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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   Form 20-F [  ]
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
 OR [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2003
 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934for the transition period from to
 COMMISSION FILE NUMBER
001-14938   Grupo Iusacell, S.A. de C.V. (Exact name of Registrant as specified in its charter)
 Iusacell Group(Translation of Registrants name into English) United Mexican States(Jurisdiction of incorporation or organization) Montes Urales 460
Colonia Lomas de Chapultepec
Delegacion Miguel Hidalgo
11000 Mexico, D.F.(Address of principal executive offices)   Securities registered or to be registered pursuant toSection 12(b)of the Act. Title of each class
    
    Name of each exchange on which registeredAmerican depositary shares,
each representing five shares
of common stock
    
    New York Stock ExchangeShares of common stock
    
    New York Stock Exchange*
   *
    
    Not for trading, but only in connection with the registration of American
depositary shares, pursuant to the requirements of the United States
Securities and Exchange Commission. Securities registered or to be registered pursuant to Section 12(g) of the Act:




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None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuers classes
of capital or common stock as of the close of the period covered by the Annual
Report: Shares of common stock
    
    93,101,240 shares
 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or15(d)of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]     No  [  ] Indicate by check mark which financial statement item the registrant has
elected to follow: Item 17 [  ]    Item 18 [X]




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TABLE OF CONTENTS PagePART I
    
    
    1ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    1ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    1ITEM 3.   KEY INFORMATION
    
    
    1ITEM 4.   INFORMATION ON THE COMPANY
    
    
    15ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    35ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    53ITEM 7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    58ITEM 8.   FINANCIAL INFORMATION
    
    
    62ITEM 9.   THE OFFER AND LISTING
    
    
    64ITEM 10. ADDITIONAL INFORMATION
    
    
    67ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    80ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    80PART II
    
    
    81ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    81ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS
    
    
    81ITEM 15. CONTROLS AND PROCEDURES
    
    
    81ITEM 16. RESERVED
    
    
    82ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    82ITEM 16B CODE OF ETHICS
    
    
    82ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    82ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    83ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
AFFILIATED PURCHASERS
    
    
    83PART III
    
    
    83ITEM 17. FINANCIAL STATEMENTS
    
    
    83ITEM 18. FINANCIAL STATEMENTS
    
    
    83
 i




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PageITEM 19. EXHIBITS
    
    
    84PURCHASE AND SALE AGREEMENTSECOND AMENDED AND RESTATED MASTER LEASE AGREEMENTCELLULAR CONCESSION FOR REGION 8AGREEMENT WITH MR. ELIZONDOCOMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGESLIST OF SUBSIDIARIESCERTIFICATIONCERTIFICATIONCERTIFICATION
  ii




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FORWARD-LOOKING INFORMATION This Annual Report contains various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the Act),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
Exchange Act), including statements regarding, among other things, the
financial performance and operating plans for Grupo Iusacell, S.A. de C.V.
These statements are based upon the current beliefs of our management, as well
as on assumptions made by management based upon information currently available
to it. The words believe, expect, likely and anticipate and similar
expressions identify some of these forward-looking statements. These
statements are subject to various risks and uncertainties and other factors
which may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Should managements
assumptions prove incorrect, actual results may vary materially and adversely
from those anticipated or projected. Readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of their
respective dates. We undertake no obligation to update publicly or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Factors described in this Annual Report under Item 3, Key
InformationRisk Factors, could cause actual results to differ materially from
such forward-looking statements. *       *       * Iusacell meansGrupo Iusacell, S.A. de C.V.This company was formerly
known asNuevo Grupo Iusacell, S.A. de C.V.Unless the context otherwise
requires, we, our or us refers to Iusacell and its subsidiaries. Iusacell Celular meansGrupo Iusacell Celular, S.A. de C.V.This
company was formerly known asGrupo Iusacell, S.A. de C.V.Iusacell owns 100%
of the capital stock of Iusacell Celular. Certain terms are defined the first time they are used in this Annual
Report. The Glossary of Telecommunications Terms that begins immediately
following Item 19, Exhibits provides definitions of certain technical terms
used herein. On July 29, 2003, MovilAccess, S.A. de C.V.(MovilAccess), a Mexican
telecommunications company subsidiary of Biper, S.A. de C.V.(Biper), a
paging company, acquired through a tender offer in Mexico and the United States
74.6% of Iusacells capital, and became Iusacells principal shareholder.
Biper, MovilAccess, 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 controlled, 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 June 2000, when Verizon was formed), as the context requires. The
term Vodafone in this Annual Report refers to Vodafone Group Plcor its
subsidiaries, as the context requires. Postpaid figures in this Annual Report include public and rural telephony,
unless otherwise indicated. Iusacells shares of common stock trade on the New York Stock Exchange (in
the form of American depositary shares) and on the Mexican stock exchange.
Both Iusacell and Iusacell Celular have publicly-traded debt securities. Unless otherwise specified, all references to U.S. dollars, U.S.
Dollars, dollars, U.S.$ or $ are to United States dollars, and
references to Ps. and pesos are to Mexican pesos. We publish our financial
statements in pesos that are adjusted to reflect changes in purchasing power
due to inflation. Thus, unless otherwise specified, our financial data is
presented in constant pesos with purchasing power as of December 31, 2003.
Actual amounts may vary from amounts presented in this Annual Report due to
rounding. iii




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We will provide without charge to each person to whom this Annual Report
is delivered, upon written or oral request, a copy of any or all of the
documents incorporated by reference into this Annual Report (not including the
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into such documents). Written requests for such copies should be
directed to Grupo Iusacell, S.A. de C.V., Montes Urales 460, Colonia Lomas de
Chapultepec, 11000 Mexico, D.F., Attention: Jose Luis Riera Kinkel, Chief
Financial Officer. E-mail requests may be directed to
investor.relations@iusacell.com.mx.
Telephone requests may be directed to 011-52-55-5109-5927. iv




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PART I 
 ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS A.  DIRECTORS AND SENIOR MANAGEMENT Not applicable. B.  ADVISERS Not applicable. C.  AUDITORS Not applicable. 
 ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE A.  OFFER STATISTICS Not applicable. B.  METHOD AND EXPECTED TIMETABLE Not applicable. 
 ITEM 3.   KEY 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, 2003, 2002, 2001, 2000 and 1999. The financial
information presented for fiscal years ended December 31, 2003, 2002 and 2001
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. Prior to August 10, 1999, when Iusacell completed a corporate
restructuring, Iusacell had minimal assets and liabilities and no operations or
contingent liabilities. For accounting purposes, Iusacell is the successor
business to Iusacell Celular, the holding and operating company prior to the
restructuring. Iusacell owns 100% of the capital stock of Iusacell Celular. The Consolidated Financial Statements have been prepared in accordance
with Mexican generally accepted accounting principles, which we refer to as
Mexican GAAP, which differs in certain significant respects from United States
generally accepted accounting principles, which we refer to as U.S. GAAP.
Pursuant to Mexican GAAP, we have prepared the Consolidated Financial
Statements and the selected financial data presented below in accordance with
Bulletin B-10 of the Mexican Institute of Public Accountants (MIPA), which
provides for the recognition of certain effects of inflation. Throughout the periods presented in this Annual Report, Bulletin B-10 has
required Iusacell to restate non-monetary assets using the National Consumer
Price Index (Indice Nacional de Precios al Consumidor), also referred to as the
INPC. Throughout the periods presented in this Annual Report, Bulletin B-10
has also required Iusacell to restate the components of shareholders equity
using the INPC and to record gains or losses in purchasing power from holding
monetary liabilities or assets. In addition, Bulletin B-10 requires restatement of all financial
statements to constant pesos as of the date of the most recent balance sheet
presented. Accordingly, we have restated all data in the Consolidated
Financial Statements and in the selected financial data set forth below in
constant pesos with purchasing power as of December 31, 2003. 1




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Note 20 to the Consolidated Financial Statements presents the principal
differences, other than inflation accounting, between Mexican GAAP and U.S.
GAAP applicable to us and contains a reconciliation of Iusacells net profit
(loss) and stockholders equity to U.S. GAAP. We have not reversed the effect
of these inflation accounting principles discussed above in the reconciliation
of Iusacells net profit (loss) and stockholders equity to U.S. GAAP. 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. As of and for the Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(Thousands of constant pesos as of December 31, 2003,
    
    (Thousands ofexcept per share and operating data)(1)
    
    
    
    
    
    U.S. dollars,except per shareand operatingdata)(2)Income Statement Data:Mexican GAAP:Revenues:Services
    
    
    4,710,509
    
    
    
    5,716,253
    
    
    
    6,192,488
    
    
    
    5,129,960
    
    
    
    4,189,420
    
    
    
    372,658Telephone equipment sales and other
    
    
    546,304
    
    
    
    581,092
    
    
    
    667,278
    
    
    
    616,968
    
    
    
    549,106
    
    
    
    48,844Total revenues
    
    
    5,256,813
    
    
    
    6,297,345
    
    
    
    6,859,766
    
    
    
    5,746,928
    
    
    
    4,738,526
    
    
    
    421,502Cost of sales:Cost of services
    
    
    1,342,994
    
    
    
    1,609,169
    
    
    
    1,684,175
    
    
    
    1,594,040
    
    
    
    1,498,646
    
    
    
    133,308Cost of telephone equipment sales
and other(3)
    
    
    336,927
    
    
    
    391,264
    
    
    
    415,550
    
    
    
    507,519
    
    
    
    899,616
    
    
    
    80,023Total cost of sales
    
    
    1,679,921
    
    
    
    2,000,433
    
    
    
    2,099,725
    
    
    
    2,101,559
    
    
    
    2,398,262
    
    
    
    213,331Gross profit
    
    
    3,576,892
    
    
    
    4,296,912
    
    
    
    4,760,041
    
    
    
    3,645,369
    
    
    
    2,340,264
    
    
    
    208,171Operating expenses
    
    
    1,806,342
    
    
    
    2,114,536
    
    
    
    2,282,434
    
    
    
    1,889,382
    
    
    
    1,898,166
    
    
    
    168,846Depreciation and amortization(3)
    
    
    1,781,615
    
    
    
    2,647,631
    
    
    
    2,878,708
    
    
    
    2,336,498
    
    
    
    2,057,775
    
    
    
    183,043Other operating income
    
    
    
    
    
    
    
    
    
    
    338,388
    
    
    
    104,998
    
    
    
    88,556
    
    
    
    7,877Operating loss
    
    
    (11,065
    )
    
    
    (465,255
    )
    
    
    (62,713
    )
    
    
    (475,513
    )
    
    
    (1,527,121
    )
    
    
    (135,841
    )Intangible assets write-off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (350,261
    )
    
    
    (31,156
    )Valuation of abandoned fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (404,700
    )
    
    
    (35,999
    )Other expense, net
    
    
    (28,823
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (626,610
    )
    
    
    (55,738
    )Integral financing cost (gain):Interest expense, net
    
    
    364,340
    
    
    
    1,079,793
    
    
    
    888,793
    
    
    
    935,898
    
    
    
    968,116
    
    
    
    86,116Foreign exchange (gain) loss, net
    
    
    (198,879
    )
    
    
    18,446
    
    
    
    (247,063
    )
    
    
    1,069,640
    
    
    
    744,512
    
    
    
    66,226Gain from monetary position
    
    
    (827,492
    )
    
    
    (495,357
    )
    
    
    (293,040
    )
    
    
    (432,167
    )
    
    
    (350,861
    )
    
    
    (31,210
    )Total
    
    
    (662,031
    )
    
    
    602,882
    
    
    
    348,690
    
    
    
    1,573,371
    
    
    
    1,361,767
    
    
    
    121,132Equity participation in net (loss) profit of
associated companies
    
    
    (59,525
    )
    
    
    (21,594
    )
    
    
    7,164
    
    
    
    (10,129
    )
    
    
    (17,544
    )
    
    
    (1,561
    )Income (loss) before assets tax, income
tax, minority interest and
extraordinary item
    
    
    562,618
    
    
    
    (1,089,731
    )
    
    
    (404,239
    )
    
    
    (2,059,013
    )
    
    
    (4,288,003
    )
    
    
    (381,427
    )Provisions for:Asset tax
    
    
    165,838
    
    
    
    171,823
    
    
    
    160,908
    
    
    
    115,647
    
    
    
    146,525
    
    
    
    13,034Income tax
    
    
    506,109
    
    
    
    0
    
    
    
    0
    
    
    
    9,618
    
    
    
    163,852
    
    
    
    14,575Total
    
    
    671,947
    
    
    
    171,823
    
    
    
    160,908
    
    
    
    125,265
    
    
    
    310,377
    
    
    
    27,609Loss from continuing operations before
minority interest and extraordinary
item
    
    
    (109,329
    )
    
    
    (1,261,554
    )
    
    
    (565,147
    )
    
    
    (2,184,278
    )
    
    
    (4,598,380
    )
    
    
    (409,036
    )Minority interest
    
    
    22,421
    
    
    
    18,091
    
    
    
    22,745
    
    
    
    17,296
    
    
    
    33,137
    
    
    
    2,948Loss from continuing operations
before extraordinary item
    
    
    (86,908
    )
    
    
    (1,243,463
    )
    
    
    (542,402
    )
    
    
    (2,166,982
    )
    
    
    (4,565,243
    )
    
    
    (406,088
    )Extraordinary item(4)
    
    
    506,109
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,517
    
    
    
    1,380Cumulative effect of the adoption of the
new accounting pronouncement and
change of accounting policy(3)
    
    
    
    
    
    
    
    
    
    
    (7,120
    )
    
    
    
    
    
    
    (159,015
    )
    
    
    (14,145
    )(Loss) gain from discontinued
operations(5)
    
    
    (1,919
    )
    
    
    9,743
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net profit (loss)
    
    
    417,282
    
    
    
    (1,233,720
    )
    
    
    (549,522
    )
    
    
    (2,166,982
    )
    
    
    (4,708,741
    )
    
    
    (418,853
    )(Loss) per share from continuing operations.
    
    
    (1.35
    )
    
    
    (17.81
    )
    
    
    (7.26
    )
    
    
    (23.28
    )
    
    
    (49.04
    )
    
    
    (4.36
    )Net profit (loss) per share
    
    
    6.49
    
    
    
    (17.67
    )
    
    
    (7.35
    )
    
    
    (23.28
    )
    
    
    (50.58
    )
    
    
    (4.50
    )Weighted-average number of shares
outstanding(6)
    
    
    64,342
    
    
    
    69,834
    
    
    
    74,757
    
    
    
    93,101
    
    
    
    93,101
    
    
    
    93,101U.S. GAAP:Total revenues
    
    
    5,256,813
    
    
    
    6,297,345
    
    
    
    6,202,884
    
    
    
    5,080,621
    
    
    
    4,446,355
    
    
    
    395,513Operating (loss) profit
    
    
    (97,366
    )
    
    
    (476,498
    )
    
    
    (517,296
    )
    
    
    (399,703
    )
    
    
    (1,740,180
    )
    
    
    (154,793
    )Net (loss) profit
    
    
    299,659
    
    
    
    (1,248,229
    )
    
    
    (889,243
    )
    
    
    (1,989,812
    )
    
    
    (4,510,354
    )
    
    
    (401,206
    )Basic and diluted (loss) profit per share(7)
    
    
    4.66
    
    
    
    (17.88
    )
    
    
    (11.90
    )
    
    
    (21.37
    )
    
    
    (48.45
    )
    
    
    (4.31
    )Balance Sheet Data:Mexican GAAP:Working capital
    
    
    1,012,072
    
    
    
    (748,326
    )
    
    
    383,369
    
    
    
    (95,241
    )
    
    
    (9,792,674
    )
    
    
    (871,079
    )
 2




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As of and for the Year Ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003(Thousands of constant pesos as of December 31, 2003,
    
    (Thousands ofexcept per share and operating data)(1)
    
    
    
    
    
    U.S. dollars,except per shareand operatingdata)(2)Property and equipment, net
    
    
    8,465,490
    
    
    
    9,397,718
    
    
    
    10,407,129
    
    
    
    9,740,145
    
    
    
    7,689,053
    
    
    
    683,958Total assets
    
    
    18,546,479
    
    
    
    18,106,908
    
    
    
    18,213,428
    
    
    
    15,724,510
    
    
    
    11,813,359
    
    
    
    1,050,824Total debt
    
    
    9,897,346
    
    
    
    8,772,834
    
    
    
    8,076,265
    
    
    
    8,730,180
    
    
    
    8,897,196
    
    
    
    791,425Total stockholders equity
    
    
    6,555,445
    
    
    
    7,287,816
    
    
    
    7,872,530
    
    
    
    5,578,633
    
    
    
    811,288
    
    
    
    72,166Capital stock
    
    
    5,911,105
    
    
    
    6,398,991
    
    
    
    7,423,712
    
    
    
    7,423,712
    
    
    
    7,423,712
    
    
    
    660,355U.S. GAAP:Working capital
    
    
    757,247
    
    
    
    (1,054,229
    )
    
    
    162,573
    
    
    
    (259,574
    )
    
    
    (9,976,174
    )
    
    
    (887,402
    )Property and equipment, net
    
    
    8,465,919
    
    
    
    9,163,547
    
    
    
    10,151,254
    
    
    
    9,543,410
    
    
    
    7,559,077
    
    
    
    672,396Total assets
    
    
    19,093,757
    
    
    
    18,684,813
    
    
    
    18,768,938
    
    
    
    16,722,561
    
    
    
    13,097,534
    
    
    
    1,165,054Total debt
    
    
    9,903,861
    
    
    
    8,772,834
    
    
    
    8,076,265
    
    
    
    8,730,181
    
    
    
    8,897,196
    
    
    
    791,425Minority interest
    
    
    41,341
    
    
    
    27,963
    
    
    
    128,819
    
    
    
    604
    
    
    
    
    
    
    
    Total stockholders equity
    
    
    6,418,311
    
    
    
    6,940,268
    
    
    
    6,873,160
    
    
    
    5,084,676
    
    
    
    574,322
    
    
    
    51,087Other Financial Data:Mexican GAAP:Capital expenditures(8)
    
    
    2,142,806
    
    
    
    2,363,487
    
    
    
    2,178,265
    
    
    
    884,809
    
    
    
    204,900
    
    
    
    18,246Interest expense, net
    
    
    364,340
    
    
    
    1,079,793
    
    
    
    888,793
    
    
    
    935,898
    
    
    
    968,116
    
    
    
    86,116Ratio of earnings to fixed
charges(9)
    
    
    2.59
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Data:Covered POPs(10)
    
    
    67,591,791
    
    
    
    68,376,034
    
    
    
    89,917,967
    
    
    
    91,356,654
    
    
    
    92,589,969
    
    
    
    92,589,969Subscribers:(11)Postpaid
    
    
    352,289
    
    
    
    442,594
    
    
    
    404,075
    
    
    
    356,014
    
    
    
    322,310
    
    
    
    322,310Prepaid
    
    
    970,509
    
    
    
    1,238,625
    
    
    
    1,451,091
    
    
    
    1,725,186
    
    
    
    953,453
    
    
    
    953,453Total subscribers
    
    
    1,322,798
    
    
    
    1,681,219
    
    
    
    1,855,166
    
    
    
    2,081,200
    
    
    
    1,275,763
    
    
    
    1,275,763Gross subscriber additions
    
    
    788,438
    
    
    
    1,092,895
    
    
    
    1,051,089
    
    
    
    1,122,024
    
    
    
    593,284
    
    
    
    593,284Average subscribers(12)
    
    
    1,290,558
    
    
    
    1,637,481
    
    
    
    1,721,072
    
    
    
    2,091,765
    
    
    
    1,810,101
    
    
    
    1,810,101Average monthly postpaid churn(13)
    
    
    2.96
    %
    
    
    3.51
    %
    
    
    3.76
    %
    
    
    3.55
    %
    
    
    3.28
    %
    
    
    3.28
    %Penetration(14)
    
    
    1.96
    %
    
    
    2.46
    %
    
    
    2.10
    %
    
    
    2.28
    %
    
    
    1.38
    %
    
    
    1.38
    %Average monthly MOUs per
subscriber(15)
    
    
    85
    
    
    
    78
    
    
    
    84
    
    
    
    63
    
    
    
    74
    
    
    
    74Nominal average monthly mobile
telephony revenue per subscriber
(ARPU)(16)
    
    
    311
    
    
    
    267
    
    
    
    267
    
    
    
    191
    
    
    
    190
    
    
    
    16.86Nominal cost to acquire a new
subscriber(17)
    
    
    3,277
    
    
    
    3,270
    
    
    
    2,677
    
    
    
    2,419
    
    
    
    3,004
    
    
    
    267.21
   (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 Annual Report, unless otherwise indicated, has been
restated in constant pesos with purchasing power as of December 31, 2003.
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, 2003. The inflation indices used in this Annual
Report are 1.2503 for 1999, 1.1475 for 2000, 1.0991 for 2001 and 1.0398
for 2002 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, 2003,
which was Ps.11.242 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, 2003 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, 2003, which was
Ps.11.23 per U.S.$1.00. The difference between the noon buying rate
reported by the Federal Reserve Bank of New York and the exchange rate
which was accessible to us causes certain inconsistencies between
references to U.S. dollar amounts in this Annual Report and the actual
outstanding U.S. dollar amounts of our U.S. dollar-denominated
obligations. For example, at December 31, 2003, our actual total debt
outstanding, excluding trade notes payable, was U.S.$800.1 million. In
preparing the Consolidated Financial Statements, we multiplied this
dollar amount by Ps.11.23 (the exchange rate which was accessible to us
at December 31, 2003) to arrive at Ps.8,985.1 million of total debt,
excluding trade notes payable. For purposes of this Annual Report, we
have converted this peso amount to U.S. dollars for the convenience of
the reader by dividing it by Ps.11.242 (the noon buying rate reported by
the Federal Reserve Bank of New York at December 31, 2003) to arrive at
U.S.$799.2 million of total debt, excluding trade notes payable.As a result of the combined effect of the restatement of the financial
data in constant pesos with purchasing power as of December 31, 2003 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




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##### Table of Contents



(3)
    
    Until September 30, 2003, we amortized the cost of handsets sold or given
to our postpaid customers under exclusive service contracts on the basis
of the term of such contracts to match costs with the timing of earned
revenues. The average amortization period was twelve months. On
September 30, 2003, we changed this accounting policy. As a result, we
now record the full cost of such handsets in our income statement under
cost of telephone equipment sales and other at the moment the contract
is signed. The cumulative effect of this change in our accounting policy
resulted in a loss for the year 2003 of Ps.159.0 million. This amount
represents the remaining balance of unamortized cost of handsets as of
September 30, 2003 and is included under cumulative effect of the
adoption of new accounting pronouncement and change in accounting policy
in our consolidated income statement for the year 2003.(4)
    
    For 1999, the extraordinary item represents the utilization of tax loss
carryforwards available to us which, under Mexican GAAP in effect at the
time, was required to be classified as an extraordinary item. Under U.S.
GAAP, the utilization of tax loss carryforwards is recorded as a component
of tax expense.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 an extraordinary gain for the year ended December
31, 2003.(5)
    
    In December 1998, we discontinued the operations of our subsidiary
Cellular Solutions de México, S.A. de C.V., which sold cellular handset
accessories. This subsidiary transferred all of its existing inventories
as of December 31, 1998 to another one of our subsidiaries and terminated
all of its employees during January and February 1999. Under U.S. GAAP,
the closing of this subsidiary does not constitute a discontinued
operation under Accounting Principles Board Opinion (APB Opinion) No.
30. Accordingly, the gain (loss) from discontinued operations is recorded
as operating income (expense).(6)
    
    On October 17, 2003, an extraordinary stockholders meeting approved a
reverse stock split and the issuance of a new single series of shares of
common stock. Each new share represents 20 series A or V shares. The
exchange of shares was completed in December 2003. Consequently, we
present share information for all periods after giving effect to this
reverse stock split.(7)
    
    Diluted (loss) profit per share for each of the years presented is equal
to basic (loss) profit per share. This is because the potential drawdowns
and conversions under a subordinated convertible facility with Bell
Atlantic and the shares outstanding (purchased by a trust for future
allocation to executives of the Company) under an executive employee stock
purchase plan are excluded because to include them would have been
antidilutive for the periods presented. The number of potentially
antidilutive shares that were excluded from the computation of diluted
(loss) profit per share to account for the drawdowns and conversions under
the facility with Bell Atlantic were 3,464,286 shares for 1999. The
number of shares outstanding under the executive employee stock purchase
plan were 384,762 for 1999 and 324,256 for each of 2000, 2001, 2002 and
2003.(8)
    
    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 1999 and
2000, pursuant to a waiver from its bank lenders, and beginning in 2001,
pursuant to the terms of its senior refinancing secured loan, Iusacell
Celular excluded capitalized interest cost from capital expenditures in
determining its compliance with capital expenditure limitations set forth
in its debt covenants. Pursuant to waivers obtained from its lenders,
Iusacell Celular excluded Lucent trade-in credits from capital
expenditures in determining its compliance with the capital expenditures
limitations set forth in its debt covenants. See Item 5, Operating and
Financial Review and ProspectsLiquidity and Capital ResourcesCapital
Expenditures.(9)
    
    The ratio of earnings to fixed charges covers continuing operations. For
this purpose, earnings are calculated as income or loss before taxes plus
(i) integral financing cost, including amortization of capitalized
interest, (ii) the interest portion of annual rent expense and (iii)
losses from less than 50%-owned affiliates. Fixed charges include the
expensed and capitalized portions of integral financing cost. Earnings
were insufficient to cover fixed charges in 2000, 2001, 2002 and 2003.
The fixed charge coverage deficiency for the years ended December 31,
2000, 2001, 2002 and 2003 amounted to Ps.1,004.4 million, Ps.307.3
million, Ps.3,063.1 million and Ps 5,070.2 million, respectively.(10)
    
    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
Estadística, Geografía e Informática).(11)
    
    Unless otherwise indicated, subscribers refers to the total number of
mobile wireless customers included in our subscriber base in the
geographic regions we cover at the end of the respective periods. Mobile
wireless subscribers for the periods presented include cellular
subscribers and PCS subscribers. In December 2001, we began providing
limited commercial PCS services in Monterrey and Tijuana and in 2002 in
other cities of regions 1 and 4. A prepaid customer is included as a
subscriber if, at the end of the period, such customers telephone number
has not yet been deactivated. See Item 4, Information on the
CompanyBusiness OverviewMobile Wireless ServicesPrepaid Customers.
Postpaid figures include public and rural telephony. 4




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##### Table of Contents



(12)
    
    Average subscribers represents the rolling monthly average number of
subscribers for the respective periods.(13)
    
    Average monthly postpaid churn for a given period is calculated by
dividing the sum of all postpaid subscribers disconnected during such
period by the sum of the beginning-of-month postpaid subscribers for each
of the months in such period, expressed as a percentage. See Item 4,
Information on the CompanyBusiness OverviewMobile Wireless
ServicesPostpaid Customers and Item 5, Operating and Financial Review
and ProspectsResults of Operations.(14)
    
    Penetration represents the end-of-period subscribers divided by the
end-of-period population in the geographic regions we cover, expressed as
a percentage.(15)
    
    Effective January 1, 2000, we changed the methodology by which we
determine average monthly minutes of use (MOUs). Under the current
methodology, average monthly MOUs per subscriber for a given period are
calculated by dividing total MOUs (which includes minutes of use from
incoming calls to postpaid customers, which had previously been excluded)
for the period by the sum of the monthly average number of subscribers for
each of the months in such period. Average monthly MOUs for 1999, which
were 77 under the methodology used in 1999, have been restated under the
current methodology. See Item 5, Operating and Financial Review and
ProspectsResults of Operations. When reporting average monthly MOUs per
subscriber, we include incoming calls only prepaid subscribers and the
MOUs they generate.(16)
    
    Effective January 1, 2000, we changed the methodology by which we
determine nominal average monthly mobile telephony revenue per subscriber
(ARPU). Under the current methodology, 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. ARPU for 1999, which was Ps.346.0
under the methodology used in 1999, has been restated under the current
methodology. See Item 5, Operating and Financial Review and
ProspectsResults of Operations. When reporting ARPU, we include
incoming calls only prepaid subscribers and the revenue they generate.(17)
    
    Through December 31, 1999, nominal cost to acquire a new subscriber
represented sales, marketing and advertising costs associated with
postpaid plans, plus the costs of cellular phones we gave to postpaid
customers, for the respective period (in nominal pesos) divided by the
gross postpaid customer additions for such period. Effective January 1,
2000, we changed the methodology by which we determine nominal cost to
acquire a new subscriber and more accurately reflect postpaid customer
acquisition costs. The new methodology includes only handset subsidies
and sales commissions and excludes allocations of advertising and overhead
costs. Nominal cost to acquire a new subscriber for 1999, which was
Ps.3,527.0 under the old methodology, has been restated under the new
methodology. 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, 2003, the Noon Buying Rate was Ps.11.242 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, 1999, 2000, 2001, 2002 and 2003. The Noon Buying Rate on June 28, 2004 was
Ps.11.4230 per U.S.$1.00. Noon Buying Rate(1)Year ended December 31,
    
    High
    
    Low
    
    Average(2)1999
    
    
    10.600
    
    
    
    9.240
    
    
    
    9.5622000
    
    
    10.087
    
    
    
    9.183
    
    
    
    9.4592001
    
    
    9.972
    
    
    
    8.946
    
    
    
    9.3372002
    
    
    10.425
    
    
    
    9.000
    
    
    
    9.6642003
    
    
    11.410
    
    
    
    10.110
    
    
    
    10.797
   (1)
    
    Source:Federal Reserve Bank of New York.(2)
    
    Average of month-end rates for annual data. The following table sets forth the high and low Noon Buying Rates expressed in
nominal pesos per U.S. dollar for each of the previous six months. 5




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##### Table of Contents



Noon Buying Rate(1)Month
    
    High
    
    LowDecember 2003
    
    
    11.41
    
    
    
    11.17January 2004
    
    
    11.10
    
    
    
    10.81February 2004
    
    
    11.25
    
    
    
    10.91March 2004
    
    
    11.23
    
    
    
    10.92April 2004
    
    
    11.44
    
    
    
    11.16May 2004
    
    
    11.64
    
    
    
    11.38
   (1)
    
    Source:Federal Reserve Bank of New York. B.  CAPITALIZATION AND INDEBTEDNESS Not applicable. C.  REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. D.  RISK FACTORS Risk Factors Relating to our Liquidity There is substantial doubt as to our ability to continue as a going concern due
to our high level of leverage and recurring losses In its Report of Independent Registered Public Accounting Firm dated March
26, 2004, PricewaterhouseCoopers, S.C. 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, 2003, our
total consolidated indebtedness, including trade notes payable, was Ps.9,100.0
million, or approximately 91.4% of our total capitalization. For the years
ended December 31, 2002 and December 31, 2003, our earnings were insufficient
to cover our fixed charges by Ps.3,063.1 million and Ps.5,070.2 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. For a description of some of our obligations and
liabilities, see Item 5, Operating and Financial Review and
ProspectsLiquidity and Capital Resources. According to the Mexican Companies Law (Ley General de Sociedades
Mercantiles), an interested party may file a claim for dissolution and force us
into a liquidation process (Proceso de Concurso Mercantil) of our assets if
during any fiscal year the accumulated losses exceed two-thirds of our
contributed capital. In 2003, our accumulated losses exceeded our contributed
capital by Ps.818.0 million. We are a holding company and can pay our liabilities only through the cash flow
from our subsidiaries or out of the proceeds of our financings. Our
obligations, including under our U.S. $350.0 million 141/4% 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 our subsidiaries. In order to pay our obligations, we must rely on
income from dividends, loans and other cash flow from our subsidiaries or debt
or equity financings. Because we are a holding company, the claims of our
creditors are structurally subordinated to the claims of our subsidiaries
creditors with respect to the assets of such subsidiaries. At December 31,
2003, our consolidated subsidiaries total indebtedness, including trade notes
payable, was Ps.5,081.9 million (U.S.$452.5 6




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##### Table of Contents



million) and may increase in the future. For a description of some of our
obligations and liabilities, see Item 5, Operating and Financial Review and
ProspectsB. Liquidity and Capital ResourcesOur Indebtedness. Our current debt agreements prevent our subsidiaries from paying
distributions or dividends or making cash available to us until at least
December 2006, except for those payments of dividends or loans or advances at
such times and in such amounts as are necessary to permit us to make interest
and principal payments as and when due in respect of our U.S.$350.0 million
141/4% 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, which may
lead to the acceleration of our repayment obligations We did not receive sufficient income from dividends or were able to obtain
alternative sources of funds to make the U.S.$24.9 million interest payments
due on each of June 1, 2003, December 1, 2003 and June 1, 2004 on the Iusacell
senior notes and, as a result, we did not make those payments. Thus, an event
of default under the indenture governing the Iusacell senior notes has occurred
and the holders of the Iusacell senior notes have the right to declare our
indebtedness under the Iusacell senior notes immediately due and payable. In the event that the holders of the Iusacell senior notes accelerate the
maturity of their debt, neither we nor our subsidiaries would have the cash
resources to repay such amounts. Due to the depressed state of the value of
telecommunication assets and the structural subordination of the claims of the
holders of the Iusacell senior notes to those of our subsidiaries creditors,
it is doubtful that the value of the assets held by our subsidiaries will be
sufficient to satisfy the claims of their creditors and our creditors,
including the holders of the Iusacell senior notes. In addition, our principal
shareholder is under no obligation to provide financial resources to us, and
has not indicated that it is prepared to do so. Therefore, unless we can
successfully restructure our consolidated debt, we believe that we will be
unable to satisfy our obligations. As a result of our failure to pay all
amounts due under the Iusacell senior notes, we may be forced to file for
bankruptcy, liquidate or reorganize, which could materially adversely affect
the value and market price of our equity and debt securities and the claims of
our equity or debt holders, who could lose some or all of their investment. Iusacell Celular is in default of its obligations under its senior notes and
its senior refinancing secured loan, and our repayment obligations have been
accelerated Iusacell Celular 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 over 50% of the
senior notes notified Iusacell Celular that they had elected to accelerate the
principal payment of the notes. In addition, Iusacell Celular failed to make
the U.S.$265.6 million principal payment on its senior refinancing secured loan
which was due on March 31, 2004 because of the automatic acceleration of the
maturity date of the loan as a result of our failure to refinance the Iusacell
Celular senior notes by such date. Iusacell Celular does not have the cash resources to repay such amounts.
Due to the depressed state of the value of telecommunication assets, it is
doubtful that the value of the assets held by Iusacell Celular and its
subsidiaries will be sufficient to satisfy the claims of Iusacell Celular  ́s
creditors. In addition, our principal shareholder is under no obligation to
provide financial resources to Iusacell Celular, and has not indicated that it
is prepared to do so. Therefore, unless we can successfully restructure our
consolidated debt, we believe that we will be unable to satisfy Iusacell
Celular  ́s obligations. As a result of the failure to pay all amounts due under
Iusacell Celular  ́s indebtedness, we may be forced to file for bankruptcy,
liquidate or reorganize, which could materially adversely affect the value and
market price of our equity and debt securities and the claims of our equity or
debt holders, who could lose some or all of their investment. 7




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If we are unable to restructure our indebtedness, we may also face a
substantial risk of Mexican bankruptcy-related proceedings and the suspension
or termination of all or a portion of our business under our concessions Since we and our subsidiaries defaulted on our respective debt
obligations, some or all of our creditors have the option of taking legal
action against us or our subsidiaries, including instituting bankruptcy
proceedings in Mexico. Further, we may choose to institute a voluntary
bankruptcy proceeding under Mexican law. If any such proceedings were to be
instituted, we could not predict their duration or outcome. We are not aware
of any regulated company of our size that has successfully completed a
restructuring under the new Mexican bankruptcy law since it was passed in May
2000. The current Mexican bankruptcy law is based on the largely untested
Bankruptcy Law (Ley de Concursos Mercantiles)enacted in May 2000 which
provides for two different and separate proceedings: conciliation and
bankruptcy. The conciliation phase lasts up to 185 days, absent protracted
litigation. This initial term is subject to extension for two 90-day periods.
The objective of the conciliation phase is to reach an agreement between the
debtor and its creditors to restructure the indebtedness of the debtor. The
bankruptcy phase does not have a specific term within which it must be
concluded. We believe that these proceedings are likely to require
significantly more time and be significantly more unpredictable than a
reorganization or bankruptcy proceeding under U.S. bankruptcy laws. If we were
to be declared subject to the Bankruptcy Law, the holders of our debt
securities would have to file a claim in Spanish against the estate of Iusacell
in a federal district court in Mexico City. Upon the courts recognition of a
holder of a Iusacell senior note as a creditor of Iusacell, that holders claim
would be unsecured and would rank equally with all other unsecured claims filed
against our estate. A conciliation proceeding is likely to result in significant changes to
our and our subsidiaries existing obligations, which could include the
cancellation or rescheduling of all or part of those obligations. During any
such proceeding, our operation of our business would be subject to the
supervision of a bankruptcy trustee. Moreover, in the event of our bankruptcy,
our operating concessions, which are critical to our business, may be subject
to termination. See item 4, Information on the CompanyB. Business
OverviewConcessions and Permits. There can be no assurance that the holders
of our debt securities would receive any meaningful recovery from a bankruptcy
proceeding. We may be unable to fund our capital expenditure programs which are critical
for us to compete, or pursue business opportunities In order to implement our operating strategy and be able to compete in the
Mexican market through 2006, we will have to incur significant capital
expenditures. We expect our aggregate capital expenditures for 2004, 2005 and
2006, not including capitalized interest, to total approximately U.S.$291.5
million. We anticipate that approximately U.S.$97.8 million of such capital
expenditures will need to be invested during 2004 in order to acquire, build
out and operate our PCS network in northern Mexico, as well as to make
additional investments in the central regions and expand the advance data
network capabilities into other key cities, among other things. 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 2005 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. 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. 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, such as the auctions for
PCS spectrum that the Mexican Ministry of Communications and Transport
(Secretaria de Comunicaciones y Transportes, or SCT) has announced will be
held before the end of 2004. 8




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We may be unable to continue to sell towers to MATC Celular and use our assets
as collateral for future indebtedness assumed by us In order to improve our short-term liquidity, since 2001 we have been
selling towers to MATC Celular, S. de R.L. de C.V. (MATC Celular) and leasing
back space to install our equipment. From 2001 to December 19, 2003,
we sold 320 towers.
In December 19, 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. As of May 31, 2004, we had sold
80 of these towers. We cannot assure you that MATC Celular will exercise its
right to purchase the additional 63 towers not yet sold to them. As a result,
we may be unable to make future sales of towers, thus restricting our ability
to raise short-term liquidity. Certain holders of the Iusacell Celular senior notes initiated an action
in a New York state court against us Among other things, such holders are
seeking injunctive relief to bar Iusacell Celular from selling, transferring or
otherwise encumbering its assets. If the Court grants such injunctive relief,
we would not be able to sell additional towers to MATC or otherwise use our
assets as collateral in future indebtedness assumed by us. See Item 8,
Financial InformationA. Consolidated Statements and Other Financial
InformationLegal ProceedingsIusacell Celular Senior Noteholders. Risk Factors Relating to Our Business We face increasing competition which may reduce our operating margins Competition in the Mexican wireless industry is substantial. We face
significant competition, mainly from Telcel, in our core mobile telephony
services business in each region in which we operate. As a subsidiary of
América Móvil, S.A. de C.V., a company spun off from Teléfonos de México, S.A.
de C.V., the former state telephone monopoly known as Telmex, Telcel has
significantly greater internal financial and operational resources than those
available to us, nationwide cellular and PCS concessions, a nationwide cellular
network and the ability to use Telmexs installed telecommunications systems.
We also face competition from Telefónica Móviles S.A. de C.V.(Telefónica)
and Operadora Unefon, S.A. de C.V.(Unefon), one of our affiliates. Both
these service providers own concessions in all nine wireless service regions in
Mexico and have begun to provide service in Mexicos principal cities. We also
face increasing competition in certain cities from Nextel de México, S.A. de
C.V., a provider of enhanced specialized mobile radio services. In long
distance, we face increasing competition from nine other concession holders. In addition, the Mexican government may grant additional concessions to
other companies to provide services similar to or the same as those that we
provide. Competition may lead to increases in advertising and promotional spending,
along with higher subsidies, increased demands on access to distribution
channels and reduced prices per minute. These factors may lead to smaller
operating margins, greater choices for customers and increasing movement of
customers between competitors, which may make it difficult for us to retain
customers or add new customers. Because of their resources and, in some cases,
ownership by larger companies, some of our competitors are financially stronger
than we are, which may enable them to offer services to customers at prices
that are below the prices at which we can offer comparable services. If we
cannot compete effectively based on the price of our 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. The technology we use may be made obsolete by advancements in technology All companies in the global telecommunications industry must adapt to
rapid and significant changes in technology. The technology that we have
selected in our wireless business may rapidly become obsolete by market demand
for new or improved digital technologies supporting wireless service or other
services in the near future. Some of the most significant changes which the
wireless communications industry is experiencing include:  
    
    evolving industry standards;
    
    ongoing improvements in the capacity and quality of digital technology; 9




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
    
    shorter development cycles for new products, enhancements and
changes in end-user needs and preferences;
    
    development of data and high bandwidth network capabilities;
    
    migration to next-generation services; and
    
    expanded availability and functionality of Wi-Fi services and other new wireless technologies. Alternative technologies may develop that may provide wireless
communications service or alternative service superior to that available from
us, or that enable voice communication over unregulated frequencies. Technological changes may require substantial new capital expenditures
and/or require write-downs of obsolete technology. They may also materially
adversely affect our operations and our competitive position to the extent we
are not able to react quickly to these changes. See We may be unable to fund
our capital expenditure programs which are critical for us to compete, or
pursue business opportunities. If our wireless service offerings do not meet customer expectations, we could
be limited in our ability to attract and retain customers Customer acceptance of the services we offer is and will continue to be
affected by technology-based differences and by the operational performance,
quality, reliability and coverage of our wireless networks. We may have
difficulty attracting and retaining customers if we are unable to meet customer
expectations for, or 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
voicemail notification, that the customers enjoy when making calls within our
network. Our roaming partners may also migrate their current technology to a
technology that is incompatible with ours. In such case, we would no longer be
able to offer roaming services to our customers through such carriers. See
"The technology we use may be made obsolete by advancements in technology. Equipment failure, power outages, natural disasters, terrorist acts, or other
breaches of network or information technology security may adversely affect our
business A major equipment failure, power outage, natural disaster, terrorist act,
or other breach of network or information technology security that affects our
mobile telephony switching offices, information systems, microwave links,
third-party owned local and long distance networks on which we rely, our cell
sites or other equipment or the networks of other providers on which our
subscribers roam could have a material adverse effect on our operations. While
we have insurance coverage for some of these events, our inability to operate
our wireless system or access our information systems even for a limited time
period, or the loss of subscriber data, may result in a loss of subscribers or
impair our ability to serve our subscribers or attract new subscribers, which
would have a material adverse effect on our business, results of operations and
financial condition. 10




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A significant portion of our accounts receivable is represented by a small
number of distributors. Our three largest distributors accounted for 59% and 52% of our net trade
accounts receivable as of December 31, 2003 and 2002, 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, 2003, MovilAccess beneficially owned about 74.6% of our
outstanding common stock and is our single largest stockholder. MovilAccess is
controlled directly or indirectly by Ricardo B. Salinas Pliego, our Chairman of
the Board of Directors and Executive Director, who also holds directly 4.6% 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 our directors and all major corporate transactions and could cause or
prevent a change of control. Mr. Salinas Pliegos interests may not be fully
aligned, and could conflict, with the interest of the other equityholders and
of debtholders. We have significant transactions with affiliates that create potential
conflicts of interest We regularly engage in transactions with entities owned or controlled by
our controlling shareholder. These transactions include telemarketing and
advertising campaigns, paging operations, sale and distribution of our
products, operation of our customer sales and service centers, collections from
customers and banking services. In particular, we have entered into an airtime
exchange and roaming agreement with Unefon, a mobile telephony competitor. In
addition, some of the members of our Board of Directors, as well as some of our
executives, serve on the Boards of Directors of TV Azteca, Unefon, Biper, our
paging competitor, and/or Elektra, a distributor of our products. In addition,
some of our executives also hold offices in other companies controlled by Mr.
Salinas Pliego. See Item 7, Major Shareholders and Related Party
TransactionsB. Related Party Transactions and Item 6, Directors, Senior
Management and EmployeesA. Directors and Senior Management. Transactions with affiliates may create the potential for conflicts of
interest. To guard against these potential conflicts of interest, we have
established a Related Party Transactions Committee of our Board of Directors
made up of independent Directors to provide an independent review of
transactions with affiliates to determine whether these transactions are
related to our business and are consummated on terms that are at least as
favorable to us as terms that would be obtainable in a similar transaction
entered into on an arms-length basis with an unrelated third party.
Nevertheless, conflicts of interest may arise and could have a negative effect
on our results of operations and financial condition. 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 our acquisition by MovilAccess, our top management and Board of
Directors was replaced wholesale, with the majority of new executives and
directors coming from companies controlled by Mr. Salinas Pliego. This
wholesale and immediate change has resulted in the substantial loss of the
institutional memory that companies typically draw from in evaluating projects
and opportunities and in developing business strategies and policies. Our new management has implemented substantial changes to our business
operations and strategies. For example, we have changed our sales, marketing
and distribution approach, including the format of our customer sales and
service centers, in an effort to maximize synergies with other companies
controlled by Mr. Salinas Pliego and control costs. See Item 4, Information
on the CompanyB. Business OverviewSales, Marketing and Distribution. We
have also revised our deactivation policy for prepaid customers, which resulted
in the turnover of approximately 437,000 customers in the third quarter of
2003. See Item 4, Information on the CompanyB. Business OverviewChurn and
TurnoverPrepaid Turnover. Furthermore, we have reevaluated the feasibility
of certain projects based on our current financial condition and have made
corresponding accounting adjustments that could have a negative effect on our
results of operations and financial condition. See Item 5, Operating and
Financial Review and ProspectsA. Operating ResultsRecent Changes in Our
Accounting Policies. We cannot assure you that these changes will be
successful. 11




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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 8,
Financial InformationFinancial StatementsLegal Proceedings. Risk Factors Relating to Doing Business in Mexico The Mexican government may impose additional conditions on our concessions or
may take them away We provide our services pursuant to concessions granted by the Mexican
government. Our activities are subject to significant government regulation
and supervision. The concessions may be subject to additional conditions for
renewal or may not be renewed when they expire. The conditions for renewal,
however, are not fully defined. Our concessions may be revoked prior to the
end on their respective terms if we fail to comply with specified obligations
and conditions. The Mexican government also reserves the right to revoke,
temporarily seize or expropriate concessions or assets related to a concession
for reasons, among others, of public interest, such as war, national disaster
or significant public disturbances. Moreover, the Mexican government may grant
additional concessions to potential competitors to provide services similar to
those that we provide. Any of these developments or other government action
could reduce the value of Iusacells concessions and adversely affect our
financial condition and results of operations. See Item 4, Information on the
Company  B. Business Overview  Concessions and Permits. The Mexican government may enact new laws or adopt new interpretations to
existing laws that could negatively affect our operations and profitability The Mexican government may enact new laws or adopt new interpretations to
existing laws that could negatively affect our operations and profitability.
In particular, in the past the Mexican government has sought to impose a 10%
excise tax on mobile telephony services. This tax has since been derogated.
However, 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. Our financial statements may not give you the same information as financial
statements prepared under U.S. generally accepted accounting principles Mexican companies listed on the Mexican Stock Exchange, including
Iusacell, must prepare their financial statements in accordance with Mexican
GAAP. Mexican GAAP differs in certain significant respects from U.S. GAAP,
including, but not limited to, the treatment of minority interest, purchase
accounting, deferred income taxes, accounting for derivative financial
instruments, gains from the exchange of non-monetary assets, the provisioning
for the consolidation of facilities and sale-leaseback transactions. In
particular, companies using Mexican GAAP must incorporate the effects of
inflation directly in their accounting records and in published financial
statements. The effects of inflation accounting under Mexican GAAP are not
eliminated in the reconciliation to U.S. GAAP, as these inflation-adjusted
figures are considered a more meaningful presentation than historical
cost-based financial reporting for both Mexican and U.S. accounting purposes.
For this and other reasons, the presentation of financial statements and
reported earnings of Mexican companies may differ from that of companies in
other countries. See Note 20 to our Consolidated Financial Statements. 12




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The general political and economic conditions in Mexico may adversely affect
our business, financial condition and results of operations We are a Mexican company, and most of our operations are in Mexico. As a
result, our business, financial condition and results of operations may be
significantly affected by the general condition of the Mexican economy, by a
devaluation of the peso, by inflation and high interest rates in Mexico, or by
political or economic developments in Mexico. The Mexican economy grew at an
annual rate of only 0.9% in 2002 and 1.3% in 2003. 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. If the Mexican government imposes exchange controls, we may not be able to
purchase imported goods or make dividend, principal and interest payments in
U.S. dollars In the past, the Mexican economy has experienced balance of payment
deficits and shortages in foreign exchange reserves. While the Mexican
government does not currently restrict the ability of Mexican or foreign
persons or entities to convert pesos to foreign currencies generally, and U.S.
dollars in particular, it has done so in the past and could do so again in the
future. We cannot assure you that the Mexican government will not institute a
restrictive exchange control policy in the future. Any such restrictive
exchange control policy could prevent or restrict access to U.S. dollars or
other foreign currencies to purchase imported goods and to meet our U.S. dollar
obligations, such as the payment of dividends or principal and interest under
our debt securities. Payment of judgments entered against us in Mexico will be in pesos, which may
expose holders of our debt securities to exchange rate risk If a proceeding to enforce our obligations under any debt securities is
brought in Mexico, Mexican law permits us to pay a resulting judgment in pesos.
Under the Mexican Monetary Law, an obligation payable in Mexico in a currency
other than pesos may be satisfied in pesos at the exchange rate in effect on
the date when payment is made. If a Mexican court declares us to be in bankruptcy (concurso mercantil),
our obligations under any debt securities:  
    
    would be converted into pesos at the exchange rate prevailing
at the time of the courts declaration of bankruptcy and then to
Unidades de Inversión, which are denominated in pesos and adjusted
periodically for inflation by the Bank of Mexico, and payment would
occur at the time claims of the court-recognized creditors are
satisfied subject to the priority established by law; and
    
    would not be otherwise adjusted to take into account
devaluation of the peso against the U.S. dollar occurring after the
courts declaration. High inflation rates in Mexico may result in a decrease in demand for our
services and may negatively affect our profit margin In recent years, Mexico has experienced high levels of inflation. The
annual rate of inflation, as measured by the Mexican National Consumer Price
Index, was 4.4%, 5.7% and 4.0% in 2001, 2002 and 2003, respectively, and was
1.6% for the three-month period ended March 31, 2004. 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. 13




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Depreciation or devaluation of the peso relative to the U.S. dollar may
adversely affect our financial condition and results of operations While our sales are almost entirely denominated in pesos, the vast
majority of our obligations are denominated in U.S. dollars. As a result, we
are exposed to the risk of devaluation of the peso relative to the U.S. dollar.
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. It may be difficult to enforce civil liabilities against us or our directors,
officers and controlling persons We are organized under the laws of Mexico, and most of our directors,
officers and controlling persons reside outside the United States. In
addition, a substantial portion of our assets and their assets are located in
Mexico. As a result, it may be difficult for investors to effect service of
process within the United States on such persons or to enforce judgments
against them, including in any action based on civil liabilities under the U.S.
federal securities laws. There is doubt as to the enforceability against such
persons in Mexico, whether in original actions or in actions to enforce
judgments of U.S. courts, of liabilities based solely on the U.S. federal
securities laws. Risk Factors Relating to Our Securities You may not be able to exercise your preemptive rights We may offer and sell additional shares of our capital stock. Mexican law
and our by-laws require us to offer holders of our shares representing capital
stock the preemptive right to subscribe for a sufficient number of shares to
avoid a proportional reduction of their holding whenever we issue new shares
for subscription and payment in cash or in kind. We may not offer additional shares of capital stock to holders of ADS
located in the United States pursuant to preemptive rights in connection with
any future issuance of stock, unless a registration statement under the
Securities Act is effective or an exemption from the registration requirements
is available. Whenever we are required to make a preemptive rights offering to
the holders of ADS located in the United States, we will evaluate the costs and
potential liabilities associated with any such registration statement, the
benefits to the holder of ADS, and any other factors that we consider
appropriate and then we will determine whether or not to file a registration
statement. We may choose not to file any such registration statement. If we
do not file a registration statement and no exemption from registration is
available, then holders of ADS located in the United States will not be able to
exercise their preemptive rights. As a result, the equity interest of such
holders in Iusacell will be reduced proportionately. The New York Stock Exchange is monitoring events at Iusacell and may delist our
ADSs We received a letter from the New York Stock Exchange dated June 4, 2004
advising us that, although we currently comply with its quantitative listing
standards, the New York Stock Exchange may make an appraisal of the suitability
for continued listing of our ADSs. This appraisal would consider factors such
as (i) unsatisfactory financial conditions and/or operating results, (ii) the
inability to meet current debt obligations or to adequately finance operations,
(iii) the announcement of an intent to file, or the making of such filing,
under any of the sections of the bankruptcy law, or the authorization of
liquidation, and a companys commitment to proceed, and (iv) public
accountants opinion on financial statements containing a going concern
emphasis. A delisting of our ADSs from the New York Stock Exchange may materially
adversely affect the liquidity of our ADSs and their price. We cannot assure
you that the New York Stock Exchange will not proceed to delist our ADSs. 14




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ITEM 4. INFORMATION ON THE COMPANY A.  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
anónima de capital variablewith indefinite life organized under the laws of
Mexico on August 6, 1998. Grupo Iusacell Celular, S.A. de C.V., the principal
operating subsidiary of Iusacell, which was known as Grupo Iusacell, S.A. de
C.V.until February 29, 2000, is a sociedad anónima de capital variablewith
indefinite life organized under the laws of Mexico on October 6, 1992. Iusacells commercial name is Grupo Iusacell, but our operating
subsidiaries market their products under the single Iusacell brand name.
Iusacell currently operates primarily in Mexico under Mexican legislation,
including, among others, the 1995 Telecommunications Law (Ley Federal de
Telecomunicaciones), the Mexican Securities Market Law (Ley del Mercado de
Valores) and the Mexican Companies Law (Ley General de Sociedades Mercantiles).
See B. Business OverviewGovernment Regulation for a discussion of the
principal regulations to which we are subject. Iusacell Celular, through its subsidiaries, is primarily engaged in the
wireless telecommunications business and holds concessions to operate cellular
telephone systems in five contiguous market regions in central and southern
Mexico, and to provide long distance service nationwide. Iusacell PCS, S.A. de
C.V., another operating subsidiary of Iusacell, holds a concession to provide
mobile wireless telephony services using PCS technology in two regions in
northern Mexico. On July 29, 2003, MovilAccess, a Mexican telecommunications service
provider controlled by Mr. Salinas Pliego and a subsidiary of Biper, 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. In December 2003, we completed a reverse stock split whereby
shareholders received one new share of common stock in exchange for 20 series A
or V shares. Over the last three fiscal years, excluding the effects of inflation
accounting, capitalized interest and certain non-cash trade-in credits, we have
invested approximately U.S.$319.6 million in capital expenditures, primarily
for our cellular communications network, long distance network and billing,
customer care and administrative systems. See Item 5, Operating and Financial
Review and ProspectsB. Liquidity and Capital ResourcesCapital Expenditures. During the first quarter of 2004, we invested approximately U.S.$8.0
million in our cellular regions to expand our coverage. In 2004, we plan to
invest a total of approximately U.S.$97.8 million in capital expenditures, not
including capitalized interest, to acquire, build out and operate our PCS
network in northern Mexico, to increase the coverage and improve the quality of
and enhance the features available through our cellular and long distance
networks, and to improve our billing and customer care systems. All of this
capital equipment will be deployed in Mexico. Our ability to carry out these
capital expenditures depends on obtaining sufficient funds. It is unclear
whether we will be able to obtain the required funds from operations and vendor
and other financing. In particular, we cannot assure you that we will be able
to complete a successful restructuring of our indebtedness. See Item 3, Key
InformationD. Risk FactorsRisk Factors Relating to our LiquidityWe may be
unable to fund our capital expenditure programs which are critical for us to
compete or pursue business opportunities and Item 5, Operating and Financial
Review and ProspectsLiquidity and Capital ResourcesCapital Expenditures. Our principal executive offices are located at Montes Urales 460, Colonia
Lomas de Chapultepec, Delegacion Miguel Hidalgo, 11000, Mexico, D.F., which is
also where we are domiciled. Our telephone number is (5255) 5109-4400. Our
agent in the United States is Puglisi & Associates, 850 Library Avenue, Suite
204, P.O. Box 885, Newark, Delaware 19715. Our Internet website address is
www.iusacell.com. The information on our website is not incorporated into this
Annual Report. B.  BUSINESS OVERVIEW We are a wireless telecommunications services provider in Mexico with
nearly 1.3 million mobile wireless customers at December 31, 2003,
approximately 74.7% of which are prepaid customers. We hold concessions in the
800 megahertz (MHz) band to provide cellular wireless services in five
contiguous geographic regions comprising all of central and southern Mexico,
and in the 1900 MHz band to provide PCS wireless services in two of the four 15




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regions in northern Mexico. Our service regions include Mexico City, one
of the worlds most populous cities, and the cities of Monterrey, Tijuana,
Guadalajara, León, Puebla, Cancún and Mérida, which when combined represent
approximately 92 million POPs comprising 90% of Mexicos total population. We provide digital service using Code Division Multiple Access (CDMA)
technology, the highest-capacity commercial digital technology available in the
800 MHz frequency band in most of the regions we operate. 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 such as high-speed instant
messaging, e-mail and Internet access at speeds of up to 144 kilobits per
second (kbps). In addition to our core mobile telephony services, we also
provide a wide range of other telecommunications services, including long
distance, wireless local telephony and data transmission services. Our subscriber base as of December 31, 2003 was 1,275,763. Of these
subscribers, 322,310 were postpaid customers who purchase mobile telephony
services pursuant to fixed-term contracts, and the remaining 953,453 were
prepaid customers who pay for their mobile telephony services in advance
primarily through the purchase of prepaid airtime. Since July 29, 2003, Iusacell has been under the management control of
MovilAccess. MovilAccess consultants and personnel have been integrally
involved in managing Iusacells day-to-day operations and defining and
implementing Iusacells business strategy. MovilAccess currently holds 74.8%
of Iusacells capital. See Item 7, Major Shareholders and Related Party
TransactionsA. Major Shareholders. Prior to the acquisition by MovilAccess
of its equity interest in Iusacell, Iusacell had been under the management
control of Verizon and Vodafone. The Telecommunications Industry in Mexico Mobile Telephony Services The Mexican government initiated its efforts to liberalize the
telecommunications industry in 1989, dividing Mexico into nine geographic
regions for the provision of cellular service. In order to provide an
alternative for cellular customers, two concessions were granted in each
region, one to Telcel, the cellular subsidiary of Telmex, and the other to an
independent operator. In addition, Telmex was required to interconnect all
cellular operators to its network in an effort to facilitate competition. The nine geographic regions are described in the table below. RegionNumber
    
    Geographical Coverage
    
    Major Cities in the Region1
    
    
    The states of Baja
California and Baja
California Sur and
the municipality of
San Luis Río
Colorado in
northwestern Sonora
state.
    
    Tijuana, Mexicali, Ensenada, Tecate
and La Paz.2
    
    
    The states of Sonora
and Sinaloa (except
for the municipality
of San Luis Río
Colorado in
northwestern
Sonora).
    
    Hermosillo, Ciudad Obregón, Culiacán
and Mazatlán.3
    
    
    The states of
Chihuahua and
Durango and the
municipalities of
Torreón, Francisco
I. Madero,
Matamoros, San Pedro
and Viesca in the
state of Coahuila.
    
    Ciudad Juárez, Chihuahua, Durango,
Gómez Palacio and Torreón.4
    
    
    The states of
Tamaulipas, Nuevo
León and Coahuila
(except for the
municipalities of
Torreón, Francisco
I. Madero,
Matamoros, San Pedro
and Viesca).
    
    Monterrey, Saltillo, Tampico, Ciudad
Victoria, Nuevo Laredo, Reynosa and
Matamoros.5
    
    
    The states of
Colima, Jalisco
(except for 12
municipalities in
northeastern
Jalisco), Michoacán
and Nayarit.
    
    Guadalajara (Mexicos second largest
city), Morelia, Tepic, Colima and
Manzanillo.6
    
    
    The states of
Aguascalientes,
Guanajuato,
Querétaro, San Luis
Potosí and Zacatecas
and 12
municipalities in
northeastern
Jalisco.
    
    Aguascalientes, León, Querétaro, San
Luis Potosí and Zacatecas.
 16




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RegionNumber
    
    Geographical Coverage
    
    Major Cities in the Region7
    
    
    The states of
Guerrero, Oaxaca,
Puebla, Tlaxcala and
Veracruz.
    
    Puebla, Acapulco, Veracruz and Oaxaca.8
    
    
    The states of
Yucatán, Quintana
Roo, Campeche,
Chiapas and Tabasco.
    
    Mérida, Cancún, Villahermosa,
Campeche, Tuxtla Gutiérrez and San
Cristobal de las Casas.9
    
    
    The states of
Mexico, Hidalgo and
Morelos and the
Federal District.
    
    Mexico City, Toluca, Cuernavaca and
Pachuca.
 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 América Móvil, S.A. de C.V., which is known as América Móvil. 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 Regions 5, 6, 7, 8 and 9
and the PCS E-band concession in Regions 1 and 4. Telefónica 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 the Mexican
Telecommunications Agency (Comisión Federal de Telecomunicaciones)(COFETEL),
as of December 31, 2003, there were approximately 15.7 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. The following table presents, for selected countries, including Latin
American countries and the United States, the number of subscribers of wireless
telephone services per 100 inhabitants as of December 31, 2002 and December 31,
2003: 17




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Selected Wireless Telephony Penetration Wireless subscribersper 100 inhabitants(1)Country
    
    2002
    
    2003Spain
    
    
    82.3
    
    
    
    91.6Portugal
    
    
    81.9
    
    
    
    90.4United States
    
    
    48.8
    
    
    
    54.3Chile
    
    
    42.8
    
    
    
    42.8
    (2)Mexico
    
    
    25.5
    
    
    
    29.1Brazil
    
    
    20.1
    
    
    
    26.4Venezuela
    
    
    25.6
    
    
    
    25.6
    (2)Argentina
    
    
    17.8
    
    
    
    17.8
    (2)
   (1)
    
    Source:International Telecommunication Union 2004 Website, except for
2003 figures for Mexico, which are derived from COFETEL.(2)
    
    2002 figures. On May 1, 1999, Mexico implemented the calling party pays modality, or
CPP, which has been implemented in most Latin American and European countries.
Calling party pays is a wireless telephony payment structure in which the party
that places a call to a wireless telephone is billed for interconnection
access, and the recipient is not billed for the airtime charges corresponding
to that call. The introduction of CPP triggered growth in wireless
penetration, particularly in the prepaid segment and wireless traffic. 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. The regions we serve cover a
contiguous geographic area comprising all of the regions in central and
southern Mexico, and two of the four regions in northern Mexico, which allows
Iusacell to achieve economies of scale. Iusacells service regions are home to a variety of industries. Region 9
includes Mexico City, which has the greatest concentration of service and
manufacturing industries in Mexico and is also the center of Mexicos public
and financial services sectors. Region 5 includes Guadalajara, Mexicos second
largest city and the commercial and service center of western Mexico, which has
also developed as a center for the maquiladora industry. Region 6 includes
León, Querétaro, Aguascalientes and San Luis Potosí and has historically been
dominated by the agricultural sector, although it has also developed as an
automobile manufacturing and high technology center. Region 7 includes Puebla,
Acapulco, Veracruz and Oaxaca and contains major operations of the Mexican
petrochemical and automotive industries and significant tourist resorts and
attractions. Region 8 includes Mérida, Villahermosa, Cancún, Campeche and
Tuxtla Gutiérrez and contains major operations of the Mexican petroleum
industry and significant tourist resorts and attractions. Regions 1 and 4,
which include Tijuana, Monterrey and Nuevo Laredo, are centers for the assembly
plant (maquiladora)industry, manufacturing, high technology and international
commerce. 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. 18




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Postpaid Services As of December 31, 2003, postpaid subscribers (including public and rural
telephony) totaled 322,310, including public and rural telephony, comprising
25.3% of our customer base. Nominal average monthly mobile telephony revenue
per subscriber (ARPU) in this segment was Ps.683.0 for 2003. 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 financial
news reporting, emergency services, entertainment information, reservations
services and sports reports. Moreover, CDMA digital postpaid customers have
available caller identification, short message service and data transmission
services. We believe that these value-added services help increase postpaid
subscriber usage and also enhance our market image as a full service mobile
telephony provider. Prepaid Services As of December 31, 2003, prepaid customers totaled 953,453, comprising
74.7% of our customer base. Prepaid ARPU was Ps.75.0 for 2003. 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. We charge for outgoing calls, as well as long distance
incoming calls and roaming services. A prepaid customer ceases to be considered a customer of Iusacell when a
specified period of time has elapsed since the customer purchased and
activated, or last added credit to, his or her last prepaid card. 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 Iusacell. An operator (a host operator) providing service to a subscriber of another
operator (the home operator) temporarily located in the host operators service
region (an in-roamer) earns usage revenue. We bill the home operator of an
in-roamer for the in-roamers usage in our service region. In the case of
roaming by an Iusacell subscriber in the region of a host operator (an
out-roamer), Iusacell is billed by the host operator for the subscribers
usage. We remit the billed amount to the host operator and bill our own
customer, the out-roamer. As a result, we retain the collection risk for
roaming charges incurred by our own subscribers. Conversely, roaming charges
billed by Iusacell for in-roaming usage by subscribers of other operators are
the responsibility of those operators. Roaming charges between wireless
operators are settled monthly. Interconnection charges owed to Telmex and long-distance charges owed to
long distance carriers as a result of roaming are the responsibility of the
host operator. In-roaming fees and usage revenue represented 3.1% of our total
revenues during 2003. Out-roaming charges represented 3.7% of Iusacells total
revenues during 2003. We have more than 60 agreements with U.S., Canadian, Latin American and
other foreign operators to provide our subscribers with international roaming
capabilities. These operators include Verizon Wireless, AT&T Wireless, Sprint
and Cingular Wireless, among others. In addition, we provide, through the
National Automatic Cellular Network, automatic call delivery throughout most of
the United States, including Puerto Rico, whereby our 19




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subscribers may receive telephone calls from Mexico without the caller
having to dial access codes. Currently, our customers are able to roam in over
2,000 municipalities in the United States and Canada, as well as in more than
150 other countries in the Americas, Europe, Asia, Africa and the Pacific. In
2003, we launched the international short message services with the main
carriers in the U.S. and Canada, enabling our customers to send and receive
messages to and from their customers. 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, 2003, we
provided long distance service in 52 cities to 1,287,589 customers,
substantially all of which were existing customers of our mobile telephony
services. We obtained an exemption from the 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 the COFETEL will not rescind this
exemption in the future. Revenues related to long distance services
represented 6.9% of our total revenues for 2003, not including dark fiber optic
cable sales. We have been able to reduce our capital investment for our long distance
business by entering into fiber optic cable swaps with three other long
distance companies between 1998 and 2002. We acquired fibers in the long
distance fiber optic networks built by Marcatel, S.A de C.V., Bestel, S.A de
C.V.,and Telereunión S.A de C.V,in central, northern and eastern Mexico, in
exchange for fibers in the long distance fiber optic network we completed in
central and western Mexico. As a result, we obtained redundancy in central
Mexico and access to the United States border and eastern Mexico at minimal
cost. We also exchange international long distance traffic with AT&T and
Teleglobe USA, Inc. These arrangements give us two alternative routes to
deliver international long distance traffic. In March 2002, the United States
Federal Communications Commission granted to Iusatel USA Inc., our U.S.
subsidiary, a Section 214 authorization that allows us to provide
facilities-based and resale telecommunications services within the United
States. We have international termination traffic contracts with U.S.
carriers. Our Other Services Paging On December 14, 1995, Iusacell Celular and Infomin, S.A. de C.V., which we
refer to as Infomin, formed Infotelecom, S.A. de C.V., which we refer to as
Infotelecom, as a joint venture to market national and international paging
services. Iusacell Celular owns 49% of Infotelecom. See Government
RegulationPaging. At December 31, 2003, Infotelecom had 4,344 paging customers and provided
service in 30 cities including Mexico City, Guadalajara, Monterrey, Puebla,
Cuernavaca, Toluca, Querétaro, León, and Ciudad Juárez. Our revenues from
paging services represented less than 0.5% of total revenues for 2003. We do
not consider paging to be an area of growth because of competition from short
message services. See Item 7, Major Shareholders and Related Parties
TransactionsB. Related Party TransactionsBipercomm Paging Services
Operation. 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, intercity buses and rural areas. The provision of
services in this way fulfills the terms of our concessions for the provision of
cellular telephony service and uses our cellular network to provide
telecommunications coverage in areas with little or no basic service. As of
December 31, 2003, we had 46,230 cellular telephones in service under our
public and rural telephony programs. 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
Region 9. As of December 31, 2003, we had 4,721 customers. See Concessions
and PermitsFixed Local Wireless Telephony. 20




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Data Transmission We provide mobile and fixed data transmission services. We offer three
types of services: (i) private lines such as E-1, E3/DS3 and STM1 directly to
carriers and large corporate customers; (ii) Internet access to carriers and
Internet service providers; and (iii) digital multiservices connection to
customers private branch exchanges (PBX) to reduce costs for mobile
telephony 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. With this advanced
network, we have increased our voice capacity and are able to offer subscribers
new data services such as high-speed access for internet, intranet, e-mail,
instant messaging, and multiple download for multimedia applications and M2M
solutions at speeds of up to 144 kilobits per second (kbps). Our target is to
complete the network upgrade to this technology in the main cities of our
service regions in the second half of 2004. 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 plan to develop a commercial strategy and
implement such features in the second half of 2004. Seasonality Our business is not materially affected by seasonality. Sales, Marketing and Distribution Our marketing strategy is directed to achieve profitable growth, focused
primarily on our mobile telephony business. We have focused our sales and
marketing strategy on innovative products and value-added services for digital
postpaid and prepaid customers, defined as the person who utilizes and depends
on mobile telephony communications on a daily basis. Our mobile telephony
subscribers are classified according to five different usage profiles. We are
implementing distribution, advertising, customer service support and pricing
plans targeted to each specific customer segment and to increase airtime usage. We currently target the various segments of our subscriber base through
various sales and distribution channels. Our sales force plan provides for
continuous training, a basic salary and monetary incentives to encourage our
sales force to activate profitable and loyal accounts, cross-sell the full
complement of our service offerings and maintain our standards in advertising,
promotions and customer service. 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 111 customer sales and service centers throughout
our cellular and PCS regions, 103 of which are managed by Elektra and eight of
which continue to be 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 103 of
our centers and also offers some of its products in the premises. However, we
are evaluating on an ongoing basis whether Iusacell should again operate and
manage some or all of these centers. See Item 7, Major Shareholders and
Related Party TransactionsB. Related Party TransactionsElektra Operation and
Management of our Customer Sales and Service Centers. Corporate Sales Force To service the needs of our corporate customers, we have created a direct
sales force, which, at December 31, 2003, included 22 full-time sales
representatives. These direct sales representatives are distributed along our
service regions to deliver personalized service. This group of trained
representatives seeks to increase sales by:  
    
    aggressively pursuing sales opportunities in the corporate
segment; 21




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
    
    bundling combinations of services into customized packages
designed to meet customers requirements;
    
    developing and marketing new services to satisfy the demands of such customers; and
    
    educating corporate purchasing managers about alternative pricing plans and services. In an effort to control costs, during 2003 we reduced our full-time
corporate sales force by more than two-thirds. To compensate for this, we now
allow our independent distributors to offer corporate plans. Since March 2004
we have been hiring sales representatives and currently have a sales force of
35 sales representatives. Independent Distributors In order to broaden our market, we maintain relationships with a broad
network of exclusive distributors and national retailers. At December 31,
2003, these distributors and retailers sold all of our products at 1,315 points
of sale in Mexico, down from 1,654 points of sale a year before. This decrease
was due primarily to our critical financial condition. Our prepaid cards were
distributed at an additional 59,540 points of sale, up from 56,459 points of
sale a year before. The increase in prepaid cards points of sale is mainly due
to the commencement of the distribution of our prepaid cards by Elektra in
August 2003 and Coppel in September 2003, two national retail house appliances
chains. See Item 7, Major Shareholders and Related Party TransactionsB.
Related Party TransactionsElektra Marketing and Sales Services. In order to ensure that our standards are maintained at all distribution
points, we provide assistance to our distributors in training, promotions and
advertising. We also provide them with information on our customer base to
allow the distributors to service our customers effectively. In particular, in
May 2004 we launched a web site for our exclusive distributors which enables
them to offer almost all of the current services that we provide at our
customer sales and service centers such as prepaid and postpaid activations,
upgrades, payments, copies of invoices and changes to user plans. Commission Sales Agents In the past, we retained commission agents as a flexible sales force in
all of our mobile telephony regions. The agents functioned as mobile telephony
service brokers for us, working out of their own premises. These agents
provided additional distribution outlets with minimal support from Iusacell.
We plan to redeploy this channel of distribution during the second half of
2004. Telemarketing From time to time, we engage telemarketing service providers as a direct
marketing mechanism or to follow up on targeted outbound calls and receive
calls through an 800 number. In recent months, we have used telemarketing as a
tool to reach out to prospective customers. Prospective customers are assigned
to our corporate sales force when more than 20 lines are requested and to an
exclusive distributor when less than 20 lines are requested. Our policy is to
call the prospective customers within 24 hours after we receive the call at our
800 number asking for information about our products. The telemarketing force
is knowledgeable as to our products specifications, but our corporate sales
force or the exclusive distributor close the sale. See Item 7, Major
Shareholders and Related Party TransactionsB. Related Party
TransactionsTeleactivos Call Center Services. Electronic Means We have implemented four electronic tools for the sale of prepaid airtime
without the purchase of a prepaid card:  
    
    sales through automated teller machines,
    
    sales over the phone by dialing *AIRE, 22




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
    
    sales through our website  www.iusacell.com, and
    
    sales through specific points of sale. Sales at ATM machines are charged against our customers bank account by
using a personal identification number. We have implemented ATM sales at Banco
Azteca, Banamex-Citibank, BBVA Bancomer, HSBC and Bancrecer. Sales using *AIRE
and our website are charged to our customers credit card. Sales through specific points of sales are made in two different ways.
Customers can purchase airtime at certain exclusive distributors by simply
giving their phone number. Customers can also use credit card terminals
installed at our exclusive distributors  ́ premises that print an electronic
ticket with the personal identification number that the customer must dial in
order to charge the airtime. Advertising From time to time, we launch advertising campaigns that emphasize the
benefits of our products and services, which we believe strengthen our brand
name. See Item 7, Major Shareholders and Related Party TransactionsB.
Related Party TransactionsAdvertising Services. Customer Service Postpaid customers can access dedicated support by dialing *611, while
prepaid customers can access support by dialing *VIVA. In the fourth quarter
of 2003, we outsourced our call center operations to an affiliate of
MovilAccess, our controlling shareholder. This outsourcing has enabled us to
reduce operational costs. See Item 7, Major Shareholders and Related Parties
TransactionsB. Related Parties TransactionTeleactivos Call Center Services. Customer service representatives are equipped to answer questions
regarding services and products 24 hours a day. We train customer service
representatives to ensure that each customer receives prompt attention,
informed answers to any inquiries and satisfactory resolution of any concerns.
In May 2003, we redesigned our compensation plan to motivate our customer
service force by compensating it based on performance, rather than having only
a fixed salary structure, as was the case before. We also implemented a loyalty and retention program. This program
includes welcome calls, first invoice calls and periodic calls to customers to
ensure satisfaction. We also make outreach calls to customers whose contracts
are ending or who choose to terminate service, offering them a range of
alternative service plans based on their profile to encourage contract renewal.
Recently, we implemented a points rewards program for postpaid and prepaid
customers to encourage loyalty. We plan to implement during the second half of 2004 a software application
that will reduce complexities in providing customer service by avoiding
interaction with multiple applications, and will compile customer contact
history information under one single system. This application will allow us to
provide better customer service. 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 days. See
Item 4, Information on the CompanyBusiness OverviewMobile Wireless
ServicesPrepaid Customers. 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. 23




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Postpaid Plans The postpaid pricing plans are designed to target primarily high and
moderate usage postpaid subscribers. High-usage customers are typically
willing to pay higher monthly fees in exchange for larger blocks of minutes,
value-added services, a free high-end handset and lower per minute airtime
charges. Moderate and lower-usage subscribers typically prefer pricing options
which have a lower monthly charge, fewer minutes included, a less expensive
handset (but still with subsidy) and higher per minute airtime charges than
those options chosen by high-usage customers. In December 2003, we launched a new set of postpaid value plans aimed to
position us as the best alternative for the high-value market segment. These
new postpaid plans were designed according to the needs of targeted consumer
segments and are supported by advertising and marketing campaigns. We also offer multi-line plans designed to fit the communication needs of
small groups of users. In addition, special cross-border plans are offered to
Region 1 subscribers whereby they can place lower priced calls across Mexico,
the United States and Canada. Finally, in Regions 1, 4 and 8, we offer local
plans with competitive per minute pricing. For our corporate customers, we offer either a flexible combination of our
various service packages at a volume rate or a large pool of minutes that can
be shared among all users at a competitive per minute price. Prepaid Plans In contrast to postpaid subscribers, prepaid customers typically generate
lower levels of airtime usage, have access to a limited number of value-added
services, often already own a handset and often are unwilling to make a fixed
financial commitment or do not have the credit profile to purchase postpaid
plan services. Our prepaid services, which we market as VIVA plans, provide for
automated reactivation and value-added services such as voice-messaging. We
currently offer our VIVA prepaid cards in denominations of Ps.100.0, Ps.150.0,
Ps.200.0 and Ps.300.0. We also offer virtual airtime in denominations of
Ps.500 and Ps.1,000 through automated teller machines and in stores operated by
Elektra and Salinas y Rocha, S.A. de C.V., national retail chains that are our
affiliates. In February 2003, we introduced new prepaid cards with an
aggressive price per minute structure designed to avoid becoming subject to a
new tax on prepaid mobile telephony services imposed by Mexican tax
authorities. This tax has since been rescinded pursuant to an injunction.
However, since our competitors instituted similar price structures, we have
been unable to roll back these price decreases because of competitive
pressures. Hybrid Plans In 2000, we launched a hybrid plan which featured elements of postpaid and
prepaid plans targeted at high school and university-aged youths who want the
status of a mobile telephony phone but want to control their usage. In March
2003, we discontinued the hybrid plans because of the high level of churn
experienced. However, due to demand from customers, we reintroduced hybrid
plans, known as Control Plan and Facillito, in January 2004. We have
increased the monthly fees charged for hybrid plans in an effort to minimize
churn. Activation, Billing and Collection Procedures We can activate a phone within 15 minutes or less for any prepaid and
postpaid customers through the use of new technologies such as Over The Air
Service Provisioning. For postpaid customers who intend to pay their monthly
charges either with a credit card or in cash there is an automatic credit
scoring process prior to the delivery and activation of a mobile telephone.
The deposit requirements are determined automatically based on the risk profile
resulting from the credit scoring. We have also implemented a system to monitor MOU levels and the number of
calls to certain geographic areas in order to identify abnormal usage by
postpaid subscribers. When abnormal usage is detected, we contact the
subscriber to determine whether such usage has been authorized. We believe
that these procedures are effective in reducing the number of billing disputes
with subscribers and losses due to fraud. Billing is currently administered using five different billing systems,
including: 24




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
    
    a mobile telephony customer care and billing system provided
by Schlumberger Distribution Mexico, S.A. de C.V., which we also use
for our 450 MHz fixed local wireless business,
    
    one point of sale system that provides billing, administration and control features,
    
    a proprietary residential long distance system,
    
    a proprietary system for high-volume business long distance customers, and
    
    a system for paging customers. We compile billing information from our switches by electronic transfer on
a half-hour basis for processing by our billing systems. We have measures in
place that enable us to recover billing information that may be lost as a
result of disasters. We invoice our postpaid customers at the end of each month for the
previous months service. All customers have 21 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 36 credit days.
Our payment policy stipulates that after 60 days of non-payment, lines are
suspended, and after 120 days of nonpayment, these lines are disconnected and
considered as delinquent accounts. We mitigate our credit exposure in seven ways:  
    
    by obtaining a credit report from the National Credit Bureau
(Buró Nacional de Crédito), a Mexican affiliate of TransUnion
Corporation for those customers not found in our internal database;
    
    by performing an automatic credit scoring and depending on
the risk profile, we may require our customers to prepay a certain
number of monthly fees or even the cost of the handset;
    
    by requiring payment to be made by credit card;
    
    by establishing credit limits and portfolio segmentation, according to customers credit quality;
    
    by requiring full payment at the time of purchase of a handset;
    
    by offering prepaid services, which eliminate all credit risk; and
    
    by applying additional collection procedures according to a customers prior payment behavior. For 2003 we reserved approximately 3.6% of our revenues for doubtful
accounts. We record a revenue provision 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 2003 was 3.3%. 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. 25




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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 of use we permit before deactivating a phone number. Under our current policy, prepaid customers have 30 or 60 days, depending
on the prepaid plan, to use an activated prepaid card, activate a new card or
otherwise recharge the airtime in their account. If the customer has not
activated a new card or recharged the airtime in its account at the end of 30
or 60 days, the balance of the customers account becomes zero, and the
customer loses the ability to make outgoing calls for an additional period of
90 days. During this 90-day period, a prepaid customer will be able to receive
incoming calls, but not to make outgoing calls. Once the 90-day period lapses,
and unless the customer has activated a new card, recharged the airtime in its
account or received incoming calls, the customers telephone number is
deactivated. In the third quarter of 2003, we made certain changes to our activation
and turnover policies aimed at providing greater transparency and focusing on
active customers. We reduced the period during which a prepaid customer can
receive incoming calls but cannot make outgoing calls from 305 and 275 days
(depending on the amount of airtime charged) to the current 90 days. Through
this policy change, in the third quarter of 2003 we identified and wrote off
approximately 437,000 existing prepaid customers who had not utilized our
service nor received income calls for more than 90 days. In the fourth quarter
of 2003, we wrote off approximately 135,000 additional lines. We also reduced the initial period for spending an activated prepaid card
and activating a new card from 60 or 90 days, depending on the prepaid plan, to
the current 30 and 60 days. Network, Equipment and Information Technology Our cellular and PCS network utilizes Lucent Technologies CDMA digital
technology. As of December 31, 2003, our integrated wireless network was
comprised of seven cellular and PCS switches, 706 cellular and PCS cell sites,
132 repeaters covering 53 million inhabitants or 57% of Mexicos total
population in Iusacells concessioned regions. During 2003, we added 17 new
cellular cell sites and one PCS cell site. We also have 807 microwave links, all of which are owned by us, with
either SDH or PDH technology. We have also leased lines located mainly in
Regions 1, 4 and 8. We have swapped our rights to certain short-haul microwave
frequency links for long-haul frequency links in northern Mexico held by an
affiliate of Telefónica, 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 5,176 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 two switches. We have introduced Dense Wavelength Division
Multiplexing (DWDM) technology in several high-traffic segments of our fiber
optic network to increase capacity. In 2003, we started the process to upgrade
our long distance network by acquiring three Nortel Passport 15000 switches
that will be located in Leon, Monterrey and Toluca. These switches will enable
us to offer advanced voice and data services based on packet technology. We have a network operations and control center (NOCC) in Mexico City
which oversees, manages and provides technical support to all our cellular and
PCS regions. In addition, we have another center for network operations in
Toluca that provides an alternative monitoring capability for the network in
the event an emergency occurs at the NOCC in Mexico City. In 2002, we started providing two-way short message service (SMS), and
since January 2003, we have been providing packet switched data (PSD) services
using 3G-1XRTT standard. Currently, we provide 1XRTT services in Mexico City,
Toluca, Cuernavaca and Valle de Bravo and plan to expand our coverage to all
our regions during the second half of 2004. 1XRTT improves efficiency in
spectrum use and allows users to get higher data speed connections. 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, 26




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which we have already completed. New modules such as the Human Resources
and Fixed Assets Control are expected to be implemented during the second half
of 2004. To improve the internal flow of information, we intend to implement a
corporate data warehouse system in 2004. This repository system will contain
all data related to business processes and will be updated on a regular basis.
We believe the implementation will be completed in the second half of 2004. Competition Mobile telephony systems compete principally on the basis of quality of
telecommunications services, customer service, price, breadth of coverage area,
roaming capabilities and value-added services. Operators are largely free to
set their own rates, provided such rates are set on the basis of cost. The
offering of mobile telephony services in Mexico is highly competitive, with one
operator, Telcel, commanding a significant share of the market. We face competition from the following companies:  
    
    Telcel, which is the largest wireless communications
provider. Telcel holds the Cellular B-band and the PCS D-band
nationwide concessions.
    
    Telefónica, which provides services in the 1.9 GHz (PCS)
spectrum in at least 96 cities in Mexico. Telefónica also operates
Cellular A-band concessions in the northern part of Mexico.
    
    Unefon, our affiliate, holds the PCS E-band nationwide
concessions. Unefon currently provides fixed and mobile wireless
services in Mexico City, Guadalajara, Monterrey, Toluca, Acapulco
and 18 other cities in Mexico. We also face competition from companies providing mobile wireless
telecommunications services using alternative existing technologies. Nextel de
México, S.A. de C.V.began marketing its enhanced specialized mobile radio
services in 1998 and currently covers 30 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 Méxicoand 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. Government Regulation Telecommunications systems in Mexico are regulated by the SCT and by
COFETEL, a decentralized regulatory body within the SCT, pursuant to the 1995
Telecommunications Law (Ley Federal de Telecomunicaciones), which became
effective on June 8, 1995. Regulations governing international long distance,
domestic long distance, local telephony, mobile and other telecommunications
services have been promulgated under the 1995 Telecommunications Law. However,
some rules from the prior Law of General Means of Communication (Ley de Vías
Generales de Comunicación) and the rules promulgated under such law, including,
without limitation, the Telecommunications Rules (Reglamento de
Telecomunicaciones) which we collectively refer to as the Original
Communications Laws, generally remain effective if they are not inconsistent
with the 1995 Telecommunications Law and the rules promulgated under that law. These laws and regulations define the regulatory structure applicable to
the nationwide telecommunications infrastructure and the provision of
telecommunications services. They govern, among other things:  
    
    applications to obtain concessions to install, maintain and operate telecommunications systems;
    
    the establishment of technical standards for the provision of telecommunications services;
    
    the grant, revocation and modification of hmits; and 27




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
    
    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. Concessions and Permits To provide public telecommunications services in Mexico through a public
network, the service provider must first obtain a concession from the SCT.
Pursuant to the 1995 Telecommunications Law, concessions for public networks
may not exceed a term of 30 years, and concessions for radioelectric spectrum
may not exceed a term of 20 years. Concessions may be extended for a term
equivalent to the term for which the concession was originally granted, but not
to exceed such 20- or 30-year limit, as the case may be. Concessions specify,
among other things:  
    
    the type of network, system or service;
    
    the allocated spectrum, if applicable;
    
    the geographical region in which the holder of the concession may provide the service;
    
    the required capital expenditure program;
    
    the term during which such service may be provided;
    
    the payment, where applicable, required to be made to acquire
the concession, including, where applicable, the participation of
the Mexican government in the revenues of the holder of the
concession; and
    
    any other rights and obligations affecting the concession
holder. In addition to concessions, the SCT may also grant permits for (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 Inversión 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 (formerly the Ministry of Commerce and Industrial
Development). The Mexican Foreign Investment Commission ruled, upon
application of Unefon, that concessions for PCS services should be treated
identically to concessions for cellular services for foreign investment
purposes. There are no foreign investment participation restrictions with
respect to operations conducted under permits. A concession or a permit may be terminated pursuant to the 1995 Telecommunications Law upon:  
    
    expiration of its term;
    
    resignation by the concession holder or the permit holder;
    
    revocation;
    
    expropriation; or 28




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
    
    dissolution or bankruptcy of the concession holder or the permit holder. A concession or a permit may be revoked prior to the end of its term under
certain circumstances, such as:  
    
    unauthorized or unjustified interruption of service;
    
    the taking of any action that impairs the rights of other concessionaires or permit holders;
    
    failure to comply with the obligations or conditions specified in the concession or permit;
    
    failure to provide interconnection services to other holders
of telecommunications concessions and permits;
    
    loss of the concession or permit holders Mexican nationality
in instances in which Mexican nationality is legally required;
    
    unauthorized assignment, transfer or encumbrance of the
concession or permit, of any rights under the concession or permit
or of assets used for the exploitation of the concession or permit;
    
    failure to pay to the Mexican government its fee for the
concession or permit or, where applicable, its participation in the
revenues of the holder of the concession or permit; or
    
    participation of any foreign government in the capital stock
of the holder of the concession or permit. In addition, the SCT may establish for any concession further events which
could result in revocation of that concession. The Mexican government, through the SCT, may also temporarily seize all
assets related to a concession or permit in the event of a natural disaster,
war, significant public disturbance or threats to internal peace and for other
reasons related to preserving public order or for economic reasons. In
addition, the Mexican government has the statutory right to expropriate a
concession and assets related to its exploitation for public interest reasons.
Under Mexican law, the Mexican government is obligated to compensate the owner
of the assets in the case of a statutory expropriation or temporary seizure,
except in the event of war. If the Mexican government temporarily seizes such
assets, it must indemnify the concession or permit holder for all losses and
damages, including lost revenues. In the case of an expropriation, the amount of the compensation is to be
determined by appraisers. If the party affected by the expropriation disagrees
with the amount appraised, it may initiate judicial action against the Mexican
government. Should no agreement be reached on the amount of the indemnity in
the case of a seizure or expropriation, the determination will be made by an
independent appraiser. Iusacell is not aware of any instance in which the SCT
has exercised any of these powers in connection with a cellular company. The Original Concession Our right to provide radiotelephony, local wireless and data transmission
services nationwide, as well as cellular service in Region 9, is based upon a
concession granted on April 1, 1957, as amended, which we refer to as the
Original Concession, to Servicio Organizado Secretarial, S.A., which merged
into SOS Telecomunicaciones, S.A. de C.V., one of our wholly-owned
subsidiaries, which we refer to as SOS. The term of the Original Concession is
50 years, and it expires on April 1, 2007. The Original Concession may,
however, be revoked prior to such date in the event that SOS fails to comply
with its terms or applicable law. The Original Concession is renewable upon
timely application to the SCT, provided that SOS has complied with all of the
requirements of the Original Concession and agrees to any new terms and
conditions established by the SCT at the time of renewal. 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. 29




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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 Region 9. In 1990, SOS was authorized to
carry intra-regional cellular-to-cellular communications throughout Region 9
without being required to interconnect with the long distance carrier. In
1992, SOS was authorized to provide public data transmission service nationwide
through its radio communications networks without the obligation to link its
subscribers to the Telecom network. In 1993, SOS was granted an additional 5 MHz band in the 800 MHz frequency
range for the provision of cellular service, due to the high volume of cellular
traffic experienced in Region 9. In the same year, SOS was authorized to
improve its radiocommunications public service in the 440-450 MHz and 485-495
MHz frequency ranges by utilizing digital technology and to interconnect its
telecommunications systems through fiber optic, satellite and microwave
technologies. The SCT also clarified the ability, and indeed the obligation,
of SOS to interconnect customers of its nationwide radio communications network
regardless of whether such customers use fixed, mobile or portable telephones. 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 Telefónicos Portátiles 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: Percent of Gross Revenues Payable ToSubsidiary
    
    Mexican GovernmentComcel
    
    
    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 30




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public interest (including, without limitation, teledensity) and
efficiency and uniformity in telecommunications throughout Mexico. These
concessions may be revoked or terminated prior to their expiration dates in the
event the concession holder fails to comply with the conditions established in
the concessions or applicable law. The concessions may, however, be renewed
for a term equal to the original term upon timely application to the SCT,
provided that the concession holder had complied with all of the requirements
of its concession and agrees to any new terms and conditions established by the
SCT at the time of such renewal. PCS Concessions In October 1998, the SCT granted to Iusacell PCS, S.A. de C.V., which we
refer to as Iusacell PCS, which is a joint venture between Iusacell and José
Ramón Elizondo Anaya, a former director of Iusacell Celular, in which Iusacell
originally held a 94.9% equity interest and a 49% voting interest, a concession
for the installation and exploitation of a public network to provide fixed and
local mobile access and a concession of 1.9 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. Paging On December 14, 1995, Iusacell Celular and Infomin formed Infotelecom as a
joint venture to market national and international paging services. Infomin
has a concession, which expires on July 20, 2009, to provide nationwide paging
services in Mexico. The joint venture agreement between Iusacell Celular and
Infomin contemplates that Infomin will ultimately transfer its paging
concession to Infotelecom. Infotelecom is required to make monthly payments to Infomin equal to 5% of
all gross revenues for the preceding month. This payment represents the amount
which Infomin as concession holder must pay to the SCT for the right to provide
paging service. In 2000, Infomin received governmental approval to transfer
its paging concession to Infotelecom. Long Distance Our right to provide international long distance services is based upon a
long distance concession granted by the SCT to Iusatel, on October 16, 1995.
The term of the long distance concession is 30 years and may be renewed upon
timely application to the SCT, for an equal period of time, provided that
Iusatel complies with certain requirements. Upon our application, the SCT and
COFETEL modified this concession on December 17, 1997, authorizing a change in
the coverage requirements and increasing flexibility in the choice of
transmission technology. Pursuant to the modified concession, Iusatel is required to comply with
technical specifications and had to serve using its own infrastructure a
minimum of 11 specified cities by July 31, 1998, 26 additional specified cities
by December 31, 1999 and another 13 additional specified cities by December 31,
2000. Iusatel complied with its coverage commitments in all cities except for
Saltillo in Region 4. Therefore, in 2001 the SCT substituted Tlaxcala for
Saltillo in our coverage commitment, and we are currently in compliance with
all our coverage commitments. Fixed Local Wireless Telephony We believe our right to provide fixed local wireless telephony service is
derived from the Original Concession. The Original Concession, as granted,
permitted SOS to provide radiocommunications service to vehicle-mounted
terminal equipment nationwide. In 1986, the SCT amended the Original
Concession to authorize SOS to provide fixed public radiotelephony service in
rural areas nationwide in accordance with plans to be approved by the SCT. We
have never received the SCTs approval of our technical and economic plans for
local wireless service in the 450 MHz frequency band. However, Iusacell
Celular has reached an agreement with the SCT on a technical process by which
we can provide local wireless service in the 450 MHz frequency band in some of
the existing service regions and has received a right of first refusal to
acquire the concessions to provide local wireless service in such regions. 31




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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:  
    
    secretarial service;
    
    voice mail; and
    
    data transmission. The term of this permit is the same as that of the authorization for using
the Region 9 cellular network through which the value-added services are to be
provided. Under this permit SOS is required to make annual payments to the
Mexican government equal to 5% of all gross revenues derived directly from the
provision of these services. In October 1994, Comcel, Telgolfo and Portacel
were each granted a permit to provide secretarial services under the same terms
granted to SOS, including the making of the annual payments to the Mexican
government. Foreign Ownership Restrictions Pursuant to the 1995 Telecommunications Law and the 1993 Foreign
Investment Law, holders of concessions to provide telecommunications services
in Mexico, excluding providers of cellular service, cannot have a majority of
their voting shares owned by, and cannot be otherwise controlled by, foreign
persons. In February 1997, the Mexican Foreign Investment Commission
conditioned its approval of Verizon assuming management control over Iusacell
upon the requirement that Iusacell would transfer at least 51% of the voting
shares of Iusatelecomunicaciones and Iusatel to Mexican investors on terms
acceptable to the Mexican Foreign Investment Commission. In November 1998, we complied with this requirement by transferring 51% of
the voting shares of these two subsidiaries to Mr. Elizondo by means of a
subscription to capital. We retained 49% of the voting shares of these
subsidiaries, representing 4.9% of their capital. We also held an additional
90% of the capital of these subsidiaries through the ownership of neutral
limited voting stock (inversión neutra) that does not constitute voting shares
for purposes of the Mexican foreign investment laws. Consequently, we hold a
94.9% equity interest in these two subsidiaries. To participate in the auctions for concessions for microwave frequencies
concluded in September 1997 and 1.9 GHz PCS frequencies concluded in May 1998,
we formed separate joint venture companies with Mr. Elizondo. The Mexican
Foreign Investment Bureau approved a capital structure substantially similar to
that authorized for Iusatel and Iusatelecomunicaciones for the joint venture
companies. Moreover, in December 1998 Mr. Elizondo acquired a 2% interest in
Infotelecom from Iusacell Celular. As a result, we currently hold only 49% of
this entity, complying with the condition precedent then necessary to allow our
partner, Infomin, to transfer its paging concession to Infotelecom. As a consequence of the acquisition by MovilAccess of 74.6% of the capital
stock of Iusacell in July 2003, we are no longer subject to foreign ownership
restrictions. On November 3, 2003, we reached an agreement with Mr. Elizondo
to take, within a period of two years, all the necessary actions to buy out Mr.
Elizondos full participation in Iusatel, Iusatelecomunicaciones, Punto-a-Punto
Iusacell, Iusacell PCS and Infotelecom. See Item 10, Additional
InformationC. Material Contracts. Rates for Telecommunications Services Under the Original Communications Laws, SCT approval was required for
rates charged for all basic and certain value-added cellular services and for
data transmission services. Historically, the SCT permitted rate increases
based on the cost of service, the level of competition, the financial situation
of the carrier and 32




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macroeconomic factors. Carriers were not allowed to discount the rates
authorized by the SCT, although operators occasionally waived activation fees
on a promotional basis. Interconnection rates were also authorized by the SCT.
All terms of interconnection (such as point of interconnection) other than
interconnection rates were negotiated between the regional cellular carriers
and Telmex under the SCTs supervision. Rates for dedicated circuit services
through microwave networks, and dedicated circuits and private networks through
satellites were not regulated under the Original Communications Laws. Under the 1995 Telecommunications Law, rates for telecommunications
services, including cellular and long distance services, are now freely
determined by the providers of such services. Providers are prohibited from
adopting discriminatory practices in the application of rates. In addition,
the SCT is authorized to impose specific rate requirements on those companies
determined by the Federal Competition Commission to have substantial market
power. All tariffs for telecommunications services, other than value-added
services, must be registered with COFETEL prior to becoming effective. 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. Additionally, we negotiated with Telmex the terms
regarding payment for the projects Telmex undertook to prepare its long
distance network for competition. We paid Telmex a fixed payment of
approximately U.S.$13.0 million and 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 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,
2003. United States Regulation Until July 2003, we were subject to certain U.S. telecommunications
regulation by reason of being a Verizon subsidiary. As a result of the
MovilAccess acquisition, we are no longer subject to such regulation. In 2002, Iusatel USA, Inc., a subsidiary of Iusatel, applied for and
received authorization under Section 214 of the Communications Act to become a
facilities-based provider of international long distance services from the
United States. As a result, Iusatel USA, Inc.is subject to the regulatory
oversight of the U.S. Federal Communications Commission. C. ORGANIZATIONAL STRUCTURE For a description of our current principal shareholder, MovilAccess, see
Item 7, Major Shareholders and Related Party TransactionsMajor Shareholders. Grupo Iusacell, S.A. de C.V.is a holding company for the shares of Grupo
Iusacell Celular, S.A. de C.V.and several other subsidiaries. The following
table shows our active direct and indirect subsidiaries, their principal lines
of business, their countries of incorporation and the percentages of our
ownership interest and voting power as of December 31, 2003. 33




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% direct and
    
    % direct andindirect
    
    indirectCountry of
    
    economic
    
    votingSubsidiary
    
    Line of Business
    
    Incorporation
    
    interest
    
    interestGrupo Iusacell Celular, S.A. de C.V.
    
    Operating cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0Iusacell PCS, S.A. de C.V.
    
    Regions 1 and 4 PCS
    
    Mexico
    
    
    94.9
    
    
    
    94.9Iusacell PCS de México, S.A. de C.V.(1)
    
    Subsidiary of Iusacell PCS
    
    Mexico
    
    
    94.9
    
    
    
    94.9Iusacell Infraestructura, S.A. de C.V.
    
    Microwave financing
    
    Mexico
    
    
    100.0
    
    
    
    100.0Iusacell Arrendadora, S.A. de C.V.
    
    Leasing
    
    Mexico
    
    
    100.0
    
    
    
    100.0Iusacell Infraestructura de
    
    Microwave financing
    
    Mexico
    
    
    100.0
    
    
    
    100.0México, S.A. de C.V.SOS Telecomunicaciones, S.A. de C.V.(2)
    
    Region 9 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0Comunicaciones Celulares de Occidente,
    
    Region 5 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0S.A. de C.V.(3)Sistemas Telefónicos Portátiles
    
    Region 6 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0Celulares, S.A. de C.V.(2)Telecomunicaciones del Golfo,
    
    Region 7 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0S.A. de C.V.(2)Iusacell, S.A. de C.V.(2)
    
    Sales and marketing
    
    Mexico
    
    
    100.0
    
    
    
    100.0Sistecel, S.A. de C.V.(2)
    
    Administrative services
    
    Mexico
    
    
    100.0
    
    
    
    100.0Iusatel, S.A. de C.V.(2)
    
    Long distance
    
    Mexico
    
    
    94.9
    
    
    
    49.0Iusatel USA, Inc.(4)
    
    Long distance U.S.
    
    United States
    
    
    94.9
    
    
    
    49.0Iusatelecomunicaciones, S.A. de C.V.(2)
    
    Local wireless
    
    Mexico
    
    
    94.9
    
    
    
    49.0Punto-a-Punto Iusacell, S.A. de C.V.(2)
    
    Microwave transmission
    
    Mexico
    
    
    94.9
    
    
    
    49.0Infotelecom, S.A. de C.V.(2)
    
    Paging
    
    Mexico
    
    
    49.0
    
    
    
    49.0Inmobiliaria Montes Urales 460,
    
    Real estate
    
    Mexico
    
    
    100.0
    
    
    
    100.0S.A. de C.V.(2)Iusanet, S.A. de C.V.(2)
    
    Services
    
    Mexico
    
    
    100.0
    
    
    
    100.0Editorial Celular, S.A. de C.V.(2)
    
    Publishing
    
    Mexico
    
    
    40.0
    
    
    
    40.0Grupo Portatel, S.A. de C.V.(2)
    
    Region 8 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0Portatel del Sureste, S.A. de C.V.(5)
    
    Region 8 cellular
    
    Mexico
    
    
    100.0
    
    
    
    100.0Mexican Cellular Investment, Inc.(2)
    
    Holding company for
    
    United States
    
    
    100.0
    
    
    
    100.0ComunicacionesCelulares deOccidente, S.A. de C.V.
   (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 Mexican 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. D. PROPERTY, PLANT AND EQUIPMENT As of December 31, 2003, we operated in our service regions a total of 706
cellular and PCS cell sites, 132 repeaters, 14 fixed local wireless 450 MHz
cell sites, 69 paging antennas, seven switches for cellular and PCS service,
one switch for local wireless service and three switches for long distance
service. We generally own our wireless network equipment. Our cellular equipment
is subject to liens under certain indebtedness of Iusacell Celular. We own our principal offices which are located in Montes Urales 460,
Colonia Lomas de Chapultepec, 11000, Mexico City, Mexico. 34




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##### Table of Contents



We generally lease the land and cellular tower space where our cell sites,
antennas, microwave transmission equipment and switching centers are located.
We own and lease administrative offices in Mexico City as well as in
Guadalajara, León, Puebla, Monterrey, Mérida and Tijuana. Over the last three years, we sold 354 of our towers to MATC Celular. In
turn, we lease site space in such towers from MATC Celular. As of May 31,
2004, we had sold 46 additional towers to MATC Celular. See Item 5, Operating
and Financial Review and ProspectsA. Operating ResultsTower Monetization. 
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion and analysis in conjunction with
the Consolidated Financial Statements included elsewhere in this Annual Report.
Unless otherwise indicated, all financial information in this Annual Report is
presented in constant pesos with purchasing power as of December 31, 2003. The
U.S. dollar translations provided in this Annual Report are, unless otherwise
indicated, calculated at the Noon Buying Rate at December 31, 2003, which was
Ps.11.242 per U.S.$1.00. Sums may not add due to rounding. A. OPERATING RESULTS General The following discussion and analysis is intended to help you understand
and assess the significant changes and trends in our historical consolidated
results of operations and financial condition and the factors affecting our
financial resources. The Consolidated Financial Statements have been prepared in accordance
with Mexican GAAP, which differs in certain significant respects from U.S.
GAAP. Note 20 to the Consolidated Financial Statements provides a description
of the principal differences between Mexican GAAP and U.S. GAAP as they relate
to us, and provides a reconciliation to U.S. GAAP of our net loss for the years
ended December 31, 2001, 2002 and 2003 and of stockholders equity as of
December 31, 2002 and 2003. As a Mexican company, we maintain our financial records in pesos.
Pursuant to Bulletin B-10, Recognition of the Effects of Inflation on
Financial Information, and Bulletin B-12, Statement of Changes in Financial
Position, issued by MIPA, our financial statements are reported in period-end
pesos to adjust for the inter-period effects of inflation. The presentation of
financial information in period-end, or constant, currency units is intended to
eliminate the distorting effect of inflation on the financial statements and to
permit comparisons in comparable monetary units. Bulletin B-10 requires us to
restate non-monetary assets, non-monetary liabilities and the components of
stockholders equity using the INPC. We have not eliminated the effects of
these inflation accounting principles in the reconciliation to U.S. GAAP. See
Note 20 to the Consolidated Financial Statements. Except where otherwise indicated, financial data for all periods in the
Consolidated Financial Statements and throughout this Annual Report have been
restated in constant pesos as of December 31, 2003, 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 2001, 2002 and 2003, the
rates of inflation in Mexico, as measured by changes in the INPC, were 4.4%,
5.7% and 4.0%, respectively. The inflation indices used are 1.0968 for 2001
figures and 1.0398 for 2002 figures. In reporting under Mexican GAAP and in accordance with Bulletin B-10, we
are required to quantify all financial effects of operating and financing the
business under inflationary conditions. For presentation purposes, integral
financing cost (gain) refers to the combined financial effects of:  
    
    net interest expense or income;
    
    net foreign exchange gains or losses; and
    
    net gains or losses on monetary position. 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 35




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##### Table of Contents



and the date it is repaid, as the appreciation of the foreign currency
results in an increase in the amount of pesos required to repay the specified
amount of the foreign currency liability. We incurred a foreign exchange loss
in 2002 and 2003 on our U.S. dollar-denominated debt as the peso depreciated
against the U.S. dollar. A foreign exchange gain arises if a liability is
denominated in a foreign currency which depreciates relative to the peso
between the time the liability is incurred and the date it is repaid, as the
depreciation of the foreign currency results in a decrease in the amount of
pesos required to repay the specified amount of the foreign currency liability.
In 2001, we incurred a foreign exchange gain on our U.S. dollar-denominated
debt as the peso appreciated against the U.S. dollar. The gain or loss on monetary position refers to the gains and losses
realized from holding net monetary liabilities or assets and reflects the
impact of inflation on monetary liabilities and assets. For example, a gain on
monetary position results from holding net monetary liabilities during periods
of inflation, such as in 2001, 2002 and 2003, 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 7.6%
against the U.S. dollar in 2002 and 2003, respectively, and appreciated by 4.8%
in 2001. Depreciation of the value of the peso has contributed to sharp increases
in inflation. Inflation, which had been 7.1% in 1994 as measured by changes in
the INPC, increased to 52.0% and 27.7% in 1995 and 1996, respectively. In
recent years, the inflation was 4.4% in 2001, 5.7% in 2002 and 4.0% in 2003. The general economic conditions in Mexico resulting from the devaluation
of the peso and the resulting inflation have had, and may have, the following
impact on our results of operations:  
    
    Peso devaluations result in a decrease in the purchasing
power of Mexican consumers, resulting in a decrease in the demand
for all goods and services, including mobile telephony and other
wireless services;
    
    Due to competitive market conditions and the overall state of
the Mexican economy, we have not been able to increase our prices in
line with the inflation rate, in fact, we have reduced prices;
    
    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 Upon the takeover of Iusacell by MovilAccess on July 29, 2003, our new
management conducted an analysis of our assets and developed a new business
strategy in line with the critical financial condition of the company. As a
result, in the third quarter of 2003, we changed some of our accounting
policies, in accordance with Mexican GAAP.  
    
    Until September 30, 2003, we amortized the cost of handsets
sold or given to our postpaid customer under exclusive service
contracts on the basis of the term of such contracts to match costs
with the timing of earned revenues. The average amortization period
was twelve months. The cost of such handsets was included under
recoverable assets and other, in our consolidated balance sheet,
net of accumulated amortization. Such cost did not exceed market
value.Since September 30, 2003, the cost of such handsets is recorded in
our income statement under cost of telephone equipment sales and
others at the moment the contract is signed. The cumulative effect 36




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##### Table of Contents




    
    of this change in our accounting policies resulted in a loss of
Ps.159.0 million for 2003. This amount represents the remaining
balance of unamortized cost of handsets as of September 30, 2003 and
is included under cumulative effect of the adoption of new
accounting pronouncement and change in accounting policy in our
income statement for 2003.In addition, we reclassified as cost of telephone equipment sales
and other Ps.226.0 million of the amortization for the period from
January 1 to September 30, 2003 which had originally been recorded as
depreciation and amortization. If this reclassification had been
made for 2001 and 2002, our cost of telephone equipment sales and
other would have been Ps.1,578.6 million and Ps.926.1 million,
respectively, and the depreciation and amortization would have been
Ps.1,715.6 million and Ps.1,917.9 million, respectively.
    
    We adopted Bulletin C-8 Intangible assets issued by the
MIPA beginning January 1, 2003. This statement requires intangible
assets to be recognized on the balance sheet as long as they are
identifiable, provide expected economic benefits and the company has
control over such benefits. It also provides that intangible assets
with an indefinite useful life should not be amortized and
intangible assets with a definite life should be amortized
systemically, based on the best estimate of their useful life as
determined in accordance with the expected future economic benefits.
These assets are subject to an annual evaluation of their
recoverable value, to identify impairment losses.During the third quarter of 2003, we wrote off assets for Ps.350.3
million. These assets mainly consisted of (i) pre-operating expenses
originated by the start-up operations of our long distance, PCS and
microwave lease business, (ii) certain payments made by us to Telmex
related to the special projects implemented by Telmex to permit
competition in long distance telephony. See Note 12c to our
financial statements. We wrote-down our handsets leasing business
goodwill (approximately Ps.35.2 million). We recorded these
write-offs in our consolidated income statement for 2003 as a special
item under intangible assets write-offs.
    
    In the third quarter 2003, we wrote-off installation expenses
of Ps.507.6 million and advance payments of Ps.166.5 million. The
installation expenses related to improvements to (i) our former
headquarters, (ii) our current headquarters that has since undergone
new remodeling, and (iii) customer sales and service centers that
are now operated by Elektra. The advance payments related to
expenses we incurred while obtaining long-term financing, which were
reclassified to current liabilities during 2003. These write-offs
are presented under other expenses, net in our consolidated income
statement for 2003.
    
    During 2003, our management performed a study of our
telecommunications equipment. Based on this study and on our new
business plan, we wrote down certain telecommunications equipment.
This resulted in a charge to income of Ps.404.7 million, presented
as a special item under valuation of abandoned fixed assets in our
consolidated income statement for 2003.
    
    We increased our net deferred tax asset valuation allowance,
which was mainly originated by the effect of our tax loss carry
forwards, reflecting uncertainty as to our ability to continue as a
going concern. The realization of the net deferred tax asset
depends on our ability to generate sufficient taxable income prior
to the expiration of the tax loss carry forwards. Our management
estimates that, considering our present critical financial
condition, the realization of the tax loss carry forwards cannot be
assured through the generation of sufficient taxable income during
the applicable period. 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 and 2003 we sold, and leased back space in, 244, 76 and 34
towers, respectively, to MATC Celular. As of May 31, 2004 we had
sold 46 additional towers. See Item 3, Key InformationD. Risk FactorsRisk
Factors 37




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##### Table of Contents



Relating to Our BusinessWe may be unable to continue to sell towers to
MATC Celular and use our assets as collateral for future indebtedness assumed
by us. In 2003, 2002 and 2001, we recorded other operating income of Ps.88.6
million, Ps.105.0 million and Ps.338.4 million in connection with our sale to
MATC Celular of 34, 76 and 244 towers, respectively. However, the leasing of
the towers from MATC Celular results in an increase in our operating expenses
over the same periods. Under U.S. GAAP, the gain was deferred and recognized
on a pro-rata basis over the life of the lease. See Note 20 to the
Consolidated Financial Statements for a further discussion. Results of Operations The following table presents results of operations data for the years
ended December 31, 2002 and 2003. Year Ended December 31,2002
    
    2003
    
    ChangePs.
    
    Ps.
    
    %(In millions of constant December 31, 2003,pesos except percentages)Total revenues
    
    
    5,746.9
    
    
    
    4,738.5
    
    
    
    (17.5
    )%Cost of sales
    
    
    2,101.6
    
    
    
    2,398.3
    
    
    
    14.1
    %Operating expenses
    
    
    1,889.4
    
    
    
    1,898.2
    
    
    
    0.5
    %Depreciation and amortization
    
    
    2,336.5
    
    
    
    2,057.8
    
    
    
    (11.9
    )%Other operating income
    
    
    105.0
    
    
    
    88.6
    
    
    
    (15.7
    )%Operating loss
    
    
    (475.5
    )
    
    
    (1,527.1
    )
    
    
    221.2
    %Special items
    
    
    
    
    
    
    755.0
    
    
    
    Other expenses, net
    
    
    
    
    
    
    626.6
    
    
    
    Integral financing cost
    
    
    1,573.4
    
    
    
    1,361.8
    
    
    
    (13.4
    )%Net loss
    
    
    (2,167.0
    )
    
    
    (4,708.7
    )
    
    
    117.3
    %
 Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenues Total revenues consist of service revenues and telephone equipment and
other revenues. Our service revenues are principally derived from the
provision of mobile telephony service (cellular and PCS) in Mexico. Our
service revenues also include revenues attributable to in-roaming and long
distance service revenue generated by our mobile telephony subscribers,
revenues from the provision of telecommunication services in Mexico other than
mobile telephony service, including long distance service revenues from
non-mobile subscribers and revenues from the provision of data transmission,
and paging services. Our service revenues include all Bulletin B-10 inflation
adjustments on all service revenue line items, whether mobile telephony service
revenues or other service revenues. Telephone equipment and other revenues
consist primarily of revenues from the sales of mobile telephone equipment and
accessories, as well as revenues attributable to out-roaming and revenues from
the sale of dark fiber optic cable. Revenues attributable to out-roaming are
passed through to the applicable host operator. The following table presents the sources of our revenues for the years
ended December 31, 2002 and 2003: Year Ended December 31,2002
    
    2003
    
    ChangePs.
    
    %
    
    Ps.
    
    %
    
    %(In millions of constant pesos as ofDecember 31, 2003, except percentages)Service revenues
    
    
    5,130.0
    
    
    
    89.3
    %
    
    
    4,189.4
    
    
    
    88.4
    %
    
    
    (18.3
    )%Telephone equipment and other revenues
    
    
    616.9
    
    
    
    10.7
    %
    
    
    549.1
    
    
    
    11.6
    %
    
    
    (11.0
    )%Total revenues
    
    
    5,746.9
    
    
    
    100.0
    %
    
    
    4,738.5
    
    
    
    100.0
    %
    
    
    (17.5
    )%
 38




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##### Table of Contents



Service Revenues.The table below presents service revenues by source for
the years ended December 31, 2002 and 2003: Year Ended December 31,2002(1)
    
    2003(1)
    
    ChangePs.
    
    %
    
    Ps.
    
    %
    
    %(In millions of constant pesos as ofDecember 31, 2003, except percentages)Airtime(2)
    
    
    2,745.8
    
    
    
    53.5
    %
    
    
    2,193.3
    
    
    
    52.3
    %
    
    
    (20.1
    )%Monthly fees
    
    
    1,578.7
    
    
    
    30.8
    %
    
    
    1,351.4
    
    
    
    32.3
    %
    
    
    (14.4
    )%Long distance
    
    
    453.8
    
    
    
    8.8
    %
    
    
    331.6
    
    
    
    7.9
    %
    
    
    (26.9
    )%Value-added services and in-roaming(3)
    
    
    351.7
    
    
    
    6.9
    %
    
    
    313.1
    
    
    
    7.5
    %
    
    
    (11.0
    )%Total service revenues
    
    
    5,130.0
    
    
    
    100.0
    %
    
    
    4,189.4
    
    
    
    100.0
    %
    
    
    (18.3
    )%
   (1)
    
    Figures include intercompany eliminations.(2)
    
    Airtime includes amounts billed to other carriers for incoming minutes
under the calling party pays modality, additional outgoing postpaid
minutes to those included in the package contracted for and prepaid
outgoing minutes net of unbilled minutes. Incoming and outgoing airtime
is charged on a per-minute basis.(3)
    
    Includes fees for value-added services, such as call waiting, call
transfer, emergency service, secretarial service and three-way calling,
and revenues from premiums for surety bonds, insurance-related charges
payable by subscribers, rural and public telephony and Iusacells cellular
magazines, as well as in-roaming service revenue. Does not include
charges for related airtime. Customers using short messaging value-added
services such as news, weather, sports and entertainment reports are
charged only for airtime. These revenues are therefore included in
airtime. Service revenues decreased 18.3% in 2003 as compared to 2002. This
decrease results mainly from increased competition in the market, lower prices
and our inability, due to severe financial constraints, to react appropriately
to this increased competition. In order to control costs, in 2003 we were
forced to make significant cuts in our sales, marketing and distribution
operations. In addition, we had to scale back our plans to build out and
upgrade our wireless network. Postpaid customers declined by 9.5%, from 356,014 in 2002 to 322,310 in
2003. This decrease was due to lower gross postpaid additions in 2003.
Prepaid customers decreased by 44.7%, from 1,725,186 customers in 2002 to
953,453 in 2003. The decline in 2003 reflects primarily (i) the disconnections
related to the reduction of the period in which a prepaid customer can receive
incoming calls but cannot make outgoing calls from 305 and 275 days (depending
on the amount of airtime previously charged) to 90 days (see Item 4,
Information on the CompanyB. Business OverviewChurn and Turnover) and (ii)
lower gross prepaid additions in 2003. Gross additions for 2003 totaled 593,284 customers, which represents a
47.1% decline from 2002. This decline resulted mainly from the significant
cuts we were forced to make in our sales, marketing and distribution operations
due to our critical financial condition, as well as to a shift in strategy
towards sales of higher-value added products, rather than the low value
segments. Postpaid subscriber churn decreased from an average monthly level of 3.6%
in 2002 to 3.3% in 2003, as we adopted stricter collection procedures to reduce
bad debt and implemented new loyalty and retention programs. However, our
overall average monthly churn for the year increased to 6.3% in 2003 from 3.4%
in 2002 primarily because of the substantial turnover that resulted from our
decision to shorten the incoming calls only period of our prepaid customers. As a result of the 47.1% decline in gross additions, the higher churn
rates and the changes in our policy for turning over prepaid customers, we
registered a net reduction of 805,437 customers in 2003, as compared to net
additions of 226,034 customers in 2002. This includes the removal during the
second half of 2003 of approximately 572,000 customers who were determined to
be inactive users under our new prepaid turnover policy. Monthly fees, airtime revenues and long distance 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 39




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##### Table of Contents



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 1.4% from Ps.693.0 in 2002 to Ps.683.0 in
2003, while prepaid ARPU declined 5.9% from Ps.80.0 in 2002 to Ps.75.3 in 2003. Telephone Equipment and Other Revenues. Telephone equipment and other
revenues decreased 11.0% in 2003, from Ps.616.9 million in 2002 to Ps.549.1
million in 2003. This decrease was primarily due to lower handset sales,
larger handset subsidies, lower revenues from out-roaming and lower sales of
dark fiber in 2003. Cost of Sales Cost of Services. 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 declined
6.0% to Ps.1,498.6 million in 2003 as compared to Ps.1,594.0 million in 2002,
primarily as a result of the implementation in the second half of 2003 of a
stringent cost control policy. As a percentage of total revenues, cost of
services increased to 31.6% in 2003 from 27.7% in 2002, because of the 17.5%
decrease in total revenues in 2003. Cost of Telephone Equipment and Other. Cost of telephone equipment and
other includes that portion of handset and accessory costs that are not
capitalized, handset and accessory inventory obsolescence charges and the cost
of dark fiber optic cable sold. Cost of telephone equipment increased 77.3%
from Ps.507.5 million in 2002 to Ps.899.6 million in 2003 primarily due to (i)
a change in accounting policy implemented in the third quarter of 2003 whereby
we now expense immediately the cost of the handsets we give to our customers,
instead of amortizing it over the life of the customers contract (See Recent
Changes in Our Accounting Policies) and (ii) a more aggressive handset
purchase campaign. These factors were offset in part by a decrease in
purchases of dark fiber in 2003 as compared to 2002. Operating Expenses Operating expenses increased 0.5% to Ps.1,898.2 million in 2003 from
Ps.1,889.4 million in 2002. As a percentage of total revenues, operating
expenses increased to 40.1% in 2003 from 32.9% in 2002 because of the 17.5%
decrease in total revenues in 2003. Sales and advertising expenses decreased 7.5% from Ps.1,419.3 million in
2002, to Ps.1,312.6 million in 2003, primarily because of lower commission
expenses due to lower gross additions, partially offset by an increase in
advertising expenses in the second half of 2003. General and administrative
expenses increased 24.6% to Ps.585.6 million from Ps.470.1 million in 2002, due
mainly to severance payments made as a result of headcount reductions. Other Operating Income We had other income of Ps.88.6 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.105.0 million from the sale of 76 towers. SeeTower Monetization. Depreciation and Amortization Depreciation and amortization expenses decreased 11.9% from Ps.2,336.5
million in 2002 to Ps.2,057.8 million in 2003, primarily due to a change in
accounting policy implemented in the third quarter of 2003 whereby we now
expense immediately the cost of the handsets we sell or give to our customers
instead of amortizing it over the life of a customers contract. See Recent
Changes in our Accounting Policies. Had we reclassified the amortization of
handsets for 2002, we would have reported depreciation and amortization of
Ps.1,917.9 million. 40




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Special Items For 2003, we recorded a write-off of Ps.350.3 million corresponding to
intangible assets and goodwill, a charge of Ps.404.7 million for the valuation
of abandoned fixed assets and a write-off of Ps.674.1 million corresponding to
installation expenses and capitalized debt issuance expenses. See a more
detailed explanation in Recent Changes in Accounting Policies. Tax Provisions Our tax provisions increased 147.8%, or Ps.185.1 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.163.9 million due to uncertainty about the realization of tax loss carry
forwards. See Recent Changes in Accounting Policies). Integral Financing Cost Our integral cost of financing decreased by 13.5%, from Ps.1,573.4 million
in 2002 to Ps.1,361.8 million in 2003. This decrease was mainly due to a
Ps.325.1 million decrease in foreign exchange losses in 2003 as a result of the
effect of a lower rate of devaluation of the peso as compared to the U.S.
dollar, our currency of indebtedness, in such year. This decrease was offset in part by (i) a Ps.81.3 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.32.2 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. Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Revenues The following table presents the sources of our revenues for the years
ended December 31, 2001 and 2002: Year Ended December 31,2001
    
    2002
    
    ChangePs.
    
    %
    
    Ps.
    
    %
    
    %(In millions of constant pesos as ofDecember 31, 2003, except percentages)Service revenues
    
    
    6,192.5
    
    
    
    90.3
    %
    
    
    5,130.0
    
    
    
    89.3
    %
    
    
    (17.2
    )%Telephone equipment and other revenues
    
    
    667.2
    
    
    
    9.7
    %
    
    
    616.9
    
    
    
    10.7
    %
    
    
    (7.5
    )%Total revenues
    
    
    6,859.7
    
    
    
    100.0
    %
    
    
    5,746.9
    
    
    
    100.0
    %
    
    
    (16.2
    )%
 Service revenues. The table below presents service revenues by source for
the years ended December 31, 2001 and 2002: Year Ended December 31,2001(1)
    
    2002(1)
    
    ChangePs.
    
    %
    
    Ps.
    
    %
    
    %(In millions of constant pesos as ofDecember 31, 2003, except percentages)Airtime(2)
    
    
    3,122.3
    
    
    
    50.4
    %
    
    
    2,745.8
    
    
    
    53.5
    %
    
    
    (12.1
    )%Monthly fees
    
    
    1,915.7
    
    
    
    30.9
    %
    
    
    1,578.7
    
    
    
    30.8
    %
    
    
    (17.6
    )%Long Distance
    
    
    713.7
    
    
    
    11.5
    %
    
    
    453.8
    
    
    
    8.8
    %
    
    
    (36.4
    )%Value-added services and in-roaming(3)
    
    
    440.8
    
    
    
    7.2
    %
    
    
    351.7
    
    
    
    6.9
    %
    
    
    (20.2
    )%Total service revenues
    
    
    6,192.5
    
    
    
    100.0
    %
    
    
    5,130.0
    
    
    
    100.0
    %
    
    
    (17.2
    )%
   (1)
    
    Figures include intercompany eliminations. 41




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(2)
    
    Airtime includes amounts billed to other carriers for incoming minutes
under calling party pays modality, additional outgoing postpaid minutes to
those included in the package contracted for and prepaid outgoing minutes
net of unbilled minutes. Incoming and outgoing airtime is charged on a
per-minute basis.(3)
    
    Includes fees for value-added services, such as call waiting, call
transfer, emergency service, secretarial service and three-way calling,
and revenues from premiums for surety bonds, insurance-related charges
payable by subscribers, rural and public telephony and Iusacells cellular
magazines, as well as in-roaming service revenue. Does not include
charges for related airtime. Customers using short messaging value-added
services such as news, weather, sports and entertainment reports are
charged only for airtime. These revenues are therefore included in
airtime. Service revenues decreased 17.2% in 2002 as compared to 2001. This
decrease results mainly from increased competition in the market, lower prices
and our inability, due to severe financial constraints, to react appropriately
to this increased competition. In 2002, postpaid customers declined by 11.9%, from 404,075 in 2001 to
356,014 in 2002, due to lower gross postpaid additions. Prepaid customers
increased by 18.9% from 1,451,091 customers in 2001 to 1,725,186 in 2002. The
increase in 2002 reflects our efforts at that time to expand that segment.
Incoming calls only prepaid customers, the substantially majority of whom
generate little traffic, grew by 54.5% from 768,076 customers in 2001 to
1,186,962 in 2002. Gross additions for 2002 totaled 1,122,024 customers, which represents a
6.7% increase over 2001. These additions were mainly derived from the
strategic focus on prepaid additions during the first half of 2002. During the
second half of 2002, however, we implemented a strategic shift, which triggered
sales of higher-value products through changes in the commission structure, but
actually resulted in a decrease in gross additions during the second half of
2002, particularly in the low value prepaid segments. Average monthly churn for the year declined from 3.9% in 2001 to 3.4% in
2002, although churn increased during the second half of the year as we
actively sought to remove non- or low-revenue producing prepaid customers.
Postpaid subscriber churn decreased from an average monthly level of 3.8% in
2001 to 3.6% in 2002 as a result of the adoption of strict collection
procedures to reduce bad debt and the implementation of new activation policies
and retention programs. As a result of higher gross additions and lower average churn, net
additions increased 29.9%, from 173,947 customers in 2001 to 226,034 in 2002.
This includes the extraordinary removal during the third quarter of 2002 of
47,415 customers who were determined to be inactive prepaid customers and were
not taken into consideration in the blended churn rate for the year. Monthly fees decreased primarily due to fewer postpaid customers and an
increase in the number of hybrid subscribers as a proportion of the total
postpaid base, particularly during the first half of 2002. Airtime revenues
decreased primarily as a result of fewer postpaid subscribers. Long distance
revenue decreased mainly due to fewer postpaid subscribers and a higher
proportion of incoming only subscribers in the prepaid subscriber base. Blended average monthly minutes of use (MOUs) for 2002 decreased 25.0%,
from 84 minutes to 63 minutes, primarily due to a higher proportion of prepaid
customers in our subscriber base. Average monthly MOUs for postpaid customers
decreased 14.4%, from 250 minutes in 2001 to 214 minutes in 2002, mainly due to
the increased proportion of hybrid customers who had lower consumption patterns
than the remainder of the postpaid customer base. Average MOUs increased 3.6%
among prepaid customers, from 28 minutes in 2001 to 29 minutes in 2002,
primarily due to promotions aimed at increasing use by higher value customers
in the prepaid customer base. ARPU decreased, 28.5% from Ps.267.0 in 2001 to Ps.191.0 in 2002, as a
result of lower average MOUs and the higher proportion of prepaid customers in
our customer base. Postpaid ARPU decreased 13.2% from Ps.798.0 in 2001 to
Ps.693.0 in 2002, primarily as a result of a higher proportion of hybrid
customers in our customer base. Prepaid ARPU declined 11.1% from Ps.90.0 in
2001 to Ps.80.0 in 2002, due to a higher proportion of lower revenue generating
customers in the customer base during the first half of the year. Telephone Equipment and Other Revenues. Telephone equipment and other
revenues decreased 7.5% in 2002, from Ps.667.3 million in 2001 to Ps.616.9
million in 2002. This decrease was primarily due to lower postpaid handset
sales and lower revenues from out-roaming in 2002. 42




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Cost of Sales Cost of Services. Our cost of services declined by 5.4% to Ps.1,594.0
million in 2002 as compared to Ps.1,684.2 million in 2001. This decrease
resulted from stringent financial controls we implemented in 2002, despite
higher lease costs associated with an increased number of non-strategic towers
sold to and leased back from MATC Celular during the year. See Tower
Monetization. As a percentage of total revenues, cost of services increased
to 27.7% in 2002 from 24.6% in 2001, primarily because of the 16.2% decrease in
total revenues in 2002. Cost of Telephone Equipment and Other. Cost of telephone equipment and
other increased 22.1% in 2002 from Ps.415.5 million in 2001 to Ps.507.5 million
primarily due to partial subsidizing of telephones sold to prepaid customers
and higher cost of dark fiber optic sales. Until September 30, 2003, the cost
of a handset given to a postpaid customer was amortized over 12 months, the
average length of our service contract, instead of being immediately expensed
in the period in which the customer receives the handset. Operating Expenses Operating expenses decreased 17.2% from Ps.2,282.4 million in 2001 to
Ps.1,889.4 million in 2002. As a percentage of total revenues, operating
expenses decreased from 33.3% in 2001 to 32.9% in 2002. Sales and advertising expenses decreased 13.7% from Ps.1,645.5 million in
2001, to Ps.1,419.3 million in 2002, primarily because of higher television
advertising rates as well as expenses incurred in association with the
consolidation of Region 8 cellular service into our business in 2001. General
and administrative expenses decreased 26.2% from Ps.636.9 million in 2001 to
Ps.470.1 million in 2002, due to the implementation in 2002 of stringent cost
controls, lower headcount and restructured compensation plans. Other Operating Income We had other income of Ps.105.0 million in 2002 mainly from the sale of 76
towers to MATC Celular. In 2001, we had other income of Ps.338.4 million from
the sale of 244 towers. See Tower Monetization. Depreciation and Amortization Depreciation and amortization expenses decreased 18.8% from Ps.2,878.7
million in 2001 to Ps.2,336.5 million in 2002, primarily due to a reduced level
of capital expenditures during the period, lower handset amortization expenses
attributable to lower postpaid gross additions, more cost-effective handset
purchases and better targeted handset subsidies for high-value customers. Integral Financing Cost Our integral cost of financing increased from Ps.348.7 million in 2001 to
Ps.1,573.4 million in 2002. This increase was mainly due to Ps.1,069.1 million
in foreign exchange losses recorded in 2002 as compared to a Ps.247.1 million
gain in 2001, resulting from a change from a 4.8% appreciation of the peso in
relation to the U.S. dollar in 2001 to a 13.8% devaluation in 2002. Net
interest expense increased by Ps.47.1 million in 2002 due to the effect of the
depreciation of the peso on our U.S. dollar-denominated indebtedness. This increase was offset in part by a Ps.139.1 million increase in gain
from monetary position in 2002 because of the effect of a higher rate of
inflation in such year on our net monetary liability position. Income Tax, Asset Tax and Employees Profit Sharing Beginning January 1, 1999, as a result of Mexican Income Tax Law
amendments, we must limit our tax consolidation to 60% of all our subsidiaries,
except for six entities (Iusatel, S.A. de C.V., Iusatelecomunicaciones, S.A. de
C.V., Infotelecom, S.A. de C.V., Iusacell PCS, S.A. de C.V., Iusacell PCS de
México, S.A. de C.V.and Punto-a-Punto Iusacell, S.A. de C.V.) which are not
included in our annual consolidated income tax return (although they are
consolidated for financial reporting purposes), because we do not hold more
than 50% of the voting shares of such subsidiaries. We plan to acquire at
least 51% of the capital stock of four of these subsidiaries by not later than
the fourth quarter of 2005. Once we do, we will be able to include these
subsidiaries in our tax consolidation. See Item 10, Additional InformationC.
Material ContractsAcquisition of Equity Interests in Certain Subsidiaries for
a description of these planned acquisitions. 43




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In December 2000, the Mexican Finance Ministry (Secretaría de Hacienda y
Crédito Público) 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.160.9 million, Ps.115.6 million and Ps.146.5
million for asset tax for 2001, 2002 and 2003 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 2001, 2002 and 2003 and paid the asset
taxes specified above. In 2002, due to the change in the statutory income tax rate which became
effective in 2003, Iusacell and its subsidiaries reduced the deferred tax asset
in 2002, resulting in a provision of deferred income tax of Ps.9.6 million.
During 2003, we decided to increase the net deferred asset valuation allowance
which is mainly originated by the effect of the tax loss carry forwards,
reflecting the uncertainty about our ability to continue as an ongoing concern.
The realization of the net deferred tax asset heavily depends on generating
sufficient taxable income prior to expiration of the tax loss carry forwards.
Our management estimates that, considering our present critical financial
condition, the realization of the tax loss carry forwards cannot be assured
through the generation of sufficient taxable income during the applicable
period. See Recent Changes in our Accounting Policies and note 12 to the
Consolidated Financial Statements for a discussion of our tax loss carry
forwards. While we have no employees at the holding company level, our subsidiaries
are required under Mexican law to pay their employees, in addition to their
required compensation and benefits, profit sharing in an aggregate amount equal
to 10% of the taxable income of the relevant subsidiary (calculated without
reference to inflation adjustments or amortization of tax loss carry forwards).
There was no statutory profit sharing in any periods presented. 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 both Mexican GAAP and
U.S. GAAP are those that require management to make estimates and assumptions
that affect the reported amounts related to the accounting for revenue
recognition, allowance for doubtful accounts, the evaluation of long-lived
assets, property plant and equipment, goodwill, and deferred taxes. For a full
description of all of our accounting policies, see Notes 4 and 20 to the
Consolidated Financial Statements included in this Annual Report. There are certain critical estimates that we believe require significant
judgment in the preparation of our consolidated financial statements. We
consider an accounting estimate to be critical if:  
    
    It requires us to make assumptions because information was
not available at the time or it included matters that were highly
uncertain at the time we were making the estimate, and
    
    Changes in the estimate or different estimates that we could
have selected would have had a material impact on our financial
condition or results of operations. Revenue Recognition Mobile telephony airtime is recorded as revenue as service is provided.
Until December 31, 2001, revenue from the sale of prepaid cards was recognized
at the date of sale. We had recognized the revenue on the sale of prepaid
cards at the date of sale rather than on a deferred basis because the length of
the average consumption period 44




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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 and are included in the line item
taxes and other payables in the accompanying consolidated balance sheets.
Sales and cost of sales of equipment and related services are recorded when
goods are delivered and services are provided. Cellular access charges are
billed in advance and recognized when the services are provided. Other
revenues, mainly from paging and long distance services, are recognized when
the related services are provided. Allowance for Doubtful Accounts The allowance for doubtful accounts represents our estimate of losses
resulting from the failure or inability of our customers to make required
payments. We consider a number of factors in determining the proper level of
the allowance including historical collection experience, current economic
trends, the aging of the accounts receivable portfolio and changes in the
credit-worthiness of our customers. Systems to detect fraudulent call activity
are in place within our network, but if these systems fail to identify such
activity, we may realize a higher degree of uncollectible accounts. While we
believe that our estimates are reasonable, changes in our customers trends or
any of the above mentioned factors could materially affect our bad debt
expense. 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 an 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 undiscounted 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 an undiscounted cash flow analysis include inflation,
currency fluctuations and future revenue growth. The use of different
estimates or assumptions within our undiscounted cash flow model could result
in undiscounted cash flows lower than the current carrying value of our assets,
therefore requiring the need to compare the carrying values to their fair
values. Our estimates and assumptions take into consideration all relevant
business and market factors which are known to us at the time, some of which
may change in future periods due to factors outside of our control (including
shareholder strategic decisions). Should these factors adversely change in
future periods, we would be required to reevaluate the carrying value of our
long-lived assets and cash flow impairment calculations could possibly change. During 2003 we wrote-off various long-lived assets based on changes in
estimates and assumptions in relation to these long-lived assets as follows:  a.
    
    As discussed in Note 4n. to our Consolidated Financial
Statements, during 2003 we wrote down intangible assets for Ps.315.1
million that mainly consisted of: (i) Pre-operating expenses
originated by our PCS start-up operations in northern Mexico and
(ii) certain payments made by the Group to Telmex related to the
special projects implemented by Telmex to permit competition in long
distance telephony (see Note 13c to our Consolidated Financial
Statements). This write down of intangible assets is presented as a
special item in our consolidated income statement for 2003.b.
    
    During the third quarter of 2003, we wrote-off installation
expenses for Ps.507.6 million and advance payments for Ps.166.5
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. 45




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The cost of mobile wireless telephones given to customers under exclusive
service contracts was amortized on a straight-line basis until September 30,
2003. During 2001, we reduced the amortization period of mobile wireless
telephones from an average of 18 months to 12 months. The term of service
contracts varies on a customer by customer basis. Due to the
cost-ineffectiveness of tracking phones on an individual contract basis for
amortization purposes, we estimate 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 for 2003 of Ps.159.0 million related to the remaining balance of
telephones being amortized as of that date, amount that is included in the line
cumulative effect of the adoption of the new accounting pronouncement and
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.226.0 million
of the amortization for the period from January to September 2003, which was
originally recorded in depreciation and amortization for the period, in the
line item cost of telephone equipment sales and other. If this
reclassification had been made for the years ended December 31, 2002 and 2001,
the cost of telephone equipment sales and other would have been of Ps.926.1
million and Ps.1,578.6 million, respectively, and the depreciation and
amortization would have been Ps.1,917.9 million and Ps.1,715.6 million,
respectively. Goodwill Under Mexican GAAP, we amortize goodwill on a straight-line basis over a
period of 20 years. We cancelled goodwill for Ps. 35.2 million during the
fourth quarter of 2003 related to our handset leasing business. This amount is
recorded under Intangible assets write-off. For a discussion of goodwill
under U.S. GAAP, see Note 20g to the Consolidated Financial Statements. 46




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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. B. LIQUIDITY AND CAPITAL RESOURCES General 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:  
    
    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 and June 1, 2004,
    
    the U.S.$7.5 million interest payment on the Iusacell Celular
10% senior notes due 2004 which was due on July 15, 2003 and the
U.S.$150.0 million principal payment and accrued interest which
became due upon acceleration on September 11, 2003,
    
    the U.S.$265.6 million principal payment on Iusacell
Celular  ́s senior refinancing secured loan which was due on March 31,
2004 because of the automatic acceleration of the maturity date of
the loan as a result of our failure to refinance the Iusacell
Celular senior notes by such date,
    
    the U.S.$3.7 million principal payments on the BNP Paribas
facilities which were due on each of June 16, 2003, December 16,
2003 and June 15, 2004,
    
    the U.S.$7.8 million principal payment plus accrued interest
on the GTE Venholdings B.V. promissory note which was due on
November 8, 2003,
    
    the U.S.$0.4 million, U.S.$0.8 million, U.S.$0.2 million and
U.S.$0.9 million principal payments which were due on June 15, 2003,
December 15, 2003, January 30, 2004 and June 15, 2004, respectively,
and an aggregate amount of U.S.$0.4 million interest payments which
were due on the same dates, each under the Harris Facility, and
    
    the U.S.$7.0 million principal payment on a promissory note
due to Elektra on October 30, 2003. In addition, funds will not be sufficient to meet our debt service and
principal amortization requirements, working capital requirements and capital
expenditure needs for our existing businesses through 2004. 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 2004, 2005 and 2006 to total
approximately U.S.$291.5 million, not including capitalized interest. We
anticipate that approximately U.S.$97.8 million of such capital expenditures
will need to be invested during 2004, in order to acquire, build out and
operate our PCS network in northern Mexico, as 47




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well as to make additional investments in the central regions and expand
the advance data network capabilities into other key cities, among other
things. 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 2005 and beyond. Furthermore, the investments
required to keep pace with technological change, such as extended coverage on
third-generation wireless telecommunication equipment, will require additional
capital resources. During the first quarter of 2004, we invested approximately
U.S.$8.0 million in our cellular regions to expand our coverage. 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. Furthermore, this would limit our ability to pursue
business opportunities that may be in our interest, such as the auctions for
PCS spectrum that the SCT has announced will be held before the end of 2004. In
2003, the total amount of our capital expenditures was U.S.$18.2 million,
which we invested to maintain our coverage and improve our information
systems. Our total capital expenditures in 2002 were U.S.$87.6 million. Of this
amount, approximately U.S.$58.2 million was used primarily for the development
of the cellular network in the central regions and to construct new and remodel
existing customer and sales services centers. The balance of U.S.$29.4 million
was primarily invested in developing and launching PCS services in Regions 1
and 4, and used to develop and increase the quality of our cellular network in
Region 8 in southern Mexico. Our total capital expenditures in 2001 were U.S.$213.8 million, of which
approximately U.S.$189.8 million were used primarily for the development of the
cellular network and to construct new and remodel existing customers and sales
services centers. The balance of U.S.$24.0 million was primarily invested in
developing and launching PCS services in the cities of Tijuana and Monterrey in
Regions 1 and 4, and used to develop and increase the quality of the cellular
network in the then recently acquired Region 8 in southern Mexico. Our Indebtedness As of December 31, 2003, our total consolidated indebtedness, including
trade notes payable, was Ps.9,100.0 million. As described below, we are in
default under substantially all of our indebtedness for, among other things,
our failure to make interest and/or principal payments. We believe that if our
financial situation does not improve or we are unable to restructure our debt,
we will be unable to recommence the servicing of our debt and operate as a
viable company. We may be forced to file for bankruptcy, liquidate or
reorganize, which would materially adversely affect the value and market price
of our equity and debt securities and the claims of our equity or debt holders,
who could lose some or all of their investment. See Item 3, Key
InformationRisk FactorsFactors Relating to our Liquidity and Financial
Condition. The following is a description of our principal indebtedness. Iusacell Senior Notes In December 1999, Iusacell issued U.S.$350.0 million of 141/4% 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 141/4% senior notes due 2006, which are also governed by the
indenture, pursuant to an exchange offer registered with the SEC. The
indenture restricts the ability of Iusacell and its subsidiaries to incur
indebtedness and make certain investments. Under circumstances involving a
change of control of Iusacell or Iusacell Celular, we are required to make an
offer to repurchase the Iusacell senior notes. We failed to make U.S.$24.9 million interest payments due on each of June
1, 2003, December 1, 2003 and June 1, 2004. The holders of the Iusacell senior
notes have the right to accelerate the outstanding principal and 48




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accrued and unpaid interest on such notes, but have not done so. In
addition, the acquisition by MovilAccess of a 74.6% interest in Iusacell in
July 2003 triggered the change of control covenant, which allows holders to
require us to repurchase their notes. We are also not in compliance with
certain other financial covenants. Up to the present date, the holders of the
Iusacell senior notes have not requested that we repurchase their notes. Senior Refinancing Secured Loan On March 29, 2001, Iusacell Celular completed the refinancing of its
senior secured credit facility by entering into a U.S.$265.6 million Amended
and Restated Senior Secured Credit Loan Agreement, which we refer to as the
senior refinancing secured loan, which consists of:  
    
    a Tranche A Loan in an aggregate principal amount of
U.S.$189.8 million for the purpose of refinancing existing
indebtedness under the senior secured credit facility and under a
certain bridge loan, the proceeds of which were used to make a
principal amortization payment under the senior secured credit
facility in January 2001; and
    
    a Tranche B Loan in an aggregate principal amount of
U.S.$75.8 million for the purpose of paying existing indebtedness
under certain Eximbank facilities and under a certain bridge loan,
the proceeds of which were used to make a principal amortization
payment under the Eximbank facilities in January 2001. The senior refinancing secured loan bears interest at a rate per annum
equal to one-, two-, three- or six-month LIBOR (at Iusacell Celulars option)
plus a spread ranging from 1.75% to 2.25%, depending on Iusacell Celulars
leverage ratio. Iusacell Celulars obligations under the senior refinancing
secured loan are unconditionally guaranteed, jointly and severally, by the
principal operating subsidiaries of Iusacell Celular and its subsidiaries
holding cellular concessions and are secured by a pledge of substantially all
the capital stock and equity interests held by Iusacell Celular and
substantially all assets used in connection with or related to such cellular
concessions. The senior refinancing secured loan provides for principal payments in
equal quarterly installments beginning on May 28, 2004 and maturing on February
28, 2006. However, the loan also provides that in the event that the Iusacell
Celular senior notes have not been refinanced by March 31, 2004, the maturity
date for the loan would be accelerated to such date. Since the refinancing of
the Iusacell Celular senior notes has not occurred, the outstanding amount
under the senior refinancing secured loan has been automatically accelerated.
We failed to make the U.S.$265.6 million principal payment on March 31, 2004. We are also not in compliance with certain financial covenants. Iusacell Celular Senior Notes In July 1997, Iusacell Celular issued U.S.$150.0 million of its 10% Senior
Notes due 2004, under an indenture dated as of July 25, 1997 among Iusacell
Celular, the subsidiaries of Iusacell Celular guaranteeing the Iusacell Celular
senior notes and First Union National Bank (now Wachovia Bank National
Association), as trustee. Substantially all of the Iusacell Celular senior
notes were exchanged in January 1998 for identical 10% Senior Notes due 2004,
which are also governed by the Iusacell Celular indenture, pursuant to an
exchange offer registered with the SEC. The Iusacell Celular indenture limits, among other things, the ability of
Iusacell Celular to make dividend payments to Iusacell, to incur indebtedness
and make certain investments. In addition, all amounts due under the Iusacell
Celular senior notes are secured by a second priority lien on its cellular
concessions and certain equipment. We failed to make a U.S.$7.5 million interest payment on July 15, 2003.
On September 11, 2003, we were notified by holders representing over 50% of the
senior notes outstanding that they had elected to accelerate the principal
payment of the notes. On January 14, 2004, certain holders of the notes
initiated an action in a New York state court seeking payment and other
remedies. We have not made any principal or interest payments since we failed
to make payment on July 15, 2003. We are also not in compliance with certain financial covenants. 49




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BNP Paribas Facilities In July 2000, our subsidiary Iusacell Infraestructura, S.A. de C.V.
entered into financing agreements for the purpose of purchasing NERA microwave
transmission equipment consisting of:  
    
    a seven-year senior amortizing term facility in the principal
amount up to U.S.$30.5 million, guaranteed by the Export Import Bank
of Norway, which we refer to as the GIEK-Guaranteed Facility; and
    
    a four-year senior loan in the principal amount up to
U.S.$5.4 million, which we refer to as the Non-GIEK-Guaranteed Loan. 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. As
of December 31, 2003, 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.
However, we have continued to make interest payments. As a result of the
non-payment of the principal installments, we are in default and the lenders
have the right to accelerate the outstanding principal and accrued and unpaid
interest on such notes. We are also not in compliance with certain financial covenants. GTE Venholdings B.V. Promissory Note On May 8, 2001, we signed a U.S.$7.8 million promissory note in favor of
GTE Venholdings B.V. that accrues interest at an annual rate equal to 11.5%,
and was scheduled to mature on May 8, 2003. The proceeds from the issuance of
this note were used to complete the funding of the acquisition of Portatel, the
region 8 cellular concession holder. On May 8, 2003, we extended the maturity
date to November 8, 2003. We failed to repay the note upon maturity. Harris Facility In August 2000, our subsidiary Iusacell Infraestructura de México, S.A. de
C.V.entered into a purchase framework agreement for the purpose of purchasing
Harris microwave equipment. This vendor financing consisted of a five-year
senior amortizing term loan facility in the principal amount of up to U.S.$6.9
million, with interest accruing at a rate of the average term 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 the average term 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. As of December 31, 2003, we had U.S.$10.3 million outstanding under
this facility. We failed to make (i) U.S.$0.4 million, U.S.$0.8 million, U.S.$0.2 million
and U.S.$0.9 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. 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. On June 24, 2004, our subsidiary
Iusacell Infraestructura de México, 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. Debt Restructuring In December 2002, we engaged Morgan Stanley as our financial advisor to
assist us in developing a comprehensive debt restructuring plan. In July 2003,
we terminated the mandate with Morgan Stanley and appointed a team of
executives and advisors from companies controlled by Mr. Salinas Pliego to
continue the effort of developing a comprehensive restructuring plan. In March
2004, we hired Hill Street Capital as our new financial advisors. We are still
in the process of developing a comprehensive restructuring proposal and
building the different communications channels with our creditors. We cannot
assure you that we will be able to complete a successful restructuring or that
we will be able to achieve it on a timely basis. 50




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Hedging Activities We currently do not carry out any hedging activities. Changes in Financial Position Historically, our cash generated from operating activities has not been
sufficient to meet our debt service, working capital and capital expenditure
requirements. We have relied on the capital markets for new equity and debt
financing, vendor financing and borrowings and equity contributions from our
principal shareholders to meet such funding needs. For the years ended 2001,
2002 and 2003, our earnings were insufficient to cover our fixed charges by
Ps.307.3 million, Ps.3,063.1 million and Ps.5,070.2 million, respectively. Our total consolidated debt, including notes payable to suppliers, was
Ps.9,100.0 million at December 31, 2003. At December 31, 2003, our ratio of
debt to total capitalization was 91.4% compared to 61.6% at December 31, 2002. Cash Flows From Operating Activities We used cash flows from operating activities in 2002 and 2003. Net cash
used by operating activities was Ps.201.9 million for 2003 compared to Ps.508.4
million in 2002. The decrease in net cash used in operations was primarily due
to the non-payment of interest due under our indebtedness in 2003, as well as
to cash management efficiencies that resulted in an increase in accounts
payable aging, partially offset by higher inventory purchases. We generated
positive cash flows from operating activities in 2001 of Ps.2,263.3 million. Cash Flows from Financing Activities Net cash provided by financing activities amounted to Ps.167.0 million in
2003 compared to Ps.653.9 million in 2002. The decrease was mainly
attributable to a decrease in proceeds from long-term debt and in trade notes
payable in 2003, offset in part by principal payments on long-term debt made in
2002. In 2001, net cash provided by financing activities was Ps.412.7 million. Cash Flows Used for Investing Activities Net cash used in investing activities was Ps.125.8 million in 2003,
compared to 435.7 million in 2002. This decrease is primarily attributable to
our critical financial condition, which has not allowed us to raise sufficient
funds to invest in the build out and upgrade of our wireless network. In 2001,
net cash used in investing activities was Ps.2,974.6 million. C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. Iusacell does not undertake research and development activities. D. TREND INFORMATION In addition to the events and developments identified elsewhere in this
Item 5, Operating and Financial Review and Prospects, our financial condition
and results of operations could also be materially affected by the following
events and developments: Regulatory Developments Calling Party Pays We are currently discussing with COFETEL and Telmex 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 long distance revenues.
We cannot assure you that COFETEL and Telmex will agree to implement this
change. 51




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International Long Distance Service In 1996, COFETEL established a uniform rates and proportional return
system for international traffic. In June 2004, as a result of a complaint
under the World Trade Organization, Mexico agreed to eliminate the proportional
return system and permit free negotiations between international carriers to
terminate their calls. At this moment, COFETEL is in the process of drafting
the new rules. We believe that free negotiations between international
carriers will result 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 will launch several applications of
MMS such as music, sounds and photos. We cannot predict whether it will be
possible to exchange MMS between carriers. We believe that MMS may have a
positive impact on our revenues. Voice over Internet Protocol (VoIP) In recent years, the market started to accept the VoIP telephone service
as a close substitute of long distance service. As a result of this
competition, we anticipate a strong reduction in long distance rates and the
introduction of monthly flat rates for unlimited calls. We believe that these
changes may have a negative impact on our long distance revenues. E. 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. F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS Iusacell Contractual Obligations The following table outlines our obligations for payments under our
consolidated indebtedness, operating leases and purchase obligations for the
periods indicated using balances as of December 31, 2003. 52




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The following table does not reflect as current the effects of our default
under certain of our obligations that have not yet been declared immediately
due and payable. Depending on subsequent events and the progress of our
restructuring efforts, we expect our payment obligations to change. Payments due by Period(Figures in thousands of U.S. Dollars as of December 31, 2003) Indebtedness(1)
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    TotalSenior notes due 2006
    
    
    
    
    
    
    
    
    
    
    350,000
    
    
    
    
    
    
    
    
    
    
    
    350,000Senior refinancing secured loan(2)
    
    
    265,622
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265,622Senior notes due 2004
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,000BNP Paribas (Oslo)
GIEK-Guaranteed Loan
    
    
    10,325
    
    
    
    5,163
    
    
    
    5,163
    
    
    
    2,581
    
    
    
    
    
    
    
    23,232BNP Paribas (Oslo)
Non-GIEK-Guaranteed Loan
    
    
    3,417
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,417GTE Venholdings B.V. Loan
    
    
    7,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,800Harris facility(3)
    
    
    2,889
    
    
    
    4,215
    
    
    
    3,090
    
    
    
    63
    
    
    
    
    
    
    
    10,257Total indebtedness
    
    
    440,053
    
    
    
    9,378
    
    
    
    358,253
    
    
    
    2,644
    
    
    
    
    
    
    
    810,328
 Operating Leases(4)
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    TotalMATC Celular
    
    
    31,863
    
    
    
    33,224
    
    
    
    34,643
    
    
    
    36,124
    
    
    
    122,779
    
    
    
    258,633Buildings and others
    
    
    3,666
    
    
    
    3,845
    
    
    
    4,037
    
    
    
    4,238
    
    
    
    11,081
    
    
    
    26,867Total operating leases
    
    
    35,529
    
    
    
    37,069
    
    
    
    38,680
    
    
    
    40,362
    
    
    
    133,860
    
    
    
    285,500
 Acquisitions
    
    2004
    
    2005
    
    2006
    
    2007
    
    Thereafter
    
    TotalJose Ramon Elizondo
    
    
    5,200
    
    
    
    5,094
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,294Total Contractual Obligations
    
    
    480,782
    
    
    
    51,541
    
    
    
    396,933
    
    
    
    43,006
    
    
    
    133,860
    
    
    
    1,106,122
   (1)
    
    These amounts are principal payments.(2)
    
    The principal payments under this loan were automatically accelerated to
March 31, 2004.(3)
    
    Does not take into account our purchase in the secondary market on June
24, 2004 of a U.S.$6.4 million promissory note issued under the Harris
Facility for U.S.$3.0 million. See item 5, Operating and Financial
Review and ProspectsB. Liquidity and Capital ResourcesOur
IndebtednessHarris Facility.(4)
    
    These amounts include minimum lease payments. 
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT Directors 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 an 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 7, Major
Shareholders and Related Party TransactionsMajor ShareholdersGovernance for
a description of Iusacells by-laws. Our by-laws require our Board of Directors to approve the following
transactions, whether carried out by Iusacell or any of its subsidiaries:  
    
    related party transactions not in the ordinary course of business,
    
    guarantees involving 30% or more of consolidated assets, and 53




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
    
    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 28, 2004, Iusacell elected new 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 Benjamín Salinas Pliego.
    
    
    48
    
    
    Chairman of the Board of DirectorsPedro Padilla Longoria.
    
    
    38
    
    
    Vice Chairman of the Board of DirectorsGustavo Guzmán Sepúlveda.
    
    
    50
    
    
    DirectorLuis Jorge Echarte Fernández.
    
    
    59
    
    
    DirectorJoaquin Arrangoiz Orvañanos.
    
    
    47
    
    
    DirectorGonzalo Brockmann García.
    
    
    49
    
    
    DirectorMarcelino Gómez Velasco Sanromán
    
    
    46
    
    
    DirectorManuel Rodríguez de Castro.
    
    
    40
    
    
    Director
 Upon the acquisition by MovilAccess of a 74.6% equity interest in Iusacell
on July 29, 2003, the then Board of Directors of Iusacell was replaced
wholesale with new members, the majority of whom are current members of the
Board. Mr. Brockmann, Mr. Gómez and Mr. Rodríguez 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 Guzmán Sepúlveda.
    
    
    50
    
    
    Chief Executive OfficerJosé Luis Riera Kinkel.
    
    
    38
    
    
    Chief Financial OfficerRicardo Benjamín Salinas Pliego
    
    
    48
    
    
    Executive DirectorPedro Padilla Longoria.
    
    
    38
    
    
    Executive DirectorEduardo Kuri Romo.
    
    
    34
    
    
    Director, SystemsAlejandra Ibargüengoitia
Vázquez Aldana.
    
    
    34
    
    
    Director, MarketingNéstor Bergero Faustinelli.
    
    
    46
    
    
    Director, TechnologyFederico Bellot Castro.
    
    
    61
    
    
    Director, SalesJulián Aldeco Correa.
    
    
    28
    
    
    Director, Postpaid ProductsPatricio Medina Moya.
    
    
    33
    
    
    Director, Prepaid ProductsAlexander Elgqvist Payró.
    
    
    31
    
    
    Director, Logistics and DistributionFernando José Cabrera García.
    
    
    39
    
    
    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, Biper, 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. 54




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Pedro Padilla Longoria. Mr. Padilla has been a member of the Board of
Directors and Executive Director of Iusacell since July 29, 2003. Mr. Padilla
has also been a member of the Board of Directors and Executive Director of
Iusacell Celular since July 29, 2003 and a Director of TV Azteca since 1993.
Mr. Padilla is also the Chief Executive Officer of TV Azteca. Mr. Padilla also
serves on the Board of Directors of Azteca Holdings, Grupo Elektra, Biper,
Unefon and Cosmofrecuencias. Mr. Padilla received a degree in law from the
Universidad Nacional Autónoma de Mexico. Gustavo Guzmán Sepúlveda.Mr. Guzmán has been a member of the Board of
Directors of Iusacell and its Chief Executive Officer since July 29, 2003. Mr.
Guzmán 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. Guzmán was the General Director of
Sales, Local Stations and Special Events of TV Azteca from 1993 to July 2003.
Mr. Guzmán received a bachelors degree in communication from the Instituto
Tecnologico de Estudios Superiores Monterrey. Luis J. Echarte Fernández. 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 Biper, Azteca International
Corporation and Foamex International Inc. Mr. Echarte holds undergraduate
degrees from Memphis State University and the University of Florida and has
completed the Executive Management Program at Stanford University. Joaquin Arrangoiz Orvañanos. Mr. Arrangoiz has been a member of the Board
of Directors of Iusacell since October 17, 2003. Mr. Arrangoiz has also served
as a member of the Board of Directors of Iusacell Celular since April 2004, as
a Director of TV Azteca since 1998 and Co-General Director of Sales of TV
Azteca since 1993. Mr. Arrangoiz received a degree in administration from
Anahuac University. Gonzalo Brockmann García.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 Westernfor
Mexico, Central America and Ecuador since 1990 and Hostales de América, S.A. de
C.V.since 1991, among others. Mr. Brockmann was the Vice President of
Development at Hoteles Best Westernfor Mexico, Central America and Ecuador
from 1985 to 1989, the General Director at Hostales de Américafrom 1985 to
1990 and a Manager of Entertainment at Westin Hotels and Resortsfrom 1983 to
1984. Mr. Brockmann holds a business administration degree from Universidad
Anáhuac and a masters in business administration (MBA) from Texas University,
Austin. Marcelino Gómez Velasco Sanromán. Mr. Gómez Velasco has been a member of
the Board of Directors of Iusacell since July 29, 2003. Mr. Gómez 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. Gómez 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 Biper
from 1997 to 2004, and as President of the Board of Directors of Intersys
México, S.A. de C.V., a network integration company, from October 1985 to
November 1999. Mr. Gómez Velasco holds a systems engineering degree from
Universidad Iberoamericana and a masters in business administration degree
(MBA) from Wharton, Pennsylvania. Manuel Rodríguez de Castro.Mr. Rodríguez de Castro has been a member of
the Board of Directors of Iusacell since July 29, 2003. Mr. Rodríguez 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. Rodríguez de Castro also has been the President of Agencia Hispana,
an investment bank since 2000. Mr. Rodríguez de Castro received a degree in
economics from the La Salle Institute of Economics. José 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 Dirección de Empresas (IPADE). 55




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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 Ibargüengoitia Vazquez Aldana. Ms. Ibargüengoitia has served as
Marketing Director of Iusacell since January 2004. Ms. Ibargüengoitia has also
served as Marketing Director of Iusacell Celular since January 2004. From July
2003 to January 2004, Ms. Ibargüengoitia served as Corporate Sales and
Marketing Services Director of Iusacell. Ms. Ibargüengoitia 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. Ibargüengoitia worked in areas related to marketing in
different companies such as Seagram de México, S.A. de C.V.Ms. Ibargüengoitia
received a marketing degree from Instituto Tecnológico de Estudios Superiores
de Occidente (ITESO) and has also completed seminar programs in Marketing and
Management from Instituto Tecnológico de Estudios Superiores de Monterrey
(ITESM). Nestor Bergero Faustinelli. Mr. Bergero has served as Director of
Technology of Iusacell since July 29, 2003. Mr. Bergero has been responsible
for Iusacells Technology division since January 2003. Mr. Bergero has also
served as Director of Technology of Iusacell Celular since July 29, 2003. Prior
to these appointments, Mr. Bergero served as Chief Technology Officer and as a
member of the Board of Directors of CTI Movil in Argentina since June 2000.
Mr. Bergero served in a variety of engineering, planning and network positions
in CTI Movil for over nine years. Previously he served as Engineering Manager
of Telecom, S.A.and in a variety of management positions in companies such as
Telintar, S.A., the Government of Córdoba, Argentina, and Sancor Cooperativas
Unidas Limitadas in Argentina. He holds a degree with honors in electronic and
electrical engineering from the Universidad Nacional de Córdoba, and he
completed a management development program at the Universidad Austral in
Argentina. Federico Bellot Castro. Mr. Bellot has served as Sales Director of
Iusacell since July 29, 2003. Mr. Bellot has also served as Sales Director of
Iusacell Celular since July 29, 2003. Prior to joining Iusacell, Mr. Bellot
served as Regional Sales Director at Unefon from September 1998 to July 2003,
where he was responsible for increasing the sales of telecommunications
services in all the regions of the country. Mr. Bellot served as General
Director of Radio Cel, S.A. de C.V., a trunking services company, from 1991 to
1993. Mr. Bellot has also worked in areas related to management in different
companies and industries such as Ranver, S.A., Productora Nacional de Redes,
Ocean Garden Products and FIPESCO (Brazil). Mr. Bellot received an accounting
degree from Universidad del Valle de Mexico and a masters degree in marketing
from Fundação Getulio Vargas (Río de Janeiro, Brazil). Julián Gerardo Aldeco Correa. Mr. Aldeco has served as Director of
Postpaid Products since May 2004. Mr. Aldeco has also served as Director of
Postpaid Products of Iusacell Celular since May 2004. Before assuming these
positions, Mr. Aldeco served as Customer Service Director of Iusacell from
October 2003 to March 2004. Mr. Aldeco also served as Loyalty and Retention
Operations Director of Iusacell from November 2002 to September 2003. Before
joining Iusacell, Mr. Aldeco served as Loyalty Operations Manager for the
Mexican affiliate of DirecTV, an entertainment company, from November 2000 to
October 2002. Mr. Aldeco also served as Customer Relationship Center Process
Engineering and Quality Sub-Director at Citibank N.A.from January 1999 to
October 2000. Mr. Aldeco holds a degree in economics from Universidad
Iberoamericana in Mexico. Patricio Medina Moya. Mr. Medina has served as Director of Prepaid
Products of Iusacell since February 2003. 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
Politécnica del Ejército (ESPE) in Quito, Ecuador and he completed a management
executive program at Universidad Argentina de la Empresa (UADE) in Buenos
Aires, Argentina. Alexander Elgqvist Payró. Mr. Elgqvist has served as Director of
Logistics and Distribution of Iusacell since July 29, 2003. Mr. Elgqvist has
also served as Director of Logistics and Distribution of Iusacell Celular since 56




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July 29, 2003. Prior to joining Iusacell, Mr. Elgqvist worked at Elektra
as Mobile Phone Product and Purchasing Director from September 2003 to June
2004, as Mobile Phone Product and Purchasing Manager from January 2000 to
September 2003, and as assistant to the Chief Executive Officer during 1998 and
1999. During the years 1998 and 1999, Mr. Elgqvist also worked as assistant to
the Chief Executive Officer at Unefon. Mr. Elgqvist participated in the
launching of the mobile phone business in Elektra, starting with Unefon in 2000
and Telcel, Pegaso, Movistar and Iusacell in the following years. Mr. Elgqvist
received a masters in business administration degree from the University of
Texas at Austin, a bachelor in business administration degree and a
telecommunications and technology degree, both from Instituto Tecnológico y de
Estudios Superiores de Monterrey in Mexico City (ITESM). Mr. Elgqvist has
completed a management program at Instituto Panamericano de Alta Dirección de
Empresas (IPADE). Fernando José Cabrera García. 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. B. COMPENSATION The aggregate compensation (including, without limitation, base salary and
benefits) paid by us to all executive officers in 2003 was Ps.98.0 million,
compared to Ps.64.5 million in 2002. These aggregate amounts exclude any
amounts paid by Verizon and Vodafone to their employees who were directors and
executive officers of Iusacell until July 29, 2003. Each independent Director
is paid a fee of U.S.$15,000 per meeting attended during the year. Our other
Directors do not receive compensation. Iusacell does not provide benefits to
Directors upon termination of their directorships. 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). C. 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, Gómez and Rodríguez 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, Gómez and Rodríguez de Castro. See Item 16A, Audit Committee
Financial Expert. 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, Gómez and Rodriguez de Castro. The Related Party Transactions Committee reviews any material transaction
between Iusacell or any of its subsidiaries and any related party to verify
that its terms are at least as favorable to us as the terms that would be
obtainable at the time for a comparable transaction or series of similar
transactions in arms-length dealings with an unrelated third person. The
members of the Related Parties Transactions Committee are Messrs. Brockmann,
Gómez and Rodríguez de Castro. See Item 7, Major Shareholders and Related
Party TransactionsB. Related Party Transactions. 57




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D. EMPLOYEES As of December 31, 2003, Iusacell and its controlled affiliates had an
aggregate of 1,912 full-time and part-time employees, including 758 temporary
employees, all of whom were based in Mexico. At December 31, 2002, Iusacell
and its subsidiaries had an aggregate of 1,685 full-time and part-time
employees, including 96 temporary employees and 5 full-time Verizon seconded
employees or consultants. At December 31, 2001, Iusacell and its subsidiaries
had an aggregate of 2,643 full-time and part-time employees, including 129
temporary employees and 8 full-time Verizon seconded employees or consultants.
The significant reduction in our employee ranks since 2001 is due to the
deterioration of our financial condition. Approximately 33.6% of our full-time employees at December 31, 2003 were
members of a labor union. We have never experienced a work stoppage and we
consider our relationship with our employees to be good. The majority of our employees render services to us through legal entities
and are not our direct employees. The table below presents a breakdown of our full-time and part-time
employees by area. EmployeesAreas
    
    2001
    
    2002
    
    2003Sales, Customer Care and
Marketing
    
    
    1,471
    
    
    
    1,100
    
    
    
    1,531Finance and Administrative
    
    
    547
    
    
    
    205
    
    
    
    171Technology
    
    
    625
    
    
    
    380
    
    
    
    210Total
    
    
    2,643
    
    
    
    1,685
    
    
    
    1,912
 E. SHARE OWNERSHIP Mr. Ricardo B. Salinas Pliego, our Chairman of the Board, directly owns
4.6% of our shares. Mr. Salinas is also the controlling shareholder of
MovilAccess, our principal shareholder with 74.8% of our shares. Our directors
and officers, excluding Mr. Salinas, do not own any of our shares. Iusacells management employee stock purchase plan has been inactive for
the last 30 months. No rights to purchase shares under the plan are
outstanding. 
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS Our principal shareholder is MovilAccess, a subsidiary of Biper,
controlled by Mr. Salinas Pliego. Mr. Salinas Pliego is our Chairman of the
Board and Executive Director. No other shareholder owns more than 5% of our shares. All shares have the
same voting rights. At May 31, 2004, based on information made available to
us, our shareholders ownership interests were as follows: CommonShareholders
    
    Shares
    
    %MovilAccess(1)
    
    
    69,666,552
    
    
    
    74.8Ricardo B. Salinas Pliego(1)
    
    
    4,319,270
    
    
    
    4.6Public float(2)
    
    
    19,115,418
    
    
    
    20.5Total
    
    
    93,101,240
    
    
    
    100.0
   (1)
    
    Shareholding information provided by MovilAccess and Mr. Salinas Pliego
on Schedule 13D filed on April 6, 2004.(2)
    
    The number presented includes 174,370 shares held in a trust that served
as part of Iusacell stock option plan and 15 shares held in Iusacells
treasury. Of Iusacells outstanding shares at May 31, 2004, 4,210,445 shares were
held in the form of American Depositary Shares (ADS) by 20 holders of record
based on information made available to us and provided by our 58




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depositary, The Bank of New York. Assuming that the holders of ADSs are
located in the United States, then 22.0% of Iusacell public float shares are
held in the United States. On September 27, 2001, our shareholders authorized a rights offering to
holders of our outstanding series V shares and ADSs. The rights offering
involved newly issued series V shares representing ADSs and series A shares for
up to U.S.$100.0 million. The subscription period began on October 5, 2001 and
ended on November 1, 2001. Iusacells then principal shareholders, Verizon and
Vodafone, purchased their pro rata portion of series A and series V shares.
Sixty-seven percent (67%) of the non-Verizon and Vodafone series V shareholders
exercised their rights to purchase additional shares. In addition, Verizons
subscription included all of the series V shares offered to, but not subscribed
for, by public shareholders. On July 29, 2003, MovilAccess completed a public tender offer in Mexico
and the United States for all outstanding equity securities of Iusacell. As a
result, MovilAccess acquired 74.6% of the outstanding capital stock of
Iusacell. 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. B. RELATED PARTY TRANSACTIONS General Policy In October 2003, our shareholders approved amendments to our bylaws to
establish a Related Party Transactions Committee. The committee reviews any
material transaction between Iusacell or any of its subsidiaries and any
related party to verify that its terms are at least as favorable to us as the
terms that would be obtainable at the time for a comparable transaction or
series of similar transactions in arms-length dealings with an unrelated third
person. See Item 6 Directors, Senior Management and EmployeesC. Board
Practices. Since the acquisition by MovilAccess of a controlling interest in Iusacell
in July 2003, Iusacell has entered into a number of transactions with companies
controlled, directly or indirectly, by Mr. Salinas Pliego. The objective
behind these transactions is to control costs by outsourcing certain operations
and/or to exploit synergies with other companies under the control of Mr.
Salinas Pliego. The following is a description of our related party
transactions. Elektra and Salinas y Rocha Retail Space Leasing and Promotion Services On August 5, 2003, Iusacell, S.A. de C.V.(Iusacell S.A.), our Sales and
Marketing subsidiary, entered into an agreement with Elektra and Salinas y
Rocha, S.A. de C.V.(SyR), two national retail chains controlled by Mr.
Salinas Pliego, whereby Elektra and SyR agreed to provide us with space in
their stores to set up points of sale and promote our services. Iusacell S.A.
agreed to pay Elektra and SyR for the leasing of the space U.S.$2.5 million in
four equal payments on October 30, 2003, November 28, 2003, December 31, 2003
and April 30, 2004. This agreement expires on August 4, 2004. On August 5, 2003, Iusacell S.A., Elektra, and SyR entered into a second
agreement, whereby Elektra and SyR agreed to include our advertising materials
in their advertising campaigns to promote the services offered by us at their
respective stores. Iusacell S.A. agreed to pay Elektra and SyR for the sales
promotion services a total of U.S.$5 million in four equal payments on October
30, 2003, November 28, 2003, December 31, 2003 and April 30, 2004. This
agreement expires on December 31, 2004. 59




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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 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 electronic
appliance products normally sold at its Elektra stores. Upon assuming the
management of our customer sales and service centers, Elektra has purchased
handsets (net of subsidy) in the amount of Ps.304.0 million and airtime in the
amount of Ps.16.0 million. 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 2003, we recorded expenses due Elektra of an aggregate of Ps.22.1
million in commissions and Ps.7.5 million in expenses, and revenues of Ps.44.5
million for reimbursement of costs related to the customer sales and service
centers. We are evaluating on an ongoing basis whether Iusacell should again
operate and manage some or all of its centers. Purchase of Handsets from Elektra In 2003, we purchased handsets from Elektra in an amount of Ps.450.0
million. 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. To
guarantee its obligations, Iusacell Celular issued a U.S.$7.0 million
promissory note in favor of Elektra, which was payable on October 30, 2003. We
have failed to make payment on this note. Elektra has initiated legal
proceedings in a Mexican court to obtain payment. See Item 8, Financial
InformationA. Consolidated Statements and Other Financial InformationLegal
ProceedingsElektra Promissory Note. Bipercomm Paging Services Operation Bipercomm, an affiliate of MovilAccess, purchased paging equipment from us
in the amount of Ps.1.0 million in 2003. We consider that paging is not an
area of growth given competition from short message services. SECSA Collection and Payment Services On October 6, 2003, each of our operating subsidiaries and Servicios
Eficientes de Cartera, S. de R.L. de C.V.(SECSA) a MovilAccess subsidiary,
entered into a ten-year services agreements pursuant to which SECSA agreed to
collect from our customers payments related to the provision of our services.
SECSA also agreed to manage payments to our suppliers and creditors. In 2003,
we paid SECSA Ps.4.9 million for these services. Teleactivos Call Center Services On September 1, 2003, Iusacell S.A. and Teleactivos, S.A. de C.V.
(Teleactivos), a MovilAccess affiliate, entered into a services agreement
pursuant to which Teleactivos agreed to provide basic customer service to our
customers via its own call center, including, among others, renewal services,
billing and collection support and technical failures reports. 60




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On November 3, 2003, Iusacell S.A. and Teleactivos entered into an
operation services agreement pursuant to which Teleactivos agreed to provide
additional value-added services via its own call center, such as, among others,
secretarial services, news, traffic reports. Teleactivos receives a monthly payment from Iusacell S.A. for its
services, based mainly on the number of calls processed. Both agreements have
an indefinite term and may be terminated by any party with a 30 days notice.
In 2003, we recorded expenses for these services of Ps.3.9 million. Unefon Airtime Exchange and Roaming In April 23, 2004, we entered into an airtime exchange and roaming
agreement with Unefon, a nationwide fixed and mobile telephony provider
controlled by Mr. Salinas Pliego, whereby both parties agreed to exchange
airtime and allow for roaming in certain cities. 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 Telefónica Móviles. Such
interconnection agreement permits the exchange of short messages between our
respective customers. The operator that generates the message pays an
interconnection fee. In 2003, the activity and fees paid under this agreement
were not significant. On June 9, 2000, we entered into an interconnection agreement with Unefon,
which at that time was not a related party. Interconnection rate under this
agreement is Ps.1.90 per minute of traffic, and this agreement has an
indefinite term. We received Ps.10.0 million and we paid Ps.14.4 million in
interconnection fees under this agreement in 2003. 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 2003,
we paid to the non-affiliated third party Ps.288.9 million under this
agreement. This agreement expires on December 31, 2004. Banco Azteca Banking Services Banco Azteca S.A., a bank controlled by Mr. Salinas Pliego, renders
banking services to us, including current accounts and payroll services. We
pay standard banking fees for these services. Provision of Telecommunications Services In 2003, we provided telecommunications services to companies controlled
by Mr. Salinas in an amount of Ps.0.2 million. 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, Biper, a paging competitor, and/or Elektra, a distributor of our
products. See Item 6, Directors, Senior Management and EmployeesA. Directors
and Senior ManagementBiographies. Verizon and Vodafone Consulting and Secondment Services Iusacell Celular, Verizon and Vodafone had entered into a series of
consulting and secondment agreements pursuant to which Verizon and Vodafone
agreed, for an indefinite term, to provide Iusacell with management, technical,
marketing, legal and other consulting services and seconded employees. On July
2003, and as a result of MovilAccess acquisition of a controlling interest in
Iusacell, Iusacell Celular, Verizon and Vodafone terminated these agreements.
In 2003, we paid to Verizon and Vodafone approximately Ps.29.6 million. 61




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GTE Roaming GTE Telecommunications Services, Inc., a Verizon subsidiary, which we
refer to as TSI, provided clearinghouse services for roaming arrangements. In
2003, Iusacell paid TSI U.S.$1.3 million for such services and billed TSI for
U.S.$11.8 million for services rendered to international carriers. Interests of Directors Mr. Javier Martínez del Campo, our director until July 2003, and Mr.
Ignacio Gómez Morin, our director until July 2003, are members of the law firm
of De Ovando y Martínez del Campo, S.C., which, in 2003, provided legal
services to us in the amount of Ps.1.1 million. Mr. Héctor Rojas, our director from July 2003 to April 2004, is a member
of the law firm Jáuregui, Navarrete, Nader y Rojas, S.C., which in 2003
provided legal services to us in the aggregate amount of approximately Ps.7.7
million. Interests of Experts and Counsel Not applicable. 
 ITEM 8. FINANCIAL INFORMATION A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION Financial Statements See page F-1 for a list of financial statements filed under Item 18. Legal Proceedings Iusacell Celular Senior Noteholders On January 14, 2004, certain holders of the Iusacell Celular senior notes
initiated an action in a New York state court. These holders claim that they
are entitled to payment of certain amounts outstanding under the Iusacell
Celular senior notes plus interest, which in their amended complaint is alleged
to be in excess of U.S.$45.0 million. Iusacell Celular moved to dismiss the
portion of the complaint that requested the court to declare that the holders
are entitled to the benefit of liens senior to or at least equal in priority to
liens held by other creditors. Iusacell Celular moved to dismiss that claim
based on various grounds, including the impropriety of the relief requested and
forum non conveniens. 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 are also seeking injunctive relief barring
Iusacell Celular from selling, transferring or otherwise encumbering the assets
pending decision on the merits of their claim for specific performance. On June
18, 2004, the court held a hearing on the matter. We expect that the court will
reach a decision on the injunctive relief in the next few days. Telemedic In March 2002, Telemedic S.A de C.V., a provider of healthcare services by
phone, filed a lawsuit in Mexico City against Iusacell S.A. seeking
compensatory damages in the amount of U.S.$8 million 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 first instance court 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,
which is currently pending. 62




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Injunctive action against additional 10% excise tax On January 1, 2002, the Mexican Congress approved a surcharge that
assessed an additional 10% federal excise tax on certain wireless
telecommunications services. The tax resulted in a 10% increase in the monthly
bills of postpaid mobile wireless customers and in the cost of prepaid cards in
denominations of Ps.200.0 or more for the year 2002. In February 2002, we
filed an injunctive action (amparo) challenging the Mexican governments
implementation of the tax. In October 2002, we received a preliminary ruling
in our favor from a Federal Court, and the Mexican government subsequently
filed an appeal. In June 2003, Mexicos Supreme Court rejected the appeal and
affirmed the ruling in favor of Iusacell. In 2003, the Mexican government implemented a modified version of the
additional 10% excise tax on certain wireless telecommunications services,
which was approved by the Mexican Congress. In March 2003, we filed an
injunctive action (amparo) challenging this implementation. Until this
injunctive action is resolved, we will continue to pay the full modified
additional 10% excise tax to the Finance Ministry. Elektra Promissory Note On August 1, 2003, Iusacell S.A. and Elektra entered into a current
account contract for the purpose of streamlining, controlling and recording the
transfer of funds between the two companies under the different commercial
arrangements described under Item 7, Major Shareholders and Related Party
TransactionsB. 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 Mexico City. Ingran alleged that
we breached our payment obligation under our distribution agreement. The court
of first instance ruled in our favor affirming that we did not owe any payments
to Ingran. Ingran appealed the decision and the appellate court affirmed the
decision in our favor with prejudice in June 2004. BBDO In June 2004, BBDO de México, 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 alleges that
we have defaulted on our payment obligations for services rendered to us. We
are contesting this claim. 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. Currently, the
lawsuit is in the discovery stage. Labor Claims We are subject to labor claims that arise in the ordinary course of our
business. At December 31, 2003, there were 103 such claims for an aggregate
amount of Ps.50.0 million. We recorded a contingency reserve for these claims
in the amount of Ps.37.0 million. 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. 63




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B. SIGNIFICANT CHANGES The senior refinancing secured loan provides that in the event that the
Iusacell Celular senior notes have not been refinanced by March 31, 2004, the
maturity date for the loan would be accelerated to such date. Since the
refinancing of the Iusacell Celular senior notes has not occurred, the
outstanding amount under the senior refinancing secured loan has been
automatically accelerated. In addition, since December 31, 2003 we have defaulted on:  
    
    interest payments on the Iusacell senior notes;
    
    principal payments on the BNP Paribas facilities; and
    
    interest and principal payments on the Harris Facility. On January 14, 2004, certain holders of Iusacell Celular senior notes
initiated an action in a New York state court seeking, among other things,
payment of certain amounts outstanding under the Iusacell Celular senior notes
plus interest. See Item 8, Financial InformationA. Consolidated Statements
and Other Financial InformationLegal ProceedingsIusacell Celular Senior
Noteholders. See Item 13, Defaults, Dividend Arrearages and Delinquencies, for a description of these defaults. 
 ITEM 9. THE OFFER AND LISTING A. OFFER AND LISTING DETAILS Iusacells shares have been listed on the Mexican Stock Exchange since
August 4, 1999, trading under the symbol CEL. ADSs representing ten Iusacell
series V shares were listed on the New York Stock Exchange from August 4, 1999
until May 12, 2003, when we implemented a change in the ADR ratio. From that
date and until December 19, 2003, one ADS represented 100 Iusacell series V
shares and traded under the symbol CEL. On December 19, 2003, Iusacell concluded an exchange of its series V and
series A shares for new common shares, at a ratio of 20 Series V or A shares
per new common share. The new shares are without par value, in registered form
and have the same rights. The reorganization of the capital structure included
a change in the ADR ratio. From that date, one ADS represents five Iusacell
shares. The trading symbol did not change. The ADSs are evidenced by American
depositary receipts issued under a deposit agreement with The Bank of New York,
as depositary. The following tables present, for the periods indicated, the high and low
sales prices of (i) the Iusacell common shares on the Mexican Stock Exchange,
as reported by the Mexican Stock Exchange, adjusted to reflect the reverse
stock split which occurred on December 19, 2003, and (ii) the Iusacell ADSs on
the New York Stock Exchange, as reported by the New York Stock Exchange,
adjusted to reflect the May 12, 2003 change in the ADR ratio and the December
19, 2003 reverse stock split and change in ADR ratio. Mexican Stock Exchange (in Ps.)Common Shares Mexican Stock ExchangePrice per Share(pesos)High
    
    LowPrevious five years:1999
    
    
    
    
    
    
    2000
    
    
    474.00
    
    
    
    156.002001
    
    
    276.00
    
    
    
    41.002002
    
    
    82.20
    
    
    
    9.002003
    
    
    23.60
    
    
    
    3.40
 64




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Mexican Stock ExchangePrice per Share(pesos)High
    
    LowPrevious two years (by quarter):2002:First Quarter
    
    
    82.20
    
    
    
    57.00Second Quarter
    
    
    65.60
    
    
    
    32.20Third Quarter
    
    
    34.60
    
    
    
    14.40Fourth Quarter
    
    
    16.40
    
    
    
    9.002003:First Quarter
    
    
    12.80
    
    
    
    6.60Second Quarter
    
    
    9.20
    
    
    
    3.40Third Quarter
    
    
    17.40
    
    
    
    6.20Fourth Quarter
    
    
    23.60
    
    
    
    17.00
 Mexican Stock ExchangePrice per Share(pesos)High
    
    LowPrevious six months:December 2003
    
    
    21.58
    
    
    
    20.20January 2004
    
    
    20.60
    
    
    
    14.80February 2004
    
    
    19.80
    
    
    
    15.10March 2004
    
    
    17.80
    
    
    
    15.01April 2004
    
    
    15.99
    
    
    
    15.20May 2004
    
    
    15.99
    
    
    
    12.00
 New York Stock ExchangePrice per ADS(dollars)High
    
    LowPrevious five years:1999
    
    
    
    
    
    
    2000
    
    
    265.00
    
    
    
    80.002001
    
    
    135.00
    
    
    
    20.502002
    
    
    45.00
    
    
    
    4.202003
    
    
    10.84
    
    
    
    1.70
 New York Stock ExchangePrice per ADS(dollars)High
    
    LowPrevious two years (by quarter):2002:First Quarter
    
    
    45.00
    
    
    
    30.90Second Quarter
    
    
    36.50
    
    
    
    16.00Third Quarter
    
    
    17.40
    
    
    
    6.60Fourth Quarter
    
    
    8.50
    
    
    
    4.202003:First Quarter
    
    
    7.40
    
    
    
    3.10Second Quarter
    
    
    6.00
    
    
    
    1.70Third Quarter
    
    
    7.77
    
    
    
    2.99Fourth Quarter
    
    
    10.84
    
    
    
    7.49
 65




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New York Stock ExchangePrice per ADS(dollars)High
    
    LowPrevious six months:December 2003
    
    
    9.44
    
    
    
    8.62January 2004
    
    
    9.28
    
    
    
    6.35February 2004
    
    
    9.02
    
    
    
    6.70March 2004
    
    
    8.17
    
    
    
    6.62April 2004
    
    
    7.10
    
    
    
    6.63May 2004
    
    
    6.90
    
    
    
    5.15
 B. PLAN OF DISTRIBUTION Not applicable. C. MARKETS Trading on the New York Stock Exchange ADSs representing Iusacell shares have been listed on the New York Stock
Exchange since August 4, 1999. In December 19, 2003 we completed the exchange
of series A and V shares for new common shares, with no par value in Mexico.
As part of the reorganization of capital, we implemented a reverse split/ADS
ratio change. Since December 19, 2003 one ADS represents five Iusacell shares
and continues to trade under the symbol CEL. Trading on the Mexican Stock Exchange The Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A. de C.V.),
located in Mexico City, is the only stock exchange in Mexico. Founded in 1907,
it is organized as a corporation whose shares are held by 29 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. D. SELLING SHAREHOLDERS Not applicable. E. DILUTION Not applicable. F. EXPENSES OF THE ISSUE Not applicable. 66




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ITEM 10. ADDITIONAL INFORMATION A. SHARE CAPITAL Not applicable. B. MEMORANDUM AND ARTICLES OF ASSOCIATION General Iusacell was incorporated on August 6, 1998 as a variable capital
corporation (sociedad anónima 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 Mexican law and 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. Voting Rights and Shareholders Meetings Each share entitles the holder thereof to one vote at any shareholders
meeting of Iusacell. Under Mexican law and Iusacells by-laws, any shareholder or group of
shareholders holding Iusacell shares representing at least 10% of the total
capital stock of Iusacell shall be entitled to designate one director. General shareholders meetings may be ordinary or extraordinary meetings.
General extraordinary meetings are those held to consider the matters specified
under Article 182 of the Mexican Law of Commercial Companies (Ley General de
Sociedades Mercantiles). A general extraordinary meeting may be held in order
to modify the fixed capital sock, liquidation, merger, transformation and any
amendments to the by-laws such as issuance of preferred capital stock,
amendments to the corporate purpose or nationality. The mandatory quorum on a first call for a general extraordinary
shareholders meeting is 75% of the outstanding shares. If such quorum is not
available on the first call, a second meeting may be called and convened,
provided that at least 50% plus one share of the aggregate of the outstanding
shares are present. Whether the general extraordinary meeting is held on a
first or second call, in order for a resolution to be validly adopted, the
favorable vote of the holders of a majority of the outstanding shares present
is required. General ordinary shareholders meetings may be called to consider all
other matters. A general ordinary shareholders meeting of Iusacell must be
held at least annually within the four months following the end of each fiscal
year to consider matters specified in Article 181 of the Mexican Law of
Commercial Companies, including, principally, the approval of the report of the
Board of Directors regarding the performance of Iusacell, the approval of the
financial statements of Iusacell for the preceding fiscal year, appointment of
directors and statutory auditors and determination of their compensation, and
the declaration of dividends. Under our by-laws, the mandatory quorum on a first call for a general
ordinary shareholders meeting is at least 50% plus one share of the
outstanding shares. If such quorum is not available on the first call, a
second meeting may be called and validly held regardless of the number of
shares represented. In order for a resolution of the general ordinary
shareholders meeting to be validly adopted as a result of a first or subsequent
call, the favorable vote of the holders of a majority the shares present is
required. 67




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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 delisting can be waived if 95% of the outstanding shares approved such
delisting in a shareholders meeting and if the amount to be offered to the
public investors for the shares is less than 300,000 UDIs. Holders of ADSs are entitled to instruct the depositary as to the exercise
of the voting rights pertaining to the shares represented by the ADSs. Under Mexican law, holders of at least 20% of our outstanding capital
stock may have any shareholder action that violates our by-laws or applicable
law set aside by filing a complaint with a Mexican court of competent
jurisdiction within 15 days after the close of the general shareholders
meeting at which such action was taken, by showing that the challenged action
violates Mexican law or our by-laws. Relief under these provisions is only
available to holders:  
    
    whose shares were not represented when the action was taken
or, if represented, were voted against it; and
    
    whose complaint makes reference to the clause of the by-laws
or the legal provision that was infringed. 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 Federación) 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, shareholders holding at least 10% of the outstanding
shares of Iusacell may request that the voting of a specific matter at a
shareholders meeting be delayed if such shareholders do not have sufficient
information on the matter subject to voting. Under Mexican law, an action for civil liabilities against members of the
Board of Directors may be initiated by a shareholders resolution taken at a
general shareholders meeting. In the event shareholders decide to bring such
an action, the persons against whom such action is brought will immediately
cease to be members of the Board of Directors. In case the shareholders
resolve not to take action against the Director(s) at such meeting,
shareholders representing not less than 15% of the outstanding shares of
Iusacell may directly take such action against members of the Board of
Directors, provided that (i) such shareholders have not voted in favor of a
resolution approved at the relevant general shareholders meeting pursuant to
which it was resolved not to take any action against the directors who are to
be sued, and (ii) the claim in question covers damages alleged to have been
caused to Iusacell and not only to the individual shareholders interests. Shareholder Conflicts of Interest Under Mexican law, any shareholder that has a conflict of interest in
connection with any transaction must abstain from voting at the relevant
shareholders meeting. A shareholder that votes on a business transaction in
which his interest conflicts with that of Iusacell may be liable for damages if
the transaction would not have been approved without such shareholders vote. Dividend Rights All shares have the same dividend rights. The declaration and payment of
such dividends will depend upon Iusacells results of operations, financial
conditions, cash requirements, future prospects and other factors deemed 68




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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. Under Mexican law, shareholders approve the declaration and payment of
dividends generally, but not necessarily, upon the recommendation of the Board
of Directors. Holders of ADSs on the applicable record date are entitled to receive
dividends declared on the shares underlying ADSs. The depositary will fix a
record date for the holders of ADSs in respect of each dividend distribution. 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. Liquidation In the event that we are liquidated, one or more liquidators must be
appointed at an extraordinary general shareholders meeting to wind up our
affairs. All outstanding shares would be entitled to participate equally in
any distribution upon liquidation. Partially-paid shares participate in any
distribution to the extent that such shares have been paid at the time of the
distribution. Changes in Share Capital and Rights of Shareholders An increase of capital stock may be done through the issuance of new
shares for payment in cash or in kind, by capitalization of indebtedness or by
capitalization of certain items of shareholders equity. No increase of
capital stock may be done until all previously issued shares of capital stock
have been fully paid. A reduction of capital stock may be done to absorb
losses, to make reimbursements to shareholders, or to release shareholders from
payments not made. A reduction of capital stock to absorb losses may be done
by reducing the value of all outstanding shares. A reduction of capital stock
shall also be done on a pro rata basis. Shareholders may also approve the redemption of fully-paid shares with
retained earnings. Such redemption would be effected by a repurchase of shares
listed on the Mexican Stock Exchange or by lot. The fixed portion of our capital stock may only be increased or decreased
by resolution of a general extraordinary shareholders meeting and an amendment
to the by-laws, whereas the variable portion of our capital stock may be
increased or decreased by resolution of a general ordinary shareholders meeting
        . No resolution by the shareholders is required for decreases in capital
stock based on the exercise of the right to withdraw variable shares or the
purchase by Iusacell of its own shares or for increases in capital stock based
on offers by Iusacell of shares it previously purchased. 69




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Preemptive Rights In the event of a capital increase through the issuance of new shares for
payment in cash or in kind, a holder of existing shares has a preferential
right to subscribe for a sufficient number of new shares to maintain the
holders existing proportionate holdings of shares. Under Mexican Law and our
by-laws, preemptive rights must be exercised within the period and under the
conditions established for such purpose by the shareholders. In no case may
such period be less than 15 days and no greater than 30 days following the
publication of notice of the capital increase in the Official Gazette of the
Federation or following the date of the shareholders meeting at which the
capital increase was approved if all shareholders were represented. Otherwise,
such rights will lapse. Under Mexican law, preemptive rights may not be waived in advance by a
shareholder, and cannot be represented by an instrument that is negotiable
separately from the corresponding share. In addition, holders of ADSs that are
U.S. persons or are located in the United States may be restricted in their
ability to participate in the exercise of preemptive rights. See Item 3, Key
InformationD. Risk FactorsRisk Factors Relating to Our SecuritiesYou may not
be able to exercise your preemptive rights. Other Provisions Fixed and Variable Capital, Withdrawal Rights As a sociedad anónima 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 for the benefit of
the Nation the shares that they may have acquired. If the shareholder should invoke such governmental protection in violation
of this agreement, its shares could be forfeited to the Mexican government.
Mexican law requires that such a provision be included in the by-laws of all
Mexican corporations unless such by-laws prohibit ownership of capital stock by
foreign investors. Purchase of Our Own Shares 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 70




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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 Delisting In the event that the registration of our shares in the Securities Section
of the National Securities Registry (Registro Nacional de Valoresor RNV) is
canceled, whether upon our request or pursuant to a resolution adopted by the
Mexican Banking and Securities Regulatory Agency (Comisión Nacional Bancaria de
Valores) (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. 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, shall disclose its opinion on the price, taking into
consideration the minority shareholders interests. The Board of Directors
opinion shall be rendered in conjunction with the Audit Committee opinion. In
the event of conflict of interest by the Board of Directors, its opinion shall
be rendered in conjunction with the opinion of an Independent Expert (as
defined by Mexican Securities regulation) appointed by the Audit Committee. If
after said offer our controlling shareholders fail to acquire 100% of our
capital stock, the cancellation of the registration of our shares will not
become effective until our controlling shareholders have created a trust with
the funds required to purchase the remaining shares at the same offering price,
with such trust being effective for at least six months. The controlling shareholders may, so long as the Board of Directors
approves and the Audit Committee renders an opinion, request CNBV to authorize
a different basis for the calculation of the share offer price. The Audit
Committee opinion must include the reasons for setting forth a different price
and must be accompanied by a report from an independent expert. In determining
whether to authorize a different basis, the CNBV would take into account
Iusacells financial condition as well as its business outlook. Appraisal Rights Whenever the shareholders approve a change of corporate purpose, change of
nationality, spin-off or transformation from one type of corporate form to
another, any shareholder entitled to vote on such change or transformation who
has voted against it has the right to withdraw from Iusacell and receive an
amount generally equivalent to the book value of our shares (in accordance with
our last balance sheet approved by a shareholders meeting), provided such
shareholder exercises its right to withdraw within 15 days following the
adjournment of the meeting at which the change, spin-off or transformation was
approved. Foreign Investment Regulation Foreign investment in capital stock of Mexican corporations in certain
economic sectors, including telephone and cellular services, is regulated by
the 1993 Foreign Investment Law, as amended, and the regulations 71




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issued under that law in 1998, which we refer to as the 1998 Regulations.
Under the 1993 Foreign Investment Law, foreign investment is defined in general
as the participation of foreign investors in the voting capital stock of
Mexican corporations and in activities which are regulated by the 1993 Foreign
Investment Law. Foreign investors are defined as non-Mexican individuals,
non-Mexican legal entities and foreign entities without legal personality. The Mexican Foreign Investment Commission, the Mexican Foreign Investment
Bureau and the Mexican National Registry of Foreign Investment are responsible
for the administration of the 1993 Foreign Investment Law and the 1998
Regulations. In order to comply with foreign investment restrictions, Mexican
companies that are engaged in specified restricted industries typically limit
particular classes of their stock to ownership by Mexican individuals and by
Mexican corporations in which foreign investment has minority participation. As a general rule, the 1993 Foreign Investment Law allows foreign
investments in up to 100% of the capital stock of Mexican companies, except for
those engaged in specified restricted industries, such as basic telephone
service, where foreign investments are limited to 49% of the voting capital
stock. Foreign investors may, however, participate in excess of 49% of the
voting capital stock of a Mexican corporation engaged in the cellular telephone
business with the prior approval of the Mexican Foreign Investment Commission. 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. C. MATERIAL CONTRACTS Concessions We conduct our mobile telephony and other services pursuant to concessions
granted by the Mexican government. For a description of these concessions, see
Item 4, Information on the CompanyB. Business OverviewConcessions and
Permits. Indebtedness We are debtors under several credit agreements and note issuances, which
we describe in Item 5, Operating and Financial Review and ProspectsB.
Liquidity and Capital ResourcesOur Indebtedness. Tower Monetization We sell our towers to, and lease back space in such towers from, MATC
Celular. See Item 5, Operating and Financial Review and ProspectsA.
Operating ResultsTower Monetization for a description of the agreements
governing these sales and leases. Acquisition of Equity Interests in Certain Subsidiaries On November 3, 2003, we entered into an agreement with Mr. Jose Ramon
Elizondo to take, within a period of two years, all the necessary actions to
buy out Mr. Elizondos (i) 5.1% equity interest and 51% voting interest in each
of Iusatelecomunicaciones, Iusatel, Punto-a-Punto Iusacell and Iusacell PCS,
our respective local wireless, long distance, microwave transmission and region
1 and 4 PCS subsidiaries, and (ii) 2% equity interest in our paging joint
venture company, Infotelecom. In exchange for such interests, we agreed to pay
Mr. Elizondo U.S.$11.2 million, payable in U.S.$0.1 million weekly
installments. We have been paying such weekly installments since November 3,
2003. See Item 4, Information on the CompanyB. Business OverviewForeign
Ownership Restrictions. D. EXCHANGE CONTROLS There are currently no exchange controls in Mexico; however, Mexico has
imposed foreign exchange controls in the past. Pursuant to the provisions of
the North American Free Trade Agreement and in the event Mexico experiences
serious balance of payment difficulties or the threat thereof in the future,
Mexico remains free to impose foreign exchange controls on investments made in
Mexico, including those made by U.S. and Canadian investors. 72




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E. TAXATION General The following is a general summary of material U.S. and Mexican federal
income tax consequences of the acquisition, ownership and disposition of
Iusacell ADSs, the Iusacell Celular senior notes and the Iusacell senior notes
(the Note or the Notes) by U.S. holders. For purposes of this summary, a U.S. holder is any holder of any of such
securities that is, for United States federal income tax purposes:  
    
    an individual who is a citizen or resident of the United
States;
    
    a corporation, or other entity treated as a corporation,
created or organized in or under the laws of the United States, or
any political subdivision thereof;
    
    an estate the income of which is includible in gross income
for United States federal income tax purposes regardless of source;
or
    
    a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust
and one or more United States persons have the authority to control
all substantial decisions of the trust. In the case of a holder of the shares or Notes that is, or is treated as,
a partnership for United States tax purposes, each partner thereof will take
into account its allocable share of income or loss from the Iusacell ADSs or
Notes and will take such income or loss into account under the rules of
taxation applicable to such partner, taking into account the activities of the
partner and the partnership. This summary does not constitute, and should not be construed as, legal or
tax advice to holders of Iusacell ADSs or Notes. This summary does not purport
to consider all the possible U.S. or Mexican federal income tax consequences of
the purchase, ownership and disposition of the Iusacell ADSs or Notes and is
not intended to reflect the individual tax position of any beneficial owner
thereof. The summary is based upon Mexican federal tax laws, their regulations
and administrative rules issued by the Mexican Ministry of Finance and Public
Credit, the Tax Treaty mentioned below and the Internal Revenue Code of 1986,
as amended (the Code), U.S. Treasury regulations promulgated thereunder,
published rulings by the U.S. Internal Revenue Service (IRS) and court
decisions, all as in effect as of the date hereof, all of which authorities are
subject to change or differing interpretations, which changes or differing
interpretations could apply retroactively. Readers are cautioned that this is
not a complete analysis or listing of all potential tax effects that may be
relevant to a decision to purchase, hold or dispose of the Iusacell ADSs or
Notes. This summary of U.S. federal income tax consequences is limited to
investors who hold the Iusacell ADSs or Notes as capital assets within the
meaning of section 1221 of the Code (i.e., generally, property held for
investment) and does not purport to deal with investors in special tax
situations, such as financial institutions, tax exempt organizations, insurance
companies, regulated investment companies, dealers or brokers in securities or
currencies, traders in securities or commodities that elect mark-to-market
treatment, persons holding notes as a hedge against currency risks or as a
position in a straddle, conversion transaction, or constructive sale
transaction for tax purposes, persons owning (actually or constructively) 10%
or more of the voting shares of the company, persons whose functional currency
(as defined in section 985 of the Code) is not the U.S. dollar or persons
subject to the alternative minimum tax. In general, for U.S. federal income
tax purposes, holders of Iusacell ADSs will be treated as the owners of the
series V shares represented by those Iusacell ADSs. Holders and prospective purchasers of the Iusacell ADSs or Notes should
consult their own tax advisors concerning the application of Mexican and U.S.
federal income tax laws to their particular situations as well as any
consequences of the purchase, ownership and disposition of the Iusacell ADSs or
Notes arising under the laws of any state, locality or foreign government or
other taxing jurisdiction. Mexico and the United States have signed and ratified a Convention for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income and related Protocols (collectively, the Tax Treaty). The
Tax Treaty is currently in effect and provisions of the Tax Treaty that may
affect holders of Iusacell 73




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ADSs or Notes are summarized below. Holders should consult with their tax
advisors as to their entitlement to the benefits afforded by the Tax Treaty.
Mexico has also executed treaties to avoid double taxation with other countries
as well as agreements providing for the exchange of information with respect to
tax matters, some of which presently are in force. The following summary does
not take into account the effect of any such treaties. Readers should consult
their tax advisors as to their entitlement to the benefits afforded by such
other treaties. The U.S. Treasury has expressed concerns that parties to whom ADSs are
released may be taking actions that are inconsistent with the claiming of
foreign tax credits for U.S. holders of ADSs. Accordingly, the analysis of
creditability of Mexican taxes described below could be affected by future
actions that may be taken by the U.S. Treasury. Taxation of Distributions of Iusacell ADSs U.S. Federal Income Tax Considerations Distributions paid out of Iusacells current or accumulated earnings and
profits (as determined for U.S. federal income tax purposes) with respect to
shares represented by Iusacell ADSs will be includible in the gross income of a
U.S. corporate holder as ordinary income when the distributions are received by
the depositary or by the U.S. holder of a certificated ADS, and will not be
eligible for the dividends received deduction. To the extent that a
distribution exceeds earnings and profits, it will be treated first as a return
of the U.S. holders tax basis to the extent of such tax basis, and then as
gain from the sale or disposition of a capital asset. A U.S. holder must
include in gross income as ordinary income the gross amount of such dividends,
including any Mexican tax withheld therefrom, without regard to whether any
portion of such tax may be refunded to the U.S. holder by the Mexican tax
authorities. Under U.S. legislation enacted in 2003, which is generally effective for
tax years beginning after December 31, 2002 and before January 1, 2009, capital
gains tax rates will apply to dividend income received by an individual (as
well as certain trusts and estates) from a U.S. corporation or from a
qualified foreign corporation provided certain holding period requirements
are met. A non-U.S. corporation (other than a foreign personal holding
corporation, foreign investment company, or passive foreign investment company)
generally will be considered to be a qualified foreign corporation if (i) the
shares of the non-U.S. corporation are readily tradable on an established
securities market in the United States, or (ii) the non-U.S. corporation is
eligible for the benefits of a comprehensive U.S. income tax treaty determined
to be satisfactory to the United States Department of the Treasury. The United
States Department of the Treasury and the Internal Revenue Service have
determined that the Tax Treaty is satisfactory for this purpose. In addition,
the United States Department of the Treasury and the Internal Revenue Service
have determined that ordinary shares, or an American Depositary Receipt in
respect of such shares (which would include the ADSs), is considered readily
tradable on an established securities market if it is listed on an established
securities market in the United States such as the New York Stock Exchange.
Information returns reporting dividends paid to U.S. persons will identify the
amount of dividends eligible for the reduced tax rates. The amount of any dividend paid in pesos will equal the U.S. dollar value
of the pesos received, calculated by reference to the exchange rate in effect
on the date the distribution is includible in income, regardless of whether the
pesos are converted into U.S. dollars. For U.S. holders, that date would be
the date the depositary receives the dividend, regardless of whether the pesos
are converted into U.S. dollars. In addition, if dividends received in pesos
are not converted into U.S. dollars on the day they are received, U.S. holders
may recognize foreign currency gain or loss (generally treated as ordinary gain
or loss) upon the disposition of such pesos measured by the differences between
such U.S. dollar value and the amount realized on such disposition. Distributions generally will constitute foreign source passive income
(or, in the case of some holders, financial services income) for U.S. foreign
tax credit purposes; however, assuming a U.S. individual holder has qualified
dividend income, special rules will apply in determining such holders foreign
tax credit limitations. Distributions of additional shares, if any, to U.S. holders of Iusacell
ADSs that are made as part of a pro rata distribution to all shareholders of
Iusacell generally will not be subject to U.S. federal income tax. Mexican Tax Considerations Apart from any liability that may result to Iusacell from our paying of
dividends to our shareholders, dividends, either in cash or in any other form,
paid with respect to the shares represented by Iusacell ADSs, will not be
subject to a Mexican withholding tax. 74




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Taxation of Capital Gains of Iusacell ADSs U.S. Federal Income Tax Considerations In general, upon the sale or other disposition of Iusacell ADSs, a U.S.
holder generally will recognize gain or loss equal to the difference between
the amount realized on such sale or disposition (if the amount realized is
denominated in a foreign currency then its U.S. dollar equivalent, determined
at the spot rate on the date of disposition) and the U.S. holders adjusted tax
basis in the shares (in U.S. dollars). Such gain or loss will be treated as
capital gain or loss if the Iusacell ADSs were held as a capital asset and will
be long-term capital gain or loss if the Iusacell ADSs have been held for more
than one year on the date of such sale or other disposition. For this purpose,
a U.S. holders holding period for the Iusacell ADSs will generally include its
holding period for the Iusacell Celular ADSs. The deductibility of capital
losses is subject to limitations. Gain or loss recognized by a U.S. holder on
a sale or other disposition of Iusacell ADSs generally will be treated as from
sources within the United States for U.S. federal income tax purposes. Mexican Tax Considerations The sale or other disposition of Iusacell ADSs by holders who are
non-residents of Mexico (as described below) will not be subject to Mexican
tax. Deposits of shares in exchange for Iusacell ADSs and withdrawals of
shares in exchange for Iusacell ADSs will not give rise to Mexican tax. Gains realized by an individual who is not a resident of Mexico on the
sale or other disposition of shares representing capital stock of a Mexican
corporation (like Iusacell) through a recognized stock exchange listed by the
Ministry of Finance and of Public Credit in the annual tax regulation, provided
that such sale is not deemed to be prearranged transactions pursuant to the
definition provided by the Mexican Income Tax Law, are exempt from Mexican
income tax. The Iusacell shares are currently listed on the Mexican Stock
Exchange. Under current law, gains realized by a non-resident holder on the sale or
disposition of shares not conducted through a recognized stock exchange
generally are subject to a Mexican tax at a rate of 25% of the gross sales
price. However, if the holder is a resident of a country which is not
considered to be a preferred tax jurisdiction (by reference to a list of
preferred tax jurisdictions under the Mexican Income Tax Law), the holder may
elect to designate a resident of Mexico as its representative, in which case
taxes would be payable at a maximum rate of 33% on the gain on such sale. In
2005 and thereafter, said maximum rate will be 32%. The United States is not
considered to be a preferred tax jurisdiction. However, even if the sale is not conducted through a recognized stock
exchange, pursuant to the Tax Treaty gains realized by qualifying U.S. holders
from the sale or other disposition of shares will not be subject to Mexican
income tax so long as:  
    
    less than 50% of the assets of Iusacell consist of real
property situated in Mexico;
    
    such U.S. holder did not own 25% or more of the shares
representing capital stock of Iusacell, directly or indirectly,
during the 12-month period preceding such disposition; or
    
    the gain is not attributable to a permanent establishment of
the U.S. holder in Mexico. Brokerage commissions paid in connection with transactions on the Mexican
Stock Exchange are subject to a value added tax of 15%. For purposes of Mexican taxation, an individual is a resident of Mexico if
he or she has established his or her home in Mexico; if the individual has
established his or her home in another country but Mexico is deemed to be his
or her center of vital interest (more than 50% of his or her total income
originates from Mexico); or if the individual has his or her principal center
of professional activities in Mexico. A legal entity is a resident of Mexico if it (i) was established under
Mexican law or (ii) has its main management in Mexico. If a legal entity has a
permanent establishment in Mexico, such permanent establishment shall be
required to pay taxes in Mexico on income attributable to such permanent
establishment in accordance with relevant tax provisions. 75




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Other Mexican Taxes There are no inheritance taxes applicable to the ownership, transfer or
disposition of Iusacell ADSs or shares. There are no Mexican stamp,
registration or similar taxes or duties payable by holders of Iusacell ADSs or
shares. Information Reporting and Backup Withholding Each U.S. holder who holds ADSs through a broker participating in the
Depositary Trust Company (DTC), or indirect participant holding Iusacell ADSs
through DTC on behalf of a beneficial owner and each paying agent making
payments in respect of Iusacell ADSs will generally be required to provide the
IRS with information, including the name, address and taxpayer identification
number of the beneficial owner of the Iusacell ADSs, and the aggregate amount
of dividends and sale proceeds paid to such beneficial owner during the
calendar year. These reporting requirements, however, do not apply with
respect to certain beneficial owners, including corporations, securities
broker-dealers, other financial institutions, tax-exempt organizations,
qualified pension and profit sharing trusts and individual retirement accounts.
Generally, a U.S. holder will provide such certification on IRS Form W-9
(Request for Taxpayer Identification Number and Certification) or a substitute
Form W-9. In the event that a beneficial owner of Iusacell ADSs fails to establish
its exemption from such information reporting requirements or is subject to the
reporting requirements described above and fails to supply its correct taxpayer
identification number in the manner required by applicable law, or underreports
its tax liability, as the case may be, a holder may be subject to backup
withholding at the rate of 28% (increased to 31% for taxable years 2011 and
thereafter) with respect to dividends and proceeds from the sale or disposition
of Iusacell ADSs. This backup withholding tax is not an additional tax and any
amounts withheld from a payment to a holder of Iusacell ADSs will be refunded
(or credited against such holders U.S. federal income tax liability, if any)
provided that the required information is furnished to the IRS. A Non-U.S. holder generally will be exempt from information reporting
requirements and backup withholding, but may be required to comply with
certification and identification procedures in order to obtain this exemption. United States Tax Consequences to Holders of Notes Payments of Interest and Additional Amounts Generally, payments of interest and any additional amounts (i.e.,
gross-up payment) paid by Iusacell or Iusacell Celular (the Additional
Amounts) will be taxable to a U.S. holder as ordinary income at the time such
payments are accrued or are received, in accordance with the U.S. holders
regular method of accounting for Federal income tax purposes. Market Discount If a U.S. holder purchases a Note for less than its principal amount, the
difference will be treated as a market discount for U.S. federal income tax
purposes subject to a de minimisexception. Under the market discount rules, a U.S. holder will be required to treat
any payment on a Note, or any gain on its sale, exchange, retirement or other
disposition, as ordinary income to the extent of the accrued market discount
which was not previously included in income. If the Note is disposed of in a
non-taxable transaction (other than a non-recognition transaction described in
section 1276(c) of the Code), accrued market discount will be includible as
ordinary income to the U.S. holder as if it had sold the Note at its fair
market value. In addition, a U.S. holder may be required to defer, until the
maturity of a Note or its earlier disposition (including a non-taxable
transaction other than a transaction described in section 1276(c) of the
Internal Revenue Code), the deduction of all or a portion of the interest
expense in respect of any indebtedness incurred or continued to purchase or
carry the Note. Market discount will be considered to accrue on a
straight-line basis during the period from the date of acquisition to the
maturity date of the Note, unless the U.S. holder elects to accrue on a
constant-yield basis. A U.S. holder of a Note may elect to include market discount in income as
it accrues on either a ratable or a constant yield basis. If a U.S. holder
makes this election, the rules regarding the treatment of gain upon the
disposition of the Note and upon the receipt of certain cash payments as
ordinary income and regarding the deferral 76




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of interest deductions will not apply. Currently, if a U.S. holder elects
to include market discount in income as it accrues, the election will apply to
all market discount obligations acquired during or after the first taxable year
to which the election applies. Currently this election may not be revoked
without the consent of the Internal Revenue Service. U.S. holders should
consult their own tax advisors before making this election. Amortizable Bond Premium If a U.S. holder purchases a Note for more than the amount payable at
maturity (or on an earlier call date), that excess will be considered an
amortizable bond premium. This holder may elect to amortize the premium to
offset the interest and Additional Amounts from the Note such holder would
otherwise be required to include in income (subject to special rules for early
redemption provisions). In any tax year, the holder can only use as much of
the premium as the constant yield method would allocate to that year. The U.S.
holders basis in the Note will be reduced by the amount of bond premium offset
against interest and Additional Amounts. Currently, if a U.S. holder elects to
amortize the premium to offset the interest from a Note, the election will
apply to all debt instruments acquired during or after the first taxable year
to which the election applies. Currently, this election may not be revoked
without the consent of the Internal Revenue Service. U.S. holders should
consult their own tax advisors before making this election. Sale, Exchange or Retirement of a Note Except as discussed above, upon the sale, exchange or retirement of a
Note, a U.S. holder generally will recognize taxable gain or loss equal to the
difference between the amount realized on the sale, exchange or retirement and
such U.S. holders adjusted tax basis in the Note. For this purpose, the
amount realized does not include any amount attributable to accrued interest on
the Note (which will be taxable as such). A U.S. holders adjusted tax basis
in a new note will generally be the cost of the Note plus the market discount,
if any, the U.S. holder previously included in income minusany amortizable
bond premium and any payments other than payments of stated interest made on
the Note. Such gain or loss generally will be long-term capital gain or loss
if the Note has been held for more than one year at the time of such sale,
exchange or retirement. The deductibility of capital losses is subject to
limitations. Gain or loss recognized by a U.S. holder on a sale or other
disposition of a Note generally will be treated as from sources within the
United States for U.S. federal income tax purposes. Foreign Tax Credit and Effect of Withholding Taxes Interest and Additional Amounts paid on Notes will constitute income from
sources outside the United States for United States federal income tax
purposes, and, with certain exceptions, will be grouped together with other
items of passive income (or, in the case of some holders, financial services
income), for purposes of computing the foreign tax credit allowable to a U.S.
holder. A U.S. holder will be required to include foreign withholding taxes, if
any, imposed on payments on a Note (including any Additional Amounts payable by
Iusacell or Iusacell Celular) in gross income as interest income. Such
treatment will be required regardless of whether, as will generally be true,
Iusacell or Iusacell Celular is required to pay additional amounts so that the
amount of Mexican withholding taxes does not reduce the net amount actually
received by the holder of the Note. Subject to certain limitations, a U.S. holder may be entitled to a credit
against its United States Federal income tax liability, or a deduction in
computing its United States Federal taxable income, for foreign income taxes
withheld by Iusacell or Iusacell Celular (which, as described above, would
include amounts withheld on Additional Amounts paid by Iusacell or Iusacell
Celular with respect to Mexican taxes). The foreign tax credit provisions are
complex, and U.S. holders are urged to consult their own tax adviser as to the
availability, if any, of a tax credit or deduction to them. Information Reporting and Backup Withholding For each calendar year in which the Notes are outstanding, each DTC
participant or indirect participant holding an interest in a Note on behalf of
a beneficial owner of a Note and each paying agent making payments in respect
of a Note will generally be required to provide the IRS with certain
information, including such beneficial owners name, address and taxpayer
identification number (either such beneficial owners Social Security number or
its employer identification number, as the case may be), and the aggregate
amount of interest, principal and Additional Amounts paid to such beneficial
owner during the calendar year. These reporting requirements, 77




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however, do not apply with respect to certain beneficial owners, including
corporations, securities broker-dealers, other financial institutions,
tax-exempt organizations, qualified pension and profit sharing trusts and
individual retirement accounts. Generally, a U.S. holder will provide such
certification on IRS Form W-9 (Request for Taxpayer Identification Number and
Certification) or a substitute Form W-9. In the event that a beneficial owner of a Note fails to establish its
exemption from such information reporting requirement or is subject to the
reporting requirements described above and fails to supply its correct taxpayer
identification number in the manner required by applicable law, or underreports
its tax liability, as the case may be, a holder may be subject to backup
withholding at the rate of 28% (increased to 31% for taxable years 2011 and
thereafter) of each payment of interest, principal and Additional Amounts with
respect to Notes. This backup withholding tax is not an additional tax and
will be allowed as a refund or credit against the beneficial owners United
States Federal income tax liability if the required information is furnished to
the IRS. Prospective purchasers of Notes are advised to consult their own tax
advisers as to the consequences of acquiring and disposing of the Notes,
including, without limitation, (i) the applicability and effect of any state,
local or non-U.S. tax laws to which they may be subject, and of any legislative
or administrative changes in law, (ii) the United States Federal income tax
consequences of the withholding of foreign taxes by Iusacell or Iusacell
Celular (and of the payment by Iusacell or Iusacell Celular of Additional
Amounts with respect thereto) and (iii) the availability of a credit or
deduction for foreign withholding taxes. Mexican Tax Consequences to Holders of Notes The following is a summary of the principal consequences under current
Mexican federal tax law, their regulations and administrative rules issued by
the Mexican Ministry of Finance and Public Credit and the Tax Treaty, in force
as of the date of this report, of the purchase, ownership and disposition of
Notes by a Foreign Holder. A Foreign Holder is a holder who (i) is not a
resident of Mexico for tax purposes and (ii) will not hold Notes or a
beneficial interest in Notes in connection with the conduct of a trade or
business through a permanent establishment in Mexico. Taxation of Payments of Interest and Principal Under the Mexican Income Tax Law, payments of interest made by Iusacell or
Iusacell Celular to a Foreign Holder in respect of their respective Notes will
be subject to Mexican withholding taxes assessed at a rate of 4.9% if, (i) the
Notes have been placed through banks or brokers in a country with which Mexico
has executed a treaty to avoid double taxation and such treaty is in force,
(ii) the Notes have been registered in the Special Section of the National
Registry of Securities (the Special Section), and (iii) as has been the case
in the past, the issuer provides the information required under general rules
issued by the Ministry of Finance and Public Credit (the Reduced Rate
Regulation), which is described below. Otherwise, payments of interest made
by Iusacell or Iusacell Celular to a Foreign Holder in respect of their
respective Notes will be subject to Mexican withholding taxes assessed at a
rate of 10%. In addition, Mexican withholding taxes will also be assessed at a
rate of 10% if the beneficiary of the interest, directly or indirectly,
receives more than 5% of the interest paid and is regarded as a related party
pursuant to the definition provided by the Mexican Income Tax Law. The information requirements under the Reduced Rate Regulation are
generally described below:  
    
    that Iusacell and Iusacell Celular, as is the case, have
timely filed with the Mexican Ministry of Finance and Public Credit
information relating to the registration of their respective Notes
in the Special Section and to the issuance of their respective
Notes; and
    
    that Iusacell and Iusacell Celular timely file each quarter
of the calendar year with the Mexican Ministry of Finance and Public
Credit information representing that no party related to Iusacell
or Iusacell Celular, as the case may be, directly or indirectly, is
the effective beneficiary of 5% or more of the aggregate amount of
the interest payment, and Iusacell and Iusacell Celular maintain
records evidencing compliance with this requirement. Under the Mexican Income Tax Law and the Reduced Rate Regulation any of
the following would be a related party to Iusacell or Iusacell Celular, as
the case may be: (1) shareholders of Iusacell or Iusacell Celular, as the case
may be, that own, directly or indirectly, individually or collectively with
related persons (within the meaning of the Mexican Income Tax Law and the
Reduced Rate Regulation) more than 10% of the voting stock of 78




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Iusacell or Iusacell Celular, as the case may be, or (2) corporations if
more than 20% of their stock is owned directly or indirectly, individually or
collectively by related persons of Iusacell or Iusacell Celular, as the case
may be. Apart from the Reduced Rate Regulation, other special rates of Mexican
withholding income tax may apply. In particular, under the Tax Treaty, the
Mexican withholding tax is reduced to 4.9% (the Treaty Rate) for some holders
that are residents of the United States within the meaning of the Tax Treaty
provided they satisfy the circumstances contemplated in the Tax Treaty and
provided that the Notes are considered to be regularly and substantially traded
on a recognized securities market, which is not expected to be the case.
During 2004, the Tax Treaty is not expected, generally, to have any material
effect on the Mexican tax consequences to holders of Notes because, as
described above, with respect to a Foreign Holder, Iusacell and Iusacell
Celular will be entitled to withhold taxes in connection with interest payments
under their respective Notes at the Reduced Rate so long as the Reduced Rate
Regulation requirements described above are met. Otherwise, holders of the
Notes should consult their tax advisors as to the possible application of the
Treaty Rate. Interest paid on Notes held by a non-Mexican pension or retirement fund
will be exempted from Mexican withholding tax if the fund (i) has been duly
incorporated as a fund pursuant to the laws of its country of origin, (ii) is
the effective beneficiary of the interest paid, (iii) is registered before the
Mexican Ministry of Finance and Public Credit for that purpose, and (iv) the
relevant interest income is exempt from taxes in that country. Iusacell and Iusacell Celular, have agreed, subject to the exceptions and
limitations contained in the indentures under which the Notes were issued, to
pay additional amounts in respect of the Mexican withholding taxes mentioned
above to the holders of the Notes. Payment of these additional amounts with
respect to the Notes will be subject to Mexican withholding tax at the same
rate generally applicable to interest paid in the Notes. Under the Mexican Income Tax Law, a Foreign Holder will not be subject to
any Mexican income taxes in respect of payments of principal made by Iusacell
or by Iusacell Celular in connection with the Notes. Taxation of the Sale and other Disposition of the Notes No Mexican income tax will be levied upon the sale of the Notes. Transfer and other Taxes There are no Mexican stamp, registration, or similar taxes payable by a
Foreign Holder in connection with the purchase ownership or disposition of the
Notes. A Foreign Holder of Notes will not be liable for Mexican estate, gift,
inheritance or similar tax with respect to the Notes, although gratuitous
transfers of the Notes may in some circumstances cause a Mexican income tax to
be imposed on the recipient. F. DIVIDENDS AND PAYING AGENTS Not applicable. G. STATEMENT BY EXPERTS Not applicable. H. DOCUMENTS ON DISPLAY We file Annual Reports with and furnish other information to the SEC as
may be applicable from time to time. You may read and copy any documents filed
or furnished by Iusacell at the SECs public reference rooms in Washington,
D.C., New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. In addition, because
Iusacells American depositary shares are listed on the New York Stock
Exchange, reports and other information concerning Iusacell can also be
inspected at the office of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005. I. SUBSIDIARY INFORMATION Not applicable. 79




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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk As of December 31, 2003, Ps.3,282.2 million of our consolidated
indebtedness had a variable interest rate. The following table summarizes the debt obligations that are sensitive to
changes in interest rates held by us as of December 31, 2003. The table
presents principal payment obligations that exist by maturity date and the
related average interest rate, and does not reflect as current the effects of
our default under certain of our obligations that have not yet been declared
immediately due and payable. Average interest rates for liabilities are
calculated based on weighted averages. Dollar-denominated amounts have been
converted to Mexican pesos based on the market exchange rate at December 31,
2003, which was U.S.$1.00 = Ps.11.23. As of December 31, 2003  Expected Maturity Date2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    Fair Valuein millions of Mexican pesosFixed rate debt
    
    
    1,804.5
    
    
    
    47.3
    
    
    
    3,965.2
    
    
    
    0.7
    
    
    
    
    
    
    
    
    
    
    
    5,817.8
    
    
    
    2,285.9Weighted-average interest rate
    
    
    13.3
    %
    
    
    14.1
    %
    
    
    14.2
    %
    
    
    6.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Variable rate debt (1)
    
    
    3,137.3
    
    
    
    58.0
    
    
    
    58.0
    
    
    
    29.0
    
    
    
    
    
    
    
    
    
    
    
    3,282.2
    
    
    
    3,282.2Weighted-average interest rate
    
    
    3.3
    %
    
    
    3.0
    %
    
    
    3.6
    %
    
    
    4.4
    %
    
    
    0.0
    %
    
    
    0.0
    %Average floor rate
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
   (1)
    
    To determine the weighted-average interest rate for variable rate debt,
we have assumed LIBOR interest rate of 1.28% for 2004, 2.44% for 2005,
3.0% for 2006, 3.75% for 2007 and 4.0% for 2008. Indebtedness amounts do
not take into account our purchase in the secondary market on June 24,
2004 of a U.S.$6.4 million promissory note issued under the Harris
Facility for U.S.$3.0 million. See item 5, Operating and Financial
Review and ProspectsB. Liquidity and Capital ResourcesOur
IndebtednessHarris Facility. We currently do not have any interest rate derivative instruments. Foreign Currency Risk As of December 31, 2003, Ps.9,100.0 million of our consolidated
indebtedness was denominated in U.S. dollars. The following table summarizes our consolidated debt that is sensitive to
changes in foreign currency exchange rates as of December 31, 2003. The table
presents principal payment obligations that exist by maturity date and the
related average interest rate, and does not reflect as current the effects of
our default under certain of our obligations that have not yet been declared
immediately due and payable. Average interest rates for liabilities are
calculated based on weighted average. Dollar-denominated amounts have been
converted to Mexican pesos based on the market exchange rate at December 31,
2003, which was U.S.$1.00 = Ps.11.23. As of December 31, 2003  Expected Maturity Date2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    Fair ValueIn millions of Mexican PesosU. S. Dollar denominated(1)
    
    
    4,941.8
    
    
    
    105.3
    
    
    
    4,023.2
    
    
    
    29.7
    
    
    
    
    
    
    
    
    
    
    
    9,100.0
    
    
    
    5,568.1Weighted-average interest
rate(2)
    
    
    10.75
    %
    
    
    13.82
    %
    
    
    14.06
    %
    
    
    4.39
    %
    
    
    0.00
    %
    
    
    0.00
    %
   (1)
    
    Does not take into account our purchase in the secondary market on June
24, 2004 of a U.S.$6.4 million promissory note issued under the Harris
Facility for U.S.$3.0 million. See item 5, Operating and Financial
Review and ProspectsB. Liquidity and Capital ResourcesOur
IndebtednessHarris Facility.(2)
    
    Note: To determine the weighted-average interest rate for variable rate
debt, we have assumed LIBOR interest rate of 1.28% for 2004, 2.44% for
2005, 3.0% for 2006, 3.75% for 2007 and 4.0% for 2008. We currently do not have any forward exchange derivative instruments. 
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES A. DEBT SECURITIES Not applicable. 80




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B. WARRANTS AND RIGHTS Not applicable. C. OTHER SECURITIES Not applicable. D. AMERICAN DEPOSITARY SHARES Not applicable. 
 PART II 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES We have defaulted on the following payment obligations:  
    
    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 and June 1, 2004,
    
    the U.S.$7.5 million interest payment on the Iusacell Celular
10% senior notes due 2004 which was due on July 15, 2003 and the
U.S.$150.0 million principal payment and accrued interest which
became due upon acceleration on September 11, 2003,
    
    the U.S.$265.6 million principal payment on Iusacell
Celular  ́s senior refinancing secured loan which was due on March 31,
2004 because of the automatic acceleration of the maturity date of
the loan as a result of our failure to refinance the Iusacell
Celular senior notes by such date,
    
    the U.S.$3.7 million principal payments on the BNP Paribas
facilities which were due on each of June 16, 2003, December 16,
2003 and June 15, 2004,
    
    the U.S.$7.8 million principal payment plus accrued interest
on the GTE Venholdings B.V. promissory note which was due on
November 8, 2003,
    
    the U.S.$0.4 million, U.S.$0.8 million, U.S.$0.2 million and
U.S.$0.9 million principal payments which were due 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
which were due on the same dates, each under the Harris Facility,
and
    
    the U.S.$7.0 million principal payment on a promissory note
due to Elektra on October 30, 2003. We have also incurred in non-payment defaults under some of these
agreements. See Item 5, Operating and Financial Review and ProspectsB.
Liquidity and Capital ResourcesOur Indebtedness. 
  ITEM 14.
    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS None. 
 ITEM 15. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures.The Chief Executive
Officer and Chief Financial Officer of Iusacell have evaluated the
effectiveness of Iusacells disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
December 31, 2003 (the Evaluation Date). Based on such evaluation, such
officers have concluded that, as of the Evaluation Date, Iusacells disclosure
controls and procedures are effective to provide reasonable assurance that
information required to be disclosed in the 81




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reports Iusacell files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required. Changes in Internal Controls.After a series of improvements in the
internal procedures performed in the later part of 2003 and since the
Evaluation Date, there have not been any other significant changes in
Iusacells internal controls or in other factors that could significantly
affect such controls. No significant deficiencies and material weaknesses were
identified that required corrective actions. 
 ITEM 16. RESERVED 
 ITEM 16A            AUDIT COMMITTEE FINANCIAL EXPERT Iusacells Audit Committee does not have a financial expert serving on the
Audit Committee. We are currently in the process of searching for a financial
expert for our Audit Committee. 
 ITEM 16B CODE OF ETHICS Iusacell had a code of ethics established by Verizon. Upon the
acquisition by MovilAccess of a controlling interest in Iusacell in July 2003,
the Verizon code of ethics was terminated. We are currently working on the
development of a new code of ethics. 
 ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit and Non-Audit Fees PricewaterhouseCoopers, which has been appointed by Iusacells Board of
Directors, has served as Iusacells independent public accountants for each of
the fiscal years in the three-year period ended December 31, 2003. Each year,
the Audit Committee submits a recommendation to Iusacells Board of Directors
to ratify the re-appointment of Iusacells independent public accountants. The following table presents the aggregate fees for professional audit
services and other services rendered by PricewaterhouseCoopers to Iusacell in
2003 and 2002. 82




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Fees Paid to PricewaterhouseCoopers 2002
    
    2003(in thousands of Mexican pesos)Audit Fees(1)
    
    
    9,385
    
    
    
    9,840Audit-related Fees(2)
    
    
    3,421
    
    
    
    896Tax Fees(3)
    
    
    1,213
    
    
    
    1,944All Other Fees(4)
    
    
    1,044
    
    
    
    Total
    
    
    15,063
    
    
    
    12,680
   (1)
    
    Audit fees include services performed by the independent accountant to
comply with generally accepted accounting standards in Mexico and the
United States. Audit fees also include fees for services provided by the
independent accountants in connection with statutory and regulatory
filings or engagements and assistance with and review of documents filed with
the SEC.(2)
    
    Audit-related fees include accounting
consultations and consultation concerning financial accounting and reporting standards.(3)
    
    Tax fees include fees for tax compliance, tax planning and tax advice.
Tax compliance generally involves claims for refund and tax payment-planning services. Tax
planning and tax advice encompass assistance with tax audits and appeals,
and requests for rulings or technical advice from
taxing authorities.(4)
    
    All other fees include mainly services related to the purchasing
information system implementation and design. 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. 
 ITEM 16D            EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES Not applicable. 
  ITEM 16E
    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS Not applicable. 
 PART III 
 ITEM 17. FINANCIAL STATEMENTS We have responded to Item 18 in lieu of responding to this Item 17. 
 ITEM 18. FINANCIAL STATEMENTS See pages F-1 to S-II. 83




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ITEM 19. EXHIBITS Documents filed as exhibits to this Annual Report. ExhibitNo.
    
    Exhibit1.1
    
    By-laws (estatutos) of Grupo Iusacell, S.A. de C.V., as amended on April
21, 2003, together with an English translation (incorporated herein by
reference to Exhibit 1.1 of Iusacells Annual Report on Form 20-F for
fiscal year 2002File No. 001-14938).2.1
    
    Indenture dated as of December 16, 1999 among Grupo Iusacell, S.A. de C.V.,
Verizon Communications Inc. and The Bank of New York, as trustee
(incorporated herein by reference to Exhibit 4.1 of the Registration
Statement F-4Registration Number 333-95547).2.2
    
    Indenture dated as of July 25, 1997 among Grupo Iusacell Celular, S.A. de
C.V., certain subsidiaries of Grupo Iusacell Celular, S.A. de C.V.and
First Union National Bank, as trustee (incorporated herein by reference to
Exhibit 4.1 of the Registration Statement F-4Registration Number
333-37431).4.1
    
    Agreement for Equipment, Furnish and Installation for Iusacells Cellular
Network, dated as of December 10, 1997, among Grupo Iusacell Celular, S.A.
de C.V., Lucent Technologies World Services, Inc. and Lucent Technologies
de México, S.A. de C.V. (incorporated herein by reference to Exhibit A of
Iusacell Celulars Annual Report on Form 20-F for fiscal year 1997File No.
001-13120).4.2
    
    Amended and Restated Credit Agreement, dated as of July 25, 1997, as
amended and restated as of March 29, 2001 among Grupo Iusacell Celular,
S.A. de C.V.and JP Morgan, as sole Bookrunner and Lead Arranger, and The
Chase Manhattan Bank, as Administrative Agent and Collateral Agent, BNP
Paribas, Citibank N.A., The Toronto-Dominion Bank and BBVA Bancomer S.A.,
as Arrangers (incorporated herein by reference to Exhibit 4(b) of
Iusacells Annual Report on Form 20-F for fiscal year 2000File No.
001-14938).4.3
    
    Amended and Restated Master Lease Agreement (English version), dated as of
May 16, 2002, among MATC Celular, S. de R.L. de C.V., Grupo Iusacell
Celular, S.A. de C.V.and Iusacell Arrendadora, S.A. de C.V.(incorporated
herein by reference to Exhibit 4.3 of Iusacells Annual Report on Form 20-F
for fiscal year 2002File No. 001-14938).4.4
    
    Amended and Restated Master Lease Agreement (English version), dated as of
May 16, 2002, between MATC Celular, S. de R.L. de C.V.and Grupo Iusacell
Celular, S.A. de C.V., for and on behalf of itself and its affiliates
(incorporated herein by reference to Exhibit 4.4 of Iusacells Annual
Report on Form 20-F for fiscal year 2002File No. 001-14938).4.5
    
    Amended and Restated Build-to-Suit and Site Development Agreement, dated as
of May 16, 2002, between MATC Celular, S. de R.L. de C.V.and Grupo
Iusacell Celular, S.A. de C.V., for and on behalf of itself and its
affiliates (incorporated herein by reference to Exhibit 4.5 of Iusacells
Annual Report on Form 20-F for fiscal year 2002File No. 001-14938).4.6*
    
    Purchase and Sale Agreement, dated as of December 19, 2003, among Grupo
Iusacell Celular, SA de C.V., Sistemas Telefónicos Portátiles Celulares,
S.A. de C.V., Telecomunicaciones del Golfo, S.A. de C.V., Communicaciones
Celulares de Occidente, S.A. de C.V., Iusatelecomunicaciones, S.A. de C.V.,
SOS Telecomunicaciones S.A. de C.V., Portatel del Sureste, S.A. de C.V. and
Iusacell PCS, S.A. de C.V. and MATC Digital, S. de R. L. de C.V.
 84




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ExhibitNo.
    
    Exhibit4.7*
    
    Second Amended and Restated Master Lease Agreement (for Purchased sites)
(English version), dated as of December 19, 2003, among MATC Celular, S. de
R.L. de C.V., Grupo Iusacell Celular, S.A. de C.V., Iusacell Arrendadora,
S.A. de C.V., MATC Digital, S. de R.L. de C.V.,and Grupo Iusacell S.A. de
C.V.4.8
    
    First Amendment and Waiver, dated as of December 7, 2001, to the Amended
and Restated Credit Agreement, dated as of July 25, 1997, as amended and
restated as of March 29, 2001 among Grupo Iusacell Celular, S.A. de C.V.,
the lenders party thereto, and JP Morgan Chase Bank as Administrative Agent
and Collateral Agent (incorporated herein by reference to Exhibit 4.3 of
Grupo Iusacells Annual Report on Form 20-F for fiscal year 2001File No.
001-14938).4.9
    
    Second Amendment and Waiver, dated as of April 28, 2003, to the Amended and
Restated Credit Agreement, dated as of July 25, 1997, as amended and
restated as of March 29, 2001 among Grupo Iusacell Celular, S.A. de C.V.,
the lenders party thereto, and JP Morgan Chase Bank as Administrative Agent
and Collateral Agent (incorporated herein by reference to Exhibit 4.7 of
Iusacells Annual Report on Form 20-F for fiscal year 2002File No.
001-14938).4.10
    
    First Amendment to the Second Amendment and Waiver, dated as of April 28,
2003, to the Amended and Restated Credit Agreement, dated as of July 25,
1997, as amended and restated as of March 29, 2001 among Grupo Iusacell
Celular, S.A. de C.V., the lenders party thereto, and JP Morgan Chase Bank
as Administrative Agent and Collateral Agent (incorporated herein by
reference to Exhibit 4.8 of Iusacells Annual Report on Form 20-F for
fiscal year 2002File No. 001-14938).4.11
    
    Second Amendment, dated as of June 10, 2003, to the Second Amendment and
Waiver dated as of April 28, 2003, to the Amended and Restated Credit
Agreement, dated as of July 25, 1997, as amended and restated as of March
29, 2001 among Grupo Iusacell Celular, S.A. de C.V., the lenders party
thereto, and JP Morgan Chase Bank as Administrative Agent and Collateral
Agent (incorporated herein by reference to Exhibit 4.9 of Iusacells Annual
Report on Form 20-F for fiscal year 2002File No. 001-14938).4.12
    
    English translation of long distance concession dated October 16, 1995
(incorporated herein by reference to Exhibit 10.1 of the Registration
Statement F-1Registration Number 333-10504).4.13
    
    English translation of cellular concession for Region 9 dated October 3,
1989 (incorporated herein by reference to Exhibit 10.1 of the Registration
Statement F-4Registration Number 333-95547).4.14
    
    English translation of cellular concession for Region 5 dated July 17, 1990
(incorporated herein by reference to Exhibit 10.2 of the Registration
Statement F-4Registration Number 333-95547).4.15
    
    English translation of cellular concession for Region 6 dated July 14, 1990
(incorporated herein by reference to Exhibit 10.3 of the Registration
Statement F-4Registration Number 333-95547).4.16
    
    English translation of cellular concession for Region 7 dated July 14, 1990
(incorporated herein by reference to Exhibit 10.4 of the Registration
Statement F-4Registration Number 333-95547).4.17*
    
    English translation of cellular concession for Region 8 dated July 17, 1990.
 85




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ExhibitNo.
    
    Exhibit4.18
    
    English translation of Point to Point Microwave Link Concessions dated June
4, 1998 (incorporated herein by reference to Exhibit 10.5 of the
Registration Statement F-4Registration Number 333-95547).4.19
    
    English translation of PCS Concession for Regions 1 and 4 dated October 12,
1998 (incorporated herein by reference to Exhibit 10.6 of the Registration
Statement F-4Registration Number 333-95547).4.20*
    
    English translation of agreement with Mr. Jose Ramon Elizondo Anaya, dated
November 3, 2003, relating to the buy out of Mr. Elizondos equity interest
in certain of our subsidiaries.7.1*
    
    Computation of ratio of earnings to fixed charges.8.1*
    
    List of subsidiaries.31.1*
    
    Rule 13a-14/15(d)-14(a) Certification (Chief Executive Officer)31.2*
    
    Rule 13a-14/15(d)-14(a) Certification (Chief Financial Officer)32*
    
    Section 1350 Certification
 * Filed herewith. 86




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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 involve some variants and the services, offerings, such
as voice and packet data on a single carrier (1XRTT), data only (1X-DO).Analog:
    
    A transmission method employing a continuous electrical signal that varies in
amplitude or frequency in response to changes in sound, light, position,
etc., impressed on a transducer in the sending device.ARPU:
    
    Average monthly mobile telephony revenue per subscriber.Band:
    
    A range of frequencies between two defined limits.CDMA:
    
    Code Division Multiple Access, the highest-capacity commercial digital
standard available. CDMA increases capacity by transmitting a large number
of simultaneous conversations over a single channel, assigning unique codes
that can be re-assembled at the receiving end.Cellular A-band:
    
    The range of frequencies used to provide cellular wireless service between
825-835 MHz and between 870-880 MHz of the radio spectrum.Cellular B-band:
    
    The range of frequencies used to provide cellular wireless service between
835-845 MHz and between 880-890 MHz of the radio spectrum.Channel:
    
    A pathway for the transmission of information between a sending point and a
receiving point.Covered POPS:
    
    The number of POPs in a defined area for whom a cellular signal is accessible.CPP:
    
    Calling Party Pays is a cellular telephony payment structure in which the
party that places a call to a cellular telephone is billed for
interconnection access, and the recipient is not billed for the airtime
charges corresponding to the call.Digital:
    
    A method of storing, processing and transmitting information through the use
of distinct electronic or optical pulses that represent the binary digits 0
and 1. Digital transmission and switching technologies employ a sequence of
discrete, distinct pulses to represent information, as opposed to the
continuous analog signal.E-1:
    
    A digital telephony format that carries data at the rate of 2.048 Mbps (DS-1
level). E-1 is the European and Latin American version of North American T-1,
although T-1 is 1.544 Mbps.E3/DS3:
    
    Digital signal X is a term for the series of standard digital transmission
rates or levels based on DS0, a transmission rate of 64 Kbps, the bandwidth
normally used for one telephone voice channel. Both the North American
T-carrier system and the European E-carrier system of transmission operate
using the DS series as a base multiple. The digital signal is what is
carried inside the carrier system. DS3, the signal in the T-3 carrier,
carries a multiple of 28 DS1 signals or 672 DS0s or 44.736 Mbps.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.
 87




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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.MOU:
    
    Monthly minutes of use.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.
Population figures for 1996, 1997, 1998 and 1999 have been calculated by
applying the forecast annual population growth rate for 1995, as published by
the Instituto Nacional de Estadística, Geografía e Informática(the National
Institute of Statistics, Geography and Information Processing, INEGI) to
the official 1990 census figures. Population figures for 2002 have been
calculated by applying the forecast annual population growth rate for 2002 to
the data derived from the 2000 Mexico census. Where the population
information is set forth without reference to a year, the information given
is as of December 31, 2003. The SCT divides Mexico into nine geographic
Regions for the provision of cellular service (individually a Region and
collectively the Regions). Information regarding the numbers of POPs
within a given Region has been calculated using the national population
growth rate, as published by INEGI. Information regarding the number of POPs
within a given city has been calculated using the growth rate for that city,
as published by INEGI, which may not be the same as the national growth rate
published by INEGI. The number of POPs in any Region or other geographic
area should not be confused with the current number of users of wireless
services in that Region or other geographic area and is not indicative of the
number of users of wireless services in the future.Roaming:
    
    A service offered by mobile communications providers which allows a
subscriber to use his or her telephone while in the service area of another
carrier.SDH:
    
    Synchronous digital hierarchy (SDH). It refers to a group of fiber-optic
transmission rates that can transport digital signals with different
capacities.
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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.
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SIGNATURES The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf. GRUPO IUSACELL, S.A. DE C.V. By: /s/ GUSTAVO GUZMAN SEPÚLVEDA 
 
 By: /s/ JOSE LUIS RIERA KINKEL 
 
 Date: June 30, 2004 90




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INDEX CONTENTS
    
    PAGEReport of Independent Accountants
    
    
    F-2Consolidated Balance SheetsFiscal Years Ended December 31, 2003 and 2002
    
    
    F-5Consolidated Income StatementsFiscal Years Ended December 31, 2003, 2002 and 2001
    
    
    F-6Consolidated Statements of Changes in Stockholders EquityFiscal Years Ended December 31, 2003, 2002 and 2001
    
    
    F-7Consolidated Statements of Changes in Financial PositionFiscal Years Ended December 31, 2003, 2002 and 2001
    
    
    F-8Notes to the Consolidated Financial Statements
    
    
    F-9Schedule IIValuation and Qualifying Accounts
    
    S-II
 F-1




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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM Mexico City, March 26, 2004, except for Notes 2 and 10a.
for which the date is April 19, 2004 The Board of Directors and Stockholders of
Grupo Iusacell, S. A. de C. V.: We have audited the accompanying consolidated balance sheets of Grupo Iusacell,
S.A. de C.V. and its subsidiaries (the Company) as of December 31, 2003 and
2002, and the related consolidated statements of income, of changes in
stockholders equity and of changes in financial position for each of the three
years in the period ended December 31, 2003. These financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America) and auditing standards generally
accepted in Mexico. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. As discussed in Note 4n. to the consolidated financial statements, for the year
ended December 31, 2003 the Company adopted Bulletin C-8 Intangible Assets
issued by the Mexican Institute of Public Accountants, with the effects
described in such note. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Grupo
Iusacell, S. A. de C. V. and its subsidiaries at December 31, 2003 and 2002,
and the results of their operations, changes in stockholders equity and
changes in their financial position for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in Mexico. F-2




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Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Information relating to the nature and effect of such differences is
presented in Note 20 to the consolidated financial statements. As discussed in Note 2 to the consolidated financial statements, on June 1,
2003, the Company did not make the scheduled interest payments under its Senior
Notes Due 2006 and this is considered as an event of default under the
indenture governing the Companys Senior Notes Due 2006 which entitled the
holders of the notes with the right to claim, request or demand the
acceleration of the due date of such Senior Notes Due 2006. Also, Grupo
Iusacell Celular, S.A. de C.V., Companys main subsidiary, did not make the
scheduled interest payments under its Secured Senior Notes Due 2004 and this is
considered an event of default which entitles the holders of the notes with the
right to claim, request or demand the acceleration of the due date of such
Secured Senior Notes Due 2004. Additionally, Grupo Iusacell Celular, S.A. de C.V. exceeded the permitted
leverage ratio under its Amended and Restated Senior Secured Credit Loan
Agreement. The Company and its lenders entered into a temporary amendment and
waiver which was extended several times and, in October 2003, was not further
extended. As a result, Grupo Iusacell Celular, S.A. de C.V. is in default and
the lenders under the Amended and Restated Senior Secured Credit Loan Agreement
are entitled with the right to request the acceleration of the due date of such
Amended and Restated Senior Secured Credit Loan Agreement. Furthermore, as discussed in Note 1 to the consolidated financial statements,
Companys two largest shareholders sold all of their shares to an unrelated
party. Under the indenture governing Grupo Iusacell Celular, S. A. de C. V.s
Secured Senior Notes Due 2004 and the contract governing the Amended and
Restated Senior Secured Credit Loan Agreement, and under the indenture
governing Companys Senior Notes Due 2006, this constituted a change of control
under which the holders of notes and the lenders are entitled with the right to
request Grupo Iusacell Celular, S.A. de C.V. and the Company, respectively, the
acceleration of the due date of these loans. F-3




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##### Table of Contents



Finally, on January 14, 2004, a group of holders of the Secured Senior Notes
Due 2004 filed a lawsuit in a New York Court against Grupo Iusacell Celular,
S.A. de C.V. for the immediate payment of the indebtedness under such loan, and
alleging breach of the Secured Senior Notes Due 2004 indenture requesting that
the Court declare that the holders of the notes are pari-passu with the lenders
under the Amended and Restated Senior Secured Credit Loan Agreement. On April
19, 2004, this group of holders of the notes filed an amended complaint and now
is also seeking injunctive relief barring the Company from selling,
transferring or otherwise encumbering the assets pending decision on the merits
of their claim for specific performance. As a result of the above, the Senior Notes Due 2006, the Secured Senior Notes
Due 2004, the Amended and Restated Senior Secured Credit Loan Agreement and
other loans, have been classified as short-term liabilities,
and as a result current liabilities exceed current assets by Ps.9,792,674,000. Operating
results of the Company have deteriorated and also, the Company has accumulated
losses of Ps.8,241,682,000 representing more than two thirds of its capital
stock and, in accordance with Mexican law, this is a cause of dissolution,
which any interested party may request be declared by a Court. Additionally,
the Company may be forced to reorganization under the Concurso Mercantil Law in
Mexico. These conditions, among others, raise substantial doubt about the
Companys ability to continue as a going concern. These matters and
managements plans are more fully discussed in Note 2 to the consolidated
financial statements. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties. PricewaterhouseCoopers José S. Oropeza de la Cruz
Audit Partner F-4




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##### Table of Contents



GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS  Expressed in thousands of
constant Mexican pesos as of December 31, 2003 December 31,2003
    
    2002AssetsCURRENT ASSETS:Cash and cash equivalents (Note 4f.)
    
    Ps
    .
    
    
    
    5,814
    
    
    Ps
    .
    
    
    
    166,404Accounts receivable:Trade, net of Ps.267,081 and Ps.97,328 of allowance for doubtful accounts in
2003 and 2002, respectively (Note 4h.)
    
    
    
    
    
    
    503,691
    
    
    
    
    
    
    
    666,141Recoverable taxes and other
    
    
    
    
    
    
    350,628
    
    
    
    
    
    
    
    558,373854,319
    
    
    
    
    
    
    
    1,224,514Inventories  Net (Note 6)
    
    
    
    
    
    
    255,995
    
    
    
    
    
    
    
    37,119Total current assets
    
    
    
    
    
    
    1,116,128
    
    
    
    
    
    
    
    1,428,037Investments (Note 7)
    
    
    
    
    
    
    14,194
    
    
    
    
    
    
    
    35,791Property and equipment  Net (Note 8)
    
    
    
    
    
    
    7,689,053
    
    
    
    
    
    
    
    9,740,145Other assets  Net (Note 9)
    
    
    
    
    
    
    1,096,089
    
    
    
    
    
    
    
    2,368,904Goodwill  Net of accumulated amortization of Ps.1,192,947 in 2003 and
Ps.1,029,920 in 2002 (Note 4m.)
    
    
    
    
    
    
    1,897,895
    
    
    
    
    
    
    
    2,151,633Total assets
    
    Ps
    .
    
    
    
    11,813,359
    
    
    Ps
    .
    
    
    
    15,724,510Liabilities and Stockholders EquityCURRENT LIABILITIES:Notes payable (Note 10g.)
    
    
    
    
    
    
    
    
    
    Ps
    .
    
    
    
    130,258Current portion of long-term debt (Note 10)
    
    Ps
    .
    
    
    
    8,897,196
    
    
    
    
    
    
    
    80,763Trade accounts payable
    
    
    
    
    
    
    427,067
    
    
    
    
    
    
    
    365,468Notes payable to suppliers, short-term (Note 11)
    
    
    
    
    
    
    22,576
    
    
    
    
    
    
    
    12,900Due to related parties (Note 5)
    
    
    
    
    
    
    89,739
    
    
    
    
    
    
    
    188,611Taxes and other payables
    
    
    
    
    
    
    1,472,224
    
    
    
    
    
    
    
    669,230Income tax (Note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,048Total current liabilities
    
    
    
    
    
    
    10,908,802
    
    
    
    
    
    
    
    1,523,278Long-term debt (Note 10)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,519,159Notes payable to suppliers, long-term (Note 11)
    
    
    
    
    
    
    92,615
    
    
    
    
    
    
    
    100,302Other accounts payable, long-term (Note 4r.)
    
    
    
    
    
    
    654
    
    
    
    
    
    
    
    3,138Total liabilities
    
    
    
    
    
    
    11,002,071
    
    
    
    
    
    
    
    10,145,877Commitments and contingencies (Note 13)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    STOCKHOLDERS EQUITY:Contributed capital (Notes 14 and 15):Capital stock
    
    
    
    
    
    
    7,423,712
    
    
    
    
    
    
    
    7,423,712Capital contributed
    
    
    
    
    
    
    1,460,878
    
    
    
    
    
    
    
    1,460,8788,884,590
    
    
    
    
    
    
    
    8,884,590Earned capital (Note 16):Accumulated (losses) profits:Legal reserve
    
    
    
    
    
    
    20,864
    
    
    
    
    
    
    
    20,864For prior years
    
    
    
    
    
    
    (3,553,805
    )
    
    
    
    
    
    
    (1,386,823
    )For the year
    
    
    
    
    
    
    (4,708,741
    )
    
    
    
    
    
    
    (2,166,982
    )(8,241,682
    )
    
    
    
    
    
    
    (3,532,941
    )Accumulated other comprehensive income
    
    
    
    
    
    
    216,419
    
    
    
    
    
    
    
    216,419Total majority stockholders equity
    
    
    
    
    
    
    859,327
    
    
    
    
    
    
    
    5,568,068Minority interest
    
    
    
    
    
    
    (48,039
    )
    
    
    
    
    
    
    10,565Total stockholders equity
    
    
    
    
    
    
    811,288
    
    
    
    
    
    
    
    5,578,633Total liabilities and stockholders equity
    
    Ps
    .
    
    
    
    11,813,359
    
    
    Ps
    .
    
    
    
    15,724,510
 The accompanying twenty notes are an integral part of these consolidated
financial statements. F-5




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##### Table of Contents



GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES 
 CONSOLIDATED INCOME STATEMENTS  Expressed in thousands of
constant Mexican pesos as of December 31, 2003 Years endedDecember 31,2003
    
    2002
    
    2001Revenues:Services
    
    Ps
    .
    
    
    
    4,189,420
    
    
    Ps
    .
    
    
    
    5,129,960
    
    
    Ps
    .
    
    
    
    6,192,488Telephone equipment sales and other
    
    
    
    
    
    
    549,106
    
    
    
    
    
    
    
    616,968
    
    
    
    
    
    
    
    667,2784,738,526
    
    
    
    
    
    
    
    5,746,928
    
    
    
    
    
    
    
    6,859,766Cost of sales:Cost of services
    
    
    
    
    
    
    1,498,646
    
    
    
    
    
    
    
    1,594,040
    
    
    
    
    
    
    
    1,684,175Cost of telephone equipment sales and other (Note 4j.)
    
    
    
    
    
    
    899,616
    
    
    
    
    
    
    
    507,519
    
    
    
    
    
    
    
    415,5502,398,262
    
    
    
    
    
    
    
    2,101,559
    
    
    
    
    
    
    
    2,099,725Gross profit
    
    
    
    
    
    
    2,340,264
    
    
    
    
    
    
    
    3,645,369
    
    
    
    
    
    
    
    4,760,041Operating expenses
    
    
    
    
    
    
    1,898,166
    
    
    
    
    
    
    
    1,889,382
    
    
    
    
    
    
    
    2,282,434Depreciation and amortization
    
    
    
    
    
    
    2,057,775
    
    
    
    
    
    
    
    2,336,498
    
    
    
    
    
    
    
    2,878,708Other operating income (Note 8)
    
    
    
    
    
    
    88,556
    
    
    
    
    
    
    
    104,998
    
    
    
    
    
    
    
    338,388Operating loss
    
    
    
    
    
    
    (1,527,121
    )
    
    
    
    
    
    
    (475,513
    )
    
    
    
    
    
    
    (62,713
    )Intangible assets write-off (Note 4o.)
    
    
    
    
    
    
    350,261
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Abandoned fixed assets write-off (Note 8d.)
    
    
    
    
    
    
    404,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
expenses  Net (Note 9d.)
    
    
    
    
    
    
    626,610
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Integral financing cost:Interest
expense - Net
    
    
    
    
    
    
    968,116
    
    
    
    
    
    
    
    935,898
    
    
    
    
    
    
    
    888,793Foreign
exchange loss (gain) - Net
    
    
    
    
    
    
    744,512
    
    
    
    
    
    
    
    1,069,640
    
    
    
    
    
    
    
    (247,063
    )Gain from monetary position
    
    
    
    
    
    
    (350,861
    )
    
    
    
    
    
    
    (432,167
    )
    
    
    
    
    
    
    (293,040
    )1,361,767
    
    
    
    
    
    
    
    1,573,371
    
    
    
    
    
    
    
    348,690Equity participation in net loss (profit) of associated companies and net loss
(gain) on sale of equity investments (Notes 3 and 7)
    
    
    
    
    
    
    17,544
    
    
    
    
    
    
    
    10,129
    
    
    
    
    
    
    
    (7,164
    )Loss from continuing operations before income tax
    
    
    
    
    
    
    (4,288,003
    )
    
    
    
    
    
    
    (2,059,013
    )
    
    
    
    
    
    
    (404,239
    )Provision for income tax (Note 12)
    
    
    
    
    
    
    310,377
    
    
    
    
    
    
    
    125,265
    
    
    
    
    
    
    
    160,908Loss from continuing operations before minority interest
    
    
    
    
    
    
    (4,598,380
    )
    
    
    
    
    
    
    (2,184,278
    )
    
    
    
    
    
    
    (565,147
    )Minority interest
    
    
    
    
    
    
    33,137
    
    
    
    
    
    
    
    17,296
    
    
    
    
    
    
    
    22,745Loss from continuing operations before extraordinary item
    
    
    
    
    
    
    (4,565,243
    )
    
    
    
    
    
    
    (2,166,982
    )
    
    
    
    
    
    
    (542,402
    )Extraordinary item for the
 early extinguishment of debt, net of taxes (Note 10g.)
    
    
    
    
    
    
    15,517
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss after extraordinary item
    
    
    
    
    
    
    (4,549,726
    )
    
    
    
    
    
    
    (2,166,982
    )
    
    
    
    
    
    
    (542,402
    )Cumulative effect of the adoption of the new accounting pronouncement and
change in accounting policy, net of taxes (Notes 4j. and 4g.)
    
    
    
    
    
    
    (159,015
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,120
    )Net loss for the year
    
    (Ps.
    
    
    4,708,741
    )
    
    (Ps.
    
    
    2,166,982
    )
    
    (Ps.
    
    
    549,522
    )Weighted-average number of shares of common stock outstanding (thousands)
    
    
    
    
    
    
    93,101
    
    
    
    
    
    
    
    93,101
    
    
    
    
    
    
    
    74,757Basic net loss per share of common stock (pesos):Loss from continuing operations before extraordinary item
    
    (Ps.
    
    
    49.04
    )
    
    (Ps.
    
    
    23.28
    )
    
    (Ps.
    
    
    7,26
    )Extraordinary item
    
    
    
    
    
    
    0.17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.09
    )Cumulative effect of the adoption of the new accounting pronouncement and
change in accounting policy
    
    
    
    
    
    
    (1.71
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basic net loss per share of common stock
    
    (Ps.
    
    
    50.58
    )
    
    (Ps.
    
    
    23.28
    )
    
    (Ps.
    
    
    7.35
    )
 The accompanying twenty notes are an integral part of these consolidated financial statements. F-6




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##### Table of Contents



GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY   Expressed in thousands of constant Mexican pesos as of December 31, 2003 Capital
    
    
    
    
    
    
    
    
    
    Accumulated profits (losses)

    
    Accumulatedother
    
    
    
    
    

    
    
    
    

    Totalstock
    
    Capital
    
    Legal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    comprehensive
    
    Minority
    
    stockholderssubscribed
    
    contributions
    
    reserve
    
    For prior years
    
    For the year
    
    income
    
    interest
    
    equityBalance at December 31, 2000
    
    Ps
    .
    
    
    
    6,398,990
    
    
    Ps
    .
    
    
    
    1,460,878
    
    
    Ps
    .
    
    
    
    20,864
    
    
    Ps
    .
    
    
    
    396,419
    
    
    (Ps.
    
    
    1,233,720
    )
    
    Ps
    .
    
    
    
    216,419
    
    
    Ps
    .
    
    
    
    27,966
    
    
    Ps
    .
    
    
    
    7,287,816Application of 2000 net profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,233,720
    )
    
    
    
    
    
    
    1,233,720
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Increase in capital stock
    
    
    
    
    
    
    1,024,722
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,024,722Increase in minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109,514
    
    
    
    
    
    
    
    109,514Comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (549,522
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (549,522
    )Balance at December 31, 2001
    
    
    
    
    
    
    7,423,712
    
    
    
    
    
    
    
    1,460,878
    
    
    
    
    
    
    
    20,864
    
    
    
    
    
    
    
    (837,301
    )
    
    
    
    
    
    
    (549,522
    )
    
    
    
    
    
    
    216,419
    
    
    
    
    
    
    
    137,480
    
    
    
    
    
    
    
    7,872,530Application of 2001 net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (549,522
    )
    
    
    
    
    
    
    549,522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Increase in capital stockDecrease in minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (126,915
    )
    
    
    
    
    
    
    (126,915
    )Comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,166,982
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,166,982
    )Balance at December 31, 2002
    
    
    
    
    
    
    7,423,712
    
    
    
    
    
    
    
    1,460,878
    
    
    
    
    
    
    
    20,864
    
    
    
    
    
    
    
    (1,386,823
    )
    
    
    
    
    
    
    (2,166,982
    )
    
    
    
    
    
    
    216,419
    
    
    
    
    
    
    
    10,565
    
    
    
    
    
    
    
    5,578,633Application of 2002 net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,166,982
    )
    
    
    
    
    
    
    2,166,982
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Decrease in minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58,604
    )
    
    
    
    
    
    
    (58,604
    )Comprehensive loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,708,741
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,708,741
    )Balance at December 31, 2003
    
    Ps
    .
    
    
    
    7,423,712
    
    
    Ps
    .
    
    
    
    1,460,878
    
    
    Ps
    .
    
    
    
    20,864
    
    
    (Ps.
    
    
    3,553,805
    )
    
    (Ps.
    
    
    4,708,741
    )
    
    Ps
    .
    
    
    
    216,419
    
    
    (Ps.
    
    
    48,039
    )
    
    Ps
    .
    
    
    
    811,288
 The accompanying twenty notes are an integral part of these consolidated
financial statements. F-7




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##### Table of Contents



GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION  Expressed in thousands of constant
Mexican pesos as of December 31, 2003 Years endedDecember 31,Operating activities:
    
    2003
    
    2002
    
    2001Loss from continuing operations before extraordinary item
    
    (Ps.
    
    
    4,565,243
    )
    
    (Ps.
    
    
    2,166,982
    )
    
    (Ps.
    
    
    542,402
    )Items not requiring the use of resources:Depreciation and amortization
    
    
    
    
    
    
    2,057,775
    
    
    
    
    
    
    
    2,336,498
    
    
    
    
    
    
    
    2,878,708Intangible assets write-off
    
    
    
    
    
    
    350,261
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other long-term assets write-offs
    
    
    
    
    
    
    674,104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Abandoned fixed assets write-off
    
    
    
    
    
    
    404,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity participation in net loss (gain) of associated companies and
net loss (gain) on sale of equity investments
    
    
    
    
    
    
    17,544
    
    
    
    
    
    
    
    10,129
    
    
    
    
    
    
    
    (7,164
    )Deferred income tax
    
    
    
    
    
    
    163,852
    
    
    
    
    
    
    
    9,618
    
    
    
    
    
    
    
    Minority interest
    
    
    
    
    
    
    (33,137
    )
    
    
    
    
    
    
    (17,296
    )
    
    
    
    
    
    
    (22,745
    )(930,144
    )
    
    
    
    
    
    
    171,967
    
    
    
    
    
    
    
    2,306,397Resources (used for) provided by operating activities:Trade accounts receivable
    
    
    
    
    
    
    162,450
    
    
    
    
    
    
    
    (11,881
    )
    
    
    
    
    
    
    75,095Related parties
    
    
    
    
    
    
    (98,872
    )
    
    
    
    
    
    
    38,891
    
    
    
    
    
    
    
    (99,572
    )Recoverable taxes and other
    
    
    
    
    
    
    207,745
    
    
    
    
    
    
    
    (62,180
    )
    
    
    
    
    
    
    (57,228
    )Inventories
    
    
    
    
    
    
    (218,876
    )
    
    
    
    
    
    
    241,703
    
    
    
    
    
    
    
    21,908Trade accounts payable
    
    
    
    
    
    
    63,588
    
    
    
    
    
    
    
    (561,225
    )
    
    
    
    
    
    
    281,479Taxes and other payables
    
    
    
    
    
    
    834,287
    
    
    
    
    
    
    
    (281,897
    )
    
    
    
    
    
    
    (334,520
    )Income tax
    
    
    
    
    
    
    (76,048
    )
    
    
    
    
    
    
    16,151
    
    
    
    
    
    
    
    17,550Employee profit sharing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,933
    )
    
    
    
    
    
    
    2,928Other
    
    
    
    
    
    
    (2,484
    )
    
    
    
    
    
    
    (57,027
    )
    
    
    
    
    
    
    56,407Resources (used for) provided by operating activities before
extraordinary item and cumulative effect of the adoption of
the new accounting pronouncement and change in accounting
policy
    
    
    
    
    
    
    (58,354
    )
    
    
    
    
    
    
    (508,431
    )
    
    
    
    
    
    
    2,270,444Extraordinary item for the early extinguishment of debt
    
    
    
    
    
    
    15,517
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of the adoption of the new accounting
pronouncement and change in accounting policy
    
    
    
    
    
    
    (159,015
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,120
    )Resources (used for) provided by operating activities
    
    
    
    
    
    
    (201,852
    )
    
    
    
    
    
    
    (508,431
    )
    
    
    
    
    
    
    2,263,324Financing activities:Proceeds from long-term debt
    
    
    
    
    
    
    297,274
    
    
    
    
    
    
    
    684,974
    
    
    
    
    
    
    
    2,745,590Principal payments on long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,382
    )
    
    
    
    
    
    
    (3,430,775
    )Proceeds from related parties financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,585(Decrease) increase in notes payable
    
    
    
    
    
    
    (130,258
    )
    
    
    
    
    
    
    9,323
    
    
    
    
    
    
    
    (11,383
    )Increase in capital stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,024,722Resources provided by financing activities
    
    
    
    
    
    
    167,016
    
    
    
    
    
    
    
    653,915
    
    
    
    
    
    
    
    412,739Investing activities:Purchase of property and equipment
    
    
    
    
    
    
    (125,754
    )
    
    
    
    
    
    
    (840,391
    )
    
    
    
    
    
    
    (2,125,382
    )(Purchase) sale of common stock of associated companies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (173,666
    )
    
    
    
    
    
    
    4,369Acquisition of Portatel, net of cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    (544,390
    )Increase in telephones to be amortized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (573,475
    )Decrease in escrow account
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    483,360
    
    
    
    
    
    
    
    544,363Disposal (purchase) of other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,952
    
    
    
    
    
    
    
    (280,077
    )Resources used for investing activities
    
    
    
    
    
    
    (125,754
    )
    
    
    
    
    
    
    (435,745
    )
    
    
    
    
    
    
    (2,974,592
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (160,590
    )
    
    
    
    
    
    
    (290,261
    )
    
    
    
    
    
    
    (298,529
    )Cash and cash equivalents at the beginning of the year
    
    
    
    
    
    
    166,404
    
    
    
    
    
    
    
    456,665
    
    
    
    
    
    
    
    755,194Cash and cash equivalents at the end of the year
    
    Ps
    .
    
    
    
    5,814
    
    
    Ps
    .
    
    
    
    166,404
    
    
    Ps
    .
    
    
    
    456,665
 The accompanying twenty notes are an integral part of these consolidated financial statements. F-8




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##### Table of Contents



GRUPO IUSACELL, S. A. DE C. V. AND SUBSIDIARIES 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003, 2002 AND 2001 Except as otherwise noted, expressed
in thousands of constant Mexican pesos as of December 31, 2003.
Amounts expressed in U.S. Dollars are in thousands. NOTE 1  ENTITY, NATURE OF BUSINESS AND PRINCIPAL STOCKHOLDERS: Entity and nature of business: As a part of the recapitalization and restructuring plan of Grupo Iusacell, S.
A. de C. V., a new holding company, Nuevo Grupo Iusacell, S. A. de C. V. was
incorporated on August 6, 1998 to acquire and hold all of the outstanding
shares of Grupo Iusacell, S. A. de C. V. On March 1, 2000, both companies
changed their names: Nuevo Grupo Iusacell, S. A. de C. V. changed its name to
Grupo Iusacell, S. A. de C. V. (Iusacell or the Company), and Grupo Iusacell,
S. A. de C. V. changed its name to Grupo Iusacell Celular, S. A. de C. V.
(Iusacell Celular). In July 1999 and February 2000, Iusacell launched public offers to exchange its
two series of common stock for the four series of common stock of Iusacell
Celular then outstanding on a one for one basis. As a result of these offers,
Iusacell acquired 99.99% of Iusacell Celular. Later, in June 2000, Iusacell
launched a private purchase offer under which the Company expected to purchase
the remaining Iusacell Celular shares not tendered during the two previous
offers. When this offer expired only 0.002% of the total outstanding shares of
Iusacell Celular at December 31, 2000 were not owned by Iusacell. Finally, on March 30, 2001, Iusacell Celulars stockholders approved a 30,000
to 1 reverse stock split. Upon implementation of the reverse split in the
second quarter of 2001, the Company increased its ownership in Iusacell Celular
to 100.00%. On October 17, 2003, at an extraordinary stockholders meeting, Iusacells
stockholder  ́s approved a 20 to 1 reverse stock split. All references to the
number of shares, per share amounts and any other reference to shares in the
consolidated financial statements and the accompanying notes to the
consolidated financial statements, unless otherwise noted, have been adjusted
to reflect the reverse stock split on a retroactive basis (Note 14). Iusacell and its subsidiaries are referred to collectively herein as the Group. F-9




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##### Table of Contents



Iusacell Celular, Companys main subsidiary, is a holding company incorporated
on October 6, 1992. Its subsidiaries are primarily engaged in the wireless
telecommunications business and hold concessions to operate cellular telephone
systems in five market areas (each a Region) in Mexico. Iusacell, through
Iusacell Celular, holds the nonwire line cellular concessions for Region 5
(Guadalajara), Region 6 (Leon), Region 7 (Puebla), a cellular authorization for
Region 9 (Mexico City), and in 2001, acquired the company that holds the
concession for Region 8 (Mérida) (Note 3). Iusacell subsidiaries also hold concessions to provide long distance services,
nationwide and international paging services and, starting on December 2001,
provide commercial wireless personal communication services (PCS) in Regions 1
and 4 in northern Mexico. Principal stockholders: In February 1997, after execution of a definitive agreement between Iusacell
Celulars principal stockholders and approval by the Mexican government, Bell
Atlantic Corporation (Bell Atlantic) assumed management control of Iusacell
Celular from Carlos Peralta and companies and individuals controlled by or
related to him (together, the Peralta Group). After the incorporation of
Iusacell, Bell Atlantic also had management control of Iusacell. On June 30,
2000, Bell Atlantic and GTE Corporation, completed their merger, creating
Verizon Communications, Inc. (Verizon). On April 4, 2001, after obtaining the authorization of the Mexican regulatory
agencies and the finalization of a stockholders agreement between the Peralta
Group and Vodafone Group Plc (Vodafone), the Peralta Group and Vodafone closed
the transaction under which the Peralta Group sold its 34.50% ownership in
Iusacell to Vodafone. On June 13, 2003, Movil Access, S.A. de C.V.
(Movil Access) a Mexican telecommunications
service provider, which is part of a group of companies controlled by
Ricardo B. Salinas Pliego, announced an agreement to acquire, at least, the outstanding shares of Iusacell owned by
Verizon and Vodafone, through a public tender offer. When the offer expired, on
July 28, 2003, Movil Access acquired 74.63% of the outstanding shares of
Iusacell and the management control of Iusacell. NOTE 2  FINANCIAL SITUATION: As mentioned in Note 10, the Group is in default under some of the agreements
governing its loans and as a result, the lenders under such loans were entitled
with the right to declare the acceleration of the due date of the indebtedness
under such loans. F-10




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##### Table of Contents



As mentioned in the same Note 10, a group of holders of the Secured Senior
Notes Due 2004 of Iusacell Celular filed a lawsuit in a New York Court against
Iusacell Celular demanding the immediate payment of the indebtedness under that
loan, and alleging breach of the Secured Senior Notes Due 2004 indenture
requesting that the Court declare that the holders of the notes are pari-passu
with the lenders under Iusacell Celulars Amended and Restated Senior Secured
Credit Loan Agreement. On April 19, 2004, this group of holders of the notes
filed an amended complaint and now is also seeking injunctive relief barring
Iusacell Celular from selling, transferring or otherwise encumbering the assets
pending decision on the merits of their claim for specific performance. During 2003, the Group did not make interest payments under some of these loans
and as of the issuance date of these financial statements, interest payments
overdue amounted to Ps.845,701 (U.S.$75,307). The Group does not expect to have
sufficient future cash flows to make these payments, unless it receives
additional funds from external sources. Also, as of the issuance date of these
financial statements the Group has not made principal and interest payments
under a loan obtained from Verizon for U.S.$7,800 (Note 5), and under the notes
payable to Harris, S.A. de C.V. and Standard Bank (Note 11). Additionally, the Group has incurred in accumulated losses that have originated
that as of December 31, 2003 has lost more than two thirds of its capital
stock, and, as of the same date, that the consolidated current liabilities
exceed the consolidated current assets by Ps.9,792,674. Furthermore, the
Company might be instituted in a reorganization proceeding under the Concurso
Mercantil Law in Mexico. Under these circumstances, Accounting Principles Generally Accepted in Mexico
(Mexican GAAP) require that these loans be presented as current liabilities.
The Group classified these loans as current liabilities as of December 31,
2003. In order to resolve the financial difficulties of the Group and to maintain the
Groups viability, the Companys management has changed its business strategy
and has implemented some short-term measures that will result in cost savings.
Some key elements of this strategy include the restructuring of its debts, a
reduction in personnel and other expenses and the optimization of capital
expenditures. The consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties. NOTE 3  ACQUISITIONS, DISPOSITIONS AND COMPANY STRUCTURE: During 2001, the Company incorporated two new subsidiaries: Iusacell PCS de
México, S. A. de C. V. for the financing of the development of the PCS services
in Regions 1 and 4, and Iusatel USA, Inc. to be engaged in the long distance
business in the United States of America. Iusatel USA, Inc. started operations
in December, 2002. F-11




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##### Table of Contents



On March 22, 2001, the Company sold its 65.00% equity interest in Satelitrón,
S. A. de C. V. As a result of the sale, the Company recorded a gain of
Ps.4,370 (U.S.$429) before taxes. During 2002, Inflight Phone de México, S. A. de C. V.
 and Promotora Celuar, S.A. de C. V., were merged into Iusacell, S. A. de C. V. The three companies are wholly-owned subsidiaries.
 The merger was recorded
as of July 31, 2002. Acquisition of Grupo Portatel, S. A. de C. V.: On October 19, 2001, Iusacell Celular completed the acquisition of a 78.34%
ownership in Grupo Portatel, S. A. de C. V. and its subsidiaries (Portatel) for
Ps.574,299 (U.S.$56,588). The Group also reached an agreement to acquire the
remaining 21.66% ownership in Portatel for Ps.163,904 (U.S.$16,150). The
Company closed the acquisition of this remaining ownership on February 8, 2002.
Portatel is engaged in the wireless communications business and holds the
concession to operate cellular telephone systems in the Region 8, which covers
the Mexican states of Yucatan, Campeche, Quintana Roo, Chiapas and Tabasco in
the southeast of Mexico. The consolidated income statements of the Company and its subsidiaries include
the consolidated results of Portatel beginning October 19, 2001. The assets
acquired and liabilities assumed were recorded at estimated fair values as
determined by the Companys management based on information currently
available, on current assumptions as to future operations and independent
appraisals. A summary of the assets acquired and liabilities assumed in the
acquisition is as follows: Estimated fair values:Assets acquired
    
    Ps
    .
    
    
    
    724,256Liabilities assumed
    
    
    
    
    
    
    (214,417
    )Goodwill (amortized by the straight-line method
over the remaining life of the concession)
    
    
    
    
    
    
    228,364Purchase price
    
    Ps
    .
    
    
    
    738,203
 Company Structure Under the laws established by the Mexican government, due to Verizons control
of the Company, Iusacell may not own the majority of the voting stock of
Mexican companies that hold concessions to provide telecommunications services
other than cellular service. As of November 1998, Iusacell Celular and Jose
Ramon Elizondo, a then director of Iusacell Celular (the Mexican National),
entered into a joint venture formation agreement (the Agreement) pursuant to
which they agreed to participate together in the microwave frequencies leasing,
long distance, local telephony, PCS and paging businesses. F-12




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##### Table of Contents



Iusacell Celular and the Mexican National agreed that Iusacell Celular would
own 94.90% of the economic interest and 49.00% of the voting shares of Iusatel,
S. A. de C. V. (Iusatel), the Groups long distance concessionaire,
Iusatelecomunicaciones, S. A. de C. V. (Iusatelecomunicaciones), the Groups
fixed wireless local telephony operation, Punto-a-Punto Iusacell, S. A. de C.
V. (Punto-a-Punto Iusacell), a microwave frequencies concessionaire and
Iusacell PCS, S. A. de C. V. (Iusacell PCS), which holds concessions for 1.9GHz
frequencies in Regions 1 and 4. The Mexican National would own 5.10% of the
economic interest and 51.00% of the voting shares of these companies.
Additionally, the Mexican National would acquire 2.00% of the voting shares of
Infotelecom, S.A. de C.V., the Groups subsidiary that provides national and
international paging services (Infotelecom) and which is the result of a joint
venture agreement between Iusacell Celular and Infomin, S.A. de C.V. (Infomin),
a Mexican company which holds a fifteen-year concession to provide nationwide
and international paging services through July 2009. As of December 31, 2003,
Infotelecom is owned 49.00%, 49.00% and 2.00%, by Iusacell Celular, Banorte, S.
A. (which acquired Infomins interest in Infotelecom in exchange for the
retirement of debt) and the Mexican National, respectively. On July 29, 2002, the Mexican Government granted the Company the right to own
up to 99.99% of the voting shares of Iusacell PCS. After this resolution was
obtained, at an extraordinary stockholders meeting held on September 12, 2002,
Iusacell PCSs stockholders approved the conversion of neutral shares of
Iusacell PCS held by Iusacell into voting shares of Iusacell PCS. After this
conversion, Iusacell holds 94.90% of the voting shares and economic interest of
Iusacell PCS. Iusatel, Iusatelecomunicaciones and Punto-a-Punto Iusacell (and until September
12, 2002 Iusacell PCS) are each referred herein as a Non-Cellular Subsidiary
and together, the Non-Cellular Subsidiaries. Pursuant to the Agreement, the Mexican National did not have the unilateral
right to approve actions at the shareholder or board level of the Non-Cellular
Subsidiaries. Under each companys by-laws, all shareholder or board action
must also be approved by the majority of the shares held by Iusacell Celular
(or Iusacell) or a majority of the board members designated by Iusacell Celular
(or Iusacell), respectively. The Agreement, together with each joint venture
companys by-laws, enable Iusacell Celular or Iusacell, as the case may be, to
have management control over the day-to-day operations and financial
administration of the Non-Cellular Subsidiaries. The Mexican National cannot
alone, among other things, select, terminate or determine the compensation of
management or establish operating and capital decisions in the ordinary course
of business. Finally, as a part of the Agreement, Iusacell and the Mexican National provide
each other with a put and call option on the shares of the Non-Cellular
subsidiaries owned by the Mexican National. F-13




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##### Table of Contents



On October 3, 2003, the Mexican National notified Iusacell that he was
exercising its put option on the Non-Cellular Subsidiaries shares owned by him,
based on the Agreement. As a result, on November 3, 2003, Iusacell and the
Mexican National signed an agreement under which Iusacell PCS (affiliated
company) will pay to the Mexican National, on its own and/or on behalf of any
of the Non-Cellular Subsidiaries, a total amount of U.S.$11,194, net of income
taxes, resulting from the capital stock refunds originated by the cancellation
of the shares owned by the Mexican National in the Non-Cellular Subsidiaries
over a period of two years. This amount will be paid through weekly variable
installments of at least, U.S.$100 each, starting on November 3, 2003. The
unpaid amount bears interest at a fixed annual rate of 14.00%. As of December
31, 2003 and as of the issuance date of these financial statement, the Group
has paid the Mexican National U.S.$900 and U.S.$2,200, respectively. Pursuant to the agreement, during two years or until the full amount has been
paid to the Mexican National, the shares described in the agreement will be
deposited in a trust, and the voting rights of such shares will be exercised by
the trust, under the instructions of Iusacell. In the event that Iusacell PCS
failed to make four payments, the trust will exercise the voting rights under
the instructions of the Mexican National. Additionally, this agreement
establishes that under certain circumstances, including the failure to make
four payments, among others, the amounts paid by Iusacell as of that date may
be retained by the Mexican National as a penalty for breaching the agreement,
and the shares deposited in the trust will revert to the Mexican National. The subsidiaries of Iusacell, which are included in the consolidated financial
statements, are the following: Economic interest(direct or indirect)as of December 31Subsidiary
    
    2003
    
    2002(%)
    
    (%)Iusacell PCS, S. A. de C. V. (Regions 1 and 4)
    
    
    94.90
    
    
    
    94.90Iusacell PCS de México, S. A. de C. V.
    
    
    94.90
    
    
    
    94.90Iusacell Infraestructura, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00Iusacell Arrendadora, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00Iusacell Infraestructura de México, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00Grupo Iusacell Celular, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00S.O.S. Telecomunicaciones, S. A. de C. V. (Region 9)
    
    
    100.00
    
    
    
    100.00Iusacell, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00Sistecel, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00Comunicaciones Celulares de Occidente, S. A. de C. V. (Region 5)
    
    
    100.00
    
    
    
    100.00Sistemas Telefónicos Portátiles Celulares, S. A. de C. V. (Region 6)
    
    
    100.00
    
    
    
    100.00Telecomunicaciones del Golfo, S. A. de C. V. (Region 7)
    
    
    100.00
    
    
    
    100.00Inmobiliaria Montes Urales 460, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00
 F-14




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##### Table of Contents



Economic interest(direct or indirect)as of December 31Subsidiary
    
    2003
    
    2002(%)
    
    (%)Mexican Cellular Investments, Inc.
    
    
    100.00
    
    
    
    100.00Iusanet, S. A. de C. V.
    
    
    100.00
    
    
    
    100.00Iusatelecomunicaciones, S. A. de C. V.
    
    
    94.90
    
    
    
    94.90Grupo Iusacell Nicaragua, S. A.
    
    
    100.00
    
    
    
    100.00Infotelecom, S. A. de C. V.
    
    
    49.00
    
    
    
    49.00Punto a Punto Iusacell, S. A. de C. V.
    
    
    94.90
    
    
    
    94.90Grupo Portatel, S. A. de C. V. and subsidiary (Region 8)
    
    
    100.00
    
    
    
    100.00Iusatel, S. A. de C. V.
    
    
    94.90
    
    
    
    94.90Iusatel USA, Inc.
    
    
    94.90
    
    
    
    94.90
 NOTE 4  BASIS OF PRESENTATION AND ACCOUNTING POLICIES:  a.
    
    Basis of presentationThe Companys consolidated financial statements have been prepared in
conformity with Mexican GAAP. The consolidated financial statements have been
presented in thousands of constant Mexican pesos as of December 31, 2003 as
required by Bulletin B-10, Recognition of the Effects of Inflation on
Financial Information, as amended, issued by the Mexican Institute of Public
Accountants (MIPA) (Bulletin B-10).b.
    
    Consolidated financial statementsThose companies in which the Company holds 50.00% or more of the capital
stock and/or exercises control over operating and financing activities are
included in the consolidated financial statements. In addition, while the
Company owns less than 50.00% of the voting common stock of the Non-Cellular
Subsidiaries, it consolidates them because it exercises management control
over their day-to-day operations and financial administration by appointment
of the stockholders and other arrangements (Note 3). All significant
inter-company balances and transactions have been eliminated in
consolidation.c.
    
    Use of estimatesThe preparation of financial statements in conformity with Mexican GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. F-15




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##### Table of Contents



d.
    
    Monetary unitThe financial statements are presented in Mexican pesos (Ps.), the currency
that, based on Mexican laws, must be used to prepare the accounting records
of the Company and its Mexican subsidiaries.e.
    
    Effects of inflation on the financial statementsThe consolidated financial statements of the Company have been prepared in
accordance with Bulletin B-10. The Third Amendment to Bulletin B-10 requires
the restatement of all comparative financial statements to constant Mexican
pesos as of the date of the most recent balance sheet presented. Accordingly,
the consolidated financial statements have been restated as follows:  -
    
    The balance sheet amounts as of December 31, 2002 presented in the
consolidated financial statements have been restated to constant Mexican pesos
as of December 31, 2003 based on the National Consumer Price Index (NCPI)
published by Banco de México (the Mexican Central Bank).-
    
    Consolidated income statements for the current and prior years have been
restated to constant Mexican pesos as of December 31, 2003 using the NCPI from
the periods in which the transactions occurred.-
    
    Bulletin B-12, Statement of Changes in Financial Information, issued by the
MIPA (Bulletin B-12), addresses the presentation of the statement of changes in
financial position when financial statements have been restated to constant
Mexican pesos as of the latest balance sheet date. Bulletin B-12 identifies the
origin and application of resources representing differences between beginning
and ending balance sheet amounts in constant Mexican pesos, excluding the
effect of holding non-monetary assets. Bulletin B-12 also provides that
monetary and foreign exchange gains and losses should not be eliminated from
resources provided by operating or financing activities.  The items that originate from the recognition of effects of inflation on
financial information are as follows:Restatement of non-monetary assets:Inventories are valued at the average price of the purchases made during the
period and are restated using the NCPI, without exceeding net realizable
value.Based on the Fifth Amendment to Bulletin B-10, property and equipment, net,
and depreciation for the year are restated using the NCPI, without exceeding
net realizable value. F-16




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##### Table of Contents



Property and equipment are depreciated using the straight-line method, based
on the restated values. The average annual rates of depreciation used by the
Company are as follows: 2003
    
    2002(%)
    
    (%)Buildings and facilities
    
    
    4.00
    
    
    
    4.00Communications equipment
    
    
    10.00
    
    
    
    10.00Furniture and fixtures
    
    
    10.00
    
    
    
    10.00Transportation equipment
    
    
    17.00
    
    
    
    17.00Computer equipment
    
    
    29.00
    
    
    
    29.00Cellular rental telephones
    
    
    
    
    
    
    25.00
  The Group does not capitalize integral financing cost for assets under
construction, unless the integral financing cost generated by loans are
directly attributable to those assets. For the years ended December 31, 2003,
2002 and 2001, the Group did not capitalize integral financing cost.Investments in associated companies are accounted for using the equity method
based on the associated companys equity and are adjusted for the effects of
inflation in accordance with Bulletin B-10.Restatement of stockholders equity:The contributed and earned capital accounts include the effect of restatement
determined by applying the NCPI factor from the date capital was contributed
or earned. The restatement represents the amount required to maintain the
contributions and accumulated results in constant Mexican pesos as of
December 31, 2003.The excess or deficit from restatement of capital account is an element of
stockholders equity that includes surplus or deficit from holding
non-monetary assets, which represents the excess or deficit in specific
values of net non-monetary assets in comparison with the increase
attributable to general inflation as measured by the NCPI.Integral financing cost:Integral financing cost is comprised of net interest expense, foreign
exchange gains and losses, and gains and losses from net monetary position.Foreign exchange gains and losses on transactions denominated in currencies
other than Mexican pesos result from fluctuations in exchange rates between
the date transactions are recorded and the date of settlement or period end. F-17




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##### Table of Contents



Gains and losses from net monetary position represent the effects of
inflation, as measured by the NCPI, on the Groups monetary assets and
liabilities at the beginning of each month. If monetary liabilities exceed
monetary assets, there is a gain from monetary position. If monetary
liabilities are less than monetary assets, there is a resulting loss from
monetary position.f.
    
    Cash and cash equivalentsCash and cash equivalents consist primarily of bank deposits. The Company
invests its excess cash in deposits with major banks.g.
    
    Financial instrumentsBulletin C-2, Financial Instruments, issued by the MIPA (Bulletin C-2),
requires that all financial instruments be recorded in the balance sheet at
their fair value and changes in the fair value be recorded in each period in
the income statement. Bulletin C-2 also requires that derivative financial
instruments used for hedging purposes be recorded in the balance sheet and
valued using the same valuation criteria used to value the hedged asset or
liability.The Groups financial instruments consist principally of cash and cash
equivalents, accounts receivable and payable, notes payable, long-term debt,
and until 2002, foreign currency and interest hedge contracts.Until October, 2002, the Group used derivative financial instruments to
manage the risk of variable interest rates and foreign currency exchange
fluctuations, which under Bulletin C-2, are classified as hedge transactions.
On October 7 and 10, 2002, the Group early terminated the derivative
financial instruments used for hedging purposes (Note 18).The carrying amounts of the Companys financial instruments, as reflected in
the balance sheet, approximate their fair value as of December 31, 2003 and
2002, except for long-term debt which has a quoted market value (Note 18).As a result of the adoption of this new accounting pronouncement in 2001, the
Group recognized a cumulative loss on derivative financial instruments of
Ps.7,120 as of January 1, 2001.h.
    
    Allowance for doubtful accountsThe Group cancels service to customers with invoices that are 60 days past
due. The allowance for doubtful accounts represents the Groups estimate of
the probable loss inherent in all accounts receivable due to general
historical trends of customer performance and factors surrounding the
specific customers credit risk. The Group wrote off accounts receivable for
Ps.198,233 in 2002. The charge to income for the year for the allowance for
doubtful accounts amounted to Ps.169,753, Ps.63,777 and Ps.119,175 in 2003,
2002 and 2001, respectively. F-18




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##### Table of Contents



i.
    
    Investment in associated companiesThe Company carries under the equity method long-term investments in
associated companies in which it owns between 20.00% and 50.00% of the
companys voting common stock and over which the Company can exercise
significant influence. Under the equity method, such investments are carried
at cost adjusted for the Companys share of the net income or losses of these
companies and the effects of restatement of non-monetary assets in the
associated companies. The effects of transactions with such associated
companies are eliminated before applying the equity method.j.
    
    Cellular telephonesUntil September 30, 2003, the cost of cellular telephones given to customers
under exclusive service contracts was amortized based on the nature and terms
of the service contracts to match costs with the timing of earned revenues.
Average amortization period was twelve months. Until September 30, 2003, the
cost of such telephones was included in Recoverable taxes and other, in the
consolidated balance sheet, net of accumulated amortization. Such cost did
not exceed market value.During the third quarter of 2003, the Group changed the accounting
policy for the telephones given to customers under exclusive service
contracts. As a result, the cost of such telephones is recorded in the income
statement at the moment when the contract is signed and such cost is included
as a part of the cost of equipment sales and other, in the consolidated
statement of income. The cumulative effect of this change in accounting
policy resulted in a loss for the year for 2003 of Ps.159,015 related to the
remaining balance of telephones being amortized as of that date, amount that
is included in the line cumulative effect of the adoption of the new
accounting pronouncement and change in accounting policy, in the consolidated
income statement for the year ended December 31, 2003.In addition to the effect for this change, the Group reclassified Ps.226,027
of the amortization for the period from January to September 2003, which were
originally recorded as a depreciation and amortization for the period, to
cost of telephone equipment sales and other. If this reclassification had
been made for the years ended December 31, 2002 and 2001, the cost of
telephone equipment sales and other would have been of Ps.926,147 and
Ps.1,578,643, respectively, and the depreciation and amortization would have
been Ps.1,917,870 and Ps.1,715,615, respectively.At the end of the contract term, the customer keeps the cellular telephone.
In the event of an early termination of an exclusive service contract, the
customer either (i) is required to return the phone to the Group or (ii)
acquires the telephone at its market value on the date of termination. F-19




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##### Table of Contents



The cost of cellular telephones sold to customers is recorded as cost of
sales based on the average cost of such telephones. Until 2002,
telephones leased to customers were included in fixed assets and were
depreciated over the initial lease period, generally two years.k.
    
    ConcessionsCosts related to the acquisition of concessions granted by the Mexican
government to provide cellular telephone services have been capitalized
and are included in other assets. Such costs are amortized on a
straight-line basis over the initial term of the respective concession.
The Mexican government requires the Companys compliance with the
specific terms of each concession. Through December 31, 2003, the Group
had complied substantially with such requirements, except for certain
informational requirements of the Mexican authorities. The Group
believes that such noncompliance does not expose it to any risk of
concession forfeiture, or any other material liability.l.
    
    AdvertisingAdvertising costs are expensed as incurred. The cost of prepaid media
advertising (including television air time, magazine, directory and other
print media) is deferred and recorded in other assets until the advertising
airtime or space is used, at which time, such cost is recognized as an
operating expense. Advertising expense amounted to Ps.428,124, Ps.291,301
and Ps.473,691 for 2003, 2002 and 2001, respectively.On July 1, 2003, the Group signed a contract with an advertising agency,
through which the agency is delivering advertising services to the
Group, including television air time provided by Televisión Azteca, S.A.
de C.V. (TVA), related party, as well as advertising in other media
companies. The contract was signed for the period from July 1, 2003 to
December 31, 2004. For the year ended December 31, 2003, the amount paid
to this advertising agency, without the Value Added Tax, amounted to
Ps.288,856.m.
    
    GoodwillGoodwill is amortized on a straight-line basis over twenty years.
Amortization expense was Ps.210,987, Ps.185,243 and Ps.186,658 in 2003,
2002 and 2001, respectively. Additionally, the Group canceled goodwill
for Ps.35,180 from its telephones leasing business, amount that is
presented as an special item in the line cancellation of intangible
assets in the consolidated statement of income for the year ended
December 31, 2003 (Note 4o.). F-20




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##### Table of Contents



n.
    
    Intangible assetsBeginning January 1, 2003, the Group adopted Bulletin C-8 Intangible assets
issued by the MIPA. This statement requires intangible assets to be
recognized on the balance sheet as long as they are identifiable, provide
expected economic benefits and the company has control over such benefits. It
also provides that intangible assets with an indefinite useful life should
not be amortized and intangible assets with a definite life should be
amortized systematically, based on the best estimate of their useful life
determined in accordance with the expected future economic benefits. These
assets are subject to an annual evaluation of their recoverable value, to
identify any impairment losses (Note 9).The adoption of this statement did not have a significant effect on the
Groups financial position. During the third quarter of 2003 and considering
the economic conditions under which the Group is operating (Note 2) and based
on the business plan prepared by the Groups new management, the Group wrote
down intangible assets for Ps.315,081, amount that was charged to income of
the year and is shown in the consolidated income statement for the year ended
December 31, 2003, as a special item (Note 4o.).o.
    
    Evaluation of long-lived assetsThe Group evaluates the recoverability of its long-lived assets when
events and circumstances indicate that such assets might be impaired.
The Group determines impairment by comparing the undiscounted cash flows
estimated to be generated by these assets to their respective carrying
amounts. In the event impairment exists, a loss is recognized based on
the amount by which the carrying value exceeds the fair value of the
asset. If quoted market prices for an asset are not available, fair
market value is determined primarily using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Losses on
property and equipment to be disposed of are determined in a similar
manner, except that fair market values are reduced for the cost to
dispose.For the year ended December 31, 2003, the Group wrote down intangible assets
for Ps.350,261, including Ps.35,180 of goodwill (Notes 4m. and 4n.).p.
    
    Deferred income taxes and employee profit sharingThe Group follows the provisions of Bulletin D-4, Accounting Treatment
of Income Tax, Assets Tax and Employee Profit Sharing, issued by the
MIPA, (Bulletin D-4). This Bulletin requires a method to calculate
deferred taxes based on comprehensive assets and liabilities. The new
method requires the recognition of future tax consequences based on the
difference between the financial statements and tax basis of assets and
liabilities -temporary differences- as of the date of the financial
statements. F-21




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##### Table of Contents



During 2003, and due to the circumstances mentioned in Note 2 and since the
Group can not assure the realization of certain tax loss carry forwards, the
Group increased the net deferred tax asset valuation allowance to fully
reserve the deferred tax asset amounting to Ps.163,852 (Note 12).Employee profit sharing is a statutory labor obligation payable to employees
and determined, for each subsidiary with employees, on its pretax income, as
adjusted, in accordance with the provisions of Mexican labor and tax laws.q.
    
    LiabilitiesBeginning January 1, 2003, the Group adopted Bulletin C-9 Liabilities,
provisions, contingent assets and liabilities and commitments issued by the
MIPA (Bulletin C-9). This Bulletin establishes general rules for the
valuation, presentation and disclosure of liabilities, provisions and
contingent assets and liabilities, as well as for the disclosure of
commitments entered into by a company as part of its normal operations. The
adoption of this Bulletin did not have a significant effect on the Groups
financial position.As a consequence of the adoption of Bulletin C-9, the Groups liabilities
represent present obligations and the liability provisions recognized in the
balance sheet represent present obligations whose settlement will probably
require the use of economic resources. These provisions have been recorded,
based on Group managements best estimate of the amount needed to settle the
liabilities; however, actual results could differ from the recorded
provisions.r.
    
    Seniority premiumsIn accordance with Mexican labor law, Groups employees are entitled to
seniority premiums upon retirement after 15 years of service or upon
dismissal, disability or death. The Group follows Bulletin D-3, Labor
Obligations, issued by the MIPA (Bulletin D-3). Under Bulletin D-3, the
actuarially determined projected benefit obligation is computed using
estimates of salaries that will be in effect at the time of payment.Personnel not yet eligible for seniority premiums are also included in the
determination of the obligation with necessary adjustments made in
accordance with the probability that these employees will reach the
required seniority. The Groups liability and related costs for
seniority premiums are immaterial for all periods presented.In accordance with Mexican labor law, the Group is liable for severance
payments to employees who are dismissed under certain circumstances.
Such compensation is expensed when paid. The Group has no employee
pension plans and does not provide for post-retirement benefits.During the last quarter of 2003, the Group transferred the majority of its
employees to two related entities which are not part of the Group. F-22




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##### Table of Contents



s.
    
    Loss per shareBasic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding
for the year.The computation of diluted loss per share is similar to basic loss per
share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the
potentially dilutive common shares had been issued. For the years ended
December, 31, 2003, 2003 and 2001, the Company did not compute nor
disclose diluted loss per share because, for those years, the Company
incurred losses from continuing operations.t.
    
    Revenue recognitionCellular air time is recorded as revenue as service is provided. Until
December 31, 2001, revenue from the sale of prepay cards was recognized
at the date of sale. The Group had recognized the revenue on the sale
of prepay cards at the date of sale rather than on a deferred basis
because the length of the average consumption period for such prepay
cards was not significant, i.e., approximately one to one and a half
months, and it was not material to results of operations for 2001.
Starting January 1, 2002, the Group started to recognize revenue from
the sale of the prepay cards as service is provided because the
increasing length of the average consumption period for such prepay
cards. Revenues from the sale of prepay cards associated with services
that have not been provided are deferred until the services are provided
and are included in taxes and other payable in the accompanying
consolidated balance sheet.Sales and cost of sales of equipment and related services are recorded
when goods are delivered and services are provided. 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.u.
    
    Foreign currency transactionsForeign currency transactions are recorded at the exchange rates in effect at
the transaction date. Assets and liabilities denominated in foreign
currencies are translated to Mexican pesos using the exchange rates in
effect at the time of settlement or valuation at each balance sheet
date, with the resulting exchange differences being recognized as
exchange gains or losses.v.
    
    Comprehensive lossComprehensive loss includes the Groups consolidated net loss and any other
item that, because of specific accounting guidance, is recorded directly
as a part of stockholders equity, and which are not capital stock
increases, decreases and/or distributions. F-23




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##### Table of Contents



The comprehensive loss line included in the consolidated statement of
stockholders equity represents the result of the performance of the
Group during the year. For the years ended December 31, 2003, 2002 and
2001, comprehensive loss was the same as the consolidated loss for the
year.w.
    
    New accounting pronouncementsThe provisions of Bulletin C-15, Impairment of the value of long-lived
assets and their disposal, issued by the MIPA (Bulletin C-15), went
into effect on January 1, 2004. This Bulletin establishes general
criteria for the identification and, if applicable, recording of losses
from impairment or decrease in value of long-lived tangible and
intangible assets, including goodwill; additionally, it defines concepts
such as net sales price and value in use for the valuation of long-lived
assets. The Group is in the process of carrying out a study to
determinate the value in use of its long-lived assets and the amount of
any possible impairment.In 2003, the MIPA issued new Bulletin C-12, Financial instruments with
characteristics of liabilities, capital or both (Bulletin C-12), which
highlights the differences between liabilities and capital from the
viewpoint of the issuer, as a basis for identifying, classifying and
accounting for the liability and capital components of combined
financial instruments at the date of issuance.Bulletin C-12 establishes the methodology for separating the liabilities and
capital components from the proceeds of the issuance of combined financial
instruments. That methodology is based on the residual nature of
stockholders equity and avoids the use of fair values affecting
stockholders equity in initial transactions. Additionally, it establishes
that beginning on January 1, 2004, the initial costs incurred in connection
with the issuance of combined instruments should be assigned to liabilities
and stockholders equity in proportion to the amounts of the components
recognized as liabilities and stockholders equity; that the profits and
losses related to financial instrument components classified as liabilities
should be recorded in comprehensive financing cost and that distributions to
owners of financial instrument components classified as capital should be
charged directly to a stockholders equity account other than the net income
for the year.Although Bulletin C-12 became effective on January 1, 2004, there is no
requirement to restate information of prior periods or recognize an initial
effect of adopting in the income for the year it is adopted, in accordance
with the transitory provisions of the Bulletin C-12. The adoption of the
Bulletin C-12 is not expected to have an impact on the Groups consolidated
financial statements. F-24




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##### Table of Contents



NOTE 5  RELATED PARTIES: As discussed in Note 1, during 2003 Verizon and Vodafone sold its investment in
the Company so beginning in the date of the sale, they are not related parties
of the Group anymore. Accounts and notes payable to Verizon and Vodafone,
including interest, as of December 31, are as follows: 2003
    
    
    
    

    
    2002Verizon
    

    
    
    
    
    Ps.
    204,264
    
    
    
    
    
    
    Ps.
    186,024Vodafone
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,587Total
    
    
    
    
    
    Ps.
    204,264
    
    
    
    
    
    
    Ps.
    188,611
 Accounts and Notes payable as of the date of the sale, were reclassified in the
consolidated balance sheet and as of December 31, 2003 are presented in the
line item taxes and other accounts payable. Until December 31, 2002 they were
presented as accounts and notes payable to related parties. Accounts and notes
payable to Verizon result from services rendered by the seconded employees
assigned to the Group by Verizon before the date of sale, and a note payable
regarding a financing provided by Verizon on May 8, 2001, in connection with
the negotiations for the purchase of Portatel (Note 3). This financing consists
of a two-year note payable for U.S.$7,800, bearing interest at a fixed annual
interest rate of 11.50%, and with an original maturity date on May 8, 2003,
which was extended to November 7, 2003. Interest and principal were payable at
the maturity of the note. As of the issuance date of these financial
statements, the Group has not paid this note nor the interests accrued as of
that date. For the period ended July 31, 2003 (date of sale), and for the years ended
December 31, 2002 and 2001, transactions with Verizon and Vodafone are as
follows: July 31,
    
    December 31,2003
    
    2002
    
    2001Service revenues
    

   
   
    
    
    Ps.
    14,101
    
    

   
  
    
    
    Ps.
    36,928
    
    

       
    
    
    Ps.
    5,777Cellular telephones repair expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

       
    
    
    Ps.
    17,166Technical expenses
    

       
    
    
    Ps.
    29,621
    
    

       
    
    
    Ps.
    22,005
    
    
    
    
    
    
    
    65,211Lease expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,764Interest expense
    
    
    
    
    
    
    9,823
    
    
    
    
    
    
    
    9,092
    
    
    
    
    
    
    
    5,977Total expenses
    

       
    
    
    Ps.
    39,444
    
    

       
    
    
    Ps.
    31,097
    
    

       
    
    
    Ps.
    95,118Acquisition of handsets
    

       
    
    
    Ps.
    12,174
    
    

       
    
    
    Ps.
    
    
    

       
    
    
    Ps.
    
 F-25




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##### Table of Contents



As of August, 2003, the Company is subsidiary of
 Movil Access. The main accounts payable and receivable with
related parties, as of December 31 2003 are as follows: Accountsreceivable (payable)Grupo Elektra
    
    (Ps.
    94,310
    )Operadora Unefon
    
    
    (2,605
    )Teleactivos
    
    
    (7,577
    )Servicios Eficientes de
Cartera
    
    
    15,973Other
    
    
    (1,220
    )Net accounts payable
    
    (Ps.
    89,739
    )
 Contracts signed with related parties are described as follows: Contracts with Grupo Elektra, S.A. de C.V. and subsidiaries  a.
    
    On August 5, 2003, Iusacell, S.A. de C.V., subsidiary of the Company
(Iusa), Elektra del Milenio, S.A. de C.V. (Elektra) and Salinas y Rocha,
S.A. de C.V. (SyR) signed a contract through which Elektra and SyR are
obligated to lease commercial areas in their stores in order for Iusa to
place a point of sale and to promote its telecommunication services as
well as other promotional and marketing activities. For these services,
Elektra and SyR will receive U.S.$2,500 payable in four installments on
October 20, 2003, November 28, 2003, December 31, 2003 and April 30, 2004.
The contract was signed for the period from August 5, 2003 to August 4,
2004.b.
    
    On August 5, 2003 Iusa, Elektra and SyR signed a contract through which
Elektra and SyR will provide support to promote through advertising
campaigns the services offered by Iusa in their stores. For such services,
Elektra and SyR will receive U.S.$5,000 payable in four installments on
October 30, 2003, November 28, 2003, December 31, 2003 and April 30, 2004.
The contract was signed for the period from August 5, 2003 to December 31,
2004.c.
    
    On August 2, 2003, Iusa and Elektra signed a ten-year commission
agreement, through which Iusa designed Elektra as a distributor to promote
and commercialize the services and sale the Iusa products in its stores
around the country.Elektra is obligated to use Iusas Trade Mark only to promote,
commercialize and sale Iusa services. Iusa will pay Elektra a commission for
the sale of its products in the following way: 25.00% on the selling price of
the VIVA kit product, 13.00% on the air-time sold, Ps.350 (pesos) for
contracts sold of the rate plan Plan Facilito. F-26




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##### Table of Contents



d.
    
    On October 1, 2003, Grupo Elektra and Iusa, signed an indefinite life
agreement under which Iusa gives to Elektra the right to operate and
manage its Centros de Solución Inmediata (CSI), chain of 103 stores
through which Iusa commercialized telephone services in Mexico. In such
stores Elektra will offer, in addition to the services and products of
Iusa, other services and products of third parties.Pursuant to the contract, Elektra will charge Iusas clients for concepts
like rents charged in advance, guaranteed deposits and surety bonds,
differences for handsets costs, etc., and will make weekly deposits to Iusa
of the amounts collected in the CSIs for these concepts, net of the
commission for the administration of the business. Also, Elektra will pay
Iusa, if applicable, an amount for the following concepts: royalties for the
administration and operation of the CSIs, the use of the trade marks, the
use of the computer system, personnel training and lease of assets.Iusa will transfer to Elektra the rights over the lease contracts of the
facilities in which the CSIs are located or will sub-lease them to Elektra.
Beginning October 2003, Elektra is paying the lease for the CSIs.The amounts (commissions) payable by Iusa are as follows:  -
    
    27.00% on the selling price of the VIVA kit product  -
    
    18.00% on the air-time sales-
    
    Up to Ps.3,180 (pesos) during one year for post-paid-
    
    Between 7.00% and 11.00% on residual commissions for post-paid-
    
    Between 2.00% and 7.00% based on the collection amounts-
    
    Ps.150 (pesos) for each activation of other distributor-
    
    Between Ps.450 and Ps.1,800 (pesos) for contracts renewal-
    
    Ps.7,200 annually for the lease of commercial spaces for customer care
activities-
    
    Ps.15 monthly for each radio base installed in the CSIs  e.
    
    On August 1, 2003, Iusa and Elektra signed a current account
contract, to control and record the transfer of funds between the two
companies originated by the corporate, commercial relationship,
financing, administration and services activities between the two
companies, for approximately Ps.80,000. Iusacell delivered a note
payable to Elektra for U.S.$7,000 as a guarantee to comply with its
obligations under this contract. The contract is for an indefinite term
(Note 13l.). F-27




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##### Table of Contents



Contract with Servicios Eficientes de Cartera, S. de R.L. (SECSA) Iusa signed a services, commissions and deposits contract with SECSA on October
6, 2003, under which SECSA (subsidiary of Movil Access) is committed to perform
collection activities, and the administration of cash flows and payments for
Iusa. The term of the contract is ten years and Iusa will pay 0.50% of the
amount of collections and payments. For the year ended December 31, 2003, Iusa
paid commissions to SECSA for Ps.4,896. Contract signed with Teleactivos, S.A. de C.V. (Teleactivos)  a.
    
    On September 1, 2003, Iusa signed a Master Agreement for Call Center
Services through which Teleactivos (affiliated company of Movil Access),
is committed to provide the following services on behalf of Iusa: Service
    
    Monthly payment*911
    
    
    Ps.
    60  Ps.80(1)*Hogar
    
    
    Ps.
    50*Doc
    
    
    Ps.
    90*Info
    
    
    Ps.
    48  Ps.75(1)*Hechos
    
    
    Ps.
    25*Vial
    
    
    Ps.
    7001-800
    
    
    Ps.
    25  Ps.45(1)Iusacell to Iusacell
    
    
    Ps.
    50 pesos for each record*FDI
    
    
    Ps.
    25  Ps.50(1)Corporate switchboard
    
    
    Ps.
    30Change your plan
    
    
    Ps.
    110
  (1)
    
    The cost is variable depending on the number of incoming and
outgoing calls.  b.
    
    On November 3, 2003 Iusa signed a Master Agreement for the Operation of a
Call Center through which Teleactivos will be in charge of the operation
of Iusas call center, and delivering the services mentioned in the
following page: F-28




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##### Table of Contents



Cost in PesosService
    
    of the position per hourShort Messages Services
    
    
    
    
    
    Ps.
    103.00*411
    
    
    
    
    
    
    107.00Activations
    
    
    
    
    
    
    110.00Claims before PROFECO
    
    
    
    
    
    
    116.00Thefts
    
    
    
    
    
    
    35.00Welcome call
    
    
    
    
    
    
    116.00First invoice
    
    
    
    
    
    
    116.00Night time (paging)
    
    
    
    
    
    
    116.00Billing and collection
    
    
    
    
    
    
    110.00Renewals
    
    
    
    
    
    
    116.00Technical disruptions
    
    
    
    
    
    
    112.00Roaming
    
    
    
    
    
    
    116.00Back office
    
    
    
    
    
    
    116.00Retention In
    
    
    
    
    
    
    116.00Retention Out
    
    
    
    
    
    
    116.00VIP
    
    
    
    
    
    
    116.00General information
    
    
    
    
    
    
    107.00Corporate
    
    
    
    
    
    
    116.00Executive
    
    
    
    
    
    
    110.00
  Both contracts are for an indefinite term and can be cancelled for any of the
parts with a 30 days in advance notification. Contracts with Operadora Unefon, S.A. de C.V. (Unefon)  a.
    
    Interconnection agreement, signed on June 9, 2000. Interconnection rate
is Ps.1.90 (pesos) per minute of traffic (fixed rate). This contract is
for an indefinite term.b.
    
    Short Messages Services (SMS) contract signed on August 14, 2003. The
rate is of Ps.0.40 (pesos) per message (fixed rate/subject to review).
This contract is for an indefinite term. In the following page, there is a summary of the related party transactions
previously described for the year ended December 31, 2003: F-29




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##### Table of Contents



Telephone equipment sales
    
    
    Ps.
    304,005Air time sales
    
    
    
    15,998Interconnection revenues
    
    
    
    10,012Lease revenues
    
    
    
    15,216Administrative services
    
    
    
    29,376Total revenues
    
    
    Ps.
    374,607Telephone equipment purchases
    
    
    Ps.
    450,002Sales commissions
    
    
    Ps.
    4,875Administrative services
    
    
    
    23,965Lease expenses
    
    
    
    21,466Interconnection expenses
    
    
    
    14,437Advertising expenses
    
    
    
    44,750Total expenses
    
    
    Ps.
    109,493
 NOTE 6  INVENTORIES, NET: As of December 31, inventories, net, consisted of the following: 2003
    
    2002Cellular telephones and accessories
    
    

    
    
    
    Ps.
    281,096
    
    
    

    
    
    
    Ps.
    144,466Less: Allowance for obsolete and
slow-moving inventories
    
    
    
    
    
    
    (52,381
    )
    
    
    
    
    
    
    (107,347
    )228,715
    
    
    
    
    
    
    
    37,119Advances to suppliers
    
    
    
    
    
    
    27,280
    
    
    
    
    
    
    
    Ps.
    255,995
    
    
    

    
    
    
    Ps.
    37,119
 NOTE 7  INVESTMENTS: As of December 31, the Companys investments were as follows: 2003
    
    2002Entity
    
    Ownership
    
    Investment
    
    Ownership
    
    InvestmentEditorial Celular, S. A. de C. V.
    
    
    40.00
    %
    
    

    
    
    
    Ps.
    12,086
    
    
    
    40.00
    %
    
    

    
    
    
    Ps.
    14,426AMCEL
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,144Other
    
    
    
    
    
    
    
    
    
    
    2,108
    
    
    
    
    
    
    
    
    
    
    
    5,221Ps.
    14,194
    
    
    
    
    
    
    

    
    
    
    Ps.
    35,791
 F-30




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##### Table of Contents



The investment in Editorial Celular, S.A. de C.V. is accounted for by the
equity method. For each of the three years in the period ended December 31,
2003, the Groups share of net (losses) earnings of Editorial Celular, S.A. de
C.V. was of Ps.1,134, (Ps.10,129) and Ps.2,794, respectively. For the year
ended December 31, 2001, the gain on sale of equity investments was of
Ps.4,370. During 2003, the Mexican Association of Cellular Concessionaires, A. C. (AMCEL)
entered into liquidation and for this reason, the Group wrote-down its
investment in such entity recording a loss of Ps.18,678 which is presented in
the line equity participation in net loss of associated companies and net loss
on sale of equity investments, in the consolidated income statement for the
year ended December 31, 2003. NOTE 8  PROPERTY AND EQUIPMENT, NET:  a.
    
    At December 31, property and equipment, net, consisted of: 2003
    
    2002Buildings and facilities
    
    

    
    
    
    Ps.
    1,819,448
    
    
    

    
    
    
    Ps.
    1,790,057Communications equipment
    
    
    
    
    
    
    12,157,387
    
    
    
    
    
    
    
    12,031,840Furniture and fixtures
    
    
    
    
    
    
    424,379
    
    
    
    
    
    
    
    412,868Transportation equipment
    
    
    
    
    
    
    54,206
    
    
    
    
    
    
    
    64,476Computer equipment
    
    
    
    
    
    
    1,924,302
    
    
    
    
    
    
    
    1,841,196Cellular rental telephones
    
    
    
    
    
    
    10,255
    
    
    
    
    
    
    
    10,32316,389,977
    
    
    
    
    
    
    
    16,150,760Accumulated depreciation
    
    
    
    
    
    
    (9,072,842
    )
    
    
    
    
    
    
    (7,300,942
    )7,317,135
    
    
    
    
    
    
    
    8,849,818Land
    
    
    
    
    
    
    87,024
    
    
    
    
    
    
    
    74,980Construction in progress
    
    
    
    
    
    
    282,826
    
    
    
    
    
    
    
    814,220Advances to suppliers
    
    
    
    
    
    
    2,068
    
    
    
    
    
    
    
    1,127Ps.
    7,689,053
    
    
    

    
    
    
    Ps.
    9,740,145
 b. Depreciation expense was Ps.1,697,443, Ps.1,507,376 and Ps.1,370,702 for
2003, 2002 and 2001, respectively. F-31




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##### Table of Contents



c.
    
    In December 1999, the Company entered into a series of agreements with
MATC Celular, S. de R. L. de C. V. (an affiliated company of American
Tower Corporation) (MATC Celular). These agreements, among other things,
gave MATC Celular the right to acquire approximately 350 existing Iusacell
Celular non-strategic towers. During 2003, 2002 and 2001, the Group sold
34, 76 and 244 non-strategic towers to MATC Celular, respectively, for
Ps.95,451 (U.S.$8,500), Ps.118,668 (U.S.$11,400) and Ps.383,305
(U.S.$36,600), respectively, generating a gain on the sale, before taxes,
of Ps.88,556, Ps.104,998 and Ps.338,388, respectively. As a part of this
agreement, a subsidiary of Iusacell signed a lease contract for the same
towers with MATC Celular for a minimum mandatory term of ten years, a term
that could be automatically extended for two additional periods of five
years each. In December 2003, the Group extended the agreements with MATC
Celular which, among other things, gave MATC Celular the right to acquire
up to 143 additional towers, which will be also leased by the Group under
conditions similar to the original agreement (Note 13a.) During 2004 and
until the issuance date of these financial statements, the Group has sold
46 additional towers.Under Mexican GAAP, Bulletin D-5, Leases, (Bulletin D-5) establishes the
general criteria for capital and operating lease transactions.
Sale-leaseback transactions are recognized with the use of the general
criteria of Bulletin D-5. The timing of the recognition of a gain derived
from sale-leaseback transactions should be based on the subsequent lease
classification criteria of the leaseback portion of the transaction. If the
subsequent leaseback is accounted for as an operating lease, full immediate
gain recognition is allowed, whereas, if the subsequent leaseback is
accounted for as a capital lease, the gain is deferred and amortized in
proportion with the estimated useful life of the asset leased. Based upon
this criteria, the sale-leaseback agreement with MATC Celular was recorded by
the Group as an operating lease and consequently, the Ps.88,556, Ps.104,998
and Ps.338,388 gains were recognized at the date of the sale and have been
recorded as other operating income in the consolidated income statements for
the years ended December 31, 2003, 2002 and 2001.d.
    
    During the year ended December 31, 2003, Groups management performed a
study of its communications equipment. Based on this study and on the new
business plan of the Group, the Groups management wrote-down certain
communications equipment to record it at its estimated net realizable
value, resulting in a charge to income of Ps.404,700, presented as a
special item in the consolidated income statement for the year ended
December 31, 2003. F-32




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##### Table of Contents



NOTE 9  OTHER ASSETS, NET:  a.
    
    At December 31, other assets consisted of the following: 2003
    
    2002Concessions
    
    

    
    
    
    Ps.
    1,618,350
    
    
    

    
    
    
    Ps.
    1,618,350Cellular telephones (Note 4g.)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    376,579Advance payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    639,538Pre-operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,442Other
    
    
    
    
    
    
    1,268
    
    
    
    
    
    
    
    110,412Deferred income taxes, net (Note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170,3731,619,618
    
    
    
    
    
    
    
    3,060,694Accumulated amortization
    
    
    
    
    
    
    (523,529
    )
    
    
    
    
    
    
    (691,790
    )Ps.
    1,096,089
    
    
    

    
    
    
    Ps.
    2,368,904
  b.
    
    Concessions (and until 2002, telephones) amortization expense was
Ps.149,345, Ps.643,879 and Ps.1,321,348 in 2003, 2002 and 2001,
respectively.c.
    
    As discussed in Note 4n., during 2003 the Group wrote down intangible
assets for Ps.315,081 that mainly consisted of: (i) Pre-operating expenses
originated by the start-up operations of PCS in northern Mexico and (ii)
certain payments made by the Group to Teléfonos de México, S.A. de C.V.
(Telmex) related to the special projects implemented by Telmex to permit
competition in long distance telephony (Note 13c.). This write down of
intangible assets is presented as a special item in the consolidated
income statement for the year ended December 31, 2003.d.
    
    During the third quarter of 2003, the Group wrote-off installation
expenses for Ps.507,625 and advance payments for Ps.166,479, these advance
payments related to the expenses incurred by the Group 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 the
consolidated income statement for the year ended December 31, 2003.e.
    
    During 2003, the Group increased the valuation allowance of its net
deferred income tax asset (Note 12). F-33




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##### Table of Contents



NOTE 10  NOTES PAYABLE AND LONG-TERM DEBT: As of December 31, 2003 and 2002, the long-term debt of the Company consisted
of the following: U.S. Dollars 2003
    
    2003
    
    2002Secured Senior Notes Due 2004 (a)
    
    

    
    
    
    U.S.$
    150,000
    
    
    

    
    
    
    Ps.
    1,684,500
    
    
    

    
    
    
    Ps.
    1,628,218Unsecured Senior Notes Due 2006 (b)
    
    
    
    
    
    
    350,000
    
    
    
    
    
    
    
    3,930,500
    
    
    
    
    
    
    
    3,799,174BNP credit agreement (c)
    
    
    
    
    
    
    23,232
    
    
    
    
    
    
    
    260,899
    
    
    
    
    
    
    
    252,183BNP refaccionario loan (d)
    
    
    
    
    
    
    3,416
    
    
    
    
    
    
    
    38,368
    
    
    
    
    
    
    
    37,084Amended and Restated Senior Secured
Credit Loan Agreement (e)
    
    
    
    
    
    
    265,622
    
    
    
    
    
    
    
    2,982,929
    
    
    
    
    
    
    
    2,883,263792,270
    
    
    
    
    
    
    
    8,897,196
    
    
    
    
    
    
    
    8,599,922Current portion of long-term debt
    
    
    
    
    
    
    792,270
    
    
    
    
    
    
    
    8,897,196
    
    
    
    
    
    
    
    80,763U.S.$
    
    
    
    

    
    
    
    Ps.
    
    
    
    

    
    
    
    Ps.
    8,519,159
  a.
    
    Secured Senior Notes Due 2004On July 25, 1997, Iusacell Celular completed an offering of long- term,
secured senior notes due July 15, 2004 for U.S.$150,000, accruing
interest at a fixed rate of 10.00%, payable semi-annually starting
January 15, 1998 (the Secured Senior Notes Due 2004). The Secured
Senior Notes Due 2004 were redeemable at the option of Iusacell
Celular, in whole or in part, at any time on or after July 15, 2001
starting at a redemption price of 105.00% of principal amount plus
accrued interest, if any, declining to 102.50% after July 15, 2002, and
finally to 100.00% after July 15, 2003.The Secured Senior Notes Due 2004 could also be redeemed at a price
equal to 100.00% of principal amount plus accrued interest, if any, in
the case of legal changes adversely affecting the treatment of the
withholding taxes on payments to holders of the Secured Senior Notes
Due 2004.On July 15, 2003, the Group decided that until concluding with its
restructuring process with its lenders, it would not pay the interest
due on the Secured Senior Notes Due 2004. Since the Group did not make
the interest payments during the 30 day cure period, this originated an
event of default under the indenture governing the Secured Senior Notes
Due 2004. Furthermore, the Group did not pay the interest due in
January 2004. Additionally, the acquisition of Iusacell by Movil Access
(Note 1) constituted a change in control under the indenture governing
the Secured Senior Notes Due 2004. These events entitled the holders of
the Secured Senior Notes Due 2004 with the right to claim, request or
demand the acceleration of the due date of the indebtedness under the
Secured Senior Notes Due 2004. F-34




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##### Table of Contents



On September 11,
2003, the Company announced that Iusacell Celular received a formal
notification of default requesting immediate payment of the indebtedness
under the Secured Senior Notes Due 2004, from a law firm in the United
States of America representing an informal committee which then represented
approximately 51.00% of the holders of the Secured Senior Notes Due 2004.Additionally, on January 14, 2004, a group of note holders representing
approximately 31.00% of the total holders of the Secured Seniors Notes
Due 2004, filed a lawsuit before a Court in New York demanding immediate
payment of the indebtedness under the Secured Senior Notes Due 2004, and
also alleging breach of the Secured Senior Notes Due 2004 indenture
requesting that the Court declare that the holders of the notes are
pari-passu with the lenders under the Amended and Restated Senior
Secured Credit Loan Agreement. On April 19, 2004, this group of holders
of the notes filed an amended complaint and now is also seeking
injunctive relief barring the Company from selling, transferring or
otherwise encumbering the assets pending decision on the merits of their
claim for specific performance (Note 2).b.
    
    Unsecured Senior Notes Due 2006On December 16, 1999, Iusacell completed an offering of long-term, unsecured
senior notes due December 1, 2006 for U.S.$350,000, accruing interest at a
fixed rate of 14.25%, payable semi-annually starting June 1, 2000 (the
Unsecured Senior Notes Due 2006). Iusacell invested approximately
U.S.$133,600 of the net proceeds of the offering in securities in escrow to
secure the first six semi-annual interest payments on the Unsecured Senior
Notes Due 2006. This investment was restricted as to withdrawal and was
utilized to meet the Companys interest commitment on the Unsecured Senior
Notes Due 2006. The last interest payment made with the proceeds invested in
the escrow account was in December 2002.At any time prior to December 1, 2002, Iusacell may redeem in the
aggregate up to 35.00% of the original principal amount of the Unsecured
Senior Notes Due 2006 with the proceeds of one or more public equity
offerings by New Iusacell at a redemption price of 114.25% of principal
amount plus accrued interest, if any. Unsecured Senior Notes Due 2006
may also be redeemed at a price equal to 100.00% of principal amount
plus accrued interest, if any, in the case of legal changes adversely
affecting the treatment of the withholding taxes on payments to holders
of the Unsecured Senior Notes Due 2006.On June 1, 2003, the Group decided that until concluding with its
restructuring process with its lenders, it would not pay the interest
due on the Unsecured Senior Notes Due 2006. Since the Group did not
make the interest payments during the 30 day cure period, this
originated an event of default under the indenture governing the
Unsecured Senior Notes Due 2006. Furthermore, the Group did not pay the
interest due in December 2003. Additionally, the acquisition of
Iusacell by Movil Access (Note 1) constituted a change in control under
the indenture governing the Unsecured Senior Notes Due 2006. These
events entitled the holders of the Secured Senior Notes Due 2004 with
the right to claim, request or demand the acceleration of the due date
of the indebtedness under the Unsecured Senior Notes Due 2006. F - 35




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##### Table of Contents



As of the issuance date of these financial statements, March 26, 2004, the
Company has not been informed if the holders of the notes will exercise this
right (Note 2).  The Group reclassified the Unsecured Senior Notes Due 2006 as a
short-term liability on the consolidated balance sheet as of December
31, 2003.c.
    
    BNP credit agreement, as amendedOn July 12, 2000, a subsidiary of Iusacell obtained financing to acquire
microwave transmission equipment. The financing consists of a
seven-year secured term facility provided by BNP Paribas (guaranteed by
the Eximbank of Norway) in the principal amount of up to U.S.$30,479.
At December 31, 2002, U.S.$25,814 of this facility had been drawn down
and the amount payable is U.S.$23,232.Loans outstanding under the BNP credit agreement provide for interest at a
rate per annum equal to 0.60% above six-month LIBOR. The BNP credit
agreement also included a commitment fee for the unutilized portion of
the credit, calculated by applying 0.40% to the available amount.
Interest under the credit agreement is paid semi-annually starting on
December 2000. Fees under the credit agreement were paid quarterly
starting on September 2000. Principal payments are due in ten equal
semi-annual installments which began in December 2002.For the year ended December 31, 2003, the Group did not make principal
payments due this year and is currently in discussions with BNP Paribas
and the Eximbank of Norway seeking for a debt restructuring agreement
(Note 2).For the years ended December 31, 2003 and 2002, the weighted-average
interest rates were 1.83% and 2.45%, respectively.The BNP Credit agreement is guaranteed by Iusacell.d.
    
    BNP refaccionario loan, as amendedOn July 12, 2000, a subsidiary of Iusacell obtained financing to acquire
microwave transmission equipment. The financing consists of a four year
secured term facility provided by BNP Paribas in the principal amount of
U.S.$5,379. At December 31, 2003, U.S.$4,555 of this facility had been
drawn down and the amount payable is U.S.$3,416.Loans outstanding under the BNP refaccionario loan provide for interest at
a rate per annum equal to 2.00% above six-month LIBOR. The BNP
refaccionario loan also included a commitment fee for the unutilized
portion of the credit, calculated by applying 0.40% to the available
amount. Interest under the refaccionario loan is paid semi-annually
starting on December 2000. Fees under the credit agreement were paid
quarterly starting on September 2000. Principal payments are due in four
equal semi-annual installments which began in December 2003. F - 36




---



##### Table of Contents



For the year ended December 31, 2003, the Group did not make principal
payments due this year and is currently in discussions with BNP Paribas
seeking for a debt restructuring agreement (Note 2).For the years ended December 31, 2003 and 2002, the weighted-average
interest rates were 3.23% and 3.87%, respectively.The BNP refaccionario loan is guaranteed by Iusacell.e.
    
    Amended and Restated Senior Secured Credit Loan AgreementOn March 29, 2001, Iusacell Celular completed the restructuring of its
long-term bank loan, its revolving credit facility, and the payment of the
Eximbank financing and the Commerzbank financing by entering into an amended
and restated senior secured loan agreement (the Amended and Restated Senior
Secured Credit Loan Agreement), which consists of:  (i)
    
    The Tranche A Loan for an aggregate principal amount of U.S.$189,805
for the purpose of refinancing existing indebtedness under the
long-term bank loan and the revolving credit facility and under a
certain bridge loan used to pay the January 2001 principal amortization
payments under the long-term bank loan and the revolving credit
facility.(ii)
    
    The Tranche B Loan for an aggregate principal amount of U.S.$75,817
for the purpose of paying existing indebtedness under the Eximbank
financing and the Commerzbank financing and under a certain bridge loan
used to pay also in January 2001 a principal amortization payment under
the Commerzbank financing.  The Amended and Restated Senior Secured Credit Loan Agreement provides for
interest at a rate per annum equal to one, two, three or six month LIBOR at
Iusacell Celulars option plus a spread ranging, depending on Iusacell
Celulars leverage ratio, from 1.75% to 2.25% with quarterly interest
payments which began on May 29, 2001. Principal installments will be due
beginning 2004 through 2006.  There was no gain or loss recognized from this loan restructuring. F - 37




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##### Table of Contents



On December 7, 2001 the Amended and Restated Senior Secured Credit Loan
Agreement was amended, and a waiver and consent were granted by the lenders
allowing Iusacell Celular to (i) create liens encumbering initial deposits
and margin deposits securing indebtedness under any interest rate protection
agreement or other interest hedging agreement up to the principal amount of
indebtedness of Iusacell Celular and its subsidiaries with floating rates of
interest; (ii) make loans or advances to Iusacell in lieu of paying
dividends at such times and in such amounts as necessary to permit Iusacell
to pay scheduled interest (including any tax gross-up with respect thereto)
and principal payments as and when due in respect to the Unsecured Senior
Notes Due 2006 and (iii) make loans or advances to Iusacell in lieu of
paying dividends in an amount not to exceed U.S.$5,000, so long as an event
of default has not occurred, to discharge other liabilities of Iusacell
incurred in the ordinary course of business.On March 27, 2003, Iusacell Celular announced that it received notification
from lenders of the occurrence of two technical defaults under the Amended
and Restated Senior Secured Credit Loan Agreement. The underlying defaults
are due to the failure to obtain the consent of the lenders prior to the
closing and opening of certain bank accounts and the failure to effect the
registration of a mortgage on certain newly acquired assets within the time
period specified in the Amended and Restated Senior Secured Credit Loan
Agreement.On April 28, 2003, as part of its debt restructuring effort, Iusacell
Celular received a temporary Amendment and Waiver (the Amendment) of the
Debt/EBITDA leverage ratio and certain other provisions and technical
defaults under the Amended and Restated Senior Secured Credit Loan
Agreement. The Amendment was scheduled to expire on May 22, 2003 and at
its expiration date the Amendment was extended to June 13, 2003 and
further extended several times. In October 2003, the Amendment was not
further extended, and upon its expiration Iusacell Celular is in default
of its Debt/EBITDA leverage ratio, which constitutes an event of default
under the Amended and Restated Senior Secured Credit Loan Agreement, and
the lenders under the Amended and Restated Senior Secured Credit Loan
Agreement were entitled with the right to request the acceleration of
the due date of such Amended and Restated Senior Secured Credit Loan
Agreement. Additionally, Iusacell Celular exceeded the aggregate amount
for the incurrence of Attributable Debt under the Amended and Restated
Senior Secured Credit Loan Agreement (Note 2).f.
    
    Covenants and collateralThe Amended and Restated Senior Secured Credit Loan Agreement, the BNP
credit agreement, the BNP refaccionario loan, the Secured Senior Notes
Due 2004 and the Unsecured Senior Notes Due 2006 contain certain
restrictive covenants, including the maintenance of certain financial
ratios, restrictions on incurring additional debt, limitations on
capital expenditures and restrictions on the sale or lease of Iusacell
Celulars assets. F - 38




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##### Table of Contents



Iusacell Celulars obligations under the amended and restated syndicated loan
are unconditionally guaranteed, jointly and severally, by the principal
operating and cellular concession-holding subsidiaries of Iusacell Celular
and are secured by the pledge of substantially all capital stock and equity
interests held by Iusacell Celular and by all cellular concessions, and by a
first lien on substantially all assets used in connection with or related to
such concessions.At December 31, 2003, all of the Companys debt is classified as current
liabilities (Note 2).g.
    
    Notes payableAs of December 31, 2002, notes payable consisted of a handset
acquisition financing facility from Banco Santander Mexicano, S.A.
(Santander) obtained by Iusacell Celular on February 25, 2002, which
consisted of a one-year unsecured credit facility in a principal amount
of U.S.$12,000. Loans outstanding under this facility provided for
interest at an annual variable rate of LIBOR plus a spread of 1.00%.
Interest was paid quarterly. At the maturity date of this facility,
February 25, 2003, Iusacell Celular reached an agreement with Santander
to refinance a portion of this facility under which Iusacell Celular
paid Santander U.S.$7,000 plus accrued interest, and refinance the
remaining U.S.$5,000. The refinanced facility consisted of an unsecured
five-months credit facility in a principal amount of U.S.$5,000 bearing
interest at an annual fixed rate of 3.84%. Interest and principal
would be paid in five equal monthly installments starting March 25,
2003. This facility contains certain restrictive covenants.On May 29, 2003, Iusacell Celular reached an agreement with Santander to
repay the remaining balance of U.S.$3,000 under the refinanced credit
facility. Under this agreement, Iusacell Celular and Santander agreed to
settle the remaining amount for U.S.$1,500. Iusacell Celular recognized the
difference as an early extinguishment of debt under Mexican GAAP Bulletin C-9
and recorded this amount as an extraordinary gain for the year ended December
31, 2003. NOTE 11   NOTES PAYABLE TO SUPPLIERS: As of December 31, notes payable to suppliers consisted of the following: U.S. Dollars 2003
    
    2003
    
    2002Short-term:The Harris Facility
    
    
    
    
    
    
    
    
    
    Ps.
    12,900Standard Bank facility
    
    U.S.$
    2,010
    
    
    Ps.
    22,576
    
    
    
    U.S.$
    2,010
    
    
    Ps.
    22,576
    
    
    Ps.
    12,900Long-term:The Harris Facility
    
    U.S.$
    4,307
    
    
    Ps.
    48,368
    
    
    Ps.
    100,302Standard Bank facility
    
    
    3,940
    
    
    
    44,247
    
    
    
    U.S.$
    8,247
    
    
    Ps.
    92,615
    
    
    Ps.
    100,302
 F - 39




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##### Table of Contents



On August 18, 2000, the Group through one of its subsidiaries entered into a
framework agreement, as amended, with its supplier Harris, S. A. de C. V. for
the purchase, construction, installation and financing of microwave equipment
in a principal amount of up to U.S.$10,873. As of December 31, 2002, the Group had drawn down five Tranches in a principal
amount of U.S.$10,429 which consists of:  (i)
    
    Tranches 1, 2A, 2B and 2C in a principal amount of U.S.$6,376 bearing
interest at a rate of average term LIBOR plus 1.25%; interest is paid
semiannually starting six months after each draw dawn date. Principal
payments are due in six equal semiannual installments starting two years
after each draw dawn date. Standard Bank acquired this loan and filed a
lawsuit before a New York Court, demanding payment of one of the notes
payable. Standard Bank and the Group reached an agreement and, on December
31, 2003 the Court dismissed the demand.  (ii)
    
    Tranche 2D in a principal amount of U.S.$4,053 bearing interest at a rate
of average term LIBOR plus 3.50%; interest is paid semiannually starting
six months after the draw dawn date. Principal payments are due in four
equal semiannual installments starting two years after the draw dawn date.  The five tranches are guaranteed by the Company.  During the year ended December 31, 2003, the Group did not make principal
and interest payments that came due this year. NOTE 12  INCOME TAX (IT), NET ASSETS TAX (AT) AND EMPLOYEE PROFIT SHARING
(EPS): For the years ended December 31, 2003, 2002 and 2001, the provision for IT and
AT consisted of the following: 2003
    
    2002
    
    2001Current IT and AT
    
    Ps.
    146,525
    
    
    Ps.
    115,647
    
    
    Ps.
    160,908Deferred IT
    
    
    163,852
    
    
    
    9,618
    
    
    
    Total
    
    Ps.
    310,377
    
    
    Ps.
    125,265
    
    
    Ps.
    160,908
 Iusacell Celular has filed annual consolidated income tax returns since the tax
year beginning January 1, 1994. Starting the year ended December 31, 2000,
Iusacell is the holding company for tax consolidation purposes. F - 40




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##### Table of Contents



Beginning January 1, 2003, IT rate in Mexico is 34.00% (35.00% for 2002 and
2001). As a result of the changes to the IT Law approved on January 1, 2002,
the IT rate will be reduced annually beginning in 2003 until it reaches a
nominal rate of 33.00% and 32.00%, in 2004 and 2005, respectively. The effect
of these reductions in the IT rate was considered in the calculation of the
deferred taxes, reducing the deferred IT asset in 2002. For the years ended
December 31, 2003 and 2002, the Group generated tax losses of Ps.1,882,879 and
Ps.2,061,784, respectively. At December 31, 2003 and 2002, the main temporary differences the Group
recognizes for the calculation of deferred income taxes were as follows: 2003
    
    2002Allowance for doubtful accounts
    
    Ps.
    267,081
    
    
    Ps.
    97,328Liability accruals
    
    
    36,831
    
    
    
    34,196Income tax losses carry forwards and tax credits
    
    
    7,950,740
    
    
    
    6,360,829Inventories
    
    
    (255,995
    )
    
    
    (37,119
    )Property and equipment
    
    
    (2,456,676
    )
    
    
    (2,789,084
    )Telephones to be amortized
    
    
    
    
    
    
    (146,971
    )Concessions
    
    
    (304,509
    )
    
    
    (320,536
    )Temporary differences
    
    
    5,237,472
    
    
    
    3,198,643Income tax rate
    
    
    34.00
    %
    
    
    35.00
    %1,780,740
    
    
    
    1,119,525Valuation allowance
    
    
    (1,780,740
    )
    
    
    (939,534
    )Deferred income tax asset
    
    
    
    
    
    
    179,991Income tax rate change
    
    
    
    
    
    
    (9,618
    )Net deferred income tax asset
    
    Ps.
    
    
    
    Ps.
    170,373
 During 2003, the Group increased the net deferred tax asset valuation allowance
which is mainly originated by the effect of the tax loss carry forwards,
reflecting the uncertainty about the ability of the Company to continue as a
going concern. The realization of the net deferred tax asset is dependent on
generating sufficient taxable income prior to expiration of the loss carry
forwards. The Companys management estimates that considering the present
situation of the Group the realization of the tax losses can not be assured
through the generation of sufficient taxable income during the following years
(Note 2). F - 41




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##### Table of Contents



As of December 31, 2003 and 2002, the Group had a valuation allowance of
Ps.1,780,740 and Ps.939,534, respectively, to reduce its deferred tax assets to
estimated realizable value. The valuation allowance primarily relates to the
deferred tax assets arising from tax loss carry forwards and tax credits. At December 31, 2003, the Group had the following net operating losses for IT
purposes that may be carried forward and applied against future taxable
earnings: Year of
    
    Amount
    
    Expirationloss
    
    of loss
    
    year1994
    
    Ps.
    105,026
    
    
    20041995
    
    
    254,245
    
    
    20051996
    
    
    120,097
    
    
    20061997
    
    
    200,536
    
    
    20071998
    
    
    994,731
    
    
    20081999
    
    
    340,426
    
    
    20092000
    
    
    784,252
    
    
    20102001
    
    
    1,023,564
    
    
    20112002
    
    
    2,061,784
    
    
    20122003
    
    
    1,882,879
    
    
    2013
 These losses are indexed for inflation from the year incurred to the sixth
month of the year utilized. Accordingly, these amounts include inflation
through June 2003. The 1.80% AT is calculated on the average value of substantially all assets
less certain liabilities. This tax is required to be paid if this computation
exceeds the amount of income tax. The 1.80% AT paid may be utilized as a
credit against future income tax in the years in which the Company generates IT
in excess of the AT. The AT is available as a carry forward for up to ten
years and is subject to restatement based on the NCPI when used. As of December
31, 2003, AT available as a carry forward was Ps.62,288 which expires in 2007. EPS, generally 10.00%, is computed on taxable income, with adjustments to
exclude inflationary effects and the restatement of depreciation expense. In
the years ended December 31, 2003 and 2002, the Company did not generate any
taxable income for profit sharing purposes. F - 42




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##### Table of Contents



The effective rate reconciliation as of December 31, was as follows: 2003
    
    2002
    
    2001Loss on continuing operations before taxes
    
    (Ps.
    4,288,003
    )
    
    (Ps.
    2,059,013
    )
    
    (Ps.
    404,239
    )Statutory IT rate
    
    
    34.00
    %
    
    
    35.00
    %
    
    
    35.00
    %Income Tax (benefit) expense at statutory rate
    
    
    (1,457,921
    )
    
    
    (720,655
    )
    
    
    (141,484
    )Add (deduct):Inventory purchases less cost of sales
    
    
    (24,077
    )
    
    
    (218,358
    )
    
    
    (1,654
    )Depreciation and amortization
    
    
    (118,468
    )
    
    
    (296,972
    )
    
    
    (257,830
    )Differences between interest and inflationary
gains or losses
    
    
    364,814
    
    
    
    223,992
    
    
    
    83,412Provision for doubtful accounts
    
    
    67,399
    
    
    
    20,445
    
    
    
    (4,152
    )Telephones to be amortized
    
    
    
    
    
    
    138,674
    
    
    
    214,136Goodwill amortization
    
    
    71,736
    
    
    
    64,836
    
    
    
    65,331Intangible assets write-offs
    
    
    385,884
    
    
    
    
    
    
    
    Income tax rate change
    
    
    
    
    
    
    3,367
    
    
    
    Other
    
    
    70,454
    
    
    
    (14,128
    )
    
    
    38,136IT (benefit) expense for the year
    
    (Ps.
    640,179
    )
    
    (Ps.
    798,799
    )
    
    (Ps.
    4,105
    )Deferred IT valuation allowance
    
    
    640,179
    
    
    
    798,799
    
    
    
    4,105Net IT (benefit) expense for the year
    
    
    
    
    
    
    
    
    
    
    Effective rate
    
    
    15.00
    %
    
    
    39.00
    %
    
    
    1.00
    %
 NOTE 13  COMMITMENTS AND CONTINGENCIES: As of December 31, 2003, the Group had the following commitments and contingent
liabilities:  a.
    
    The Group has entered into operating lease agreements for administrative
offices, sales branches and service facilities and since 2001, operating
lease agreements with Iusacell Arrendadora, S.A. de C.V. (subsidiary
company) for the lease of towers (Note 8c.). These lease agreements
expire at various dates through 2011, and some agreements contain options
for renewal. Lease expense was Ps.480,344, Ps.398,079 and Ps.172,728 for
the years ended December 31, 2003, 2002 and 2001, respectively. Future
annual minimum rental payments under existing leases as of December 31,
2003 are as follows: 2004
    
    Ps.
    398,9892005
    
    
    416,2842006
    
    
    434,3772007
    
    
    453,2672008
    
    
    472,988Thereafter
    
    
    1,030,262Ps.
    3,206,167
 F - 43




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##### Table of Contents



b.
    
    Iusacell Celular has certain commitments from his joint venture agreement
with Infomin for the incorporation of Infotelecom (Note 3). Iusacell
Celular committed to contribute up to U.S.$10,500. As of December 31,
2001, the Company had invested U.S.$10,500. Additionally, if a partner
does not fulfill its responsibilities under the joint venture agreement,
sanctions could cause such partner to lose its investment and incur a
penalty of up to U.S.$1,000.c.
    
    During April 2001, Iusatel, a subsidiary of the Company, reached an
agreement to settle the outstanding amounts due related to the special
projects implemented by Telmex to permit competition in long distance
telephony. Iusatel agreed to pay for its portion of such special projects
in two parts: (i) a fixed payment of approximately U.S.$13,600, payable in
twelve equal monthly installments beginning in April 2001, and (ii) a
U.S.$0.0053 per full minute, usage-based surcharge to the local wire line
interconnection rate from January 1, 2001 through December 31, 2004 for
long distance calls terminated in Telmexs local wire line network.d.
    
    Iusacell, S. A. de C.V., a subsidiary of the Company, decided to sue and
seek compensatory damages from one of the Company  ́s distributors as a
result of the latters decision to breach their distribution agreement.
In the same act, such distributor also sued Iusacell, S. A. de C. V.
The decision of the Court in the first instance was not to set a favorable
opinion to any of the parts. Both parties appealed the Courts decision.
During 2003 this process was settled without any damage to the Group.e.
    
    On January 1, 2002, the Mexican Congress approved a tax law reform that
assesses an additional 10.00% excise tax on certain wireless
telecommunications services. In February 2002 the Company and some of its
subsidiaries filed an injunction action to challenge the Mexican
governments implementation of the tax. The Group obtained a favorable
resolution against this 10.00% excise tax and the Mexican government filed
an appeal.On June 6, 2003, the Group was officially notified that by disposition of the
appeal filed by the Mexican government, Mexicos Supreme Court affirmed the
ruling in favor of the Group in their injunction filed against the
above-mentioned excise tax for 2002. The Group is in the process to obtain
the refund of the tax paid for the year 2002 and the Court has requested that
the authorities comply with the injunction resolution.In February 2003, the Company filed an injunction action to challenge the
Mexican government regarding the same 10.00% excise tax for the year 2003.
The Group obtained a favorable resolution and the Mexican government filed an
appeal which is in process. F - 44




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##### Table of Contents



f.
    
    A supplier of the Company has sued Iusacell, S. A. de C. V. for the
improper termination of their agreement. The Company has obtained a
favorable resolution in the first instance. The supplier filed an appeal
and a new resolution was ruled declaring that the claim of the supplier
can proceed against the subsidiary of the Company. The Group has filed an
injunction which is currently in process.The amount claimed by the supplier is Ps.85,023. Based on the Companys
external legal counsels, the Companys management considers that it is
possible that the Group obtains a favorable resolution.g.
    
    A telecommunications company sued SOS Telecomunicaciones, S.A. de C.V., a
subsidiary of the Group. In June 2003 this matter ended since the lawsuit
did not proceed.h.
    
    A client of the Group sued Iusacell, S.A. de C.V., a subsidiary of the
Group, due to a claim for improper termination of their agreement. During
2003, Companys subsidiary obtained a favorable resolution in the first
instance. The client has filed an appeal. The amount claimed by the client
is U.S.$25,000. Based on the Groups external legal counsels, the
Companys management considers it is probable that the Groups subsidiary
obtains a favorable resolution.i.
    
    A services supplier of the Company sued Iusacell, S. A. de C.V. claiming
an improper termination of their agreement. The process is in its
preliminary stage. The amount claimed by this supplier is Ps.7,000. Based
on the Groups external legal counsels, the Companys management considers
it is possible that the Groups subsidiary obtains a favorable resolution.j.
    
    Iusacell, S.A. de C.V., a subsidiary of the Company, was sued by a person
for the improper use of her image. The person has not obtained favorable
resolutions before two different instances. The amount claimed by this
person cannot be determined. Based on the Groups external legal counsels,
the Companys management considers it is possible that the Groups
subsidiary obtains a favorable resolution.k.
    
    Various subsidiaries of the Group are currently in a process before the
Mexican Tax Court to obtain a resolution about their position of not being
subject to certain rights payable to the Telecommunications Ministry in
Mexico over interconnection revenues from calling party pays. The process
is in the first stage on such Court. The amount of rights that the
subsidiaries of the Group consider is not subject to be paid is
approximately Ps.340,000. Based on the Groups external legal counsels,
the Companys management considers it is possible that the Groups
subsidiaries obtain a favorable resolution.l.
    
    Elektra has started collection procedures against the Group to recover an
account payable in the amount of U.S.$7,000 originated from the operations
derived from the contract signed with the Group (Note 5). F - 45




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##### Table of Contents



NOTE 14  CONTRIBUTED CAPITAL: During the years ended December 31, 2003, 2002 and 2001, the following
transactions took place: At the September 29, 2001 stockholders meeting, the Companys stockholders
approved a capital increase of up to Ps.1,024,722 (U.S.$100,000) through the
issuance of 11,223,087 series A shares and 10,516,043 series V shares. The
Companys major stockholders subscribed their proportional part of the
increase and the Company launched a rights offering for the unsubscribed series
V shares. When the offer expired, a total of 4,102,337 series V shares where
subscribed, leaving 2,034,703 series V shares unsubscribed, which were then
subscribed by Verizon through some of its subsidiaries. On October 17, 2003, at an extraordinary stockholders meeting, Companys
stockholders approved a complete amendment of the Companys by-laws and
approved the restructuring of the capital stock of the Company through the
exchange of the two series of shares representing the capital stock of the
Company for new common, ordinary, registered shares with no par value and full
voting rights, at a ratio of 20 series A and/or series V shares, for one new
share. As a result of this approval, Companys stockholders approved the
issuance of 93,101,240 new shares and the cancellation of all series A and
series V shares outstanding. The changes in the number of shares of common stock for the period January 1,
2001 through December 31, 2003 are as follows: Number of sharesJanuary 1, 2001
    
    
    71,362,110September 29, 2001  issuance of shares to
subscribe capital increase
    
    
    21,739,130Balance as of December 31, 2001
    
    
    93,101,240No changes
    
    
    Balance as of December 31, 2002
    
    
    93,101,240No changes
    
    
    Balance as of December 31, 2003
    
    
    93,101,240
 F - 46




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##### Table of Contents



As of December 31, 2003, capital stock is represented by common, ordinary,
registered shares with no par value. These shares have full voting rights and
can be subscribed by Mexican and/or foreign persons or entities once all the
legal requirement for foreign investment as for the ownership percentages of
the Companys capital stock are met. NOTE 15  EXECUTIVE EMPLOYEE STOCK PURCHASE PLAN: Since the second half of 2001, this plan has been inactive. Such plan is
administered by a trust with the assistance of the trust division of a Mexican
bank and by a committee composed of certain executive officers of the Company:
the committee determined to which executive employees the shares will be
offered for purchase, the purchase price per share, the vesting schedule, the
payment terms and all other terms and conditions thereof. A summary of the changes of the stock options for employees for the year ended
December 31, is presented below: 2003
    
    2002
    
    2001Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-average
    
    
    
    
    
    average
    
    
    
    
    
    averageexercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseShares
    
    price
    
    Shares
    
    price
    
    Shares
    
    priceOutstanding at beginning of the year
    
    
    324,256
    
    
    Ps.
    221.00
    
    
    
    324,256
    
    
    Ps.
    221.00
    
    
    
    324,256
    
    
    Ps.
    216.80Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,950
    
    
    
    179.20Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canceled/forfeited /reversed
    
    
    324,256
    
    
    
    221.00
    
    
    
    
    
    
    
    
    
    
    
    32,950
    
    
    
    138.40Outstanding at year end
    
    
    
    
    
    Ps.
    
    
    
    
    324,256
    
    
    Ps.
    221.00
    
    
    
    324,256
    
    
    Ps.
    221.00Shares exercisable at year end
    
    
    
    
    
    
    
    
    
    
    291,306
    
    
    
    
    
    
    
    291,306
 The following table summarizes Stock Purchase Plan options outstanding as of
December 31, 2002 and 2001: Outstanding
    
    ExercisableWeighted-average
    
    
    
    
    
    Weighted-averageRange of
    
    
    
    
    
    Remaining
    
    Exercise
    
    
    
    
    
    exerciseprices
    
    Number
    
    life
    
    price
    
    Number
    
    priceDecember 31, 2001
    
    Ps.
    86.20 - 183.40
    
    
    
    101,821
    
    
    
    3.26
    
    
    
    144.80
    
    
    
    101,821
    
    
    Ps.
    144.80229.20 - 307.00
    
    
    
    189,485
    
    
    
    4.98
    
    
    
    255.80
    
    
    
    189,485
    
    
    
    269.20December 31, 2002
    
    Ps.
    86.20 - 183.40
    
    
    
    101,821
    
    
    
    3.26
    
    
    
    144.80
    
    
    
    101,821
    
    
    Ps.
    144.80229.20 - 307.00
    
    
    
    189,485
    
    
    
    4.98
    
    
    
    255.80
    
    
    
    189,485
    
    
    
    269.20
 F - 47




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##### Table of Contents



NOTE 16  EARNED CAPITAL: Under Mexican law, a legal reserve must be created and increased annually by
5.00% of the annual net earnings until it reaches 20.00% of the nominal amount
of a corporations capital stock. This reserve is not available for dividends,
but may be used to reduce a deficit or be transferred to capital. Dividends paid are not subject to IT if paid from the Net Tax Profit Account
(CUFIN). Any excess over this account is subject to a tax equivalent to 49.25%
and 47.06% depending on whether paid in 2004 and 2005 respectively. The tax is
payable by the Company and may be credited against its IT in the same year or
the following two years. Dividends paid are not subject to withholding tax. At
December 31, 2003, the balance on the CUFIN is approximately Ps.146,600. The
Company currently cannot pay dividends under the covenants of some of its
loans. The contributed capital and earned capital accounts consist of the following: December 31, 2003Accumulated
    
    MajorityHistorical
    
    adjustments for
    
    stockholdersvalue
    
    inflation
    
    equityCapital stock subscribed
    
    Ps.
    5,932,620
    
    
    Ps.
    1,491,092
    
    
    Ps.
    7,423,712Capital contributions
    
    
    1,209,952
    
    
    
    250,926
    
    
    
    1,460,878Legal reserve
    
    
    16,688
    
    
    
    4,176
    
    
    
    20,864Accumulated losses from prior years
    
    
    (3,618,913
    )
    
    
    65,108
    
    
    
    (3,553,805
    )Net loss for the year
    
    
    (4,371,024
    )
    
    
    (337,717
    )
    
    
    (4,708,741
    )Accumulated other comprehensive income
    
    
    173,102
    
    
    
    43,317
    
    
    
    216,419Total
    

    (Ps.
    657,575
    )
    
    Ps.
    1,516,902
    
    
    Ps.
    859,327
 December 31, 2002Accumulated
    
    MajorityHistorical
    
    adjustments for
    
    stockholdersvalue
    
    inflation
    
    equityCapital stock subscribed
    
    Ps.
    5,932,620
    
    
    Ps.
    1,491,092
    
    
    Ps.
    7,423,712Capital contributions
    
    
    1,209,952
    
    
    
    250,926
    
    
    
    1,460,878Legal reserve
    
    
    16,688
    
    
    
    4,176
    
    
    
    20,864Accumulated losses from prior years
    
    
    (1,721,429
    )
    
    
    334,606
    
    
    
    (1,386,823
    )Net loss for the year
    
    
    (1,897,484
    )
    
    
    (269,498
    )
    
    
    (2,166,982
    )Accumulated other comprehensive income
    
    
    173,102
    
    
    
    43,317
    
    
    
    216,419Total
    
    Ps.
    3,713,449
    
    
    Ps.
    1,854,619
    
    
    Ps.
    5,568,068
 F - 48




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##### Table of Contents



NOTE 17  FOREIGN CURRENCY POSITION: The balance sheet as of December 31 includes assets and liabilities denominated
in U.S. Dollars, as follows: 2003
    
    2002Monetary assets
    
    U.S.$
    12,441
    
    
    U.S.$
    14,150Monetary liabilities
    
    
    970,659
    
    
    
    875,766Net monetary liability position
in U.S. Dollars
    
    U.S.$
    958,218
    
    
    U.S.$
    861,616Equivalent in nominal Mexican pesos
    
    Ps.
    10,760,788
    
    
    Ps.
    8,994,668
 As of December 31, 2003 and 2002, most of the communications equipment and
inventories of cellular telephones and accessories are of foreign origin (Notes
6 and 8). During 2003, 2002 and 2001, interest income and interest expense on assets and
liabilities denominated in U.S. Dollars were as follows: 2003
    
    2002
    
    2001Interest income
    
    U.S.$
    456
    
    
    U.S.$
    1,356
    
    
    U.S.$
    9,446Interest expense
    
    
    81,891
    
    
    
    82,317
    
    
    
    90,128Net interest expense
    
    U.S.$
    81,435
    
    
    U.S.$
    80,961
    
    
    U.S.$
    80,682Equivalent in nominal Mexican
Pesos
    
    Ps.
    914,515
    
    
    Ps.
    845,176
    
    
    Ps.
    739,814
 Operating results for the years ended December 31, 2003, 2002 and 2001 include
depreciation and amortization expenses, related to fixed assets and inventories
of foreign origin. The exchange rates as of December 31, 2003 and 2002 were Ps.11.2300 and
Ps.10.4393, per U.S. Dollar, respectively. At the issuance date of these
financial statements, March 26, 2004, the exchange rate in effect was
Ps.11.0130 per U.S. Dollar. F - 49




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##### Table of Contents



NOTE 18  FINANCIAL INSTRUMENTS: The Group determines the fair value of outstanding financial instruments as
follows:  a.
    
    Cash and cash equivalents: the carrying value approximates fair value due
to its short-term nature.b.
    
    Accounts receivable and payable: the carrying value approximates fair
value due to its short-term nature.c.
    
    Notes payable: Carrying value approximates fair value due to its
short-term nature.d.
    
    Long-term debt: the Group estimates the fair value of its long-term debt
based on public and current rates available for debt of the same remaining
duration.e.
    
    Derivatives: the Group determined the fair value of derivative financial
instruments as follows:  Foreign-currency exchange forward contractsThe Group purchased foreign-currency exchange forward contracts with contract
terms of up to three years to protect itself against the adverse effect that
exchange rate fluctuations may have on foreign currency-denominated
liabilities, principally U.S. dollars.During 2002 and 2001, the Group used derivative instruments to hedge its
foreign-currency exposure of approximately 50.00% of the principal and
interest payments coming due over the next year. In August and October 2001,
the Group also used foreign-currency exchange forward contracts to hedge its
exchange rate exposure on the Secured Senior Notes Due 2004 for U.S.$150,000
and its interest payments of U.S.$34,500. Until its early termination, these
derivatives were highly effective since a foreign currency rate change on the
forward contract was offset by a corresponding change in the value of the
hedged loan.In October 2002, the Group early terminated its foreign-currency exchange
forward contracts hedging its exchange rate exposure on the Secured Senior
Notes Due 2004, paying a termination fee of U.S.$1,687.As of December 31, 2003 and 2002, the Group does not have any
foreign-currency exchange contracts.Interest rate collarsIn July 1998, Iusacell Celular entered into an interest rate collar agreement
for a notional amount of U.S.$35,000 until July 30, 2002. The collar
agreement limits the maximum effective LIBOR cost to 6.12% if six-month LIBOR
is lower than 7.12% and 7.12% if LIBOR equals or exceeds 7.12%. Iusacell
Celular can participate in a decline in LIBOR to 5.30%. F - 50




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On February 26, 1999, Iusacell Celular entered into an additional interest
rate collar agreement to limit the maximum interest rate, which must be paid
on U.S.$15,000 of its floating rate debt until July 30, 2002. This collar
agreement limits the maximum effective LIBOR cost to 5.82% if six-month LIBOR
is lower than 6.82% and 6.82% if LIBOR equals or exceeds 6.82%. Iusacell
Celular can participate in a decline in LIBOR to 4.75%. These interest rate collars expired during 2002. At December 31, the fair values of financial instruments were as follows: 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    Fairvalue
    
    value
    
    value
    
    valueCash and cash equivalents
    
    Ps.
    5,814
    
    
    Ps.
    5,814
    
    
    Ps.
    166,404
    
    
    Ps.
    166,404Accounts receivable
    
    
    854,319
    
    
    
    854,319
    
    
    
    1,224,514
    
    
    
    1,224,514Accounts payable
    
    
    2,104,875
    
    
    
    2,104,875
    
    
    
    1,415,697
    
    
    
    1,415,697Notes payable
    
    
    
    
    
    
    
    
    
    
    130,258
    
    
    
    130,258Long-term debt:Secured Senior Notes Due
2004
    
    
    1,684,500
    
    
    
    943,320
    
    
    
    1,628,218
    
    
    
    814,108Unsecured Senior Notes Due
2006
    
    
    3,930,500
    
    
    
    1,139,845
    
    
    
    3,799,174
    
    
    
    1,139,752BNP credit agreement
    
    
    260,899
    
    
    
    260,899
    
    
    
    252,183
    
    
    
    252,183BNP refaccionario loan
    
    
    38,368
    
    
    
    38,368
    
    
    
    37,084
    
    
    
    37,084Amended and Restated Senior
Secured Credit Loan Agreement
    
    
    2,982,929
    
    
    
    2,982,929
    
    
    
    2,883,263
    
    
    
    2,883,263
 NOTE 19  SEGMENT INFORMATION: Beginning the year ended December 31, 2003, the Group prepares segment
information based on Bulletin B-5 Segment Financial Information issued by the
MIPA (Bulletin B-5). Before this date, the Groups segment data was prepared in
accordance with International Accounting Standard No.14 (revised). The adoption
of Bulletin B-5 did not change the way in which the Group prepares this
information. Reportable segments are those that are based on the Groups method
of internal reporting. F - 51




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The Group has three reportable segments that it operates and manages as
strategic business units that offer different products and services. The Group
measures its reportable segments based on operating profit (loss), including
inter-segment revenues and corporate expenses that are allocated to the
operating segments and excluding any non-recurring items. Inter-segment
transactions are accounted for at current market prices. The Group evaluates
the performance of its segments and allocates resources to them based on
operating income (loss). The accounting policies underlying the reported
segment data are the same as those described in the summary of significant
accounting policies (Note 4). The Groups three reportable segments and their principal activities are: Cellular  The Group operates and provides wireless cellular telephone services
in five of the nine Regions in the Mexican market. The Group serves customers
in large metropolitan areas such as Mexico City, Guadalajara, León, Puebla and
Mérida. The Groups services include value added services such as voice mail
and caller identification of incoming calling numbers. Long distance  The Group provides long distance services for which its first
natural market is its cellular subscriber base. The Group is also providing
these services to residential and commercial entities. The Group uses its own
switches and transmission equipment and a combination of fiber optic lines,
microwave links, satellite transmission and lines leased from Telmex to provide
these services. Other businesses  The Group provides paging, local telephony, microwave links
and data transmission services. It has concessions for PCS services, which
started to be provided at the end of 2002. The tables below present information about reportable segments for the years
ended December 31, 2003, 2002 and 2001 under Mexican GAAP measurement: Year ended December 31, 2003Long
    
    Other
    
    Total
    
    Reconciling
    
    TotalCellular
    
    distance
    
    businesses
    
    segments
    
    items
    
    consolidatedRevenues  third party
    
    Ps.
    4,583,784
    
    
    Ps.
    111,043
    
    
    Ps.
    43,699
    
    
    Ps.
    4,738,526
    
    
    
    
    
    
    Ps.
    4,738,526Revenues  affiliates
    
    
    5,819,691
    
    
    
    265,435
    
    
    
    1,394,277
    
    
    
    7,479,403
    
    
    (Ps.
    7,479,403
    )
    
    
    Depreciation and
amortization
    
    
    1,727,355
    
    
    
    140,096
    
    
    
    190,324
    
    
    
    2,057,775
    
    
    
    
    
    
    
    2,057,775Operating loss
    
    
    (1,276,639
    )
    
    
    (72,939
    )
    
    
    (177,543
    )
    
    
    (1,527,121
    )
    
    
    
    
    
    
    (1,527,121
    )Total assets
    
    
    16,613,155
    
    
    
    1,077,259
    
    
    
    12,081,981
    
    
    
    29,772,395
    
    
    
    (17,959,036
    )
    
    
    11,813,359Capital expenditures
    
    
    185,194
    
    
    
    369
    
    
    
    19,337
    
    
    
    204,900
    
    
    
    
    
    
    
    204,900
 F - 52




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Year ended December 31, 2002Long
    
    Other
    
    Total
    
    Reconciling
    
    TotalCellular
    
    distance
    
    businesses
    
    segments
    
    items
    
    consolidatedRevenues  third parties
    
    Ps.
    5,429,539
    
    
    Ps.
    280,742
    
    
    Ps.
    36,647
    
    
    Ps.
    5,746,928
    
    
    
    
    
    
    Ps.
    5,746,928Revenues - affiliates
    
    
    4,332,212
    
    
    
    337,867
    
    
    
    1,541,488
    
    
    
    6,211,567
    
    
    (Ps.
    6,211,567
    )
    
    
    Depreciation and
amortization
    
    
    2,046,240
    
    
    
    128,786
    
    
    
    163,368
    
    
    
    2,338,394
    
    
    
    (1,896
    )
    
    
    2,336,498Operating loss
    
    
    (62,142
    )
    
    
    (143,857
    )
    
    
    (212,091
    )
    
    
    (418,090
    )
    
    
    (57,423
    )
    
    
    (475,513
    )Total assets
    
    
    19,373,768
    
    
    
    1,436,103
    
    
    
    13,562,936
    
    
    
    34,372,807
    
    
    
    (18,648,297
    )
    
    
    15,724,510Capital expenditures
    
    
    514,450
    
    
    
    13,836
    
    
    
    356,523
    
    
    
    884,809
    
    
    
    
    
    
    
    884,809
 Year ended December 31, 2001Long
    
    Other
    
    Total
    
    Reconciling
    
    TotalCellular
    
    distance
    
    businesses
    
    segments
    
    items
    
    consolidatedRevenues  third parties
    
    Ps.
    6,463,800
    
    
    Ps.
    322,552
    
    
    Ps.
    73,414
    
    
    Ps.
    6,859,766
    
    
    
    
    
    
    Ps.
    6,859,766Revenues - affiliates
    
    
    3,310,903
    
    
    
    695,543
    
    
    
    1,514,952
    
    
    
    5,521,398
    
    
    (Ps.
    5,521,398
    )
    
    
    Depreciation and
amortization
    
    
    2,720,753
    
    
    
    112,012
    
    
    
    54,815
    
    
    
    2,887,580
    
    
    
    (8,872
    )
    
    
    2,878,708Operating loss
    
    
    (460,940
    )
    
    
    (129,490
    )
    
    
    (82,491
    )
    
    
    (672,921
    )
    
    
    610,208
    
    
    
    (62,713
    )Total assets
    
    
    30,425,825
    
    
    
    1,027,599
    
    
    
    2,326,804
    
    
    
    33,780,228
    
    
    
    (15,566,800
    )
    
    
    18,213,428Capital expenditures
    
    
    1,694,012
    
    
    
    98,346
    
    
    
    178,795
    
    
    
    1,971,153
    
    
    
    
    
    
    
    1,971,153
 NOTE 20  SIGNIFICANT DIFFERENCES BETWEEN MEXICAN
 GAAP AND ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA The Groups consolidated financial statements are
 prepared in accordance with Mexican GAAP, which varies in certain significant respects from
accounting principle generally accepted in the United States of America (U.S. GAAP). The reconciliation to U.S. GAAP does not include the reversal of the
adjustments to the financial statements for the effects of inflation required
under Mexican Bulletin B-10. The application of Bulletin B-10 represents a
comprehensive measure of the effects of price-level changes in the financial
statements based on historical cost for Mexican and U.S. accounting purposes.
The principal differences, other than inflation accounting, between Mexican and
U.S. GAAP are listed below together with an explanation, where appropriate, of
the adjustments that affect consolidated net income for each of the three years
in the period ended December 31, 2003, and stockholders equity as of December
31, 2003 and 2002. F - 53




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a. Deferred income taxes Under Mexican GAAP, the Group
applies revised Bulletin D-4 as described in Note 4p. For purposes of the reconciliation to U.S. GAAP, the Group has
applied Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes, for all periods presented. The U.S. GAAP adjustment to
deferred income taxes exists as a result of the U.S. GAAP adjustments
changing the book basis which impacts various deferred
tax balances and the related valuation allowance. SFAS 109 requires an asset and liability method of accounting whereby deferred
taxes are recognized for the tax consequences of all temporary differences
between the financial statement carrying amounts and the related tax basis of
assets and liabilities. Under U.S. GAAP, the effect on deferred taxes of a
change in tax rate is recognized in income in the period that includes the
enactment date. b. Pre-operating costs Under Mexican GAAP, the Group capitalized certain pre-operating costs,
primarily related to the development of the PCS network in regions 1 and 4
until 2001. Under U.S. GAAP, pre-operating costs are expressed as incurred. As discussed in
 Notes 4n. and 9, in 2003 the Group adopted Bulletin
C-8. During the third quarter of 2003 for mexican GAAP purposes the Group wrote down the carrying value
of all its pre-operating expenses and hence, the remaining US GAAP
difference was reversed. c. Derivative financial instruments As mentioned in Note 18, the Group entered into interest rate collar agreements
to hedge an aggregate notional amount of U.S.$50,000 of its floating rate debt.
Additionally, during 2001 the Group purchased foreign-currency forward
exchange contracts, which at December 31, 2001, hedged a notional amount of
U.S.$201,000 in debt. The Group employs risk management strategies using
foreign currency forwards and interest rate collar agreements. The Group does
not hold derivatives for trading purposes. F - 54




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As mentioned in Note 4g., the Group follows Bulletin C-2, which requires that
all financial instruments, including those used for hedging purposes, be
recorded in the balance sheet at their fair value and changes in the fair value
to be recorded in the income statement for each period. Bulletin C-2 also
requires that derivative financial instruments used for hedging purposes, be
recorded in the balance sheet and valued using the same valuation criteria used
to value the hedged asset or liability. Based on these valuation criteria,
under Mexican GAAP since the hedged liabilities are not carried at fair value,
the Group did not record the derivative financial instruments related to those
hedged liabilities at fair value but rather, the Group keeps the derivative
financial instruments valued at the exchange rate at the end of the year. On December 30, 1999 Iusacell Celular entered into a foreign currency hedge
utilizing forward-rate contracts, hedging its exchange rate exposure for up to
U.S.$77,000 or approximately 50% of the principal and interest payments coming
due over the period April 2000 to April 2001. Under U.S. GAAP, effective January 1, 2001, the Group adopted SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, as amended by
SFAS 137 and 138. Under SFAS 133, all derivatives are also recognized on the
balance sheet at their fair value. The Groups derivative financial instruments are classified as cash flow hedges
based on certain criteria established by SFAS 133. Accordingly, the effective
portion of the gain or loss of the hedged instrument is reported in accumulated
other comprehensive income, and its ineffective portion is reported in
earnings. All of the Groups derivatives were considered highly effective. The
portion of accumulated other comprehensive income to be reclassified into
earnings over the next 12 months is expected to be immaterial. The cumulative effect on the adoption of this new accounting pronouncement
amounted to Ps. 7,120 as of January 1, 2001. All derivative financial instrument arrangements were terminated as of December 31, 2002. F - 55




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d. Gain from the exchange of non-monetary assets During 2002 and 2001, the Company entered into certain fiber optic cable swap
agreements to exchange certain long-distance fiber optic cables fair valued at
Ps.126,039 and Ps.156,814, respectively. Under Mexican GAAP, the Group
recorded the transactions as both acquisitions (at the carrying value of the
asset sold) and sales of fixed assets based on the contract amount, resulting
in a gain on the sale of Ps.55,288 and Ps.151,009, for the years ended December
31, 2002 and 2001, respectively. Under U.S. GAAP, because the assets exchanged
are similar productive assets and, on a net basis, no cash was exchanged, the
transactions did not result in the recognition of earnings. Consequently,
under U.S. GAAP, the acquisitions and sales would not have been recorded.
 The resulting gains have been reversed and the depreciation for U.S. GAAP purposes
has been determinded on the carrying value of the equipment sold. Additionally in December 1998, the Group entered into another similar fiber optic cable swap
agreement with Bestel for Ps.268,902, resulting in a gain on the sale of
Ps.234,172 that was not recorded under U.S. GAAP. e. Sale-leaseback transaction with MATC Celular As mentioned in Note 8c., during 2003, 2002 and 2001 the Group sold and
leased-back 34, 76 and 244, respectively, non strategic towers to MATC Celular. Under Mexican GAAP, sale-leaseback transactions are recognized with the use of
the general criteria for capital and operating lease transactions pursuant to
Bulletin D-5, Leases. The timing of the recognition of a gain derived from
sale-leaseback transactions should be based on the subsequent lease
classification criteria of the leaseback portion of the transaction. If the
subsequent leaseback is accounted for as an operating lease, full immediate
gain recognition is allowed whereas if the subsequent leaseback is accounted
for as a capital lease, the gain is deferred and amortized in proportion with
the estimated useful life of the asset leased. Based upon these criteria, the
sale-leaseback agreement with MATC was recorded by the Company as an operating
lease and consequently, the Ps.88,556, Ps.104,998 and Ps.338,388 gains were
recognized at the date of the sale. Under U.S. GAAP, SFAS 28, Accounting for Sales with Lease Backs, these
sale-leaseback transactions should be recognized as a single financing
transaction in which any profit or loss on the sale is deferred and amortized
by the seller, who becomes the lessee. As the Group retained more than a
minor part but less than substantially all of the use of the assets leased and
the profit on the sale does not exceed the present value of the minimum lease
payments, the Group deferred Ps.47,361, Ps.90,091 and Ps.297,714 of the gains
at the transaction dates. In addition, as the leaseback qualified as an
operating lease, the Group is amortizing the difference between the deferred gain
 against the gross
rental charged to be recorded under U.S. GAAP and the gain recorded under Mexican GAAP
to operations over the lease term. Consequently, the U.S. GAAP net
income for the years ended December 31, 2003, 2002 and 2001 was decreased
Ps.27,774, Ps.73,309 and Ps.286,993, respectively. F - 56




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f. Capitalized interest Mexican GAAP allows, but does not require, capitalization of financing costs as
part of the cost of assets under construction. Financing costs capitalized
include interest costs, gains from monetary position and foreign exchange
losses. Under Mexican GAAP, the Group did not capitalize any financing costs
for each of the years ended December 31, 2003, 2002 and 2001. U.S. GAAP requires the capitalization of interest during the construction of
qualifying assets. In an inflationary economy, such as Mexico, acceptable
practice is to capitalize interest net of the monetary gain on the related
Mexican Peso debt, but not on U.S. dollar or other stable currency debt.
U.S.GAAP does not allow the capitalization of foreign exchange losses. g. Goodwill and indefinite-lived intangible assets Under Mexican GAAP, the Group amortizes goodwill on a straight-line basis over
a period of 20 years. In July 2001, the Financial
 Accounting Standards Board
(FASB) issued SFAS 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. SFAS 141 supercedes Accounting
Principles Board Opinion (APB) No. 16, Business Combinations and amends or
supercedes a number of related interpretations of APB 16. SFAS 141 eliminates
the pooling-of-interests method of accounting for business combinations and
changes the criteria to recognize intangible assets apart from goodwill. SFAS
142 supercedes APB 17, Intangible Assets. Under SFAS 142, goodwill and
indefinite-lived intangible assets are no longer amortized but are reviewed
annually or more frequently if impairment indicators arise, for impairment. SFAS 141 is effective for any business combination accounted for by the
purchase method that is completed after June 30, 2001. Accordingly, the Group
applied SFAS 141 to the Portatel acquisition and SFAS 142 to the intangible
assets acquired therein (Note 3). Effective January 1, 2002, the Group adopted the provisions of SFAS 142.
Goodwill is no longer amortized but is reviewed for impairment on an annual
basis at the reporting unit level. The impairment test is performed in two
phases. The first step of the goodwill impairment test compares the fair value
of the reporting unit with its carrying value, including goodwill. If the fair
value of the reporting unit exceeds its carrying value, goodwill of the
reporting unit is considered not impaired; however if the carrying value of the
reporting unit exceeds its fair value, an additional procedure must be
performed. The additional procedure compares the implied fair value of the
reporting unit (as defined by SFAS 142) with the carrying amount of that
goodwill. An impairment loss is recorded to the extent that the carrying amount
of goodwill exceeds its implied fair value. Upon adoption of SFAS 142,
goodwill was tested for impairment and no impairment charges were recorded. Under Mexican GAAP goodwill continues to be amortized. For U.S. GAAP purposes,
the reversal of goodwill amortization under Mexican GAAP increased the net
income for the years ended December 31, 2003 and 2002 in Ps.210,987 and
Ps.185,243, respectively. F - 57




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Additionally, the Group defined concessions as intangible assets with definite
life, consequently, under both Mexican GAAP and U.S. GAAP, the amortization of
this intangible asset continues. The impact of adopting SFAS 142 on net loss and loss per share adjusted to
exclude amortization expense related to goodwill is as follows: Years ended December 31,2003
    
    2002
    
    2001Net loss for the year under U.S. GAAP
    
    (Ps.
    4,510,354
    )
    
    (Ps.
    1,989,812
    )
    
    (Ps.
    889,243
    )Amortization of goodwill
    
    
    
    
    
    
    
    
    
    
    184,472Pro-forma net loss for the year
under U.S. GAAP
    
    (Ps.
    4,510,354
    )
    
    (Ps.
    1,989,812
    )
    
    (Ps.
    704,771
    )Basic and diluted net loss per share:Reported loss per share
    
    (Ps.
    48.45
    )
    
    (Ps.
    21.37
    )
    
    (Ps.
    11.90
    )Pro-forma basic and diluted loss per
share
    
    (Ps.
    48.45
    )
    
    (Ps.
    21.37
    )
    
    (Ps.
    9.43
    )
 h. Purchase of minority interest On November 3, 2003 when Iusacell and the Mexican National signed an agreement
under which Iusacell PCS will pay to the Mexican National, a total amount of
U.S.$11,194, net of income taxes, to purchase his equity interest in the
Non-Cellular Subsidiaries, under the provisions of U.S. GAAP,
 a purchase of minority interest was consummated.
Under Mexican GAAP this was not treated as a purchase and therefore, there was
no accounting recognition.
Under U.S.
GAAP, during the year ended December 31, 2003, the purchase of the minority
interest would have resulted in the recognition of a loss of Ps. 188,131.
Additionally, the present value of the
future cash payments to the Mexican National would be recorded as a liability of Ps.128,918
(U.S.$11,480) and the minority interest balance would have been eliminated on
 the date of consummation. i. Effect of inflation accounting on U.S. GAAP adjustments In order to determine the net effect on the financial statements of recognizing
certain of the adjustments described above, it is necessary to recognize the
effects of applying the Mexican GAAP inflation accounting principles (see Note
4e.) to such adjustments. F - 58




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j. Minority interest Under Mexican GAAP, the minority interest in consolidated subsidiaries is
presented as a separate component within the stockholders equity section of
the consolidated balance sheet. For U.S. GAAP purposes, minority interest is
not included in stockholders equity and accordingly, is excluded to arrive at
U.S. GAAP stockholders equity. k. Accounting for sales commissions Mexican GAAP allows vendor sales commissions to be recorded as a cost incurred.
Under U.S. GAAP cash consideration (including sales incentive) given by a
vendor to a customer is presumed to be a reduction of the selling prices of the
vendors products or services and, therefore, should be characterized as a
reduction of revenue when recognized in the vendors income statement. That
presumption is overcome and the consideration should be characterized as a cost
incurred if, and to the extent that the vendor receives, or will receive, an
identifiable benefit (goods or services) in exchange for the consideration and
can reasonably estimate the fair value of the benefit identified. As these
criteria were not met the commissions should be recorded as a reduction of
revenue for U.S. GAAP reporting purposes. If commissions of Ps.292,171,
Ps.484,980 and Ps.505,874 had been characterized as a reduction of revenue,
revenue would have been Ps.4,446,355, Ps.5,080,621 and Ps.6,202,884 for the
years ended December 31, 2003, 2002 and 2001. l. Early extinguishment of debt Mexican GAAP allows the gain or loss on the early extinguishment of debt to be
recorded outside of operations as an extraordinary item. Under U.S. GAAP the
gain on the early extinguishment of debt of Ps.15,517 during 2003 does not
qualify as an extraordinary item under the provisions of APB 30 Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions and would therefore be recorded within income from continuing operations. m. Provision for consolidation of facilities Perior to 2002, the Group recorded a charge and
related provision for the potential sale
and anticipated loss on the sale of its then corporate headquarters. Since the
Group has not had the ability to remove such headquarters from operations,
under U.S. GAAP,
an impairment charge would not have been recorded
therefore, under U.S. GAAP the charge and related provision recorded by the
Group has been reversed. F - 59




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n. Net income (loss) and stockholders equity under U.S. GAAP In the following page there is a summary of net loss and stockholders equity
adjusted to take into account certain material differences between Mexican GAAP
and U.S. GAAP: Years ended December 31,2003
    
    2002
    
    2001Net loss under Mexican GAAP
    
    (Ps.
    4,708,741
    )
    
    (Ps.
    2,166,982
    )
    
    (Ps.
    549,522
    )Pre-operating costs (b.)
    
    
    145,442
    
    
    
    4,031
    
    
    
    (42,186
    )Derivative financial instruments (c.)
    
    
    
    
    
    
    177
    
    
    
    Gain from the exchange of non-monetary
assets (d.)
    
    
    
    
    
    
    (55,288
    )
    
    
    (151,009
    )Depreciation of the gain from the exchange
of non-monetary assets (d.)
    
    
    28,946
    
    
    
    25,722
    
    
    
    23,417Sale lease-back transaction (e.)
    
    
    (27,774
    )
    
    
    (73,309
    )
    
    
    (286,993
    )Capitalized interest (f.)
    
    
    58,330
    
    
    
    99,296
    
    
    
    105,889Depreciation of capitalized interest (f.)
    
    
    (20,519
    )
    
    
    (10,589
    )
    
    
    Amortization of goodwill (g.)
    
    
    210,987
    
    
    
    185,243
    
    
    
    2,186Purchase of minority interest (h.)
    
    
    (188,131
    )
    
    
    
    
    
    
    Minority interest (j.)
    
    
    (8,894
    )
    
    
    1,302
    
    
    
    8,658Effect of inflation accounting on U.S.
 GAAP
adjustments (i.)
    
    
    
    
    
    
    585
    
    
    
    317Net loss under U.S.GAAP
    
    (Ps.
    4,510,354
    )
    
    (Ps.
    1,989,812
    )
    
    (Ps.
    889,243
    )Weighted-average number of shares
outstanding basic (thousands)
    
    
    93,101
    
    
    
    93,101
    
    
    
    74,757Basic and diluted net loss per
share (pesos)
    
    (Ps.
    48.45
    )
    
    (Ps.
    21.37
    )
    
    (Ps.
    11.90
    )
 The weighted-average number of shares outstanding under the Stock Purchase Plan
at December 31, 2002 and 2001 was 6,485,124. Because of the anti-dilutive
effect, outstanding options during 2002 and 2001 are not included in the
computation of diluted (loss) per share for 2002 and 2001.  F - 60




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##### Table of Contents



As of December 31,2003
    
    2002Stockholders equity under Mexican GAAP
    
    Ps.
    811,288
    
    
    Ps.
    5,578,633Pre-operating costs (b.)
    
    
    
    
    
    
    (145,442
    )Gain from the exchange of non-monetary
assets (d.)
    
    
    (440,469
    )
    
    
    (440,469
    )Accumulated amortization on the gain from
the exchange of non-monetary assets (d.)
    
    
    78,085
    
    
    
    49,139Sale lease-back transactions (e.)
    
    
    (388,076
    )
    
    
    (360,302
    )Capitalized interest (f.)
    
    
    263,515
    
    
    
    205,185Accumulated depreciation on capitalized
interest (f.)
    
    
    (31,108
    )
    
    
    (10,589
    )Amortization of goodwill (g.)
    
    
    398,416
    
    
    
    187,429Purchase of minority interest (h.)
    
    
    (188,131
    )
    
    
    Minority interest (j.)
    
    
    49,106
    
    
    
    (604
    )Provision for consolidation of
 facilities (m.)
    
    
    21,696
    
    
    
    21,696Stockholders equity under U.S. GAAP
    
    Ps.
    574,322
    
    
    Ps.
    5,084,676
 Provided below is an analysis of changes in stockholders equity under U.S.
GAAP: As of December 31,2003
    
    2002Opening balance
    
    Ps.
    5,084,676
    
    
    Ps.
    6,873,160Net loss for the year
    
    
    (4,510,354
    )
    
    
    (1,989,812
    )Other comprehensive income:Inflation effects
    
    
    
    
    
    
    (585
    )Derivative financial instruments
    
    
    
    
    
    
    201,913Closing balance
    
    Ps.
    574,322
    
    
    Ps.
    5,084,676
 F - 61




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##### Table of Contents



o. Depreciation Under Mexican GAAP, depreciation is not included in the measure of gross
profit. Under U.S. GAAP, Ps.1,689,016, Ps.1,492,244 and Ps.1,347,285 for the
years ended December 31, 2003, 2002 and 2001, respectively, are reclassified to
cost of sales. p. Change in accounting estimate Mexican GAAP allows a change in accounting estimate to be recorded outside
of income from continuing operations on the income statements. U.S. GAAP requires separate disclosure
if material, however the effect of a change in accounting estimates is reported within income from continuing
operations. The change in estimate discussed in note 4j. increased the cost of equipment sales
and other by Ps.159,015, or 1.7 per share during the year ended December 31, 2003. q. Supplementary U.S. GAAP disclosures 1) Cash flow information Under U.S. GAAP, SFAS 95, Statement of Cash Flows, a statement of cash flows
is required, which presents only movements in cash and excludes non-cash items.
SFAS 95 does not provide any specific guidance with respect to
inflation-adjusted financial statements. However, it is accepted practice to
adjust cash flows from operating activities for the monetary gains and losses
and unrealized foreign exchange gains and losses.  F - 62




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##### Table of Contents



Years ended December 31,Operating activities:
    
    2003
    
    2002
    
    2001Net loss under U.S. GAAP
    
    (Ps.
    4,510,354
    )
    
    (Ps.
    1,989,812
    )
    
    (Ps.
    889,243
    )Adjustments to reconcile net loss to cash
provided (used in) by operating activities:Depreciation
    
    
    1,689,016
    
    
    
    1,492,244
    
    
    
    1,347,285Amortization
    
    
    149,345
    
    
    
    643,878
    
    
    
    1,505,820Gain on the sale of towers
    
    
    (60,782
    )
    
    
    (31,689
    )
    
    
    (51,394
    )Purchase of minority interest
    
    
    188,131
    
    
    
    
    
    
    
    Intangible assets write-off
    
    
    204,819
    
    
    
    
    
    
    
    Other long-term assets write-off
    
    
    674,104
    
    
    
    
    
    
    
    Abandoned fixed assets write-off
    
    
    404,700
    
    
    
    
    
    
    
    Equity in (profit) loss of associated companies
    
    
    17,544
    
    
    
    10,129
    
    
    
    (2,794
    )Gain on sale of equity investments
    
    
    
    
    
    
    
    
    
    
    (4,370
    )Increase in allowance for doubtful accounts
    
    
    169,753
    
    
    
    63,777
    
    
    
    119,175Increase in allowance for obsolete and slow-
moving inventories
    
    
    
    
    
    
    11,659
    
    
    
    72,554Minority interest
    
    
    (24,243
    )
    
    
    (18,598
    )
    
    
    (31,403
    )Deferred income taxes and employee
profit sharing
    
    
    163,852
    
    
    
    9,618
    
    
    
    Gain on net monetary position and foreign
exchange losses
    
    
    393,651
    
    
    
    636,888
    
    
    
    (540,418
    )Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (30,982
    )
    
    
    (222,968
    )
    
    
    (159,629
    )Inventories
    
    
    (218,876
    )
    
    
    230,043
    
    
    
    (62,555
    )Increase (decrease) in:Trade accounts payable and related parties
    
    
    (122,622
    )
    
    
    (478,969
    )
    
    
    169,689Taxes and other payable
    
    
    1,067,446
    
    
    
    (233,085
    )
    
    
    (288,289
    )Income tax
    
    
    (74,535
    )
    
    
    17,299
    
    
    
    22,745Other
    
    
    (2,484
    )
    
    
    (57,203
    )
    
    
    (12,458
    )Net cash provided by operating activities
    
    
    77,483
    
    
    
    83,211
    
    
    
    1,194,715Financing activities:Proceeds from notes payable and long-term
debt
    
    
    
    
    
    
    71,727
    
    
    
    888,127Payments of notes payable and long-term
debt
    
    
    (125,272
    )
    
    
    (40,382
    )
    
    
    (827,164
    )Decrease in escrow account
    
    
    
    
    
    
    483,360
    
    
    
    480,407Proceeds from related parties financing
    
    
    
    
    
    
    
    
    
    
    84,585Proceeds from equity offerings
    
    
    
    
    
    
    
    
    
    
    1,024,722Net cash provided by financing activities
    
    
    (125,272
    )
    
    
    514,705
    
    
    
    1,650,677
 F - 63




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##### Table of Contents



Years ended December 31,2003
    
    2002
    
    2001Investing activities:Purchase of property and equipment, net
    
    (Ps.
    190,979
    )
    
    (Ps.
    898,069
    )
    
    (Ps.
    2,135,891
    )Proceeds from sales of investments in
associated companies
    
    
    (10,107
    )
    
    
    (173,666
    )
    
    
    4,370Proceeds from the sale of towers
    
    
    95,451
    
    
    
    118,668
    
    
    
    383,305Acquisition of Portatel, net of cash
    
    
    
    
    
    
    
    
    
    
    (544,390
    )Purchase of other assets
    
    
    
    
    
    
    90,921
    
    
    
    (800,657
    )Net cash used in investing activities
    
    
    (105,635
    )
    
    
    (862,146
    )
    
    
    (3,093,263
    )Translation and inflation effects in cash
    
    
    (7,166
    )
    
    
    (26,031
    )
    
    
    (50,658
    )Net decrease
in cash and cash equivalents
    
    
    (160,590
    )
    
    
    (290,261
    )
    
    
    (298,529
    )Cash and
cash equivalents at beginning of year
    
    
    166,404
    
    
    
    456,665
    
    
    
    755,194Cash and
cash equivalents at the end of year
    
    Ps.
    5,814
    
    
    Ps.
    166,404
    
    
    Ps.
    456,665Interest paid
    
    Ps.
    206,323
    
    
    Ps.
    813,730
    
    
    Ps.
    514,263Income tax paid
    
    Ps.
    106,390
    
    
    Ps.
    161,168
    
    
    Ps.
    125,588Supplemental disclosures of non-cash
activities:Acquisition of minority interest
    
    Ps.
    128,918
    
    
    Ps.
    
    
    
    Ps.
    
 2) Deferred income taxes Significant components of deferred income taxes under U.S. GAAP are as follows: December 31, 2003SFAS 109
    
    SFAS 109applied to
    
    applied toMexican GAAP
    
    U.S. GAAPBalances
    
    adjustments
    
    TotalDeferred tax assets:Allowance for doubtful accounts
    
    Ps.
    86,347
    
    
    
    
    
    
    Ps.
    86,347Net operating loss carryforwards and tax
credits
    
    
    2,544,237
    
    
    
    
    
    
    
    2,544,237Reorganization reserve
    
    
    12,154
    
    
    
    
    
    
    
    12,154Gain from the exchange of non-monetary
assets
    
    
    
    
    
    
    115,963
    
    
    
    115,963Gain on the sale lease-back transaction
    
    
    
    
    
    
    124,184
    
    
    
    124,184Valuation allowance
    
    
    (1,675,524
    )
    
    
    (165,777
    )
    
    
    (1,841,301
    )Deferred tax assets
    
    
    967,214
    
    
    
    74,370
    
    
    
    1,041,584
 F - 64




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##### Table of Contents



December 31, 2003SFAS 109
    
    SFAS 109applied to
    
    applied tMexican GAAP
    
    U.S. GAAPBalances
    
    adjustments
    
    TotalDeferred tax liabilities:Inventories
    
    Ps.
    83,634
    
    
    
    
    
    
    Ps.
    83,634Property and equipment
    
    
    786,137
    
    
    
    
    
    
    
    786,137Concessions
    
    
    97,443
    
    
    
    
    
    
    
    97,443Capitalized interest
    
    
    
    
    
    Ps.
    74,370
    
    
    
    74,370Deferred tax liabilities
    
    
    967,214
    
    
    
    74,370
    
    
    
    1,041,584Net deferred tax assets
    
    Ps.
    
    
    
    Ps.
    
    
    
    Ps.
    
 December 31, 2002SFAS 109
    
    SFAS 109applied to
    
    applied tMexican GAAP
    
    U.S. GAAPBalances
    
    adjustments
    
    TotalDeferred tax assets:Allowance for doubtful accounts
    
    Ps.
    32,128
    
    
    
    
    
    
    Ps.
    32,128Net operating loss carryforwards and tax
credits
    
    
    2,035,466
    
    
    
    
    
    
    
    2,035,466Reorganization reserve
    
    
    4,070
    
    
    
    
    
    
    
    4,070Gain from the exchange of non-monetary
assets
    
    
    
    
    
    
    125,226
    
    
    
    125,226Pre-operating costs
    
    
    
    
    
    
    46,541
    
    
    
    46,541Gain on the sale lease-back transaction
    
    
    
    
    
    
    115,297
    
    
    
    115,297Valuation allowance
    
    
    (843,744
    )
    
    
    (224,793
    )
    
    
    (1,068,537
    )Deferred tax assets
    
    
    1,227,920
    
    
    
    62,271
    
    
    
    1,290,191Deferred tax liabilities:Inventories
    
    
    12,498
    
    
    
    
    
    
    
    12,498Property and equipment
    
    
    892,507
    
    
    
    
    
    
    
    892,507Cellular telephones to be amortized
    
    
    49,970
    
    
    
    
    
    
    
    49,970Concessions
    
    
    102,572
    
    
    
    
    
    
    
    102,572Capitalized interest
    
    
    
    
    
    
    62,271
    
    
    
    62,271Deferred tax liabilities
    
    
    1,057,547
    
    
    
    62,271
    
    
    
    1,119,818Net deferred tax assets
    
    Ps.
    170,373
    
    
    Ps.
    
    
    
    Ps.
    170,373
 F-65




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##### Table of Contents



3)
    
    Stock Purchase Plan As mentioned in Note 15, the Company has a fixed stock option plan, the Stock
Purchase Plan. This plan grants options to purchase Iusacell common stock at a
price equal to the market price of the stock at the date of the grant. The
Group applies APB 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its plan. The Group adopted the
disclosure-only provisions of SFAS 123, Accounting for Stock Based
Compensation. The Group recognizes no compensation expense for its Stock
Purchase Plan as the exercise price of the options equals the market price of
the stock on the grant date. If the Group had elected to recognize compensation
expense based on the fair value at the grant dates for 2001, 2000 and 1999, in
accordance with the provisions of SFAS 123, net (loss) profit and earnings per
share would have been changed to the following pro forma amounts: Years ended December 31,2003
    
    2002
    
    2001Under Mexican GAAP:Net loss
    
    As reported
    
    
    (Ps.4,708,741
    )
    
    
    (Ps.2,166,982
    )
    
    
    (Ps.549,522
    )Pro forma
    
    
    (4,711,885
    )
    
    
    (2,171,335
    )
    
    
    (557,193
    )Basic and fully diluted
    
    As reported
    
    
    (50.58
    )
    
    
    (23.28
    )
    
    
    (7.35
    )loss per share
    
    Pro forma
    
    
    (50.61
    )
    
    
    (23.32
    )
    
    
    (7.45
    )Under U.S. GAAP:Net loss
    
    As reported
    
    
    (Ps.4,510,354
    )
    
    
    (Ps.1,989,812
    )
    
    
    (Ps.889,243
    )Pro forma
    
    
    (4,513,498
    )
    
    
    (1,994,166
    )
    
    
    (896,915
    )Basic and fully diluted
    
    As reported
    
    
    (48.45
    )
    
    
    (21.37
    )
    
    
    (11.90
    )loss per share
    
    Pro forma
    
    
    (48.48
    )
    
    
    (21.42
    )
    
    
    (12.00
    )
 These results may not be representative of the effects on pro forma net income
for future years. The Company determined the pro forma amounts using the Black-Scholes
option-pricing model based on the following weighted-average assumptions: 2002
    
    2001
    
    2000Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    99.0
    %
    
    
    74.0
    %
    
    
    67.0
    %Risk-free interest rate
    
    
    4.0
    %
    
    
    4.0
    %
    
    
    14.0
    %Expected lives (in years)
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
 F-66




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##### Table of Contents



In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based Compensation -
 Transition and Disclosure (SFAS 148). SFAS 148 amends SFAS 123 to provide alternative methods
of transition for a voluntary change to the fait value based method of accounting for stock-based
 employee compensation. In addition, SFAS 148 amends the disclosure requirements of  SFAS 123 to
 require prominent disclosures in both annual and interim financial statements about the method of
 accounting for stock-based employee compensation and the effect of the method used on reported
 results. SFAS 148 is effective for financial statements for fiscal years ending after December
 15, 2002. The Company has elected to continue to account for its stock based compensation in
 accordance with the provision of APB 25 as interpreted by FIN 144.  4)
    
    New Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities, an interpretation of ARB 51. The primary
objectives of FIN 46 are to provide guidance on the identification of entities
for which control is achieved through means other than through voting rights
(variable interest entities or VIEs) and how to determine when and which
business enterprise should consolidate the VIE (the primary beneficiary). This
new model for consolidation applies to an entity which either (1) the equity
investors (if any) do not have a controlling financial interest or (2) the
equity investment at risk is insufficient to finance that entitys activities
without receiving additional subordinated financial support from other parties.
In addition, FIN 46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make
additional disclosures. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 applies to public enterprises as of
the beginning of the applicable interim or annual period, and it applies to
nonpublic enterprises as of the end of the applicable annual period. In
December 2003 the FASB redeliberated certain proposed modifications and revised
FIN 46 (FIN 46-R). The revised provisions are applicable no later than the
first reporting period ending after March 15, 2004. The Company does not expect
that the adoption of FIN 46 and FIN 46-R will have a material impact on its
financial statements. F-67




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##### Table of Contents



In February 2003, the FASB issued Emerging Issues Task Force 00-21 (EITF
00-21), Revenue Arrangements with Multiple Deliverables. EITF 00-21 requires
revenue arrangements with multiple deliverables to be divided into separate
units of accounting. If the deliverables in the arrangement meet certain
criteria, arrangement consideration should be allocated among the separate
units based on their relative fair values. Applicable revenue recognition
criteria should be considered separately for each unit. The guidance in EITF
00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company is evaluating the impact of adoption
of EITF 00-21 will have on its financial position and results of operations. 5) U.S. GAAP requires the desegregation of the account balances as disclosed
below. There is no similar requirement under Mexican GAAP. As of December 31,
the account balances were as follows: 2003
    
    2002Recoverable taxes and other:Interconnection fees
    
    Ps.
    59,556
    
    
    Ps.
    72,280Recoverable VAT
    
    
    68,918
    
    
    
    186,794Other taxes
    
    
    59,065
    
    
    
    60,193Telephones to be amortized
    
    
    
    
    
    
    146,970Other
    
    
    163,089
    
    
    
    92,136350,628
    
    
    
    558,373Taxes and other payables:Taxes and rights payable
    
    
    56,587
    
    
    
    256,041Interest payable
    
    
    824,237
    
    
    
    127,961Verizon
    
    
    204,264
    
    
    
    Other
    
    
    387,136
    
    
    
    285,228Ps.
    1,472,224
    
    
    Ps.
    669,230
 6) A significant portion of our trade receivables is represented by a small
number of distributors. The Groups three largest distributors accounted for
59% and 52% of our net trade accounts receivables as of December 31, 2003 and
2002, respectively. Management has established certain measures to reduce the
risk associated with this concentration such as certain guarantees and property
liens. Management believes that this distributor concentration will be reduced
over time as the size of the operations grows. However, results of operations
could be negatively affected, at least in the short term, if any defaults on
payment occur with respect to these distributors. F-68




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##### Table of Contents



GRUPO IUSACELL, S.A. DE C.V. SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
Years Ended 2001, 2002 and 2003
(Amounts expressed in Thousands of Mexican Pesos (Ps.)
with Purchasing Power as of December 31, 2003) Balance at
    
    Charged to
    
    Charged to
    
    
    
    
    
    Balance atbeginning
    
    costs and
    
    other
    
    
    
    
    
    end ofof period
    
    expenses
    
    accounts
    
    Deductions
    
    periodAllowance for obsolete and
slow-moving inventories2001
    
    
    56,414
    
    
    
    72,554
    
    
    
    
    
    
    
    7,239
    
    
    
    121,7292002
    
    
    121,729
    
    
    
    11,659
    
    
    
    
    
    
    
    26,041
    
    
    
    107,3472003
    
    
    107,347
    
    
    
    (41,996
    )
    
    
    
    
    
    
    12,970
    
    
    
    52,381Allowance for doubtful
accounts2001
    
    
    243,646
    
    
    
    119,175
    
    
    
    
    
    
    
    131,037
    
    
    
    231,7842002
    
    
    231,784
    
    
    
    63,777
    
    
    
    
    
    
    
    198,233
    
    
    
    97,3282003
    
    
    97,328
    
    
    
    169,753
    
    
    
    
    
    
    
    
    
    
    
    267,081
 S-II