentina and its subsidiaries have engaged in and will continue to engage in transactions with related parties of Nortel. Certain decisions concerning Telecom Argentina’s operations or financial structure may present conflicts of interest between these shareholders as direct or indirect owners of Nortel’s and Telecom’s capital stock and as parties with interests in these related party contracts.

 

Nevertheless, all related parties’ transactions were made on an arm’s-length basis and those which exceed 1% of the shareholders’ equity of Nortel and Telecom are subject to a prior approval process established by Decree No. 677/01, which was replaced on January 28, 2013 by Law No. 26,831, and require involvement of the Audit Committee and/or an opinion of two independent valuation firms as well as subsequent approval by the Board of Directors to verify that the agreement could reasonably be considered to be in accordance with normal and habitual market practice. See “Item 7—Major Shareholders and Related Party Transactions—Related Party Transactions.”

 

Holders of Series B ADSs may not be able to exercise their preemptive rights should Nortel issue additional shares of common stock.

 

The terms and conditions of the Series B Preferred Shares include preemptive rights to holders of the Series B Preferred Shares which require Nortel to offer holders of the Series B Preferred Shares the right to purchase a sufficient number of the Series B Preferred Shares to maintain their existing ownership percentage if Nortel issues additional shares of common stock. United States holders of Series B ADSs will not be able to exercise through Morgan Guaranty Trust Company, as Depositary (the “Depositary”), the preemptive rights for Series B Preferred Shares underlying their Series B ADSs unless a registration statement under the Securities Act is effective with respect to such rights or an exemption from the registration requirement thereunder is available. Nortel intends to evaluate at the time of any rights offering the costs and potential liabilities associated with any such registration statement as well as the indirect benefits to it of enabling the holders of Series B ADSs to exercise preemptive rights and any other factors Nortel considers appropriate at the time. No assurance can be given that any registration statement would be filed. To the extent holders of Series B ADSs are unable to exercise their preemptive rights because a registration statement has not been filed and no exemption from such registration requirement under the Securities Act is available, the Depositary would sell such holders’ preemptive rights and distribute the net proceeds

 

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thereof to the holders of Series B ADSs, and such holders’ equity interest in Nortel would be proportionately diluted. The Depositary, after consultation with Nortel, has discretion to determine the procedure for making rights available to holders of Series B ADSs or for disposing of such rights and making the net proceeds available to such holders. If by the terms of a rights offering or for any other reason the Depositary may not make such rights or net proceeds available to any holder of Series B ADSs, the Depositary may allow the rights to lapse.

 

Fluctuations in Nortel’s share price depend on various factors, some of which are outside of our control.

 

The market price of our shares is subject to change due to various factors which are outside of our control such as changes in market expectations, changes in the economic, financial and political situation of Argentina and changes in measures used by investors or analysts to value our stock or market trends unrelated to our performance and operations. We cannot predict when such external factors will affect our stock price or whether their effects will be positive or negative.

 

Finally, currency fluctuations could impact the value of an investment in Nortel. Although Nortel’s ADSs listed on the New York Stock Exchange are U.S. dollar denominated securities, they do not eliminate the currency risk associated with an investment in an Argentine company.

 

Risks Associated with Telecom and its Operations

 

The Pesification and freezing of rates may continue to adversely affect Telecom Argentina’s revenues.

 

In accordance with the Public Emergency Law, in January 2002, rates for Basic telephone services and long-distance services were converted to pesos and fixed at an exchange rate of P$1.00=US$1.00. The rates that Telecom Argentina may charge in the future will be determined by negotiations between Telecom Argentina and the Argentine government. According to the Public Emergency Law, while undertaking these negotiations, the Argentine government must consider the effect of these rates on the competitiveness of the general economy, the quality of service and investment plans of service providers, as contractually agreed. The Argentine government must also consider consumer protection, accessibility of the services and the profitability of public service providers such as Telecom Argentina. The Public Emergency Law has been subsequently extended through December 31, 2013. See “Item 4—Information on the Company—Regulatory Framework—Regulatory Environment—Rates” in the Telecom Form 20-F attached as an exhibit hereto.

 

On March 6, 2006, Telecom Argentina executed a Letter of Understanding (the “Letter of Understanding 2006”) with the Argentine government pursuant to which Telecom Argentina will be permitted to raise certain rates and incorporate certain modifications to the current regulatory framework. Under the Letter of Understanding 2006, the only agreed upon adjustments to the rate structure were the rate increases to the termination charge for international incoming calls and the extension of the time bands for peak-hour rates applied to local and domestic long distance calls. See “Item 4—Information on the Company—Regulatory Framework—Regulatory Environment—Rates” in the Telecom Form 20-F attached as an exhibit hereto.

 

The Letter of Understanding 2006 contemplated the signing and effectiveness of the Minutes of Agreement of the Renegotiation upon the fulfillment of certain necessary steps. As of the date of this Annual Report, such fulfillment has yet to occur. Although we expect such fulfillment to occur, Telecom Argentina cannot guarantee if or when this will happen. Telecom is unable to predict the outcome of the negotiations that are continuing with regard to further rate increases and the rate scheme which will be applied in the future. Moreover, we are unable to predict whether the Argentine government, as a result of the current rate renegotiations, will impose additional conditions or requirements, and if these conditions or requirements are imposed, whether Telecom Argentina will be able to satisfy them.

 

Rate restrictions for regulated services may continue for a number of years and may affect revenues from fixed-line and other services. While Telecom Argentina intends to continue to strive to control operating costs and capital expenditures and improve productivity, these efforts has not offset the significant decline in profit margins and operating results that resulted from mandatory rate freezing and the increase in costs due to high levels of investment in capital expenditures and higher operating costs.

 

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Telecom must comply with conditions in its license, and regulations and laws related thereto, and such compliance may at times be outside of its control.

 

Telecom is subject to a complex series of laws and regulations with respect to most of the telecommunications services that it provides. Such laws and regulations are often governed by considerations of public policy. Telecom provides telecommunications services pursuant to licenses that are subject to regulation by various regulatory bodies. Any partial or total revocation of the licenses would likely have a material adverse impact on its financial condition, results of operations and cash flows. Telecom’s dissolution and the declaration of bankruptcy, among others, are events that may lead to a revocation of Telecom Argentina’s licenses.

 

Certain license conditions are not within Telecom Argentina’s control. For example, any transfer of shares resulting in a direct or indirect loss of control in Telecom Argentina without prior approval of the regulatory authorities may result in the revocation of Telecom Argentina’s license. Pursuant to the provisions of Telecom Argentina’s List of Conditions as amended by Resolutions SC No. 111/03 and No. 29/04: (i) any reduction of ownership of Nortel in the capital stock of Telecom Argentina to less than 51% without prior approval of the Regulatory Bodies; or (ii) any reduction of ownership of currently common shareholders in the capital stock with voting power of Nortel to less than 51% without prior approval of the Regulatory Bodies, may result in the revocation of Telecom Argentina’s telecommunications license.

 

Nortel owns all of Telecom Argentina’s Class A shares of common stock (51% of Telecom Argentina’s total capital stock) and approximately 7.64% of Telecom Argentina’s Class B shares of common stock (3.74% of Telecom Argentina’s total capital stock) which, in the aggregate, represents approximately 54.74% of Telecom Argentina’s total capital stock as of the date of this Annual Report. Telecom Argentina is directly controlled by Nortel by virtue of Nortel’s ownership of a majority of Telecom Argentina’s capital stock; however, Nortel’s controlling interest is subject to certain agreements among Sofora’s shareholders. In addition, the Telecom Italia Group and W de Argentina — Inversiones (a company that is part of the Argentine Werthein Group) are each required to maintain direct ownership of at least 15% of the common stock of Sofora.

 

Compliance with conditions in Telecom’s license and related regulations and laws may be affected by events or circumstances outside of our and their control, and therefore we cannot predict whether such events or circumstances will occur and if any do occur, this could result in an adverse effect on Telecom’s and our financial condition, operations and cash flows.

 

Telecom operates in a competitive environment that may result in a reduction in its market share in the future.

 

Telecom competes with licensed provider groups, composed of, among others, independent fixed-line service providers, mobile and cable operators, as well as individual licensees, some of which are affiliated with major service providers outside Argentina. As of December 31, 2012, more than 1000 licenses for local and/or long distance services, payphones and Value Added Services had been granted since the end of the exclusivity period.

 

Internet and mobile services, which Telecom expects will continue to account for an increasing percentage of Telecom’s revenues in the future, are characterized by rapidly changing technology, evolving industry standards, changes in customer preferences and the frequent introduction of new services and products. To remain competitive in the fixed telecommunications market, Telecom must invest in its fixed-line network and information technology. Specifically, in the Internet services market, Telecom must constantly upgrade its access technology and software in order to increase the speed, embrace emerging transmission technologies and improve the responsiveness, functionality, coverage and features of its services. Also, to remain competitive in the mobile telecommunications market, Telecom must enhance its mobile networks by expanding its network infrastructure and extending 3G (and HSPA+) technology and bandwidth in mobile data transmission. In addition, a key factor for Personal’s competitiveness is to be awarded with new mobile frequency bands. Future technological developments may result in decreased customer demand for certain of its services or even render them obsolete. In addition, as new technologies develop, equipment may need to be replaced or upgraded or network facilities (in particular, mobile and Internet network facilities) may need to be rebuilt in whole or in part, at substantial cost, to remain competitive. These enhancements and the implementation of new technologies will continue requiring increased capital expenditures.

 

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Telecom also anticipates that it will have to devote significant resources to the refurbishment and maintenance of its existing network infrastructure to comply with regulatory obligations particularly regarding fixed-line services and to remain competitive with the quality of its services in both Internet and mobile business. Telecom also expects to continue to devote resources to customer retention and loyalty in such segments.

 

As a result of the implementation of the Number Portability regulation that took place in March 2012 for the Personal Mobile Service segment, there was an increase in competition among service providers, also there were higher customer retention costs and increased churn amongst high value customers in the Argentine mobile market. This increased competition is expected to continue.

 

The macroeconomic situation in Argentina may adversely affect its ability to successfully invest in, and implement, new technologies, coverage and services in a timely fashion. Accordingly, we cannot assure you that Telecom will have the ability to make needed capital expenditures and operating expenses. If Telecom is unable to make these capital expenditures, or if its competitors are able to invest in their businesses to a greater degree and/or faster than we are, Telecom’s competitive position will be adversely impacted.

 

Moreover, the products and services that Telecom offers may fail to generate revenues or attract and retain customers. If Telecom’s competitors present similar or better responsiveness, functionality, services, speed, plans or features, Telecom’s customer base and its revenues may be materially affected.

 

Telecom also expects that the level of competition in its markets will continue to increase in the future, particularly as a result of the emergence of the operator Argentine Satellite Solution Corporation S.A. (“ARSAT” — a company wholly owned by the Argentine Government) which could initially result, among other things, in a decline in governmental agency customers regarding fixed and mobile services due to a potential preference of public entities to hire ARSAT. Competition is and will continue to be affected by its competitors’ business strategies and alliances. Accordingly, Telecom may face additional pressure on the rates that it charges for its services or experience a loss of market share of fixed and mobile services. In addition, the general business and economic climate in Argentina may affect Telecom and its competitors differently; thus its ability to compete in the market could be adversely affected.

 

Even though Telecom grew and developed in recent years in a highly competitive market, because of the range of regulatory, business and economic uncertainties Telecom faces, as discussed in this “Risk Factors” section, it is difficult for Telecom to predict with meaningful precision and accuracy its future market share in relevant geographic areas and customer segments, the drop in our customer’s consumption, which could result in a reduction of our revenue and market share, the speed with which change in its market share or prevailing prices for services may occur or the effects of competition. Those effects could be material and adverse to Telecom’s overall financial condition, results of operations and cash flows.

 

Changes in the laws and regulations of the Argentine mobile industry, or restrictions on rate increases could adversely affect Personal.

 

The Argentine mobile industry is currently subject to an important set of regulations that has enabled the development of a highly competitive and intense capital expenditure environment. Notwithstanding that, in the last few years several bills were introduced in the Argentine Congress proposing a substantial change through the declaration of the mobile industry as a “public service” which could result in deeper and specific regulations regarding rates, quality of service, coverage areas or other core aspects of our business. Other bills were also presented in the Congress proposing changes to specific rules that regulate Personal’s services, such as changes in billing processes and customer service. In December 2012, a bill proposing that remaining unused credit should be available for 180 days before expiration, achieved Lower Chamber approval and, if adopted by the Senate in 2013, it may become law, which could have an adverse effect on Personal’s operations, financial situation, results of operations and cash flows.

 

We cannot assure that similar initiatives will not be proposed in the future and will not obtain the approval of the National Congress.

 

In addition, in early 2013 the Argentine government adopted certain initiatives in order to reduce current inflation rates, including price agreements with certain non-regulated sectors such as supermarkets and retailers. In this context and taking into account the current situation of the mobile telecommunications market, Personal could not implement the rate increases announced at the end of 2012 (to be effective as from March 2013) for postpaid and “cuentas claras” customers. Although mobile telephony is a non rate regulated industry, we cannot predict whether

 

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current or new factors —including governmental initiatives in order to reduce inflation rates— would negatively impact Personal’s ability to apply rate increases, thus negatively affecting the profit margins and the level of cash flows.

 

Future allocations of mobile frequency bands may affect the competitiveness of the Argentine mobile industry and could impact Personal’s competitive position within it.

 

Telefónica Móviles Argentina S.A. returned to the Argentine government the frequency bands exceeding an aggregate 50 MHz, as a result of the combination of operations of Unifón and Movicom in 2004, in accordance with the current laws and pursuant to a plan to be subsequently issued. In 2005, the SC issued its plan relating to the return of those frequency bands although it did not stipulate how the returned bands would be reallocated or assigned to other operators.

 

The launch of the auction to reassign the 850 MHz and 1900 MHz frequency bands returned by Telefónica Móviles Argentina S.A. was postponed several times. Finally, the auction was launched by Resolution No. SC 57/11.

 

Personal took part in the spectrum auction process and expected to acquire additional spectrum to complete its “Spectrum cap” throughout Argentina, but, on September 5, 2012, Personal was notified of SC Resolution No. 71, by which, as provided for in Article 10 of the List of Conditions, the auction approved by SC Resolution No. 57/11 was canceled for reasons of opportunity, merit and convenience of the Argentine Government. As part of that process, the CNDC issued an opinion as requested by the SC, by which it recommended against assigning additional frequency bands that were subject to auction to Personal — regardless of the cap established by the regulatory authority — in order to avoid the risks that such additional spectrum could cause.  However, this recommendation was not considered in evaluating Personal’s background in the auction nor in the reasons for cancelling the auction.  Personal believes that the grounds of this opinion are clearly contrary to the current regulatory framework and to the previous actions of the Government.

 

By Presidential Decree No. 2426/12 issued in December 2012, the current spectrum and telecommunication license general regulation was modified to allow the SC to allocate spectrum directly to Government organizations (or organizations where the state is the main owner) without proceeding with a public auction as was required before this modification. It also mandates the SC to allocate the spectrum from the recently cancelled auction (which represents approximately 20% of current mobile spectrum available) to Argentine Satellite Solution Corporation S.A. (“ARSAT” — a company wholly owned by the Argentine Government). See “Item 4—Information on the Company—Regulatory Framework—Regulatory Bodies and General Legal Framework” in the Telecom Form 20-F for a description of the dispositions of Decree No. 2426/12.

 

In December 2012 the President announced the launching of a new state owned mobile service branded “libre.ar”. The business plan has not been presented and details of these operations were not disclosed yet.

 

The government’s dual-role, as both regulator and competitor, represents a significant change in the mobile industry. We cannot assure that it could not open several risks to Personal’s business including possible adverse changes in the regulatory framework and the current market rules. The lack of allocation of additional frequency bands is negatively affecting the quality of service of all the Argentine mobile operators and the evolution of the sector. It could also adversely affect Personal’s competitive position and may require higher capital expenditures for Personal to continue providing high quality mobile services to its customers. See “Item 4—Information on the Company—Regulatory Framework—Other Regulations—Regulations Applicable to PCS Services” in the Telecom Form 20-F for a detailed description of Personal’s license.

 

Actual or perceived health risks or other problems relating to mobile handsets or transmission masts could lead to litigation or decreased mobile communications usage.

 

The effects of, and any damage caused by, exposure to an electromagnetic field were and are the subject of careful evaluations by the international scientific community, but until now there is no scientific evidence of harmful effects on health. Telecom cannot rule out that exposure to electromagnetic fields or other emissions originating from mobile handsets will finally not be identified as a health risk.

 

Although Argentine mobile operators comply with the international security standards established by the World Health Organization and Argentine regulations, which are similar, Telecom’s mobile business may be harmed as a result of these alleged health risks. For example, the perception of these health risks could result in a lower number

 

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of customers, reduced usage per customer or potential consumer liability. In addition, these concerns may cause regulators and municipalities to impose restrictions on the construction of base station towers or other infrastructure, which may hinder the completion of network build-outs and the commercial availability of new services and may require additional investments.

 

Operational risks could adversely affect Telecom Argentina’s reputation and its profitability.

 

Telecom Argentina faces operational risks inherent in its business, including those resulting from inadequate internal and external processes, fraud, employee errors or misconduct, failure to comply with applicable laws, failure to document transactions properly or systems failures. In addition, unauthorized access to Telecom Argentina’s information systems or institutional sites could cause the loss or improper use of confidential information, unauthorized changes in Telecom Argentina’s information and network systems or alterations to Telecom Argentina’s information published on these sites. These events could result in direct or indirect losses, technical failures in Telecom Argentina’s ability to provide its services, inaccurate information for decision making, adverse legal and regulatory proceedings, and harm its reputation and operational effectiveness, among others.

 

Telecom Argentina has risk management practices at the highest levels designed to detect, manage and monitor the evolution of these kind of operational risks, and for this purpose it established a Risk Management Committee in September 2012.

 

However, there is no guarantee that these measures will be successful in effectively mitigating the operational risks that Telecom Argentina faces and such failures could have a material adverse effect on its results of operations and could harm its reputation.

 

Telecom’s operations and financial condition could be affected by union negotiations.

 

In Argentina, labor organizations have substantial support and have considerable political influence. In recent years, the demands of Telecom’s labor organizations have increased mainly as a result of the increase in the cost of living (which was affected by increased inflation) and a decline in the population’s purchasing power.

 

In addition to the recategorization process executed in 2012 for Telecom Argentina’s nonunionized employees, certain labor organizations have advocated that some of Telecom’s nonunionized employees should be represented by trade unions. Unions have also requested that we delegate currently outsourced tasks to Telecom’s employees.

 

If the number of employees covered by trade unions increases or Personal’s employees (currently included in the collective bargain agreement of the Argentine Federation of Commercial and Service Employees “FAECyS”) are included in the new collective bargain agreement for the mobile industry, this could result in reduced flexibility in our relationship with Personal’s employees and increased costs, including the higher compensation that Telecom may need to pay. See “Item 6—Directors, Senior Management and Employees—Employees and Labor Relations.” See “Item 6—Directors, Senior Management and Employees—Employees and Labor Relations” in the Telecom Argentina Form 20-F incorporated herein by reference.

 

The Argentine government may order salary increases to be paid to employees in the private sector or changes in labor regulations, which would increase Telecom’s cost of doing business.

 

The Argentine government has in the past and may in the future promulgate laws, regulations and decrees requiring companies in the private sector to maintain minimum wage levels and provide specified benefits to employees (including higher levels of severance payments to former employees dismissed without proper cause). Telecom cannot guarantee that the government will not adopt measures, as it did in the past, which will increase salaries or require Telecom to provide additional benefits, which would increase Telecom’s costs and, among other things, in the absence of an adjustment of regulated rates in our fixed services segments, continue reducing Telecom’s profit margins.

 

Moreover, there are certain bills pending in the Argentine Congress regarding modifications to labor regulations, such as increasing severance payments or considering amounts paid to employees that are currently not subject to social security contributions as part of the normal and usual employees’ salaries, increasing liability of the companies for the contractor’s and sub-contractor’s employees in outsourced tasks and the implementation of a regime that would entitle employees to participate in the profits of companies that employ them.

 

If such bills are approved, the modifications in current labor regulations and conditions could materially impact Telecom’s relationship with its employees by increasing the labor cost and in some cases decreasing the flexibility to provide services to its clients.

 

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The Regulatory Authorities may impose increased penalties on Telecom Argentina and Personal

 

The Regulatory Authorities have increased the number of cases and the amount of fines applied to Telecom Argentina mainly in connection with alleged delays in the fixed lines installation and maintenance of services. Additionally, the Regulatory Authorities have initiated different administrative procedures against Telecom Argentina and Personal related to temporary interruptions of services caused by different incidents. Lately the Authorities have threatened Telecom Personal with the applications of fines and the obligation to pay compensation to the clients involved. In many of these cases, we believe that the Authorities are misinterpreting of the legal framework of our telecommunication license or exceeding the legal terms of the service provision. Final administrative nor judicial decisions on these cases have not been made yet. We cannot foresee whether the Regulatory Authorities based on the increased number of administrative complaints will seek to apply significant sanctions to Telecom Argentina or Telecom Personal, any of which could have an adverse effect on Telecom Argentina or Personal´s operations, financial situation, results of operations and cash flows.

 

Telecom is involved in various legal proceedings which could result in unfavorable decisions and financial penalties for Telecom.

 

Telecom is party to a number of legal proceedings, some of which have been pending for several years. Telecom cannot be certain that these claims will be resolved in its favor. Responding to the demands of litigation may divert Management’s time, attention and financial resources.

 

In addition, in recent years, certain changes in the treatment of employment matters under Argentine law have created new incentives for individuals to pursue employment-related litigation in Argentine courts. These changes include holdings that an employee of a contractor or subcontractor may file a direct action against the company contracting the work, that any cap on severance pay in cases of dismissal without cause is unconstitutional, that an employee may bring a civil action in the event of an occupational accident, and that an employee can bring a lawsuit against the employer because of changes in working conditions. Additionally, Telecom is exposed to claims of employees of contractors and subcontractors and commercial agents claiming direct or indirect responsibility of Telecom based on a broad interpretation of the rules of labor law.

 

Also, Telecom is subject to various lawsuits initiated by some employees and former employees who claim wage differences caused by the impact of the concepts “non-remunerative sums (amounts not subject to social security contributions)” and “food vouchers” over the settlement of items such as overtime, productivity, vacation, supplementary annual salary and other additional benefits provided by the Collective Bargaining Agreement and, in certain cases, have obtained favorable rulings for these claims. Additionally, Telecom Argentina cannot assure that after the recategorization process executed by Telecom Argentina in 2012 as a result of the agreements reached with the labor organizations, individual employee claims will not be filed regarding such recategorization process.

 

In the past, Personal was subject and currently is subject to claims by former representatives (commercial agents) who end their business relationship by making claims for reasons that are not always justified by contract terms.

 

As a result, Telecom Argentina and Personal may face increased risk of employment and commercial litigation. If this occurs, we cannot guarantee that it will not have an adverse effect on our results of operations, financial condition and cash flows, despite the provisions that Telecom has recorded to cover from these matters, as it is described in “Item 8—Financial Information—Legal Proceedings” in the Telecom Argentina Form 20-F incorporated herein by reference.

 

The Argentine National Communications Commission (Comisión Nacional de Comunicaciones or “CNC”) regulates telecommunications services in Argentina and in its capacity is empowered to apply economic sanctions against licensees for breaches of the current regulatory framework. Recently, there has been a growing trend of imposing sanctions on Telecom Argentina for technical reasons, mainly related to the delay in repairing defective lines and / or installing new lines. In addition, there was an increased number of sanctions on Telecom Argentina and Personal regarding service failures. Although penalties are appealed in the administrative stage, if the appeals are not solved in its favor in the administrative or judicial stage, or the penalties imposed by the CNC increased, it could have an adverse effect on our financial situation, results of our operations and cash flows.

 

In 2009, the environmental agency required Telecom Argentina to be registered in the National Registry of Generators and Operators of Hazardous Waste as a result of alleged problems with its liquid drainage at an underground chamber (as it had been previously required to do in 1999). This registration would require Telecom

 

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Argentina to pay an annual fee calculated in accordance with a formula that takes into consideration the extent of the hazard and the quantity of the waste. Telecom Argentina filed a request for administrative review seeking to obtain rejection of the environmental agency’s ordinance. Telecom cannot guarantee that the rejection will be obtained.  In addition, changes in environmental legislation or the evolution of products and services we offer could require Telecom Argentina to be registered in the National Registry of Generators and Operators of Hazardous Waste. In that case or if the rejection of the environmental agency’s ordinance is not obtained, Telecom Argentina would face increased costs which may include retroactive fees.

 

See “Item 8—Financial Information—Legal Proceedings—Civil, commercial, labor, regulatory, tax and other matters proceedings” in the Telecom Argentina Form 20-F incorporated herein by reference.

 

The enforcement of regulations aimed at protecting consumers may have an adverse effect on Telecom.

 

The Consumer Protection Act No. 24,240 (the “Consumer Protection Act”) establishes a series of principles and rules for the protection of consumers and users. The Consumer Protection Act applies to the telecommunications industry and to any other industry in which consumers and users are involved.

 

Telecom Argentina and Personal have received several customer complaints in connection with the provisions of the Consumer Protection Act that were filed with different law enforcement bodies (national, provincial or municipal). In the last few years there was also an increase in legal actions brought by consumer associations. See “Item 8—Financial Information—Legal Proceedings—Civil, commercial, labor, regulatory, tax and other matters proceedings—General Proceedings—Consumer Trade Union Proceedings.” in the Telecom Argentina Form 20-F incorporated herein by reference.

 

This situation may entail risks for Telecom Argentina and Personal concerning, among others, the prices charged for their services or the obligation to return amounts charged for their services. If such were the case, any of such consequences could have an adverse effect on Telecom’s financial situation, results of operations and cash flows.

 

The BCRA has imposed restrictions on the transfer of funds outside of Argentina in the past; some restrictions currently exist and may increase in the future, which could prevent Telecom Argentina and Nortel from making payments on dividends and liabilities.

 

In the past, the Argentine government has imposed a number of monetary and currency exchange control measures, including temporary restrictions on the free availability of funds deposited with banks and restrictions or limitations on the access to foreign exchange markets and transfers of funds abroad, including for purposes of paying principal and interest on debt, trade liabilities to foreign suppliers and dividend payments to foreign shareholders. Between the end of 2001 and 2002, the Argentine government implemented a unified exchange market (Mercado Único y Libre de Cambiós — MULC) with significant regulations and restrictions for the purchase and transfer of foreign currency.

 

Since late 2011 the Argentine government implemented a series of measures aimed to increase controls on the foreign trade and capital flows. To that effect, certain measures were implemented to control and limit the purchase of foreign currency, such as the prior approval of the AFIP for any purchase of foreign currency made by private companies and individuals for saving purposes. In addition, the BCRA expanded the controls and measures to make payments abroad accessing the local foreign exchange market, regarding trade payables and financial debt, and also established demanding procedures that must be met to pay certain trade payables with related parties. Although there are no regulations that prohibit making dividend payment to foreign shareholders, in practice authorities have substantially limited any purchase of foreign currency to pay dividends since these exchange controls were implemented. There can be no assurance that the BCRA or other government agencies will not increase controls and restrictions for making payments to foreign creditors or dividend payments to foreign shareholders, which would limit our ability to comply in a timely manner with payments related to our liabilities to foreign creditors or non-resident shareholders. See “Item 10—Additional Information—Foreign Investment and Exchange Controls in Argentina.”

 

Pursuing the same objective, in October 2011 Decree No. 1,722 eliminated an exception for oil, gas and mining companies, and thus requires these companies to liquidate all their export receipts in the local foreign exchange market. Moreover, in October 2011 the National Insurance Bureau issued Resolution No. 36,162 imposing the obligation for insurance companies to repatriate all investments and liquid assets allocated outside Argentina. We cannot ensure that similar measures will not be implemented for other private companies or other sectors in the future.

 

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In addition, starting in February 2012 all import operations of goods and services must be filed and approved in advance by AFIP. Such procedure could also negatively affect our supply chain, as some raw materials, equipment and handsets are imported by our suppliers.

 

For a detailed explanation of risks associated with an investment in Telecom, see “Item 3—Key Information—Risk Factors” in the Telecom Form 20-F included as an exhibit hereto.

 

ITEM 4.                        INFORMATION ON THE COMPANY

 

The Company

 

Nortel Inversora S.A. was organized by a consortium of Argentine and international investors to acquire a controlling interest in the common stock of Telecom as the first step in Argentina’s privatization of its fixed-link public telecommunications services and basic telephone services. See “Item 7—Major Shareholders and Related Party Transactions.” As of December 31, 2012, Nortel owned approximately 54.74% of the common stock of Telecom Argentina. Nortel’s sole substantial activity is owning such stock and its sole substantial source of cash income is cash dividends paid on such stock. (See “Item 10—Additional Information—Bylaws and Terms and Conditions of Issuance of Series B Preferred Shares—Nortel’s Capital Stock”).

 

Nortel is a stock corporation (sociedad anónima) organized under the laws of Argentina on October 31, 1990. The duration of Nortel is 99 years from such date of organization. The Company’s business offices are located at Alicia Moreau de Justo 50-11th Floor C1107 AAB Buenos Aires, Argentina and its telephone number is 54-11-4968-3631. Nortel’s operations are limited only by its corporate purpose as stated in its bylaws, which is to invest in companies, other than financial services companies generally, and to invest in Telecom specifically. Therefore, Nortel is able to expand into other businesses within its corporate purpose without regulatory approval. Nortel Inversora S.A.’s commercial names are “Nortel Inversora” outside of Argentina and “Nortel” or “Nortel Inversora” in Argentina.

 

For a description of Telecom’s business and its principal capital expenditures, see “Item 4—Information on the Company” in the Telecom Form 20-F included as an exhibit hereto.

 

Our authorized agent in the United States for SEC reporting purposes is Puglisi & Associates, 850 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware 19715.

 

Recent Developments

 

Nortel’s Final Redemption and Cancellation of Series A Preferred Shares. Capital reduction.

 

The shareholders’ meeting and the Board of Directors’ meeting of Nortel held on June 13 and June 14, 2012, respectively, approved the scheduled redemption of 401,794 Series A Preferred Shares, which at the time represented 100% of the outstanding Series A Preferred Shares, and the consequent capital reduction from P$72,026,490 to P$68,008,550, pursuant to the terms and conditions of issuance of the Series A Preferred Shares. This resulted in the cancellation of all ADRs representing Series A Preferred Shares, which were delisted from the Luxembourg Stock Exchange as of August 15, 2012.

 

As of the date of this Annual Report no Series A Preferred Shares are outstanding and, consequently, following Nortel’s payment of all accrued Series A dividends, no right to vote or appoint a member of Nortel’s Board of Directors director is held by any preferred shareholder.

 

Nortel Board of Directors called for the Annual Shareholders’ Meeting

 

On March 18, 2013, Nortel’s Board of Directors called a shareholders’ meeting to be held on April 26, 2013, to consider among other issues: (i) the allocation of Nortel’s non-appropriated retained earnings as of December 31, 2012 as follows: P$204 million to the constitution of a Special Reserve for implementation of IFRS according to Resolution CNV No. 609/12 and P$1,446 million as a Voluntary Reserve for the Future Dividends, and the authorization of the Board of Directors to approve the timing and amounts to be deducted from the latter Reserve for

 

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the purpose of distributing dividends, taking into account Nortel’s future liquidity; (ii) the election of two directors and one alternate director; and (iii) the election of the members of the Supervisory Committee for fiscal year 2013.

 

Administrative complaints in connection with Telecom Personal’s service cuts

 

On March 11, 2013, the CNC notified Telecom Personal of an administrative complaint related to a network incident that took place on March 8, 2013, affecting only the 3G service in Buenos Aires City and some clients of few localities in the North Region of the country. The incident lasted only around 2½ hours.

 

Telecom Personal filed its defenses against such penalty procedures, based on the arguments by which such penalties should be released, but, on April 5, 2013, the CNC notified Telecom Personal a Resolution applying a sanction of P$6 million, and imposing the obligation to repay the sum of P$30 to each affected customer.

 

The Management of Telecom Personal, with the advice of their legal counsels, believes that there are solid arguments to file defenses against such penalty. However, it cannot be assured that we will have a favorable result in the administrative stage. Otherwise, we cannot assure what actions the company would take to defend its rights at court.

 

Additionally, on April 4, 2013, the CNC notified Telecom Personal of an administrative complaint related to a network incident that took place on April 2, 2013, and affected the provision of the services in the City of La Plata, due to the floods resulting from the devastating storm that occurred across the city on that day.

 

Telecom Personal will file its defenses against such penalty procedure, based on the arguments by which such penalties should be released.

 

Telecom Argentina Board of Directors called for the Annual Shareholders’ Meeting

 

Telecom Argentina’s Board of Directors, at their meeting held on March 18, 2013, called a shareholders’ meeting to be held on April 23, 2013, to consider among other issues: (i) the allocation of Telecom Argentina’s non-appropriated retained earnings as of December 31, 2012 as follows: P$153 million to the legal reserve; P$351 million to the constitution of a Special Reserve for implementation of IFRS according to Resolution CNV No. 609/12; P$1,000 million as a Reserve for future dividends in cash; P$1,200 million to the constitution of a voluntary reserve for investments in own shares and P$351 million to a voluntary reserve for future capital expenditures; (ii) The election of directors and alternate directors for a three years term; and (iii) The election of members of the Supervisory Committee for the year 2013 and their appointment.

 

SC Resolution No. 1/13

 

On April 8, 2013, the SC Resolution No. 1/13 was published in the Official Bulletin, establishing that all mobile operators should guarantee the service provision, even in emergencies or catastrophe situations, in which case the normal service provision should be restored in a maximum term of 1 hour. Mobile operators, must, in all cases, prioritize the access to emergency services in the affected areas. Moreover, Resolution No. 1/13 requires that mobile operators present within 45 days a contingency plan that includes, among other things, an equipment replacement system or redundance system in order to assure the service continuity. As of the date of this Annual Report, Personal is analyzing the effects that this new resolution could have in its operations, financial situation and cash flows, as well as the actions that could be taken.

 

Personal Annual Shareholders’ Meeting

 

Personal’s shareholders, at their meeting held on April 10, 2013, approved, in accordance with the requirements established by Resolution No. 593/11 and No. 609/12 (See “Item 8—Financial Information—Dividend Policy” in the Telecom Form 20-F attached as an Exhibit hereto) among other items, the allocation of retained earnings as of December 31, 2012 as follows: (i) the constitution of a Special Reserve for implementation of IFRS according to Resolution CNV No. 609/12 by P$405 million, (ii) the constitution of a voluntary reserve for the finance of working capital and capital expenditures in Argentina by P$233 million and (iii) the allocation of P$1,950 million to the reserve for future cash dividends. The shareholders also approved the delegation of authority in Personal’s Board of Directors to determine the amount, time, terms and conditions to allocate the reserve for future cash dividends and the reserve for the finance of working capital and capital expenditures in Argentina.

 

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Acquisition Financing

 

To finance its acquisition of Telecom, Nortel incurred approximately US$202.4 million of debt (which was fully repaid in 2001) and issued the Series A Preferred Shares with a subscription price of US$713 million and the Series B Preferred Shares with a subscription price of US$433 million. Until their final redemption on June 14, 2012, the Series A Preferred Shares paid a dividend of 6% per annum (“Base Dividend”).

 

In addition, beginning with the Nortel fiscal year commencing on January 1, 1994 and for each fiscal year thereafter for which liquid and realized profits were legally available for distribution after payment of the Base Dividend, holders of Series A Preferred Shares were to receive an additional dividend calculated based on the Distributable Return on Equity (“DROE”) of Telecom Argentina, if the DROE was higher than 10%. The Series A Preferred Shares were scheduled to be redeemed in ten equal annual installments of their subscription price commencing in 1998. The redemption payments were to be made exclusively with funds out of liquid and realized profits and/or distributable reserves. Any redemption payments not declared nor paid by Nortel when due bore interest, at LIBOR, from the due date until the actual payment date.

 

Historically, Nortel’s principal source of cash has been cash dividends paid by Telecom Argentina on the Class A and Class B Shares owned by Nortel. On January 26, 2001 and May 4, 2001, Nortel paid the fourth and fifth installments of the scheduled redemptions of Series A Preferred Shares in a nominal amount at the dates of payment of approximately P$55.1 million and P$14 million, respectively (the latter, corresponding to the proportional amount for the three month period ended December 31, 2000). Because Telecom Argentina did not pay dividends for fiscal years 2001-2008, Nortel was unable to make any dividend payments or pay the required amortization on its Series A Preferred Shares for the fiscal years ended December 31, 2001-2009. Since Telecom Argentina made dividend distributions for the fiscal years ended December 31, 2009 (of approximately P$1,053 million), December 31, 2010 (of approximately P$915 million) and December 31, 2011 (of approximately P$807), Nortel was able to make various dividend, amortization and settlement payments for the fiscal years ended December 31, 2010 (of approximately P$1,016 million) and December 31, 2011 (of approximately P$476), thus paying all accrued and unpaid amortization and dividends on the Series A Preferred Shares and causing the final redemption and cancellation of such shares. In addition, the liquidity obtained from Telecom Argentina’s payment of dividends for the fiscal year ended December 31, 2011 allowed Nortel to make available (i) to the holders of Series B Preferred Shares, a dividend for the year ended December 31, 2011 of approximately P$5.39 million, and (ii) to the holders of shares of common stock, a dividend for the year ended December 31, 2011 of approximately P$5.61 million. On March 18, 2013, Telecom Argentina’s Board of Directors called a shareholders’ meeting to be held on April 23, 2013, to consider among other issues the allocation of Telecom Argentina’s non-appropriated retained earnings as of December 31, 2012. Telecom Argentina’s Board proposed to allocate P$1,000 million as a Reserve for Future Dividends in Cash and to authorize the Board of Directors to approve the reduction of such Reserve for the purpose of distributing dividends in cash. On the same day, Nortel’s Board of Directors called a shareholders’ meeting to be held on April 26, 2013, to consider among other issues the allocation of Nortel’s non-appropriated retained earnings as of December 31, 2012. Nortel’s Board proposed to allocate P$1,466 million as a Voluntary Reserve for the Future Dividends and to authorize the Board of Directors to approve the timing and amounts to be deducted from such Reserve for the purpose of distributing dividends, taking into account Nortel’s future liquidity.

 

Nortel’s failure to pay the Series A dividends due to the lack of liquid and realized profits and/or distributable reserve, triggered the right of the holders of Series A Preferred Shares to exercise their voting rights and to appoint a member of Nortel’s Board of Directors. Nortel’s failure to cause Telecom Argentina to comply with the financial ratio covenant contained in the terms and conditions of the Series A and Series B Preferred Shares also triggered the right of the Series A and Series B shareholders to exercise their voting rights and to appoint a member of Nortel’s Board of Directors. Since December 31, 2006 such ratio no longer exceeded 1.75:1 and as a result, Series B Preferred Shareholders did not have director voting rights in fiscal years 2007-2012 and will not have such rights in 2013. The Series A shareholders retained their right to appoint a member of Nortel’s Board of Directors as a result of the non-payment of the Series A dividends until June 29, 2012, when all accrued Series A dividends were made available by Nortel to the Series A Preferred Shareholders, following the final redemption of the Series A Preferred Shares. On such date, Javier Errecondo and Saturnino Jorge Funes, who had been appointed as Director and Alternate Director, respectively, by a Special Meeting of the Series A Preferred Shareholders on April 7, 2011, ceased to occupy their positions.

 

Pursuant to the Public Emergency Law, the unpaid dividends and outstanding installments for the redemption of Series A preferred shares were “pesified” at the exchange rate of P$1.00 = US$1.00 plus the adjustment coefficient set forth by Decree No. 214/02, also known as “CER.”

 

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Holders of Series B Preferred Shares are entitled to a dividend in an amount equal to 48.96% of the earnings of Nortel legally available for distribution in any fiscal year. Under the Argentine Corporations Law, dividends can be lawfully paid and declared only out of the Company’s realized and liquid profits subject to the decision of the Shareholders’ Meeting. See “See “Item 10—Additional Information—Bylaws and Terms and Conditions of Issuance of Series B Preferred Shares—Nortel’s Capital Stock—Dividends”. Due to the Series A Preferred Shares’ final redemption on June 14, 2012, such dividend is no longer subject to a provision for payments of amounts due to the Series A Preferred Shares. The Series B Preferred Shares are not redeemable.

 

Nortel is unable to predict whether Telecom will be able to make any additional dividend payments. Please see “Item 3—Key Information—Risk Factors” in this Annual Report and in the Telecom Form 20-F attached as an Exhibit hereto.

 

Relationship between Nortel and Telecom

 

As of December 31, 2012, Nortel owns 502,034,299 of Telecom Argentina’s Class A shares of common stock, nominal value P$1.00 per share (the “Series A Shares”), representing 100% of Telecom Argentina’s issued and outstanding Class A Shares and 51% of Telecom Argentina’s total capital stock, and 36,832,408 of Telecom Argentina’s Class B Shares, nominal value P$1.00 per share, representing approximately 7.6% of Telecom Argentina’s issued and outstanding Class B Shares and approximately 3.74% of Telecom Argentina’s total capital stock. Pursuant to the Privatization Regulations and the terms and conditions of the Transfer Agreement, Nortel is required to own all of Telecom Argentina’s Class A Shares unless the Regulatory Bodies otherwise agree. See “Item 4—Information on the Company—Regulatory Framework” in the Telecom Form 20-F included as an exhibit hereto and “Item 7—Major Shareholders and Related Party Transactions.” Nortel is not required by the Privatization Regulations to own any of Telecom Argentina’s Class B Shares.

 

Under Argentine law, by virtue of its majority ownership of the common stock of Telecom Argentina, Nortel has control over substantially all decisions made at Telecom Argentina’s shareholders’ meetings, including decisions relating to capital increases, the proposal and approval of the annual financial statements, the issuance of securities, the allocation of profits and the declaration of dividends.

 

Nortel’s principal shareholder is Sofora Telecomunicaciones S.A., or Sofora. Sofora owns approximately 78.38% of Nortel’s capital stock as of the date of this report. Sofora is 68% owned by the Telecom Italia Group and 32% owned by W de Argentina — Inversiones, a holding company incorporated in the Kingdom of Spain and a company of the Werthein Group. On the Transfer Date, Telecom Italia and Finance Cable et Radio S.A. (“FCR”), a subsidiary of France Telecom S.A., were jointly designated as operators of Telecom Argentina. The Telecom Italia Group was Telecom Argentina’s exclusive operator from December 2003 until October 2010. On October 13, 2010, the SC issued Resolution No. 136/10 which, among other issues, authorized the change of control of Telecom Argentina and Personal resulting from the TI-W Transaction. On the same Resolution, the legal figure of the “Operator” included in the List of Conditions, Decree No. 62/90 as amended, was left without effect with respect to Telecom Argentina. See “Item 7—Major Shareholders and Related Party Transactions—“Telco” and “TI-W” Commitments.”

 

Regulatory Framework

 

The telecommunications industry in Argentina is subject to extensive regulation. For more information on the regulatory framework within which Telecom operates, see “Item 4—Information on the Company—Regulatory Framework” in the Telecom Form 20-F included as an exhibit hereto.

 

DISCLOSURE PURSUANT TO SECTION 219 OF THE IRAN THREAT REDUCTION AND SYRIA HUMAN RIGHTS ACT OF 2012 (ITRSHRA)

 

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act. Section 13(r) requires an issuer to disclose in its annual or quarterly reports filed with the SEC whether the issuer or any of its affiliates has knowingly engaged in certain activities, transactions or dealings with the Government of Iran, relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction during the period covered by the annual or quarterly report. Disclosure is required even when the activities were conducted outside the United States by non-U.S. entities and even when such activities were conducted in compliance with applicable law.

 

In accordance with our Code of Ethics and Conduct, we seek to comply with all applicable laws.

 

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See “Item 4—Information on the Company—Regulatory Framework—Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRSHRA)” in the Telecom Form 20-F attached as an exhibit and incorporated by reference hereto.

 

Capital Expenditures

 

As a holding company, Nortel has no material capital expenditures.

 

The information contained under “Item 4—Information on the Company—Capital Expenditures” in the Telecom Form 20-F included as an exhibit hereto is hereby incorporated herein by reference in partial answer to this section.

 

Property, Plant and Equipment

 

As a holding company, Nortel has no material physical properties.

 

The information contained under “Item 4—Information on the Company—Property, Plant and Equipment” in the Telecom Form 20-F included as an exhibit hereto is hereby incorporated herein by reference in partial answer to this section.

 

ITEM 4A.               UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5.                        OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

You should read the following discussion in conjunction with our Consolidated Financial Statements, including the notes to those financial statements, which appear elsewhere in this Annual Report. Our Consolidated Financial Statements have been prepared in accordance with IFRS. See “Item 3. Key Information—Selected Financial Data.” The following discussion and analysis is presented by the Management of our company and provides a view of our financial condition, operating performance and prospects from Management’s perspective. The strategies and expectations referred to in this discussion are considered forward-looking statements and may be strongly influenced or changed by shifts in market conditions, new initiatives that we implement and other factors. Since much of this discussion is forward-looking, you are urged to review carefully the factors referenced elsewhere in this Annual Report that may have a significant influence on the outcome of such forward-looking statements. We cannot provide assurance that the strategies and expectations referred to in this discussion will come to fruition. Forward-looking statements are based on current plans, estimates and projections, and therefore, you should not place too much reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statements in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond our control. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. Please refer to “Forward-Looking Statements” and “Item 3—Key Information—Risk Factors” for descriptions of some of the factors relevant to this discussion and other forward-looking statements in this Annual Report.

 

Nortel is a holding company whose principal asset is its approximately 54.74% of the common stock of Telecom Argentina. Therefore, the following discussion of Nortel’s financial condition and results of operations should be read in conjunction with Nortel’s Consolidated Financial Statements and notes thereto included elsewhere in this Form 20-F and with Telecom’s consolidated financial statements and notes thereto and “Item 5—Operating and Financial Review and Prospects” included in the Telecom Form 20-F incorporated by reference herein and included as an exhibit hereto. Such financial statements and notes thereto have been prepared in accordance with IFRS.

 

Management Overview

 

The Telecom Group ended the 2012 fiscal year in a solid financial situation as well as with a strong market position. The Telecom Group has continued to expand its Internet accesses base, reaching 1.6 million fixed Internet accesses, and its mobile subscribers base, reaching 21.3 million mobile subscribers (including Personal and Núcleo). To promote the expansion of business total additions in PP&E and intangible assets amounted to P$3,416 million in 2012, representing 15% of consolidated total revenues in 2012.

 

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Telecom is considered one of the leading companies in the Argentine telecommunications sector. The Company has attained this position without neglecting its commitment to generate economic value for its shareholders, demonstrating good performance in terms of revenues and profitability. Telecom Argentina had consolidated net financial assets of P$3,648 million as of December 31, 2012, compared to consolidated net financial assets of P$2,684 million and P$1,224 million as of December 31, 2011 and 2010, respectively. The strong cash flow generation has allowed Personal and Telecom Argentina to maintain the high level of capital expenditures and has allowed Telecom Argentina to pay P$807 million in cash dividends during 2012 without incurring any financial indebtedness.

 

The following discussion and analysis summarizes relevant measures of results of operations presenting items by nature. The Company believes that the presentation of the measure “operating income before depreciation and amortization” provides investors and financial analysts with appropriate information that is relevant to understanding the Company’s past, present and future performance. Moreover, operating income before depreciation and amortization is one of the key performance measures used by Telecom’s Management for monitoring the Company’s profitability and financial position, at each segment and at consolidated levels.

 

Continuing the trend of prior years, revenues in 2012 grew by 20% compared to 2011, reaching P$22,117 million, and grew by 26% in 2011 compared to 2010, reaching P$18,498 million. Operating income before depreciation and amortization in 2012 increased P$577 million as compared to 2011, reaching P$6,570 million (equivalent to 30% of total revenues), while in 2011 it increased P$1,126 million as compared to 2010, reaching P$5,993 million (equivalent to 32% of total revenues). Operating income increased P$109 million in 2012 as compared to 2011, reaching P$3,966 million (equivalent to 18% of total revenues) while in 2011 it increased P$695 million as compared to 2010, reaching P$3,857 million (equivalent to 21% of total revenues). Net income increased P$190 million in 2012 as compared to 2011, reaching P$2,732 million (equivalent to 12% of total revenues), while it increased P$593 million in 2011 as compared to 2010, reaching P$2,542 million (equivalent to 14% of total revenues).

 

Telecom’s results of operations continue to be affected by the Pesification and freeze of regulated rates in the Fixed Services segment and macroeconomic factors. For a discussion of these and other factors that may affect our results of operations. See “—Years ended December 31, 2012, 2011 and 2010—Factors Affecting Results of Operations” and “—Trend Information” below.

 

For a detailed analysis of Telecom’s results of operations for fiscal year 2012, see “—Years ended December 31, 2012, 2011 and 2010” below.

 

Economic and Political Developments in Argentina

 

In the second half of 2001 and through the first half of 2002, Argentina experienced a deep economic recession together with an overwhelming financial and political crisis. The rapid and radical nature of changes in the Argentine social, political, economic and legal environment created a very unstable macroeconomic environment. In January 2002, the Argentine government abandoned the Convertibility regime which had fixed the peso/U.S. dollar exchange rate at 1:1 and adopted emergency economic measures which converted and froze Telecom Argentina’s rates for the voice-regulated services in the Fixed Services segment into pesos at a 1:1 peso/U.S. dollar ratio (referred to herein as “Pesification”), among other measures. Capital outflows increased sharply, leading to a massive devaluation of the peso and an upsurge in inflation. By the end of 2002, the peso had devalued by 237% (having devalued 280% as of June 30, 2002) while the wholesale price index increased 118% and the consumer price index increased 41%.

 

After the abovementioned crisis, the Argentine economy began a new period of rapid growth. Argentina’s GDP increased for six consecutive years, from 2003 to 2008, at an average rate of 8.5%. However, the international financial crisis affected the country decreasing its growth rate significantly to 0.9% in 2009. Throughout 2010 and 2011, the economy showed a rapid and strong recovery growing at a 9.2% and 8.9% annual rate respectively, but in 2012 a slowdown affected the economy. Inflation emerged as a main concern for the economy. According to official statistics reported by the INDEC, the consumer price index rose, 7.7% in 2009, 10.9% in 2010,9.5% in 2011 and 10.8% in 2012, while the wholesale price index increased 10.0% in 2009, 14.6% in 2010,12.7% in 2011 and 13.1% in 2012. Nonetheless, since 2007, the public credibility of the INDEC as a reference for reporting Argentine economic statistics has been challenged. For further detail regarding Argentine economic conditions see “Item 3—Key Information—Risk Factors—Risks relating to Argentina—Inflation could accelerate, causing adverse effects on the economy and negatively impacting Telecom’s margins.”

 

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During the period between 2005 and 2007, the peso remained relatively stable against the U.S. dollar, with US$1.00 trading within a range of P$2.86 to P$3.16. However, the international financial crisis created uncertainty that affected the Argentine exchange rate, as reflected by a peso/dollar exchange rate increase of 9.5% and 10.1% per year in 2008 and 2009, respectively. The peso/dollar exchange rate was relatively stable in 2010 and 2011, ending 2010 at P$3.98 per US$1.00 and 2011 at P$4.30 per US$1.00, increasing 4.7% and 8.0% respectively. In 2012, the pace of peso devaluation accelerated to 14.4% and the official exchange rate ended the year at a P$4.92 per US$1.00. Increasing restrictions on the foreign exchange (“FX”) market has been established, and an authorization from the “AFIP” (National Tax Authority) is now required to access the FX market to acquire foreign currencies. These restrictions intensified the gap between the FX rate and the implicit FX rate, reached through the valuation of securities trading in the local market in pesos and those trading in an external market in other currency.

 

After a vigorous growth in 2010—2011, several factors influenced the slowing in the Argentine economy in 2012. The global economy did not expand as strong as expected, and financial volatility continued at high levels. Locally, key agricultural sectors suffered from a heavy drought, reducing production and Argentine’s exports. Investment levels were hit by import restrictions and by a significant deterioration in the construction sector, mainly due to the increasing restrictions in the FX market, disturbing the normal functioning of the housing market. Private consumption remained positive, although growing at a much slower pace. In the second half of the year, the economy started showing some signs of recovery, ending 2012 with an economic growth of 1.9% over 2011.

 

The most important factors for the economy in 2012 can be summarized as follows:

 

·                  The fiscal and debt difficulties in developed countries continued affecting global growth and financial stability. Particularly, in the euro area, the return to recovery after a protracted contraction is delayed, while developing countries showed a less dynamic level of growth. On the other hand agricultural commodities prices reached high levels, mainly due to climatic problems across the globe, giving support to the already reduced Argentine crop harvest. The Brazilian economy suffered a significant deceleration that reduced imports from Argentine products by 1.2% year-on-year.

 

·                  Private consumption still remained positive and continued moving the demand forward, although slower than previous years, due to lower consumer confidence. Consumption was encouraged mainly by expansive fiscal policies and lax monetary policy that maintained real interest rates at low levels and promoted consumption. On the other hand, investment levels were affected by uncertainties in the access to the FX market and by limitations on equipments and parts purchased from abroad. Inflation remained high and, according to INDEC, the annual inflation as of December 2012 was 10.8%, which is substantially lower than private estimates.

 

·                  Argentine international commerce contracted in 2012, due to lower levels of exports of 3%, amounting to US$ 81.2 billion and reduced imports of 7%, totaling US$68,5 billion. As a result, the trade balance totaled US$12.7 billion increasing 27% over 2011. The strong drought affected agricultural production and its exports, while industrial exports dropped 4% year over year, mainly due to a weaker demand from the Brazilian economy. The imports reduction is due to the lower levels of investments and the decelerated economic growth.

 

·                  Expansive fiscal spending continued through 2012, growing by 31%. Despite efforts to cap public subsidies and transfers to the provinces, the increase on public social spending contributed to record high spending as a percent GDP. Fiscal revenues expanded 30% over 2011, due to a slowing economy and diminished export taxes, which helped to reach the first non-Financial Public Sector deficit in decades, of 4.4 billion pesos or 0.2% of GDP. When public debt services (interests and GDP Warrants) are considered the Fiscal Deficit reached 55.6 billion pesos, close to 2.5% in GDP terms. A significant portion of government revenues were obtained from transfers from the Central Bank and the National Pension Funds.

 

·                  The official exchange rate slightly accelerated through 2012 with depreciation of 14.4%, ending 2012 at P$4.92 per US$1.00 dollar. The BCRA intervened in the exchange market acquiring and selling foreign currency when supply and demand grew strongly, avoiding a nominal appreciation or depreciation and reducing the volatility on the exchange rate. The Government continued implementing measures to increase control over the exchange market, such as the need for prior authorization from the tax authorities (“AFIP”) when acquiring foreign currency in the market. The new restrictions deepened the gap between the official FX rate and the implicit FX rate already mentioned.

 

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·                  Monetary indicators continued to show signs of expansion; the monetary base rose 38% in 2012. This expansion was mainly driven by increasing assistance from the Central Bank to the National Treasury and the Central Bank’s positive net purchases of foreign currencies in the exchange market, part of which were then transferred to the national government to serve service the national debt. Private deposits in pesos rose 41% annually, helped by the growth in time deposits, on the contrary deposits in dollars decreased 35% when compared to the end of 2011. As a result, interest rates on placements (Private Badlar rate) performed at an average rate of 14%. Despite the economic slowdown, loans granted in pesos continued expanding due to the high liquidity of the financial system and BCRA initiatives to foster lending, thus encouraging private consumption. Finally, international reserves totaled 43,292 million dollars as of December 31, 2012, showing a 7% year over year decrease.

 

·                  The labor market was relatively stable despite a slowing economy, reaching an unemployment rate of 6.9% in the final quarter of 2012, a small increase from the same quarter a year ago. Furthermore, salaries in nominal terms expanded 24.5% annually, as of December 2012.

 

·                  According to public figures, the Gross National Public Debt amounted to US$183 billion as of June 2012, which represented approximately 41.5% of Argentina’s GDP, not including those securities that were eligible for, but not tendered in 2005 and 2010 Debt Exchanges of its 2002 defaulted debt. The holdouts situation has not been resolved and is subject to continued litigation, which is disturbing the normal access to the international financial markets and impacting sovereign risk. Nonetheless, Argentina holds a solid position in terms of public indebtedness; its level of debt to GDP is relatively low, and a significant amount is held by National Public Sector Agencies (54.9% of the total National Debt) like ANSES. As a result, the portion of public debt exposed to “market risk” represents nearly one third of the total debt.

 

The Argentine economy faced many changes in 2012 and showed a strong deceleration that had an impact on the telecommunication sector. An improved scenario is expected for 2013, hopefully aided by the recovery of the agricultural production and the Brazilian economy.

 

Because the substantial majority of Telecom’s property and operations are located in Argentina, macroeconomic and political conditions in Argentina will continue to affect them. The Argentine government has exercised and continues to exercise significant influence over many aspects of the Argentine economy. Accordingly, Argentine governmental actions concerning the economy could significantly affect private sector entities in general and Telecom’s operations in particular, as well as affect market conditions, prices and returns on Argentine securities, including ours. While Telecom’s business continued growing in 2012, its operating results, financial condition and cash flows remain vulnerable to fluctuations in the Argentine economy. See “Item 3—Key Information—Risk Factors—Risks relating to Argentina”.

 

Critical Accounting Policies

 

Our Consolidated Financial Statements, prepared in accordance with IFRS, are dependent upon and sensitive to accounting methods, assumptions and estimates that we use as a basis for its preparation. We have identified critical accounting estimates and related assumptions and uncertainties inherent in our accounting policies (that are fully described in Note 3 to our Consolidated Financial Statements), which we believe are essential to an understanding of the underlying financial reporting risks. Additionally we have identified the effect that these accounting estimates, assumptions and uncertainties have on our Consolidated Financial Statements.

 

Use of estimates

 

IFRS involves the use of assumptions and estimates that may significantly affect the reported amounts of assets, liabilities and results of operations and any accompanying financial information.

 

Management considers financial projections in the preparation of the financial statements as further described below. These financial projections anticipate scenarios deemed both likely and conservative based upon macroeconomic, financial and industry-specific assumptions. However, actual results may differ significantly from such estimates.

 

Variations in the assumptions regarding exchange rates, rates of inflation, level of economic activity and consumption, creditworthiness of our current and potential customers, aggressiveness of our current or potential competitors and technological, legal or regulatory changes could also result in significant differences from financial projections used by us for valuation and disclosure of items under IFRS.

 

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The most important accounting estimates, those which require a high degree of subjective assumptions and judgments, are the following:

 

Revenue recognition

 

Revenues are recognized to the extent that it is probable that economic benefits will flow to the Telecom Group and their amount can be measured reliably. Revenues are stated net of estimated discounts and returns.

 

Revenues from upfront connection fees for fixed, data and Internet services that are non-separable from the service are accounted for as a single transaction and deferred over the term of the contract or, in the case of indefinite period contracts, over the average period of the customer relationship (approximately nine years for the fixed telephony customers). Therefore, these revenues are influenced by the estimated expected duration of customer relationships for indefinite period contracts.

 

Revenues are also subject to estimations of the traffic measures. Unbilled revenues from the billing cycle dating to the end of each month are calculated based on the traffic and are accrued at the end of the month. In addition, revenues from unexpired prepaid calling cards are recognized on the basis of the minutes used, at the contract price per minute.

 

Changes in these estimations, if any, may require adjustments to recorded revenues.

 

PP&E and intangible assets

 

Useful lives and residual value

 

Telecom records PP&E and intangible assets at acquisition or construction cost. PP&E and intangible assets, except for indefinite useful life intangibles, are depreciated or amortized on a straight-line basis over their estimated useful lives. The determination of the depreciable amount of the assets and their useful lives involves significant judgment. Telecom periodically reviews, at least at each financial year-end, the estimated useful lives of its PP&E and amortizable intangible assets.

 

Recoverability assessment of PP&E and intangible assets with finite useful life

 

At least at every annual closing date, Telecom assesses, whenever events or changes in circumstances indicate that PP&E and amortizable intangible assets may be impaired.

 

Under IFRS, the carrying value of a long-lived asset is considered impaired by Telecom when the recoverable amount of such asset is lower than its carrying value. In such event, a loss would be recognized based on the amount by which the carrying value exceeds the recoverable amount of the long-lived asset. The recoverable amount is the higher of the fair value (less costs to sell) and its value in use (present value of the future cash flows expected to be derived from the asset, group of assets or cash generating unit). Once an impairment loss is identified and recognized, future reversal of impairment loss is permitted only if the indicators of the impairment no longer exist or have decreased.

 

The identification of impairment indicators and the estimation of the value in use for assets (or groups of assets or cash generating units) require Management to make significant judgments concerning the validation of impairment indicators, expected cash flows and applicable discount rates. Estimated cash flows are based on significant Management’s assumptions about the key factors that could affect future business performance such as the future market share, competition level, capital expenditures, salary increases, foreign exchange rates evolution, capital structure, capital cost, etc.

 

For the years presented, Telecom estimated that there are no indicators of impairment of assets that are subject to amortization.

 

However, changes in our current expectations and operating assumptions, including changes in our business strategy, technology, competition, changes in market conditions or regulations, and the outcome of the rates negotiations for regulated fixed services with the Argentine government, could significantly impact these judgments and could require future adjustments to the carrying amount of recorded assets.

 

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Intangible assets with indefinite useful life—PCS license

 

Telecom determined that Personal’s PCS license met the definition of an indefinite-lived intangible asset for the years presented. Therefore, Personal does not amortize the cost of its license. However, Personal tests it annually for impairment. An impairment loss is recognized when the carrying amount exceeds the recoverable amount. The recoverability assessment of an indefinite-lived intangible asset such as the PCS license requires Telecom’s Management to make assumptions about the future cash flows expected to be derived from such asset.

 

Such estimated cash flows are based on significant Management’s assumptions about the key factors that could affect future business performance such as the future market share, competition level, capital expenditures, salary increases, foreign exchange rates evolution, capital structure, discount rate, etc.

 

Personal’s net cash flows projection is denominated in Argentine pesos, its functional currency. However, due to the fact that there is no prevailing long-term discount rate in Pesos available in the market, Personal: (a) has converted such peso-denominated cash flows into U.S. dollars using future estimated exchange rates applicable to each period; and (b) has discounted these U.S. dollar-denominated cash flows at an annual U.S. dollar rate of approximately 14% in order to obtain the recoverable value of intangible assets with indefinite useful life. Future cash flows estimates are based on Management’s projections for a period not to exceed five years and then taken to perpetuity assuming a growth rate of 2% per annum.

 

Through this evaluation, it was determined that the carrying amount of the PCS license did not exceed the recoverable amount of the asset. As a result, no impairment has been recognized.

 

Our judgments regarding future cash flows may change due to future market conditions, competition, business strategy, the evolution of technology, changes in regulations and other factors. These changes, if any, may require material adjustments to the carrying amount of the PCS license.

 

Income Taxes and Recoverability assessment of deferred income tax assets

 

We are required to estimate our income taxes (current and deferred) in each of the companies of the Telecom Group according to a reasonable interpretation of the tax law in effect in each jurisdiction where the companies operate. This process may involve complex estimates to determine taxable income and deductible and taxable temporary differences between the carrying amounts and the taxable amounts. In particular, deferred tax assets are recognized for all deductible temporary differences to the extent that future taxable income will be available against which they can be utilized. The measurement of the recoverability of deferred tax assets requires estimating future taxable income based on Telecom’s projections and takes into account conservative tax planning. If actual results differ from these estimates due to changes in tax authority’s interpretations and the new fiscal jurisprudence, or we adjust those estimates in future periods, our financial position, results of operation and cash flows may be materially affected.

 

The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law as of the end of the reporting period and the effects of future changes in tax laws or rates are not anticipated.

 

Receivables and payables valued at amortized cost

 

Receivables and payables valued at amortized cost are initially recorded at their fair value, which is generally determined by using a discounted cash flow valuation method. The fair value under this method is estimated as the present value of all future cash flows discounted using an estimated discount rate, especially for long-term receivables and payables. The estimated discount rate used to determine the discounted cash flow of long-term receivables and payables is an annual rate in pesos ranging between 19% and 28% for years 2012 and 2011. Additionally, an annual U.S. dollar rate of approximately 8% was used for discounting long-term receivables denominated in U.S. dollars during 2012 and 2011. The difference between the initial fair value and the nominal amount of receivables and payables is recognized as finance income or expense using the effective interest method over the relevant period.

 

Changes in these estimated discount rates could materially affect our financial position and results of operations.

 

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Provisions

 

Telecom is subject to proceedings, lawsuits and other claims related to labor, civil, tax, regulatory and other matters. In order to determine the proper level of provisions relating to these contingencies, Telecom assesses the likelihood of any adverse judgments or outcomes related to these matters as well as the range of probable losses that may result from the potential outcomes. Telecom consults with internal and external legal counsel on these matters. A determination of the amount of provisions required, if any, is made after careful analysis of each individual issue. Telecom’s determination of the required provisions may change in the future due to new developments in each matter, changes in jurisprudential precedents and tribunal decisions or changes in Telecom’s method of resolving such matters, such as changes in settlement strategy, and, therefore, these changes may materially affect our financial position and results of operations.

 

Allowance for Doubtful Accounts

 

Telecom maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make the required payments. Telecom bases its estimates on the aging of its accounts receivable balances, its historical write-offs, customer creditworthiness and changes in its customer payment terms when evaluating the adequacy of its allowance for doubtful accounts. If the financial condition of Telecom’s customers were to deteriorate, Telecom’s actual write-offs could be higher than expected.

 

(a) Consolidated

 

As discussed above, Nortel is a holding company whose principal asset is its approximately 54.74% of the common stock of Telecom Argentina. Therefore, the following discussion of Nortel’s consolidated financial condition and results of operations should be read in conjunction with the immediately following discussion set forth herein under Section (b) of this Item 5 and with Nortel’s Consolidated Financial Statements and notes thereto included elsewhere in this Form 20-F and with Telecom’s Consolidated Financial Statements and notes thereto and “Item 5—Operating and Financial Review and Prospects” included in the Telecom Form 20-F incorporated herein by reference and included as an exhibit hereto. Such financial statements and notes thereto have been prepared in accordance with IFRS.

 

Years ended December 31, 2012, 2011 and 2010

 

For purposes of these sections, the fiscal years ended December 31, 2012, 2011 and 2010 are called “2012,” “2011” and “2010,” respectively.

 

Our results of operations, (which include Telecom’s results of operations) are determined in accordance with IFRS. The Telecom Group provides customers with a broad range of telecommunication services. To fulfill its purpose, it conducts different activities that are distributed among the companies in the Group. Each company represents an operating segment. These operating segments have been aggregated into the following segments according to the nature of the products and services provided and economic characteristics:

 

Segment

 

Company of the Telecom Group / Operating Segment

Fixed Services

 

Telecom Argentina S.A.

Telecom Argentina USA, Inc.

Micro Sistemas S.A. (i)

Personal Mobile Services

 

Telecom Personal S.A.

Springville S.A. (i)

Núcleo Mobile Services

 

Núcleo S.A.

 


(i)    Dormant entity at December 31, 2012.

 

The main products and services in each segment are:

 

·                  Fixed Services: local area, national long-distance and international communications, supplementary services (including call waiting, itemized invoicing, voicemail, etc.), interconnection with other operators, data transmission (including private networks, point-to-point traffic, radio and TV signal transmission), Internet services (Broadband and Arnet Mobile), IT solution outsourcing and sales of equipment.

 

·                  Personal Mobile Services and Núcleo Mobile Services: voice communications, GSM and 3G mobile communications over UMTS / HSPA / HSPA+ networks (including high-speed mobile Internet content and

 

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applications download, multimedia messaging, online streaming, corporate e-mail, social network access and contacts save services) and sale of mobile communication devices (handsets, 3G modems and tablets).

 

The following table shows a breakdown of Telecom’s revenues by business segment for the year ended December 31, 2012:

 

Segment

 

Revenues (1)
(P$ millions)

 

Percentage of
Consolidated Revenues

 

 

 

 

 

 

 

Fixed Services

 

6,023

 

27.2

 

Personal Mobile Services

 

15,227

 

68.9

 

Núcleo Mobile Services

 

867

 

3.9

 

TOTAL

 

22,117

 

100.0

 

 


(1)      Includes service revenues and equipment sales and the effect of elimination of intersegment transactions.

 

Management’s explanations under “(B) Results of Operations by Segment” below regarding changes in financial condition and results of operations for years 2012, 2011 and 2010 related to segments of the Company have been provided based on financial information under IFRS as disclosed in Note 28 to our Consolidated Financial Statements. For the year 2011, the General Manager assessed the operating segments performance both under Argentine GAAP and IFRS. During the year 2010, the financial information provided to the General Manager was based on Argentine GAAP. However, we believe that Management discussion based on IFRS for years 2011 and 2010 provides a more useful and easier understanding of the Company’s business and represents the measurement principles most consistent with those used in measuring the corresponding amounts in our Consolidated Financial Statements.

 

Factors Affecting Results of Operations

 

Described below are certain factors that may be helpful in understanding our operating results. These factors are based on the information currently available to our Management and may not represent all of the factors that are relevant to an understanding of our current or future results of operations. Additional information regarding trends expected to influence Telecom’s results of operations are analyzed under “Item 5—Operating and Financial Review and Prospects—Trend Information” in the Telecom Argentina Form 20-F incorporated herein by reference.

 

Impact of Political and Economic Environment in Argentina. Levels of economic activity affect Telecom Argentina’s customers’ consumption of local and long-distance traffic, the demand for new fixed lines, Broadband and mobile services and the levels of uncollectible accounts and disconnections. Demand for Telecom’s services and the amount of revenues it collects is also affected by inflation, exchange rate variations and the rate of unemployment, among others. The same factors, but to a lesser degree, affect the activity of Núcleo, that operates in Paraguay.

 

Rate Regulation. Revenue from Telecom’s Fixed Services segment will depend principally on the number of lines in service, the minutes of use or “traffic” for local and long-distance services and the rates charged for services. The rates that Telecom Argentina charges in its fixed telephony service (including both monthly basic charges and measured service charges), installation charges, public telephone charges and charges for Internet Dial-Up traffic (“Regulated Services”) are subject to regulation. These rates were pesified and rate increases were frozen by the Argentine government in 2002. Telecom Argentina has been in discussions with regulators with respect to rate adjustments and, on March 6, 2006, Telecom Argentina signed the Letter of Understanding 2006 with the Argentine government which permits Telecom Argentina to raise certain of its regulated rates. However, the agreement is still subject to the implementation of certain administrative steps and the pending approval by the legislative branch. Although Telecom’s Management expects that the contract renegotiation process will be satisfactorily completed, to date there is no certainty regarding either the outcome of the negotiations or the timing of such outcome. The impact of the rates Pesification on Telecom Argentina’s results of operations has been particularly relevant in recent years as a result of inflationary pressures on Telecom Argentina’s costs structure. See “Item 3—Key Information—Risk Factors” and “—Economic and Political Developments in Argentina.”

 

The mobile business is not a rate-regulated industry. However, certain social or political factors could negatively affect rate adjustments, thus delaying their application to set-off the cost increases and higher capital expenditures that are required to maintain the quality of services. See “Item 3—Key Information—Risk Factors—Risks associated with Telecom and its operations.”

 

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Competition. The Argentine telecommunications market has become increasingly competitive. Competition is mainly focused on fixed services for large customers, small enterprises and government, Internet and mobile services. To remain competitive, we must devote significant resources to capital expenditures, subscriber acquisitions costs and trade expenses (including advertising and selling commissions).

 

Personal and Núcleo subscribers bases are expected to continue expanding in 2013 although at more moderate rates than those of recent years, especially in Broadband and mobile Internet subscribers. Telecom aims to obtain high-value mobile subscribers and encourage consumption through the launch of new products and services. Value Added Services will continue to be one of the main drivers of revenue growth in the mobile services business.

 

Also, competition has increased as a result of the implementation of the Number Portability Regulation in March 2012, which also resulted in higher subscriber retention costs.

 

Technology Developments and Capital Expenditures. Improvements in technology influence demand for services and equipment by Telecom’s customers. For example, demand for fixed-line telecommunications services has been affected by continued significant growth in mobile business. Growth in the fixed services business at present is being driven by the expansion of Broadband for individuals and corporations and our continuous updating of commercial and support systems. The increase in Broadband adoption has also proven to be a critical factor in facilitating the offering of Value Added Services to customers and the bundling of services. In the fixed-services business, Telecom must invest in its fixed-line network and information technology. Specifically, in Internet services, it must constantly upgrade its access technology and software, embrace emerging transmission technologies and improve the responsiveness, functionality, coverage and features of its services.

 

In the mobile business, to provide its subscribers with new and better services, Personal has to enhance its mobile networks by expanding the network infrastructure and extending 3G and HSPA+ technology and bandwidth for mobile data transmission.

 

In addition, as new technologies develop, equipment may need to be replaced or upgraded and network facilities (in particular, mobile and Internet network facilities) may need to be rebuilt in whole or in part, at substantial cost, to remain competitive. These enhancements and the implementation of new technologies will continue requiring increased capital expenditures.

 

Devaluation of the peso. The peso has been subject to significant devaluations in the past. The majority of our revenues are received in pesos whereas a portion of the materials and supplies related to the construction and maintenance of our networks and services are incurred in foreign currencies. Consequently, the Pesification of our regulated rates in the fixed services and the high level of competition limits our ability to transfer to our customers the fluctuations in the exchange rates between the peso and the U.S. dollar and other currencies. In addition, any devaluation of the peso against foreign currencies may increase operating costs and capital expenditures, which will adversely affect our results of operations, considering the net effect on revenues and costs.

 

Increase in inflation. In the past, Argentina has experienced periods of high inflation. In recent years, inflation levels have been increasing and have remained relatively high. The economic recovery, a higher increase in public spending or a fast devaluation of the Argentine peso could lead to higher inflation. Any increase in inflation levels not accompanied by an increase in the rates we charge our customers could adversely affect our results of operations in nominal and real terms.

 

Tax pressures and litigation. Local municipalities in the regions where Telecom operates have introduced regulations and proposed various taxes and fees for the installation of infrastructure, equipment and expansion of fixed-line and mobile networks. Local and federal tax authorities have brought an increasing number of claims against Telecom. Telecom disagrees with these proceedings and is contesting them. Also, jurisprudential changes in labor and pension matters have generated higher claims from employees and former employees and also increased claims from employees of a contractor or subcontractor alleging joint liability. We cannot assure you that the laws and regulations currently governing the economy or the telecommunications industry will not change, that the claims will be resolved in Telecom’s favor, or that any changes to the existing laws and regulations will not adversely affect Telecom’s and our business, financial condition, results of operations and cash flows as well.

 

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(A)  Consolidated Results of Operations

 

In the year ended December 31, 2012, we reported net income of P$2,675 million, compared to net income of P$2,439 million for the year ended December 31, 2011, and net income of P$1,785 million for the year ended December 31, 2010.

 

Consolidated revenues in 2012 were P$22,117 million compared to P$18,498 million in 2011 and P$14,627 million in 2010. The increase of P$3,619 million in 2012 (a 20% increase) can be largely attributed to the growth in the Personal Mobile Services segment and in Internet services included in the Fixed Services segment.

 

In 2012, operating expenses (including depreciation and amortization) totaled P$18,252 million, representing an increase of P$3,535 million, or 24%. The most significant changes in operating expenses included increases in employee benefit expenses and severance payments, taxes and fees with the Regulatory Authority (mainly caused by the increase in revenues), cost of equipments and handsets (due to an expansion of the subscriber base and customer upgrade of mobile handsets), commissions (as a result of the increase in prepaid subscriber base), energy fees, restructuration costs and in fees for services, maintenance, materials and supplies (attributable to increased service costs related to call centers, and the effect of inflation on prices).

 

In 2011, operating expenses (including depreciation and amortization) totaled P$14,717 million, representing an increase of P$3,211 million, or 28% compared to 2010. The most significant changes in operating expenses included increases in employee benefit expenses and severance payments, taxes and fees with the Regulatory Authority (mainly caused by the increase in revenues), cost of equipments and handsets (due to an expansion of the subscriber base and customer upgrade of mobile handsets), commissions, advertising (mainly as a result of Personal’s rebranding and other promotional campaigns) and in fees for services, maintenance, materials and supplies (attributable to increased service costs related to call centers, higher supplies consumption and the effect of inflation on prices).

 

Our fixed telephony service (10% of the consolidated revenue in 2012 vs. 12 % in 2011) is still affected by the Pesification and freezing of regulated rates in early 2002; as a result, the increase in the 2012 structure of operating expenses for the Fixed Services segment (18%) is higher than the increase in revenues (14%).

 

Since fiscal year 2012, the Company’s Management has changed the calculating method of the Operating income before Depreciation and Amortization by not considering within it the “Gain on disposal of PP&E” previously disclosed within the line “Revenues and other income” and from this fiscal year are shown below Operating income before Depreciation and Amortization, as part of Operating income. Accordingly, comparative figures for years ended December 31, 2011 and 2010 have been adapted in the consolidated income statements.

 

(A.1)  2012 Compared to 2011

 

 

 

 

 

 

 

 

 

Change by segment (1)

 

 

 

Years Ended December 31,

 

 

 

Fixed

 

Personal
Mobile

 

Núcleo
Mobile

 

 

 

 

 

2012

 

2011

 

Total Change

 

Services

 

Services

 

Services

 

Nortel

 

 

 

(P$ millions)

 

%

 

(P$ millions)

 

Revenues

 

22,117

 

18,498

 

20

 

3,619

 

694

 

2,772

 

153

 

 

Other income

 

79

 

30

 

163

 

49

 

55

 

(6

)

 

 

Operating expenses (without depreciation and amortization)

 

(15,640

)

(12,559

)

25

 

(3,081

)

(860

)

(2,146

)

(85

)

10

 

Operating income before depreciation and amortization (2)

 

6,556

 

5,969

 

10

 

587

 

(111

)

620

 

68

 

10

 

Depreciation and amortization

 

(2,612

)

(2,158

)

21

 

(454

)

(111

)

(336

)

(7

)

 

Gain on disposal of PP&E

 

8

 

22

 

(64

)

(14

)

(13

)

(1

)

 

 

Operating income

 

3,952

 

3,833

 

3

 

119

 

(235

)

283

 

61

 

10

 

Financial results, net

 

187

 

 

n/a.

 

187

 

83

 

64

 

2

 

38

 

Income tax expense

 

(1,464

)

(1,394

)

5

 

(70

)

5

 

(67

)

(6

)

(2

)

Net income

 

2,675

 

2,439

 

10

 

236

 

(147

)

280

 

57

 

46

 

 

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Change by segment (1)

 

 

 

Years Ended December 31,

 

 

 

Fixed

 

Personal
Mobile

 

Núcleo
Mobile

 

 

 

 

 

2012

 

2011

 

Total Change

 

Services

 

Services

 

Services

 

Nortel

 

Net income attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nortel (Controlling Company)

 

1,413

 

1,273

 

11

 

140

 

 

 

 

 

 

 

 

 

Non-controlling interest

 

1,262

 

1,166

 

8

 

96

 

 

 

 

 

 

 

 

 

 


(1)         Includes the effect of eliminations of Intersegment transactions.

 

(2)         Although it is not specifically defined, this is a permitted measure under IFRS. See “Management Overview” for a discussion of the use of this measure.

 

Revenues

 

During 2012, total consolidated revenues increased by 20% to P$22,117 million from P$18,498 million in 2011, mainly driven by our mobile, Broadband and data transmission businesses.

 

Consolidated revenues for 2012 and 2011 are comprised as follows:

 

 

 

 

 

 

 

 

 

Change by segment (1)

 

 

 

Years Ended December 31,

 

 

 

Fixed

 

Personal
Mobile

 

Núcleo
Mobile

 

 

 

2012

 

2011

 

Total Change

 

Services

 

Services

 

Services

 

 

 

(P$ millions)

 

%

 

(P$ millions)

 

Voice

 

9,927

 

9,184

 

8

 

743

 

110

 

572

 

61

 

Data

 

6,767

 

5,316

 

27

 

1,451

 

152

 

1,283

 

16

 

Internet

 

3,395

 

2,411

 

41

 

984

 

440

 

474

 

70

 

Service Revenues

 

20,089

 

16,911

 

19

 

3,178

 

702

 

2,329

 

147

 

Equipment (2)

 

2,028

 

1,587

 

28

 

441

 

(8

)

443

 

6

 

Revenues

 

22,117

 

18,498

 

20

 

3,619

 

694

 

2,772

 

153

 

 


(1)         Net of the Intersegment revenues effect.

 

(2)         This item is composed of voice, data and Internet equipment in each year.

 

Voice

 

Revenues from voice services increased 8% to P$9,927 million in 2012 from P$9,184 million in 2011. Such increase is largely due to a growth in the mobile subscriber base, as well as an increase in the prices of our services in the Personal Mobile Services segment. Revenues from voice services represented 45% of our total consolidated revenues for 2012 compared to 50% of our total consolidated revenues s for 2011.

 

Fixed services

 

Revenues from voice services represented 53% of our total Fixed Services segment revenues attributable to third parties for 2012 compared to 58% of our total segment revenues for 2011.

 

Voice services mainly include revenues from monthly basic charges, charges for supplementary services, measured service (national and international calls) and public telephone service. Charges for supplementary services include call waiting, call forwarding, three-way calling, caller ID, direct inwards dialing, toll-free service and voicemail, among others. Measured service charges are based on the number and duration of calls. Measured service revenues depend on the number of lines in service, the volume of usage, the number of new lines installed and applicable rates. Most of our customers are billed monthly. They also include interconnection services (which primarily include access, termination and long-distance transport of calls), international long-distance service (which reflect payments made under bilateral agreements between the Company and foreign telecommunications carriers covering inbound international long-distance calls) and revenues related to billing and collection services charged to other operators.

 

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Revenues from voice retail increased 5% to P$2,475 million and are still affected by the Pesification and freezing of regulated rates in early 2002. Revenues from regulated rate services represented 36% of our total segment revenues in 2012 compared with a 41% in 2011. See “(B) Results of Operations by Segment—(B.1) Fixed Services Segment—Revenues—Voice — retail” for a description of the services included as voice retail.

 

Monthly basic charges increased P$75 million or 8% to P$1,032 million in 2012 from P$957 million in 2011. Such growth was due to the increase of non-regulated services during the period.

 

Measured service charges for supplementary services increased 5% to P$1,306 million in 2012 from P$1,242 million in 2011. Such increase was due to the effect of the flat rate packs. In relative terms, revenues from local measured service increased 6% vs. 2011 and domestic long distance increased 5% vs. 2011.

 

Voice wholesale revenues (including fixed and mobile interconnection revenues, together with the revenues generated by the subsidiary Telecom USA amounting to $43) amounted to $739 (-1% vs. 2011).

 

Interconnection services decreased 2% to P$516 million in 2012 from P$525 million in 2011. Other wholesale revenues reached P$223 million in 2012 and P$222 million in 2011.

 

Personal Mobile services

 

Revenues from voice services represented 41% of our total Personal Mobile Services segment revenues attributable to third parties for 2012 compared to 46% for 2011.

 

Voice services mainly include revenues from monthly basic charges, airtime usage charges and roaming charges to our customers for their use of our and other carriers’ networks, CPP, TLRD and roaming charges to other mobile service providers whose customers use our network.

 

Voice retail revenues reached P$4,461 million in 2012 (+11% vs. 2011). The increase was mainly due to increase in prices and an increase in the subscriber base.

 

Voice wholesale revenues reached P$1,838 million in 2012 (+6% vs. 2011). The increase was mainly due to higher traffic with mobile operators (TLRD) and an increase in roaming revenues, also due to higher traffic.

 

In Núcleo Mobile Services segment, voice revenues increased 17% to P$414 million in 2012 compared to P$353 million in 2011 mainly due to an increase in the subscriber base.

 

Data and Internet

 

Revenues from data and Internet services increased 32% to P$10,162 million in 2012 from P$7,727 million in 2011. Revenues from data and Internet represented 46% of our total consolidated revenues for 2012 compared to 42% of our total consolidated revenues for 2011.

 

Internet revenues in the Fixed segment increased 28% to P$1,993 million in 2012 from P$1,553 million in 2011. The increase was mainly due to the substantial expansion of the Broadband service (+5% of customers vs. 2011), an increase in average prices resulting in an improvement in the Average Monthly Revenue per User (“ARPU”) amounted to P$102.3 in 2012 vs. P$87 in 2011. As of December 31, 2012, the number of Internet accesses reached approximately 1,629,000 equivalent to 39% of fixed lines in service of Telecom Argentina (vs. 37% in 2011), compared to 1,550,000 as of December 31, 2011, increasing by 5%.

 

Revenues from data services in the Fixed segment increased 26% to P$735 million in 2012 from P$583 million in 2011, where the focus was to strengthen Telecom Argentina’s position as an integrated TICs provider (Datacenter, VPN, among others) for wholesale and government segments. The increase was mainly due to an increase in virtual private network services (private data network services replacing the point-to-point service) leases of circuits, dedicated lines and the growth in data center services. The majority of our revenues from data transmission services is denominated in U.S. dollars and, consequently, in 2012 and 2011, was affected by the fluctuations in the exchange rate between the peso and the U.S. dollar resulting in an increase in data transmission revenues.

 

In the Mobile Services segments, data and Internet services mainly include SMS, MMS, GPRS and Internet. Revenues from data and Internet in the Personal Mobile segment increased 33% to P$7,013 million in 2012 from P$5,256 million in 2011.

 

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Mobile data revenues reached $5.765 (29% vs. 2011). This increase is mainly due to the SMS traffic performance, related to the increase in the subscriber base and higher prices of this service, both in prepaid or postpaid customers.

 

As a consequence of the voice traffic increase, the usage of VAS (Internet and data) and the prices increase implemented in 2012, the ARPU increased to P$57.7 in 2012 (vs. P$51.4 in 2011).

 

Mobile Internet revenues in the Personal Mobile segment increased 61% to P$1,248 million in 2012 from P$774 million in 2011. Such increases were mainly due to an increase in the subscriber base.

 

Equipment

 

Revenues from equipment increased by 28% to P$2,028 million in 2012 from P$1,587 million in 2011. This increase is mainly related to the Personal Mobile services segment in the retail business with an increase of $443 vs. 2011 and was due to a mix between the increase in the average price of the handsets of 34% and the decrease of 5% in the handsets sold.

 

Other Income

 

Other income mainly includes penalties collected from suppliers, as a result of delays in deliveries of goods or matters related to the quality of the services provided. During 2012, other income increased 163% to P$79 million from P$30 million, mainly due to an increase in penalties collected from suppliers.

 

Operating expenses (without depreciation and amortization)

 

Total operating expenses increased by P$3,081 million totaling P$15,640 million in 2012, representing a 25% increase as compared to 2011. The increase was mainly due to increases in employee benefit expenses and severance payments, fees for services, maintenance, materials and supplies, taxes and fees with the Regulatory Authority, commissions, energy fees, restructuring costs and cost of equipments and handsets.

 

 

 

 

 

 

 

 

 

Change by segment (1)

 

 

 

Years Ended
December 31,

 

 

 

Fixed

 

Personal
Mobile

 

Núcleo
Mobile

 

 

 

 

 

2012

 

2011

 

Total Change

 

Services

 

Services

 

Services

 

Nortel

 

 

 

(P$ millions)

 

%

 

(P$ millions)

 

Employee benefit expenses and severance payments

 

3,276

 

2,615

 

25

 

661

 

431

 

220

 

9

 

1

 

Interconnection costs and other telecommunications charges

 

1,707

 

1,497

 

14

 

210

 

(5

)

199

 

16

 

 

Fees for services, maintenance, materials and supplies

 

2,114

 

1,723

 

23

 

391

 

135

 

245

 

10

 

1

 

Taxes and fees with the Regulatory Authority

 

2,019

 

1,607

 

26

 

412

 

82

 

337

 

4

 

(11

)

Commissions

 

1,949

 

1,515

 

29

 

434

 

30

 

396

 

8

 

 

Cost of equipments and handsets

 

2,043

 

1,640

 

25

 

403

 

(15

)

396

 

22

 

 

Advertising

 

660

 

599

 

10

 

61

 

17

 

36

 

8

 

 

Provisions

 

153

 

225

 

(32

)

(72

)

(75

)

4

 

(1

)

 

Bad-debt expense

 

275

 

169

 

63

 

106

 

28

 

77

 

1

 

 

Restructuring Costs

 

90

 

 

n/a

 

90

 

83

 

7

 

 

 

Other operating expenses

 

1,354

 

969

 

40

 

385

 

149

 

229

 

8

 

(1

)

Total operating expenses (without depreciation and amortization)

 

15,640

 

12,559

 

25

 

3,081

 

860

 

2,146

 

85

 

(10

)

 


(1)         Net of the Intersegment transactions effect.

 

Employee benefit expenses and severance payments

 

During 2012, employee benefit expenses and severance payments were P$3,276 million, representing a 25% increase from 2011. This was primarily due to salary increases that Telecom implemented across all segments and the increase in Telecom’s headcount. In the Fixed Services segment, the increases were mainly due to salary

 

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increases and severance payments and termination benefits, as a result of an increase in the number of employees who retired or were dismissed. In the Personal Mobile Services segment there was a 9% increase in the number of employees (from 4,820 employees in 2011 to 5,254 employees in 2012).

 

With a total headcount of 16,808 at the end of 2012 (+3% vs. 2011), lines in service per employee reached 371 in the Fixed Services segment (slightly lower to 2011), 3,612 in the Personal mobile services segment (-4% vs. 2011) and 5,226 in the Núcleo mobile services segment (+6% vs. 2011).

 

Interconnection costs and other telecommunications charges

 

Interconnection costs and other telecommunications charges includes interconnection costs, lease of circuits and costs of international outbound calls, which reflect payments made under bilateral agreements between Telecom Argentina and international carriers in connection with outgoing calls made by our customers. Additionally, the cost of roaming and TLRD is included in the Mobile Services segments. In 2012, interconnection costs and other telecommunications charges amounted to P$1,707 million compared with P$1,497 million in 2011. The increase was mainly due to higher traffic volume.

 

Fees for services, maintenance, materials and supplies

 

Expenses related to fees for services, maintenance, materials and supplies increased 23% to P$2,114 million in 2012 from P$1,723 million in 2011. This increase was mainly due to higher maintenance costs across all segments, and to higher fees for services related to call centers (a P$173 million increase from 2011 to 2012).

 

Taxes and fees with the Regulatory Authority

 

Taxes and fees with the Regulatory Authority (including turnover tax, IDC, municipal and other taxes) increased 26% to P$2,019 million in 2012 from P$1,607 million in 2011, mainly due to charges of turnover tax (P$221 million increase from 2011 to 2012) as a result of the increase in revenues during 2012 and from taxes with the Regulatory Authority (an increase of P$92 million from 2011).

 

Commissions

 

Commissions increased by P$434 million, or 29%, to P$1,949 million in 2012 from P$1,515million in 2011. The increase was mainly due to higher commissions related to commercial agents associated with increased revenues because of major acquisition and retention costs, higher card sales, and prepaid recharges and collections.

 

Commissions are net of agent commissions capitalized as SAC, which totaled P$314 (+P$66 million or 27% vs. 2011), and are directly related to the increase in the postpaid subscribers’ base in the Personal Mobile Services segment.

 

Cost of equipments and handsets

 

During 2012, the cost of equipments and handsets increased to P$2,043 million from P$1,640 million in 2011, representing a 25% increase. The increase in costs of mobile handsets in both Mobile Services segments was P$418 million and was mainly due to higher average unit cost of sales (+26% vs. 2011) offset by a decrease in the number of handsets sold (-5% vs. 2011).

 

Cost of equipments and handsets are net of costs capitalized as SAC (P$463 million in 2012, P$7 million or 1% lower than 2011).

 

Advertising

 

Costs related to advertising increased by P$61 million, or 10%, to P$660 million in 2012. During 2012, Telecom Argentina continued its focus on advertising campaigns as a result of competition in the Internet services market while Personal recorded higher media advertising expenses to strengthen the brand position of the Telecom Group.

 

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Table of Contents

 

Provisions

 

During 2012, we recorded P$153 million in provisions compared to P$225 million recorded in 2011, representing a 32% decrease. The decrease in 2012 was mainly due to a decrease in labor claims amounting to P$68 million and in regulatory tax proceedings amounting to P$24 million, partially offset by an increase in civil and commercial proceedings amounting to P$20 million.

 

Bad Debt Expense

 

In 2012, bad debt expense amounted to P$275 million, an increase of 63% as compared to 2011, representing 1% of consolidated revenues in 2012 and less than 1% in 2011. The increase was mainly due to higher revenues in 2012 (+ 20%) as compared to 2011 and higher aging of the accounts receivables, mainly in voice retail customers in the Personal Mobile Services segment.

 

Restructuring Costs

 

In the last quarter of 2012, the Telecom Argentina’s Management decided to implement a restructuring plan aimed to improve the efficiency of the Telecom Group’s organizational structure. This plan contemplates the removal and / or merger of management structures in various areas of Telecom Argentina and Personal. The plan involves the dismissal of about 90 employees with a total estimated cost of P$90 million. As of December 31, 2012, 45 dismissals have been made effective, 40 employees of Telecom Argentina and 5 employees of Personal, for a total amount of P$36 million. The remaining P$54 million has been accrued.

 

Other Operating Expenses

 

Other operating expenses, which include costs associated with Value Added Services, transportation costs, energy and rentals, among others, increased 40% to P$1,354 million in 2012 from P$969 million in 2011 primarily as a result of the subsidies elimination on certain public services. Other operating expenses also were higher due to higher costs associated with the provision of Value Added Services, higher costs of site leases and international and satellite connectivity.

 

Operating income before depreciation and amortization

 

Our consolidated operating income before depreciation and amortization was P$6,556 million in 2012, representing an increase of P$587 million or 10% from P$5,969 million in 2011. It represented 30% and 32% of total consolidated revenues, respectively.

 

Depreciation and Amortization

 

Depreciation of PP&E and amortization of intangible assets increased by P$454 million, or 21%, to P$2,612 million during 2012. The increase in PP&E depreciation reached P$254 million, in amortization of SAC and Service connection or habilitation costs totaled P$195 million and in amortization of other intangible assets totaled P$5 million.

 

For a further breakdown of our consolidated operating expenses, see “—Results of Operations by Segment” below.

 

Gain on disposal of PP&E

 

The gain amounted to P$8 million, a reduction of P$14 million vs. 2011 and mainly corresponds to the Fixed Services segment.

 

Operating income

 

During 2012, consolidated operating income was P$3,952 million, representing an increase of P$119 million or 3% from 2011. Operating income represented 18% of consolidated revenues in 2012 versus 21% in 2011. The decrease in the margin was mainly due to the increase of operating expenses (including depreciation and amortization) of 24% partially offset by the increase in revenues of 20%.

 

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Table of Contents

 

 

 

Years Ended December 31,

 

% of Change

 

 

 

2012

 

2011

 

2012-2011

 

 

 

(P$ millions / %)

 

Increase/(Decrease)

 

Operating income before depreciation and amortization (1)

 

6,556

 

5,969

 

10

 

As % of revenues

 

30

 

32

 

 

 

Depreciation and amortization

 

(2,612

)

(2,158

)

21

 

As % of revenues

 

(12

)

(12

)

 

 

Gain on disposal of PP&E

 

8

 

22

 

(64

)

Operating income

 

3,952

 

3,833

 

3

 

As % of revenues

 

18

 

21

 

 

 

 


(1)         Although it is not specifically defined, this is a permitted measure under IFRS. See “Management Overview” for a discussion of the use of this measure.

 

Financial results, net

 

During 2012, Nortel recorded a net financial gain of P$187 million compared to a net financial result of P$ nil million in 2011. The positive change in the net financial results was mainly due to higher gains from net financial position of P$172 million and lower interest loss on provisions of P$34 million, partially offset by higher net foreign currency exchange losses by P$30 million as compared to 2011 (including the effect of loss on derivatives).

 

Income tax expense

 

The Company’s income tax charge includes three effects: (i) the current tax payable for the year pursuant to fiscal legislation applicable to each company in the Telecom Group; (ii) the effect of applying the deferred tax method on temporary differences arising out of the asset and liability valuation according to fiscal versus accounting criteria; and (iii) the analysis of recoverability of deferred tax assets.

 

(i)    Regarding current tax expenses, Telecom Argentina, Telecom Argentina USA, Personal and Núcleo generated tax profit in fiscal year 2012, resulting in an income tax payable of P$1,522 million versus P$1,434 million in 2011. Fixed Segment income tax expense assessed in 2012 amounted to P$312 million as compared to P$379 million in 2011; Personal’s, in 2012, amounted to P$1,187 million compared to P$1,039 million in 2011; and Núcleo’s, in 2012, amounted to P$23 million compared to P$16 million in 2011.

 

(ii)   Regarding the deferred tax, in 2012 and 2011, the Company recorded a deferred tax benefit of P$3 million and a deferred tax loss of P$4 million, respectively, Telecom Argentina and Telecom USA recorded a deferred tax benefit of P$39 million and P$101 million, respectively; Personal recorded a deferred tax benefit of P$20 million and a deferred tax loss of P$59 million in 2012 and 2011, respectively; and Núcleo generated a P$3 million gain in 2012 and a P$2 million gain in 2011, totaling P$65 million of deferred tax benefit in 2012 and P$40 million of deferred tax benefit in 2011.

 

(iii)  Regarding the analysis of recoverability of deferred tax assets, the Company recorded a valuation allowance for deferred tax assets of P$4 million and a reversal of the valuation allowance for deferred tax assets of P$5 million in 2012 and 2011, respectively. Personal recorded a valuation allowance for deferred tax assets of P$3 million and P$5 million in 2012 and 2011, respectively, while no charges were recorded for Telecom Argentina, Telecom Argentina USA and Núcleo in those years.

 

Net income

 

For 2012, we recorded net income of P$2,675 million (12% of total consolidated revenues), of which P$1,413 million is attributable to Nortel. The Fixed Services segment accounted for a gain of P$502 million, the Personal Mobile Services segment accounted for a P$2,085 million gain and the Núcleo Mobile Services segment accounted for a gain of P$145 million, representing 7%, 14% and 17% of the total segment revenues, respectively.

 

For 2011, we recorded net income of P$2,439 million (13% of total consolidated revenues), of which P$1,273 million are attributable to Nortel. The Fixed Services segment accounted for a gain of P$517 million, the Personal Mobile Services segment accounted for a P$1,936 million gain and the Núcleo Mobile Services segment accounted for a gain of P$89 million, representing 8%, 15% and 12% of the total segment revenues, respectively.

 

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(A.2)  2011 Compared to 2010

 

 

 

 

 

 

 

 

 

 

 

Change by segment (1)

 

 

 

Years Ended December 31,

 

 

 

 

 

Fixed

 

Personal
Mobile

 

Núcleo
Mobile

 

 

 

 

 

2011

 

2010

 

Total Change

 

Services

 

Services

 

Services

 

Nortel

 

 

 

(P$ millions)

 

%

 

(P$ millions)

 

Revenues

 

18,498

 

14,627

 

26

 

3,871

 

669

 

2,954

 

248

 

 

Other Income

 

30

 

25

 

20

 

5

 

5

 

 

 

 

Operating expenses (without depreciation and amortization)

 

(12,559

)

(9,794

)

28

 

(2,765

)

(859

)

(1,752

)

(139

)

(15

)

Operating income before depreciation and amortization (2)

 

5,969

 

4,858

 

23

 

1,111

 

(185

)

1,202

 

109

 

(15

)

Depreciation and amortization

 

(2,158

)

(1,712

)

26

 

(446

)

(42

)

(349

)

(55

)

 

Gain on disposal of PP&E

 

22

 

7

 

214

 

15

 

15

 

 

 

 

Operating income

 

3,833

 

3,153

 

22

 

680

 

(212

)

853

 

54

 

(15

)

Financial results, net

 

 

(292

)

n/a

 

292

 

(30

)

247

 

 

75

 

Income tax expense

 

(1,394

)

(1,076

)

30

 

(318

)

51

 

(366

)

(4

)

1

 

Net income

 

2,439

 

1,785

 

37

 

654

 

(191

)

734

 

50

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nortel (Controlling Company)

 

1,273

 

895

 

42

 

378

 

 

 

 

 

 

 

 

 

Non-controlling interest

 

1,166

 

890

 

31

 

276

 

 

 

 

 

 

 

 

 

 


(1)         Includes the effect of eliminations of Intersegment transactions.

(2)         Although it is not specifically defined, this is a permitted measure under IFRS. See “Management Overview” for a discussion of the use of this measure.

 

Revenues

 

During 2011, total consolidated revenues increased by 26% to P$18,498 million from P$14,627 million in 2010, mainly driven by our mobile, Broadband and data transmission businesses.

 

Total consolidated revenues for 2011 and 2010 are comprised as follows:

 

 

 

 

 

 

 

 

 

 

 

Change by segment (1)

 

 

 

Years Ended December 31,

 

 

 

 

 

Fixed

 

Personal
Mobile

 

Núcleo
Mobile

 

 

 

2011

 

2010

 

Total Change

 

Services

 

Services

 

Services

 

 

 

(P$ millions)

 

%

 

(P$ millions)

 

Voice

 

9,184

 

8,247

 

11

 

937

 

206

 

632

 

99

 

Data

 

5,316

 

3,641

 

46

 

1,675

 

95

 

1,485

 

95

 

Internet

 

2,411

 

1,643

 

47

 

768

 

349

 

383

 

36

 

Service Revenues

 

16,911

 

13,531

 

25

 

3,380

 

650

 

2,500

 

230

 

Equipment (2)

 

1,587

 

1,096

 

45

 

491

 

19

 

454

 

18

 

Revenues

 

18,498

 

14,627

 

26

 

3,871

 

669

 

2,954

 

248

 

 


(1)         Net of the Intersegment revenues effect.

(2)         This item is composed of voice, data and Internet equipment in each year.

 

Voice

 

Revenues from voice services increased 11% to P$9,184 million in 2011 from P$8,247 million in 2010. Such increase is largely due to a growth in the mobile subscriber base, as well as an increase in (i) the number of lines in service and (ii) the prices of our services in the Personal Mobile Services segment. Revenues from voice services represented 50% of our total consolidated revenues for 2011 compared to 56% of our total consolidated revenues for 2010.

 

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Table of Contents

 

Fixed services

 

Revenues from voice services represented 58% of our total Fixed Services segment revenues attributable to third parties for 2011 compared to 62% of our total segment revenues attributable to third parties for 2010.

 

Voice services mainly include revenues from monthly basic charges, charges for supplementary services, measured service (national and international calls) and public telephone service. Charges for supplementary services include call waiting, call forwarding, three-way calling, caller ID, direct inwards dialing, toll-free service and voicemail, among others. Measured service charges are based on the number and duration of calls. Measured service revenues depend on the number of lines in service, the volume of usage, the number of new lines installed and applicable rates. Most of our customers are billed monthly. They also include interconnection services (which primarily include access, termination and long-distance transport of calls), international long-distance service (which reflect payments made under bilateral agreements between the Company and foreign telecommunications carriers covering inbound international long-distance calls) and revenues related to billing and collection services charged to other operators.

 

Revenues from voice retail increased 7% to P$2,357 million in 2011. Revenues from regulated rate services represented 41% of our total segment revenues in 2011 compared with 45% in 2010.

 

Monthly basic charges increased 1% to P$957 million in 2011 from P$944 million in 2010. Such growth was due to an increase in the number of lines in service and in the level of service packages sold as well as increased prices for non-regulated services during the period.

 

Measured service charges increased 12% to P$1,242 million in 2011 from P$1,110 million in 2010. Such increase was due to higher local calls and an increase in the number of lines in service. However, some fixed services rates remained unchanged since 2002 as a result of the Pesification and freeze of rates imposed by the Argentine government.

 

Interconnection services increased 1% to P$525 million in 2011 from P$522 million in 2010. The increase in 2011 was due to higher fixed traffic transported and terminated on Telecom’s fixed-line network.

 

Personal Mobile services

 

Revenues from voice services represented 46% of our total Personal Mobile Services segment revenues to third parties for 2011 compared to 54% for 2010.

 

Voice services mainly include revenues from monthly basic charges, airtime usage charges and roaming charges to our customers for their use of our and other carriers’ networks, CPP, TLRD and roaming charges to other mobile service providers whose customers use our network.

 

Voice retail revenues reached P$4,001 million in 2011 (+16% vs. 2010). The increase was mainly due to increases in prices and the growth of our subscriber base.

 

Voice wholesale revenues reached P$1,726 million in 2011 (+5% vs. 2010). The increase was mainly due to higher traffic with mobile operators (TLRD) and an increase in roaming revenues.

 

In Núcleo Mobile Services segment, voice revenues increased 39% to P$353 million in 2011 compared to P$254 million in 2010 mainly due to an increase in the subscriber base and the appreciation of the Paraguayan currency with respect to the Argentine Peso.

 

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Table of Contents

 

Data and Internet

 

Revenues from data and Internet services increased 46% to P$7,727 million in 2011 from P$5,284 million in 2010. Revenues from data and Internet represented 42% of our total consolidated revenues for 2011 compared to 36% of our total consolidated revenues for 2010.

 

Internet revenues in the Fixed segment increased 29% to P$1,553 million in 2011 from P$1,204 million in 2010. The increase was mainly due to the growth in the number of Internet accesses and to the increase in the average price of fixed charge services as a result of the completion of promotions granted to customers in the first months of subscription (“ARPU” amounted to P$87 in 2011, vs. P$76 in 2010). As of December 31, 2011, the number of Internet accesses reached approximately 1,550,000 (equivalent to 37% of lines in service) compared to 1,380,000 as of December 31, 2010 (33% of lines in service), increasing by 12%.

 

Revenues from data services in the Fixed segment increased 19% to P$583 million in 2011 from P$488 million in 2010. The increase was mainly due to an increase in virtual private network services (private data network services replacing the point-to-point service) leases of circuits, dedicated lines and the growth in data center services. The majority of our revenues from data transmission services is denominated in U.S. dollars and, consequently, in 2011 and 2010, was affected by the fluctuations in the exchange rate between the peso and the U.S. dollar resulting in an increase in data transmission revenues.

 

In the Mobile Services segments, data and Internet services mainly include SMS, MMS, GPRS and Internet. Revenues from data and Internet in the Personal Mobile segment increased 55% to P$5,256 million in 2011 from P$3,388 million in 2010.

 

Mobile data revenues reached P$4,482 million (50% vs. 2010). This increase is mainly due to the SMS traffic performance, related to the increase in the subscriber base and higher prices of this service, both in prepaid and postpaid customers.

 

Mobile Internet revenues in the Personal Mobile segment increased 98% to P$774 million in 2011 from P$391 million in 2010. Such increase was mainly due to an increase in the subscriber base.

 

Equipment

 

Revenues from equipment increased by 45% to P$1,587 million in 2011 from P$1,096 million in 2010. In the Fixed Services segment, the increase was mainly due to higher sales of “Aladino” telephone sets and data equipment. In the Mobile Services segments, the increases were primarily due to the expansion of the subscriber base and a higher selling price of handsets sold. Additionally, as a result of technological advances and our provision of state-of-the-art services, more subscribers upgraded their mobile handsets.

 

For a further breakdown of our consolidated revenues, see “—Results of Operations by Segment” below.

 

Other Income

 

Other income mainly includes penalties collected from suppliers, as a result of delays in deliveries of goods or matters related to the quality of the services provided. During 2011, other income increased 20% to P$30 million from P$25 million in 2010.

 

Operating expenses (without depreciation and amortization)

 

Total operating expenses increased by P$2,765 million totaling P$12,559 million in 2011, representing a 28% increase as compared to 2010. The increase was mainly due to increases in employee benefit expenses and severance payments, fees for services, maintenance, materials and supplies, taxes and fees with the Regulatory Authority, commissions and cost of equipments and handsets.

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

Change by segment (1)

 

 

 

Years Ended
December 31,

 

 

 

 

 

Fixed

 

Personal
Mobile

 

Núcleo
Mobile

 

 

 

 

 

2011

 

2010

 

Total Change

 

Services

 

Services

 

Services

 

Nortel

 

 

 

(P$ millions)

 

%

 

(P$ millions)

 

Employee benefit expenses and severance payments

 

2,615

 

1,980

 

32

 

635

 

444

 

172

 

15

 

4

 

Interconnection costs and other telecommunications charges

 

1,497

 

1,377

 

9

 

120

 

8

 

83

 

29

 

 

Fees for services, maintenance, materials and supplies

 

1,723

 

1,336

 

29

 

387

 

129

 

245

 

12

 

1

 

Taxes and fees with the Regulatory Authority

 

1,607

 

1,257

 

28

 

350

 

63

 

271

 

7

 

9

 

Commissions

 

1,515

 

1,155

 

31

 

360

 

25

 

296

 

39

 

 

Cost of equipments and handsets

 

1,640

 

1,197

 

37

 

443

 

14

 

429

 

 

 

Advertising

 

599

 

441

 

36

 

158

 

12

 

134

 

12

 

 

Provisions

 

225

 

130

 

73

 

95

 

93

 

2

 

 

 

Bad-debt expense

 

169

 

119

 

42

 

50

 

4

 

42

 

4

 

 

Other operating expenses

 

969

 

802

 

21

 

167

 

67

 

78

 

21

 

1

 

Total operating expenses (without depreciation and amortization)

 

12,559

 

9,794

 

28

 

2,765

 

859

 

1,752

 

139

 

15

 

 


(1)         Net of the Intersegment transactions effect.

 

Employee benefit expenses and severance payments

 

During 2011, employee benefit expenses and severance payments were P$2,615 million, representing a 32% increase from 2010. This was primarily due to salary increases that Telecom implemented across all segments and the increase in Telecom’s headcount. In the Fixed Services segment, the increases were mainly due to salary increases and severance payments and termination benefits, as a result of an increase in the number of employees who retired or were dismissed. In the Personal Mobile Services segment there was a 10% increase in the number of employees (from 4,370 employees in 2010 to 4,820 employees in 2011).

 

Telecom’s total headcount of 16,346 at the end of 2011 (+4% vs. 2010), lines in service per employee reached 373 in the Fixed Services segment (2% lower than 2010), 3,774 in the Personal mobile services segment (+1% vs. 2010) and 4,944 in the Núcleo mobile services segment (+10% vs. 2010).

 

Interconnection costs and other telecommunications charges

 

Interconnection costs and other telecommunications charges includes interconnection costs, lease of circuits and costs of international outbound calls, which reflect payments made under bilateral agreements between Telecom Argentina and international carriers in connection with outgoing calls made by our customers. Additionally, the cost of roaming and TLRD is included in the Mobile Services segments. In 2011, interconnection costs and other telecommunications charges amounted to P$1,497 million compared with P$1,377 million in 2010. In the Fixed Services segment, the increase was mainly due to higher traffic volume in Telecom Argentina’s network and price increases resulting from inflation and an increase in traffic of outgoing calls originated in our network that required the payment of fees to transport such calls across international lines. In the Mobile Services segments, the increase was mainly due to higher traffic volume resulting from Personal’s network and higher costs of roaming due to an increase in mobile traffic among mobile operators as a consequence of a growth in the total subscriber base.

 

Fees for services, maintenance, materials and supplies

 

Expenses related to fees for services, maintenance, materials and supplies increased 29% to P$1,723 million in 2011 from P$1,336 million in 2010. This increase was mainly due to higher maintenance costs across all segments (maintenance costs for network equipment, buildings and vehicles, maintenance costs of radio base systems and maintenance of BlackBerry equipment) due to inflation and devaluation of the Argentine Peso against the U.S. dollar which amounted to P$133 million, and also to higher fees for services related to call centers (a P$149 million increase from 2010 to 2011).

 

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Table of Contents

 

Taxes and fees with the Regulatory Authority

 

Taxes and fees with the Regulatory Authority increased 28% to P$1,607 million in 2011 from P$1,257 million in 2010, mainly due to charges of turnover tax (P$166 million increase from 2010 to 2011) as a result of the increase in revenues during 2011 and from taxes with the Regulatory Authority (an increase of P$95 million from 2010).

 

Commissions

 

Commissions increased by P$360 million, or 31%, to P$1,515 million in 2011 from P$1,155 million in 2010. The increase was mainly due to the growth in the subscriber base, higher commissions for the distribution of prepaid cards and higher commissions for collections as a result of the increase in revenues and a higher transaction cost for collection services.

 

Cost of equipments and handsets

 

During 2011, the cost of equipments and handsets increased to P$1,640 million from P$1,197 million in 2010, representing a 37% increase. The increase in costs of mobile handsets in both Mobile Services segments was P$429 million and was primarily attributable to an expansion of the subscriber base and the number of customers that upgraded their handsets as a result of technological advances and new service offerings, especially smartphones. The increase in costs in the Fixed Services segment was P$14 million and it was primarily attributable to an increase in sales of “Aladino” telephone sets and data equipment.

 

Advertising

 

Costs related to advertising increased by P$158 million, or 36%, to P$599 million in 2011. During 2011, Telecom Argentina continued its focus on advertising campaigns as a result of competition in the Internet services market while Personal recorded higher media advertising expenses including the effects of the rebranding in 2011.

 

Provisions

 

During 2011, we recorded P$225 million in provisions compared to P$130 million recorded in 2010, representing a 73% increase. The increase in 2011 was mainly due to an increase in labor claims amounting to P$78 million and the increase of civil and commercial proceedings amounting to P$10 million.

 

Bad Debt Expense

 

In 2011, bad debt expense amounted to P$169 million, an increase of 42% as compared to 2010, representing less than 1% of consolidated revenues in both years. The increase was mainly due to higher revenues in 2011 (+ 26%) as compared to 2010 and higher aging of the accounts receivables of voice retail customers.

 

Other Operating Expenses

 

Other operating expenses, which include costs associated with Value Added Services, transportation costs, insurance, energy and rentals, among others, increased 21% to P$969 million in 2011 from P$802 million in 2010 primarily as a result of the increase in the prices of transportation, fuel and electricity used to provide Telecom Argentina’s services. Other operating expenses also were higher due to higher costs associated with the provision of Value Added Services to Personal and Núcleo’s subscribers, higher costs of site leases and international and satellite connectivity.

 

Operating income before depreciation and amortization

 

Our consolidated operating income before depreciation and amortization was P$5,969 million in 2011 and P$4,858 million in 2010, representing 32% and 33% of total consolidated revenues, respectively.

 

Depreciation and Amortization

 

Depreciation of PP&E and amortization of intangible assets increased by P$446 million, or 26%, to P$2,158 million during 2011. This increase was the result of higher investment in PP&E and intangible assets and higher amortization of subscriber acquisitions costs (“SAC”) in the Personal Mobile Services segment, partially offset by a reduction in the level of depreciation due to the end of the amortization period for certain assets.

 

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Table of Contents

 

For a further breakdown of our consolidated operating expenses, see “—Results of Operations by Segment” below.

 

Gain on disposal of PP&E

 

The gain on disposal of PP&E amounted to P$22 million, an increase of P$15 million vs. 2010 and mainly corresponds to the Fixed Services segment.

 

Operating income

 

During 2011, consolidated operating income was P$3,833 million, representing an increase of P$680 million or 22% from 2010. Operating income represented 21% of consolidated revenues in 2011 versus 22% in 2010.

 

 

 

Years Ended December 31,

 

% of Change

 

 

 

2011

 

2010

 

2011-2010

 

 

 

(P$ millions / %)

 

Increase

 

Operating income before depreciation and amortization (1)

 

5,969

 

4,858

 

23

 

As % of revenues

 

32

 

33

 

 

 

Depreciation and amortization

 

(2,158

)

(1,712

)

26

 

As % of revenues

 

(12

)

(12

)

 

 

Gain on disposal of PP&E

 

22

 

7

 

214

 

Operating income

 

3,833

 

3,153

 

22

 

As % of revenues

 

21

 

22

 

 

 

 


(1)         (1)   Although it is not specifically defined, this is a permitted measure under IFRS. See “Management Overview” for a discussion of the use of this measure.

 

Financial results, net

 

During 2011, Nortel recorded a net financial result of P$ nil compared to a net financial loss of P$292 million in 2010. The positive change in the net financial results was mainly due to lower net foreign currency exchange losses by P$90 million as compared to 2010 (including the effect of loss on derivatives), lower interest on financial debt of P$119 million and higher interest on cash equivalents, investments and receivables by P$96 million partially offset by higher interest on provisions by P$42 million.

 

Income tax expense

 

The Company’s income tax charge includes three effects: (i) the current tax payable for the year pursuant to fiscal legislation applicable to each company in the Telecom Group; (ii) the effect of applying the deferred tax method on temporary differences arising out of the asset and liability valuation according to fiscal versus accounting criteria; and (iii) the analysis of recoverability of deferred tax assets.

 

(i)    Regarding current tax expenses, Telecom Argentina, Telecom Argentina USA, Personal and Núcleo generated tax profit in fiscal year 2011, resulting in a current income tax of P$1,434 million versus P$1,067 million in 2010. Telecom Argentina’s current income tax expense assessed in 2011 amounted to P$379 million as compared to P$408 million in 2010; Personal’s, in 2011, amounted to P$1,039 million compared to P$655 million in 2010; and Núcleo’s, in 2011, amounted to P$16 million compared to P$4 million in 2010.

 

(ii)   Regarding the deferred tax, in