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 May 2005
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
March 31, 2005 and March 31, 2004........................1
Condensed Consolidated Statements of Operations for
the Three Months Ended March 31, 2005 and 2004 ..........2
Condensed Consolidated Statements of Changes in
Financial Position for the Three Months Ended
March 31, 2005 and 2004 .................................3
Condensed Consolidated Statement of Changes in
Stockholders' Equity as of March 31, 2005...............4
Notes to Condensed Consolidated Financial Statements.....5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................35
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.............................................43
Item 4. Controls and Procedures.................................43
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................44
Item 2. Changes in Securities and Use of Proceeds...............44
Item 3. Defaults upon Senior Securities.........................45
Item 4. Submission of Matters to a Vote of Security Holders.....45
Item 5. Other Information.......................................45
Item 6. Exhibits and Reports....................................45
Signatures..........................................................46
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 developments 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.
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2005 and December 31, 2004
(Thousand pesos of constant purchasing power as of March 31, 2005)
(Unaudited)
-----------------
March 31, December 31,
----------------- ----------------
Assets 2005 2004
----------------- ----------------
Current assets:
Cash and cash equivalents (includes $1,168,292 and $534,017 from $ 1,255,702 558,494
temporary investments in 2005 and 2004, respectively)
Accounts receivable, (net of allowance for doubtfull accounts of
$115,669 and $100,959 in 2005 and 2004, respectively) 558,882 511,334
Refundable taxes and other accounts receivable 125,324 83,100
Prepaid expenses (note 5) 116,578 132,849
Inventories 59,983 58,680
----------------- ----------------
Total current assets 2,116,469 1,344,457
Long-term accounts receivable 19,534 19,914
Property, systems and equipment, net (note 6) 6,275,192 6,157,397
Telephone concession rights, net of accumulated amortization of $273,426
and $260,562 in 2005 and 2004, respectively 695,893 708,757
Pre-operating expenses, net 194,029 204,119
Deferred income taxes (note 11) 115,891 124,999
Other assets (note 7) 156,786 142,061
----------------- ----------------
Total assets $ 9,573,794 8,701,704
================= ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 467,601 600,470
Accrued interest 93,352 10,959
Taxes payable 23,752 41,049
Short-term debt (note 8) 129,026 109,227
Current maturities of long-term debt (note 9) 51,604 49,352
Other accounts payable (note 10) 211,171 202,140
Derivative financial instruments (note 4) 7,047 942
----------------- ----------------
Total current liabilities 983,553 1,014,139
Long-term debt, excluding current maturities (note 9) 2,875,641 2,041,173
Premium on bond issuance (note 9) 56,066 -
Other long-term accounts payable 3,870 3,569
Seniority premiums 2,235 2,412
----------------- ----------------
Total liabilities 3,921,365 3,061,293
----------------- ----------------
Stockholders' equity (note 12):
Common stock 7,159,184 7,159,184
Additional paid-in capital 141,654 141,654
Deficit (1,765,088) (1,779,508)
Cumulative deferred income tax effect 119,382 119,382
Change in the fair value of derivative instruments (note 4) (2,703) (301)
----------------- ----------------
Total stockholders' equity 5,652,429 5,640,411
Commitments and contingencies (note 13)
----------------- ----------------
Total liabilities and stockholders' equity $ 9,573,794 8,701,704
================= ================
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 Operations
(Thousand pesos of constant purchasing power as of March 31, 2005)
Three months ended
----------------------------------------
March 31,
----------------------------------------
(Unaudited)
2005 2004
--------------------- -----------------
Rental, installation, service and other revenues $ 1,118,679 904,699
--------------------- -----------------
Operating costs and expenses:
Cost of sales and services (351,813) (281,373)
Selling and administrative expenses (399,290) (308,555)
Depreciation and amortization (262,325) (240,977)
--------------------- -----------------
(1,013,428) (830,905)
--------------------- -----------------
Operating income 105,251 73,794
--------------------- -----------------
Comprehensive financing result:
Interest expense (96,410) (69,680)
Interest income 16,887 5,375
Foreign exchange (loss) gain, net (7,072) 11,236
Monetary position gain 12,122 17,018
--------------------- -----------------
Comprehensive financing result, net (74,473) (36,051)
--------------------- -----------------
Other (expense) income, net (7,250) 14,803
--------------------- -----------------
Income before income taxes 23,528 52,546
--------------------- -----------------
Deferred income tax (note 11) (9,108) (19,106)
--------------------- -----------------
Net income $ 14,420 33,440
===================== =================
The accompanying notes are an integral part of the consolidated financial statements.
-3-
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Financial Position
(Thousand pesos of constant purchasing power as of March 31, 2005)
Three months ended
-------------------------------------
March 31,
-------------------------------------
(Unaudited)
2005 2004
-------------------------------------
Operating activities:
Net income $ 14,420 33,440
Add charges (deduct credits) to operations not requiring
(providing) resources:
Depreciation 234,321 215,876
Amortization 28,004 25,101
Deferred income tax 9,108 19,106
------------------ ------------------
Resources provided by the operations 285,853 293,523
Net investment in operations (213,640) (191,000)
------------------ ------------------
Resources provided by operating activities 72,213 102,523
------------------ ------------------
Financing activities:
Proceeds from (payments of) loans and interest, net 938,912 (73,290)
Premium on bond issuance 56,066 -
Other accounts payable 1,909 (2,740)
------------------ ------------------
Resources provided by (used in) financing activities 996,887 (76,030)
------------------ ------------------
Investing activities:
Acquisition and construction of property, systems
and equipment, net (352,116) (202,826)
Pre-operating results - (826)
Other assets (19,776) (10,136)
------------------ ------------------
Resources used in investing activities (371,892) (213,788)
------------------ ------------------
Increase (decrease) in cash and cash equivalents 697,208 (187,295)
Cash and cash equivalents at beginning of period 558,494 1,076,270
------------------ ------------------
Cash and cash equivalents at end of period $ 1,255,702 888,975
================== ==================
The accompanying notes are an integral part of the consolidated financial statements.
-4-
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders' Equity
(Thousand pesos of constant purchasing power as of March 31, 2005)
Change in
Cumulative the fair Total
Additional deferred value of stock
Common paid-in income derivative holders'
stock capital Deficit tax effect instruments equity
-------------- ----------------- -------------- -------------- ------------- -----------
Balances as of
December 31, 2004 $ 7,159,184 141,654 (1,779,508) 119,382 (301) 5,640,411
Comprehensive income - - 14,420 - (2,402) 12,018
-------------- ----------------- -------------- -------------- ------------- -----------
Balances as of
March 30, 2005
(Unaudited) $ 7,159,184 141,654 (1,765,088) 119,382 (2,703) 5,652,429
============== ================= ============== ============== ============= ===========
The accompanying notes are an integral part of the consolidated financial statements.
-5-
AXTEL, S. A. DE C. V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
March 31, 2005 and 2004
(Thousand pesos of constant purchasing power as of March 31, 2005)
(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 13f). 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
59.5% of shares with voting rights owned by Telinor Telefonia, S. de R.L.
de C.V., the remaining 40.5% 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 $145,362 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
$73,310 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 $750,647 for a period
of twenty years with an extension option.
The Company has commercial services in Monterrey, Mexico City, Guadalajara,
Puebla, Toluca, Leon, Tijuana, Cd. Juarez, Saltillo, Aguascalientes,
Queretaro and San Luis Potosi.
-6-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
(2) Financial statement presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Mexico
(MexGAAP), which include the recognition of the effects of inflation on the
financial information, and are expressed in Mexican pesos of constant
purchasing power as of March 31, 2005, based on the National Consumer Price
Index (NCPI) published by Banco de Mexico.
The following national consumer price indexes (NCPI) were used to recognize
the effects of inflation:
Inflation
NCPI %
-------------- --------------
March 31, 2005 414.687 0.74
December 31, 2004 411.648 5.47
March 31, 2004 396.544 1.60
The accompanying financial statements should be read in conjunction with
Axtel's Annual Audited Financial Statements for the year ended December 31,
2004, as certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles in Mexico have been condensed or omitted. The
Company's condensed consolidated interim financial statements are
unaudited, but in the opinion of management, reflect all necessary
adjustments for a fair presentation, which are of a normal recurring
nature. Operations results for the three months ended March 31, 2005 are
not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2005.
When reference is made to pesos or "$", 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%
-7-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
(3) Accounting changes
a) Business combinations
In March, 2004, the Mexican Institute of Public Accountants issued the
new Bulletin B-7 Business Combinations, which is mandatory beginning
on January 1, 2005, although it allows early application. The Bulletin
B-7 provides for certain rules to the accounting treatment of business
acquisitions and investments in associated entities. The most relevant
aspects included in Bulletin B-7 among others are: the adoption of the
purchase method as a unique rule of accounting. In consequence, the
use of the International Accounting Standard IAS-22, Business
Combinations was eliminated; the accounting treatment of goodwill,
eliminating his amortization and establishing certain rules of
impairment; and specific rules in the acquisition of the minority
interest, transferences of assets or exchange of stocks among entities
under common control, and the accounting treatment of intangible
assets recognized in a business combinations were established.
The initial adoption of this Bulletin had no material effects neither
on the financial position nor on the result of operations of the
Company.
b) Labor obligations.
The new Bulletin D-3, issued in January 2004, substitutes and
supersedes former Bulletin D-3, published in January 1993 and revised
in 1998. The provisions of this Bulletin were effective immediately,
except for those relating to payments upon termination of labor
relationships, which are effective January 1, 2005.
This Bulletin adds the issue of post-retirement benefit payments, to
supersede Circular 50, "Interest Rates to be Used for Valuing Labor
Obligations and Supplementary Application of Accounting Principles,
Relating to Labor Obligations." Also, this Bulletin eliminates the
issue of unforseen payments, and replaces it with the one relating to
"Payments Upon Termination of the Labor Relationship," defining them
as those payable to workers upon termination of the labor relationship
before retirement age. These payments are of two types: (i) for
restructuring reasons, for which the provisions of Bulletin C-9,
"Liabilities, Accruals, Contingent Assets and Liabilities, and
Commitments," should be applied, and (ii) for reasons other than
restructuring, which valuation and disclosure requirements are the
same as those for pension and seniority premium payments, permitting
that, upon adoption of the Bulletin, the transition asset or liability
be immediately recognized in the results of operations or that it be
amortized over the average remaining service life of employees.
-8-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
(4) Hedging
On March 29, 2004, the Company entered into derivative Cross Currency Swaps
(CCS) transaction, denominated "Coupon Swap" agreement to hedge a portion
of its U.S. dollar foreign exchange exposure resulting from the issuance of
the U.S. $250 million 11% senior notes which mature in 2013. Under the CCS
transactions, Axtel will receive semiannual payments calculated based on
the aggregate notional amount of U.S.$ 113.75 million at an annual U.S.
rate of 11%, and the Company will make semiannual payments calculated based
on the aggregate of $1,270,019 (nominal value) at annual Mexican rate of
12.30%. The CCS will expire in December 2008. During the life of the
contracts, the cash flows originated by the exchange of interest rates
under the CCS match in interest payment dates and conditions those of the
underlying debt. The Company does not enter into derivative instruments for
any purpose other than cash-flow-hedging purposes. That is, the Company
does not speculate using derivative instruments.
By using derivative financial instruments to hedge exposures to changes in
currency exchange rates fluctuations, the Company exposes itself to credit
risk and market risk. Credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. When the fair value of
a derivative contract is positive, the counterparty owes the Company, which
creates credit risk for the Company. When the fair value of a derivative
contract is negative, the Company owes the counterparty and, therefore, it
does not possess credit risk. The Company minimizes the credit risk in
derivative instruments by entering into transactions with high-quality
foreign financial counterparties.
The CCS information is as follows:
(Amounts in charts are expressed in millions, except exchange rates which are expressed in pesos)
Currencies Interest Rates
------------------------------- -----------------------------------------
Notional
amount
Notional (nominal Axtel Axtel Estimated
Maturity date amount value) receives pays fair value
- -------------------------------------------------------------------------------------------------------------
December 15, 2008 U.S.$ 113.75 $ 1,270 11.00% 12.30% U.S.$(0.6)
For the three-month period ended March 31, 2005, the change in net
unrealized losses "mark to market" for derivatives designated as cash flow
hedges was U.S. $(0.6) million. No hedge ineffectiveness on cash flow
hedges was recognized during 2005.
-9-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
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.
(5) Prepaid expenses
Prepaid expenses consist of the following:
(Unaudited)
-----------------
March 31, December 31,
----------------- -------------------
2005 2004
Airspan Communications Limited $ 30,105 93,511
Nortel Networks de Mexico 4,859 3,493
Nortel Networks Limited 43,132 2,128
Maxcom Telecomunicaciones 1,004 292
Other 37,478 33,425
----------------- -------------------
Total prepaid expenses $ 116,578 132,849
================= ===================
(6) Property, systems and equipment
Property, systems and equipment are analyzed as follows:
(Unaudited)
---------------------
March 31, December 31,
--------------------- -------------------
2005 2004 Useful lives
Land $ 38,527 38,301
Building 125,132 124,874 25 years
Computer and electronic equipment 1,065,693 1,057,421 3 years
Transportation equipment 23,779 19,060 4 years
Furniture and fixtures 100,952 100,500 10 years
Network equipment 6,873,411 6,710,503 6 to 28 years
Leasehold improvements 157,293 152,187
Construction in progress 1,355,493 1,193,890
--------------------- -------------------
9,740,280 9,396,736
Less accumulated depreciation 3,465,088 3,239,339
--------------------- -------------------
Property, systems and equipment, net $ 6,275,192 6,157,397
===================== ===================
-10-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
As of March 31, 2005 the Company has capitalized CFR as a component of the
acquisition cost of property, systems and equipment aggregating $2,307.
(7) Other assets
Other assets consist of the following:
(Unaudited)
---------------------
March 31, December 31
--------------------- -------------------
2005 2004
Notes issuance costs $ 86,915 71,199
Telmex / Telnor infrastructure costs 56,319 56,319
Guarantee deposits 20,357 19,011
Other 12,701 12,600
--------------------- -------------------
176,292 159,129
Less accumulated amortization 19,506 17,068
--------------------- -------------------
Other assets, net $ 156,786 142,061
===================== ===================
(8) Short-term debt
Short term debt and its main characteristics are as follows:
(Unaudited)
-------------------
March 31, December 31,
------------------- ------------------
2005 2004
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. $ 62,623 85,436
Revolving line of credit with Banco Santander Serfin, S.A. used for letters
of credit, denominated in U.S. dollars up to 180 days. 44,255 -
Revolving lines of credit with different institutions used for letters of
credit denominated in U.S. dollars up to 360 days. 22,148 23,791
------------------- -----------------
Total short-term notes payable $ 129,026 109,227
=================== =================
-11-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
(9) Long-term debt
Long-term debt and its main characteristics are as follows:
(Unaudited)
------------------
March 31, December 31,
------------------ -------------------
2005 2004
U.S. $250,000,000 in aggregate principal amount of 11% Senior Notes due
2013. Interest is payable semi-annually in arrears on June 15, and
December 15 of each year which began on June 15, 2004. $ 2,823,550 1,985,893
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 December 2007. The interest rate is 7.0%. 51,601 53,937
Other long-term financing with several credit institutions with interest
rates fluctuating between 6% and 9% for those denominated in dollars and
TIIE (Mexican average interbank rate) plus six percentage
points for those denominated in pesos. 52,094 50,695
------------------ -------------------
Total long-term debt 2,927,245 2,090,525
Less current maturities 51,604 49,352
------------------ -------------------
Long-term debt, excluding current maturities $ 2,875,641 2,041,173
================== ===================
Annual installments of long-term debt are as follows:
Year Amount
March 2007 $ 33,659
March 2008 15,841
March 2009 2,386
Thereafter 2,823,755
----------------
$ 2,875,641
================
-12-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
The following are the most important changes in long-term debt during the
three-month period ended March 2005 and the year ended December 31, 2004:
o During January 2005, the Company re-opened its bond issuance program,
issuing U.S. $75 million under the current indenture. This issuance
matures on December 2013. The bonds were issued at a price of 106.75%
over face value having a yield to maturity of 9.84%.
o 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.
o 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 March 31, 2005, the Company was in compliance in all its
covenants and obligations.
(10) Other accounts payable
As of March 31, 2005 and December 31, 2004, the other accounts payable
consist of the following:
(Unaudited)
---------------------
March 31, December 31,
--------------------- --------------------
2005 2004
Guarantee deposits (note 13a) $ 146,825 147,523
Interest payable (note 13a) 34,469 32,163
Other 29,877 22,454
--------------------- --------------------
Total other accounts payable $ 211,171 202,140
===================== ====================
(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.
-13-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
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.
In December 2004, the Mexican Congress approved changes to the Income Tax
Law, previously on January 1, 2002 a new Income Tax Law had been enacted,
this law provided for a 1% annual reduction in the income tax rate
beginning in 2003, so that the income tax rate would have been 32% in 2005,
nevertheless the main change included in December 2004 and its impact on
the Company's financial statements was related to a reduction in the income
tax rates from previously approved tax rate of 32% in 2005 to a new tax
rate of 30%. Also, for years 2006 and 2007 the tax rates will decrease to
29% and 28%, respectively. Consequently, the deferred income taxes, were
calculated assuming a 30% tax rate for current assets and current
liabilities; 29% and 28%, for assets and liabilities whose tax effects will
be reversed after 2005. The effect of the reduction in the deferred income
tax assets calculation for 2004 was $51,300.
For the three months ended March 31, 2005 and 2004 (unaudited), deferred IT
amounted to an expense of $9,108 and $19,106, respectively.
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, 2004 are presented below:
December 31,
--------------------
2004
Deferred tax assets:
Net operating loss carryforwards $ 518,811
Accounts receivable 28,268
Accrued liabilities 4,069
Tax on assets 17,431
Accrued vacations 2,037
--------------------
Total gross deferred tax assets 570,616
Less valuation allowance 19,081
--------------------
Net deferred tax assets 551,535
--------------------
-14-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
Deferred tax liabilities:
Property, systems and equipment 179,339
Telephone concession rights 166,387
Pre-operating expenses 58,152
Other assets 5,054
Inventories 17,604
-------------------
Total deferred tax liabilities 426,536
-------------------
Deferred tax assets, net $ 124,999
===================
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 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 March 31, 2005 and December 31, 2004, 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, it is probable that there will be enough
future taxable income to realize the net deferred tax assets.
According to the IT law, the tax loss of a year, restated by inflation, may
be carried to the succeeding ten years. The tax losses have no effect on
ESPS. As of December 31, 2004, the tax loss carryforwards expired as
follows:
Year Inflation-adjusted tax Recoverable TA
loss carryforwards
- --------------------------- ----------------------- --------------------
2009 $ 597 -
2010 1,183,654 -
2011 225,024 -
2012 443,096 -
2013 525 8,658
2014 - 8,773
----------------------- --------------------
$ 1,852,896 17,431
======================= ====================
-15-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
(12) Stockholders' equity
The main characteristics of stockholders' equity are described below:
(a) Common stock structures
In the Extraordinary Shareholders Meeting held on September 8, 2004
the shareholders approved a proposal to increase the variable portion
of the capital stock of the Company in the amount in Mexican pesos
equal to $3,089 through the issuance of 124,957,212 non-voting Series
"N" shares which will represent 4.7% of the total issued capital stock
of the Company. These series "N" stocks have not been issued.
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 Series "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 $7,226,904 may be refunded to stockholders tax-free.
No dividends may be paid while the Company has a deficit. Some of the
debt agreements mentioned in note 9 establish limitations on dividend
payment.
(13) Commitments and contingencies
As of March 31, 2005, the Company has 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) expiring 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 13 million dollars 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 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. The Company has recognized a liability to cover such
interest for $34,469, presenting it as other accounts payable in the
balance sheet as of March 31, 2005.
-16-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
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 March
31, 2005, the trial is at a stage where evidence is being shown.
(b) On October 2002, Metronet, S.A. de C.V. ("Metronet") filed an action
against the Company in the Fourth Civil Court in Monterrey (Mexico).
Metronet claims that the Company wrongfully terminated a letter of
intent and is seeking payment for services and direct damages of
approximately U.S.$3.8 million, plus other expenses and attorneys'
fees. The trial court ruled against the Company in first instance. The
Company appealed such judgment before the Appeal Court and the Appeal
Court on October 22, 2004 ruled in favor of the Company, discharging
Axtel of any liability, damages or payment in favor of Metronet.
Metronet has a last resource before the Mexican Federal Courts to
change the Appeal Court judgment.
(c) On December 23, 2003, LAIF X filed a demand for arbitration against
the Company, Telinor, Blackstone Capital Partners Merchant Banking
Fund, L.P., Blackstone Offshore Capital Partners III, L.P. and
Blackstone Family Investment Partnership III, L.P. (collectively the
Blackstone Entities") disputing the validity of the transfer of Series
"A" shares held by Telinor to the Blackstone Entities, and the
conversion of the series "A" shares into series "C" shares in
connection with such transfer. LAIF X claims that such transfer and
conversion were not authorized by the Company's bylaws or shareholder
resolution, and that the Blackstone Entities' purposed ownership of
the Company's shares is therefore invalid. LAIF X also challenges the
composition of the Company's Board of Directors. In addition to the
declaratory relief, LAIF X's demand for Arbitration seeks unspecified
damages and cost from the Company, Telinor and the Blackstone
Entities.
(d) 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.
(e) 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 $32,101 and
to other service providers for $49,602.
(f) 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.
-17-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
(g) The Company leases some equipment and facilities under operating
leases. Some of these leases have renewal clauses. Lease expense for
three-month periods ended March 31, 2005 and 2004 was $89,434 and
$61,338, respectively.
The annual payments under these leases as of March 31, 2005 are as follows:
Contracts in:
-----------------------------------------------------------------
Pesos U.S. Dollars UDIS
(thousands) (Investment units)
---------------- --------------- ---------------------------
2005 $ 51,753 5,415 41,125
2006 53,935 6,435 54,833
2007 47,612 5,471 54,833
2008 41,625 3,299 54,833
2009 35,815 2,741 45,694
Thereafter 149,660 11,471 -
---------------- --------------- --------------
$ 380,400 34,832 251,318
================ =============== ==============
(h) As of March 31, 2005, the Company has placed purchase orders which are
pending delivery from suppliers for approximately $741,514.
(i) On April 20, 2004 Axtel and Airspan entered into Amendment Agreement
No. 2 to the Purchase and License Agreement of Fixed Wireless Access
Equipment and the Technical Assistance Support Services Agreement,
both dated March 20, 2004, by virtue of which the parties agreed to:
(i) reduce the prices of (a) the Fixed Wireless Access Equipment (RSS
customer premise equipment and the radio base station equipment) and
(b) the Technical and Support Services for years 2004 and 2005; (ii)
eliminate Axtel's obligation to provide a payment guarantee and modify
its payments terms under such Agreements, (iii) improve the delivery
times of the equipments; (iv) create a single unit of RSS (customer
premise equipment) which will be sold at a lower price in comparison
of the current RSS customer premise equipment; and (v) cancel Axtel's
purchase commitments of years 2005, 2006 and 2007 established under
sold Agreements and to replace such commitments with two new
commitments, one for U.S.$ 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 product, commencing January 1st, 2006
and ending on May 1st, 2006.
(j) On December 2004, the Company entered into a Purchase and License
Agreement for FWA Equipment, by virtue of which the Company is
commited to purchase equipment manufactured by Airspan for U.S. $38.7
millions, from December 2004 through December 2006.
-18-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
As of March 31, 2005 the Company has placed purchase orders for U.S. $35.4
millions.
(k) On July 20, 2004 Axtel, Nortel Networks Limited and Nortel Networks de
Mexico, S.A. de C.V., entered into a Purchase and License Agreement
for the supply of next generation soft switch equipment and related
services (the "NGN PLA"). This NGN PLA contains standard commercial
and legal terms. In this NGN PLA, Axtel has a purchase commitment to
acquire from Nortel Networks the equipment and the software licenses
required to have 100,000 lines in services by the end of the five (5)
year term of such agreement.
(14) 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.
The main differences between Mexican GAAP and U.S. GAAP and their effect on
consolidated net income for the three-month periods ended March 31, 2005
and 2004, and on stockholders' equity as of March 31, 2005 and December 31,
2004 are presented below, with an explanation of the adjustments.
(Unaudited)
Three months ended
----------------------------------
March 31,
----------------------------------
2005 2004
------------- ----- --------------
Net income reported under Mexican GAAP ...................... $ 14,420 33,440
------------- --------------
Approximated U.S. GAAP adjustments
1. Deferred income taxes (see 14a)........................... 9,108 19,106
2. Amortization of start-up cost (see 14c).................. 10,090 9,394
3. Start-up costs of the period (see 14c)................... - (826)
4. Revenue recognition (see 14b)............................. (6,726) 2,994
5. Allowance for post retirement benefits (see 14d).......... 155 455
6. Capitalized interest (see 14e)............................ (183) (414)
------------- --------------
Total approximate U.S. GAAP adjustments...................... 12,444 30,709
------------- --------------
26,864 64,149
Approximate net income under U.S. GAAP....................... $
============= ==============
-19-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
(Unaudited) December 31,
March 31,
--------------- ---- -----------------
2005 2004
--------------- ---- ---------------
Total stockholders' equity reported under Mexican GAAP................ $ 5,652,429 5,640,411
--------------- ---------------
Approximate U.S. GAAP adjustments
1. Deferred income taxes (see 14a).................................... (115,891) (124,999)
2. Start-up costs (see 14c)..........................................c (194,029) (204,119)
3. Revenue recognition (see 14b)...................................... (90,811) (84,085)
4. Allowance for post retirement benefits (see 14d)................... (20,959) (21,114)
5. Capitalized interest (see 14e)..................................... 24,753 24,936
--------------- ---------------
Total approximate U.S. GAAP adjustments............................... (396,937) (409,381)
--------------- ---------------
Total approximate stockholders' equity under U.S. GAAP................ $ 5,255,492 5,231,030
=============== ===============
The term "SFAS" as used in this document refers to Statement of Financial
Accounting Standards.
(a) Deferred income taxes (IT) and employee's statutory profit sharing
("ESPS")
For Mexican GAAP Deferred IT are accounted for under the asset and
liability method. All of the Company's pretax income and reported
income tax expense is derived from domestic operations.
For Mexican GAAP Deferred ESPS is recognized only for timing
differences arising from the reconciliation of book income to income
for ESPS purposes, which can be reasonably presumed to result in a
future liability or benefit, with indication that the liabilities or
benefits will materialize.
For U.S. GAAP purposes, the Company accounts for IT and ESPS 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.
-20-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31,
2004 for U.S. GAAP are presented below:
December 31,
2004
-------------------
Deferred tax assets:
Net operating loss carryforwards..................... $ 518,811
Accounts receivable.................................. 28,268
Deferred revenues.................................... 23,545
Seniority premium and allowance for
post retirement benefits.......................... 6,586
Accrued vacations.................................... 2,037
Accrued liabilities.................................. 4,069
Tax on assets........................................ 17,431
-------------------
Total gross deferred tax assets.............. 600,747
Less valuation allowance............................. (229,188)
-------------------
Net deferred tax assets...................... 371,559
-------------------
Deferred tax liabilities:
Property, systems and equipment ..................... 187,568
Telephone concession rights.......................... 166,387
Inventories.......................................... 17,604
-----------------
Total deferred tax liabilities............... 371,559
-----------------
Net deferred tax liabilities under U.S. GAAP -
Less net deferred tax assets recognized
under Mexican GAAP.............................. 124,999
-----------------
U.S. GAAP adjustment to stockholders' equity......... $ 124,999
=================
-21-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
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 had not generated taxable income prior 2002 a deferred tax
asset valuation allowance of $229,188 as of December 31, 2004 was
recorded for U.S. GAAP. This represents a decrease in the valuation
allowance of $148,678 for the year ended December 31, 2004.
(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.
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.
-22-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
(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 costs were
recognized when incurred as a deferred asset and amortized over a
period of 10 years. The Company has reversed the amortization of
$10,090 and $9,394 for the three months period ended March 31, 2005
and 2004 as shown in the U.S. GAAP reconciliation, and has reduced
stockholders' equity by $194,029 and $204,119 to write off the
unamortized balance at March 31, 2005 and December 31, 2004. For U.S.
GAAP purposes during the three months period ended March 31, 2004 the
Company reversed $826 of capitalized amortization costs.
(d) Other employee benefits
Severance
For the year ended December 31, 2004 and prior 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 $20,959 and $21,114 as of March 30, 2005 and
December 31, 2004, respectively. As of March 31, 2005, the Company has
not recognized this liability under Mexican GAAP.
(e) Capitalized interest
Under Mexican GAAP, the Company capitalizes interest on property,
systems and equipment under construction. The amount of financing cost
to be capitalized is comprehensively measured in order to include
properly the effects of inflation. Therefore, the amount capitalized
includes: (i) the interest cost of the debt incurred, plus (ii) any
foreign currency fluctuations that result from the related debt, and
less (iii) the monetary position result recognized on the related
debt. Under U.S. GAAP, only interest is considered an additional cost
of constructed assets to be capitalized and depreciated over the lives
of the related assets.
The U.S. GAAP reconciliation removes the foreign currency gain or loss
and the monetary position result capitalized for Mexican GAAP, derived
from borrowings denominated in foreign currency.
-23-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
(f) Guaranteed debt
On December 16, 2003, the Company completed an offering of senior
unsecured notes, for a value of U.S.$ 175 million maturing on December
15, 2013. Interest on the notes are payable semiannually at annual
rate of 11%, beginning on June 15, 2004.
During January 2005, the Company issued U.S. $75 million under the
current indenture. This issuance matures on December 2013. The bonds
were issued at a price of 106.75% over face value having a yield to
maturity of 9.84%.
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.
-24-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
The condensed consolidating financial information is as follows:
Condensed consolidating balance sheets:
Adjustments
(Unaudited) Combined and Axtel
As of March 31, 2005 Axtel Guarantors Eliminations Consolidated
----------------------------------------------- ----------------------------------------------------------------------
Current assets $ 2,121,370 89,667 (94,568) 2,116,469
Property, systems and equipment, net 6,267,129 9,312 (1,249) 6,275,192
Deferred charges 1,000,641 5,172 - 1,005,813
Investment in subsidiaries 21,750 - (21,750) -
Other non-current assets 170,570 5,750 - 176,320
--------------- ------------------ ---------------- -----------------
Total assets $ 9,581,460 109,901 (117,567) 9,573,794
--------------- ------------------ ---------------- -----------------
Current liabilities $ 993,454 84,667 (94,568) 983,553
Long-term debt 2,875,641 - - 2,875,641
Other non-current liabilities 59,936 2,235 - 62,171
--------------- ------------------ ---------------- -----------------
Total liabilities 3,929,031 86,902 (94,568) 3,921,365
--------------- ------------------ ---------------- -----------------
Total stockholders equity 5,652,429 22,999 (22,999) 5,652,429
--------------- ------------------ ---------------- -----------------
Total liabilities and stockholders equity $ 9,581,460 109,901 (117,567) 9,573,794
--------------- ------------------ ---------------- -----------------
Adjustments
Combined and Axtel
As of December 31, 2004 Axtel Guarantors Eliminations Consolidated
----------------------------------------------- --------------- ------------------ ----------------- ----------------
Current assets $ 1,359,829 111,548 (126,920) 1,344,457
Property, systems and equipment, net 6,149,228 9,486 (1,317) 6,157,397
Deferred charges 1,031,995 5,880 - 1,037,875
Investment in subsidiaries 24,385 - (24,385) -
Other non-current assets 157,976 3,999 - 161,975
--------------- ------------------ ----------------- ----------------
Total assets $ 8,723,413 130,913 (152,622) 8,701,704
--------------- ------------------ ----------------- ----------------
Current liabilities $ 1,038,260 102,799 (126,920) 1,014,139
Long-term debt 2,041,173 - - 2,041,173
Other non-current liabilities 3,569 2,412 - 5,981
--------------- ------------------ ----------------- ----------------
Total liabilities 3,083,002 105,211 (126,920) 3,061,293
--------------- ------------------ ----------------- ----------------
Total stockholders equity 5,640,411 25,702 (25,702) 5,640,411
--------------- ------------------ ----------------- ----------------
Total liabilities and stockholders equity $ 8,723,413 130,913 (152,622) 8,701,704
--------------- ------------------ ----------------- ----------------
-25-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
Condensed consolidating income statements:
Adjustments
(Unaudited) Combined and Axtel
For the three-month period ended March 31, 2005 Axtel Guarantors Eliminations Consolidated
------------------------------------------------- ------------------ ---------------- ------------------ -------------------
Rental, installation, service and other revenues $ 1,118,679 225,232 (225,232) 1,118,679
Costs of sales and services (351,813) - - (351,813)
Selling and administrative expenses (397,883) (226,639) 225,232 (399,290)
Depreciation and amortization (262,208) (117) - (262,325)
Operating income (loss) 106,775 (1,524) - 105,251
Comprehensive financing result, net (74,334) (470) 331 (74,473)
Other (expenses) income, net (6,986) 67 (331) (7,250)
Income tax (8,399) (709) - (9,108)
Investment in subsidiaries (2,636) - 2,636 -
------------------ ---------------- ------------------ -------------------
Net income (loss) $ 14,420 (2,636) 2,636 14,420
------------------ ---------------- ------------------ -------------------
Adjustments
(Unaudited) Combined and Axtel
For the three-month period ended March 31, 2004 Axtel Guarantors Eliminations Consolidated
------------------------------------------------- ------------------ ---------------- ------------------ -------------------
Rental, installation, service and other revenues $ 904,699 214,506 (214,506) 904,699
Costs of sales and services (281,373) - - (281,373)
Selling and administrative expenses (309,036) (214,025) 214,506 (308,555)
Depreciation and amortization (240,866) (111) - (240,977)
Operating income 73,424 370 - 73,794
Comprehensive financing result, net (35,824) (514) 287 (36,051)
Other income (expenses), net 14,493 597 (287) 14,803
Income tax (18,357) (749) - (19,106)
Investment in subsidiaries (296) - 296 -
------------------ ---------------- ------------------ -------------------
Net income (loss) $ 33,440 (296) 296 33,440
------------------ ---------------- ------------------ -------------------
-26-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
Condensed consolidating statements of changes in financial position:
Adjustments
(Unaudited) Combined and Axtel
For the three-month period ended March 31, 2005 Axtel Guarantors Eliminations Consolidated
---------------------------------------------------------- -------------- -------------- ---------------- -----------------
Operating activities:
Net income (loss) $ 14,420 (2,636) 2,636 14,420
Non-cash items 273,243 826 (2,636) 271,433
-------------- -------------- ---------------- -----------------
Resources provided by (used in) operations 287,663 (1,810) - 285,853
Net (investment in) financing from operations (217,072) 3,645 (213) (213,640)
-------------- -------------- ---------------- -----------------
Resources provided by operations, net 70,591 1,835 (213) 72,213
-------------- -------------- ---------------- -----------------
Financing activities:
Proceeds from (loans payments), net 938,912 (213) 213 938,912
Others 57,975 - - 57,975
-------------- -------------- ---------------- -----------------
Resources provided by (used in) financing 996,887 (213) 213 996,887
activities
-------------- -------------- ---------------- -----------------
Investing activities:
Acquisition and construction of property, systems and
equipment, net (352,104) (12) - (352,116)
Other assets (18,027) (1,749) - (19,776)
-------------- -------------- ---------------- -----------------
Resources used in investing activities (370,131) (1,761) (371,892)
-------------- -------------- ---------------- -----------------
Increase (decrease) in cash and equivalents 697,347 (139) - 697,208
Cash and equivalents at the beginning of the period 556,469 2,025 - 558,494
-------------- -------------- ---------------- -----------------
Cash and equivalents at the end of the period $ 1,253,816 1,886 - 1,255,702
-------------- -------------- ---------------- -----------------
-27-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
Adjustments
(Unaudited) Combined and Axtel
For the three-month period ended March 31, 2004 Axtel Guarantors Eliminations Consolidated
---------------------------------------------------------- -------------- -------------- ---------------- -----------------
Operating activities:
Net income (loss) $ 33,440 (296) 296 33,440
Non-cash items 259,519 860 (296) 260,083
-------------- -------------- ---------------- -----------------
Resources provided by operations 292,959 564 - 293,523
Net (investment in) financing from operations (191,103) 459 (356) (191,000)
-------------- -------------- ---------------- -----------------
Resources provided by operations, net 101,856 1,023 (356) 102,523
-------------- -------------- ---------------- -----------------
Financing activities:
Loans payments, net (73,290) (356) 356 (73,290)
Others (2,740) - - (2,740)
-------------- -------------- ---------------- -----------------
Resources used in financing activities (76,030) (356) 356 (76,030)
-------------- -------------- ---------------- -----------------
Investing activities:
Acquisition and construction of property, systems and
equipment, net (202,814) (12) - (202,826)
Other assets (10,965) 3 - (10,962)
-------------- -------------- ---------------- -----------------
Resources used in investing activities (213,779) (9) - (213,788)
-------------- -------------- ---------------- -----------------
Increase in cash and equivalents (187,953) 658 - (187,295)
Cash and equivalents at the beginning of the period 1,075,788 482 - 1,076,270
-------------- -------------- ---------------- -----------------
Cash and equivalents at the end of the period $ 887,835 1,140 - 888,975
-------------- -------------- ---------------- -----------------
-28-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
The tables below present combined balance sheets as of March 31, 2005 and
December 31, 2004, income statements for each of the three-month periods
ended March 31, 2005 and March 31, 2004, and statements of changes in
financial position for each of the three-month periods ended March 31, 2005
and March 31, 2004 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)
As of March 31, 2005 Adjustments
------------------------------------ Servicios and Combined
Assets Icosa Inmobiliaria Axtel Eliminations Guarantors
------------ ------------------- -------------- -------------- ----------------
Cash and cash equivalents $ 1,007 12 867 - 1,886
Accounts receivable 540 - 99 - 639
Related parties receivables 5,356 - 61,911 (11) 67,256
Refundable taxes and other
accounts receivable 1,062 1,194 17,630 - 19,886
------------ ------------------- -------------- -------------- ----------------
Total current assets 7,965 1,206 80,507 (11) 89,667
------------ ------------------- -------------- -------------- ----------------
Property, systems and equipment,
net - 9,312 - - 9,312
Deferred income taxes 18 - 5,389 (235) 5,172
Other 1,138 - 4,612 - 5,750
------------ ------------------- -------------- -------------- ----------------
Total non current assets 1,156 9,312 10,001 (235) 20,234
------------ ------------------- -------------- -------------- ----------------
Total assets $ 9,121 10,518 90,508 (246) 109,901
------------ ------------------- -------------- -------------- ----------------
Liabilities and Stockholders Equity
Account payable and accrued
liabilities $ 215 - 10,970 - 11,185
Taxes payable 3,767 - 33,782 - 37,549
Related parties payables - 8,443 11 (11) 8,443
Other accounts payable 1,109 - 26,381 - 27,490
------------ ------------------- -------------- -------------- ----------------
Total current liabilities 5,091 8,443 71,144 (11) 84,667
------------ ------------------- -------------- -------------- ----------------
Deferred income tax - 235 - (235) -
Others 341 - 1,894 - 2,235
------------ ------------------- -------------- -------------- ----------------
Total liabilities 5,432 8,678 73,038 (246) 86,902
------------ ------------------- -------------- -------------- ----------------
Stockholders' equity 3,738 1,743 20,154 - 25,635
Net (loss) income (49) 97 (2,684) - (2,636)
------------ ------------------- -------------- -------------- ----------------
Total stockholders equity 3,689 1,840 17,470 - 22,999
------------ ------------------- -------------- -------------- ----------------
Total liabilities and stockholders
equity $ 9,121 10,518 90,508 (246) 109,901
------------ ------------------- -------------- -------------- ----------------
-29-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
As of December 31, 2004
------------------------------------
Adjustments
Servicios and Combined
Assets Icosa Inmobiliaria Axtel Eliminations Guarantors
------------ ------------------- -------------- --------------- ----------------
Cash and cash equivalents $ 593 12 1,420 - 2,025
Related parties receivables 7,397 - 88,752 (4) 96,145
Refundable taxes and other
accounts receivable 1,336 1,202 10,840 - 13,378
------------ ------------------- -------------- --------------- ----------------
Total current assets 9,326 1,214 101,012 (4) 111,548
------------ ------------------- -------------- --------------- ----------------
Property, systems and equipment,
net - 9,486 - - 9,486
Deferred income taxes 9 - 6,105 (234) 5,880
Other 809 - 3,190 - 3,999
------------ ------------------- -------------- --------------- ----------------
Total non current assets 818 9,486 9,295 (234) 19,365
------------ ------------------- -------------- --------------- ----------------
Total assets $ 10,144 10,700 110,307 (238) 130,913
------------ ------------------- -------------- --------------- ----------------
Liabilities and stockholders'
equity
Account payable and accrued
liabilities $ 163 - 18,314 - 18,477
Taxes payable 4,759 - 51,101 - 55,860
Related parties payables 4 8,655 - (4) 8,655
Other accounts payable 1,075 - 18,732 - 19,807
------------ ------------------- -------------- --------------- ----------------
Total current liabilities 6,001 8,655 88,147 (4) 102,799
------------ ------------------- -------------- --------------- ----------------
Deferred income tax - 234 - (234) -
Others 405 - 2,007 - 2,412
------------ ------------------- -------------- --------------- ----------------
Total liabilities 6,406 8,889 90,154 (238) 105,211
------------ ------------------- -------------- --------------- ----------------
Stockholders' equity 4,931 1,400 29,945 - 36,276
Net (loss) income (1,193) 411 (9,792) - (10,574)
------------ ------------------- -------------- --------------- ----------------
Total stockholders equity 3,738 1,811 20,153 - 25,702
------------ ------------------- -------------- --------------- ----------------
Total liabilities and stockholders
equity $ 10,144 10,700 110,307 (238) 130,913
------------ ------------------- -------------- --------------- ----------------
-30-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
Guarantors' Combined Income Statements:
Adjustments
(Unaudited) Servicios and Combined
For the three-months period ended March 31, 2005 Icosa Inmobiliaria Axtel Eliminations Guarantors
-------------------------------------------------- ------------ ---------------- --------------- -------------- --------------
Rental and service revenues $ 23,548 482 201,202 - 225,232
Administrative expenses (23,548) - (203,091) - (226,639)
Depreciation and amortization - (105) (12) - (117)
------------ ---------------- --------------- -------------- --------------
Operating income (loss) - 377 (1,901) - (1,524)
------------ ---------------- --------------- -------------- --------------
Comprehensive financing result, net (61) (278) (131) - (470)
------------ ---------------- --------------- -------------- --------------
Other income, net 3 - 64 - 67
------------ ---------------- --------------- -------------- --------------
(Loss) income before income taxes and
employee statutory profit sharing (58) 99 (1,968) - (1,927)
------------ ---------------- --------------- -------------- --------------
Total income tax and employee
statutory profit sharing benefit 9 (2) (716) - (709)
------------ ---------------- --------------- -------------- --------------
Net (loss) income $ (49) 97 (2,684) - (2,636)
------------ ---------------- --------------- -------------- --------------
Adjustments
(Unaudited) Servicios and Combined
For the three-months period ended March 31, 2004 Icosa Inmobiliaria Axtel Eliminations Guarantors
-------------------------------------------------- ------------ ---------------- --------------- -------------- --------------
Rental and service revenues $ 13,423 505 200,578 - 214,506
Administrative expenses (13,423) - (200,602) - (214,025)
Depreciation and amortization - (111) - - (111)
------------ ---------------- --------------- -------------- --------------
Operating income (loss) - 394 (24) - 370
------------ ---------------- --------------- -------------- --------------
Comprehensive financing result, net (68) (162) (284) - (514)
------------ ---------------- --------------- -------------- --------------
Other income, net 7 - 590 - 597
------------ ---------------- --------------- -------------- --------------
(Loss) income before income taxes and
employee statutory profit sharing (61) 232 282 - 453
------------ ---------------- --------------- -------------- --------------
Total income tax and employee
statutory profit sharing 3 60 (812) - (749)
------------ ---------------- --------------- -------------- --------------
Net (loss) income $ (58) 292 (530) - (296)
------------ ---------------- --------------- -------------- --------------
-31-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
Guarantors' Combined Statements of Changes in Financial Position:
Adjustments
(Unaudited) Servicios and Combined
For the three-months period ended March 31, 2005 Icosa Inmobiliaria Axtel Eliminations Guarantors
------------------------------------------------- ------------ --------------- --------------- -------------- --------------
Operating activities:
Net (loss) income $ (49) 97 (2,684) - (2,636)
Non-cash items (9) 107 728 - 826
------------ --------------- --------------- -------------- --------------
Resources (used in) provided by
operations (58) 204 (1,956) - (1,810)
Net financing from operations 800 9 2,836 - 3,645
------------ --------------- --------------- -------------- --------------
Resources provided by operations, net 742 213 880 - 1,835
------------ --------------- --------------- -------------- --------------
Financing activities:
Loans payment, net - (213) - - (213)
------------ --------------- --------------- -------------- --------------
Resources used in financing activities - (213) - - (213)
------------ --------------- --------------- -------------- --------------
Investing activities:
Property, system and equipment, net - - (12) - (12)
Other assets (328) - (1,421) - (1,749)
------------ --------------- --------------- -------------- --------------
Resources used in investing activities (328) - (1,433) - (1,761)
------------ --------------- --------------- -------------- --------------
Increase (decrease) in cash and equivalents 414 - (553) - (139)
Cash and equivalents at the beginning of the
period 593 12 1,420 - 2,025
------------ --------------- --------------- -------------- --------------
Cash and equivalents at the end of the period $ 1,007 12 867 - 1,886
------------ --------------- --------------- -------------- --------------
-32-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of March 31, 2005)
Adjustments
(Unaudited) Servicios and Combined
For the three-months period ended March 31, 2004 Icosa Inmobiliaria Axtel Eliminations Guarantors
------------------------------------------------- ------------ --------------- --------------- -------------- --------------
Operating activities:
Net (loss) income $ (58) 292 (530) - (296)
Non-cash items (3) 51 812 - 860
------------ --------------- --------------- -------------- --------------
Resources (used in) provided by operations (61) 343 282 - 564
Financing from operations, net 145 13 301 - 459
------------ --------------- --------------- -------------- --------------
Resources provided by operations, net 84 356 583 - 1,023
------------ --------------- --------------- -------------- --------------
Financing activities:
Loans payments, net - (356) - - (356)
------------ --------------- --------------- -------------- --------------
Resources used in financing activities - (356) - - (356)
------------ --------------- --------------- -------------- --------------
Investing activities:
Property, system and equipment, net - - (12) - (12)
Other assets 3 - - - 3
------------ --------------- --------------- -------------- --------------
Resources used in investing activities 3 - (12) - (9)
------------ --------------- --------------- -------------- --------------
Increase in cash and equivalents 87 - 571 - 658
Cash and equivalents at the beginning of the
period 168 14 300 - 482
------------ --------------- --------------- -------------- --------------
Cash and equivalents at the end of the period $ 255 14 871 - 1,140
------------ --------------- --------------- -------------- --------------
-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)
Guarantors - U.S. GAAP reconciliation of net income and stockholders'
equity:
As discussed at the beginning of this note 14, 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 for the three month-period ended March 31, 2005 and
2004 and on the stockholders' equity as of March 31, 2005 and December 31,
2004 is presented below, with an explanation of the adjustments.
(Unaudited)
---------------------------------------------
Three-month period ended March 31
---------------------------------------------
2005 2004
----------------------- -- ------------------
Net loss reported under Mexican GAAP .............................. $ (2,636) (296)
----------------------- ------------------
Approximated U.S. GAAP adjustments
1. Deferred income taxes (A)....................................... 709 749
2. Allowance for post retirement benefits (B)...................... 155 455
----------------------- ------------------
Total approximate U.S. GAAP adjustments............................ 864 1,204
----------------------- ------------------
Approximate net (loss) income under U.S. GAAP...................... $ (1,772) 908
======================= ==================
(Unaudited)
-----------------
Three-month Year ended
period ended
March 31 December 31
----------------- --- ----------------
2005 2004
----------------- --- ----------------
Total stockholders' equity reported under Mexican GAAP................ $ 22,999 25,702
----------------- ----------------
Approximate U.S. GAAP adjustments
1. Deferred income taxes (A).......................................... (5,172) (5,880)
2. Allowance for post retirement benefits (B)......................... (20,959) (21,114)
----------------- ----------------
Total approximate U.S. GAAP adjustments............................... (26,131) (26,994)
----------------- ----------------
Total approximate stockholders' deficit under U.S. GAAP............... $ (3,132) (1,292)
================= ================
-34-
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)
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, as of March 31, 2005 and December 31, 2004, represented
expenses of $5,172 and $5,880, respectively.
B. Other employee benefits Severance
For the year ended December 31, 2004 and prior 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 three-month
periods ended March 31, 2005 and 2004 the Company recorded an increase in
net income of $155 and $455, respectively, and recognized a liability
amounting to $20,959 and $21,114 as of March 31, 2005 and December 31,
2004, respectively. As of March 31, 2005 the Company has not recognized
this liability under Mexican GAAP.
-35-
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 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 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
March 31, 2005) Three-month period ended
Three-month period ended March 31, March 31,
------------------------------------------ ------------------------
Revenue Source 2005 2004 % of Change 2005 2004
------------------------ ----------- --------- ------------ --------- -----------
Local calling services.. Ps. 785.8 Ps. 628.9 25.0% 70.2% 69.5%
Long distance services.. 100.9 89.4 12.9% 9.0% 9.9%
Other services.......... 232.0 186.5 24.4% 20.8% 20.6%
------------------------ ----------- --------- ------------ --------- -----------
Total................... Ps. 1,118.7 Ps. 904.7 23.7% 100.0% 100.0%
=========== ========= ============ ========= ===========
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.
-36-
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.
Three Month Ended March 31, 2005 Compared with Three Month Ended March 31, 2004
Revenues from Operations
Revenues from operations increased to Ps. 1,118.7 million for three month
period ended March 31, 2005 from Ps. 904.7 million for the same period in 2004,
an increase of Ps. 214.0 million, or 24%. The number of access lines increased
to 490,231 from 369,231, an increase of 33%, and our average revenue per user
decreased to Ps. 627.9 from Ps. 676.6. This decrease was a result of the various
commercial offers, including minutes of cellular and long distance calls, that
we made available to our customers. During 2004, the Company expanded its
coverage by opening six new cities, which combined with new and innovative
commercial offers, allowed the Company to increase the number of lines in
service.
Local services. Local service revenues increased to Ps. 785.8 million for
the three-month period ended March 31, 2005 from Ps. 628.9 million for the same
period ended in 2004, an increase of Ps. 156.9 million, or 25%. These increases
were primarily due to higher number of lines in service, which increased the
monthly rent and cellular consumption.
Long distance services. Long distance services revenues increased to Ps.
100.9 million for the three-month period ended March 31, 2005 from Ps. 89.4
million for the period ended March 31, 2004, an increase of Ps. 11.5 million, or
13%. This is a consequence of a higher consumption in both, domestic and
international long distance, resulting in large part from the expansion of our
network during 2004.
Other services. Revenue from other services increased to Ps. 232.0 million
in the first quarter of 2005 from Ps. 186.5 million in the same period in 2004,
an increase of Ps. 45.5 million, or 24%, due to increases in data revenues as
well as increased subscriptions for value added services.
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues from operations increased to Ps. 351.8
million for the three-month period ended March 31, 2005 from Ps. 281.4 million
registered in the same period in 2004, an increase of Ps. 70.4 million, or 25%.
This change was due primarily to a Ps. 34.5 million increase in our underlying
costs related to calling party pays calls as well as increased long distance
costs. Both increases were due to the higher number of lines in service.
Gross profit. Gross profit is defined as revenues minus costs of revenues.
For the three-month period ended March 31, 2005 gross profit was Ps. 766.9
million, an increase of Ps. 143.5 million, or 23%, compared with the same period
in 2004.
Operating expenses. Operating expenses for the first quarter of 2005
increased Ps. 90.7 million to Ps. 399.3 million. During the same period of 2004
this amount was Ps. 308.6 million. This increase was attributable to the
Company's geographic expansion during 2004.
Depreciation and Amortization. Depreciation and amortization from
continuing operations increased to Ps. 262.3 million for the three-month period
ended March 31, 2005 from Ps. 241.0 million for the same period in
-37-
2004, an increase of Ps. 21.3 million, or 9%. This increase in depreciation and
amortization reflects the Company's increased capital expenditures as a result
of its infrastructure growth.
Operating income (loss). Due to the factors previously described, our
operating income increased to Ps 105.3 million or 43% when compared to the same
period of 2004.
Comprehensive financial result. The comprehensive financial result was Ps.
(74.5) million for the first quarter of 2005, compared to a comprehensive
financial result of Ps. (36.1) million for the same period in 2004. The
following table illustrates the comprehensive financial results:
Comprehensive Financial Result Comparison
Three-month period ended March 31, % of
Description 2005 2004 Change
---------------------------------------------------------------------------------------------
Interest expense Ps. (96.4) Ps. (69.7) -38.3%
Interest income 16.9 5.4 213.0%
Foreign exchange gain (loss), net (7.1) 11.2 N/A
Monetary position gain 12.1 17.0 -28.8%
Total Ps. (74.5) Ps. (36.1) -106.4%
=============================================================================================
The main impact in the comprehensive financial result is due to the
offering of an additional $75 million of our senior notes during the month of
January of 2005.
Net Income (loss). Our net income was Ps. 14.4 million for the three-month
period ended March 31, 2005 vs. Ps. 33.4 million for the three-month period
ended March 31, 2004. We anticipate that we could incur net losses for at least
the next several quarters.
Liquidity and Capital Resources
Historically we have relied primarily on vendor financing, private equity
contributions, internal cash from operations, the proceeds from bank debt and
the sale of our 11% Senior Notes due 2013 to fund our operations, capital
expenditures and working capital requirements. 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.
At March 31, 2005, we had cash and cash equivalents of Ps. 1,255.7 million
compared to cash and cash equivalents of Ps. 889.0 million in the same period of
2004.
Net cash provided by operating activities for the three-month period ended
March 31, 2005 was Ps. 72.2 million compared to Ps. 102.5 million in the same
period of 2004.
Net cash used in investing activities was Ps. 371.9 million for the first
Quarter of 2005 compared to Ps. 213.8 million in the same period of 2004. These
cash flows primarily reflect investments in fixed assets of Ps. 352.1 million
and Ps. 202.8 million for the three-month period ended March 31, 2005 and 2004,
respectively.
-38-
Net cash provided by (used in) financing activities from continuing
operations was Ps. 996.9 million and Ps. (76.0) million for the three-month
period ended March 31, 2005 and 2004, respectively. The amount reflected in the
first quarter of 2005 was primarily due to the issuance of additional senior
notes in January 2005.
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 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.
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.......... 16.0 16.0 -- -- --
Long-term debt......................... 254.6 -- 4.6 -- 250.0
Operating leases....................... 8.9 2.9 6.0 -- --
Airspan(1)............................. 35.0 34.8 0.2 -- --
--------- ----------- ---------- --------- ----------
Total contractual cash obligation...... 341.9 33.5 43.4 15.0 250.0
========= =========== ========== ========= ==========
___________________
(1) Includes Airspan's new supply agreements.
US GAAP Reconciliation
We describe below the principal differences between Mexican GAAP and US
GAAP. See Note 14 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.
-39-
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.
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
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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 2004, the FASB issued FASB Statement No. 123 (revised 2004),
Share-Based Payment, which addresses the accounting for transactions in which an
entity exchanges its equity instruments for goods or services, with a primary
focus on transactions in which an entity obtains employee services in
share-based payment transactions. This Statement is a revision to Statement 123
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
its related implementation guidance. For companies whose stock does not trade in
a public market, this Statement will require measurement of the cost of employee
services received in exchange for stock compensation based on the grant-date
fair value of the employee stock options. Incremental compensation costs arising
from subsequent modifications of awards after the grant date must be recognized.
This Statement will be effective for us as of January 1, 2006.
In December 2004, the FASB issued FASB Statement No. 153, Exchanges of
Non-monetary Assets, which eliminates an exception in APB 29 for non-monetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of non-monetary assets that do not have commercial substance. This
Statement will be effective for us for non-monetary asset exchanges occurring on
or after January 1, 2006.
The Company estimates that the adoption of the above bulletins will not
have a material effect on its financial position or results of operations.
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 14 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.
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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.
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
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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 March 31, 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. $1,270.0 million at an annual rate of 12.3%. Both
of these transactions will cease in December 2008.
The following table provides information about the details of our option
contracts as of March 31, 2005:
(Amounts in millions) Currencies Interest Rates
----------------------------------- -------------------------------
Maturity date Notional Notional Amount in new Axtel Axtel pays Estimated
amount amount currency receives fair value
December 15, 2008 US$ 113.8 Ps. 1,270 US$ 13.75 11.00% 12.30% US$ (0.6)
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.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in report that it files
or submits under the U.S. Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms. An evaluation was carried
out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures as of March 31,
2005. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective.
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
There have been no material changes in our legal proceedings previously
disclosed, except in connection with Shareholdings Disputes, which have had the
following developments:
(1) LAIF X Mexican Litigation:
On or about October 24, 2003, LAIF X sprl filed a petition before the civil
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
civil trial court denied the admission of such petition and ordered its
dismissal on November 14, 2003; the State Superior Court of Appeals (Sala
Novena Civil) confirmed such dismissal on March 18, 2004. LAIF X sprl
requested constitutional review on April 20, 2004, challenging the State
Superior Court's decision confirming the dismissal by the civil trial
court. The Federal District Court denied such relief and confirmed the
dismissal. LAIF X sprl requested review by the Federal Circuit Court of the
decision rendered by the Federal District Court; on April 14, 2005, the
Federal Circuit Court confirmed the resolution denying the relief sought by
LAIF. This decision is final and allows no further legal recourse.
(2) LAIF X Arbitral Proceeding:
On December 23, 2003, LAIF X sprl filed a Demand for Arbitration before the
International Centre for Dispute Resolution of the American Arbitration
Association against us, Telinor and Blackstone (collectively
"respondents"). In this arbitral proceeding, LAIF X sprl seeks among other
relief, (a) a declaration that the allocation of the Series C shares to
Blackstone was not made in compliance with our bylaws, (b) an order to
nullify the Series C shares allocated to Blackstone, to cancel the
corresponding stock certificates and to re-issue instead the same number of
Series A shares to Telinor, (c) an order to remove the Series C directors
appointed during the Ordinary Shareholders Meeting held on October 9, 2003
and to hold a Special Meeting of the Series C shareholders to elect new
Series C directors and (d) damages for an unspecified amount. LAIF X
amended its complaint in March 2004, requesting a declaration that LAIF X
sprl is a legitimate shareholder of the Company. Each of the respondents
filed their answers to LAIF X sprl's Demand for Arbitration and requested,
among other things, (a) the dismissal of the arbitration for lack of an
arbitrable dispute, (b) alternatively, a stay of the arbitration until
resolution of the pending litigation filed by Telinor in Mexico challenging
LAIF X sprl status as a shareholder of the Company (more fully described
below under the caption Telinor Mexican Litigation) and (c) a denial of
LAIF X sprl's request for relief in its entirety and a declaration that our
issuance of Series A shares to Telinor, as agent for Blackstone, and the
subsequent exchange of those shares for Series C shares, were properly
executed in accordance with the resolutions of our Extraordinary
Shareholders Meeting dated February 28, 2003, our bylaws and Mexican law.
Respondents have also challenged on jurisdictional grounds the Tribunal's
right to consider the issue of whether LAIF X is a legitimate shareholder
of the Company. The hearing on the merits of this matter was scheduled for
early December 2004. At the request of LAIF X, the hearing was rescheduled
to November 15, 2005 in order to give the parties an opportunity to resolve
the matters raised in the arbitration in a consensual manner.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS
Not applicable.
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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: May 13, 2005