<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 2000
REGISTRATION NO. 333-95547
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM F-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
NUEVO GRUPO IUSACELL, S.A. DE C.V.
(Exact Name of Registrant as Specified in Its Charter)
NEW IUSACELL GROUP, INC.
(Translation of Registrant's Name Into English)
<TABLE>
<S> <C> <C>
MEXICO 481 NOT APPLICABLE
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
PROLONGACION PASEO DE LA REFORMA 1236
COLONIA SANTA FE
DELEGACION CUAJIMALPA
05348 MEXICO, D.F., MEXICO
(525)109-4400
(Address and Telephone Number of Registrant's Principal Executive Offices)
------------------------
CT CORPORATION SYSTEM
111 EIGHTH AVENUE
NEW YORK, NEW YORK 10011
(212) 894-8940
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service of Process)
------------------------
With copies to:
SARA P. HANKS, ESQ.
CLIFFORD CHANCE ROGERS & WELLS LLP
200 PARK AVENUE
NEW YORK, NEW YORK 10166
(212) 878-8000
------------------------
Approximate date of commencement of proposed exchange and sale of the
securities to the public: As soon as practicable after the Registration
Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
------------------------
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<PAGE> 2
PROSPECTUS
[IUSACELL DIGITAL LOGO]
NUEVO GRUPO IUSACELL, S.A. DE C.V.
Offer to Exchange American Depositary Shares of New Iusacell for American
Depositary Shares of Old Iusacell
------------------
We offer to exchange our series V ADSs for series D ADSs and series L ADSs of
Grupo Iusacell, S.A. de C.V., which we refer to as Old Iusacell. If you tender
your Old Iusacell series D or L ADSs in this exchange offer, you will receive
one of our series V ADS for each Old Iusacell series D or L ADS that you tender.
Each series V ADS represents 10 series V shares. Our series V ADSs are listed on
the New York Stock Exchange under the symbol CEL and our series A and V shares
are listed on the Mexican Stock Exchange.
Old Iusacell intends to delist its series L ADSs from the New York Stock
Exchange upon the expiration of this exchange offer. Old Iusacell also plans to
delist its series A and B shares from the Mexican Stock Exchange as promptly as
practicable before the expiration of this exchange offer and its series D and L
shares from the Mexican Stock Exchange shortly after the expiration of this
exchange offer. In addition, the deposit agreements governing the series D and L
ADSs will be terminated at the expiration of this exchange offer.
If you do not tender your Old Iusacell series D or L ADSs in this exchange
offer, the series D or L shares underlying your ADSs will be converted into
series V shares and will be sold in Mexico. You will receive the proceeds of
that sale, less fees, taxes and expenses. Your Old Iusacell ADSs will have no
value.
------------------
INVESTING IN THESE SECURITIES INVOLVES SOME RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
The exchange offer will expire at 6:00 p.m., New York City time (5:00 p.m.,
Mexico City time), on February 29, 2000, unless extended.
January 31, 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Forward-Looking Statements.................................. 12
The Exchange Offer.......................................... 13
Use of Proceeds............................................. 19
Market Information.......................................... 20
Dividends................................................... 25
Capitalization.............................................. 26
Exchange Rates.............................................. 27
Selected Consolidated Financial and Operating Information... 28
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 36
Business.................................................... 71
Where You Can Find More Information......................... 106
Enforceability of Civil Liabilities......................... 106
Management.................................................. 107
Principal Shareholders...................................... 115
Certain Transactions........................................ 118
Description of New Iusacell Capital Stock................... 121
Description of New Iusacell ADSs............................ 127
Comparison of Shareholder Rights............................ 133
Taxation.................................................... 134
Legal Matters............................................... 139
Independent Accountants..................................... 139
Expert...................................................... 139
Index to Financial Statements............................... F-1
Glossary of Telecommunications Terms........................ A-1
</TABLE>
WE ARE NOT MAKING THE EXCHANGE OFFER TO, AND WILL NOT ACCEPT SURRENDERS OF
OLD IUSACELL ADSS FROM, HOLDERS IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER,
OR THE ACCEPTANCE OF THAT OFFER, WOULD NOT COMPLY WITH LOCAL SECURITIES LAWS.
We have not authorized any person to give you any information or to make
any representation that is not contained in this prospectus in connection with
the exchange offer. If such information or representation is given or made to
you, you must not rely upon it as having been authorized by New Iusacell.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that you
should consider before investing in our securities. You should read the entire
prospectus carefully.
In this prospectus, where we refer to New Iusacell, we mean Nuevo Grupo
Iusacell, S.A. de C.V.; where we refer to Old Iusacell, we mean Grupo Iusacell,
S.A. de C.V., a subsidiary of New Iusacell; and, where we refer to Iusacell, we
mean New Iusacell, Old Iusacell and their subsidiaries. We also sometimes use
general or Mexican telecommunications industry terms, which are explained in
Annex A -- Glossary of Telecommunications Terms.
IUSACELL
We are the second largest wireless telecommunications provider in Mexico
with more than one million cellular customers. We own and operate concessions
for a range of frequencies in the 800 MHz band used to provide cellular wireless
services in four contiguous regions in central Mexico, including Mexico City,
one of the world's most populous cities.
- Our cellular concessions cover regions representing approximately 67
million inhabitants, or 69% of Mexico's total population.
- Our cellular network makes services available in areas where
approximately 53 million people live, representing 79% of the inhabitants
of the regions where we provide cellular wireless services and 55% of
Mexico's total population.
Since August 1999, we have been offering digital coverage and services in all
areas where we provide cellular wireless services.
For the nine months ended September 30, 1999, our revenues and EBITDA,
which we define as operating profit or loss plus depreciation and amortization,
were Ps.$2,908.5 million (U.S.$311.0 million) and Ps.1,003.3 million (U.S.$107.3
million), respectively. For the twelve month period ended September 30, 1999,
our revenues and EBITDA were Ps.3,731.8 million (U.S.$399.0 million) and
Ps.1,234.1 million (U.S.$132.0 million), respectively.
Since February 1997, we have been under the management control of
subsidiaries of Bell Atlantic Corporation. Bell Atlantic has invested
approximately U.S.$1.2 billion since 1993 for its 40.4% economic and voting
interest in our equity. Today, Bell Atlantic personnel seconded to Iusacell and
Bell Atlantic consultants are integrally involved in defining and implementing
our long-term strategy and in managing day-to-day operations. Since Bell
Atlantic took control of our management in February 1997, our cellular
subscriber base has grown from approximately 245,000 to 1,132,205 subscribers at
September 30, 1999.
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.
------------------
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 internet website address is
http://www.iusacell.com.mx. Information contained in this website is not part of
this offering memorandum.
1
<PAGE> 5
REORGANIZATION OF IUSACELL
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 series D and L shares of Old Iusacell for
series V 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,
- improved Iusacell's financial condition,
- provided funds for our capital expenditure program,
- provided funds to acquire two PCS concessions in northern Mexico, and
- created additional structural flexibility to obtain debt financing for
Iusacell's capital expenditure program.
At the conclusion of the August 1999 reorganization, approximately 42,703
series D shares and 6,830,705 series L shares of Old Iusacell had not been
exchanged for series V shares of New Iusacell. In this prospectus, we are
offering to exchange series V ADSs for the remaining publicly-held Old Iusacell
series D and L ADSs. See "-- The Exchange Offer" and "The Exchange Offer."
2
<PAGE> 6
THE EXCHANGE OFFER
Reason........................ Mexican regulations requires us to offer to
purchase any Old Iusacell series D and L shares
that were not tendered in the exchange offer we
completed on August 4, 1999.
Terms and Conditions.......... We offer to exchange New Iusacell series V ADSs
for Old Iusacell series D and series L ADSs on
a one-for-one basis. We may modify the terms of
the exchange offer. See "The Exchange Offer --
Conditions" and "Principal Shareholders."
Expiration Date............... 6:00 p.m., New York City time (5:00 p.m.,
Mexico City time), on February 29, 2000, unless
extended. See "The Exchange Offer -- Terms of
the Offer."
How to Tender................. You may tender your Old Iusacell ADSs in the
exchange offer only by instructing your broker,
dealer, trust company, bank, custodian or other
nominee holding such securities to tender them
in the manner described below. We will not
accept tenders of less than all of your Old
Iusacell ADSs. See "The Exchange Offer -- How
to Tender."
Withdrawal Rights............. You may withdraw the tender of your Old
Iusacell ADSs at any time prior to the
expiration date. See "The Exchange Offer --
Withdrawal Rights."
Adverse Consequences of
Failure to Tender............. If you do not tender your Old Iusacell ADSs in
the exchange offer, you will be deemed to have
instructed the Depositary to exchange the Old
Iusacell shares underlying your ADSs for New
Iusacell series V shares. The Depositary will
then sell the series V shares and you will be
entitled to receive the proceeds from the sale,
less fees, taxes and expenses. See "The
Exchange Offer -- Adverse Consequences of
Failure to Tender."
Tax Considerations............ In general, for U.S. federal income tax
purposes, U.S. holders of Old Iusacell ADSs
that exchange their Old Iusacell ADSs for New
Iusacell ADSs in this exchange offer will not
recognize gain or loss. However, a U.S. holder
that owns more than 5% of the voting power and
capital stock of Old Iusacell and that
exchanges Old Iusacell ADSs for New Iusacell
ADSs will recognize gain or loss upon the
receipt of New Iusacell ADSs in exchange for
Old Iusacell ADSs, unless it enters into a
five-year gain recognition agreement with the
U.S. Internal Revenue Service. In general, U.S.
holders of Old Iusacell ADSs that do not tender
their Old Iusacell ADS in this exchange offer
will recognize gain or loss on the disposition
of the Old Iusacell shares underlying those
ADSs. See "Taxation -- The Exchange
Offer -- U.S. Federal Income Tax
Considerations."
In general, for Mexican income tax purposes,
the exchange of series D and L shares of Old
Iusacell (and Old Iusacell ADSs representing
such shares) for series V shares of New
Iusacell (or New Iusacell ADSs representing
such shares) pursuant to the exchange offer
will be exempt from Mexican taxes if such
transaction is carried out by holders who are
non-residents of
3
<PAGE> 7
Mexico. See "Taxation -- The Exchange
Offer -- Mexican Tax Considerations."
New Iusacell ADSs and
Shares........................ Each New Iusacell series V ADS represents ten
series V shares of common stock, without stated
par value, of New Iusacell.
Exchange Agent................ The Bank of New York.
New Iusacell ADS Depositary... The Bank of New York.
Questions..................... If you have any questions about the exchange
offer, including the procedure for tendering
Old Iusacell ADSs and shares, you should
contact the General Counsel of Iusacell at
+525-109-4400.
4
<PAGE> 8
EFFECT OF THE EXCHANGE OFFER ON YOUR HOLDINGS
The following examples illustrate the material terms of the offer that we
are making. The table shows what you will get if you participate in the exchange
offer.
<TABLE>
<CAPTION>
YOUR PERCENTAGE YOUR PERCENTAGE
OF OLD IUSACELL OF NEW IUSACELL
VOTING POWER AND VOTING AND EQUITY
EQUITY OWNERSHIP IS IN THE OWNERSHIP WILL BE
---------------------- EXCHANGE YOU ----------------------
IF YOU OWN VOTING EQUITY WILL RECEIVE VOTING EQUITY
---------- -------- -------- ------------------- -------- --------
<S> <C> <C> <C> <C> <C>
10,000 Old Iusacell 10,000 New Iusacell
series D ADSs.............. 0.008861% 0.007813% series V ADSs 0.007565% 0.007565%
10,000 Old Iusacell 10,000 New Iusacell
series L ADSs.............. 0% 0.007813% series V ADSs 0.007565% 0.007565%
</TABLE>
SHAREHOLDERS OF OLD IUSACELL
BEFORE AND AFTER THE EXCHANGE OFFER
New Iusacell owns approximately 99.5% of Old Iusacell. Assuming full
participation in the exchange offer, New Iusacell will own 100% of Old Iusacell.
SHAREHOLDERS OF NEW IUSACELL
BEFORE THE EXCHANGE OFFER
This is a summary of our shareholders before the exchange offer.
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------------------------------
SHAREHOLDERS A SHARES % V SHARES % TOTAL %
------------ ----------- ----- ----------- ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Bell Atlantic................... 504,331,308 68.4 27,178,520 4.7 531,509,828 40.4
Peralta Group................... 232,499,437 31.6 298,984,939 51.7 531,484,376 40.4
Public investors................ -- -- 252,037,408 43.6 252,037,408 19.2
Total................. 736,830,745 100.0 578,200,867 100.0 1,315,031,612 100.0
</TABLE>
SHAREHOLDERS OF NEW IUSACELL
AFTER THE EXCHANGE OFFER
This is a summary of our shareholders after the exchange offer, assuming
full participation in the exchange offer.
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------------------------------
SHAREHOLDERS A SHARES % V SHARES % TOTAL %
------------ ----------- ----- ----------- ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Bell Atlantic................... 504,331,308 68.4 27,178,520 4.6 531,509,828 40.2
Peralta Group................... 232,499,437 31.6 298,993,182 51.1 531,492,619 40.2
Public investors................ -- -- 258,902,573 44.3 258,902,573 19.6
Total................. 736,830,745 100.0 585,074,275 100.0 1,321,905,020 100.0
</TABLE>
5
<PAGE> 9
RISK FACTORS
You should carefully consider the following risk factors, as well as other
information presented in this prospectus regarding the exchange offer. To the
extent information relates to the Mexican government or Mexican macroeconomic
data, we have extracted that information from official publications of the
Mexican government and have not independently verified it.
RISK FACTORS RELATING TO OLD IUSACELL AND NEW IUSACELL ADSS
IF YOU DO NOT EXCHANGE YOUR OLD IUSACELL ADSS, YOU WILL NO LONGER HAVE ANY
INTEREST IN IUSACELL
When the exchange offer is consummated, The Bank of New York, as
depositary, will exchange all of the series D and L shares underlying the Old
Iusacell ADSs. If you have not exchanged your Old Iusacell ADSs for New Iusacell
ADSs, The Bank of New York will sell the New Iusacell series V shares that it
received for the Old Iusacell series D or L shares underlying your Old Iusacell
ADSs. You will be entitled to receive the proceeds of the sale of these series V
shares, less fees, taxes and expenses.
In addition, on the expiration date of the exchange offer, the existing ADR
programs for the Old Iusacell series D and L shares will be terminated and its
series L ADSs will be de-listed from the New York Stock Exchange and its series
D and L shares will be de-listed from the Mexican Stock Exchange and the Mexican
Registry of Securities and Intermediaries. These actions will effectively
eliminate the trading market for the remaining Old Iusacell ADSs and shares. See
"The Exchange Offer -- Certain Effects of the Exchange Offer."
IF YOU HOLD SERIES V ADSS, YOUR PROPORTIONAL INTEREST IN NEW IUSACELL COULD BE
REDUCED IN THE FUTURE
Mexican law requires us to offer holders of capital stock of a particular
series of shares the preemptive right to subscribe for a sufficient number of
shares to avoid a proportional reduction of their holding whenever we issue new
shares.
United States holders of series V ADSs will not be able to exercise this
preemptive right for the shares underlying their series V ADSs unless a
registration statement under the Securities Act is effective with respect to
those rights or an exemption from those registration requirements is available.
Some exemptions under the Securities Act may not be available to us due to the
large number of shareholders that we have in the United States.
Whenever we are required to make a preemptive rights offering, we will
evaluate the costs and potential liabilities associated with any such
registration statement and any other factors we consider appropriate. However,
consistent with the past practices of Old Iusacell and similarly situated
companies, we may choose not to file any such registration statement. If we do
not file a registration statement and no exemption from registration under the
Securities Act is available, then holders of series V ADS, such as yourself, may
be unable to exercise their preemptive rights. Those holders' equity interest in
New Iusacell will be reduced proportionately. See "Description of ADSs."
RISK FACTORS RELATING TO IUSACELL
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 Bell
Atlantic and the Peralta Group to meet such funding needs.
As of September 30, 1999, our total consolidated indebtedness, including
trade notes payable, was Ps.4,413.4 million (U.S.$471.9 million), or
approximately 45.0% of our total capitalization. After giving effect to the
offer described in this offering memorandum, our December 1999 offering of
14 1/4% senior notes and other pro forma adjustments, our total consolidated
indebtedness, including trade notes payable,
6
<PAGE> 10
at September 30, 1999 would have been Ps.7,795.2 million (U.S.$833.5 million).
See "Capitalization." Although we had net income of Ps.619.3 million (U.S.$66.2
million) for the nine months ended September 30, 1999, we experienced net losses
for each of the five years up to and including the period ended December 31,
1998. Our positive net income in the first nine months of 1999 was driven
primarily by the benefits of foreign exchange gains attributable to the
appreciation of the Peso against the U.S. dollar during the first nine months of
1999, and monetary gains resulting from the effects of inflation on our net
monetary liability position during each of the first three quarters of 1999.
For the year ended December 31, 1998, our earnings were insufficient to
cover our fixed charges by Ps.2,224.0 million (U.S.$237.8 million). We had no
fixed charge coverage deficiency for the nine month period ended September 30,
1999. 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 due to various financings 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. See
"-- 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" and
"Capitalization."
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, we are exposed to Peso devaluation risk. 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.3.4662 per U.S.$1.00 on December 19, 1994 to Ps.5.0000 per U.S.$1.00 on
December 31, 1994 and Ps.7.7400 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.9.9010 per U.S.$1.00 on
December 31, 1998.
We do not currently have in place hedging arrangements with respect to this
risk, although we expect to use forward-rate contracts to hedge up to 50% of the
principal and interest payments of our U.S. dollar denominated debt coming due
over the next 18 months, or approximately U.S.$83.0 million. 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 the notes. In
addition, any further devaluation of the Peso may negatively affect the value of
a Mexican company's securities, such as ours. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Devaluation and
Inflation" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
WE FACE INCREASING COMPETITION WHICH MAY REDUCE OUR OPERATING MARGINS
We face significant competition in our core cellular services business from
Telcel in each region in which we operate. As a wholly owned subsidiary of
Telmex, Telcel has significantly greater internal financial and other resources
than those available to us, nationwide cellular and PCS concessions, a
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 sometimes has forced price rollbacks
and reductions.
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<PAGE> 11
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 than those available to us, which may limit our ability to
compete effectively. See "-- 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" and "Business -- Competition."
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 1999,
2000 and 2001, not including capital expenditures to build out our PCS network
in northern Mexico, to total approximately U.S.$475.0 million, of which
approximately U.S.$132.8 million has already been invested during the first nine
months of 1999 and an approximately U.S.$44.2 million is expected to be invested
during the fourth quarter of 1999. For an explanation of the items included in
capital expenditures, see "Notes to the Selected Consolidated Financial and
Operating Information -- Footnote (6)." We expect capital expenditures to build
out our PCS network in northern Mexico will not exceed U.S.$55.0 million through
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 1999 and/or 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 Bell Atlantic and/or the Peralta Group and also including vendor
financing, on acceptable terms or at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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
8
<PAGE> 12
capital expenditures and/or require write-downs of obsolete technology. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Non-recurring Charges -- Project 450 Non-Cash Writedown" and
"Business -- Network and Equipment -- Cellular Services."
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. We will have to devote substantial management resources to take
advantage of new opportunities and business ventures. In so doing, we 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,
we could experience a material adverse effect on our existing business,
financial condition and results of operations. See "Business -- Business
Strategy."
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.69.1 million (U.S.$7.4 million) and Ps.19.6 million
(U.S.$2.1 million) in 1998 and in the nine months ended September 30, 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.34.3 million (U.S.$3.7 million). For the nine months ended
September 30, 1999, we incurred approximately Ps.1.1 million (U.S.$0.1 million)
in fraud detection and prevention. Because we implemented extensive fraud
detection and prevention technology in 1998, we expect to spend only
approximately Ps.3.6 million (U.S.$0.4 million) and Ps.7.5 million (U.S.$0.8
million) in 1999 and 2000, respectively 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.
YEAR 2000 ISSUES MAY CONTINUE TO DISRUPT OUR BUSINESS
In October 1999, we completed an enterprise-wide program to identify and
address the impact of the Year 2000 problem on our operations. We, together with
our independent consultants, have completed the inventory, assessment and
initial planning phases of our Year 2000 compliance program. Remediation,
replacement and retirement activities were initiated in July 1998. All required
modifications or replacements of mission critical systems and internal network
elements were implemented by the end of the third quarter of 1999. All other
required modifications or replacements were completed 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.
Year 2000 failures may still arise later this year. The failure to correct
a material Year 2000 problem could cause an interruption or failure of normal
business billing and service functions or operations, which could have a
material adverse effect on our reputation, results of operations, liquidity or
financial condition. We could also be subject to third party claims and
sanctions by Mexican governmental authorities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000
Compliance."
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OUR STRATEGY TO EXPAND OUR WIRELESS FOOTPRINT IN MEXICO LEADS US TO CONSIDER
SIGNIFICANT ACQUISITIONS WITHIN MEXICO FROM TIME TO TIME THAT MAY ADVERSELY
AFFECT OUR BUSINESS, RESULTS AND FINANCIAL CONDITION.
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 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 Northern Region Properties
and currently there are discussions regarding a separate transaction in which we
would acquire 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 are ongoing. 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 the notes, including,
without limitation, that they could involve the incurrence of significant
amounts of additional debt or other liabilities; the acquisition of substantial
amounts of pre-existing debt that would be structurally senior to the debt under
the notes; 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, including debt under the notes.
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.
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, encompasses Mr. Carlos Peralta and a group of individuals and
companies related to or controlled by him.
WE DEPEND ON BELL ATLANTIC PERSONNEL; IF BELL ATLANTIC RECALLED THEM, WE WOULD
HAVE INSUFFICIENT QUALIFIED EMPLOYEES
Our Chief Executive Officer, Executive Vice President-Finance, Chief
Technology Officer and General Counsel 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, marketing and customer
care operations. So long as Bell Atlantic controls Iusacell, these or other
seconded employees and consultants are expected to continue to provide services
to us. If these employees were not made available to us by Bell Atlantic, our
results of operations and financial condition could be materially adversely
affected. See "Management" and "Certain Transactions."
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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 New Iusacell. In 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.22.0
million (U.S.$2.4 million) penalty for purported incorrect deductions of certain
interest expense for income tax purposes, which we have already paid.
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. See "Business -- Other
Services -- Local Telephony." 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 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 have a material adverse effect on the value of Iusacell's
concessions and on our financial condition and results of operations. See
"Business -- Government Regulation."
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 New
Iusacell, must prepare their financial statements in accordance with Mexican
generally accepted accounting principles, referred to as Mexican GAAP. Mexican
GAAP differs in significant respects from United States generally accepted
accounting principles, referred to as U.S. GAAP, including the treatment of
minority interest, deferred income taxes, employee profit sharing,
capitalization of pre-operating costs, the revaluation of fixed assets, 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 20 to the Audited Consolidated Financial
Statements.
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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 within 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. We cannot
predict the results of these elections nor the impact they might have on the
Mexican economy, particularly on the current governmental commitment to the
growth and deregulation of the telecommunications industry.
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.
Crises such as these could have a material adverse effect on our financial
condition and results of operations and on the market value of our securities.
WE MAY NOT BE ABLE TO MAKE PAYMENTS IN U.S. DOLLARS WHICH COULD EXPOSE YOU TO
CURRENCY RISK AND INCONVENIENCE
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,
including dividend payments, and could also have a material adverse effect on
our business, financial condition and results of operations. We cannot predict
the impact of any such measures on the Mexican economy. See "Exchange Rates."
FORWARD-LOOKING STATEMENTS
This prospectus contains projections of some financial data and discloses
plans and objectives for the future. This forward-looking information, as
defined in the United States Private Securities Litigation Reform Act of 1995,
reflects our views regarding future events and financial performance. Actual
events and results could differ materially from those projected in the
forward-looking statements as a result of the risk factors described above, as
well as factors discussed below.
The words "believe," "expect," "anticipate," "intend" and "plan" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which in any
event speak only as of their dates. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The risk factors described above, and
many other factors, could cause actual events and results to differ materially
from historical results or those anticipated. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, our actual results may vary materially
from those expected, estimated or projected. We do not undertake to update our
forward-looking statements or risk factors to reflect future events or
circumstances.
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THE EXCHANGE OFFER
BACKGROUND
In August 1999, Iusacell completed a corporate reorganization which
included an exchange offer by New Iusacell of its series V ADSs and shares for
Old Iusacell series D and L ADSs and shares on a one-for-one basis. Following
that exchange offer, approximately 42,703 series D shares and 6,830,705 series L
shares, in the form of shares or ADSs, had not been exchanged for series V
shares or ADSs. See "Prospectus Summary -- Reorganization of Iusacell." The
exchange offer described in this prospectus is being made in anticipation of a
Mexican regulatory requirement which obligates New Iusacell to offer to purchase
the remaining publicly-held series D and L shares.
TERMS OF THE OFFER
New Iusacell offers, upon the terms and conditions described in this
prospectus, to exchange ADSs representing its series V shares, which we refer to
as New Iusacell ADSs, for any and all outstanding ADSs representing Old
Iusacell's series D or L shares, which we refer to as Old Iusacell ADSs, on a
one-for-one basis.
ADS Holders that participate in the exchange offer must exchange all, but
not less than all, of their Old Iusacell ADSs and shares.
THE EXCHANGE OFFER WILL EXPIRE AT 6:00 P.M., NEW YORK CITY TIME (5:00 P.M.,
MEXICO CITY TIME), ON FEBRUARY 29, 2000, UNLESS EXTENDED. The term "expiration
date" means 6:00 p.m., New York City time (5:00 p.m., Mexico City time), on
February 29, 2000, unless New Iusacell, in its sole discretion, notifies the
exchange agent that the period of the exchange offer has been extended, in which
case the term "expiration date" means the latest time and date on which the
exchange offer as so extended will expire. See "-- Expiration and Extension."
In accordance with the terms and conditions of the exchange offer, New
Iusacell will accept validly tendered Old Iusacell ADSs until the expiration
date.
In addition, New Iusacell reserves the right, in its discretion, to amend
the exchange offer. If any amendment constitutes a material change in the
information previously disclosed to the holders of Old Iusacell ADSs, New
Iusacell will, in accordance with the applicable rules of the Commission,
disclose such change in a manner reasonably calculated to inform such holders.
If it is necessary to permit adequate dissemination of information regarding
such material change, New Iusacell will extend the expiration date.
IMPORTANT EFFECTS OF THE EXCHANGE OFFER
Upon completion of the exchange offer, Old Iusacell expects to de-list its
series L ADSs from the New York Stock Exchange and its series A, B, D and L
shares from the Mexican Stock Exchange and the Mexican Stock Registry of
Securities and Intermediaries. Old Iusacell's series D ADSs were de-listed from
the New York Stock Exchange in December 1999. This will effectively eliminate
the trading market for the remaining Old Iusacell ADSs and shares.
EXPIRATION AND EXTENSION
The exchange offer will expire at 6:00 p.m., New York City time (5:00 p.m.,
Mexico City time), on February 29, 2000, unless extended by New Iusacell. During
any extension of the exchange offer, all Old
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Iusacell ADSs and shares previously tendered will remain subject to the exchange
offer and to the withdrawal rights specified in this section. The exchange offer
may be extended by notice from New Iusacell to The Bank of New York, in its
capacity as exchange agent, at any time or from time to time, on or prior to
9:00 a.m. (New York City time) on the business day following the date then fixed
for the expiration of the exchange offer. Public announcement of any extension
of the exchange offer will be timely made by New Iusacell by making a release to
the Dow Jones News Service, and, if required by law or regulation, by other
means.
HOW TO TENDER
A holder of Old Iusacell ADSs that chooses to participate in the exchange
offer must exchange all, but not less than all, of its Old Iusacell ADSs. To
tender Old Iusacell ADSs in the exchange offer, a holder must instruct a broker,
dealer, bank, trust company, custodian or other nominee holding such Old
Iusacell ADSs on behalf of such holder, whom we refer to as the Holder's Agent,
to tender such Old Iusacell ADSs prior to the expiration date in the manner
described below and upon the terms and conditions described in this prospectus.
The Letter to Clients provided with this prospectus includes a form for a holder
of Old Iusacell ADSs to use to instruct the Holder's Agent to tender.
If a holder holds Old Iusacell ADSs in certificated form, then such holder
will be able to tender Old Iusacell ADSs only if it arranges for a Holder's
Agent to hold such Old Iusacell ADSs on its behalf in book-entry form. Old
Iusacell ADSs may be held in book-entry form through a DTC participant subject
to certain restrictions described in the Old Iusacell ADS deposit agreements.
You should contact the exchange agent or New Iusacell's General Counsel at the
telephone or facsimile numbers which appear on the back cover of this prospectus
if you have questions in this regard.
EXCHANGE OFFER PROCEDURES
THE ROLE OF THE HOLDER'S AGENT
A Holder's Agent who has been instructed by a holder to tender its Old
Iusacell series D or L ADSs in the exchange offer must determine whether they
are held in book-entry form (generally referenced by CUSIP No. 40049W207 and
40049W306, respectively) or in certificated form, registered in the name of the
holder.
In the case of Old Iusacell D or L ADSs held in book-entry form, the
Holder's Agent should arrange for instructions to be transmitted to the DTC
participant holding such Old Iusacell ADSs through its DTC account to tender
such Old Iusacell ADSs in the exchange offer to the exchange agent prior to the
expiration date. In the event one or more brokers, dealers, banks, trust
companies, custodians or other nominees acts as an intermediary between such
Holder's Agent and such DTC participant, instructions to arrange for such Old
Iusacell ADSs to be tendered should be delivered to such intermediary to be
forwarded to such DTC participant. New Iusacell ADSs will be delivered to the
account of the Holder's Agent in book-entry form through the same DTC
participant that delivered the tendered Old Iusacell ADSs.
In the case of Old Iusacell D or L ADSs held in certificated form, the
Holder's Agent must arrange with the Old Iusacell ADS depositary to hold such
New Iusacell ADSs on its behalf in book-entry form. The exchange will be made in
book-entry form. Upon completion of the exchange, the Holder's Agent may request
to the New Iusacell ADS depositary that ADRs representing such New Iusacell ADSs
be issued in certificated form or send the completed letter of transmittal,
together with the certificate, to the exchange agent.
Each Holder's Agent that intends to tender Old Iusacell ADSs should contact
the DTC participant whom it will instruct to deliver the series D or L ADSs and
the accompanying tender documentation to the exchange agent to assure that all
necessary arrangements are made with such participant in a timely manner that
permits such participant to make delivery on or before the expiration date. Each
holder and Holder's Agent will be responsible for the risks in connection with
the procedures of such participant, and New Iusacell will have no liabilities or
obligations in connection with such risks.
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Holder's Agents should contact New Iusacell's General Counsel or the
exchange agent at the telephone or facsimile numbers which appear on the back
cover of this prospectus with any questions in regards to the above.
THE ROLE OF DTC
A DTC participant must tender Old Iusacell ADSs held by it in book-entry
form by both:
- delivering the Old Iusacell ADSs by means of book-entry transfer into the
DTC account which is maintained for such purpose by or on behalf of the
exchange agent and which will be established by the exchange agent
promptly after the commencement of the exchange offer, and
- transmitting a message to, and receiving confirmation from, the exchange
agent's DTC account, stating that such participant has received and
agrees to be bound by the terms and conditions described in this
prospectus with respect to the exchange of the tendered Old Iusacell ADSs
for New Iusacell ADSs, which we refer to as the Agent's Message.
The Holder's Agent will be deemed to have caused the delivery by the DTC
participant of the Agent's Message to the exchange agent, and to have agreed:
- to be bound by, and to bind the holder on whose behalf the Holder's Agent
has acted, to the terms and conditions of the exchange offer described in
this prospectus, and
- that New Iusacell and the exchange agent may enforce such agreement
against the Holder's Agent and such holder.
THE AGENT'S MESSAGE FROM THE DTC PARTICIPANTS CONSTITUTES THE ONLY TENDER
DOCUMENTATION TO BE DELIVERED TO THE EXCHANGE AGENT AND ANY OTHER MATERIALS
DELIVERED TO THE EXCHANGE AGENT WILL NOT BE ACCEPTED.
GENERAL PROVISIONS
THE METHOD OF DELIVERY OF OLD IUSACELL ADSS AND ALL OTHER DOCUMENTS OR
INSTRUCTIONS IS AT THE RISK OF THE HOLDERS OF OLD IUSACELL ADSS.
A tender will be deemed to have been received only when the exchange agent
receives both a duly completed Agent's Message through the facilities of DTC at
the exchange agent's DTC account and confirmation of book-entry transfer of such
Old Iusacell ADSs into the exchange agent's DTC account.
New Iusacell reserves full discretion to determine all questions as to
tenders, including whether the documentation is complete, the date and time of
receipt of a tender, the propriety of execution and delivery of any document or
instruction, and other questions as to validity, form, eligibility or
acceptability of any tender. New Iusacell reserves the right to reject any
tender not in proper form or otherwise not valid or the acceptance for exchange
which may, in the opinion of New Iusacell's counsel, be unlawful, or to waive
any irregularities or conditions. New Iusacell's interpretation of the terms and
conditions of the exchange offer will be final and binding.
New Iusacell will not be obligated to give any notice of any defects or
irregularities in tenders and will not incur any liability for failure to give
such notice. The exchange agent may, but will not be obligated to, give notice
of any irregularities or defects in tenders, and will not incur any liability
for any failure to give notice.
Old Iusacell ADSs will not be deemed to have been duly or validly tendered
unless and until all defects and irregularities have been cured or waived. All
improperly tendered Old Iusacell ADSs will be returned without cost to the
tendering holder by means of book-entry delivery through DTC to the accounts of
the DTC participant promptly after the expiration date.
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Old Iusacell ADSs being tendered must be delivered to the exchange agent in
accordance with the procedures described in this prospectus on or before the
expiration date, as there will be no guaranteed delivery procedures permitting
delivery after the expiration date.
TERMS AND CONDITIONS OF A TENDER OF OLD IUSACELL ADSS
Old Iusacell ADSs being tendered in the exchange offer and the completed
Agent's Message must be received by the exchange agent in accordance with the
terms described in this prospectus by 6:00 p.m., New York City time (5:00 p.m.,
Mexico City time), on February 29, 2000, unless extended.
Each holder, by instructing the Holder's Agent to tender its Old Iusacell
ADSs, and each Holder's Agent by delivering, or causing to be delivered, the Old
Iusacell ADSs and the completed Agent's Message to the exchange agent represents
and warrants that the holder has represented, warranted and agreed, that:
- the holder has received a copy of this prospectus and has read and agreed
to be bound by all the terms and conditions of the exchange offer,
- the holder has full power and authority to tender its Old Iusacell ADSs
and to acquire New Iusacell ADSs,
- the holder sells, assigns and transfers the Old Iusacell ADSs to the
exchange agent, as agent for New Iusacell, and irrevocably constitutes
and appoints the exchange agent as its true and lawful agent and
attorney-in-fact to cause the Old Iusacell ADSs to be exchanged in the
exchange offer, subject only to the right of withdrawal described in this
prospectus,
- the Old Iusacell ADSs are being tendered and, when accepted by the
exchange agent, as agent for New Iusacell, will be, free and clear of all
charges, liens, restrictions, claims, equitable interests and
encumbrances, other than the claims of the holder under the express terms
of the exchange offer, and
- the holder will, upon the request of the exchange agent or New Iusacell,
execute and deliver any additional documents necessary or desirable to
complete the exchange of the Old Iusacell ADSs.
All authority conferred or agreed to be conferred, and all representations,
warranties and agreements made, by the holder and the Holder's Agent will
survive the death or incapacity of the holder and the Holder's Agent and will in
all respects be binding upon the successors, assigns, heirs, executors,
administrators and personal representatives of the holder and the Holder's
Agent.
WITHDRAWAL RIGHTS
All tenders of Old Iusacell ADSs may be withdrawn at any time prior to the
expiration date.
Any holder who has instructed the Holder's Agent to tender its Old Iusacell
ADSs and wishes to withdraw the tender will need to make arrangements with the
Holder's Agent. The ability of a holder to cause the withdrawal of a tender of
Old Iusacell ADSs will be dependent upon the terms of the arrangements between
the holder and the Holder's Agent and, if the Holder's Agent is not the DTC
participant tendering the Old Iusacell ADSs, the arrangements between the
Holder's Agent and the DTC participant tendering the Old Iusacell ADSs,
including any arrangements involving intermediaries between such Holder's Agent
and such participant.
All questions as to the validity and timeliness of notices of withdrawal in
respect of Old Iusacell ADSs that have been delivered to the exchange agents
will be determined by New Iusacell. New Iusacell's determination will be final
and binding on the parties. Each holder and Holder's Agent bears the risks
arising in connection with the procedures for withdrawal and New Iusacell will
have no liabilities or obligations in connection with such risks.
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ACCEPTANCE OF TENDERS
Old Iusacell ADSs validly tendered and not withdrawn will be accepted
promptly after the expiration date, provided there is compliance with the terms
and conditions of the exchange offer, including the reservation of certain
rights by New Iusacell. Acceptance of the tendered Old Iusacell ADSs will be
effected by the delivery of a notice by New Iusacell to the exchange agent.
If New Iusacell modifies the terms of the exchange offer, the modified
terms will be made available to all holders, whether or not their Old Iusacell
ADSs have been tendered prior to such modification. New Iusacell will disclose
any material modifications in accordance with the applicable rules of the
Commission and, if required, will extend the exchange offer to permit holders of
Old Iusacell ADSs adequate time to consider the modification.
The tender of Old Iusacell ADSs pursuant to the procedures described in
"-- How to Tender" will constitute an acceptance by the tendering holder of the
exchange offer. New Iusacell's acceptance for exchange of Old Iusacell ADSs
tendered pursuant to the exchange offer will constitute a binding agreement
between the tendering holder and New Iusacell upon the terms and subject to the
conditions of the exchange offer.
If any tendered Old Iusacell ADSs are not accepted because of an invalid
tender or because New Iusacell does not accept any Old Iusacell ADSs for
exchange, the tendered Old Iusacell ADSs will be returned by the exchange agent
to the DTC participant who delivered the Old Iusacell ADSs to the exchange
agent, without expense, but at the risk of, the tendering holder. The return of
the Old Iusacell ADSs by the DTC participant to the account of the tendering
holder depends on the arrangements between the holder and the Holder's Agent and
the arrangements between the Holder's Agent and the DTC participant. New
Iusacell will not have any liabilities or obligations in connection with such
arrangements.
Subject to the terms and conditions of the exchange offer, the exchange
agent will, in exchange for validly tendered Old Iusacell ADSs, deliver the
whole number of New Iusacell ADSs by book-entry transfer to the accounts of the
participants in DTC who tendered such Old Iusacell ADSs pursuant to the exchange
offer.
The delivery terms described above apply also to holders of Old Iusacell
ADSs in certificated form since, as described under the caption "-- Exchange
Offer Procedures -- The Role of the Holder's Agent," such holders must first
arrange for such securities to be held in book-entry form before tendering them
to the appropriate exchange agent.
New Iusacell will pay, or cause to be paid, all security transfer taxes, if
any, with respect to the issuance of any New Iusacell ADSs pursuant to the
exchange offer, unless the holder tendering Old Iusacell ADSs differs from the
person receiving New Iusacell ADSs in exchange or if a transfer tax is imposed
for any reason other than the issuance of New Iusacell ADSs pursuant to the
exchange offer, in which case the amount of any transfer taxes must be paid by
the tendering holder.
ADVERSE CONSEQUENCES OF FAILURE TO TENDER
If you do not tender your Old Iusacell ADSs in the exchange offer, the
terms of the deposit agreement governing the Old Iusacell ADSs provide that you
will be deemed to have instructed the Old Iusacell ADS depositary to exchange
the Old Iusacell shares underlying your Old Iusacell ADSs for New Iusacell
series V shares. Upon expiration of the exchange offer, the Old Iusacell ADS
deposit agreements will be deemed terminated. During the 30 day period after
termination of the Old Iusacell ADS deposit agreements, you may contact the Old
Iusacell depositary and request that your untendered Old Iusacell ADSs be
converted into series V shares.
If you do not exchange your Old Iusacell ADSs or convert them to series V
shares, then, following the termination of the Old Iusacell ADS deposit
agreements, the Old Iusacell ADS depositary will sell the
17
<PAGE> 21
series V shares underlying your untendered Old Iusacell ADSs and you will be
entitled to receive the proceeds from the sale, less fees, taxes and expenses.
THE EXCHANGE AGENT
The Bank of New York will act as exchange agent in connection with the
exchange offer for Old Iusacell ADSs. The Bank of New York is also the New
Iusacell ADS depositary and the Old Iusacell ADS depositary.
The exchange agent has waived its fee for providing its services to New
Iusacell and to you. New Iusacell will indemnify the exchange agent against
certain liabilities in relation to its engagement.
The amount estimated by New Iusacell to pay fees and expenses relating to
the exchange is approximately U.S.$0.5 million. New Iusacell expects to fund
such amount from available cash.
Affiliates of the exchange agent and its customers may have significant
positions in securities of Old Iusacell, and may be tendering Old Iusacell ADSs
in the exchange offer. Affiliates of the exchange agent also from time to time
provide general banking and financial services to New Iusacell and Old Iusacell
and some of their subsidiaries.
QUESTIONS
You should direct any questions regarding the exchange offer, including the
procedure for tendering your ADSs or shares, to New Iusacell's General Counsel
at the telephone or facsimile numbers which appear on the back cover of this
prospectus.
SOLICITATION OF TENDERS; EXPENSES
Except as described above under "-- The Exchange Agent and Information
Agent," New Iusacell has not retained any agent in connection with the exchange
offer and will not make any payments to brokers, dealers, salespersons or other
persons for soliciting or recommending acceptances of the exchange offer.
However, New Iusacell will pay brokerage houses and other custodians, nominees
and fiduciaries their reasonable out-of-pocket expenses in forwarding copies of
this prospectus and related documents to the beneficial owners of the Old
Iusacell ADSs and in handling or forwarding tenders for their customers.
EXCHANGE OF OLD IUSACELL SHARES
If you are exchanging Old Iusacell shares you should contact the exchange
agent at (800) 507-9357 or the General Counsel of New Iusacell at +525-109-4400
for information as to the procedures to follow.
18
<PAGE> 22
USE OF PROCEEDS
New Iusacell will not receive any proceeds from the exchange offer
discussed in this prospectus.
19
<PAGE> 23
MARKET INFORMATION
SHARES AND ADSS
The series A and V shares of New Iusacell are listed on the Mexican Stock
Exchange. The New Iusacell series V ADSs are listed on the New York Stock
Exchange under the symbol CEL. The series V ADSs are evidenced by ADRs issued
under the New Iusacell ADS deposit agreement.
The series D and L shares of Old Iusacell are listed on the Mexican Stock
Exchange. The Old Iusacell series L ADSs are listed on the New York Stock
Exchange under the symbols CEL.Y. The Old Iusacell series D ADSs were delisted
from the New York Stock Exchange in December 1999. The Old Iusacell ADSs are
evidenced by ADRs issued under the Old Iusacell ADS deposit agreements.
Old Iusacell intends to de-list its series L ADSs from the New York Stock
Exchange upon the completion of the exchange offer described in this prospectus,
and the series A, B, D and L shares from the Mexican Stock Exchange and the
Mexican Stock Registry of Securities and Intermediaries after complying with
Mexican regulatory requirements. Old Iusacell's series D ADSs were de-listed
from the New York Stock Exchange in December 1999. These actions will
effectively eliminate the trading market for such securities.
The following tables present for the periods indicated, the high, low and
period end sales prices and the average daily trading volume of the New Iusacell
series V shares and the Old Iusacell series D and L shares on the Mexican Stock
Exchange as reported by the Mexican Stock Exchange, and the high, low and period
end sales price and the average daily trading volume of the New Iusacell series
V ADSs and the Old Iusacell series D and L ADSs on the New York Stock Exchange
as reported by the New York Stock Exchange.
NEW IUSACELL
- --------------------------------------------------------------------------------
MEXICAN STOCK EXCHANGE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE DAILY
TRADING VOLUME
PERIOD HIGH LOW CLOSE (SHARES)
------ ----- ---- ----- --------------
<S> <C> <C> <C> <C>
SERIES V
Third Quarter 1999........................................ 10.90 9.00 9.00 140,222
Fourth Quarter 1999....................................... 17.00 8.80 14.10 502,900
</TABLE>
NEW IUSACELL
- --------------------------------------------------------------------------------
NEW YORK STOCK EXCHANGE (IN U.S.$)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE DAILY
TRADING VOLUME
PERIOD HIGH LOW CLOSE (ADSS)
------ ----- ---- ----- --------------
<S> <C> <C> <C> <C>
SERIES V
Third Quarter 1999(3)..................................... 11.87 9.50 9.50 173,550
Fourth Quarter 1999(3).................................... 16.63 9.38 14.94 231,688
</TABLE>
20
<PAGE> 24
<TABLE>
<CAPTION>
OLD IUSACELL
- -------------------------------------------------------------------------------------------------
MEXICAN STOCK EXCHANGE (IN PS.)
- -------------------------------------------------------------------------------------------------
AVERAGE DAILY
TRADING VOLUME
PERIOD HIGH LOW CLOSE (SHARES)
------ ----- ----- ----- --------------
<S> <C> <C> <C> <C>
SERIES D
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....................................... 13.89 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)................................... 4.00 4.00 4.00 0
First Quarter 1999....................................... 6.80 6.80 6.80 194
Second Quarter 1999...................................... 11.10 7.50 11.00 1,806
Third Quarter 1999....................................... 13.90 11.00 13.90 20,250
Fourth Quarter 1999(1)................................... -- -- -- --
SERIES L
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...................................... 17.24 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....................................... 13.80 12.38 13.38 4,680
Fourth Quarter 1999(1)................................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
OLD IUSACELL
- -------------------------------------------------------------------------------------------------
NEW YORK STOCK EXCHANGE (IN U.S.$)
- -------------------------------------------------------------------------------------------------
AVERAGE DAILY
TRADING VOLUME
PERIOD HIGH LOW CLOSE (ADSS)
------ ------ ------ ------ --------------
<S> <C> <C> <C> <C>
SERIES D
First Quarter 1997.................................... 9.625 5.605 8.375 9,958
Second Quarter 1997................................... 15.125 8.375 14.750 10,238
Third Quarter 1997.................................... 16.000 11.000 12.500 5,648
Fourth Quarter 1997................................... 15.875 12.000 15.250 13,277
First Quarter 1998.................................... 16.500 13.625 14.000 10,853
Second Quarter 1998................................... 13.813 9.250 9.250 10,888
Third Quarter 1998.................................... 12.188 3.875 4.656 6,211
Fourth Quarter 1998................................... 8.750 4.125 6.313 4,316
First Quarter 1999.................................... 8.750 6.063 7.375 5,812
Second Quarter 1999................................... 13.750 7.00 12.750 7,747
Third Quarter 1999(3)................................. 15.25 10.63 10.63 11,954
Fourth Quarter 1999(1)(2)............................. -- -- -- --
</TABLE>
21
<PAGE> 25
<TABLE>
<CAPTION>
OLD IUSACELL
- -------------------------------------------------------------------------------------------------
NEW YORK STOCK EXCHANGE (IN U.S.$)
- -------------------------------------------------------------------------------------------------
AVERAGE DAILY
TRADING VOLUME
PERIOD HIGH LOW CLOSE (ADSS)
------ ----- ----- ----- --------------
<S> <C> <C> <C> <C>
SERIES L
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(3).................................... 15.56 9.50 13.31 34,328
Fourth Quarter 1999(3)................................... 16.13 7.25 14.69 5,440
</TABLE>
- ---------------
(1) There was no trading during this period.
(2) The series D ADSs were delisted from the New York Stock Exchange in
mid-December, 1999.
(3) Source: Bloomberg L.P.
Brokerage firms are permitted to buy odd lots for their own account. The Mexican
Stock Exchange publishes an official daily price list that includes price
information for each listed security.
The Mexican Stock Exchange operates a system of automatic suspension of
trading in a number of shares as a means of controlling excessive price
volatility. Each day, a price band, with upper and lower limits, for such shares
is established. If, during the day, a bid or offer in respect of a listed share
is accepted at a price outside this band, trading in all series of shares issued
by New Iusacell is automatically suspended for one hour. The automatic
suspension system will not apply to equity securities such as New Iusacell's
series V shares, which will trade in the form of depositary shares on exchanges,
including automated quotation systems, other than the Mexican Stock Exchange,
unless otherwise authorized by the CNBV. In addition, the Mexican Stock Exchange
may also suspend trading of a security, including securities not subject to the
automatic suspension system, for up to five days if it determines that
disorderly trading is occurring with respect to such security, which may be
extended beyond five days if so approved by the CNBV.
Settlement is effected two trading days after a share transaction is
completed on the Mexican Stock Exchange. Deferred settlements, even if by mutual
agreement, are not permitted without the approval of the CNBV. All securities
traded on the Mexican Stock Exchange are on deposit with Indeval, which
commenced operations in 1979. 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 is Latin America's second largest exchange in
terms of market capitalization, but it remains relatively small and illiquid
compared to major world markets. As of December 31, 1999, 190 Mexican companies
were listed on the Mexican Stock Exchange, excluding mutual funds, and the ten
most actively traded equity issues represented approximately 67.1% 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,
22
<PAGE> 26
a major part of such activity reflects transactions of institutional investors.
There is no formal over-the-counter market for securities in Mexico.
MARKET REGULATION AND REGISTRATION STANDARDS
On April 28, 1995, the 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.$35.7 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 stockholders, with
diversified individual participation with respect to the total amount of
the offering.
To maintain their registration in Subsection A, issuers are required to
have:
- 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
23
<PAGE> 27
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 CNBV. Securities which are offered outside Mexico are
required to be registered in the Special Section of the RNVI.
Old Iusacell is registered in Subsection A of the RNVI, and the CNBV has
confirmed that New Iusacell will also be registered in Subsection A of the RNVI.
Pursuant to the Mexican Securities Market Law, the CNBV must be notified
before stockholders of a company listed on the Mexican Stock Exchange effect one
or more simultaneous or successive transactions affecting 10% or more of such
company's capital stock, other than on the Mexican Stock Exchange. The holders
of the shares being transferred in such transactions are obligated to inform the
CNBV of the results of the transactions within three days of completion of the
last transaction, or that the transactions have not been completed. The CNBV
will notify the Mexican Stock Exchange of such transactions, without specifying
the names of the parties involved.
Issuers of listed securities are required to file unaudited quarterly
financial statements and audited annual financial statements as well as various
periodic reports with the CNBV and the Mexican Stock Exchange.
24
<PAGE> 28
DIVIDENDS
Since becoming a public company in 1994, Iusacell has not paid any
dividends and does not contemplate paying dividends in the foreseeable future.
Each series A and V share will have the same dividend rights. The
declaration and payment of such dividends will depend on New Iusacell's results
of operations, financial condition, 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 New 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.
New Iusacell and its subsidiaries may agree to similar restrictions in the
future as they incur additional debt. See "Description of New Iusacell Capital
Stock -- Dividend Rights."
In accordance with the Shareholders' Agreement dated as of June 21, 1999,
which we refer to as the New Iusacell Shareholders Agreement, each of Bell
Atlantic and the Peralta Group will have the right to cause New 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 New 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 New 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 a majority of the 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 represented by series V ADSs evidenced by such
ADRs. The depositary will fix a record date for the holders of ADRs in respect
of each dividend distribution. See "Description of New Iusacell ADSs -- Share
Dividends and Other Distributions."
25
<PAGE> 29
CAPITALIZATION
The following table sets forth the capitalization of New Iusacell as of
September 30, 1999, and as adjusted to give effect to this exchange offer
(assuming full participation), the offering of 14 1/4% senior notes completed in
December 1999 and the application of the proceeds therefrom, the final drawdown
of the Eximbank Facilities in October 1999, an initial debt amortization payment
in November 1999 and the payment of an accounts payable balance to Lucent
Technologies. This table should be read in conjunction with "Use of Proceeds,"
"Selected Consolidated Financial and Operating Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
---------------------------------------------------------------
In thousands of constant September 30, ACTUAL ADJUSTED ACTUAL ADJUSTED
1999 Pesos and U.S. dollars(1) ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash and marketable securities(2)......................... Ps. 137,824 Ps. 2,829,365 U.S.$ 14,737 U.S.$ 302,541
============ ============== ============== ==============
Short-term debt:(3)
Senior credit facility(4)............................... Ps. 210,420 Ps. 210,420 U.S.$ 22,500 U.S.$ 22,500
Eximbank Facilities(5).................................. 106,969 67,719 11,438 7,241
Handset facilities...................................... 118,462 118,462 12,667 12,667
Vendor facility......................................... 33,789 33,789 3,613 3,613
------------ -------------- -------------- --------------
Total short-term debt................................. 469,640 430,390 50,218 46,021
------------ -------------- -------------- --------------
Long-term debt:(3)
Senior credit facility(4)............................... 1,893,780 1,893,780 202,500 202,500
10% series B notes due 2004............................. 1,402,800 1,402,800 150,000 150,000
Eximbank Facilities(5).................................. 634,730 782,613 67,871 83,684
Handset facilities...................................... 12,466 12,466 1,333 1,333
Notes offered hereby.................................... -- 3,273,200 -- 350,000
------------ -------------- -------------- --------------
Total long-term debt.................................. 3,943,776 7,364,859 421,704 787,517
------------ -------------- -------------- --------------
Total debt............................................ 4,413,416 7,795,249 471,922 833,538
------------ -------------- -------------- --------------
Stockholders' equity:
Contributed capital..................................... 4,755,485 4,755,485 508,500 508,500
Earned capital.......................................... 619,322 619,322 66,223 66,223
Minority interest....................................... 28,472 28,472 3,044 3,044
------------ -------------- -------------- --------------
Total stockholders' equity............................ 5,403,279 5,403,279 577,767 577,767
------------ -------------- -------------- --------------
Total capitalization.............................. Ps.9,816,695 Ps. 13,198,528 U.S.$1,049,689 U.S.$1,411,305
============ ============== ============== ==============
</TABLE>
- ---------------
(1) Peso amounts were converted to U.S. dollars at the noon buying rate of
Ps.9.3520 per U.S.$1.00 on September 30, 1999. 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. See "Risk Factors -- Risk Factors Relating to
Iusacell -- We may lose money because of currency devaluations" and "-- Risk
Factors Relating to Doing Business in Mexico -- We may not be able to make
interest and principal payments in U.S. dollars, which will expose you to
currency risk and inconvenience."
(2) Adjusted columns reflect incremental aggregate cash of Ps.2,691.5 million
and U.S.$287.8 million, respectively, reflecting Ps.3,273.2 million
(U.S.$350.0 million) of proceeds from this offering and application of the
proceeds thereof, less Ps.100.9 million (U.S.$10.8 million) of debt issuance
costs plus net cash of Ps.109.4 million (U.S.$11.7 million) resulting from a
drawdown of the Eximbank Facilities of Ps.176.8 million (U.S.$18.9 million)
less an initial amortization payment of Ps.67.3 million (U.S.$7.2 million)
and the payment of an accounts payable to Lucent in the amount of Ps.589.2
million (U.S.$63.0 million). Adjusted columns also include approximately
U.S.$133.5 million of net proceeds from this offering that will be held in
escrow to meet the first six interest payments on the notes.
(3) All of Iusacell's short- and long-term debt is denominated in U.S. dollars.
(4) The senior credit facility consists of a five-year senior secured term
facility in the principal amount of U.S.$125.0 million and a five-year
senior secured revolving credit facility in the principal amount of
U.S.$100.0 million which was fully drawn by July 24, 1998 and which was
subsequently converted to a term loan. Quarterly amortizations commence
April 2000.
(5) In March 1998, Old Iusacell obtained a bridge loan facility from UBS AG,
formerly known as Swiss Bank Corporation. The U.S.$75.0 million outstanding
under this bridge loan facility was refinanced on July 15, 1999 by term loan
facilities, a portion of which are guaranteed by the United States
Export-Import Bank. U.S.$79.3 million was drawn on such term loan facilities
on such date. Old Iusacell subsequently drew down an additional U.S.$18.9
million under these facilities on October 15, 1999 and made an initial
semi-annual amortization payment of $7.2 million under the guaranteed
portion of the facility in early November 1999.
26
<PAGE> 30
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
January 27, 2000 was Ps.9.520 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, 1994.................... Ps.5.000 Ps.3.479 Ps.5.750 Ps.3.105
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
Nine months ended September 30, 1999............ 9.352 9.382 9.515 9.288
Year ended December 31, 1999.................... 9.480 9.563 9.533 9.308
</TABLE>
- ---------------
(1) Source: Federal Reserve Bank of New York.
(2) Average of month-end rates.
At September 30, 1999, our total debt outstanding, including trade notes
payable, which amounted to Ps.4,413.4 million (U.S.$471.9 million), was
dollar-denominated and unhedged against foreign exchange risk. Devaluation of
the Peso in relation to the U.S. dollar will adversely affect our ability to
meet our U.S. dollar-denominated obligations, including the notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Devaluation and Inflation" and "-- Liquidity and Capital
Resources -- Liquidity."
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. See "Risk
Factors -- Risk Factors Relating to Doing Business in Mexico -- We may not be
able to make dividend payments in U.S. dollars, which will expose you to
currency risk and inconvenience."
27
<PAGE> 31
SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following tables present selected consolidated financial information of
Iusacell. This information has been derived from and should be read in
conjunction with:
- the audited consolidated financial statements of Iusacell as of December
31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and
1996, and
- the unaudited consolidated financial statements of Iusacell as of and for
the nine months ended September 30, 1999 and 1998.
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 99.5% of the
capital stock of Old Iusacell and plans to acquire substantially all of the
remaining 0.5% as a result of the offering described in this prospectus.
The consolidated financial statements appear elsewhere in this prospectus.
The audited consolidated financial statements have been audited by
PricewaterhouseCoopers, independent public accountants. The unaudited
consolidated financial statements have been the subject of a limited review by
PricewaterhouseCoopers. A limited review is substantially less in scope than an
audit in accordance with generally accepted auditing standards.
The financial statements have been prepared in accordance with Mexican
GAAP, which differs in significant respects from U.S. GAAP. Pursuant to Mexican
GAAP, the financial statements and the selected financial data presented below
have been prepared in accordance with Bulletin B-10 of the Mexican Institute of
Public Accountants, which provides for the recognition of certain effects of
inflation.
Bulletin B-10 requires Iusacell to restate non-monetary assets using the
NCPI, but without exceeding their net realizable value. Until December 31, 1996,
Bulletin B-10 required Iusacell to restate non-monetary assets at current
replacement cost. Bulletin B-10 also requires Iusacell to restate non-monetary
liabilities and the components of shareholders' equity using the NCPI and to
record gains or losses in purchasing power from holding monetary liabilities or
assets.
In addition, Bulletin B-10 requires restatement of all financial statements
to constant Pesos as of the date of the most recent balance sheet presented.
Accordingly, all data in the financial statements and in the selected financial
data set forth below have been restated in constant Pesos as of September 30,
1999. The effect of these inflation accounting principles has not been reversed
in the reconciliation to U.S. GAAP. Note 20 to the audited consolidated
financial statements contains a reconciliation of Iusacell's net income and
stockholders' equity to U.S. GAAP. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations -- U.S. GAAP Reconciliation."
28
<PAGE> 32
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 for
September 30, 1999 of Ps.9.3520 to U.S.$1.00. These translations should not be
construed as representations that the Peso amounts actually represent such U.S.
dollar amounts or could be converted into U.S. dollars at the rate indicated as
of any of the dates mentioned in this prospectus, or at all.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
In thousands of constant September 30, -------------------------------------------------------------------------------------------
1999 Pesos and U.S. dollars except per 1994 1995 1996 1997 1998 1998
share amounts and subscriber data(1) ------------ ------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
MEXICAN GAAP:
Revenues:
Services....................... Ps.2,835,758 Ps. 2,286,846 Ps.2,072,472 Ps. 2,009,313 Ps. 2,688,655 U.S.$ 287,495
Telephone equipment sales and other... 386,859 407,474 334,286 413,227 412,001 44,055
------------ ------------- ------------ ------------- ------------- -------------
Total...................... 3,222,617 2,694,320 2,406,758 2,422,540 3,100,656 331,550
Cost of sales:
Cost of services............... 824,122 838,416 759,818 669,559 841,354 89,965
Cost of telephone equipment and
other........................ 190,208 226,162 186,369 262,304 220,447 23,572
------------ ------------- ------------ ------------- ------------- -------------
Total...................... 1,014,330 1,064,578 946,187 931,863 1,061,801 113,537
Gross profit................... 2,208,287 1,629,742 1,460,571 1,490,677 2,038,855 218,013
Operating expenses............. 1,371,926 1,190,046 1,053,025 968,473 1,183,165 126,515
Depreciation and amortization... 825,616 948,059 855,889 757,726 872,658 93,312
Project 450 non-cash writedown... -- -- -- -- 1,077,473 115,213
Operating profit (loss)........ 10,745 (508,363) (448,343) (235,522) (1,094,441) (117,027)
Other income, net.............. -- -- -- -- 145,676 15,577
Integral financing cost (gain):
Interest expense, net........ 288,821 245,256 397,887 323,181 245,200 26,219
Foreign exchange (gain) loss, net... 742,703 998,209 (87,932) 63,105 918,227 98,185
Gain on net monetary position... (70,738) (709,985) (493,053) (381,156) (745,336) (79,698)
------------ ------------- ------------ ------------- ------------- -------------
Total...................... 960,786 533,480 (183,098) 5,130 418,091 44,706
Equity participation in net income of
associated companies......... 4,387 (55,409) 1,866 205,326 27,290 2,918
Provision for equipment
impairment(2)................ -- -- -- 1,208,352 -- --
Loss before asset tax, employee profit
sharing, minority interest,
extraordinary item and discontinued
operations................... (945,654) (1,097,252) (263,379) (1,243,678) (1,339,566) (143,238)
Provision for asset tax........ 45,954 41,185 49,827 59,031 70,496 7,538
Employee profit sharing........ 917 2,946 -- -- -- --
------------ ------------- ------------ ------------- ------------- -------------
Total...................... 46,871 44,131 49,827 59,031 70,496 7,538
Loss before minority interest,
extraordinary item and discontinued
operations................... (992,525) (1,141,383) (313,206) (1,302,709) (1,410,062) (150,776)
Minority interest.............. 64 52,420 4,500 270 6,198 663
------------ ------------- ------------ ------------- ------------- -------------
Loss before extraordinary item and
discontinued operations...... (992,461) (1,088,963) (308,706) (1,302,439) (1,403,864) (150,113)
Extraordinary item(3).......... -- -- (205,537) -- -- --
Loss from discontinued
operations(4)................ (20,248) (2,165)
------------ ------------- ------------ ------------- ------------- -------------
Net loss....................... Ps. (992,461) Ps.(1,088,963) Ps. (514,243) Ps.(1,302,439) Ps.(1,424,112) U.S.$(152,278)
============ ============= ============ ============= ============= =============
Net loss per share............. Ps. (1.05) Ps. (1.12) Ps. (0.52) Ps. (1.22) Ps. (1.27) U.S.$ (0.14)
U.S. GAAP:(5)
Total revenues................. Ps.3,222,618 Ps. 2,694,320 Ps.2,518,460 Ps. 2,535,174 Ps. 3,120,443 U.S.$ 333,666
Operating profit (loss)........ 10,745 (508,363) (712,282) (1,615,305) (926,082) (99,025)
Net loss....................... (969,821) (514,215) (183,684) (884,166) (1,414,792) (151,282)
Basic and diluted loss per share(6)... (1.03) (0.52) (0.21) (0.82) (1.26) (0.13)
Basic and diluted pro forma net loss
per share(6)................. -- -- -- -- (1.06) (0.11)
</TABLE>
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Footnotes begin on page 33.
29
<PAGE> 33
<TABLE>
<CAPTION>
In thousands of constant AS OF AND FOR THE YEAR ENDED DECEMBER 31,
September 30, 1999 Pesos and -----------------------------------------------
U.S. dollars except per share 1994 1995 1996
amounts and subscriber data(1) ------------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
MEXICAN GAAP:
Working capital................ Ps. (540,068) Ps.(2,044,741) Ps.(2,307,150)
Property and equipment, net.... 6,336,256 6,067,482 4,682,065
Total assets................... 11,166,344 10,313,682 8,438,606
Total debt..................... 2,045,850 2,349,834 1,988,543
Stockholders' equity........... 7,946,300 6,211,723 4,719,559
U.S. GAAP:(5)
Working capital................ Ps. -- Ps. 2,366,916 Ps.(2,474,949)
Property and equipment, net.... 6,336,258 6,067,482 4,682,065
Total assets................... 11,131,435 11,231,501 9,375,937
Total debt..................... 2,045,850 2,349,834 1,988,543
Stockholders' equity........... 7,691,758 5,253,614 4,281,545
OTHER FINANCIAL DATA:
MEXICAN GAAP:
Ratio of earnings to fixed
charges(7).................... -- -- --
OPERATING DATA:
POPs........................... 61,464,945 63,447,714 64,730,493
Subscribers(8)
Contract...................... 194,723 208,802 159,144
Prepay........................ -- 1,399 73,762
------------- ------------- -------------
Total....................... 194,723 210,201 232,906
Gross subscriber additions..... 117,539 103,733 172,519
Average subscribers(9)......... 161,042 202,462 221,554
Penetration(10)................ 0.32% 0.33% 0.36%
Average monthly contract
churn(11)..................... 2.67% 3.62% 4.28%
Average monthly MOUs per
subscriber(12)................ 179 140 118
Nominal average monthly revenue
per subscriber(13)............ Ps. 595 Ps. 464 Ps. 492
Nominal cost to acquire a new
subscriber(14)................ Ps. 5,717 Ps. 6,143 Ps. 6,076
<CAPTION>
In thousands of constant AS OF AND FOR THE YEAR ENDED DECEMBER 31,
September 30, 1999 Pesos and ---------------------------------------------------
U.S. dollars except per share 1997 1998 1998
amounts and subscriber data(1) ------------- ------------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
MEXICAN GAAP:
Working capital................ Ps. (339,180) Ps.(1,319,275) U.S.$(141,069)
Property and equipment, net.... 3,925,390 5,827,104 623,086
Total assets................... 8,691,774 10,899,176 1,165,438
Total debt..................... 2,892,616 4,889,004 522,776
Stockholders' equity........... 4,333,837 4,025,136 430,404
U.S. GAAP:(5)
Working capital................ Ps. (546,724) Ps.(1,482,751) U.S.$(158,549)
Property and equipment, net.... 3,925,390 5,644,039 603,511
Total assets................... 9,555,384 11,336,466 1,212,197
Total debt..................... 2,892,616 4,900,790 524,037
Stockholders' equity........... 4,287,183 4,027,474 430,654
OTHER FINANCIAL DATA:
MEXICAN GAAP:
Ratio of earnings to fixed
charges(7).................... -- -- --
OPERATING DATA:
POPs........................... 66,014,273 67,298,053
Subscribers(8)
Contract...................... 199,964 277,014
Prepay........................ 200,159 478,361
------------- -------------
Total....................... 400,123 755,375
Gross subscriber additions..... 406,353 747,720
Average subscribers(9)......... 387,765 742,601
Penetration(10)................ 0.61% 1.12%
Average monthly contract
churn(11)..................... 2.94% 2.58%
Average monthly MOUs per
subscriber(12)................ 105 87
Nominal average monthly revenue
per subscriber(13)............ Ps. 464 Ps. 361 U.S.$ 39
Nominal cost to acquire a new
subscriber(14)................ Ps. 5,326 Ps. 3,477 U.S.$ 372
</TABLE>
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30
<PAGE> 34
<TABLE>
<CAPTION>
AS OF AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
In thousands of constant September 30, 1999 Pesos and U.S. dollars, 1998 1999 1999
except per share amounts and subscriber data(1) ------------- ------------- ------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
MEXICAN GAAP:
Revenues:
Services....................................................... Ps. 1,954,419 Ps. 2,626,137 U.S.$280,810
Telephone equipment sales and other............................ 322,965 282,369 30,193
------------- ------------- ------------
Total...................................................... 2,277,384 2,908,506 311,003
Cost of sales:
Cost of services............................................. 591,172 778,668 83,262
Cost of telephone equipment and other........................ 174,991 163,129 17,443
------------- ------------- ------------
Total...................................................... 766,163 941,797 100,705
Gross profit................................................... 1,511,221 1,966,709 210,298
Operating expenses............................................. 886,412 963,442 103,020
Depreciation and amortization.................................. 615,617 967,396 103,443
Project 450 non-cash writedown................................. 986,396 -- --
Operating profit (loss)........................................ (977,204) 35,871 3,835
Integral financing cost (gain):
Interest expense, net........................................ 198,070 162,751 17,403
Foreign exchange (gain) loss, net............................ 1,011,283 (325,293) (34,783)
Gain on net monetary position................................ (432,489) (519,605) (55,561)
------------- ------------- ------------
Total...................................................... 776,864 (682,147) (72,941)
Equity participation in net income of associated companies..... 20,252 2,587 277
Income (loss) before asset tax and minority interest........... (1,733,816) 720,605 77,053
Provision for asset tax........................................ 38,271 111,609 11,934
Employee profit sharing.................................... -- 373 40
Income (loss) before minority interest..................... (1,772,087) 608,623 65,079
Minority interest.............................................. 3,339 10,699 1,144
------------- ------------- ------------
Net income (loss).............................................. Ps.(1,768,748) Ps. 619,322 U.S.$ 66,223
============= ============= ============
U.S. GAAP:(5)
Total revenues................................................. Ps. 2,277,384 Ps. 2,908,506 U.S.$311,004
Operating (loss) profit........................................ (802,207) 35,871 3,836
Net (loss) profit.............................................. (1,615,534) 582,578 62,294
Basic and diluted (loss) profit per share(6)................... (1.47) 0.46 0.05
Basic and diluted pro forma net loss per share(6)..............
</TABLE>
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31
<PAGE> 35
<TABLE>
<CAPTION>
AS OF AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
In thousands of constant September 30, 1999 Pesos and U.S. dollars, 1998 1999 1999
except per share amounts and subscriber data(1) ------------- ------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
MEXICAN GAAP:
Working capital................................................ Ps.(1,040,326) Ps. (999,004) U.S.$ (106,822)
Property and equipment, net.................................... 5,154,715 6,488,285 693,786
Total assets................................................... 10,028,689 11,941,781 1,276,923
Total debt..................................................... 5,023,500 4,377,893 468,124
Stockholders' equity........................................... 3,348,921 5,403,279 577,767
U.S. GAAP:(5)
Working capital................................................ Ps. (647,122) Ps.(1,188,967) U.S.$ (127,135)
Property and equipment, net.................................... 5,154,715 6,488,285 693,786
Total assets................................................... 10,629,659 12,572,695 1,344,386
Total debt..................................................... 5,023,500 4,379,740 468,321
Stockholders' equity........................................... 3,506,066 5,354,090 572,507
OTHER FINANCIAL DATA:
MEXICAN GAAP:
Ratio of earnings to fixed charges(7).......................... -- 5.89x 2.53x
OPERATING DATA:
Subscribers(8)
Contract....................................................... 256,075 342,666
Prepay....................................................... 371,781 789,539
------------- -------------
Total...................................................... 627,856 1,132,205
Gross subscriber additions..................................... 289,555 470,643
Average subscribers(9)......................................... 645,781 1,100,576
Average monthly contract churn(11)............................. 2.58% 2.44%
Average monthly MOUs per subscriber(12)........................ 89 77
Nominal average monthly revenue per subscriber(13)............. Ps. 371 Ps. 339 U.S.$ 36
Nominal cost to acquire a new subscriber(14)................... Ps. 3,389 Ps. 3,624 U.S.$ 388
</TABLE>
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<PAGE> 36
NOTES TO THE SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
(1) According to Mexican GAAP, financial data for all periods in the financial
statements included in this prospectus, unless otherwise indicated, have
been restated in constant September 30, 1999 Pesos. Restatement into
September 30, 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 September 30, 1999. The
inflation indices used in this prospectus are 2.9242 for 1994 figures,
1.9243 for 1995 figures, 1.5068 for 1996 figures, 1.3021 for 1997 figures,
1.1609 for September 1998 figures and 1.0978 for December 1998 figures.
These indices represent the estimates used by Old Iusacell when it prepared
and released to the public its third quarter 1999 financial statements.
Peso amounts in the selected consolidated financial statements were
converted to U.S. dollars at the exchange rate of Ps.9.3520 per U.S.$1.00
reported by the Federal Reserve Bank of New York as its noon buying rate
for Pesos on September 30, 1999. 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 for such date, or at all.
In determining Peso amounts of U.S. dollar-denominated obligations at
September 30, 1999 in its financial statements under Mexican GAAP, however,
Iusacell applied the exchange rate published by the Banco de Mexico, which
on September 30, 1999 was Ps.9.3483 per U.S.$1.00. The difference between
the noon buying rate and the Banco de Mexico exchange rates causes certain
inconsistencies between references to U.S. dollar amounts in this
prospectus and the actual U.S. dollar amounts. For example, Iusacell's
actual total debt, excluding trade notes payable, at September 30, 1999 was
U.S.$468.3 million. In preparing Iusacell's September 30, 1999 financial
statements, we multiplied this amount by 9.3483 to arrive at the Ps.4,377.9
million in total debt, excluding trade notes payable. However, for purposes
of this prospectus, we converted this Peso amount to U.S. dollars using the
rate of Ps.9.3520, which yields a U.S. dollar-denominated total debt,
excluding trade notes payable, of U.S.$468.1 million.
The combined effect of the restatement of the financial data in September
30, 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 in U.S. dollars is not equal to the actual amounts
outstanding. For example, as of December 31, 1998, after the restatement in
September 30, 1999 constant Pesos and the convenience translation, total
debt outstanding, excluding trade notes payable, is U.S.$522.8 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
December 31, 1998 consolidated financial information and references to U.S.
dollar amounts in other sections of this prospectus.
(2) Iusacell's financial statements for the year ended December 31, 1997 have
been restated to reflect a reassessment of the accounting for the
impairment charge related to the analog communications network. The
impairment, which had previously been recorded directly against
stockholders' equity has now been recorded as an expense under Mexican GAAP
in the restated financial statements. For U.S. GAAP purposes, the
impairment charge relating to the analog communications equipment was
initially recorded as an operating expense. See Note 22 to the Audited
Consolidated Financial Statements.
(3) 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.
(4) In December 1998, Iusacell discontinued the operations of its subsidiary,
Cellular Solutions de Mexico, S.A. de C.V., a company engaged in the
selling of accessories for cellular handsets. 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
33
<PAGE> 37
Note 19 to the Audited Consolidated Financial Statements. Under U.S. GAAP
the loss from discontinued operations is recorded as an operating expense.
(5) See Note 20 to the Audited Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- U.S. GAAP Reconciliation" for a discussion of differences
between U.S. GAAP and Mexican GAAP.
(6) Diluted earnings (loss) per share for the years ended December 31, 1998 and
1997 is equal to basic (loss) per share. Any unutilized drawdowns and
conversions under the subordinated convertible facility with Bell Atlantic
and the authorized but unissued shares subject to the management 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 because the loss per share for such periods would
have been reduced. For the years ended December 31, 1998 and 1997, the
number of potentially dilutive shares that were excluded from the
computation of diluted earnings (loss) per share for any unutilized
drawdowns and conversions under the facility with Bell Atlantic were
69,285,714 and 214,285,714 shares, respectively, and for the authorized but
unissued shares subject to the management employee stock purchase plan were
70,004 and 262,666 shares, respectively.
Diluted earnings (loss) per share for the years ended December 31, 1996,
1995 and 1994 is equal to basic earnings (loss) per share as Iusacell did
not have any potentially dilutive securities.
(7) 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 1994, 1995, 1996, 1997 and 1998. The
fixed charge coverage deficiency for the years ended December 31, 1994,
1995, 1996, 1997 and 1998 amounted to Ps.1,694.2 million (U.S.$181.2
million), Ps.1,997.2 million (U.S.$213.6 million), Ps.453.9 million
(U.S.$48.5 million), Ps.1,304.1 million (U.S.$139.4 million) and Ps.2,224.0
million (U.S.$237.8 million). The fixed charge coverage deficiency for the
nine month period ended September 30, 1998 amounted to Ps.2,691.8 million
(U.S.$287.8 million). There was no fixed charge coverage deficiency for the
nine month period ended September 30, 1999.
(8) Subscribers refers to Iusacell's cellular subscribers in its cellular
operating regions at the end of the respective periods. A prepay customer
is included as a subscriber if, at the end of the period, the customer's
telephone number has not yet been deactivated. See "Business -- Cellular
Services -- Prepay Customers."
(9) Average subscribers represents the rolling monthly average number of
subscribers for the respective periods.
(10) Penetration represents the end of period subscribers divided by the end of
period POPs in Iusacell's cellular operating regions, expressed as a
percentage.
(11) 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 1994 through 1996 are 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.
34
<PAGE> 38
(12) 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 1994 through 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 result by the number of months in such period.
(13) 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 1994 through 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.
(14) 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.
35
<PAGE> 39
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements included elsewhere in this prospectus.
Unless otherwise indicated, all financial information in this prospectus is
presented in constant Pesos as of September 30, 1999. The U.S. dollar
translations provided in this prospectus are, unless otherwise indicated,
calculated at the exchange rate at September 30, 1999 reported by the Federal
Reserve Bank of New York as its noon buying rate for Pesos, which was Ps.9.3520
per U.S.$1.00. Sums may not add due to rounding.
RECENT DEVELOPMENTS
On October 18, 1999 Bell Atlantic, one of our principal shareholders,
confirmed that it was engaged in discussions with a third party that involved a
possible combination or alliance of our business with one or more of the
Cellular A-Band properties in northern Mexico that we do not operate. On
November 19, 1999, Bell Atlantic publicly announced that these discussions had
been terminated.
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 its subsidiaries and factors
affecting Iusacell's 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 Audited 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 Audited Consolidated Financial Statements also provides
a reconciliation to U.S. GAAP of Iusacell's net loss for the years ended
December 31, 1996, 1997 and 1998 and of stockholders' equity as of December 31,
1997 and 1998.
As a Mexican company, Iusacell maintains its financial records in Pesos.
Pursuant to Bulletin B-10, "Recognition of the Effects of Inflation on Financial
Information," and Bulletin B-12, "Statement of Changes in Financial Position,"
issued by the Mexican Institute of Public Accountants, 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 Iusacell
to restate non-monetary assets, non-monetary liabilities and the components of
stockholders' equity using the NCPI. The effects of these inflation accounting
principles have not been eliminated in the reconciliation to U.S. GAAP. See Note
20 to the Audited 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 September 30, 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 1996, 1997 and 1998 and in the
first nine months of 1999, the rates of inflation in Mexico, as measured by
changes in the NCPI, were 27.7%, 15.7%, 18.6% and 9.8%, respectively. The
inflation indices used are 1.5068 for 1996 figures, 1.3021 for 1997 figures,
1.1609 for September 1998 figures and 1.0978 for December 1998 figures. These
indices represent the estimates used by Iusacell when it prepared and released
to the public its third quarter 1999 financial statements.
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<PAGE> 40
In reporting under Mexican GAAP and in accordance with Bulletin B-10,
Iusacell is 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. The gain or loss on monetary position refers to the gains
and losses realized from holding net monetary assets or liabilities and reflects
the impact of inflation on monetary assets and liabilities. For example, a gain
on monetary position results from holding net monetary liabilities in Pesos
during periods of inflation, as the purchasing power of the Peso declines over
time.
DEVALUATION AND INFLATION
On December 20, 1994, the Mexican government responded to exchange rate
pressures by increasing the upper limit of the then existing free market
Peso/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.3.4662 to U.S.$1.00 on December 19, 1994, by
December 31, 1994 the noon buying rate had fallen to Ps.5.0000 to U.S.$1.00,
representing a 44.3% devaluation. The Peso continued to decline against the U.S.
dollar during 1995, closing at a noon buying rate of Ps.7.7400 to U.S.$1.00 on
December 31, 1995, which represented a 54.8% devaluation relative to the U.S.
dollar for the year.
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.7.8810 to U.S.$1.00 and
Ps.8.0700 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.10.1960 per U.S. dollar on September 30, 1998, but strengthened in the
fourth quarter of 1998 and continued to strengthen in the first nine months of
1999. For the twelve months of 1998, the Peso devalued 22.7% relative to the
U.S. dollar to Ps.9.9010 per U.S. dollar on December 31, 1998. On September 30,
1999, the noon buying rate was Ps.9.3520 per U.S. dollar.
Peso devaluations have contributed to sharp increases in inflation.
Inflation, which had been 7.1% in 1994, 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. In the first nine months of 1999, inflation was 9.8%, or
approximately 13.1% on an annualized basis.
In the past, these economic conditions have negatively affected Iusacell's
results of operating and financial condition and may do so in the future. See
"-- Other Material Trends and Contingencies -- Negative Economic Conditions."
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<PAGE> 41
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 Iusacell's 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, Iusacell is not always able to increase its prices in line with
the significant inflation in the economy. It was 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 Iusacell's assets and, therefore, resulted in a
substantial increase in depreciation and amortization expense, which had
an adverse impact on Iusacell's 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.
Beginning in 1998, the restatement of the valuation of assets using a
foreign exchange rate is no longer permitted under Mexican GAAP.
- 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, Iusacell recorded
a gain because of the appreciation of the Peso against the U.S. dollar
during a significant portion of the year. In 1997, Iusacell experienced a
minimal foreign exchange loss due to the relative stability of the Peso
throughout the year. During the first nine months of 1998 Iusacell,
recorded exchange losses because of the effect of the 26.8% devaluation
of the Peso in that period on its net U.S. dollar liability position.
Iusacell recorded exchange gains in the fourth quarter of 1998, although
these were insufficient to offset the cumulative exchange losses through
September 30, 1998. Iusacell recorded a substantial exchange gain in the
first nine months of 1999 as the Peso continued to strengthen.
- A portion of Iusacell's 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 Iusacell's revenues are denominated in
Pesos. In a period of Peso devaluation, this relationship causes a
negative impact on Iusacell's 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 Iusacell's financial condition as a result of the following factors:
- Substantially all of Iusacell's 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 Iusacell's 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
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<PAGE> 42
valuation of such asset for the current period was restated using a
foreign exchange rate which increased at a lower rate. Beginning in 1998,
the restatement of the valuation of assets using a foreign exchange rate
is no longer permitted under Mexican GAAP.
INCREASE IN PREPAY SUBSCRIBER BASE
In June 1996, Iusacell introduced its Control Plus prepay program in
response to economic conditions in Mexico and to a prepay cellular card program
offered by Telcel. In September 1997, Iusacell introduced in Region 9 its
next-generation, automated VIVA prepay program which had, by March 1999, almost
completely replaced Control Plus in all of Iusacell's cellular markets. In
October 1999, Iusacell 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 Iusacell's 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 69.7% at September 30, 1999 (789,539
subscribers). Prepay customers comprised 75.6%, 78.3% and 82.6% of Iusacell's
net subscriber additions in 1997, 1998 and the first nine months of 1999,
respectively. Iusacell expects that prepay customers will continue to comprise
the substantial majority of new subscriber additions. As a result, Iusacell
expects that the percentage of its 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 16.9% in the first nine months of
1999.
In 1996, Iusacell 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 Iusacell's prepay
program, resulting in lower revenues from these customers. In 1997, 1998 and the
first nine months of 1999, Iusacell experienced a 25.6%, 38.5% and 23.7%
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, Iusacell anticipates further growth in the
number of contract subscribers, including both customers converting from analog
to digital service and new digital cellular customers. See "-- Digitalization."
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 percentage of prepay customers to
Iusacell's total subscribers continues to increase, Iusacell expects that
average minutes of use per customer and average monthly revenues per customer
will continue to decrease. Iusacell expects the decrease to moderate with the
implementation of the CPP modality. See "-- Other Material Trends and
Contingencies -- Regulatory Developments."
In November 1998, Iusacell extended the life of its 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, Iusacell extended the life of its VIVA prepay cards to
a maximum of 365 days and, in October 1999, the life of VIVA prepay cards was
extended to 545 days. After the balance of a prepay card becomes zero, the VIVA
customer currently has 365 days to activate a new card before losing his phone
number. During this 365-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. Iusacell is considering indefinitely extending the period of
time for some "incoming calls only" customers who have experienced significant
incoming call traffic. See "Business -- Cellular Services -- Prepay Customers."
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<PAGE> 43
Extending the life of VIVA prepay cards defers the turnover of prepay
customers. 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 extension, by deferring prepay turnover for 185 additional days,
reduced reported turnover in prepay and overall subscriber net additions in the
second and third quarters of 1999 and will also reduce reported turnover in the
fourth quarter of 1999. Any further extension of VIVA card life for "incoming
calls only" customers will also reduce reported turnover for prepay and overall
subscriber net additions for the extension period.
In late March 1999, Iusacell 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. Iusacell has 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. 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 the third quarter of 1999 than those of the first or second
quarter of 1999.
DIGITALIZATION
In December 1997, Iusacell entered into an agreement with subsidiaries of
Lucent Technologies, Inc. to swap out its existing analog network for a Lucent
analog network overlaid with a Lucent CDMA digital network. Because Iusacell
received a trade-in credit from Lucent for the book value of the swapped-out
network equipment, under Mexican GAAP and U.S. GAAP Iusacell will not be
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, Iusacell expects that the
subsidies it provides for handsets will be higher than they would have been had
Iusacell remained an exclusively analog service provider as Iusacell migrates a
portion of its analog customers to digital service and subscribes new digital
customers. These new digital customers will initially be almost all contract
subscribers, because Iusacell has only just begun to commercialize a digital
prepay service, which, due to more costly handsets, is significantly more
expensive to activate than analog prepaid service.
Iusacell believes that digitalization will increase subscriber usage.
Iusacell's 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 12,181 at September 30, 1998 to
163,171 at September 30, 1999. Iusacell intends to migrate substantially all
remaining analog contract customers to digital service by the end of 2000.
Iusacell's digital contract customers in the aggregate generate approximately
50% of its total cellular traffic.
The rapid growth in digital subscribers and traffic over the last twelve
months strained Iusacell's digital capacity and deteriorated Iusacell's digital
service quality in the third quarter of 1999. As a result, and in anticipation
of further digital migration, Iusacell decided to accelerate its capital
expenditure program to expand digital capacity and improve digital service
quality. See "-- Liquidity and Capital Resources -- Capital Expenditures."
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<PAGE> 44
LOCAL TELEPHONY IN THE 450 MHZ FREQUENCY BAND
In November 1994, Iusacell sought government approval of its 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. See "Business -- Other Services -- Local, Public and Rural Telephony."
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, Iusacell anticipates that it would
be required to pay approximately U.S.$2.25 million for concessions in Regions 4,
5, 6, 7 and 9, where it has 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 COFETEL. Consequently, Iusacell has not yet determined whether to proceed
with its 450 MHz fixed local wireless project. However, given the capabilities
of the CDMA technology that it is implementing, Iusacell is 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. Iusacell
expects to make its decision on the overall strategy for providing local
telephony services during the first quarter of 2000.
In September 1998, Iusacell 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 its investment in 450 MHz
TDMA technology had occurred. As a result, Iusacell 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.1,077.5 million (U.S.$115.2 million). Iusacell also determined
that certain of the 450 MHz project assets, representing about 10% of their book
value, are redeployable in the mobile wireless network. See "-- Non-recurring
Charges -- Project 450 Non-Cash Writedown."
Iusacell was party to certain agreements regarding the supply and servicing
of infrastructure equipment and handsets for its 450 MHz local wireless service.
These agreements terminated in 1997, and there could be substantial costs
arising from the termination of these agreements in addition to the non-cash
losses described above. In addition, Iusacell 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 Iusacell. Finally, Iusacell 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 is involved in litigation with another
handset vendor in connection with a purported agreement to purchase 60,000
handsets that Iusacell never executed. See "Business -- Legal Proceedings."
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<PAGE> 45
NON-RECURRING CHARGES
During the three year period ended December 31, 1998, Iusacell recorded
various non-recurring charges as summarized in the following table.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------- MEXICAN GAAP
1996 1997 1998 TREATMENT
---------- ------------ ------------ ---------------------
(IN THOUSANDS OF PESOS)
<S> <C> <C> <C> <C>
RESTRUCTURING CHARGES
Employee severance........... Ps.130,252 Ps. -- Ps. --
Fixed assets obsolescence
reserve................... 49,723 -- --
Provision for consolidation
of facilities............. 17,866 -- --
Change in estimate of
allowance for doubtful
accounts.................. 7,696 -- --
---------- ------------ ------------
Total restructuring
charges................. Ps.205,537 Ps. -- Ps. -- Extraordinary item
IMPAIRMENT OF ANALOG
COMMUNICATIONS EQUIPMENT..... -- 1,208,352 -- Non-operating expense
PROJECT 450 WRITEDOWN.......... -- -- 1,077,473 Operating expense
---------- ------------ ------------
TOTAL NON-RECURRING CHARGES.... Ps.205,537 Ps.1,208,352 Ps.1,077,473
========== ============ ============
</TABLE>
Under U.S. GAAP, all of the above non-recurring charges were recorded as
operating expenses during the respective periods, except that the restructuring
charge related to the provision for consolidation of facilities was not
considered an expense for U.S. GAAP purposes. The following is a description of
each of the non-recurring charges.
RESTRUCTURING CHARGES
In connection with the reorganization of Iusacell during 1996, Iusacell
raised an accrual for a restructuring charge of Ps.205.5 million (U.S.$22.0
million). This charge, because of its characteristics of being non-recurring and
unusual, was classified as an extraordinary item in the consolidated statement
of income under Mexican GAAP. The accrual for the restructuring charge was fully
utilized by December 31, 1997.
As a result of a misclassification and further analysis of the amounts
previously reported for employee severance and consolidation of facilities, the
components of the restructuring reserve have been reclassified as follows:
<TABLE>
<CAPTION>
ORIGINALLY
REPORTED RECLASSIFIED
---------- ------------
(IN THOUSANDS OF PESOS)
<S> <C> <C>
Employee severance(1)....................................... Ps.108,038 Ps.130,252
Provision for consolidation of facilities(2)................ 40,080 17,866
Fixed assets obsolescence reserve(3)........................ 49,723 49,723
Change in estimate of allowance for doubtful accounts(4).... 7,696 7,696
---------- ----------
Total restructuring charges................................. Ps.205,537 Ps.205,537
========== ==========
</TABLE>
- ---------------
(1) The reserve for employee severance, as originally reported, was understated.
The reclassified amount is comprised of an estimate of severance payments to
be made to (i) approximately 400 mid-level management and non-management
employees pursuant to Mexican labor law requirements and (ii) three senior
management employees pursuant to the terms of their respective individual
employment contracts. These severance payments do not relate to prior
employee service, have any related contingencies or require that employees
provide future services.
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<PAGE> 46
(2) As a result of the decision to dispose of its corporate headquarters
building ("Montes Urales"), Iusacell recorded an impairment loss to adjust
the book value of Montes Urales to its fair value less costs to sell based
on an agreement to sell Montes Urales. The provision for consolidation of
facilities, as originally reported, was overstated. The reclassified amount
considers the book value of Montes Urales and the agreed upon sales price.
The book value of Montes Urales as of December 31, 1996, 1997 and 1998 and
as of September 30, 1999 was Ps.113.4 million (U.S.$12.1 million), Ps.98.3
million (U.S.$10.5 million), Ps.95.6 million (U.S.$10.2 million) and Ps.89.4
million (U.S.$9.6 million), respectively. Iusacell has reassessed this
accounting treatment under U.S. GAAP and determined that, as management did
not have the current ability to remove Montes Urales from operations in
December 1996, Montes Urales did not qualify as an asset held to be disposed
of at such date and consequently, should have been accounted for as an asset
to be held and used pursuant to the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." As a result, under U.S.
GAAP, an impairment charge would not have been recorded at December 31, 1996
related to Montes Urales. See "-- U.S. GAAP Reconciliation-Restatement
related to the provision for consolidation of facilities."
(3) The fixed assets obsolescence reserve relates to certain spare parts for the
analog communications equipment that, as a result of a detailed review by
Iusacell's engineers in November 1996, were determined to be obsolete.
Consequently, Iusacell recorded an impairment provision to adjust such
assets to their estimated salvage value and ceased the recording of
depreciation expense. The remaining book value of the spare parts as of
December 31, 1996 and 1997 was Ps.14.2 million (U.S.$1.5 million) and
Ps.12.8 million (U.S.$1.4 million), respectively. During 1998, in connection
with the implementation of the CDMA digital technology, Iusacell determined
that the remaining spare parts could be utilized in the conversion process
and, consequently, placed such parts into operations and began to record
depreciation expense. The remaining book value of the spare parts as of
December 31, 1998 and as of September 30, 1999 was Ps.10.2 million (U.S.$1.1
million) and Ps.8.8 million (U.S.$0.9 million), respectively.
(4) During 1996, Iusacell began to fully reserve accounts receivable over 90
days past due, based on changes in the estimation of the probable loss
inherent in the accounts receivable. Previously, Iusacell's policy involved
fully reserving balances over 120 days past due. The allowance for doubtful
accounts represents Iusacell's estimate of the probable loss inherent in all
accounts receivable considering general historical trends of customer
performance and factors surrounding the credit risk of specific customers.
IMPAIRMENT OF ANALOG COMMUNICATIONS EQUIPMENT
During 1997, based on certain changes in circumstances surrounding
Iusacell's analog communications equipment, Iusacell determined that the
carrying value of such equipment was impaired. See "-- Year Ended December 31,
1998 Compared to Year Ended December 31, 1997 -- Provision for Equipment
Impairment." Consequently, Iusacell recorded an impairment loss of Ps.1,208.4
million (U.S.$129.2 million) to reduce the value of its analog communications
equipment to fair value, amounting to Ps.3,170.4 million (U.S.$339.0 million).
The book value of the analog communications equipment as of December 31, 1997
and 1998 and September 30, 1999 was Ps.3,170.4 million (U.S.$339.0 million),
Ps.3,554.3 million (U.S.$380.1 million) and Ps.0.0 million (U.S.$0.0 million),
respectively. The equipment no longer provides cellular service to Iusacell's
customers because of the conversion to Lucent equipment completed in August
1999.
PROJECT 450 NON-CASH WRITEDOWN
During 1998, Iusacell 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 its investment in the project assets had occurred.
Consequently, Iusacell recorded an impairment charge of Ps.1,077.5 million
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<PAGE> 47
(U.S.$115.2 million) to write down the 450 MHz assets to fair value, amounting
to Ps.56.5 million (U.S.$6.0 million). Even though there was a limited market
for the 450 MHz network equipment, Iusacell's 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 September 30, 1999 is Ps.44.6 million
(U.S.$4.8 million) and Ps.40.1 million (U.S.$4.3 million), respectively. See
"-- Local Telephony in the 450 MHz Frequency Band."
YEAR 2000 COMPLIANCE
GENERAL
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
have failed to operate or failed to produce correct results if "00" were
interpreted to mean 1900, rather than 2000.
Iusacell implemented an enterprise-wide program to identify and address the
impact of the Year 2000 on its operations. This program included steps to:
- identify hardware and equipment issues and identify each item of firmware
and each software application or software application element that will
require modification or replacement in order to process and store
correctly dates and date-related data prior to, through and subsequent to
January 1, 2000,
- develop a plan and cost estimate for any such required modification or
replacement and a contingency plan and cost estimate in the event any
such modification or replacement is not expected to be implemented on a
timely basis,
- implement such corrective action or contingency plan, and
- test and evaluate the modified or replaced applications internally and
verify resolution of Year 2000 problems externally.
Iusacell completed the inventory, assessment and initial planning phases of
its Year 2000 compliance program in 1998. Remediation, replacement and
retirement activities were initiated in July 1998. All required modifications or
replacements of mission critical systems and internal network elements were
implemented by the end of the third quarter of 1999. All other required
modifications or replacements were completed by the end of October 1999. A
number of the necessary changes for Year 2000 compliance were made as part of
larger systems upgrades or replacements; for example, the replacement of the
existing analog cellular network with a new analog and digital cellular network
and the replacement of several existing cellular billing systems with a new
single cellular billing and customer care system. Internal testing for all
mission critical systems and internal network elements was completed by the end
of the third quarter of 1999. Iusacell completed all remaining planned internal
testing by mid-November 1999. Iusacell's transition to the Year 2000 was
accomplished with no interruption in service and with no billing problems. The
Company did not experience any failures in its mission critical systems. Four
minor systems failures were corrected within the first few days of 2000. No
contingency plans were deployed.
THIRD PARTY ISSUES
In general, Iusacell's product vendors have made available either Year 2000
compliant versions of their offerings or new compliant products as replacements
of discontinued offerings. Its key utilities also successfully handled the Year
2000 transition. Iusacell intends to monitor critical utilities, as appropriate,
through the completion of their respective remediation projects.
Iusacell's network operations interconnect and interoperate with domestic
and international networks of other carriers. If one of these carriers should
fail or suffer an adverse impact from a Year 2000 problem, customers could
experience impairment of service. External interoperability testing has been
completed
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<PAGE> 48
with respect to billing system interoperability. Iusacell has determined that,
given the projected testing costs, network interoperability testing with Telmex
is not cost effective. Because the protocols for signaling and interconnection
do not involve date-related information, signaling and interconnection with
Telmex, as well as with other carriers, are not susceptible to Year 2000
problems. If Telmex is not Year 2000 compliant for reasons other than signalling
and interconnection, it is possible that calls made by customers on or after
January 1, 2000 which interconnect with Telmex's landlines may fail to be
completed.
Iusacell cannot provide any assurance that all significant third parties
have implemented timely corrective measures necessary on their part to prevent
disruption of services or to ensure correct billing and payments.
CONTINGENCY PLANS
Iusacell has developed a corporate contingency plan to ensure that core
business functions and key support processes are in place in the event of
external, internal or supply chain failures. Iusacell is developing and
implementing a corporate contingency plan in the event of power failures induced
by Year 2000 problems. We are also monitoring water, transportation and other
public services as part of our overall program. All contingency planning was
completed in September 1999. Iusacell finalized procedures and tested critical
contingency plans, during the fourth quarter of 1999.
Because of the performance and stability problems initially experienced by
Iusacell with the cellular customer care and billing system provided by LHS
Communication Systems, Inc., Iusacell began to implement a contingency plan to
make the "Link" billing system provided by Bell Canada, which it had been using
in Regions 6, 7 and 9 prior to LHS system implementation, Year 2000 compliant.
Iusacell incurred Ps.19.0 million (U.S.$2.0 million) in expenses on this
contingency plan. With the implementation of the LHS system in all regions by
the end of the third quarter of 1999, this contingency plan was abandoned.
COSTS
From the inception of the Year 2000 project through December 31, 1998 and
September 30, 1999, Iusacell has incurred pretax expenses of approximately
Ps.16.8 million (U.S.$1.8 million) and Ps.39.8 million (U.S.$4.3 million),
respectively. Capital expenditures were insignificant in 1998 and amounted to
Ps.91.6 million (U.S.$9.8 million) in the nine-month period ended September 30,
1999, representing the acquisition of computer hardware equipment which
qualified for classification as fixed assets. Based on internal and external
studies, Iusacell estimates that total costs from July 1, 1998 through early
2000 to resolve its Year 2000 problem will be as high as U.S.$16.9 million:
U.S.$9.2 million for inventory, assessment, initial planning and the primary
remediation and replacement program and, in the event such corrective action is
not implemented on a timely basis in whole or in part, up to U.S.$7.7 million to
implement the above mentioned contingency plans.
These costs are associated with both internal and external staffing
resources, a portion of which will not be incremental, but rather will represent
the redeployment of existing information technology resources; however, because
of the complexity of the issue and possible unidentified risks, actual costs may
vary from this estimate. Funding for Year 2000 activities came primarily from
cash flow from operations.
RISKS
The failure to correct a material Year 2000 problem could cause an
interruption or failure of Iusacell's normal business functions or operations,
which could have a material adverse effect on Iusacell's reputation, results of
operations, liquidity or financial condition.
Due to the uncertainty inherent in other Year 2000 issues that are
ultimately beyond Iusacell's control, including, for example, the final Year
2000 readiness of suppliers, customers and interconnecting carriers, Iusacell is
unable to determine, at this time, the likelihood of a material impact on
results of operations, liquidity or financial condition. However, Iusacell took
measures to mitigate that risk through
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<PAGE> 49
the scheduled implementation and completion of its Year 2000 company-wide
program. Iusacell anticipates that, in the event of any material interruptions
or failures of service or billing resulting from actual or perceived Year 2000
problems within or beyond Iusacell's control, it could be subject to third party
claims and sanctions by Mexican authorities.
OTHER MATERIAL TRENDS AND CONTINGENCIES
Iusacell's financial condition and results of operations could also be
materially affected by the following events and developments:
NEGATIVE ECONOMIC CONDITIONS
The financial crises in emerging markets that began in late 1997, together
with the weakness through the first quarter of 1999 in the price of oil, which
is a significant source of revenue for the Mexican government, contributed to
renewed weakness in the Peso in the first three quarters of 1998, although the
Peso strengthened significantly in the fourth quarter of 1998 and the first nine
months of 1999. The Mexican government responded to revenue shortfalls from the
oil sector with new cutbacks in federal spending. Press reports during the
second and third quarters of 1998 also suggested that consumer spending, which
had been recovering, may have suffered a temporary setback.
Although the exact correlation between general government and consumer
spending and wireless telephony purchases and usage in Mexico is unknown, these
economic conditions may negatively affect subscriber growth rates and the
willingness of consumers to use their phones, thereby negatively affecting
revenues. In addition, the weakness in the Peso resulted in significant foreign
exchange losses for Iusacell in the first nine months of 1998. However, in the
fourth quarter of 1998 and the first nine months of 1999, Iusacell had
significant foreign exchange gains as the Peso strengthened against the U.S.
dollar.
These economic conditions, which also contributed to an increase in
domestic interest rates in the second half of 1998 and an upward surge of
inflation in early 1999, may also negatively impact the availability and cost of
funds. See "Risk Factors -- Risk Factors Relating to Doing Business in Mexico --
If Mexico experiences any more political or economic crises, we may lose money."
PRICE INCREASES AND ROLLBACKS
Iusacell has attempted, and continues to attempt, to exercise price
leadership in the Mexican cellular market, with a strategy of having its prices
keep pace with inflation if economic and competitive conditions permit. During
the first half of 1997, this strategy was effectively implemented through
weighted average price increases of 14.8% in April 1997 for the per minute
airtime price on its contract and prepay plans, and 8.3% in May 1997 for the
fixed monthly charge on all its contract plans. See "Business --
Marketing -- Pricing." In October 1997, however, Iusacell 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
Iusacell adjusted airtime prices downward by 4.6% on a weighted average basis
and in November 1997 further decreased airtime charges on one of its low-end
contract plans by 1.0%, in each case in order to maintain competitiveness.
In late March 1998, Iusacell raised airtime prices approximately 7.9% on
average for contract plans and 13.6% for prepay customers. Because of market and
competitive conditions, however, this increase was partially rolled back in
early May 1998 for both contract and prepay customers and, in late May 1998, the
remainder of the price increase for contract plans was reversed. As a result,
however, a 9.9% airtime price increase for prepay customers remained.
In August 1998, Iusacell 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 this price
increase not to be implemented. However, in October 1998, Iusacell raised
airtime prices for its contract plans by approximately 8% on a weighted average
basis. In late March 1999,
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<PAGE> 50
Iusacell raised airtime prices on its 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.
Iusacell's revenues will be adversely affected to the extent that price
increases cannot keep pace with inflation.
NEW COMPETITION
As a direct result of the spectrum auctions organized by the COFETEL which
concluded in May 1998, Iusacell is now facing additional mobile wireless
competition operating in the 1.9 GHz (PCS) spectrum in its cellular territories
and, in 2000, expects 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.
REGULATORY DEVELOPMENTS
The Mexican authorities resolved several critical regulatory issues in 1998
and will likely continue to resolve additional important regulatory issues
during the remainder of 1999 and 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.
Iusacell 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, Iusacell 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 to
mobile wireless customers. As a result, Iusacell booked a net Ps.31.9 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.
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.
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<PAGE> 51
In early January 1999, Iusacell filed with 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 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.
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, Iusacell 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 five months of CPP operations, Iusacell believes that
its call traffic increased by more than 8% due to CPP, with an increase in the
percentage of total calls that were incoming calls. Recently, Telmex reversed
its opposition to CPP, publicly announcing support for CPP.
The overwhelming majority of Iusacell's cellular customers have chosen not
to opt out of the CPP modality. Iusacell expects that the implementation of the
CPP modality will accelerate subscriber growth and increase subscriber usage
throughout the Mexican wireless market. Iusacell believes that, when other
countries have implemented CPP, they generally have experienced substantial
increases in usage by wireless telephone customers.
In the event that CPP causes a surge in cellular traffic, Iusacell will
likely experience improved revenue growth, but it may also need to incur
substantial additional capital expenditures to augment its capacity in order to
handle this greater traffic. See "-- Liquidity and Capital Resources -- Capital
Expenditures."
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 Iusacell's 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 its 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 late 1999 or 2000, the
SCT and 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
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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.
During the third quarter of 1998, Telmex and Alestra, S. de R.L., which is
commercially known as Alestra and in which AT&T is a shareholder, attempted to
reach a negotiated settlement of several issues related to long distance,
including the amount and reimbursement mechanism for such special projects. No
definitive agreement has been reached to date on such special projects and, if
such an agreement is reached, the impact on the financial condition and
operations of Iusacell cannot yet be estimated.
Quality Standards. In October 1999, Iusacell entered into an agreement
with the COFETEL to maintain certain cellular quality standards measured in
terms of connection time, dropped calls and ineffective attempts. Iusacell
currently meets these quality standards. Failure to maintain these quality
standards may result in refund obligations to subscribers and other governmental
sanctions. If Iusacell's call traffic grows at faster than expected levels,
Iusacell may need to further accelerate its capital expenditure program in order
to augment its capacity and thereby remain in compliance with the agreed quality
standards. See "-- Liquidity and Capital Resources -- Capital Expenditures."
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<PAGE> 53
RESULTS OF OPERATIONS
The following table presents for the periods indicated the percentage
relationships which certain items bear to revenues:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
----------------------- --------------------
1996 1997 1998 1998 1999
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Cellular service revenues...................... 70.2% 74.1% 74.6% 73.2% 83.3%
Other service revenues......................... 15.9 8.8 12.1 12.6 7.0
----- ----- ----- ----- -----
Total service revenues...................... 86.1 82.9 86.7 85.8 90.3
Telephone equipment and other revenues......... 13.9 17.1 13.3 14.2 9.7
----- ----- ----- ----- -----
Total revenues.............................. 100.0 100.0 100.0 100.0 100.0
Cost of sales:
Cost of services............................... 31.6 27.6 27.1 26.0 26.8
Cost of telephone equipment and other.......... 7.7 10.8 7.1 7.7 5.6
----- ----- ----- ----- -----
Total....................................... 39.3 38.4 34.2 33.7 32.4
Gross profit..................................... 60.7 61.5 65.8 66.3 67.6
Operating expenses............................... 43.8 40.0 38.2 38.9 33.1
Depreciation & amortization...................... 35.6 31.3 28.1 27.0 33.3
Project 450 non-cash writedown................... -- -- 34.8 43.3 --
----- ----- ----- ----- -----
Operating income (loss).......................... (18.7) (9.8) (35.3) (42.9) 1.2
Other income, net................................ -- -- 4.7 -- --
Integral financing cost (gain):
Interest expense, net.......................... 16.5 13.3 7.9 8.7 5.6
Foreign exchange (gain) loss, net.............. (3.7) 2.6 29.6 44.4 (11.2)
Gain on net monetary position.................. (20.5) (15.7) (24.0) (19.0) (17.9)
----- ----- ----- ----- -----
Total....................................... (7.7) 0.2 13.5 34.1 (23.5)
Equity participation in net income (loss) of
associated companies........................... 0.1 8.5 0.9 0.9 0.1
Provision for equipment impairment............... -- (49.9) -- -- --
Income (loss) from continuing operations before
asset tax, employee profit sharing, minority
interest and extraordinary item................ (10.9) (51.4) (43.2) (76.1) 24.8
Provision for asset tax and employee profit
sharing........................................ 2.1 2.4 2.3 1.7 3.8
Minority interest................................ (0.2) -- (0.2) 0.1 0.4
Extraordinary item............................... 8.5 -- -- -- --
Loss from discontinued operation................. -- -- (0.7) -- --
----- ----- ----- ----- -----
Net income (loss)................................ (21.3)% (53.8)% (46.0)% (77.7)% 21.4%
----- ----- ----- ------ -----
----- ----- ----- ------ -----
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES
Total revenues consist of cellular service revenues, revenues from other
services and telephone equipment and other revenues. Iusacell's service revenues
are principally derived from the provision of cellular telephone service in
Mexico. Other service revenues consist of revenues from the provision of
telecommunication services in Mexico other than cellular. 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. Revenues attributable to out-roaming are passed through to the
applicable host operator. See "Business -- Cellular Services -- Roaming."
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The following table presents the source of Iusacell's revenues for the nine
months ended September 30, 1999 ("Interim 1999") and the nine months ended
September 30, 1998 ("Interim 1998").
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1998 1999 CHANGE
---------------- ---------------- ------
PS. % PS. % %
------- ----- ------- ----- ------
(IN MILLIONS OF PESOS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Cellular service revenues....................... 1,668.3 73.3 2,422.9 83.3 45.2
Other service revenues.......................... 286.1 12.6 203.2 7.0 (29.0)
------- ----- ------- ----- -----
Total service revenues........................ 1,954.4 85.9 2,626.1 90.3 34.4
Telephone equipment and other revenues.......... 323.0 14.1 282.4 9.7 (12.6)
------- ----- ------- ----- -----
Total revenues................................ 2,277.4 100.0 2,908.5 100.0 27.7
======= ===== ======= ===== =====
</TABLE>
Cellular Services. The table below presents cellular service revenues by
source for Interim 1999 and Interim 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
1998(1) 1999(1)
-------------------- --------------------
PS. % PS. %
--------- ------- --------- -------
(IN MILLIONS OF PESOS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Airtime(2)............................................... 628.4 37.7 916.6 37.7
Monthly fees............................................. 793.4 47.6 1,004.4 41.5
Long distance............................................ 121.9 7.3 295.8 12.2
Value-added services(3).................................. 70.8 4.2 152.5 6.3
In-roaming(4)............................................ 46.9 2.8 52.3 2.2
Activation fees and other................................ 6.9 0.4 1.3 0.1
------- ----- ------- -----
Total cellular service revenues.......................... 1,668.3 100.0 2,422.9 100.0
======= ===== ======= =====
</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 conference calling, and revenues
from activation 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.
(4) See "Business -- Cellular Service -- Roaming" for a discussion of the
differences between in-roaming and out-roaming and the revenues associated
with these services. In-roaming revenues are reflected in total service
revenues and are paid to Iusacell by operators from other regions.
Out-roaming revenues are reflected in telephone equipment and other revenues
and are passed through to the applicable host operator.
Cellular service revenues increased by 45.2% to Ps.2,422.9 million
(U.S.$259.1 million) in Interim 1999 from Ps.1,668.3 million (U.S.$178.4
million) in Interim 1998 and represented 83.3% and 73.3% of total revenues in
Interim 1999 and Interim 1998, respectively. Revenues increased primarily as a
result of growth in the subscriber base and price increases. The number of
contract subscribers increased 33.8% and the number of prepay subscribers
increased 112.4% at September 30, 1999 as compared to September 30, 1998. See
"-- Increase in Prepay Subscriber Base." The benefit of the increase in
subscriber base was
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<PAGE> 55
offset in part by a 13.5% decrease in average monthly MOUs and a 8.6% decrease
in nominal average monthly cellular revenue per subscriber in Interim 1999 as
compared to Interim 1998.
Monthly fees from contract customers increased 26.6% to Ps.1,004.4 million
(U.S.$107.4 million) in Interim 1999 from Ps.793.4 million (U.S.$84.8 million)
in Interim 1998 because of the increase in contract subscribers and the 12%
price increase at the end of the first quarter of 1999. Airtime revenues also
increased 45.9% to Ps.916.6 million (U.S.$98.0 million) in Interim 1999 from
Ps.628.4 million (U.S.$67.2 million) in Interim 1998 because of higher usage
resulting from the increase in the subscriber base, accelerated migration by
analog customers to digital service and the addition of revenues from CPP
starting May 1, 1999. Long distance cellular revenues increased 142.7% to
Ps.295.8 million (U.S.$31.6 million) in Interim 1999 from Ps.121.9 million
(U.S.$13.0 million) in Interim 1998 mainly because of additional business
customers and an increase in usage by such customers and additional revenues
from international incoming traffic. See "-- Digitalization."
Average monthly MOUs for Interim 1999 (excluding incoming calls only prepay
customers) were 77, a decrease of 13.5% compared to the monthly average of 89
MOUs in Interim 1998. 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 general trend toward lower MOUs as Iusacell's expanded
customer base now includes subscribers who tend to generate fewer MOUs.
Nominal average monthly cellular revenue per subscriber declined 8.6% to
Ps.339 in Interim 1999 (excluding incoming calls only prepay customers) from
Ps.371 in Interim 1998. The reasons for this decline are primarily the same as
those noted to explain the decline of monthly MOUs.
Iusacell had 1,132,205 and 627,856 cellular subscribers at September 30,
1999 and 1998, respectively. Prepay subscribers increased by 112.4% from 371,781
subscribers, or 59.2% of total subscribers, at September 30, 1998 to 789,539
subscribers, or 69.7% of total subscribers, at September 30, 1999. A prepay
customer is included as a customer if, at the end of the period, such customer's
telephone number remains activated. See "Business -- Cellular Services -- Prepay
Customers." Contract subscribers increased by 33.8% from 256,075 to 342,666
between the same dates. Digital contract subscribers increased from 12,181 at
September 30, 1998 to 163,171 at September 30, 1999.
Contract subscriber churn declined to an average monthly level of 2.44% for
Interim 1999 from 2.58% for Interim 1998. This decline reflects improved
customer service and the implementation of special programs specifically
designed to enhance customer retention and loyalty.
Other Services. Other service revenues decreased by 29.0% to Ps.203.2
million (U.S.$21.7 million) in Interim 1999 from Ps.286.1 million (U.S.$30.6
million) in Interim 1998, and represented 7.0% and 12.6% of total revenues in
Interim 1999 and Interim 1998, respectively. This decrease was principally due
to lower sales of non-cellular products and services.
Telephone Equipment and Other. Telephone equipment and other revenues
decreased 12.6% to Ps.282.4 million (U.S.$30.2 million) in Interim 1999 from
Ps.323.0 million (U.S.$34.5 million) in Interim 1998. This decrease was
primarily due to lower out-roaming revenues and lower telephone equipment
revenues as fewer handsets were sold to prepay customers.
COST OF SALES
Iusacell's cost of sales includes cost of services, cost of telephone
equipment and other costs. Total cost of sales increased 22.9% to Ps.941.8
million (U.S.$100.7 million) in Interim 1999 from Ps.766.2 million (U.S.$81.9
million) in Interim 1998. As a percentage of total revenues, cost of sales
decreased marginally to 32.4% in Interim 1999 from 33.7% in Interim 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 and electricity, expensed
handset costs and accessories costs. Cost of services increased 31.7% to
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<PAGE> 56
Ps.778.7 million (U.S.$83.3 million) in Interim 1999 from Ps.591.2 million
(U.S.$63.2 million) in Interim 1998. This increase was mainly due to the
increase in revenues and additional fixed costs for leased circuits. As a
percentage of service revenues, cost of services increased from 26.0% for
Interim 1998 to 26.8% for Interim 1999 primarily because of the additional fixed
costs for leased circuits.
Cost of Telephone Equipment and Other. Cost of telephone equipment and
other costs decreased by 6.8% to Ps.163.1 million (U.S.$17.4 million) in Interim
1999 from Ps.175.0 million (U.S.$18.7 million) in Interim 1998 primarily due to
a lower average cost of handsets. As a percentage of telephone equipment and
other revenues, costs decreased to 5.6% in Interim 1999 from 7.7% in Interim
1998. The cost of a cellular handset given to a contract customer is amortized
over 18 months, the average length of Iusacell's cellular contract, instead of
being expensed in the period in which the customer received the telephone. If
these handset costs had been expensed instead of amortized, Iusacell's cost of
telephone equipment and other costs would have increased by Ps.82.4 million
(U.S.$8.8 million) and Ps.238.1 million (U.S.$25.5 million) in Interim 1999 and
Interim 1998, respectively.
OPERATING EXPENSES
Operating expenses increased 8.7% to Ps.963.4 million (U.S.$103.0 million),
which included a reduction of approximately Ps.59.7 million (U.S.$6.4 million)
in marketing expenses related to the funds provided in connection with the
swapout of the analog telecommunications network, in Interim 1999 from Ps.886.4
million (U.S.$94.8 million) in Interim 1998. As a percentage of total revenues,
operating expenses decreased to 33.1% in Interim 1999 from 38.9% in Interim
1998. Sales and advertising expenses increased by 6.2% from Ps.584.6 million
(U.S.$62.5 million) in Interim 1998 to Ps.621.1 million (U.S.$66.4 million) in
Interim 1999, primarily because of higher sales volume, larger distributor
commissions and more extensive advertising. General and administrative expenses
increased by 13.4% to Ps.342.3 million (U.S.$36.6 million) in Interim 1999 from
Ps.301.8 million (U.S.$32.3 million) in Interim 1998 because of increased
consulting fees for Year 2000 related compliance programs and higher fees
related to legal matters.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses decreased by 39.6% to Ps.967.4
million (U.S.$103.4 million) in Interim 1999 from Ps.1,602.0 million (U.S.$171.3
million) in Interim 1998. Excluding the Project 450 non-cash writedown,
depreciation and amortization in Interim 1998 would have been Ps.615.6 million
(U.S.$65.8 million). Consequently, on a normalized basis, depreciation and
amortization expenses increased 27.7% in Interim 1999 from Interim 1998,
primarily due to the substantial increases in network investment as a result of
capital expenditures in 1998 and 1999.
OPERATING INCOME
Iusacell recorded operating income of Ps.35.9 million (U.S.$3.8 million),
including the Ps.59.7 million (U.S.$6.4 million) marketing expense benefit from
the swapout of assets noted above, in Interim 1999 as compared to an operating
loss of Ps.977.2 million (U.S.$104.5 million) in Interim 1998.
The operating loss during Interim 1998 was primarily due to Iusacell's 450
project writedown. Excluding the Project 450 writedown, Iusacell would have had
operating income of Ps.9.2 million (U.S.$1.0 million).
INTEGRAL FINANCING GAIN
Iusacell recorded an integral financing gain of Ps.682.1 million (U.S.$72.9
million) in Interim 1999 compared to a cost of Ps.776.9 million (U.S.$83.1
million) in Interim 1998. This difference was principally due to a foreign
exchange gain of Ps.325.3 million (U.S.$34.8 million) in Interim 1999 as
compared to a foreign exchange loss of Ps.1,011.3 million (U.S.$108.1 million)
in Interim 1998. The Interim 1999 foreign exchange gain resulted from the effect
on Iusacell's U.S. dollar liability position of a 5.9% appreciation of the Peso
relative to the U.S. dollar in Interim 1999, while the foreign exchange loss
53
<PAGE> 57
in Interim 1998 resulted from the effect on Iusacell's U.S. dollar liability
position of a 25.3% devaluation of the Peso relative to the U.S. dollar in
Interim 1998. Monetary gain increased by 20.1% to Ps.519.6 million (U.S.$55.6
million) in Interim 1999 from Ps.432.5 million (U.S.$46.2 million) in Interim
1998 primarily due to a higher net monetary liability position and
period-over-period inflation of 16.1%. Net interest expense decreased by 17.8%
from Ps.198.1 million (U.S.$21.2 million) in Interim 1998 to Ps.162.8 million
(U.S.$17.4 million) in Interim 1999 primarily due to increased capitalized
interest related to the investment in CDMA digital equipment during Interim
1999.
NET INCOME
As a result of the factors described above and Iusacell's equity
participation in the net income of its associated companies, Iusacell's net
income was Ps.619.3 million (U.S.$66.2 million) in Interim 1999 as compared to a
net loss of Ps.1,768.7 million (U.S.$189.1 million) in Interim 1998. Excluding
the Project 450 writedown, Iusacell would have had a net loss of Ps.782.4
million (U.S.$83.7 million) in interim 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
The following table presents the source of Iusacell's revenues for the
years ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998
-------------------- -------------------- %
PS. % PS. % CHANGE
--------- ------- --------- ------- ------
(IN MILLIONS OF PESOS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Cellular service revenues....................... 1,795.3 74.1 2,313.7 74.6 28.9
Other service revenues.......................... 213.9 8.8 375.0 12.1 75.3
------- ----- ------- ----- ----
Total service revenues........................ 2,009.2 82.9 2,688.7 86.7 33.8
Telephone equipment and other revenues.......... 413.3 17.1 412.0 13.3 (0.3)
------- ----- ------- ----- ----
Total revenues................................ 2,422.5 100.0 3,100.7 100.0 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. %
--------- ------- --------- -------
(IN MILLIONS OF PESOS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Airtime(2)............................................... 672.0 37.4 830.0 35.9
Monthly fees............................................. 800.5 44.6 1,055.0 45.6
Long distance............................................ 158.7 8.8 193.8 8.4
Value-added services(3).................................. 93.1 5.2 165.4 7.1
In-roaming(4)............................................ 69.4 3.9 61.9 2.7
Activation fees and other................................ 1.6 0.1 7.6 0.3
------- ----- ------- -----
Total cellular service revenues................ 1,795.3 100.0 2,313.7 100.0
======= ===== ======= =====
</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) 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.
54
<PAGE> 58
(3) Includes fees for value-added services, such as call waiting, call transfer,
emergency service, secretarial service and conference calling, and revenues
from activation bonds, insurance-related charges payable by subscribers,
rural and public telephony and 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.
(4) See "Business -- Cellular Services -- Roaming" for a discussion of the
differences between in-roaming and out-roaming and the revenues associated
with these services. In-roaming revenues are reflected in total service
revenues and are paid to Iusacell by operators from other regions. Out-
roaming revenues are reflected in telephone equipment and other revenues and
are passed through to the applicable host operator.
Cellular service revenues increased by 28.9% to Ps.2,313.7 million
(U.S.$247.4 million) in 1998 from Ps.1,795.3 million (U.S.$192.0 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. The number of contract subscribers increased 38.5% and the number of
prepay subscribers increased 139.0% at December 31, 1998 as compared to December
31, 1997. The benefit of the increase in subscriber base was offset in part by 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.1,055.0 million
(U.S.$112.8 million) in 1998 from Ps.800.5 million (U.S.$85.6 million) in 1997
because of the increase in contract subscribers. Airtime revenues also increased
23.5% to Ps.830.0 million (U.S.$88.8 million) in 1998 from Ps.672.0 million
(U.S.$71.9 million) in 1997 mainly because of higher usage resulting from the
increase in the subscriber base. Long distance cellular revenues increased 22.1%
to Ps.193.8 million (U.S.$20.7 million) in 1998 from Ps.158.7 million (U.S.$17.0
million) in 1997 mainly because of additional high volume customers and an
increase in usage by all customers.
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
now includes subscribers who tend to generate fewer MOUs.
Nominal average monthly cellular revenue per subscriber declined 22.2% to
Ps.361 in 1998 from Ps.464 in 1997. This decline was primarily due to the same
reasons noted to explain the decline of monthly MOUs, and to a shift in usage
mix towards discounted incoming calls (discounts were implemented in October
1997). See "-- Other Material Trends and Contingencies -- Price Increases and
Rollbacks."
Iusacell 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. See "Business
- -- Cellular Services -- Prepay Customers." Contract subscribers increased by
38.5% from 199,964 to 277,014 between the same dates.
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.
Other Services. Other service revenues increased by 75.3% to Ps.375.0
million (U.S.$40.1 million) in 1998 from Ps.213.9 million (U.S.$22.9 million) in
1997, and represented 12.1% and 8.8% of total revenues in 1998 and 1997,
respectively. This increase was principally due to higher sales of non-cellular
products and services.
Telephone Equipment and Other. Telephone equipment and other revenues
decreased 0.3% to Ps.412.0 million (U.S.$44.1 million) in 1998 from Ps.413.3
million (U.S.$44.2 million) in 1997. This decrease was primarily due to lower
out-roaming revenues.
55
<PAGE> 59
COST OF SALES
Total cost of sales increased 13.9% to Ps.1,061.8 million (U.S.$113.5
million) in 1998 from Ps.931.9 million (U.S.$99.6 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.841.4 million
(U.S.$90.0 million) in 1998 from Ps.669.6 million (U.S.$71.6 million) in 1997.
This increase was mainly due to the 22.3% increase in cellular service revenues
(which resulted in higher overall (i) taxes and fees payable to the Mexican
government and (ii) Telmex interconnection fees), offset in part by a 21.9%
decrease in long-distance interconnection costs resulting from a greater use of
Iusacell's own expanded 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.
See "-- Other Material Trends and Contingencies -- Regulatory Developments."
Cost of Telephone Equipment and Other. Cost of telephone equipment and
other costs decreased by 16.0% to Ps.220.4 million (U.S.$23.6 million) in 1998
from Ps.262.3 million (U.S.$28.0 million) in 1997 primarily due to a lower cost
of handsets. As a percentage of telephone equipment and other revenues, costs
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
Iusacell's cellular contract, instead of being expensed in the period in which
the customer received the telephone. If the handset costs had been expensed
instead of amortized, Iusacell's cost of telephone equipment and other costs
would have increased by Ps.273.1 million (U.S.$29.2 million) and Ps.205.3
million (U.S.$22.0 million) in 1998 and 1997, respectively.
OPERATING EXPENSES
Operating expenses increased 22.2% to Ps.1,183.2 million (U.S.$126.5
million) in 1998 from Ps.968.5 million (U.S.$103.6 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.603.9
million (U.S.$64.6 million) in 1997 to Ps.810.7 million (U.S.$86.7 million) in
1998, primarily because of increased competition for customer growth and the
launch of Iusacell's digital services. General and administrative expenses
increased 2.1% to Ps.372.5 million (U.S.$39.8 million) in 1998 from Ps.364.6
million (U.S.$39.0 million) in 1997, primarily due to higher salaries and
benefits and general operating costs. In accordance with Mexican GAAP, until
September 1998, certain pre-operating expenses, primarily related to Project
450, were capitalized rather than expensed as under U.S. 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. See
"-- Depreciation and Amortization."
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses, including the project 450 non-cash
writedown, increased by 157.4% to Ps.1,950.1 million (U.S.$208.5 million) in
1998 from Ps.757.7 million (U.S.$81.0 million) in 1997. This significant
increase was primarily due to the Ps.1,077.5 million (U.S.$115.2 million)
non-cash writedown of the carrying value of Iusacell's investment in its 450 MHz
fixed wireless project. See "-- Local Telephony in the 450 MHz Frequency Band."
OPERATING LOSS
Iusacell recorded an operating loss of Ps.1,094.4 million (U.S.$117.0
million) in 1998 as compared to an operating loss of Ps.235.5 million (U.S.$25.2
million) in 1997. Excluding the non-cash writedown for the 450 MHz project, the
1998 operating loss would have been Ps.17.0 million (U.S.$1.8 million).
56
<PAGE> 60
OTHER INCOME
Other income of Ps.145.7 million (U.S.$15.6 million) in 1998 primarily
represents a gain from the Mexican GAAP accounting of a fiber optic cable
agreement with Bestel, S.A. de C.V. See "-- U.S. GAAP Reconciliation -- Gain
from the exchange of non-monetary assets."
INTEGRAL FINANCING COST
Integral financing cost was Ps.418.1 million (U.S.$44.7 million) in 1998
compared to a cost of Ps.5.1 million (U.S.$0.5 million) in 1997 due principally
to a foreign exchange loss of Ps.918.2 million (U.S.$98.2 million) in 1998 as
compared to a foreign exchange loss of Ps.63.1 million (U.S.$6.7 million) in
1997, resulting from the effect of a higher Peso devaluation and U.S. dollar net
liability position in 1998 as compared with 1997. Net interest expense decreased
by 24.1% to Ps.245.2 million (U.S.$26.2 million) in 1998 from Ps.323.2 million
(U.S.$34.6 million) in 1997 because of the capitalization of interest related to
investments in fixed assets in the amount of Ps.135.8 million (U.S.$14.5
million). Monetary gain increased by 95.6% to Ps.745.3 million (U.S.$79.7
million) in 1998 from Ps.381.2 million (U.S.$40.8 million) in 1997 primarily due
to a higher net monetary liability position and period-over-period inflation of
18.6%.
PROVISION FOR EQUIPMENT IMPAIRMENT
As a result of a reassessment of the accounting for the impairment charge
related to Iusacell's analog communications network under Mexican GAAP, a
provision of Ps.1,208.4 million (U.S.$129.2 million) was recorded as a charge to
income in 1997. See "-- U.S. GAAP Reconciliation -- Fixed Assets Revaluation"
and Notes 20 and 22 to the Audited Consolidated Financial Statements.
For U.S. GAAP purposes, the Ps.1,208.4 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 amount of Iusacell's analog
telecommunications network 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 Iusacell would need to adopt digital technology in
order to remain competitive and that CDMA was the best technology
available to Iusacell.
- The plans developed in 1997 by Telmex, the incumbent carrier, and other
wireless carriers to launch digital technology in Mexico in 1998.
- Iusacell's decision to participate in the digital personal communications
services 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 Iusacell's subscriber base during 1997, such that the
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, Iusacell estimated the future
cash flows, undiscounted and without interest, of the analog equipment based on
its remaining life and considering the eventual disposition of the equipment
under the terms of a December 1997 agreement with Lucent 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.
57
<PAGE> 61
Having determined that the analog equipment had been impaired, Iusacell
then used the measurement criteria in SFAS 121 to determine the amount of the
impairment. Because the analog network is Iusacell's principal fixed asset and
integral to its operations, Iusacell believes 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, Iusacell reduced the
value of its investment in the analog network 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 to be granted pursuant to the agreement with
Lucent. See "-- Digitalization" and Note 20 to the Audited Consolidated
Financial Statements.
LOSS FROM DISCONTINUED OPERATIONS
Loss from discontinued operations of Ps.20.2 million (U.S.$2.2 million) in
1998 represents the loss recognized as a result of Iusacell's discontinuation of
its Cellular Solutions de Mexico operation. See Note 19 to the Audited
Consolidated Financial Statements.
NET LOSS
As a result of the factors described above, Iusacell's net loss was
Ps.1,424.1 million (U.S.$152.3 million) in 1998 as compared to a net loss of
Ps.1,302.4 million (U.S.$139.3 million) in 1997. Excluding the non-cash
writedown for the 450 MHz project, Iusacell's net loss for 1998 would have been
Ps.346.6 million (U.S.$37.1 million).
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
The following table presents the source of Iusacell's revenues for the
years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997
---------------- ---------------- %
PS. % PS. % CHANGE
------- ----- ------- ----- ------
(IN MILLIONS OF PESOS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Cellular service revenues....................... 1,690.9 70.2 1,795.3 74.1 6.2
Other service revenues(1)....................... 381.7 15.9 213.9 8.8 (43.9)
------- ----- ------- ----- -----
Total service revenues........................ 2,072.6 86.1 2,009.2 82.9 (3.0)
Telephone equipment and other revenues........ 334.2 13.9 413.3 17.1 23.6
------- ----- ------- ----- -----
Total revenues............................. 2,406.8 100.0 2,422.5 100.0 0.7
======= ===== ======= ===== =====
</TABLE>
- ---------------
(1) Other service revenues consist of revenues from the provision of
telecommunication services in Mexico other than cellular and, until December
1996, from revenues derived from Iusacell's consolidated 51% investment in
Iusatel Chile, S.A. de C.V. ("Iusatel Chile"), a Chilean long distance
provider. Iusacell sold its 51% stake in Iusatel Chile in December 1996. See
"Business -- International Joint Ventures."
58
<PAGE> 62
Cellular Services. The table below presents cellular service revenues by
source for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996(1) 1997(1)
-------------------- --------------------
PS. % PS. %
--------- ------- --------- -------
(IN MILLIONS OF PESOS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
Airtime(2)............................................... 590.7 34.9 672.0 37.4
Monthly fees............................................. 771.1 45.6 800.5 44.6
Long distance(3)......................................... 126.3 7.5 158.7 8.8
Value-added services(4).................................. 125.9 7.4 93.1 5.2
In-roaming(5)............................................ 76.8 4.6 69.4 3.9
Activation fees and other................................ 0.1 0.0 1.6 0.1
------- ----- ------- -----
Total cellular service revenues........................ 1,690.9 100.0 1,795.3 100.0
======= ===== ======= =====
</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) Long distance revenues generated by cellular subscribers were passed through
to Telmex prior to August 11, 1996. Since that date, such revenues have been
retained by Iusacell.
(4) Includes fees for value-added services, such as call waiting, call transfer,
emergency service, secretarial service and conference calling, and revenues
from activation bonds, insurance-related charges payable by subscribers,
rural and public telephony and 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.
(5) See "Business -- Cellular Services -- Roaming" for a discussion of the
differences between in-roaming and out-roaming and the revenues associated
with these services. In-roaming revenues are reflected in total service
revenues and are paid to Iusacell by operators from other regions.
Out-roaming revenues are reflected in telephone equipment and other revenues
and are passed through to the applicable host operator.
Cellular service revenues increased by 6.2% to Ps.1,795.3 million
(U.S.$192.0 million) in 1997 from Ps.1,690.9 million (U.S.$180.8 million) in
1996 and represented 74.1% and 70.2% of total revenues in 1997 and 1996,
respectively. Revenues increased as a result of a 71.8% increase in total
subscribers in 1997, comprised by a 25.6% increase in contract subscribers and a
171.4% increase in prepay subscribers, offset in part by a 11.0% decrease in
average monthly MOUs.
Airtime revenues increased 13.8% to Ps.672.0 million (U.S.$71.9 million) in
1997 from Ps.590.7 million (U.S.$63.2 million) in 1996, and represented 37.4% of
total cellular revenue in 1997 as compared to 34.9% in 1996. This increase in
airtime revenue resulted mainly from price increases and higher usage resulting
from the increase in the subscriber base. Monthly fees from contract customers
increased 3.8% to Ps.800.5 million (U.S.$85.6 million) in 1997 from Ps.771.1
million (U.S.$82.5 million) in 1996. Monthly fee growth benefited from price
increases in 1997, but trailed contract customer growth because the majority of
the new contract plan additions was added during the second half of 1997. Long
distance cellular revenues increased 25.6% to Ps.158.7 million (U.S.$17.0
million) in 1997 from Ps.126.3 million (U.S.$13.5 million) in 1996 mainly
because of the growth in the cellular subscriber base in 1997.
59
<PAGE> 63
Iusacell had 400,123 and 232,906 cellular subscribers at December 31, 1997
and 1996, respectively. Prepay subscribers increased by 171.4% from 73,762
subscribers, or 31.7% of total subscribers, at December 31, 1996 to 200,159
subscribers, or 50.0% of total subscribers, at December 31, 1997. Contract
subscribers increased by 25.6% from 159,144 to 199,964 between the same dates.
In 1997, contract subscriber churn declined dramatically to an average
monthly level of 2.94% from 4.28% during 1996. This decline reflects net
increases in contract subscribers, which reversed the previous downward trend in
contract customers experienced in 1996 when many such customers migrated to
prepay plans as a result of economic conditions, as well as improved customer
service.
Average monthly MOUs for 1997 were 105, a decrease of 11.0% compared to the
monthly average of 118 MOUs in 1996. This decline in MOUs was largely due to the
significant increase in the number of Iusacell's prepay customers, who generate
substantially lower average MOUs than contract customers. In addition, Iusacell
has experienced a trend toward lower MOUs as its expanded customer base now
includes subscribers who tend to generate fewer MOUs.
Nominal average monthly cellular revenue per subscriber decreased 5.7% to
Ps.464 in 1997 from Ps.492 in 1996. This decline was primarily due to the same
reasons noted to explain the decline of monthly MOUs.
Other Services. Other service revenues decreased by 43.9% to Ps.213.9
million (U.S.$22.9 million) in 1997 from Ps.381.7 million (U.S.$40.8 million) in
1996, and represented 8.8% and 15.9% of total revenues in 1997 and 1996,
respectively. This decrease, in large part, was because of the sale of
Iusacell's interest in Iusatel Chile in December 1996. Revenues derived from
Iusatel Chile were Ps.89.3 million (U.S.$9.6 million) in 1996.
Telephone Equipment and Other. Telephone equipment and other revenues grew
23.6% to Ps.413.3 million (U.S.$44.2 million) in 1997 from Ps.334.2 million
(U.S.$35.7 million) in 1996. This increase was primarily due to an increase in
handset sales to support Iusacell's growing prepay program.
COST OF SALES
Total cost of sales decreased 1.5% to Ps.931.9 million (U.S.$99.6 million)
in 1997 from Ps.946.2 million (U.S.$101.2 million) in 1996. As a percentage of
total revenues, cost of sales decreased to 38.4% in 1997 from 39.3% in 1996.
Cost of Services. Cost of services decreased 11.9% to Ps.669.6 million
(U.S.$71.6 million) in 1997 from Ps.759.8 million (U.S.$81.2 million) in 1996.
This decrease was mainly due to the sale of Iusatel Chile and reduced Telmex
interconnection fees.
Cost of Telephone Equipment and Other. Despite the lower rate of inflation
in 1997 relative to the rate of inflation in 1996, cost of telephone equipment
and other costs increased by 40.7% to Ps.262.3 million (U.S.$28.0 million) in
1997 from Ps.186.4 million (U.S.$19.9 million) in 1996, primarily due to an
increase in handsets sold to support Iusacell's prepay program. As a percentage
of telephone equipment and other revenues, costs of telephone equipment and
other costs increased to 63.5% in 1997 from 55.8% in 1996. The cost of a
cellular handset given to a contract customer is amortized over 18 months,
instead of being expensed in the period in which the customer received the
telephone. If these handset costs had been expensed instead of amortized,
Iusacell's cost of telephone equipment and other costs would have increased by
Ps.205.3 million (U.S.$22.0 million) and Ps.293.7 million (U.S.$31.4 million) in
1997 and 1996, respectively.
All of Iusacell's cellular handsets are subject to obsolescence based on a
number of factors, including changes in customer preferences, competition and
technological developments. The decrease in the allowance for obsolete and slow
moving inventories as a percentage of cellular telephone and accessories (from
39% at December 31, 1996 to 11% at December 31, 1997) was primarily related to
two items: (i) a significant amount of handsets were purchased in December 1997
in anticipation of a sales promotion to be launched in early 1998 and (ii) a
special provision for loss established at the end of 1996 to cover damage from a
flood at one of Iusacell's warehouses.
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OPERATING EXPENSES
Operating expenses decreased 8.0% to Ps.968.5 million (U.S.$103.6 million)
in 1997 from Ps.1,053.0 million (U.S.$112.6 million) in 1996, and, as a
percentage of total revenues, decreased to 40.0% in 1997 from 43.8% in 1996.
Sales and advertising expenses grew 6.7% from Ps.565.7 million (U.S.$60.5
million) in 1996 to Ps.603.9 million (U.S.$64.6 million) in 1997. General and
administrative expenses declined 25.2% to Ps.364.6 million (U.S.$39.0 million)
in 1997 from Ps.487.3 million (U.S.$52.1 million), primarily due to the
elimination of general and administrative expenses from Iusatel Chile, a 17%
reduction in administrative and staff personnel and a decline in consulting fees
in 1997.
In accordance with Mexican GAAP, pre-operating expenses (net of
pre-operating revenues) associated with Iusacell's provision of local wireless
service in the 450 MHz band on a trial basis (as well as with certain other
services) are capitalized rather than, as required under U.S. GAAP, expensed.
The pre-operating expenses (net of pre-operating revenues) that were capitalized
in 1997 and 1996 equaled Ps.110.3 million (U.S.$11.8 million) and Ps.108.1
million (U.S.$11.6 million), respectively.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses decreased by 11.5% to Ps.757.7
million (U.S.$81.0 million) in 1997 from Ps.855.9 million (U.S.$91.5 million) in
1996. The decline in depreciation and amortization is attributable to the
reduction in the carrying value of fixed assets during 1997. In accordance with
Mexican GAAP and following Bulletin B-10, fixed assets and depreciation for the
year are restated using inflation factors without exceeding net realizable
value.
OPERATING LOSS
For 1997, Iusacell recorded an operating loss of Ps.235.5 million
(U.S.$25.2 million) as compared to an operating loss of Ps.448.3 million
(U.S.$47.9 million) in 1996.
INTEGRAL FINANCING COST
Integral financing cost was Ps.5.1 million (U.S.$0.5 million) in 1997
compared to a gain of Ps.183.1 million (U.S.$19.6 million) in 1996 due
principally to a foreign exchange loss of Ps.63.1 million (U.S.$6.7 million) in
1997 compared to a foreign exchange gain of Ps.87.9 million (U.S.$9.4 million)
in 1996. In 1997, Iusacell recorded a decrease in gain on monetary position of
22.7% to Ps.381.2 million (U.S.$40.8 million) in 1997 from Ps.493.0 million
(U.S.$52.7 million) in 1996 reflecting the lower rate of inflation in 1997. Net
interest expense decreased 18.8% to Ps.323.2 million (U.S.$34.6 million) in 1997
from Ps.397.9 million (U.S.$42.5 million) in 1996. The decrease in interest
expense was due to significantly lower interest rates, offset in part by higher
levels of borrowing in 1997.
EQUITY PARTICIPATION IN NET INCOME OF ASSOCIATED COMPANIES
Iusacell recorded equity participation in net income of associated
companies of Ps.205.3 million (U.S.$22.0 million) in 1997 as compared to Ps.1.9
million (U.S.$0.2 million) in 1996. This increase was due to the gain on the
sale of Iusacell's Ecuadorian affiliate. See "Business -- International Joint
Ventures."
PROVISION FOR EQUIPMENT IMPAIRMENT
As a result of a reassessment of the accounting for the impairment charge
related to Iusacell's analog communications network under Mexican GAAP, a
provision of Ps.1,208.4 million (U.S.$129.2 million) was recorded as a charge to
income in 1997. See "-- U.S. GAAP Reconciliation -- Fixed Assets Revaluation"
and Notes 20 and 22 to the Audited Consolidated Financial Statements.
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NET LOSS
As a result of the factors described above, Iusacell's net loss was
Ps.1,302.4 million (U.S.$139.3 million) in 1997 as compared to a net loss of
Ps.514.2 million (U.S.$55.0 million) in 1996. Excluding the provision for
equipment impairment for the analog communications network, Iusacell's net loss
for 1997 would have been Ps.94.1 million (U.S.$10.1 million).
INCOME TAX, ASSET TAX AND EMPLOYEES' PROFIT SHARING
Prior to January 1, 1999, Iusacell prepared its tax returns on a fully
consolidated basis for all but three of its subsidiaries, benefiting from the
ability to offset losses incurred by some subsidiaries against the gains of
others within the consolidated group. Iusacell 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, Iusacell must
limit its tax consolidation to 60% of all its 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 its consolidated tax
return (although they are consolidated for financial statement purposes),
because Iusacell does not hold at least 51% of the voting shares of such
subsidiaries. Iusacell 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 the Company has filed for a review
(recurso de revision). See "Business -- Legal Proceedings -- Non Judicial
Disputes."
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 tax exceeds the computed income tax liability. Iusacell
provided for Ps.49.8 million (U.S.$5.3 million), Ps.59.1 million (U.S.$6.3
million), Ps.70.5 million (U.S.$7.5 million) and Ps.111.6 million (U.S.$11.9
million) of net asset taxes for 1996, 1997, 1998 and the first nine months of
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, Iusacell paid no income taxes
in 1996, 1997, 1998 and the first nine months of 1999 and paid the asset taxes
specified above. See Note 12 to the Audited Consolidated Financial Statements
for a discussion of Iusacell's carry forward tax losses.
While Iusacell has no employees at the holding company level, its
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 and Ps.0.4 million in Interim 1999.
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. See "Prospectus
Summary -- Reorganization of Iusacell." The indebtedness discussed in this
section was all incurred by Old Iusacell. The notes described in this offering
memorandum will be effectively subordinated to all existing and future
indebtedness and other liabilities of Old Iusacell and New Iusacell's other
subsidiaries.
GENERAL
Iusacell believes that funds from operating activities, existing export
credit agency financing, other vendor financing, and the net proceeds from the
recent debt and equity offerings, will be adequate to meet its debt service and
principal amortization requirements, working capital requirements and capital
expenditure needs for its existing businesses for 1999 and the first half of
2000, although no assurance can
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be given in this regard. In 2000, Iusacell will seek to raise up to U.S.$40.0
million in vendor financing to acquire microwave transmission equipment, attempt
to monetize some of its radio tower assets within the restrictions imposed by
its debt covenants and engage in an equity capital markets transaction. However,
we cannot assure you that Iusacell will be able to complete any of these
transactions. In 2001, Iusacell expects to meet its funding needs for its
existing businesses through a combination of debt and equity capital market
transactions and vendor financings. Iusacell's 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. Iusacell
is seeking to obtain this financing from equipment vendors and other sources.
Iusacell's future operating performance and ability to service and repay its
indebtedness will be subject to future economic and competitive conditions and
to financial, business and other factors, many of which are beyond Iusacell's
control. See "-- Capital Expenditures."
CAPITAL EXPENDITURES
Iusacell expects 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,
implement new billing systems, complete its Year 2000 compliance program 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. See "-- Liquidity."
Total capital expenditures in 1997 were Ps.920.6 million (U.S.$98.4
million), compared with Ps.359.4 million (U.S.$38.4 million) in 1996. Total
capital expenditures in 1998 increased substantially because of the accelerated
deployment of the CDMA digital network and were Ps.3,553.3 million (U.S.$379.9
million), including Ps.541.4 million (U.S.$57.9 million) for the acquisition of
PCS frequency concessions in Regions 1 and 4.
Iusacell expects capital expenditures for 1999, 2000 and 2001 to total
approximately U.S.$475.0 million. Iusacell expects to invest up to U.S.$177.0
million during 1999, of which approximately U.S.$132.8 million had been invested
as of September 30, 1999. In 1999, approximately U.S.$131.2 million will be
allocated to the development of the wireless network, including completion of
the deployment of a replacement analog cellular network and a new CDMA digital
network pursuant to an agreement entered into with Lucent in December 1997. The
balance of U.S.$45.8 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 billing system and upgrades to other management
information systems,
- used to make equipment and software applications Year 2000 compliant and
- used to pay interest that is being capitalized.
Iusacell expects capital expenditures for 2000 and 2001 to total approximately
U.S.$195.0 million and U.S.$103.0 million, respectively. For an explanation of
the items included in capital expenditures, see "Notes to the Selected
Consolidated Financial and Operating Information -- Footnote (9)."
Additional funds will be allocated to the build-out and operation of
concessions to provide wireless telephony over the PCS E-Band in Region 1 and
Region 4, subject to obtaining financing at the PCS operating company level from
equipment vendors and other sources. Iusacell expects that capital expenditures
to build out its wireless network in northern Mexico will not exceed U.S.$55.0
million in 2000 and 2001. See "Risk Factors -- Risk Factors Relating to
Iusacell -- 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."
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In December 1997, COFETEL approved the modification of Iusacell's long
distance concession, substantially reducing the coverage and technological
investment requirements. Iusacell estimates that full compliance with these
requirements will require approximately U.S.$115.0 million in capital
expenditures, of which approximately U.S.$58.0 million had already been invested
prior to 1998, approximately U.S.$27.0 million was invested in 1998,
approximately U.S.$25.0 million will be invested in 1999, 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 its 14 1/4%
Senior Notes due 2006, New Iusacell does not 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, New Iusacell expects to meet its
liquidity requirements, if any, with funds provided by its recent equity and
debt offering, and capital contributions from its principal shareholders.
Old Iusacell's liquidity has been provided by cash from operations, short
and long-term borrowings, vendor financing and capital contributions.
Total debt, including trade notes payable, was Ps.4,413.4 million
(U.S.$471.9 million) at September 30, 1999, which compares with U.S.$462.0
million at December 31, 1998. After giving pro forma effect to this offering and
other adjustments described under "Capitalization," our total indebtedness,
including trade notes payable, would have been Ps.7,795.2 million (U.S.$833.5
million) at September 30, 1999.
Old Iusacell's debt at December 31, 1998 represented an increase of 69.0%
from its total debt at December 31, 1997. All of Old Iusacell's debt outstanding
at September 30, 1999 was U.S. dollar-denominated and unhedged against foreign
exchange risk. See "-- Market Risks." At September 30, 1999, Old Iusacell's
average cost of outstanding debt was approximately 8.3%, with a remaining
average maturity of approximately 3.0 years. At September 30, 1999, Old
Iusacell's debt to total capital ratio was 45.0% as compared to 55.5% at
December 31, 1998 and 40.2% at December 31, 1997. Excluding the one-time charge
related to the 450 MHz project, the debt to total capital ratio would have been
50.6% at December 31, 1998.
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 and the Bank of New York as trustee (the "New
Iusacell Indenture"). U.S.$133.5 million of these proceeds were deposited into a
security account and will be used to pay the first six semi-annual installments
of interest on the New Iusacell notes. The New Iusacell notes are subject to an
exchange offer for registered notes, which will also be governed by the New
Iusacell Indenture (whether or not exchanged, the "14 1/4% Senior Notes"). This
exchange offer is expected to occur by March 31, 2000.
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 (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 (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.
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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 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 a 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 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.
The Eximbank Financing. On July 15, 1999, Old Iusacell consummated a
financing which consists of:
- a five-year senior secured 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
- a two-year senior secured 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 analog and CDMA digital cellular network equipment
acquired for Regions 6, 7 and 9, a second lien on any and all other Lucent
analog and CDMA digital cellular network equipment acquired under Old Iusacell's
contract with Lucent, 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.
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As of September 30, 1999, U.S.$79.3 million had been borrowed under the
Eximbank Facilities. An additional U.S.$18.9 million was borrowed on October 14,
1999.
In December 1999, Iusacell was informed that UBS AG intends to assign its
interest in the Eximbank Facilities to Banque Nationale de Paris.
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 ("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.
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.
As of September 30, 1999, U.S.$14.0 million were outstanding under the two
handset facilities. These loans are classified as trade notes payable under
Mexican GAAP.
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.$6.2 million in future loans to be made by Banco Bilbao Vizcaya to its
customers for the purchase of digital handsets.
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.
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 September 30, 1999, Old Iusacell had U.S.$3.6 million of such
vendor financing outstanding of which U.S.$1.7 million was paid in October 1999,
U.S.$0.8 million was paid in November 1999 and U.S.$1.1 million is due and
payable in March 2000. This vendor financing is classified as trade notes
payable under Mexican GAAP.
New Iusacell is currently negotiating up to U.S.$40.0 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,
computer hardware and software, and radio towers.
Recent equity offerings. On August 10, 1999, New Iusacell completed a
comprehensive equity recapitalization and restructuring. See "Prospectus
Summary -- Reorganization of Iusacell." 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, New Iusacell received net proceeds of approximately
U.S.$33.7 million, which were used primarily for the acquisition of cellular
network infrastructure equipment.
DIVIDEND POLICY
Since becoming a public company in 1994, Iusacell has not paid dividends
and it currently has no plans to initiate dividend payments. In addition, the
Old Iusacell Indenture, the Senior Credit Facility and the Eximbank Facility and
the New Iusacell Indenture will limit Iusacell's ability to pay dividends.
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MARKET RISKS
Iusacell's earnings are affected by changes in interest rates as a result
of its 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 unsecured 14 1/4% Senior
Notes and 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. Iusacell does not enter into derivative financial contracts
for trading or speculative purposes; however, Iusacell manages 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. The following table summarizes the
maturity dates, carrying values and fair values of the debt obligations and the
interest rate collar agreement as of December 31, 1998.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
--------- --------- --------- --------- --------- ---------- --------- ----------
(IN MILLIONS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Short-term notes payable...... U.S.$75.0 U.S.$ -- U.S.$ -- U.S.$ -- U.S.$ -- U.S.$ -- U.S.$75.0 U.S.$75.0
Chase Credit Facility......... -- 33.8 92.3 99.0 -- -- 225.0 225.0
10% Senior Notes.............. -- -- -- -- -- 150.0 150.0 130.0
Handset facility UBS.......... -- 10.0 -- -- -- -- 10.0 10.0
Interest rate collar.......... 35.0 35.0 35.0 35.0 -- -- -- 1.1
</TABLE>
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%.
Iusacell's primary foreign currency exposure relates to its 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
Iusacell's ability to meet its 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 its ability to meet its long-term debt obligations. As of
December 31, 1998, a hypothetical immediate 10% devaluation of the Peso relative
to the U.S. dollar, as it relates to Iusacell's short-term foreign debt, would
have a Ps.87.4 million (U.S.$9.3 million) unfavorable impact over a one-year
period on earnings and on cash flows.
Iusacell does not currently have in place hedging arrangements with respect
to this foreign currency risk. However, Iusacell expects to hedge utilizing
forward-rate contracts, its exchange rate exposure for up to 50% of the
principal and interest payments coming due over the next 18 months, or
approximately U.S.$83.0 million. If the Peso to U.S. dollar exchange rate
remains at the September 30, 1999 level through June 30, 2001, then the
estimated cost to Iusacell of this hedging program will be approximately
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U.S.$11.7 million. Iusacell is also considering limited hedging alternatives for
up to an additional 50% of the remaining outstanding principal and interest
obligations coming due over the next 18 months.
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, the treatment of
fixed assets revaluation, 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 Audited
Consolidated Financial Statements and Note 8 to the Unaudited Consolidated
Financial Statements for a reconciliation to U.S. GAAP of stockholders' equity
and net 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.
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 September 30, 1999, Iusacell recognized for U.S. GAAP purposes a
gross deferred tax asset of Ps.1,222.1 million (U.S.$130.7 million), reflecting
the benefit of tax loss carryforwards which expire in varying amounts between
2001 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 September 30, 1999 will be realized based on the
following:
- although Iusacell has generated consolidated operating losses for the
past five years, 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 September 30, 1999,
and
- the net deferred tax asset amounting to Ps.162.2 million (U.S.$17.4
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.
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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 80% year over year in 1997 and
1998, improved revenues (based on customer growth and price increases),
and lower network and operating costs, resulting in an operating profit
in the first two quarters of 1998 (and, excluding the 450 write-down,
also in the third quarter of 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.
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, Iusacell recorded a
non-cash writedown related to its investment in the 450 MHz project for Mexican
GAAP purposes and, consequently, wrote off all pre-operating costs as of that
date.
FIXED ASSETS REVALUATION
As described in Note 4 b) to the Audited Consolidated Financial Statements,
under Mexican GAAP the writedown of the carrying value of the telecommunications
analog equipment was originally recorded as a direct charge to the deficit from
holding non-monetary assets restatement account included in stockholders'
equity. Iusacell has restated the financial statements for the year ended
December 31, 1997 to reflect such writedown as a charge against income from
operations. Under U.S. GAAP, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," 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 for recoverability,
the entity should estimate the future cash flows expected to result from the use
of the asset and its 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.
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.
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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.210.3 million (U.S.$22.5 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.183.1
million (U.S.$19.6 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 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.
RESTATEMENT RELATED TO THE PROVISION FOR CONSOLIDATION OF FACILITIES
As described in Note 2 to the Audited Consolidated Financial Statements,
during 1996 Iusacell originally recorded a provision for consolidation of
facilities related to its former headquarters building ("Montes Urales") under
both Mexican GAAP and U.S. GAAP. Iusacell has reassessed this accounting
treatment under U.S. GAAP and determined that, as management did not have the
ability to remove Montes Urales from operations in December 1996, Montes Urales
did not qualify as an asset held to be disposed of at such date and
consequently, should have been accounted for as an asset to be held and used
pursuant to the provisions of SFAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of." As a result,
under U.S. GAAP, an impairment charge would not have been recorded at December
31, 1996 related to Montes Urales.
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BUSINESS
OVERVIEW
Iusacell is Mexico's second largest wireless telecommunications provider
with more than 1.1 million cellular customers at September 30, 1999. Iusacell
owns and operates 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, Puebla, Veracruz, Leon, Acapulco and San Luis Potosi, and combined
represent approximately 67 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 the Board of
Directors and management of Iusacell, Bell Atlantic personnel seconded to
Iusacell and Bell Atlantic consultants have been integrally involved in managing
the day-to-day operations and defining and implementing the long-term strategy
of Iusacell. Since 1993, Bell Atlantic has invested approximately U.S.$1.2
billion for its 40.4% economic and voting interest in Iusacell.
Since Bell Atlantic took control of Iusacell's management in February 1997,
Iusacell's subscriber base has grown from approximately 245,000 to 1,132,205
subscribers as of September 30, 1999. Iusacell's subscribers who can make
outgoing calls and receive incoming calls had an average monthly revenue per
cellular subscriber during the nine months ended September 30, 1999 of Ps.339
(approximately U.S.$36.2). In May 1998, Iusacell launched digital service using
CDMA technology in the 800 MHz frequency band in the Mexico City area and
extended this service to other cities in each of its other cellular regions in
October 1998. Iusacell now offers digital coverage and services in all areas
where it provides cellular wireless services. In addition to its core mobile
wireless services, Iusacell also provides a wide range of other
telecommunications services including long distance, paging, wireless local
telephony and data transmission. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "-- Cellular Services" and
"-- Other Services."
The management team at Iusacell is able to draw extensively upon Bell
Atlantic's expertise in the development and implementation of Iusacell's
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 former
Chief Financial Officer and current Executive Vice President -- Finance has 15
years of executive telecommunications experience with Bell Atlantic, and
Iusacell's Chief Technology Officer has 29 years of experience with Bell
Atlantic.
In June 1997, Iusacell appointed as its Director General 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 more than
five 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 15 years of experience with
BellSouth Corporation and Nextel International, Inc., including nine 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
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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 7 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.$31.6 billion and U.S.$2.9 billion, respectively,
for the fiscal year ended December 31, 1998 and total assets of approximately
U.S.$55.1 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 approvals by the United States Federal
Communications Commission and various other regulatory authorities.
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.
On September 21, 1999, Bell Atlantic and Vodafone AirTouch Plc entered into
an agreement to combine their United States wireless businesses into a new
company which would be managed by Bell Atlantic. Assuming that all of the assets
are contributed as provided for in the agreement, the new business will be 55%
owned by Bell Atlantic and 45% owned by Vodafone AirTouch. Including GTE's
wireless assets, the new business will serve approximately 20 million wireless
customers and 3.5 million paging customers throughout the United States, making
it the largest wireless business in the country. The new enterprise will have a
footprint covering more than 90% of the U.S. population, and 49 of the top 50
U.S. wireless markets. The completion of this transaction is subject to a number
of conditions, including certain regulatory approvals and the approval of the
shareholders of Vodafone AirTouch. The companies expect to complete the
transaction within the first nine months of 2000.
COMPETITIVE STRENGTHS
LARGE CELLULAR SUBSCRIBER BASE
At September 30, 1999, Iusacell had 1,132,205 cellular subscribers,
including both contract and prepay subscribers. 30.3% of Iusacell's cellular
subscriber base, consisted of customers that purchased cellular services
pursuant to fixed term contracts and the remaining 69.7% of its cellular
customers purchased their cellular services in advance, through prepay calling
cards. Iusacell believes that its 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 call waiting, emergency service (*911), short messaging service
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.
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LEADING DIGITAL TECHNOLOGY PLATFORM IN ALL OUR MARKETS
Iusacell believes it is the market leader in technology. Through its
recently completed deployment of a CDMA digital network in all areas where it
provides cellular service, Iusacell became the first company in Mexico to make
digital voice service broadly available to all of its customers. Iusacell's
digital network currently provides service to areas where approximately 53
million inhabitants, or approximately 55% of Mexico's total population, live.
Compared with analog cellular technology, Iusacell's 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.
Iusacell's network technology provides superior switching and transmission
capabilities. These features allow for lower capital expenditures per subscriber
and reduced network operating costs.
In order to take advantage of the benefits of its new digital network
capacity, Iusacell has almost entirely stopped providing analog handsets to
contract customers and has accelerated its efforts to migrate existing analog
contract customers to digital service. At December 31, 1998 and September 30,
1999, Iusacell had approximately 27,000 and 163,000 digital contract customers,
respectively, and expects to have more than 200,000 digital contract customers
by the end of December 1999. Iusacell's digital contract customers in the
aggregate currently generate approximately 50% of its total cellular traffic.
As of September 30, 1999, Iusacell had invested more than U.S.$376.2
million in its cellular telecommunications network since January 1997. Of this
total, Iusacell's analog and CDMA digital network supplied by Lucent represents
an investment of U.S.$261.5 million. As of September 30, 1999, Iusacell's
network was made up of five cellular switches, 357 cell sites and 56 repeaters.
BELL ATLANTIC WIRELESS EXPERTISE AND SUPPORT
Iusacell's management team draws extensively upon Bell Atlantic's expertise
to develop and implement its operating strategy. Bell Atlantic is one of the
largest cellular operators in the United States, serving more than 6.0 million
subscribers along the East Coast and in the Southwest. Bell Atlantic also has
substantial investments in other wireless telecommunications companies,
including PrimeCo Personal Communications L.P. in the United States, Omnitel
Pronto Italia S.p.A. in Italy, EuroTel Praha s.r.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. Iusacell believes
that Bell Atlantic's extensive experience in the development and implementation
of marketing programs designed to promote substantial subscriber growth provides
Iusacell with a significant competitive advantage in the Mexican mobile wireless
market. Since Bell Atlantic took management control in February 1997, Iusacell's
cellular subscriber base has grown from approximately 245,000 to 1,132,205
subscribers at September 30, 1999.
EXPERIENCED MANAGEMENT TEAM
The six senior members of the Iusacell operational management team
appointed by Bell Atlantic have an aggregate of approximately 80 years of
experience in the telecommunications industry. Individually, Iusacell's
operating managers have established track records of producing subscriber
growth, penetrating new markets and developing new telecommunications product
offerings. Iusacell's management team is complemented by experienced Mexican and
Bell Atlantic telecommunications executives and consultants.
WELL-RECOGNIZED BRAND NAME
All of the services that Iusacell offers use the well-recognized IUSACELL
Digital brand name to increase consumer awareness and customer loyalty. Iusacell
believes that its network's superior call quality and its customer care
operations contribute to its strong, favorable brand awareness among potential
and existing customers. Iusacell's ten years of operation give it significant
advantages over new entrants to the wireless market offering similar services.
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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 perceived to be of value by the
customer,
- strong distribution, and
- superior customer service.
Iusacell believes that its strategic and operating plan will enable it to
increase its subscriber base, subscriber usage, revenues and profitability in
its core wireless businesses. This strategic plan incorporates the following key
elements:
NATIONWIDE WIRELESS FOOTPRINT
Iusacell believes that it is important to provide reliable and high quality
wireless service to its customers throughout Mexico. It intends to achieve this
goal by owning concessions in each region of Mexico or, in those areas where it
is unable to secure concessions, by reselling another concessionaire's services
or enabling seamless roaming services and offering its customers telephones that
can access nationwide services on different frequencies. As part of this
strategy, Iusacell recently acquired concessions to provide PCS services in two
regions in northern Mexico. By adding these new regions to areas already covered
by its existing cellular footprint, Iusacell now owns concessions covering
approximately 78 million inhabitants, or 80% of Mexico's total population.
From time to time Iusacell explores possibilities to expand its nationwide
wireless footprint. Iusacell is currently examining the possibility of making an
offer to acquire Grupo Portatel, S.A. de C.V., a cellular wireless service
provider in southern Mexico. Iusacell would expect to accomplish any such
acquisition largely, if not entirely, through the issuance of capital stock. In
addition, Bell Atlantic recently engaged in but terminated discussions with a
third party that involved a possible combination or alliance among Iusacell and
four Cellular A-Band properties in northern Mexico that we do not own or
operate.
Iusacell also believes that it is important for its customers to be able to
access wireless services throughout North, Central and South America. Currently,
Iusacell's customers are able to roam in over 1,300 cities in the United States
and Canada as well as in Argentina and Peru. Iusacell continues to seek
arrangements that will allow its customers to roam in certain major cities in
the United States, Canada and Latin America.
SIGNIFICANTLY STRENGTHEN OUR DISTRIBUTION CHANNELS
Iusacell continues to strengthen its 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 its operating regions. Iusacell continues to develop
additional and exclusive long-term relationships with its distributors to
encourage them to sell its products and services. Iusacell intends to continue
to increase its distribution system primarily by expanding the number of
locations where customers can purchase prepay cards. To further this strategy,
Iusacell, or its distributors, have entered agreements to allow its 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 and Mexico City subway stations. Since Bell
Atlantic took control of Iusacell's management in February 1997, Iusacell has
increased its points of distribution from approximately 230 to 5,751 at
September 30, 1999.
Iusacell also opened or remodeled 17 customer sales and service centers in
1997 and 22 in 1998, bringing the total number of customer sales and service
centers owned and operated by Iusacell at
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September 30, 1999 to 96. Thirty-two of these stores present Iusacell's new
store image, an environment which emphasizes retail merchandising rather than
transaction processing.
SUPERIOR NETWORK AND CUSTOMER SERVICE
Iusacell believes that superior network technology and proactive and timely
customer service help it to attract and retain customers. To build a superior
network, Iusacell recently completed the swap out of its previous analog network
with an analog and CDMA digital network supplied by Lucent and became the first
company in Mexico to make digital voice services broadly available to all of its
customers. For its customers, its 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 twelve months, Iusacell has experienced rapid growth in digital
subscribers and traffic. See "-- Digitalization." As a result, and in
anticipation of further growth in digital subscribers and digital usage,
Iusacell decided to accelerate its capital expenditure program to expand digital
capacity and improve digital service quality. See "-- Liquidity and Capital
Resources -- Capital Expenditures."
To provide proactive and timely customer service, Iusacell operates two
call centers that provide automated and efficient service to its 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. Iusacell also utilizes welcome packages, customer
satisfaction calls, special programs for corporate customers and customized
billing to communicate its commitment to its customers. Iusacell's customer
service centers offer "one-stop-shopping" for cellular, long distance, paging
and data transmission services as a convenience to its customers. Iusacell has
substantially decreased customer service waiting time during peak hours at these
centers. Iusacell's customer services representatives undergo ongoing rigorous
training and are continually monitored and evaluated.
In March 1999, Iusacell installed a new prepay operating system in its four
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
Iusacell designs its products and services for each customer segment. For
contract customers, Iusacell offers six pricing packages tailored to meet the
needs of this high-usage customer segment. Iusacell believes that its 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.
Iusacell also sells prepay cards allowing it to efficiently target the
segment of lower-usage customers. Iusacell believes its 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, Iusacell 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.
VALUE ADDED SERVICES
Iusacell's new analog and CDMA digital network permits it to provide its
digital and analog customers with a wide range of value added services,
including caller identification, voice mail, and three way calling. To encourage
its customers to migrate to digital service, Iusacell offers additional
value-added services, such as short messaging service, only to digital
customers.
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SALES FORCE INCENTIVES
To increase the size and quality of its subscriber base, Iusacell has a
sales force compensation plan which is largely performance based. Iusacell's
compensation plan is based on sales volume and product mix and rewards its 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.
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 has substantially completed the
privatization process.
Telcel holds the Cellular B-Band concession in each of the nine cellular
regions and is Mexico's largest cellular operator. The Cellular A-Band
concession holders and the regions in which they serve are:
- subsidiaries of Iusacell in Regions 5, 6, 7 and 9,
- Baja Celular, S.A. de C.V. in Region 1,
- Movitel del Noroeste, S.A. de C.V. in Region 2,
- Telefonia Celular de Norte, S.A. de C.V. in Region 3,
- Celular de Telefonia, S.A. de C.V. in Region 4, and
- Portatel del Sureste, S.A. de C.V. in Region 8.
Motorola, Inc. is a controlling or significant shareholder in the
aforementioned five non-Iusacell concession holders. Telcel is the sole cellular
competitor for each Cellular A-Band company.
In connection with the privatization of Telmex in 1990, the Mexican
government granted Telmex a concession to provide public domestic and
international long distance telephone service with an exclusivity period of six
years. In August 1996, the exclusivity period expired, and 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 that
held by Iusacell. 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.
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- 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.
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. subsidiary, and an 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. 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.
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, which
permit it to offer service beginning January 1, 2000.
Each concession has a twenty-year term and authorizes the provision of
mobile and fixed wireless service and other value-added services.
UNDERSERVED TELEPHONY MARKET
Iusacell believes 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, 1997, there were
approximately 9.6 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.
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The following table presents, for major Latin American countries and the
United States, telephone lines in service per 100 inhabitants as of December 31,
1997.
SELECTED TELEPHONE PENETRATION
<TABLE>
<CAPTION>
LINES IN SERVICE PER
COUNTRY 100 INHABITANTS(1)
- ------- --------------------
<S> <C>
United States............................................... 64.37
Uruguay..................................................... 23.20
Argentina................................................... 19.13
Chile....................................................... 17.98
Colombia.................................................... 14.75
Venezuela................................................... 11.64
Brazil...................................................... 10.66
Mexico...................................................... 9.60
Peru........................................................ 6.75
</TABLE>
- ---------------
(1) Source: International Telecommunications Union -- Yearbook of Statistics,
January 1999.
Pyramid Research, a division of the Economist Intelligence Unit, Ltd., an
independent telecommunications consultant, estimates that at the end of 1998,
the teledensity rate in Mexico was 10.2 telephone lines per 100 inhabitants
compared to teledensity rates of 19.1 in Argentina, 18.0 in Chile, 12.1 in
Brazil and 11.7 in Venezuela.
According to Pyramid Research, the wireline local telephony market
represents approximately 50.0% of Mexico's total telecommunications market, when
measured by revenues, and generated approximately Ps.3.4 billion of revenue in
1998. The business segment of the local telephone market represents
approximately 25% of the market, with the balance accounted for by the
residential segment. During the period from 1992 to 1998, the total local
telephone market call volume grew an average of 5.4% per year compared to an
average gross domestic product growth of 2.8% per year.
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, 1997.
SELECTED CELLULAR PENETRATION
<TABLE>
<CAPTION>
CELLULAR SUBSCRIBERS
COUNTRY PER 100 INHABITANTS(1)
- ------- ----------------------
<S> <C>
United States............................................... 20.65
Argentina................................................... 5.63
Venezuela................................................... 4.62
Uruguay..................................................... 4.57
Colombia.................................................... 3.50
Chile....................................................... 2.80
Brazil...................................................... 2.75
Mexico...................................................... 1.81
Peru........................................................ 1.79
</TABLE>
- ---------------
(1) Source: International Telecommunications Union -- Yearbook of Statistics,
January 1999.
Wireless penetration in Mexico has grown significantly over the last 21
months. Iusacell estimates that, at September 30, 1999, there were more than 5
cellular subscribers per 100 inhabitants in Mexico.
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The Mexican government, together with the telecommunications industry,
currently is discussing alternative incentives to help correct Mexico's
comparatively low teledensity.
CHANGING COMPETITIVE DYNAMICS
Iusacell's cellular competitor is Telcel, a wholly owned subsidiary of
Telmex, which holds the Cellular B-Band concession in all nine regions of
Mexico. Iusacell believes that Telmex faces increasing competition, especially
in the long distance market, which was opened to competition in January 1997,
and in local telephony upon the introduction of service by the new local
telephony concessionaires during 1999. Telmex's major long distance competitors
include Alestra and Avantel, two joint ventures in which AT&T and MCI WorldCom,
respectively, are the strategic partners. Telmex's major local telephony
competitors will include Axtel, in which Bell Canada is the strategic partner,
and Unefon, a Mexican company whose affiliates have strong distribution and
marketing capabilities.
In late 1995, Iusacell brought a suit charging Telmex with unlawfully
cross-subsidizing Telcel's cellular phone operations. See "-- Legal
Proceedings." Iusacell believes that the increased competition in both the long
distance and local markets, together with the proposed accounting separation
rules issued by COFETEL in December 1998 and dominant carrier regulations, if
implemented, should hinder Telmex's ability to continue to cross-subsidize
Telcel.
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 six months of CPP operations, Iusacell's call traffic
increased by more than 11%, with an increase in the percentage of total calls
that were incoming calls. Iusacell believes that a significant portion of this
increase is attributable to increased usage by its prepay customers because CPP
gives them the incentive to keep their handsets turned on to receive incoming
calls. Iusacell expects that CPP will contribute to the continued 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 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 cover a variety of industries. Region 9 includes Mexico
City, which has the greatest concentration of service and manufacturing
industries and is also the center of Mexico's public and financial services
sectors. Region 5 includes Guadalajara, Mexico's second largest city and the
commercial and service center of western Mexico. Region 6 includes Leon and San
Luis Potosi and has historically been dominated by the agricultural sector,
although it has recently begun to develop as an automobile manufacturing center.
Region 7 includes Puebla, Veracruz, Acapulco and Oaxaca and contains major
operations of the Mexican petrochemical and automotive industries and
significant tourist resorts and attractions.
SUBSCRIBERS AND SYSTEM USAGE
As of September 30, 1999, Iusacell had a total of 618,189 cellular
subscribers in Region 9. Of this number, 31.6% were contract plan subscribers
and 68.4% were prepay customers. According to customer
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profiles, professionals comprise a large portion of its Region 9 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, it offers secretarial services and provides
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. Iusacell
believes that these value-added services help increase contract subscriber usage
and also enhance its market image as a full service cellular provider.
As of September 30, 1999, Iusacell had a combined total of 514,016 cellular
subscribers in Regions 5, 6 and 7. Of this number, 28.6% were contract plan
subscribers and 71.4% were prepay customers. Iusacell believes that its
subscriber base in these regions consists of subscribers engaged in a variety of
occupations. Due to the lower landline penetration outside of Region 9, the
subscriber base in Regions 5, 6 and 7 includes a number of users who purchase
cellular services as a principal means of telecommunications. Compared to Region
9, the marketing programs in these regions have focused more on the benefits
inherent in basic cellular service, such as mobility and convenience.
Iusacell believes that a strong distribution network is necessary in order
to develop and sustain a significant presence in these markets. See
"-- Marketing -- Distribution."
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 currently has 365 days to activate a new card after
the balance on his existing card becomes zero before losing his phone number.
During such time and with the implementation of the CPP modality, a VIVA
customer will be able to receive local incoming calls, but such customer will
not be able to make outgoing calls. Balances automatically become zero if the
customer has not activated a new card within 180 days after activation of the
previous card. Iusacell is considering indefinitely extending the period of time
for "incoming calls only" customers who have experienced significant incoming
call traffic. Iusacell continues 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 March 1999, Iusacell substantially completed the installation of the
VIVA prepay operating system and the conversion of its Control Plus platform
customers to VIVA throughout its regions. The VIVA platform better tracks those
customers who turn over. 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 Iusacell's ability to add and retain prepay customers and has increased
usage. See "-- Marketing -- Pricing."
Given the higher turnover among its prepay customers, Iusacell pursues
plans to migrate its qualified prepay customers to contract plans, where
customer loyalty and retention have been historically higher.
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CONTRACT CHURN
Contract churn measures both voluntarily- and involuntarily-disconnected
subscribers. Through December 31, 1997, Iusacell 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, 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.
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. Iusacell
believes that a significant part of its contract churn in 1996 and the first
half of 1997 was due to customers switching from its contract plans to either
Telcel's prepay program, launched in February 1996, or Iusacell's own prepay
plan, launched in June 1996. With improved economic conditions in Mexico,
improved customer service and customer retention programs and the digitalization
of the network, the contract churn rate has declined, from 3.03% in the first
nine months of 1997 to 2.44% in the first nine months of 1999.
ROAMING
Iusacell offers its contract cellular subscribers nationwide and
international service via roaming agreements. Subscribers can make calls from
any location in Mexico served by 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. Iusacell also provides
cellular services to all subscribers of other non-wireline cellular operators in
Mexico while such subscribers are temporarily located in a region served by
Iusacell.
An operator (a host operator) providing service to another operator's
subscriber temporarily located in its service region (an in-roamer) earns usage
revenue. Iusacell bills such other operator (the home operator) of an in-roamer
for the in-roamer's usage. In the case of roaming by a Iusacell subscriber in
the region of a host operator (an out-roamer), Iusacell is billed by the host
operator for the subscriber's usage. Iusacell remits the billed amount to the
host operator and bills its own customer, the out-roamer, without any markup. As
a result, Iusacell retains the collection risk for roaming charges incurred by
its own subscribers. Conversely, roaming charges billed by Iusacell for
in-roaming usage by subscribers of other non-wireline operators are the
responsibility of those operators. Roaming charges between 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 2.1% of Iusacell's total revenues during 1997, 1998 and the first
nine months of 1999, respectively. Out-roaming charges represented 5.2%, 5.4%
and 4.6% of Iusacell's total revenues during 1997, 1998 and the first nine
months of 1999.
Iusacell has signed over 61 agreements with United States, Canadian and
other foreign operators to provide its subscribers with international roaming
capabilities. These operators include Bell Atlantic
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Mobile, AT&T Wireless, BellSouth Mobility, Rogers Cantel and AirTouch
Communications. Iusacell is continually reviewing opportunities to enter into
agreements with other cellular operators to expand its international roaming
capabilities. In addition, Iusacell provides, through the National Automatic
Cellular Network, automatic call delivery throughout most of the United States,
including Puerto Rico, and Canada, whereby Iusacell subscribers may receive
telephone calls from Mexico without the caller having to dial access codes.
Currently, Iusacell's customers are able to roam in over 1,300 cities in the
United States and Canada as well as in Argentina and Peru.
PERSONAL COMMUNICATIONS SERVICES
As part of Iusacell's strategy to develop a nationwide wireless footprint,
in 1998 Iusacell won in auction concessions giving it the right to provide PCS
wireless services in Regions 1 and 4 in northern Mexico for which Iusacell paid
Ps.541.4 million (U.S.$57.9 million; U.S.$66.6 million including value added
tax) in June and September 1998. These two regions include several industrial
cities, including Monterrey and Tijuana, and cover approximately 11% of Mexico's
total population. Iusacell expects to launch wireless PCS in Monterrey in 2000,
subject to obtaining financing. Iusacell seeks to obtain this financing from
equipment vendors and other sources.
Iusacell intends to market PCS using the same fundamental strategies
successfully employed by its existing cellular operations. The PCS network that
Iusacell intends to deploy will use digital CDMA technology purchased from
Lucent Technologies, Inc.
LONG DISTANCE SERVICES
In August 1996, Iusacell became one of Telmex's first competitors in long
distance service when Iusacell began to provide long distance services to its
cellular subscriber base in Mexico pursuant to the 30-year concession to Iusatel
which was awarded in October 1995 and was modified in December 1997. Iusacell's
competitors in long distance include the 16 other companies granted concessions,
including Telmex, the former long distance monopoly. Iusacell believes 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 11% compared
with 1997. In the first half of 1999, prices were increased approximately 13.6%.
Iusacell currently provides long distance service using its own switches
and transmission equipment and a combination of fiber optic lines, microwave
links and lines leased from Telmex and Alestra. At September 30, 1999, Iusacell
provided long distance service in 60 cities to 1,158,501 customers,
approximately 1,147,433 of whom were existing customers for Iusacell's other
services. Iusacell has 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 12.0% of total revenues for 1998 and the first
nine months of 1999, respectively. See "-- The Telecommunications Industry in
Mexico -- Market Liberalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Iusacell's long distance concession provides for coverage and technological
investment requirements. If Iusacell does not satisfy such requirements, it may
have to pay fines and penalties and potentially lose its long distance
concession. After evaluating the commercial feasibility of complying with its
initial concession, Iusacell requested that the SCT and COFETEL modify the terms
of such concession to reflect a more rational business plan. In December 1997,
the government granted the modification request, authorizing a change in the
coverage requirements and increasing flexibility in the choice of transmission
technology, significantly reducing Iusacell's investment requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Other Material Trends and Contingencies -- Regulatory
Developments -- Long Distance Concession."
Iusacell further reduced the capital investment for its long distance
business by entering into fiber optic cable swap agreements with two other long
distance companies, Marcatel and Bestel, in March 1998
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and December 1998, respectively. These agreements have allowed Iusacell
effectively 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 Iusacell was building in central
Mexico. See "-- Government Regulation -- Concessions and Permits -- Long
Distance" and "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources -- Capital
Expenditures."
OTHER SERVICES
PAGING
On December 14, 1995, 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. See "-- Government Regulation -- Concessions and
Permits -- Paging." 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, 1998, 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 32
cities by mid-2000. Iusacell plans to take advantage of its existing cellular
network and its 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 September 30, 1999, Infotelecom had 27,249 paging customers.
Iusacell's revenues related to paging services represented 1.6% and 1.3% of
total revenues for 1998 and the first nine months of 1999, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Under their joint venture agreement, Iusacell and Infomin valued the
Infomin paging concession at U.S.$10.5 million, and Iusacell 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, Iusacell had been funding the joint venture by means of loans. On
December 31, 1998, Iusacell capitalized Ps.121.8 million (U.S.$13.0 million) in
advances to Infotelecom, including Ps.45.2 million (U.S.$4.8 million) in
interest which was not credited against the U.S.$10.5 million required to be
funded by Iusacell. However, U.S.$9.0 million of such capitalization was applied
against the U.S.$10.5 million to be funded by Iusacell.
LOCAL, PUBLIC AND RURAL TELEPHONY
Iusacell operates a mobile nationwide IMTS radiotelephone network in the
440-450 MHz, 485-495 MHz and 138-144 MHz frequency bands, providing local
radiotelephone services to commercial and noncommercial customers across Mexico.
As of September 30, 1999, Iusacell had 6 IMTS radiotelephone subscribers with
average monthly billings for the nine months ended September 30, 1999 of
approximately Ps.833 (U.S.$89.1) per customer. Due to the substitutability of
cellular service for IMTS service, Iusacell is negotiating the cessation of IMTS
service and the migration of IMTS subscribers to cellular service or other local
telephony services with the SCT and COFETEL.
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Iusacell also operates public and rural telephony programs, utilizing
available cellular capacity. These programs provide telecommunications services
through cellular telephones in phone booths, intercity buses and rural areas.
The provision of services in this way fulfills the terms of Iusacell's
concessions for the provision of cellular telephone service and utilizes
Iusacell's cellular network to provide telecommunications coverage in areas with
little or no basic service. As of September 30, 1999, Iusacell had 11,290
cellular telephones in service under its public and rural telephony programs.
As of September 30, 1999, Iusacell was providing, on a trial basis pending
approval from the SCT, local wireless service in the 450 MHz frequency band to
15,080 customers in selected markets in Region 9. The average monthly minutes of
use for these trial subscribers during the nine months ended September 30, 1999,
who had average monthly billings during such nine-month period of approximately
Ps.341 (U.S.$36.46) per subscriber, excluding long distance charges, was
approximately 539 minutes per subscriber divided almost equally among incoming
(52%) and outgoing (48%) calls. Iusacell does not charge its customers
interconnection fees for incoming calls. Iusacell believes 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. See "-- The Telecommunications Industry in Mexico -- Underserved
Telephony Market."
Iusacell has experienced substantial delays in obtaining the SCT's approval
of its technical and economic plans for local wireless service in the 450 MHz
frequency band. However, on June 10, 1997, the SCT and 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 Iusacell to convert and consolidate its existing concessioned
radiotelephony frequencies into 450 MHz spectrum in Regions 4, 5, 6, 7 and 9 and
grants Iusacell 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 Iusacell 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 Iusacell to decide
whether to exercise its right of first refusal.
As a result of these delays and the uncertainty relating to its ability, at
a commercially acceptable cost, to implement full scale local wireless service
in the 450 MHz frequency band, Iusacell is exploring alternatives for providing
local telephony services, such as limited zone wireless services in the 800 MHz
(cellular) or 1.9 GHz (PCS) frequency bands deploying digital technology that
permits mobility or fixed wireless services over such bands. If Iusacell were to
determine that it would be preferable to pursue such an alternative rather than
to continue to pursue local wireless service in the 450 MHz frequency band, such
alternative could require the acquisition of concessions, other regulatory
approvals and the payment of substantial fees. Iusacell expects to finalize
overall strategy for providing local telephony services in the first quarter of
2000.
In September 1998, Iusacell 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 its investment in 450 MHz
TDMA technology had occurred. As a result, Iusacell recorded a substantial
non-cash writedown of its investment in the 450 MHz fixed local wireless
project. See "-- Government Regulation -- Concessions and Permits -- Local
Telephony," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Local Telephony in the 450 MHz Frequency Band" and
"Management's -- Discussion and Analysis of Financial Condition and Results of
Operations -- Non-recurring Charges."
In expanding its local telephone services, Iusacell plans to capitalize on
synergies between its mobile wireless and local wireless services, utilizing its
existing cellular network and anticipated 1.9 GHz (PCS) network for connections
with the local subscribers' premises. Furthermore, Iusacell believes that local
wireless service requires a lower infrastructure investment per line than
landline service.
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In January 1996, Iusacell's 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 its long distance concession. See
"-- Long Distance Services." 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
Iusacell currently does not anticipate that the provision of local wireline
service will become a significant part of its services, it may provide, on a
case-by-case basis, local wireline telephone service as part of its overall
provision of telecommunications services.
DATA TRANSMISSION
Iusacell began providing data transmission services in 1993. Iusacell
provides both public and private data transmission primarily using excess
capacity in its microwave backbone in its existing cellular network in Region 9,
and 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. Iusacell currently intends to sell its interest
in Satelitron. Iusacell provides its data transmission services primarily to the
financial services and consumer products industries.
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.36.5 million (U.S.$3.9 million) for these concessions. These
frequencies are being used to interconnect Iusacell's cell sites, business
customers and other networks. Additionally, Iusacell has 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.
In September 1999, Punto-a-Punto Iusacell entered into an agreement with an
affiliate of the four Cellular A-Band regions in northern Mexico to swap long
haul microwave frequency links held by the affiliate for short-haul microwave
frequency links held by Iusacell plus cash payable upon the receipt by the
affiliate of its concession for long-haul frequencies. For the next 19 years,
Punto-a-Punto Iusacell will allow the affiliate to lease up to 200 short-haul
frequency links in each of the 15 GHz and 23 GHz frequency bands, for use in any
Region in Mexico, and will pay the affiliate a one-time, up front lump-sum
payment of approximately U.S.$2.45 million. In return, Punto-a-Punto Iusacell
will have the right to lease, for the next 19 years, up to 150 long-haul
frequency links in a 7 GHz frequency band for use in any one or more of Regions
5, 6, 7, 8 and 9. Punto-a-Punto Iusacell expects to close this transaction by
the end of 1999.
MARKETING
With the assumption of control by Bell Atlantic, Iusacell has redefined its
marketing strategy for achieving profitable growth, particularly in its cellular
business. More recently, Iusacell has focused its marketing strategy on the CDMA
digital cellular business, where there is greater per subscriber usage and
revenues. Iusacell seeks to increase its average monthly revenue per subscriber,
aggressively grow its cellular subscriber base, decrease the cost of acquiring
additional subscribers and reduce contract churn and prepay turnover by
improving its marketing to its existing and potential cellular subscribers.
Iusacell's subscribers consist of contract and prepay customers who can be
classified as high, moderate or low-usage customers. Iusacell is implementing
distribution, advertising, customer service support and pricing plans targeted
to each specific customer segment and to increase airtime usage.
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CONTRACT SUBSCRIBERS
Contract subscribers seek uninterrupted mobile cellular service, including
long distance, roaming, access to high-quality customer service and the ability
to choose among value-added services such as call waiting, emergency service,
short message service, caller identification and conference call service, all
for one monthly fee. At September 30, 1999, approximately 30.3% of Iusacell's
total customer base was made up of contract subscribers.
High-usage contract subscribers include corporate customers, professionals,
owners of small to medium-sized businesses and other subscribers who have a high
need for mobility and who rely on cellular service daily. These subscribers are
willing to pay a higher monthly fee in exchange for a large block of free
minutes, a lower airtime rate and a full range of value-added services and
customer service conveniences. These subscribers are concentrated in analog and
digital premium plans. Iusacell is aggressively pursuing customer growth in this
segment, particularly with its "New Millennium" digital plans, through targeted
marketing and distribution, advertising campaigns, pricing plans and special
promotions.
Moderate-usage contract subscribers include some professionals, small
business owners and residential customers who use cellular services frequently
and require the reliability of a contract plan, but do not generate the monthly
MOUs of high-usage contract subscribers. Iusacell plans to continue to generate
revenue from this segment through targeted marketing and distribution,
advertising, pricing and special promotions. Iusacell seeks to migrate these
customers to digital service as well.
While Iusacell does not target low-usage contract customers as aggressively
as other customers, it provides service options to meet the requirements of this
subscriber group. The low-usage contract plan segment consists primarily of
residential customers and small business owners who prefer the reliability of
contract plan service, but whose usage may not justify the inclusion of various
value-added services in the fixed monthly charge. This segment is targeted
through Iusacell's group of independent distributors and, to some extent,
through its commission agents and advertising programs. Three pricing plans are
currently offered to meet the needs of low-usage contract customers.
PREPAY SUBSCRIBERS
Since the inception of the prepay plan in 1996, the number of prepay
subscribers has grown to represent approximately 69.7% of Iusacell's subscribers
at September 30, 1999. A prepay subscriber can activate a cellular phone at a
Iusacell customer service center, purchase a prepaid card with a fixed amount of
credit to be used over a period of up to 180 days and credit the prepaid card
value to the subscriber's account either at a customer service center or by a
phone call. Such a customer will have access to incoming and outgoing cellular
service until the credit is fully used or otherwise until the card expires at
the end of 180 days, whichever occurs first, and thereafter will have access to
local incoming cellular service for an additional 365 days without activating a
new card. Iusacell is considering indefinitely extending the period of time for
"incoming calls only" customers who have experienced significant incoming call
traffic. See "-- Cellular Services -- Prepay Customers."
Iusacell believes that prepay plans are attractive to a wide range of
cellular customers. In addition to helping customers control costs, a prepay
program has no monthly bill and allows customers to prepay for cellular services
in cash. The prepay market is composed of customers who, among others, typically
earn a variable income and prefer not to make a fixed financial commitment, do
not have the credit profile required to purchase a contract plan or seek
cellular services for emergency or limited use only.
Iusacell believes the prepay service offerings provide an opportunity to
improve margins because, compared to the average contract plan, prepay plans
involve higher average per minute airtime charges, a lower cost to acquire
prepay subscribers and the absence of billing costs, credit concerns and payment
risk. Prepay customers are also potential customers for other services and
products offered by Iusacell. However, 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
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customer. Iusacell focuses marketing efforts on increasing usage by prepay
customers, including migrating qualified prepay customers to higher revenue
contract plans.
As of the March 1999, Iusacell had installed and substantially completed
the migration of all of its prepay customers to its new VIVA prepay operating
system in all four of its operating regions. This new operating system allows
Iusacell to better track the usage patterns and identity of its prepay
subscribers. The new operating system has improved customer satisfaction through
automated reactivation, voice messaging and other value-added services, and has
lowered the cost of support for prepay services. The 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 Iusacell's prepay program, has enhanced Iusacell's ability to add
and retain prepay customers.
DISTRIBUTION
Iusacell targets the various segments of its subscriber base through six
sales and distribution channels: customer sales and service centers, corporate
representatives, independent distributors, a direct sales force, commission
sales agents and telemarketing. Iusacell is aggressively increasing the number
of its points of distribution in order to acquire additional subscribers. At
September 30, 1999, Iusacell had 5,751 points of distribution, as compared to
2,820, 918 and 228 at December 31, 1998, 1997 and 1996, respectively. These
points of sale are comprised of 96 customer sales and service centers owned and
operated by Iusacell, 916 points of sale operated by independent distributors
who offer all Iusacell products and 4,739 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 Iusacell's service offerings and maintain its standards in advertising,
promotions and customer service.
Customer Sales and Service Centers. Iusacell has reconfigured each of its
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, Iusacell continues to emphasize the
customer sales and service centers that it owns and operates itself as a key
distribution channel. In 1997, Iusacell 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 refurbished centers in the future. During 1998, Iusacell
opened 22 new customer sales and service centers based on the experience gained
from the ten prototype locations. As of September 30, 1999, Iusacell owned and
operated 94 customer sales and service centers throughout its four cellular
regions, and two other centers dedicated to long distance and paging sales in
northern Mexico.
Corporate Representatives. To service the needs of its large corporate and
other high-usage customers, Iusacell has created a dedicated corporate sales
group, which, at September 30, 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.
Iusacell plans to increase the size and geographic reach of this sales
force in the future.
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Independent Distributors. In order to broaden its market, Iusacell
maintains relationships with a broad network of 128 exclusive distributors that,
at September 30, 1999, sold all of Iusacell's products at 916 points of sale and
distributed VIVA prepay cards at an additional 4,739 points of sale. This
includes a distribution contract with Precel, formerly one of Telcel's largest
distributors, which currently provides exclusive distribution in 200 locations.
In order to ensure that its standards are maintained at all distribution points,
Iusacell provides assistance to its distributors in training, promotions and
advertising. Iusacell also provides them with information on its customer base
to allow the distributors to service Iusacell's customers effectively.
Direct Sales Force. As of September 30, 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. Iusacell carefully selects, trains and motivates
this sales force to maintain service standards.
Commission Sales Agents. Iusacell retains commission agents as a flexible
sales force in all of its 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 September 30, 1999, Iusacell had
arrangements with 52 commission sales agents who distribute its products with no
direct costs to Iusacell.
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
its 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
Iusacell's 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 Iusacell 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.
CUSTOMER SERVICE
Iusacell views superior customer service as essential in order to
distinguish itself in the competitive Mexican cellular telecommunications
market. Iusacell trains its customer service representatives to ensure that each
customer receives prompt attention, informed answers to any inquiries and
satisfactory resolution of any concerns. Iusacell believes that enhanced
customer service, especially after-sales support, is integral in developing
brand loyalty and supports the efforts of its sales force to cross-sell its
services and products. For prepay customers, the newly installed 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, Iusacell has installed dedicated
personal computer terminals linked to its 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
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service, allows Iusacell to better tailor its marketing strategy to each
customer. Along with providing information as to how Iusacell can improve its
customer service, this data is expected to enable representatives from each of
the distribution channels to better target their sales approach to each customer
when cross-selling Iusacell's services and products.
In early 1998, Iusacell opened two call centers that provide more automated
and efficient service to customers through the use of state-of-the-art software
and rigorous customer service training. By the end of 1998, these call centers
consolidated the work previously done by six call centers. In 1998, Iusacell
also began implementing the Customer Attention Support Team (CAST) program in
its busiest customer service centers in order to accelerate the problem
resolution process. This program has also been expanded to include the majority
of Iusacell's customer service centers in all four of its cellular operating
regions.
PRICING
General. Iusacell offers a variety of flexible pricing options for its
cellular service. The primary components of the contract pricing plans include
monthly fees, per minute usage charges and a 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 calls over a period of no more
than 180 days and for local incoming calls for 185 additional days. 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 handset and lower
per minute airtime charges under a single contract. Moderate-usage contract
subscribers typically prefer pricing options which have a lower monthly charge,
fewer free minutes and higher per minute airtime charges than those options
chosen by high-usage customers.
With the introduction of CDMA cellular service in Region 9 in early 1998,
Iusacell inaugurated five digital contract pricing plans. In September 1998,
Iusacell added six more plans. The pricing plans for digital service target
moderate and high-usage customers and offer incremental free minutes as a part
of the basic monthly charge. The digital pricing plans offer different packages
of additional services and features available only with digital technology.
In April 1999, in an effort to differentiate its digital product, Iusacell
drastically simplified its digital contract plan offerings. Iusacell reduced the
number of its contract plans from 11 to 5 and substantially increased the number
of minutes included with the monthly fee when compared with previous comparable
digital and analog contract plans.
To satisfy the more limited needs of low-usage contract subscribers,
Iusacell also offers plans which provide 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, Iusacell's prepay programs have no
monthly bill and allow customers to prepay for cellular services in cash.
In September 1997, Iusacell introduced its next-generation VIVA prepay
service to replace its in-house Control Plus platform. VIVA provides for
automated reactivation without human intermediaries and value-added services
such as voice-messaging. VIVA prepay cards are available in denominations of
Ps.100, 150, 250 and 500, although a new customer cannot be activated with a
Ps.100 card. As of March 31, 1999, VIVA had been implemented in all four regions
and substantially all existing Control Plus customers had been migrated to VIVA.
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Discounts on Incoming Calls. In response to competitive and market
conditions, Iusacell offers discounts on the airtime charges of up to 50% for
incoming calls for its 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. Iusacell intends to continually review market pricing and will
attempt to increase prices, if economic and competitive conditions permit, to
keep pace with inflation. In April 1997, Iusacell announced a weighted average
increase of 14.8% for the per minute airtime price on all its contract and
prepay plans. This weighted average price increase was calculated by applying
the actual price increases announced in April 1997 to both peak and non-peak per
minute airtime charges for each of Iusacell's contract and prepay plans,
weighted by the ratio of each plan's contribution to overall airtime revenues
during the month of February 1997.
In May 1997, Iusacell announced a weighted average increase of 4.5% for the
fixed monthly charges on all its contract plans. This weighted average price
increase was calculated by applying the actual price increases announced in May
1997 for all Iusacell's contract plans, weighted by the ratio of each plan's
contribution to overall monthly fixed charges during the month of April 1997.
To maintain competitiveness, airtime prices were adjusted downward by 4.6%
on a weighted average basis in October 1997 and another 1.0% on one of the
low-end contract plans in November 1997. Also, in response to Telcel pricing
actions and as a means of boosting traffic volumes and ultimately average
revenue per subscriber, the airtime price for incoming calls was reduced by
25%-50% for all contract plans in October 1997.
In late March 1998, Iusacell raised airtime prices approximately 7.9% on
average for contract plans and 13.6% for prepay customers. Because of market and
competitive conditions, however, this increase was partially rolled back in
early May 1998 for both contract and prepay customers and, in late May 1998, the
remainder of the price increase for contract plans was reversed. As a result,
however, a 9.9% price increase for prepay customers remained.
In August 1998, Iusacell filed with 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 this price increase not
to be implemented. In October 1998, Iusacell raised airtime prices for its
contract plans by approximately 8% on a weighted average basis. In late March
1999, Iusacell raised airtime prices on its 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 matched the increases.
ACTIVATION, BILLING AND COLLECTION PROCEDURES
Iusacell 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. Iusacell believes that its ability to activate a cellular
telephone number promptly gives it a competitive advantage over Telcel.
Iusacell mitigates its 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,
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- 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, Iusacell reserved approximately 1.0% of its cellular
revenues for doubtful receivables. For the first nine months of 1999, Iusacell
reserved approximately 1.6% of its cellular revenues for doubtful receivables.
Iusacell has instituted customer retention procedures where a late-paying
customer is contacted by a service representative prior to termination to urge
such customer to settle his or her account and to inquire about the reasons for
nonpayment. Iusacell believes that these follow-up procedures help decrease the
rate of nonpayment and improve customer goodwill by allowing Iusacell to address
any customer grievances which may have led to customer delinquency, helping to
retain potentially profitable accounts.
Iusacell has also implemented a system to monitor MOU levels and the number
of calls to certain geographic areas in order to identify abnormal usage by
contract subscribers. When abnormal usage is detected, Iusacell contacts the
subscriber to determine whether such usage has been authorized. Iusacell
believes that these procedures are effective in reducing the number of billing
disputes with subscribers and losses due to cellular fraud.
Billing is currently administered using 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, two point of sale
systems, a proprietary residential long distance system, a proprietary system
for high-volume business long distance customers and a purchased system for
paging customers. Iusacell compiles billing information from its switches on
magnetic tape every 24 hours for processing by its billing systems. Protective
and disaster recovery measures are taken in connection with all billing
information.
In late 1997, Iusacell decided to implement the LHS customer care and
billing system to support its cellular business in all of its regions. Although
the 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 have negatively impacted billing cycles, the
implementation of flexible pricing discounts and billing for roaming, these
problems, except for the roaming issues, have been largely resolved. The LHS
customer care and billing system was implemented in Region 6 in early August
1999, in Region 7 in early September 1999 and in Region 9 beginning October 1,
1999. Iusacell expects that the new LHS system will ultimately improve
processing speed and data integrity; will permit easier and more flexible access
to customer information, thereby facilitating targeted marketing and resolution
of customer complaints; and will help resolve Year 2000 compliance issues. In
the future, Iusacell may determine to extend this new system to all of its
product lines to permit a customer to receive a single bill for all services
provided.
Iusacell expects to invest in 1998, 1999 and 2000 a total of approximately
U.S.$33.7 million for the cellular portion of its new customer call and billing
system. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance" and "-- Liquidity and Capital
Resources -- Capital Expenditures."
NETWORK AND EQUIPMENT
CELLULAR SERVICES
As of September 30, 1999, Iusacell's integrated cellular network was
composed of 5 cellular switches, 357 cell sites and 56 repeaters, and covers
approximately 79% of total cellular regional POPs: 53 million inhabitants or 55%
of Mexico's total population.
In December 1997, Iusacell signed an agreement with subsidiaries of Lucent
Technologies, Inc. for the replacement of Iusacell's existing analog network
equipment with Lucent analog and CDMA digital
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network equipment. This replacement began in February 1998 and was completed in
August 1999. In May 1998, Iusacell launched CDMA digital service in the Mexico
City area of Region 9. In the fourth quarter of 1998, Iusacell introduced
digital service in the cities of Guadalajara, Morelia, Leon, Queretaro, Puebla
and Cuernavaca. Region 5 became Iusacell's first region to swap out completely
to Lucent analog and CDMA network equipment in February 1999 and, since that
time, Iusacell gradually swapped out the remainder of its network on a
sub-region by sub-region basis. Region 6 was completely swapped out in May 1999,
Region 9 was completely swapped out in July 1999, and Region 7 was completely
swapped out in August 1999.
Iusacell elected to deploy CDMA technology instead of TDMA technology based
on its 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 Iusacell is
marketing dual-mode cellular telephones capable of sending and receiving both
analog and digital transmissions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Digitalization."
Iusacell's cellular network consists of digital switching systems that are
capable of serving multiple markets. Region 9 is served by two Lucent
Technologies 5ESS switches. Regions 5, 6, and 7 are each served by one Lucent
Technologies 5ESS switch. All switching equipment is fully networked.
Iusacell installed its first mobile switching center in 1989 in Region 9
and currently operates 192 cell sites in Region 9, providing telephone coverage
to substantially all of the populated territory and major highway routes of
Region 9. Regions 5, 6 and 7 currently operate with a total of 164 cell sites,
resulting in cellular telephone coverage in all major population centers as well
as along the principal highway routes in the regions.
Iusacell installed 71 cell sites and 5 repeaters in its regions during 1998
in an effort to increase geographic coverage, as well as boost call-carrying
capacity within areas already covered, and removed from operation 4 cell sites
and 9 repeaters in 1998. Iusacell installed 15 cell sites and removed from
operation one cell site in the first eight months of 1999 and plans to install
17 additional cell sites and one additional repeater during the remaining four
months. Iusacell increases call-carrying capacity and coverage by three
principal means: "cell splitting," deploying "micro-cells" and using cell site
repeaters or enhancers. Approximately 70% of the cells in Region 9 were created
as a result of cell splitting.
Digital microwave links between cell sites and the landline system are
supplied by various equipment manufacturers. Taking advantage of the ability of
its various switching systems to run customized software, Iusacell has developed
a proprietary software package which is able to track and report, in real-time,
all aspects of network performance, including traffic analysis, call quality and
alarms. Iusacell seeks to upgrade and improve its cellular network as new
technologies become available.
Iusacell has a network operations and control center (NOCC) in Mexico City
which oversees, administers and provides technical support to all regions.
Iusacell plans to upgrade its NOCC by installing a new network management system
that will provide more complete and automated surveillance capabilities and
fault and performance management for all network equipment. The first phase of
the NOCC upgrade became operational in the first quarter of 1999 and the second
and final phase will become operational during the fourth quarter of 1999.
OTHER SERVICES
Iusacell provides paging services primarily using its own cellular network
facilities as well as 48 owned and one leased paging antennas. For long
distance, Iusacell uses fiber optics and state-of-the-art digital systems. In
particular, Iusacell uses its three long distance switches and its own fiber
optic network and transmission equipment, as well as other facilities leased
from Telmex and other competitors.
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Iusacell provides private data transmission services, primarily using
excess capacity in its microwave backbone in its existing cellular network in
Region 9, and satellite transmission through its Satelitron joint venture, which
provides a shared hub for private networks.
Iusacell's local wireless network, if implemented in the 450 MHz frequency
band, is expected to be based on the most advanced digital switching,
transmission and subscriber connection equipment that is readily available and
commercially feasible. Iusacell would utilize its existing infrastructure,
including one switch and 15 450 MHz cell sites, to the extent possible. If
Iusacell opts to provide local wireless service through its 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.
INFRASTRUCTURE SYNERGIES
While cellular transmitters are unique to cellular service, towers can be
used for cellular and paging transmissions, and the same physical infrastructure
can be used for cellular, paging and long distance equipment. Synergies also
exist in maintenance, work force training and equipment purchasing. Iusacell
believes that, as it expands its non-cellular offerings, these synergies will
allow it to reduce its infrastructure costs significantly and will reduce the
time needed for implementation of a new service.
For a discussion of Iusacell's capital expenditure plans for its cellular
and other services, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Capital Expenditures."
COMPETITION
The offering of cellular services in Mexico is currently a regulated
duopoly in each region. Iusacell's cellular competitor in all regions in which
it provides service is Telcel, the holder of the 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. See "-- Government
Regulation."
Iusacell will face 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, Iusacell began to face
competition from the winners of 1.9 GHz (PCS) spectrum in the auctions concluded
in May 1998. Pegaso commercially launched its PCS services in Region 1 in
February 1999 and recently launched its PCS services in Mexico City, Guadalajara
and Monterrey. Iusacell expects Pegaso to begin to provide PCS services in
Acapulco and Veracruz in the first quarter of 2000. Iusacell also expects to
face increasing competition from companies that provide services utilizing new
technologies, such as satellite telephony.
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.
(Biper), 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 Iusacell's paging
competitors have already established nationwide paging networks, giving them a
significant operational and marketing advantage over Iusacell. COFETEL recently
concluded auctions for a series of nationwide and regional concessions for
frequencies to be used to provide two-way paging services. 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, Iusacell faces 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.
Iusacell chose not to commit significant marketing resources to the balloting
process and fared poorly in initial balloting results.
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In the local telephony market, Iusacell expects 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 launched service in Mexico City in January 2000. See "-- The
Telecommunications Industry in Mexico -- Market Liberalization."
In providing data transmission services, Iusacell competes for customers
with Telmex, state-owned Telecom and the operational long distance companies. In
addition, Iusacell believes that the current Mexican data transmission industry
includes over 1,000 private networks that provide data transmission services.
INTERNATIONAL JOINT VENTURES
On September 12, 1997, Iusacell signed an agreement to sell its direct and
indirect minority interests in its Ecuadorian cellular company, Conecel, and its
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, Iusacell received U.S.$29.4 million in cash
consideration for its direct interests in these companies, and in 1998 it
received approximately U.S.$2.0 million, net of taxes, in respect of its
indirect interest. In November 1999, Iusacell 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, Iusacell sold a 51% stake in Iusatel Chile, a Chilean
long distance company, and agreed to sell the remaining 49% upon acquisition
from its previous partners. The second stage of this transaction was completed
in early 1997. Iusacell 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. Iusacell received full payment in December 1997.
GOVERNMENT REGULATION
Telecommunications systems in Mexico are regulated by the SCT and 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.
These laws and regulations define the regulatory structure applicable to
the nationwide telecommunications infrastructure and the provision of
telecommunications services. They govern, among other things:
- applications to install, maintain and operate telecommunications systems,
- the establishment of technical standards for the provision of
telecommunications services,
- 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 its subsidiaries, should be governed by the
Original Communications Laws and respected under the new regulatory regime until
their expiration. The 1995 Telecommunications Law may grant rights enhancing
those set forth in the Original Communications Laws. However, rates charged by
holders of concessions and permits granted under the Original Communications
Laws will continue to require prior approval from the SCT, unless such
concession or permit is amended. Iusacell, whose four cellular concessions were
granted under the Original Communications Laws, has requested an amendment of
its concessions to permit it to register tariffs with COFETEL without prior
approval from the SCT.
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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,
- 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 (x)
establishing, operating or exploiting private telecommunications services not
constituting a public network (i.e., reselling) and (y) installing, operating or
exploiting transmission-ground stations. There is no specified maximum term for
permits. Under the 1995 Telecommunications Law, only registration with the SCT
is required to provide value-added telecommunications services.
Under the 1995 Telecommunications Law and the 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,
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- 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, and
- 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.
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. Iusacell's right to provide radiotelephony, local
wireless and data transmission services nationwide, as well as cellular service
in Region 9, is based upon the concession granted to the predecessor of
Iusacell's wholly owned subsidiary, SOS Telecomunicaciones, S.A. de C.V., 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 it may offer. In 1978, the
Original Concession was amended to grant SOS an additional allocation in the
440-450 MHz and 485-495 MHz frequency ranges
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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 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, Iusacell
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. See "-- Foreign Ownership Restrictions." Iusacell is
currently negotiating the terms and conditions for such extension and division
with 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.
In Region 9, Iusacell holds the right to provide cellular service pursuant
to an authorization granted to SOS by the SCT in 1989 under the Original
Concession. In Regions 5, 6 and 7, Iusacell holds the right to provide cellular
service through its subsidiaries Comunicaciones Celulares de Occidente, S.A. de
C.V., 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>
PERCENT OF GROSS REVENUES
PAYABLE TO MEXICAN
SUBSIDIARY 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
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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 Iusacell sold a 2% interest in Infotelecom to Mr.
Jose Ramon Elizondo, a director of Iusacell. As a result, Iusacell currently
holds a 49% interest in Infotelecom. See "-- Other Services -- Paging."
Infotelecom is required to make monthly payments to Infomin equal to 5% of all
gross revenues for the preceding month. This payment represents the amount which
Infomin as concession holder must pay the SCT for the right to provide paging
service.
Long Distance. Iusacell's right to provide international long distance
services is based upon a long distance concession granted by the SCT to Iusatel,
S.A. de C.V. on October 16, 1995. The term of the long distance concession is 30
years and may be renewed upon timely application to the SCT, for an equal period
of time, provided that Iusatel complies with certain requirements. Upon
Iusacell's application, the SCT and 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Capital
Expenditures."
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 Iusacell transfer at least 51% of the voting
shares of Iusatel to Mexican investors on terms acceptable to the Foreign
Investment Commission. In November 1998, Iusacell 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. Iusacell 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. See "-- Foreign Ownership
Restrictions."
Local Telephony. Iusacell believes its 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
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are generally classified as either "fixed" or "mobile." Iusacell's
radiocommunications network is a mobile network. In 1993, the SCT clarified the
ability, and indeed the obligation, of SOS to interconnect customers of its
nationwide radiocommunications network regardless of whether such customers use
fixed, mobile or portable telephones.
Pursuant to the Original Concession, the commencement of construction and
marketing of local wireless service in the 450 MHz frequency band on a
commercial basis requires the prior approval of the SCT. Iusacell has never
received the SCT's approval of its 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, Iusacell would convert and consolidate some of its existing
concessioned radiotelephony frequencies into 450 MHz spectrum in Regions 4, 5,
6, 7 and 9 and would have a right of first refusal to acquire the concessions to
provide local wireless service over such frequencies at prices derived from the
prices of the winning bids in the auctions for 450 MHz and 1.9 GHz (PCS)
frequency bands concluded in May 1998.
These auctions yielded a right of first refusal exercise price estimated at
U.S.$2.25 million for all five regions. However, neither the SCT nor COFETEL has
formally notified Iusacell 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 Iusacell to decide whether to
exercise its right of first refusal.
Iusacell is exploring alternatives for providing local telephony services,
including limited zone wireless services in the 800 MHz (cellular) or 1.9 GHz
(PCS) frequency bands deploying digital technology that will permit mobility and
fixed wireless services over such bands. If Iusacell 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. Iusacell expects to make its decision on the overall strategy for
providing local telephony services before the fourth quarter of 1999.
In September 1998, Iusacell 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 its investment in 450 MHz
TDMA technology had occurred. As a result, Iusacell recorded a substantial
non-cash writedown of its investment in the 450 MHz fixed local wireless
project. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Local Telephony in the 450 MHz Frequency Band."
In November 1998, Mr. Jose Ramon Elizondo, a director of Iusacell, 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 its total voting shares.
Iusacell 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. See "-- Foreign Ownership Restrictions."
Data Transmission. Iusacell's right to offer telex and provide public data
transmission service throughout Mexico is derived from the Original Concession.
Iusacell utilizes its allocations in the 138-144 MHz, 440-450 MHz and 485-495
MHz frequency bands, excess capacity in its cellular microwave backbone in
Region 9 and Satelitron satellite transmission services to provide data
transmission services. 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
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provision of access to its satellite bandwidth, and 2.5% of all such gross
revenues to Telecom for supervision and supporting services. Iusacell currently
intends to sell its 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, Iusacell complied with this requirement by transferring
51% of the voting shares of these two subsidiaries to Mr. Jose Ramon Elizondo, a
director of Iusacell, by means of a subscription to capital. Iusacell retained
49% of the voting shares of these subsidiaries. Iusacell also holds 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, Iusacell holds a
94.9% equity interest in these two subsidiaries.
In order to participate in the auctions for concessions for microwave
frequencies concluded in September 1997, Iusacell 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.
In order to participate in the auctions for concessions for 1.9 GHz PCS
frequencies concluded in May 1998, Iusacell 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 Iusacell.
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, Iusacell currently holds only 49% of this entity,
complying with the condition precedent necessary to allow its other partner,
Infomin,
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S.A. de C.V., a Mexican controlled company, to transfer its paging concession to
Infotelecom, as previously agreed with Iusacell. See "Certain
Transactions -- Interests of Directors."
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 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
from providing interLATA (long distance) telecommunications, engaging in the
manufacture of customer premises equipment ("CPE"), or engaging in the
manufacture or sale of telecommunications equipment.
The Telecommunications Act of 1996 (the "1996 Act"), which became effective
on February 8, 1996, includes provisions that open local telephony markets to
competition and would permit regional Bell operating companies, such as Bell
Atlantic, to provide interLATA services (long distance) and video programming
and to engage in manufacturing. Under the 1996 Act, Bell Atlantic was allowed to
provide certain interLATA (long distance) services immediately upon enactment,
including interLATA (long distance) services originating outside the states
where its subsidiaries provide local exchange telephone services 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.
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 (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
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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, Iusacell may now provide both the foreign "half" and
the United States "half" of telecommunications traffic originating in Mexico (or
any other foreign country) and may now carry international telecommunications
traffic which, although routed through the United States, neither originates nor
terminates in the United States. In addition, Iusacell may, on a resale basis,
carry United States originated traffic bound for Mexico (or other foreign
countries) so long as the traffic originates outside the states where Bell
Atlantic's subsidiaries provide local exchange telephone service.
In 1996, Iusatel applied for and received authorization under Section 214
of the United States Communications Act of 1934 to become a facilities-based
provider of international long distance services from the United States (the
"Section 214 Authorization"). The Section 214 Authorization was transferred to a
Peralta Group entity in January 1996. 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. Iusacell has not yet
determined whether it will engage in activities permitted by the 1996 Act or,
upon any reassignment to Iusatel, the Section 214 Authorization. If Iusacell
chooses to engage in such activities, no definitive prediction can be made as to
the specific impact of such activities on Iusacell's 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
Iusacell to refrain from taking any actions that would cause Bell Atlantic to be
in violation of applicable law.
EMPLOYEES
At September 30, 1999, Iusacell and its subsidiaries had an aggregate of
1,823 full-time and part-time employees, 131 temporary employees and 5 full time
Bell Atlantic seconded employees or consultants. Approximately 38.2% of the full
time employees were members of a labor union. Iusacell has never experienced a
work stoppage and management considers its relationship with its employees to be
good.
PROPERTY
Throughout the regions served by its cellular operations at September 30,
1999, Iusacell operated 96 customer sales and service centers and a total of 357
cellular 800 MHz cell sites, 15 fixed local wireless 450 MHz cell sites, 56
repeaters, five mobile switching centers, one switch for local wireless service,
three switches for long distance service and 49 paging antennas.
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Iusacell generally leases the land where its customer sales and service
centers, cell sites, antennas, microwave transmission equipment and mobile
switching centers are located. Iusacell owns and leases administrative offices
in Mexico City as well as in Guadalajara, Puebla, Monterrey, Leon and Ciudad
Juarez. Iusacell generally owns its cellular network equipment, subject to
liens.
LEGAL PROCEEDINGS
Although Iusacell is a party to some legal proceedings in the ordinary
course of its 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, Iusacell 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 its 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, confirming that the per
diem fines accrued against Telmex and Telcel for their prior refusal to comply
had reached approximately Ps.8.5 million (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).
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 Iusacell 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.
Iusacell's 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
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conveniens. The litigation is now in the discovery stage; production of
documents has largely been completed and depositions of witnesses has begun.
Iusacell believes the lawsuit has no basis and does not anticipate that
Mitsubishi will obtain a judgment in its favor for a material amount of money
damages because, in Iusacell's view, the purported contract was a non-binding
letter of intent, and the purported reliance by Mitsubishi on negotiations with
Iusacell to order terminal components was unreasonable and unwarranted.
Accordingly, Iusacell has not yet created any contingency reserve with respect
to the litigation.
SUIT BY PUBLICIDAD FERRER
In February 1998, Publicidad Ferrer y Asociados, S.A. de C.V., Iusacell's
former advertising agency, filed a complaint with the 39th Civil Superior
Tribunal in the Federal District of Mexico against Iusacell. Publicidad Ferrer's
complaint alleges that Iusacell improperly terminated its contract and seeks
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 Iusacell 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 found Iusacell in breach of its 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.
Although Iusacell petitioned for a review (recurso de revision) of the
denial of its injunctive action, upon review, The First Circuit Collegial
Tribunal's decision was upheld. Iusacell created a contingency reserve for the
entire Ps.16.8 million (U.S.$1.8 million) award in favor of Publicidad Ferrer
and is currently negotiating a settlement with them.
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,
Iusacell prepared its 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, Iusacell 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.
Recently, this court rejected the Company's injunctive action, and the Company
has filed for a review (recurso de revision) with the Second Circuit Collegial
Tribunal in Administrative Matters. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Income Tax, Asset Tax and
Employees' Profit Sharing."
In May 1998, Iusacell discovered that its former corporate headquarters in
Mexico City, of which one of its 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.89.4 million (U.S.$9.6 million) at September
30, 1999. Iusacell is currently negotiating with the Mexican Treasury, the
holder of the liens, to unencumber the property. We cannot assure you, however,
that Iusacell will be able to remove the liens from such property and realize
any value from such asset.
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In April 1994, Iusacell and Northern Telecom Limited ("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
Iusacell's 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,
Iusacell made advance payments of U.S.$15.0 million in anticipation of 1995 and
1996 purchases which were never made. Iusacell now seeks a refund of such
advanced funds. Nortel, however, has asserted that such advances should be
credited against development costs.
In 1995, Iusacell entered into a U.S.$82.0 million purchase agreement with
Telrad Telecommunications Electronics Industries, Ltd. for 450 MHz local
wireless terminals. Iusacell 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 Iusacell believes that it has 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 Iusacell believes that Nortel is
legally obligated to refund the U.S.$15.0 million advance to Iusacell, there can
be no assurance that Iusacell will succeed in obtaining such refund. See
"-- Government Regulation."
In 1996, Mexican tax authorities commenced tax audits on Iusacell and two
of its subsidiaries. These audits were completed in early 1999. In May 1999, the
Mexican tax authorities assessed Iusacell a Ps.21.4 million (U.S.$2.3 million)
penalty for purported incorrect deductions of certain interest expense for
income tax purposes. Iusacell recently paid this assessment.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual and special reports and other information with the
Securities and Exchange Commission. You may read and copy any document New
Iusacell or Old Iusacell files at the Commission's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information on its public reference room. Our filings
with the Commission may also be available at the Commission's web site at
http://www.sec.gov or at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
ENFORCEABILITY OF CIVIL LIABILITIES
Iusacell is incorporated with limited liability in Mexico and substantially
all of its assets are located in Mexico. In addition, the majority of the
directors and officers of Iusacell and some of the experts named in this
prospectus reside outside the United States (principally in Mexico) and all or a
significant portion of the assets of those persons and of Iusacell are located
outside the United States. As a result, it may not be possible for investors to
effect service of process upon such persons within the United States or to
enforce against such persons, Iusacell judgments obtained in the courts of the
United States, including without limitation, judgments predicated upon the civil
liability provisions of the federal securities laws of the United States.
Iusacell has been advised by De Ovando y Martinez del Campo, S.C., its
special Mexican counsel, that there is doubt as to the enforceability in
original actions in Mexican courts of liabilities predicated solely upon U.S.
Federal securities laws and as to the enforceability in Mexican courts of
judgments of U.S. courts obtained in actions predicated upon the civil liability
provisions of the U.S. Federal securities laws. As a result, because
substantially all of the assets of Iusacell are located in Mexico, holders of
Iusacell securities may effectively be required to pursue in Mexico, under
Mexican law, any claims they may have against Iusacell.
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MANAGEMENT
New Iusacell is managed by a twelve-member Board of Directors. The
directors nominated by Bell Atlantic have the power under Iusacell's bylaws 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 "Principal Shareholders."
DIRECTORS
The following table presents information with respect to the current
directors of New Iusacell at June 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Lawrence T. Babbio, Jr. ................... 54 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.................... 47 Series V Director
Ernesto Canales Santos..................... 58 Series V Director
Luis Felipe Gonzalez Munoz................. 44 Series V Director
Rodolfo Garcia Muriel...................... 54 Series V Director
Fulvio V. del Valle........................ 49 President, Director General and Series V
Director
</TABLE>
- ---------------
* Mr. Chynoweth passed away on November 30, 1999.
New Iusacell's bylaws authorize alternate directors to serve on the Board
of Directors in place of directors who are unable to attend meetings or
otherwise participate in the activities of the Board of Directors. The Series A
alternate directors are Thomas Burgos, Ruben G. Perlmutter, Mary Cummings, John
Furey, Jeffrey S. Noto, Javier Martinez del Campo and Ignacio Gomez Morin. The
Series V alternate directors 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 the current executive
officers of New Iusacell at June 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
*Thomas A. Bartlett........................ 41 Chief Executive Officer
Fulvio V. del Valle........................ 49 President and Director General
William S. Roberts......................... 44 Executive Vice President and Chief
Financial Officer
Rolando Stevens............................ 43 Executive Vice President and Chief
Operating Officer
*Howard F. Zuckerman....................... 55 Executive Vice President, Finance
Ricardo Arevalo............................ 34 Vice President, Information Systems, and
Chief Information Officer
*Thomas Burgos............................. 48 Vice President, Network Operations, Chief
Technology Officer
Ramon Pando................................ 43 Vice President, Sales
*Ruben G. Perlmutter....................... 41 Vice President, Mergers and Acquisitions,
and General Counsel
Amaury Rivera.............................. 38 Vice President, Marketing
Francisco Soroa............................ 46 Vice President, Public Relations and
Corporate Communications
Jose Bellido............................... 39 Director, Human Resources
Jorge Halvas............................... 35 Director, Regulatory Affairs
</TABLE>
- ---------------
* Indicates an employee of Bell Atlantic who is currently serving as an officer
of New Iusacell pursuant to consulting or secondment arrangements. See
"Certain Transactions."
COMMITTEES OF THE BOARD OF DIRECTORS
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.
See "Principal 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. The members of the Executive
Committee are Messrs. Babbio, Strigl, Bartlett, Chynoweth, Heimann, Peralta,
Canales and del Valle.
The Finance and Audit Committee recommends New Iusacell's independent
public accountants, reviews New Iusacell's 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. The members of the Finance and Audit Committee are Messrs. Bartlett,
Chynoweth, Heimann, 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. The members of the Human Resources and
Compensation Committee are Messrs. Bartlett, Heimann and Rihan and Ms. Cummings.
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COMPENSATION
The aggregate amount of compensation paid by Old Iusacell in 1998 to all
directors and executive officers as a group was Ps.42.7 million (U.S.$4.6
million).
In addition, in 1998 Old Iusacell granted purchase rights with a respect to
a total of 913,100 Series L shares to its executive officers under the
management employee stock purchase plan described below. As of December 31,
1998, the individuals who are currently executive officers of Old Iusacell held
purchase rights under the plan with respect to 2,808,282 Series L shares. In
1998, the individuals who are currently Old Iusacell executive officers
exercised purchase rights with respect to 330,510 Series L shares and executive
officers whose labor relationship with Old Iusacell terminated during 1998
exercised purchase rights with respect to 144,750 Series L shares. In addition,
purchase rights with respect to 604,103 Series L shares were forfeited by
executive officers whose labor relationship with Old Iusacell terminated during
1998.
As part of its general compensation policy, Iusacell also conducts periodic
reviews of its management and employees to determine bonus compensation.
Iusacell also provides its executive officers with use of an automobile. In
addition, Iusacell provides its executive officers and other employees with food
and gas stamps on a monthly basis (Ps.700 and Ps.1,035 per month, respectively)
and with contributions to a savings plan (Ps.1,361 per month).
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 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 the closing price for the Series V shares on the
Mexican Stock Exchange on the business day selected by the Technical Committee
as the date of sale.
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. All such purchase rights vest either in three equal
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annual installments commencing a year after the date of grant or in a lump two
or three years after the date of the grant.
As of December 31, 1998, purchase rights with respect to 7,699,890 Old
Iusacell Series L shares were outstanding and had not been forfeited or
exercised, purchase rights with respect to 2,103,581 Old Iusacell Series L
shares had been forfeited and purchase rights with respect to 967,440 Old
Iusacell Series L shares had been exercised.
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 September 30, 1999, purchase rights with respect to 6,285,562 Series
V shares had not been exercised and were outstanding in the management trust
administering the plan.
BIOGRAPHIES
Lawrence T. Babbio, Jr. has been a member and Chairman of the Board of
Directors of New Iusacell since August 1998. Mr. Babbio has been a member of the
Board of Directors of Old Iusacell since November 1993, became Vice Chairman of
the Board in February 1994 and, upon the death of Alejo Peralta y Diaz Ceballos
on April 8, 1997, became Chairman of the Board. Since 1966, Mr. Babbio has
served in a variety of capacities with affiliates of Bell Atlantic and its
predecessors. In August 1997, Mr. Babbio was elected president and chief
executive officer of the Network Group and chairman of the Global Wireless Group
of Bell Atlantic. From January 1995 until August 1997, Mr. Babbio served as vice
chairman of Bell Atlantic. From May 1994 to January 1995, he served as executive
vice president and chief operating officer of Bell Atlantic. From February 1991
to May 1994 he served as chairman, president and chief executive officer of Bell
Atlantic Enterprises International, Inc. Prior to that, he served as president
of Bell Atlantic Mobile Systems, Inc., a position he had held since November
1990. He currently serves on the board of directors of Bell Atlantic, 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.
Carlos Peralta Quintero has been a member of the Board of Directors of New
Iusacell since August 1998. Mr. Peralta has been a member of the Board of
Directors of Old Iusacell since October 1992 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.
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 has also been a member of the Board of Directors of
Old Iusacell since April 1996 and Chief Executive Officer of Old Iusacell since
February 1997; 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 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.
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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.
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.
Jose Bellido Valerio has served as Director, Human Resources of New
Iusacell since August 1999. 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).
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.
Ernesto Canales Santos has been a member of the Board of Directors of New
Iusacell since August 1998 and a member of the Board of Directors of Old
Iusacell since November 1993. 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.
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Fernando de Ovando 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 February 1997 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. and its predecessors 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.
Jose Ramon Elizondo Anaya 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 February 1997. Since June 1991, Mr. Elizondo has served as
chairman of the board and chief executive officer of Union de Capitales, S.A. de
C.V. (UNICA), a capital investment fund. For more than ten years prior 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 its investment banking committee and managing director of the mergers and
acquisitions and corporate finance departments. Mr. Elizondo is a member of the
boards of directors of Ekco, S.A., Banca Quadrom, S.A. de C.V., Grupo Azucero
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.
Rodolfo Garcia Muriel has been a member of the Board of Directors of New
Iusacell since June 1998 and was an alternate member of the Board of Directors
of Old Iusacell from November 1993 to May 1994 and became a director of Old
Iusacell in May 1994. He is currently general director of Compania Industrial de
Parras, S.A. de C.V. Mr. Garcia Muriel has been a member of the boards of
directors of Cementos Mexicanos, S.A. de C.V., Cementos Maya, S.A., Cementos
Tolteca, S.A. de C.V., and Grupo Financiero InverMexico, S.A. de C.V. He also
served as chairman of the boards of directors of Corporacion Industrial Mexico
Francia, Fondo de Optimacion de Capitales, Consejo Regional Metropolitano de
Banco Mexicano, Parras Cone de Mexico, S.A. de C.V. and Lavapar, S.A. de C.V.,
and is currently the vice president of the National Chamber of the Textile
Industry (Canaitex).
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 is a member of the Finance and Audit Committee. Mr.
Gonzalez has served as chief financial officer of Industrias Unidas, S.A. de
C.V. since November 1993. For more than ten years prior to such position, Mr.
Gonzalez was employed by Vitrocrisa, S.A. de C.V. and its affiliates, including
as director of administration, finance and human resources from September 1990
until July 1993, and as director of administration and finance from February
1988 to September 1990. Mr. Gonzalez is a member of the board of directors of
Grupo Industrial IUSA, S.A. de C.V., Propulsora de Negocios, S.A. de C.V.,
Cambridge Lee Industries Inc., 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.
Jorge Halvas Begovich has been Director, Regulatory Affairs of New Iusacell
since August 1999, 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).
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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
since April 1999. 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.
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).
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.
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.
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. 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 Bell South Corporation, the last seven with Bell
South International, Inc. and its affiliates. Mr. Roberts was employed for more
than four years by Bell South Inversiones S.A. in Chile: as Chief Operating
Officer from August 1994 to November 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.
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
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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.
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.
Dennis F. Strigl 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
since April 1997 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 its 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.
Howard F. Zuckerman has been Executive Vice President, Finance of New
Iusacell since August 1999 and Executive Vice President, Finance of Old Iusacell
since July 1999. Mr. Zuckerman served as Executive Vice President, Finance and
Audit and Chief Financial Officer of Old Iusacell from September 1998 through
June 1999, Vice President, Finance and Audit and Chief Financial Officer of Old
Iusacell between February 1997 and August 1998, and Director, Finance of Old
Iusacell from November 1996 to February 1997. Mr. Zuckerman has been a member of
the Board of Directors of Old Iusacell since April 1997. Since March 1984, Mr.
Zuckerman has served in a variety of financial management positions with
affiliates of Bell Atlantic. In May 1993, he was appointed vice president,
finance of the carrier services division (serving the United States
interexchange carrier market) of Bell Atlantic Network Services, Inc. For more
than nine years prior to such position, Mr. Zuckerman had served in a variety of
executive capacities with Bell Atlantic Enterprises International, Inc. and
related affiliates of the unregulated businesses of Bell Atlantic, including
chief financial officer of Bell Atlantic Investment Development Corporation from
1988 to 1992 and director of accounting of Bell Atlantic Enterprises, Inc. From
1975 to 1983, Mr. Zuckerman held financial management positions with Squibb
Corporation, a diversified pharmaceutical company based in the United States,
and was appointed an Assistant Corporate Controller in July 1982. From 1970 to
1975, Mr. Zuckerman was employed by the audit division of the New York office of
Arthur Andersen & Co. Mr. Zuckerman is a Certified Public Accountant in New York
and New Jersey. He holds an economics degree from Cornell University and an
M.B.A. from the University of Chicago.
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PRINCIPAL SHAREHOLDERS
New Iusacell shareholders before the exchange offer are as follows:
<TABLE>
<CAPTION>
A SHARES V SHARES TOTAL
-------------------- -------------------- ----------------------
SHAREHOLDER NUMBER % NUMBER % NUMBER %
- ----------- ----------- ----- ----------- ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Bell Atlantic(1)......... 504,331,308 68.4 27,178,520 4.7 531,509,828 40.4
Peralta Group(2)......... 232,499,437 31.6 298,984,939 51.7 531,484,376 40.4
Public investors(3)...... -- -- 252,037,408 43.6 252,037,408 19.2
----------- ----- ----------- ----- ------------- -----
Total.................. 736,830,745 100.0 578,200,867 100.0 1,315,031,612 100.0
=========== ===== =========== ===== ============= =====
</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 a management trust pursuant to an
management employee stock purchase plan. See "Management -- Management
Employee Stock Purchase Plan."
Assuming full participation in the exchange offer, New Iusacell
shareholders will be as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------------------------------------------------------
SHAREHOLDERS A SHARES % V SHARES % TOTAL %
- ------------ ----------- ----- ----------- ----- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Bell Atlantic............ 504,331,308 68.4 27,178,520 4.6 531,509,828 40.2
Peralta Group............ 232,499,437 31.6 298,984,939 51.1 531,484,376 40.2
Public investors(1)...... -- -- 258,902,573 44.3 258,902,573 19.6
----------- ----- ----------- ----- ------------- -----
----------- ----- ----------- ----- ------------- -----
Total.................. 736,830,745 100.0 585,066,032 100.0 1,321,896,777 100.0
=========== ===== =========== ===== ============= =====
</TABLE>
- ---------------
(1) Includes the series V shares held by a management trust pursuant to an
management employee stock purchase plan. See "Management -- Management
Employee Stock Purchase Plan."
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.
New Iusacell's directors and officers as a group own, in aggregate, less
than 1% of Iusacell's shares, excluding the shares held by Mr. Carlos Peralta.
GOVERNANCE
In accordance with New Iusacell's bylaws and the New Iusacell Shareholders
Agreement, New Iusacell's Board of Directors consists of twelve members. The
Series A shareholders have the right to appoint seven directors and their
alternates and the Series V shareholders have the right to appoint five
directors and their alternates. Iusacell's bylaws 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 Atlantic has the
right to elect six of the Series A directors, including the Chairman of the
Board of Directors, whose vote, under both New Iusacell's 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, four Series V
directors. Bell Atlantic and the Peralta Group have also agreed that the
Director General of New Iusacell shall be the remaining Series V director.
New Iusacell's bylaws 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 bylaws to approve, without the
affirmative
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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. 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 New
Iusacell's Board of Directors or its 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 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 New 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 New Iusacell 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 New Iusacell to effect a six-month shelf registration of its
shares. After one party's exercise of its registration rights, all other parties
having registration rights may elect to include their shares in the offering.
Any party holding registration rights may not exercise such rights during the
90-day period commencing on the effective date of any registration statement
filed by Iusacell for a primary equity offering in which gross proceeds are
expected to exceed U.S.$30.0 million.
The New Iusacell Shareholders Agreement also provides that if New Iusacell
registers any equity securities for a primary or secondary public offering, it
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. New Iusacell has 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, New Iusacell has agreed not to effect any
public sale or distribution of securities similar to those being registered
during the period commencing 21 days prior to the effective date of a
registration statement covering the registered securities and continuing until
90 days following such effective date.
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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.
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CERTAIN TRANSACTIONS
GENERAL POLICY
Iusacell 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 Iusacell will not, and will not permit
any of its subsidiaries to, enter into any contract or transaction with or for
the benefit of any of their affiliates (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 Iusacell 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
million (the "Bell Atlantic Facility"). The subordinated convertible debentures
(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 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
1998, Old Iusacell has been invoiced by Bell Atlantic for a total of U.S.$5.8
million, which amount includes U.S.$2.4 million in reimbursement of the actual
cost of seconded employees. At December 31, 1998, Old Iusacell owed Bell
Atlantic U.S.$13.1 million for consulting services and seconded employees
provided in 1996, 1997 and 1998.
REAL ESTATE LEASES
Inmobiliaria Montes Urales 460, S.A. de C.V., a subsidiary of Iusacell,
leases office space to Servicios Corporativos IUSA, S.A. de C.V., a member of
the Peralta Group, pursuant to a one-year lease which is re-priced on January 1
of each year. Currently, payments under the lease equal U.S.$99,220 per month.
In 1998, Servicios Corporativos IUSA paid Inmobiliaria Montes Urales 460
U.S.$813,072 for such office space.
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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 paid by Iusacell to Fracomex per month for all such leases is
approximately U.S.$26,795. In 1998, these payments totaled approximately
U.S.$344,000.
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.$22,830 per month for these land leases. In 1998, payments for these leases
totaled U.S.$273,960.
Iusacell leases office space to Telecomunicaciones y Equipos, S.A. de C.V.
(TESA), a Peralta Group member. Currently, payments under the lease equal
U.S.$6,410 per month. In 1998, lease payments totaled U.S.$76,920. TESA owes
Iusacell rental payments for 1996 in the total amount of U.S.$76,920.
OTHER SERVICES
Iusacell's 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 1998, Iusacell billed Internet Directo U.S.$247,696, including
value-added taxes, for such services.
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.493,484.74 (U.S.$51,831) 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.
INTERESTS OF DIRECTORS
In December 1998, Old Iusacell paid Mr. Marco Antonio de la Torre Barranco,
an alternate director of Iusacell, U.S.$350,000 for his 31.7% interest in
Cellular Solutions de Mexico, S.A. de C.V., a company involved in the sale of
cellular accessories. Old Iusacell now owns 100% of Cellular Solutions de
Mexico, S.A. de C.V., which ceased business operations in December 1998.
In 1998, Manufacturas Electronicas Pasteje, S.A. de C.V., a joint venture
between the Peralta Group and Mr. Marco Antonio de la Torre Barranco, provided
telephone and accessory repair services to Iusacell in the amount of Ps.3.3
million (U.S.$351,650).
In 1998, 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.3.0 million
(U.S.$311,247).
Mr. Fernando de Ovando, a director of New Iusacell, Mr. Javier Martinez del
Campo, an alternate director of New Iusacell, 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 1998, provided legal services to Iusacell in
the amount of approximately Ps.1.1 million (U.S.$117,000).
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. Iusacell and Mr. Elizondo have agreed 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
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- 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. See
"Business -- Government Regulation -- Foreign Ownership Restrictions."
New Iusacell estimates 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.
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DESCRIPTION OF NEW IUSACELL CAPITAL STOCK
The outstanding capital stock of New Iusacell consists of series A shares
and series V shares. The following table presents the number of shares that will
be issued and outstanding, assuming that all Old Iusacell ADSs and shares are
tendered in the exchange offer described in this prospectus. See "Prospectus
Summary -- The Reorganization."
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF PERCENTAGE OF
SHARES SHARES CAPITAL STOCK VOTING POWER
------ ------------- ------------- -------------
<S> <C> <C> <C>
Series A...................................... 736,830,745 56.6% 56.6%
Series V...................................... 565,508,927 43.4% 43.4%
------------- ----- -----
Total............................... 1,302,339,672 100.0% 100.0%
============= ===== =====
</TABLE>
We provide below information concerning New Iusacell's capital stock and
significant provisions of its bylaws and of applicable Mexican law. This
description does not purport to be complete and is qualified in its entirety by
reference to New Iusacell's bylaws and the provisions of applicable Mexican law.
GENERAL
New Iusacell was incorporated on August 6, 1998 as a variable capital
corporation (sociedad anonima de capital valiable) established under the laws of
Mexico.
Each series A share and series V share entitles the holder to one vote at
any general meeting of the shareholders of New Iusacell.
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 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.
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.
VOTING RIGHTS
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
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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.
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 bylaws, 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 New 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 New Iusacell, the approval of the
financial statements of New Iusacell for the preceding fiscal year 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 New Iusacell's bylaws, 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.
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 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 bylaws require the approval of holders of at least 95% of the
outstanding shares of New Iusacell and the approval from the CNBV for the
amendment of the controlling shareholders' obligation specified in Article 28 of
the bylaws for the repurchase of shares in the event of delisting. See "-- Other
Provisions -- Repurchase 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.
See "Description of New Iusacell ADSs -- Voting Rights."
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Under Mexican law, holders of 33% of New Iusacell's 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 New Iusacell's bylaws. 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 bylaws or the legal
provision that were 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 of New
Iusacell. 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 of New
Iusacell or depositing such shares with New Iusacell's 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 New Iusacell and not only to the individual plaintiffs' interests.
DIVIDEND RIGHTS
At the annual ordinary general meeting of shareholders of New Iusacell, the
Board of Directors will generally submit the financial statements of New
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 New lusacell'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. For a description of provisions of New
Iusacell Shareholders Agreement governing the payment of dividends, see
"Dividends."
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.
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LIQUIDATION
In the event that New Iusacell is liquidated, one or more liquidators must
be appointed at an extraordinary general shareholders' meeting to wind up its
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
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 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.
The fixed portion of New Iusacell's capital stock may only be increased or
decreased by resolution of an extraordinary general meeting and an amendment to
the bylaws, whereas the variable portion of New Iusacell's capital stock may be
increased or decreased by resolution of an ordinary general meeting. See
"-- Other Provisions -- Fixed and Variable Capital; Withdrawal Rights."
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 New Iusacell of its shares or for increases based on offers by Old
Iusacell of shares previously purchased by it. See "-- Other
Provisions -- Purchase by New Iusacell, of its Shares" and "-- Appraisal
Rights."
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 the bylaws 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 U.S. persons
or are located in the United States may be restricted in their ability to
participate in the exercise of preemptive rights. See "Description of New
Iusacell ADSs -- Share Dividends and Other Distributions."
OTHER PROVISIONS
FIXED AND VARIABLE CAPITAL; WITHDRAWAL RIGHTS
As a sociedad anonima de capital variable, New Iusacell, is permitted to
issue shares constituting fixed capital and shares constituting variable
capital. The issuance of variable capital shares, unlike the
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issuance of fixed capital shares, does not require an amendment of the bylaws,
although it does require approval at an ordinary general meeting
Under the bylaws and CNBV regulations, variable capital may not be greater
than ten times the minimum fixed portion of New Iusacell's capital stock
specified in the bylaws. No shares of New 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 New
Iusacell in an authenticated written notice to that effect. If notice of
withdrawal were received 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 New Iusacell's financial statements for the fiscal year at the
end of which the withdrawal were to become effective, as approved by its
shareholders at an annual ordinary general meeting. Any such amount to be paid
by New Iusacell would become due on the day following such annual ordinary
general meeting.
FORFEITURE OF SHARES
As required by Mexican law, the bylaws 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., 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 New
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 bylaws of all
Mexican corporations unless such bylaws prohibit ownership of capital stock by
foreign investors.
DURATION
The duration of New Iusacell's existence under the bylaws is indefinite.
PURCHASE BY NEW IUSACELL OF ITS SHARES
New Iusacell may repurchase its shares representing variable capital 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. The capital stock of New
Iusacell 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 of New Iusacell 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
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of shares. Amounts used for the repurchase of shares may not exceed the
aggregate amount of New Iusacell's retained earnings.
Repurchased shares would be held by New Iusacell as treasury stock, pending
future sales which may only be effected on the Mexican Stock Exchange. The
capital stock of New Iusacell 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 New Iusacell, 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 the shares of New Iusacell in the
Securities Section of the RNVI is canceled, whether upon the request of New
Iusacell or pursuant to a resolution adopted by the CNBV, New Iusacell's bylaws
and CNBV regulations require that New Iusacell's controlling shareholders make a
public offer to purchase the shares owned by minority holders. The shares must
be purchased by New Iusacell's controlling shareholders, at the higher of (i)
the average quotation price of the shares for the 30 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.
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 its interest conflicts with that of New Iusacell may be liable for damages
if the transaction would not have been approved without such shareholder's vote.
DIRECTOR CONFLICTS OF INTEREST
Under Mexican law, any member of the Board of Directors who has a conflict
of interest with New 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 New
Iusacell. Additionally, members of the Board of Directors may not represent any
shareholders at any shareholders' meeting.
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 New Iusacell and receive an amount
generally equivalent to the book value of its shares (in accordance with New
Iusacell's 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.
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DESCRIPTION OF NEW IUSACELL ADSS
ADRs are certificates that evidence New Iusacell ADSs, just as a stock
certificate evidences a holding of shares. Each New Iusacell ADS will represent
ownership interests in ten series V shares (or the right to receive series V
shares) which New Iusacell will deposit with a custodian in Mexico (the
"Custodian"). Each New Iusacell ADS will also represent 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 New 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 New
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. For more complete information, you should read the entire
deposit agreement and the form of ADR. Directions on how to obtain copies of
these are provided in the section entitled "Business -- Available Information."
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 New 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. See "Taxation." 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 New
Iusacell may distribute as a dividend or free distribution, if New 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.
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RIGHTS TO RECEIVE ADDITIONAL SHARES
If New Iusacell offers holders of its 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. New 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 New 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.
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 New 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 New Iusacell distributed and
distribute the proceeds, in the same way as it distributes cash. Or, it may
decide to hold what New 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. New Iusacell
has no obligation to register under the Securities Act the New lusacell ADSs,
shares, rights or other securities that may be distributed to holders of series
V shares and ADSs. New 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 that New Iusacell
makes on its shares or any value for them if it is illegal or impractical for
New 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.
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VOTING RIGHTS
You may instruct The Bank of New York to vote the series V shares
underlying your ADRs but only if New 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 New Iusacell asks for your instructions, The Bank of New York will
notify you of the upcoming vote and arrange to deliver New 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, The Bank of New York
will try, as far as is practical, and in conformity with Mexican law and the
provisions of New Iusacell's bylaws, to vote or to have its agents vote the
shares or other deposited securities as you instruct. The 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 New Iusacell.
New 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 of transfer fees - Transfer and registration of shares on the
share register of New 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>
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<PAGE> 133
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.
RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
<TABLE>
<CAPTION>
IF NEW IUSACELL: THEN:
<S> <C>
- - Changes the nominal or par value of - The cash, shares or other securities received
its shares by The Bank of New York will become deposited
- - Reclassifies, splits up or securities
consolidates any of the deposited
securities
- - Distributes securities on the - The Bank of New York may, and will if New
shares that are not distributed to Iusacell asks it to, distribute some or all of
you the cash, shares or other securities it
- - Recapitalizes, reorganizes, received. It may also issue new ADRs or ask you
mergers, liquidate, sells all or to surrender your outstanding ADRs in exchange
substantially all of its assets, or for new ADRs, identifying the new deposited
takes any similar action securities
</TABLE>
AMENDMENT AND TERMINATION
New 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 New 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 New Iusacell that it would like to resign and
New 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, the Bank of New York
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 win has
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.
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<PAGE> 134
LIMITATION ON OBLIGATIONS AND LIABILITY TO ADR HOLDERS
The deposit agreement expressly limits New Iusacell's obligations and the
obligations of The Bank of New York. This limits New Iusacell's liability and
the liability of The Bank of New York. New 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
- 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, New Iusacell and The Bank of New York agree to
indemnify each other under certain circumstances.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before the Bank of New York 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 New
Iusacell are closed or at any time if The Bank of New York or New 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) The Bank of New York or New
Iusacell has closed its transfer books; (ii) the transfer of shares is
blocked to permit voting at a shareholders' meeting; or (iii) New
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
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<PAGE> 135
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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<PAGE> 136
COMPARISON OF SHAREHOLDER RIGHTS
There are differences between the current rights of holders of series D and
L shares or ADSs of Old Iusacell and the rights such holders will have as
holders of series V shares or ADSs of New Iusacell. For more detailed
descriptions of the capital stock of New Iusacell and New Iusacell ADSs, see
"Description of New Iusacell Capital Stock" and "Description of New Iusacell
ADSs."
VOTING RIGHTS
Holders of series D and L shares or ADSs of Old Iusacell are entitled to
appoint one series D director and one series L director, respectively. The Board
of Directors of Old Iusacell consists of twenty-one directors. By comparison,
holders of series V shares or ADSs of New Iusacell will be entitled to appoint
five series V directors. The Board of Directors of New Iusacell consists of
twelve directors.
Holders of series L shares of Old Iusacell have limited voting rights. They
may vote at extraordinary general shareholders' meetings only in connection with
the following matters
- transformation of Old Iusacell from one type of company to another,
- any merger of Old Iusacell with another company where Old Iusacell is not
the surviving entity or any merger with another company whereby Old
Iusacell is the surviving entity but the merged company has a corporate
purpose unrelated to the corporate purpose of Old Iusacell, and
- cancellation of the registration of the series L shares on any Mexican or
foreign stock exchange.
By exchanging their shares for series V shares of New Iusacell, holders of
series L shares of Old Iusacell will enjoy full voting rights. Consequently,
holders of series D shares of Old Iusacell will experience a dilution of their
voting interest upon exchanging for series V shares of New Iusacell. For a
description of the effect of the exchange offer on your holdings, see
"Prospectus Summary -- Effect of the Exchange Offer on Your Holdings." For a
description of voting rights, see "Description of New Iusacell Capital Stock."
DIVIDENDS
Holders of series V shares of New Iusacell will be able to vote at the
annual ordinary general meeting of shareholders of New Iusacell on the payment
of dividends or any other distribution, if any. Holders of series L shares of
Old Iusacell are not permitted to vote on such matters.
BENEFICIAL EQUITY INTERESTS
Before the exchange offer described in this prospectus, public shareholders
of Old Iusacell had approximately a 0.5% economic interest and less than 0.1%
voting interest in Old Iusacell. Assuming full participation in the exchange
offer described in this prospectus, public shareholders will not have any direct
economic or voting interest in Old Iusacell.
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<PAGE> 137
TAXATION
GENERAL
The following is a general summary of material U.S. and Mexican federal
income tax consequences of the exchange offer and the acquisition, ownership and
disposition of New Iusacell ADSs obtained in connection therewith. This summary
does 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 the possible
U.S. or Mexican federal income tax consequences of the exchange offer or
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. Mexico has also executed
double taxation treaties with other countries as well as agreements providing
for the exchange of information with respect to tax matters, some of which are
in force. The following summary does not take into account the effect of any
such treaties. Holders should consult with their tax advisors as to their
entitlement to the benefits afforded by the Tax Treaty or any other applicable
tax treaty.
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<PAGE> 138
THE EXCHANGE OFFER
U.S. FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Clifford Chance Rogers & Wells LLP, counsel for New
Iusacell, the exchange of Old Iusacell ADSs or series L or D shares for New
Iusacell ADSs representing series V shares pursuant to the exchange offer will
be tax-free under Section 368(a)(1)(B) of the Code. Accordingly, no material
gain or loss for U.S. federal income tax purposes will be recognized by Old
Iusacell or New Iusacell in the transactions constituting the exchange offer.
An opinion of counsel is based on customary assumptions and representations
regarding, among other things, the history of prior dealings between Old
Iusacell and New Iusacell, the existing and future ownership of the stock of New
Iusacell and the future business plans of New Iusacell. Prospective investors
should be aware that an opinion of counsel is not binding on the IRS or any
court. No ruling from the IRS concerning the tax consequences of the exchange
offer has been, or will be, requested by Old Iusacell or New Iusacell.
In general, U.S. Holders of Old Iusacell ADSs (other than a U.S. Holder who
or which owns 5% or more of the voting power and total value of the stock of Old
Iusacell (as determined applying certain attribution rules) (a "5% U.S. Holder")
as discussed below) who exchange such Old Iusacell ADSs for New Iusacell ADSs in
the exchange offer will not recognize gain or loss upon the receipt of New
Iusacell ADSs in exchange for their Old Iusacell ADSs. U.S. Holders of Old
Iusacell ADSs who do not tender such Old Iusacell ADS in the exchange offer will
recognize gain or loss on the disposition of the shares underlying the Old
Iusacell ADSs. See "-- Taxation of Capital Gains -- U.S. Federal Income Tax
Considerations."
Pursuant to the U.S. Treasury regulations, in general, a 5% U.S. Holder who
exchanges Old Iusacell ADSs for New Iusacell ADSs in the exchange offer will
recognize gain or loss upon the receipt of New Iusacell ADSs in exchange for Old
Iusacell ADSs unless such 5% U.S. Holder enters into a five-year gain
recognition agreement ("GRA") with the IRS. In general, a 5% U.S. Holder by
filing a GRA agrees that if New Iusacell disposes of the Old Iusacell ADSs in a
taxable transaction during the term of the GRA (i.e., during the following five
years), the 5% U.S. Holder must amend its tax return for the year of the
exchange offer and include in income the amount of the unrecognized gain, if
any, plus interest. To be eligible to file a GRA, among other things, a 5% U.S.
Holder must receive an annual statement from New Iusacell setting forth certain
required information; New Iusacell has agreed to distribute this statement to 5%
U.S. Holders that reasonably request to receive such statement. 5% U.S. Holders
are urged consult with their own tax advisors concerning the U.S. federal income
tax consequences of participating in the exchange offer and the consequences of
entering into a GRA.
MEXICAN TAX CONSIDERATIONS
In the opinion of De Ovando y Martinez del Campo, S.C., special Mexican
counsel for New Iusacell, the exchange of Old Iusacell ADSs or series L or D
shares for series V shares represented by New Iusacell ADSs pursuant to the
exchange offer will be tax-free under Mexican tax laws.
The exchange of series D and L shares of Old Iusacell (and ADSs
representing such Old Iusacell shares) for series V shares of New Iusacell (or
ADSs representing such New Iusacell shares) pursuant to the exchange offer will
be exempt from Mexican taxes only when such transaction is carried out by:
- holders of Old Iusacell series D or L ADSs who are non-residents of
Mexico,
- holders of series D or L shares of Old Iusacell who are non-residents of
Mexico.
TAXATION OF DISTRIBUTIONS
U.S. FEDERAL INCOME TAX CONSIDERATIONS
Subject to the "Passive Foreign Investment Company" discussion below,
distributions paid out of New Iusacell's current or accumulated earnings and
profits (as determined for U.S. federal income tax
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<PAGE> 139
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 includable in income, regardless of whether the Pesos
are converted into U.S. dollars. In addition, 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 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.
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 its paying of
dividends to its 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%.
TAXATION OF CAPITAL GAINS
U.S. FEDERAL INCOME TAX CONSIDERATIONS
Subject to the "Passive Foreign Investment Company" discussion below, 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.
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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 expected to be
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.
However, pursuant to the Tax Treaty, gains realized by qualifying U.S.
Holders from the sale or other disposition of shares, even if the sale is not
conducted through a recognized stock exchange, 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 owned 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.
PASSIVE FOREIGN INVESTMENT COMPANY
New Iusacell believes that it is not a passive foreign investment company
("PFIC") for U.S. federal income tax purposes in the current taxable year and
does not expect to become a PFIC in future taxable years. However, because the
determination of whether New Iusacell ADSs constitute shares of a PFIC will be
based upon the composition of our income and assets on an annual basis, we
cannot assure you that we will not be considered a PFIC for any subsequent
taxable year. If the New Iusacell ADSs were shares of a PFIC for any fiscal
year, a U.S. Holder of ADSs would be subject to adverse U.S. federal income tax
consequences with respect to any gains realized on the sale of other disposition
of the New Iusacell ADSs and distributions received with respect to New Iusacell
ADSs. Prospective investors should consult their own tax advisers as to the
effect to them of New Iusacell being a PFIC and the availability of the
"qualified electing fund" or "mark to market" elections.
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,
137
<PAGE> 141
- 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 before
purchasing the New Iusacell ADSs.
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 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-8 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-8.
The U.S. Treasury Department has recently 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.
138
<PAGE> 142
LEGAL MATTERS
Certain legal matters will be passed upon for Iusacell by Clifford Chance
Rogers & Wells LLP, New York, New York, special United States counsel to
Iusacell, with respect to matters of New York law and United States federal law,
and by De Ovando y Martinez del Campo, S.C., Mexico, D.F., special Mexican
counsel to Iusacell, with respect to matters of Mexican law.
INDEPENDENT ACCOUNTANTS
The Audited Consolidated Financial Statements of Iusacell included in this
prospectus have been audited by PricewaterhouseCoopers, independent accountants,
as stated in their report appearing in this prospectus. This report includes
explanatory paragraphs regarding:
- the application of U.S. GAAP,
- the restatement of the financial statements to reclassify to operating
expense an impairment charge previously recorded directly against
shareholders' equity under Mexican GAAP, and
- the recognition of an impairment loss relating to the 450 MHz project
assets under both Mexican and U.S. GAAP.
With respect to the Unaudited Consolidated Financial Statements included in
this prospectus, PricewaterhouseCoopers reported that they have applied limited
procedures in accordance with professional standards for a review of such
information. However, their report included in this prospectus states that they
did not audit and they do not express an opinion on that unaudited consolidated
financial information. Accordingly, the degree of reliance on their report on
such information should be restricted in light of the limited nature of the
review procedures applied. PricewaterhouseCoopers is not subject to the
liability provisions of Section 11 of the Securities Act of 1933 for their
review letter on the unaudited consolidated financial information because that
review letter is not a "report" or a "part" of the registration statement
prepared or certified by PricewaterhouseCoopers within the meaning of Sections 7
and 11 of the Act.
EXPERT
The description of the appraisal of Iusacell's prior analog
telecommunications network described in this prospectus has been prepared by
Consultores y Valuadores de Empresas, S.C., an international property appraiser,
as indicated in their appraisal report. Description of the appraisal is included
in this prospectus in reliance upon such report and information given on the
authority of the firm as experts in property valuation.
139
<PAGE> 143
INDEX TO FINANCIAL STATEMENTS
The audited financial statements of New Iusacell have been excluded
because, at September 30, 1999, it had nominal assets and liabilities and no
operations, nor did it have any contingent liabilities or commitments.
CONSOLIDATED FINANCIAL STATEMENTS OF GRUPO IUSACELL, S.A. DE C.V.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ANNUAL FINANCIAL INFORMATION AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-4
Consolidated Income Statements for the years ended
December 31, 1998, 1997 and 1996....................... F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996... F-6
Consolidated Statements of Changes in Financial Position
for the years ended December 31, 1998, 1997 and 1996... F-7
Notes to the Consolidated Financial Statements............ F-8
INTERIM FINANCIAL INFORMATION*
Review Letter of Independent Accountants.................. F-64
Consolidated Balance Sheets as of September 30, 1999 and
1998 (unaudited)....................................... F-65
Consolidated Income Statements for the nine-month periods
ended September 30, 1999 and 1998 (unaudited).......... F-67
Consolidated Statements of Changes in Stockholders' Equity
for the nine-month periods ended September 30, 1999 and
1998 (unaudited)....................................... F-68
Consolidated Statements of Changes in Financial Position
for the nine-month periods ended September 30, 1999 and
1998 (unaudited)....................................... F-69
Notes to the Consolidated Financial Statements
(unaudited)............................................ F-70
</TABLE>
- ---------------
* These interim financial statements are included because they have been filed
with the Comision Nacional Bancaria y de Valores in Mexico.
F-1
<PAGE> 144
[PRICEWATERHOUSECOOPERS LETTERHEAD]
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. (the "Company") and subsidiaries as of December 31, 1998 and
1997, 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, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audits in accordance with generally accepted 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, 1998 and 1997, and
the consolidated results of its operations, changes in stockholders' equity and
changes in its consolidated financial position for each of the three years in
the period ended December 31, 1998, 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, 1998, 1997 and 1996 and the total
amount of stockholders' equity as of December 31, 1998 and 1997 to the extent
summarized in Note 20 to the consolidated financial statements.
F-2
<PAGE> 145
[PRICEWATERHOUSECOOPERS LOGO]
As described in Note 22 as it relates to Mexican GAAP, the Company had
previously recorded an impairment charge related to the analog communications
network directly against stockholders' equity. The Company has reassessed this
accounting treatment and determined that the impairment charge should have been
recorded as an operating expense. Consequently, the accompanying consolidated
financial statements for the year ended December 31, 1997 have been restated
accordingly (see Note 22).
As described in Note 18, in 1998, the Company recorded an impairment loss
related to the 450 project assets amounting to Ps.1,077,473,612 as a result of a
decision by management to reevaluate the feasibility of the 450 MHz technology
as a fixed wireless service.
PricewaterhouseCoopers
Juan Manuel Ferron Solis
Public Accountant
Mexico City, D. F., Mexico.
February 22, 1999 (except with
respect to the matters discussed
in Notes 13.b, 20, 21 and 22 for
which the date is May 21, 1999,
and to the matter discussed in
Note 13.e, for which the date is
June 25, 1999).
F-3
<PAGE> 146
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of September 30, 1999)
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents Ps. 280,184 Ps. 152,993
------------- ------------
Accounts receivable:
Trade, net of Ps.73,794 and Ps.101,740 of
allowance for doubtful accounts in 1998
and 1997, respectively (Note 4.d) 332,793 266,296
Related parties (Note 5) 12,493 57,329
Recoverable taxes and other 647,000 294,383
------------- ------------
992,286 618,008
------------- ------------
Inventories (Note 6) 203,113 350,355
------------- ------------
Total current assets 1,475,583 1,121,356
INVESTMENT IN ASSOCIATED COMPANIES (Note 7) 17,032 23,152
PROPERTY AND EQUIPMENT, net (Note 8) 5,827,104 3,925,390
OTHER ASSETS, net (Note 9) 1,711,111 1,647,867
EXCESS OF COST OF INVESTMENTS IN SUBSIDIARIES OVER
BOOK VALUE, net of accumulated amortization of
Ps.399,855 in 1998 and Ps.328,386 in 1997 (Note 4.i) 1,868,346 1,974,009
------------- ------------
Total assets Ps.10,899,176 Ps.8,691,774
============= ============
LIABILITIES
CURRENT:
Notes payable (Note 10) Ps. 814,944 Ps. 3,467
Trade accounts payable (Note 11) 958,571 916,697
Related parties (Note 5) 136,914 104,554
Taxes and other payables 831,341 424,214
Income tax (Note 12) 53,083 11,502
Employee profit sharing (Note 12) 5 102
------------- ------------
Total current liabilities 2,794,858 1,460,536
LONG-TERM DEBT (Note 10) 4,074,060 2,889,149
TRADE ACCOUNTS PAYABLE, LONG-TERM (Note 11) 2,316 5,260
COMMITMENTS AND CONTINGENCIES (Notes 4.k and 13) 2,806 2,992
------------- ------------
Total liabilities 6,874,040 4,357,937
------------- ------------
STOCKHOLDERS' EQUITY
CONTRIBUTED CAPITAL (Notes 14 and 15):
Capital stock:
Nominal 3,998,608 2,979,286
Restatement 5,479,537 5,332,158
------------- ------------
9,478,145 8,311,444
------------- ------------
Capital contributed:
Nominal 18,655 18,655
Restatement 61,106 61,106
------------- ------------
79,761 79,761
------------- ------------
9,557,906 8,391,205
------------- ------------
EARNED CAPITAL (Note 16):
Accumulated losses:
Legal reserve 4,361 4,361
For prior years (3,367,411) (2,064,972)
For the year (1,424,112) (1,302,439)
------------- ------------
(4,787,162) (3,363,050)
------------- ------------
Deficit from restatement (746,499) (709,390)
------------- ------------
Total majority stockholders' equity 4,024,245 4,318,765
MINORITY INTEREST 891 15,072
------------- ------------
Total stockholders' equity 4,025,136 4,333,837
------------- ------------
Total liabilities and stockholders' equity Ps.10,899,176 Ps.8,691,774
============= ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE> 147
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of September 30, 1999)
<TABLE>
<CAPTION>
Restated
1998 1997 1996
------------- -------------- ------------
<S> <C> <C> <C>
REVENUES:
Services Ps. 2,688,655 Ps. 2,009,313 Ps.2,072,472
Telephone equipment sales and other 412,001 413,227 334,286
------------- -------------- ------------
3,100,656 2,422,540 2,406,758
------------- -------------- ------------
COST OF SALES:
Cost of services 841,354 669,559 759,818
Cost of telephone equipment sales and other 220,447 262,304 186,369
------------- -------------- ------------
1,061,801 931,863 946,187
------------- -------------- ------------
Gross profit 2,038,855 1,490,677 1,460,571
------------- -------------- ------------
OPERATING EXPENSES 1,183,165 968,473 1,053,025
DEPRECIATION AND AMORTIZATION 872,658 757,726 855,889
450 PROJECT NON CASH WRITEDOWN (Note 18) 1,077,473 - -
------------- -------------- ------------
Operating loss (1,094,441) (235,522) (448,343)
------------- -------------- ------------
OTHER INCOME, net 145,676 - -
------------- -------------- ------------
PROVISION FOR EQUIPMENT IMPAIRMENT (Notes 4.b and 22) - (1,208,352) -
------------- -------------- ------------
INTEGRAL FINANCING COST (GAIN):
Interest expense, net 245,200 323,181 397,887
Foreign exchange loss (gain), net 918,227 63,105 (87,932)
Gain from monetary position (745,336) (381,156) (493,053)
------------- -------------- ------------
418,091 5,130 (183,098)
------------- -------------- ------------
EQUITY PARTICIPATION IN NET GAIN OF
ASSOCIATED COMPANIES AND NET GAIN
ON SALE OF EQUITY INVESTMENTS (Note 7) (27,290) (205,326) (1,866)
------------- -------------- ------------
Loss from continuing operations before
assets tax, minority interest and
extraordinary item (1,339,566) (1,243,678) (263,379)
------------- -------------- ------------
PROVISIONS FOR ASSETS TAX 70,496 59,031 49,827
------------- -------------- ------------
Loss from continuing operations before
minority interest and extraordinary item (1,410,062) (1,302,709) (313,206)
MINORITY INTEREST 6,198 270 4,500
------------- -------------- ------------
Loss from continuing operations before
extraordinary item (1,403,864) (1,302,439) (308,706)
EXTRAORDINARY ITEM:
Group reorganization charge (Notes 2, 4.d and 8.b) - - -
------------- -------------- ------------
Net loss from continuing operations (1,403,864) (1, 302,439) (308,706)
LOSS FROM DISCONTINUED OPERATIONS (Net of Income tax) (Note 19) 20,248 - 205,537
------------- -------------- ------------
Net loss for the year (Ps.1,424,112) (Ps.1, 302,439) (Ps. 514,243)
============= ============== ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (thousands) 1,121,396 1,070,825 981,624
============= ============== ============
LOSS PER SHARE BEFORE EXTRAORDINARY ITEM (pesos) (Ps. 1.25) (Ps. 1.22) (Ps. 0.31)
============= ============== ============
NET LOSS PER SHARE (pesos) (Ps. 1.26) (Ps. 1.22) (Ps. 0.52)
============= ============== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE> 148
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of September 30, 1999)
<TABLE>
<CAPTION>
Accumulated losses
Capital -----------------------
stock Capital Legal Prior
subscribed contributions reserve years
------------ ------------- -------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 Ps.7,401,924 Ps.79,761 Ps.4,361 (Ps. 461,766)
Application of 1995 net loss (1,088,963)
Recognition of inflation
effects on financial
information
Minority interest for the year
Net loss for the year
------------ ------------ -------- -------------
Balance at December 31, 1996 7,401,924 79,761 4,361 ( 1,550,729)
Application of 1996 net loss (514,243)
Increase in capital stock from
the capitalization of
stockholders' debt 799,288
Increase in capital stock
through the issuance of
shares under the Executive
Stock Purchase Plan 110,232
Minority interest for the year
Net loss for the year
------------ ------------ -------- -------------
Balance at December 31, 1997 8,311,444 79,761 4,361 (2,064,972)
Application of 1997 net loss (1,302,439)
Increase in capital stock from
the capitalization of
stockholders' debt 1,158,822
Increase in capital stock
through the issuance of
shares under the Executive
Stock Purchase Plan 7,879
Recognition of inflation effects
on financial information
Minority interest for the year
Net loss for the year
------------ ------------ -------- -------------
Balance at December 31, 1998 Ps.9,478,145 Ps.79,761 Ps.4,361 (Ps.3,367,411)
============ ============ ======== =============
</TABLE>
<TABLE>
<CAPTION>
(Deficit) Total
For the excess from Minority stockholders'
year restatement Interest equity
------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 (Ps.1,088,963) Ps. 312,677 (Ps.36,271) Ps.6,211,723
Application of 1995 net loss 1,088,963 -
Recognition of inflation
effects on financial
information (1,022,067) (1,022,067)
Minority interest for the year 44,146 44,146
Net loss for the year (514,243) (514,243)
------------- ------------- ----------- ------------
Balance at December 31, 1996 (514,243) (709,390) 7,875 4,719,559
Application of 1996 net loss 514,243 -
Increase in capital stock from
the capitalization of
stockholders' debt 799,288
Increase in capital stock
through the issuance of
shares under the Executive
Stock Purchase Plan 110,232
Minority interest for the year 7,197 7,197
Net loss for the year (1,302,439) (1,302,439)
------------- ------------- ----------- ------------
Balance at December 31, 1997 (1,302,439) (709,390) 15,072 4,333,837
Application of 1997 net loss 1,302,439 -
Increase in capital stock from
the capitalization of
stockholders' debt 1,158,822
Increase in capital stock
through the issuance of
shares under the Executive
Stock Purchase Plan 7,879
Recognition of inflation effects
on financial information (37,109) (37,109)
Minority interest for the year (14,181) (14,181)
Net loss for the year (1,424,112) (1,424,112)
------------- ------------- ----------- ------------
Balance at December 31, 1998 (Ps.1,424,112) (Ps. 746,499) Ps. 891 Ps.4,025,136
============= ============= =========== ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE> 149
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Notes 1, 2, 3 and 4)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of September 30, 1999)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Loss from continuing operations before extraordinary item (Ps.1,403,864) (Ps.1,302,439) (Ps.308,706)
Items not requiring the use of resources:
Depreciation and amortization 872,658 757,726 855,889
450 Project non cash writedown 1,077,473 - -
Provision for equipment impairment - 1,208,352 -
Equity participation in net gain of associated
companies and net gain on sale of equity investments (27,290) (205,326) (1,866)
Minority interest (6,198) (270) (4,500)
------------ ------------ ----------
512,779 458,043 540,817
Resources (used for) provided by operating activities-
Trade accounts receivable (66,497) (67,600) 54,188
Related parties 77,199 (471,660) 465,580
Recoverable taxes and other (352,616) (172,635) (35,875)
Inventories 110,133 (199,680) 79,592
Trade accounts payable 38,930 253,904 (593,969)
Taxes and other payables 407,125 (96,448) 136,417
Income tax 41,581 2,290 7,459
Employee profit sharing (97) (84) (295)
Other (188) 141 83
------------ ------------ ----------
Resources provided by (used for) operating
activities before extraordinary item and
discontinued operations 768,349 (293,729) 653,997
Extraordinary item:
Group reorganization charge - - 205,535
Loss from discontinued operations 20,248 - -
------------ ------------ ----------
Resources provided by (used for) operating activities 748,101 (293,729) 448,462
------------ ------------ ----------
FINANCING ACTIVITIES:
Proceeds from long-term debt 1,210,402 2,889,149 147,450
Principal payments on long-term debt (25,491) (934,713) (723,839)
Increase (decrease) in notes payable 811,475 (1,050,363) 81,962
Increase in capital stock from the capitalization of
stockholders' debt 1,158,822 799,288 -
Increase in capital stock through the issuance of shares
under the Executive Employee Stock Purchase Plan 7,879 110,232 -
------------ ------------ ----------
Resources provided by (used for) financing activities 3,163,087 1,813,593 (494,427)
------------ ------------ ----------
INVESTING ACTIVITIES:
Purchase of property and equipment (2,587,295) (920,600) (359,399)
Sale of common stock of associated companies 12,055 314,556 40,184
Purchase of PCS frequencies (541,349) - -
Increase in telephones to be amortized (606,760) (220,519) (59,748)
(Purchase) disposal of other assets (60,648) (677,269) 309,764
------------ ------------ ----------
Resources used for investing activities (3,783,997) (1,503,832) (69,199)
------------ ------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 127,191 16,032 (115,164)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF
THE YEAR 152,993 136,961 252,125
------------ ------------ -----------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR Ps. 280,184 Ps. 152,993 Ps.136,961
============ ============ ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE> 150
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998, 1997 AND 1996
(Except as otherwise noted, adjusted for price-level changes and expressed
in thousands of constant Mexican pesos as of September 30, 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. Its subsidiaries are primarily
engaged in the wireless telecommunications business and hold
concessions to operate cellular telephone systems in four
contiguous market areas ("Regions") in central Mexico. The Company
and its subsidiaries are referred to collectively herein as the
"Group" or "Grupo Iusacell".
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 personal communication wireless services (PCS) in Regions 1
and 4 in northern Mexico.
Affiliated companies of each of Carlos Peralta (together with Carlos
Peralta, the "Peralta Group") and Bell Atlantic Corporation ("Bell
Atlantic") hold substantial ownership interests (direct or
indirect) in the Company.
Based on a definitive agreement between the Company's principal
stockholders and approval by the Mexican government, in February
1997 Bell Atlantic assumed management control of the Company from
the Peralta Group.
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 1998 1997
- ------------------------------------------ ---- ----
<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%
</TABLE>
F-8
<PAGE> 151
<TABLE>
<CAPTION>
Economic
interest
(direct or
indirect)
as of
December 31
------------
Subsidiary 1998 1997
- ------------------------------------------ ---- ----
<S> <C> <C>
Telecomunicaciones del Golfo, S.A. de C.V. (Region 7) 100% 100%
Inflight Phone de Mexico, S.A de C.V. 100% 100%
GMD Comunicaciones, S.A. de C.V. -- 100%
Hermes Telecomunicaciones, S.A. de C.V. -- 100%
Inmobiliaria Montes Urales 460, S.A. de C.V. 100% 100%
Portaserv, S.A. de C.V. -- 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% 100%
Iusatelecomunicaciones, S.A. de C.V. 95% 100%
Iusatel, S.A. de C.V. 95% 100%
Grupo Iusacell Nicaragua, S.A 100% 100%
Compania Colombiana de Telefonia Celular, S.A. 70% 70%
Cellular Solutions de Mexico, S.A. de C.V. 100% 68%
Satelitron, S.A. de C.V. 65% 65%
Infotelecom, S.A. de C.V. 49% 51%
Punto a Punto Iusacell, S.A. de C.V. 95% 95%
Iusacell PCS, S.A. de C.V. (Regions 1 and 4) 95% --
</TABLE>
2. Acquisitions, Group Structure and Group Reorganization
Acquisitions of Regions 5, 6 and 7
----------------------------------
In 1993, the Company obtained 100% ownership of Sistemas Telefonicos
Portatiles Celulares, S.A. de C.V. ("Portacel") and majority
ownership of Telecomunicaciones del Golfo, S.A. de C.V.
("Telgolfo").
Portacel and Telgolfo hold the non-wireline cellular concessions for
Region 6 (Leon) and Region 7 (Puebla), respectively. The cost
incurred in 1993 to acquire control of Portacel and Telgolfo
amounted to Ps.1,204,093, of which Ps.1,027,191 represented the
excess of investment cost over the book value. In 1994, the Group
purchased the remaining minority ownership interest of Telgolfo
for Ps.73,390, of which Ps.68,311 represented the excess of
investment cost over the book value.
In 1993, the Company acquired 67% of Hermes Telecomunicaciones, S.A.
de C.V. ("Hermes"), which owns 51% of Comunicaciones Celulares de
Occidente, S.A. de C.V. ("Comcel"). Comcel holds the non-wireline
cellular concession for Region 5 (Guadalajara). In December 1993,
the Company reached an agreement for the Group to purchase the
remaining interests in both Comcel and Hermes. The Group's cost of
acquiring Comcel and Hermes totaled Ps.1,572,296, of which
Ps.1,274,659 represented the excess of investment cost over the
book value.
F-9
<PAGE> 152
Other acquisitions and subsidiaries
-----------------------------------
In 1994, the Company acquired 51% of Telecomunicaciones Digitales
Internacionales, S.A. de C.V. (later renamed Iusatel Chile, S.A.
de C.V.). The Company purchased this ownership interest for
Ps.28,920, which was the book value of the shares acquired. During
1996, the Company increased its ownership interest in Iusatel
Chile, S.A. de C.V. from 51% to 100% through the payment of $100
U.S. Dollars to the minority stockholders in connection with the
settlement of litigation among the Company, Iusatel Chile, S.A. de
C.V. and such minority stockholders. In December 1996, the Company
sold its debt and equity investments in Iusatel Chile, S. A. de C.
V. for $5,000 U.S. Dollars. Payment was received in the form of
three promissory notes which matured between March and July 1997.
Full payment of such notes was made in December 1997.
In 1994, the Company increased its ownership in Compania Colombiana
de Telefonia Celular, S.A. ("Telecel") from 28.5% to 63.25%, by
acquiring an additional 34.75% interest from another Telecel
shareholder. The cost to acquire this interest was Ps.46,516 of
which Ps.32,953 represented the excess of investment cost over the
book value. In 1995, the Company increased its ownership interest
in Telecel from 63.25% to 70.14% through a capital contribution of
Ps.1,092, Telecel had a minority ownership in Ecuadorian cellular
and paging companies, which was sold in September 1997 (see Note
7). Telecel is currently in the process of being liquidated and no
gain or loss is anticipated in such liquidation.
In 1994, the Company acquired 99.9% of Inmobiliaria Montes Urales
460, S.A. de C.V.. The cost was Ps. 100,845 of which Ps. 18,950
represented the excess of investment cost over the book value.
In March 1997, the Company signed an agreement under which the assets
of this subsidiary were to be sold to a third party for
approximately $8,275 U.S. Dollars (see Note 13.f).
In 1995, the Company incorporated a new subsidiary, Grupo Iusacell de
Nicaragua, S.A. This subsidiary owns 100% of the shares of Radio
Telefonia Rural de Nicaragua, S.A. As of December 31, 1998, the
Company had not made any investment in this project and has no
commitments for any such investments.
In January 1996, the Group increased its ownership in Renta-Cell,
S.A. de C.V. ("Renta-Cell"), which rents cellular phones, from
33.33% to 70% through the acquisition of an additional 36.67%
interest from the other Renta-Cell shareholders. The cost to
acquire this interest was Ps.4,931. Starting in January 1996, the
Company consolidated the assets, liabilities and operating results
of this subsidiary. In November 1997, in connection with the
resolution of various matters, the Group increased its ownership
in Renta-cell from 70% to 100% through the acquisition of the
remaining 30% interest from the other Renta-Cell shareholders. The
cost to acquire the remaining interest was Ps.24,089, all of which
represented the excess of investment cost over book value. Such
amount was charged to operations during the year ended December
31, 1997.
In December 1998, the Company increased its ownership in Cellular
Solutions de Mexico, S.A. de C.V. ("Cellular Solutions") from 68%
to 100% through the acquisition of an additional 32% interest from
the other shareholder, an alternate director of the Company. Such
interest was acquired in anticipation of the disposition of
Cellular Solutions (see Note 19). The cost to acquire this
interest was Ps.3,843, all of which represented the excess of
investment cost over book value. The amount of such excess was
included in the loss from discontinued operations of Cellular
Solutions for the year ended December 31, 1998.
F-10
<PAGE> 153
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. 25,877.
In December 1995, the Company signed a joint venture agreement
with Infomin, S.A. de C.V., a Mexican company which holds a
fifteen-year concession to provide nationwide and international
paging services through July 2009. Pursuant to this agreement, in
March 1996, the Company and Infomin established a joint venture
company, Infotelecom. As of December 31, 1998, Infotelecom is
owned 49%, 49% and 2%, by the Company, Infomin and the Mexican
National, respectively. Under the joint venture agreement for
Infotelecom, the Company committed to contribute up to $10,500
U.S. Dollars; as of December 31, 1998 and 1997, the Company had
invested $9,032 and $8,500 U.S. Dollars, respectively, in this
joint venture. The joint venture agreement establishes the
individual and joint responsibilities of the partners. In case a
partner does not fulfill its responsibilities, sanctions could
cause such partner to lose its investment and incur up to $1,000
U.S. Dollars as a penalty.
In October 1997, the Company and the Mexican National incorporated
Punto a Punto Iusacell, a company engaged in the participation in
government auctions for microwave frequencies and to operate any
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 also participating in the
long haul microwave frequencies auctions.
In June 1998, the Company 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, both Iusatel and
Iusatelecomunicaciones were reorganized, as described above,
whereby 51% of the respective voting shares were subscribed to by
the Mexican National for Ps. 24,561 and Ps. 8,402, respectively.
F-11
<PAGE> 154
The shares acquired by the Mexican National of the five entities
subject 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 of these
five joint venture investments to the Company 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. 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 as the purchaser 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 such 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 Infotelecom, Punto a
Punto Iusacell, Iusacell PCS, Iusatel and Iusatelecomunicaciones
(see Note 7). The Mexican National, among other things, cannot
alone select, terminate or determine the compensation of
management and cannot alone establish operating and capital
decisions in the ordinary course of business.
Consequently, the Company consolidates these subsidiaries in
accordance with Mexican GAAP 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 Mexican GAAP requirement for
consolidation is satisfied.
Group reorganization
--------------------
As a part of the reorganization of the Company during 1996, the
respective stockholders of Hermes, GMD Comunicaciones, S.A. de
C.V., and Portaserv, S.A. de C.V., voted to dissolve these
companies. From such date, these three companies have not engaged
in any business. On December 31, 1998 these subsidiaries were
liquidated.
Additionally, the reorganization plan, approved by the Company's
Executive Committee, included a reduction in facilities, the
replacement of certain top-level management and a general head
count reduction.
F-12
<PAGE> 155
In connection with the reorganization plan and the change in
managerial and administrative control of the Group (see Note 14),
the Company established a reserve of Ps.205,537 on December 31,
1996 for the above expenses. This reserve, due to its
characteristics of being nonrecurring and unusual, is classified
as an extraordinary item in the consolidated statements of income.
As a result of a misclassification and further analysis of the
amounts previously reported for employee severance and
consolidation of facilities, the components of the restructuring
reserve have been reclassified as follows:
<TABLE>
<CAPTION>
Originally
Reported Reclassified
---------- ------------
<S> <C> <C>
Employee severance (1) Ps.108,038 Ps.130,252
Provision for consolidation of
facilities (2) 40,080 17,866
Fixed assets obsolescence reserve (3) 49,723 49,723
Change in estimate of allowance for
doubtful accounts (4) 7,696 7,696
---------- ----------
Ps.205,537 Ps.205,537
========== ==========
</TABLE>
(1) The reserve for employee severance, as originally reported,
was understated. The reclassified amount is comprised of an
estimate of severance payments to be made to (i) approximately 400
mid-level management and non-management employees pursuant to
Mexican Labor Law and (ii) 3 senior management employees pursuant
to the terms of their respective individual employment contracts.
These severance payments do not: a) relate to prior employee
service; b) have any related contingencies; or c) require that
employees provide future services.
(2) As a result of the decision to dispose of its corporate
headquarters building ("Montes Urales"), the Company recorded an
impairment loss to adjust the book value of Montes Urales to its
fair value less costs to sell based on an agreement to sell Montes
Urales (see note 13.f). The provision for consolidation of
facilities, as originally reported, was overstated. The
reclassified amount considers the book value of Montes Urales and
the agreed upon sales price.
(3) The fixed assets obsolescence reserve relates to certain spare
parts for the analog communications equipment that were purchased
at values over the minimum amount under the Company's
capitalization policy for fixed assets and have average lives of
approximately 12 years. As a result of a detailed review by the
Company's engineers in November 1996, the equipment was determined
to be obsolete. Consequently, the Company recorded an impairment
provision to adjust such assets to their estimated salvage value.
(4) During 1996, the Company began to fully reserve accounts
receivable over 90 days past due, based on a change in estimate of
the probable loss inherent in the accounts receivable. Previously,
the Company's policy involved reserving such balances over 120
days past due. This change in estimate in the allowance for
doubtful accounts represents the Company's estimate of the
probable loss inherent in all accounts receivable considering (i)
general historical trends of customer performance and (ii) factors
surrounding the credit risk of specific customers.
F-13
<PAGE> 156
3. Basis of presentation
a) Basis of presentation
------------------------
The Group's consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in
Mexico ("Mexican GAAP"). The consolidated financial statements
have been presented in thousands of constant Mexican pesos as of
September 30, 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").
The 1997 financial statements have been restated, as mentioned in
Note 4 b) below.
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.
The Company also consolidates Iusatel, Iusatelecomunicaciones,
Infotelecom, Punto a Punto Iusacell and Iusacell PCS, over which
the Company owns less than 50% of the voting common stock, but
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.
F-14
<PAGE> 157
b) Effects of inflation on the
financial statements
------------------------------
The consolidated financial statements of the Group have been prepared
in accordance with Bulletin B-10. The Third Amendment of Bulletin
B-10, effective for fiscal years beginning January 1, 1990,
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 31,1997 presented in
the consolidated financial statements have been restated to
constant Mexican pesos as of September 30, 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 September
30, 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
origination and application of resources representing
differences between beginning and ending balance sheet
balances in constant Mexican pesos, excluding the effect of
holding non-monetary assets. Bulletin B-12 also provides that
monetary and foreign exchange gains and losses should not be
eliminated from resources provided by operating nor 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 of 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.
Restatement of 1997:
In October 1997, the Group recorded an impairment loss to reduce the
value of the 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 as close as possible to, but not higher than, their
fair market value. In 1997 such impairment loss was charged to the
deficit from holding non-monetary assets restatement account in
stockholders' equity.
F-15
<PAGE> 158
In December 1997, as further described in Note 13.d the Company
signed an agreement with Lucent Technologies ("Lucent") to
purchase digital communications equipment, primarily to address
(i) customer requirements for better voice quality, (ii) a need to
increase network capacity to handle rapidly growing subscriber
levels, and (iii) a need to remain competitive, particularly in
view of the government's auction of digital wireless concessions
to other carriers. In 1998, based on further analysis of the
accounting effects of the contract with Lucent, the Company
reconsidered the appropriate presentation of the impairment loss
described in the preceding paragraph and decided to charge it
directly against income, thus restating the 1997 financial
statements herein.
Property and equipment are depreciated using the straight-line
method, based on the restated values. The average annual rates of
depreciation used by the Company are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Buildings and facilities 4% 3%
Communications equipment 9% 9%
Furniture and fixtures 9% 9%
Transportation equipment 18% 17%
Computer equipment 21% 21%
Cellular rental telephones 25% 25%
</TABLE>
Investments in associated companies are accounted for using the
equity method based on the investees' equity and are adjusted for
the effects of inflation in accordance with Bulletin B-10.
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 September 30, 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.
F-16
<PAGE> 159
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, which approximates market
value. These investments are highly liquid cash equivalents,
having a maturity of ninety days or less when acquired.
d) Allowance for doubtful
accounts
-------------------------
The 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 considering (i) general historical trends of customer
performance and (ii) factors surrounding the credit risk of
specific customers. During 1998, 1997 and 1996, the Group wrote
off accounts receivable for Ps.58,161, Ps.84,761 and Ps.129,029,
respectively. The charge to income for the year, to increase the
allowance for doubtful accounts, amounted to Ps.30,213, Ps.47,429
and Ps.100,382, in 1998, 1997 and 1996, respectively.
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 entity'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
Iusatel, Iusatelecomunicaciones, Infotelecom, Punto a Punto
Iusacell and Iusacell PCS, in which the Company owns less than 50%
of the voting common stock, but exercises management control over
the 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 (a) is required to return
the phone to the Group or (b) 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.
F-17
<PAGE> 160
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 terms of the
respective concession. The Mexican government requires the Group
to comply with the specific terms of each concession. The Group
has substantially complied with such requirements through December
31, 1998, except for certain informational requirements of the
Mexican authorities. The Group believes that such noncompliance
does not expose the Group to any type of regulatory risk such as
concession forfeiture.
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.198,546, Ps.139,869 and Ps.161,813 for 1998, 1997
and 1996, 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.119,038, Ps.121,554 and
Ps.131,499 in 1998, 1997 and 1996, 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 expected to
reverse over a definite period of time) at rates in effect at the
time such differences arise, and reversed at the rates in effect
at the time such differences reverse.
In accordance with Bulletin D-4, the Group did not record a
provision for deferred taxes as of December 31, 1998 and 1997.
Employee profit sharing is a statutory labor obligation payable to
employees which is determined on the basis of each subsidiary's
pretax income as adjusted in accordance with the provisions of
Mexican labor law and Mexican tax law.
F-18
<PAGE> 161
k) Seniority premiums
---------------------
In accordance with Mexican labor law, the Group's employees are
entitled to seniority premiums after 15 years of service or upon
dismissal, disability or death. The Group follows Bulletin D-3,
"Labor Obligations", issued by the Mexican Institute of Public
Accountants ("Bulletin D-3"). Under Bulletin D-3, the actuarially
determined projected benefit obligation is computed using
estimates of salaries that will be in effect at the time of
payment.
Personnel not yet eligible for seniority premiums are also included
in the determination of the obligation with necessary adjustments
made in accordance with the probability that these employees will
reach the required seniority. At December 31, 1998, the average
seniority of the eligible employees is less than 4 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 and
services are delivered. 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 on provision of these services.
n) Foreign currency transactions
--------------------------------
Foreign currency transactions are recorded at the exchange rates in
effect at the transaction date. Assets and liabilities denominated
in foreign currencies are translated to Mexican pesos using the
exchange rates in effect at the time of settlement or valuation at
each balance sheet date, with the resulting exchange differences
being recognized as exchange gains or losses.
F-19
<PAGE> 162
5. Related parties
Affiliates of 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>
1998 1997
--------- ---------
<S> <C> <C>
Punto a Punto Iusacell, S.A. de C.V. Ps. - Ps.47,440
IUSA and related entities 12,493 9,889
--------- ---------
Total Ps.12,493 Ps.57,329
========= =========
</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>
1998 1997
---------- ----------
<S> <C> <C>
IUSA and related entities Ps. - Ps. 4,660
Bell Atlantic 136,914 99,894
---------- ----------
Total Ps.136,914 Ps.104,554
========== ==========
</TABLE>
Accounts payable result from the leasing of certain facilities and
services received.
During 1997, the Company had notes payable and interest of $57,900
U.S. Dollars (Ps.503,899) due to Bell Atlantic, of which $25,000
U.S. Dollars (Ps.217,573) were repaid and $32,900 U.S. Dollars
(Ps.286,326) were converted to equity (see Note 14).
The $25,000 U.S. Dollars of borrowings were repaid prior to the
stated maturity date as part of the debt restructuring program
described in Note 10. There was no gain (loss) recognized by the
Company related to the early repayment.
Following is an analysis of the related party transactions
described above for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Service revenue Ps.16,071 Ps.11,507 Ps.14,054
Lease income 12,191 2,629 2,989
--------- --------- ---------
Total income Ps.28,262 Ps.14,136 Ps.17,043
========= ========= =========
</TABLE>
F-20
<PAGE> 163
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Commission expenses Ps. - Ps. 117 Ps. 4,652
Technical expenses 48,333 39,606 89,620
Lease expenses 2,778 4,669 8,995
Interest expense 12,334 29,004 44,592
Operating expenses - - 9,543
--------- --------- ----------
Total expenses Ps.63,445 Ps.73,396 Ps.157,402
========= ========= ==========
</TABLE>
6. Inventories
As of December 31, inventories consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cellular telephones and accessories Ps.161,440 Ps.330,249
Less: Allowance for obsolete and
slow-moving inventories (12,342) (38,215)
---------- ----------
Net 149,098 292,034
Advances to suppliers 54,015 58,321
---------- ----------
Total inventories Ps.203,113 Ps.350,355
========== ==========
</TABLE>
7. Investment in associated companies
On September 30, 1997, the Group sold the direct and indirect
interests of its Ecuadorian cellular and paging companies,
Consorcio Ecuatoriano de Telecomunicaciones, S. A. (CONECEL) and
Corptilor, S.A. In 1997, the Group received $29,400 U.S. Dollars
in cash consideration for its direct interests in CONECEL,
resulting in a gain of Ps.204,234. 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, the Company believed
that sale recognition was not appropriate.
The Group received $2,000 U.S. Dollars, net of taxes, in respect
to its indirect interests during 1998, resulting in a gain of
Ps.17,778.
As of December 31, the Group's investment in associated companies is
as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Entity Ownership Investment Ownership Investment
------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Editorial Celular, S.A.
de C.V. 40.00% Ps. 7,353 40.00% Ps. 4,976
Punto a Punto Iusacell,
S. A. de C. V. - - 94.90% 63
Other 9,679 18,113
--------- ---------
Ps.17,032 Ps.23,152
========= =========
</TABLE>
F-21
<PAGE> 164
As of December 31, 1998 the investment of the Company in Punto a
Punto Iusacell was consolidated (see Note 2).
Summarized financial information for these associated companies
accounted for by the equity method as of December 31, 1998, 1997
and 1996 and for the years ended December 31, 1998, 1997 and 1996,
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Total assets Ps.13,498 Ps. 58,843 Ps.676,526
Total liabilities 2,773 52,472 358,748
Revenues 37,841 35,342 368,110
Gross profit 19,173 16,819 19,131
Net income 7,133 2,731 8,018
Group's share of net earnings 2,853 1,092 1,866
Gain on sale of equity investments 24,437 204,234 -
</TABLE>
8. Property and equipment, net
a) At December 31, property and equipment, net consisted of:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Buildings and facilities Ps. 1,366,875 Ps. 1,367,826
Communications equipment 3,554,328 3,170,524
Furniture and fixtures 143,056 119,833
Transportation equipment 52,480 50,448
Computer equipment 312,695 292,219
Cellular rental telephones 2,412 34,657
------------- -------------
5,431,846 5,035,507
Accumulated depreciation (3,386,432) (2,042,229)
------------- -------------
2,045,414 2,993,278
Land 49,625 47,599
Construction in progress 3,627,754 579,496
Advances to suppliers 104,311 305,017
------------- -------------
Ps. 5,827,104 Ps. 3,925,390
============= =============
</TABLE>
b) Depreciation expense was Ps.371,510, Ps.430,954 and Ps.430,632
for 1998, 1997 and 1996, respectively. In addition, as described
in Note 18, the charge for the write-down of the 450 MHz project
fixed assets was Ps.314,072 and is included in the caption
entitled 450 MHz project non-cash write-down in the accompanying
income statement.
F-22
<PAGE> 165
9. Other assets
a) At December 31, other assets consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Concessions Ps. 812,189 Ps. 253,320
Cellular telephones to be amortized 334,518 109,869
Prepaid expenses 167,350 126,346
Advance payments 270,039 388,026
Project 450 pre-operating expenses and
capitalized interest (Note 18) - 662,923
Pre-operating expenses, other 48,002 30,256
Other 79,013 77,127
------------ ------------
Ps.1,711,111 Ps.1,647,867
============ ============
</TABLE>
b) Concessions and cellular telephone amortization expense was
Ps.382,110, Ps.205,218 and Ps.293,757 in 1998, 1997 and 1996,
respectively. In addition, in 1998 the charge for the write-down
of the 450 MHz project pre-operating expenses and capitalized
interest, as described in Note 18, was Ps.763,401 and is included
in the caption entitled 450 MHz project non-cash asset write-down
in the accompanying income statement.
10. Notes payable and long-term debt
During the year ended December 31, 1997, the Company completed a
$150,000 U.S. Dollars offering of long-term, unsecured senior
notes and borrowed $125,000 U.S. Dollars under a long-term bank
loan. Proceeds were used to repay certain short-term notes, and
short-term and long-term loans, including the loan from Bell
Atlantic. As a part of this arrangement, the Company obtained a
revolving credit line of $100,000 U.S. Dollars. During 1998, the
Company borrowed the total amount available under this revolving
credit line.
As of December 31, 1998 and 1997, the long-term debt of the Group
consisted of the following:
<TABLE>
<CAPTION>
Mexican Pesos
---------------------------
U.S.Dollars 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Long-term bank loan U.S.$125,000 Ps.1,358,020 Ps.1,313,249
Unsecured senior notes 150,000 1,629,625 1,575,900
Revolving credit facility 100,000 1,086,415 -
------------ ------------ ------------
U.S.$375,000 Ps.4,074,060 Ps.2,889,149
============ ============ ============
</TABLE>
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%. Interest is payable
quarterly.
F-23
<PAGE> 166
Unsecured senior notes
----------------------
On July 25, 1997 the Company completed an offering of long-term,
unsecured senior notes due July 15, 2004 for $150,000 U.S.
Dollars, bearing interest at a fixed rate of 10%, payable
semi-annually starting January 15, 1998 (the "notes"). The notes
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 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 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 affecting
the treatment of the withholding taxes on payments to holders of
the notes.
Amortization and collateral
---------------------------
The long term bank loan and revolving credit facility have payment
requirements of $33,750 U.S. Dollars in 2000, $92,250 U.S. Dollars
in 2001 and $99,000 U.S. Dollars in 2002. The U.S. $150,000 of
unsecured senior notes are due in 2004.
The long-term bank loan, revolving credit facility and unsecured
senior notes 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, 1998, the Group had complied with such covenants
except for the limitation on 1998 capital expenditures for which
the Company has received a waiver from the banks which extended
for a period of more than twelve months beyond the balance sheet
date.
As of December 31, 1998 and 1997, assets collateralizing all
long-term debt include substantially all assets used in Grupo
Iusacell's cellular business (including the cellular concessions),
as well as other property and equipment.
Bell Atlantic Subordinated Convertible Debt Facility
----------------------------------------------------
In July 1997, Bell Atlantic committed to provide the Company with
subordinated convertible financing in an aggregate amount up to
$150,000 U.S. Dollars. Borrowings under the facility bear interest
at an annual rate of LIBOR plus 5.0%. The availability of funds
under this facility expires on June 30, 1999. At the option of
Bell Atlantic, borrowings under the facility are convertible into
Series A shares of the Company at a conversion price of $0.70 U.S.
Dollars per share. During the year ended December 31, 1998, the
Company borrowed $101,500 U.S. Dollars (Ps.1,158,822) under the
facility, which were converted into Series A common shares (see
Note 14). As of December 31, 1998, no borrowings were outstanding
under this facility and $48,500 U.S. Dollars were available for
further borrowing.
F-24
<PAGE> 167
Notes payable
-------------
As of December 31, 1998 and 1997, notes payable consisted of the
following:
<TABLE>
<CAPTION>
Mexican Pesos
---------------------
U.S. Dollars 1998 1997
------------ ---------- --------
<S> <C> <C> <C>
Short-term loan bearing interest at a
variable rate of LIBOR plus 2.5%
maturing on April 30, 1999 U.S.$52,000 Ps.564,938 Ps. -
Short-term loan bearing interest at a
variable rate of LIBOR plus 2.5%
maturing on April 30, 1999 23,000 249,876 -
Other - 130 3,468
----------- ---------- --------
Total U.S.$75,000 Ps.814,944 Ps.3,468
=========== == ======== ========
</TABLE>
The Company is currently negotiating a long-term refinancing of the
$75,000 U.S. Dollars in short-term loans.
The Group leases certain communications equipment and transportation
equipment under agreements which are classified as capital leases.
Most of these leases have purchase options at the end of the
original lease term. Leased capital assets included in property
and equipment at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----- ---------
<S> <C> <C>
Leased equipment Ps. - Ps.25,491
Accumulated depreciation - (7,285)
----- ---------
Ps. - Ps.18,206
===== =========
</TABLE>
11. Trade accounts payable
As of December 31, trade accounts payable consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Current accounts Ps.830,528 Ps.907,174
Short-term notes payable 128,043 9,523
---------- ----------
Total Ps.958,571 Ps.916,697
========== ==========
Long-term notes payable Ps. 2,316 Ps. 5,260
========== ==========
</TABLE>
F-25
<PAGE> 168
On August 14, 1997, the Company and Telmex entered into a settlement
agreement with respect to the fees charged by Telmex to Iusacell
through May 31, 1997 for interconnection services, switched long
distance services and certain other services billed by Telmex as
of the date of the settlement agreement. The Company paid Telmex
Ps.221,357, of which Ps.28,906 constituted value-added tax and
Ps.37,239 was accounted for as interest expense.
In September 1997, the Company and Telmex amended such
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, 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.
The income tax rate in Mexico is 34%. 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.
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, 1998, the net assets tax available as carry forward was
Ps.241,952.
At December 31, 1998, 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>
1991 Ps. 12,268 2001
1993 218,394 2003
1994 1,251,235 2004
1995 646,527 2005
1996 17,940 2006
1997 518,254 2007
1998 218,269 2008
</TABLE>
F-26
<PAGE> 169
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 1998. Losses include Ps.223,221 and
Ps.335,967 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.
Employee profit sharing, generally 10%, is computed on taxable
income, with adjustments to exclude inflationary effects and the
restatement of depreciation expense. In the year ended December
31, 1998, there was a provision for profit sharing for Ps.518. In
the year ended December 31, 1997 there was no provision for profit
sharing.
The effective rate reconciliation as of December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income tax benefit at statutory rate (Ps.455,454) (Ps.422,849) (Ps. 89,548)
Add (deduct):
Inventory purchases less cost of sales 246,821 (99,326) (47,811)
Depreciation and amortization 8,670 (144,801) (142,506)
Provision for equipment impairment - 410,837 -
Project 450 non-cash write-down 366,342 - -
Differences between interest and
inflationary gains or losses (123,297) 137,584 215,879
Net assets tax 70,496 59,031 49,827
Income tax loss carryforwards 74,211 176,206 6,100
Provision for doubtful accounts (113,382) 11,197 (3,951)
Telephones to be amortized 129,917 69,774 99,876
Goodwill amortized 40,473 41,329 44,710
Other (174,301) (179,951) (82,749)
----------- ------------ -----------
Effective income tax expense at
effective rate Ps. 70,496 Ps. 59,031 Ps. 49,827
=========== =========== ===========
</TABLE>
13. Commitments and contingencies
As of December 31, 1998, 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.
Such lease agreements expire at various dates through 2007.
Some agreements contain options for renewal. Rental expense was
Ps.108,106, Ps.80,946 and Ps.70,846 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Future annual minimum rental payments under existing leases
with terms in excess of one year as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 Ps.105,567
2000 93,166
2001 80,917
2002 66,190
Thereafter 42,833
----------
Ps.388,673
==========
</TABLE>
F-27
<PAGE> 170
b) The Group may have contingent liabilities for taxes and
penalties that the tax authorities may assess based on audit of
prior years' tax returns. During 1997, the Mexican tax
authorities completed an audit of three companies of the Group
(Grupo Iusacell, S.A. de C.V., Iusacell, S.A. de C.V. and SOS
Telecomunicaciones, S.A. de C.V.), resulting in claims of
Ps.7,989, 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. Further in
1999, as a result of those investigations, the Company was
assessed a Ps.21,881 penalty by the tax authorities under the
claim that it had incorrectly deducted for income tax purposes
certain interest expense. The Company plans to challenge this
penalty as it believes it has strong legal grounds to overcome
the assessment.
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
America 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 has breached the contract by not purchasing the
terminals. MELA alleges the contract was for the sale of 60,000
units at a unit cost of $0.510 U.S. Dollars. The lawsuit is
currently in the discovery stage. Management believes the
lawsuit has no basis as 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 the Company's exposure to loss by judgement at
trial.
d) In December 1997, the Company signed an agreement with
Lucent Technologies with a commitment to purchase CDMA digital
wireless equipment for $188,000 U.S. Dollars to install its
digital cellular network. In connection with this contract,
Lucent will issue trade-in credits to the Company for
approximately $93,000 U.S. Dollars, representing the net
replacement cost of the network equipment being displaced. The
trade-in credits are deducted from each purchase invoice
proportionally to the total equipment purchased. As of December
31, 1998 the Company had purchased equipment priced at
approximately $120,000 U.S. Dollars under this agreement.
e) In February 1998, the Company's former advertising agency sued
the Company for Ps.23,000, alleging improper termination of its
contract. The Company won the lawsuit during 1998 without any
damages in favor of such former advertising agency and also won
a first appeal. The Company's former advertising agency has
recently filed a second and final appeal. Management believes
the lawsuit has no basis and does not anticipate that any
significant damages in favor of such former advertising agency
will result at the end of the lawsuit. In June 1999, Mexican
Supreme Court found the Company in breach of its contract with
the Company's former 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 ruled that the damages suffered by the agency were
only Ps.16,000. The Company intends to file an injunctive
action (amparo) against this sentence on the basis that the
tribunal exceeded the scope of its review and also assessed
damages incorrectly.
f) As a result of delays in the construction of the new corporate
headquarters, the sale of Montes Urales did not take place
during the year ended December 31, 1997. In April 1998, the
Company learned that the property was subject to two liens from
the former owner that, until removed, prohibited the Company
from transferring the title of Montes Urales to the prospective
buyer. Such liens were not identified when the Company acquired
the stock of the Corporation which owned Montes Urales in 1994,
nor was the Company notified of such liens subsequent to the
acquisition. The Company is currently analyzing the matter and
the actions it needs to pursue to remove such liens. There can
be no assurance, however, that the Company will be able to
remove the liens from such property and realize any value from
such assets.
F-28
<PAGE> 171
g) The Company has certain commitments derived from its joint
venture agreement with Infomin, S.A. de C.V. (see Note 2).
14. Contributed capital
As stated in Note 1, in December 1996, the Company's principal
stockholders signed an agreement to transfer management control of
Grupo Iusacell to Bell Atlantic. Following execution of the
agreement, at an extraordinary shareholders' meeting, the
Company's shareholders approved the following modifications of the
Company's estatutos sociales (by-laws):
1) Series A shares may be acquired by Mexicans and/or foreigners.
2) The conversion of 200,000,000 Series B shares and 166,769,760
Series D shares held by Bell Atlantic into 366,769,760 Series A
shares.
3) The conversion of 100,000,000 Series A shares held by the
Peralta Group into 100,000,000 Series D shares.
These modifications were subject to the receipt of authorizations
from the National Foreign Investment Commission and the Federal
Competition Commission. On February 10 and 12, 1997, Grupo
Iusacell's new share ownership and management control structure
received the required Mexican government authorizations.
Based on the above mentioned authorizations and the adoption of
such resolutions, the total authorized fixed portion of capital
stock was increased by Ps.937,512 through the authorization of up
to 74,163,591 Series A shares and up to 54,407,837 Series D
shares.
At the same shareholders' meeting, an Executive Employee Stock
Purchase Plan for the Company's executive employees (the "Stock
Purchase Plan") was approved (see Note 15). As part of this plan,
the total authorized fixed portion of capital stock was increased
by Ps.130,210 through the issuance of up to 15,625,000 Series L
shares (to be made available under the Stock Purchase Plan and to
provide for the exercise of preemptive stockholder rights).
On February 28, 1997 the Company's Board of Directors ratified a
capital increase of Ps.799,288. 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 previously authorized
Series L shares were kept in the Company's treasury available for
the Stock Purchase Plan; the balance of 7,719,916 Series L shares
were cancelled. During 1997, 7,549,834 of these shares were
subscribed by employees, as follows:
F-29
<PAGE> 172
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.56,497.
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.24,379.
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.29,356.
On April 17, 1998, 262,666 Series L shares which had not been
subscribed for under the Stock Purchase Plan were automatically
canceled.
At a shareholders' meeting in June 1998, the total authorized fixed
portion of capital stock was increased by Ps.33,457 through the
issuance of up to 2,000,000 Series L shares 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.0.59. The balance of 812,460 Series L shares were cancelled.
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. During 1998, 1,117,496 of these new
shares 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 for the Stock Purchase
Plan. The subscription price for those shares was Ps.4,719.
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.3,159.
As of December 31, 1998, 70,004 Series L shares remained available
in the Company's treasury for issuance under the Stock Purchase
Plan.
On November 17, 1998 the Company's Board of Directors ratified a
capital stock increase of Ps.836,145 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.293,317 ($25,200 U.S. Dollars), 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.543,204 ($46,300 U.S. Dollars), which were
converted into 66,142,857 Series A shares on the same date.
F-30
<PAGE> 173
On December 21, 1998 the Board of Directors of the Company ratified a
capital increase of Ps.322,302 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 $30,000 U.S. Dollars. The 42,857,142 Series A
shares were initially subscribed by Bell Atlantic, of which 50%,
or 21,428,571, of such shares, were then sold to the Peralta
Group. There was no gain or loss recognized from the sale.
The changes in the number of shares of common stock for the period
January 1, 1996 through December 31, 1998 are analyzed as follows:
<TABLE>
<CAPTION>
Number of shares
----------------
<S> <C>
January 1, 1996 balance 981,624,430
No changes -
-------------
December 31, 1996 balance 981,624,430
February 28, 1997 - issuance of common
stock through the capitalization of debt 100,162,110
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
-------------
December 31, 1997 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
=============
</TABLE>
F-31
<PAGE> 174
At December 31, 1998 and 1997, the issued and outstanding shares of
common stock of the Company, without par value, are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Series A 891,753,409 746,753,410
Series B 5,562,450 5,562,450
Series D 186,904,725 186,904,725
Series L 151,326,154 150,208,618
------------- -------------
Total 1,235,546,738 1,089,429,203
============= =============
</TABLE>
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.
On August 26, 1998 the Company announced a recapitalization and
restructuring plan. Under this plan a new holding company, Nuevo
Grupo Iusacell, S.A. de C.V. ("Nuevo Iusacell") has been created.
Nuevo Iusacell will offer to exchange, on a one for one basis,
Nuevo Iusacell Series V shares for outstanding Series B, D and L
shares and for some Series A shares, and will offer to exchange,
on a one for one basis, Nuevo Iusacell Series A shares for all
other Series A shares. All Nuevo Iusacell shares will have full
voting rights.
15. Executive Employee Stock Purchase Plan
In March 1997, the Company adopted the Stock Purchase Plan. The
Stock Purchase Plan is administrated by a management trust with
the assistance of the trust division of a Mexican Bank. Under the
Stock Purchase Plan, the Technical Committee, which is composed of
certain executive officers of the Company, determines the
executive employees to whom Series L shares of the Company will be
offered for purchase. The Technical Committee also determines the
number of Series L shares to be offered for purchase to such
executive employees, the purchase price per share for such
purchase rights, the vesting schedule for such purchase rights,
the payment terms and all other terms and conditions therefor.
The number of Series L shares that may be 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. All such purchase
rights vest either in three equal annual installments commencing
on April 17, 1998, June 6, 1998 or September 30, 1998 or in their
entirety on April 17, 1999 or June 6, 1999 (see Note 14).
F-32
<PAGE> 175
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 such purchase rights vest either in three equal annual
installments commencing on September 1, 1999 or commencing on October
1, 1999 (see Note 14).
16. Earned Capital
Under Mexican law, a legal reserve must be created, and annually
increased by 5% of the annual net earnings until it reaches 20% of
the nominal amount of its capital stock. This reserve is not
available for dividends, but may be used to reduce a deficit or may
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 the Company as of December 31, 1998
is approximately Ps.114,131. The Company cannot pay dividends under
the covenants for the senior notes and bank loans.
The earned capital accounts consist of the following:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------
Accumulated
Historical adjustments for
value inflation Total
------------- ------------ ------------
<S> <C> <C> <C>
Legal reserve Ps. 1,499 Ps. 2,862 Ps. 4,361
Accumulated losses from
prior years (1,839,161) (1,528,250) (3,367,411)
Net loss for the year (1,464,050) 39,938 (1,424,112)
Deficit from restatement -- (746,499) (746,499)
------------ ------------ ------------
Total (Ps.3,301,712) (Ps.2,231,949) (Ps.5,533,661)
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------
Accumulated
Historical adjustments for
value inflation Total
------------- ------------- ------------
<S> <C> <C> <C>
Legal reserve Ps. 1,499 Ps. 2,862 Ps. 4,361
Accumulated losses from
prior years (1,646,797) (418,175) (2,064,972)
Net loss for the year (192,364) (1,110,075) (1,302,439)
Deficit from restatement -- (709,390) (709,390)
------------ ------------ ------------
Total (Ps.1,837,662) (Ps.2,234,778) (Ps.4,072,440)
============ ============ ============
</TABLE>
F-33
<PAGE> 176
17. Foreign Currency Position
The balance sheet as of December 31 includes assets and liabilities
denominated in U.S. Dollars, as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Monetary assets U.S.$ 46,331 U.S.$ 52,166
Monetary liabilities 574,489 360,775
--------------- --------------
Net monetary liability position
in U.S. Dollars U.S.$ 528,158 U.S.$ 308,609
=============== ==============
Equivalent in nominal
Mexican pesos Ps. 5,226,810 Ps. 2,489,888
=============== ==============
</TABLE>
As of December 31, 1998 and 1997, most of the communications equipment
and inventories of cellular telephones and accessories are of
foreign origin (see Notes 6 and 8).
During 1998 and 1997, interest expense and interest income on assets and
liabilities denominated in U.S. Dollars were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Interest income U.S.$ 494 U.S.$ 386 U.S.$ 18,298
Interest expense 16,419 15,994 52,011
------------- ------------- -------------
Net interest expense U.S.$ 15,925 U.S.$ 15,608 U.S.$ 33,713
============= ============= ==============
Equivalent in nominal Mexican
Pesos Ps. 157,599 Ps. 125,927 Ps. 264,057
============= ============= ==============
</TABLE>
Operating results for the years ended December 31, 1998 and 1997, include
depreciation and amortization expenses, originated by fixed assets
and inventories of foreign origin.
The exchange rate as of December 31, 1998 and 1997 was Ps.9.8963 and
Ps.8.0681, per 1 U.S. Dollar, respectively. At the issuance date of
these financial statements, February 22, 1998, the exchange rate in
effect was Ps. 9.9333 per 1 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:
F-34
<PAGE> 177
<TABLE>
<CAPTION>
1998 1997
--------- ------------
<S> <C> <C>
Fixed assets Ps.44,635 Ps. 530,868
Capitalized interest (Note 9) -- 350,161
Inventory of handsets 19,967 28,256
Pre-operating expenses (Note 9) -- 312,762
--------- ------------
Total Ps.64,602 Ps.1,222,047
========= ============
</TABLE>
On June 10, 1997, the Mexican Ministry of Communications and Transport
("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.
During September 1998, the Group made the decision to write-down the
carrying value of the assets supporting its Project 450 MHz assets as
the Group believes there has been an impairment of its investment in
this technology. During 1998 an impairment charge for Ps.1,077,474
was recorded, and represented 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, basically the selling 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 its employees during
January and February 1999.
Financial information regarding Cellular Solutions as of December 31 was
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- ----------
<S> <C> <C> <C>
Current assets Ps. 3,917 Ps.8,955 Ps. 5,691
Total assets 5,406 10,399 7,810
Total liabilities 39,980 9,549 8,322
Revenues 19,578 23,851 15,888
Gross Profit 4,302 6,827 5,609
Loss from operations before income taxes (8,622) (7,179) (18,023)
Provision for income taxes 99 184 202
Loss on disposal, including provision of
Ps. 1,042 for operating losses during
phase-out period (no applicable taxes) (11,527) -- --
--------- -------- ----------
Net (loss) profit (Ps.20,248) (Ps.7,363) (Ps. 18,225)
========= ======== ==========
</TABLE>
F-35
<PAGE> 178
20. Differences between Mexican and United States Generally Accepted
Accounting Principles
The Company's consolidated financial statements are prepared based on
accounting principles generally accepted in Mexico ("Mexican
GAAP"), which differ in certain significant respects from United
States generally accepted accounting principles ("U.S. GAAP").
The following reconciliation to U.S. GAAP does not include the reversal
of the adjustments to the financial statements for the effects of
inflation required under Mexican Bulletin B-10. The application of
Bulletin B-10 represents a comprehensive measure of the effects of
price-level changes in the financial statements based on historical
cost for Mexican and U.S. accounting purposes. The principal
differences, other than inflation accounting, between Mexican and
U.S. GAAP are listed below, together with an explanation where
appropriate, of the adjustments that affect consolidated net income
and stockholders' equity for each of the years ended December 31,
1998, 1997 and 1996.
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 Company's net assets which may be used to offset future income
tax obligations. Under Mexican GAAP, the net asset tax is charged to
the provision for income taxes. Under SFAS 109, such amounts are
treated as a deferred tax benefit and offset by a valuation
allowance, if required.
Employee profit sharing expense, which is based on each subsidiary's
taxable income after certain statutory adjustments, is included in
the income tax provision under Mexican GAAP. The provision for
employee profit sharing is charged to operations for U.S. GAAP
purposes.
F-36
<PAGE> 179
b) Preoperating costs
Under Mexican GAAP, the Company 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) Restatement related to the provision for consolidation of facilities
As described in Note 2, during the year ended December 31, 1996, the
Company originally recorded a provision for consolidation of
facilities related to Montes Urales under both Mexican and US GAAP.
The Company has reassessed this accounting treatment under U.S.
GAAP and determined that, as management did not have the ability to
remove Montes Urales from operations in December 1996, Montes
Urales did not qualify as an asset held to be disposed of at such
date and consequently, should have been accounted for as an asset
to be held and used pursuant to the provisions of SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." As a result, under U.S. GAAP,
an impairment charge would not have been recorded at December 31,
1996 related to Montes Urales. The effect of this restatement on
U.S. GAAP net loss and basic and diluted net loss per share is as
follows:
<TABLE>
<CAPTION>
For the year ended December 31, 1996
As previously reported As restated
---------------------- -----------------
<S> <C> <C>
Net loss under U.S. GAAP (Ps. 200,646) (Ps. 183,684)
Basic and diluted net loss per share
under U.S. GAAP (Pesos) (Ps. 0.20) (Ps. 0.19)
</TABLE>
The effect of the additional depreciation on Montes Urales related to
the 1996 restatement was immaterial for 1998 and 1997.
Consequently, the Company has not revised the financial statements
for such periods.
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 as a reconciling item to arrive at U.S.
GAAP equity.
F-37
<PAGE> 180
e) Basic and fully diluted loss per share
As of January 1, 1997, Mexican GAAP requires 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 (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 years ended December 31, 1998 and 1997, 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 facility with Bell Atlantic were 69,285,714
and 214,285,714 shares, respectively, and for the shares subject to
rights under the Stock Purchase Plan 332,650 and 262,666 shares,
respectively. Diluted earnings (loss) per share is equal to basic
earnings (loss) per share for the year ended December 31, 1996 as
the Company did not have any potentially dilutive securities.
f) Effect of inflation accounting on U.S. GAAP adjustments
In order to determine the net effect on the financial statements of
recognizing certain of the adjustments described above, it is
necessary to recognize the effects of applying the Mexican GAAP
inflation accounting principles (described in Note 4) to such
adjustments.
g) 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, 1998
in Note 20 j) below.
F-38
<PAGE> 181
h) Interest rate collar
Effective July 30, 1998, in connection with the $225,000 U.S. Dollars
credit agreement (see Note 10), the Company was required to enter
into an interest rate 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 $35,000
U.S. Dollars of its floating rate debt. The cap rates range from
6.12% to 7.12% above six-month LIBOR with the floor rates ranging
from 5.30% to 6.12% above six-month LIBOR. The interest rate collar
matures on July 30, 2002.
Under Mexican GAAP, the interest rate collar agreement is 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 $35,000 U.S. Dollar million notional amount of the interest rate
collar agreement does not quantify risk or represent assets or
liabilities of the Company, but is used in the determination of
cash settlements under the agreement. The Company is exposed to
credit loss from counterparty nonperformance, but does not
anticipate any such loss from the interest rate collar agreement,
which is with a major financial institution.
The fair value of the interest rate collar agreement is Ps.11,786
($1,085 U.S. Dollars) as of December 31, 1998, 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.
i) Gain from the exchange of non-monetary assets
In December, 1998, the Company entered into a fiber optic cable swap
agreement with Bestel to exchange certain long-distance fiber optic
cables for a contract amount of Ps.210,217. 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.183,065 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.
j) Net loss and stockholders' equity under U.S. GAAP
The following is a summary of net loss and stockholders' equity adjusted
to take into account certain material differences between Mexican
GAAP and U.S. GAAP:
F-39
<PAGE> 182
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
Restated
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Net loss as reported under Mexican GAAP (Ps.1,424,112) (Ps.1,302,439) (Ps.514,243)
Deferred income taxes 55,311 482,155 254,351
Pre-operating costs 174,350 (83,599) (90,751)
Interest rate collar (11,786) -- --
Gain from the exchange of non-monetary assets (183,065) -- --
Provision for consolidation of facilities -- -- 16,963
Effect of inflation accounting on U.S. GAAP adjustments (25,490) 19,717 149,996
------------ ------------ ----------
Net loss under U.S. GAAP (1,414,792) (884,166) (183,684)
============ ============ ==========
Weighted average number of shares outstanding
(thousands) 1,121,396 1,070,825 981,624
============ ============ ==========
Basic and diluted net loss per share (pesos) (Ps. 1.26) (Ps. 0.82) (Ps. 0.19)
============ ============ ==========
</TABLE>
Comprehensive income:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Net loss under U.S. GAAP (Ps.1,414,792) (Ps. 884,166) (Ps. 183,684)
Inflation effects for the period (11,619) (19,717) (1,172,062)
Deferred income taxes -- -- 383,677
------------- ------------ ------------
Comprehensive loss (1,426,411) (903,883) (972,069)
============= ============ ============
Accumulated comprehensive loss (Ps. 6,318,819) (Ps.4,892,408) (Ps.3,988,525)
============= ============ ============
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Stockholders' equity under Mexican GAAP Ps.4,025,136 Ps.4,333,837
Minority interest (891) (15,072)
Deferred income taxes 181,117 125,805
Pre-operating costs -- (174,350)
Interest rate collar (11,786) --
Gain from the exchange of non-monetary assets (183,065) --
Provision for consolidation of facilities 16,963 16,963
------------ ------------
Stockholders' equity as reported under U.S. GAAP Ps.4,027,474 Ps.4,287,183
============ ============
</TABLE>
F-40
<PAGE> 183
The following is the Statement of Stockholders' Equity under US GAAP
for each of the two years ended December 31, 1998:
<TABLE>
<CAPTION>
Contributed Accumulated Loss for
Capital Losses the year Total
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Balances as of 12/31/96 Ps.7,481,685 (Ps.3,016,456) (Ps. 183,684) Ps.4,281,545
Application of 1996 net loss (183,684) 183,684 --
Increase in capital stock 909,521 909,521
Effects of inflation (19,717) (19,717)
Net loss for the year (884,166) (884,166)
------------ ------------ ------------- ------------
Balances as of 12/31/97 Ps.8,391,206 (Ps.3,219,857) (Ps. 884,166) Ps.4,287,183
Application of 1997 net loss (884,166) 884,166 --
Increase in capital stock 1,166,702 1,166,702
Effects of inflation (11,619) (11,619)
Net loss for the year (1,414,792) (1,414,792)
------------ ------------ ------------- ------------
Balances as of 12/31/98 Ps.9,557,908 (Ps.4,115,642) (Ps. 1,414,792) Ps.4,027,474
============ ============ ============= ============
</TABLE>
k) 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. Hence, these requirements
accelerated the adoption of digital technology in the Mexican
wireless market. (ii) the view of Bell Atlantic, which obtained
management control of the Company in 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 (v) an increase in the Company's subscriber base
during 1997, such that the analog network was operating at close to
full capacity by November 1997. The CDMA digital network has the
potential to increase capacity by a six to eight multiples compared
with analog. 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.1,208,352 to adjust the carrying amount of the analog equipment
to its fair value, amounting to Ps.3,170,524, 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-41
<PAGE> 184
l) Employee severance
The Group is required to pay certain severance benefits only 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, 1998 and 1997
severance accruals recorded were immaterial.
m) Supplementary U.S. GAAP disclosures
1) Cash flow information
SFAS No.95, "Statement of Cash Flows" ("SFAS 95"), 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,
--------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net loss under U.S. GAAP (Ps.1,414,792) (Ps. 884,166) (Ps. 183,684)
Adjustments to reconcile net loss to cash
(used in) provided by operating activities:
Depreciation 371,510 430,954 430,632
Amortization 501,147 326,772 425,257
450 Project non-cash write-down 903,124 -- --
Equity in loss (earnings) of associated
companies (2,853) (1,092) (1,866)
Gain on sale of equity investments (24,437) (204,234) --
Increase in allowance for doubtful accounts 30,213 47,429 100,382
(Decrease) / Increase in allowance for
obsolete and slow-moving inventories -- 20,186 5,816
Fixed assets impairment charge -- 1,208,352 --
Minority interest (6,199) (270) (4,500)
Deferred income taxes and employee
profit sharing 15,185 (423,123) (204,525)
Gain on net monetary position and
foreign exchange losses 198,381 (425,603) (861,456)
Reorganization reserve -- -- 205,535
</TABLE>
F-42
<PAGE> 185
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Changes in operating assets and liabilities:
Accounts receivable (Ps. 569,635) (Ps.142,168) (Ps.122,917)
Inventories 110,133 (219,864) 73,778
Trade accounts payable and related parties 1,284,286 680,291 (95,448)
Taxes and other payable 505,180 (314,882) 114,007
Income tax (29,011) 3,387 7,165
Other (186) 447 91
------------- ---------- ----------
Net cash provided by (used in) operating activities 1,872,046 102,416 (111,733)
Investing activities:
Purchase of property and equipment, net (2,404,230) (882,632) (299,047)
Proceeds from sales of investments in asso-
ciated companies 12,055 322,021 40,184
Purchase of other assets (1,208,755) (771,789) 449,096
------------ ---------- ----------
Net cash (used in) provided by investing
activities (3,600,930) (1,332,400) 190,233
------------ ---------- ----------
Financing activities:
Proceeds from notes payable and long-term debt 1,873,687 3,120,505 195,758
Payments of notes payable and long-term debt (25,491) (1,984,722) (389,423)
Increase of capital stock 7,879 110,233 --
------------ ---------- ----------
Net cash provided by (used in) financing
Activities 1,856,075 1,246,016 (193,665)
------------ ---------- ----------
Net increase (decrease) in cash and cash
equivalents Ps. 127,191 Ps. 16,032 (Ps.115,165)
Cash and cash equivalents at beginning of year 152,993 136,961 252,126
------------- ---------- ----------
Cash and cash equivalents at the end of year Ps. 280,184 Ps.152,993 Ps.136,961
============= ========== ==========
Interest expense paid Ps. 337,774 Ps.241,421 Ps.325,364
============= ========== ==========
Income tax paid Ps. 35,985 Ps. 42,450 Ps. 30,257
============= ========== ==========
</TABLE>
Supplemental disclosures of non-cash activities:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1998 1997 1996
------------- ----------- ----------
<S> <C> <C> <C>
Sales of investment in Iusatel Chile in
exchange for notes receivable (Note 2) Ps. -- Ps. -- Ps.58,788
Conversion of debt to equity 1,158,822 799,288 --
</TABLE>
F-43
<PAGE> 186
2) The provision for income taxes for the years ended December 31, 1998,
1997 and 1996 was as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Asset tax not offset by current
taxes Ps.70,496 Ps.59,031 Ps.49,827
Deferred tax (55,311) (482,155) (254,351)
----------- ------------ ------------
Tax charge (benefit) Ps.15,185 (Ps.423,124) (Ps.204,524)
=========== ============ ============
</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:
<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. 69,058 Ps.-- Ps. 69,058
Property and equipment 253,531 -- 253,531
Cellular telephones to be amortized 113,736 -- 113,736
Concessions 2,915 -- 2,915
-------------- ------------- -------------
Deferred tax liabilities Ps.439,240 Ps.-- Ps.439,240
-------------- ------------- -------------
Deferred assets:
Allowance for doubtful accounts Ps. 25,090 Ps. -- Ps. 25,090
Net operating loss carryforwards and tax credits 1,222,133 -- 1,222,133
Reorganization reserve 22,246 -- 22,246
Interest rate collar -- 4,008 4,008
Gain from the exchange of non-monetary
assets -- 62,242 62,242
Valuation allowance (649,112) (66,250) (715,362)
-------------- ------------- -------------
Deferred tax assets 620,357 -- 620,357
-------------- ------------- -------------
Net deferred tax assets (Ps. 181,117) Ps. -- (Ps. 181,117)
============== ============= =============
</TABLE>
F-44
<PAGE> 187
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------
SFAS 109 SFAS 109
applied to applied to
Mexican GAAP U.S. GAAP
balances adjustments Total
-------------- ------------- -------------
<S> <C> <C> <C>
Deferred liabilities:
Inventories Ps. 119,120 Ps. -- Ps. 119,120
Property and equipment 342,111 -- 342,111
Cellular telephones to be amortized 37,356 -- 37,356
Concessions 2,728 -- 2,728
-------------- ------------- -------------
Deferred tax liabilities Ps. 501,315 Ps. -- Ps. 501,315
-------------- ------------- -------------
Deferred assets:
Allowance for doubtful accounts Ps. 34,592 Ps. -- Ps. 34,592
Net operating loss carryforwards and tax credits 1,165,386 -- 1,165,386
Reorganization reserve 26,385 -- 26,385
Preoperating expenses -- 28,423 28,423
Valuation allowance (599,243) (28,423) (627,666)
-------------- ------------- -------------
Deferred tax assets 627,120 -- 627,120
-------------- ------------- -------------
Net deferred tax assets (Ps. 125,805) Ps. -- (Ps. 125,805)
============== ============= =============
</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.383,677 for the year ended December 31, 1996 (not
applicable thereafter).
The Company has recorded a deferred tax asset of Ps.1,222,133 reflecting
the benefit of tax loss carryforwards, which expire in varying
amounts between 2001 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, 1998 will be realized based on the
following:
(i) the net deferred tax asset amounting to Ps.181,117 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, and
(ii) although the Group has generated operating losses for the past
five years, it believes that it is more likely than not that
the net deferred tax asset will be realized based on Group's
business plan based 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, 1998.
F-45
<PAGE> 188
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 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 80% year over year, improved
revenues (based on customer growth and price increases), and lower
network and operating costs, resulting in an operating profit in
the first two quarters of 1998 and, excluding the Project 450
write-down, also in the third quarter of 1998, 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.)
The effective rate reconciliation under US GAAP as of December 31, is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Income tax benefit at statutory rate (Ps. 471,090) (Ps.444,569) (Ps. 63,638)
Add (deduct):
Inventory purchases less cost of sales 196,759 (31,435) (74,873)
Depreciation and amortization 286,431 (252,865) (142,506)
Differences between interest and
inflationary gains or losses (123,297) 137,584 215,879
Net assets tax 70,496 59,031 49,827
Income tax loss carryforwards 67,335 109,784 (42,014)
Provision for doubtful accounts (103,880) 24,248 3,780
Telephones to be amortized 206,297 61,442 20,314
Goodwill amortized 40,473 41,329 44,710
Pre-operating expenses (59,278) 28,423 30,854
Other (95,061) (156,096) (246,857)
----------- ---------- ----------
Effective income tax benefit at effective rate Ps. 15,185 (Ps.423,124) (Ps.204,524)
=========== ========== ==========
</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, 1998 and 1997.
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, bear interest at variable rates and consequently, the
carrying value approximates fair value. As of December 31, 1998 and
1997, the carrying value of the unsecured senior notes was
Ps.1,629,625 and Ps.1,575,900 and the fair value was Ps.1,412,069
and Ps.1,575,900, respectively.
F-46
<PAGE> 189
5) Economic environment
The Company is a Mexican corporation with substantially all its
operations situated in Mexico and approximately 99.5% of its
revenues in 1998 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 the Company's 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 and revenues are generated in Mexican pesos.
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. As of December 31, 1998, the amounts
incurred by the Company, related to its Year 2000 compliance costs,
were approximately $2,800 U.S. Dollars. Amounts incurred as of
December 31, 1997 were immaterial.
b) Foreign Currency Exchange Risk
A substantial amount of the Company's debt obligations, including the
long-term bank loan and unsecured senior notes, are denominated in
U.S. Dollars while 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. The Company currently does not plan to enter into
hedging transactions with respect to these foreign currency risks,
but continues to consider the appropriateness of this option. 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.
c) Working capital deficiency
The Company's consolidated financial statements for year ended December
31, 1998 have been prepared on a going concern basis which
contemplates the realization of assets and settlement of
liabilities in the normal course of business. Under US GAAP, the
Company incurred a net loss of Ps.1,414,792 for the year ended
December 31, 1998, which included a Ps. 1,077,473 non cash expense
for the write down of its investment in the 450 MHz project. In
addition, under US GAAP, the Company had negative working capital
of Ps.1,482,751 at December 31, 1998. The continuation of the
Company as a going concern is dependent upon its ability to
generate sufficient cash from operations and financing activities.
In this regard, management expects operational cash flows in the
coming years, and its plans include raising additional financing to
develop PCS and to fully develop digital CDMA based wireless
services.
F-47
<PAGE> 190
7) 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 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,
-------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C> <C>
Under Mexican GAAP
Net loss As reported (Ps. 1,424,112) (Ps. 1,302,439)
Pro forma (1,432,756) (1,346,237)
Basic and
fully diluted As reported (Ps. 1.27) (Ps. 1.22)
loss per share Pro forma (1.28) (1.26)
Under U.S. GAAP:
Net loss As reported (Ps.1,414,792) (Ps. 884,166)
Pro forma (1,423,436) (927,966)
Basic and
fully diluted As reported (Ps. 1.26) (Ps. 0.82)
loss per share Pro forma (1.27) (0.87)
</TABLE>
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>
1998 1997
--------- --------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 67% 45%
Risk-free interest rate 25% 23%
Expected lives (in years) 2.7 2.7
</TABLE>
The weighted average value of options granted during 1998 and 1997 was
Ps.3.93 and Ps.4.85, respectively.
F-48
<PAGE> 191
This table is a summary of the status of the Stock Purchase Plan:
<TABLE>
<CAPTION>
Weighted
Average
Stock Options Exercise Price
------------- --------------
<S> <C> <C>
Granted 8,571,311 Ps. 10.28
Exercised -- --
Canceled/forfeited 1,021,477 8.48
Outstanding December 31, 1997 7,549,834 10.52
Granted 2,199,600 6.47
Exercised 967,460 8.20
Canceled/forfeited 1,082,084 9.63
Outstanding December 31, 1998 7,699,890 9.78
</TABLE>
As of December 31, 1998, 5,500,290 shares were exercisable; none were
exercisable at December 31, 1997. The following table summarizes
information about Stock Purchase Plan options outstanding as of
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Range Weighted
of Remaining Average
Exercise Contractual Exercise
Prices Shares Life Price
----------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
1997 Ps. 8.48 to 14.00 7,549,834 2 Ps. 10.52
1998 Ps. 5.16 to 14.00 7,699,890 2 Ps. 9.78
</TABLE>
8) Capitalized interest
As of December 31, 1998, 1997 and 1996, capitalized interest amounted
to Ps.135,763, Ps.341,391 and Ps.218,407, respectively. For the
years ended December 31, 1998, 1997 and 1996 interest expensed
amounted to Ps. 358,918, Ps.300,054 and Ps.471,174, respectively.
9) 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 on certain long-term debt. The Company has not yet
determined the impact that the adoption of SFAS 133 will have on
its financial position or results of operations.
F-49
<PAGE> 192
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," effective for
fiscal years beginning after December 15, 1998, provides guidance
on accounting for the costs of computer software developed or
obtained for internal use. This SOP requires that only certain
costs of acquiring or developing internal-use software be
capitalized and amortized to expense over the expected useful life
of the software. The Company is currently assessing the impact of
the adoption of this SOP on its results of operations, financial
position and cash flows.
SOP 98-5, "Reporting on the Costs of Start-Up Activities", effective for
fiscal years beginning after December 15, 1998, requires costs of
start-up activities and organization costs to be expensed as
incurred. Under US GAAP, the Company expenses costs of start-up
activities as incurred and, consequently, the Company believes that
the adoption of this SOP will not have a material impact on its
results of operations, financial position or cash flows.
10) Restructuring Reserve
As described in Note 2, a restructuring reserve associated with the
Company's reorganization plan was recorded during the year ended
December 31, 1996. Under U.S. GAAP, the components of the
restructuring reserve were recorded as operating expenses. The
following are additional disclosures as required by U.S. GAAP,
including a detail of the changes in components of the reserve for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Original Cash Non-cash Remaining Remaining
reserve outlays adjustments reserve Activity reserve
12/31/96 (a) 1997 1997 12/31/97 1998 12/31/98
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Employee severance
accrual Ps.130,252 (Ps.71,975) (Ps.58,277) Ps. -- -- --
Fixed assets
obsolescence 49,723 -- -- -- -- --
-------------------------------------------------------------------------------
Total restructuring
reserve Ps.179,975 (Ps.71,975) (Ps.58,277) Ps. -- Ps. -- Ps. --
===============================================================================
</TABLE>
(a) Under Mexican GAAP the Company recorded Ps. 205,537 as a
restructuring reserve as of December 31, 1996. Under U.S. GAAP the
reserve amounted to Ps.179,975 as a result of (i) the consolidation
of facilities reserve was not recorded under U.S. GAAP (see Note
20.c) and (ii) the change in estimate of allowance for doubtful
accounts is excluded from the restructuring reserve under U.S.
GAAP.
F-50
<PAGE> 193
Employee severance accrual
The replacement of certain top-level management and a general
headcount reduction was completed during the year ended December 31,
1997.
As a result of (i) negotiations with top-level management during
1997 and (ii) an actual headcount reduction of 371 employees, which
was lower than the original estimate of 400 employees, actual
severance benefits paid of Ps.71,975 were less than the amount
originally accrued, and consequently, the Company reversed the
remaining original liability amounting to Ps.58,277 into income in
1997.
Fixed assets obsolescence reserve
The fixed assets obsolescence reserve relates to certain spare parts
related to the analog communications equipment that, as a result of
a detailed review by the Company's engineers in November 1996, were
determined to be obsolete.
For US GAAP purposes, such equipment was classified as assets to be
disposed of as of December 31, 1996. The Company recorded an
impairment provision to adjust such assets to their respective
estimated salvage value, amounting to Ps.14,323, based on
information provided by the engineers and ceased the recording of
depreciation expense.
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: the successful
deployment of more attractive alternative technology, the
availability of 450 Mhz handsets at substantially lower costs had
not occurred, the Mexican government had not issued the coverage
and investment requirements for the 450 Mhz licenses, nor had the
government 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.1,077,473 was recorded to reduce the
Project 450 assets to their fair value, amounting to Ps. 44,635.
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 Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 131 establishes standards for
the way that public enterprises must determine and report
information about operating segments in their annual and interim
reports.
F-51
<PAGE> 194
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 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), that includes intersegment revenues and
corporate expenses that are allocated to the operating segments and
excludes 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).
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 that exist 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 this type of service 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 provide paging, local telephony and data
transmission services. It has concessions for PCS services and
microwave links, which are in a preoperating stage.
The table below presents information about reported segments for the year
ended December 31, 1998 under Mexican GAAP measurement, using the
presentation required by SFAS 131. The Company has not provided
information for the years ending December 31, 1997 and 1996 as it
was impracticable to prepare such information.
<TABLE>
<CAPTION>
Long Other Total Reconciling Total
Cellular Distance Businesses Segments Items (2) Consolidated
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues- third party Ps.2,875,398 Ps.60,409 Ps.173,852 Ps.3,109,659 (Ps. 9,003) Ps. 3,100,656
Revenues- affiliates 1,224,044 198,993 488,802 1,911,839 (1,911,839) --
Depreciation and
amortization 827,562 24,790 22,239 874,591 (1,933) 872,658
Operating income
(loss) 58,725 (142,805) (16,675) (100,755) (993,686) (1,094,441)
EBITDA (1) 886,286 (118,016) 5,563 773,833 81,857 855,690
Total assets 13,448,006 1,083,849 1,312,895 15,844,750 (4,945,574) 10,899,176
Capital expenditures 3,059,602 472,809 20,865 3,553,276 -- 3,553,276
</TABLE>
F-52
<PAGE> 195
(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 loss under Mexican GAAP as of December
31, 1998 is as follows:
<TABLE>
<S> <C>
EBITDA Ps. 855,690
Depreciation and amortization (872,658)
Project 450 non-cash write-down (1,077,473)
Other income, net 145,676
Integral cost of financing (418,091)
Equity participation in net gain of associated
companies and net gain on sale of equity investments 27,290
Assets tax (70,496)
Minority interest 6,198
Loss from discontinued operations (20,248)
------------
Net loss for the year (Ps.1,424,112)
------------
</TABLE>
(2) Reconciling items primarily reflect intersegment eliminations and
certain non-recurring items, including a gain on sale of Ps.
183,065 related to a fiber optic cable agreement (see Note 20.i)
and a non-cash write-down of Ps. 1,077,473 in connection with the
Project 450 (see Notes 18 and 20.b).
n) Discontinued Operations
As described in Note 19, in December 1998, the Company decided to
discontinue the operations of its subsidiary, Cellular Solutions de
Mexico, which was in the business of selling accessories for
cellular handsets, and consequently, recognize a loss from
discontinued operations amounting to Ps.20,248. Under U.S. GAAP the
loss from discontinued operations is recorded as an operating
expense.
21. Condensed Consolidating Financial Information
As mentioned in Note 10, in July 1997, the Company issued $150,000
U.S. Dollars of senior unsecured notes (the "Notes") as part of its
refinancing program. The Notes are guaranteed on a senior
subordinated, unsecured basis pursuant to guarantees by most of the
Company's subsidiaries both directly and indirectly wholly-owned
("Guarantor Subsidiaries"). The subsidiary guarantees are full,
unconditional, joint and several.
Presented below is condensed consolidating financial information as of
December 31, 1998 and 1997 and for the three years ended December
31, 1998 for i) the parent 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
disclosures concerning each of the Guarantor Subsidiaries because
management has determined that such information is not material to
investors.
F-53
<PAGE> 196
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. 248,705 (Ps. 27,870) Ps. 58,516 Ps. 833 Ps. 280,184
-------------- ------------- -------------- -------------- --------------
Accounts receivable:
Trade 320,544 368,723 12,019 (368,493) 332,793
Related parties 1,199,188 687,769 -- (1,874,464) 12,493
Recoverable taxes and other -- 128,153 426,087 92,760 647,000
-------------- ------------- -------------- -------------- --------------
1,519,732 1,184,645 438,106 (2,150,197) 992,286
-------------- ------------- -------------- -------------- --------------
Inventories 5,016 182,259 25,135 (9,297) 203,113
-------------- ------------- -------------- -------------- --------------
Total current assets 1,773,453 1,339,034 521,757 (2,158,661) 1,475,583
Investment in associated companies 2,082,169 174,784 -- (2,239,921) 17,032
Property and equipment, net 4,031,565 1,111,790 742,729 (58,980) 5,827,104
Other assets 298,699 675,611 95,652 641,149 1,711,111
Excess of investment cost over
book value 1,837,076 31,270 -- -- 1,868,346
-------------- ------------- -------------- -------------- --------------
Total assets Ps. 10,022,962 Ps. 3,332,489 Ps. 1,360,138 (Ps. 3,816,413) Ps. 10,899,176
============== ============= ============= ============== ==============
LIABILITIES
Current liabilities:
Notes payable Ps. 814,944 Ps. -- Ps. -- Ps. -- Ps. 814,944
Trade accounts payable 520,383 425,526 341,178 (328,516) 958,571
Related parties - -- 1,292,520 (1,155,606) 136,914
Taxes and other payable 538,853 200,851 149,594 (57,957) 831,341
Income tax 50,474 1,345 1,269 -- 53,088
-------------- ------------- -------------- -------------- --------------
Total current liabilities 1,924,654 627,722 1,784,561 (1,542,079) 2,794,858
Long-term debt 4,074,060 -- -- -- 4,074,060
Trade accounts payable, long-term -- 2,316 -- -- 2,316
Commitments and contingencies -- 2,749 57 -- 2,806
-------------- ------------- -------------- -------------- --------------
Total liabilities 5,998,714 632,787 1,784,618 (1,542,079) 6,874,040
-------------- ------------- -------------- -------------- --------------
</TABLE>
F-54
<PAGE> 197
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
STOCKHOLDERS' EQUITY
Stockholders' equity:
Capital contributions 9,539,461 5,264,831 1,079,757 (6,326,143) 9,557,906
Earned capital (5,515,213) (2,565,129) (1,504,237) 4,050,918 (5,533,661)
Minority interest -- -- -- 891 891
-------------- ------------- -------------- -------------- --------------
Total stockholders' equity 4,024,248 2,699,702 (424,480) (2,274,334) 4,025,136
-------------- ------------- -------------- -------------- --------------
Total liabilities and
stockholders' equity Ps. 10,022,962 Ps. 3,332,489 Ps. 1,360,138 (Ps. 3,816,413) Ps. 10,899,176
============== ============= ============= ============== ==============
Total stockholders' equity
under Mexican GAAP Ps. 4,024,248 Ps. 2,699,702 (Ps. 424,477) (Ps. 2,274,337) Ps. 4,025,136
Minority interest -- -- -- (891) (891)
Deferred income taxes 181,474 11,221 15,096 (26,674) 181,117
Interest rate collar (11,786) -- -- -- (11,786)
Gain from exchange of non-mone-
tary assets -- -- (183,065) -- (183,065)
Provision for consolidation
of facilities 16,963 -- -- -- 16,963
-------------- ------------- -------------- -------------- --------------
Total stockholders' equity
under U.S. GAAP Ps. 4,210,899 Ps. 2,710,923 (Ps. 592,446) (Ps. 2,301,902) Ps. 4,027,474
============== ============= ============= ============== ==============
</TABLE>
F-55
<PAGE> 198
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. 263,477 Ps. 4,404,226 Ps. 353,796 (Ps. 1,920,843) Ps. 3,100,656
Total cost of sales 20,870 1,828,591 304,812 (1,092,472) 1,061,801
---------------- ------------- --------------- -------------- --------------
Gross profit 242,607 2,575,635 48,984 (828,371) 2,038,855
Operating expenses 60,247 1,818,874 129,686 (825,642) 1,183,165
Depreciation and amortization 331,657 509,821 33,154 (1,975) 872,657
450 Project non-cash write-down -- -- 1,077,474 -- 1,077,474
---------------- ------------- --------------- -------------- --------------
Operating profit (loss) (149,297) 246,940 (1,191,330) (754) (1,094,441)
--------------- ------------- --------------- -------------- --------------
Other income -- -- 145,676 -- 145,676
--------------- ------------- --------------- -------------- --------------
Integral financing result:
Interest expense, net (261,072) 178,248 256,312 71,712 245,200
Foreign exchange loss, net 819,767 94,159 4,301 -- 918,227
Gain from monetary position (343,978) (103,339) (212,171) (85,848) (745,336)
--------------- ------------- --------------- -------------- --------------
214,717 169,068 48,442 (14,136) 418,091
--------------- ------------- --------------- -------------- --------------
Equity participation in net (gain)
loss of associated companies 1,025,560 (28,255) -- (1,024,595) (27,290)
Provision for assets tax 30,694 38,360 1,442 -- 70,496
Minority interest -- -- -- 6,198 6,198
Loss from discontinued operations 3,844 16,404 -- -- 20,248
--------------- ------------- --------------- -------------- --------------
Net loss for the year (Ps. 1,424,112) Ps. 51,363 (Ps. 1,095,538) Ps. 1,044,175 (Ps.1,424,112)
=============== ============= ============== ============== =============
Net loss for the year under
Mexican GAAP (Ps. 1,424,112) Ps. 51,363 (Ps. 1,095,539) Ps. 1,044,176 (Ps.1,424,112)
Deferred income taxes 56,107 (25,269) 17,143 7,330 55,311
Pre-operating costs -- -- 174,350 -- 174,350
Interest rate collar (11,786) -- -- -- (11,786)
Gain from exchange of non-mone-
tary assets -- (183,065) -- (183,065)
Effect of inflation on U.S. GAAP
adjustments (25,857) 11,644 (7,901) (3,376) (25,490)
-------------- ------------- -------------- -------------- --------------
Net loss for the year under U.S.
GAAP (Ps. 1,405,648) Ps. 37,738 (Ps. 1,095,012) Ps. 1,048,130 (Ps. 1,414,792)
============== ============= ============== ============== ==============
</TABLE>
F-56
<PAGE> 199
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. 1,405,648) Ps. 37,738 (Ps. 1,095,012) Ps. 1,048,130 (Ps. 1,414,792)
Adjustments to reconcile net
loss to cash provided by
(used in) operating activities:
Depreciation and amortization 331,657 509,821 33,155 (1,976) 872,657
450 Project non cash write-down -- -- 903,124 -- 903,124
Equity in net loss (earnings) of
associated companies and net
gain on sale of equity investments 1,174,150 -- -- (1,201,440) (27,290)
Increase in allowance for
doubtful accounts 29,102 33,475 1,090 (33,454) 30,213
Minority interest -- -- -- (6,199) (6,199)
Deferred income taxes and emplo-
yee profit sharing (25,413) 63,629 (15,702) (7,329) 15,185
Gain on net monetary position and
foreign exchange losses 501,645 (20,825) (199,972) (82,467) 198,381
Changes in operating assets and
liabilities:
Accounts receivable (423,365) 36,747 (294,198) 111,181 (569,635)
Inventories 13,386 108,757 23,839 (35,849) 110,133
Trade accounts payable and related
parties 1,991,912 (72,457) 771,813 (1,406,982) 1,284,286
Taxes and other payable 443,189 (33,123) 200,928 (105,814) 505,180
Income Tax 11,282 (39,743) (1,494) 944 (29,011)
Other -- (44) (142) -- (186)
-------------- ----------- -------------- ------------- --------------
Net cash provided by (used in)
operating activities 2,641,897 623,975 327,429 (1,721,255) 1,872,046
-------------- ----------- -------------- ------------- --------------
Investing activities:
Purchase of property and equipment,
net (2,221,346) (357,343) (1,000,372) 1,174,831 (2,404,230)
Investment in associated
companies, net cash acquired (2,123,315) (161,135) 10,832 2,285,673 12,055
Purchase of other assets (43,683) (140,526) 719,126 (1,743,672) (1,208,755)
-------------- ----------- -------------- ------------- --------------
Net cash (used in) provided
by investing activities (4,388,344) (659,004) (270,414) 1,716,832 (3,600,930)
-------------- ----------- -------------- ------------- --------------
Financing activities:
Proceeds from notes payable and
long-term debt 1,873,687 -- -- -- 1,873,687
Payments of notes payable and
long-term debt (30,751) -- -- 5,260 (25,491)
Increase of capital stock 7,879 -- -- -- 7,879
-------------- ----------- -------------- ------------- --------------
Net cash provided by (used in)
financing activities 1,850,815 -- -- 5,260 1,856,075
-------------- ----------- -------------- ------------- --------------
Net increase (decrease) in cash 104,368 (35,029) 57,015 837 127,191
Cash at beginning of year 144,336 7,160 1,497 -- 152,993
-------------- ----------- -------------- ------------- --------------
Cash at the end of year Ps. 248,704 (Ps. 27,869) Ps. 58,512 Ps. 837 Ps. 280,184
============== ============ ============== ============= ==============
</TABLE>
F-57
<PAGE> 200
CONDENSED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term
investments Ps. 144,336 Ps. 7,161 Ps. 1,496 Ps. -- Ps. 152,993
-------------- -------------- -------------- -------------- -------------
Accounts receivable:
Trade -- 278,519 27,988 (40,211) 266,296
Related parties 4,962,376 -- -- (4,905,047) 57,329
Recoverable taxes and other 42,160 155,280 112,668 (15,725) 294,383
-------------- -------------- -------------- -------------- -------------
5,004,536 433,799 140,656 (4,960,983) 618,008
-------------- -------------- -------------- -------------- -------------
Inventories 18,401 291,017 48,976 (8,039) 350,355
-------------- -------------- -------------- -------------- -------------
Total current assets 5,167,273 731,977 191,128 (4,969,022) 1,121,356
Investment in associated companies 1,170,114 13,648 10,831 (1,171,441) 23,152
Property and equipment, net 1,993,238 1,264,275 669,921 (2,044) 3,925,390
Other assets 294,665 538,415 814,787 -- 1,647,867
Excess of investment cost over
book value 1,946,066 27,943 -- -- 1,974,009
-------------- -------------- -------------- -------------- -------------
Total assets Ps. 10,571,356 Ps. 2,576,258 Ps. 1,686,667 (Ps. 6,142,507) Ps. 8,691,774
============== ============== ============== ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable Ps. 3,467 Ps. -- Ps. -- Ps. -- Ps. 3,467
Trade accounts payable 507,009 372,437 45,288 (8,037) 916,697
Related parties 2,679,977 683,589 1,646,031 (4,905,043) 104,554
Taxes and other payable 159,226 257,666 64,361 (57,039) 424,214
Income tax 8,499 2,729 1,321 (945) 11,604
-------------- -------------- -------------- -------------- -------------
Total current liabilities 3,358,178 1,316,421 1,757,001 (4,971,064) 1,460,536
Long-term debt 2,889,149 -- -- -- 2,889,149
Trade accounts payable, long-term 5,260 -- -- -- 5,260
Commitments and contingencies -- 2,792 200 -- 2,992
-------------- -------------- -------------- -------------- -------------
Total liabilities 6,252,587 1,319,213 1,757,201 (4,971,064) 4,357,937
-------------- -------------- -------------- -------------- -------------
Stockholders' equity:
Capital contributions 8,391,207 3,689,721 394,460 (4,084,183) 8,391,205
Earned capital (4,072,438) (2,432,676) (464,994) 2,897,668 (4,072,440)
Minority interest -- -- -- 15,072 15,072
-------------- -------------- -------------- -------------- -------------
Total stockholders' equity 4,318,769 1,257,045 (70,534) (1,171,443) 4,333,837
-------------- --------------- -------------- -------------- -------------
Total liabilities and
stockholders' equity Ps. 10,571,356 Ps. 2,576,258 Ps. 1,686,667 (Ps. 6,142,507) Ps. 8,691,774
============== ============== ============== ============== =============
Total stockholders' equity
under Mexican GAAP Ps. 4,318,769 Ps. 1,257,045 (Ps. 70,534) (Ps. 1,171,443) Ps.4,333,837
Minority interest -- -- -- (15,072) (15,072)
Deferred income taxes 125,365 36,489 (2,046) (34,003) 125,805
Pre-operating costs -- (174,350) -- -- (174,350)
Provision for consolidation
of facilities 16,963 -- -- -- 16,963
-------------- -------------- -------------- --------------------------------
Total stockholders' equity
under U.S. GAAP Ps. 4,461,097 Ps. 1,119,184 (Ps. 72,580) (Ps.1,220,518) Ps.4,287,183
============== ============== ============== ============= =============
</TABLE>
F-58
<PAGE> 201
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. 477,888 Ps. 3,464,036 Ps. 292,145 (Ps. 1,811,529) Ps. 2,422,540
Total cost of sales 27,513 1,600,409 259,323 (955,382) 931,863
-------------- -------------- ------------ -------------- --------------
Gross profit 450,375 1,863,627 32,822 (856,147) 1,490,677
Operating expenses 78,316 1,683,719 225,215 (1,018,777) 968,473
Depreciation and amortization 361,574 373,823 22,329 -- 757,726
-------------- -------------- ------------ -------------- --------------
Operating profit (loss) 10,485 (193,915) (214,722) 162,630 (235,522)
-------------- -------------- ------------ -------------- --------------
Provision for equipment impairment (739,376) (468,976) -- -- (1,208,352)
-------------- -------------- ------------ -------------- --------------
Integral financing result:
Interest expense, net 18,568 39,090 177,308 88,215 323,181
Foreign exchange loss, net 54,359 8,048 698 -- 63,105
Gain from monetary position (126,939) (43,870) (146,638) (63,709) (381,156)
-------------- -------------- ------------ -------------- --------------
(54,012) 3,268 31,368 24,506 5,130
-------------- -------------- ------------ -------------- --------------
Equity participation in net (gain)
loss of associated companies 617,362 -- -- (822,688) (205,326)
Provision for assets tax 10,198 42,551 423 5,859 59,031
Minority interest -- -- -- 270 270
-------------- -------------- ------------ -------------- --------------
Net loss for the year (Ps. 1,302,439) (Ps. 708,710) (Ps. 246,513) Ps. 955,223 (Ps. 1,302,439)
============== ============== ============ ============== ==============
Net loss for the year under
Mexican GAAP (Ps. 1,302,439) (Ps. 708,710) (Ps. 246,513) Ps. 955,223 (Ps. 1,302,439)
Deferred income taxes 282,794 120,127 79,234 -- 482,155
Pre-operating costs -- (83,599) -- -- (83,599)
Effect of inflation on U.S. GAAP
adjustments 11,566 4,912 3,239 -- 19,717
-------------- -------------- ------------ -------------- --------------
Net loss for the year under U.S.
GAAP (Ps. 1,008,079) (Ps. 667,270) (Ps. 164,040) Ps. 955,223 (Ps. 884,166)
============== ============== ============ ============== ==============
</TABLE>
F-59
<PAGE> 202
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. 1,008,079) (Ps. 667,270) (Ps. 164,040) Ps. 955,223 (Ps. 884,166)
Adjustments to reconcile net
loss to cash provided by
(used in) operating activities:
Depreciation and amortization 361,574 373,823 22,329 -- 757,726
Provision for equipment impairment 739,376 468,976 -- -- 1,208,352
Equity in net loss (earnings) of
associated companies and net gain
on sale of equity investments 617,362 -- -- (822,688) (205,326)
Increase in allowance for
doubtful accounts -- 48,389 (960) -- 47,429
Increase in allowance for obsolete
and slow-moving inventories (70) 20,425 (169) -- 20,186
Minority interest -- -- -- (270) (270)
Deferred income taxes and employee
profit sharing (272,597) (77,574) (78,812) 5,860 (423,123)
Gain on net monetary position and
foreign exchange losses (79,147) (125,926) (153,524) (67,006) (425,603)
Changes in operating assets and
liabilities:
Accounts receivable (23,825) (153,673) 38,860 (3,530) (142,168)
Inventories (3,945) (222,123) (9,404) 15,608 (219,864)
Trade accounts payable and related
parties (973,312) 939,306 688,340 25,957 680,291
Taxes and other payable (95,838) (171,181) 36,479 (84,342) (314,882)
Income Tax (316) 2,608 1,047 48 3,387
Other -- 79 140 228 447
-------------- ------------ ------------ ----------- ------------
Net cash provided by (used in)
operating activities (738,817) 435,859 380,286 25,088 102,416
-------------- ------------ ------------ ----------- ------------
Investing activities:
Purchase of property and
equipment, net (778,093) (4,571) 7,408 (107,376) (882,632)
Investment in associated
companies, net cash acquired (148,390) 20,366 (10,832) 460,877 322,021
Purchase of other assets 367,002 (79,991) (381,701) (677,099) (771,789)
-------------- ------------ ------------ ----------- ------------
Net cash (used in) provided
by investing activities (559,481) (64,196) (385,125) (323,598) (1,332,400)
-------------- ------------ ------------ ----------- ------------
Financing activities:
Proceeds from notes payable and
long-term debt 2,271,826 (301,645) (698) 1,151,022 3,120,505
Payments of notes payable and
long-term debt (1,050,365) (78,670) -- (855,687) (1,984,722)
Increase of capital stock 110,246 -- -- (13) 110,233
-------------- ------------ ------------ ----------- ------------
Net cash provided by (used in)
financing activities 1,331,707 (380,315) (698) 295,322 1,246,016
-------------- ------------ ------------ ----------- ------------
Net increase (decrease) in cash 33,409 (8,652) (5,537) (3,188) 16,032
Cash at beginning of year 110,926 15,814 7,032 3,189 136,961
-------------- ------------ ------------ ----------- ------------
Cash at the end of year Ps. 144,335 Ps. 7,162 Ps 1,495 Ps. -- Ps. 152,993
============== ============ ============ =========== ============
</TABLE>
F-60
<PAGE> 203
CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues Ps. 441,671 Ps.3,395,943 Ps. 128,638 (Ps.1,559,494) Ps.2,406,758
Total cost of sales 7,696 1,519,545 94,930 (675,984) 946,187
----------- ------------ ----------- ------------- ------------
Gross profit 433,975 1,876,398 33,708 (883,510) 1,460,571
Operating expenses 104,669 1,666,654 60,242 (778,540) 1,053,025
Depreciation and amortization 348,729 505,550 1,610 -- 855,889
----------- ------------ ----------- ------------- ------------
Operating profit (loss) (19,423) (295,806) (28,144) (104,970) (448,343)
----------- ------------ ----------- ------------- ------------
Integral financing result:
Interest expense, net 150,493 43,532 116,861 87,001 397,887
Foreign exchange loss, net (84,704) (1,490) (1,738) -- (87,932)
Gain from monetary position (214,123) (80,870) (115,488) (82,572) (493,053)
----------- ------------ ----------- ------------- ------------
(148,334) (38,828) (365) 4,429 (183,098)
----------- ------------ ----------- ------------- ------------
Equity participation in net (gain)
loss of associated companies 415,701 -- -- (417,567) (1,866)
Provision for assets tax 29,611 72,011 251 (52,046) 49,827
Minority interest -- -- -- (4,500) (4,500)
Group reorganization reserve 197,842 7,695 -- -- 205,537
----------- ------------ ----------- ------------- ------------
Net loss for the year (514,244) (Ps. 514,243) (Ps.336,684) (Ps.28,030) Ps. 364,714 (Ps. 514,243)
=========== ============ =========== ============= ============
Net loss for the year under
Mexican GAAP (Ps. 514,243) (Ps.336,684) (Ps.28,030) Ps.364,714 (Ps. 514,243)
Deferred income taxes 117,998 136,353 -- -- 254,351
Pre-operating costs -- (90,751) -- -- (90,751)
Provision for consolidation
of facilities 16,963 -- -- -- 16,963
Effect of inflation on U.S. GAAP
adjustments (200,334) 350,330 -- -- 149,996
----------- ------------ ----------- ------------- ------------
Net loss for the year under U.S.
GAAP (Ps. 579,616) Ps. 59,248 (Ps. 28,030) Ps. 364,714 (Ps.183,684)
=========== ============ =========== ============= ============
</TABLE>
F-61
<PAGE> 204
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss for the year (Ps.579,616) Ps.59,248 (Ps.28,030) Ps.364,714 (Ps.183,684)
Adjustments to reconcile net
loss to cash provided by
(used in) operating activities:
Depreciation and amortization 348,729 505,550 1,610 -- 855,889
Equity in net loss (earnings)
of associated companies and net
gain on sale of equity investments 415,701 -- -- (417,567) (1,866)
Increase in allowance for
doubtful accounts -- 98,081 17,359 (15,058) 100,382
Increase in allowance for obsolete
and slow-moving inventories 555 3,448 1,520 293 5,816
Minority interest -- -- -- (4,500) (4,500)
Deferred income taxes and emplo-
yee profit sharing (88,387) (64,344) 250 (52,044) (204,525)
Gain on net monetary position and
foreign exchange losses (98,492) (432,690) (117,226) (213,048) (861,456)
Group reorganization reserve 197,842 7,695 -- (2) 205,535
Changes in operating assets and
liabilities:
Accounts receivable (12,834) (93,909) (39,241) 23,067 (122,917)
Inventories 14,790 66,652 875 (8,539) 73,778
Trade accounts payable and re-
lated parties (360,010) (160,679) 343,086 82,155 (95,448)
Taxes and other payable (88,683) 24,774 (938) 178,854 114,007
Income Tax 7,393 (8,483) (2,172) 10,427 7,165
Other -- 888 (906) 109 91
-------- -------- -------- -------- --------
Net cash provided by (used in)
operating activities (243,012) 6,231 176,187 (51,139) (111,733)
-------- -------- -------- -------- --------
Investing activities:
Purchase of property and
equipment, net (178,513) (58,498) 87,408 (149,444) (299,047)
Investment in associated
companies, net cash acquired 692,550 99,478 26,524 (778,368) 40,184
Purchase of other assets (575,594) 438,197 (231,358) 817,851 449,096
-------- -------- -------- -------- --------
Net cash (used in) provided
by investing activities (61,557) 479,177 (117,426) (109,961) 190,233
-------- -------- -------- -------- --------
Financing activities:
Proceeds from notes payable and
long-term debt 424,203 -- 109,783 (338,228) 195,758
Payments of notes payable and
long-term debt (198,326) (526,487) (173,802) 509,192 (389,423)
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 225,877 (526,487) (64,019) 170,964 (193,665)
-------- -------- -------- -------- --------
Net increase (decrease) in cash (78,691) (41,079) (5,258) 9,864 (115,164)
Cash at beginning of year 189,617 56,891 12,289 (6,672) 252,125
-------- -------- -------- -------- --------
Cash at the end of year Ps.110,926 Ps.15,812 Ps.7,031 Ps.3,192 Ps.136,961
======== ======== ======== ======== ========
</TABLE>
F-62
<PAGE> 205
22. Restatement of 1997 Financial Statements
As described in Note 4.b, the Company had previously recorded an
impairment charge related to the analog communications network
directly against stockholders` equity.
The Company has reassessed this accounting treatment and determined
that the impairment charge should have been recorded as operating
expense. Consequently, the financial statements for the year ended
December 31, 1997 have been restated. The effect of the
restatement is as follows:
<TABLE>
<CAPTION>
For the year ended,
December 31, 1997
--------------------------------------
As previously
reported As restated
------------- -------------
<S> <C> <C>
Consolidated Income statement:
Net loss (Ps. 94,088) (Ps.1,302,440)
Net loss per share (Ps. 0.08) (Ps. 1.22)
</TABLE>
- - - - - - - - - - - - - - - - - - - - - -
F-63
<PAGE> 206
[PRICEWATERHOUSECOOPERS LETTERHEAD]
INDEPENDENT ACCOUNTANT'S REPORT
We have reviewed the accompanying consolidated interim financial statements of
Nuevo Grupo Iusacell, S.A. de C.V. and subsidiaries (successor entity to Grupo
Iusacell, S.A. de C.V. and subsidiaries) as of September 30, 1999 and 1998, and
for the nine-month periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the standards for review established
by the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with generally accepted accounting principles in Mexico.
PricewaterhouseCoopers
Juan Manuel Ferron Solis
Public Accountant
Mexico City, D.F., Mexico.
November 19, 1999 (except
for the matters discussed in
Notes 7.d and 8 for which
the date is December 23, 1999).
F-64
<PAGE> 207
NUEVO GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED INTERIM BALANCE SHEETS (unaudited)
AS OF SEPTEMBER 30, 1999 AND 1998
(Notes 1 and 2)
(Adjusted for price-level changes and expressed in thousands of
constant Mexican pesos as of September 30, 1999)
<TABLE>
<CAPTION>
1999 1998*
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents Ps. 137,824 Ps. 166,232
-------------- --------------
Accounts receivable:
Trade, net of allowance for doubtful accounts 467,440 298,258
Related parties 11,452 17,624
Recoverable taxes and other 688,625 475,189
-------------- --------------
1,167,517 791,071
-------------- --------------
Inventories 289,661 278,322
-------------- --------------
Total current assets 1,595,002 1,235,625
INVESTMENT IN ASSOCIATED COMPANIES 182,743 17,827
PROPERTY AND EQUIPMENT, net 6,488,285 5,154,715
OTHER ASSETS, net 1,851,665 1,714,199
EXCESS OF COST OF INVESTMENTS IN SUBSIDIARIES
OVER BOOK VALUE 1,824,086 1,906,323
-------------- --------------
Total assets Ps. 11,941,781 Ps. 10,028,689
============== ==============
</TABLE>
*The figures of 1998 represent Grupo Iusacell, S.A. de C.V. and Subsidiaries
(see Note 1)
The accompanying notes are an integral part of
these unaudited consolidated interim financial statements.
F-65
<PAGE> 208
NUEVO GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED INTERIM BALANCE SHEETS (unaudited)
AS OF SEPTEMBER 30, 1999 AND 1998
(Notes 1 and 2)
(Adjusted for price-level changes and expressed in thousands of
constant Mexican pesos as of September 30, 1999)
<TABLE>
<CAPTION>
1999 1998*
-------------- --------------
LIABILITIES
CURRENT:
<S> <C> <C>
Notes payable (Note 3) Ps. 435,688 Ps. 623,892
Trade accounts payable 1,077,814 719,739
Related parties 126,148 155,369
Taxes and other payables 948,909 738,769
Income tax 4,572 38,176
Employee profit sharing 875 6
-------------- --------------
Total current liabilities 2,594,006 2,275,951
LONG-TERM DEBT (Note 3) 3,942,205 4,399,608
TRADE ACCOUNTS PAYABLE, LONG-TERM -- 1,469
COMMITMENTS AND CONTINGENCIES (Note 4) 2,291 2,740
-------------- --------------
Total liabilities 6,538,502 6,679,768
-------------- --------------
STOCKHOLDERS' EQUITY
CONTRIBUTED CAPITAL (Note 5):
Capital stock 4,610,629 9,187,481
Capital contributed 144,856 79,761
-------------- --------------
4,755,485 9,267,242
-------------- --------------
EARNED CAPITAL :
Accumulated losses:
Legal reserve -- 4,361
For prior years -- (3,367,411)
Net income (loss) for the period 619,322 (1,768,748)
-------------- --------------
619,322 (5,131,798)
-------------- --------------
DEFICIT FROM RESTATEMENT -- (761,154)
-------------- --------------
Total majority stockholders' equity 5,374,807 3,374,290
MINORITY INTEREST 28,472 (25,369)
-------------- --------------
Total stockholders' equity 5,403,279 3,348,921
-------------- --------------
Total liabilities and stockholders' equity Ps. 11,941,781 Ps. 10,028,689
============== ==============
</TABLE>
*The figures of 1998 represent Grupo Iusacell, S.A. de C.V. and Subsidiaries
(see Note 1)
The accompanying notes are an integral part of
these unaudited consolidated interim financial statements.
F-66
<PAGE> 209
NUEVO GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
CONSOLIDATED INTERIM INCOME STATEMENTS (unaudited)
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(Notes 1 and 2)
(Adjusted for price-level changes and expressed in thousands of
constant Mexican pesos as of September 30, 1999)
<TABLE>
<CAPTION>
1999 1998*
------------- --------------
<S> <C> <C>
REVENUES:
Services Ps. 2,626,137 Ps. 1,954,419
Telephone equipment sales and other 282,369 322,965
------------- --------------
2,908,506 2,277,384
------------- --------------
COST OF SALES:
Cost of services 778,668 591,172
Cost of telephone equipment and other 163,129 174,991
------------- --------------
941,797 766,163
------------- --------------
Gross profit 1,966,709 1,511,221
------------- --------------
OPERATING EXPENSES 963,442 886,412
DEPRECIATION AND AMORTIZATION 967,396 615,617
450 PROJECT NON CASH WRITEDOWN -- 986,396
------------- --------------
Operating income (loss) 35,871 (977,204)
------------- --------------
INTEGRAL FINANCING (GAIN) COST:
Interest expense, net 162,751 198,070
Foreign exchange (gain) loss, net (325,293) 1,011,283
Gain from monetary position (519,605) (432,489)
------------- --------------
(682,147) 776,864
------------- --------------
EQUITY PARTICIPATION IN NET GAIN OF
ASSOCIATED COMPANIES (2,587) (20,252)
------------- --------------
Income (loss) before assets tax, profit sharing and
minority interest 720,605 (1,733,816)
PROVISIONS FOR:
Assets tax 111,609 38,271
Profit sharing 373 --
------------- --------------
Income (loss) before minority interest 608,623 (1,772,087)
MINORITY INTEREST (10,699) (3,339)
------------- --------------
Net income (loss) for the period Ps. 619,322 (Ps. 1,768,748)
============= ==============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING (thousands) 1,269,997 1,095,646
============= ==============
NET INCOME (LOSS) PER SHARE (pesos) Ps. 0.49 (Ps. 1.61)
============= ==============
</TABLE>
*The figures of 1998 represent Grupo Iusacell, S.A. de C.V. and Subsidiaries
(see Note 1)
The accompanying notes are an integral part of
these unaudited consolidated interim financial statements.
F-67
<PAGE> 210
NUEVO GRUPO IUSACELL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(Notes 1 and 2)
(Adjusted for price-level changes and expressed in thousands of constant
Mexican pesos as of September 30, 1999)
<TABLE>
<CAPTION>
Accumulated losses
---------------------------------
Capital Capital Legal For prior Net (loss) income
stock contributed reserve years for the year
------------- ------------ ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997* Ps. 8,311,444 Ps. 79,761 Ps. 4,361 (Ps. 2,064,972) (Ps. 1,302,439)
Application of 1997 net loss -- -- -- (1,302,439) 1,302,439
Increase in capital stock 876,037 -- -- -- --
Recognition of the effects of inflation
on the financial statements -- -- -- -- --
Minority interest for the period -- -- -- -- --
Net loss for the period -- -- -- -- (1,768,748)
------------- ----------- ---------- -------------- --------------
Balance at September 30, 1998* Ps. 9,187,481 Ps. 79,761 Ps. 4,361 (Ps. 3,367,411) (Ps. 1,768,748)
------------- ----------- ---------- -------------- --------------
Balance at December 31, 1998* Ps. 9,478,145 Ps. 79,761 Ps.4,361 (Ps.3,367,411) (Ps. 1,424,112)
Application of 1998 net loss -- -- -- (1,424,112) 1,424,112
Effect of reorganization (9,478,091) (79,761) (4,361) 4,791,523 --
Effect of primary and rights offerings 4,610,575 144,856 -- -- --
Minority interest for the period -- -- -- -- --
Net profit for the period -- -- -- -- 619,322
------------- ----------- ---------- -------------- --------------
Balance at September 30, 1999 Ps. 4,610,629 Ps. 144,856 Ps. -- Ps. -- Ps. 619,322
============= =========== ========== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
(Deficit) Total
from Minority stockholders'
restatement interest equity
------------ ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1997* (Ps. 709,390) Ps. 15,072 Ps. 4,333,837
Application of 1997 net loss -- -- --
Increase in capital stock -- -- 876,037
Recognition of the effects of inflation
on the financial statements (51,764) -- (51,764)
Minority interest for the period -- (40,441) (40,441)
Net loss for the period -- -- (1,768,748)
------------ ----------- -------------
Balance at September 30, 1998* (Ps. 761,154) (Ps. 25,369) Ps. 3,348,921
------------ ------------- -------------
Balance at December 31, 1998* (Ps. 746,499) Ps. 891 Ps. 4,025,136
Application of 1998 net loss -- -- --
Effect of reorganization 746,499 (891) (4,025,082)
Effect of primary and rights offerings -- -- 4,755,431
Minority interest for the period -- 28,472 28,472
Net profit for the period -- -- 619,322
------------ ------------ -------------
Balance at September 30, 1999 Ps. -- Ps. 28,472 Ps. 5,403,279
============ ============ =============
</TABLE>
*The figures of 1998 and 1997 represent Grupo Iusacell, S.A. de C.V. and
Subsidiaries (see Note 1)
The accompanying notes are an integral part of
these unaudited consolidated interim financial statements.
F-68
<PAGE> 211
NUEVO GRUPO IUSACELL, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN FINANCIAL POSITION (unaudited)
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(Notes 1 and 2)
(Adjusted for price-level changes and expressed in thousands of
constant Mexican pesos as of September 30, 1999)
<TABLE>
<CAPTION>
1999 1998*
----------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) for the period Ps. 619,322 (Ps. 1,768,748)
Items not requiring the use of resources:
Depreciation and amortization 967,396 615,617
450 Project non cash writedown -- 986,396
Equity participation in net gain of associated companies (2,587) (20,252)
Minority interest (10,699) (3,339)
----------- --------------
1,573,432 (190,326)
Resources provided by (used for) operating activities-
Trade accounts receivable (134,647) (30,973)
Recoverable taxes and other (41,624) (179,711)
Related parties (9,725) 90,348
Inventories 1,276 73,335
Trade accounts payable 29,104 (204,177)
Taxes and other payables 117,568 312,975
Income tax (48,511) 26,632
Employee profit sharing 870 (96)
Other (515) (265)
----------- --------------
Resources provided by (used for) operating activities 1,487,228 (102,258)
----------- --------------
FINANCING ACTIVITIES:
(Decrease) increase in long-term debt (131,855) 1,499,718
(Decrease) increase in notes payable (379,255) 620,412
Increase of capital stock -- 876,037
Effect of reorganization (4,024,194) --
Effect of primary and rights offering 4,755,431 --
----------- --------------
Resources provided by financing activities 220,127 2,996,167
----------- --------------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,241,723) (2,455,987)
Sale of common stock of associated companies (163,125) 25,664
Purchase of other assets (425,168) (413,190)
Increase (decrease) in minority interest 38,281 (37,157)
Purchase of Infotelecom (57,980) --
----------- --------------
Resources used for investing activities (1,849,715) (2,880,670)
----------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (142,360) 13,239
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 280,184 152,993
----------- --------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD Ps. 137,824 Ps. 166,232
=========== ==============
</TABLE>
*The figures of 1998 represent Grupo Iusacell, S.A. de C.V. and Subsidiaries
(see Note 1)
The accompanying notes are an integral part of
these unaudited consolidated interim financial statements.
F - 69
<PAGE> 212
NUEVO GRUPO IUSACELL, S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED
FINANCIAL STATEMENTS (unaudited)
(Adjusted for price-level changes and expressed in thousands
of constant Mexican pesos as of September 30, 1999 and
thousands of U.S. Dollars)
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. ("Nuevo Iusacell"), was
incorporated on August 6, 1998 to acquire and hold all of the
outstanding shares of Grupo Iusacell, S.A. de C.V.. In July 1999,
Nuevo Iusacell initiated an offer to exchange its two classes of
common stock for the four classes of common stock of Grupo
Iusacell, S.A. de C.V. then outstanding on a one for one basis. As
a result of the exchange, Nuevo Iusacell acquired 99.5% of Grupo
Iusacell, S.A. de C.V. shares when the offer expired on August 4,
1999. Mexican law requires Nuevo Iusacell to make a repurchase
offer for the remaining shares of Grupo Iusacell, S.A. de C.V.,
which it expects to complete by the end of February, 2000.
Prior to the exchange offer, Nuevo Iusacell had nominal assets and
liabilities and no operations. Nuevo Iusacell also did not have any
contingent liabilities or commitments. For accounting purposes.
Nuevo Iusacell is the successor business to Grupo Iusacell, S.A. de
C.V..
Immediately after the exchange offer, Nuevo 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). Nuevo Iusacell's principal
shareholders sold an aggregate of 101,403,217 shares of its series
V common stock, resulting in 40.4% ownership interest for each such
shareholder.
Grupo Iusacell, S.A. de C.V. 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
("Regions") in central Mexico. Grupo Iusacell, S.A. de C.V. and its
subsidiaries are referred to collectively herein as the "Group" or
"Grupo Iusacell".
In October 1995, a subsidiary of Grupo 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, 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 Grupo Iusacell
acquired frequencies through auctions conducted by the Mexican
government to provide personal communication wireless services
(PCS) in Regions 1 and 4 in northern Mexico.
F-70
<PAGE> 213
Carlos Peralta and companies affiliated with him (together with Carlos
Peralta, the "Peralta Group") and Bell Atlantic Corporation ("Bell
Atlantic") each hold directly or indirectly 40.4% equity ownership
interests in Nuevo Iusacell.
Based on an agreement between Grupo Iusacell's principal stockholders
and approval by the Mexican government, Bell Atlantic assumed
management control of Grupo Iusacell from the Peralta Group in
February 1997.
2. Basis of presentation
a) Basis of Presentation
Prior to the reorganization described in note 1, the interim
consolidated financial statements of Nuevo Iusacell reflect the
operations of Grupo Iusacell and its subsidiaries, the predecessor
entity. For the purposes of the interim consolidated financial
statements both Nuevo Iusacell and Grupo Iusacell are referred to
as the "Company."
The Company's consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in Mexico
("Mexican GAAP").
The consolidated financial statements for the interim nine-month
periods have been presented in thousands of constant Mexican pesos
as of September 30, 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"). All amounts presented in
U.S. Dollars are in thousands.
The amounts as of September 30, 1999 and 1998, presented in the
financial statements and in the notes, have been restated using
inflation rates based on the National Consumer Price Index (NCPI)
published by Banco de Mexico (Mexican Central Bank) in order to
present them in Mexican pesos of purchasing power as of September
30, 1999.
In management's opinion, the accompanying interim consolidated
financial statements include all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation of
results for such interim periods. Certain information and note
disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting
principles have been omitted; however, management believes that
the disclosures made are adequate to make the information
presented not misleading.
The interim results for the nine-month periods ended September 30,
1999 and 1998 are not necessarily indicative of the results for
the full calendar year. These financial statements should be read
in conjunction with the audited consolidated financial statements
as of December 31, 1998 and 1997 of Grupo Iusacell and
subsidiaries and for the three years in the period ended December
31, 1998 and footnotes thereto (the "Audited Financial
Statements"). Refer to Notes 3 and 4 to the Audited Financial
Statements for a discussion of Grupo Iusacell's significant
accounting policies.
F-71
<PAGE> 214
b) Consolidated financial
statements
Those companies in which the Company holds 50% or more of the capital
stock and/or exercises control over day-to-day operating and
financial administration activities ("effective management
control") are included in the consolidated financial statements.
Grupo Iusacell consolidates Iusatel, S.A de C.V.,
Iusatelecomunicaciones, S.A. de C.V., Infotelecom, S.A. de C.V.,
Punto a Punto Iusacell, S.A. de C.V. and Iusacell PCS, S.A. de
C.V., in which Grupo Iusacell owns less than 50% of the voting
common stock, but exercises management control over the day-to-day
operations and financial administration by appointment of the
shareholders and other arrangements.
All significant intercompany 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 the 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.
3. Long term debt and notes payable
As of September 30, the long-term debt of the Company consisted of
the following:
<TABLE>
<CAPTION>
Mexican Pesos
-------------------------------
U.S. Dollars
1999 1999 1998
------------ ------------- -------------
<S> <C> <C> <C>
Long-term bank loan U.S.$125,000 Ps. 1,168,537 Ps. 1,466,536
Unsecured senior notes 150,000 1,402,245 1,759,843
Revolving credit facility 100,000 934,830 1,173,229
Long-term U.S. Eximbank loan 57,192 534,631 --
Long-term commercial bank loan 22,117 206,754 --
Handset facility 4,000 37,392 --
------------ ------------- -------------
Total debt U.S.$458,309 Ps. 4,284,389 Ps. 4,399,608
Less: short term portion 36,417 342,184 --
------------ ------------- -------------
Long term debt U.S.$421,704 Ps. 3,942,205 Ps. 4,399,608
============ ============= =============
</TABLE>
F-72
<PAGE> 215
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%. Interest is payable quarterly.
Eximbank Financing
On July 15,1999, Grupo Iusacell consummated a financing to acquire
cellular infrastructure equipment manufactured in the U.S.A. The
financing consists of a five-year senior secured term facility
provided by UBS AG in the principal amount of approximately $72,500
U.S. dollars, which is guaranteed by the Export-Import Bank of the
United States, and a two-year senior secured term facility provided
bu UBS AG and Commerzbank AG in the principal amount of approximately
$25,700 U.S. dollars, which is not guaranteed by the Export-Import
Bank of the United States. As of September 30, 1999, $79,300 US
dollars of this facility had been drawn down, of which $75,000 U.S.
dollars had been used to refinance a short-term bridge facility which
expired on July 15, 1999. The majority of the equipment secures the
loan.
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 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.
The long-term bank loan, the revolving credit facility and the long-term
unsecured senior notes impose certain restrictive covenants such as
maintenance of certain financial ratios, restrictions on incurring
additional debt, limitations on capital expenditures and restrictions
on the sale or lease of the Grupo Iusacell assets. As of September
30, 1999, as a result of certain waivers and consents obtained from
the bank syndicate which extend for a period of more than twelve
months beyond the balance sheet date, Grupo Iusacell had complied
with all such covenants.
As of September 30, 1999 and 1998, Grupo Iusacell assets collateralizing
long-term debt include substantially all assets used in the cellular
business (including the cellular concessions) and shares in certain
subsidiaries.
At September 30, 1999, the Company's long-term debt matures as follows:
<TABLE>
<CAPTION>
Years ended September 30, U.S. Dollars Mexican Pesos
------------------------- ------------ -------------
<S> <C> <C>
2000 U.S. 36,417 Ps. 342,184
2001 127,138 1,188,524
2002 110,438 1,032,408
2003 11,438 106,926
2004 and thereafter 172,878 1,614,347
------------ -------------
Total U.S. 458,309 Ps. 4,284,389
============ =============
</TABLE>
F-73
<PAGE> 216
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 $150,000
U.S. Dollars, 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 $0.70 U.S.
Dollars per share. During the nine-month period ended September 30,
1999, $31,000 U.S. Dollars were borrowed under the facility, which
amount was immediately converted to Series A shares (see Note 5). As
of September 30, 1999, no borrowings were outstanding under this
facility because all borrowings had been converted into Series A
shares and the facility expired as of June 30, 1999.
Notes payable
As of September 30, 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
variable rate of LIBOR plus 1.5%,
maturing on April 21, 2000 10,000 93,489 --
Bridge loan facility bearing interest
at a variable rate of LIBOR plus 1.0% with
maturity date of December 1998, extended
to July 1999. -- -- 621,811
Other -- -- 2,081
----------- ---------- ----------
Total U.S.$10,000 Ps. 93,489 Ps.623,892
=========== ========== ==========
</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 equal to 1.50% above LIBOR. The Company
drew down the entire U.S.$10,000 available under this facility in April
1999.
Interest rate collar
In July 1998, the Company entered into an interest rate collar agreement
on a notional amount of U.S. $35,000 until July 30, 2002. The collar
agreement limits the maximum effective LIBOR cost to 6.12% if six-month
LIBOR is lower than 7.12% and 7.12% if LIBOR equals or exceeds that
level.
On February 26, 1999, Grupo Iusacell entered into an interest rate
collar agreement with The Chase Manhattan Bank to limit the maximum
interest rate which must be paid on U.S.$ 15,000 of its floating rate
debt. 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, if six-month LIBOR equals or goes above 6.82%, then the maximum
effective LIBOR cost is limited to 6.82%.
F-74
<PAGE> 217
4. Commitments and contingencies
As of September 30, 1999, Nuevo Iusacell and Grupo Iusacell have the
following commitments and contingent liabilities:
a) Grupo Iusacell has entered into operating lease agreements for
administrative offices, sales branches, and service facilities.
Such lease agreements expire at various dates through 2007. Some
agreements contain options for renewal.
b) Mitsubishi Electronics America Inc. ("MELA") filed a complaint in
the United States on July 18, 1996 against Grupo Iusacell, Bell
Atlantic 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 had 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 $0.510 U.S.
Dollars. 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.
c) In December 1997, Grupo Iusacell signed an agreement with Lucent
Technologies to purchase CDMA-based wireless equipment for
$188,000 U.S. Dollars and to install its digital cellular network.
In connection with this contract, Lucent issued trade-in credits
for approximately $93,000 U.S. Dollars, 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.
d) 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 ruled that the
damages suffered by the agency were 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 assessed damages incorrectly.
e) 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.
F-75
<PAGE> 218
f) Pursuant to the joint venture agreement signed between Grupo
Iusacell and Infomin, S.A. de C.V. in 1996 to provide paging
services, Grupo Iusacell committed to contribute up to $10,500
U.S. Dollars. During 1998, $9,032 U.S. Dollars were contributed.
The joint venture agreement establishes the individual and joint
responsibilities of the partners. In case a partner does not
fulfill its responsibilities, sanctions could cause such partner
to lose its investment and incur up to $ 1,000 U.S. Dollars as a
penalty.
5. Contributed capital
At September 30, 1999 and 1998, the issued and outstanding shares of
common stock of the Company, without par value, were as follows:
<TABLE>
<CAPTION>
1999 1998*
------------- -------------
<S> <C> <C>
Series A 736,830,745 848,896,267
Series B -- 5,562,450
Series D -- 186,904,725
Series L -- 150,791,114
Series V 578,200,864 --
------------- -------------
Total 1,315,031,609 1,192,154,556
============= =============
</TABLE>
* Represent capital structure of Grupo Iusacell prior to recapitalization
and restructure plan.
As described in Note 1, the Company completed on August 1999 a
reorganization whereby the capital stock of Nuevo Iusacell was
exchanged for the capital stock of Grupo Iusacell on a one-for-one
basis. Consequently, the issued and outstanding shares of common
stock as of September 30, 1999 and as of September 30, 1998 reflect
the common stock of Nuevo Iusacell and Grupo Iusacell, respectively.
6. Foreign Currency Position
The balance sheet as of September 30 includes assets and liabilities
denominated in U.S. Dollars, as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Monetary assets U.S.$ 47,327 U.S.$ 37,198
Monetary liabilities 603,831 518,781
-------------- --------------
Net monetary liability position
in U.S. Dollars U.S$ 556,504 U.S.$ 481,583
============== ==============
Equivalent in nominal
Mexican pesos Ps. 5,202,350 Ps. 4,866,976
============== ==============
</TABLE>
The exchange rate as of September 30, 1999 and 1998 was Ps. 9.3483 and
Ps. 10.1062 per 1 U.S. Dollar, respectively.
F-76
<PAGE> 219
7. Subsequent Events and Commitments
a) In October 1999, Grupo Iusacell drew down the remaining U.S. $18,900
available under the Eximbank loan facility and, in November 1999,
repaid a U.S. $7,200 amortization installment under the same
facility. In November 1999, in connection with a program to migrate
its analog contract customers to digital service, Grupo Iusacell
agreed to guarantee up to U.S. $6,200 in loans to be made by Banco
Bilbao Vizcaya to its customers for the purchase of digital handsets.
b) Grupo Iusacell failed to pay U.S. $63,000 to Lucent Technologies for
network equipment that it had purchased under a contract requiring
payment on September 30 and October 31, 1999. In addition, Grupo
Iusacell is obligated to pay U.S. $28,000 to Lucent Technologies on
November 30 and December 31, 1999. A portion of the proceeds of Nuevo
Iusacell's U.S.$350,000 senior notes offering, if completed
successfully , will be used to satisfy all or a portion of these
obligations (see Note 7.d)
c) 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 securing the long-term
bank loan and the revolving credit facility with respect to a single
parcel of real property in Leon (in Region 6) with an estimated
market value of Ps.15,900 (approximately U.S.$1,700) because it
believed the amount of the mortgage registration fee excessive and
unreasonable compared to the value of the property. These defaults
triggered cross-defaults among these credit facilities and in its
Ps.93,489 (U.S.$10,000) handset facility. In December 1999, Old
Iusacell obtained irrevocable and unconditional waivers of all these
defaults and a modification of the restrictive covenant under the
long-term bank loan, revolving credit facility and the two U.S.
Eximbank loan facilities to enable it to make capital expenditures in
excess of the maximum amount permitted for 1999 and to increase the
maximum amount of capital expenditures permitted for 2000. Old
Iusacell paid customary fees to receive these waivers.
d) On December 16, 1999, Nuevo Grupo Iusacell completed an offering of
U.S.$ 350,000 Senior Notes due 2006, bearing interest at a fixed rate
of 14.25%.
8. Differences between Mexican and United States Generally Accepted Accounting
Principles
The Company's consolidated financial statements are prepared based on
accounting principles generally accepted in Mexico ("Mexican GAAP"),
which differ in certain significant respects from United States
generally accepted accounting principles ("U.S. GAAP").
The following reconciliation to U.S. GAAP does not include the reversal
of the adjustments to the financial statements for the effects of
inflation required under Mexican Bulletin B-10.
The application of Bulletin B-10 represents a comprehensive measure of
the effects of price-level changes in the financial statements based
on historical cost for Mexican and U.S. accounting purposes. The
principal differences, other than inflation accounting, together with
an explanation where appropriate, of the adjustments that affect
stockholders' equity, consolidated net income and consolidated
comprehensive income as of September 30, 1999 and 1998 and for each
of the nine-month periods ended September 30, 1999 and 1998 are as
follows:
F-77
<PAGE> 220
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.
SFAS109 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.
SFAS109 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.
Mexican tax law requires payment of a 1.8% tax on the Company's
net assets which may be used to offset future income tax
obligations. Under Mexican GAAP, the net asset tax is charged
to the provision for income taxes. Under SFAS 109, such
amounts are treated as a deferred tax benefit and offset by a
valuation allowance, if required.
Employee profit sharing expense, which is based on each
subsidiary's taxable income after certain statutory
adjustments, is included in the income tax provision under
Mexican GAAP. The provision for employee profit sharing is
charged to operations for U.S. GAAP purposes.
b) Pre-operating costs
Under Mexican GAAP, the Company capitalized certain pre-operating
costs, primarily related to Project 450. On September 30,
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.
Under U.S. GAAP, pre-operating costs are expensed as incurred. The
Mexican GAAP adjustment for the nine-month period ended
September 30, 1998 represents the pre-operating costs that
were originally written off for US GAAP purposes.
F-78
<PAGE> 221
c) Minority interest
Under Mexican GAAP, the minority interest in consolidated
subsidiaries is presented as a separate component within the
stockholders' equity section of the consolidated balance
sheet. For U.S. GAAP purposes, minority interest is not
included in stockholders' equity and accordingly is deducted
as a reconciling item to arrive at U.S. GAAP equity.
d) Basic and fully diluted loss per share
Mexican GAAP requires 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
nine-month periods ended September 30, 1999 and 1998 as the
drawdowns and conversions under the facility with Bell
Atlantic and the shares subject to the Stock Purchase Plan are
excluded from the computation of diluted earnings (loss) per
share because to do so would have been antidilutive for the
periods presented.
e) Effects 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 to such adjustments.
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 income under U.S. GAAP for the nine-month
periods ended September 30, 1999 and 1998 in Note 8 h) below.
F-79
<PAGE> 222
g) Interest rate collar
Effective July 30, 1998, in connection with the $225,000 U.S.
Dollars credit agreement (see Note 3), the Company was
required to enter into an interest rate 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 $35,000 U.S. Dollars
of its floating rate debt. The cap rates range from 6.12% to
7.12% above six-month LIBOR with the floor rates ranging from
5.30% to 6.12% above six-month LIBOR. The interest rate collar
matures on July 30, 2002.
On February 26, 1999, the Company entered into another interest
rate collar agreement to limit the maximum interest rate which
must be paid on U.S.$15,000 of its floating rate debt. 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, if six-month LIBOR equals or goes above 6.82%,
then the maximum effective LIBOR cost is limited to 6.82%.
Under Mexican GAAP, the interest rate collar agreements are
recorded on a cash basis. Under US 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 is included in accrued other expenses at the
balance sheet date.
The $50,000 U.S. Dollar million 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 agreement. 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 agreement is Ps.1,847
($198 U.S. Dollars) and Ps.15,912 ($1,385 U.S. Dollars) as of
September 30, 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.
h) Net income (loss) and stockholders' equity under U.S. GAAP
The following is a summary of net income (loss) and stockholders'
equity adjusted to take into account certain material
differences between Mexican GAAP and U.S. GAAP:
F-80
<PAGE> 223
<TABLE>
<CAPTION>
Nine-month periods
ended September 30,
-----------------------------------
1999 1998
------------- ----------------
<S> <C> <C>
Net income (loss) as reported under
Mexican GAAP Ps. 619,322 (Ps. 1,768,748)
Deferred income taxes (18,870) 4,274
Pre-operating expenses -- 174,996
Effect of inflation accounting on US GAAP
adjustments (16,027) (10,144)
Interest rate collar (1,847) (15,912)
------------ --------------
Net income (loss) under U.S. GAAP Ps. 582,578 (Ps. 1,615,534)
============ ==============
Weighted average number of
shares outstanding (thousands) 1,269,997 1,095,646
============ ==============
Basic and diluted net income (loss)
per share (pesos) Ps. 0.46 (Ps. 1.47)
============ ==============
</TABLE>
Comprehensive loss:
<TABLE>
<CAPTION>
Nine-month periods
ended September 30,
-----------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Net income (loss) under U.S. GAAP Ps. 582,578 (1,615,534)
Inflation effects for the period 16,027 (41,620)
-------------- -------------
Comprehensive loss Ps. 598,605 (Ps.1,657,154)
============== ==============
Accumulated comprehensive loss (Ps. 5,720,214) (Ps. 6,549,562)
============== ==============
</TABLE>
<TABLE>
<CAPTION>
Nine-month periods
ended September 30,
-----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Stockholders' equity under Mexican GAAP Ps. 5,403,279 Ps. 3,348,921
Minority interest (28,472) 25,369
Deferred income taxes (18,870) 147,688
Interest rate collar (1,847) (15,912)
------------- -------------
Stockholders' equity as reported under
U.S. GAAP Ps. 5,354,090 Ps. 3,506,066
============= =============
</TABLE>
F-81
<PAGE> 224
Changes in Stockholders' equity under US GAAP are as follows:
<TABLE>
<CAPTION>
Contributed Accumulated Loss for
Capital Losses The year Total
--------------- ------------------ -------------- -------------
<S> <C> <C> <C> <C>
Balances as of 12/31/97 8,391,205 (3,219,856) (884,166) 4,287,183
Application of 1997
net loss (884,166) 884,166 --
Increase in capital
stock 876,037 876,037
Effects of inflation (41,620) (41,620)
Net income for the
period (1,615,534) (1,615,534)
---------- ---------- ---------- ----------
Balances as of
9/30/98 9,267,242 (4,145,642) (1,615,534) 3,506,066
========== ========== ========== ==========
Balances as of 12/31/98
9,557,908 (4,115,642) (1,414,792) 4,027,474
Application of 1998
net loss (1,414,792) 1,414,792 --
Effect of
reorganization (5,530,434) 5,530,434 --
Effect of primary and
rights offerings 728,011 728,011
Effects of inflation 16,027 16,027
Net loss for the period
582,578 582,578
---------- ---------- ---------- ----------
Balances as of 9/30/99
4,755,485 16,027 582,578 5,354,090
========== ========== ========== ==========
</TABLE>
i) Supplementary U.S. GAAP disclosures
---------------------------------------------------
1) Cash flow information
Since Statement of Financial Accounting Standards No.95,
"Statement of Cash Flows" ("SFAS 95") does not provide any
specific guidance with respect to inflation adjusted financial
statements for U.S. GAAP purposes, the following cash flow
statement is presented, using U.S. GAAP balance sheets
restated for inflation.
Monetary gains and losses and unrealized foreign exchange gains
and losses have been included as operating cash flow
reconciling items. Other items have been included based on
their cash flows, adjusted by inflation.
F-82
<PAGE> 225
<TABLE>
<CAPTION>
Nine-month periods ended
------------------------
September 30,
-------------
1999 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net income (loss) under U.S. GAAP Ps. 582,578 (Ps.1,615,534)
Adjustments to reconcile net income (loss) to
cash used in operating activities:
Depreciation and amortization 967,396 1,427,017
Equity in earnings of associated companies (2,587) (20,252)
Increase in allowance for doubtful accounts 47,338 33,217
Increase in allowance for obsolete and
slow-moving inventories 3,394 6,140
Minority interest (10,699) (3,339)
Deferred income taxes and employee profit sharing 130,852 33,997
(Gain) loss on net monetary position and foreign
exchange losses (828,871) 588,939
Changes in operating assets and liabilities:
Accounts receivable (289,599) (303,583)
Inventories (2,118) 45,571
Trade accounts payable and related parties 119,408 (717,475)
Taxes and other payable 195,817 370,064
Income tax (159,623) (8,140)
Other (515) (265)
----------- -------------
Cash provided (used) by operating activities 752,771 (163,644)
----------- -------------
Investing activities:
Purchase of property and equipment, net (1,241,723) (2,455,987)
Investment in associated companies, net of cash
acquired (159,899) (11,493)
Purchase of other assets (444,867) (382,861)
----------- -------------
Total cash used in investing activities (1,846,489) (2,850,342)
----------- -------------
Financing activities:
Proceeds from notes payable and long-term debt 515,259 3,036,254
Payments of notes payable and long-term debt (291,912) (9,029)
Effects of primary and rights offering 728,011 --
----------- -------------
Total cash provided by financing activities 951,358 3,027,224
----------- -------------
Net (decrease) increase in cash and cash equivalents (142,360) 13,239
Cash and cash equivalents at beginning of period 280,184 152,993
----------- -------------
Cash and cash equivalents at the end of period Ps. 137,824 Ps. 166,232
=========== =============
Supplemental disclosure of non-cash activities:
Conversion of debt under the Bell Atlantic facility Ps. -- Ps. 741,201
=========== =============
</TABLE>
F-83
<PAGE> 226
2) The provision for income taxes for the nine-month periods ended
September 30, was as follows:
<TABLE>
<CAPTION>
Nine-month periods ended
------------------------
September 30,
-------------
1999 1998
----------- ----------
<S> <C> <C>
Asset tax not offset by current taxes Ps. 111,982 Ps. 38,271
Deferred taxes 18,870 (4,274)
----------- ----------
Tax expense Ps. 130,852 Ps. 33,997
=========== ==========
</TABLE>
3) Deferred income taxes
Significant components of deferred income taxes under U.S. GAAP
are as follows:
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------------
SFAS 109 SFAS 109
applied to applied to
Mexican GAAP US GAAP Total
balances adjustments
-------------- ------------ -----------
<S> <C> <C> <C>
Deferred liabilities:
Inventories Ps. 98,485 Ps. -- Ps. 98,485
Property and equipment 253,531 -- 253,531
Cellular telephones to be
amortized 113,736 -- 113,736
Concessions 2,915 -- 2,915
------------ -------- ------------
Deferred tax liabilities 468,667 -- 468,667
------------ -------- ------------
Deferred assets:
Allowance for doubtful
accounts 35,647 -- 35,647
Net operating loss carryforward
and tax credits 1,222,133 -- 1,222,133
Reorganization reserve 22,246 -- 22,246
Interest rate collar -- 628 628
Allowance for deferred
tax assets (649,112) (628) (649,740)
------------ -------- ------------
Deferred tax assets 630,914 -- 630,914
------------ -------- ------------
Net deferred tax assets Ps. 162,247 Ps. -- Ps. 162,647
============ ======== ============
</TABLE>
F-84
<PAGE> 227
<TABLE>
<CAPTION>
September 30, 1998
--------------------------------------------
SFAS 109 SFAS 109
applied to applied to
Mexican GAAP US GAAP Total
balances adjustments
-------------- ------------ ------------
<S> <C> <C> <C>
Deferred liabilities:
Inventories Ps. 94,629 Ps. -- Ps. 94,629
Property and equipment 258,934 -- 258,934
Cellular telephones to be
amortized 114,263 -- 114,263
Concessions 2,599 -- 2,599
------------- ---------- --------------
Deferred tax liabilities 470,425 -- 470,425
------------- ---------- --------------
Deferred assets:
Allowance for doubtful accounts 34,768 -- 34,768
Net operating loss carryforwards
and tax credits 1,169,717 -- 1,169,717
Reorganization reserve 26,483 -- 26,483
Allowance for deferred
tax assets (629,999) -- (629,999)
------------- ---------- --------------
Deferred tax assets 600,969 -- 600,969
------------- ---------- --------------
Net deferred tax assets Ps. 130,544 Ps. -- Ps. 130,544
============= ========== ==============
</TABLE>
The Company has recorded a deferred tax asset of Ps.1,222,133 reflecting
the benefit of tax loss carryforwards, which expire in varying amounts
between 2001 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 September 30, 1999 will be realized based on the following:
(i) the net deferred tax asset amounting to Ps.162,247 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, and
(ii) although the Group has generated operating losses for the past
five years, it believes that it is more likely than not that the
net deferred tax asset will be realized based on Group's business
plan based estimate of future taxable income over the next five
years in an amount sufficient to utilize the net deferred tax
losses recorded as of September 30, 1999.
F-85
<PAGE> 228
4) Disclosure of certain risks and uncertainties:
a) Foreign currency risk
A substantial amount of the Company's debt obligations, including
the long-term bank loan and unsecured senior notes, are
denominated in U.S. Dollars, while the Company generates revenues
in Pesos. Therefore, the Company is exposed to currency exchange
rate risks that could significantly affect the Company's ability
to meet its obligations. The exchange rate of 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 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 short-term
foreign debt and its long-term debt obligations. The Company does
not currently have in place hedging arrangements with respect to
this foreign currency risk. However, the Company expects to hedge
utilizing forward-rate contracts, its exchange rate exposure for
up to 50% of the principal and interest payments coming due over
the next 18 months. The Company is also considering limited
hedging alternatives for up to an additional 50% of the remaining
outstanding principal and interest obligations coming due over the
next 18 months.
b) Working capital deficiency
The Company's consolidated financial statements for the nine-month
period ended September 30, 1999 have been prepared on a going
concern basis which contemplates the realization of assets and
settlement of liabilities in the normal course of business. Under
US GAAP, the Company had negative working capital of Ps.1,188,967
at September 30, 1999. The continuation of the Company as a going
concern is dependent upon its ability to generate sufficient cash
from operations and financing activities. In this regard,
management expects operational cash flows in the coming years, and
its plans include raising additional financing to fully develop
digital CDMA based wireless and PCS services. As mentioned in Note
7.d, the Company completed the offering of U.S.$350,000 Senior
Notes due 2006 (see Note 7.d).
12. Condensed financial information
Presented below is condensed consolidating financial information for
i) the parent company; ii) the combined guarantor subsidiaries;
iii) the combined non-guarantor subsidiaries; iv) eliminations;
and v) the Company's consolidated financial statements. The
subsidiary guarantees are full, unconditional, joint and several.
Where applicable, the equity method has been used by the parent
Company with respect to its investments in subsidiaries for the
respective periods presented.
The Company has not presented separate financial statements and other
disclosures concerning each of the subsidiary guarantors because
management believes that such information is not material to
investors.
F-86
<PAGE> 229
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term
investments Ps. 4,659 Ps. 31,083 Ps. 913 Ps. 101,169 Ps. 137,824
------------- ------------- ------------- ------------ -------------
Accounts receivable:
Trade -- 515,817 17,462 (65,839) 467,440
Related parties 1,663,091 910,099 -- (2,561,738) 11,452
Recoverable taxes
and other 314,518 253,958 188,455 (68,306) 688,625
------------- ------------- ------------- ------------ -------------
1,977,609 1,679,874 205,917 (2,695,883) 1,167,517
------------- ------------- ------------- ------------ -------------
Inventories 62,269 264,088 21,688 (58,384) 289,661
------------- ------------- ------------- ------------ -------------
Total current assets 2,044,537 1,975,045 228,518 (2,653,098) 1,595,002
Investment in associated
companies 1,857,490 320,953 -- (1,995,700) 182,743
Property and equipment,
net 4,916,238 859,295 732,109 (19,357) 6,488,285
Other assets 348,937 699,101 103,709 699,918 1,851,665
Excess of investment
cost over book value 1,794,365 29,721 -- -- 1,824,086
------------- ------------- ------------- ------------ -------------
Total assets Ps.10,961,567 Ps. 3,884,115 Ps. 1,064,336 (Ps.3,968,237) Ps.11,941,781
============= ============= ============= ============ =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable Ps. 225,341 Ps. -- Ps. -- Ps. 210,347 Ps. 537,421
Trade accounts payable 904,622 248,995 25,254 (101,057) 1,077,814
Related parties -- -- 1,539,891 (1,413,743) 126,148
Taxes and other payable 299,675 540,464 870 107,900 948,909
Income tax 4,571 5 153,213 (152,342) 5,447
------------- ------------- ------------- ------------ -------------
Total current liabilities 1,434,209 789,464 1,719,228 (1,348,895) 2,594,006
Long-term debt 4,152,551 -- -- (210,346) 3,942,205
Commitments and
contingencies -- 2,233 58 -- 2,291
------------- ------------- ------------- ------------ -------------
Total liabilities 5,586,760 791,697 1,719,286 (1,559,241) 6,538,502
------------- ------------- ------------- ------------ -------------
Stockholders' equity:
Capital contributions 4,755,485 5,269,565 1,077,660 (6,347,225) 4,755,485
Earned capital 619,322 (2,188,050) (1,732,610) 3,920,660 619,322
Minority interest -- 10,903 -- 17,569 28,472
------------- ------------- ------------- ------------ -------------
Total stockholders' equity 5,374,807 3,092,418 (654,950) (2,408,996) 5,403,279
------------- ------------- ------------- ------------ -------------
Total liabilities and
stockholders' equity Ps.10,961,567 Ps.3,884,115 Ps.1,064,336 (Ps.3,968,237) Ps.11,941,781
============= ============= ============= ============ =============
Total stockholders' equity
under Mexican GAAP Ps. 5,374,807 Ps.3,092,418 (Ps. 654,950) (Ps.2,408,996) Ps. 5,403,279
Minority interest -- (10,903) -- (17,569) (28,472)
Deferred income taxes (6,326) (15,179) (1,809) 4,444 (18,870)
Interest rate collar (1,847) -- -- -- (1,847)
------------- ------------- ------------- ------------ -------------
Total stockholders' equity
under US GAAP Ps. 5,366,634 Ps.3,066,336 (Ps. 656,759) (Ps.2,422,121) Ps. 5,354,090
============= ============= ============= ============ =============
</TABLE>
F-87
<PAGE> 230
CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues Ps. 347,368 Ps. 4,037,177 Ps. 382,605 (Ps. 1,858,644) Ps. 2,908,506
Total cost of sales 15,599 1,580,795 290,218 (944,815) 941,797
------------ -------------- ------------ -------------- --------------
Gross profit 331,769 2,456,382 92,387 (913,829) 1,966,709
Operating expenses 42,246 1,718,709 147,094 (944,607) 963,442
Depreciation and
amortization 434,720 494,702 41,687 (3,713) 967,396
------------ -------------- ------------ -------------- --------------
Operating profit (loss) (145,197) 242,791 (96,394) 34,491 35,871
------------ -------------- ------------ -------------- --------------
Integral financing cost (gain):
Interest expense, net (88,470) (97,336) 233,721 114,836 162,751
Foreign exchange loss, net (274,742) (51,807) 1,254 2 (325,293)
Gain from monetary
position (351,185) 71,025 (121,374) (118,071) (519,605)
------------ -------------- ------------ -------------- --------------
714,397 (78,118) 113,601 (3,233) (682,147)
------------ -------------- ------------ -------------- --------------
Equity participation in net
(gain) loss of associated
companies 2,587 -- -- -- 2,587
Provision for assets tax 67,858 22,805 (65) 21,384 111,982
Minority interest 12,169 1,470 -- -- 10,699
------------ -------------- ------------ -------------- --------------
Net (loss) profit
for the year Ps. 516,098 Ps. 296,814 (Ps. 209,930) Ps. 16,340 Ps. 619,322
============ ============== ============ ============== ===============
Net loss for the year under
Mexican GAAP Ps. 516,098 Ps. 296,814 (Ps. 209,930) Ps. 16,340 Ps. 619,322
Deferred income taxes (6,326) (15,179) (1,809) 4,444 (18,870)
Interest rate collar (1,847) -- -- -- (1,847)
Gain on net monetary
Position (5,373) (12,892) (1,536) 3,774 (16,027)
------------ -------------- ------------ -------------- --------------
Net (loss) profit for the
year under US GAAP Ps. 502,552 Ps. 268,743 (Ps. 213,275) Ps. 24,558 Ps. 582,578
============ ============== ============ ============== ===============
</TABLE>
F-88
<PAGE> 231
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW FOR THE NINE-
MONTH PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
-------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net profit (loos) for the year Ps. 502,552 Ps. 268,743 (Ps. 213,275) Ps. 24,558 Ps. 582,578
Adjustments to reconcile
cash provided by (used in)
operating activities:
Depreciation and amortization 434,720 494,702 41,687 (3,713) 967,396
Equity in net (earnings) of
Associated companies (2,587) -- -- -- (2,587)
Increase in allowance
for doubtful accounts -- 52,237 1,768 (6,667) 47,338
Increase in allowance for
obsolete and slow-moving
inventories 730 3,094 254 (684) 3,394
Minority interest (12,169) 1,470 -- -- (10,699)
Deferred income taxes and
employee profit sharing 74,184 37,984 1,744 16,940 130,852
Gain on net monetary
position and foreign
exchange losses (620,554) 32,110 (118,584) (121,843) (828,871)
Changes in operating
assets and liabilities:
Accounts receivable (38,574) (387,605) 213,906 (77,325) (289,599)
Inventories (57,983) (84,923) 3,193 137,595 (2,118)
Trade accounts payable
and related parties (12,057) (396,253) 55,724 471,994 119,408
Taxes and other payable (186,292) 377,940 (136,366) 140,535 195,817
Income tax (113,761) (24,145) 152,009 (173,726) (159,623)
Other -- (516) 1 -- (515)
------------- ------------ ------------ ------------- -------------
Net cash provided by (used
in) operating activities (31,792) 374,838 2,061 407,664 752,771
------------- ------------ ------------ ------------- -------------
Financing activities:
Proceeds from notes payable
and long-term debt 378,091 -- -- 137,168 515,259
Payments of notes payable
and long-term debt (337,321) -- -- 45,409 (291,912)
Effects of primary and rights
Offerings 834,461 84,999 (20,540) (170,909) 728,011
------------- ------------ ------------ ------------- -------------
Net cash provided by (used
in) financing activities 875,231 84,999 (20,540) 14,894 951,358
------------- ------------ ------------ ------------- -------------
Investing activities:
Purchase of property and
equipment, net (1,319,393) (244,207) (31,067) 350,944 (1,241,723)
Investment in associated
companies, net of cash
acquired 239,435 (136,736) -- (262,598) (159,899)
Purchase of other assets (7,527) (21,941) (8,057) (407,342) (444,867)
------------- ------------ ------------ ------------- -------------
Net cash (used in) provided
by investing activities (1,087,485) (400,884) (39,124) (318,996) (1,846,489)
------------- ------------ ------------ ------------- -------------
Net increase (decrease)
in cash (244,046) 58,953 (57,603) 100,336 (142,360)
Cash at beginning of year 248,705 (27,870) 58,516 833 280,184
------------- ------------ ------------ ------------- -------------
Cash at the end of year Ps. 4,659 Ps. 31,083 Ps. 913 Ps. 101,169 Ps. 137,824
============= ============ ============ ============= =============
</TABLE>
F-89
<PAGE> 232
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term
investments Ps. 125,773 (Ps. 2,239) Ps. 40,998 Ps. 1,700 Ps. 166,232
--------------- -------------- -------------- --------------- --------------
Accounts receivable:
Trade -- 336,172 16,563 (54,476) 298,258
Related parties 2,759,646 -- -- (2,742,023) 17,624
Recoverable taxes and
other 176,293 127,180 105,442 66,273 475,189
--------------- -------------- -------------- --------------- --------------
2,935,939 463,352 122,005 (2,730,226) 791,071
--------------- -------------- -------------- --------------- --------------
Inventories 120,025 140,382 48,343 (30,428) 278,322
--------------- -------------- -------------- --------------- --------------
Total current assets 3,181,738 601,495 211,346 (2,758,954) 1,235,625
Investment in associated
companies 1,676,672 49,236 -- (1,708,081) 17,827
Property and equipment,
net 3,489,133 1,221,408 514,297 (70,123) 5,154,715
Other assets 296,432 703,451 92,560 621,756 1,714,199
Excess of investment
cost over book value 1,874,192 31,899 -- 232 1,906,323
--------------- -------------- -------------- --------------- --------------
Total assets Ps. 10,518,166 Ps. 2,607,489 Ps. 818,203 (Ps. 3,915,170) Ps. 10,028,689
=============== ============== ============== =============== ==============
LIABILITIES
Current liabilities:
Notes payable Ps. 623,892 Ps. -- Ps. -- Ps. -- Ps. 623,892
Trade accounts payable 468,362 193,336 88,469 (30,427) 719,739
Related parties -- 863,419 1,341,890 (2,049,940) 155,369
Taxes and other payable 564,474 211,374 90,001 (127,080) 738,769
Income tax 38,162 20 -- -- 38,182
--------------- -------------- -------------- --------------- --------------
Total current liabilities 1,694,890 1,268,150 1,520,360 (2,207,448) 2,275,951
Long-term debt 4,399,608 -- -- -- 4,399,608
Trade accounts payable,
long-term 1,469 -- -- -- 1,469
Commitments and
contingencies -- 2,687 52 -- 2,740
--------------- -------------- -------------- --------------- --------------
Total liabilities 6,095,966 1,270,837 1,520,412 (2,207,448) 6,679,768
--------------- -------------- -------------- --------------- --------------
Stockholders' equity:
Capital contributions 9,245,843 3,703,417 939,413 (4,621,431) 9,267,242
Earned capital (4,783,091) (2,381,715) (1,641,622) 2,913,476 (5,892,952)
Minority interest (40,551) 14,950 -- 232 (25,369)
--------------- -------------- -------------- --------------- --------------
Total stockholders' equity 4,422,200 1,336,652 (702,209) (1,707,723) 3,348,921
--------------- -------------- -------------- --------------- --------------
Total liabilities and
stockholders' equity Ps. 10,518,166 Ps. 2,607,489 Ps. 818,203 (Ps. 3,915,170) Ps. 10,028,689
=============== ============== ============== =============== ==============
</TABLE>
F-90
<PAGE> 233
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Total stockholders' equity
under Mexican GAAP Ps. 4,422,200 Ps. 1,336,652 (Ps. 702,209) (Ps. 1,707,723) Ps. 3,348,921
Minority interest 40,319 (14,950) -- -- 25,369
Deferred income taxes 18,241 (14,068) 25,358 118,157 147,688
Interest rate collar (15,912) -- -- -- (15,912)
-------------- -------------- ------------- -------------- --------------
Total stockholders' equity
under US GAAP Ps. 4,464,849 Ps. 1,307,634 (Ps. 676,851) (Ps. 1,589,566) Ps. 3,506,066
============== ============= ============= ============== ==============
</TABLE>
CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
------------- ------------ -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Total revenues Ps. 203,361 Ps.3,080,921 Ps. 290,363 (Ps. 1,297,260) Ps. 2,277,384
Total cost of sales 14,641 1,290,029 239,143 (777,651) 766,163
------------- ------------ -------------- -------------- --------------
Gross profit 188,719 1,790,891 51,220 (519,610) 1,511,221
Operating expenses 44,521 1,213,406 147,668 (519,182) 886,412
Depreciation and
Amortization 249,321 344,123 22,207 (34) 615,617
450 Project write-down -- -- 986,396 -- 986,396
------------- ------------ -------------- -------------- --------------
Operating profit (loss) (105,122) 233,362 (1,105,050) (394) (977,204)
------------- ------------ -------------- -------------- --------------
Integral financing result:
Interest expense, net (139,720) 147,357 162,013 28,421 198,070
Foreign exchange loss,
net 911,295 94,617 5,371 -- 1,011,283
Gain from monetary
position (172,695) (71,402) (159,813) (28,578) (432,489)
------------- ------------ -------------- -------------- --------------
598,879 170,571 7,571 (157) 776,864
------------- ------------ -------------- -------------- --------------
Equity participation in net
(gain) loss of associated
companies 2,476 17,694 -- 81 20,252
Provision for assets tax 27,816 10,301 154 -- 38,271
Minority interest 4,661 (1,322) -- -- 3,339
------------- ------------ -------------- -------------- --------------
Net (loss) profit
for the year Ps. 724,680 Ps. 68,862 (Ps. 1,112,775) (Ps. 155) (Ps. 1,768,748)
============= ============ ============== ============== ==============
Net (loss) profit
for the year under
Mexican GAAP (Ps. 724,680) Ps. 68,862 (Ps. 1,112,774) (Ps. 155) (Ps. 1,768,748)
Deferred income taxes (67,229) (43,988) 12,759 102,731 4,274
Preoperating costs -- 174,996 -- -- 174,996
Interest rate collar (15,912) -- -- -- (15,912)
Loss on net monetary
position (6,011) (3,093) 209 (1,249) (10,144)
------------- ------------ -------------- -------------- --------------
Net (loss) profit for the
year under US GAAP (Ps. 813,832) Ps. 196,778 (Ps. 1,099,805) Ps. 101,327 (Ps. 1,615,534)
============= ============ ============== ============== ==============
</TABLE>
F-91
<PAGE> 234
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Combined Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net gain (loss)
for the year (Ps. 813,832) Ps. 196,778 (Ps.1,099,805) Ps. 101,327 (Ps.1,615,534)
Adjustments to reconcile
net cash provided
by (used in) operating
activities:
Depreciation and
amortization 249,321 169,127 22,207 (34) 440,621
450 Project write down -- -- 986,396 -- 986,396
Equity in net loss (earnings)
of associated companies (2,476) (17,694) -- (81) (20,252)
Increase in allowance for
doubtful accounts -- 37,267 1,621 (5,671) 33,217
Increase in allowance for
obsolete and slow-moving
inventories 2,648 3,097 1,067 (672) 6,140
Minority interest (4,661) 1,322 -- -- (3,339)
Deferred income taxes and
employee profit sharing 95,046 54,288 12,606 (102,732) 33,997
Gain on net monetary
position and foreign
exchange losses 744,611 26,307 (154,652) (27,328) 588,939
Changes in operating
assets and liabilities:
Accounts receivable (143,610) (106,179) 3,610 (57,404) (303,583)
Inventories (104,204) 148,621 (252) 1,406 45,571
Trade accounts payable
and related parties (638,329) (4,366) (109,149) 34,370 (717,475)
Taxes and other payable 435,504 (28,559) 35,686 (72,567) 370,064
Income Tax 3,982 (13,018) (1,480) 2,377 (8,140)
Other -- 121 (147) (238) (265)
--------------- -------------- ------------- ------------ -------------
Net cash provided by
(used in) operating
activities (176,001) 467,111 (327,505) (127,247) (163,643)
--------------- -------------- ------------- ------------ -------------
Financing activities:
Proceeds from notes payable
and long-term debt 2,345,009 -- -- 691,245 3,036,254
Payments of notes payable
and long-term debt (9,029) -- -- -- (9,029)
--------------- -------------- ------------- ------------ -------------
Net cash provided by
(used in) financing
activities 2,335,979 -- -- 691,245 3,027,224
--------------- -------------- ------------- ------------ -------------
</TABLE>
F-92
<PAGE> 235
<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 (1,737,805) (296,555) (369,128) (52,499) (2,455,987)
Investment in associated
companies, net of cash
acquired (535,391) (4,214) 10,873 517,239 (11,493)
Purchase of other assets 78,205 (175,770) 725,256 (1,010,553) (382,861)
----------- ---------- --------- ------------ ------------
Net cash (used in)
provided by investing
activities (2,194,990) (476,539) 367,001 (Ps. 545,813) (2,850,342)
----------- ---------- --------- ------------ ------------
Net increase (decrease)
in cash (19,100) (9,427) 39,496 18,184 13,240
Cash at beginning of year 144,873 7,187 1,501 (569) 152,993
----------- ---------- --------- ------------ ------------
Cash at the end of year Ps. 125,773 (Ps. 2,239) Ps.40,997 Ps. 17,616 Ps. 166,233
=========== ========== ========= ============ ============
</TABLE>
- - - - - - - - - - - - - - - - - - - -
F-93
<PAGE> 236
ANNEX A
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.
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-wide radius.
LATA: Local Access and Transport Area; an area in which a local
exchange carrier is permitted to provide service as
designated by the 1982 United States federal court decree
resulting from antitrust litigation brought by the United
States Department of Justice against AT&T Corporation.
PCS: Personal Communications Services; PCS has come to represent
tow 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 customers.
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.
A-1
<PAGE> 237
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 1994, 1995, 1996, 1997
and 1998 have been calculated by applying the forecast annual
population growth rate for 1992 and 1995, as published by the
Instituto Nacional de Estadistica, Geografia e Informatica
(the National Institute of Statistics, Geography and Data
Processing, "INEGI") to the official 1990 census figures.
Where the population information is set forth without
reference to a year, the information given is as of December
31, 1998. 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, 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, Ciudad Victoria, Tampico, Reynosa and Matamoros.
Region 5: Consists of the states of Colima, Jalisco, Michoacan and
Nayarit (except for twelve municipalities in northeastern
Jalisco). Major cities in the region include Guadalajara
(population 1.8 million), Mexico's second largest city,
Morelia, Tepic, Colima and Manzanillo.
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, San Luis Potosi,
Aguascalientes and Zacatecas.
A-2
<PAGE> 238
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, Tuxtla Gutierrez and
San Cristobal de las Casas.
Region 9: Consists of the states of Mexico, Hidalgo and Morelos and the
Federal District. Major cities in the region include Mexico
City, one of the world's most populous cities, Toluca,
Cuernavaca and Pachuca.
roaming: A service offered by mobile communications providers which
allows a subscriber to use his or her telephone while in the
service area of another carrier.
SCT: Secretaria de Comunicaciones y Transportes, the Mexican
Telecommunications and Transportation Secretariat.
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.
A-3
<PAGE> 239
The Exchange Agent for the Exchange Offer is:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
If by Hand, Express Mail or Facsimile Transmission
Overnight Courier: Number: If by Mail:
The Bank of New York (212) 815-6213 The Bank of New York
101 Barclay Street P.O. Box 11248
New York, New York 10286 Telephone Number: Church Street Station
Attention: Receive and Deliver (800) 507-9357 New York, New York 10286-1248
Attention: Tender and
Window Exchange
Department
</TABLE>
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES OF THIS PROSPECTUS
MAY BE DIRECTED TO IUSACELL'S GENERAL COUNSEL AT +525-109-4400. YOU MAY ALSO
CONTACT YOUR BROKER, DEALER, COMMERCIAL BANK OR TRUST COMPANY OR OTHER NOMINEE
FOR ASSISTANCE CONCERNING THE EXCHANGE OFFER.
<PAGE> 240
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Mexican law, when an officer of a corporation acts within the scope
of his authority, the corporation will answer for any resulting liabilities or
expenses.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <C> <S>
1.1 -- Form of Exchange Agent Agreement.**
2.1 -- 1998 Company Exchange and Rights Offer and Shareholder
Secondary Offering Agreement dated as of August 6, 1998
among Bell Atlantic Latin America Holdings, Inc., Bell
Atlantic International, Inc., Bell Atlantic New Zealand
Holdings, Inc., Carlos Peralta Quintero, IUSA Grupo
Comunicaciones, S.A. de C.V., FIUSA Pasteje, S.A. de C.V.,
Langness Investments Limited, Inmobiliaria Reforma Lomas
Altas, S.A. de C.V., Fraccionadora y Constructora Mexicana,
S.A. de C.V., Confecciones Pasteje, S.A. de C.V., Interelec,
S.A. de C.V., Grupo Iusacell, S.A. de C.V. and the
Registrant.*
2.2 -- Amendment Number 1 to the 1998 Company Exchange and Rights
Offer and Shareholder Secondary Offering Agreement.*
3.1 -- By-laws (estatutos) of Registrant.*
4.1 -- Form of Amended and Restated Deposit Agreement between The
Bank of New York and the Registrant.**
5.1 -- Opinion of De Ovando y Martinez del Campo, S.C., special
Mexican counsel to the Registrant, regarding the validity of
the series V shares.**
8.1 -- Opinion of De Ovando y Martinez del Campo, S.C., special
Mexican counsel to the Registrant, regarding tax matters.**
8.2 -- Opinion of Clifford Chance Rogers & Wells LLP, special U.S.
counsel to the Registrant, regarding tax matters.**
10.1 -- English translation of Cellular Concession for Region 9
dated October 3, 1989.**
10.2 -- English translation of Cellular Concession for Region 5
dated July 17, 1990.**
10.3 -- English translation of Cellular Concession for Region 6
dated July 14, 1990.**
10.4 -- English translation of Cellular Concession for Region 7
dated July 14, 1990.**
10.5 -- English translation of Point to Point Microwave Links
Concession dated June 4, 1998.**
10.6 -- English translation of PCS Concession for Regions 1 and 4
dated October 12, 1998.**
10.7 -- English translation of Satellite Services Permit dated
December 15, 1991.**
15.1 -- Acknowledgement of PricewaterhouseCoopers.**
21.1 -- List of subsidiaries of Registrant.*
23.1 -- Consent of PricewaterhouseCoopers.**
23.2 -- Consent of De Ovando y Martinez del Campo, S.C., special
Mexican counsel to the Registrant (contained in Exhibit
5.1).
23.3 -- Consent of Clifford Chance Rogers & Wells LLP, special
counsel to the Registrant (contained in Exhibit 8.2).
24.1 -- Powers of attorney (included on signature page to
Registration Statement).
</TABLE>
II-1
<PAGE> 241
<TABLE>
<C> <C> <S>
99.1 -- Shareholders Agreement dated as of June 21, 1999 by and
among the Registrant, Bell Atlantic Latin American Holdings,
Inc., Bell Atlantic International, Inc., Bell Atlantic New
Zealand Holdings, Inc., Carlos Peralta Quintero, IUSA Grupo
Communications, S.A. de C.V., FIUSA Pasteje, S.A. de C.V.,
Langness Investments Limited, Inmobiliaria Reforma Lomas
Altas, S.A. de C.V., Fraccionadora y Constructora Mexicana,
S.A. de C.V., Confecciones Pasteje, S.A. de C.V. and
Interelec, S.A. de C.V.*
99.2 -- Letter from the Depositary to Brokers.**
99.3 -- Letter from Brokers to their Clients.**
99.4 -- Notice to ADR Holders.**
</TABLE>
(B) FINANCIAL STATEMENT SCHEDULES:
Schedule II -- Valuation and Qualifying Accounts.*
- ---------------
* Filed on Registration Statement of New Iusacell on Form F-1, as amended (File
No. 333-10504).
** Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is
sent or given, the latest annual report, to security holders that is
incorporated by reference in the prospectus and furnished pursuant to
and meeting the requirements of Rule 14a-3 or Rule 14c-3 of the
Exchange Act; and where interim financial information required to be
presented by Article 3 of Regulation S-X is not set forth in the
prospectus, to deliver, or cause to be delivered to each person to whom
the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide
such interim financial information.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant
to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(3) The undersigned Registrant hereby undertakes (i) to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this Form, within one business
day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means; and (ii) to arrange
or provide for a facility in the United States for the purpose of
responding to such requests. The undertaking in subparagraph (i) above
includes information contained in documents filed subsequent to the
effective date of this Registration Statement through the date of
responding to the request.
(4) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction and
the company being acquired involved therein, that was not the subject
of and included in this Registration Statement when it became
effective.
II-2
<PAGE> 242
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant, Nuevo Grupo Iusacell, S.A. de C.V. certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form F-4
and has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Mexico, Mexico, on
, 2000.
NUEVO GRUPO IUSACELL, S.A. DE C.V.
By: /s/ WILLIAM S. ROBERTS
------------------------------------
William S. Roberts
Executive Vice President, and
Chief Financial Officer Designate
By: /s/ RUBEN G. PERLMUTTER
------------------------------------
Ruben G. Perlmutter
Vice President, Mergers and
Acquisitions, and
General Counsel
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<PAGE> 243
POWERS OF ATTORNEY AND SIGNATURES
We, the undersigned directors and officers of Nuevo Grupo Iusacell, S.A. de
C.V., do hereby constitute and appoint William S. Roberts, Executive Vice
President, and Chief Financial Officer Designate and Ruben G. Perlmutter, Vice
President, Mergers and Acquisitions, and General Counsel, and each of them, our
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution in each of them, to do any and all acts and things in our
respective names and on our respective behalves in the capacities indicated
below that William S. Roberts and Ruben G. Perlmutter, or any one of them, may
deem necessary or advisable to enable Nuevo Grupo Iusacell, S.A. de C.V. to
comply with the Securities Act of 1933, as amended, and any rules, regulations
and requirements of the Securities and Exchange Commission, in connection with
this Registration Statement, including specifically, but not limited to, power
and authority to sign for us in our respective names in the capacities indicated
below any and all amendments (including post-effective amendments) hereto and to
file the same, with all exhibits thereto and other documents therewith, with the
Securities and Exchange Commission; and we do hereby ratify and confirm all that
William S. Roberts and Ruben G. Perlmutter, or any of them, shall do or cause to
be done by virtue hereof.
PODER-MANDATO Y FIRMAS
Nosotros, los abajo firmantes directores y ejecutivos de Nuevo Grupo
Iusacell, S.A. de C.V., otorgamos poder especial en cuanto a derecho se refiere
y designamos a William S. Roberts, Vice Presidente Ejecutivo y Ejecutivo
Financiero Principal Designado, y a Ruben G. Perlmutter, Vice Presidente de
Fusiones y Adquisiciones y Juridico, para que ellos, o cualquiera de ellos,
actuen como nuestros apoderados y mandatarios, con plenos poderes de sustitucion
y delegacion para que realicen todos y cualesquiera actos, por cuenta y a nombre
nuestro en el caracter que se indica mas adelante, que William S. Roberts y
Ruben G. Perlmutter, o cualquiera de ellos, consideren necesario o conveniente
para los fines de que Nuevo Grupo Iusacell, S.A. de C.V. cumpla con todos los
requisitos del "Securities Act of 1933," segun texto vigente, y todas las
normas, reglamentos y requisitos de; "Securities and Exchange Commission," en
relacion con esta Declaracion de Registro, incluyendo especificamente, pero no
limitado a, poder y autorizacion para firmar por todos y cada uno de nosotros en
el caracter indicado mas adelante, todas y cada una de las enmiendas a la
Declaracion de Registro (incluyendo enmiendas posteriores a la aceptacion por la
autoridad mencionada) y para que interpongan y registren la Declaracion de
Registro, con todos sus anexos y otra documentacion necesaria por ante el
"Securities and Exchange Commission;" y en el presente acto ratificamos y
confirmamos todos los actos que William S. Roberts y Ruben G. Perlmutter, o
cualquiera de ellos, realicen por virtud del presente poder.
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<PAGE> 244
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ THOMAS A. BARTLETT* Chief Executive Officer (Principal February 7, 2000
- --------------------------------------------- Executive Officer) and Director
Thomas A. Bartlett
/s/ FULVIO V. DEL VALLE* President, Director General and February 7, 2000
- --------------------------------------------- Director
Fulvio V. del Valle
/s/ WILLIAM S. ROBERTS* Executive Vice President and Chief February 7, 2000
- --------------------------------------------- Financial Officer Designate
William S. Roberts (Principal Financial and
Accounting Officer)
/s/ LAWRENCE T. BABBIO, JR.* Chairman of the Board of Directors February 7, 2000
- ---------------------------------------------
Lawrence T. Babbio, Jr.
/s/ CARLOS PERALTA QUINTERO Director February 7, 2000
- ---------------------------------------------
Carlos Peralta Quintero
Director February 7, 2000
- ---------------------------------------------
Ernesto Canales Santos
/s/ MARY CUMMINGS* Director February 7, 2000
- ---------------------------------------------
John Chynoweth By: Mary Cummings
Alternate Director
Director February 7, 2000
- ---------------------------------------------
Jose Ramon Elizondo Anaya
Director February 7, 2000
- ---------------------------------------------
Rodolfo Garcia Muriel
/s/ LUIS FELIPE GONZALEZ Director February 7, 2000
- ---------------------------------------------
Luis Felipe Gonzalez Munoz
/s/ STEPHEN B. HEIMANN* Director February 7, 2000
- ---------------------------------------------
Stephen B. Heimann
/s/ FERNANDO DE OVANDO* Director February 7, 2000
- ---------------------------------------------
Fernando de Ovando
/s/ DENNIS F. STRIGL* Director February 7, 2000
- ---------------------------------------------
Dennis F. Strigl
By: /s/ DONALD J. PUGLISI* Authorized Representative in the February 7, 2000
--------------------------------------- United States of Nuevo Grupo
Donald J. Puglisi Iusacell, S.A. de C.V
</TABLE>
- ---------------
* By power of attorney authorizing Ruben G. Perlmutter to execute the
Registration Statement and amendments and/or post-effective amendments and
supplements thereto on behalf of Nuevo Grupo Iusacell, S.A. de C.V. and its
directors and officers.
II-5
