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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 1-13120
GRUPO IUSACELL, S.A. DE C.V.
(Exact name of Registrant as specified in its charter)
IUSACELL GROUP, INC. THE UNITED MEXICAN STATES
(Translation of Registrant's name into English) (Jurisdiction of incorporation
or organization)
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Prolongacion Paseo de la Reforma 1236
Colonia Santa Fe
Delegacion Cuajimalpa
05348 Mexico, D.F., Mexico
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
American Depositary Shares, each New York Stock Exchange
representing 10 Series D Shares
Series D Shares New York Stock Exchange*
American Depositary Shares, each New York Stock Exchange
representing 10 Series L Shares
Series L Shares New York Stock Exchange*
- --------------------
* Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and
Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
U.S. $148,215,000 10% Series B Senior Notes Due 2004
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Series A Capital Stock 746,753,410 Shares
Series B Capital Stock 5,562,450 Shares
Series D Capital Stock 186,904,725 Shares
Series L Capital Stock 150,208,638 Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 |_| Item 18|X|
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. Description of Business ............................... 1
ITEM 2. Description of Property ............................... 27
ITEM 3. Legal Proceedings ..................................... 28
ITEM 4. Control of Registrant ................................. 29
ITEM 5. Nature of Trading Market .............................. 30
ITEM 6. Exchange Control and Other Limitations Affecting
Security-Holders ...................................... 33
ITEM 7. Taxation .............................................. 35
ITEM 8. Selected Financial Data ............................... 39
ITEM 9. Management's Discussion and Analysis of Financial
Condition and Results of Operation .................... 43
ITEM 10. Directors and Officers of Registrant .................. 60
ITEM 11. Compensation of Directors and Officers ................ 66
ITEM 12. Options to Purchase Securities from Registrant
or Subsidiaries ....................................... 66
ITEM 13. Interest of Management in Certain Transactions ........ 67
PART II
ITEM 14. Description of Securities to be Registered ............ 69
PART III
ITEM 15. Default Upon Senior Securities ........................ 69
ITEM 16. Changes in Securities and Changes in Security
for Registered Securities ............................. 69
PART IV
ITEM 17. Financial Statements .................................. 69
ITEM 18. Financial Statements .................................. 70
ITEM 19. Financial Statements and Exhibits ..................... 70
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In this Annual Report on Form 20-F (the "Annual Report"), all references
to the "Company" or "Iusacell" are to Grupo Iusacell, S.A. de C.V., a limited
liability stock company (sociedad anonima de capital variable) organized under
the laws of Mexico on October 6, 1992.
Effective January 1, 1996, the Mexican Congress approved the establishment
of a new currency unit, the Peso, which replaced the New Peso at the rate of one
Peso per one New Peso. Unless stated otherwise, references herein to "Pesos" or
"Ps." are to Mexican Pesos, and references to "U.S. dollars," "$" or "U.S.$" are
to United States dollars. Iusacell publishes its financial statements in Pesos.
Pursuant to Mexican GAAP, financial data for all periods in the financial
statements included herein, unless otherwise indicated elsewhere herein, have
been restated in constant December 31, 1997 Pesos. Restatement into constant
December 31, 1997 Pesos is made by multiplying the relevant nominal Peso amount
by the inflation index for the period between the end of the period to which
such nominal Peso amount relates and December 31, 1997. The inflation index used
for 1993 figures is 2.4041, for 1994 figures is 2.2457, for 1995 figures is
1.4778 and for 1996 figures is 1.1572. Certain amounts set forth herein may not
add up or may be slightly inconsistent due to rounding.
Unless otherwise indicated, the U.S. Dollar amounts have been translated
from Pesos at an exchange rate of Ps. 8.0700 per U.S. dollar, the exchange rate
at December 31, 1997, reported by the Federal Reserve Bank of New York as its
noon buying rate for Pesos ("Noon Buying Rate"). Certain amounts set forth
herein may be slightly inconsistent due to rounding. Currency conversions
contained in this Annual Report should not be construed as representations that
the Peso amounts actually represent such Dollar amounts. Additionally, these
conversions should
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not be construed as representations that these Peso amounts have been, could
have been or could be converted into Dollars at those or any other rates of
exchange.
The Company will provide without charge to each person to whom this report
is delivered, on the written or oral request of each such person, a copy of any
or all of the documents incorporated herein by reference (other than exhibits,
unless such exhibits are specifically incorporated by reference in such
documents). Written requests for such copies should be directed to Grupo
Iusacell, S.A. de C.V., Prolongacion Paseo de la Reforma 1236, Colonia Santa Fe,
Delegacion Cuajimalpa, 05348 Mexico, D.F., Mexico, Attention: Director, Investor
Relations. Telephone requests may be directed to 011-52-5-109-5759.
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Glossary of Certain Telecommunications Terms
"A" Band: The range of frequencies used to provide cellular wireless
service from 825-835 MHz and 870-880 MHz of the radio
spectrum.
Analog: A transmission method employing a continuous electrical signal
that varies in amplitude or frequency in response to changes
in sound, light, position, etc., impressed on a transducer in
the sending device.
"B" Band: The range of frequencies used to provide cellular wireless
service from 835-845 MHz and 880-890 MHz of the radio
spectrum.
Band: A range of frequencies between two defined limits.
Bandwidth: The relative range of frequencies that can be passed through a
transmission medium without distortion. The greater the
bandwidth, the greater the information carrying capacity.
Bandwidth is measured in Hertz.
Base Station: In mobile telecommunications, the central radio
transmitter/receiver that maintains communications with the
mobile radiotelephone sets within range. In cellular and
personal communications applications, each cell or microcell
has its own base station; each base station in turn is
interconnected with other cells' base stations and with the
public switched telephone network.
CDMA: Code Division Multiple Access, a standard of digital cellular
technology which provides more call carrying capacity than
analog or TDMA.
CDPD: Cellular Digital Packet Data, a new packet data network
protocol which offers fast and reliable data transmission
without using large amounts of network capacity.
Cell Site: The location of a transmitting/receiving station serving a
given geographic area in a cellular communications system.
Channel: A pathway for the transmission of information between a
sending point and a receiving point.
COFETEL: Comision Federal de Telecomunicationes, the Mexican Federal
Telecommunications Commission.
Covered POPs: The number of POPs in a defined area for whom a cellular
signal is accessible.
Digital: A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital transmission and
switching technologies employ a sequence of discrete, distinct
pulses to represent information, as opposed to the continuous
analog signal.
Hand-off: The act of switching a call in progress from one weak-signal
site to a strong-signal site without disrupting the call. In
current cellular systems, this function is performed by the
MSC, which monitors the signal strength of ongoing calls
continuously. In cellular networks, both the MSC and the user
equipment participate in the hand-off process.
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Hertz: The unit measuring the frequency with which an alternating
electromagnetic signal cycles through the zero-value state
between lowest and highest states. One hertz (abbreviated Hz)
equals one cycle per second. KHz (kilohertz) stands for
thousands of hertz; MHz (megahertz) stands for millions of
hertz and GHz (gigahertz) stands for billions of hertz.
IMTS: Improved mobile telephone service; IMTS systems are analog
mobile telephone systems that employ a single powerful radio
base station to communicate with IMTS mobile telephones that
are within approximately a 25-mile-wide radius.
LATA: Local Access and Transport Area; an area in which a local
exchange carrier is permitted to provide service as designated
by the 1982 United States federal court decree resulting from
antitrust litigation brought by the United States Department
of Justice against AT&T Corp.
Mobile Switching The computer-controlled mobile switching center selects the
Center: appropriate path for the transmission of a cellular call and
monitors the hand-off process.
PCS: Personal Communications Services. PCS has come to represent
two things: first, a digital wireless communications service
operating over the 1.9 GHz Band; and second, more generically,
a wireless communications service utilizing a digital network
that offers certain typical features such as voice, video and
data applications, short messaging, voicemail, caller
identification, call conferencing and call forwarding. Generic
PCS suppliers promote this service on the ability of its
features to be customized, or "bundled," to the needs of the
individual customers.
PCS A-Band: The range of frequencies used to provide PCS wireless services
from 1.850-1.865 GHz and 1.930-1.945 GHz of the radio
spectrum.
PCS B-Band: The range of frequencies used to provide PCS wireless services
from 1.870-1.885 GHz and 1.950-1.965 GHz of the radio
spectrum.
PCS D-Band: The range of frequencies used to provide PCS wireless services
from 1.865-1.870 GHz and 1.945-1.950 GHz of the radio
spectrum.
PCS E-Band: The range of frequencies used to provide PCS wireless services
from 1.885-1.890 GHz and 1.965-1.970 GHz of the radio
spectrum.
Penetration rate: A cellular operator's subscribers within a defined area
divided by total POPs within that area.
POPs: The population for a particular area based on the 1990 Mexican
census. Population figures for 1993, 1994, 1995, 1996 and 1997
have been calculated by applying the forecast annual
population growth rate for 1992 and 1995, as published by the
Instituto Nacional de Estadistica, Geografia e Informatica
(the National Institute of Statistics, Geography and Data
Processing, "INEGI") to the official 1990 census figures.
Where the population information is set forth without
reference to a year, the information given is as of December
31, 1997. The SCT divides Mexico into nine geographic regions
for the provision of cellular service (individually a "Region"
and collectively the "Regions"). Information regarding the
numbers of POPs within a given region has been calculated
using the natural population growth rate, as published by
INEGI. Information regarding the number of POPs within a given
city has been
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calculated using the growth rate for that city, as published
by INEGI, which may not be the same as the national growth
rate published by INEGI. The number of POPs in any region or
other geographic area should not be confused with the current
number of users of cellular services in that region or other
geographic area and is not indicative of the number of users
of cellular services in the future.
Region 1: Consists of the states of Baja California Norte and Baja
California Sur. Major cities in the region include Tijuana,
Mexicali, Ensenada and La Paz.
Region 2: Consists of the states of Sonora and Sinaloa. Major cities in
the region include Hermosillo, Ciudad Obregon, Culiacan and
Mazatlan.
Region 3: Consists of the states of Chihuahua and Durango. Major
cities in the region include Ciudad Juarez, Chihuahua,
Durango, Gomez Palacio and Torreon. Region 4: Consists of the
states of Tamaulipas, Nuevo Leon and Coahuila. Major cities in
the region include Monterrey, Saltillo, Ciudad Victoria,
Tampico, Reynosa and Matamoros.
Region 5: Consists of the states of Colima, Jalisco, Michoacan and
Nayarit. Major cities in the region include Guadalajara
(population 1.8 million), Mexico's second largest city,
Morelia, Tepic and Manzanillo.
Region 6: Consists of the states of Aguascalientes, Guanajuato,
Queretaro, San Luis Potosi and Zacatecas. Major cities in the
region include Leon, San Luis Potosi, Aguascalientes and
Queretaro.
Region 7: Consists of the states of Guerrero, Oaxaca, Puebla,
Tlaxcala and Veracruz. Major cities in the region include
Puebla, Veracruz, Acapulco and Oaxaca.
Region 8: Consists of the states of Yucatan, Quintana Roo, Campeche,
Chiapas and Tabasco. Major cities in the region include
Merida, Cancun, Villahermosa, Campeche, Tuxtla Gutierrez and
San Cristobal de las Casas.
Region 9: Consists of the states of Mexico, Hidalgo and Morelos and
the Federal District. Major cities in the region include
Mexico City, one of the world's most populous cities, Toluca,
Cuernavaca and Pachuca.
Repeater: A device which automatically retransmits received signals on
an outbound circuit, generally in an amplified form.
Roaming: A service offered by mobile communications providers which
allows a subscriber to use his or her telephone while in the
service area of another carrier.
SCT: Secretaria de Comunicaciones y Transportes, the Mexican
Telecommunications and Transportation Secretariat.
Site Splitting or
Cell Splitting: The process of dividing sites or cells into smaller
coverage areas by reducing their power output and the antenna
height of the station transmitter. Site or cell splitting
allows for the further reuse of frequencies by a mobile
communications system.
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Switch: A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching
is the process of interconnecting circuits to form a
transmission path between users.
TDMA: Time Division Multiple Access, a standard of digital cellular
technology, which provides more call carrying capacity than
analog, but less than CDMA.
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PART I
ITEM 1. Description of Business
Company Overview
Grupo Iusacell, S.A. de C.V. ("Iusacell" or the "Company") is the second
largest wireless telecommunications company in Mexico, owning and operating the
"A" Band cellular concessions in four contiguous regions in central Mexico.
These regions include Mexico City, one of the world's most populous cities, and
the cities of Guadalajara, Puebla, Veracruz, Leon, Acapulco and San Luis Potosi,
and combined represent approximately 66.1 million POPs or 70% of Mexico's
population. In May 1998, Iusacell launched CDMA digital service in the Mexico
City area of Region 9 and expects to extend this service to the rest of Region 9
and the other three contiguous regions by early 1999. Also in May 1998, the
Company won auctions for PCS (1.9 GHz) concessions in two additional regions in
northern Mexico. The Company expects to launch service in these regions by the
first quarter of 1999. These new regions include the cities of Monterrey and
Tijuana, and combined represent approximately 10.6 million POPs or 11% of
Mexico's population.
The Company had a total of 400,123 cellular subscribers at December 31,
1997, and an average monthly cellular revenue per subscriber during the last
quarter of 1997 of Ps.459 (approximately U.S.$57). In addition to its core
cellular services, the Company also provides a wide range of other
telecommunications services including long distance, paging, local telephony and
data transmission. See "Item 9--Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "--Cellular Services" and
"--Other Services."
In February 1997, Bell Atlantic Corporation, a diversified
telecommunications company, through certain of its subsidiaries (together with
Bell Atlantic Corporation, "Bell Atlantic"), assumed control of the Board of
Directors and management of Iusacell. Bell Atlantic has invested approximately
U.S.$1.1 billion since 1993 for its 42.0% economic interest in the Company.
Prior to 1997, Bell Atlantic participated substantially in the financial and
technological operations of the Company. In February 1997, Bell Atlantic
appointed a new Iusacell management team, which has assumed control of
Iusacell's operations, including marketing, distribution and customer service,
and has developed, and is in the process of implementing, a comprehensive
operating and strategic plan.
The new management team at Iusacell is able to draw extensively upon Bell
Atlantic's expertise in the development and implementation of the Company's new
operating strategy. Iusacell's Chief Executive Officer is also President of Bell
Atlantic's international wireless operations and has significant experience with
Bell Atlantic's wireless operations in the United States. The Company's Chief
Operating Officer was formerly the Chief Financial Officer of Iusacell and has
30 years of experience with Bell Atlantic in a variety of operating and
financial roles. Iusacell's current Chief Financial Officer has 14 years of
experience with Bell Atlantic. In June 1997, the Company appointed as its
Director General a Mexican citizen with extensive experience in multinational
operations, who most recently had been the managing director of the Mexican
cellular company which operates the "A" Band cellular concessions in two
contiguous northern regions. The new management team is supported by other
personnel from Bell Atlantic.
Bell Atlantic Relationship
Since making its initial investment in the Company in late 1993, Bell
Atlantic has become increasingly involved in the management and operations of
Iusacell. From late 1993 through February 1997, Bell Atlantic participated
substantially in the financial and technological operations of the Company.
Today, Bell Atlantic personnel seconded to Iusacell and Bell Atlantic
consultants are integrally involved in managing the day-to-day operations and
defining and implementing the long-term strategy of Iusacell. In particular,
Bell Atlantic seconded employees are now directing the Company's marketing,
distribution, customer service and financial operations.
In November 1993, Bell Atlantic invested U.S.$520.0 million in exchange
for a 23.2% equity interest in Iusacell. Following completion of the Company's
initial public offering in June 1994, Bell Atlantic purchased for U.S.$520.0
million an additional interest in the Company. As a result of these
transactions, Bell Atlantic owned
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shares representing 41.9% of the economic interest of Iusacell and 44.3% of the
voting rights relating to the Company's common stock.
In February 1997, Bell Atlantic assumed control of the Board of Directors
and management of Iusacell from the Peralta Group. The Peralta Group, however,
still retains 52.3% of the voting stock of the Company and certain veto rights.
In February 1997, Bell Atlantic also converted U.S.$32.9 million of debt into
equity, committed to provide the Company up to U.S.$150.0 million of
subordinated convertible debt financing and granted the Peralta Group put
options with respect to all outstanding shares of the Company held by the
Peralta Group. See "Item 13--Interest of Management in Certain Transactions" and
"Item 4--Control of Registrant." As a result of these transactions, Bell
Atlantic currently owns approximately 42.0% of the economic interest of Iusacell
and approximately 44.6% of the Company's voting rights. Bell Atlantic
consolidates Iusacell's financial results for financial reporting purposes. See
"Item 4--Control of Registrant" and "Item 10--Directors and Officers of
Registrant."
Bell Atlantic is one of the largest telecommunications companies in the
world, with extensive participation in and knowledge of the wireless
telecommunications business. In August 1997, Bell Atlantic Corporation and NYNEX
Corporation, two of the original seven Regional Bell Operating Companies formed
as a result of the divestiture of American Telephone and Telegraph Company
("AT&T") in 1983, completed their merger to form the new Bell Atlantic. Bell
Atlantic now provides local exchange telephone service in 12 states and the
District of Columbia in a region in the northeastern United States stretching
from Maine to Virginia that encompasses 64 million people and 25 million
households, utilizing more than 40 million access lines and employing more than
140,000 people. Bell Atlantic is also one of the world's largest wireless
telecommunications companies, with more than 7 million attributable customers in
its cellular and PCS operations in 25 states in the United States and in its six
international wireless investments in Latin America, Europe and Asia. In its
wireless markets, Bell Atlantic has emphasized the delivery of high-quality
customer service through customer service centers, call centers and an extensive
distribution system. Bell Atlantic had operating revenues and net income of
approximately U.S.$30.2 billion and U.S.$2.5 billion, respectively, for the
fiscal year ended December 31, 1997 and total assets of approximately U.S.$54.0
billion at such date. Bell Atlantic is a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Reports and information
filed by Bell Atlantic with the Securities and Exchange Commission (the
"Commission") may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Office at 7 World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may be
obtained by mail from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
Competitive Strengths
Large Subscriber Base
Iusacell has built a base of 400,123 cellular subscribers at December 31,
1997, including both "contract" and "prepay" subscribers. Approximately 50% of
that cellular subscriber base consists of customers who purchase cellular
services pursuant to fixed term contracts with the Company. The Company believes
that these customers seek the convenience of uninterrupted mobile cellular
service and access to high quality customer service and are willing to pay a
monthly fee for the choice of value-added services such as call waiting, 911,
short messaging service and caller identification. Customers who purchase
cellular services in advance through prepay calling cards represent the
remaining 50% of Iusacell's cellular customers. The prepay subscribers are
attractive to the Company due to their higher average per minute airtime
charges, lower acquisition costs and the absence of billing costs, credit
concerns and collection risk. The Company's large customer base allows Iusacell
to cross-sell its services to over a half a million existing customers through a
"one-stop-shopping" approach.
Proven Bell Atlantic Expertise
Iusacell has begun the implementation of a broad strategic and operating
plan modelled upon Bell Atlantic's wireless success in the United States and
Europe. Bell Atlantic is one of the largest cellular operators in the United
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States, serving more than 5.0 million subscribers along the East Coast and in
the Southwest. Bell Atlantic also has substantial investments in other wireless
telecommunications companies, including PrimeCo Personal Communications L.P. in
the United States, Omnitel Pronto Italia S.p.A. in Italy, Eurotel Praha S.R.D.
in the Czech Republic, Eurotel Bratislava S.R.D. in the Slovak Republic, STET
Hellas in Greece and Excelcomindo in Indonesia. Iusacell believes that Bell
Atlantic's extensive experience in the development and implementation of
marketing programs designed to promote substantial subscriber growth will
provide the Company with a significant competitive advantage in the Mexican
cellular market.
Significant Brand Equity
The Company believes that its call quality, customer care and accurate
billing contribute to its strong, favorable brand awareness. In order to
maximize brand equity, management has consolidated its brand names under the
single, well-recognized IUSACELL Digital brand name.
State-of-the-Art Technological Platform
Iusacell has an existing integrated network infrastructure that serves as
the backbone for its core cellular business and provides a platform for bundled
product offerings, such as long distance, paging and other telecommunications
services. With the benefit of Bell Atlantic's expertise, the Company has
invested in digital switching systems, dedicated microwave links, cell sites and
other network infrastructure. The Company has a network of five cellular
switches, 275 cell sites and 57 repeaters, which covers approximately 70% of the
Company's total POPs. In December 1997, Iusacell signed an agreement with
subsidiaries of Lucent Technologies, Inc. (collectively, "Lucent") for the
replacement of Iusacell's existing analog network with Lucent analog and CDMA
network equipment. This replacement began in February 1998 and is expected to be
completed by early 1999.
Nationwide Geographic Coverage
The Company runs and operates cellular concessions in four contiguous
regions in Central Mexico. These regions include Mexico City, the nation's
economic and political capital, and other parts of the country with high
concentrations of industry, tourism and agriculture. In May 1998, the Company
won auctions for PCS (1.9 GHz) concessions in two additional regions in northern
Mexico which include the cities of Monterrey and Tijuana. The Company's cellular
geographic footprint covers 66.1 million POPs, with total Covered POPs of 46.3
million; the two northern concessions add 10.6 million POPs to this footprint.
Experienced Management Team
The four senior members of the new management team appointed by Bell
Atlantic have an aggregate of 66 years of experience in the telecommunications
industry. Individually, the Company's operating managers have established track
records of producing subscriber growth, penetrating new markets and developing
new telecommunications product offerings. Iusacell's management team is
complemented by experienced Bell Atlantic telecommunications executives and
consultants.
Business Strategy
Iusacell's new management team has developed, and is in the process of
implementing, a comprehensive operating and strategic plan primarily focused on
increasing Iusacell's subscriber base, subscriber usage, revenues and
profitability in its core wireless businesses. This strategic plan incorporates
the following key elements:
New Product Offerings and Sales Force Incentives
Iusacell has introduced new product and pricing packages targeted both at
high-usage contract customers, who favor value-added products, and at low-usage
prepay customers. The Company considers its contract customers to be
particularly receptive to bundled product offerings that include long distance,
paging, and other
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telecommunications services. In addition, with the digitalization of the
Company's network, the Company is considering marketing its cellular services to
customers for use in a limited geographic zone. In May 1997, the Company's sales
force compensation plan was overhauled to be largely performance based and to
reward the sales of value-added products as well as any migration of qualified
prepay customers to contract plans.
Enhanced Distribution
Iusacell has improved the distribution of its products based upon the Bell
Atlantic model which emphasizes consistent, standardized merchandising through a
well-balanced mix of company-owned stores and independent distributors
conveniently located throughout the Company's operating regions. By the end of
1999, the Company intends to have significantly increased the number of
Iusacell-owned and operated customer service centers, incorporating a new,
uniform store design.
At December 31, 1996, Iusacell had 228 points of distribution. This number
more than quadrupled to 918 by December 31, 1997. In 1997, the Company opened 17
new customer service centers and, at December 31, 1997, the Company owned and
operated 74 customer service centers. In 1998, the Company plans to open 22 new
customer service centers and refurbish the majority of its owned and operated
centers. In March 1997, Iusacell signed a contract with Precel, formerly one of
the largest distributors for the Company's competitor, adding 75 locations,
thereby increasing Iusacell's total points of sale in Mexico City by over 40%
and reducing the competition's distribution presence. Iusacell plans to enter
into agreements with other distributors to further increase its points of sale.
Digital Network; Capacity and Coverage Improvements
In December 1997, Iusacell signed an agreement with subsidiaries of Lucent
Technologies, Inc. for the replacement of Iusacell's existing analog network
with Lucent analog and CDMA network equipment. This replacement began in
February 1998 and is expected to be completed by early 1999. In addition, as
part of its strategy to improve customer satisfaction, the Company added 57 cell
sites and 21 repeaters in 1997 and plans to augment capacity further by adding
more than 80 cell sites and 9 repeaters in 1998.
Nationwide Footprint
In May 1998, the Company won auctions for PCS (1.9 GHz) concessions in two
regions in northern Mexico. The Company expects to launch service in these
regions by not later than the first quarter of 1999. These new PCS concessions,
together with the cellular concessions the Company owns and operates in four
contiguous regions in central Mexico, will allow the Company to provide service
to regions encompassing approximately 76.7 million POPs or 81% of Mexico's
population.
Revitalized Customer Service
Iusacell's marketing strategy emphasizes proactive and timely customer
service. The Company utilizes welcome packages, customer satisfaction calls,
Executive Blue Chip programs for corporate customers and customized billing to
communicate its commitment to its customers. Iusacell's customer service centers
offer "one-stop-shopping" for cellular, long distance, paging, local telephony
and data transmission services as a convenience to its customers. In addition,
in early 1998, the Company opened two call centers that will provide more
automated and efficient service to customers through the use of state-of-the-art
software and rigorous customer service training. These call centers will, by the
end of 1998, consolidate the activities currently provided in six call centers.
Iusacell also continues to focus on reducing its fraud rate, as evidenced by its
deployment of CDMA technology with its proven encryption benefits. The Company
has implemented other fraud prevention measures, including the introduction of
authenticated handsets, fraud detection systems and fingerprinting for analog
signals, the investigation of cloning activities and restrictions on
international long distance dialing. In late 1997, Iusacell also installed a new
prepay operating system in Region 9 which has improved customer satisfaction
through automated card activation and account information and through provision
of voice messaging and other value-added services, and has lowered the cost of
support for prepay services.
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Realignment of Organizational Structure
Iusacell has consolidated its business divisions in order to increase
operating efficiencies, to facilitate cross-marketing of services and to reduce
duplicative costs. Overall headcount was reduced by approximately 17% in 1997
with the elimination of over 350 positions not directly associated with sales
and distribution. Furthermore, the Company has consolidated corporate activities
previously conducted at five separate locations in a new headquarters.
Redesigned Brand Image and Promotional Campaigns
In 1997, Iusacell launched its newly designed brand logo and product
packages with a new advertising campaign targeted at higher usage customers. For
the first time, all product offerings were marketed under the single,
well-recognized IUSACELL brand name. In anticipation of the digitalization of
Iusacell's network and product offerings, in February 1998 the IUSACELL brand
name was reinaugurated as IUSACELL Digital. As a result, the Company expects to
increase brand awareness and customer loyalty, thereby increasing usage in its
addressable market.
Local Telephony Service Offerings
Iusacell has historically provided local telephony in Mexico on a limited
basis through a mobile nationwide IMTS radiotelephony network and through both
rural and public cellularbased telephony programs. The Company also has
approximately 17,000 customers who participate in a trial of local wireless
service in the 450 MHz frequency band, which the Company began in 1994. The
Company plans to expand its 450 MHz service or pursue other alternatives for the
provision of local telephony on a larger scale, such as limited zone product
offerings in the 800 MHz (cellular) or 1.9 GHz (PCS) frequency bands using
digital technology that permits mobility or fixed products offerings in such
bands. See "Item 9--Management's Discussion and Analysis of Financial Condition
and Results of Operations--Local Telephony in the 450 MHz Frequency Band."
Price Leadership for Cellular Service
The Company has attempted to exercise price leadership in the Mexican
cellular market, with a strategy of having its prices keep pace with inflation,
if economic and competitive conditions permit. In April 1997, Iusacell announced
a weighted average increase of 15% for the per minute airtime price on its
contract and prepay plans and in May 1997 announced a weighted average increase
of 8.3% for the fixed monthly charge on all its contract plans. However, airtime
prices were adjusted downward by 4.6% on a weighted average basis in October
1997; and, in response to pricing actions by Telcel and as a means of boosting
traffic volumes and ultimately average revenue per subscriber, the airtime price
for incoming calls was reduced by 25%-50% for all contract plans. Airtime prices
were also reduced 1.0% for one contract plan in November 1997.
In late March 1998, the Company announced a weighted average increase of
7.9% and 13.6% for the per minute airtime price on its contract and prepay
plans, respectively. Telcel did not follow the contract plan increase and only
partially followed the prepay plan increase, leading in May 1998 to a full
rollback in two steps of the contract plan prices and a partial rollback of
prepay plan prices, leaving only a 9.9% increase in prepay airtime charges.
The Telecommunications Industry in Mexico
Market Liberalization
The Mexican government initiated its efforts to liberalize the
telecommunications industry in 1989, dividing Mexico into nine geographic
regions for the provision of cellular service. In order to provide an
alternative for cellular customers, two concessions were granted in each region,
one to Radiomovil Dipsa, S.A. de C.V. ("Telcel"), the cellular subsidiary of
Telefonos de Mexico, S.A. de C.V. ("Telmex"), the former state telephone
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monopoly, and the other to an independent operator. In addition, Telmex was
required to interconnect all cellular operators to its network in an effort to
facilitate competition.
In December 1990, the Mexican government initiated the privatization of
Telmex, then the sole provider of landline local, long distance and "B" Band
cellular services, when it sold 20.4% of the equity and 50.1% of the voting
power in Telmex to a private consortium for U.S.$1.76 billion. The winning
consortium consisted of Grupo Carso, S.A. de C.V., a Mexican conglomerate which
owns or otherwise controls a majority of the consortium's voting interest, SBC
Communications Inc. and France Telecom S.A. Subsequent to the original
privatization, the Mexican government further reduced its holdings in Telmex
through additional transactions and has now substantially completed the
privatization process.
Telcel obtained the "B" Band cellular concession in each of the nine
cellular regions and is therefore Mexico's largest cellular operator. The "A"
Band concession holders and the regions in which they serve are: (i) Baja
Celular, S.A. de C.V. in Region 1; (ii) Movitel del Noroeste, S.A. de C.V. in
Region 2; (iii) Telefonia Celular de Norte, S.A. de C.V. in Region 3; (iv)
Celular de Telefonia, S.A. de C.V. in Region 4 ; (v) Portatel del Sureste, S.A.
de C.V. in Region 8; and (vi) subsidiaries of the Company in Regions 5, 6, 7 and
9. Motorola, Inc. is a controlling or significant shareholder in the
aforementioned five non-Company concession holders. Telcel is the sole
competitor for each "A" Band cellular company.
In connection with the privatization of Telmex in 1990, the Mexican
government granted Telmex a concession to provide public domestic and
international long distance telephone service with an exclusivity period of six
years. In August 1996, the exclusivity period expired, and full open competition
commenced in January 1997. A presubscription balloting process has been
conducted in Mexico's 100 largest cities, covering 80% of Mexico's total POPs,
to enable customers to choose a long distance provider.
The SCT has granted 15 long distance concessions, only seven of which are
currently in operation. Long distance concessionaires include, among others,
Alestra S. de R.L., in which AT&T is a shareholder; Avantel, S.A. de C.V., in
which MCI Communications Corporation ("MCI") is a shareholder; Miditel, S.A. de
C.V., in which Korea Telecom is a shareholder ("Miditel"); Telinor, S.A. de C.V.
("Telinor"), in which The Bell Telephone Company of Canada ("Bell Canada") is a
shareholder; and Iusatel, S.A. de C.V. ("Iusatel"), a subsidiary of Iusacell.
Each concession has a nationwide scope and a thirty-year term and authorizes
domestic and international long distance services and value-added services,
including voice and data transmission services.
The Mexican government has also initiated the liberalization process for
competition in local telephony service. Accordingly, the SCT has already granted
three concessions for wireline local telephone service. In May 1998, the
COFETEL-organized auctions for spectrum in the 450 MHz, 1.9 GHz (PCS) and
3.4-3.7 GHz (Ionica) frequency bands for local wireless service concluded. Four
companies won nationwide concessions in the Ionica frequencies: Telmex; Telinor;
a Miditel affiliate; and Servicios Profesionales de Comunicacion, S.A. de C.V.,
a TV Azteca, S.A. de C.V. and Elektra, S.A. de C.V. affiliate ("SPC"). Three
companies won nationwide concessions in the 1.9 GHz (PCS) frequencies: SPC won
the 30MHz PCS-A Band auction on a nationwide level; a consortium of QUALCOMM
Incorporated and a Televisa, S.A. de C.V. affiliate won a mix of 30MHz PCS-B
Band and 10MHz PCS-E Band concessions across all nine regions; and Telcel won
the 10MHz PCS-D Band auction on a nationwide level. Moreover, a Miditel
affiliate, an Iusacell affiliate and Grupo Hermes, S.A. de C.V. won auctions for
seven of the remaining nine PCS-B Band and PCS-E Band properties. Formal
concessions are expected to be issued by the end of 1998. Each concession is
expected to have a twenty-year term and authorize mobile and fixed wireless
service and other value-added services.
Growth Opportunities
Underserved Telephony Market. The Company believes that there is
substantial unmet demand for telephone service in Mexico as demonstrated by the
relatively low level of wireline and cellular penetration and the long customer
wait for landline service. According to the International Telecommunications
Union ("ITU"), an agency of the United Nations, as of December 31, 1995, there
were approximately 9.6 lines per 100 inhabitants in Mexico, which is lower than
the teledensity rates in certain other Latin American countries and
substantially
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lower than those in developed countries such as the United States. The ITU
forecasts that Mexican teledensity will reach 14.6 lines per 100 inhabitants by
the end of the year 2000.
The following table presents, for major Latin American countries and the
United States, telephone lines in service per 100 inhabitants as of December 31,
1995.
Selected Telephone Penetration
Lines in service per
Country 100 inhabitants(1)
- ------- ------------------
United States............................................... 62.6
Uruguay..................................................... 19.6
Argentina................................................... 16.0
Chile....................................................... 13.2
Venezuela................................................... 11.1
Colombia.................................................... 10.0
Mexico...................................................... 9.6
Brazil...................................................... 7.5
Peru........................................................ 4.7
- ----------
(1) Source: International Telecommunications Union--World Telecommunications
Development Report 1997.
Expected Recovery in Consumer Spending. The Company saw consumer spending
recover in 1997 following the 1995-1996 economic crisis in Mexico. According to
WEFA forecasts, GDP growth is expected to be 4.4% and 3.4% in 1998 and 1999,
respectively. With GDP per capita expected to increase during this period based
on an annual population growth rate of 1.8% (as forecasted by WEFA), the Company
anticipates increased demand for its services.
Changing Competitive Dynamics
The Company's cellular competitor is Telcel, a wholly owned subsidiary of
Telmex, which holds the "B" Band cellular concessions in all nine regions of
Mexico. The Company believes that Telmex faces increasing competition,
especially in the long distance market, which was fully opened to competition in
January 1997, and in local telephony upon the introduction of service by the new
local telephony concessionaires beginning in late 1998. Telmex's major long
distance competitors include two joint ventures in which AT&T and MCI are the
strategic partners. Telmex's major local telephony competitors will include
Telinor, in which Bell Canada is the strategic partner, and SPC, a Mexican
company whose affiliates have strong distribution and marketing capabilities.
In late 1995, the Company brought a suit charging Telmex with unlawfully
cross-subsidizing Telcel's cellular phone operations. The Company believes that
the increased competition in both the long distance and local markets will
hinder Telmex's ability to continue to cross-subsidize Telcel. See "Item
3--Legal Proceedings."
Cellular Services
History and Overview
Iusacell's predecessor became the first Mexican provider of cellular
telecommunications services in 1989, when it commenced operation of the "A" Band
cellular network in Region 9. Through a series of transactions from 1990 to
1994, Iusacell acquired 100% beneficial ownership interests in the entities
which hold the "A" Band cellular concessions in Regions 5, 6 and 7. These
regions cover a contiguous geographic area in central Mexico, which allows
Iusacell to achieve certain economies of scale.
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Iusacell's regions cover a variety of industries. Region 9 includes Mexico
City, which has the greatest concentration of service and manufacturing
industries and is also the center of Mexico's public and financial services
sectors. Region 5 includes Guadalajara, Mexico's second largest city and the
commercial and service center of western Mexico. Region 6 includes Leon and San
Luis Potosi and has historically been dominated by the agricultural sector,
although it has recently begun to develop as an automobile manufacturing center.
Region 7 includes Puebla, Veracruz, Acapulco and Oaxaca and contains major
operations of the Mexican petrochemical industry and significant tourism
industry resorts and attractions.
Subscribers and System Usage
As of December 31, 1997, Iusacell had a total of 208,760 cellular
subscribers in Region 9. Of this number, 53.1% were contract plan subscribers
and 46.9% were prepay customers. According to Company customer profiles,
professionals comprise a large portion of its Region 9 cellular subscriber base.
The Company offers a number of value-added services designed specifically to
fulfill the demands of this important group of contract subscribers. For
example, Iusacell offers secretarial services and provides English-speaking
operators to serve the large English-speaking market in Region 9. The Company
also provides financial news reporting, emergency services, entertainment
information, reservations services and sports reports. The Company believes that
these value-added services help increase contract subscriber usage and also
enhance Iusacell's market image as a full service cellular provider.
Furthermore, the Company also believes that a strong distribution network is
necessary in order to develop and sustain a significant presence in this
important market. The Company believes it has particularly strengthened its
competitive position in Region 9 by entering into a distribution contract with
Precel, which increased the Company's number of independent distributors in
Region 9 by 40%. See "--Marketing Strategy--Distribution."
As of December 31, 1997, Iusacell had a combined total of 191,363 cellular
subscribers in Regions 5, 6 and 7. Of this number, 46.4% were contract plan
subscribers and 53.6% were prepay customers. The Company believes that its
subscriber base in these regions consists of subscribers engaged in a variety of
occupations. Due to the lower landline penetration outside of Region 9, the
subscriber base in Regions 5, 6 and 7 includes a number of users who purchase
cellular services as a principal means of telecommunications. Compared to Region
9, the marketing programs in these regions have focused more on the benefits
inherent in basic cellular service, such as mobility and convenience, than on
the benefits that value-added services provide. Although few value-added
services are currently being offered to contract subscribers, Iusacell is
evaluating the feasibility of offering a broader range of value-added services
similar to those offered to its contract subscribers in Region 9.
The table below sets forth information regarding the cellular subscriber
base for Region 9 and for Regions 5, 6 and 7 combined at the dates or for the
periods indicated.
Selected Cellular Subscriber Base Data
Year Ended December 31,
---------------------------------------
1995 1996 1997
---------- ---------- ----------
Region 9
Total POPs (in millions) ............... 23.8 24.3 24.9
Covered POPs (in millions) ............. 20.3 22.1 22.3
Percentage of population covered ....... 85.3% 91.0% 89.6%
Subscribers(1):
Contract ............................. 129,099 92,085 110,779
Prepay ............................... 1,399 38,233 97,981
---------- ---------- ----------
Total ............................ 130,498 130,318 208,760
"A" Band penetration(2) ................ 0.55% 0.54% 0.84%
Average monthly MOUs per subscriber(3) . 154 133 122
Nominal average monthly cellular revenue
per subscriber(4)..................... Ps. 469 Ps. 496 Ps. 585
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Year Ended December 31,
---------------------------------------
1995 1996 1997
---------- ---------- ----------
Nominal average monthly cellular revenue
per subscriber(5)..................... U.S.$73 U.S.$65 U.S.$72
Regions 5, 6 and 7 Combined
Total POPs (in millions) ............... 39.7 40.3 41.2
Covered POPs (in millions) ............. 20.0 23.4 24.0
Percentage of population covered ....... 50.4% 58.1% 58.7%
Subscribers(1):
Contract ............................. 79,703 67,059 89,185
Prepay ............................... -- 35,529 102,178
---------- ---------- ----------
Total ............................ 79,703 102,588 191,363
"A" Band penetration(2) ................ 0.20% 0.25% 0.46%
Average monthly MOUs per subscriber(3) . 117 94 75
Nominal average monthly cellular revenue
per subscriber(4) .................... Ps. 457 Ps. 481 Ps. 395
Nominal average monthly cellular revenue
per subscriber(5)..................... U.S.$71 U.S.$63 U.S.$49
- ----------
(1) The 1996 and 1997 breakdown between contract and prepay subscribers has
been restated as a result of a change in categorization: public telephony
subscribers, which had previously been categorized as contract
subscribers, are now categorized as prepay subscribers.
(2) "A" Band penetration represents the end of period "A" Band subscribers
divided by the end of period POPs.
(3) Average monthly MOUs per subscriber is calculated by dividing the total
MOUs for the respective period by the average number of subscribers for
such period and dividing the resulting quotient by the number of months in
such period.
(4) Nominal average monthly cellular revenue per subscriber is calculated by
dividing the total cellular service revenue for the respective period (in
nominal Pesos) by the average number of subscribers for such period and
dividing the resulting quotient by the number of months in such period.
(5) Calculated as described in Note (3) above, converted to U.S. dollars using
the Noon Buying Rate for the relevant period. See "Item 8--Selected
Financial Data--Exchange Rates."
Contract Churn
Contract churn measures both voluntarily and involuntarily disconnected
subscribers. The Company calculates contract churn for a given period by
dividing, for each month in that period, the total number of contract
subscribers disconnected in such month by the number of contract subscribers at
the beginning of such month and dividing the sum of the resulting quotients for
all months in such period by the number of months in such period. Voluntarily
disconnected subscribers encompass subscribers who choose to (i) no longer
subscribe to cellular service, (ii) become a prepay customer of the Company or
(iii) obtain cellular service (either on a contract or a prepay basis) from the
Company's competitor. Involuntarily disconnected subscribers encompass customers
whose service is terminated after failing to meet the Company's payment
requirements. The Company believes that a significant part of its contract churn
in 1996 and the first half of 1997 was due to customers switching from its
contract plans to a prepay program. Following the introduction of Telcel's
prepay program in February 1996, the Company commercially launched its own
prepay plan in June 1996 in order to attract, service and retain subscribers.
Prepay Turnover
Currently, a prepay customer is no longer considered a customer of the
Company when 60 days have elapsed since the customer purchased and activated, or
added credit to, his or her last prepay card. The customer's telephone number is
then deactivated, and he or she is considered to have turned over. The Company's
current prepay customers who want to continue to have cellular service must
choose to (i) continue to be prepay customers
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of the Company by purchasing another card, (ii) become contract customers of the
Company or (iii) become customers (either on a contract or a prepay basis) of
Telcel. Due to the higher turnover among its prepay customers, the Company is
attempting to migrate its qualified prepay customers to contract plans, where
customer loyalty and retention have been historically higher. The Company is
evaluating different methods of determining turnover, as the current method is
dependent upon, among other things, the number of days of use the Company
permits before expiration of prepay cards (currently 60 days but will increase
to 90 days upon migration of all prepay customers to the new prepay operating
system). Iusacell has installed a new prepay operating system in Regions 9 and 5
(which will also be installed in Regions 6 and 7 by the end of the third quarter
of 1998) which the Company expects will better track those customers who turn
over. This new operating system, together with initiatives to increase the
number of distribution points for prepay cards, improve customer care and
otherwise improve the convenience of the Company's prepay program, has enhanced
the Company's ability to add and retain prepay customers.
Roaming
Iusacell offers its contract cellular subscribers nationwide and
international service via roaming agreements. Subscribers can make calls from
any location in Mexico served by an "A" Band cellular operator, and can receive
any call made to the subscriber's number ("automatic call delivery") regardless
of the region in Mexico in which such subscriber is located. Iusacell also
provides cellular services to all subscribers of other non-wireline cellular
operators in Mexico while such subscribers are temporarily located in a region
served by Iusacell.
An operator (a "host operator") providing service to another operator's
subscriber temporarily located in its service region (an "in-roamer") earns
usage revenue. Iusacell bills such other operator (the "home operator") of an
in-roamer for the in-roamer's usage. In the case of roaming by a Iusacell
subscriber in the region of a host operator (an "out-roamer"), Iusacell is
billed by the host operator for the subscriber's usage. Iusacell remits the
billed amount to the host operator and bills its own customer, the out-roamer,
without any markup. As a result, Iusacell retains the collection risk for
roaming charges incurred by its own subscribers. Conversely, roaming charges
billed by Iusacell for in-roaming usage by subscribers of other non-wireline
operators are the responsibility of those operators. Roaming charges between
non-wireline operators are settled monthly. Interconnection charges owed to
Telmex and long-distance charges owed to the carrier as a result of roaming are
the responsibility of the host operator. In addition to higher per minute
charges for airtime (as compared to home region rates), the host operator is
entitled to receive a fee for each day roaming service is initiated. During
1997, in-roaming fees and usage revenue represented 3.9% of Iusacell's total
revenues. Out-roaming charges represented 5.2% of Iusacell's total revenues.
Iusacell has signed over 60 agreements with United States and other
foreign operators to provide its subscribers with international roaming
capabilities. These operators include Bell Atlantic Mobile, AT&T Wireless,
BellSouth Mobility, Rogers Cantel and AirTouch Communications. Iusacell is
continually reviewing opportunities to enter into agreements with other cellular
operators to expand its international roaming capabilities. In addition,
Iusacell provides, through the National Automatic Cellular Network, automatic
call delivery throughout most of the United States (including Puerto Rico) and
Canada, whereby Iusacell subscribers may receive telephone calls from Mexico
without the caller having to dial access codes.
PCS Services
In May 1998, Iusacell won auctions for PCS (1.9 GHz) concessions in
Regions 1 and 4 in northern Mexico. These two regions include the cities of
Monterrey and Tijuana, and combined represent approximately 10.6 million POPs or
11% of Mexico's population. The Company expects to launch service in these
regions by the first quarter of 1999.
Long Distance Services
In August 1996, Iusacell became one of Telmex's first competitors in long
distance service when Iusacell began to provide long distance services to its
cellular subscriber base in Mexico pursuant to the 30-year concession Iusatel
was awarded by the SCT on October 16, 1995 (which was modified in February
1998). The Company's competitors in long distance include the 13 other companies
granted concessions as well as Telmex, the former long distance monopoly. The
Company believes that competition in the Mexican long distance market has
stimulated
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growth in demand for long distance service; as prices dropped approximately 30%,
long distance traffic increased nearly 9% in 1997 compared to 1996.
The Company currently provides long distance service using its own
switches and transmission equipment and a combination of fiber optic lines,
satellite transmission and lines leased from Telmex. At December 31, 1997, the
Company provided long distance service in 60 cities to approximately 430,000
customers, approximately 417,000 of whom were existing customers for the
Company's other services. The Company chose not to commit significant marketing
resources to the presubscription balloting process among long distance providers
in Mexico and as a result fared poorly in initial balloting results. See "--The
Telecommunications Industry in Mexico--Market Liberalization".
The Company's long distance concession provides for certain coverage and
technological investment requirements. If the Company does not satisfy such
requirements, it could be subject to certain fines and penalties and potentially
lose its long distance concession. After evaluating the commercial feasibility
of complying with its initial concession, the Company requested that the SCT and
the COFETEL modify the terms of such concession to reflect a more rational
business plan. In February 1998, the government granted the modification
request, authorizing a change in the coverage requirements and increasing
flexibility in the choice of transmission technology, thereby significantly
reducing the Company's investment requirements. The Company further reduced the
capital investment for its long distance business by entering into a fiber optic
cable swap agreement in March 1998 with Marcatel S.A. de C.V. ("Marcatel"), a
long distance concessionaire, effectively acquiring certain fibers in the long
distance fiber optic network Marcatel was building in northern Mexico in
exchange for certain fibers in the long distance fiber optic network Iusacell
was building in central Mexico. See "--Government Regulation--Concessions and
Permits--Long Distance Concession" and "Item 9--Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and Capital
Resources--Capital Expenditures."
Other Services
Paging
On December 14, 1995, the Company and Infomin formed Infotelecom as a
joint venture to market national and international paging services. The Company
owns 51% of Infotelecom, while Infomin owns the other 49%. Infomin has a
concession, which expires on July 20, 2009, to provide nationwide paging
services in Mexico. Under the Infotelecom joint venture agreement, Infomin is
obligated to contribute this concession to Infotelecom. Due to restrictions on
foreign ownership under the paging concession, however, Infomin cannot
contribute its paging license to the joint venture so long as Bell Atlantic
continues to control the management of Iusacell and the Company continues to
hold more than 49% of the voting shares of Infotelecom.
Pursuant to a marketing agreement that the Company has entered into with
Infomin, Infotelecom has the right to market national paging services on behalf
of Infomin, and Infotelecom is required to make monthly payments to Infomin
equal to 5% of all gross revenues for the preceding month. This payment
represents the amount which Infomin as the concession holder must pay the SCT
for the right to provide paging services.
Infotelecom began marketing paging services in August 1996 and service is
now provided in 17 cities, including Mexico City, Guadalajara, Monterrey,
Puebla, Cuernavaca, Toluca, Queretaro, Leon and Ciudad Juarez. Infotelecom plans
to expand the marketing of paging services to 27 cities by the end of 1998. The
Company plans to take advantage of its existing cellular network and of its
operating and administrative resources in order to achieve cost efficiencies in
the provision of paging services. As of December 31, 1997, Infotelecom had
14,220 paging customers.
Under the joint venture agreement, the Company and Infomin valued the
Infomin paging concession at U.S.$10.5 million, and the Company agreed to fund
the first U.S.$10.5 million of Infotelecom's cash requirements before Infomin
would be required to make pro rata cash contributions. The Company and Infomin
have not yet agreed on the appropriate manner in which to capitalize
Infotelecom. As a result, the Company has been funding the joint venture by
means of loans. As of December 31, 1997, the Company had loaned Infotelecom
approximately Ps.86.4 million (U.S.$ 10.7 million) to fund capital expenditures
and operating losses. In the event the Company
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determines, independently or jointly with Infomin, to abandon or liquidate the
Infotelecom joint venture, there can be no assurance as to how much, if any, of
such loaned amounts Iusacell would be able to recover.
Local Telephony
Iusacell operates a mobile nationwide IMTS radiotelephone network in the
440-450 MHz, 485-495 MHz and 138-144 MHz frequency bands, providing local
radiotelephone services to commercial and noncommercial customers across Mexico.
As of December 31, 1997, Iusacell had 593 IMTS radiotelephone subscribers with
average monthly billings of approximately Ps.250 (U.S.$31) per customer. Due to
the substitutability of cellular service for IMTS service, Iusacell is
negotiating the cessation of IMTS service and the migration of IMTS subscribers
to cellular service or local telephony services with the SCT and the COFETEL.
The Company also operates public and rural telephony programs, utilizing
available cellular capacity. These programs provide telecommunications services
through cellular telephones in phone booths, intercity buses and rural areas.
The provision of services in this way fulfills the terms of the Company's
concessions for the provision of cellular telephone service and utilizes the
Company's cellular network to provide telecommunications coverage in areas with
little or no basic service. As of December 31, 1997, Iusacell had 6,956 cellular
telephones in service under its public and rural telephony programs.
As of December 31, 1997, Iusacell was providing, on a trial basis pending
approval from the SCT, local wireless service in the 450 MHz frequency band to
17,228 customers in selected markets in Region 9. The Company believes that
there is substantial unmet demand for telephone service in Mexico as
demonstrated by the relatively low level of residential, business line and
cellular penetration and long customer wait for landline service. See "--The
Telecommunications Industry in Mexico--Growth Opportunities". Iusacell has
developed a rate plan for local wireless service in the 450 MHz frequency band
which, while differing in some respects from the plan used by Telmex, would
result in a target revenue range which approximates a typical Telmex customer's
monthly bill.
The Company has experienced substantial delays in obtaining the SCT's
approval of its technical and economic plans for local wireless service in the
450 MHz frequency band. However, on June 10, 1997, the SCT and the Company
reached agreement on a process by which the Company could obtain a concession
issued and recognized by the SCT to provide local wireless service in the 450
MHz frequency band. Under this agreement, Iusacell would convert and consolidate
certain of its existing concessioned radiotelephony frequencies into 450 MHz
spectrum in Regions 4, 5, 6, 7 and 9 and would have a right of first refusal to
acquire the concessions to provide local wireless service over such frequencies
at prices derived from the prices of the winning bids in the auctions for 450
MHz and 1.9 GHz (PCS) frequency bands concluded in May 1998. These auctions
yielded a right of first refusal exercise price estimated at U.S.$2.25 million
for all five regions. The Company is currently studying whether to exercise its
right of first refusal.
As a result of the delays experienced by the Company and the uncertainty
relating to the Company's ability, at a commercially acceptable cost, to
implement full scale local wireless service in the 450 MHz frequency band, the
Company is exploring alternatives for providing local telephony services, such
as limited zone wireless services in the 800 MHz (cellular) or 1.9 GHz (PCS)
frequency bands deploying digital technology that permits mobility or fixed
wireless services over such bands. If the Company were to determine that it
would be preferable to pursue such an alternative rather than to continue to
pursue local wireless service in the 450 MHz frequency band, such alternative
could require the acquisition of concessions, other regulatory approvals and the
payment of substantial fees, and the Company would record substantial non-cash
losses in writing off assets relating to its 450 MHz local wireless service. See
"--Government Regulation--Concessions and Permits--Local Telephony" and "Item
9--Management's Discussion and Analysis of Financial Condition and Results of
Operations--Local Telephony in the 450 MHz Frequency Band."
In expanding its local telephone services, the Company plans to capitalize
on synergies between its mobile wireless and local wireless services, utilizing
its existing cellular network and anticipated PCS (1.9 GHz) network for
connections with the local subscribers' premises. Furthermore, the Company
believes that local wireless service requires a lower infrastructure investment
per line than landline service.
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Iusacell's long distance subsidiary has also applied for a license to
provide local wireline service, including dedicated circuits, local switching
and data service. While the Company currently does not anticipate that the
provision of local wireline service will become a significant part of its
services, the Company may provide, on a case-by-case basis, local wireline
telephone service as part of its overall provision of telecommunications
services.
Data Transmission
Iusacell began providing data transmission services in 1993. The Company
provides both public and private data transmission primarily using excess
capacity in the Company's microwave backbone in its existing cellular network in
Region 9, and satellite transmission through Satelitron, S.A. de C.V.
("Satelitron"), a joint venture among the Company, Hughes Network Systems and
another partner which provides a shared hub for private networks. The Company
provides its data transmission services primarily to the financial services and
consumer products industries.
Marketing Strategy
With the assumption of control by Bell Atlantic, Iusacell has redefined
its strategy for achieving profitable growth, particularly in its cellular
business. The Company seeks to increase its average monthly revenue per
subscriber, increase its cellular subscriber base, decrease the cost of
acquiring additional subscribers, reduce contract churn and prepay turnover by
improving its marketing efforts to its existing and potential cellular
subscribers.
The Company's subscribers consist of contract and prepay customers who can
be classified as high, moderate or low-usage customers. Iusacell is implementing
distribution, advertising, customer service support and pricing plans targeted
to each specific customer segment.
Contract Subscribers
Contract subscribers seek uninterrupted mobile cellular service, including
long distance, access to high-quality customer service and the ability to choose
among value-added services such as call waiting, *911 service, short message
service and caller identification, all for one monthly fee.
High-usage contract subscribers include corporate customers,
professionals, owners of small to medium-sized businesses and other subscribers
who have a high need for mobility and who rely on cellular service daily. These
subscribers are willing to pay a higher monthly fee in exchange for a large
block of free minutes, a lower airtime rate and a full range of value-added
services and customer service conveniences. These subscribers are concentrated
in the Company's premium plans. The Company is aggressively pursuing customer
growth in this segment through targeted marketing and distribution (customer
service centers, corporate representatives, direct sales force), advertising
campaigns (business and leisure publications, moving billboards) and pricing
plans.
Moderate-usage contract subscribers include some professionals, small
business owners and residential customers who use cellular services frequently
and require the reliability of a contract plan, but do not generate the monthly
MOUs of high-usage contract subscribers. The Company plans to continue to
generate revenue from this segment through targeted distribution (customer
service centers, direct sales force, distributors), advertising and pricing
plans.
While the Company does not target low-usage contract customers as
aggressively as other customers, it provides service options to meet the
requirements of this subscriber group. The low-usage contract plan segment
consists primarily of residential customers and small business owners who prefer
the reliability of contract plan service, but whose usage may not justify the
inclusion of various value-added services in the fixed monthly charge. The
Company targets this segment through its group of independent distributors and,
to some extent, through its commission agents and advertising programs. Three
pricing plans are currently offered to meet the needs of low-usage customers.
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Prepay Subscribers
Since the inception of the Company's prepay plan in 1996, the number of
prepay subscribers has grown to represent approximately 50% of Iusacell's
subscribers at December 31, 1997. A prepay subscriber can activate a cellular
phone at a Company customer service center, purchase a prepaid card with a fixed
amount of credit to be used over a period of no more than 60 days, and credit
the prepaid card value to the subscriber's account either at a customer service
center or by a phone call. Such a customer will have access to cellular service
(including long distance, but without roaming capability and limited access to
*911 emergency service) until the credit is fully used or until the card expires
at the end of 60 days, whichever occurs first. Upon the completion of the
migration of Iusacell's prepay customers to the new automated prepay operating
system by the fourth quarter of 1998, these 60- day periods will be increased to
90 days.
The prepay market is composed of customers who typically cannot afford to
purchase a contract plan, do not have the credit profile required to purchase a
contract plan or seek cellular services for emergency or limited use only.
Iusacell believes that prepay plans are attractive to a wide range of cellular
customers. In addition to helping customers control costs, a prepay program has
no monthly bill and allows customers to prepay for cellular services in cash.
Iusacell is now marketing these features to new classes of potential customers.
Iusacell believes the prepay service offerings provide an opportunity to
improve margins because, compared to the average contract plan, prepay plans
involve higher average per minute airtime charges, a lower cost to acquire
prepay subscribers (principally due to the absence of a handset subsidy) and the
absence of billing costs, credit concerns and payment risk. Prepay customers are
also potential customers for the Company's other services and products, and the
Company intends to focus marketing efforts on migrating qualified prepay
customers to higher revenue contract plans. In addition, the Company is
exploring new methods to increase minutes of use by its prepay customers. Prepay
customers, on average, have substantially lower minutes of use than contract
customers and do not pay monthly fees and, as a result, generate substantially
lower average monthly revenues per customer.
Iusacell has installed its new prepay operating system in Regions 9 and 5
and intends to install this new platform in Regions 6 and 7 by the end of the
third quarter of 1998. This new operating system allows Iusacell to better track
the usage patterns and identity of its prepay subscribers. The new operating
system also is expected to improve customer satisfaction through automated
reactivation, voice messaging and other value-added services, and to lower the
cost of support for prepay services. The new operating system, together with
initiatives to increase the number of distribution points for prepay cards,
improve customer care and otherwise improve the convenience of the Company's
prepay program, has enhanced the Company's ability to add and retain prepay
customers.
Distribution
Iusacell targets the various segments of its subscriber base through five
sales and distribution channels: customer service centers, independent
distributors, corporate representatives, a direct sales force and commission
sales agents. The Company is aggressively increasing the number of its points of
distribution in order to acquire additional subscribers. At December 31, 1997,
the Company had 918 points of distribution compared to 228 points of
distribution at December 31, 1996.
Historically, Iusacell's sales force compensation was based largely upon
salary and a commission structure which encouraged the sale of prepay cards.
Since the assumption of control of the Company by Bell Atlantic, the Company has
overhauled its sales compensation plan. The new plan, implemented in May 1997,
is designed to motivate the sales force within each distribution channel through
monetary incentives. In addition, this new plan will provide training so that
the sales force is encouraged to activate profitable and loyal accounts,
cross-sell the full line of the Company's service offerings and maintain the
Iusacell standards in advertising, promotions and customer service.
Customer Service Centers. Iusacell has reconfigured each of its customer
service centers to offer one-stop-shopping for a variety of cellular, long
distance and paging services, as well as accessories. Walk-in customers can
subscribe to cellular service contract plans, purchase prepay cards, sign up for
long distance service
14
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and purchase equipment such as handsets, pagers and accessories. In an effort to
maximize customer loyalty, reduce contract churn and prepay turnover and to
increase average monthly revenue per subscriber through cross-selling, the
Company plans to significantly increase the number of Iusacell-owned and
operated customer service centers by the end of 1999, incorporating a new,
uniform store design. In 1997, in addition to opening 17 new customer service
centers, the Company established ten redesigned prototype customer service
centers, which will provide the basis for new and refurbished centers in the
future. During 1998, the Company plans to open 22 new customer service centers
and refurbish the majority of its existing customer service centers based on the
experience gained from the ten prototype locations.
Independent Distributors. In order to broaden its market, Iusacell
maintains relationships with a broad network of 105 exclusive distributors in
844 locations. This includes a new distribution contract with Precel, formerly
one of Telcel's largest distributors, to obtain exclusive distribution in 75
locations. The Company's distribution arrangement with Precel increased the
number of Company locations in Regions 5, 7 and 9, by 7, 3 and 65 locations,
respectively, and significantly reduced Telcel's distribution presence in Mexico
City. In order to ensure that Iusacell's standards are maintained at all
distribution points, the Company provides assistance to its distributors in
training, promotions and advertising and provides information on its customer
base to allow the distributors to service the Company's customers effectively.
Corporate Representatives. To service the needs of its large corporate and
other high-usage customers, the Company has created a dedicated corporate sales
group, which, at December 31, 1997, included 81 full-time sales representatives.
This group of trained representatives seeks to increase sales to high-usage
customers by (i) "bundling" combinations of services into customized packages
designed to meet customers' requirements, (ii) developing and marketing new
services to satisfy the demands of such customers and (iii) educating corporate
purchasing managers about alternative pricing plans and services. The Company
plans to increase the size and geographic reach of this sales force in the
future.
Direct Sales Force. As of December 31, 1997, the Company employed 19
direct sales representatives to target moderate-usage contract plan subscribers.
These direct sales representatives travel extensively to deliver personalized
service to subscribers such as small and medium-sized businesses and
individuals. The Company carefully selects, trains and motivates this sales
force to maintain Iusacell's service standards.
Commission Sales Agents. The Company retains commission agents as a
flexible sales force in Regions 5, 6 and 7. The agents function as cellular
service brokers for the Company, working out of their own premises to better
target their customers. These agents provide additional distribution outlets
with minimal Company support. As of December 31, 1997, the Company had an
arrangement with 20 commission sales agents who distribute the Company's product
with no direct costs to Iusacell.
Advertising
Iusacell has launched an integrated media plan emphasizing the benefits of
the Company's products and supported by the Iusacell brand image, the logo for
which was recently redesigned. For the first time, all product offerings are
being marketed under the single, well-recognized IUSACELL brand name
(reinaugurated as IUSACELL Digital in February 1998 in anticipation of the
digitalization of Iusacell's network and product offerings). The media plan
targets the Company's subscribers through a coordinated print, radio, television
and fixed and moving outdoor advertising campaign. A key element of this
integrated media plan is the periodic agency review wherein the sales results of
a given campaign are evaluated. The integrated media plan enables the Company to
negotiate more favorable advertising rates. Print advertisements prominently
feature an ad-response telephone number to solicit new customer inquiries. A
24-hour line is staffed with trained representatives who are equipped to answer
questions regarding services and products. The Company believes that this
24-hour line helps to convey the image of Iusacell as a high-quality, customer
service-oriented telecommunications service provider.
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<PAGE>
Customer Service
Iusacell views superior customer service as essential in order to
distinguish itself in the competitive Mexican cellular telecommunications
market. The Company provides training for its customer service representatives
to ensure that each customer receives prompt attention, informed answers to any
inquiries and satisfactory resolution of any concerns. The Company believes that
enhanced customer service, especially after-sales support, is integral in
developing brand loyalty and supports the efforts of its sales force to
cross-sell the Company's services and products. For prepay customers, Iusacell
has installed in Regions 9 and 5, and by the end of the third quarter of 1998
will install in Regions 6 and 7, a new operating system that will better track
the usage patterns and identities of these subscribers. The new operating system
has improved customer satisfaction through automated activation, voice messaging
and other value-added services and has lowered the cost of support services. To
further enhance customer service, Iusacell has installed dedicated personal
computer terminals linked to the Company's billing system so that each customer
service representative, either personally or through the 24-hour service line,
can handle customer inquiries, billing questions and account payments with
real-time data and a full customer profile in hand. Customer data gathered from
such sources as the activation process, the billing system and exit interviews
with customers who terminate service, will allow Iusacell to better tailor its
marketing strategy to each customer. Along with providing information as to how
the Company can improve its customer service, this data is expected to enable
representatives from each of the distribution channels to better target their
sales approach to each customer when cross-selling the Company's services and
products.
In early 1998, the Company opened two call centers that will provide more
automated and efficient service to customers through the use of state-of-the-art
software and rigorous customer service training. By the end of 1998, these call
centers will consolidate the activities currently provided in six call centers.
In 1998, the Company also implemented the Customer Attention Support Team (CAST)
Program in its busiest customer service centers in order to accelerate the
problem resolution process.
Pricing
Since 1994, Iusacell has offered a variety of flexible pricing options for
its cellular service. The primary components of the contract pricing plans
include monthly fees, per minute usage charges and a certain number of free
minutes per month. Additionally, the Company's prepay program markets cards
which credit a finite number of Pesos to a customer's account, to be utilized
over a period of no more than 60 days (to be increased to 90 days upon migration
of all prepay customers to the new operating system).
The contract pricing plans are designed to target high, moderate and
low-usage contract subscribers. High-usage customers are typically willing to
pay higher monthly fees in exchange for larger blocks of free minutes,
value-added services, a free handset and lower per minute airtime charges under
a single contract. The Company offers the Productivity and Premium plans which
are specifically targeted at the high end of the market; the Corporate plan
targets multiple heavy users on a corporate level. Moderate-usage contract
subscribers typically prefer pricing options which have a lower monthly charge,
fewer free minutes and higher per minute airtime charges than those options
chosen by high-usage customers. The Company offers the Flex 75, Ganador,
Aniversario and Flex 150 plans to satisfy the needs of the moderate-usage
contract subscriber base. To satisfy the more limited needs of the low-usage
contract subscribers, the Company offers the Security, Standard and Tu Tiempo
plans, which offer a moderately priced, fixed monthly charge coupled with a high
per minute airtime charge and relatively few free minutes.
In contrast to contract subscribers, prepay customers typically generate
low levels of cellular usage, do not have access to value-added services (except
for purchasers of Ps. 500 prepay cards) or roaming, generally already own a
handset and often cannot afford to or do not have the credit profile to purchase
contract plan cellular services. Other prepay customers include vacationers and
travelling business people who require cellular service for short periods of
time. In addition to helping customers control costs, the Company's prepay
programs have no monthly bill and allows customers to prepay for cellular
services in cash. In June 1996, the Company introduced "Control Plus," a prepay
cellular telephone service whereby a customer may bring a handset to a customer
service center for activation and purchase a prepay card in denominations of Ps.
100, Ps. 250 and Ps. 500 from a customer service center or any of a variety of
vendors, including newsstands, lottery stands, supermarkets and other retail
outlets.
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<PAGE>
Once the card is purchased and the handset is activated, the customer can call
the Company with the card's serial number to credit the corresponding value of
cellular service to the customer's account. When this credit occurs, the service
is active and ready for the customer's use. A phone number is assigned at the
time of activation. That number is terminated when 60 days have elapsed from the
date of the last credit. In September 1997, the Company introduced its
next-generation "VIVA" prepay service. Based on the new prepay operating system,
VIVA provides for automated reactivation without human intermediaries and
value-added services such as voice-messaging. VIVA prepay cards are available in
denominations of Ps.100, 150, 250 and 500. VIVA has been implemented in Regions
9 and 5, with migration of existing Control Plus customers to VIVA scheduled to
be completed by July 1998. VIVA will be implemented in Regions 6 and 7 by the
end of the third quarter of 1998, with migration of existing Control Plus
customers to VIVA scheduled to be completed by the end of 1998.
With the exception of Tu Tiempo, Control Plus and VIVA, all packages
include a selection of free cellular handsets. The table below sets forth the
various contract and prepay plan rate options in effect as of December 31, 1997.
Cellular Rate Options
<TABLE>
<CAPTION>
Fixed Peak Non-Peak Free Contract
Monthly Activation per Minute per Minute Monthly Period
Charge Fee Charge(1) Charge(1) Minutes (months)
-------- ---------- ----------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Contract Plans:
Premium...................... Ps.1,099 Ps. 0 Ps. 1.60 Ps. 1.10 600 12
Corporate.................... 899 0 1.75 1.15 410 12
Productivity................. 759 0 1.95 1.25 300 12
Flex 150..................... 399 0 2.60 1.75 150 18
Flex 75...................... 279 0 3.30 2.15 75 18
Aniversario.................. 355 0 2.52 1.45 120 18
Ganador...................... 299 0 2.35 1.40 100 18
Standard..................... 255 0 2.36 1.47 30 18
Security..................... 179 0 3.90 2.25 30 24
Tu Tiempo.................... 99 149 1.79-2.89 1.79-2.89 0 0
C300......................... 569 0 1.50 1.00 300 12
R150......................... 259 0 2.25 1.40 150 18
Prepay Plans:
Control Plus/VIVA Prepay Card
(any amount)................. 0 0 3.74 3.74 0 0
</TABLE>
- ----------
(1) Peak per minute charges currently apply to usage between 8:00 A.M. and
10:00 P.M. Monday through Friday. Non-peak per-minute charges apply at all
other times.
The Company intends to continually review its market pricing and will
attempt to increase prices, if economic and competitive conditions permit, to
keep pace with inflation. In April 1997, the Company announced a weighted
average increase of 15% for the per minute airtime price on all its contract and
prepay plans. This weighted average price increase was calculated by applying
the actual price increases announced in April 1997 to both peak and non-peak per
minute airtime charges for each of the Company's contract and prepay plans,
weighted by the ratio of each plan's contribution to overall airtime revenues
during the month of February 1997. In May 1997, the Company announced a weighted
average increase of 8.3% for the fixed monthly charges on all its contract
plans. This weighted average price increase was calculated by applying the
actual price increases announced in May 1997 for all the Company's contract
plans, weighted by the ratio of each plan's contribution to overall monthly
fixed charges during the month of April 1997. To maintain competitiveness,
airtime prices were adjusted downward by 4.6% on a weighted average basis in
October 1997 and another 1.0% on the Ganador plan in November 1997. Also, in
response to Telcel pricing actions and as a means of boosting traffic volumes
and ultimately average revenue per
17
<PAGE>
subscriber, the airtime price for incoming calls was reduced by 25%-50% for all
contract plans in October 1997. In late March 1998, the Company announced a
weighted average increase of 7.9% and 13.6% for the per minute airtime price in
its contract and prepay plans, respectively. Telcel did not follow the contract
plan increases and only partially followed the prepay plan increase, leading in
May 1998 to a full rollback in two steps of the contract plan prices and a
partial rollback of prepay plan prices, leaving only a 9.9% increase in prepay
airtime charges.
Activation, Billing and Collection Procedures
The Company can activate a phone within 30 minutes of receiving credit
approval for customers who intend to pay their monthly charges with a credit
card. For customers who intend to pay their monthly charges in cash, there is a
credit review process of no longer than 48 hours prior to the delivery and
activation of a cellular telephone and a requirement of a security deposit,
depending on the contract plan, in a minimum amount equal to 1.5 times the
corresponding monthly rental fee. For prepay customers, activation time is 30
minutes or less. The Company believes that its ability to activate a cellular
telephone number promptly gives the Company a competitive advantage over Telcel.
The Company mitigates its credit exposure in four ways: (i) by credit
card, by obtaining a credit report from the Bureau Nacional de Credito
("National Credit Bureau"), a Mexican affiliate of TransUnion Corporation; (ii)
by requiring payment to be made by credit card or, for those customers who do
not pay by credit card, by requiring security deposits and conducting a credit
investigation; (iii) by requiring that customers paying purchase a bond, which
provides for payment in the event of customer defaults; and (iv) by utilizing
prepay cards, which eliminate all credit risk.
The Company has instituted customer retention procedures whereby a
late-paying customer is contacted by a service representative prior to
termination to urge such customer to settle his or her account and to inquire
about the reasons for nonpayment. Iusacell believes that these follow-up
procedures help decrease the rate of nonpayment and improve customer goodwill by
allowing Iusacell to address any customer grievances which may have led to
customer delinquency, thereby helping to retain potentially profitable accounts.
Iusacell has also implemented a system to monitor MOU levels and the
number of calls to certain geographic areas in order to identify abnormal usage
by contract subscribers. When abnormal usage is detected, Iusacell contacts the
subscriber to determine whether such usage has been authorized. The Company
believes that these procedures are effective in reducing the number of billing
disputes with subscribers and losses due to cellular fraud.
Billing is currently administered using eight different billing systems,
including a customized version of Bell Canada's "Link" billing system in Regions
6, 7 and 9 and the Communication Administration System in Region 5. In late
1997, the Company determined to implement a single customer care and billing
system from LHS Communications Systems, Inc. that will support all of its
product lines in all of its regions. The Company expects that the new LHS
customer care and billing system will improve processing speed and data
integrity; will permit convergent billing to a customer of all services in a
single bill; will permit easier and more flexible acess to customer information,
thereby facilitating targeted marketing and resolution of customer complaints;
and will help resolve Year 2000 compliance issues. The Company expects to invest
approximately U.S.$15 million in its new customer care and billing system, which
will largely be implemented in 1998. See "Item 9--Management's Discussion and
Analysis of Financial Condition and Results of Operations --Year 2000
Compliance" and "-- Liquidity and Capital Resources -- Capital Expenditures".
The Company compiles billing information from its switches on magnetic tape
every 24 hours for processing by its billing systems. Protective and disaster
recovery measures are taken in connection with all billing information.
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<PAGE>
Network and Equipment
Cellular Services
Iusacell's integrated cellular network is currently composed of 5 cellular
switches, 275 cell sites and 57 repeaters, and covers approximately 70% of total
cellular regional POPs.
In December 1997, Iusacell signed an agreement with subsidiaries of Lucent
Technologies, Inc. for the replacement of Iusacell's existing analog network
equipment. This replacement began in February 1998 and is expected to be
completed by early 1999; in May 1998, Iusacell launched CDMA digital service in
the Mexico City area of Region 9. The Company elected to deploy CDMA technology
instead of TDMA technology based on its and Bell Atlantic's evaluation of the
two technologies. For the past two years, Iusacell has used TDMA technology for
internal purposes across 106 cell sites in Region 9. Bell Atlantic is
successfully using CDMA technology in several of its U.S. markets with favorable
customer response. CDMA offers significantly greater call-carrying capacity,
superior voice quality and lower fraud and is more compatible for future
upgrading than TDMA. Iusacell will maintain transmitting equipment to serve both
analog and digital formats, and the Company is marketing dual-mode cellular
telephones capable of sending and receiving both analog and digital
transmissions. See "Item 9--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Digitalization."
Iusacell's cellular network consists of digital switching systems that are
capable of serving multiple markets. Regions 6, 7 and 9 are served by four
Northern Telecom DMS 250 (MTX) switches, and Region 5 is served by one Motorola
switch (EMX 2500). All switching equipment is fully networked. Iusacell
installed its first mobile switching center in 1989 in Region 9 and currently
operates 161 cell sites, providing telephone coverage to substantially all of
the populated territory and major highway routes of Region 9. Regions 5, 6 and 7
currently operate with a total of 114 cell sites, resulting in cellular
telephone coverage in all major population centers as well as along the
principal highway routes in the regions. Iusacell plans to install more than 80
cell sites and 9 repeaters in its regions during 1998 in an effort to increase
geographic coverage, as well as boost call-carrying capacity within areas
already covered. The Company increases call-carrying capacity and coverage by
three principal means: "cell splitting," deploying "micro-cells," and using cell
site repeaters or enhancers. Approximately 70% of the cells in Region 9 were
created as a result of cell splitting.
Digital microwave links between cell sites and the landline system are
supplied by various equipment manufacturers. The entire microwave network
consists of 403 individual microwave point to point links (hops). Taking
advantage of the ability of its various switching systems to run customized
software, Iusacell has developed a proprietary software package which is able to
track and report, in real-time, all aspects of network performance, including
traffic analysis, call quality and alarms. Iusacell seeks to upgrade and improve
its cellular network as new technologies become available.
The Company has a network operations and control center (NOCC) in Mexico
City which oversees, administers and provides technical support to all regions.
The Company plans to upgrade its NOCC by installing a new Network Management
System that will provide more complete and automated surveillance capabilities
and fault and performance management for all network equipment. The Company
expects the NOCC upgrade to be operational by the third quarter of 1998.
Other Services
Iusacell provides paging services primarily using its own cellular network
facilities. For long distance, the Company uses fiber optics and
state-of-the-art digital systems. In particular, Iusacell uses its three long
distance switches and its own transmission equipment, as well as other
facilities leased from Telmex.
Iusacell provides private data transmission services primarily using
excess capacity in the Company's microwave backbone in its existing cellular
network in Region 9, and satellite transmission through its Satelitron joint
venture, which provides a shared hub for private networks.
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<PAGE>
The Company's local wireless network, if implemented in the 450 MHz
frequency band, is expected to be based on the most advanced digital switching,
transmission and subscriber connection equipment that is readily available and
commercially feasible. The Company intends to utilize its existing
infrastructure to the extent possible. If the Company opts to provide local
wireless service through its 800 MHz or 1.9 GHz (PCS) frequency bands, the
digital technology that would be employed would offer additional features such
as out-of-zone mobility.
Infrastructure Synergies
While cellular transmitters are unique to cellular service, towers can be
used for cellular and paging transmissions, and the same physical infrastructure
(land, shelter, etc.) can be used for cellular, paging and long distance
equipment. Synergies also exist in maintenance, work force training and
equipment purchasing. For example, since plugs (electronic circuit boards used
in switches) can be used in both cellular and long distance switches, a
proportionately lower inventory of plugs can be maintained. The Company believes
that, as it expands its non-cellular offerings, these synergies will allow it to
reduce its infrastructure costs significantly and will reduce the time needed
for implementation of a new service.
For a discussion of the Company's capital expenditure plans for its
cellular and other services, see "Item 9--Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Capital Expenditures."
Competition
The offering of cellular services in Mexico is currently a regulated
duopoly in each region. Iusacell's cellular competitor in all regions in which
it provides service is Telcel, the holder of the "B" Band cellular concession
for service throughout Mexico and the country's largest cellular provider.
Cellular systems compete principally on the basis of quality of
telecommunications services, customer service, roaming capabilities, value-added
services, breadth of coverage area and, more recently, price. Operators are
largely free to set their own rates, provided such rates are set on the basis of
cost. See "--Government Regulation."
While Iusacell currently faces limited mobile wireless competition from
entities providing telecommunications services utilizing other existing
technologies, the Company will likely face increased competition from
technologies being developed or to be developed in the future. Emerging
technologies such as enhanced specialized mobile radio and satellite telephone
may compete with current cellular services. By late 1998 or early 1999, however,
the Company will face competition from the winners of 1.9 GHz (PCS) spectrum in
the auctions concluded in May 1998.
In paging services, the Company competes with established companies such
as Comunicaciones MTEL (Skytel), S.A. de C.V., Enlaces Radiofonicos, S.A. de
C.V. (Digitel), Telecomunicaciones Elektra, S.A. de C.V. (Biper), Grupo Radio
Beep, S.A. de C.V., Grupo Codime, S.A. de C.V. (Coditel) and Buscatel, S.A. de
C.V., a Telmex subsidiary. In addition, several new concessions have been
awarded in the last year and other companies have publicly announced their
intention to provide similar services in Mexico.
In providing long distance telephone service, Iusacell faces or will face
competition from 14 other concession holders, including Telmex and joint venture
companies in which AT&T and MCI have beneficial ownership interests.
Presubscription balloting has taken place in one hundred cities where telephone
customers chose their long distance carrier. The Company chose not to commit
significant marketing resources to the balloting process and fared poorly in
initial balloting results.
In the local telephony market, the Company expects to face significant
competition from both Telmex, the existing monopoly, and new competitors
providing service over the 1.9 GHz (PCS) and 3.4-3.7 GHz (Ionica) frequency
bands. See "--The Telecommunications Industry in Mexico--Market Liberalization."
In providing data transmission services, Iusacell competes for customers
with Telmex and Telecom. In addition, the Company believes that the current
Mexican data transmission industry includes over 1,000 private networks that
provide data transmission services.
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International Joint Ventures
On September 30, 1997, the Company consummated the sale of its direct and
indirect minority interests in its Ecuadorean cellular company, Conecel, and its
Ecuadorean paging company, Corptilor, S.A., to a corporation controlled by the
controlling shareholder of the majority shareholder of these companies. At the
closing, Iusacell received U.S.$29.4 million in cash consideration for its
direct interests in these companies and anticipates receiving approximately
U.S.$2.0 million (net of taxes) in respect of its indirect interest in 1998.
In December 1996, Iusacell agreed to sell its wholly-owned subsidiary,
Iusatel Chile, a Chilean long distance company, for U.S.$5.0 million. The sale
transaction also included a capitalization of U.S.$13.3 million of obligations
of the Company to Iusatel Chile. Iusacell received full payment in December
1997.
Government Regulation
Telecommunications systems in Mexico are regulated by the SCT and
the COFETEL, an independent regulatory body within the SCT, pursuant to the Ley
Federal de Telecomunicaciones (the "1995 Telecommunications Law"), which became
effective on June 8, 1995, although certain rules set forth in the Ley de Vias
Generales de Comunicacion and the rules promulgated thereunder including,
without limitation, the Reglamento de Telecomunicaciones (collectively, the
"Original Communications Laws") generally remain effective. These laws and
regulations define the regulatory structure applicable to the nationwide
telecommunications infrastructure and the provision of telecommunications
services. They govern, among other things, applications to install, maintain and
operate telecommunications systems; the establishment of technical standards for
the provision of telecommunications services; and the granting, revocation and
modification of concessions and permits. In particular, the terms and conditions
of concessions and permits granted under the Original Communications Laws (which
is the case for most concessions and permits granted to the Company and its
subsidiaries) should be governed by the Original Communications Laws and
respected under the new regulatory regime until their expiration. The 1995
Telecommunications Law may grant rights enhancing those set forth in the
Original Communications Laws. However, rates charged by holders of concessions
and permits granted under the Original Communications Laws will continue to
require prior approval from the SCT, unless such concession or permit is
amended.
Concessions and Permits
To provide public telecommunications services in Mexico through a public
network, the service provider must first obtain a concession from the SCT.
Pursuant to the 1995 Telecommunications Law, concessions for public networks may
not exceed a term of 30 years, and concessions for radioelectric spectrum may
not exceed a term of 20 years. Concessions may be extended for a term equivalent
to the term for which the concession was originally granted. Concessions
specify, among other things, (i) the type of network, system or service, (ii)
the allocated spectrum, if applicable, (iii) the geographical region in which
the holder of the concession may provide the service, (iv) the required capital
expenditure program, (v) the term during which such service may be provided,
(vi) the payment, where applicable, required to be made to acquire the
concession, including, where applicable, the participation of the Mexican
government in the revenues of the holder of the concession, and (vii) any other
rights and obligations affecting the concession holder. In addition to
concessions, the SCT may also grant permits for (x) establishing, operating or
exploiting private telecommunications services not constituting a public network
(i.e., reselling) and (y) installing, operating or exploiting
transmission-ground stations. There is no specified maximum term for permits.
Under the 1995 Telecommunications Law, only registration with the SCT is
required to provide value-added telecommunications services.
Under the 1995 Telecommunications Law and the Ley de Inversion Extranjera
(the "Foreign Investment Law"), concessions may only be granted to Mexican
individuals and to Mexican corporations whose foreign investment participation
does not exceed 49% of the voting shares thereof or who are not otherwise
controlled by non-Mexicans, except that, in the case of concessions for cellular
communications services, foreign investment participation may exceed 49% with
the prior approval of the Mexican Foreign Investment Commission (the "Foreign
Investment Commission") of the Mexican Ministry of Commerce and Industrial
Development ("SECOFI"). There are no foreign investment participation
restrictions in respect of operations conducted under permits.
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A concession or a permit may be terminated pursuant to the 1995
Telecommunications Law upon: (i) expiration of its term, (ii) resignation by the
concession holder or the permit holder, (iii) revocation, (iv) expropriation or
(v) dissolution or bankruptcy of the concession holder or the permit holder.
A concession or a permit may be revoked prior to the end of its term under
certain circumstances, such as: (i) unauthorized interruption of service, (ii)
the taking of any action that impairs the rights of other concessionaires or
permit holders, (iii) failure to comply with the obligations or conditions
specified in the concession or permit, (iv) failure to provide interconnection
services with other holders of telecommunications concessions and permits, (v)
loss of the concession or permit holder's Mexican nationality, (vi) unauthorized
assignment, transfer or encumbrance of the concession or permit, any rights
thereunder or assets used for the exploitation of the concession or permit,
(vii) failure to pay to the Mexican government its fee for the concession or,
where applicable, its participation in the revenues of the holder of the
concession and (viii) participation of any foreign government in the capital
stock of the holder of the concession. In addition, the SCT may establish for
any concession further events which could result in revocation of that
concession.
The Mexican government, through the SCT, may also temporarily seize all
assets related to a concession or permit in the event of a natural disaster,
war, significant public disturbance or threats to internal peace and for other
reasons related to preserving public order or for economic reasons. In addition,
the government has the statutory right to expropriate related assets for public
interest reasons. Under Mexican law, the Mexican government is obligated to
compensate the owner of the assets in the case of a statutory expropriation or
temporary seizure, except in the event of war. If the Mexican government
temporarily seizes such assets, it must indemnify the concession holder for all
losses and damages, including lost revenues. In the case of an expropriation,
the amount of the compensation is to be determined by appraisers. If the party
affected by the expropriation disagrees with the amount appraised, such party
may initiate judicial action against the government. Should no agreement be
reached on the amount of the indemnity in the case of a seizure or
expropriation, such determination will be made by an independent appraiser.
Iusacell is not aware of any instance in which the SCT has exercised any of the
foregoing powers in connection with a cellular company.
The Original Concession. Iusacell's right to provide radiotelephony, local
wireless and data transmission services nationwide, as well as cellular service
in Region 9, is based upon the concession granted to the predecessor of
Iusacell's wholly owned subsidiary, SOS Telecomunicaciones, S.A. de C.V.
("SOS"), on April 1, 1957, as amended (the "Original Concession"). The term of
the Original Concession is 50 years, and it expires on April 1, 2007. The
Original Concession may, however, be revoked prior to such date in the event
that SOS fails to comply with its terms or applicable law. In consideration for
the Original Concession, SOS must make payments to the Mexican government equal
to 5% of all gross revenues derived from services provided through its Region 9
cellular network and payments in an amount which is the greater of (i) 4% of all
gross revenues and (ii) 10% of net income, in either case, derived from services
provided through its nationwide radiocommunication network. Under the terms of
the Original Concession, SOS must continually modernize its services. In
updating its services, SOS must submit technical and economic plans for approval
by the SCT. In determining whether to approve these plans, the SCT is authorized
to consider whether the plans sufficiently address factors such as the public
interest (including, without limitation, teledensity) and efficiency and
uniformity in telecommunications throughout Mexico. The Original Concession is
renewable upon timely application to the SCT, provided that SOS has complied
with all of the requirements of the Original Concession and agrees to any new
terms and conditions established by the SCT at the time of such renewal.
Initially, the Original Concession authorized only the installation and
commercial operation of nationwide mobile (vehicle-installed) radiotelephone
public service in the 132-144 Mhz frequency range. Since then, however, the
Original Concession has been amended numerous times, thereby allowing Iusacell
to expand the types of telecommunications services which it may offer. In 1978,
the Original Concession was amended to grant SOS an additional allocation in the
440-450 MHz and 485-495 MHz frequency ranges in return for yielding a portion of
its 132-144 MHz frequency range allocation. SOS retained the frequencies between
138 and 144 MHz. Between 1986 and 1989, the Original Concession was further
amended to enable SOS to provide fixed rural radiotelephone service, to offer
telex and data transmission with the obligation to link its subscribers to the
network owned by Telecom, and to interconnect its radiocommunications ground
stations through satellite. In 1989, SOS was authorized to
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install, operate and maintain a mobile public radiocommunications network with
cellular technology in the 825-835 MHz and 870-880 MHz frequency ranges in
Region 9. In 1990, SOS was authorized to carry intra-regional
cellular-to-cellular communications throughout Region 9 without being required
to interconnect with the long distance carrier. In 1992, SOS was authorized to
provide public data transmission service nationwide through its radio
communications networks without the obligation to link its subscribers to the
Telecom network. In 1993, SOS was granted an additional 5 MHz band in the 800
MHz frequency range for the provision of cellular service, due to the high
volume of cellular traffic experienced in Region 9. In the same year, SOS was
authorized to improve its radiocommunications public service in the 440-450 MHz
and 485-495 MHz frequency ranges by utilizing digital technology and to
interconnect its telecommunications systems through fiber optic, satellite and
microwave technologies. The SCT also clarified the ability, and indeed the
obligation, of SOS to interconnect customers of its nationwide radio
communications network regardless of whether such customers use fixed, mobile or
portable telephones.
In accordance with the 1995 Telecommunications Law, SOS applied to renew
the Original Concession in March 1997. Given the nearly 10 years remaining on
the term of the Original Concession, the Company does not expect any definitive
determination by the SCT with respect to the renewal application in the near
term.
Cellular Concessions. Mexico is divided into nine cellular regions. The
SCT has allocated cellular telephone system frequencies in each region in the
"A" Band and "B" Band. In each region, Telcel holds the "B" Band concession; and
its cellular competitor in each region holds the "A" Band concession.
In Region 9, Iusacell holds the right to provide cellular service pursuant
to an authorization granted to SOS by the SCT in 1989 under the Original
Concession. In Regions 5, 6 and 7, Iusacell holds the right to provide cellular
service through its subsidiaries Comunicaciones Celulares de Occidente, S.A. de
C.V. ("Comcel"), Sistemas Telefonicos Portatiles Celulares, S.A. de C.V.
("Portacel") and Telecomunicaciones del Golfo, S.A. de C.V. ("Telgolfo"),
respectively. Comcel, Portacel and Telgolfo each hold 20-year concessions
expiring in 2010 which authorize these subsidiaries to install, operate,
maintain and exploit mobile public radiotelephone networks with cellular
technology for commercial use in Band A. In consideration for these
authorizations and concessions, the subsidiaries made initial payments to the
Mexican government and, in addition, must make payments as follows:
Percent of Gross
Revenues Payable To
Mexican Government
------------------
Comcel........................................ 8%
Portacel...................................... 7%
Telgolfo...................................... 8%
By the terms of their concessions, Comcel, Portacel and Telgolfo must
continually modernize their services after receiving approval of their technical
and economic plans from the SCT. In determining whether to approve these plans,
the SCT is authorized to consider whether the plans sufficiently address factors
such as the public interest (including, without limitation, teledensity) and
efficiency and uniformity in telecommunications throughout Mexico. These
concessions may be revoked or terminated prior to their expiration dates in the
event the concession holder fails to comply with certain conditions set forth in
the concessions or applicable law. The concessions may, however, be renewed for
a term equal to the original term upon timely application to the SCT, provided
that the concession holder had complied with all of the requirements of its
concession and agrees to any new terms and conditions established by the SCT at
the time of such renewal.
Paging. On December 14, 1995, the Company and Infomin formed Infotelecom
as a joint venture to market national and international paging services. Infomin
has a concession, which expires on July 20, 2009, to provide nationwide paging
services in Mexico. Although the joint venture agreement between Iusacell and
Infomin contemplates that Infomin will ultimately transfer its paging concession
to Infotelecom, Infomin's paging concession prohibits foreign ownership of more
than 49% of the voting shares of the entity holding the concession. As a result,
Infomin will be unable to contribute its paging license to the joint venture so
long as Bell Atlantic continues to control the management of Iusacell and
Iusacell continues to hold more than 49% of the voting shares of
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Infotelecom. See "--Other Services--Paging." Infotelecom is required to make
monthly payments to Infomin equal to 5% of all gross revenues for the preceding
month. This payment represents the amount which Infomin as concession holder
must pay the SCT for the right to provide paging service.
Long Distance Concession. Iusacell's right to provide international long
distance services is based upon a long distance concession granted by the SCT to
Iusatel, S.A. de C.V. ("Iusatel") on October 16, 1995. The term of the long
distance concession is 30 years and may be renewed upon timely application to
the SCT, for an equal period of time, provided that Iusatel complies with
certain requirements. Upon the application of the Company, the SCT and the
COFETEL modified this concession on February 18, 1998, authorizing a change in
the coverage requirements and increasing flexibility in the choice of
transmission technology. Pursuant to the modified concession, Iusatel is
required to comply with certain technical specifications and must serve with its
own infrastructure a minimum of 11 cities by July 31, 1998, 26 additional cities
by December 31, 1999 and another 13 additional cities by December 31, 2000. See
"--Other Services--Long Distance" and "Item 9--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Capital Expenditures."
Local Telephony. Iusacell believes its right to provide local telephony
service is derived from the Original Concession. The Original Concession, as
originally granted, permitted the Company to provide radiocommunications service
to vehicle-mounted terminal equipment nationwide. In 1986, the SCT amended the
Original Concession to authorize the Company to provide fixed public
radiotelephony service in rural areas nationwide in accordance with plans to be
approved by the SCT. In 1990, the Reglamento de Telecomunicaciones was
promulgated by the Mexican government which further modified the Original
Concession. These regulations classified radiocommunications services on the
basis of the networks used to provide such services rather than upon the basis
of subscriber terminal equipment. Radiocommunications networks are generally
classified as either "fixed" or "mobile." Iusacell's radiocommunications network
is a mobile network. In 1993 the SCT clarified the ability, and indeed the
obligation, of SOS to interconnect customers of its nationwide
radiocommunications network regardless of whether such customers use fixed,
mobile or portable telephones.
Pursuant to the Original Concession, the commencement of construction and
marketing of local wireless service in the 450 MHz frequency band on a
commercial basis requires the prior approval of the SCT. The Company has
experienced substantial delays in obtaining the SCT's approval of its technical
and economic plans for local wireless service in the 450 MHz frequency band.
However, on June 10, 1997, the SCT and the Company reached agreement on a
process by which the Company could obtain a concession issued and recognized by
the SCT to provide local wireless service in the 450 MHz frequency band. Under
this agreement, Iusacell would convert and consolidate certain of its existing
concessioned radiotelephony frequencies into 450 MHz spectrum in Regions 4, 5,
6, 7 and 9 and would have a right of first refusal to acquire the concessions to
provide local wireless service over such frequencies at prices derived from the
prices of the winning bids in the auctions for 450 MHz and 1.9 GHz (PCS)
frequency bands concluded in May 1998. These auctions yielded a right of first
refusal exercise price estimated at U.S.$2.25 million for all five regions. The
Company is currently studying whether to exercise its right of first refusal.
The Company is exploring alternatives for providing local telephony
services, including limited zone wireless services in the 800 MHz (cellular) or
1.9 GHz (PCS) frequency bands deploying digital technology that will permit
mobility and fixed wireless services over such bands. If the Company were to
determine that it would be preferable to pursue such an alternative, the
acquisition of concessions, other regulatory approvals and the payment of
substantial fees could be required, and the Company would record substantial
non-cash losses in writing off assets relating to its 450 MHz local wireless
service. See "Item 9--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Local Telephony in the 450 MHz Frequency
Band."
Data Transmission. Iusacell's right to offer telex and provide public data
transmission service throughout Mexico is derived from the Original Concession.
Iusacell utilizes its allocations in the 138-144 MHz, 440-450 MHz and 485-495
MHz frequency bands, excess capacity in its cellular microwave backbone in
Region 9 and Satelitron satellite transmission services to provide data
transmission services.
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Satellite Transmission Permit. On December 15, 1991, Satelitron, a joint
venture among Hughes Network Systems, Iusacell and one other investor, was
granted a 15-year permit to provide dedicated circuit services and private
networks through Mexican satellites or any other satellites designated by the
Mexican government. The Satelitron permit is renewable for 15 additional years
upon timely application to the SCT, provided Satelitron has complied with all of
the requirements of the permit and agrees to any new terms and conditions
established by the SCT at the time of such renewal. Under this permit,
Satelitron is required to make monthly payments to the SCT equal to 2.5% of all
gross revenues derived from its provision of access to its satellite bandwidth,
and 2.5% of all such gross revenues to Telecom for supervision and supporting
services.
Dedicated Microwave Circuit Services Permit. On December 8, 1993, the SCT
authorized SOS to use its microwave network's excess capacity to provide
dedicated circuit services. In accordance with the terms of this permit, these
dedicated microwave circuits cannot be interconnected to public exchange
networks, and the service must only be provided through the links of the
microwave network authorized by the SCT. On February 1, 1994, the SCT authorized
SOS to carry voice, data and video conferencing through these dedicated circuit
services.
Value-Added Services Permit. On June 17, 1993, SOS was granted a permit to
provide through its public network the following value-added telecommunications
services to its cellular subscribers: (i) secretarial service, (ii) voice mail
and (iii) data transmission. The term of this permit is the same as that of the
authorization for using the Region 9 cellular network through which the
value-added services are to be provided. Under this permit SOS is required to
make annual payments to the Mexican government equal to 5% of all gross revenues
derived directly from the provision of these services. In October 1994, Comcel,
Telgolfo and Portacel were each granted a permit to provide secretarial services
under the same terms granted to SOS, including the making of the aforementioned
payments to the Mexican government.
Foreign Ownership Restrictions
Pursuant to the 1995 Telecommunications Law and the Mexican Foreign
Investment Law (the "Foreign Investment Law"), holders of concessions to provide
telecommunications services in Mexico (including long distance and local
telephony, but not cellular service) cannot have a majority of their voting
shares owned by, and cannot be otherwise controlled by, foreign persons. In
February 1997, the Mexican Foreign Investment Commission conditioned its
approval of Bell Atlantic assuming management control over the Company and its
subsidiaries upon the requirement that, within a renewable period of 180 days,
Iusacell would transfer at least 51% of the voting shares of
Iusatelecomunicaciones and Iusatel to Mexican investors on terms acceptable to
the Foreign Investment Commission. The Foreign Investment Bureau of the SECOFI
has twice renewed the transfer deadline. Iusacell intends to comply with this
requirement by transferring 51% of the voting shares of these subsidiaries to
Mexican nationals while retaining a larger equity interest through the ownership
of "neutral" limited-voting shares (inversion neutra).
Iusacell has commenced discussions with Mexican nationals with respect to
the sale of the requisite voting interest in Iusatelecomunicaciones and Iusatel.
Iusacell intends that, as part of any such transfer, it will enter into a
shareholders agreement with the purchaser that will contain adequate protections
for Iusacell, including governance rights commensurate with Iusacell's equity
interest in such subsidiaries. There can be no assurance, however, that a sale
can be effected on such terms, or at all, or whether such terms will be
acceptable to the Mexican Foreign Investment Bureau.
In order to participate in the auctions for concessions for microwave
frequencies concluded in September 1997, the Company formed a joint venture with
Mr. Jose Ramon Elizondo, a Director of the Company and a Mexican investor. The
Mexican Foreign Investment Bureau has approved a capital structure substantially
similar to that authorized for Iusatel and Iusatelecomunicaciones for the
microwave joint venture.
In order to participate in the auctions for concessions for 1.9 GHz (PCS)
frequencies concluded in May 1998, the Company also formed a joint venture with
Mr. Jose Ramon Elizondo. The Company has petitioned the Mexican Foreign
Investment Bureau to approve a capital structure substantially similar to that
authorized for Iusatel, Iusatelecomunicaciones and the microwave joint venture.
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The concession pursuant to which the Company commercializes paging
services is also subject to foreign ownership restrictions. See "--Concessions
and Permits--Paging."
Rates for Telecommunications Services
Under the Original Communications Laws, SCT approval was required for
rates charged for all basic and certain value-added cellular services and for
data transmission services. Historically, the SCT permitted rate increases based
on the cost of service, the level of competition, the financial situation of the
carrier and certain macroeconomic factors. Carriers were not allowed to discount
the rates authorized by the SCT, although operators occasionally waived
activation fees on a promotional basis. Interconnection rates were also
authorized by the SCT. All terms of interconnection (such as point of
interconnection) other than interconnection rates were negotiated between the
regional non-wireline cellular carriers and Telmex under the SCT's supervision.
Rates for dedicated circuit services through microwave networks, and dedicated
circuits and private networks through satellites, were not regulated under the
Original Communications Laws.
Under the 1995 Telecommunications Law, rates for telecommunications
services (including cellular and long distance services) are now freely
determined by the providers of such services. Providers are prohibited from
adopting discriminatory practices in the application of rates. In addition, the
SCT is authorized to impose specific rate requirements on those companies
determined by the Federal Competition Commission to have substantial market
power. All tariffs for telecommunications services (other than value-added
services) must be registered with the Federal Telecommunications Commission
prior to becoming effective.
United States Regulation
Bell Atlantic, like all other regional Bell operating companies, was
subject to a consent decree (the "Decree") entered in a United States federal
court in 1982 resulting from antitrust litigation brought by the United States
Department of Justice against AT&T. The Decree required AT&T to divest itself of
its local telephone companies. Under the Decree, Bell Atlantic was prohibited
from providing interLATA (long distance) telecommunications, engaging in the
manufacture of customer premises equipment ("CPE"), or engaging in the
manufacture or sale of telecommunications equipment.
The Telecommunications Act of 1996 (the "1996 Act"), which became
effective on February 8, 1996, includes provisions that would open local
telephony markets to competition and would permit regional Bell operating
companies, such as Bell Atlantic, to provide interLATA services (long distance)
and video programming and to engage in manufacturing. Under the 1996 Act, Bell
Atlantic was allowed to provide certain interLATA (long distance) services
immediately upon enactment, including interLATA (long distance) services
originating outside the states where its subsidiaries provide local exchange
telephone services or interLATA (long distance) services that are "incidental"
to other permitted business such as wireless services. However, the ability of
Bell Atlantic and its affiliates to engage in businesses previously prohibited
by the Decree, including providing interLATA (long distance) services
originating in the states where Bell Atlantic's subsidiaries provide local
exchange telephone service, and manufacturing CPE or telecommunications
equipment, is largely dependent on satisfying certain conditions contained in
the 1996 Act and any regulations promulgated thereunder.
As a company affiliated with Bell Atlantic, the operations of Iusacell had
been subject to the Decree and the various waivers granted thereunder. Bell
Atlantic obtained waivers under the Decree in 1986 and 1993 that together
permitted it to conduct business outside the United States, subject to certain
exceptions and restrictions. Under such exceptions and restrictions, a foreign
telecommunications entity affiliated with Bell Atlantic (an "FTE"), such as
Iusacell, could not provide interexchange (long distance) telecommunications
services between points in the United States or own any international
telecommunications facilities in the United States. As to telecommunications
traffic between the United States and a foreign country, an FTE could provide
only the foreign "half" of such traffic. An FTE was also subject to certain
prohibitions on discrimination in handling traffic to and from the United States
and limitations on interests it could own in international cables and satellite
facilities to and from the United States. Finally, an FTE was subject to
prohibitions on exporting to the United States any telecommunications equipment
or CPE manufactured outside the United States.
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The 1996 Act eliminated the restrictions under the Decree that preclude an
FTE from providing the United States "half" of traffic originating in a foreign
county, from exporting to the United States telecommunications equipment or CPE
manufactured outside the United States and, subject to the same conditions that
Bell Atlantic must satisfy under the 1996 Act and any regulations promulgated
thereunder only with respect to interLATA (long distance) telecommunications
services originating in Bell Atlantic's local exchange territories, from
providing interLATA (long distance) telecommunications services between points
in the United States or international long distance service originating in the
United States and owning international telecommunications facilities in the
United States. Under the 1996 Act, Iusacell may now provide both the foreign
"half" and the United States "half" of telecommunications traffic originating in
Mexico (or any other foreign country) and may now carry "transit" traffic (that
is, international telecommunications traffic which, though routed through the
United States, neither originates nor terminates in the United States) through
the United States. In addition, Iusacell may, on a resale basis, carry United
States originated traffic bound for Mexico (or other foreign countries) so long
as the point of interconnection is, and the traffic originates, outside the
states where Bell Atlantic's subsidiaries provide local exchange telephone
service. Activities permitted by the 1996 Act are not subject to the
prohibitions set forth in the Decree and the waivers issued thereunder on
discrimination in handling traffic to and from the United States and on
limitations on interests an FTE could own in international cables and satellite
facilities to and from the United States.
In 1996, Iusatel applied for and received authorization under Section 214
of the Communications Act of 1934 to become a facilities-based provider of
international long distance services from the United States (the "Section 214
Authorization"). The Section 214 Authorization was transferred to a Peralta
Group entity in January 1996 in anticipation of the consummation of the 1996
Share Conversion Agreement (as defined in "Item 4--Control of Registrant"). Upon
the completion of the restructuring of Iusatel to comply with the 1995
Telecommunications Law and the Foreign Investment Law, Iusatel and such Peralta
Group entity will seek to formally return control of the Section 214
Authorization to Iusatel. The Company has not yet determined whether it will
engage in activities permitted by the 1996 Act or, upon any reassignment to
Iusatel, the Section 214 Authorization. If the Company chooses to engage in such
activities, no definitive prediction can be made as to the specific impact of
such activities on the Company's business, financial condition or results of
operations.
Other laws of the United States may restrict certain activities of
Iusacell by virtue of Bell Atlantic's ownership interest. Such laws may include
the United States Trading with the Enemy Act, the United States Cuban Democracy
Act, the Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996 and
other laws and regulations that restrict trade with, and investments in, certain
countries, including Cuba, and the United States Foreign Corrupt Practices Act.
The New Shareholders Agreement (as defined in "Item 4--Control of
Registrant") contains, and the predecessor agreement thereto contained, certain
provisions, designed to require Iusacell to refrain from taking any actions that
would cause Bell Atlantic to be in violation of applicable law.
Employees
As of December 31, 1997, the Company and its subsidiaries had an aggregate
of 1,892 full-time and part-time employees, of whom approximately 28% were
members of a labor union. The Company has never experienced a work stoppage and
management considers its relationship with its employees to be good.
ITEM 2. Description of Property
Throughout the regions served by its cellular operations at December 31,
1997, Iusacell operates 74 customer service centers and a total of 275 cell
sites, 57 repeaters, five mobile switching centers, two switches for local
wireless service and three switches for long distance service.
The Company generally leases the land where the Iusacell customer service
centers, cell sites and mobile switching centers are located. Iusacell owns and
leases administrative offices in Mexico City as well as in Guadalajara, Puebla,
Monterrey, Leon and Ciudad Juarez. The Company generally owns its cellular
network equipment subject to certain liens.
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ITEM 3. Legal Proceedings
Although Iusacell is a party to certain legal proceedings in the ordinary
course of its business, the Company's management believes that none of these
proceedings, individually or in the aggregate, is likely to have a material
adverse effect on the Company.
A ruling by the Federal Competition Commission is still pending on the
suit filed by the Company in November 1995, against Telmex and Telcel, claiming
that the two companies have engaged in monopolistic practices in the Mexican
telecommunications market, including unlawful cross-subsidies by Telmex of
Telcel's cellular phone operations. Telmex and Telcel filed eight motions
against the suit, all of which motions were rejected by the Federal Competition
Commission. In February 1997, the Federal Competition Commission imposed a fine
of Ps. 847,500 (U.S.$105,938) on Telmex and Telcel for their refusal to provide
the expert appointed by the Company with the necessary information to prepare
his opinion on the cross-subsidies claim. Telmex and Telcel filed for an
injunction (amparo) against the Federal Competition Commission asserting that
Mexican antitrust laws do not apply to Telmex and Telcel and questioning the
constitutionality of the Federal Competition Commission. A Mexican appellate
court recently ruled against Telmex and Telcel on these matters. The Company is
now awaiting the determination by the Federal Competition Commission on the
process by which the expert appointed by the Company shall engage in discovery
in connection with the preparation of his opinion.
Mitsubishi Electronics America, Inc. ("Mitsubishi") filed a complaint in
the United States on July 18, 1996 against the Company, Bell Atlantic and Bell
Atlantic Latin American Holdings, Inc. alleging, among other things, that the
Company breached a purported contract for the purchase of 60,000 local wireless
telephone terminals at a cost of U.S.$510 each. The Company's motions to dismiss
the complaint for lack of personal jurisdiction and on substantive grounds were
rejected, although the court reserved judgment on the Company's motion to
dismiss for forum non conveniens. The litigation is now in the discovery stage.
The Company is unable at this time to estimate its potential liability, if any,
and accordingly has not created any contingency reserve with respect to the
litigation.
In May 1998, the Company discovered that its former corporate offices in
Mexico City, of which one of its subsidiaries is the owner, was encumbered by a
lien for an amount in excess of the estimated fair market value of the property.
This lien did not encumber the subject property at the time the Company acquired
the shares of the company that owns the property, and the Company was never
notified of the registration of such lien. The Company is currently analyzing
the matter and the actions it needs to pursue to unencumber the property. There
can be no assurance, however, that the Company will be able to remove the lien
from such property and realize any value from such asset.
In April 1994, the Company and Northern Telecom Limited ("Nortel") entered
into a five-year, U.S.$315.0 million agreement (the "Nortel Agreement") pursuant
to which Nortel would supply network switching equipment, switching center
transmission equipment and radio base station equipment, as well as associated
software and technical services, for the development of the 450 MHz local
wireless network. Pursuant to a side letter agreement entered into in December
1995, the Nortel Agreement would terminate automatically if the Company's
technical and economic plans for the 450 MHz project had not been approved by,
or the Company did not receive a concession to provide local wireless telephony
in the 450 MHz frequency band from, the SCT on or before December 31, 1997.
Neither event having occurred on or prior to December 31, 1997, the Nortel
Agreement has terminated. As required under the Nortel Agreement, the Company
made an advance payment of U.S.$15.0 million in anticipation of future purchases
which were never made. The Company now seeks a refund of such advanced funds.
The Company has also entered into a U.S.$82.0 million purchase agreement with
Telrad Telecommunications Electronics Industries, Ltd. ("Telrad") for terminals
which the Company terminated for default in November 1996. Although the Company
believes that it has no further liability under the Telrad contract and has no
further liability under the Nortel Agreement, there can be no assurance that
Telrad or Nortel will not seek legal redress against the Company or that Telrad
or Nortel will not succeed in obtaining damages from the Company. Although the
Company believes that Nortel is legally obligated to refund the U.S.$15 million
advance to the Company, there can be no assurance that the Company will succeed
in obtaining such refund. See "Item 1--Description of Business--Government
Regulation."
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ITEM 4. Control of Registrant
The Peralta Group currently owns approximately 47.7% of the economic
interest of Iusacell and approximately 52.3% of the Company's voting rights.
Bell Atlantic currently owns approximately 42.0% of the economic interest of
Iusacell and approximately 44.6% of the Company's voting rights. The following
table sets forth the ownership of all classes of the capital stock of Iusacell
by the Peralta Group and Bell Atlantic. Excluding shares held by the Peralta
Group as disclosed below, the Company's remaining directors and executive
officers as a group own less than 1% of the outstanding Series D shares and less
than 5% of the outstanding Series L shares.
Identity of
Title of Class Person or Group Amount Owned Percent of Class
- -------------- --------------- ------------ ----------------
Series A.................. Peralta Group 332,966,159 44.6%
Bell Atlantic 413,787,251 55.4
Series B.................. Bell Atlantic 5,562,450 100.0
Series D.................. Peralta Group 158,613,110 84.9
Series L.................. Peralta Group 27,834,000 18.6
Bell Atlantic 38,792,690 25.9
In February 1997, Bell Atlantic and the Peralta Group consummated certain
of the transactions contemplated by the 1996 Share Conversion Agreement entered
into among the Peralta Group, Bell Atlantic and the Company (the "1996 Share
Conversion Agreement"). As a result of the surrender to the Company by Bell
Atlantic and the Peralta Group of shares of certain series of the Company's
capital stock for conversion into shares of other series of the Company's
capital stock, Bell Atlantic obtained management control of Iusacell despite the
Peralta Group maintaining a majority of the voting rights pertaining to the
Company's capital stock. Bell Atlantic paid the Peralta Group U.S.$50.0 million
as consideration for such conversions. In addition, Bell Atlantic granted the
Peralta Group put options with respect to all outstanding shares of the Company
held by the Peralta Group; the Peralta Group has the right to put one-third of
the total number of its current outstanding Iusacell shares to Bell Atlantic on
December 31 of each of 1997, 1998 and 1999 at a per share price of U.S.$0.85,
U.S.$0.96 and U.S.$1.07, respectively. In order to effect the change of
management control, the bylaws of the Company were amended. Pursuant to these
amendments to Iusacell's bylaws, Bell Atlantic has the ability to determine the
outcome of any action requiring the approval of the Company's shareholders,
except that the Peralta Group's concurrence is currently required in order to
change the nationality, corporate nature or corporate purpose of the Company, to
amend the Company's bylaws, to merge or dissolve the Company, to spin off parts
of the Company, to increase the fixed capital of the Company, to issue bonds or
preferred capital stock, to redeem shares of capital stock, to cancel the
registration of the Series L Shares of the Company on the Mexican Stock Exchange
or any other securities exchange, to sell or acquire, or exercise withdrawal
rights with respect to, shares of other companies if the relevant consideration
exceeds 20% of the stockholders' equity of the Company and with respect to any
other matter which, pursuant to applicable law or the Company's bylaws, may
require a special quorum at the relevant shareholders meeting.
In accordance with the bylaws of the Company and the Amended and Restated
Shareholders Agreement dated as of February 18, 1997 (the "New Shareholders
Agreement"), Iusacell's Board of Directors consists of 21 members. The Series A
shareholders have the right to appoint ten Series A Directors and their
alternates, the Series B shareholders have the right to appoint nine Series B
Directors and their alternates, the Series D shareholders have the right to
appoint one Series D Director and an alternate and the Series L shareholders
have the right to appoint one Series L Director and an alternate. Pursuant to
the New Shareholders Agreement, Bell Atlantic and the Peralta Group each have
the right to nominate two Series A Directors and their respective alternates and
have agreed to vote their respective Series A shares to elect all such nominees.
Bell Atlantic and the Peralta Group have also agreed to consult with each other
to attempt to agree upon the remaining six Series A Directors and their
alternates; in the absence of any such agreement, Bell Atlantic, as holder of a
majority of the Series A Shares, has the right to nominate and elect such
remaining Series A Directors and their alternates.
The Company's bylaws provide that resolutions of the Board of Directors
shall be valid when approved by a majority of the vote of the members present,
including the favorable vote of at least one Series A Director and
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one Series B Director. As a result, the Directors nominated by Bell Atlantic
have the power under the bylaws to approve, without the affirmative vote of any
other Directors, all resolutions of the Board of Directors. The New Shareholders
Agreement, however, grants the Peralta Group supermajority rights with respect
to certain transactions. For actions of the Board of Directors, a "supermajority
vote" means the affirmative vote of a majority of the members of the Board of
Directors, including at least one Series A Director, one Series B Director and
one Series D Director. The following transactions are subject to a supermajority
vote by the Company's Board of Directors: (i) acquisitions of
non-telecommunications businesses for a purchase price in excess of U.S.$30.0
million; (ii) certain acquisitions, joint ventures and mergers within the
telecommunications business involving assets in excess of U.S.$100.0 million;
(iii) certain dispositions of assets for a consideration in excess of U.S.$30.0
million in any twelve month period; (iv) certain incurrences of indebtedness
after January 1, 1998 in an amount exceeding U.S.$100.0 million in the aggregate
within any twelve month period; (v) certain issuances of capital stock in an
amount exceeding U.S.$50.0 million in the aggregate within any twelve month
period; (vi) entering into, amending or terminating contracts with or for the
benefit of certain affiliates of the Company, except for any renewals or
extensions on substantially similar terms of certain consulting and seconded
employee arrangements with Bell Atlantic affiliates; (vii) termination or
disposition of any telecommunication transmission business with annual revenues
of more than U.S.$10.0 million in each of the two most recent fiscal years; and
(viii) certain terminations of concessions relating to telecommunications
operations.
Since January 1, 1998, each of Bell Atlantic Latin America Holdings, Inc.
("BALAH") and Bell Atlantic International, Inc. ("BAII"), acting on behalf of
itself, its affiliates and its transferees, and one member of the Peralta Group,
acting on behalf of the Peralta Group and its transferees, have the right to
cause Iusacell to facilitate two registered secondary public offerings of its
shares, subject to certain minimum ownership requirements. In addition, since
January 1, 1998, each of BALAH and BAII and such Peralta Group member has a
one-time option to cause Iusacell to effect a six-month shelf registration of
its shares. After one party's exercise of its registration rights, all other
parties having registration rights may elect to include their shares in the
offering. Any party holding registration rights may not exercise such rights
during the 90-day period commencing on the effective date of any registration
statement filed by Iusacell for a primary equity offering in which gross
proceeds are expected to exceed U.S.$30.0 million. The New Shareholders
Agreement also provides that if Iusacell registers any equity securities for a
primary or secondary offering after January 1, 1998, it must permit BALAH and
BAII and the Peralta Group (and anyone to whom they have transferred shares
otherwise than in a public offering) to include their shares in such offering.
Iusacell has agreed to bear all expenses of any of the above-described primary
or secondary offerings (other than the fees of counsel to the holders of the
registration rights). In addition, the Company has agreed not to effect any
public sale or distribution of securities similar to those being registered
during the period commencing 21 days prior to the effective date of a
registration statement covering the registered securities and continuing until
90 days following such effective date.
ITEM 5. Nature of Trading Market
Shares and ADRs
The Series D and L Common Shares (the "Shares") are listed on the Bolsa
Mexicana de Valores, S.A. de C.V. (the "Mexican Stock Exchange"). The American
Depositary Shares ("ADSs") representing such shares are listed on the New York
Stock Exchange, Inc. (the "New York Stock Exchange" or "NYSE") under the symbols
"CEL" and "CELD", respectively. The ADSs are evidenced by American Depositary
Receipts ("ADRs") issued by the Bank of New York, as Depositary under a Deposit
Agreement among the Company, the Depositary and the holders from time to time of
ADRs.
The following tables set forth for the period indicated the high, low and
period end sales prices of the Series D and Series L Common Shares on the
Mexican Stock Exchange as reported by the Mexican Stock Exchange, and the high,
low and period end sales price of the Series D and Series L ADSs on the New York
Stock Exchange as reported by the New York Stock Exchange beginning January 1,
1996 and ending December 31, 1997.
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Mexican Stock Exchange (in Ps.)
Period High Low Close
- ------ ---- --- -----
Series D
First Quarter 1996 7.20 6.88 6.88
Second Quarter 1996 7.00 6.60 6.98
Third Quarter 1996 -- -- --
Fourth Quarter 1996 6.98 4.98 5.75
First Quarter 1997 7.10 4.90 7.10
Second Quarter 1997 11.00 7.12 11.00
Third Quarter 1997 9.70 9.70 9.70
Fourth Quarter 1997 12.66 9.00 12.66
Series L
First Quarter 1996 9.60 8.00 8.50
Second Quarter 1996 10.10 8.32 8.34
Third Quarter 1996 8.30 6.00 6.00
Fourth Quarter 1996 7.20 5.25 5.75
First Quarter 1997 9.34 6.80 8.48
Second Quarter 1997 14.00 8.48 14.00
Third Quarter 1997 14.80 13.50 14.00
Fourth Quarter 1997 17.24 13.00 17.24
New York Stock Exchange (in U.S.$)
Period High Low Close
- ------ ---- --- -----
Series D
First Quarter 1996 11.125 8.000 8.875
Second Quarter 1996 11.875 8.375 8.750
Third Quarter 1996 8.785 6.750 6.750
Fourth Quarter 1996 7.125 5.625 5.750
First Quarter 1997 12.375 7.000 10.375
Second Quarter 1997 19.250 10.250 18.375
Third Quarter 1997 20.188 15.000 17.938
Fourth Quarter 1997 22.500 15.750 21.688
Series L
First Quarter 1996 13.375 10.000 10.875
Second Quarter 1996 14.375 9.375 10.750
Third Quarter 1996 10.875 7.375 7.500
Fourth Quarter 1996 9.500 6.500 7.625
First Quarter 1997 9.750 5.500 8.375
Second Quarter 1997 15.250 8.375 14.750
Third Quarter 1997 16.000 11.000 12.500
Fourth Quarter 1997 16.000 10.750 15.250
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Trading on the Mexican Stock Exchange
The Mexican Stock Exchange, which was founded in 1894 and has operated
continuously since 1907, is located in Mexico City and is Mexico's only stock
exchange. The Mexican Stock Exchange is organized as a corporation, and its
shares are owned by Mexico's 32 operating brokerage firms. These firms are
exclusively authorized to trade on the floor of the Mexican Stock Exchange.
Trading of securities on the Mexican Stock Exchange is by open outcry on
the floor of the exchange or through an automated system and takes place between
the hours of 8:30 a.m. and 3:00 p.m., Mexico City time, on each weekday other
than public holidays. Lot sizes typically range from 1,000 to 100,000 shares.
Brokerage firms are permitted to buy odd lots for their own account. The Mexican
Stock Exchange publishes an official daily price list that includes price
information for each listed security. The Mexican Stock Exchange operates a
system of automatic suspension of trading in certain shares as a means of
controlling excessive price volatility. Each day, a price band, with upper and
lower limits, for such shares is established. If, during the day, a bid or offer
in respect of a listed share is accepted at a price outside this band, trading
in all shares issued by the issuer of such listed shares is automatically
suspended for one hour. The automatic suspension system does not apply to equity
securities which also trade in the form of depositary shares in markets (defined
to include automated quotation systems) other than the Mexican Stock Exchange,
unless otherwise authorized by the Comision Nacional Bancaria y de Valores
(National Banking and Securities Commission, or "CNBV"). In addition, the
Mexican Stock Exchange may also suspend trading of a security (including those
not subject to the automatic suspension system described above) for up to five
days if it determines that disorderly trading is occurring with respect thereto,
which may be extended beyond five days if so approved by the CNBV.
Settlement is effected two trading days after a share transaction is
completed on the Mexican Stock Exchange. Deferred settlements, even if by mutual
agreement, are not permitted without the approval of the CNBV. All securities
traded on the Mexican Stock Exchange are on deposit with S.D. Indeval, S.A. de
C.V. Institucion para el Deposito de Valores ("Indeval"), which commenced
operations in 1979. Pursuant to the Ley del Mercado de Valores (the "Mexican
Securities Market Law") of 1975, the only persons authorized to be shareholders
of Indeval are Banco de Mexico, brokerage firms, securities specialists, stock
exchanges, credit institutions, insurance and bonding companies. Indeval acts as
a clearing house, depositary, custodian, settlement, transfer and registration
institution for Mexican Stock Exchange transactions, eliminating the need for
physical delivery of securities.
The Mexican Stock Exchange is Latin America's second largest exchange in
terms of market capitalization, but it remains relatively small and illiquid
compared to major world markets. As of December 31, 1997, 194 Mexican companies
were listed on the Mexican Stock Exchange, excluding mutual funds. During 1997,
the ten most actively traded equity issues represented approximately 57.3% of
the total volume of the shares traded on the Mexican Stock Exchange, not
including public offerings. Although there is substantial participation by the
public in the trading of securities on the Mexican Stock Exchange, a major part
of such activity reflects transactions of institutional investors. There is no
formal over-the-counter market for securities in Mexico.
Market Regulation and Registration Standards
On April 28, 1995, the Ley de la Comision Nacional Bancaria y de Valores
(the National Banking and Securities Commission Law) was enacted, which merged
the former Mexican National Securities Commission with the Mexican National
Banking Commission to create the CNBV, which now has supervisory jurisdiction
over both banking and securities activities. The CNBV regulates the public
offering and trading of securities and imposes sanctions on illegal use of
privileged information. The CNBV regulates the Mexican securities market, the
Mexican Stock Exchange and brokerage houses through a Board of Governors
composed of 13 members, five of which are appointed by the Secretaria de
Hacienda y Credito Publico (the Ministry of Finance and Public Credit, or the
"Ministry of Finance").
In order to offer securities to the public in Mexico, an issuer must meet
certain qualitative and quantitative requirements, and only securities for which
a listing application has been approved by the CNBV may be listed on the Mexican
Stock Exchange. CNBV approval does not imply any kind of certification or
assurance relating to the
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<PAGE>
merits or the quality of the securities or the solvency of the issuer. In 1993,
the CNBV published general rules to implement an intermediate securities market
in addition to the current market operated by the Mexican Stock Exchange in
order to permit less liquid issues and issuers with a lower capitalization to
participate in a public securities market. The general rules of the CNBV divide
the Securities Section of the Registro Nacional de Valores e Intermediarios (the
National Registry of Securities and Intermediaries, or "RNVI") into two
subsections, Subsection "A" and Subsection "B."
In general, in order to become registered and maintain such registration
in Subsection "A" of the RNVI, an issuer is required to meet more stringent
qualitative and quantitative requirements than for Subsection "B." To become
registered in Subsection "A," an issuer is generally required to have (i) at
least three years of operating history (unless it is a holding company, in which
case the holding company's principal subsidiaries must comply with this
requirement); (ii) stockholders' equity of at least 125,000,000 unidades de
inversion ("UDIs") which are inflation-indexed currency units (equivalent to
Ps.250.0 million or U.S.$31.0 million as of December 31, 1997); (iii) profits
for the last three years of operation taken as a whole; (iv) a public float of
at least 15% of the capital stock on a fully diluted basis; and (v) as a result
of its initial offering, at least 200 stockholders, with diversified individual
participation with respect to the total amount of the offering. To maintain
their registration in Subsection "A," issuers are required to have (i)
stockholders' equity of at least 62,500,000 UDIs (equivalent to Ps.125.0 million
or U.S.$15.5 million as of December 31, 1997); (ii) a public float of at least
12% of the capital stock on a fully diluted basis; and (iii) at least 100
stockholders, whose individual participation is diversified with respect to the
total capitalization of the issuer, in accordance with the current market price
for the securities. The CNBV has the authority to waive one or more of these
requirements under certain circumstances.
The requirements for registration in Subsection "B" of the RNVI are
similar to those for registration in Subsection "A," except that the
quantitative requirements are lower. The Mexican Stock Exchange carries out an
annual review of each Subsection "A" issuer to determine if it continues to meet
the eligibility requirements for registration in Subsection "A." The
registration of the issuer's securities may be reclassified to Subsection "B" if
the issuer does not meet the 64,500,000 UDI requirement (but meets the
corresponding requirement for Subsection "B" (10,000,000 UDIs)) or, if as a
result of a spin-off, the issuer does not meet the requirement for Subsection
"A" but meets the requirements for Subsection "B". In other instances, where an
issuer fails to comply with any of the requirements for either Subsection, as
appropriate, the Mexican Stock Exchange may request such issuer to submit a
correction program. If the program is not submitted or complied with by such
issuer, such registration and the listing thereof with the Mexican Stock
Exchange may be canceled by the CNBV. Securities which are offered outside of
Mexico are required to be registered in the Special Section of the RNVI.
Pursuant to the Mexican Securities Market Law, the CNBV must be notified
before stockholders of a company listed on the Mexican Stock Exchange effect one
or more simultaneous or successive transactions resulting in the transfer of 10%
or more of such company's capital stock, other than on the Mexican Stock
Exchange. The holders of the shares being transferred in such transactions are
obligated to inform the CNBV of the results of the transactions within three
days of completion of the last transaction, or that the transactions have not
been completed. The CNBV will notify the Mexican Stock Exchange of such
transactions, without specifying the names of the parties involved.
Issuers of listed securities are required to file unaudited quarterly
financial statements and audited annual financial statements as well as various
periodic reports with the CNBV and the Mexican Stock Exchange.
The Notes
The Notes (as defined herein) are not currently listed on any securities
exchange nor quoted through the National Association of Securities Dealers
Automatic Quotation System ("NASDAQ").
ITEM 6. Exchange Control and Other Limitations Affecting Security-Holders
Mexico abolished its exchange control system on November 11, 1991. Under
the previous Mexican exchange control system established in 1982, Mexican
residents and companies were entitled to purchase, and
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required to sell, foreign currencies for certain purposes at a controlled rate
of exchange (the "Controlled Rate") that was established daily by Banco de
Mexico. Transactions to which the Controlled Rate applied included payments for
virtually all merchandise imports, revenues from virtually all merchandise
exports, royalty payments and payments of principal, interest and related
expenses with respect to indebtedness to foreign creditors registered with the
Mexican government. For all transactions to which the Controlled Rate did not
apply, foreign currencies could also be purchased, if they were available, at
the then prevailing domestic free market rate for the type of transaction (the
"Free Market Rate").
From November 11, 1991 to October 20, 1992, Banco de Mexico permitted the
Free Market Rate to fluctuate according to supply and demand within a moving
band. In late December 1994, the Mexican government responded to exchange rate
pressures first by increasing by 15% the upper limit of the Peso/Dollar exchange
rate band and then, two days later, allowing the Peso to fluctuate freely
against the Dollar. By December 31, 1994, the Peso/Dollar exchange rate, which
had been Ps.3.4662 to $1.00 on December 19, 1994, was Ps.5.000 to $1.00. At
December 31, 1997, the Peso/Dollar exchange rate was Ps.8.0700 to $1.00.
Fluctuations in the exchange rate between the Peso and the Dollar affect
the Dollar equivalent of the Peso price of securities traded on the Mexican
Stock Exchange, including the Shares and, as a result, are likely to affect the
market price of the ADSs. The Peso devaluation most likely had a direct effect
on the drop in the market price of the ADSs recorded after the devaluation. See
"Item 5--Nature of Trading Market." Such fluctuations also would affect the
Dollar conversion by the Depositary of any cash dividends paid in Pesos on
Shares represented by ADSs. Fluctuations in the exchange rate can also affect
the Company's operating results depending on the terms of its contractual
arrangements and the effect of the fluctuation on the specific industries served
by the Company.
Except for the period from September through December 1982 during the
Mexican liquidity crisis, Banco de Mexico consistently has made foreign currency
available to Mexican private sector entities (such as the Company) to meet their
foreign currency obligations. Nevertheless, in the event of renewed shortages of
foreign currency, there can be no assurance that Banco de Mexico would continue
to make foreign currency available to private sector companies or that foreign
currency needed by the Company to service foreign currency obligations could be
purchased in the open market without substantial additional cost.
Foreign investment in capital stock of Mexican corporations in certain
economic sectors, including cellular telephony, is regulated by the Foreign
Investment Law and the regulations applicable thereto (the "Foreign Investment
Regulations"). Under the Foreign Investment Law, foreign investment is defined
in general as the participation of foreign investors in the capital stock of
Mexican corporations, or investments made therein by Mexican corporations in
which foreign capital has a majority participation, and the participation of
foreign investors in certain activities regulated by the Foreign Investment Law.
Foreign investors are defined as non-Mexican individuals, non-Mexican legal
entities and foreign entities without legal personality. The Foreign Investment
Commission and the National Registry of Foreign Investment of the SECOFI are
responsible for the administration of the Foreign Investment Law and the Foreign
Investment Regulations. In order to comply with restrictions on the percentage
of their capital stock that may be owned by non-Mexican investors, Mexican
companies typically limit particular classes of their stock to ownership by
Mexican individuals and Mexican corporations in which foreign investment has a
majority participation.
As a general rule, the Foreign Investment Law allows foreign investment in
up to 100% of the capital stock of Mexican companies except for those engaged in
certain specified restricted industries, such as basic telephone service, where
foreign investment control is limited to 49%. Foreign investment may, however,
participate in a proportion in excess of 49% of the capital stock of a Mexican
corporation engaged in the cellular telephone business with the advance approval
of the Foreign Investment Commission. The Company has applied for and obtained
such approval. In addition to the limitations on share ownership, the Foreign
Investment Law and Foreign Investment Regulations require that Mexican
shareholders retain the power to determine the administrative control and the
management of Mexican corporations engaged in industries in which special
restrictions as to foreign investment are applicable. Pursuant to the 1995
Telecommunications Law, concessions (including a concession for basic telephone
service) may only be granted to Mexican individuals or Mexican companies where
foreign investment does not exceed 49% (except that with respect to cellular
telephony such percentage may be higher when approved by the Foreign Investment
Commission).
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Under the Company's ByLaws, and as permitted by the approval mentioned
above, the Shares of the Company are not restricted to Mexican ownership.
Pursuant to the Company's ByLaws, the Series A shares must always represent at
least 51% of the voting stock of Iusacell.
Pursuant to the provisions of NAFTA, Mexico remains free to impose foreign
exchange controls on investments made in Mexico, including those made by U.S.
and Canadian investors.
ITEM 7. Taxation
General
The following is a general summary of certain anticipated U.S. federal and
Mexican tax consequences of the ownership of the Notes, Shares or ADSs. The tax
treatment of a holder of the Notes, Shares or ADSs may vary depending upon the
particular situation of the holder. The following summary of U.S. federal income
tax consequences is limited to investors who are U.S. Persons (as defined below)
(except as explicitly provided below) who will hold the Notes, Shares or ADSs as
"capital assets" within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code") and whose "functional currency" within the
meaning of Section 985 of the Code is the Dollar. Certain holders (including,
but not limited to, insurance companies, tax-exempt organizations, financial
institutions, persons subject to the alternative minimum tax, holders that are
not U.S. Persons, brokers-dealers and holders of 10% or more of the voting
shares of the Company) may be subject to special rules not discussed below. The
discussion below also does not address the effect of any United States state or
local tax law on a holder of the Notes, Shares or ADSs. As used herein, the term
"U.S. Person" means an individual who is a citizen or resident of the United
States, a corporation organized in or under the laws of the United States or any
state thereof, an estate or trust that is subject to United States federal
income taxation without regard to the source of its income, and a trust, if both
(i) a court within the United States is able to exercise primary supervision
over the administration of the trust and (ii) one or more United States persons
have the authority to control all substantial decisions of the trust. In the
case of a holder of Notes, Shares or ADSs that is a partnership for United
States tax purposes, each partner will take into account its allocable share of
income or loss from the Notes, Shares or ADSs, and will take such income or loss
into account under the rules of taxation applicable to such partner, taking into
account the activities of the partnership and the partner. The summary does not
constitute, and should not be considered as, legal or tax advice to holders of
the Notes, Shares or ADSs.
The summary is for general information purposes only and is based upon the
tax laws of the United States and Mexico as in effect on the date hereof, which
are subject to change. Prospective purchasers of the Notes, Shares or ADSs
should consult their own tax advisors as to the U.S., Mexican or other tax
consequences of the purchase, ownership and disposition of Shares and ADSs,
including, in particular, the effect of any foreign, state or local tax laws.
Mexico and the United States have signed and ratified a Convention for the
Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to
Taxes on Income and Protocols thereto (collectively, the "Tax Treaty"). The Tax
Treaty is currently in effect and provisions of the Tax Treaty that may affect
holders of Notes, Shares or ADSs are summarized below. Mexico has also executed
double taxation treaties with other countries as well as agreements providing
for the exchange of information with respect to tax matters, some of which are
in force. The following summary does not take into account the effect of any
such treaties. Holders must consult with their tax advisors as to their
entitlement to the benefits afforded by the Tax Treaty.
In general, for U.S. federal income tax purposes, holders of ADRs
evidencing ADSs will be treated as the owners of the Shares represented by those
ADSs.
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Taxation of Dividends
U.S. Tax Considerations
Dividends paid out of current or accumulated earnings and profits with
respect to the L Shares and B Shares represented by the Shares or ADSs will be
includible in the gross income of a holder that is a U.S. Person (a "U.S.
holder"), as ordinary income when the dividends are received by the Depositary
or by the U.S. holder of a certificated ADR and will not be eligible for any
dividends received deduction otherwise allowable to corporations under Section
243 of the Code. To the extent that a distribution exceeds earnings and profits,
it will be treated first as a return of the U.S. holder's basis to the extent
thereof, and then as gain from the sale or disposition of a capital asset.
Dividends paid in Pesos will be includible in the income of a U.S. holder in a
Dollar amount calculated by reference to the exchange rate in effect on the day
the Pesos are received by the Depositary or by the U.S. holder of a certificated
ADR. U.S. holders should consult their own tax advisors regarding the treatment
of any foreign currency gain or loss on any Pesos received which are not
converted into Dollars on the day the Pesos are received. Dividends generally
will constitute foreign source "passive income" (or in the case of certain
holders, "financial services income") for U.S. foreign tax credit purposes.
Distributions of additional L Shares or B Shares to holders of Shares with
respect to their ADSs that are made as part of a pro rata distribution to all
shareholders of the Company generally will not be subject to U.S. federal income
tax.
A holder of Shares or ADSs that is, with respect to the United States, not
a U.S. holder (a "non-U.S. holder") generally will not be subject to U.S.
federal income or withholding tax on dividends received on Shares or ADSs.
Special rules may apply in the case of non-U.S. holders (i) that are engaged in
a U.S. trade or business, (ii) that are former citizens or long-term residents
of the United States, "controlled foreign corporations," "foreign personal
holding companies," corporations which accumulate earnings to avoid U.S. Federal
income tax, and certain foreign charitable organizations, each within the
meaning of the Code, or (iii) certain non resident alien individuals who are
present in the United States for 183 days or more during a taxable year. Such
persons are urged to consult their tax advisors before purchasing Shares or
ADSs.
Mexican Tax Considerations
Dividends, either in cash or in any other form, paid with respect to the
Shares (including Series B Shares and Series L Shares represented by ADSs) will
not be subject to any Mexican withholding or other tax, if the amount maintained
in the "cuenta de utilidad fiscal neta" or "previously taxed net earnings
account" ("CUFIN") exceeds the dividend payment to be made. However, if the
Mexican corporation's CUFIN balance is less than the dividend payment then the
Company will be required to pay a 34% income tax on the gross amount which
exceeds such balance (calculated as the amount of such excess times 1.515).
Taxation of Interest Payments
U.S. Tax Considerations
Generally, payments of interest on a Note will be taxable to a U.S. holder
as ordinary interest income at the time such payments are accrued or are
received, in accordance with the U.S. holder's regular method of accounting for
federal income tax purposes. Interest paid by the Company will constitute income
from sources outside the United States, and with certain exceptions, will be
"passive" or "financial services" income, which is treated separately from other
types of income for purposes of computing the foreign tax credit allowable to a
U.S. holder (as discussed below).
A non-U.S. holder generally will not be subject to U.S. federal income or
withholding tax on dividends received with respect to Notes. Special rules may
apply in the case of non-U.S. holders (i) that are engaged in a U.S. trade or
business, (ii) that are former citizens or long-term residents of the United
States, "controlled foreign corporations," "foreign personal holding companies,"
corporations which accumulate earnings to avoid U.S. Federal income tax, and
certain foreign charitable organizations, each within the meaning of the Code,
or (iii) certain non
36
<PAGE>
resident alien individuals who are present in the United States for 183 days or
more during a taxable year. Such persons are urged to consult their tax advisors
before purchasing Notes.
Interest paid on the Notes will constitute income from sources outside the
United States, and, with certain exceptions, will be grouped together with other
items of "passive" income, for purposes of computing the foreign tax credit
allowable to a U.S. holder. If the interest payments are subject to a
withholding tax imposed by a foreign country at a rate of 5 percent or more, the
interest may be considered "high withholding tax interest" for purposes of
computing the foreign tax credit. If a U.S. holder is predominantly engaged in
the active conduct of a banking, insurance, financing or similar business, the
interest may be considered "financial services income" for purposes of computing
the foreign tax credit.
A U.S. holder will be required to include foreign withholding taxes, if
any, imposed on payments on a Note in gross income as interest income. Such
treatment will be required regardless of whether, as will generally be true, the
Company is required to pay additional amounts so that the amount of Mexican
withholding taxes does not reduce the net amount actually received by the holder
of the Note. Subject to certain limitations, a U.S. holder may be entitled to a
credit against its U.S. federal income tax liability, or a deduction in
computing its U.S. federal taxable income, for foreign income taxes withheld by
the Company. A U.S. holder may be required to provide the Internal Revenue
Service ("IRS") with a certified copy of the receipt evidencing payment of
withholding tax imposed in respect of payments on the Notes in order to claim a
foreign tax credit in respect of such foreign withholding tax.
Mexican Tax Considerations
Under Mexico's Income Tax Law (the "Income Tax Law"), payments of interest
made by the Company in respect of the Notes to a foreign holder will be subject
to a Mexican withholding tax assessed at a rate of 15% considering that the
Notes have been (i) placed outside of Mexico through a bank or broker, and (ii)
registered with the Special section of the Mexican Registro Nacional de Valores
e Intermediarios. Pursuant to the Income Tax Law, during 1998, payments of
interest made by the Company in respect of the Notes to a foreign holder will be
subject to a reduced 4.9% Mexican withholding tax rate (the "Reduced Rate") if
(x) the effective beneficiary resides in a country which has entered into a
treaty to avoid double taxation with Mexico which is in effect, (y) the
requirements for the application of a lower rate established in the applicable
treaty are satisfied and (z) the requirements set forth in (i) and (ii) above
are satisfied.
Notwithstanding the foregoing, pursuant to general rules issued by the
Ministry of Finance and Public Credit (the "Reduced Rate Regulation"), payments
of interest made by the Company to foreign holders with respect to the Notes
will be subject to withholding taxes imposed at the Reduced Rate until March
1999 (or thereafter if, as has been the case in the past, the effectiveness of a
rule equivalent to the Reduced Rate Regulation is extended), regardless of the
place of residence or tax regime applicable to the foreign holder recipient of
such interest, if (a) the requirements set forth in (i) and (ii) above are
satified, (b) the Company timely files with the Ministry of Finance and Public
Credit certain information relating to the issuance of the Notes and the
corresponding Offering Memorandum, (c) the Company timely files with the
Ministry of Finance and Public Credit after the date of each interest payment
under the Notes, information representing that no party related to the Company
(which is defined under the Reduced Rate Regulation as parties other than (x)
shareholders of the Company that own, directly or indirectly, individually or
collectively with related persons (within the meaning of the Reduced Rate
Regulation) more than 10% of the voting stock of the Company, or (y)
corporations more than 20% of the stock of which is owned directly or
indirectly, individually or collectively, with related persons of the Company),
directly or indirectly, is the effective beneficiary of 5% or more of the
aggregate amount of each such interest payment, and (d) the Company maintains
records which evidence compliance with (c) above.
In the event the effectiveness of the Reduced Rate Regulation is not
extended beyond March 1999, other reduced rates of Mexican withholding income
tax may apply. In particular under the Tax Treaty, the rate would be reduced to
4.9% for certain holders that are residents of the United States (within the
meaning of the Tax Treaty) under certain circumstances contemplated therein.
37
<PAGE>
Interest paid on Notes held by a non-Mexican pension or retirement fund
will be exempt from Mexican withholding tax provided any such fund (i) has been
duly incorporated as such pursuant to the laws of its country of origin, (ii) is
exempt from income tax in such country, and (iii) has been registered with the
Ministry of Finance and Public Credit for that purpose.
Capital gains resulting from the sale or other disposition of the Notes by
a foreign holder will not be subject to Mexican income of other taxes.
There are no Mexican stamp, registration, or similar taxes payable by a
foreign holder in connection with the purchase, ownership or disposition of the
Notes. A foreign holder of Notes will be liable for Mexican estate, gift,
inheritance or similar tax with respect to the Notes.
Taxation of Capital Gains
U.S. Tax Considerations
Gain or loss recognized by a U.S. holder on the sale or other disposition
of the Notes, ADSs or Shares will be subject to U.S. federal income taxation as
capital gain or loss in an amount equal to the difference between such holder's
basis in the Notes, ADSs or the Shares and the amount realized on the
disposition. Such gain or loss will be treated as long-term capital gain or loss
if the Notes, ADSs or Shares have been held for more than one year on the date
of such sale or other disposition. Gain recognized by a U.S. holder on a sale or
other disposition of Notes, ADSs or Shares, including gain that arises because
the U.S. holder's basis in the Shares or the ADSs has been reduced because a
distribution is treated as a return of capital rather than as a dividend,
generally will be treated as U.S. source income for foreign tax credit purposes.
Consequently, in the event Mexico imposes a tax on capital gains realized by a
U.S. holder on a sale or other disposition of Notes, Shares or ADSs (see Mexican
Tax Considerations), such U.S. holder may not be able to obtain a credit for
such taxes against the U.S. holder's U.S. Federal income tax liability unless
(i) such gains are re-sourced as foreign source income under the Tax Treaty or
(ii) such holder can apply the credit against tax due on income from other
foreign sources. Deposits and withdrawals of Shares by U.S. holders in exchange
for ADSs will not result in the realization of gain or loss for U.S. federal
income tax purposes. U.S. holders that withdraw any Shares should consult their
own tax advisors regarding the treatment of any foreign currency gain or loss on
any Pesos received in respect of such Shares.
A non-U.S. holder of Notes, Shares or ADSs will generally not be subject
to U.S. federal income or withholding tax on gains realized on the sale of
Notes, Shares or ADSs. Special rules may apply in the case of non- U.S. holders
(i) that are engaged in a U.S. trade or business, (ii) that are former citizens
or long-term residents of the United States, "controlled foreign corporations,"
"foreign personal holding companies," corporations which accumulate earnings to
avoid U.S. Federal income tax, and certain foreign charitable organizations,
each within the meaning of the Code, or (iii) certain non resident alien
individuals who are present in the United States for 183 days or more during a
taxable year. Such persons are urged to consult their U.S. tax advisors before
purchasing Notes, Shares or ADSs.
Mexican Tax Considerations
The sale or other disposition of ADSs by holders who are nonresidents of
Mexico (as described below) will not be subject to Mexican tax. Deposits of
Shares in exchange for ADSs and withdrawals of Shares in exchange for ADSs will
not give rise to Mexican tax. Pursuant to the Tax Treaty, gain realized by
qualifying U.S. Holders from the sale or other disposition of ADSs, even if the
sale is not conducted through a recognized stock exchange or a highly
exchangeable market, will not be subject to Mexican income tax except that
Mexican taxes may apply if (i) 50% or more of the assets of the Company consist
of immovable property situated in Mexico, (ii) such U.S. Holder owned 25% or
more of the capital of the Company, directly or indirectly, during the 12-month
period preceding such disposition, or (iii) the gain is attributable to a
permanent establishment or fixed base of the U.S. Holder in Mexico.
Gain realized by a nonresident of Mexico on the sale or other disposition
of stock of a Mexican corporation (like the Company) through a recognized stock
exchange or a highly exchangeable market is exempt from Mexican
38
<PAGE>
income tax if the stock is on the list of publicly traded shares published by
the Ministry of Finance in the Official Gazette. The Shares are included on that
list. Accordingly, gain realized by a nonresident holder on the sale or other
disposition of Shares through a recognized stock exchange or a highly
exchangeable market, such as the Mexican Stock Exchange and the New York Stock
Exchange, is exempt from Mexican income tax.
Under current law, gains realized by a nonresident holder on the sale or
disposition of Shares not conducted through a recognized stock exchange or a
highly exchangeable market generally are subject to a Mexican tax at a rate of
20% of the gross sale price. However, if the holder is a resident of a country
which is not considered to be a low tax rate country (by reference to a list of
low rate countries published by the Mexican Ministry of Finance and Public
Credit), the holder may elect to designate a resident of Mexico as its
representative, in which case the tax generally would be 30% of the gain on such
disposition. Pursuant to the Tax Treaty, the gain realized by a U.S. holder from
the sale or other disposition of Shares may not be subject to Mexican taxes if
the applicable conditions contemplated by the Tax Treaty are met. Brokerage
commissions paid in connection with transactions on the Mexican Stock Exchange
are subject to a value added tax of 15%.
For purposes of Mexican taxation, an individual is a resident of Mexico if
he or she has established his or her home in Mexico, unless he or she has
resided in another country for more than 183 calendar days during a year and can
demonstrate that he or she had become a resident of that country for tax
purposes. A Mexican citizen with his or her domicile in Mexico and a legal
entity established under Mexican law are presumed to be residents of Mexico
unless such person or entity can demonstrate otherwise. If a legal entity has a
permanent establishment in Mexico, such permanent establishment shall be
required to pay taxes in Mexico in accordance with relevant tax provisions.
Other Mexican Taxes
There are no inheritance or succession taxes applicable to the ownership,
transfer or disposition of ADSs or Shares. There are no Mexican stamp, issuer,
registration or similar taxes or duties payable by holders of ADSs or Shares.
Treaties to prevent double taxation have been executed between Mexico and
several countries. This summary does not discuss the effects of the treaties
entered into by, or effective with respect to, Mexico.
Information Reporting and Backup Withholding
Each U.S. payor making payments in respect of Shares or ADSs will
generally be required to provide the IRS with certain information, including the
name, address and taxpayer identification number of the beneficial owner of
Notes, Shares or ADSs, and the aggregate amount of interest and dividends paid
to such beneficial owner during the calendar year. These reporting requirements,
however, do not apply with respect to certain beneficial owners, including
corporations, securities broker-dealers, other financial institutions,
tax-exempt organizations, qualified pension and profit sharing trusts and
individual retirement accounts.
In the event that a beneficial owner of Notes, Shares or ADSs fails to
establish its exemption from such information reporting requirements or is
subject to the reporting requirements described above and fails to supply its
correct taxpayer identification number in the manner required by applicable law,
or underreports its tax liability, as the case may be, the U.S. payor making
payments in respect of Notes, Shares or ADSs may be required to "backup"
withhold a tax equal to 31% of each payment with respect to Notes, Shares or
ADSs. This backup withholding tax is not an additional tax and may be credited
against the beneficial owner's U.S. Federal income tax liability if the required
information is furnished to the IRS. For those non-U.S. holders who are not
exempt recipients, compliance with the identification procedures contained in
IRS Form W-8 will establish an exemption from information reporting and backup
withholding.
ITEM 8. Selected Financial Data
The following tables present selected consolidated financial information
for Iusacell and its consolidated subsidiaries. This information has been
derived from, and should be read in conjunction with, the audited
39
<PAGE>
consolidated financial statements of Iusacell as of December 31, 1997 and 1996
and for the years ended December 31, 1997, 1996 and 1995 (the "Consolidated
Financial Statements") appearing elsewhere in this Annual Report.
The financial statements have been prepared in accordance with Mexican
GAAP, which differs in significant respects from U.S. GAAP. Pursuant to Mexican
GAAP, the financial statements and the selected financial data set forth below
have been prepared in accordance with Bulletin B-10 of the Mexican Institute of
Public Accountants, as amended ("Bulletin B-10"), which provides for the
recognition of certain effects of inflation. Until December 31, 1996, Bulletin
B-10 required the Company to restate nonmonetary assets at current replacement
cost, to restate nonmonetary liabilities using the Indice Nacional de Precios al
Consumidor (the "INPC" or National Consumer Price Index), to restate the
components of shareholders' equity using the INPC and to record gains or losses
in purchasing power from holding monetary liabilities or assets. Beginning on
January 1, 1997, Bulletin B-10 now requires the Company to restate nonmonetary
assets (other than inventory) using the INPC. Bulletin B-10 also requires
restatement of all financial statements to constant Pesos as of the date of the
most recent balance sheet presented. Accordingly, all data in the financial
statements and in the selected financial data set forth below have been restated
in constant Pesos as of December 31, 1997. See Note 4 to the Consolidated
Financial Statements. The effect of these inflation accounting principles has
not been reversed in the reconciliation to U.S. GAAP. Note 19 to the
Consolidated Financial Statements contains a reconciliation of the Company's net
income and stockholders' equity to U.S. GAAP.
The Dollar amounts provided below are translations from the Peso amounts,
solely for the convenience of the reader, at the Noon Buying Rate for December
31, 1997 of Ps.8.0700 to U.S.$1.00. These translations should not be construed
as representations that the Peso amounts actually represent such Dollar amounts
or could be converted into Dollars at the rate indicated as of any dates
mentioned herein.
40
<PAGE>
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
-----------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997
------------- ------------- ------------- ------------- ------------- --------------
(Millions of constant December 31, 1997 Pesos, except ratios (Millions of
and subscriber data)(1) U.S. dollars,
except ratios
and
subscriber
data)(2)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Services................................ Ps. 1,559,446 Ps. 2,177,833 Ps. 1,756,274 Ps. 1,591,637 Ps. 1,543,132 U.S.$ 191,218
Telephone equipment sales
and other ............................ 139,411 297,104 312,936 256,728 317,354 39,325
------------- ------------- ------------- ------------- ------------- -------------
Total ................................ 1,698,857 2,474,937 2,069,210 1,848,365 1,860,486 230,543
Cost of sales:
Cost of services ....................... 383,962 632,917 643,895 583,533 514,215 63,719
Cost of telephone
equipment and other .................. 123,183 146,078 173,690 143,129 201,447 24,962
------------- ------------- ------------- ------------- ------------- -------------
Total ................................ 507,145 778,995 817,585 726,662 715,662 88,681
Gross profit ............................. 1,191,712 1,695,942 1,251,625 1,121,703 1,144,824 141,862
Operating expenses ....................... 682,844 1,053,625 913,943 800,763 743,777 92,166
Depreciation & amortization .............. 262,833 634,065 728,100 657,314 581,926 72,110
Operating profit (loss) .................. 246,035 8,252 (390,418) (336,374) (180,879) (22,414)
Integral financing cost
(gain):
Interest expense, net ................... 321,270 221,812 188,354 305,573 248,200 30,756
Foreign exchange (gain)
loss, net .............................. 20,559 570,389 766,614 (67,531) 48,464 6,005
Gain on net monetary
position ............................... (131,604) (54,326) (545,261) (378,659) (292,724) (36,273)
Financing cost incurred in
the acquisition of Regions
5, 6 and 7 ............................. 253,269 0 0 0 0 0
------------- ------------- ------------- ------------- ------------- -------------
Total ................................ 463,494 737,875 409,707 (140,617) 3,940 488
Equity participation in net
income (loss) of associated
companies ............................... 7,971 3,369 (42,554) (6,516) 157,688 19,540
Other income ............................. 3,955 0 0 0 0 0
Income (loss) from
continuing
operations before asset tax,
employee profit sharing,
minority interest and
extraordinary item ...................... (205,533) (726,254) (842,679) (202,273) (27,131) (3,362)
Provisions for:
Asset tax .............................. 24,904 35,292 31,630 38,267 45,335 5,618
Employee profit sharing ................ 0 704 2,263 0 0 0
------------- ------------- ------------- ------------- ------------- -------------
Total ................................ 24,904 35,996 33,893 38,267 45,335 5,618
Income (loss)
before minority
interest and
extraordinary item ..................... (230,437) (762,250) (876,572) (240,540) (72,466) (8,980)
Minority interest ........................ 7,476 49 40,258 3,456 207 26
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before
extraordinary item ...................... (222,959) (762,201) (836,314) (237,084) (72,259) (8,954)
Extraordinary item(3) .................... 0 0 0 (157,850) 0 0
Net income (loss)......................... Ps. (222,959) Ps. (762,201) Ps. (836,314) Ps. (394,934) Ps. (72,259) U.S.$ (8,954)
============= ============= ============= ============== ============= =============
U.S. GAAP:(4)
Total revenues............................ Ps. 1,698,857 Ps. 2,474,937 Ps. 2,069,210 Ps. 1,949,598 1,946,988 U.S.$ 241,262
Operating profit (loss)................... 246,035 8,252 (390,418) (691,848) (1,240,538) (153,722)
------------- ------------- ------------- ------------- ------------- -------------
Net Income (loss)......................... Ps. (102,415) Ps. (744,812) Ps. (394,912) Ps. (154,094) (679,030) U.S.$ (84,142)
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
As of and for the Year Ended December 31,
-----------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997
------------- ------------- ------------- ------------- ------------- --------------
(Millions of constant December 31, 1997 Pesos, except ratios (Millions of
and subscriber data)(1) U.S. dollars,
except ratios
and
subscriber
data)(2)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Mexican GAAP:
Working capital................... Ps. 213,518 Ps. (414,766) Ps.(1,570,339) Ps.(1,771,866) Ps. (260,486) U.S.$(32,278)
Property & equipment, net ........ 3,124,070 4,866,180 4,659,763 3,595,776 3,014,660 373,564
Total assets ..................... 6,888,192 8,575,635 7,920,799 6,480,760 6,675,195 827,162
Total debt ....................... 2,053,463 1,571,191 1,804,648 1,527,180 2,221,500 275,279
Stockholders' equity ............. 4,449,566 6,102,675 4,770,538 3,624,574 3,328,343 412,434
U.S. GAAP:(4)
Working capital .................. N/A N/A 1,817,766 (1,900,736) (419,878) (52,030)
Property & equipment, net ........ 3,124,070 4,866,180 4,659,763 3,595,776 3,014,660 373,564
Total assets ..................... 6,835,172 8,548,825 8,625,674 7,206,409 7,338,439 909,348
Total debt ....................... 2,053,463 1,571,191 1,804,648 1,527,180 2,221,500 275,279
Stockholders' equity ............. 4,383,041 5,907,189 4,034,722 3,275,157 3,279,486 406,380
Subscriber Data:
POPs ............................. 60,301,858 61,464,945 63,447,714 64,782,192 66,076,930
Subscribers(5)
Contract ....................... 127,361 194,723 208,802 159,144 199,964
Prepay ......................... 0 0 1,399 73,762 200,159
---------- ---------- ---------- ---------- ----------
Total ........................ 127,361 194,723 210,201 232,906 400,123
Gross subscriber additions ....... 68,551 117,539 103,733 119,968 167,217
Average subscribers(6) ........... 121,100 161,042 202,462 221,554 387,765
Contract churn(7) ................ 3.66% 2.67% 3.62% 4.28% 2.95%
Penetration(8) ................... 0.21% 0.32% 0.33% 0.36% 0.61%
Average monthly MOUs per
subscriber(9) .................... 211 179 140 118 100
Nominal average monthly
revenue per subscriber(10) ...... Ps. 638 Ps. 595 Ps. 464 Ps. 492 Ps. 495
</TABLE>
- ----------
(1) Pursuant to Mexican GAAP, financial data for all periods in the financial
statements included herein have, unless otherwise indicated elsewhere
herein, been restated in constant December 31, 1997 pesos. Restatement
into December 31, 1997 Pesos is made by multiplying the relevant nominal
Peso amount by the inflation index for the period between the end of the
period to which such nominal peso amount relates and December 31, 1997.
The inflation index used in this Annual Report for 1993 figures is 2.4041,
for 1994 figures is 2.2457, for 1995 figures is 1.4778 and for 1996 is
1.1572.
(2) Peso amounts were converted to U.S. dollars at the exchange rate of
Ps.8.0700 per U.S.$1.00 reported by the Federal Reserve Bank of New York
as its noon buying rate for Pesos on December 31, 1997. Such conversions
should not be construed as representations that the Peso amounts actually
represent such U.S. dollar amounts or could be converted into U.S. dollars
at the rate indicated, or at all.
(3) For 1996, the extraordinary item represents restructuring expenses
associated with the reorganization of and change in management control of
the Company, the write-off of certain obsolete network equipment and an
additional reserve for doubtful accounts.
(4) See Note 19 to the Consolidated Financial Statements and "Item
9--Management's Discussion and Analysis of Financial Condition and Results
of Operations--U.S. GAAP Reconciliation" for a discussion of certain
differences between U.S. GAAP and Mexican GAAP.
(5) Subscribers refers to the Company's subscribers in its operating regions
at the end of the respective periods. A prepay customer is included as a
subscriber if, at the end of the period, the customer's card has not yet
expired.
(6) Average subscribers represents the rolling monthly average number of
subscribers for the respective periods.
(7) Contract churn for a given period is calculated by dividing for each month
in that period the total number of contract subscribers disconnected in
such month by the number of contract subscribers at the beginning of such
month and dividing the sum of the resulting quotients for all months in
such period by the number of months in such period. For a discussion of
prepay turnover, see "Item 9--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Increase in Prepay
Subscriber Base"
(8) Penetration represents the end of period subscribers divided by the end of
period POPs.
(9) Average monthly MOUs (minutes of use) per subscriber is calculated by
dividing the total minutes of use for the respective period by the number
of average subscribers for the respective period dividing the result by
twelve.
(10) Nominal average monthly cellular revenue per subscriber is calculated by
dividing the total cellular service revenue for the respective period by
the average number of subscribers for the respective period and dividing
the quotient by twelve.
42
<PAGE>
Exchange Rates
The following table sets forth, for the periods indicated, the period-end,
average, high and low free market rate or, as the case may be, Noon Buying Rate,
all expressed in nominal Pesos per U.S. Dollar. The Noon Buying Rate at December
31, 1997 and at June 25, 1998 was Ps.8.0700 and Ps. 8.9950, respectively, per
U.S.$1.00.
Free Market/Noon Buying Rate(1)
--------------------------------------------
Year Ended December 31, High Low Average(2) Period End
----------------------- -------- -------- --------- ------------
1993............................. 3.240 3.094 3.109 3.108
1994............................. 5.750 3.105 3.479 5.000
1995............................. 8.050 5.270 6.526 7.740
1996............................. 8.045 7.325 7.635 7.881
1997............................. 8.410 7.717 7.917 8.070
- ----------
(1) Source: Banco de Mexico through November 7, 1993; Federal Reserve Bank of
New York since November 8, 1993. The Federal Reserve Bank of New York
commenced publication of the Noon Buying Rate on November 8, 1993.
(2) Average of month-end rates.
Fluctuations in the exchange rate between the Peso and the U.S. Dollar
will affect the ability of the Company to meet its U.S. Dollar-denominated
obligations.
The Mexican economy has suffered balance of payment deficits and shortages
in foreign exchange reserves. While the Mexican government does not currently
restrict the ability of Mexican or foreign persons or entities to convert pesos
to U.S. Dollars, no assurance can be given that the Mexican government will not
institute a restrictive exchange control policy in the future. Any such
restrictive exchange control policy could adversely affect the Company's ability
to make payments in U.S. Dollars, and could also have a material adverse effect
on the Company's business, financial condition and results of operations.
ITEM 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All peso amounts discussed herein are presented in thousands of constant
December 31, 1997 pesos in accordance with Mexican GAAP.
General
The following discussion and analysis is intended to facilitate an
understanding and assessment of significant changes and trends in the historical
results of operations and financial condition of the Company and factors
affecting the Company's financial resources. It should be read in conjunction
with the audited consolidated financial statements as of December 31, 1996 and
1997 and for the fiscal years ended December 31, 1995, 1996 and 1997 (the
"Consolidated Financial Statements") and the notes thereto appearing elsewhere
in this Annual Report. The Consolidated Financial Statements have been prepared
in accordance with Mexican GAAP, which differs in significant respects from U.S.
GAAP. Note 19 to the Consolidated Financial Statements provides a description of
the principal differences between Mexican GAAP and U.S. GAAP as they relate to
the Company, and a reconciliation to U.S. GAAP of the Company's net income and
total stockholders' equity as of and for the years ended December 31, 1995, 1996
and 1997.
As a Mexican company, Iusacell maintains its financial records in Pesos.
Pursuant to Bulletin B-10, "Recognition of the Effects of Inflation on Financial
Information," and Bulletin B-12, "Statement of Changes in Financial Position,"
issued by the Mexican Institute of Public Accountants, the Company's financial
statements are reported in period-end Pesos to adjust for the interperiod
effects of inflation. The presentation of financial information in period-end,
or constant, currency units is intended to eliminate the distorting effect of
inflation on the financial statements and to permit comparisons across
comparable periods in comparable monetary units. Bulletin B-10 requires the
Company to restate nonmonetary assets (other than inventory), nonmonetary
liabilities and the components of stockholders' equity using the INPC. The
effects of these inflation accounting principles have not been eliminated in the
reconciliation to U.S. GAAP. See Note 19 to the Consolidated Financial
Statements.
43
<PAGE>
Except where otherwise indicated, financial data for all periods in the
Consolidated Financial Statements and throughout this Annual Report have been
restated in constant Pesos as of December 31, 1997, in accordance with the fifth
amendment to Bulletin B-10. References in this Annual Report to "real" amounts
are to inflation-adjusted Pesos and references to "nominal" amounts are to
unadjusted historical Pesos. In calendar years 1995, 1996 and 1997, the rates of
inflation in Mexico, as measured by changes in the INPC, were 52.0%, 27.7% and
15.7%, respectively. The inflation index used for 1995 figures is 1.4778 and for
1996 figures is 1.1572.
In reporting under Mexican GAAP and in accordance with Bulletin B-10, the
Company is required to quantify all financial effects of operating and financing
the business under inflationary conditions. For presentation purposes, "integral
financial cost (gain)" refers to the combined financial effects of: (i) net
interest expense or interest income; (ii) net foreign exchange gains or losses;
and (iii) net gains or losses on monetary position. Net foreign exchange gains
or losses reflect the impact of changes in foreign exchange rates on assets and
liabilities denominated in currencies other than Pesos. A foreign exchange loss
arises if a liability is denominated in a foreign currency which appreciates
relative to the Peso between the time the liability is incurred and the date it
is repaid, as the appreciation of the foreign currency results in an increase in
the amount of Pesos which must be exchanged to repay the specified amount of the
foreign currency liability. The gain or loss on monetary position refers to the
gains and losses realized from holding net monetary assets or liabilities and
reflects the impact of inflation on monetary assets and liabilities. For
example, a gain on monetary position results from holding net monetary
liabilities in Pesos during periods of inflation, as the purchasing power of the
Peso declines over time.
Devaluation and Inflation
On December 20, 1994, the Mexican government responded to exchange rate
pressures by increasing the upper limit of the then existing free market Peso/US
dollar exchange rate band by 15% and, two days later, by eliminating the band to
allow the Peso to fluctuate freely against the U.S. dollar. This resulted in a
major devaluation of the Peso relative to the U.S. dollar. Where the Noon Buying
Rate had been Ps.3.4662 to U.S.$1.00 on December 19, 1994, by December 31, 1994
the Noon Buying Rate had fallen to Ps.5.0000 to U.S.$1.00, representing a 44.3%
devaluation. The Peso continued to decline against the U.S. dollar during 1995,
closing at a Noon Buying Rate of Ps.7.7400 to U.S.$1.00 on December 31, 1995,
which represented a 54.8% devaluation relative to the U.S. dollar for the year.
In 1996, the Peso revalued as compared to the U.S. Dollar during the first half
of the year, but closed at Ps.7.8810 to U.S.$1.00 at December 31, 1996,
representing a 1.8% decline of the Peso as compared to December 31, 1995. The
Peso also revalued as compared to the U.S. dollar for the first three quarters
of 1997, but closed at Ps.8.0700 to U.S.$1.00 at December 31, 1997, representing
a 2.4% decline of the Peso as compared to December 31, 1996. Cumulatively, the
value of the Peso has declined 132.8% and 4.3% from December 19, 1994 and
December 31, 1995, respectively, to December 31, 1997. On June 25, 1998, the
Noon Buying Rate was Ps.8.9950 to U.S.$1.00.
The Mexican government's response to this devaluation and ensuing high
levels of inflation was to enact a series of fiscal and monetary measures which,
among other things, restricted credit and the money supply, raised prices for
public goods and services, and restricted federal spending. As a result, the
Mexican economy experienced a recession in 1995: GDP contracted by 6.2% in 1995,
although it has since grown by 5.1% in 1996 and 7.0% in 1997.
Impact on the Company's Results of Operations
The general economic conditions in Mexico resulting from the devaluation
of the Peso and the resulting inflation have had an overall negative impact on
the Company's results of operations primarily as a result of the following
factors:
(i) The devaluation resulted in a significant decrease in the purchasing
power of Mexican consumers, resulting in a decrease in the demand for cellular
telephony.
44
<PAGE>
(ii) Due to competitive market conditions and the overall state of the
Mexican economy, until mid-1997 the Company was not able to increase its prices
in line with the significant inflation in the economy.
(iii) The significant inflation led to an upward restatement of the
Company's assets and, therefore, resulted in a substantial increase in
depreciation and amortization expense in 1995, which had an adverse impact on
the Company's earnings. In 1996, while there was still significant inflation,
depreciation and amortization expense decreased as the result of a substantial
reduction in capital expenditures and the reduction in the carrying value of
dollar-acquired non-monetary assets in accordance with the rules of the Mexican
Stock Exchange (which in turn resulted from the fact that the rate of inflation
exceeded that of devaluation). Depreciation and amortization also decreased in
1997 as capital expenditures did not substantially increase until the second
half of the year and as a result of the reduction in the carrying value of
dollar-acquired non-monetary assets in accordance with the rules of the Mexican
Stock Exchange as the rate of inflation again exceeded that of devaluation.
(iv) The significant devaluation of the Peso as compared to the U.S.
dollar in 1995 resulted in the recording of exchange losses given the Company's
net U.S. dollar liability position. In 1996 and 1997, the Company recorded a
gain because of the appreciation of the Peso against the U.S. dollar during a
significant portion of the year.
(v) A portion of the Company's costs and expenses (e.g., depreciation and
amortization and interest expense) is denominated in U.S. dollars or calculated
on the basis of pesos/U.S. dollar devaluation, while almost all of the Company's
revenues are denominated in Pesos, which, in a period of Peso devaluation, had a
negative impact on the Company's margins.
Impact on the Company's Financial Condition
The general economic conditions in Mexico resulting from the devaluation
of the Peso and the resulting inflation have had an overall negative impact on
the Company's financial condition as a result of the following factors:
(i) The majority of the Company's indebtedness is denominated in U.S.
dollars. As a result, the Peso carrying amount of such debt increased to reflect
the additional Pesos required to meet such foreign liabilities.
(ii) Whenever the inflation rate exceeds the rate of devaluation, as was
the case in 1996 and 1997, the carrying value of the Company's assets purchased
in foreign currencies will be reduced. This is because, assuming the foreign
currency value of a given asset remains unchanged between periods, the value of
such asset for the prior period is restated upwards using the inflation rate,
while the valuation of such asset for the current period is restated using a
foreign exchange rate which increased at a lower rate.
Increase in Prepay Subscriber Base
In June 1996, the Company introduced its Control Plus prepay program in
response to economic conditions in Mexico and to a prepay cellular card program
offered by Telcel. In September 1997, the Company introduced in Region 9 its
next-generation, automated VIVA prepay program which, by the end of 1998, will
completely replace Control Plus in all the Company's markets.
The Control Plus and VIVA programs have been extremely popular, with
prepay customers increasing from an insignificant percentage of the Company's
subscriber base in June 1996 (14,675 subscribers) to 31.7% at December 31, 1996
(73,762 subscribers) and to 50.0% at December 31, 1997 (200,159 subscribers).
Prepay customers comprised 76.9% of the Company's new subscriber base growth in
1997 and the Company expects that prepay customers will continue to comprise the
substantial majority of new subscriber base growth. As a result, the Company
expects that the percentage of its customers who subscribe to cellular service
on a prepay basis will continue to increase.
45
<PAGE>
In 1996, the Company experienced a 18.3% reduction in the number of
contract customers, who generate higher average revenue per subscriber than do
prepay customers. Many of these contract customers migrated to the Company's
prepay program, resulting in lower revenues and cash flow from these customers.
In 1997, the Company experienced a 25.6% increase in the number of contract
customers, with minimal migration by contract customers to prepay programs. The
Company anticipates further growth in the number of contract subscribers.
Prepay customers, on average, have substantially lower minutes of use than
contract customers and do not pay monthly fees and, as a result, generate
substantially lower average monthly revenues per customer -- even though prepay
plans involve higher per minute airtime charges than the average contract plan.
Consequently, as the percentage of prepay customers to the Company's total
subscribers continues to increase, the Company expects that average minutes of
use per customer and average monthly revenues per customer will continue to
decrease.
Digitalization
In December 1997, the Company entered into an agreement with subsidiaries
of Lucent Technologies, Inc. to swap-out its existing analog network for a
Lucent analog network overlaid with a CDMA digital network. Since the Company
will receive a trade-in credit from Lucent for the book value of the swapped-out
network equipment, under U.S. GAAP the Company will not be required to write off
any of such swapped-out assets.
Digital and dual-mode (i.e., digital-analog) handsets are substantially
more expensive than analog handsets. As a result, the Company expects that the
subsidies it provides for handsets will also increase as the Company migrates a
portion of its analog customers to digital service and subscribes new digital
customers. These new digital customers will be contract subscribers, since the
Company does not intend to offer a digital prepay product in the near term.
Local Telephony in the 450 MHz Frequency Band
The Company has experienced substantial delays in obtaining the necessary
governmental approvals for its full scale commercial launch of local wireless
service in the 450 MHz frequency band. The SCT never approved the technical and
economic plans for such service, which the Company first submitted to the SCT in
November 1994. In June 1997, however, the SCT and the Company reached agreement
on a process by which the Company could obtain a concession issued and
recognized by the SCT to provide local wireless service in the 450 MHz frequency
band. Under this agreement, Iusacell would convert and consolidate certain of
its existing concessioned radiotelephony frequencies into 450 MHz spectrum in
Regions 4, 5, 6, 7 and 9 and would have a right of first refusal to acquire the
concessions to provide local wireless service in such regions over such
frequencies at prices derived from the prices of the winning bids in the
auctions for 450 MHz and 1.9 GHz (PCS) frequency bands, which concluded in May
1998. Based on the results of these auctions, Iusacell would be required to pay
approximately US$2.25 million for such concessions, in addition to the
coverage/build-out requirements relating thereto, which have not yet been
defined by the SCT and COFETEL and may be substantial.
As a result of the delays experienced by the Company and the uncertainty
relating to the Company's ability, at a commercially reasonable cost, to
implement full scale local wireless service in the 450 MHz frequency band, the
Company is exploring alternatives for providing local telephony service,
including fixed or limited zone wireless service in the 800 MHz (cellular) band
in Regions 5, 6,7 and 9 and in the 1.9 GHz (PCS) band in Regions 1 and 4. At
this time, however, the Company has no made a decision as to whether it will
acquire the concessions to provide local wireless telephony in Regions 4, 5, 6,
7 and 9 over the 450 MHz frequency band or whether it will, in addition or
substitution therefor, pursue an alternative means to provide local telephony
services. If the Company were to determine not to continue to pursue local
wireless service in the 450 MHz frequency band, the Company would record
substantial non-cash losses.
46
<PAGE>
Since the Company has determined to swap-out its existing analog cellular
network for a Lucent analog-digital cellular network, less than 10% of the fixed
assets currently employed in the Company's 450 MHz trial service could be used
in its cellular operations (with the cost of each such asset being depreciated
over its remaining useful life). If such remaining fixed assets are sold for
less than their book value, the Company would be required to write off such
assets to the extent of the deficiency between their book value and the sale
proceeds. At December 31, 1997, the book value of the fixed assets (including
capitalized interest) deployed in the Company's 450 MHz local wireless service
totaled Ps.643.6 million (U.S.$79.7 million).
In addition, if the Company were to discontinue the 450 MHz local wireless
project, Iusacell would also be required to write off the pre-operating expenses
(net of pre-operating revenues) from the project that the Company has been
capitalizing in accordance with Mexican GAAP. At December 31, 1997, a total of
Ps. 246.9 million (U.S.$ 30.6 million) of such capitalized pre-operating
expenses (net of pre-operating revenues) for the 450 MHz local wireless project
were included in "Other assets" on the Company's balance sheet.
Between the write-off of fixed assets (assuming 90% of them were not able
to be used or sold) and the write-off of net capitalized pre-operating expenses,
the Company's total non-cash loss in the event of a discontinuation of the 450
MHz local wireless project would have been Ps.826.1 million (U.S.$102.4 million)
at December 31, 1997. See Note 18 to the Consolidated Financial Statements.
The Company was party to certain agreements regarding the supply and
servicing of equipment for its 450 MHz local wireless service. These agreements
terminated in 1997, and there could be substantial costs arising from the
termination of these agreements in addition to the non-cash losses described
above. In addition, the Company could be required to write off some or all of a
U.S.$15 million advance made in 1994 in respect of network infrastructure that
was never ordered to the extent such advance is not refunded to the Company. See
"Item 3--Legal Proceedings." Finally, the Company could be required to purchase
approximately U.S.$2.1 million in handsets that were ordered and manufactured
but not yet paid for or delivered.
Year 2000 Compliance
The Company has initiated a company-wide program to identify and address
the impact of the onset of the Year 2000 on its operations. This program
includes steps to (i) identify hardware and equipment issues and to identify
each item of firmware and each software application or element thereof that will
require modification or replacement to correctly process and store dates and
date-related data prior to, through and subsequent to January 1, 2000, (ii)
develop a plan for any such required modification or replacement, (iii)
implement such corrective action plan, and (iv) test the modified or replaced
application.
The Company has substantially completed the identification of the scope of
its Year 2000 problem. The Company expects that all the required modifications
or replacements will be implemented by the first half of 1999 and that testing
will be conducted throughout the remainder of 1998 and 1999. A number of the
necessary changes are being made as part of larger systems upgrades or
replacements; in particular, the replacement of the Company's existing analog
cellular network with a new analog and digital cellular network and the
replacement of the Company's several existing billing systems with a new single
convergent billing and customer care system.
While the Company believes that it is taking appropriate and timely steps
to ensure Year 2000 compliance, its operations are dependent on vendor and third
party compliance to some extent. The Company is requiring all its equipment,
systems and software vendors to represent and warrant that the services and
products provided are, or will be, Year 2000 compliant on a timeline consistent
with the Company's objectives. However, the Company cannot provide any assurance
that all significant third parties will implement timely corrective measures
necessary on their part to prevent disruption of the Company's services. In that
event, the Company will implement contingency plans to minimize and eliminate
such disruption.
For the years 1998 and 1999, the Company's preliminary estimate is that
total costs ranging between Ps. 72.6 million and Ps. 121.1 million will be
incurred to prepare its equipment and its software applications for Year 2000.
47
<PAGE>
These costs are associated with both internal and external staffing resources, a
portion of which will not be incremental, but rather will represent the
redeployment of existing information technology resources. However, because of
the complexity of the issue and possible unidentified risks, actual costs may
vary from this estimate. Failure by the Company or vendors to complete the Year
2000 corrective work in a timely manner could result in a disruption of the
Company's services and could have an adverse effect on the Company's future
financial results.
Other Material Trends and Contingencies
The Company's financial condition and results of operations could also be
materially affected by the following events and developments:
Negative Economic Conditions
The Asian financial crisis which began in October 1997, together with the
recent weakness in the price of oil, Mexico's principal export, have contributed
to renewed weakness in the Peso. From October 24, 1997, the day prior to the
collapse of Malaysia's currency, the Noon Buying Rate of the Peso has declined
from Ps. 7.8400 per U.S.$1.00 to Ps. 8.9950 per U.S.$1.00 on June 25, 1998,
representing a 14.73% devaluation relative to the U.S. dollar in less than eight
months. The price of Mexican crude oil has declined from a blended rate of
U.S.$16.06 per barrel in November 1997 to U.S.$9.67 per barrel in March 1998.
The Mexican government has responded to revenue shortfalls from the oil sector
with new cutbacks in federal spending. Recent press reports also suggest that
consumer spending, which had been recovering through the first quarter of 1998,
may have suffered a setback. Although the exact correlation between general
government and consumer spending and wireless telephony purchases and usage in
Mexico is unknown, these economic conditions may negatively affect the Company's
subscriber growth rate and the willingness of the Company's consumers to use
their phones, negatively affecting average monthly revenues per subscriber.
These economic conditions may also negatively impact the availability and cost
of funds in the capital markets.
Price Increases and Rollbacks
The Company has attempted to exercise price leadership in the Mexican
cellular market, with a strategy of having its prices keep pace with inflation
if economic and competitive conditions permit. During the first half of 1997,
this strategy was effectively implemented through weighted average price
increases of 15% in April 1997 for the per minute airtime price on its contract
and prepay plans, and 8.3% in May 1997 for the fixed monthly charge on all its
contract plans. See "Item 1--Description of Business--Marketing
Strategy--Pricing." In October 1997, however, the Company initiated pricing
discounts of between 25% and 50% for the cost of incoming cellular calls, in
response to pricing actions by Telcel and as a means of boosting traffic
volumes, and ultimately average revenue per subscriber. Moreover, in October
1997 the Company adjusted airtime prices downward by 4.6% on a weighted average
basis and in November 1997 further decreased airtime charges on its Ganador plan
by 1.0%, in each case in order to maintain competitiveness.
In late March 1998, the Company raised airtime prices approximately 7.9%
for contract plans and 13.6% for prepay plans. Because of market and competitive
conditions, however, this increase was partially rolled back in early May (for
both contract and prepay customers) and, in late May, the remainder of the price
increase for contract plans was reversed. As a result, however, a 9.9% increase
for prepay remained.
The Company's revenues will be adversely affected to the extent that the
Company's price increases cannot keep pace with inflation.
New Competition
As a direct result of the spectrum auctions organized by the COFETEL which
concluded in May 1998, the Company, by the first quarter of 1999, should be
facing additional mobile wireless competition operating in the 1.9 GHz (PCS)
spectrum and additional local telephony competition operating in the 3.1-3.4 GHz
(Ionica)
48
<PAGE>
spectrum. Although the specific consequences for the Company of this new
competition are difficult to predict, the experience of other countries suggests
that, although demand for wireless telephony services will increase, prices will
experience downward pressure, especially at the time of market entry.
Regulatory Developments
The Mexican authorities will likely resolve several critical regulatory
issues in 1998 which may have a material effect on the financial condition and
results of operations of the Company. The Mexican government will determine the
fees that the Company will have to pay Telmex, the predominant wireline
operator, for interconnection services to Telmex's network (currently Ps. 0.31
per minute), as well as the degree of symmetry of the reciprocity in the
interconnection fee payable by Telmex to the Company for the interconnection
services that the Company provides Telmex (currently there is no reciprocity).
The Company believes that it will benefit from having to pay Telmex lower
interconnection rates and by having Telmex pay it interconnection fees with the
greatest symmetrical reciprocity possible.
The Mexican government may also determine the timing and terms under which
the calling party pays modality will be implemented. Countries that have
implemented calling party pays (that is, a cellular telephony payment scheme
similar to the existing wireline payment scheme, whereby the party that places a
call to a cellular telephone, and not the cellular subscriber receiving the
call, will be billed for the recipient's airtime charges corresponding to that
call) have experienced at least a 30% increase in usage of wireless telephony.
However, the extent to which calling party pays will be profitable for the
Company will depend on the fees Telmex will be permitted to charge for billing
and collection services. Moreover, in the event that calling party pays causes a
surge in cellular traffic, the Company may need to incur substantial additional
capital expenditures to augment its capacity in order to handle such greater
traffic.
In February 1998, the SCT authorized a modification of the Company's
concession to provide long distance services, modifying coverage requirements
and permitting the use of non-fiber optic technology for transmission purposes.
Together with a fiber-swapping agreement reached by the Company with one of its
competitors, the modified concession permits a more efficient, more
technologically flexible long distance network and eliminates more than U.S.$200
million in capital expenditure requirements. In 1998, the SCT and the COFETEL
may also determine how much, through what means and over how much time long
distance concessionaires, including Iusatel, will pay for the special projects
implemented by Telmex prior to January 1997 to permit competition in long
distance telephony, including the numbering and signalling plans and
expenditures to facilitate interconnection. In May 1997, the COFETEL issued a
ruling mandating that the total amount reimbursable to Telmex for such special
projects was U.S.$422 million. Several long distance concessionaires objected to
the ruling, and the COFETEL is reviewing its ruling in light of these
objections.
Results of Consolidated Operations
The following table sets forth for the periods indicated the percentage
relationships which certain amounts bear to revenues:
49
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenues:
Cellular service revenues ....................... 68.1% 70.2% 74.1%
Other service revenues .......................... 16.8 15.9 8.8
----- ----- -----
Total service revenues ...................... 84.9 86.1 82.9
Telephone equipment and other revenues .......... 15.1 13.9 17.1
----- ----- -----
Total ....................................... 100.0 100.0 100.0
Cost of sales:
Cost of services ................................ 31.1 31.6 27.6
Cost of telephone equipment and other ........... 8.4 7.7 10.8
----- ----- -----
Total ....................................... 39.5 39.3 38.4
Gross profit ...................................... 60.5 60.7 61.6
Operating expenses ................................ 44.2 43.3 40.0
Depreciation and amortization ..................... 35.2 35.6 31.3
----- ----- -----
Operating profit (loss) ........................... (18.9) (18.2) (9.7)
Integral financing cost (gain):
Interest expense, net ........................... 9.1 16.5 13.3
Foreign exchange (gain) loss, net ............... 37.0 (3.7) 2.6
Gain on net monetary position ................... (26.3) (20.5) (15.7)
----- ----- -----
Total ....................................... 19.8 (7.7) 0.2
Equity participation in net income (loss) of
associated companies ............................ (2.0) (0.4) 8.5
Income (loss) from continuing operations before
asset tax, employee profit sharing, minority
interest and extraordinary item ................. (40.7) (10.9) (1.5)
Provision for asset tax and employee profit sharing 1.6 2.1 2.4
Minority interest ................................. 1.9 0.1 0.0
Extraordinary item ................................ 0.0 8.5 0.0
----- ----- -----
Net income (loss) ................................. (40.4)% (21.4)% (3.9)%
===== ===== ====
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Total revenues consist of cellular service revenues, revenues from other
services and telephone equipment and other revenues. The Company's service
revenues are principally derived from the provision of cellular telephone
service in Mexico. Other service revenues consist of revenues from the provision
of telecommunication services in Mexico other than cellular and, until December
1996, from revenues derived from the Company's consolidated 51% investment in
Iusatel Chile, S.A. de C.V. ("Iusatel Chile"), a Chilean long distance provider.
The Company sold its 51% stake in Iusatel Chile in December 1996. See "Item
1--Description of Business--International Joint Ventures." Telephone equipment
and other revenues consist primarily of revenues from sales of cellular
telephone equipment and accessories, as well as revenues attributable to
out-roaming (which revenues are passed through to the applicable host operator).
50
<PAGE>
The following table sets forth the source of the Company's revenues for
the year ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1997
--------------------- -----------------
Ps. % Ps. % % Change
------- ------- ------ ------- --------
<S> <C> <C> <C> <C> <C>
Cellular service revenues ............ 1,298.5 70.2% 1,378.8 74.1% 6.2%
Other service revenues ............... 293.1 15.9% 164.3 8.8% (43.9)
------- ------ ------ ------
Total service revenues ............. 1,591.6 86.1% 1,543.1 82.9% (3.0)%
Telephone equipment and other revenues 256.7 13.9% 317.4 17.1% 23.6%
------- ------ ------- ------
Total revenues ..................... 1,848.3 100.0% 1,860.5 100.0% 0.7%
======= ====== ======= ======
</TABLE>
Cellular Services. The table below sets forth cellular service revenues by
source and operating region for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
Year Ended December 31, 1996(1)
---------------------------------------------------------
Regions 5, 6 and 7
Region 9 Combined Total
----------------- ----------------- ------------------
Ps. % Ps. % Ps. %
------- ------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Airtime(2) ...................... 286.5 36.1% 167.0 33.0% 453.5 34.9%
Monthly fees .................... 361.9 45.7% 230.3 45.5% 592.2 45.6%
Long distance(3) ................ 52.9 6.7% 44.1 8.7% 97.0 7.5%
Value-added services(4) ......... 62.4 7.9% 34.3 6.7% 96.7 7.4%
In-roaming(5) ................... 28.8 3.6% 30.2 6.0% 59.0 4.6%
Activation fees ................. 0.0 0.0% 0.1 0.0% 0.1 0.0%
------ ----- ------ ----- ------- ------
Total cellular service revenues 792.5 100.0% 506.0 100.0% 1,298.5 100.0%
====== ===== ====== ===== ======= ======
<CAPTION>
Year Ended December 31, 1996(1)
---------------------------------------------------------
Regions 5, 6 and 7
Region 9 Combined Total
----------------- ----------------- ------------------
Ps. % Ps. % Ps. %
------- ------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Airtime(2)....................... 302.2 37.7% 213.9 37.1% 516.1 37.4%
Monthly fees..................... 374.7 46.7% 240.1 41.6% 614.8 44.6%
Long distance(3)................. 72.4 9.0% 49.5 8.6% 121.9 8.8%
Value-added services(4).......... 26.1 3.3% 45.4 7.9% 71.5 5.2%
In-roaming(5).................... 26.1 3.3% 27.2 4.7% 53.3 3.9%
Activation fees.................. 0.3 0.0% 0.9 0.2% 1.2 0.1%
------ ----- ------ ----- ------- -----
Total cellular service revenues 801.8 100.0% 577.0 100.0% 1,378.8 100.0%
====== ===== ====== ===== ======= =====
</TABLE>
- ----------
(1) Figures reflect intercompany eliminations. These figures do not include
revenues derived from paging, long distance, local telephony or data
transmission services.
(2) Airtime is charged on a per-minute basis for peak (Monday to Friday, 8:00
a.m. to 10:00 p.m.) and non-peak airtime.
(3) Long distance revenues generated by cellular subscribers were passed
through to Telmex prior to August 11, 1996. Since that date, such revenues
have been retained by the Company.
(4) Includes fees for value-added services such as call waiting, call
transfer, emergency service, secretarial service and conference calling,
and revenues from activation bonds, insurance-related charges payable by
subscribers, rural and public telephony and the Company's cellular
magazine. Does not include charges for related airtime. Customers using
certain value-added services such as news, weather, sports and
entertainment reports are charged only for airtime, which is therefore
included in airtime.
(5) See "Item 1--Description of Business--Cellular Services--Roaming" for a
discussion of the differences between in-roaming and out-roaming and the
revenues associated therewith. In-roaming revenues are reflected in total
service revenues and are paid to the Company by operators from other
regions. Out-roaming revenues are reflected in telephone equipment and
other revenues and are passed through to the applicable host operator.
51
<PAGE>
Cellular service revenues increased by 6.2% to Ps.1,378.8 million
(U.S.$170.9 million) in 1997 from Ps.1,298.5 million (U.S.$160.9 million) in
1996 and represented 74.1% and 70.2% of total revenues in 1997 and 1996,
respectively. Revenues increased as a result of a 71.8% increase in total
subscribers in 1997, in particular the 25.6% increase in contract subscribers,
offset in part by a 15.3% decrease in average monthly MOUs. Airtime revenues
increased 13.8% to Ps. 516.1 million (U.S.$64.0 million) in 1997 from Ps.453.5
million (U.S.$56.2 million) in 1996, and represented 37.4% of total cellular
revenue in 1997 as compared to 34.9% in 1996. This increase in airtime revenue
results mainly from the increase in subscriber base. Monthly fees from contract
customers increased 3.8% to Ps.614.8 million (U.S.$76.2 million) in 1997 from
Ps.592.2 million (U.S.$73.4 million) in 1996. Monthly fees growth trailed
contract customer growth because the majority of the new contract plan additions
was added during the second half of 1997.
Long distance cellular revenues increased 24.9% to Ps.121.9 million
(U.S.$15.1 million) in 1997 from Ps.97.0 million (U.S.$12.0 million) in 1996
mainly because of the growth in the cellular subscriber base in 1997. Long
distance revenues represented 8.8% and 7.5% of total cellular revenues in 1997
and 1996, respectively.
Iusacell had 400,123 and 232,906 cellular subscribers at December 31, 1997
and 1996, respectively. For the twelve month period ended December 31, 1997,
prepay subscribers increased by 173.6% from 73,762 subscribers, or 31.7% of
total subscribers, to 200,159 subscribers, or 50.0% of total subscribers.
Contract subscribers increased by 25.6% from 159,144 to 199,964. A prepay
customer is included as a customer if, at the end of the period, the customer's
prepay card has not yet expired. See "Item 1--Decription of Business--Cellular
Services--Prepay Turnover."
In 1997, contract subscriber churn declined dramatically to an average
monthly level of 2.95%, from 4.28% during 1996. This decline reflects net
increases in contract subscribers, which reversed the previous downward trend in
contract customers experienced in 1996 when many such customers migrated to
prepay plans.
Average monthly MOUs for 1997 were 100, a decrease of 15.3% compared to
the monthly average of 118 MOUs in 1996. This decline in MOUs was largely due to
the significant increase in the number of the Company's prepay customers, who
generate substantially lower average MOUs than contract customers. In addition,
the Company has experienced a trend toward lower MOUs as Iusacell's expanded
customer base is now attracting subscribers who tend to generate fewer MOUs.
Nominal average monthly cellular revenue per subscriber increased 0.6% to
Ps.495 in 1997 from Ps.492 in 1996. The nominal average monthly cellular revenue
per subscriber in 1997 was higher than in 1996 primarily due to price increases
implemented by the Company in 1997. See "--Other Material Trends and
Contingencies--Price Increases and Rollbacks."
Other Services. Other service revenues decreased by 43.9% to Ps.164.3
million (U.S.$20.4 million) in 1997 from Ps. 293.1 million (U.S.$36.3 million)
in 1996, and represented 8.8% and 15.9% of total revenues in 1997 and 1996,
respectively. This decrease was principally due to the sale of the Company's
interest in Iusatel Chile in December 1996. Revenues derived from Iusatel Chile
were Ps.69.1 million (U.S.$8.6 million) in 1996.
Telephone Equipment and Other. Telephone equipment and other revenues grew
23.6% to Ps.317.4 million (U.S.$39.3 million) in 1997 from Ps.256.7 million
(U.S.$31.8 million) in 1996. This increase was primarily due to an increase in
handset sales to supply the Company's prepay program.
Cost of Sales
Iusacell's cost of sales includes cost of services, cost of telephone
equipment and other costs. Total cost of sales decreased 1.5% to Ps.715.7
million (U.S.$88.7 million) in 1997 from Ps.726.7 million (U.S.$90.0 million) in
1996. As a percentage of total revenues, cost of sales decreased to 38.4% in
1997 from 39.3% in 1996.
52
<PAGE>
Cost of Services. Cost of services decreased 11.9% to Ps.514.2 million
(U.S.$63.7 million) in 1997 from Ps.583.6 million (U.S.$72.3 million) in 1996.
This decrease was mainly due to the sale of Iusatel Chile and reduced Telmex
interconnection fees.
Cost of Telephone Equipment and Other. Despite the lower rate of inflation
in 1997 relative to the rate of inflation in 1996, cost of telephone equipment
and other costs increased by 40.7% to Ps.201.4 million (U.S.$25.0 million) in
1997 from Ps.143.1 million (U.S.$17.7 million) in 1996 (primarily due to an
increase in handsets sold to support the Company's prepay program), and, as a
percentage of telephone equipment and other revenues, increased to 63.5% in 1997
from an unusually low 55.8% in 1996. The cost of a cellular handset given to a
contract customer is amortized over 18 months (the average length of the
Company's cellular contract), instead of being expensed in the period in which
the customer received the telephone. If these handset costs had been expensed
instead of amortized, the Company's cost of telephone equipment and other costs
would have increased by Ps.157.6 million (U.S.$19.5 million) and Ps.225.6
million (U.S.$28.0 million) in 1997 and 1996, respectively.
Operating Expenses
Operating expenses decreased 7.1% to Ps.743.8 million (U.S.$92.2 million)
in 1997 from Ps.800.8 million (U.S.$99.2 million) in 1996, and, as a percentage
of total revenues, increased to 40.0% in 1997 from 43.3% in 1996.
Notwithstanding the increase in revenues in 1997 from 1996, sales and
advertising expenses were relatively stable at Ps.513.4 million (U.S.$63.6
million) and Ps.476.1 million (U.S.$59.0 million) for 1997 and 1996,
respectively. General and administrative expenses declined 23.5% to Ps.312.0
million (U.S.$38.7 million) from Ps.407.7 million (U.S.$50.5 million), primarily
due to the elimination of general and administrative expenses from Iusatel
Chile, a 17% reduction in administrative and staff personnel and a decline in
consulting fees in 1997. In accordance with Mexican GAAP, pre-operating expenses
(net of pre-operating revenues) associated with the Company's provision of local
wireless service in the 450 MHz band on a trial basis (as well as with certain
other services of the Company) are capitalized rather than, as has been required
under U.S. GAAP since the beginning of 1996, expensed. The pre-operating
expenses (net of pre-operating revenues) that were capitalized in the fiscal
years 1997 and 1996 equalled Ps.84.7 million (U.S.$10.5 million) and Ps.83.0
million (U.S.$10.3 million), respectively.
Depreciation and Amortization
Depreciation and amortization expenses decreased by 11.5% to Ps.581.9
million (U.S.$72.1 million) in 1997 from Ps.657.3 million (U.S.$81.4 million) in
1996. The decline in depreciation and amortization is attributable to the
reduction in the carrying value of fixed assets during 1997. In accordance with
Mexican GAAP and following Bulletin B-10, fixed assets and depreciation for the
year are restated using inflation factors without exceeding net realizable
value. In connection with the Company's CDMA overlay to be launched in 1998, the
Company anticipates an increase in depreciation attributable to the increased
capital expenditures and an increase in amortization expenses as customers trade
in their analog handsets for digital handsets provided by the Company at little
or no cost to the customers. See "Digitalization."
Operating Loss
For 1997, the Company recorded an operating loss of Ps.180.9 million
(U.S.$22.4 million) as compared to an operating loss of Ps.336.4 million
(U.S.$41.7 million) in 1996.
Integral Financing Cost (Gain)
Integral financing loss was Ps.3.9 million (U.S.$0.5 million) in 1997
compared to a gain of Ps.140.6 million (U.S.$17.4 million) in 1996 due
principally to a foreign exchange loss of Ps.48.5 million (U.S.$6.0 million) in
1997 compared to a foreign exchange gain of Ps.67.5 million (U.S.$8.4 million)
in 1996. In 1997, the Company recorded a decrease in gain on monetary position
of 22.7% to Ps.292.7 million (U.S.$36.3 million) from Ps.378.7 million
(U.S.$46.9 million) in 1996 reflecting the lower rate of inflation in 1997. Net
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<PAGE>
interest expense decreased 18.8% to Ps.248.2 million (U.S.$30.8 million) in 1997
from Ps.305.6 million (U.S.$37.9 million) in 1996. The decrease in interest
expense was due to significantly lower interest rates, offset in part by higher
levels of borrowing in 1997.
Equity Participation in Net Income (Loss) of Associated Companies
The Company recorded equity participation in net income of associated
companies of Ps.157.7 million (U.S.$19.5 million) in 1997 as compared to a loss
of Ps.6.5 million (U.S.$0.8 million) in 1996. This increase was due to the gain
of the sale of the Company's Ecuadorean affiliate. See "Item 1--Description of
Business--International Joint Ventures."
Net Income (Loss)
As a result of the factors described above, the Company's net loss was
Ps.72.2 million (U.S.$8.9 million) in 1997 as compared to net loss of Ps.394.9
million (U.S.$48.9 million) in 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues
The following table sets forth the source of the Company's revenues for
the years ended December 31, 1995 and 1996.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1997
--------------------- ------------------
Ps. % Ps. % % Change
------- ------- ------ ------- --------
<S> <C> <C> <C> <C> <C>
Cellular service revenues ............ 1,408.1 68.1 1,298.5 70.2 (7.8)
Other service revenues ............... 348.2 16.8 293.1 15.9 (15.8)
------- ------ ------- ------
Total service revenues ............. 1,756.3 84.9 1,591.6 86.1 (9.4)
Telephone equipment and other revenues 312.9 15.1 256.7 13.9 (18.0)
------- ------ ------- ------
Total revenues ..................... 2,069.2 100.0 1,848.3 100.0 (10.7)
======= ====== ======= ======
</TABLE>
Cellular Services. The table below sets forth the cellular service
revenues by source and operating region for 1995 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31, 1996(1)
---------------------------------------------------------
Regions 5, 6 and 7
Region 9 Combined Total
----------------- ----------------- ------------------
Ps. % Ps. % Ps. %
------- ------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Airtime(2)........................... 360.8 39.4 170.5 34.7 531.3 37.7
Monthly fees......................... 392.1 42.8 217.9 44.3 610.0 43.3
Long distance(3)..................... 57.9 6.3 39.2 8.0 97.1 6.9
Value-added services(4).............. 75.2 8.2 45.1 9.2 120.3 8.5
In-roaming(5)........................ 28.7 3.1 16.9 3.4 45.6 3.2
Activation fees...................... 1.9 0.2 1.9 0.4 3.8 0.3
------- ----- ------ ----- ------- ------
Total cellular service revenues... 916.6 100.0 491.5 100.0 1,408.1 100.0
======= ===== ====== ===== ======= ======
<CAPTION>
Year Ended December 31, 1996(1)
---------------------------------------------------------
Regions 5, 6 and 7
Region 9 Combined Total
----------------- ----------------- ------------------
Ps. % Ps. % Ps. %
------- ------ ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Airtime(2)........................... 286.5 36.1 167.0 33.0 453.5 34.9
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Monthly fees......................... 361.9 45.7 230.3 45.5 592.2 45.6
Long distance(3)..................... 52.9 6.7 44.1 8.7 97.0 7.5
Value-added services(4).............. 62.4 7.9 34.3 6.7 96.7 7.4
In-roaming(5)........................ 28.8 3.6 30.2 6.0 59.0 4.6
Activation fees...................... 0.0 -- 0.1 -- 0.1 --
------ ----- ------ ----- ------- ------
Total cellular service revenues.. 792.5 100.0 506.0 100.0 1,298.5 100.0
====== ===== ====== ===== ======= ======
</TABLE>
- ----------
(1) Figures reflect intercompany eliminations. These figures do not include
revenues derived from paging, long distance, local telephony and data
transmission services.
(2) Airtime is charged on a per-minute basis for peak (Monday to Friday, 8:00
a.m. to 10:00 p.m.) and non-peak airtime.
(3) Long distance revenues generated by cellular subscriber were passed
through to Telmex prior to August 11, 1996. Since that date, such revenues
have been retained by the Company.
(4) Includes fees for value-added services such as call waiting, call
transfer, emergency service, secretarial service and conference calling,
and revenues from activation bonds, insurance-related charges payable by
subscribers, rural and public telephony and the Company's cellular
magazine. Does not include charges for related airtime. Customers using
certain value-added services such as news, weather, sports and
entertainment reports are charged only for airtime, which is therefore
included in airtime.
(5) See "Item 1--Description of Business--Cellular Services--Roaming" for a
discussion of the differences between in-roaming and out-roaming and the
revenues associated therewith. In-roaming revenues are reflected in total
service revenues and are paid to the Company by operators from other
regions. Out-roaming revenues are reflected in telephone equipment and
other revenues and are passed through to the applicable host operator.
Cellular service revenues declined by 7.8% to Ps.1,298.5 million
(U.S.$160.9 million) from Ps.1,408.1 million (U.S.$174.5 million) and
represented 70.2% and 68.1% of total revenues in 1996 and 1995, respectively.
Despite a 10.8% increase in total subscribers, revenues declined primarily due
to a 9.1% decrease in total MOUs. The Company experienced a significant change
in the composition of its subscriber base between 1995 and 1996 with the
introduction of the Company's Control Plus prepay program in June 1996. Average
monthly revenues generated by prepay customers are substantially lower than
those generated by contract subscribers because prepay programs tend to attract
lower volume users who pay no monthly fee, although such users are charged, on
average, higher per minute airtime rates. The decline in the number of contract
subscribers also resulted in a decline in revenues from value-added services.
The proportion of the Company's customers that subscribes to the Company's
prepay plan as opposed to the Company's contract plans grew significantly as a
result of the introduction of Control Plus.
Iusacell had 232,906 and 210,201 cellular subscribers at December 31, 1996
and 1995, respectively. During the year ended December 31, 1996, prepay
subscribers increased from a negligible percentage of total subscribers to 31.7%
of total subscribers, and the number of contract subscribers declined by 18.3%.
Contract subscribers decreased to 159,144 at December 31, 1996 from 208,802 at
December 31, 1995, and prepay subscribers grew to 73,762 at December 31, 1996
from 1,399 at December 31, 1995. A prepay customer is included as a customer if,
at the end of the period, the customer's prepay card has not yet expired. See
"Item 1--Description of Business--Cellular Services--Prepay Turnover".
During 1996, contract subscriber churn increased to an average monthly
level of 4.28% compared to 3.62% during 1995, which the Company believes was due
to the continuing effect of the Mexican recession on the consumer segment of the
economy and the migration of contract plan customers to the prepay programs of
the Company and its competitor.
Average MOUs for 1996 were 118, a decrease of 16.4% compared to the
average of 140 MOUs in 1995. This decline in MOUs was largely due to the
significant increase in the number of the Company's prepay customers, who
generate substantially lower average MOUs than contract customers. In addition,
the Company has experienced a trend toward lower MOUs as Iusacell's expanded
customer base attracts subscribers who tend to generate fewer MOUs. During the
second half of 1996, the Company introduced three new contract plans--Flex 75,
Flex 150 and Tu Tiempo--which were designed to encourage higher MOUs, retain and
increase contract subscribers and migrate qualified prepay customers to contract
plans. See "Item 1--Description of
55
<PAGE>
Business--Marketing Strategy--Pricing." Nominal average monthly cellular revenue
per subscriber increased 5.6% to Ps.492 in 1996 from Ps.464 in 1995.
Other Services. Other service revenues decreased by 15.8% to Ps.293.1
million (U.S.$36.3 million) in 1996 from Ps.348.2 million (U.S.$43.1 million) in
1995. The decline in other services revenue was caused by the Company's
inability to raise prices to keep pace with the rate of inflation (27.7%) in
1996, offset in part by the Company's new paging and long distance services
launched in August 1996. Revenues derived from Iusatel Chile, which the Company
sold in December 1996, were Ps.69.1 million (U.S.$8.6 million).
Telephone Equipment and Other. Telephone equipment and other revenues
decreased 18.0% to Ps.256.7 million (U.S.$31.8 million) in 1996 from Ps.312.9
million (U.S.$38.8 million) in 1995. This decline reflected fewer sales and
upgrades of handsets. The decline in 1996 from 1995 was partially offset by a
significant increase in sales of used handsets from inventory.
Cost of Sales
Total cost of sales decreased 11.1% to Ps.726.7 million (U.S.$90.0
million) in 1996 from Ps.817.6 million (U.S.$101.3 million) in 1995. As a
percentage of total revenues, total cost of sales decreased to 39.3% in 1996
from 39.5% in 1995.
Cost of Services. Cost of services decreased by 9.4% to Ps.583.5 million
(U.S.$72.3 million) in 1996 from Ps.643.9 million (U.S.$79.8 million) in 1995,
and were 36.7% of total service revenues in each period. Cost of services
remained relatively constant as its primary components were revenue-based fees
paid to the Mexican government and minute-based interconnection fees paid to
Telmex.
Cost of Telephone Equipment and Other. Cost of telephone equipment and
other costs decreased by 17.6% to Ps.143.1 million (U.S.$17.7 million) in 1996
from Ps.173.7 million (U.S.$21.5 million) in 1995 and, as a percentage of
telephone equipment and other revenues, increased slightly to 55.8% in 1996,
compared to 55.5% in 1995. The decline in costs is attributable to the reduced
demand for telephone equipment in 1996, itself a result of continued adverse
conditions in the consumer segment of the Mexican economy, as well as the
popularity of the Company's prepay program, where the subscriber typically
already owns a cellular handset. The cost of a cellular handset given to a
contract customer is amortized over 18 months (the average length of the
Company's cellular contract), instead of being expensed in the period in which
the customer received the telephone. If these handset costs had been expensed
instead of amortized, the Company's cost of telephone equipment and other costs
would have increased by Ps.225.6 million (U.S.$28.0 million) and Ps.317.7
million (U.S.$39.4 million) in 1996 and 1995, respectively. See Note 4 to the
Consolidated Financial Statements. In connection with the Company's CDMA overlay
to be launched in 1998, the Company expects to provide digital handsets at no or
little cost to the customers.
Operating Expenses
Operating expenses decreased by 12.4% to Ps.800.8 million (U.S.$99.2
million) in 1996 from Ps.913.9 million (U.S.$113.3 million) in 1995, and, as a
percentage of revenues, decreased in 1996 to 43.3% as compared to 44.2% in 1995.
The decrease in operating expenses was principally due to lower sales and
advertising costs, partially offset by a slight increase in corporate overhead
expenses. In accordance with Mexican GAAP, pre-operating expenses (net of
pre-operating revenues) associated with the Company's provision, on a trial
basis, of local wireless service in the 450 MHz band (as well as with certain
other services of the Company) are capitalized rather than (as has been required
under U.S. GAAP since the beginning of 1996) expensed. The amount of these
pre-operating expenses (net of pre-operating revenues) that were capitalized
instead of expensed in 1996 equalled Ps.69.5 million (U.S.$8.6 million). U.S.
GAAP would not have required that these pre-operating amounts be expensed in
1995, given the more developmental stage of the Company's 450 MHz project at
that time. See Note 19 to the Consolidated Financial Statements.
56
<PAGE>
Depreciation and Amortization
Depreciation and amortization expenses decreased by 9.7% to Ps.657.3
million (U.S.$81.4 million) in 1996 from Ps.728.1 million (U.S.$90.2 million) in
1995. The decline in depreciation and amortization in 1996 compared to 1995 is
attributable to the reduction in the carrying value of fixed assets during 1996
recorded in accordance with Bulletin B-10, as well as, to a lesser extent,
substantially lower capital expenditures in 1996.
Operating Loss
In 1996, the Company recorded an operating loss of Ps.336.4 million
(U.S.$41.7 million) as compared to an operating loss of Ps.390.4 million
(U.S.$48.4 million) in 1995.
Integral Financing Cost (Gain)
Integral financing gain was Ps.140.6 million (U.S.$17.4 million) in 1996
compared to a cost of Ps.409.7 million (U.S.$50.8 million) in 1995 due
principally to a foreign exchange gain of Ps.67.5 million (U.S.$8.4 million) in
1996 compared to a foreign exchange loss of Ps.766.6 million (U.S.$95 million)
in 1995. The foreign exchange gain was due to the slight appreciation of the
Peso as compared to the U.S. dollar for a significant period during 1996
compared to a significant devaluation of the Peso in 1995. The integral
financing gain was partially offset by a decrease in gain on monetary position
of 30.5% to Ps.378.7 million (U.S.$46.9 million) in 1996 from Ps.545.3 million
(U.S.$67.6 million) in 1995 reflecting the lower rate of inflation in 1996. Net
interest expense increased 62.3% to Ps.305.6 million (U.S.$37.9 million) in 1996
from Ps.188.4 million (U.S.$23.3 million) in 1995. The increase in interest
expense was due to higher levels of borrowing in 1996, including borrowings
under the Chase Facility and the full year effect of the U.S.$33.9 million in
vendor financing arranged with Northern Telecom Limited in November 1995.
Equity Participation in Net Loss of Associated Companies
Equity participation in net loss of associated companies decreased by
84.7% to a loss of Ps.6.5 million (U.S.$0.8 million) in 1996 from a loss of
Ps.42.6 million (U.S.$5.3 million) in 1995. This decrease was due to operating
improvements in the Company's Ecuadorean affiliate. See "Item 1--Description of
Business--International Joint Ventures."
Extraordinary Item
In 1996, the Company recorded a Ps.157.8 million (U.S.$19.6 million)
extraordinary charge consisting primarily of restructuring expenses associated
with the reorganization and the change in management control of the Company,
which occurred in February 1997. See Notes 2, 4 and 8(b) to the Consolidated
Financial Statements.
Net Loss
As a result of the factors described above, net loss decreased 52.8% to
Ps.394.9 million (U.S.$48.9 million) in 1996 from Ps.836.3 million (U.S.$103.6
million) in 1995.
Income Tax, Asset Tax and Employees' Profit Sharing
The Company prepares its tax returns on a consolidated basis, thereby
benefitting from the ability to offset losses incurred by certain subsidiaries
against the gains of others within the consolidated group.
Iusacell and its subsidiaries are subject to an alternative net asset tax
which is levied on the average value of substantially all assets less certain
liabilities. This tax, which was 1.8% in 1995, 1996 and 1997, is required to be
paid if the amount of the asset tax exceeds the computed income tax liability.
The Company provided for Ps.31.6 million (U.S.$3.9 million), Ps.38.3 million
(U.S.$4.7 million) and Ps.45.3 million (U.S.$5.6 million) of net asset taxes for
1995, 1996, and 1997, respectively. These taxes may be applied in
57
<PAGE>
subsequent years against income tax payments, to the extent income tax
liabilities for such years exceed the net asset tax calculation. Due to net
losses, the Company paid no income taxes in 1995, 1996 and 1997 and paid the
asset taxes specified above. See Note 12 to the Consolidated Financial
Statements for a discussion of the Company's tax loss.
While Iusacell has no employees at the holding company level, the
Company's subsidiaries are required under Mexican law to pay their employees, in
addition to their required compensation and benefits, profit sharing in an
aggregate amount equal to 10% of the taxable income of the relevant subsidiary
(calculated without reference to inflation adjustments or amortization of tax
loss carryforwards). In 1995, 1996 and 1997, statutory profit sharing totalled
Ps.2.3 million (U.S.$0.3 million), Ps.0 million (U.S.$0 million) and Ps.0
million (U.S.$0 million), respectively.
Liquidity and Capital Resources
Liquidity
The Company's liquidity has been provided by cash from operations, short
and long-term borrowings, vendor financing and capital contributions.
Total debt at December 31, 1997 was Ps. 2,221.5 million (US$275.3
million), an increase of Ps. 694.3 million (US$86.0 million) from Ps. 1,527. 2
million (U.S.$189.2 million) at December 31, 1996. All of the Company's debt
outstanding at December 31, 1997 was US dollar denominated and unhedged. At
December 31, 1997, the Company's average cost of outstanding debt was
approximately 9.35%, with a remaining average maturity of approximately 5.3
years. At December 31, 1997, the Company's debt to total capital ratio stood at
40.2% versus 37.6% at December 31, 1996.
In February 1997, as part of the transactions relating to the assumption
of management control by subsidiaries of Bell Atlantic Corporation, the Company
converted approximately US$70.1 million in debt from its principal shareholders
into approximately 100.1 million shares of the Company's capital stock. In
addition, a subsidiary of Bell Atlantic Corporation committed to provide the
Company with subordinated convertible financing in an aggregate amount of US$150
million bearing interest at an annual rate of LIBOR plus 5.0% (the "Bell
Atlantic Facility").
In July 1997, the Company refinanced approximately US$210.1 million in
indebtedness (including accrued and unpaid interest) with the net proceeds of
(i) the issuance of US$150.0 million of its 10% Senior Notes due 2004 under the
Indenture dated as of July 25, 1997 among the Company, the subsidiaries of the
Company guaranteeing such notes and First Union National Bank, as Trustee (the
"Indenture"), almost all of which were exchanged for 10% Series B Senior Notes
due 2004 in January 1998 (whether or not exchanged, the "10% Senior Notes") and
(ii) the Chase Credit Facility (as defined below).
The "Chase Credit Facility" consists of (i) the five-year senior secured
term facility in the principal amount of US$125.0 million (the "Term Facility"),
all of which was drawn down in July 1997, and (ii) the five-year senior secured
revolving credit facility in an aggregate principal amount of US$100.0 million
(the "Revolving Credit Facility"). At December 31, 1997, the Revolving Credit
Facility was fully available. The Company may request from time to time until
December 31, 1999 that the commitments and loans under the Term Facility or the
Revolving Credit Facility be increased in an aggregate principal amount not to
exceed US$100.0 million (with a minimum increase of US$25.0 million) -- although
the Company is exploring purchase money project financing as an alternative.
The availability of the Revolving Credit Facility is subject to various
conditions precedent typical of bank loans, including the absence of any
material adverse change on the part of the Company in particular or in the
financial, banking or capital markets in general. The obligations of the Company
under the Chase Credit Facility are unconditionally guaranteed, jointly and
severally, by the principal operating and concession-holding companies of the
Company and are secured by the pledge of substantially all capital stock and
equity interests
58
<PAGE>
held by the Company and by all cellular concessions and substantially all assets
used in connection with or related to such concessions.
Loans outstanding under each of the Term Facility and the Revolving Credit
Facility bear interest at a rate per annum equal to (at the Company's option)
(i) one-, two-, three- or six-month LIBOR plus 1.75% or (ii) an Alternate Base
Rate (equal to the higher of the prime rate of The Chase Manhattan Bank, the
reserve adjusted secondary market rate for certificates of deposit plus 1% per
annum and the Federal Funds effective rate plus 1.2 of 1% per annum). The Term
Facility has amortization requirements of US$18.8 million in 2000, US$51.2
million in 2001 and US$55.0 million in 2002. Assuming US$100.0 million is drawn
under the Revolving Credit Facility, it will have amortization requirements of
US$15.0 million in 2000, US$41.0 million in 2001 and US$44.0 million in 2002.
The Company's ability to service and repay the 10% Senior Notes and borrowings
under the Chase Credit Facility will be subject to future economic and
competitive conditions and to financial, business and other factors, many of
which are beyond the Company's control.
The Indenture and the Chase Credit Facility contain a number of
restrictive covenants that, among other things, restrict the ability of the
Company and its subsidiaries to dispose of assets, incur additional
indebtedness, prepay other indebtedness or amend other debt instruments and
material agreements, pay dividends or make distributions, create liens on
assets, enter into sale and leaseback transactions and other lease financings,
make loans or investments, make acquisitions, engage in mergers or
consolidations, change the business conducted by the Company and its
subsidiaries, or engage in certain transactions with affiliates and otherwise
restrict certain corporate activities. In addition, under the Credit Facility,
the Company is required to comply with specified financial ratios and tests,
including minimum interest coverage ratios, maximum leverage ratios and maximum
capital expenditure levels.
The Company believes that funds from operating activities and borrowings
under the Revolving Credit Facility and the Bell Atlantic Facility will be
adequate to meet its debt service and principal amortization requirements,
working capital requirements and its capital expenditure needs for its existing
businesses, although no assurance can be given in this regard. The Company's
capital expenditure needs and working capital requirements to acquire and
operate concessions to provide wireless telephone services in Region 1 and
Region 4 over Band E in the 1.9 GHz (PCS) frequency band will require a
significant amount of additional funding. The Company's future operating
performance and ability to service and repay the 10% Senior Notes and borrowings
under the Credit Facility will be subject to future economic and competitive
conditions and to financial, business and other factors, many of which are
beyond the Company's control. See "--Capital Expenditures."
Capital Expenditures
The Company expects to have substantial capital expenditures to upgrade
its network infrastructure, build out its cellular, long distance, local
telephone and paging networks, acquire and build out its PCS networks in Region
1 and Region 4, build new and redesign existing Iusacell-owned and operated
customer service centers and support existing operations and new business
opportunities. The degree and timing of capital expenditures will remain
strongly dependent on the competitive environment and economic developments in
Mexico, including inflation and exchange rates, as well as on the timing of
regulatory actions and on the availability of suitable financing.
As a result of the financial constraints caused in part by the economic
situation in Mexico and the inability of the Company to obtain significant
amounts of additional financing, the Company reduced its capital expenditure
program in 1996 and the first quarter of 1997, with outlays principally limited
to expansion of the cellular network and the startup of long distance and
paging. Substantial capital expenditures resumed in the second quarter of 1997.
Total capital expenditures in 1997 were Ps.677.9 million (US$84.0 million),
compared with Ps. 276.0 million (US$34.2 million) in 1996.
The Company expects capital expenditures for 1998, 1999 and 2000 to total
approximately US$530 million, of which approximately US$325 million will be
invested during 1998. Approximately US$250 million
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will be allocated to the development of the Company's wireless network,
including the deployment of a replacement analog cellular network and a new CDMA
digital network pursuant to an agreement entered into with Lucent in December
1997. Approximately US$180.0 million will be allocated to the acquisition,
build-out and operation of concessions to provide wireless telephone over B and
E of the 1.9 GHz (PCS) frequencies in Region 1 and Region 4. The balance of
US$100 million primarily will be (i) invested in developing the Company's long
distance, paging and other networks, (ii) used to fund certain non-network
infrastructure, such as the development and deployment of a new convergent
billing system, upgrades to other management information systems, and the
deployment of advanced fraud detection and prevention systems, and (iii) used to
build new and redesign existing Iusacell-owned and operated customer service
centers.
In February 1998, the COFETEL approved the modification of the Company's
long distance concession, substantially reducing the coverage and technological
investment requirements thereunder. The Company estimates that full compliance
with these requirements will require approximately US$115.0 million in capital
investment, of which approximately US$58.0 million had already been invested
prior to 1998 and US$31.0 million will be invested in 1998.
The Company's 1998 to 2000 capital expenditure program, including PCS
concession acquisition and buildout in Regions 1 and 4, will require additional
financing, which the Company expects will be available in the form of additional
secured bank financing under the Chase Credit Facility, including use of the
Revolving Credit Facility, vendor financing, export credit agency financing and
the Bell Atlantic Facility. The Company may also be required to seek additional
bank financing or seek to issue additional debt securities. To the extent that
financing is not available, the Company could be required to substantially limit
its capital expenditure plans. The Indenture and the Credit Facility limit the
ability of the Company to incur debt, and the degree to which the Company is
leveraged will also adversely affect its ability to obtain additional financing.
Beginning some time in 2000, the Company expects to finance its capital
expenditure program with funds from operating activities. Capital expenditures
beginning in 2000 will continue to be substantial, and there can be no assurance
that the Company's results from operations will improve sufficiently to generate
enough funds to support these capital expenditures.
Dividend Policy.
The Company has not paid and currently has no plans to initiate dividend
payments. In addition, the Indenture and the Credit Facility limit the Company's
ability to pay dividends.
U.S. GAAP Reconciliation
The principal differences between Mexican GAAP and U.S. GAAP as they
relate to the Company are the treatment of minority interest, deferred income
taxes, capitalized pre-operating expenses and revenues for the Company's 450 MHz
local wireless project, extraordinary charges and gains and losses on monetary
position. See Note 19 to the Consolidated Financial Statements.
ITEM 10. Directors and Officers of Registrant
Iusacell is currently managed by a 21-member Board of Directors (the
"Board of Directors"). The Directors nominated by Bell Atlantic have the power
under the Company's bylaws to approve, without the affirmative vote of any other
Directors, all resolutions of the Board of Directors. However, the New
Shareholders Agreement grants the Peralta Group supermajority rights with
respect to certain transactions. See "Item 4 -- Control of Registrant."
Pursuant to the New Shareholders Agreement, Lawrence T. Babbio, Jr.
automatically became the Chairman of the Board of Directors of Iusacell upon the
death of Ing. Alejo Peralta y Diaz Ceballos, founder of Iusacell, on April 8,
1997. That position was reaffirmed at the annual shareholders' meeting of
Iusacell on April 10, 1997 and again on June 8, 1998.
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Generally, the Board of Directors is authorized to elect or appoint
Iusacell's executive officers as well as officers of wholly-owned subsidiaries
and employees or agents of the Company. However, Mr. Babbio (or his successor as
Chairman of the Board of Directors, as the case may be) has the power under the
New Shareholders Agreement to appoint and dismiss the Chief Executive Officer,
President, Director General, Chief Operating Officer and Director of the
Cellular Division of Iusacell. If Bell Atlantic no longer has control of the
Board of Directors, the Chief Financial Officer and the principal officer
responsible for each of strategic planning and network planning at Iusacell will
continue to be nominated by Bell Atlantic, provided that Bell Atlantic maintains
certain minimum ownership requirements.
Directors and Executive Officers
The following table sets forth certain information with respect to the
current directors and principal executive officers of the Company:
<TABLE>
<CAPTION>
<C> <S> <C> <C>
Name Age Position(s)
---- --- --------------------------------------------------------
Lawrence T. Babbio, Jr........... 53 Chairman of the Board of Directors and Series A
Director
* Thomas A. Bartlett............... 40 Chief Executive Officer and Series
B Director
Fulvio V. del Valle.............. 48 President and Director General and Series L Director
* Edward R. Kingman, Jr............ 50 Executive Vice President and Chief Operating
Officer and Series B Director
* Howard F. Zuckerman.............. 54 Vice President--Finance and Audit and Chief
Financial Officer and Series B Director
Carlos Peralta Quintero.......... 46 Series A Director
Luis Felipe Gonzalez Munoz....... 43 Series A Director
William O. Albertini............. 55 Series A Director
Dennis F. Strigl................. 52 Series A Director
Manuel Somoza Alonso............. 50 Series A Director
Jose Ramon Elizondo Anaya........ 44 Series A Director
Rodolfo Garcia Muriel............ 53 Series A Director
Gabriel Alarcon Velazquez........ 61 Series A Director
Eduardo Rihan Azar............... 76 Series A Director
Katherine A. Dunne............... 41 Series B Director
* Noah S. Asher.................... 36 Vice President--Administration and Strategic Planning and
Series B Director
* Ruben G. Perlmutter.............. 40 Vice President--Mergers and Acquisitions and
General Counsel and Series B Director
Jeffrey S. Noto.................. 33 Series B Director
Fernando de Ovando............... 46 Series B Director
Javier Martinez del Campo Lanz... 39 Series B Director
Ernesto Canales Santos........... 57 Series D Director
</TABLE>
- ---------
* Indicates an employee of Bell Atlantic who is currently serving as an
officer of Iusacell pursuant to consulting or secondment arrangements. See
"Item 13 -- Interest of Management in Certain Transactions."
Lawrence T. Babbio, Jr. has been a member of the Board of Directors of
Iusacell since November 1993, became Vice Chairman of the Board in February 1994
and, upon the death of Alejo Peralta y Diaz Ceballos on April 8, 1997, became
Chairman of the Board. Since 1966, Mr. Babbio has served in a variety of
capacities with affiliates of Bell Atlantic and its predecessors. In August
1997, Mr. Babbio was elected president and chief executive officer of the
Network Group and chairman of the Global Wireless Group of Bell Atlantic. From
January 1995 until August 1997, Mr. Babbio served as vice chairman of Bell
Atlantic. From May 1994 to January 1995, he served as executive vice president
and chief operating officer of Bell Atlantic. From February 1991 to May 1994 he
served as chairman, president and chief executive officer of Bell Atlantic
Enterprises International, Inc. Prior to that, he served as president of Bell
Atlantic Mobile Systems, Inc., a position he had held since November 1990. He
currently serves on the board of directors of Bell Atlantic
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and Compaq Computer Corporation. Mr. Babbio holds an undergraduate degree in
electrical engineering from Stevens Institute of Technology and received an
M.B.A. from New York University.
Carlos Peralta Quintero has been a member of the Board of Directors of
Iusacell since October 1992 and served as Vice Chairman of the Company from
October 1992 to February 1997. He also currently serves as the Chairman of the
Board of Directors of Grupo Industrial IUSA, S.A. de C.V. Mr. Peralta is also a
member of the boards of directors of Cambridge Lee Industries Ltd. and Alper
Holdings Ltd.
Thomas A. Bartlett has been a member of the Board of Directors of Iusacell
since April 1996 and Chief Executive Officer of the Company since February 1997;
he also served as President of the Company from February 1997 through September
1997. Since 1983, Mr. Bartlett has served in a variety of capacities with
affiliates of Bell Atlantic. In August 1995, he was appointed president of Bell
Atlantic's international wireless operations. For more than four years prior
thereto, Mr. Bartlett served in several capacities with Bell Atlantic Mobile
Systems, Inc. and Bell Atlantic NYNEX Mobile: as president of the New England
and Upstate New York region for Bell Atlantic NYNEX Mobile in July and August
1995, as regional vice president for the Philadelphia Tri-State region for Bell
Atlantic Mobile Systems, Inc. from May 1992 through June 1995, and as vice
president for business development for Bell Atlantic Mobile Systems, Inc. from
July 1991 to May 1992. From December 1988 to July 1991, Mr. Bartlett served as
chief financial officer of Bell Atlantic Business Systems Services, Inc. Mr.
Bartlett holds an industrial engineering degree from Lehigh University and an
M.B.A. from Rutgers University.
Fulvio V. del Valle has been the President of Iusacell since October 1997,
the Director General of Iusacell since June 1997 and a member of the Board of
Directors of Iusacell since June 1998. From August 1996 until June 1997, Mr. del
Valle served as managing director of the non-wireline cellular companies in
Regions 3 (Norcel) and 4 (CedeTel). For more than 20 years prior thereto, Mr.
del Valle served in senior Latin America region executive positions for several
multinational corporations. Mr. del Valle was employed by AMP Inc., as regional
director, Latin America, from January 1996 through July 1996 and as managing
director, Mexico from August 1992 until January 1996. From September 1986 until
July 1992, Mr. del Valle served as Regional Director for South America,
Electronics Division for DuPont Latin America Corp. and from March 1980 through
August 1986, he served as general manager, Latin American North Region for
National Semiconductor Corp. Mr. del Valle holds an undergraduate degree in
electrical engineering from the Instituto Politecnico Nacional of Mexico and a
master's degree in physics from Virginia Polytechnic Institute.
Gabriel Alarcon Velazquez has been a member of the Board of Directors of
Iusacell since November 1993. He is currently president and chief executive
officer of the Mexican newspaper El Heraldo de Mexico, Grupo Alarcon, S.A. de
C.V. and Cadena Real, S.A. de C.V. He is also currently on the board of
directors of Grupo Financiero Bancomer, S.A. de C.V. and Grupo Financiero
Interacciones, S.A. de C.V. Mr. Alarcon was chief executive officer of Portacel
from 1989 to 1993. Mr. Alarcon holds a degree in business administration from
Instituto Tecnologico Autonomo de Mexico.
William O. Albertini has been a member of the Board of Directors of
Iusacell since November 1993. Since 1967, Mr. Albertini has served in a variety
of capacities with affiliates of Bell Atlantic and its predecessors. In August
1997, Mr. Albertini was elected executive vice president and chief financial
officer of the Global Wireless Group of Bell Atlantic. Mr. Albertini served as
executive vice president of Bell Atlantic and a member of its Board of Directors
between January 1995 and August 1997 and as chief financial officer of Bell
Atlantic from January 1991 until August 1997. From January 1991 until January
1995, he served as vice president of Bell Atlantic. He currently serves on the
board of directors of American Water Works Company, Inc. and Black Rock Funds
(formerly Compass Capital Funds). Mr. Albertini holds an undergraduate degree
from the University of Notre Dame, an M.B.A. from Lehigh University and a
master's degree from the Massachusetts Institute of Technology.
Noah S. Asher has been Vice President--Administration of Iusacell and a
member of the Board of Directors of Iusacell since February 1997 and became
responsible for strategic planning activities in May 1998. Mr. Asher has served
in two capacities for Bell Atlantic International Wireless since March 1995--as
vice
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president of Latin American operations since September 1996 and as chief
financial officer from March 1995 until September 1996. For more than four years
prior thereto, Mr. Asher worked in a variety of financial management capacities
for Scott Paper Company, including more than two years as the financial manager
of Grupo Crisoba, S.A. de C.V., a Scott Paper Company joint venture based in
Mexico City, and eighteen months in Brussels, Belgium as manager of European
treasury. From September 1984 until May 1987, Mr. Asher was employed as an
auditor by Coopers & Lybrand. Mr. Asher is a Certified Public Accountant. Mr.
Asher holds an undergraduate degree in economics and a masters degree in
international relations from the University of Pennsylvania and an M.B.A. from
the Wharton School of Business.
Ernesto Canales Santos has been a member of the Board of Directors of
Iusacell since November 1993. Mr. Canales is a founding partner of Canales y
Rios Zertuche, S.C., a law firm formed in 1988. Previously, he was chief legal
counsel of Grupo Industrial Alfa, S.A. de C.V., from 1974 to 1986. Mr. Canales
is a member of the boards of directors of Grupo Financiero Banamex/Accival, S.A.
de C.V., Industrias AXA, S.A. de C.V., Grupo Financiero InverMexico, S.A. de
C.V., and Grupo Financiero Promex-Finamex, S.A. de C.V. Mr. Canales is also a
commissioner of Telecab, S.A. de C.V., and a member of the Patronato del Museo
de Historia Mexicana. Mr. Canales holds a law degree from Escuela Libre de
Derecho and a master's degree in comparative law from Columbia University.
Fernando de Ovando has been a member of the Board of Directors of Iusacell
since February 1997 and was the Secretary of the Company from November 1993
until February 1997. Mr. de Ovando has been a partner in the law firm of De
Ovando y Martinez del Campo, S.C. and its predecessors since 1984. Mr. de Ovando
serves on the board of directors of Grupo Financiero Inverlat, S.A. de C.V. and
Q.B. Industrias, S.A. de C.V., and is a member of the boards of directors and/or
secretary of several other private Mexican corporations and Mexican subsidiaries
of foreign corporations. Mr. de Ovando holds a law degree from the Universidad
Anahuac and an LL.M. degree from the University of Toronto.
Katharine A. Dunne has been a member of the Board of Directors of Iusacell
since June 1998. Since 1986, Ms. Dunne has been employed as an attorney by Bell
Atlantic Network Services, Inc. within the Bell Atlantic mergers and
acquisitions legal group, having served as an attorney from October 1986 to
October 1990, as a Senior Attorney from October 1990 through December 1993 and
as General Attorney from January 1994 until December 1997. In December 1997, Ms.
Dunne was appointed Assistant General Counsel - Mergers & Acquisitions of Bell
Atlantic. Ms. Dunne holds an undergraduate degree from Datrmouth College and a
law degree from the University of Virginia.
Jose Ramon Elizondo Anaya has been a member of the Board of Directors of
Iusacell since February 1997. Since June 1991, Mr. Elizondo has served as
chairman of the board and chief executive officer of Union de Capitales, S.A. de
C.V. (UNICA), a capital investment fund. For more than ten years prior thereto,
Mr. Elizondo was a manager of Operadora de Bolsa, Casa de Bolsa, including
managing director of the investment banking department and president of its
investment banking committee and managing director of the mergers and
acquisitions and corporate finance departments. Mr. Elizondo is a member of the
boards of directors of Ekco, S.A., Banca Quadrom, S.A. de C.V., Grupo
Embotelladoras, S.A. de C.V., Grupo Financiero BanCrecer, S.A., Grupo Marti,
S.A., Q Tel, S.A. de C.V., TV Azteca, S.A. de C.V.. as well as the companies in
which UNICA has invested. Mr. Elizondo holds an undergraduate public accounting
degree from Universidad LaSalle and received an M.B.A. from the Instituto
Tecnologico y de Estudios Superiores de Monterrey.
Rodolfo Garcia Muriel was an alternate member of the Board of Directors of
the Company from November 1993 to May 1994 and became a Director in May 1994. He
is currently general director of Compania Industrial de Parras, S.A. de C.V. Mr.
Garcia Muriel has been a member of the boards of directors of Cementos
Mexicanos, S.A. de C.V., Cementos Maya, S.A., Cementos Tolteca, S.A. de C.V.,
and Grupo Financiero InverMexico, S.A. de C.V. He also served as chairman of the
boards of directors of Corporacion Industrial Mexico Francia, Fondo de
Optimacion de Capitales, Consejo Regional Metropolitano de Banco Mexicano,
Parras Cone de Mexico, S.A. de C.V. and Lavapar, S.A. de C.V., and is currently
the vice president of the National Chamber of the Textile Industry (Canaitex).
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Luis Felipe Gonzalez Munoz has been a member of the Board of Directors of
Iusacell since April 1997 and between May 1994 and December 1996; between
December 1996 and April 1997, Mr. Gonzalez was an alternate member of the Board
of Directors. Mr. Gonzalez is a member of the Finance and Audit Committee. Mr.
Gonzalez has served as chief financial officer of Industrias Unidas, S.A. de
C.V. since November 1993. For more than ten years prior thereto, Mr. Gonzalez
was employed by Vitrocrisa, S.A. de C.V. and its affiliates, including as
director of administration, finance and human resources from September 1990
until July 1993, and as director of administration and finance from February
1988 to September 1990. Mr. Gonzalez is a member of the board of directors of
Grupo Industrial Iusa, S.A. de C.V., Propulsora de Negocios, S.A. de C.V.,
Cambridge Lee Industries Inc. and Hilpar, S.A. de C.V. Mr. Gonzalez holds an
undergraduate business administration degree and M.B.A. from the Instituto
Tecnologico y de Estudios Superiores de Monterrey.
Edward R. Kingman, Jr. has been Executive Vice President and Chief
Operating Officer of Iusacell since February 1997 and a member of the Board of
Directors of Iusacell since April 1997. Prior thereto, between December 1993 and
February 1997, he served as Senior Vice President, Chief Financial Officer and
Treasurer of Iusacell, and was an alternate member of the Board of Directors
from April 1995 until April 1997. Previously, Mr. Kingman served as vice
president of finance at Bell Atlantic Network Services, Inc., executive director
of finance for Bell Atlantic Network Services, Inc., principal financial
executive, treasurer and controller for Bell Atlantic--Washington, D.C.
(formerly The Chesapeake and Potomac Telephone Company) and treasurer of each of
Bell Atlantic--Maryland (formerly The Chesapeake and Potomac Telephone Company
of Maryland), Bell Atlantic--Virginia (formerly The Chesapeake and Potomac
Telephone Company of Virginia) and Bell Atlantic--West Virginia (formerly The
Chesapeake and Potomac Telephone Company of West Virginia). Mr. Kingman holds an
undergraduate degree in communications from the American University. Mr.
Kingman's post-graduate training includes an M.B.A. from the American University
and the Advanced Management Program of the Harvard Graduate School of Business.
He also has advanced post-graduate training in finance from Harvard University
and the University of Pennsylvania.
Javier Martinez del Campo Lanz has been a member of the Board of Directors
of Iusacell since February 1997. Mr. Martinez del Campo has been a partner in
the law firm of De Ovando y Martinez del Campo, S.C. and its predecessors since
1984. Mr. Martinez del Campo serves on the board of directors of Grupo Gigante,
S.A. de C.V. and is a member of the boards of directors or secretary of several
other Mexican subsidiaries of foreign corporations. Mr. Martinez del Campo holds
a law degree from the Universidad Anahuac and a masters degree in comparative
law from the University of San Diego.
Jeffrey S. Noto has been a member of the Board of Directors of Iusacell
since June 1998. Since 1987, Mr. Noto has served in a variety of customer
service, planning and finance capacities within Bell Atlantic's wireless group,
the last five years as part of the international wireless division. In May 1998,
Mr. Noto was appointed Vice President - Administration and Chief Financial
Officer of Bell Atlantic's International wireless operations. Prior thereto, he
served as Director of Operations from January 1997 to May 1998, as Associate
Director of Business Development and Business Operations from August 1994 to
January 1997, and as Manager of Business and Strategic Planning from August 1992
to August 1994. Mr. Noto holds an undergraduate degree in economics from Rutgers
University.
Ruben G. Perlmutter has served as Vice President, Mergers & Acquisitions
and General Counsel and a member of the Board of Directors of Iusacell since
February 1997. From November 1993 through February 1997, Mr. Perlmutter was
employed as an attorney by Bell Atlantic Network Services, Inc. For more than
four years prior thereto, Mr. Perlmutter was a corporate associate at Kramer,
Levin, Naftalis, Nessen, Kamin & Frankel, a New York law firm. Mr. Perlmutter
holds degrees from Harvard College and Harvard Law School.
Eduardo Rihan Azar was an alternate member of the Board of Directors from
November 1993 to May 1994 and has been a member of the Board of Directors of
Iusacell since May 1994. Mr. Rihan is president of Acco Mexicana, S.A. de C.V.,
Wearever de Mexico, S.A. de C.V., Mex-Internacional, S.A. de C.V., Inmobiliaria
Chihuahua, S.A. de C.V. and Promotora de Maquiladoras DNC, S.A. de C.V. Mr.
Rihan serves as a member of the board of directors of Baja del Mar, S.A. de
C.V., Grupo Iusa, S.A. de C.V. and
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Desarrollo Industrial de Tijuana, S.A. de C.V. Mr. Rihan attended the University
of Southern California where he studied chemical engineering.
Manuel Somoza Alonso has been a member of the Board of Directors of
Iusacell since February 1997. Since 1966, Mr. Somoza has served in a variety of
capacities within the banking and brokerage industries. Mr. Somoza is currently
serving as chairman of Apolo Sociedad Operadora de Sociedades de Inversion.
Prior thereto, from 1995 to 1997, Mr. Somoza served as chairman of the board of
directors of Somoza, Cortina y Asociados, Casa de Bolsa, and from December 1996
to September 1997 as Director General of Grupo Financiero Bancrecer, S.A. From
November 1991 through June 1995, Mr. Somoza served as director general of Grupo
Financiero Invermexico, S.A. de C.V. and, from April 1992 through June 1995, as
director general of Banco Mexicano. Mr. Somoza serves on the board of directors
of Mexicana de Inversiones Femac, S.A. de C.V. Mr. Somoza holds an undergraduate
degree in economics from Universidad Anahuac and received an M.B.A. from the
Instituto Tecnologico y de Estudios Superiores de Monterrey.
Dennis F. Strigl has been a member of the Board of Directors of Iusacell
since April 1997 and was a member of the Board of Directors between November
1993 and September 1995. Mr. Strigl has served as president and chief executive
officer of Bell Atlantic Mobile Systems, Inc. and Bell Atlantic NYNEX Mobile
since 1991, and in August 1997 was elected group president and chief executive
officer of the Global Wireless Group of Bell Atlantic. Prior thereto, Mr. Strigl
was vice president for operations and chief operating officer of Bell Atlantic
New Jersey, Inc. (formerly New Jersey Bell Telephone Company) and served on its
board of directors. Between 1984 and 1989, Mr. Strigl served in a variety of
capacities for Ameritech Corporation. Mr. Strigl holds an undergraduate degree
in business administration from Canisius College and an M.B.A. from Fairleigh
Dickinson University.
Howard F. Zuckerman has been Vice President, Finance and Audit and Chief
Financial Officer of Iusacell since February 1997 and a member of the Board of
Directors of Iusacell since April 1997. Since March 1984, Mr. Zuckerman has
served in a variety of financial management positions with affiliates of Bell
Atlantic. In May 1993, he was appointed vice president, finance of the carrier
services division (serving the United States interexchange carrier market) of
Bell Atlantic Network Services, Inc., the service company for Bell Atlantic's
regulated operations. For more than nine years prior thereto, Mr. Zuckerman had
served in a variety of executive capacities with Bell Atlantic Enterprises
International, Inc. and related affiliates of the unregulated businesses of Bell
Atlantic, including chief financial officer of Bell Atlantic Investment
Development Corporation from 1988 to 1992 and director of accounting of Bell
Atlantic Enterprises, Inc. From 1975 to 1983, Mr. Zuckerman held financial
management positions with Squibb Corporation, a diversified pharmaceutical
company based in the United States, and was appointed an Assistant Corporate
Controller in July 1982. From 1970 to 1975, Mr. Zuckerman was employed by the
audit division of the New York office of Arthur Andersen & Co. Mr. Zuckerman is
a Certified Public Accountant in New York and New Jersey. He holds an economics
degree from Cornell University and an M.B.A. from the University of Chicago.
Alternate Directors
The Company's bylaws authorize Alternate Directors to serve on the Board
of Directors in place of Directors who are unable to attend meetings or
otherwise participate in the activities of the Board of Directors. The Series A
Alternate Directors are Gabriel Alarcon Brockmann, Victor Barreiro Cortes,
Antonio Cortina Icaza, Marco Antonio de la Torre Barranco, Carlos Garcia Muriel,
Ignacio Gomez Morin, Roberto Legriba Castilla, Alejandro Portilla Garceran,
Manuel Romano M. and Pedro Santamarina N. The Series B Alternate Directors are
Christopher M. Bennett, Stephen B. Heimann, Jose Estandia Fernandez, Teresa
Gomez Fernandez del Castillo, Silvia Malagon Soberanes, John A. D'Apolito, Pilar
Olmedo Martell and Xavier Sanchez Gavito. The Series D Alternate Director is
Francisco Jose Flores Melendez. The Series L Alternate Director is David A.
Riffelmacher.
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Committees of the Board of Directors
The Company has established Executive, Finance and Audit, Human Resources
and Compensation, and Strategic Planning and Technology Committees of the Board
of Directors. All decisions of these committees require a majority vote of their
members, including the favorable vote of at least one member appointed by each
of the Series A and Series B shareholders, except for decisions on matters over
which the New Shareholders Agreement provides for a supermajority vote. See
"Control of Registrant."
The Executive Committee, an administrative and decision-making body of the
Board of Directors, may act for the Board of Directors except where Mexican law
requires action of the Board of Directors. The members of the Executive
Committee are Messrs. Albertini, Babbio, Bartlett, Canales, del Valle, Dunne,
Peralta and Strigl. The Finance and Audit Committee recommends the Company's
independent public accountants, reviews Iusacell's annual consolidated financial
statements, provides oversight of Iusacell's auditing, accounting, financial
reporting and internal control functions, and reviews with management and the
Company's independent public accountants the plans and results of the auditing
function. The members of the Finance and Audit Committee are Messrs. Albertini,
Bartlett, Canales, Dunne, Gonzalez and Noto. The Human Resources and
Compensation Committee reviews, evaluates and makes recommendations to the Board
of Directors regarding Iusacell's executive compensation standards and
practices, including salaries, bonus distributions, grants under the Stock
Purchase Plan (as defined) and deferred compensation arrangements. The members
of the Human Resources and Compensation Committee are Messrs. Asher, Bartlett,
Dunne and Rihan. The Strategic Planning and Technology Committee reviews and
advises management with respect to long-term business goals, strategies and
resource allocations, and monitors and assesses the Company's technology
strategies, policies and investments. The members of the Strategic Planning and
Technology Committee are Messrs. Babbio, Bartlett, Peralta and Strigl.
ITEM 11. Compensation of Directors and Officers
Compensation
The aggregate amount of compensation paid by the Company during the year
ended December 31, 1997 to all directors and executive officers as a group was
Ps.26,437,782 million (U.S.$3,276,057), not including severance payments. In
addition, during the year ended December 31, 1997, the Company granted purchase
rights with a respect to a total of 3,195,848 Series L Shares to its executive
officers under the executive employee stock purchase plan adopted in March 1997
(the "Stock Purchase Plan"). As of December 31, 1997, executive officers of the
Company held purchase rights with respect to 2,636,835 Series L Shares; purchase
rights with respect to 559,013 Series L Shares had been forfeited by executive
officers whose labor relationship with the Company had terminated during 1997.
See "Item 12--Options to Purchase Securities from Registrant or
Subsidiaries--Executive Employee Stock Purchase Plan." As part of its general
compensation policy, the Company conducts periodic reviews of its management and
employees to determine bonus compensation.
ITEM 12. Options to Purchase Securities from Registrant or Subsidiaries
Executive Employee Stock Purchase Plan
In March 1997, Iusacell adopted an executive employee stock purchase plan
(the "Stock Purchase Plan") in order to help retain key executives and better
align their interests with those of the Company. The Stock Purchase Plan is
administered by a management trust with the assistance of the trust division of
Bancrecer, S.A. Under the Stock Purchase Plan, the technical committee of the
management trust (the "Technical Committee"), which is composed of certain
executive officers of the Company, determines the executive employees to whom
Series L Shares of Iusacell will be offered for purchase under the Stock
Purchase Plan. The Technical Committee determines the number of Series L Shares
to be offered for purchase to such executive employees, the purchase price per
share for such purchase rights (which will be the closing price for the Series L
Shares on the Mexican Stock Exchange on the business day selected by the
Technical Committee as the date of sale), the vesting schedule for such purchase
rights, the payment terms and all other terms and
66
<PAGE>
conditions therefor. Grantees who leave the employ of the Company forfeit
unvested purchase rights and, after a certain period of time, forfeit vested and
unexercised purchase rights, all of which forfeited purchase rights may be
reissued by the Technical Committee. The number of Series L Shares that may be
granted under the Stock Purchase Plan cannot exceed 4.9% of the aggregate number
of issued and outstanding Iusacell shares.
In December 1996, the shareholders of Iusacell approved the issuance of
7,812,500 Series L Shares for grant of purchase rights under the Stock Purchase
Plan. In March, June and September 1997, the Human Resources and Compensation
Committee and, in April, June and September 1997, the Technical Committee of the
Company's Board of Directors granted purchase rights with respect to a total of
8,571,121 Series L Shares to 51 executive employees at a purchase price of Ps.
8.48 per Series L Share in April 1997, Ps. 13.82 per Series L Share in June
1997, and Ps. 14.00 per Series L Share in September 1997. All such purchase
rights vest either in three equal annual installments commencing a year after
the date of grant or in a lump sum two years after the date of the grant.
As of December 31, 1997, purchase rights with respect to 7,549,834 Series
L Shares were outstanding, and purchase rights with respect to 1,506,418 Series
L Shares had been forfeited.
ITEM 13. Interest of Management in Certain Transactions
General Policy
The Company adopted a policy on transactions with related parties in
November 1993 in connection with the acquisition by Bell Atlantic of its initial
holdings in the Company. This policy provides that the Company will not, and
will not permit any of its subsidiaries to, enter into any contract or
transaction with or for the benefit of any of their affiliates (other than
transactions with, between or among wholly-owned subsidiaries), including any
member of the Peralta Group and Bell Atlantic and its subsidiaries, which is not
at a price and on other terms at least as favorable to the Company or the
subsidiary as those which could be obtained on an arm's-length basis from an
unaffiliated third party.
Bell Atlantic Facility
On July 25, 1997 Bell Atlantic agreed to provide the Company with the Bell
Atlantic Facility. The convertible subordinated debentures (the "Debentures") to
be issued under the Bell Atlantic Facility will mature on December 31, 1999, and
will bear interest at an annual rate equal to six-month LIBOR plus 500 basis
points, payable semi-annually in cash or by issuance of additional Debentures,
at the option of Bell Atlantic, subject to the terms of the Subordination
Agreement (as defined) described below.
The principal amount of the Debentures will be convertible at any time
prior to maturity into Series A Shares of the Company at a conversion price of
U.S.$0.70 per share. Any Debentures issued in lieu of cash interest will be
convertible at any time prior to maturity into Series A Shares at a conversion
price equal to the average closing price on the New York Stock Exchange of the
American Depository Receipts evidencing Series D American Depositary Shares and
Series L American Depositary Shares of the Company over 10 trading days
preceding such interest payment date. The Debentures will be transferable only
to affiliates of Bell Atlantic, subject to certain exceptions.
Bell Atlantic entered into a subordination agreement (the "Subordination
Agreement") with Chase, as administrative agent under the Chase Credit Facility,
the Trustee (as defined therein), on behalf of the holders of the Notes, and the
Company. The Subordination Agreement provides that no payments of principal,
interest or other amounts may be made with respect to the Debentures if a
default or event of default has occurred and is continuing or would result
therefrom under the Chase Credit Facility or the Indenture. In addition, the
Subordination Agreement also prohibits the payment of principal, cash interest
and other amounts (except for certain withholding taxes) except to the extent
permitted under certain covenants described in the terms and conditions of the
Notes. The credit agreement governing the Chase Credit Facility contains a
similar prohibition on such payments. No amendments, waivers or other
modifications of the Bell Atlantic Facility that would or could have a negative
adverse effect on the holders of the Notes will be permitted except with the
consent of the
67
<PAGE>
Required Lenders (as defined under the Chase Credit Facility) and the consent of
the Trustee or the holders of a majority of the principal amount of the Notes.
Breaches of the Subordination Agreement by Bell Atlantic or the Company will
constitute a default under the Chase Credit Facility and the Indenture.
Iusacell intends to satisfy its future funding needs with borrowings under
the Chase Credit Facility and from other independent sources such as additional
bank debt, export credit agency financing and vendor financing. If such
financing is not available at a rate or in the time frame required by the
Company, the Company intends to borrow under the Bell Atlantic Facility. Because
Bell Atlantic controls Iusacell, there can be no assurance, however, that
Iusacell will be permitted to borrow under the Bell Atlantic Facility. The Chase
Credit Facility requires the Company to fund Iusacell's 450 MHz local wireless
subsidiary through the Bell Atlantic Facility but only up to an aggregate amount
of U.S.$12.0 million; any Debentures issued in connection with such borrowings
must be promptly converted into Series A Shares of Iusacell. In the
Subordination Agreement, Bell Atlantic agreed not to cause or permit the
termination of the Bell Atlantic Facility.
In 1997, the Company borrowed an aggregate principal amount of U.S.$24.5
million in loans from Bell Atlantic New Zealand Holdings, Inc. at annual
interest rates equal to one-month or six-month LIBOR plus 4.00% or 5.00%. All
such borrowings were repaid on July 25, 1997 with the proceeds of the Chase
Credit Facility.
Other Transactions
Iusacell and certain subsidiaries of Bell Atlantic have entered into a
series of consulting and secondment agreements pursuant to which Bell Atlantic
has agreed, for an indefinite term, to provide Iusacell with management,
technical, marketing, legal and other consulting services and certain seconded
employees. Seconded employees generally agree to expatriate assignments of two
to three years duration, with such employees' salaries being paid by Bell
Atlantic and reimbursed by the Company. Bell Atlantic charges the Company for
the provision of consulting services at cost. With respect to consulting
services rendered in the 1997 fiscal year, Iusacell has been invoiced by Bell
Atlantic for a total of U.S.$5.5 million, which amount includes a fixed
management consulting fee of U.S.$0.2 million for the services of certain senior
Bell Atlantic officials through the close of business on February 18, 1997,
U.S.$3.0 million in reimbursement of the actual cost of seconded employees and
U.S.$2.3 million in respect of other consulting services. As part of the 1996
Share Conversion Agreement, consulting services for 1997 after the close of
business on February 18, 1997 and for subsequent years will not include a fixed
management consulting fee for the services provided by certain senior Bell
Atlantic officials.
Pursuant to the 1996 Share Conversion Agreement, in February 1997, Fiusa
Pasteje, S.A. de C.V., a member of the Peralta Group ("FIUSA"), and BAII, an
affiliate of Bell Atlantic, converted U.S.$37.2 million and U.S.$32.9 million of
Iusacell indebtedness, respectively, into Series A Shares and Series D Shares at
a conversion price of U.S.$0.70 per share. The indebtedness converted by FIUSA
represented indebtedness acquired by FIUSA from Merrill Lynch International Bank
Limited, Merchant Bank in August 1996 (plus accrued interest thereon) and
U.S.$6.0 million in loans made to Iusacell by FIUSA in December 1996 and January
1997 at an annual interest rate of LIBOR plus 500 basis points (plus accrued
interest thereon). FIUSA received 4,390,619 Series A Shares and 48,754,000
Series D Shares upon such conversion. The indebtedness converted by BAII
represented indebtedness acquired by BAII from Chase in February 1997 and
U.S.$6.0 million in loans made to Iusacell by BAII in January and February 1997
at an annual interest rate of LIBOR plus 500 basis points (plus accrued interest
thereon). BAII received 47,017,491 Series A Shares upon such conversion. See
"Item 4 -- Control of Registrant."
Desarrollo de Sistemas de Seguridad Privada, S.A. de C.V. ("Desarrollo"),
a member of the Peralta Group, and Sistecel S.A. de C.V., a wholly owned
subsidiary of the Company, entered into a Services Agreement dated January 2,
1996 pursuant to which Desarrollo provided security and secretarial services for
Mr. Peralta. The total amount charged by Desarrollo to Iusacell in 1996 was
approximately U.S.$400,000. No amount was charged by Desarrollo to Iusacell in
1997. As part of the 1996 Share Conversion Agreement, this arrangement was
terminated effective at the close of business on February 18, 1997.
68
<PAGE>
Inmobiliaria Montes Urales 460, S.A. de C.V., a subsidiary of the Company,
leases office space to Servicios Corporativos IUSA, S.A. de C.V. ("Servicios"),
a member of the Peralta Group pursuant to one-year leases which are re-priced on
January 1 of each year. Currently, payments under the lease equal U.S.$15,347
per month. In addition, Servicios has paid Iusacell Ps. 0.7 million for the
purchase of certain vehicles for Mr. Carlos Peralta.
The Peralta Group owns Fraccionadora y Constructora Mexicana, S.A. de C.V.
("Fracomex"), a company engaged in real estate investment and management that
has entered into lease agreements with certain subsidiaries of the Company. The
total amount paid by Iusacell to Fracomex per month is approximately U.S.$27,275
(such amount being based upon the market rate for such services). In 1997 these
payments totalled approximately U.S.$327,302.
Industrias Unidas, S.A. de C.V. ("IUSA"), a company controlled by the
Peralta Group, leases land, buildings, houses and a warehouse to Iusacell at
IUSA's industrial complex in Pasteje. In addition, IUSA has agreed to sell to
Iusacell equipment to provide energy and air conditioning services to the leased
buildings. Iusacell pays IUSA approximately U.S.$9,752 per month for the
foregoing leases and paid Ps. 2.5 million for the purchased equipment.
Iusacell owns 68.3% of Cellular Solutions de Mexico, S.A. de C.V.
("Cellular Solutions"), a company involved in the sale of cellular accessories.
Mr. Marco Antonio de la Torre Barranco, an alternate director of the Company,
owns the remaining 31.7% of Cellular Solutions. In 1997, the Company paid Mr. de
la Torre Ps. 273,533 for his 10% interest in Promotora Celular, S.A. de C.V., a
company involved in distributing cellular services for Iusacell and Ps. 9.2
million for his 15% interest in Rentacell, S.A. de C.V., a company engaged in
the Mexican cellular telephone rental business.
Iusacell and Jose Ramon Elizondo, a director of the Company, have
organized Punto-a-Punto Iusacell, S.A. de C.V. to participate in the operation
of three concessions for point-to-point short haul microwave frequencies
acquired in the auctions concluded in October 1997. Iusacell owns 94.9% of the
economic interest and 49% of the voting shares of this company; Mr. Elizondo
owns 51% of the voting shares thereof. The Company and Mr. Elizondo have agreed
to create a similar entity to operate the concessions for 1.9 GHz (PCS)
frequencies in Region 1 and Region 4 in the auctions completed in May 1998. See
"Item 1 -- Description of Business -- Government Regulation -- Foreign Ownership
Restrictions."
PART II
ITEM 14. Description of Securities to Be Registered
Not applicable.
PART III
ITEM 15. Default Upon Senior Securities
Not applicable.
ITEM 16. Changes in Securities and Changes in Security for Registered Securities
Not applicable.
PART IV
ITEM 17. Financial Statements
The Company has responded to Item 18 in lieu of responding to this Item.
69
<PAGE>
ITEM 18. Financial Statements
See Item 19(a) for a list of financial statements filed under Item 18.
ITEM 19. Financial Statements and Exhibits
Page
----
(a) List of Financial Statements
Report of Independent Accountants ............................. F-1
Consolidated Balance Sheets--December 31, 1997 and 1996........ F-3
Consolidated Statements of Income--Fiscal Years Ended
December 31, 1997, 1996 and 1995............................. F-5
Consolidated Statements of Changes in Stockholders'
Equity--Fiscal Years Ended December 31, 1997, 1996 and 1995.. F-6
Consolidated Statements of Changes in Financial Position--
Fiscal Years Ended December 31, 1997, 1996 and 1995.......... F-7
Notes to Consolidated Financial Statements..................... F-9
Financial Statement Schedules
Report of Independent Accountants on Financial Statement
Schedules.................................................... S-1
Schedule II--Valuation and Qualifying Accounts and Reserves.... S-2
(b) List of Exhibits
Agreement for Equipment, Furnish and Installation, for Iusacell's
Cellular Network dated December 10, 1997 between Grupo Iusacell,
S.A. de C.V., Lucent Technologies World Services Inc. and Lucent
Technologies de Mexico, S.A. de C.V.*Exhibit A
- ---------
* Certain clauses have been omitted and filed separately with the Securities
and Exchange Commission pursuant to a request for confidential treatment
under Rule 24b-2 of the Exchange Act of 1934.
70
<PAGE>
The Board of Directors of
Grupo Iusacell, S.A. de C.V.:
We have audited the accompanying consolidated balance sheets of Grupo
Iusacell, S.A. de C.V. (the "Company") and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, changes in
stockholders' equity, and changes in financial position for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted audited
standards in Mexico. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material mis- statement and are prepared in accordance with generally
accepted accounting principles. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
a. The carrying values of the Company's property, plant and equipment
related to the 450 project are dependent on the assumption that these assets
will continue to be used in the operations of the Company. As a result of the
delays experienced by the Company and the uncertainty relating to the Company's
ability, at a commercially reasonable cost, to implement full scale local
wireless service in the 450 MHz frequency band, the Company may determine not to
pursue such service. In that event, the Company would record substantial
non-cash losses, consisting of the write off of assets in the range of Ps.
826,100, including about 90% of the tangible assets and all the pre-operative
expenses (see Note 19.k).
b. As mentioned in Note 4.b, until December 31, 1996, the Company restated
Property and Equipment, net, and depreciation for the year, based on fair market
values determined from appraisals performed by independent appraisers; as a
result of the application of the Fifth Amendment of Bulletin B-10, modified,
issued by the Mexican
F-1
<PAGE>
Institute of Public Accountants, for the period ended December 31, 1997, such
method was changed to the method of restating based on the National Consumer
Price Index. For this reason amounts as of December 31, 1997 for the
above-mentioned items are not comparable with the figures as of December 31,
1996.
c. As of December 31, 1996, the Company established a reserve for
restructuring costs for Ps.157,850,000, which was charged to the consolidated
income statement as an extraordinary expense (see Notes 2, 4.d and 8.b to the
consolidated financial statements).
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Grupo Iusacell, S.A. de C.V. and subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of its operations, changes in stockholders' equity
and changes in its consolidated financial position for each of the three years
in the period ended December 31, 1997, in conformity with accounting principles
generally accepted in Mexico.
Accounting principles generally accepted in Mexico vary in certain
respects from accounting principles generally accepted in the United States. In
our opinion, based on our audits, application of accounting principles generally
accepted in the United States would have affected the determination of the
amount shown as net loss for the years ended December 31, 1997, 1996 and 1995
and the total amount of stockholders' equity as of December 31, 1997 and 1996 to
the extent summarized in Note 19 to the consolidated financial statements.
COOPERS & LYBRAND
DESPACHO ROBERTO CASAS ALATRISTE
/s/ Coopers & Lybrand
Juan Manuel Ferron Solis
Public Accountant
Mexico City, D.F., Mexico
February 16, 1998 and
June 30, 1998 for Notes 19 and 20 and paragraph a.
F-2
<PAGE>
GRUPO IUSACELL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of December 31, 1997)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
CURRENT:
Cash and cash equivalents Ps. 117,497 Ps. 105,185
------------- -------------
Accounts receivable:
Trade, net of Ps.78,136 and Ps.106,808 of
allowance for doubtful accounts in 1997
and 1996, respectively (Note 4.d) 204,512 152,596
Related parties (note 5) 44,028 8,178
Recoverable taxes and other 226,084 93,502
------------- -------------
474,624 254,276
------------- -------------
Inventories (Note 6) 269,069 115,717
------------- -------------
Total current assets 861,190 475,178
INVESTMENT IN ASSOCIATED COMPANIES (Note 7) 17,781 101,669
PROPERTY AND EQUIPMENT, net (Note 8) 3,014,660 3,595,776
OTHER ASSETS, net (Note 9) 1,265,545 718,372
EXCESS OF COST OF INVESTMENTS IN SUBSIDIARIES OVER
BOOK VALUE, net of accumulated amortization
of Ps.252,197 in 1997 and Ps.191,632 in 1996 Note 4.i) 1,516,019 1,589,765
------------- -------------
Total assets Ps. 6,675,195 Ps. 6,480,760
============= =============
LIABILITIES
CURRENT:
Notes payable (Note 10) Ps. 2,663 Ps. 809,331
Current portion of long-term debt (Note 10) -- 122,126
Trade accounts payable (Note 11) 704,014 501,831
Related parties (Note 5) 80,294 406,674
Taxes and other payables 325,794 399,865
Income tax (Note 12) 8,833 7,074
Employee profit sharing (Note 12) 78 143
------------- -------------
Total current liabilities 1,121,676 2,247,044
LONG-TERM DEBT (Note 10) 2,218,837 595,723
TRADE ACCOUNTS PAYABLE, LONG-TERM (Note 11) 4,040 11,228
COMMITMENTS AND CONTINGENCIES (notes 4.k and 13) 2,299 2,191
------------- -------------
Total liabilities 3,346,852 2,856,186
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------------ ------------
STOCKHOLDERS' EQUITY
<S> <C> <C>
CONTRIBUTED CAPITAL (Notes 14 and 15):
Capital stock:
Nominal 2,979,286 2,356,153
Restatement 3,403,818 3,328,449
------------ ------------
6,383,104 5,684,602
------------ ------------
Capital contributed:
Nominal 18,655 18,655
Restatement 42,601 42,601
------------ ------------
61,256 61,256
------------ ------------
6,444,360 5,745,858
------------ ------------
EARNED CAPITAL (Note 15):
Accumulated losses:
Legal reserve 3,349 3,349
For prior years (1,585,879) (1,190,945)
For the year (72,259) (394,934)
------------ -----------
(1,654,789) (1,582,530)
------------ ------------
Deficit from restatement (1,472,802) (544,802)
------------ -----------
Total majority stockholders' equity 3,316,769 3,618,526
MINORITY INTEREST 11,574 6,048
------------ -----------
Total stockholders' equity 3,328,343 3,624,574
------------ -----------
Total liabilities and stockholders' equity Ps.6,675,195 Ps.6,480,760
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
GRUPO IUSACELL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of December 31, 1997)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Services Ps.1,543,132 Ps.1,591,637 Ps.1,756,274
Telephone equipment sales and other 317,354 256,728 312,936
------------ ------------ ------------
1,860,486 1,848,365 2,069,210
------------ ------------ ------------
COST OF SALES:
Cost of services 514,215 583,533 643,895
Cost of telephone equipment and other 201,447 143,129 173,690
------------ ------------ ------------
715,662 726,662 817,585
Gross profit 1,144,824 1,121,703 1,251,625
------------ ------------ ------------
OPERATING EXPENSES 743,777 800,763 913,942
DEPRECIATION AND AMORTIZATION 581,926 657,314 728,100
------------ ------------ ------------
Operating loss (180,879) (336,374) (390,417)
------------ ------------ ------------
INTEGRAL FINANCING COST (GAIN):
Interest expense, net 248,200 305,573 188,354
Foreign exchange loss (gain), net 48,464 (67,531) 766,614
Gain from monetary position (292,724) (378,659) (545,261)
------------ ------------ ------------
3,940 (140,617) 409,707
------------ ------------ ------------
EQUITY PARTICIPATION IN NET (GAIN)
LOSS OF ASSOCIATED COMPANIES (Note 7) (157,688) 6,516 42,554
------------ ------------ ------------
Loss on continuing operations
before assets tax, employee
profit sharing, minority in-
terest and extraordinary item (27,131) (202,273) (842,678)
------------ ------------ ------------
PROVISIONS FOR
Asset tax 45,335 38,267 31,630
Employee profit sharing -- -- 2,263
------------ ------------ ------------
45,335 38,267 33,893
------------ ------------ ------------
Loss before minority interest
and extraordinary item (72,466) (240,540) (876,571)
MINORITY INTEREST 207 3,456 40,258
------------ ------------ ------------
Loss before extraordinary item (72,259) (237,084) (836,313)
EXTRAORDINARY ITEM:
Group reorganization charge
Notes 2, 4.d and 8.b) -- 157,850 --
------------ ------------ ------------
Net loss for the year (Ps. 72,259) (Ps. 394,934) (Ps. 836,313)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (thousands) 1,070,825 981,624 981,624
============ ============ ============
LOSS PER SHARE BEFORE EXTRAORDINARY
ITEM (pesos) (Ps. 0.07) (Ps. 0.24 (Ps. 0.85)
============ ============ ============
NET LOSS PER SHARE (pesos) (Ps. 0.07) (Ps. 0.40) (Ps. 0.85)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
GRUPO IUSACELL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of December 31, 1997)
<TABLE>
<CAPTION>
Accumulated losses
------------------
Capital (Deficit) Total
Stock Capital Legal Prior For the excess from Minority stockholders'
subscribed contributions reserve years year restatement interest equity
---------- ------------- ------- ----- ------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1994 Ps.5,684,602 Ps. 61,256 Ps. 3,349 Ps. 407,568 (Ps.762,200) Ps. 700,223 Ps. 7,877 Ps.6,102,675
Application of 1994
net loss (762,200) 762,200 --
Recognition of the
effects of inflation
on the financial
statements (460,090) (460,090)
Minority interest for
the year (35,733)
Net loss for the year (836,313) (836,313)
------------ ----------- ---------- ----------- ---------- ----------- ---------- ------------
Balance at December
31, 1995 5,684,602 61,256 3,349 (354,632) (836,313) 240,133 (27,856) 4,770,539
Application of 1995
net loss (836,313) 836,313 --
Recognition of the
effects of inflation
on the financial
statements (784,935) (784,935)
Minority interest for
the year 33,904 33,904
Net loss for the year (394,934) (394,934)
------------ ----------- ---------- ----------- ---------- ----------- ---------- ------------
Balance at December
31, 1996 5,684,602 61,256 3,349 (1,190,945) (394,934) (544,802) 6,048 3,624,574
Application of 1996
net loss (394,934) 394,934 --
Increase in capital
stock from the
capitalization of
stockholders' debt 615,345 615,345
Increase in capital
stock through the
issuance of shares
under the Executive
Stock Purchase Plan 83,157 83,157
Recognition of the
effects of inflation
on the financial
statements (928,000) (928,000)
Minority interest for
the year 5,526 5,526
Net loss for the year (72,259) (72,259)
------------ ----------- ---------- ----------- ---------- ----------- ---------- ------------
Balance at December
31, 1997 Ps.6,383,104 Ps. 61,256 Ps. 3,349 (Ps.1,585,879) (Ps.72,259) (Ps.1,472,802) Ps.11,574 Ps.3,328,343
============ =========== ========== ============ ========== ============ ========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
GRUPO IUSACELL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of December 31, 1997)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Loss before extraordinary item .......... (Ps. 72,259) (Ps. 237,084) (Ps.836,313)
Items not requiring the use of resources:
Depreciation and amortization ......... 581,926 657,314 733,755
Equity participation in net (gain)
loss of associated companies ........ (157,688) 6,516 42,554
Minority interest ..................... (207) (3,456) (40,258)
----------- ------------ -----------
351,772 423,290 (100,262)
Resources (used for) provided by
operating activities-
Trade accounts receivable ............... (51,916) 41,615 134,849
Related parties ......................... (362,230) 357,561 43,353
Recoverable taxes and other ............. (132,582) (27,552) 86,092
Inventories ............................. (153,352) 61,126 51,849
Trade accounts payable .................. 194,995 (456,162) 296,386
Taxes and other payables ................ (74,071) 104,767 93,019
Income tax .............................. 1,759 5,729 1,345
Employee profit sharing ................. (65) (227) (915)
Other ................................... 108 66 202
----------- ------------ -----------
Resources (used for) provided
by operating activities before
extraordinary item .................. (225,582) 510,213 605,918
Extraordinary item:
Group reorganization charge ............. -- 157,850 --
----------- ------------ -----------
Resources (used for) provided
by operating activities ............. (225,582) 352,363 605,918
----------- ------------ -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt ............ 2,218,837 113,240 30,186
Principal payments on long-term debt .... (717,849) (555,900) (476,109)
Net change in notes payable ............. (806,668) 62,946 679,379
Increase of capital stock ............... 698,502 -- --
----------- ------------ -----------
Resources provided by (used
for) financing activities ........... 1,392,822 (379,714) 233,456
----------- ------------ -----------
INVESTING ACTIVITIES:
Purchase of property and equipment ...... (677,853) (276,015) (512,349)
Sale of common stock of associated
companies ............................. 247,309 22,911 (55,778)
(Purchase) disposal of other assets ..... (724,384) 192,010 (357,416)
----------- ------------ -----------
</TABLE>
F-7
<PAGE>
<TABLE>
<S> <C> <C> <C>
Resources used for investing
activities (1,154,928) (61,094) (925,543)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 12,312 (88,445) (86,169)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR 105,185 193,630 279,799
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR Ps. 117,497 Ps. 105,185 Ps. 193,630
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997, 1996 AND 1995
(Adjusted for price-level changes and expressed in thousands
of constant Mexican pesos as of December 31, 1997 and
thousands of U.S. Dollars)
1. Entity and Nature of Business
Grupo Iusacell, S.A. de C.V. (the "Company") is a holding Company
which was incorporated on October 6, 1992. Its subsidiaries are primarily
engaged in the wireless telecommunications business and hold concessions to
operate cellular telephone systems in four contiguous market areas ("Regions")
in Mexico. In October 1995, the Company received a concession from the Mexican
government to operate as a long distance carrier and started its operations in
this market in August 1996. During 1996, the Company also signed a joint venture
agreement for the operation of nationwide and international paging services. The
Company started to provide paging services in August 1996.
Affiliated companies of each of the Peralta Family and Bell Atlantic
Corporation ("Bell Atlantic") hold substantial ownership interests (direct or
indirect) in the Company.
On December 27, 1996, the Company's stockholders signed a definitive
agreement to change the management control of Grupo Iusacell, S.A. de C.V., from
the Peralta Family to Bell Atlantic, subject to certain Mexican government
approvals. Bell Atlantic assumed such management control on February 18, 1997
(see Note 14).
The Company and its subsidiaries are referred to collectively herein
as the "Group" or "Grupo Iusacell".
2. Acquisitions and Group Reorganization
Acquisitions of Regions 5, 6 and 7
In 1993, the Company obtained ownership of Sistemas Telefonicos Portatiles
Celulares, S.A. de C.V. ("Portacel") and Telecomunicaciones del Golfo, S.A. de
C.V. ("Telgolfo"). Portacel and Telgolfo hold the non-wireline cellular
concessions for Region 6 and Region 7, respectively.
F-9
<PAGE>
The cost incurred in 1993 to acquire control of Portacel and Telgolfo
amounted to Ps.924,731, of which Ps.788,872 represented the excess of investment
cost over the book value.
In February 1994, the Company purchased the remaining minority ownership
interest of Telgolfo for Ps.56,363, of which Ps.52,463 represented the excess of
investment cost over the book value.
In 1993, the Company acquired 67% of Hermes Telecomunicaciones, S.A. de
C.V. ("Hermes"), a company that owns 51% of Comunicaciones Celulares de
Occidente, S.A. de C.V. ("Comcel"). Comcel holds the non-wireline cellular
concession for Region 5. In December 1993, the Company reached an agreement to
purchase the remaining interests in both Comcel and Hermes. The Company's cost
of acquiring Comcel and Hermes totaled Ps.1,207,508, of which Ps.978,925
represented the excess of investment cost over the book value.
Other acquisitions
In 1994, the Company acquired 51% of Telecomunicaciones Digitales
Internacionales, S.A. de C.V. (later renamed Iusatel Chile, S.A. de C.V.). The
Company purchased this ownership interest for Ps.22,211, which was the book
value of the shares acquired. During 1996, the Company increased its ownership
interest in Iusatel Chile, S.A. de C.V. from 51% to 100% through the payment of
$100 U.S. Dollars to the minority stockholders in connection with the settlement
of litigation among the Company, Iusatel Chile, S.A. de C.V. and such minority
stockholders. In December 1996, the Company sold its debt and equity in Iusatel
Chile, S. A. de C. V. for $5,000 U.S. Dollars. Payment was received in the form
of three promissory notes which matured between March and July 1997. Full
payment of such notes was made in December 1997.
In August 1994, the Company increased its ownership in Compania Colombiana
de Telefonia Celular, S.A. ("Telecel") from 28.5% to 63.25%, by acquiring an
additional 34.75% interest. The cost to acquire this interest was Ps.35,724, of
which Ps.25,307 represented the excess of investment cost over the book value.
In March 1995, the Company increased its ownership interest in Telecel through a
capital contribution of Ps.839. Through this contribution, the Company increased
its ownership in Telecel from 63.25% to 70.14%.
On December 13, 1994, Iusacell, S.A. de C.V. (subsidiary company) acquired
99.99% of Inmobiliaria Montes Urales 460, S.A. de C.V. The cost was Ps.77, 166,
of which Ps.14,500 represented the excess of investment cost over the book
value. In March 1997, the Company signed an agreement under which the assets of
Inmobiliaria Montes Urales 460, S.A. de C.V. are to be sold to a third party for
approximately 8,275 U.S. Dollars.
In August 1995, the Company acquired from a related party 100% interest of
Iusatel, S.A. de C.V. Starting August 11, 1996, Iusatel, S.A. de C.V. began to
provide national and international long distance basic telephone services
pursuant to a concession received from the Mexican government in October 1995.
Under the conditions established by the Mexican government for Bell Atlantic's
assumption of management control of the Company, the Company
F-10
<PAGE>
must sell a majority of the voting shares of Iusatel, S.A. de C.V. to a Mexican
national by August 1998.
In August 1995, the Company incorporated as a new subsidiary, Grupo
Iusacell de Nicaragua, S.A. This company owns 100% of the shares of Radio
Telefonia Rural de Nicaragua, S.A. which in July 1995 entered into a joint
venture agreement with the Nicaraguan Telecommunications Ministry for the
provision of fixed wireless local telephone services. In May 1996, the
Nicaraguan Telecommunications Ministry revoked the agreement. As of December 31,
1997, the Company has not made any investment in this project and has no
commitments for any such investments.
In December 1995, the Company signed a joint venture agreement with
Infomin, S.A. de C.V., a Mexican company which holds a fifteen-year concession
to provide nationwide and international paging services through July 2009.
Pursuant to this agreement, in March 1996, the Company and Infomin established a
joint venture company, Infotelecom, S.A. de C.V., which is owned 51% and 49% by
the Company and Infomin, respectively. The Company committed to contribute up to
$10,500 U.S. Dollars; as of December 31, 1997 and 1996, the Company had invested
$8,500 and $3,500 U.S. Dollars, respectively, in the joint venture. The joint
venture agreement establishes the individual and joint responsibilities of the
partners. In case a partner does not fulfill its responsibilities, sanctions
could cause such partner to lose its investment and up to $1,000 U.S.Dollars as
a penalty.
In January 1996, the Company increased its ownership in Renta-Cell, S.A.
de C.V., which rents cellular phones, from 33.33% to 70% through the acquisition
of an additional 36.67% from its partners. The cost to acquire this interest was
Ps.3,786. Starting January 1996, the Company consolidated the assets,
liabilities and operating results of this subsidiary. In November 1997, the
Company increased its ownership of Renta-cell, S.A. de C.V. from 70% to 100%
through the acquisition of an additional 30% from its partners. The cost to
acquire the remaining interest was Ps.18,500 which represented the excess of
investment cost over the book value.
Group Reorganization
During 1996, several of the Company's subsidiaries were reorganized or
merged. The reorganization consisted of the following operations:
At an extraordinary stockholders' meetings held on December 31, 1996, the
respective stockholders of Hermes Telecomunicaciones, S.A. de C.V., GMD
Comunicaciones, S.A. de C.V. and Portaserv, S.A. de C.V., voted to dissolve
these companies. As of this date, these three companies have not performed any
transactions except those necessary to wind-up their pending businesses.
At the end of 1996, and based on the reorganization of the Company and the
change in the managerial and administrative control of the Group (which occurred
in February 1997), the Company established a reserve of Ps.157,850 for the
restructuring expenses associated with the reorganization. This reserve, due to
its characteristics of being non-recurrent and unusual,
F-11
<PAGE>
represents an extraordinary item in the consolidated income statement. The
composition of this reserve is as follows:
Provision for consolidation of facilities Ps.82,971
Employee severance 30,781
Fixed assets obsolescence reserve 38,188
Change in estimate of allowance for 5,910
doubtful accounts ----------
Ps.157,850
==========
Summary
The subsidiary companies which are included within the consolidated
financial statements are as follows (directly or indirectly):
Ownership Interest
as of December 31
-----------------
Subsidiary 1997 1996
-------------------------------------- ---- ----
S.O.S. Telecomunicaciones, S.A. de C.V. 100% 100%
Iusacell, S.A. de C.V. 100% 100%
Sistecel, S.A. de C.V. 100% 100%
Comunicaciones Celulares de Occidente, 100% 100%
S.A. de C.V. (Region 5)
Sistemas Telefonicos Portatiles Celulares, 100% 100%
S.A. de C.V. (Region 6)
Telecomunicaciones del Golfo, S.A. de 100% 100%
C.V. (Region 7)
Inflight Phone de Mexico, S.A de C.V. 100% 100%
GMD Comunicaciones, S.A. de C.V. 100% 100%
Hermes Telecomunicaciones, S.A. de 100% 100%
C.V.
Inmobiliaria Montes Urales 460, S.A. de 100% 100%
C.V.
Portaserv, S.A. de C.V. 100% 100%
Mexican Cellular Investments, Inc. 100% 100%
Iusanet, S.A. de C.V. 100% 100%
Promotora Celular, S.A. de C.V. 100% 75%
Renta-Cell, S.A. de C.V. 100% 70%
Iusatelecomunicaciones, S.A. de C.V. 100% 100%
Iusatel, S.A. de C.V. 100% 100%
F-12
<PAGE>
Ownership Interest
as of December 31
-----------------
Subsidiary 1997 1996
-------------------------------------- ---- ----
Grupo Iusacell Nicaragua, S.A. 100% 100%
Compaia Colombiana de Telefonia 70% 70%
Celular, S.A.
Cellular Solutions de Mexico, S.A. de 68% 68%
C.V.
Satelitron, S.A. de C.V. 65% 51%
Infotelecom, S.A. de C.V. 51% 51%
3. Basis of presentation
a) Basis of Presentation
The Group's consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in Mexico ("Mexican
GAAP").
The consolidated financial statements for the two periods have been
presented in thousands of constant Mexican pesos as of December 31, 1997 as
required by Bulletin B-10, "Recognition of the Effects of Inflation on Financial
Information", as amended, issued by the Mexican Institute of Public Accountants
("Bulletin B-10"). All amounts presented in U.S.
Dollars are in thousands.
The amounts as of December 31, 1996 and 1995, presented in the
financial statements and in the notes have been restated based on the 1997
annual inflation rate (15.72%) based on the National Consumer Price Index (NCPI)
published by Banco de Mexico (Mexican Central Bank) in order to present them in
Mexican pesos of purchasing power as of December 31, 1997.
b) Consolidated financial statements
Those companies in which the Group holds 50% or more of the capital
stock and/or exercises control over operating and financing activities are
included in the consolidated financial statements.
All significant intercompany balances and transactions have been
eliminated on consolidation.
c) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the
F-13
<PAGE>
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
4. Accounting Policies
A summary of the Group's significant accounting policies is as follows:
a) Monetary unit
The financial statements are presented in Mexican pesos, the
currency that, based on Mexican laws, must be used to prepare the accounting
records of the Company and its Mexican subsidiaries. All amounts presented in
the 1997, 1996 and 1995 consolidated financial statements are expressed in
thousands of Mexican pesos.
b) Effects of inflation on the financial statements
The consolidated financial statements of the Group have been
prepared in accordance with Bulletin B-10. The Third Amendment of Bulletin B-10,
effective for fiscal years beginning January 1, 1990 and thereafter, requires
the restatement of all comparative financial statements to constant Mexican
pesos as of the date of the most recent balance sheet presented. Accordingly,
the consolidated financial statements have been restated as follows:
- Consolidated income statements for the current and prior year have been
restated to constant Mexican pesos as of December 31, 1997 using the NCPI
from the periods in which the transactions (income and expenses) occurred.
- Bulletin B-12, "Statement of Changes in Financial Information," issued
by the Mexican Institute of Public Accountants ("Bulletin B-12"),
addresses the appropriate presentation of the statement of changes in
financial position where financial statements have been restated to
constant Mexican pesos as of the latest balance sheet date. Bulletin B-12
identifies the origination and application of resources representing
differences between beginning and ending balance sheet balances in
constant Mexican pesos, excluding the effect of holding non-monetary
assets. Bulletin B-12 also provides that monetary and foreign exchange
gains and losses should not be eliminated from resources provided by
operating activities, nor from financing activities.
The items which originate from the recognition of effects of inflation on
financial information are as follows:
Restatement of non-monetary assets:
Inventories are valued at the average price of the purchases made during
the period, and are restated using the NCPI, without exceeding net
realizable value.
F-14
<PAGE>
Until December 31, 1996, property and equipment other than real
estate were stated at net replacement cost. Real estate properties were
stated at their fair market value. Net replacement cost and fair market
values were determined from appraisals performed by independent appraisers
registered with the Comision Nacional Bancaria y de Valores (Mexican
National Banking and Securities Comission).
Based on the Fifth Amendment of Bulletin B-10, effective January 1,
1997, property and equipment, net, and depreciation for the year, are
restated using the NCPI factors, without exceeding net realizable value.
Based on the pace of technological change in the telecommunications
industry, the Company reduced the carrying value of its communications
equipment to net replacement cost in November 1997. This valuation was
determined from an appraisal performed by independent appraisers
registered with the Comision Nacional Bancaria y de Valores in order to
comply with the Second Amendment of Bulletin B-10, which requires
non-monetary assets to be valued no higher than net replacement cost.
Accordingly, NCPI factors were not applicable and the appraisal resulted
in a charge to the deficit from holding non-monetary assets account in
stockholders' equity.
Property and equipment, other than communications equipment, are
depreciated using the straight-line method, based on the restated values.
Until December 31, 1996 useful lives were determined by independent
appraisers. For communications equipment, useful lives are still being
determined by independent appraisers. The average annual rates of
depreciation used by the Company are as follows:
1997 1996
-------- --------
Buildings and facilities 3% 3%
Communications equipment 9% 10%
Furniture and fixtures 9% 8%
Transportation equipment 17% 15%
Computer equipment 21% 21%
Cellular rental telephones 25% 25%
Investments in associated companies are accounted for using the
equity method based on the investees' equity adjusted for the effects of
inflation in accordance with Bulletin B-10.
Restatement of stockholders' equity:
The common stock and retained earnings accounts include the effect
of restatement determined by applying the NCPI factor from the date
capital was contributed or earned. The restatement represents the amount
required to maintain the contributions and accumulated results in constant
Mexican pesos as of December 31, 1997.
F-15
<PAGE>
The excess or deficit from restatement of capital is an element of
stockholders' equity that includes surplus or deficit from holding
nonmonetary assets, which represents the excess or deficit in specific
values of net nonmonetary assets in comparison with the increase
attributable to general inflation as measured by the NCPI.
Integral financing (gain) cost:
Integral financing (gain) cost comprises net interest expense,
foreign exchange gains and losses, and gains and losses from net monetary
position.
Foreign exchange gains and losses on transactions denominated in
currencies other than Mexican pesos result from fluctuations in exchange
rates from the date transactions are recorded to the time of settlement or
valuation at the end of the period.
Gains and losses from monetary position represent the effects of
inflation, as measured by the NCPI, on the Group's monetary assets and
liabilities at the beginning of each month. If monetary liabilities exceed
monetary assets, there is a gain from monetary position. Otherwise, if
monetary liabilities are less than monetary assets, there is a resulting
loss from monetary position.
c) Cash and cash equivalents
Cash and short-term investments consist primarily of short-term,
fixed rate investments and bank deposits. The Company invests its excess cash in
deposits with major banks. The investments are carried at cost plus accrued
interest, which approximates market value. These investments are highly liquid
cash equivalents, having a maturity of ninety days or less when acquired.
d) Allowance for doubtful accounts
The Company cancels service to those customers with invoices that
are 60 days past due. Beginning in 1996, the Company began to fully reserve
accounts receivable that were 90 days past due. Prior to 1996, the Company fully
reserved accounts receivable over 120 days past due. The accumulated effect at
the beginning of the year for the change of this estimate was Ps.5,910 and such
amount is presented as part of the reorganization reserve (see Note 2). During
1997, 1996 and 1995, the Company wrote off accounts receivable for Ps.36,424,
Ps.77,092 and Ps.79,361, respectively. The charge to income for the year, to
increase the allowance for doubtful accounts, amounted to Ps.16,807, Ps.68,168
and Ps.89,776, in 1997, 1996 and 1995, respectively.
e) Investment in associated companies
Long-term investments in common stock of companies in which the
Group owns not less than 20% nor more than 50% of the entity's voting common
stock and over which the Company can exercise significant influence are
accounted for using the equity method. Under the equity method such investments
are carried at cost adjusted for the Company's share of the
F-16
<PAGE>
net income or losses of these companies and the effects of restatement of
non-monetary assets by the associated companies. The effect of transactions with
such associated companies are eliminated before applying the equity method.
Investments of less than 20% of an entity's voting common stock or
over which the Company cannot exercise significant influence are stated at cost.
f) Cellular Telephones
Cellular telephones given to customers through an exclusive service
contract are amortized over the initial contract period which averages eighteen
months. The amortization is periodically reviewed and adjusted if the customer
does not fulfill the original agreement. The cost of such telephones are
included in other assets, net of accumulated amortization.
The cost of cellular telephones sold to customers is recorded as a
cost of telephone equipment sold. Telephones leased to customers are included in
fixed assets and are depreciated over the initial lease period, generally two
years.
g) Concessions
Costs related to the acquisition of concessions granted by the
Mexican government to provide cellular telephone services have been capitalized
and are included in other assets. Such costs are amortized on a straight-line
basis over a twenty-year period, which is the period of the concession. The
Mexican government requires that the Company comply with the specific
requirements of each concession. The Company has substantially complied with
such requirements through December 31, 1997, except for certain informational
requirements of the authorities. The Company believes this situation does not
expose such concessions to any regulatory risk.
h) Advertising
Prepaid media advertising costs are included in other assets in the
accompanying balance sheet. Such costs are expensed, as incurred, and are
included in current operating expenses.
i) Excess of cost of investment in subsidiaries over book value
The excess of cost over the book value of net assets of acquired
subsidiaries is amortized on a straightline basis over twenty years.
Amortization expense was Ps.93,352, Ps.100,991 and Ps.88,355 in 1997, 1996 and
1995, respectively.
The carrying amount applicable to each acquired subsidiary is
reviewed if the facts and circumstances suggest that it might be impaired.
F-17
<PAGE>
j) Income taxes and employee profit sharing
Income taxes are computed in accordance with the partial liability
method, as required by Bulletin D-4, "Accounting Treatment for Income Tax and
Employee Profit Sharing," issued by the Mexican Institute of Public Accountants
("Bulletin D-4"), under which deferred income tax provisions are recorded for
identifiable, non-recurring temporary differences (i.e., those expected to
reverse over a definite period of time) at rates in effect at the time such
differences arise, and reversed at the rates in effect at the time such
differences reverse.
In accordance with Bulletin D-4, the Company did not record a
provision for deferred taxes as of December 31, 1997, 1996 and 1995.
Employee profit sharing is a statutory labor obligation payable to
employees which is determined on the basis of each subsidiary's pretax income as
adjusted in accordance with the provisions of the Mexican labor law and the
Mexican tax law.
k) Seniority premiums
In accordance with Mexican labor law, the Group's employees are
entitled to seniority premiums after 15 years of service or upon dismissal,
disability or death. The Group follows Bulletin D-3, "Labor Obligations", issued
by the Mexican Institute of Public Accountants ("Bulletin D-3"). Under Bulletin
D-3, the actuarially determined projected benefit obligation is computed using
estimates of salaries that will be in effect at the time of payment. Personnel
not yet eligible for seniority premiums are also included in the determination
of the obligation with necessary adjustments made in accordance with the
probability that these employees will reach the required seniority. At December
31, 1997, the average seniority of the eligible employees is less than 4 years.
Also, in accordance with Mexican labor law, the Company is liable
for severance payments to employees who are dismissed under certain
circumstances. Such compensation is expensed when paid.
The Company has no employee pension plans and does not provide for
post retirement benefits.
l) Earnings (loss) per share
Effective January 1, 1997, Bulletin B-14 "Earnings per Share" issued
by the Mexican Institute of Public Accountants ("Bulletin B-14"), requires the
disclosure in the income statement of the net earning (loss) per share, and any
per share effect of any extraordinary item affecting the net profit or loss for
the year. Such per share amounts must be calculated based on the weighted
average number of shares of common and/or preferred stock outstanding.
F-18
<PAGE>
m) Revenue recognition
Cellular air time is recorded as revenue as service is provided.
Sales of equipment and related services are recorded when goods and services are
delivered. Cellular access charges are billed in advance and recognized when the
services are provided. Other revenue, mainly from paging and long distance
services, are recognized on provision of these services.
n) Foreign currency transactions
Foreign currency transactions are recorded at the exchange rates in
effect at the transaction date. Assets and liabilities denominated in foreign
currencies are translated to Mexican pesos using the exchange rates in effect at
the time of settlement or valuation at each balance sheet date, with resulting
exchange differences being recognized as exchange gains or losses.
5. Related parties
Affiliates of the Peralta Family and Bell Atlantic hold substantial
ownership interests (direct or indirect) in the Company. In addition, the
Peralta Family holds ownership interests in various other entities, primarily
Industrias Unidas, S.A. de C.V. ("IUSA") and related entities which are
customers of or suppliers to the Company.
A summary of related party accounts and notes receivable, including
interest, as of December 31, is as follows:
1997 1996
---------- ---------
Punto a Punto Iusacell, S.A. Ps 36,434 Ps. --
de C.V.
IUSA and related entities 7,594 4,804
Peralta Family entites -- 3,374
---------- ---------
Total Ps. 44,028 Ps. 8,178
========== =========
Accounts receivable result from the financing of related parties'
operations, the sale of cellular telephone services and operating lease
contracts.
Accounts and notes payable to related parties, including interest,
as of December 31, are as follows:
F-19
<PAGE>
1997 1996
----------- ------------
IUSA and related Ps. 3,577 Ps. 788
entities
Peralta Family entities -- 605
FIUSA Pasteje -- 329,570
Bell Atlantic 76,717 75,711
----------- ------------
Total Ps.80,294 Ps.406,674
Accounts payable result from the leasing of some facilities and services
received. The notes payable to FIUSA Pasteje and Bell Atlantic resulted from the
financing of the Company's operations.
As a part of the agreement signed by Company's stockholders to change the
management control of Grupo Iusacell, at an extraordinary stockholders' meeting
in December 1996, the Company's stockholders approved the capitalization of
outstanding debt with Bell Atlantic and FIUSA Pasteje (see Note 14).
During 1997, as a part of the program to restructure its indebtedness
fully described in Note 10, the Company repaid its borrowings from Bell Atlantic
prior to the stated maturity date.
Following is an analysis of the related party transactions described above
for the years ended December 31:
1997 1996 1995
--------- ---------- ---------
Service revenue Ps. 8,837 Ps. 10,793 Ps.12,535
Lease income 2,019 2,296 2,537
Interest income -- -- 474
Total income Ps.10,856 Ps. 13,089 Ps.15,546
Commission
expenses Ps. 89 Ps. 3,573 Ps.18,255
Technical expenses 30,417 68,827 39,653
Lease expenses 3,586 6,908 2,842
Interest expense 22,275 34,247 16,014
Operating expenses -- 7,329 12,780
--------- ---------- ---------
Total expenses Ps.56,367 Ps.120,884 Ps.89,544
========= ========== =========
6. Inventories
As of December 31, inventories consist of the following:
F-20
<PAGE>
1997 1996
---------- ----------
Cellular telephones and
accessories Ps.253,628 Ps.94,411
Allowance for obsolete and
slow-moving inventories (29,348) (37,267)
---------- ----------
Net 224,280 57,144
Advances to suppliers 44,789 58,573
---------- ----------
Total inventories Ps.269,069 Ps.115,717
========== ==========
7. Investment in associated companies
The Company and a Mexican national organized Punto a Punto Iusacell, S. A.
de C. V. to participate in the auctions for microwave frequencies. The Company
owns 94.9% of the economic interest and 49% of the voting shares of Punto a
Punto Iusacell, S. A. de C. V.
On September 30, 1997, the Company consummated the sale of its direct and
indirect minority interests in its Ecuadorian cellular and paging companies,
Consorcio Ecuatoriano de Telecomunicaciones, S. A. (CONECEL) and Corptilor, S.A.
At the closing of the transaction, the Company received $29,400 U.S. Dollars in
cash consideration for its direct interests in CONECEL and anticipates receiving
up to an additional $2,000 U.S. Dollars, net of taxes, in respect to its
indirect interests. This sale generated a gain of Ps.156,849.
As of December 31, the Group's investment in associated companies is as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Entity Ownership Investment Ownership Investment
- ------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Editorial Celular, S.A.
de C.V. 40.00% 3,822 40.00% Ps. 2,530
Punto a Punto Iusacell,
S.A. de C.V. 94.90% 48 -- --
Consorcio Ecuatoriano de
Telecomunicaciones,
S.A. -- -- 27.53% 88,617
Other 13,911 10,522
--------- ----------
Ps.17,781 Ps.101,699
========= ==========
</TABLE>
Summarized financial information for these associated companies accounted
for by the equity method as of and for the years ended December 31, 1997 and
1996, is as follows:
F-21
<PAGE>
1997 1996
---------- ----------
Total assets Ps. 45,191 Ps.519,565
Total liabilities 40,298 275,515
Revenues 27,142 282,705
Gross profit 12,917 14,693
Net income 2,098 6,157
Group's share of net gain
(loss) 157,688 (6,516)
========== ==========
8. Property and equipment, net
a) At December 31, property and equipment, net consisted of:
1997 1996
------------ ------------
Buildings and facilities Ps.1,050,476 Ps.1,060,570
Communications
equipment 2,434,930 3,489,562
Furniture and fixtures 92,030 69,784
Transportation
equipment 38,744 39,501
Computer equipment 224,421 192,467
Cellular rental
telephones 26,617 26,855
------------- -------------
3,867,218 4,878,739
Accumulated
depreciation (1,568,411) (1,617,695)
------------- -------------
2,298,807 3,261,044
Land 36,556 38,004
Construction in
progress 445,047 171,075
Advances to suppliers 234,250 125,653
------------- -------------
Ps. 3,014,660 Ps. 3,595,776
============= =============
b) Depreciation expense was Ps.330,969, Ps.330,721 and Ps.318,341 for
1997, 1996 and 1995, respectively. In 1996, the Company established an
obsolescence reserve of Ps.38,188 for certain communications equipment, which is
included in the accumulated depreciation and is part of the restructuring
expenses classified as an extraordinary item. This reserve is included in the
balance of accumulated depreciation at December 31, 1996.
F-22
<PAGE>
9. Other assets
At December 31, other assets consisted of the following:
1997 1996
------------ ----------
Concessions Ps. 194,548 Ps.175,815
Cellular telephones to 84,378 72,627
be amortized
Prepaid expenses 97,032 47,569
Advance payments 298,000 84,467
450 Project 509,117 330,760
preoperating expenses
(Note 18)
Preoperating expenses, 23,237 4,318
other
Other 59,233 2,816
------------ ----------
Ps.1,265,545 Ps.718,372
============ ==========
Cellular telephones amortization expense was Ps.157,605, Ps.225,602 and
Ps.317,701 in 1997, 1996 and 1995, respectively.
10. Notes payable and long-term debt
During 1997, the Company restructured its loans, through the offering of
long-term, unsecured senior notes and a long-term, secured syndicated bank loan.
The proceeds from both transactions were used principally to repay (i) $65,440
U.S. Dollars of short-term notes (including interest and commissions) contracted
with a U.S. bank, (ii) $119,174 U.S. Dollars of short-term and long-term loans
(including interest and commissions) contracted with Mexican banks, and (iii)
$25,498 U.S. Dollars of a credit obtained from Bell Atlantic (see Note 5).
As of December 31, 1997, the long-term debt of the Company consisted of
the following:
U.S. Dollars Mexican Pesos
------------ -------------
Long-term bank loan U.S.$125,000 Ps.1,008,562
Unsecured senior notes 150,000 1,210,275
------------ ------------
U.S.$275,000 Ps.2,218,837
============ ============
Long-term bank loan
This loan consists of $125,000 U.S. Dollars maturing on July 15, 2002,
bearing interest at a variable rate which will be elected by the Company, equal
to (i) LIBOR plus 1.75% or (ii)
F-23
<PAGE>
the higher of the loan agent's prime rate, the reserve adjusted secondary market
rate for certificates of deposit plus 1% or the Federal Funds effective rate
plus 0.5%. Interest is payable quarterly. The loan has principal amortization
requirements as follows:
Date U.S. Dollars
---- ------------
July 15, 2000 U.S.$18,750
July 15, 2001 51,250
July 15, 2002 55,000
------------
U.S.$125,000
============
As a part of this arrangement, the Company has a revolving credit facility
in the United States for up to $100,000 U.S. Dollars with principal payments of
15% in 2000, 41% in 2001 and 44% in 2002. The facility expires in July 1998. As
of December 31, 1997, the Company had not used this revolving credit facility.
In January and February 1998, the Company withdrew $52,000 U.S. Dollars under
this revolving credit facility.
Senior notes
On July 15, 1997 the Company concluded an offering of senior notes due
July 15, 2004 for $150, 000 U.S. Dollars, bearing interest at a fixed rate of
10% payable semi-annually starting January 15, 1998 (the "Notes"). The Notes
will be redeemable, at the option of the Company, in whole or in part, at any
time on or after July 15, 2001 starting at a redemption price of 105.0% plus
accrued interest, if any, declining to 102.5% after July 15, 2002, and finally
to 100.0% after July 15, 2003.
In addition, at any time and from time to time prior to July 15, 2000, the
Company may redeem in the aggregate up to 35% of the original aggregate
principal amount of the notes with proceeds of a public equity offering by the
Company at a redemption price of 110.0% plus accrued interest, if any. The notes
may be redeemed at a price equal to 100.0% plus accrued interest, if any, in the
case of legal changes affecting the treatment of the withholding taxes on
payments to holders of the notes.
The long-term bank loan and the senior notes impose certain restrictive
covenants such as maintenance of certain financial ratios, restrictions on
incurring additional debt, limitations on capital expenditures, and restrictions
on the sale or lease of the Group's assets. As of December 31, 1997, the Company
has complied with such covenants.
At December 31, 1996, the notes payable and long-term debt consisted of
the following:
F-24
<PAGE>
Notes payable at December 31, 1996:
1996
----------
Short term loan of $24,282 U.S Dollars bearing
interest at a variable rate of LIBOR plus 5.75% and
maturing on February 28, 1997 Ps.220,086
Unsecured business short term loan of $65,000 U.S.
Dollars bearing interest at a variable rate of LIBOR
plus 4% and maturity dates from February through
March 1997. 589,245
----------
Total Ps.809,331
==========
Long term debt at December 31, 1996:
1996
----------
Long-term loan of $18,000 U.S. Dollars bearing
interest at a variable rate of LIBOR plus 2.9375%
maturing December 2001. Interest and principal were
payable semiannually commencing June 15, 1994. Ps.163,152
Long-term loan of $7,935 U.S. Dollars bearing interest
at a rate of 12.55% maturing on July 15, 2002.
Interest and principal were payable semi-annually
commencing January 1994. 71,923
Long-term loan of $33,952 U.S. Dollars bearing
interest at a variable rate of LIBOR plus 4% maturing
on January 28, 2004. Interest and principal were
payable semiannually commencing June 1994. 307,735
Long-term loan of $13,156 U.S. Dollars bearing
interest at a variable rate of LIBOR plus 3.75%
maturing on November 14, 2004. Interest and
principal were payable semiannually commencing July
1994. 119,241
Various medium and long-term loans denominated in
U.S. Dollars bearing interest at rates that ranged from
LIBOR plus 2.5% to LIBOR plus 3%, maturing
between February 1998 and April 2002. 55,798
----------
Total Ps.717,849
Less current portion (122,126)
----------
Total long-term Ps.595,723
==========
F-25
<PAGE>
As of December 31, 1997 and 1996, assets collateralizing long-term debt
include substantially all assets, (including the cellular concessions) and other
property and equipment.
The Group leases certain communications equipment and transportation
equipment under agreements which are classified as capital leases. Most
equipment leases have purchase options at the end of the original lease term.
Leased capital assets included in property and equipment at December 31, 1997
and 1996 are as follows:
1997 1996
--------- ---------
Communications Ps.17,389 Ps.26,315
equipment
Accumulated (4,970) (5,182)
depreciation --------- ---------
Ps.12,419 Ps.21,133
========= =========
11. Trade accounts payable
As of December 31, trade accounts payable consisted of the following:
1997 1996
---------- ----------
Current accounts Ps.696,700 Ps.294,464
Notes payable 7,314 207,367
---------- ----------
Total Ps.704,014 Ps.501,831
========== ==========
Long-term notes Ps. 4,040 Ps. 11,228
payable ========== ==========
As of December 31, 1996, because of various disputes with Telefonos de
Mexico, S.A. de C.V. and affiliated companies ("Telmex'") the Company had only
partially paid amounts invoiced by that company.
On August 14, 1997, the Company and Telmex entered into a settlement
agreement with respect to the fees charged by Telmex to Iusacell through May 31,
1997 for interconnection services, switched long distance services and certain
other services billed by Telmex as of the date of the settlement agreement. The
Company paid Telmex Ps.170,000, of which Ps.22,200 constituted value-added tax
and Ps.28,600 was accounted for as interest expense.
In September 1997, the Company and Telmex also entered into amendments to
the current interconnection agreement pursuant to which the Company agreed to
pay Telmex an interim interconnection rate of 31 cents per minute retroactive to
June 1, 1997 and Telmex agreed to extend to the Company the 38% discount
available to other large business consumers for use of its long distance
network.
F-26
<PAGE>
12. Income Tax, Assets Tax and Employee Profit Sharing
The Company has filed a consolidated income tax return since the tax year
beginning January 1, 1994.
The income tax rate is 34%. The provision for income tax differs from the
statutory income tax rate due to temporary and permanent differences in the
determination of the income for tax reporting and financial reporting purposes.
The most significant temporary differences are the tax deduction for inventory
purchases and certain liability accruals which are deductible only when paid for
tax purposes. The most important permanent items are the differences between
book and tax depreciation, goodwill amortization and non-deductible expenses.
In accordance with Mexican accounting principles, no deferred taxes have
been provided on temporary differences since such differences are of a recurring
nature and their realization cannot be foreseen in a defined period of time.
The 1.8% net assets tax is calculated on the average value of
substantially all assets less certain liabilities. This tax is required to be
paid if this computation exceeds the amount of income tax. The 1.8% assets tax
paid may be utilized as a credit against future income tax in the years in which
the Company generates an income tax in excess of the assets tax. The assets tax
is available as a carry forward for up to ten years and is subject to
restatement based on the National Consumer Price Index when used. As of December
31, 1997, the net assets tax available as carry forward was Ps.133,217.
At December 31, 1997, the Company had the following net operating losses
for income tax purposes that may be carried forward and applied against future
taxable earnings:
Year of Loss Amount of Loss Expiration Year
------------ -------------- ---------------
1991 Ps. 9,456 2001
1993 459,365 2003
1994 988,500 2004
1995 510,785 2005
1996 6,694 2006
1997 265,752 2007
These losses are indexed for inflation from the year incurred to the sixth
month of the year utilized. Accordingly, these amounts include inflation up to
June 1997. Losses include Ps.171,432 and Ps.258,019 of capital stock issuance
costs expensed for tax purposes in 1994 and 1993. Such amounts were charged
against stockholders equity in the financial statements.
Employee profit sharing, generally 10%, is computed on taxable income,
with adjustments to exclude inflationary effects and the restatement of
depreciation expense. In the years ended December 31, 1997 and 1996 there were
no provisions for profit sharing.
F-27
<PAGE>
The effective rate reconciliation as of December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Income tax benefit at statutory rate (Ps. 14,417) (Ps. 135,753) (Ps.286,510)
Add (deduct):
Inventory purchases less cost of sales (76,281) (36,719) (90,800)
Depreciation and amortization (111,205) (109,443) (133,130)
Differences between interest and
inflationary gains or losses 93,856 165,793 224,521
Net assets tax 45,335 38,267 31,630
Application of income tax loss
carryforwards 90,356 11,081 164,157
Provision for doubtful accounts 12,080 (1,428) 7,290
Telephones to be amortized 42,032 58,886 86,445
Goodwill amortized 29,443 27,865 25,798
Other (65,864) 19,718 2,229
----------- ----------- ----------
Effective income tax expense at effect
rate Ps. 45,335 Ps. 38,267 Ps. 31,630
=========== =========== ==========
</TABLE>
13. Commitments and contingencies
As of December 31, 1997, the Company has the following commitments and
contingent liabilities:
a) The Company has entered into operating lease agreements for
administrative offices, sales branches, and service facilities. Such lease
agreements expire at various dates through 2007. Some agreements contain options
for renewal. Rental expense was Ps.62,166, Ps.54,409 and Ps.55,360 for the years
ended December 31, 1997, 1996 and 1995, respectively.
Future minimum rental payments under existing leases with terms in excess
of one year as of December 31, 1997 are as follows:
1998 Ps. 69,287
1999 59,486
2000 53,153
2001 44,672
Thereafter 36,005
----------
Ps.262,603
==========
F-28
<PAGE>
b) For taxes and penalties that the tax authorities may collect if they
disagree with the criteria applied by the Group regarding the calculation of
some taxes, rights and federal contributions as a result of prior years' tax
returns. As of this date, there has been no notification of disagreement from
the authorities. In February 1996, the tax authorities (Secretaria de Hacienda y
Credito Puiblico) started an audit in three companies of the Group (Grupo
Iusacell, S.A. de C.V., Iusacell, S.A. de C.V. and SOS Telecomunicaciones, S.A.
de C.V.). During 1997, the tax authorities finished such audit and determined
differences of Ps.6,135, including penalties and surcharges. These differences
are classified as a part of the provision for taxes in the income statement for
1997.
c) Mitsubishi Electronics America Inc. ("MELA") filed a complaint in the
United States on July 18, 1996 against Grupo Iusacell, S.A. de C.V. and Bell
Atlantic Corporation. Essentially, Mitsubishi alleges that it had a contract
with Grupo Iusacell for the sale of telephone terminals and that Iusacell has
breached the contract by not purchasing the terminals. MELA alleges the contract
was for the sale of 60,000 units at a unit cost of .510 U.S. Dollars. Grupo
Iusacell filed a motion to dismiss for lack of personal jurisdiction. The motion
was denied by Illinois State court. Management believes the lawsuit has no basis
and does not anticipate that any significant damages will result in favor of
MELA at the end of the lawsuit. The lawsuit is currently in the discovery stage.
d) In 1996, the Company received a notification from the authorities
requesting the payment of surcharges related to the purchase completed in 3
installments in 1990 of the Region 5 concession. This Region was bought by Grupo
Iusacell in 1993 (see Note 2). In 1997, the Ministry of Communications and
Transportation ("S.C.T.") notified the Company that, based on its review, the
Company had no further obligation with respect to such concession payments.
e) In December 1997, the Company signed an agreement with Lucent
Technologies to purchase CDMA-based wireless equipment for $ 182,000 U.S.
Dollars, to install its digital cellular network. In connection with this
contract, Lucent has issued trade-in credits to the Company for approximately $
90,000 U.S. Dollars, representing the net replacement cost of the network
equipment being displaced.
f) In February 1998, the Company's former advertising agency sued the
Company for Ps.23,000, alleging improper termination of its contract. Management
believes the lawsuit has no basis and does not anticipate that any significant
damages in favor of such former advertising agency will result at the end of the
lawsuit.
14. Contributed capital
As mentioned in Note 1, in December 1996, the Company's principal
stockholders signed an agreement to transfer management control over Grupo
Iusacell to Bell Atlantic. Following the signed agreement, at a extraordinary
stockholders' meeting, the following resolutions modifying the Company's bylaws
were adopted:
(1) Series A shares may be acquired by Mexicans and/or foreigners.
F-29
<PAGE>
(2) The conversion of 200,000,000 Series B shares and 166,769,760
Series D shares, for 366,769,760 Series A shares.
(3) The conversion of 100,000,000 Series A shares for 100,000,000
Series D shares.
These resolutions were subject to the receipt of authorizations from the
National Foreign Investment Commission and the Federal Competition Commission.
On February 10 and 12, 1997, Grupo Iusacell's new share ownership and management
control structure received the required Mexican government authorizations.
Based on the above mentioned authorizations and the adoption of such
resolutions, the stockholders decided to increase the fixed portion of the
capital stock by up to Ps.720,000 through the issuance of up to 74,163,591
Series A shares and up to 54,407,837 Series D shares. At the same stockholders'
meeting, an Executive Employee Stock Purchase Plan for the Company's executives
(the "Stock Purchase Plan") was approved (see Note 15) . As part of this plan,
the stockholders decided to increase the fixed portion of the capital stock by
up to Ps.100,000 through the issuance of up to 15,625,000
On February 28, 1997 the Company's Board of Directors ratified a capital
increase of Ps.545,351. The shares were offered for their subscription and
payment in the following way:
a) Bell Atlantic Latin America Holdings, Inc. subscribed 47,017,491 Series
A shares through the capitalization of certain liabilities.
b) FIUSA Pasteje, S.A. de C.V. subscribed 4,390,619 Series A shares and
48,754,265 Series D shares through the capitalization of certain liabilities.
c) Preemptive stockholder rights were exercised for the amount of 92,584
Series L shares.
Additionally, 7,812,500 Series L shares were kept in Company's treasury
available for the Stock Purchase Plan. During 1997, 7,549,834 of these shares
have been subscribed by employees, as follows:
On April, 17, 1997, the Technical Committee of the trust administrating
the Stock Purchase Plan ("Technical Committee") approved the subscription of
5,741,033 Series L shares for the Stock Purchase Plan. The subscription price
for those shares was Ps.52,648.
On June 6, 1997, the Technical Committee approved the subscription of
1,124,344 Series L shares for the Stock Purchase Plan. The subscription price
for those shares was Ps.15,639.
On September 30, 1997 the Technical Committee approved the subscription of
684,457 Series L shares for the Stock Purchase Plan. The subscription price for
those shares was Ps.9,495.
F-30
<PAGE>
As of December 31, 1997, 262,666 Series L shares remained available in the
Company's treasury for issuance under the Stock Purchase Plan.
The changes in the number of shares of common stock for the period January
1, 1995 through December 31, 1997 are analyzed as follows:
Number of
Shares
-------------
January 1, 1995 balance 981,624,430
No changes -------------
December 31, 1995 balance 981,624,430
No changes -------------
December 31, 1996 balance 981,624,430
February 28, 1997 - issuance of
common stock through the capitalization of debt 100,254,959
April 17, 1997 - issuance of
common stock for the Stock Purchase Plan 5,741,033
June 6, 1997 - issuance of common stock
for the Stock Purchase Plan 1,124,344
September 30, 1997 - issuance of
common stock for the Stock Purchase Plan 684,457
-------------
December 31, 1997 balance 1,089,429,223
=============
At December 31, 1997 and 1996, the issued and outstanding shares of common
stock of the Company, without par value, are as follows:
1997 1996
------------- -----------
Series A 746,753,410 428,575,540
Series B 5,562,450 205,562,450
Series D 186,904,725 204,920,220
Series L 150,208,638 142,566,220
------------- -----------
Total 1,089,429,223 981,624,430
============= ===========
Series A, B and D represent shares entitling the holder of each share to
one vote at the Company's stockholders' meetings. The stockholders of Series L
shares may vote only in limited circumstances as described in the Company's
bylaws. Stockholder actions on certain matters require approval by both Series A
and Series B stockholders.
F-31
<PAGE>
Series A shares must always represent no less than 51% of the capital
stock with full voting rights and are acquirable by Mexicans or foreigners.
Series B, D and L shares may also be acquired by foreigners or Mexicans.
Series B shares cannot exceed 29.1% of the total capital stock and Series
D shares cannot exceed 19.9% of the total capital stock. Series L shares cannot
exceed 19% of the total capital stock.
15. Executive Employee Stock Purchase Plan
In March 1997, the Company adopted the Stock Purchase Plan. The Stock
Purchase Plan is administrated by a management trust with the assistance of the
trust division of a Mexican Bank. Under the Stock Purchase Plan, the Technical
Committee, which is composed of certain executive officers of the Company,
determines the executive employees to whom Series L shares of the Company will
be offered for purchase. The Technical Committee also determines the number of
Series L shares to be offered for purchase to such executive employees, the
purchase price per share for such purchase rights, the vesting schedule for such
purchase rights, the payment terms and all other terms and conditions therefor.
The number of Series L shares that may be granted under the Stock Purchase Plan
cannot exceed 4.9% of the aggregate number of issued and outstanding Company
shares.
During 1997, the Technical Committee granted purchase rights with respect
to a total of 7,549,834 Series L shares. All such purchase rights vest either in
three equal annual installments commencing on April 17, 1998, June 6, 1998 or
September 30, 1998 or in their entirety on April 17, 1999 or June 6, 1999 (see
Note 14).
16. Earned Capital
In accordance with Mexican corporate law, a legal reserve must be created,
and annually increased by 5% of the annual net earnings until it reaches 20% of
the common stock amount. This reserve is not available for dividends, but may be
used to reduce a deficit or may be transferred to capital.
As defined in the Federal income tax law, a tax on dividends is calculated
based on the paid dividends which exceed taxable net income. The accumulated
taxable net income of the Company as of December 31, 1997 is approximately
Ps.86,488.
The Company cannot pay dividends under the covenants for the senior notes
and bank loans.
The earned capital accounts consist of the following:
F-32
<PAGE>
December 31, 1997
-------------------------------------------------
Accumulated
Historical adjustments
value for inflation Total
------------- ------------- -------------
Legal reserve Ps. 1,499 Ps. 1,850 Ps. 3,349
Accumulated losses from prior (1,646,797) 60,918 (1,585,879)
years
Net loss for the year (192,364) 120,105 (72,259)
Deficit from restatement -- (1,472,802) (1,472,802)
------------- ------------- -------------
Total (Ps.1,837,662) (Ps.1,289,929) (Ps.3,127,591)
============= ============= =============
December 31, 1996
-------------------------------------------------
Accumulated
Historical adjustments
value for inflation Total
------------- ------------- -------------
Legal reserve Ps. 1,499 Ps. 1,850 Ps. 3,349
Accumulated losses from prior (1,131,162) (59,783) (1,190,945)
years
Net loss for the year (515,635) 120,701 (394,934)
Deficit from restatement -- (544,802) (544,802)
------------- ----------- -------------
Total (Ps.1,645,298) (Ps.482,034) (Ps.2,127,332)
============= =========== =============
17. Foreign Currency Position
The balance sheet as of December 31 includes assets and liabilities
denominated in U.S. Dollars, as follows:
1997 1996
----------------- -----------------
Monetary assets U.S.$ 52,166 U.S.$ 12,752
Monetary liabilities 360,775 254,629
----------------- -----------------
Net monetary liability position
in U.S. Dollars U.S.$ 308,609 U.S.$ 241,877
================= =================
Equivalent in nominal Mexican
pesos Ps. 2,489,887 Ps. 1,894,502
================= =================
During 1997 and 1996, interest expense and interest income on assets and
liabilities denominated in U.S. Dollars were as follows:
F-33
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
Interest income U.S.$ 386 U.S.$ 18,298 U.S.$ 7,749
Interest expense 15,994 52,011 28,779
-------------- -------------- ---------------
Net expense U.S.$ 15,608 U.S.$ 33,713 U.S.$ 21,030
============== ============== ===============
Equivalent in nominal Mexican pesos Ps. 125,927 Ps. 264,057 Ps. 162,764
============== ============== ===============
</TABLE>
The exchange rate as of December 31, 1997, 1996 and 1995 was Ps.8.0681,
Ps.7.8325 and 7.7396 per 1 U.S. Dollar, respectively. At the issuance date of
these financial statements, the exchange rate in effect was Ps.8.4652 per 1 U.S.
Dollar.
18. Project 450
During 1994, the Company created a subsidiary to be in charge of providing
fixed wireless local telephony services ("Project 450"). At December 31, the
Company's investment in Project 450 consisted of the following assets:
1997 1996
----------- -------------
Fixed assets PS. 362,144 U.S.$ 423,489
Capitalized interest (Note 9) 262,185 167,734
Inventory 19,275 23,116
Pre-operating expenses (Note 9) 246,932 163,026
----------- -------------
Total Ps. 890,536 Ps. 777,365
=========== =============
December 31, 1996 amounts have been reclassified to conform to the 1997
presentation.
The Company had an agreement with a foreign supplier under which it agreed
to buy approximately $315,000 U.S. Dollars worth of network switching equipment
and radio base station equipment as well as associated software and technical
services for the development of the local wireless network, in a five year
period commencing when the Ministry of Communications and Transportation
("S.C.T.") would grant the required licenses. On December 31, 1997, this
agreement automatically terminated without penalty. Consequently, any obligation
of the Company to acquire any additional equipment under the agreement was
terminated.
On June 10, 1997, the S.C.T. and the Company reached an agreement on a
process whereby the Company could obtain a concession issued and recognized by
the S.C.T. to provide local wireless service in the 450 MHz frequency band.
Although the Company is exploring alternatives for providing local telephone
service in other frequency bands, management believes that at least 75% of the
Project 450 tangible assets could be used in its cellular operations. (See Note
19).
F-34
<PAGE>
19. Differences between Mexican and United States
Generally Accepted Accounting Principles
The Company's consolidated financial statements are prepared based on
accounting principles generally accepted in Mexico ("Mexican GAAP"), which
differ in certain significant respects from United States generally accepted
accounting principles ("U.S. GAAP").
The following reconciliation to U.S. GAAP does not include the reversal of
the adjustments to the financial statements for the effects of inflation
required under Mexican Bulletin B-10. The application of Bulletin B-10
represents a comprehensive measure of the effects of price-level changes in the
financial statements based on historical cost for Mexican and U.S. accounting
purposes. The principal differences, other than inflation accounting, between
Mexican and U.S. GAAP are listed below, together with an explanation where
appropriate, of the adjustments that affect consolidated net income and
stockholders' equity for each of years ended December 31, 1997, 1996 and 1995.
a) Deferred income taxes and employee profit sharing
Under Mexican GAAP deferred income taxes are provided for
identifiable, non-recurring timing differences (those expected to reverse over a
definite period of time) at rates in effect at the time such differences
originate. Benefits from loss carryforwards are not allowed to be recognized
before the period in which the carryforward is utilized. For purposes of this
reconciliation to U.S. GAAP, the Company has applied Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"("SFAS 109"), for all
periods presented.
SFAS 109 requires an asset and liability method of accounting
whereby deferred taxes are recognized for the tax consequences of all temporary
differences between the financial statement carrying amounts and the related tax
bases of assets and liabilities. Under U.S. GAAP, the effect on deferred taxes
of a change in tax rate is recognized in income in the period that includes the
enactment date.
SFAS 109 requires deferred tax assets to be reduced by a valuation
allowance if, based on the weight of available evidence, including cumulative
losses in recent years, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
As described in Note 12, Mexican tax law requires payment of a 1.8%
tax on the Company's net assets which may be used to offset future income tax
obligations. Under Mexican GAAP, the net asset tax is charged to the provision
for income taxes. Under SFAS 109, such amounts are treated as a deferred tax
benefit and offset by a valuation allowance, if required.
Employee profit sharing expense, which is based on each subsidiary's
taxable income after certain statutory adjustments, is included in the income
tax provision under Mexican GAAP. The provision for employee profit sharing is
charged to operations for U.S.
GAAP purposes.
F-35
<PAGE>
b) Capitalized interest
Under Mexican GAAP, capitalization of integral financing costs on
assets under construction is allowed but not required. For Mexican GAAP purposes
the Company began capitalizing interest on January 1, 1995. Prior to this date,
interests costs were expensed for Mexican GAAP purposes. Under Mexican GAAP,
interest on those obligations which are identified as relating to construction
projects is subject to capitalization. For U.S. GAAP purposes, interest is
capitalized by applying the weighted average rate of borrowings to the average
amount of accumulated expenditures for the asset. In 1994, the interest
capitalized under Mexican GAAP was adjusted to reconcile with U.S. GAAP. For the
years ended December 31, 1997 and 1996, there was no difference in the amounts
capitalized under Mexican and U.S. GAAP. As of December 31, 1997 and 1996, the
capitalized interest amounted to Ps.262,185 and Ps.167,734, respectively.
c) Acquisitions
Under Mexican GAAP, assets and liabilities of acquired subsidiaries
are carried over the acquiring entity's financial statements at their book value
as of the date of acquisition. The excess of cost over such book value is
recorded as "excess of cost of investment in subsidiaries over book value"
("goodwill") in the accompanying balance sheets.
Under U.S. GAAP, for acquisitions accounted for using the purchase
method, the cost of acquiring another entity is allocated to the tangible and
identifiable intangible assets based on their fair values at the date of
acquisition and liabilities assumed are recorded at their then current fair
values. Any excess of cost over such fair values is recorded as goodwill.
In the accompanying balance sheet, the concessions acquired in the
acquisitions of Regions 5, 6 and 7, have been recorded at their book value under
Mexican GAAP and not at their fair value as required by U.S. GAAP. Substantially
all goodwill recorded under Mexican GAAP would be assigned to cellular
concessions under U.S. GAAP. However, since acquired concessions are amortized
over the same twenty year period as goodwill, there is no effect on U.S. GAAP
net income or stockholders' equity.
d) Fixed assets impairment
Statement of Financial Accounting Standard No. 121: "Accounting for
the impairment of long lived assets and for long lived assets to be disposed of"
states that assets to be disposed of should be accounted for at the lower of
carrying amount or fair value less costs to sell. Any reduction in the carrying
value of the assets should be accounted for as a component of income from
operations.
Therefore under US GAAP, the reduction in the carrying value of the
telecommunications analog network would be accounted for as a component of
income from operations rather than as a reduction in the amount "Excess from
restatement" in stockholders' equity. The effects of the above adjustment are
included in paragraph j) below.
F-36
<PAGE>
e) Investment in Project 450
Under Mexican GAAP capital expenditures, related finance costs and
pre-operating costs related to Project 450 have been capitalized.
Under U.S. GAAP pre-operating costs that meet the definition of
deferred start up costs would be expensed as incurred.
f) Minority interest
Under Mexican GAAP, the minority interest in consolidated
subsidiaries is presented as a separate component within the stockholders'
equity section of the consolidated balance sheet. For U.S. GAAP purposes,
minority interest is not included in stockholders' equity and accordingly is
deducted as a reconciling item to arrive at U.S. GAAP equity.
g) Earnings (loss) per share
As of January 1, 1997, Mexican GAAP requires the disclosure of earnings
per share ("EPS") for public companies. Under U.S. GAAP, disclosure of EPS is
also required for public companies. Accordingly, EPS has been computed for the
years ended December 31, 1997, 1996 and 1995, based on the weighted average
number of common shares outstanding during such periods.
h) Effect of inflation accounting on U.S. GAAP adjustments
In order to determine the net effect on the financial statements of
recognizing certain of the adjustments described above, it is necessary to
recognize the effects of applying the Mexican GAAP inflation accounting
principles (described in Note 4) to such adjustments.
i) Extraordinary item
In the financial statements prepared in accordance with Mexican
GAAP, Ps.157,850 relating to restructuring charges for 1996 have been clasified
as an extraordinary item. Under U.S. GAAP such amounts would be classified as
operating expenses.
j) Net loss and stockholders' equity under U.S. GAAP
The following is a summary of net loss and stockholders' equity
adjusted to take into account certain material differences between Mexican GAAP
and U.S. GAAP:
F-37
<PAGE>
Years ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ -----------
Net loss as reported under Mexican
GAAP (Ps. 394,934) (Ps. 72,259) (Ps.836,313)
Deferred income taxes 370,290 195,340 263,260
Fixed assets revaluation (928,000) -- --
Project 450 investment (64,203) (69,695) --
Gain on net monetary position 15,142 115,195 178,142
------------ ------------ -----------
Net loss under U.S. GAAP (Ps. 679,030) (Ps. 154,094) (Ps.394,911)
============ ============ ===========
Weighted average number of shares
outstanding (thousands) 1,070,825 981,624 981,624
============ ============ ===========
Net loss per share (pesos) (Ps. 0.63) (Ps. 0.16) (Ps. 0.40)
============ ============ ===========
Years ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Stockholders' equity as reported
under Mexican GAAP Ps.3,328,343 Ps.3,624,574 Ps.4,770,539
Minority interest (11,574) (6,048) 27,856
Deferred income taxes 96,615 (273,673) --
Project 450 investment (133,898) (69,695) (763,672)
------------ ------------ ------------
Stockholders' equity
under U.S. GAAP Ps.3,279,486 Ps.3,275,158 Ps.4,034,723
============ ============ ============
k) Supplementary U.S. GAAP disclosures
(1) Cash flow information
Since Statement of Financial Accounting Standards No. 95, "Statement
of Cash Flows" ("SFAS95"), does not provide any specific guidance with respect
to inflation adjusted financial statements, for U.S. GAAP purposes, the
following cash flow statement is presented, using U.S. GAAP balance sheets
restated for inflation. Monetary gains and losses, and unrealized foreign
exchange gains and losses have been included as operating cash flow reconciling
items. Other items have been included based on their cash flows, adjusted by
inflation.
F-38
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1997 1996 1995
--------------------------------------------------
Operating Activities:
<S> <C> <C> <C>
Net loss under U.S. GAAP (Ps.679,030) (Ps.154,094) (Ps.394,911)
Adjustments to reconcile net loss
to cash provided by (used in)
operating activities:
Depreciation 330,969 330,721 318,341
Amortization 250,957 326,593 415,414
Equity in loss (earnings) of
associated companies (157,688) 6,516 42,554
Increase in allowance for doubtfu1
accounts 6,807 77,091 89,776
Increase in allowance for obsolete
and slow-moving inventories (2,856) 4,467 56,725
Fixed assets revaluation 928,000 -- --
Minority interest (207) (3,457) (40,258)
Deferred income taxes and
employee profit sharing (16,799) (195,340) (263,259)
Gain on net monetary position and
foreign exchange losses (326,858) (661,589) (723,403)
Group reorganization reserve -- 157,850 --
Changes in operating assets and
liabilities:
Accounts receivable (89,566) (94,399) 7,995
Inventories (150,496) 56,661 (4,875)
Trade accounts payable and
related parties (91,377) (73,303) 532,216
Taxes and other payable (241,826) 138,851 223,277
Income Tax 2,602 5,501 429
Other 342 65 202
-------------- ------------- ---------------
Net cash provided by (used in)
operating activities (535,182) (77,860) 260,223
============== ============= ===============
</TABLE>
F-39
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Financing activities:
Proceeds from notes payable and
long-term debt 2,396,507 150,340 1,859,677
Payments of notes payable and
long-term debt (1,524,246) (299,073) (1,343,015)
Increase of capital stock 698,502 -- --
------------ ----------- -----------
Total cash provided by (used in)
financing activities 1,570,763 (148,733) 579,151
------------ ----------- -----------
Investing activities:
Purchase of property and
equipment, net (677,853) (229,665) (512,349)
Investment in associated
companies, net of cash acquired 247,309 22,911 (55,778)
Purchase of other assets (592,725) 344,902 (357,416)
------------ ----------- -----------
Total cash (used in) provided by
investing activities (1,023,269) 138,148 (925,543)
------------ ----------- -----------
Net increase (decrease) in cash Ps. 12,312 (Ps.88,445) (Ps. 86,169)
Cash at beginning of year 105,185 193,630 279,799
------------ ----------- -----------
Cash at the end of year Ps. 117,497 Ps. 105,185 Ps. 193,630
============ =========== ===========
Interest expense paid Ps. 127,750 Ps. 195,340 Ps. 263,260
============ =========== ===========
Income tax paid Ps. 36,502 Ps. 34,347 Ps. 24,482
============ =========== ===========
</TABLE>
Supplemental disclosures of non-cash activities:
As detailed in Note 2, the sale of the investment in Iusatel Chile and the
increase in the participation in the equity of Renta-Cell, were non-cash
transaction for the year ended December 31, 1996. The sale of the investment in
Iusatel Chile became a cash transaction during 1997.
(2) The provision for income taxes for the years ended December 31, 1997,
1996 and 1995 was as follows:
F-40
<PAGE>
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Assets tax not offset by current taxes Ps. 45,335 Ps. 38,267 Ps. 31,630
Deferred taxes Ps.(370,290) Ps.(195,340) Ps.(263,260)
----------- ----------- -----------
Tax benefit Ps.(324,955) Ps.(157,073) Ps.(231,630)
=========== =========== ===========
</TABLE>
(3) Deferred income taxes
Significant components of deferred income taxes under U.S. GAAP are
as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1997
-----------------------------------------------------
SFAS 109 applied SFAS 109 applied
to Mexican GAAP to US GAAP Total
balances adjustments
--------------- ---------------- --------------
<S> <C> <C> <C>
Deferred liabilities:
Inventories Ps. 91,483 Ps. -- Ps. 91,483
Property and equipment 578,258 (315,520) 262,738
Cellular telephones to be amortized 28,689 -- 28,689
Concessions 2,096 -- 2,096
-------------- -------------- --------------
Total deferred tax liabilities Ps. 700,526 Ps. (315,520) Ps. 385,006
============== ============== ==============
Deferred assets:
Allowance for doubtful accounts Ps. 26,566 Ps. -- Ps. 26,566
Net operating loss and tax credit
carryforward 895,004 -- 895,004
Group reorganization reserve 20,264 -- 20,264
Preoperating expenses -- 21,829 21,829
Allowance for deferred tax assets (144,693) (337,349) (482,042)
-------------- -------------- --------------
Total deferred tax assets 797,141 -- 481,621
-------------- -------------- --------------
Net deferred tax liabilities Ps. (96,615) Ps. (315,520) Ps. (96,615)
============== ============== ==============
</TABLE>
F-41
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1996
----------------------------------------------------
SFAS 109 applied SFAS 109 applied
to Mexican GAAP to US GAAP Total
balances adjustments
---------------- ---------------- --------------
<S> <C> <C> <C>
Deferred liabilities:
Inventories Ps. 39,344 Ps. -- Ps. 39,344
Property and equipment 976,769 -- 976,769
Cellular telephones to be amortized 35,086 -- 35,086
Concessions 12,033 -- 12,033
-------------- -------------- --------------
Total deferred tax liabilities Ps. 1,063,232 Ps. -- Ps. 1,063,232
============== ============== ==============
Deferred assets:
Allowance for doubtful accounts Ps. 36,591 Ps. -- Ps. 36,591
Net operating loss and tax credit
carryforward 757,489 -- 757,489
Group reorganization reserve 53,669 -- 53,669
Preoperating expenses -- 23,696 23,696
Allowance for deferred tax assets (58,190) (23,696) (81,886)
-------------- -------------- --------------
Total deferred tax assets 789,559 -- 789,559
-------------- -------------- --------------
Net deferred tax liabilities Ps. 273,673 Ps. -- Ps. 273,673
============== ============== ==============
</TABLE>
Under U.S. GAAP, the effect of the restatement of non-monetary assets is
recorded directly to stockholders' equity. Accordingly, the deferred taxes
related to such assets would be reflected directly in equity under U.S. GAAP.
Deferred taxes recorded directly to stockholders' equity relating to the
restatement of non-monetary assets were Ps.315,519, Ps.722,288 and (Ps.294,659)
for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company has recorded a deferred tax asset of Ps.895,005 reflecting the
benefit of tax loss carryforwards (see paragraph 2 above), which expire in
varying amounts between 2001 and 2007. Realization is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. However, the amount of
the deferred tax asset considered realizable could be reduced in the near term
if estimates of future taxable income during the carryforward periods are
reduced.
(4) Fair values of financial instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at December 31,
1997 and 1996.
Cash and cash equivalents: The carrying amount reported in the balance
sheet approximates fair value due to its short-term nature.
Long term debt: the fair value of the long term debt as of December
31, 1997 is estimated to be approximately 100% of its nominal value.
F-42
<PAGE>
(5) Economic environment
The Company is a Mexican corporation with substantially all its operations
situated in Mexico and approximately 99.5% of its revenues in 1997 resulted from
sales generated within Mexico. Accordingly, the economic environment within
Mexico, which is significantly affected by the actions taken by the Mexican
government, can be expected to have significant impact on the Company's
financial condition and results of operations and on the Company's ability to
meet its future obligations. The Company imports handsets, cellular sites and
other telecommunications equipment, while their pricing and receivables are
quoted and stated in Mexican pesos.
(6) Disclosure of certain significant risks and uncertainties:
a) Local Telephony in the 450 MHz Frequency Band. The carrying values of
the Company's property, plant and equipment are dependent on the assumption that
these assets will continue to be used in the operation of the Company. As a
result of the delays experienced by the Company and the uncertainty relating to
the Company's ability at a commercially acceptable cost, to obtain concessions
to provide local wireless service in the 450 MHz frequency band, the Company is
exploring alternatives for providing local telephony services, including limited
zone wireless services in the 800 MHz (cellular) or 1.9 GHz (PCS) frequency
bands deploying digital technology that permits mobility. If the Company were to
determine that it would be preferable to pursue such an alternative rather than
to continue to pursue local wireless service in the 450 MHz frequency band, such
alternative could require the acquisition of concessions, other regulatory
approvals and the payment of substantial fees. Additionally, the Company would
record substantial non-cash losses, consisting of the write-off of assets
relating to its 450 MHz local wireless service in the range of Ps. 826,100,
including 90% of the tangible assets and all the pre-operative expenses (see
Note 18).
b) Year 2000 Compliance. The Company has initiated a company-wide program
to identify and address the impact of the onset of the Year 2000 on its
operations. The Company has substantially completed the identification of the
scope of its Year 2000 problem. The Company expects that all of the required
modifications or replacements will be implemented by the first half of 1999.
While the Company believes that it is taking appropriate and timely steps to
ensure Year 2000 compliance, its operations are dependent on vendor and third
party compliance to some extent. For the years 1998 and 1999, the Company's
preliminary estimate is that total costs ranging between Ps. 72.6 million and
Ps. 121.1 million will be incurred to prepare its equipment and its software
applications for the year 2000.
(7) Stock Purchase Plan
As mentioned in Note 15, the Company has a fixed stock based compensation
plan, the Stock Purchase Plan. This plan grants to eligible employees rights to
purchase Iusacell common stock at a price equal to the market price of the stock
at the date of the grant. The Company applies APB Opinion No. 25 and related
interpretations in accounting for this plan. The Company has adopted the
disclosure-only provisions of SFAS No. 123. The Company does not recognize
compensation expense for its Stock Purchase Plan. If the Company had elected to
F-43
<PAGE>
recognize compensation expense based on the fair value at the grant dates for
1997 consistent with the provisions of SFAS No. 123, net income and earnings per
share would have been changed to the pro forma amounts indicated below:
Year ended
December 31, 1997
-----------------
Net loss As reported Ps.(72,259)
Pro forma (113,830)
Loss per share As reported Ps.(0.07)
Pro forma (0.11)
These results may not be representative of the effects on pro forma net
income for future years.
The Company determined the pro forma amounts using the Black-Scholes
option-pricing model based on the following weighted-average assumptions:
1997
----
Dividend yield 0%
Expected volatility 45
Risk-free interest rate 23%
Expected lives (in years) 2.7
The weighted average value of stock rights granted during 1997 was 4.85
pesos.
This table is a summary of the status of the Stock Purchase Plan:
Weighted
Average
Stock Rights Exercise Price
------------ --------------
Granted 8,571,281 Ps. 10.28
Exercised -- --
Canceled/forfeited 1,265,876 Ps. 8.48
Outstanding, December
31, 1997 7,305,405 Ps. 10.59
As of December 31, 1997 no stock rights were exercisable. The following
table summarizes information about Stock Purchase Plan rights outstanding as of
December 31, 1997:
F-44
<PAGE>
Weighted
Range of Remaining Average
Exercise Prices Shares Contractual Life Exercise Price
--------------- ------ ---------------- --------------
Ps. 8.48 to Ps.
14.00 7,305,405 2 5.00 pesos
(8) The Financial Accounting Standards Board has issued several new
pronouncements that include the following:
SFAS 130, "Reporting Comprehensive Income", establishes guidelines for the
reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general purpose
financial statements. It requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
same prominence as other financial statements; it does not address issues
of recognition or measurement. The Company is currently assessing the
impact of adoption of this standard on its financial statements.
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information", effective for fiscal years beginning after December 31,
1997, establishes guidelines for the way that public enterprises report
information about operating segments in financial statements. This
statement also established guidelines for related disclosures about
products and services, geographic areas, and major customers. The Company
is currently assessing the impact of adoption of this standard on its
financial statements.
SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", effective for fiscal years beginning after December 1S, 1997,
revises current disclosure requirements for employers' pension and other
retiree benefits but does not change the measurement of recognition of
pension or other postretirement benefit plans. It standarizes the
disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures from prior
Statements that are no longer useful. The Company is currently assessing
the impact of adoption of this standard on its financial statements.
20. Condensed Consolidated Information
As mentioned in Note 10, in July 1997, the Company issued 150,000 U.S.
Dollars of senior unsecured notes (the "Notes") as part of its refinancing
program. The Notes are guaranteed on a senior subordinated, unsecured basis
pursuant to guarantees by most of the Company's subsidiaries both directly and
indirectly wholly-owned ("guarantor subsidiaries").
The following condensed consolidated financial information presents:
F-45
<PAGE>
1. The parent Company with its investments in subsidiaries accounted
for on the equity method.
2. Condensed combined balance sheet as of December 31, 1997 and 1996,
and condensed combined statements of income for the years then
ended, for the guarantor subsidiaries.
3. Condensed combined balance sheet as of December 31, 1997 and 1996,
and condensed combined statements of income for the years then
ended, for the nonguarantor subsidiaries.
4. Elimination entries necessary to consolidate the parent Company and
all of its subsidiaries.
The condensed information of 1995 is not presented since the non-guarantor
subsidiaries were inconsequential in that year.
F-46
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Combined
Combined Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and short-term
investments Ps. 110,849 Ps. 5,499 Ps. 1,149 Ps. -- Ps. 117,497
------------ ------------- ------------ ------------- ------------
Accounts receivable:
Trade -- 213,900 21,495 (30,883) 204,512
Related parties 3,811,054 -- -- (3,767,026) 44,028
Recoverable taxes
and other 32,379 119,253 86,528 (12,076) 226,084
------------ ------------- ------------ ------------- ------------
3,843,433 333,153 108,023 (3,809,985) 474,624
------------ ------------- ------------ ------------- ------------
Inventories 14,132 223,499 37,613 (6,175) 269,069
------------ ------------- ------------ ------------- ------------
Total current assets 3,968,414 562,151 146,785 (3,816,160) 861,190
Investment in associated
companies 898,635 10,482 8,319 (899,655) 17,781
Property and equipment, net 1,530,787 970,951 514,493 (1,571) 3,014,660
Other assets 226,300 413,497 625,748 -- 1,265,545
Excess of investment cost over
book value 1,494,559 21,460 -- -- 1,516,019
------------ ------------- ------------ ------------- ------------
Total assets Ps.8,118,695 Ps. 1,978,541 Ps.1,295,345 Ps.(4,717,386) Ps.6,675,195
============ ============= ============ ============= ============
LIABILITIES
Current liabilities:
Notes payable Ps. 2,6631 Ps. -- Ps. -- Ps. -- Ps. 2,663
Trade accounts payable 389,378 286,029 34,782 (6,175) 704,014
Related parties 2,058,197 524,987 1,264,135 (3,767,025) 80,294
Taxes and other payable 122,284 197,885 49,429 (43,804) 325,794
Income tax 6,527 2,095 1,015 (726) 8,911
Total current liabilities 2,579,049 1,010,996 1,349,361 (3,817,730) 1,121,676
Long-term debt 2,218,837 -- -- -- 2,218,837
Trade accounts payable, long-term 4,040 -- -- -- 4,040
Commitments and contingencies -- 2,146 153 -- 2,299
------------ ------------- ------------ ------------- ------------
Total liabilities 4,801,926 1,013,142 1,349,514 (3,817,730) 3,346,852
------------ ------------- ------------ ------------- ------------
Stockholders' equity:
Capital contributions 6,444,360 2,833,670 302,941 (3,136,611) 6,444,360
Earned Capital (3,127,591) (1,868,271) (357,110) 2,225,381 (3,127,591)
Minority interest -- -- -- 11,574 11,574
------------ ------------- ------------ ------------- ------------
Total stockholders' equity 3,316,769 965,399 (54,169) (899,656) 3,328,343
------------ ------------- ------------ ------------- ------------
Total liabilities and
stockholders' equity Ps.8,118,695 Ps. 1,978,541 Ps.1,295,345 Ps.(4,717,386) Ps.6,675,195
============ ============= ============ ============= ============
Total stockholders' equity under
Mexican GAAP Ps.3,316,769 Ps. 965,399 Ps. (54,169) Ps. (899,656) Ps.3,328,343
Minority interest (11,574) (11,574)
Deferred income taxes 96,615 96,615
Project 450 investments (133,898) (133,898)
------------ ------------- ------------ ------------- ------------
Total stockholders' equity under
US GAAP Ps.3,413,384 Ps. 831,501 Ps. (65,743) Ps. (899,656) Ps.3,279,486
============ ============= ============ ============= ============
</TABLE>
F-47
<PAGE>
CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues Ps. 367,013 Ps.2,660,345 Ps. 224,365 Ps.(1,391,236) Ps.1,860,486
Total cost of sales 21,130 1,229,098 199,158 (733,724) 715,662
----------- ------------ ------------ ------------- ------------
Gross profit 345,883 1,431,247 5,206 (657,512) 1,144,824
Operating expenses 60,146 1,293,080 172,963 (782,412) 743,777
Depreciation and amortization 277,685 287,092 17,149 -- 581,926
----------- ------------ ------------ ------------- ------------
Operating profit (loss) 8,052 (148,925) (164,906) 124,900 (180,879)
----------- ------------ ------------ ------------- ------------
Integral financing result:
Interest expense, net 14,260 30,020 136,170 67,750 248,200
Foreign exchange loss, net 41,747 6,181 536 -- 48,464
Gain from monetary position (97,488) (33,692) (112,616) (48,928) (292,724)
----------- ------------ ------------ ------------- ------------
(41,481) 2,509 24,090 18,822 3,940
----------- ------------ ------------ ------------- ------------
Equity participation in net (gain)
loss of associated companies 113,961 -- -- (271,649) (157,688)
Provision for assets taxes 7,831 32,680 325 4,499 45,335
Minority interest -- -- -- 207 207
Net loss for the year Ps. (72,259) Ps. (184,114) Ps. (189,321) Ps. (373,435) Ps. (72,259)
=========== ============ ============ ============= ============
Net loss for the year under
Mexican GAAP Ps. (72,259) Ps. (184,114) Ps. (189,321) Ps. 373,435 Ps. (72,259)
Deferred income taxes 217,183 92,256 60,851 370,290
Fixed assets revaluation (567,833) (360,167) (928,000)
Project 450 investments (64,203) (64,203)
Gain on net monetary position 8,881 3,773 2,488 15,142
----------- ------------ ------------ ------------- ------------
Net loss for the year under
US GAAP Ps.(414,028) Ps. (512,455) Ps. (125,982) Ps. 373,435 Ps. (679,030)
=========== ============ ============ ============= ============
</TABLE>
F-48
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and short-term
investments Ps. 85,190 Ps. 12,143 Ps. 5,401 Ps. 2,451 Ps. 105,185
------------ ------------ -------------- ------------- -------------
Accounts receivable:
Trade -- 149,101 26,388 (22,893) 152,596
Related parties 2,220,314 136,532 -- (2,348,669) 8,178
Recoverable taxes and
other 14,081 103,194 51,055 (74,828) 93,502
------------ ------------ -------------- ------------- -------------
2,234,395 388,827 77,443 (2,446,389) 254,276
------------ ------------ -------------- ------------- -------------
Inventories 11,049 68,595 30,262 5,811 115,717
------------ ------------ -------------- ------------- -------------
Total current assets 2,330,634 469,565 113,106 (2,438,127) 475,178
Investment in associated companies 1,565,877 26,123 -- (1,490,331) 101,669
Property and equipment, net 1,874,952 1,190,678 539,819 (9,673) 3,595,776
Other assets 41,304 286,393 392,294 (1,619) 718,372
Excess of investment cost over
book value 1,566,999 22,706 -- 60 1,589,765
------------ ------------ -------------- ------------- -------------
Total assets Ps.7,379,766 Ps.1,995,465 Ps. 1,045,219 Ps.(3,939,690) Ps. 6,480,760
============ ============ ============== ============= =============
LIABILITIES
Current liabilities:
Notes payable Ps. 809,331 Ps. 60,419 Ps. -- (Ps. 60,419) Ps. 809,331
current portion of long-
term debt 61,707 -- -- 60,419 122,126
Trade accounts payable 333,271 132,722 37,881 (2,043) 501,831
Related parties 1,980,236 -- 775,104 (2,348,666) 406,674
Taxes and other payable 188,052 296,671 21,090 (105,948) 399,865
Income tax 6,771 92 211 143 7,217
------------ ------------ -------------- ------------- -------------
Total current liabilities 3,379,368 489,904 834,286 (2,456,514) 2,247,044
Long-term debt 370,644 225,079 -- -- 595,723
Trade accounts payable, long-term 11,228 -- -- -- 11,228
Commitments and contingencies -- 2,084 46 61 2,191
------------ ------------ -------------- ------------- -------------
Total liabilities 3,761,240 717,067 834,332 (2,456,453) 2,856,186
------------ ------------ -------------- ------------- -------------
Stockholders' equity:
Capital contributions 5,745,858 2,808,943 321,221 (3,130,164) 5,745,858
Earned capital (2,127,332) (1,530,545) (110,334) 1,640,879 (2,127,332)
Minority interest -- -- -- 6,048 6,048
------------ ------------ -------------- ------------- -------------
Total stockholders' equity 3,618,526 1,278,398 210,887 (1,483,237) 3,624,574
------------ ------------ -------------- ------------- -------------
Total liabilities and
stockholders' equity Ps.7,379,766 Ps.1,995,465 Ps. 1,045,219 (Ps.3,939,690) Ps. 6,480,760
============ ============ ============== ============= =============
Total stockholders' equity under
Mexican GAAP Ps.3,618,526 Ps.1,278,398 Ps. 210,887 Ps. 1,483,237 Ps. 3,624,574
Minority interest -- -- -- (6,048) (6,048)
Deferred income taxes (153,937) (50,587) (70,410) 1,261 (273,673)
Project 450 Investment -- (69,695) -- -- (69,695)
------------ ------------ -------------- ------------- -------------
Total stockholders' equity under
US GAAP Ps.3,464,589 Ps.1,158,116 Ps. 140,477 Ps.(1,488,024) Ps. 3,275,158
============ ============ ============== ============= =============
</TABLE>
F-49
<PAGE>
CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues Ps. 339,198 Ps.2,608,049 Ps. 98,792 (Ps.1,197,674) Ps.1,848,365
Total costs of sales 5,910 1,166,994 72,906 (519,148) 726,662
----------- ------------ ---------- ------------- ------------
Gross profit 333,288 1,441,055 25,886 (678,526) 1,121,703
Operating expenses 72,436 1,279,974 46,265 (597,912) 800,763
Depreciation and amortization 267,820 388,257 1,525 (288) 657,314
----------- ------------ ---------- ------------- ------------
Operating loss (6,968) (227,176) (21,904) (80,326) (336,374)
----------- ------------ ---------- ------------- ------------
Integral financing result:
Interest expense, net 115,577 33,432 89,748 66,816 305,573
Foreign exchange gain, net (65,052) (1,144) (1,335) -- (67,531)
Gain from monetary
position (164,444) (62,108) (88,693) (63,414) (378,659)
----------- ------------ ---------- ------------- ------------
(113,919) (29,820) (280) 3,402 (140,617)
----------- ------------ ---------- ------------- ------------
Equity participation in net (gain)
loss of associated companies 327,204 -- -- (320,688) 6,516
Provision for assets tax 22,741 55,304 (192) (39,586) 38,267
Minority interest -- 3,011 -- 445 3,456
Extraordinary item 151,940 5,910 -- -- 157,850
----------- ------------ ---------- ------------- ------------
Net loss for the year (Ps.394,934) (Ps. 255,559) (21,432) Ps. 276,991 (Ps. 394,934)
=========== ============ ========== ============= ============
Net loss for the year under
Mexican GAAP Ps.(394,934) Ps. (255,559) Ps.(21,432) Ps. 276,991 Ps. (394,934)
Deferred income taxes 90,621 104,719 -- -- 195,340
Project 450 investments -- (69,695) -- -- (69,695)
Gain on net monetary position (153,855) 269,050 -- -- 115,195
----------- ------------ ---------- ------------- ------------
Net loss for the year under
US GAAP Ps.(458,168) Ps. 48,515 Ps.(21,432) Ps. 276,991 Ps. (154,094)
=========== ============ ========== ============= ============
</TABLE>
F-50
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENTS SCHEDULES
The Board of Directors of
Grupo Iusacell, S.A. de C.V.:
We have audited the accompanying consolidated financial statements of Grupo
Iusacell, S.A. de C.V. and subsidiaries as of December 31, 1997 and 1996, and
for each of the three years in the period ended December 31, 1997 and have
issued our report thereon dated February 16, 1998 (included elsewhere in this
Annual Report 20-F). Our audits also included the financial schedules listed in
Item 19 of this Annual Report 20-F. These schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audit.
In our opinion, based on our audit, the financial statements schedules referred
to above, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
Coopers & Lybrand
Despacho Roberto Casas Alatriste
/s/Coopers & Lybrand
Juan Manuel Ferron Solis
Public Accountant
S-1
<PAGE>
Grupo Iusacell, S.A. de C.V. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
Years Ended 1995, 1996 and 1997
(Thousands of Mexican Pesos, with Purchasing Power
as of December 31, 1997)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning of Cost and Other End of
Period Expenses Accounts Deductions Period
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1995
Allowance for obsolete and
slow-moving inventories .... $ 64,975 1,944 ---- 10,194 56,725
Allowance for doubtful
accounts..................... 169,146 89,776 ---- 130,113 128,809
1996
Allowance for obsolete and
slow-moving inventories ..... 56,725 4,467 ---- 23,924 37,268
Allowance for doubtful
accounts..................... 128,809 77,092 ---- 99,093 106,808
Allowance for obsolete fixed
assets....................... --- 121,159 ---- ---- 121,159
1997
Allowance for obsolete and
slow-moving inventories ..... 37,268 15,502 ---- 23,422 29,348
Allowance for doubtful
accounts..................... 106,808 36,424 ---- 65,096 78,136
Allowance for obsolete fixed
assets....................... 121,159 40,613 ---- ---- 161,772
</TABLE>
S-2
<PAGE>
EXHIBIT A
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
AGREEMENT FOR
EQUIPMENT, FURNISH AND
INSTALLATION, FOR
IUSACELL'S CELLULAR
NETWORK
December 10, 1997
NOTE: Certain clauses marked herein with an asterisk (*) have been omitted and
filed separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment under Rule 24b-2 of the Securities and
Exchange Act of 1934.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 1 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
TABLE OF CONTENTS
TABLE OF CONTENTS 3
- --------------------------------------------------------------------------------
RECITALS 6
1. SCOPE OF THE AGREEMENT 9
2. TERM OF THE AGREEMENT AND OF PRICES 10
3. PROCEDURE TO PLACE ORDERS 11
4. PRICES 18
5. INSURANCE, PASSAGE OF RISK OF LOSS AND TITLE TRANSFER 20
6. TERMS OF PAYMENT 22
7. IMPORTATION 24
8. DELIVERY TERMS 25
9. ACCEPTANCE 27
10. SUPPLY SPECIFICATIONS 28
11. SOFTWARE FEATURES 28
12. OBLIGATIONS OF THE PARTIES 28
13. DOCUMENTATION 28
14. TRAINING 30
15. WARRANTIES 31
16. SUPPORT 31
17. LIMITATION OF LIABILITY 35
18. LICENSE FOR USE OF SOFTWARE 36
19. USE OF INFORMATION 40
20. PATENTS, TRADEMARKS AND COPYRIGHTS 43
21. MARKETING FUND 45
22. EXPORT CONTROL 45
23. ASSIGNMENT 45
24. FORCE MAJEURE 46
25. CANCELLATION FOR BREACH 47
26. HEADINGS AND DEFINITIONS 49
27. PRIORITY OF ARTICLES 49
28. GOVERNING LAW 49
29. DISPUTE RESOLUTION 49
30. MODIFICATIONS TO THE AGREEMENT 51
31. SURVIVAL OF OBLIGATIONS 52
32. NOTICES 52
33. ENTIRE AGREEMENT 54
34. INDEPENDENT CONTRACTOR 54
35. TAXES 54
36. RIGHT OF ACCESS 55
37. SEVERABILITY 56
38. NON-WAIVER 56
39. PUBLICATION OF AGREEMENT 57
40. NON-SOLICITATION 57
41. GOVERNMENT APPROVALS; COMPLIANCE WITH LAWS 57
42. LIQUIDATED DAMAGES 58
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 2 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
43. PRICING CERTIFICATION 58
44. COUNTERPARTS 58
ATTACHMENT 1 DEFINITIONS 60
ATTACHMENT 2 SUPPLIES AND PRICES FOR INITIAL COMMITMENT 68
PRICING SUMMARY - ALL REGIONS
PROFESSIONAL SERVICES
ATTACHMENT 3 ADDITIONAL PURCHASES DISCOUNT SCHEDULE 70
ATTACHMENT 4 INITIAL COMMITMENT 71
PROJECT IMPLEMENTATION SCEHDULE:
ATTACHMENT 5 ORDERS PLACED 72
ATTACHMENT 6 INSURANCE POLICY 73
ATTACHMENT 7 PRODUCT SPECIFICATIONS 74
ATTACHMENT 7A SYSTEM APPLICATION ENGINEERING 75
GENERAL SYSTEM SPECIFICATION
ATTACHMENT 7B SYSTEM PERFORMANCE 76
ATTACHMENT 7C SWITCH PERFORMANCE CRITERIA 77
ATTACHMENT 8 PROJECT IMPLEMENTATION 79
ATTACHMENT 9 FEATURES 80
IUSACELL FEATURES LIST
LUCENT AMPS/CDMA STANDARD FEATURE LIST 81
ATTACHMENT 10 TRAINING 83
ATTACHMENT 11 CONFIDENTIALITY 84
ATTACHMENT 12 PURCHASE ORDER FORM 87
ATTACHMENT 13 INTEGRAL CUSTOMER ASSISTANT PROCESS
AND RS&R PROCESS 88
ATTACHMENT 14 ACCEPTANCE 90
ATTACHMENT 15 PROJECT CHANGE CONTROL PROCESS 97
NOTE: Certain clauses marked herein with an asterisk (*) have been omitted and
filed separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment under Rule 24b-2 of the Securities and
Exchange Act of 1934.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 3 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
AGREEMENT ENTERED INTO BY AND AMONG GRUPO IUSACELL, S.A. DE C.V., REPRESENTED BY
ING. FULVIO VARGAS DEL VALLE (HEREINAFTER, "IUSACELL"), LUCENT TECHNOLOGIES
WORLD SERVICES INC., REPRESENTED BY MR. THOMAS L. MASSENGILL (HEREINAFTER,
"WSI"), FOR EQUIPMENT, SERVICES AND SOFTWARE SOURCED OUTSIDE THE UNITED MEXICAN
STATES, AND LUCENT TECHNOLOGIES DE MEXICO, S.A. DE C.V., REPRESENTED BY MR.
ROGELIO VELASCO ROMERO, FOR EQUIPMENT, SERVICES AND SOFTWARE SOURCED IN THE
UNITED MEXICAN STATES (HEREINAFTER, "LTM") (WSI AND LTM SHALL JOINTLY BE
REFERRED TO AS "LUCENT"), PURSUANT TO THE FOLLOWING:
RECITALS
A. IUSACELL states:
A.1. That it is a Mexican corporation, duly incorporated under the laws
of the United Mexican States, as evidenced in public deed number
33,275 dated October 6, 1992, granted before Notary Public number 1
of the Federal District of Mexico, Roberto Nunez y Bandera, Esq.,
which was filed before the Public Registry of the Property and
Commerce of the Federal District of Mexico under mercantile folio
number 168528.
A.2. That its representative is authorized to execute this AGREEMENT, as
evidenced in public deed number 3,964 dated June 4, 1997, granted
before Notary Public number 212 of the Federal District of Mexico,
Francisco I. Hugues Velez, Esq., which was filed before the Public
Registry of the Property and Commerce under mercantile folio number
168528, and that his authority has not been revoked or limited in
any manner.
B. LTM states:
B.1. That it is a Mexican corporation, duly incorporated under the laws
of the United Mexican States, as evidenced in public deed number
132,987 dated February 16, 1990, granted before Notary Public number
6 of the Federal District of Mexico, Fausto Rico Alvarez, Esq.,
which was filed before the Public Registry of the Property and
Commerce of the Federal District of Mexico under mercantile folio
number 128327.
B.2. That its representative is authorized to execute this AGREEMENT, as
evidenced in public deed number 18,726 dated September 2, 1997,
granted before Notary number 102 of the Federal District of Mexico,
Jose Maria Morera Gonzalez, Esq., which was filed before the Public
Registry of the Property and Commerce of the Federal District of
Mexico under mercantile folio number 128327.
C. WSI states:
C.1. That it is a corporation, duly incorporated under the laws of the
State of Delaware, United States of America, as evidenced by public
deed number 10372460, issued by the Secretary of State of Delaware
on November 20, 1984.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 4 of 61
<PAGE>
AGREEMENT FOR
EQUIPMENT, FURNISH AND INSTALLATION, FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
C.2. That its representative is authorized to execute this AGREEMENT, as
evidenced in the power-of-attorney granted before Marc C. Luciani,
Notary Public of the State of New Jersey, United States of America,
on May 20, 1997, and that his authority has not been revoked or
limited in any manner.
D. The PARTIES jointly state:
D.1. WHEREAS, it is IUSACELLs intent to contract, license and receive
from LUCENT, and it is LUCENT's intent to sell, license or otherwise
provide IUSACELL, the SUPPLIES and SERVICES necessary for the
INSTALLATION of a wireless telephone network for cellular REGIONS 5,
6 ,7 and 9 in the territory of the United Mexican States
(hereinafter, the "NETWORK").
D.2. WHEREAS, it is IUSACELL's intent to grant by any legal means the
right of use of all or part of the NETWORK to any of its AFFILIATES
or subsidiaries that will obtain or have obtained concessions from
the (Mexican) Ministry of Communications and Transport for the
rendering of telecommunications services in the REGIONS set forth in
Recital D.1 above.
D.3. For this AGREEMENT, both parties agree all words and expressions in
capital letters will have the precise meaning defined in these terms
and conditions or in ATTACHMENT 1, Definitions. For the purposes of
this AGREEMENT, the definitions shall be applicable to both the
singular and plural forms of any of the terms defined herein. The
use of gender herein shall be deemed to include the neuter,
masculine, and feminine genders wherever necessary or appropriate.
IN VIEW OF THE ABOVE, the parties hereto agree to the following:
1. SCOPE OF THE AGREEMENT
1.1. The terms and conditions set forth herein shall govern the purchase
of EQUIPMENT, SERVICES and/or the granting of one or more LICENSE(S)
TO USE SOFTWARE and/or DOCUMENTATION and/or INFORMATION set forth in
ATTACHMENTS 2, SUPPLIES and PRICES for the INITIAL COMMITMENT, and 4
INITIAL COMMITMENT.
1.2. IUSACELL shall, during the TERM hereof, purchase or license from
LUCENT, as the case may be, all of the SUPPLIES encompassed in the
INITIAL COMMITMENT.
1.3. LUCENT's provision of any SUPPLIES or SERVICES which are not
included in the INITIAL COMMITMENT or ATTACHMENT 3, ADDITIONAL
PURCHASES, shall not be subject to the terms and conditions of this
AGREEMENT; rather, such SUPPLIES and/or SERVICES, as the case may
be, shall be subject to a separate written agreement of the parties
or, if none, to LUCENT's standard terms and conditions as may be in
effect from time to time for such SUPPLY or SERVICE, in accordance
with clause 3.2.2.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 5 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
1.4. For all PURCHASE ORDERS related to the INITIAL COMMITMENT, IUSACELL
agrees to pay to LUCENT for the SUPPLIES the PRICES set forth in
ATTACHMENT 2, SUPPLIES and PRICES for the INITIAL COMMITMENT. (*)
1.5. For all ADDITIONAL PURCHASES during the TERM of this AGREEMENT,
IUSACELL shall pay to LUCENT (*).
1.6. IUSACELL agrees that all other PRICES and discounts, quoted by
LUCENT at any time, will be valid for the term set forth in the
subject quotation.
2. TERM OF THE AGREEMENT AND OF PRICES
2.1. The parties agree that the term of this AGREEMENT shall be from the
execution date hereof through December 31, 2001 (hereinafter, the
"TERM"). The TERM may be extended for one additional year, to
December 31, 2002, provided:
2.1.1. IUSACELL has placed, and LUCENT has accepted, ORDERS for the
entire INITIAL COMMITMENT prior to December 31, 2001, and
2.1.2. Any party has provided written notice to the other party on
or before October 31, 2001.
2.2. (*)
2.3. (*)
3. PROCEDURE TO PLACE ORDERS
PURCHASE ORDER (or "PO"), as used herein, shall mean purchase orders
issued by IUSACELL for the purpose of ordering SUPPLIES and/or SERVICES.
3.1. For the purposes of placing PURCHASE ORDERS, both parties agree to
the following procedure:
3.1.1. Only IUSACELL's Purchasing Department can issue PURCHASE
ORDERS, all of which shall be substantially in the form
attached hereto as ATTACHMENT 12, PO FORM. IUSACELL shall
cancel and invalidate any provisions now or in the future
contained on the reverse side of the PO FORM or in any
document attached thereto by striking through such
provisions, and having an authorized representative of
IUSACELL initial such struck-through language. Except as
expressly set forth herein, IUSACELL agrees that all
provisions contained in any PO shall be null and void and
that only the terms and conditions of this AGREEMENT shall
apply thereto. LUCENT shall not accept any PO the reverse
side or attachment to which has not been canceled and
invalidated as provided for above.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 6 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
3.1.2. Only LUCENT's Contract Management organization can receive,
review and accept PURCHASE ORDERS.
PURCHASE ORDERS issued hereunder shall specify at least:
3.2. For the INITIAL COMMITMENT:
3.2.1. PURCHASE ORDER number,
3.2.2. Delivery information:
3.2.2.1. SITES,
3.2.2.2. Dates,
3.2.2.3. Forms (FURNISH ONLY and/or EF&I),
3.2.3. Bill to address, (invoicing address, IUSACELL's legal
address),
3.2.4 INCOTERM agreed in this contract: EXW,
3.2.5. Description and quantities of SUPPLIES:
3.2.5.1. EQUIPMENT, SPARE PARTS,
3.2.5.2 LICENSED MATERIALS,
3.2.5.3 SERVICES:
3.2.5.3.1: ENGINEERING,
3.2.5.3.2. INSTALLATION,
3.2.5.3.3. Configuration,
3.2.5.3.4. Optimization,
3.2.6. Unit PRICE,
3.2.7. Quantity PRICE,
3.2.8. Taxes (IVA),
3.2.9. Shipment, freight, and importation information.
3.2.10 Reference to this AGREEMENT.
3.2.11. Such additional information as may be necessary to enable
LUCENT to fulfill the requirements contained in the
PURCHASE ORDER.
3.3. For the ADDITIONAL PURCHASES:
3.3.1. IUSACELL may present to LUCENT a PROPOSED ORDER, based on
the PRICES offered by LUCENT in a valid quotation, and
taking into account the discounts for ADDITIONAL PURCHASES
set forth in ATTACHMENT 3 herein, provided such discounts
are valid as determined in accordance with clause 1.5.,
hereof. LUCENT shall review said PROPOSED ORDER during a
period not to exceed 10 (ten) calendar days following the
receipt of such PROPOSED ORDER and inform IUSACELL as to:
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 7 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
3.3.1.1. The written acceptance of the PROPOSED ORDER, if the
requirements established by LUCENT herein are
satisfied, and thereupon such PROPOSED ORDER shall
constitute an ORDER, or
3.3.1.2. Any modifications and/or additions that LUCENT deems
reasonably necessary for the PROPOSED ORDER to be
accepted. As soon as IUSACELL completes such
modifications and/or additions, LUCENT's Contract
Management Organization shall review such amendment
and, assuming such amended PROPOSED ORDER fulfills
the requirements set forth in the AGREEMENT, accept
such amended PROPOSED ORDER in writing.
3.3.1.3. While it is LUCENT's objective to provide IUSACELL
with an acknowledgment of each PROPOSED ORDER
received, it is IUSACELL's responsibility to advise
LUCENT of any missing or late notifications to ensure
that the PROPOSED ORDER has not been lost. No
PROPOSED ORDER is to be considered accepted by LUCENT
unless it has been expressly accepted as provided
herein.
3.3.2. If IUSACELL wishes to acquire any SUPPLIES and/or SERVICES
not included in the INITIAL COMMITMENT or the ADDITIONAL
PURCHASES, the procedure shall be as follows:
3.3.2.1. Quotation request: IUSACELL shall request from LUCENT
a written quotation according to the type of SUPPLY
that IUSACELL intends to purchase. Such request shall
include the following information:
3.3.2.1.1. For PROJECTS:
3.3.2.1.1.1. Scope of the PROJECT and/or the jobs
3.3.2.1.1.2. Detailed technical characteristics of:
3.3.2.1.1.2.1. Required functionalities.
3.3.2.1.1.2.2. Interconnection with other
systems.
3.3.2.1.1.2.3. Operating environment ENGINEERING,
i.e., traffic loads, backbone
matrix, synchronization,
signaling, etc.
3.3.2.1.1.3. Description and layout of INSTALLATION
SITE.
3.3.2.1.1.4. Implementation schedule and cutover
dates.
3.3.2.1.2. For SERVICES:
3.3.2.1.2.1. Scope of the PROJECT and/or the
relevant works.
3.3.2.1.2.2. Detailed technical characteristics of
the required SERVICES.
3.3.2.1.2.3. Description and layout of SITES where
the SERVICES are to be provided.
3.3.2.1.2.4. Term of rendering of the SERVICES.
3.3.2.1.3. For LICENSE FOR USE OF SOFTWARE:
3.3.2.1.3.1. Scope of the PROJECT and/or the works;
3.3.2.1.3.2. Detailed technical characteristics of:
3.3.2.1.3.2.1. Required functionalities
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 8 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
3.3.2.1.3.2.2. Operating environment
ENGINEERING:
3.3.2.1.3.2.2.1. Technical characteristics
of the EQUIPMENT in which
the requested SOFTWARE
shall run.
3.3.2.1.3.2.2.2. Operating system.
3.3.2.1.3.2.2.3. Interconnection with
other systems.
3.3.2.1.3.2.2.4. Interfaces.
3.3.2.1.3.2.2.5. Synchronization.
3.3.2.1.3.2.2.6 Signaling.
3.3.2.1.3.2.3. TECHNICAL SPECIFICATIONS of
other systems for interface
development.
3.3.2.1.3.2.3.1. SOFTWARE evolution plan
required by IUSACELL.
3.3.2.1.3.2.3.2. Implementation schedule,
delivery and cutover
dates.
3.3.2.1.4. For SPARE PARTS:
3.3.2.1.4.1. Detailed description of the SPARE PART.
3.3.2.1.4.2. Part code.
3.3.2.1.4.3. Quantity required.
3.3.2.1.4.4. Requested delivery date and place.
3.3.2.1.5. For non-SPARE PART EQUIPMENT:
3.3.2.1.5.1. Detailed description of the EQUIPMENT.
3.3.2.1.5.2. EQUIPMENT code.
3.3.2.1.5.3. Quantity required.
3.3.2.1.5.4. Requested delivery date and place.
3.3.2.2. Quotation: Within (*) subsequent to LUCENT's receipt
of the request mentioned in the foregoing paragraph,
given the provided information is complete, LUCENT
shall deliver a quotation to IUSACELL. All quotations
shall include delivery intervals. Notwithstanding the
foregoing, LUCENT agrees to make a good faith effort
to deliver quotations to IUSACELL as soon as
practicable.
3.3.2.3. Negotiation: Within (*) subsequent to the
presentation of the quotation mentioned in clause
3.3.2.2. of this AGREEMENT, IUSACELL and LUCENT shall
commence negotiations with respect to the provision
of the requested SUPPLY.
3.3.2.4. Place and order: If the parties reach an agreement,
IUSACELL shall issue the respective PROPOSED ORDER to
LUCENT for the review thereof as described in clause
3.1. of this AGREEMENT.
3.3.3. IUSACELL agrees to include in each PROPOSED ORDER, PURCHASE
ORDER AND CHANGE ORDER hereunder the following statement:
"This order is part of and
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 9 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
is subject to the terms and conditions of AGREEMENT executed
between LUCENT and IUSACELL on December 10, 1997". All
PURCHASE ORDERS and CHANGE ORDERS shall be subject to the
terms and conditions hereof and shall be incorporated herein
as part of ATTACHMENT 5 after the PURCHASE ORDERS and CHANGE
ORDERS have been accepted in writing by LUCENT.
3.3.4. At any time during the TERM hereof, IUSACELL may request
quotations and/or present LUCENT with PROPOSED ORDERS.
3.3.5. All PURCHASE ORDERS, and PROPOSED ORDERS shall contain at
least the information set forth in this clause in paragraph
3.3.2.1. and, to the extent necessary and not included
therein, the information set forth in clause 3.1. under
INITIAL COMMITMENT.
3.3.6. Either party may request changes in the work within the
general scope of the AGREEMENT consisting of additions,
deletions, or other revisions with the AGREEMENT, PRICES and
implementation schedule being adjusted accordingly. If the
parties agree to the change, it will be authorized by a
CHANGE ORDER developed and negotiated in good faith in
accordance with the PROJECT Change Control Process set forth
in ATTACHMENT 15 hereunder.
3.3.7. LUCENT will not unreasonably reject a PURCHASE ORDER or
PROPOSED ORDERS for any SUPPLY or SERVICE which is an
addition, extension or expansion of any LUCENT SUPPLY
previously ordered under this AGREEMENT.
3.4. CANCELLATION
IUSACELL may cancel all or part of an PURCHASE ORDER at any time; however,
the following charges will be billed by LUCENT and paid by IUSACELL as
indicated:
3.4.1. PURCHASE ORDERS canceled within the first quarter of the
delivery term set forth in the corresponding PURCHASE ORDER
will be billed at (*) of the canceled item(s) PRICE;
3.4.2. PURCHASE ORDERS canceled within the second quarter of the
delivery term set forth in the corresponding PURCHASE ORDER
will be billed at (*) of the canceled item(s) PRICE;
3.4.3. PURCHASE ORDERS canceled anytime after the second quarter of
the delivery term set forth in the corresponding PURCHASE
ORDER will be billed at (*) of the canceled item(s) PRICE.
3.4.4. Notwithstanding the foregoing, the above mentioned charges
shall not apply to any PURCHASE ORDERS canceled by IUSACELL
in writing within (*) of IUSACELL's receipt of LUCENT's
notice of acceptance thereof.
3.5. PLANNING INFORMATION
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 10 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
IUSACELL shall provide to LUCENT non-binding, rolling, four-quarter
forecasts of IUSACELL's expected annual purchases under this AGREEMENT.
IUSACELL shall deliver to LUCENT an updated version of such annual
forecast on or before the beginning of each calendar year.
4. PRICES
4.1. The PRICES agreed upon by LUCENT and IUSACELL for the SUPPLIES and
SERVICES corresponding to the INITIAL COMMITMENT are set forth in
ATTACHMENT 2. Such PRICES are as follows:
4.1.1. (*)
4.1.2. Expressed in United States Dollars.
4.1.3. Do not include sales and excise taxes, import taxes, value
added taxes, customs duties, customs broker fees, and customs
handling costs, all of which, if applicable, shall be paid by
IUSACELL,
4.1.4. For EQUIPMENT and SOFTWARE: They are quoted in EXW terms,
based on the 1990 revision of the Incoterms published by the
International Chamber of Commerce.
4.2 The parties hereunder agree that any addition to the PRICE list
shall be agreed upon in writing. PRICES not included in ATTACHMENT 2
shall be valid only for the relevant PURCHASE ORDER.
4.3. (*)
4.4. VOLUME PURCHASE PLAN (VPP)
4.4.1. IUSACELL shall receive credits for certain purchases made by
IUSACELL from LUCENT as follows: (*)
4.5 The SOFTWARE Generic Upgrade Program fee shall be determined from
time to time by LUCENT as and when a generic upgrade to the SOFTWARE
becomes available and shall be invoiced to IUSACELL if such generic
upgrade is requested by IUSACELL pursuant to a PURCHASE ORDER.
4.6 The Annual SOFTWARE Maintenance Program fee shall be determined from
time to time by LUCENT and shall be invoiced to IUSACELL if
participation in such Program is requested by IUSACELL pursuant to a
PURCHASE ORDER. The Annual SOFTWARE Maintenance Program shall cover
post-warranty maintenance and non-generic update to the SOFTWARE,
but shall not cover generic upgrades to the SOFTWARE.
5. INSURANCE, PASSAGE OF RISK OF LOSS AND TITLE TRANSFER
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 11 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
5.1. Title and risk of loss for EQUIPMENT and the license for use of
SOFTWARE set forth in clause 18 shall be transferred to IUSACELL at
the point of embarkation immediately upon delivery to the designated
carrier. At such time, LUCENT shall convey to IUSACELL free and
clear title to the EQUIPMENT sold to IUSACELL under this AGREEMENT.
5.2. IUSACELL shall, throughout the TERM, maintain in full force and
effect an insurance policy issued by an insurance carrier acceptable
to LUCENT with coverages acceptable to LUCENT, such acceptance shall
not be unreasonably withheld. IUSACELL shall deliver to LUCENT a
copy of such insurance policy within (*) from the date of execution
hereof, such insurance policy shall be attached hereto as ATTACHMENT
6. LUCENT shall be an additional named insured under such policy
throughout the TERM and IUSACELL shall furnish to LUCENT a
certificate of insurance evidencing the foregoing together with the
copy of such policy and on each renewal thereof. The insurance
policy shall cover the full replacement cost, and all expenses
related to the replacement of the SUPPLIES from the point of
embarkation through ATP.
Failure to provide the above-referenced insurance policy in
accordance with the foregoing shall give LUCENT the right in
LUCENT's sole discretion to:
5.2.1. Suspend performance of all obligations hereunder until such
insurance policy or any renewal thereof has been provided to
LUCENT in accordance with the foregoing (in this event clause
8.5 hereof shall apply);
5.2.2 Purchase an insurance policy on IUSACELL's behalf and at
IUSACELL's expense. Such expense shall be invoiced by LUCENT
to IUSACELL as it is incurred, and such invoice(s) shall be
payable by IUSACELL to LUCENT within (*) of receipt thereof
by IUSACELL.
5.2.3 Terminate this AGREEMENT without liability to LUCENT (*)
written notice to IUSACELL (so long as IUSACELL shall not
have completely cured such failure with such (*) period).
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 12 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
6. TERMS OF PAYMENT
6.1. INVOICES
Invoices for the SUPPLIES specified in ATTACHMENT 2 or in any
PURCHASE ORDER shall be sent in no less than three (3) copies, and
shall be submitted by LUCENT to the address specified in the
PURCHASE ORDER. Invoices shall be paid by IUSACELL in accordance
with the payment terms set forth herein.
6.2. PAYMENT
IUSACELL shall pay CASH following LUCENT's delivery of the
DOCUMENTATION listed below to IUSACELL. Contemporaneously with
LUCENT's acceptance of any PURCHASE ORDER under the terms of this
AGREEMENT, IUSACELL shall pay to LUCENT in CASH the downpayment(s)
set forth herein for of all SUPPLIES and SERVICES which form a part
of any PURCHASE ORDER. IUSACELL's failure to comply with the
foregoing shall release LUCENT from any obligations regarding
ENGINEERING, manufacturing, shipping, delivery and/or INSTALLATION
obligations under such PURCHASE ORDER, the term for completion or
delivery of which shall be automatically extended in accordance with
clause 8, Delivery Terms, following LUCENT's receipt of such
downpayment. The remaining balance shall be paid in accordance with
this clause 6.2.
6.2.1. EQUIPMENT AND LICENSED MATERIALS: (*)
6.2.2. SERVICES: (*)
6.2.3. ENGINEERING: (*)
6.2.4. TRAINING: (*)
6.3. ADDITIONAL PURCHASE ORDERS
Contemporaneously with the acceptance of any ADDITIONAL PURCHASE
ORDER under the terms of this AGREEMENT, IUSACELL shall pay to
LUCENT in CASH the downpayment(s) set forth in clause 6.2 above for
of all SUPPLIES and SERVICES forming a part of any ADDITIONAL
PURCHASE ORDER. IUSACELL's failure to comply with the foregoing
shall absolve LUCENT of its ENGINEERING, manufacturing, shipping,
delivery and/or INSTALLATION obligations under such ADDITIONAL
PURCHASE ORDER, which shall be automatically extended in accordance
with clause 8, Delivery Terms, following LUCENT's receipt of such
downpayment. The remaining balance shall be paid in accordance with
clause 6.2 hereof.
6.4. LUCENT shall inform IUSACELL of the following to enable IUSACELL to
effect payments due hereunder to LUCENT via bank wire transfer:
6.4.1. Name of the beneficiary
6.4.2. Name and address of the bank
6.4.3. Account number
6.4.4. ABA Number
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 13 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
6.5. Delinquent payments shall be subject to interest charges at the rate
of (*) per month or equivalent portion thereof, of the amount due
but not to exceed the maximum lawful rate.
6.6. Payments of all amounts contained in this AGREEMENT shall be made in
US dollars and invoices shall be rendered in the same currency. All
costs and commissions for payment, as well as the banking and
cabling costs will be to the account and expense of IUSACELL. If
IUSACELL in good faith disputes any item contained on any invoice,
then IUSACELL shall pay all undisputed amounts to LUCENT and notify
LUCENT of the disputed items within (*) of receipt of the invoice
and pay said disputed amount into an interest bearing escrow account
in a bank acceptable to both parties for the benefit of both
parties.
The parties shall make all efforts to reach an agreement on the
disputed amounts. Upon resolution of the disputed amount, which the
parties will use their reasonable best efforts to achieve within (*)
from the date IUSACELL notifies LUCENT of the disputed items, the
prevailing party with respect to a particular dispute shall be
entitled to the escrowed amount pertaining to such dispute, plus
interest on such amount. If IUSACELL is unable to document a claim
against the invoiced item within (*) after the date LUCENT delivered
the original invoice, such date will be the basis for calculating
late payment charges set forth above. In the event the parties are
unable to resolve any disputed amount in good faith with such (*)
term, the disputed amounts shall be resolved in accordance with the
arbitration procedure set forth clause 29, hereof.
6.7. Notwithstanding anything in this AGREEMENT to the contrary,
IUSACELL's use of any part of the SUPPLIES or ADDITIONAL PURCHASES
in service (not including SERVICES directly connected with ATP
testing contemplated by this AGREEMENT), whether or not revenue is
generated, shall be deemed to constitute the issuance of the
CERTIFICATE OF ACCEPTANCE for such SUPPLIES.
6.8. In the event IUSACELL suspends the performance of its obligations
hereunder for a period of (*) or more from the original schedule,
all invoiced amounts shall become immediately due and payable in
CASH.
7. IMPORTATION
7.1. IUSACELL shall be the importer of record on all importation/customs
DOCUMENTATION concerning the SUPPLIES licensed or purchased under
this AGREEMENT.
7.2. LUCENT shall handle the importation of the SUPPLIES and ADDITIONAL
PURCHASES in the name and on behalf of IUSACELL. Within the (*)
immediately following IUSACELL's receipt of notice from LUCENT or
the customs broker, as the case may be, regarding the amounts to be
paid for such importation (including, without limitation, duties,
fees, taxes and transportation expenses), IUSACELL shall pay such
amounts in full directly to the customs broker. IUSACELL agrees to
provide such assistance as LUCENT shall reasonably require so that
the customs broker effects the appropriate importation of the
SUPPLIES.
7.3. LUCENT shall deliver the NAFTA Certificate of Origin, if available,
other Certificate(s) of Origin required by Mexican law , and other
DOCUMENTATION required for the operation of
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 14 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
the SUPPLIES and ADDITIONAL PURCHASES in Mexico, including NOM
certificates granted by SECOFI and SCT Homologation certificates,
where applicable.
8. DELIVERY TERMS
8.1. Unless otherwise specified in the PURCHASE ORDER, LUCENT shall
deliver all EQUIPMENT, SPARE PARTS and LICENSED MATERIALS EXW.
8.2. LUCENT's PRICES include packing and marking containers in accordance
with LUCENT's standard practices for shipment. When, in order to
meet IUSACELL's request, LUCENT packs a SUPPLY and/or is required to
mark shipping cartons in accordance with IUSACELL's specifications,
such shall be done by LUCENT for an additional charge which shall be
invoiced to and paid by IUSACELL in accordance with the terms and
conditions of this AGREEMENT. LUCENT shall:
8.2.1. Render the commercial invoice
8.2.2. Send full set of bill of lading, marked as to whom to notify
8.2.3. Render a certificate of origin when available
8.2.4. Enclose Packing List
8.2.5. Mark containers in accordance with characteristics and
requirements of each container, in English, with appropriate
illustrative marks universal in international trade
8.2.6. Mark each container with carton number, contract number,
destination, weights and cubes. International shipments will
also be marked with the freight forwarder's location and the
port of destination.
8.3. LUCENT shall deliver the SUPPLIES in accordance with each specific
PURCHASE ORDER as follows:
8.3.1. For FURNISH ONLY PURCHASE ORDERS ("FO"): LUCENT will make
arrangements for the delivery of SUPPLIES ordered by IUSACELL
according to the specifications and intervals included in the
PURCHASE ORDERS. Delivery will be made according to the
relevant PURCHASE ORDER.
8.3.2. For EF&I: LUCENT shall deliver the SUPPLIES installed,
tested, wired and ready to be placed in service, according to
the ACCEPTANCE PROTOCOL set forth in ATTACHMENT 14.
8.4. Delays
8.4.1. Any delays not exclusively attributable to LUCENT's acts or
omissions, including without limitation, delays by IUSACELL
in fulfilling its obligations hereunder, delays during
transport and/or Mexican Customs clearance, shall not be
LUCENT's responsibility, and the implementation schedule
shall be extended for a reasonable period of time, which
shall be no less than the delay as determined by LUCENT in
its reasonable discretion.
8.4.2. IUSACELL shall reimburse LUCENT for all reasonable costs,
including, but not limited to storage, transportation, food
and lodging incurred by LUCENT as a direct or indirect
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 15 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
result of delays not exclusively attributable to LUCENT's
acts or omissions (or those of LUCENT's agents of
contractors) or to FORCE MAJEURE.
8.4.3 IUSACELL agrees to pay LUCENT all reasonable costs,
including, but not limited to, storage, transportation, food
and lodging for LUCENT's personnel, resulting from such
delay, within 10 (ten) calendar days from the day LUCENT
presents the invoices therefor to IUSACELL.
8.5. Idle Time Delays
If for any reason due to IUSACELL's failure to fulfill its obligations
hereunder, LUCENT is unable to timely proceed with the contracted work,
then the completion schedule shall be automatically extended by a
reasonable amount of time in no event less than amount of time of the
delay, and IUSACELL shall compensate LUCENT for all reasonable direct
costs, including, but not limited to storage, transportation, and food and
lodging for LUCENT's personnel, resulting from such delay.
9. ACCEPTANCE
Acceptance of the SUPPLIES and the ADDITIONAL PURCHASES shall be governed
by the provisions contained in ATTACHMENT 14.
10. SUPPLY SPECIFICATIONS
TECHNICAL SPECIFICATIONS applicable to the performance of the SUPPLIES are
contained in ATTACHMENT 7. Except as otherwise provided herein, prior to
shipment, LUCENT may at any time modify the TECHNICAL SPECIFICATIONS
relating to its SUPPLIES, provided the modifications, under normal and
proper use, do not materially adversely affect the use, function, or
performance of the ordered SUPPLIES under normal and proper use. Unless
otherwise agreed in writing, such substitution shall not result in any
additional charges to IUSACELL. LUCENT shall notify IUSACELL of such
modification at least 10 (ten) calendar days prior to shipment.
11. SOFTWARE FEATURES (*)
12. OBLIGATIONS OF THE PARTIES
The scope of the parties' obligations, in addition to those agreed
upon herein, is detailed in ATTACHMENT 8.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 16 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
13. DOCUMENTATION
13.1. LUCENT shall furnish to IUSACELL DOCUMENTATION for PRODUCTS and
SOFTWARE provided under this AGREEMENT sufficient to operate and
maintain such PRODUCTS and SOFTWARE in accordance with LUCENT's
standard practices and as customarily provided to its customers.
LUCENT's standard practices for the furnishing of DOCUMENTATION in
effect at the time of execution of this AGREEMENT, together with
such additional terms and conditions as agreed upon by the parties,
are set forth in this clause. LUCENT may, from time to time, make
changes to these practices.
13.2. IUSACELL acknowledges that DOCUMENTATION may be in a mechanical
format or other format in which third party suppliers to LUCENT have
underlying rights and, accordingly, agrees that any license terms or
restrictive legends furnished to IUSACELL with any DOCUMENTATION
shall control over any contrary or less restrictive provisions of
this AGREEMENT, including, but not limited to, any such provisions
as exist in clause 19., USE OF INFORMATION.
13.3. LUCENT will provide IUSACELL the DOCUMENTATION in support of its
cellular analog and CDMA SUPPLIES. This DOCUMENTATION is in the form
of a CD-ROM. The CD-ROM contains the complete set of Wireless
DOCUMENTATION. One set of DOCUMENTATION, contained on a CD-ROM, will
be provided for each purchased MSC, each Regional Headquarters and
for IUSACELL's Central Headquarters. Updates, when issued by LUCENT,
to these documents (also on CD-ROM) will be provided to IUSACELL
free of charge during the WARRANTY PERIOD. Additional DOCUMENTATION
may be purchased by IUSACELL from LUCENT's INFORMATION Center, at
LUCENT's effective PRICES on the date of the purchase by IUSACELL.
13.4. All DOCUMENTATION (whether or not in CD ROM) furnished by LUCENT,
and all copies thereof made by IUSACELL, including translations,
compilations, and partial copies are, and shall remain, the property
of LUCENT or the third party supplier. Except for any part of such
DOCUMENTATION which is or becomes generally known to the public
through acts not attributable to IUSACELL, IUSACELL shall hold such
DOCUMENTATION in confidence, and shall not, without LUCENT's prior
written consent, disclose, provide, or otherwise make available, in
whole or in part, any DOCUMENTATION to anyone, except to its
employees having a need-to-know in connection with the licensed use
thereof. IUSACELL shall not make any copies of any DOCUMENTATION
except as necessary to exercise the rights granted hereunder.
IUSACELL shall reproduce and include any LUCENT copyright and
proprietary notice on all such necessary copies of DOCUMENTATION.
IUSACELL shall also mark all media containing such copies with a
warning that DOCUMENTATION is subject to restrictions contained in
an agreement between LUCENT and IUSACELL and that they are the
property of LUCENT. IUSACELL shall maintain records of the number
and location of all copies of DOCUMENTATION. If IUSACELL's license
is canceled or terminated, or when the DOCUMENTATION is no longer
needed by IUSACELL, IUSACELL shall return all copies of such
DOCUMENTATION to LUCENT or follow written disposition instructions
provided by LUCENT.
14. TRAINING
14.1. A complete schedule of recommended and optional training programs
for REGION 9 only is set out in ATTACHMENT 10, Training. PRICES in
ATTACHMENT 10 are valid for the
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 17 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
period identified therein. Training scheduled for delivery beyond
the date specified in ATTACHMENT 10, or for REGIONS other than
REGION 9, shall be subject to LUCENT's published PRICES or PRICES as
mutually agreed to by IUSACELL and LUCENT. All PRICES reflect
tuition costs only and do not include costs of travel, lodging and
meals for IUSACELL's personnel, which shall be the responsibility of
IUSACELL.
14.2. Training PRICES included in ATTACHMENT 10, are based on the
following: (*)
15. WARRANTIES
Warranties set forth hereunder are non-transferable and shall only be
exercised by IUSACELL or a subsidiary thereof in possession of a
concession to render telecommunications services in REGIONS 5, 6, 7, or 9
in Mexico.
15.1. EQUIPMENT WARRANTY (*)
15.2. SOFTWARE WARRANTY (*)
15.2.1. Year 2000 Compliance Specification/Additional Warranty (*)
15.3. SERVICE Warranty (*)
15.4. Third Party SUPPLIES Warranty
SUPPLIES which are manufactured by a third party and provided to
IUSACELL by LUCENT will be warranted only to the extent warranted by
the third party manufacturer. LUCENT will assign to IUSACELL
whatever rights LUCENT may have in relation to the THIRD PARTY
PRODUCTS, but LUCENT's rights and obligations that are assigned to
IUSACELL shall be no greater than what LUCENT receives from the
third party manufacturer.
16. SUPPORT
16.1. During the implementation phase and prior to ATP, there is no charge
for on SITE support. Once ATP has been completed, IUSACELL is
responsible for providing maintenance, and the SUPPLIES are covered
under the warranty provisions herein. LUCENT's warranty obligations
provide for remote technical support. Except as provided in the
third paragraph of clause 15.1, LUCENT's warranty obligations do not
include on SITE support. Should IUSACELL request LUCENT to provide
on SITE support, such support is billable at pricing level I, as
provided herein.
16.2. Technical Support Service During Warranty
16.2.1. LUCENT shall assist IUSACELL in answering technical
questions and diagnosing operating problems not covered
under the warranties set forth in clause 15., hereof, with
SUPPLIES only as provided for herein, as follows:
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 18 of 61
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AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
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16.2.1.1. LUCENT's Local Field Support ("LFS") team in Mexico,
shall provide a first level of support from 8:30
a.m. through 17:00 p.m. on Mexican business days for
real time consultation. LUCENT shall also maintain a
Help Desk operator with access to on call
technicians 24 (twenty-four) hours per day, 7
(seven) days per week. LUCENT may, at its option
with IUSACELL's consent, enhance its support to
include SITE visits to IUSACELL's facilities and to
provide on SITE diagnostics and consultation at the
hourly rate set forth below.
16.2.1.2. Problems which cannot be resolved by the LFS team
will be escalated to LUCENT's Tier II Customer
Technical Support Organization.
16.2.1.3. These services will be provided to IUSACELL as set
forth in this Warranty clause or pursuant to a
separate PURCHASE ORDER, as agreed by both parties.
16.2.1.4. On SITE technical support will be billed at (*), per
person per hour for calls within a 30 Kilometer
radius of the Torre Latinoamericana building,
located at the corner of Avenida Madero and Eje
Central, Colonia Centro, Mexico D.F. Calls outside
this radius will be billed at (*), per person per
hour plus reasonable expenses, including but not
limited to travel and lodging expenses.
16.3. Technical Support Service Post-Warranty
16.3.1. LUCENT shall provide IUSACELL Post Warranty Technical
Support Service in answering technical questions and
diagnosing operating problems with LUCENT's Products and
SOFTWARE. The support as described herein will be provided
for a period of 1 (one) year as from expiration of the
WARRANTY PERIOD for the PRICE quoted below. (*)
Upon written request from IUSACELL, LUCENT shall provide rates
applicable to subsequent years.
16.3.2. LUCENT's Local Field Support ("LFS") team in Mexico, shall
provide a first level of support from 8:30 a.m. through
17:00 p.m. on Mexican business days for real time
consultation. LUCENT shall also maintain a Help Desk
operator with access to on call technicians 24 (twenty-four)
hours per day, 7 (seven) days per week. LUCENT may, at its
option with IUSACELL's consent, enhance its support to
include SITE visits to IUSACELL's facilities and to provide
on SITE diagnostics and consultation at the hourly rate set
forth below.
16.3.3. Problems which cannot be resolved by the LFS team will be
escalated to LUCENT's Tier II Customer Technical Support
Organization.
16.3.4. These services will be provided to IUSACELL pursuant to a
separate PURCHASE ORDER.
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The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
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December 10, 1997
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16.3.5. On SITE technical support will be billed at (*), per person
per hour for calls within a 30 (thirty) Kilometer radius of
the Torre Latinoamericana building, located at the corner of
Avenida Madero and Eje Central, Colonia Centro Mexico D.F.
Calls outside this radius will be billed at (*), per person
per hour plus reasonable expenses, including but not limited
to travel and lodging expenses.
16.3.6. During any WARRANTY PERIOD and for any period during which
LUCENT shall provide IUSACELL Technical Support, LUCENT
shall notify IUSACELL of any defects in SUPPLIES which may
materially adversely affect the performance of such SUPPLIES
and, assuming LUCENT is responsible to correct such defect
under the terms hereof, how and in what time period LUCENT
intends to correct such defect.
THE WARRANTIES SET FORTH IN THIS CLAUSE 16 ARE EXCLUSIVE AND ARE IN LIEU
OF ALL OTHER EXPRESS AND IMPLIED WARRANTIES, INCLUDING, WITHOUT
LIMITATION, WARRANTIES OF MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR
PURPOSE. IUSACELL'S SOLE AND EXCLUSIVE REMEDY SHALL BE LUCENT'S OBLIGATION
TO CORRECT OR REFUND AS SET FORTH ABOVE.
17. LIMITATION OF LIABILITY
17.1. IUSACELL's exclusive remedies and the entire liability of LUCENT and
its AFFILIATES and their employees and agents for any claim, loss,
damage, or expense of IUSACELL or any other person or entity arising
out of or in any way related to this AGREEMENT shall be as follows:
17.1.1. For infringement, the remedy set forth in the "Patents,
Trademarks, and Copyrights" clause;
17.1.2. For the performance of SUPPLIES or claims that they do not
conform to a warranty, the remedy set forth in the
applicable "Warranty" provision;
17.1.3. For tangible property damage and personal injury caused by
LUCENT's negligence or willful misconduct, the amount of
direct damages;
17.1.4. For damage or failure of performance by LUCENT (other than
as set forth in clauses 17.1.1. to 17.1.3. above), if any,
for which a remedy is expressly set forth in this AGREEMENT,
the remedy expressly so set forth; and
17.1.5. For everything other than as set forth above, the amount of
direct damages not to exceed the purchase PRICE paid by
IUSACELL for the SUPPLY directly giving rise to the claim
plus awarded counsel fees and costs.
17.2. Notwithstanding any other provision of this AGREEMENT (other than
clause 17.1., immediately preceding), LUCENT and its AFFILIATES and
their employees and agents shall not be liable for any incidental,
indirect, special, reliance, or consequential damage or lost
profits, revenues or savings arising out of or in any way related to
this AGREEMENT. This clause 17.2. shall survive failure of an
exclusive or limited remedy.
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The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
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17.3. Notwithstanding any other provision of this AGREEMENT, IUSACELL and
its AFFILIATES and their employees and agents shall not be liable
for any incidental, indirect, special, reliance, or consequential
damage or lost profits, revenues or savings arising out of this
AGREEMENT. This clause 17.3. shall survive failure of an exclusive
or limited remedy.
17.4. The parties shall give one another prompt notice of any claim. Any
action or proceeding against any party hereto must be brought within
24 (twenty-four) months after the cause of action accrues.
18. LICENSE FOR USE OF SOFTWARE
18.1. License
Upon delivery of SOFTWARE pursuant to this AGREEMENT, LUCENT grants to
IUSACELL a personal, nontransferable (except as otherwise provided
herein), and nonexclusive LICENSE FOR USE OF SOFTWARE on a DESIGNATED
PROCESSOR for its own business operations in Mexico. No license is granted
to IUSACELL to sublicense such SOFTWARE furnished by LUCENT. IUSACELL
shall not reverse engineer, decompile or disassemble SOFTWARE furnished as
object code to generate corresponding SOURCE CODE. Unless otherwise agreed
in writing by LUCENT, IUSACELL shall not modify SOFTWARE furnished by
LUCENT under this AGREEMENT except as provided in LUCENT's DOCUMENTATION.
If the DESIGNATED PROCESSOR becomes temporarily inoperative, IUSACELL
shall have the right to use the SOFTWARE temporarily on a backup processor
until operable status is restored and processing on the DESIGNATED
PROCESSOR is completed. The DESIGNATED PROCESSOR may be changed upon
written agreement by both parties' legal representatives.
Upon 30 (thirty) calendar days' advance written notice, IUSACELL may
relocate SOFTWARE or optional feature packages for which IUSACELL has the
right to use from one IUSACELL-owned processor to another IUSACELL-owned
processor. IUSACELL shall not be required to pay additional right-to-use
fees as a result of such relocation, except where size sensitive units are
a factor or where use of the SOFTWARE is for a different purpose than
originally specified. LUCENT may charge IUSACELL for SERVICES requested by
IUSACELL in support of such relocation. IUSACELL shall remove all copies
of the SOFTWARE from any processor from which the SOFTWARE has been
relocated.
18.2. Cancellation of a License
Notwithstanding any other clause in this AGREEMENT to the contrary, if
IUSACELL fails to comply with any of the material terms and conditions of
this AGREEMENT with respect to the use of SOFTWARE, and such failure
continues beyond ten (10) calendar days after receipt of written notice
thereof by IUSACELL, LUCENT, upon written notice to IUSACELL, may cancel
any affected LICENSE FOR USE OF SOFTWARE.
18.3. Optional SOFTWARE Features
SOFTWARE provided to IUSACELL under this AGREEMENT may contain optional
features which are separately licensed and priced. IUSACELL agrees that
such optional features will not be activated without written authorization
from LUCENT and IUSACELL's payment of appropriate license fees. If, in
spite of IUSACELL's best efforts to comply with this restriction, such
features are activated, IUSACELL agrees to so notify LUCENT promptly and
to pay LUCENT the
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
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December 10, 1997
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license fees for the activated features plus interest at the rate of (*)
per month, accrued as of the date such features were activated.
18.4. Title, Restrictions and Confidentiality
All SOFTWARE (whether or not part of FIRMWARE) furnished by LUCENT, and
all copies thereof made by IUSACELL, including translations, compilations,
and partial copies are, and shall remain, the property of LUCENT or the
third party supplier thereof, as the case may be. Except for any part of
such SOFTWARE which is or becomes generally known to the public through
acts not attributable to IUSACELL, IUSACELL shall hold such SOFTWARE in
confidence, and shall not, without LUCENT's prior written consent,
disclose, provide, or otherwise make available, in whole or in part, any
SOFTWARE to anyone, except to its employees having a need-to-know in
connection with licensed Use. IUSACELL shall not make any copies of any
SOFTWARE except as necessary to exercise the rights granted hereunder.
IUSACELL shall reproduce and include any LUCENT or third party supplier
copyright and proprietary notice on all such necessary copies of SOFTWARE.
IUSACELL shall also mark all media containing such copies with a warning
that SOFTWARE are subject to restrictions contained in an agreement
between LUCENT and IUSACELL and that they are the property of LUCENT or
the corresponding third party supplier. IUSACELL shall maintain records of
the number and location of all copies of SOFTWARE. If IUSACELL's license
is canceled or terminated, or when the SOFTWARE is no longer needed by
IUSACELL, IUSACELL shall return all copies of such SOFTWARE to LUCENT or
follow written disposition instructions provided by LUCENT.
18.5. Compatibility of SUPPLIES
Except as specifically set forth in this clause, LUCENT makes no
representations or warranties whatsoever that SUPPLIES will be compatible
with any equipment or software currently or hereafter owned or used by
IUSACELL or any other entity (all such equipment or software hereinafter
are referred to as "OTHER EQUIPMENT"). IUSACELL shall be responsible for
any and all modifications or additions which may be required to OTHER
EQUIPMENT so that such OTHER EQUIPMENT will operate with SUPPLIES
furnished and installed by LUCENT. LUCENT shall not be responsible for any
defects, deficient performance, trouble isolation or other issues which
result from processor deficiencies, inadequate memory or storage capacity,
incompatibility with other software or hardware or failure to meet
specifications.
No warranty is made with respect to the functioning of EQUIPMENT and SPARE
PARTS neither integrated nor assembled by LUCENT with OTHER EQUIPMENT ,
unless specifications for such integration or assembly were approved in
writing by LUCENT, and SUPPLIES were installed by LUCENT or its
subcontractors.
If IUSACELL requests LUCENT to make any modifications or additions so that
such OTHER EQUIPMENT operates with SUPPLIES furnished and installed by
LUCENT, LUCENT, at its discretion, may elect to do so, and in such case,
the modifications and additions will be made as requested by IUSACELL and
shall be billed to and paid for by IUSACELL at PRICES determined by LUCENT
as a separate item in addition to any other amounts due and payable by
IUSACELL hereunder. LUCENT shall have no liability to IUSACELL for any
such modifications or additions to OTHER EQUIPMENT except to the extent
LUCENT fails to follow IUSACELL's instructions.
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The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
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FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
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18.6. Custom Material Development
From time to time, IUSACELL may request custom SOFTWARE (including, but
not limited to, development of identified features or modifications to
SOFTWARE or SOFTWARE Enhancements) or custom development of EQUIPMENT
(including, but not limited to, development of identified features or
modifications to EQUIPMENT or EQUIPMENT Enhancements) to be provided by
LUCENT under this AGREEMENT (the "CUSTOM MATERIAL"). If IUSACELL requests
CUSTOM MATERIAL that is a specific enhancement or modification of a
previously licensed feature or of previously purchased EQUIPMENT, IUSACELL
will identify to LUCENT in writing a summary of any such proposed
development of CUSTOM MATERIAL. Such summary will provide a description of
any proposed CUSTOM MATERIAL sufficient to enable LUCENT to determine the
general demand for, and its plans, if any, to develop the same or similar
materials. LUCENT will respond to such summary and indicate, in its sole
discretion, if it wishes IUSACELL to submit a subsequent Request for
Proposal (RFP) from IUSACELL for the development of such CUSTOM MATERIAL.
IUSACELL acknowledges that LUCENT will have no obligation to develop any
CUSTOM MATERIAL for IUSACELL.
Within (*) following LUCENT's receipt of an RFP for CUSTOM MATERIAL from
IUSACELL, LUCENT will respond stating the terms and conditions upon which
LUCENT would be willing to undertake such development, including, but
limited to, a listing of specifications, custom development charges,
planned license fees and a proposed delivery schedule. IUSACELL may then
place a PURCHASE ORDER therefor, as set forth in clause 3 above.
Unless otherwise agreed in writing by the parties, LUCENT will own all
forms of intellectual property rights (including, but limited to, patent,
trade secret, copyright, trademarks and mask rights) pertaining to CUSTOM
MATERIAL, and will have the right to file for or otherwise secure and
protect such rights.
19. USE OF INFORMATION
19.1. All technical and business information, including, without
limitation, (i.) MSC and cell site features, configurations, size,
and growth plans, (ii.) frequency and network plans, (iii.) network
performance statistics, (iv.) tower and antenna configurations, (v.)
business plans, and (vi.) customer information, in whatever form
disclosed by any party hereto to the other (all hereinafter
designated "INFORMATION"), shall remain the property of the
furnishing party or its AFFILIATES. All SOFTWARE, DOCUMENTATION, and
TECHNICAL SPECIFICATIONS shall be deemed to be INFORMATION
regardless of how labeled. The furnishing party grants the receiving
party and its AFFILIATES the right to use such INFORMATION only as
follows: Such INFORMATION:
(a) shall not be reproduced or copied, in whole or part,
except for use as authorized in this AGREEMENT; and
(b) shall, together with any full or partial copies thereof,
be returned or destroyed when no longer needed.
IUSACELL shall use such INFORMATION only:
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The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
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December 10, 1997
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(a) to order SUPPLIES or SERVICES,
(b) to evaluate LUCENT's SUPPLIES, or other items, or
SERVICES, or
(c) to install, operate, and maintain the particular
SUPPLIES, or other items for which it was furnished.
Unless the furnishing party consents in writing, such INFORMATION, except
for that part, if any, which is known to the receiving party to be free of
any confidential obligation, or which becomes generally known to the
public through acts not attributable to the receiving party, shall be held
in confidence by the receiving party. The receiving party may disclose
such INFORMATION to other persons, upon the furnishing party's prior
written authorization, but solely to enable such third party to perform
acts which this clause expressly authorizes the receiving party to perform
itself and further provided such other person agrees in writing (a copy of
which writing will be provided to the furnishing party at its request) to
the same conditions respecting use of INFORMATION contained in this clause
and to any other reasonable conditions requested by the furnishing party.
Each party shall be liable for any breach hereof by its employees and
AFFILIATES.
19.2. Both parties further agree:
19.2.1. To obtain, from any third party in need to know of, and
receive, any part of the INFORMATION, a commitment of
confidentiality and restrictive use in the form attached
hereto as ATTACHMENT 11, (Non-Disclosure Agreement); and
19.2.2. To enforce by all means such commitments, and to assist
actively the furnishing (disclosing) party in the protection
of the INFORMATION against any wrongful act or negligence by
third parties.
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The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
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AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
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20. PATENTS, TRADEMARKS AND COPYRIGHTS
In the event of any claim, action, proceeding or suit by a third party
against IUSACELL alleging an infringement of any United States of America
or Mexican patent, United States of America or Mexican copyright, or
United States of America or Mexican trademark, or a violation in the
United States of America or Mexico of any trade secret or proprietary
rights by reason of the use, in accordance with LUCENT's or other
applicable specifications, of any SUPPLIES or other item furnished by
LUCENT to IUSACELL under this AGREEMENT, LUCENT, at its expense, will
defend IUSACELL, subject to the conditions and exceptions stated below.
LUCENT will reimburse IUSACELL for any cost, expenses or attorney's fees
plus disbursements incurred at LUCENT's written request or authorization,
and will indemnify IUSACELL against any liability assessed against
IUSACELL by final judgment or settlement on account of such infringement
or violation arising out of such use.
If IUSACELL's use shall be enjoined or in LUCENT's opinion is likely to be
enjoined, LUCENT will, at its expense and at its option, either (a)
replace the affected SUPPLIES with a suitable substitute free of any
infringement or violation, (b) modify it so that it will be free of the
infringement or violation, or (C) procure for IUSACELL a license or other
right to use it. If none of the foregoing options is practical, LUCENT
will remove the enjoined SUPPLIES or other item and refund to IUSACELL any
amounts paid to LUCENT less a reasonable charge for any actual period of
use by IUSACELL.
IUSACELL shall, within 5 (five) business days of the date IUSACELL
acquires actual or constructive knowledge thereof, give LUCENT prompt
written notice of all such claims, actions, proceedings or suits alleging
infringement or violation and LUCENT shall assume the sole defense
thereof, including appeals, and shall have the full and complete authority
to settle same. IUSACELL shall, upon LUCENT's request and at LUCENT's
expense, furnish all information and assistance available to IUSACELL and
cooperate in every reasonable way to facilitate the defense and/or
settlement of any such claim, action, proceeding or suit.
No undertaking of LUCENT under this clause shall extend to any such
alleged infringement or violation to the extent that it:
1. Arises from adherence to design modifications, specifications,
drawings, or written instructions which LUCENT is directed by
IUSACELL to follow, but only if such alleged infringement or
violation does not reside in corresponding commercial SUPPLIES
of LUCENT's design or selection; or
2. Arises from LUCENT's adherence to instructions to apply
IUSACELL's trademark, trade name, or other company
identification; or
3. Resides in SUPPLIES which are not of LUCENT's origin and which
are furnished by IUSACELL to LUCENT for use under this
AGREEMENT; or
4. Relates to use of SUPPLIES provided by LUCENT in combination
with other SUPPLIES, furnished either by LUCENT or others,
which combination was not installed, recommended, contemplated
in LUCENT's instructions for the SUPPLY or otherwise directed
or approved in writing by authorized LUCENT personnel.
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The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
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December 10, 1997
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In the foregoing cases numbered 1. through 4., IUSACELL will defend and
save LUCENT harmless, subject to the same terms and conditions and
exceptions stated above with respect to LUCENT's rights and obligations
under this clause.
The liability of LUCENT and IUSACELL with respect to any and all claims,
actions, proceedings, or suits by third parties alleging infringement of
patents, trademarks, or copyrights or violation of trade secrets or
proprietary rights because of, or in connection with, any items furnished
pursuant to this AGREEMENT shall be limited to the specific undertakings
contained in this clause.
21. MARKETING FUND
WSI shall provide IUSACELL with a marketing fund, in an aggregate amount
and in such installments as shall be determined by WSI and IUSACELL.
22. EXPORT CONTROL
The parties acknowledge that the SUPPLIES and INFORMATION (including, but
not limited to, SERVICES and training) provided under this AGREEMENT are
subject to US export laws and regulations, and any use or transfer of such
SUPPLIES and INFORMATION must be authorized under those regulations.
IUSACELL agrees not to use, distribute, transfer, or transmit the SUPPLIES
or INFORMATION (even if incorporated into other SUPPLIES) in violation of
US export regulations. If requested by LUCENT, IUSACELL also agrees to
sign written assurances and other export-related documents as may be
required for LUCENT to comply with US export regulations.
23. ASSIGNMENT
Except as provided in this clause 23, neither party shall assign this
AGREEMENT or any right or interest under this AGREEMENT, nor delegate any
work or obligation to be performed under this AGREEMENT (an "assignment"),
without the other party's prior written consent. LUCENT, in its sole
discretion, may assign this AGREEMENT in whole or in part, to any
AFFILIATE upon written notice to IUSACELL. Subject to LUCENT's prior
written approval, which shall not be unreasonably withheld, IUSACELL shall
be entitled to assign all or part of its rights hereunder to any or all of
its OPERATING AFFILIATES, provided such OPERATING AFFILIATES previously
agree in writing to be bound under the terms and conditions set forth in
this AGREEMENT. Such assignment shall be made only to those of IUSACELL's
OPERATING AFFILIATES which were previously authorized to provide wireless
telecommunications services by the SCT or the COFETEL.
Nothing shall preclude a party from employing a subcontractor in carrying
out its obligations under this AGREEMENT, but a party's use of such
subcontractor shall not release the party from its obligations under this
AGREEMENT. Each party shall be responsible for the work and activities of
each of its subcontractors, including compliance with the terms of this
AGREEMENT. Additionally, each party shall be responsible for all payments
to its subcontractors.
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The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
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December 10, 1997
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24. FORCE MAJEURE
Neither party shall be liable to the other party for any loss, damage,
delay or failure of performance resulting directly or indirectly from any
cause which is beyond its reasonable control, including, but not limited
to the elements; extraordinary traffic conditions; riots; civil
disturbances; wars; states of belligerency or acts of the public enemy;
labor disputes; strikes; work stoppages; inability to secure raw
materials, supplies or transportation facilities; or the laws,
regulations, acts or failures to act of any governmental authority,
including but not limited to denial of a US Export License, hereinafter
referred to as "FORCE MAJEURE". A party shall promptly notify the other
party of the occurrence of a FORCE MAJEURE event and the notifying party
shall be excused from any further performance of these obligations
affected by the FORCE MAJEURE Event for as long as such FORCE MAJEURE
Event continues and such party uses and continues to use its best efforts
to recommence performance. Failure of either party to perform for 3
(three) months due to FORCE MAJEURE will represent grounds by either party
for its termination of the portion of this AGREEMENT affected by the FORCE
MAJEURE event. The occurrence of any of the foregoing FORCE MAJEURE events
will not constitute an excuse for IUSACELL not to pay LUCENT any amounts
due and payable hereunder.
25. CANCELLATION FOR BREACH
Except as otherwise expressly set forth in this AGREEMENT, in the event of
a breach or default of this AGREEMENT, the non-breaching party shall have
the right to terminate this AGREEMENT on 30 (thirty) calendar days written
notice, unless the breaching party cures its breach to the satisfaction of
the non-breaching party during said 30 (thirty) calendar days. If the
parties are unable to resolve a dispute regarding the existence or cure of
an alleged breach within such 30 (thirty) day period, such dispute shall
be resolved in accordance with the arbitration procedure set forth in
clause 29, hereof. Notwithstanding anything to the contrary contained
herein, LUCENT shall have the right to terminate this AGREEMENT for breach
if IUSACELL fails to pay to LUCENT or into the escrow account established
in clause 6.6, hereof in the case of disputed amounts, any amount due to
LUCENT hereunder within 5 (five) days of the date such payment was due.
Either party may terminate this AGREEMENT on 24 (twenty-four) hour written
notice if the other party files a petition of bankruptcy, or is
adjudicated bankrupt, or makes a general assignment for the benefit of
creditors; or either party becomes insolvent or is otherwise unable to
meet its business obligations for a period of forty-five (45) calendar
days.
Termination under this clause shall not affect IUSACELL's obligation to
pay for goods or SERVICES already shipped or performed under this
AGREEMENT, nor shall it affect those obligations defined under clause 31,
Survival of Obligations.
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The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
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FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
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26. HEADINGS AND DEFINITIONS
All headings in this AGREEMENT are inserted for convenience only and are
not intended to affect the meaning or interpretation of this AGREEMENT.
27. PRIORITY OF ARTICLES
In case of a difference between the terms and conditions contained in this
AGREEMENT, and those contained in the ATTACHMENTS thereto, the former
shall prevail.
28. GOVERNING LAW
The validity, interpretation and performance of this AGREEMENT shall be
governed by the laws of the State of New York, USA, except its
choice-of-law rules, and except the United Nations Convention on the
International Sale of Goods.
29. DISPUTE RESOLUTION
29.1. Senior Management of either party may, upon notice and within 5
(five) business days of receipt of a notice from the other party
elect to utilize a non-binding resolution procedure whereby each
presents its case before a panel consisting of two senior executives
of each of the parties and, if such executives can agree upon such
an individual, a mutually acceptable neutral advisor. If a party
elects to use the procedure set forth in this clause, the other
party shall participate. The hearing shall occur no more than 10
(ten) business days after a party serves notice to use the procedure
set forth in this clause. If the matter cannot be resolved by such
senior executives, the neutral advisor, if one has been agreed upon,
may be asked to assist such senior executives in evaluating the
strengths and weaknesses of each party's position on the merits of
their dispute. The parties shall each bear their respective costs
incurred in connection with the procedure set forth in this clause,
except that they shall share equally the fees and expenses of the
neutral advisor, if any, and the cost of the facility for the
hearing.
29.2. If a dispute is not resolved as set forth above, then either party
may, upon notice to the other party, submit the dispute to binding
arbitration in accordance with the following:
29.2.1. The arbitration shall be held in Miami, Florida, USA, before
a panel of three arbitrators. All arbitration proceedings
will be conducted in English, which shall be the official
language of the arbitration. Either party may, upon notice
to the other party, demand arbitration by serving on the
other party a statement of the dispute, the facts relating
or giving rise to such dispute and the name of the
arbitrator selected by it. Issues of arbitration shall be
decided by the arbitrators.
29.2.2. Within 10 (ten) business days after receipt of such notice,
the other party shall name its arbitrator, and the two
arbitrators named by the parties shall, within 10 (ten)
business days after the date of such notice, select the
third arbitrator.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 28 of 61
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AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
29.2.3. The arbitration shall be administered by the American
Arbitration Association and be governed by the Commercial
Arbitration Rules of the American Arbitration Association,
as may be amended from time to time, except as expressly
provided in this clause. The arbitrators may not amend or
disregard any provision of this clause.
29.2.4. Discovery shall only be allowed as ordered by the
arbitrators. The arbitrators shall allow such discovery as
is appropriate to the purposes of arbitration in
accomplishing a fair, speedy and cost-effective resolution
of disputes. The arbitrators shall reference the rules of
evidence of the Federal Rules of Civil Procedure then in
effect in setting the scope and direction of such discovery,
but shall afford substantial weight to the burden of
discovery in making such determinations. All documents used
in the arbitration proceeding will be in English.
29.2.5. The decision and award rendered by the arbitrators shall be
binding on the parties and may be enforced by any court of
competent jurisdiction. The arbitrators shall have no
authority to award punitive or exemplary damages or to award
damages in excess or in contravention of the AGREEMENT.
29.2.6. The costs of the arbitration proceedings conducted pursuant
to this clause shall be paid by the party designated by the
arbitrators.
30. MODIFICATIONS TO THE AGREEMENT
This AGREEMENT and/or the ATTACHMENTS thereto may be modified only by a
written agreement signed by authorized representatives of the parties.
31. SURVIVAL OF OBLIGATIONS
The parties' rights and obligations which, by their nature, would continue
beyond the termination, cancellation, or expiration of this AGREEMENT,
including but not limited to, the obligations in the clauses entitled
Limitations of Liability, Patents, Trademarks and Copyrights, Publication
of AGREEMENT, and Export Control, shall survive such termination,
cancellation, or expiration.
32. NOTICES
32.1. Any notice required or permitted to be made under this AGREEMENT
shall be in writing and shall be deemed to have been duly given when
it has been delivered by hand or sent by prepaid registered airmail,
facsimile, or electronic mail to the party to which it is required
or permitted to be given or made at such party's address specified
herein or as later designated in writing by such party.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 29 of 61
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AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
32.2. In the event of a change of address, facsimile or electronic mail
address, notice of such change shall be given promptly to the other
party, in accordance with this clause 32.
32.3. Notice shall be sent to the following addresses:
IUSACELL:
Vice President of Technical Operations
cc: Director of Purchasing
cc: Legal Director
Avenida Prolongacion Paseo de la Reforma no. 1236
Col. Santa Fe
Delegacion Cuajimalpa
C.P. 05109, Mexico D.F.
Mexico
Electronic Mail: [email protected]
cc [email protected]
tels. 5 104-4100
Fax: (5) 104 4172
LTM:
Director of Sales for New Markets,
cc: Market Contract Management, and
cc: Law Department
Bosque de Cidros no. 18, 6th Floor
Col. Bosques de las Lomas
Mexico 11700, D.F.
Electronic Mail: [email protected]
Tel. (5) 258-7511 xt 7513
Fax: (5) 259-6122
WSI:
Vice President C&LA Business Management
2333 Ponce de Leon Blvd
Coral Gables, Florida
USA 33134
Electronic Mail: [email protected]
Tel. 305 569 4042
Fax 305 569 4044
33. ENTIRE AGREEMENT
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 30 of 61
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AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
This AGREEMENT and the ATTACHMENTS hereto, shall supersede and nullify any
other previous agreements or covenants, whether oral or written between
the parties concerning the subject matter hereof and constitutes the
entire agreement of the parties with respect thereto.
None of the clauses or ATTACHMENTS hereto shall be construed as an
indication or guideline against any applicable laws. In case of conflict
between the contents of this AGREEMENT and any applicable laws, rules,
regulations or orders, the text of the applicable laws, rules, regulations
or orders shall prevail, and the parties hereunder shall re-negotiate the
clauses or ATTACHMENTS in dispute to modify its contents to avoid
violation of the same.
34. INDEPENDENT CONTRACTOR
All work performed by one party under this AGREEMENT shall be performed as
an independent contractor and not as an agent of the other and neither
party shall be, nor represent itself to be, the employee, agent,
representative, partner or joint venturer of the other. Neither party
shall have the right or authority to assume or create an obligation on
behalf of or in the name of the other or to otherwise act on behalf of the
other. The performing party shall be responsible for the labor
relationship with its employees and for its employees' compliance with all
applicable laws, rules, and regulations while performing work under this
AGREEMENT.
35. TAXES
IUSACELL shall bear all taxes, duties, levies and other similar charges
(and any related interest and penalties), however designated, imposed as a
result of the existence or operation of this AGREEMENT, including but not
limited to any tax which IUSACELL is required to withhold or deduct from
payments to LUCENT, except :
(a) Any tax imposed upon LUCENT in a jurisdiction outside the
United States if such tax is allowable as a credit against the
United States income taxes of LUCENT; and
(b) Any net income tax imposed upon LUCENT by the United States or
the United Mexican States or any governmental entity within
the United States or the United Mexican States.
In order for the exception contained in (a) to apply, IUSACELL must
furnish LUCENT with such evidence as may be required by United States
taxing authorities to establish that such tax has been paid so that LUCENT
may claim the credit.
If IUSACELL is required to bear a tax pursuant to the paragraph above,
IUSACELL shall pay such taxes and other charges and any additional amounts
as are necessary to ensure that the net amounts received by LUCENT after
all such payments or withholding equal the amounts to which LUCENT is
otherwise entitled under this AGREEMENT as if such taxes or other charges
did not exist.
36. RIGHT OF ACCESS
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 31 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
IUSACELL shall provide LUCENT or its representatives reasonable access to
its facilities to enable LUCENT to timely perform of its obligations under
this AGREEMENT. No charge shall be made for such access. Reasonable prior
notification will be given when access is required.
LUCENT's personnel will exercise reasonable care not to materially damage
IUSACELL's property or working EQUIPMENT.
IUSACELL shall not require releases or waivers of any personal rights from
LUCENT or its representatives in connection with the visits to its
premises and agrees that no such releases or waivers shall be pleaded by
it in any action or proceeding.
In the event the INSTALLATION SITE is not IUSACELL's property, IUSACELL
will, at its expense, secure and provide all PERMITS needed by LUCENT to
comply with applicable laws, rules, regulations and orders as well as the
terms and conditions set forth herein.
37. SEVERABILITY
If any part, term, condition, or provision in this AGREEMENT shall be held
to be invalid or unenforceable, the remaining portions of the AGREEMENT
shall remain in effect. In the event such invalid or unenforceable
provision is an essential and material element of this AGREEMENT, the
parties shall promptly negotiate a replacement provision, and failing
Agreement on such provisions, either party may terminate the AGREEMENT on
30 (thirty) days written notice.
38. NON-WAIVER
No waiver of the terms and conditions of this AGREEMENT or the failure of
either party strictly to enforce any such term or condition on one or more
occasions shall be construed as a waiver of the same or of any other term
or condition of this AGREEMENT or on any other occasion.
39. PUBLICATION OF AGREEMENT
The parties shall keep the provisions of this AGREEMENT confidential
except as reasonably necessary for performance hereunder and except to the
extent disclosure may be required by applicable laws or regulations, in
which latter case, the party required to make such disclosure shall
promptly inform the other prior to such disclosure in sufficient time to
enable such other party to make known any objections it may have to such
disclosure. The disclosing party shall take all reasonable steps to secure
a protective order or other similar restraint that the AGREEMENT will be
withheld from the public record, except to the extent disclosure may be
required by applicable laws or regulations, or to the extent the other
parties do not have any objection to such disclosure.
40. NON-SOLICITATION
During the TERM of this AGREEMENT and for a period of 3 (three) years
thereafter, neither party will hire, employ or solicit for employment any
employees of the other party without such party's prior written consent.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 32 of 61
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AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
41. GOVERNMENT APPROVALS; COMPLIANCE WITH LAWS
41.1. In performing this AGREEMENT, the parties shall comply with all
applicable requirements of Mexican and other applicable law,
including without limitation all applicable national and local laws,
ordinances, regulations and codes (including procurement of required
PERMITS or certificates) and all legally made requirements of the
Secretariat of Communications and Transportation (SCT) with respect
to the SUPPLIES. IUSACELL shall, upon LUCENT's written request,
assist LUCENT in the procurement of such PERMITS and certificates as
LUCENT may require to perform its obligations hereunder; provided,
however, that LUCENT shall reimburse IUSACELL for reasonable
expenses actually incurred by it in the provision of such
assistance.
41.2. (*)
42. LIQUIDATED DAMAGES (*)
43. PRICING CERTIFICATION (*)
44. COUNTERPARTS
This AGREEMENT may be executed by the parties in separate counterparts,
all of which shall constitute this same AGREEMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 33 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
This AGREEMENT was duly read by the parties and they signed it by mutual
agreement in triplicate in the Federal District of Mexico and in Miami,
Florida, USA, as of December 10, 1997.
GRUPO IUSACELL S.A. DE C.V. LUCENT TECHNOLOGIES DE MEXICO S.A. DE
C.V.
- ------------------------------- -----------------------------------------
ING. FULVIO VARGAS DEL VALLE MR. ROGELIO VELASCO ROMERO
PRESIDENT AND DIRECTOR GENERAL DIRECTOR GENERAL
Date: Date:
LUCENT TECHNOLOGIES WORLD SERVICES INC.
----------------------------------------
MR. THOMAS L. MASSENGILL
VICE PRESIDENT
Date:
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 34 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 1
DEFINITIONS
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 35 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
DEFINITIONS
Both parties agree to give the meaning specified in this ATTACHMENT to all words
in all capital letters.
================================================================================
TERM DEFINITION
- --------------------------------------------------------------------------------
ABA Number designated for identification of bank
account(s)
- --------------------------------------------------------------------------------
ACCEPTANCE DATE APPOINTMENT Means the date set forth by LUCENT in the
COMPLETION NOTICE when LUCENT will perform
jointly with IUSACELL all tests to prove
SERVICES were performed by LUCENT in
accordance with this AGREEMENT.
- --------------------------------------------------------------------------------
ACCEPTANCE PROTOCOL The ACCEPTANCE PROTOCOL for the INITIAL
COMMITMENT is set forth in ATTACHMENT 14.
- --------------------------------------------------------------------------------
ADDITIONAL PURCHASES Means any EQUIPMENT, SPARE PARTS, LICENSED
MATERIALS, and/or SERVICES purchased by
IUSACELL which are not included in the INITIAL
COMMITMENT.
- --------------------------------------------------------------------------------
ADDITIONAL PURCHASE ORDER PURCHASE ORDER for ADDITIONAL PURCHASES
- --------------------------------------------------------------------------------
AFFILIATE A company which is under common control with,
controls, or is controlled by one of the
parties to this AGREEMENT.
- --------------------------------------------------------------------------------
AGREEMENT This AGREEMENT between LUCENT and IUSACELL.
- --------------------------------------------------------------------------------
ATP All tests passed, as defined for each REGION
in ATTACHMENT 14.
- --------------------------------------------------------------------------------
ATP CERTIFICATE Document signed by both parties upon
completion of ATP.
- --------------------------------------------------------------------------------
ATTACHMENT Any document appended to this AGREEMENT and
referred to as an ATTACHMENT. All ATTACHMENTS
shall be deemed a part of this AGREEMENT.
- --------------------------------------------------------------------------------
CASH Means the payment made by IUSACELL to LUCENT
via bank wire transfer within 30 (thirty)
calendar days from the date of IUSACELL's
receipt of each applicable invoice from
LUCENT.
- --------------------------------------------------------------------------------
CERTIFICATE OF ACCEPTANCE The document evidencing IUSACELL's acceptance
of products, LICENSED
MATERIALS and SERVICES.
- --------------------------------------------------------------------------------
COMPLETION NOTICE Written notice delivered by LUCENT to
IUSACELL indicating that the SUPPLIES and
LICENSED MATERIALS have been installed in
accordance with the statement of work and are
ready to be tested by IUSACELL in accordance
with the ACCEPTANCE PROTOCOL.
- --------------------------------------------------------------------------------
CTIP The Customer Training and information SUPPLIES
(CTIP)
- --------------------------------------------------------------------------------
CHANGE ORDER The document by which IUSACELL requests
from LUCENT changes in the Scope of Work or
otherwise.
================================================================================
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 35 of 61
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FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
================================================================================
TERM DEFINITION
- --------------------------------------------------------------------------------
DESIGNATED PROCESSOR The SUPPLY for which a license to Use
LICENSED MATERIALS is initially granted.
- --------------------------------------------------------------------------------
DOCUMENTATION Means the written information for SUPPLIES
and SOFTWARE available under this AGREEMENT
sufficient to operate and maintain such
SUPPLIES and SOFTWARE. DOCUMENTATION may
include INFORMATION. and RELATED
DOCUMENTATION
- --------------------------------------------------------------------------------
EF&I "Engineer, Furnish & Install" (EF&I) means a
situation in which LUCENT is required by an
ORDER to engineer, furnish and install the
ordered SUPPLY and/or SOFTWARE;
- --------------------------------------------------------------------------------
ENGINEERING Means all the technical designs needed to
install LUCENT's SUPPLIES in accordance with
the designated SITE. TECHNICAL
SPECIFICATIONS.
- --------------------------------------------------------------------------------
EQUIPMENT Means systems, materials and SPARE PARTS
thereof, but the term does not mean SOFTWARE
whether or not such SOFTWARE is part of
FIRMWARE
- --------------------------------------------------------------------------------
EXW Shall be defined in accordance with the 1990
revision of the INCOTERMS.
- --------------------------------------------------------------------------------
FIRMWARE A combination of (1) Hardware and (2)
SOFTWARE represented by a pattern of bits
contained in such Hardware.
- --------------------------------------------------------------------------------
FURNISH ONLY ORDER (FO) An ORDER requesting only the furnishing of
SUPPLIES or LICENSED MATERIALS and no related
SERVICES.
- --------------------------------------------------------------------------------
INFORMATION Shall have the meaning ascribed to it in
Clause 19., hereof.
- --------------------------------------------------------------------------------
INITIAL COMMITMENT The SUPPLIES, LICENSED MATERIALS and SERVICES
described in ATTACHMENT 4. The INITIAL
COMMITMENT constitutes IUSACELL's PROJECT as
described in the specifications provided to
IUSACELL by LUCENT.
- --------------------------------------------------------------------------------
INSTALLATION Means all wiring, connections, processes and
tasks LUCENT will perform in order to deliver
the SUPPLIES to a DESIGNATED SITE and ready
to be tested in accordance with the
ACCEPTANCE PROTOCOL.
- --------------------------------------------------------------------------------
LICENSE FOR USE OF SOFTWARE Means the right to use
LUCENT grants to IUSACELL in accordance with
the terms of this AGREEMENT.
- --------------------------------------------------------------------------------
LICENSED MATERIALS The SOFTWARE and RELATED DOCUMENTATION for
which licenses are granted by LUCENT under
this AGREEMENT. No SOURCE CODE versions of
SOFTWARE are included in LICENSED MATERIALS.
- --------------------------------------------------------------------------------
MSC Mobile Switching Center, synonym of HQ
Headquarters, and also synonym of RCO
Regional Central Office, and also synonym of
Central Headquarters, which includes the
EQUIPMENT and SOFTWARE used for the operation
of cell sites for the provision of wireless
telecommunications services.
- --------------------------------------------------------------------------------
ORDERS As this term is described in clause 3
- --------------------------------------------------------------------------------
OPERATING AFFILIATES Any of IUSACELL's AFFILIATES that have
obtained concessions from the (Mexican)
Ministry of Communications and Transport for
the rendering of telecommunications services
in the REGIONS set forth in Recital D.1 of
this AGREEMENT.
================================================================================
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 37 of 61
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FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
================================================================================
TERM DEFINITION
- --------------------------------------------------------------------------------
PERMITS Any and all governmental PERMITS, licenses,
or authorizations regardless of denomination,
issued by any Mexican federal, state or
municipal entities, required for the
completion of a STATEMENT OF WORK. PERMITS
shall include customs duties and taxes
associated with the importation of SUPPLIES
and LICENSED MATERIALS into Mexico.
- --------------------------------------------------------------------------------
PRICES Means the agreed moneys IUSACELL will pay to
LUCENT in exchange for SUPPLIES and/or
SERVICES delivered by LUCENT in accordance
with this AGREEMENT in exchange for SUPPLIES
set forth in ATTACHMENT 2.
- --------------------------------------------------------------------------------
PROJECT Means the SITE's TECHNICAL SPECIFICATIONS,
EQUIPMENT and SUPPLIES and/or SERVICES, which
are part of a set, and agreed by the parties,
to be installed and placed in service by
IUSACELL, to commercialize telecommunications
services.
- --------------------------------------------------------------------------------
PROPOSED ORDER Means the order draft, with all technical
INFORMATION included, prepared by IUSACELL
based on a valid quotation and including
applying discounts as set forth in
ATTACHMENT 3.
- --------------------------------------------------------------------------------
PURCHASE ORDER As this term is described in clause 3.
- --------------------------------------------------------------------------------
REGION Cellular Telecommunication service areas
within the territory of the United Mexican
States, as designated by the (Mexican)
Ministry of Communications and Transport.
- --------------------------------------------------------------------------------
SERVICES The performance of work by LUCENT for
IUSACELL and includes but is not limited to:
(1) ENGINEERING services, (2) INSTALLATION
services, (3) maintenance and repair services
and other services traditionally offered by
LUCENT, and (4) nontraditional services
requested by IUSACELL.
- --------------------------------------------------------------------------------
SITE Means IUSACELL's (owned, rented or leased)
location where the SUPPLIES will be INSTALLED
and placed in service.
- --------------------------------------------------------------------------------
SOFTWARE A computer program consisting of a set of
logical instructions and tables of
INFORMATION which guide the functioning of a
processor; such program may be contained in
any medium whatsoever, including hardware
containing a pattern of bits representing
such program, but the term SOFTWARE does not
mean or include such medium. The SOFTWARE
provided hereunder will be LUCENT's generally
available software adapted as necessary for
use in Mexico.
- --------------------------------------------------------------------------------
SOURCE CODE Means any version of SOFTWARE incorporating
high-level or assembly language or human
readable material that generally is not
directly executable by a processor.
- --------------------------------------------------------------------------------
SPARE PARTS Means EQUIPMENT pieces or parts of
LUCENT's EQUIPMENT (either manufactured
and/or sold by LUCENT).
- --------------------------------------------------------------------------------
STATEMENT OF WORK The description of the activities to be
undertaken by LUCENT in order to deliver
SUPPLIES, LICENSED MATERIALS or SERVICES
under this AGREEMENT. The Statement of Work
for the INITIAL COMMITMENT is set forth in
ATTACHMENT 4.
================================================================================
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 38 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
================================================================================
TERM DEFINITION
- --------------------------------------------------------------------------------
SUPPLIES SYSTEMS, EQUIPMENT, LICENSED MATERIALS and
SPARE PARTS thereof. The SUPPLIES provided
hereunder will be LUCENT's generally
available products adapted as necessary for
use in Mexico.
- --------------------------------------------------------------------------------
SYSTEM SUPPLIES necessary for the operations of a
cellular communications network.
- --------------------------------------------------------------------------------
THIRD PARTY PRODUCT Those products which are neither manufactured
nor procured by LUCENT as a part of a
manufactured product.
- --------------------------------------------------------------------------------
TECHNICAL SPECIFICATIONS LUCENT's or its vendors' technical
specifications for particular SUPPLIES,
SOFTWARE, or SERVICES furnished hereunder.
- --------------------------------------------------------------------------------
WARRANTY PERIOD The period of time during which a warranty
granted by LUCENT is in force.
================================================================================
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 39 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 2
SUPPLIES AND
PRICES FOR
INITIAL
COMMITMENT
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 40 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 3
ADDITIONAL
PURCHASES
DISCOUNT
SCHEDULE
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 41 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 4
INITIAL
COMMITMENT
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 42 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 5
ORDERS PLACED
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 43 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 6
INSURANCE
POLICY
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 44 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 7
PRODUCT
SPECIFICATIONS
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 45 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 7A
SYSTEM
APPLICATION
ENGINEERING
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 46 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 7B
SYSTEM PERFORMANCE
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 47 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 7C
SWITCH
PERFORMANCE
CRITERIA
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 48 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 8
PROJECT
IMPLEMENTATION
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 49 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 9
IUSACELL FEATURES LIST
* OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 50 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 9
LUCENT AMPS/CDMA
STANDARD
FEATURE LIST
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 51 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 10
TRAINING
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 52 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 11
CONFIDENTIALITY
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 53 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
CONFIDENTIALITY
The undersigned is involved in the INSTALLATION, operation, and/or maintenance
of products or EQUIPMENT supplied by Lucent Technologies de Mexico, S.A de C.V.
and/or Lucent Technologies World Services Inc. (hereinafter, jointly, "LUCENT")
to Grupo Iusacell, S.A. de C.V. (hereinafter, "IUSACELL"), and therefore he has
or may access to INFORMATION and technical data, SOFTWARE and related documents
(hereinafter, jointly, "INFORMATION"), owned or controlled by any of the
abovereferenced parties . The undersigned agrees that all the INFORMATION:
a) shall be treated in strict confidentiality by the undersigned and
shall be used only in accordance with the agreement entered into by
and between LUCENT and IUSACELL on December 10, 1997;
b) shall not be reproduced nor copied, in whole or in part, except with
a prior written consent by the disclosing party;
c) jointly with any copies thereof, shall be returned or destroyed in
the presence of and at the disclosing party's satisfaction, or may,
if contained in an erasable SOFTWARE mean, be erased, at the
disclosing party's satisfaction, within one business day from the
disclosing party's request.
Further, the undersigned agrees in conveying the terms hereof to all levels
within any corporation or party that has access to the INFORMATION.
ACCEPTED AND AGREED TO:
Signature:_______________________________
Name:__________________________________
Date:___________________________________
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 54 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 12
PURCHASE ORDER
FORM
[OMITTED FROM FINAL CONTRACT.]
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 55 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 13
INTEGRAL
CUSTOMER
ASSISTANT PROCESS AND RS&R
PROCESS
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 56 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 14
ACCEPTANCE
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 57 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ACCEPTANCE
1.- EQUIPMENT AND LICENSED MATERIALS
o EQUIPMENT AND LICENSED MATERIALS shall be deemed accepted by IUSACELL upon
delivery to LUCENT's designated warehouse in Mexico. IUSACELL shall
inspect the EQUIPMENT and LICENSED MATERIALS within five(5) business days
following its receipt of a notice of delivery from LUCENT and, if such
EQUIPMENT AND LICENSED MATERIALS conform to the specifications contained
in the ORDER therefor, IUSACELL shall execute and deliver to LUCENT the
corresponding CERTIFICATE OF ACCEPTANCE. If such EQUIPMENT AND LICENSED
MATERIALS do not conform to the specifications contained in IUSACELL's
ORDER therefor, IUSACELL shall so notify LUCENT within such period and
LUCENT shall take such corrective action as it deems necessary. Upon
correction of the non-conformities, LUCENT shall issue to IUSACELL a new
notice of delivery whereupon IUSACELL shall proceed to inspect and accept
the EQUIPMENT and LICENSED MATERIALS in accordance herewith.
2.- SERVICES
SERVICES performed in a particular SITE shall be deemed automatically
accepted by IUSACELL immediately upon achievement of ATP on a SITE by SITE
basis.
3.- TRAINING
TRAINING shall be deemed automatically accepted by IUSACELL on a course by
course basis immediately upon completion of each course in accordance with
ATTACHMENT 10.
4.- ENGINEERING
Engineering will be deemed accepted upon approval by IUSACELL of the
installation drawings for the corresponding PURCHASE ORDER.
5.- ACCEPTANCE DUE TO USE
Notwithstanding anything in this AGREEMENT to the contrary, IUSACELL's use
of any part of the SUPPLIES or ADDITIONAL PURCHASES in service (not
including SERVICES directly connected with ATP testing contemplated by
this AGREEMENT), whether or not revenue is generated, shall be deemed to
constitute the issuance of the CERTIFICATE OF ACCEPTANCE for such
SUPPLIES.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 58 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
MOBILE SWITCHING
CENTER
ACCEPTANCE TESTS
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 59 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
CELL SITE
ACCEPTANCE TESTS
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 60 of 61
<PAGE>
AGREEMENT FOR EQUIPMENT, FURNISH AND INSTALLATION,
FOR IUSACELL'S CELLULAR NETWORK
December 10, 1997
================================================================================
ATTACHMENT 15
PROJECT CHANGE
CONTROL PROCESS
* OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.
================================================================================
The information contained herein is of a proprietary nature and is furnished
solely for the use of IUSACELL, LTM and WSI. The enclosed material shall not
be copied, distributed, or made available to others for the use of
IUSACELL, LTM and WSI. The enclosed material shall not be copied,
distributed, or made available to others without the previous
written approval of LUCENT Technologies and GRUPO IUSACELL.
PAGE 61 of 61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all requirements for filing on
Form 20-F and has duly caused this annual report to be signed on its behalf by
the undersigned, thereunto duly authorized.
GRUPO IUSACELL, S.A. DE C.V.
By: /s/ HOWARD F. ZUCKERMAN
-----------------------------------------
Howard F. Zuckerman
Vice President, Finance and Audit and
Chief Financial Officer
Date: June 29, 1998
