<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
Amendment No. 1 to
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, 1999
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 1-12500
----------------------
GRUPO IUSACELL, S.A. DE C.V.
f/k/a
NUEVO GRUPO IUSACELL, S.A. DE C.V.
(Exact name of Registrant as specified in its charter)
IUSACELL GROUP, INC.
(Translation of Registrant's name into English)
UNITED MEXICAN STATES
(Jurisdiction of incorporation or organization)
------------------------
PROLONGACION PASEO DE LA REFORMA 1236
COLONIA SANTA FE
DELEGACION CUAJIMALPA
05348 MEXICO, D.F.
(Address of principal executive offices)
------------------------
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
American depositary shares, New York Stock Exchange
each representing 10 series V shares
Series V shares New York Stock Exchange*
</TABLE>
- --------------------
* 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:
NONE
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 736,830,745 shares
Series V Capital Stock 578,200,867 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]
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I.......................................................................................................... 1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS......................................... 1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE....................................................... 1
ITEM 3. KEY INFORMATION............................................................................... 2
ITEM 4. INFORMATION ON THE COMPANY.................................................................... 16
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.................................................. 46
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.................................................... 71
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS............................................. 79
ITEM 8. FINANCIAL INFORMATION......................................................................... 84
ITEM 9. THE OFFER AND LISTING......................................................................... 87
ITEM 10. ADDITIONAL INFORMATION........................................................................ 94
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................... 107
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES........................................ 109
PART II......................................................................................................... 114
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............................................... 114
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.................. 114
ITEM 15. RESERVED...................................................................................... 114
ITEM 16. RESERVED...................................................................................... 114
PART III........................................................................................................ 115
ITEM 17. FINANCIAL STATEMENTS.......................................................................... 115
ITEM 18. FINANCIAL STATEMENTS.......................................................................... 116
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS............................................................. 116
</TABLE>
- -------------------
"NEW IUSACELL" AND "IUSACELL" MEAN GRUPO IUSACELL, S.A. DE C.V. THIS COMPANY WAS
FORMERLY KNOWN AS NUEVO GRUPO IUSACELL, S.A. DE C.V.
"OLD IUSACELL" MEANS GRUPO IUSACELL CELULAR, S.A. DE C.V. THIS COMPANY WAS
FORMERLY KNOWN AS GRUPO IUSACELL, S.A. DE C.V. NEW IUSACELL OWNS 99.9% OF THE
CAPITAL STOCK OF OLD IUSACELL.
New Iusacell's equity securities trade on the New York and Mexican stock
exchanges. Both New Iusacell and Old Iusacell have publicly traded debt
securities.
Unless otherwise specified, all references to "U.S. dollars," "dollars," "U.S.$"
or "$" are to United States dollars, and references to "Ps." and "pesos" are to
Mexican pesos. We publish our financial statements in pesos that are adjusted to
reflect changes in purchasing power due to inflation. Thus, unless otherwise
specified, our financial data is presented in constant pesos of December 31,
1999 purchasing power. Amounts presented in this annual report may not add up or
may be slightly inconsistent due to rounding.
Unless otherwise provided, this annual report contains translations of peso
amounts into U.S. dollars solely for the convenience of the reader based on the
exchange rate reported by the Federal Reserve Bank of New York as its noon
buying rate for pesos, which we refer to as the Noon Buying Rate, at December
31, 1999, which was Ps.9.480 per
i
<PAGE> 3
U.S.$1.00. These currency conversions should not be construed as representations
that the peso amounts actually represent such dollar amounts. Additionally,
these conversions should not be construed as representations that these peso
amounts have been, could have been or could be converted into U.S. dollars at
those or any other rates of exchange.
--------------------
We will provide without charge to each person to whom this report is delivered,
upon written or oral request, a copy of any or all of the documents incorporated
by reference into this annual report (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., Attention: Director, Investor Relations. Telephone requests may be
directed to 011-52-5109-5759.
-ii-
<PAGE> 4
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
A. DIRECTORS AND SENIOR MANAGEMENT
See Item 6, "Directors, Senior Management and Employees."
B. ADVISERS
Principal Banker. Iusacell's principal commercial banker is The Chase
Manhattan Bank, 270 Park Avenue, New York, New York 10017.
Legal Advisers. Iusacell's principal United States legal advisers are
Clifford Chance Rogers & Wells LLP, 200 Park Avenue, New York, New York 10166.
Iusacell's principal Mexican corporate and securities legal advisers
are De Ovando y Martinez del Campo, S.C., Bosque de Alisos 47-B, Suite 101, Col.
Bosques de las Lomas, 05120 Mexico, D.F.
C. AUDITORS
Iusacell's auditors for the 1999, 1998 and 1997 fiscal years have been
PriceWaterhouseCoopers, S.C., Mariano Escobedo 573, Col. Rincon del Bosque,
11570 Mexico, D.F. The partners of PriceWaterhouseCoopers, S.C. are members of
the Mexican Institute of Public Accountants (Instituto Mexicano de Contadores
Publicos, A.C.).
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
1
<PAGE> 5
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following tables present selected consolidated financial information of
Iusacell and its consolidated subsidiaries. We have extracted some of this
information from the audited consolidated financial statements of Iusacell as of
December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and
1997, which we refer to as the Consolidated Financial Statements appearing
elsewhere in this annual report and you should read this information in
conjunction with those Consolidated Financial Statements.
Prior to August 10, 1999, when Iusacell completed a corporate
restructuring, New Iusacell had minimal assets and liabilities and no operations
and contingent liabilities. For accounting purposes, New Iusacell is the
successor business to Old Iusacell. New Iusacell currently owns 99.9% of the
capital stock of Old Iusacell.
The financial statements have been prepared in accordance with Mexican
GAAP, which differs in significant respects from U.S. GAAP. Pursuant to Mexican
GAAP, we have prepared the financial statements and the selected financial data
presented below in accordance with Bulletin B-10 of the Mexican Institute of
Public Accountants, which provides for the recognition of certain effects of
inflation.
Until December 31, 1996, Bulletin B-10 required Iusacell to restate
non-monetary assets at current replacement cost, to restate non-monetary
liabilities using the National Consumer Price Index (Indice Nacional de Precios
al Consumidor), also referred to as the INPC, 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 requires Iusacell to restate non-monetary 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, we have restated all data in the Consolidated Financial Statements
and in the selected financial data set forth below in constant pesos as of
December 31, 1999. We have not reversed the effect of these inflation accounting
principles in the reconciliation to U.S. GAAP.
Note 20 to the Consolidated Financial Statements presents the principal
differences, other than inflation accounting, between Mexican GAAP and U.S. GAAP
and contains a reconciliation of Iusacell's net income and stockholders' equity
to U.S. GAAP.
The U.S. dollar amounts provided below are translations from the peso
amounts, solely for the convenience of the reader, at the Noon Buying Rate at
December 31, 1999 of Ps.9.480 per U.S.$1.00. You should not construe these
translations 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 as of any dates mentioned in this annual report.
2
<PAGE> 6
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
------------- ------------ ------------- ------------- ------------ ------------
(THOUSANDS OF CONSTANT DECEMBER 31, 1999 PESOS, EXCEPT (THOUSANDS OF
RATIOS AND SUBSCRIBER DATA)(1) U.S. DOLLARS,
EXCEPT RATIOS
AND
SUBSCRIBER DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Mexican GAAP:
Revenues:
Services ............................ Ps.2,339,757 Ps.2,120,423 Ps.2,055,803 Ps.2,750,863 Ps.3,767,693 U.S.$397,436
Telephone equipment sales
and other ...................... 416,902 342,020 422,788 421,534 436,960 46,093
------------- ------------ ------------- ------------- ------------ ------------
Total revenues ............. 2,756,659 2,462,443 2,478,591 3,172,397 4,204,653 443,529
Cost of sales:
Cost of services ............... 857,815 777,398 685,051 860,821 1,074,191 113,311
Cost of telephone equipment
and other ...................... 231,395 190,681 268,373 225,548 269,491 28,428
------------- ------------ ------------- ------------- ------------ ------------
Total cost of sales ........ 1,089,210 968,079 953,424 1,086,369 1,343,682 141,739
Gross profit ........................ 1,667,449 1,494,364 1,525,167 2,086,028 2,860,971 301,790
Operating expenses .................. 1,217,580 1,077,389 990,880 1,210,540 1,444,799 152,405
Depreciation & amortization ......... 969,994 875,692 775,258 892,850 1,425,022 150,319
Project 450 non-cash writedown ...... -- -- -- 1,102,401 -- --
Operating (loss) .................... (520,125) (458,717) (240,971) (1,119,763) (8,850) (934)
Other (income) expense, net ......... -- -- -- (149,046) 23,054 2,432
Integral financing cost (gain):
Interest expense, net .......... 250,931 407,093 330,659 250,873 291,417 30,740
Foreign exchange (gain) loss,
net ......................... 1,021,304 (89,966) 64,565 939,474 (159,074) (16,780)
Gain on net monetary position .. (726,412) (504,461) (389,975) (762,581) (661,868) (69,817)
------------- ------------ ------------- ------------- ------------ ------------
Total integral financing
cost (gain) ............. 545,823 (187,334) 5,249 427,766 (529,525) (55,857)
Equity participation in net income
(loss) of associated companies ... (56,691) 1,909 210,076 27,922 (47,611) (5,022)
Provision for equipment
impairment(3) .................. -- -- 1,236,307 -- -- --
Income (loss) before asset tax,
employee profit sharing,
minority interest,
extraordinary item and
discontinued operations ....... (1,122,639) (269,474) (1,272,451) (1,370,561) 450,010 47,469
Provision for asset tax ............. 42,138 50,980 60,397 72,127 132,645 13,992
Provision for income tax ............ -- -- -- -- 404,810 42,701
Employee profit sharing ............. 3,015 -- -- -- -- --
------------- ------------ ------------- ------------- ------------ ------------
Total provisions for taxes
and employee profit
sharing ................ 45,153 50,980 60,397 72,127 537,455 56,693
Income (loss) before minority
interest, extraordinary
item and discontinued
operations ..................... (1,167,792) (320,454) (1,332,848) (1,442,688) (87,445) (9,224)
Minority interest ................... 53,633 4,604 276 6,342 17,933 1,892
------------- ------------ ------------- ------------- ------------ ------------
Income (loss) before extraordinary
item and discontinued
operations ..................... (1,114,159) (315,850) (1,332,572) (1,436,346) (69,512) (7,332)
Extraordinary item(4) ............... -- (210,292) -- -- 404,810 42,701
Loss from discontinued
operations(5) .................. -- -- -- (20,716) (1,536) (162)
------------- ------------ ------------- ------------- ------------ ------------
Net income (loss) ................... Ps.(1,114,159) Ps.(526,142) Ps.(1,332,572) Ps.(1,457,062) Ps.333,762 U.S.$35,207
============= ============ ============= ============= ============ ============
Income (loss) per share before
extraordinary item .............. Ps.(1.15) Ps.(0.31) Ps.(1.24) Ps.(1.30) Ps.(0.06) U.S.$ (0.01)
Net income (loss) per share ......... (1.15) (0.53) (1.24) (1.30) 0.26 0.03
U.S. GAAP:(6)
Total revenues ...................... Ps.2,756,659 Ps.2,576,730 Ps.2,593,830 Ps.3,192,641 Ps.4,204,653 U.S.$ 443,529
Operating profit (loss) ............. (520,125) (728,762) (1,652,678) (947,509) (77,878) (8,215)
Net income (loss) ................... (526,112) (187,934) (904,623) (1,447,526) 234,232 24,708
Basic and diluted income (loss)
per share(7) .................... (0.53) (0.21) (0.84) (1.35) 0.18 0.02
</TABLE>
- --------------------------
Footnotes appear on page 5.
3
<PAGE> 7
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- -------- ---------- -------
(THOUSANDS OF CONSTANT DECEMBER 31, 1999 PESOS, EXCEPT RATIOS
AND SUBSCRIBER DATA)(1)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Mexican GAAP:
Working capital .................. Ps. (2,092,051) Ps. (2,360,531) Ps. (347,028) Ps. (1,349,797) Ps. 809,505
Property and equipment,
net ............................ 6,207,867 4,790,395 4,016,213 5,961,927 6,771,108
Total assets ..................... 10,552,312 8,633,851 8,892,877 11,151,350 14,834,370
Total debt ....................... 2,404,203 2,034,552 2,959,543 5,002,121 7,916,374
Stockholders' equity ............. 6,355,445 4,828,755 4,434,109 4,118,268 5,243,361
U.S. GAAP:(6)
Working capital .................. Ps. (2,421,680) Ps. (2,532,213) Ps. (559,374) Ps. (1,517,058) Ps. 605,687
Property and equipment,
net ............................ 6,207,867 4,790,395 4,016,213 5,774,626 6,582,807
Total assets ..................... 11,491,366 9,592,869 9,776,469 11,598,760 15,272,205
Total debt ....................... 2,404,203 2,034,552 2,959,543 5,014,180 7,921,636
Minority interest ................ (37,111) 8,058 15,418 911 33,069
Stockholders' equity ............. 5,375,168 4,380,608 4,386,376 4,120,659 5,133,707
OTHER FINANCIAL DATA:
Mexican GAAP:
EBITDA(8) (21) ................... Ps. 449,869 Ps. 416,975 Ps. 534,287 Ps. 875,488 Ps. 1,416,172
EBITDA Margin(9) ................. 16% 17% 22% 28% 34%
Capital Expenditures(10) ......... Ps. 682,550 Ps. 367,715 Ps. 941,901 Ps. 3,635,488 Ps. 1,713,921
Interest expense, net ............ 250,931 407,093 330,659 250,873 291,417
Ratio of earnings to fixed
charges(11) .................... -- -- -- -- 2.59
U.S. GAAP:
EBITDA(8) (20) ................... Ps. 449,869 Ps. 146,930 Ps. (877,420) Ps. 1,053,872 Ps. 1,347,144
CASH FLOW DATA(12)
Mexican GAAP:
Net cash provided (used) by
operating activities ........... Ps. 807,220 Ps. 458,838 Ps. (300,525) Ps. 765,408 Ps. 1,147,442
Net cash used in investing
activities ..................... (1,233,035) (70,800) (1,538,625) (3,871,546) (3,955,572)
Net cash provided (used) by
financing activities ........... 311,013 (505,866) 1,855,552 3,236,271 3,673,425
U.S. GAAP:(6)
Net cash provided (used) by
operating activities ........... Ps. 346,676 Ps. (114,318) Ps. 104,786 Ps. 1,915,360 Ps. 725,289
Net cash provided (used) in
investing activities ........... (1,233,035) 194,635 (1,363,228) (3,684,246) (3,886,544)
Net cash provided (used) by
financing activities ........... 771,561 (198,146) 1,274,845 1,899,020 4,026,550
SUBSCRIBER DATA:
POPs ............................. 63,290,574 64,996,443 65,847,614 66,712,645 67,591,791
Subscribers(13)
Contract .................... 208,802 159,144 199,964 277,014 352,289
Prepay ...................... 1,399 73,762 200,159 478,361 970,509
Total .................... 210,201 232,906 400,123 755,375 1,322,798
Gross subscriber additions ....... 103,733 172,519 406,353 747,720 788,438
Average subscribers(14) .......... 202,462 221,554 387,765 742,601 1,290,558
Penetration(15) .................. 0.33% 0.36% 0.61% 1.13% 1.96%
Average monthly contract
churn(16) .................... 3.62% 4.28% 2.94% 2.58% 2.96%
Average monthly MOUs per
subscriber(17) ................. 140 118 105 87 77
Nominal average monthly
revenue per
subscriber(18) ................. Ps. 464 Ps. 492 Ps. 464 Ps. 361 Ps. 346
Nominal cost to acquire
a new subscriber(19) ........... Ps. 6,143 Ps. 6,076 Ps. 5,326 Ps. 3,477 Ps. 3,527
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED DECEMBER 31,
----------------------
1999
----------------------
(THOUSANDS OF
U.S. DOLLARS,
EXCEPT RATIOS
AND SUBSCRIBERS
DATA)
<S> <C>
BALANCE SHEET DATA:
Mexican GAAP:
Working capital .................. U.S.$ 85,391
Property and equipment,
net ............................ 714,252
Total assets ..................... 1,564,807
Total debt ....................... 835,061
Stockholders' equity ............. 553,097
U.S. GAAP:(6)
Working capital .................. U.S.$ 63,891
Property and equipment,
net ............................ 694,389
Total assets ..................... 1,610,992
Total debt ....................... 835,616
Minority interest ................ 3,488
Stockholders' equity ............. 541,530
OTHER FINANCIAL DATA:
Mexican GAAP:
EBITDA(8) (21) ................... U.S.$ 149,385
EBITDA Margin(9) ................. 34%
Capital Expenditures(10) ......... U.S.$ 180,793
Interest expense, net ............ 30,740
Ratio of earnings to fixed
charges(11) .................... 2.59
U.S. GAAP:
EBITDA(8) (20) ................... U.S.$ 142,104
CASH FLOW DATA(12)
Mexican GAAP:
Net cash provided (used) by
operating activities ........... U.S.$ 121,038
Net cash used in investing
activities ..................... (417,254)
Net cash provided (used) by
financing activities ........... 387,492
U.S. GAAP:(6)
Net cash provided (used) by
operating activities ........... U.S.$ 76,507
Net cash provided (used) in
investing activities ........... (409,973)
Net cash provided (used) by
financing activities ........... 424,742
SUBSCRIBER DATA:
POPs .............................
Subscribers(13)
Contract ....................
Prepay ......................
Total ....................
Gross subscriber additions .......
Average subscribers(14) ..........
Penetration(15) ..................
Average monthly contract
churn(16) ....................
Average monthly MOUs per
subscriber(17) .................
Nominal average monthly
revenue per
subscriber(18) ................. U.S.$ 36
Nominal cost to acquire
a new subscriber(19) ........... U.S.$ 372
</TABLE>
- --------------------------
Footnotes appear on page 5.
4
<PAGE> 8
(1) According to Mexican GAAP, financial data for all periods in the
financial statements included in this annual report, unless otherwise
indicated, have been restated in constant December 31, 1999 pesos.
Restatement into December 31, 1999 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, 1999. The inflation indices used in this
annual report are 1.9687 for 1995 figures, 1.5416 for 1996 figures,
1.3322 for 1997 figures and 1.1232 for 1998 figures.
(2) Peso amounts were converted to U.S. dollars at the Noon Buying Rate
for December 31, 1999 of Ps.9.480 per U.S.$1.00. 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.
In determining peso amounts of U.S. dollar-denominated obligations at
December 31, 1999 in its financial statements under Mexican GAAP,
however, Iusacell applied the exchange rate published by the Banco de
Mexico, which on December 31, 1999 was Ps.9.4986 per U.S.$1.00. The
differences between the Noon Buying Rate and the Banco de Mexico
exchange rate cause certain inconsistencies between references to U.S.
dollar amounts in this annual report and the actual U.S. dollar
amounts. For example, Iusacell's actual total debt, excluding trade
notes payable, at December 31, 1999 was U.S.$833.4 million. In
preparing Iusacell's December 31, 1999 financial statements, we
multiplied this amount by 9.4986 to arrive at the Ps.7,916.4 million
in total debt, excluding trade notes payable. However, for purposes of
this annual report, we converted this peso amount to U.S. dollars
using the rate of Ps.9.480, which yields a U.S. dollar-denominated
total debt, excluding trade notes payable, of U.S.$835.0 million.
The combined effect of the restatement of the financial data in
December 31, 1999 constant pesos and the convenience translation of
peso amounts into U.S. dollars discussed above means that the amount
shown for certain balance sheet items is not equal to the actual
amounts outstanding. For example, as of December 31, 1998, after the
restatement in December 31, 1999 constant pesos and the convenience
translation using the December 31, 1999 Noon Buying Rate, total debt
outstanding, excluding trade notes payable, was Ps.5,002.1 million, or
U.S.$527.6 million. The actual amount of total debt outstanding,
excluding trade notes payable, was U.S.$450.0 million. This impact
explains any inconsistency between our consolidated financial
information and references to U.S. dollar amounts in other sections of
this annual report.
(3) For U.S. GAAP purposes, the impairment charge relating to the analog
communications equipment is recorded as an operating expense. See Note
4b) to the Consolidated Financial Statements.
(4) For 1996, the extraordinary item represents restructuring expenses
associated with the reorganization and change in management control of
Iusacell, the write-off of obsolete network equipment and an
additional reserve for doubtful accounts. For 1999, the extraordinary
item represents the utilization of tax loss carryforwards available to
Iusacell which under Mexican GAAP is required to be classified as an
extraordinary item. Under U.S. GAAP the utilization of tax loss
carryforwards is recorded as a component of tax expense.
(5) In December 1998, Iusacell discontinued the operations of its
subsidiary, Cellular Solutions de Mexico, S.A. de C.V., a company
which sold cellular handset accessories. Cellular Solutions de Mexico
transferred all its existing inventories as of December 31, 1998 to
another subsidiary of Iusacell and terminated all its employees during
January and February 1999. See Note 19 to the Consolidated Financial
Statements. Under U.S. GAAP, the loss from discontinued operations is
recorded as an operating expense.
(6) See Note 20 to the Consolidated Financial Statements and Item 5,
"Operating and Financial Review and Prospects--U.S. GAAP
Reconciliation" for a discussion of differences between U.S. GAAP and
Mexican GAAP.
(7) Diluted earnings (loss) per share for the years ended December 31,
1998 and 1997 is equal to basic earnings (loss) per share as the
potential drawdowns and conversions under the subordinated convertible
facility with Bell Atlantic and the authorized but unissued shares
subject to the executive employee stock purchase plan are excluded
from the computation of diluted earnings (loss) per share because to
include them would have been antidilutive for the periods presented.
For the years ended December 31, 1998 and 1997, the number of
potentially antidilutive shares that were excluded from the
computation of diluted
5
<PAGE> 9
earnings (loss) per share for the drawdowns and conversions under the
facility with Bell Atlantic were 69,285,714 and 214,285,714 shares,
respectively, and for the shares subject to the executive employee
stock purchase plan were 70,004 and 262,666 shares, respectively.
Diluted earnings (loss) per share for the year ended December 31, 1999
is equal to basic earnings (loss) per share as Iusacell no longer had
any potentially dilutive or antidilutive securities.
Diluted earnings (loss) per share for the years ended December 31,
1996 and 1995 is equal to basic earnings (loss) per share as Iusacell
did not have any potentially dilutive or antidilutive securities.
(8) EBITDA as used in this annual report is operating profit (loss) plus
the sum of depreciation and amortization and, under U.S. GAAP,
non-cash items, and is presented because Iusacell believes that EBITDA
provides useful information regarding Iusacell's debt service ability.
EBITDA should not be considered in isolation or as a substitute for
the consolidated income statements or the consolidated statements of
changes in financial position prepared in accordance with Mexican GAAP
or as a measure of profitability or liquidity. EBITDA as presented in
this annual report (under both Mexican GAAP and U.S. GAAP) differs
from EBITDA as defined in the instruments governing New Iusacell and
Old Iusacell's bank debt and senior notes. EBITDA in this annual
report has not been reduced to reflect the additional expenses that
Old Iusacell would have incurred had it expensed, rather than, as is
its current practice under Mexican GAAP and as is permitted under U.S.
GAAP, amortized (over 18 months) the cost of cellular telephones it
gives to its contract customers. EBITDA is not (i) a measure
determined under U.S. GAAP, (ii) an alternative to U.S. GAAP operating
income (loss) and net income (loss), or (iii) a measure of liquidity
or cash flows as determined under U.S. GAAP. EBITDA does not represent
discretionary funds. EBITDA, as calculated by Iusacell, may not be
comparable to similarly titled measures reported by other companies.
(9) EBITDA margin is calculated by dividing EBITDA by the total revenues
for the respective period.
(10) Capital expenditures includes accruals for fixed asset purchases, the
capitalization of interest costs related to long term debt incurred in
connection with the acquisition of property, plant and equipment,
trade-in credits received from Lucent Technologies for exchanging our
previous analog network for a digital and analog network supplied by
Lucent Technologies, and the net value of long distance fiber acquired
in swaps for Iusacell long distance fiber. For 1999, pursuant to a
waiver from its lenders, capital expenditures for determining
compliance with capital expenditure limitations set forth in Old
Iusacell's debt covenants excludes the capitalization of interest
costs and Lucent Technologies trade-in credits. See Item 5, "Operating
and Financial Review and Prospects--Liquidity and Capital
Resources--Capital Expenditures."
(11) The ratio of earnings to fixed charges covers continuing operations.
For this purpose earnings are calculated as income or loss before
taxes plus (i) integral financing cost, including amortization of
capitalized interest, (ii) the interest portion of annual rent
expense, and (iii) losses from the less than 50%-owned affiliates.
Fixed charges include the expensed and capitalized portions of
integral financing cost. Earnings were inadequate to cover fixed
charges in 1995, 1996, 1997 and 1998. The fixed charge coverage
deficiency for the years ended December 31, 1995, 1996, 1997 and 1998
amounted to Ps.2,043.4 million (U.S.$215.5 million), Ps.464.4 million
(U.S.$49.0 million), Ps.1,334.3 million (U.S.$140.7 million) and
Ps.2,275.5 million (U.S.$240.0 million).
(12) Under Mexican GAAP, the cash flow data has been adjusted for inflation
and includes certain non-cash items, such as monetary gains and losses
and foreign exchange gains and losses and, as a result, are not
comparable with the respective U.S. GAAP cash flow data. Under U.S.
GAAP, the effect of inflation adjustments has been included in the
separate line item "Gain on net monetary position and foreign exchange
losses." See Note 20 to the Consolidated Financial Statements.
(13) Subscribers refers to Iusacell's subscribers in its 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 telephone
number has not yet been deactivated. See Item 4, "Information on the
Company--Business Overview--Cellular Services--Prepay Customers."
(14) Average subscribers represents the rolling monthly average number of
subscribers for the respective periods.
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<PAGE> 10
(15) Penetration represents the end of period subscribers divided by the
end of period POPs in Iusacell's Regions, expressed as a percentage.
(16) Effective January 1, 1998, Iusacell changed the methodology by which
it determines average monthly contract churn for a given period.
Average monthly contract churn for a given period is now calculated by
dividing the sum of all contract subscribers disconnected during such
period by the sum of the beginning-of-month contract subscribers for
each of the months in such period, expressed as a percentage. Only
1997 average monthly contract churn information, which was 2.88% under
the old methodology, has been restated under the new methodology. The
average monthly contract churn data for 1995 and 1996 is presented
under the old methodology, which calculates average monthly 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. See Item 4,
"Information on the Company--Cellular Services--Contract Churn" and
Item 5, "Operating and Financial Review and Prospects--Results of
Operations."
(17) Effective January 1, 1998, Iusacell changed the methodology by which
it determines average monthly MOUs (minutes of use) per subscriber.
Average monthly MOUs per subscriber for a given period are now
calculated by dividing total MOUs in the period by the sum of the
monthly average subscribers for each of the months in such period.
Only 1997 average monthly MOUs per subscriber information, which was
98 under the old methodology, has been restated under the new
methodology. The average monthly MOUs per subscriber data for 1995 and
1996 are presented under the old methodology, which calculates average
monthly MOUs per subscriber for a given period by dividing the total
minutes of use for the respective period by the number of average
subscribers for the respective period and dividing the quotient by the
number of months in such period. See Item 5, "Operating and Financial
Review and Prospects--Results of Operations." When reporting average
monthly MOUs per subscriber, we exclude incoming calls only prepay
subscribers and the MOUs they generate.
(18) Effective January 1, 1998, Iusacell changed the methodology by which
it determines nominal average monthly cellular revenue per subscriber
(ARPU). ARPU for a given period is now calculated by dividing the sum
of the monthly cellular revenue and other cellular revenues for each
of the months in the period by the sum of the monthly average cellular
subscribers for each of the months in such period. Only 1997 ARPU
information, which was Ps.451 under the old methodology, has been
restated under the new methodology. The ARPU for 1995 and 1996 is
presented under the old methodology, which calculates ARPU for a given
period 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 the number of months in
such period. See Item 5, "Operating and Financial Review and
Prospects--Results of Operations." When reporting ARPU, we exclude
incoming calls only prepay subscribers and the revenue they generate.
(19) Nominal cost to acquire a new subscriber represents sales, marketing
and advertising costs, plus the costs of cellular phones Iusacell
gives to its contract customers, for the respective period (in nominal
pesos) divided by the gross customer additions for such period.
(20) The EBITDA calculation based on U.S. GAAP for 1997 has been reduced to
reflect the Ps.1,236.3 million (U.S.$130.4 million) provision for
equipment impairment, which is considered an operating expense under
U.S. GAAP.
(21) The EBITDA calculation based on Mexican GAAP for 1998 has been reduced
to reflect the Ps.1,102.4 million (U.S.$116.3 million) Project 450
writedown, which was expensed for U.S. GAAP purposes during 1997 and
1996.
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<PAGE> 11
EXCHANGE RATES
The following table sets forth, for the periods indicated, the
period-end, average, high and low Noon Buying Rates, in each case for the
purchase of U.S. dollars, all expressed in nominal pesos per U.S. dollar. The
Noon Buying Rate at March 17, 2000 was Ps. 9.322 per U.S. $1.00.
<TABLE>
<CAPTION>
NOON BUYING RATE (1)
PERIOD END AVERAGE (2) HIGH LOW
---------- ----------- ------- -----
<S> <C> <C> <C> <C>
Year ended December 31, 1995 ... 7.740 6.526 8.050 5.270
Year ended December 31, 1996 ... 7.881 7.635 8.045 7.325
Year ended December 31, 1997 ... 8.070 7.917 8.410 7.717
Year ended December 31, 1998 ... 9.901 9.152 10.630 8.040
Year ended December 31, 1999 ... 9.480 9.563 10.600 9.243
Month ended September 30, 1999.. 9.352 9.382 9.515 9.288
Month ended October 31, 1999 ... 9.618 9.575 9.732 9.405
Month ended November 30, 1999... 9.424 9.416 9.624 9.320
Month ended December 31, 1999... 9.480 9.427 9.533 9.308
Month ended January 31, 2000 ... 9.640 9.489 9.640 9.401
Month ended February 29, 2000... 9.364 9.423 9.597 9.354
</TABLE>
- ------
(1) Source: Federal Reserve Bank of New York
(2) Average of month-end rates for annual data.
In the past, 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, it has done so in the past and may
do so in the future. Any such restrictive exchange control policy could
adversely affect our ability to make payments in U.S. dollars and could also
have a material adverse effect on our financial condition and results of
operations.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
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<PAGE> 12
D. RISK FACTORS
RISK FACTORS RELATING TO IUSACELL
WE ARE A HOLDING COMPANY AND WILL DEPEND ON OUR SUBSIDIARIES TO PAY OUR
LIABILITIES
We are a holding company with no significant assets other than the
stock of our subsidiaries. We also had some cash from the remaining proceeds of
the December 1999 issuance of U.S. $350.0 million of our 14 1/4% senior notes
due 2006, which ultimately will be invested in additional stock of our
subsidiaries.
In order to pay our obligations, we will rely on income from dividends
and other cash flow from our subsidiaries. Because we are a holding company, the
claims of all holders of our subsidiaries' debt rank senior to our obligations.
At December 31, 1999, our subsidiaries' total indebtedness, including trade
notes payable, was Ps.4,602.4 million (U.S.$485.5 million) and may increase in
the future.
Our current debt agreements prevent our subsidiaries from paying
dividends to us or otherwise making cash available to us until at least May
2004. In addition, substantially all of our subsidiaries' assets are pledged to
secure their obligations under their existing debt instruments. Dividends and
cash flow from our subsidiaries are therefore severely restricted by the
outstanding debt of our subsidiaries and the restrictive covenants that govern
that debt.
Our ability to pay our obligations before May 2004 will depend on our
ability to either
- raise equity or debt capital at the holding company level,
or
- generate sufficient cash flow at the subsidiary level and
make dividend payments to the holding company after
eliminating the covenants restricting such dividend payments
through the prepayment of the Old Iusacell debt whose terms
restrict dividend payments.
After the expiration of the restrictive covenants that prevent our
subsidiaries from paying dividends to New Iusacell, our ability to pay our
liabilities will depend on our ability to generate sufficient cash flow and/or
to access equity or debt financing. We cannot assure you that we will be able to
raise equity or debt capital or that our subsidiaries will generate sufficient
cash flow to pay dividends to enable us to pay our obligations.
Furthermore, the ability of our subsidiaries to pay dividends is
subject to Mexican legal requirements, which provide that a Mexican corporation
may declare and pay dividends only out of the profits reflected in its financial
statements, if such payment is approved by its stockholders and after the
creation of required legal reserves and the absorption or satisfaction of losses
suffered in previous fiscal years. Claims of creditors of our subsidiaries,
including trade creditors, and bank and other lenders, will generally have
priority over claims of New Iusacell to the assets and cash flows of our
subsidiaries.
Additionally, in the event we engage in business activities at the
holding company level and incur associated liabilities, or otherwise incur
liabilities at the holding company level, we may not have the resources
available to satisfy those liabilities for the same reasons discussed above. In
the event we incur such liabilities, we could be required to turn to the capital
markets or our principal shareholders in order to help us satisfy those
liabilities. At that time, we may not have access to equity or debt financing.
In addition, our principal shareholders are under no obligation to provide
financial resources to us and there can be no assurance that they would do so. A
material unsatisfied liability at the holding company level could lead to our
bankruptcy or otherwise make it difficult or impossible for us to comply with
our obligations.
WE ARE SUBJECT TO RESTRICTIVE COVENANTS
The terms of our debt and of our subsidiaries' existing debt impose
significant operating and financial restrictions. These restrictions will
affect, and in many respects significantly limit or prohibit, our ability and
the ability of our subsidiaries to, among other things,
- borrow money,
- pay dividends on stock,
- make investments,
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<PAGE> 13
- use assets as security in other transactions, and
- sell certain assets or merge with or into other companies.
If we do not comply with these restrictions, we could be in default
even if we can currently pay our debt. If there were a default, holders of the
relevant debt could demand immediate payment of the aggregate amount of that
debt. This could lead to our bankruptcy or reorganization for the benefit of our
creditors or to our inability to pay our obligations.
WE MAY BE UNABLE TO SERVICE OUR DEBT, ACCESS CREDIT OR PURSUE BUSINESS
OPPORTUNITIES BECAUSE OUR SUBSIDIARIES ARE HIGHLY LEVERAGED AND HAVE
INSUFFICIENT CASH FLOW
Historically, our cash generated from operating activities has not been
sufficient to meet our debt service, working capital and capital expenditure
requirements. We have relied on the capital markets for new equity and debt
financing, vendor financing and borrowings and equity contributions from our
principal shareholders to meet such funding needs.
As of December 31, 1999, our total consolidated indebtedness, including
trade notes payable, was Ps.7,953.3 million (U.S.$838.9 million), or
approximately 60.3% of our total capitalization. Although we had net income of
Ps.333.8 million (U.S.$35.2 million) for the period ended December 31, 1999, we
experienced net losses for each of the six years up to and including the period
ended December 31, 1998. Our positive net income in 1999 was driven primarily by
the benefits of foreign exchange gains attributable to the appreciation of the
peso against the U.S. dollar during 1999, and monetary gains resulting from the
effects of inflation on our net monetary liability position during 1999.
For the year ended December 31, 1998, our earnings were insufficient to
cover our fixed charges by Ps.2,275.5 million (U.S.$240.0 million). We had no
fixed charge coverage deficiency for the year ended December 31, 1999; we had a
fixed charge coverage amount of Ps.501.9 million (U.S.$52.9 million). For this
purpose, earnings are calculated as income or loss before taxes plus (i)
integral financing cost, including amortization of capitalized interest, (ii)
the interest portion of annual rent expense, and (iii) losses from the less than
50%-owned affiliates. Fixed charges include the expensed and capitalized
portions of integral financing cost.
The degree to which we are leveraged and the covenants with which we
have to comply under our various financing agreements may adversely affect our
ability to finance future operations, to finance necessary capital expenditures,
to service our indebtedness, to compete effectively against better capitalized
competitors and to withstand downturns in our business or the Mexican economy
generally. Our high level of indebtedness could limit our ability to pursue
business opportunities that may be in our interest and that of our
securityholders.
WE MAY LOSE MONEY BECAUSE OF CURRENCY DEVALUATIONS
While our sales are almost entirely denominated in pesos, the vast
majority of our obligations, and all of our long-term debt, are denominated in
U.S. dollars. As a result, except for those obligations for which we have
hedging arrangements in place, we are exposed to peso devaluation risk. Although
the peso appreciated 4.3% against the U.S. dollar in 1999, the peso has devalued
substantially against the U.S. dollar in the past and may devalue significantly
in the future. For example, the Noon Buying Rate rose from Ps.3.466 per
U.S.$1.00 on December 19, 1994 to Ps.5.000 per U.S.$1.00 on December 31, 1994
and Ps.7.740 per U.S.$1.00 on December 31, 1995, representing a 123.3%
devaluation of the peso relative to the U.S. dollar. In 1998, the peso devalued
22.7% relative to the U.S. dollar to Ps.9.901 per U.S.$1.00 on December 31,
1998.
Further declines in the value of the peso relative to the U.S. dollar
could adversely affect our ability to meet U.S. dollar-denominated obligations,
including any debt securities. In addition, any further devaluation of the peso
may negatively affect the value of a Mexican company's securities, such as ours.
WE FACE INCREASING COMPETITION WHICH MAY REDUCE OUR OPERATING MARGINS
We face significant competition in our core cellular services business
from Radiomovil Dipsa, S.A. de C.V., commonly known as Telcel, in each region in
which we operate. As a wholly owned subsidiary of Telefonos de Mexico, S.A. de
C.V., the former state telephone monopoly known as Telmex, Telcel has
significantly greater internal financial and other resources than those
available to us, nationwide cellular and PCS concessions, a
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<PAGE> 14
nationwide cellular network, and an ability to use Telmex's installed
telecommunications systems. Competition is substantial and we, like Telcel, bear
significant promotional expenses, including the provision of cellular telephones
to contract subscribers free of charge or at a substantial discount. In
addition, competition from Telcel has not always enabled us to implement price
increases to keep pace with inflation and has occasionally forced price
rollbacks and reductions.
We face increasing competition from other companies providing
comparable mobile wireless services utilizing emerging technologies, including
PCS services in the 1.9 GHz frequency band, enhanced specialized mobile radio
services and satellite telephony. We also face increasing competition in
providing long distance, paging, wireless local telephony and data transmission
services. The Mexican government may grant additional concessions to other
companies to provide services similar to or the same as those that we provide.
Besides Telmex, some other competitors may also have greater financial
and other resources, which may limit our ability to compete effectively.
IF WE DO NOT OBTAIN SIGNIFICANT CAPITAL FROM OUTSIDE SOURCES, WE WILL NOT BE
ABLE TO CONTINUE TO BUILD OUT OUR WIRELESS INFRASTRUCTURE AND PURSUE LONG
DISTANCE OPPORTUNITIES AND MAY LOSE THE OPPORTUNITY TO GENERATE REVENUES
In order to implement our operating strategy through 2001, we will have
to incur significant capital expenditures. We expect capital expenditures for
2000, 2001 and 2002, not including capitalized interest or capital expenditures
to build out our PCS network in northern Mexico, to total approximately
U.S.$495.0 million, of which approximately U.S.$225.2 million will be invested
during 2000. We expect capital expenditures to build out our PCS network in
northern Mexico will not exceed U.S.$55.0 million, in the aggregate, in 2000 and
2001.
As we make additional investments in our cellular network and pursue
long distance opportunities, we will need additional external funding in
mid-2000 and beyond. We will also need additional external funding in 2000 in
order to acquire, build out and operate PCS networks in northern Mexico. The
terms of our concessions may, in the future, also require us to make other
significant network investments for which additional funds would be required. We
cannot assure you that we will be able to obtain additional funds, including
funds from either of our principal shareholders, or capital markets, bank or
vendor financing, on acceptable terms or at all.
IF WE ARE NOT ABLE TO OBTAIN CONCESSIONS FOR SPECTRUM AND GOVERNMENT APPROVALS,
DEVELOP NEW TECHNOLOGIES AND HIRE AND RETAIN QUALIFIED PERSONNEL, WE WILL BE
UNABLE TO IMPLEMENT NEW SERVICES AND MAY LOSE BUSINESS TO OUR COMPETITORS
Our ability to expand long distance and paging services and to
implement PCS and wireless local telephony services in accordance with our plans
will depend on a number of factors over which we have limited or no control.
These factors include, among others, our ability to acquire concessions for
spectrum at commercially acceptable prices, raise sufficient capital, obtain
required governmental approvals, negotiate reasonable interconnection
agreements, obtain rights of way for fiber optic cables, successfully deploy
technologies, secure leases for base stations, hire and retain additional
qualified personnel and develop an adequate customer base. Any of these factors
could delay, impede or reduce the scope of the implementation of new services
and result in a material adverse effect on our existing business, financial
condition and results of operations.
THE TECHNOLOGY WE USE MAY BE MADE OBSOLETE BY THE TECHNOLOGY USED BY OUR
COMPETITORS
All companies in the global telecommunications industry must adapt to
rapid and significant changes in technology. The technology that we have
selected in our wireless business may be challenged by competition from new or
improved digital technologies supporting wireless service or other services in
the near future. Technological changes may adversely affect our competitive
position, require substantial new capital expenditures and/or require
write-downs of obsolete technology.
WE MAY NOT HAVE ENOUGH MANAGEMENT RESOURCES TO BE ABLE TO EXPAND AS WE WISH
We plan to continue to access additional opportunities in the wireless
business in Mexico. In May 1998, we won auctions for concessions for a range of
frequencies in the 1.9 GHz band to provide PCS services in two regions in
northern Mexico. In late March 2000, we launched our wireless Internet service.
We will have to devote substantial management resources to take advantage of new
opportunities and business ventures. In so doing, we
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<PAGE> 15
will have to attract and retain qualified management personnel in pace with our
rate of growth. If we are unable to attract and retain qualified management
personnel, our existing business, financial condition and results of operations
could be harmed.
OUR STRATEGY TO EXPAND OUR WIRELESS FOOTPRINT IN MEXICO LEADS US TO CONSIDER
SIGNIFICANT ACQUISITIONS FROM TIME TO TIME THAT MAY ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
One of our business strategies is to provide our customers with access
to reliable and high-quality wireless service throughout Mexico. Providing
access in regions where we do not own concessions through roaming or airtime
exchange agreements does not afford us optimal control over coverage, quality
and pricing. As a result, from time to time we explore possibilities to expand
our wireless footprint in Mexico.
For example, Bell Atlantic was recently engaged in discussions
regarding a transaction in which we would have acquired the four Cellular A-Band
properties in northern Mexico that we do not own, which we refer to as the
Northern Region Properties, as well as discussions regarding a separate
transaction in which we would acquire Grupo Portatel S.A. de C.V., the cellular
A-Band provider in southern Mexico commonly known as Portatel. Although the most
recent discussions with respect to the Northern Region Properties have been
terminated, we could discuss a combination with respect to these properties with
the same or different parties in the future. The discussions with Portatel have
not continued although they have not been formally terminated. We cannot predict
at this time when or whether any acquisition will occur.
Although we believe that these transactions would significantly
strengthen our competitive position, at the same time they pose a number of
significant risks and uncertainties for us and for the holders of our
securities, including, without limitation, that they could involve the
incurrence of significant amounts of additional debt or other liabilities; the
acquisition of significant operational, financial, legal, labor or other
liabilities or risks, or significant financial needs, of which we may not be
aware and that we may not discover until after the acquisition has been
consummated; and the increase in our capital expenditure requirements. Any of
these risks could result in a material adverse change in our financial condition
and/or ability to service debt. In addition, any acquisition made with our
shares could be dilutive to our shareholders.
Because we cannot foresee all of the risks that one or more of these
acquisitions might involve, should they occur, it is not possible for us to
describe all these risks. As a result, holders of our securities must be
prepared to accept any deterioration in our prospects, business, financial
condition, results of operations or cash flow stemming from one or more of these
acquisitions.
In addition, an acquisition of the Northern Region Properties could
result in a change of control, so that Bell Atlantic would no longer control or
manage us. If a change of control were to occur from an acquisition of the
Northern Region Properties or any other transaction, Bell Atlantic would no
longer be in a position to determine our policies and strategy, manage our
operations or provide the technical and financial support that we have
historically relied on. It is not possible for us to describe the strategy that
would be followed by Iusacell following a change of control. If Bell Atlantic
were no longer to control or manage us, this would constitute a change of
control under New Iusacell and Old Iusacell debt instruments relating to up to
approximately U.S.$813.5 million of our indebtedness. In the event of any such
change of control, New Iusacell or Old Iusacell, as the case may be, would have
to make an offer to repurchase that indebtedness. We cannot assure you that
either New Iusacell or Old Iusacell, or both, would have sufficient funds or
have the ability to obtain sufficient funds on a timely basis to pay for any or
all of the indebtedness that we may have to repurchase if that happened.
CELLULAR FRAUD INCREASES OUR EXPENSES
The fraudulent use of cellular telecommunications networks imposes a
significant cost upon cellular service providers who must bear the cost of
services provided to fraudulent users. We suffer losses of revenue as a result
of fraudulent use, and also suffer cash costs due to our obligation to reimburse
carriers for the cost of services provided to some fraudulent users. These cash
costs approximated Ps.70.7 million (U.S.$7.5 million) and Ps.25.5 million
(U.S.$2.7 million) in 1998 and in 1999, respectively.
Although technology has been developed to combat the fraudulent use of
telecommunications networks, this technology does not eliminate fraudulent use
entirely. We must make significant expenditures periodically to acquire and use
anti-fraud technology. For 1998, our costs for detecting and preventing fraud
were approximately Ps.35.1 million (U.S.$3.7 million). For 1999, we incurred
approximately Ps.1.1 million (U.S.$0.1 million) in fraud
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<PAGE> 16
detection and prevention, because we implemented extensive fraud detection and
prevention technology in 1998. We expect to spend only approximately Ps.9.5
million (U.S.$1.0 million) in 2000 for fraud detection and prevention. However,
we cannot assure you that the anti-fraud technology that we have purchased will
continue to be effective in detecting and preventing fraud. If our anti-fraud
technology becomes obsolete, we will once again have to make significant
expenditures to acquire and use anti-fraud technology.
RISK FACTORS RELATING TO OUR SHAREHOLDERS
We have two principal groups of shareholders. The first, Bell
Atlantic, comprises various subsidiaries of Bell Atlantic Corporation. The
second, the Peralta Group, comprises Mr. Carlos Peralta and a group of
individuals related to him and companies controlled by him.
IF BELL ATLANTIC SOLD ALL OR A SUBSTANTIAL PART OF ITS INTEREST IN US, THAT SALE
COULD RESULT IN BELL ATLANTIC NO LONGER MANAGING OUR OPERATIONS, IN WHICH CASE
WE WOULD HAVE TO MAKE AN OFFER TO REPURCHASE A SUBSTANTIAL MAJORITY OF OUR DEBT
SECURITIES
Bell Atlantic currently has the right and power to elect a majority of
the members of our Board of Directors and, with certain exceptions, unilaterally
determine our policies and strategy.
If Bell Atlantic were to sell all or a substantial part of its direct
interest in Iusacell, the sale could cause Bell Atlantic to lose its ability to
manage us. Bell Atlantic would then no longer be in a position to determine our
policies and strategies, manage our operations or provide the technical and
financial support that we have historically relied on. It is not possible for us
to describe the strategy that Iusacell would implement following any such
management change.
In addition, any substantial sale by Bell Atlantic would constitute a
change of control under New Iusacell and Old Iusacell debt instruments relating
to up to approximately U.S.$813.5 million of our indebtedness. In the event of
any such change of control, New Iusacell or Old Iusacell, as the case may be,
would have to make an offer to repurchase that indebtedness. We cannot assure
you that either New Iusacell or Old Iusacell, or both, would have sufficient
funds or have the ability to obtain sufficient funds on a timely basis to pay
for any or all of the indebtedness that we may have to repurchase if that
happened.
WE DEPEND ON BELL ATLANTIC PERSONNEL; IF BELL ATLANTIC RECALLED THEM, WE WOULD
HAVE INSUFFICIENT QUALIFIED EMPLOYEES
Our Chief Executive Officer, Chief Technology Officer, General Counsel
and principal strategic planning executive are employees of Bell Atlantic whose
services are provided on a consulting or secondment basis. We also use the
services of a number of Bell Atlantic employees on a consulting basis, primarily
in the areas of network operations, information systems, strategic planning,
marketing and customer care operations. So long as Bell Atlantic controls
Iusacell, we expect these or other seconded employees and consultants to
continue to provide services to us. If Bell Atlantic did not make these
employees available to us, our results of operations and financial condition
could be materially adversely affected.
ALLEGATIONS RELATING TO CARLOS PERALTA MAY PREVENT US FROM OBTAINING OR
RETAINING GOVERNMENT CONCESSIONS AND MAY CAUSE OUR CUSTOMERS TO PERCEIVE US
NEGATIVELY
Mr. Carlos Peralta, a member of the Peralta Group of shareholders, is
currently a director of Iusacell. In January 1996, Mr. Peralta stated that he
had transferred funds to bank accounts controlled by the brother of the then
President of Mexico. Press accounts have speculated that those payments were
payments for governmental favors and the Swiss Government has seized the money,
alleging that it was connected to money laundering. Apparently prompted by Mr.
Peralta's disclosure, the Mexican tax authorities initiated tax audits of Old
Iusacell, some of its subsidiaries and Mr. Peralta. In 1997, Mr. Peralta was
indicted on charges of tax evasion. Mr. Peralta was subsequently acquitted of
all related charges. The tax audits of Old Iusacell were completed in early
1999. In May 1999, Mexican tax authorities assessed Old Iusacell a Ps. 21.4
million penalty (U.S.$ 2.3 million at the exchange rate then in effect) for
purported incorrect deductions of certain interest expense for income tax
purposes, which we paid in August 1999.
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Our business activities have required and will continue to require
licenses and approvals from the Mexican government. It is possible that Mr.
Peralta's public statements and indictment and the Mexican government's
inquiries could impact our ability to obtain concessions, licenses and approvals
for business opportunities in the future or to obtain the renewal of existing
concessions, licenses and approvals. Various press reports speculated that Mr.
Peralta's public statements contributed to the delay in Old Iusacell and the
Mexican Telecommunications and Transportation Ministry (Secretaria de
Comunicaciones y Transportes), commonly referred to as the SCT, reaching
agreement regarding local wireless service in the 450 MHz frequency band.
Additionally, the publicity surrounding Mr. Peralta's statements or indictment
may have a negative impact on consumer perceptions of Iusacell and may adversely
affect our business, financial condition and results of operations.
RISK FACTORS RELATING TO DOING BUSINESS IN MEXICO
THE MEXICAN GOVERNMENT MAY IMPOSE ADDITIONAL CONDITIONS ON OUR CONCESSIONS OR
MAY TAKE THEM AWAY
We provide our services pursuant to concessions granted by the Mexican
government. Our activities are subject to significant government regulation and
supervision. The concessions may be subject to additional conditions or may not
be renewed when they expire. The Mexican government also reserves the right to
revoke, temporarily seize or expropriate concessions or assets related to a
concession for reasons, among others, of public interest or order such as war,
national disaster or significant public disturbances. Moreover, the Mexican
government may grant additional concessions to potential competitors to provide
services similar to those that we provide. Any of these developments or other
government action could harm the value of Iusacell's concessions and our
financial condition and results of operations.
OUR FINANCIAL STATEMENTS MAY NOT GIVE YOU THE SAME INFORMATION AS FINANCIAL
STATEMENTS PREPARED UNDER U.S. ACCOUNTING RULES
Mexican companies listed on the Mexican Stock Exchange, including
Iusacell, must prepare their financial statements in accordance with Mexican
generally accepted accounting principles, which we refer to as Mexican GAAP.
Mexican GAAP differs in significant respects from United States generally
accepted accounting principles, which we refer to as U.S. GAAP, including the
treatment of minority interest, deferred income taxes, employee profit sharing,
capitalization of pre-operating costs, interest rate collars, gains from the
exchange of non-monetary assets and the provisioning for the consolidation of
facilities. In particular, all such Mexican companies must incorporate the
effects of inflation directly in their accounting records and in published
financial statements. The effects of inflation accounting under Mexican GAAP are
not eliminated in the reconciliation to U.S. GAAP. For this and other reasons,
the presentation of Mexican financial statements and reported earnings may
differ from that of companies in other countries.
IF MEXICO EXPERIENCES ANY MORE POLITICAL AND ECONOMIC CRISES, WE MAY LOSE MONEY
We are a Mexican company and all of our operations are in Mexico.
Accordingly, the political and economic environment in Mexico has a significant
impact on our financial condition and results of operations.
The Mexican government has exercised, and continues to exercise,
significant influence over the Mexican economy. Mexican governmental actions
concerning the economy and state-owned enterprises could have a significant
impact on Mexican private sector entities in general and on us in particular,
and on market conditions, prices and returns on Mexican securities, including
our securities. In July 2000, Mexico will hold national elections followed by a
change of administration in December 2000. We cannot predict the results of
these elections nor the impact a change in administration might have on the
Mexican economy, particularly on the current governmental commitment to the
growth and deregulation of the telecommunications industry. Historically, the
Mexican markets have experienced significant volatility during the transition to
or following the change to a new administration. The volatility could be
exacerbated by the fact that the ruling party may lose power for the first time
in more than 70 years.
In the past, Mexico has experienced economic crises, caused by internal
and external factors, characterized by exchange rate instability, high
inflation, high domestic interest rates, economic contraction, a reduction of
international capital flows, a reduction of liquidity in the banking sector and
high unemployment. These economic conditions substantially reduced the
purchasing power of the Mexican population and, as a result, the demand for
telephony services.
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Crises such as these could harm our financial condition and results of
operations and the market value of our securities.
IF THE MEXICAN GOVERNMENT IMPOSES EXCHANGE CONTROLS, WE MAY NOT BE ABLE TO
PURCHASE IMPORTED GOODS OR MAKE DIVIDEND, PRINCIPAL AND INTEREST PAYMENTS IN
U.S. DOLLARS
In the past, the Mexican economy has experienced 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 foreign currencies generally, and U.S. dollars
in particular, it has done so in the past and could do so again in the future.
We cannot assure you that the Mexican government will not institute a
restrictive exchange control policy in the future. Any such restrictive exchange
control policy could prevent or restrict access to U.S. dollars or other foreign
currencies to purchase imported goods and to meet our U.S. dollar obligations,
such as the payment of dividends or principal and interest under any debt
securities.
PAYMENT OF JUDGMENTS ENTERED AGAINST US WILL BE IN PESOS, WHICH MAY EXPOSE DEBT
SECURITY HOLDERS TO EXCHANGE RATE RISKS
If a proceeding to enforce our obligations under any debt securities
is brought in Mexico, Mexican law permits us to pay a resulting judgment in
pesos. Under the Mexican Monetary Law, an obligation payable in Mexico in a
currency other than pesos may be satisfied in pesos at the exchange rate in
effect on the date when payment is made.
If a Mexican court declares us to be bankrupt or in suspension of
payments, our obligations under any debt securities:
- would be converted into pesos at the exchange rate
prevailing at the time of the court's declaration of
bankruptcy or suspension of payments and payment would occur
at the time claims of creditors are satisfied, and
- would not be adjusted to take into account depreciation of
the peso against the United States dollar occurring after
the court's declaration.
IF WE ARE UNABLE TO FILE CONSOLIDATED TAX RETURNS, OUR TAX MAY INCREASE AND WE
MAY MAKE LESS MONEY
Prior to January 1, 1999, we prepared our tax returns on a fully
consolidated basis for all but three of our subsidiaries, benefiting from the
ability to offset losses incurred by some subsidiaries against the gains of
others in the consolidated group. We have never fully consolidated for tax
purposes those companies in which we own less than a majority of the voting
shares, even though some of these companies are consolidated for accounting
purposes. Beginning January 1, 1999, as a result of Mexican income tax law
amendments, we must limit our tax consolidation to 60% of our wholly-owned
subsidiaries, although we are contesting such amendments. Related changes to the
Mexican tax law, together with the recapitalization and restructuring plan
completed in August 1999 that resulted in New Iusacell owning more than 50% of
Old Iusacell's shares, may materially impact the ability of Old Iusacell to
continue to prepare consolidated tax returns for itself and most of its
subsidiaries and thereby apply its net loss carryforwards against its
subsidiaries' profits. In that case, the taxes that we pay as a group would
increase, resulting in a decrease in our net income or an increase in our net
loss. We are currently analyzing the effect of these changes in law and ways to
minimize their impact and we cannot predict what the ultimate result of these
changes will be.
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ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Grupo Iusacell, S.A. de C.V., known as Nuevo Grupo Iusacell, S.A. de
C.V. until February 29, 2000, is a sociedad anonima de capital variable with
indefinite life organized under the laws of Mexico on August 6, 1998. New
Iusacell was formed for the purpose of acquiring and holding the shares of Grupo
Iusacell Celular, S.A. de C.V., known as Grupo Iusacell, S.A. de C.V. until
February 29, 2000, a sociedad anonima de capital variable with indefinite life
organized under the laws of Mexico on October 6, 1992.
New Iusacell's commercial name is "Grupo Iusacell," but our operating
subsidiaries market their products under the single Iusacell Digital(TM) brand
name. New Iusacell currently operates entirely in Mexico under Mexican
legislation, although our participation in the United States capital markets
also makes us subject to certain securities laws of the United States.
On July 6, 1999, New Iusacell launched an offer to exchange two classes
of New Iusacell voting ordinary shares for the four classes of Old Iusacell
ordinary shares then outstanding on a one-for-one basis. We completed this offer
on August 10, 1999 and, as a result, New Iusacell acquired 99.5% of the
outstanding Old Iusacell shares. On January 31, 2000, New Iusacell launched a
second exchange offer for the purpose of exchanging American depositary shares
representing New Iusacell's series V shares for the balance of American
depositary shares representing Old Iusacell's series D and series L shares on a
one-for-one basis. We completed this offer on February 29, 2000 and, as a
result, New Iusacell now holds 99.9% of the outstanding Old Iusacell shares. We
intend to acquire for cash the remaining Old Iusacell shares held by entities
other than New Iusacell or its subsidiaries.
Old Iusacell was formed to hold the principal telecommunications
interests of the Peralta Group. Its subsidiaries are primarily engaged in the
wireless telecommunications business and hold concessions to operate cellular
telephone systems in four contiguous market areas in central Mexico. Old
Iusacell was granted an authorization to provide cellular service in Region 9
(Mexico City) in 1989 and, in a series of transactions from 1990 to 1994,
purchased the companies holding concessions to provide cellular service in
Region 5 (Guadalajara), Region 6 (Leon) and Region 7 (Puebla). In October 1995,
an Old Iusacell subsidiary received a concession to provide long distance
service and began providing long distance service in August 1996. In August
1996, a joint venture between Old Iusacell and a third party concessionaire
began to provide paging services.
New Iusacell also has a separate subsidiary which, in May 1998,
acquired concessions in auction for frequencies to provide PCS services in
Region 1 (Tijuana) and Region 4 (Monterrey) in northern Mexico for Ps.554.0
million (U.S.$58.4 million), excluding value-added tax.
In February 1997, Bell Atlantic assumed management control of Old
Iusacell. This change of control was implemented when Bell Atlantic and the
Peralta Group effected certain conversions of shares from one series into
another that gave Bell Atlantic a majority of the Old Iusacell series A shares
and control over the Old Iusacell Board of Directors. All these conversions were
effected on a one-for-one basis.
In September 1997, in order to focus exclusively on its core Mexican
market, Old Iusacell sold its direct and indirect interests in Ecuadorian
cellular and paging companies for approximately U.S.$31.4 million, net of taxes.
See Item 4B, "Information on the Company--Business Overview--International Joint
Ventures."
In December 1997, Old Iusacell executed a minimum U.S.$188.0 million
agreement with subsidiaries of Lucent Technologies, Inc. pursuant to which Old
Iusacell agreed to replace its existing analog wireless cellular network with a
new Lucent Technologies digital and analog network. The network swap-out was
completed in August 1999.
In December 1999, as a first step toward minimizing its involvement in
real estate management and tower maintenance, Old Iusacell entered into an
agreement with the Mexican subsidiary of American Tower Corporation pursuant to
which American Tower could acquire the majority of towers currently owned and/or
operated by Old Iusacell. In return, Old Iusacell would lease space on those
towers.
Over its last three full fiscal years, and excluding the effects of
inflation accounting, capitalized interest and certain non-cash trade-in
credits, Old Iusacell has invested approximately U.S.$480.2 in capital
expenditures, primarily for its cellular communications network, its long
distance network, the new billing and customer care
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systems and administrative systems. See Item 5, "Operating and Financial Review
and Prospects--Liquidity and Capital Resources--Capital Expenditures."
In 2000, we plan to make at least U.S.$225.2 million in capital
expenditures, not including capitalized interest, to increase the capacity and
coverage and improve the quality of, and enhance the features available through,
our wireless and long distance networks, complete the initial buildout of our
long distance network, and improve our billing and customer care systems. We are
also required to initiate commercial operation of PCS service in Region 1 and
Region 4 by September 2000 and cover 20% of the POPs in those regions by
September 2001, which will require approximately U.S.$55.0 million in additional
capital expenditures. All this capital equipment will be deployed in Mexico. We
expect to finance our 2000 capital expenditure plan through cash from
operations, the approximately U.S.$120.0 million in proceeds remaining at the
beginning of 2000 from the issuance by New Iusacell of U.S.$350.0 million in
14 1/4 % Senior Notes due 2006 in December 1999, vendor financing and the
proceeds from a planned public offering of our series V shares. See Item 5,
"Operating and Financial Review and Prospects--Liquidity and Capital Resources."
Our principal executive offices are located at Prolongacion Paseo de la
Reforma 1236, Colonia Santa Fe, Delegacion Cuajimalpa, 05348, Mexico, D.F. Our
telephone number is (525) 109-4400. Our agent in the United States is Puglisi &
Associates, 850 Library Avenue, Suite 204, P.O. Box 885, Newark, Delaware 19715.
Our internet website address is http://www.iusacell.com.mx. The information on
our website is not incorporated into this document.
B. BUSINESS OVERVIEW
We are the second largest wireless telecommunications provider in
Mexico with more than 1.3 million cellular customers at December 31, 1999. We
own and operate concessions in the 800 MHz band to provide cellular wireless
services 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, Leon, Puebla, Acapulco and Veracruz, and combined represent
approximately 68 million POPs or 69% of Mexico's total population.
Since February 1997, Iusacell has been under the management control of
subsidiaries of Bell Atlantic Corporation. From late 1993 through February 1997,
Bell Atlantic participated substantially in the financial and technological
operations of Iusacell. Since Bell Atlantic assumed control of our Board of
Directors and management, Bell Atlantic personnel seconded to Iusacell and Bell
Atlantic consultants have been integrally involved in managing our day-to-day
operations and defining and implementing our long-term strategy. Since 1993,
Bell Atlantic has invested approximately U.S.$1.2 billion for its current 40.2%
economic and voting interest in Iusacell.
Since Bell Atlantic took control of Iusacell's management in February
1997, our subscriber base has grown from approximately 245,000 to 1,322,798
subscribers as of December 31, 1999. Of these subscribers, 352,289 were
post-paid contract customers who purchase cellular services pursuant to fixed
term contracts and the remaining 970,509 were customers who pay for their
cellular services in advance through the purchase of prepay calling cards.
Approximately 207,000 of these prepay customers are incoming calls only
customers who only receive incoming calls and cannot make outgoing calls. These
customers generate little or no revenue. Iusacell's subscribers who can both
make outgoing calls and receive incoming calls had an average monthly cellular
revenue per subscriber (ARPU) during 1999 of Ps.346 (approximately U.S.$36.5),
with Iusacell's prepay subscribers who can both make and receive calls having
had an ARPU during 1999 of Ps.100 (approximately U.S.$10.5).
In May 1998, we launched digital service using CDMA technology in the
800 MHz frequency band in the Mexico City area and, since August 1999, we have
offered digital coverage and services in all areas where we provide cellular
wireless services. In addition to our core mobile wireless services, we also
provide a wide range of other telecommunications services including long
distance, paging, wireless local telephony and data transmission.
The management team at Iusacell is able to draw extensively upon Bell
Atlantic's expertise in the development and implementation of our 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. Iusacell's Chief
Technology Officer has 29 years of experience with Bell Atlantic and our
full-time strategic planning executive has 22 years of experience with Bell
Atlantic.
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Iusacell's President and Director General, hired in June 1997, is a
Mexican citizen with extensive experience in multinational operations, who
immediately prior to joining Iusacell had been the managing director of the
Mexican cellular company which operates the Cellular A-Band concessions in two
contiguous northern regions. Iusacell's Chief Operating Officer, who was
appointed in February 1999, also has an extensive background in multinational
operations, with six years of sales, marketing and operational experience in
wireless communications. Iusacell's Chief Financial Officer, hired in April
1999, is a telecommunications industry veteran with more than 16 years of
experience with BellSouth Corporation and Nextel International, Inc., including
ten years of experience in the Latin American wireless industry.
The management team is supported by an experienced group of Mexican
executives and other personnel from Bell Atlantic.
BELL ATLANTIC
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 and NYNEX
Corporation, two of the original seven Regional Bell Operating Companies formed
as a result of the break-up of AT&T in 1984, 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 63 million people and
22 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 12 million attributable customers
in its cellular and PCS operations in 24 states in the United States and in its
six international wireless investments in Latin America, Europe and the Pacific
Rim. 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.$33.2 billion and U.S.$4.2 billion, respectively,
for the fiscal year ended December 31, 1999 and total assets of approximately
U.S.$62.6 billion at such date.
On July 27, 1998, Bell Atlantic and GTE Corporation entered into a
definitive agreement providing for a merger of equals transaction in which GTE
shareholders will receive 1.22 shares of Bell Atlantic common stock for each GTE
share they own. GTE is one of the world's largest telecommunications companies,
providing landline and wireless telephone, advanced internet, information, and
paging services and systems. The combined Bell Atlantic/GTE entity will have a
presence in over 30 countries and the customers in their service territories
currently account for more than 30% of the world's international
telecommunications traffic. Consummation of the Bell Atlantic/GTE merger depends
on a number of conditions, including approval by the United States Federal
Communications Commission.
Bell Atlantic and GTE are reporting companies under the Exchange Act.
Reports and information filed by Bell Atlantic and GTE with 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.
In April 2000, Bell Atlantic and Vodafone AirTouch plc combined their
United States wireless businesses into a new company, Verizon Wireless, which
will be managed by Bell Atlantic. Under the terms of the combination, United
States wireless properties currently owned by GTE will be contributed to Verizon
Wireless when the merger between Bell Atlantic and GTE is completed. When
additional properties from GTE's domestic wireless business are included, the
new company will serve more than 24 million wireless and nearly 4 million paging
customers, making it the largest wireless business in the United States. The
company's footprint will cover over 90 percent of the U.S. population, and 96 of
the top 100 U.S. wireless markets, with 232 million POPs.
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COMPETITIVE STRENGTHS
LARGE CELLULAR SUBSCRIBER BASE
At December 31, 1999, we had 1,322,798 cellular subscribers, including
both contract and prepay subscribers. 26.6% of our cellular subscriber base
consisted of customers that purchased cellular services pursuant to fixed term
contracts and the remaining 73.4% of our cellular customers purchased their
cellular services in advance, through prepay calling cards. Prepay customers
include both those who can both receive and make calls and those who are only
able to receive incoming calls. We believe that our contract 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 wireless Internet, call waiting, emergency service
(*911), short messaging, voice-mail, three-way calling and caller
identification. Prepay subscribers are attractive because of their higher
average per minute airtime charges, lower acquisition costs and the absence of
billing costs, credit concerns and collection risk.
LEADING DIGITAL TECHNOLOGY PLATFORM IN ALL OUR MARKETS
We believe we are the Mexican market leader in technology. In August
1999, upon completion of our deployment of a CDMA digital network in all areas
where we provide cellular service, we became the first company in Mexico to make
digital voice service broadly available to all of our customers. Our digital
network currently provides service to areas where approximately 59 million
inhabitants, or approximately 61% of Mexico's total population, live.
Compared with analog cellular technology, our digital technology
increases system capacity by approximately six to ten times, offers better call
quality and clarity, enables significantly longer telephone battery life,
ensures greater call confidentiality and fraud protection and provides a wider
variety of advanced features and applications, such as short messaging service.
Our network technology provides superior switching and transmission
capabilities. These features allow for lower capital expenditures per subscriber
and reduced network operating costs.
From January 1997 through December 31, 1999, we made approximately U.S
$480.2 million in capital expenditures, most of which was spent on our cellular
telecommunications network. See Item 5, "Operating and Financial Review and
Prospects--Liquidity and Capital Resources--Capital Expenditures."
In order to take advantage of the benefits of our new digital network
capacity, we have almost entirely stopped providing analog handsets to contract
customers and have accelerated our efforts to migrate existing analog contract
customers to digital service. At December 31, 1998 and December 31, 1999,
Iusacell had 27,410 and 219,829 digital contract customers, respectively, and we
expect to migrate the substantial majority of approximately 132,000 remaining
analog contract customers to digital service by the end of December 2000. As of
December 31, 1999, our digital contract customers in the aggregate generated
approximately 50% of our total cellular traffic.
BELL ATLANTIC WIRELESS EXPERTISE AND SUPPORT
Our management team draws extensively upon Bell Atlantic's expertise to
develop and implement our operating strategy. Bell Atlantic is the managing
partner of Verizon Wireless, the wireless company formed in early April 2000 by
the combination of the United States wireless businesses of Bell Atlantic and
Vodafone AirTouch plc. Verizon Wireless is the largest wireless business in the
United States. Bell Atlantic also has substantial investments in other wireless
telecommunications companies, including Omnitel Pronto Italia S.p.A. in Italy,
EuroTel Praha s.r.o. in the Czech Republic, EuroTel Bratislava a.s. in the
Slovak Republic, STET Hellas Telecommunications S.A. in Greece and P.T.
Excelcomindo Pratama in Indonesia. We believe that Bell Atlantic's extensive
experience in the development and implementation of marketing programs designed
to promote substantial subscriber growth provide us with a significant
competitive advantage in the Mexican mobile wireless market. Since Bell Atlantic
took management control in February 1997, our cellular subscriber base has grown
from approximately 245,000 to 1,322,798 subscribers at December 31, 1999.
EXPERIENCED MANAGEMENT TEAM
The five senior members of the Iusacell operational management team
appointed by Bell Atlantic have an aggregate of approximately 71 years of
experience in the telecommunications industry. Individually, Iusacell's
operating managers have established track records of producing subscriber
growth, penetrating new markets and
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developing new telecommunications product offerings. Iusacell's management team
is complemented by experienced Mexican and Bell Atlantic telecommunications
executives and consultants.
WELL-RECOGNIZED BRAND NAME
All of the services that we offer use the well-recognized IUSACELL
Digital brand name to increase consumer awareness and customer loyalty. We
believe that our network's superior call quality and our customer care
operations contribute to our strong, favorable brand awareness among potential
and existing customers. Iusacell's ten years of operation give us significant
advantages over new entrants to the wireless market offering similar services.
BUSINESS STRATEGY
Iusacell's strategic and operating plan is based on the wireless
operating model that Bell Atlantic has successfully deployed in the United
States, Europe and Asia. This model focuses on:
- state-of-the-art network technology and performance,
- delivery of products and services which customers consider
valuable,
- strong distribution, and
- superior customer service.
We believe that our strategic and operating plan will enable us to
increase our subscriber base, subscriber usage, revenues and profitability in
our core wireless businesses. This strategic plan incorporates the following key
elements:
NATIONWIDE WIRELESS FOOTPRINT
We believe that it is important to provide reliable and high quality
wireless service to our customers throughout Mexico. We intend to achieve this
goal by owning concessions in each region of Mexico or, in those areas where we
are unable to secure concessions, by exchanging airtime with other
concessionaires or by enabling seamless roaming services and offering our
customers telephones that can access nationwide services on different
frequencies. In May 1998, as part of this strategy, Iusacell acquired
concessions to provide PCS services in two regions in northern Mexico. By adding
these new regions to areas already covered by our existing cellular footprint,
Iusacell now owns concessions covering approximately 79 million inhabitants, or
80% of Mexico's total population.
From time to time we explore possibilities to expand our nationwide
wireless footprint. We recently examined the possibility of making an offer to
acquire Portatel, a cellular wireless service provider in southern Mexico. In
addition, Bell Atlantic recently engaged in but terminated discussions with a
third party that involved a possible combination of Iusacell and the Northern
Region Properties.
We also believe that it is important for our customers to be able to
access wireless services throughout North, Central and South America. Currently,
Iusacell's customers are able to roam in over 2,000 municipalities in the United
States and Canada, as well as in Argentina and Peru. In 2000, we intend to
implement roaming agreements that will allow our customers to roam in over 20
countries in Central and South America, in some Caribbean islands, throughout
most of Europe and in some countries in Asia and Africa.
SIGNIFICANTLY STRENGTHEN OUR DISTRIBUTION CHANNELS
We continue to strengthen our product distribution system to emphasize
consistent, standardized merchandising through a well-balanced mix of
company-owned stores and independent distributors conveniently located
throughout all of our operating regions. We continue to develop additional
long-term relationships with our distributors to encourage them to sell our
products and services, and seek to make these relationships exclusive. We intend
to continue to increase our distribution system primarily by expanding the
number of locations where customers can purchase prepay cards. To further this
strategy, we, or our distributors, have entered into agreements to allow our
prepay cards to be marketed by or at distributors of Mexico's national lottery
tickets, PEMEX franchise gas stations, OXXO and Seven Eleven franchise
convenience stores, Bancrecer automatic teller machines, Mexico
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City newsstands and Mexico City subway stations. Since Bell Atlantic took
control of Iusacell's management in February 1997, we have increased our points
of distribution from approximately 230 to 6,522 at December 31, 1999.
Iusacell also opened or remodeled 17 customer sales and service centers
in 1997, 22 in 1998 and 17 in 1999, bringing the total number of customer sales
and service centers owned and operated by us at December 31, 1999 to 96.
Thirty-two of these stores present Iusacell's new store image, an environment
which emphasizes retail merchandising rather than transaction processing. In
2000, we intend to open 13 new customer sales and service centers, replace 11
existing customer sales and service centers and remodel 28 other existing
customer sales and service centers.
SUPERIOR NETWORK AND CUSTOMER SERVICE
We believe that superior network technology and proactive and timely
customer service help us to attract and retain customers. To build a superior
network, we swapped out our previous analog network for an analog and CDMA
digital network supplied by Lucent Technologies and, upon completion of the swap
out in August 1999, became the first company in Mexico to make digital voice
services broadly available to all of our customers. For our customers, our
digital technology offers better call quality and clarity, ensures greater call
confidentiality and fraud protection, enables significantly longer telephone
battery life, and provides a wider variety of advanced features and applications
as compared with analog cellular technology. Over the last fifteen months,
Iusacell has experienced rapid growth in digital subscribers and traffic. As a
result, and in anticipation of further growth in digital subscribers and digital
usage, we decided to accelerate our capital expenditure program to expand
digital capacity and improve digital service quality.
To provide proactive and timely customer service, we operate two call
centers that provide automated and efficient service to our customers. Our call
center service quality and response speed should further improve with the
implementation of state-of-the-art customer service software in 2000. We also
use welcome packages, customer satisfaction calls, special programs for
corporate customers and customized billing to communicate our commitment to our
customers. Our customer service centers offer "one-stop-shopping" for cellular,
long distance, paging and data transmission services as a convenience to our
customers. We have substantially decreased customer service waiting time during
peak hours at these centers. Our customer services representatives undergo
ongoing rigorous training and are continually monitored and evaluated.
In March 1999, Iusacell completed the installation of a new prepay
operating system in its four cellular regions. The prepay operating system
improved customer satisfaction through automated card activation and account
information and by providing voice mail and other value-added services. It has
also lowered both the cost of support for prepay services and prepay turnover
and facilitated increased per subscriber usage.
CUSTOMER SEGMENTATION
We design our products and services for each customer segment. For
contract customers, we offer six pricing packages tailored to meet the needs of
high and mid-usage customers and another pricing package tailored to lower usage
customers. We believe that our contract customers seek the convenience of
uninterrupted mobile service and access to high quality customer service and
wish to purchase their long distance, paging, and other telecommunications
services bundled together as a single product.
We also sell prepay cards, to further penetrate the segment of lower
usage customers. We believe our prepay customers seek service without a fixed
financial commitment and monthly billing.
In September 1999, Iusacell introduced "one-single rate" plans for
contract customers who seek the convenience of paying a single per minute rate
for local, national long distance and long distance service to the United
States. In October 1999, we introduced a "one single rate" plan for prepay
customers and extended coverage of all one single rate plans to include
international long distance service to Canada. At December 31, 1999, we had
46,428 one-single rate customers, 17,776 of whom were contract customers, or
4.8% of the total contract customer base, and 28,652 of whom were VIVA(TM)
prepay customers, or 3.2% of the total prepay customer base.
VALUE-ADDED SERVICES
Our new analog and CDMA digital network permits us to provide our
digital and analog customers with a wide range of value added services,
including caller identification, voice mail, and three way calling. To encourage
our
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customers to migrate to digital service, we offer additional value-added
services, such as short messaging service, only to digital customers. In late
March 2000, we launched our wireless Internet service as a value-added service
available only to our digital contract customers.
SALES FORCE INCENTIVES
To increase the size and quality of our subscriber base, we have a
sales force compensation plan which is largely performance based. Our
compensation plan is based on sales volume and product mix and rewards our sales
force for upgrading analog contract customers to digital service and qualified
prepay customers to contract plans. The compensation plan is also designed to
encourage salespersons to sell bundled products and value-added services.
Recently, the compensation plan has been modified to place greater emphasis on
customer retention.
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 Telcel, the cellular subsidiary of Telmex, 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 Cellular
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 completed the privatization
process in June 1994.
Telcel holds the Cellular B-Band concession in each of the nine
cellular regions and is Mexico's largest cellular operator. Our subsidiaries
hold the Cellular A-Band concession in each of Regions 5, 6, 7 and 9, and
entities in which Motorola, Inc. is a controlling or significant shareholder
hold the Cellular A-Band concession in each of the other five regions.
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 competition with
proprietary infrastructure commenced in January 1997. A presubscription
balloting process was conducted in Mexico's 150 largest cities, covering 85% of
Mexico's total POPs, to enable customers to choose a long distance provider.
The SCT has granted a total of 17 long distance concessions, including
the one held by us. Services are currently being provided under only ten of
these concessions. Long distance concessionaires include, among others:
- Alestra S. de R.L., in which AT&T Corporation is a
shareholder,
- Avantel, S.A. de C.V., in which MCI WorldCom Inc. is a
shareholder,
- Telinor, S.A. de C.V. (Axtel), in which The Bell Telephone
Company of Canada, commonly known as Bell Canada, is a
shareholder, and
- Iusatel, S.A. de C.V., a subsidiary of Iusacell.
Each concession has a nationwide scope and a thirty-year term. Concession
holders are authorized to offer domestic, international 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. Maxcom, S.A. de
C.V., MetroRed, S.A. de C.V. and Megacable MCM, S.A. de C.V. recently initiated
service in the Mexico City area.
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In May 1998, the auctions for spectrum in the 450 MHz, 1.9 GHz (PCS)
and 3.4-3.7 GHz (Wireless Local Loop) frequency bands for local wireless service
organized by the COFETEL concluded. Four companies won nationwide concessions in
the Wireless Local Loop frequencies:
- Telmex,
- Axtel,
- Midicel, S.A. de C.V. (Midicel), and
- Servicios Profesionales de Comunicacion, S.A. de C.V.
(Unefon), a TV Azteca, S.A. de C.V. and Elektra, S.A. de
C.V. affiliate.
Three companies won nationwide concessions in the 1.9 GHz (PCS)
frequencies. Unefon won the 30 MHz PCS A-Band auction on a nationwide level.
Pegaso Comunicaciones y Sistemas, S.A. de C.V. (Pegaso), a consortium led by
Leap Communications International, Inc., Grupo Televisa, S.A., Sprint PCS and a
group of other investors won a mix of 30 MHz PCS B-Band and 10 MHz PCS E-Band
concessions across all nine regions. Telcel won the 10 MHz PCS D-Band auction on
a nationwide level. Grupo Hermes, S.A. de C.V. and Midicel won auctions for
seven of the remaining nine PCS B-Band and PCS E-Band properties. Each
concession has a 20-year term and authorizes the provision of mobile and fixed
wireless service and other value-added services.
Formal concessions for Wireless Local Loop and PCS frequencies were
issued in late 1998 to all auction winners, except Unefon and Midicel, which
received extensions to May 15, 1999 to pay accrued interest and to June 15, 1999
to pay the balance of their concession fees. Midicel did not meet its interest
payment requirements in May 1999 and forfeited its Wireless Local Loop and PCS
concessions and approximately U.S.$50 million in deposits, letters of credit and
surety bonds. Midicel later offered full payment and petitioned for a review
(recurso de revision) of the forfeiture order. As a result, the forfeiture order
has been suspended. Unefon did meet its May 1999 and June 1999 payment
requirements and received its Wireless Local Loop and PCS concessions. Pegaso
initiated mobile PCS services in Tijuana, Monterrey, Guadalajara and Mexico City
in 1999 and in Acapulco and Veracruz in early 2000, until recently only selling
prepay products. Unefon commercially launched fixed wireless services in
Acapulco and Toluca in February 2000 and recently initiated service in Mexico
City.
UNDERSERVED TELEPHONY MARKET
We believe that there is substantial unmet demand for telephone service
in Mexico as demonstrated by the relatively low level of wireline and cellular
penetration. According to the International Telecommunications Union, an agency
of the United Nations, as of December 31, 1998, there were approximately 10.36
lines per 100 inhabitants in Mexico, which is lower than the teledensity rates
in some other Latin American countries and substantially lower than those in
developed countries such as the United States.
The following table presents, for major Latin American countries and
the United States, telephone lines in service per 100 inhabitants as of December
31, 1998:
<TABLE>
<CAPTION>
Selected Telephone Penetration
Lines in service per
Country 100 inhabitants(1)
-------------------------------------- --------------------
<S> <C>
United States................... 66.10
Uruguay......................... 25.04
Argentina....................... 19.74
Chile........................... 18.57
Colombia........................ 16.13
Brazil.......................... 12.05
Venezuela....................... 11.67
Mexico.......................... 10.36
Peru............................ 6.27
</TABLE>
-------------------
(1) Source: International Telecommunications Union--Yearbook of
Statistics, February 2000.
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<PAGE> 27
Pyramid Research, a division of the Economist Intelligence Unit, Ltd., an
independent telecommunications consultant, estimates that at the end of 1999,
the wireline teledensity rate in Mexico was 11.0 telephone lines per 100
inhabitants compared to wireline teledensity rates of 22.7 in Chile, 20.7 in
Argentina, 15.4 in Brazil and 11.3 in Venezuela.
According to Pyramid Research, the local telephony market represents
approximately 52.6% of Mexico's total telecommunications market, when measured
by revenues, and generated approximately U.S.$4.1 billion of revenue in 1999.
The national long distance market represents approximately 34.2% of Mexico's
total telecommunications market, generating approximately U.S.$2.6 billion of
revenue in 1999, and the international long distance market represents
approximately 13.2% of Mexico's total telecommunications market, generating
approximately U.S.$1.0 billion of revenue in 1999. During the period 1995 to
1999, total Mexican local telephone service revenues increased by 150% while the
per capita gross domestic product grew 54%.
The following table presents, for major Latin American countries and the
United States, the number of subscribers of cellular mobile telephone services
per 100 inhabitants as of December 31, 1998:
Selected Cellular Penetration
<TABLE>
<CAPTION>
Cellular subscribers
Country per 100 inhabitants(1)
---------------- ----------------------
<S> <C>
United States... 31.25
Venezuela....... 8.67
Argentina....... 7.00
Chile........... 6.50
Uruguay......... 5.96
Brazil.......... 4.68
Colombia........ 4.56
Mexico.......... 3.50
Peru............ 3.00
</TABLE>
(1) Source: International Telecommunications Union -- Yearbook of
Statistics, February 2000.
Wireless penetration in Mexico has grown significantly over the last 24
months. According to the International Telecommunications Union, wireless
penetration in Mexico was 1.81 subscribers per 100 inhabitants at December 31,
1997. Pyramid Research estimates that, at December 31, 1999, there were 7.7
mobile wireless subscribers per 100 inhabitants in Mexico. We believe, however,
that this estimate is overstated because it likely includes a substantial number
of wireless customers who generate little or no traffic. We believe that in 1999
Telcel stopped deactivating customers at the end of their contract term and the
expiration of their prepay card. See " -- Cellular Service -- Prepay Customers."
CALLING PARTY PAYS
On May 1, 1999, Mexico implemented the "calling party pays" modality, or
CPP, which had already been implemented in some other Latin American and
European countries. Calling party pays is a cellular telephony payment structure
in which the party that places a call to a cellular telephone is billed for
interconnection access, and the recipient is not billed for the airtime charges
corresponding to that call.
In the first eight months of CPP operations, we believe that CPP resulted
in a 13% increase in our call traffic, with an increase in the percentage of
total calls that were incoming calls from 39% in March 1999 to 43% in December
1999. We believe that a significant portion of this increase is attributable to
increased usage by our prepay customers because CPP gives them the incentive to
keep their handsets turned on to receive incoming calls. We expect that CPP will
continue to contribute to the acceleration of subscriber growth and increase
subscriber usage throughout the Mexican wireless market.
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 Cellular
A-Band network in Region 9. Through a series of transactions from 1990 to
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<PAGE> 28
1994, Iusacell acquired 100% beneficial ownership interests in the entities
which hold the Cellular-A Band concessions in Regions 5, 6 and 7. These regions
cover a contiguous geographic area in central Mexico, which allows Iusacell to
achieve economies of scale.
Iusacell's regions are home to 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, which has recently begun to
develop as a center for the maquiladora industry. Region 6 includes Leon,
Queretaro, Aguascalientes and San Luis Potosi and has historically been
dominated by the agricultural sector, although it has recently begun to develop
as an automobile manufacturing and high technology center. Region 7 includes
Puebla, Acapulco, Veracruz and Oaxaca and contains major operations of the
Mexican petrochemical and automotive industries and significant tourist resorts
and attractions.
SUBSCRIBERS AND SYSTEM USAGE
As of December 31, 1999, Iusacell had a total of 722,462 cellular
subscribers in Region 9. Of this number, 28.5% were contract subscribers and
71.5% were prepay customers. According to customer profiles, professionals
comprise a large portion of our Region 9 contract cellular subscriber base.
Iusacell offers a number of value-added services designed specifically to
fulfill the demands of this important group of contract subscribers. For
example, we offer secretarial services and provide English-speaking operators to
serve the large English-speaking market in Region 9. Iusacell also provides
financial news reporting, emergency services, entertainment information,
reservations services and sports reports. Moreover, CDMA digital contract
customers in Region 9 have available caller identification, short messaging
service and data transmission services. We believe that these value-added
services help increase contract subscriber usage and also enhance our market
image as a full service cellular provider.
As of December 31, 1999, we had a combined total of 600,336 cellular
subscribers in Regions 5, 6 and 7. Of this number, 24.4% were contract
subscribers and 75.6% were prepay customers. We believe that our contract
subscriber base in these regions consists of subscribers engaged in a variety of
occupations. Due to the lower wireline 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.
We believe that a strong distribution network is necessary in order to
develop and sustain a significant presence in these markets.
PREPAY CUSTOMERS
A prepay customer is no longer considered a customer of Iusacell when a
specified period of time has 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.
Iusacell's current prepay customers who want to continue to have wireless
service must choose to:
- continue to be prepay customers of Iusacell by purchasing another
card,
- become contract customers of Iusacell, or
- become either contract or prepay customers of Telcel or another
wireless service provider.
A VIVA prepay customer normally has 185 days to activate a new card after
the balance on his existing card becomes zero before losing his telephone
number. With the implementation of CPP, during this 185-day period, a VIVA
customer will be able to receive local incoming calls, but will not be able to
make outgoing calls (an "incoming calls only" customer). Balances automatically
become zero if the customer has not activated a new card within 180 days after
activation of the previous card. See Item 5, "Operating and Financial Review and
Prospects -- Increase in Prepay Subscriber Base." We continue to evaluate
different methods of determining turnover, as the current method is dependent
upon, among other things, the number of days of use Iusacell permits before
deactivating a telephone number.
In October 1999, in order to evaluate whether we could generate additional
revenues from incoming calls only customers, we extended the period of time to
activate a new card from 185 days until April 30, 2000 for those
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<PAGE> 29
incoming calls only customers who otherwise would have lost service before that
date. In April 2000, we will determine whether to further extend card life for
some or all of our incoming calls only customers.
At December 31, 1999, Iusacell had approximately 207,000 incoming calls
only customers. The substantial majority of incoming calls only customers
generate little or no traffic. Iusacell's prepay subscribers who can make both
outgoing calls and receive incoming calls had an average monthly revenue per
cellular subscriber during 1999 of Ps.100 (approximately U.S.$10.5).
In March 1999, we substantially completed the installation of the VIVA
prepay operating system. The VIVA platform better tracks those customers who
turn over than its predecessor. This new operating system (together with
initiatives to increase the number of distribution points for prepay cards,
adjust commissions to encourage distributors to sell prepay cards of higher
denominations, improve customer care and otherwise improve the convenience of
the prepay program) has enhanced our ability to add and retain prepay customers
and has increased usage. In 2000 and 2001 we intend to invest approximately
U.S.$8.0 million in order to expand the capacity of our VIVA prepay operating
system and enable prepay roaming.
Given the higher turnover among our prepay customers, we pursue plans to
migrate our qualified prepay customers to contract plans, where customer loyalty
and retention have been historically higher.
CONTRACT CHURN
Contract churn measures both voluntarily and involuntarily disconnected
subscribers. Through December 31, 1997, we calculated 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. Effective
January 1, 1998, we changed the methodology by which we determine average
monthly contract churn for a given period. Average monthly contract churn for a
given period is now calculated by dividing the sum of all contract subscribers
disconnected during such period by the sum of the beginning-of-month contract
subscribers for each of the months in such period, expressed as a percentage.
Voluntarily disconnected subscribers encompass subscribers who choose to:
- no longer subscribe to wireless service,
- become a prepay customer of Iusacell, or
- obtain wireless service on a contract or a prepay basis from Telcel or
another wireless service provider.
Involuntarily disconnected subscribers encompass customers whose service is
terminated after failing to meet Iusacell's payment requirements.
Upon completing implementation of our new billing system in October 1999,
we determined that close to 16,000 contract subscribers should have been churned
in previous periods. We decided, however, to apply this churn only in 1999,
without restating prior period churn, resulting in a full year 1999 average
monthly contract churn level of 2.96%.
ROAMING
We offer our contract cellular subscribers nationwide and international
service via roaming agreements. Subscribers can make calls from any location in
Mexico served by a Cellular A-Band 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. We also provide 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. We bill 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. We remit the billed amount to the host operator and bill
our own customer, the out-roamer, without any markup. As a result, we retain the
collection risk for roaming charges incurred by our own subscribers. Conversely,
roaming charges billed by Iusacell for in-
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<PAGE> 30
roaming usage by subscribers of other non-wireline operators are the
responsibility of those operators. Roaming charges between wireless operators
are settled monthly.
Interconnection charges owed to Telmex and long-distance charges owed to
long distance carriers 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. In-roaming fees and usage revenue represented
3.9%, 3.6% and 1.6% of our total revenues during 1997, 1998 and 1999,
respectively. Out-roaming charges represented 5.2%, 5.4% and 4.2% of Iusacell's
total revenues during 1997, 1998 and 1999.
We have signed 63 agreements with United States, Canadian and other foreign
operators to provide our subscribers with international roaming capabilities.
These operators include Verizon Wireless, AT&T Wireless and BellSouth Mobility.
In addition, we provide, through the National Automatic Cellular Network,
automatic call delivery throughout most of the United States, including Puerto
Rico, whereby our subscribers may receive telephone calls from Mexico without
the caller having to dial access codes. Currently, our customers are able to
roam in over 2,000 municipalities in the United States and Canada as well as in
Argentina and Peru.
We are continually reviewing opportunities to enter into agreements with
other cellular operators to expand our international roaming capabilities.
Recently, Iusacell entered into agreements with PARC and GlobalRoam that, when
implemented in 2000, will allow our customers to roam in over 20 countries in
Central and South America, in some Caribbean islands, throughout most of Europe
and in some countries in Asia and Africa.
PERSONAL COMMUNICATIONS SERVICES
As part of our strategy to develop a nationwide wireless footprint, in 1998
we won auction concessions giving us the right to provide PCS wireless services
in Regions 1 and 4 in northern Mexico. We paid Ps.554.0 million (U.S.$58.4
million; U.S.$67.2 million including value added tax) for these concessions in
June and September 1998. These two regions include several industrial cities,
including Monterrey and Tijuana, and cover approximately 11.0% of Mexico's total
population. We are required to and expect to launch PCS services in Regions 1
and 4 in the third quarter of 2000. We will seek to obtain financing for such
purpose from equipment vendors and other sources.
We intend to market PCS using the same fundamental strategies successfully
employed by our existing cellular operations. The PCS network that we intend to
deploy will use digital CDMA technology purchased from Lucent Technologies.
LONG DISTANCE SERVICES
In August 1996, we became one of Telmex's first competitors in long
distance service when we began to provide long distance services to our cellular
subscriber base in Mexico pursuant to the 30-year concession which was awarded
to Iusatel in October 1995 and was modified in December 1997. Our competitors in
long distance include the 16 other companies granted concessions, including
Telmex, the former long distance monopoly. We believe that competition in the
Mexican long distance market has stimulated growth in demand for long distance
service; as prices dropped approximately 30%, long distance traffic increased
nearly 14% in 1997 compared to 1996. During 1998, there were no significant
price changes and long distance traffic increased approximately 11% compared
with 1997. During 1999, prices were increased approximately 14% in March 1999
and long distance traffic increased approximately 25% compared with 1998.
We currently provide long distance service using our own switches and
transmission equipment and a combination of fiber optic lines, microwave links
and lines leased from Telmex and Alestra. At December 31, 1999, we provided long
distance service in 60 cities to 1,365,618 customers, 1,353,746 of whom were
existing customers for our other services. We have chosen not to commit
significant marketing resources to the presubscription balloting process, from
1997 to the present, and as a result fared poorly in initial balloting results.
Revenues related to long distance services represented 10.5% and 11.1% of total
revenues for 1998 and 1999, respectively, not including dark fiber optic cable
sales.
Our long distance concession provides for coverage and technological
investment requirements. If we do not satisfy such requirements, we may have to
pay fines and penalties and potentially lose our long distance concession. After
evaluating the commercial feasibility of complying with our initial concession,
we requested that the SCT and the COFETEL modify the terms of the concession to
reflect a more rational business plan. In December 1997, the
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<PAGE> 31
government granted the modification request, authorizing a change in the
coverage requirements and increasing flexibility in the choice of transmission
technology, significantly reducing our investment requirements.
We further reduced the capital investment for our long distance business by
entering into fiber optic cable swap agreements with two other long distance
companies, Marcatel and Bestel, in March 1998 and December 1998, respectively.
These agreements have allowed us to acquire fibers in the long distance fiber
optic networks being built by Marcatel and Bestel in central and northern Mexico
in exchange for fibers in the long distance fiber optic network we were building
in central Mexico. As a result, we were able to obtain redundancy in central
Mexico and access to the United States border at minimal cost. Formal fiber
exchanges with Marcatel and Bestel are expected to occur in 2000, upon
completion of the buildout of the initial phase of our long distance fiber optic
network.
In December 1999, we agreed to swap dark fiber optic cable with and sell
approximately U.S.$6.4 million of additional dark fiber optic cable to
Telereunion, S.A. de C.V., an affiliate of Telescape International, Inc.
Consummation of this agreement is subject to, among other things, the release by
Telereunion's lenders of liens on the fiber to be sold to us. This agreement
will allow us to acquire fibers in Telereunion's long distance fiber optic
network in the states of Puebla and Veracruz in exchange for fibers in our long
distance fiber optic network in central Mexico.
OTHER SERVICES
PAGING
On December 14, 1995, Iusacell and Infomin formed Infotelecom as a joint
venture to market national and international paging services. Iusacell owns 49%
of Infotelecom, Infomin owns 49%, and the remaining 2% is owned by Mr. Jose
Ramon Elizondo, a director of New Iusacell. 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. Infomin has informed us that it intends to transfer
its shares in Infotelecom to Banorte, S.A. Institucion de Banca Multiple, a
Mexican bank, in settlement of certain indebtedness.
Pursuant to a marketing agreement between Iusacell and 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, at December
31, 1999, provided service 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 a total of 43
cities in 2000. We plan to take advantage of our existing cellular network and
our operating and administrative resources in order to achieve cost efficiencies
in the provision of paging services. In September 1999, Infotelecom launched a
prepay pager program.
As of December 31, 1999, Infotelecom had 28,276 paging customers.
Iusacell's revenues related to paging services represented 1.6% and 1.2% of
total revenues for 1998 and 1999, respectively.
Under their joint venture agreement, Iusacell and Infomin valued the
Infomin paging concession at U.S.$10.5 million, and we 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. In December 1998, Iusacell and
Infomin determined the appropriate manner in which to capitalize Infotelecom. Up
to that time, we had been funding the joint venture by means of loans. On
December 31, 1998, Iusacell capitalized Ps.124.7 million (U.S.$13.2 million) in
advances to Infotelecom, including Ps.46.3 million (U.S.$4.9 million) in
interest which was not credited against the U.S.$10.5 million required to be
funded by us. However, U.S.$9.0 million of such capitalization was applied
against the U.S.$10.5 million to be funded by us. In 1999, Iusacell capitalized
approximately an additional U.S.$1.0 million against the U.S.$10.5 million
funding requirement.
PUBLIC AND RURAL TELEPHONY AND LOCAL WIRELESS
Iusacell 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 our concessions for the
provision of cellular telephone
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<PAGE> 32
service and utilizes our cellular network to provide telecommunications coverage
in areas with little or no basic service. As of December 31, 1999, we had 12,840
cellular telephones in service under our public and rural telephony programs.
As of December 31, 1999, we were providing, on a trial basis pending
approval from the SCT, local wireless service in the 450 MHz frequency band to
14,879 customers in selected markets in Region 9. The average monthly minutes of
use for these trial subscribers during 1999, who had average monthly billings
during 1999 of approximately Ps.335 (U.S.$35.30) per subscriber excluding long
distance charges, was approximately 564 minutes per subscriber divided almost
equally among incoming (52%) and outgoing (48%) calls. We do not charge our
customers interconnection fees for incoming calls. We believe that there is
substantial unmet demand for telephone service in Mexico as demonstrated by the
relatively low level of residential wireline, business wireline and cellular
penetration.
We have experienced substantial delays in obtaining the SCT's approval of
our technical and economic plans for local wireless service in the 450 MHz
frequency band. However, on June 10, 1997, the SCT and Iusacell agreed on a
process by which Iusacell could obtain a concession issued and recognized by the
SCT to provide local wireless service in the 450 MHz frequency band. This
agreement allows us to convert and consolidate our existing concessioned
radiotelephony frequencies into 450 MHz spectrum in Regions 4, 5, 6, 7 and 9 and
grants us a right of first refusal to acquire 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. However, neither the
SCT nor COFETEL has formally notified us of the exact right of first refusal
exercise price, the payment terms or the coverage/build-out requirements
relating to the concessions, all of which are necessary for us to decide whether
to exercise our right of first refusal.
As a result of these delays and the uncertainty relating to our ability, at
a commercially acceptable cost, to implement full scale local wireless service
in the 450 MHz frequency band, we are 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 we 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, that
alternative could require the acquisition of concessions, other regulatory
approvals and the payment of substantial fees. We expect to finalize overall
strategy for providing local telephony services during 2000.
In September 1998, we determined that, because of many factors, including
the impact of changing technology since the initiation of the 450 MHz fixed
local wireless project in 1994, an impairment of our investment in 450 MHz TDMA
technology had occurred. As a result, we recorded a substantial non-cash
writedown of our investment in the 450 MHz fixed local wireless project. See
Item 5, "Operating and Financial Review and Prospects -- Local Telephony in the
450 MHz Frequency Band."
In expanding our local telephone services, we plan to capitalize on
synergies between our mobile wireless and local wireless services, utilizing our
existing cellular network and anticipated 1.9 GHz (PCS) network for connections
with the local subscribers' premises. Furthermore, we believe that local
wireless service requires a lower infrastructure investment per line than
landline service.
In January 1996, our long distance subsidiary applied to modify its
concession to allow it to provide local wireline service, including dedicated
circuits, local switching and data service. This request was reasserted in
Iusacell's October 1997 application to modify our long distance concession. This
request was rejected for procedural reasons in July 1998, and the subsidiary is
considering filing a modified application. Iusatelecomunicaciones, S.A. de C.V.,
Iusacell's 450 MHz local wireless subsidiary, is also considering filing for a
local wireline concession. While we currently do not anticipate that the
provision of local wireline service will become a significant part of our
services, we may provide, on a case-by-case basis, local wireline telephone
service as part of our overall provision of telecommunications services.
DATA TRANSMISSION
We began providing data transmission services in 1993. We provide both
public and private data transmission primarily using excess capacity in our
microwave backbone in our existing cellular network in Region 9, and
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satellite transmission through Satelitron, S.A. de C.V., a joint venture among
Iusacell, Hughes Network Systems and another partner which provides a shared hub
for private networks. We provide our data transmission services primarily to the
financial services and consumer products industries. We currently intend to sell
our interest in Satelitron.
MICROWAVE TRANSMISSION
In December 1998, the SCT issued three 20 year concessions to Punto-a-Punto
Iusacell, S.A. de C.V., a joint venture between Iusacell and Mr. Jose Ramon
Elizondo, a director of Iusacell, for short haul microwave frequencies in the 15
GHz and 23 GHz frequency bands won at auction. Punto-a-Punto Iusacell paid
approximately Ps.37.4 million (U.S.$3.9 million) for these concessions. These
frequencies are being used to interconnect our cell sites, business customers
and other networks. Additionally, we have an obligation to lease these
frequencies to other users to enable them to install their own microwave links.
No such leasing is currently taking place.
Punto-a-Punto Iusacell participated in the auctions for long haul microwave
frequencies in the 7 GHz frequency band that began in March 1999 and concluded
in July 1999. However, Punto-a-Punto Iusacell did not win any concessions in
these auctions.
Punto-a-Punto Iusacell has recently entered into an agreement with an
affiliate of the service provider in the four Cellular A-Band regions in
northern Mexico to swap the right to use long haul microwave frequency links
held by the affiliate for short-haul microwave frequency links held by Iusacell
plus U.S.$2.45 million in cash. Punto-a-Punto Iusacell expects to close this
transaction by mid-2000.
MARKETING
With the assumption of control by Bell Atlantic, we redefined our marketing
strategy for achieving profitable growth, particularly in our cellular business.
More recently, we have focused our marketing strategy on the CDMA digital
cellular business, where there is greater per subscriber usage and revenues than
there is with analog subscribers. We seek to increase our average monthly
revenue per subscriber, aggressively grow our cellular subscriber base, decrease
the cost of acquiring additional subscribers and reduce contract churn and
prepay turnover.
Iusacell's subscribers consist of contract and prepay customers who can be
classified as high, moderate or low-usage customers. We are implementing
distribution, advertising, customer service support and pricing plans targeted
to each specific customer segment and to increase airtime usage.
DISTRIBUTION
We target the various segments of our subscriber base through six sales and
distribution channels: Iusacell owned and operated customer sales and service
centers, corporate representatives, independent distributors, a direct sales
force, commission sales agents and telemarketing. We are aggressively increasing
the number of our points of distribution in order to acquire additional
subscribers. At December 31, 1999, Iusacell had 6,522 points of distribution, as
compared to 2,820, 918 and 228 at December 31, 1998, 1997 and 1996,
respectively. These points of sale comprise 96 customer sales and service
centers owned and operated by Iusacell, 1,097 points of sale operated by
independent distributors who offer all Iusacell products and 5,329 points of
sale for distribution only of VIVA prepay cards also operated by independent
distributors.
Iusacell's redesigned sales force compensation plan is structured to
motivate the sales force within each distribution channel through monetary
incentives. In addition, this plan provides training so that the sales force is
encouraged to activate profitable and loyal accounts, cross-sell the full line
of our service offerings and maintain our standards in advertising, promotions
and customer service.
Customer Sales and Service Centers. We have reconfigured each of our
customer sales and 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 and purchase equipment such as
handsets, pagers and accessories. In an effort to maximize customer loyalty,
reduce contract churn and prepay turnover and increase average monthly revenue
per subscriber through cross-selling, we continue to emphasize the customer
sales and service centers that we own and operate ourselves as a key
distribution channel. In 1997, we opened or remodeled 17 customer sales and
service centers, including 10 redesigned prototype customer sales and service
centers incorporating a new uniform store design, which provided the basis for
new and
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refurbished centers in the future. During 1998, we opened 22 new customer sales
and service centers based on the experience gained from the ten prototype
locations. In 1999, although we did not open any new customer sales and service
centers, we replaced one existing customer sales and service center and
remodeled 16 other existing customer sales and service centers. In 2000, we
intend to open 13 new customers sales and service centers, replace 11 existing
customer sales and service centers and remodel 28 other existing customer sales
and service centers. As of December 31, 1999, Iusacell owned and operated 94
customer sales and service centers throughout our four cellular regions, and two
other centers dedicated to long distance and paging sales in northern Mexico.
Corporate Representatives. To service the needs of our large corporate and
other high-usage customers, we have created a dedicated corporate sales group,
which, at December 31, 1999, included 62 full-time sales representatives. This
group of trained representatives seeks to increase sales to high-usage customers
by:
- "bundling" combinations of services into customized packages designed
to meet customers' requirements,
- developing and marketing new services to satisfy the demands of such
customers, and
- educating corporate purchasing managers about alternative pricing
plans and services.
We plan to increase the size and geographic reach of this sales force in the
future.
Independent Distributors. In order to broaden our market, we maintain
relationships with a broad network of 128 exclusive distributors that, at
December 31, 1999, sold all of our products at 1,097 points of sale and
distributed VIVA prepay cards at an additional 5,329 points of sale. This
includes a distribution contract with Precel, formerly one of Telcel's largest
distributors, which currently provides exclusive distribution in more than 160
locations. In order to ensure that our standards are maintained at all
distribution points, we provide assistance to our distributors in training,
promotions and advertising. We also provide them with information on our
customer base to allow the distributors to service our customers effectively.
Direct Sales Force. As of December 31, 1999, Iusacell employed 15 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.
Iusacell also has established a program dedicated to servicing heavy users in a
personal and expedient manner. We carefully select, train and motivate this
sales force to maintain service standards.
Commission Sales Agents. We retain commission agents as a flexible sales
force in all of our cellular regions. The agents function as cellular service
brokers for Iusacell, working out of their own premises to better target their
customers. These agents provide additional distribution outlets with minimal
support from Iusacell. As of December 31, 1999, we had arrangements with 52
commission sales agents who distribute our products with no direct costs to us.
Telemarketing. From time to time, Iusacell engages telemarketing service
providers as a direct marketing mechanism or to follow up on targeted mailings.
ADVERTISING
Iusacell has launched an integrated media plan emphasizing the benefits of
our products and supported by the Iusacell brand image, the logo for which was
redesigned in 1997. Since that time, all product offerings have been marketed
under the single, well-recognized IUSACELL brand name which was reinaugurated as
IUSACELL Digital in February 1998, in anticipation of the digitalization of our
network and product offerings.
The media plan targets potential subscribers through a coordinated print,
radio, television and fixed and moving outdoor advertising campaign. A key
element of this integrated media plan is a periodic agency review, where the
sales results of a given campaign are evaluated. The integrated media plan
enables us to negotiate more favorable advertising rates. Television and print
advertisements prominently feature an ad-response telephone number to solicit
new customer inquiries. Trained representatives who are equipped to answer
questions regarding services and products are available from 7 a.m. to 11 p.m.
daily.
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CUSTOMER SERVICE
We view superior customer service as essential in order to distinguish
ourselves in the competitive Mexican cellular telecommunications market. We
train our customer service representatives to ensure that each customer receives
prompt attention, informed answers to any inquiries and satisfactory resolution
of any concerns. We believe that enhanced customer service, especially
after-sales support, is essential to developing brand loyalty and supports the
efforts of our sales force to cross-sell our services and products. For prepay
customers, the VIVA prepay operating system better tracks the usage patterns and
identities of these subscribers. The 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, we have installed dedicated personal
computer terminals linked to our billing system so that each customer service
representative, either at a Iusacell customer sales and service center or at a
Iusacell call center, 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, allows us to
better tailor our marketing strategy to each customer. Along with providing
information as to how we can improve our 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 Iusacell's
services and products.
In early 1998, we opened two call centers that provide more automated and
efficient service to customers. Iusacell's call center service quality and
response speed should further improve with the implementation of
state-of-the-art customer service software over the next several months. In
1998, we also began implementing the Customer Attention Support Team program in
our busiest customer service centers in order to accelerate the problem
resolution process. This program has also been expanded to include the majority
of our customer service centers in all four of our cellular operating regions.
PRICING
General. Iusacell offers a variety of flexible pricing options for our
cellular service. The primary components of the contract pricing plans include
monthly fees, per minute usage charges and a number of free minutes per month.
The prepay program markets cards which credit a defined number of pesos to a
customer's account, to be utilized for outgoing and incoming calls over a period
of no more than 180 days and only for incoming local calls for 185 additional
days (although this 185-day period has been extended until April 30, 2000 for
those prepay customers who otherwise would have been deactivated). See " --
Prepay Customers." Most of the contract plans include a selection of free
cellular handsets. The prepay plans do not provide free cellular handsets.
Contract Plans. The digital and analog contract pricing plans are designed
to target primarily high and moderate 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 high-end handset and
lower per minute airtime charges under a single contract. Moderate and low-usage
subscribers typically prefer pricing options which have a lower monthly charge,
fewer free minutes, a less expensive handset and higher per minute airtime
charges than those options chosen by high-usage customers.
In April 1999, in an effort to differentiate our digital product, we
drastically simplified our digital contract plan offerings. We reduced the
number of our contract plans from 11 to 6 and substantially increased the number
of minutes included with the monthly fee when compared with previous comparable
digital and analog contract plans. However, to satisfy the more limited needs of
low-usage contract subscribers, we maintained one additional contract plan which
provides a moderately priced, fixed monthly charge coupled with a high per
minute airtime charge and relatively few free minutes.
Prepay Plans. 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 are unwilling to make a fixed
financial commitment or do not have the credit profile to purchase contract plan
cellular services. Other prepay customers include vacationers and traveling
business people who require cellular service for short periods of time. In
addition to helping customers control costs, our prepay programs have no monthly
bill and allow customers to prepay for cellular services in cash.
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In September 1997, we introduced our next-generation VIVA prepay service.
VIVA provides for automated reactivation and value-added services such as
voice-messaging. VIVA prepay cards are available in denominations of Ps.100,
150, 250 and 500, although a new customer cannot be activated with a Ps.100
card.
Discounts on Incoming Calls. In response to competitive and market
conditions, we offer discounts on the airtime charges of up to 50% for incoming
calls for our customers who are in their home region and who have opted out of
the CPP system. Beginning in May 1999, with the advent of the CPP modality,
cellular customers who do not opt out of CPP do not pay airtime charges for
incoming local calls (other than incoming local calls while roaming outside
their home region).
Strategy. We intend to continually review market pricing and will attempt
to increase prices, if economic and competitive conditions permit, to keep pace
with inflation. Constant adjustments to meet market and competitive conditions
may require that we increase or decrease prices over short periods of time. See
Item 5, "Operating and Financial Review and Prospects -- Other Material Trends
and Contingencies -- Price Increases and Rollbacks."
ACTIVATION, BILLING AND COLLECTION PROCEDURES
We 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.
We believe that our ability to activate a cellular telephone number promptly
gives us a competitive advantage over Telcel.
We mitigate our credit exposure in five ways:
- for those customers paying by credit card, by obtaining a credit
report from the National Credit Bureau (Bureau Nacional de Credito), a
Mexican affiliate of TransUnion Corporation,
- 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,
- by requiring that contract customers purchase a bond, which provides
for payment in the event of customer defaults, after the first year of
service,
- by establishing credit limits, and
- by utilizing prepay cards, which eliminate all credit risk.
For 1997 and 1998, we reserved approximately 1.3% of our cellular revenues
for doubtful receivables. For 1999, we reserved approximately 2.7% of our
cellular revenues for doubtful receivables.
Toward the end of the third quarter of 1999, we changed our billing
practice for contract customers who had fallen behind in their payments and
whose service had been suspended. Rather than continue our policy of not
charging monthly fees upon suspension, in the hope of receiving additional
revenues from CPP tariffs for incoming local calls and from suspended customers
who ultimately pay overdue amounts and reinitiate service, we began to permit
incoming call service and continue to charge monthly fees to suspended customers
for an additional three months, but reserved a substantial portion of the
monthly fees as doubtful receivables. This resulted in additional revenue and in
the increase in 1999 reserves discussed above. For the same reason, in January
2000, we reserved 5.1% of our cellular revenues for doubtful receivables.
Preliminary analysis indicates that the company is collecting approximately
one-third of these additional monthly charges.
We have 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, we contact the subscriber
to determine whether such usage has been authorized. We believe 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 five different billing systems,
including a new cellular customer care and billing system provided by LHS
Communications Systems, Inc. in Regions 5, 6, 7 and 9 which we also use for our
450 MHz fixed local wireless business, one point of sale system, a proprietary
residential long distance system, a
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proprietary system for high-volume business long distance customers and a
purchased system for paging customers. We compile billing information from our
switches by electronic transfer every hour for processing by our billing
systems. We take protective and disaster recovery measures in connection with
all billing information.
In late 1997, we determined to implement the LHS customer care and billing
system to support our contract customer cellular business in all of our regions.
We expect that the new LHS system will ultimately improve processing speed and
data integrity and will permit easier and more flexible access to customer
information, thereby facilitating targeted marketing and resolution of customer
complaints. The first implementation of the LHS customer care and billing
system, in Region 5 in January 1999, experienced certain performance and
stability problems due to software defects which negatively impacted billing
cycles, the implementation of flexible pricing discounts, billing for roaming
and credit and collection functionality. Although LHS implementation in Regions
6, 7 and 9 during August, September and October 1999 experienced fewer problems,
call rating, switch provisioning, billing cycle, roaming, reporting and general
ledger interface functionality problems have not yet been completely corrected.
As a result, we have workarounds in place. In the future, we may determine to
extend this new system to all of our product lines to permit a customer to
receive a single bill for all services provided.
We expect that we will invest a total of approximately U.S.$33.7 million
for the cellular portion of our new customer call and billing through the end of
2000.
NETWORK AND EQUIPMENT
CELLULAR SERVICES
As of December 31, 1999, our integrated cellular network was composed of 5
cellular switches, 366 cell sites and 68 repeaters, and covers approximately 88%
of total cellular regional POPs, consisting of 59 million inhabitants or 61% of
Mexico's total population. In 1999, we added 28 cell sites and 14 repeaters.
In December 1997, we signed an agreement with subsidiaries of Lucent
Technologies for the replacement of Iusacell's existing analog network equipment
with Lucent Technologies analog and CDMA digital network equipment. This
replacement began in February 1998. All regions were completely swapped out as
of August 1999.
We elected to deploy CDMA technology instead of TDMA technology based on
our and Bell Atlantic's evaluation of the two technologies. Bell Atlantic is
successfully using CDMA technology in most of its U.S. markets with favorable
customer response. CDMA offers significantly greater call-carrying capacity,
superior voice quality, longer telephone battery life and greater fraud
protection and is easier to upgrade than TDMA. Iusacell will maintain
transmitting equipment to serve both analog and digital formats, and we are
marketing dual-mode cellular telephones capable of sending and receiving both
analog and digital transmissions.
Digital microwave links between cell sites and the landline system are
supplied by various equipment manufacturers. Taking advantage of the ability of
our various switching systems to run customized software, we have 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. We seek to upgrade and improve our cellular network as new technologies
become available.
We have a network operations and control center (NOCC) in Mexico City which
oversees, administers and provides technical support to all regions. We upgraded
our NOCC by installing a new network management system that provides more
complete and automated surveillance capabilities and fault and performance
management for all network equipment. The first phase of the NOCC upgrade became
operational in the first quarter of 1999 and the second and final phase became
operational in November 1999.
OTHER SERVICES
We provide paging services primarily using our own cellular network
facilities as well as 48 owned and one leased paging antennas. For long
distance, we use fiber optics and state-of-the-art digital systems. In
particular, we use our three long distance switches and our own fiber optic
network and transmission equipment, as well as other facilities leased from
Telmex and other competitors.
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We provide private data transmission services, primarily using excess
capacity in our microwave backbone in our existing cellular network in Region 9,
and satellite transmission through our Satelitron joint venture, which provides
a shared hub for private networks.
We expect that our local wireless network, if implemented in the 450 MHz
frequency band, will be based on the most advanced digital switching,
transmission and subscriber connection equipment that is readily available and
commercially feasible. We would utilize our existing infrastructure, including
one switch and fourteen 450 MHz cell sites, to the extent possible. If we opt to
provide local wireless service through our 800 MHz cellular or 1.9 GHz (PCS)
frequency bands, the digital technology that would be employed would offer
additional features such as out-of-zone mobility.
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 Cellular B-Band 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, price, breadth of coverage area, roaming
capabilities and value-added services. Operators are largely free to set their
own rates, provided they are set on the basis of cost.
We are facing increasing competition from companies providing mobile
wireless telecommunications services utilizing alternative existing
technologies. Nextel de Mexico, S.A. de C.V. began marketing its enhanced
specialized mobile radio services in 1998. In 1999, we began to face competition
from the winners of 1.9 GHz (PCS) spectrum in the auctions concluded in May
1998. Pegaso commercially launched its mobile wireless PCS services in Tijuana
in February 1999, initiated PCS services in Monterrey, Guadalajara and Mexico
City later in 1999 and recently began to provide PCS services in Acapulco and
Veracruz. We also expect to face increasing competition from companies that
provide services utilizing new technologies, such as satellite telephony.
However, we currently view satellite telephony as a complementary service and
have become a distributor for Globalstar de Mexico, S. de R.L., and provide
Globalstar with some back office services and Globalstar customers with Iusacell
CDMA wireless services while they are in our coverage areas.
In paging services, Iusacell competes with established companies such as
Comunicaciones Mtel, S.A. de C.V. (Skytel), Operadora Biper, S.A. de C.V.,
Enlaces Radiofonicos, S.A. de C.V. (Digitel), Comunicacion Dinamica
Metropolitana, S.A. de C.V. (Coditel), Grupo Radio Beep, S.A. de C.V. and
Buscatel, S.A. de C.V., a Telmex subsidiary. Some of our paging competitors have
already established nationwide paging networks, giving them a significant
operational and marketing advantage over us. The COFETEL recently concluded
auctions for a series of nationwide and regional concessions for frequencies to
be used to provide two-way paging services in which Iusacell did not
participate. Moreover, digital wireless providers, including Telcel, Pegaso and
Iusacell, have begun to provide short message service, which is a paging
service, over wireless frequencies.
In providing long distance telephone service, we face or will face
competition from 16 other concession holders, including Telmex and joint venture
companies in which AT&T and MCI WorldCom have beneficial ownership interests.
Presubscription balloting took place in 150 cities in 1997, 1998 and the first
quarter of 1999 in which telephone customers chose their long distance carrier.
We chose not to commit significant marketing resources to the balloting process
and fared poorly in initial balloting results.
In the local telephony market, we expect to face significant competition
from Telmex, the existing monopoly, and new competitors providing service over
the 1.9 GHz (PCS) and 3.4-3.7 GHz (Wireless Local Loop) frequency bands. Unefon
commercially launched its fixed wireless PCS services in Acapulco and Toluca in
February 2000 and recently initiated service in Mexico City. We expect Unefon to
launch mobile wireless services once its network is more fully built out.
In providing data transmission services, we compete for customers with
Telmex, state-owned Telecomunicaciones de Mexico, which we refer to as Telecom,
and the operational long distance companies. In addition, we believe 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 12, 1997, we signed an agreement to sell our direct and
indirect minority interests in our Ecuadorian cellular company, Conecel, and our
Ecuadorian paging company, Corptilor, S.A., to a corporation controlled by the
controlling shareholder of the majority shareholder of these companies. At the
September 30, 1997 closing, we received U.S.$29.4 million in cash consideration
for our direct interest in these companies, and in 1998 we received
approximately U.S.$2.0 million, net of taxes, in respect of our indirect
interest. In November 1999, we received an additional U.S.$1.6 million, net of
Colombian taxes, in respect of the liquidation of the company that held this
indirect interest.
In December 1996, we sold a 51% stake in Iusatel Chile, a Chilean long
distance company, and agreed to sell the remaining 49% upon acquisition from our
previous partners. The second stage of this transaction was completed in early
1997. We received U.S.$5.0 million for the two sales. The sale transaction also
included a capitalization of U.S.$13.3 million of obligations of Iusacell to
Iusatel Chile. We received full payment in December 1997.
GOVERNMENT REGULATION
Telecommunications systems in Mexico are regulated by the SCT and the
COFETEL, a decentralized regulatory body within the SCT, pursuant to the 1995
Telecommunications Law (Ley Federal de Telecomunicaciones), which became
effective on June 8, 1995. Regulations governing international long distance,
domestic long distance and local telephony have been promulgated under the 1995
Telecommunications Law. However, some rules from the prior Law of General Means
of Communication (Ley de Vias Generales de Comunicacion) and the rules
promulgated under such law, including, without limitation, the
Telecommunications Rules (Reglamento de Telecomunicaciones) which we
collectively refer to as the Original Communications Laws, generally remain
effective if they are not inconsistent with the 1995 Telecommunications Law and
the rules promulgated under that law.
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 obtain concessions to install, maintain and operate
telecommunications systems,
- the establishment of technical standards for the provision of
telecommunications services,
- the grant, revocation and modification of concessions and permits, and
- the auction of spectrum.
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 Iusacell and our 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. Iusacell's four cellular concessions were
granted under the Original Communications Laws, and we have requested an
amendment of our concessions to permit us to register tariffs with the COFETEL
without prior approval from the SCT.
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, but not to exceed
such 20- or 30-year limit, as the case may be. Concessions specify, among other
things:
- the type of network, system or service,
- the allocated spectrum, if applicable,
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- the geographical region in which the holder of the concession may
provide the service,
- the required capital expenditure program,
- the term during which such service may be provided,
- 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
- any other rights and obligations affecting the concession holder.
In addition to concessions, the SCT may also grant permits for (i)
establishing, operating or exploiting private telecommunications services not
constituting a public network (i.e., reselling) and (ii) 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 Foreign Investment Law (Ley
de Inversion Extranjera), concessions may only be granted to Mexican individuals
and to Mexican corporations in which non-Mexicans hold no more than 49% of their
voting shares or which 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 of the Mexican Ministry of Commerce and Industrial
Development. There are no foreign investment participation restrictions in
respect of operations conducted under permits.
A concession or a permit may be terminated pursuant to the 1995
Telecommunications Law upon:
- expiration of its term,
- resignation by the concession holder or the permit holder,
- revocation,
- expropriation, or
- 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:
- unauthorized or unjustified interruption of service,
- the taking of any action that impairs the rights of other
concessionaires or permit holders,
- failure to comply with the obligations or conditions specified in the
concession or permit,
- failure to provide interconnection services with other holders of
telecommunications concessions and permits,
- loss of the concession or permit holder's Mexican nationality in
instances in which Mexican nationality is legally required,
- unauthorized assignment, transfer or encumbrance of the concession or
permit, of any rights under the concession or permit or of assets used
for the exploitation of the concession or permit,
- failure to pay to the Mexican government its fee for the concession or
permit or, where applicable, its participation in the revenues of the
holder of the concession or permit, or
- participation of any foreign government in the capital stock of the
holder of the concession or permit.
In addition, the SCT may establish for any concession further events which
could result in revocation of that concession.
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<PAGE> 41
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 a concession and assets
related to its exploitation 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 or permit 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, it 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, the determination will be made by an
independent appraiser. Iusacell is not aware of any instance in which the SCT
has exercised any of these powers in connection with a cellular company.
The Original Concession. Our 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 Old
Iusacell, SOS Telecomunicaciones, S.A. de C.V., on April 1, 1957, as amended,
which we refer to as 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. 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 renewal.
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
radiocommunications 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.
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, allowing Iusacell to expand
the types of telecommunications services which we 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 radiotelephony 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 install, operate and maintain a mobile
public radiocommunications network with cellular technology in the 825-835 MHz
and 870-880 MHz frequency bands 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
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<PAGE> 42
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. Moreover, in December 1996, we applied to
divide the Original Concession into two concessions, one relating to the
provision of cellular services over the 800 MHz frequency band in Region 9,
which would not be subject to restrictions on foreign investment, and a second
relating to the 450 MHz frequencies, which would be subject to restrictions on
foreign investment. We are currently negotiating the terms and conditions for
such extension and division with the COFETEL.
Cellular Concessions. Mexico is divided into nine cellular regions. The SCT
has allocated cellular telephone system frequencies in each region in the
Cellular A-Band and the Cellular B-Band. In each region, Telcel holds the
Cellular B-Band concession and its cellular competitor in each region holds the
Cellular A-Band concession.
n Region 9, we hold 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, we hold the right to provide cellular service through its
subsidiaries Comunicaciones Celulares de Occidente, S.A. de C.V., known as
Comcel, Sistemas Telefonicos Portatiles Celulares, S.A. de C.V., known as
Portacel and Telecomunicaciones del Golfo, S.A. de C.V., known as 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 the Cellular A-Band. In consideration for these
authorizations and concessions, the subsidiaries made initial payments to the
Mexican government and, in addition, must make payments as follows:
<TABLE>
<CAPTION>
SUBSIDIARY PERCENT OF GROSS REVENUES PAYABLE TO MEXICAN GOVERNMENT
---------------- -------------------------------------------------------
<S> <C>
Comcel ................ 8%
Portacel .............. 7%
Telgolfo .............. 8%
</TABLE>
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 the conditions established 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, Iusacell 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. Infomin,
therefore, would be unable to contribute its paging license to the joint venture
so long as Bell Atlantic continued to control the management of Iusacell and
Iusacell continued to hold more than 49% of the voting shares of Infotelecom. In
order to eliminate this obstacle to the transfer of the paging concession to
Infotelecom, in December 1998 we sold a 2% interest in Infotelecom to Mr. Jose
Ramon Elizondo, a director of Iusacell. As a result, we currently hold a 49%
interest in Infotelecom. 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. Infomin recently received governmental
approval to transfer its paging concession to Infotelecom. We expect the
transfer to be implemented in the second quarter of 2000. The financial
statements of Infotelecom are consolidated with the financial statements of
Iusacell. See Note 2 to the Consolidated Financial Statements.
Long Distance. Our 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. 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,
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<PAGE> 43
provided that Iusatel complies with certain requirements. Upon our application,
the SCT and the COFETEL modified this concession on December 17, 1997,
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
technical specifications and had to serve with its own infrastructure a minimum
of 11 specified cities by July 31, 1998, 26 additional specified cities by
December 31, 1999 and another 13 additional specified cities by December 31,
2000.
In February 1997, the Mexican Foreign Investment Commission conditioned its
approval of Bell Atlantic assuming management control over Iusacell upon the
requirement, among others, that we transfer at least 51% of the voting shares of
Iusatel to Mexican investors on terms acceptable to the Foreign Investment
Commission. In November 1998, we complied with this requirement by having Mr.
Elizondo agree to subscribe to 5.1% of the capital stock of Iusatel, comprising
51% of the voting shares thereof. We retained a 94.9% equity interest in
Iusatel, including a 90% equity interest through the ownership of neutral
limited voting stock (inversion neutra) and a 49% voting interest representing a
4.9% equity interest. The financial statements of Iusatel are consolidated with
the financial statements of Iusacell. See Note 2 to the Consolidated Financial
Statements.
Local Telephony. We believe our right to provide local telephony service is
derived from the Original Concession. The Original Concession, as originally
granted, permitted Iusacell to provide radiocommunications service to
vehicle-mounted terminal equipment nationwide.
In 1986, the SCT amended the Original Concession to authorize Iusacell to
provide fixed public radiotelephony service in rural areas nationwide in
accordance with plans to be approved by the SCT. In 1990, the Telecommunications
Rules were 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." Our 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. We have never received
the SCT's approval of our technical and economic plans for local wireless
service in the 450 MHz frequency band.
However, in June 1997, the SCT and Iusacell reached agreement on a process
by which Iusacell could obtain a concession issued and recognized by the SCT to
provide local wireless service in the 450 MHz frequency band. Under this
agreement, we would convert and consolidate some of our 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. However, neither the SCT nor the COFETEL
has formally notified us of the exact right of first refusal exercise price, the
payment terms or the coverage/build-out requirements relating to the
concessions, all of which are necessary for us to decide whether to exercise our
right of first refusal.
We are 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 we were to determine that it would
be preferable to pursue such alternatives, the acquisition of concessions, other
regulatory approvals and the payment of substantial fees could be required. We
expect to make our decision on the overall strategy for providing local
telephony services in 2000.
In September 1998, we determined that, because of many factors, including
the impact of changing technology since the initiation of the 450 MHz fixed
local wireless project in 1994, an impairment of our investment in 450 MHz TDMA
technology had occurred. As a result, we recorded a substantial non-cash
writedown of our investment in the 450 MHz fixed local wireless project.
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<PAGE> 44
In November 1998, Mr. Elizondo agreed to subscribe to 5.1% of the capital
stock of Iusatelecomunicaciones, S.A. de C.V., the Iusacell subsidiary which
provides local wireless service in the 450 MHz frequency band on a trial basis,
comprising 51% of our total voting shares. We retained a 94.9% equity interest
in Iusatelecomunicaciones, including a 90% equity interest through the ownership
of neutral limited voting stock (inversion neutra) and a 49% voting interest
representing a 4.9% equity interest. The financial statements of
Iusatelecomunicaciones are consolidated with the financial statements of
Iusacell. See Note 2 to the Consolidated Financial Statements.
Data Transmission. Our right to offer telex and provide public data
transmission service throughout Mexico is derived from the Original Concession.
We use our allocations in the 138-144 MHz, 440-450 MHz and 485-495 MHz frequency
bands, excess capacity in our cellular microwave backbone in Region 9 and
Satelitron satellite transmission services to provide data transmission
services.
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. We currently intend to sell our interest in Satelitron.
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:
- secretarial service,
- voice mail, and
- 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 annual payments to the Mexican
government.
FOREIGN OWNERSHIP RESTRICTIONS
Pursuant to the 1995 Telecommunications Law and the 1993 Foreign Investment
Law, holders of concessions to provide telecommunications services in Mexico,
excluding providers of 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 Iusacell 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 twice extended the transfer deadline.
In November 1998, we complied with this requirement by transferring 51% of
the voting shares of these two subsidiaries to Mr. Elizondo by means of a
subscription to capital. We retained 49% of the voting shares of these
subsidiaries. We also hold another 90% of the capital of these subsidiaries
through the ownership of neutral limited voting stock (inversion neutra) that
does not constitute voting shares for purposes of the Mexican foreign investment
laws. Consequently, we hold a 94.9% equity interest in these two subsidiaries,
whose financial results we consolidate.
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<PAGE> 45
In order to participate in the auctions for concessions for microwave
frequencies concluded in September 1997, we formed Punto-a-Punto Iusacell, S.A.
de C.V., a joint venture with Mr. Elizondo. The Mexican Foreign Investment
Bureau has approved a capital structure substantially similar to that authorized
for Iusatel and Iusatelecomunicaciones for the microwave joint venture. The
financial statements of Punto-a-Punto Iusacell are consolidated with the
financial statements of Iusacell. See Note 2 to the Consolidated Financial
Statements.
In order to participate in the auctions for concessions for 1.9 GHz PCS
frequencies concluded in May 1998, we formed Iusacell PCS, S.A. de C.V., another
joint venture with Mr. Elizondo. The Mexican Foreign Investment Bureau approved
a capital structure substantially similar to that authorized for Iusatel,
Iusatelecomunicaciones and Punto-a-Punto.
Moreover, in December 1998 Mr. Elizondo acquired a 2% interest in
Infotelecom, S.A. de C.V., a company which commercializes paging services, from
Iusacell. As a result, we currently hold only 49% of this entity, complying with
the condition precedent necessary to allow our other partner, Infomin, S.A. de
C.V., a Mexican controlled company, to transfer its paging concession to
Infotelecom, as previously agreed with us.
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 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 COFETEL 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,
with certain limited exceptions, from providing interLATA (long distance)
telecommunications, engaging in the manufacture of customer premises equipment,
which we refer to as CPE, or engaging in the manufacture or sale of
telecommunications equipment.
The Telecommunications Act of 1996, which we refer to as the 1996 Act,
which became effective on February 8, 1996, includes provisions that open local
telephony markets to competition and would permit regional Bell operating
companies, such as the local operating telephone companies of 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 permitted under the Decree, interLATA (long
distance) services permitted under the Decree, InterLATA (long distance)
services originating outside the states where its subsidiaries provide local
exchange telephone services and 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 related regulations.
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Since Iusacell is affiliated with Bell Atlantic, its operations must comply
with the terms of the Decree. 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, which we refer to as 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 prohibited from discriminating in handling traffic to and from the United
States and was limited as to interests it could own in international cables and
satellite facilities to and from the United States. Finally, an FTE was
prohibited from exporting to the United States any telecommunications equipment
or CPE manufactured outside the United States.
The 1996 Act eliminated certain restrictions under the Decree including:
- restrictions that precluded an FTE from providing the United States
"half" of traffic originating in a foreign country,
- restrictions on exporting to the United States telecommunications
equipment or CPE manufactured outside the United States, and
- restrictions on providing interLATA (long distance) telecommunications
services between points in the United States or international long
distance service originating in the United States, and from owning
international telecommunications facilities in the United States
subject to the same conditions that Bell Atlantic must satisfy under
the 1996 Act and any regulations promulgated thereunder with respect
to interLATA (long distance) telecommunications services originating
in the states in which Bell Atlantic's local exchange subsidiaries
provide service.
Under the 1996 Act, we 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 international telecommunications
traffic which, although routed through the United States, neither originates nor
terminates in the United States. In addition, we may carry United States
originated traffic bound for Mexico (or other foreign countries) so long as the
traffic originates outside the states where Bell Atlantic's subsidiaries provide
local exchange telephone service and subject to having appropriate authority
under Section 214 of the United States Communications Act of 1934.
In 1996, Iusatel applied for and received authorization under Section 214
of the Communications Act to become a facilities-based provider of international
long distance services from the United States. The Section 214 Authorization was
transferred to a Peralta Group entity in January 1997. Because the restructuring
of Iusatel to comply with the 1995 Telecommunications Law and the Foreign
Investment Law has been completed, Iusatel and such Peralta Group entity intend
to seek to formally return control of the Section 214 Authorization to Iusatel.
We have not yet determined whether we will engage in activities permitted by the
1996 Act or, upon any reassignment to Iusatel, the Section 214 Authorization. If
we choose to engage in such activities, we cannot predict the specific impact of
such activities on our business, financial condition or results of operations.
Other laws of the United States may restrict activities of Iusacell by
virtue of Bell Atlantic's ownership interest, including laws and regulations
that restrict trade with, and investments in, specific countries, as well as the
United States Foreign Corrupt Practices Act. The Foreign Corrupt Practices Act
is also applicable to Iusacell because its securities are listed on the New York
Stock Exchange.
The Iusacell Shareholders Agreement contains provisions designed to require
us to refrain from taking any actions that would cause Bell Atlantic to be in
violation of applicable law.
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<PAGE> 47
C. ORGANIZATIONAL STRUCTURE
The following chart represents Iusacell's organizational structure,
including only its significant subsidiaries. All the companies have been
organized under the laws of Mexico. The first percentage figure given indicates
direct and indirect economic interest; the second percentage indicates direct
and indirect voting interest.
Grupo Iusacell, S.A. de C.V.
99.9% / 99.9% 94.9% / 49%
Grupo Iusacell Celular, S.A. de C.V. Iusacell PCS, S.A. de C.V.
100% / 100% SOS Telecomunicaciones, S.A. de C.V.
100% / 100% Comunicaciones Celulares de Occidente, S.A. de C.V.
100% / 100% Sistemas Telefonicos Portatiles Celulares, S.A. de C.V.
100% / 100% Telecomunicaciones del Golfo, S.A. de C.V.
100% / 100% Iusacell, S.A. de C.V.
100% / 100% Sistecel, S.A. de C.V.
94.9% / 49% Iusatel, S.A. de C.V.
94.9% / 49% Iusatelecomunicaciones, S.A. de C.V.
94.9% / 49% Punto-a-Punto Iusacell, S.A. de C.V.
49% / 49% Infotelecom, S.A. de C.V.
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All of these companies, including those in which we own a minority voting
interest, are consolidated with the financial statements of Iusacell. See Note 2
to the Consolidated Financial Statements.
D. PROPERTY, PLANTS AND EQUIPMENT
Throughout the regions served by our cellular operations at December 31,
1999, we operated 96 customer sales and service centers and a total of 366
cellular 800 MHz cell sites, 68 repeaters, 14 fixed local wireless 450 MHz cell
sites, 49 paging antennas, five switches for cellular service, one switch for
local wireless service and three switches for long distance service.
We generally lease the land where our customer sales and service centers,
cell sites, antennas, microwave transmission equipment and switching centers are
located. We own and lease administrative offices in Mexico City as well as in
Guadalajara, Leon, Puebla, Monterrey and Ciudad Juarez. We generally own our
cellular network equipment, subject to liens.
At December 31, 1999, our property and equipment consisted of the following
(in thousands of constant December 31, 1999 pesos and millions of U.S. dollars
before accumulated depreciation of Ps.2,657.2 million (U.S. $280.3 million) in
1999):
<TABLE>
<S> <C> <C>
Buildings and facilities Ps.1,398.5 U.S.$147.5
Communications equipment 6,028.2 635.9
Furniture and fixtures 153.5 16.2
Transportation equipment 53.7 5.7
Computer equipment 488.7 51.5
Cellular rental telephones 1.2 0.1
Land 51.1 5.4
</TABLE>
See Item 5, "Operating and Financial Review and Prospects -- Liquidity and
Capital Resources" for a discussion of planned capital expenditures and existing
encumbrances.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis in conjunction with
the Consolidated Financial Statements included elsewhere in this annual report.
Unless otherwise indicated, all financial information in this annual report is
presented in constant pesos as of December 31, 1999. The U.S. dollar
translations provided in this annual report are, unless otherwise indicated,
calculated at the Noon Buying Rate at December 31, 1999, which was Ps.9.480 per
U.S.$1.00. Sums may not add due to rounding.
GENERAL
The following discussion and analysis is intended to help you understand
and assess the significant changes and trends in the historical results of
operations and financial condition of Iusacell and our subsidiaries and factors
affecting our financial resources. You should read this section in conjunction
with the Consolidated Financial Statements and their notes appearing elsewhere
in this prospectus.
The Consolidated Financial Statements have been prepared in accordance with
Mexican GAAP, which differs in significant respects from U.S. GAAP. Note 20 to
the Consolidated Financial Statements provides a description of the principal
differences between Mexican GAAP and U.S. GAAP as they relate to Iusacell. Note
20 to the Consolidated Financial Statements also provides a reconciliation to
U.S. GAAP of Iusacell's net loss for the years ended December 31, 1997 and 1998
and net profit for the year ended December 31, 1999 and of stockholders' equity
as of December 31, 1998 and 1999.
As a Mexican company, we maintain our 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, Iusacell'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 us to
restate non-monetary assets, non-monetary liabilities and the components of
stockholders' equity using the INPC. We have not eliminated the effects of these
inflation accounting principles in the reconciliation to U.S. GAAP. See Note 20
to the Consolidated Financial Statements.
Except where otherwise indicated, financial data for all periods in the
Consolidated Financial Statements and throughout this prospectus have been
restated in constant pesos as of December 31, 1999, in accordance with the fifth
amendment to Bulletin B-10. References in this prospectus to "real" amounts are
to inflation-adjusted pesos and references to "nominal" amounts are to
unadjusted historical pesos. In calendar years 1997, 1998 and 1999, the rates of
inflation in Mexico, as measured by changes in the INPC, were 15.7%, 18.6% and
12.3%, respectively. The inflation indices used are 1.3322 for 1997 figures and
1.1232 for December 1998 figures.
In reporting under Mexican GAAP and in accordance with Bulletin B-10, we
are required to quantify all financial effects of operating and financing the
business under inflationary conditions. For presentation purposes, "integral
financing cost (gain)" refers to the combined financial effects of:
- net interest expense or interest income,
- net foreign exchange gains or losses, and
- net gains or losses on monetary position.
Net foreign exchange gains or losses reflect the impact of changes in
foreign exchange rates on monetary 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. We incurred a foreign exchange loss in 1995, 1997 and 1998
on our U.S. dollar denominated debt as the peso depreciated against the U.S.
dollar. A foreign exchange gain arises if a liability is denominated in a
foreign currency which depreciates relative to the peso between the time the
liability is incurred and the date it is repaid, as the depreciation of the
foreign currency results in a decrease in the amount of pesos which must be
exchanged to repay the specified amount of the foreign currency liability. In
1996 and 1999, we incurred a foreign exchange gain on our U.S. dollar
denominated
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<PAGE> 50
debt as the peso appreciated against the U.S. dollar in 1999 and for most of
1996. 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 in 1995, 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/U.S. 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.3.466 to U.S.$1.00 on December 19, 1994, by
December 31, 1994 the Noon Buying Rate had fallen to Ps.5.000 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.7.740 to U.S.$1.00 on
December 31, 1995, which represented a 54.8% devaluation relative to the U.S.
dollar for the year.
The Mexican economy began to recover in 1996 and 1997, as exchange rates
stabilized, inflation decreased and gross domestic product grew by 5.1% and
7.0%, respectively. The Noon Buying Rates were Ps.7.881 to U.S.$1.00 and
Ps.8.070 to U.S.$1.00 on December 31, 1996 and 1997, respectively. However, the
financial crises in the emerging markets that began in late 1997, together with
the weakness in the price of oil, which is a significant source of revenue for
the Mexican government, contributed to renewed weakness in the peso. For the
first nine months of 1998, the peso devalued 26.8% relative to the U.S. dollar
to Ps.10.196 per U.S. dollar on September 30, 1998, but strengthened in the
fourth quarter of 1998. For the twelve months of 1998, the peso devalued 22.7%
relative to the U.S. dollar to Ps.9.901 per U.S. dollar on December 31, 1998. In
1999, the Mexican economy, buoyed by a sharp increase in the price of oil
beginning in the second quarter and strength in consumer spending, experienced
relative stability, and the peso appreciated 4.3% against the U.S. dollar to
Ps.9.480 per U.S. dollar on December 31, 1999.
Peso devaluations have contributed to sharp increases in inflation.
Inflation, which had been 7.1% in 1994 as measured by changes in the INPC,
increased to 52.0% and 27.7% in 1995 and 1996, respectively. After a reduction
to 15.7% in 1997, inflation was 18.6% for the year 1998. Inflation declined
again in 1999 to 12.3%.
In the past, peso devaluations and inflation have negatively affected our
results of operating and financial condition and may do so in the future.
IMPACT ON IUSACELL'S RESULTS OF OPERATIONS
The general economic conditions in Mexico resulting from the devaluation of
the peso and the resulting inflation have had, and may have, an overall negative
impact on our results of operations primarily as a result of the following
factors:
- Peso devaluations result in a significant decrease in the purchasing
power of Mexican consumers, resulting in a decrease in the demand for
cellular telephony.
- Due to competitive market conditions and the overall state of the
Mexican economy, we are not always able to increase our prices in line
with the significant inflation in the economy. We were not able to do
so in 1995, 1996 and the period from the fourth quarter of 1997
through the third quarter of 1998.
- The significant inflation experienced in 1995 led to an upward
restatement of our assets and, therefore, resulted in a substantial
increase in depreciation and amortization expense, which had an
adverse impact on our earnings for that year. 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 peso-carrying value of
dollar-acquired non-monetary assets as at the end of 1995 in
accordance with the rules of the Mexican Stock Exchange. 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 as at the end of 1996 in accordance with the rules
of the Mexican Stock Exchange as the rate of inflation exceeded that
of devaluation.
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<PAGE> 51
- The significant devaluation of the peso as compared to the U.S. dollar
in 1995 resulted in the recording of a net foreign exchange loss given
Iusacell's net U.S. dollar liability position. In 1996, we recorded a
gain because of the appreciation of the peso against the U.S. dollar
during a significant portion of the year. In 1997, we experienced a
minimal foreign exchange loss due to the relative stability of the
peso throughout the year. During the first nine months of 1998, we
recorded exchange losses because of the effect of the 26.8%
devaluation of the peso in that period on our net U.S. dollar
liability position. We recorded exchange gains in the fourth quarter
of 1998, although these were insufficient to offset the cumulative
exchange losses through September 30, 1998. We recorded a substantial
exchange gain in 1999 as the peso continued to strengthen.
- A portion of our costs and expenses (e.g., some depreciation and
amortization and all interest expense) is denominated in, or indexed
to, U.S. dollars, while almost all of our revenues are denominated in
pesos. In a period of peso devaluation, this relationship causes a
negative impact on our margins.
IMPACT ON IUSACELL'S FINANCIAL CONDITION
The general economic conditions in Mexico resulting from the devaluation of
the peso and the resulting inflation have had, and may have, an overall negative
impact on our financial condition as a result of the following factors:
- Substantially all of our indebtedness is denominated in U.S. dollars.
As a result, the peso-carrying amount of such debt increases to
reflect the additional pesos required to meet such foreign currency
liabilities.
- Prior to 1998, whenever the inflation rate exceeded the devaluation
rate, as was the case in 1996, the carrying value of our assets
purchased in foreign currencies would be reduced. This was because,
assuming the foreign currency value of a given asset remained
unchanged between periods, the value of such asset for the prior
period was restated upwards using the inflation rate, while the
valuation of such asset for the current period was restated using a
foreign exchange rate which increased at a lower rate.
INCREASE IN PREPAY SUBSCRIBER BASE
In June 1996, we introduced our Control Plus prepay program in response to
economic conditions in Mexico and to a prepay cellular card program offered by
Telcel. In September 1997, we introduced in Region 9 our next-generation,
automated VIVA prepay program which had, by March 1999, almost completely
replaced Control Plus in all of our cellular markets. In October 1999, we
introduced a "one single rate" plan for prepay customers. One single rate prepay
customers pay a single per minute rate for local, national long distance and
long distance service to the United States and Canada.
The Control Plus and VIVA programs have been extremely popular, with prepay
customers increasing from an insignificant percentage of our subscriber base at
June 30, 1996 (14,675 subscribers) to 31.7% at December 31, 1996 (73,762
subscribers), 50.0% at December 31, 1997 (200,159 subscribers), 63.3% at
December 31, 1998 (478,361 subscribers) and 73.4% at December 31, 1999 (970,509
subscribers). Prepay customers comprised 75.6%, 78.3% and 86.7% of our net
subscriber additions in 1997, 1998 and 1999, respectively. We expect that prepay
customers will continue to comprise the substantial majority of new subscriber
additions. As a result, we expect that the percentage of our customers who
subscribe to cellular service on a prepay basis will continue to increase.
The percentage of total service revenues derived from prepay customers was
3.7% in 1996, 14.1% in 1997, 17.3% in 1998 and 11.9% in 1999.
In 1996, we experienced a 23.8% 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 our prepay program,
resulting in lower revenues from these customers. In 1997, 1998 and 1999, we
experienced a 25.6%, 38.5% and 27.2% increase in the aggregate number of
contract customers, respectively, compared to the beginning period number, with
limited migration by contract customers to prepay programs. Although the current
rate of growth is expected to decline as the product customer base grows, we
anticipate further growth in the number of contract subscribers, including both
customers converting from analog to digital service and new digital cellular
customers.
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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 subscriber, even though prepay
plans involve higher outgoing call per minute airtime charges than the average
contract plan. Consequently, as the proportion of prepay customers to our total
subscribers continues to increase, we expect that average minutes of use per
customer and average monthly revenues per customer will continue to decrease.
The implementation of the CPP modality and the digitalization of the contract
subscriber base have moderated this decline.
In November 1998, we extended the life of our VIVA prepay cards from a
maximum of 135 days to a maximum of 180 days to allow greater flexibility in
their use. In April 1999, in anticipation of the advent of the CPP modality and
for competitive reasons, we extended the life of our VIVA prepay cards to a
maximum of 365 days. After the balance of a prepay card becomes zero (which
occurs automatically after 180 days), the VIVA customer has 185 days to activate
a new card before losing his phone number. During this 185-day period, the VIVA
customer will be an "incoming calls only" customer, able to receive incoming
local calls, but not able to make outgoing calls.
In October 1999, in order to evaluate whether we could generate additional
revenues from incoming calls only customers, we extended the period of time to
activate a new card from 185 days until April 30, 2000 for those incoming calls
only customers who otherwise would have lost service before that date. In April
2000, we will determine whether to further extend card life for some or all of
our incoming calls only customers.
Extending the life of VIVA prepay cards defers the deactivation of prepay
customers who may in fact not be using the service. The November 1998 extension,
by deferring prepay turnover for 45 additional days, contributed to the strong
growth in subscriber net additions, particularly prepay net additions, during
the fourth quarter of 1998. Likewise, the April 1999 and October 1999
extensions, by deferring prepay turnover, increased overall subscriber net
additions in the second, third and fourth quarters of 1999 and will also
increase overall subscriber net additions in the first quarter of 2000. Any
further extension of VIVA card life for incoming calls only customers will also
defer turnover and increase overall subscriber net additions for the extension
period.
At December 31, 1999, we had approximately 207,000 incoming calls only
customers. The substantial majority of incoming calls only customers generate
little or no traffic. If we deactivate these customers, our overall subscriber
net additions will be negatively affected.
In late March 1999, we implemented marketing initiatives focused on
increasing usage by and revenues derived from prepay customers. These
initiatives included an approximate 6% price increase, the implementation of a
Ps.59 or Ps.79 activation fee for a customer activating a telephone number with
a Ps.250 or Ps.150 prepay card, the increase in the minimum denomination of the
prepay card with which a customer can activate prepay service from Ps.100 to
Ps.150, the adjustment of commissions to encourage distributors to activate
customers with prepay cards of higher denominations and the sending of
electronic reminders to customers to replenish their cards. Together with the
continuing efforts to increase the number of distribution points for prepay
cards in order to facilitate and encourage their replenishment, these
initiatives appear to have had their intended results. We have fewer, but higher
revenue generating new prepay customers. Prepay subscriber net additions for the
second quarter of 1999 were higher than those of the first quarter of 1999.
However, prepay subscriber net additions for the second quarter of 1999 were
substantially lower when adjusted for the effect of the April 1999 extension of
life of the VIVA prepay cards and were lower than those of the first quarter of
1999. In the third quarter of 1999, Iusacell implemented initiatives to
reinvigorate its new prepay customer activations. These initiatives resulted in
higher prepay subscriber net additions for each of the third and fourth quarters
of 1999 than those of the first or second quarter of 1999.
DIGITALIZATION
In December 1997, we entered into an agreement with subsidiaries of Lucent
Technologies to swap out our existing analog network for a Lucent Technologies
analog network overlaid with a Lucent Technologies CDMA digital network. Because
we received a trade-in credit from Lucent Technologies for the book value of the
swapped-out network equipment, under Mexican GAAP and U.S. GAAP we were not
required to write off the value of any of such swapped-out assets.
Digital and dual-mode (i.e., digital-analog) handsets are substantially
more expensive than analog handsets, although the prices for all types of
handsets have declined over time. As a result, we expect that the subsidies we
provide for handsets will be higher than they would have been had we remained an
exclusively analog service
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<PAGE> 53
provider as we migrate a portion of our analog customers to digital service and
subscribe new digital customers. These new digital customers will initially be
almost all contract subscribers, because we have only just begun to
commercialize a digital prepay service, which, due to more costly handsets, is
significantly more expensive to activate than analog prepay service.
We believe that digitalization will increase subscriber usage. Our
experience has been that the average new digital customer uses his or her
cellular telephone more than the average analog customer and that analog
customers that migrate to digital service tend to increase their usage upon
migration.
Digital contract subscribers increased from 27,410 at December 31, 1998 to
219,829 at December 31, 1999. We intend to migrate substantially all remaining
analog contract customers to digital service by the end of 2000. As of December
31, 1999, our digital contract customers in the aggregate generated
approximately 50% of our total cellular traffic.
The rapid growth in digital subscribers and traffic over the last twelve
months strained our digital capacity and slightly deteriorated our digital
service quality in the fourth quarter of 1999. As a result, and in anticipation
of further digital migration, we decided to accelerate our capital expenditure
program to expand digital capacity and improve digital service quality.
LOCAL TELEPHONY IN THE 450 MHZ FREQUENCY BAND
In November 1994, we sought government approval of our technical and
economic plans for the commercial launch of fixed local wireless service in the
450 MHz frequency band on a national level. The SCT never approved such plans.
In June 1997, however, the SCT and Iusacell reached agreement on a process by
which Iusacell could obtain one or more regional concessions to provide such
service. The price for such concessions was to be 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, we anticipate that we would be
required to pay approximately U.S.$2.25 million for concessions in Regions 4, 5,
6, 7 and 9, where we have a right of first refusal to acquire such concessions.
However, the exact price, payment terms and coverage/build-out requirements
relating to the concessions, which may be substantial, have not yet been
formally defined by the SCT and the Mexican Federal Telecommunications
Commission (Comision Federal de Telecomunicaciones), which is commonly referred
to as the COFETEL. Consequently, we have not yet determined whether to proceed
with our 450 MHz fixed local wireless project. However, given the capabilities
of the CDMA technology that we are implementing, we are exploring alternatives
for providing local telephony services, including fixed or limited zone wireless
local telephony services in the 800 MHz frequency band in Regions 5, 6, 7 and 9
and in the 1.9 GHz PCS frequency band in Regions 1 and 4. We expect to make our
decision on the overall strategy for providing local telephony services in 2000.
In September 1998, we determined that, because of many factors, including
the impact of changing technology since the initiation of the 450 MHz fixed
local wireless project in 1994, an impairment of our investment in 450 MHz TDMA
technology had occurred. As a result, we recorded a non-cash writedown of 100%
of the development and pre-operating expenses for the project and 90% of the
fixed assets deployed in the project. The writedown in 1998 amounted to
Ps.1,102.4 million (U.S.$116.3 million). We also determined that certain of the
450 MHz project assets, representing about 10% of their book value, are
redeployable in the mobile wireless network.
We were party to certain agreements regarding the supply and servicing of
infrastructure equipment and handsets for our 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, we could be required to write off some or
all of a U.S.$15.0 million advance made in 1994 to a vendor in respect of
network infrastructure that was never ordered to the extent such advance is not
refunded to us. Finally, we could be required to purchase approximately U.S.$2.1
million in handsets that were ordered, manufactured and delivered, but not yet
paid for, and we are involved in litigation with another handset vendor in
connection with a purported agreement to purchase 60,000 handsets that we never
executed.
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NON-RECURRING CHARGES
During the three year period ended December 31, 1999, we recorded various
non-recurring charges as summarized in the following table.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
MEXICAN GAAP
1997 1998 1999 TREATMENT
------------ ------------ ---- ---------------------
<S> <C> <C> <C> <C>
IMPAIRMENT OF ANALOG
COMMUNICATIONS
EQUIPMENT............ 1,236,307 -- -- Non-operating expense
PROJECT 450 WRITEDOWN.. -- 1,102,401 Operating expense
------------ ------------ --
TOTAL NON-RECURRING
CHARGES.............. Ps.1,236,307 Ps.1,102,401 --
============ ============ ==
</TABLE>
Under U.S. GAAP, all of the above non-recurring charges were recorded as
operating expenses during the respective periods. The following is a description
of the non-recurring charges.
IMPAIRMENT OF ANALOG COMMUNICATIONS EQUIPMENT
During 1997, based on certain changes in circumstances surrounding our
then-existing analog communications network equipment, we determined that the
carrying value of such equipment was impaired. Consequently, we recorded an
impairment loss of Ps.1,236.3 million (U.S.$130.4 million) to reduce the value
of our analog communications network equipment to fair value, amounting to
Ps.3,243.7 million (U.S.$342.2 million). The book value of the analog
communications network equipment that was in use at the time of the impairment
determination as of December 31, 1997, 1998 and 1999 was Ps.3,243.7 million
(U.S.$342.2 million), Ps.3,636.5 million (U.S.$383.6 million) and Ps.0.0 million
(U.S.$0.0 million), respectively. This equipment no longer provides cellular
service to our customers because of the conversion to Lucent Technologies
equipment completed in August 1999.
PROJECT 450 NON-CASH WRITEDOWN
During 1998, we determined that, because of many factors, including the
impact of changing technology since the initiation of the 450 MHz project in
1994, an impairment of our investment in the project assets had occurred.
Consequently, we recorded an impairment charge of Ps.1,102.4 million (U.S.$116.3
million) to write down the 450 MHz assets to a fair value amounting to Ps.57.8
million (U.S.$6.1 million). Even though there was a limited market for the 450
MHz network equipment, our operations group determined that certain of these
assets, representing about 10% of the related fixed assets, could be redeployed
in the mobile wireless network and such assets continue to be depreciated. A
full provision for impairment was recorded for all other assets associated with
the project. The book value of the 450 MHz project fixed assets as of December
31, 1998 and December 31, 1999 is Ps.45.6 million (U.S.$4.8 million) and Ps.36.0
million (U.S.$3.8 million), respectively.
YEAR 2000 COMPLIANCE
The Year 2000 problem relates to computers, software and other equipment
that include programming code in which calendar year data is abbreviated to only
two digits. As a result of this design decision, some of these systems could
fail to operate or fail to produce correct results if "00" is interpreted to
mean 1900, rather than 2000.
We completed all required modifications or replacements (including
modification or replacement of mission critical systems and internal network
elements) in accordance with our Year 2000 enterprise-wide compliance program by
the end of October 1999.
Our transition to the Year 2000 was accomplished with no interruption in
service and with no billing problems. We did not experience any failures in our
mission critical systems. Four minor systems failures were corrected within the
first few days of 2000. No contingency plans were deployed on or after December
31, 2000.
From the inception of the Year 2000 project through December 31, 1999, in
connection with the Year 2000 project, we incurred pretax expenses of
approximately Ps. 63.3 million (U.S.$6.7 million) and made Ps. 24.7 million
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(U.S.$2.6 million) in capital expenditures. This cost was well below the
U.S.$16.9 million cost estimate we made in 1998. Funding for Year 2000
activities came primarily from cash flow from operations.
OTHER MATERIAL TRENDS AND CONTINGENCIES
Our financial condition and results of operations could also be materially
affected by the following events and developments:
NEW COMPETITION
As a direct result of the spectrum auctions organized by the COFETEL which
concluded in May 1998, we are now facing additional mobile wireless competition
operating in the 1.9 GHz (PCS) spectrum in our cellular territories and, in
2000, expect to face additional local telephony competition operating in the
3.4-3.7 GHz (Wireless Local Loop) spectrum. The specific consequences for
Iusacell of this new competition are difficult to predict. The experience of
other countries suggests that, although overall demand for wireless telephony
services will increase, prices will experience downward pressure, especially at
the time of market entry by the new competitors. To date, although new
competition has not caused us to decrease prices, we have not increased prices
since late March 1999.
PRICE INCREASES AND ROLLBACKS
We have attempted, and continue to attempt, to exercise price leadership in
the Mexican cellular market, with a strategy of having our prices keep pace with
inflation if economic and competitive conditions permit. During the first half
of 1997, we effectively implemented this strategy through weighted average price
increases of 14.8% in April 1997 for the per minute airtime price on our
contract and prepay plans, and 8.3% in May 1997 for the fixed monthly charge on
all our contract plans. In October 1997, however, we 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 we
adjusted airtime prices downward by 4.6% on a weighted average basis and in
November 1997 further decreased airtime charges on one of our low-end contract
plans by 1.0%, in each case in order to maintain competitiveness.
In late March 1998, we raised airtime prices approximately 7.9% on average
for contract plans and 13.6% for prepay customers. Because of market and
competitive conditions, however, we partially rolled back this increase in early
May 1998 for both contract and prepay customers and, in late May 1998, we
reversed the remainder of the price increase for contract plans. A 9.9% airtime
price increase for prepay customers, however, remained in effect.
In August 1998, we filed with the COFETEL to register tariffs that would
increase analog contract plan airtime prices in Region 9 by approximately 3% on
a weighted average basis. Competitive conditions caused us not to implement
price increase. However, in October 1998, our raised airtime prices for our
contract plans by approximately 8% on a weighted average basis. In late March
1999, we raised airtime prices on our contract plans by approximately 12% on a
weighted average basis and approximately 6% for prepay customers. These price
increases remained in place as the competition followed our lead.
Our revenues will be adversely affected to the extent that price increases
cannot keep pace with inflation.
REGULATORY DEVELOPMENTS
The Mexican authorities resolved several critical regulatory issues in 1998
and 1999 and will likely continue to resolve additional important regulatory
issues during 2000 which may have a material effect on Iusacell's financial
condition and results of operations.
Local Interconnection. On November 27, 1998, the COFETEL issued a
resolution which established the per minute interconnection rate for telephone
calls made from wireless customers to wireline customers at Ps.0.2573 per full
minute payable on a per second basis, which will be indexed on a monthly basis
for inflation as of October 1, 1998. In accordance with a September 1997
agreement with Telmex, this tariff was applied retroactively to June 1, 1997. We
had been paying an interconnection fee of Ps.0.31 per minute or fraction of a
minute. As a result of the retroactive application of this interconnection
tariff, we received a benefit of Ps.32.0 million (U.S.$3.4 million) in 1998.
The COFETEL declined to provide for any amount of reciprocity in the
interconnection fee payable by Telmex to wireless operators for interconnection
services that Iusacell provides Telmex for calls made by wireline customers
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to mobile wireless customers. As a result, we booked a net Ps.32.6 million
(U.S.$3.4 million) revenue reduction for the fourth quarter of 1998 and, in
early January 1999, filed for an administrative reconsideration of the local
interconnection ruling seeking, among other things, full interconnection
reciprocity for calls made by wireless customers to wireline customers.
The November 27, 1998 resolution is only applicable through December 31,
2000. We are currently discussing local interconnection terms for 2001 and
beyond with the COFETEL and Telmex. We seek, among other things, a reduction in
the per minute wireless to wireline interconnection rate from Ps.0.2573 per
minute to Ps.0.2000 per minute, indexed for inflation as of October 1, 1998, and
symmetrical (100%) reciprocity in the interconnection fee payable by Telmex to
Iusacell for wireline to fixed wireless interconnection.
Calling Party Pays. On November 27, 1998, the COFETEL also ruled that the
calling party pays modality would be implemented by May 1, 1999 as an option for
the wireless customer. CPP is a cellular telephony payment scheme similar to the
existing wireline payment scheme, where the wireline or fixed wireless party
that places a call to a cellular telephone, and not the cellular subscriber
receiving the call, will be billed for interconnection access, and the recipient
will not be billed for the airtime charges corresponding to that call. The
COFETEL established the CPP interconnection tariff at Ps.1.80 per minute or
fraction of a minute, which was to be indexed on a monthly basis for inflation
as of October 1, 1998, for calls from Telmex wireline customers to mobile
wireless customers. CPP would only apply to local calls and the mobile party
pays modality would continue to apply to incoming long distance and incoming
calls to a roamer.
In early January 1999, Telmex filed an injunction which suspended
temporarily the scheduled implementation of CPP. This preliminary injunction was
set aside by the Mexican courts in February 1999. Telmex then filed for a review
of the order setting aside the preliminary injunction. This motion has not yet
been decided.
In early January 1999, we filed with the COFETEL for an administrative
reconsideration of the CPP ruling, seeking, among other things:
- an increase in the CPP interconnection tariff to in excess of Ps.2.00
per minute, and
- interconnection reciprocity for any and all incoming calls from
wireline telephones to subscribers maintaining the mobile party pays
modality.
In April 1999, Telmex and the Cellular A-Band carriers completed
negotiating a new mobile wireless -- Telmex local wireline interconnection
agreement with the approval of the COFETEL. The calling party pays modality was
implemented on May 1, 1999. All mobile wireless customers were automatically
converted to CPP, with the right to revert to the mobile party pays modality.
The interconnection rate was frozen for six months at Ps.1.90 per minute or
fraction of a minute. Had the indexing established by the November 27, 1998
COFETEL resolution been applied, the rate for May 1999 would have been Ps.1.97
per minute or fraction of a minute. The price which Telmex may charge its
customers was frozen for six months at Ps.2.50 per minute or fraction of a
minute, plus Telmex's applicable per call local charge. This CPP interconnection
tariff and the Telmex surcharge were extended for another six-month period
through April 2000 at the same rates. Had the indexing established by the
November 27, 1998 COFETEL resolution been applied, the rate for November 1999
would have been Ps.2.17 per minute or fraction of a minute. Iusacell cannot
predict whether the COFETEL intends to extend the same tariff and surcharge at
the same rates for another defined period of time, apply indexing as required by
the November 27, 1998 resolution or apply lesser tariff and/or surcharge
increases.
Telmex greeted the May 1, 1999 implementation of CPP with an advertising
campaign critical of the high costs to wireline customers, whom they urged to
block CPP calls. But after a moderate decline in traffic during the first two
weeks of May 1999, we experienced a gradual increase in traffic over the last
two weeks of May 1999, slightly exceeding pre-CPP traffic levels by the end of
the month. In the first eight months of CPP operations, we believe that our call
traffic increased by more than 13% due to CPP, with an increase in the
percentage of total calls that were incoming calls from 39% to 43%. Recently,
Telmex reversed its opposition to CPP, publicly announcing support for CPP.
The overwhelming majority of our cellular customers have chosen not to opt
out of the CPP modality. We believe that the implementation of the CPP modality
has accelerated prepay subscriber growth and increased subscriber usage
throughout the Mexican wireless market and will continue to do so.
53
<PAGE> 57
In the event that CPP continues to cause a surge in cellular traffic, we
will likely experience improved revenue growth, but we may also need to incur
substantial additional capital expenditures to augment our capacity in order to
handle this greater traffic.
We are currently discussing with the COFETEL and Telmex the possibility of
extending the CPP modality to incoming national long distance calls and to
incoming local and national long distance calls received by subscribers who are
roaming within Mexico. If this proposal is accepted, the mobile party pays
modality would continue to apply only to incoming international long distance
calls.
Long Distance Interconnection. In a separate resolution issued on November
27, 1998, the COFETEL also established the interconnection tariff between long
distance and local wireline carriers at Ps.0.2573 per full minute payable on a
per second basis, which will be indexed on a monthly basis for inflation as of
October 1, 1998. With respect to international long distance calls, the COFETEL
eliminated the requirement that a Mexican long distance company pay 58% of the
incoming international settlement rate to the local telephone carrier
terminating a call.
Long Distance Concession. In December 1997, the COFETEL authorized a
modification of our concession to provide long distance services, modifying
coverage requirements and permitting the use of microwave and other non-fiber
technologies for transmission purposes. Together with fiber-swapping agreements
reached by Iusacell with two of our competitors, the modified concession permits
a more efficient, more technologically flexible long distance network and
eliminates more than U.S.$200 million in Iusacell capital expenditure
requirements over the next three years.
In 2000, 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
signaling 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. We are currently discussing the potential terms of
a negotiated settlement with Telmex on this and other issues, which would
involve payments to Telmex with a net present value in excess of U.S.$15
million. However, there can be no certainty that we will be able to reach a
negotiated settlement with Telmex or, if we can reach such a settlement, on what
terms.
Quality Standards. In October 1999, we entered into an agreement with the
COFETEL to maintain certain cellular quality standards measured in terms of
connection time, dropped calls and ineffective attempts. We currently meet these
quality standards. Failure to maintain these quality standards may result in
refund obligations to subscribers and other governmental sanctions. If our call
traffic grows at faster than expected levels, we may need to further accelerate
our capital expenditure program in order to augment our capacity and thereby
remain in compliance with the agreed quality standards.
Although we currently meet the COFETEL quality standards and although the
period in which the COFETEL may impose sanctions has not yet commenced, we
nevertheless have determined voluntarily to compensate our subscribers in Region
9 in light of perceived quality problems during 1999 due to network
digitalization and rapid traffic growth. Our subscribers who were subscribers as
of December 31, 1999 will receive:
- if a contract subscriber, 20% more included minutes in their contract
package in April and May 2000,
- or if a prepay customer, 5 free minutes.
We do not expect the financial impact of this voluntary compensation program to
be material.
54
<PAGE> 58
RESULTS OF OPERATIONS
The following table presents for the periods indicated the percentage
relationships which certain items bear to revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Revenues:
Cellular service revenues............. 74.1% 74.6% 82.5%
Other service revenues................ 8.8 12.1 7.1
----- ----- -----
Total service revenues.............. 82.9 86.7 89.6
Telephone equipment and other revenues 17.1 13.3 10.4
----- ----- -----
Total revenues...................... 100.0 100.0 100.0
Cost of sales:
Cost of services...................... 27.6 27.1 25.6
Cost of telephone equipment and other. 10.8 7.1 6.4
----- ----- -----
Total............................... 38.4 34.2 32.0
Gross Profit............................ 61.6 65.8 68.0
Operating expenses...................... 40.0 38.2 34.3
Depreciation & amortization............. 31.3 28.1 33.9
Project 450 non-cash writedown.......... -- 34.8 --
----- ----- -----
Operating income (loss)................. (9.7) (35.3) (0.2)
Other income (loss), net................ -- (4.7) 0.6
Interest financing cost (gain);
Interest expense, net................ 13.3 7.9 6.9
Foreign exchange (gain) loss, net.... 2.6 29.6 (3.8)
Gain on net monetary position........ (15.7) (24.0) (15.7)
----- ----- -----
Total............................... 0.2 13.5 (12.6)
Equity participation in net income (loss)
of associated companies.............. 8.5 0.9 (1.1)
Provision for equipment impairment...... (49.9) -- --
Income (loss) from continuing operations
before asset tax, employee profit
sharing, minority interest and (51.3) (43.2) 10.7
extraordinary item...................
Provision for asset tax, income tax and
employee profit sharing ............. 2.4 2.3 12.7
Minority interest....................... -- (0.2) (0.4)
Extraordinary item...................... -- -- 9.6
Loss from discontinued operation........ -- (0.7) (0.1)
----- ----- -----
Net income (loss)....................... (53.7)% (46.0)% 7.9%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Total revenues consist of cellular service revenues, revenues from other
services and telephone equipment and other revenues. Our cellular service
revenues are principally derived from the provision of cellular telephone
service in Mexico and also include revenues attributable to in-roaming and long
distance service revenue generated by our cellular subscribers. Other service
revenues consist of revenues from the provision of telecommunication services in
Mexico other than cellular, including long distance service revenue from
non-cellular subscribers and revenues from the provision of data transmission,
fixed local wireless, satellite transmission and IMTS services. 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 and, beginning in 1999, revenues from the sale of dark fiber
optic cable (which, before 1999, had been included in Other income). Revenues
attributable to out-roaming are passed through to the applicable host operator.
55
<PAGE> 59
The following table presents the source of our revenues for the years ended
December 31, 1999 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1999 CHANGE
----------------- ---------------- ------
PS. % PS. % %
------- ----- ------- ----- ------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS OF PESOS, EXCEPT PERCENTAGES)
Cellular service revenues.............. 2,367.2 74.6 3,469.7 82.5 46.6
Other service revenues................. 383.7 12.1 298.0 7.1 (22.3)
------- ----- ------- ----- ------
Total service revenues............... 2,750.9 86.7 3,767.7 89.6 37.0
Telephone equipment and other revenues. 421.5 13.3 437.0 10.4 3.7
------- ----- ------- ----- ------
Total revenues....................... 3,172.4 100.0 4,204.7 100.0 32.5
======= ===== ======= ===== =====
</TABLE>
Cellular Services. The table below presents cellular service revenues by
source for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998(1) 1999(1)
------------------- ------------------
PS. % PS. %
---------- ----- -------- ------
<S> <C> <C> <C> <C>
(IN MILLIONS OF PESOS, EXCEPT PERCENTAGES)
Airtime(2)....................... 849.2 35.9 1,367.0 39.4
Monthly fees..................... 1,079.4 45.6 1,406.2 40.5
Long distance.................... 198.3 8.4 413.4 11.9
Value-added services(3).......... 169.2 7.1 214.2 6.2
In-roaming....................... 63.3 2.7 66.9 1.9
Activation fees and other........ 7.8 0.3 2.0 0.1
---------- ----- -------- ------
Total cellular service revenues.. 2,367.2 100.0 3,469.7 100.0
========== ===== ======== ======
</TABLE>
- -------------------
(1) Figures reflect intercompany eliminations. These figures do not include
revenues derived from paging, local telephony or data transmission services
or from long distance services unrelated to cellular service.
(2) Airtime includes amounts billed to other carriers for incoming minutes
under CPP starting May 1, 1999. Incoming and outgoing airtime is charged on
a per-minute basis for both peak (Monday to Friday, 8:00 a.m. to 10:00
p.m.) and non-peak airtime.
(3) Includes fees for value-added services, such as call waiting, call
transfer, emergency service, secretarial service and three-way calling, and
revenues from premiums for activation surety bonds, insurance-related
charges payable by subscribers, rural and public telephony and Iusacell's
cellular magazine. Does not include charges for related airtime. Customers
using value-added services such as news, weather, sports and entertainment
reports are charged only for airtime. These revenues are therefore included
in airtime.
We had 1,322,798 and 755,375 cellular subscribers at December 31, 1999 and
1998, respectively. Prepay subscribers increased by 102.9% from 478,361
subscribers, or 63.3% of total subscribers, at December 31, 1998 to 970,509
subscribers, or 73.4% of total subscribers, at December 31, 1999. A prepay
customer is included as a customer if, at the end of the reporting period, such
customer's telephone number remains activated. Contract subscribers increased by
27.2% from 277,014 subscribers, or 36.7% of total subscribers, at December 31,
1998, to 352,289 subscribers, or 26.6% of total subscribers, at December 31,
1999.
Cellular service revenues increased by 46.6% to Ps.3,469.7 million
(U.S.$366.0 million) in 1999 from Ps.2,367.2 million (U.S.$249.7 million) in
1998 and represented 82.5% and 74.6% of total revenues in 1999 and 1998,
respectively. Revenues increased primarily as a result of subscriber growth, the
migration of approximately 99,000 analog contract subscribers to digital service
(which resulted in an increase in average usage by migrated customers), calling
party pays (which resulted in a significant increase in incoming calls traffic
and contributed to the growth in prepay subscribers) and greater usage of long
distance services by our cellular subscribers. This increase was offset in part
by the decline in average monthly MOUs and nominal average monthly cellular
revenue per subscriber described below.
Monthly fees from contract customers increased 30.3% to Ps.1,406.2 million
(U.S.$148.3 million) in 1999 from Ps.1,079.4 million (U.S.$113.9 million) in
1998 because of the increase in contract subscribers. Airtime revenues increased
61.0% to Ps.1,367.0 million (U.S.$144.2 million) in 1999 from Ps.849.2 million
(U.S.$89.6 million) in 1998 for the reasons described in the preceding
paragraph. Long distance cellular revenues increased 108.5% to
56
<PAGE> 60
Ps.413.4 million (U.S.$43.6 million) in 1999 from Ps.198.3 million (U.S.$20.9
million) in 1998 mainly because of growth in usage across all our regions.
Average monthly MOUs for 1999 (excluding incoming calls only prepay
customers) were 77, a decrease of 11.5% compared to the monthly average of 87
MOUs in 1998. This decline in MOUs was largely due to the significant increase
in the number of our prepay customers, who generate substantially lower average
MOUs than contract customers. However, this general decline masks the 8.6%
increase in average monthly MOUs among contract subscribers in 1999 compared to
1998.
Nominal average monthly cellular revenue per subscriber (excluding incoming
calls only prepay customers) declined 4.2% to Ps. 346.0 (U.S.$36.5) in 1999 from
Ps.361.0 (U.S.$38.1) in 1998. The reasons for this decline are primarily the
same as those noted to explain the decline of average monthly MOUs. As with
average monthly MOUs, this general decline masks the 16.9% increase in average
monthly cellular revenue per subscriber among contract subscribers in 1999
compared to 1998.
Contract subscriber churn increased to an average monthly level of 2.96% in
1999 from 2.58% in 1998. Billing system implementation problems contributed to a
delay in recognizing churn from prior periods, which we chose to recognize in
1999.
Other Services. Other service revenues decreased by 22.3% to Ps.298.0
million (U.S.$31.4 million) in 1999 from Ps.383.7 million (U.S.$40.5 million) in
1998, and represented 7.1% and 12.1% of total revenues in 1999 and 1998,
respectively. This decrease was principally due to the fewer subscribers and
consequential lower revenues in our satellite transmission, 450 MHz fixed local
wireless and IMTS businesses, and a more than 80% decline in data transmission
revenues, offset in part by increased long distance revenues from our mid-sized
business and residential non-cellular long distance customers.
Telephone Equipment and Other. Telephone equipment and other revenues
increased 3.7% to Ps.437.0 million (U.S.$46.1 million) in 1999 from Ps.421.5
million (U.S.$44.5 million) in 1998. This increase was primarily due to the Ps.
60.4 million (U.S. $6.4 million) in revenues from the sale of dark fiber optic
cable which more than offset a sharp decline in revenues from sales of handsets
and accessories. We believe that the large number of existing handsets and
accessories available in the market created lower demand for new handsets and
accessories, particularly among our prepay customers.
COST OF SALES
Our cost of sales includes cost of services, cost of telephone equipment
and other costs. Total cost of sales increased 23.7% to Ps.1,343.7 million
(U.S.$141.7 million) in 1999 from Ps.1,086.4 million (U.S.$114.6 million) in
1998. As a percentage of total revenues, cost of sales decreased to 32.0% in
1999 from 34.2% in 1998.
Cost of Services. Cost of services includes taxes and fees on revenues
payable to the Mexican government, interconnection costs, technical costs such
as maintenance, repair costs, lease expenses, salaries of technical personnel
and electricity. Cost of services increased 24.8% to Ps.1,074.2 million
(U.S.$113.3 million) in 1999 from Ps.860.8 million (U.S.$90.8 million) in 1998.
This increase was mainly due to the 46.6% increase in cellular service revenues,
which resulted in higher overall (i) taxes and fees payable to the Mexican
government and (ii) Telmex interconnection fees. This increase was offset in
part by lower fees than would otherwise have been payable to the Mexican
government as a result of a change in the methodology by which Iusacell
determines the revenue base upon which it calculates the participation fee of
the Mexican government. Beginning in January 1999, Iusacell does not include in
that revenue base that portion of cellular service monthly fees attributable to
handset acquisition costs. As a percentage of service revenues, cost of services
decreased from 31.3% for 1998 to 28.5% for 1999 primarily because of cost
improvement actions.
Cost of Telephone Equipment and Other. Cost of telephone equipment and
other includes that portion of handset and accessory costs that is not
capitalized, handset inventory obsolescence charges and the cost of dark fiber
optic cable sold. Cost of telephone equipment and other costs increased by 19.5%
to Ps.269.5 million (U.S.$28.4 million) in 1999 from Ps.225.5 million (U.S.$23.8
million) in 1998 primarily due to the increase in telephones sold to prepay
program gross additions, the prepay handset costs associated with the 2 for 1
promotion for contract customers (in which a new contract customer also receives
a free prepay phone) and an increase in handset inventory obsolescence charges.
As a percentage of telephone equipment and other revenues, the cost of telephone
equipment and other increased to 61.7% in 1999 from 53.5% in 1998. The cost of a
cellular handset given to a
57
<PAGE> 61
contract customer is amortized over 18 months, the average length of our
cellular contract, instead of being immediately expensed in the period in which
the customer received the telephone.
OPERATING EXPENSES
Operating expenses increased 19.4% to Ps.1,444.8 million (U.S.$152.4
million) in 1999 from Ps.1,210.5 million (U.S.$127.7 million) in 1998. As a
percentage of total revenues, operating expenses decreased to 34.3% in 1999 from
38.2% in 1998. Sales and advertising expenses increased by 11.1% from Ps.829.5
million (U.S.$87.5 million) in 1998 to Ps.921.9 million (U.S.$97.2 million) in
1999, primarily because of increased commissions resulting from higher sales and
revenue-related increases in advertising. General and administrative expenses
increased by 37.0% to Ps.522.9 million (U.S.$55.2 million) in 1999 from Ps.381.7
million (U.S.$40.2 million) in 1998, driven primarily by extraordinary expenses
related to the Year 2000 project and reserves related to certain litigation with
vendors. In accordance with Mexican GAAP, until September 1998, certain
pre-operating expenses, primarily related to Project 450, were capitalized
rather than expensed as under US GAAP. In September 1998, under Mexican GAAP,
Iusacell wrote off all capitalized pre-operating expenses accumulated as of that
date as a charge against current operations.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased by 59.6% to Ps.1,425.0
million (U.S.$150.3 million) in 1999 from Ps.892.9 million (U.S.$94.2 million)
in 1998, excluding the Project 450 non-cash writedown in 1998 of Ps.1,102.4
million (U.S.$116.3 million). The increase was primarily due as a result of
completing the initial phase deployment of the new Lucent Technologies analog
and digital network and making additional investments to meet the capacity and
coverage requirements for continued growth. Additionally, the digitalization of
the contract subscriber base resulted in greater amortization expenses driven
mainly by increased purchases of more expensive digital handsets.
OPERATING LOSS
We recorded an operating loss of Ps.8.9 million (U.S.$0.9 million) in 1999
as compared to an operating loss of Ps.1,119.8 million (U.S.$118.1 million) in
1998. The net loss in 1998 includes the impact of the Ps.1,102.4 million
(U.S.$116.3 million) Project 450 non-cash writedown.
INTEGRAL FINANCING GAIN
We recorded an integral financing gain of Ps.529.5 million (U.S.$55.9
million) in 1999 compared to an integral financing loss of Ps.427.8 million
(U.S.$45.1 million) in 1998. This difference was principally due to a foreign
exchange gain of Ps.159.1 million (U.S.$16.8 million) in 1999 as compared to a
foreign exchange loss of Ps.939.5 million (U.S.$99.1 million) in 1998. The 1999
foreign exchange gain resulted from the appreciation of the peso against the
U.S. dollar. Gain on monetary position decreased by 13.2% to Ps.661.8 million
(U.S.$69.8 million) in 1999 from Ps.762.6 million (U.S.$80.4 million) in 1998
primarily due to a lower period-over-period inflation as measured by changes in
the INPC, 12.3% in 1999 compared to 18.6% in 1998. Net interest expense
increased by 16.1% to Ps.291.4 million (U.S.$30.7 million) in 1999 from Ps.
$250.9 million (U.S.$26.5 million) in 1998 primarily due to higher outstanding
debt. This trend will continue in 2000 as we experience the full impact of the
December 1999 issuance by New Iusacell of U.S.$350.0 million of senior notes due
2006.
NET INCOME
As a result of the factors described above, our net income was Ps.333.8
million (U.S.$35.2 million) in 1999 as compared to a net loss of Ps.1,457.1
million (U.S.$153.7 million) in 1998. The net loss in 1998 includes the impact
of the Ps.1,102.4 million (U.S.$116.3 million) Project 450 non-cash writedown.
58
<PAGE> 62
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
The following table presents the source of our revenues for the years ended
December 31, 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 %
------------------- -------------------
PS. % PS. % CHANGE
------- ----- ------- ----- ------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS OF PESOS, EXCEPT PERCENTAGES)
Cellular service revenues................. 1,836.8 74.1 2,367.2 74.6 28.9
Other service revenues.................... 219.0 8.8 383.7 12.1 75.3
Total service revenues.................. 2,055.8 82.9 2,750.9 86.7 33.8
Telephone equipment and other revenues.... 422.8 17.1 421.5 13.3 (0.3)
------- ----- ------- ----- ------
Total revenues.......................... 2,478.6 100.0 3,172.4 100.0 28.0
======= ===== ======= ===== ======
</TABLE>
Cellular Services. The table below presents cellular service revenues by
source for the years ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997(1) 1998(1)
------------------ -------------------
PS. % PS. %
--------- ----- ------- --------
<S> <C> <C> <C> <C>
(IN MILLIONS OF PESOS, EXCEPT PERCENTAGES)
Airtime(2)....................... 687.7 37.4 849.2 35.9
Monthly fees..................... 819.1 44.6 1,079.4 45.6
Long distance.................... 162.3 8.8 198.3 8.4
Value-added services(3).......... 95.2 5.2 169.2 7.1
In-roaming....................... 70.9 3.9 63.3 2.7
Activation fees and other........ 1.6 0.1 7.8 0.3
--------- ----- ------- --------
Total cellular service revenues.. 1,836.8 100.0 2,367.2 100.0
========= ===== ======= ========
</TABLE>
- -------------------
(1) Figures reflect intercompany eliminations. These figures do not include
revenues derived from paging, local telephony or data transmission services
or from long distance services unrelated to cellular service.
(2) Incoming and outgoing airtime is charged on a per-minute basis for both
peak (Monday to Friday, 8:00 a.m. to 10:00 p.m.) and non-peak airtime.
(3) Includes fees for value-added services, such as call waiting, call
transfer, emergency service, secretarial service and three-way calling, and
revenues from premiums for activation surety bonds, insurance-related
charges payable by subscribers, rural and public telephony and Iusacell's
cellular magazine. Does not include charges for related airtime. Customers
using value-added services such as news, weather, sports and entertainment
reports are charged only for airtime. These revenues are therefore included
in airtime.
We had 755,375 and 400,123 cellular subscribers at December 31, 1998 and
1997, respectively. Prepay subscribers increased by 139.0% from 200,159
subscribers, or 50.0% of total subscribers, at December 31, 1997 to 478,361
subscribers, or 63.3% of total subscribers, at December 31, 1998. Contract
subscribers increased by 38.5% from 199,964 subscribers, or 50.0% of total
subscribers, at December 31, 1997 to 277,014, or 36.7% of total subscribers at
December 31, 1999.
Cellular service revenues increased by 28.9% to Ps.2,367.2 million
(U.S.$249.7 million) in 1998 from Ps.1,836.8 million (U.S.$193.8 million) in
1997 and represented 74.6% and 74.1% of total revenues in 1998 and 1997,
respectively. Revenues increased primarily as a result of a larger subscriber
base, offset in part by the impact of a 17.1% decrease in average monthly MOUs
and a 22.2% decrease in nominal average monthly cellular revenue per subscriber
in 1998 as compared to 1997.
Monthly fees from contract customers increased 31.8% to Ps.1,079.4 million
(U.S.$113.9 million) in 1998 from Ps.819.1 million (U.S.$86.4 million) in 1997
because of the increase in contract subscribers. Airtime revenues also increased
23.5% to Ps.849.2 million (U.S.$89.6 million) in 1998 from Ps.687.7 million
(U.S.$72.5 million) in 1997 mainly because of higher usage resulting from the
increase in the subscriber base. Long distance cellular revenues
59
<PAGE> 63
increased 22.1% to Ps.198.3 million (U.S.$20.9 million) in 1998 from Ps.162.3
million (U.S.$17.1 million) in 1997 mainly because of increased traffic from new
and existing cellular subscribers.
Average monthly MOUs for 1998 were 87, a decrease of 17.1% compared to the
monthly average of 105 MOUs in 1997. This decline in MOUs was largely due to the
significant increase in the number of Iusacell's prepay customers, who generate
substantially lower average MOUs than contract customers. In addition, Iusacell
has experienced a trend toward lower MOUs as Iusacell's expanded customer base
increasingly includes subscribers who tend to generate fewer MOUs.
Nominal average monthly cellular revenue per subscriber declined 22.2% to
Ps.361 (U.S.$38.1) in 1998 from Ps.464 (U.S.$49.0) in 1997. This decline was
primarily due to the same reasons noted to explain the decline of average
monthly MOUs, and to a shift in usage mix towards discounted incoming calls
(discounts were implemented in October 1997).
Contract subscriber churn declined to an average monthly level of 2.58% for
1998 from 2.94% for 1997. This decline reflects improved customer service and
the implementation of special programs specifically designed to enhance customer
retention and loyalty. It also reflects the effect of billing system
implementation problems, which resulted in the recognition in 1999 of some churn
relating to 1998. See " -- Year Ended December 31, 1999 Compared to Year Ended
December 31, 1998 -- Revenues."
Other Services. Other service revenues increased by 75.2% to Ps.383.7
million (U.S.$40.5 million) in 1998 from Ps.219.0 million (U.S.$23.1 million) in
1997, and represented 12.1% and 8.8% of total revenues in 1998 and 1997,
respectively. This increase was principally due to increased traffic from new
and existing mid-sized business long distance customers.
Telephone Equipment and Other. Telephone equipment and other revenues
decreased 0.3% to Ps.421.5 million (U.S.$44.5 million) in 1998 from Ps.422.8
million (U.S.$44.6 million) in 1997. This decrease was primarily due to lower
out-roaming revenues.
COST OF SALES
Total cost of sales increased 13.9% to Ps.1,086.4 million (U.S.$114.6
million) in 1998 from Ps.953.4 million (U.S.$100.6 million) in 1997. As a
percentage of total revenues, cost of sales decreased to 34.2% in 1998 from
38.4% in 1997.
Cost of Services. Cost of services increased 25.6% to Ps.860.8 million
(U.S.$90.8 million) in 1998 from Ps.685.0 million (U.S.$72.3 million) in 1997.
This increase was mainly due to the 22.3% increase in cellular service revenues
which resulted in higher overall taxes and fees payable to the Mexican
government and Telmex interconnection fees, offset in part by a 21.9% decrease
in long-distance interconnection costs resulting from a greater use of our own
expanded long distance network. As a percentage of service revenues, cost of
services decreased from 33.3% for 1997 to 31.3% for 1998 mainly because of cost
improvement actions and a retroactive reduction in Telmex interconnection fees.
Cost of Telephone Equipment and Other. Cost of telephone equipment and
other costs decreased by 16.0% to Ps.225.5 million (U.S.$23.8 million) in 1998
from Ps.268.3 million (U.S.$28.3 million) in 1997 primarily due to lower prepay
handset costs. As a percentage of telephone equipment and other revenues, cost
of telephone equipment and other decreased to 53.5% in 1998 from 63.5% in 1997.
The cost of a cellular handset given to a contract customer is amortized over 18
months, the average length of our cellular contract, instead of being expensed
in the period in which the customer received the telephone.
OPERATING EXPENSES
Operating expenses increased 22.2% to Ps.1,210.5 million (U.S.$127.7
million) in 1998 from Ps.990.9 million (U.S.$104.5 million) in 1997. As a
percentage of total revenues, operating expenses decreased to 38.2% in 1998 from
40.0% in 1997. Sales and advertising expenses increased by 34.2% from Ps.617.9
million (U.S.$65.2 million) in 1997 to Ps.829.5 million (U.S.$87.5 million) in
1998, primarily because of increased competition for customer growth and the
launch of our digital services. General and administrative expenses increased
2.1% to Ps.381.7 million (U.S.$40.3 million) in 1998 from Ps.373.0 million
(U.S.$39.3 million) in 1997, primarily due to higher salaries and benefits and
general operating costs. In accordance with Mexican GAAP, until September 1998,
we
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capitalized certain pre-operating expenses, primarily related to Project 450,
rather than expense them as under U.S. GAAP. In September 1998, under Mexican
GAAP, we wrote off all capitalized pre-operating expenses accumulated as of that
date as a charge against current operations.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses, including the Project 450 non-cash
writedown, increased by 157.4% to Ps.1,995.3 million (U.S.$210.5 million) in
1998 from Ps.775.3 million (U.S.$81.8 million) in 1997. This significant
increase was primarily due to the Ps.1,102.4 million (U.S.$116.3 million)
non-cash writedown of the carrying value of our investment in the 450 MHz fixed
wireless project.
OPERATING LOSS
We recorded an operating loss of Ps.1,119.8 million (U.S.$118.1 million) in
1998 as compared to an operating loss of Ps.241.0 million (U.S.$25.4 million) in
1997. Excluding the non-cash writedown for the 450 MHz project, the 1998
operating loss would have been Ps.17.4 million (U.S.$1.8 million).
OTHER INCOME
Other income of Ps.149.0 million (U.S.$15.7 million) in 1998 primarily
represents a gain from the Mexican GAAP accounting for the fiber optic cable
swap agreement with Bestel, S.A. de C.V.
INTEGRAL FINANCING COST
Integral financing cost was Ps.427.8 million (U.S.$45.1 million) in 1998
compared to a cost of Ps.5.2 million (U.S.$0.5 million) in 1997 due principally
to a foreign exchange loss of Ps.939.5 million (U.S.$99.1 million) in 1998
compared to a foreign exchange loss of Ps.64.6 million (U.S.$6.8 million) in
1997, resulting from the effect of the higher peso devaluation in 1998 as
compared with 1997. Net interest expense decreased by 24.1% to Ps.250.9 million
(U.S.$26.5 million) in 1998 from Ps.330.7 million (U.S.$34.9 million) in 1997
because we were able to capitalize Ps.138.9 million (U.S.$14.7 million) of
interest related to investments in fixed assets. Monetary gain increased by
95.6% to Ps.762.6 million (U.S.$80.4 million) in 1998 from Ps.390.0 million
(U.S.$41.1 million) in 1997 primarily due to the impact of period-over-period
inflation of 18.6% on the higher net monetary liability position in 1998
resulting from the July 1997 refinancing and the 1998 UBS AG bridge loan in
anticipation of the Eximbank Facility described below under " -- Liquidity and
Capital Resources -- Liquidity."
PROVISION FOR EQUIPMENT IMPAIRMENT
In 1997, we recorded a provision of Ps.1,236.3 million (U.S.$130.4 million)
under Mexican GAAP as a charge to income to reduce the value of our
then-existing analog communications network equipment to fair value. See Note 20
to the Consolidated Financial Statements.
For U.S. GAAP purposes, the Ps.1,236.3 million impairment provision was
determined in accordance with the Statement of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-lived Assets and Assets to be
Disposed of" ("SFAS 121"). During the year ended December 31, 1997, changes in
circumstances indicated that the carrying value of Iusacell's analog
telecommunications network equipment might not be recoverable. These
circumstances included:
- Customer and marketing requirements for better voice quality, more and
improved value-added services and reduction of wireless fraud, all of
which were more viable with a digital platform. These requirements
accelerated the adoption of digital technology in the Mexican wireless
market.
- The view of Bell Atlantic, which assumed management control of
Iusacell in February 1997, that we would need to adopt digital
technology in order to remain competitive and that CDMA was the best
technology available to us.
- The plans developed in 1997 by Telmex, the incumbent carrier, and
other wireless carriers to launch digital technology in Mexico in
1998.
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- Our decision to participate in the digital PCS frequencies auctions
that were announced in November 1997. Effectively, the auctions were
contributing to the growing market pressures for a wireless service
change from analog to digital technology throughout Mexico.
- An increase in our subscriber base during 1997, such that our analog
network was operating at close to full capacity by November 1997. The
CDMA digital network has the potential to increase capacity by six to
ten times compared with an analog network with comparable equipment.
In view of these changes in circumstances, we estimated the future cash
flows, undiscounted and without interest, of our then-existing analog
communications network equipment based on its remaining life and considering the
eventual disposition of the equipment under the terms of a December 1997
agreement with Lucent Technologies to replace such equipment. At the time of
that assessment, the sum of the undiscounted future cash flows was less than the
book value of the analog equipment.
Having determined that our then-existing analog communications network
equipment had been impaired, we then used the measurement criteria in SFAS 121
to determine the amount of the impairment. Because the analog network was our
principal fixed asset and integral to our operations, we believe that the asset
does not qualify as an asset to be disposed of in accordance with SFAS 121, but
rather an asset to be held and used. Consequently, for U.S. GAAP purposes, we
reduced the value of our investment in the analog communications network
equipment to its fair value and recorded such write-down as a charge to
operating expenses. Fair value was determined based on an independent appraisal.
Furthermore, such fair value approximates the amount of the trade-in credits
that were granted pursuant to the agreement with Lucent Technologies. See Note
20 to the Consolidated Financial Statements.
LOSS FROM DISCONTINUED OPERATIONS
Loss from discontinued operations of Ps.20.7 million (U.S.$2.2 million) in
1998 represents the loss recognized as a result of our discontinuation of our
Cellular Solutions de Mexico operation. See Note 19 to the Consolidated
Financial Statements.
NET LOSS
As a result of the factors described above, our net loss was Ps.1,457.1
million (U.S.$153.7 million) in 1998 as compared to a net loss of Ps.1,332.6
million (U.S.$140.6 million) in 1997. Excluding the Project 450 non-cash
writedown, Iusacell's net loss for 1998 would have been Ps.354.7 million
(U.S.$37.4 million).
INCOME TAX, ASSET TAX AND EMPLOYEES' PROFIT SHARING
Prior to January 1, 1999, we prepared our tax returns on a fully
consolidated basis for all but three of our subsidiaries, benefiting from the
ability to offset losses incurred by some subsidiaries against the gains of
others within the consolidated group. We only consolidated 60% of Iusatel, S.A.
de C.V. Iusatelecomunicaciones, S.A. de C.V. and Infotelecom, S.A. de C.V. for
tax purposes because they were not wholly owned subsidiaries. Beginning January
1, 1999, as a result of Mexican income tax law amendments, we must limit our tax
consolidation to 60% of all our subsidiaries, except for five entities (Iusatel,
S.A. de C.V., Iusatelecomunicaciones, S.A. de C.V., Infotelecom, S.A. de C.V.,
Iusacell PCS, S.A. de C.V. and Punto-a-Punto Iusacell, S.A. de C.V.) which will
not be included in our consolidated tax return (although they are consolidated
for financial reporting purposes), because we do not hold at least 51% of the
voting shares of such subsidiaries. We filed an injunctive action (amparo)
against the new income tax law amendments on the basis that the law is
unconstitutional. This injunctive action was recently rejected, but we have
filed for a review (recurso de revision).
Related changes to the Mexican income tax law, together with the
recapitalization and restructuring plan completed in August 1999 that resulted
in New Iusacell owning more than 50% of outstanding Old Iusacell shares, may
also have negatively and materially impacted the ability of Old Iusacell to
continue to prepare consolidated tax returns for itself and most of its
subsidiaries and thereby apply its net operating loss carryforwards against its
subsidiaries' profits. We are currently analyzing the financial impact of these
changes in law and ways to minimize their impact. See Note 12 to the
Consolidated Financial Statements.
Iusacell and its subsidiaries pay an alternative net asset tax which is
levied on the average value of substantially all assets less certain
liabilities. This tax, which is 1.8% annually, is required to be paid if the
amount of the asset
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tax exceeds the computed income tax liability. We provided for Ps.60.4 million
(U.S.$6.4 million), Ps.72.1 million (U.S.$7.6 million) and Ps.132.6 million
(U.S.$14.0 million) of net asset taxes for 1997, 1998 and 1999, respectively.
These taxes may be applied in 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, we paid no income taxes in 1997, 1998 and 1999
and paid the asset taxes specified above. See Note 12 to the Consolidated
Financial Statements for a discussion of our carry forward tax losses.
While we have no employees at the holding company level, our 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).
There was no statutory profit-sharing in any periods presented, except for
Ps.0.5 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As a part of the equity recapitalization and restructure of Iusacell
completed in August 1999, New Iusacell acquired 99.5% of the capital stock of
Old Iusacell on August 10, 1999. Prior to that time, New Iusacell had no
operations, indebtedness or liabilities and nominal assets. As a result of a
second exchange offer launched in the United States by New Iusacell for the
remaining Old Iusacell ADSs and completed on February 29, 2000, New Iusacell now
holds 99.9% of the capital stock of Old Iusacell.
GENERAL
We believe that funds from operating activities, existing export credit
agency financing, other vendor financing, and the net proceeds from the debt and
equity offerings in 1999, will be adequate to meet our debt service and
principal amortization requirements, working capital requirements and capital
expenditure needs for our existing businesses for the first half of 2000,
although we cannot provide any assurance in this regard. In 2000, we will seek
to raise U.S.$34.5 million in vendor financing to acquire microwave transmission
equipment, attempt to monetize some of our radio tower assets within the
restrictions imposed by our debt covenants pursuant to an agreement signed in
December 1999 with a Mexican affiliate of American Tower Corporation and
consider equity capital markets financings in Mexico and abroad. We expect that
these transactions will allow us to meet our funding needs for our existing
businesses through 2001. However, we cannot assure you that we will be able to
complete any of these transactions or that the proceeds of these transactions
will be sufficient to meet our needs. Our capital expenditure needs and working
capital requirements to build-out and operate concessions to provide wireless
telephone services in Region 1 and Region 4 over the PCS E-Band will require a
significant amount of additional funding in 2000 and beyond. We are seeking to
obtain this financing from equipment vendors and other sources, although we may
use up to U.S.$10.0 million of cash from operations to fund the initial PCS
buildout. Our future operating performance and ability to service and repay our
indebtedness will be subject to future economic and competitive conditions and
to financial, business and other factors, many of which are beyond our control.
CAPITAL EXPENDITURES
We expect to make substantial capital expenditures to upgrade network
infrastructure, build out cellular, long distance, wireless local telephony and
paging networks, build out PCS networks in Region 1 and Region 4, enhance our
new billing systems, 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 debt and/or equity
financing.
Total capital expenditures in 1997 were U.S.$87.7 million, excluding
U.S.$0.5 million in capitalized interest. Total capital expenditures in 1998
increased substantially because of the accelerated deployment of the CDMA
digital network and were U.S.$248.0 million, excluding U.S.$49.8 million for the
acquisition of PCS frequency concessions in Regions 1 and 4, U.S. $66.4 million
in Lucent Technologies trade-in credits and U.S.$12.5 million in capitalized
interest. Total capital expenditures in 1999 were U.S.$144.5 million, not
including Lucent Technologies trade-in credits in the amount of U.S.$19.2
million and capitalized interest in the amount of U.S.$17.1 million. 1997 and
1998 capital expenditures data do not consider the effect of inflation. The 1997
and 1998 capital expenditure amounts were derived using historical pesos
translated at the exchange rate in effect at the end of the corresponding year.
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We expect capital expenditures for 2000, 2001 and 2002 to total
approximately U.S.$495.0 million, not including amounts in respect of
capitalized interest. We expect to invest up to U.S.$225.2 million during 2000.
In 2000, approximately U.S.$175.0 million will be allocated to the development
of the wireless network. The balance of U.S.$50.2 million primarily will be:
- invested in developing long distance, paging and other networks,
- used to fund non-network infrastructure, such as the further
development and deployment of the new wireless billing system, the
expansion of prepay platform capacity and implementation of prepay
roaming, and the upgrade of other management information systems,
- used to construct new and remodel existing customer sales and service
centers, and
- invested to enable Iusacell to provide mobile internet services.
We expect capital expenditures for 2001 and 2002 to total approximately
U.S.$140.0 million and U.S.$130.0 million, respectively. For an explanation of
the items included in capital expenditures, see Item 3A, "Selected Financial
Data -- Notes to the Selected Consolidated Financial and Operating Information
- -- Footnote (10)."
We will allocate additional funds to the build-out and operation of
concessions to provide wireless telephony over the PCS E-Band in Region 1 and
Region 4. We expect that capital expenditures to build out our wireless network
in northern Mexico will not exceed U.S.$55.0 million in 2000 and 2001.
In December 1997, the COFETEL approved the modification of our long
distance concession, substantially reducing the coverage and technological
investment requirements. We estimate that full compliance with these
requirements will require approximately U.S.$110.0 million in capital
expenditures, of which approximately U.S.$85.0 million had already been invested
prior to 1999, approximately U.S.$11.1 million was invested in 1999,
approximately U.S.$9.0 million will be invested in 2000 and 2001 and
approximately U.S.$5.0 million will be invested thereafter.
If we are successful in acquiring additional cellular concessions in
Mexico, we may be required to increase our capital expenditure budget. We would
expect to finance these capital expenditures through a combination of debt and
vendor financing, equity capital and operating cash flow.
LIQUIDITY
General. Except for payment of principal and interest on the Senior Notes
due 2006 issued in December 1999, New Iusacell does not currently have
significant liquidity requirements. Old Iusacell's debt agreements currently
prohibit Old Iusacell and its subsidiaries from paying dividends or otherwise
making cash available to New Iusacell. While such restrictions exist, we expect
to meet New Iusacell's liquidity requirements with funds provided by our recent
debt offering, future equity and debt offerings, and capital contributions from
our principal shareholders. Our principal shareholders are under no obligation
to make capital contributions to us.
Total New Iusacell debt, including trade notes payable, was Ps.7,953.3
million (U.S.$838.9 million) at December 31, 1999. At December 31 1999, New
Iusacell's average cost of outstanding debt was approximately 11.3%, with a
remaining average maturity of approximately 4.5 years. At December 31, 1999, New
Iusacell's debt to total capital ratio was 60.3%.
Old Iusacell's liquidity has been provided by cash from operations, short
and long-term borrowings, vendor financing and capital contributions. Total Old
Iusacell debt, including trade notes payable, was Ps.4,602.4 million (U.S.$485.5
million) outstanding at December 31, 1999, 5.1% higher than the Ps.4,377.9
million (U.S.$461.8 million) outstanding at December 31, 1998 (using historical
pesos translated at the exchange rate in effect at the end of 1998). At December
31, 1999, Old Iusacell's average cost of outstanding debt was approximately
8.6%, with a remaining average maturity of approximately 2.7 years. At December
31, 1999, Old Iusacell's debt to total capital ratio was 46.8% as compared to
55.5% at December 31, 1998 and 40.2% at December 31, 1997.
All of New Iusacell and Old Iusacell's debt outstanding at December 31,
1999 was U.S. dollar-denominated and only partly hedged against foreign exchange
risk. See " -- Hedging" and Item 11, "Quantitative and Qualitative Disclosures
About Market Risk."
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Senior Notes due 2006. In December 1999, New Iusacell issued U.S.$350.0
million of 14-1/4% senior notes due 2006 under an indenture dated as of December
16, 1999 among New Iusacell, Bell Atlantic Corporation and the Bank of New York,
as trustee, which we refer to as the New Iusacell Indenture. U.S.$133.6 million
of the proceeds from the offering were deposited in a security account for
purposes of payment of the first six semiannual installments of interest
thereon. The senior notes are subject to be exchanged for registered notes,
which will also be governed by the New Iusacell Indenture. Under certain
circumstances involving a change of control of New Iusacell or Old Iusacell,
Bell Atlantic, jointly and severally with New Iusacell, will be required to make
an offer to repurchase the Senior Notes due 2006.
Old Iusacell Notes. In July 1997, Old Iusacell issued U.S.$150.0 million of
10% Senior Notes due 2004 under an indenture dated as of July 25, 1997 among Old
Iusacell, the subsidiaries of Old Iusacell guaranteeing such notes and First
Union National Bank, as trustee, which we refer to as the Old Iusacell
Indenture, substantially all of which were exchanged in January 1998 for 10%
Series B Senior Notes due 2004 which are also governed by the Old Iusacell
Indenture, which we refer to as, whether or not exchanged, the 10% Senior Notes.
The Old Iusacell Indenture limits the ability of Old Iusacell to make
dividend payments to New Iusacell. In addition, it restricts the ability of Old
Iusacell and its principal subsidiaries to incur indebtedness.
In connection with the Eximbank Facilities described below, Old Iusacell
was required, under the terms of the Old Iusacell Indenture, to equally and
ratably secure the holders of the Old Iusacell notes by a second priority pledge
of the cellular concessions, certain equipment and supplies.
The Senior Credit Facility. In July 1997, Old Iusacell entered into a
senior credit facility which consists of:
- a five-year senior secured amortizing term facility in the principal
amount of U.S.$125.0 million, all of which was drawn down in July
1997, and
- a five-year senior secured revolving credit facility in an aggregate
principal amount of U.S.$100.0 million.
By July 24, 1998, the full U.S.$100.0 million had been drawn under the
revolving credit facility and on that date the revolving credits were converted
to an amortizing term loan.
Old Iusacell's obligations under the Senior Credit Facility are
unconditionally guaranteed, jointly and severally, by the principal operating
and concession-holding subsidiaries of Old Iusacell and are secured by the
pledge of substantially all capital stock and equity interests held by Old
Iusacell and by all cellular concessions and substantially all assets used in
connection with or related to such concessions. In particular, the Senior Credit
Facility lenders have a second priority lien on all Lucent Technologies analog
and CDMA digital cellular network equipment acquired for Regions 6, 7, and 9
under the Eximbank Facilities described below and a first priority lien on all
other assets (including, without limitation, the cellular concessions) of Old
Iusacell and its concession-holding subsidiaries.
Loans outstanding under the Senior Credit Facility bear interest at a rate
per annum equal to (at Old Iusacell's option):
- one-, two-, three- or six-month LIBOR plus 1.75% per annum, or
- an alternate base rate equal to the sum of (i) the highest of the
prime rate of The Chase Manhattan Bank, the reserve adjusted secondary
market rate for three-month certificates of deposit plus 1% per annum
or the Federal Funds effective rate plus 0.5% per annum plus (ii)
0.75% per annum.
In January 2000, in connection with certain covenant waivers and
modifications, Old Iusacell prepaid U.S.$1.7 million in principal amount of the
Senior Credit Facility. See " -- Loan Covenant Waivers and Modifications."
The Eximbank Financing. On July 15, 1999, Old Iusacell consummated a
financing which consists of:
- a five-year senior secured amortizing term facility provided by UBS AG
in the principal amount of approximately U.S.$72.5 million, which is
guaranteed by the Export-Import Bank of the United States, and
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- a two-year senior secured amortizing term facility provided by UBS AG
and Commerzbank AG in the principal amount of approximately U.S.$25.7
million, which is not guaranteed by the Export-Import Bank of the
United States.
Old Iusacell's obligations under the Eximbank Facilities are
unconditionally guaranteed, jointly and severally, by the principal operating
and concession-holding subsidiaries of Old Iusacell and are secured by a first
lien on certain Lucent Technologies analog and CDMA digital cellular network
equipment acquired for Regions 6, 7 and 9, a second lien on any and all other
Lucent Technologies analog and CDMA digital cellular network equipment acquired
under Old Iusacell's contract with Lucent Technologies, including such equipment
in Region 5, and a second lien on Old Iusacell's four cellular concessions and
substantially all other assets used in connection with or related to such
concessions.
Loans outstanding under the Eximbank Facilities bear interest at a rate per
annum equal to 0.20% per annum above six-month LIBOR, in the case of the
facility guaranteed by the Export-Import Bank of the United States, and 1.75%
per annum above six-month LIBOR, in the case of the unguaranteed commercial
facility.
During 1999, U.S.$98.2 million was borrowed under the Eximbank Facilities.
On November 5, 1999, the Company paid a principal amount of US$7.3 million,
leaving an outstanding principal balance of US$90.9 million.
In December 1999, UBS AG assigned its interest in the Eximbank Facilities
to Banque Nationale de Paris.
In January 2000, in connection with certain covenant waivers and
modifications, Old Iusacell prepaid U.S.$0.1 million in principal amount under
the Eximbank Facilities and will prepay an additional U.S.$0.6 million in
principal amount under the Eximbank Facilities by May 2000.
Handset financing. In January 1999, Old Iusacell obtained a handset
financing facility from UBS AG, which consists of a 360-day senior unsecured
credit facility in the principal amount of U.S.$10.0 million to be used solely
to acquire cellular handsets, which we refer to as the UBS Handset Facility.
Loans outstanding under this facility will bear interest at an annual rate equal
to 1.50% above LIBOR for the related interest period, which can have a duration
of 30, 60, 90, 180 or 360 days, with respect to each disbursement. Old Iusacell
drew down the entire U.S.$10.0 million available under this facility in April
1999 for a 360-day term at a fixed interest rate of 6.8%. In December 1999, UBS
AG assigned its interest in the UBS Handset Facility to Banque Nationale de
Paris.
In September 1999, Old Iusacell obtained a handset financing facility from
Banco Bilbao Vizcaya which consists of an eighteen-month senior unsecured credit
facility in the principal amount of U.S.$4.0 million to be used solely to
acquire cellular handsets. Loans outstanding under this facility will bear
interest at an annual rate equal to 2.50% above 180-day LIBOR. Old Iusacell drew
down the entire U.S.$4.0 million available under this facility in September
1999. Amortizations occur in equal installments every six months.
In December 1999, Old Iusacell entered into a second eighteen-month senior
unsecured credit facility with Banco Bilbao Vizcaya in the principal amount of
U.S.$4.0 million to be used solely to purchase cellular handsets. As with the
September 1999 facility, loans outstanding under this facility will bear
interest at an annual rate equal to 2.50% above 180-day LIBOR and will be
amortized in equal installments every six months. Old Iusacell drew down
U.S.$3.5 million under this facility on December 8, 1999.
As of December 31, 1999, U.S.$17.5 million were outstanding under the three
handset facilities. These loans are classified as trade notes payable under
Mexican GAAP.
In November 1999, in connection with a program to migrate our analog
contract customers to digital service, Old Iusacell agreed to guarantee up to
U.S.$6.6 million in future loans to be made by Banco Bilbao Vizcaya to our
customers for the purchase of digital handsets.
Vendor financing. Old Iusacell, from time to time, also incurs vendor
financing indebtedness in order to finance purchases of equipment, hardware and
software. As of December 31, 1999, Old Iusacell had U.S.$1.1 million of such
vendor financing outstanding, all of which was paid in March 2000. These vendor
financings are classified as trade notes payable under Mexican GAAP.
New Iusacell is currently negotiating U.S.$34.5 million in vendor financing
for the purchase of microwave equipment by a new subsidiary to be created for
the sole purpose of purchasing or leasing network equipment,
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computer hardware and software, and radio towers. As of December 31, 1999,
approximately U.S.$2.8 million had been drawn down through an interim
arrangement with a microwave equipment vendor.
Amortization Schedule. New Iusacell's ability to service and repay to
Senior Notes due 2006 and Old Iusacell's ability to service and repay the 10%
Senior Notes, the borrowings under the Senior Credit Facility, the Eximbank
Facilities, the handset financings and the vendor financing will depend on
future economic and competitive conditions and on financial, business and other
factors, many of which are beyond New Iusacell or Old Iusacell's control.
The following table presents Iusacell's amortization requirements with
respect to its total indebtedness, including trade notes payable, as of December
31, 1999.
<TABLE>
<CAPTION>
MILLIONS OF
YEAR U.S. DOLLARS
------------
<S> <C>
2000................................................... 69.2 (1)
2001................................................... 134.0
2002................................................... 112.6
2003................................................... 14.3
2004................................................... 157.2
-----
TOTAL 487.3 (2)
</TABLE>
- ------------------------
(1) Includes repayment of U.S.$1.1 million in vendor financing in March
2000 and principal prepayments in the aggregate amount of U.S.$2.4
million made to the lenders under the Senior Credit Facility and the
Eximbank Facilities in January 2000. See " -- Vendor Financing" and "
-- Loan Covenant Waivers and Modifications."
(2) The U.S.$350.0 million in Senior Notes due 2006 matures in December
2006.
Hedging. In December 1999, Old Iusacell used forward-rate contracts to
hedge its exchange rate exposure for U.S.$77.0 million, approximately 50% of the
principal and interest payments on its indebtedness coming due over the period
April 2000 to April 2001. If the peso to U.S. dollar exchange rate remains at
its December 31, 1999 level through April 30, 2001, then the estimated cost to
Old Iusacell of this hedging program will be approximately Ps.91.3 million
(U.S.$9.6 million). Old Iusacell is also considering limited hedging
alternatives for up to an additional 50% of the remaining outstanding principal
and interest obligations coming due through April 2001.
Loan Covenant Waivers and Modifications. In October 1999, Old Iusacell
exceeded the capital expenditure limitation for 1999 under the Senior Credit
Facility and the Eximbank Facilities. Old Iusacell also had not registered the
mortgage securing the Senior Credit Facility with respect to a single parcel of
real property in Leon (in Region 6) with an estimated market value of Ps.15.9
million (approximately U.S.$1.7 million) because it is believed the amount of
the mortgage registration fee excessive and unreasonable compared to the value
of the property. These defaults under the Senior Credit Facility and the
Eximbank Facilities triggered cross-defaults among these facilities and in the
UBS Handset Facility. In December 1999, Old Iusacell obtained waivers of these
defaults and a modification of the restrictive covenant under the Senior Credit
Facility and each of the Eximbank Facilities to enable it to make capital
expenditures in excess of the maximum amount permitted for 1999 and to increase
the maximum amount of capital expenditures permitted for 2000. These waivers and
modifications, for which Iusacell paid a customary fee, allowed us to make our
planned capital expenditures for 1999 and would have allowed Iusacell to make
our then planned capital expenditures for 2000.
In April 2000, Old Iusacell will request covenant waivers and modifications
from the lenders under the Senior Credit Facility and Eximbank Facilities in
order to provide it with the flexibility to make additional capital expenditures
and/or incur indebtedness in connection with the sale leaseback of its tower
assets described below, to approve the terms and conditions of certain permitted
unsecured indebtedness, to not classify surety bonds issued in the ordinary
course of business as indebtedness, to permit the sale of certain mortgaged
property and to permit the sale of certain other property without having to
apply a certain percentage of the proceeds from such sale to prepay
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the principal of the Senior Credit Facility and Eximbank Facilities. Based on
conversations with its bank lenders, Iusacell expects to receive these waivers
and modifications in exchange for customary fees and some increase in the
interest rate on one or both facilities.
Recent equity offerings. On August 10, 1999, we completed a comprehensive
equity recapitalization and restructuring. As part of this transaction, New
Iusacell issued 23,596,783 new series V shares at a price of U.S.$1.05 per share
and 18,405,490 new series V shares at a price of U.S.$0.70 per share. After
commissions and expenses, Iusacell received net proceeds of approximately
U.S.$33.7 million, which were used primarily for the acquisition of cellular
network infrastructure equipment. See Item 4A, "Information on the Company --
History and Development of the Company."
Tower Monetization. In December 1999, Iusacell entered into a series of
agreements with a Mexican affiliate of American Tower Corporation. These
agreements, among other things, give American Tower the opportunity to market a
portfolio of approximately 350 existing Iusacell towers and, subject to
restrictions imposed by Iusacell's debt covenants, acquire them. Iusacell
intends to seek at least a partial waiver of the restrictions imposed by our
debt covenants in order to implement this agreement and anticipates receiving
approximately U.S.$30.0 million in proceeds from this transaction through
mid-2001.
DIVIDEND POLICY
Since becoming a public company in 1994, we have not paid dividends and we
currently have no plans to initiate dividend payments. In addition, the New
Iusacell Indenture, the Old Iusacell Indenture, the Senior Credit Facility and
the Eximbank Facility limit both New Iusacell's and Old Iusacell's ability to
pay dividends.
U.S. GAAP RECONCILIATION
The principal differences between Mexican GAAP and U.S. GAAP as they relate
to Iusacell are the adjustment for the effects of inflation, minority interests,
deferred income taxes, employee profit sharing, capitalized pre-operating costs
for Iusacell's 450 MHz local wireless project, provisions for consolidation of
facilities and accounting for non-monetary exchanges and interest rate collars.
See Note 20 to the Consolidated Financial Statements for a reconciliation to
U.S. GAAP of stockholders' equity and net profit (loss) for the respective
periods presented.
INFLATION ADJUSTMENTS
The 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 GAAP (Bulletin B-10) because the application of Bulletin B-10
represents a comprehensive measure of the effects of price level changes in the
Mexican economy and, as such, is considered a more meaningful presentation than
historical cost-based financial reporting for both Mexican and U.S. accounting
purposes.
DEFERRED INCOME TAXES AND EMPLOYEE PROFIT SHARING
Under Mexican GAAP, deferred income taxes are provided for identifiable,
non-recurring timing differences 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.
Under U.S. GAAP, Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" requires an asset and liability method of
accounting for income taxes 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. The effect
on deferred taxes of a change in tax rate is recognized in income in the period
in which the change is enacted. In 1999 the income tax rate in Mexico increased
to 35% from the 34% rate applicable in 1998 and 1997.
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 of December 31, 1999, Iusacell recognized for U.S. GAAP purposes a gross
deferred tax asset of Ps.881.1 million (U.S.$92.9 million), reflecting the
benefit of tax loss carryforwards which expire in varying amounts
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between 2004 and 2008. Realization is dependent on generating sufficient taxable
income prior to expiration of the loss carryforwards. Although realization is
not assured, our management believes it is more likely than not that all of the
net deferred tax asset at December 31, 1999 will be realized based on the
following:
- although Iusacell generated consolidated operating losses in the six
years prior to 1999, it believes that it is more likely than not that
the net deferred tax asset will be realized based on Iusacell's latest
estimate of future taxable income over the next five years in an
amount sufficient to utilize the net deferred tax losses recorded as
of December 31, 1999, and
- the net deferred tax asset amounting to Ps.173.1 million (U.S.$18.3
million) represents only the tax loss carryforwards (which are subject
to indexation) of 1997 and 1998 which have expiration periods of 9 and
10 years, respectively.
Iusacell's estimate of future taxable income is based primarily on and
supported by:
- management's expectations of Iusacell's growth and profitability over
the next 5 years,
- the significant improvement in operating performance from February
1997 through December 1998, as evidenced by the success of the
implementation of the Bell Atlantic wireless business model. This
model has produced strong subscriber growth in excess of 75% year over
year in 1998 and 1999, improved revenues (based on customer growth and
price increases), and lower network and operating costs, resulting in
an operating profit in the first three quarters of 1999 (and,
excluding the Project 450 write-down, also in 1998), as compared to an
operating loss during 1997, and
- the effects of cost-cutting measures achieved as a result of the
restructuring completed during 1997 and 1998, primarily related to a
15% reduction in headcount and elimination of duplicate administrative
costs.
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 lower than currently expected.
As of December 31, 1999, we had a valuation allowance of Ps.354,074 to
reduce our deferred tax assets to estimated realizable value. The valuation
allowance primarily relates to the deferred tax assets arising from tax loss
carryforwards and tax credits. The net change in the total valuation allowance
for the year ended December 31, 1999 was principally due to the realization of
tax loss carryforwards during the year ended December 31, 1999.
Employee profit sharing expense, which is based on the taxable income of
each corporate entity after statutory adjustments, is included in the income tax
provision under Mexican GAAP. Under U.S. GAAP, the provision for employee profit
sharing is charged to operations.
PRE-OPERATING COSTS
Under Mexican GAAP, Iusacell capitalized certain pre-operating costs
primarily related to Iusacell's 450 MHz local wireless project. Under U.S. GAAP,
pre-operating costs are expensed as incurred. During 1998, we recorded a
non-cash writedown related to our investment in the 450 MHz project for Mexican
GAAP purposes and, consequently, wrote off all pre-operating costs as of that
date.
MINORITY INTERESTS
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.
GAIN FROM THE EXCHANGE OF NON-MONETARY ASSETS
In December 1998, Iusacell entered into a fiber optic cable swap agreement
with Bestel, S.A. de C.V. to exchange certain long-distance fiber optic cables
for a contract amount of Ps.215.1 million (U.S.$22.7 million). Under Mexican
GAAP, Iusacell recorded the transaction as both an acquisition and sale of fixed
assets based on the contract amount, resulting in a gain on the sale of Ps.187.3
million (U.S.$19.8 million). Under U.S. GAAP, because the assets exchanged are
similar productive assets and, on a net basis, no cash was exchanged, the
transaction does
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not result in the recognition of earnings. Consequently, under U.S. GAAP, the
acquisition and sale would not have been recorded.
INTEREST RATE COLLAR
Under Mexican GAAP, the interest rate collar agreements are recorded on a
cash basis. Under U.S. GAAP, the differential to be paid or received as interest
rates change is accrued and recognized as an adjustment of interest expense at
the balance sheet date. Additionally, the related amount payable or receivable
from counterparties is included in other accrued expenses at the balance sheet
date.
PROVISION FOR IMPAIRMENT OF ANALOG EQUIPMENT
As described in Note 4 b) to the Consolidated Financial Statements, under
Mexican GAAP, an impairment charge against income from operations was recorded
during the year ended December 31, 1997 to reflect a writedown of the carrying
value of the then-existing analog communications network equipment. Under U.S.
GAAP, we evaluated the analog equipment for impairment using the criteria of
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" which requires that long-lived assets to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review of recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset and
our eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized based on the fair value of the
asset. The impairment loss is recorded as a component of income from operations.
EXTRAORDINARY ITEM
Under Mexican GAAP, the utilization of our tax loss carryforwards is
classified as an extraordinary item and presented as a separate line item in our
consolidated income statement. Under U.S. GAAP, the utilization of the tax loss
carryforward is recorded as a component of the taxation expense.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
New Iusacell is managed by a twelve-member Board of Directors. The
directors nominated by Bell Atlantic have the power under our by-laws to
approve, without the affirmative vote of any other directors, all resolutions of
the Board of Directors, except with respect to some transactions over which the
New Iusacell Shareholders Agreement grants the Peralta Group supermajority
rights. Pursuant to the New Iusacell Shareholders Agreement, Lawrence T. Babbio,
Jr. is the Chairman of the Board of Directors and possesses a tie-breaking vote.
See Item 7, "Major Shareholders and Related Party Transactions -- Major
Shareholders --Governance" for a description of the New Iusacell Shareholders
Agreement, which governs the appointment of directors as between our major
shareholders.
A. DIRECTORS AND SENIOR MANAGEMENT
DIRECTORS
The following table presents information with respect to our directors at
December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Lawrence T. Babbio, Jr.......... 55 Chairman of the Board of Directors and
Series A Director
Dennis F. Strigl................ 53 Series A Director
Thomas A. Bartlett.............. 41 Chief Executive Officer and Series A
Director
John E. Chynoweth*+............. 48 Series A Director
Stephen B. Heimann.............. 44 Series A Director
Fernando de Ovando+............. 47 Series A Director
Jose Ramon Elizondo Anaya....... 45 Series A Director
Carlos Peralta Quintero......... 48 Series V Director
Ernesto Canales Santos.......... 59 Series V Director
Luis Felipe Gonzalez Munoz...... 45 Series V Director
Rodolfo Garcia Muriel........... 54 Series V Director
Fulvio V. del Valle............. 50 President, Director General and Series V
Director
</TABLE>
-------------------
* Mr. Chynoweth passed away on November 30, 1999. His successor was appointed
at Iusacell's shareholders' meeting on April 10, 2000.
+ On April 10, 2000, Mr. Chynoweth was succeeded as a Series A Director by
Christopher M. Bennett, a Bell Atlantic employee, and Mr. de Ovando was
succeeded as a Series A Director by Javier Martinez del Campo.
Based on announcements issued by Bell Atlantic and GTE Corporation, we
expect that, upon completion of the Bell Atlantic combination with GTE
Corporation, several of Bell Atlantic employees who currently serve as our
directors will be replaced principally by current GTE Corporation employees.
The term of each director expires upon the election of his successor at a
duly convened general ordinary shareholders meeting.
Our by-laws 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 as of April 10, 2000 are Thomas Burgos, Ruben G. Perlmutter, Mary
Cummings, Dermott O. Murphy, Jeffrey S. Noto, John Furey and Ignacio Gomez
Morin. The Series V alternate directors as of April 10, 2000 are Victor Barreiro
Cortes, Marco Antonio de la Torre Barranco, Francisco Jose Flores Melendez and
Eduardo Rihan for Messrs. Peralta, Canales, Gonzalez and Muriel and William S.
Roberts for Mr. del Valle.
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EXECUTIVE OFFICERS
The following table presents information relating to our executive officers
at December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Thomas A. Bartlett.............. 41 Chief Executive Officer*
Fulvio V. Del Valle............. 50 President and Director General
William S. Roberts.............. 44 Executive Vice President, Finance and
Audit, and Chief Financial Officer
Rolando Stevens................. 44 Executive Vice President and Chief
Operating Officer
Ricardo Arevalo................. 35 Vice President, Information Systems,
and Chief Information Officer
Thomas Burgos................... 48 Vice President, Technical Operations,
and Chief Technology Officer*
Ramon Pando..................... 44 Vice President, Sales
Ruben G. Perlmutter............. 41 Vice President, Mergers and
Acquisitions, and General Counsel*
Amaury Rivera................... 38 Vice President, Marketing
Francisco Soroa................. 47 Vice President, Public Relations and
Corporate Communications
Jose Bellido.................... 40 Director, Human Resources**
Jorge Halvas.................... 35 Director, Regulatory Affairs**
</TABLE>
- -------------------
* Indicates an employee of Bell Atlantic who is serving as an executive
officer of New Iusacell.
** Promoted to Vice President in February 2000.
BIOGRAPHIES
Lawrence T. Babbio, Jr. has been a member and Chairman of the Board of
Directors of New Iusacell since August 1998. Mr. Babbio was a member of the
Board of Directors of Old Iusacell from November 1993 until February 2000,
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 December 1998, Mr. Babbio was elected
president and chief operating officer of Bell Atlantic. From August 1997 to
December 1998 he was 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, Compaq Computer Corporation
and Aramark Corporation. Mr. Babbio holds an undergraduate degree in electrical
engineering from Stevens Institute of Technology and an M.B.A. from New York
University. Mr. Babbio's business address is 1095 Avenue of the Americas, New
York, NY 10036.
Carlos Peralta Quintero has been a member of the Board of Directors of New
Iusacell since August 1998. Mr. Peralta was a member of the Board of Directors
of Old Iusacell from October 1992 until February 2000 and served as Vice
Chairman of Old Iusacell from October 1992 to February 1997. He also currently
serves as the Chairman of the Board of Directors and Chief Executive Officer of
Grupo Industrial IUSA, S.A. de C.V. Mr. Peralta is also a member of the boards
of directors of Compania Industrial de Parras, S.A. de C.V., Hilaturas Parras,
S.A. de C.V., Cambridge Lee Industries Ltd. and Alper Holdings Ltd. Mr.
Peralta's business address is Paseo de la Reforma 2608, Col. Lomas Altas, 11550
Mexico, D.F.
Thomas A. Bartlett has been a member of the Board of Directors of New
Iusacell since August 1998 and Chief Executive Officer of New Iusacell since
August 1999. Mr. Bartlett also was a member of the Board of Directors of Old
Iusacell from April 1996 until February 2000 and Chief Executive Officer of Old
Iusacell from February 1997 until February 2000; he also served as President of
Old Iusacell 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 to such
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appointment, 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. Mr. Bartlett's business address is 1717 Arch
Street, 29th Floor, Philadelphia, PA 19103.
Fulvio V. del Valle has been a member of the Board of Directors of New
Iusacell since June 1999 and President and Director General of New Iusacell
since August 1999. Mr. del Valle has also been the President of Old Iusacell
since October 1997, the Director General of Old Iusacell since June 1997 and a
member of the Board of Directors of Old 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, 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
December 1995. 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. Mr. del Valle's business address is Prol. Paseo de la
Reforma 1236, Col. Santa Fe, 05348 Mexico, D.F.
Ricardo Arevalo Ruiz has served as Vice President, Information Systems and
Chief Information Officer of New Iusacell since August 1999. Mr. Arevalo has
also served as Vice President, Information Systems of Old Iusacell since
November 1997 and as Chief Information Officer since August 1998. Mr. Arevalo
joined Old Iusacell in August 1997 and served as Director, Systems Development
until November 1997. From May 1993 until August 1997, Mr. Arevalo served as
Director, Information Systems, Materials and Logistics, and Customer Service at
AMP de Mexico, S.A. de C.V. Prior to such position, from October 1990 until May
1993, Mr. Arevalo was employed as Information Systems Manager for Tequila
Cuervo, S.A. de C.V. Mr. Arevalo holds an undergraduate degree in computer
sciences and a diploma in marketing from the Instituto Tecnologico y de Estudios
Superiores de Monterrey. Mr. Arevalo's business address is Prol. Paseo de la
Reforma 1236, Col. Santa Fe, 05348, Mexico, D.F.
Jose Bellido Valerio has served as Vice President, Human Resources of New
Iusacell since February 2000 and, prior thereto, was Director, Human Resources
of New Iusacell from August 1999 through January 2000. Mr. Bellido has also been
Director, Human Resources of Old Iusacell since May 1996. Before that, from May
1994 through April 1996, he served as Old Iusacell's Director of Personnel and,
from February 1993 through April 1994, as Old Iusacell's Human Resources
Manager. For more than four years prior to joining Old Iusacell, Mr. Bellido
served as Manager of Industrial Relations for Aeromexico, S.A. de C.V. Mr.
Bellido holds a law degree from the Universidad Nacional Autonoma de Mexico, a
specialized degree in labor law from Universidad Panamericana, a diploma in
human resources strategic planning from the University of California at
Berkeley, and a masters degree in business from the Instituto Panamericano de
Alta Direccion de Empresas (IPADE). Mr. Bellido's business address is Prol.
Paseo de la Reforma 1236, Col. Santa Fe, 05348, Mexico, D.F.
Thomas Burgos has served as Vice President, Technical Operations and Chief
Technology Officer of New Iusacell since August 1999. He has also been Vice
President, Technical Operations and Chief Technology Officer of Old Iusacell
since June 1998 and, from June 1997 until June 1998, served as Old Iusacell's
Director of Network Operations. Since 1970, Mr. Burgos has served in a variety
of network and marketing positions with affiliates of Bell Atlantic and their
predecessors. From February 1993 until June 1997, Mr. Burgos served as Director,
Network of Bell Atlantic -- New Jersey, Inc. From November 1989 until February
1993, Mr. Burgos served as Director of Staff Support, Network and Network
Services for Bell Atlantic Network Services, Inc. For 13 years before, Mr.
Burgos served in various network and marketing capacities for New Jersey Bell,
Inc. and worked 6 years as a telecommunications specialist in AT&T's long lines
division. Mr. Burgos holds a B.S. degree from Trinity University, Delaware. Mr.
Burgos' business address is Prol. Paseo de la Reforma 1236, Col. Santa Fe,
05348, Mexico, D.F.
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Ernesto Canales Santos has been a member of the Board of Directors of New
Iusacell since August 1998 and was a member of the Board of Directors of Old
Iusacell from November 1993 until February 2000. Mr. Canales is a founding
partner of Canales Asesoria Juridica, S.C., a law firm formed in 1986.
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.,
Industrias Unidas, S.A. (IUSA) and Industrias Monterey, S.A. (IMSA). Mr. Canales
is also a member of the Patronato del Museo de Historia Mexicana. Mr. Canales
holds a law degree from the Escuela Libre de Derecho and a master's degree in
comparative law from Columbia University. Mr. Canales' business address is
Batallon de San Patricio No. 111, Torre Comercial America, Col. Valle Orientel,
66269 Garza Garcia, N.L., Mexico.
Fernando de Ovando has been a member of the Board of Directors of New
Iusacell since June 1998 and was a member of the Board of Directors of Old
Iusacell from February 1997 until February 2000 and was the Secretary of Old
Iusacell 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. since 1984. Mr.
de Ovando is a member of the boards of directors and/or secretary of several
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. Mr. de Ovando's business address is
Bosque de Alisos No. 47-B, Desp 101, Col. Bosques de las Lomas, 05120, Mexico,
D.F.
Jose Ramon Elizondo Anaya has been a member of the Board of Directors of
New Iusacell since June 1998 and was a member of the Board of Directors of Old
Iusacell from February 1997 until February 2000. 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 to such position, Mr. Elizondo was a manager of Operadora de Bolsa,
Casa de Bolsa, including managing director of the investment banking department
and president of our 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 Quadrum, S.A. de C.V.,
Grupo Azucarero Mex, 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., 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. Mr. Elizondo's
business address is Montes Urales 460, 2nd Floor, Col. Lomas de Chapultepec,
11000, Mexico, D.F.
Rodolfo Garcia Muriel has been a member of the Board of Directors of New
Iusacell since June 1998, was an alternate member of the Board of Directors of
Old Iusacell from November 1993 to May 1994 and was a director of Old Iusacell
from May 1994 until February 2000. 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). Mr. Garcia's business address is Palmas 731, 7th Floor,
Col. Lomas de Chapultepec, 11000, Mexico, D.F.
Luis Felipe Gonzalez Munoz has been a member of the Board of Directors of
New Iusacell since June 1998 and a member of the Board of Directors of Old
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 has served as chief financial officer of Industrias
Unidas, S.A. de C.V. since November 1993. For more than ten years prior to such
position, Mr. Gonzalez was employed by Vitrocrisa, S.A. de C.V. and our
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., Compania Industrial
Parras, S.A. de C.V., and Hilaturas Parras, 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. Mr. Gonzalez' business
address is Prol. Paseo de la Reforma 2608, Col. Lomas Altas, 11550, Mexico, D.F.
Jorge Halvas Begovich has been Vice President, Regulatory Affairs of New
Iusacell since February 2000 and, prior thereto, served as Director, Regulatory
Affairs of New Iusacell from August 1999 through January 2000.
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Mr. Halvas has also been Director, Regulatory Affairs of Old Iusacell since June
1997 and, from December 1995 until June 1997, served as Manager, Regulatory
Affairs of Old Iusacell. For more than eight years prior to such position, Mr.
Halvas worked in various capacities in the banking and brokerage industries:
from January 1995 through November 1995, Mr. Halvas served as a consultant to
the Vice President of Specialized Supervision of the Comision Nacional Bancaria
y de Valores, and from February 1993 until December 1994, he served as a Credit
Director for Banca Confia, S.A. Abaco Grupo Financiero. Mr. Halvas holds an
undergraduate business degree from Universidad Panamericana and an M.B.A. from
the Instituto Panamericano de Alta Direccion de Empresas (IPADE). Mr. Halvas'
business address is Prof. Paseo de la Reforma 1236, Col. Santa Fe, 05348,
Mexico, D.F.
Stephen B. Heimann has been a member of the Board of Directors of New
Iusacell since June 1999 and a member of the Board of Directors of Old Iusacell
from April 1999 until February 2000. Mr. Heimann has been Senior Attorney --
International Wireless at Bell Atlantic Network Services, Inc. since August
1997, having previously been employed as a mergers and acquisitions attorney for
that company since February 1990. From September 1981 until February 1990, Mr.
Heimann was a corporate associate at the Washington, D.C. law firm of Shaw,
Pittman, Potts & Trowbridge. Mr. Heimann holds degrees from Yale College and
Yale Law School. Mr. Heimann's business address is 1717 Arch Street, 32nd Floor,
Philadelphia, PA 19103.
Ramon Pando Leyva has served as Vice President, Sales of New Iusacell since
August 1999 and as Vice President, Sales of Old Iusacell since April 1999. For
more than five years prior, he served in a variety of sales positions within Old
Iusacell: as Region 9 Sales Director from February 1997, to April 1999, as Sales
and Distribution Director of Wireless Local Telephony from July 1994 to February
1997, and as Region 9 Cellular Division Sales Director from April 1993 until
July 1994. For more than six years before joining Old Iusacell, Mr. Pando was
the Commercial Director of Valvulas Inoxidables, S.A. de C.V. Mr. Pando holds an
undergraduate degree in business administration from the Universidad Autonoma de
Mexico (UNAM), has received diplomas in marketing and financial administration
from the Instituto Tecnologico de Monterrey and completed the advanced
management program at the Instituto Panamericano de Alta Direccion de Empresas
(IPADE). Mr. Pando's business address is Prol. Paseo de la Reforma 1236, Col.
Santa Fe, 05348, Mexico, D.F.
Ruben G. Perlmutter has served as Vice President, Mergers & Acquisitions,
and General Counsel of New Iusacell since August 1999 and Vice President,
Mergers & Acquisitions and General Counsel and a member of the Board of
Directors of Old 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 to such position, 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. Mr. Perlmutter's business address is Prol. Paseo de la
Reforma 1236, Col. Santa Fe, 05348, Mexico, D.F.
Amaury Rivera has been Vice President, Marketing of New Iusacell since
August 1999 and Vice President, Marketing of Old Iusacell since February 1999.
Before joining Old Iusacell, from March 1996 through January 1999, Mr. Rivera
served as Regional Vice President of Lambda Communications Inc. and General
Manager of Centennial Puerto Rico Wireless. Mr. Rivera served as Vice President
and General Manager of Perry Products Co., Inc. from January 1993 until March
1996; as Vice President, Marketing and Assistant to the President of Vassallo
Industries, Inc. from January 1990 to January 1993; and, for more than five
years before then, as an investment banker at Bear Stearns & Co. Mr. Rivera
holds an undergraduate degree in marketing and finance from the School of
Management of Boston University. Mr. Rivera's business address is Prol. Paseo de
la Reforma 1236, Col. Santa Fe, 05348, Mexico, D.F.
William S. Roberts has served as Executive Vice President and Chief
Financial Officer of New Iusacell since August 1999 and as Executive Vice
President and Chief Financial Officer of Old Iusacell since July 1999 and served
as Executive Vice President and Chief Financial Officer Designate of Old
Iusacell from April 1999 through June 1999. Mr. Roberts has also been a director
of Old Iusacell since February 2000. From June 1998 until December 1998, Mr.
Roberts served as Vice Chairman and Chief Executive Officer of Nextel Mexico,
S.A. de C.V. From September 1997 to June 1998 Mr. Roberts was employed as Vice
President, International Operations of Nextel International, Inc., and he served
as Chief Operating Officer of McCaw International, Inc. from November 1996 to
September 1997. For 13 years prior, Mr. Roberts served in a variety of
capacities with affiliates of BellSouth Corporation, the last seven with
BellSouth International, Inc. and our affiliates. Mr. Roberts was employed for
more than four years by BellSouth Inversiones S.A. in Chile: as Chief Operating
Officer from August 1994 to November
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1996, as Director General of the Cellular Division from February 1995 to
September 1995, and as Finance Director from July 1992 through July 1994. From
July 1990 to July 1992, Mr. Roberts served as Finance Director of Comunicaciones
Celulares de Occidente, S.A. de C.V., Old Iusacell's Region 5 cellular
concessionaire. Mr. Roberts is a Certified Public Accountant in Virginia and
Georgia and holds an undergraduate accounting degree from the University of West
Florida. Mr. Roberts' business address is Prol. Paseo de la Reforma 1236, Col.
Santa Fe, 05348, Mexico, D.F.
Francisco Soroa de las Cuevas has been Vice President, Public Relations and
Corporate Communications of New Iusacell since August 1999 and Vice President,
Public Relations and Corporate Communications of Old Iusacell since February
1997 and, from November 1996 until February 1997, served as Director, Public
Relations of Old Iusacell. From October 1998 through January 1999 Mr. Soroa was
also responsible for human resources. From May 1995 until November 1996, Mr.
Soroa served as Director of Public Relations of Pepsico de Mexico, S.A. de C.V.
For more than seven years prior to such position, from June 1987 until May 1995,
Mr. Soroa served as Director of Public Relations and Service to Personnel of
Volkswagen de Mexico, S.A. de C.V. Mr. Soroa holds an undergraduate degree in
international relations from the Universidad de las Americas. Mr. Soroa's
business address is Prol. Paseo de la Reforma 1236, Col. Santa Fe, 05348,
Mexico, D.F.
Rolando Stevens Avila has been Executive Vice President and Chief Operating
Officer of New Iusacell since August 1999 and Executive Vice President and Chief
Operating Officer of Old Iusacell since February 1999 and served as Senior Vice
President, Commercial Operations of Old Iusacell from February 1997 through
January 1999. Mr. Stevens has also served as Director General of Infotelecom,
S.A. de C.V. since August 1996. Prior thereto, between August 1994 and February
1997, he served as Divisional Director of Wireless Local Telephony of Old
Iusacell and, from January 1994 until August 1994 served as Region 9 Cellular
Operations Director of Old Iusacell. For more than nine years prior to such
position, Mr. Stevens held Director General positions for several divisions of
Philips N.V. as well as marketing executive positions for Philips projects in
Mexico, Brazil, Europe and the United States. For more than eight years prior
thereto, Mr. Stevens held technical management positions for several divisions
of the Philips Company. Mr. Stevens holds a degree in mechanical electrical
engineering from the Universidad Nacional Autonoma de Mexico and an M.B.A. in
marketing and finance from the Universidad LaSalle and received post-graduate
training in industrial engineering at the University of Southern California. Mr.
Stevens' business address is Prol. Paseo de la Reforma 1236, Col. Santa Fe,
05348, Mexico, D.F.
Dennis F. Strigl has been a member of the Board of Directors of New
Iusacell since June 1999 and was a member of the Board of Directors of Old
Iusacell from April 1997 until February 2000 and 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 to such position, 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 our
board of directors. Between 1984 and 1989, Mr. Strigl served in a variety of
capacities for Ameritech Corporation. Mr. Strigl currently serves on the board
of directors of General Magic Corp. and Salient 2 Communications, Inc. Mr.
Strigl holds an undergraduate degree in business administration from Canisius
College and an M.B.A. from Fairleigh Dickinson University. Mr. Strigl's business
address is 180 Washington Valley Road, Bedminster, NJ 07921.
B. COMPENSATION
The aggregate amount of compensation paid by Iusacell in 1999 to all
directors and executive officers as a group was Ps.37.9 million (U.S.$4.0
million).
In addition, in 1999 Old Iusacell granted purchase rights with a respect to
a total of 779,000 series L shares to its executive officers under the
management employee stock purchase plan described below, which were later
exchanged for series V shares. As of December 31, 1999, the individuals who are
currently executive officers of New Iusacell held purchase rights under the plan
with respect to 3,770,506 series V shares. In 1999, the individuals who are
currently Old Iusacell executive officers exercised purchase rights with respect
to 1,099,240 series L shares and executive officers whose labor relationship
with Old Iusacell terminated during 1999 exercised purchase rights with respect
to 87,680 series L or V shares. In addition, purchase rights with respect to
342,632 series L or V shares were forfeited by executive officers whose labor
relationship with Old Iusacell terminated during 1999.
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As part of our general compensation policy, we also conduct periodic
reviews of our management and employees to determine bonus compensation.
Iusacell also provides executive officers with use of an automobile. In
addition, we provide our executive officers and other employees with food stamps
(up to Ps. 1,153 per month), gas stamps (up to 320 liters per month) and with
contributions to a savings plan (up to Ps.1,498 per month).
C. BOARD PRACTICES
New Iusacell has established Executive, Finance and Audit, and Human
Resources and Compensation 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 the series A shareholders.
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. As of April 10, 2000, the members of
the Executive Committee are Messrs. Babbio, Strigl, Bartlett, Bennett, Heimann,
Peralta, Canales and del Valle.
The Finance and Audit Committee recommends New Iusacell's independent
public accountants, reviews our annual consolidated financial statements,
provides oversight of New Iusacell's auditing, accounting, financial reporting
and internal control functions, and reviews with management and New Iusacell's
independent public accountants the plans and results of the auditing function.
As of April 10, 2000, the members of the Finance and Audit Committee are Messrs.
Bartlett, Heimann, Murphy, Noto, Canales and Gonzalez.
The Human Resources and Compensation Committee reviews, evaluates and makes
recommendations to the Board of Directors regarding New Iusacell's executive
compensation standards and practices, including salaries, bonus distributions,
grants under the executive employee stock purchase plan (described below) and
deferred compensation arrangements. As of April 10, 2000, the members of the
Human Resources and Compensation Committee are Messrs. Bartlett, Heimann and
Rihan and Ms. Cummings.
D. EMPLOYEES
At December 31, 1999, Iusacell and our subsidiaries had an aggregate of
1,840 full-time and part-time employees, 139 temporary employees and 4 full time
Bell Atlantic seconded employees or consultants. Approximately 40.2% of the full
time employees were members of a labor union. We have never experienced a work
stoppage and management considers our relationship with our employees to be
good.
E. SHARE OWNERSHIP
Our directors and officers as a group own, in aggregate, less than 1% of
our shares, excluding the shares held by Mr. Carlos Peralta. See "Major
Shareholders and Related Party Transactions -- Major Shareholders."
MANAGEMENT EMPLOYEE STOCK PURCHASE PLAN
New Iusacell's management employee stock purchase plan became the successor
to Old Iusacell's management employee stock purchase plan upon the close of
Iusacell's reorganization in August 1999. The plan helps to retain key
executives and better align their interests with those of Iusacell. 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 Iusacell, determines the executive employees to
whom series V shares of New Iusacell will be offered for purchase under the
stock purchase plan.
The Technical Committee, upon direction from the Human Resources and
Compensation Committee, determines the number of series V 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. The purchase price per share for the
purchase rights is one-tenth the closing price for the series V ADSs on the New
York Stock Exchange on the business day selected by the Technical Committee as
the date of sale, converted into pesos at the prevailing exchange rate published
by the Banco de Mexico.
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Grantees who leave the employ of New Iusacell forfeit unvested purchase
rights and, after a 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 V shares that may be granted under the stock
purchase plan cannot exceed 4.9% of the aggregate number of issued and
outstanding New Iusacell shares.
In December 1996, Old Iusacell's shareholders approved the issuance of
7,812,500 Old Iusacell series L shares for grant of purchase rights under the
stock purchase plan. In April 1998, 262,666 Old Iusacell series L shares which
were authorized for issuance but never issued under the stock purchase plan were
automatically canceled pursuant to a resolution of the shareholders of Old
Iusacell at the time such shares were authorized for issuance. In June 1998, Old
Iusacell's shareholders approved a 1,187,500 share increase in the number of Old
Iusacell series L shares available for grant under the stock purchase plan.
In 1997, the Human Resources and Compensation Committee and the Technical
Committee granted purchase rights with respect to a total of 8,571,311 Old
Iusacell series L shares to 51 executive employees at purchase prices ranging
between Ps.8.48 and Ps.14.00 per series L share. In 1998, the Human Resources
and Compensation Committee and the Technical Committee granted purchase rights
with respect to a total of 2,199,600 Old Iusacell series L shares to 15
executive employees at purchase prices ranging between Ps.5.16 and Ps.6.98 per
series L share. In 1999, the Human Resources and Compensation Committee and the
Technical Committee granted purchase rights with respect to a total of 1,603,000
Old Iusacell series L shares to 12 executive employees at purchase prices
ranging from Ps.9.20 to Ps.11.46 per series L share. All such purchase rights
vest either in three equal annual installments commencing a year after the date
of grant or in a lump two or three years after the date of the grant.
Upon the close of the Iusacell reorganization in August 1999, outstanding
purchase rights with respect to Old Iusacell series L shares were exchanged for
rights to purchase New Iusacell series V shares. In addition, 39 Iusacell
management employees exercised the right to purchase 1,220,690 series V shares
at U.S.$0.70 per share (Ps.6.52 on the date immediately prior to the date of the
launch of the offer) in the rights offer in respect of the shares held in the
management trust administering the plan.
As of December 31, 1999, purchase rights with respect to 5,502,749 series V
shares had not been exercised and were outstanding in the management trust
administering the plan: 4,820,664 series V shares held by executive employees
and 682,085 previously forfeited, unassigned series V shares held by the trust
and awaiting reassignment. In addition, in 1999, 2,267,145 shares held by the
trust had been exercised.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
We have two principal groups of shareholders. The first, Bell Atlantic,
comprises various subsidiaries of Bell Atlantic Corporation. Since February
1997, we have been under management control of subsidiaries of Bell Atlantic
Corporation. Our second group of shareholders, the Peralta Group, comprises Mr.
Carlos Peralta and a group of individuals and companies controlled by or related
to him. No other shareholders own more than 5% of any class of our shares. At
March 31, 2000, based on the information made available to us, our shareholders
were as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
--------------------------------------------------------------------------------------
SHAREHOLDERS A SHARES % V SHARES % TOTAL %
------------ ----------- ----- ----------- ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Bell Atlantic(1) .. 504,331,308 68.4 27,178,520 4.7 531,509,828 40.2
Peralta Group(2) .. 232,499,437 31.6 264,110,404 45.1 496,609,841 37.6
Public investors(3) -- -- 293,753,764 50.2 293,753,764 22.2
============= ===== ============= ===== ============= =====
Total ........... 736,830,745 100.0 585,042,688 100.0 1,321,873,433 100.0
============= ===== ============= ===== ============= =====
</TABLE>
- -------------------
(1) The address of the Bell Atlantic Corporation is: 1095 Avenue of the
Americas, New York, New York.
(2) The address of the Peralta Group is: Paseo de la Reforma 2608, Col. Reforma
Lomas Altas, Deleg. Miguel Hidalgo, 11950 Mexico D.F.
(3) Includes the series V shares held by the trust administering our executive
employee stock purchase plan.
Our directors and officers as a group own, in aggregate, less than 1% of
Iusacell's shares, excluding the shares held by Mr. Carlos Peralta.
Of Iusacell's series V shares at March 31, 2000, 278,462,370 series V
shares were held in the form of American depositary shares and held by 41
holders of record. Assuming that the holders of ADSs are located in the United
States, then 52.0% of the series V shares (the ADSs plus all but 1,400,000
series V shares held by Bell Atlantic which are already held as ADSs) are held
in the United States.
In August 1999, we completed a reorganization of Iusacell. The
reorganization included U.S.$132.5 million in borrowings from our principal
shareholders between August 1998 and March 1999 that were immediately converted
into equity, an offer to exchange the shares of Old Iusacell for shares of New
Iusacell, primary equity offerings that raised U.S.$33.7 million in net proceeds
for New Iusacell and a U.S.$106.5 million secondary offering by our principal
shareholders. This reorganization more than doubled the number of Iusacell's
publicly held shares. Before the August 1999 primary and secondary offerings,
Bell Atlantic had a 47.2% interest in Iusacell and the Peralta Group had a 43.8%
interest. After the August 1999 reorganization, Bell Atlantic and the Peralta
Group each had a 40.4% interest in Iusacell. On January 31, 2000, we launched a
second exchange offer to acquire the remaining 0.5% interest in Old Iusacell
held by public shareholders. This offer was completed on February 29, 2000 and,
as a result, we now hold 99.9% of the outstanding Old Iusacell shares. See Item
4, "Information on the Company -- History and Development of the Company." Since
this second exchange offer placed additional series V shares with public
shareholders, both Bell Atlantic and the Peralta Group were slightly diluted.
Bell Atlantic currently holds a 40.2% interest in Iusacell. Several relatives of
Carlos Peralta sold 34,874,534 series V shares in 2000 and the Peralta Group
currently holds a 37.6% interest in Iusacell.
Mr. Carlos Peralta has pledged 392,318,334 New Iusacell shares held of
record by him to four banks as security for certain loans extended to him.
GOVERNANCE
In accordance with New Iusacell's by-laws and the New Iusacell Shareholders
Agreement, our Board of Directors consists of twelve members. The series A
shareholders have the right to appoint seven directors and their alternates
(including the Chairman of the Board of Directors) and the series V shareholders
have the right to appoint five directors and their alternates. Mexican law and
Iusacell's by-laws give Bell Atlantic, as majority owner of the series A shares,
the right to elect six of the series A directors. Under the New Iusacell
Shareholders Agreement, Bell
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Atlantic has the right to elect six of the series A directors, including the
Chairman of the Board of Directors, whose vote, under both our by-laws and the
New Iusacell Shareholders Agreement, breaks a tie. The Peralta Group has the
right to appoint the remaining series A director from a list of nominees
provided by Bell Atlantic and, as the majority owner of the series V shares, all
five series V directors, subject to the right of any holder of a 10% or greater
equity interest in New Iusacell in the form of series V shares to elect one
director. In addition, Bell Atlantic and the Peralta Group have also agreed that
the Director General of New Iusacell shall be the fifth series V director.
Our by-laws provide that resolutions of the Board of Directors will be
valid when approved by a majority vote of the members present, including a
majority of the series A directors. As a result the directors nominated by Bell
Atlantic have the power under the by-laws to approve, without the affirmative
vote of any other directors, all resolutions of the Board of Directors. The New
Iusacell 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 a majority of the series A
directors and of the series V directors.
Our by-laws also provide that resolutions of our shareholders will be valid
when approved by a majority of our outstanding shares, including a majority of
the outstanding series A shares. The New Iusacell Shareholders Agreement,
however, grants the Peralta Group supermajority rights with respect to certain
transactions. For actions by the shareholders, "supermajority vote" means the
affirmative vote of the beneficial owners of a majority of the series A shares
and of the series V shares.
The following transactions are subject to a supermajority vote by our Board
of Directors or our shareholders:
- acquisitions of non-telecommunications businesses for a purchase price
in excess of U.S.$30.0 million,
- certain acquisitions, joint ventures and mergers within the
telecommunications business involving assets in excess of U.S.$100.0
million,
- certain dispositions of assets for consideration in excess of
U.S.$30.0 million,
- certain incurrences of indebtedness after January 1, 1999 in an amount
exceeding U.S.$100.0 million in the aggregate within any twelve-month
period,
- certain issuances of capital stock in an amount exceeding U.S.$50.0
million in the aggregate within any twelve-month period,
- entering into, amending or terminating contracts with or for the
benefit of certain affiliates of New Iusacell, except for any renewals
or extensions on terms substantially similar to those of certain
consulting and seconded employee arrangements of New Iusacell with
Bell Atlantic affiliates,
- 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
- terminations of concessions relating to telecommunications operations.
Pursuant to the New Iusacell Shareholders Agreement, Bell Atlantic and the
Peralta Group have agreed to some restrictions on the transfer of their New
Iusacell shares. Bell Atlantic and the Peralta Group agreed, among other things,
that until February 4, 2000, they will not sell more than 2% of their respective
holdings in Iusacell as of August 11, 1999. The Peralta Group also granted Bell
Atlantic a right of first refusal on the transfer of any series A shares by the
Peralta Group.
Pursuant to the New Iusacell Shareholders Agreement, Bell Atlantic and the
Peralta Group have the right to cause us to facilitate two registered secondary
public offerings of their respective shares, as long as minimum ownership
requirements are met. In addition, the Peralta Group has a one-time option to
cause us 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.
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The New Iusacell Shareholders Agreement also provides that if we register
any equity securities for a primary or secondary public offering, we must permit
Bell Atlantic 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. We have agreed to bear all expenses of any of the above-described
primary or secondary public offerings, other than the fees of counsel to the
holders of the registration rights and any underwriting commissions or
discounts. In addition, we have 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.
Pursuant to an agreement dated February 22, 1999 between Bell Atlantic and
the Peralta Group, the Peralta Group has the right to require Bell Atlantic to
purchase up to 516,877,269 shares of New Iusacell (which was the total number of
shares held by the Peralta Group on the date of such agreement) by giving Bell
Atlantic notice to such effect between November 15, 2001 and December 15, 2001.
The purchase price for such shares is contractually set at U.S.$0.75 per share.
These rights are specific to these 516,877,269 shares and, subject to certain
exceptions, terminate automatically with respect to particular shares if the
Peralta Group transfers such shares to a third party.
B. RELATED PARTY TRANSACTIONS
GENERAL POLICY
We adopted a policy on transactions with related parties in November 1993
in connection with the acquisition by Bell Atlantic of its initial holdings in
Iusacell. This policy provides that we will not, and will not permit any of our
subsidiaries to, enter into any contract or transaction with or for the benefit
of any of their affiliates (excluding transactions with, between or among wholly
owned subsidiaries), including the Peralta Group and Bell Atlantic, which is not
at a price and on other terms at least as favorable to us or the subsidiary as
those which could be obtained on an arm's-length basis from an unaffiliated
third party. This policy has been formalized in the New Iusacell Shareholders
Agreement.
THE BELL ATLANTIC FACILITY
On July 25, 1997 Bell Atlantic agreed to provide Old Iusacell with a
subordinated convertible financing facility in an aggregate amount of U.S.$150.0
million, which we refer to as the Bell Atlantic Facility. The subordinated
convertible debentures, which we refer to as the Debentures, issuable under the
Bell Atlantic Facility were available for issuance through June 30, 1999, were
to mature on December 31, 1999, and were to 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 a subordination agreement with certain senior lenders. The
principal amount of the Debentures was convertible at any time prior to maturity
into series A shares of Old Iusacell at a conversion price of U.S.$0.70 per
share.
In August, September and December 1998, Old Iusacell effected borrowings
totaling U.S.$101.5 million under the Bell Atlantic Facility. The Debentures
issued upon such borrowings were immediately converted into an aggregate of
144,999,999 series A shares of Old Iusacell, 21,428,571 of which shares were
simultaneously sold to the Peralta Group. In March 1999, Old Iusacell borrowed
an additional U.S.$31.0 million under the Bell Atlantic Facility. The Debentures
issued upon such borrowing were immediately converted into an aggregate of
44,285,714 series A shares of Old Iusacell, 22,142,857 of which shares were
simultaneously sold to the Peralta Group. The availability of funds under the
Bell Atlantic Facility expired on June 30, 1999. Old Iusacell did not draw down
any of the remaining U.S.$17.5 million available.
CONSULTING AND SECONDMENT AGREEMENTS
Old Iusacell and 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 seconded employees. Seconded employees
generally agree to expatriate assignments of two to three years duration, with
such employees' compensation being paid by Bell Atlantic and reimbursed by
Iusacell. Bell Atlantic charges Iusacell for the provision of consulting
services at cost.
With respect to consulting services and seconded employees provided in
1999, Old Iusacell has been invoiced by Bell Atlantic for a total of U.S.$3.5
million, which amount includes U.S.$2.1 million in reimbursement of the
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actual cost of seconded employees. We expect to receive an additional invoice in
the amount of approximately U.S. $0.6 million in respect of consulting services
provided in the fourth quarter of 1999. At December 31, 1999, Old Iusacell owed
Bell Atlantic U.S.$13.1 million for consulting services and seconded employees
provided in 1997, 1998 and 1999.
REAL ESTATE LEASES
Inmobiliaria Montes Urales 460, S.A. de C.V., a subsidiary of Iusacell,
leased office space to Servicios Corporativos IUSA, S.A. de C.V., a company
controlled by Carlos Peralta, until May 1999 pursuant to a lease which was
re-priced on January 1 of each year. Payments under the lease in 1999 equaled
U.S.$99,220 per month. In 1999, Servicios Corporativos IUSA paid Inmobiliaria
Montes Urales 460 U.S.$446,490 for such office space.
The Peralta Group owns Fraccionadora y Constructora Mexicana, S.A. de C.V.,
known as Fracomex, a company engaged in real estate investment and management
that has entered into 13 lease agreements with some subsidiaries of Iusacell.
The total amount payable by Iusacell to Fracomex per month for all such leases
currently is U.S.$31,265. In 1999, these payments totaled approximately
U.S.$312,654.
Two Peralta Group members lease land to Iusacell at the Peralta Group
industrial complex in Pasteje, Mexico, upon which Iusacell has built and
operates warehouses. Iusacell subleases some of this land to its Satelitron
satellite transmission subsidiary. These land leases expire in December 2015,
but can be terminated before then if either party gives the other one year's
prior written notice. Currently, Iusacell pays these two Peralta Group entities
U.S.$26,293 per month for these land leases. In 1999, payments for these leases
totaled U.S.$280,437.
On July 21, 1999, Inmobiliaria Montes Urales, S.A. de C.V., a subsidiary of
Iusacell, entered into an agreement with Video Visa Publicaciones, a company
controlled by Jose Ramon Elizondo, a director of Iusacell, for the rental of
space in our former headquarters building. The total amount payable by Video
Visa to Inmobiliaria Montes Urales is approximately U.S.$8,942.25 per month.
However, between August 1, 1999 and January 31, 2000, Video Visa was to pay rent
in kind through publication of advertisements of Iusacell Digital products.
Iusacell leases office space to Telecomunicaciones y Equipos, S.A. de C.V.
(TESA), a company formerly controlled by Carlos Peralta. TESA had owed Iusacell
rental payments for 1996 in the total amount of U.S.$76,920. In 1999, TESA's new
owners reached a settlement agreement with Iusacell in which Ps.514,314.98
(approximately U.S.$54,250) of the debt was forgiven. The balance of the debt
owed by TESA to Iusacell, for 1999 or otherwise, was paid.
OTHER SERVICES
Our Satelitron subsidiary provides data transmission services, technical
services and facilities to Internet Directo, S.A. de C.V., a Peralta Group
member that provides transmission enhancement services to internet access
providers. In 1999, Iusacell billed Internet Directo U.S.$590,343, including
value-added taxes, for such services. As of December 31, 1999, Internet Directo
owed Satelitron approximately U.S.$88,880 of the billed amount.
In 1996 and 1997, a subsidiary of Iusacell provided dedicated circuits to
Empresa Attis de Mexico, S.A. de C.V., a Mexican company in which, at that time,
the Peralta Group held a minority position. Since 1997, Empresa Attis has owed
Iusacell Ps.504,903 (U.S.$53,260) for such circuits. Empresa Attis was adjudged
bankrupt in 1997. This receivable has recently been determined to be
unrecoverable and has been charged against Iusacell's bad debt reserve in 1999.
INTERESTS OF DIRECTORS
In 1999, Manufacturas Electronicas Pasteje, S.A. de C.V., a joint venture
between the Peralta Group and Mr. Marco Antonio de la Torre Barranco, an
alternate director of Iusacell, provided telephone and accessory repair services
to Iusacell in the amount of Ps.0.8 million (U.S.$920,000).
In 1999, Telemercadeo Integral Panamericano, S.A. de C.V., a joint venture
between the Peralta Group and Mr. Marco Antonio de la Torre Barranco, provided
telemarketing services to Iusacell in the amount of Ps.0.8 million
(U.S.$87,100).
Mr. Fernando de Ovando, a director of New Iusacell until April 10, 2000,
Mr. Javier Martinez del Campo, an alternate director of New Iusacell until April
10, 2000 and a director of New Iusacell from and after that date, and
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Mr. Ignacio Gomez Morin, an alternate director of New Iusacell, are members of
the law firm of De Ovando y Martinez del Campo, S.C., which, in 1999, provided
legal services to Iusacell in the amount of approximately Ps.3.3 million
(U.S.$352,700).
As of November 1998, New Iusacell, Old Iusacell and Mr. Jose Ramon
Elizondo, a director of New Iusacell, entered into an agreement to participate
together in the microwave frequencies leasing, long distance, local telephony,
PCS and paging businesses. We have agreed with Mr. Elizondo that Iusacell will
own 94.9% of the economic interest and 49% of the voting shares of:
- Iusatel, S.A. de C.V., Iusacell's long distance concessionaire,
- Iusatelecomunicaciones, S.A. de C.V., Iusacell's fixed local wireless
telephony operation,
- Punto-a-Punto Iusacell, S.A. de C.V., a microwave frequencies
concessionaire, and
- Iusacell PCS, S.A. de C.V., which holds concessions for 1.9 GHz (PCS)
frequencies in Region 1 and Region 4.
Mr. Elizondo will own 5.1% of the economic interest and 51% of the voting shares
of these companies.
In addition, Mr. Elizondo agreed to purchase a 2% economic and voting
interest in Infotelecom, S.A. de C.V., a paging company, at cost from Old
Iusacell, which will continue to hold a 49% economic and voting interest in such
company. Mr. Elizondo completed this purchase in December 1998 for approximately
Ps.25,000 (approximately U.S.$2,625).
In November 1998, Mr. Elizondo subscribed to 51% of the voting shares of
Iusatel, S.A. de C.V. and Iusatelcommunicaciones, S.A. de C.V. for approximately
Ps.23.6 million (U.S.$2.5 million) and Ps.8.1 million (U.S.$850,000),
respectively. Mr. Elizondo has not yet paid for these subscriptions to capital
and has until June 30, 2000 to do so.
Old Iusacell and Mr. Elizondo organized Punto-a-Punto Iusacell, S.A. de
C.V. in July 1997 to participate in the operation of three concessions for
point-to-point short haul microwave frequencies acquired in the auctions
concluded in October 1997 and to participate in the auctions for long haul
microwave frequencies that commenced in March 1999 and concluded in July 1999
(and in which Punto-a-Punto Iusacell did not win any concessions). Old Iusacell
and Mr. Elizondo created a similar entity, Iusacell PCS, S.A. de C.V., in
October 1997 to operate the concessions for 1.9 GHz (PCS) frequencies in Region
1 and Region 4 acquired through the auctions completed in May 1998.
We estimate that Mr. Elizondo's maximum investment in these five entities
will be U.S.$15 million. The shares acquired or to be acquired by Mr. Elizondo
will be or are illiquid. From and after June 30, 2002, Mr. Elizondo can put all,
but not less than all, shares in any one or more of these five joint venture
investments to New Iusacell for an amount equal to his investment in the
corresponding joint venture company or companies, his cost of money to finance
such investment or investments plus, for each year of his investment, 4% of the
corresponding investment amount, grossed up with respect to any applicable
Mexican income taxes. New Iusacell and Old Iusacell each will have the right, at
any time, to call Mr. Elizondo's interest in these companies at the same price
as if the put were exercised.
C. INTERESTS OF EXPERTS AND COUNSEL
Mr. Fernando de Ovando, a director of New Iusacell until April 10, 2000,
Mr. Javier Martinez del Campo, an alternate director of New Iusacell until April
10, 2000 and a director of New Iusacell from and after that date, and Mr.
Ignacio Gomez Morin, an alternate director of New Iusacell, are members of the
law firm of De Ovando y Martinez del Campo, S.C., which, in 1999, provided legal
services to Iusacell in the amount of approximately Ps.3.3 million
(U.S.$352,700).
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ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
FINANCIAL STATEMENTS
See Item 19(a) for a list of financial statements filed under Item 18.
LEGAL PROCEEDINGS
Although we are a party to some legal proceedings in the ordinary course of
our business, management believes that, except as described below, none of these
proceedings, individually or in the aggregate, are likely to have a material
adverse effect on Iusacell.
SUIT AGAINST TELMEX AND TELCEL
A ruling by the Federal Competition Commission is still pending on the suit
filed by Iusacell 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.
As relief, we sought a declaration that Telmex and Telcel have violated
Mexican antitrust laws; the imposition of applicable sanctions; the termination
of the anticompetitive control that Telmex allegedly exercises over Telcel; the
modification of the interconnection contracts between Telmex and Iusacell to
eliminate anticompetitive provisions; the declaration of Telmex as a dominant
carrier in the cellular market; the regulation of interconnection in a manner
that promotes competition, including special regulation of Telmex as a dominant
carrier; the regulation of the terms under which users have access to the
different services that Telmex provides; the establishment of separate
accounting standards for Telmex; and the establishment of regulations for
unbundled and non-discriminating interaffiliate interconnection tariffs between
and among Telmex and our affiliates.
Telmex and Telcel have filed various motions against the suit. In February
1997, the Federal Competition Commission imposed a fine of Ps.847,500
(approximately U.S.$106,000 at that time) on Telmex and Telcel for their refusal
to provide the expert appointed by Iusacell with the necessary information to
prepare his opinion on the cross-subsidies claim. Additional fines were to
accrue on a daily basis. 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. In October 1997, the Administrative Third Court
of Appeals for the First Circuit in Mexico denied granting Telmex and Telcel a
preliminary injunction. Telmex and Telcel appealed this denial to the Mexican
Supreme Court, which has yet to determine the matter. In November 1998, in order
to accelerate resolution of this matter, the Federal Competition Commission
issued a new discovery order against Telmex and Telcel to provide documentation
to Iusacell relating to the cross-subsidies claim, confirming that the per diem
fines accrued against Telmex and Telcel for their prior refusal to comply had
reached approximately Ps.8.5 million (approximately U.S.$900,000). Telmex and
Telcel filed an injunctive action (amparo) against this new discovery order and
the imposition of the fine. Telmex's amparo was recently denied, but Telmex has
petitioned for a review of the decision (recurso de revision). To continue to
push the process forward, the Federal Competition Commission, applying the
recently issued Competition Regulations, issued a third discovery order,
applicable not only to Telmex and Telcel, but also to Iusacell, seeking
information relating to cross-subsidies for its own review. We recently complied
with this discovery order and have been informed that neither Telmex nor Telcel
complied. In addition, neither Telmex nor Telcel filed an injunctive action
(amparo) or a petition for review (recurso de revision) against this third
discovery order.
SUIT BY MITSUBISHI
Mitsubishi Electronics America, Inc. filed a complaint with the Circuit
Court of Cook County, Illinois, in the United States on July 18, 1996 against
Iusacell, Bell Atlantic Corporation and Bell Atlantic Latin American Holdings,
Inc. Mitsubishi's complaint alleges, among other things, that we breached a
purported contract for the purchase of 60,000 local wireless telephone terminals
at a cost of U.S.$510 each. Mitsubishi seeks judgment in an amount in excess of
U.S.$50,000 for each of three counts against Iusacell, plus punitive damages for
one of those counts. Mitsubishi has filed answers to interrogatories claiming
damages in an amount of U.S.$8,825,343.
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Mitsubishi has recently field an amended complaint against Old Iusacell, adding
a fraud allegation against Iusacell which Iusacell intends to move to dismiss.
Our motions to dismiss the complaint for lack of personal jurisdiction and
on substantive grounds were rejected, although the court reserved judgment on
Iusacell's motion to dismiss for forum non conveniens. The litigation is now in
the discovery stage; production of documents has largely been completed and
depositions of witnesses has begun. We believe the lawsuit has no basis and do
not anticipate that Mitsubishi will obtain a judgment in its favor for a
material amount of money damages because, in our view, the purported contract
was a non-binding letter of intent, and the purported reliance by Mitsubishi on
negotiations with us to order terminal components was unreasonable and
unwarranted. Nevertheless, in light of anticipated litigation expenses in 2000
and 2001, we are creating a contingency reserve of U.S.$3.0 million with respect
to the litigation.
SUIT BY PUBLICIDAD FERRER
In February 1998, Publicidad Ferrer y Asociados, S.A. de C.V., our former
advertising agency, filed a complaint with the 39th Civil Superior Tribunal in
the Federal District of Mexico against us. Publicidad Ferrer's complaint alleged
that we improperly terminated its contract and sought approximately Ps.23.7
million (U.S.$2.5 million) in damages in respect of lost commissions. In
September 1998, the 39th Civil Superior Tribunal ruled in favor of Iusacell,
finding no breach of contract and no damages. Publicidad Ferrer appealed to the
Third Superior Tribunal in the Federal District of Mexico, which affirmed the
lower court's ruling. Publicidad Ferrer then appealed to the First Circuit
Collegial Tribunal of the Mexican Supreme Court. In June 1999, the First Circuit
Collegial Tribunal reversed the ruling of the Third Superior Tribunal, finding
us in breach of contract and finding further that Publicidad Ferrer suffered
Ps.23.7 million in damages. The First Circuit Collegial Tribunal remanded the
case to the Third Superior Tribunal for sentencing in accordance with the
guidelines set forth in its ruling. Upon remand, the Third Superior Tribunal
confirmed the finding that we were in breach of our contract, but also ruled
that the damages suffered by Publicidad Ferrer were only Ps.16.8 million
(U.S.$1.8 million). Both Iusacell and Publicidad Ferrer filed injunctive actions
(amparos) against this sentence. The First Circuit Collegial Tribunal denied
both injunctive actions. In February 2000, we settled this litigation for
Ps.14.5 million (U.S.$1.5 million).
NON-JUDICIAL DISPUTES
In early 1999, the Mexican government enacted amendments to the Mexican
Income Tax Law (Ley del Impuesto Sobre la Renta) pursuant to which holding
companies, beginning January 1, 1999, were required to limit their tax
consolidation to 60% of all of their subsidiaries. Prior to January 1, 1999, we
prepared our tax returns on a fully consolidated basis (except for three
non-wholly owned subsidiaries which were 60% consolidated for tax purposes),
benefiting from the ability to offset loss incurred by some subsidiaries against
the gains of others within the consolidated group. In April 1999, we filed an
injunctive action (amparo) with the Second Court in Administrative Matters of
the Federal District of Mexico against these new income tax law amendments on
the grounds that they were unconstitutional. In late 1999, this court rejected
our injunctive action, and we have filed for a review (recurso de revision) with
the Second Circuit Collegial Tribunal in Administrative Matters. We do not
expect resolution of our motion for review until the fourth quarter of 2000.
In May 1998, we discovered that our former corporate headquarters in Mexico
City, of which one of our subsidiaries is the owner, is encumbered by liens for
an amount in excess of the estimated fair market value of the property. The
potential loss that may result due to the liens would be the book value of the
building, which was Ps.84.3 million (U.S.$8.9 million) at December 31, 1999. We
are currently negotiating with the Mexican Treasury, the holder of the liens, to
unencumber the property. We cannot assure you, however, that we will be able to
remove the liens from such property and realize any value from such asset.
In March 1994, Iusacell and Northern Telecom (CALA) Corporation ("Nortel")
entered into a five-year, U.S.$330.0 million agreement, which we refer to as 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 our technical and economic plans for the 450 MHz project had
not been approved by, or Iusacell 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. In 1994, as required under the Nortel
Agreement, we made advance payments of U.S.$15.0 million in
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anticipation of 1995 and 1996 purchases which were never made. We seek a refund
of such advanced funds. Nortel, however, has asserted that such advances should
be credited against development costs.
In 1995, we entered into a U.S.$82.0 million purchase agreement with Telrad
Telecommunications Electronics Industries, Ltd. for 450 MHz local wireless
terminals. We terminated this agreement in November 1996 based on the failure by
Telrad to meet delivery and government approval milestones and the failure to
meet quality standards.
Although we believe that we have no further liability under the Telrad
contract and has no further liability under the Nortel Agreement, we cannot
assure you that Telrad or Nortel will not seek legal redress against Iusacell or
that Telrad or Nortel will not succeed in obtaining damages from Iusacell.
Although we believe that Nortel is legally obligated to refund the U.S.$15.0
million advance to Iusacell, we cannot assure you that we will succeed in
obtaining such refund.
In 1996, Mexican tax authorities commenced tax audits on Old Iusacell and
two of its subsidiaries. These audits were completed in early 1999. In May 1999,
the Mexican tax authorities assessed us a Ps.21.4 million nominal peso penalty
(U.S.$2.2 million at the exchange rate then in effect) for purported incorrect
deductions of certain interest expense for income tax purposes. We paid this
assessment.
DIVIDEND POLICY
Since becoming a public company in 1994, we have not paid any dividends. We
do not contemplate paying dividends in the foreseeable future.
Each series A and V share has the same dividend rights. The declaration and
payment of such dividends will depend upon Iusacell's results of operations,
financial conditions, cash requirements, future prospects and other factors
deemed relevant by the shareholders. In addition, Mexican law provides that
Mexican companies may only pay dividends from retained earnings included in the
financial statements that have been approved by their shareholders. Dividends
may be paid only after all losses have been paid for, a legal reserve equal to
20% of paid-in capital has been achieved and shareholders have approved the
dividend payment. Some of Iusacell's subsidiaries, including Old Iusacell, have
outstanding debt obligations which limit the amount of dividends that can be
paid in any given year or prohibit dividends entirely. Iusacell and its
subsidiaries may agree to similar restrictions in the future as they incur
additional debt.
In accordance with the New Iusacell Shareholders Agreement, each of Bell
Atlantic and the Peralta Group has the right to cause Iusacell to pay dividends
in each fiscal year in an amount of up to 25% of the consolidated net income for
the prior fiscal year, provided that such payment is not in violation of
applicable law and would not adversely affect the foreseeable cash flow or
capital requirements of Iusacell. Consolidated net income for these purposes
will be determined in accordance with Mexican GAAP. However, the New Iusacell
Shareholders Agreement provides that, if consolidated net income so determined
exceeds consolidated net income determined in accordance with U.S. GAAP by more
than 10%, consolidated net income will be determined in accordance with U.S.
GAAP.
Any declaration and/or payment of dividends that would (i) in any fiscal
year exceed 25% of Iusacell's consolidated net income for the prior fiscal year
or (ii) be subject to Mexican withholding tax (except for dividends required by
the Peralta Group or Bell Atlantic, as discussed above) may be made only upon
the approval of holders of a majority of all outstanding shares, including
holders of a majority of the series A shares. Under Mexican law, shareholders
approve the declaration and payment of dividends generally, but not necessarily,
upon the recommendation of the Board of Directors.
Holders of ADRs on the applicable record date are entitled to receive
dividends declared on the shares underlying series V ADSs. The depositary will
fix a record date for the holders of ADSs in respect of each dividend
distribution.
B. SIGNIFICANT CHANGES
Not applicable.
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ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
New Iusacell's series A and V shares have been listed on the Mexican
Stock Exchange since August 4, 1999, with the series V shares listed under the
symbol CEL. ADSs representing ten New Iusacell series V shares have been listed
on the New York Stock Exchange since August 4, 1999 and trade under the symbol
CEL. The series V ADSs are evidenced by American depositary receipts issued
under a deposit agreement with The Bank of New York, as depositary. Each of the
New Iusacell series A and V shares are without stated par value and are in
registered form. With respect to limitations on the rights of series A and V
shares, see Item 5, "Operating and Financial Review and Prospects -- Liquidity
and Capital Resources -- Liquidity" and Item 7, "Major Shareholders and Related
Party Transactions -- Major Shareholders -- Governance."
Old Iusacell's series D and L shares were listed on the Mexican Stock
Exchange until February 29, 2000. ADSs representing ten Old Iusacell series D
shares were listed on the New York Stock Exchange from June 21, 1994 until
August 10, 1999 and traded under the symbol CEL.d. ADSs representing ten Old
Iusacell series L shares were listed on the New York Stock Exchange from June
21, 1994 until February 29, 2000 and traded under the symbol CEL until August 4,
1999 and thereafter under the symbol CEL.y.
The following tables present, for the periods indicated, the high, low
and period end sales prices of (i) the Old Iusacell series D and series L shares
and the New Iusacell series V shares on the Mexican Stock Exchange, as reported
by the Mexican Stock Exchange, and (ii) the Old Iusacell series D and series L
ADS and the New Iusacell series V ADSs on the New York Stock Exchange, as
reported by the New York Stock Exchange. We present the average trading volume
of the shares and ADSs for the indicated periods in 1997, 1998, 1999 and 2000.
We do not have average trading volume information for 1995 and 1996.
<TABLE>
<CAPTION>
MEXICAN STOCK EXCHANGE (IN PS.)
- ------------------------------------------------------------------------------------------
AVERAGE DAILY
TRADING VOLUME
PERIOD HIGH LOW CLOSE (SHARES)
- ------ ---- --- ----- --------------
<S> <C> <C> <C> <C>
SERIES D
First Quarter 1995 ....... 7.10 6.70 7.00 --
Second Quarter 1995 ...... 7.50 5.94 6.06 --
Third Quarter 1995 ....... 7.20 5.80 7.20 --
Fourth Quarter 1995(1) ... -- -- -- --
First Quarter 1996 ....... 7.20 6.88 6.88 --
Second Quarter 1996 ...... 7.00 6.60 6.98 --
Third Quarter 1996(1) .... -- -- -- --
Fourth Quarter 1996 ...... 6.98 4.98 5.75 --
First Quarter 1997 ....... 7.15 4.94 7.15 2,081
Second Quarter 1997 ...... 11.08 7.17 11.08 770
Third Quarter 1997 ....... 9.77 9.77 9.77 2,369
Fourth Quarter 1997 ...... 12.75 9.07 12.75 157,365
First Quarter 1998 ....... 12.89 12.73 12.73 1,823
Second Quarter 1998 ...... 8.76 8.76 8.76 410
Third Quarter 1998 ....... 8.52 4.00 4.00 631
Fourth Quarter 1998(1) ... -- -- -- --
First Quarter 1999 ....... 6.80 6.80 6.80 194
Second Quarter 1999 ...... 11.10 7.50 11.10 1,806
Third Quarter 1999 ....... 13.90 11.00 13.90 20,250
Fourth Quarter 1999(1) (3) -- -- -- --
</TABLE>
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<TABLE>
<CAPTION>
MEXICAN STOCK EXCHANGE (IN PS.)
- ------------------------------------------------------------------------------------------
AVERAGE DAILY
TRADING VOLUME
PERIOD HIGH LOW CLOSE (SHARES)
- ------ ---- --- ----- --------------
<S> <C> <C> <C> <C>
SERIES L .................
First Quarter 1995 ....... 10.00 5.40 6.80 --
Second Quarter 1995 ...... 8.48 7.00 7.28 --
Third Quarter 1995 ....... 9.18 7.08 8.98 --
Fourth Quarter 1995 ...... 8.80 8.14 7.96 --
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 6.79 8.46 14,105
Second Quarter 1997 ...... 13.97 8.98 13.97 6,595
Third Quarter 1997 ....... 14.77 13.47 13.97 32,505
Fourth Quarter 1997 ...... 12.74 12.97 17.20 43,750
First Quarter 1998 ....... 18.86 16.27 18.86 5,818
Second Quarter 1998 ...... 16.47 16.17 16.17 880
Third Quarter 1998 ....... 14.56 4.90 4.90 13,785
Fourth Quarter 1998 ...... 8.50 4.50 8.10 1,935
First Quarter 1999 ....... 8.60 8.10 8.50 532
Second Quarter 1999 ...... 13.50 8.30 11.50 1,903
Third Quarter 1999(4) .... 13.80 12.38 13.38 4,680
SERIES V
Third Quarter 1999 ....... 10.86 9.00 9.00 14,018,252(2)
Fourth Quarter 1999 ...... 17.00 8.80 14.10 412,852
September 1999 ........... 10.86 9.00 9.00 62,571
October 1999 ............. 11.28 8.80 11.20 195,059
November 1999 ............ 13.40 11.60 11.76 958,059
December 1999 ............ 17.00 11.80 14.10 331,000
January 2000 ............. 16.50 13.30 15.50 364,769
February 2000 ............ 22.90 16.00 19.64 363,095
</TABLE>
<TABLE>
<CAPTION>
NEW YORK STOCK EXCHANGE (IN U.S.$)
- --------------------------------------------------------------------------------------
AVERAGE DAILY
TRADING VOLUME
PERIOD HIGH LOW CLOSE (ADSs)
- ------ ---- --- ----- --------------
<S> <C> <C> <C> <C>
SERIES D
First Quarter 1995 .......... 16.000 7.375 10.375 --
Second Quarter 1995 ......... 13.125 9.000 10.500 --
Third Quarter 1995 .......... 12.375 9.500 10.500 --
Fourth Quarter 1995 ......... 10.375 8.000 8.000 --
</TABLE>
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<TABLE>
<CAPTION>
NEW YORK STOCK EXCHANGE (IN U.S.$)
- ----------------------------------------------------------------------------------------
AVERAGE DAILY
TRADING VOLUME
PERIOD HIGH LOW CLOSE (ADSs)
- ------ ---- --- ----- --------------
<S> <C> <C> <C> <C>
First Quarter 1996 .. 11.125 8.000 8.875 --
Second Quarter 1996 . 11.875 8.375 8.750 --
Third Quarter 1996 .. 8.875 6.750 6.750 --
Fourth Quarter 1996 . 7.125 5.625 5.750 --
First Quarter 1997 .. 9.625 5.605 8.375 9,958
Second Quarter 1997 . 15.125 8.375 14.750 10,238
Third Quarter 1997 .. 16.000 11.000 12.500 5,648
Fourth Quarter 1997 . 15.875 12.000 15.250 13,277
First Quarter 1998 .. 16.500 13.625 14.000 10,853
Second Quarter 1998 . 13.813 9.250 9.250 10,888
Third Quarter 1998 .. 12.188 3.875 4.656 6,211
Fourth Quarter 1998 . 8.750 4.125 6.313 4,316
First Quarter 1999 .. 8.750 6.063 7.375 5,812
Second Quarter 1999 . 13.750 7.000 12.750 7,747
Third Quarter 1999(3) 15.250 10.630 10.630 11,954
SERIES L
First Quarter 1995 .. 18.750 8.750 11.875 --
Second Quarter 1995 . 15.875 10.875 12.000 --
Third Quarter 1995 .. 15.500 11.250 13.000 --
Fourth Quarter 1995 . 13.375 9.250 10.125 --
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 .. 12.000 7.125 10.375 54,169
Second Quarter 1997 . 18.875 10.750 18.375 44,148
Third Quarter 1997 .. 20.000 15.375 19.938 45,653
Fourth Quarter 1997 . 22.438 17.125 21.688 38,135
First Quarter 1998 .. 22.813 19.063 20.625 31,575
Second Quarter 1998 . 20.563 13.625 13.750 33,946
Third Quarter 1998 .. 16.500 4.563 4.938 47,167
Fourth Quarter 1998 . 9.813 4.375 7.125 33,575
First Quarter 1999 .. 9.875 6.375 8.000 51,556
Second Quarter 1999 . 14.500 7.500 13.000 132,798
Third Quarter 1999 .. 15.560 9.500 13.310 34,328
Fourth Quarter 1999 . 16.125 7.250 14.688 5,440
September 1999 ...... 12.000 11.375 11.500 3,907
October 1999 ........ 11.500 10.563 10.625 4,455
November 1999 ....... 11.750 7.250 10.250 8,900
December 1999 ....... 16.125 10.000 14.688 6,850
January 2000 ........ 17.500 14.000 14.500 5,926
February 2000(4) .... 24.500 16.000 20.375 8,000
</TABLE>
89
<PAGE> 93
<TABLE>
<CAPTION>
NEW YORK STOCK EXCHANGE (IN U.S.$)
- ----------------------------------------------------------------------------------------
AVERAGE DAILY
TRADING VOLUME
PERIOD HIGH LOW CLOSE (ADSs)
- ------ ---- --- ----- --------------
<S> <C> <C> <C> <C>
SERIES V
Third Quarter 1999 .. 11.870 9.500 9.500 173,550
Fourth Quarter 1999 . 16.625 9.375 14.938 231,688
September 1999 ...... 11.875 9.500 9.500 82,962
October 1999 ........ 11.875 9.375 11.875 145,675
November 1999 ....... 14.563 12.500 12.500 312,814
December 1999 ....... 16.625 12.500 14.938 242,973
January 2000 ........ 17.813 14.000 15.125 205,845
February 2000 ....... 24.750 16.000 21.250 314,950
</TABLE>
- ----------
(1) There was no trading during this period.
(2) Reflects effect of the August 4, 1999 exchange of shares over the Mexican
Stock Exchange in connection with the Iusacell restructuring and
recapitalization plan.
(3) The series D shares and the series L shares were delisted from the Mexican
Stock Exchange on February 29, 2000.
(4) The series D ADSs were delisted from the New York Stock Exchange on August
10, 1999. The series L ADSs were delisted from the New York Stock Exchange
on February 29, 2000.
Source: Bloomberg L.P.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
TRADING ON THE NEW YORK STOCK EXCHANGE
ADSs representing ten New Iusacell series V shares have been listed on the
New York Stock Exchange since August 4, 1999 and trade under the symbol CEL.
ADSs representing ten Old Iusacell series D shares were listed on the New
York Stock Exchange from June 21, 1994 until August 10, 1999 and traded under
the symbol CEL.d. ADSs representing ten Old Iusacell series L shares were listed
on the New York Stock Exchange from June 21, 1994 until February 29, 2000 and
traded under the symbol CEL until August 4, 1999 and thereafter, until February
29, 2000, under the symbol CEL.y.
TRADING ON THE MEXICAN STOCK EXCHANGE
GENERAL
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 33 operating brokerage firms. These firms are
exclusively authorized to trade on the floor of the Mexican Stock Exchange.
Electronic trading on the Mexican Stock Exchange 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 are of 1,000 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.
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<PAGE> 94
Since January 11, 1999, the trading of equity securities listed on the
Mexican Stock Exchange is made through the Electronic Negotiation System, an
automated, computer-linked system commonly known as BMV-SENTRA Capitales. The
trading of debt securities on the Mexican Stock Exchange commenced in November
1995 through the system known as BMV-SENTRA Titulos de Deuda.
The BMV-SENTRA system allows participation in the securities markets
through work stations set up for this purpose on the trading floor of the
Mexican Stock Exchange and on the trading desks of each member broker. Member
brokers must maintain the number of work stations authorized by the Mexican
Stock Exchange, which work stations must be located in the territory of Mexico.
To access the BMV-SENTRA system, each member broker is given a password.
Transactions may be carried out through ordinary matched transactions
during a trading day or through an auction process. Ordinary transactions may
take the form of firm bids and offers that are matched on a given trading date,
or matched transactions (operaciones de cruce) in which the same broker or
brokers act for the seller and for the purchaser of the relevant securities.
Matched transactions may only occur if existing bids or offers made on better
terms are first matched. Auctions may only be initiated with the approval of the
Mexican Stock Exchange in order to (i) determine the market price of a security,
(ii) commence the trading of a security on a trading day or (iii) reinitiate
trading of a security the trading of which was suspended. Securities may only be
traded at prevailing market prices (which may be adjusted for corporate events)
or at auction prices.
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, known as Indeval, a privately
owned central securities depositary. Pursuant to the Mexican Securities Market
Law of 1975, the only persons authorized to be shareholders of Indeval are the
Mexican Central Bank, brokerage firms, securities specialists, stock exchanges,
credit institutions and 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 publishes a daily official price list that
includes information on each listed security. The Mexican Stock Exchange may
suspend trading of a particular security for various reasons. Trading may be
suspended in the event of disclosure of material non-public information, if the
Mexican Stock Exchange considers that the suspension is necessary for the public
to be fully informed. The Mexican Stock Exchange may also spend trading of a
particular security as a result of significant price fluctuations during a given
trading day (fluctuations exceeding a given price level by more than 15%) or as
a result of unusual movements in the price of a security, but in this last case,
during no more than five consecutive trading days. The Mexican Stock Exchange
may also suspend trading generally as a result of fortuitous events or force
majeure, or if unusual market fluctuations arise.
As of December 31, 1999, approximately 186 Mexican companies were listed on
the Mexican Stock Exchange, excluding mutual funds. During 1999, the ten most
actively traded equity issues represented approximately 51.5% 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.
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 stock markets and is subject to significant volatility.
During 1994, for example, the Mexican Stock Exchange Index (Indice de Precios y
Cotizaciones), which is based on the share prices of 30 major Mexican issuers,
experienced one-day declines of approximately 6% and 15%. Furthermore, following
the devaluation of the peso in late 1994, the Mexican Stock Exchange Index
declined (in peso terms) by approximately 36% from December 20, 1994 to February
27, 1995. On several occasions in 1995, the Mexican Stock Exchange Index
declined by more than 5% (in peso terms) in one day. From October 21, 1997 to
October 27, 1997, following sharp declines in Asian stock markets, the Mexican
Stock Exchange Index declined by 20.6%. There was another sharp decline of 38.8%
in the Mexican Stock Exchange Index from July 14, 1998 to September 10, 1998
following a decrease in oil prices and concerns about increasing inflation in
Mexico.
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<PAGE> 95
MARKET REGULATION AND REGISTRATION STANDARDS
On April 28, 1995, the National Banking and Securities Commission Law (Ley
de la Comision Nacional Bancaria y de Valores) 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 Mexican Ministry of Finance and
Public Credit.
In order to offer securities to the public in Mexico, an issuer must meet
qualitative and quantitative requirements, and only securities for which a
listing application has been approved by the Mexican National Securities
Commission may be listed on the Mexican Stock Exchange. CNBV approval does not
imply any kind of certification or assurance relating to the merits or the
quality of the securities or the solvency of New Iusacell. 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 National Registry of Securities and
Intermediaries, which we refer to as the 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:
- at least three years operating history unless the issuer is a holding
company, in which case the issuer's principal subsidiaries must have
an operating history of at least three years,
- stockholders' equity of at least 125,000,000 unidades de inversion,
which we refer to as UDIs, and which are inflation-indexed currency
units (equivalent to Ps.333.9 million or U.S.$35.2 million as of
December 31, 1999),
- profits for the last three years of operation taken as a whole,
- a public float of at least 15% of the capital stock on a fully diluted
basis, and
- as a result of its initial offering, at least 200 stock holders, 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:
- stockholders' equity of at least 62,500,000 UDIs (equivalent to
Ps.167.0 million or U.S.$17.6 million as of December 31, 1999),
- a public float of at least 12% of the capital stock on a fully diluted
basis, and
- 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 an issuer's securities may be reclassified to Subsection B if the issuer's
stockholders' equity is less than 62,500,000 UDIs but more than 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 the issuer, the registration and listing with the Mexican Stock Exchange may
be canceled by the
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<PAGE> 96
CNBV. Securities which are offered outside Mexico are required to be registered
in the Special Section of the RNVI.
Iusacell is registered in Subsection A of the RNVI.
Pursuant to the Mexican Securities Market Law, the CNBV must be notified
before shareholders of a company listed on the Mexican Stock Exchange effect one
or more simultaneous or successive transactions affecting 10% or more of such
company's capital stock. Also, a transfer of a block of shares representing 10%
or more of the shares of a public company outside the Mexican Stock Exchange
must be reported to the CNBV. The holders of the shares being transferred in the
transactions are also obligated to inform the CNBV of the results of the
transactions within ten days of completion of the last transaction, or that the
transactions have not been completed. The CNBV will notify the Mexican Stock
Exchange of these 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.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
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<PAGE> 97
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
DESCRIPTION OF IUSACELL CAPITAL STOCK
The outstanding capital stock of Iusacell consists of series A shares and
series V shares, no par value. The following table presents the number of shares
that were outstanding as of December 31, 1999 and March 31, 2000.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
PERCENTAGE
NUMBER OF NUMBER OF ISSUED PERCENTAGE OF OF VOTING
SHARES AUTHORIZED SHARES SHARES CAPITAL STOCK POWER
------ ----------------- ---------------- ------------- ----------
<S> <C> <C> <C> <C>
Series A ......... 749,830,745 736,830,745 56.0% 56.0%
Series V ......... 638,780,690 578,200,867 44.0% 44.0%
------------- ------------- ----- -----
Total....... 1,388,611,435 1,315,031,612 100.0% 100.0%
============= ============= ===== =====
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
PERCENTAGE
NUMBER OF NUMBER OF ISSUED PERCENTAGE OF OF VOTING
SHARES AUTHORIZED SHARES SHARES CAPITAL STOCK POWER
------ ----------------- ---------------- ------------- ----------
<S> <C> <C> <C> <C>
Series A ......... 749,830,745 736,830,745 55.7% 55.7%
Series V ......... 638,780,690 585,042,688 44.3% 44.3%
------------- ------------- ----- -----
Total....... 1,388,611,435 1,321,873,433 100.0% 100.0%
============= ============= ===== =====
</TABLE>
On February 29, 2000, we completed a second exchange offer of New Iusacell
series V shares in the form of ADSs for Old Iusacell series D and L shares in
the form of ADSs in which we exchanged 5,670,360 of our series V shares for
33,068 Old Iusacell series D shares and 5,637,292 Old Iusacell series L shares.
In March 2000, Old Iusacell's ADS Depositary, The Bank of New York
converted the remaining 1,171,461 series D and series L shares that had
previously been held in the form of series D and series L ADSs into our series V
shares.
All authorized shares that are not issued within a defined period of time
are automatically canceled. We expect to cancel 66,738,002 authorized but
unissued series A and V shares in April 2000. All issued shares are fully paid.
Neither Iusacell nor any of its subsidiaries holds any shares issued by
Iusacell. Iusacell has no shares that do not represent capital.
We have not issued any options to purchase our capital stock.
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<PAGE> 98
SHARE CAPITAL HISTORY
<TABLE>
<CAPTION>
OLD IUSACELL'S SHARES NEW IUSACELL'S SHARES
--------------------------------------------------------------------- ----------------------------
SERIES A SERIES B SERIES D SERIES L SERIES A SERIES V
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance as of 1/1/97 428,575,540 205,562,450 204,920,220 142,566,220
Share conversion upon
change of control(1) 266,769,760 (200,000,000) (66,769,760)
Issuance of common
stock upon exercise of
preemptive rights 256(2)
Issuance of common
stock for the Stock
Purchase Plan 7,642,398(3)
Issuance of common
stock through the
capitalization of debt 51,408,110(4) 48,754,000(4)
------------ ------------ ------------ ------------ ------------ ------------
Balance as of 12/31/97 746,753,410 5,562,450 186,904,725 150,208,618
Issuance of common
stock upon exercise of
preemptive rights 40(5)
Issuance of common
stock for the Stock
Purchase Plan 1,117,496(6)
Issuance of common
stock through the
conversion of debt 144,999,999(7)
Incorporation of New
Iusacell 8,750 8,750
------------ ------------ ------------ ------------ ------------ ------------
Balance as of 12/31/98 891,753,409 5,562,450 186,904,725 151,325,154 8,750 8,750
Issuance of common
stock for the Stock
Purchase Plan 70,004(8)
Issuance of common
stock through the
conversion of debt 44,285,714(9)
Exchange offer (10) (936,039,123) (5,562,450) (186,844,813) (144,565,453) 736,821,995 536,189,844
Rights offer 18,405,490(11)
Primary offering 23,596,783(12)
------------ ------------ ------------ ------------ ------------ ------------
Balance as of
12/31/99(13) -- -- 59,912 6,830,705 736,830,745 578,200,867
============ ============ ============ ============ ============ ============
</TABLE>
- ----------
(1) In February 1997, in connection with the acquisition by Bell Atlantic of
the management control of Old Iusacell, Bell Atlantic and the Peralta Group
effected certain share conversions in order to give Bell Atlantic a
majority of the Old Iusacell series A shares and control over the Old
Iusacell Board of Directors. All conversions were effected on a
share-for-share basis.
(2) Preemptive rights exercised at the market price per share for series D
shares on the date of exercise.
(3) Stock Purchase Plan shares issued at prices ranging from Ps. 8.48 to
Ps. 14.00 per share.
(4) Debt capitalized at the peso equivalent on the capitalization date of
U.S.$0.70 per share.
(5) Preemptive rights exercised at the market price per share for series L
shares on the date of exercise.
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<PAGE> 99
(6) Stock Purchase Plan shares issued at prices ranging from Ps.5.16 to Ps.6.98
per share.
(7) Debt converted into equity at the peso equivalent on the conversion date of
U.S.$0.70 per share.
(8) Stock Purchase Plan shares issued at Ps.9.20 per share.
(9) Debt converted into equity at the peso equivalent on the conversion date of
U.S.$0.70 per share.
(10) In August 1999, in connection with the Iusacell restructuring and
recapitalization plan, we exchanged our series A and V shares for Old
Iusacell's series A, B, D and L shares on a one-for-one basis. See Item 4,
"Information on the Company --History and Development of the Company."
(11) Rights offer shares sold at U.S.$0.70 per share or its peso equivalent.
(12) Primary offer shares sold at U.S.$1.05 per share or its peso equivalent.
(13) Subsequent Events: On February 29, 2000, we completed a second exchange
offer of our series V shares (in the form of ADSs) for Old Iusacell series
D and L shares (in the form of ADSs) in which we exchanged 5,670,360 of our
series V shares for 33,068 Old Iusacell series D shares and 5,637,292 Old
Iusacell series L shares. In March 2000, Old Iusacell's ADS Depositary
converted the remaining 1,171,461 series D and series L shares that had
previously been held in the form of series D and series L ADSs into our
series V shares.
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<PAGE> 100
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
GENERAL
New Iusacell was incorporated on August 6, 1998 as a variable capital
corporation (sociedad anonima de capital variable) established under the laws of
Mexico. New Iusacell was registered in the Public Registry of Commerce of the
Federal District of Mexico under Commercial Number 242349 on November 3, 1998.
We were formed for the purpose of acquiring and holding the shares of Grupo
Iusacell Celular, S.A. de C.V.
New Iusacell's corporate purposes are found under Article Two of its
by-laws. New Iusacell's primary purpose is to act as a holding company. The
duration of our existence under our by-laws is indefinite.
DIRECTORS
Under Mexican law, any member of the Board of Directors who has a conflict
of interest with Iusacell in any transaction must disclose such fact to the
other members of the Board of Directors and abstain from voting on such matter
at the relevant meeting of the Board of Directors. Any member of the Board of
Directors who violates such provision may be liable for damages caused to us.
Additionally, members of the Board of Directors may not represent any
shareholders at any shareholders' meeting.
VOTING RIGHTS AND SHAREHOLDERS' MEETINGS
Each series A and series V share entitles the holder to one vote at any
general meeting of the shareholders of Iusacell. Series A shareholders are
entitled to vote at a special meeting of the series A shareholders to elect
seven of the twelve members of our Board of Directors and the corresponding
alternate directors. Series V shareholders are entitled to vote at a special
meeting of the series V shareholders to elect five of the twelve members of our
Board of Directors and the corresponding alternate directors.
Under Mexican law, the holders of shares of any series are also entitled to
vote at a special meeting of the holders of shares of such series on any action
that would prejudice the rights of such holders, and such a holder would be
entitled to judicial relief against any such action taken without the approval
of holders of the relevant series at such a meeting. Any determination that an
action does not require a vote at a special meeting would be subject to judicial
challenge by an affected shareholder, and the necessity for a vote at a special
meeting would ultimately be determined by a court. Mexican law does not provide
extensive guidance on the criteria to be applied in making such a determination.
General shareholders' meetings may be ordinary or extraordinary meetings.
Extraordinary general meetings are meetings called to consider the matters
specified in Article 182 of the Ley General de Sociedades Mercantiles, which we
refer to as the Mexican Companies Law including, principally, changes in the
fixed share capital, any amendments to the by-laws, liquidation, issuance of
preferred stock, merger, transformation from one type of company to another,
change in nationality and change of corporate purpose.
General meetings called to consider all other matters are ordinary
meetings. An ordinary general meeting of the shareholders of Iusacell must be
held at least annually during the four months following the end of each fiscal
year to consider matters specified in Article 181 of the Mexican Companies Law,
including, principally, the approval of the report of the Board of Directors
regarding the performance of Iusacell, the approval of the financial statements
of Iusacell for the preceding fiscal year, appointment of directors and
statutory auditors and determination of their compensation, and the declaration
of dividends.
Special meetings are meetings of the holders of a particular series of
shares called to consider matters relevant only to holders of such series of
shares or which would prejudice the rights of such holders. Special meetings of
the series A and the series V shareholders, respectively, are to be held at
least once a year if necessary to elect the members of the Board of Directors
(or any committee of the Board of Directors) representing such shareholders and
to address other matters relating to the relevant series.
Under our by-laws, the quorum on a first call for an ordinary general
shareholders meeting of the series A and V shareholders is at least 51% of the
outstanding series A and V shares. If a quorum is not available on the first
call, a second meeting may be called. In order for a resolution of the ordinary
general meeting to be validly adopted as a result of a first or subsequent call,
attendance by and the favorable vote of the holders of a majority of the series
A shares is required.
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<PAGE> 101
The quorum on a first call for an extraordinary general meeting is 75% of
the outstanding shares. The quorum on a first call for a special meeting is 75%
of the outstanding shares of the corresponding series. If a quorum is not
available on the first call, a second meeting may be called and convened,
provided that at least 51% of the outstanding shares or 51% of the outstanding
shares of the corresponding series, as the case may be, are present. Whether on
a first or second call, in order for a resolution of an extraordinary general
meeting to be validly adopted, the favorable vote of the holders of a majority
of the outstanding shares, including a majority of the outstanding series A
shares, is required. Whether on a first or second call for a special meeting to
take action, the favorable vote of a majority of the outstanding shares of the
corresponding series is required.
The by-laws require the approval of holders of at least 95% of the
outstanding shares of Iusacell and the approval from the CNBV for the amendment
of the controlling shareholders' obligation specified in Article 28 of the
by-laws for the repurchase of shares in the event of delisting.
Holders of ADRs are entitled to instruct the depositary as to the exercise
of the voting rights pertaining to the series V shares represented by the ADSs.
Under Mexican law, holders of 33% of our outstanding capital stock may have
any shareholder action set aside by filing a complaint with a Mexican court of
competent jurisdiction within 15 days after the close of the meeting at which
such action was taken, by showing that the challenged action violates Mexican
law or our by-laws. Relief under these provisions is only available to holders:
- who were entitled to vote on, or whose rights as shareholders were
adversely affected by, the challenged shareholder action,
- whose shares were not represented when the action was taken or, if
represented, were voted against it, and
- whose complaint makes reference to the clause of the by-laws or the
legal provision that was infringed.
Shareholders' meetings may be called by the Board of Directors, the
statutory auditors or any Mexican court of competent jurisdiction. The Board of
Directors or the statutory auditors may be required to call a meeting of
shareholders by the holders of 33% of the outstanding capital stock. In
addition, the Board of Directors or the statutory auditors must call a
shareholders' meeting at the written request of any shareholder if no ordinary
general shareholders' meeting has been held for two consecutive years or if the
shareholders' meetings held during such period have not considered the items
mentioned in Article 181 of the Mexican Companies Law discussed above. Notice of
a meeting must be published in the Official Gazette of the Federation (Diario
Oficial de la Federacion) and in a newspaper of general circulation in Mexico
City at least 15 days prior to the meeting. In order to attend a shareholders'
meeting, a shareholder must request and obtain an admission card by furnishing,
at least 48 hours before the time set for holding the shareholders' meeting,
appropriate evidence of its ownership of shares or depositing such shares with
our corporate secretary or with an institution authorized to accept such
deposit. If so entitled to attend the meeting, a shareholder may be represented
by proxy signed before two witnesses.
Under Mexican law, an action for civil liabilities against members of the
Board of Directors may be initiated by a shareholders' resolution. In the event
shareholders decide to bring such an action, the persons against whom such
action is brought will immediately cease to be members of the Board of
Directors. Additionally, shareholders representing not less that 33% of the
outstanding shares of New Iusacell may directly take such action against members
of the Board of Directors, provided that (i) such shareholders have not voted in
favor of a resolution approved at the relevant shareholders' meeting pursuant to
which it was resolved not to take any action against the directors who are to be
sued, and (ii) the claim in question covers damages alleged to have been caused
to Iusacell and not only to the individual plaintiffs' interests.
SHAREHOLDER CONFLICTS OF INTEREST
Under Mexican law, any shareholder that has a conflict of interest in
connection with any transaction must abstain from voting at the relevant
shareholders' meeting. A shareholder that votes on a business transaction in
which our interest conflicts with that of Iusacell may be liable for damages if
the transaction would not have been approved without such shareholder's vote.
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<PAGE> 102
DIVIDEND RIGHTS
At the annual ordinary general meeting of shareholders of Iusacell, the
Board of Directors will generally submit the financial statements of Iusacell
for the previous fiscal year, together with a report by the Board of Directors,
to the series A and V shareholders for their approval. The series A and V
shareholders, having approved the financial statements, will determine the
allocation of Iusacell's net profits for such fiscal year. At least 5% of such
net profits must be allocated to a legal reserve, which is not available for
distribution except as a stock dividend, until the amount of the legal reserve
equals 20% of New Iusacell's capital stock. Additional amounts may be allocated
to other reserve funds as the shareholders determine including a reserve to
repurchase shares. The remaining balance of net profits, if any, is available
for distribution as dividends but only after losses, if any, of previous years
have been paid for.
All shares of each series outstanding at the time a dividend or other
distribution is declared are entitled to share pro rata in such dividend or
other distribution. Partially-paid shares participate in any distribution to the
extent that such shares have been paid at the time of the distribution.
LIQUIDATION
In the event that we are liquidated, one or more liquidators must be
appointed at an extraordinary general shareholders' meeting to wind up our
affairs. All outstanding shares would be entitled to participate equally in any
distribution upon liquidation. Partially-paid shares participate in any
distribution to the extent that such shares have been paid at the time of the
distribution.
CHANGES IN SHARE CAPITAL AND RIGHTS OF SHAREHOLDERS
An increase of capital stock may be effected through the issuance of new
shares for payment in cash or in kind, by capitalization of indebtedness or by
capitalization of certain items of shareholders' equity. No increase of capital
stock may be effected until all previously issued shares of capital stock have
been fully paid. A reduction of capital stock may be effected to absorb losses,
to redeem shares, or to release shareholders from payments not made. A reduction
of capital stock to absorb losses is effected by reducing the value of all
outstanding shares. A reduction of capital stock to redeem shares is effected by
redeeming shares pro rata or by lot.
Shareholders may also approve the redemption of fully-paid shares with
retained earnings. Such a redemption would be effected by a repurchase of shares
listed on the Mexican Stock Exchange.
The by-laws require that, unless a shareholders' meeting resolves
otherwise, any capital increase effected pursuant to a capital contribution be
represented by new series A and V shares in proportion to the number of shares
of each such series outstanding. Our by-laws provide that the series V shares
may not exceed 49% of our capital stock.
The fixed portion of our capital stock may only be increased or decreased
by resolution of an extraordinary general meeting and an amendment to the
by-laws, whereas the variable portion of our capital stock may be increased or
decreased by resolution of an ordinary general meeting of shareholders.
No resolution by the shareholders is required for decreases in capital
stock based on exercise of the right to withdraw variable shares and of the
purchase by Iusacell of our own shares or for increases based on offers by us of
shares we had previously purchased.
PREEMPTIVE RIGHTS
In the event of a capital increase through the issuance of new shares for
payment in cash or in kind, a holder of existing shares of a given series has a
preferential right to subscribe for a sufficient number of new shares of the
same series to maintain the holder's existing proportionate holdings of shares
of that series. Preemptive rights must be exercised within the period and under
the conditions established for such purpose by the shareholders, and under
Mexican law and our by-laws in no case may such period be less than 15 days
following the publication of notice of the capital increase in the Official
Gazette of the Federation or following the date of the shareholders' meeting at
which the capital increase was approved if all shareholders were represented.
Otherwise, such rights will lapse.
Under Mexican law, preemptive rights may not be waived in advance by a
shareholder, and cannot be represented by an instrument that is negotiable
separately from the corresponding share. Holders of ADRs that are
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U.S. persons or are located in the United States may be restricted in their
ability to participate in the exercise of preemptive rights.
OTHER PROVISIONS
FIXED AND VARIABLE CAPITAL, WITHDRAWAL RIGHTS
As a sociedad anonima de capital variable, we may issue shares constituting
fixed capital and shares constituting variable capital. The issuance of variable
capital shares, unlike the issuance of fixed capital shares, does not require an
amendment of our by-laws, although it does require approval at an ordinary
general meeting of shareholders.
Under the by-laws and CNBV regulations, variable capital may not be greater
than ten times the minimum fixed portion of our capital stock specified in the
by-laws. No shares of Iusacell representing variable capital are currently
outstanding. Outstanding variable capital shares may be fully or partially
withdrawn by a resolution adopted by a shareholders' meeting calling for a
capital reduction. In contrast, the minimum fixed capital required by law cannot
be withdrawn. A holder of variable capital shares that wishes to effect a total
or partial withdrawal of such shares would be required to notify us in an
authenticated written notice to that effect. If we received that notice prior to
the last quarter of the fiscal year, the withdrawal would become effective at
the end of the fiscal year in which the notice was given. Otherwise, the
withdrawal would become effective at the end of the following fiscal year.
Redemption of variable capital shares of New Iusacell would be made at the
lower of (i) 95% of the average share price quoted on the Mexican Stock Exchange
during the 30 business days prior to the date on which the withdrawal were to
become effective or (ii) the book value per variable capital share as calculated
from our financial statements for the fiscal year at the end of which the
withdrawal were to become effective, as approved by our shareholders at an
ordinary general meeting. Any such amount to be paid by Iusacell would become
due on the day following such ordinary general meeting. The covenants contained
in the New Iusacell Indenture limit New Iusacell's ability to issue variable
capital shares. The covenants contained in the Old Iusacell Indenture, the
Senior Credit Facility and the Eximbank Facilities limit Old Iusacell's ability
to issue variable capital shares.
FORFEITURE OF SHARES
As required by Mexican law, the by-laws provide that "current or future
foreign shareholders of New Iusacell shall be deemed to have agreed with the
Ministry of Foreign Relations of Mexico to consider themselves as Mexican
nationals with respect to the shares of New Iusacell that they may acquire or of
which they may be owners, and therefore not to invoke the protection of their
governments with respect to such shares under penalty, should they do so, of
forfeiting for the benefit of the Nation the shares that they may have
acquired."
In the opinion of De Ovando y Martinez del Campo, S.C., special Mexican
counsel to Old Iusacell and New Iusacell, under this provision a non-Mexican
shareholder is deemed to have agreed not to invoke the protection of his own
government by requesting such government to interpose a diplomatic claim against
the Mexican government with respect to its rights as a shareholder, but is not
deemed to have waived any other rights it may have with respect to its
investment in Iusacell, including any rights under U.S. securities laws (the
enforceability of which may be challenged in Mexico).
If the shareholder should invoke such governmental protection in violation
of this agreement, its shares could be forfeited to the Mexican government.
Mexican law requires that such a provision be included in the by-laws of all
Mexican corporations unless such by-laws prohibit ownership of capital stock by
foreign investors.
PURCHASE OF OUR OWN SHARES
We may repurchase our own shares on the Mexican Stock Exchange at any time
at the then-prevailing market price. Any such repurchase must be approved by the
Board of Directors. Our capital stock would be reduced automatically in an
amount equal to the nominal value of each repurchased share. The amount of such
reduction is determined by dividing the paid-in capital stock by the number of
shares outstanding immediately prior to such repurchase. In the event that the
purchase price of such shares exceeded the nominal value, the difference would
be paid for with amounts allocated from net earnings to a special reserve
created for the repurchase of shares. Amounts used for the repurchase of shares
may not exceed the aggregate amount of our retained earnings.
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We would hold repurchased shares as treasury stock, pending future sales
which may only be effected on the Mexican Stock Exchange. Our capital stock
would be automatically increased upon the resale of such shares in an amount
equal to their nominal value; any excess amount would be allocated to the
special reserve referred to above. The economic and voting rights corresponding
to such repurchased shares may not be exercised during the period in which such
shares are owned by us, and such shares would not be deemed to be outstanding
for purposes of calculating any quorum or vote at any shareholders' meeting
during such period.
REPURCHASE IN THE EVENT OF DELISTING
In the event that the registration of our shares in the Securities Section
of the RNVI is canceled, whether upon our request or pursuant to a resolution
adopted by the CNBV, our by-laws and CNBV regulations require that our
controlling shareholders make a public offer to purchase the shares owned by
minority holders. The shares must be purchased by our controlling shareholders
at the higher of (i) the average quotation price of the shares for the 30
trading days prior to the date of the offer or (ii) the book value of the
shares, as reflected in the last quarterly report filed with the CNBV and the
Mexican Stock Exchange prior to the date of the offer.
APPRAISAL RIGHTS
Whenever the shareholders approve a change of corporate purpose, change of
nationality or transformation from one type of corporate form to another, any
shareholder entitled to vote on such change or transformation who has voted
against it has the right to withdraw from Iusacell and receive an amount
generally equivalent to the book value of our shares (in accordance with our
last balance sheet approved by a shareholders' meeting), provided such
shareholder exercises its right to withdraw within 15 days following the
adjournment of the meeting at which the change or transformation was approved.
FOREIGN INVESTMENT LEGISLATION
Foreign investment in capital stock of Mexican corporations in certain
economic sectors, including telephone and cellular services, is regulated by the
1993 Foreign Investment Law, as amended, and the regulations issued under that
law in 1998, which we refer to as the 1998 Regulations. Under the 1993 Foreign
Investment Law, foreign investment is defined in general as the participation of
foreign investors in the voting capital stock of Mexican corporations and in
activities which are regulated by the 1993 Foreign Investment Law. Foreign
investors are defined as non-Mexican individuals, non-Mexican legal entities and
foreign entities without legal personality.
The Mexican Foreign Investment Commission and the Mexican National Registry
of Foreign Investment are responsible for the administration of the 1993 Foreign
Investment Law and the 1998 Regulations. In order to comply with foreign
investment restrictions, Mexican companies that are engaged in specified
restricted industries typically limit particular classes of their stock to
ownership by Mexican individuals and by Mexican corporations in which foreign
investment has a minority participation.
As a general rule, the 1993 Foreign Investment Law allows foreign
investment in up to 100% in the capital stock of Mexican companies, except for
those engaged in specified restricted industries, such as basic telephone
service, where foreign investment is limited to 49% of the voting capital stock.
Foreign investment may, however, participate in a proportion in excess of 49% of
the voting capital stock of a Mexican corporation engaged in the cellular
telephone business with the advance approval of the Foreign Investment
Commission. New Iusacell has received such approval and, as a result, neither
our series A nor our series V shares are restricted to Mexican ownership.
Foreign states and foreign governments are prohibited under the 1995
Telecommunications Law from holding a concession or permit to provide
telecommunications services, from receiving any such concession or permit as a
guarantee, or from being the beneficiary of any such guarantee or from directly
or indirectly owning shares of New Iusacell.
C. MATERIAL CONTRACTS
In December 1997, Old Iusacell executed a minimum U.S.$188.0 million
agreement with subsidiaries of Lucent Technologies, Inc. pursuant to which Old
Iusacell agreed to replace its existing analog wireless cellular network with a
new Lucent Technologies analog and digital network and to continue to expand its
network with Lucent Technologies network equipment. Through December 31, 1999,
Old Iusacell has purchased approximately
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U.S.$277.0 million of network equipment and services under this agreement. Old
Iusacell's network swap-out was completed in August 1999.
In December 1999, Old Iusacell, as a first step toward minimizing its
involvement in real estate management and tower maintenance business, entered
into an agreement with a Mexican subsidiary of American Tower Corporation
pursuant to which American Tower's Mexican subsidiary could acquire the majority
of towers currently owned and/or operated by Old Iusacell. In return, Old
Iusacell would lease space on those towers. If this agreement were fully
implemented, Old Iusacell would receive in excess of U.S.$30.0 million in
proceeds from the sale of the towers.
See also, Item 5, "Operating and Financial Review and Prospects --
Liquidity and Capital Resources -- Liquidity," for a summary of Iusacell's
material credit agreements and indentures.
D. EXCHANGE CONTROLS
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 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/ U.S. dollar
exchange rate band and then, two days later, allowing the peso to fluctuate
freely against the U.S. dollar. By December 31, 1994, the peso/ U.S. dollar
exchange rate, which had been Ps.3.466 to U.S.$1.00 on December 19, 1994, was
Ps.5.000 to U.S.$1.00. At December 31, 1996, the peso/ U.S. dollar exchange rate
was Ps.7.88 to U.S.$1.00.
Fluctuations in the exchange rate between the peso and the U.S. dollar
affect the U.S. dollar equivalent of the peso price of securities traded on the
Mexican Stock Exchange, including our shares and, as a result, are likely to
affect the market price of our securities. The peso devaluation most likely had
a direct effect on the drop in the market price of the ADSs recorded after the
devaluation. See market prices in Item 9, - "The Offer and Listing - Offer and
Listing -- Details." 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 Iusacell's operating
results depending on the terms of its contractual arrangements and the effect of
the fluctuation on the specific industries served by Iusacell. See Item 5,
"Operating and Financial Review and Prospects -- Devaluation and Inflation."
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 Iusacell) to meet their
foreign currency obligations. Nevertheless, in the event of renewed shortages of
foreign currency, we cannot assure you that Banco de Mexico would continue to
make foreign currency available to private sector companies or that foreign
currency we need to service foreign currency obligations could be purchased in
the open market without substantial additional cost.
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.
E. TAXATION
GENERAL
The following is a general summary of material U.S. and Mexican federal
income tax consequences of the acquisition, ownership and disposition of New
Iusacell ADSs. This summary does not constitute, and should not be construed as,
legal or tax advice to holders of New Iusacell ADSs. This summary does not
purport to consider all
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the possible U.S. or Mexican federal income tax consequences of the purchase,
ownership and disposition of the New Iusacell ADSs and is not intended to
reflect the individual tax position of any beneficial owner thereof. The summary
is based upon Mexican federal tax law and the Internal Revenue Code of 1986, as
amended (the "Code"), its legislative history, existing and proposed U.S.
Treasury regulations promulgated thereunder, published rulings by the U.S.
Internal Revenue Service ("IRS") and court decisions, all in effect as of the
date hereof, all of which authorities are subject to change or differing
interpretations, which changes or differing interpretations could apply
retroactively.
This summary is limited to investors who hold the New Iusacell ADSs as
"capital assets" within the meaning of section 1221 of the Code (i.e.,
generally, property held for investment) and does not purport to deal with
investors in special tax situations, such as financial institutions, tax exempt
organizations, insurance companies, regulated investment companies, dealers in
securities or currencies, persons holding notes as a hedge against currency
risks or as a position in a "straddle," "conversion transaction," or
"constructive sale" transaction for tax purposes, or persons whose functional
currency (as defined in section 985 of the Code) is not the U.S. dollar. In
general, for U.S. federal income tax purposes, holders of New Iusacell ADSs will
be treated as the owners of the series V shares represented by those New
Iusacell ADSs.
Prospective purchasers of the New Iusacell ADSs should consult their own
tax advisors concerning the application of Mexican and U.S. federal income tax
laws to their particular situations as well as any consequences of the purchase,
ownership and disposition of the New Iusacell ADSs arising under the laws of any
state, locality or foreign government or other taxing jurisdiction.
As used herein, the term "U.S. Holder" 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 of its states, 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 New Iusacell 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 New Iusacell 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.
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 related Protocols (collectively, the "Tax Treaty"). The Tax
Treaty is currently in effect and provisions of the Tax Treaty that may affect
holders of New Iusacell ADSs are summarized below. Holders should consult with
their tax advisors as to their entitlement to the benefits afforded by the Tax
Treaty.
The U.S. Treasury has expressed concerns that parties to whom ADSs are
released may be taking actions that are inconsistent with the claiming of
foreign tax credits for U.S. Holders of ADSs. Accordingly, the analysis of
creditability of Mexican taxes described below could be affected by future
actions that may be taken by the U.S. Treasury.
TAXATION OF DISTRIBUTIONS
U.S. FEDERAL INCOME TAX CONSIDERATIONS
Distributions paid out of New Iusacell's current or accumulated earnings
and profits (as determined for U.S. federal income tax purposes) with respect to
the series V shares represented by New Iusacell ADSs will be includible in the
gross income of a U.S. Holder as ordinary income when the distributions are
received by the depositary or by the U.S. Holder of a certificated ADS, and will
not be eligible for the dividends received deduction otherwise allowable to U.S.
Holders that are corporations. To the extent that a distribution exceeds
earnings and profits, it will be treated first as a return of the U.S. Holder's
tax basis to the extent of such tax basis, and then as gain from the sale or
disposition of a capital asset. A U.S. Holder must include in gross income as
ordinary income the gross amount of such dividends, including any Mexican tax
withheld therefrom, without regard to whether any portion of such tax may be
refunded to the U.S. Holder by the Mexican tax authorities. The amount of any
dividend paid in pesos will equal the U.S. dollar value of the pesos received,
calculated by reference to the exchange rate in effect on the date the
distribution is includible in income, regardless of whether the
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pesos are converted into U.S. dollars. For U.S. Holders, that date would be the
date the depositary receives the dividend, regardless of whether the pesos are
converted into U.S. dollars. In addition, if dividends received in pesos are not
converted into U.S. dollars on the day they are received, U.S. Holders may
recognize foreign currency gain or loss (generally treated as ordinary gain or
loss) upon the disposition of such pesos measured by the differences between
such U.S. dollar value and the amount realized on such disposition.
Distributions generally will constitute foreign source "passive income" (or, in
the case of some holders, "financial services income") for U.S. foreign tax
credit purposes.
Subject to certain conditions and limitations, the Mexican tax withheld
from dividend payments on New Iusacell ADSs (as described below under " --
Mexican Tax Considerations") will be treated as foreign income tax that may be
deducted from taxable income or credited against a U.S. Holder's U.S. federal
income tax liability. However, the Mexican tax may be deducted only if the U.S.
Holder does not claim a credit for any Mexican or other foreign taxes paid or
accrued in that year. The foreign tax credit provisions are complex, and U.S.
holders are urged to consult their own tax adviser as to the availability, if
any, of a tax credit or deduction to them.
Distributions of additional series V shares, if any, to U.S. Holders of New
Iusacell ADSs that are made as part of a pro rata distribution to all
shareholders of New Iusacell generally will not be subject to U.S. federal
income tax.
MEXICAN TAX CONSIDERATIONS
Apart from any liability that may result to New Iusacell from our paying of
dividends to our shareholders, dividends, either in cash or in any other form,
paid with respect to the series V shares represented by New Iusacell ADSs, will
be subject to 5% Mexican withholding tax based on the amount of the distributed
dividend, multiplied by a factor of 1.5385, which produces a net effect of
approximately 7.7%. Such Mexican withholding tax will be withheld from such
dividend payment to a shareholder so that the shareholder receives an amount net
of any Mexican withholding tax.
TAXATION OF CAPITAL GAINS
U.S. FEDERAL INCOME TAX CONSIDERATIONS
In general, upon the sale or other disposition of New Iusacell ADSs, a U.S.
Holder generally will recognize gain or loss equal to the difference between the
amount realized on such sale or disposition (if the amount realized is
denominated in a foreign currency then its U.S. dollar equivalent, determined at
the spot rate on the date of disposition) and the U.S. Holder's adjusted tax
basis in the shares (in U.S. dollars). Such gain or loss will be treated as
capital gain or loss if the New Iusacell ADSs were held as a capital asset and
will be long-term capital gain or loss if the New Iusacell ADSs have been held
for more than one year on the date of such sale or other disposition. For this
purpose, a U.S. Holder's holding period for the New Iusacell ADSs will generally
include its holding period for the Old Iusacell ADSs. Gain or loss recognized by
a U.S. Holder on a sale or other disposition of New Iusacell ADSs generally will
be treated as U.S. source income for foreign tax credit purposes.
MEXICAN TAX CONSIDERATIONS
The sale or other disposition of New Iusacell ADSs by holders who are
nonresidents of Mexico (as described below) will not be subject to Mexican tax.
Deposits of shares in exchange for New Iusacell ADSs and withdrawals of shares
in exchange for New Iusacell ADSs will not give rise to Mexican tax.
Gains realized by a nonresident of Mexico on the sale or other disposition
of shares representing capital stock of a Mexican corporation (like New
Iusacell) through a recognized stock exchange, such as the Mexican Stock
Exchange, are exempt from Mexican income tax if the stock is on the list of
publicly-traded shares published by the Ministry of Finance and Public Credit
through general rules. The New Iusacell series V shares are currently included
on that list.
Under current law, gains realized by a nonresident holder on the sale or
disposition of shares not conducted through a recognized stock exchange
generally are subject to a Mexican tax at a rate of 20% of the gross sales
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
taxes would be payable at a 40% rate on the gain on such disposition. The United
States is not considered to be a low tax rate country.
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However, even if the sale is not conducted through a recognized stock
exchange, pursuant to the Tax Treaty gains realized by qualifying U.S. Holders
from the sale or other disposition of shares will not be subject to Mexican
income tax so long as:
- less than 50% of the assets of New Iusacell consist of real property
situated in Mexico,
- such U.S. Holder did not own 25% or more of the shares representing
capital stock of New Iusacell, directly or indirectly, during the
12-month period preceding such disposition, or
- the gain is not attributable to a permanent establishment or fixed
base of the U.S. Holder in Mexico.
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 days, whether consecutive or not,
during a calendar year and can demonstrate that he or she has become a resident
of that country for tax purposes. A legal entity is a resident of Mexico if it
(i) was established under Mexican law or (ii) has its main management in Mexico.
If a legal entity has a permanent establishment or fixed base in Mexico, such
permanent establishment or fixed base shall be required to pay taxes in Mexico
on income attributable to such permanent establishment or fixed base in
accordance with relevant tax provisions.
U.S. TAXATION OF NON-U.S. HOLDERS
In general, subject to the discussion below of special rules that may apply
to certain Non-U.S. Holders and the discussion below of backup withholding:
- payments of dividends and sale proceeds by New Iusacell or any paying
agent to a Non-U.S. Holder will not be subject to U.S. federal income
or withholding tax,
- gain realized by a Non-U.S. Holder on the sale or other disposition of
the New Iusacell ADSs will not be subject to U.S. federal income tax
or withholding tax, and
- the New Iusacell ADSs will not be subject to U.S. federal estate tax,
if beneficially owned by an individual who was a Non-U.S. Holder at
the time of his death.
Special rules may apply in the case of Non-U.S. Holders:
- that are engaged in a United States trade or business
- 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
- certain non-resident alien individuals who are present in the U.S. for
183 days or more during a taxable year and meet certain other
conditions.
Such Non-U.S. Holders are urged to consult their own tax advisors.
OTHER MEXICAN TAXES
There are no inheritance or succession taxes applicable to the ownership,
transfer or disposition of New Iusacell ADSs or shares. There are no Mexican
stamp, registration or similar taxes or duties payable by holders of New
Iusacell ADSs or shares.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Each DTC participant or indirect participant holding New Iusacell ADSs on
behalf of a beneficial owner and each paying agent making payments in respect of
New Iusacell ADSs will generally be required to provide the IRS with
information, including the name, address and taxpayer identification number of
the beneficial owner of the New Iusacell ADSs, and the aggregate amount of
dividends and sale proceeds paid to such beneficial owner during
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the calendar year. These reporting requirements, however, do not apply with
respect to certain beneficial owners, including Non-U.S. Holders (who file IRS
Form W-8BEN as discussed below), 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 New Iusacell 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, a holder may be subject
to backup withholding at the rate of 31% with respect to dividends and proceeds
from the sale or disposition of New Iusacell ADSs. This backup withholding tax
is not an additional tax and any amounts withheld from a payment to a holder of
New Iusacell ADSs will be refunded (or credited against such holder's U.S.
federal income tax liability, if any) provided that the required information is
furnished to the IRS.
Non-U.S. Holders will generally be exempt from information reporting and
backup withholding upon filing a timely and properly completed IRS Form W-8BEN.
The U.S. Treasury Department has issued final regulations (the
"Regulations") that unify current certification procedures and modify reliance
standards. The Regulations are generally effective for payments made on or after
January 1, 2001. Potential investors and holders of New Iusacell ADSs should
consult their own tax advisors concerning the adoption of the Regulations and
the potential effect on their acquisition, ownership and disposition of New
Iusacell ADSs.
F. DIVIDENDS AND PAYING AGENTS
Not applicable, but see Item 5, "Operating and Financial Review and
Prospects -- Liquidity and Capital Resources -- Dividend Policy" and Item 8,
"Financial Information -- Consolidated Statements and Other Financial
Information -- Dividend Policy."
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We file annual reports with and furnish other information to the SEC as may
be applicable from time to time. You may read and copy any documents filed or
furnished by Iusacell at the SEC's public reference rooms in Washington, D.C.,
New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. In addition, because
Iusacell's American depositary shares are listed on the New York Stock Exchange,
reports and other information concerning Iusacell can also be inspected at the
office of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
I. SUBSIDIARY INFORMATION
Not applicable.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISKS
Iusacell's earnings are affected by changes in interest rates as a result
of long-term borrowings. Old Iusacell's Eximbank Financing bears interest at a
variable rate of six-month LIBOR plus, depending on whether not the facility is
guaranteed by the Export-Import Bank of the United States, either 0.20% or
1.75%. The Senior Credit Facility bears interest at a variable rate equal to (at
Old Iusacell's option):
- one-, two-, three- or six-month LIBOR plus 1.75%, or
- an alternate base rate equal to the sum of (i) the highest of the
prime rate of The Chase Manhattan Bank, the reserve adjusted secondary
market rate for three-month certificates of deposit plus 1% per annum
or the Federal Funds effective rate plus 0.5% per annum plus (ii)
0.75% per annum.
New Iusacell also has fixed rate debt under its 14-1/4% Senior Notes due
2006 which will be exchanged for fixed rate registered debt when they are
issued. Old Iusacell has fixed rate debt under its 10% Senior Notes.
Under the terms of the Senior Credit Facility, Old Iusacell must maintain
45% of its debt portfolio at fixed rates or under appropriate floating rate
hedging mechanisms. We do not enter into derivative financial contracts for
trading or speculative purposes; however, we have managed the exposure to
interest rate risk through the use of interest rate collars. In July 1998, Old
Iusacell entered into an interest rate collar agreement on a notional amount of
U.S.$35.0 million until July 30, 2002. The collar agreement limits the maximum
effective LIBOR cost to 6.12% if six-month LIBOR is lower than 7.12% and 7.12%
if LIBOR equals or exceeds that level. On February 26, 1999, Old Iusacell
entered into a second interest rate collar agreement to limit the maximum
interest rate Old Iusacell must pay on U.S.$15.0 million of its floating rate
debt until July 2002. Under the terms of this second collar agreement, Old
Iusacell's maximum effective LIBOR cost is limited to 5.82% if six-month LIBOR
is lower than 6.82% and, if six-month LIBOR equals or goes above 6.82%, then Old
Iusacell's maximum effective LIBOR cost is limited to 6.82%. The following table
summarizes the maturity dates, carrying values and fair values of the debt
obligations and the interest rate collar agreements and forward rate contracts
as of December 31, 1999.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 AFTER TOTAL FAIR VALUE
--------- --------- --------- --------- ---------- ---------- ---------- ----------
(IN MILLIONS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NEW IUSACELL
14.25% Senior Notes ...... -- -- -- -- -- U.S.$350.0 U.S.$350.0 U.S.$362.3
OLD IUSACELL
10.0% Senior Notes ....... -- -- -- -- U.S.$150.0 -- 150.0 142.5
Chase Credit Facility .... U.S.$35.2 U.S.$91.6 U.S.$98.2 225.0 224.9
Ex-Im Bank Tranche ....... 14.5 14.5 14.5 U.S.$14.5 7.2 -- 65.2 56.7
Commercial Bank Tranche... -- 25.7 -- -- -- -- 25.7 25.7
Handset Facilities ....... 15.0 2.5 -- -- -- -- 17.5 17.5
Interest Rate Collars .... -- -- 50.0 -- -- -- 50.0 50.6
Forward Rate Contracts.... 44.0 33.0 -- -- -- -- 77.0 77.0
</TABLE>
FOREIGN CURRENCY RISK
Iusacell's primary foreign currency exposure relates to our foreign
currency denominated debt. Iusacell's debt obligations are denominated in U.S.
dollars while it generates revenues in Mexican pesos. Therefore, Iusacell is
exposed to currency exchange rate risks that could significantly affect our
ability to meet our obligations. The exchange rate of pesos to the U.S. dollar
is a freely floating rate and the peso has experienced significant devaluations
in recent years. Any significant decrease in the value of the peso relative to
the U.S. dollar in the near term may have a material adverse effect on Iusacell
and on our ability to meet our long-term debt obligations. As of December 31,
1999, a hypothetical immediate 10% devaluation of the peso relative to the U.S.
dollar, as it relates to Iusacell's short-term foreign debt principal, would
have a Ps.61.4 million (U.S.$6.5 million) unfavorable impact over a one-year
period on both earnings and cash flows.
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In December 1999, Iusacell used forward-rate contracts to hedge its
exchange rate exposure for U.S. $77.0 million approximately 50% of the principal
and interest payments coming due over the period April 2000 to April 2001.
Iusacell is also considering limited hedging alternatives for up to an
additional 50% of the remaining outstanding principal and interest obligations
coming due through April 2001.
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DESCRIPTION OF IUSACELL ADSs
ADRs are certificates that evidence Iusacell ADSs, just as a stock
certificate evidences a holding of shares. Each Iusacell ADS represents
ownership interests in ten series V shares (or the right to receive series V
shares) deposited with a custodian in Mexico, which we refer to as the
Custodian. Each Iusacell ADS also represents securities, cash or other property
deposited with The Bank of New York but not distributed to ADR holders. The Bank
of New York's office is located at 101 Barclay Street, New York, NY 10286.
You may hold ADRs either directly or indirectly through your broker or
other financial institution. If you hold ADRs directly, you are an ADR holder
and The Bank of New York will deliver your Iusacell ADSs represented by ADRs to
you. This description assumes you hold your ADRs directly. If you hold ADRs
indirectly, you must rely on the procedures of your broker or other financial
institution to assert the rights of ADR holders described in this section. You
should consult with your broker or financial institution to find out what those
procedures are.
Because The Bank of New York will actually be the legal owner of the series
V shares, you must rely on it to exercise the rights of a shareholder. The
obligations of The Bank of New York are set out in a deposit agreement among
Iusacell, The Bank of New York and you, as an ADR holder. The deposit agreement
and the ADRs are generally governed by New York law.
The following is a summary of the material terms of the deposit agreement.
Because it is a summary, it does not contain all the information that may be
important to you.
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS
The Bank of New York has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on series V shares or other deposited
securities, after deducting its fees and expenses. You will receive
distributions in proportion to the number of series V shares your ADRs
represent.
CASH
The Bank of New York will convert any cash dividend or other cash
distribution Iusacell pays on the series V shares into U.S. dollars, if The Bank
of New York can do so on a reasonable basis and can transfer the U.S. dollars to
the United States. If that is not possible or if any approval from the Mexican
government is needed and cannot be obtained, the deposit agreement allows The
Bank of New York to distribute the dividend or distribution in pesos only to
those ADR holders to whom it is possible to do so. It will hold the pesos it
cannot convert for the account of the ADR holders who have not yet been paid. It
will not invest the pesos and it will not be liable for any interest.
Before a distribution is made, any withholding taxes that must be paid
under Mexican law will be deducted. The Bank of New York will distribute only
whole U.S. dollars and cents and round fractional cents to the nearest whole
cent. If exchange rates fluctuate during a time when The Bank of New York cannot
convert the peso, you may lose some or all of the value of the distribution.
SHARES
The Bank of New York may distribute new ADRs representing any shares
Iusacell may distribute as a dividend or free distribution, if Iusacell
furnishes it promptly with satisfactory evidence that it is legal to do so. The
Bank of New York will only distribute whole ADRs. It will sell shares which
would require it to issue a fractional ADR and distribute the net proceeds in
the same way as it distributes cash. If The Bank of New York does not distribute
additional ADRs, each ADR will also represent the new shares.
RIGHTS TO RECEIVE ADDITIONAL SHARES
If we offer holders of our series V shares any rights to subscribe for
additional shares or any other rights, The Bank of New York may make these
rights available to you. Iusacell must first instruct The Bank of New York to do
so and furnish it with satisfactory evidence that it is legal to do so. If
Iusacell does not furnish this evidence and/or give these instructions, and The
Bank of New York decides it is legal and practical to sell the rights, The Bank
of New York will sell the rights and distribute the proceeds in the same way as
it distributes cash. The Bank of New York may allow rights that are not
distributed or sold to lapse. In that case, you will receive no value for them.
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If The Bank of New York makes rights available to you, it will exercise the
rights and purchase the shares on your behalf. The Bank of New York will then
deposit the shares and issue ADRs to you. It will only exercise rights if you
pay it the exercise price and any other charges the rights and the deposit
agreement require you to pay.
U.S. securities laws may restrict the sale, deposit, cancellation, and
transfer of ADRs issued upon exercise of rights. For example, you may not be
able to trade freely in the United States ADRs that you acquire in a rights
offering. In this case, The Bank of New York may issue the ADRs under a separate
restricted deposit agreement which will contain the same conditions as the
deposit agreement, except for changes needed to put the restrictions in place.
OTHER DISTRIBUTIONS
The Bank of New York will send to you anything else Iusacell distributes on
the deposited securities by any means it thinks is legal, fair and practical. If
it cannot make the distribution in that way, The Bank of New York has a choice.
It may decide to sell what Iusacell distributed and distribute the proceeds, in
the same way as it distributes cash. Or, it may decide to hold what Iusacell
distributed, in which case ADRs will also represent the newly distributed
property.
The Bank of New York is not responsible if it decides that it is unlawful
or impractical to make a distribution available to any ADR holders. Iusacell has
no obligation to register under the Securities Act the Iusacell ADSs, shares,
rights or other securities that may be distributed to holders of series V shares
and ADSs. Iusacell also has no obligation to take any other action to permit the
distribution of ADRs, shares, rights or anything else to ADR holders. This means
that you may not receive distributions we make on our shares or any value for
them if it is illegal or impractical for Iusacell to make them available to you.
DEPOSIT, WITHDRAWAL AND CANCELLATION
The Bank of New York will deliver ADRs if you or your broker deposit shares
or evidence of rights to receive series V shares with the custodian. Upon
payment of its fees and expenses and of any taxes or charges, such as stamp
taxes or stock transfer taxes or fees, The Bank of New York will register the
appropriate number of ADRs in the names you request and will deliver the ADRs at
its office to the persons you request.
You may turn in your ADRs at The Bank of New York's office. Upon payment of
its fees and expenses and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, The Bank of New York will deliver
- the underlying series V shares to an account designated by you, and
- any other deposited securities underlying the ADR at the office of the
custodian.
As an alternative, at your request, risk and expense, The Bank of New York
will deliver the deposited securities at its office.
VOTING RIGHTS
You may instruct The Bank of New York to vote the series V shares
underlying your ADRs but only if Iusacell asks The Bank of New York to ask for
your instructions. Otherwise, you will not be able to exercise your right to
vote unless you withdraw the shares. However, you may not know about the meeting
enough in advance to withdraw the shares.
If Iusacell asks for your instructions, The Bank of New York will notify
you of the upcoming vote and arrange to deliver Iusacell's voting materials to
you. The materials will
- describe the matters to be voted on, and
- explain how you, on a specified date, may instruct The Bank of New
York to vote the shares or other deposited securities underlying your
ADRs as you direct.
For instructions to be valid, The Bank of New York must receive them on or
before the date specified. If you give valid instructions, U.S. will try, as far
as is practical, and in conformity with Mexican law and the provisions of
Iusacell's by-laws, to vote or to have its agents vote the shares or other
deposited securities as you instruct. The
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Bank of New York will only vote or attempt to vote as you instruct. However, if
The Bank of New York does not receive your voting instructions, it will give a
proxy to vote your series V shares to a designated representative of Iusacell.
Iusacell cannot assure you that you will receive the voting materials in
time to ensure that you can instruct The Bank of New York to vote your shares.
In addition, The Bank of New York and its agents are not responsible for failing
to carry out voting instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise your right to vote
and there may be nothing you can do if your shares are not voted as you
requested.
FEES AND EXPENSES
<TABLE>
<CAPTION>
ADR holders must pay: For:
<S> <C>
- $5.00 (or less) per 100 ADRs - Each issuance of an ADR, including as a result
of a distribution of shares or rights or other
property
- Each cancellation of an ADR, including upon
termination of the deposit agreement
- $.02 (or less) per ADR - Distribution of proceeds of sales of
securities or rights, but not for
distributions of cash dividends
- Registration or transfer fees - Transfer and registration of shares on the
share register of Iusacell from your name to
the name of The Bank of New York or its agent
when you deposit or withdraw shares
- Expenses of The Bank of New York - Conversion of pesos to U.S. dollars
- Certain cable, telex and facsimile
transmission expenses as provided in the
deposit agreement
- Taxes and other governmental - As necessary
charges The Bank of New York or the
Custodian have to pay on any ADR
or share underlying an ADR, for
example, stock transfer taxes,
stamp duty or withholding taxes
</TABLE>
PAYMENT OF TAXES
The Bank of New York may deduct the amount of any taxes owed from any
payments to you. It may also sell deposited securities, by public or private
sale, to pay any taxes owed. You will remain liable if the proceeds of the sale
are not enough to pay the taxes. If The Bank of New York sells deposited
securities, it will, if appropriate, reduce the number of ADRs to reflect the
sale and pay to you any proceeds, or send to you any property, remaining after
it has paid the taxes.
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RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
<TABLE>
<CAPTION>
If Iusacell: Then:
<S> <C>
- - Changes the nominal or par value of its shares - The cash, shares or other securities received
by The Bank of New York will become deposited
securities. Each ADR will automatically
- - Reclassifies, splits up or consolidates any of represent its equal share of the new deposited
the deposited securities securities
- - Distributes securities on the shares that are not - The Bank of New York may, and will if Iusacell
distributed to you asks it to, distribute some or all of the
cash, shares or other securities it received.
- - Recapitalizes, reorganizes, mergers, liquidate, It may also issue new ADRs or ask you to surrender
sells all or substantially all of its assets, or your outstanding ADRs in exchange for new ADRs,
takes any similar action identifying the new deposited securities
</TABLE>
AMENDMENT AND TERMINATION
Iusacell may agree with The Bank of New York to amend the deposit agreement
and the ADRs without your consent for any reason. If the amendment adds or
increases fees or charges, except for taxes and other governmental charges or
certain expenses of The Bank of New York, or prejudices an important right of
ADR holders, it will only become effective 30 days after The Bank of New York
notifies you of the amendment. At the time an amendment becomes effective, you
are considered, by continuing to hold your ADR, to agree to the amendment and to
be bound by the ADRs and the deposit agreement as amended.
The Bank of New York will terminate the deposit agreement if Iusacell asks
it to do so. The Bank of New York may also terminate the deposit agreement if
The Bank of New York has told Iusacell that it would like to resign and Iusacell
has not appointed a new depositary bank within 90 days. In both cases, The Bank
of New York must notify you at least 90 days before termination.
After termination, The Bank of New York and its agents will be required to
do only the following under the deposit agreement: (i) advise you that the
deposit agreement is terminated and (ii) collect and deliver any distributions
on the deposited securities and other shares and deposited securities upon
cancellation of ADRs. At any time after the expiration of one year after
termination, The Bank of New York will, if practical, sell any remaining
deposited securities by public or private sale. After that, U.S. will hold the
money it received on the sale, as well as any other cash it is holding under the
deposit agreement for the pro rata benefit of the ADR holders that have not
surrendered their ADRs. It will not invest the money and will have no liability
for interest. The Bank of New York's only obligations will be to account for the
money and other property and with respect to indemnification. After termination,
our only obligations will be with respect to indemnification and to pay certain
amounts to The Bank of New York.
LIMITATION ON OBLIGATIONS AND LIABILITY TO ADR HOLDERS
The deposit agreement expressly limits Iusacell's obligations and the
obligations of The Bank of New York. This limits Iusacell's liability and the
liability of The Bank of New York. Iusacell and The Bank of New York:
- are only obligated to take the actions specifically described in the
deposit agreement without negligence or bad faith,
- are not liable if either is prevented or delayed by law or
circumstances beyond their control from performing their obligations
under the deposit agreement,
- are not liable if either exercises discretion permitted under the
deposit agreement,
- have no obligations to become involved in a lawsuit or other
proceeding related to the ADRs or the deposit agreement on your behalf
or on behalf of any other party, and
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- may rely upon any documents they believe in good faith to be genuine
and to have been signed or presented by the proper party.
In the deposit agreement, Iusacell and The Bank of New York agree to
indemnify each other under certain circumstances.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before U.S. will issue or register the transfer of an ADR, make a
distribution on an ADR, or permit the withdrawal of series V shares, The Bank of
New York may require:
- payment of stock transfer or other taxes or other governmental charges
and transfer or registration fees charged by third parties for the
transfer of any shares or other deposited securities,
- production of satisfactory proof of the identity and genuineness of
any signature or other information it deems necessary, and
- compliance with regulations it may establish, from time to time,
consistent with the deposit agreement, including presentation of
transfer documents.
The Bank of New York may refuse to deliver, transfer, or register transfers
of ADRs generally when the transfer books of The Bank of New York or Iusacell
are closed or at any time if The Bank of New York or Iusacell think it advisable
to do so.
You have the right to cancel your ADRs and withdraw the underlying series V
shares at any time except:
- when temporary delays arise because: (i) either The Bank of New York
or Iusacell has closed its transfer books; (ii) the transfer of shares
is blocked to permit voting at a shareholders' meeting; or (iii)
Iusacell is paying a dividend on the shares,
- when you or other ADR holders seeking to withdraw shares owe money to
pay fees, taxes and similar charges, or
- when it is necessary to prohibit withdrawals in order to comply with
any laws or governmental regulations that apply to ADRs or to the
withdrawal of shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
deposit agreement.
PRE-RELEASE OF ADRs
In certain circumstances, subject to the provisions of the deposit
agreement, The Bank of New York may issue ADRs before deposit of the underlying
series V shares. This is called a pre-release of the ADRs. The Bank of New York
may also deliver shares upon cancellation of pre-released ADRs even if the ADRs
are cancelled before the pre-release transaction has been closed out. A
pre-release is closed out as soon as the underlying shares are delivered to The
Bank of New York. The Bank of New York may receive ADRs instead of shares to
close out a pre-release. The Bank of New York may pre-release ADRs only under
the following conditions:
- before or at the time of the pre-release, the person to whom the
pre-release is being made must represent to The Bank of New York in
writing that it or its customer beneficially owns the shares or ADRs
to be deposited,
- the pre-release must be fully collateralized with cash or other
collateral that The Bank of New York considers appropriate, and
- The Bank of New York must be able to close out the pre-release on not
more than five business days' notice.
In addition, The Bank of New York will limit the number of ADRs that may be
outstanding at any time as a result of pre-release, although The Bank of New
York may disregard the limit from time to time, if it thinks it is appropriate
to do so.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
See Item 5, "Operating and Financial Review and Prospects -- Liquidity and
Capital Resources -- Liquidity -- Loan Covenant Waivers and Modifications."
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF
SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. RESERVED
Not applicable.
ITEM 16. RESERVED
Not applicable.
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PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
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ITEM 18. FINANCIAL STATEMENTS
See Item 19(a) for a list of financial statements filed under Item 18.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(a) List of Financial Statements
Grupo Iusacell, S.A. de C.V.
Report of Independent Accountants ............................................................... F-1
Consolidated Balance Sheets -- December 31, 1999 and 1998........................................ F-3
Consolidated Statements of Income -- Fiscal Years Ended December 31, 1999, 1998 and 1997......... F-4
Consolidated Statements of Changes in Stockholders' Equity -- Fiscal
Years Ended December 31, 1999, 1998 and 1997 .................................................. F-5
Consolidated Statements of Changes in Financial Position -- Fiscal Years Ended December
31, 1999, 1998 and 1997 ....................................................................... F-6
Notes to Consolidated Financial Statements....................................................... F-7
Grupo Iusacell Celular, S.A. de C.V.
Report of Independent Accountants ............................................................... F-51
Consolidated Balance Sheets -- December 31, 1999 and 1998........................................ F-52
Consolidated Statements of Income -- Fiscal Years Ended December 31, 1999, 1998 and 1997......... F-53
Consolidated Statements of Changes in Stockholders' Equity -- Fiscal
Years Ended December 31, 1999, 1998 and 1997 .................................................. F-54
Consolidated Statements of Changes in Financial Position -- Fiscal Years Ended December
31, 1999, 1998 and 1997 ....................................................................... F-55
Notes to Consolidated Financial Statements....................................................... F-56
Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedules............................... S-I
Schedule IX -- Valuation and Qualifying Accounts and Reserves.................................... S-II
</TABLE>
(b) List of Exhibits
None.
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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:
---------------------------------
William S. Roberts
Executive Vice President,
Finance and Audit, and
Chief Financial Officer
BY:
---------------------------------
Ruben G. Perlmutter
Vice President, Mergers and
Acquisitions, and General Counsel
DATE: April , 2000
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GLOSSARY OF TELECOMMUNICATIONS TERMS
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.
band: A range of frequencies between two defined limits.
cdma: Code Division Multiple Access, a standard of digital
cellular technology which provides more call carrying
capacity than analog or TDMA. CDMA increases capacity by
transmitting a large number of simultaneous conversations
over a single channel, assigning unique codes that can be
reassembled at the receiving end.
Cellular A-band: The range of frequencies used to provide cellular wireless
service between 825-835 MHz and between 870-880 MHz of the
radio spectrum.
Cellular B-band: The range of frequencies used to provide cellular wireless
service between 835-845 MHz and between 880-890 MHz of the
radio spectrum.
channel: A pathway for the transmission of information between a
sending point and a receiving point.
COFETEL: Comision Federal de Telecomunicaciones, 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.
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 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 Corporation.
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 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
customer.
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PCS A-Band: The range of frequencies used to provide PCS wireless
services between 1.850-1.865 GHz and between 1.930-1.945
GHz of the radio spectrum.
PCS B-Band: The range of frequencies used to provide PCS wireless
services between 1.870-1.885 GHz and between 1.950-1.965
GHz of the radio spectrum.
PCS D-Band: The range of frequencies used to provide PCS wireless
services between 1.865-1.870 GHz and between 1.945-1.950
GHz of the radio spectrum.
PCS E-Band: The range of frequencies used to provide PCS wireless
services between 1.885-1.890 GHz and between 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 1995, 1996, 1997,
1998 and 1999 have been calculated by applying the
forecast annual population growth rate for 1995, as
published by the Instituto Nacional de Estadistica,
Geografia e Informatica (the National Institute of
Statistics, Geography and Information 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, 1999. 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 national population growth rate, as published by
INEGI. Information regarding the number of POPs within a
given city has been 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
wireless services in that region or other geographic area
and is not indicative of the number of users of wireless
services in the future.
Region 1: Consists of the states of Baja California Norte and Baja
California Sur and the municipality of San Luis Rio
Colorado in northwestern Sonora. Major cities in the
region include Tijuana, Mexicali, Ensenada, Tecate and La
Paz.
Region 2: Consists of the states of Sonora and Sinaloa (except for
the municipality of San Luis Rio Colorado in northwestern
Sonora). Major cities in the region include Hermosillo,
Ciudad Obregon, Culiacan and Mazatlan.
Region 3: Consists of the states of Chihuahua and Durango and the
municipalities of Torreon, Francisco I. Madero, Matamoros,
San Pedro and Viesca in the state of Coahuila. Major
cities in the region include Ciudad Juarez, Chihuahua,
Durango, Gomez Palacio and Torreon.
Region 4: Consists of the states of Tamaulipas and Nuevo Leon and,
with the exception of the municipalities of Torreon,
Francisco I. Madero, Matamoros, San Pedro and Viesca, the
state of Coahuila. Major cities in the region include
Monterrey, Saltillo, Tampico, Nuevo Laredo, Reynosa and
Matamoros.
Region 5: Consists of the states of Colima, Jalisco (except for
twelve municipalities in northeastern Jalisco), Michoacan
and Nayarit. Major cities in the region include
Guadalajara (population 1.9 million), Mexico's second
largest city, Morelia, Tepic, Colima and Manzanillo.
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<PAGE> 123
Region 6: Consists of the states of Aguascalientes, Guanajuato,
Queretaro, San Luis Potosi, Zacatecas and twelve
municipalities in northeastern Jalisco. Major cities in
the region include Leon, Queretaro, Aguascalientes, San
Luis Potosi and Zacatecas.
Region 7: Consists of the states of Guerrero, Oaxaca, Puebla,
Tlaxcala and Veracruz. Major cities in the region include
Puebla, Acapulco, Veracruz 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 and Tuxtla
Gutierrez.
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.
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 Ministry.
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, by interlacing
conversations on a single channel through time-sharing
methods.
120
<PAGE> 124
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Nuevo Grupo Iusacell, S. A. de C. V.:
We have audited the accompanying consolidated balance sheets of Nuevo Grupo
Iusacell, S. A. de C.V. (the "Company") and subsidiaries (successor to Grupo
Iusacell S.A. de C.V. and subsidiaries, see Note 1) as of December 31, 1999 and
1998, and the related consolidated statements of income, changes in
stockholders' equity, and changes in financial position for each of the three
years then ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards in Mexico which are substantially similar, in all material respects,
to United States generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Nuevo
Grupo Iusacell, S. A. de C. V. and subsidiaries as of December 31, 1999 and
1998, and the consolidated results of its operations, changes in stockholders'
equity and changes in its consolidated financial position for the three years
ended December 31, 1999, 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 profit (loss) for the years ended December 31, 1999, 1998 and 1997 and the
total amount of stockholders' equity as of December 31, 1999 and 1998 to the
extent summarized in Note 20 to the consolidated financial statements.
PricewaterhouseCoopers
Juan Manuel Ferron Solis
Partner
Mexico City, Mexico
February 29, 2000 (except with
respect to the matters discussed
in Notes 20 and 21, for which
the date is March 16, 2000).
F-1
<PAGE> 125
NUEVO GRUPO IUSACELL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999 AND 1998
(NOTES 1, 2, 3 AND 4)
(ADJUSTED FOR PRICE-LEVEL CHANGES AND EXPRESSED IN THOUSANDS OF CONSTANT
MEXICAN PESOS AS OF DECEMBER 31, 1999)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
------
CURRENT:
Cash and cash equivalents (Note 4.c) Ps. 1,151,961 Ps. 286,666
------------- -------------
Current portion of escrow account (Note 10) 422,688 --
------------- -------------
Accounts receivable:
Trade, net of Ps.149,278 and Ps.75,400 of allowance for
doubtful accounts in 1999 and 1998, respectively (Note
4.d) 707,934 340,492
Related parties (Note 5) 8,342 12,782
Recoverable taxes and other 607,146 661,970
------------- -------------
1,323,422 1,015,244
------------- -------------
Inventories (Note 6) 184,328 207,812
------------- -------------
Total current assets 3,082,399 1,509,722
INVESTMENT IN ASSOCIATED COMPANIES (Note 7) 25,237 17,425
PROPERTY AND EQUIPMENT, net (Note 8) 6,771,108 5,961,927
LONG-TERM PORTION OF ESCROW ACCOUNT (Note 10) 845,375 --
OTHER ASSETS, net (Note 9) 2,127,971 1,750,702
EXCESS OF COST OF INVESTMENTS IN SUBSIDIARIES OVER BOOK
VALUE, net of accumulated amortization of Ps.487,245 in
1999 and Ps.409,108 in 1998 (Note 4.i) 1,982,280 1,911,574
------------- -------------
Total assets Ps.14,834,370 Ps.11,151,350
============= =============
LIABILITIES
-----------
CURRENT:
Notes payable (Note 10) Ps. 94,986 Ps. 833,799
Current portion of long-term debt (Note 10) 505,643 --
Trade accounts payable (Note 11) 641,479 980,749
Related parties (Note 5) 116,034 140,082
Taxes and other payables 912,999 850,572
Income tax (Note 12) 1,375 54,311
Employee profit sharing (Note 12) 378 6
------------- -------------
Total current liabilities 2,272,894 2,859,519
LONG-TERM DEBT (Note 10) 7,315,745 4,168,322
TRADE ACCOUNTS PAYABLE, LONG-TERM (Note 11) -- 2,370
COMMITMENTS AND CONTINGENCIES (Notes 4.k and 13) 2,370 2,871
------------- -------------
Total liabilities 9,591,009 7,033,082
------------- -------------
STOCKHOLDERS' EQUITY
--------------------
CONTRIBUTED CAPITAL (Notes 14, 15 and 16):
Capital stock 4,727,987 9,697,443
Capital contributed 148,543 81,607
------------- -------------
4,876,530 9,779,050
------------- -------------
EARNED CAPITAL (Note 16):
Accumulated profits (losses):
Legal reserve -- 4,461
For prior years -- (3,445,323)
For the year 333,762 (1,457,062)
------------- -------------
333,762 (4,897,924)
------------- -------------
Deficit from restatement -- (763,769)
------------- -------------
Total majority stockholders' equity 5,210,292 4,117,357
MINORITY INTEREST 33,069 911
------------- -------------
Total stockholders' equity 5,243,361 4,118,268
------------- -------------
Total liabilities and stockholders' equity Ps.14,834,370 Ps.11,151,350
============= =============
</TABLE>
The accompany notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 126
NUEVO GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of December 31, 1999)
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------- ---------------
<S> <C> <C> <C>
REVENUES:
Services Ps.3,767,693 Ps.2,750,863 Ps.2,055,803
Telephone equipment sales and other 436,960 421,534 422,788
--------------- ------------------ ------------
4,204,653 3,172,397 2,478,591
--------------- ------------------ ------------
COST OF SALES:
Cost of services 1,074,191 860,821 685,051
Cost of telephone equipment sales and other 269,491 225,548 268,373
--------------- ------------------ ------------
1,343,682 1,086,369 953,424
--------------- ------------------ ------------
Gross profit 2,860,971 2,086,028 1,525,167
--------------- ------------------ ------------
OPERATING EXPENSES 1,444,799 1,210,540 990,880
DEPRECIATION AND AMORTIZATION 1,425,022 892,850 775,258
450 PROJECT NON-CASH WRITEDOWN (Note 18) - 1,102,401 -
--------------- ------------------ ------------
Operating loss ( 8,850) ( 1,119,763) ( 240,971)
--------------- ------------------ ------------
OTHER EXPENSES (INCOME), net 23,054 ( 149,046) -
--------------- ------------------ ------------
PROVISION FOR EQUIPMENT IMPAIRMENT (Note 4.b) - - 1,236,307
--------------- ------------------ ------------
INTEGRAL FINANCING (GAIN) COST:
Interest expense, net 291,417 250,873 330,659
Foreign exchange (gain) loss, net ( 159,074) 939,474 64,565
Gain from monetary position ( 661,868) ( 762,581) ( 389,975)
--------------- ------------------ ------------
( 529,525) 427,766 5,249
--------------- ------------------ ------------
EQUITY PARTICIPATION IN NET LOSS (GAIN) OF
ASSOCIATED COMPANIES AND NET LOSS (GAIN)
ON SALE OF EQUITY INVESTMENTS (Note 7) 47,611 ( 27,922) ( 210,076)
--------------- ------------------ ------------
Profit (loss) from continuing operations before
assets tax, income tax, minority interest
and extraordinary item 450,010 ( 1,370,561) ( 1,272,451)
--------------- ------------------ ------------
PROVISIONS FOR:
Assets tax 132,645 72,127 60,397
Income tax 404,810 - -
--------------- ------------------ ------------
Loss from continuing operations
before minority interest and
extraordinary item ( 87,445) ( 1,442,688) ( 1,332,848)
MINORITY INTEREST 17,933 6,342 276
--------------- ------------------ ------------
Net loss from continuing operations
before extraordinary item ( 69,512) ( 1, 436,346) ( 1,332,572)
EXTRAORDINARY ITEM:
Amortization of tax loss carryforwards 404,810 - -
--------------- ------------------ ------------
Net profit (loss) from continuing
operations 335,298 ( 1,436,346) ( 1,332,572)
LOSS FROM DISCONTINUED OPERATIONS (net of Income tax)
(Note 19) 1,536 20,716 -
--------------- ------------------ ------------
Net profit (loss) for the year Ps. 333,762 (Ps. 1, 457,062) (Ps.1,332,572)
=============== ================== ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (thousands) 1,286,844 1,121,396 1,070,825
=============== ================== ============
LOSS PER SHARE BEFORE EXTRAORDINARY ITEM (pesos) (Ps. 0.06) (Ps. 1.30) (Ps. 1.24)
=============== ================== ============
NET PROFIT (LOSS) PER SHARE (pesos) Ps. 0.26 (Ps. 1.30) (Ps. 1.24)
=============== ================== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE> 127
NUEVO GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of December 31, 1999)
<TABLE>
<CAPTION>
Accumulated profits (losses)
Capital ---------------------------------------------
stock Capital Legal Prior For the
subscribed contributions reserve years year
--------------- ------------- -------- --------------- -------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 Ps.7,573,183 Ps.81,607 Ps.4,461 (Ps. 1,586,610) (Ps. 526,141)
Application of 1996 net loss ( 526,141) 526,141
Increase in capital stock from the
capitalization of stockholders'
debt 817,781
Increase in capital stock through
the issuance of shares under the
Executive Stock Purchase Plan 112,783
Minority interest for the year
Net loss for the year ( 1,332,572)
-------------- ------------ ---------- -------------- ---------------
Balance at December 31, 1997 8,503,747 81,607 4,461 ( 2,112,751) ( 1,332,572)
Application of 1997 net loss ( 1,332,572) 1,332,572
Increase in capital stock from the
capitalization of stockholders'
debt 1,185,634
Increase in capital stock through
the issuance of shares under the
Executive Stock Purchase Plan 8,062
Recognition of inflation effects
on financial information
Minority interest for the year
Net loss for the year ( 1,457,062)
-------------- ------------ ---------- --------------- --------------
Balance at December 31, 1998 9,697,443 81,607 4,461 ( 3,445,323) ( 1,457,062)
Application of 1998 net loss ( 1,457,062) 1,457,062
Increase in capital stock from the
capitalization of stockholders'
debt 392,781
Effect of reorganization ( 5,580,086) ( 81,607) ( 4,461) 4,902,385
Effect of rights and primary offerings 217,849 148,543
Minority interest for the year
Net profit for the year 333,762
-------------- ------------ ---------- --------------- --------------
Balance at December 31, 1999 Ps.4,727,987 Ps.148,543 Ps. - Ps. - Ps. 333,762
============== ============ ========== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
Deficit Total
from Minority stockholders'
restatement Interest equity
------------ ---------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1996 (Ps.725,802) Ps. 8,057 Ps.4,828,755
Application of 1996 net loss -
Increase in capital stock from the
capitalization of stockholders'
debt 817,781
Increase in capital stock through
the issuance of shares under the
Executive Stock Purchase Plan 112,783
Minority interest for the year 7,362 7,362
Net loss for the year ( 1,332,572)
-------------- ------------ ----------------
Balance at December 31, 1997 ( 725,802) 15,419 4,434,109
Application of 1997 net loss -
Increase in capital stock from the
capitalization of stockholders'
debt 1,185,634
Increase in capital stock through
the issuance of shares under the
Executive Stock Purchase Plan 8,062
Recognition of inflation effects
on financial information ( 37,967) ( 37,967)
Minority interest for the year ( 14,508) ( 14,508)
Net loss for the year ( 1,457,062)
-------------- ------------ ----------------
Balance at December 31, 1998 ( 763,769) 911 4,118,268
Application of 1998 net loss -
Increase in capital stock from the
capitalization of stockholders'
debt 392,781
Effect of reorganization 763,769 21,317 21,317
Effect of rights and primary offerings 366,392
Minority interest for the year 10,841 10,841
Net profit for the year 333,762
-------------- ------------ ----------------
Balance at December 31, 1999 Ps. - Ps.33,069 Ps.5,243,361
============== ============ ================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 128
\
NUEVO GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of December 31, 1999)
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ ------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Loss from continuing operations before extraordinary item (Ps. 69,512) (Ps.1,436,346) (Ps.1,332,572)
Items not requiring the use of resources:
Depreciation and amortization 1,425,022 892,850 775,258
450 Project non cash writedown - 1,102,401 -
Provision for equipment impairment - ( - 1,236,307
Equity participation in net loss (gain) of associated compa-
nies and net loss (gain) on sale of equity investments 47,611 ( 27,922) ( 210,076)
Minority interest ( 17,933) ( 6,342) ( 276)
----------------- ---------------- ---------------
1,385,188 524,641 468,641
Resources (used for) provided by operating activities
Trade accounts receivable ( 367,442) ( 68,036) ( 69,164)
Related parties ( 19,608) 78,986 ( 482,572)
Recoverable taxes and other 54,824 ( 360,775) ( 176,629)
Inventories 23,484 112,682 ( 204,300)
Trade accounts payable ( 341,640) 39,830 259,778
Taxes and other payables 62,427 416,544 ( 98,679)
Income tax ( 52,936) 42,543 2,343
Employee profit sharing 372 ( 99) ( 86)
Other ( 501) ( 192) 143
----------------- ---------------- ----------------
Resources provided by (used for) operating activites
before extraordinary item and discontinued operations 744,168 786,124 ( 300,525)
Amortization of tax loss carryforwards 404,810 - -
Loss from discontinued operations ( 1,536) ( 20,716) -
----------------- --------------- ---------------
Resources provided by (used for) operating activities 1,147,442 765,408 ( 300,525)
---------------- --------------- ---------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 3,653,065 1,238,406 2,955,992
Principal payments on long-term debt - ( 26,080) ( 956,338)
(Decrease) increase in notes payable ( 738,813) 830,249 ( 1,074,666)
Effect of rights and primary offerings 366,392 - -
Increase in capital stock from the capitalization of stockholders'
debt 392,781 1,185,634 817,781
Increase in capital stock through the issuance of shares under
the Executive Employee Stock Purchase Plan - 8,062 112,783
---------------- --------------- ----------------
Resources provided by financing activities 3,673,425 3,236,271 1,855,552
---------------- --------------- ----------------
INVESTING ACTIVITIES:
Purchase of property and equipment ( 1,502,280) ( 2,647,158) ( 941,899)
(Purchase) sale of common stock of associated companies ( 5,332) 12,334 321,833
Purchase of PCS frequencies - ( 553,873) -
Increase in telephones to be amortized ( 758,281) ( 620,798) ( 225,621)
Increase in escrow account ( 1,268,063) - -
Purchase of other assets ( 421,616) ( 62,051) ( 692,938)
---------------- ---------------- -----------------
Resources used for investing activities ( 3,955,572) ( 3,871,546) ( 1,538,625)
---------------- ---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 865,295 130,133 16,402
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF
THE YEAR 286,666 156,533 140,131
---------------- ------------------ ----------------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR Ps. 1,151,961 Ps. 286,666 Ps. 156,533
================ ================== ================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE> 129
NUEVO GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998 AND 1997
(Except as otherwise noted, adjusted for price-level changes and expressed
in thousands of constant Mexican pesos as of December 31, 1999
Amounts expressed in U.S. Dollars are in thousands.)
1. Entity and Nature of Business
As a part of a recapitalization and restructuring plan, a new holding
company, Nuevo Grupo Iusacell, S.A. de C.V. ("New Iusacell" or the
"Company"), was incorporated on August 6, 1998 to acquire and hold
all of the outstanding shares of Grupo Iusacell, S.A. de C.V.
("Old Iusacell"). In July 1999, New Iusacell initiated an offer to
exchange its two series of common stock for the four series of
common stock of Old Iusacell then outstanding on a one for one
basis. As a result of the exchange, New Iusacell acquired 99.5% of
Old Iusacell shares when the offer expired on August 10, 1999. A
second offer expired on February 29, 2000 and as a result New
Iusacell owns 99.9% of Old Iusacell shares. New Iusacell intends
to make a repurchase offer for the remaining shares of Old Iusacell
in the second quarter of 2000.
Prior to the exchange offer, New Iusacell had nominal assets and
liabilities and no operations. New Iusacell also did not have any
contingent liabilities or commitments. For accounting purposes,
New Iusacell is the successor business to Old Iusacell, and the
figures presented in the financial statements and notes for dates
prior to the exchange offer are the consolidated financial
information of Old Iusacell and its subsidiaries. New Iusacell and
its subsidiaries (Old Iusacell and its subsidiaries prior to the
recapitalization) are referred to collectively herein as the
"Group."
Immediately after the exchange offer, New Iusacell completed both a
rights offer of 18,405,490 shares of its series V common stock,
raising U.S.$12,884 in proceeds, and a primary offer of 23,596,783
shares of its series V common stock, raising U.S.$23,847 in net
proceeds (after commissions). Total proceeds from the rights and
primary offerings amounted to Ps.366,392 (U.S.$36,731). New
Iusacell's principal shareholders sold an aggregate of
101,403,217 shares of its series V common stock, resulting in a
40.4% ownership interest for each such shareholder.
Old Iusacell is a holding company 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 (each a
"Region") in central Mexico. Old Iusacell holds the non-wireline
cellular concesions for Region 5
F-6
<PAGE> 130
(Guadalajara), Region 6 (Leon), Region 7 (Puebla) and a cellular
authorization for Region 9 (Mexico City).
In October 1995, a subsidiary of New Iusacell received a concession
from the Mexican government to operate as a long distance carrier
and began offering long distance service in August 1996. During
1996, Old Iusacell also signed a joint venture agreement for the
operation of a business to provide nationwide and international
paging services. The joint venture began to provide paging
services in August 1996. In May 1998, a subsidiary of Old Iusacell
acquired frequencies through auctions conducted by the Mexican
government to provide wireless personal communication services
("PCS") in Regions 1 and 4 in northern Mexico.
Carlos Peralta and companies and individuals controlled by or related
to him (together, the "Peralta Group") and subsidiaries of Bell
Atlantic Corporation ("Bell Atlantic") hold substantial ownership
interests (direct or indirect) in New Iusacell.
In February 1997, after execution of a definitive agreement between
Old Iusacell's principal shareholders and approval by the Mexican
government, Bell Atlantic assumed management control of Old
Iusacell from the Peralta Group.
Summary
The subsidiaries of New Iusacell which are included in the
consolidated financial statements are as follows:
<TABLE>
<CAPTION>
Economic interest
(direct or indirect)
as of
December 31
----------------------
Subsidiary 1999 1998
------------------------------------------ ---- ----
<S> <C> <C>
Old Iusacell 100% -
S.O.S. Telecomunicaciones, S.A. de C.V. (Region 9) 100% 100%
Iusacell, S.A. de C.V. 100% 100%
Sistecel, S.A. de C.V. 100% 100%
Comunicaciones Celulares de Occidente, S.A. de C.V. (Region 5) 100% 100%
Sistemas Telefonicos Portatiles Celulares, S.A. de C.V. (Region 6) 100% 100%
Telecomunicaciones del Golfo, S.A. de C.V. (Region 7) 100% 100%
Inflight Phone de Mexico, S.A de C.V. 100% 100%
Inmobiliaria Montes Urales 460, 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% 100%
Renta-Cell, S.A. de C.V. - 100%
Iusatelecomunicaciones, S.A. de C.V. 95% 95%
Iusatel, S.A. de C.V. 95% 95%
</TABLE>
F-7
<PAGE> 131
<TABLE>
<S> <C> <C>
Grupo Iusacell Nicaragua, S.A. 100% 100%
Compania Colombiana de Telefonia Celular, S.A. - 70%
Cellular Solutions de Mexico, S.A. de C.V. 100% 100%
Satelitron, S.A. de C.V. 65% 65%
Infotelecom, S.A. de C.V. 49% 49%
Punto a Punto Iusacell, S.A. de C.V. 95% 95%
Iusacell PCS, S.A. de C.V. (Regions 1 and 4) 95% 95%
</TABLE>
2. Acquisitions, Disposals and Group Structure
In November 1997, in connection with the resolution of various
matters, the Group increased its ownership in Renta-Cell, S.A. de
C.V. ("Renta-Cell") from 70% to 100% by acquiring the remaining
30% interest from the other Renta-Cell shareholders. The cost of
this acquisition was Ps.24,647, all of which represented the
excess of investment cost over book value. This amount was
charged to operations during the year ended December 31, 1997.
During 1999, Renta-Cell was merged into Promotora Celular, S.A.
de C.V. The merger was recorded based on the financial statements
of both subsidiary companies as of March 31, 1999.
F-8
<PAGE> 132
In December 1998, the Group increased its ownership in Cellular
Solutions de Mexico, S.A. de C.V. ("Cellular Solutions") from 68%
to 100% by acquiring the remaining 32% interest from the other
shareholder, an alternate director of New Iusacell. This interest
was acquired in anticipation of the discontinuance of Cellular
Solutions (see Note 19). The cost of this acquisition was
Ps.3,932, all of which represented the excess of investment cost
over book value. The amount of such excess was included in
Cellular Solutions' loss from discontinued operations for the
year ended December 31, 1998.
In November 1999, the Group liquidated its investment in Compania
Colombiana de Telefonia Celular, S.A. ("Telecel") and recorded a
loss of Ps.49,775.
Group Structure
Under the laws established by the Mexican government related to Bell
Atlantic's assumption of management control, Old Iusacell may not own
the majority of the voting stock of companies that hold concessions
to provide telecommunications services other than cellular service.
In November 1998, Old Iusacell and Jose Ramon Elizondo, a director of
New Iusacell (herein referred to as the "Mexican National"), entered
into a joint venture formation agreement ("the Agreement") pursuant
to which they agreed to participate together in the microwave
frequencies leasing, long distance, local telephony, PCS and paging
businesses. Old Iusacell and the Mexican National agreed that Old
Iusacell would own 94.9% of the economic interest and 49% of the
voting shares of Iusatel, S.A. de C.V., the Group's long distance
concessionaire ("Iusatel"), Iusatelecomunicaciones, S.A. de C.V., the
Group's fixed wireless local telephony operation
("Iusatelecomunicaciones"), Punto-a-Punto Iusacell, S.A. de C.V., a
microwave frequencies concessionaire ("Punto-a-Punto Iusacell") and
Iusacell PCS, S.A. de C.V., which holds concessions for 1.9GHz (PCS)
frequencies in Regions 1 and 4 ("Iusacell PCS"). The Mexican National
would own 5.1% of the economic interest and 51% of the voting shares
of these companies. In addition, the Mexican National agreed to
purchase a 2% economic and voting interest in Infotelecom, S.A. de
C.V., a paging company ("Infotelecom"), at cost, from the Group,
which would continue to hold a 49% economic and voting interest in
such company. The Mexican National completed this purchase in
December 1998 for Ps.26.
In December 1995, Old Iusacell signed a joint venture agreement with
Infomin, S.A. de C.V. ("Infomin"), 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, Old Iusacell and Infomin established a joint venture
company, Infotelecom. As of December 31, 1999, Infotelecom is owned
49%, 49% and 2%, by Old Iusacell, Infomin and the Mexican National,
respectively. Under the Infotelecom joint venture agreement, Old
Iusacell committed to contribute up to U.S.$10,500. As of December
31, 1999 and 1998, Old
F-9
<PAGE> 133
Iusacell had invested U.S.$10,000 and U.S.$9,032, respectively. This
agreement establishes the individual and joint responsibilities of
the partners. If a partner does not fulfill its responsibilities,
sanctions could cause such partner to lose its investment and incur a
penalty of up to U.S.$1,000.
In October 1997, Old Iusacell and the Mexican National incorporated
Punto a Punto Iusacell, a company which participates in government
auctions for microwave frequencies and operates concessions acquired
in those auctions. Punto a Punto Iusacell acquired three concessions
in the short haul microwave frequencies auction concluded in October
1997 and is negotiating to lease long haul microwave frequencies won
at auction by a third party.
F-10
<PAGE> 134
In June 1998, Old Iusacell and the Mexican National incorporated
Iusacell PCS, a company formed to participate in government auctions
for frequencies in the 1.9 GHz band. Iusacell PCS acquired
concessions in Regions 1 and 4 in such auctions, which were concluded
in May 1998.
In November 1998, pursuant to the Agreement, the Mexican National
acquired 51% of the voting shares of each of Iusatel and
Iusatelecomunicaciones for Ps. 25,130 and Ps. 8,597, respectively.
The shares of Infotelecom, Punto a Punto Iusacell, Iusacell PCS,
Iusatel and Iusatelecomunicaciones (each a "Non-Cellular Subsidiary"
and together, the "Non-Cellular Subsidiaries") acquired by the
Mexican National pursuant to the Agreement are or will be illiquid.
As a result, Old Iusacell agreed to grant the Mexican National, from
and after June 30, 2002 (or sooner under certain circumstances), the
right to put all, but not less than all, shares in any one or more
Non-Cellular Subsidiary to Old Iusacell for an amount equal to his
investment in the corresponding Non-Cellular Subsidiary, his cost of
money to finance such investment or investments plus, for each year
of his investment, 4% of his investment amount, grossed up with
respect to any applicable Mexican income taxes. In return, the
Agreement also contains a call option which provides Old Iusacell the
right at any time to call the Mexican National's interest in these
companies at the same price as if the put were exercised, subject to
any legal requirement to have another Mexican National purchase of
the shares subject to the call option.
The Mexican National does not have the unilateral right to approve
actions at the shareholder or board level of these five companies.
Under each company's by-laws, all shareholder or board action must
also be approved by the majority of the shares held by Old Iusacell
or a majority of the board members designated by Old Iusacell,
respectively.
The Agreement, together with each joint venture company's by-laws,
enable Old Iusacell to have management control over the day-to-day
operations and financial administration of the Non-Cellular
Subsidiaries. The Mexican National cannot alone, among other things,
select, terminate or determine the compensation of management or
establish operating and capital decisions in the ordinary course of
business.
Consequently, the Group consolidates the Non-Cellular Subsidiaries in
accordance with Bulletin B-8, "Consolidated and Combined Financial
Statements and valuation of permanent investments" issued by the
Mexican Institute of Public Accountants ("Bulletin B-8"), which
provides that, in the event that majority ownership of a company's
voting shares does not exist, control over the day-to-day operations
and financial administration of that company may be achieved by other
means. Since the Group has such other arrangements in place with the
majority shareholder, the requirement for consolidation under
generally accepted accounting principles in Mexico ("Mexican GAAP")
is satisfied.
3. Basis of presentation
a) Basis of presentation
F-11
<PAGE> 135
The Group's consolidated financial statements have been prepared in
conformity with Mexican GAAP. The consolidated financial
statements have been presented in thousands of constant Mexican
pesos as of December 31, 1999 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").
F-12
<PAGE> 136
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.
In addition, while the Group owns less than 50% of the voting
common stock of the Non-Cellular Subsidiaries, it consolidates
them because it exercises management control over their
day-to-day operations and financial administration by appointment
of the shareholders and other arrangements (see Note 2). All
significant inter-company balances and transactions have been
eliminated in 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 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.
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 to
Bulletin B-10, effective for fiscal years beginning January 1,
1990, 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:
- The balance sheet amounts as of December 31,1998 presented in
the consolidated financial statements have been restated to
constant Mexican pesos as of December 31, 1999 based on the
F-13
<PAGE> 137
National Consumer Price Index ("NCPI") published by Banco de
Mexico (the "Mexican Central Bank").
- Consolidated income statements for the current and prior years
have been restated to constant Mexican pesos as of December 31,
1999 using the NCPI from the periods in which the transactions
(income and expenses) occurred.
F-14
<PAGE> 138
- Bulletin B-12, "Statement of Changes in Financial Information",
issued by the Mexican Institute of Public Accountants
("Bulletin B-12"), addresses the presentation of the statement
of changes in financial position when financial statements have
been restated to constant Mexican pesos as of the latest
balance sheet date. Bulletin B-12 identifies the origin and
application of resources representing differences between
beginning and ending balance sheet amounts 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 or financing activities.
The items that 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.
Based on the Fifth Amendment to Bulletin B-10, effective January 1,
1997, property and equipment, net, and depreciation for the year
are restated using the NCPI, without exceeding net realizable
value.
In October 1997, the Group recorded an impairment loss to reduce the
value of its investment in its analog communications equipment to
fair value. The valuation of the analog equipment was determined
based on an appraisal performed by independent appraisers
registered with the Comision Nacional Bancaria y de Valores in
order to comply with Bulletin B-10, which requires non-monetary
assets to be valued as closely as possible to, but not higher
than, their fair market value.
In December 1997, as further described in Note 13.d, Old Iusacell
signed an agreement with subsidiaries of Lucent Technologies,
Inc. ("Lucent") to purchase analog and digital communications
equipment, primarily to address (i) customer requirements for
better voice quality, (ii) the need to increase network capacity
to handle rapidly growing subscriber levels, and (iii) the need
to remain competitive, particularly in view of the government's
auction of digital wireless concessions in the 1.9 GHz frequency
band to other carriers.
Property and equipment are depreciated using the straight-line
method, based on the restated values. The average annual rates of
depreciation used by the Group are as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Buildings and facilities 4% 4%
</TABLE>
F-15
<PAGE> 139
<TABLE>
<S> <C> <C>
Communications equipment 9% 9%
Furniture and fixtures 9% 9%
Transportation equipment 18% 18%
Computer equipment 21% 21%
Cellular rental telephones 25% 25%
</TABLE>
Investments in associated companies are accounted for using the
equity method based on the associated company's equity and are
adjusted for the effects of inflation in accordance with Bulletin
B-10.
F-16
<PAGE> 140
Restatement of stockholders' equity:
The contributed and earned capital 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, 1999.
The excess or deficit from restatement of capital account is an
element of stockholders' equity that includes surplus or deficit
from holding non-monetary assets, which represents the excess or
deficit in specific values of net non-monetary assets in
comparison with the increase attributable to general inflation as
measured by the NCPI.
Integral financing (gain) cost:
Integral financing (gain) cost is comprised of 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 between the date transactions are recorded and the
date of settlement or period end.
Gains and losses from net 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. 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 Group invests its
excess cash in deposits with major banks. The investments are
carried at cost plus accrued interest, approximating 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 Group cancels service to customers with invoices that are 60
days past due. The allowance for doubtful accounts represents the
Group's estimate of the probable loss inherent in all accounts
receivable due to general historical trends of customer
performance and factors surrounding the specific customer's
credit risk. The Group wrote off
F-17
<PAGE> 141
accounts receivable for Ps.18,889, Ps.59,506 and Ps.86,723 in
1999, 1998 and 1997, respectively. The charge to income for the
year in order to increase the allowance for doubtful accounts
amounted to Ps.92,767, Ps.30,913 and Ps.48,524 in 1999, 1998 and
1997, respectively.
F-18
<PAGE> 142
e) Investment in associated
companies
The Group carries long-term investments in associated companies in
which the Group owns between 20% and 50% of the Company's voting
common stock and over which the Group can exercise significant
influence. Such investments are accounted for using the equity
method. As described in Note 2, the Company has consolidated the
Non-Cellular Subsidiaries, in which Old Iusacell owns less than
50% of the voting common stock, because it exercises management
control over their day-to-day operations and financial
administration. Under the equity method such investments are
carried at cost adjusted for the Company's share of the net
income or losses of these companies and the effects of
restatement of non-monetary assets in the associated companies.
The effects of transactions with such associated companies are
eliminated before applying the equity method.
f) Cellular Telephones
The cost of cellular telephones given to customers under exclusive
service contracts is amortized based on the nature and terms of
the service contracts to match costs with the timing of revenues
earned. The costs of such telephones are included in other
assets, net of accumulated amortization, not to exceed market
value.
At the end of the contract term, the cellular telephone is given to
the customer. In the event of an early termination of an
exclusive service contract, the customer either (i) is required
to return the phone to the Group or (ii) acquires the telephone
at its book value on the date of termination.
The cost of cellular telephones sold to customers is recorded as
cost of sales based on the average cost of such telephones.
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 the initial term of the
respective concession. The Mexican government requires the
Group's compliance with the specific terms of each concession.
Through December 31, 1999 the Group had complied substantially
with such requirements, except for certain informational
requirements of the Mexican authorities. The Group believes that
such noncompliance
F-19
<PAGE> 143
does not expose it to any risk of concession forfeiture, or any
other material liability.
h) Advertising
Advertising costs are expensed as incurred. The cost of prepaid
media advertising (including television air time, magazine,
directory and other print media) is deferred and recorded in
other assets until the advertising airtime or space is used, at
which time such cost is recognized as an operating expense.
Advertising expense amounted to Ps.228,866, Ps.203,139 and
Ps.143,106 for 1999, 1998 and 1997, respectively.
F-20
<PAGE> 144
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 straight-line basis over twenty
years. Amortization expense was Ps.169,684, Ps.121,795 and
Ps.124,366 in 1999, 1998 and 1997, respectively.
The carrying amount of such excess cost applicable to each acquired
subsidiary is reviewed if the facts and circumstances suggest
that it might be impaired.
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 that are
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 (see Note
4.o for the new accounting bulletin effective January 1, 2000).
In accordance with Bulletin D-4, the Group did not record a
provision for deferred taxes as of December 31, 1999 and 1998.
Employee profit sharing is a statutory labor obligation payable to
employees and determined for each subsidiary with employees, on
its pretax income as adjusted in accordance with the provisions
of Mexican labor and tax laws.
k) Seniority premiums
In accordance with Mexican labor law, the Group's employees are
entitled to seniority premiums upon retirement 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
F-21
<PAGE> 145
required seniority. At December 31, 1999, the average seniority
of the eligible employees was less than 5 years. The Group's
liability and related costs for seniority premiums are immaterial
for all periods presented.
In accordance with Mexican labor law, the Group is liable for
severance payments to employees who are dismissed under certain
circumstances. Such compensation is expensed when paid.
The Group has no employee pension plans and does not provide for
post-retirement benefits.
F-22
<PAGE> 146
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 disclosure in the income statement of the net
earnings (loss) per share, and the 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.
m) Revenue recognition
Cellular air time is recorded as revenue as service is provided
except for revenue from the sale of prepay cards which is
recognized at the date of sale. The Group recognizes the revenue
on the sale of prepay cards at the date of sale rather than on a
deferred basis because the length of the average consumption
period for such prepay cards is not significant, i.e.,
approximately 1.2 months or less, and it is not material to
results of operations for all periods presented. Sales of
equipment and related services are recorded when goods are
delivered and services are provided. Cellular access charges are
billed in advance and recognized when the services are provided.
Other revenues, mainly from paging and long distance services,
are recognized when the related services are provided.
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 the resulting exchange
differences being recognized as exchange gains or losses.
o) New accounting bulletins
As of January 1, 2000, the Group will adopt the provisions of
revised Bulletin D-4. This revised Bulletin significantly
modifies previous accounting treatment for the calculation of
deferred taxes by the partial liability method to a method based
on comprehensive assets and liabilities. The new method requires
the recognition of future tax consequences based on the
difference between the financial statements and tax bases of
assets and liabilities.
In accordance with revised Bulletin D-4, the accrued effect as of
January 1, 2000 will be charged directly to stockholders' equity.
The Group's
F-23
<PAGE> 147
management estimates that the implementation of revised Bulletin
D-4 will require the recognition of a net asset for deferred
income tax of approximately Ps.173,102 and a net credit to
stockholders' equity for the same amount.
F-24
<PAGE> 148
The principal temporary differences giving rise to the deferred
income tax asset at January 1, 2000 are as follows:
<TABLE>
<S> <C>
Inventories Ps. 184,328
Property and equipment 756,431
Cellular telephones to be amortized 538,959
Concessions 9,031
Allowance for doubtful accounts ( 149,278)
Other allowances ( 65,429)
Net operating loss carryforwards and tax credits ( 1,768,619)
--------------
(Ps. 494,577)
Statutory tax rate 35%
---------------
Deferred tax asset (Ps. 173,102)
===============
</TABLE>
5. Related Parties
The Peralta Group and Bell Atlantic hold substantial ownership interests
in the Company. In addition, the Peralta Group 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 Group.
A summary of related party accounts and notes receivable, including
interest, as of December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
IUSA and related entities Ps. 8,342 Ps.12,782
------------ ------------
Total Ps. 8,342 Ps.12,782
============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Bell Atlantic Ps.116,034 Ps.140,082
------------- --------------
Total Ps.116,034 Ps.140,082
============= ==============
</TABLE>
F-25
<PAGE> 149
Accounts payable result from the leasing of certain facilities and
services received.
During 1997, Old Iusacell had notes payable and interest due to Bell
Atlantic of U.S.$57,900 (Ps.515,558), of which U.S.$25,000
(Ps.222,607) was repaid and U.S.$32,900 (Ps.292,951) was converted
to equity (see Note 14).
The U.S.$25,000 of borrowings was repaid prior to the stated maturity
date as part of a debt restructuring program made by Old Iusacell in
1997. There was no gain (loss) recognized by Old Iusacell related to
the early repayment.
In July 1997, Bell Atlantic agreed to provide Old Iusacell with
subordinated convertible debenture financing in an aggregate amount
of U.S.$150,000. The principal amount of the debentures was
convertible into Old Iusacell series A shares (see Note 10).
Following is an analysis of the related party transactions described
above for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Service revenue Ps. 14,254 Ps.16,443 Ps.11,773
Lease income 4,211 12,473 2,690
------------ ------------ -------------
Total income Ps. 18,465 Ps.28,916 Ps.14,463
============ ============ =============
Commission expenses Ps. - Ps. - Ps. 120
Technical expenses 5,525 49,450 40,521
Lease expenses 5,623 2,842 4,777
Interest expense - 12,620 29,675
------------ ------------ -------------
Total expenses Ps. 11,148 Ps.64,912 Ps.75,093
============ ============ =============
</TABLE>
6. Inventories
As of December 31, inventories consisted of the following:
F-26
<PAGE> 150
<TABLE>
<S> <C> <C>
1999 1998
------------- --------------
Cellular telephones and accessories Ps.193,809 Ps.165,175
Less: Allowance for obsolete and
slow-moving inventories ( 7,842) ( 12,627)
------------- -------------
Net 185,967 152,548
Advances to suppliers ( 1,639) 55,264
------------- -------------
Total inventories Ps.184,328 Ps.207,812
============= =============
</TABLE>
7. Investment in Associated
Companies
On September 30, 1997, the Group sold its direct and indirect interests
in Ecuadorian cellular and paging companies, Consorcio Ecuatoriano
de Telecomunicaciones, S. A. ("CONECEL") and Corptilor, S.A. In
1997, the Group received U.S.$29,400 in cash consideration for its
direct interests in CONECEL, resulting in a gain of Ps.208,959. At
December 31, 1997, the gain on sale of Old Iusacell's indirect
interest in CONECEL by its Colombian subsidiary was deferred as a
result of an uncertainty as to the timing and, given some of the
capital markets legislation emerging from Colombia at that time,
even the possibility of repatriation of the proceeds from Colombia.
Therefore, the Company believed that sale recognition was not
appropriate.
The Group received U.S.$2,000, net of taxes, in respect to its indirect
interests during 1998, resulting in a gain of Ps.18,189.
F-27
<PAGE> 151
As of December 31, the Group's investment in associated companies is as
follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- -------------------------------
Entity Ownership Investment Ownership Investment
------------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Editorial Celular, S.A.
de C.V. 40.00% Ps. 10,466 40.00% Ps. 7,523
AMCEL - 13,300 8,431
Other 1,471 1,471
------------- ------------
Ps. 25,237 Ps. 17,425
============= ============
</TABLE>
Summarized financial information for these associated companies
accounted for by the equity method as of December 31, 1999, 1998 and
1997 and for the years ended December 31, 1999, 1998 and 1997, is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------- --------------
<S> <C> <C> <C>
Total assets Ps. 19,322 Ps. 13,811 Ps. 60,205
Total liabilities 3,922 2,837 53,687
Revenues 38,867 38,717 36,160
Gross profit 18,858 19,617 17,209
Net income 5,160 7,298 2,794
Group's share of net earnings 2,164 2,919 1,117
(Loss) gain on sale of equity investments ( 49,775) 25,003 208,959
</TABLE>
8. Property and Equipment, Net
a) At December 31, property and equipment, net consisted of:
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
Buildings and facilities Ps.1,398,529 Ps.1,398,500
Communications equipment 6,028,236 3,636,564
Furniture and fixtures 153,488 146,365
Transportation equipment 53,682 53,695
Computer equipment 488,675 319,930
Cellular rental telephones 1,230 2,468
--------------- ---------------
8,123,840 5,557,522
Accumulated depreciation ( 2,657,205) ( 3,464,783)
--------------- ---------------
5,466,635 2,092,739
Land 51,144 50,773
Construction in progress 1,074,220 3,711,691
Advances to suppliers 179,109 106,724
--------------- ---------------
Ps.6,771,108 Ps.5,961,927
=============== ===============
</TABLE>
F-28
<PAGE> 152
b) Depreciation expense was Ps.693,099, Ps.380,104 and Ps.440,926 for
1999, 1998 and 1997, respectively. In addition, as described in Note
18, the Ps.321,339 charge for the write-down of the Project 450
fixed assets is included in the caption titled Project 450 non-cash
write-down in the accompanying income statement.
F-29
<PAGE> 153
9. Other Assets
a) At December 31, other assets consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Concessions Ps. 820,834 Ps. 830,982
Cellular telephones to be amortized 538,959 342,258
Prepaid expenses 198,146 171,222
Advance payments 280,294 276,287
Pre-operating expenses 112,754 49,112
Other 176,984 80,841
----------------- ---------------
Ps.2,127,971 Ps.1,750,702
================= ===============
</TABLE>
b) Concessions and cellular telephone amortization expense was
Ps.562,239, Ps.390,951 and Ps.209,966 in 1999, 1998 and 1997,
respectively. In addition, in 1998 the Ps.781,062 charge for the
write-down of Project 450 pre-operating expenses and capitalized
interest, as described in Note 18, is included in the caption titled
Project 450 non-cash write-down in the accompanying income
statement.
10. Notes Payable and Long-Term Debt
As of December 31, 1999 and 1998, the long-term debt of the Group
consisted of the following:
<TABLE>
<CAPTION>
Mexican pesos
----------------------
U.S.Dollars 1999 1998
------------- -------------- ----------------
<S> <C> <C> <C>
Unsecured senior notes due 2004 U.S.$150,000 Ps.1,424,790 Ps. 1,667,329
Long-term bank loan 125,000 1,187,325 1,389,441
Revolving credit facility 100,000 949,860 1,111,552
Eximbank financing 65,175 619,074 -
Commerzbank financing 25,750 244,589 -
BBV Handset facilities 7,500 71,243 -
Unsecured senior notes due 2006 350,000 3,324,507 -
---------------- ---------------- ---------------
U.S.$823,425 Ps.7,821,388 Ps. 4,168,322
Current portion of long-term debt 53,233 505,643 -
---------------- ---------------- ---------------
U.S.$770,192 Ps.7,315,745 Ps.4,168,322
================ ================ ===============
</TABLE>
F-30
<PAGE> 154
a) Unsecured senior notes due 2004
On July 25, 1997 Old Iusacell completed an offering of long- term,
unsecured senior notes due July 15, 2004 for U.S.$150,000, bearing
interest at a fixed rate of 10%, payable semi-annually starting
January 15, 1998 (the "Notes Due 2004"). The Notes Due 2004 are
redeemable at the option of Old Iusacell, in whole or in part, at
any time on or after July 15, 2001 starting at a redemption price of
105.0% of principal amount 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 prior to July 15, 2000 Old Iusacell may redeem
in the aggregate up to 35% of the original aggregate principal
amount of the Notes Due 2004 with proceeds of a public equity
offering by Old Iusacell at a redemption price of 110.0% of
principal amount plus accrued interest, if any. The Notes Due 2004
may also be redeemed at a price equal to 100.0% of principal amount
plus accrued interest, if any, in the case of legal changes
adversely affecting the treatment of the withholding taxes on
payments to holders of the Notes Due 2004.
b) Long-term bank loan and revolving credit facility
The long-term bank loan and revolving credit facility bear interest at a
variable rate equal to the lower of (i) LIBOR plus 1.75% or (ii) 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% or (iii) 0.75% per annum.
Interest is payable quarterly.
c) Eximbank financing
On July 15,1999, Old Iusacell consummated a financing to acquire
cellular infrastructure equipment manufactured in the U.S.A. The financing
consists of (i) a five-year senior secured term facility provided by UBS AG
in the principal amount of approximately U.S.$72,500, and guaranteed by the
Export-Import Bank of the United States and (ii) a two-year senior secured
term facility provided by UBS AG and Commerzbank AG in the principal amount
of approximately U.S.$25,750, but not guaranteed by the Export-Import Bank of
the United States. During 1999, U.S.$98,250 of this facility had been drawn
down , of which U.S.$75,000 had been used to refinance a short-term bridge
facility which expired on July 15, 1999. An initial amortization payment of
U.S.$7,242
F-31
<PAGE> 155
dollars was made in November 1999. Banque Nationale de Paris purchased UBS's
interest in this loan in December 1999.
Loans outstanding under the Eximbank facilities bear interest at a rate
per annum equal to 0.20% per annum above six-month LIBOR, in case of the
guaranteed facility and 1.75% per annum above six-month LIBOR, in the case of
the unguaranteed facility.
d) BBV Handset Facilities
In September 1999, Old Iusacell obtained a handset financing facility
from Banco Bilbao Vizcaya ("BBV") which consists of an 18-month senior
unsecured credit facility in the principal amount of U.S.$4,000 to be used
solely to acquire cellular handsets. Loans outstanding under this facility
bear interest at an annual rate equal to 2.50% above LIBOR for the related
interest period, which can have a duration of 30, 60, 90, 180 or 360 days,
with respect to each disbursement. Old Iusacell drew down the entire
U.S.$4,000 available under this facility in September 1999. Payments are due
in equal installments every six months.
In November 1999, in connection with a program to migrate its analog
contract customers to digital service, Old Iusacell agreed to guarantee up to
U.S.$6,600 in future loans to be granted by BBV to the Company's customers
for the purchase of digital handsets.
In December 1999, Old Iusacell entered into a second 18-month senior
unsecured credit facility with BBV in the principal amount of U.S.$4,000 to
be used solely to purchase handsets. As with the September 1999 facility,
loans outstanding under this facility will bear interest at annual rate equal
to 2.50% above 180-day LIBOR. Payments are due in equal installments every
six months. Old Iusacell drew down U.S.$3,500 under this facility on December
8, 1999.
F-32
<PAGE> 156
e) Unsecured senior notes due 2006
On December 9, 1999 New Iusacell completed an offering of long-term,
unsecured senior notes due December 1, 2006 for U.S.$350,000,
bearing interest at a fixed rate of 14.25%, payable semi-annually
starting June 1, 2000 (the "Notes Due 2006"). New Iusacell invested
in securities approximately U.S.$133,600 of the net proceeds of the
offering. Investment is held by a security agent in an escrow
account to secure payment in full of the interest on the notes due
2006. This investment is restricted as to withdrawal and may only be
utilized to meet the Company's interest commitment on the notes due
2006.
At any time prior to December 1, 2002, the Notes Due 2006 can be
redeemed in the aggregate of up to 35% of the original aggregate
principal amount with the proceeds of one or more public equity
offerings by New Iusacell at a redemption price of 114.25% of
principal amount plus accrued interest, if any. The Notes Due 2006
may also be redeemed at a price equal to 100.0% of principal amount
plus accrued interest, if any, in the case of legal changes
adversely affecting the treatment of the withholding taxes on
payments to holders of the Notes Due 2006.
f) Covenants and Collateral
The long-term bank loan, the revolving credit facility, the Notes Due
2004 and the Notes Due 2006, contain certain restrictive covenants,
including the maintenance of certain financial ratios, restrictions
on incurring additional debt, limitations on capital expenditures
and restrictions on the sale or lease of Old Iusacell's assets. As
of December 31, 1999, Old Iusacell had complied with such covenants
except that in October 1999, Old Iusacell exceeded the capital
expenditure limitation for 1999 under the long-term bank loan, the
revolving credit facility and the two U.S. Eximbank loan facilities.
Old Iusacell also had not registered the mortgage of a single parcel
of real property in Leon, Guanajuato (Region 6) to secure the
long-term bank loan and the revolving credit facility. These
defaults triggered cross-defaults, all of which were cured by a
modification or waiver of the restrictive covenant under the
long-term bank loan, revolving credit facility and the two U.S.
Eximbank loan facilities to enable Old Iusacell to make capital
expenditures in excess of the maximum amount permitted for 1999, to
increase the maximum amount of capital expenditures permitted for
2000 and to not comply with the Leon mortgage registration.
Old Iusacell's obligations under the long-term bank loan and the
revolving credit facility are unconditionally guaranteed, jointly
and severally, by the principal operating and concession-holding
subsidiaries of Old Iusacell and are secured by the pledge of
substantially all capital stock and equity interests held by Old
Iusacell and by all cellular concessions, and by a first lien on
substantially all assets used in connection with or related to
F-33
<PAGE> 157
such concessions, except for a second lien on the assets over which
the Eximbank lenders have a first lien.
Old Iusacell's obligations under the Eximbank facilities are
unconditionally guaranteed, jointly and severally, by the principal
operating and concession-holding subsidiaries of Old Iusacell and
are secured by a first lien on certain Lucent analog and CDMA
equipment and a second lien on certain other analog and CDMA
equipment.
In connection with the Eximbank facilities, Old Iusacell was required,
under the terms of its indenture relating to the Notes due 2004, to
equally and ratably secured the holders of the Notes due 2004 by a
second priority pledge of the cellular concessions and a second
priority lien on certain equipment.
F-34
<PAGE> 158
At December 31, 1999, the Group's long-term debt matures as follows:
<TABLE>
<CAPTION>
Years ended December 31, U.S. Dollars Mexican pesos
----------------------- ------------- -------------
<S> <C> <C>
2000 U.S. 53,233 Ps. 505,643
2001 134,983 1,282,150
2002 113,483 1,077,930
2003 14,483 137,568
2004 157,243 1,493,590
2005 and thereafter 350,000 3,324,507
-------------- ---------------
Total U.S. 823,425 Ps. 7,821,388
============== ===============
</TABLE>
g) Bell Atlantic subordinated convertible debt facility
In July 1997, Bell Atlantic committed to provide Old Iusacell with
subordinated convertible financing in an aggregate amount of
U.S.$150,000, bearing interest at an annual rate of LIBOR plus 5.0%.
At the option of Bell Atlantic, borrowings under the facility were
convertible into series A shares at a conversion price of U.S.$0.70
per share. During the year ended December 31, 1999, U.S. $31,000 was
borrowed under the facility and immediately converted to series A
shares (see Note 10). During 1998, $101,500 U.S. Dollars were
borrowed and converted to series A shares. The facility expired on
June 30,1999 with $17,500 U.S. Dollars unutilized.
h) Notes payable
As of December 31, notes payable consisted of the following:
<TABLE>
<CAPTION>
U.S. Dollars Mexican pesos
----------------------
1999 1999 1998
---------- --------- ---------
<S> <C> <C> <C>
Handset facility bearing interest at a
fixed rate of 6.81%, maturing
on April 21, 2000 U.S.$10,000 Ps. 94,986 Ps. -
Bridge loan facility bearing interest
at a variable rate of LIBOR plus 1.0% with
maturity date of December 1998, extended
to July 1999 - - 833,667
Other - - 132
----------- ---------- ----------
Total U.S.$10,000 Ps. 94,986 Ps.833,799
=========== ========== ==========
</TABLE>
F-35
<PAGE> 159
In January 1999, Old Iusacell obtained a handset facility from UBS AG,
which consists of a 360-day senior unsecured credit facility in the
principal amount of U.S.$10,000. Loans outstanding under this
facility bear interest at an annual rate of 6.81%. Old Iusacell drew
down the entire U.S.$10,000 available under this facility in April
1999. Banque Nationale de Paris purchased UBS's interest in this
loan in December 1999.
F-36
<PAGE> 160
i) Interest rate collar and Foreign Exchange Hedging
In July 1998, Old Iusacell entered into an interest rate collar
agreement on a notional amount of U.S.$35,000 until July 30, 2002.
The collar agreement limits the maximum effective LIBOR cost to
6.12% if six-month LIBOR is lower than 7.12% and 7.12% if LIBOR
equals or exceeds 7.12%. Old Iusacell can participate in a decline
in LIBOR to 5.30%.
On February 26, 1999, Old Iusacell entered into an interest rate collar
agreement to limit the maximum interest rate which must be paid on
U.S.$15,000 of its floating rate debt until July 2002. This collar
agreement limits the maximum effective LIBOR cost to 5.82% if
six-month LIBOR is lower than 6.82% and 6.82% if LIBOR equals or
exceeds 6.82%. Old Iusacell can participate in a decline in LIBOR to
4.75%.
On December 30, 1999 Old Iusacell entered into a foreign currency hedge
utilizing forward-rate contracts, hedging its exchange rate exposure
for up to U.S.$77,000 or approximately 50% of the principal and
interest payments coming due over the period April 2000 to April
2001. If the Mexican peso to U.S. Dollar exchange rate remains at
the December 31, 1999 level through April 30, 2001, then the
estimated cost to Old Iusacell of this hedging program will be
approximately Ps.91,296 (U.S.$9,622).
11. Trade Accounts Payable
As of December 31, trade accounts payable consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Current accounts Ps.630,909 Ps.849,745
Short-term notes payable 10,570 131,004
------------- -------------
Total Ps.641,479 Ps.980,749
============= =============
Long-term notes payable Ps. - Ps. 2,370
============= =============
</TABLE>
On August 14, 1997, Old Iusacell and Telmex entered into a settlement
agreement with respect to fees Telmex charged 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.226,479, of
which Ps.29,575 constituted value-added tax and Ps.38,101 was
accounted for as interest expense.
In September 1997, Old Iusacell and Telmex amended the interconnection
agreement, requiring Old Iusacell to pay Telmex an interim
interconnection rate of 31 centavos per minute retroactive to June
1,
F-37
<PAGE> 161
1997 and that Telmex extend to Old Iusacell a 38% discount available
to other large business consumers for use of its long distance
network.
In December 1998, the Comision Federal de Telecomunicaciones
("COFETEL") reached an agreement on various outstanding
interconnection issues, including a reduction in the rate charged
for calls terminated by Telmex from 31 centavos per minute to
approximately 26 centavos per minute, effective October 1, 1998
(such rate being subject to inflation adjustments).
F-38
<PAGE> 162
12. Income Tax, Net Assets Tax and
Employee Profit Sharing
Old Iusacell has filed annual consolidated income tax returns since the
tax year beginning January 1, 1994. New Iusacell does not
consolidate its income tax return with Old Iusacell.
The income tax rate in Mexico is 35% (34% for 1998 and 1997). The
provision for income tax differs from the statutory income tax rate
due to temporary and permanent differences in the determination of
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 significant
permanent differences 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 for temporary differences since such differences
are of a recurring nature and their realization does not occur over
a defined time period. For the year ended December 31, 1999, the
Group generated a tax profit of Ps.1,156,600 which was totally
offset by the application of tax loss carryforwards.
At December 31, 1999, the Group had the following net operating losses
for income tax purposes that may be carried forward and applied
against future taxable earnings:
<TABLE>
<CAPTION>
Year of Amount Expiration
loss of loss year
--------- ---------- -----------
<S> <C> <C>
1994 189,015 2004
1995 692,132 2005
1996 14,653 2006
1997 467,398 2007
1998 405,421 2008
</TABLE>
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 1999. Due to a tax law change in 1999, the
Company did not include additional tax losses for Ps.950,000,
relating to one of its subsidiaries, Iusatelecomunicaciones, and may
not be able to apply its losses against its other subsidiaries'
profits in 2000 and beyond. Old Iusacell has filed an amparo against
such change of law. Losses include Ps.228,386 and Ps.343,740 of
capital stock issuance costs expensed for tax purposes in 1994 and
1993, respectively. Such amounts were charged against stockholders'
equity in the financial statements.
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% net assets tax paid may be utilized as a credit
against future income tax in the years
F-39
<PAGE> 163
in which the Group 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 NCPI when used. As
of December 31, 1999, the net assets tax available as carry forward
was Ps.262,055.
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, 1999 and
1998, the provision for profit sharing was of Ps.382 and Ps.530,
respectively.
F-40
<PAGE> 164
The effective rate reconciliation as of December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- ---------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate Ps. 173,630 (Ps. 465,991) (Ps.432,632)
Add (deduct):
Inventory purchases less cost of sales 38,685 252,531 ( 101,624)
Depreciation and amortization ( 293,477) ( 183,203) ( 261,824)
Provision for equipment impairment - - 420,342
Project 450 non-cash write-down - 374,818 -
Differences between interest and
inflationary gains or losses 136,010 ( 126,150) 140,767
Net assets tax 132,645 72,127 60,397
Income tax loss carryforwards ( 404,810) 75,928 180,283
Provision for doubtful accounts 25,857 ( 116,005) 11,456
Telephones to be amortized 196,784 132,923 71,388
Goodwill amortized 59,389 41,409 42,285
Other 67,932 13,740 ( 70,441)
-------------- ------------- -------------
Effective income tax expense at
effective rate Ps.132,645 Ps. 72,127 Ps. 60,397
============== ============= =============
</TABLE>
13. Commitments and Contingencies
As of December 31, 1999, the Group had the following commitments and
contingent liabilities:
a) The Group has entered into operating lease agreements for
administrative offices, sales branches and service facilities. These
lease agreements expire at various dates through 2007, and some
agreements contain options for renewal. Rental expense was
Ps.114,241, Ps.110,607 and Ps.82,819 for the years ended December
31, 1999, 1998 and 1997, respectively.
Future annual minimum rental payments under existing leases with
terms in excess of one year as of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 Ps. 109,783
2001 89,890
2002 73,900
2003 52,989
Thereafter 42,649
-------------
Ps.369,211
=============
</TABLE>
b) The Group may have contingent liabilities for taxes and penalties
that the tax authorities may assess based on audits of prior
years' tax
F-41
<PAGE> 165
returns. During 1997, the Mexican tax authorities completed an
audit of three companies of the Group (Old Iusacell, Iusacell,
S.A. de C.V. and SOS Telecomunicaciones, S.A. de C.V.), resulting
in claims of Ps.8,174, including penalties and surcharges. These
differences were paid in 1997 and are classified as a part of the
provision for taxes in the income statement for that year. As a
result of those investigations, Old Iusacell was assessed a
Ps.21,881 penalty in 1999 by the tax authorities under the claim
that it had incorrectly deducted for income tax purposes certain
interest expense. Old Iusacell paid this penalty.
F-42
<PAGE> 166
c) Mitsubishi Electronics America Inc. ("MELA") filed a complaint in
the United States on July 18, 1996 against Old Iusacell, Bell
Atlantic Corporation and Bell Atlantic Latin American Holdings
Inc., an affiliate of Bell Atlantic. Essentially, MELA alleges
that it had a contract with Old Iusacell for the sale of
telephone terminals and that Old Iusacell breached the contract
or defrauded MELA by not purchasing the terminals. MELA alleges
the contract was for the sale of 60,000 units at a unit cost of
U.S.$0.510. MELA has filed an amended complaint against Old
Iusacell with fraud in addition to the other existing
allegations. Old Iusacell intends to move to dismiss the fraud
charges, as it has previously done. The lawsuit is currently in
the discovery stage. Management believes the lawsuit has no basis
since no contract was ever signed and that, at trial, no material
damages will result in favor of MELA. Based on external counsel's
opinion it is too early to evaluate the extent of Old Iusacell's
exposure to loss by judgment at trial.
d) In December 1997, Old Iusacell signed an agreement with Lucent
Technologies to purchase CDMA-based wireless equipment for
U.S.$188,000 and install its digital cellular network. In connection
with this contract, Lucent issued trade-in credits for approximately
U.S.$93,000, representing the net replacement cost of the analog
network equipment being replaced. The trade-in credits are deducted
from each purchase invoice proportionally to the cost of the total
equipment purchased.
e) In February 1998, Old Iusacell's former advertising agency sued
Old Iusacell for Ps.23,000, alleging improper termination of its
contract. Old Iusacell won the lawsuit in trial court during 1998
without any damages in favor of such former advertising agency and
also won a first appeal. The advertising agency filed a second and
final appeal and, in June 1999, the Mexican Supreme Court found Old
Iusacell in breach of its contract with the advertising agency and
found further that the advertising agency suffered Ps.23,000 in
damages. Subsequently, another tribunal confirmed the breach of
contract finding, but assessed damages of only Ps.16,000. Old Iusacell
has filed an injunctive action (amparo) with the Mexican Supreme Court
against this sentence on the basis that this tribunal and the Mexican
Supreme Court exceeded the scope of their review and also incorrectly
assessed damages. In December 1999, the suit was settled for
Ps.14,500.
f) In April 1998, Old Iusacell learned that the Montes Urales
property was subject to two liens. Such liens were not identified when
Inmobiliaria Montes Urales was acquired in 1994, nor was Old Iusacell
notified of such liens subsequent to acquisition. To date, the liens
have not been removed and it is uncertain as to when the removal will
take place.
g) Old Iusacell has certain commitments derived from its joint venture
agreement with Infomin. (see Note 2).
h) In 1994, Old Iusacell and Northern Telecom (CALA) Corporation
("Nortel") entered into an agreement pursuant to which Nortel would
supply network switching equipment for the development of the 450 MHz
local wireless
F-43
<PAGE> 167
network. The agreement would terminate automatically if Old Iusacell
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 prior to December 31, 1997, the
agreement was terminated. In 1994, as required under the agreement,
Old Iusacell made advance payments of U.S.$15,000. Old Iusacell now
seeks a refund of such advanced funds. Nortel, however, has asserted
that such advances should be credited against development costs. Legal
counsel believes that Nortel is legally obligated to refund the
U.S.$15,000 advance to Old Iusacell.
F-44
<PAGE> 168
i) During 2000, the SCT and COFETEL may determine how much, through
what means and over how much time long distance concessionaires,
including a subsidiary of Old Iusacell, Iusatel, will pay for the
special projects implemented by Telmex prior to January 1997 to permit
competition in long distance telephony. There can be no certainty that
Old Iusacell will be able to reach a negotiated settlement with Telmex
or, if it can reach such a settlement, on what terms.
14. Contributed Capital
During the years ended December 31, 1999, 1998 and 1997, the
following transactions took place:
On February 18, 1997, in connection with the 1997 recapitalization
of Old Iusacell, the Peralta Group converted 100,000,000 series A
shares into series D shares and Bell Atlantic converted
200,000,000 series B shares and 166,769,760 series D shares into
series A shares.
On February 28, 1997 Old Iusacell's Board of Directors ratified a
capital increase of Ps.817,781. The shares were offered for
subscription and payment in the following way:
a) Bell Atlantic subscribed for 47,017,491 series A shares through the
conversion of certain debt (Note 5).
b) FIUSA Pasteje, S.A. de C.V. subscribed for 4,390,619 series A
shares and 48,754,000 series D shares through the capitalization of
certain liabilities.
c) Preemptive stockholder rights were exercised for the amount of 265
series D shares and 92,564 series L shares.
Additionally, 7,812,500 of the 15,625,000 series L shares authorized
during 1996 were kept in Old Iusacell's treasury available for
the Executive Employee Stock Purchase Plan (the "Stock Purchase
Plan"), and the balance of 7,719,916 series L shares was
cancelled. During 1997, 7,549,834 of these shares were 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 4,719,560 series L shares for the
Stock Purchase Plan. The subscription price for those shares was
Ps.57,804.
On June 6, 1997, the Technical Committee approved the subscription
of 1,272,200 series L shares for the Stock Purchase Plan. The
subscription price for those shares was Ps.24,943.
On September 30, 1997, the Technical Committee approved the
subscription of 1,558,074 series L shares for the Stock Purchase
Plan. The subscription price for those shares was Ps.30,036.
On April 17, 1998, 262,666 series L shares of Old Iusacell which had
not been subscribed for under the Stock Purchase Plan as of December
31, 1998, were automatically canceled.
F-45
<PAGE> 169
At the June 1998 shareholders' meeting, the total authorized fixed
portion of capital stock of Old Iusacell was increased by Ps. 34,231
through the issuance of up to 2,000,000 series L shares of Old
Iusacell under the Stock Purchase Plan.
From June 30 to July 14, 1998, preemptive stockholder rights related to
the new authorization of series L shares of Old Iusacell for the
Stock Purchase Plan were exercised for 40 series L shares of Old
Iusacell in the amount of Ps.0.61.
F-46
<PAGE> 170
During June 1998, 1,187,500 of the 2,000,000 previously authorized
series L shares of Old Iusacell were added to Old Iusacell's
treasury available for the Stock Purchase Plan. The balance of
812,460 series L shares of Old Iusacell was canceled. During 1998,
1,117,496 of these new shares of Old Iusacell made available under
the Stock Purchase Plan were subscribed by employees, as follows:
On September 2, 1998, the Technical Committee approved the
subscription of 582,456 series L shares of Old Iusacell for the
Stock Purchase Plan. The subscription price for those shares was
Ps.4,829.
On October 2, 1998, the Technical Committee approved the
subscription of 535,040 series L shares of Old Iusacell for the
Stock Purchase Plan. The subscription price for those shares was
Ps.3,233.
As of December 31, 1998, 70,004 series L shares of Old Iusacell
remained available in Old Iusacell's treasury for issuance under the
Stock Purchase Plan.
In August 8, 1998 New Iusacell was incorporated. The initial capital
stock was Ps.61, and 8,750 series A Shares and 8,750 series V Shares
were issued.
On November 17, 1998 Old Iusacell's Board of Directors ratified a
capital stock increase of Ps.855,875 by the issuance of 102,142,857
series A shares of Old Iusacell which were subscribed through the
conversion of debentures issued by Old Iusacell under the Bell
Atlantic subordinated convertible debt facility (see Note 10). The
convertible debentures were issued and converted as follows:
On August 19, 1998, Old Iusacell issued debentures in a principal
amount of Ps.300,103 (U.S. $25,200), which were converted into
36,000,000 series A shares of Old Iusacell on the same date.
On September 29, 1998, Old Iusacell issued debentures in a principal
amount of Ps.555,772 (U.S.$46,300), which were converted into
66,142,857 series A shares of Old Iusacell on the same date.
On December 21, 1998 the Board of Directors of Old Iusacell ratified a
capital increase of Ps.329,759 by the issuance of 42,857,142 series
A shares of Old Iusacell. The increase was subscribed through the
conversion of debentures issued by Old Iusacell under the Bell
Atlantic subordinated convertible debt facility, in an aggregate
principal amount of U.S.$30,000. The 42,857,142 series A shares of
Old Iusacell were initially subscribed by Bell Atlantic, of which
50%, or 21,428,571, of such shares, was then sold to the Peralta
Group. There was no gain or loss recognized from the sale.
On February 10, 1999 the technical committee approved the subscription
of 70,004 series L Shares of Old Iusacell for the Stock Purchase
Plan.
F-47
<PAGE> 171
On March 3, 1999 Old Iusacell converted an amount of Ps.392,781
(U.S.$31,000) into 44,285,714 series A shares of Old Iusacell. The
44,285,714 series A shares of Old Iusacell were initially subscribed
by Bell Atlantic, of which 50%, or 22,142,857, of such shares, was
then sold to Carlos Peralta. There was no gain or loss recognized
from the sale.
At August 10, 1999 the Group concluded a corporate reorganization. The
Group corporate reorganization included the following transactions:
a) An exchange offer by New Iusacell of its series A and V ADSs and
shares, for Old Iusacell's series A, B, D and L ADSs and shares on a
one-for-one basis. At the end of the exchange offer approximately
6,890,617 series D and L shares were not tendered.
F-48
<PAGE> 172
b) A rights offer in which the shareholders of Old Iusacell who
participated in the exchange were also offered the option to
purchase an aggregate of 22,419,716 series V shares of New Iusacell,
in the form of ADSs or shares. A total of 18,405,490 series V shares
were subscribed. Total proceeds amounted to Ps.128,518 (U.S.$12,884)
c) Primary and secondary offerings under which New Iusacell sold
23,596,783 series V shares, and Bell Atlantic and the Peralta Group
sold 101,403,217 series V shares of New Iusacell. Total proceeds on
the primary offering amounted to Ps.237,874 (U.S.$23,847).
The changes in the number of shares of common stock for the
period January 1, 1998 through December 31, 1999 are analyzed
as follows:
<TABLE>
<CAPTION>
Old Iusacell's shares New Iusacell's shares
--------------------- ---------------------
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
series A series B series D series L series A series V
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of 1/1/97 428,575,540 205,562,450 204,920,220 142,566,220
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Share conversion upon
exchange of control 266,769,760 (200,000,000) (66,769,760)
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Issuance of common
stock upon exercise of
preemptive rights 265
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Issuance of common
stock for the Stock
Purchase Plan 7,642,398
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Issuance of common
stock through the
capitalization of debt 51,408,110 48,754,000
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Balance as of 12/31/97 746,753,410 5,562,450 186,904,725 150,208,618 - -
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Issuance of common
stock upon exercise of
preemptive rights 40
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Issuance of common
stock for the Stock
Purchase Plan 1,117,496
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Issuance of common
stock through the
capitalization of debt 144,999,999
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Incorporation of New
Iusacell 8,750 8,750
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Balance as of 12/31/98 891,753,409 5,562,450 186,904,725 151,326,154 8,750 8,750
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Issuance of common
stock for the Stock
Purchase Plan 70,004
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
</TABLE>
F-49
<PAGE> 173
<TABLE>
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock through the
capitalization of debt 44,285,714
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Exchange offer (936,039,123) (5,562,450) (186,844,813) (144,565,453) 736,821,995 536,189,844
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Rights offer 18,405,490
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Primary offering 23,596,783
------------------------- -------------- --------------- -------------- --------------- ------------- ------------
Balance as of 12/31/99 - - 59,912 6,830,705 736,830,745 578,200,867
========================= ============== =============== ============== =============== ============= ============
</TABLE>
F-50
<PAGE> 174
Each series A and series V share entitles the holder to one vote at any
general meeting of the shareholders of New Iusacell. Series A
shareholders are entitled to vote at a special meeting of the series
A shareholders to elect seven of the twelve members of the Board of
Directors and the corresponding alternate directors. Series V
shareholders are entitled to vote at a special meeting of the series
V shareholders to elect five of the twelve members of the Board of
Directors and the corresponding alternate directors.
New Iusacell's bylaws require that, unless a shareholders' meeting
resolves otherwise, any capital increase effected pursuant to a
capital contribution be represented by new series A and V shares in
proportion to the number of shares of each such series outstanding.
The bylaws provide that the series V shares may not exceed 49% of
New Iusacell's capital stock.
15. Executive Employee Stock
Purchase Plan
In March 1997, Old Iusacell adopted the Stock Purchase Plan. The Stock
Purchase Plan is administered by a management trust with the
assistance of the trust division of a Mexican bank. Under the Stock
Purchase Plan, a committee which is composed of certain executive
officers of the Company (the "Technical Committee"), determines to
which executive employees series V shares of New Iusacell will be
offered for purchase (prior to the exchange offer the shares subject
to the Stock Purchase Plan were series L shares of Old Iusacell,
which were exchanged for series V shares). The Technical Committee
also determines the number of series V 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 V shares that may be subject to purchase rights
granted under the Stock Purchase Plan cannot exceed 4.9% of the
aggregate number of issued and outstanding New Iusacell shares.
During 1997, the Technical Committee granted purchase rights with
respect to a total of 7,549,834 series L shares, exchanged on August
1999 for series V shares. All such purchase rights vest either in
three equal annual installments commencing on either April 17, 1998,
June 6, 1998 or September 30, 1998 or in their entirety on either
April 17, 1999 or June 6, 1999.
During 1998, the Technical Committee granted purchase rights with
respect to a total of 2,199,600 series L shares through the issuance
of 1,117,516 series L shares and the reassignment of 1,082,084
series L shares (all series L shares were exchanged on August 1999
for series V shares). All such purchase rights vest in three equal
annual installments commencing on either September 1, 1999 or
October 1, 1999 or in their entirety on either September 1, 2000 or
October 1, 2000.
F-51
<PAGE> 175
During 1999, the Technical Committee granted purchase rights with
respect to a total of 1,603,000 series L shares through the issuance
of 70,004 series L shares and the reassignment of 1,532,996 series L
shares (as mentioned above, all series L shares were exchanged on
August 1999 for series V shares). All such purchase rights vest in
three equal annual installments commencing on either February 10,
2000 or May 26, 2000 or in their entirety on either February 10,
2001 or May 26, 2001.
16. Earned Capital
Under Mexican law, a legal reserve must be created and increased
annually by 5% of the annual net earnings until it reaches 20% of
the nominal amount of a corporation's capital stock. This reserve is
not available for dividends, but may be used to reduce a deficit or
be transferred to capital.
Under 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 New Iusacell as of December 31,
1999 is approximately Ps.116,772. New Iusacell cannot pay dividends
under the covenants for the Notes Due 2006.
The contributed capital and earned capital accounts consist of the
following:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------
Accumulated
Historical adjustments for
value inflation Total
----------------- --------------- ----------------
<S> <C> <C> <C>
Capital stock Ps.4,601,200 Ps. 126,787 Ps.4,727,987
Capital contributions 145,184 3,359 148,543
Net profit for the year ( 307,559) 641,321 333,762
---------------- ---------------- ----------------
Total Ps.4,438,825 Ps. 771,467 Ps.5,210,292
================ ================ ================
</TABLE>
F-52
<PAGE> 176
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------
Accumulated
Historical adjustments for
value inflation Total
----------------- --------------- ----------------
<S> <C> <C> <C>
Capital stock Ps.3,998,608 Ps.5,698,835 Ps.9,697,443
Capital contributions 18,655 62,952 81,607
Legal reserve 1,499 2,962 4,461
Accumulated losses from prior
years ( 1,839,161) ( 1,606,162) ( 3,445,323)
Net loss for the year ( 1,464,050) 6,988 ( 1,457,062)
Deficit from restatement - ( 763,769) ( 763,769)
---------------- ---------------- ----------------
Total Ps. 715,551 Ps.3,401,806 Ps.4,117,357
================ ================ ================
</TABLE>
17. Foreign Currency Position
The balance sheet as of December 31 includes assets and liabilities
denominated in U.S. Dollars, as follows:
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Monetary assets U.S.$ 278,208 U.S.$ 46,331
Monetary liabilities 948,803 574,489
------------------- -------------------
Net monetary liability position
in U.S. Dollars U.S.$ 670,595 U.S.$ 528,158
=================== ===================
Equivalent in nominal
Mexican pesos Ps. 6,369,714 Ps. 5,226,810
=================== ===================
</TABLE>
As of December 31, 1999 and 1998, most of the communications equipment
and inventories of cellular telephones and accessories are of
foreign origin (see Notes 6 and 8).
During 1999, 1998 and 1997, interest income and interest expense on
assets and liabilities denominated in U.S. Dollars were as follows:
F-53
<PAGE> 177
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------ ------------------
<S> <C> <C> <C>
Interest income U.S.$ 769 U.S.$ 494 U.S.$ 386
Interest expense 36,130 16,419 15,994
------------------- ------------------ ------------------
Net interest expense U.S.$ 35,361 U.S.$ 15,925 U.S.$ 15,608
=================== ================== ==================
Equivalent in nominal Mexican
pesos Ps. 335,880 Ps. 157,599 Ps. 125,927
=================== ================== ==================
</TABLE>
Operating results for the years ended December 31, 1999 and 1998,
include depreciation and amortization expenses, related to fixed
assets and inventories of foreign origin.
The exchange rate as of December 31, 1999 and 1998 was Ps.9.4986 and
Ps.9.8963, per U.S. Dollar, respectively. At the issuance date of
these financial statements, February 29, 2000, the exchange rate in
effect was Ps. 9.4395 per U.S. Dollar.
18. Project 450
During 1994, Old Iusacell created a subsidiary to provide fixed wireless
local telephony services using the 450 MHz frequency band ("Project
450"). At December 31, Old Iusacell's investment in Project 450
consisted of the following assets:
<TABLE>
<CAPTION>
1999 1998
------------ ---------------
<S> <C> <C>
Fixed assets Ps.36,404 Ps. 45,668
Inventory of handsets 2 20,429
------------ ---------------
Total Ps.36,406 Ps. 66,097
============ ===============
</TABLE>
On June 10, 1997, the Mexican Telecommunications and Transportation
Ministry ("SCT") and Old Iusacell reached an agreement on a process
whereby Old Iusacell could obtain concessions issued by the SCT to
provide local wireless service in the 450 MHz frequency band. While
awaiting the Mexican government's resolution on coverage, spectrum
clearing and other requirements which may cause management to
reconsider the feasibility of fully deploying the 450 MHz
technology, the Group began its overlay of CDMA digital technology
in the 800 MHz frequency band.
Given the capabilities of CDMA technology and the success the Group has
had thus far with its deployment, the Group is exploring
alternatives for providing local telephony service, including fixed
or limited zone wireless
F-54
<PAGE> 178
service in the 800 MHz and 1.9 GHz bands. The Group has not made a
decision as to whether it will pursue its right of first refusal to
acquire the above-mentioned 450 MHz concessions, or whether it will
pursue an alternative means to provide local telephony services.
F-55
<PAGE> 179
During September 1998, the Group made the decision to write-down the
carrying value of the assets supporting its Project 450 assets as
the Group believes there has been an impairment of its investment in
this technology. During 1998, an impairment charge for Ps.1,102,401
was recorded, representing 100% of the pre-operating expenses and
90% of the fixed assets deployed in this project.
19. Discontinued Operations
In December 1998, Old Iusacell decided to discontinue the operations of
Cellular Solutions, a subsidiary entity dedicated to the sale of
accessories for cellular handsets. Cellular Solutions transferred
all its existing inventories as of December 31, 1998 to another
subsidiary of Old Iusacell and terminated all of Cellular Solutions'
employees during January and February 1999.
Financial information regarding Cellular Solutions as of and for the
year ended December 31, was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ -----------
<S> <C> <C> <C>
Current assets Ps.1,543 Ps. 4,008 Ps. 9,162
Total assets 1,543 5,531 10,640
Total liabilities 33,248 40,906 9,770
Revenues - 20,031 24,403
Gross Profit - 4,402 6,985
Loss from operations before income taxes - (8,822) (7,345)
Provision for income taxes - 101 188
Loss on disposal, including provision in 1998
of Ps. 1,066 for operating losses during
phase-out period (no applicable taxes) - (11,794) -
----------- ------------ ------------
Net loss Ps. - (Ps.20,717) (Ps.7,533)
=========== ============ ============
</TABLE>
20. Differences between Mexican and United States
Generally Accepted Accounting Principles
The Company's consolidated financial statements are prepared based on
Mexican GAAP, which differ in certain significant respects from
United States generally accepted accounting principles ("U.S.
GAAP").
F-56
<PAGE> 180
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 the years ended December 31,
1999, 1998 and 1997.
F-57
<PAGE> 181
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
("SFAS") 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 Group'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.
b) Preoperating costs
Under Mexican GAAP, the Group capitalized certain pre-operating costs,
primarily related to Project 450. Under US GAAP, pre-operating costs
are expensed as incurred. During 1998, Old Iusacell recorded a
write-down related to its investment in Project 450 for Mexican GAAP
purposes and consequently, wrote-off all capitalized pre-operating
costs as of that date.
c) Derivative Financial Instruments
Effective July 30, 1998, in connection with the U.S.$225,000 credit
agreement (see Note 10), Old Iusacell entered into an interest rate
collar
F-58
<PAGE> 182
agreement designated as a hedge of a portion of Old Iusacell's
floating rate debt. The interest rate collar limits Old Iusacell's
exposure to fluctuations in short-term interest rates by locking in
a range of interest rates on U.S.$35,000 of its floating rate debt.
The cap rates range from 6.12% to 7.12% for six-month LIBOR with the
floor rate ranging down to 5.30% for six-month LIBOR. The interest
rate collar matures on July 30, 2002.
F-59
<PAGE> 183
Additionally, on February 26, 1999, Old Iusacell entered into a second
interest rate collar agreement to limit the maximum interest rate
which must be paid on U.S.$15,000 of its floating rate debt until
July 2002. Under the terms of this collar agreement, the maximum
effective LIBOR cost is limited to 5.82% if six-month LIBOR is lower
than 6.82% and to 6.82% if LIBOR equals or exceeds that level. The
floor level for six-month libor is 4.75%.
Under Mexican GAAP, the interest rate collar agreements are recorded on
a cash basis. Under U.S. GAAP, the differential to be paid or
received as interest rates change is accrued and recognized as an
adjustment of interest expense at the balance sheet date.
Additionally, the related amount payable or receivable from
counter-parties is included in accrued other expenses at the balance
sheet date.
The U.S.$50,000 aggregate notional amount of the interest rate collar
agreements does not quantify risk or represent assets or liabilities
of the Company, but is used in the determination of cash settlements
under the agreements. The Company is exposed to credit loss from
counterparty nonperformance, but does not anticipate any such loss
from the interest rate collar agreements, which are with a major
financial institution.
The fair value of the interest rate collar agreements was Ps.5,262
(U.S.$554) and Ps.12,059 (U.S.$1,085), as of December 31, 1999 and
1998, respectively, and was estimated based on current market
settlement prices of comparable contracts obtained from dealer
quotes. The Company does not hold or issue derivative financial
instruments for trading purposes.
As described in Note 10, on December 30, 1999, Old Iusacell entered
into a foreign currency hedge utilizing forward rate contracts,
hedging its exchange rate exposure for up to U.S.$77,000 or
approximately 50% of the principal and interest payments coming due
over the period April 2000 to April 2001. Under Mexican GAAP, the
contracts are recorded on a cash basis. Under US GAAP, the contracts
are recorded at fair value based on spot rates. The premium on such
contracts is recorded upon inception of the contract and amortized
over its related term. The contracts have terms from four to sixteen
months and forward rates ranging from U.S.$ 9.9577 to U.S.$.11.4066.
d) 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 accordingly as a reconciling item to arrive
at U.S. GAAP equity.
F-60
<PAGE> 184
e) Basic and fully diluted loss per share
As of January 1, 1997, Mexican GAAP required the disclosure of earnings
(loss) per share for public companies. Under U.S. GAAP, disclosure
of basic earnings (loss) per share and diluted earnings (loss) per
share is required for public companies in accordance with SFAS No.
128, "Earnings Per Share". Basic earnings (loss) per share is
computed by dividing income (loss) available to common shareholders
by the weighted average number of common shares outstanding for the
year. The computation of diluted earnings (loss) per share is
similar to basic earnings (loss) per share, except that the
denominator is increased to include the number of additional common
shares that would have been outstanding if the potentially dilutive
common shares had been issued. Diluted earnings (loss) per share is
equal to basic earnings (loss) per share for the years ended
December 31, 1998 and 1997 as the drawdowns and conversions under
the subordinated convertible facility with Bell Atlantic (see Note
10) and the shares subject to rights under the Stock Purchase Plan
(see Note 15) are excluded from the computation of diluted earnings
(loss) per share because to do so would have been anti-dilutive for
the periods presented.
For the year ended December 31, 1998, the number of potentially dilutive
shares that were excluded from the computation of diluted earnings
(loss) per share for the drawdowns and conversions under the Bell
Atlantic subordinated convertible debt facility were 69,285,714
shares, and for the shares subject to rights under the Stock
Purchase Plan 332,650 shares. Diluted earnings (loss) per share is
equal to basic earnings (loss) per share for the year ended December
31, 1999 as the Company did not have any potentially dilutive
securities.
f) Comprehensive income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 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. SFAS No. 130 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. The statement, however, does not address
recognition or measurement issues. The adoption of SFAS No. 130 had
no impact on net loss or shareholders' equity. The Company has
presented comprehensive loss and accumulated comprehensive loss
under U.S. GAAP for each of the three years ended December 31, 1999
in Note 20 i) below.
g) Gain from the exchange of non-monetary assets
F-61
<PAGE> 185
In December, 1998, Old Iusacell entered into a fiber optic cable swap
agreement with Bestel to exchange certain long-distance fiber
optic cables for Ps.215,081. Under Mexican GAAP, the Company
recorded the transaction as both an acquisition and sale of fixed
assets based on the contract amount, resulting in a gain on the
sale of Ps.187,301 which was recorded as other income. Under U.S.
GAAP, because the assets exchanged are similar productive assets
and, on a net basis, no cash was exchanged, the transaction does
not result in the recognition of earnings. Consequently, under
U.S. GAAP the acquisition and sale would not have been recorded.
F-62
<PAGE> 186
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 (see Note 4) to such adjustments.
i) Net income (loss) and stockholders'
equity under U.S. GAAP
The following is a summary of net profit (loss) and stockholders' equity
adjusted to take into account certain material differences between
Mexican GAAP and U.S. GAAP:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1999 1998 1997
---------------- --------------- --------------
<S> <C> <C> <C>
Net profit (loss) as reported under Mexican GAAP Ps. 333,762 (Ps.1,457,062) (Ps.1,332,572)
Deferred income taxes ( 17,656) 56,591 493,311
Pre-operating costs ( 69,028) 178,385 ( 85,533)
Interest rate collar 6,797 ( 12,059) -
Gain from the exchange of non-monetary assets - ( 187,301) -
Effect of inflation accounting on US GAAP adjustments ( 19,643) ( 26,080) 20,171
------------------ -------------- ----------------
Net profit (loss) under U.S. GAAP Ps. 234,232 ( 1,447,526) ( 904,623)
================== ============== ================
Weighted average number of shares outstanding
(thousands) 1,286,844 1,070,825 1,070,825
================== ============== ================
Basic and diluted net profit (loss) per share (pesos) Ps. 0.18 (Ps. 1.35) (Ps. 0.84)
================== ============== ================
Comprehensive income:
</TABLE>
F-63
<PAGE> 187
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1999 1998 1997
---------------- --------------- --------------
<S> <C> <C> <C>
Net profit (loss) under U.S. GAAP Ps. 234,232 (Ps. 1,447,526) (Ps. 904,623)
Inflation effects for the period 19,643 ( 11,887) ( 20,171)
---------------- --------------- --------------
Comprehensive income (loss) Ps. 253,875 ( 1,459,413) ( 924,794)
================ =============== ==============
Accumulated comprehensive loss (Ps.6,211,143) ( Ps.6,465,018) (Ps.5,005,605)
================ =============== ==============
<CAPTION>
Years ended December 31,
--------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Stockholders' equity under Mexican GAAP Ps.5,243,361 Ps.4,118,268
Minority interest ( 33,069) ( 911)
Deferred income taxes 167,652 185,308
Pre-operating costs ( 69,028) -
Interest rate collar ( 5,262) ( 12,059)
Gain from the exchange of non-monetary assets ( 187,301) ( 187,301)
Provision for consolidation of facilities 17,354 17,354
-------------- ---------------
Stockholders' equity as reported under U.S. GAAP Ps.5,133,707 Ps.4,120,659
============== ===============
</TABLE>
The following is the Statement of Stockholders' Equity under US GAAP for
each of the two years ended December 31, 1999:
<TABLE>
<CAPTION>
Contributed Accumulated Loss for
Capital Losses the year Total
--------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Balances as of 12/31/97 Ps.8,585,354 (Ps. 3,294,355) (Ps. 904,623) Ps.4,386,376
Application of 1997 net loss ( 904,623) 904,623 -
Increase in capital stock 1,193,696 1,193,696
Effects of inflation ( 11,887) ( 11,887)
Net loss for the year ( 1,447,526) ( 1,447,526)
--------------- ----------------- ----------------- ----------------
Balances as of 12/31/98 Ps.9,779,050 (Ps. 4,210,865) (Ps.1,447,526) Ps.4,120,659
Application of 1998 net loss ( 1,447,526) 1,447,526 -
Increase in capital stock 392,781 392,781
Effect of reorganization ( 5,661,693) 5,661,693 -
Effect of rights and primary
offerings 366,392 366,392
Effects of inflation 19,643 19,643
Net profit for the year 234,232 234,232
--------------- ----------------- ----------------- ----------------
Balances as of 12/31/99 Ps.4,876,530 Ps. 22,945 Ps. 234,232 Ps.5,133,707
=============== ================= ================= ================
</TABLE>
F-64
<PAGE> 188
j) Provision for impairment of analog equipment
As mentioned in Note 4.b, during the year ended December 31, 1997,
changes in circumstances indicated that the carrying amount of the
Group's analog telecommunications network might not be recoverable.
These circumstances included: (i) customer and marketing
requirements for better voice quality, more and improved value-added
services and reduction of wireless fraud, all of which were more
viable with a digital platform, factors accelerating the adoption of
digital technology in the Mexican wireless market; (ii) the view of
Bell Atlantic, which assumed management control of Old Iusacell in
February 1997, that Old Iusacell would need to adopt digital
technology in order to remain competitive and that CDMA was the best
technology available to Old Iusacell; (iii) the plans, developed in
1997 by other wireless carriers, to launch digital technology in
Mexico in 1998; (iv) Old Iusacell's decision to participate in the
digital PCS auctions that were announced in November 1997; and (v)
an increase in the Company's subscriber base during 1997, resulting
in the analog network operating at close to full capacity by
November 1997 (a CDMA digital network has the potential to increase
capacity by a six to ten times compared with analog equipment).
Consequently, under U.S. GAAP, Old Iusacell evaluated the analog
equipment for impairment using the criteria of SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."
In December 1997, the future estimated cashflows (undiscounted and
without interest) of the analog equipment, considering the
disposition of the equipment under the terms of the agreement with
Lucent Technologies (see Note 13), were less than the book value.
Consequently, Old Iusacell recorded an impairment charge of
Ps.1,236,307 to adjust the carrying amount of the analog equipment
to its fair value, amounting to Ps.3,243,881, based on an
independent appraisal performed by Consultores y Valuadores de
Empresas, S.C.
Under U.S. GAAP, this impairment charge is reflected as a component of
operating loss for the year ended December 31, 1997.
F-65
<PAGE> 189
k) Employee severance
The Group is required to pay certain severance benefits to employees
that are dismissed without proper cause. Since during the normal
course of operations, it is impracticable to estimate the number of
employees that will be dismissed in the future, under U.S. GAAP,
severance payments made to employees during the normal course of
operations are expensed when paid. As of December 31, 1999 and 1998
severance accruals recorded were immaterial.
l) Supplementary U.S. GAAP disclosures
1) Cash flow information
SFAS No.95, "Statement of Cash Flows", 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.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------
1999 1998 1997
------------- --------------- --------------
<S> <C> <C> <C>
Operating activities:
Net profit (loss) under U.S. GAAP Ps. 234,232 (Ps.1,447,526) (Ps. 904,623)
Adjustments to reconcile net loss to cash
(used in) provided by operating activities:
Depreciation 693,099 380,104 440,926
Amortization 731,923 512,746 334,332
450 Project non-cash write-down - 924,016 -
Equity in loss (earnings) of associated
companies ( 2,164) ( 2,919) ( 1,117)
Gain on sale of equity investments 49,775 ( 25,003) ( 208,959)
Increase in allowance for doubtful accounts 92,767 30,913 48,524
(Decrease) / Increase in allowance for
obsolete and slow-moving inventories ( 4,785) - 20,653
Fixed assets impairment charge - - 1,236,307
Minority interest ( 17,933) ( 6,342) ( 276)
Deferred income taxes and employee
</TABLE>
F-66
<PAGE> 190
<TABLE>
<S> <C> <C> <C>
profit sharing 150,301 15,536 ( 432,914)
Gain on net monetary position and
foreign exchange losses ( 801,299) 202,971 ( 435,450)
Changes in operating assets and liabilities:
Accounts receivable ( 567,624) ( 582,815) ( 145,457)
Inventories 28,269 112,681 ( 224,951)
Trade accounts payable and related parties 129,646 1,314,001 696,031
Taxes and other payable 194,792 516,868 ( 322,167)
Income tax ( 185,209) ( 29,682) 3,465
Other ( 501) 189) 462
--------------- --------------- --------------
Net cash provided by operating activities 725,289 1,915,360 104,786
=============== =============== ==============
</TABLE>
F-67
<PAGE> 191
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1999 1998 1997
--------------- ----------------- ----------------
<S> <C> <C> <C>
Investing activities:
Purchase of property and equipment, net (Ps.1,502,280) (Ps.2,459,857) ( Ps. 903,054)
Proceeds from sales of investments in asso-
ciated companies ( 5,332) 12,333 329,472
Increase in escrow account ( 1,268,063) - -
Purchase of other assets ( 1,110,869) ( 1,236,722) ( 789,646)
--------------- --------------- ----------------
Net cash used in investing activities ( 3,886,544) ( 3,684,246) ( 1,363,228)
--------------- --------------- --------------
Financing activities:
Proceeds from notes payable and long-term debt 4,354,157 1,917,039 3,192,705
Payments of notes payable and long-term debt ( 693,999) ( 26,081) ( 2,030,643)
Increase of capital stock - 8,062 112,783
Effect of rights and primary offerings 366,392 - -
-------------- ------------- ---------------
Net cash provided by financing activities 4,026,550 1,899,020 1,274,845
-------------- ------------- ---------------
Net increase in cash and cash equivalents Ps. 865,295 Ps. 130,134 Ps. 16,403
Cash and cash equivalents at beginning of year 286,666 156,532 140,129
---------------- --------------- ---------------
Cash and cash equivalents at the end of year Ps. 1,151,961 Ps. 286,666 Ps. 156,532
================ =============== ===============
Interest expense paid Ps. 343,184 Ps. 345,589 Ps. 247,007
================ =============== ===============
Income tax paid Ps. 90,120 Ps. 36,818 Ps. 43,432
================ =============== ===============
</TABLE>
F-68
<PAGE> 192
Supplemental disclosures of non-cash activities:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Conversion of debt to equity Ps. 392,781 Ps.1,185,634 Ps. 817,781
</TABLE>
2) The provision for income taxes for the years ended December 31,
1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
<S> <C> <C> <C>
Asset tax not offset by current
taxes Ps. 132,645 Ps. 72,127 Ps. 60,397
Deferred tax 17,656 ( 56,591) ( 493,311)
-------------- --------------- --------------
Tax charge (benefit) Ps. 150,301 Ps. 15,536 (Ps. 432,914)
============== =============== ==============
</TABLE>
3) Deferred income taxes
For Mexican tax purposes, inventories are expensed when purchased
and consequently, result in the recognition of a deferred tax
liability.
F-69
<PAGE> 193
Significant components of deferred income taxes under U.S. GAAP are
as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------
SFAS 109 SFAS 109
applied to applied to
Mexican GAAP U.S. GAAP
balances adjustments Total
-------------- ----------- -------------
<S> <C> <C> <C>
Deferred liabilities:
Inventories Ps. 64,515 Ps. - Ps. 64,515
Property and equipment 264,751 - 264,751
Cellular telephones to be amortized 188,636 - 188,636
Concessions 3,160 - 3,160
----------------- ------------- ---------------
Deferred tax liabilities Ps. 521,062 Ps. - Ps. 521,062
----------------- ------------- ---------------
Deferred assets:
Allowance for doubtful accounts Ps. 52,247 Ps. - Ps. 52,247
Net operating loss carryforwards and tax credits 881,072 - 881,072
Reorganization reserve 22,900 - 22,900
Interest rate collar - 6,062 6,062
Gain from the exchange of non-monetary assets - 63,682 63,682
Pre-operating expenses - 22,275 22,275
Valuation allowance ( 262,055) ( 92,019) ( 354,074)
---------------- ------------- --------------
Deferred tax assets 694,164 - 694,164
---------------- ------------- --------------
Net deferred tax assets (Ps. 173,102) Ps. - (Ps. 173,102)
================ ============= ==============
</TABLE>
F-70
<PAGE> 194
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------
SFAS 109 SFAS 109
applied to applied to
Mexican GAAP U.S. GAAP
balances adjustments Total
-------------- ----------- -------------
<S> <C> <C> <C>
Deferred liabilities:
Inventories Ps. 70,656 Ps. - Ps. 70,656
Property and equipment 259,397 - 259,397
Cellular telephones to be amortized 116,368 - 116,368
Concessions 2,982 - 2,982
----------------- ------------- ----------------
Deferred tax liabilities Ps. 449,403 Ps. - Ps. 449,403
----------------- ------------- ----------------
Deferred assets:
Allowance for doubtful accounts Ps. 25,671 Ps. - Ps. 25,671
Net operating loss carryforwards and tax credits 1,250,410 - 1,250,410
Reorganization reserve 22,761 - 22,761
Interest rate collar - 4,100 4,100
Gain from the exchange of non-monetary assets - 63,682 63,682
Valuation allowance ( 664,131) ( 67,782) ( 731,913)
---------------- ------------- ---------------
Deferred tax assets 634,711 - 634,711
---------------- ------------- ---------------
Net deferred tax assets (Ps. 185,308) Ps. - (Ps. 185,308)
================ ============= ===============
</TABLE>
F-71
<PAGE> 195
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.392,554 for the year ended December 31, 1996 (not
applicable thereafter).
The Company has recorded a deferred tax asset of Ps.881,072
reflecting the benefit of tax loss carryforwards, which expire in
varying amounts between 2004 and 2008. 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
net deferred tax asset at December 31, 1999 will be realized
based on the following:
(i) the net deferred tax asset amounting to Ps.173,102 represents only
the tax loss carryforwards (which are subject to indexation) of 1998 which
has expiration periods of 10 years, and
(ii) although the Group generated operating losses for five years through
1998, it believes that it is more likely than not that the net deferred tax
asset will be realized based on the Group's business plan estimate of future
taxable income over the next five years in an amount sufficient to utilize
the net deferred tax losses recorded as of December 31, 1999.
The Group's estimate of future taxable income is based primarily on
and supported by (i) management's expectations of Old Iusacell's
growth and profitability over the next 5 years, and (ii) the
significant improvement in operating performance from February
1997 through December 1999, as evidenced by the success of the
implementation of the Bell Atlantic wireless business model. This
model has produced strong subscriber growth in excess of 75% year
over year, improved revenues (based on customer growth and price
increases) and lower network and operating costs, resulting in an
operating profit during the first three quarters of 1999 and
during 1998 (excluding the write-down of Project 450), as
compared to an operating loss during 1997 and (iii) the effects
of cost-cutting measures achieved as a result of the
restructuring completed during 1997 and 1998, primarily related
to a 15% reduction in headcount and elimination of duplicate
administrative costs.
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 (See Note 12).
As of December 31, 1999, the Company had a valuation allowance of
Ps.354,074 to reduce its deferred tax assets to estimated
realizable value. The valuation allowance primarily relates to
the deferred tax assets arising from tax loss carryforwards and
tax credits. The net change in the total valuation allowance for
the year ended December
F-72
<PAGE> 196
31, 1999 was principally due to the realization of tax loss
carryforwards during the year ended December 31, 1999.
F-73
<PAGE> 197
The effective rate reconciliation under US GAAP as of December 31,
is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate Ps. 145,793 (Ps.481,990) (Ps.454,855)
Add (deduct):
Inventory purchases less cost of sales 32,544 201,311 ( 32,162)
Depreciation and amortization ( 288,123) 293,058 ( 258,716)
Differences between interest and
inflationary gains or losses 140,378 ( 126,150) 140,767
Net assets tax 132,645 72,127 60,397
Income tax loss carryforwards ( 437,548) 68,893 112,324
Provision for doubtful accounts ( 719) ( 106,283) 24,809
Telephones to be amortized 269,052 211,070 62,864
Goodwill amortized 59,389 41,409 42,285
Pre-operating expenses 23,470 ( 60,650) 29,081
Income tax rate change 5,450 - -
Other 67,971 ( 97,259) ( 159,708)
------------- -------------- -------------
Effective income tax expense (benefit) at effective rate Ps. 150,301 Ps. 15,536 (Ps.432,914)
============= ============== =============
</TABLE>
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, 1999 and 1998.
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 Company's long-term debt, except for the
unsecured senior notes, bears interest at variable rates and
consequently, the carrying value approximates fair value. As of
December 31, 1999 and 1998, the carrying value of the unsecured
Senior Notes Due 2004 was Ps.1,424,790 and Ps.1,667,329 and the
F-74
<PAGE> 198
fair value was Ps.1,353,551 and Ps.1,444,740, respectively. As of
December 31, 1999, the carrying value and the fair value of the
Senior Notes Due 2006 was Ps.3,324,507 and Ps.3,457,487,
respectively.
Foreign currency exchange contracts: At December 31, 1999, the book
value and the fair value of the foreign currency hedge forward
rate contracts was Ps.822,796 and Ps.731,500, respectively. Fair
values were determined based on estimated current market
settlement prices obtained from dealer quotes.
5) Economic environment
The Company is a Mexican corporation with substantially all of its
operations located in Mexico and approximately 99% of its 1999
revenues 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
a significant impact on the Company's financial condition and
results of operations and on its ability to meet its future
obligations. The Company imports (and purchases in U.S. Dollars)
handsets, equipment for cellular sites and other
telecommunications equipment, while prices are set and revenues
are generated in Mexican pesos.
F-75
<PAGE> 199
6) Disclosure of certain significant risks and uncertainties:
A) Year 2000 compliance:
All external and internal costs specifically associated with
modifying internal-use software for the Year 2000 are charged
to expenses as incurred by the Company. For the years ended
December 31, 1999 and 1998, the Year 2000 compliance costs
incurred by the Company, were approximately U.S.$6,095 and
U.S.$2,800, respectively. Amounts incurred as of December 31,
1997 were immaterial.
B) Foreign Currency Exchange Risk
Although a substantial amount of the Company's debt obligations,
including the long-term bank loan and unsecured senior notes,
is denominated in U.S. Dollars, the Company generates
revenues in Mexican pesos; therefore, the Company is exposed
to currency exchange rate risks that could significantly
affect the Company's ability to meet its obligations. As
mentioned in Note 10 and in Note 20.c, Old Iusacell entered
into a foreign currency hedge utilizing forward-rate
contracts, hedging its exchange rate exposure for principal
and interest payments coming due over the period April 2000
to April 2001. The exchange rate of Mexican pesos to the U.S.
Dollar is a freely floating rate which has declined in recent
years. Any significant decrease in the value of the Mexican
peso relative to the U.S. Dollar in the near term may have a
material adverse effect on the Company and on its ability to
meet its long-term debt obligations.
7) Concentration of credit risk
Financial instruments, which potentially subject the Company to
significant concentrations of credit risk, consist
principally of interest-bearing investments, foreign currency
exchange contracts and trade accounts receivable.
The Company maintains cash and cash equivalents, investments
and certain other financial instruments with various major
financial institutions. The Company performs periodic
evaluations of the relative credit standing of these
financial institutions and limits the amount of credit
exposure with any institution.
Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of subscribers
and their dispersion across Mexico. Prior to providing
services to a new subscriber, the Company requires a credit
card or a deposit, as a guarantee from the customer over the
period it provides services, and performs a credit history
check.
F-76
<PAGE> 200
8) Stock Purchase Plan
As mentioned in Note 15, the Company has a fixed stock option plan,
the ("Stock Purchase Plan"). This plan grants options 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 Accounting
Principles Board Opinion No.25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its
plan. The Company has adopted the disclosure-only provisions of
SFAS No.123 "Accounting for Stock based Compensation". The
Company recognizes no compensation expense for its Stock Purchase
Plan. If the Company had elected to recognize compensation
expense based on the fair value at the grant dates for 1997
through 1999, and subsequent fixed plan awards 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:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Under Mexican GAAP
Net profit (loss) As reported Ps. 333,762 (Ps. 1,457,062)
Pro forma 325,118 ( 1,465,706)
Basic and fully
diluted profit As reported Ps. 0.26 (Ps. 1.30)
(loss) per share Pro forma 0.25 ( 1.31)
<CAPTION>
Years ended December 31,
--------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Under U.S. GAAP:
Net profit (loss) As reported Ps. 234,232 (Ps. 1,447,526)
Pro forma 225,588 ( 1,456,170)
Basic and fully
diluted profit As reported Ps. 0.18 (Ps. 1.29)
(loss) per share Pro forma 0.18 ( 1.30)
</TABLE>
F-77
<PAGE> 201
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:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 71% 67%
Risk-free interest rate 20% 25%
Expected lives (in years) 2.0 2.7
</TABLE>
The weighted average per share value of options granted during 1999
and 1998 was Ps.11.06 and Ps.6.47, respectively.
This table is a summary of the status of the Stock Purchase Plan:
<TABLE>
<CAPTION>
Weighted
Average
Stock Options Exercise Price
------------- --------------
<S> <C> <C>
Outstanding December 31, 1997 7,549,834 Ps. 10.52
Granted 2,199,600 6.47
Exercised 967,460 9.58
Canceled/forfeited 1,082,084 9.82
Outstanding December 31, 1998 7,699,890 9.58
Granted 1,603,000 11.06
Exercised 2,267,145 10.09
Canceled/forfeited 1,532,996 7.74
Outstanding December 31, 1999 5,502,749 10.31
</TABLE>
As of December 31, 1999 and 1998, 3,899,749 and 5,500,290 shares,
respectively, were exercisable; however no shares were
exercisable at December 31, 1997. The following table summarizes
information about Stock Purchase Plan options outstanding as of
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Range Weighted
of Remaining Average
Exercise Contractual Exercise
Prices Shares Life Price
------------------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
1997 Ps. 8.48 to 14.00 7,549,834 0 Ps. 10.52
1998 5.16 to 8.48 5,332,908 1 7.65
1998 13.82 to 14.00 2,366,982 1 13.92
1999 5.16 to 9.20 2,632,017 2 7.59
1999 11.46 to 14.00 2,870,732 2 12.81
</TABLE>
F-78
<PAGE> 202
9) Capitalized interest and interest expense
As of December 31, 1999, 1998 and 1997, capitalized interest
amounted to Ps.162,383, Ps.138,904 and Ps.349,290, respectively.
For the years ended December 31, 1999, 1998 and 1997 interest
expensed amounted to Ps.291,417, Ps.367,222 and Ps.306,996,
respectively.
10) New Accounting Pronouncements
SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their
fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a
hedge transaction and, if it is, the type of hedge transaction.
Derivative financial instruments are currently used by the
Company to manage interest rate risk and foreign exchange rate
risk, on certain long-term debt. The Company is currently
determining the impact that the adoption of SFAS 133 will have on
its financial position or results of operations.
F-79
<PAGE> 203
11) Project 450 non-cash write-down
As described in Note 18, during the year ended December 31, 1998,
Old Iusacell recorded an impairment charge to write-down the
Project 450 assets to their fair value. Under U.S. GAAP, the
impairment charge was determined in accordance with SFAS 121 as
follows:
During the third quarter of 1998, changes in circumstances indicated
that the carrying amount of the Project 450 assets might not be
recoverable. These circumstances included (i) the successful
deployment of more attractive alternative technology; (ii) the
lack of availability of 450 MHz handsets at substantially lower
costs; and (iii) that the Mexican government had not issued the
coverage and investment requirements for the 450 MHz licenses or
provided any indications on timing and means to clear the
contaminated frequencies in the northern regions.
In view of these circumstances, Old Iusacell decided not to fully
continue Project 450, given that it was becoming less
operationally and technically feasible. At such time, the
undiscounted future cash flows were less than the carrying value
of the Project 450 assets. As a result, in September 1998, Old
Iusacell's Board of Directors resolved to writedown the Project
450 assets. An impairment charge of Ps.1,102,401 was recorded to
reduce the Project 450 assets to their fair value, amounting to
Ps. 45,668. Even though there was no market for the 450 MHz
network equipment, Old Iusacell's operations group determined
that certain of these assets, representing about 10% of the
related fixed assets, could be re-deployed in the mobile wireless
network. Therefore, a full provision for impairment was recorded
for all other assets associated with the project.
12) Segment Information
In 1998, the Company adopted Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise
and Related Information". SFAS No.131 establishes standards for
the way that public enterprises must determine and report
information about operating segments in their annual and interim
reports.
The "management approach" designates the internal organization that
is used by management for making operating decisions and
assessing performance as the source of the Company's reportable
segments. The adoption of SFAS No.131 did not affect results of
operations or financial position.
The Company has three reportable segments that it operates and
manages as strategic business units that offer different products
and services. The Company measures its reportable segments based
on operating income (loss), including intersegment revenues and
corporate expenses that are allocated to the operating segments
and excluding any non-recurring items. Intersegment transactions
are
F-80
<PAGE> 204
accounted for at current market prices. The Company evaluates the
performance of its segments and allocates resources to them based
on earnings before interest, taxes, depreciation and amortization
(EBITDA) and operating income (loss). The Company is not
dependent on any single customer. The accounting policies
underlying the reported segment data are the same as those
described in the summary of significant accounting policies (see
Note 4).
F-81
<PAGE> 205
The Company's three reportable segments and their principal
activities are:
Cellular - The Company operates and provides wireless cellular
telephone services in four of the nine Regions in the Mexican
market. The Company serves customers in large metropolitan areas
such as Mexico City, Guadalajara, Leon and Puebla. The Company's
services include "value added services" such as voice mail and
caller identification of incoming calling numbers.
Long Distance - The Company provides long distance services for
which its first natural market is its cellular subscriber base.
The Company is also providing these services to residential and
commercial entities. The Company uses its own switches and
transmission equipment and a combination of fiber optic lines,
microwave links, satellite transmission and lines leased from
Telmex to provide these services.
Other Businesses - The Company provides paging, local telephony and
data transmission services. It has concessions for PCS services
and microwave links, which are in a preoperating stage.
The tables below presents information about reported segments for the
year ended December 31, 1999 and 1998 under Mexican GAAP
measurement, using the presentation required by SFAS 131. The
Company has not provided information for the year ending December
31, 1997 as it was impracticable to prepare.
<TABLE>
<CAPTION>
Year ended December 31, 1999
-----------------------------
Long Other Total Reconciling Total
Cellular Distance Businesses Segments Items (2) Consolidated
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues- third party Ps.3,929,595 Ps.110,906 Ps.162,657 4,203,158 1,495 4,204,653
Revenues- affiliates 1,815,599 344,877 447,572 2,608,048 ( 2,608,048) -
Depreciation and
amortization 1,369,198 53,710 8,226 1,431,134 ( 6,112) 1,425,022
Operating income
(loss) 89,180 ( 119,801) ( 71,708) (102,329) 93,479 ( 8,850)
EBITDA (1) 1,458,378 ( 66,091) ( 63,482) 1,328,805 87,367 1,416,172
Total assets 14,530,800 318,812 718,788 15,568,400 ( 734,030) 14,834,370
Capital expenditures 1,597,961 104,960 11,000 1,713,921 - 1,713,921
</TABLE>
F-82
<PAGE> 206
<TABLE>
<CAPTION>
Year ended December 31, 1998
-----------------------------
Long Other Total Reconciling Total
Cellular Distance Businesses Segments Items (2) Consolidated
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues- third party Ps.2,941,927 Ps. 61,807 Ps. 177,874 Ps.3,181,608 (Ps. 9,211) Ps. 3,172,397
Revenues- affiliates 1,252,365 203,597 500,112 1,956,074 (1,956,074) -
Depreciation and
amortization 846,709 25,364 22,754 894,827 ( 1,977) 892,850
Operating income
(loss) 60,084 (146,109) (17,061) (103,086) (1,016,677) (1,119,763)
EBITDA (1) 906,792 (120,747) 5,692 791,737 83,751 875,488
Total assets 13,759,156 1,108,926 1,343,272 16,211,354 (5,060,004) 11,151,350
Capital expenditures 3,130,393 483,748 21,348 3,635,489 - 3,635,489
</TABLE>
F-83
<PAGE> 207
(1) EBITDA as used by the Company is operating profit (loss) plus
the sum of depreciation and amortization. The Company's
reconciliation of EBITDA to consolidated net profit (loss) under
Mexican GAAP as of December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
EBITDA Ps.1,416,172 Ps. 875,488
Depreciation and amortization ( 1,425,022) ( 892,850)
Project 450 non-cash write-down - ( 1,102,401)
Other (expense) income, net ( 23,054) 149,046
Integral financing gain (cost) 529,525 ( 427,766)
Equity participation in net (loss) gain of
associated companies and net (loss) gain on sale
of equity investments ( 47,611) 27,922
Assets tax ( 132,645) ( 72,127)
Minority interest 17,933 6,342
Loss from discontinued operations ( 1,536) ( 20,716)
---------------------- --------------------
Net profit (loss) for the year Ps. 333,762 (Ps.1,457,062)
====================== ====================
</TABLE>
(2)Reconciling items primarily reflect inter-segment eliminations and
certain non-recurring items, including a gain on sale in 1998 of
Ps. 187,301 related to a fiber optic cable agreement (see Note
20.g) and a non-cash write-down of Ps. 1,102,401 in connection
with Project 450 (see Notes 18 and 20.b).
m) Discontinued Operations
As described in Note 19, in December 1998, Old Iusacell decided to
discontinue the operations of its subsidiary, Cellular Solutions,
which was in the business of selling accessories for cellular
handsets, and consequently, recognized a loss from discontinued
operations amounting to Ps. 1,536 and Ps.20,716, for the years ended
December 31, 1999 and 1998, respectively. Under U.S. GAAP the loss
from discontinued operations is recorded as an operating expense.
n) Extraordinary item
Under Mexican GAAP the utilization of the Company's tax loss
carryforwards is classified as an extraordinary item and presented
as a separate line item in the consolidated income statement. Under
U.S. GAAP, the utilization of the Company's tax loss carryforward is
recorded
F-84
<PAGE> 208
as a component of the taxation expense.
21. Subsequent events
As part of the recapitalization and reorganization plan mentioned in Note
1, on March 1, 2000, New Iusacell changed its name from Nuevo Grupo
Iusacell, S.A. de C.V. to Grupo Iusacell, S.A. de C.V., and Old
Iusacell changed its name from Grupo Iusacell, S.A. de C.V. to Grupo
Iusacell Celular, S.A. de C.V.
- - - - - - - - - - - - - - - - - - - - - -
F-85
<PAGE> 209
REPORT OF INDEPENDENT ACCOUNTANTS
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. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of income, changes in stockholders' equity,
and changes in financial position for each of the three years ended December 31,
1999. 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 audits.
We conducted our audits in accordance with generally accepted auditing standards
in Mexico which are substantially similar, in all material respects, to United
States generally accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement 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.
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, 1999 and 1998, and
the consolidated results of its operations, changes in stockholders' equity and
changes in its consolidated financial position for each of the three years
ended,December 31, 1999, 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, 1999, 1998 and 1997 and the total
amount of stockholders' equity as of December 31, 1999 and 1998 to the extent
summarized in Note 20 to the consolidated financial statements.
PricewaterhouseCoopers
Juan Manuel Ferron Solis
Partner
Mexico City, Mexico
February 29, 2000 (except with
respect to the matters discussed
in Notes 20, 21 and 22, for which
the date is March 16, 2000).
F-86
<PAGE> 210
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of December 31, 1999)
<TABLE>
<CAPTION>
1999 1998
------------------------------------
ASSETS
------
<S> <C> <C>
CURRENT:
Cash and cash equivalents (Note 4.c) Ps. 178,061 Ps. 286,666
---------------- -----------------
Accounts receivable:
Trade, net of Ps.149,278 and Ps.75,400 of allowance for doubtful
accounts in 1999 and 1998, respectively (Note 4.d) 707,934 340,492
Related parties (Note 5) 47,140 12,782
Recoverable taxes and other 601,279 661,970
---------------- -----------------
1,356,353 1,015,244
---------------- -----------------
Inventories (Note 6) 184,328 207,812
---------------- -----------------
Total current assets 1,718,742 1,509,722
INVESTMENT IN ASSOCIATED COMPANIES (Note 7) 25,237 17,425
PROPERTY AND EQUIPMENT, net (Note 8) 6,771,108 5,961,927
OTHER ASSETS, net (Note 9) 2,021,277 1,750,702
EXCESS OF COST OF INVESTMENTS IN SUBSIDIARIES OVER BOOK VALUE, net of
accumulated amortization of Ps.487,245 in 1999 and Ps.409,108 in 1998 (Note 4.i) 1,801,211 1,911,574
---------------- -----------------
Total assets Ps.12,337,575 Ps.11,151,350
================ =================
LIABILITIES
-----------
CURRENT:
Notes payable (Note 10) Ps. 94,986 Ps. 833,799
Current portion of long- term debt (Note 10) 505,643 -
Trade accounts payable (Note 11) 641,479 980,749
Related parties (Note 5) 116,034 140,082
Taxes and other payables 884,842 850,572
Income tax (Note 12) 1,375 54,311
Employee profit sharing (Note 12) 379 6
---------------- ----------------
Total current liabilities 2,244,738 2,859,519
LONG-TERM DEBT (Note 10) 3,991,234 4,168,322
TRADE ACCOUNTS PAYABLE, LONG-TERM (Note 11) - 2,370
COMMITMENTS AND CONTINGENCIES (Notes 4.k and 13) 2,370 2,871
---------------- ----------------
Total liabilities Ps. 6,238,342 Ps. 7,033,082
---------------- ----------------
STOCKHOLDERS' EQUITY
--------------------
CONTRIBUTED CAPITAL (Notes 14, 15 and 16):
Capital stock Ps. 11,314,227 Ps. 9,697,443
Capital contributed 81,607 81,607
--------------- ----------------
11,395,834 9,779,050
---------------- ----------------
EARNED CAPITAL (Note 16):
Accumulated profits (losses):
Legal reserve 4,461 4,461
For prior years ( 4,902,385) ( 3,445,323)
For the year 382,447 ( 1,457,062)
---------------- -----------------
( 4,515,477) ( 4,897,924)
---------------- -----------------
Deficit from restatement ( 756,401) ( 763,769)
---------------- -----------------
Total majority stockholders' equity 6,123,956 4,117,357
MINORITY INTEREST ( 24,723) 911
---------------- ------------------
Total stockholders' equity 6,099,233 4,118,268
---------------- ------------------
Total liabilities and stockholders' equity Ps.12,337,575 Ps.11,151,350
================ =================
</TABLE>
F-87
<PAGE> 211
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of December 31, 1999)
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
REVENUES:
Services Ps.3,767,693 Ps.2,750,863 Ps.2,055,803
Telephone equipment sales and other 436,960 421,534 422,788
--------------- --------------- --------------
4,204,653 3,172,397 2,478,591
--------------- --------------- --------------
COST OF SALES:
Cost of services 1,074,191 860,821 685,051
Cost of telephone equipment sales and other 269,491 225,548 268,373
--------------- --------------- --------------
1,343,682 1,086,369 953,424
--------------- --------------- --------------
Gross profit 2,860,971 2,086,028 1,525,167
--------------- --------------- --------------
OPERATING EXPENSES 1,444,508 1,210,540 990,880
DEPRECIATION AND AMORTIZATION 1,424,363 892,850 775,258
450 PROJECT NON-CASH WRITEDOWN (Note 18) - 1,102,401 -
--------------- --------------- --------------
Operating loss ( 7,900) ( 1,119,763) ( 240,971)
--------------- --------------- --------------
OTHER EXPENSES (INCOME), net 23,054 ( 149,046) -
--------------- --------------- --------------
PROVISION FOR EQUIPMENT IMPAIRMENT (Note 4.b) - - 1,236,307
--------------- --------------- --------------
INTEGRAL FINANCING (GAIN) COST:
Interest expense, net 268,710 250,873 330,659
Foreign exchange (gain) loss, net ( 184,837) 939,474 64,565
Gain from monetary position ( 661,133) ( 762,581) ( 389,975)
--------------- --------------- --------------
(577,260) 427,766 5,249
--------------- --------------- --------------
EQUITY PARTICIPATION IN NET LOSS (GAIN) OF
ASSOCIATED COMPANIES AND NET LOSS (GAIN)
ON SALE OF EQUITY INVESTMENTS (Note 7) 47,611 ( 27,922) ( 210,076)
--------------- --------------- --------------
Profit (loss) from continuing operations before assets
tax, income tax, minority interest and extraordinary
item 498,695 ( 1,370,561) ( 1,272,451)
PROVISIONS FOR:
Assets tax 132,645 72,127 60,397
Income Tax 405,881 - -
--------------- --------------- --------------
Loss from continuing operations before minority
interest and extraordinary item ( 39,831) ( 1,442,688) ( 1,332,848)
MINORITY INTEREST 17,933 6,342 276
--------------- --------------- --------------
Loss from continuing operations before extraordinary
item ( 21,898) ( 1,436,346) ( 1,332,572)
EXTRAORDINARY ITEM:
Amortization of tax loss carryforwards 405,881 - -
--------------- --------------- --------------
Net profit (loss) from continuing operations 383,983 ( 1,436,346) ( 1,332,572)
LOSS FROM DISCONTINUED OPERATIONS (net of Income tax) (Note 19) 1,536 20,716 -
--------------- --------------- --------------
Net profit (loss) for the year Ps. 382,447 (Ps. 1,457,062) (Ps. 1,332,572)
=============== =============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (thousands) 1,286,844 1,121,396 1,070,825
=============== =============== ==============
LOSS PER SHARE BEFORE EXTRAORDINARY ITEM (pesos) (Ps. 0.02) (Ps. 1.30) (Ps. 1.24)
=============== =============== ==============
NET PROFIT (LOSS) PER SHARE (pesos) Ps. 0.30 (Ps. 1.30) (Ps. 1.24)
=============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-88
<PAGE> 212
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of December 31, 1999)
<TABLE>
<CAPTION>
Accumulated profits (losses)
Capital -------------------------------
stock Capital Legal Prior
subscribed contributions reserve years
------------- ---------- -------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 Ps.7,573,183 Ps.81,607 Ps.4,461 (Ps. 1,586,610)
Application of 1996 net loss ( 526,141)
Increase in capital stock from the
capitalization of stockholders'
debt 817,781
Increase in capital stock through
the issuance of shares under the
Executive Stock Purchase Plan 112,783
Minority interest for the year
Net loss for the year
------------- ---------- -------- ---------------
Balance at December 31, 1997 8,503,747 81,607 4,461 ( 2,112,751)
Application of 1997 net loss ( 1,332,572)
Increase in capital stock from the
capitalization of stockholders'
debt 1,185,634
Increase in capital stock through
the issuance of shares under the
Executive Stock Purchase Plan 8,062
Recognition of inflation effects
on financial information
Minority interest for the year
Net loss for the year
------------- ---------- -------- ---------------
Balance at December 31, 1998 9,697,443 81,607 4,461 ( 3,445,323)
Application of 1998 net loss ( 1,457,062)
Increase in capital stock from the
capitalization of stockholders'
debt 1,616,784
Recognition of inflation effects
on financial information
Minority interest for the year
Net profit for the year
------------- ---------- -------- ---------------
Balance at December 31, 1999 Ps.11,314,227 Ps. 81,607 Ps.4,461 (Ps. 4,902,385)
============= ========== ======== ===============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
profits (losses)
---------------- Deficit Total
For the from Minority stockholders'
year restatement Interest equity
-------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 (Ps. 526,141) (Ps.725,802) Ps. 8,057 Ps.4,828,755
Application of 1996 net loss 526,141 -
Increase in capital stock from the
capitalization of stockholders'
debt 817,781
Increase in capital stock through
the issuance of shares under the
Executive Stock Purchase Plan 112,783
Minority interest for the year 7,362 7,362
Net loss for the year ( 1,332,572) ( 1,332,572)
-------------- ------------ ----------- ------------
Balance at December 31, 1997 ( 1,332,572) ( 725,802) 15,419 4,434,109
Application of 1997 net loss 1,332,572 -
Increase in capital stock from the
capitalization of stockholders'
debt 1,185,634
Increase in capital stock through
the issuance of shares under the
Executive Stock Purchase Plan 8,062
Recognition of inflation effects
on financial information ( 37,967) ( 37,967)
Minority interest for the year ( 14,508) ( 14,508)
Net loss for the year ( 1,457,062) ( 1,457,062)
-------------- ------------ ----------- ------------
Balance at December 31, 1998 ( 1,457,062) ( 763,769) 911 4,118,268
Application of 1998 net loss 1,457,062 -
Increase in capital stock from the
capitalization of stockholders'
debt 1,616,784
Recognition of inflation effects
on financial information 7,368 7,368
Minority interest for the year ( 25,634) ( 25,634)
Net profit for the year 382,447 382,447
-------------- ------------ ----------- ------------
Balance at December 31, 1999 Ps. 382,447 (Ps.756,401) (Ps.24,723) Ps.6,099,233
============== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-89
<PAGE> 213
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of December 31, 1999)
<TABLE>
<CAPTION>
1999 1998 1997
---------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Loss from continuing operations before extraordinary item (Ps. 21,898) (Ps. 1,436,346) (Ps. 1,332,572)
Items not requiring the use of resources:
Depreciation and amortization 1,424,363 892,850 775,258
450 Project non cash writedown - 1,102,401 -
Provision for equipment impairment - - 1,236,307
Equity participation in net loss (gain) of associated compa-
nies and net loss (gain) on sale of equity investments 47,611 ( 27,922) ( 210,076)
Minority interest ( 17,933) ( 6,342) ( 276)
---------------- -------------- --------------
1,432,143 524,641 468,641
Resources (used for) provided by operating activities
Trade accounts receivable ( 367,442) ( 68,036) ( 69,164)
Related parties 60,691 78,986 ( 482,572)
Recoverable taxes and other ( 58,406) ( 360,775) ( 176,629)
Inventories 23,484 112,682 ( 204,300)
Trade accounts payable ( 341,640) 39,830 259,778
Taxes and other payables 34,270 416,544 ( 98,679)
Income tax ( 52,936) 42,543 2,343
Employee profit sharing 372 ( 99) ( 86)
Other ( 501) ( 192) 143
---------------- -------------- --------------
Resources provided by (used for) operating activities
before extraordinary item and discontinued operations 730,035 786,124 ( 300,525)
Amortization of tax loss carryforwards 405,881 - -
Loss from discontinued operations ( 1,536) 20,716 -
---------------- -------------- --------------
Resources provided by (used for) operating activities 1,134,380 765,408 ( 300,525)
---------------- -------------- --------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 328,555 1,238,406 2,955,992
Principal payments on long-term debt - ( 26,080) ( 956,338)
(Decrease) increase in notes payable ( 738,813) 830,249 ( 1,074,666)
Increase in capital stock from the capitalization of stockholders'
debt 1,616,784 1,185,634 817,781
Increase in capital stock through the issuance of shares under
the Executive Employee Stock Purchase Plan - 8,062 112,783
---------------- -------------- --------------
Resources provided by financing activities 1,206,526 3,236,271 1,855,552
---------------- -------------- --------------
INVESTING ACTIVITIES:
Purchase of property and equipment ( 1,502,280) ( 2,647,158) ( 941,899)
Sale of common stock of associated companies 11,856 12,334 321,833
Purchase of PCS frequencies - ( 553,873) -
Increase in telephones to be amortized ( 758,281) ( 620,798) ( 225,621)
Purchase of other assets ( 200,806) ( 62,051) ( 692,938)
---------------- -------------- --------------
Resources used for investing activities ( 2,449,511) ( 3,871,546) ( 1,538,625)
---------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 108,605) 130,133 16,402
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF
THE YEAR 286,666 156,533 140,131
---------------- -------------- -------------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR Ps. 178,061 Ps. 286,666 Ps. 156,533
================ ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-90
<PAGE> 214
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998 AND 1997
(Except as otherwise noted, adjusted for price-level changes and expressed
in thousands of constant Mexican pesos as of December 31, 1999.
Amounts expressed in U.S. Dollars are in thousands.)
1. Entity and Nature of Business
Grupo Iusacell, S.A. de C.V. (the "Company") is a holding company
incorporated on October 6, 1992, and as mentioned in the following
paragraph, starting August 4, 1999, the Company is subsidiary of Nuevo
Grupo Iusacell, S.A. de C.V. ("New Iusacell"). Its subsidiaries are
primarily engaged in the wireless telecommunications business and hold
concessions to operate cellular telephone systems in four contiguous
market areas (each a "Region") in central Mexico. The Company holds
the celllular concessions for Region 5 (Guadalajara), Region 6 (Leon),
Region 7 (Puebla) and a cellular authorization for Region 9 (Mexico
City). The Company and its subsidiaries are referred to collectively
herein as the "Group" or "Grupo Iusacell".
As a part of a recapitalization and restructuring plan, a new holding
company, New Iusacell, was incorporated on August 6, 1998 to acquire
and hold all of the outstanding shares of the Company. In July 1999,
New Iusacell initiated an offer to exchange its two classes of common
stock for the four classes of common stock of the Company then
outstanding on a one for one basis. As a result of the exchange, New
Iusacell acquired 99.5% of Company's shares when the offer expired on
August 10, 1999. Second offer expired on February 29, 2000 and as a
result New Iusacell owns 99.9% of Company's shares. New Iusacell
intends to make a repurchase offer for the remaining shares of the
Company in the second quarter of 2000.
In October 1995, a subsidiary of the Company received a concession from
the Mexican government to operate as a long distance carrier and began
offering long distance service in August 1996. During 1996, the
Company also signed a joint venture agreement for the operation of a
business to provide nationwide and international paging services. The
joint venture began to provide paging services in August 1996. In May
1998, a subsidiary of the Company acquired frequencies through
auctions conducted by the Mexican government to provide wireless
personal communication services ("PCS") in Regions 1 and 4 in northern
Mexico.
New Iusacell holds a 99.5% ownership interest in the Company. Carlos
Peralta and companies and individuals controlled by or related to him
F-91
<PAGE> 215
(together, the "Peralta Group") and subsidiaries of Bell Atlantic
Corporation ("Bell Atlantic") hold substantial ownership interests
(direct or indirect) in New Iusacell.
In February 1997, after execution of a definitive agreement between the
Company's principal shareholders and approval by the Mexican
government, Bell Atlantic assumed management control of the Company
from the Peralta Group. After the recapitalization and restructuring
plan mentioned above, Bell Atlantic also has management control of New
Iusacell.
F-92
<PAGE> 216
Summary
The subsidiaries of the Company which are included in the consolidated
financial statements are as follows:
<TABLE>
<CAPTION>
Economic interest
(direct or indirect)
as of
December 31
-----------------
Subsidiary 1999 1998
------------------------------------------ ---- ----
<S> <C> <C>
S.O.S. Telecomunicaciones, S.A. de C.V. (Region 9) 100% 100%
Iusacell, S.A. de C.V. 100% 100%
Sistecel, S.A. de C.V. 100% 100%
Comunicaciones Celulares de Occidente, S.A. de C.V. (Region 5) 100% 100%
Sistemas Telefonicos Portatiles Celulares, S.A. de C.V. (Region 6) 100% 100%
Telecomunicaciones del Golfo, S.A. de C.V. (Region 7) 100% 100%
Inflight Phone de Mexico, S.A de C.V. 100% 100%
Inmobiliaria Montes Urales 460, 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% 100%
Renta-Cell, S.A. de C.V. - 100%
Iusatelecomunicaciones, S.A. de C.V. 95% 95%
Iusatel, S.A. de C.V. 95% 95%
Grupo Iusacell Nicaragua, S.A. 100% 100%
Compania Colombiana de Telefonia Celular, S.A. - 70%
Cellular Solutions de Mexico, S.A. de C.V. 100% 100%
Satelitron, S.A. de C.V. 65% 65%
Infotelecom, S.A. de C.V. 49% 49%
Punto a Punto Iusacell, S.A. de C.V. 95% 95%
Iusacell PCS, S.A. de C.V. (Regions 1 and 4) 95% 95%
</TABLE>
2. Acquisitions, Disposals and Group Structure
In November 1997, in connection with the resolution of various matters,
the Group increased its ownership in Renta-Cell, S.A. de C.V.
("Renta-Cell") from 70% to 100% by acquiring the remaining 30%
interest from the other Renta-Cell shareholders. The cost of this
acquisition was Ps.24,647, all of which represented the excess of
investment cost over book value. This amount was charged to
operations during the year ended December 31, 1997. During 1999,
Renta-Cell was merged into Promotora Celular, S.A. de C.V. The
merger was recorded based on the financial statements of both
subsidiary companies as of March 31, 1999.
F-93
<PAGE> 217
In December 1998, the Group increased its ownership in Cellular
Solutions de Mexico, S.A. de C.V. ("Cellular Solutions") from 68% to
100% by acquiring the remaining 32% interest from the other
shareholder, an alternate director of New Iusacell. This interest
was acquired in anticipation of the discontinuance of Cellular
Solutions (see Note 19). The cost of this acquisition was Ps.3,932,
all of which represented the excess of investment cost over book
value. The amount of such excess was included in Cellular Solutions'
loss from discontinued operations for the year ended December 31,
1998.
In November 1999, the Group liquidated its investment in Compania
Colombiana de Telefonia Celular, S.A. ("Telecel") and recorded a
loss of Ps.49,775.
Group Structure
Under the laws established by the Mexican government related to Bell
Atlantic's assumption of management control, the Company may not own
the majority of the voting stock of companies that hold concessions to
provide telecommunications services other than cellular service. In
November 1998, the Company and Jose Ramon Elizondo, a director of the
Company (herein referred to as the "Mexican National"), entered into a
joint venture formation agreement ("the Agreement") pursuant to which
they agreed to participate together in the microwave frequencies
leasing, long distance, local telephony, PCS and paging businesses. The
Company and the Mexican National agreed that the Company would own
94.9% of the economic interest and 49% of the voting shares of Iusatel,
S.A. de C.V., the Company's long distance concessionaire ("Iusatel"),
Iusatelecomunicaciones, S.A. de C.V., the Company's fixed wireless
local telephony operation ("Iusatelecomunicaciones"), Punto-a-Punto
Iusacell, S.A. de C.V., a microwave frequencies concessionaire
("Punto-a-Punto Iusacell") and Iusacell PCS, S.A. de C.V., which holds
concessions for 1.9GHz (PCS) frequencies in Regions 1 and 4 ("Iusacell
PCS"). The Mexican National would own 5.1% of the economic interest and
51% of the voting shares of these companies. In addition, the Mexican
National agreed to purchase a 2% economic and voting interest in
Infotelecom, S.A. de C.V., a paging company ("Infotelecom"), at cost,
from the Company, which would continue to hold a 49% economic and
voting interest in such company. The Mexican National completed this
purchase in December 1998 for Ps. 26.
In December 1995, the Company signed a joint venture agreement with
Infomin, S.A. de C.V. ("Infomin"), 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. ("Infotelecom"). As of December 31, 1999,
Infotelecom is owned 49%, 49% and 2%, by Old Iusacell, Infomin and the
Mexican National, respectively. Under the Infotelecom joint venture
F-94
<PAGE> 218
agreement, the Company committed to contribute up to U.S.$10,500. As of
December 31, 1999 and 1998, the Company had invested U.S.$10,000 and
U.S.$9,032, respectively. This agreement establishes the individual and
joint responsibilities of the partners. If a partner does not fulfill
its responsibilities, sanctions could cause such partner to lose its
investment and incur a penalty of up to U.S.$1,000.
In October 1997, the Company and the Mexican National incorporated Punto a
Punto Iusacell, a company which participates in government auctions for
microwave frequencies and operates concessions acquired in those
auctions. Punto a Punto Iusacell acquired three concessions in the
short haul microwave frequencies auction concluded in October 1997 and
is negotiating to lease long haul microwave frequencies won at auction
by a third party.
In June 1998, the Company and the Mexican National incorporated Iusacell
PCS, S.A. de C.V., a company formed to participate in government
auctions for frequencies in the 1.9 GHz band. Iusacell PCS acquired
concessions in Regions 1 and 4 in such auctions, which were concluded
in May 1998.
In November 1998, pursuant to the Agreement, the Mexican National acquired
51% of the voting shares of each of Iusatel and Iusatelecomunicaciones
for Ps. 25,130 and Ps. 8,597, respectively. The shares of Infotelecom,
Punto a Punto Iusacell, Iusacell PCS, Iusatel and
Iusatelecomunicaciones (each a "Non-Cellular Subsidiary" and together,
the "Non-Cellular Subsidiaries" acquired by the Mexican National
pursuant to the Agreement are or will be illiquid. As a result, the
Company agreed to grant the Mexican National, from and after June 30,
2002 (or sooner under certain circumstances), the right to put all, but
not less than all, shares in any one or more Non-Cellular Subsidiary to
the Company for an amount equal to his investment in the corresponding
Non-Cellular Subsidiary, his cost of money to finance such investment
or investments plus, for each year of his investment, 4% of his
investment amount, grossed up with respect to any applicable Mexican
income taxes. In return, the Agreement also contains a call option
which provides the Company the right at any time to call the Mexican
National's interest in these companies at the same price as if the put
were exercised, subject to any legal requirement to have another
Mexican National purchase the shares subject to the call option.
The Mexican National does not have the unilateral right to approve actions
at the shareholder or board level of the Non-Cellular Subsidiaries.
Under each company's by-laws, all shareholder or board action must also
be approved by the majority of the shares held by the Company or a
majority of the board members designated by the Company, respectively.
The Agreement, together with each joint venture company's by-laws, enable
the Company to have management control over the day-to-day operations
and financial administration of the Non-Cellular Subsidiaries. The
Mexican National cannot alone, among other things, select, terminate or
determine the compensation of management or establish operating and
capital decisions in the ordinary course of business.
F-95
<PAGE> 219
Consequently, the Company consolidates these subsidiaries in accordance
with Bulletin B-8, "Consolidated and Combined Financial Statements and
valuation of permanent investments" issued by the Mexican Institute of
Public Accountants ("Bulletin B-8"), which provides that, in the event
that majority ownership of a company's voting shares does not exist,
control over the day-to-day operations and financial administration of
that company may be achieved by other means. Since the Company has such
other arrangements in place with the majority shareholder, the
requirement for consolidation under generally accepted accounting
principles in Mexico ("Mexican GAAP") is satisfied.
3. Basis of presentation
a) Basis of presentation
The Group's consolidated financial statements have been prepared in
conformity with Mexican GAAP. The consolidated financial statements
have been presented in thousands of constant Mexican pesos as of
December 31, 1999 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").
F-96
<PAGE> 220
b) Consolidated financial
statements
Those companies in which the Company holds 50% or more of the capital
stock and/or exercises control over operating and financing
activities are included in the consolidated financial statements. In
addition, while the Company owns less than 50% of the voting common
stock of Iusatel, Iusatelecomunicaciones, Infotelecom, Punto a Punto
Iusacell and Iusacell PCS, it consolidates them because it exercises
management control over their day-to-day operations and financial
administration by appointment of the shareholders and other
arrangements (see Note 2). All significant inter-company balances
and transactions have been eliminated in 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 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.
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 to Bulletin
B-10, effective for fiscal years beginning January 1, 1990, 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:
F-97
<PAGE> 221
- The balance sheet amounts as of December 31,1998 presented in
the consolidated financial statements have been restated to
constant Mexican pesos as of December 31, 1999 based on the
National Consumer Price Index ("NCPI") published by Banco de
Mexico (the "Mexican Central Bank").
- Consolidated income statements for the current and prior years
have been restated to constant Mexican pesos as of December
31, 1999 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 presentation of
the statement of changes in financial position when financial
statements have been restated to constant Mexican pesos as of
the latest balance sheet date. Bulletin B-12 identifies the
origin and application of resources representing differences
between beginning and ending balance sheet amounts 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 or financing activities.
The items that 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.
Based on the Fifth Amendment to Bulletin B-10, effective January 1,
1997, property and equipment, net, and depreciation for the year are
restated using the NCPI, without exceeding net realizable value.
In October 1997, the Group recorded an impairment loss to reduce the
value of its investment in its analog communications equipment to
fair value. The valuation of the analog equipment was determined
based on an appraisal performed by independent appraisers registered
with the Comision Nacional Bancaria y de Valores in order to comply
with Bulletin B-10, which requires non-monetary assets to be valued
as closely as possible to, but not higher than, their fair market
value.
In December 1997, as further described in Note 13.d, the Company signed
an agreement with subsidiaries of Lucent Technologies, Inc.
("Lucent") to purchase analog and digital communications equipment,
primarily to address (i) customer requirements for better voice
quality, (ii) the need to increase network capacity to handle
rapidly growing subscriber levels, and (iii) the need to remain
competitive, particularly in view of the government's auction of
digital wireless concessions in
F-98
<PAGE> 222
the 1.9 GHz frequency band to other carriers.
Property and equipment are depreciated using the straight-line method,
based on the restated values. The average annual rates of
depreciation used by the Group are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Buildings and facilities 4% 4%
Communications equipment 9% 9%
Furniture and fixtures 9% 9%
Transportation equipment 18% 18%
Computer equipment 21% 21%
Cellular rental telephones 25% 25%
</TABLE>
Investments in associated companies are accounted for using the equity
method based on the associated company's equity and are adjusted for
the effects of inflation in accordance with Bulletin B-10.
F-99
<PAGE> 223
Restatement of stockholders' equity:
The contributed and earned capital 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, 1999.
The excess or deficit from restatement of capital account is an element
of stockholders' equity that includes surplus or deficit from
holding non-monetary assets, which represents the excess or deficit
in specific values of net non-monetary assets in comparison with the
increase attributable to general inflation as measured by the NCPI.
Integral financing (gain) cost:
Integral financing (gain) cost is comprised of 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 between the date transactions are recorded and the
date of settlement or period end.
Gains and losses from net 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. 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 Group invests its excess
cash in deposits with major banks. The investments are carried at
cost plus accrued interest, approximating 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 Group cancels service to customers with invoices that are 60 days
past due. The allowance for doubtful accounts represents the
Company's estimate of the probable loss inherent in all accounts
receivable due togeneral historical trends of customer performance
and factors surrounding specific customers' credit risk. The Group
F-100
<PAGE> 224
wrote off accounts receivable for Ps.18,889, Ps.59,506 and Ps.86,723
in 1999, 1998 and 1997, respectively. The charge to income for the
year in order to increase the allowance for doubtful accounts
amounted to Ps.92,767, Ps.30,913 and Ps.48,524 in 1999, 1998 and
1997, respectively.
F-101
<PAGE> 225
e) Investment in associated
companies
The Group carries long-term investments in associated companies in
which the Group owns between 20% and 50% of the Company's voting
common stock and over which the Group can exercise significant
influence. Such investments are accounted for using the equity
method. As described in Note 2, the Company has consolidated the
Non-Cellular Subsidiaries, in which the Company owns less than 50%
of the voting common stock, because it exercises management control
over their day-to-day operations and financial administration. Under
the equity method such investments are carried at cost adjusted for
the Company's share of the net income or losses of these companies
and the effects of restatement of non-monetary assets in the
associated companies. The effects of transactions with such
associated companies are eliminated before applying the equity
method.
f) Cellular Telephones
The cost of cellular telephones given to customers under exclusive
service contracts is amortized based on the nature and terms of the
service contracts to match costs with the timing of revenues earned.
The costs of such telephones are included in other assets, net of
accumulated amortization, not to exceed market value.
At the end of the contract term, the cellular telephone is given to the
customer. In the event of an early termination of an exclusive
service contract, the customer either (i) is required to return the
phone to the Group or (ii) acquires the telephone at its book value
on the date of termination.
The cost of cellular telephones sold to customers is recorded as cost
of sales based on the average cost of such telephones. 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 the initial term of the
respective concession. The Mexican government requires the Group's
compliance with the specific terms of each concession. Through
December 31, 1999 the Group had complied substantially with such
requirements, except for certain informational requirements of the
Mexican authorities. The Group believes that such noncompliance
F-102
<PAGE> 226
does not expose it to any risk of concession forfeiture, or any
other material liability.
h) Advertising
Advertising costs are expensed as incurred. The cost of prepaid media
advertising (including television air time, magazine, directory and
other print media) is deferred and recorded in other assets until
the advertising airtime or space is used, at which time such cost is
recognized as an operating expense. Advertising expense amounted to
Ps.228,866, Ps.203,139 and Ps.143,106 for 1999, 1998 and 1997,
respectively.
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 straight-line basis over twenty
years. Amortization expense was Ps.169,684, Ps.121,795 and
Ps.124,366 in 1999, 1998 and 1997, respectively.
The carrying amount of such excess cost applicable to each acquired
subsidiary is reviewed if the facts and circumstances suggest that
it might be impaired.
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 that are 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 (see Note 4.o for the new
accounting bulletin effective January 1, 2000).
In accordance with Bulletin D-4, the Group did not record a provision
for deferred taxes as of December 31, 1999 and 1998.
Employee profit sharing is a statutory labor obligation payable to
employees and determined for each subsidiary with employees, on its
pretax income as adjusted in accordance with the provisions of
Mexican labor and tax laws.
k) Seniority premiums
F-103
<PAGE> 227
In accordance with Mexican labor law, the Group's employees are
entitled to seniority premiums upon retirement 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, 1999, the average seniority
of the eligible employees was less than 5 years. The Group's
liability and related costs for seniority premiums are immaterial
for all periods presented.
In accordance with Mexican labor law, the Group is liable for severance
payments to employees who are dismissed under certain circumstances.
Such compensation is expensed when paid.
The Group 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 disclosure in the income statement of the net earnings
(loss) per share, and the 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.
m) Revenue recognition
Cellular air time is recorded as revenue as service is provided except
for revenue from the sale of prepay cards which is recognized at the
date of sale. The Company recognizes the revenue on the sale of
prepay cards at the date of sale rather than on a deferred basis
because the length of the average consumption period for such prepay
cards is not significant, i.e., approximately 1.2 months or less,
and it is not material to results of operations for all periods
presented. Sales of equipment and related services are recorded when
goods are delivered and services are provided. Cellular access
charges are billed in advance and recognized when the services are
provided. Other revenues, mainly from paging and long distance
services, are recognized when the related services are provided.
F-104
<PAGE> 228
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 the resulting exchange differences
being recognized as exchange gains or losses.
o) New accounting bulletins
As of January 1, 2000, the Group will adopt the provisions of revised
Bulletin D-4. This revised Bulletin significantly modifies previous
accounting treatment for the calculation of deferred taxes by the
partial liability method to a method based on comprehensive assets
and liabilities. The new method requires the recognition of future
tax consequences based on the difference between the financial
statements and tax bases of assets and liabilities.
In accordance with revised Bulletin D-4, the accrued effect as of
January 1, 2000 will be charged directly to stockholders' equity.
The Group's management estimates that the implementation of revised
Bulletin D-4 will require the recognition of a net asset for
deferred income tax of approximately Ps.172,031 and a net credit to
stockholders' equity for the same amount.
F-105
<PAGE> 229
The principal temporary differences giving rise to the deferred
income tax liability at January 1, 2000 are as follows:
<TABLE>
<S> <C>
Inventories Ps. 184,328
Property and equipment 756,431
Cellular telephones to be amortized 538,959
Concessions 9,031
Allowance for doubtful accounts ( 149,278)
Other allowances ( 65,429)
Net operating loss carryforwards ( 1,765,559)
--------------
(Ps. 491,517)
Statutory tax rate 35%
--------------
Deferred tax asset (Ps. 172,031)
==============
</TABLE>
5. Related Parties
The Peralta Group and Bell Atlantic hold substantial ownership interests
in the Company. In addition, the Peralta Group 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 Group.
A summary of related party accounts and notes receivable, including
interest, as of December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
IUSA and related entities Ps. 8,342 Ps.12,782
New Iusacell 38,798 -
------------ ------------
Total Ps.47,140 Ps.12,782
============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Bell Atlantic Ps.116,034 Ps.140,082
------------- ------------
Total Ps.116,034 Ps.140,082
============= ============
</TABLE>
F-106
<PAGE> 230
Accounts payable result from the leasing of certain facilities and
services received.
During 1997, the Company had notes payable and interest due to Bell
Atlantic, of U.S.$57,900 (Ps.515,558), of which U.S.$25,000
(Ps.222,607) was repaid and U.S.$32,900 (Ps.292,951) was converted to
equity (see Note 14).
The U.S.$25,000 of borrowings was repaid prior to the stated maturity date
as part of a debt restructuring program made by the Company in 1997.
There was no gain (loss) recognized by the Company related to the early
repayment.
In July 1997, Bell Atlantic agreed to provide the Company with
subordinated convertible debenture financing in an aggregate amount of
U.S.$150,000. The principal amount of the debentures was convertible
into Company's series A shares (see Note 10).
Following is an analysis of the related party transactions described above
for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Service revenue Ps.14,254 Ps. 16,443 Ps.11,773
Lease income 4,211 12,473 2,690
------------ ------------ -------------
Total income Ps.18,465 Ps. 28,916 Ps.14,463
============ ============ =============
Commission expenses Ps. - Ps. - Ps. 120
Technical expenses 5,525 49,450 40,521
Lease expenses 5,623 2,842 4,777
Interest expense - 12,620 29,675
------------ ------------ -------------
Total expenses Ps.11,148 Ps. 64,912 Ps.75,093
============ ============ =============
</TABLE>
6. Inventories
As of December 31, inventories consisted of the following:
F-107
<PAGE> 231
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cellular telephones and accessories Ps.193,809 Ps.165,175
Less: Allowance for obsolete and
slow-moving inventories ( 7,842) ( 12,627)
------------- -------------
Net 185,967 152,548
Advances to suppliers ( 1,639) 55,264
------------- -------------
Total inventories Ps.184,328 Ps.207,812
============= =============
</TABLE>
7. Investment in Associated
Companies
On September 30, 1997, the Group sold its direct and indirect interests in
Ecuadorian cellular and paging companies, Consorcio Ecuatoriano de
Telecomunicaciones, S. A. ("CONECEL") and Corptilor, S.A. In 1997, the
Group received U.S.$29,400 in cash consideration for its direct
interests in CONECEL, resulting in a gain of Ps.208,959. At December
31, 1997, the gain on sale of the Company's indirect interest in
CONECEL by its Colombian subsidiary was deferred as a result of an
uncertainty as to the timing and, given some of the capital markets
legislation emerging from Colombia at that time, even the possibility
of repatriation of the proceeds from Colombia. Therefore, the Company
believed that sale recognition was not appropriate.
F-108
<PAGE> 232
The Group received U.S.$2,000, net of taxes, in respect to its
indirect interests during 1998, resulting in a gain of Ps.18,189.
As of December 31, the Group's investment in associated companies is as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------
Entity Ownership Investment Ownership Investment
----------------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Editorial Celular, S.A.
de C.V. 40.00% Ps. 10,466 40.00% Ps. 7,523
AMCEL - 13,300 - 8,431
Other 1,471 1,471
---------- ------------
Ps. 25,237 Ps. 17,425
========== ============
</TABLE>
Summarized financial information for these associated companies accounted
for by the equity method as of December 31, 1999, 1998 and 1997 and for
the years ended December 31, 1999, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------- ----------
<S> <C> <C> <C>
Total assets Ps. 19,322 Ps. 13,811 Ps. 60,205
Total liabilities 3,922 2,837 53,687
Revenues 38,867 38,717 36,160
Gross profit 18,858 19,617 17,209
Net income 5,160 7,298 2,794
Group's share of net earnings 2,164 2,919 1,117
(Loss) gain on sale of equity investments (49,775) 25,003 208,959
</TABLE>
8. Property and Equipment, Net
a) At December 31, property and equipment, net consisted of:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Buildings and facilities Ps.1,398,529 Ps.1,398,500
Communications equipment 6,028,236 3,636,564
Furniture and fixtures 153,488 146,365
Transportation equipment 53,682 53,695
Computer equipment 488,675 319,930
Cellular rental telephones 1,230 2,468
--------------- ---------------
8,123,840 5,557,522
Accumulated depreciation (2,657,205) (3,464,783)
</TABLE>
F-109
<PAGE> 233
<TABLE>
<S> <C> <C>
--------------- ---------------
5,466,635 2,092,739
Land 51,144 50,773
Construction in progress 1,074,220 3,711,691
Advances to suppliers 179,109 106,724
--------------- ---------------
Ps.6,771,108 Ps.5,961,927
=============== ===============
</TABLE>
b) Depreciation expense was Ps.693,099, Ps.380,104 and Ps.440,926 for
1999, 1998 and 1997, respectively. In addition, as described in Note
18, the Ps.321,339 charge for the write-down of the Project 450 fixed
assets is included in the caption titled Project 450 non-cash
write-down in the accompanying income statement.
9. Other Assets
a) At December 31, other assets consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
Concessions Ps. 820,834 Ps. 830,982
Cellular telephones to be amortized 538,959 342,258
Prepaid expenses 198,146 171,222
Advance payments 280,294 276,287
Pre-operating expenses 112,754 49,112
Other 70,290 80,841
---------------- ---------------
Ps.2,021,277 Ps.1,750,702
================ ===============
</TABLE>
b) Concessions and cellular telephone amortization expense was Ps.562,239,
Ps.390,951 and Ps.209,966 in 1999, 1998 and 1997, respectively. In
addition, in 1998 the Ps.781,062 charge for the write-down of Project
450 pre-operating expenses and capitalized interest, as described in
Note 18, is included in the caption entitled Project 450 non-cash
write-down in the accompanying income statement.
10. Notes Payable and Long-Term Debt
As of December 31, 1999 and 1998, the long-term debt of the Group
consisted of the following:
F-110
<PAGE> 234
<TABLE>
<CAPTION>
Mexican pesos
-----------------------------
U.S.Dollars 1999 1998
------------ ------------- -------------
<S> <C> <C> <C>
Unsecured senior notes due 2004 U.S.$150,000 Ps.1,424,790 Ps. 1,667,329
Long-term bank loan 125,000 1,187,325 1,389,441
Revolving credit facility 100,000 949,860 1,111,552
Eximbank financing 65,175 619,074 -
Commerzbank financing 25,750 244,589 -
BBV Handset facilities 7,500 71,239 -
------------ ------------- -------------
U.S.$473,425 Ps.4,496,877 Ps. 4,168,322
Current portion of long-term debt 53,233 505,643 -
------------ ------------- -------------
U.S.$420,192 Ps.3,991,234 Ps.4,168,322
============ ============= =============
</TABLE>
a) Unsecured senior notes due 2004
On July 25, 1997 the Company completed an offering of long- term,
unsecured senior notes due July 15, 2004 for U.S.$150,000, bearing
interest at a fixed rate of 10%, payable semi-annually starting January
15, 1998 (the "Notes Due 2004"). The Notes Due 2004 are 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% of principal
amount 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 prior to July 15, 2000 the Company may redeem in
the aggregate up to 35% of the original aggregate principal amount of
the Notes Due 2004 with proceeds of a public equity offering by the
Company at a redemption price of 110.0% of principal amount plus
accrued interest, if any. The Notes Due 2004 may also be redeemed at a
price equal to 100.0% of principal amount plus accrued interest, if
any, in the case of legal changes adversely affecting the treatment of
the withholding taxes on payments to holders of the Notes Due 2004.
b) Long-term bank loan and revolving credit facility
The long-term bank loan and revolving credit facility bear interest at a
variable rate equal to the lower of (i) LIBOR plus 1.75% or (ii) 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% or (iii) 0.75% per annum. Interest is payable
quarterly.
c) Eximbank Financing
F-111
<PAGE> 235
On July 15,1999, Grupo Iusacell consummated a financing to acquire
cellular infrastructure equipment manufactured in the U.S.A. The financing
consists of (i) a five-year senior secured term facility provided by UBS
AG in the principal amount of approximately U.S.$72,500, and guaranteed by
the Export-Import Bank of the United States and (ii) a two-year senior
secured term facility provided by UBS AG and Commerzbank AG in the
principal amount of approximately U.S.$25,750, but not guaranteed by the
Export-Import Bank of the United States. During 1999, U.S.$98,250 of this
facility had been drawn down , of which U.S.$75,000 had been used to
refinance a short-term bridge facility which expired on July 15, 1999. An
initial amortization payment of U.S.$7,242 dollars was made in November
1999. Banque Nationale de Paris purchased UBS's interest in this loan in
December 1999.
Loans outstanding under the Eximbank facilities bear interest at a
rate per annum equal to 0.20% per annum above six-month LIBOR, in case of
the guaranteed facility and 1.75% per annum above six-month LIBOR, in the
case of the unguaranteed facility.
d) BBV handset facilities
In September 1999, the Company obtained a handset financing facility
from Banco Bilbao Vizcaya ("BBV") which consists of an 18-month
senior unsecured credit facility in the principal amount of
U.S.$4,000 to be used solely to acquire cellular handsets. Loans
outstanding under this facility bear interest at an annual rate
equal to 2.50% above LIBOR for the related interest period, which
can have a duration of 30, 60, 90, 180 or 360 days, with respect to
each disbursement. The Company drew down the entire U.S.$4,000
available under this facility in September 1999. Payments are due
in equal installments every six months.
In November 1999, in connection with a program to migrate its analog
contract customers to digital service, the Company agreed to
guarantee up to U.S.$6,600 in future loans to be granted by BBV to
the Company's customers for the purchase of digital handsets.
F-112
<PAGE> 236
In December 1999, the Company entered into a second 18-month senior
unsecured credit facility with BBV in the principal amount of U.S.$4,000
to be used solely to purchase handsets. As with the September 1999
facility, loans outstanding under this facility will bear interest at
annual rate equal to 2.50% above 180-day LIBOR. Payments are due in equal
installments every six months. The Company drew down U.S.$3,500 under this
facility on December 8, 1999.
e) Covenants and Collateral
The long-term bank loan, the revolving credit facility and the Notes Due
2004, contain certain restrictive covenants, including the 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, 1999, the Group had complied
with such covenants except that in October 1999, the Company exceeded the
capital expenditure limitation for 1999 under the long-term bank loan, the
revolving credit facility and the two U.S. Eximbank loan facilities. The
Company also had not registered the mortgage of a single parcel of real
property in Leon, Guanajuato (Region 6) to secure the long-term bank loan
and the revolving credit facility. These defaults triggered
cross-defaults, all of which were cured by a modification or waiver of the
restrictive covenant under the long-term bank loan, revolving credit
facility and the two U.S. Eximbank loan facilities to enable Old Iusacell
to make capital expenditures in excess of the maximum amount permitted for
1999, to increase the maximum amount of capital expenditures permitted for
2000 and to not comply with the Leon mortgage registration.
The Company's obligations under the long-term bank loan and the revolving
credit facility are unconditionally guaranteed, jointly and severally, by
the principal operating and concession-holding subsidiaries of the Company
and are secured by the pledge of substantially all capital stock and
equity interests held by the Company and by all cellular concessions, and
by a first lien on substantially all assets used in connection with or
related to such concessions, except for a second lien on the assets over
which the Eximbank lenders have a first lien.
The Company's obligations under the Eximbank facilities are unconditionally
guaranteed, jointly and severally, by the principal operating and
concession-holding subsidiaries of the Company and are secured by a first
lien on certain Lucent analog and CDMA equipment and a second lien on
certain other analog and CDMA equipment. Company's obligations under the
Eximbank facilities are unconditionally guaranteed, jointly and severally,
by the principal operating and concession-holding subsidiaries of the
Company and are secured by a first lien on certain Lucent analog and CDMA
equipment. In connection with the Eximbank facilities, Old Iusacell was
required, under the terms of its indenture relating to the Notes due 2004,
to equally and ratably secured the holders of the Notes due 2004 by a
second priority pledge of the cellular concessions and a second priority
lien on certain
F-113
<PAGE> 237
equipment.
At December 31, 1999, the Group's long-term debt matures as follows:
<TABLE>
<CAPTION>
Years ended December 31, U.S. Dollars Mexican pesos
------------------------ ------------- --------------
<S> <C> <C>
2000 U.S. 53,233 Ps. 505,643
2001 134,983 1,282,150
2002 113,483 1,077,930
2003 14,483 137,568
2004 157,243 1,493,586
------------- --------------
Total U.S. 473,425 Ps. 4,496,877
============= ==============
</TABLE>
F-114
<PAGE> 238
f) Bell Atlantic subordinated convertible debt facility
In July 1997, Bell Atlantic committed to provide Grupo Iusacell with
subordinated convertible financing in an aggregate amount of
U.S.$150,000, bearing interest at an annual rate of LIBOR plus 5.0%. At
the option of Bell Atlantic, borrowings under the facility were
convertible into series A shares at a conversion price of U.S.$0.70 per
share. During the year ended December 31, 1999, U.S.$31,000 was
borrowed under the facility and immediately converted to series A
shares (see Note 10). During 1998, $101,500 US dollars were borrowed
and converted to series A shares. The facility expired on June 30, 1999
with $17,500 US dollars unutilized.
g) Notes payable
As of December 31, notes payable consisted of the following:
<TABLE>
<CAPTION>
U.S. Dollars Mexican pesos
------------ -----------------------
1999 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Handset facility bearing interest at a
fixed rate of 6.81%, maturing on
April 21, 2000 U.S.$10,000 Ps. 94,986 Ps. -
Bridge loan facility bearing interest
at a variable rate of LIBOR plus 1.0% with
maturity date of December 1998, extended
to July 1999 - - 833,667
Other - - 132
----------- ---------- ----------
Total U.S.$10,000 Ps. 94,986 Ps.833,799
=========== ========== ===========
</TABLE>
In January 1999, the Company obtained a handset facility from UBS AG,
which consists of a 360-day senior unsecured credit facility in the
principal amount of U.S.$10,000. Loans outstanding under this facility
bear interest at an annual rate of 6.81%. The Company drew down the
entire U.S.$10,000 available under this facility in April 1999. Banque
Nationale de Paris purchased UBS's interest in this loan in December
1999.
h) Interest rate collar
In July 1998, the Company entered into an interest rate collar agreement
on a notional amount of U.S.$35,000 until July 30, 2002. The collar
F-115
<PAGE> 239
agreement limits the maximum effective LIBOR cost to 6.12% if six-month
LIBOR is lower than 7.12% and 7.12% if LIBOR equals or exceeds 7.12%.
The Company can participate in a decline in LIBOR to 5.30%.
On February 26, 1999, Grupo Iusacell entered into an interest rate collar
agreement to limit the maximum interest rate which must be paid on
U.S.$15,000 of its floating rate debt until July 2002. This collar
agreement limits the maximum effective LIBOR cost to 5.82% if six-month
LIBOR is lower than 6.82% and 6.82% if LIBOR equals or exceeds 6.82%.
The Company can participate in a decline in LIBOR to 4.75%
F-116
<PAGE> 240
On December 30, 1999 the Company entered into a foreign
currency hedge utilizing forward-rate contracts, hedging its
exchange rate exposure for up to U.S.$77,000 or approximately 50% of
the principal and interest payments coming due over the period April
2000 to April 2001. If the Mexican peso to U.S. Dollar exchange rate
remains at the December 31, 1999 level through April 30, 2001, then
the estimated cost to the Company of this hedging program will be
approximately Ps.91,296 (U.S.$9,622).
11. Trade Accounts Payable
As of December 31, trade accounts payable consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Current accounts Ps.630,909 Ps.849,745
Short-term notes payable 10,570 131,004
------------- -------------
Total Ps.641,479 Ps.980,749
============= =============
Long-term notes payable Ps. - Ps. 2,370
============= =============
</TABLE>
On August 14, 1997, the Company and Telmex entered into a settlement
agreement with respect to fees Telmex charged 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.226,479, of which
Ps.29,575 constituted value-added tax and Ps.38,101 was accounted for
as interest expense.
In September 1997, the Company and Telmex amended the interconnection
agreement, requiring the Company to pay Telmex an interim
interconnection rate of 31 centavos per minute retroactive to June 1,
1997 and that Telmex extend to the Company a 38% discount available to
other large business consumers for use of its long distance network.
In December 1998, the Comision Federal de Telecomunicaciones ("COFETEL")
reached an agreement on various outstanding interconnection issues,
including a reduction in the rate charged for calls terminated by
Telmex from 31 centavos per minute to approximately 26 centavos per
minute, effective October 1, 1998 (such rate being subject to inflation
adjustments).
12. Income Tax, Net Assets Tax and
Employee Profit Sharing
The Company has filed annual consolidated income tax returns since the tax
year beginning January 1, 1994. New Iusacell does not consolidate its
income tax return with the Company.
F-117
<PAGE> 241
The income tax rate in Mexico is 35% (34% for the years ended December 31,
1998 and 1997). The provision for income tax differs from the statutory
income tax rate due to temporary and permanent differences in the
determination of 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 significant
permanent differences 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 for temporary differences since such differences are of a
recurring nature and their realization does not occur over a defined
time period.
F-118
<PAGE> 242
For the year ended December 31, 1999, the Group generated a tax profit
of Ps.1,159,660 which was totally offset by the application of tax loss
carryforwards.
At December 31, 1999, the Group had the following net operating losses for
income tax purposes that may be carried forward and applied against
future taxable earnings:
<TABLE>
<CAPTION>
Year of Amount Expiration
loss of loss year
-------- ---------- ---------------
<S> <C> <C>
1994 Ps.185,955 2004
1995 692,132 2005
1996 14,653 2006
1997 327,932 2007
1998 405,421 2008
</TABLE>
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 1999. Due to a tax law change in 1999, the Company
did not include additional tax losses for Ps.950,000, relating to one
of its subsidiaries, Iusatelecomunicaciones, and may not be able to
apply its losses against its other subsidiaries' profits in 2000 and
beyond. The Company has filed an amparo against such change of law.
Losses include Ps.228,386 and Ps.343,740 of capital stock issuance
costs expensed for tax purposes in 1994 and 1993, respectively. Such
amounts were charged against stockholders' equity in the financial
statements.
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% net assets tax paid may be utilized as a credit against future
income tax in the years in which the Group 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
NCPI when used. As of December 31, 1999, the net assets tax available
as a carry forward was Ps. 262,055.
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, 1999 and 1998,
the provision for profit sharing was of Ps. 382 and Ps.530,
respectively.
The effective rate reconciliation as of December 31, is as follows:
F-119
<PAGE> 243
<TABLE>
<CAPTION>
1999 1998 1997
------------ --------------- --------------
<S> <C> <C> <C>
Income tax benefit at statutory rate Ps. 173,630 (Ps. 465,991) (Ps.432,632)
Add (deduct):
Inventory purchases less cost of sales 38,685 252,531 (101,624)
Depreciation and amortization (293,477) (183,203) (261,824)
Provision for equipment impairment - - 420,342
Project 450 non-cash write-down - 374,818 -
Differences between interest and
inflationary gains or losses 137,081 (126,150) 140,767
Net assets tax 132,645 72,127 60,397
Income tax loss carryforwards (405,881) 75,928 180,283
Provision for doubtful accounts 25,857 (116,005) 11,456
Telephones to be amortized 196,784 132,923 71,388
Goodwill amortized 59,389 41,409 42,285
Other 67,932 13,740 (70,441)
------------ --------------- --------------
Effective income tax expense at effective rate Ps.132,645 Ps. 72,127 Ps. 60,397
============ =============== ==============
</TABLE>
13. Commitments and Contingencies
As of December 31, 1999, the Group had the following commitments and
contingent liabilities:
a) The Group has entered into operating lease agreements for
administrative offices, sales branches and service facilities. These
lease agreements expire at various dates through 2007, and some
agreements contain options for renewal. Rental expense was
Ps.114,241, Ps.110,607 and Ps.82,819 for the years ended December
31, 1999, 1998 and 1997, respectively.
Future annual minimum rental payments under existing leases with
terms in excess of one year as of December 31, 1992 are as follows:
<TABLE>
<S> <C>
2000 Ps. 109,783
2001 89,890
2002 73,900
2003 52,989
Thereafter 42,649
-----------
Ps. 369,211
===========
</TABLE>
b) The Group may have contingent liabilities for taxes and penalties
that the tax authorities may assess based on audits of prior years'
tax returns. During 1997, the Mexican tax authorities completed an
audit of three companies of the Group (Grupo Iusacell, Iusacell,
S.A. de C.V. and SOS Telecomunicaciones, S.A. de C.V.), resulting in
claims of Ps.8,174, including penalties and surcharges. These
differences were paid in 1997 and are classified as a part of the
provision for taxes in the income statement for that year. As a
result of those investigations, the Company was assessed a Ps.21,881
penalty in 1999 by the tax authorities under the claim that it had
incorrectly deducted for income tax purposes certain interest
expense. The Company paid this penalty.
F-120
<PAGE> 244
c) Mitsubishi Electronics America Inc. ("MELA") filed a complaint in
the United States on July 18, 1996 against Grupo Iusacell, Bell
Atlantic Corporation and Bell Atlantic Latin American Holdings Inc.,
an affiliate of Bell Atlantic. Essentially, MELA alleges that it had
a contract with Grupo Iusacell for the sale of telephone terminals
and that Grupo Iusacell breached the contract or defrauded MELA by
not purchasing the terminals. MELA alleges the contract was for the
sale of 60,000 units at a unit cost of U.S.$0.510. MELA has filed an
amended complaint against the Company with fraud in addition to the
other existing allegations. The Company intends to move to dismiss
the fraud charges, as it has previously done. The lawsuit is
currently in the discovery stage. Management believes the lawsuit
has no basis since no contract was ever signed and that, at trial,
no material damages will result in favor of MELA. Based on external
counsel's opinion it is too early to evaluate the extent of Grupo
Iusacell's exposure to loss by judgment at trial.
d) In December 1997, Grupo Iusacell signed an agreement with Lucent
Technologies to purchase CDMA-based wireless equipment for U.S.$188,000 and
install its digital cellular network. In connection with this contract, Lucent
issued trade-in credits for approximately U.S.$93,000, representing the net
replacement cost of the analog network equipment being replaced. The trade-in
credits are deducted from each purchase invoice proportionally to the cost of
the total equipment purchased.
F-121
<PAGE> 245
e) In February 1998, Grupo Iusacell's former advertising agency sued
the company for Ps.23,000, alleging improper termination of its contract. Grupo
Iusacell won the lawsuit in trial court during 1998 without any damages in favor
of such former advertising agency and also won a first appeal. The advertising
agency filed a second and final appeal and, in June 1999, the Mexican Supreme
Court found Grupo Iusacell in breach of its contract with the advertising agency
and found further that the advertising agency suffered Ps.23,000 in damages.
Subsequently, another tribunal confirmed the breach of contract finding, but
assessed damages of only Ps.16,000. Grupo Iusacell has filed an injunctive
action (amparo) with the Mexican Supreme Court against this sentence on the
basis that this tribunal and the Mexican Supreme Court exceeded the scope of
their review and also incorrectly assessed damages. In December 1999 the suit
was settled for Ps.14,500.
f) In April 1998, Grupo Iusacell learned that the Montes Urales
property was subject to two liens. Such liens were not identified when
Inmobiliaria Montes Urales was acquired in 1994, nor was Grupo Iusacell notified
of such liens subsequent to acquisition. To date, the liens have not been
removed and it is uncertain as to when the removal will take place.
g) The Company has certain commitments derived from its joint venture
agreement with Infomin, S.A. de C.V. (see Note 2).
h) In 1994, the Company and Northern Telecom (CALA) Corporation
("Nortel") entered into an agreement pursuant to which Nortel would supply
network switching equipment for the development of the 450 MHz local wireless
network. The agreement would terminate automatically if 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
ocurred prior to December 31, 1997, the agreement was terminated. In 1994, as
required under the agreement, the Company made advance payments of U.S.$15,000.
The Company now seeks a refund of such advanced funds. Nortel, however, has
asserted that such advances should be credited against development costs. Legal
counsel believes that Nortel is legally obligated to refund the U.S.$15,000
dollars advance to the Company.
i) During 2000, the SCT and COFETEL may determine how much, through
what means and over how much time long distance concessionaires, including a
subsidiary of the Company, Iusatel, will pay for the special projects
implemented by Telmex prior to January 1997 to permit competition in long
distance telephony. There can be no certainty that the Company will be able to
reach a negotiated settlement with Telmex or, if it can reach such a settlement,
on what terms.
14. Contributed Capital
During the years ended December 31, 1999, 1998 and 1997, the following
transactions took place:
F-122
<PAGE> 246
On February 18, 1997, in connection with the 1997 recapitalization of
Old Iusacell, the Peralta Group converted 100,000,000 series A shares
into series D shares and Bell Atlantic converted 200,000,000 series B
shares and 166,769,760 series D shares into series A shares.
F-123
<PAGE> 247
On February 28, 1997 the Company's Board of Directors ratified a capital
increase of Ps.817,781. The shares were offered for subscription and
payment in the following way:
a) Bell Atlantic subscribed for 47,017,491 series A shares through the
conversion of certain debt (Note 5).
b) FIUSA Pasteje, S.A. de C.V. subscribed for 4,390,619 series A shares and
48,754,000 series D shares through the capitalization of certain liabilities.
c) Preemptive stockholder rights were exercised for the amount of 265 series
D shares and 92,564 series L shares.
Additionally, 7,812,500 of the 15,625,000 series L shares authorized
during 1996, were kept in the Company's treasury available for the
Executive Employee Stock Purchase Plan (the "Stock Purchase Plan"), and
the balance of 7,719,916 series L shares was canceled. During 1997,
7,549,834 of these shares were 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 4,719,560 series L shares for the Stock Purchase Plan.
The subscription price for those shares was Ps.57,804.
On June 6, 1997, the technical committee approved the subscription of
1,272,200 series L shares for the Stock Purchase Plan. The subscription
price for those shares was Ps.24,943.
On September 30, 1997, the technical committee approved the
subscription of 1,558,074 series L shares for the Stock Purchase Plan.
The subscription price for those shares was Ps.30,036.
On April 17, 1998, 262,666 series L shares which had not been subscribed
for under the Stock Purchase Plan as of December 31, 1998, were
automatically canceled.
At the June 19998 shareholders' meeting, the total authorized fixed
portion of capital stock of the Company was increased by Ps.34,231
through the issuance of up to 2,000,000 series L shares of the Company
under the Stock Purchase Plan.
From June 30 to July 14, 1998, preemptive stockholder rights related to
the new authorization of series L shares for the Stock Purchase Plan
were exercised for 40 series L shares in the amount of Ps.0.61.
During June 1998, 1,187,500 of the 2,000,000 previously authorized series
L shares were added to the Company's treasury available for the Stock
Purchase Plan. The balance of 812,460 series L shares was canceled.
During 1998, 1,117,496 of these new shares of the Company made
available under the Stock Purchase Plan were subscribed by employees,
as follows:
On September 2, 1998, the Technical Committee approved the
F-124
<PAGE> 248
subscription of 582,456 series L shares for the Stock Purchase Plan.
The subscription price for those shares was Ps.4,829.
On October 2, 1998, the Technical Committee approved the subscription
of 535,040 series L shares for the Stock Purchase Plan. The
subscription price for those shares was Ps.3,233.
As of December 31, 1998, 70,004 series L shares remained available in
the Company's treasury for issuance under the Stock Purchase Plan.
F-125
<PAGE> 249
On November 17, 1998 the Company's Board of Directors ratified a capital
stock increase of Ps.855,875 by the issuance of 102,142,857 series A
shares which were subscribed through the conversion of debentures
issued by the Company under the Bell Atlantic subordinated convertible
debt facility (see Note 10). The convertible debentures were issued and
converted as follows:
On August 19, 1998, the Company issued debentures in a principal amount
of Ps.300,103 (U.S.$25,200), which were converted into 36,000,000
series A shares on the same date.
On September 29, 1998, the Company issued debentures in a principal
amount of Ps.555,772 (U.S.$46,300), which were converted into
66,142,857 series A shares on the same date.
On December 21, 1998 the Board of Directors of the Company ratified a
capital increase of Ps.329,759 by the issuance of 42,857,142 series A
shares. The increase was subscribed through the conversion of
debentures issued by the Company under the Bell Atlantic subordinated
convertible debt facility, in an aggregate principal amount of
U.S.$30,000. The 42,857,142 series A shares were initially subscribed
by Bell Atlantic, of which 50%, or 21,428,571, of such shares, was then
sold to the Peralta Group. There was no gain or loss recognized from
the sale.
On February 10, 1999 the technical committee approved the subscription of
70,004 series L Shares for the Stock Purchase Plan.
On March 3, 1999 the Company converted an amount of Ps.337,024
(U.S.$31,000) into 44,285,714 series A shares. The 44,285,714 series A
shares were initially subscribed by Bell Atlantic, of which 50%, or
22,142,857, of such shares, were then sold to Carlos Peralta. There was
no gain or loss recognized from the sale.
On August 10, 1999, the Group concluded a corporate reorganization
included the following transactions:
a) An exchange offer by New Iusacell of its series A and V ADSs and shares
for Company's series A, B, D and L ADSs and shares on a one-for-one basis. At
the end of the exchange offer approximately 6,890,617 series D and L shares were
not tendered.
b) A rights offer in which the shareholders of the Company who participated
in the exchange were also offered the option to purchase an aggregate of
22,419,716 series V shares of New Iusacell, in the form of ADSs or shares. A
total of 18,405,490 series V shares were subscribed.
c) Primary and secondary offers under which New Iusacell sold 23,596,783
series V shares, and Bell Atlantic and the Peralta Group sold 101,403,217 series
V shares of New Iusacell.
On December 31, 1999, a total of 365,011,584 series A shares were
subscribed through the capitalization of stockholders' debt. The total
F-126
<PAGE> 250
amount converted was of Ps.1,279,760. This increase was ratified by the
Board of Directors of the Company on February 21, 2000.
The changes in the number of shares of common stock for the period January
1, 1998 through December 31, 1999 are analyzed as follows:
F-127
<PAGE> 251
<TABLE>
<CAPTION>
Number of shares
-------------
<S> <C>
January 1, 1997 balance 981,624,430
February 28, 1997 - issuance of common
stock through the capitalization of debt 100,162,110
February 28, 1997 - issuance of common stock
upon exercise of preemptive stockholder rights 92,829
April 17, 1997 - issuance of common
stock for the Stock Purchase Plan 4,719,560
June 6, 1997 - issuance of common
stock for the Stock Purchase Plan 1,272,200
September 30, 1997 - issuance of common
stock for the Stock Purchase Plan 1,558,074
-------------
January 1, 1998 balance 1,089,429,203
July 14, 1998 - issuance of common stock
upon exercise of preemptive stockholder rights 40
September 2, 1998 - issuance of common
stock for the Stock Purchase Plan 582,456
October 2, 1998 - issuance of common
stock for the Stock Purchase Plan 535,040
November 17, 1998 - issuance of common
stock through the capitalization of debt 102,142,857
December 21, 1998 - issuance of common
stock through the capitalization of debt 42,857,142
--------------
December 31, 1998 balance 1,235,546,738
February 10, 1999 - issuance of common
stock for the Stock Purchase Plan 70,004
March 3, 1999 - issuance of common
stock for the Stock Purchase Plan 44,285,714
December 31, 1999 - issuance of common
Stock through the capitalization of debt 365,011,584
--------------
December 31, 1999 balance 1,644,914,040
==============
</TABLE>
At December 31, 1999 and 1998, the issued and outstanding shares of common
stock of the Company, without par value, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
series A 1,256,764,993 891,753,409
series B 5,562,450 5,562,450
series D 186,904,725 186,904,725
series L 195,681,872 151,326,154
------------- -------------
Total 1,644,914,040 1,235,546,738
============= =============
</TABLE>
F-128
<PAGE> 252
Series A, B and D represent shares entitling the holder of each share to
one vote at the Company's stockholders' meetings. The holders 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.
Series A shares must always represent no less than 51% of the capital
stock with full voting rights and may be acquired 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 administered by a management trust with the assistance
of the trust division of a Mexican bank. Under the Stock Purchase Plan,
a committee, which is composed of certain executive officers of the
Company (the "Technical Committee"), determines to which executive
employees series L shares of the Company will be offered for purchase
(after the exchange offer the shares subject to the Stock Purchase Plan
are series V shares of New Iusacell). 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 V shares that may be subject to purchase rights
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, exchanged on August 1999 for
series V shares. All such purchase rights vest either in three equal
annual installments commencing on either April 17, 1998, June 6, 1998
or September 30, 1998 or in their entirety on either April 17, 1999 or
June 6, 1999.
During 1998, the Technical Committee granted purchase rights with respect
to a total of 2,199,600 series L shares through the issuance of
1,117,516 series L shares and the reassignment of 1,082,084 series L
shares (all series L shares were exchanged on August 1999 for series V
shares). All such purchase rights vest in three equal annual
installments commencing on either September 1, 1999 or commencing on
either October 1, 1999 or in their entirety on either September 1, 2000
or
F-129
<PAGE> 253
October 1, 2000.
During 1999, the Technical Committee granted purchase rights with respect
to a total of 1,603,000 series L shares through the issuance of 70,004
series L shares and the reassignment of 1,532,996 series L shares (as
mentioned above, all series L shares were exchanged on August 1999 for
series V shares). All such purchase rights vest in three equal annual
installments commencing on either February 10, 2000 or commencing on
May 26, 2000 or in their entirety on either February 10, 2001 or May
26, 2001.
16. Earned Capital
Under Mexican law, a legal reserve must be created and increased annually
by 5% of the annual net earnings until it reaches 20% of the nominal
amount of a corporation's capital stock. This reserve is not available
for dividends, but may be used to reduce a deficit or be transferred to
capital.
F-130
<PAGE> 254
Under 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,
1999 is approximately Ps.116,772. The Company cannot pay dividends
under the covenants for the senior notes due 2004.
The contributed capital and earned capital accounts consist of the
following:
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------
Accumulated
Historical adjustments for
value inflation Total
------------- --------------- ---------------
<S> <C> <C> <C>
Capital stock Ps.5,585,491 Ps.5,728,736 Ps.11,314,227
Capital contributions 18,655 62,952 81,607
Legal reserve 1,499 2,962 4,461
Accumulated losses from prior
years ( 3,303,211) ( 1,599,174) ( 4,902,385)
Net profit for the year ( 258,200) 640,647 382,447
Deficit from restatement - ( 756,401) ( 756,401)
------------- --------------- ---------------
Total Ps.2,044,234 Ps.4,079,722 Ps. 6,123,956
============= =============== ===============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------
Accumulated
Historical adjustments for
value inflation Total
------------- --------------- ---------------
<S> <C> <C> <C>
Capital stock Ps.3,998,608 Ps.5,698,835 Ps.9,697,443
Capital contributions 18,655 62,952 81,607
Legal reserve 1,499 2,962 4,461
Accumulated losses from prior
years ( 1,839,161) ( 1,606,162) ( 3,445,323)
Net loss for the year ( 1,464,050) 6,988 ( 1,457,062)
Deficit from restatement - ( 763,769) ( 763,769)
------------- --------------- ---------------
Total Ps. 715,551 Ps.3,401,806 Ps.4,117,357
============= =============== ===============
</TABLE>
F-131
<PAGE> 255
17. Foreign Currency Position
The balance sheet as of December 31 includes assets and liabilities
denominated in U.S. Dollars, as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- -----------------
<S> <C> <C>
Monetary assets U.S.$ 164,708 U.S.$ 46,331
Monetary liabilities 598,803 574,489
---------------- -----------------
Net monetary liability position
in U.S. Dollars U.S.$ 434,095 U.S.$ 528,158
================ =================
Equivalent in nominal
Mexican pesos Ps. 4,123,295 Ps. 5,226,810
================ =================
</TABLE>
As of December 31, 1999 and 1998, most of the communications equipment and
inventories of cellular telephones and accessories are of foreign
origin (see Notes 6 and 8).
During 1999, 1998 and 1997, interest income and interest expense on assets
and liabilities denominated in U.S. Dollars were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ------------------
<S> <C> <C> <C>
Interest income U.S.$ 769 U.S.$ 494 U.S.$ 386
Interest expense 36,130 16,419 15,994
---------------- ---------------- ------------------
Net interest expense U.S.$ 35,361 U.S.$ 15,925 U.S.$ 15,608
================ ================ =================
Equivalent in nominal Mexican
pesos Ps. 335,880 Ps. 157,599 Ps. 125,927
================ ================ =================
</TABLE>
F-132
<PAGE> 256
Operating results for the years ended December 31, 1999 and 1998, include
depreciation and amortization expenses, related to fixed assets and
inventories of foreign origin.
The exchange rate as of December 31, 1999 and 1998 was Ps.9.4986 and
Ps.9.8963, per U.S. Dollar, respectively. At the issuance date of these
financial statements, February 29, 2000, the exchange rate in effect
was Ps. 9.4395 per U.S. Dollar
18. Project 450
During 1994, the Company created a subsidiary to provide fixed wireless
local telephony services using the 450 MHz frequency band ("Project
450"). At December 31, the Company's investment in Project 450
consisted of the following assets:
<TABLE>
<CAPTION>
1999 1998
--------- ------------
<S> <C> <C>
Fixed assets Ps.36,404 Ps. 45,668
Inventory of handsets 2 20,429
--------- ------------
Total Ps.36,406 Ps. 66,097
========= ============
</TABLE>
On June 10, 1997, the Mexican Telecommunications and Transportation
Ministry ("SCT") and the Company reached an agreement on a process
whereby the Company could obtain concessions issued by the SCT to
provide local wireless service in the 450 MHz frequency band. While
awaiting the Mexican government's resolution on coverage, spectrum
clearing and other requirements which may cause management to
reconsider the feasibility of fully deploying the 450 MHz technology,
the Group began its overlay of CDMA digital technology in the 800 MHz
frequency band.
Given the capabilities of CDMA technology and the success the Group has
had thus far with its deployment, the Group is exploring alternatives
for providing local telephony service, including fixed or limited zone
wireless service in the 800 MHz and 1.9 GHz bands. The Group has not
made a decision as to whether it will pursue its right of first refusal
to acquire the above-mentioned 450 MHz concessions, or whether it will
pursue an alternative means to provide local telephony services.
F-133
<PAGE> 257
During September 1998, the Group made the decision to write-down the
carrying value of the assets supporting its Project 450 assets as the
Group believes there has been an impairment of its investment in this
technology. During 1998, an impairment charge for Ps.1,102,401 was
recorded representing 100% of the pre-operating expenses and 90% of the
fixed assets deployed in this project.
19. Discontinued Operations
In December 1998, the Company decided to discontinue the operations of its
subsidiary, Cellular Solutions, subsidiary dedicated to the sale of
accessories for cellular handsets. Cellular Solutions transferred all
its existing inventories as of December 31, 1998 to another subsidiary
of the Company and terminated all of Cellular Solutions' employees
during January and February 1999.
Financial information regarding Cellular Solutions as of and for the year
ended December 31 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Current assets Ps.1,543 Ps. 4,008 Ps. 9,162
Total assets 1,543 5,531 10,640
Total liabilities 33,248 40,906 9,770
Revenues - 20,031 24,403
Gross Profit - 4,402 6,985
Loss from operations before income taxes - ( 8,822) ( 7,345)
Provision for income taxes - 101 188
Loss on disposal, including provision in 1998
of Ps. 1,066 for operating losses during
phase-out period (no applicable taxes) - ( 11,794) -
---------- ----------- ----------
Net loss Ps. - (Ps.20,717) (Ps.7,533)
========== =========== ==========
</TABLE>
20. Differences between Mexican and United States
Generally Accepted Accounting Principles
The Company's consolidated financial statements are prepared based on
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
F-134
<PAGE> 258
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 the years ended December 31, 1999, 1998 and 1997.
F-135
<PAGE> 259
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 ("SFAS") 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 Group'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.
b) Preoperating costs
Under Mexican GAAP, the Group capitalized certain pre-operating costs,
primarily related to Project 450. Under US GAAP, pre-operating costs
are expensed as incurred. During 1998, the Company recorded a
write-down related to its investment in Project 450 for Mexican GAAP
purposes and consequently, wrote-off all capitalized pre-operating
costs as of that date.
c) Derivative Financial Instruments
Effective July 30, 1998, in connection with the U.S.$225,000 credit
agreement (see Note 10), the Company entered into an interest rate
F-136
<PAGE> 260
collar agreement designated as a hedge of a portion of the Company's
floating rate debt. The interest rate collar limits the Company's
exposure to fluctuations in short-term interest rates by locking in a
range of interest rates on U.S.$35,000 of its floating rate debt. The
cap rates range from 6.12% to 7.12% for six-month LIBOR with the floor
rate ranging down to 5.30% for six-month LIBOR. The interest rate
collar matures on July 30, 2002.
F-137
<PAGE> 261
Additionally, on February 26, 1999, the Company entered into a second
interest rate collar agreement to limit the maximum interest rate which
must be paid on U.S.$15,000 of its floating rate debt until July 2002.
Under the terms of this collar agreement, the maximum effective LIBOR
cost is limited to 5.82% if six-month LIBOR is lower than 6.82% and to
6.82% if LIBOR equals or exceeds that level. The floor level for
six-month libor is 4.75%.
Under Mexican GAAP, the interest rate collar agreements are recorded on a
cash basis. Under U.S. GAAP, the differential to be paid or received as
interest rates change is accrued and recognized as an adjustment of
interest expense at the balance sheet date. Additionally, the related
amount payable or receivable from counter-parties is included in
accrued other expenses at the balance sheet date.
The U.S.$50,000 aggregate notional amount of the interest rate collar
agreements does not quantify risk or represent assets or liabilities of
the Company, but is used in the determination of cash settlements under
the agreements. The Company is exposed to credit loss from counterparty
nonperformance, but does not anticipate any such loss from the interest
rate collar agreements, which are with a major financial institution.
The fair value of the interest rate collar agreements is Ps.5,262 (U.S.
$554) and Ps.12,059 (U.S. $1,085), as of December 31, 1999 and 1998,
respectively, and is estimated based on current market settlement
prices of comparable contracts obtained from dealer quotes. The Company
does not hold or issue derivative financial instruments for trading
purposes.
On December 30, 1999, the Company entered into a foreign currency hedge
utilizing forward rate contracts, hedging its exchange rate exposure
for up to U.S.$77,000 or approximately 50% of the principal and
interest payments coming due over the period April 2000 to April 2001.
If the Mexican peso to the U.S. Dollar exchange rate remains at the
December 31, 1999 level through April 30, 2001, then the estimated cost
to the Company of this hedging program will be approximately Ps.91,962
(U.S.$9,622).
As described in Note 10, on December 30, 1999, Old Iusacell entered into a
foreign currency hedge utilizing forward rate contracts, hedging its
exchange rate exposure for up to U.S.$77,000 or approximately 50% of
the principal and interest payments coming due over the period April
2000 to April 2001. Under Mexican GAAP, the contracts are recorded on a
cash basis. Under US GAAP, the contracts are recorded at fair value
based on spot rates. The premium on such contracts is recorded upon
inception of the contract and amortized over its related term. The
contracts have terms from four to sixteen months and forward rates
ranging from U.S.$ 9.9577 to U.S.$.11.4066.
d) Minority interest
F-138
<PAGE> 262
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 is
deducted accordingly as a reconciling item to arrive at U.S. GAAP
equity.
F-139
<PAGE> 263
e) Basic and fully diluted loss per share
As of January 1, 1997, Mexican GAAP required the disclosure of earnings
(loss) per share for public companies. Under U.S. GAAP, disclosure of
basic earnings (loss) per share and diluted earnings (loss) per share
is required for public companies in accordance with SFAS No. 128,
"Earnings Per Share". Basic earnings (loss) per share is computed by
dividing income (loss) available to common shareholders by the weighted
average number of common shares outstanding for the year. The
computation of diluted earnings (loss) per share is similar to basic
earnings (loss) per share, except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been issued.
Diluted earnings (loss) per share is equal to basic earnings (loss) per
share for the years ended December 31, 1998 and 1997 as the drawdowns
and conversions under the subordinated convertible facility with Bell
Atlantic (see Note 10) and the shares subject to rights under the Stock
Purchase Plan (see Note 15) are excluded from the computation of
diluted earnings (loss) per share because to do so would have been
anti-dilutive for the periods presented.
For the year ended December 31, 1998, the number of potentially dilutive
shares that were excluded from the computation of diluted earnings
(loss) per share for the drawdowns and conversions under the Bell
Atlantic subordinated convertible debt facility were 69,285,714 shares,
and for the shares subject to rights under the Stock Purchase Plan
332,650 shares. Diluted earnings (loss) per share is equal to basic
earnings (loss) per share for the year ended December 31, 1999 as the
Company did not have any potentially dilutive securities.
f) Comprehensive income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 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. SFAS No. 130 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. The
statement, however, does not address recognition or measurement issues.
The adoption of SFAS No. 130 had no impact on net loss or shareholders'
equity. The Company has presented comprehensive loss and accumulated
comprehensive loss under U.S. GAAP for each of the three years ended
December 31, 1999 in Note 20 i) below.
g) Gain from the exchange of non-monetary assets
F-140
<PAGE> 264
In December, 1998, the Company entered into a fiber optic cable swap
agreement with Bestel to exchange certain long-distance fiber optic
cables for of Ps.215,081. Under Mexican GAAP, the Company recorded the
transaction as both an acquisition and sale of fixed assets based on
the contract amount, resulting in a gain on the sale of Ps.187,301
which was recorded as other income. Under U.S. GAAP, because the
assets exchanged are similar productive assets and, on a net basis, no
cash was exchanged, the transaction does not result in the recognition
of earnings. Consequently, under U.S. GAAP the acquisition and sale
would not have been recorded.
F-141
<PAGE> 265
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 (see Note 4) to such adjustments.
i) Net income (loss) and stockholders'
equity under U.S. GAAP
The following is a summary of net profit (loss) and stockholders' equity
adjusted to take into account certain material differences between
Mexican GAAP and U.S. GAAP:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1999 1998 1997
------------- --------------- --------------
<S> <C> <C> <C>
Net profit (loss) as reported under Mexican GAAP Ps. 382,447 (Ps.1,457,062) (Ps.1,332,572)
Deferred income taxes ( 18,726) 56,591 493,311
Pre-operating costs ( 69,028) 178,385 ( 85,533)
Interest rate collar 6,797 ( 12,059) -
Gain from the exchange of non-monetary assets - ( 187,301) -
Effect of inflation accounting on US GAAP adjustments ( 19,595) ( 26,080) 20,171
------------- --------------- --------------
Net profit (loss) under U.S. GAAP Ps. 281,895 ( 1,447,526) ( 904,623)
============= =============== ==============
Weighted average number of shares outstanding
(thousands) 1,286,844 1,070,825 1,070,825
============= =============== ==============
Basic and diluted net profit (loss) per share (pesos) Ps. 0.22 (Ps. 1.35) (Ps. 0.84)
============= =============== ==============
</TABLE>
F-142
<PAGE> 266
Comprehensive income:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1999 1998 1997
--------------- ----------------- ----------------
<S> <C> <C> <C>
Net profit (loss) under U.S. GAAP Ps. 281,895 (Ps. 1,447,526) (Ps. 904,623)
Inflation effects for the period 19,595 ( 11,887) ( 20,171)
--------------- ----------------- ----------------
Comprehensive income (loss) Ps. 301,490 ( 1,459,413) ( 924,794)
=============== ================= ================
Accumulated comprehensive loss (Ps.6,163,528) (Ps.6,465,018) (Ps.5,005,605)
=============== ================= ================
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Stockholders' equity under Mexican GAAP Ps.6,099,233 Ps.4,118,268
Minority interest 24,723 ( 911)
Deferred income taxes 166,582 185,308
Pre-operating costs ( 69,028) -
Interest rate collar ( 5,262) ( 12,059)
Gain from the exchange of non-monetary assets ( 187,301) ( 187,301)
Provision for consolidation of facilities 17,354 17,354
------------ ------------
Stockholders' equity as reported under U.S. GAAP Ps.6,046,301 Ps.4,120,659
============ ============
</TABLE>
The following is the Statement of Stockholders' Equity under US GAAP
for each of the two years ended December 31, 1999:
<TABLE>
<CAPTION>
Contributed Accumulated Loss for
Capital Losses The year Total
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Balances as of 12/31/97 Ps.8,585,354 (Ps.3,294,355) (Ps.904,623) Ps.4,386,376
Application of 1997 net loss (904,623) 904,623 -
Increase in capital stock 1,193,696 1,193,696
Effects of inflation (11,887) (11,887)
Net loss for the year (1,447,526) (1,447,526)
-------------- -------------- ------------- ------------
Balances as of 12/31/98 Ps.9,779,050 (Ps.4,210,865) (Ps.1,447,526) Ps.4,120,659
Application of 1998 net loss (1,447,526) 1,447,526 -
Increase in capital stock 1,616,784 1,616,784
Effects of inflation 26,963 26,963
Net profit for the year 281,895 281,895
-------------- -------------- ------------- ------------
Balances as of 12/31/99 Ps.11,395,834 (Ps.5,631,428) Ps.281,895 Ps.6,046,301
============== ============== ============= ============
</TABLE>
j) Provision for impairment of analog equipment
F-143
<PAGE> 267
As mentioned in Note 4.b, during the year ended December 31, 1997,
changes in circumstances indicated that the carrying amount of the
Group's analog telecommunications network might not be recoverable.
These circumstances included: (i) customer and marketing requirements
for better voice quality, more and improved value-added services and
reduction of wireless fraud, all of which were more viable with a
digital platform, factors accelerating the adoption of digital
technology in the Mexican wireless market; (ii) the view of Bell
Atlantic, which assumed management control of the Company in February
1997, that the Company would need to adopt digital technology in order
to remain competitive and that CDMA was the best technology available
to the Company; (iii) the plans, developed in 1997 by other wireless
carriers, to launch digital technology in Mexico in 1998; (iv) the
Company's decision to participate in the digital PCS auctions that were
announced in November 1997, and (v) an increase in the Company's
subscriber base during 1997, resulting in the analog network operating
at close to full capacity by November 1997 (a CDMA digital network has
the potential to increase capacity by a six to ten times compared with
similar analog equipment). Consequently, under U.S. GAAP, the Company
evaluated the analog equipment for impairment using the criteria of
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of."
In December 1997, the future estimated cashflows (undiscounted and without
interest) of the analog equipment, considering the disposition of the
equipment under the terms of the agreement with Lucent Technologies
(see Note 13), were less than the book value. Consequently, the Company
recorded an impairment charge of Ps.1,236,307 to adjust the carrying
amount of the analog equipment to its fair value, amounting to
Ps.3,243,881, based on an independent appraisal performed by
Consultores y Valuadores de Empresas, S.C.
Under U.S. GAAP, this impairment charge is reflected as a component of
operating loss for the year ended December 31, 1997.
F-144
<PAGE> 268
k) Employee severance
The Group is required to pay certain severance benefits to employees that
are dismissed without proper cause. Since during the normal course of
operations, it is impracticable to estimate the number of employees
that will be dismissed in the future, under U.S. GAAP, severance
payments made to employees during the normal course of operations are
expensed when paid. As of December 31, 1999 and 1998 severance accruals
recorded were immaterial.
l) Supplementary U.S. GAAP disclosures
1) Cash flow information
SFAS No.95, "Statement of Cash Flows" 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.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net profit (loss) under U.S. GAAP Ps. 281,895 (Ps.1,447,526) (Ps. 904,623)
Adjustments to reconcile net loss to cash
(used in) provided by operating activities:
Depreciation 693,099 380,104 440,926
Amortization 731,264 512,746 334,332
450 Project non-cash write-down - 924,016 -
Equity in loss (earnings) of associated
companies ( 2,164) ( 2,919) ( 1,117)
Gain on sale of equity investments 49,775 ( 25,003) ( 208,959)
Increase in allowance for doubtful accounts 92,767 30,913 48,524
(Decrease) / Increase in allowance for
obsolete and slow-moving inventories ( 4,785) - 20,653
Fixed assets impairment charge - - 1,236,307
Minority interest ( 17,933) ( 6,342) ( 276)
Deferred income taxes and employee
profit sharing 151,371 15,536 ( 432,914)
Gain on net monetary position and
foreign exchange losses ( 826,374) 202,971 ( 435,450)
</TABLE>
F-145
<PAGE> 269
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1999 1998 1997
---------------- -------------- ---------------
<S> <C> <C> <C>
Changes in operating assets and liabilities:
Accounts receivable (Ps. 567,505) (Ps.582,815) (Ps. 145,457)
Inventories 28,269 112,681 ( 224,951)
Trade accounts payable and related parties 1,435,784 1,314,001 696,031
Taxes and other payable ( 98,060) 516,868 ( 322,167)
Income tax ( 33,838) ( 29,682) 3,465
Other ( 501) ( 189) 462
---------------- -------------- ---------------
Net cash provided by operating activities 1,913,064 1,915,360 104,786
Investing activities:
Purchase of property and equipment, net ( 1,502,280) ( 2,459,857) ( 903,054)
Proceeds from sales of investments in asso-
ciated companies 11,856 12,333 329,472
Purchase of other assets ( 890,059) ( 1,236,722) ( 789,646)
---------------- -------------- ---------------
Net cash used in investing activities ( 2,380,483) ( 3,684,246) ( 1,363,228)
---------------- -------------- ---------------
Financing activities:
Proceeds from notes payable and long-term debt 1,052,575 1,917,039 3,192,705
Payments of notes payable and long-term debt ( 693,761) ( 26,081) ( 2,030,643)
Increase of capital stock - 8,062 112,783
---------------- -------------- ---------------
Net cash provided by financing activities 358,814 1,899,020 1,274,845
Net (decrease) increase in cash and cash equivalents (Ps. 108,605) Ps. 130,134 Ps. 16,403
Cash and cash equivalents at beginning of year 286,666 156,532 140,129
---------------- -------------- ---------------
</TABLE>
F-146
<PAGE> 270
<TABLE>
<S> <C> <C> <C>
Cash and cash equivalents at the end of year Ps. 178,061 Ps. 286,666 Ps. 156,532
================ ============== ===============
Interest expense paid Ps. 343,184 Ps. 345,589 Ps. 247,007
================ ============== ===============
Income tax paid Ps. 90,120 Ps. 36,818 Ps. 43,432
================ ============== ===============
</TABLE>
Supplemental disclosures of non-cash activities:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------
1999 1998 1997
----------------- ----------------- ---------------
<S> <C> <C> <C>
Conversion of debt to equity Ps.1,616,784 Ps.1,185,634 Ps. 817,781
</TABLE>
2) The provision for income taxes for the years ended December
31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------------------
1999 1998 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Asset tax not offset by current
taxes Ps. 132,645 Ps. 72,127 Ps. 60,397
Deferred tax 18,726 ( 56,591) ( 493,311)
-------------- --------------- --------------
Tax charge (benefit) Ps. 151,371 Ps. 15,536 (Ps.432,914)
============== =============== ==============
</TABLE>
3) Deferred income taxes
For Mexican tax purposes, inventories are expensed when
purchased and consequently, result in the recognition of a
deferred tax liability.
Significant components of deferred income taxes under U.S. GAAP
are as follows:
F-147
<PAGE> 271
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------
SFAS 109 SFAS 109
applied to applied to
Mexican GAAP U.S. GAAP
balances adjustments Total
----------------- ------------- ----------------
<S> <C> <C> <C>
Deferred liabilities:
Inventories Ps. 64,515 Ps. - Ps. 64,515
Property and equipment 264,751 - 264,751
Cellular telephones to be amortized 188,636 - 188,636
Concessions 3,160 - 3,160
----------------- ------------- ----------------
Deferred tax liabilities Ps. 521,062 Ps. - Ps. 521,062
----------------- ------------- ----------------
Deferred assets:
Allowance for doubtful accounts Ps. 52,247 Ps. - Ps. 52,247
Net operating loss carryforwards and tax credits 880,001 - 880,001
Reorganization reserve 22,900 - 22,900
Interest rate collar - 6,062 6,062
Gain from the exchange of non-monetary assets - 63,682 63,682
Pre-operating expenses - 22,275 22,275
Valuation allowance ( 262,055) ( 92,019) ( 354,074)
---------------- ------------ ---------------
Deferred tax assets 693,093 - 693,093
---------------- ------------ ---------------
Net deferred tax assets (Ps. 172,031) Ps. - (Ps. 172,031)
================ ============ ===============
</TABLE>
F-148
<PAGE> 272
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------
SFAS 109 SFAS 109
applied to applied to
Mexican GAAP U.S. GAAP
balances adjustments Total
----------------- ------------- ----------------
<S> <C> <C> <C>
Deferred liabilities:
Inventories Ps. 70,656 Ps. - Ps. 70,656
Property and equipment 259,397 - 259,397
Cellular telephones to be amortized 116,368 - 116,368
Concessions 2,982 - 2,982
----------------- ------------- ----------------
Deferred tax liabilities Ps. 449,403 Ps. - Ps. 449,403
----------------- ------------- ----------------
Deferred assets:
Allowance for doubtful accounts Ps. 25,671 Ps. - Ps. 25,671
Net operating loss carryforwards and tax credits 1,250,410 - 1,250,410
Reorganization reserve 22,761 - 22,761
Interest rate collar - 4,100 4,100
Gain from the exchange of non-monetary assets - 63,682 63,682
Valuation allowance ( 664,131) ( 67,782) ( 731,913)
---------------- ------------- ---------------
Deferred tax assets 634,711 - 634,711
---------------- ------------- ---------------
Net deferred tax assets (Ps. 185,308) Ps. - (Ps. 185,308)
================ ============= ===============
</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.392,554 for the year ended December 31, 1996 (not
applicable thereafter).
The Company has recorded a deferred tax asset of Ps.880,001
reflecting the benefit of tax loss carryforwards, which
expire in varying amounts between 2004 and 2008.
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 net deferred
tax asset at December 31, 1999 will be realized based on
the following:
(i) the net deferred tax asset amounting to Ps.172,031
represents only the tax loss carryforwards (which are subject to
indexation) of 1998 which has expiration periods of 10 years, and
F-149
<PAGE> 273
(ii) although the Group generated operating losses for five
years through 1998, it believes that it is more likely than not that the
net deferred tax asset will be realized based on the Group's business
plan estimate of future taxable income over the next five years in an
amount sufficient to utilize the net deferred tax losses recorded as of
December 31, 1999.
The Group's estimate of future taxable income is based
primarily on and supported by (i) management's
expectations of the Company's growth and profitability
over the next 5 years, and (ii) the significant
improvement in operating performance from February 1997
through December 1999, as evidenced by the success of the
implementation of the Bell Atlantic wireless business
model. This model has produced strong subscriber growth
in excess of 75% year over year, improved revenues (based
on customer growth and price increases) and lower network
and operating costs, resulting in an operating profit
during the first three quarters of 1999 and during 1998
(excluding the write-down of Project 450), as compared to
an operating loss during 1997 and (iii) the effects of
cost-cutting measures achieved as a result of the
restructuring completed during 1997 and 1998, primarily
related to a 15% reduction in headcount and elimination
of duplicate administrative costs.
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 (See Note 12.)
As of December 31, 1999, the Company had a valuation allowance
of Ps.354,074 to reduce its deferred tax assets
to estimated realizable value. The valuation allowance
primarily relates to the deferred tax assets arising
from tax loss carryforwards and tax credits. The net
change in the total valuation allowance for the year
ended December 31, 1999 was principally due to the
realization of tax loss carryforwards during the year
ended December 31, 1999.
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<PAGE> 274
The effective rate reconciliation under US GAAP as of December
31, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- --------------- -------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate Ps. 145,809 (Ps.481,990) (Ps.454,855)
Add (deduct):
Inventory purchases less cost of sales 32,544 201,311 ( 32,162)
Depreciation and amortization ( 288,123) 293,058 ( 258,716)
Differences between interest and
inflationary gains or losses 141,432 ( 126,150) 140,767
Net assets tax 132,645 72,127 60,397
Income tax loss carryforwards ( 437,548) 68,893 112,324
Provision for doubtful accounts ( 719) ( 106,283) 24,809
Telephones to be amortized 269,052 211,070 62,864
Goodwill amortized 59,389 41,409 42,285
Pre-operating expenses 23,470 ( 60,650) 29,081
Income tax rate change 5,450 - -
Other 67,970 ( 97,259) ( 159,708)
------------- --------------- -------------
Effective income tax expense (benefit) at effective rate Ps. 151,371 Ps. 15,536 (Ps.432,914)
============= =============== =============
</TABLE>
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, 1999 and 1998.
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 Company's long-term debt, except for the
unsecured senior notes, bears interest at variable rates and
consequently, the carrying value approximates fair value. As of
December 31, 1999 and 1998, the carrying value of the unsecured
senior notes due 2004 was Ps.1,424,790 and Ps.1,667,329 and the
F-151
<PAGE> 275
fair value was Ps.1,353,551 and Ps.1,444,740, respectively.
Foreign currency exchange contracts: At December 31, 1999, the
book value and the fair value of the foreign currency hedge
forward rate contracts was Ps.822,796 and Ps.731,500,
respectively. Fair values were determined based on estimated
current market settlement prices obtained from dealer quotes.
5) Economic environment
The Company is a Mexican corporation with substantially all of its
operations located in Mexico and approximately 99.5% of its 1999
revenues 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 a
significant impact on the Company's financial condition and
results of operations and its ability to meet its future
obligations. The Company imports (and purchases in U.S. Dollars)
handsets, equipment for cellular sites and other
telecommunications equipment, while prices are set and revenues
are generated in Mexican pesos.
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<PAGE> 276
6) Disclosure of certain significant risks and uncertainties:
A) Year 2000 compliance:
All external and internal costs specifically associated with
modifying internal-use software for the Year 2000 are charged
to expenses as incurred by the Company. For the years ended
December 31, 1999 and 1998, the Year 2000 compliance costs
incurred by the Company, were approximately U.S.$6,095 and
U.S.$2,800, respectively. Amounts incurred as of December 31,
1997 were immaterial.
B) Foreign Currency Exchange Risk
Although substantial amount of the Company's debt obligations,
including the long-term bank loan and unsecured senior notes,
is denominated in U.S. Dollars, the Company generates revenues
in Mexican pesos; therefore, the Company is exposed to currency
exchange rate risks that could significantly affect the
Company's ability to meet its obligations. As mentioned in Note
10 and in Note 20.c, the Company entered into a foreign
currency hedge utilizing forward-rate contracts, hedging its
exchange rate exposure for principal and interest payments
coming due over the period April 2000 to April 2001. The
exchange rate of Mexican pesos to the U.S. Dollar is a freely
floating rate which has declined in recent years. Any
significant decrease in the value of the Mexican peso relative
to the U.S. Dollar in the near term may have a material adverse
effect on the Company and on its ability to meet its long-term
debt obligations.
7) Concentration of credit risk
Financial instruments, which potentially subject the Company to
significant concentrations of credit risk, consist principally
of interest-bearing investments, foreign currency exchange
contracts and trade accounts receivable.
The Company maintains cash and cash equivalents, investments and
certain other financial instruments with various major financial
institutions. The Company performs periodic evaluations of the
relative credit standing of these financial institutions and
limits the amount of credit exposure with any institution.
Concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of subscribers
and their dispersion across Mexico. Prior to providing services
to a new subscriber, the Company requires a credit card or a
deposit, as a guarantee from the customer over the period it
provides services, and performs a credit history check.
F-153
<PAGE> 277
8) Stock Purchase Plan
As mentioned in Note 15, the Company has a Stock Purchase Plan. This plan
grants options 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
Accounting Principles Board Opinion No.25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its plan. The
Company has adopted the disclosure-only provisions of SFAS No.123
"Accounting for Stock based Compensation". The Company recognizes no
compensation expense for its Stock Purchase Plan. If the Company had
elected to recognize compensation expense based on the fair value at the
grant dates for 1997 through 1999, and subsequent fixed plan awards
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:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1999 1998
----------------- -------------------
<S> <C> <C>
Under Mexican GAAP
Net profit (loss) As reported Ps. 382,447 (Ps. 1,457,062)
Pro forma 373,803 ( 1,465,706)
Basic and fully
diluted profit
(loss) per share As reported
Pro forma Ps. 0.30 (Ps. 1.30)
0.29 ( 1.31)
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1999 1998
------------------ -------------------
<S> <C> <C>
Under U.S. GAAP:
Net profit (loss) As reported Ps. 281,895 (Ps. 1,447,526)
Pro forma 273,251 ( 1,456,170)
Basic and fully
diluted profit
(loss) per share As reported
Pro forma Ps. 0.22 (Ps. 1.29)
0.21 ( 1.30)
</TABLE>
F-154
<PAGE> 278
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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 71% 67%
Risk-free interest rate 20% 25%
Expected lives (in years) 2.0 2.7
</TABLE>
The weighted average per share value of options granted during 1999 and
1998 was Ps.11.06 and Ps.6.47, respectively.
This table is a summary of the status of the Stock Purchase Plan:
<TABLE>
<CAPTION>
Weighted
Average
Stock Options Exercise Price
------------- --------------
<S> <C> <C>
Outstanding December 31, 1997 7,549,834 Ps. 10.52
Granted 2,199,600 6.47
Exercised 967,460 9.58
Canceled/forfeited 1,082,084 9.82
Outstanding December 31, 1998 7,699,890 9.58
Granted 1,603,000 11.06
Exercised 2,267,145 10.09
Canceled/forfeited 1,532,996 7.74
Outstanding December 31, 1999 5,502,749 10.31
</TABLE>
As of December 31, 1999 and 1998, 3,899,749 and 5,500,290 shares,
respectively, were exercisable; however, no shares were
exercisable at December 31, 1997. The following table summarizes
information about Stock Purchase Plan options outstanding as of
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Range Weighted
of Remaining Average
Exercise Contractual Exercise
Prices Shares Life Price
-------------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
1997 Ps. 8.48 to 14.00 7,549,834 0 Ps. 10.52
1998 5.16 to 8.48 5,332,908 1 7.65
1998 13.82 to 14.00 2,366,982 1 13.92
1999 5.16 to 9.20 2,632,017 2 7.59
1999 11.46 to 14.00 2,870,732 2 12.81
</TABLE>
F-155
<PAGE> 279
9) Capitalized interest and interest expense
As of December 31, 1999, 1998 and 1997, capitalized interest amounted
to Ps.162,383, Ps.138,904 and Ps.349,290, respectively. For the
years ended December 31, 1999, 1998 and 1997 interest expensed
amounted to Ps.291,417, Ps.367,222 and Ps.306,996, respectively.
10) New Accounting Pronouncements
SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" is effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their
fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction.
Derivative financial instruments are currently used by the Company
to manage interest rate risk and foreign exchange rate risk, on
certain long-term debt. The Company is currently determining the
impact that the adoption of SFAS 133 will have on its financial
position or results of operations.
F-156
<PAGE> 280
11) Project 450 non-cash write-down
As described in Note 18, during the year ended December 31, 1998, the
Company recorded an impairment charge to write-down the Project
450 assets to their fair value. Under U.S. GAAP, the impairment
charge was determined in accordance with SFAS 121 as follows:
During the third quarter of 1998, changes in circumstances indicated
that the carrying amount of the Project 450 assets might not be
recoverable. These circumstances included (i) the successful
deployment of more attractive alternative technology; (ii) the
lack of availability of 450 MHz handsets at substantially lower
costs; and (iii) that the Mexican government had not issued the
coverage and investment requirements for the 450 MHz licenses or
provided any indications on timing and means to clear the
contaminated frequencies in the northern regions.
In view of these circumstances, the Company decided not to fully
continue Project 450, given that it was becoming less
operationally and technically feasible. At such time, the
undiscounted future cash flows were less than the carrying value
of the Project 450 assets. As a result, in September 1998, the
Company's Board of Directors resolved to writedown the Project 450
assets. An impairment charge of Ps.1,102,401 was recorded to
reduce the Project 450 assets to their fair value, amounting to
Ps. 45,668. Even though there was no market for the 450 MHz
network equipment, the Company's operations group determined that
certain of these assets, representing about 10% of the related
fixed assets, could be re-deployed in the mobile wireless network.
Therefore, a full provision for impairment was recorded for all
other assets associated with the project.
12) Segment Information
In 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No.131
establishes standards for the way that public enterprises must
determine and report information about operating segments in their
annual and interim reports.
The "management approach" designates the internal organization
that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable
segments. The adoption of SFAS No.131 did not affect results of
operations or financial position.
The Company has three reportable segments that it operates and
manages as strategic business units that offer different products
and services. The Company measures its reportable segments based
on operating income (loss), including intersegment revenues and
corporate expenses that are allocated to the operating segments
and excluding any non-recurring items. Intersegment transactions
are accounted for at current market prices. The Company evaluates
the performance of its segments and allocates resources to them
based on earnings before interest, taxes, depreciation and
amortization (EBITDA) and operating income (loss). The Company is
not dependent on any single customer. The accounting policies
underlying the reported segment data are the same as those
described in the summary of significant accounting policies (see
Note 4).
F-157
<PAGE> 281
The Company's three reportable segments and their principal activities
are:
Cellular - The Company operates and provides wireless cellular
telephone services in four out of the nine Regions in the Mexican
market. The Company serves customers in large metropolitan areas
such as Mexico City, Guadalajara, Leon and Puebla. The Company's
services include "value added services" such as voice mail and
caller identification of incoming calling numbers.
Long Distance - The Company provides long distance services for which
its first natural market is its cellular subscriber base. The
Company is also providing these services to residential and
commercial entities. The Company uses its own switches and
transmission equipment and a combination of fiber optic lines,
microwave links, satellite transmission and lines leased from
Telmex to provide these services.
Other Businesses - The Company provides paging, local telephony and
data transmission services. It has concessions for PCS services
and microwave links, which are in a preoperating stage.
The tables below presents information about reported segments for the
year ended December 31, 1999 and 1998 under Mexican GAAP
measurement, using the presentation required by SFAS 131. The
Company has not provided information for the year ending December
31, 1997 as it was impracticable to prepare.
<TABLE>
<CAPTION>
Year ended December 31, 1999
----------------------------
Long Other Total Reconciling Total
Cellular Distance Businesses Segments Items (2) Consolidated
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues- third party Ps.3,929,595 Ps.110,906 Ps.162,657 4,203,158 1,495 4,204,653
Revenues- affiliates 1,815,599 344,877 447,572 2,608,048 (2,608,048) -
Depreciation and amortization 1,369,198 53,710 8,226 1,431,134 (6,771) 1,424,363
Operating income (loss) 89,180 (119,801) (71,708) (102,329) 94,429 (7,900)
EBITDA (1) 1,458,378 (66,091) (63,482) 1,328,805 87,658 1,416,463
Total assets 13,262,737 318,812 718,788 14,300,337 (1,962,762) 12,337,575
Capital expenditures 1,597,961 104,960 11,000 1,713,921 - 1,713,921
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1998
----------------------------
Long Other Total Reconciling Total
Cellular Distance Businesses Segments Items (2) Consolidated
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues- third party Ps.2,941,927 Ps.61,807 Ps.177,874 Ps.3,181,608 (Ps.9,211) Ps.3,172,397
Revenues- affiliates 1,252,365 203,597 500,112 1,956,074 (1,956,074) -
Depreciation and amortization 846,709 25,364 22,754 894,827 (1,977) 892,850
Operating income (loss) 60,084 (146,109) (17,061) (103,086) (1,016,677) (1,119,763)
EBITDA (1) 906,792 (120,747) 5,692 791,737 83,751 875,488
Total assets 13,759,156 1,108,926 1,343,272 16,211,354 (5,060,004) 11,151,350
Capital expenditures 3,130,393 483,748 21,348 3,635,489 - 3,635,489
</TABLE>
F-158
<PAGE> 282
(1) EBITDA as used by the Company is operating profit (loss) plus
the sum of depreciation and amortization. The Company's
reconciliation of EBITDA to consolidated net profit (loss) under
Mexican GAAP as of December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1999 1998
------------------- ------------------
<S> <C> <C>
EBITDA Ps.1,416,463 Ps.875,488
Depreciation and amortization (1,424,363) (892,850)
Project 450 non-cash write-down - (1,102,401)
Other (expense) income, net (23,054) 149,046
Integral financing gain (cost) 577,260 (427,766)
Equity participation in net (loss) gain
of associated companies and net (loss)
gain on sale of equity investments (47,611) 27,922
Assets tax (132,645) (72,127)
Minority interest 17,933 6,342
Loss from discontinued operations (1,536) (20,716)
------------------- ------------------
Net profit (loss) for the year Ps.382,447 (Ps.1,457,062)
=================== ==================
</TABLE>
(2) Reconciling items primarily reflect inter-segment eliminations
and certain non-recurring items, including a gain on sale in 1998
of Ps. 187,301 related to a fiber optic cable agreement (see Note
20.g) and a non-cash write-down of Ps. 1,102,401 in connection
with Project 450 (see Notes 18 and 20.b).
m) Discontinued Operations
As described in Note 19, in December 1998, the Company decided to
discontinue the operations of its subsidiary, Cellular Solutions,
which was in the business of selling accessories for cellular
handsets, and consequently, recognized a loss from discontinued
operations amounting to Ps. 1,536 and Ps.20,716, for the years
ended December 31, 1999 and 1998, respectively. Under U.S. GAAP
the loss from discontinued operations is recorded as an operating
expense.
n) Extraordinary item
Under Mexican GAAP the utilization of the Company's tax loss
carryforwards is classified as an extraordinary item and presented
as a separate line item in the consolidated income statement.
Under U.S. GAAP, the utilization of the Company's tax loss
carryforward is recorded
F-159
<PAGE> 283
as a component of the taxation expense.
21. Condensed Consolidating Financial Information
As mentioned in Note 10, in July 1997, the Company issued U.S.$150,000
of senior unsecured notes due 2004 as part of its refinancing
program. The Notes Due 2004 are guaranteed on a senior
subordinated, unsecured basis pursuant to guarantees by most of
the Company's directly and indirectly wholly owned subsidiaries
("Guarantor Subsidiaries"). The subsidiary guarantees are full,
unconditional, joint and several.
F-160
<PAGE> 284
Presented below is condensed consolidating financial information
as of December 31, 1999 and 1998 and for the three years ended
December 31, 1999 for i) the Company; ii) the combined Guarantor
Subsidiaries; iii) the combined non-Guarantor Subsidiaries; iv)
eliminations; and v) the Company's consolidated financial
statements.
Where applicable, the equity method has been used by the parent
company with respect to its investments in certain subsidiaries
for the respective periods presented.
The Company has not presented separate financial statements and
other disclosure concerning each of the Guarantor Subsidiaries
because management has determined that such information is not
material to investors.
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999
<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. 43,290 Ps. 70,741 Ps. 154 Ps. 63,876 Ps. 178,061
------------- -------------- -------------- --------------- ---------------
Accounts receivable:
Trade - 696,009 9,019 2,906 707,934
Related parties 1,683,750 764,574 ( 1,713,101) ( 688,083) 47,140
Recoverable taxes and other 53,048 374,744 297,171 ( 123,684) 601,279
------------- -------------- -------------- --------------- ---------------
1,736,798 1,835,327 ( 1,406,911) ( 808,861) 1,356,353
------------- -------------- -------------- --------------- ---------------
Inventories 2,013 179,164 9,135 ( 5,984) 184,328
------------- -------------- -------------- --------------- ---------------
Total current assets 1,782,101 2,085,232 ( 1,397,622) ( 750,969) 1,718,742
Investment in associated companies 1,867,544 295,601 - ( 2,137,908) 25,237
Property and equipment, net 5,192,604 820,128 779,245 ( 20,869) 6,771,108
Other assets 367,501 809,715 112,893 731,168 2,021,277
Excess of investment cost over
book value 1,801,210 - - 1 1,801,211
------------- -------------- -------------- --------------- ---------------
Total assets Ps.11,010,960 Ps.4,010,676 (Ps. 505,484) (Ps.2,178,577) Ps.12,337,575
============= ============== ============== =============== ===============
</TABLE>
F-161
<PAGE> 285
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------------- --------------- ---------------- ---------------- ---------------
LIABILITIES
<S> <C> <C> <C> <C> <C>
Current liabilities:
Notes payable Ps. 600,629 Ps. - Ps. - Ps. - Ps. 600,629
Trade accounts payable 229,947 410,743 47,966 ( 47,177) 641,479
Related parties - - - 116,034 116,034
Taxes and other payable 282,885 527,256 170,084 ( 95,383) 884,842
Income tax 1,282 97 373 2 1,754
---------------- --------------- ---------------- ---------------- ---------------
Total current liabilities 1,114,743 938,096 218,423 ( 26,524) 2,244,738
Long-term debt 3,991,234 - - - 3,991,234
Trade accounts payable, long-term - - - - -
Commitments and contingencies - 2,310 60 - 2,370
---------------- --------------- ---------------- ---------------- ---------------
Total liabilities 5,105,977 940,406 218,483 ( 26,524) 6,238,342
---------------- --------------- ---------------- ---------------- ---------------
STOCKHOLDERS' EQUITY
Stockholders' equity:
Capital contributions 11,376,872 5,391,215 1,113,117 ( 6,485,370) 9,557,906
Earned capital ( 5,448,505) ( 2,332,590) ( 1,837,084) 4,346,301 ( 5,533,661)
Minority interest ( 23,384) 11,645 - ( 12,984) ( 24,723)
---------------- --------------- ---------------- ---------------- ---------------
Total stockholders' equity 5,904,983 3,070,270 ( 723,967) ( 2,152,053) 6,099,233
---------------- --------------- ---------------- ---------------- ---------------
Total liabilities and
stockholders' equity Ps.11,010,960 Ps.4,010,676 (Ps. 505,484) (Ps.2,178,577) Ps.12,337,575
================ =============== ================ ================ ===============
Total stockholders' equity
under Mexican GAAP Ps.5,904,983 Ps.3,070,270 (Ps. 723,967) (Ps.2,152,053) Ps.6,099,233
Minority interest - - - 24,723 24,723
Deferred income taxes 208,399 ( 29,516) 15,472 ( 27,773) 166,582
Interest rate collar ( 5,262) - - - ( 5,262)
Gain from exchange of non-mone-
tary assets - - ( 187,301) - ( 187,301)
Provision for consolidation
of facilities 17,354 - - - 17,354
---------------- --------------- ---------------- ---------------- ---------------
Total stockholders' equity
under U.S. GAAP Ps.6,125,474 Ps.3,040,754 (Ps. 964,824) (Ps.2,155,103) Ps.6,046,301
================ =============== ================ ================ ===============
</TABLE>
F-162
<PAGE> 286
CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenues Ps. 627,382 Ps .5,903,956 Ps. 582,655 (Ps.2,909,340) Ps. 4,204,653
Total cost of sales 22,578 2,332,458 391,312 ( 1,402,666) 1,343,682
------------- ------------- ------------- ------------- -------------
Gross profit 604,804 3,571,498 191,343 ( 1,506,674) 2,860,971
Operating expenses 114,170 2,688,292 258,218 ( 1,616,172) 1,444,508
Depreciation and amortization 686,912 678,958 63,500 ( 5,007) 1,424,363
------------- ------------- ------------- ------------- -------------
Operating profit (loss) ( 196,278) 204,248 ( 130,375) 114,505 ( 7,900)
------------- ------------- ------------- ------------- -------------
Other income - - - 23,054 23,054
------------- ------------- ------------- ------------- -------------
Integral financing result:
Interest expense, net ( 57,111) ( 133,133) 304,154 154,800 268,710
Foreign exchange loss, net ( 174,181) ( 13,995) 3,340 ( 1) ( 184,837)
Gain from monetary position ( 445,355) 96,556 ( 158,892) ( 153,442) ( 661,133)
------------- ------------- ------------- ------------- -------------
( 676,647) ( 50,572) 148,602 1,357 ( 577,260)
------------- ------------- ------------- ------------- -------------
Equity participation in net (gain)
loss of associated companies ( 3,215) - - 50,826 47,611
Provision for assets tax 83,280 27,994 ( 15) 21,386 132,645
Minority interest ( 17,192) 1,673 - ( 2,414) ( 17,933)
Loss from discontinued operations - - - 1,536 1,536
------------- ------------- ------------- ------------- -------------
Net profit for the year Ps. 417,496 Ps. 225,153 (Ps. 278,962) Ps. 18,760 Ps. 382,447
============= ============= ============== ============= =============
Net profit (loss) for the year under
Mexican GAAP Ps. 417,496 Ps. 225,153 (Ps 278,962) Ps. 18,760 Ps. 382,447
Deferred income taxes 22,317 ( 40,996) 27 ( 73) ( 18,726)
Pre-operating costs - - ( 69,028) - ( 69,028)
Interest rate collar 6,797 - - - 6,797
Effect of inflation on U.S. GAAP
adjustments 40,982 ( 60,508) 40 ( 109) ( 19,595)
------------- ------------- ------------- ------------- -------------
Net profit (loss) for the year under
US GAAP Ps. 487,592 Ps. 123,649 (Ps. 347,924) Ps. 18,578 Ps. 281,895
============= ============= ============= ============= ============
</TABLE>
F-163
<PAGE> 287
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net profit (loss) for the year Ps.487,592 Ps.123,649 (Ps.347,924) Ps. 18,578 Ps.281,895
Adjustments to reconcile net
loss to cash provided by
(used in) operating activities:
Depreciation and amortization 686,912 678,958 63,500 ( 5,007) 1,424,363
Equity in net loss (earnings) of
associated companies and net
gain on sale of equity investments ( 3,215) - - 50,826 47,611
Increase in allowance for
doubtful accounts - 91,204 1,182 381 92,767
Increase in allowance for obsolete
and slow-moving inventories ( 52) ( 4,651) ( 237) 155 ( 4,785)
Minority interest ( 17,192) 1,673 - ( 2,414) ( 17,933)
Deferred income taxes and emplo-
yee profit sharing 105,597 ( 13,002) 12 58,765 151,371
Gain on net monetary position and
foreign exchange losses ( 578,554) 22,053 ( 155,512) ( 114,361) ( 826,374)
Changes in operating assets and
liabilities:
Accounts receivable - ( 409,959) 2,096 ( 159,642) ( 567,505)
Inventories 3,171 11,963 16,819 ( 3,684) 28,269
Trade accounts payable and related
parties 857,402 ( 83,320) 97,947 563,755 1,435,784
Taxes and other payable ( 268,436) 321,758 17,029 ( 168,411) ( 98,060)
Income Tax ( 72,678) 39,717 ( 952) 74 ( 33,838)
Other - ( 503) 2 - ( 501)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities 1,200,547 779,540 ( 306,038) 239,015 1,913,064
------------- ------------- ------------- ------------- -------------
Investing activities:
Purchase of property and equipment,
net ( 1,023,154) ( 361,572) ( 82 ,831) ( 34,723) ( 1,502,280)
Investment in associated
companies, net cash acquired 256,609 ( 106,801) - ( 137,952) 11,856
Purchase of other assets ( 715,443) ( 86,478) ( 15,028) ( 73,110) ( 890,059)
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided
by investing activities ( 1,481,988) ( 554,851) ( 97,859) ( 245,785) ( 2,380,483)
------------- ------------- ------------- ------------- -------------
Financing activities:
Proceeds from notes payable and
long-term debt 764,033 - 344,181 ( 55,639) 1,052,575
Payments of notes payable and
long-term debt ( 693,761) ( 125,433) - 125,433 ( 693,761)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities 70,272 ( 125,433) 344,181 69,794 358,814
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash ( 211,169) 99,256 ( 59,716) 63,024 ( 108,605)
Cash at beginning of year 254,459 ( 28,515) 59,870 852 286,666
------------- ------------- ------------- ------------- -------------
Cash at the end of year Ps 43,290 Ps. 70,741 Ps. 154 Ps. 63,876 Ps. 178,061
============= ============= ============= ============= =============
</TABLE>
F-164
<PAGE> 288
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
<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. 254,459 (Ps. 28,515) Ps. 59,870 Ps. 852 Ps. 286,666
---------------- ---------------- ---------------- ---------------- ----------------
Accounts receivable:
Trade - 377,254 12,297 ( 49,059) 340,492
Related parties 1,226,934 703,682 - ( 1,917,824) 12,782
Recoverable taxes and other 327,960 131,118 435,945 ( 233,054) 661,970
---------------- --------------- ---------------- ---------------- ----------------
1,554,894 1,212,054 448,243 ( 2,199,947) 1,015,244
---------------- --------------- ---------------- ---------------- ----------------
Inventories 5,132 186,476 25,717 ( 9,513) 207,812
---------------- --------------- ---------------- ---------------- ----------------
Total current assets 1,814,486 1,370,016 533,829 ( 2,208,608) 1,509,722
Investment in associated companies 2,130,345 178,828 - ( 2,291,748) 17,425
Property and equipment, net 4,124,439 1,137,514 759,914 ( 59,939) 5,961,927
Other assets 305,610 691,243 97,865 655,984 1,750,702
Excess of investment cost over
book value 1,879,581 31,994 - - 1,911,574
---------------- --------------- ---------------- ---------------- ----------------
Total assets Ps. 10,254,460 Ps. 3,409,594 Ps. 1,391,608 (Ps. 3,904,312) Ps. 11,151,350
================ =============== ================ ================ ================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
Current liabilities:
Notes payable Ps. 833,799 Ps. - Ps. - Ps. - Ps. 833,799
Trade accounts payable 532,423 435,371 349,072 ( 336,117) 980,749
Related parties - - 1,322,425 ( 1,182,344) 140,082
Taxes and other payable 551,321 205,498 153,055 ( 59,302) 850,572
Income tax 51,643 1,376 1,298 - 54,317
---------------- --------------- ---------------- ---------------- ----------------
Total current liabilities 1,969,186 642,246 1,825,851 ( 1,577,763) 2,859,519
Long-term debt 4,168,322 - - - 4,168,322
Trade accounts payable, long-term - 2,370 - - 2,370
Commitments and contingencies - 2,813 58 - 2,871
---------------- --------------- ---------------- ---------------- ----------------
Total liabilities 6,137,508 647,428 1,825,909 (1,577,763) 7,033,082
---------------- --------------- ---------------- ---------------- ----------------
</TABLE>
F-165
<PAGE> 289
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Stockholders' equity:
Capital contributions Ps. 9,760,178 Ps.5,386,645 Ps.1,104,740 ( Ps.6,472,512) Ps.9,779,050
Earned capital ( 5,642,820) ( 2,624,479) ( 1,539,041) 4,144,647 ( 5,661,693)
Minority interest - - - 911 911
------------- ------------- ------------- ------------- -------------
Total stockholders' equity 4,117,358 2,762,166 (434,301) ( 2,326,954) 4,118,268
------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity Ps.10,254,866 3,409,594 1,391,608 ( 3,904,718) 11,151,350
============= ============= ============= ============= =============
Total stockholders' equity
under Mexican GAAP Ps. 4,117,358 2,762,166 ( 434,301) ( 2,326,954) 4,118,268
Minority interest - - - ( 911) ( 911)
Deferred income taxes 185,673 11,481 15,445 (27,291) 185,308
Interest collar ( 12,059) - - - ( 12,059)
Exchange gain - - ( 187,301) - ( 187,301)
Provision for consolidation
of facilities 17,354 - - - 17,354
------------- ------------- ------------- ------------- -------------
Total stockholders' equity
under U.S. GAAP Ps.4,308,326 Ps.2,773,646 (Ps.606,157) (Ps.2,355,156) Ps.4,120,659
============= ============= ============= ============== =============
</TABLE>
F-166
<PAGE> 290
CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total revenues Ps. 269,573 Ps. 4,506,128 Ps. 361,982 (Ps.1,965,286) Ps. 3,172,397
Total cost of sales 21,353 1,870,900 311,865 ( 1,117,748) 1,086,369
------------- ------------- ------------- ------------- -------------
Gross profit 248,220 2,635,228 50,117 ( 847,538) 2,086,028
Operating expenses 61,641 1,860,958 132,687 ( 844,745) 1,210,540
Depreciation and amortization 339,331 521,617 33,921 ( 2,019) 892,850
450 Project non cash writedown - - 1,102,401 - 1,102,401
------------- ------------- ------------- ------------- -------------
Operating profit (loss) ( 152,751) 252,654 ( 1,218,891) ( 774) ( 1,119,763)
------------- ------------- ------------- ------------- -------------
Other income - - 149,046 - 149,046
------------- ------------- ------------- ------------- -------------
Provision for equipment impairment - - - - -
------------- ------------- ------------- ------------- -------------
Integral financing result:
Interest expense, net ( 267,112) 182,372 262,242 73,371 250,873
Foreign exchange loss, net 838,734 96,338 4,402 - 939,474
Gain from monetary position ( 351,937) ( 105,730) ( 217,080) ( 87,834) ( 762,581)
------------- ------------- ------------- ------------- -------------
291,685 172,980 49,564 ( 14,463) 427,766
------------- ------------- ------------- ------------- -------------
</TABLE>
F-167
<PAGE> 291
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Equity participation in net (gain)
loss of associated companies (Ps.1,049,289) Ps. 28,909 Ps. - Ps.1,048,302 Ps. 27,922
Provision for assets tax 31,404 39,248 1,475 - 72,127
Minority interest - - - 6,342 6,342
Loss from discontinued operations 3,933 16,784 - - 20,716
------------- ------------- ------------- ------------- -------------
Net loss for the year (Ps.1,457,062) Ps. 52,551 (Ps. 1,120,885) Ps.1,068,333 (Ps. 1,457,062)
============= ============= ============= ============= =============
Net loss for the year under
Mexican GAAP (Ps.1,457,062) Ps. 52,551 (Ps. 1,120,885) Ps.1,068,333 (Ps. 1,457,062)
Deferred income taxes 57,405 ( 25,854) 17,540 7,500 56,591
Pre-operating costs - - 178,385 - 178,385
Interest rate collar ( 12,059) - - - ( 12,059)
Gain on exchange - - ( 187,301) - ( 187,301)
Effect of inflation on U.S. GAAP
adjustments ( 26,455) 11,913 ( 8,084) ( 3,454) ( 26,080)
------------- ------------- ------------- ------------- -------------
Net loss for the year under U.S.
GAAP (Ps.1,438,171) (Ps.38,611) (Ps.1,120,345) Ps.1,072,379 (Ps.1,447,526)
============= ============= ============= ============= =============
</TABLE>
F-168
<PAGE> 292
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss for the year (Ps.1,438,171) Ps.38,611 (Ps. 1,120,348) Ps. 1,072,381 (Ps.1,447,526)
Adjustments to reconcile net
loss to cash provided by
(used in) operating activities:
Depreciation and amortization 339,331 521,617 33,922 (2,020) 892,850
450 Project non cash write down - - 924,016 - 924,016
Equity in net loss (earnings) of
associated companies and net gain
on sale of equity investments 1,201,317 - - ( 1,229,239) ( 27,922)
Increase in allowance for
doubtful accounts 29,775 34,250 1,116 ( 34,228) 30,913
Minority interest - - - ( 6,342) ( 6,342)
Deferred income taxes and emplo-
yee profit sharing ( 26,001) 65,101 ( 16,065) ( 7,499) 15,536
Gain on net monetary position and
foreign exchange losses 513,252 ( 21,307) ( 204,599) ( 84,375) 202,971
Changes in operating assets and
liabilities:
Accounts receivable ( 433,160) 37,597 ( 301,005) 113,753 ( 582,815)
Inventories 13,696 111,273 24,391 ( 36,678) 112,681
Trade accounts payable and re-
lated parties 2,037,999 ( 74,133) 789,671 ( 1,439,536) 1,314,001
Taxes and other payable 453,443 ( 33,889) 205,577 ( 108,262) 516,868
Income Tax 11,543 ( 40,663) ( 1,529) 966 ( 29,682)
Other - ( 45) ( 144) - ( 189)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities 2,703,023 638,412 335,003 ( 1,716,078) 1,915,360
------------- ------------- ------------- ------------- -------------
</TABLE>
F-169
<PAGE> 293
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Investing activities:
Purchase of property and
equipment, net ( 2,272,742) ( 365,611) ( 1,023,518) 1,202,013 (2,459,857)
Proceeds from sale of investments ( 2,172,443) ( 164,863) 11,083 2,338,556 12,333
Purchase of other assets ( 44,694) ( 143,777) 735,765 ( 1,784,016) ( 1,236,722)
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided
by investing activities ( 4,489,878) ( 674,252) ( 276,671) ( 1,756,554) ( 3,684,246)
------------- ------------- ------------- ------------- -------------
Financing activities:
Proceeds from notes payable and
long-term debt 1,917,039 - - - 1,917,039
Payments of notes payable and
long-term debt ( 31,462) - - 5,382 ( 26,081)
Increase of capital stock 8,062 - - - 8,062
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities 1,893,638 - - 5,382 1,899,020
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash 106,783 ( 35,839) 58,332 857 130,134
Cash at beginning of year 147,676 7,326 1,531 - 156,532
------------- ------------- ------------- ------------- -------------
Cash at the end of year Ps. 254,459 (Ps. 28,514) Ps. 59,863 Ps.857 Ps. 286,666
============= ============= ============= ============= =============
</TABLE>
F-170
<PAGE> 294
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. 488,94 Ps. 3,544,184 Ps. 298,904 (Ps.1,853,443) Ps.2,478,591
Total cost of sales 28,150 1,637,438 265,323 ( 977,487) 953,424
------------- ------------- ------------- ------------- -------------
Gross profit 460,795 1,906,746 33,581 ( 875,956) 1,525,167
Operating expenses 80,128 1,722,676 230,426 ( 1,042,349) 990,880
Depreciation and amortization 369,940 382,472 22,846 - 775,258
------------- ------------- ------------- ------------- -------------
Operating profit (loss) 10,728 ( 198,402) ( 219,690) 166,393 ( 240,971)
------------- ------------- ------------- ------------- -------------
Provision for equipment impairment 756,483 479,824 - - 1,236,307
------------- ------------- ------------- ------------- -------------
Integral financing result:
Interest expense, net 18,998 39,994 181,410 90,257 330,659
Foreign exchange loss, net 55,617 8,234 714 - 64,565
Gain from monetary position ( 129,876) ( 44,885) ( 150,031) ( 65,183) ( 389,975)
------------- ------------- ------------- ------------- -------------
( 55,262) 3,344 32,094 25,073 5,249
------------- ------------- ------------- ------------- -------------
Equity participation in net (gain)
loss of associated companies (631,646) - - 841,722 210,076
Provision for assets tax 10,434 43,536 433 5,995 60,397
Minority interest - - - 276 276
------------- ------------- ------------- ------------- -------------
Net loss for the year (Ps. 1,332,574) (Ps. 725,108) (Ps. 252,217) Ps. 977,324 (Ps.1,332,572)
============= ============= ============= ============= =============
</TABLE>
F-171
<PAGE> 295
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net loss for the year under
Mexican GAAP (Ps. 1,332,574) (Ps. 725,108) (Ps. 252,217) Ps. 977,324 (Ps.1,332,572)
Deferred income taxes 289,337 122,906 81,067 - 493,311
Pre-operating costs - ( 85,533) - - ( 85,533)
Effect of inflation on U.S. GAAP
adjustments 11,834 5,026 3,312 - 20,171
------------- ------------- ------------- ------------- -------------
Net loss for the year under U.S.
GAAP (Ps. 1,031,403) (Ps. 682,709) (Ps. 167,837) Ps. 977,324 (Ps. 904,623)
============= ============= ============= ============= =============
</TABLE>
F-172
<PAGE> 296
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
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>
Operating activities:
Net loss for the year (Ps.1,031,403) (Ps. 682,709) (Ps. 167,835) Ps. 977,324 (Ps. 904,623)
Adjustments to reconcile net
loss to cash provided by
(used in) operating activities:
Depreciation and amortization 369,940 382,472 22,846 - 775,258
Equity in net loss (earnings)
of associated companies and net
gain on sale of equity investments 631,646 - - ( 841,722) ( 210,076)
Increase in allowance for
doubtful accounts - 49,509 ( 985) - 48,524
Increase in allowance for obsolete
and slow-moving inventories ( 72) 20,898 ( 173) - 20,653
Provision for equipment impairment 756,483 479,824 - - 1,236,307
Minority interest - - - ( 276) ( 276)
Deferred income taxes and emplo-
yee profit sharing ( 278,904) ( 79,369) ( 80,365) 5,994 ( 432,914)
Gain on net monetary position and
foreign exchange losses ( 80,978) ( 128,840) ( 157,076) ( 68,556) ( 435,450)
Changes in operating assets and
liabilities:
Accounts receivable ( 24,376) ( 157,229) 39,759 ( 3,612) ( 145,457)
Inventories ( 4,036) ( 227,262) ( 9,622) 15,969 ( 224,951)
Trade accounts payable and re-
lated parties ( 995,832) 961,039 704,266 26,558 696,031
Taxes and other payable ( 98,055) ( 175,142) 37,323 ( 86,293) ( 322,167)
Income Tax ( 323) 2,668 1,071 49 3,465
Other - 81 143 238 462
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities ( 755,911) 445,941 389,082 25,673 104,786
------------- ------------- ------------- ------------- -------------
Investing activities:
Purchase of property and
equipment, net ( 796,096) ( 4,677) 7,579 ( 109,860) ( 903,054)
Investment in associated
companies, net cash acquired ( 151,823) 20,837 ( 11,083) 471,540 329,472
Purchase of other assets 375,493 ( 81,842) ( 390,533) ( 692,765) ( 789,646)
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided
by investing activities ( 572,426) ( 65,681) ( 394,036) ( 331,085) ( 1,363,228)
------------- ------------- ------------- ------------- -------------
</TABLE>
F-173
<PAGE> 297
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Financing activities:
Proceeds from notes payable and
long-term debt 2,324,390 ( 308,624) ( 714) 1,177,653 3,192,705
Payments of notes payable and
long-term debt ( 1,074,668) ( 80,490) - ( 875,485) ( 2,030,643)
Increase in capital stock 112,797 - - ( 13) 112,783
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities 1,362,519 ( 389,114) ( 714) 302,155 1,274,845
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash 34,182 ( 8,855) ( 5,668) ( 3,257) 16,403
Cash at beginning of year 113,493 16,180 7,195 3,257 140,129
------------- ------------- ------------- ------------- -------------
Cash at the end of year Ps. 147,675 Ps. 7,325 Ps. 1,527 Ps. - Ps. 156,532
============= ============= ============= ============= =============
</TABLE>
22. Subsequent events
As part of the recapitalization and reorganization plan mentioned in Note 1,
on March 1, 2000, New Iusacell changed its name from Nuevo Grupo
Iusacell, S.A. de C.V. to Grupo Iusacell, S.A. de C.V., and the Company
changed its name from Grupo Iusacell, S.A. de C.V. to Grupo Iusacell
Celular, S.A. de C.V.
- - - - - - - - - - - - - - - - - - - - - -
F-174
<PAGE> 298
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors of
Nuevo Grupo Iusacell, S. A. de C. V.:
We have audited the consolidated balance sheets of Nuevo Grupo Iusacell, S.
A. de C. V. (the "Company") and subsidiaries (successor to Grupo Iusacell, S.A.
de C.V. and subsidiaries) as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in stockholders' equity, and changes
in financial position for each of the three years ended December 31, 1999 and
have issued our report thereon dated February 29, 2000, except with respect
to certain matters discussed in Notes 20 and 21 for which the date is March 16,
2000, included elsewhere in this Annual Report on Form 20-F. Our audits also
included the financial statements schedule listed in Item 19 of this Annual
Report on Form 20-F. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
schedule based on our audits.
In our opinion, the financial statements schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
PricewaterhouseCoopers
Juan Manuel Ferron Solis
Public Accountant
Mexico City, D. F., Mexico.
March 16, 2000
S-I
<PAGE> 299
NUEVO GRUPO IUSACELL
Schedule II - Valuation and Qualifying Accounts and Reserves
December 1999, 1998 and 1997
(Thousands of Mexican pesos with purchasing power as of December 31, 1999)
<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>
1997 DECEMBER
Allowance for obsolete and
slow-moving inventories 49,650 20,652 0 31,204 39,099
Allowance for doubtful accounts 142,192 48,524 0 86,723 103,993
Allowance for obsolete fixed assets 69,152 0 0 69,152 0
Restructure reserve 133,264 0 0 133,264 0
1998 DECEMBER
Allowance for obsolete
and slow-moving inventories 39,099 0 0 26,472 12,627
Allowance for doubtful accounts 103,993 30,913 0 59,508 75,400
1999 DECEMBER
Allowance for obsolete
and slow-moving inventories 12,627 11,510 0 16,295 7,842
Allowance for doubtful accounts 75,400 92,767 0 18,889 149,278
</TABLE>
S-II
