FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the month of August 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, CP 66215
(52)(81) 8114-0000
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F ___
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1): _________
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of
a Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): _________
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of
a Form 6-K if submitted to furnish a report or other document that the
registrant foreign private issuer must furnish and make public under the laws of
the jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information
contained in this Form, the registrant is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the Securities
Exchange Act of 1934.
Yes ___ No X
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-_____.
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Forward Looking Statements
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
June 30, 2005 and December 31, 2004.....................1
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended June 30, 2005 and 2004...2
Condensed Consolidated Statements of Changes in
Financial Position for the Three and Six Months
Ended June 30, 2005 and 2004 ...........................3
Condensed Consolidated Statement of Changes in
Stockholders' Equity as of June 30, 2005................4
Notes to Condensed Consolidated Financial Statements......5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................39
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...........................................................48
PART II OTHER INFORMATION
Item 1. Legal Proceedings...........................................48
Item 2. Changes in Securities and Use of Proceeds...................49
Item 3. Defaults upon Senior Securities.............................49
Item 4. Submission of Matters to a Vote of Security Holders.........49
Item 5. Other Information...........................................49
Item 6. Exhibits and Reports........................................49
Signatures..........................................................50
In this report, references to "$," "$U.S." or "Dollars" are to United
States Dollars and references to "Ps." or "Pesos" are to Mexican Pesos. This
report contains translations of certain Peso amounts into Dollars at specified
rates solely for the convenience of the reader. These translations should not be
construed as representations that the Peso amounts actually represent such
Dollar amounts or could be converted into Dollars at the rates indicated or at
any other rate.
Forward Looking Statements
This report on Form 6-K contains certain forward-looking statements within
the meaning of Section 27A of the United States Securities Act of 1933, as
amended, (the "Securities Act") and Section 21E of the United States Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking
statements reflect our views with respect to our financial performance and
future events. All forward-looking statements contained herein are inherently
uncertain. Actual results could differ materially from those projected in the
forward-looking statements as a result of factors discussed herein. Many of
these statements may be identified by the use of forward-looking words such as
"believe," "expect," "anticipate," "should," "planned," "estimated" and
"potential," among others. Readers are cautioned not to place reliance on these
forward-looking statements. The following factors, as well as other factors
described in this report, could cause actual results to differ materially from
such forward-looking statements:
o ability to attract subscribers;
o changes and developments in technology, including our ability to
upgrade our networks to remain competitive and our ability to
anticipate and react to frequent and significant technological
changes;
o our ability to manage, implement and monitor billing and operational
support systems;
o an increase in churn, or subscriber cancellations;
o the control of us retained by certain of our stockholders;
o changes in capital availability or cost, including interest rate or
foreign currency exchange rate fluctuations;
o the effects of governmental regulation of the Mexican
telecommunications industry;
o declining rates for long distance traffic;
o fluctuations in labor costs;
o foreign currency exchange fluctuations relative to the US dollar or
the Mexican peso;
o the general political, economic and competitive conditions in markets
and countries where we have operations, including competitive pricing
pressures, inflation or deflation and changes in tax rates;
o the timing and occurrence of events which are beyond our control; and
o other factors described in this Form 6-K.
Any forward-looking statements in this Form 6-K are based on certain
assumptions and analysis made by us in light of our experience and perception of
historical trends, current conditions, expected future develop-
ments and other factors we believe are appropriate under the current
circumstances. Forward-looking statements are not a guarantee of future
performance and actual results or developments may differ materially from
expectations. You are therefore cautioned not to place undue reliance on such
forward-looking statements. While we continually review trends and uncertainties
affecting our results of operations and financial condition, we do not intend to
update any particular forward-looking statements contained in this document.
-ii-
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Quarterly Condensed Consolidated Financial Statements
June 30, 2005
(With comparative figures as of December 31, 2004 and June 30, 2004)
(With Independent Auditors' Review Report Thereon)
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2005 and December 31, 2004
(Thousand pesos of constant purchasing power as of June 30, 2005)
(Unaudited)
June 30, December 31,
Assets 2005 2004
--------------- ------------
Current assets:
Cash and cash equivalents (includes $1,082,516 and $535,245 from
temporary investments in 2005 and 2004, respectively).............. $ 1,106,082 559,780
Accounts receivable, (net of allowance for doubtful accounts of
$134,928 and $101,191 in 2005 and 2004, respectively).............. 611,787 512,512
Refundable taxes and other accounts receivable........................ 124,187 83,291
Prepaid expenses (note 5)............................................. 94,896 133,155
Inventories........................................................... 61,426 58,815
--------------- ------------
Total current assets....................................... 1,998,378 1,347,553
Long-term accounts receivable............................................ 19,355 19,960
Property, systems and equipment, net (note 6)............................ 6,385,756 6,171,577
Telephone concession rights, net of accumulated amortization of $286,961
and $261,162 in 2005 and 2004, respectively........................... 684,590 710,389
Pre-operating expenses, net.............................................. 184,720 204,589
Deferred income taxes (note 11).......................................... 67,690 125,287
Other assets (note 7).................................................... 157,604 142,388
--------------- ------------
Total assets.................................................. $ 9,498,093 8,721,743
=============== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities.............................. $ 479,397 601,853
Accrued interest...................................................... 15,025 10,985
Taxes payable......................................................... 34,424 41,143
Short-term debt (note 8).............................................. 108,136 109,479
Current maturities of long-term debt (note 9)......................... 47,873 49,465
Other accounts payable (note 10)...................................... 214,247 202,607
Derivative financial instruments (note 4)............................. 42,700 944
--------------- ------------
Total current liabilities..................................... 941,802 1,016,476
Long-term debt, excluding current maturities (note 9).................... 2,750,958 2,045,873
Premium on bond issuance (note 9)........................................ 54,589 --
Other long-term accounts payable......................................... 2,996 3,577
Seniority premiums....................................................... 2,117 2,417
--------------- ------------
Total liabilities............................................. 3,752,462 3,068,343
Stockholders' equity (note 12):
Common stock.......................................................... 7,175,671 7,175,671
Additional paid-in capital............................................ 141,980 141,980
Deficit............................................................... (1,650,624) (1,783,606)
Cumulative deferred income tax effect................................. 119,657 119,657
Change in the fair value of derivative instruments (note 4)........... (41,053) (302)
--------------- ------------
Total stockholders' equity.................................... 5,745,631 5,653,400
Commitments and contingencies (note 13)
--------------- ------------
Total liabilities and stockholders' equity.................... $ 9,498,093 8,721,743
=============== ============
The accompanying notes are an integral part of the consolidated financial statements.
-1-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Thousand pesos of constant purchasing power as of June 30, 2005)
Three months ended Six months ended
June 30, June 30,
(Unaudited) (Unaudited)
2005 2004 2005 2004
------------ ----------- ----------- ------------
Rental, installation, service and other revenues......... $1,200,133 935,746 2,321,388 1,842,527
------------ ----------- ----------- ------------
Operating costs and expenses:
Cost of sales and services.......................... (375,655) (288,187) (728,278) (570,208)
Selling and administrative expenses................. (407,491) (328,262) (807,701) (637,527)
Depreciation and amortization....................... (264,438) (251,109) (527,367) (492,641)
------------ ----------- ----------- ------------
(1,047,584) (867,558) (2,063,346) (1,700,376)
------------ ----------- ----------- ------------
Operating income................................ 152,549 68,188 258,042 142,151
Comprehensive financing result:
Interest expense.................................... (88,126) (66,402) (184,758) (136,241)
Interest income..................................... 9,395 4,280 26,320 9,668
Foreign exchange gain (loss), net................... 88,706 (41,680) 81,618 (30,420)
Monetary position gain.............................. 3,919 2,002 16,069 19,058
------------ ----------- ----------- ------------
Comprehensive financing result, net............. 13,894 (101,800) (60,751) (137,935)
------------ ----------- ----------- ------------
Other income (expense), net.............................. 554 (4,420) (6,712) 10,415
------------ ----------- ----------- ------------
Income (loss) before income taxes............... 166,997 (38,032) 190,579 14,631
------------ ----------- ----------- ------------
Deferred income tax (note 11)............................ (48,467) 8,678 (57,597) (10,469)
------------ ----------- ----------- ------------
Net income (loss)............................... $ 118,530 (29,354) 132,982 4,162
============ =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
-2-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Financial Position
(Thousand pesos of constant purchasing power as of June 30, 2005)
Six months ended
June 30,
(Unaudited)
2005 2004
---------------- ---------------
Operating activities:
Net income......................................................... $ 132,982 4,162
Add charges (deduct credits) to operations not requiring
(providing) resources:
Depreciation................................................ 471,607 441,386
Amortization................................................ 55,760 51,255
Deferred income tax......................................... 57,597 10,469
---------------- ---------------
Resources provided by the operations.................... 717,946 507,272
Net investment in operations....................................... (217,263) (93,997)
---------------- ---------------
Resources provided by operating activities............... 500,683 413,275
---------------- ---------------
Financing activities:
Proceeds from (payments of) loans and interest, net................ 706,190 (100,052)
Premium on bond issuance........................................... 54,589 --
Other accounts payable............................................. (4,066) 4,541
---------------- ---------------
Resources provided by (used in) financing activities.... 756,713 (95,511)
---------------- ---------------
Investing activities:
Acquisition and construction of property, systems
and equipment, net............................................. (685,786) (510,499)
Pre-operating results.............................................. (364) (7,275)
Other assets....................................................... (24,944) (16,389)
---------------- ---------------
Resources used in investing activities.................. (711,094) (534,163)
---------------- ---------------
Increase (decrease) in cash and cash equivalents........ 546,302 (216,399)
Cash and cash equivalents at beginning of period........................ 559,780 1,078,749
---------------- ---------------
Cash and cash equivalents at end of period.............................. $ 1,106,082 862,350
================ ===============
The accompanying notes are an integral part of the consolidated financial statements.
-3-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders' Equity
(Thousand pesos of constant purchasing power as of June 30, 2005)
Cumulative Change in the
Additional deferred fair value of Total
paid-in income tax derivative stockholders'
Common stock capital Deficit effect instruments equity
------------- ----------- ----------- ------------ ------------- -------------
Balances as of December 31, 2004... $ 7,175,671 141,980 (1,783,606) 119,657 (302) 5,653,400
Comprehensive income............... -- -- 132,982 -- (40,751) 92,231
------------- ----------- ----------- ------------ ------------- -------------
Balances as of June 30, 2005
(Unaudited)...................... $ 7,175,671 141,980 (1,650,624) 119,657 (41,053) 5,745,631
============= =========== =========== ============ ============= =============
The accompanying notes are an integral part of the consolidated financial statements.
-4-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 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
access, point-to-point, point-to-multipoint, fiber optic radio links and
copper technology, which are used 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 $145,698 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
$73,478 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 $752,375 for a period
of twenty years with an extension option.
The Company has commercial services in Monterrey, Mexico City,
Guadalajara, Puebla, Toluca, Leon, Queretaro, San Luis Potosi,
Aguascalientes, Saltillo, Ciudad Juarez and Tijuana.
-5-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
(2) Financial statement presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Mexico
(MexGAAP), which include the recognition of the effects of inflation on the
financial information, and are expressed in Mexican pesos of constant
purchasing power as of June 30, 2005, based on the National Consumer Price
Index (NCPI) published by Banco de Mexico.
The following national consumer price indexes (NCPI) were used to recognize
the effects of inflation:
Inflation
NCPI %
---------- ---------
June 30, 2005....................... 415.642 0.97
December 31, 2004................... 411.648 5.47
June 30, 2004....................... 397.283 1.79
The accompanying financial statements should be read in conjunction with
Axtel's Annual Audited Financial Statements for the year ended December 31,
2004, as certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles in Mexico have been condensed or omitted. The
Company's condensed consolidated interim financial statements are
unaudited, but in the opinion of management, reflect all necessary
adjustments for a fair presentation, which are of a normal recurring
nature. Operations results for the six months ended June 30, 2005 are not
necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2005.
When reference is made to pesos or "$", 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%
-6-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 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 its 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.
-7-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
(4) Hedging
On March 29, 2004, the Company entered into a 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 rate of 11%, and the Company will make semiannual payments
calculated based on the aggregate of $1,270,019 (nominal value) at annual
rate of 12.30%.
On June 6, 2005, the Company entered into a new derivative CCS. The purpose
of this agreement is to hedge the remaining portion of its U.S. dollar
foreign exchange exposure. Under this agreement, Axtel will receive
semiannual payments calculated based on the aggregate notional amount of
U.S.$ 136.25 million at an annual rate of 11%, and the Company will make
semiannual payments calculated based on the aggregate of $1,480,356
(nominal value) at annual rate of 12.26%.
Both of the CCS will expire in December 2008. During the life of the
contracts, the cash flows originated by the exchange of interest rates
under the CCS match in interest payment dates and those conditions of the
underlying debt, except that the underlying debt due on 2013. The Company
does not enter into derivative instruments for any purpose other than
cash-flow-hedging purposes.
By using derivative financial instruments to hedge exposures to changes in
currency exchange rates fluctuations, the Company exposes itself to credit
risk and market risk. Credit risk is the failure of the counterparty to
perform under the terms of the derivative contract. When the fair value of
a derivative contract is positive, the counterparty owes the Company, which
creates credit counterparty risk for the Company. When the fair value of a
derivative contract is negative, the Company owes the counterparty and,
therefore, it does not possess credit risk exposure. The Company minimizes
the credit risk in derivative instruments by entering into transactions
with high-quality foreign financial counterparties.
-8-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
The CCS information is as follows:
(Amounts in charts are expressed in millions, except exchange rates which
are expressed in pesos)
Currencies Interest Rates
--------------------------------- --------------------------------------------
Notional
amount
(nominal Axtel Axtel Estimated
Maturity date Notional amount value) receives pays fair value
------------------- ----------------- ------------- ------------ ----------- ---------------
December 15, 2008 U.S.$ 113.75 $ 1,270 11.00% 12.30% U.S.$(2.4)
December 15, 2008 U.S.$ 136.25 $ 1,480 11.00% 12.26% U.S.$(1.5)
For the six-month period ended June 30, 2005, the change in net unrealized
losses "mark to market" for derivatives designated as cash flow hedges was
U.S. $(3.9) million. No hedge ineffectiveness on cash flow hedges was
recognized during 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)
June 30, December 31,
2005 2004
--------------- --------------
Airspan Communications Limited............... $ 31,534 93,727
Nortel Networks de Mexico.................... 7,477 3,501
Nortel Networks Limited...................... 20,656 2,132
Maxcom Telecomunicaciones.................... 1,726 293
Other........................................ 33,503 33,502
--------------- --------------
Total prepaid expenses........ $ 94,896 133,155
=============== ==============
-9-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
(6) Property, systems and equipment
Property, systems and equipment are analyzed as follows:
(Unaudited)
June 30, December 31,
2005 2004 Useful lives
-------------- ------------- ---------------
Land.............................................. $ 38,610 38,389
Building.......................................... 125,417 125,162 25 years
Computer and electronic equipment................. 1,083,094 1,059,856 3 years
Transportation equipment.......................... 25,161 19,104 4 years
Furniture and fixtures............................ 104,461 100,731 10 years
Network equipment................................. 7,484,690 6,725,957 6 to 28 years
Leasehold improvements............................ 168,161 152,538
Construction in progress.......................... 1,057,567 1,196,640
-------------- -------------
10,087,161 9,418,377
Less accumulated depreciation..................... 3,701,405 3,246,800
-------------- -------------
Property, systems and equipment, net......... $ 6,385,756 6,171,577
============== =============
As of June 31, 2005 the Company has capitalized CFR as a component of the
acquisition cost of property, systems and equipment aggregating $2,312.
(7) Other assets
Other assets consist of the following:
(Unaudited)
June 30, December 31,
2005 2004
--------------- ------------
Notes issuance costs................................... $ 89,214 71,363
Telmex / Telnor infrastructure costs................... 56,448 56,448
Guarantee deposits..................................... 21,957 19,055
Other.................................................. 14,095 12,629
181,714 159,495
--------------- ------------
Less accumulated amortization.......................... 24,110 17,107
--------------- ------------
Other assets, net............................. $ 157,604 142,388
=============== ============
-10-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
(8) Short-term debt
Short term debt and its main characteristics are as follows:
(Unaudited)
June 30, 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........................... $ 60,120 85,633
Revolving line of credit with Banco Santander Serfin,
S.A. used for letters of credit, denominated in U.S.
dollars up to 180 days. The interest rate is 7%......... 42,486 --
Revolving lines of credit with different institutions
used for letters of credit denominated in U.S. dollars
up to 360 days........................................... 5,530 23,846
--------------- ------------
Total short-term notes payable............................... $ 108,136 109,479
=============== ============
-11-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
(9) Long-term debt
Long-term debt and its main characteristics are as follows:
(Unaudited)
June 30, 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..................... $ 2,710,700 1,990,467
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........................................... 44,437 54,061
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................... 43,694 50,810
--------------- -------------
Total long-term debt............................... 2,798,831 2,095,338
Less current maturities................... 47,873 49,465
--------------- -------------
Long-term debt, excluding current maturities........... 2,750,958 2,045,873
=============== =============
Annual installments of long-term debt are as follows:
Year Amount
---- ------
June 2007................................... $ 29,007
June 2008................................... 9,324
June 2009................................... 1,927
Thereafter.................................. 2,710,700
-------------
$ 2,750,958
=============
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. Thus, resulting in a reduction of the financial cost from 11.0% to
9.84%.
-12-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
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.
Some of the debt agreements that remain outstanding establish certain
covenants, the most important of which refer to limitations on dividend
payments and comprehensive insurance on pledged assets, among others. As of
June 30, 2005, the Company was in compliance with all of its covenants and
obligations.
(10) Other accounts payable
As of June 30, 2005 and December 31, 2004, other accounts payable consist
of the following:
(Unaudited)
June 30, December 31,
2005 2004
------------ ------------
Guarantee deposits (note 13a).......... $ 140,956 147,863
Interest payable (note 13a)............ 35,660 12,237
Other.................................. 37,631 22,507
------------ ------------
Total other accounts payable.. $ 214,247 202,607
============ ============
(11) Income tax (IT), tax on assets (TA), employee statutory profit sharing
(ESPS) and tax loss carryforwards
The parent company and its subsidiaries file their tax returns on a
stand-alone basis, and the consolidated financial statements show the
aggregate of the amounts determined by each company.
In accordance with the current tax legislation, companies must pay either
the IT or TA, whichever is greater. Both taxes recognize the effects of
inflation, in a manner different from MexGAAP.
The TA law establishes a 1.8% tax on assets adjusted for inflation in the
case of inventory, property, systems and equipment and deducted from
certain liabilities. TA levied in excess of IT for the year can be
recovered in the succeeding ten years, updated for inflation, provided that
in any of such years IT exceeds TA.
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
which 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. The
primary change in December 2004 was a
-13-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
further reduction in the income tax rates from the 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 recalculated 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
$51,418.
For the six months ended June 30, 2005 and 2004 (unaudited), deferred IT
amounted to an expense of $57,597 and $10,469, 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............ $ 520,007
Accounts receivable......................... 28,333
Accrued liabilities......................... 4,078
Tax on assets............................... 17,471
Accrued vacations........................... 2,042
--------------
Total gross deferred tax assets.... 571,931
Less valuation allowance................. 19,125
--------------
Net deferred tax assets............ 552,806
==============
December 31,
2004
--------------
Deferred tax liabilities:
Property, systems and equipment.......... 179,752
Telephone concession rights.............. 166,771
Pre-operating expenses................... 58,286
Other assets............................. 5,065
Inventories.............................. 17,645
--------------
Total deferred tax liabilities..... 427,519
--------------
Deferred tax assets, net........... $ 125,287
==============
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
-14-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
amounts of realizable deferred tax assets could be reduced if the taxable
income is lower. As of June 30, 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:
Inflation-
adjusted tax loss Recoverable
Year carryforwards TA
------------------------------------ ----------------- -----------
2009................................ $ 599 --
2010................................ 1,186,380 --
2011................................ 225,542 --
2012................................ 444,117 --
2013................................ 526 8,678
2014................................ -- 8,792
------------------ -----------
$ 1,857,164 17,470
================== ===========
(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 common stock of the Company in the amount in Mexican pesos
equal to $3,096 through the issuance of 124,957,212 non-voting Series
"N" shares which will represent 4.7% of the total issued common 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.
-15-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
(b) Stockholders' equity restrictions
Stockholder contributions, restated as provided for in tax law,
totaling of $7,227,377 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 June 30, 2005, the Company has the following commitments and
contingencies:
(a) On January 24, 2001 a contract was signed with Spectrasite
Communications Mexico, S. de R.L. de C.V. (Spectrasite) 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 Spectrasite and, in turn, sell or lease
them under an operating lease plan.
On January 24, 2001, the Company received 13 million dollars from
Spectrasite 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 Spectrasite 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 $35,660, presenting it as other accounts payable in the
balance sheet as of June 30, 2005.
During 2002, Spectrasite 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
Spectrasite for unilateral rescission of the contract. As of June 30,
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. On
November
-16-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
12, 2004 Metronet requested constitutional review challenging such
State Superior Court's decision. On May 27, 2005, the Mexican Federal
Court resolved the constitutional review requested by Metronet by
ordering the State Superior Court of Appeals to review the case and to
issue a resolution. The State Superior Court of Appeals on July 7,
2005 ruled again in favor of the Company, releasing Axtel of any
liability and responsibility, this resolution will take full effect
until August 5, 2005, save and except if Metronet requests on or
before such date a new constitutional review before the Mexican
Federal Courts.
(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' 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 $32,882 and
to other service providers for $40,619.
(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.
(g) The Company leases some equipment and facilities under operating
leases. Some of these leases have renewal clauses. Lease expense for
six-month periods ended June 30, 2005 and 2004 was $172,016 and
$123,321, respectively.
-17-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
The annual payments under these leases as of June 30, 2005 are as
follows:
Contracts in:
----------------------------------------------------------
U.S. Dollars UDIS
Pesos (thousands) (Investment units)
-------------- --------------- ------------------
2005........................ $ 46,627 5,366 27,416
2006........................ 68,133 6,730 54,833
2007........................ 61,290 5,721 54,833
2008........................ 52,225 3,439 54,833
2009........................ 44,269 2,774 45,694
Thereafter.................. 244,953 11,600 --
-------------- --------------- ------------------
$ 517,497 35,630 237,609
============== =============== ==================
(h) As of June 30, 2005, the Company has placed purchase orders which are
pending delivery from suppliers for approximately $759,030.
(i) On April 20, 2004 Axtel and Airspan entered into Amendment Agreement
No. 2 to the Purchase and License Agreement of Fixed Wireless Access
Equipment and the Technical Assistance Support Services Agreement,
both dated March 20, 2004, by virtue of which the parties agreed to:
(i) reduce the prices of (a) the Fixed Wireless Access Equipment (RSS
customer premise equipment and the radio base station equipment) and
(b) the Technical and Support Services for years 2004 and 2005; (ii)
eliminate Axtel's obligation to provide a payment guarantee and modify
its payments terms under such Agreements, (iii) improve the delivery
times of the equipments; (iv) create a single unit of RSS (customer
premise equipment) which will be sold at a lower price in comparison
of the current RSS customer premise equipment; and (v) cancel Axtel's
purchase commitments of years 2005, 2006 and 2007 established under
previous Agreements and replace such commitments with two new
commitments, one for U.S.$ 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. As of June 30, 2005 the Company has
placed purchase orders totaling the agreed commitments.
(j) On December 2004, the Company entered into a Purchase and License
Agreement for FWA Equipment, by virtue of which the Company is
committed to purchase equipment manufactured by Airspan for U.S. $38.7
millions, from December 2004 through December 2006.
As of June 30, 2005, the Company has placed purchase orders totaling
the agreed commitments.
-18-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
(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. As of June 30, 2005, the Company has
acquired the equipment and software licenses required to the have
41,704 lines in services.
(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 of America (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 of America.
The main differences between Mexican GAAP and U.S. GAAP and their effect on
consolidated net income for the three month and six-month periods ended
June 30, 2005 and 2004, and on stockholders' equity as of June 30, 2005 and
December 31, 2004 are presented below, with an explanation of the
adjustments.
(Unaudited) (Unaudited)
Three months ended Six months ended
June 30, June 30,
2005 2004 2005 2004
----------- ----------- ---------- ----------
Net (loss) income reported under Mexican GAAP.......... $ 118,530 (29,354) 132,982 4,162
----------- ----------- ---------- ----------
Approximated U.S. GAAP adjustments.....................
1. Deferred income taxes (see 14a)..................... 48,467 (8,678) 57,597 10,469
2. Amortization of start-up costs (see 14c)............ 10,119 9,438 20,233 18,854
3. Start-up costs of the period (see 14c).............. (364) (6,447) (364) (7,275)
4. Revenue recognition (see 14b)....................... (10,433) 1,795 (17,174) 4,796
5. Allowance for post retirement benefits (see 14d).... 48 53 203 508
6. Capitalized interest (see 14e)...................... (57) (48) (240) (463)
----------- ----------- ---------- ----------
Total approximate U.S. GAAP adjustments................ 47,780 (3,887) 60,255 26,889
----------- ----------- ---------- ----------
Approximate net income (loss) under U.S. GAAP.......... $ 166,310 (33,241) 193,237 31,051
-19-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
(Unaudited)
June 30, December 31,
2005 2004
-------------- --------------
Total stockholders' equity reported under Mexican GAAP.............. $ 5,745,631 5,653,400
Approximate U.S. GAAP adjustments...................................
1. Deferred income taxes (see 14a).................................. (67,690) (125,287)
2. Start-up costs (see 14c)......................................... (184,720) (204,589)
3. Revenue recognition (see 14b).................................... (101,453) (84,279)
4. Allowance for post retirement benefits (see 14d)................. (20,959) (21,162)
5. Capitalized interest (see 14e)................................... 24,753 24,993
-------------- --------------
Total approximate U.S. GAAP adjustments............................. (350,069) (410,324)
-------------- --------------
Total approximate stockholders' equity under U.S. GAAP.............. $ 5,395,562 5,243,076
============== ==============
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 June 30, 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.................... $ 520,007
Accounts receivable................................. 28,333
Deferred revenues................................... 23,600
Seniority premium and allowance for post
retirement benefits............................ 6,600
Accrued vacations................................... 2,042
Accrued liabilities................................. 4,078
Tax on assets....................................... 17,471
-----------------
Total gross deferred tax assets............ 602,131
Less valuation allowance............................ (229,715)
-----------------
Net deferred tax assets.................... 372,416
-----------------
Deferred tax liabilities:
Property, systems and equipment .................... 188,000
Telephone concession rights......................... 166,771
Inventories......................................... 17,645
-----------------
Total deferred tax liabilities................. 372,416
Net deferred tax liabilities under U.S. GAAP........ --
Less net deferred tax assets recognized
under Mexican GAAP............................. 125,287
-----------------
U.S. GAAP adjustment to stockholders' equity........ $ 125,287
=================
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 to 2002. A deferred tax
asset valuation allowance of $229,715 as of December 31, 2004 was
recorded for U.S. GAAP. This represents a decrease in the valuation
allowance of $149,020 for the year ended December 31, 2004.
-21-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
(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.
(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, these costs were
recognized when incurred as a deferred asset and amortized over a
period of 10 years. The Company has reversed the amortization of
$20,233 and $18,854 for the six months period ended June 30, 2005 and
2004 as shown in the U.S. GAAP reconciliation, and has reduced
stockholders' equity by $184,720 and $204,589 to write off the
unamortized balance at June 30, 2005 and December 31, 2004. For U.S.
GAAP purposes during the six months period ended June 30, 2004 the
Company reversed $364 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, exclud-
-22-
ing 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 $21,162 as of June 30, 2005 and
December 31, 2004, respectively. As of June 30, 2005, the Company has
not recognized this liability under Mexican GAAP.
(e) Capitalized interest
Under Mexican GAAP, the Company capitalizes interest on property,
systems and equipment under construction. The amount of financing cost
to be capitalized is comprehensively measured in order to include
properly the effects of inflation. Therefore, the amount capitalized
includes: (i) the interest cost of the debt incurred, plus (ii) any
foreign currency fluctuations that result from the related debt, and
less (iii) the monetary position result recognized on the related
debt. Under U.S. GAAP, only interest is considered an additional cost
of constructed assets to be capitalized and depreciated over the lives
of the related assets.
The U.S. GAAP reconciliation removes the foreign currency gain or loss
and the monetary position result capitalized for Mexican GAAP, derived
from borrowings denominated in foreign currency.
(f) Guaranteed debt
On December 16, 2003, the Company completed an offering of senior
unsecured notes, for a value of U.S.$ 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 thus resulting in a
reduction of the financial cost from 11.0% to 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 infor-
-23-
AXTEL, S.A. DE C.V. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Thousand pesos of constant purchasing power as of June 30, 2005)
mation 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 June 30, 2005)
The condensed consolidating financial information is as follows:
Condensed consolidating balance sheets:
(Unaudited) Combined Adjustments and Axtel
As of June 30, 2005 Axtel Guarantors Eliminations Consolidated
- -------------------------------------------- ------------ ----------- ---------------- ------------
Current assets.............................. $ 2,007,427 110,346 (119,395) 1,998,378
Property, systems and equipment, net........ 6,377,780 9,207 (1,231) 6,385,756
Deferred charges............................ 931,813 5,187 -- 937,000
Investment in subsidiaries.................. 22,510 -- (22,510) --
Other non-current assets.................... 171,157 5,802 -- 176,959
------------ ----------- ---------------- ------------
Total assets........................... $ 9,510,687 130,542 (143,136) 9,498,093
============ =========== ================ ============
Current liabilities......................... $ 956,513 104,684 (119,395) 941,802
Long-term debt.............................. 2,750,958 -- -- 2,750,958
Other non-current liabilities............... 57,585 2,117 -- 59,702
------------ ----------- ---------------- ------------
Total liabilities...................... 3,765,056 106,801 (119,395) 3,752,462
------------ ----------- ---------------- ------------
Total stockholders equity................... 5,745,631 23,741 (23,741) 5,745,631
------------ ----------- ---------------- ------------
Total liabilities and stockholders equity... $ 9,510,687 130,542 (143,136) 9,498,093
============ =========== ================ ============
Combined Adjustments and Axtel
As of December 31, 2004 Axtel Guarantors Eliminations Consolidated
- -------------------------------------------- ------------ ----------- ---------------- ------------
Current assets.............................. $ 1,362,960 111,805 (127,212) 1,347,553
Property, systems and equipment, net........ 6,163,391 9,507 (1,321) 6,171,577
Deferred charges............................ 1,034,371 5,894 -- 1,040,265
Investment in subsidiaries.................. 24,441 -- (24,441) --
Other non-current assets.................... 158,339 4,009 -- 162,348
------------ ----------- ---------------- ------------
Total assets........................... $ 8,743,502 131,215 (152,974) 8,721,743
============ =========== ================ ============
Current liabilities......................... $ 1,040,652 103,036 (127,212) 1,016,476
Long-term debt.............................. 2,045,873 -- -- 2,045,873
Other non-current liabilities............... 3,577 2,417 -- 5,994
------------ ----------- ---------------- ------------
Total liabilities...................... 3,090,102 105,453 (127,212) 3,068,343
------------ ----------- ---------------- ------------
Total stockholders equity................... 5,653,400 25,762 (25,762) 5,653,400
------------ ----------- ---------------- ------------
Total liabilities and stockholders equity... $ 8,743,502 131,215 (152,974) 8,721,743
============ =========== ================ ============
-25-
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, 2005)
Condensed consolidating income statements:
(Unaudited) Combined Adjustments and Axtel
For the three-month period ended June 30, 2005 Axtel Guarantors Eliminations Consolidated
- -------------------------------------------- ------------ ----------- ---------------- ------------
Rental, installation, service and other $ 1,200,133 242,198 (242,198) 1,200,133
revenues....................................
Costs of sales and services................. (375,655) -- -- (375,655)
Selling and administrative expenses......... (407,927) (241,762) 242,198 (407,491)
Depreciation and amortization............... (264,326) (112) -- (264,438)
Operating income (loss)..................... 152,225 324 -- 152,549
Comprehensive financing result, net......... 14,003 (457) 348 13,894
Other (expenses) income, net................ 60 842 (348) 554
Income tax.................................. (48,469) 2 -- (48,467)
Investment in subsidiaries.................. 711 -- (711) --
------------ ------------ -------------- -------------
Net income (loss)........................... $ 118,530 711 (711) 118,530
============ ============ ============== =============
(Unaudited) Combined Adjustments and Axtel
For the three-month period ended June 30, 2004 Axtel Guarantors Eliminations Consolidated
- -------------------------------------------- ------------ ----------- ---------------- ------------
Rental, installation, service and other $ 935,746 236,786 (236,786) 935,746
revenues....................................
Costs of sales and services................. (288,187) -- -- (288,187)
Selling and administrative expenses......... (328,272) (236,776) 236,786 (328,262)
Depreciation and amortization............... (250,597) (512) -- (251,109)
Operating income............................ 68,690 (502) -- 68,188
Comprehensive financing result, net......... (101,675) (434) 309 (101,800)
Other income (expenses), net................ (4,438) 327 (309) (4,420)
Income tax.................................. 8,624 54 -- 8,678
Investment in subsidiaries.................. (555) -- 555 --
------------ ------------ -------------- -------------
Net income (loss)........................... $ (29,354) (555) 555 (29,354)
============ ============ ============== =============
-26-
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, 2005)
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, 2005)
(Unaudited) Combined Adjustments and Axtel
For the six-month period ended June 30, 2005 Axtel Guarantors Eliminations Consolidated
- -------------------------------------------- ------------ ------------- ---------------- -------------
Rental, installation, service and other $ 2,321,388 467,949 (467,949) 2,321,388
revenues....................................
Costs of sales and services................. (728,278) -- -- (728,278)
Selling and administrative expenses......... (806,726) (468,924) 467,949 (807,701)
Depreciation and amortization............... (527,139) (228) -- (527,367)
Operating income............................ 259,245 (1,203) -- 258,042
Comprehensive financing result, net......... (60,504) (929) 682 (60,751)
Other (expenses) income, net................ (6,938) 908 (682) (6,712)
Income tax.................................. (56,890) (707) -- (57,597)
Investment in subsidiaries.................. (1,931) -- (711) --
------------ ------------- ---------------- -------------
Net income (loss)........................... $ 132,982 (1,931) 1,931 132,982
============ ============= ================ =============
(Unaudited) Combined Adjustments and Axtel
For the six-month period ended June 30, 2004 Axtel Guarantors Eliminations Consolidated
- -------------------------------------------- ------------ ------------- ---------------- -------------
Rental, installation, service and other $ 1,842,527 451,788 (451,788) 1,842,527
revenues....................................
Costs of sales and services................. (570,208) -- -- (570,208)
Selling and administrative expenses......... (638,021) (451,294) 451,788 (637,527)
Depreciation and amortization............... (492,018) (623) -- (492,641)
Operating (loss) income..................... 142,280 (129) -- 142,151
Comprehensive financing result, net......... (137,579) (949) 593 (137,935)
Other income (expenses), net................ 10,083 925 (593) 10,415
Income tax.................................. (9,771) (698) -- (10,469)
Investment in subsidiaries.................. (851) -- 851 --
------------ ------------- ---------------- -------------
Net income (loss)........................... $ 4,162 (851) 851 4,162
============ ============= ================ =============
-27-
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, 2005)
Condensed consolidating statements of changes in financial position:
Adjustments
(Unaudited) Combined and Axtel
For the six-month period ended June 30, 2005 Axtel Guarantors Eliminations Consolidated
- ------------------------------------------------------- ---------- ---------- ------------ ------------
Operating activities:
Net income (loss)................................... $ 132,982 (1,931) 1,931 132,982
Non-cash items...................................... 585,960 935 (1,931) 584,964
---------- ---------- ------------ ------------
Resources provided by (used in) operations....... 718,942 (996) -- 717,946
Net (investment in) financing from operations....... (220,990) 4,091 (364) (217,263)
---------- ---------- ------------ ------------
Resources provided by (used in) operations, net.. 497,952 3,095 (364) 500,683
---------- ---------- ------------ ------------
Financing activities:
Proceeds from (loans payments), net................. 706,190 (364) 364 706,190
Others.............................................. 50,523 -- -- 50,523
---------- ---------- ------------ ------------
Resources provided by (used in) financing
activities....................................... 756,713 (364) 364 756,713
Investing activities:
Acquisition and construction of property, systems and
equipment, net................................... (685,768) (18) -- (685,786)
Other assets........................................ (23,515) (1,793) -- (25,308)
---------- ---------- ------------ ------------
Resources used in investing activities........... (709,283) (1,811) -- (711,094)
---------- ---------- ------------ ------------
Increase in cash and equivalents....................... 545,382 920 -- 546,302
Cash and equivalents at the beginning of the period.... 557,751 2,029 -- 559,780
---------- ---------- ------------ ------------
Cash and equivalents at the end of the period.......... $1,103,133 2,949 -- 1,106,082
========== ========== ============ ============
-28-
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, 2005)
Adjustments
(Unaudited) Combined and Axtel
For the six-month period ended June 30, 2004 Axtel Guarantors Eliminations Consolidated
- --------------------------------------------------------- ----------- ---------- ------------ ------------
Operating activities:
Net income (loss)................................... $ 4,162 (851) 851 4,162
Non-cash items...................................... 502,641 1,320 (851) 503,110
----------- ---------- ------------ ------------
Resources provided by operations................. 506,803 469 -- 507,272
Net (investment in) financing from operations....... (94,164) 736 (569) (93,997)
----------- ---------- ------------ ------------
Resources provided by (used in) operations, net.. 412,639 1,205 (569) 413,275
----------- ---------- ------------ ------------
Financing activities:
Loans payments, net................................. (100,052) (569) 569 (100,052)
Others.............................................. 4,541 -- -- 4,541
----------- ---------- ------------ ------------
Resources (used in) provided by financing activities (95,511) (569) 569 (95,511)
----------- ---------- ------------ ------------
Investing activities:
Acquisition and construction of property, systems and
equipment, net................................... (510,094) (405) -- (510,499)
Other assets........................................ (23,667) 3 -- (23,664)
----------- ---------- ------------ ------------
Resources used in investing activities......... (533,761) (402) -- (534,163)
----------- ---------- ------------ ------------
Increase (decrease) in cash and equivalents............ (216,633) 234 -- (216,399)
Cash and equivalents at the beginning of the period.... 1,078,265 484 -- 1,078,749
----------- ---------- ------------ ------------
Cash and equivalents at the end of the period.......... $ 861,632 718 -- 862,350
=========== ========== ============ ============
-29-
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, 2005)
The tables below present combined balance sheets as of June 30, 2005 and
December 31, 2004, income statements for each of the three-month and the
six-month periods ended June 30, 2005 and June 30, 2004, and statements of
changes in financial position for each of the six-month periods ended June 30,
2005 and June 30, 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 June 30, 2005 Adjustments
and Combined
Icosa Inmobiliaria Servicios Eliminations Guarantors
----------- ------------ --------- ------------ ----------
Assets
Cash and cash equivalents................... $ 759 12 2,178 - 2,949
Accounts receivable......................... 33 - 217 - 250
Related parties receivables................. 7,476 - 82,741 (12) 90,205
Refundable taxes and other accounts
receivable............................... 1,645 1,193 14,104 - 16,942
----------- ------------ --------- ------------ ----------
Total current assets..................... 9,913 1,205 99,240 (12) 110,346
----------- ------------ --------- ------------ ----------
Property, systems and equipment, net........ - 9,207 - - 9,207
Deferred income taxes....................... 8 - 5,421 (242) 5,187
Other....................................... 1,138 - 4,664 - 5,802
----------- ------------ --------- ------------ ----------
Total non current assets................. 1,146 9,207 10,085 (242) 20,196
----------- ------------ --------- ------------ ----------
Total assets............................... $ 11,059 10,412 109,325 (254) 130,542
=========== ============ ========= ============ ==========
Liabilities and Stockholders Equity
Account payable and accrued liabilities..... $ 181 - 12,264 - 12,445
Taxes payable............................... 4,543 - 41,957 - 46,500
Related parties payables.................... - 8,311 12 (12) 8,311
Other accounts payable...................... 2,375 - 35,053 - 37,428
----------- ------------ --------- ------------ ----------
Total current liabilities................ 7,099 8,311 89,286 (12) 104,684
----------- ------------ --------- ------------ ----------
Deferred income tax......................... - 242 - (242) -
Others...................................... 292 - 1,825 - 2,117
Total liabilities........................ 7,391 8,553 91,111 (254) 106,801
Stockholders' equity........................ 3,747 1,725 20,200 - 25,672
Net (loss) income........................... (79) 134 (1,986) - (1,931)
----------- ------------ --------- ------------ ----------
Total stockholders equity................... 3,668 1,859 18,214 - 23,741
----------- ------------ --------- ------------ ----------
Total liabilities and stockholders equity... $ 11,059 10,412 109,325 (254) 130,542
=========== ============ ========= ============ ==========
-30-
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, 2005)
As of December 31, 2004 Adjustments
and Combined
Icosa Inmobiliaria Servicios Eliminations Guarantors
----------- ------------ --------- ------------ ----------
Assets
Cash and cash equivalent.................... $ 594 12 1,423 - 2,029
Related parties receivables................. 7,414 - 88,957 (4) 96,367
Refundable taxes and other accounts
receivable............................... 1,340 1,205 10,864 - 13,409
----------- ------------ --------- ------------ ----------
Total current assets................... 9,348 1,217 101,244 (4) 111,805
----------- ------------ --------- ------------ ----------
Property, systems and equipment, net........ - 9,507 - - 9,507
Deferred income taxes....................... 9 - 6,119 (234) 5,894
Other....................................... 811 - 3,198 - 4,009
----------- ------------ --------- ------------ ----------
Total non current assets............... 820 9,507 9,317 (234) 19,410
----------- ------------ --------- ------------ ----------
Total assets........................... $ 10,168 10,724 110,561 (238) 131,215
=========== ============ ========= ============ ==========
Liabilities and stockholders' equity
Account payable and accrued liabilities..... $ 164 - 18,356 - 18,520
Taxes payable............................... 4,770 - 51,219 - 55,989
Related parties payables.................... 4 8,675 - (4) 8,675
Other accounts payable...................... 1,077 - 18,775 - 19,852
----------- ------------ --------- ------------ ----------
Total current liabilities.............. 6,015 8,675 88,350 (4) 103,036
----------- ------------ --------- ------------ ----------
Deferred income tax......................... - 234 - (234) -
Others...................................... 406 - 2,011 - 2,417
----------- ------------ --------- ------------ ----------
Total liabilities...................... 6,421 8,909 90,361 (238) 105,453
----------- ------------ --------- ------------ ----------
Stockholders' equity........................ 4,942 1,403 30,014 - 36,359
Net (loss) income........................... (1,195) 412 (9,814) - (10,597)
----------- ------------ --------- ------------ ----------
Total stockholders equity................... 3,747 1,815 20,200 - 25,762
----------- ------------ --------- ------------ ----------
Total liabilities and stockholders equity... $ 10,168 10,724 110,561 (238) 131,215
=========== ============ ========= ============ ==========
-31-
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, 2005)
Guarantors' Combined Income Statements:
(Unaudited) Adjustments
For the three-months period ended and Combined
June 30, 2005 Icosa Inmobiliaria Servicios Eliminations Guarantors
- -------------------------------------------- ---------- ------------- ----------- ------------ ------------
Rental and service revenues................. $ 24,197 480 217,521 - 242,198
Administrative expenses..................... (24,197) - (217,565) - (241,762)
Depreciation and amortization............... - (105) (7) - (112)
---------- ------------- ----------- ------------ ------------
Operating income (loss)................. - 375 (51) - 324
---------- ------------- ----------- ------------ ------------
Comprehensive financing result, net......... (20) (332) (105) - (457)
---------- ------------- ----------- ------------ ------------
Other income, net........................... 1 - 841 - 842
---------- ------------- ----------- ------------ ------------
(Loss) income before income taxes and
employee statutory profit sharing..... (19) 43 685 - 709
---------- ------------- ----------- ------------ ------------
Total income tax and employee statutory
profit sharing benefit................ (10) (7) 19 - 2
---------- ------------- ----------- ------------ ------------
Net (loss) income................... $ (29) 36 704 - 711
========== ============= =========== ============ ============
(Unaudited) Adjustments
For the three-months period ended and Combined
June 30, 2004 Icosa Inmobiliaria Servicios Eliminations Guarantors
- -------------------------------------------- ---------- ------------- ----------- ------------ ------------
Rental and service revenues................. $ 16,557 501 219,727 - 236,786
Administrative expenses..................... (16,557) - (220,219) - (236,776)
Depreciation and amortization............... - (110) (402) - (512)
---------- ------------- ----------- ------------ ------------
Operating income (loss)................. - 392 (894) - (502)
---------- ------------- ----------- ------------ ------------
Comprehensive financing result, net......... (28) (292) (114) - (434)
---------- ------------- ----------- ------------ ------------
Other income, net........................... (10) - 337 - 327
---------- ------------- ----------- ------------ ------------
(Loss) income before income taxes and
employee statutory profit sharing..... (38) 100 (671) - (609)
---------- ------------- ----------- ------------ ------------
Total income tax and employee statutory
profit sharing benefit................ (5) (4) 63 - 54
---------- ------------- ----------- ------------ ------------
Net (loss) income................... $ (43) 96 (608) 0 (555)
========== ============= =========== ============ ============
-32-
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, 2005)
(Unaudited) Adjustments
For the six-months period ended and Combined
June 30, 2005 Icosa Inmobiliaria Servicios Eliminations Guarantors
- -------------------------------------------- ---------- ------------- ----------- ------------ ------------
Rental and service revenues............. $ 47,800 963 419,186 - 467,949
Administrative expenses................. (47,800) - (421,124) - (468,924)
Depreciation and amortization........... - (210) (18) - (228)
---------- ------------- ----------- ------------ ------------
Operating income (loss)............. - 753 (1,956) - (1,203)
---------- ------------- ----------- ------------ ------------
Comprehensive financing result, net..... (81) (611) (237) - (929)
---------- ------------- ----------- ------------ ------------
Other income, net....................... 3 - 905 - 908
---------- ------------- ----------- ------------ ------------
(Loss) income before income taxes and
employee statutory profit sharing. (78) 142 (1,288) - (1,224)
---------- ------------- ----------- ------------ ------------
Total income tax and employee statutory
profit sharing benefit............ (1) (8) (698) - (707)
---------- ------------- ----------- ------------ ------------
Net (loss) income............... $ (79) 134 (1,986) - (1,931)
========== ============= =========== ============ ============
(Unaudited) Adjustments
For the six-months period ended and Combined
June 30, 2004 Icosa Inmobiliaria Servicios Eliminations Guarantors
- -------------------------------------------- ---------- ------------- ----------- ------------ ------------
Rental and service revenues............. $ 30,012 1,009 420,767 - 451,788
Administrative expenses................. (30,012) - (421,282) - (451,294)
Depreciation and amortization........... - (221) (402) - (623)
---------- ------------- ----------- ------------ ------------
Operating income.................... - 788 (917) - (129)
---------- ------------- ----------- ------------ ------------
Comprehensive financing result, net..... (96) (454) (399) - (949)
---------- ------------- ----------- ------------ ------------
Other expenses, net..................... (3) - 928 - 925
---------- ------------- ----------- ------------ ------------
(Loss) income before income taxes and
employee statutory profit sharing. (99) 334 (388) - (153)
---------- ------------- ----------- ------------ ------------
Total income tax and employee statutory
profit sharing benefit............ (2) 55 (751) - (698)
---------- ------------- ----------- ------------ ------------
Net (loss) income............... $ (101) 389 (1,139) - (851)
========== ============= =========== ============ ============
-33-
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, 2005)
Guarantors' Combined Statements of Changes in Financial Position:
(Unaudited) Adjustments
For the six-months period ended and Combined
June 30, 2005 Icosa Inmobiliaria Servicios Eliminations Guarantors
- -------------------------------------------- ---------- ------------- ----------- ------------ ------------
Operating activities:
Net (loss) income........................ $ (79) 134 (1,986) - (1,931)
Non-cash items........................... 1 218 716 - 935
---------- ------------- ----------- ------------ ------------
Resources (used in) provided by
operations......................... (78) 352 (1,270) - (996)
Net financing from operations 569 12 3,510 - 4,091
---------- ------------- ----------- ------------ ------------
Resources provided by operations,
net................................ 491 364 2,240 - 3,095
---------- ------------- ----------- ------------ ------------
Financing activities:
Loans payment, net....................... - (364) - - (364)
---------- ------------- ----------- ------------ ------------
Resources used in financing activities...... - (364) - - (364)
---------- ------------- ----------- ------------ ------------
Investing activities:
Property, system and equipment, net...... - - (18) - (18)
Other assets............................. (326) - (1,467) - (1,793)
---------- ------------- ----------- ------------ ------------
Resources used in investing
activities....................... (326) - (1,485) - (1,811)
---------- ------------- ----------- ------------ ------------
Increase in cash and equivalents............ 165 - 755 - 920
Cash and equivalents at the beginning
of the period............................ 594 12 1,423 - 2,029
---------- ------------- ----------- ------------ ------------
Cash and equivalents at the end
of the period........................... $759 12 2,178 - 2,949
========== ============= =========== ============ ============
-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, 2005)
(Unaudited) Adjustments
For the six-months period ended June 30, and Combined
2004 Icosa Inmobiliaria Servicios Eliminations Guarantors
- -------------------------------------------- ---------- ------------- ----------- ------------ ------------
Operating activities:
Net (loss) income........................ $(101) 389 (1,139) - (851)
Non-cash items........................... (2) 165 1,153 - 1,320
---------- ------------- ----------- ------------ ------------
Resources (used in) provided by
operations......................... (99) 554 14 - 469
Financing from operations, net........ 13 15 708 - 736
---------- ------------- ----------- ------------ ------------
Resources provided by (used in)
operations, net.................... (86) 569 722 - 1,205
---------- ------------- ----------- ------------ ------------
Financing activities:
Loans payment, net....................... - (569) - - (569)
---------- ------------- ----------- ------------ ------------
Resources used in financing activities...... - (569) - - (569)
---------- ------------- ----------- ------------ ------------
Investing activities:
Property, system and equipment, net...... - - (405) - (405)
Other assets............................. 3 - - - 3
---------- ------------- ----------- ------------ ------------
Resources provided by (used in)
investing activities............. 3 - (405) - (402)
---------- ------------- ----------- ------------ ------------
(Decrease) Increase in cash and
equivalents........................... (83) - 317 - 234
Cash and equivalents at the beginning
of the period............................ 169 14 301 - 484
---------- ------------- ----------- ------------ ------------
Cash and equivalents at the end
of the period............................ $ 86 14 618 - 718
========== ============= =========== ============ ============
-35-
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, 2005)
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 and the six-month periods ended June
30, 2005 and 2004 and on the stockholders' equity as of June 30, 2005 and
December 31, 2004 is presented below, with an explanation of the adjustments.
(Unaudited)
three-month period
ended June 30
2005 2004
------------- -------------
Net income (loss) reported under Mexican GAAP............ $ 711 (555)
------------- -------------
Approximate U.S. GAAP adjustments
1. Deferred income taxes (A)........................ (2) (54)
2. Allowance for post retirement benefits (B)....... 48 53
------------- -------------
Total approximate U.S. GAAP adjustments.................. 46 (1)
------------- -------------
Approximate net income (loss) income under U.S. GAAP..... $ 757 (556)
============= =============
(Unaudited)
six-month period
ended June 30
2005 2004
------------- -------------
Net (loss) reported under Mexican GAAP................... $ (1,931) (851)
------------- -------------
Approximate U.S. GAAP adjustments
1. Deferred income taxes (A)........................ 707 698
2. Allowance for post retirement benefits (B)....... 203 508
------------- -------------
Total approximate U.S. GAAP adjustments.................. 910 1,206
------------- -------------
Approximate net (loss) income under U.S. GAAP............ $ (1,021) 355
============= =============
-36-
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, 2005)
Unaudited
Six-month
period ended Year ended
June 30 December 31
2005 2004
-------------- -------------
Total stockholders' equity reported under Mexican GAAP........ $ 23,741 25,762
-------------- -------------
Approximate U.S. GAAP adjustments
1. Deferred income taxes (A)............................. (5,187) (5,894)
2. Allowance for post retirement benefits (B)............ (20,959) (21,162)
-------------- -------------
Total approximate U.S. GAAP adjustments....................... (26,146) (27,056)
-------------- -------------
Total approximate stockholders' deficit under U.S. GAAP....... $ (2,405) (1,294)
============== =============
-37-
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 June 30, 2005 and December 31, 2004, represented expenses of
$5,187 and $5,894, 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 six-month periods ended June 30, 2005 and
2004 the Company recorded an increase in net income of $203 and $508,
respectively, and recognized a liability amounting to $20,959 and $21,162 as of
June 30, 2005 and December 31, 2004, respectively. As of June 30, 2005 the
Company has not recognized this liability under Mexican GAAP.
-38-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We provide bundled local and long distance voice services, as well as data
and internet services. Our integrated service offering enables us to maximize
the recurring revenue received from each customer, increasing the return of our
investment in infrastructure, 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, allowing us to maintain our controlled churn rate.
Revenues
We derive our revenues from:
o Local calling services. We generate revenue by enabling our customers
to originate and receive an unlimited number of calls within a defined
local service area. Customers are charged an initial fee for
activating the service, a flat monthly fee for basic service, a per
call fee ("measured service") and a per minute usage fee for calls
completed on a cellular line ("calling party pays calls").
o Long distance services. We generate revenues by providing long
distance services (domestic and international) for our customers'
completed calls.
o Other services. We generate revenues by providing other services to
our customers, which include internet, data, interconnection and
dedicated private line service, as well as value-added services such
as caller ID, call waiting, call forwarding and voicemail.
The following summarizes our revenues and percentage of revenues from
operations from these sources:
Revenues (Constant Ps.
in millions as of % of Revenues
June 30, 2005) Six-month period ended
Six-month period ended June 30, June 30,
------------------------------------------- -----------------------
Revenue Source 2005 2004 % of Change 2005 2004
------------------------ ------------- ------------ ------------ --------- -----------
Local calling services.. Ps1,647.1 Ps. 1,300.1 26.7% 71.0% 70.6%
Long distance services.. 213.1 183.0 16.4% 9.2% 9.9%
Other services.......... 461.2 359.4 28.3% 19.9% 19.5%
------------- ------------ ------------ --------- -----------
Total................... Ps. 2,321.4 Ps. 1,842.5 26.0% 100.0% 100.0%
============= ============ ============ ========= ===========
Revenues (Constant Ps.
in millions as of % of Revenues
June 30, 2005) three-month period ended
Three-month period ended June 30, June 30,
------------------------------------------- -----------------------
Revenue Source 2005 2004 % of Change 2005 2004
------------------------ ------------- ------------ ------------ --------- -----------
Local calling services.. Ps. 859.5 Ps. 669.8 28.3% 71.6% 71.6%
Long distance services.. 112.0 93.5 19.9% 9.3% 10.0%
Other services.......... 228.6 172.5 32.5% 19.0% 18.4%
------------- ------------ ------------ --------- -----------
Total................... Ps. 1,200.1 Ps. 935.7 28.3% 100.0% 100.0%
============= ============ ============ ========= ===========
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Cost of Revenues and Operating Expenses
Our costs are categorized as follows:
o Cost of revenues include expenses related to the termination of our
customers' cellular and long distance calls in other carriers'
networks, as well as expenses related to billing, payment processing,
operator services and our leasing of private circuit links.
o Operating expenses include costs incurred in connection with general
and administrative matters including compensation and benefits, the
costs of leasing land related to our operations and costs associated
with sales and marketing and the maintenance of our network.
o Depreciation and amortization includes depreciation of all
communications network and equipment and amortization of preoperating
expenses and the cost of spectrum licenses.
Six Months Ended June 30, 2005 Compared with Six Months Ended June 30, 2004
Revenues from Operations
Revenues from operations increased to Ps. 2,321.4 million for six-month
period ended June 30, 2005 from Ps. 1,842.5 million for the same period in year
2004, an increase of Ps. 478.9 million, or 26%. The number of access lines
increased to 529,653 from 388,194, an increase of 36%, and our average revenue
per user decreased to Ps. 633.1 from Ps. 680.6.
Local services. Local service revenues increased to Ps. 1,647.1 million for
the six-month period ended June 30, 2005 from Ps. 1,300.1 million for the same
period ended in year 2004, an increase of Ps. 347.0 million, or 27%. These
increases were primarily due to higher monthly rent and cellular consumption.
Long distance services. Long distance services revenues increased to Ps.
213.1 million for the six-month period ended June 30, 2005 from Ps. 183.0
million for the same period ended in year 2004, an increase of Ps. 30.1 million,
or 16%. This increase was mainly driven by a higher consumption in domestic long
distance and offset in part by a price reduction related to special offers.
Other services. Revenue from other services increased to Ps. 461.2 million
in the six-month period ended June 30, 2005 from Ps. 359.4 million for the same
period in year 2004, an increase of Ps. 101.7 million, due to increases in both
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. 728.3
million for the six-month period ended June 30, 2005 from Ps. 570.2 million
registered in the same period in 2004, an increase of Ps. 158.1 million, or 28%.
This increase was due primarily to a Ps. 131.1 million increase in our
underlying costs related to calling party pays calls, as well as increased long
distance costs due to higher consumption levels.
Gross profit. Gross profit is defined as revenues minus costs of revenues.
For the six-month period ended June 30, 2005 the gross profit was Ps. 1,593.1
million, an increase of Ps. 320.8 million, or 25%, compared with the same period
in year 2004. Our gross margin remained at 69% of total revenues for the
six-month period ended June 30, 2005 when compared to the same period in year
2004.
Operating expenses. Operating expenses for the six-month period ended June
30, 2005 increased Ps. 170.2 million to Ps. 807.7 million. During the same
period in year 2004 this amount was Ps. 637.5 million. This increase was
attributable primarily to increases in rents related to long distance links,
sales commissions and in the provision of the uncollectible reserves.
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Depreciation and Amortization. Depreciation and amortization from
continuing operations increased to Ps. 527.4 million for the six-month period
ended June 30, 2005 from Ps. 492.6 million for the same period in year 2004, an
increase of Ps. 34.7 million, or 7%. This increase in depreciation and
amortization reflects the Company's infrastructure growth.
Operating income (loss). Due to the factors previously described, operating
income increased to Ps. 258.0 million for the six-month period ended June 30,
2005 compared to an operating income of Ps. 142.2 million for the same period in
year 2004, an increase of Ps. 115.9 million, or 82%.
Comprehensive financial result. The comprehensive financial result was Ps.
(60.8) million for the six month period ended June 30, 2005, compared to a
comprehensive financial result of Ps. (137.9) million for the same period in
year 2004. The following table illustrates the comprehensive financial results:
Comprehensive Financial Result Comparison
Six-month period ended June 30, % of
Description 2005 2004 Change
-------------------------------------- --------------------- -------------------- -----------------
Interest expense Ps.(184.8) Ps.(136.2) 36%
Interest income 26.3 9.7 172%
Foreign exchange gain (loss), net 81.6 (30.4) N/A
Monetary position gain 16.1 19.1 -16%
====================================== ===================== ==================== =================
Total Ps. (60.8) Ps. (137.9) -56%
Net Income (loss). We registered a net income of Ps. 133.0 million for the
six-month period ended June 30, 2005 compared to Ps. 4.2 million recorded in the
six-month period ended June 30, 2004.
Three Month Ended June 30, 2005 Compared with Three Month Ended June 30, 2004
Revenues from Operations
Revenues from operations increased to Ps. 1,200.1 million for three-month
period ended June 30, 2005 from Ps. 935.7 million for the same period in year
2004, an increase of Ps. 264.4 million, or 28%. The average revenue per user
decreased to Ps. 636.5 from Ps. 682.8.
Local services. Local service revenues increased to Ps. 859.5 million for
the three-month period ended June 30, 2005 from Ps. 669.8 million for the same
period in year 2004, an increase of Ps. 189.8 million, or 28%. These increases
were primarily due to higher monthly rent and cellular consumption as a result
of a higher number in lines in service.
Long distance services. Long distance services revenues increased to Ps.
112.0 million for the three-month period ended June 30, 2005 from Ps. 93.5
million for the same period in year 2004, an increase of Ps. 18.6 million, or
20%. This increase is mainly driven by a higher consumption in domestic long
distance and is offset in part by a price reduction related to special offers.
Other services. Revenue from other services increased to Ps. 228.6 million
in the three-month period ended June 30, 2005 from Ps. 172.5 million in the same
period in 2004, an increase of Ps. 56.1 million, due to the increase in data
revenues and value added services.
-41-
Cost of Revenues and Operating Expenses
Cost of Revenues. Cost of revenues from operations increased to Ps. 375.7
million for the three-month period ended June 30, 2005 from Ps. 288.2 million
registered in the same period in year 2004, an increase of Ps. 87.5 million, or
30%. This growth was due primarily to a Ps 77.0 million increase in our
underlying costs related to calling party pays calls, as well as increased long
distance costs due to higher consumption levels.
Gross profit. Gross profit is defined as revenues minus costs of revenues.
For the three-month period ended June 30, 2005 the gross profit was Ps. 824.5
million, an increase of Ps. 176.9 million, or 27%, compared with the same period
in year 2004. Our gross margin remained at 69% of total revenues for the
three-month period ended June 30, 2005.
Operating expenses. Operating expenses for the three-month period ended
June 30, 2005 increased Ps. 79.2 million to Ps. 407.5 million. During the same
period of year 2004 this amount was Ps. 328.3 million. This increase was
attributable primarily to increases in rents, sales and advertising related to
current operational levels of the Company.
Depreciation and Amortization. Depreciation and amortization from
continuing operations increased to Ps. 264.4 million for the three-month period
ended June 30, 2005 from Ps. 251.1 million for the same period in year 2004, an
increase of Ps. 13.3 million, or 5%. This increase in depreciation and
amortization reflects the Company's infrastructure growth.
Operating income (loss). Due to the factors previously described, operating
income increased to Ps. 152.5 million for the three-month period ended June 30,
2005 compared to an operating income of Ps. 68.2 million for the same period in
year 2004, an increase of Ps. 84.4 million or, 124%.
Comprehensive financial result. The comprehensive financial result was Ps.
13.9 million for the three-month period ended June 30, 2005, compared to a
comprehensive financial result of Ps. (101.8) million for the same period in
year 2004. The following table illustrates the comprehensive financial results:
Comprehensive Financial Result Comparison
Three-month period ended June 30, % of
Description 2005 2004 Change
-------------------------------------- --------------------- -------------------- ---------------
Interest expense Ps. (88.1) Ps. (66.4) 32.7%
Interest income 9.4 4.3 118.6%
Foreign exchange gain (loss), net 88.7 (41.7) N/A
Monetary position gain 3.9 2 95.8%
====================================== ===================== ==================== ===============
Total Ps. 13.9 Ps (101.8) N/A
The main impact in the comprehensive financial result is the interest
payment related to our 11% senior notes due 2013 issued in December 2003 and
January 2005. The foreign exchange gain for the three-month period ended June
30, 2005 was positively affected as a result of 4.0% appreciation of the Peso
against the US dollar compared to 2.3% depreciation that occurred during the
same period in year 2004.
Net Income (loss). We registered Ps. 118.5 million for the three-month
period ended June 30, 2005 compared to Ps. (29.4) million recorded in the
three-month period ended June 30, 2004.
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Liquidity and Capital Resources
We have relied primarily on vendor financing, private equity contributions,
internal cash from operations, the proceeds from the 11% senior notes due 2013
and bank debt 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 June 30, 2005, we had cash and cash equivalents of Ps 1,106.1 million
compared to cash and cash equivalents of Ps. 862.4 million in the same period in
year 2004.
Net cash provided by (used in) operating activities was Ps. 500.7 million
for the six-month period ended June 30, 2005 compared to Ps. 413.3 million
recorded in the same period in year 2004. Net cash provided by (used in)
operating activities for the three-month period ended June 30, 2005 was Ps.
428.3 million compared to Ps. 310.5 for the same period in year 2004.
Net cash used in investing activities was Ps. (711.1) million for the
six-month period ended June 30, 2005 compared to Ps. (534.2) million recorded in
the same period in year 2004. For the three-month period ended June 30, 2005 net
cash used in investing activities reached Ps. (338.3) million compared to Ps.
(319.9) million registered in the same period in year 2004. These cash flows
primarily reflect investments in fixed assets of Ps. 685.8 million and Ps. 510.5
million for the six-month period ended June 30, 2005 and 2004, respectively. For
the three-month period ended June 30, 2005 investment in fixed assets reached
Ps. 332.9 million, an increase of Ps. 25.7 million compared to the same period
in 2004.
Net cash provided by (used in) financing activities from continuing
operations was Ps. 756.7 million and Ps. (95.5) million for the six-month period
ended June 30, 2005 and 2004, respectively. For the three-month period ended
June 30, 2005, our net cash provided by (used in) financing activities was Ps.
(242.5) million compared to Ps. (19.3) million recorded in the same period in
year 2004.
We expect to make additional investments in the future as we selectively
expand our network into other areas of Mexico in order to exploit market
opportunities as well as to maintain our existing network and operating
facilities.
Capitalization of preoperating expenses
We commenced commercial operations in June 1999. As permitted under Mexican
GAAP, during our preoperating stage we were able to capitalize all of our
general and administrative expenses and our net comprehensive cost of financing.
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.
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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.......... 15.8 15.8 -- -- --
Long-term debt......................... 253.8 -- 3.6 0.2 250.0
Operating leases....................... 8.5 3.8 4.5 0.2 --
Total contractual cash obligation...... 278.1 19.6 8.1 0.4 250.0
============== =========== =========== =========== ===========
- ---------------------------------------------------------------------------------------------------------------------
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.
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.
-44-
Vacations. Under Mexican GAAP, vacation expenses are recognized when taken,
rather than in the period when they are earned by an employee, as is required
under US GAAP. Starting on January 2003, Mexican GAAP requires the recognition
of vacation expense when earned.
Severance. Under Mexican GAAP, severance payments should be recognized in
earnings in the period in which they are paid, unless such payments are used by
an entity as a substitution for pension benefits, in which case, they should be
considered as a pension plan. Under US GAAP, post-employment benefits for former
or inactive employees, excluding retirement benefits, are accounted for under
the provisions of SFAS No. 112, which requires recognition of certain benefits,
including severance, over an employee's service life.
Capitalization of interest. In accordance with Mexican GAAP, capitalization
of interest or, during inflationary periods, comprehensive cost of financing or
income incurred in the period of construction and installation of an asset is
permitted. The interest to be capitalized is that of the specific financing
obtained for the construction of the related asset. Under US GAAP,
capitalization of interest is required for certain qualifying assets that
require a period of time to get them ready for their intended use. The amount of
interest to be capitalized is that portion of the interest cost incurred during
the assets' acquisition period that theoretically could have been avoided if
expenditures for the assets had not been made, and is not limited to
indebtedness attributable to the asset.
Recent Accounting Pronouncements
Financial instruments with characteristics of liabilities, equity, or both
In May 2003, the Mexican Institute of Public Accountants issued Bulletin
C-12, "Financial Instruments with Characteristics of Liabilities, Equity, or
Both." Bulletin C-12, is effective for fiscal years beginning after December 31,
2003, although earlier application is permitted. Bulletin C-12 puts together
regulations contained in other bulletins related to issuance of complex
financial instruments, and adds regulations necessary for a comprehensive
resolution of general problems. Therefore, Bulletin C-12 defines the basic
differences between liabilities and equity; establishes rules for the
classification and valuation of the liability and equity components of combined
financial instruments, upon initial recognition; and establishes rules for
disclosure of combined financial instruments. Under Bulletin C-12, financial
instruments should be classified as liabilities or equity at the beginning of
the year of adoption, and comparative financial information for prior years
should not be restated, nor a cumulative-effect-type adjustment recognized in
the year of adoption.
The Company estimates that the adoption of the new Bulletin C-12 will not
have a material effect on its financial position or results of operations.
Recent accounting pronouncements under US GAAP
In December 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 nonpublic companies, 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 the Company 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 the Company for non-monetary asset exchanges
occurring on or after January 1, 2006.
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Critical Accounting Policies
Our consolidated financial statements included elsewhere in this report
have been prepared in accordance with Mexican GAAP, which differ in significant
respects from respects from US GAAP. See note 15 to our condensed consolidated
financial statements, included elsewhere in this quarterly report, for a
description of the principal differences between Mexican GAAP and US GAAP as
they relate to us.
We have identified below the accounting policies we have applied under
Mexican GAAP that are critical to understanding our overall financial reporting.
Income taxes
Under Mexican GAAP, income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit (AT) carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Significant judgment is required to appropriately assess the amounts of tax
assets. We record tax assets when we believe there will be enough future taxable
income for the realization of such deductible temporary difference. If this
determination cannot be made, a valuation allowance is established to reduce the
carrying value of the asset.
Deferred income tax and employees statutory profit sharing is recognized
only for timing differences arising from the reconciliation of book income to
income for profit sharing purposes, on which it may be reasonably estimated that
a future liability or benefit will arise and there is no indication that the
liabilities or benefits will not materialize.
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.
-46-
Revenue Recognition
On December 3, 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). This bulletin
summarizes the point of view of the SEC in the recognition of revenues in the
financial statements according to US GAAP. The SEC concluded that only when all
the following conditions are met is revenue recognition appropriate:
(a) there is persuasive evidence of an agreement;
(b) the delivery was made or the services rendered;
(c) the sales price to the purchaser is fixed or determinable;
(d) collection is reasonably assured.
SAB 101, specifically in Topic 13A, Question 5, discusses the situation of
recognizing as revenue certain non-refundable cash items. SAB 101 provides that
the seller should not recognize non-refundable charges generated in certain
transactions when there is continuous involvement by the vendor.
One of the examples provided by SAB 101 is activation revenues from
telecommunication services. The SAB concludes that unless the charge for the
activation service is an exchange for products delivered or services rendered
that represent the culmination of a separate revenue-generating process, the
deferral method of revenue is appropriate.
Based on the provisions and interpretations of SAB 101, for purposes of the
US GAAP reconciliation, the Company has deferred the activation revenues over a
three-year period starting in the month such charge is originated. This period
was determined based on Company experience. The net effect of the deferral and
amortization is presented in the above US GAAP reconciliation.
-47-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks
Our primary foreign currency exposure relates to our US dollar-denominated debt.
Most of our debt obligations at June 30, 2005 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 12.30%. Both
of these transactions will cease in December 2008. During June of this year, the
Company did inter into a two separate derivative transactions, which will cover
the remaining portion of its US foreign exchange exposure. The terms and
conditions of such transactions are the following: Axtel will receive
semi-annual payments based on the aggregate notional amount of US $136.2 million
ay an annual rate of 11%, and the Company will make semiannual payments
calculated based on the aggregate pf Ps. 1,480.0 million at an annual rate of
12.26%. Both transactions will mature on December 2008.
The following table provides information about the details of our option
contracts as of June 30, 2004 (in thousands except average strike price):
(Amounts in millions) Currencies Interest Rates
----------------------------------- -------------------------------
Maturity date Notional Notional Amount in new Axtel Axtel pays Estimated
amount amount currency receives fair value
December 15, 2008 US$ 113.8 Ps. 1,270 US$ 113.8 11.00% 12.30% US$ (2.4)
December 15, 2008 US$ 136.2 Ps. 1,480 US$ 136.2 11.00% 12.26% US$(1.5)
Prior to entering into foreign currency hedging contracts, we evaluate the
counterparties' credit ratings. Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed to perform as
contracted. We do not currently anticipate non-performance by such
counterparties.
The exchange rate of the peso to the US dollar is a freely floating rate
and the peso has experienced significant devaluation in previous years. Any
significant decrease in the value of the peso relative to the US dollar in the
near term may have a material adverse effect on our results of operations and
financial condition, including our ability to repay or repurchase the notes.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information relating to our legal proceedings, please see our
Registration Statement on Form F-4 (Reg. No. 333-123608). There have been no
material changes in our legal proceedings from that described in the
Registration Statement, except for the Metronet Disputes, which have the
following developments:
In October 2002, Metronet, S.A. de C.V. ("Metronet") filed an action
against us in the Fourth Civil Court in Monterrey (Mexico). Metronet claims that
we wrongfully terminated a letter of intent and is seeking payment for services
and direct damages of approximately US$3.8 million, plus other expenses and
attorneys' fees. The trial court ruled against us. Then, on appeal, the State
Superior Court of Appeals ruled in our favor, releasing us of any liability and
responsibility on the grounds that such letter of intent itself did not
constitute a binding final agreement
-48-
but a promise to enter a future contract. On November 12, 2004, Metronet
requested constitutional review challenging such State Superior Court's
decision. On May 27, 2005, the Federal 3rd Circuit Court for Civil Matters (4th
Circuit) ruled that the State Superior Court wrongly considered that the letter
of intent entered by Metronet and us is not a final binding agreement. The
Federal 3rd Circuit Court for Civil Matters ordered the State Superior Court to
issue a judgment in accordance to the following: (i) the letter of intent is a
final binding agreement, and (ii) all issues raised by us on appeal and the
trial shall be reviewed once again along with all evidence related with this
case. Thereafter the State Superior Court shall freely determine if the services
referred by Metronet in its action were effectively provided to us and if
applicable, if they were provided pursuant to such letter of intent.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS
Not applicable.
-49-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Axtel, S.A. de C.V.
By: /s/ Patricio Jimenez Barrera
---------------------------------
Patricio Jimenez Barrera
Chief Financial Officer
Date: August 15, 2005
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