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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, 2006
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
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1. Press Release of the Registrant dated July 17, 2006
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 17, 2006
/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
Col. Lomas de Chapultepec
Miguel Hidalgo
11000 Mexico, Mexico City
Mexico
Tel. 5 109 5927
Fax. 5 109 5939
www.iusacell.com.mx
The shares of Grupo Iusacell, S.A. de C.V., (Iusacell) have been
registered in the Mexican Stock Exchange ("Bolsa Mexicana de Valores"), since
August 4, 1999, under the symbol CEL. The shares of Iusacell are with no par
value.
On October 17, 2003, the Extraordinary Shareholders Meeting of
Iusacell, approved the capital stock restructure by virtue of the conversion of
all the shares series "A" and series "V" in a Unique Series, although approved
the reverse stock split whereby shareholders received one new share of common
stock in exchange for twenty series "A" and series "V" shares.
The capital stock of Iusacell of Ps.$5,938'689,106.14 is represented by
93'424,919 ordinary 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, 2005.
"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."
CONTENT
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1) GENERAL INFORMATION
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a) Terms and Definitions Glossary
b) Executive Summary
c) Risk Factors
d) Other Securities
e) Significant Changes to the Rights of the Securities Registered
f) Destiny of the Funds
g) Public Documents
2) THE COMPANY
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a) History and Development of the Issuer
b) Description of the Business
i) Principal Activity
ii) Channels of Distribution
iii) Patent, License, Trademarks 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) Description of the Principal Assets
xi) Legal, Administrative or Arbitration Proceedings
xii) Shares Representatives of the Stock Capital
xiii) Dividends
3) FINANCIAL INFORMATION
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a) Selected Financial Information
b) Financial Information per Business Line, Geographic Zone and
Exportation Sales
c) Material Credits Report
d) Management Discussion and Analysis of Financial Condition and
Results of Operations
i) Results of Operation
ii) Financial Situation, Liquidity and Capital Resources
iii) Internal Control
e) Critical Accounting Policies
4) MANAGEMENT
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a) External Auditors
b) Related Party Transactions and Conflict of Interests
c) Management and Shareholders
d) By laws and other Agreements
5) STOCK MARKET
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a) Capital Structure
b) Behavior of the Stock in the Stock Market
6) RESPONSIBLE PERSONS
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7) EXHIBITS
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CONSIDERED INFORMATION
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This Annual Report contents various estimated statements and figures
including, among other things, the financial development and operative planning
designed for Grupo Iusacell, S.A. de C.V. This information is based in actual
considerations realized by our management and in outline assumptions by the
management based in the actual available information. Words "estimates",
"believes", "intends", "may" or "anticipates" or other variation are using to
identify some of these declarations and considered statement. This information
is submitted to variations, risks and uncertainties, also to other facts that
could have as result that our real results, or our performance or success be
mainly different compared with the future results, tacit or expressly mentioned
in those statements and considerations. In the event that the considerations of
the management don not be exact, the real results could be important and adverse
different in comparison with the considerations. We warning the readers do not
exclusively assume these declarations and statements, which solely are valid
regarding the respective dates. We do not assume any obligation to publicly
bring up of modify any of the declarations and statements, as result of new
information or future events or any other reason.
The factors described in this Annual Report under Item 1. "General
Information- c) Risk Factors", could have as result the fact that the real
results may be importantly different regarding those statements.
* * *
"Iusacell" means Grupo Iusacell, S.A. de C.V. This company used to name
Nuevo Grupo Iusacell, S.A. de C.V., unless otherwise provided in the context,
the terms "we" or "us" refer to Iusacell and its consolidated subsidiaries.
"Iusacell Celular"means Grupo Iusacell Celular, S.A. de C.V. This
company used to name Grupo Iusacell, S.A. de C.V. Iusacell is owner of the 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 Terms and Definitions" provides definitions of certain
technical terms used herein.
On July 29, 2003, Grupo Movil Access, S.A. de C.V., or Movil Access, a
Mexican telecommunications company subsidiary of Grupo Movil Access, S.A. de
C.V., or GMA, a paging company formerly known as Biper, S.A. de C.V., acquired
through a tender offer in Mexico and the United States 74.6% of Iusacell's
capital, and became Iusacell's principal shareholder. GMA, Movil Access,
Operadora Unefon S.A. de C.V., a fixed and mobile telephony 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 that
are either controlled or subject to significant influence, directly or
indirectly, by Mr. Ricardo B. Salinas Pliego.
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 information memorandum refers to
Vodafone Group Plc or its subsidiaries, as the context requires.
The securities represented the stock capital of Iusacell are listed in
the Mexican Stock Market. Iusacell as Iusacell Celular have debt securities
publicly listed.
Unless otherwise provide, all the references to "E.U. dollars", "E.U.
Dollars", "dollars", "E.U.$" or "$" are to dollars of the United States and the
references to "Ps." And "pesos" are to Mexican pesos. We published our financial
statements in Mexican pesos, which are adjusted in order to reflect changes in
the power acquisition as consequence of the inflation. In this way, unless
otherwise provided, our financial information is presented in constant pesos at
December 31, 2005. It is possible that the amounts presented in this Annual
Report shows inconsistencies regarding its rounding off.
(5)
1) GENERAL INFORMATION
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a) GLOSSARY OF TERMS AND DEFINITIONS
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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 involves 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.
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.
Calling Party Pays (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.
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 which number identify 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.
(6)
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.
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.
(7)
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. 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.
b) EXECUTIVE SUMMARY
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We are a wireless telecommunications services provider in Mexico with
nearly 1.9 million mobile wireless customers at December 31, 2005, 68.6% 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, which
allows us to provide PCS wireless services at national level.
We provide digital service using 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 2005, we
improved our network in certain cities by implementing EVDO 3-G technology,
which permits users to benefit from high-speed data transmissions up to 2.4
megabits per second. 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, 2005 was 1,857,065. Of these
subscribers, 583,695 were postpaid customers who purchase mobile telephony
services pursuant to fixed-term contracts, and the remaining 1,273,370 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
Movil Access. The personal and advisors of Movil Access are completely involved
in the daily management of the transactions of Iusacell as in the definitions
and implementation of long term strategies of Iusacell. Movil Access owns the
74.6% of the capital stock of Iusacell. Before the acquisition of our capital by
Movil Access, Iusacell was under the management control of Verizon and Vodafone.
Currently we are restructuring our debt, and on June 2, 2006, Iusacell
filed a request of concurso mercantil proceeding. See Item 3 paragraph c)
"Material Credits Report - Debt Restructuring Process".
(8)
c) RISK FACTORS
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Risk Factors Regarding the Plan of ReorganizationDebt Restructuring
Process
Because the Mexican Business Reorganization Act (Ley de Concursos
Mercantiles) is a relatively new statutory mechanism with a limited number of
court cases involving these proceedings in Mexico, you may receive different
treatment than we propose under the terms of the Reorganization Plan.
As part of the Reorganization Plan, on June 2, 2006, Iusacell filed a
solicitation for a concurso mercantil in order that once Iusacell is p pronounce
in concurso mercantil, the Reorganization Plan has to be presented to the
recognized creditors for their approval. Once the Reorganization Plan has been
approved, the exchange of the notes may take place and the debt restructuring
may be considered completed.
The company can not assure you which will be the development of the
proceeding under the Mexican Business Reorganization Act. The Mexican Business
Reorganization Act was recently enacted and very few companies of our size have
completed a concurso mercantil proceeding under the new law. Under the Mexican
Business Reorganization Act (LCM), concurso mercantil proceedings include a
verification phase that typically lasts 30 days and a conciliation phase that
may last up to 185 days. The objective of the verification phase is to determine
whether the debtor is in fact insolvent under Mexican law. The objective of the
conciliation phase is to reach an agreement between the debtor and its creditors
to restructure the indebtedness of the debtor. We cannot provide any assurance
that an agreement between our creditors and us will in fact occur or that
approval of such an agreement will occur within the time frame provided by the
law or under the terms specified by the law. If an agreement is not reached
during the conciliation phase, we may enter into a bankruptcy phase (quiebra).
The bankruptcy phase in which our operations could be affected according with
the law. The bankruptcy does not have a specific term within which it must be
concluded. Consequently, we cannot accurately predict the duration of any
concurso mercantil proceeding related with the concurso mercantil under the LCM.
Pursuant to the LCM, the Reorganization Plan will require the
recommendation of a conciliator (conciliador) appointed by the Mexican Institute
(the Instituto Federal de Especialistas de Concursos Mercantiles), and the
approval of a Mexican judge. As part of the Concurso Mercantil proceeding, the
conciliator is required to be available to creditors, some of whom may object to
or seek to modify the terms of the Reorganization Plan. We cannot provide any
assurances that the conciliator will recommend the Reorganization Plan supported
by such parties, or any other plan, that the conciliator will act expeditiously
or that decisions by the conciliator will not receive comments or oppositions.
In case that Iusacell is declared in Concurso Mercantil, this procedure
will have different effects depending on the relation of the third party with
us, even as creditor or shareholder, so in order to know more about the effects
or to make a decision, we recommend you to consult a specialist and not to base
exclusively in the content of this Annual Report.
Although Mexican law has created a statutory timetable for handling
reorganization, the approval process depends on a number of factors beyond our
control, including, but not limited to, the scope of the review of and revisions
to the Reorganization Plan by the Mexican Court, the number and scope of
objections to the Reorganization Plan that are filed with the Mexican Court, the
complexity of any evidence submitted to the court and how long it takes the
court to handle such objections or comments.
RISK FACTORS REGARDING 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 31, 2006, 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, 2005, our total consolidated indebtedness, including other
financing, was Ps.8,534.4 million, or approximately 130.7% of our total
capitalization. For the years ended December 31, 2003, 2004 and 2005, our
earnings were insufficient to cover our fixed charges by Ps.5,510.9 million,
Ps.1,845.9 million and Ps.600.3 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.
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. See Item 3, paragraph c) "Material Credits Report -
Debt Restructuring Process".
(9)
Iusacell is a holding company and can pay our liabilities only through
the cash flow from our subsidiaries or out of the proceeds of our financing. 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 March 31, 2006,
our consolidated subsidiaries total indebtedness, including trade notes payable,
was Ps.4,867.9 million (U.S.$446.6 million) all under default. For a description
of some of our obligations and liabilities, see Item 3, paragraph c) "Material
Credits Report".
Our current debt agreements prevent our subsidiaries from paying
distributions or dividends or making cash available to us, 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 interest payments due on each of
June 1, 2003, December 1, 2003, June 1, 2004 and December 1, 2004 of U.S.$24.9
million each one, on the Iusacell senior notes and, as a result, we did not make
those payments. In response to these nonpayment, 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.
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. See Item 3, paragraph c) "Material Credits Report - Debt
Restructuring Process".
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.
(10)
Iusacell Celular reach an preliminary agreement with the majority, in
general terms, of its creditors that represents the 58% in order to reorganize
its debt of: Senior Refinancing Secured Loan and with U.S.$150.0 million 10%
senior notes due 2004 (See Item 3, paragraph c) "Material Credits Report - Debt
Reorganization Process"). The Reorganization Plan stablished the possibility of
make the reorganization of Iusacell Celular with its creditors, could be
judicially through a concurso mercantil proceeding according LCM or out of
court, in the knowledge that Iusacell Celular could chose the way for that. The
Reorganization Plan of Iusacell Celular will be formalized in its case,
according with the established in the LCM.
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, 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.$305.0 million. We anticipate that approximately U.S.$70 million of such
capital expenditures will need to be invested during 2006 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
2008 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.
RISKS 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 Radio Movil Dipsa, S.A. de C.V. (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.
(known as Telmex), Telcel has significantly greater internal financial and
operational resources than those available to us, has nationwide cellular and
PCS concessions, a nationwide cellular network and has the ability to use
Telmex's installed telecommunications systems. We also face competition from
Telefonica Moviles S.A. de C.V., which we refer to as Telefonica, and Operadora
Unefon, S.A. de C.V. (Unefon), which we refer to as 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. (Nextel), a provider of specialized mobile radio services. In long
distance, we face increasing competition from nine other concession holders.
The Mexican government may also grant additional concessions to other
companies to provide services similar to or the same as those that we provide.
In addition, the Mexican government is in the process of developing new
regulations that will authorize the operation of telecommunication services
resellers.
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.
(11)
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% 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 Federal Telecommunications Commission
(Comision Federal de Telecomunicaciones or 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 to Ps.2.03 in 2006 and Ps.1.82 in 2007. This ruling has forced
us to reduce our "Calling Party Pays" and interconnection rates, resulting in a
decrease in revenues and gross margin.
In addition, in early 2005 other local fixed telephony concessionaries
have recently requested that COFETEL approve the reduction of "Calling Party
Pays" interconnection rates for calls originating from their networks. If
COFETEL approves such a reduction, we may be forced to further reduce our rates.
New Securities Market Law
On September 30, 2005, the Mexican Congress published the new
Securities Market Law, which is in force starting on June 28, 2006. The new
Securities Market Law includes dispositions that pretend to improve the
information disclosure, minoritary shareholders rights and corporate governance.
Also, the new Securities Market Law imposes more obligations and liabilities to
the Board of Directors members and to significant officers (as the duty of
dispatch and duty of loyalty). Otherwise, according with the new Securities
Market Law we will be forced to adopt certain modifications to our by-laws
within 180 days after the date to take effect the new law. Currently, we are in
the process of evaluating the specific modifications that apply to our by-laws.
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:
o evolving industry standards;
o ongoing improvements in the capacity and quality of digital
technology;
o shorter development cycles for new products, enhancements and
changes in end-user needs and preferences;
o development of data and high bandwidth network capabilities;
(12)
o migration to next-generation services; and
o 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 "--Risks Relating to Our
Financial Condition--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.
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.
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.
(13)
A significant portion of our activations is represented by a small
number of distributors.
Our three largest distributors accounted for 54% and 45% of our total
activations in 2005 and 2004, 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 largest stockholder. MuvilAccess 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 controls our
business, policies and affairs, including the election of at least the majority
of Iusacell's 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 equity holders and
of debt holders.
We have significant transactions with affiliates that create potential
conflicts of interest.
We regularly engage in transactions with entities owned or controlled
by the controlling shareholder of Iusacell, our parent company. 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, GMA, 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 - d) Related
Party Transactions and Conflict of Interests" and c) "Management and
Shareholders."
Transactions with affiliates may create the potential for conflicts of
interest. To guard against these potential conflicts of interest, Iusacell has
established a Related Party Transactions Committee of its Board of Directors
made up of independent Directors to provide an independent review of Iusacell's
and its subsidiaries' (including us) 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 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 us. 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 our officers or directors for
so long as we remain subject to the reporting requirements of the SEC. Our
success 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 our financial condition and
results of operations.
On May 29, 2006 TV Azteca, S.A. de C.V. announced through a press
release that "...as result of conversations between the company and the
Securities and Exchange Commission (SEC), previously announced, a potential
agreement was structured. The proposal of agreement will be revised by the SEC,
which expects to reach a conclusion regarding the procedure in 90 days. The
proposal of solution, in the event it is accepted by the SEC, will not represent
economic consequences for TV Azteca. Ricardo B. Salinas and Pedro Padilla will
assume the monetary cost derivate of such proposal..."
(14)
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 business
philosophies, strategies and policies. Most recently in July 2003, as a result
of the acquisition of Iusacell by MuvilAccess, our top management and Board of
Directors were replaced wholesale, with the majority of new executives and
directors coming from companies controlled or significantly influenced 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 companies controlled or
significantly influenced by Mr. Salinas Pliego and control costs. See
"Business--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 "Business--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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations--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 paragraph b) "Description of the Business, xi) Legal,
Administrative or Arbitration Proceedings."
Our auditors are new to our company.
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, as our new auditors. Given that Freyssinier Morin
has been our auditor for less than two years is probable that they may not be
able to identify issues and suggest corrective actions on internal controls and
procedures.
(15)
RISKS 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 commercial activities are subject to several regulations and the
government supervision. Sometimes, the concessionaires are subject to additional
conditions or inclusive do not renew its concessions when this expire, even the
conditions of renewal do not be well define. The conditions or renewal could be
adverse and/or costly and could have a negative effect in our operation results
and financial condition. Concretely, our cellular concessionaries that cover
regions 5, 6, 7, 8 and 9 have request to the authorities the renewal of their
concessions according with their titles of concession. We can not anticipate the
terms and conditions in which the concessions will be renew or, if, in its case,
be renew. The renewals of the concessions are subject to criteria that are not
always predictable. In addition, at the moment of grant the renewal, our
concessions will be subject automatically to the payment of the rights under
article 244B of the Federal Law of Rights (Ley Federal de Derechos) that
nowadays we are not subject. The abovementioned, will considerable increase the
payments for the exploitation, which could have a negative effect in our
operation results and financial condition.
Our concessions may be revoked prior to the end of their respective
terms if we fail to comply with specified obligations and conditions. The
Mexican government also reserves the right to 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. Also, our 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. Any of these developments or other government
action could reduce the value of our concessions and adversely affect our
financial condition and results of operations.
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 1.4% in 2003, 4.2% in 2004 and 3.0% in 2005.
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. The electoral process, including municipal and local
elections, could lead to further friction 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.
(16)
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 you to exchange rate risks.
In the event that proceedings are brought against us in Mexico, either
to enforce a judgment rendered outside Mexico or as a result of an original
action bought in Mexico, we would not be required to discharge these obligations
in a currency other than pesos. Under the Mexican Monetary Law (Ley Monetaria de
los Estados Unidos Mexicanos), an obligation, whether resulting from a judgment
or by contractual agreement, denominated in any currency other than pesos, which
is payable in Mexico, may be satisfied in pesos at the rate of exchange in
effect on the date on which any such payment is made.
If we were to enter into any concurso mercantil proceedings, our
obligations regarding any security debt:
o foreign currency-denominated claims of unsecured creditors will be
mandatorily converted into unidades de inversion or UDIs, which
will be converted to pesos and adjusted periodically to inflation
published by Bank of Mexico. Indexed unit established by Mexican
law. The payment will occur at the moment that the claims of the
recognized creditors be satisfied, subject to the order stablished
by law, and
o would not be adjusted to take into account depreciation of the
peso against the U.S. dollar occurring after such court
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 4.0%, 5.2% and 3.3% in 2003, 2004 and 2005, respectively. 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.
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 and appreciated by 4.8% in 2005, 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.
(17)
d) OTHER SECURITIES
----------------
Iusacells shares have been listed on the Mexican Stock Exchange since
August 4, 1999, trading under the symbol CEL. ADRs 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 ADR 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 with no par value, not representing
any series and which have the same rights and obligations. The reorganization of
the capital structure included a change in the ADR ratio. From that date and
upto September 20, 2005, one ADR represented 5 Iusacell shares and were traded
under the ticker CEL. The ADRs 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 Iusacell's ADR program and the subsequent delisting of its ADRs
from The New York Stock Exchange. On September 19, 2005, and as per our
instruction, The Bank of New York terminated our ADR program. As a result, on
September 20, 2005, the trading of our ADRs on The New York Stock Exchange was
suspended.
We file annual reports and financial information before the Comision
Nacional Bancaria y de Valores (National Banking and Securities Commission) and
the Bolsa Mexicana de Valores (Mexican Stock Exchange). Also, we file relevant
information to the markets in Mexico and the United States according with the
securities legislation.
e)SIGNIFICANT CHANGES REGARDING THE RIGHTS OF THE SECURITIES REGISTERED
---------------------------------------------------------------------
On June 1, 2005, an extraordinary shareholders' meeting approved the
termination of Iusacell's ADR program and the subsequent delisting of its ADRs
from The New York Stock Exchange. On September 19, 2005, and as per our
instruction, The Bank of New York terminated our ADR program. As a result, on
September 20, 2005, the trading of our ADRs on The New York Stock Exchange was
suspended.
f) DESTINY OF FUNDS
----------------
Not aplicable
g) PUBLIC DOCUMENTS
----------------
Without charge, we could give to any person, copy of this Annual
Report, previously oral or written solicitation. The written solicitudes of
copies should be address to Grupo Iusacell, S.A. de C.V., Montes Urales 460,
Colonia Lomas de Chapultepec, 11000, Mexico, D.F., and Attention: Jose Luis
Riera Kinkel, Chief Financial Officer. Solicitudes by e-mail should be address
to investor.relations@iusacell.com.mx. Telephone solicitudes could be at phone
number 555-109-5927.
(18)
2) THE COMPANY
--------------
a) HISTORY AND DEVELOPMENT OF THE ISSUER
-------------------------------------
HISTORY AND DEVELOPMENT OF THE COMPANY
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 kown 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 commercialize their products under the brand name Iusacell(C). We
currently operate primarily in Mexico under Mexican legislation, including,
among others, the 1995 Telecommunications Law (Ley Federal de
Telecomunicaciones) and the Mexican Companies Law (Ley General de Sociedades
Mercantiles).
Iusacell Celular through its subsidiaries is primarily engaged in the
wireless telecommunications business and hold concessions to operate cellular
telephone systems in five contiguous market regions in central and southern
Mexico, and to provide long distance service nationwide. We also recently
obtained authorization from the SCT for Iusatel, S.A. de C.V. to provide fixed
local wireline telephony nationwide.
Iusacell PCS, S.A. de C.V., which we refer to as Iusacell PCS and
Iusacell PCS de Mexico, S.A. de C.V. (Iusacell PCS de Mexico), now hold
concessions to provide fixed and mobile wireless telephony services using PC S
technology on a nationwide basis in Mexico as a result of the award by the SCT
in April 2005of seven concessions for its remaining regions.
On July 29, 2003, MovilAccess, a Mexican telecommunications service
provider controlled by Mr. Salinas Pliego and a subsidiary of GMA, 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. Verizon and
Vodafone, the then principal shareholders of Iusacell, tendered all their
shares. At December 2003, we completed at reverse stock split whereby
shareholders received one new share of common stock in exchange for twenty
series "A" and series "V" shares.
In 2005, excluding the effects of inflation accounting, capitalized
interest and certain non-cash trade-in credits, we invested U.S.$64.0 million in
capital expenditures, primarily to increase the coverage, improve the quality
and enhance the features of our cellular and long distance networks in the
central regions, and expand our advanced data network capabilities in certain
key cities. See Item 3, paragraph d) "Management's Discussion and Analysis of
Financial Condition and Results of Operations, ii) Liquidity and Capital
Resources."
In 2006, we plan to invest a total of approximately U.S.$70.0 million
in capital expenditures, not including capitalized interest, to acquire, build
and operate our nationwide PCS network, to increase the coverage and improve the
quality of our cellular and long distance networks in the central regions,
enhance our information technology systems, increase capacity in certain cities
and 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.
On June 1, 2005, an extraordinary shareholders' meeting approved the
termination of Iusacell's ADR program and the subsequent delisting of its ADRs
from The New York Stock Exchange. On September 19, 2005, and as per our
instruction, The Bank of New York terminated our ADR program. As a result, on
September 20, 2005, the trading of our ADRs on The New York Stock Exchange was
suspended.
Our principal executive offices are located at Montes Urales 460,
Colonia Lomas de Chapultepec, Delegacion Miguel Hidalgo, 11000, Mexico, D.F.,
Mexico, which is also where we are domiciled. Our telephone number is (5255)
5109-4400. Our Internet address is www.iusacell.com.mx. The information of our
Internet page should not consider as part of this Annual Report.
(19)
b) BUSINESS DESCRIPTION
--------------------
We are a wireless telecommunications services provider in Mexico with
nearly 1.9 million mobile wireless customers at December 31, 2005, 68.6% of
which are prepaid customers. We hold and operate concessions in the 800
megahertz (MHz) band which allow us to provide cellular wireless services in
five contiguous geographic regions comprising all of central and southern
Mexico, and in the 1900 MHz band, they allow us to provide nationwide PCS
wireless services.
We provide digital service using 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 2005, we
improved our network in certain cities by implementing EVDO 3-G technology,
which permits users to benefit from high-speed data transmissions up to 2.4
megabits per second. 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, 2005 was 1,857,065. Of these
subscribers, 583,695 were postpaid customers who purchase mobile telephony
services pursuant to fixed-term contracts, and the remaining 1,273,370 were
prepaid customers who pay for their mobile telephony services in advance
primarily through the purchase of airtime.
Since July 29, 2003, Iusacell has been under the management control of
Movil Access. The personal and advisors of Movil Access are completely involved
in the daily management of the transactions of Iusacell as in the definitions
and implementation of long term strategies of Iusacell. Movil Access owns the
74.6% of the capital stock of Iusacell. See Item 4 "Management, paragraph c)
Management and Shareholders". Before the acquisition of our capital by Movil
Access, Iusacell was 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.
(20)
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 Sur Tijuana, Mexicali, Ensenada, Tecate
and the municipality of San Luis Rio Colorado in and La Paz.
northwestern Sonora state.
2 The states of Sonora and Sinaloa (except for the Hermosillo, Ciudad Obregon, Culiacan
municipality of San Luis Rio Colorado in northwestern and Mazatlan.
Sonora).
3 The states of Chihuahua and Durango and the Ciudad Juarez, Chihuahua, Durango,
municipalities of Torreon, Francisco I. Madero, Gomez 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, Francisco I. Victoria, Nuevo Laredo, Reynosa and
Madero, Matamoros, San Pedro and Viesca). Matamoros.
5 The states of Colima, Jalisco (except for 12 Guadalajara (Mexico's second largest
municipalities in northeastern Jalisco), Michoacan and city), Morelia, Tepic, Colima and
Nayarit. Manzanillo.
6 The states of Aguascalientes, Guanajuato, Queretaro, San Aguascalientes, Leon, Queretaro, San
Luis Potosi and Zacatecas and 12 municipalities in Luis Potosi and Zacatecas.
northeastern Jalisco.
7 The states of Guerrero, Oaxaca, Puebla, Tlaxcala and Puebla, Acapulco, Veracruz and
Veracruz. Oaxaca.
8 The states of Yucatan, Quintana Roo, Campeche, Chiapas Merida, Cancun, Villahermosa,
and Tabasco. Campeche, 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. Our affiliate Iusacell PCS, S.A. de C.V. holds PCS E-band concessions in
regions 1 and 4 and the 1900 MHz band concessions 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.
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, 2005, there were approximately 18.2 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.
(21)
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, 2005, postpaid subscribers totaled 583,695,
comprising 31.4% of our customer base. Nominal average monthly mobile telephony
revenue per subscriber (ARPU) in this segment was Ps.745 for 2005.
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. During
2005, we launched Moviloffice, a mobile office service with email
synchronization, and Ubicacel, a location-based (LBS), whereby a subscriber can
find directions to places or locate another subscriber's handset. 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.
Our EVDO band allows us to offer value-added services such as LBS
(Ubicacel), transferring of video streaming (Iusaclips), mobile office services
(Moviloffice), access to online cameras (Iusacam), and high-speed internet
access with absolute mobility (BAM) (where you can obtain connection speeds of
up to 2.4 megabits per second, and. On the second quarter of 2006, we launch the
access to television signal services (IusaTV). We planned to launch ring back
tones by the end of 2006.
PREPAID SERVICES
As of December 31, 2005, prepaid customers totaled 1,273,370,
comprising 68.6% of our customer base. Prepaid ARPU was Ps.134.0 for 2005.
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 six
specific peso denominations. We charge for outgoing calls, as well as long
distance incoming calls and roaming services.
(22)
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 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 us.
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 Celular subscriber in the region of a host operator (an
out-roamer), Iusacell Celular 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 Celular 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 3.0% of our
revenues from services during 2005. Out-roaming charges represented 2.0% of our
revenues from services during 2005.
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, 2005, we
provided long distance service in 56 cities to 1,861,519 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 6.4% of our
revenues from services for 2005.
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.
(23)
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 2005, SMS represented 3.9% of our revenues from services. We cannot
yet estimate whether short messages have had or will have an adverse impact on
the volume of voice calls and, consequently, our revenues.
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 during 2006.
DATA TRANSMISSION
We provide mobile and fixed data transmission services. We offer three
types of services: (1) private lines such as E-1, E3/DS3 and STM1 directly to
carriers and large corporate customers; (2) internet access to carriers and
Internet service providers; and (3) convergent IP services integrating data
communications and IP telephony for large corporate customers to improve
interoffice communications and 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
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 are
currently awaiting authorization from COFETEL to introduce these features and we
cannot anticipate when COFETEL's authorization will be granted. In the last
quarter of 2005, we launched the mobile broadband (BAM) service based on 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 0.8% of our
revenues from services in 2005.
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. At December 31, 2005, we had
51,251 cellular telephones in service under our public and rural telephony
programs, of which 5,501 subscribers represent postpaid plans and 45,750
subscribers represent prepaid plans.
We also provide, on a trial basis pending approval from the SCT, fixed
local wireless service in the 450 MHz frequency band in selected markets in
cellular region 9.
(24)
Revenues from public and from rural telephony and fixed local wireless
telephony represented 0.7% of our revenues from services in 2005.
FIXED LOCAL WIRELINE TELEPHONY
On December 19, 2005, Iusatel received an authorization from the SCT to
provide fixed local services nationwide. This authorization was granted by means
of an amendment to our long distance concession and is for the duration of the
original concession. Under this authorization, Iusatel is obligated to build 15
urban fiber rings in five cities. Iusatel is not obligated to pay fees to the
government for this service.
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 51% of Infotelecom.
At December 31, 2005, Infotelecom had 42 paging customers and provided
service in Mexico City. Our revenues from paging services represented less than
0.1% of our revenues from services in 2005. We do not consider paging to be an
area of growth because of competition from short message services.
SEASONALITY
Our business is not materially affected by seasonality.
MARKETING
Periodically, we launch marketing campaigns evidencing the benefits of
our products and services. Also, we launch promotional campaigns to support the
launch of new products and the publish of seasonally promotions. Considering
this actions enforce our trademark.
CUSTOMER SALES
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 MuvilAccess, Iusacell's
controlling shareholder. This outsourcing has enabled us to reduce operational
costs. Service is also provided by a streamlined automated voice servicing
platform to give customers quicker access to a service agent. See Item 4
"Management -paragraph b) Related Party Transactions and Conflict of Interests."
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. Our principal tool is a software application that reduces complexities
in providing customer service by avoiding interaction with multiple
applications, which also compiles customer contact history information under one
single system. This application allows us to provide better customer service for
postpaid customers.
In order to motivate our customer service workforce, a performance
management process was deployed in 2005 to all customer service representatives,
which involved setting goals and weekly evaluations linked to compensation.
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. We also actively maintain our Red Club "points"
rewards program for postpaid and prepaid customers to encourage loyalty.
(25)
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, 60 or 90 days. See
Item 2, The Company paragraph b) "Business Description - i) Our Mobile Telephony
Services-Prepaid Services". Most of the postpaid plans include a selection of
free handsets. The prepaid plans do not provide free handsets.
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. The plans
were modified in 2004 and 2005 to assure competitiveness and profitability.
We also offer multi-line plans designed to fit the communications needs
of small groups of users. Also, the special plans for borderline areas in which
the customers could make a call at a minor cost in Mexico, E.U. and Canada, we
offer to subscribers of 1 and 4 PCS regions and cellular region 8, we offer
local plans at a competitive per minute price.
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, Ps.150,
Ps.200 and Ps.300. We also offer virtual airtime in additional denominations of
Ps.500 and Ps.1,000 through automated teller machines, our website, *AIRE and in
stores operated by Elektra and Salinas y Rocha, , and other national retail
chains that are not our affiliates. In October 2005, we introduced an aggressive
strategy for growth and reinforcement of our prepaid subscribers that provides
for free local calls made to other Iusacell subscribers, when purchasing prepaid
cards of denominations of Ps.200 or higher.
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 hybrid
plans because of the high level of churn experienced. However, due to demand
from our customers and once we revisited the manner that we offered the service,
we reintroduced hybrid plans in January 2004. We have modified the requirements
for applying for hybrid plans in an effort to minimize churn.
(26)
In 2004, we launched hybrid plans in three new retail chains operated
by Grupo Elektra and its subsidiaries (Elektra, Bodega de Remates and Salinas y
Rocha). These "Planes VIVA Control" allow customers to make payments on a weekly
basis while controlling their level of consumption. Customers of the "Planes
VIVA Control" can buy virtual airtime if they need to exceed the minutes
included in their weekly plan.
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 (OTA). 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:
o 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;
o one point of sale system that provides billing,
administration and control features;
o a proprietary residential long distance system;
o a proprietary system for high-volume business long distance
customers; and
o 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 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:
o 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;
o 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;
o by requiring payment to be made by credit card;
(27)
o by establishing credit limits and portfolio segmentation,
according to customers' credit quality;
o by requiring full payment at the time of purchase of a
handset;
o by offering prepaid services, which eliminate all credit
risk; and
o by applying additional collection procedures according to a
customer's prior payment behavior.
For 2005 we reserved approximately 1.3% of our net revenues for
doubtful accounts.
We record a bad debt 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 2005 was 2.26%. 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 and customer segments.
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, 60 or 90 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, 60 or 90 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 receiving incoming
calls.
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, 60 or 90 days.
Average monthly prepaid turnover for 2005 was 3.82%.
(28)
ii) CHANNEL DISTRIBUTION
------------------------
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, including data
transmission. 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 last quarter 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 130 customer sales and service centers, 40 of which
are managed by Elektra and 90 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 40 of
our centers and also offers some of its products in the premises. See Point 4
"Management, paragraph b) Related Party Transactions and Conflict of Interests."
CORPORATE SALES FORCE
To service the needs of our corporate customers, we have created a
direct sales force, which, at December 31, 2005, included 103 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:
o aggressively pursuing sales opportunities in the corporate
segment;
o "bundling" combinations of services into customized packages
designed to meet customers' requirements;
o developing and marketing new services to satisfy the demands
of such customers; and
o 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, 2005, these distributors
and retailers sold all of our products at 2,550 points of sale in Mexico, an
increase from 1,154 points of sale a year before. This increase was due
primarily to the efforts of new affiliate distributors through the regional
sales force. Including non-exclusive distributors, our prepaid cards were
distributed at approximately 100,000 points of sale in 2005.
(29)
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 AGENTS
In the past we used to have commission agents as a flexible sales force
in all our regions of mobile telephone services. The commission agents act as a
services commission agent of mobile telephone for us and worked in its own
locals. This agents granted additional points of distribution with minimum
support of us. At the beginning of 2005, we discontinued the use of commission
agents as sales agents, using only our own corporate sales force.
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. See Item 4
"Management, paragraph b) "Related Party Transactions and Conflict of
Interests."
ELECTRONIC MEANS
We have implemented four electronic tools for the sale of prepaid
airtime without the purchase of a prepaid card:
o sales through automated teller machines;
o sales over the phone by dialing *AIRE;
o sales through our website - www.iusacell.com.mx; and
o 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 BAZ,
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, TRADEMARKS AND OTHER AGREEMENTS
-------------------------------------------------------
Iusacell do not take care of investigation and development activities.
The commercial name of Iusacell is "Grupo Iusacell", even that our operative
subsidiaries commercialize their products under the trademark Iusacell (TM) and
the prepaid products by the trademark VIVA de Iusacell (TM)
Other trademarks under different products are commercialized are "3G de
Iusacell" (TM) that cover the applications downloading third generation services
focus in entertainment, persons and vehicles localization, "Moviloffice" (TM)
and "BAM de Iusacell" (TM) that refers to mobile conection services of high
speed conexion to Internet.
(30)
MATERIAL AGREEMENTS
CONCESSIONS
We provide our telephone mobile services and other services based on
the 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:
o the type of network, system or service;
o the allocated spectrum, if applicable;
o the geographical region in which the holder of the concession
may provide the service;
o the required coverage program;
o the term during which such service may be provided;
o 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
o 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. 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:
o expiration of its term;
o resignation by the concession holder or the permit holder;
o revocation;
o expropriation;
o rescue (rescate); or
o liquidation or bankruptcy of the concession holder or the
permit holder.
(31)
A concession or a permit may be revoked prior to the end of its term
under certain circumstances, such as:
o unauthorized or unjustified interruption of service;
o the taking of any action that impairs the rights of other
concessionaires or permit holders;
o failure to comply with the obligations or conditions
specified in the concession or permit;
o failure to provide interconnection services to other holders
of telecommunications concessions and permits;
o loss of the concession or permit holder's Mexican nationality
in instances in which Mexican nationality is legally
required;
o 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;
o 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
o 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
(requisa) 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 (rescate) and assets related to its exploitation for
public interest or national security 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 of a concession and the assets,
equipment and premises related to the concessioned business, the amount of the
compensation is to be determined in the expropriation order (declaratoria de
rescate). The expropriation order (declaratoria de rescate) may exclude certain
assets from the expropriation (rescate) and no compensation would be paid for
those assets.
If the party affected by the expropriation disagrees with the amount of
the compensation, it will be entitled to request a competent Mexican court to
determine the amount. 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 - Risks Relating to Our Business - The Mexican
government may impose additional conditions on our concessions or may take them
away."
(32)
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.
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. In
consideration for these authorizations and concessions, the subsidiaries made
initial payments to the Mexican government and, in addition, must make payments
as follows:
(33)
PERCENT OF GROSS REVENUES
PAYABLE TO THE
SUBSIDIARY MEXICAN 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. See "Risk
Factors--Risks Relating to Our Business--The Mexican government may impose
additional conditions on our concessions or may take them away."
PCS CONCESSIONS
In October 1998, the SCT granted to Iusacell PCS, hereinafter 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 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
regions 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
Federal Law of Rights (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.
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.
(34)
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 WIRELINE TELEPHONY
On December 19, 2005, Iusatel was granted an authorization from SCT to
provide fixed local wireline telephony nationwide. This authorization was
granted by means of an amendment to our long distance concession and is valid
for the duration of the original concession. Under this authorization, Iusatel
is obligated to build 15 urban fiber rings in 5 cities. Iusatel is not obligated
to pay fees to the government for this service.
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, we have 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.
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:
o secretarial service;
o voicemail; and
o data transmission.
(35)
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, 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.
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 and Infotelecom. In October 2005, we made a final payment
to Mr. Elizondo and, since that time, Mr. Elizondo no longer participates in
Iusatel, Iusatelecomunicaciones, Punto-a-Punto Iusacell 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.
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. 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.
We have not renewed the agreement and are not currently in negotiations to renew
the agreement. We are currently operating under the same long distance business
and local interconnection rates as used in 2005.
(36)
DEBT
We are debtors in many credit agreements and debt instruments. See Item
3, paragraph c) "Material Credits Report.
TOWERS MONETIZATION
We sold certain of our towers and lease the space in them to MATC
Celular. See Item 3 "Financial Information, paragraph d) Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a description
of the towers purchase, sale and lease agreements.
PARTICIPATIONS IN CERTAIN SUBSIDIARIES ACQUISITION
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 (i) 51% of participation and 51% of voting rights in Iusatel,
Iusatelecomunicaciones, Punto-a-Punto Iusacell and Iusacell PCS, our companies
of local telephone, long distance, data transmission and PCS of regions 1 and 4,
respectively, and (ii) 2% of participation in Infotelecom, our joint venture of
radio localization.. As trade of these participations, we agreed to pay to Mr.
Elizondo U.S.$11.2 millions through weekly installments of U.S.$0.1 million.
This amount was totally paid on October 3, 2005.
iv) PRINCIPAL CLIENTS
---------------------
Our services are focused to the general public with wireless
telecommunications of voice and data needs and added value services.
v) APPLICABLE LEGISLATION AND TAX SITUATION
-------------------------------------------
GOVERNMENTAL 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.
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:
o applications to obtain concessions to install, maintain and
operate telecommunications systems;
o the establishment of technical standards for the provision of
telecommunications services;
o the grant, revocation and modification of concessions and
permits; and
o 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.
(37)
In terms of tax situation, Iusacell is liable to income tax and added
value tax and other general taxes dispositions, as corporation tax payer.
vi) HUMAN RESOURCES
-------------------
The table below presents a breakdown of permanent and temporary
employees at Iusacell and its controlled affiliates:
DECEMBER 31,
---------------------------------
2003 2004 2005
--------- --------- ---------
Permanent Employees(1) ..................... 1,154 1,148 2,328
Temporary Employees ........................ 758 2,238 1,919
----------
(1) Includes both full-time and part-time employees.
During the last quarter of 2004, we implement a sales and publicity
strategy, consistent of each region is treated as an independent unit of
business, with marketing campaigns and sales channels adapted to the needs of
each region. The increase in the number of employees at December 31, 2005
compare with December 31, 2004 mostly comes from the implementation of this
strategy.
In 2005, we had an average of 2,086 temporary employees, mainly in the
sales area.
Approximately 12% of our 2,328 full-time employees at December 31, 2005
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 renders services to us through legal
entities and is not our direct employees.
The table below presents a breakdown of our employees by area.
DECEMBER 31,
---------------------------------
2003 2004 2005
--------- --------- ---------
Sales, Customer Care and Marketing ......... 1,531 2,613 3,334
Finance and Administrative ................. 171 369 408
Technology ................................. 210 404 505
--------- --------- ---------
Total ...................................... 1,912 3,386 4,247
vii) ENVIRONMENTAL DEVELOPMENT
------------------------------
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.
(38)
We face competition from the following companies:
o 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;
o 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;
and
o Unefon, our affiliate, which holds the PCS A-band nationwide
concessions.
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 specialized mobile radio services in
1998 and currently covers 52 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.
ix) CORPORATE STRUCTURE
-----------------------
Our principal shareholder, Movil Access, is part of a group of
companies controlled directly or indirectly, by Mr. Ricardo B. Salinas Pliego.
For a description of our principal shareholder, Movil Access, see Item 4
"Management - c) Management 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 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, 2005.
% 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 Cellular Operator Mexico 100.0 100.0
Iusacell PCS, S.A. de C.V Regions 1and 4 PCS Mexico 100.0 100.0
Iusacell PCS de Mexico, S.A. de C.V. (1) Regions 2, 3, 5, 6, 7, 8
and 9 PCS Mexico 100.0 100.0
Iusacell Infraestructura, S.A de C.V Microwave Financing Mexico 100.0 100.0
Iusacell Arrendadora, S.A. de C.V Leases Mexico 100.0 100.0
Iusacell Infraestructura de
Mexico, S.A. de C.V Microwave Financing Mexico 100.0 100.0
SOS Telecomunicaciones, S.A. de C.V. (2) Region 9 Cellular Mexico 100.0 100.0
Comunicaciones Celulares de
Occidente, S.A. de C.V. (3) Region 5 Cellular Mexico 100.0 100.0
Sistemas Telefonicos Portatiles
Celulares, S.A. de C.V. (2) Region 6 Cellular Mexico 100.0 100.0
Telecomunicaciones del Golfo, S.A. de
C.V. (2) Region 7 Cellular Mexico 100.0 100.0
Iusacell, S.A. de C.V. (2) Sales and Marketing Mexico 100.0 100.0
Sistecel, S.A. de C.V. (2) Administrative Services Mexico 100.0 100.0
Iusatel, S.A. de C.V. (2) Long Distance Mexico 100.0 100.0
Iusatel USA, Inc. (4) Long Distance E.U. United Status 100.0 100.0
Iusatelecomunicaciones, S.A. de C.V. (2) Local Wireless Mexico 100.0 100.0
Punto-a-Punto Iusacell, S.A. de C.V. (2) Microwave transmissions Mexico 100.0 100.0
(39)
% DIRECT AND % DIRECT AND
INDIRECT INDIRECT
COUNTRY OF ECONOMIC VOTING
SUBSIDIARY LINE OF BUSINESS INCORPORATION INTEREST INTEREST
---------------------------------------- ------------------------- -------------- -------------- --------------
Infotelecom, S.A. de C.V. (2) Paging Mexico 51.0 51.0
Inmobiliaria Montes Urales 460, S.A. de
C.V. (2) Real State Mexico 100.0 100.0
Iusanet, S.A. de C.V. (2) Services Mexico 100.0 100.0
Editorial Celular, S.A. de C.V (2) Publishing Mexico 40.0 40.0
Grupo Portatel, S.A. de C.V. (2) Holding company for
Portatel del Sureste,
S.A. de C V. Mexico 100.0 100.0
Portatel del Sureste, S.A. de C.V. (5) Region 8 Cellular Mexico 100.0 100.0
Mexican Cellular Investment, Inc. (2) Holding company for
Comunicaciones Celulares
de Occidente, S.A. de C.V. United States 100.0 100.0
----------
(1) Held indirectly through Iusacell PCS, S.A. de C.V.
(2) Held through Grupo Iusacell Celular, S.A. de C.V.
(3) Held through Mexicana Cellular Investment, Inc.
(4) Held through Iusatel, S.A. de C.V.
(5) 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) DESCRIPTION OF THE PRINCIPAL ASSETS
--------------------------------------
NETWORK, EQUIPMENT AND INFORMATION TECHNOLOGY
Our cellular 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, 2005, our integrated wireless network was
comprised of eight cellular and PCS switches, 841 cell and PCS sites, 190
repeaters and 15 sites for 450MHz local wireless services.
We also have 932 microwave links, all of which are owned by us, with
either SDH or PDH technology. We have also leased lines located mainly in region
1 and 4 PCS and 8 cellular. 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 5,310 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. Our long distance network operates 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 for
its initials in english), and since January 2003, we have been providing "Packet
Switched Data" (PSD) in order to provide data 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. In 2005, we improved our network in Villahermosa, Mexico City,
Guadalajara, Monterrey, Cancun, Ciudad del Carmen and Los Cabos by implementing
EVDO 3-G technology, which permits users to benefit from high speed data
transmissions.
We have a network operations and control center (NOCC) in Toluca which
oversees, manages and provides technical support to our entire 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.
(40)
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 have our own telecommunications equipment; however our cellular
equipment is liable to certain encumbrances regarding the debt securities of
Iusacell Celular.
We are the owner of our principal headquarters, that is located on
Montes Urales 460, Lomas de Chapultepec, 11000, Mexico, Mexico City.
Mostly, we lease the properties where our points of sales and services
are located, and the space for cellular tower, cellular sites, antennas and
transmission, microwave and central equipment. We are the owners and lease
administrative offices in Mexico City, also in Guadalajara, Leon, Puebla,
Monterrey, Merida, Villahermosa, Veracruz and Tijuana.
From 2001 to 2005, we sold 457 towers to MATC Celular. As part of the
agreement we lease space in the towers sold to MATC Celular. At May 31, 2006, we
have not sold additional towers to MATC Celular. See Item 3 "Financial
Information - d) Management Discussion and Analysis of Financial Condition and
Results of Operations - Towers Monetization."
xi) LEGAL, ADMINISTRATIVE OR ARBITRATION PROCEEDINGS
-----------------------------------------------------
LEGAL PROCEEDINGS
CONCURSO MERCANTIL
As part of the Reorganization Plan, on June 2, 2006, Iusacell, applied
for a concurso mercantile proceeding, and therefore, once Iusacell is declared
under a concurso mercantil procedure, the Reorganization Plan is expected to be
presented to the recognized creditors seeking their approval..
See Item 3, paragraph c) "Material Credits Report - Debt Restructuring
Process".
IUSACELL SENIOR NOTES
On May 27, 2005, an individual claiming to be a holder of U.S.$373,000
in Existing Notes initiated an action in a Mexican court. The plaintiff claims
that he is entitled to payment of principal, accrued interest, past-due interest
and court costs because of Iusacell's failure to pay interest when due and the
subsequent acceleration of the Existing Notes. On June 22, 2005, we responded to
the complaint claiming that the plaintiff had not provided sufficient evidence
supporting his claim and that service of the complaint was flawed. The court
ruled in our favor but the plaintiff appealed. The appellate court confirmed the
decision.
IUSACELL CELULAR 2004 NOTES
On January 14, 2004, certain holders of the Iusacell Celular Existing
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 Existing 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 conveniens.
(41)
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.
The court denied the holders' request to preliminarily enjoin Iusacell Celular
from selling, transferring or otherwise encumbering its assets. The
interlocutory appeal was withdrawn Currently there's no more activity
regarding this process.
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 Ps.85 million, plus interest, 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. In
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. After further motions and appeals, in February 2005, the appellate
court ruled that Telemedic was entitled to receive compensatory damages in the
amount of Ps.3 million. We have appealed this ruling to the Supreme Court. On
November 17, 2005, the appellate court ruled that Telemedic was entitled to
receive compensatory damages in the amount of Ps.2.2 million. On December 7,
2005, we filed an appeal with the Supreme Court. The current claimed amount is
Ps.1.4 million. We are currently evaluating the possibility of seeking another
injunction.
We have not established any reserves for this contingency.
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 "Related Party Transactions." 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.
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 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. We have recorded a provision for
approximately half of the amount claimed.
(42)
LABOR CLAIMS
We are subject to labor claims that arise in the ordinary course of our
business. At December 31, 2005, there were 125 such claims for an aggregate
amount of Ps.63.1 million. We recorded a contingency reserve for these claims in
the amount of Ps.23.4 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 April 30, 2006, 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 Movil Access, our principal shareholder with 74.6% of our shares
at April 30, 2006. 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, 2006, no options had been
exercised.
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".
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, 2005, 2004, 2003, 2002 and 2001. The financial
information presented for fiscal years ended December 31, 2005, 2004 and 2003
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, which provides for the recognition of certain effects of inflation.
(43)
Throughout the periods presented in this Annual Report, Bulletin B-10
has required Iusacell to restate non-monetary assets using the Mexican Consumer
Price Index . Throughout the periods presented in this Annual Report, Bulletin
B-10 has also required Iusacell to restate the components of shareholders'
equity using the Mexican Consumer Price Index and to record gains or losses in
purchasing power from holding monetary liabilities or assets.
In addition, Bulletin B-10 requires the 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, 2005.
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.
(44)
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2005
----------- ----------- ----------- ----------- ----------- -----------
(Thousands of constant pesos as of December 31, 2005 except per (Thousands
share and operating data)(1) of U.S.
dollars,
except per
share and
operating
data)(2)
INCOME STATEMENT DATA:
Mexican GAAP:
Revenues from services .................... 7,323,613 6,051,803 4,769,108 5,188,044 6,506,911 612,242
Commissions (3) ........................... (481,546) (423,333) (247,138) (325,684) (384,812) (36,207)
----------- ----------- ----------- ----------- ----------- -----------
Net revenues ....................... 6,842,067 5,628,470 4,521,970 4,862,360 6,122,099 576,035
Cost of sales:
Cost of services ....................... 2,128,577 2,023,685 1,652,158 2,196,656 2,728,617 256,739
Handsets subsidy (3) (4) ............... 1,353,680 624,684 643,623 896,158 653,519 61,490
----------- ----------- ----------- ----------- ----------- -----------
Total cost of sales ................ 3,482,257 2,648,369 2,295,781 3,092,814 3,382,136 318,229
Gross profit .............................. 3,359,810 2,980,101 2,226,189 1,769,546 2,739,963 257,806
Operating expenses ........................ 1,931,017 1,526,486 1,745,661 1,308,870 1,700,471 159,999
Depreciation and amortization (4) ......... 1,864,762 2,084,590 2,236,654 2,026,884 1,567,003 147,441
----------- ----------- ----------- ----------- ----------- -----------
Operating loss ............................ (435,969) (630,975) (1,756,126) (1,566,208) (527,511) (49,634)
Gain (loss) from sale of fixed
assets (3).............................. 367,806 114,125 96,254 214,853 (4,860) (457)
Intangible assets' write--off ............. -- -- (380,709) -- -- --
Valuation of abandoned fixed assets ....... -- -- (439,880) -- -- --
Early extinguishment of debt (5) .......... -- -- 16,866 41,722 -- --
Other expense, net ........................ -- -- (681,080) (11,587) (28,158) (2,649)
Integral financing cost (gain):
Interest expense, net .................. 966,059 1,017,255 1,052,272 1,118,892 1,121,648 105,537
Foreign exchange (gain) loss, net ...... (268,541) 1,162,623 809,231 (72,040) (573,635) (53,974)
Gain from monetary position ............ (318,514) (469,735) (381,361) (481,661) (449,748) (42,317)
----------- ----------- ----------- ----------- ----------- -----------
Total .................................. 379,004 1,710,143 1,480,142 565,191 98,265 9,246
Equity participation in net (loss)
profit of associated companies ......... 7,787 (11,009) (19,070) (13,760) -- --
Income (loss) before assets tax,
income tax, minority interest
and cumulative effect of change
of accounting policy ................... (439,380) (2,238,002) (4,643,887) (1,900,171) (658,794) (61,986)
Provisions for:
Asset tax .............................. 174,895 125,700 159,263 160,677 54,579 5,135
Income tax ............................. -- 10,454 178,095 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total ..................................... 174,895 136,154 337,358 160,677 54,579 5,135
Loss before minority interest and
cumulative effect of change of
accounting policy ...................... (614,275) (2,374,156) (4,981,245) (2,060,848) (713,373) (67,121)
Minority interest ......................... 24,721 18,800 36,018 5,447 7,858 739
----------- ----------- ----------- ----------- ----------- -----------
Loss before cumulative effect of
change of accounting policy ............ (589,554) (2,355,356) (4,945,227) (2,055,401) (705,515) (66,382)
Cumulative effect of change of
accounting policy(4) ................... (7,739) -- (172,838) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net profit (loss) ......................... (597,293) (2,355,356) (5,118,065) (2,055,401) (705,515) (66,382)
=========== =========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Mexican GAAP:
Working capital ........................... 416,695 (103,520) (10,643,932) (11,437,219) (11,282,136) (1,061,548)
Property and equipment, net ............... 11,311,803 10,586,839 8,357,448 7,307,684 6,288,552 591,697
Total assets .............................. 19,796,690 17,091,414 12,849,400 11,338,232 10,822,338 1,018,285
Total debt ................................ 8,778,321 9,489,079 9,670,613 9,127,980 8,405,988 790,928
Total stockholders' equity ................ 8,556,875 6,063,574 881,813 (1,186,964) (2,075,985) (195,332)
Capital stock ............................. 8,069,043 8,069,043 8,069,043 8,075,314 8,075,314 759,815
(45)
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2005
----------- ----------- ----------- ----------- ----------- -----------
(Thousands of constant pesos as of December 31, 2005 except per (Thousands
share and operating data)(1) of U.S.
dollars,
except per
share and
operating
data)(2)
OTHER FINANCIAL DATA:
Mexican GAAP:
Capital expenditures(6) ................... 2,367,618 961,724 222,711 426,248 429,587 40,420
Interest expense, net ..................... 966,059 1,017,255 1,052,272 1,118,892 1,121,648 105,537
Ratio of earnings to fixed
charges(7) ............................. -- -- -- -- -- --
Operating Data:
Covered POPs(8) ........................... 89,917,967 91,356,654 92,589,969 93,840,000 103,091,627 103,091,627
Subscribers:(9)
Postpaid ............................... 366,226 307,129 276,730 350,847 583,695 583,695
Prepaid ................................ 1,488,940 1,774,071 999,033 1,111,893 1,273,370 1,273,370
----------- ----------- ----------- ----------- ----------- -----------
Total subscribers .................. 1,855,166 2,081,200 1,275,763 1,462,740 1,857,065 1,857,065
Gross subscriber additions ................ 1,051,089 1,122,024 593,284 821,765 1,063,385 1,063,385
Average subscribers(10) ................... 1,721,072 2,091,765 1,810,101 1,340,102 1,630,300 1,630,300
Average monthly postpaid churn(11) ........ 3.82% 3.63% 3.31% 2.76% 2.26% 2.26%
Penetration(12) ........................... 2.10% 2.28% 1.38% 1.56% 1.80% 1.80%
Average monthly MOUs per
subscriber(13) ......................... 84 63 74 141 172 172
Nominal average monthly mobile
telephony revenue per subscriber
(ARPU)(14) ............................. 267 191 190 293 307 28.9
Nominal cost to acquire a new
subscriber(15) ......................... 2,677 2,419 3,004 3,059 2,730 257.3
----------
(1) In accordance with Mexican GAAP, financial data for all periods covered by
the Consolidated Financial Statements, as well as the other financial data
presented in this information memorandum, unless otherwise indicated, has
been restated in constant pesos with purchasing power as of December 31,
2005. 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, 2005. The inflation indices used in this information
memorandum are 1.1946 for 2001, 1.1302 for 2002, 1.0869 for 2003 and 1.0333
for 2004 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, 2005,
which was Ps.10.628 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, 2005 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, 2005, which was Ps.10.610 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 information memorandum and the actual outstanding U.S.
dollar amounts of our U.S. dollar-denominated obligations. For example, at
December 31, 2005, our actual total U.S. dollar-denominated debt
outstanding, excluding other financing, was U.S.$800.1 million. In
preparing the Consolidated Financial Statements, we multiplied this dollar
amount by Ps.10.610 (the exchange rate which was accessible to us at
December 31, 2005) to arrive at Ps.8,488.7 million of total debt, excluding
other financing. For purposes of this information memorandum, we have
converted this peso amount to U.S. dollars for the convenience of the
reader by dividing it by Ps.10.628 (the noon buying rate reported by the
Federal Reserve Bank of New York at December 31, 2005) to arrive at
U.S.$798.7 million of total U.S. dollar-denominated debt, excluding other
financing.
As a result of the combined effect of the restatement of the financial data
in constant pesos with purchasing power as of December 31, 2005 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) Starting January 1, 2005, we decided to make the following
reclassifications in our income statements:
(i) Sales commissions not directly related to the activation of
handsets were reclassified, and are now presented as a deduction in
revenues from services instead of being recorded as operating expenses
as it was previously done. The purpose of this change was to match
revenues directly with the cost that gives rise to such revenue. This
is only a reclassification between captions in our income statement
and does not affect our operating loss or our net loss.
(ii) Income (loss) from the sale of fixed assets was reclassified, and
is now presented after our operating loss. 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. This is only a reclassification
between captions in our income statement and does not affect net loss
but does affect our operating loss.
(46)
(iii) 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: (a) for
postpaid handsets, the subsidy is deferred at the time of activation
and is amortized on a straight-line during the life of the contract
with the client (until December 31, 2004, the subsidy was recognized in
the income statement at the time the handset was delivered to the
client); and (b) for prepaid handsets, the treatment of the subsidy has
not changed, as the subsidy continues to be recognized in the income
statement at the time the handset is delivered to the client. If we had
applied our former accounting policy, our "handsets subsidy" for the
year ended December 31, 2005 would have been Ps.1,295.3 million. As a
result of the foregoing changes in 2005, it became impractical for us
to determine the effect of this change in our accounting policy for the
years ended 2003 and 2004 since we lack sufficient information (per
every handset activation) to determine the handset subsidy amortization
that would have resulted if we had applied our new accounting policy
during those years.
Reclassifications described in points (i), (ii) and (iii) do not modify
our net loss for the year, but the reclassification described in point
(ii) does modify our operating loss. If we had not reclassified "gain
from the sale of fixed assets," our operating loss for the years ended
December 31, 2001, 2002, 2003, 2004 and 2005 would have been Ps.68.2
million, Ps.516.8 million, Ps.1,659.9 million, Ps.1,351.4 million and
Ps.532.4 million, respectively.
(4) 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 and we recorded
the charge to our income statement under the caption "depreciation and
amortization." On September 30, 2003, we changed this accounting policy. As
a result, from October 1, 2003 until December 31, 2004, we recorded the
full cost of such handsets in our income statement under "handsets subsidy"
at the moment the contract was signed. The cumulative effect of this change
in our accounting policy resulted in a loss for the year 2003 of Ps.172.8
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. We have reclassified Ps.1,264.2 million and Ps.455.0
million for the years ended December 31, 2001 and 2002, respectively,
originally recorded in "depreciation and amortization" to "handsets
subsidy" for comparison purposes. Starting January 1, 2005, we changed our
accounting policy back to the original policy of deferring the cost of
postpaid handsets at the moment the telephone is activated and amortizing
it during the life of the contract. If we had applied the former accounting
policy, handsets subsidy for the year ended December 31, 2005 would have
increased by Ps.641.8 million to Ps.1,295.3 million.
(5) On May 29, 2003 we reached an agreement with Santander Serfin, S.A. 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 a special gain for the year ended December 31,
2003. See Note 11g to our Consolidated Financial Statements.
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 a special gain in 2004. See Note
12 to our Consolidated Financial Statements.
(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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital
Resources--Capital Expenditures."
(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 2001, 2002, 2003, 2004 and 2005. The fixed charge
coverage deficiency for the years ended December 31, 2001, 2002, 2003, 2004
and 2005 amounted to Ps.334.0 million, Ps.3,329.4 million, Ps.5,510.9
million, Ps.1,845.9 million and Ps.600.3 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
"Business--Our Mobile Telephony Services--Prepaid Services." In 2004, we
reclassified public and rural telephony subscribers as prepaid subscribers,
which we believe is the more accurate classification given that these
telephones are activated by means of 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 "Business--Our Mobile
Telephony Services--Postpaid Services" and "Management's Discussion and
Analysis of Financial Condition and 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.
(47)
(13) Average monthly minutes of use, which we refer to as 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, which we
refer to as 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.
(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.10.628 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, 200,1 2002, 2003, 2004 and 2005. The Noon Buying Rate on June 23,
2006 was Ps.11.440 per U.S.$1.00.
NOON BUYING EXCHANGE RATE(1)
----------------------------
YEAR ENDED AT DECEMBER 31 HIGH LOW AVERAGE (2)
---------------------------- -------- ---------- ----------------
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
2005 11.411 10.414 10.868
----------
(1) Reported by the Federal Reserve Bank of New York.
(2) Annual average rates reflect the average of month-end rates.
The following table sets low and high Noon Buying Rates expressed in
nominal pesos per U.S. for each perior of the following six previously months to
this Annual Report:
NOON BUYING
EXCHANGE RATE (1)
--------------------
MONTH HIGH LOW
------------- -------- ---------
December 2005 10.773 10.414
January 2006 10.643 10.437
February 2006 10.529 10.432
March 2006 10.948 10.621
April 2006 11.160 10.856
May 2006 11.305 10.841
----------
(1) Reported by the Federal Reserve Bank of New York.
(48)
b) FINANCIAL INFORMATION PER BUSINESS LINE, GEOGRAPHIC ZONE AND
------------------------------------------------------------
EXPORTATION SALES
-----------------
See Item 3 "Financial Information - a) Selected Financial Data."
See Note 19 of our Consolidated Financial Statements.
c) MATERIAL CREDITS REPORT
-----------------------
OUR INDEBTEDNESS
As of December 31, 2005, our total consolidated indebtedness, including other
financing, was Ps.8,534.4 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 1, paragraph c) "Risk Factors - Risk Factors
Related with our Liquidity and Financial Condition" and See Item 3, paragraph c)
"Material Credits Report - Debt Restructuring Process".
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 interest payments due on June 1, 2003, December 1,
2003, June 1, 2004 and December 1, 2004 of U.S.$24.9 million each one. In
addition, the acquisition by Movil Access 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, notifiying us that the an unidentified percentage of holders of the
Iusacell senior notes had elected to accelerate the principal payment of the
notes. See Item 3, paragraph c) "Material Credits Report - Debt Restructuring
Process".
SENIOR REFINANCING SECURED LOAN
On March 29, 2001, Iusacell Celular completed the refinancing of its
senior secured credit facility by entering into a Amended and Restated Senior
Secured Credit Loan Agreement, which we refer to as the Senior Refinancing
Secured Loan, which consists of:
o the Tranche A Loans 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
(49)
o the Tranche B Loans 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.
The Senior Secured Refinancing Loans bear 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 Tranche A Loans and
Tranche B Loans 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 Secured Refinancing Loans provide for principal payments in
equal quarterly installments beginning on May 28, 2004 and maturing on February
28, 2006. However, the Credit Agreement also provides that in the event that the
2004 Notes have not been refinanced by March 31, 2004, the maturity date for the
loans would be accelerated to such date. Since the refinancing of the 2004 Notes
has not occurred, the outstanding amount under the Senior Secured Refinancing
Loans 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. On January 23, 2006, we announced that we had reached an
agreement in principle with creditors representing the majority of our secured
debt also involving an exchange of the existing secured debt for a new Note. See
Item 3, paragraph c) "Material Credits Report - Debt Restructuring Process".
IUSACELL CELULAR 2004 NOTES
In July 1997, we issued U.S.$150.0 million of 10% Senior Notes due
2004, which we refer to as Iusacell Celular Notes, 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, we will refer to this
instrument as "The Indenture of Iusacell Celular". Substantially all of the
Iusacell Celular senior notes were exchanged in January 1998 for identical 2004
Notes, which are also governed by the indenture, pursuant to an exchange offer
registered with the SEC.
The indenture limits, among other things, our 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
Notes are secured by a second-priority lien on our cellular concessions and
certain telecommunications 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
2004 Notes outstanding that they had elected to accelerate the principal payment
of the notes. We have not made any principal or interest payments since we
failed to make payment on July 15, 2003. On January 14, 2004, certain holders of
the 2004 Notes initiated an action in a New York state court seeking payment and
other remedies. See Item 2 "The Company- Description of the Business- xi) Legal,
Administrative or Arbitration Proceedings."
We are also not in compliance with certain financial covenants. On
January 23, 2006, we announced that we had reached an agreement in principle
with creditors representing the majority of our secured debt also involving an
exchange of the existing secured debt. See Item 3 paragraph c) "Material Credits
Report - Debt Restructuring Process".
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:
o 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.
o 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.
(50)
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, June 15, 2005, December 15, 2005
and June 15, 2006. 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 guarantee the obligations of our
subsidiaries according with both debt instruments.
Additionally, we are not in compliance with certain financial
covenants. At this moment we have not received any notice accelerating the
payment of this credit. We have a total indebtedness of U.S. $23.3 millions and
U.S. $3.4 millions of principal regarding GIEK-Guaranteed Facility and
Non-GIEK-Guaranteed Loan, respectively.
On march 10, 2006, Iusacell Infraestructura reach an agreement in
principle with BNP Paribas and Export Import Bank of Norway, subject to the
filling of the final documentation, with the purpose of restructuring this
credits. See Item 3, paragraph c) "Material Credits Report - Debt Restructuring
Process".
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. On April
2006, this credit was assigned to one of our subsidiaries.
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 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.
This credit has severals drawdowns in different periods, generating many
tranches with different maturities and interests periods.
In some of the tranches, 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 these payment defaults.
In other tranches, 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.
(51)
On June 22, 2006 we reach an agreement in principle in order to
restructure this credit. See Item 3, paragraph c) "Material Credits Report -
Debt Restructuring Process".
DEBT RESTRUCTURING PROCESS
Iusacell
Iusacell reached an agreement with a majority of its creditors of in
terms of nominal value (the "Majority of the Iusacell Notes") issued by the
Company (the "Iusacell's Notes") for the restructuring of its outstanding debt
(the "GI Restructuring"). The abovementioned in order to refinance the
outstanding debt of such notes for the aggregate amount of US$350 million (the
"Iusacell's Notes Original Debt").
Subject to the parties executing the final version of the restructuring
documents, the GI Restructuring will cause, among other things, the cancellation
of the GI Original Debt and the exchange of the 2006 Notes for new notes to be
issued with a maturity in 2013 (the "2013 Notes"), for an aggregate amount of
US$175 million and bearing an annual 10% interest rate. In accordance with the
agreement reached with the Majority of the GI Creditors, Iusacell may, at its
sole option, elect to pay at least 60% of the interest due of the 2013 Notes and
to capitalize the remaining 40% of the interest due on any interest payment
date.
As agreed with the Majority of the GI Creditors, the 2013 Notes will be
secured with a pledge on common shares (the "Shares") representing between 28%
and a maximum of 34% of the capital stock of Iusacell (the "GI Collateral"),
which will be construed and ruled by the applicable laws of the United Mexican
States. For such purpose, the ownership of the Shares will be transferred to a
trust executed with a Mexican banking institution. The trust agreement will
provide for mechanisms for the execution of the GI Collateral in case of a
payment default of Iusacell as provided in the GI restructuring documents.
As a condition precedent for the GI Restructuring, the Majority of the
GI Creditors executed certain lock-up agreements (the "GI Lock-up Agreements")
pursuant to which they commit to (i) abstain to execute any action to obstruct
the GI Restructuring, and (ii) amend certain terms and conditions provided to in
the GI Original Debt documents pursuant to which the Iusacell's Notes issued,
with the purpose of allowing the issuance of the 2013 Notes, the exchange of the
Iusacell's Notes for the 2013 Notes and conclude the GI Restructuring as
agreed. The Iusacell's Notes to be exchanged will be cancelled.
In accordance with the terms of the GI Lock-up Agreements, the Majority
of the GI Creditors, according with theirs obligations under the same, committed
themselves to grant their consent to carry out the GI Restructuring, upon
Iusacell's request and subject to the compliment by Iusacell of certain
obligations and/or conditions.
As agreed with the Majority of the GI Creditors, and as a consequence
of the GI Restructuring, any past accrued and unpaid interest and those
interests that might be accrued derived from the GI Original Debt to the date in
which the exchange takes place, will not be paid.
On April 18, 2006 Iusacell launched an exchange offer of the 2006 Notes
for the 2013 Notes and the amendment of certain terms and conditions stated in
the GI Original Debt documents of the 2006 Notes and on behalf of which this
this Notes were issued, in order to formalized the 2013 Notes. This exchange
offer expired on June 1st 2006. As part of the Reorganization Plan, on June 2,
2006, Iusacell, filled its application for the concurso mercantil, in order that
once Iusacell is pronounce in concurso mercantil, present to the approval of the
recognized creditors the Reorganization Plan reached. Once the Reorganization
Plan is approved by the Court, the exchange of the notes and the reorganization
of the debt will be completed.
Iusacell Celular
Iusacell Celular reached an agreement in principle, with a majority of
its creditors, in terms of nominal value (the "GIC Creditors") for the
restructuring of its outstanding debt (the "GIC Restructuring") for: (i) the
principal amount of US$189.8 million of Tranche A of the Amended and Restated
Senior Secured Credit Loan Agreement; (ii) the principal amount of US$75.8
million of Tranche B of the Amended and Restated Senior Secured Credit Loan
Agreement; and (iii) the principal amount of US$150.0 million derived from the
Secured Senior Notes Due 2004 (Tranche A and Tranche B of the Amended and
Restated Senior Secured Credit Loan Agreement, jointly with the Secured Senior
Notes Due 2004, will be collectively referred to as the "GIC Original Debt").
(52)
The agreement provides the possibility to carry out the GIC
Restructuring with all its creditors, either throughout a Concurso Mercantil
procedure pursuant to the LCM or out-of-court procedure.
Subject to the parties executing the final version of the restructuring
documents, the GIC Restructuring will cause the exchange of:
(i) Tranche A of the Amended and Restated Senior Secured Credit Loan Agreement,
for a senior secured note with an amortization schedule finally due 2011
(the "2011 Notes") to be issued for up to the face value of the debt under
Tranche A of the Amended and Restated Senior Secured Credit Loan Agreement,
for a maximum amount of US$189.8 million that will bear interest, payable
quarterly at an annual rate equivalent to three-month LIBOR rate plus 4%.
(ii) Tranche B of the Amended and Restated Senior Secured Credit Loan Agreement
and the debt derived from the Secured Senior Notes Due 2004, for a junior
secured note due 2012 (the "2012 Notes") to be issued for a maximum amount
of US$203.2 million bearing interest at a 10% annual interest rate, to be
paid semi-annually. (The instruments referred to in items (i) and (ii)
above will be collectively referred to as the "GIC New Debt"). The Secured
Senior Notes Due 2004 to be exchanged will be subsequently cancelled.
Pursuant to the agreement reached with creditors of the debt derived
from Tranche B of the Amended and Restated Senior Secured Credit Loan Agreement,
and the holders of the Secured Senior Notes Due 2004, Iusacell Celular may, at
its sole option, elect to pay, at least 70% of the interest due derived from the
2011 Notes, and to capitalize the remaining 30%.
As agreed with the GIC Creditors, the GIC New Debt, this is, that
derived from the 2011 and 2012 Notes will be secured with the same collateral
that secured Tranche A and Tranche B of the Amended and Restated Senior Secured
Credit Loan Agreement, as well as the Secured Senior Notes Due 2004 (the "GIC
Collateral"), which will be construed and ruled by the applicable laws of
Mexico. The collateral agreements, as their nature may be, will provide for
mechanisms for the execution of the GIC Collateral in case of payment default of
Iusacell as provided in the GIC Restructuring documents.
The agreements with the creditors provide that any past accrued and
unpaid interest and those interests that might be accrued derived from the
Secured Senior Notes Due 2004 to the date in which the exchange takes place,
will not be paid.
As a condition precedent for the GIC Restructuring, as of the date of
issuance of these consolidated financial statements, some GIC Creditors executed
certain lock-up agreements (the "GIC Lock-up Agreements") pursuant to which they
commit to (i) abstain to execute any action to obstruct the GIC Restructuring,
and (ii) amend certain terms and conditions provided to in the GIC Original Debt
documents, with the purpose of allowing the issuance of the 2011 Notes and the
2012 Notes, the exchange of the debt derived from Tranche A of the Amended and
Restated Senior Secured Credit Loan Agreement for the 2011 Notes, and Tranche B
of the Amended and Restated Senior Secured Credit Loan Agreement and the debt
derived from the Secured Senior Notes Due 2004 for the 2012 Notes, as well as
concluding the GIC Restructuring as agreed.
On May 25, 2006 Iusacell Celular launched (i) the exchange offer of
2004 Notes and Tranche A and Tranche B of the Amended and Restated Senior
Secured Credit Loan Agreement for 2011 Notes and 2012 Notes, (ii) amend certain
terms and conditions provided in the documents of the Original Debt of the 2004
Notes and the agreements of the Tranches A and B of the Senior Secured Loan
Agreement.
We believed that the majority of the guaranteed creditors pretend the
opportune exchange of its debt and the granted of their consents in terms of the
offer, the realization of the exchange is subject to certain conditions. The
exchange offer will expire on June 29, 2006, unless it will be prorogate by
Iusacell Celular.
(53)
Iusacell Infraestructura
Iusacell Infraestructura, S.A. de C.V. ("Iusacell Infraestructura")
reached an agreement with its creditors BNP Paribas (Oslo Branch) ("BNP") and
the Bank of Exportations and Importations Norwegian of the Kingdom
Garantiinstitutt for Eksport Kreditter ("GIEK") which is subject to the
execution by the parties of the final documents, for the restructuring of:
i. The principal amount of the BNP/GIEK credit agreement amending said amount
for up to 87.5% of its total debt, this is, the amount of US$20.3 million
(the "New BNP/GIEK Mid-Term Financing") derived from the credit agreement
executed by and between Iusacell Infraestructura as borrower, BNP as lender
and Iusacell as guarantor of Iusacell Infraestructura. Additionally,
approximately 87.5% of the cost of the funding guarantee provided by GIEK
will be refinanced. The New BNP/GIEK Mid-Term Financing is divided into two
tranches, the first one for the amount of US$17.4 million (the "Tranche A
of the BNP/GIEK New Mid-Term Financing"), bearing interest at an annual
rate equivalent to three-month LIBOR plus 2.5%, interest payable on a
quarterly basis, and the second one for the amount of US$2.9 million (the
"Tranche B of the New BNP/GIEK Mid-Term Financing") bearing interest
starting January 1, 2011, at an annual interest rate equivalent to
three-month LIBOR plus 2.5%, interest payable on a quarterly basis; and
ii. The principal amount of the BNP refaccionario loan (Note 11d.) amending
said amount for up to 87.5% of its debt, this is, the amount of US$3
million (the "New BNP/GIEK Commercial Financing"). The New BNP/GIEK
Commercial Financing is divided into two tranches, the first one for the
amount of US$2.6 million (the "Tranche A of the BNP/GIEK New Commercial
Financing") bearing interest at an annual interest rate equivalent to
three-month LIBOR rate plus 3.5%, interest payable on a quarterly basis,
and the second one for the amount of US$0.4 million(the "Tranche B of the
BNP/GIEK New Commercial Financing") bearing interest starting January 1,
2011, at an annual interest rate equivalent to three-month LIBOR plus 3.5%,
payable on a quarterly basis. (Hereinafter, the BNP/GIEK credit agreement
jointly with the BNP/GIEK refaccionario loan, will be referred to as the
"IISA Original Debt", and the restructuring referred to in item (i) above
collectively with the one referred to in this item (ii), hereinafter
referred to as the "IISA Restructuring".
The agreement provides the payment of Tranche A of the BNP/GIEK New
Mid-Term Financing in accordance with a quarterly payment calendar, beginning
2007 and concluding in 2010, and the quarterly payment of Tranche B of the
BNP/GIEK Mid-Term Financing during 2011. Additionally, such agreement provides
also Iusacell Infraestructura concluding the payments under Tranche A of the
BNP/GIEK New Commercial Financing pursuant to a payment calendar beginning 2007
and concluding in 2009. Under Tranche B of the BNP/GIEK New Commercial
Financing, Iusacell Infraestructura shall pay quarterly installments during
2011.
Iusacell Infraestructura de Mexico
On June 22, 2006 we reach an agreement in principle for restructuring
this debt, subject to the execution of the final documentation, the restructure
implies among other things. (i) cancellation of the original notes and issue of
the new notes with the reduction in the principal amount approximately of 18%,
remaining U.S.$3.2 million, (ii) the new notes bearing interest at an annual
interest rate equivalent to three-month LIBOR plus 2.5%, interest payable on a
quarterly basis, (iii) the payment of 6% of the principal at the date of the
final documentation and (iv) the new notes will have 16 amortizations of
principal due on 2010.
(54)
d) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
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,
2005. The U.S. dollar translations provided in this information memorandum are,
unless otherwise indicated, calculated at the noon buying rate reported by the
Federal Reserve Bank of New York at December 31, 2005, which was Ps.10.628 per
U.S.$1.00. Sums may not add due to rounding.
i) RESULTS OF OPERATIONS
------------------------
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 of Iusacell and
subsidiaries, and the factors affecting our financial resources.
The Consolidated Financial Statements have been prepared in accordance
with Mexican GAAP.
The figures as of and for the year ended December 31, 2003 were audited
by PricewaterhouseCoopers, S.C., our former independent accountants. The figures
presented in this Annual Report as of and for the year ended December 31, 2003
differ from those presented by PricewaterhouseCoopers, S.C., as a result of: (i)
adjustments for inflation in order to provide for purchasing power in constant
Mexican pesos as of December 31, 2005, and (ii) reclassification for comparison
purposes (see "Selected Consolidated Financial Data--Footnote 3" and "--Recent
Changes in Our Accounting Policies").
As a Mexican company, we maintain our financial records in pesos.
Pursuant to Bulletin B-10, "Recognition of the Effects of Inflation on Financial
Information," and Bulletin B-12, "Statement of Changes in Financial Position,"
issued by the Mexican Institute of Public Accountants, or 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
Mexican Consumer Price Index.
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, 2005, 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 2003, 2004 and 2005, the rates of
inflation in Mexico, as measured by changes in the Mexican Consumer Price Index,
were 4.0%, 5.2%, and 3.3% respectively. The inflation indices used are 1.1302
for 2002 figures, 1.0869 for 2003 figures, and 1.0333 for 2004 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:
o net interest expense or income;
o net foreign exchange gains or losses; and
o net gains or losses on monetary position.
Net foreign exchange gains or losses reflect the impact of changes in
foreign exchange rates on monetary assets and liabilities denominated in
currencies other than pesos. A foreign exchange loss arises if a liability is
denominated in a foreign currency which appreciates relative to the peso between
the time the liability is incurred and the date it is repaid, as the
appreciation of the foreign currency results in an increase in the amount of
pesos required to repay the specified amount of the foreign currency liability.
We incurred a foreign exchange loss in 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
(55)
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 and 2005, 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 reflect 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 2003, 2004 and 2005, as the purchasing power of the peso
declines over time.
DEVALUATION AND INFLATION
In the past, the Mexican economy has been subject to significantly high
levels of inflation and currency devaluation. For example, 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 7.4%
against the U.S. dollar in 2002 and 2003, respectively, and appreciated by 4.8%
and 4.8% in 2001 and 2005, respectively. 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 Mexican Consumer Price Index, increased to 52.0% and 27.7% in
1995 and 1996, respectively. In recent years, the inflation was 4.0% in 2003,
5.2% in 2004 and 3.3% in 2005.
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:
o 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;
o 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;
o 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.
RECENT CHANGES IN OUR ACCOUNTING POLICIES
Beginning January 1, 2005, we made the following changes to our
accounting policies:
o Sales commissions not directly related to the
activation of handsets were reclassified, and are now
presented as a deduction in revenues from services
instead of being recorded as operating expenses as was
previously done. The purpose of this change was to
match revenues directly with the cost that gives rise
to such revenue. This is only a reclassification
between captions in our income statement and does not
affect our operating loss or our net loss.
(56)
o Gain (loss) from the sale of fixed assets was
reclassified, and is now presented after operating
loss. 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. If we had not
reclassified "gain (loss) from the sale of fixed
assets," our operating loss for the years ended
December 31, 2001, 2002, 2003, 2004 and 2005 would have
been Ps.68.2 million, Ps.516.8 million, Ps.1,659.9
million, Ps.1,351.4 million and Ps.532.4 million,
respectively.
o The net cost of the handset subsidy (which is sales
price, less cost of sale, commissions related to the
activation and other costs) is presented as a single
item, with the following alternatives: (1) for postpaid
handsets, the subsidy is deferred at the time of
activation and is amortized on a straight-line during
the life of the contract with the client (until
December 31, 2004, the subsidy was recognized in the
income statement at the time the handset was delivered
to the client); and (2) for prepaid handsets, the
treatment of the subsidy has not changed, as the
subsidy continues to be recognized in the income
statement at the time the handset is delivered to the
client. If we had applied our former accounting policy,
our "handsets subsidy" for the year ended December 31,
2005 would have been Ps.1,295.3 million. As a result of
the foregoing changes in 2005, it became impractical
for us to determine the effect of this change in our
accounting policy for the years ended 2003 and 2004
since we lack sufficient information (per every handset
activation) to determine the handset subsidy
amortization that would have resulted if we had applied
our new accounting policy during those years.
CRITICAL ACCOUNTING POLICIES AND 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 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 description of our principal 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:
o It requires our management 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
o 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
(57)
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. 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. We recorded a provision for those services that have been provided to
the customer but have not been billed yet at the end of the period.
HANDSETS SUBSIDY
Starting January 1, 2005, we changed our accounting policy related to
the sales of handsets. The net cost of the handset subsidy (which is sales
price, less cost of sale, commissions related to the activation and other cost)
is now presented as a single item, with the following alternatives: (a) for
postpaid handsets, the subsidy is deferred at the time of activation and is
amortized on a straight-line during the life of the contract with the client
(until December 31, 2004, the subsidy was recognized in the income statement at
the time the handset was delivered to the client); and (b) for prepaid handsets,
the treatment of the subsidy has not changed, as the subsidy continues to be
recognized in the income statement at the time the handset is delivered to the
client. If we had applied our former accounting policy, our "handsets subsidy"
for the year ended December 31, 2005 would have been Ps.1,295.3 million. As a
result of the foregoing changes in 2005, it became impractical for us to
determine the effect of this change in our accounting policy for the years ended
2003 and 2004 since we lack sufficient information (per every handset
activation) to determine the handset subsidy amortization that would have
resulted if we had applied our new accounting policy during those years.
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.
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:
As discussed in Note 4n to our Consolidated Financial Statements,
during 2003 we wrote down intangible assets for Ps.342.5 million that mainly
consisted of: (1) pre-operating expenses originated by our PCS start-up
operations in northern Mexico and (2) certain payments made by us to Telmex
related to the special projects implemented by Telmex to permit competition in
long distance telephony. This write down of intangible assets is presented as a
special item in our consolidated income statement for 2003.
(58)
During the third quarter of 2003, we wrote-off installation expenses
for Ps.551.7 million and advance payments for Ps.180.9 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.
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 2003 of Ps.172.8 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.245.7
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 "handsets subsidy." We have reclassified Ps.1,264.2 million and
Ps.455.0 million for the years ended December 31, 2001 and 2002, respectively,
originally recorded under "depreciation and amortization" to "handsets subsidy."
GOODWILL
Under Mexican GAAP, we amortize goodwill on a straight-line basis over
a period of 20 years. We cancelled goodwill for Ps.38.2 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 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. As of the date of
this information memorandum, it is not possible for us to determine with
accuracy either the results of the efforts described in Note 21b. to our
Consolidated Financial Statements related to our debt restructuring, or the
exact dates in which an eventual debt forgiveness would occur. As a result, we
decided not to record a deferred income tax asset derived from the tax losses
which we may use to reduce the tax effects of such debt forgiveness.
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, 2004 and
2005 we sold, and leased back space in, 244, 76, 34, 97 and 6 towers,
respectively, to MATC Celular. As of May 31, 2006, we have not sold any
additional towers.
(59)
In 2003, 2004 and 2005, we recorded gains from the sale of fixed assets
of Ps.96.3 million, Ps.214.8 million, and Ps.11.7 million in connection with our
sale to MATC Celular of 34, 97 and 6 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, 2003, 2004 and 2005.
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2003 2004 2005 CHANGE
-------- -------- -------- --------
Ps. Ps. Ps. %
-------- -------- -------- --------
(In millions of constant pesos as of
December 31, 2005, except percentages)
Revenues from services .......... 4,769.1 5,188.0 6,506.9 25.4%
Commissions ..................... (247.1) (325.7) (384.8) 18.1%
Cost of sales ................... (2,295.8) (3,092.8) (3,382.1) 9.4%
Operating expenses .............. (1,745.7) (1,308.9) (1,700.5) 29.9%
Depreciation and amortization ... (2,236.7) (2,026.9) (1,567.0) (22.7)%
Operating loss .................. (1,756.1) (1,566.2) (527.5) (66.3)%
Results from sale of fixed assets 96.3 214.9 (4.9) (102.3)%
Special items ................... (820.6) -- -- --
Early extinguishment of debt .... 16.9 41.7 -- (100.0)%
Other expenses, net ............. (681.1) (11.6) (28.2) 143.1%
Integral financing cost ......... (1,480.1) (565.2) (98.3) (82.6)%
Net loss ........................ (5,118.1) (2,055.4) (705.5) (65.7)%
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
NET REVENUES
The following table presents the sources of our revenues for the years ended
December 31, 2004 and 2005:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2004 2005 CHANGE
-------------------- ---------------- ------
Ps. % Ps % %
------- ------ ------- ------ ------
(In millions of constant pesos as of
December 31, 2005, except percentages)
Revenues from services .. 5,188.0 106.% 6,506.9 106.3% 25.4%
Commissions ............. (325.7) (6.7%) (384.8) (6.3)% 18.1%
------- ------ ------- ------ ------
Net revenues ............ 4,862.3 100.0% 6,122.1 100.0% 25.9%
======= ====== ======= ====== ======
Revenues from services
Our revenues from services are principally derived from the provision
of mobile telephony service (cellular and PCS) in Mexico. Our revenues from
services 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,
revenues from the provision of data transmission, short message services and
paging services. Our revenues from services include all Bulletin B-10 inflation
adjustments on all service revenue line items, whether mobile telephony service
revenues or other service revenues. Revenues attributable to out-roaming are
passed through to the applicable host operator. The table below presents
revenues from services by source for the years ended December 31, 2004 and 2005:
(60)
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2004(1) 2005(1) CHANGE
------------------- ------------------- ------
Ps. % Ps % %
------- ------ ------- ------ ------
(In millions of constant pesos as of
December 31, 2005, except percentages)
Airtime(2) ........................ 1,349.7 26.0% 1,440.4 22.1% 6.7%
Calling party pays revenues(3) .... 1,405.2 27.1% 1,401.3 21.5% (0.3)%
Monthly fees ...................... 1,504.6 29.0% 2,169.8 33.3% 44.2%
Long distance ..................... 318.1 6.1% 417.1 6.4% 31.1%
Value-added services(4) ........... 84.9 1.6% 211.6 3.3% 149.2%
In roaming ........................ 173.4 3.3% 198.3 3.0% 14.4%
Out-roaming ....................... 159.0 3.1% 133.0 2.0% (16.4)%
Short message services ............ 103.9 2.0% 256.9 3.9% 147.3%
Other ............................. 89.2 1.7% 278.5 4.3% 212.2%
------- ------ ------- ------ ------
Total revenues from services ...... 5,188.0 100.0% 6,506.9 100.0% 25.4%
======= ====== ======= ====== ======
----------
(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. 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.
Revenues from services increased 25.4% in 2005 as compared to 2004.
This increase resulted mainly from (1) an increase of 27.0% in our subscriber
base primarily due to our continued aggressive promotional and discount
campaign, (2) an increase in monthly fees due primarily to an increase in rates
in several of our postpaid plans and (3) an increase in short message services
revenue resulting from its increased popularity among customers.
Postpaid customers increased by 66.4%, from 350,847 customers in 2004
to 583,695 customers in 2005. This increase was due to the continued
implementation of strong mass media advertising and aggressive promotional and
discount campaigns and an increase of our retention efforts. Prepaid customers
increased by 14.5% from 1,111,893 customers in 2004 to 1,273,370 in 2005. The
increase in 2005 reflects primarily a continued improvement in our ability to
capture and retain customers as well as our strategy of providing a better
service to our clients.
Gross additions for 2005 totaled 1,063,385 customers, which represents
a 29.4% increase from 2004. This increase resulted mainly from our continued
aggressive campaigns of publicity, mass media advertising, higher points of
sales, and the launching of new services.
Postpaid subscriber churn decreased from an average monthly level of
2.8% in 2004 to 2.3% in 2005, primarily because of our continued client
retention efforts and the implementation of our customer care regional
structures that allowed us to be closer to our clients and give timely solutions
to their needs. Our overall average monthly churn for the year decreased to 3.0%
in 2005 from 4.3% in 2004 primarily because of our efforts to improve our
customer service.
As a result of the 29.4% increase in gross additions, the lower churn
rates and the changes in our policy for turning over high value customers, we
registered a net increase of 394,325 customers in 2005, as compared to net
additions of 186,977 customers in 2004.
Airtime revenues increased 6.7% mainly because of (1) a larger
subscriber base, and (2) increased use of our hybrid plans.
Calling party pays revenues slightly decreased 0.3% mainly due to a
decrease in the rate from Ps.1.90 in 2004 to Ps.1.71 in 2005, partially offset
by an increase in our subscriber base and in traffic.
Monthly fees increased 44.2% mainly because of: (1) a 66.4% increase in
our postpaid subscriber base (which includes 190,310 new subscribers of hybrid
plans, and (2) the increase in several of our postpaid plans.
(61)
Long distance revenues increased 31.1% primarily as a result of (1) an
increase in traffic originated by foreign long distance carriers due to higher
demand, and (2) an increase in the volume of long distance calls of our
customers, in each as a result of the increase in subscriber base.
Value added services increased 149.2% due to (1) an increase in the
theft protection charges billed to our subscribers, and (2) an increase of sales
in the push-to-talk add-ons and 3G services.
Short message services revenues increased 147.3% due to a higher use of
this service from our customers, and an increase of revenues charged to other
carriers.
Blended average MOUs for 2005 increased 22.0%, from 141 minutes to 172
minutes, primarily due to the reduction of the price per minute that allow the
clients to make more calls for less money and the increase in postpaid
subscribers as a percentage of the total subscriber base. Average monthly MOUs
for postpaid customers increased 2.7%, to 453 minutes in 2005 from 441 minutes
in 2004, while average monthly MOUs for prepaid customers increased 7.0%, from
57 minutes in 2004 to 61 minutes in 2005.
Overall, ARPU increased 4.8% from Ps.293.4 in 2004 to Ps.307.5 in 2005,
as a result of the increase of the proportion of the postpaid subscribers as
percentage of the total subscriber base. Postpaid ARPU decreased 11.4% from
Ps.840.3 in 2004 to Ps.744.9 in 2005, while prepaid ARPU decreased 3.2% from
Ps.140.2 in 2004 to Ps.135.7 in 2005.
Commissions
Commissions increased 18.1% in 2005, from Ps.325.7 million in 2004 to
Ps.384.8 million in 2005. This increase was primarily due to a higher prepaid
airtime sales, increased volume bonuses and higher collection commissions.
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 24.2% to
Ps.2,728.6 million in 2005 as compared to Ps.2,196.7 million in 2004, primarily
as a result of (1) an increase of Ps.154.5 million in costs related to the
capacity exchange and roaming agreement with Unefon (see "Related Party
Transactions--Unefon Capacity Exchange and Roaming"), (2) an increase of Ps.40.1
million in the number of leased transmission sites, (3) an increase of Ps.116.3
million of calling party pays interconnection, and (4) an increase of Ps.108.1
million from the annual payments generated from the acquisition of PCS licenses.
As a percentage of net revenues, cost of services decreased to 44.6% in 2005
from 45.2% in 2004, because of a higher increase in our net revenues than the
increase of our cost of services.
Handsets subsidy
This caption is the net resulting from the revenues from the sale of
the telephone less the following components: (1) the handset cost, (2)
commissions related to the handset activation, and (3) other costs, etc.
Handsets subsidy decreased 27.1% from Ps.896.2 million in 2004 to Ps.653.5
million in 2005 primarily due to the change in our accounting policy in 2005.
Beginning January 1, 2005 we began to amortize the net subsidy of the handsets
sold through postpaid plans during the life of the service contract. Our
management considers that this change improves the presentation of the financial
information related to those concepts by identifying in a sole caption the
amount designated for handsets subsidy. In addition, since the average length of
service contracts increased during 2005, our management believes that there
exists a closer correlation between the costs necessary to provide service
revenues (which are accrued during the life of the service contract) and the
average length of service contracts. If we had followed the accounting policy
used in 2004 and 2003, the handsets subsidy would have been Ps.1,295.3 million
for the year ended December 31, 2005. As a result of the foregoing changes in
2005, it became impractical for us to determine the effect of this change in our
accounting policy for the years ended 2003 and 2004 since we lack sufficient
information (per every handset activation) to determine the handset subsidy
amortization that would have resulted if we had applied our new accounting
policy during those years.
(62)
OPERATING EXPENSES
Operating expenses increased 29.9% to Ps.1,700.5 million in 2005 from
Ps.1,308.9 million in 2004. As a percentage of total revenues, operating
expenses increased to 27.8% in 2005 from 26.9% in 2004 because of (1) an
increase of employees due to our regionalization strategy, (2) an increase of
temporary employees due to the opening of new points of sale, (3) an increase in
advertising expenses, and (4) an increase in fees paid to counselors and
advisors due to the debt restructuring effort.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses decreased 22.7% from Ps.2,026.9
million in 2004 to Ps.1,567.0 million in 2005, primarily due to (1) 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 and (2) our capital expenditures in 2005 were not enough
to offset the effect of those fixed assets that became fully depreciated in
2005.
RESULTS FROM SALE OF FIXED ASSETS
We had a loss of Ps.4.9 million in 2005 mainly as a result of the sale
of 6 towers and the disposal of obsolete fixed assets, while in 2004, we had a
gain of Ps.214.9 million from the sale of 97 towers. See--"Tower Monetization."
TAX PROVISIONS
Our asset tax provisions decreased 66.0%, or Ps.106.1 million in 2005.
In accordance with certain modifications to the Mexican Asset Tax Law, we were
allowed in 2005 to deduct debts to the taxable basis for asset tax purposes;
however, since this provision was ruled unconstitutional by the Mexican Supreme
Court, we filed an action for injunctive relief (amparo) in respect of the years
we were not allowed to make the deduction. We were successful in our action but
the liability was recorded in 2003 and 2004 applying the rules that prevailed at
that time.
INTEGRAL FINANCING COST
Our integral cost of financing decreased by 82.6%, from Ps.565.2
million in 2004 to Ps.98.3 million in 2005. This decrease was mainly due to an
increase in our foreign exchange gains from Ps.72.0 million in 2004 to Ps.573.6
million in 2005. This increase was partly offset by a 6.6% decrease in our gain
from monetary position.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
NET REVENUES
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, 2005, except percentages)
Revenues from services ............ 4,769.1 105.5% 5,188.0 106.7% 8.8%
Commissions ....................... (247.1) (5.5)% (325.7) (6.7)% 31.8%
------- ----- ------- ----- ------
Net revenues ...................... 4,522.0 100.0% 4,862.3 100.0% 7.5%
======= ===== ======= ===== ======
Revenues from service
The table below presents revenues from services by source for the years
ended December 31, 2003 and 2004:
(63)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2003(1) 2004(1) CHANGE
------------------ ------------------ --------
Ps. % Ps % %
------- ----- ------- ----- --------
(In millions of constant pesos as of
December 31, 2005, except percentages)
Airtime(2) ...................... 1,080.4 22.7% 1,349.7 26.0% 24.9%
Calling party pays revenues(3) .. 1,303.7 27.3% 1,405.2 27.1% 7.8%
Monthly fees .................... 1,468.8 30.8% 1,504.6 29.0% 2.4%
Long distance ................... 360.4 7.6% 318.1 6.1% (11.7)%
Value-added services(4) ......... 180.7 3.8% 84.9 1.6% (53.0)%
In-roaming ...................... 159.6 3.3% 173.4 3.3% 8.6%
Out-roaming ..................... 173.4 3.6% 159.0 3.1% (8.3)%
Short message services .......... 6.1 0.1% 103.9 2.0% 1,603.3%
Other ........................... 36.0 0.8% 89.2 1.7% 147.8%
------- ----- ------- ----- --------
Total revenues from services .... 4,769.1 100.0% 5,188.0 100.0% 8.8%
======= ===== ======= ===== ========
----------
(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. 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.
Revenues from services increased 8.8% in 2004 as compared to 2003. This
increase results mainly from (1) 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 (2) 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 as part of our
promotional campaign.
Postpaid customers increased by 26.7%, from 276,730 customers in 2003
to 350,847 customers in 2004. This increase was due mainly to (1) the
implementation of mass media advertising and aggressive promotional and discount
campaigns, and (2) 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 and
promotional 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 (1) a larger
subscriber base, (2) increased use in our hybrid plans, and (3) an increase in
additional outgoing postpaid minutes.
Calling party pays revenues increased 7.8% mainly due to (1) a larger
subscriber base in both the prepaid and postpaid modalities, and (2) 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.
(64)
Long distance revenues decreased 11.7% primarily as a result of (1) a
decrease in traffic with foreign long distance carriers due to lower demand, and
(2) 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.
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.
Commissions
Commissions increased 31.8% from Ps.247.1 million in 2003 to Ps.325.7
million in 2004 due to (1) increased competitiveness and an increase in rates
paid to distributors, (2) higher sales of prepaid airtime, and (3) the
introduction of more points of sale.
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 33.0% to
Ps.2,196.7 million in 2004 as compared to Ps.1,652.2 million in 2003, primarily
as a result of (1) a Ps.276.1 million, or 70.6% increase in calling party pays
interconnection, (2) a Ps.80.5 million increase in taxes on telecommunications
revenues payable to the Mexican government due mainly to an increase in our
taxable income, (3) an increase of Ps.57.6 million in costs related to the
capacity exchange and roaming agreement with Unefon (see "Related Party
Transactions--Unefon Capacity Exchange and Roaming," and (4) Ps.124.0 million in
extraordinary inventory write-offs and obsolescence charges related to certain
handsets, compared to a Ps.45.7 million credit in 2003 related to an adjustment
made for an excess in allowance for obsolete and slow-moving inventory. These
factors were offset by a Ps.112.2 million decrease in technical expenses due to
a lower headcount and savings in maintenance and leasing expenses. As a
percentage of net revenues, cost of services increased to 45.2% in 2004 from
36.5% 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.
Handsets Subsidy
Handsets subsidy increased 39.2% from Ps.643.6 million in 2003 to
Ps.896.2 million in 2004 primarily due to (1) higher gross additions in 2004 and
(2) the cumulative effect of change of accounting policy was not presented as
part of the handsets subsidy.
OPERATING EXPENSES
Operating expenses decreased 25.0% to Ps.1,308.9 million in 2004 from
Ps.1,745.7 million in 2003. As a percentage of total revenues, operating
expenses decreased to 26.9% in 2004 from 38.6% in 2003 because of (1) a Ps.201.8
million decrease in advertising expenses, (2) a Ps.96.7 million decrease in
overhead expenses at our stores because of the transfer of the operation of many
of our stores to Elektra (see "Related Party Transactions--Elektra Marketing and
Sales Services and Operation and Management of our Customer Sales and Service
Centers"), (3) a Ps.62.9 million decrease in lease, repair and maintenance costs
related to our corporate headquarters, as we occupied less space in 2004 as
compared to 2003 due to a reduction in personnel, (4) a Ps.61.6 million decrease
in professional fees, including legal and consulting, and (5) a Ps.49.0 million
decrease in severance payments because our significant downsizing occurred in
2003. These decreases were offset in part by a Ps.34.7 million increase in our
reserves for doubtful accounts due to our increased revenue base.
(65)
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses decreased 9.4% from Ps.2,236.7
million in 2003 to Ps.2,026.9 million in 2004, primarily due to a decrease in
the fixed asset base resulting from the impairment of assets mainly related to
transmission that were obsolete in 2003, the sale of 97 towers during 2004 and
the full depreciation of some assets.
RESULTS FROM SALE OF FIXED ASSETS
We had a gain of Ps.214.9 million in 2004 mainly as a result of the
sale of 97 towers to MATC Celular, while in 2003, we had a gain of Ps.96.3
million as a result of the sale of 34 towers. See--"Tower Monetization."
SPECIAL ITEMS
For 2003, we recorded a write-off of Ps.380.7 million corresponding to
intangible assets and goodwill, a charge of Ps.439.9 million for the valuation
of abandoned fixed assets and a write-off of Ps.732.6 million corresponding to
installation expenses and capitalized debt issuance expenses. See a more
detailed explanation in "--Recent Changes in Our Accounting Policies."
TAX PROVISIONS
Our tax provisions decreased 52.4%, or Ps.176.7 million in 2004, due to
a downward adjustment in 2003 of deferred tax assets because of uncertainty as
to the realization of tax loss carryforwards, resulting in a Ps.178.1 million
increase of the tax provision in that year.
INTEGRAL FINANCING COST
Our integral cost of financing decreased by 61.8%, from Ps.1,480.1
million in 2003 to Ps.565.2 million in 2004. This decrease was mainly due to (1)
a change in foreign exchange from a loss of Ps.809.2 million in 2003 to a gain
of Ps.72.0 million in 2004 because of the effect of the devaluation and the
appreciation on a weighted average basis of the peso as compared to the U.S.
dollar in 2003 and in 2004, respectively, on our net U.S. dollar liability
position, and (2) a Ps.100.3 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.66.6 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
"Related Party Transactions--SECSA Collection and Payment Services").
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
NET REVENUES
The following table presents the sources of our net 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, 2005, except percentages)
Revenues from services .. 6,051.8 107.5% 4,769.1 105.5% (21.2)%
Commissions ............. (423.3) (7.5)% (247.1) (5.5)% (41.6)%
------- ----- ------- ----- ------
Net revenues ............ 5,628.5 100.0% 4,522.0 100.0% (19.7)%
======= ===== ======= ===== ======
(66)
Revenues from services decreased 21.2% in 2003 as compared to 2002.
This decrease results mainly from a growing increase in market competition, less
prices and our incapacity to react to this growing competition due to our strong
financial restrictions. In order to control more effciciently our costs during
2003, we were forced to make significant reductions in our sales, marketing and
distribution operations. Additionally, we redisigned our plans for expanding and
updating our wireless network. On the other hand, our commissions were reduced
41.6%, primarily from a decrease in our prepaid air time sales and the
modification in 2003 of our payment plans for our distributors.
Postpaid customers decreased by 9.9%, from 307,129 in 2002 to 276,730
in 2003. This decrease was due mainly to minor additions of postpaid during
2003. Prepaid customers decreased by 43.7%, from 1,774,071 customers in 2002 to
999,033 customers in 2003. The decrease in 2003 reflects primarily (i) the churn
related to reduction of the period in which a prepaid customer can receive
incoming calls but can not make outgoing calls, which varied from 305 - 275 days
(depending of the last of the amount of the last customers recharge) to 90 days
and (ii) minor net additions in prepaid during 2003.
Gross additions for 2003 totaled 593,284 customers, which represents a
47.1% decrease from 2002. This decrease resulted mainly from the significant
reduction of our sales, marketing and distribution operations, resulting from
our critical financial condition, as well as from our strategy change, focusing
more to at the sale of products of greater added value, instead of 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.
COST OF SALES
Cost of Services
Our cost of services declined 18.4% to Ps.1,652.2 million in 2003 as
compared to Ps.2,023.7 million in 2002, primarily as a result from stringent
financial controls we implemented in the second half of 2003. As a percentage of
net revenues, cost of services increased to 36.5% in 2003 from 36.0% in 2002,
because of the 19.7% decreased in net revenues in 2002.
Handsets Subsidy
Handsets subsidy increased 3.0% in 2003, to Ps.624.7 million in 2002 to
Ps. 643.6 million in 2003, primarily due to (i) a change in accounting policy
implemented in the third quarter of 2003 whereby we expensed immediately the
cost of the handsets we gave to our customers, instead of amortizing it over the
life of the customer's contract and (ii) a more aggressive handset purchase
campaign.
(67)
OPERATING EXPENSES
Operating expenses increased 14.4% to Ps.1,745.7 million in 2003
compared to Ps.1,526.5 million in 2002. As a percentage of net revenues,
operating expenses increased to 38.6% in 2003 from 27.1% in 2002 because of a
19.7% decrease of net revenues in 2003. Some of the items which were the
following: (1) increase in advertising expenses during the second half of 2003
and (2) severance payments made as a result of headcount reductions.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased 7.3% from Ps.2,084.6
million in 2002 to Ps.2,236.7 million in 2003, primarily due to acquisitions of
fixed assets during 2003.
RESULTS FROM SALE OF FIXED ASSETS
We had other income of Ps.96.3 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.114.1 million from the sale of 76 towers. See--"Tower Monetization."
SPECIAL ITEMS
For 2003, we recorded a write-off of Ps.380.7 million corresponding to
intangible assets and goodwill, a charge of Ps.439.9 million for the valuation
of abandoned fixed assets and a write-off of Ps.732.7 million corresponding to
installation expenses and capitalized debt issuance expenses.
TAX PROVISIONS
Our tax provisions increased 147.8%, or Ps.201.2 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.178.1 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.1,710.2
million in 2002 to Ps.1,480.1 million in 2003. This decrease was mainly due to a
Ps.353.4 million decrease in 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.88.3 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.35.0 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.
INCOME TAX, ASSET TAX AND EMPLOYEES' PROFIT SHARING
Beginning January 1, 1999, as a result of Mexican Income Tax Law
amendments, we were required to 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., Iusacell PCS,
Iusacell PCS de Mexico and Punto-a-Punto Iusacell, S.A. de C.V.) which were not
included in our annual consolidated income tax return (although they were
consolidated for financial reporting purposes), because we did not hold more
than 50% of the voting shares of such subsidiaries. Beginning with fiscal year
2003, we were allowed to consolidate Iusacell PCS, and Iusacell PCS de Mexico
for tax purposes. We were allowed to consolidate the remaining subsidiaries
(except Punto-a-Punto Iusacell, S.A. de C.V.) for the 2005 tax consolidation. We
expect to be allowed to consolidate Punto-a-Punto Iusacell, S.A. de C.V.) for
tax purposes during 2006.
(68)
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.159.3 million, Ps.160.7 million and Ps.54.6 million
for asset tax for 2003, 2004 and 2005 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 2003, 2004 and 2005 and paid the asset taxes
specified above.
During 2003, 2004 and 2005, 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 13
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.
Funds from operating activities and other sources have not been
sufficient to enable us to make:
o 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.
o 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.
o 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.
o 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, June 15, 2005,
December 15, 2005 and June 15, 2006.
o 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,
(69)
o the U.S.$1.0 million principal payment which was due on February
7, 2005, August 8, 2005 and February 6, 2006, and the U.S.$0.1
million principal payments which was due on July 25,2005 and
January 23, 2006, under the Harris Facility, and
o 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 2006, 2007 and 2008 to total
approximately U.S.$305.0 million, not including capitalized interest. We
anticipate that approximately U.S.$70.0 million of such capital expenditures
will need to be invested during 2006, 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 2007 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.
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 2005 were U.S.$64.0 millions, which
were used principally to acquire, build out and operate our PCS network in
Mexico, 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 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. The level of Capital Investment was low due to cash and our financial
situation.
HEDGING ACTIVITIES
As of December 31, 2005, we do not carry out any hedging activities.
(70)
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 2003,
2004 and 2005, our earnings were insufficient to cover our fixed charges by
Ps.5,510.9 million, Ps.1,845.9 million and Ps.600.3 million, respectively.
Our total consolidated debt, including other financings, was Ps.8,534.4
million at December 31, 2005. At December 31, 2005, our ratio of debt to total
capitalization was 130.7% compared to 113.7% at December 31, 2004.
RESOURCES FROM OPERATING ACTIVITIES
Resources from operating activities were Ps.584.0 million in 2005
compared to Ps.448.8 million in 2004. The variation was primarily due to (1) a
lower operating loss in 2005 as compared to 2004, (2) lower inventory purchases
in 2005 as compared to 2004, and (3) a higher financing through our suppliers in
2005 as compared to 2004.
Resources from operating activities were Ps.448.8 million in 2004. The
change from a net use of resources for operating activities of Ps.219.4 million
in 2003 to resources provided by operating activities in 2004 of Ps.448.8
million was primarily due to (1) a lower operating loss in 2004 as compared to
2003 and (2) lower inventory purchases in 2004 as compared to 2003..
RESOURCES FROM FINANCING ACTIVITIES
Resources from financing activities decreased to a net use of Ps.82.5
million in 2005, from resources provided of Ps.253.0 million in 2004. This
decrease was mainly due to a lower effect of the valuation of our U.S. dollar
denominated debt from a positive amount of Ps.246.7 million in 2004 to a
negative amount of Ps.76.1 million in 2005. This effect resulted from (1) the
appreciation of the Mexican peso against the U.S. dollar as of December 31, 2005
compared to the exchange rate as of December 31, 2004, and (2) the recording of
the excess of reimbursement over the cost of shares of certain our subsidiaries.
Those effects were partially offset by the net resources of Ps.178.9 million
received from the securitization of accounts receivable in 2005.
Resources from financing activities increased to Ps.253.0 million in
2004, from Ps.181.5 million in 2003. This increase was mainly due to the payment
of Ps.141.6 million of notes in 2003, partially offset by a Ps.76.4 million
decrease in our debt resulting from the appreciation of the Mexican peso in
relation to the U.S. dollar at December 31, 2004 as compared to December 31,
2003.
RESOURCES USED FOR INVESTING ACTIVITIES
Resources used in investing activities decreased to Ps.466.1 million in
2005 from Ps.704.0 million in 2004 primarily due to (1) an increase in
investments in our network to serve a higher subscriber base, (2) acquisitions
and upgrades in software and licenses to improve our billing and information
systems, and (3) the acquisition of PCS licenses of Ps.39.6 million. Those
increases were offset by a decrease in the acquisitions of other long-term
assets in 2005 compared to 2004.
Resources used in investing activities increased to Ps.704.0 million
from Ps.136.7 million in 2003 primarily due to (1) an increase in investments in
our network to serve a higher subscriber base, (2) acquisitions and upgrades in
software and licenses to improve our billing and information systems, and (3)
the operating and/or remodeling of our corporate and regional headquarters.
FINANCIAL INSTRUMENTS
Iusacell's financial instruments consist mainly of cash and cash
equivalents, accounts receivable and payable, other financing and debt
originally issued as long-term.
(71)
Until October 2002, Iusacell used derivatives to manage the fluctuation
risk in interest rates and in foreign exchange rates. As December 31, 2005, we
did not have foreign exchange or interest rate risk hedges.
CASH
Cash consist principally in banking deposits. Iusacell invests its cash
in excess in deposits with banks.
POSITION IN FOREIGN CURRENCY
The balance sheet as of December 31 includes assets and liabilities denominated
in U.S. Dollars, as follows (figures expressed in millions of U.S. Dollars):
2005 2004
--------------- ----------------
Monetary assets U.S.$ 11.4 U.S.$ 12.3
Monetary liabilities (1,117.4) (1,045.3)
--------------- ----------------
Net monetary liability position (U.S.$ 1,106.0) (U.S.$ 1,033.0)
=============== ================
Equivalent in nominal Mexican pesos (Ps. 11,734.9) (Ps. 11,518.1)
=============== ================
As of December 31, 2005 and 2004, an important portion of the inventories of
cellular telephones and accessories, and most of the communications equipment
are of foreign origin.
During 2005, 2004 and 2003, interest income and interest expense on assets and
liabilities denominated in U.S. Dollars, were as follows (figures expressed in
millions of U.S. Dollars):
2005 2004 2003
----------- ------------ -----------
Interest income U.S.$ - U.S.$ - U.S.$ 0.5
Interest expense (92.2) (82.1) (81.9)
----------- ------------ -----------
Net interest expense (U.S.$ 92.2) (U.S.$ 82.1) (U.S.$ 81.4)
=========== ============ ============
Equivalent in nominal Mexican pesos (Ps. 978.3) (Ps. 915.6) (Ps. 914.5)
=========== ============ ============
Operating results for the years ended December 31, 2005, 2004 and 2003
include depreciation and amortization expenses related to fixed assets and
inventories of foreign origin.
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:
(72)
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 these changes.
INTERNATIONAL LONG DISTANCE SERVICE
In 1996, COFETEL established a uniform rate 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 2006.
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 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 description of our principal accounting
policies, see Note 4 to the Consolidated Financial Statements included in this
information memorandum.
(73)
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:
o 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
o 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. 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. We recorded a provision for those
services that have been provided to the customer but have not been billed yet at
the end of the period.
HANDSETS SUBSIDY
Starting January 1, 2005, we changed our accounting policy related to
the sales of handsets. The net cost of the handset subsidy (which is sales
price, less cost of sale, commissions related to the activation and other cost)
is now presented as a single item, with the following alternatives: (a) for
postpaid handsets, the subsidy is deferred at the time of activation and is
amortized on a straight-line during the life of the contract with the client
(until December 31, 2004, the subsidy was recognized in the income statement at
the time the handset was delivered to the client); and (b) for prepaid handsets,
the treatment of the subsidy has not changed, as the subsidy continues to be
recognized in the income statement at the time the handset is delivered to the
client. If we had applied our former accounting policy, our "handsets subsidy"
for the year ended December 31, 2005 would have been Ps.1,295.3 million. As a
result of the foregoing changes in 2005, it became impractical for us to
determine the effect of this change in our accounting policy for the years ended
2003 and 2004 since we lack sufficient information (per every handset
activation) to determine the handset subsidy amortization that would have
resulted if we had applied our new accounting policy during those years.
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.
(74)
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:
As discussed in Note 4n to our Consolidated Financial Statements,
during 2003 we wrote down intangible assets for Ps.342.5 million that mainly
consisted of: (1) pre-operating expenses originated by our PCS start-up
operations in northern Mexico and (2) certain payments made by us to Telmex
related to the special projects implemented by Telmex to permit competition in
long distance telephony. This write down of intangible assets is presented as a
special item in our consolidated income statement for 2003.
During the third quarter of 2003, we wrote-off installation expenses
for Ps.551.7 million and advance payments for Ps.180.9 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.
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 2003 of Ps.172.8 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.245.7
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 "handsets subsidy." We have reclassified Ps.1,264.2 million and
Ps.455.0 million for the years ended December 31, 2001 and 2002, respectively,
originally recorded under "depreciation and amortization" to "handsets subsidy."
GOODWILL
Under Mexican GAAP, we amortize goodwill on a straight-line basis over
a period of 20 years. We cancelled goodwill for Ps.38.2 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 MIPA, goodwill is no
longer amortized and its value will be subject to annual impairment tests.
(75)
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. As of the date of
this information memorandum, it is not possible for us to determine with
accuracy either the results of the efforts described in Note 21b. to our
Consolidated Financial Statements related to our debt restructuring, or the
exact dates in which an eventual debt forgiveness would occur. As a result, we
decided not to record a deferred income tax asset derived from the tax losses
which we may use to reduce the tax effects of such debt forgiveness.
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, 2004 and
2005 we sold, and leased back space in, 244, 76, 34, 97 and 6 towers,
respectively, to MATC Celular. As of March 31, 2006, we have not sold any
additional towers.
In 2003, 2004 and 2005, we recorded gains from the sale of fixed assets
of Ps.96.3 million, Ps.214.8 million, and Ps.11.7 million in connection with our
sale to MATC Celular of 34, 97 and 6 towers, respectively. However, the leasing
of the towers from MATC Celular results in an increase in our operating expenses
over the same periods.
(76)
4) MANAGEMENT
a) EXTERNAL AUDITORS
-----------------
PricewaterhouseCoopers, which had been appointed by Iusacell's Board of
Directors, served as our 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 accountants. 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 2004.
The following table presents the aggregate accrued fees for
professional audit services and other services rendered by Freyssinier Morin,
S.C. in 2004 and 2005.
FEES PAID TO INDEPENDENT
ACCOUNTANTS
------------------------------
2004 2005
------------- -------------
(in thousands of Mexican pesos)
Audit Fees(1)............................. Ps. 6,800 Ps. 7,068
Audit-Related Fees(2)..................... -- --
Tax Fees(3)............................... -- --
------------- -------------
Total..................................... Ps. 6,800 Ps. 7,068
------------- -------------
----------
(1) Audit fees include services performed by the independent accountant to
comply with generally accepted accounting standards in Mexico. 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 Bolsa Mexicana de
Valores (BMV) and the Securities and Exchange Commission (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.
(77)
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.
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., or Iusacell S.A., our sales
and marketing subsidiary, entered into an agreement with Elektra and Salinas y
Rocha, S.A. de C.V., or 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 during 2003 and 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.
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.$5.0 million in four equal payments
during 2003 and 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.$2.5 million.
For both agreements we recognized Ps.55.1 million and Ps.55.2 million
as operating expenses in 2004 and 2005, respectively.
In 2005 Elektra issued a note of credit to Iusacell por Ps. 20.0
millones for bonification of both contracts above mention.
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. During 2005, Elektra
returned to Iusacell the operation of most of the customer sales and service
centers. In 2004 and 2005, we sold to Elektra handsets (net of subsidies) for
inventory in the amount of Ps.203.3 million and Ps.39.3 million, respectively.
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 and 2005, we recorded expenses due Elektra of an aggregate
amount of Ps.127.8 million and Ps.248.5 million in commissions, Ps.22.1 million
and Ps.29.9 million in lease expenses, Ps.9.2 million and Ps.34.6 million in
administrative services, and Ps.8.2 million and Ps.17.3 million for overhead and
transportation and other expenses. We also recorded revenues of Ps.75.5 million
and Ps.22.6 million for reimbursement of costs related to the customer sales and
service centers in 2004 and 2005, respectively. We also paid Ps.19.2 million to
BAZ for commissions derived from the sale of "Planes Viva Control."
(78)
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 and 2005, we purchased handsets in
an aggregate amount equal to Ps.278.4 million and Ps.343.4 million under the
terms of this agreement, respectively. In addition, we purchased handsets from
Elektra in an aggregate amount of Ps.321.9 million outside of the agreement in
2004. We also recorded Ps.4.9 million of past due interest expense derived from
this agreement in 2005.
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
and 2005, we recorded Ps.20.7 million and Ps.10.7 million of interest from the
current account, respectively. 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
"Business--Legal Proceedings--Elektra Promissory Note."
CIRCULO DE CREDITO, S.A. DE C.V. CREDIT REPORTS AGREEMENT
On July 21, 2005, we entered into an agreement with Circulo de Credito,
S.A. de C.V., a subsidiary of Elektra, for the provision of credit reports on
customers not found in our internal database nor in the National Credit Bureau
database. During 2005, we did not pay any amount under this agreement.
BIPERCOMM PAGING SERVICES OPERATION
Bipercomm, an affiliate of MovilAccess, purchased paging equipment from
us in the amount of Ps.0.2 million and Ps.0.1 million in 2004 and 2005,
respectively. We consider that paging is not an area of growth given competition
from short message services. During 2004, we also acquired from GMA and its
subsidiaries telephone equipment for Ps.0.2 million.
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., or 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. We recorded
commission expenses of Ps.44.6 million and Ps.62.1 million related to these
services in 2004 and 2005, respectively.
TELEACTIVOS CALL CENTER SERVICES
On September 1, 2003, Iusacell S.A. and Teleactivos, S.A. de C.V., or
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.
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.
(79)
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. We
recorded expenses for these services of Ps.85.5 million and Ps.126.6 million in
2004 and 2005, respectively.
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
On 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 influenceand a related party, 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.58.1 million and Ps.3.8 million, and expenses of Ps.57.5 million
and Ps.2.0 million corresponding to capacity exchange and roaming, respectively.
In 2005, we recorded revenues of Ps.184.6 million and Ps.49.4 million, and
expenses of Ps.184.6 million and Ps.18.8 million corresponding to capacity
exchange and roaming, 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 was Ps.1.71 per minute of traffic in 2005 and Ps. 1.90 per
minute of traffic in 2004, 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.29.1 million and Ps.28.5 million, and
expenses of Ps.48.2 million and Ps.65.3 million, in interconnection fees in 2004
and 2005, respectively. 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.73.7 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. We
paid Ps.184.0 million to the non-affiliated party under the new agreement in
2005.
ADMINISTRATIVE AND OTHER SERVICES
In 2004 and 2005, we recorded revenues of Ps.4.5 million and Ps.2.0
million, respectively, for administrative services, technical, financial
analysis, accountant assistance, legal, financial, sales and production,
brokerage, public relations, also, commercial studies, industrial or technical
and support provided to TV Azteca and some of its affiliates. We also recorded
Ps.43.1 million and Ps.29.6 million in 2004 and 2005, respectively, 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, overhead expenses and helicopter lease costs. We also
purchased inventories from TV Azteca for Ps.19.2 million in 2005, and we
recorded revenues from the reimbursement of personnel and office leases of
Ps.14.6 million from GMA and its subsidiaries in 2005.
BANCO AZTECA BANKING SERVICES
Banco Azteca S.A., Institucion de Banca Multiple or BAZ, a 100%
subsidiary of Grupo, renders banking services to us, including current accounts,
payroll services and trust funds administration.. We pay standard banking fees
for these services.
(80)
On January 5, 2005, BAZ 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, which
was guaranteed by MovilAccess, Iusacell PCS and Iusacell PCS de Mexico. On
November 14, 2005 the letter of credit was amended to be a prepaid letter of
credit in the amount of Ps.19.4 million. We paid BAZ Ps.5.8 million and Ps.2.1
million in 2004 and 2005, respectively, in fees related to these letters of
credit.
We are currently analyzing the convenience of appointing BAZ as our
past-due portfolio recovery agent. We believe that BAZ may have the
infrastructure and systems to allow it to collect our past-due receivables at a
higher success rate than us. We recorded expenses of Ps.10.0 million due to BAZ
for the administration of our receivables portfolio in 2005.
PROVISION OF TELECOMMUNICATIONS SERVICES
On July 1, 2004 and February 1, 2005, we entered into agreements with
Elektra and TV Azteca and BAZ, respectively, pursuant to which we provide local
and long distance telephony services to their respective offices and other
premises. For 2004 and 2005, we recorded revenues of Ps.19.5 million and Ps.71.8
million, respectively, under these agreements is undefined.
On February 1, 2005, we entered on agreements with Elektra, TV Azteca
and BAZ respectively, pursuant to which we provided voice services, data,
connectivity, monitoring, and equipment administration of last mille primarily.
For the years ended December 31, 2004 and 2005, we recorded revenues
under these agreements to Ps.19.5 million and Ps. 71.8 million, respectively (of
which Ps.10.7 million and Ps.36.2 million related to Grupo Elektra, S.A. de C.V.
and its subsidiaries, Ps.8.4 million and Ps.31.2 million related to TV Azteca,
and Ps.0.4 million and Ps.4.4 million related to GMA and its subsidiaries,
respectively).
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.7.8 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. We recorded leases expenses of Ps.0.5 million and Ps.1.7 million under
this agreement related to 2004 and 2005, respectively.
On October 1, 2004, Iusacell and Compania Operadora de Teatros, S.A. de
C.V., or 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 paid COTSA a fee in
an amount equal to 3% of the amount of the bond. We recorded Ps.0.3 million in
fees related to 2004.
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 recorded Ps.0.3
million and Ps.0.1 million in expenses related to these services in 2004 and
2005, respectively.
Corporativo Persal, S.A. de C.V., a company owned by Mr. Salinas
Pliego's son, was appointed as one of our prepaid airtime distributors in 2005.
We did not have operations in 2005.
(81)
On January 5, 2005, Movil Access, S.A. de C.V., granted Banco Azteca,
S.A. a guarantee related to the letter of credit issued by Banco Azteca, S.A.
and we plan 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. We recorded Ps. 5.4 million in expenses during 2005.pay
standard commissions.
DOSGDOSC, S.A. de C.V., a company owned by Mr. Guzman Sepulveda's son,
was appointed as one of our distributors in 2005. We paid Ps.0.5 million in 2005
and we plan to pay standard commissions.
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:
o related party transactions not in the ordinary course of
business,
o guarantees involving 30% or more of consolidated assets, and
o 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 27, 2006, 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.
The following table presents information with respect to our directors
as of the date hereof:
NAME AGE POSITION(S)
------------------------------------- ------- ---------------------------------------
Ricardo Benjamin Salinas Pliego...... 50 Chairman of the Board of Directors
Pedro Padilla Longoria............... 40 Vice Chairman of the Board of Directors
Gustavo Guzman Sepulveda............. 52 Director
Luis Jorge Echarte Fernandez......... 62 Director
Joaquin Arrangoiz Orvananos.......... 49 Director
Gonzalo Brockmann Garcia............. 51 Director
Marcelino Gomez Velasco Sanroman..... 48 Director
Manuel Rodriguez de Castro........... 41 Director
(82)
Upon the acquisition by Movil Access 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............. 52 Chief Executive Officer
Jose Luis Riera Kinkel............... 40 Chief Financial Officer
Ricardo Benjamin Salinas Pliego...... 50 Executive Director
Pedro Padilla Longoria............... 40 Executive Director
Eduardo Kuri Romo.................... 36 Director, Systems
Alejandra Ibarguengoitia Vazquez
Aldana.............................. 36 Director, Marketing
Franklin Moron Castillo.............. 39 Director, Sales
Patricio Medina Moya................. 35 Director, Mobile Products
Fernando Jose Cabrera Garcia......... 41 General Counsel and Secretary
non-member of the Board
Upon the acquisition by Movil Access 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.
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. 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.
(83)
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 business 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
master 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.
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).
(84)
Franklin Moron Castillo .Mr. Moron has served as Director of
Distribution Channel of Iusacell since April 2005. Prior to that, Mr. Moron was
Director of Sales of Tyco and Skytel. Mr. Moron holds an engineering degree from
Universidad Central de Venezuela in Caracas, Venezuela and a Strategic Planning
Master from Instituto Tecnologico Autonomo de Mexico (ITAM).
Jaime 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 master in
law degree from Georgetown University in Washington D.C. Mr. Cabrera recently
completed a Certificate in Telecommunications.
COMPENSATION
The aggregate compensation (including, without limitation, base salary
and benefits) paid by us to all executive officers in 2005 was Ps.86.5 million,
compared to Ps.95.3 million in 2004. 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).
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.
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.
(85)
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 Movil Access, a subsidiary of GMA at 99%,
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 February 28, 2006, based on information made
available to us, our shareholders' ownership interests were as follows:
SHAREHOLDERS COMMON SHARES %
-------------------------- ---------------- -------
Movil Acces................ 69,736,552 74.6
Ricardo B. Salinas Pliego.. 6,960,670 7.4
Public float............... 16,727,697 18.0
Total...................... 93,424,919 100.0
On July 29, 2003, Movil Access completed a public tender offer in
Mexico and the United States for all outstanding equity securities of Iusacell.
As a result, Movil Access acquired 74.6% of the outstanding capital stock of
Iusacell.
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.
On June 1, 2005, Iusacell held a general extraordinary shareholder's
meeting by which its shareholders accepted ADR's Termination Program and
consequently ADR's delisting of the "NYSE". On September 19, 2005 and per
instructions of Iusacell, the Bank of New York (BoNY) ended our program of
ADR's. As a result, on September 20, 2005, operations of ours ADR's in NYSE were
suspended.
d) BY - LAWS AND OTHER AGREEMENTS
------------------------------
December 30, 2005 the Mexican Congress issued the new Mexican Stock
Law, which will be on June, 28, 2006. The new Mexican Stock Law includes
dispositions that pretends a better rule of disclosure of information, minority
shareholders rights and corporate practices. However, the new Mexican Stock Law
rules mayor obligations and liabilities to the members of the Board of Directors
and principal executives ( as the diligence and loyalty due). On the other hand,
according to the new Mexican Stock Law we will be obligated to adopt certain
amendments to our By-laws until the following 180 days after the date of
entrance of this new law.
(86)
We are in the process to evaluate that specific amendments that will applied to
our By-laws being primary, as follows: (i) amend our name to reflect that we
adopt a new type of entity, being now Sociedad Anonima Bursatil or S:A:B., (ii)
to create a new committee of our Board of Directors, the Corporate Practices
Committee, which will be integrated in its totally by independent directors; and
(iii) the elimination of the examiner and the assumption of its responsibilities
by the Board of Directors through an Audit Committee and the new Better
Corporate Practices Committee, either as our External Auditor. We are in the
process to evaluate the specific amendments to be applied to the company.
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. 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.
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.
(87)
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.
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:
o whose shares were not represented when the action was taken
or, if represented, were voted against it; and
o whose complaint makes reference to the clause of the by-laws
or the legal provision that was infringed.
Shareholders' meetings may be called by the Board of Directors, 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.
(88)
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.
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 .
(89)
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.
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.
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.
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."
(90)
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. 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.
(91)
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 telephone business
with the prior approval of the Mexican Foreign Investment Commission.
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.
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. ADRs 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 ADR represented 100 Iusacell series V
shares and traded under the symbol CEL.
(92)
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 ADR represents five Iusacell
shares. The trading symbol did not change. The ADRs 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 ADRs 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, the New York Stock Exchange (NYSE)
suspends the trading of the ADRs. September 19, 2005 and per instructions of the
Bank of New York (BoNY) we ended our program of ADR's. As a result, September
20, 2005, operations of ours ADR's in NYSE were suspended.
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, and (ii) the Iusacell ADRs
on the New York Stock Exchange, as reported by the New York Stock Exchange. The
prices before May 12, 2003, were adjusted to reflect the effects of the change
in the ADR ratio and before December 19, 2003 were adjusted to reflect the
reverse stock split and change in the ADR ratio which occurred.
On June 1, 2005, held a general extraordinary shareholder's meeting by
which its shareholders accepted ADR's Termination Program and consequently
ADR's delisting of the "NYSE". On September 19, 2005 and per instructions of
Iusacell, the Bank of New York (BoNY) ended our program of ADR's. As a result,
on September 20, 2005, operations of ours ADR's in NYSE were suspended.
MEXICAN STOCK EXCHANGE (IN PS.)--COMMON SHARES
MEXICAN STOCK EXCHANGE PRICE PER SHARE (PESOS)
----------------------
PREVIOUS FIVE YEARS: HIGH LOW
-------------------------------- ------- ------
2001............................ 276.00 41.00
2002............................ 82.20 9.00
2003............................ 23.60 3.40
2004............................ 24.00 12.00
2005............................ 34.18 17.80
MEXICAN STOCK EXCHANGE PRICE PER SHARE (PESOS)
----------------------
PREVIOUS TWO YEARS (BY QUARTER): HIGH LOW
-------------------------------- ------- ------
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
2005:
----
First Quarter................... 23.29 20.99
Second Quarter.................. 32.82 17.80
Third Quarter................... 34.18 26.00
Fourth Quarter.................. 30.00 24.02
(93)
MEXICAN STOCK EXCHANGE PRICE PER SHARE (PESOS)
----------------------
PREVIOUS SIX MONTHS: HIGH LOW
-------------------------------- ------- ------
December 2005................... 30.00 25.07
January 2006.................... 33.56 26.00
February 2006................... 31.21 26.84
March 2006...................... 31.00 27.50
April 2006...................... 29.45 27.10
May 2006........................ 40.50 29.45
NEW YORK STOCK EXCHANGE PRICE PER ADR (DOLLARS)
-----------------------
PREVIOUS FIVE YEARS: HIGH LOW
-------------------------------- ------- ------
2001............................ 135.00 20.50
2002............................ 45.00 4.20
2003............................ 10.84 1.70
2004............................ 10.29 5.15
2005............................ 20.47 8.00
NEW YORK STOCK EXCHANGE PRICE PER ADR (DOLLARS)
-----------------------
PREVIOUS TWO YEARS (BY QUARTER): HIGH LOW
-------------------------------- ------- ------
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
2005:
----
First Quarter................... 10.30 9.05
Second Quarter.................. 15.28 8.00
Third Quarter................... 20.47 11.75
TRADING ON THE NEW YORK STOCK EXCHANGE
ADRS's 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/ADR ratio change. Since December 19, 2003 one ADR represents five Iusacell
shares and continues to trade under the symbol CEL.
On June 1, 2005, Iusacell held a general extraordinary shareholder's
meeting by which its shareholders accepted ADR's Termination Program and
consequently ADR's delisting of the "NYSE". On September 19, 2005 and per
instructions of Iusacell, the Bank of New York (BoNY) ended our program of
ADR's. As a result, on September 20, 2005, operations of ours ADR's in NYSE were
suspended.
(94)
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.
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6) RESPONSIBLE PERSONS
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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
Chief Executive Officer Chief Financial Officer
Fernando Jose Cabrera Garcia
Legal Director
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7) ANNEX
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FINANCIAL STATEMENTS AND EXAMINERS STATEMENT
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