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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 or 15d-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
For the month of July, 2005
GRUPO IUSACELL, S.A. de C.V.
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(Translation of registrant's name into English)
Montes Urales 460
Col. Lomas de Chapultepec, Deleg. Miguel Hidalgo
11000, Mexico D.F.
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(Address of principal executive office)
Indicate by check mark whether the registrant files or will fill annual reports
under cover of Form 20-F or Form 40-F: Form 20-F [X] Form 40-F [ ]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g-3-2(b) under the Securities and Exchange Act
of 1934. Yes [ ] No [X]
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Documents Furnished By the Registrant
1. Press Release of the Registrant dated July 15, 2005
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRUPO IUSACELL, S.A. DE C.V.
Date: July 15, 2005 /s/ Fernando Cabrera
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Name: Fernando Cabrera
Title: Attorney in fact
/s/ Jose Luis Riera
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Name: Jose Luis Riera
Title: Attorney in fact
GRUPO IUSACELL, S.A. DE C.V.
Montes Urales No. 460,
Colonia Lomas de Chapultepec
Delegacion Miguel Hidalgo
11000, Mexico, D.F.
Mexico
Te. 5109 5927
Fax. 5109 5939
www.iusacell.com.mx
Grupo Iusacell, S.A. de C.V. (Iusacell) shares have been listed on the
Mexican Stock Exchange since August 4, 1999, trading under the symbol CEL. ADSs
representing five Iusacell series V shares were listed on the New York Stock
Exchange since August 4, 1999 and traded under the symbol CEL. ADRs are
documented under deposit certificates known as "American Depositary Receipts"
issued in terms of a deposit agreement with The Bank of New York, as Depositary.
Iusacell's shares are with no par value.
On October 17, 2003, an extraordinary shareholders meeting approved the
capital restructuring via the conversion to a Sole Series of all of its series
"A" and "V" shares, as well as an exchange of its series "A" and series "V"
shares for new common shares, at a ratio of 20 Series V or A shares per new
common share.
Iusacell's capital stock is $5,938'689,106.14 and it is represented by
93'424,919 common shares with no par value.
Ticker: CEL
Iusacell's shares are registered with the Special and the Securities
section of the National Registry of Securities.
"Registration with the National Registry of Securities does not imply a
certification as to investment quality of the securities nor the solvency of the
issuer."
Annual Report submitted in accordance with the General Provisions
applicable for Issuers of Securities and other participants of the Securities
Market issued by the CNBV (Disposiciones de Caracter General aplicables a las
Emisoras de valores y a otros participantes del Mercado de Valores), for the
fiscal year ended December 31, 2004.
"This is a free translation of the Annual Report filed in Spanish with the
Mexican National Banking and Securities Commission (Comision Nacional Bancaria y
de Valores). As this is a free translation, there may be some differences with
respect to the original version in Spanish. You may access the Spanish version
at www.bmv.com.mx."
TABLE OF CONTENTS
1) GENERAL INFORMATION
a) Glossary of Terms and Definitions
b) Executive Summary
c) Risk Factors
d) Other Securities
e) Significant Changes to the Securities Registered under the Registry
f) Use of proceeds
g) Public Documents
2) THE COMPANY
a) History and Development of the Issuer
b) Business Description
i. Principal Activity
ii. Distribution Channels
iii. Patents, Licenses, Trade Marks and other Agreements
iv. Principal Clients
v. Applicable Legislation and Tax Situation
vi. Human Resources
vii. Environmental Performance
viii. Market Information
ix. Corporate Structure
x. Principal Assets
xi. Judicial, Administrative or Arbitral Proceedings
xii. Shares Representing the Capital Stock
xiii. Dividends
3) FINANCIAL INFORMATION
a) Selected Financial Data
b) Financial Information by Line of Business, Geographical Zone and Export
Sales
c) Material Indebtedness Report
d) Management Comments and Analysis on the Operating Results and Financial
Situation of the Issuer
i. Operating Results
ii. Financial Situation, Liquidity and Capital Resources
iii. Internal Control
e) Critical Accounting Estimates
4) MANAGEMENT
a) External Auditors
b) Related Party Transactions and Conflict of Interest
c) Directors and Shareholders
d) By-laws and other Agreements
5) SHARE MARKET
a) Share Structure
b) Performance of the Shares in the Stock Market
6) RESPONSIBLE PERSONS
7) EXHIBITS
FORWARD-LOOKING INFORMATION
This Annual Report contains various forward-looking statements,
including statements regarding, among other things, the financial performance
and operating plans for Grupo Iusacell, S.A. de C.V. These statements are based
upon the current beliefs of our management, as well as on assumptions made by
management based upon information currently available to it. The words
"believe," "expect," "likely" and "anticipate" and similar expressions identify
some of these forward-looking statements. These statements are subject to
various risks and uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Should management's assumptions prove incorrect,
actual results may vary materially and adversely from those anticipated or
projected. Readers are cautioned not to place undue reliance on such
forward-looking statements, which speak only as of their respective dates. We
undertake no obligation to update publicly or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Factors described in this Annual Report under Item 1, "General
Information-- c) Risk Factors," could cause actual results to differ materially
from such forward-looking statements.
* * *
"Iusacell" means Grupo Iusacell, S.A. de C.V. This company was formerly
known as Nuevo Grupo Iusacell, S.A. de C.V. Unless the context otherwise
requires, "we", "our" or "us" refers to Iusacell and its subsidiaries.
"Iusacell Celular" means Grupo Iusacell Celular, S.A. de C.V. This
company was formerly known as Grupo Iusacell, S.A. de C.V. Iusacell owns 100% of
the capital stock of Iusacell Celular.
Certain terms are defined the first time they are used in this Annual
Report. The "Glossary of Telecommunications Terms" provides definitions of
certain technical terms used herein.
On July 29, 2003, MovilAccess, S.A. de C.V. ("MovilAccess"), a Mexican
telecommunications company subsidiary of Grupo Movil Access, S.A. de C.V., (GMA,
f/k/a Biper, S.A. de C.V.) a paging company, acquired through a tender offer in
Mexico and the United States 74.6% of Iusacell's capital, and became Iusacell's
principal shareholder. GMA, MovilAccess, Unefon, S.A. de C.V., a fixed mobile
telephone company, Grupo Elektra S.A. de C.V., an electronic appliance retailer,
and TV Azteca S.A. de C.V., a Mexican television network, are all part of a
group of companies controlled, directly or indirectly or with a significant
influence by Mr. Ricardo B. Salinas Pliego or in which Mr. Ricardo B. Salinas
Pliego has significant influence. See Item 1, "General Information-- c) Risk
Factors--We have significant transactions with affiliates that create potential
conflicts of interest."
The term "Verizon" in this Annual Report refers to Verizon
Communications Inc. or its subsidiaries, and to Bell Atlantic Corporation (in
connection with events prior to June 2000, when Verizon was formed), as the
context requires. The term "Vodafone" in this Annual Report refers to Vodafone
Group Plc or its subsidiaries, as the context requires.
Prepaid figures in this Annual Report include public and rural
telephony, unless otherwise indicated. See footnote 10 in Item 3, "Financial
Information-- a) Selected Financial Data."
Iusacell's shares of common stock trade on the New York Stock Exchange
(in the form of American depositary shares) and on the Mexican stock exchange.
Both Iusacell and Iusacell Celular have publicly-traded debt securities.
Unless otherwise specified, all references to "U.S. dollars", "U.S.
Dollars", "dollars", "U.S.$" or "$" are to United States dollars, and references
to "Ps." and "pesos" are to Mexican pesos. We publish our financial statements
in pesos that are adjusted to reflect changes in purchasing power due to
inflation. Thus, unless otherwise specified, our financial data is presented in
constant pesos with purchasing power as of December 31, 2004. Actual amounts may
vary from amounts presented in this Annual Report due to rounding.
I. GENERAL INFORMATION
a) GLOSSARY OF TERMS AND DEFINITIONS
GLOSSARY OF TELECOMMUNICATIONS TERMS
1XRTT: A member of CDMA 2000 which is a family of standards that
defines the radio interface allowing a smooth transition
from CDMA (1S-95) systems. This family of standards involve
some variants and the services, offerings, such as voice and
packet data on a single carrier (1XRTT), data only (1X-DO).
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.
ARPU: Average monthly mobile telephony revenue per subscriber.
Band: A range of frequencies between two defined limits.
CDMA: Code Division Multiple Access, the highest-capacity
commercial digital standard available. CDMA increases
capacity by transmitting a large number of simultaneous
conversations over a single channel, assigning unique codes
that can be re-assembled at the receiving end.
Cellular A-band: The range of frequencies used to provide cellular wireless
service between 825-835 MHz and between 870-880 MHz of the
radio spectrum.
Cellular B-band: The range of frequencies used to provide cellular wireless
service between 835-845 MHz and between 880-890 MHz of the
radio spectrum.
Channel: A pathway for the transmission of information between a
sending point and a receiving point.
Covered POPS: The number of POPs in a defined area for whom a cellular
signal is accessible.
CPP: 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 the call.
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.
(0)
E-1: A digital telephony format that carries data at the rate of
2.048 Mbps (DS-1 level). E-1 is the European and Latin
American version of North American T-1, although T-1 is
1.544 Mbps.
E3/DS3: Digital signal X is a term for the series of standard
digital transmission rates or levels based on DS0, a
transmission rate of 64 Kbps, the bandwidth normally used
for one telephone voice channel. Both the North American
T-carrier system and the European E-carrier system of
transmission operate using the DS series as a base multiple.
The digital signal is what is carried inside the carrier
system. DS3, the signal in the T-3 carrier, carries a
multiple of 28 DS1 signals or 672 DS0s or 44.736 Mbps.
EVDO: Asymmetrical technology that utilizes an exclusive data
carrier wave and permits for down link reception
transmission at speeds ranging between 38.4 kbps and 2.4
Mbps for downlink reception and between 9.6 and 144 kbps for
uplink transmission, which allows the offer of services with
greater multimedia content such as video streaming,
video-on-demand, data access and high-definition games,
among others.
Hertz: The unit measuring the frequency with which an alternating
electromagnetic signal cycles through the zero-value state
between lowest and highest states. One hertz (abbreviated
Hz) equals one cycle per second; KHz (kilohertz) stands for
thousands of hertz; MHz (megahertz) stands for millions of
hertz; and GHz (gigahertz) stands for billions of hertz.
IMTS: Improved mobile telephone service; IMTS systems are analog
mobile telephone systems that employ a single powerful radio
base station to communicate with IMTS mobile telephones that
are within approximately a 25-mile radius.
LATA: Local access and transport area; an area in which a local
exchange carrier is permitted to provide service as
designated by the 1982 United States federal court decree
resulting from antitrust litigation brought by the United
States Department of Justice against AT&T corporation.
PCS: Personal communications services. PCS represents a digital
wireless communications service with the ability to provide
features such as voice, video and data applications, short
messaging, voicemail, caller identification, call
conferencing and call forwarding.
PCS A-band: The range of frequencies used to provide PCS wireless
services between 1.850-1.865 GHz and between 1.930-1.945 GHz
of the radio spectrum.
PCS B-band: The range of frequencies used to provide PCS wireless
services between 1.870-1.885 GHz and between 1.950-1.965 GHz
of the radio spectrum.
(1)
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.
PDH: A transmission system for voice communication using
plesiochronous synchronization. PDH is the conventional
multiplexing technology for network transmission systems.
Penetration rate: A cellular operator's subscribers within a defined area
derived by total POPs within that area.
POPs: The population for a particular area based on the 2000
Mexican census, as published by the Instituto Nacional de
Estadistica, Geografia e Informatica (the National Institute
of Statistics, Geography and Information Processing,
"INEGI"). Population figures have been calculated by
applying the forecast annual population growth rate for a
particular year to the data derived from the 2000 Mexico
census. 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.
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.
SDH: Synchronous digital hierarchy (SDH). It refers to a group of
fiber-optic transmission rates that can transport digital
signals with different capacities.
STM1: Synchronous Transport Module Digital signal X is a term for
the series of standard digital transmission. STM1 is the
signal that carries 155 Mbps.
Switch: A device that opens or closes circuits or selects the paths
or circuits to be used for transmission of information.
Switching is the process of interconnecting circuits to form
a transmission path between users.
TDMA: Time division multiple access, a standard of digital
cellular technology, which provides more call carrying
capacity than analog, but less than CDMA, by interlacing
conversations on a single channel through time-sharing
methods.
Wi-Fi: Wireless Fidelity is the popular term for a high-frequency
wireless local area network (WLAN). The Wi-Fi technology is
rapidly gaining acceptance in many companies as an
alternative to a wired LAN. It can also be installed for a
home network.
(2)
b) EXECUTIVE SUMMARY
We are a wireless telecommunications services provider in Mexico with
nearly 1.5 million mobile wireless customers at December 31, 2004, approximately
76.0% of which are prepaid customers. We hold concessions in the 800 megahertz
(MHz) band to provide cellular wireless services in five contiguous geographic
regions comprising all of central and southern Mexico, and in the 1900 MHz band
to provide PCS wireless services nationwide.
We provide digital service using Code Division Multiple Access ("CDMA")
technology, the highest-capacity commercial digital technology available in the
800 and 1900 MHz frequency bands. In January 2003, we launched the country's
first CDMA2000 1XRTT voice and high-speed data network in Mexico City. With this
advanced network, we increased voice capacity and are able to offer subscribers
new data services, e-mail and Internet access at speeds of up to 144 kilobits
per second (kbps). In addition to our core mobile telephony services, we also
provide a wide range of other telecommunications services, including long
distance, wireless local telephony and data transmission services.
Our subscriber base as of December 31, 2004 was 1,462,740. Of these
subscribers, 350,847 were postpaid customers who purchase mobile telephony
services pursuant to fixed-term contracts, and the remaining 1,111,893 were
prepaid customers who pay for their mobile telephony services in advance
primarily through the purchase of prepaid airtime.
Since July 29, 2003, Iusacell has been under the management control of
MovilAccess. MovilAccess consultants and personnel have been integrally involved
in managing Iusacell's day-to-day operations and defining and implementing
Iusacell's business strategy. MovilAccess currently holds 74.6% of Iusacell's
capital. See Item 4, "Management - c) Directors and Shareholders." Prior to the
acquisition by MovilAccess of its equity interest in Iusacell, Iusacell had been
under the management control of Verizon and Vodafone.
c) RISK FACTORS
RISK FACTORS RELATING TO OUR LIQUIDITY
There is substantial doubt as to our ability to continue as a going concern due
to our high level of leverage and recurring losses
In its Report of Independent Registered Public Accounting Firm dated
March 21, 2005, Freyssinier Morin, S.C., our independent accountants, stated
that we are highly leveraged and have suffered recurring losses from operations
that raise substantial doubt as to our ability to continue as a going concern.
As of December 31, 2004, our total consolidated indebtedness, including trade
notes payable, was Ps.8,968.8 million, or approximately 113.7% of our total
capitalization. For the years ended December 31, 2002, 2003 and 2004, our
earnings were insufficient to cover our fixed charges by Ps.3,222.1 million,
Ps.5,333.3 million and Ps.1,786.4 million, respectively. We are also currently
in default under substantially all of our indebtedness for, among other things,
failure to make principal and/or interest payments.
(3)
We believe that if our financial situation does not improve, we will be
unable to recommence the servicing of our debt and operate as a viable company.
We may be forced to file for bankruptcy, liquidate or reorganize, which would
materially adversely affect the value and market price of our equity and debt
securities and the claims of our equity or debt holders, who could lose some or
all of their investment. For a description of some of our obligations and
liabilities, see Item 3, "Financial Information - Financial Situation, Liquidity
and Capital Resources."
According to the Mexican Companies Law (Ley General de Sociedades
Mercantiles), an interested party may file a claim for dissolution and force us
into a liquidation process (Proceso de Concurso Mercantil) of our assets if
during any fiscal year the accumulated losses exceed two-thirds of our
contributed capital. In 2003 and 2004, our accumulated losses exceeded our
contributed capital by Ps.860.4 million and Ps.2,843.5 million, respectively.
We are a holding company and can pay our liabilities only through the cash flow
from our subsidiaries or out of the proceeds of our financings. Our obligations,
including under our U.S. $350.0 million 14 1/4% senior notes due 2006, are
structurally subordinated to those of our subsidiaries
Iusacell is a holding company with no significant assets other than the
stock of its subsidiaries. In order to pay our obligations, we must rely on
income from dividends, loans and other cash flow from our subsidiaries or debt
or equity financings. Because we are a holding company, the claims of our
creditors are structurally subordinated to the claims of our subsidiaries'
creditors with respect to the assets of such subsidiaries. At December 31, 2004,
our consolidated subsidiaries' total indebtedness, including trade notes
payable, was Ps.4,979.3 million (U.S.$446.6 million) and may increase in the
future. For a description of some of our obligations and liabilities, see
Item 3, "Financial Information - c) Material Indebtedness Report."
Our current debt agreements prevent our subsidiaries from paying
distributions or dividends or making cash available to us until at least
December 2006, except for those payments of dividends or loans or advances at
such times and in such amounts as are necessary to permit us to make interest
and principal payments as and when due in respect of our U.S.$350.0 million
14 1/4% senior notes due 2006, which we refer to as the Iusacell senior notes,
so long as certain events of default have not occurred under our subsidiaries'
debt agreements. Our principal operating subsidiary, Iusacell Celular, is in
default under its U.S.$265.6 million senior refinancing secured loan as well as
in its U.S.$150.0 million 10% senior notes due 2004 for, among other things,
failure to make principal and/or interest payments. As a result, dividends and
cash flow from Iusacell Celular are therefore unavailable to us pursuant to the
terms of its outstanding debt and the restrictive covenants that govern such
debt.
Furthermore, the ability of our subsidiaries to pay dividends or
distributions is subject to Mexican legal requirements, which in general terms
provide that a Mexican corporation may declare and pay dividends or
distributions only out of the profits reflected in its year-end financial
statements, if such payment is approved by its stockholders and after the
creation of required legal reserves and the absorption or satisfaction of losses
suffered in previous fiscal years.
We are in default on our obligations under the Iusacell senior notes, and our
repayment obligations have been accelerated
We did not receive sufficient income from dividends or were able to
obtain alternative sources of funds to make the U.S.$24.9 million interest
payments due on each of June 1, 2003, December 1, 2003, June 1, 2004 and
December 1, 2004 on the Iusacell senior notes and, as a result, we did not make
those payments. In response to these nonpayments, on April 29, 2005, we received
a notice from The Bank of New York, acting as trustee under the indenture
governing the Iusacell senior notes, informing us that and unidentified
percentage of holders of the Iusacell senior notes had elected to accelerate the
principal payment of the notes.
(4)
Neither we nor our subsidiaries have the cash resources to repay such
amounts. Due to the depressed state of the value of telecommunication assets and
the structural subordination of the claims of the holders of the Iusacell senior
notes to those of our subsidiaries' creditors, it is doubtful that the value of
the assets held by our subsidiaries will be sufficient to satisfy the claims of
their creditors and our creditors, including the holders of the Iusacell senior
notes. In addition, our principal shareholder is under no obligation to provide
financial resources to us, and has not indicated that it is prepared to do so.
Therefore, unless we can successfully restructure our consolidated debt, we
believe that we will be unable to satisfy our obligations. As a result of our
failure to pay all amounts due under the Iusacell senior notes, we may be forced
to file for bankruptcy, liquidate or reorganize, which could materially
adversely affect the value and market price of our equity and debt securities
and the claims of our equity or debt holders, who could lose some or all of
their investment.
Iusacell Celular is in default of its obligations under its senior notes and its
senior refinancing secured loan, and its repayment obligations have been
accelerated
Iusacell Celular, our principal cellular telephony operating subsidiary,
did not make the July 15, 2003 U.S.$7.5 million interest payment due on its
U.S.$150.0 million 10% senior notes due 2004. In response to this nonpayment, on
September 11, 2003, holders representing 51.3% of the senior notes notified
Iusacell Celular that they had elected to accelerate the principal payment of
the notes. In addition, Iusacell Celular failed to make the U.S.$265.6 million
principal payment on its senior refinancing secured loan which was due on
March 31, 2004 because of the automatic acceleration of the maturity date of the
loan as a result of our failure to refinance the Iusacell Celular senior notes
by such date.
Iusacell Celular does not have the cash resources to repay such amounts.
Due to the depressed state of the value of telecommunication assets, it is
doubtful that the value of the assets held by Iusacell Celular and its
subsidiaries will be sufficient to satisfy the claims of Iusacell Celular's
creditors. In addition, our principal shareholder is under no obligation to
provide financial resources to Iusacell Celular, and has not indicated that it
is prepared to do so. Therefore, unless we can successfully restructure our
consolidated debt, we believe that we will be unable to satisfy Iusacell
Celular's obligations. As a result of the failure to pay all amounts due under
Iusacell Celular's indebtedness, we may be forced to file for bankruptcy,
liquidate or reorganize, which could materially adversely affect the value and
market price of our equity and debt securities and the claims of our equity or
debt holders, who could lose some or all of their investment.
If we are unable to restructure our indebtedness, we may also face a substantial
risk of Mexican bankruptcy-related proceedings and the suspension or termination
of all or a portion of our business under our concessions
Since we and our subsidiaries defaulted on our respective debt
obligations, some or all of our creditors have the option of taking legal action
against us or our subsidiaries, including instituting bankruptcy proceedings in
Mexico. Further, we may choose to institute a voluntary bankruptcy proceeding
under Mexican law. If any such proceedings were to be instituted, we could not
predict their duration or outcome. We are not aware of any regulated company of
our size that has successfully completed a restructuring under the Mexican
bankruptcy law since it was passed in May 2000.
(5)
The current Mexican bankruptcy law is based on the largely untested Ley
de Concursos Mercantiles enacted in May 2000 which provides for two different
and separate proceedings: conciliation and bankruptcy. The conciliation phase
lasts up to 185 days, absent protracted litigation. This initial term is subject
to extension for two 90-day periods. The objective of the conciliation phase is
to reach an agreement between the debtor and its creditors to restructure the
indebtedness of the debtor. The bankruptcy phase does not have a specific term
within which it must be concluded. We believe that these proceedings are likely
to require significantly more time and be significantly more unpredictable than
a reorganization or bankruptcy proceeding under U.S. bankruptcy laws. If we were
to be declared subject to the Bankruptcy Law, the holders of our debt securities
would have to file a claim in Spanish against the estate of Iusacell in a
federal district court in Mexico City. Upon the court's recognition of a holder
of a Iusacell senior note as a creditor of Iusacell, that holder's claim would
be unsecured and would rank equally with all other unsecured claims filed
against our estate.
A conciliation proceeding is likely to result in significant changes to
our and our subsidiaries' existing obligations, which could include the
cancellation or rescheduling of all or part of those obligations. During any
such proceeding, our operation of our business would be subject to the
supervision of a bankruptcy trustee. Moreover, in the event of our bankruptcy,
our operating concessions, which are critical to our business, may be subject to
termination. There can be no assurance that the holders of our debt securities
would receive any meaningful recovery from a bankruptcy proceeding.
We may be unable to fund our capital expenditure programs which are critical for
us to compete, or pursue business opportunities
In order to implement our operating strategy and be able to compete in
the Mexican market through 2007, we will have to incur significant capital
expenditures. We currently estimate our aggregate capital expenditures
requirements for 2005, 2006 and 2007, not including capitalized interest, to
total approximately U.S.$188.1 million. We anticipate that approximately
U.S.$50.1 million of such capital expenditures will need to be invested during
2005 in order to acquire, build and operate our PCS network in Mexico, as well
as to make additional investments in the central regions and expand the advance
data network capabilities into other key cities. As we make additional
investments in our mobile telephony network and pursue long distance and data
transmission opportunities, we will also be likely to need additional external
funding in 2006 and beyond. Furthermore, the investments required to keep pace
with technological change, such as extended coverage on third-generation
wireless telecommunication equipment, will require additional capital resources.
Historically, our cash generated from operating activities has not been
sufficient to meet our debt service, working capital and capital expenditure
requirements. In the past, we have relied on the capital markets for new equity
and debt financing, on vendor financing, and on borrowings and equity
contributions from our shareholders to meet such funding needs. Given our
current critical financial condition, it is highly unlikely that we will be able
to obtain funding for these planned capital expenditures without first
completing a successful restructuring of our existing indebtedness.
The failure to obtain funding for capital expenditures will materially
adversely affect our ability to compete effectively against better capitalized
competitors and to withstand downturns in our business or in the Mexican economy
generally. Furthermore, this would limit our ability to pursue business
opportunities that may be in our interest.
(6)
RISK FACTORS RELATING TO OUR BUSINESS
We face increasing competition which may reduce our operating margins
Competition in the Mexican wireless industry is substantial. We face
significant competition, mainly from Telcel, in our core mobile telephony
services business. As a subsidiary of America Movil, S.A. de C.V., a company
spun off from Telefonos de Mexico, S.A. de C.V., the former state telephone
monopoly known as Telmex, Telcel has significantly greater internal financial
and operational resources than those available to us, nationwide cellular and
PCS concessions, a nationwide cellular network and the ability to use Telmex's
installed telecommunications systems. We also face competition from Telefonica
Moviles S.A. de C.V. ("Telefonica") and Operadora Unefon, S.A. de C.V.
("Unefon"), one of our affiliates. Both these service providers own concessions
in all nine wireless service regions in Mexico and provide service in Mexico's
principal cities. We also face increasing competition in certain cities from
Nextel de Mexico, S.A. de C.V., a provider of enhanced specialized mobile radio
services. In long distance, we face increasing competition from nine other
concession holders.
In addition, the Mexican government may grant additional concessions to
other companies to provide services similar to or the same as those that we
provide.
Competition may lead to increases in advertising and promotional
spending, along with higher subsidies, increased demands on access to
distribution channels and reduced prices per minute. These factors may lead to
smaller operating margins, greater choices for customers and increasing movement
of customers between competitors, which may make it difficult for us to retain
customers or add new customers. Because of their resources and, in some cases,
ownership by larger companies, some of our competitors are financially stronger
than we are, which may enable them to offer services to customers that we cannot
offer due to our financial constraints, or at prices that are below the prices
at which we can offer comparable services. If we cannot compete effectively
based on the availability or price of service offerings, our revenues and growth
may be adversely affected. In the past, competitive pressures have not always
allowed us to implement price increases to keep pace with inflation and have
occasionally caused us to implement price rollbacks and reductions.
Mexican authorities may enact new laws and regulations, or may adopt new
interpretations to existing laws and regulations that could negatively affect
our operations and profitability
Mexican authorities may enact new laws and regulations, or may adopt new
interpretations to existing laws and regulations that could negatively affect
our operations and profitability. In particular, in the past the Mexican
government has sought to impose a 10% excise tax on mobile telephony services.
Although this tax has been derogated, we cannot assure you that the Mexican
government will not seek to enact new taxes. If such taxes are imposed, or any
new laws are enacted or new interpretations to existing laws are adopted that
result in increased costs, we may be unable to pass on such costs to our
customers, or demand may decrease if we do pass on such costs.
We are particularly exposed to this regulatory risk given that we
operate in the telecommunications industry, which is highly regulated. For
example, in December 2004, the Mexican Telecommunications Agency (Comision
Federal de Telecomunicaciones) ("COFETEL") ruled that, beginning January 2005,
Telmex and its affiliate, Telefonos del Noroeste, S.A. de C.V., must apply a
rate of Ps.2.25 per minute for "calling party pays" calls originating on fixed
telephones and terminating on mobile phones. This rate will decrease further in
2006 and 2007. This ruling has forced us to reduce our "calling party pays" and
interconnection rates in order to remain competitive, resulting in a decrease in
revenues and gross margin.
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Additionally, some concessionaires for local fixed services have
presented an interconnection disagreement before the COFETEL seeking the
decrease of the interconnection rate for "calling party pays". The COFETEL, when
resolving the disagreement, can set "calling party pays" interconnection rates
that could affect our profitability and that could present adverse conditions
for the future development and profitability of mobile services.
The technology we use may be made obsolete by advancements in technology
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 rapidly become obsolete by market demand
for new or improved digital technologies supporting wireless service or other
services in the near future. Some of the most significant changes which the
wireless communications industry is experiencing include:
. evolving industry standards;
. ongoing improvements in the capacity and quality of digital
technology;
. shorter development cycles for new products, enhancements and
changes in end-user needs and preferences;
. development of data and high bandwidth network capabilities;
. migration to next-generation services; and
. expanded availability and functionality of Wi-Fi and EVDO
services and other new wireless technologies.
Alternative technologies may develop that may provide wireless
communications service or alternative service superior to that available from
us, or that enable voice communication over unregulated frequencies.
Technological changes may require substantial new capital expenditures
and/or require write-downs of obsolete technology. They may also materially
adversely affect our operations and our competitive position to the extent we
are not able to react quickly to these changes. See "--We may be unable to fund
our capital expenditure programs which are critical for us to compete, or pursue
business opportunities."
If our wireless service offerings do not meet customer expectations, we could be
limited in our ability to attract and retain customers
Customer acceptance of the services we offer is and will continue to be
affected by technology-based differences and by the operational performance,
quality, reliability and coverage of our wireless networks. We may have
difficulty attracting and retaining customers if we are unable to meet customer
expectations for, or are otherwise unable to resolve quality issues relating to,
our wireless networks, billing systems, or customer care or if those issues
limit our ability to expand our network capacity or subscriber base, or
otherwise place us at a competitive disadvantage to other wireless service
providers in our markets.
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We rely on roaming arrangements with other carriers, which we may be unable to
obtain or maintain in the future on terms that are acceptable to us
Our customers automatically can access another provider's analog
cellular or digital system only if the other provider allows our customers to
roam on its network. We rely on agreements to provide roaming capability to our
customers in many areas outside our service area, within and outside Mexico, and
to improve coverage within our network footprint.
Some competitors may be able to obtain lower roaming rates than we do
because they have larger call volumes or because of their affiliations with, or
ownership of, wireless providers, or may be able to reduce roaming charges by
providing service principally over their own network. In addition, the quality
of service that a wireless provider delivers during a roaming call may be
inferior to the quality of service we or our affiliates provide, and our
customers may not be able to use some of the advanced features, such as high
speed, short-messaging or voicemail notification, that the customers enjoy when
making calls within our network. In particular, the biggest mobile telephony
companies in Mexico, Telcel and Telefonica, are able to offer a worldwide full
voice and data roaming service, which is a competitive disadvantage for us with
corporate and other high-usage customers.
Our roaming partners may also migrate their current technology to a
technology that is incompatible with ours. In such case, we would no longer be
able to offer roaming services to our customers through such carriers. See
"--The technology we use may be made obsolete by advancements in technology."
Equipment failure, power outages, natural disasters, terrorist acts, or other
breaches of network or information technology security may adversely affect our
business
A major equipment failure, power outage, natural disaster, terrorist
act, or other breach of network or information technology security that affects
our mobile telephony switching offices, information systems, microwave links,
third-party owned local and long distance networks on which we rely, our cell
sites or other equipment or the networks of other providers on which our
subscribers roam could have a material adverse effect on our operations. While
we have insurance coverage for some of these events, our inability to operate
our wireless system or access our information systems even for a limited time
period, or the loss of subscriber data, may result in a loss of subscribers or
impair our ability to serve our subscribers or attract new subscribers, which
would have a material adverse effect on our business, results of operations and
financial condition.
A significant portion of our activations is represented by a small number of
distributors
Our three largest distributors accounted for 45% and 26% of our total
activation in 2004 and 2003, respectively. We have established certain measures
to reduce the risk associated with this concentration, such as certain
guarantees and liens. Our results of operations could be materially adversely
affected, at least in the short-term, if any payment defaults occur with respect
to these distributors or if any of these distributors were to enter into
bankruptcy or other reorganization proceedings or terminate their relationship
with us.
Our controlling stockholder is able to influence our business and affairs
As of December 31, 2004, MovilAccess beneficially owned about 74.6% of
our outstanding common stock and is our single largest stockholder. MovilAccess
is controlled directly or indirectly by Ricardo B. Salinas Pliego, our Chairman
of the Board of Directors and Executive Director, who also holds directly 7.4%
of our outstanding common stock. As a result, Mr. Salinas Pliego
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controls our business, policies and affairs, including the election of at least
the majority of our directors and all major corporate transactions and could
cause or prevent a change of control. Mr. Salinas Pliego's interests may not be
fully aligned, and could conflict, with the interest of the other equityholders
and of debtholders.
We have significant transactions with affiliates that create potential conflicts
of interest
We regularly engage in transactions with entities owned or controlled by
our controlling shareholder. These transactions include telemarketing and
advertising campaigns, paging operations, sale and distribution of our products,
operation of our customer sales and service centers, collections from customers
and banking services. In particular, we have entered into a capacity exchange
and roaming agreement with Unefon, a mobile telephony competitor. In addition,
some of the members of our Board of Directors, as well as some of our
executives, serve on the Boards of Directors of TV Azteca, Unefon, Biper, our
paging competitor, and/or Elektra, a distributor of our products. In addition,
some of our executives also hold offices in other companies controlled by
Mr. Salinas Pliego. See Item 4, "Management - b) Related Party Transactions and
Conflict of Interest and c) Directors and Shareholders".
Transactions with affiliates may create the potential for conflicts of
interest. To guard against these potential conflicts of interest, we have
established a Related Party Transactions Committee of our Board of Directors
made up of independent Directors to provide an independent review of
transactions with affiliates to determine whether these transactions are related
to our business and are consummated on terms that are at least as favorable to
us as terms that would be obtainable in a similar transaction entered into on an
arm's-length basis with an unrelated third party. Nevertheless, conflicts of
interest may arise and could have a negative effect on our results of operations
and financial condition.
The SEC is seeking court-orders barring our Chairman and Vice-Chairman of the
Board, who are also key executive officers, from serving as officers or
directors of any publicly-held company with securities trading in the United
States, such as Iusacell
On January 4, 2005, the U.S. Securities and Exchange Commission (the
"SEC"), filed civil fraud charges against, among others, Mr. Ricardo Salinas
Pliego, our Chairman of the Board and Executive Director, Mr. Pedro Padilla
Longoria, our Vice Chairman of the Board and Executive Director, and
Mr. Luis Jorge Echarte Fernandez, one of our Directors. The charges are
unrelated to Iusacell. However, the SEC is seeking, among other things,
court-orders barring Mr. Salinas Pliego and Mr. Padilla Longoria from serving as
officers or directors of any publicly-held company with securities trading in
the United States.
If the SEC is able to obtain such court-orders, Mr. Salinas Pliego and
Mr. Padilla Longoria will not be able to serve as officers or directors of
Iusacell for so long as Iusacell remains subject to the reporting requirements
of the SEC. The success of Iusacell depends in part on Mr. Salinas Pliego's and
Mr. Padilla Longoria's participation as key members of our Board of Directors
and management. Their resignation could have a material adverse effect on the
financial condition and results of operations of Iusacell.
We have experienced significant turnover in our top management and our Board of
Directors
In recent years we have experienced significant turnover in our top
management ranks. Frequent changes in our top management and Board of Directors
negatively affect our ability to develop and implement successful
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business philosophies, strategies and policies. Most recently in July 2003, as a
result of our acquisition by MovilAccess, our top management and Board of
Directors was replaced wholesale, with the majority of new executives and
directors coming from companies controlled by Mr. Salinas Pliego. This wholesale
and immediate change has resulted in the substantial loss of the institutional
memory that companies typically draw from in evaluating projects and
opportunities and in developing business strategies and policies.
Our new management has implemented substantial changes to our business
operations and strategies. For example, we have changed our sales, marketing and
distribution approach, including the format of our customer sales and service
centers, in an effort to maximize synergies with other related companies by
Mr. Salinas Pliego and control costs. See Item 2, "The Company - b) Business
Description - Principal Activity - Sales, Marketing and Distribution." We have
also revised our deactivation policy for prepaid customers, which resulted in
the turnover of approximately 572,000 customers in the second half of 2003. See
Item 2, "The Company - b) Business Description - Principal Activity--Churn and
Turnover--Prepaid Turnover." Furthermore, we have reevaluated the feasibility of
certain projects based on our current financial condition and have made
corresponding accounting adjustments that could have a negative effect on our
results of operations and financial condition. See Item 3, "Financial
Information - Management Comments and Analysis on the Operating Results and
Financial Situation of the Issuer - Recent Changes in Our Accounting Policies."
We cannot assure you that these changes will be successful.
We may be unable to hire or retain key personnel
Our success depends in part upon our ability to hire and retain
highly-skilled and qualified key personnel. The competition for highly-qualified
management personnel in the telecommunications industry is intense. In addition,
our critical financial condition makes it more difficult for us to attract such
personnel. Accordingly, we cannot assure you that we will be able to hire and
retain the key personnel necessary for our success.
We are subject to various litigations
We are a defendant in certain litigations and legal proceedings
involving claims for substantial amounts of money. We have made provisions for
some of these contingencies. The ultimate resolutions of these actions could
have a material adverse effect on our operations and financial condition. See
Item 2, "The Company--b) Business Description--xi) Judicial, Administrative or
Arbitral Proceedings."
We recently changed our external auditors
In the last quarter of 2004, we appointed Freyssinier Morin, S.C., as
our auditors. Given that Freyssinier Morin has been our auditor for less than
one year, Freyssinier Morin may not be able to identify issues and suggest
corrective actions on internal controls and procedures, disclosure and other
matters.
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 for renewal
or may not be renewed when they expire. The conditions for renewal, however, are
not fully defined. Particularly, our cellular concessionaires that provide
services in regions 5, 6, 7, 8 and 9 have requested the renewal
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of its concessions in accordance with its concessions. We cannot anticipate that
such renewals will be granted and in which terms and conditions. The conditions
for renewals are subject to criteria that cannot be predicted. Additionally, at
the moment those renewals are granted, the concessions will be subject
automatically to the payment of duties in terms of the article 244B of the "Ley
Federal de Derechos". Currently, we are not subject to such payment. We consider
that this will significantly increases the payments for the exploitation of the
concessions, and will affect adversely our operational results and financial
condition.
Our concessions may be revoked prior to the end on their respective
terms if we fail to comply with specified obligations and conditions. The
Mexican government also reserves the right to revoke, temporarily seize or
expropriate concessions or assets related to a concession for reasons, among
others, of public interest, 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 reduce the value of
Iusacell's concessions and adversely affect our financial condition and results
of operations. See Item 2, "The Company -- b) Business Description -- Patents,
Licenses, Trade Marks and Other Agreements."
Mexican government may authorize the operation of telecommunications services
resellers
The Mexican government has executed an international agreement with the
U.S. government through which it was obligated to issue, before July 1(DEG),
2005 the Resellers Rules (Reglamento de Comercializadoras). Preliminary versions
known until this date, contain general interpretation aspects that entitled the
authority to regulate commercial relationships between concessionaires and the
resellers. This may adversely affect our operational results and financial
condition.
The general political and economic conditions in Mexico may adversely affect our
business, financial condition and results of operations
We are a Mexican company, and most of our operations are in Mexico. As a
result, our business, financial condition and results of operations may be
significantly affected by the general condition of the Mexican economy, by a
devaluation of the peso, by inflation and high interest rates in Mexico, or by
political or economic developments in Mexico. The Mexican economy grew at an
annual rate of only 0.8% in 2002, 1.4% in 2003 and 4.4% in 2004.
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 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
mobile telephony services. Crises such as these could adversely affect our
financial condition and results of operations and the market value of our
securities.
The Presidential and federal Congressional elections in Mexico will be
held in July 2006. In addition local and municipal elections are held around the
country every year. The electoral process could lead to further friction
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among political parties and the executive branch, which could cause political
and economic instability. In addition, national politicians are currently
focused on the 2006 elections and crucial reforms regarding fiscal and labor
policies, gas, electricity, social security and oil have not been and may not be
approved. The effects of the electoral process on the social and political
situation could adversely affect the Mexican economy, which in turn could have a
material adverse effect on our business, financial condition and results of
operations. Additionally, once the President and federal representatives are
elected, there could be significant changes in the laws, public policies and
government programs, which could have an adverse affect on our business,
financial condition and results of operations.
If the Mexican government imposes exchange controls, we may not be able to
purchase imported goods or make dividend, principal and interest payments in
U.S. dollars
In the past, the Mexican economy has experienced balance of payment
deficits and shortages in foreign exchange reserves. While the Mexican
government does not currently restrict the ability of Mexican or foreign persons
or entities to convert pesos to foreign currencies generally, and U.S. dollars
in particular, it has done so in the past and could do so again in the future.
We cannot assure you that the Mexican government will not institute a
restrictive exchange control policy in the future. Any such restrictive exchange
control policy could prevent or restrict access to U.S. dollars or other foreign
currencies to purchase imported goods and to meet our U.S. dollar obligations,
such as the payment of dividends or principal and interest under our debt
securities.
Payment of judgments entered against us in Mexico will be in pesos, which may
expose holders of our debt securities to exchange rate risk
If a proceeding to enforce our obligations under any debt securities is
brought in Mexico, Mexican law permits us to pay a resulting judgment in pesos.
Under the Mexican Monetary Law, an obligation payable in Mexico in a currency
other than pesos may be satisfied in pesos at the exchange rate in effect on the
date when payment is made.
If a Mexican court declares us to be in bankruptcy (concurso mercantil),
our obligations under any debt securities:
. would be converted into pesos at the exchange rate prevailing at
the time of the court's declaration of bankruptcy and then to
Unidades de Inversion, which are denominated in pesos and
adjusted periodically for inflation by the Bank of Mexico, and
payment would occur at the time claims of the court-recognized
creditors are satisfied subject to the priority established by
law; and
. would not be otherwise adjusted to take into account devaluation
of the peso against the U.S. dollar occurring after the court's
declaration.
High inflation rates in Mexico may result in a decrease in demand for our
services and may negatively affect our profit margin
In recent years, Mexico has experienced high levels of inflation. The
annual rate of inflation, as measured by the Mexican National Consumer Price
Index, was 5.7% and 4.0% and 5.2% in 2002, 2003 and 2004, respectively, and was
0.8% for the three-month period ended March 31, 2005. High inflation rates may
adversely affect demand for mobile telephony services. In addition, the overall
state of the Mexican economy and competitive pressures may not allow us to
increase our prices in line with the inflation rate, thus negatively affecting
our profit margin.
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Depreciation or devaluation of the peso relative to the U.S. dollar may
adversely affect our financial condition and results of operations
While our sales are almost entirely denominated in pesos, the vast
majority of our obligations are denominated in U.S. dollars. As a result, we are
exposed to the risk of devaluation of the peso relative to the U.S. dollar.
Although the peso remained relatively stable as compared to the U.S. dollar in
2004, the peso depreciated by 13.9% and 7.6% relative to the U.S. dollar during
2002 and 2003, respectively. In the past, the peso has depreciated substantially
against the U.S. dollar and may depreciate significantly in the future.
Declines in the value of the peso relative to the U.S. dollar could
adversely affect our financial condition and results of operations and our
ability to meet U.S. dollar-denominated obligations. In particular, a
devaluation could affect our capacity for future investments because the prices
for equipment are set in U.S. dollars. In addition, any devaluation of the peso
may negatively affect the value of the securities of a Mexican company with
sales in pesos and debt denominated in U.S. dollars, such as our company.
RISK FACTORS RELATING TO OUR SECURITIES
We are terminating our ADR program, delisting our ADSs from The New York
Stock Exchange and, if we are able to meet certain conditions, might seek to
deregister from the SEC
On June 1, 2005, an extraordinary shareholders' meeting approved the
termination of our ADR program and the subsequent delisting of our ADSs from The
New York Stock Exchange. We anticipate that the termination of the ADR program
and that the delisting will be consummated by the end of the second half of
2005. These actions may have a negative effect on the market price of our ADSs
and the underlying common shares, as trading will be limited to our common
shares in the Mexican Stock Exchange.
Once the ADR program is terminated and the ADSs are delisted from The
New York Stock Exchange, holders of ADSs or, upon conversion, the underlying
common shares, will no longer be entitled to receive dividend payments in U.S.
dollars but will instead receive their dividend payments in Pesos. In addition,
such holders will no longer be contractually entitled to receive shareholder
notifications in English, and must rely instead on information filed in English
by Iusacell with the SEC (for so long as we remain a reporting company with the
SEC) and in Spanish with the Mexican Banking and Securities Regulatory Agency
(Comision Nacional Bancaria de Valores, or "CNBV") and the Mexican Stock
Exchange.
We are also considering the possibility of suspending our registration
with the SEC, provided we meet the conditions for such suspension, which include
mainly the requirement that each class of our registered securities (which
include our ADSs (including the underlying common shares) and the Iusacell
senior notes) have less than 300 U.S. beneficial owners. If we are able to
suspend our registration with the SEC, we will no longer be required to file
annual or periodic reports with the SEC, and investors will have to rely on our
filings with the CNBV and the Mexican Stock Exchange, which are made in the
Spanish language, for information.
d) OTHER SECURITIES
Iusacell's shares have been listed on the Mexican Stock Exchange since
August 4, 1999, trading under the symbol CEL. ADSs representing ten Iusacell
series V shares were listed on the New York Stock Exchange from August 4, 1999
until May 12, 2003, when we implemented a change in the ADR ratio. From that
date and until December 19, 2003, one ADS represented 100 Iusacell series V
shares and traded under the symbol CEL.
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On December 19, 2003, Iusacell concluded an exchange of its series V and
series A shares for new common shares, at a ratio of 20 Series V or A shares per
new common share. The new shares are without par value, in registered form and
have the same rights. The reorganization of the capital structure included a
change in the ADR ratio. From that date, one ADS represents five Iusacell
shares. The trading symbol did not change. The ADSs are evidenced by American
depositary receipts issued under a deposit agreement with The Bank of New York,
as depositary.
On June 1, 2005, an extraordinary shareholders' meeting approved the
termination of our ADR program and the subsequent delisting of our ADSs from The
New York Stock Exchange. We anticipate that the trading of the ADRs in the U.S.
market will be suspended on or around September 19, 2005 and the termination of
the ADR program and that the delisting will be consummated by the end of the
second half of 2005. These actions may have a negative effect on the market
price of our ADSs and the underlying common shares, as trading will be limited
to our common shares in the Mexican Stock Exchange. Both Iusacell and Iusacell
Celular have publicly-traded debt securities registered before the Securities
and Exchange Commission (SEC).
We furnish annual reports before the SEC, as well as any other
information that could be applicable from time to time.
We furnish annual reports and financial information before the Mexican
Securities and Banking Commission and the Mexican Stock Exchange. We also
provide relevant information to the markets in Mexico and the U.S. in terms of
the securities legislation.
In the last three fiscal years and as of the date of filing of this
Annual Report, we have furnished the information mentioned in paragraphs above,
completely and in a timely matter.
e) SIGNIFICANT CHANGES TO THE SECURITIES REGISTERED UNDER THE REGISTRY
On June 1, 2005, an extraordinary shareholders' meeting approved the
termination of our ADR program and the subsequent delisting of our ADSs from The
New York Stock Exchange. We anticipate that the trading of the ADRs in the U.S.
market will be suspended by or around September 19, 2005 and that the
termination of the ADR program and the delisting will be consummated by the end
of the second half of 2005. These actions may have a negative effect on the
market price of our ADSs and the underlying common shares, as trading will be
limited to our common shares in the Mexican Stock Exchange.
f) USE OF PROCEEDS
Not applicable
g) PUBLIC DOCUMENTS
We will provide without charge to each person, a copy of this Annual
Report, upon written or oral request. Written requests for such copies should be
directed to Grupo Iusacell, S.A. de C.V., Montes Urales 460, Colonia Lomas de
Chapultepec, 11000 Mexico, D.F., Attention: Jose Luis Riera Kinkel, Chief
Financial Officer. E-mail requests may be directed to
investor.relations@iusacell.com.mx. Telephone requests may be directed to
555-109-5927.
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2. THE COMPANY
a) HISTORY AND DEVELOPMENT OF THE ISSUER
Grupo Iusacell, S.A. de C.V., which was known as Nuevo Grupo Iusacell,
S.A. de C.V. until February 29, 2000, is a holding company that is a sociedad
anonima de capital variable with indefinite life organized under the laws of
Mexico on August 6, 1998. Grupo Iusacell Celular, S.A. de C.V., the principal
operating subsidiary of Iusacell, which was known as Grupo Iusacell, S.A. de
C.V. until February 29, 2000, is a sociedad anonima de capital variable with
indefinite life organized under the laws of Mexico on October 6, 1992.
Iusacell's commercial name is "Grupo Iusacell," but our operating
subsidiaries market their products under the single Iusacell(TM) brand name.
Iusacell currently operates primarily in Mexico under Mexican legislation,
including, among others, the 1995 Telecommunications Law (Ley Federal de
Telecomunicaciones), the Mexican Securities Market Law (Ley del Mercado de
Valores) and the Mexican Companies Law (Ley General de Sociedades Mercantiles).
We have a national footprint in Mexico. Iusacell Celular, through its
subsidiaries, is primarily engaged in the wireless telecommunications business
and holds concessions to operate cellular telephone systems in five contiguous
market regions in central and southern Mexico, and to provide long distance
service nationwide. Iusacell PCS, S.A. de C.V., which we refer to as Iusacell
PCS, another operating subsidiary of Iusacell and Iusacell PCS de Mexico, S.A.
de C.V., which we refer to as Iusacell PCS de Mexico, now hold concessions to
provide fixed and mobile wireless telephony services using PCS technology on a
nationwide basis in Mexico, as a result of the award by the SCT in April 2005 of
seven concessions for its remaining regions.
On July 29, 2003, MovilAccess, a Mexican telecommunications service
provider controlled by Mr. Salinas Pliego, completed a public tender offer in
Mexico and the United States, pursuant to which it acquired 74.6% of all
outstanding capital stock of Iusacell. In December 2003, we completed a reverse
stock split whereby shareholders received one new share of common stock in
exchange for 20 series A or V shares.
In 2004, excluding the effects of inflation accounting, capitalized
interest and certain non-cash trade-in credits, we invested U.S.$40.2 million in
capital expenditures, primarily to increase the coverage, improve the quality
and enhance the features of our cellular and long distance network, and to
improve our billing and customer care systems. See Item 3, "Financial
Information - Management Comments and Analysis on the Operating Results and
Financial Situation of the Issuer - Financial Situation, Liquidity and Capital
Resources--Capital Expenditures."
During the first quarter of 2005, we invested approximately U.S.$15.1
million in our cellular regions to expand our coverage, and upgrade our 3G
coverage network. In 2005, we plan to invest a total of approximately U.S.$50.1
million in capital expenditures, not including capitalized interest, to acquire,
build out and operate our PCS network, to increase the coverage and improve the
quality of our cellular and long distance networks in the central regions and to
expand our advanced data network capabilities in certain key cities. Our ability
to carry out these capital expenditures depends on obtaining sufficient funds.
It is unclear whether we will be able to obtain the required funds from
operations and vendor and other financing. In particular, we cannot assure you
that we will be able to complete a successful restructuring of our indebtedness.
See Item 1, "General Information--c) Risk Factors--Risk Factors Relating to our
Liquidity--We may be unable to fund our capital expenditure programs which are
critical for us to
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compete or pursue business opportunities" and Item 3, "Financial Information -
Management Comments and Analysis on the Operating Results and Financial
Situation of the Issuer - Financial Situation, Liquidity and Capital
Resources--Capital Expenditures."
Our principal executive offices are located at Montes Urales 460,
Colonia Lomas de Chapultepec, Delegacion Miguel Hidalgo, 11000, Mexico, D.F. Our
telephone number is (5255) 5109-4400. Our Internet website address is
www.iusacell.com. The information on our website is not incorporated into this
Annual Report.
b) BUSINESS DESCRIPTION
We are a wireless telecommunications services provider in Mexico with
nearly 1.5 million mobile wireless customers at December 31, 2004, approximately
76.0% of which are prepaid customers. We hold concessions in the 800 megahertz
(MHz) band to provide cellular wireless services in five contiguous geographic
regions comprising all of central and southern Mexico, and in the 1900 MHz band
to provide PCS wireless services nationwide.
We provide digital service using Code Division Multiple Access ("CDMA")
technology, the highest-capacity commercial digital technology available in the
800 and 1900 MHz frequency bands. In January 2003, we launched the country's
first CDMA2000 1XRTT voice and high-speed data network in Mexico City. With this
advanced network, we increased voice capacity and are able to offer subscribers
new data services, e-mail and Internet access at speeds of up to 144 kilobits
per second (kbps). In addition to our core mobile telephony services, we also
provide a wide range of other telecommunications services, including long
distance, wireless local telephony and data transmission services.
Our subscriber base as of December 31, 2004 was 1,462,740. Of these
subscribers, 350,847 were postpaid customers who purchase mobile telephony
services pursuant to fixed-term contracts, and the remaining 1,111,893 were
prepaid customers who pay for their mobile telephony services in advance
primarily through the purchase of prepaid airtime.
Since July 29, 2003, Iusacell has been under the management control of
MovilAccess. MovilAccess consultants and personnel have been integrally involved
in managing Iusacell's day-to-day operations and defining and implementing
Iusacell's business strategy. MovilAccess currently holds 74.6% of Iusacell's
capital. See Item 4, "Management - c) Directors and Shareholders." Prior to the
acquisition by MovilAccess of its equity interest in Iusacell, Iusacell had been
under the management control of Verizon and Vodafone.
THE TELECOMMUNICATIONS INDUSTRY IN MEXICO
Mobile Telephony Services
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.
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The nine cellular geographic regions are described in the table below.
REGION
NUMBER GEOGRAPHICAL COVERAGE MAJOR CITIES IN THE REGION
------ -------------------------------------------------- -----------------------------------------
1 The states of Baja California and Baja California Tijuana, Mexicali, Ensenada, Tecate and
Sur and the municipality of San Luis Rio Colorado La Paz.
in northwestern Sonora state.
2 The states of Sonora and Sinaloa (except for the Hermosillo, Ciudad Obregon, Culiacan and
municipality of San Luis Rio Colorado in Mazatlan.
northwestern Sonora).
3 The states of Chihuahua and Durango and the Ciudad Juarez, Chihuahua, Durango, Gomez
municipalities of Torreon, Francisco I. Madero, Palacio and Torreon.
Matamoros, San Pedro and Viesca in the state of
Coahuila.
4 The states of Tamaulipas, Nuevo Leon and Coahuila Monterrey, Saltillo, Tampico, Ciudad
(except for the municipalities of Torreon, Victoria, Nuevo Laredo, Reynosa and
Francisco I. Madero, Matamoros, San Pedro and Matamoros.
Viesca).
5 The states of Colima, Jalisco (except for 12 Guadalajara (Mexico's second largest
municipalities in northeastern Jalisco), Michoacan city), Morelia, Tepic, Colima and
and Nayarit. Manzanillo.
6 The states of Aguascalientes, Guanajuato, Aguascalientes, Leon, Queretaro, San Luis
Queretaro, San Luis Potosi and Zacatecas and 12 Potosi and Zacatecas.
municipalities in northeastern Jalisco.
7 The states of Guerrero, Oaxaca, Puebla, Tlaxcala Puebla, Acapulco, Veracruz and Oaxaca.
and Veracruz.
8 The states of Yucatan, Quintana Roo, Campeche, Merida, Cancun, Villahermosa, Campeche,
Chiapas and Tabasco. Tuxtla Gutierrez and San Cristobal de las
Casas.
9 The states of Mexico, Hidalgo and Morelos and the Mexico City, Toluca, Cuernavaca and
Federal District. Pachuca.
The same nine geographic regions apply for the provision of PCS service.
However, cellular regions 5, 6, 7 and 8 correspond to PCS regions 6, 7, 8 and 5,
respectively.
In December 1990, the Mexican government initiated the privatization of
Telmex, which was then the sole provider of landline local and long distance
service and competing in Cellular B-band cellular services, when it sold 20.4%
of the equity and 50.1% of the voting power in Telmex to a private consortium
for U.S.$1.76 billion. The winning consortium consisted of Grupo Carso, S.A. de
C.V., a Mexican conglomerate which owns or otherwise controls a majority of the
consortium's voting interest, SBC Communications Inc. and France Telecom S.A.
Subsequent to the original privatization, the Mexican government further reduced
its holdings in Telmex through additional transactions and completed the sale
process in June 1994. In 2001, Telcel and other wireless international
subsidiaries of Telmex were spun-off from Telmex to form a new company named
America Movil, S.A. de C.V., which is known as America Movil.
Telcel holds the Cellular B-band and PCS D-band concessions in each of
the nine cellular regions and is Mexico's largest mobile wireless operator. Our
subsidiaries hold the Cellular A-band concession in cellular regions 5, 6, 7, 8
and 9 and the PCS E-band concession in regions 1 and 4 and the 1900 MHz band
concession for the remaining PCS regions. Telefonica holds, through
subsidiaries, the Cellular A-band concessions for regions 1, 2, 3 and 4 and PCS
band concessions nationwide. Unefon, our affiliate, has a nationwide PCS band
concession.
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Underserved Telecommunications Market
Despite the significant increase in wireline and wireless penetration in
Mexico in recent years, we believe that there remains a substantial unmet demand
for telephone services in Mexico. According to COFETEL, as of December 31, 2004,
there were approximately 17.1 wireline telephone lines per 100 inhabitants in
Mexico, which is lower than the teledensity of some other Latin American
countries and substantially lower than those of developed countries such as the
United States. Due to the relatively low wireline penetration in developing
countries such as Mexico, increases in the level of wireless penetration in
these countries may be partly attributable to users who purchase wireless
services as a principal means of telecommunications.
On May 1, 1999, Mexico implemented the "calling party pays" modality for
local calls, or CPP, which has been implemented in most Latin American and
European countries. Calling party pays is a wireless telephony payment structure
in which the party that places a call to a wireless telephone is billed for
interconnection access, and the recipient is not billed for the airtime charges
corresponding to that call. The introduction of CPP triggered growth in wireless
penetration, particularly in the prepaid segment and wireless traffic.
i) PRINCIPAL ACTIVITY
OUR MOBILE TELEPHONY SERVICES
History and Overview
We became the first Mexican provider of cellular telecommunications
services in 1989, when we commenced operations of our Cellular A-band network in
region 9. Through a series of transactions from 1990 to 2002, we acquired 100%
beneficial ownership interests in the entities which hold the Cellular A-band
concessions in regions 5, 6, 7, and 8. In December 2001, we initiated the
commercial launch of our PCS services in the cities of Tijuana and Monterrey in
regions 1 and 4 in northern Mexico. In April 2005, we obtained the 1900 MHz band
concessions for the remaining PCS regions, achieving a national footprint.
We offer wireless communications services in a variety of plans, which
are divided into two basic groups: either "postpaid," where the customer is
billed monthly for usage during the previous month based on a fixed-term
contract, or "prepaid," where the customer pays in advance for a specified
volume of usage over a specified period.
Postpaid Services
As of December 31, 2004, postpaid subscribers totaled 350,847,
comprising 24.0% of our customer base. Nominal average monthly mobile telephony
revenue per subscriber (ARPU) in this segment was Ps.840.3 for 2004.
We offer a number of value-added services designed specifically to
fulfill the demands of postpaid subscribers, such as voicemail, call forwarding,
call waiting, three-way calling and secretarial services. We also provide news,
sports and entertainment reporting, emergency road and legal services, and
purchasing services for items or products such as concert tickets, bus tickets,
pizza and drugstore products. Moreover, CDMA digital postpaid customers have
available caller identification, short message service and multimedia services.
In July 2004, we launched 3G services based on our third generation network,
which offers to subscribers with 3G handset features such as transfer of ring
tones, images, games, email, chat, multimedia messaging and push-to-talk over
cellular (POC), among other services, in cities with 1XRTT coverage. In
addition, we plan to launch other value-added services such as location-based
(LBS) (whereby a subscriber can find
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directions to places or locate another subscriber's handset) and mobile office
services, a Blackberry-like service. We believe that these value-added services
help increase postpaid subscriber usage and also enhance our market image as a
full service mobile telephony provider.
Prepaid Services
As of December 31, 2004, prepaid customers (including public and rural
telephony) totaled 1,111,893, comprising 76.0% of our customer base. Prepaid
ARPU was Ps.140.2 for 2004.
In contrast to postpaid subscribers, prepaid customers typically
generate lower levels of usage, have access to a limited number of value-added
services, or may choose to purchase a handset with preloaded minutes. Prepaid
customers often are unwilling to make a fixed financial commitment or do not
have the credit profile to purchase postpaid plan mobile telephony services.
Customers may purchase airtime credit with cash or credit or debit card.
Customers may make their purchases at a distributor's point of sale, at our
customer sales and service centers, through automated teller machines, through
our website or by phone.
The prepaid program markets four different prepaid cards, each of which
credits a specific peso denomination worth of airtime usage over a specified
period of time. For purchases through automated teller machines, we offer two
specific peso denominations of virtual air time. We charge for outgoing calls,
as well as long distance incoming calls and roaming services.
A prepaid customer ceases to be considered a customer of Iusacell when a
specified period of time has elapsed since the customer purchased and activated,
or last added credit to his or her last prepaid card, or last received an
incoming call. The customer's telephone number is then deactivated, and the
customer is considered to have turned over.
Roaming
Through our roaming agreements with other operators, we offer nationwide
roaming service to our prepaid and postpaid mobile telephony subscribers, and
international service only to our postpaid subscribers. Through these
agreements, subscribers can make calls from any location in Mexico served by a
Cellular A-band or PCS band operator, and can receive a call made to the
subscriber's number (automatic call delivery) regardless of the region in Mexico
in which the subscriber is located. We also provide mobile telephony services to
all subscribers of our roaming partners in Mexico while such subscribers are
temporarily located in a region served by Iusacell.
An operator (a host operator) providing service to a subscriber of
another operator (the home operator) temporarily located in the host operator's
service region (an in-roamer) earns usage revenue. We bill the home operator of
an in-roamer for the in-roamer's usage in our service region. In the case of
roaming by an Iusacell subscriber in the region of a host operator (an
out-roamer), Iusacell is billed by the host operator for the subscriber's usage.
We remit the billed amount to the host operator and bill our own customer, the
out-roamer. As a result, we retain the collection risk for roaming charges
incurred by our own subscribers. Conversely, roaming charges billed by Iusacell
for in-roaming usage by subscribers of other 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-roaming fees and usage revenue represented 3.1% of our total
revenues during 2004. Out-roaming charges represented 2.8% of Iusacell's total
revenues during 2004.
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We have more than 60 agreements with U.S., Canadian, Latin American and
other foreign operators to provide our subscribers with international roaming
capabilities, including automatic call delivery without the need to dial an
access code. These operators include Verizon Wireless, AT&T Wireless, Sprint and
Cingular Wireless, among others. Currently, our customers are able to roam in
over 2,000 municipalities in the United States and Canada, as well as in more
than 180 other countries around the world.
OUR LONG DISTANCE SERVICES
In August 1996, we became one of Telmex's first competitors in long
distance service when we began to provide long distance services to our mobile
telephony subscribers in Mexico pursuant to a 30-year concession.
We currently provide long distance service using our own switches and
transmission equipment and a combination of fiber optic lines, microwave links
and lines leased from Telmex and other carriers. At December 31, 2004, we
provided long distance service in 52 cities to 1,471,246 customers,
substantially all of which were existing customers of our mobile telephony
services. We obtained an exemption from COFETEL that allows us not to make
available to our mobile telephony customers the services of other long distance
carriers. We cannot assure you that COFETEL will not rescind this exemption in
the future. Revenues related to long distance services represented 5.7% of our
total revenues for 2004, not including dark fiber optic cable sales.
We have been able to reduce our capital investment for our long distance
business by entering into fiber optic cable swaps with three other long distance
companies between 1998 and 2002. We acquired fibers in the long distance fiber
optic networks built by Marcatel, S.A de C.V., Bestel, S.A de C.V., and
Telereunion S.A de C.V, in central, northern and eastern Mexico, in exchange for
fibers in the long distance fiber optic network we completed in central and
western Mexico. As a result, we obtained redundancy in central Mexico and access
to the United States border and eastern Mexico at minimal cost.
We also exchange international long distance traffic with AT&T and
Teleglobe USA, Inc. These arrangements give us two alternative routes to deliver
international long distance traffic. In March 2002, the United States Federal
Communications Commission granted to Iusatel USA Inc., our U.S. subsidiary, a
Section 214 authorization that allows us to provide facilities-based and resale
telecommunications services within the United States. We have international
termination traffic contracts with U.S. carriers.
OUR OTHER SERVICES
Short Message Service (SMS) and Multimedia Message Service (MMS)
In December 2003, Iusacell entered into an agreement with all other
Mexican mobile telephony companies to allow our respective customers to exchange
short messages. We also have agreements with almost every carrier in the United
States and Canada, which allow our subscribers to send and receive short
messages from U.S. and Canadian mobile phone customers. In addition to basic SMS
services, we offer SMS premium services with content from television
broadcasting companies and radio stations. Through SMS premium, subscribers can
receive sports and weather information, news, jokes and can participate in
contests, among other things.
In 2004, SMS represented 2.0% of our total revenues. We cannot yet
estimate whether short messages have had or will have an adverse impact on the
volume of voice calls and therefore in our revenues.
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In the second half of 2004, we launched MMS services. Through MMS,
subscribers can send messages that include pictures, video and sound to another
MMS handset, email account or internet portal. We believe that MMS may
experience significant growth in the second half of 2005.
Paging
On December 14, 1995, Iusacell Celular and Infomin, S.A. de C.V., which
we refer to as Infomin, formed Infotelecom, S.A. de C.V., which we refer to as
Infotelecom, as a joint venture to market national and international paging
services. Iusacell Celular owns 49% of Infotelecom. See "--Government
Regulation--Paging."
At December 31, 2004, Infotelecom had 3,186 paging customers and
provided service in 30 cities including Mexico City, Guadalajara, Monterrey,
Puebla, Cuernavaca, Toluca, Queretaro, Leon, and Ciudad Juarez. Our revenues
from paging services represented less than 1% of total revenues for 2004. We do
not consider paging to be an area of growth because of competition from short
message services.
Public and Rural Telephony and Fixed Local Wireless Telephony
We operate public and rural telephony programs, using available cellular
capacity. These programs provide telecommunications services through cellular
telephones in phone booths and rural areas. The provision of services in this
way fulfills the terms of our concessions for the provision of cellular
telephony service and uses our cellular network to provide telecommunications
coverage in areas with little or no basic service. As of December 31, 2004, we
had 40,597 cellular telephones in service under our public and rural telephony
programs.
We also provide, on a trial basis pending approval from the Mexican
Ministry of Communication and Transportation (Secretaria de Comunicacion y
Transporte, or SCT), fixed local wireless service in the 450 MHz frequency band
in selected markets in cellular region 9. As of December 31, 2004, we had 2,431
customers. See "--Concessions and Permits--Fixed Local Wireless Telephony."
Revenues from public and from rural telephony and fixed local wireless
telephony represented 1.0% of total revenues in 2004.
Data Transmission
We provide mobile and fixed data transmission services. We offer three
types of services: (i) private lines such as E-1, E3/DS3 and STM1 directly to
carriers and large corporate customers; (ii) Internet access to carriers and
Internet service providers; and (iii) digital multiservices connection to
customers' private branch exchanges ("PBX") to reduce costs for local and long
distance calls to corporate customers.
In January 2003, we commercially launched Mexico's first CDMA2000 1XRTT
voice and high-speed mobile data network in Mexico City. We completed the
upgrade of our network to this technology in the second half of 2004. With this
advanced network, we have increased our voice capacity and are able to offer
subscribers new data services such as high-speed access for internet, intranet,
e-mail, instant messaging, and multiple download for multimedia applications and
M2M solutions at speeds of up to 144 kilobits per second (kbps).
During the latter part of 2003 and early 2004, we completed the
technical testing stage of different platforms to offer voice over IP services
in the modality of groups, commercially known as "push to talk" features. We
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are currently awaiting authorization from COFETEL to introduce these features.
In addition, we plan to start the upgrade of our network to EVDO technology,
offering data services for bandwidth velocity of up to 2.4 Megabits per second,
video streaming and access to television channels, among other things.
Revenues from data transmission services represented 0.5% of total
revenues in 2004.
SEASONALITY
Our business is not materially affected by seasonality.
Advertising
From time to time, we launch advertising campaigns that emphasize the
benefits of our products and services, which we believe strengthen our brand
name. We also undertake promotional campaigns to support the launching of new
products.
CUSTOMER SERVICE
Postpaid and prepaid customers can access dedicated support by dialing
*611, a toll-free number or a local number. In the fourth quarter of 2003, we
outsourced our call center operations to an affiliate of MovilAccess, our
controlling shareholder. This outsourcing has enabled us to reduce operational
costs. See Item 4, "Management - b) Related Party Transactions and Conflict of
Interest - Teleactivos Call Center Services."
Customer service representatives are equipped to answer questions
regarding services and products 24 hours a day, seven days a week. We train
customer service representatives to ensure that each customer receives prompt
attention, informed answers to any inquiries and satisfactory resolution of any
concerns. In May 2003, we redesigned our compensation plan to motivate our
customer service force by compensating it based on performance, rather than
having only a fixed salary structure, as was the case before. In September 2004,
we streamlined our automated voice servicing platform to give customers quicker
access to a service agent.
We also implemented a loyalty and retention program. This program
includes welcome calls and first invoice calls. We also make outreach calls to
customers whose contracts are ending or who choose to terminate service,
offering them a range of alternative service plans based on their profile to
encourage contract renewal. Recently, we implemented a "points" rewards program
for postpaid and prepaid customers to encourage loyalty.
In the second half of 2004, we implemented a software application that
reduces complexities in providing customer service by avoiding interaction with
multiple applications, and compiles customer contact history information under
one single system. This application allows us to provide better customer service
for postpaid subscribers.
PRICING
General
We offer a variety of flexible pricing options for our mobile telephony
customers. The primary components of the postpaid pricing plans include monthly
fees, additional per-minute usage charges and a number of included minutes per
month. The prepaid program markets cards which credit peso amounts to a
customer's account. The cards can be used for a period of 30 or 60 days. See
Item 2, "The Company - b) Business Description - i) Principal Activity--Mobile
Wireless Services--Prepaid Customers." Most of the postpaid plans include a
selection of free handsets. The prepaid plans do not provide free handsets.
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We continually review market pricing in order to maintain a competitive
offer and attract customers from our target market. As a result, constant
adjustments to meet market and competitive conditions may require that we
increase or decrease prices over short periods of time. In the past, we have
been unable to increase prices to match increases in inflation due to
competitive pressures.
Postpaid Plans
The postpaid pricing plans are designed to target primarily high and
moderate usage postpaid subscribers. High-usage customers are typically willing
to pay higher monthly fees in exchange for larger blocks of minutes, value-added
services, a free high-end handset and lower per minute airtime charges. Moderate
and lower-usage subscribers typically prefer pricing options which have a lower
monthly charge, fewer minutes included, a less expensive handset (but still with
subsidy) and higher per minute airtime charges than those options chosen by
high-usage customers.
In December 2003, we launched a new set of postpaid value plans aimed to
position us as the best alternative for the high-value market segment. These new
postpaid plans were designed according to the needs of targeted consumer
segments and are supported by advertising and marketing campaigns.
We also offer multi-line plans designed to fit the communications needs
of small groups of users. In addition, special cross-border plans are offered to
PCS region 1 and region 4 subscribers whereby they can place lower priced calls
across Mexico, the United States and Canada. Finally, in PCS regions 1 and 4 and
cellular region 8, we offer local plans with competitive per minute pricing.
For our corporate customers, we offer either a flexible combination of
our various service packages at a volume rate or a large pool of minutes that
can be shared among all users at a competitive per minute price.
Prepaid Plans
In contrast to postpaid subscribers, prepaid customers typically
generate lower levels of airtime usage, have access to a limited number of
value-added services, often already own a handset and often are unwilling to
make a fixed financial commitment or do not have the credit profile to purchase
postpaid plan services.
Our prepaid services, which we market as "VIVA" plans, provide for
automated reactivation and value-added services such as voice-messaging. We
currently offer our VIVA prepaid cards in denominations of Ps.100.0, Ps.150.0,
Ps.200.0 and Ps.300.0. We also offer virtual airtime in denominations of Ps.500
and Ps.1,000 through automated teller machines and in stores operated by Elektra
and Salinas y Rocha, S.A. de C.V., and other national retail chains that are our
affiliates. In February 2003, we introduced new prepaid cards with an aggressive
price per minute structure designed to avoid becoming subject to a new tax on
prepaid mobile telephony services imposed by Mexican tax authorities. This tax
has since been rescinded pursuant to an injunction.
Hybrid Plans
In 2000, we launched a hybrid plan which featured elements of postpaid
and prepaid plans targeted at the lower socio-economic segment of the
population, which generally wants the communications services of a mobile
telephone but wants to control usage. In March 2003, we discontinued the
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hybrid plans because of the high level of churn experienced. However, due to
demand from customers, we reintroduced hybrid plans in January 2004. We have
increased the monthly fees charged for hybrid plans in an effort to minimize
churn.
ACTIVATION, BILLING AND COLLECTION PROCEDURES
We can activate a phone within 15 minutes or less for any prepaid and
postpaid customers through the use of new technologies such as Over The Air
Service Provisioning. For postpaid customers who intend to pay their monthly
charges either with a credit card or in cash there is an automatic credit
scoring process prior to the delivery and activation of a mobile telephone. The
deposit requirements are determined automatically based on the risk profile
resulting from the credit scoring.
We have also implemented a system to monitor MOU levels and the number
of calls to certain geographic areas in order to identify abnormal usage by
postpaid subscribers. When abnormal usage is detected, we contact the subscriber
to determine whether such usage has been authorized. We believe that these
procedures are effective in reducing the number of billing disputes with
subscribers and losses due to fraud.
Billing is currently administered using five different billing systems,
including:
. a mobile telephony customer care and billing system provided by
Schlumberger Distribution Mexico, S.A. de C.V., which we also
use for our 450 MHz fixed local wireless business,
. one point of sale system that provides billing, administration
and control features,
. a proprietary residential long distance system,
. a proprietary system for high-volume business long distance
customers, and
. a system for paging customers.
We compile billing information from our switches by electronic transfer
on a half-hour basis for processing by our billing systems. We have measures in
place that enable us to recover billing information that may be lost as a result
of disasters.
We invoice our postpaid customers at the end of each month for the
previous month's service. All customers have 19 credit days, after which they
receive an overdue balance notification, except for a select number of postpaid
customers distinguished by volume, which customers are allowed to a longer
credit period. Our payment policy stipulates that after 60 days of non-payment,
lines are suspended, and after 120 days of nonpayment, these lines are
disconnected and considered as delinquent accounts.
We mitigate our credit exposure in seven ways:
. by obtaining a credit report from the National Credit Bureau
(Buro Nacional de Credito), a Mexican affiliate of TransUnion
Corporation for those customers not found in our internal
database;
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. by performing an automatic credit scoring and depending on the
risk profile, we may require our customers to prepay a certain
number of monthly fees or even the cost of the handset;
. by requiring payment to be made by credit card;
. by establishing credit limits and portfolio segmentation,
according to customers' credit quality;
. by requiring full payment at the time of purchase of a handset;
. by offering prepaid services, which eliminate all credit risk;
and
. by applying additional collection procedures according to a
customer's prior payment behavior.
For 2004 we reserved approximately 2.3% of our revenues for doubtful
accounts. We record a revenue provision based on historical trends, by applying
a percentage to the amounts outstanding for those postpaid customers who have
fallen behind on their payments and whose service had been partially suspended.
We permit incoming call service and continue to charge monthly fees to suspended
customers for an additional two months, but reserve a substantial portion of the
monthly fees as a revenue provision.
CHURN AND TURNOVER
Postpaid Churn
Postpaid churn measures both voluntarily and involuntarily disconnected
subscribers. Average monthly postpaid churn for a given period is calculated by
dividing the sum of all postpaid subscribers disconnected during such period by
the sum of the beginning-of-month postpaid subscribers for each of the months in
such period, expressed as a percentage. Voluntarily disconnected subscribers
encompass subscribers who choose not to continue with Iusacell postpaid services
or choose to migrate to one of our prepaid options. Involuntarily disconnected
subscribers encompass customers whose service is terminated after failing to
meet Iusacell's payment requirements.
Average monthly postpaid churn for 2004 was 2.76%. To reduce churn, we
have implemented retention and loyalty program that includes the proactive
calling of customers as well as the development of specific retention offers to
address specific problems.
Prepaid Turnover
We evaluate alternative methods of determining prepaid customer turnover
on an ongoing basis, as the current method is dependent upon, among other
things, the number of days without use we permit before deactivating a phone
number.
Under our current policy, prepaid customers have 30 or 60 days,
depending on the prepaid amount, to use an activated prepaid card, activate a
new card or otherwise replenish the airtime in their account. If the customer
has not activated a new card or replenished the airtime in its account at the
end of 30 or 60 days, the balance of the customer's account becomes zero, and
the customer loses the ability to make outgoing calls for an additional period
of 90 days. During this 90-day period, a prepaid customer will be able to
receive incoming calls, but not to make outgoing calls. Once the 90-day period
lapses, and unless the customer has activated a new card, replenished the
airtime in its account or received incoming calls, the customer's telephone
number is deactivated. This 90-day period can be extended by
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receiving incoming calls, up to a maximum of 300 or 330 days, depending on the
prepaid amount replenished. At the end of such 300- or 330-day period, unless
the customer has replenished the airtime in its account, the telephone number is
deactivated.
In the third quarter of 2003, we made certain changes to our activation
and turnover policies aimed at providing greater transparency and focusing on
active customers. We reduced the period during which a prepaid customer can
receive incoming calls but cannot make outgoing calls from 305 and 275 days
(depending on the amount of airtime charged) to the current 90 days. Through
this policy change, in the third quarter of 2003 we identified and wrote off
approximately 437,000 existing prepaid customers who had not utilized our
service nor received income calls for more than 90 days. In the fourth quarter
of 2003, we wrote off approximately 135,000 additional lines. We also reduced
the initial period for spending an activated prepaid card and activating a new
card from 60 or 90 days, depending on the prepaid plan, to the current 30 and
60 days.
Average monthly prepaid turnover for 2004 was 4.31%.
ii) DISTRIBUTION CHANNELS
SALES, MARKETING AND DISTRIBUTION
Our marketing strategy is directed to achieve profitable growth, focused
primarily on our mobile telephony business. We have focused our sales and
marketing strategy on innovative products and value-added services for digital
postpaid and prepaid customers, defined as the person who utilizes and depends
on mobile telephony communications on a daily basis. Our mobile telephony
subscribers are classified according to five different usage profiles. We are
implementing distribution, advertising, customer service support and pricing
plans targeted to each specific customer segment and to increase airtime usage.
We currently target the various segments of our subscriber base through
various sales and distribution channels. Our sales force plan provides for
continuous training, a basic salary and monetary incentives to encourage our
sales force to activate profitable and loyal accounts, cross-sell the full
complement of our service offerings and maintain our standards in advertising,
promotions and customer service.
During the second half of 2004, we implemented a regional sales and
marketing strategy, whereby each region is treated as an independent business
unit, with marketing campaigns and sales channels tailored to the
characteristics of each region.
Customer Sales and Service Centers
Our customer sales and service centers offer one-stop-shopping for a
variety of mobile wireless services and accessories. Walk-in customers can
subscribe to mobile telephony service postpaid plans, purchase prepaid cards,
sign up for long distance service and purchase equipment such as handsets and
accessories. Certain of our stores also offer face-to-face customer service. We
currently have a total of 119 customer sales and service centers, 109 of which
are managed by Elektra and ten of which are managed by us.
In an effort to control costs, during 2003 we closed 17 centers. Our
affiliate Elektra, a retail house appliances chain with significant experience
in the operation of retail points of sale, has assumed the operations of 109 of
our centers and also offers some of its products in the premises. See Item 4,
"Management - b) Related Party Transactions and Conflict of Interest - Elektra
Operation and Management of our Customer Sales and Service Centers."
(27)
Corporate Sales Force
To service the needs of our corporate customers, we have created a
direct sales force, which, at December 31, 2004, included 68 full-time sales
representatives. These direct sales representatives are distributed throughout
Mexico to deliver personalized service. This group of trained representatives
seeks to increase sales by:
. aggressively pursuing sales opportunities in the corporate
segment;
. "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.
Independent Distributors
We maintain relationships with a broad network of exclusive distributors
and national retailers. At December 31, 2004, these distributors and retailers
sold all of our products at 1,154 points of sale in Mexico, down from 1,315
points of sale a year before. This decrease was due primarily to the termination
of relationships with distributors with low productivity. Our prepaid cards were
distributed at near to 60,000 points of sale, up from 56,450 points of sale a
year before. The increase in prepaid cards points of sale is mainly due to the
commencement of the distribution of our prepaid cards by Elektra in August 2003
and Coppel in September 2003, two national retail house appliances chains. See
Item 4, "Management - b) Related Party Transactions and Conflict of
Interest--Elektra Marketing and Sales Services."
In order to ensure that our standards are maintained at all distribution
points, we provide assistance to our distributors in training, promotions and
advertising. We also provide them with information on our customer base to allow
the distributors to service our customers effectively. In particular, in May
2004 we launched a web site for our exclusive distributors which enables them to
offer almost all of the current services that we provide at our customer sales
and service centers such as prepaid and postpaid activations, upgrades,
payments, copies of invoices and changes to user plans.
Commission Sales Agents
In the past, we retained commission agents as a flexible sales force in
all of our mobile telephony regions. The agents functioned as mobile telephony
service brokers for us, working out of their own premises. These agents provided
additional distribution outlets with limited support from Iusacell. At December
31, 2004, we had 18 commission agents.
Telemarketing
From time to time, we engage telemarketing service providers as a direct
marketing mechanism or to follow up on targeted outbound calls and receive calls
through an 800 number. In recent months, we have used telemarketing as a tool to
reach out to prospective customers. Prospective customers are assigned to our
corporate sales force when more than 20 lines are requested and to an exclusive
distributor when less than 20 lines are requested. Our policy is to call the
prospective customers within 24 hours after we receive a call at our 800 number
asking for information about our products.
(28)
The telemarketing force is knowledgeable as to our products specifications, but
our corporate sales force or the exclusive distributor close the sale. See Item
4, "Management - Related Party Transactions and Conflict of Interest -
Teleactivos Call Center Services."
Electronic Means
We have implemented four electronic tools for the sale of prepaid
airtime without the purchase of a prepaid card:
. sales through automated teller machines,
. sales over the phone by dialing *AIRE,
. sales through our website - www.iusacell.com, and
. sales through specific points of sale.
Sales at ATM machines are charged against our customer's bank account by
using a personal identification number. We have implemented ATM sales at Banco
Azteca, Banamex-Citibank, BBVA Bancomer, Scotia Bank Inverlat and HSBC. Sales
using *AIRE and our website are charged to our customer's credit or debit card.
For sales through specific points of sales, customers can purchase
airtime at certain exclusive distributors by simply giving their phone number.
iii) PATENTS, LICENSES, TRADE MARKS AND OTHER AGREEMENTS
Iusacell does not undertake research and development activities.
Iusacell's commercial name is "Grupo Iusacell," but our operating subsidiaries
market their products under the single Iusacell(TM) brand name. We also market
our prepaid products under the brand VIVA de Iusacell.
MATERIAL CONTRACTS
Concessions
We conduct our mobile telephony and other services pursuant to
concessions granted by the Mexican government.
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;
(29)
. the required coverage program;
. the term during which such service may be provided;
. the payment, where applicable, required to be made to
acquire the concession, including, where applicable, the
participation of the Mexican government in the revenues
of the holder of the concession; and
. any other rights and obligations affecting the
concession holder.
In addition to concessions, the SCT may also grant permits for (i)
establishing, operating or exploiting telecommunications services not
constituting a public network (i.e., reselling) and (ii) installing, operating
or exploiting transmission-ground stations. There is no specified maximum term
for permits. Under the 1995 Telecommunications Law, only registration with the
SCT is required to provide value-added telecommunications services.
Under the 1995 Telecommunications Law and the 1993 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 Economy. The Mexican Foreign Investment Commission ruled, upon
application of Unefon, that concessions for PCS services should be treated
identically to concessions for cellular services for foreign investment
purposes. There are no foreign investment participation restrictions with
respect to 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 to other
holders of telecommunications concessions and permits;
(30)
. loss of the concession or permit holder's Mexican
nationality in instances in which Mexican nationality is
legally required;
. unauthorized assignment, transfer or encumbrance of the
concession or permit, of any rights under the concession
or permit or of assets used for the exploitation of the
concession or permit;
. failure to pay to the Mexican government its fee for the
concession or permit or, where applicable, its
participation in the revenues of the holder of the
concession or permit; or
. participation of any foreign government in the capital
stock of the holder of the concession or permit.
In addition, the SCT may establish for any concession further events
which could result in revocation of that concession.
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 Mexican 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 Mexican
government. Should no agreement be reached on the amount of the indemnity in the
case of a seizure or expropriation, the determination will be made by an
independent appraiser. Iusacell is not aware of any instance in which the SCT
has exercised any of these powers in connection with a cellular company.
The Original Concession
Our right to provide radiotelephony, local wireless and data
transmission services nationwide, as well as cellular service in region 9, is
based upon a concession granted on April 1, 1957, as amended, which we refer to
as the Original Concession, to Servicio Organizado Secretarial, S.A., which
merged into SOS Telecomunicaciones, S.A. de C.V., one of our wholly-owned
subsidiaries, which we refer to as SOS. 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. See Item 1, "General
Information--c) Risk Factors--Risk Factors Relating to Doing Business in
Mexico--The Mexican government may impose additional conditions on our
concessions or may take them away."
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 equal
to 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 radio
communications network.
(31)
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 us to expand the
types of telecommunications services which we may offer. In 1978, the Original
Concession was amended to grant SOS an additional allocation in the 440-450 MHz
and 485-495 MHz frequency ranges in return for yielding a portion of its
132-144 MHz frequency range allocation. SOS retained the frequencies between 138
and 144 MHz.
Between 1986 and 1989, the Original Concession was further amended to
enable SOS to provide fixed rural radiotelephony service, to offer telex and
data transmission with the obligation to link its subscribers to the network
owned by Telecom, and to interconnect its radiocommunications ground stations
through satellite.
In 1989, SOS was authorized to install, operate and maintain a mobile
public radiocommunications network with cellular technology in the 825-835 MHz
and 870-880 MHz frequency bands in cellular region 9. In 1990, SOS was
authorized to carry intra-regional cellular-to-cellular communications
throughout cellular 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.
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, we hold the right to provide cellular service pursuant to
an authorization granted to SOS by the SCT in 1989 under the Original
Concession. In regions 5, 6, 7 and 8, we hold the right to provide cellular
service through our wholly-owned 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, Telecomunicaciones del Golfo, S.A.
de C.V., known as Telgolfo, and Portatel del Sureste, S.A. de C.V. known as
Portatel, respectively. Comcel, Portacel, Telgolfo and Portatel each holds a
20-year concession expiring in 2010 which authorizes these subsidiaries to
install, operate, maintain and exploit mobile public radiotelephone networks
with cellular technology for commercial use in the Cellular A-band.
(32)
In consideration for these authorizations and concessions, the subsidiaries made
initial payments to the Mexican government and, in addition, must make payments
as follows:
PERCENT OF GROSS REVENUES
PAYABLE TO THE MEXICAN
SUBSIDIARY GOVERNMENT
---------------------- ------------------------------
Comcel ............... 8%
Portacel ............. 7%
Telgolfo ............. 8%
Portatel ............. 6%
SOS .................. 5%
By the terms of their concessions, Comcel, Portacel, Telgolfo and
Portatel must continually modernize their services after receiving approval of
their technical and economic plans from the SCT. In determining whether to
approve these plans, the SCT is authorized to consider whether the plans
sufficiently address factors such as the public interest (including, without
limitation, teledensity) and efficiency and uniformity in telecommunications
throughout Mexico. These concessions may be revoked or terminated prior to their
expiration dates in the event the concession holder fails to comply with the
conditions established in the concessions or applicable law. The concessions
may, however, be renewed for a term equal to the original term upon timely
application to the SCT, provided that the concession holder had complied with
all of the requirements of its concession and agrees to any new terms and
conditions established by the SCT at the time of such renewal.
PCS Concessions
In October 1998, the SCT granted to Iusacell PCS, which is a joint
venture between Iusacell and Jose Ramon Elizondo Anaya, a former director of
Iusacell Celular, in which Iusacell originally held a 94.9% equity interest and
a 49% voting interest, a concession for the installation and exploitation of a
public network to provide fixed and local mobile access and a concession of 1900
MHz frequencies in region 1 (which includes the city of Tijuana) and region 4
(which includes the city of Monterrey), for a renewable 20-year term. Under the
terms of its concession, Iusacell PCS is committed to cover at least 20% of the
total population in those regions by the end of the third year of the concession
and 50% of the total population in those regions by the end of the fifth year of
the concession. We are currently in compliance with the coverage commitments
under our concession. Upon our application, in November 2000, the SCT granted
Iusacell PCS an exemption for five years from the obligation to offer customers
the option to choose a long distance carrier other than us. We cannot assure you
that we will be able to obtain an extension of this exemption.
In April 2005, the SCT granted to Iusacell PCS de Mexico, S.A. de C.V., which we
refer to as Iusacell PCS de Mexico, a subsidiary of Iusacell PCS, a concession
for the installation and exploitation of a public network to provide fixed and
local mobile access and a concession of 1900 MHz bands in regions 2, 3, 5, 6, 7,
8 and 9, for a renewable 20-year term. Under the terms of these concessions,
Iusacell PCS de Mexico is required to cover at least 20% and 50% of the total
population in those regions by the end of the third and fifth years of the
concession, respectively. Additionally and, unlikely the PCS concessions for
regiones 1 and 4, the use of the frequencies covered by these concessions is
subject to the payment of some duties in accordance with Article 244B of the Ley
Federal de Derechos. Due to our financial condition, we cannot asure that we
will be able to make investments to fulfill our commitments under these
concessions. See Item 1. "General Information - c) Risk Factors - We may be
unable to fund our capital expenditure programs which are critical for us to
compete, or pursue business opportunities."
(33)
Paging
On December 14, 1995, Iusacell Celular 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. The joint venture agreement between Iusacell Celular and
Infomin contemplates that Infomin will ultimately transfer its paging concession
to Infotelecom.
Infotelecom is required to make monthly payments to Infomin equal to 5%
of all gross revenues for the preceding month. This payment represents the
amount which Infomin as concession holder must pay to the SCT for the right to
provide paging service. In 2000, Infomin received governmental approval to
transfer its paging concession to Infotelecom.
Long Distance
Our right to provide long distance services is based upon a long
distance concession granted by the SCT to Iusatel, on October 16, 1995. The term
of the long distance concession is 30 years and may be renewed upon timely
application to the SCT, for an equal period of time, provided that Iusatel
complies with certain requirements. Upon our 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 using 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. Iusatel complied with its coverage commitments in all cities except for
Saltillo in region 4. Therefore, in 2001 the SCT substituted Tlaxcala for
Saltillo in our coverage commitment, and we are currently in compliance with all
our coverage commitments.
Fixed Local Wireless Telephony
We believe our right to provide fixed local wireless telephony service
is derived from the Original Concession. The Original Concession, as granted,
permitted SOS to provide radiocommunications service to vehicle-mounted terminal
equipment nationwide. In 1986, the SCT amended the Original Concession to
authorize SOS to provide fixed public radiotelephony service in rural areas
nationwide in accordance with plans to be approved by the SCT. We have never
received the SCT's approval of our technical and economic plans for local
wireless service in the 450 MHz frequency band. However, Iusacell Celular has
reached an agreement with the SCT on a technical process by which we can provide
local wireless service in the 450 MHz frequency band in some of the existing
service regions and has received a right of first refusal to acquire the
concessions to provide local wireless service in such regions.
In September 1998, we determined that, because of many factors,
including the impact of changing technology since the initiation of the 450 MHz
fixed local wireless project in 1994, an impairment of our investment in 450 MHz
TDMA technology had occurred. As a result, we recorded a substantial non-cash
write-down of our investment in the 450 MHz fixed local wireless project.
(34)
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 Verizon assuming management control over Iusacell upon the
requirement that Iusacell would transfer at least 51% of the voting shares of
Iusatelecomunicaciones and Iusatel to Mexican investors on terms acceptable to
the Mexican Foreign Investment Commission.
In November 1998, we complied with this requirement by transferring 51%
of the voting shares of these two subsidiaries to Mr. Elizondo by means of a
subscription to capital. We retained 49% of the voting shares of these
subsidiaries, representing 4.9% of their capital. We also held an additional 90%
of the capital of these subsidiaries through the ownership of neutral limited
voting stock (inversion neutra) that does not constitute voting shares for
purposes of the Mexican foreign investment laws. Consequently, we hold a 94.9%
equity interest in these two subsidiaries.
To participate in the auctions for concessions for microwave frequencies
concluded in September 1997 and 1.9 GHz PCS frequencies concluded in May 1998,
we formed separate joint venture companies with Mr. Elizondo. The Mexican
Foreign Investment Bureau approved a capital structure substantially similar to
that authorized for Iusatel and Iusatelecomunicaciones for the joint venture
companies.
Moreover, in December 1998 Mr. Elizondo acquired a 2% interest in
Infotelecom from Iusacell Celular. As a result, we currently hold only 49% of
this entity, complying with the condition precedent then necessary to allow our
partner, Infomin, to transfer its paging concession to Infotelecom.
As a consequence of the acquisition by MovilAccess of 74.6% of the
capital stock of Iusacell in July 2003, we are no longer subject to foreign
ownership restrictions. On November 3, 2003, we reached an agreement with
Mr. Elizondo to take, within a period of two years, all the necessary actions to
buy out Mr. Elizondo's full participation in Iusatel, Iusatelecomunicaciones,
Punto-a-Punto Iusacell, Iusacell PCS and Infotelecom.
RATES FOR TELECOMMUNICATIONS SERVICES
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.
(35)
In January 2001, we negotiated a rate reduction with Telmex that
decreased both long distance and local cellular interconnection charges from
U.S.$0.0330 to U.S.$0.0125 per minute. In addition, we agreed to pay Telmex an
aggregate of U.S.$13.0 million as compensation for the projects Telmex undertook
to prepare its long distance network for competition and we also agreed to pay a
U.S.$0.0053 per minute surcharge to the local wireline interconnection rate for
four years for long distance calls terminated in Telmex's local networks. In
September 2004, we made our final projects payment to Telmex.
In December 2001, Telmex, Alestra and Avantel reached an agreement to
further reduce the interconnection rate from U.S.$0.0125 per minute to
U.S.$0.00975 per minute. We negotiated similar terms with Telmex for both our
long distance business and local interconnection rate through December 31, 2005.
Indebtedness
We are debtors under several credit agreements and note issuances, which
we describe in Item 3, "Financial Information - c) Material Indebtedness
Report."
Tower Monetization
We sell our towers to, and lease back space in such towers from, MATC
Celular. See Item 3, "Financial Information - Management Comments and Analysis
on the Operating Results and Financial Situation of the Issuer" for a
description of the agreements governing these sales and leases.
Acquisition of Equity Interests in Certain Subsidiaries
On November 3, 2003, we entered into an agreement with Mr. Jose Ramon
Elizondo to take, within a period of two years, all the necessary actions to buy
out Mr. Elizondo's (i) 5.1% equity interest and 51% voting interest in each of
Iusatelecomunicaciones, Iusatel, Punto-a-Punto Iusacell and Iusacell PCS, our
respective local wireless, long distance, microwave transmission and region 1
and 4 PCS subsidiaries, and (ii) 2% equity interest in our paging joint venture
company, Infotelecom. In exchange for such interests, we agreed to pay
Mr. Elizondo U.S.$11.2 million, payable in U.S.$0.1 million weekly installments.
We have been paying such weekly installments since November 3, 2003.
iv) PRINCIPAL CLIENTS
Our services are directed to those with wireless voice and data
communications and value added services needs.
v) APPLICABLE LEGISLATION AND TAX SITUATION
GOVERNMENT REGULATION
Telecommunications systems in Mexico are regulated by the SCT and by
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, local telephony, mobile and other telecommunications
services have been promulgated under the 1995 Telecommunications Law. However,
some rules from the prior Law of General Means of Communication (Ley de Vias
Generales de Comunicacion) and the rules promulgated under such law, including,
without limitation, the Telecommunications Rules (Reglamento de
Telecomunicaciones) which we collectively refer to as the Original
Communications Laws, generally remain effective if they are not inconsistent
with the 1995 Telecommunications Law and the rules promulgated under that law.
(36)
These laws and regulations define the regulatory structure applicable to
the nationwide telecommunications infrastructure and the provision of
telecommunications services. They govern, among other things:
. applications to obtain concessions to install, maintain and
operate telecommunications systems;
. the establishment of technical standards for the provision of
telecommunications services;
. the grant, revocation and modification of concessions and
permits; and
. the auction of spectrum.
The terms and conditions of concessions and permits granted under the
Original Communications Laws, which is the case for the cellular concessions and
permits granted to Iusacell and its subsidiaries, are 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. For instance, rates charged by
holders of concessions and permits granted under the Original Communications
Laws no longer require prior approval from the SCT, but only require
registration with COFETEL.
In terms of the tax regime, Iusacell is subject to the payment of income
tax and value added tax and other general dispositions related to tax matters,
as a taxpayer corporation.
vi) HUMAN RESOURCES
The table below presents a breakdown of permanent and temporary
employees at Iusacell and its controlled affiliates:
DECEMBER 31,
------------------------------------------
2002 2003 2004
------------ ------------ ------------
Permanent Employees(1) 1,584 1,154 1,148
Temporary Employees 101(2) 758 2,238
----------
(1) Includes both full-time and part-time employees.
(2) Includes five Verizon seconded employees.
In 2004, we had an average of 1,444 temporary employees, mainly in the
sales area.
Approximately 18% of our 1,148 full-time employees at December 31, 2004
were members of a labor union. We have never experienced a work stoppage and we
consider our relationship with our employees to be good.
The majority of our employees render services to us through legal
entities and are not our direct employees.
(37)
The table below presents a breakdown of our employees by area.
DECEMBER 31,
------------------------------------------
AREAS 2002 2003 2004
------------------------------ ------------ ------------ ------------
Sales, Customer Care and
Marketing 1,100 1,531 2,613
Finance and Administrative 205 171 369
Technology 380 210 404
------------ ------------ ------------
Total 1,685 1,912 3,386
------------ ------------ ------------
vii) ENVIRONMENTAL PERFORMANCE
Not Applicable
viii) MARKET INFORMATION
COMPETITION
Mobile telephony 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 such rates are set on the basis of cost. The offering
of mobile telephony services in Mexico is highly competitive, with one operator,
Telcel, commanding a significant share of the market.
We face competition from the following companies:
. Telcel, which is the largest wireless communications provider.
Telcel holds the Cellular B-band, the PCS D-band and the PCS
F-band nationwide concessions.
. Telefonica, which provides services in the 1.9 GHz (PCS)
spectrum in most cities in Mexico. Telefonica also operates
Cellular A-band concessions in the northern part of Mexico.
. Unefon, our affiliate, holds the PCS A-band nationwide
concessions. Unefon currently provides fixed and mobile wireless
services in Mexico City, Guadalajara, Monterrey, Toluca,
Acapulco and 21 other cities in Mexico.
We also face competition from companies providing mobile wireless
telecommunications services using alternative existing technologies. Nextel de
Mexico, S.A. de C.V. began marketing its enhanced specialized mobile radio
services in 1998 and currently covers 33 cities in Mexico.
In long distance services, we face competition from nine other
concession holders, including primarily Telmex, Alestra S.A. de C.V. and Avantel
S.A. de C.V., the latter two of which are joint venture companies in which AT&T
and MCI WorldCom, respectively, have beneficial ownership interests. In data
transmission services, we compete for customers with Telmex, state-owned
Telecomunicaciones de Mexico and long distance companies to form a highly
competitive market with more than 20 participants. In addition, we believe that
the current Mexican data transmission industry includes over 1,000 private
networks that provide data transmission services.
In addition, the Mexican government may grant additional concessions to
other companies to provide services similar to or the same as those that we
provide.
(38)
ix) CORPORATE STRUCTURE
Our principal shareholder, MovilAccess, is part of a group of companies
controlled, directly or indirectly, by Mr. Ricardo Salinas Pliego. For a
description of MovilAccess, see Item 4, "Management - c) Directors and
Shareholders."
Grupo Iusacell, S.A. de C.V. is a holding company for the shares of
Grupo Iusacell Celular, S.A. de C.V. and several other subsidiaries. The
following table shows our active direct and indirect subsidiaries, their
principal lines of business, their countries of incorporation and the
percentages of our ownership interest and voting power as of December 31, 2004.
(39)
% DIRECT AND % DIRECT AND
INDIRECT INDIRECT
COUNTRY OF ECONOMIC VOTING
SUBSIDIARY LINE OF BUSINESS INCORPORATION INTEREST INTEREST
------------------------------------------ ----------------------- ------------- ------------ ------------
Grupo Iusacell Celular, S.A. de C.V. Operating cellular Mexico 100.0 100.0
Iusacell PCS, S.A. de C.V.(1) Regions 1 and 4 PCS Mexico 94.9 94.9
Iusacell PCS de Mexico, S.A. de C.V.(2) Regions 2, 3, 5, 6, 7, Mexico 94.9 94.9
8 and 9 PCS
Iusacell Infraestructura, S.A. de C.V. Microwave financing Mexico 100.0 100.0
Iusacell Arrendadora, S.A. de C.V. Leasing Mexico 100.0 100.0
Iusacell Infraestructura de Microwave financing Mexico 100.0 100.0
Mexico, S.A. de C.V.
SOS Telecomunicaciones, S.A. de C.V.(3) Region 9 cellular Mexico 100.0 100.0
Comunicaciones Celulares de Occidente, Region 5 cellular Mexico 100.0 100.0
S.A. de C.V.(4)
Sistemas Telefonicos Portatiles Celulares, Region 6 cellular Mexico 100.0 100.0
S.A. de C.V.(3)
Telecomunicaciones del Golfo, Region 7 cellular Mexico 100.0 100.0
S.A. de C.V. (3)
Iusacell, S.A. de C.V.(3) Sales and marketing Mexico 100.0 100.0
Sistecel, S.A. de C.V.(3) Administrative services Mexico 100.0 100.0
Iusatel, S.A. de C.V.(1)(3) Long distance Mexico 94.9 49.0
Iusatel USA, Inc.(5) Long distance U.S. United States 94.9 49.0
Iusatelecomunicaciones, S.A. de C.V.(1)(3) Local gireles Mexico 94.9 49.0
Punto-a-Punto Iusacell, S.A. de C.V.(1)(3) Microwave transmission Mexico 94.9 49.0
Infotelecom, S.A. de C.V.(1)(3) Paging Mexico 49.0 49.0
Inmobiliaria Montes Urales 460, Real estate Mexico 100.0 100.0
S.A. de C.V.(3)
Iusanet, S.A. de C.V.(3) Services Mexico 100.0 100.0
Editorial Celular, S.A. de C.V.(3) Publishing Mexico 40.0 40.0
Grupo Portatel, S.A. de C.V.(3) Holding company for Mexico 100.0 100.0
Portatel del Sureste
S.A. de C.V.
Portatel del Sureste, S.A. de C.V.(6) Region 8 cellular Mexico 100.0 100.0
Mexican Cellular Investment, Inc.(3) Holding company for United States 100.0 100.0
Comunicaciones
Celulares de
Occidente, S.A. de C.V.
----------
(1) On November 3, 2003, we entered into an agreement with Mr. Jose Ramon
Elizondo to take, within a period of two years, all necessary actions
to buy out Mr. Elizondo's (i) 5.1% equity interest and 51% voting
interest in each of Iusatelecomunicaciones, Iusatel, Punto-a-Punto
Iusacell and Iusacell PCS, and (ii) 2% equity interest in Infotelecom.
This table does not reflect such acquisitions since they have not yet
been completed.
(40)
(2) Held indirectly through Iusacell PCS, S.A. de C.V.
(3) Held through Grupo Iusacell Celular, S.A. de C.V.
(4) Held through Mexican Cellular Investment, Inc.
(5) Held through Iusatel, S.A. de C.V.
(6) Held through Grupo Portatel, S.A. de C.V.
All of the above companies, including those in which we own directly or
indirectly a minority voting interest, except for Editorial Celular, S.A. de
C.V., are consolidated with the financial statements of Iusacell. See Note 3 to
the Consolidated Financial Statements.
x) PRINCIPAL ASSETS
NETWORK, EQUIPMENT AND INFORMATION TECHNOLOGY
Our cellular and PCS network utilizes mainly Lucent Technologies' CDMA
digital technology. We also have Motorola CDMA digital technology and we are
introducing Huawei equipment. As of December 31, 2004, our integrated wireless
network was comprised of seven cellular and PCS switches, 732 cellular and PCS
cell sites and 153 repeaters. During 2004, we added 14 new cellular cell sites
and 12 PCS cell sites.
We also have 828 microwave links, all of which are owned by us, with
either SDH or PDH technology. We have also leased lines located mainly in PCS
regions 1 and 4 and cellular region 8. We have swapped our rights to certain
short-haul microwave frequency links for long-haul frequency links in northern
Mexico held by an affiliate of Telefonica, the Cellular A-band provider. In
addition, in April 2004, we obtained the right to install long-haul microwave
links using Bestel's frequencies.
Our long distance network consists of 5,302 kilometers of fiber optic
backbone (including fiber optic cable obtained through swaps), in both
metropolitan and long distance segments, using SDH (STM16 capacity in the
backbone) and three switches. We have introduced Dense Wavelength Division
Multiplexing (DWDM) technology in several high-traffic segments of our fiber
optic network to increase capacity. In the second half of 2004, we completed the
process of upgrading our long distance network by acquiring three Nortel
Passport 15000 switches that are located in Leon, Monterrey and Toluca, and a
call server. These switches enable us to offer advanced voice and data services
based on packet technology.
In 2002, we started providing two-way short message service (SMS), and
since January 2003, we have been providing packet switched data (PSD) services
using 3G-1XRTT standard. Currently, we provide 1XRTT services in our entire
network. 1XRTT improves efficiency in spectrum use and allows users to get
higher data speed connections.
We have a network operations and control center (NOCC) in Toluca which
oversees, manages and provides technical support to all our network. When we
moved our corporate headquarters in January 2004, we had to close our NOCC in
Mexico City because of lack of sufficient space. Consequently, our Toluca NOCC,
which provided redundancy prior to the closing of the Mexico City NOCC, has
become our primary NOCC. We are currently evaluating the installation of a new
NOCC.
(41)
In recognition of the need to upgrade our technology and to improve
internal financial processes, in the second half of 2003 we began to implement
various accounting and administrative modules of the SAP system, which we have
already completed. Modules for Human Resources and Fixed Assets Control were
implemented during the first quarter of 2005.
To improve the internal flow of information, we implemented a corporate
data warehouse system in 2004. This repository system contains all data related
to business processes and is updated on a regular basis.
We own our wireless network equipment. Our cellular equipment is subject
to liens under certain indebtedness of Iusacell Celular.
We own our principal offices which are located in Montes Urales 460,
Colonia Lomas de Chapultepec, 11000, Mexico City, Mexico.
We generally lease the land and cellular tower space where our cell
sites, antennas, microwave transmission equipment and switching centers are
located. We own and lease administrative offices in Mexico City as well as in
Guadalajara, Leon, Puebla, Monterrey, Merida, Villahermosa, Veracruz and
Tijuana.
From 2001 to 2004, we sold 451 of our towers to MATC Celular. In turn,
we lease site space in such towers from MATC Celular. As of May 31, 2005, we had
sold five additional towers to MATC Celular. See Item 3, "Financial Information
- d) Management Comments and Analysis on the Operating Results and Financial
Situation of the Issuer--Tower Monetization."
xi) JUDICIAL, ADMINISTRATIVE OR ARBITRATION PROCEEDINGS
LEGAL PROCEEDINGS
Iusacell Senior Notes
On May 27, 2005, a holder of U.S.$373,000 in Iusacell senior notes
initiated an action in a Mexican court. The holder claims that he is entitled to
payment of principal, accrued interest, past-due interest and court costs.
Iusacell believes that the complaint did not prove its right to claim the
payment and objected certain technical aspects in the service of the complaint
that for the moment, keeps suspended the procedure.
Iusacell Celular Senior Noteholders
On January 14, 2004, certain holders of the Iusacell Celular senior
notes initiated an action in a New York state court. These holders claim that
they are entitled to payment of certain amounts outstanding under the Iusacell
Celular senior notes plus interest, which in their amended complaint is alleged
to be in excess of U.S.$45.0 million. Iusacell Celular moved to dismiss the
portion of the complaint that requested the court to declare that the holders
are entitled to the benefit of liens senior to or at least equal in priority to
liens held by other creditors. Iusacell Celular moved to dismiss that claim
based on various grounds, including the impropriety of the relief requested and
forum non convenience.
In response to the motion to dismiss, the holders amended their
complaint, deleting the claim for declaratory relief and adding a claim for
specific performance of Iusacell Celular's alleged obligation to provide the
holders with the benefit of liens senior to or at least equal in priority to
liens held by other creditors. The holders were also seeking injunctive relief
barring Iusacell Celular from selling, transferring or otherwise encumbering
assets pending decision on the merits of their claim for specific performance.
On June 30, 2004, the court denied the holders' request to preliminarily enjoin
the Company from selling, transferring or otherwise encumbering its assets.
(42)
Telemedic
In March 2002, Telemedic S.A de C.V., a provider of healthcare services
by phone, filed a lawsuit in Mexico City against Iusacell S.A. seeking
compensatory damages in the amount of U.S.$8 million plus interests related to
an alleged breach of contract. In its claim, Telemedic alleges that Iusacell
S.A. breached a contractual obligation to automatically enroll its customers in
Telemedic's healthcare-by-phone services. We responded that an amendment to the
consumer protection laws forbids us from automatically enrolling our customers.
The court of first instance ruled in favor of Iusacell S.A., but
Telemedic appealed and the appellate court reversed the decision. Iusacell S.A.
filed an injunctive action (amparo) against the appellate court decision. On
August 2004 , the Supreme Court affirmed the appellate court's ruling and asked
the appellate court to review the bases for its calculation of compensatory
damages. On August 2004, the appellate court ruled that Telemedic was entitled
to receive compensatory damages and for the second time, Iusacell, S.A. appealed
such resolution. The Supreme Court ruled in favor of Iusacell, S.A. and the
bases for the calculation of compensatory damages were modified one more time.
For the third time, the court of second instance ruled, and reduce the
compensatory damages to U.S.$3.0 million. We have appealed this ruling to the
Supreme Court.
We have not established any reserves for this contingency.
Injunctive action against additional 10% excise tax
On January 1, 2002, the Mexican Congress approved a surcharge that
assessed an additional 10% federal excise tax on certain wireless
telecommunications services. The tax resulted in a 10% increase in the monthly
bills of postpaid mobile wireless customers and in the cost of prepaid cards in
denominations of Ps.200.0 or more for the year 2002. In February 2002, we filed
an injunctive action (amparo) challenging the Mexican government's
implementation of the tax. In October 2002, we received a preliminary ruling in
our favor from a Federal Court, and the Mexican government subsequently filed an
appeal. In June 2003, Mexico's Supreme Court rejected the appeal and affirmed
the ruling in favor of Iusacell. We have initiated a process to obtain a refund
for taxes paid.
In 2003, the Mexican government implemented a modified version of the
additional 10% excise tax on certain wireless telecommunications services, which
was approved by the Mexican Congress. In March 2003, we filed an injunctive
action (amparo) challenging this implementation, which was granted in October
2003. The Mexican government filed an appeal, which was rejected by the Supreme
Court in October 2004. We have initiated a process to obtain a refund for taxes
paid.
Elektra Promissory Note
On August 1, 2003, Iusacell S.A. and Elektra entered into a current
account contract for the purpose of streamlining, controlling and recording the
transfer of funds between the two companies under the different commercial
arrangements described under Item 4, "Management - Related Party Transactions
and Conflict of Interest." This contract, which has an indefinite term, provided
for the opening of reciprocal Ps.80.0 million current accounts. To guarantee its
obligations, Iusacell Celular issued a U.S.$7.0 million promissory note in favor
of Elektra, which was payable on October 30, 2003. We have failed to make
payment on this note. Elektra has initiated legal proceedings in a Mexican court
against us to obtain payment on this note.
(43)
Ingran Lawsuit
In May 2003, Comercializadora Ingran, S.A. de C.V., a former
distributor, filed a lawsuit against Iusacell S.A., seeking compensatory and
consequential damages in the amount of U.S.$25 million in Mexico City. Ingran
alleged that we breached our payment obligation under our distribution
agreement. The court of first instance ruled in our favor affirming that we did
not owe any payments to Ingran. Ingran appealed the decision and the appellate
court affirmed the decision in our favor with prejudice in June 2004.
BBDO
In June 2004, BBDO de Mexico, S.A. de C.V., an advertising agency that
rendered advertising services to us from 2001 to 2003, filed a lawsuit against
Iusacell S.A. in Mexico seeking payment of Ps.23.4 million. BBDO alleged that we
have defaulted on our payment obligations for services rendered to us. In
November 2004, we reached a settlement and the lawsuit was withdrawn with
prejudice.
Cortina Facilities
In September 2003, Cortina Facilities, S.A. de C.V., a provider of
cleaning services, filed a lawsuit against Iusacell Celular in Mexico seeking
payment of Ps.6 million. Cortina Facilities alleges that we defaulted on our
payment obligations for cleaning services rendered to us. The court of first
instance ruled in our favor, and the appellate court reaffirmed. Cortina
Facilities filed an injunctive relief action (amparo) against the appellate
court's decision, which is currently pending.
Labor Claims
We are subject to labor claims that arise in the ordinary course of our
business. At December 31, 2004, there were 108 such claims for an aggregate
amount of Ps.59.9 million. We recorded a contingency reserve for these claims in
the amount of Ps.37.0 million.
xii) SHARES REPRESENTING THE CAPITAL STOCK
Iusacell's capital stock is $5,938,689,106.14 and it is represented by
93,424,919 ordinary shares with no par value.
At May 31, 2005, Mr. Ricardo B. Salinas Pliego, our Chairman of the
Board, directly owned 7.4% of our shares. Mr. Salinas is also the controlling
shareholder of MovilAccess, our principal shareholder with 74.6% of our shares
at May 31, 2005. Our directors and officers, as a group, do not own any of our
shares.
Iusacell's management employee stock purchase plan approved in 1996 and
which had been inactive for nearly three years, was terminated in August 2004.
At a shareholders' meeting held on September 23, 2004, a new stock option plan
for company executives was approved, under terms and conditions to be determined
by the Board of Directors or a body designated by the Board.
On December 26, 2004, a trust was formed to manage the new stock option
plan. Pursuant to the terms of the plan, two days later, options to purchase
6,193,392 shares were allocated to some executive officers. Grantees under the
plan can exercise their options within five years from the date of grant at a
strike price of Ps.18.75 per share. As of May 31, 2005, no options had been
exercised.
(44)
xiii) DIVIDEND
DIVIDEND POLICY
We have never paid dividends, and we currently have no plans to initiate
dividend payments. In addition, the agreements governing our indebtedness limit
both Iusacell's and Iusacell Celular's ability to pay dividends. See item 4.
"Management - d) By-laws and Other Agreements - Dividend Rights."
(45)
3) FINANCIAL INFORMATION
a) SELECTED FINANCIAL DATA
The following tables present selected consolidated financial data of
Iusacell and its consolidated subsidiaries. We have derived this data from the
audited consolidated financial statements of Iusacell as of and for each of the
years ended December 31, 2004, 2003, 2002, 2001 and 2000. The financial
information presented for fiscal years ended December 31, 2004, 2003 and 2002
was derived from our audited consolidated financial statements, which we refer
to as the Consolidated Financial Statements, appearing elsewhere in this Annual
Report, and you should read this information in conjunction with the
Consolidated Financial Statements.
The Consolidated Financial Statements have been prepared in accordance
with Mexican generally accepted accounting principles, which we refer to as
Mexican GAAP, which differs in certain significant respects from United States
generally accepted accounting principles, which we refer to as U.S. GAAP.
Pursuant to Mexican GAAP, we have prepared the Consolidated Financial Statements
and the selected financial data presented below in accordance with Bulletin B-10
of the Mexican Institute of Public Accountants ("MIPA"), which provides for the
recognition of certain effects of inflation.
Throughout the periods presented in this Annual Report, Bulletin B-10
has required Iusacell to restate non-monetary assets using the National Consumer
Price Index (Indice Nacional de Precios al Consumidor), also referred to as the
INPC. Throughout the periods presented in this Annual Report, Bulletin B-10 has
also required Iusacell to restate the components of shareholders' equity using
the INPC and to record gains or losses in purchasing power from holding monetary
liabilities or assets.
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, we have restated all data in the Consolidated Financial
Statements and in the selected financial data set forth below in constant pesos
with purchasing power as of December 31, 2004.
We have never paid dividends, nor do we contemplate paying dividends in
the foreseeable future. Accordingly, we have not included in these tables a line
item for dividends declared per share.
(46)
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2004
----------- ------------ ------------ ------------ ------------ ------------
(Thousands of constant pesos as of December 31, 2004, (Thousands
except per share and operating data)(1) of U.S.
dollars,
except per
share and
operating
data)(2)
INCOME STATEMENT DATA:
Revenues:
Services ................................ 6,012,927 6,513,878 5,396,205 4,406,851 4,780,562 428,596
Telephone equipment sales and other . 611,251 701,910 648,989 577,605 650,835 58,350
----------- ------------ ------------ ------------ ------------ ------------
Total revenues .................. 6,624,178 7,215,788 6,045,194 4,984,456 5,431,397 486,946
Cost of sales:
Cost of services .................... 1,692,685 1,771,584 1,676,771 1,576,426 1,847,255 165,614
Cost of telephone equipment sales
and other(3) .................... 411,571 437,117 533,859 946,306 1,369,125 122,747
----------- ------------ ------------ ------------ ------------ ------------
Total cost of sales ............. 2,104,256 2,208,701 2,210,630 2,522,732 3,216,380 288,361
Gross profit ............................ 4,519,922 5,007,087 3,834,564 2,461,724 2,215,017 198,585
Operating expenses ...................... 2,224,280 2,400,892 1,987,441 1,996,681 1,769,185 158,614
Depreciation and amortization(3) ........ 2,785,043 3,028,113 2,457,762 2,164,574 1,961,564 175,862
Other operating income .................. -- 355,950 110,447 93,152 207,929 18,642
Operating loss .......................... (489,401) (65,968) (500,192) (1,606,379) (1,307,803) (117,249)
Intangible assets' write-off ............ -- -- -- (368,440) -- --
Valuation of abandoned fixed assets ..... -- -- -- (425,704) -- --
Other expense, net ...................... -- -- -- (659,131) (11,214) (1,005)
Integral financing cost (gain):
Interest expense, net ............... 1,135,834 934,921 984,471 1,018,361 1,082,834 97,080
Foreign exchange (gain) loss, net ... 19,403 (259,886) 1,125,154 783,152 (69,718) (6,250)
Gain from monetary position ......... (521,066) (308,249) (454,596) (369,071) (466,139) (41,791)
----------- ------------ ------------ ------------ ------------ ------------
Total ............................... 634,171 366,786 1,655,029 1,432,442 546,977 49,039
Equity participation in net (loss)
profit of associated companies .......... (22,715) 7,536 (10,655) (18,455) (13,317) (1,194)
Income (loss) before assets tax, income
tax, minority interest and
extraordinary item .................. (1,146,287) (425,218) (2,165,876) (4,510,551) (1,879,311) (168,487)
Provisions for:
Asset tax ........................... 180,741 169,259 121,649 154,130 155,499 13,941
Income tax .......................... -- -- 10,117 172,356 -- --
----------- ------------ ------------ ------------ ------------ ------------
Total ........................... 180,741 169,259 131,766 326,486 155,499 13,941
Loss from continuing operations and
extraordinary item ...................... (1,327,028) (594,477) (2,297,642) (4,837,037) (2,034,810) (182,428)
Minority interest ....................... 19,030 23,925 18,194 34,857 5,271 473
----------- ------------ ------------ ------------ ------------ ------------
Loss from continuing operations
before extraordinary item ........... (1,307,998) (570,552) (2,279,448) (4,802,180) (2,029,539) (181,955)
Extraordinary item(4) ................... -- -- -- 16,322 40,377 3,620
Cumulative effect of
change of accounting policy(3) . .... -- (7,490) -- (167,268) -- --
(Loss) gain from discontinued
operations .......................... 10,249 -- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------
Net profit (loss) ....................... (1,297,749) (578,042) (2,279,448) (4,953,126) (1,989,162) (178,335)
=========== ============ ============ ============ ============ ============
(Loss) per share from continuing
operations .............................. (18.73) (7.63) (24.48) (51.58) (21.78) (1.95)
Net profit (loss) per share ............. (18.58) (7.73) (24.48) (53.20) (21.35) (1.91)
Weighted-average number of shares
outstanding(5) ...................... 69,834 74,757 93,101 93,101 93,161 93,161
----------- ------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Working capital ......................... (787,164) 403,266 (100,184) (10,300,912) (11,068,634) (992,347)
Property and equipment, net ............. 9,885,460 10,947,259 10,245,659 8,088,114 7,072,180 634,049
Total assets 19,046,657 19,158,705 16,540,612 12,435,304 10,972,837 983,758
Total debt 9,228,144 8,495,423 9,183,276 9,358,960 8,833,814 791,986
Total stockholders' equity 7,666,054 8,281,114 5,868,164 853,395 (1,148,712) (102,987)
Capital stock 6,731,099 7,809,003 7,809,003 7,809,003 7,815,072 700,652
Other Financial Data:
Capital expenditures(6) 2,486,152 2,291,317 930,731 215,534 448,257 40,188
Interest expense, net 1,135,834 934,921 984,471 1,018,361 1,082,834 97,080
Ratio of earnings to fixed charges(7) ... -- -- -- -- -- --
OPERATING DATA:
Covered POPs(8) ......................... 68,376,034 89,917,967 91,356,654 92,589,969 93,840,000
Subscribers:(9)
Postpaid ............................ 423,459 366,226 307,129 276,730 350,847
Prepaid ............................. 1,257,760 1,488,940 1,774,071 999,033 1,111,893
Total subscribers ............... 1,681,219 1,855,166 2,081,200 1,275,763 1,462,740
Gross subscriber additions .............. 1,092,895 1,051,089 1,122,024 593,284 821,765
Average subscribers(10) ................. 1,637,481 1,721,072 2,091,765 1,810,101 1,340,102
Average monthly postpaid churn(11) . .... 3.54% 3.82% 3.63% 3.31% 2.76%
Penetration(12) ......................... 2.46% 2.10% 2.28% 1.38% 1.56%
Average monthly MOUs per
subscriber(13) ...................... 78 84 63 74 141
Nominal average monthly mobile
telephony revenue per subscriber
(ARPU)(14) .......................... 267 267 191 190 293 16.86
Nominal cost to acquire a new
Subscriber(15) ...................... 3,270 2,677 2,419 3,004 3,059 267.21
(47)
----------
(1) Financial data for all periods covered by the Consolidated Financial
Statements, as well as the other financial data presented in this Annual
Report, unless otherwise indicated, has been restated in constant pesos
with purchasing power as of December 31, 2004. Restatement of peso
amounts is made by multiplying the relevant nominal peso amount for the
relevant period by the inflation index for the period from the end of
the period to which such nominal peso amount relates through December
31, 2004. The inflation indices used in this Annual Report are 1.2071
for 2000, 1.1561 for 2001, 1.0938 for 2002 and 1.0519 for 2003 figures.
(2) Peso amounts were converted to U.S. dollars at the noon buying rate
reported by the Federal Reserve Bank of New York for December 31, 2004,
which was Ps.11.154 per U.S.$1.00. Such conversions should not be
construed as representations that the peso amounts actually represent
such U.S. dollar amounts or could be converted into U.S. dollars at the
rate indicated, or at all.
In determining the peso amounts of our U.S. dollar-denominated
obligations at December 31, 2004 in the Consolidated Financial
Statements under Mexican GAAP, however, we applied the exchange rate
which was accessible to us, based on market quotes on December 31, 2004,
which was Ps.1.15 per U.S.$1.00. The difference between the noon buying
rate reported by the Federal Reserve Bank of New York and the exchange
rate which was accessible to us causes certain inconsistencies between
references to U.S. dollar amounts in this Annual Report and the actual
outstanding U.S. dollar amounts of our U.S. dollar-denominated
obligations. For example, at December 31, 2004, our actual total U.S.
dollar-denominated debt outstanding, excluding trade notes payable, was
U.S.$800.1 million. In preparing the Consolidated Financial Statements,
we multiplied this dollar amount by Ps.11.150 (the exchange rate which
was accessible to us at December 31, 2004) to arrive at Ps.8,920.8
million of total debt, excluding trade notes payable. For purposes of
this Annual Report, we have converted this peso amount to U.S. dollars
for the convenience of the reader by dividing it by Ps.11.154 (the noon
buying rate reported by the Federal Reserve Bank of New York at December
31, 2004) to arrive at U.S.$799.8 million of total U.S.
dollar-denominated debt, excluding trade notes payable.
(48)
As a result of the combined effect of the restatement of the financial
data in constant pesos with purchasing power as of December 31, 2004 and
the translation of peso amounts into U.S. dollars, the amounts shown for
certain balance sheet items are not equal to the actual amounts
outstanding.
(3) Until September 30, 2003, we amortized the cost of handsets sold or
given to our postpaid customers under exclusive service contracts on the
basis of the term of such contracts to match costs with the timing of
earned revenues. The average amortization period was twelve months. On
September 30, 2003, we changed this accounting policy. As a result, we
now record the full cost of such handsets in our income statement under
"cost of telephone equipment sales and other" at the moment the contract
is signed. The cumulative effect of this change in our accounting policy
resulted in a loss for the year 2003 of Ps.167.3 million. This amount
represents the remaining balance of unamortized cost of handsets as of
September 30, 2003 and is included under "cumulative effect of change in
accounting policy" in our consolidated income statement for the year
2003.
(4) On May 29, 2003 we reached an agreement with Santander Serfin, S.A.
(Santander) to repay the remaining balance of U.S.$3.0 million under a
refinanced credit facility. Under this agreement, we and Santander
agreed to settle the remaining amount for U.S.$1.5 million. We
recognized the difference as an early extinguishment of debt under
Mexican GAAP Bulletin C-9 and we recorded this amount as an
extraordinary gain for the year ended December 31, 2003.
On June 24, 2004, we purchased promissory notes issued to one of our
vendors in an aggregate nominal amount of U.S.$6.4 million for U.S.$3.0
million. We recognized the difference as an extraordinary gain in 2004.
See Note 11 to our Consolidated Financial Statements.
(5) On October 17, 2003, an extraordinary stockholders meeting approved a
reverse stock split and the issuance of a new single series of shares of
common stock. Each new share represents 20 series A or V shares. The
exchange of shares was completed in December 2003. Consequently, we
present share information for all periods after giving effect to this
reverse stock split.
The number of shares outstanding under the executive employee stock
purchase plan was 324,256 for each of 2000, 2001, 2002 and 2003. On
August 2, 2004, the executive employee stock purchase plan was
terminated and the 324,256 shares were sold in the market. On September
23, 2004, our shareholders resolved to create a new stock option plan
and 6,193,392 shares were issued under the plan.
(6) Capital expenditures include fixed asset purchases, capitalized labor
costs, the capitalization of interest costs related to long-term debt
incurred in connection with the acquisition of property, plant and
equipment, trade-in credits received from Lucent Technologies for
exchanging our previous analog network for a digital and analog network
supplied by Lucent Technologies and, in some cases, the net value of
long distance fiber acquired in swaps for our long distance fiber. In
2000, pursuant to a waiver from its bank lenders, and beginning in 2001,
pursuant to the terms of its senior refinancing secured loan, Iusacell
Celular excluded capitalized interest cost from capital expenditures in
determining its compliance with capital expenditure limitations set
forth in its debt covenants. Pursuant to waivers obtained from its
lenders, Iusacell Celular excluded Lucent trade-in credits from capital
expenditures in determining its compliance with the capital expenditures
limitations set forth in its debt covenants. See Item 3, "Financial
Information - Management Comments and Analysis on the Operating Results
and Financial Situation of the Issuer - ii) Financial Situation,
Liquidity and Capital Resources--Capital Expenditures."
(49)
(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 less than 50%-owned affiliates. Fixed charges include the
expensed and capitalized portions of integral financing cost. Earnings
were insufficient to cover fixed charges in 2000, 2001, 2002, 2003 and
2004. The fixed charge coverage deficiency for the years ended December
31, 2000, 2001, 2002, 2003 and 2004 amounted to Ps.1,056.5 million,
Ps.323.3 million, Ps.3,222.1 million, Ps.5,333.3 million and Ps.1,786.4
million, respectively.
(8) Covered POPs is the aggregate number of POPs in the geographic regions
in which we have concessions for wireless services and whom we therefore
have the potential to serve. POPs means points of presence, or
population, for a given area based on census data published by Mexico's
National Institute of Statistics, Geography and Information Processing
(Instituto Nacional de Estadistica, Geografia e Informatica).
(9) Unless otherwise indicated, subscribers refers to the total number of
mobile wireless customers included in our subscriber base in the
geographic regions we covered at the end of the respective periods.
Mobile wireless subscribers for the periods presented include cellular
subscribers and PCS subscribers. In December 2001, we began providing
limited commercial PCS services in Monterrey and Tijuana and in 2002 in
other cities of regions 1 and 4. A prepaid customer is included as a
subscriber if, at the end of the period, such customer's telephone
number has not yet been deactivated. See Item 2, "The Company--Business
Description--i) Principal Activity - Mobile Wireless Services." In 2004,
we reclassified public and rural telephony subscribers as prepaid
subscribers, since users have shifted from coins to prepaid cards. We
have adjusted the figures for postpaid and prepaid subscribers for prior
years accordingly. This adjustment resulted in higher average monthly
postpaid churn in those years than we had previously reported.
(10) Average subscribers represents the rolling monthly average number of
subscribers for the respective periods.
(11) Average monthly postpaid churn for a given period is calculated by
dividing the sum of all postpaid subscribers disconnected during such
period by the sum of the beginning-of-month postpaid subscribers for
each of the months in such period, expressed as a percentage. See Item
2, "The Company - b) Business Description - i) Principal Activity
--Mobile Wireless Services - Postpaid Churn" and Item 3, "Financial
Information - d) Management Comments and Analysis on the Operating
Results and Financial Situation of the Issuer - Results of Operations."
(12) Penetration represents the end-of-period subscribers divided by the
end-of-period population in the geographic regions we cover, expressed
as a percentage.
(13) Average monthly minutes of use ("MOUs") per subscriber for a given
period are calculated by dividing total MOUs (which includes minutes of
use from both outgoing and incoming calls) for the period by the sum of
the monthly average number of subscribers for each of the months in such
period. In calculating average monthly MOUs per subscriber, we include
"incoming calls only" prepaid subscribers and the MOUs they generate.
(14) Nominal average monthly mobile telephony revenue per subscriber ("ARPU")
for a given period is calculated by dividing the sum of the nominal
monthly revenues and other mobile telephony revenues (excluding revenues
generated from the sale of handsets and accessories to postpaid
customers) for each of the months in the period by the sum of the
monthly average mobile telephony subscribers for each of the months in
such period. In calculating ARPU, we include "incoming calls only"
prepaid subscribers and the revenue they generate.
(50)
(15) Nominal cost to acquire a new subscriber for a given period is
calculated by dividing the sum of sales commissions, plus the cost of
cellular phones we give to postpaid customers for the respective period
(in nominal pesos), by the gross postpaid customer additions for such
period.
EXCHANGE RATES
Unless otherwise specified, this Annual Report contains translations of
peso amounts into U.S. dollars solely for the convenience of the reader based on
the exchange rate reported by the Federal Reserve Bank of New York as its noon
buying rate for pesos, which we refer to as the Noon Buying Rate. At December
31, 2004, the Noon Buying Rate was Ps.11.154 per U.S.$1.00. These currency
conversions should not be construed as representations that the peso amounts
actually represent such dollar amounts. Additionally, these conversions should
not be construed as representations that these peso amounts have been, could
have been or could be converted into U.S. dollars at those or any other rates of
exchange.
The following table sets forth the high, low and average Noon Buying
Rates expressed in nominal pesos per U.S. dollar for each of the years ended
December 31, 2000, 2001, 2002, 2003 and 2004. The Noon Buying Rate on June 29,
2005 was Ps.10.7560 per U.S.$1.00.
NOON BUYING RATE(1)
----------------------------------------
YEAR ENDED DECEMBER 31, HIGH LOW AVERAGE(2)
------------------------------ ------------ ------------ ------------
2000 10.087 9.183 9.459
2001 9.972 8.946 9.337
2002 10.425 9.000 9.664
2003 11.410 10.110 10.797
2004 11.635 10.805 11.309
----------
(1) Source: Federal Reserve Bank of New York.
(2) Average of month-end rates for annual data.
The following table sets forth the high and low Noon Buying Rates expressed in
nominal pesos per U.S. dollar for each of the previous six months.
NOON BUYING RATE(1)
----------------------------------
MONTH HIGH LOW
------------------------------ -------------- -------------
December 2004 11.3285 11.1110
January 2005 11.4110 11.1715
February 2005 11.2060 11.0430
March 2005 11.3295 10.9755
April 2005 11.2298 11.0360
May 2005 11.0330 10.8850
----------
(1) Source: Federal Reserve Bank of New York.
b) FINANCIAL INFORMATION BY LINE OF BUSINESS, GEOGRAPHICAL ZONE AND
EXPORT SALES.
See Item 3. "Financial Information - a) Selected Financial Data."
See Note 19 of the Financial Statements
(51)
c) MATERIAL INDEBTEDNESS REPORT
OUR INDEBTEDNESS
As of December 31, 2004, our total consolidated indebtedness, including
trade notes payable, was Ps.8,968.8 million. As described below, we are in
default under substantially all of our indebtedness for, among other things, our
failure to make interest and/or principal payments. We believe that if our
financial situation does not improve or we are unable to restructure our debt,
we will be unable to recommence the servicing of our debt and operate as a
viable company. We may be forced to file for bankruptcy, liquidate or
reorganize, which would materially adversely affect the value and market price
of our equity and debt securities and the claims of our equity or debt holders,
who could lose some or all of their investment. See Item 3, "Key
Information--Risk Factors--Factors Relating to our Liquidity and Financial
Condition."
The following is a description of our principal indebtedness.
Iusacell Senior Notes
In December 1999, 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 Iusacell,
Bell Atlantic (which is now Verizon), and The Bank of New York, as trustee. In
June 2000, substantially all of the Iusacell senior notes were exchanged for
identical 14 1/4% senior notes due 2006, which are also governed by the
indenture, pursuant to an exchange offer registered with the SEC. The indenture
restricts the ability of Iusacell and its subsidiaries to incur indebtedness and
make certain investments. Under circumstances involving a change of control of
Iusacell or Iusacell Celular, we are required to make an offer to repurchase the
Iusacell senior notes.
We failed to make U.S.$24.9 million interest payments due on each of
June 1, 2003, December 1, 2003, June 1, 2004 and December 1, 2004. In addition,
the acquisition by MovilAccess of a 74.6% interest in Iusacell in July 2003
triggered the change of control covenant, which allows holders to require us to
repurchase their notes. We are also not in compliance with certain other
financial covenants. On April 29, 2005, we received a notice from The Bank of
New York, acting as trustee under the indenture governing the Iusacell senior
notes, informing us that the an unidentified percentage of holders of the
Iusacell senior notes had elected to accelerate the principal payment of the
notes.
Senior Refinancing Secured Loan
On March 29, 2001, Iusacell Celular completed the refinancing of its
senior secured credit facility by entering into a U.S.$265.6 million Amended and
Restated Senior Secured Credit Loan Agreement, which we refer to as the senior
refinancing secured loan, which consists of:
. a Tranche A Loan in an aggregate principal amount of U.S.$189.8
million for the purpose of refinancing existing indebtedness
under the senior secured credit facility and under a certain
bridge loan, the proceeds of which were used to make a principal
amortization payment under the senior secured credit facility in
January 2001; and
. a Tranche B Loan in an aggregate principal amount of U.S.$75.8
million for the purpose of paying existing indebtedness under
certain Eximbank facilities and under a certain bridge loan, the
proceeds of which were used to make a principal amortization
payment under the Eximbank facilities in January 2001.
(52)
The senior refinancing secured loan bears interest at a rate per annum
equal to one-, two-, three- or six-month LIBOR (at Iusacell Celular's option)
plus a spread ranging from 1.75% to 2.25%, depending on Iusacell Celular's
leverage ratio. Iusacell Celular's obligations under the senior refinancing
secured loan are unconditionally guaranteed, jointly and severally, by the
principal operating subsidiaries of Iusacell Celular and its subsidiaries
holding cellular concessions and are secured by a pledge of substantially all
the capital stock and equity interests held by Iusacell Celular and
substantially all assets used in connection with or related to such cellular
concessions.
The senior refinancing secured loan provides for principal payments in
equal quarterly installments beginning on May 28, 2004 and maturing on February
28, 2006. Since the refinancing of the Iusacell Celular senior notes has not
occurred, the outstanding amount under the senior refinancing secured loan has
been automatically accelerated. We failed to make the U.S.$265.6 million
principal payment on March 31, 2004.
We are also not in compliance with certain covenants.
Iusacell Celular Senior Notes
In July 1997, Iusacell Celular issued U.S.$150.0 million of its 10%
Senior Notes due 2004, under an indenture dated as of July 25, 1997 among
Iusacell Celular, the subsidiaries of Iusacell Celular guaranteeing the Iusacell
Celular senior notes and First Union National Bank (now Wachovia Bank National
Association), as trustee. Substantially all of the Iusacell Celular senior notes
were exchanged in January 1998 for identical 10% Senior Notes due 2004, which
are also governed by the Iusacell Celular indenture, pursuant to an exchange
offer registered with the SEC.
The Iusacell Celular indenture limits, among other things, the ability
of Iusacell Celular to make dividend payments to Iusacell, to incur indebtedness
and make certain investments. In addition, all amounts due under the Iusacell
Celular senior notes are secured by a second priority lien on its cellular
concessions and certain equipment.
We failed to make a U.S.$7.5 million interest payment on July 15, 2003.
On September 11, 2003, we were notified by holders representing over 50% of the
senior notes outstanding that they had elected to accelerate the principal
payment of the notes. On January 14, 2004, certain holders of the notes
initiated an action in a New York state court seeking payment and other
remedies. We have not made any principal or interest payments since we failed to
make payment on July 15, 2003. See Item 2, "The Company - Business Description -
xi) Judicial, Administrative or Arbitration Proceedings."
We are also not in compliance with certain covenants.
BNP Paribas Facilities
In July 2000, our subsidiary Iusacell Infraestructura, S.A. de C.V.
entered into financing agreements for the purpose of purchasing NERA microwave
transmission equipment consisting of:
. a seven-year senior amortizing term facility in the principal
amount up to U.S.$30.5 million, guaranteed by the Export Import
Bank of Norway, which we refer to as the GIEK-Guaranteed
Facility; and
. a four-year senior loan in the principal amount up to U.S.$5.4
million, which we refer to as the Non-GIEK-Guaranteed Loan.
(53)
The GIEK-Guaranteed Facility bears interest at six-month LIBOR plus
0.6%. The Non-GIEK Guaranteed Loan bears interest at six-month LIBOR plus 2.0%.
We guarantee the obligations of our subsidiary under both of these facilities.
Our subsidiary had drawn down U.S.$25.8 million in principal under the
GIEK-Guaranteed Facility and U.S.$4.6 million in principal under the
Non-GIEK-Guaranteed Loan. On December 16, 2002, we made a payment of U.S.$3.7
million under these facilities, leaving an outstanding debt of U.S.$26.6 million
at that date. We failed to make U.S.$3.7 million principal payments due on each
of June 16, 2003, December 16, 2003 and June 15, 2004, and U.S.$2.6 million
principal payments due on December 15, 2004 and June 15, 2005. However, we have
continued to make interest payments. As a result of the non-payment of the
principal installments, we are in default and the lenders have the right to
accelerate the outstanding principal and accrued and unpaid interest on such
notes.
We are also not in compliance with certain financial covenants.
GTE Venholdings B.V. Promissory Note
On May 8, 2001, we signed a U.S.$7.8 million promissory note in favor of
GTE Venholdings B.V. that accrues interest at an annual rate equal to 11.5%, and
was scheduled to mature on May 8, 2003. The proceeds from the issuance of this
note were used to complete the funding of the acquisition of Portatel, the
region 8 cellular concession holder. On May 8, 2003, we extended the maturity
date to November 8, 2003. We failed to repay the note upon maturity.
Harris Facility
In August 2000, our subsidiary Iusacell Infraestructura de Mexico, S.A.
de C.V. entered into a purchase framework agreement for the purpose of
purchasing Harris microwave equipment. This vendor financing consisted of a
five-year senior amortizing term loan facility in the principal amount of up to
U.S.$6.9 million, with interest accruing at a rate calculated as the average
between 90-day and 180-day LIBOR plus 1.25%. This agreement was amended in both
June and July 2001 to increase the amount to U.S.$10.3 million and modify the
interest rate to calculated as the average between 90-day and 180-day LIBOR plus
3.50%, and was amended again in December 2001 to increase the amount to
U.S.$10.9 million. We guarantee the obligations of our subsidiary under this
facility.
We failed to make (i) U.S.$0.4 million, U.S.$0.8 million, U.S.$0.2
million, U.S.$0.9 million and U.S.$1.0 million principal payments on June 15,
2003, December 15, 2003, January 30, 2004 and June 15, 2004 respectively, and
(ii) an aggregate amount of U.S.$0.4 million interest payments on the same
dates. On June 24, 2004, our subsidiary Iusacell Infraestructura de Mexico, S.A.
de C.V. purchased in the secondary market a U.S.$6.4 million promissory note
issued under this facility for U.S.$3.0 million. Through this purchase, we were
able to cure the payment defaults.
On February 7, 2005, we failed to make a U.S.$1.0 million principal
payment. As a result, we are in default and Harris has the right to accelerate
the outstanding principal and accrued and unpaid interest on such loan. We have
not received an acceleration notice in connection with this facility up to the
present date. We have U.S.$4.3 million in aggregate principal amount outstanding
under the facility.
DEBT RESTRUCTURING
In December 2002, we engaged Morgan Stanley as our financial advisor to
assist us in developing a comprehensive debt restructuring plan. In July 2003,
we terminated the mandate with Morgan Stanley and appointed a team of executives
and advisors from companies controlled by Mr. Salinas Pliego to continue the
effort of developing a comprehensive restructuring plan. In March 2004, we hired
Hill Street Capital LLC as our new financial advisors. We continue to review
with some of our creditors, different restructuring alternatives that allow us
to reach an agreement in the less time possible. We cannot assure you that we
will be able to complete a successful restructuring or that we will be able to
achieve it on a timely basis.
(54)
d) MANAGEMENT COMMENTS AND ANALYSIS ON THE OPERATING RESULTS AND
FINANCIAL SITUATION OF THE ISSUER
You should read the following discussion and analysis in conjunction
with the Consolidated Financial Statements included elsewhere in this Annual
Report. Unless otherwise indicated, all financial information in this Annual
Report is presented in constant pesos with purchasing power as of December 31,
2004. The U.S. dollar translations provided in this Annual Report are, unless
otherwise indicated, calculated at the Noon Buying Rate at December 31, 2004,
which was Ps.11.154 per U.S.$1.00. Sums may not add due to rounding.
i) OPERATING RESULTS
GENERAL
The following discussion and analysis is intended to help you understand
and assess the significant changes and trends in our historical consolidated
results of operations and financial condition and the factors affecting our
financial resources.
The Consolidated Financial Statements have been prepared in accordance
with Mexican GAAP.
As a Mexican company, we maintain our financial records in pesos.
Pursuant to Bulletin B-10, "Recognition of the Effects of Inflation on Financial
Information," and Bulletin B-12, "Statement of Changes in Financial Position,"
issued by MIPA, our financial statements are reported in period-end pesos to
adjust for the inter-period 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 in comparable monetary units. Bulletin B-10 requires us to restate
non-monetary assets, non-monetary liabilities and the components of
stockholders' equity using the INPC.
Except where otherwise indicated, financial data for all periods in the
Consolidated Financial Statements and throughout this Annual Report have been
restated in constant pesos as of December 31, 2004, in accordance with the fifth
amendment to Bulletin B-10. References in this Annual Report to "real" amounts
are to inflation-adjusted pesos and references to "nominal" amounts are to
unadjusted historical pesos. In calendar years 2002, 2003 and 2004, the rates of
inflation in Mexico, as measured by changes in the INPC, were 5.7%, 4.0% and
5.2% respectively. The inflation indices used are 1.0938 for 2002 figures and
1.0519 for 2003 figures.
In reporting under Mexican GAAP and in accordance with Bulletin B-10, we
are required to quantify all financial effects of operating and financing the
business under inflationary conditions. For presentation purposes, "integral
financing cost (gain)" refers to the combined financial effects of:
. net interest expense or income;
. net foreign exchange gains or losses; and
. net gains or losses on monetary position.
(55)
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 required to repay the specified amount of the foreign currency liability.
We incurred a foreign exchange loss in 2002 and 2003 on our U.S.
dollar-denominated debt as the peso depreciated against the U.S. dollar. A
foreign exchange gain arises if a liability is denominated in a foreign currency
which depreciates relative to the peso between the time the liability is
incurred and the date it is repaid, as the depreciation of the foreign currency
results in a decrease in the amount of pesos required to repay the specified
amount of the foreign currency liability. In 2004, we incurred a foreign
exchange gain on our U.S. dollar-denominated debt as the peso appreciated
against the U.S. dollar.
The gain or loss on monetary position refers to the gains and losses
realized from holding net monetary liabilities or assets and reflects the impact
of inflation on monetary liabilities and assets. For example, a gain on monetary
position results from holding net monetary liabilities during periods of
inflation, such as in 2002, 2003 and 2004, as the purchasing power of the peso
declines over time.
DEVALUATION AND INFLATION
Mexico experienced a severe economic crisis following the devaluation of
the peso in December 1994, when the Mexican government allowed the peso to
fluctuate freely against the U.S. dollar. The value of the peso generally
continued to decline during subsequent years, depreciating by 54.8% relative to
the U.S. dollar in 1995 and by 22.7% in 1998. In recent years, the peso
depreciated by 13.7% and 7.6% against the U.S. dollar in 2002 and 2003,
respectively, and appreciated by 4.8% in 2001. In 2004, the peso remained
relatively stable as compared to the U.S. dollar.
Depreciation of the value of the peso has contributed to sharp increases
in inflation. Inflation, which had been 7.1% in 1994 as measured by changes in
the INPC, increased to 52.0% and 27.7% in 1995 and 1996, respectively. In recent
years, the inflation was 5.7% in 2002, 4.0% in 2003 and 5.2% in 2004.
The general economic conditions in Mexico resulting from the devaluation
of the peso and the resulting inflation have had, and may have, the following
impact on our results of operations:
. Peso devaluations result in a decrease in the purchasing power
of Mexican consumers, resulting in a decrease in the demand for
all goods and services, including mobile telephony and other
wireless services;
. Due to competitive market conditions and the overall state of
the Mexican economy, we are often unable to increase our prices
in line with the inflation rate;
. Significant inflation leads to an upward restatement of our
assets, resulting in a substantial increase in depreciation and
amortization expense; and
. Given our net U.S. dollar liability position, devaluation of the
peso as compared to the U.S. dollar results in the recording of
net foreign exchange losses, and appreciation of the peso as
compared to the U.S. dollar results in the recording of net
foreign exchange gains.
(56)
RECENT CHANGES IN OUR ACCOUNTING POLICIES
Upon the takeover of Iusacell by MovilAccess on July 29, 2003, our new
management conducted an analysis of our assets and developed a new business
strategy in line with the critical financial condition of the company. As a
result, in the third quarter of 2003, we changed some of our accounting
policies, in accordance with Mexican GAAP.
. Until September 30, 2003, we amortized the cost of handsets sold
or given to our postpaid customer under exclusive service
contracts on the basis of the term of such contracts to match
costs with the timing of earned revenues. The average
amortization period was twelve months. The cost of such handsets
was included under "recoverable assets and other," in our
consolidated balance sheet, net of accumulated amortization.
Such cost did not exceed market value.
Since September 30, 2003, the cost of such handsets is recorded
in our income statement under "cost of telephone equipment sales
and others" at the moment the contract is signed. The cumulative
effect of this change in our accounting policies resulted in a
loss of Ps.167.3 million for 2003. This amount represents the
remaining balance of unamortized cost of handsets as of
September 30, 2003 and is included under "cumulative effect of
change in accounting policy" in our income statement for 2003.
In addition, we reclassified as "cost of telephone equipment
sales and other" Ps.237.8 million of the amortization for the
period from January 1 to September 30, 2003 which had originally
been recorded as "depreciation and amortization." If this
reclassification had been made for 2002, our cost of telephone
equipment sales and other would have been Ps.974.2 million and
the depreciation and amortization would have been Ps.2,017.4
million.
. We adopted Bulletin C-8 "Intangible assets" issued by the MIPA
beginning January 1, 2003. This statement requires intangible
assets to be recognized on the balance sheet as long as they are
identifiable, provide expected economic benefits and the company
has control over such benefits. It also provides that intangible
assets with an indefinite useful life should not be amortized
and intangible assets with a definite life should be amortized
systemically, based on the best estimate of their useful life as
determined in accordance with the expected future economic
benefits. These assets are subject to an annual evaluation of
their recoverable value, to identify impairment losses.
During the third quarter of 2003, we wrote off assets for
Ps.368.4 million. These assets mainly consisted of (i)
pre-operating expenses originated by the start-up operations of
our long distance, PCS and microwave lease business, (ii)
certain payments made by us to Telmex related to the special
projects implemented by Telmex to permit competition in long
distance telephony. See Note 9c to our Consolidated Financial
Statements. We wrote-down our handsets leasing business goodwill
(approximately Ps.37.0 million). We recorded these write-offs in
our consolidated income statement for 2003 as a special item
under "intangible assets' write-offs."
. In the third quarter 2003, we wrote-off installation expenses of
Ps.533.9 million and advance payments of Ps.175.1 million. The
installation expenses related to improvements to (i) our former
headquarters, (ii) our current headquarters that has since
undergone new remodeling, and (iii) customer sales and service
centers that are now operated by Elektra. The advance payments
related to expenses we incurred while obtaining long-term
financing, which were reclassified to current liabilities during
2003. These write-offs are presented under "other expenses, net"
in our consolidated income statement for 2003.
(57)
. During 2003, our management performed a study of our
telecommunications equipment. Based on this study and on our new
business plan, we wrote down certain telecommunications
equipment. This resulted in a charge to income of Ps.425.7
million, presented as a special item under "valuation of
abandoned fixed assets" in our consolidated income statement for
2003.
. We increased our net deferred tax asset valuation allowance,
which was mainly originated by the effect of our tax loss carry
forwards, reflecting uncertainty as to our ability to continue
as a going concern. The realization of the net deferred tax
asset depends on our ability to generate sufficient taxable
income prior to the expiration of the tax loss carry forwards.
Our management estimates that, considering our present critical
financial condition, the realization of the tax loss carry
forwards cannot be assured through the generation of sufficient
taxable income during the applicable period.
. Beginning in 2004, we adopted Bulletin C-15 "Impairment of the
Value of Long-Lived Assets and Disposal" issued by the MIPA.
Bulletin C-15 requires us to record an impairment change in an
amount equal to the excess of book value over fair market value
for certain assets. The adoption of Bulletin C-15 did not result
in any impairment changes.
. Beginning with the first quarter of 2005, we made the following
changes to our accounting policies. These changes in our
accounting policies do not affect the numbers presented in this
Annual Report and are provided for informational purposes only:
. Sales commissions not directly related to the activation of
handsets are reclassified, and are now presented as a
deduction in gross revenues instead of being recorded as
sales expenses as we previously did. The purpose of this
change is to match revenues directly with the cost that give
rise to such revenue.
. Income from the sale of fixed assets is reclassified and is
now presented after operating income before depreciation and
amortization. We consider that this item should not affect
operating income as it is derived from an activity that is
not part of our core business.
. The net cost of the handset subsidy (which is sales price,
less cost of sale, commissions related to the activation and
other cost) is presented as a single item, with the
following alternatives: (i) the subsidy for postpaid
handsets is deferred at the time of activation and is
amortized on a straight-line during the life of the contract
with the client. In the past, the subsidy was recognized in
the income statement at the time the handset was delivered
to the client; (ii) the policy related to the subsidy for
prepay handsets has not changed, it continues being
recognized in the income statement at the time the handset
is delivered to the client.
(58)
TOWER MONETIZATION
In December 1999, we entered into a series of agreements with MATC
Celular. These agreements, which were amended in May 2002, among other things,
gave MATC Celular the right to acquire approximately 350 existing towers. In
December 2003, we entered into a new series of agreements with MATC Celular
that, among other things, gave MATC Celular the right to acquire up to 143
additional towers for up to U.S.$31.4 million.
During 2001, 2002, 2003 and 2004 we sold, and leased back space in, 244,
76, 34 and 97 towers, respectively, to MATC Celular. As of May 31, 2005, we had
sold five additional towers.
In 2004, 2003, 2002 and 2001, we recorded other operating income of
Ps.207.9 million, Ps.93.2 million, Ps.110.4 million and Ps.356.0 million in
connection with our sale to MATC Celular of 97, 34, 76 and 244 towers,
respectively. However, the leasing of the towers from MATC Celular results in an
increase in our operating expenses over the same periods.
RESULTS OF OPERATIONS
The following table presents results of operations data for the years
ended December 31, 2002, 2003 and 2004.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2002 2003 2004 CHANGE
------------ ------------ ------------ ------------
Ps. Ps. Ps. %
------------ ------------ ------------ ------------
(In millions of constant December 31, 2004,
pesos except percentages)
Total revenues 6,045.2 4,984.5 5,431.4 9.0%
Cost of sales 2,210.6 2,522.7 3,216.4 27.5%
Operating expenses 1,987.4 1,996.7 1,769.2 (11.4)%
Depreciation and amortization 2,457.8 2,164.6 1,961.6 (9.4)%
Other operating income 110.4 93.2 207.9 123.2%
Operating loss (500.2) (1,606.4) (1,307.8) (18.6)%
Special items - 794.1 - (100.0)%
Other expenses, net - 659.1 11.2 (98.3)%
Integral financing cost 1,655.0 1,432.4 547.0 (61.8)%
Net loss (2,279.4) (4,953.1) (1,989.2) (59.8)%
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Revenues
Total revenues consist of service revenues and telephone equipment and
other revenues. Our service revenues are principally derived from the provision
of mobile telephony service (cellular and PCS) in Mexico. Our service revenues
also include revenues attributable to in-roaming and long distance service
revenue generated by our mobile telephony subscribers, revenues from the
provision of telecommunication services in Mexico other than mobile telephony
service, including long distance service revenues from non-mobile subscribers'
and revenues from the provision of data transmission, and
(59)
paging services. Our service revenues include all Bulletin B-10 inflation
adjustments on all service revenue line items, whether mobile telephony service
revenues or other service revenues. Telephone equipment and other revenues
consist primarily of revenues from the sales of mobile telephone equipment and
accessories, as well as revenues attributable to out-roaming and revenues from
the sale of dark fiber optic cable. Revenues attributable to out-roaming are
passed through to the applicable host operator.
The following table presents the sources of our revenues for the years
ended December 31, 2003 and 2004:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2003 2004 CHANGE
----------------- ----------------- -------
Ps. % Ps. % %
------- ------- ------- ------- -------
(In millions of constant pesos as of
December 31, 2004, except percentages)
Service revenues ........................ 4,406.9 88.4% 4,780.6 88.0% 8.5%
Telephone equipment and other revenues .. 577.6 11.6% 650.8 12.0% 12.7%
------- ------- ------- ------- -------
Total revenues .......................... 4,984.5 100.0% 5,431.4 100.0% 9.0%
======= ======= ======= ======= =======
Service Revenues. The table below presents service revenues by source
for the years ended December 31, 2003 and 2004:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2003(1) 2004(1) CHANGE
----------------- ----------------- -------
Ps. % Ps. % %
------- ------- ------- ------- -------
(In millions of constant pesos as of
December 31, 2004, except percentages)
Airtime(2) 1,045.6 23.7% 1,306.2 27.3% 24.9%
Calling party pays revenues(3) 1,261.7 28.6% 1,359.9 28.4% 7.8%
Monthly fees 1,421.5 32.3% 1,456.1 30.6% 2.4%
Long distance 348.8 7.9% 307.9 6.4% (11.7)%
Value-added services(4) 174.9 4.0% 182.7 3.8% 4.5%
In-roaming 154.4 3.5% 167.8 3.5% 8.7%
------- ------- ------- ------- -------
Total service revenues 4,406.9 100.0% 4,780.6 100.0% 8.5%
======= ======= ======= ======= =======
----------
(1) Figures adjusted for intercompany eliminations.
(2) Airtime includes additional outgoing postpaid minutes to those included
in the package contracted for and prepaid outgoing minutes net of
unbilled minutes. Incoming and outgoing airtime is charged on a
per-minute basis.
(3) Includes amounts billed to other carriers for incoming minutes under the
calling party pays modality. Incoming and outgoing airtime is charged on
a per-minute basis.
(4) Includes fees for value-added services, such as call waiting, call
transfer, emergency service, secretarial service and three-way calling,
and revenues from premiums for surety bonds, insurance-related charges
payable by subscribers, rural and public telephony and Iusacell's
cellular magazines, as well as in-roaming service revenue. It does not
include charges for related airtime. Customers using short messaging
value-added services such as news, weather, sports and entertainment
reports are charged only for airtime. These revenues are therefore
included in airtime.
(60)
Service revenues increased 8.5% in 2004 as compared to 2003. This
increase results mainly from (i) a 14.7% increase in our total subscriber base
primarily due to an aggressive promotional and discount campaign in 2004, and
the opening of new points of sale, and (ii) an increase in airtime usage by our
customers as a result of our focus on corporate accounts. These factors were
partially offset by a reduction in the fees charged to customers.
Postpaid customers increased by 26.7%, from 276,730 in 2003 to 350,847
in 2004. This increase was due mainly to (i) the implementation of mass media
advertising and aggressive promotional and discount campaigns, and (ii) the
opening of new points of sale. Prepaid customers increased by 11.3%, from
999,033 customers in 2003 to 1,111,893 in 2004. The increase in 2004 reflects
primarily an improvement in our ability to capture and retain customers in 2004
as compared to 2003, when we implemented certain cuts in our sales, marketing
and distribution operations to address our critical financial condition.
Gross additions for 2004 totaled 821,765 customers, which represents a
38.5% increase from 2003. This increase resulted mainly from the advertising
campaigns referred to above.
Postpaid subscriber churn decreased from an average monthly level of
3.3% in 2003 to 2.8% in 2004, primarily because of our client retention efforts
and a tighter supervision of our customer care operations. As a result of this
and an improvement in our ability to retain prepaid customers, our overall
average monthly churn for the year decreased to 4.3% in 2004 from 6.3% in 2003.
As a result of the 38.5% increase in gross additions and the decrease in
our overall churn, we registered a net increase of 186,977 customers in 2004, as
compared to a net reduction of 805,437 customers in 2003. The net reduction in
2003 includes the removal during the second half of 2003 of approximately
572,000 customers who were determined to be inactive users under our new prepaid
turnover policy.
Airtime revenues increased 24.9% mainly because of (i) a larger
subscriber base, (ii) increased use in our hybrid plans, and (iii) an increase
in additional outgoing postpaid minutes.
Calling party pays revenues increased 7.8% mainly due to (i) a larger
subscriber base in both the prepaid and postpaid modalities, and (ii) promotions
on our rates that resulted in more incoming traffic.
Monthly fees increased 2.4% mainly because of a 26.7% increase in our
postpaid subscriber base, offset in part by discounts and promotions offered in
our plans.
Long distance revenues decreased 11.7% primarily as a result of (i) a
decrease in traffic with foreign long distance carriers due to lower demand, and
(ii) increased competition in long distance rates.
Blended average MOUs for 2004 increased 90.5%, from 74 minutes to 141
minutes, primarily due to an increase in the postpaid subscriber base, and
promotions in zones where we have had lower traffic. Average monthly MOUs for
postpaid customers increased 67.1%, to 441 minutes in 2004 from 264 minutes in
2003, while average monthly MOUs for prepaid customers increased 90.0%, from 30
minutes in 2003 to 57 minutes in 2004.
(61)
Overall ARPU increased 54.8% from Ps.189.5 in 2003 to Ps.293.4 in 2004,
as a result of our strategy to focus our efforts on attracting high-usage
postpaid customers and tailoring plans to corporate clients, which tend to
generate more revenue than other customers. Postpaid ARPU increased 12.4% from
Ps.747.0 in 2003 to Ps.840.3 in 2004, while prepaid ARPU increased 66.0% from
Ps.84.5 in 2003 to Ps.140.2 in 2004.
Telephone Equipment and Other Revenues. Telephone equipment and other
revenues increased 12.7%, from Ps.577.6 million in 2003 to Ps.650.8 million in
2004. This increase was primarily due to (i) the recognition of Ps. 56.2 million
in revenues from a capacity exchange and roaming agreement with Unefon (See Item
4, "Management - Related Party Transactions and Conflict of Interest"), and (ii)
an increase in telephone equipment sales. These factors were partially offset by
a decrease in leasing revenues (because in January 2004 we moved our corporate
headquarters to a building that we had been previously renting to third parties)
and out-roaming revenues (because of promotions and a decrease in traffic).
Cost of Sales
Cost of Services. Cost of services includes taxes and fees on revenues
payable to the Mexican government, interconnection costs, and technical costs
such as maintenance, repair costs, lease expenses, salaries of technical
personnel and utilities on a pro-rata basis. Our cost of services increased
17.2% to Ps.1,847.3 million in 2004 as compared to Ps.1,576.4 million in 2003,
primarily as a result of (i) a Ps.267.2 million, or 70.6% increase in calling
party pays interconnection, and (ii) a Ps.77.9 million increase in taxes on
telecommunications revenues payable to the Mexican government due mainly to an
increase in our taxable income. These factors were offset by a Ps.108.6 million
decrease in technical expenses due to a lower headcount and savings in
maintenance and leasing expenses. As a percentage of total revenues, cost of
services increased to 34.0% in 2004 from 31.6% in 2003, because of competitive
pressures that did not allow us to transfer fully to our customers the increased
interconnection costs and required us to conduct aggressive discount and
promotional campaigns.
Cost of Telephone Equipment and Other. Cost of telephone equipment and
other includes the cost of handsets and accessories delivered to our customers,
handset and accessory inventory obsolescence charges and the cost of dark fiber
optic cable sold. Cost of telephone equipment and other increased 44.7% from
Ps.946.3 million in 2003 to Ps.1,369.1 million in 2004 primarily due to (i)
Ps.55.7 million in costs related to the capacity exchange and roaming agreement
with Unefon (see Item 4, "Management - Related Party Transactions and Conflict
of Interest--Unefon Capacity Exchange and Roaming") and (ii) Ps.120.0 million in
extraordinary inventory write-offs and obsolescence charges related to certain
handsets, compared to a Ps.44.2 million credit in 2003 related to an adjustment
made for an excess in allowance for obsolete and slow-moving inventory.
Operating Expenses
Operating expenses decreased 11.4% to Ps.1,769.2 million in 2004 from
Ps.1,996.7 million in 2003. As a percentage of total revenues, operating
expenses decreased to 32.6% in 2004 from 40.1% in 2003 because of (i) a Ps.195.3
million decrease in advertising expenses, (ii) a Ps.47.4 million decrease in
severance payments because our significant downsizing occurred in 2003, and
(iii) a Ps.93.6 million decrease in overhead expenses at our stores (such as
maintenance, rent, telephony services, energy, etc.), and (iv) a decrease of
Ps.60.9 million in lease expenses, fixing and maintenance of our offices (due to
the used space was reduced because of the downsizing). These decreases were
offset in part by a Ps.195.2 million increase in commissions because of higher
subscriber additions in 2004, a Ps.86.3 million increase in salaries and
benefits of external sales personnel hired during 2004 to support the increase
in our distribution channels, and a Ps.33.6 million increase in our reserves for
doubtful accounts due to our increased revenue base.
(62)
Other Operating Income
We had other income of Ps.207.9 million in 2004 mainly as a result of
the sale of 97 towers to MATC Celular, while in 2003, we had other income of
Ps.93.2 million from the sale of 34 towers. See--"Tower Monetization."
Depreciation and Amortization
Depreciation and amortization expenses decreased 9.4% from Ps.2,164.6
million in 2003 to Ps.1,961.6 million in 2004, primarily due to (i) the
reduction of our fixed asset base resulting from the valuation of abandoned
fixed assets recorded in 2003 (since those fixed assets were written-off, their
depreciation was no longer calculated for 2004); (ii), the sale of 97 towers in
2004; and (iii) some or our fixed assets were totally depreciated in 2004.
Special Items
For 2003, we recorded a write-off of Ps.368.4 million corresponding to
intangible assets and goodwill, a charge of Ps.425.7 million for the valuation
of abandoned fixed assets and a write-off of Ps.709.0 million corresponding to
installation expenses and capitalized debt issuance expenses. See a more
detailed explanation in "--Recent Changes in Accounting Policies."
Tax Provisions
Our tax provisions decreased 52.4%, or Ps.171.0 million in 2004, due to
a downward adjustment in 2003 of deferred tax assets because of uncertainty as
to the realization of tax loss carry forwards, resulting in a Ps.172.4 million
increase of the tax provision in that year.
Integral Financing Cost
Our integral cost of financing decreased by 61.8%, from Ps.1,432.4
million in 2003 to Ps.547.0 million in 2004. This decrease was mainly due to (i)
a change in foreign exchange from a loss of Ps.783.2 million in 2003 to a gain
of Ps.69.7 million in 2004, because of the appreciation of the exchange rate of
the peso versus the U.S. dollar as of December 31, 2004 compared with the
exchange rate as of December 31, 2003, the loss occurred in 2003 was due mainly
because to the devaluation of the Mexican peso as of December 2003 as compared
to December 31, 2002., and (ii) a Ps.97.0 million increase in net monetary gains
due to the effect of a higher rate of inflation in 2004 in our net monetary
liability position. These factors were offset in part by a Ps.64.4 million
increase in net interest expense due to interest expense recorded in connection
with the agreement with Mr. Elizondo, and higher commissions charged by SECSA
(see Item 4, "Management - Related Party Transactions and Conflict of
Interest--SECSA Collection and Payment Services").
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues
The following table presents the sources of our revenues for the years
ended December 31, 2002 and 2003:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002 2003 CHANGE
----------------- ----------------- -------
Ps. % Ps. % %
------- ------- ------- ------- -------
(In millions of constant pesos as of
December 31, 2004, except percentages)
Service revenues ....................... 5,396.2 89.3% 4,406.9 88.4% (18.3)%
Telephone equipment and other revenues . 649.0 10.7% 577.6 11.6% (11.0)%
------- ------- ------- ------- -------
Total revenues ......................... 6,045.2 100.0% 4,984.5 100.0% (17.5)%
======= ======= ======= ======= =======
(63)
Service Revenues. The table below presents service revenues by source
for the years ended December 31, 2002 and 2003:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002(1) 2003(1) CHANGE
----------------- ----------------- -------
Ps. % Ps. % %
------- ------- ------- ------- -------
(In millions of constant pesos as of
December 31, 2004, except percentages)
Airtime(2) ............................. 1,453.0 26.9% 1,045.6 23.7% (28.0)%
Calling party pays revenues(3) ......... 1,435.2 26.6% 1,261.7 28.6% (12.1)%
Monthly fees ........................... 1,660.6 30.8% 1,421.5 32.3% (14.4)%
Long distance .......................... 477.4 8.8% 348.8 7.9% (26.9)%
Value-added services(4) ................ 229.8 4.3% 174.9 4.0% (23.9)%
In-roaming ............................. 140.2 2.6% 154.4 3.5% 10.2%
======= ======= ======= ======= =======
Total service revenues ................. 5,396.2 100.0% 4,406.9 100.0% (18.3)%
======= ======= ======= ======= =======
----------
(1) Figures include intercompany eliminations.
(2) Airtime includes additional outgoing postpaid minutes to those included
in the package contracted for and prepaid outgoing minutes net of
unbilled minutes. Incoming and outgoing airtime is charged on a
per-minute basis.
(3) Includes amounts billed to other carriers for incoming minutes under the
calling party pays modality. Incoming and outgoing airtime is charged on
a per-minute basis.
(4) Includes fees for value-added services, such as call waiting, call
transfer, emergency service, secretarial service and three-way calling,
and revenues from premiums for surety bonds, insurance-related charges
payable by subscribers, rural and public telephony and Iusacell's
cellular magazines, as well as in-roaming service revenue. It does not
include charges for related airtime. Customers using short messaging
value-added services such as news, weather, sports and entertainment
reports are charged only for airtime. These revenues are therefore
included in airtime.
Service revenues decreased 18.3% in 2003 as compared to 2002. This
decrease results mainly from increased competition in the market, lower prices
and our inability, due to severe financial constraints, to react appropriately
to this increased competition. In order to control costs, in 2003 we were forced
to make significant cuts in our sales, marketing and distribution operations. In
addition, we had to scale back our plans to build out and upgrade our wireless
network.
Postpaid customers declined by 9.9%, from 307,129 in 2002 to 276,730 in
2003. This decrease was due to lower gross postpaid additions in 2003. Prepaid
customers decreased by 43.7%, from 1,774,071 customers in 2002 to 999,033 in
2003. The decline in 2003 reflects primarily (i) the disconnections related to
the reduction of the period in which a prepaid customer can receive incoming
calls but cannot make outgoing calls from 305 and 275 days (depending on the
amount of airtime previously charged) to 90 days and (ii) lower gross prepaid
additions in 2003.
(64)
Gross additions for 2003 totaled 593,284 customers, which represents a
47.1% decline from 2002. This decline resulted mainly from the significant cuts
we were forced to make in our sales, marketing and distribution operations due
to our critical financial condition, as well as to a shift in strategy towards
sales of higher-value added products, rather than the low value segments.
Postpaid subscriber churn decreased from an average monthly level of
3.6% in 2002 to 3.3% in 2003, as we adopted stricter collection procedures to
reduce bad debt and implemented new loyalty and retention programs. However, our
overall average monthly churn for the year increased to 6.3% in 2003 from 3.4%
in 2002 primarily because of the substantial turnover that resulted from our
decision to shorten the "incoming calls only period" of our prepaid customers.
As a result of the 47.1% decline in gross additions, the higher churn
rates and the changes in our policy for turning over prepaid customers, we
registered a net reduction of 805,437 customers in 2003, as compared to net
additions of 226,034 customers in 2002. This includes the removal during the
second half of 2003 of approximately 572,000 customers who were determined to be
inactive users under our new prepaid turnover policy.
Monthly fees, airtime revenues, calling party pays revenues, long
distance revenues and value-added service revenues each decreased in 2003 as
compared to 2002 primarily because of the reduction in postpaid subscribers.
Blended average MOUs for 2003 increased 17.5%, from 63 minutes to 74
minutes, primarily due to (i) a higher proportion of postpaid customers in our
subscriber base, and (ii) aggressive promotions aimed at increasing usage by
offering lower per minute prices. Average monthly MOUs for postpaid customers
increased 23.4%, to 264 minutes in 2003 from 214 minutes in 2002, while average
monthly MOUs for prepaid customers increased 3.4%, from 29 minutes in 2002 to 30
minutes in 2003.
Overall, ARPU decreased slightly, 0.7% from Ps.191.0 in 2002 to Ps.189.5
in 2003, as a result of a variety of promotions that involved lower per minute
prices. Postpaid ARPU decreased 1.1% from Ps.755.0 in 2002 to Ps.747.0 in 2003,
while prepaid ARPU increased 0.2% from Ps.84.3 in 2002 to Ps.84.5 in 2003.
Telephone Equipment and Other Revenues. Telephone equipment and other
revenues decreased 11.0% in 2003, from Ps.649.0 million in 2002 to Ps.577.6
million in 2003. This decrease was primarily due to lower handset sales, larger
handset subsidies, lower revenues from out-roaming and lower sales of dark fiber
in 2003.
Cost of Sales
Cost of Services. Our cost of services declined 6.0% to Ps.1,576.4
million in 2003 as compared to Ps.1,676.8 million in 2002, primarily as a result
of the implementation in the second half of 2003 of a stringent cost control
policy. As a percentage of total revenues, cost of services increased to 31.6%
in 2003 from 27.7% in 2002, because of the 17.5% decrease in total revenues in
2003.
Cost of Telephone Equipment and Other. Cost of telephone equipment
increased 77.3% from Ps.533.9 million in 2002 to Ps.946.3 million in 2003
primarily due to (i) a change in accounting policy implemented in the third
quarter of 2003 whereby we now expense immediately the cost of the handsets we
give to our customers, instead of amortizing it over the life of the customer's
contract (See "--Recent Changes in Our Accounting Policies") and (ii) a more
aggressive handset purchase campaign. These factors were offset in part by a
decrease in purchases of dark fiber in 2003 as compared to 2002.
(65)
Operating Expenses
Operating expenses increased 0.5% to Ps.1,996.7 million in 2003 from
Ps.1,987.4 million in 2002. As a percentage of total revenues, operating
expenses increased to 40.1% in 2003 from 32.9% in 2002 because of the 17.5%
decrease in total revenues in 2003.
Sales and advertising expenses decreased 7.5% from Ps.1,493.0 million in
2002, to Ps.1,380.7 million in 2003, primarily because of lower commission
expenses due to lower gross additions, partially offset by an increase in
advertising expenses in the second half of 2003. General and administrative
expenses increased 24.6% to Ps.616.0 million from Ps.494.4 million in 2002, due
mainly to severance payments made as a result of headcount reductions.
Other Operating Income
We had other income of Ps.93.2 million in 2003 mainly as a result of the
sale of 34 towers to MATC Celular, while in 2002, we had other income of
Ps.110.4 million from the sale of 76 towers. See--"Tower Monetization."
Depreciation and Amortization
Depreciation and amortization expenses decreased 11.9% from Ps.2,457.8
million in 2002 to Ps.2,164.6 million in 2003, primarily due to a change in
accounting policy implemented in the third quarter of 2003 whereby we now
expense immediately the cost of the handsets we sell or give to our customers
instead of amortizing it over the life of a customer's contract. Had we
reclassified the amortization of handsets for 2002, we would have reported
depreciation and amortization of Ps.2,017.4 million.
Special Items
For 2003, we recorded a write-off of Ps.368.4 million corresponding to
intangible assets and goodwill, a charge of Ps.425.7 million for the valuation
of abandoned fixed assets and a write-off of Ps.709.0 million corresponding to
installation expenses and capitalized debt issuance expenses.
Tax Provisions
Our tax provisions increased 147.8%, or Ps.194.7 million in 2003, due to
the increase in our valuation allowance related to a deferred tax asset from our
tax loss carry forwards. We decided to increase the valuation allowance by
Ps.172.4 million due to uncertainty about the realization of tax loss carry
forwards.
Integral Financing Cost
Our integral cost of financing decreased by 13.5%, from Ps.1,655.0
million in 2002 to Ps.1,432.4 million in 2003. This decrease was mainly due to a
Ps.342.0 million decrease in foreign exchange losses in 2003 as a result of the
effect of a lower rate of devaluation of the peso as compared to the U.S.
dollar, our currency of indebtedness, in such year.
This decrease was offset in part by (i) a Ps.85.5 million decrease in
gain from monetary position in 2003 because of the effect of a lower rate of
inflation in such year on our net monetary liability position, and (ii) a
Ps.33.9 million increase in 2003 in our net interest expense because of the
effect of the devaluation of the peso on our U.S. dollar-denominated debt.
(66)
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Revenues
The following table presents the sources of our revenues for the years
ended December 31, 2001 and 2002:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2001 2002 CHANGE
----------------- ----------------- -------
Ps. % Ps. % %
------- ------- ------- ------- -------
(In millions of constant pesos as of
December 31, 2003, except percentages)
Service revenues ....................... 6,513.9 90.3% 5,396.2 89.3% (17.2)%
Telephone equipment and other revenues . 701.8 9.7% 649.0 10.7% (7.5)%
------- ------- ------- ------- -------
Total revenues ................. 7,215.7 100.0% 6,045.2 100.0% (16.2)%
======= ======= ======= ======= =======
Service revenues. The table below presents service revenues by source
for the years ended December 31, 2001 and 2002:
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2001(1) 2002(1) CHANGE
----------------- ----------------- -------
Ps. % Ps. % %
------- ------- ------- ------- -------
(In millions of constant pesos as of
December 31, 2003, except percentages)
Airtime(2) ............................. 3,284.4 50.4% 2,888.3 53.5% (12.1)%
Monthly fees ........................... 2,015.1 30.9% 1,660.6 30.8% (17.6)%
Long Distance .......................... 750.7 11.5% 477.4 8.8% (36.4)%
Value-added services and in-roaming(3) . 463.7 7.2% 369.9 6.9% (20.2)%
------- ------- ------- ------- -------
Total service revenues ......... 6,513.8 100.0% 5,396.2 100.0% (17.2)%
======= ======= ======= ======= =======
----------
(1) Figures include intercompany eliminations.
(2) Airtime includes amounts billed to other carriers for incoming minutes
under calling party pays modality, additional outgoing postpaid minutes
to those included in the package contracted for and prepaid outgoing
minutes net of unbilled minutes. Incoming and outgoing airtime is
charged on a per-minute basis.
(3) Includes fees for value-added services, such as call waiting, call
transfer, emergency service, secretarial service and three-way calling,
and revenues from premiums for surety bonds, insurance-related charges
payable by subscribers, rural and public telephony and Iusacell's
cellular magazines, as well as in-roaming service revenue. Does not
include charges for related airtime. Customers using short messaging
value-added services such as news, weather, sports and entertainment
reports are charged only for airtime. These revenues are therefore
included in airtime.
Service revenues decreased 17.2% in 2002 as compared to 2001. This
decrease results mainly from increased competition in the market, lower prices
and our inability, due to severe financial constraints, to react appropriately
to this increased competition.
(67)
In 2002, postpaid customers declined by 16.1%, from 366,266 in 2001 to
307,129 in 2002, due to lower gross postpaid additions. Prepaid customers
increased by 19.5% from 1,488,940 customers in 2001 to 1,774,071 in 2002. The
increase in 2002 reflects our efforts at that time to expand that segment.
"Incoming calls only" prepaid customers, the substantially majority of whom
generate little traffic, grew by 54.5% from 768,076 customers in 2001 to
1,186,962 in 2002.
Gross additions for 2002 totaled 1,122,024 customers, which represents a
6.7% increase over 2001. These additions were mainly derived from the strategic
focus on prepaid additions during the first half of 2002. During the second half
of 2002, however, we implemented a strategic shift, which triggered sales of
higher-value products through changes in the commission structure, but actually
resulted in a decrease in gross additions during the second half of 2002,
particularly in the low value prepaid segments.
Average monthly churn for the year declined from 3.9% in 2001 to 3.4% in
2002, although churn increased during the second half of the year as we actively
sought to remove non- or low-revenue producing prepaid customers. Postpaid
subscriber churn decreased from an average monthly level of 3.8% in 2001 to 3.6%
in 2002 as a result of the adoption of strict collection procedures to reduce
bad debt and the implementation of new activation policies and retention
programs.
As a result of higher gross additions and lower average churn, net
additions increased 29.9%, from 173,947 customers in 2001 to 226,034 in 2002.
This includes the extraordinary removal during the third quarter of 2002 of
47,415 customers who were determined to be inactive prepaid customers and were
not taken into consideration in the blended churn rate for the year.
Monthly fees decreased primarily due to fewer postpaid customers and an
increase in the number of hybrid subscribers as a proportion of the total
postpaid base, particularly during the first half of 2002. Airtime revenues
decreased primarily as a result of fewer postpaid subscribers. Long distance
revenue decreased mainly due to fewer postpaid subscribers and a higher
proportion of incoming only subscribers in the prepaid subscriber base.
Blended average monthly minutes of use (MOUs) for 2002 decreased 25.0%,
from 84 minutes to 63 minutes, primarily due to a higher proportion of prepaid
customers in our subscriber base. Average monthly MOUs for postpaid customers
decreased 14.4%, from 250 minutes in 2001 to 214 minutes in 2002, mainly due to
the increased proportion of hybrid customers who had lower consumption patterns
than the remainder of the postpaid customer base. Average MOUs increased 3.6%
among prepaid customers, from 28 minutes in 2001 to 29 minutes in 2002,
primarily due to promotions aimed at increasing use by higher value customers in
the prepaid customer base.
ARPU decreased, 28.5% from Ps.267.0 in 2001 to Ps.191.0 in 2002, as a
result of lower average MOUs and the higher proportion of prepaid customers in
our customer base. Postpaid ARPU decreased 13.2% from Ps.798.0 in 2001 to
Ps.693.0 in 2002, primarily as a result of a higher proportion of hybrid
customers in our customer base. Prepaid ARPU declined 11.1% from Ps.90.0 in 2001
to Ps.80.0 in 2002, due to a higher proportion of lower revenue generating
customers in the customer base during the first half of the year.
Telephone Equipment and Other Revenues. Telephone equipment and other
revenues decreased 7.5% in 2002, from Ps.667.3 million in 2001 to Ps.616.9
million in 2002. This decrease was primarily due to lower postpaid handset sales
and lower revenues from out-roaming in 2002.
(67)
Cost of Sales
Cost of Services. Our cost of services declined by 5.4% to Ps.1,594.0
million in 2002 as compared to Ps.1,684.2 million in 2001. This decrease
resulted from stringent financial controls we implemented in 2002, despite
higher lease costs associated with an increased number of non-strategic towers
sold to and leased back from MATC Celular during the year. See "--Tower
Monetization." As a percentage of total revenues, cost of services increased to
27.7% in 2002 from 24.6% in 2001, primarily because of the 16.2% decrease in
total revenues in 2002.
Cost of Telephone Equipment and Other. Cost of telephone equipment and
other increased 22.1% in 2002 from Ps.415.5 million in 2001 to Ps.507.5 million
primarily due to partial subsidizing of telephones sold to prepaid customers and
higher cost of dark fiber optic sales. Until September 30, 2003, the cost of a
handset given to a postpaid customer was amortized over 12 months, the average
length of our service contract, instead of being immediately expensed in the
period in which the customer receives the handset.
Operating Expenses
Operating expenses decreased 17.2% from Ps.2,282.4 million in 2001 to
Ps.1,889.4 million in 2002. As a percentage of total revenues, operating
expenses decreased from 33.3% in 2001 to 32.9% in 2002.
Sales and advertising expenses decreased 13.7% from Ps.1,645.5 million
in 2001, to Ps.1,419.3 million in 2002, primarily because of higher television
advertising rates as well as expenses incurred in association with the
consolidation of Region 8 cellular service into our business in 2001. General
and administrative expenses decreased 26.2% from Ps.636.9 million in 2001 to
Ps.470.1 million in 2002, due to the implementation in 2002 of stringent cost
controls, lower headcount and restructured compensation plans.
Other Operating Income
We had other income of Ps.105.0 million in 2002 mainly from the sale of
76 towers to MATC Celular. In 2001, we had other income of Ps.338.4 million from
the sale of 244 towers.
Depreciation and Amortization
Depreciation and amortization expenses decreased 18.8% from Ps.2,878.7
million in 2001 to Ps.2,336.5 million in 2002, primarily due to a reduced level
of capital expenditures during the period, lower handset amortization expenses
attributable to lower postpaid gross additions, more cost-effective handset
purchases and better targeted handset subsidies for high-value customers.
Integral Financing Cost
Our integral cost of financing increased from Ps.348.7 million in 2001
to Ps.1,573.4 million in 2002. This increase was mainly due to Ps.1,069.1
million in foreign exchange losses recorded in 2002 as compared to a Ps.247.1
million gain in 2001, resulting from a change from a 4.8% appreciation of the
peso in relation to the U.S. dollar in 2001 to a 13.8% devaluation in 2002. Net
interest expense increased by Ps.47.1 million in 2002 due to the effect of the
depreciation of the peso on our U.S. dollar-denominated indebtedness.
This increase was offset in part by a Ps.139.1 million increase in gain
from monetary position in 2002 because of the effect of a higher rate of
inflation in such year on our net monetary liability position.
(69)
INCOME TAX, ASSET TAX AND EMPLOYEES' PROFIT SHARING
Beginning January 1, 1999, as a result of Mexican Income Tax Law
amendments, we must limit our tax consolidation to 60% of all our subsidiaries,
except for six entities (Iusatel, S.A. de C.V., Iusatelecomunicaciones, S.A. de
C.V., Infotelecom, S.A. de C.V., and Punto-a-Punto Iusacell, S.A. de C.V.) which
are not included in our annual consolidated income tax return (although they are
consolidated for financial reporting purposes), because we do not hold more than
50% of the voting shares of such subsidiaries. We plan to acquire at least 51%
of the capital stock of four of these subsidiaries by not later than the fourth
quarter of 2005. Once we do, we will be able to include these subsidiaries in
our tax consolidation.
In December 2000, the Mexican Finance Ministry (Secretaria de Hacienda y
Credito Publico) ruled that we could prepare consolidated tax returns for
ourselves and the subsidiaries in which we hold a majority of voting shares and
thereby apply our net operating loss carry forwards against our and such
subsidiaries' profits. In April 2001, the Mexican Finance Ministry ruled that
Iusacell Celular's net operating loss carry forwards could be transferred to
Iusacell, so that Iusacell could apply such net operating loss carry forwards
against its and its majority-owned subsidiaries' tax result.
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% of the taxable base, is required to be paid
if the amount of the asset tax exceeds the computed income tax liability. We
recorded provisions of Ps.121.6 million, Ps.154.1 million and Ps.155.5 million
for asset tax for 2002, 2003 and 2004 respectively. These taxes may be applied
in subsequent years against income tax payments, to the extent income tax
liabilities for such years exceed the net asset tax calculation. Due to net
losses, we paid no income taxes in 2002, 2003 and 2004 and paid the asset taxes
specified above.
In 2002, due to the change in the statutory income tax rate which became
effective in 2003, Iusacell and its subsidiaries reduced the deferred tax asset
in 2002, resulting in a provision of deferred income tax of Ps.10.1 million.
During 2003 and 2004, we decided to increase the net deferred asset valuation
allowance which is mainly originated by the effect of the tax loss carry
forwards, reflecting the uncertainty about our ability to continue as an ongoing
concern. The realization of the net deferred tax asset heavily depends on
generating sufficient taxable income prior to expiration of the tax loss carry
forwards. Our management estimates that, considering our present critical
financial condition, the realization of the tax loss carry forwards cannot be
assured through the generation of sufficient taxable income during the
applicable period. See "--Recent Changes in our Accounting Policies" and Note 12
to the Consolidated Financial Statements for a discussion of our tax loss carry
forwards.
While we have no employees at the holding company level, our
subsidiaries are required under Mexican law to pay their employees, in addition
to their required compensation and benefits, profit sharing in an aggregate
amount equal to 10% of the taxable income of the relevant subsidiary (calculated
without reference to inflation adjustments or amortization of tax loss carry
forwards). There was no statutory profit sharing in any periods presented.
ii) FINANCIAL SITUATION, LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements include working capital, purchases of network
equipment, interest and principal payments on outstanding indebtedness and
acquisitions of and strategic investments in businesses. We have financed our
growth to date through equity contributions from our previous principal
shareholders, public offerings and private placements of debt and equity
securities, bank debt and vendor financing.
(70)
Funds from operating activities and other sources have not been
sufficient to enable us to make:
. the U.S.$24.9 million interest payments on the Iusacell senior
notes which were due on each of June 1, 2003, December 1, 2003,
June 1, 2004 and December 1, 2004, and the U.S.$350.0 million
principal payment and accrued interest which became due upon
acceleration notified by an unidentified percentage or holders
on April 29, 2005,
. the U.S.$7.5 million interest payment on the Iusacell Celular
10% senior notes due 2004 which was due on July 15, 2003 and the
U.S.$150.0 million principal payment and accrued interest which
became due upon acceleration on September 11, 2003,
. the U.S.$265.6 million principal payment on Iusacell Celular's
senior refinancing secured loan which was due on March 31, 2004
because of the automatic acceleration of the maturity date of
the loan as a result of our failure to refinance the Iusacell
Celular senior notes by such date,
. the U.S.$3.7 million principal payments on the BNP Paribas
facilities which were due on each of June 16, 2003, December 16,
2003 and June 15, 2004, and the U.S.$2.6 million principal
payments that were due on December 15, 2004 and June 15, 2005,
. the U.S.$7.8 million principal payment plus accrued interest on
the GTE Venholdings B.V. promissory note which was due on
November 8, 2003,
. the U.S.$1.0 million principal payment which was due on February
7, 2005 under the Harris Facility, and
. the U.S.$7.0 million principal payment on a promissory note due
to Elektra on October 30, 2003.
In addition, funds will not be sufficient to meet our debt service and
principal amortization requirements, working capital requirements and capital
expenditure needs for our existing businesses through 2005. Our future operating
performance and ability to service and repay our indebtedness will be subject to
many factors, including a successful debt restructuring, future economic and
competitive conditions and to financial, business and other factors, many of
which are beyond our control.
CAPITAL EXPENDITURES
We plan capital expenditures for 2005, 2006 and 2007 to total
approximately U.S.$188.1 million, not including capitalized interest. We
anticipate that approximately U.S.$50.1 million of such capital expenditures
will need to be invested during 2005, in order to acquire, build out and operate
our PCS network, to increase the coverage and improve the quality of our
cellular and long distance networks in the central regions and to expand our
advanced data network capabilities in certain key cities.
As we make additional investments in our mobile telephony network and
pursue long distance and data transmission opportunities, we may need additional
external funding in 2006 and beyond. Furthermore, the investments required to
keep pace with technological change, such as extended coverage on
third-generation wireless telecommunication equipment, will require additional
capital resources. During the first quarter of 2005, we invested approximately
U.S.$15.1 million in our cellular regions to expand air coverage, and upgrade
our 3G coverage network.
(71)
The degree and timing of capital expenditures will remain strongly
dependent on the nature, timing and success of our debt restructuring efforts,
the competitive environment and economic developments in Mexico, including
inflation and exchange rates, the timing of regulatory actions and on the
availability of new funding from suitable debt and/or equity financing.
The failure to obtain funding for capital expenditures will materially
adversely affect our ability to compete effectively against better capitalized
competitors and to withstand downturns in our business or in the Mexican economy
generally.
Our total capital expenditures in 2004 were U.S.$40.2 million, which
were used to make additional investments in the central regions and expand the
advance data network capabilities into other key cities and to acquire, build
out and operate our PCS network in northern Mexico, among other things.
In 2003, the total amount of our capital expenditures was U.S.$18.2
million, which we invested to maintain our coverage and improve our information
systems.
Our total capital expenditures in 2002 were U.S.$87.6 million. Of this
amount, approximately U.S.$58.2 million was used primarily for the development
of the cellular network in the central regions and to construct new and remodel
existing customer and sales services centers. The balance of U.S.$29.4 million
was primarily invested in developing and launching PCS services in regions 1 and
4, and used to develop and increase the quality of our cellular network in
region 8 in southern Mexico.
HEDGING ACTIVITIES
We currently do not carry out any hedging activities.
CHANGES IN FINANCIAL POSITION
Historically, our cash generated from operating activities has not been
sufficient to meet our debt service, working capital and capital expenditure
requirements. We have relied on the capital markets for new equity and debt
financing, vendor financing and borrowings and equity contributions from our
principal shareholders to meet such funding needs. For the years ended 2002,
2003 and 2004, our earnings were insufficient to cover our fixed charges by
Ps.3,222.1 million, Ps.5,333.3 million and Ps.1,786.4 million, respectively.
Our total consolidated debt, including notes payable to suppliers, was
Ps.8,968.8 million at December 31, 2004. At December 31, 2004, our ratio of debt
to total capitalization was 113.7% compared to 91.4% at December 31, 2003.
Resources From Operating Activities
Resources provided by operating activities were Ps.434.3 million in
2004. The change from a net use of resources for operating activities of
Ps.212.3 million in 2003 to resources provided by operating activities in 2004
of Ps.434.3 million was primarily due to (i) a lower operating loss in 2004 as
compared to 2003 and (ii) lower inventory purchases in 2004 as compared to 2003.
(72)
Resources used in operating activities were Ps.212.3 million in 2003
compared to Ps.534.8 million in 2002. The decrease in resources used in
operating activities was primarily due to the non-payment of interest due under
our indebtedness in 2003, as well as to cash management efficiencies that
resulted in an increase in accounts payable aging, partially offset by higher
inventory purchases.
Resources From Financing Activities
Resources provided by financing activities increased to Ps.244.9 million
in 2004, from Ps.175.7 million in 2003. This increase was mainly due to the
payment of Ps.137.0 million of notes in 2003, partially offset by a Ps.73.9
million decrease in our debt resulting from the appreciation on an average
weighted basis of the Peso as compare to the U.S. dollar in 2004.
Resources provided by financing activities amounted to Ps.175.7 million
in 2003 compared to Ps.687.9 million in 2002. The decrease was mainly
attributable to a decrease in proceeds from long-term debt and in trade notes
payable in 2003, offset in part by principal payments on long-term debt made in
2002.
Resources Used for Investing Activities
Resources used in investing activities increased to Ps.681.3 million
from Ps.132.3 million in 2003 primarily due to (i) an increase in investments in
our network to serve a higher subscriber base, (ii) acquisitions and upgrades in
software and licenses to improve our billing and information systems, and (iii)
the operating and/or remodeling of our corporate and regional headquarters.
Resources used in investing activities were Ps.132.3 million in 2003,
compared to Ps.458.4 million in 2002. This decrease is primarily attributable to
our critical financial condition, which has not allowed us to raise sufficient
funds to invest in the build out and upgrade of our wireless network.
Financial Instruments
Iusacell's financial instruments consist principally in cash, accounts
receivable and accounts payable, notes payable, long term debt and, until 2002,
hedging agreements and exchange risk and interest rates.
Until October 2002, Iusacell used derivatives to manage the fluctuation
risk in interest rates and in exchange rates of foreign currency.
Cash
Cash consist principally in banking deposits. Iusacell invests its cash
in excess in deposits with banks.
(73)
Position in Foreign Currency
General
Balance sheet at December 31 includes assets and liabilities in U.S. dollars as
follows:
2004 2003
----------------- ----------------
Money Assets US$ 12,324 US$ 12,441
Money Liabilities (1,045,338) (970,659)
Net passive money position in U.S.
dollars U.S.$ (1,033,014) U.S.$ (958,218)
Equivalent in nominal pesos Ps. (11,518,106) Ps. (10,760,788)
At December 31 2004 and 2003, most of our telecommunications equipment
and handsets were from abroad.
During 2004, 2003 and 2002, revenues and interest expenses generated for
assets and liabilities denominated in U.S. dollars were as follows:
2004 2003 2002
-------------- --------------- --------------
Interest Revenues U.S.$ 356 U.S.$ 56 US$ (81,891)
Interest Expenses (82,121) (81,891) (82,317)
Net Interest Expenses U.S.$ (82,121) U.S.$ (81,435) U.S.$ (80,961)
Equivalent in nominal pesos Ps. (915,651) Ps (914,515) Ps. (845,176)
Operating results for the years ended December 31 2004 and 2003 include
expenses for depreciation and amortization, related to fixed assets and foreign
inventory.
OFF-BALANCE SHEET ARRANGEMENTS
We currently do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
TREND INFORMATION
In addition to the events and developments identified elsewhere in this
section, our financial condition and results of operations could also be
materially affected by the following events and developments:
(74)
REGULATORY DEVELOPMENTS
Calling Party Pays
We are currently discussing with COFETEL, Telmex and other Mexican
carriers the possibility of extending the calling party pays ("CPP") modality to
all incoming long distance calls. If CPP is extended to all incoming long
distance calls, we believe that this change would have a positive impact on our
cellular revenues. We cannot assure you that COFETEL and other carriers will
agree to implement this change.
International Long Distance Service
In 1996, COFETEL established a uniform rates and proportional return
system for international traffic. In June 2004, as a result of a complaint under
the World Trade Organization, Mexico agreed to eliminate the proportional return
system and permit free negotiations between international carriers to terminate
their calls. These free negotiations between international carriers have
resulted in a reduction of the price of long distance calls. We cannot predict
whether such reduction will have a positive impact on our long distance revenues
by generating a greater volume of calls, or a negative impact resulting from a
loss of business to competitors which could offer better prices than us.
SERVICE AND TECHNOLOGICAL DEVELOPMENTS
Short Message Service (SMS)
In December 2003, Iusacell signed an agreement with other mobile
companies to allow our respective customers to exchange short messages. Iusacell
cannot predict whether short messages will have an adverse impact on the volume
of voice calls and its final impact over revenues.
Multimedia Message Service (MMS)
In the second half of 2004, Iusacell launched several applications of
MMS such as music, sounds and photos. We cannot predict whether it will be
possible to exchange MMS between carriers. We believe that MMS may have a
positive impact on our revenues.
Voice over Internet Protocol (VoIP)
In recent years, the market started to accept the VoIP telephone service
as a close substitute of long distance service. As a result of this competition,
we anticipate a strong reduction in long distance rates and the introduction of
monthly flat rates for unlimited calls. We believe that these changes may have a
negative impact on our long distance revenues.
iii) INTERNAL CONTROL
We perform regular reviews of our internal controls and carry out
improvements where advisable. We changed our independent accountants for the
audit of our financial statements for fiscal year 2004. No significant
deficiencies and material weaknesses were identified that required corrective
actions.
e) CRITICAL ACCOUNTING ESTIMATES
We have identified certain key accounting policies on which our
consolidated financial condition and results of operations are dependent. These
key accounting policies most often involve complex matters or are based on
subjective judgments or decisions that require management to make estimates
(75)
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. We base our estimates on historical
experience, where applicable, and other assumptions that we believe are
reasonable under the circumstances. Actual results may differ from our estimates
under different assumptions or conditions. In the opinion of our management, our
most critical accounting policies under Mexican GAAP are those that require
management to make estimates and assumptions that affect the reported amounts
related to the accounting for revenue recognition, allowance for doubtful
accounts, the evaluation of long-lived assets, property plant and equipment,
goodwill, and deferred taxes. For a full description of all of our accounting
policies, see Note 4 to the Consolidated Financial Statements included in this
Annual Report.
There are certain critical estimates that we believe require significant
judgment in the preparation of our consolidated financial statements. We
consider an accounting estimate to be critical if:
. It requires us to make assumptions because information was not
available at the time or it included matters that were highly
uncertain at the time we were making the estimate, and
. Changes in the estimate or different estimates that we could
have selected would have had a material impact on our financial
condition or results of operations.
Revenue Recognition
Mobile telephony airtime is recorded as revenue as service is provided.
Until December 31, 2001, revenue from the sale of prepaid cards was recognized
at the date of sale. We had recognized the revenue on the sale of prepaid cards
at the date of sale rather than on a deferred basis because the length of the
average consumption period for such prepaid cards was not significant, i.e.,
approximately one to one-and-a-half months, and it was not material to results
of operations for 2001 and 2000. Starting January 1, 2002, we started to
recognize revenue from the sale of the prepaid cards as service is provided
because of the increasing length of the average consumption period for such
prepaid cards. Revenues from the sale of prepaid cards associated with services
that have not been provided are deferred until the services are provided or the
prepaid airtime expires, and are included in the line item "taxes and other
payables" in the accompanying consolidated balance sheets. Sales and cost of
sales of equipment and related services are recorded when goods are delivered
and services are provided. Cellular access charges are billed in advance and
recognized when the services are provided. Other revenues, mainly from paging
and long distance services, are recognized when the related services are
provided.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents our estimate of losses
resulting from the failure or inability of our customers to make required
payments. We consider a number of factors in determining the proper level of the
allowance including historical collection experience, current economic trends,
the aging of the accounts receivable portfolio and changes in the
credit-worthiness of our customers. Systems to detect fraudulent call activity
are in place within our network, but if these systems fail to identify such
activity, we may realize a higher degree of uncollectible accounts. While we
believe that our estimates are reasonable, changes in our customers' trends or
any of the above mentioned factors could materially affect our bad debt expense.
(76)
Evaluation of Long-Lived Assets
We recognize on our balance sheets certain long-lived assets and
capitalized costs including goodwill and property, plant and equipment. These
assets are assigned useful lives which impact annual depreciation and
amortization expense, the assignment of which involves significant judgments and
estimates. These long-lived assets are evaluated for impairment on a periodic
basis and we recognize impairment to the extent we believe that the carrying
value is no longer recoverable from future cash flows. Factors we take into
consideration include the future discounted cash flows to be generated by the
assets and the possible impact that inflation may have on our ability to
generate cash flow since, with inflation accounting, the carrying value is
restated for inflation prior to performing an impairment analysis. Key
assumptions we evaluate in preparing a discounted cash flow analysis include
inflation, currency fluctuations and future revenue growth. The use of different
estimates or assumptions within our discounted cash flow model could result in
discounted cash flows lower than the current carrying value of our assets,
therefore requiring the need to compare the carrying values to their fair
values. Our estimates and assumptions take into consideration all relevant
business and market factors which are known to us at the time, some of which may
change in future periods due to factors outside of our control (including
shareholder strategic decisions). Should these factors adversely change in
future periods, we would be required to reevaluate the carrying value of our
long-lived assets and cash flow impairment calculations could possibly change.
During 2003 we wrote-off various long-lived assets based on changes in
estimates and assumptions in relation to these long-lived assets as follows:
a. As discussed in Note 4n. to our Consolidated Financial Statements,
during 2003 we wrote down intangible assets for Ps.331.4 million
that mainly consisted of: (i) pre-operating expenses originated by
our PCS start-up operations in northern Mexico and (ii) certain
payments made by the Group to Telmex related to the special projects
implemented by Telmex to permit competition in long distance
telephony (see Note 13b to our Consolidated Financial Statements).
This write down of intangible assets is presented as a special item
in our consolidated income statement for 2003.
b. During the third quarter of 2003, we wrote-off installation expenses
for Ps.533.9 million and advance payments for Ps.175.1 million,
these advance payments related to the expenses in which we incurred
while obtaining long-term financing, which were reclassified to
current liabilities during 2003. This write-off is presented in the
other expenses, net, line in our consolidated income statement for
2003.
Property, Plant and Equipment
We depreciate property, plant and equipment and other intangible assets
with a definite life using straight-line methods over the period of time we
estimate we will benefit from each asset.
The cost of mobile wireless telephones given to customers under
exclusive service contracts was amortized on a straight-line basis until
September 30, 2003. The term of service contracts varied on a customer by
customer basis. Due to the cost-ineffectiveness of tracking phones on an
individual contract basis for amortization purposes, we estimated the average
term of our contracts based on current trends.
(77)
During the third quarter of 2003, we changed the accounting policy for
the telephones given to our customers under exclusive service contracts. As a
result, the cost of such telephones is recorded in the income statement at the
moment when the contract is signed and such cost is included as a part of the
cost of equipment sales and other, in the consolidated statement of income. The
cumulative effect of this change in accounting policy resulted in a loss for the
year for 2003 of Ps.167.3 million related to the remaining balance of telephones
being amortized as of that date, amount that is included in the line cumulative
effect of change in accounting policy, in our consolidated income statement for
the year ended December 31, 2003.
In addition to the effect of this change, we reclassified Ps.237.7
million of the amortization for the period from January to September 2003, which
was originally recorded in depreciation and amortization for the period, in the
line item "cost of telephone equipment sales and other." If this
reclassification had been made for the years ended December 31, 2002, the cost
of telephone equipment sales and other would have been of Ps.974.2 million and
the depreciation and amortization would have been Ps.2,017.4 million.
Goodwill
Under Mexican GAAP, we amortize goodwill on a straight-line basis over a
period of 20 years. We cancelled goodwill for Ps.37.0 million during the fourth
quarter of 2003 related to our handset leasing business. This amount is recorded
under "Intangible assets write-off." Since the effectiveness on January 1, 2005
of Bulletin B-7 "Business Acquisitions" issued by the MIPA, goodwill is no
longer amortized and its value will be subject to annual impairment tests.
Deferred Taxes
At December 31, 2002, we had recorded a net deferred tax asset mainly
reflecting the benefit of tax loss carry forwards. However, during the third
quarter of 2003, we increased our valuation allowance due to changes in our
business plan and estimates brought by our change in control. Considering the
present financial situation of Iusacell, we cannot assure you that we will
generate sufficient taxable income during the following years to realize our tax
loss carry forwards. Our estimates and assumptions take into consideration all
relevant business and market factors which are known to us at the time, some of
which may change in the future due to factors outside our control (including
shareholder strategic decisions). Should these factors adversely change in the
future, we may be required to record a deferred tax liability.
(78)
4) MANAGEMENT
a) EXTERNAL AUDITORS
PricewaterhouseCoopers, which had been appointed by Iusacell's Board of
Directors, served as Iusacell's independent public accountants for each of the
fiscal years ended December 31, 2002 and 2003. For the fiscal year 2004, our
Audit Committee recommended a change of auditors. In the last quarter of 2004,
we appointed Freyssinier Morin, S.C., a member of Moores Rowland International,
an international association of independent accounting firms. Each year, the
Audit Committee submits a recommendation to Iusacell's Board of Directors to
ratify the re-appointment of Iusacell's independent public accountants.
The following table presents the aggregate accrued fees for professional
audit services and other services rendered by PricewaterhouseCoopers to Iusacell
in 2003 and by Freyssinier Morin, S.C. in 2004.
FEES PAID TO INDEPENDENT ACCOUNTANTS
2003 2004
-------------------- --------------------
(in thousands of Mexican pesos)
Audit Fees(1) ........... Ps.10,351 Ps.6,800
Audit-Related Fees(2) ... 942 --
Tax Fees(3) ............. 2,045 --
-------------------- --------------------
Total ................... Ps.13,338 Ps.6,800
-------------------- --------------------
----------
(1) Audit fees include services performed by the independent accountant to
comply with generally accepted accounting standards in Mexico and the
United States. Audit fees also include fees for services provided by the
independent accountants in connection with statutory and regulatory
filings or engagements, and assistance with and review of documents
filed with the SEC.
(2) Audit-related fees include accounting consultations and consultation
concerning financial accounting and reporting standards.
(3) Tax fees include fees for tax compliance, tax planning and tax advice.
Tax compliance generally involves claims for refund and tax
payment-planning services. Tax planning and tax advice encompass
assistance with tax audits and appeals and requests for rulings or
technical advice from taxing authorities.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The general authority to pre-approve the engagement of our independent
auditors to render non-audit services is under the purview of our Audit
Committee. Accordingly, the Audit Committee has established pre-approval
procedures to control the provision of all audit and non-audit services by our
independent auditors (the "Pre-Approval Policy"). Under the Pre-Approval Policy,
the engagement of our independent auditors to provide audit and non-audit
services must be pre-approved by the Audit Committee, either in the form of a
special approval or through the inclusion of the services in question in a list
adopted by the Audit Committee of pre-approved services. The Pre-Approval Policy
is detailed as to the particular services to be provided. Additionally, the
Pre-Approval Policy affirms that the Audit Committee's responsibilities under
the Exchange Act are not delegated to management.
(79)
b) RELATED PARTY TRANSACTIONS AND CONFLICT OF INTEREST
GENERAL POLICY
In October 2003, our shareholders approved amendments to our bylaws to
establish a Related Party Transactions Committee. The committee reviews any
material transaction between Iusacell or any of its subsidiaries and any related
party to verify that its terms are at least as favorable to us as the terms that
would be obtainable at the time for a comparable transaction or series of
similar transactions in arm's-length dealings with an unrelated third person.
See Item 4 "Management - c) Directors and Shareholders-- Board Practices."
Since the acquisition by MovilAccess of a controlling interest in
Iusacell in July 2003, Iusacell has entered into a number of transactions with
companies controlled, directly or indirectly, by Mr. Salinas Pliego. The
objective behind these transactions is to archive operating efficiencies,
control costs by outsourcing certain operations and/or to exploit synergies with
other companies under the control of Mr. Salinas Pliego. The following is a
description of our related party transactions.
ELEKTRA AND SALINAS Y ROCHA RETAIL SPACE LEASING AND PROMOTION SERVICES
On August 5, 2003, Iusacell, S.A. de C.V. ("Iusacell S.A."), our sales
and marketing subsidiary, entered into an agreement with Elektra and Salinas y
Rocha, S.A. de C.V. ("SyR"), two national retail chains controlled by
Mr. Salinas Pliego, whereby Elektra and SyR agreed to provide us with space in
their stores to set up points of sale and promote our services. Iusacell S.A.
agreed to pay Elektra and SyR for the leasing of the space U.S.$2.5 million in
four equal payments on October 30, 2003, November 28, 2003, December 31, 2003
and April 30, 2004. This agreement, which was originally set to expire in August
2004, was renewed through December 31, 2005. Under the new terms, Iusacell S.A.
agreed to pay U.S.$4.2 million in four installments, the first of which was paid
on December 31, 2004 in an amount of U.S.$1.3 million.
On August 5, 2003, Iusacell S.A., Elektra, and SyR entered into a second
agreement, whereby Elektra and SyR agreed to include our advertising materials
in their advertising campaigns to promote the services offered by us at their
respective stores. Iusacell S.A. agreed to pay Elektra and SyR for the sales
promotion services a total of U.S.$5 million in four equal payments on October
30, 2003, November 28, 2003, December 31, 2003 and April 30, 2004. This
agreement, which was originally set to expire in December 2004, was renewed
through December 31, 2005. Under the new terms, Iusacell S.A. agreed to pay
U.S.$2.55 million on four installments, the first of which was paid on December
31, 2004 in an amount of U.S.$1.3 million.
For both agreements we recognized Ps.50.4 million as operating expenses
in 2004.
ELEKTRA MARKETING AND SALES SERVICES AND OPERATION AND MANAGEMENT OF OUR
CUSTOMER SALES AND SERVICE CENTERS
On August 2, 2003, Iusacell S.A. and Elektra entered into a ten-year
sales commission contract whereby Elektra agreed to act as commission agent for
us. As such, Elektra agreed to market and sell our prepaid and hybrid products
at its chain of stores distributed throughout Mexico.
On October 1, 2003, Iusacell S.A. and Elektra entered into a master
agreement whereby we granted Elektra the right to operate and manage 103 of our
111 customer sales and service centers. To increase traffic flow at these
centers, Elektra is permitted to use a portion of the space to sell electronic
appliance products normally sold at its Elektra stores. In 2004, we sold to
Elektra handsets (net of subsidies) for inventory in the amount of Ps.196.8
million.
(80)
Iusacell S.A. pays Elektra a commission based on a percentage of sales
made by Elektra (the applicable percentage varies depending on the product) for
Elektra's marketing, sales and operation and management services. Elektra, in
turn, reimburses Iusacell S.A. for costs related to the customer sales and
service centers such as for the lease and maintenance of the stores, use of
computer systems, furniture and fixtures, administrative and personnel costs.
In 2004, we recorded expenses due Elektra of an aggregate amount of
Ps.123.7 million in commissions, Ps.21.7 million in lease expenses and Ps.16.8
million in administrative services. We also recorded revenues of Ps.73.1 million
for reimbursement of costs related to the customer sales and service centers and
Ps.10.3 million for wireless telephony and data transmission services (see
"Provision of Telecommunication Services").
PURCHASE OF HANDSETS FROM ELEKTRA
We entered into a handset supply agreement with Elektra that gives
Elektra the right to receive a commission ranging between 1% and 3% of the price
negotiated by Elektra with suppliers. In 2004, we purchased handsets in an
aggregate amount equal to Ps.269.4 million under the terms of this agreement. In
addition, we purchased handsets from Elektra in an aggregate amount of Ps.311.5
million outside of the agreement.
ELEKTRA CURRENT ACCOUNT ARRANGEMENT
On August 1, 2003, Iusacell S.A. and Elektra entered into a current
account contract for the purpose of streamlining, controlling and recording the
transfer of funds between the two companies under the different commercial
arrangements described above. This contract, which has an indefinite term,
provided for the opening of reciprocal Ps.80.0 million current accounts. In
2004, we recorded Ps.20.0 million of interest from the current account. To
guarantee its obligations, Iusacell Celular issued a U.S.$7.0 million promissory
note in favor of Elektra, which was payable on October 30, 2003. We have failed
to make payment on this note. Elektra has initiated legal proceedings in a
Mexican court to obtain payment. See Item 2, "The Company - b) Business
Description - xi) Judicial, Administrative or Arbitral Proceedings--Elektra
Promissory Note."
BIPERCOMM PAGING SERVICES OPERATION
Bipercomm, an affiliate of MovilAccess, purchased paging equipment from
us in the amount of Ps.0.2 million in 2004. We consider that paging is not an
area of growth given competition from short message services.
SECSA COLLECTION AND PAYMENT SERVICES
On October 6, 2003, each of our operating subsidiaries and Servicios
Eficientes de Cartera, S. de R.L. de C.V. ("SECSA") a MovilAccess subsidiary,
entered into a ten-year services agreements pursuant to which SECSA agreed to
collect from our customers payments related to the provision of our services.
SECSA also agreed to manage payments to our suppliers and creditors. In 2004, we
recorded expenses for commissions due to SECSA for Ps.43.1 million for these
services.
TELEACTIVOS CALL CENTER SERVICES
On September 1, 2003, Iusacell S.A. and Teleactivos, S.A. de C.V.
("Teleactivos"), a MovilAccess affiliate, entered into a services agreement
pursuant to which Teleactivos agreed to provide basic customer service to our
customers via its own call center, including, among others, renewal services,
billing and collection support and technical failures reports.
(81)
On November 3, 2003, Iusacell S.A. and Teleactivos entered into an
operation services agreement pursuant to which Teleactivos agreed to provide
additional value-added services via its own call center, such as, among others,
secretarial services, news, traffic reports.
Teleactivos receives a monthly payment from Iusacell S.A. for its
services, based mainly on the number of calls processed. Both agreements have an
indefinite term and may be terminated by any party with a 30 days' notice. In
2004, we recorded expenses for these services of Ps.82.7 million.
In addition, in May 2005, Teleactivos began acting also as a distributor
for our products and services, and receives commissions under the same terms as
our other distributors.
UNEFON CAPACITY EXCHANGE AND ROAMING
In April 23, 2004, we entered into an airtime exchange and roaming
agreement with Unefon, a nationwide fixed and mobile telephony provider in which
Mr. Salinas Pliego has significant influence, whereby both parties agreed to
exchange airtime and allow for roaming in certain cities. This agreement was
terminated and replaced by a capacity exchange and roaming agreement on August
3, 2004. Under this agreement, both parties agreed to exchange capacity and
allow for roaming in certain cities. In 2004, we recorded revenues of Ps.56.2
million and Ps.3.7 million, and expenses of Ps.55.7 million and Ps.2.0 million
corresponding to capacity exchange and roaming and SMS interconnection,
respectively.
UNEFON INTERCONNECTION
On June 9, 2000, we entered into an interconnection agreement with
Unefon, which at that time was not a related party. The interconnection rate
under this agreement is Ps.1.71 per minute of traffic, and this agreement has an
indefinite term. On August 14, 2003, we entered into an interconnection
agreement with Unefon for the rendering of short message services under terms
and conditions similar to those agreed with Telcel and Telefonica Moviles. The
agreement permits the exchange of short messages between our respective
customers. The operator that generates the message pays an interconnection fee.
We recorded revenues of Ps.28.2 million and expenses of Ps.46.6 million
in interconnection fees in 2004. These figures include both short messaging and
calling party pays interconnection.
ADVERTISING SERVICES
On July 1, 2003, Iusacell S.A. entered into an advertising agency
agreement with a non-affiliated third party, pursuant to which we receive
advertising services from TV Azteca, S.A. de C.V., a Mexican television network
controlled by Mr. Salinas Pliego and several other media companies. In 2004, we
paid to the non-affiliated third party Ps.71.4 million under this agreement.
This agreement expired in December 2004, but the parties entered into a new
agreement with substantially similar terms that expires on December 31, 2005.
ADMINISTRATIVE AND OTHER SERVICES
In 2004, we recorded revenues of Ps.4.3 million for administrative
services provided to TV Azteca and some of its affiliates. We also recorded
Ps.41.7 million in expenses paid to TV Azteca and certain of its affiliates
related to reimbursement of expenses of personnel who provide administrative
services to Iusacell, systems consulting services fees and helicopter lease
costs.
(82)
BANCO AZTECA BANKING SERVICES
Banco Azteca S.A., a bank controlled by Mr. Salinas Pliego, renders
banking services to us, including current accounts and payroll services. We pay
standard banking fees for these services.
On January 5, 2005, Banco Azteca issued a Ps.148.8 million letter of
credit to support our bid for PCS concessions. The letter of credit was
guaranteed by MovilAccess, our principal shareholder. On May 18, 2005, the
letter of credit was cancelled and a new one was issued in the amount of Ps.19.4
million. We paid Banco Azteca Ps.6.7 million in fees related to these letters of
credit.
We are currently analyzing the convenience of appointing Banco Azteca as
our past-due portfolio recovery agent. We believe that Banco Azteca may have the
infrastructure and systems to allow it to collect our past-due receivables at a
higher success rate than us.
PROVISION OF TELECOMMUNICATIONS SERVICES
On July 1, 2004, we entered into agreements with Elektra and TV Azteca
pursuant to which we provide local and long distance telephony services to their
respective offices and other premises. For 2004, we recorded revenues of Ps.18.5
million under these agreements (Ps.10.3 million related to Elektra and Ps.8.2
million related to TV Azteca).
DIRECTORSHIPS IN AFFILIATED COMPANIES
Some of the members of our Board of Directors, as well as some of our
executives, serve on the Board of Directors of Unefon, a mobile telephony
competitor, GMA, a paging competitor, and/or Elektra, a distributor of our
products. See Item 4, "Management - c) Directors and Shareholders."
INTERESTS OF DIRECTORS
Mr. Hector Rojas, our director from July 2003 to April 2004, was a
member of the law firm Jauregui, Navarrete y Nader S.C., which in 2004 provided
legal services to us in the aggregate amount of approximately Ps.7.6 million.
OTHER TRANSACTIONS
On August 1, 2004, Iusacell S.A. and Bienes Raices en Promocion del
Centro, S.A. de C.V., a subsidiary of Elektra, entered into a one-year lease
agreement pursuant to which Iusacell S.A. leases certain premises in Mexico
City. During 2004, Ps.0.5 million were accrued under this agreement.
On October 1, 2004, Iusacell and Compania Operadora de Teatros, S.A. de
C.V. ("COTSA"), another subsidiary of Elektra, entered into an agreement whereby
COTSA agreed to act as joint and several co-obligor of Iusacell and its
subsidiaries with respect to bid and performance bonds. We pay COTSA a fee in an
amount equal to 3% of the amount of the bond. In 2004, we accrued Ps.0.3 million
in expenses related to these transactions.
Muris Salinas Consultores, S.A. de C.V., a company owned by a cousin of
Mr. Salinas Pliego, provides custom agent services for us. We pay standard fees.
In 2004, we recorded Ps.0.3 million in expenses related to these services.
(83)
Corporativo Persal, S.A. de C.V., a company owned by Mr. Salinas
Pliego's son, is one of our prepaid airtime distributors. We pay standard
commissions. We did not have any operations during 2004.
On January 5, 2005, MovilAccess, S.A. de C.V., granted Banco Azteca,
S.A. a guarantee related to the letter of credit issued by Banco Azteca, S.A. to
support our participation in the PCS auctions. The guarantee was a pledge on
Iusacell shares and Movil Access, S.A. de C.V. will charge us a monthly fee
based on the amount guaranteed and in accordance with the passive and active
market rates. These commissions will start in 2005.
c) DIRECTORS AND SHAREHOLDERS
DIRECTORS AND OFFICERS
Our by-laws provide that our Board of Directors must consist of no less
than five and no more than twenty Directors. Of all members, at least 20% must
be independent (as defined under the Mexican Securities Law.) Resolutions of the
Board of Directors will be valid when approved by a majority vote of the members
present, except for certain matters that require a unanimous vote. The Chairman
of the Board has the tie-breaking vote. Mr. Ricardo B. Salinas Pliego is the
Chairman of the Board of Directors. See Item 4, "Management - d) By-laws and
other Agreements" for a description of Iusacell's by-laws.
Our by-laws require our Board of Directors to approve the following
transactions, whether carried out by Iusacell or any of its subsidiaries:
. related party transactions not in the ordinary course of
business,
. guarantees involving 30% or more of consolidated assets, and
. other transactions not in the ordinary course of business
involving more than 1% of consolidated assets.
Our by-laws authorize alternate directors to serve on the Board of
Directors in place of directors who are unable to attend meetings or otherwise
participate in the activities of the Board of Directors.
On April 29, 2005, the shareholders of Iusacell elected all the
directors, who will hold office for a period of one year and until the election
of their successors at a duly convened general ordinary shareholders meeting.
(84)
The following table presents information with respect to our directors
as of the date hereof:
NAME AGE POSITION(S)
----------------------------------- ----- ----------------------------------------
Ricardo Benjamin Salinas Pliego ... 49 Chairman of the Board of Directors
Pedro Padilla Longoria ............ 39 Vice Chairman of the Board of Directors
Gustavo Guzman Sepulveda .......... 51 Director
Luis Jorge Echarte Fernandez ...... 60 Director
Joaquin Arrangoiz Orvananos ....... 48 Director
Gonzalo Brockmann Garcia .......... 50 Director
Marcelino Gomez Velasco Sanroman .. 47 Director
Manuel Rodriguez de Castro ........ 41 Director
Upon the acquisition by MovilAccess of a 74.6% equity interest in
Iusacell on July 29, 2003, the then Board of Directors of Iusacell was replaced
wholesale with new members, the majority of whom are current members of the
Board. Mr. Brockmann, Mr. Gomez and Mr. Rodriguez de Castro are independent
Directors. All the members of the Board who are not independent are also
Directors and/or executive officers of other companies controlled by Mr. Salinas
Pliego.
EXECUTIVE OFFICERS
The following table presents information relating to our executive
officers as of the date hereof:
NAME AGE POSITION(S)
----------------------------------------------------------------- --- ----------------------------------------
Gustavo Guzman Sepulveda ........................................ 51 Chief Executive Officer
Jose Luis Riera Kinkel .......................................... 39 Chief Financial Officer
Ricardo Benjamin Salinas Pliego ................................. 49 Executive Director
Pedro Padilla Longoria .......................................... 39 Executive Director
Eduardo Kuri Romo ............................................... 35 Director, Systems
Alejandra Ibarguengoitia Vazquez Aldana ......................... 35 Director, Marketing
Nestor Bergero Faustinelli ...................................... 47 Director, Technology
Federico Bellot Castro .......................................... 62 Director, Sales
Patricio Medina Moya ............................................ 34 Director, Mobile Products
Fernando Jose Cabrera Garcia .................................... 40 General Counsel and Secretary non-member
of the Board
Upon the acquisition by MovilAccess of a 74.6% equity interest in
Iusacell on July 29, 2003, the then management of Iusacell was replaced
wholesale with new executive officers, the majority of whom are our current
officers.
BIOGRAPHIES
Ricardo B. Salinas Pliego. Mr. Salinas Pliego has been Chairman of the
Board and Executive Director of Iusacell since July 29, 2003. Mr. Salinas Pliego
has also been Chairman of the Board and Executive Director of Iusacell Celular
since July 29, 2003, Chairman of the Board of Directors of TV Azteca since 1993,
Chairman of the Board of Grupo Elektra since 1993, Director of Unefon since 1999
and President of Unefon since 1998. Mr. Salinas Pliego also serves on the Board
of Directors of numerous other Mexican companies, including Azteca Holdings,
Grupo Dataflux, GMA, Cosmofrecuencias and Todito. Mr. Salinas Pliego received a
degree in accounting from the Instituto Tecnologico de Estudios Superiores
Monterrey and received an MBA from the Freeman School of Business at Tulane
University.
(85)
Pedro Padilla Longoria. Mr. Padilla has been a member of the Board of
Directors and Executive Director of Iusacell since July 29, 2003. Mr. Padilla
has also been a member of the Board of Directors and Executive Director of
Iusacell Celular since July 29, 2003 and a Director of TV Azteca since 1993.
Mr. Padilla also serves on the Board of Directors of Azteca Holdings, Grupo
Elektra, GMA, Unefon and Cosmofrecuencias. Mr. Padilla received a degree in law
from the Universidad Nacional Autonoma de Mexico.
Gustavo Guzman Sepulveda. Mr. Guzman has been a member of the Board of
Directors of Iusacell and its Chief Executive Officer since July 29, 2003.
Mr. Guzman has also been a member of the Board of Directors of Iusacell Celular
and its Chief Executive Officer since July 29, 2003 and the Director of the
Soccer Division of TV Azteca since 1993. Mr. Guzman was the General Director of
Sales, Local Stations and Special Events of TV Azteca from 1993 to July 2003.
Mr. Guzman received a bachelor's degree in communication from the Instituto
Tecnologico de Estudios Superiores Monterrey.
Luis J. Echarte Fernandez. Mr. Echarte has been a member of the Board of
Directors of Iusacell since July 29, 2003. Mr. Echarte has also served as a
member of the Board of Directors of Iusacell Celular since July 29, 2003 and as
a Director of TV Azteca since November 1999. Prior to joining TV Azteca,
Mr. Echarte was Grupo Elektra's Chief Financial Officer. He joined Grupo Elektra
in 1994. Mr. Echarte also serves as Chief Executive Officer of Azteca
International and on the Boards of Directors of GMA, Azteca International
Corporation and Foamex International Inc. Mr. Echarte holds undergraduate
degrees from Memphis State University and the University of Florida and has
completed the Executive Management Program at Stanford University.
Joaquin Arrangoiz Orvananos. Mr. Arrangoiz has been a member of the
Board of Directors of Iusacell since October 17, 2003. Mr. Arrangoiz has also
served as a member of the Board of Directors of Iusacell Celular since April
2004, as a Director of TV Azteca since 1998 and Co-General Director of Sales of
TV Azteca since 1993. Mr. Arrangoiz received a degree in administration from
Anahuac University.
Gonzalo Brockmann Garcia. Mr. Brockmann has been a member of the Board
of Directors of Iusacell since April 2004. Mr. Brockmann has also been a member
of the Board of Directors of Elektra since March 2003, Hoteles Best Western for
Mexico, Central America and Ecuador since 1990 and Hostales de America, S.A. de
C.V. since 1991, among others. Mr. Brockmann was the Vice President of
Development at Hoteles Best Western for Mexico, Central America and Ecuador from
1985 to 1989, the General Director at Hostales de America from 1985 to 1990 and
a Manager of Entertainment at Westin Hotels and Resorts from 1983 to 1984.
Mr. Brockmann holds a business administration degree from Universidad Anahuac
and a masters in business administration (MBA) from Texas University, Austin.
Marcelino Gomez Velasco Sanroman. Mr. Gomez Velasco has been a member of
the Board of Directors of Iusacell since July 29, 2003. Mr. Gomez Velasco also
has been the President of the Board of Directors of Centro Netec, S.A. de C.V.,
a technical education and consulting services company, since January 2000.
Mr. Gomez Velasco served as a member of the Board of Directors of Unefon from
April 2002 to July 2003, as a member of the Board of Directors of GMA from 1997
to 2004, and as President of the Board of Directors of Intersys Mexico, S.A. de
C.V., a network integration company, from October 1985 to November 1999.
Mr. Gomez Velasco holds a systems engineering degree from Universidad
Iberoamericana and a masters in business administration degree (MBA) from
Wharton, Pennsylvania.
(86)
Manuel Rodriguez de Castro. Mr. Rodriguez de Castro has been a member of
the Board of Directors of Iusacell since July 29, 2003. Mr. Rodriguez de Castro
also has served as Director of Elektra since March 2003 and of Grupo Oda, a
Spanish distributor of telecommunications systems and wireless telephony, since
1997. Mr. Rodriguez de Castro also has been the President of SJTrust, formerly
known as Agencia Hispana, an investment bank since 2000. Mr. Rodriguez de Castro
received a degree in economics from the La Salle Institute of Economics.
Mr. Rodriguez de Castro also holds a masters degree in business administration
from the IESE (Navarra), as well as a masters degree in international relations
from the Ortega y Gasset Foundation.
Jose Luis Riera Kinkel. Mr. Riera has served as Chief Financial Officer
of Iusacell since July 29, 2003. Mr. Riera has also served as Chief Financial
Officer of Iusacell Celular since July 29, 2003. Prior to joining Iusacell,
Mr. Riera held several positions, including the positions of General Director of
Corporate Finance of Elektra and Chief Financial Officer of Unefon from March
1998 to July 2003. Mr. Riera received an engineering degree from Universidad
Panamericana and a master degree in business administration from Instituto
Panamericano de Alta Direccion de Empresas (IPADE).
Eduardo Kuri Romo. Mr. Kuri has served as Systems Director of Iusacell
since July 29, 2003. Mr. Kuri has also served as Systems Director of Iusacell
Celular since July 29, 2003. Prior to joining Iusacell, Mr. Kuri worked at TV
Azteca as Engineering and Systems Director from June 1998 to July 2000, as
General Director of Signal Distribution from January 1997 to June 1998, as
Technical Support and National Network Director from April 1996 to January 1997
and as Technical Support Manager from May 1995 to April 1996. Mr. Kuri received
an engineering degree in electronics and systems from Universidad La Salle and
also has completed a High Management Seminar Program from the IPADE.
Alejandra Ibarguengoitia Vazquez Aldana. Ms. Ibarguengoitia has served
as Marketing Director of Iusacell since January 2004. Ms. Ibarguengoitia has
also served as Marketing Director of Iusacell Celular since January 2004. From
July 2003 to January 2004, Ms. Ibarguengoitia served as Corporate Sales and
Marketing Services Director of Iusacell. Ms. Ibarguengoitia worked at TV Azteca
as Promotions Director from December 2001 to July 2003, as Promotions Manager
from March 2000 to December 2001, as Sales Manager from December 1996 to March
2000, and as Sales Executive from January 1995 to December 1996. Previously, Ms.
Ibarguengoitia worked in areas related to marketing in different companies such
as Seagram de Mexico, S.A. de C.V. Ms. Ibarguengoitia received a marketing
degree from Instituto Tecnologico de Estudios Superiores de Occidente (ITESO)
and has also completed seminar programs in Marketing and Management from
Instituto Tecnologico de Estudios Superiores de Monterrey (ITESM).
Nestor Bergero Faustinelli. Mr. Bergero has served as Director of
Technology of Iusacell since July 29, 2003. Mr. Bergero has been responsible for
Iusacell's Technology division since January 2003. Mr. Bergero has also served
as Director of Technology of Iusacell Celular since July 29, 2003. Prior to
these appointments, Mr. Bergero served as Chief Technology Officer and as a
member of the Board of Directors of CTI Movil in Argentina since June 2000.
Mr. Bergero served in a variety of engineering, planning and network positions
in CTI Movil for over nine years. Previously he served as Engineering Manager of
Telecom, S.A. and in a variety of management positions in companies such as
Telintar, S.A., the Government of Cordoba, Argentina, and Sancor Cooperativas
Unidas Limitadas in Argentina. He holds a degree with honors in electronic and
electrical engineering from the Universidad Nacional de Cordoba, and he
completed a management development program at the Universidad Austral in
Argentina.
Federico Bellot Castro. Mr. Bellot has served as Sales Director of
Iusacell since July 29, 2003. Mr. Bellot has also served as Sales Director of
Iusacell Celular since July 29, 2003. Prior to joining Iusacell, Mr. Bellot
served as Regional Sales Director at Unefon from September 1998 to July 2003,
where he was responsible for increasing the sales of telecommunications services
in all the regions of the country. Mr. Bellot served as General Director of
Radio Cel, S.A. de C.V., a trunking services company, from 1991 to 1993.
Mr. Bellot has also worked in areas related to management in different companies
and industries such as Ranver, S.A., Productora Nacional de Redes, Ocean Garden
Products and FIPESCO (Brazil). Mr. Bellot received an accounting degree from
Universidad del Valle de Mexico and a masters degree in marketing from Fundacao
Getulio Vargas (Rio de Janeiro, Brazil).
(87)
Patricio Medina Moya. Mr. Medina has served as Director of Mobile
Products since July 2004. Prior to that, Mr. Medina was Director of Prepaid
Products of Iusacell from February 2003 to July 2004. Mr. Medina has also served
as Director of Prepaid Products of Iusacell Celular since February 2003. Before
joining Iusacell, Mr. Medina was a Senior Management Telecommunications
Consultant at NGC - Cap Gemini Ernst & Young's affiliate in Argentina from
October 1999 to December 2002, where he was responsible for managing key
accounts in the telecommunications business and for new business development
projects for both wireless and wireline service providers in Chile, Argentina
and Mexico. Mr. Medina holds an engineering and finance degree from Escuela
Politecnica del Ejercito (ESPE) in Quito, Ecuador and he completed a management
executive program at Universidad Argentina de la Empresa (UADE) in Buenos Aires,
Argentina.
Fernando Jose Cabrera Garcia. Mr. Cabrera has served as general counsel
of Iusacell since July 29, 2003 and as Secretary non-member of the Board of
Directors since October 2003. Mr. Cabrera has also served as general counsel of
Iusacell Celular since July 29, 2003. Prior to joining Iusacell, from January
1998 to July 2003, Mr. Cabrera served as legal director of the Sports, News and
Entertainment Division at TV Azteca. Mr. Cabrera served as corporate associate
for over eight years in multinational law firms such as Cole Corette & Abrutyn
(based in Washington D.C.), Basham Ringe & Correa (Mexico City) and Baker &
Mckenzie, where he became a partner of the Mexico City Office in 1997.
Mr. Cabrera holds a degree from Universidad Iberoamericana in Mexico and a
masters in law degree from Georgetown University in Washington D.C.
COMPENSATION
The aggregate compensation (including, without limitation, base salary
and benefits) paid by us to all executive officers in 2004 was Ps.92.2 million,
compared to Ps.103.1 million in 2003. These aggregate amounts exclude any
amounts paid by Verizon and Vodafone to their employees who were directors and
executive officers of Iusacell until July 29, 2003. Each independent Director is
paid a fee of U.S.$15,000 per meeting attended during the year. Our other
Directors do not receive compensation. Iusacell does not provide benefits to
Directors upon termination of their directorships. The compensation of our
Directors is determined by the shareholders' meeting.
As part of Iusacell's general compensation policy, we conduct periodic
reviews of our management and employees to determine bonus compensation.
Iusacell also provides executive officers with use of an automobile and gas
stamps (up to 200 liters per month).
We do not provide pension, retirement or similar benefits for our
directors and executive officers.
BOARD PRACTICES
Our Board of Directors has Compensation, Audit, Investment and Related
Party Transactions committees. All decisions of these committees require a
majority vote of their members. Mexican law requires the Audit Committee to be
comprised of a majority of independent directors and to be chaired by an
independent director.
The Compensation Committee reviews, evaluates and makes recommendations
to the Board of Directors regarding Iusacell's executive compensation standards
and practices, including salaries and bonus distributions. The members of the
Committee are Messrs. Brockmann, Gomez and Rodriguez de Castro.
(88)
The Audit Committee recommends the engagement of auditors, reviews our
annual consolidated financial statements and provides oversight of our auditing,
accounting, financial reporting and internal control functions. The Audit
Committee reviews with management and the auditors the plans and results of the
auditing function. The members of the Audit Committee are Messrs. Brockmann,
Gomez and Rodriguez de Castro.
The Investment Committee reviews any material investment out of the
ordinary course of business or not included in the annual budget, and evaluates
business opportunities and their associated risks. The members of the Investment
Committee are Messrs. Brockmann, Gomez and Rodriguez de Castro.
The Related Party Transactions Committee reviews any material
transaction between Iusacell or any of its subsidiaries and any related party to
verify that its terms are at least as favorable to us as the terms that would be
obtainable at the time for a comparable transaction or series of similar
transactions in arm's-length dealings with an unrelated third person. The
members of the Related Parties Transactions Committee are Messrs. Brockmann,
Gomez and Rodriguez de Castro.
SHAREHOLDERS
Our principal shareholder is MovilAccess, a subsidiary of Biper at 80%,
controlled by Mr. Salinas Pliego. Mr. Salinas Pliego is our Chairman of the
Board and Executive Director.
No other shareholder owns more than 5% of our shares. All shares have
the same voting rights. At May 31, 2005, based on information made available to
us, our shareholders' ownership interests were as follows:
SHAREHOLDERS COMMON SHARES %
------------------------------ --------------- ---------------
MovilAccess(1) ............... 69,736,552 74.6
Ricardo B. Salinas Pliego(1) . 6,960,670 7.4
Public float ................. 16,727,697 17.9
--------------- ---------------
Total ............... 93,424,919 100.0
=============== ===============
----------
(1) Shareholding information provided by MovilAccess and Mr. Salinas Pliego
on Schedule 13D filed on October 26, 2004.
Of Iusacell's outstanding shares at May 31, 2005, 6,627,245 shares were
held in the form of American Depositary Shares (ADSs) by 21 holders of record
based on information made available to us and provided by our depositary, The
Bank of New York. Assuming that all the holders of ADSs are located in the
United States, then 39.6% of Iusacell public float shares are held in the United
States.
On July 29, 2003, MovilAccess completed a public tender offer in Mexico
and the United States for all outstanding equity securities of Iusacell. As a
result, MovilAccess acquired 74.6% of the outstanding capital stock of Iusacell.
(89)
On October 17, 2003, Iusacell held a general ordinary and extraordinary
shareholder's meeting by which its shareholders accepted a management proposal
to exchange its series A and series V shares for a new common share class. In
December 2003, Iusacell effected the exchange of its series A and series V
shares for new ordinary shares with no par value at a ratio of 20 series A
and/or series V shares to one new share. Iusacell did not issue fractional
shares. Accordingly, fractions of new shares were paid at a price equal to the
opening market price quoted on the Mexican Stock Exchange on October 17, 2003,
as determined by the shareholders' meeting. Iusacell's ticker on the Mexican
Stock Exchange and the New York Stock Exchange remained unchanged.
As a consequence of Iusacell's reverse stock split, we conducted a
parallel reorganization of capital in the majority of our subsidiaries in order
to eliminate the existing Series A and Series B shares, creating a capital
structure with only one single class of shares. As a result, all outstanding
shares of our subsidiaries subject to the reorganization were cancelled and
replaced by new shares.
d) BY - LAWS AND OTHER AGREEMENTS
GENERAL
Iusacell was incorporated on August 6, 1998 as a variable capital
corporation (sociedad anonima de capital variable) established under the laws of
Mexico. Iusacell was registered in the Public Registry of Commerce of the
Federal District of Mexico under Commercial Number 242349 on November 3, 1998.
We were initially formed for the purpose of acquiring and holding the shares of
Iusacell's operative company Grupo Iusacell Celular, S.A. de C.V. Our by-laws
currently reflect the provisions contemplated in the Mexican Securities Market
law (Ley del Mercado de Valores) and its regulation.
Iusacell's corporate purpose is found under Article Two of its by-laws.
Iusacell's primary purpose is to act as a holding company. The duration of the
company according to our by-laws is indefinite.
DIRECTORS
Under Iusacell's by-laws, any member of the Board of Directors who has a
conflict of interest with Iusacell in any transaction must disclose such fact to
the other members of the Board of Directors and abstain from voting on such
matter at the relevant meeting of the Board of Directors. Any member of the
Board of Directors who violates such provision may be liable for damages caused
to us. Additionally, members of the Board of Directors may not represent any
shareholder at any shareholders' meeting.
Our by-laws do not grant any express power to the Board of Directors to
give its members loans.
VOTING RIGHTS AND SHAREHOLDERS' MEETINGS
Each share entitles the holder thereof to one vote at any shareholders
meeting of Iusacell.
Under Mexican law and Iusacell's by-laws, any shareholder or group of
shareholders holding Iusacell shares representing at least 10% of the total
capital stock of Iusacell shall be entitled to designate one director.
General shareholders' meetings may be ordinary or extraordinary
meetings. General extraordinary meetings are those held to consider the matters
specified under Article 182 of the Mexican Law of Commercial Companies (Ley
General de Sociedades Mercantiles). A general extraordinary meeting may be held
in order to modify the fixed capital sock, liquidation, merger, transformation
and any amendments to the by-laws such as issuance of preferred capital stock,
amendments to the corporate purpose or nationality.
(90)
The mandatory quorum on a first call for a general extraordinary
shareholders meeting is 75% of the outstanding shares. If such quorum is not
available on the first call, a second meeting may be called and convened,
provided that at least 50% plus one share of the aggregate of the outstanding
shares are present. Whether the general extraordinary meeting is held on a first
or second call, in order for a resolution to be validly adopted, the favorable
vote of the holders of a majority of the outstanding shares present is required.
General ordinary shareholders' meetings may be called to consider all
other matters. A general ordinary shareholders meeting of Iusacell must be held
at least annually within the four months following the end of each fiscal year
to consider matters specified in Article 181 of the Mexican Law of Commercial
Companies, including, principally, the approval of the report of the Board of
Directors regarding the performance of Iusacell, the approval of the financial
statements of Iusacell for the preceding fiscal year, appointment of directors
and statutory auditors and determination of their compensation, and the
declaration of dividends.
Under our by-laws, the mandatory quorum on a first call for a general
ordinary shareholders' meeting is at least 50% plus one share of the outstanding
shares. If such quorum is not available on the first call, a second meeting may
be called and validly held regardless of the number of shares represented. In
order for a resolution of the general ordinary shareholders meeting to be
validly adopted as a result of a first or subsequent call, the favorable vote of
the holders of a majority the shares present is required.
The by-laws provide that the controlling shareholders' obligation
specified in Article 12 of the by-laws for the repurchase of shares in the event
of cancellation of registration of our shares in the Securities Section of the
National Security Registry (Registro Nacional de Valores or "RNV") can be waived
if 95% of the outstanding shares approved such cancellation in a shareholders'
meeting and if the amount to be offered to the public investors for the shares
is less than 300,000 UDIs.
Holders of ADSs are entitled to instruct the depositary as to the
exercise of the voting rights pertaining to the shares represented by the ADSs.
Under Mexican law, holders of at least 20% of our outstanding capital
stock may have any shareholder action that violates our by-laws or applicable
law set aside by filing a complaint with a Mexican court of competent
jurisdiction within 15 days after the close of the general shareholders' meeting
at which such action was taken, by showing that the challenged action violates
Mexican law or our by-laws. Relief under these provisions is only available to
holders:
. whose shares were not represented when the action was taken or,
if represented, were voted against it; and
. whose complaint makes reference to the clause of the by-laws or
the legal provision that was infringed.
(91)
Shareholders' meetings may be called by the Board of Directors, any of
the statutory auditors or any Mexican court of competent jurisdiction. In
addition, the Board of Directors or any of the statutory auditors may be
required to call a shareholders meeting upon the written request of holders of
at least 10% of the outstanding capital stock. In addition, the Board of
Directors or the statutory auditors must call a shareholders' meeting at the
written request of any shareholder if no ordinary general shareholders' meeting
has been held for two consecutive years or if the shareholders' meetings held
during such period have not considered the items mentioned in Article 181 of the
Mexican Law of Commercial Companies discussed above. Notice of a meeting must be
published in the Official Gazette of the Federation (Diario Oficial de la
Federacion) and/or in a newspaper of general circulation in Mexico City at least
15 days prior to the meeting. In order to attend a shareholders' meeting, a
shareholder must request and obtain an admission card by furnishing, at least 48
hours before the time set for holding the shareholders' meeting, appropriate
evidence of its ownership of shares or depositing such shares with our corporate
secretary of the Board of Directors 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 taken at a
general shareholders' meeting. 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. In case the shareholders resolve not to
take action against the Director(s) at such meeting, shareholders representing
not less than 15% of the outstanding shares of 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
general shareholders' meeting pursuant to which it was resolved not to take any
action against the directors who are to be sued, and (ii) the claim in question
covers damages alleged to have been caused to Iusacell and not only to the
individual shareholders' interests.
SHAREHOLDER CONFLICTS OF INTEREST
Under Mexican law, any shareholder that has a conflict of interest in
connection with any transaction must abstain from voting at the relevant
shareholders' meeting. A shareholder that votes on a business transaction in
which his interest conflicts with that of Iusacell may be liable for damages if
the transaction would not have been approved without such shareholder's vote.
DIVIDEND RIGHTS
All shares have the same dividend rights. The declaration and payment of
such dividends will depend upon Iusacell's results of operations, financial
conditions, cash requirements, future prospects and other factors deemed
relevant by the shareholders. In addition, Mexican law provides that Mexican
companies may only pay dividends from retained earnings included in the year-end
financial statements that have been approved by their shareholders. Dividends
may be paid only after all losses for previous years have been paid for, a legal
reserve equal to 20% of paid-in capital has been achieved and shareholders have
approved the dividend payment. Iusacell and some of Iusacell's subsidiaries,
including Iusacell Celular, have outstanding debt obligations which limit the
amount of dividends that can be paid in any given year or prohibit dividends
entirely.
Holders of ADSs on the applicable record date are entitled to receive
dividends declared on the shares underlying ADSs. The depositary will fix a
record date for the holders of ADSs in respect of each dividend distribution.
(92)
At the annual general ordinary shareholders meeting of Iusacell, the
Board of Directors will generally submit the financial statements of Iusacell
for the previous fiscal year, together with a report by the Board of Directors,
to the shareholders for their approval. Upon the approval of the financial
statements, the shareholders will determine the allocation of Iusacell's net
profits for such fiscal year. At least 5% of such net profits must be allocated
to a legal reserve until the amount of the legal reserve equals 20% of
Iusacell's capital stock. Such reserve is not available for distribution except
as a stock dividend. Additional amounts may be allocated to other reserve funds
as the shareholders determine including a reserve to repurchase shares. The
remaining balance of net profits, if any, is available for distribution as
dividends but only after losses, if any, of previous years have been paid for.
All shares 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.
The covenants contained in the Iusacell indenture limit Iusacell's
ability to declare and distribute dividends to its shareholders. The covenants
contained in the Iusacell Celular indenture and in the terms of the senior
refinancing secured loan limit Iusacell Celular's ability to declare and
distribute dividends to Iusacell.
According to our by-laws and Mexican law, dividends that are not claimed
within five years from the date of payment will be deemed abandoned and will
revert back to Iusacell.
LIQUIDATION
In the event that we are liquidated, one or more liquidators must be
appointed at an extraordinary general shareholders' meeting to wind up our
affairs. Pursuant to Mexican law, all outstanding shares would be entitled to
participate equally in any distribution upon liquidation. Partially-paid shares
participate in any distribution to the extent that such shares have been paid at
the time of the distribution.
CHANGES IN SHARE CAPITAL AND RIGHTS OF SHAREHOLDERS
An increase of capital stock may be done 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 done until all previously issued shares of capital stock have been
fully paid. A reduction of capital stock may be done to absorb losses, to make
reimbursements to shareholders, or to release shareholders from payments not
made. A reduction of capital stock to absorb losses may be done by reducing the
value of all outstanding shares. A reduction of capital stock shall also be done
on a pro rata basis.
Shareholders may also approve the redemption of fully-paid shares with
retained earnings. Such redemption would be effected by a repurchase of shares
listed on the Mexican Stock Exchange or by lot.
The fixed portion of our capital stock may only be increased or
decreased by resolution of a general extraordinary shareholders meeting and an
amendment to the by-laws, whereas the variable portion of our capital stock may
be increased or decreased by resolution of a general ordinary shareholders
meeting .
No resolution by the shareholders is required for decreases in capital
stock based on the exercise of the right to withdraw variable shares or the
purchase by Iusacell of its own shares or for increases in capital stock based
on offers by Iusacell of shares it previously purchased.
(93)
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 has a preferential
right to subscribe for a sufficient number of new shares to maintain the
holder's existing proportionate holdings of shares. Under Mexican Law and our
by-laws, preemptive rights must be exercised within the period and under the
conditions established for such purpose by the shareholders. In no case may such
period be less than 15 days and no greater than 30 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. In addition, holders of ADSs 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.
LIABILITY FOR FURTHER CAPITAL CALLS
Shareholders are not liable for further capital calls by Iusacell.
OTHER PROVISIONS
Fixed and Variable Capital, Withdrawal Rights
As a sociedad anonima de capital variable, we may issue shares
representing fixed capital and/or variable stock. The issuance of variable
capital shares, unlike the issuance of fixed capital shares, does not require an
amendment of our by-laws, although it does require approval of the general
ordinary shareholders meeting.
No shares of Iusacell representing variable capital are currently
outstanding. Outstanding variable capital shares may be fully or partially
withdrawn. In contrast, the minimum fixed capital required by law cannot be
withdrawn. A holder of variable capital shares that wishes to effect a total or
partial withdrawal of such shares would be required to notify us in an
authenticated written notice to that effect. If we received that notice prior to
the last quarter of the fiscal year, the withdrawal would become effective at
the end of the fiscal year in which the notice was given. Otherwise, the
withdrawal would become effective at the end of the following fiscal year.
Redemption of variable capital shares of Iusacell would be made at the
lower of (i) 95% of the average share price quoted on the Mexican Stock Exchange
during the 30 business days prior to the date on which the withdrawal were to
become effective or (ii) the book value per variable capital share as calculated
from our financial statements for the fiscal year at the end of which the
withdrawal were to become effective, as approved by our shareholders at an
ordinary general meeting. Any such amount to be paid by Iusacell would become
due on the day following the general ordinary meeting approving the financial
statements.
The covenants contained in the Iusacell indenture limit Iusacell's
ability to issue variable capital shares. The covenants contained in the
Iusacell Celular indenture and the senior credit refinancing secured loan limit
Iusacell Celular's ability to issue variable capital shares.
(94)
Forfeiture of Shares
As required by Mexican law, Iusacell's by-laws provide that "current or
future foreign shareholders of the Company agree with the Ministry of Foreign
Relations to consider themselves as Mexican nationals with respect to the shares
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 violate this agreement, of forfeiting their shares for the
benefit of the Nation."
Mexican law requires that such a provision be included in the by-laws of
all Mexican corporations unless such by-laws prohibit ownership of capital stock
by foreign investors.
Purchase of Our Own Shares
According to Mexican law, we may repurchase any series of our shares on
the Mexican Stock Exchange at any time at the then prevailing market price. Any
such repurchase must be done by affecting our shareholders' equity account,
while we hold the repurchased shares, or by reducing our capital stock, if such
shares are to be converted into treasury stock. No resolution from a
shareholders' meeting is required for such reduction, but a shareholders'
meeting must approve, for each year, the maximum amount of funds that may be
used to repurchase shares. However such amount may not exceed our net earnings
(including retained earnings). Repurchased shares may not be represented at any
shareholders' meeting. However, repurchased shares may be placed among the
investing public, without approval by the shareholders or the Board of
Directors, and the corresponding capital increase shall not require a resolution
of a shareholders' meeting.
Under our by-laws and according to Mexican law, Iusacell's subsidiaries
are not allowed to own directly or indirectly any of the capital stock of
Iusacell. Also, Iusacell's subsidiaries are not allowed to own any capital stock
of any controlling shareholder of Iusacell.
The covenants contained in the Iusacell indenture limit Iusacell's
ability to repurchase its own shares. The covenants contained in the Iusacell
Celular indenture and in the terms of the senior refinancing secured loan limit
Iusacell Celular's ability to repurchase its own shares.
Repurchase in the Event of Cancellation of Registration
In the event that the registration of our shares in the Securities
Section of the RNV is canceled, whether upon our request or pursuant to a
resolution adopted by the CNBV, our by-laws and CNBV regulations require that
our controlling shareholders make a public offer to purchase the shares owned by
minority holders prior to such cancellation (which requirement may be waived as
described in "--Voting Rights and Shareholders' Meetin"). The shares must be
purchased by our controlling shareholders at least and at the higher of (i) the
quotation price on the Mexican Stock Exchange 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 except in the case that
such value had been modified in accordance with criteria applicable to
determination of relevant information. In this case the most recent Company's
financial information must be considered.
The quotation price on the Mexican Stock Exchange will be the average
per volume for the last 30 trading days prior to the date of the offer. In any
event, such period cannot exceed six moths. If the trading period is less than
30 days, the days in which the shares were actually traded will be taken into
consideration for purposes of the calculation. In the event that no trading of
shares has occurred, the offer price will be the book value.
(95)
In accordance with our by-laws and as provided by Mexican law, our Board
of Directors, within the five days prior to the date of the offer, must disclose
its opinion on the price, taking into consideration the minority shareholders'
interests. The Board of Directors opinion must be rendered in conjunction with
the Audit Committee opinion. In the event of conflict of interest by the Board
of Directors, its opinion must be rendered in conjunction with the opinion of an
independent expert (as defined by Mexican securities regulation) appointed by
the Audit Committee.
If after said offer our controlling shareholders fail to acquire 100% of
our capital stock, the cancellation of the registration of our shares will not
become effective until our controlling shareholders have created a trust with
the funds required to purchase the remaining shares at the same offering price,
with such trust being effective for at least six months.
The controlling shareholders may, so long as the Board of Directors
approves and the Audit Committee renders an opinion, request CNBV to authorize a
different basis for the calculation of the share offer price. The Audit
Committee opinion must include the reasons for setting forth a different price
and must be accompanied by a report from an independent expert. In determining
whether to authorize a different basis, the CNBV would take into account
Iusacell's financial condition as well as its business outlook.
Appraisal Rights
Whenever the shareholders approve a change of corporate purpose, change
of nationality, spin-off or transformation from one type of corporate form to
another, any shareholder entitled to vote on such change or transformation who
has voted against it has the right to withdraw from Iusacell and receive an
amount generally equivalent to the book value of our shares (in accordance with
our last balance sheet approved by a shareholders' meeting), provided such
shareholder exercises its right to withdraw within 15 days following the
adjournment of the meeting at which the change, spin-off or transformation was
approved.
FOREIGN INVESTMENT REGULATION
Foreign investment in capital stock of Mexican corporations in certain
economic sectors, including telephone and cellular services, is regulated by the
1993 Foreign Investment Law, as amended, and the regulations issued under that
law in 1998, which we refer to as the 1998 Regulations. Under the 1993 Foreign
Investment Law, foreign investment is defined in general as the participation of
foreign investors in the voting capital stock of Mexican corporations and in
activities which are regulated by the 1993 Foreign Investment Law. Foreign
investors are defined as non-Mexican individuals, non-Mexican legal entities and
foreign entities without legal personality.
The Mexican Foreign Investment Commission, the Mexican Foreign
Investment Bureau 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 minority participation.
As a general rule, the 1993 Foreign Investment Law allows foreign
investments in up to 100% of the capital stock of Mexican companies, except for
those engaged in specified restricted industries, such as basic telephone
service, where foreign investments are limited to 49% of the voting capital
stock. Foreign investors may, however, participate in excess of 49% of the
voting capital stock of a Mexican corporation engaged in the cellular telephone
business with the prior approval of the Mexican Foreign Investment Commission.
(96)
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 Mexican companies, including Iusacell.
Change of Control
There are no provisions in our by-laws that would have the effect of
delaying or preventing a change in control of Iusacell.
(97)
5) SHARES MARKET
a) SHARE STRUCTURE
Iusacell's shares have been listed on the Mexican Stock Exchange since
August 4, 1999, trading under the symbol CEL. ADSs representing ten Iusacell
series V shares were listed on the New York Stock Exchange from August 4, 1999
until May 12, 2003, when we implemented a change in the ADR ratio. From that
date and until December 19, 2003, one ADS represented 100 Iusacell series V
shares and traded under the symbol CEL.
On December 19, 2003, Iusacell concluded an exchange of its series V and
series A shares for new common shares, at a ratio of 20 Series V or A shares per
new common share. The new shares are without par value, in registered form and
have the same rights. The reorganization of the capital structure included a
change in the ADR ratio. From that date, one ADS represents five Iusacell
shares. The trading symbol did not change. The ADSs are evidenced by American
depositary receipts issued under a deposit agreement with The Bank of New York,
as depositary.
On June 1, 2005, an extraordinary shareholders' meeting approved the
termination of our ADR program and the subsequent delisting of our ADSs from The
New York Stock Exchange. On June 21, 2005 The Bank of New York notified the
termination of the ADR's program to the Iusacell's ADRs holders. With such
notification, The Bank of New York stopped the issuance of new ADRs by filing
before the SEC an amendment to the F-6. Additionally, the deposit agreement was
amended to reduce to 60 days, the period in which the shareholders can exchange
ADRs for shares listed in the Mexican Stock Exchange. In accordance with the
termination of the deposit agreement, it is expected that the New York Stock
Exchange (NYSE) suspends the trading of the ADRs on or around September 19. We
anticipate that the termination of the ADR program and that the delisting will
be consummated by the end of the second half of 2005. These actions may have a
negative effect on the market price of our ADSs and the underlying common
shares, as trading will be limited to our common shares in the Mexican Stock
Exchange.
b) PERFORMANCE OF THE SHARES IN THE STOCK MARKET
The following tables present, for the periods indicated, the high and
low sales prices of (i) the Iusacell common shares on the Mexican Stock
Exchange, as reported by the Mexican Stock Exchange, adjusted to reflect the
reverse stock split which occurred on December 19, 2003, and (ii) the Iusacell
ADSs on the New York Stock Exchange, as reported by the New York Stock Exchange,
adjusted to reflect the May 12, 2003 change in the ADR ratio and the December
19, 2003 reverse stock split and change in ADR ratio.
MEXICAN STOCK EXCHANGE (IN PS.)--COMMON SHARES
MEXICAN STOCK EXCHANGE
--------------------------
PRICE PER SHARE
(pesos)
--------------------------
HIGH LOW
------------- ---------
PREVIOUS FIVE YEARS:
2000 ......................... 474.00 156.00
2001 ......................... 276.00 41.00
2002 ......................... 82.20 9.00
2003 ......................... 23.60 3.40
2004 ......................... 24.00 12.00
(98)
MEXICAN STOCK EXCHANGE
--------------------------
PRICE PER SHARE
(pesos)
--------------------------
HIGH LOW
------------- ---------
PREVIOUS TWO YEARS (by quarter):
2003:
First Quarter ................ 12.80 6.60
Second Quarter ............... 9.20 3.40
Third Quarter ................ 17.40 6.20
Fourth Quarter ............... 23.60 17.00
2004:
First Quarter ................ 20.60 14.80
Second Quarter ............... 15.99 12.00
Third Quarter ................ 19.50 13.15
Fourth Quarter ............... 24.00 18.50
MEXICAN STOCK EXCHANGE
--------------------------
PRICE PER SHARE
(pesos)
--------------------------
HIGH LOW
------------- ---------
PREVIOUS SIX MONTHS:
December 2004 ................ 24.00 21.50
January 2005 ................. 23.16 21.45
February 2005 ................ 23.29 21.20
March 2005 ................... 22.00 20.99
April 2005 ................... 20.80 18.75
May 2005 ..................... 19.18 17.80
NEW YORK STOCK EXCHANGE
--------------------------
PRICE PER ADS
(dollars)
--------------------------
HIGH LOW
------------- ---------
PREVIOUS FIVE YEARS:
2000 ......................... 265.00 80.00
2001 ......................... 135.00 20.50
2002 ......................... 45.00 4.20
2003 ......................... 10.84 1.70
2004 ......................... 10.29 5.15
NEW YORK STOCK EXCHANGE
--------------------------
PRICE PER ADS
(dollars)
--------------------------
HIGH LOW
------------- ---------
PREVIOUS TWO YEARS (BY QUARTER):
2003:
First Quarter ................ 7.40 3.10
Second Quarter ............... 6.00 1.70
Third Quarter ................ 7.77 2.99
Fourth Quarter ............... 10.84 7.49
2004:
First Quarter ................ 9.28 6.35
Second Quarter ............... 7.10 5.15
Third Quarter ................ 8.63 5.71
Fourth Quarter ............... 10.29 8.00
(99)
NEW YORK STOCK EXCHANGE
--------------------------
PRICE PER ADS
(dollars)
--------------------------
HIGH LOW
------------- ---------
PREVIOUS SIX MONTHS:
December 2004 ................ 10.29 9.59
January 2005 ................. 10.25 9.90
February 2005 ................ 10.30 9.58
March 2005 ................... 9.81 9.05
April 2005 ................... 9.05 8.19
May 2005 ..................... 8.60 8.00
TRADING ON THE NEW YORK STOCK EXCHANGE
ADSs representing Iusacell shares have been listed on the New York Stock
Exchange since August 4, 1999. In December 19, 2003 we completed the exchange of
series A and V shares for new common shares, with no par value in Mexico. As
part of the reorganization of capital, we implemented a reverse split/ADS ratio
change. Since December 19, 2003 one ADS represents five Iusacell shares and
continues to trade under the symbol CEL.
TRADING ON THE MEXICAN STOCK EXCHANGE
The Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A. de C.V.),
located in Mexico City, is the only stock exchange in Mexico. Founded in 1907,
it is organized as a corporation whose shares are held by 30 brokerage firms,
which are exclusively authorized to trade on the Exchange. Trading on the
Mexican Stock Exchange takes place principally on the Exchange through automated
systems, which is open between the hours of 8:30 a.m. and 3:00 p.m., Mexico City
time, each business day. Trades in securities listed on the Mexican Stock
Exchange can also be effected off the Exchange. The Mexican Stock Exchange
operates a system of automatic suspension of trading in shares of a particular
issuer as a means of controlling excessive price volatility, but under current
regulations this system does not apply to securities, such as our common stock,
that are directly or indirectly (for example, through American Depositary
Shares) quoted on a stock exchange (including for these purposes NASDAQ) outside
Mexico.
Settlement is effected two business days after a share transaction on
the Mexican Stock Exchange. Deferred settlement, even by mutual agreement, is
not permitted without the approval of the Mexican National Securities
Commission. Most securities traded on the Mexican Stock Exchange, including our
common stock, are on deposit with S.D. Indeval, S.A. de C.V. ("Indeval"), a
privately owned securities depositary that acts as a clearinghouse for Mexican
Stock Exchange transactions.
(100)
The undersigned hereby declare, under oath, that, within the scope of our
respective functions, we prepared the information relative to the issuer
contained in this Annual Report, which, to the best of our knowledge, reasonably
reflects its situation. Likewise, we declare that we do not have knowledge of
any relevant information that has been omitted or misstated in this Annual
Report or that the report contains any misleading information for investors.
------------------------ ---------------------- ---------------------
Gustavo Guzman Sepulveda Jose Luis Riera Kinkel Fernando Jose Cabrera
Chief Executive Officer Chief Financial Officer Garcia
Legal Director
(101)
OPINION FROM THE EXTERNAL AUDITORS
Despacho Freyssinier Morin, S.C.
The undersigned declares under oath that the financial statements contained in
this annual report annual were audited in accordance with generally accepted
accounting principles. Likewise, the undersigned declares that, within the scope
of the work performed, I am not aware of any relevant financial information that
was omitted or misstated in this annual report or that the report contains
misleading information for investors.
Sincerely,
----------------------------------
C.P.C. Jorge E. Santibanez Fajardo
Partner.
Mexico, D.F.
June 29, 2005
(102)
7) EXHIBITS
a) AUDITED FINANCIAL STATEMENTS AND STATUTORY AUDITOR'S REPORT
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
(Subsidiary of Movil Access, S.A. de C.V.)
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
(103)
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
(Subsidiary of Movil Access, S.A. de C.V.)
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
INDEX
Contents Page
Report of independent accountants 1 to 3
Consolidated financial statements:
Balance sheets 4
Income statements 5
Statements of changes in stockholders' equity (deficit) 6
Statements of changes in financial position 7
Notes to the consolidated financial statements 8 to 47
(0)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Grupo Iusacell, S.A. de C.V.
(Subsidiary of Movil Access, S.A. de C.V.)
Mexico City, Mexico
We have audited the consolidated balance sheet of Grupo Iusacell, S.A. de C.V.
and subsidiaries (the Company), as of December 31, 2004, and the related
consolidated statements of income, of changes in stockholders' equity and of
changes in financial position for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
The consolidated financial statements as of December 31, 2003, and for the years
ended December 31, 2003 and 2002, presented for comparison purposes only, were
audited by other independent accountants, whose report dated March 26, 2004, and
for certain information April 19, 2004, expressed an unqualified opinion on
those statements, and included explanatory paragraphs describing the following
matters: 1) The Company adopted, in 2003, Statement C-8 "Intangible Assets"
issued by the Mexican Institute of Public Accountants, with the effects
described in Note 4n. to the consolidated financial statements; 2) The Company
incurred in certain events of default related to its debt originally issued at
long-term, which entitled the creditors with the right to request the immediate
payment of the principal and interest; also, one subsidiary of the Company was
sued before a New York Court. Under these circumstances, the Company classified
its debt, originally issued at long-term, as short-term liabilities, and as a
result, current liabilities exceeded current assets by Ps.10,300.9 millions
(constant Mexican pesos of December 31, 2004); 3) The Company reported
accumulated losses representing more than two thirds of its capital stock,
which, in accordance with Mexican law is a cause of dissolution, and could be
among the assumptions provided by the Concurso Mercantil Law in Mexico and; 4)
The circumstances described in numerals 2) and 3) above, raise substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements did not include any adjustments related to the
recoverability and classification of the amounts recorded as assets, and the
amounts and classification of liabilities, deemed necessary in the event the
Company could not continue operating as a going concern.
We conducted our audit in accordance with auditing standards generally accepted
in Mexico. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement, and have been prepared in conformity with accounting principles
generally accepted in Mexico. 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
statements presentation. We believe that our audit provides a reasonable basis
for our opinion.
(1)
a) As more fully discussed in Notes 2 and 10 to the accompanying
consolidated financial statements, the Company has incurred in
events of default under the agreements and/or instruments governing
the loans which conform the Company's debt. Such events relate,
mainly, to the failure in the payment of the principal and the
corresponding interest, to technical defaults and noncompliance of
financial ratios, and to the change of control of the Company that
occurred when the former shareholders, Verizon Communications, Inc.
(Verizon) and Vodafone Group Plc. (Vodafone), sold the majority
equity shares to Movil Access, S.A. de C.V., as well as other
defaults detailed in such notes. These defaults entitled the
creditors of most of the Company's debt to request the immediate
payment of principal and corresponding accessories, in accordance
with the executed agreements. As a result of the above, and in
conformity with accounting principles generally accepted in Mexico,
long-term debt, as described in Note 10 to the consolidated
financial statements, has been classified as short-term and,
consequently, as of December 31, 2004, current liabilities exceeded
current assets by Ps.11,068.6 million, approximately. On January 14,
2004, a group of holders of the Secured Senior Notes Due 2004,
issued by the Company's main subsidiary, filed a lawsuit in a New
York Court against that subsidiary, for the immediate payment of
principal and interest; the lawsuit includes other aspects also
described in Notes 2 and 10 to the consolidated financial
statements.
b) The Company has incurred accumulated losses as of December 31, 2004,
which have originated the total loss of the Company's capital stock,
and a deficit in its stockholders' equity at that date. The loss of
capital stock, in accordance with Mexican General Corporate Law, is
cause of a possible dissolution of the Company; furthermore, the
Company might be instituted in a reorganization proceeding under the
Concurso Mercantil Law in Mexico.
These circumstances, in addition to the description in paragraph a)
above, raise substantial doubt about the Company's ability to
continue as a going concern, which will depend, among other factors,
on its debt restructure and/or, as the case may be, on obtaining or
generating the additional resources necessary to settle its
obligations and to cover its operating needs. The accompanying
consolidated financial statements, due to the reasons described in
Note 4a. to such financial statements, have been prepared
considering that the Company will continue as a going concern and,
in consequence, do not include any adjustments related to the
recoverability and classification of the amounts recorded as assets,
and the amounts and classification of the liabilities, which might
be deemed necessary in the event the Company would enter into a
liquidation process.
c) In accordance with Note 4o. to the consolidated financial
statements, beginning in 2004, the Company adopted Statement C-15
"Impairment of the Value of Long-Lived Assets and Disposal", issued
by the Mexican Institute of Public Accountants, in order to value
such assets.
(2)
In our opinion, the financial statements referred to in the first
paragraph present fairly, in all material respects, the consolidated
financial position of Grupo Iusacell, S.A. de C.V. and subsidiaries
as of December 31, 2004, and the consolidated results of its
operations, changes in its consolidated stockholders' equity
(deficit), and changes in its consolidated financial position for
the year then ended, in conformity with accounting principles
generally accepted in Mexico.
Despacho Freyssinier Morin, S.C.
CPC Jorge E. Santibanez Fajardo
Partner
Mexico City, Mexico
March 21, 2005
(3)
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
(Subsidiary of Movil Access, S.A. de C.V.)
CONSOLIDATED BALANCE SHEETS
(Notes 1, 2, 3 and 4)
Expressed in thousands of
constant Mexican pesos as of December 31, 2004
December 31,
----------------------------------
2004 2003
--------------- ---------------
Assets
CURRENT ASSETS:
Cash and cash equivalents (Note 4f.) Ps. 3,953 Ps. 6,116
--------------- ---------------
Accounts receivable:
Trade, net of Ps. 321,764 and Ps. 280,942 of allowance for doubtful accounts
in 2004 and 2003, respectively (Note 4h.) 338,347 529,833
Recoverable taxes and other 314,444 368,826
Related parties (Note 5) 41,574 8,831
--------------- ---------------
694,365 907,490
--------------- ---------------
Inventories - Net (Note 6) 329,401 269,281
--------------- ---------------
Total current assets 1,027,719 1,182,887
INVESTMENTS (Note 7) 2,107 14,931
PROPERTY AND EQUIPMENT - Net (Note 8) 7,072,180 8,088,114
OTHER ASSETS - Net (Note 9) 1,076,618 1,152,976
GOODWILL - Net of accumulated amortization of Ps. 1,457,044 in 2004 and
Ps.1,254,861 in 2003 (Note 4m.) 1,794,213 1,996,396
--------------- ---------------
Total assets Ps. 10,972,837 Ps. 12,435,304
=============== ===============
Liabilities and Stockholders' Equity (Deficit)
CURRENT LIABILITIES:
Original long-term debt, reclassified as short-term (Note 10) Ps. 8,833,814 Ps. 9,358,960
Interest payable 1,630,949 867,015
Trade accounts payable 305,978 449,232
Notes payable to suppliers (Note 11) 23,303 23,748
Taxes and other payables 812,088 681,617
Asset tax (Note 12) 137,170 -
Related parties (Note 5) 353,051 103,227
--------------- ---------------
Total current liabilities 12,096,353 11,483,799
Notes payable to suppliers, long-term (Note 11) 24,717 97,422
Other accounts payable, long-term (Note 4r.) 479 688
--------------- ---------------
Total liabilities 12,121,549 11,581,909
--------------- ---------------
Commitments and contingencies (Note 13) - -
--------------- ---------------
STOCKHOLDERS' EQUITY (DEFICIT):
Contributed capital (Notes 14 and 15):
Capital stock 7,815,072 7,809,003
Paid-in capital 1,536,698 1,536,698
--------------- ---------------
9,351,770 9,345,701
--------------- ---------------
Earned capital (deficit) (Note 16): Accumulated (losses) profits:
Legal reserve 21,947 21,947
For prior years (8,691,372) (3,738,246)
For the year (1,989,162) (4,953,126)
--------------- ---------------
(10,658,587) (8,669,425)
--------------- ---------------
Accumulated other earned capital 227,651 227,651
--------------- ---------------
Total majority stockholders' equity (deficit) (1,079,166) 903,927
Minority interest (69,546) (50,532)
--------------- ---------------
Total stockholders' equity (deficit) (1,148,712) 853,395
--------------- ---------------
Total liabilities and stockholders' equity (deficit) Ps. 10,972,837 Ps. 12,435,304
=============== ===============
The accompanying twenty notes are an integral part of these consolidated
financial statements.
(4)
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
(Subsidiary of Movil Access, S.A. de C.V.)
CONSOLIDATED INCOME STATEMENTS
(Notes 1, 2, 3 and 4)
Expressed in thousands of
constant Mexican pesos as of December 31, 2004
Years ended
December 31,
---------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Revenues:
Services Ps. 4,780,562 Ps. 4,406,851 Ps. 5,396,205
Telephone equipment sales and other 650,835 577,605 648,989
--------------- --------------- ---------------
5,431,397 4,984,456 6,045,194
--------------- --------------- ---------------
Cost of sales:
Cost of services 1,847,255 1,576,426 1,676,771
Cost of telephone equipment sales and other (Note 4j.) 1,369,125 946,306 533,859
--------------- --------------- ---------------
3,216,380 2,522,732 2,210,630
--------------- --------------- ---------------
Gross profit 2,215,017 2,461,724 3,834,564
Operating expenses 1,769,185 1,996,681 1,987,441
Depreciation and amortization 1,961,564 2,164,574 2,457,762
Other operating income (Note 8) (207,929) (93,152) (110,447)
--------------- --------------- ---------------
Operating loss (1,307,803) (1,606,379) (500,192)
--------------- --------------- ---------------
Intangible assets write-off (Note 4o.) - 368,440 -
--------------- --------------- ---------------
Abandoned fixed assets write-off (Note 8d.) - 425,704 -
--------------- --------------- ---------------
Other expenses - Net (Note 9d.) 11,214 659,131 -
--------------- --------------- ---------------
Integral financing cost:
Interest expense - Net 1,082,834 1,018,361 984,471
Foreign exchange loss (gain) (69,718) 783,152 1,125,154
Gain from monetary position (466,139) (369,071) (454,596)
--------------- --------------- ---------------
546,977 1,432,442 1,655,029
--------------- --------------- ---------------
Equity participation in net loss of associated
companies (Notes 3 and 7) 13,317 18,455 10,655
--------------- --------------- ---------------
Loss from continuing operations before asset tax (1,879,311) (4,510,551) (2,165,876)
Provision for asset tax (Note 12) 155,499 326,486 131,766
--------------- --------------- ---------------
Loss from continuing operations before minority interest (2,034,810) (4,837,037) (2,297,642)
Minority interest 5,271 34,857 18,194
--------------- --------------- ---------------
Loss from continuing operations before extraordinary item (2,029,539) (4,802,180) (2,279,448)
Extraordinary item for the early extinguishment of debt
(Notes 11 and 10g.) 40,377 16,322 -
--------------- --------------- ---------------
Loss after extraordinary item (1,989,162) (4,785,858) (2,279,448)
Cumulative effect of change in accounting policy (Note 4j)) - (167,268) -
--------------- --------------- ---------------
Net loss for the year Ps. (1,989,162) Ps. (4,953,126) Ps. (2,279,448)
=============== =============== ===============
Weighted-average number of shares of common stock
outstanding (thousands) 93,161 93,101 93,101
=============== =============== ===============
Basic net loss per share of common stock (pesos):
Loss from continuing operations before extraordinary item Ps. (21.78) Ps. (51.58) Ps. (24.48)
Extraordinary item 0.43 0.18 -
Cumulative effect of change in accounting policy - (1.80) -
--------------- --------------- ---------------
Basic net loss per share of common stock Ps. (21.35) Ps. (53.20) Ps. (24.48)
=============== =============== ===============
The accompanying twenty notes are an integral part of these consolidated
financial statements.
(5)
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
(Subsidiary of Movil Access, S.A. de C.V.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Notes 1, 2, 3 and 4)
Expressed in thousands of constant Mexican pesos as of December 31, 2004
Accumulated profits (losses)
----------------------------------------------------
Capital Paid-in Legal
stock capital reserve For prior years For the year
--------------- --------------- --------------- --------------- ---------------
Balance at December 31, 2001 Ps. 7,809,003 Ps. 1,536,698 Ps. 21,947 Ps. (880,757) Ps. (578,041)
Application of 2001 net loss - - - (578,041) 578,041
Decrease in minority interest - - - - -
Comprehensive loss for the year - - - - (2,279,448)
--------------- --------------- --------------- --------------- ---------------
Balance at December 31, 2002 7,809,003 1,536,698 21,947 (1,458,798) (2,279,448)
Application of 2002 net loss - - - (2,279,448) 2,279,448
Decrease in minority interest - - - - -
Comprehensive loss for the year - - - - (4,953,126)
--------------- --------------- --------------- --------------- ---------------
Balance at December 31, 2003 7,809,003 1,536,698 21,947 (3,738,246) (4,953,126)
Application of 2003 net loss - - - (4,953,126) 4,953,126
Decrease in minority interest - - - - -
Increase of capital stock 6,069 - - - -
Comprehensive loss for the year - - - - (1,989,162)
--------------- --------------- --------------- --------------- ---------------
Balance at December 31, 2004 Ps. 7,815,072 Ps. 1,536,698 Ps. 21,947 Ps. (8,691,372) Ps. (1,989,162)
=============== =============== =============== =============== ===============
Accumulated
other Total
earned Minority stockholders'
capital interest equity (deficit)
--------------- --------------- ---------------
Balance at December 31, 2001 Ps. 227,651 Ps. 144,616 Ps. 8,281,117
Application of 2001 net loss - - -
Decrease in minority interest - (133,502) (133,502)
Comprehensive loss for the year - - (2,279,448)
--------------- --------------- ---------------
Balance at December 31, 2002 227,651 11,114 5,868,167
Application of 2002 net loss - - -
Decrease in minority interest - (61,646) (61,646)
Comprehensive loss for the year - - (4,953,126)
--------------- --------------- ---------------
Balance at December 31, 2003 227,651 (50,532) 853,395
Application of 2003 net loss - - -
Decrease in minority interest - (19,014) (19,014)
Increase of capital stock - - 6,069
Comprehensive loss for the year - - (1,989,162)
--------------- --------------- ---------------
Balance at December 31, 2004 Ps. 227,651 Ps (69,546) Ps. (1,148,712)
=============== =============== ===============
The accompanying twenty notes are an integral part of these consolidated
financial statements.
(6)
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
(Subsidiary of Movil Access, S.A. de C.V.)
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Notes 1, 2, 3 and 4)
Expressed in thousands of constant
Mexican pesos as of December 31, 2004
Years ended
December 31,
---------------------------------------------
2004 2003 2002
------------- ------------- -------------
Operating activities:
Loss from continuing operations before extraordinary item Ps.(2,029,539) Ps.(4,802,180) Ps.(2,279,448)
Items not requiring the use of resources:
Depreciation and amortization 1,961,564 2,164,574 2,457,762
Intangible assets write-off - 368,440 -
Other long-term assets write-offs - 709,090 -
Abandoned fixed assets write-off - 425,704 -
Equity participation in net loss of associated companies 13,317 18,455 10,655
Deferred income tax - 172,356 10,117
Minority interest (5,271) (34,857) (18,194)
------------- ------------- -------------
(59,929) (978,418) 180,892
Resources provided by (used for) operating activities:
Trade accounts receivable 191,486 170,881 (12,498)
Related parties 217,081 (104,003) 40,909
Recoverable taxes and other 54,382 218,527 (65,407)
Inventories (60,120) (230,236) 254,247
Trade accounts payable (216,403) 66,888 (590,353)
Taxes and other payables 130,469 877,586 (296,527)
Asset tax 137,170 (79,995) 16,989
Employee profit sharing - - (3,085)
Other (209) (2,613) (59,987)
------------- ------------- -------------
Resources provided by (used for) operating activities
before extraordinary item and cumulative effect of
change in accounting policy 393,927 (61,383) (534,820)
Extraordinary item for the early extinguishment of debt 40,377 16,322 -
Cumulative effect of change in accounting policy - (167,268) -
------------- ------------- -------------
Resources provided by (used for) operating activities 434,304 (212,329) (534,820)
------------- ------------- -------------
Financing activities:
Changes from valuation of debt 238,788 312,703 720,524
Principal payments on long-term debt - - (42,478)
(Decrease) increase in notes payable - (137,018) 9,807
Increase in capital stock 6,069 - -
------------- ------------- -------------
Resources provided by financing activities 244,857 175,685 687,853
------------- ------------- -------------
Investing activities:
Purchase of property and equipment (412,511) (132,280) (884,007)
(Purchase) of common stock of associated companies 12,824 - (182,679)
Decrease in escrow account - - 508,446
(Purchase) disposal of other assets (281,637) - 99,880
------------- ------------- -------------
Resources used for investing activities (681,324) (132,280) (458,360)
------------- ------------- -------------
Net decrease in cash and cash equivalents (2,163) (168,924) (305,327)
Cash and cash equivalents at the beginning of the year 6,116 175,040 480,367
------------- ------------- -------------
Cash and cash equivalents at the end of the year Ps. 3,953 Ps. 6,116 Ps. 175,040
============= ============= =============
The accompanying twenty notes are an integral part of these consolidated
financial statements.
(7)
GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES
(Subsidiary of Movil Access, S.A. de C.V.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004, 2003 AND 2002
Except as otherwise noted, expressed
in thousands of constant Mexican pesos as of December 31, 2004.
Amounts expressed in U.S. Dollars are in thousands.
NOTE 1 - ENTITY, NATURE OF BUSINESS AND PRINCIPAL STOCKHOLDERS:
Entity and nature of business:
Grupo Iusacell, S.A. de C.V. (Iusacell or the Company) is a holding company
which was incorporated on August 6, 1998. Since July 28, 2003, Iusacell is a
subsidiary of Movil Access, S.A. de C.V. Iusacell and its subsidiaries are
jointly referred in these notes as the Group.
Grupo Iusacell Celular, S.A. de C.V. (Iusacell Celular) is the main subsidiary
and 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 five market areas (each a
Region) in Mexico. Iusacell, through Iusacell Celular, holds the non-wire line
cellular concessions for Region 5 (Guadalajara), Region 6 (Leon), Region 7
(Puebla), a cellular authorization for Region 9 (Mexico City), and in 2001,
acquired the company that holds the concession for Region 8 (Merida) (Note 3).
Iusacell subsidiaries also hold concessions to provide long distance services
and nationwide paging services; starting in December 2001, provide commercial
wireless personal communication services (PCS) in Regions 1 and 4 in northern
Mexico.
On October 17, 2003, at an extraordinary stockholders' meeting, Iusacell's
stockholders approved a 20 to 1 reverse stock split. All references to the
number of shares, per share amounts and any other reference to shares in the
consolidated financial statements and the accompanying related notes, unless
otherwise noted, have been adjusted to reflect the reverse stock split on a
retroactive basis (Note 14).
Principal stockholders:
On June 13, 2003, Movil Access, S.A. de C.V. (Movil Access), a Mexican
telecommunications service provider, controlled by Ricardo Salinas Pliego,
announced an agreement to acquire, at least, the outstanding shares of Iusacell
owned at that time by Verizon Communications, Inc. (Verizon) and Vodafone Group
Plc (Vodafone), through a public purchase tender offer. When the offer expired,
on July 28, 2003, Movil Access acquired 74.63% of the outstanding shares of
Iusacell and the management control of the Company.
(8)
NOTE 2 - FINANCIAL SITUATION:
As mentioned in Note 10, the Group is in default under some of the agreements
and/or instruments governing its loans as described in such Note; as a result,
and due to cross defaults, the lenders of most of the indebtedness, were
entitled with the right to declare the acceleration of the due date of the
indebtedness under such loans.
As mentioned in Note 10a., a group of holders of the Secured Senior Notes Due
2004 of Iusacell Celular filed a lawsuit in a New York Court against Iusacell
Celular demanding the immediate payment of the indebtedness under that loan, and
alleging breach of the Secured Senior Notes Due 2004 indenture requesting that
the Court declare that the holders of the notes are pari-passu with the lenders
under Iusacell Celular's Amended and Restated Senior Secured Credit Loan
Agreement. On April 19, 2004, this group of holders of the notes filed an
amended complaint and they were also seeking injunctive relief barring Iusacell
Celular from selling, transferring or otherwise encumbering the assets pending
decision on the merits of their claim for specific performance; the Court denied
the group of holders' petition.
During 2004 and 2003, the Group did not make interest payments under some of
these loans and as of December 31, 2004, interest payments overdue amounted to
Ps.1,407,759 (U.S.$126,256), which are presented as "interest payable" in the
consolidated balance sheet. The Group has neither the certainty nor the
expectations that it will have sufficient cash flows to make these payments,
unless it refinances its indebtedness and/or receives additional funds from
external sources. Also, as of the issuance date of these financial statements,
the Group has not made principal and interest payments under a loan obtained
from Verizon for U.S.$7,800 (Note 5).
Under these circumstances, Accounting Principles Generally Accepted in Mexico
(Mexican GAAP) require that these loans be reclassified as short-term debt. The
Group presents these loans as current liabilities as of December 31, 2004 and
2003.
Additionally, the Group has incurred in accumulated losses as of December 31,
2004, which have originated the total loss of its capital stock. As of the same
date, consolidated current liabilities exceed consolidated current assets by Ps.
11,068,634. The loss of the capital stock, in accordance with Mexican General
Corporate Law, is cause of a possible dissolution of the Company; furthermore,
the Company might be instituted in a reorganization proceeding under the
Concurso Mercantil Law in Mexico, which any creditor can request.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern; however, the consolidated financial statements have
been prepared considering that the Company expects to continue operating as
described on Note 4a.
(9)
NOTE 3 - ACQUISITIONS, DISPOSITIONS AND COMPANY STRUCTURE:
Company Structure:
Under applicable laws, due to Verizon's control of the Company in 1997,
Iusacell could not own the majority of the voting stock of Mexican subsidiaries
that provide services other than cellular telephony. In November 1998, Iusacell
Celular and Jose Ramon Elizondo, a then alternate director of Iusacell Celular
(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.
Iusacell Celular and the Mexican National agreed that Iusacell Celular
would own 94.90% of the economic interest and 49.00% of the voting shares of:
Iusatel, S. A. de C. V. (Iusatel), the Group's long distance concessionaire;
Iusatelecomunicaciones, S. A. de C. V. (Iusatelecomunicaciones), the Group's
fixed wireless local telephony operation; Punto a Punto Iusacell, S. A. de C. V.
(Punto a Punto Iusacell), a microwave frequencies concessionaire; and Iusacell
PCS, S. A. de C. V. (Iusacell PCS), which holds concessions for 1.9GHz
frequencies in Regions 1 and 4. The Mexican National would own 5.10% of the
economic interest and 51.00% of the voting shares of these subsidiaries.
Additionally, the Mexican National would acquire 2.00% of the voting shares of
Infotelecom, S.A. de C.V., the Group's subsidiary that provides national paging
services (Infotelecom) and which is the result of a joint venture agreement
between Iusacell Celular and Infomin, S.A. de C.V. (Infomin), a Mexican company
which holds a fifteen-year concession to provide nationwide paging services
through July 2009. As of December 31, 2004, Infotelecom is owned 49.00%, 49.00%
and 2.00%, by Iusacell Celular, Banorte, S. A. (which acquired Infomin's
interest in Infotelecom in exchange for the retirement of debt) and the Mexican
National, respectively.
On July 29, 2002, the Mexican Government issued a favorable resolution
allowing the Company to own up to 99.99% of the voting shares of Iusacell PCS.
After this resolution was obtained, at an extraordinary stockholders' meeting
held on September 12, 2002, Iusacell PCS's stockholders approved the conversion
of neutral shares of Iusacell PCS held by Iusacell into voting shares of
Iusacell PCS.
Iusatel, Iusatelecomunicaciones, Punto a Punto Iusacell and Infotelecom
(and until September 12, 2002 Iusacell PCS) are each referred herein as a
Non-Cellular Subsidiary and collectively, the Non-Cellular Subsidiaries.
Pursuant to the Agreement, the Mexican National did not have the unilateral
right to approve actions at the shareholder or board level of the Non-Cellular
Subsidiaries. Under each company's by-laws, all shareholder or board action must
also be approved by the majority of the shares held by Iusacell Celular (or
Iusacell) or the majority of the board members designated by Iusacell Celular
(or Iusacell), respectively. The Agreement, together with each Non-Cellular
Subsidiaries by-laws, enable Iusacell Celular or Iusacell, as the case may be,
to have management control over the day-to-day operations and financial
administration of the Non-Cellular Subsidiaries. The Mexican National cannot
alone, among other things, select, terminate or determine the compensation of
management or establish operating and capital decisions in the ordinary course
of business.
(10)
Finally, as a part of the Agreement, Iusacell and the Mexican National provide
each other with a put and call option on the shares of the Non-Cellular
Subsidiaries owned by the Mexican National.
On October 3, 2003, the Mexican National notified Iusacell that he was
exercising his put option on the Non-Cellular Subsidiaries shares owned by him,
based on the Agreement. As a result, on November 3, 2003, Iusacell and the
Mexican National signed an agreement under which each Non-Cellular Subsidiary
will pay to the Mexican National, on its own and/or on behalf of any of the
Non-Cellular Subsidiaries, a total amount of U.S.$11,194, net of income taxes,
resulting from the capital stock reimbursements of the shares owned by the
Mexican National in the Non-Cellular Subsidiaries over a period of two years.
This amount will be paid through weekly variable installments of at least,
U.S.$100 each, starting on November 3, 2003. The unpaid amount bears interest at
a fixed annual rate of 14.00%. As of December 31, 2004 and as of the issuance
date of these financial statements, the Group has paid the Mexican National
U.S.$6,100 and U.S.$7,400, respectively.
Pursuant to the agreement, during two years or until the full amount has been
paid to the Mexican National, the shares described in the agreement will be
deposited in a trust, and the voting rights of such shares will be exercised by
the trust, under the instructions of Iusacell. In the event that Iusacell failed
to make four payments, the trust will exercise the voting rights under the
instructions of the Mexican National. Additionally, this agreement establishes
that under certain circumstances, including the failure to make four payments,
among others, the amounts paid by Iusacell as of that date may be retained by
the Mexican National as a penalty for breaching the agreement, and the shares
deposited in the trust will revert to the Mexican National.
The subsidiaries of Iusacell are shown in the following schedule. The
identification of the companies with a capital letter indicates that they are
direct subsidiaries of Iusacell; and those which are indirect subsidiaries are
identified with the same letter than their holding company, followed by a
consecutive number:
(11)
Economic interest (direct or
indirect)
as of December 31,
------------------------------
Subsidiary and activity 2004 2003
----------------------------------------------------------------------------- --------------- ------------
(%) (%)
A Grupo Iusacell Celular, S.A. de C.V. (Holding company and infrastructure) 100.00 100.00
A.1 Sistemas Telefonicos Portatiles Celulares, S.A. de C.V. (Concession of
Region 6) 100.00 100.00
A.2 Telecomunicaciones del Golfo, S.A. de C.V. (Concession of Region 7) 100.00 100.00
A.3 S.O.S. Telecomunicaciones, S.A. de C.V. (Concession of Region 9) 100.00 100.00
A.4 Grupo Portatel, S.A. de C.V. and subsidiary (Concession of Region 8) 100.00 100.00
A.5 Iusacell, S.A. de C.V. (Sales and marketing) 100.00 100.00
A.6 Punto a Punto Iusacell, S.A. de C.V. (Microwave frequency concessionaire) 94.90 94.90
A.7 Iusatelecomunicaciones, S.A. de C.V. (Local wireless telephony) 94.90 94.90
A.8 Iusatel, S.A. de C.V. (Long distance concessionaire) 94.90 94.90
A.8.1 Iusatel USA, Inc. (Long distance U.S.) 94.90 94.90
A.9 Infotelecom, S.A. de C.V. (Paging) 49.00 49.00
A.10 Inmobiliaria Montes Urales 460, S.A. de C.V. (Real estate) 100.00 100.00
A.11 Sistecel, S.A. de C.V. (Services) 100.00 100.00
A.12 Mexican Cellular Investments, Inc. (Holding company of Comunicaciones
Celulares de Occidente) 100.00 100.00
A.12.1 Comunicaciones Celulares de Occidente, S.A. de C.V. (Concession of Region 5) 100.00 100.00
A.13 Iusanet, S.A. de C.V. (Services) 100.00 100.00
B Iusacell PCS, S.A. de C.V. (Concession of PCS regions 1 and 4) 94.90 94.90
B.1 Iusacell PCS de Mexico, S.A. de C.V. (Subsidiary of Iusacell PCS) 94.90 94.90
C Iusacell Infraestructura, S.A. de C.V. (Infrastructure) 100.00 100.00
D Iusacell Arrendadora, S.A. de C.V. (Infrastructure) 100.00 100.00
E Iusacell Infraestructura de Mexico, S.A. de C.V. (Infrastructure) 100.00 100.00
F Grupo Iusacell Nicaragua, S.A. (No operations) 100.00 100.00
See Note 10f. in relation to liens on these subsidiaries' capital stock or
assets.
NOTE 4 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES:
a. Basis of presentation
The Company's consolidated financial statements have been prepared in
conformity with Mexican GAAP considering Iusacell as a going concern;
consequently, even though its financial situation is unfavorable as
described in Note 2, the consolidated financial statements do not include
any adjustments which might be deemed necessary in the event the Company is
unable to continue with its operations.
The valuation of the Company's properties and equipment, goodwill and other
assets, as described in the accounting policies under this Note, has been
determined considering information that includes projections based on the
continuity of the Company's operations and that consider the debt
renegotiation, the maintenance of the Company's position in the cellular
market and the optimization of its capital expenditures. Long-term debt, due
to the reasons stated in Note 2, was classified as short-term debt.
(12)
Under these circumstances, Iusacell considers that the policies followed in
the preparation and presentation of its consolidated financial statements,
and described in the following paragraphs, are the most adequate to reflect
its financial situation and results of its operations.
The consolidated financial statements have been presented in thousands of
constant Mexican pesos as of December 31, 2004 as required by Statement
B-10, "Recognition of the Effects of Inflation on Financial Information", as
amended, issued by the Mexican Institute of Public Accountants (MIPA)
(Statement B-10).
b. Consolidated financial statements
Those companies in which the Company holds 50.00% or more of the capital
stock and/or exercises control over operating and financing activities are
included in the consolidated financial statements. In addition, while the
Company owns less than 50.00% of the voting shares of the Non-Cellular
Subsidiaries, it consolidates them because it exercises management control
over their day-to-day operations and financial administration (Note 3). All
significant inter-company balances and transactions have been eliminated in
consolidation.
c. Use of estimates
The preparation of financial statements in conformity with Mexican GAAP
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. Major estimates and
assumptions are related to the valuation of property and equipment,
concessions and goodwill.
d. Monetary unit
The financial statements are presented in Mexican pesos (Ps.), the currency
that, based on Mexican laws, must be used to prepare the accounting records
of the Company and its Mexican subsidiaries.
(13)
e. Effects of inflation on the financial statements
The consolidated financial statements of the Company have been prepared in
accordance with Statement B-10. The Third Amendment to Statement B-10
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, 2003 presented in the
consolidated financial statements have been restated to constant Mexican
pesos as of December 31, 2004 based on the National Consumer Price Index
(NCPI) published by Banco de Mexico (the Mexican Central Bank), by
applying an inflation percentage of 5.19%.
- Consolidated income statements for the current and prior years have been
restated to constant Mexican pesos as of December 31, 2004 using the NCPI
from the periods in which the transactions occurred.
- Statement B-12, "Statement of Changes in Financial Position", issued by
the MIPA (Statement 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. Statement
B-12 identifies the origin and application of resources representing
differences between beginning and ending balance sheet amounts in constant
Mexican pesos, excluding the effect of holding non-monetary assets.
Statement B-12 also provides that monetary and foreign exchange gains and
losses should not be eliminated from resources provided by operating or
financing activities.
The items that originate from the recognition of effects of inflation on
financial information are as follows:
Restatement of non-monetary assets:
Inventories are valued at the average price of the purchases made during the
period and are restated using the NCPI, not exceeding net realizable value.
Based on the Fifth Amendment to Statement B-10, property and equipment, net,
and depreciation for the year are restated using the NCPI, not exceeding net
realizable value.
(14)
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:
2004 2003
----- -----
(%) (%)
Buildings and facilities 4.00 4.00
Communications equipment 10.00 10.00
Furniture and fixtures 10.00 10.00
Transportation equipment 17.00 17.00
Computer equipment 29.00 29.00
The Group does not capitalize integral financing cost for assets under
construction, unless the integral financing cost generated by loans are
directly attributable to those assets. For the years ended December 31,
2004, 2003 and 2002, the Group did not capitalize integral financing cost.
Based also on the Fifth Amendment to Statement B-10, concessions and
goodwill, net, and amortization for the year are restated using the NCPI,
not exceeding net realizable value.
Investments in associated companies are accounted for using the equity
method based on the associated company's equity and are adjusted for the
effects of inflation in accordance with Statement B-10.
Restatement of stockholders' equity (deficit):
The contributed and earned capital (deficit) accounts include the effect of
restatement determined by applying the NCPI factor from the date capital was
contributed or earned, and losses were incurred. The restatement represents
the amount required to maintain the contributions and accumulated results in
constant Mexican pesos as of December 31, 2004.
The excess from restatement of capital account is an element of
stockholders' equity that includes surplus from holding non-monetary assets,
which represents the excess in specific values of net non-monetary assets in
comparison with the increase attributable to general inflation as measured
by the NCPI. This account is presented in caption accumulated other earned
capital in the consolidated balance sheets.
Integral financing cost:
Integral financing 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.
(15)
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. Monetary liabilities exceed
monetary assets, resulting in a gain from monetary position.
f. Cash and cash equivalents
Cash and cash equivalents consist primarily of bank deposits.
g. Financial instruments
Statement C-2, "Financial Instruments", issued by the MIPA (Statement C-2),
requires that all financial instruments be recorded in the balance sheet at
their fair value and changes in the fair value be recorded in each period in
the income statement. Statement C-2 also requires that derivative financial
instruments used for hedging purposes be recorded in the balance sheet and
valued using the same valuation criteria used to value the hedged asset or
liability.
The Group's financial instruments consisted until 2002, in foreign currency
and interest hedge contracts. As issuer, the Group has equity and debt
financial instruments, as described in Notes 10 and 14.
Until October 2002, the Group used derivative financial instruments to
manage the risk of variable interest rates and foreign currency exchange
fluctuations, which under Statement C-2, are classified as hedge
transactions. On October 7 and 10, 2002, the Group early terminated the
derivative financial instruments used for hedging purposes (Note 18).
h. Allowance for doubtful accounts
The Group cancels service to customers with invoices that are 60 days past
due. The allowance for doubtful accounts represents the Group's estimate of
the probable loss inherent in all accounts receivable due to general
historical trends of customer performance. The movements of the allowance
for doubtful accounts are as follows:
Years ended December 31,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
Beginning balance Ps. 280,942 Ps. 102,380 Ps. 243,814
Increases 127,498 178,562 67,087
Write-offs 86,676 - 208,521
------------ ------------ ------------
Ending balance Ps. 321,764 Ps. 280,942 Ps. 102,380
============ ============ ============
(16)
i. Investment in associated companies
The Company carries under the equity method long-term investments in
associated companies in which it owns between 20.00% and 50.00% of the
company's voting common stock and over which the Company can exercise
significant influence. 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.
j. Cellular telephones
Until September 30, 2003, the cost of cellular telephones given to customers
under exclusive service contracts was amortized based on the nature and
terms of the service contracts to match costs with the timing of earned
revenues. Average amortization period was twelve months. Until September 30,
2003, the cost of such telephones was included in recoverable taxes and
other, in the consolidated balance sheet, net of accumulated amortization.
Such cost did not exceed market value.
During the third quarter of 2003, the Group decided to change the accounting
policy for the telephones given to customers under exclusive service
contracts. As a result, the cost of such telephones is recorded in the
income statement at the moment when the contract is signed and such cost is
included as a part of the cost of telephone equipment sales and other, in
the consolidated income statement. The cumulative effect of this change in
accounting policy resulted in a loss for the year for 2003 of Ps.167,268
corresponding to the remaining balance of telephones being amortized as of
that date, amount that is included in caption cumulative effect of change in
accounting policy, in the consolidated income statement for the year ended
December 31, 2003.
In addition to the effect for this change, the Group reclassified Ps.237,758
of the amortization for the period from January to September 2003, amount
originally recorded as a depreciation and amortization for the period, to
cost of telephone equipment sales and other. If this reclassification had
been made for the year ended December 31, 2002, the cost of telephone
equipment sales and other would have been of Ps.974,214 and the depreciation
and amortization would have been Ps.2,017,408.
At the end of the contract term, the customer keeps the cellular telephone.
In the event of an early termination of an exclusive service contract, the
customer either (i) is required to return the telephone to the Group or (ii)
acquires the telephone at its market value on the date of termination, or in
some cases, a conventional penalty is charged for the early termination.
The cost of cellular telephones sold to customers is recorded as cost of
sales based on the average cost of such telephones. Until 2002, telephones
leased to customers were included in fixed assets and were depreciated over
the initial lease period, generally two years.
k. 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 the straight-line
method over the initial term of the respective concession. The weighted
average remaining useful life of the recorded concessions is 10.19 years.
The Mexican Government requires
(17)
the Group's compliance with the specific terms of each concession. Through
December 31, 2004, the Group had complied substantially with such
requirements, except for certain information requirements of the Mexican
authorities. The Group considers that such noncompliance does not expose it
to any risk of concession forfeiture, or any other material liability.
l. Advertising
Advertising costs are expensed as incurred. The cost of prepaid media
advertising (including television airtime, magazine, directory and other
print material) 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.255,074,
Ps.450,344 and Ps.306,420 for 2004, 2003 and 2002, respectively.
On July 1, 2003, the Group signed a contract with an advertising agency,
through which the agency is delivering advertising services to the Group,
including television airtime provided by Television Azteca, S.A. de C.V.
(TVA), related party, as well as advertising in other media companies. The
contract was signed for the period from July 1, 2003 to December 31, 2004.
For the years ended December 31, 2004 and 2003, the amounts paid to this
advertising agency, without value added tax, amounted to Ps.71,361 and
Ps.303,848, respectively.
m. Goodwill
Goodwill represents the excess of the cost of the acquired subsidiaries'
shares over its equity. Goodwill is amortized on the straight-line method
over twenty years and its value is subject to annual impairment tests. From
the date Statement B-7 "Business Acquisitions" is in force (January 1,
2005), goodwill no longer will be amortized and its value will be subject to
annual impairment tests (Note 4w.). Amortization expense was Ps.202,183,
Ps.221,937 and Ps.194,857 in 2004, 2003 and 2002, respectively.
Additionally, the Group wrote-off goodwill for Ps.37,006 from its telephones
leasing business, amount that is presented as an special item in the caption
of intangible assets write-off in the consolidated income statement for the
year ended December 31, 2003 (Note 4o.).
(18)
n. Intangible assets
In accordance with Statement C-8 "Intangible Assets" issued by the MIPA,
these assets are recognized on the balance sheet as long as they are
identifiable, provide expected economic benefits and the Company has control
over such benefits. Intangible assets with an indefinite useful life are not
to be amortized and intangible assets with a definite life are amortized
systematically, based on the best estimate of their useful life determined
in accordance with the expected future economic benefits. These assets are
subject to an annual evaluation of their recoverable value, to identify any
impairment losses (Notes 4o. and 9).
The adoption of Statement C-8 did not have a significant effect on the
Group's financial position. During the third quarter of 2003 and considering
the economic conditions under which the Group is operating (Note 2) and
based on the business plan prepared by the Group's new management, the Group
wrote down intangible assets for Ps.331,434, amount that was charged to
income of the year and is shown in the consolidated income statement for the
year ended December 31, 2003, as a special item (Note 4o.).
o. Evaluation of long-lived assets
Starting January 1, 2004, the Group adopted Statement C-15 "Impairment of
the Value of Long-Lived Assets and Disposal" (Statement C-15), issued by the
MIPA, which establishes, among other things, criteria for the identification
and, if necessary, recording the losses from impairment or from decrease in
the value of long-lived assets, tangible and intangible. The estimates made
by the Company, when adopting Statement C-15, did not generate impairment
effects that could impact in the financial position and results of
operations of the Group for the year ended December 31, 2004. The Group
determined the impairment test by comparing the discounted cash flows
estimated to be generated by these assets to their respective carrying
amounts. The Group evaluates the recoverability of its long-lived assets
when events and circumstances indicate that such assets might be impaired.
The Group considers long-lived assets: property and equipment, concessions
and goodwill.
For the year ended December 31, 2003, the Group wrote down intangible assets
for Ps.368,440, including Ps.37,006 of goodwill (Notes 4m. and 4n.).
p. Deferred income taxes and employee profit-sharing
The Group follows the provisions of Statement D-4, "Accounting Treatment of
Income Tax, Asset Tax and Employee Profit-Sharing", issued by the MIPA
(Statement D-4). This Statement requires a method to calculate deferred
taxes based on comprehensive assets and liabilities. The new method requires
the recognition of future tax consequences based on the difference between
the financial statements and tax basis of assets and liabilities -timing
differences- as of the date of the financial statements.
During 2003, and due to the circumstances mentioned in Note 2, and since the
Group cannot assure the realization of certain tax loss carry forwards, the
Group increased the net deferred tax asset valuation allowance to fully
reserve the deferred tax asset amounting to Ps.172,356 (Note 12); for the
same reasons, as of December 31, 2004 and 2003, no deferred income tax asset
was recorded.
(19)
Employee profit-sharing is a statutory labor obligation payable to employees
and determined, for each subsidiary with employees, on its pretax income, as
adjusted, in accordance with the provisions of Mexican labor and income tax
laws.
q. Liabilities
Beginning January 1, 2003, the Group adopted Statement C-9 "Liabilities,
provisions, contingent assets and liabilities and commitments" issued by the
MIPA (Statement C-9). This Statement establishes general rules for the
valuation, presentation and disclosure of liabilities, provisions and
contingent assets and liabilities, as well as for the disclosure of
commitments entered into by a company as part of its normal operations. The
adoption of this Statement did not have a significant effect on the Group's
financial position.
r. Seniority premiums
In accordance with Mexican labor law, Group's employees are entitled to
seniority premiums upon retirement after 15 years of service or upon
dismissal, disability or death. The Group follows Statement D-3, "Labor
Obligations", issued by the MIPA (Statement D-3). Under Statement D-3, the
actuarially determined projected benefit obligation is computed using
estimates of salaries that will be in effect at the time of payment.
During the last quarter of 2003 and throughout 2004, the Group transferred
all of its employees to two related entities which are not part of the
Group.
s. Loss per share
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding for
the year.
The computation of diluted loss per share is similar to basic 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. For the years ended December, 31,
2004, 2003 and 2002, the Company did not compute nor disclose diluted loss
per share because, for those years, the Company incurred losses from
continuing operations.
(20)
t. Revenue recognition
Cellular airtime is recorded as revenue as service is provided. Starting
January 1, 2002, the Group started to recognize revenue from the sale of the
prepay cards as service is provided. Revenues from the sale of prepay cards
associated with services that have not been provided are deferred until the
services are provided or the prepay cards have expired, and are included in
taxes and other payables in the accompanying consolidated balance sheet.
Sales and cost of sales of equipment and related services are recorded when
goods are delivered and services are provided. Other revenues, mainly from
paging and long distance services, are recognized when the related services
are provided.
u. 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.
v. Comprehensive loss
Comprehensive loss includes the Group's consolidated net loss and any other
item that, because of specific accounting guidance, is recorded directly as
a part of stockholders' equity, and which are not capital stock increases,
decreases and/or distributions.
The comprehensive loss caption included in the consolidated statement of
stockholders' equity (deficit) represents the result of the performance of
the Group during the year. For the years ended December 31, 2004, 2003 and
2002, comprehensive loss was the same as the consolidated loss for the year.
w. New accounting pronouncements
Starting January 1, 2005, rules contained in the following statements issued
by the MIPA, are in force, with the following adoption effects:
- Statement B-7, "Business Acquisitions" (Statement B-7), which establishes,
among other things, the valuation method for business acquisitions,
modifies goodwill accounting treatment, by eliminating its amortization
from January 1, 2005 onwards, and establishing that goodwill is subject to
impairment rules on a yearly basis; also, it gives specific guidance in
acquisitions of minority interest and in assets transfers or exchange of
shares among entities of a same group. Adoption of Statement B-7 will
represent for the Group a decrease in the amortization charge of
Ps.202,183, since, in accordance with these rules, goodwill no longer will
be amortized. This decrease does not consider any possible impairment
effect that might need to be recorded in that year.
The management of the Group considers that the adoption of the following
statements will not have effect in the Group's financial statements:
- Amendments to Statement C-2 "Financial Instruments", which require that
valuation effects from instruments available for sale, are recorded in
stockholders' equity and not in results for the period, and incorporates
rules to determine the impairment effects on financial instruments.
(21)
- Statement C-10 "Derivative Financial Instruments and Hedging Operations",
which further to compel and detail the accounting, valuation and
disclosure criteria for derivative financial instruments, requires that
effectiveness of risk hedging on foreign subsidiaries cash flows and net
investments, be recognized in comprehensive income.
- Amendments to Statement D-3 "Labor Obligations", which establishes rules
for valuation and accounting of liabilities generated for other
remunerations at the termination of the labor relation.
x. Reclassifications
Certain reclassifications have been made in the 2003 consolidated balance
sheet, for comparison purposes with 2004. The most important
reclassifications are the following:
As of December 31, 2003
------------------------------------------------
Reclassified Previously reported
--------------------- -----------------------
Interest payable Ps. 867,015 Ps. -
Taxes and other payables 681,617 1,548,632
--------------------- -----------------------
Ps. 1,548,632 Ps. 1,548,632
===================== =======================
NOTE 5 - RELATED PARTIES:
As discussed in Note 1, during 2003 Verizon and Vodafone sold their investment
in the Company. Therefore, since the date of the sale, they are no longer
related parties of the Group.
Beginning August 2003, the Company is subsidiary of Movil Access, a company
controlled by Ricardo Salinas Pliego. The main accounts receivable and payable
with related parties, as of December 31, 2004 and 2003, are as follows:
December 31,
----------------------------
2004 2003
------------ ------------
Accounts receivable:
Biper, S.A. de C.V. and subsidiaries Ps. 40,160 Ps. 8,831
Operadora Unefon, S.A. de C.V. 1,414 -
------------- ------------
Ps. 41,574 Ps. 8,831
============= ============
(22)
December 31,
----------------------------
2004 2003
------------- ------------
Accounts payable:
Grupo Electra, S.A. de C.V. and subsidiaries Ps. (329,727) Ps. (99,204)
Grupo TV Azteca, S.A. de C.V. and subsidiaries (22,450) -
Operadora Unefon, S.A. de C.V. - (2,740)
Other (874) (1,283)
------------- ------------
Ps. (353,051) Ps. (103,227)
============= ============
Contracts signed with related parties are as follows:
Contracts with Grupo Elektra, S.A. de C.V. and subsidiaries
a. On August 5, 2003, Iusacell, S.A. de C.V., subsidiary of the Company
(Iusacell S.A.), Elektra del Milenio, S.A. de C.V. (Elektra) and Salinas y
Rocha, S.A. de C.V. (SyR) signed a contract through which Elektra and SyR
are obligated to lease commercial areas in their stores for Iusacell S.A. to
place a point of sale and to promote its telecommunication services as well
as other promotional and marketing activities. For these services, Elektra
and SyR received U.S.$2,500 during 2003 and 2004. The contract was signed
for the period from August 5, 2003 to August 4, 2004. Iusacell, S.A.
extended this contract for year 2005, thus, in December 2004 made an advance
payment of U.S.$1,300 plus the corresponding value added tax as part of the
future fee.
b. On August 5, 2003, Iusacell S.A., Elektra and SyR signed a contract through
which Elektra and SyR are obligated to provide support to promote through
advertising campaigns the services offered by Iusacell S.A. in their stores.
For such services, Elektra and SyR received U.S.$5,000 payable during 2003
and 2004. The contract was signed for the period from August 5, 2003 to
December 31, 2004. Iusacell S.A. extended this contract for year 2005, thus,
in December 2004 made an advanced payment of U.S.$1,300 plus the
corresponding value added tax as part of the future fee.
c. On August 2, 2003, Iusacell S.A. and Elektra signed a ten-year commission
agreement, through which Iusacell S.A. appointed Elektra as a distributor to
promote and commercialize the services and sale the Iusacell S.A. products
in its stores across the country.
Elektra is obligated to use Iusacell S.A.'s "Trade Mark" solely to promote,
commercialize and sale Iusacell S.A. services. Iusacell S.A. pays Elektra a
commission for the sale of its products as follows: 25.00% on the selling
price of the "VIVA kit" product, 13.00% on the airtime sold, Ps.350 (pesos)
for contracts sold of the rate plan "Plan Facilito".
(23)
d. On October 1, 2003, Grupo Elektra and Iusacell S.A., signed an indefinite
life agreement under which Iusacell S.A. gives Elektra the right to operate
and manage its "Centros de Solucion Inmediata" (CSI), consisting of a chain
of 103 stores through which Iusacell S.A. commercializes cellular telephone
services in Mexico. The store format was changed and denominated
"Elektricity" and offers to the public, along with Iusacell S.A. services,
several other products and services related to Elektra and Banco Azteca,
S.A. (BAZ).
Pursuant to the agreement, Elektra charges clients on behalf of Iusacell
S.A. for rents charged in advance, guaranteed deposits and surety bonds,
differences for handsets costs, etc., and makes weekly deposits to Iusacell
S.A. for amounts collected at the CSIs for these concepts, net of the
commission for the administration of the business. Also, Elektra pays
Iusacell S.A., if applicable, an amount for the following concepts:
royalties for the administration and operation of the CSIs, the use of trade
marks, the use of the computer system, personnel training and lease of
assets.
Subsequent to the signing of this agreement, Iusacell S.A. transferred to
Elektra the rights on the lease contracts of some of the facilities in which
the CSIs are located and will sub-lease them to Elektra. Beginning October
2003, Elektra pays the lease for the CSIs and charges Iusacell S.A. a
proportional lease.
The amounts (commissions) payable by Iusacell S.A. are as follows:
- 27.00% on the selling price of the "VIVA kit" product
- 18.00% on the airtime sales
- Up to Ps.3,180 (pesos) during one year for post-paid
- Between 7.00% and 11.00% on residual commissions for post-paid
- Between 2.00% and 7.00% based on the collection amounts
- Ps.150 (pesos) for each activation of other distributor
- Between Ps.450 and Ps.1,800 (pesos) for contracts renewal
- Ps.7,200 annually for the lease of commercial spaces for customer
care activities
- Ps.15 monthly for each radio base installed in the CSIs
e. On August 1, 2003, Iusacell S.A. and Elektra signed a current account
contract for approximately Ps. 80,000, to control and record the transfer of
funds between the two companies originated by the corporate and commercial
relationship, financing, administration and services activities between the
two companies. Iusacell S.A. delivered a note payable to Elektra for
U.S.$7,000 as a guarantee to comply with its obligations under this
agreement. The agreement is for an indefinite term (Note 13i.).
(24)
f. During 2004, the Group purchased from Elektra Ps. 269,426 for handsets. On
January 3, 2005, the Group and Elektra signed the corresponding agreement
for an indefinite term. Elektra will charge Iusacell a fee of 1% to 3% of
the handsets' value.
Contract with Servicios Eficientes de Cartera, S. de R.L. (SEC)
Several subsidiaries of the Group signed on October 6, 2003, a service,
commission and deposit contract with SEC, under which SEC (subsidiary of Movil
Access) is committed to perform collection activities, and the administration of
cash flows and payments for the Group. The term of the contract is ten years and
the Group will pay 0.50% of the amount of collections and payments. For the
years ended December 31, 2004 and 2003, the Group paid commissions to SEC for
Ps.43,118 and Ps.5,150, respectively.
Contracts with Teleactivos, S.A. de C.V. (Teleactivos)
a. On September 1, 2003, Iusacell S.A. signed a Master Agreement for Call
Center Services through which Teleactivos (affiliated company of Movil
Access), is committed to provide the following services on behalf of
Iusacell S.A.: *911, *Hogar, *Doc, *Info, *Hechos, etc.
b. On November 3, 2003, Iusacell S.A. signed a Master Agreement for the
Operation of a Call Center through which Teleactivos will be in charge of
the operation of Iusacell S.A.'s call center, and delivering the following
services: short messages service, *411, activations, theft reports, welcome
call, first invoice, billing and collection, renewals, etc.
Both contracts are for an indefinite term and can be terminated by any of
the parties with 30 days in advance notification. For the years ended
December 31, 2004 and 2003, the Group recorded expenses derived from theses
contracts for Ps.82,733 and Ps.14,609, respectively.
Contracts with Operadora Unefon, S.A. de C.V. (Unefon)
a. Interconnection agreement, signed on June 9, 2000. Interconnection rate set
by the Telecommunications Federal Commission (Cofetel) was Ps.1.90 (pesos)
per minute of traffic for years ended December 31, 2004, 2003 and 2002, and
that rate was modified beginning January 1, 2005 (Note 20). This contract is
for an indefinite term.
b. Short Messages Services (SMS) contract signed on August 14, 2003. The rate
is Ps.0.40 (pesos) per message (fixed rate/subject to review). This contract
is for an indefinite term.
c. On August 3, 2004, the Group signed with Unefon a 10-year contract through
which the parties agree to give each other provision of capacity and roaming
services throughout Regions 2 to 9. This contract allows the Group to
increase its capacity and coverage in certain areas of Mexico. For year 2004
the amount of revenue obtained from this exchange of services was Ps.56,200
and the related cost was Ps.55,674.
(25)
A summary of the transactions that gave origin to accounts receivable and
payable with related parties for years ended December 31, 2004 and 2003, is
shown below:
Years ended December 31,
---------------------------
2004 2003
------------ ------------
Telephone equipment sales Ps. 196,953 Ps. 319,783
Airtime sales - 16,828
Interconnection revenues 28,179 10,532
Telephony service revenues 22,618 -
Infrastructure exchange revenue 56,200 -
Administrative services 77,417 46,906
------------ ------------
Total revenues Ps. 381,367 Ps. 394,049
============ ============
Telephone equipment purchases Ps. 581,165 Ps. 473,357
============ ============
Commissions Ps. 165,768 Ps. 5,128
Administrative services 137,445 25,209
Lease expenses 22,550 22,580
Interconnection expenses 48,588 15,186
Advertising expenses 53,335 47,073
Infrastructure exchange expenses 55,674 -
Interest expense 20,049 -
------------ ------------
Total expenses Ps. 503,409 Ps. 115,176
============ ============
Accounts and notes payable to Verizon, including interest (which was considered
a related party until the date of the sale of the Company's shares to Movil
Access), were Ps.246,272 and Ps.214,865 as of December 31, 2004 and 2003,
respectively.
Those accounts and notes payable as of the date of the sale were reclassified in
the consolidated balance sheet and as of December 31, 2004 and 2003 are
presented under caption taxes and other accounts payable. Accounts payable to
Verizon result mainly from services rendered by the seconded employees assigned
to the Group by Verizon before the date of the sale, and a note payable
corresponding to financing provided by Verizon on May 8, 2001, in connection
with the negotiations for the purchase of Portatel. This financing consists of a
two-year note payable for U.S.$7,800, bearing interest at a fixed annual
interest rate of 11.50%, and with an original maturity date on May 8, 2003,
which was extended to November 7, 2003. Principal and interest were payable at
the maturity of the note. As of the issuance date of these consolidated
financial statements, the Group has not paid this note nor accrued interest as
of that date.
(26)
For the 7-month period ended July 31, 2003 (date of sale), and for the year
ended December 31, 2002, transactions with Verizon and Vodafone are as follows:
July 31, December 31,
2003 2002
------------ ------------
Service revenues Ps. 14,833 Ps. 38,845
============ ============
Technical expenses 31,158 23,147
Interest expense 10,333 9,563
------------ ------------
Total expenses Ps. 41,491 Ps. 32,710
============ ============
Telephone equipment purchases Ps. 12,806 Ps. -
============ ============
NOTE 6 - INVENTORIES, NET:
As of December 31, inventories, net, consisted of the following:
2004 2003
------------ -------------
Cellular telephones and accessories Ps. 410,831 Ps. 295,685
Less: Reserve for obsolete and slow-moving
inventories (81,430) (55,100)
------------ -------------
329,401 240,585
Advances to suppliers - 28,696
------------ -------------
Ps. 329,401 Ps. 269,281
============ =============
NOTE 7 - INVESTMENTS:
As of December 31, the Company's investments in associated companies
were as follows:
2004 2003
----------------------------- ----------------------------
Entity Ownership Investment Ownership Investment
-------------------------------------- ------------ ------------ ------------ ------------
Editorial Celular, S.A. de C.V 40% Ps. 12,824 40% Ps. 12,714
Valuation reserve (12,824) -
Other 2,107 2,217
------------ ------------
Ps. 2,107 Ps. 14,931
============ ============
(27)
The investment in Editorial Celular, S.A. de C.V. (Editorial) is accounted for
by the equity method. For each of the three years ended December 31, 2004, 2003
and 2002, the Group's share of net (losses) earnings of Editorial was of
(Ps.493), Ps.1,192 and (Ps.10,655), respectively. During year ended December 31,
2004, the Group decided to create a valuation reserve for the total amount of
the investment in Editorial due to the reduced viability of that company, and to
the net losses reported in the last fiscal years. The amount charged to the 2004
income statement was Ps.12,824 and is presented as part of equity participation
in net loss of associated companies in the consolidated income statement.
During 2003, the Mexican Association of Cellular Concessionaires, A. C. (AMCEL)
entered into a liquidation process. Therefore, the Group wrote down its
investment in such entity recording a loss of Ps.19,647 which is presented in
caption equity participation in net loss of associated companies in the
consolidated income statement for the year ended December 31, 2003.
NOTE 8 - PROPERTY AND EQUIPMENT, NET:
a. At December 31, property and equipment, net, consisted of:
2004 2003
--------------- ---------------
Buildings and facilities Ps. 1,922,407 Ps. 1,913,877
Communications equipment 13,025,516 12,788,355
Furniture and fixtures 145,482 446,404
Transportation equipment 65,508 57,019
Computer equipment 875,819 2,024,173
Cellular rental telephones - 10,787
--------------- ---------------
16,034,732 17,240,615
Accumulated depreciation (9,466,312) (9,543,722)
--------------- ---------------
6,568,420 7,696,893
Land 91,546 91,540
Construction in progress 394,057 297,505
Advances to suppliers 18,157 2,176
--------------- ---------------
Ps. 7,072,180 Ps. 8,088,114
=============== ===============
b. Depreciation expense was Ps.1,651,174, Ps.1,785,541 and Ps.1,585,609 for
2004, 2003 and 2002, respectively.
c. In December 1999, the Company entered into a series of agreements with MATC
Celular, S. de R. L. de C. V. (an affiliated company of American Tower
Corporation) (MATC Celular). These agreements, among other things, gave MATC
Celular the right to acquire from the Group approximately 350 existing
towers. As a part of this agreement, a subsidiary of Iusacell signed a lease
contract for the same towers with MATC Celular for a minimum mandatory term
of ten years, a term that could be automatically extended for two additional
periods of five years each. In December 2003, the Group extended the
agreements with MATC Celular which, among other things, gave MATC Celular
the right to acquire up to 143 additional towers, which will be also leased
by the Group under conditions similar to the original agreements (Note
13a.). During 2004, 2003 and 2002, the Company and some of its subsidiaries
sold 97, 34 and 76 towers to MATC Celular, respectively, for U.S.$20,370,
U.S.$8,500 and U.S.$11,400, respectively, generating a gain on the sale,
before taxes, of Ps.207,929, Ps.93,152 and Ps.110,447, respectively. During
2005 and up to the date of issuance of these financial statements, the
Company has sold 3 additional towers.
(28)
Under Mexican GAAP, Statement D-5, "Leases", (Statement D-5) establishes the
general criteria for capital and operating lease transactions.
Sale-leaseback transactions must be recorded using the general criteria of
Statement D-5. The timing of recognition of a gain derived from
sale-leaseback transactions should be based on the subsequent lease
classification criteria of the leaseback portion of the transaction. If the
subsequent leaseback is accounted for as an operating lease, full immediate
gain recognition is allowed; whereas, if the subsequent leaseback is
accounted for as a capital lease, the gain is deferred and amortized in
proportion with the estimated useful life of the leased asset. Based upon
this criteria, the sale-leaseback agreement with MATC Celular was recorded
by the Company as an operating lease and consequently, Ps.207,929, Ps.93,152
and Ps.110,447 gains were recognized at the date of the sale and have been
recorded as other operating income in the consolidated income statements for
the years ended December 31, 2004, 2003 and 2002, respectively.
d. During the year ended December 31, 2003, Group's management performed a
study of its communications equipment. Based on this study and on the new
business plan of the Group, Group's management decided to write down certain
communications equipment recording it at its estimated net realizable value,
resulting in a charge to results for the year of Ps.425,704, amount that is
presented as a special item in the consolidated income statement for the
year ended December 31, 2003. Also, during year ended December 31, 2004, the
Company made a physical inventory of its fixed assets, and derived from the
inventory and the abovementioned study, the Company wrote-off fixed assets
against the reserve for obsolescence and abandonment for a net book value
amount of Ps.535,032.
e. The value of these assets is subject to an annual impairment test
(Note 4o.).
NOTE 9 - OTHER ASSETS, NET:
a. At December 31, other assets consisted of the following:
2004 2003
--------------- ---------------
Concessions Ps. 1,363,909 Ps. 1,363,909
Advance payments 21,624 -
Other 11,824 1,334
--------------- ---------------
1,397,357 1,365,243
Accumulated amortization (320,739) (212,267)
--------------- ---------------
Ps. 1,076,618 Ps. 1,152,976
=============== ===============
b. Concessions amortization expense (and until 2002, of telephones) was
Ps.108,207, Ps.157,096 and Ps.677,296 in 2004, 2003 and 2002, respectively.
c. As discussed in Note 4n., during 2003 the Group wrote down intangible assets
for Ps.331,434, mainly consisting of: (i) Pre-operating expenses originated
by the start-up operations of PCS in northern Mexico and (ii) certain
payments made by the Group to Telefonos de Mexico, S.A. de C.V. (Telmex)
related to the special projects implemented by Telmex to permit competition
in long distance telephony (Note 13b.). This write down of intangible assets
is presented as a special item in the consolidated income statement for the
year ended December 31, 2003.
(29)
d. During the third quarter of 2003, the Group wrote-off installation expenses
for Ps.533,971 and advance payments for Ps.175,119. These advance payments
correspond to the expenses incurred by the Group while obtaining long-term
financing, which were reclassified to current liabilities during 2003. This
anticipated write-off is presented in caption other expenses, net, in the
consolidated income statement for year ended December 31, 2003.
NOTE 10 - LONG-TERM DEBT AND NOTES PAYABLE:
As of December 31, long-term debt of the Group, reclassified as
short-term, consisted of the following:
U.S. Dollars
2004 2004 2003
----------------- -------------- --------------
Senior Notes Due 2004 (a) U.S.$ 150,000 Ps. 1,672,500 Ps. 1,771,926
Senior Notes Due 2006 (b) 350,000 3,902,500 4,134,493
BNP credit agreement (c) 23,232 259,041 274,440
BNP refaccionario loan (d) 3,416 38,094 40,359
Amended and Restated Senior Secured
Credit Loan Agreement (e) 265,622 2,961,679 3,137,742
----------------- -------------- --------------
U.S.$ 792,270 Ps. 8,833,814 Ps. 9,358,960
================= ============== ==============
a. Secured Senior Notes Due 2004
On July 25, 1997, Iusacell Celular completed an offering of long- term,
secured senior notes due July 15, 2004 for U.S.$150,000, bearing interest at
a fixed rate of 10.00%, payable semi-annually starting January 15, 1998 (the
Secured Senior Notes Due 2004).
(30)
On July 15, 2003, the Group decided that until concluding with its
restructuring process with its lenders, it would not pay the interest due on
the Secured Senior Notes Due 2004. Since the Group did not make the interest
payments during the 30 day cure period stated in the indenture, this
originated an event of default under the indenture governing the Secured
Senior Notes Due 2004. Furthermore, Iusacell Celular did not pay either the
interest due in January 2004, neither paid principal nor interest scheduled
in July 2004; therefore, as of December 31, 2004, this indebtedness is past
due. During 2005, and as of the date of issuance of these consolidated
financial statements, no principal or interest payment has been made.
On September 11, 2003, the Company announced that Iusacell Celular
received a formal notification of default requesting immediate payment of
the indebtedness under the Secured Senior Notes Due 2004, from a law firm in
the United States of America representing an informal committee which then
represented approximately 51.00% of the holders of the Secured Senior Notes
Due 2004.
Additionally, on January 14, 2004, a group of note holders representing
approximately 31.00% of the total holders of the Secured Senior Notes Due
2004, filed a lawsuit before a Court in New York demanding immediate payment
of the indebtedness under the Secured Senior Notes Due 2004, and also
alleging breach of the Secured Senior Notes Due 2004 indenture requesting
that the Court declare that the holders of the notes are pari-passu with the
lenders under the Amended and Restated Senior Secured Credit Loan Agreement
(Note 10e.). On April 19, 2004, this group of holders of the notes filed an
amended complaint seeking injunctive relief barring Iusacell Celular from
selling, transferring or otherwise encumbering the assets pending decision
on the merits of their claim for specific performance; the Court denied that
petition (Note 2).
Since the Secured Senior Notes Due 2004 is past due in 2004, there are no
available quotations for determining its fair value. As of December 31, 2003
its fair value was Ps.992,278.
b. Unsecured Senior Notes Due 2006
On December 16, 1999, Iusacell completed an offering of long-term, unsecured
senior notes due December 1, 2006 for U.S.$350,000, accruing interest at a
fixed rate of 14.25%, payable semi-annually starting June 1, 2000 (the
Unsecured Senior Notes Due 2006). Iusacell invested approximately
U.S.$133,600 of the net proceeds of the offering in securities in escrow to
secure the first six semi-annual interest payments on the Unsecured Senior
Notes Due 2006. This investment was restricted as to withdrawal and was
utilized to meet the Company's interest commitment on the Unsecured Senior
Notes Due 2006. The last interest payment made with the proceeds invested in
the escrow account was in December 2002.
(31)
On June 1, 2003, the Group decided that until concluding with its
restructuring process with its lenders, it would not pay the interest due on
the Unsecured Senior Notes Due 2006. Since the Group did not make the
interest payments during the 30 day cure period established by the
indenture, this originated an event of default under the indenture governing
the Unsecured Senior Notes Due 2006. Furthermore, the Group did not pay
either the interest due in December 2003, June and December 2004.
Additionally, the acquisition of Iusacell by Movil Access (Note 1)
constituted a change in control under the indenture governing the Unsecured
Senior Notes Due 2006. These events entitled the holders of the Secured
Senior Notes Due 2006 with the right to declare the acceleration of the due
date of the indebtedness under the Unsecured Senior Notes Due 2006. As of
the issuance date of these financial statements, March 21, 2005, the Company
has not been informed if the holders of the notes will exercise this right
(Note 2).
The Company reclassified the Unsecured Senior Notes Due 2006 as a short-term
liability on the consolidated balance sheet as of December 31, 2004 and
2003.
As of December 31, 2004 and 2003, fair values of this instrument, based on
market public quotations, were Ps.1,385,387 and Ps.1,199,003, respectively.
c. BNP credit agreement, as amended
On July 12, 2000, a subsidiary of Iusacell obtained financing to acquire
microwave transmission equipment. The financing consists of a seven-year
secured term facility provided by BNP Paribas (guaranteed by the Eximbank of
Norway) in the principal amount of up to U.S.$30,479. At December 31, 2004,
U.S.$25,814 of this facility had been drawn down and the amount payable is
U.S.$23,232.
Loans outstanding under the BNP credit agreement provide for interest at a
rate per annum equal to 0.60% above six-month LIBOR. The BNP credit
agreement also included a commitment fee for the unutilized portion of the
credit, calculated by applying 0.40% to the available amount. Interest under
the credit agreement is paid semi-annually starting on December 2000. Fees
under the credit agreement were paid quarterly starting in September 2000.
Principal payments are due in ten equal semi-annual installments which began
in December 2002.
For years ended December 31, 2004 and 2003, the subsidiary of Iusacell did
not make principal payments, and is currently in conversations with BNP
Paribas and the Eximbank of Norway seeking a debt restructuring agreement
(Note 2).
For years ended December 31, 2004 and 2003, the weighted-average interest
rates were 2.17% and 1.83%, respectively.
The BNP credit agreement is guaranteed by Iusacell.
(32)
d. BNP refaccionario loan, as amended
On July 12, 2000, a subsidiary of Iusacell obtained financing to acquire
microwave transmission equipment. The financing consists of a four year
secured term facility provided by BNP Paribas in the principal amount of
U.S.$5,379. At December 31, 2004, U.S.$4,555 of this facility had been drawn
down and the amount payable is U.S.$3,416.
Loans outstanding under the BNP refaccionario loan provide for interest at a
rate per annum equal to 2.00% above six-month LIBOR. The BNP refaccionario
loan also included a commitment fee for the unutilized portion of the
credit, calculated by applying 0.40% to the available amount. Interest under
the refaccionario loan is paid semi-annually starting in December 2000. Fees
under the credit agreement were paid quarterly starting in September 2000.
Principal payments are due in four equal semi-annual installments which
began in December 2002.
For years ended December 31, 2004 and 2003, the subsidiary of Iusacell did
not make principal payments, and is currently in conversations with BNP
Paribas seeking a debt restructuring agreement (Note 2).
For years ended December 31, 2004 and 2003, the weighted-average interest
rates were 3.59% and 3.23%, respectively.
The BNP refaccionario loan is guaranteed by Iusacell.
e. Amended and Restated Senior Secured Credit Loan Agreement
On March 29, 2001, Iusacell Celular completed the restructuring of its
long-term bank loan, its revolving credit facility, and the payment of the
Eximbank financing and the Commerzbank financing by entering into an amended
and restated senior secured loan agreement (the Amended and Restated Senior
Secured Credit Loan Agreement), which consists of:
(33)
(i) Tranche A Loan for an aggregate principal amount of U.S.$189,805 for the
purpose of refinancing existing indebtedness under the long-term bank
loan and the revolving credit facility and under a certain bridge loan
used to pay the January 2001 principal amortization payments under the
long-term bank loan and the revolving credit facility.
(ii)Tranche B Loan for an aggregate principal amount of U.S.$75,817 for the
purpose of paying existing indebtedness under the Eximbank financing and
the Commerzbank financing and under a certain bridge loan used to pay
also in January 2001 a principal amortization payment under the
Commerzbank financing.
(34)
The Amended and Restated Senior Secured Credit Loan Agreement provides
for interest at a rate per annum equal to one, two, three or six-month LIBOR
at Iusacell Celular's option plus a spread ranging, depending on Iusacell
Celular's leverage ratio, from 1.75% to 2.25% with quarterly interest
payments which began on May 29, 2001. Principal installments were scheduled
to begin during 2004 through 2006.
There was no gain or loss recognized from this loan restructuring.
On December 7, 2001 the Amended and Restated Senior Secured Credit Loan
Agreement was amended, and a waiver and consent were granted by the lenders
allowing Iusacell Celular to: (i) create liens encumbering initial deposits
and margin deposits securing indebtedness under any interest rate protection
agreement or other interest hedging agreement up to the principal amount of
indebtedness of Iusacell Celular and its subsidiaries with floating rates of
interest; (ii) make loans or advances to Iusacell in lieu of paying
dividends at such times and in such amounts as necessary to permit Iusacell
to pay scheduled interest (including any tax gross-up with respect thereto)
and principal payments as and when due in respect to the Unsecured Senior
Notes Due 2006 and (iii) make loans or advances to Iusacell in lieu of
paying dividends in an amount not to exceed U.S.$5,000, as long as an event
of default has not occurred, to discharge other liabilities of Iusacell
incurred in the ordinary course of business.
On March 27, 2003, Iusacell Celular announced that it received notification
from lenders of the occurrence of two technical defaults under the Amended
and Restated Senior Secured Credit Loan Agreement. The underlying defaults
are due to the failure to obtain the consent of the lenders prior to the
closing and opening of certain bank accounts and the failure to effect the
registration of a mortgage on certain newly acquired assets within the time
period specified in the Amended and Restated Senior Secured Credit Loan
Agreement. Iusacell Celular registered the mortgage and requested, but has
not yet received, the consent of the lenders with respect to the bank
accounts.
On April 28, 2003, as part of its debt restructuring effort, Iusacell
Celular received a temporary Amendment and Waiver (the Amendment) of the
Debt/EBITDA leverage ratio and certain other provisions and technical
defaults under the Amended and Restated Senior Secured Credit Loan
Agreement. The Amendment was scheduled to expire on May 22, 2003 and at its
expiration date the Amendment was extended to June 13, 2003 and further
extended several times. In October 2003, the Amendment was not further
extended, and upon its expiration Iusacell Celular is in default of its
Debt/EBITDA leverage ratio, which constitutes an event of default under the
Amended and Restated Senior Secured Credit Loan Agreement, and the lenders
under the Amended and Restated Senior Secured Credit Loan Agreement were
entitled with the right to request the acceleration of the due date of such
Amended and Restated Senior Secured Credit Loan Agreement. Additionally,
Iusacell Celular exceeded the aggregate amount for the incurrence of
Attributable Debt under the Amended and Restated Senior Secured Credit Loan
Agreement (Note 2). Since the refinancing of Iusacell Celular notes did not
occur on March 31, 2004, the outstanding amount under the Senior Secured
Credit Loan has been automatically accelerated.
(35)
For year ended December 31, 2004, Iusacell Celular failed to make principal
payments.
f. Covenants and collateral
The Amended and Restated Senior Secured Credit Loan Agreement, the BNP
credit agreement, the BNP refaccionario loan, the Secured Senior Notes Due
2004 and the Unsecured Senior Notes Due 2006 contain certain restrictive
covenants, including the maintenance of certain financial ratios,
restrictions on incurring additional debt, limitations on capital
expenditures and restrictions on the sale or lease of Iusacell Celular's
assets. As it has been mentioned before, the Group incurred in certain
events of default under the agreements governing such indebtedness.
Iusacell Celular's obligations under the amended and restated syndicated
loan are unconditionally guaranteed, jointly and severally, by the principal
operating and cellular concession-holding subsidiaries of Iusacell Celular
and are secured by the pledge of most of all capital stock and equity
interests held by Iusacell Celular and by all cellular concessions, and by a
first lien on substantially all assets used in connection with or related to
such concessions.
At December 31, 2004 and 2003, all of the Company's debt is classified as
short-term debt (Note 2).
g. Notes payable
As of December 31, 2002, notes payable consisted of a handset acquisition
financing facility from Banco Santander Mexicano, S.A. (Santander) obtained
by Iusacell Celular on February 25, 2002, which consisted of a one-year
unsecured credit facility in a principal amount of U.S.$12,000. Loans
outstanding under this facility provided for interest at an annual variable
rate of LIBOR plus a spread of 1.00%. Interest was paid quarterly. At the
maturity date of this facility, February 25, 2003, Iusacell Celular reached
an agreement with Santander to refinance a portion of this facility under
which Iusacell Celular paid Santander U.S.$7,000 plus accrued interest, and
refinance the remaining U.S.$5,000. The refinanced facility consisted of an
unsecured credit facility in a principal amount of U.S.$5,000 bearing
interest at an annual fixed rate of 3.84%. Interest and principal would be
paid in five equal monthly installments starting March 25, 2003. This
facility contained certain restrictive covenants.
On May 29, 2003, Iusacell Celular reached another agreement with Santander
to repay the remaining balance of U.S.$3,000 under the refinanced credit
facility. Under this new agreement, Iusacell Celular and Santander agreed to
settle the remaining amount for U.S.$1,500. Iusacell Celular recognized the
difference as an early extinguishment of debt under Mexican GAAP Statement
C-9 and recorded this amount as an extraordinary gain for year ended
December 31, 2003.
(36)
NOTE 11 - NOTES PAYABLE TO SUPPLIERS:
As of December 31, notes payable to suppliers consisted of the following:
U.S. Dollars
2004 2004 2003
------------ ------------ ------------
Short-term:
The Harris facility U.S. $2,090 Ps. 23,303 Ps. -
Standard Bank facility - - 23,748
------------ ------------ ------------
U.S. $2,090 Ps. 23,303 Ps. 23,748
============ ============ ============
Long-term:
The Harris facility U.S. $2,217 Ps. 24,717 Ps. 50,879
Standard Bank facility - - 46,543
------------ ------------ ------------
U.S. $2,217 Ps. 24,717 Ps. 97,422
============ ============ ============
On August 18, 2000, the Group through one of its subsidiaries entered into a
framework agreement, as amended, with its supplier Harris, S. A. de C. V. for
the purchase, construction, installation and financing of microwave equipment in
a principal amount of up to U.S.$10,873.
As of December 31, 2004 and 2003, the Group had drawn down six tranches in a
principal amount of U.S.$10,683 which consisted of:
(i) Tranches 1, 2A, 2B and 2C in a principal amount of U.S.$6,376 bearing
interest at a rate of average term LIBOR plus 1.25%; interest is paid
semiannually starting six months after each draw dawn date. Principal
payments are due in six equal semiannual installments starting two years
after each draw dawn date. Standard Bank acquired this loan and filed a
lawsuit before a New York Court, demanding payment of one of the notes
payable. Standard Bank and the Group reached an agreement and during 2003
the Court dismissed the demand.
On June 24, 2004, the Group purchased in the secondary market a U.S.$6.4
million promissory notes issued under this facility for U.S.$3.0 million.
The Group recognized in its consolidated income statement the difference of
U.S.$3.4 million as an extraordinary item for the year ended December 31,
2004.
(ii) Tranche 2D and 2E in principal amounts of U.S.$4,053 and U.S.$254 bearing
interest at an annual rate of 6.55% and 6.02%, respectively. Interest is
paid semiannually starting six months after the draw dawn date. Principal
payments are due in four equal semiannual installments starting two years
after the draw dawn date. On February 7, 2005 the Group failed to make a
U.S.$1,013 principal payment.
The outstanding two tranches are guaranteed by Iusacell.
(37)
NOTE 12 - INCOME TAX (IT), ASSET TAX (AT) AND EMPLOYEE PROFIT-SHARING (EPS):
For the years ended December 31, 2004, 2003 and 2002, the provision for IT and
AT consisted of the following:
2004 2003 2002
------------ ------------ ------------
Current IT and AT Ps. 155,499 Ps. 154,130 Ps. 121,649
Deferred IT - 172,356 10,117
------------ ------------ ------------
Total Ps. 155,499 Ps. 326,486 Ps. 131,766
============ ============ ============
Iusacell Celular has filed annual consolidated income tax returns since the tax
year beginning January 1, 1994. Starting year ended December 31, 2000, Iusacell
is the holding company for tax consolidation purposes.
Beginning January 1, 2004, IT rate in Mexico is 33.00% (34.00% for 2003 and
35.00% for 2002). As a result of the changes to the IT Law, the IT rate will be
30.00% in 2005 and 29.00% in 2006, respectively. The effect of these reductions
in the IT rate was considered in the calculation of the deferred taxes, reducing
the deferred IT asset. For years ended December 31, 2004 and 2003, the Group
incurred tax losses of Ps.1,577,375 and Ps.1,882,879 (nominal pesos),
respectively.
At December 31, 2004 and 2003, the main timing differences the Group recognizes
for the calculation of deferred income taxes, were as follows:
December 31,
-----------------------------------
2004 2003
--------------- ---------------
Allowance for doubtful accounts Ps. 321,764 Ps. 80,942
Liability accruals 497,543 38,744
Income tax loss carry forwards 8,848,232 8,170,675
Inventories (329,401) (269,281)
Property and equipment (755,141) (2,567,319)
Concessions (314,248) (337,172)
Other 46,836 -
--------------- ---------------
Timing differences 8,315,585 5,316,589
Income tax rate 33.00% 34.00%
--------------- ---------------
2,744,143 1,807,640
Income tax rate change effect (249,468) -
--------------- ---------------
Deferred income tax asset 2,494,675 1,807,640
Recoverable asset tax 564,572 65,521
Valuation allowance (3,059,247) (1,873,161)
--------------- ---------------
Net deferred income tax asset Ps. - Ps. -
=============== ===============
(38)
During 2004 and 2003, the Group decided to increase the net deferred tax asset
valuation allowance which is mainly originated by the effect of the tax loss
carry forwards, because the realization of the net deferred tax asset depends
mainly on generating sufficient taxable income prior to expiration of the loss
carry forwards, and the Company's management estimates that considering the
present situation of the Group the realization of the tax losses cannot be
assured through the generation of sufficient taxable income during the following
years (Note 2).
The 1.80% AT 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 1.80% AT paid may be utilized as a credit against
future income tax in the years in which the Company generates IT in excess of
the AT. The AT 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, 2004, AT
available as a carry forward was Ps.564,572.
At December 31, 2004, the Group had the following net tax losses for IT purposes
and the following recoverable AT:
Year of losss Amount Recoverable Expiration
or IT payment of loss AT year
------------- -------------- ------------- -------------
1995 Ps. 210,096 Ps. 53,589 2005
1996 129,717 52,458 2006
1997 216,619 59,763 2007
1998 1,077,594 38,668 2008
1999 367,705 41,883 2009
2000 233,481 88,934 2010
2001 748,880 81,456 2011
2002 2,209,670 85,117 2012
2003 2,077,095 30,030 2013
2004 1,577,375 32,674 2014
-------------- -------------
Ps. 8,848,232 Ps. 564,572
============== =============
EPS, generally 10.00%, is computed on taxable income, with adjustments to
exclude inflationary effects. In years ended December 31, 2004, 2003 and 2002,
the Company did not generate any taxable income for profit sharing purposes.
(39)
NOTE 13 - COMMITMENTS AND CONTINGENCIES:
As of December 31, 2004, 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 and since 2001, operating
lease agreements with MATC Celular for the lease of towers (Note 8c.). These
lease agreements expire at various dates through 2014, and some agreements
contain options for renewal. Lease expense was Ps.444,326, Ps.505,274 and
Ps.418,739 for years ended December 31, 2004, 2003 and 2002, respectively.
Future annual minimum rental payments under existing leases as of December
31, 2004, are as follows:
2005 Ps. 454,108
2006 474,051
2007 494,488
2008 515,415
2009 537,328
Thereafter 1,104,872
---------------
Ps. 3,580,262
===============
b. During April 2001, a subsidiary of the Company reached an agreement to
settle the outstanding amounts due related to the special projects
implemented by Telmex to permit competition in long distance telephony.
Iusatel agreed to pay for its portion of such special projects in two parts:
(i) a fixed payment of approximately U.S.$13,600, payable in twelve equal
monthly installments beginning in April 2001, and (ii) a U.S.$0.0053 per
full minute, usage-based surcharge to the local wire line interconnection
rate from January 1, 2001 through December 31, 2004 for long distance calls
terminated in Telmex's local wire line network. During October 2004, Iusatel
finished the scheduled payments in accordance with the agreement related to
the special projects implemented by Telmex to permit competition in long
distance telephony.
c. On January 1, 2002, the Mexican Congress approved a tax law reform that
assesses an additional 10.00% excise tax on certain wireless
telecommunications services. In February 2002, the Company and some of its
subsidiaries filed an injunction action to challenge the Mexican
Government's implementation of the tax. The Group obtained a favorable
resolution against this 10.00% excise tax and the Mexican Government filed
an appeal.
On June 6, 2003, the Group was officially notified that by disposition of
the appeal filed by the Mexican Government, Mexico's Supreme Court affirmed
the ruling in favor of the Group in their injunction filed against the
above-mentioned excise tax for 2002. The Group is in the process to obtain
the refund of the tax paid for the year 2002 and the Court has requested
that the authorities comply with the injunction resolution.
In February 2003, the Group filed an injunction action to challenge the
Mexican Government regarding the same 10.00% excise tax for year 2003. The
Group obtained a favorable resolution and the Mexican Government filed an
appeal; however, Mexico's Supreme Court confirmed the sentence obtained
in the first instance. The Group will proceed to file a refund request for
the paid excise tax.
(40)
d. A supplier of the Group has sued Iusacell S.A. for the improper termination
of their agreement. The Group has obtained a favorable resolution in the
first instance. The supplier filed an appeal and a new resolution was ruled
declaring that the claim of the supplier can proceed against the subsidiary
of the Company.
The Group filed an injunction which was declared to be sustained, and a new
resolution modifying the amount of the payment was issued. Against that
resolution was filed an injunction act.
The amount claimed by the supplier was Ps.85,023; as of the issuance date of
these consolidated financial statements, the amount determined was
approximately Ps.35,000. Based on the Company's external legal counsels, the
Group's management considers that it is possible that the Group obtains a
favorable resolution.
e. A client of the Group sued Iusacell S.A, a subsidiary of the Company, due to
a claim for improper termination of their agreement. The Company's
subsidiary obtained a favorable resolution in the first instance. The client
filed an appeal, which was overruled by the judge. No refutation mean was
filed and consequently this trial has concluded and Iusacell S.A. is exempt
to make the claimed payment.
f. A services supplier of the Group sued Iusacell S. A. claiming on improper
termination of their agreement. It was issued a resolution absolving
Iusacell S.A. to make any payment in the first instance. Against the
mentioned resolution, the supplier filed an appeal, and the result was a
confirmation of the no payment sentence. The amount claimed by this supplier
is U.S.$680. Based on the Group's external legal counsels, the Company's
management considers it is possible that the Group's subsidiary obtains a
favorable resolution.
g. Iusacell S.A., a subsidiary of the Company, was sued by a person for the
improper use of her image. The person has not obtained favorable resolutions
before two different instances. There was no determined amount claimed by
this person. Finally, Iusacell S.A. obtained a favorable resolution
absolving it to make any payment.
(41)
h. Some subsidiaries of the Group are currently in a process before the Mexican
Tax Court to obtain a resolution about their position of not being subject
to certain rights payable to the Telecommunications Ministry in Mexico over
interconnection revenues from calling party pays. The process is in the
first stage on such Court. The amount of rights that the subsidiaries of the
Group consider is not subject to be paid is approximately Ps.396,002. Based
on the Group's external legal counsels, the Company's management considers
it is possible that the Group's subsidiaries obtain a favorable resolution,
and consequently no provision has been created.
i. Elektra has started legal collection procedures against the Group to recover
an account payable in the amount of U.S.$7,000 originated from the
operations derived from the contract signed with the Group (Note 5).
j. The Group is also involved in other legal processes of individual
quantitative lesser impact. In the opinion of the Groups's legal counsels,
the total amount which could represent a loss, as the case may be, would not
have a material effect on the consolidated financial statements.
NOTE 14 - CONTRIBUTED CAPITAL:
During years ended December 31, 2004 and 2003, the following transactions took
place:
On October 17, 2003, at an extraordinary stockholders' meeting, the Company's
stockholders approved a complete amendment of the Company's by-laws and approved
the restructuring of the capital stock of the Company through the exchange of
the two series of shares representing the capital stock of the Company for new
common, ordinary, registered shares with no par value and full voting rights, at
a ratio of 20 series A and/or series V shares, for one new share.
The minimum fixed capital stock of the Company is Ps.5,938,688 (nominal).
Approximately 17,500,000 shares were distributed among public investors as of
December 31, 2004, and the market price in the Mexican Stock Exchange at that
date was Ps.24.14 (pesos).
On September 23, 2004, at a general extraordinary stockholders' meeting, the
Company's stockholders approved the creation of an Executive Employee Stock
Option Plan (the Plan). As a consequence, the stockholders approved a capital
stock increase (in its minimum part) up to Ps.130,000, through the issuance of
6,517,086 shares. At that meeting, the stockholders also decided to grant the
preference right to the absent stockholders or to those who have not resigned
their subscription rights, in order to subscribe the shares in the same
proportion they had at the time of the capital increase. During the period it
was permitted to exercise the preference right, the stockholders subscribed
323,694 shares at an exercise price of Ps.18.75 (pesos) per share. The by-laws
reform to reflect the capital increase is still pending. The rest of the shares
issued during that meeting (6,193,392 shares), were kept in the Company's
treasury for purposes of the Plan.
In the meeting described in the above paragraph, the stockholders decided to
cancel 15 shares, which at that date, were held in the Company's treasury.
(42)
The changes in the number of shares of common stock for the period
January 1, 2003 through December 31, 2004, are as follows:
Number of
shares
------------------
Total as of January 1, 2003 93,101,240
No changes -
------------------
Total as of December 31, 2003 93,101,240
Capital stock increase 323,694
Cancellation of shares (15)
------------------
Total as of December 31, 2004 93,424,919
==================
As of December 31, 2004 and 2003, capital stock is represented by common,
ordinary, registered shares with no par value and no series classification.
These shares have full voting rights and can be subscribed by Mexican and/or
foreign individuals or entities once all legal requirements for foreign
investment as to the ownership percentages of the Company's capital stock are
met.
NOTE 15 - EXECUTIVE EMPLOYEE STOCK PURCHASE PLAN (EESPP):
Since the second half of 2001, the former plan had been inactive. Such plan was
administered by a trust with the assistance of the trust division of a Mexican
bank and by a committee composed of certain executive officers of the Company;
the committee determined to which executive employees the shares will be offered
for purchase, the purchase price per share, the vesting schedule, the payment
terms and all other terms and conditions thereof. On August 2, 2004, the EESPP
approved by the stockholders' meeting held on December 18, 1996, was cancelled
because of the extinction in accordance with its original terms. As a
consequence of the cancellation, the 174,370 shares that composed the patrimony
of the trust created for the EESPP purposes, were sold by the trust.
At the general extraordinary stockholders' meeting held on September 23, 2004,
the stockholders of the Company agreed to create a new EESPP. 6,193,392 shares
out of the total shares issued at that meeting were held in the Company's
treasury (Note 14).
On December 26, 2004, an Administrating Executive Employee Stock Purchase Plan
Trust (the Trust) was created and on December 28, 2004, the 6,193,392 shares
were assigned. Those shares will have to be subscribed and paid in the terms and
conditions determined for that purpose by the Trust Technical Committee.
(43)
NOTE 16 - EARNED CAPITAL (DEFICIT):
Under Mexican law, a legal reserve must be created and increased annually by
5.00% of the annual net earnings until it reaches 20.00% of the nominal amount
of Company's capital stock. This reserve is not available for dividends, but may
be used to reduce a deficit or be transferred to capital.
The Company currently cannot pay dividends or make capital reimbursements under
the covenants of some of its loans.
The contributed capital and earned capital accounts consist of the following:
December 31, 2004
-----------------------------------------------------
Accumulated Majority
Historical adjustments for stockholders'
value inflation equity (deficit)
-------------- --------------- ----------------
Capital stock Ps. 5,938,689 Ps. 1,876,383 Ps. 7,815,072
Paid-in capital 1,209,952 326,746 1,536,698
Legal reserve 16,688 5,259 21,947
Accumulated losses for prior years (7,989,937) (701,435) (8,691,372)
Net loss for the year (1,756,494) (232,668) (1,989,162)
Accumulated other earned capital 173,102 54,549 227,651
-------------- --------------- ----------------
Total Ps. (2,408,000) Ps. 1,328,834 Ps. (1,079,166)
============== =============== ================
December 31, 2003
-----------------------------------------------------
Accumulated Majority
Historical adjustments for stockholders'
value inflation equity
-------------- --------------- ----------------
Capital stock Ps. 5,932,620 Ps. 1,876,383 Ps. 7,809,003
Paid-in capital 1,209,952 326,746 1,536,698
Legal reserve 16,688 5,259 21,947
Accumulated losses for prior years (3,618,913) (119,333) (3,738,246)
Net loss for the year (4,371,024) (582,102) (4,953,126)
Accumulated other earned capital 173,102 54,549 227,651
-------------- --------------- ----------------
Total Ps. (657,575) Ps. 1,561,502 Ps. 903,927
============== =============== ================
NOTE 17 - FOREIGN CURRENCY POSITION:
The balance sheet as of December 31 includes assets and liabilities denominated
in U.S. Dollars, as follows:
2004 2003
------------------ ----------------
Monetary assets U.S.$ 12,324 U.S.$ 12,441
Monetary liabilities (1,045,338) (970,659)
------------------ ----------------
Net monetary liability position U.S.$ (1,033,014) U.S.$ (958,218)
================== ================
Equivalent in nominal Mexican pesos Ps. (11,518,106) Ps. (10,760,788)
================== ================
(44)
As of December 31, 2004 and 2003, most of the communications equipment and
inventories of cellular telephones and accessories are of foreign origin (Notes
6 and 8).
During 2004, 2003 and 2002, interest income and interest expense on assets and
liabilities denominated in U.S. Dollars, were as follows:
2004 2003 2002
------------- ------------- -------------
Interest income U.S.$ - U.S.$ 456 U.S.$ 1,356
Interest expense (82,121) (81,891) (82,317)
------------- ------------- -------------
Net interest expense U.S.$ (2,121) U.S.$ (81,435) U.S.$ (80,961)
============= ============= =============
Equivalent in nominal Mexican pesos Ps. (915,651) Ps. (914,515) Ps. (845,176)
============= ============= =============
Operating results for years ended December 31, 2004, 2003 and 2002 include
depreciation and amortization expenses, related to fixed assets and inventories
of foreign origin.
The exchange rates as of December 31, 2004, 2003 and 2002 were Ps.11.15,
Ps.11.23 and Ps.10.44, per U.S. Dollar, respectively. At the issuance date of
these consolidated financial statements, March 21, 2005, the exchange rate in
effect was Ps.11.18 per U.S. Dollar.
(45)
NOTE 18 - FINANCIAL INSTRUMENTS:
The Group determined the fair value of outstanding financial instruments as
follows:
Foreign currency exchange forward contracts
The Group purchased before 2002 foreign currency exchange forward contracts with
terms of up to three years to protect itself against the adverse effect that
exchange rate fluctuations may have on foreign currency-denominated liabilities,
principally U.S. dollars.
Until its early termination, in October 2002, these derivative instruments were
highly effective; the Group paid a termination fee of U.S.$1,687.
As of December 31, 2004 and 2003, the Group does not have any foreign currency
exchange contracts.
Interest rate collars
The following interest rate collars were due in 2002:
In July 1998, Iusacell Celular entered into an interest rate collar agreement
for a notional amount of U.S.$35,000 until July 30, 2002. The collar agreement
limited the maximum effective LIBOR cost to 6.12% if six-month LIBOR was lower
than 7.12% and 7.12% if LIBOR equaled or exceeded 7.12%. Iusacell Celular was
able to participate in a decline in LIBOR to 5.30%.
On February 26, 1999, Iusacell Celular entered into an additional interest rate
collar agreement to limit the maximum interest rate, which had to be paid on
U.S.$15,000 of its floating rate debt until July 30, 2002. This collar agreement
limited the maximum effective LIBOR cost to 5.82% if six-month LIBOR was lower
than 6.82% and 6.82% if LIBOR equaled or exceeded 6.82%. Iusacell Celular was
able to participate in a decline in LIBOR to 4.75%.
NOTE 19 - SEGMENT INFORMATION:
Beginning in year ended December 31, 2003, the Group prepares segment
information based on Statement B-5 "Segment Financial Information" issued by the
MIPA (Statement B-5). Before this date, the Group's segment data was prepared in
accordance with International Accounting Standard No.14 (revised). The adoption
of Statement B-5 did not change the way in which the Group prepares this
information. Reportable segments are those that are based on the Group's method
of internal reporting.
(46)
The Group has three reportable segments that it operates and manages as
strategic business units that offer different products and services. The Group
measures its reportable segments based on operating profit (loss), including
inter-segment revenues and corporate expenses that are allocated to the
operating segments and excluding any non-recurring items. Inter-segment
transactions are accounted for at current market prices. The Group evaluates the
performance of its segments and allocates resources to them based on operating
income (loss). The accounting policies underlying the reported segment data are
the same as those described in the summary of significant accounting policies
(Note 4).
The Group's three reportable segments and their principal activities are:
Cellular - The Group operates and provides wireless cellular telephone services
in five of the nine Regions in the Mexican market. The Group serves customers in
large metropolitan areas such as Mexico City, Guadalajara, Leon, Puebla and
Merida. The Group's services include "value added services" such as voice mail
and secretarial service.
Long distance - The Group provides long distance services for which its first
natural market is its cellular subscriber base. The Group is also providing
these services to residential and commercial clients. The Group 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 Group provides paging, microwave links and data
transmission services. It has concessions for PCS services, which started to be
commercialized at the end of December 2001.
The tables below present information about reportable segments for the years
ended December 31, 2004, 2003 and 2002, under Mexican GAAP measurement:
Year ended December 31, 2004
--------------------------------------------------------------------------------------------------
Long Other Total Reconciling Total
Cellular distance businesses Segments items consolidated
------------- ------------- ------------- ------------- ------------- -------------
Revenues - third parties Ps, 5,292,642 Ps. 78,839 Ps. 59,916 Ps. 5,431,397 Ps. - Ps. 5,431,397
Revenues - affiliates 6,462,540 357,499 616,998 7,437,037 (7,437,037) -
Depreciation and
amortization 1,630,364 143,867 187,333 1,961,564 - 1,961,564
Operating loss (968,553) (50,493) (288,757) (1,307,803) - (1,307,803)
Total assets 12,976,650 732,331 7,160,310 20,869,291 (9,896,454) 10,972,837
Capital expenditures 399,941 948 47,369 448,258 - 448,258
(47)
Year ended December 31, 2003
--------------------------------------------------------------------------------------------------
Long Other Total Reconciling Total
Cellular distance businesses Segments items consolidated
------------- ------------- ------------- ------------- ------------- -------------
Revenues - third parties Ps. 4,821,683 Ps. 116,806 Ps. 45,967 Ps. 4,984,456 Ps. - Ps. 4,984,456
Revenues - affiliates 6,121,733 279,211 1,466,640 7,867,584 (7,867,584) -
Depreciation and
amortization 1,817,005 147,367 200,202 2,164,574 - 2,164,574
Operating loss (1,342,897) (76,725) (186,757) (1,606,379) - (1,606,379)
Total assets 17,475,378 1,133,169 12,709,036 31,317,583 (18,882,279) 12,435,304
Capital expenditures 194,805 388 20,341 215,534 - 215,534
Year ended December 31, 2002
--------------------------------------------------------------------------------------------------
Long Other Total Reconciling Total
Cellular distance businesses Segments items consolidated
------------- ------------- ------------- ------------- ------------- -------------
Revenues - third parties Ps. 5,711,332 Ps. 295,313 Ps. 38,549 Ps. 6,045,194 Ps. - Ps. 6,045,194
Revenues - affiliates 4,557,054 355,402 1,621,491 6,533,947 (6,533,947) -
Depreciation and
amortization 2,152,439 135,470 171,847 2,459,756 (1,994) 2,457,762
Operating loss (65,367) (151,323) (223,099) (439,789) (60,403) (500,192)
Total assets 20,379,267 1,510,637 14,266,852 36,156,756 (19,616,144) 16,540,612
Capital expenditures 541,150 14,554 375,027 930,731 - 930,731
NOTE 20 - SUBSEQUENT EVENT:
The Cofetel ruled that Telmex and its affiliate, Telefonos del Noroeste, S.A. de
C.V., will have to apply a rate of Ps.2.25 (pesos) per minute, for calls from
fixed telephones to mobile phones contracted under the modality "calling party
pays" beginning January 1, 2005; Ps.2.03 (pesos) beginning January 1, 2006 and
Ps.1.82 (pesos) beginning January 1, 2007.
Also, the Company signed interconnection agreements with other local operators,
and the "calling party pays" rates collected from and paid to other operators
will be reduced in the same proportion during the periods mentioned in the above
paragraph.
(48)
EXAMINER'S REPORT
To the General Shareholders' Meeting
Grupo Iusacell, S.A. de C.V.
In my position of examiner and pursuant to Article 166 of the General Law of
Commercial Corporations (Ley General de Sociedades Mercantiles) and the By-laws
of Grupo Iusacell, S.A. de C.V., I render you my report about the truthfulness,
proficiency and reasonability of the financial statements I have presented to
you, the Board of Directors, up to December 31st, 2004 and for the year which
came to an end on that date.
I attended the Meeting of the Board of Directors to which I was summoned and had
access to the records of previous meetings, of this Board, related to the fiscal
year of 2004; likewise, I have obtained, from the own administration of the
Company, the information about the operations, documentation and records I
considered necessary to examine. My revision has been done according to the
auditing rules which are generally accepted.
As indicated in Note 2 of the financial statements that are attached, ruled by
the independent auditors of the Company, such statements have been prepared to
meet legal and statutory provisions, considering Grupo Iusacell, S.A. de C.V. as
an individual legal entity, reason by which they do not present themselves
funded with those of its subsidiary companies; the investments of the Company in
the subsidiaries, which constitute the base for the evaluation of the financial
situation and the operation results of the economical entity that, as a set,
constitutes Grupo Iusacell, S.A. de C.V. and such subsidiary companies. The
consolidated financial statements, previously mentioned, were rendered by the
same independent auditors of the Company.
In my opinion, the criteria and political accounting and information followed by
the Company and considered by the administration to prepare the financial
statements presented to this Meeting, are adequate and enough and were applied
in a consistent way with the previous exercise; therefore, such financial
statements reflect in a truthful, reasonable and sufficient way the financial
situation of Grupo Iusacell, S.A. de C.V., as of December 31st, 2004, the
results of their operations, the variations in their accounting capital and the
changes in their financial situation, for the year ended in that date, in
agreement with the accounting principles generally accepted.
The matters mentioned in the following paragraphs a), b) and c), are important
for an adequate interpretation of the financial statements of Grupo Iusacell,
S.A. de C.V., as of December 31st, 2004 and for the year which came to an end on
that date.
a) As it is further explained in Notes 2 and 7 of the audited financial
statements attached, the Company and its subsidiaries, that have
engaged a long term debt, have incurred in events that constitute
breaches of the agreements that they executed to obtain the
financing that integrates their debt. Such events refer,
principally, to a breach in the payment of capital and due
interests, to technical and maintenance breaches due to financial
reasons, and to the change of control of the Company that occurred
when the previous shareholders Verizon Communications Inc., and
Vodafone Group Plc sold, most of the representative shares of the
capital stock to Movil Access, S.A. de C.V. besides other breaches
that are detailed in such notes. These breaches grant to the
creditors of most of the debt of the Company and its subsidiaries,
the authority to claim the immediate payment of the principal and
the corresponding accessories, according to the agreements executed.
As a consequence of the latter, and in accordance with what the
accounting principles generally accepted in Mexico require, the long
debt term contracted by the Company, that is described in the
audited financial statements in Note 7, has been classified as a
short term, reason by which, by December 31st, 2004, the passives at
a short term exceed the circulating assets in approximately
Ps.4,999.5 million. On January 14th, 2004, a group of bond holders
of the bonds with a maturity date of 2004, issued by Grupo Iusacell
Celular, S.A. de C.V., main subsidiary of the Company, demanded to
such a subsidiary before a court in New York City the immediate
payment of capital and interests; the demand includes other aspects
that are also described in Notes 2 and 7 of the audited financial
statements.
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b) The Company has incurred in accumulated losses as of December 31st,
2004, that have originated the total loss of their equity capital
and a deficit in its countable capital up to that date. The loss of
the equity capital, according to the General Law of Commercial
Corporations, is an event that may cause a possible dissolution of
the Company, additionally; the Company could be under the event that
may allow any creditor to request the declaration of a concurso
mercantil procedure, according to the applicable legal provisions.
These circumstances, in addition to what is mentioned in the
preceding paragraph a), generates doubts about the possibility that
the Company continues with its operations, which will depend,
amongst other factors, that the Company as well as its subsidiaries
can restructure their debt and/or, in its case, that the necessary
resources are obtained or generated to pay its obligations and cover
its operation needs. The audited financial statements that are
accompanied, for the reasons indicated in Note 4a to such
statements, have been prepared considering that Grupo Iusacell, S.A.
de C.V. will continue with its operations and, in consequence, do
not include any adjustment relative to the recovery and
classification of the assets and the amounts and classification of
passives, that could be necessary in case that the Company would go
into a liquidation process.
c) According to what is described in Note 4k of the audited financial
statements, beginning from 2004, the Company and its subsidiaries
apply the established lineaments in Bulletin C-15 "Deterioration in
the value of long term assets and their disposition", issued by the
Mexican Institute of Public Accountants (Instituto Mexicano de
Contadores Publicos, A.C.), for the validation of its assets.
CPC Juan Alfredo Alvarez Cederborg
Examiner
Mexico, Federal District
March 21st, 2005
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