[SKY LOGO]
September 23, 2005
Mr. Michael Henderson
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Dear Mr. Henderson:
On behalf of Innova, S. de R.L. de C.V. (the "Company"), I am writing in
response to the questions raised in our September 13, 2005 telephone
conversation related to Comment No. 8 of the comment letter issued by the
staff (the "Staff") of the Securities and Exchange Commission (the
"Commission") on August 1, 2005 and our initial response dated September 2,
2005 relating to the Company's accounting for the Direct TV transaction.
Pursuant to the Staff's request, we are enclosing the quantitative and
qualitative materiality analysis prepared under the guidance of Staff
Accounting Bulletin No. 99 (SAB 99). It is our conclusion that the impact
of not recording the transaction in 2004 for US GAAP purposes was not
material to our financial statements on both a quantitative and qualitative
basis, as set forth in the attached schedules. The conclusions set forth
herein have been discussed with our Board of Directors. Our proposed
accounting for the transaction under US GAAP is based on the following:
Although we believe that our contractual obligation to pay for subscribers
only arises upon the subscriber successfully being categorized as a "good
subscriber"(1) as defined in the purchase agreement, we acknowledge that at
December 31, 2004, to the extent that subscribers had signed on but had not
yet reached the classification of a "good subscriber", an estimated
liability could have been recognized. Therefore, pursuant to US GAAP, we
would recognize an estimated asset and liability at such date. Our attached
analysis is based on a conservative model which takes into consideration
100% of the subscribers signed up through December 31, 2004 and not just
those which became good subscribers in subsequent periods. The cost per
subscriber was also determined based on the minimum threshold of 70,000
subscribers required to migrate to our system for us to be obligated to pay
the Ps. 621 million (i.e. the highest possible cost per subscriber). We
have also concluded that discounting the non interest bearing liability is
appropriate pursuant to APB No. 21 Interest on "Receivables and Payables"
due to its contractual payment provisions and have thus reflected the
initial asset and liability at the discounted amounts. The subscriber
intangible asset was subsequently amortized based on the expected
subscriber relationship period and the accretion expense was recognized on
the liability. Lastly, as we report under a price-level method of
accounting, we also have calculated the purchasing power gain on the
liability.
- --------------------------------
(1) Subscribers are considered fully migrated ("good subscribers") if
once they have subscribed to our service, they remain as subscribers for
four months in the case of credit card payers and six months in the case of
cash payers, respectively. At December 31, 2004, none of the 34,614 signed
subscribers arising from the subscriber list had met this contractual
definition.
If you need any additional information or have any questions or additional
comments concerning the foregoing, please contact me at (5255) 5448-4131 or
contact Faustino Montero at PricewaterhouseCoopers at (5255) 5263-6095 or
Andrew Varney of Fried, Frank, Harris, Shriver & Jacobson, LLP at (202)
639-7032.
Sincerely,
/s/ Carlos Ferreiro Rivas
Carlos Ferreiro Rivas
Chief Financial Officer
cc: Faustino Montero
Andrew P. Varney
INNOVA
RECOGNITION OF THE ASSET & LIABILITY AND AMORTIZATION, BASED ON MIGRATED
SUBSCRIBERS ONLY
AMOUNTS IN THOUSANDS OF PESOS
GROSS
-----------------------------------------------------------------
NO. OF COST PER NOMINAL DISCOUNTED
RECOGNITION OF THE INTANGIBLE ASSET: SUBSCRIBERS SUBSCRIBER AMOUNT (1) AMOUNT (3)
Actual subscriber migration per month
October 1,411 8.87 12,520 10,899
November 15,632 8.87 138,703 121,651
December 17,571 8.87 155,908 137,940
------------ ------------ ------------ ------------
Intangible Asset 34,614 8.87 307,131 270,489
============ ============ ============ ============
INITIAL INITIAL
NO. OF COST PER NOMINAL DISCOUNTED
RECOGNITION OF THE LIABILITY: SUBSCRIBERS SUBSCRIBER AMOUNT (1) AMOUNT (3)
October 1,411 8.87 12,520 10,899
November 15,632 8.87 138,703 121,651
December 17,571 8.87 155,908 137,940
------------ ------------ ------------ ------------
Liability 34,614 8.87 307,131 270,489
============ ============ ============ ============
12/31/04 AMORTIZATION NET BOOK VALUE
RECOGNITION OF THE INTANGIBLE ASSET: CONSTANT PESOS EXPENSE (2) AS OF 12/31/04
Actual subscriber migration per month
October 11,014 459 10,555
November 121,902 2,540 119,362 INPC Oct 111.368
December 137,940 0 137,940 INPC Nov 112.318
INPC Dic 112.550
------------ ------------ ------------
Intangible Asset 270,856 2,999 267,857 10.550%
============ ============ ============
(ACCRETION) NET LIABILITY AS
RECOGNITION OF THE LIABILITY: EXPENSE OF 12/31/04
October 195 11,093
November 1,105 122,756
December 0 137,940
------------ ------------
Liability 1,300 271,789
============ ============
IMPACT ON INCOME STATEMENT:
Amortization Expense (2,999)
Interest Expense (1,300)
Monetary Gain on the Liability 367 (4)
----------
(3,932)
(1) Based on the actual migration of subscribers multiplied by the actual
purchase price per subscriber
(2) Per our accounting policies, we commenced the amortization in the
first month subsequent to acquisition
(3) We discounted the asset and the liability from February 06 which is
the measurement date and the earliest expected settlement date.
(4) Pursuant to inflation accounting, monetary assets and liabilities
generated gains and losses in purchasing power as measured by
inflation.
SUMMARY OF IMPACT:
Non-current Intangible Asset Db 267,857.36
Operating Expenses/ (amortization) Db 2,998.55
Interest Expense Db 1,299.99
Non-current Liability Cr 271,788.95
Monetary Gain on the Liability Cr 366.95
---------------- -------------
272,155.90 272,155.90
================ =============
QUANTITATIVE MATERIALITY ANALYSIS:
- ---------------------------------
Unadjusted difference on Intangible Assets: 267,857.36
Total assets as reported USGAAP 4,906,926.00
% 5.46%
Unadjusted difference on liabilities: 271,788.95
Total liabilities as reported USGAAP 7,879,612.00
% 3.45%
Unadjusted difference on net income - 3,931.59
Net income as reported (USGAAP) 599,310.00
% impact -0.66%
Unadjusted difference on operating income - 2,998.55
Operating income as reported (USGAAP) 975,207.00
% impact -0.31%
Unadjusted difference on equity - 3,931.59
Equity owners deficit as reported
(USGAAP) - 2,972,686.00
% 0.13%
INNOVA
SUPPLEMENTAL QUALITATIVE ANALYSIS RELATED TO THE DIRECT TV SUBSCRIBER LIST ISSUE
SEC COMMENT NO. 8
No. Qualitative factor Evaluation and conclusion
1. Whether the misstatement arises from an No - The Company views this item as
item capable of precise measurement or an estimate as it could not precisely
whether it arises from an estimate and, measure the number of ultimate "good
if so, the degree of imprecision inherent subscribers" and the final liability
in the estimate in 2004.
2. Whether the misstatement masks a change No - The Company reported positive
in earnings or other trends operating income and a net income for
2004. This adjustment would not
impact the trend in either numbers in
any significant manner as
demonstrated in the attached SAB 99
quantitative analysis. In addition,
this adjustment would not impact cash
flows from financing and investing
activities or working capital.
3. Whether the misstatement hides a failure No - Ratios that provide useful
to meet analysts' consensus expectations information to investors, financial
for the enterprise analysts and the public in their
review of the Company's operating
performance, as well as their
comparison to other companies in the
same industry are the following: (i)
average revenue per user, (ii)
monthly average rotation of users,
(iii) free cash flow, and (iv)
EBITDA. None of these ratios would be
affected in any significant manner by
this adjustment.
4. Whether the misstatement changes a loss No - The Company reported a net
into income or vice versa income for the period and this
adjustment would not impact the net
income in any significant manner.
5. Whether the misstatement concerns a N/A - The Company operates in only
segment or other portion of the one business segment.
registrant's business that has been
identified as playing a significant role
in the registrant's operations or
profitability
6. Whether the misstatement affects the No - The Company is not a public
registrant's compliance with regulatory company in Mexico and voluntarily
requirements files its annual report on Form 20-F.
7. Whether the misstatement affects the No - The Company's indenture
registrant's compliance with loan agreements expressly permit this
covenants or other contractual transaction and there are no debt
requirements covenant implications at December 31,
2004. In addition, these liabilities
are subordinated to existing
indebtedness of the registered
bondholders.
8. Whether the misstatement has the effect No - management is not compensated
of increasing management's compensation - based on U.S. GAAP results.
for example, by satisfying requirements
for the award of bonuses or other forms
of incentive compensation
9. Whether the misstatement involves No - We believe that this transaction
concealment of an unlawful transaction. was disclosed in a transparent manner
both in the body of the annual report
on Form 20-F as well as the notes to
the audited financial statements.
10. Expected market reaction None - The Company believes that the
market understands the transaction
and the amount of the liability. In
essence, this is only a timing issue
as the entire liability will be
recognized in 2005.