FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the month of August 2004
Commission File Number 333-114196
AXTEL, S.A. DE C.V.
(Translation of Registrant's name into English)
Blvd. Gustavo Diaz Ordaz 3.33 No. L-1
Col. Unidad San Pedro
San Pedro Garza Garcia, N.L.
Mexico, LP 66215
(52)(81) 8114-0000
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F ___
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1): _________
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of
a Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): _________
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of
a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the laws of
the jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information
contained in this Form, the registrant is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the Securities
Exchange Act of 1934.
Yes ___ No X
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-_____.
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Forward Looking Statements
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2004 and December 31, 2003.........................1
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 2004 and 2003 ......2
Condensed Consolidated Statements of Changes in Financial
Position for the Six Months Ended June 30, 2004 and 2003 ...3
Condensed Consolidated Statement of Changes in
Stockholders' Equity as of June 30, 2004...................4
Notes to Condensed Consolidated Financial Statements..........5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................39
Item 3. Quantitative and Qualitative Disclosures About Market Risk...48
Item 4. Controls and Procedures......................................48
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................48
Item 2. Changes in Securities and Use of Proceeds....................49
Item 3. Defaults upon Senior Securities..............................49
Item 4. Submission of Matters to a Vote of Security Holders..........49
Item 5. Other Information............................................49
Item 6. Exhibits and Reports.........................................49
Signatures...............................................................50
In this report, references to "$," "$U.S." or "Dollars" are to United
States Dollars and references to "Ps." or "Pesos" are to Mexican Pesos.
Forward Looking Statements
This report on Form 6-K contains certain forward-looking statements within
the meaning of Section 27A of the United States Securities Act of 1933, as
amended, (the "Securities Act") and Section 21E of the United States Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking
statements reflect our views with respect to our financial performance and
future events. All forward-looking statements contained herein are inherently
uncertain. Actual results could differ materially from those projected in the
forward-looking statements as a result of factors discussed herein. Many of
these statements may be identified by the use of forward-looking words such as
"believe," "expect," "anticipate," "should," "planned," "estimated" and
"potential," among others. Readers are cautioned not to place reliance on these
forward-looking statements. The following factors, as well as other factors
described in this report, could cause actual results to differ materially from
such forward-looking statements:
o ability to attract subscribers;
o changes and developments in technology, including our ability to
upgrade our networks to remain competitive and our ability to
anticipate and react to frequent and significant technological
changes;
o our ability to manage, implement and monitor billing and operational
support systems;
o an increase in churn, or subscriber cancellations;
o the control of us retained by certain of our stockholders;
o changes in capital availability or cost, including interest rate or
foreign currency exchange rate fluctuations;
o the effects of governmental regulation of the Mexican
telecommunications industry;
o declining rates for long distance traffic;
o fluctuations in labor costs;
o foreign currency exchange fluctuations relative to the US dollar or
the Mexican peso;
o the general political, economic and competitive conditions in markets
and countries where we have operations, including competitive pricing
pressures, inflation or deflation and changes in tax rates;
o the timing and occurrence of events which are beyond our control; and
o other factors described in this Form 6-K.
Any forward-looking statements in this Form 6-K are based on certain
assumptions and analysis made by us in light of our experience and perception of
historical trends, current conditions, expected future develop-
ments and other factors we believe are appropriate under the current
circumstances. Forward-looking statements are not a guarantee of future
performance and actual results or developments may differ materially from
expectations. You are therefore cautioned not to place undue reliance on such
forward-looking statements. While we continually review trends and uncertainties
affecting our results of operations and financial condition, we do not intend to
update any particular forward-looking statements contained in this document.
-ii-
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
(Thousand pesos of constant purchasing power as of June 30, 2004)
(Unaudited)
-----------------
June 30, December 31,
----------------- ----------------
Assets 2004 2003
----------------- ----------------
Current assets:
Cash and cash equivalents (including $4,565 and $4,577 of
restricted cash as of June 30, 2004 and December 31, 2003) $ 824,260 1,031,100
Accounts receivable 461,577 409,047
Refundable taxes and other accounts receivable 29,914 19,780
Prepaid expenses (note 5) 235,359 187,176
Inventories 32,424 21,938
Derivative financial instruments (notes 3 and 4) 22,299 570
----------------- ----------------
Total current assets 1,605,833 1,669,611
Property, systems and equipment, net (note 6) 5,351,333 5,285,273
Long-term accounts receivable 19,956 20,344
Telephone concession rights, net of accumulated amortization
of $225,024 and $200,389 in 2004 and 2003, respectively 703,613 728,248
Pre-operating expenses, net 192,642 203,709
Deferred income taxes (note 11) 239,136 256,495
Other assets (note 7) 120,536 111,205
----------------- ----------------
Total assets $ 8,233,049 8,274,885
================= ================
Liabilities and Stockholders' Equity
Current liabilities:
Short-term debt (note 8) $ 30,936 24,429
Current maturities of long-term debt (note 9) 34,775 55,382
Accounts payable and accrued expenses 351,791 315,743
Accrued interest 11,598 68,181
Taxes payable 50,297 70,489
Other accounts payable (note 10) 215,811 197,791
----------------- ----------------
Total current liabilities 695,208 732,015
Long-term debt, excluding current maturities (note 9) 2,035,253 2,060,204
Other long-term accounts payable 3,439 2,211
Seniority premiums 1,824 2,036
----------------- ----------------
Total liabilities 2,735,724 2,796,466
----------------- ----------------
Stockholders' equity (note 12):
Common stock 6,858,720 6,858,720
Additional paid-in capital 135,710 135,710
Deficit (1,626,405) (1,630,383)
Cumulative deferred income tax effect 114,372 114,372
Change in the fair value of derivative instruments (note 3) 14,928 -
----------------- ----------------
Total stockholders' equity 5,497,325 5,478,419
Commitments and contingencies (note 13)
Subsequent events (note 14)
----------------- ----------------
Total liabilities and stockholders' equity $ 8,233,049 8,274,885
================= ================
The accompanying notes are an integral part of the consolidated financial statements.
-1-
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Thousand pesos of constant purchasing power as of June 30, 2004)
Three months ended Six months ended
---------------------------------------- ------------------------------------
June 30, June 30,
---------------------------------------- ------------------------------------
(Unaudited) (Unaudited)
2004 2003 2004 2003
---------------------------------------- ------------------------------------
Rental, installation, service and other
revenues $ 894,414 722,881 1,761,142 1,399,516
-------------------- ------------------ ----------------- ------------------
Operating costs and expenses:
Cost of sales and services (275,458) (203,587) (545,022) (397,931)
Selling and administrative expenses (313,763) (290,001) (609,367) (561,935)
Depreciation and amortization (240,017) (215,274) (470,881) (428,643)
-------------------- ------------------ ----------------- ------------------
(829,238) (708,862) (1,625,270) (1,388,509)
-------------------- ------------------ ----------------- ------------------
Operating income 65,176 14,019 135,872 11,007
-------------------- ------------------ ----------------- ------------------
Comprehensive financing result:
Interest expense (63,469) (33,960) (130,223) (132,500)
Interest income 4,091 5,718 9,241 13,030
Foreign exchange gain (loss), net (39,839) 39,664 (29,076) (218,071)
Monetary position gain 1,914 5,345 18,216 71,003
-------------------- ------------------ ----------------- ------------------
Comprehensive financing
result, net (97,303) 16,767 (131,842) (266,538)
-------------------- ------------------ ----------------- ------------------
Other (expense) income, net (note 9) (4,225) (105,028) 9,955 1,790,547
-------------------- ------------------ ----------------- ------------------
(Loss) income before income taxes (36,352) (74,242) 13,985 1,535,016
-------------------- ------------------ ----------------- ------------------
Deferred income tax (note 11) 8,295 (53,065) (10,007) (485,815)
-------------------- ------------------ ----------------- ------------------
Net (loss) income $ (28,057) (127,307) 3,978 1,049,201
==================== ================== ================= ==================
The accompanying notes are an integral part of the consolidated financial statements.
-2-
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Financial Position
(Thousand pesos of constant purchasing power as of June 30, 2004)
Six months ended
-------------------------------------
June 30,
-------------------------------------
(Unaudited)
2004 2003
-------------------------------------
Operating activities:
Net income $ 3,978 1,049,201
Add charges (deduct credits) to operations not requiring
(providing) resources:
Depreciation 421,890 384,274
Amortization 48,991 44,369
Gain in the forgiveness of debt (note 9b) - (1,892,882)
Deferred income tax 10,007 485,815
------------------ ------------------
Resources provided by the operation 484,866 70,777
Net investment in operations (89,843) (151,820)
------------------ ------------------
Resources provided by (used in) operating activities 395,023 (81,043)
------------------ ------------------
Financing activities:
Increase in common stock - 2,706,682
Additional paid-in capital - (9,457)
Payments of loans and interest, net (95,634) (2,494,850)
Deferred financing costs - 69,615
Other long-term accounts payable 4,340 28,835
------------------ ------------------
Resources (used in) provided by financing activities (91,294) 300,825
------------------ ------------------
Investing activities:
Acquisition and construction of property, systems
and equipment, net (487,950) (190,340)
Pre-operating results (6,954) -
Other assets (15,665) (99)
------------------ ------------------
Resources used in investing activities (510,569) (190,439)
------------------ ------------------
(Decrease) increase in cash and cash equivalents (206,840) 29,343
Cash and cash equivalents at beginning of period 1,031,100 332,840
------------------ ------------------
Cash and cash equivalents at end of period $ 824,260 362,183
================== ==================
The accompanying notes are an integral part of the consolidated financial statements.
-3-
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders' Equity
(Thousand pesos of constant purchasing power as of June 30, 2004)
Change in
Cumulative the fair
Additional deferred value of Total
Common paid-in income tax derivative stockholders'
stock capital Deficit effect instruments equity
-------------- ----------- ---------------- --------------- --------------- -------------
Balances as of December 31, 2003 $ 6,858,720 135,710 (1,630,383) 114,372 - 5,478,419
Comprehensive income - - 3,978 - 14,928 18,906
-------------- ----------- ---------------- -------------- --------------- -------------
Balances as of June 30, 2004
(Unaudited) $ 6,858,720 135,710 (1,626,405) 114,372 14,928 5,497,325
============== =========== ================ ============== =============== =============
The accompanying notes are an integral part of the consolidated financial statements.
-4-
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
June 30, 2004 and 2003
(Thousand pesos of constant purchasing power as of June 30, 2004)
(1) Organization and description of business
Axtel, S. A. de C. V. and subsidiaries (the Company or AXTEL) is a Mexican
corporation engaged in operating and/or exploiting a public
telecommunication network to provide voice, sound, data, text, and image
conducting services, and local, national, and international long-distance
calls. To provide these services and carry out the Company's activity, a
concession is required (see note 13d). In June 1996, the Company obtained a
concession from the Mexican Federal Government to install, operate and
exploit public telecommunication networks for an initial period of thirty
years.
The Company's capital structure has a Mexican majority share ownership with
58.52% of shares with voting rights owned by Telinor Telefonia, S. de R.L.
de C.V., the remaining 41.48% is distributed among other entities.
AXTEL offers different access technologies, including fixed wireless
telephones, point-to-point, point-to-multipoint, a fiber optic radio links
and copper technology, depending on the communication needs of the clients.
The Company has been granted the following licenses over the spectrum of
frequencies necessary to provide the services:
o 60MHz for Point-to-Multi-Point in the 10.5GHz band to cover each one
of the nine regions of the Mexican territory. The acquisition of these
twenty-year concessions, with an extension option, represented an
investment of $139,262 for the Company.
o 112MHz for Point-to-Point in the 15GHz band and a 100MHz in the 23GHz
band with countrywide coverage. The acquisition of these twenty-year
concessions, with an extension option, represented an investment of
$70,233 for the Company.
o 50MHz in the 3.4GHz. The licenses obtained allow coverage in the nine
regions of the country, and the investment was $719,142 for a period
of twenty years with an extension option.
-5-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
The Company has commercial services in Monterrey, Mexico City, Guadalajara,
Puebla, Toluca and Leon (See note 14).
(2) Financial statement presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Mexico
(MexGAAP), which include the recognition of the effects of inflation on the
financial information, and are expressed in Mexican pesos of constant
purchasing power as of June 30, 2004, based on the National Consumer Price
Index (NCPI) published by Banco de Mexico.
The following national consumer price indexes (NCPI) were used to recognize
the effects of inflation:
Inflation
NCPI %
-------------- --------------
June 30, 2004 397.283 1.79
December 31, 2003 390.299 3.99
June 30, 2003 381.442 1.63
The accompanying financial statements should be read in conjunction with
Axtel's Annual Audited Financial Statements for the year ended December 31,
2003, as certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles in Mexico have been condensed or omitted. The
Company's condensed consolidated interim financial statements are
unaudited, but in the opinion of management, reflect all necessary
adjustments for a fair presentation, which are of a normal recurring
nature. Operations results for the six months ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2004. Certain 2003 amounts have been reclassified
to conform to the 2004 presentation.
When reference is made to pesos or "$", it means Mexican pesos; when
reference is made to dollars or U.S.$, it means currency of the United
States of America. Except where otherwise is indicated or specific
references are made to "U.S. dollar millions", the amounts in these notes
are stated in thousand of constant Mexican pesos as of the balance sheet
date.
The consolidated financial statements include the assets, liabilities,
equity and results on operations of the subsidiaries listed below. The
balances and transactions between companies have been eliminated in the
preparation of the consolidated financial statements.
% ownership
-----------
Instalaciones y Contrataciones, S. A. de C. V. 99.998%
Impulsora e Inmobiliaria Regional, S. A. de C. V. 99.998%
Servicios Axtel, S. A. de C. V. 99.998%
-6-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
(3) Accounting changes
Derivative financial instruments
The Mexican Institute of Public Accountant (IMCP) issued Bulletin C-10
"Derivative financial instruments and hedging operations", effective
January 1, 2005, with an early adoption encouragement. One of the main
provision of this new standard is the classification of hedging through
derivative financial instruments according to the exposure to be hedged, in
three accounting models: on fair values, on cash flows and on net
investments of subsidiaries located abroad. Bulletin C-2, "Financial
instruments" only divided derivative financial instruments according to the
Company's intention, either for hedging purposes or negotiation or
speculation purposes.
Bulletin C-10 mentions that in a hedging exposure of cash flows the
effective portion (documented, designated and measured from the beginning
of the operation) of the gains or losses of the hedging instrument should
be recognized within the comprehensive result account in stockholders'
equity, before being offset to asset or liabilities whose risks will be
hedged and/or offset. The non-effective portions (portions not hedging or
that stop hedging the designated risks) should be immediately recognized in
results of the period.
The Company decided on the early adoption of Bulletin C-10 for 2004. As a
result of this early adoption, the Company recognized a gain from effective
hedging amounts for the derivative financial instruments as an increase to
stockholders' equity accounts, for $14,928, net of a deferred tax effect of
$7,352 which corresponds to the unrealized portions of these derivative
financial instruments.
(4) Hedging
On March 29, 2004, the Company entered into two separate derivative Cross
Currency Swaps (CCS) transactions denominated "Coupon Swap" agreements to
hedge a portion of their US dollar foreign exchange exposure resulting from
the issuance of the U.S. $175 million 11% senior notes which mature in
2013. Under the transactions, Axtel will receive semiannual payments
calculated based on the aggregate notional amount of U.S.$ 113.75 million
at an annual rate of 11%, and the Company will make semiannual payments
calculated based on the aggregate of $1,270,019 (nominal value) at annual
rate of 12.30%. Both of these transactions will expire in December 2008.
During the life of the contracts, the cash flows originated by the exchange
of interest rates under the CCS match, in interest payment dates and
conditions, those of the underlying debt.
-7-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
If there is no early settlement, at maturity of the contracts and the
underlying debt, the Company and the counterparty will exchange notional
amounts, so the Company will receive the cash flow in the currency of the
underlying debt necessary to cover its primary obligation, and will pay the
notional amount in the exchanged currency in the CCS, as a result, the
original financial risk profile related to interest rates and currencies of
the underlying debt has been effectively exchanged. The CCS information is
as follows:
(Amounts in millions)
Currencies Interest Rates
--------------------------------------------------------
Notional
amount Amount in
Notional (nominal new Axtel Axtel Estimated
Maturity Date amount value) currency receives pays fair value
------------------------------------------------------------------------------------------------------------------
December 15, 2008 U.S.$ 113.75 $ 1,270 U.S.$ 113.75 11.00% 12.30% U.S.$1.95
The estimated fair values of derivative instruments used for the exchange
of interest rates and/or currencies fluctuate over time and will be
determined by future interest rates and currency prices. These values
should be viewed in relation to the fair values of the underlying
transactions and as part of the overall Company's exposure to fluctuations
in interest rates and foreign exchange rates. The notional amounts of
derivative instruments do not necessarily represent amounts exchanged by
the parties, and consequently, there is no direct measure of the Company's
exposure to the use of these derivatives. The amounts exchanged in cash are
determined based on the basis of the notional amounts and other terms
included in the derivative financial instruments.
(5) Prepaid expenses
Prepaid expenses consist of the following:
(Unaudited)
June 30, December 31,
2004 2003
---- ----
Airspan Communications $ 163,886 -
Nortel Networks 10,578 164,037
Other 60,895 23,139
----------------- --------------------
Total prepaid expenses $ 235,359 187,176
================= ====================
-8-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
(6) Property, systems and equipment
Property, systems and equipment are analyzed as follows:
(Unaudited)
-----------------
June 30, December 31,
----------------- -------------------
2004 2003 Useful lives
---- ---- ------------
Land $ 36,474 36,490
Building 119,721 118,638 25 years
Computer and electronic equipment 956,100 862,577 3 years
Transportation equipment 15,753 14,697 4 years
Furniture and fixtures 93,535 90,026 10 years
Network equipment 5,850,033 5,870,179 6 to 28 years
Leasehold improvements 141,267 134,213
Construction in progress 813,990 420,774
----------------- -------------------
8,026,873 7,547,594
Less accumulated depreciation 2,675,540 2,262,321
----------------- -------------------
Property, systems and equipment, net $ 5,351,333 5,285,273
================= ===================
The Company has capitalized CFR as a component of the acquisition cost of
property, systems and equipment, aggregating $2,210 as of June 30,2004.
(7) Other assets
Other assets consist of the following:
(Unaudited)
June 30, December 31,
------------- --------------
2004 2003
Notes issuance costs $ 66,168 60,920
Telmex special projects 42,427 34,084
Guarantee deposits 11,619 14,385
Other 4,496 1,816
------------- --------------
124,710 111,205
Less accumulated amortization 4,174 -
------------- --------------
Other assets, net $ 120,536 111,205
============= ==============
-9-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
(8) Short-term debt
Short term debt and their main characteristics are as follows:
(Unaudited)
-----------------
June 30, December 31,
----------------- -------------------
2004 2003
---- ----
Revolving line of credit with SR Telecom Canada Inc. denominated in U.S.
dollars. The payments are made 50% net 30 days and 50% net 360 days. The
interest rate is LIBOR plus 6.25 percent points applicable only to the
360-day portion. $ - 4,247
Revolving line of credit with Banco Mercantil del Norte S.A. (Banorte) used
for letters of credit, denominated in U.S. dollars up to 360 days. 24,503 14,350
Other short-term financing with several institutions and/or suppliers with
interest rates fluctuating between 10% and 11%. 6,433 5,832
----------------- -----------------
Total short-term notes payable $ 30,936 24,429
================= =================
(9) Long-term debt
Long-term debt and its main characteristics are as follows:
(Unaudited)
-----------------
June 30, December 31,
----------------- -------------------
2004 2003
---- ----
U.S.$ 175 million in aggregate principal amount of 11% Senior Notes due
2013. Interest will be payable semi-annually in arrears on June 15, and
December 15 of each year commencing June 15, 2004. $ 1,997,030 2,001,485
Hewlett Packard de Mexico, S. de R.L. de C.V., denominated in U.S.
dollars, payable in 36 monthly installments with a six-month grace period
maturing in 2005. The interest rate is 9.8%. - 4,544
Promissory Notes with Hewlett Packard Operations Mexico, S. de R.L. de
C.V. denominated in U.S. dollars, payable in 12 quarterly installments
maturing in September 2006. The interest rate is 9.5%. 23,490 21,955
-10-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
(Unaudited)
-----------------
June 30, December 31,
----------------- -------------------
2004 2003
---- ----
Line of credit with Siemens Financial Services Inc. denominated in U.S.
dollars. The payments are made in six semiannual installments through
2005. The interest rate is LIBOR plus 5.5 percentage points. Interest is
payable semiannually. - 52,447
Line of credit with Agilent Technologies Mexico S. de R.L. de C.V.
denominated in U.S. dollars. The payments are made in six semiannual
installments through 2005. The interest rate is 9.8%. - 2,459
Other long-term financing with several credit institutions with rates
fluctuating between 9% and 10% for those denominated in dollars and TIIE
(Mexican average interbank rate) plus six percentage points for those
denominated in pesos. 49,508 32,696
----------------- -------------------
Total long-term debt 2,070,028 2,115,586
Less current maturities 34,775 55,382
----------------- -------------------
Long-term debt, excluding current maturities $ 2,035,253 2,060,204
================= ===================
Annual installments of long-term debt are as follows:
Year Amount
---- ------
June 2006 $ 27,414
June 2007 10,809
June 2008 -
Thereafter 1,997,030
----------------
$ 2,035,253
================
The following are the most important changes in long-term debt during the
six-month period ended June 2004 and the year ended 2003:
a) On March 18, 2003, the Company obtained a loan for U.S.$ 75 million
from Banco Mercantil del Norte, S.A. (Banorte) at a variable Libor
interest rate to 90 days plus certain basis points, payable quarterly.
The loan payments were set in four equal consecutive quarterly
installments of U.S.$ 4.5 million and one last installment of U.S.$ 57
million, beginning 24 months after the credit disposition date, which
was March 20, 2003. On December 17, 2003 this loan was paid. (See note
9d).
-11-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
b) On March 20, 2003, the Company entered into a debt-restructuring
agreement with Nortel Networks Limited and Nortel Networks de Mexico
(Nortel), as follows: payment in cash of U.S.$ 125.2 million, issuance
by the Company of a promissory note for U.S.$ 24.2 million and the
capitalization of debt of U.S.$ 178.5 million in exchange for
250,836,980 Series "N" shares of common stock (see note 12). As a
result of this transaction, Axtel recognized a gain on the forgiveness
of debt of approximately $1,892,000. The promissory note for U.S.$
24.2 million dollars was paid in December 2003. (See note 9d). After
this transaction and in accordance with the debt restructuring
agreement all new purchases from Nortel should be either secured
through the issuance of a letter of credit or prepaid.
c) On May 2003 the Company entered in an agreement with Bell Canada
International (BCI) to terminate all of the rights and obligations of
both parties under the technical services agreement and a secondment
agreement dated as of October 6, 1997, including Axtel's obligations
to pay fees in the future based on the Company's financial performance
and in full settlement of any and all claims that BCI may have against
Axtel arising out of or related to the above mentioned agreements. The
termination agreement was for U.S.$ 15.6 million, which was included
in other income (expense) line item; originally payable as follows:
U.S.$ 2.7 million at closing of the agreement, U.S.$ 1.1 million in
June 2003, U.S.$ 1.1 million in September 2003, U.S.$ 1.1 million in
December 2003 and U.S.$ 9.3 million, maturing thirty seven (37) months
after closing payable without interest and in a single installment. On
December 17, 2003 this debt was paid (Se note 9d).
d) On December 16, 2003, the Company completed an offering of senior
unsecured notes, for a value of U.S.$ 175 million ($2,001 million
pesos) maturing on December 15, 2013. Interest on the Notes are
payable semiannually at a annual rate of 11%, beginning on June 15,
2004.
Each of the subsidiaries is guaranteeing the notes with unconditional
guaranties that are unsecured.
The indenture of the notes contains certain affirmative and negative
covenants.
With the proceeds of the offering the Company prepaid in full the
Banorte facility, the Nortel promissory note and the BCI Indebtedness.
Some of the debt agreements that remain outstanding establish certain
covenants, the most important of which refer to limitations on dividend
payments and comprehensive insurance on pledged assets, among others. As of
June 30, 2004, the Company was in compliance in all its covenants and
obligations.
-12-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
(10) Other accounts payable
As of June 30, 2004 and December 31, 2003, the other accounts payable
consist of the following:
(Unaudited)
June 30, December 31,
2004 2003
---- ----
Guarantee Deposits (note 13a) $ 148,351 148,682
Interest payable (note 13a) 28,144 24,701
Other 39,316 24,408
-------------- --------------
Total other accounts payable $ 215,811 197,791
============== ==============
(11) Income tax (IT), tax on assets (TA), employee statutory profit sharing
(ESPS) and tax loss carryforwards
The parent company and its subsidiaries file their tax returns on a
stand-alone basis, and the consolidated financial statements show the
aggregate of the amounts determined by each company.
In accordance with the current tax legislation, companies must pay either
the IT or TA, whichever is greater. Both taxes recognize the effects of
inflation, in a manner different from MexGAAP.
The TA law establishes a 1.8% tax on assets adjusted for inflation in the
case of inventory, property, systems and equipment and deducted from
certain liabilities. TA levied in excess of IT for the year can be
recovered in the succeeding ten years, updated for inflation, provided that
in any of such years IT exceeds TA.
A new Income tax Law was enacted on January 1, 2002. This law provides for
a 1% annual reduction in the income tax rate beginning in 2003, so that the
income tax rate would be 32% in 2005.
The tax expense attributable to the income before IT differed from the
amount computed by applying the tax rate enacted of 33% and 34% to pretax
income, as a result of the items mentioned below:
For the six months ended June 30, 2004 and 2003 (unaudited), deferred IT
amounted to an expense of $10,007 and $485,815, respectively.
-13-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 2003 are presented below:
December 31,
------------
2003
----
Deferred tax assets:
Net operating loss carryforwards $ 508,437
Allowance for doubtful accounts and write-off 176,532
Accrued liabilities 22,977
Tax on assets 8,359
Fair value of derivative instruments -
Accrued vacations 2,500
----------------
Total gross deferred tax assets 718,805
Less valuation allowance 11,251
----------------
Net deferred tax assets 707,554
----------------
Deferred tax liabilities:
Property, systems and equipment 219,759
Telephone concession rights 155,764
Pre-operating expenses 66,196
Other assets 1,883
Inventories 7,457
----------------
Total deferred tax liabilities 451,059
----------------
Deferred tax assets, net $ 256,495
================
The Company assesses realizability of deferred tax assets based on the
existence of taxable temporary differences expected to reverse in the same
periods as the realization of deductible temporary differences or in later
periods in which the tax loss carryforwards can be applied and when, in
the opinion of Company management, there will be enough future taxable
income for the realization of such deductible temporary differences.
However, the amounts of realizable deferred tax assets could be reduced if
the taxable income is lower. As of June 30, 2004 and December 31, 2003 a
deferred tax asset valuation allowance was established for tax loss
carryforwards from the subsidiaries and TA from the Company. No deferred
tax asset valuation allowance was established for AXTEL tax loss
carryforwards, since, in the opinion of Company management there will be
enough future taxable income to realize the net deferred tax assets.
-14-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
According to the IT law, the tax loss of a year, updated for inflation,
may be carried to the succeeding ten years. The tax losses have no effect
on ESPS. As of December 31, 2003, the tax loss carryforwards expire as
follows:
Inflation-adjusted
tax loss
Year carryforwards
---- -------------
2009 $ 574
2010 945,715
2011 214,018
2012 428,559
-----------------
$ 1,588,866
=================
(12) Stockholders' equity
The main characteristics of stockholders' equity are described below:
(a) Common stock structures
At a General Stockholders' Meeting, held on February 28, 2003 the
stockholders approved the following:
1. Cancellation of the stockholders' outstanding contribution of
U.S.$ 10 million according to the resolutions of the General
Stockholders' Meeting held on March 30, 2001, releasing the
Company's stockholders from their obligation to make this
contribution to capital. Consequently, a U.S.$ 10 million
decrease was approved of the variable portion of common stock of
the Company.
2. Additional contribution to the variable portion of common stock
for an amount equivalent in Mexican pesos to U.S.$ 60 million
payable in cash. Consequently, it was approved to issue
2,156,184,303 shares, which will be distributed as follows:
1,041,437,018 Series A shares Variable; 549,355,873 Series B
shares Variable; 451,232,470 Series C shares Variable and
114,158,942 Series N shares, all of them with no par value. In
addition the Shareholder's Meeting also resolved that all Series
"B" shares were to be exchanged for either Series "A" shares, in
the case of investors of Mexican nationality, or Series "C"
shares, in the case of investors of non-Mexican nationality.
3. Additional contribution to the variable portion of common stock
of the Company for up to the amount equivalent in Mexican pesos
to U.S.$ 200 million through the capitalization of liabilities
payable to Nortel (See note 9). Consequently, it was approved to
issue 250,836,980 registered shares, with no par value and no
right to vote. All the shares were Series "N" shares of the
Company's common stock in favor of Nortel, that when issued, will
represent 9.9% of the total number of shares issued and paid of
the Company's common stock.
-15-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
In addition, the Company entered in a subscription agreement with
Nortel Networks Limited (Nortel), where Nortel agrees to subscribe for
250,836,980 nominative, non par value and non-voting Series "N" Shares
for a total subscription price of $2,020,480 (U.S.$ 178.5 million).
Such subscription price shall be considered to be satisfied by means
of the debt capitalization as contemplated in the Restructuring
Agreement (see note 9). Upon subscription of the shares, such shares
represent 9.9% of the total issued and outstanding shares of the
common stock of the Corporation.
Also, the Company entered in a subscription agreements with LAIF X
Sprl, Tapazeca Sprl and New Hampshire Insurance Company whereby these
entities agreed to subscribe and pay for 115,068,613 Series "B"
shares, and 426,843,722 Series "C" shares all of which are nominative,
non par value and voting shares, and 36,181,412 Series "N" shares
which are nominative, non par value and non-voting for a total
subscription price of U.S.$ 16.0 million.
The Company common stock consists of 1,253,233,984 Series "A" shares,
888,152,627 Series "C" shares and 392,320,255 series "N" shares.
Series "A" and "C" shares have the right to vote, and series "N"
shares have no par value and no voting rights. Series "A" is
restricted to Mexican individuals or corporations.
(b) Stockholders' equity restrictions
Stockholder contributions, restated as provided for in tax law,
totaling of $6,927,369 may be refunded to stockholders tax-free.
No dividends may be paid while the Company has a deficit.
(13) Commitments and contingencies
As of June 30, 2004, there are the following commitments and contingencies:
(a) On January 24, 2001 a contract was signed with Spectra Site
Communications Mexico, S. de R.L. de C.V. (Spectra Site) which expired
on January 24, 2004, to provide the Company with services to locate,
construct, set up and sell sites within the Mexican territory. As part
of the operation, the Company agreed to build 650 sites, subject to
approval and acceptance by Spectra Site and, in turn, sell or lease
them under an operating lease plan.
On January 24, 2001, the Company received U.S.$ 13 million from
Spectra Site to secure the acquisition of the 650 sites at 20,000
dollars per site. These funds are not subject to restriction per the
contract for use and destination. However, the contract provides for
the payment of interest at a Prime rate in favor of Spectra Site on
the amount of the security corresponding to the number of sites that
as of June 24, 2004 had not been sold or leased in accordance with the
terms of the contract. As of June 30, 2004, the Company has recognized
a liability to cover such interest for $28,144, presenting it as other
accounts payable in the balance sheet.
-16-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
During 2002, Spectra Site Communications filed an Ordinary Mercantile
Trial against the Company before the Thirtieth Civil Court of Mexico
City, demanding the refund of the guarantee deposit mentioned above,
plus interest and trial-related expenses. The Company countersued
Spectra Site for unilateral rescission of the contract. As of June 30,
2004, the trial is at a stage where evidence is being shown, and thus
it is impossible to determine whether there is a contingency for the
Company.
(b) The Company is involved in a number of lawsuits and claims arising in
the normal course of business. It is expected that the final outcome
of these matters will not have significant adverse effects on the
Company's financial position and results of operations.
(c) In compliance with commitments made in the acquisition of concession
rights, the Company has granted surety bonds to the Federal Treasury
and to the Ministry of Communication and Transportation of $31,392 and
to other service providers for $29,052.
(d) The concessions granted by the Ministry of Communications and
Transportation (SCT), mentioned in note 1, establish certain
obligations of the Company, including, but not limited to: (i) filing
annual reports with the SCT, including identifying main shareholders
of the Company, (ii) reporting any increase in common stock, (iii)
providing continuous services with certain technical specifications,
(iv) filing monthly reports about disruptions, (v) filing the
services' tariff, and (vi) providing a bond.
(e) The Company leases some equipment and facilities under operating
leases. Some of these leases have renewal clauses. Lease expense for
three months period ended June 30, 2004 and 2003 was $59,110 and
$46,790 respectively. Lease expense for six months period ended June
30, 2004 and 2003 was $117,874 and $97,534 respectively.
The annual payments under these leases as of June 30, 2004 are as
follows:
Contracts in:
-------------------------------------------------
Dollars UDIS
Pesos (thousands) (Investment units)
------------ ------------- -------------------
2004 $ 35,076 5,052 27,416
2005 53,658 5,309 54,833
2006 39,861 4,535 54,833
2007 34,089 3,646 54,833
2008 28,874 2,711 54,833
Thereafter 87,251 13,971 45,694
---------------
------------ -------------
$ 278,809 35,224 292,442
============ ============= ===============
(f) As of June 30, 2004, the Company has placed purchase orders which are
with pending delivery status from suppliers for approximately
$844,727.
(g) The Company has certain supply contracts establishing commitments to
purchase en established minimum amount per year. These contracts are
for a term of three years.
-17-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
(h) On April 20, 2004 Axtel and Airspan entered, into a Amendment
Agreement No. 2 to the Purchase and License Agreement of Fixed
Wireless Access Equipment and the Technical Assistance Support
Services Agreement, both dated March 20, 2004, by virtue of which the
Parties agreed to: (i) reduce the prices of (a) the Fixed Wireless
Access Equipment (RSS customer premise equipment and the radio base
station equipment) and (b) the Technical and Support Services for
years 2004 and 2005; (ii) eliminate Axtel's obligation to provide a
payment guarantee under such Agreements, (iii) improve the delivery
times of the equipments; (iv) create a single unit of RSS (customer
premise equipment) which will be sell at a lower price in comparison
of the current RSS customer premise equipment; and (v) cancel Axtel's
purchase commitments of years 2005, 2006 and 2007 established under
such Agreements and to replace such commitments with two new
commitments, one for U.S.$ 55.0 million to purchase Fixed Wireless
Access Equipment commencing April 20, 2004 and ending on December
31st, 2005 and the second commitment for the amount of U.S.$ 10.0
million to purchase any Airspan's product, commencing January 1st,
2006 and ending on May 1st, 2006.
(14) Subsequent events
During the month of July, the Company expanded their coverage to the cities
of Queretaro and San Luis Potosi. In these cities the Company offers the
same array of products and services which are currently provided in the
cities where the Company has presence.
-18-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
(15) Differences between Mexican and United States accounting principles
The consolidated financial statements of the Company are prepared according
to accounting principles generally accepted in Mexico (Mexican GAAP), which
differ in certain significant respects from those applicable in the United
States (U.S. GAAP).
The consolidated financial statements under Mexican GAAP include the
effects of inflation provided for by Bulletin B-10, whereas the financial
statements prepared under U.S. GAAP are presented on a historical cost
basis. The following reconciliation does not eliminate the inflation
adjustments for Mexican GAAP, since they represent an integral measurement
of the effects of the changes in the price levels in the Mexican
inflationary economy and, as such, are considered a more meaningful
presentation than the financial reports based on historic costs for book
purposes for Mexico and the United States.
-19-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
The main differences between Mexican GAAP and U.S. GAAP and their effect
on consolidated net loss and stockholders' equity as of June 30, 2004 and
2003 is presented below, with an explanation of the adjustments.
(Unaudited) (Unaudited)
Three months ended Six months ended
---------------------------------- --------------------------
June 30, June 30,
---------------------------------- --------------------------
2004 2003 2004 2003
---------------------------------- --------------------------
Net (loss) income reported under Mexican GAAP ........... $ (28,057) (127,307) 3,978 1,049,201
------------- ---------------- ------------- ------------
Approximated U.S. GAAP adjustments
1. Deferred income taxes (see 15a)....................... (8,295) 53,065 10,007 485,815
2. Amortization of pre-operating expenses, net (see 15c). 2,859 9,015 11,067 18,013
3. Deferred revenues (see 15b)........................... 1,716 8,267 4,584 21,005
4. Allowance for post retirement benefits (see 15d)...... 50 122 486 447
5. Deferred financing cost amortization (see 15f)........ - - - 13,523
6. Interest capitalization (see 15e)..................... (46) (115) (443) (420)
7. Gain in the forgiveness of debt (see 15g)............. - 19 - 1,303,612
------------- --------------- ------------- -------------
Total approximate U.S. GAAP adjustments.................. (3,716) 70,373 25,701 1,841,995
------------- --------------- ------------- -------------
Approximate net income (loss) under U.S. GAAP............ $ (31,773) (56,934) 29,679 2,891,196
============= =============== ============= =============
(Unaudited)
June 31, December 31,
----------------------------------
2004 2003
----------------------------------
Total stockholders' equity reported under Mexican GAAP................ $ 5,497,325 5,478,419
--------------- ---------------
Approximate U.S. GAAP adjustments
1. Deferred income taxes (see 15a).................................... (239,136) (256,495)
2. Pre-operating expenses (see 15c)..................................c (192,642) (203,709)
3. Deferred revenues (see 15b)........................................ (70,098) (74,682)
4. Allowance for post retirement benefits (see 15d)................... (27,184) (27,670)
5. Interest capitalization (see 15e).................................. 24,753 25,196
--------------- ---------------
Total approximate U.S. GAAP adjustments............................... (504,307) (537,360)
--------------- ---------------
Total approximate stockholders' equity under U.S. GAAP................ $ 4,993,018 4,941,059
=============== ===============
-20-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
The term "SFAS" as used in this document refers to Statement of Financial
Accounting Standards.
(a) Deferred income taxes and employee's statutory profit sharing
Deferred income taxes are accounted for under the asset and liability
method. All of the Company's pretax income (loss) and reported income
tax (expense) benefit is derived from domestic operations.
Deferred ESPS is recognized only for timing differences arising from
the reconciliation of book income to income for profit sharing
purposes, which can be reasonably presumed to result in a future
liability or benefit, with no indication that the liabilities or
benefits will not materialize.
For U.S. GAAP purposes, the Company accounts for income taxes and
employee statutory profit sharing under SFAS 109 "Accounting for
Income Taxes," which uses the asset and liability method to account
for deferred tax assets and liabilities. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the
future tax consequences of "temporary differences," by applying the
enacted statutory tax rates applicable to future years to the
differences between the book amounts of the financial statements and
the tax bases of existing assets and liabilities and the tax loss
carryforwards. The amount of deferred income taxes charged or credited
to the operations in each period, for U.S. GAAP purposes, is based on
the difference between the beginning and ending balances of the
deferred tax assets and liabilities for each period, expressed in
nominal pesos. The deferred tax effect of a change in the tax rate is
recognized in the results of operations of the period in which the
change is enacted.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as December 31, 2003
for U.S. GAAP are presented below:
December 31,
------------
2003
----
Deferred tax assets:
Net operating loss carryforwards................... $ 508,437
Allowance for doubtful accounts and write-off...... 176,532
Deferred revenues.................................. 25,391
Seniority premium and allowance for
post retirement benefits........................ 8,854
Accrued vacations.................................. 2,500
Accrued liabilities................................ 22,977
Tax on assets...................................... 8,359
Fair value of derivative instruments............... -
-------------
-21-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
Total gross deferred tax assets............. 753,050
Less valuation allowance............................ (362,010)
-------------
Net deferred tax assets..................... 391,040
-------------
Deferred tax liabilities:
Property, systems and equipment .................... 227,819
Telephone concession rights......................... 155,764
Other assets........................................ -
Inventories......................................... 7,457
-------------
Total deferred tax liabilities.............. 391,040
-------------
Net deferred tax liabilities under U.S. GAAP -
Less net deferred assets recognized
under Mexican GAAP............................ 256,495
-------------
U.S. GAAP adjustment to stockholders' equity....... $ (256,495)
=============
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Since the
Company has not generated taxable income in its three years of
operations, a deferred tax asset valuation allowance of $362,010 as of
December 31, 2003 was recorded for U.S. GAAP. This represents a
decrease in the valuation allowance $(509,986) for the year ended
December 31, 2003.
(b) Revenue recognition
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). This bulletin
summarizes the point of view of the SEC in the recognition of revenues
in the financial statements according to U.S. GAAP. The SEC concluded
that only when all the following conditions are met is revenue
recognition appropriate:
a) there is persuasive evidence of an agreement;
b) the delivery was made or the services rendered;
c) the sales price to the purchaser is fixed or determinable; and
d) collection is reasonable assured.
-22-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
SAB 101, specifically in Topic 13A, Question 5, discusses the
situation of recognizing as revenue certain non-refundable cash items.
SAB 101 provides that the seller should not recognize non-refundable
charges generated in certain transactions when there is continuous
involvement by the vendor.
One of the examples provided by SAB 101 is activation revenues from
telecommunication services. The SAB concludes that unless the charge
for the activation service is an exchange for products delivered or
services rendered that represent the culmination of a separate
revenue-generating process, the deferral method of revenue is
appropriate.
Based on the provisions and interpretations of SAB 101, for purposes
of the U.S. GAAP reconciliation, the Company has deferred the
activation revenues over a three-year period starting in the month
such charge is originated. This period was determined based on Company
experience. The net effect of the deferral and amortization is
presented in the above U.S. GAAP reconciliation.
(c) Start-up costs
In April 1998, the AICPA issued Statement of Position 98-5, "Report of
Start-up Costs" (SOP 98-5), which requires start-up costs, including
organization costs, to be expensed as incurred. SOP 98-5 is effective,
except for certain investment companies, for fiscal years beginning
after December 15, 1998. Under Mexican GAAP, this type of costs is
recognized as a deferred asset and amortized over a period of 10
years. The Company has reversed the amortization of $11,067 and
$18,013 in June 30, 2004 and 2003, as shown in the U.S. GAAP
reconciliation, and has reduced stockholders' equity by $192,642 and
$203,709 to write off the unamortized balance at June 31, 2004 and
December 31, 2003.
(d) Other employee benefits
Severance
Under Mexican GAAP (Bulletin D-3), severance payments should be
recognized in earnings in the period in which they are paid, unless
such payments are used by an entity as a substitution of pension
benefits, in which case, they should be considered as a pension plan.
Under U.S. GAAP, post-employment benefits for former or inactive
employees, excluding retirement benefits, are accounted for under the
provisions of SFAS 112, which requires recognition of certain
benefits, including severance, over an employee's service life. The
Company recognized an accrual amounting to $27,184 and $27,670 as of
June 30, 2004 and December 31, 2003, respectively.
-23-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
(e) Capitalized interest
Under Mexican GAAP, the Company capitalizes interest on property,
systems and equipment under construction. The amount of financing cost
to be capitalized is comprehensively measured in order to include
properly the effects of inflation. Therefore, the amount capitalized
includes: (i) the interest cost of the debt incurred, plus (ii) any
foreign currency fluctuations that result from the related debt, and
less (iii) the monetary position result recognized on the related
debt. Under U.S. GAAP, only interest is considered an additional cost
of constructed assets to be capitalized and depreciated over the lives
of the related assets.
The U.S. GAAP reconciliation removes the foreign currency gain or loss
and the monetary position result capitalized for Mexican GAAP, derived
from borrowings denominated in foreign currency.
(f) Deferred financing cost amortization
Under Mexican GAAP, the Company amortizes deferred financing cost
under the straight-line method over the life of the related debt. For
U.S. GAAP, this cost is amortized on the interest method over the life
of the related debt.
(g) Gain on the forgiveness of debt
On March 20, 2003, the Company entered into a debt-restructuring
agreement with Nortel Networks Limited and Nortel Networks de Mexico
(Nortel). The Company paid Nortel U.S.$ 125.2 million in cash, issued
a new note for U.S.$ 24.2 million and capitalized U.S.$ 178.5 million
in exchange for 250,836,980 series N shares of capital stock to
settled all the debt outstanding with Nortel as of the date of the
transaction.
For U.S. GAAP, and as required by SFAS 15 "Accounting for Debtors and
Creditors for Troubled Debt Restructurings", the equity provided by
Company to Nortel was recorded at the fair market value resulting in a
net gain on the forgiveness of the debt of approximately $3,195,310.
-24-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
(h) Guaranteed debt
On December 16, 2003, the Company completed an offering of senior
unsecured notes, for a value of U.S.$ 175 million (2,001 million
pesos) maturing on December 15, 2013. Interest on the notes are
payable semiannually at annual rate of 11%, beginning on June 15, 2004
(see note 9d).
Each of the Company's consolidated subsidiaries, Instalaciones y
Contrataciones, S.A. de C.V. (Instalaciones), Impulsora e Inmobiliaria
Regional, S.A. de C.V. (Impulsora) and Servicios Axtel, S.A. de C.V.
(Servicios), are guaranteeing the notes with unconditional guaranties
that are unsecured. Each of the subsidiary guarantors is 99.99% owned
by Axtel, S.A. de C.V. All guarantees are full and unconditional and
are joint and several.
Axtel is eligible, under Adopting Release (nos. 33-7878 and 34-43124)
and a no-action request letter, for presenting the condensed
consolidating financial information of Impulsora, Instalaciones and
Servicios in this note in accordance with Rule 3-10 (f) of Regulation
S-X. Each of Impulsora, Instalaciones and Servicios have total capital
stock outstanding of 50,000 common shares. Axtel directly owns all but
one share of each of Impulsora, Instalaciones and Servicios. The
ownership of the remaining share by someone other than Axtel is a
requirement of Mexican law.
For the purpose of the accompanying condensed consolidating balance
sheets, income statements and changes in financial position under
Mexican GAAP, the first column, "Axtel" corresponds to the parent
company issuer. The second column, "Combined Guarantors", represents
the combined amounts of Instalaciones, Impulsora and Servicios, after
adjustments and eliminations relating to their combination. The third
column, "Adjustments and Eliminations", includes all amounts resulting
from the consolidation of Axtel, and the guarantors. The fourth
column, "Axtel Consolidated", represents the Company's consolidated
amounts as reported in the consolidated financial statements.
Additionally, all amounts presented under the line item "Investments
in subsidiaries" for both the balance sheet and the income statement
are accounted for by the equity method.
-25-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
The condensed consolidating financial information is as follows:
Condensed consolidating balance sheets:
Adjustments
(Unaudited) Combined and Axtel
As of June 30, 2004 Axtel Guarantors Eliminations Consolidated
-------------------------------------------- ----------------------------------------------------------------------
Current assets $ 1,599,573 110,328 (104,068) 1,605,833
Property, systems and equipment, net 5,343,298 9,630 (1,595) 5,351,333
Deferred charges 1,129,708 5,683 - 1,135,391
Investment in subsidiaries 20,421 - (20,421) -
Other non current assets 140,327 165 - 140,492
--------------- ------------------ ---------------- -----------------
Total assets $ 8,233,327 125,806 (126,084) 8,233,049
--------------- ------------------ ---------------- -----------------
Current liabilities $ 697,310 101,966 (104,068) 695,208
Long-term debt 2,035,253 - - 2,035,253
Other non-current liabilities 3,439 1,824 - 5,263
--------------- ------------------ ---------------- -----------------
Total liabilities 2,736,002 103,790 (104,068) 2,735,724
--------------- ------------------ ---------------- -----------------
Total stockholders equity 5,497,325 22,016 (22,016) 5,497,325
--------------- ------------------ ---------------- -----------------
Total liabilities and stockholders equity $ 8,233,327 125,806 (126,084) 8,233,049
--------------- ------------------ ---------------- -----------------
Adjustments
Combined and Axtel
As of December 31, 2003 Axtel Guarantors Eliminations Consolidated
-------------------------------------------- --------------- ------------------ ----------------- ----------------
Current assets $ 1,667,061 95,005 (92,455) 1,669,611
Property, systems and equipment, net 5,277,031 10,014 (1,772) 5,285,273
Deferred charges 1,182,103 6,349 - 1,188,452
Investment in subsidiaries 21,234 - (21,234) -
Other non current assets 131,381 168 - 131,549
--------------- ------------------ ----------------- ----------------
Total assets $ 8,278,810 111,536 (115,461) 8,274,885
--------------- ------------------ ----------------- ----------------
Current liabilities $ 737,976 86,494 (92,455) 732,015
Long-term debt 2,060,204 - - 2,060,204
Other non-current liabilities 2,211 2,036 - 4,247
--------------- ------------------ ----------------- ----------------
Total liabilities 2,800,391 88,530 (92,455) 2,796,466
--------------- ------------------ ----------------- ----------------
Total stockholders equity 5,478,419 23,006 (23,006) 5,478,419
--------------- ------------------ ----------------- ----------------
Total liabilities and stockholders equity $ 8,278,810 111,536 (115,461) 8,274,885
--------------- ------------------ ----------------- ----------------
-26-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
Condensed consolidating income statements:
Adjustments
(Unaudited) Combined and Axtel
For the three-month period ended June 30, 2004 Axtel Guarantors Eliminations Consolidated
------------------------------------------------- ------------------ ---------------- ------------------ -------------------
Rental, installation, service and other revenues $ 894,414 226,328 (226,328) 894,414
Costs of sales and services (275,458) - - (275,458)
Selling and administrative expenses (313,773) (226,318) 226,328 (313,763)
Depreciation and amortization (239,528) (489) - (240,017)
Operating income (loss) 65,655 (479) - 65,176
Comprehensive financing result, net (97,183) (415) 295 (97,303)
Other income, net (4,242) 312 (295) (4,225)
Income tax 8,244 51 - 8,295
Investment in subsidiaries (531) - 531 -
------------------ ---------------- ------------------ -------------------
Net income (loss) $ (28,057) (531) 531 (28,057)
------------------ ---------------- ------------------ -------------------
Adjustments
(Unaudited) Combined and Axtel
For the three-month period ended June 30, 2003 Axtel Guarantors Eliminations Consolidated
------------------------------------------------- ------------------ ---------------- ------------------ -------------------
Rental, installation, service and other revenues $ 722,834 192,576 (192,529) 722,881
Costs of sales and services (203,587) - - (203,587)
Selling and administrative expenses (290,648) (191,882) 192,529 (290,001)
Depreciation and amortization (215,173) (101) - (215,274)
Operating (loss) income 13,426 593 - 14,019
Comprehensive financing result, net 16,854 (394) 307 16,767
Other income (expenses), net (102,270) (2,451) (307) (105,028)
Income tax (53,053) (12) - (53,065)
Investment in subsidiaries (2,264) - 2,264 -
------------------ ---------------- ------------------ -------------------
Net income (loss) $ (127,307) (2,264) 2,264 (127,307)
------------------ ---------------- ------------------ -------------------
-27-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
Adjustments
(Unaudited) Combined and Axtel
For the six-month period ended June 30, 2004 Axtel Guarantors Eliminations Consolidated
------------------------------------------------- ------------------ ---------------- ------------------ -------------------
Rental, installation, service and other revenues $ 1,761,142 431,832 (431,832) 1,761,142
Costs of sales and services (545,022) - - (545,022)
Selling and administrative expenses (609,839) (431,360) 431,832 (609,367)
Depreciation and amortization (470,286) (595) - (470,881)
Operating income 135,995 (123) - 135,872
Comprehensive financing result, net (131,502) (907) 567 (131,842)
Other income, net 9,638 884 (567) 9,955
Income tax (9,340) (667) - (10,007)
Investment in subsidiaries (813) - 813 -
------------------ ---------------- ------------------ -------------------
Net income (loss) $ 3,978 (813) 813 3,978
------------------ ---------------- ------------------ -------------------
Adjustments
(Unaudited) Combined and Axtel
For the six-month period ended June 30, 2003 Axtel Guarantors Eliminations Consolidated
------------------------------------------------- ------------------ ---------------- ------------------ -------------------
Rental, installation, service and other revenues $ 1,399,470 390,070 (390,024) 1,399,516
Costs of sales and services (397,931) - - (397,931)
Selling and administrative expenses (571,300) (380,659) 390,024 (561,935)
Depreciation and amortization (428,441) (202) - (428,643)
Operating (loss) income 1,798 9,209 - 11,007
Comprehensive financing result, net (266,296) (923) 681 (266,538)
Other income (expenses), net 1,801,394 (10,166) (681) 1,790,547
Income tax (485,798) (17) - (485,815)
Investment in subsidiaries (1,897) - 1,897 -
------------------ ---------------- ------------------ -------------------
Net income (loss) $ 1,049,201 (1,897) 1,897 1,049,201
------------------ ---------------- ------------------ -------------------
-28-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
Condensed consolidating statements of changes in financial position:
Adjustments
(Unaudited) Combined and Axtel
For the six-month period ended June 30, 2004 Axtel Guarantors Eliminations Consolidated
---------------------------------------------------------- -------------- -------------- ---------------- -----------------
Operating activities:
Net (loss) income $ 3,978 (813) 813 3,978
Non-cash items 480,439 1,262 (813) 480,888
-------------- -------------- ---------------- -----------------
Resources provided by (used in) operations 484,417 449 - 484,866
Net (investment in) financing from operations (90,002) 703 (544) (89,843)
-------------- -------------- ---------------- -----------------
Resources provided by operations, net 394,415 1,152 (544) 395,023
-------------- -------------- ---------------- -----------------
Financing activities:
Increase in common stock - - - -
Additional paid-in capital - - - -
Loans payments, net (95,634) (544) 544 (95,634)
Others 4,340 - - 4,340
-------------- -------------- ---------------- -----------------
Resources used in financing activities (91,294) (544) 544 (91,294)
-------------- -------------- ---------------- -----------------
Investing activities:
Acquisition and construction of property, systems and
equipment, net (487,563) (387) - (487,950)
Other assets (22,622) 3 - (22,619)
-------------- -------------- ---------------- -----------------
Resources used in investing activities (510,185) (384) (510,569)
-------------- -------------- ---------------- -----------------
(Decrease) increase in cash and equivalents (207,064) 224 - (206,840)
Cash and equivalents at the beginning of the period 1,030,637 463 - 1,031,100
-------------- -------------- ---------------- -----------------
Cash and equivalents at the end of the period $ 823,573 687 - 824,260
-------------- -------------- ---------------- -----------------
-29-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
Adjustments
(Unaudited) Combined and Axtel
For the six-month period ended June 30, 2003 Axtel Guarantors Eliminations Consolidated
---------------------------------------------------------- -------------- -------------- ---------------- -----------------
Operating activities:
Net income $ 1,049,201 (1,897) 1,897 1,049,201
Non-cash items (976,746) 219 (1,897) (978,424)
-------------- -------------- ---------------- -----------------
Resources used in operations 72,455 (1,678) - 70,777
Net financing from (investment in) operations (152,536) 1,211 (495) (151,820)
-------------- -------------- ---------------- -----------------
Resources used in operations, net (80,081) (467) (495) (81,043)
-------------- -------------- ---------------- -----------------
Financing activities:
Increase in common stock 2,706,682 - - 2,706,682
Additional paid-in capital (9,457) - - (9,457)
Proceeds from (loans payments), net (2,494,850) (495) 495 (2,494,850)
Others 98,450 - - 98,450
-------------- -------------- ---------------- -----------------
Resources provided by (used in) financing 300,825 (495) 495 300,825
activities
-------------- -------------- ---------------- -----------------
Investing activities:
Acquisition and construction of property, systems and
equipment, net (190,340) - - (190,340)
Other assets 266 (365) - (99)
-------------- -------------- ---------------- -----------------
Resources used in investing activities (190,074) (365) - (190,439)
-------------- -------------- ---------------- -----------------
Increase in cash and equivalents 30,670 (1,327) - 29,343
Cash and equivalents at the beginning of the period 331,358 1,482 - 332,840
-------------- -------------- ---------------- -----------------
Cash and equivalents at the end of the period $ 362,028 155 - 362,183
-------------- -------------- ---------------- -----------------
-30-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
The tables below present combined balance sheets as of June 30, 2004 and
December 31, 2003, income statements for each of the three-month and six-month
periods ended June 30, 2004 and June 30, 2003, and statements of changes in
financial position for each of the six-month periods ended June 30, 2004 and
June 30, 2003 for the Guarantors. Such information presents in separate columns
each individual Guarantor, combination adjustments and eliminations, and the
combined guarantors. All significant related parties balances and transactions
between the Guarantors have been eliminated in the "Combined Guarantors" column.
The amounts presented in the column "Combined Guarantors" are readily comparable
with the information of the Guarantors included in the condensed consolidating
financial information.
Guarantors' Combined Balance Sheets:
(Unaudited) Adjustments
As of June 30, 2004 Servicios and Combined
------------------------------------
Assets Icosa Inmobiliaria Axtel Eliminations Guarantors
------------ ------------------- -------------- -------------- ----------------
Cash and cash equivalents $ 82 13 592 - 687
Accounts receivable 33 - 190 - 223
Related parties receivables 6,418 - 88,921 (575) 94,764
Refundable taxes and other
accounts receivable 2,152 1,334 11,168 - 14,654
------------ ------------------- -------------- -------------- ----------------
Total current assets 8,685 1,347 100,871 (575) 110,328
------------ ------------------- -------------- -------------- ----------------
Property, systems and equipment,
net - 9,627 3 - 9,630
Deferred income taxes 2 - 6,065 (384) 5,683
Other 165 - - - 165
------------ ------------------- -------------- -------------- ----------------
Total non current assets 167 9,627 6,068 (384) 15,478
------------ ------------------- -------------- -------------- ----------------
Total assets $ 8,852 10,974 106,939 (959) 125,806
------------ ------------------- -------------- -------------- ----------------
Liabilities and Stockholders Equity
Account payable and accrued
liabilities $ 163 - 18,168 - 18,331
Taxes payable 3,387 - 36,479 - 39,866
Related parties payables - 8,544 - (575) 7,969
Other accounts payable 2,056 - 33,744 - 35,800
------------ ------------------- -------------- -------------- ----------------
Total current liabilities 5,606 8,544 88,391 (575) 101,966
------------ ------------------- -------------- -------------- ----------------
Deferred income tax - 384 - (384) -
Others 260 - 1,564 - 1,824
------------ ------------------- -------------- -------------- ----------------
Total liabilities 5,866 8,928 89,955 (959) 103,790
------------ ------------------- -------------- -------------- ----------------
Stockholders' equity 3,083 1,674 18,072 - 22,829
Net (loss) income (97) 372 (1,088) - (813)
------------ ------------------- -------------- -------------- ----------------
Total stockholders equity 2,986 2,046 16,984 - 22,016
------------ ------------------- -------------- -------------- ----------------
----------------
Total liabilities and stockholders
equity $ 8,852 10,974 106,939 (959) 125,806
------------ ------------------- -------------- -------------- ----------------
-31-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
As of December 31, 2003
------------------------------------
Adjustments
Servicios and Combined
Assets Icosa Inmobiliaria Axtel Eliminations Guarantors
------------ ------------------- -------------- --------------- ----------------
Cash and cash equivalents $ 162 13 288 - 463
Accounts receivable 34 - 98 - 132
Related parties receivables 5,407 - 77,759 (585) 82,581
Refundable taxes and other
accounts receivable 1,000 1,359 9,470 - 11,829
------------ ------------------- -------------- --------------- ----------------
Total current assets 6,603 1,372 87,615 (585) 95,005
------------ ------------------- -------------- --------------- ----------------
Property, systems and equipment,
net - 10,014 - - 10,014
Deferred income taxes 3 - 6,783 (437) 6,349
Other 168 - - - 168
------------ ------------------- -------------- --------------- ----------------
Total non current assets 171 10,014 6,783 (437) 16,531
------------ ------------------- -------------- --------------- ----------------
Total assets $ 6,774 11,386 94,398 (1,022) 111,536
------------ ------------------- -------------- --------------- ----------------
Liabilities and stockholders'
equity
Account payable and accrued
liabilities $ 165 - 8,600 - 8,765
Taxes payable 2,794 - 48,532 - 51,326
Related parties payables - 9,098 - (585) 8,513
Other accounts payable 449 - 17,441 - 17,890
------------ ------------------- -------------- --------------- ----------------
Total current liabilities 3,408 9,098 74,573 (585) 86,494
------------ ------------------- -------------- --------------- ----------------
Deferred income tax - 437 - (437) -
Others 282 - 1,754 - 2,036
------------ ------------------- -------------- --------------- ----------------
Total liabilities 3,690 9,535 76,327 (1,022) 88,530
------------ ------------------- -------------- --------------- ----------------
Stockholders' equity 3,831 1,516 21,152 - 26,499
Net (loss) income (747) 335 (3,081) - (3,493)
------------ ------------------- -------------- --------------- ----------------
Total stockholders equity 3,084 1,851 18,071 - 23,006
------------ ------------------- -------------- --------------- ----------------
Total liabilities and stockholders
equity $ 6,774 11,386 94,398 (1,022) 111,536
------------ ------------------- -------------- --------------- ----------------
-32-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
Guarantors' Combined Income Statements:
Adjustments
(Unaudited) Servicios and Combined
For the three-months period ended June 30, Icosa Inmobiliaria Axtel Eliminations Guarantors
---------------------------------------------- ------------ ---------------- --------------- -------------- --------------
Rental and service revenues $ 15,826 480 210,022 - 226,328
Administrative expenses (15,826) - (210,492) - (226,318)
Depreciation and amortization - (105) (384) - (489)
------------ ---------------- --------------- -------------- --------------
Operating income (loss) - 375 (854) - (479)
------------ ---------------- --------------- -------------- --------------
Comprehensive financing result, net (27) (279) (109) - (415)
------------ ---------------- --------------- -------------- --------------
Other income, net (10) - 322 - 312
------------ ---------------- --------------- -------------- --------------
(Loss) income before income taxes and
employee statutory profit sharing (37) 96 (641) - (582)
------------ ---------------- --------------- -------------- --------------
Total income tax and employee
statutory profit sharing benefit (5) (4) 60 - 51
------------ ---------------- --------------- -------------- --------------
Net (loss) income $ (42) 92 (581) - (531)
------------ ---------------- --------------- -------------- --------------
Adjustments
(Unaudited) Servicios and Combined
For the three-months period ended June 30, Icosa Inmobiliaria Axtel Eliminations Guarantors
---------------------------------------------- ------------ ---------------- --------------- -------------- --------------
Rental and service revenues $ 9,786 500 182,290 - 192,576
Administrative expenses (10,378) - (181,504) - (191,882)
Depreciation and amortization - (101) - - (101)
------------ ---------------- --------------- -------------- --------------
Operating income (592) 399 786 - 593
------------ ---------------- --------------- -------------- --------------
Comprehensive financing result, net (28) (263) (103) - (394)
------------ ---------------- --------------- -------------- --------------
Other expenses, net - - (2,451) - (2,451)
------------ ---------------- --------------- -------------- --------------
(Loss) income before income taxes and
employee statutory profit sharing (620) 136 (1,768) - (2,252)
------------ ---------------- --------------- -------------- --------------
Total income tax and employee
statutory profit sharing (22) (36) 46 - (12)
------------ ---------------- --------------- -------------- --------------
Net (loss) income $ (642) 100 (1,722) - (2,264)
------------ ---------------- --------------- -------------- --------------
-33-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
Adjustments
(Unaudited) Servicios and Combined
For the six-months period ended June 30, 2004 Icosa Inmobiliaria Axtel Eliminations Guarantors
---------------------------------------------- ------------ ---------------- --------------- -------------- --------------
Rental and service revenues $ 28,686 964 402,182 - 431,832
Administrative expenses (28,686) - (402,674) - (431,360)
Depreciation and amortization - (211) (384) - (595)
------------ ---------------- --------------- -------------- --------------
Operating income (loss) - 753 (876) - (123)
------------ ---------------- --------------- -------------- --------------
Comprehensive financing result, net (92) (434) (381) - (907)
------------ ---------------- --------------- -------------- --------------
Other income, net (3) - 887 - 884
------------ ---------------- --------------- -------------- --------------
(Loss) income before income taxes and
employee statutory profit sharing (95) 319 (370) - (146)
------------ ---------------- --------------- -------------- --------------
Total income tax and employee
statutory profit sharing benefit (2) 53 (718) - (667)
------------ ---------------- --------------- -------------- --------------
Net (loss) income $ (97) 372 (1,088) - (813)
------------ ---------------- --------------- -------------- --------------
Adjustments
(Unaudited) Servicios and Combined
For the six-months period ended June 30, 2003 Icosa Inmobiliaria Axtel Eliminations Guarantors
---------------------------------------------- ------------ ---------------- --------------- -------------- --------------
Rental and service revenues $ 18,766 1,004 370,300 - 390,070
Administrative expenses (19,274) - (361,385) - (380,659)
Depreciation and amortization - (202) - - (202)
------------ ---------------- --------------- -------------- --------------
Operating income (508) 802 8,915 - 9,209
------------ ---------------- --------------- -------------- --------------
Comprehensive financing result, net (73) (523) (327) - (923)
------------ ---------------- --------------- -------------- --------------
Other expenses, net (84) - (10,082) - (10,166)
------------ ---------------- --------------- -------------- --------------
(Loss) income before income taxes and
employee statutory profit sharing (665) 279 (1,494) - (1,880)
------------ ---------------- --------------- -------------- --------------
Total income tax and employee
statutory profit sharing (193) 6 170 - (17)
------------ ---------------- --------------- -------------- --------------
Net (loss) income $ (858) 285 (1,324) - (1,897)
------------ ---------------- --------------- -------------- --------------
-34-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
Guarantors' Combined Statements of Changes in Financial Position:
Adjustments
(Unaudited) Servicios and Combined
For the six-months period ended June 30, 2004 Icosa Inmobiliaria Axtel Eliminations Guarantors
------------------------------------------------ ------------ ---------------- --------------- --------------- --------------
Operating activities:
Net (loss) income $ (97) 372 (1,088) - (813)
Non-cash items 2 158 1,102 - 1,262
------------ ---------------- --------------- --------------- --------------
Resources (used in) provided by
operations (95) 530 14 - 449
Net financing from operations 12 14 677 - 703
------------ ---------------- --------------- --------------- --------------
Resources provided by operations, net (83) 544 691 - 1,152
------------ ---------------- --------------- --------------- --------------
Financing activities:
Increase in common stock - - - - -
Loans payment, net - (544) - - (544)
------------ ---------------- --------------- --------------- --------------
Resources used in financing activities - (544) - - (544)
------------ ---------------- --------------- --------------- --------------
Investing activities:
Property, system and equipment, net - - (387) - (387)
Other assets 3 - - - 3
------------ ---------------- --------------- --------------- --------------
Resources used in investing activities 3 - (387) - (384)
------------ ---------------- --------------- --------------- --------------
Increase in cash and equivalents (80) - 304 - 224
Cash and equivalents at the beginning of the
period 162 13 288 - 463
------------ ---------------- --------------- --------------- --------------
Cash and equivalents at the end of the period $ 82 13 592 - 687
------------ ---------------- --------------- --------------- --------------
-35-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
Adjustments
(Unaudited) Servicios and Combined
For the six-months period ended June 30, 2003 Icosa Inmobiliaria Axtel Eliminations Guarantors
------------------------------------------------ ------------ ---------------- --------------- --------------- --------------
Operating activities:
Net income (loss) $ (858) 285 (1,324) - (1,897)
Non-cash items 193 196 (170) - 219
------------ ---------------- --------------- --------------- --------------
Resources (used in) provided by operations (665) 481 (1,494) - (1,678)
Financing from (investment in)
operations, net 1,055 12 144 - 1,211
------------ ---------------- --------------- --------------- --------------
Resources provided by (used in)
operations, net 390 493 (1,350) - (467)
------------ ---------------- --------------- --------------- --------------
Financing activities:
Loans payments, net - (495) - - (495)
------------ ---------------- --------------- --------------- --------------
Resources used in financing activities - (495) - - (495)
------------ ---------------- --------------- --------------- --------------
Investing activities:
Other assets (365) - - - (365)
------------ ---------------- --------------- --------------- --------------
Resources used in investing activities (365) - - - (365)
------------ ---------------- --------------- --------------- --------------
Increase (decrease) in cash and equivalents 25 (2) (1,350) - (1,327)
Cash and equivalents at the beginning of the
period 79 52 1,351 - 1,482
------------ ---------------- --------------- --------------- --------------
Cash and equivalents at the end of the period $ 104 50 1 - 155
------------ ---------------- --------------- --------------- --------------
-36-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
Guarantors - U.S. GAAP reconciliation of net income and stockholders' equity:
As discussed at the beginning of this note 15, the following reconciliation to
U.S. GAAP does not eliminate the inflation adjustments for Mexican GAAP, since
they represent an integral measurement of the effects of the changes in the
price levels in the Mexican economy and, as such, are considered a more
meaningful presentation than the financial reports based on historic costs for
book purposes for Mexico and the United States.
The main differences between Mexican GAAP and U.S. GAAP and their effect on
consolidated net loss and stockholders' equity as of June 30, 2004, December 31,
2003 and June 30, 2003 is presented below, with an explanation of the
adjustments.
(Unaudited)
---------------------------------------
Three-month period ended June 30
---------------------------------------
2004 2003
---------------------------------------
Net (loss) reported under Mexican GAAP ............... $ (531) (2,264)
------------------ -----------------
Approximated U.S. GAAP adjustments
1. Deferred income taxes (A).......................... (51) 12
2. Allowance for post retirement benefits (B)......... 50 122
------------------ -----------------
Total approximate U.S. GAAP adjustments............... (1) 134
------------------ -----------------
Approximate net loss under U.S. GAAP.................. $ (532) (2,130)
================== =================
(Unaudited)
--------------------------------------
Six-month period ended June 30
--------------------------------------
2004 2003
--------------------------------------
Net loss reported under Mexican GAAP ................. $ (813) (1,897)
----------------- -----------------
Approximated U.S. GAAP adjustments
1. Deferred income taxes (A).......................... 667 17
2. Allowance for post retirement benefits (B)......... 486 447
----------------- -----------------
Total approximate U.S. GAAP adjustments............... 1,153 464
----------------- -----------------
Approximate net income (loss) under U.S. GAAP......... $ 340 (1,433)
================= =================
-37-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2004)
(Unaudited)
---------------
Six-month Year ended
period ended
June 30 December 31
----------------------------------
2004 2003
----------------------------------
Total stockholders' equity reported under Mexican GAAP...... $ 22,016 23,006
--------------- ----------------
Approximate U.S. GAAP adjustments
1. Deferred income taxes (A)................................ (5,683) (6,349)
2. Allowance for post retirement benefits (B)............... (27,184) (27,670)
--------------- ----------------
Total approximate U.S. GAAP adjustments..................... (32,867) (34,019)
--------------- ----------------
Total approximate stockholders' deficit under U.S. GAAP..... $ (10,851) (11,013)
=============== ================
Guarantors-Notes to the U.S. GAAP reconciliation
A. Deferred income taxes
Deferred income taxes adjustment in the stockholders' equity reconciliation
to U.S. GAAP, at June 30, 2004 and December 31, 2003, represented expenses
of $5,683 and $6,349, respectively.
B. Other employee benefits Severance
Under Mexican GAAP (Bulletin D-3), severance payments should be recognized
in earnings in the period in which they are paid, unless such payments are
used by an entity as a substitution of pension benefits, in which case,
they should be considered as a pension plan. Under U.S. GAAP,
post-employment benefits for former or inactive employees, excluding
retirement benefits, are accounted for under the provisions of SFAS 112,
which requires recognition of certain benefits, including severance, over
an employee's service life. For the six-month periods ended June 30, 2004
and 2003 the Company recorded an increase in net income of $486 and $447,
respectively, and recognized an accrual amounting to $27,184 and $27,670 as
of June 30, 2004 and December 31, 2003, respectively.
-38-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We provide bundled local and long distance voice services, as well as data
and internet services. Our integrated service offering enables us to maximize
the recurring revenue received from each customer, increasing the return
achieved on our investment in infrastructure, sales and marketing and
distribution. Long distance services, for example, have been a significant
source of revenue, but would not be cost-effective to provide as a stand-alone
service offering because of the significant downward pricing pressure on long
distance services in Mexico. In addition, we believe and have found that
customers prefer to purchase their telecommunications services from a single
provider and receive a single bill. We believe customer loyalty is increased
with the provision of additional services, resulting in a lower customer churn
rate.
Revenues
We derive our revenues from:
o Local calling services. We generate revenue by enabling our customers
to originate and receive an unlimited number of calls within a defined
local service area. Customers are charged an initial fee for
activating the service, a flat monthly fee for basic service, a per
call fee ("measured service") and a per minute usage fee for calls
completed on a cellular line ("calling party pays calls").
o Long distance services. We generate revenues by providing long
distance services (Domestic and International) for our customers'
completed calls.
o Other services. We generate revenues by providing other services to
our customers including internet, data, interconnection and dedicated
private line service, as well as value-added services such as caller
ID, call waiting, call forwarding and voicemail.
The following summarizes our revenues and percentage of revenues from
operations from these sources:
Revenues (Constant Ps.
in millions as of % of Revenues
June 30, 2004) Six-month period ended
Six-month period ended June 30, June 30,
----------------------------------------- -----------------------
Revenue Source 2004 2003 % of Change 2004 2003
------------------------ ----------- ----------- ----------- --------- ----------
Local calling services.. Ps. 1,242.7 Ps. 1,062.8 16.9% 70.6% 75.9%
Long distance services.. 174.9 140.0 25.0% 9.9% 10.0%
Other services.......... 343.5 196.8 74.6% 19.5% 14.1%
----------- ----------- ----------- --------- ----------
Total................... Ps. 1,761.1 Ps. 1,399.5 25.8% 100.0% 100.0%
=========== =========== =========== ========= ==========
Revenues (Constant Ps.
in millions as of % of Revenues
June 30, 2004) Three-month period ended
Three-month period ended June 30, June 30,
----------------------------------------- -----------------------
Revenue Source 2004 2003 % of Change 2004 2003
------------------------ ----------- ----------- ----------- --------- ----------
Local calling services.. Ps. 640.2 Ps. 545.1 17.4% 71.6% 75.4%
Long distance services.. 89.3 72.2 23.7% 10.0% 10.0%
Other services.......... 164.9 105.6 56.2% 18.4% 14.6%
----------- ----------- ----------- --------- ----------
Total................... Ps. 894.4 Ps. 722.9 23.7% 100.0% 100.0%
=========== =========== =========== ========= ==========
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Cost of Revenues and Operating Expenses
Our costs are categorized as follows:
o Cost of revenues include expenses related to the termination of our
customers' cellular and long distance calls in other carriers'
networks, as well as expenses related to billing, payment processing,
operator services and our leasing of private circuit links.
o Operating expenses include costs incurred in connection with general
and administrative matters including compensation and benefits, the
costs of leasing land related to our operations and costs associated
with sales and marketing and the maintenance of our network.
o Depreciation and amortization includes depreciation of all
communications network and equipment and amortization of preoperating
expenses and the cost of spectrum licenses.
Debt Repurchase
As previously discussed, during the first quarter of 2003, we implemented a
significant restructuring of our debt and equity and entered into agreements to
replace our most significant supply contracts. These transactions resulted in a
net gain for financial statement purposes and an increase in shareholder's
equity.
Additional information regarding the debt repurchase is included in our
previously filed documents.
Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003
Revenues from Operations
Revenues from operations increased to Ps. 1,761.1 million for six-month
period ended June 30, 2004 from Ps. 1,399.5 million for the same period in year
2003, an increase of Ps. 361.6 million, or 26%. The number of access lines
increased to 388,194 from 311,080, an increase of 25%, and our average revenue
per user decreased to Ps. 650.5 from Ps. 673.3. During the year 2003, the
Company launched new and innovative commercial offers, thus allowing the Company
to increase the number of lines in service, which had a favorable impact on the
2004 revenues.
Local services. Local service revenues increased to Ps. 1,242.7 million for
the six-month period ended June 30, 2004 from Ps. 1,062.8 million for the same
period ended in year 2003, an increase of Ps. 179.9 million, or 17%. These
increases were primarily due to higher monthly rent and cellular consumption
driven by specifically targeted offers to capture high consumption customers.
This effect was partially offset by the reduction of Ps. 34.9 million in
measured service revenues.
Long distance services. Long distance services revenues increased to Ps.
174.9 million for the six-month period ended June 30, 2004 from Ps. 140.0
million for the period ended June 30, 2003, an increase of Ps. 35.0 million, or
25%. This increase was mainly driven by a higher consumption in domestic long
distance, offset in part by a price reduction related to special offers.
Other services. Revenue from other services increased to Ps. 343.5 million
in the six-month period ended June 30, 2004 from Ps. 196.8 million in the same
period in 2003, an increase of Ps. 146.7 million, due to increases in both data
revenues as well as increased subscriptions for value added.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues from operations increased to Ps. 545.0
million for the six-month period ended June 30, 2004 from Ps. 397.9 million
registered in the same period in 2003, an increase of Ps. 147.1 million, or 37%.
This growth was due primarily to a Ps. 149.4 million increase in our underlying
costs related to calling party pays calls, as well as increased long distance
costs due to higher consumption levels.
Gross profit. Gross profit is defined as revenues minus costs of revenues.
For the six-month period ended June 30, 2004 the gross profit was Ps. 1,216.1
million, an increase of Ps. 214.5 million, or 21%, compared with the same period
in year 2003. Our gross margin decreased to 69% of total revenues for the
six-month period ended June 30, 2004 when compared to 72% recorded in same
period in year 2003.
Operating expenses. Operating expenses for the six-month period ended June
30, 2004 grew Ps. 47.4 million totaling Ps. 609.4 million. During the same
period of 2003 this amount was Ps. 561.9 million. This
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increase was attributable primarily to increases in salaries, rents and
maintenance which were partially offset by an uncollectible reserve reduction
derived from efficiencies in collection policies.
Depreciation and Amortization. Depreciation and amortization from
continuing operations increased to Ps. 470.9 million for the six-month period
ended June 30, 2004 from Ps. 428.6 million for the same period in year 2003, an
increase of Ps. 42.2 million, or 10%. This increase in depreciation and
amortization reflects the Company's infrastructure growth.
Operating income (loss). Due to the factors previously described, operating
income increased to Ps. 135.9 million for the six-month period ended June 30,
2004 compared to an operating income of Ps. 11.0 million for the same period in
year 2003, an increase of Ps. 124.9 million, or 11x.
Comprehensive financial result. The comprehensive financial result was Ps.
(131.8) million for the six month period ended June 30, 2004, compared to a
comprehensive financial result of Ps. (266.5) million for the same period in
year 2003. The following table illustrates the comprehensive financial results:
Comprehensive Financial Result Comparison
Six-month period ended June 30, % of
Description 2004 2003 Change
-------------------------------------------------------------------------------------------------
Interest expense Ps. (130.2) Ps. (132.5) 1.7%
Interest income 9.2 13.0 -29.2
Foreign exchange gain (loss), net (29.1) (218.1) 86.7%
=================================================================================================
Monetary position gain 18.2 71.0 -74.4%
=================================================================================================
Total Ps. (131.8) Ps. (266.5) 50.5%
The main impact in the comprehensive financial result is the interest
payment related to our senior notes issued in December 2003.
Net Income (loss). We registered a net income of Ps. 4.0 million for the
six-month period ended June 30, 2004 compared to Ps. 1,049.2 million recorded in
the six-month period ended June 30, 2003. The 2003 net income reflects the
financial gain obtained from our debt repurchase that took effect on March 2003.
Three Month Ended June 30, 2004 Compared with Three Month Ended June 30, 2003
Revenues from Operations
Revenues from operations increased to Ps. 894.4 million for three month
period ended June 30, 2004 from Ps. 722.9 million for the same period in year
2003, an increase of Ps. 171.5 million, or 24%. The average revenue per user
decreased to Ps. 652.6 from Ps. 692.8.
Local services. Local service revenues increased to Ps. 640.2 million for
the three-month period ended June 30, 2004 from Ps. 545.1 million for the same
period in year 2003, an increase of Ps. 95.1 million, or 17%. These increases
were primarily due to higher monthly rent and cellular consumption driven by
specifically targeted offers to capture high consumption customers. This effect
was partially offset by the reduction of Ps. 15.4 million in measured service
revenues.
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Long distance services. Long distance services revenues increased to Ps.
89.3 million for the three-month period ended June 30, 2004 from Ps. 72.2
million for the same period 2003, an increase of Ps. 17.1 million, or 24%. This
increase was mainly driven by a higher consumption in domestic long distance and
offset by a price reduction related to special offers.
Other services. Revenue from other services increased to Ps. 164.9 million
in the three-month period ended June 30, 2004 from Ps. 105.6 million in the same
period in 2003, an increase of Ps. 59.3 million, due to the increase in data
revenues.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues from operations increased to Ps. 275.5
million for the three-month period ended June 30, 2004 from Ps. 203.6 million
registered in the same period in 2003, an increase of Ps. 71.9 million, or 35%.
This growth was due primarily to a Ps. 70.6 million increase in our underlying
costs related to calling party pays calls, as well as increased long distance
costs due to higher consumption levels.
Gross profit. Gross profit is defined as revenues minus costs of revenues.
For the three-month period ended June 30, 2004 the gross profit was Ps. 619.0
million, an increase of Ps. 99.7 million, or 19%, compared with the same period
in year 2003. Our gross margin decreased to 69% of total revenues for the
three-month period ended June 30, 2004 when compared to 72% of total revenues
recorded in same period in year 2003.
Operating expenses. Operating expenses for the three-month period ended
June 30, 2004 grew Ps. 23.8 million to Ps. 313.8 million. During the same period
of 2003 this amount was Ps. 290.0 million. This increase was attributable
primarily to increases in salaries, rents and maintenance which were partially
offset by an uncollectible reserve reduction derived from efficiencies in
collection policies and advertising.
Depreciation and Amortization. Depreciation and amortization from
continuing operations increased to Ps. 240.0 million for the three-month period
ended June 30, 2004 from Ps. 215.3 million for the same period in year 2003, an
increase of Ps. 24.7 million, or 11%. This increase in depreciation and
amortization reflects the Company's infrastructure growth.
Operating income (loss). Due to the factors previously described, operating
income increased to Ps. 65.2 million for the three-month period ended June 30,
2004 compared to an operating income of Ps. 14.0 million for the same period in
year 2003, an increase of Ps. 51.2 million or, 4x.
Comprehensive financial result. The comprehensive financial result was Ps.
(97.3) million for the three-month period ended June 30, 2004, compared to a
comprehensive financial result of Ps. 16.8 million for the same period in year
2003. The following table illustrates the comprehensive financial results:
Comprehensive Financial Result Comparison
Three-month period ended June 30, % of
Description 2004 2003 Change
----------------------------------------------------------------------------------------------
Interest expense Ps. (63.5) Ps. (34.0) -86.8%
Interest income 4.1 5.7 28.1%
Foreign exchange gain (loss), net (39.8) 39.7 N/A
==============================================================================================
Monetary position gain 1.9 5.3 -64.2%
==============================================================================================
Total Ps. (97.3) Ps. 16.8 N/A
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The main impact in the comprehensive financial result is the interest
payment related to our senior notes issued in December 2003. The foreign
exchange loss for the three-month period ended June 30, 2004 was negatively
affected as a result of 2.3% depreciation of the Peso against the US dollar
compared to 2.7% appreciation that occurred during the same period of 2003. The
foreign exchange loss for the three-month period ended June 30, 2004 was Ps.
39.8 million compared to an exchange gain of Ps. 39.7 million recorded in the
same period of 2003.
Net Income (loss). We registered Ps. (28.1) million for the three-month
period ended June 30, 2004 compared to Ps. (127.3) million recorded in the
three-month period ended June 30, 2003.
Liquidity and Capital Resources
Historically we have relied primarily on vendor financing, private equity
contributions, internal cash from operations and the proceeds from bank debt to
fund our operations, capital expenditures and working capital requirements.
After giving effect to the offering of the outstanding notes and the net
proceeds therefrom, we believe that we will be able to meet our debt service
obligations and fund our operating requirements in the future with cash flow
from operations, although no assurance can be given in this regard. We will
continue to focus on investments in fixed assets and working capital management,
including the collection of accounts receivable and management of accounts
payable.
We expect to make additional investments in future periods as we
selectively expand our network into other areas of Mexico in order to exploit
market opportunities as well as to maintain our existing network and operating
facilities.
Capitalization of preoperating expenses
We commenced commercial operations in June 1999. As permitted under Mexican
GAAP, during our preoperating stage we were able to capitalize all of our
general and administrative expenses and our net comprehensive cost of financing.
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Beginning in June 1999, we are required to amortize all previously
capitalized general and administrative expenses and to depreciate all previously
capitalized net comprehensive cost of financing. These capitalized preoperating
expenses are amortized on a straight-line basis for a period not exceeding ten
years.
Summary of contractual obligations
The following table discloses aggregate information about our contractual
obligations and the periods in which payments are due.
Less than More than 5
Total 1 year 1-3 years 3-5 years years
----------- ------------- ---------- ------------ ------------
pro forma, payments due by period
(US$ in millions)
Contractual obligations:
Debt maturing within one year.......... 6.7 6.7 -- -- --
Long-term debt......................... 178.3 -- 3.3 -- 175.0
Operating leases....................... 6.4 3.3 2.9 0.2 --
Nortel/Airspan(1)...................... 76.4 35.3 40.1 1.1 --
----------- ------------- ---------- ------------ ------------
Total contractual cash obligation...... 267.8 39.6 46.3 1.3 175.0
=========== ============= ========== ============ ============
- --------------------------------------------------------------------------------
(1) Includes Airspan's new supply agreement.
US GAAP Reconciliation
We describe below the principal differences between Mexican GAAP and US
GAAP. See Note 15 to the unaudited consolidated financial statements for
reconciliation to US GAAP of shareholders' equity and net loss for the period
presented.
Recognition of the effects of inflation on financial information. Under
Mexican GAAP, the effects of inflation are reflected in financial statements and
such a convention has no counterpart under US GAAP. However, although Mexican
GAAP includes the effects of inflation in financial statements, the SEC does not
require the restatement of financial statements to reconcile the effects of the
Mexican GAAP inflation accounting.
Preoperating expenses. Under Mexican GAAP, all expenses incurred while a
company is in the pre-operating or development stages are deferred and
considered as a component of a company's assets. Such capitalized expenses are
amortized on a straight-line basis for a period not exceeding 10 years after the
corresponding asset commences operations. According to US GAAP, such
preoperating or development expenses are expensed and reported as a deficit to
shareholders' equity recorded during the developing stage.
Deferred income tax and employees statutory profit sharing. Under Mexican
GAAP deferred income tax is accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit (TA) carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax and employees statutory profit sharing is
recognized only for timing differences arising from the reconciliation of book
income to income for profit sharing purposes, on which it may reasonably be
estimated that a future liability or benefit will arise and there is no
indication that the liabilities or benefits will not materialize. Under US GAAP,
deferred income tax and employees statutory profit sharing are determined under
the asset and liability method recognizing the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss carryforwards.
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Statement of changes in financial position. In accordance with Mexican
GAAP, we present statements of changes in financial position in constant pesos.
This presentation identifies the generation and application of resources
representing differences between beginning and ending financial statements
balances in constant pesos.
The changes in the consolidated financial statement balances included in
our unaudited consolidated financial statements constitute cash flow activity
stated in constant pesos (including monetary losses which are considered as cash
losses in the financial statements presented in constant pesos). SFAS No. 95
does not provide guidance with respect to inflation adjusted financial
statements. However, US GAAP requires that non-cash financing and investing
transactions should be excluded from the statement of cash flows and reported in
related disclosures.
Vacations. Under Mexican GAAP, vacation expenses are recognized when taken,
rather than in the period when they are earned by an employee, as is required
under US GAAP. Starting on January 2003, Mexican GAAP requires the recognition
of vacation expense when earned.
Severance. Under Mexican GAAP, severance payments should be recognized in
earnings in the period in which they are paid, unless such payments are used by
an entity as a substitution for pension benefits, in which case, they should be
considered as a pension plan. Under US GAAP, post-employment benefits for former
or inactive employees, excluding retirement benefits, are accounted for under
the provisions of SFAS No. 112, which requires recognition of certain benefits,
including severance, over an employee's service life.
Capitalization of interest. In accordance with Mexican GAAP, capitalization
of interest or, during inflationary periods, comprehensive cost of financing or
income incurred in the period of construction and installation of an asset is
permitted. The interest to be capitalized is that of the specific financing
obtained for the construction of the related asset. Under US GAAP,
capitalization of interest is required for certain qualifying assets that
require a period of time to get them ready for their intended use. The amount of
interest to be capitalized is that portion of the interest cost incurred during
the assets' acquisition period that theoretically could have been avoided if
expenditures for the assets had not been made, and is not limited to
indebtedness attributable to the asset.
Recent Accounting Pronouncements
Financial instruments with characteristics of liabilities, equity, or both
In May 2003, the Mexican Institute of Public Accountants issued Bulletin
C-12, "Financial Instruments with Characteristics of Liabilities, Equity, or
Both." Bulletin C-12, is effective for fiscal years beginning after December 31,
2003, although earlier application is permitted. Bulletin C-12 puts together
regulations contained in other bulletins related to issuance of complex
financial instruments, and adds regulations necessary for a comprehensive
resolution of general problems. Therefore, Bulletin C-12 defines the basic
differences between liabilities and equity; establishes rules for the
classification and valuation of the liability and equity components of combined
financial instruments, upon initial recognition; and establishes rules for
disclosure of combined financial instruments. Under Bulletin C-12, financial
instruments should be classified as liabilities or equity at the beginning of
the year of adoption, and comparative financial information for prior years
should not be restated, nor a cumulative-effect-type adjustment recognized in
the year of adoption.
The Company estimates that the adoption of the new Bulletin C-12 will not
have a material effect on its financial position or results of operations.
Recent accounting pronouncements under US GAAP
In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities, which addresses how
a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consoli-
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date the entity. FIN 46R replaces FASB Interpretation No. 46 Consolidation of
Variable Interest Entities, which was issued in January 2003. The Company will
be required to apply FIN 46R to variable interests in VIEs created after
December 31, 2003. For variable interests in VIEs created before January 1,
2004, the Interpretation will be applied beginning on January 1, 2005. For any
VIEs that must be consolidated under FIN 46R that were created on January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created on
January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE
initially would be measured at their carrying amounts, with any differences
between the net amount added to the balance sheet and any previously recognized
interest begin recognized as the cumulative effect of an accounting change. If
determining the carrying amounts is not practicable, fair value at the date FIN
46R first applies may be used to measure the assets, liabilities, and
noncontrolling interest of the VIE.
FASB Statements No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, was issued in May 2003. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The Statement also includes required disclosures for financial
instruments within its scope. For the Company, the Statement was effective for
instruments entered into or modified after May 31, 2003 and otherwise will be
effective as of January 1, 2004, except for mandatory redeemable financial
instruments. For certain mandatory redeemable financial instruments, the
Statement will be effective for the Company on January 1, 2005. The effective
date has been deferred indefinitely for certain types of mandatory redeemable
financial instruments. The Company currently does not have any financial
instruments that are within the scope of this Statement.
Critical Accounting Policies
Our consolidated financial statements included elsewhere in this report
have been prepared in accordance with Mexican GAAP, which differ in significant
respects from respects from US GAAP. See note 15 to our condensed consolidated
financial statements, included elsewhere in this quarterly report, for a
description of the principal differences between Mexican GAAP and US GAAP as
they relate to us.
We have identified below the accounting policies we have applied under
Mexican GAAP that are critical to understanding our overall financial reporting.
Income taxes
Under Mexican GAAP, income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit (AT) carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Significant judgment is required to appropriately assess the amounts of tax
assets. We record tax assets when we believe there will be enough future taxable
income for the realization of such deductible temporary difference. If this
determination cannot be made, a valuation allowance is established to reduce the
carrying value of the asset.
Deferred income tax and employees statutory profit sharing is recognized
only for timing differences arising from the reconciliation of book income to
income for profit sharing purposes, on which it may be reasonably estimated that
a future liability or benefit will arise and there is no indication that the
liabilities or benefits will not materialize.
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Recognition of the effects of inflation
Under Mexican GAAP, the financial statements are restated to reflect the
loss of purchasing power (inflation) of their functional currency. The inflation
effects arising from holding monetary assets and liabilities are reflected in
the income statements as monetary position result. Inventories, fixed assets and
deferred charges, with the exception and the equity accounts, are restated to
account for inflation using the Mexican National Consumer price Index (NCPI)
published by Banco de Mexico (central bank). The result is reflected as an
increase in the carrying value of each item. Income statement accounts are also
restated for inflation into constant Mexican Pesos as of the reporting date.
Impairment of long-lived assets
We evaluate periodically the adjusted values of our property, plant,
systems and equipment and other non-current assets, to determine whether there
is an indication of potential impairment.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net revenues expected to be generated
by the asset. If such assets are considered to be impaired, the impairment is
measured by the amount by which the carrying amount of the asset exceeds the
expected net revenues. Assets to be disposed of are reported at the lower of the
carrying amount or realizable value.
Revenue Recognition
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). This bulletin
summarizes the point of view of the SEC in the recognition of revenues in the
financial statements according to US GAAP. The SEC concluded that only when all
the following conditions are met is revenue recognition appropriate:
(a) there is persuasive evidence of an agreement;
(b) the delivery was made or the services rendered;
(c) the sales price to the purchaser is fixed or determinable;
(d) collection is reasonably assured.
SAB 101, specifically in Topic 13A, Question 5, discusses the situation of
recognizing as revenue certain non-refundable cash items. SAB 101 provides that
the seller should not recognize non-refundable charges generated in certain
transactions when there is continuous involvement by the vendor.
One of the examples provided by SAB 101 is activation revenues from
telecommunication services. The SAB concludes that unless the charge for the
activation service is an exchange for products delivered or services rendered
that represent the culmination of a separate revenue-generating process, the
deferral method of revenue is appropriate.
Based on the provisions and interpretations of SAB 101, for purposes of the
US GAAP reconciliation, the Company has deferred the activation revenues over a
three-year period starting in the month such charge is originated. This period
was determined based on Company experience. The net effect of the deferral and
amortization is presented in the above US GAAP reconciliation.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks
Our primary foreign currency exposure relates to our US dollar-denominated debt.
Most of our debt obligations at June 30, 2004 were denominated in US dollars.
Therefore, we are exposed to currency exchange rate risks that could
significantly affect our ability to meet obligations. On March 29, 2004, the
Company entered into two separate derivative transactions denominated "coupon
Swap" agreements to hedge a portion of its US dollar foreign exchange exposure
resulting from the issuance of our US $175.0 million 11% senior notes that will
mature in year 2013. Under the transactions, Axtel will receive semi-annual
payments based on the aggregate notional amount of US $113.8 million at an
annual rate of 11%, and the Company will make semiannual payments calculated
based on the aggregate of Ps. $1,270.0 million at an annual rate of 12.3%. Both
of these transactions will cease in December 2008.
The following table provides information about the details of our option
contracts as of June 30, 2004 (in thousands except average strike price):
(Amounts in millions) Currencies Interest Rates
Maturity date ----------------------------------- -------------------------------
Notional Notional Amount in new Axtel Axtel pays Estimated
amount amount currency receives fair value
December 15, 2008 US$ 113.8 Ps. 1,270 US$ 113.8 11.00% 12.30% US$ 1.95
Prior to entering into foreign currency hedging contracts, we evaluate the
counterparties' credit ratings. Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed to perform as
contracted. We do not currently anticipate non-performance by such
counterparties.
The exchange rate of the peso to the US dollar is a freely floating rate
and the peso has experienced significant devaluation in previous years. Any
significant decrease in the value of the peso relative to the US dollar in the
near term may have a material adverse effect on our results of operations and
financial condition, including our ability to repay or repurchase the notes.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information relating to our legal proceedings, please see our
Registration Statement on Form F-4 (Reg. No. 333-114196). There have been no
material changes in our legal proceedings from that described in the
Registration Statement, except for the Shareholdings Disputes, which have the
following developments:
In October 2003, LAIF X sprl filed a petition before the trial court
located in Monterrey (Mexico), seeking preliminary injunctive relief consisting
of an order to suspend the effectiveness of the resolutions adopted during the
meeting of our shareholders held on October 9, 2003, with respect to the
appointment of members of our board of directors by the holders of Series C
shares, pending the resolution of the dispute through the dispute resolution
process set forth in our bylaws. The trial court dismissed this action and the
State Superior Court of Appeals (Sala Novena Civil) confirmed such dismissal. In
April 2004, LAIF X sprl requested constitutional review challenging the State
Superior Court's decision confirming the dismissal by the Civil Court. The
Federal District Court denied such relief and confirmed the dismissal. On June
2004, LAIF X requested the review of the Federal District Court's decision by
the Federal Circuit Court.
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There have been no material changes in the other disputes regarding this
matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the period covered by this report, the following matters have been
submitted to a vote of our shareholders:
Extraordinary Shareholders Meeting dated April 12, 2004. Approval by
unanimous vote of those present of a proposal for the utilization of the excess
funds obtained by the Company from the issuance and placement of our senior
notes issued in December 2003. Number of Votes Casted: (i) Votes in favor:
2,119,430,462, (ii) Votes against or withheld: 0, (iii) Abstentions: 0, (iv)
Non-attendance: 21,956,149 and (v) Broker Non-Votes: Not Applicable.
Extraordinary Shareholders Meeting dated April 27, 2004. Approval by
unanimous vote of those present of a proposal for (i) the indemnification in
favor of our current, past and future directors and officers with respect to any
claim that may arise out of, or derive from, or is related with the performance
of their duties, and (ii) the amendment of our corporate bylaws to include a new
Article 24(Bis) to include the indemnification approved pursuant to the First
Item of the Agenda. Number of Votes Casted: (i) Votes in favor: 2,119,430,462,
(ii) Votes against or withheld: 0, (iii) Abstentions: 0, (iv) Non-attendance:
21,956,149 and (v) Broker Non-Votes: Not Applicable.
Special Series "N" Shareholders Meeting dated June 10, 2004. Approval by
unanimous vote of those present of the resignation of the Series "N" Independent
Director of our Board of Directors and approval of a proposal presented by
Nortel Networks Limited not to appoint a successor for such office and to
reserve its right to appoint the Series "N" Independent Director at a future
date. Number of Votes Casted: (i) Votes in favor: 339,324,567, (ii) Votes
against or withheld: 0, (iii) Abstentions: 0, (iv) Non-attendance: 52,995,688
and (v) Broker Non-Votes: Not Applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS
Not applicable.
-49-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Axtel, S.A. de C.V.
By: /s/ Patricio Jimenez Barrera
----------------------------------
Patricio Jimenez Barrera
Chief Financial Officer
Date: August 12th, 2004
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