FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of: November 16, 1998
-----------------
TRICOM, S.A.
(Translation of registrant's name into English)
AVENIDA LOPE DE VEGA NO. 95, SANTO DOMINGO, DOMINICAN REPUBLIC
(Address of principal executives offices)
Indicate by check mark whether the registrant files or will
file annual reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
----------- -----------
Indicate by check mark whether the registrant by furnishing
the information contained in this Form is also thereby furnishing
the information to the Commission pursuant to Rule 12g3-2(b)
under the Securities Exchange Act of 1934.
Yes No X
----------- -----------
If "Yes" is marked, indicate below the file number assigned
to the registrant in connection with Rule 12g3-2(b): 82-_________
TRICOM, S.A.
<PAGE>
TRICOM, S.A.
QUARTERLY REPORT
FOR THE
THIRD QUARTER
ENDED
SEPTEMBER 30, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
GENERAL INTRODUCTION . . . . . . . . . . . . . . . . . . . . . 1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . 2
Consolidated Balance Sheet as of December 31, 1997
and September 30, 1998 (unaudited) . . . . . . . . . 2
Consolidated Statement of Operations Three Months
and Nine Months ended September 30, 1997 and 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows Nine Months
Ended September 30, 1997 and 1998 (unaudited) . . . . 5
Notes to Financial Statements . . . . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION . . . . . . . . . 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK. . . . . . . . . . . . . . . . . . . . . . . . 17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 6-K . . . . . . . . . 19
<PAGE>
GENERAL INTRODUCTION
Unless the context indicates otherwise, all references to
(i) the "Company" or "TRICOM" refer to TRICOM, S.A. and its
consolidated subsidiaries and their respective operations, and
include TRICOM's predecessors, and (ii) "GFN" refers to GFN
Corporation Ltd. and its direct and indirect subsidiaries, other
than the Company and its subsidiaries, and include GFN's
predecessors.
PRESENTATION OF CERTAIN FINANCIAL INFORMATION
The Company prepares its consolidated financial statements
in conformity with generally accepted accounting principles in
the United States. The Company adopted the United States dollar
as its functional currency effective January 1, 1997.
FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report which are
not historical facts are forward-looking statements that involve
risks and uncertainties. Management cautions the reader that
these forward-looking statements are only predictions; actual
events or results may differ materially as a result of risks
facing the Company. Such risks include, but are not limited to,
the following factors: competition; declining rates for
international long distance traffic; opposition to increased
rates for basic local service; the Company's significant capital
expenditure requirements and its need to finance such
expenditures; the inability of the Company to expand its local
access line network in a timely manner and within the amount
budgeted for such capital expenditure program; the inability of
the Company to manage effectively its rapid expansion; the
continued growth of the Dominican economy, demand for telephone
services in the Dominican Republic and moderation of inflation;
and the continuation of a favorable political and regulatory
environment in the Dominican Republic.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRICOM, S.A. AND
SUBSIDIARIES
CONSOLIDATED BALANCE
SHEET
(IN US$)
DECEMBER 31 SEPTEMBER 30
------------ ------------
1997 1998
------------ -----------
(AUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash US$ 5,732,505 US$ 21,773,101
equivalents
Accounts receivable:
Customers 5,612,123 4,786,892
Carriers 5,546,399 4,436,705
Related parties 625,248 243,750
Officers and 200,294 241,050
employees
Current portion 281,382 23,579
of long term
accounts
receivable
Other 3,525,123 7,286,684
------------ -----------
15,790,569 17,018,661
Allowance for (668,827) (623,437)
doubtful ------------ -----------
accounts
Accounts 15,121,742 16,395,224
receivable,
net
Current portion of 22,750,000 54,469,879
pledged securities
Inventories, net 5,633,477 11,266,706
Prepaid expenses 2,518,052 1,500,593
------------ ------------
Total current 51,755,776 105,405,503
assets
Long-term accounts 966,592 367,480
receivable
Unearned interest (204,576) (82,626)
------------ ----------
Long-term 762,016 284,854
accounts
receivable, net
Investments:
Pledged securities 53,018,390 ---
Others 1,796,521 2,006,654
------------ ------------
Total investments 54,814,911 2,006,654
------------ ------------
Property and equipment, 202,977,596 304,629,047
net
Other assets at cost, 10,833,238 15,732,278
less accumulated
amortization
TOTAL ASSETS US$ 321,143,537 US$ 428,058,336
============ ============
2
<PAGE>
<TABLE>
TRICOM, S.A. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN US$)
DECEMBER 31 SEPTEMBER 30
----------- ------------
1997 1998
----------- ------------
(AUDITED) (UNAUDITED)
<S>
LIABILITIES & SHAREHOLDERS
EQUITY <C> <C>
Current liabilities:
Short-term obligations US$ -- US$ 158,326
Notes payable:
Borrowed funds-banks 5,905,005 7,791,342
Borrowed funds-
related parties 4,849,818 18,414,988
Bonds payable-short
term -- --
Current portion of
long term debt -- 32,000,000
Carifa Loan ------------- ----------------
10,754,823 58,206,330
Accounts payable:
Carriers 2,327,768 2,234,441
Suppliers 17,746,637 28,121,903
Related parties -- --
Other 1,023,478 916,929
------------- ----------------
21,097,883 31,273,273
Other Liabilities 3,039,761 4,346,705
Accrued expenses 12,017,371 11,730,473
------------- ----------------
Total current
liabilities 46,909,838 105,715,107
Reserve for severance
indemnities 140,641 25,870
Long-term debt:
Carifa Loan 32,000,000 --
Senior Notes 200,000,000 200,000,000
------------- ----------------
Total liabilities 279,050,479 305,740,977
Shareholders equity:
Class A Common Stock at
par value RD$10:
Authorized 55,000
shares: 5,7000,000
shares issued at
September 30, 1998 -- 3,750,000
Class B Stock at par
value RD$10:
Authorized 221,517,095
shares at December 31,
1997 and 21,044,544
shares at September
30, 1998; 19,390,528
shares issued at
December 31, 1997 and
19,144,544 issued at
September 30, 1998 43,357,343 12,595,095
Paid-in-capital, excess
over par -- 94,515,379
Legal reserve 600,233 600,233
Retained earnings
(deficit) 3,147,997 718,290
Period net income (loss) (2,429,707) 12,162,119
Equity adjustment for
foreign currency (2,023,757) (2,023,757)
translation ------------- ----------------
42,652,109 122,317,359
Less treasury stock at (559,051) --
cost, 245,985 shares ----------- -----------
42,093,058 122,317,359
TOTAL LIABILITIES & 321,143,537 428,058,336
SHAREHOLDERS EQUITY US$ =========== US$ ===========
</TABLE>
3
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN US$)
<TABLE>
THREE MONTH PERIOD ENDED
SEPTEMBER 30,
----------------------------
1997 1998
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Operating Revenues: (Note 1)
Toll US$ 3,808,391 US$ 4,465,767
International settlement 11,501,513 13,177,167
Local service 1,962,228 3,484,598
Cellular 3,604,511 5,443,230
Paging 1,306,211 1,109,492
Sale and lease of equipment 1,032,580 978,349
Installations 1,231,842 3,772,153
Other 12,566 205,150
----------- -----------
TOTAL OPERATING REVENUES 24,459,842 32,635,906
OPERATING COSTS:
Satellite connections and carriers 8,288,489 7,604,076
Network depreciation 1,550,418 3,086,136
Expense in lieu of income taxes 1,675,232 2,575,250
General and administrative expenses 6,491,570 10,020,901
Depreciation expense 519,435 914,829
Other 813,227 753,710
----------- -----------
TOTAL OPERATING COSTS 19,338,371 24,954,902
OPERATING INCOME 5,121,471 7,681,004
OTHER INCOME (EXPENSES)
Interest expense (3,512,436) (3,799,246)
Interest income 806,162 1,500,694
Foreign exchange gain (loss) (301,297) (54,360)
Other (680,028) (83,732)
----------- -----------
TOTAL OTHER EXPENSES (3,687,599) (2,436,644)
----------- -----------
EARNINGS BEFORE EXTRAORDINARY 1,433,872 5,244,360
ITEM
EXTRAORDINARY ITEM (5,452,995) --
NET EARNINGS US$ (4,019,123) US$ 5,244,360
=========== ===========
EBITDA (Note 2) US$ 8,866,556 US$ 14,257,219
EARNINGS PER SHARE BEFORE
EXTRAORDINARY ITEM US$ 0.08 US$ 0.22
EARNINGS PER SHARE US$ (0.24) US$ 0.22
WEIGHTED AVG. NUMBER OF SHARES 17,085,851 22,311,211
OUTSTANDING
</TABLE>
<TABLE>
NINE MONTH PERIOD ENDED
SEPTEMBER 30,
-----------------------------
1997 1998
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING REVENUES: (NOTE 1)
Toll US$ 11,183,790 US$ 13,327,639
International settlement 28,207,247 36,676,456
Local service 4,234,351 9,198,808
Cellular 9,023,020 14,734,640
Paging 3,795,893 3,556,468
Sale and lease of equipment 4,418,355 2,798,781
Installations 2,949,077 9,780,712
Other 19,175 274,313
----------- -----------
TOTAL OPERATING REVENUES 63,830,908 90,347,817
OPERATING COSTS:
Satellite connections and carriers 23,113,981 23,433,672
Network depreciation 5,240,471 8,224,804
Expense in lieu of income taxes 4,370,340 6,719,661
General and administrative expenses 16,771,059 25,945,424
Depreciation expense 1,120,984 2,321,725
Other 2,778,063 2,341,223
----------- -----------
TOTAL OPERATING COSTS 53,394,898 68,986,509
OPERATING INCOME 10,436,010 21,361,308
OTHER INCOME (EXPENSES)
Interest expense (8,461,203) (12,041,255)
Interest income 958,557 3,943,125
Foreign exchange gain (loss) (301,297) (139,197)
Other (642,467) (961,862)
----------- -----------
TOTAL OTHER EXPENSES (8,446,410) (9,199,189)
----------- -----------
EARNINGS BEFORE EXTRAORDINARY ITEM 1,989,600 12,162,119
EXTRAORDINARY ITEM (5,452,995) --
NET EARNINGS US$ (3,463,395) US$ 12,162,119
=========== ==========
EBITDA (Note 2) US$ 21,167,805 US$ 38,627,498
EARNINGS PER SHARE BEFORE EXTRAORDINARY
ITEM US$ 0.12 US$ 0.55
EARNINGS PER SHARE US$ (0.20) US$ 0.55
WEIGHTED AVG. NUMBER OF SHARES OUTSTANDING 17,085,851 23,311,211
</TABLE>
4
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN US$)
PERIOD ENDED
SEPTEMBER 30,
----------------
1997 1998
(UNAUDITED) (UNAUDITED)
Cash flows from operating
activities:
Cash received from US$ 73,485,762 US$ 88,211,099
customers
Cash paid to suppliers and (49,819,350) (49,073,587)
employees
Cash received from (paid (159,114) 381,498
to) related
Interest paid (8,804,636) (12,163,205)
Interest received on 958,557 3,943,125
deposits
Expense in lieu of income (4,370,340) (6,719,661)
tax
Other income (expenses), (943,765) (1,101,061)
net ------------- -------------
Net cash provided by 10,347,114 23,478,208
(used in)
operating activities
Cash flows from investing
activities:
Acquisition of investments (54,342,649) --
Current portion of (22,750,000) (31,719,879)
investments
Cancellation of -- 52,808,258
investments
Acquisition of property (47,402,725) (112,198,006)
and equipment ------------- -------------
Net cash used in (124,495,374) (91,109,627)
investing activities
Cash flows from financing
activities
Borrowed funds (paid to) (37,011,757) 2,044,663
from banks
Borrowed funds from (18,569,576) 13,565,170
related parties
Short terms obligations (2,235,955) --
Issuance (redemption) of (7,061,768) 32,000,000
short- term bonds
High yield bond issue 200,000,000 --
Long-term debt (28,000,000) (32,000,000)
Issuance of common stock 20,000,000 68,062,182
------------- -------------
Net cash provided by 127,120,944 83,672,015
financing activities
Net increase (decrease) in 12,972,684 16,040,596
cash and cash equivalents
Cash and cash 4,291,804 5,732,505
equivalents at ============= =============
beginning of the
year
Cash and cash equivalents at US$ 17,264,488 US$ 21,773,101
end of period ============= =============
5
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The Company considers that all adjustments (all of which are
normal recurring accruals) necessary for a fair statement of
financial position and results of operations for these periods
have been made; however, results for such interim periods are
subject to year-end audit adjustments. Results for such interim
periods are not necessarily indicative of results for a full
year.
NOTE 2 - CALCULATION OF EBITDA
EBITDA typically consists of earnings (loss) before interest
expense, income taxes, depreciation and amortization. Because
the Company makes payments to the Dominican government in lieu of
income taxes, such expense is characterized as an operating
expense and EBITDA is calculated after the deduction of such
expense. EBITDA is commonly used in the telecommunications
industry to analyze companies on the basis of operating
performance, leverage and liquidity. However, it does not
purport to represent cash generated or used by operating
activities and should not be considered in isolation or as a
substitute for a measure of performance in accordance with
generally accepted accounting principles.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
COMPANY OVERVIEW
Background
TRICOM is the sole alternate provider of diversified
telecommunications services in the Dominican Republic. TRICOM
commenced operations as a low-cost international long distance
provider in 1992 and has since expanded to providing local
service, national long distance, cellular, paging, Internet
access and value-added services. The Company believes that the
Dominican Republic represents an attractive market for
telecommunications services due to substantial unmet demand for
local services, high volumes of international traffic, a rapidly
growing economy, and a regulatory environment that fosters
competition. The Company has developed a substantial presence in
the international long distance market for the Dominican Republic
and has constructed a cellular and paging network which covers
approximately 80% of the country's population. In addition,
TRICOM has been aggressively expanding its basic local phone
service business since the fourth quarter of 1996. As a result
of these efforts, the Company has achieved significant growth,
with operating revenues increasing from US$1.9 million in 1992,
to US$90.1 million in 1997.
Principal Shareholders
TRICOM is controlled by GFN and Motorola, Inc. ( Motorola ).
GFN, one of the Dominican Republic's largest holding companies
with interests in media, banking, credit cards and insurance,
beneficially owns 60% of the issued and outstanding shares of
Class B Stock and Motorola beneficially owns 40% of the issued
and outstanding shares of Class B Stock. Each share of Class B
Stock entitles the holder thereof to cast ten votes while each
share of Class A Common Stock entitles the holder thereof to cast
one vote.
International Long Distance Services
TRICOM is a leading participant in the large market for
international long distance traffic between the Dominican
Republic and the United States. The Company has operating
agreements with all major facilities-based international carriers
responsible for international long distance traffic between the
Dominican Republic and the United States, and also has agreements
with numerous resellers which account for an increasing share of
the total traffic between the two countries. In January 1997,
the Company commenced operations in the United States through its
wholly owned subsidiary TRICOM USA, Inc. ( TRICOM USA ), a
6
<PAGE>
facilities-based international and resale carrier. TRICOM USA
operates an international gateway switch in New York through
which it provides international carrier services to resellers.
TRICOM USA also markets prepaid international long-distance cards
to customers living in the New York metropolitan area, Florida,
Massachusetts, Puerto Rico and the U.S. Virgin Islands.
Domestic Services
The Company implemented a local service expansion program
beginning in the fourth quarter of 1996. The Company expanded
its local access line network to 71,647 local access lines at
September 30, 1998, including 54,576 net local access lines
installed since January 1, 1997. The Company anticipates
installing approximately 35,000 local access lines in 1998.
Since implementing its local service expansion program, the
Company also increased its cellular network capacity and cellular
service capabilities and expanded the number of cellular
subscribers from 16,136 at December 31, 1996 to 88,990 at
September 30, 1998.
Wireless Local Loop Project
The Company is deploying a fixed cellular system, called a
wireless local loop, or WLL , in order to accelerate TRICOM's
expansion into the domestic residential and commercial markets.
On August 18, 1998, the Company announced that it had selected
Motorola's Cellular Infrastructure Group to deploy a WLL that
employs CDMA (Code Division Multiple Access) technology. The
contract provides for the installation of network capacity for
150,000 wireless subscribers. TRICOM anticipates that the WLL
will enable the Company to accelerate its penetration of the
local market in the Dominican Republic at a lower cost compared
to the cost of deploying traditional copper wire lines. The
Company believes that the WLL will enable it to provide telephony
services to large areas, enabling it to use mass marketing
techniques to target under served markets. Based upon
information published by the Central Bank, there are currently
approximately 750,000 local access lines in service in the
Dominican Republic, representing a penetration rate of
approximately 9%.
The Company expects to deploy the WLL in three stages over a
four-year period. Although the initial build-out of the WLL will
have been completed by the end of 1998, service using the system
will be available on a limited basis during the first quarter of
1999. Upon completion of the initial build-out phase, the WLL
system is expected to cover approximately 70% of the area of
Santo Domingo, with a population of 2.1 million people, and
approximately 38% of the area of Santiago, the country's second
largest city, and will be capable of serving approximately 14,000
subscribers. The Company anticipates that the WLL will have
capacity to connect approximately 36,000 wireless subscribers by
the end of 1999. The second stage, covering five additional
cities comprising a total population of approximately 1.1 million
people, should be operational by the end of the second quarter of
1999. The third and final stage of the project will be completed
during 2000 and 2001 and will increase coverage to seven
additional cities in the Dominican Republic while increasing
capacity in the previously covered cities. Motorola will provide
TRICOM with installation teams for each network component, staff
training and network testing. Motorola also will provide the
Company with dedicated, in-country technical support and
maintenance and other services.
The infrastructure of a WLL generally consists of digital
switches, base station transmitters and receivers, and related
equipment. Each customer will be connected to the WLL through a
transceiver which will be installed inside or outside the
customer's home. Transceivers will send and receive signals to
and from the local radio base station using an integral
omnidirectional antenna. The transceiver will be connected by a
cable to a standard telephone jack in a customer's home that, in
turn, connects to a customer's standard telephone. The
transceiver is powered by the home's power supply, but it will
also contain a battery that will allow operation to continue for
up to 24 hours of standby supply and three hours of talk time in
the event of a power outage. The CDMA technology uses codes to
differentiate subscribers' phone conversations, allowing for the
most efficient use of the radio spectrum while at the same time
providing enhanced voice quality which is comparable to
traditional copper wire systems. Among the benefits of this
technology are its ability to offer ubiquitous coverage, rapid
installation, a scalable network with redeployable equipment,
reduced maintenance costs and mobility.
The Company has identified certain risks attendant to its
WLL project. Although the CDMA technology to be incorporated
into the WLL is similar to certain technology deployed by PCS
service providers in the United States, to date the technology
has not been used extensively for a fixed local access system.
7
<PAGE>
In addition, the technology to be used for the WLL cannot perform
certain data communications functions as well as conventional
wire access lines. There can be no assurance that the CDMA
technology will be applied successfully in the Dominican
Republic, that the CDMA protocol will not become obsolete or
subject to competition from other technologically superior
wireless protocols that may be used by the incumbent local
service provider in the future or that customers will accept the
WLL as an alternative to wire access lines, particularly in view
of its service limitations. No industry standard or uniform
protocol currently exists for digital cellular equipment that
operates on the 1.9 GHz radio frequency band, and generally the
Company will not be able to use equipment supplied by vendors
other than Motorola. Consequently, the Company will need to
deploy equipment supplied by Motorola for the central switch and
at the base stations.
Revenue Recognition
The Company derives its operating revenues primarily from
toll revenues, international settlement revenues, cellular
services, paging services, local services, the sale and lease of
equipment and installations. The components of each of these
services are as follows:
Toll revenues are amounts received by the Company from its
customers in the Dominican Republic for international and
domestic long distance calls as well as interconnection
charges received from Compania Dominicana de Telefonos C.
por A., the incumbent local service provider ( Codetel ).
Toll revenues are generated by retail telephone centers,
large corporate accounts, residential and commercial
customers, calling card users and cellular subscribers.
Toll revenues are recognized as they are billed to
customers, except that revenues from prepaid calling cards
are recognized as the calling cards are used or expire.
International settlement revenues represent amounts
recognized by the Company for termination of traffic from
foreign telecommunications carriers to the Dominican
network.
Local service revenues consist of wireline rent, local
measured service and charges for CLASS services or vertical
features, including call forwarding, three-way calling, call
waiting and voice mail, as well as calling party pays
revenues and revenues from other miscellaneous wireline
services.
Cellular revenues represent fees received for mobile
cellular services, including interconnection charges for
calls incoming to the Company's cellular subscribers, but
excluding international long distance calls generated by
cellular units. Cellular fees consist of fixed monthly
access fees, per minute usage charges and additional charges
for custom or vertical features, including call waiting,
call forwarding, three-way calling and voice mail, and for
ther miscellaneous cellular services.
Paging revenues consist of fixed monthly charges for
nationwide service and use of paging equipment and
activation fees.
Revenues from the sale and lease of equipment consist of
sales and rental fees charged for customer premise
equipment, including private branch exchanges and key
telephone systems, residential telephones, cellular handsets
and paging units. Since late 1996, the Company has only
sold such equipment.
Installation revenues consist of fees charged by the Company
for installing local access lines, private branch exchanges
and key telephone systems as well as fees for activating
cellular handsets.
Other revenues consist of revenues that are not generated
from the Company's core business, including commissions
received for providing package handling services for a
courier, commissions received for collection services for
utility companies.
8
<PAGE>
The following table sets forth the percentage contribution
of each category of revenues to total operating revenues for
the periods indicated:
<TABLE>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Toll . . . . . . . . . . . . . 15.6% 13.7% 17.5% 14.8%
International settlement . . . 47.0 40.4 44.2 40.6
Local service . . . . . . . . . 8.0 10.7 6.6 10.2
Cellular . . . . . . . . . . . 14.7 16.7 14.1 16.3
Paging . . . . . . . . . . . . 5.3 3.4 5.9 3.9
Sale and lease of equipment . . 4.2 3.0 6.9 3.1
Installations . . . . . . . . . 5.0 11.6 4.6 10.8
Other . . . . . . . . . . . . . 0.1 0.6 0.0 0.3
________________
Note: Percentages may not add up to 100% due to rounding.
</TABLE>
The following table sets forth certain items in the
statements of operations expressed as a percentage of total
operating revenues for the periods indicated:
<TABLE>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating costs . . . . . . . . 79.1% 76.5% 83.7% 76.4%
Operating income . . . . . . . 20.9 23.5 16.3 23.6
Interest expense, net . . . . . (11.1) (7.0) (11.8) (8.9)
Other income (expenses) . . . . (15.1) (7.5) (13.2) (10.2)
Earnings before Extraordinary 5.9 16.1 3.1 13.5
Item . . . . . . . . . . . . .
Net earnings . . . . . . . . . (16.4) 16.1 (5.4) 13.5
EBITDA . . . . . . . . . . . . 36.2 43.7 33.2 42.8
</TABLE>
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
Operating Revenues. The Company's total operating revenues
increased 41.5% to US$90.3 million for the nine-month period
ended September 30, 1998 (the "1998 Interim Period") from US$63.8
million for the nine-month period ended September 30, 1997 (the
"1997 Interim Period"), and by 33.4% to US$32.6 million for the
three-month period ended September 30, 1998 (the "1998 Third
Quarter") from US$24.5 million for the three-month period ended
September 30, 1997 (the "1997 Third Quarter"). The Company
attributes much of this growth to increased international
settlement revenues generated by TRICOM USA, increased
installation and local service revenues associated with its local
access network expansion program and the introduction of the
Company's prepaid cellular program.
Toll. Toll revenues increased 19.2% to US$13.3 million for
the 1998 Interim Period from US$11.2 million for the 1997 Interim
Period, and 17.3% to US$4.5 million for the 1998 Third Quarter
from US$3.8 million for the 1997 Third Quarter. The growth in
toll revenues was attributable to the increase by 60.4% in
domestic long distance minutes to 14.3 million minutes for the
1998 Interim Period from 8.9 million minutes for the 1997 Interim
Period, and by 47.9% to 5.2 million minutes for the 1998 Third
Quarter from 3.5 million minutes for the 1997 Third Quarter due
to a higher number of local access lines in service.
The increase in toll revenues also was attributable to
higher outbound international traffic. Outbound international
minutes increased by 9.0% to 16.3 million minutes for the 1998
Interim Period from 15.0 million minutes for the 1997 Interim
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Period and by 6.6% to 5.5 million minutes for the 1998 Third
Quarter from 5.2 million minutes for the 1997 Third Quarter,
reflecting increased traffic volume from the Efectiva prepaid
calling card and from the increased number of local access lines,
partially offset by the reduction of traffic from retail
telephone centers. The Efectiva prepaid calling card and local
access lines accounted for 30.1% and 29.0%, respectively, of the
total outbound international minutes for the 1998 Interim Period
compared to 28.4% and 22.3%, respectively, for the 1997 Interim
Period. Interconnection revenues related to domestic and
international long distance traffic also increased due to the
growth of the Company's local access line installed base.
Interconnection revenues increased by approximately 89.8% to
US$2.4 million for the 1998 Interim Period from US$1.3 for the
1997 Interim Period and by approximately 92.7% to US$957,000 for
the 1998 Third Quarter from US$497,000 for the 1997 Third
Quarter. Toll revenues represented 14.8% of total operating
revenues for the 1998 Interim Period compared to 17.5% of total
operating revenues for the 1997 Interim Period, and 13.7% of
total operating revenues for the 1998 Third Quarter compared to
15.6% of total operating revenues for the 1997 Third Quarter.
International settlement. International settlement revenues
increased 30.0% to US$36.7 million for the 1998 Interim Period
from US$28.2 million for the 1997 Interim Period, and increased
by 14.6% to US$13.2 million for the 1998 Third Quarter from
US$11.5 million for the 1997 Third Quarter. This increase was
achieved despite a 19% decrease in settlement rates for the 1998
Interim Period compared to the 1997 Interim Period. Inbound
minutes increased by 55.0% to 143.6 million for the 1998 Interim
Period from 92.7 million minutes for the 1997 Interim Period, and
by 18.1% to 51.4 million minutes for the 1998 Third Quarter from
43.5 million minutes for the 1997 Third Quarter. The increases
in the number of minutes in 1998 reflected new volume based
agreements and the contribution of TRICOM USA's operations in the
United States. TRICOM USA accounted for 55.7% and 59.9% of the
total inbound minutes in the 1998 Interim Period and the 1998
Third Quarter, respectively, compared to 36.1% and 41.9% in the
1997 Interim Period and the 1997 Third Quarter, respectively.
Inbound minutes generated by TRICOM USA during the 1998 Interim
Period and the 1998 Third Quarter included 66.6 million minutes
and 23.8 million minutes attributable to the provision of
facilities by TRICOM USA to resellers, respectively, and 13.4
million minutes and 7.0 million minutes attributable to prepaid
calling cards distributed in the United States during the 1998
Interim Period and the 1998 Third Quarter, respectively.
Settlement rates declined in the 1998 Interim Period to an
average rate of US$0.22 per minute from US$0.27 per minute during
the 1997 Interim Period as a result of increased competition in
the market for international long distance service between the
Dominican Republic and the United States. Settlement rates for
traffic between the United States and the Dominican Republic have
declined over the past five years, and the Company anticipates
that competitive and regulatory pressures could push settlement
rates lower. TRICOM has been able to increase revenues from the
provision of international long distance services by increasing
the volume of international traffic that it handles. Future
decreases in settlement rates, without corresponding increases in
the Company's long distance traffic from the United States would
reduce the Company's international settlement revenues, adversely
affect the profit margins that the Company realizes on such
traffic and could have a material adverse effect on the Company's
business, financial condition and results of operations.
International settlement revenues represented 40.6% of total
operating revenues for the 1998 Interim Period compared to 44.2%
of total operating revenues for the 1997 Interim Period, and
40.4% of total operating revenues for the 1998 Third Quarter
compared to 47.0% of total operating revenues for the 1997 Third
Quarter.
Local service. Local service revenues increased 117.2% to
US$9.2 million for the 1998 Interim Period from US$4.2 million
for the 1997 Interim Period, and 77.6% to US$3.5 million for the
1998 Third Quarter from US$2.0 million for the 1997 Third
Quarter. The increases resulted from the growth in the number of
local access lines in service, reflecting the Company's ongoing
program to expand its local access network initiated in 1996,
combined with a higher average monthly rent charged to customers
which increased to US$10 during the 1998 Interim Period from US$8
during the 1997 Interim Period.
During the 1998 Interim Period, the Company added 28,452 net
local access lines, including 11,228 net local lines during the
1998 Third Quarter, compared to 17,924 net local access lines
added during the 1997 Interim Period, including 6,553 net local
lines during the 1997 Third Quarter. The number of net local
access line additions during the 1998 Third Quarter represents
the highest number of net line additions in any quarter since
TRICOM began installing local access lines in 1994. At September
30, 1998, the Company had 71,647 local access lines in service
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compared to 34,995 local access lines in service at September 30,
1997. As a result, interconnection revenues related to local
calls received from Codetel increased 65.3% to US$748,000 for the
1998 Interim Period from US$452,000 for the 1997 Interim Period,
and 49.5% to US$259,000 for the 1998 Third Quarter from
US$173,000 for the 1997 Third Quarter. Local service revenues
represented 10.2% of total operating revenues for the 1998
Interim Period compared to 6.6% of total operating revenues for
the 1997 Interim Period, and 10.7% of total operating revenues
for the 1998 Third Quarter compared to 8.0% of total operating
revenues for the 1997 Third Quarter.
Cellular. Cellular revenues increased by 63.3% to US$14.7
million for the 1998 Interim Period from US$9.0 million for the
1997 Interim Period, and by 51.0% to US$5.4 million for the 1998
Third Quarter from US$3.6 million for the 1997 Third Quarter.
This increase was attributable to the growth of airtime minutes,
a result of a higher average subscriber base. Airtime minutes
increased 29.7% to 69.1 million minutes for the 1998 Interim
Period from 53.2 million minutes for the 1997 Interim Period, and
increased 17.2% to 24.5 million minutes for the 1998 Third
Quarter from 20.9 million minutes for the 1997 Third Quarter. In
addition, the average price per outgoing airtime minute increased
by 22.4% to US$0.25 in the 1998 Interim Period from US$0.20 in
the 1997 Interim Period.
The average number of cellular subscribers during the 1998
Interim Period was higher than for the 1997 Interim Period, as
the Company added 47,883 net subscribers, including 12,895 net
subscribers during the 1998 Third Quarter, compared to 13,993 net
subscribers added in the 1997 Interim Period, including 6,608 net
subscribers added during the 1997 Third Quarter. The number of
cellular subscribers increased at September 30, 1998 by 195.4% to
88,990 from 30,129 at September 30, 1997. The Company attributes
the increase in cellular airtime and the number of subscribers to
the introduction of prepaid cellular services and the Amigo
prepaid card for cellular calls in the third quarter of 1997.
Prepaid cellular services generated approximately 42% of the
Company's total airtime minutes and 30.9% of total cellular
revenues in the 1998 Interim Period. Prepaid cellular revenues
increased by US$4.5 million to US$4.7 million in the 1998 Interim
Period compared to US$102,000 during the 1997 Interim Period, and
increased by US$2.0 million to US$2.1 million for the 1998 Third
Quarter from US$102,000 for the 1997 Third Quarter.
The Company's average monthly churn rate for cellular
services was 4.0% for both the 1998 Interim Period and the 1997
Interim Period and 5.6% for the 1998 Third Quarter compared to
4.4% for the 1997 Third Quarter. The Company calculates churn by
dividing the number of subscribers disconnected during a given
period by the sum of subscribers at the beginning of each month
during such period. Interconnection revenues associated with
airtime traffic received from Codetel increased by 20.1% to
US$1.0 million in the 1998 Interim Period from US$840,000 in the
1997 Interim Period due to a higher volume of incoming minutes
received by prepaid cellular subscribers, as well as to a larger
subscriber base. Cellular revenues represented 16.3% of total
operating revenues for the 1998 Interim Period compared to 14.1%
of total operating revenues for the 1997 Interim Period, and
16.7% of total operating revenues for the 1998 Third Quarter
compared to 14.7% for the 1997 Third Quarter.
Paging. Paging revenues decreased 6.3% to US$3.6 million
for the 1998 Interim Period compared to US$3.8 million for the
1997 Interim Period, and by 15.1% to US$1.1 million for the 1998
Third Quarter from US$1.3 million for the 1997 Third Quarter.
The decrease in the 1998 Interim Period reflected a decline in
the average revenue per paging subscriber during the first nine
months of 1998 from the average revenue per paging subscriber
during the first nine months of 1997, which resulted from
increased competition in the market. Although, the Company only
added 825 net paging subscribers during the 1998 Interim Period,
including 196 net paging subscribers during the 1998 Third
Quarter, compared to 4,407 net paging subscribers added in the
1997 Interim Period, including 782 net paging subscribers in the
1997 Third Quarter, the number of paging subscribers increased by
4.4% to 28,652 at September 30, 1998 from 27,443 at September
30, 1997. The Company's average monthly churn rate for paging
services was 3.5% for the 1998 Interim Period compared to 3.6%
for the 1997 Interim Period and 3.5% for the 1998 Third Quarter
compared to 3.8% for the 1997 Third Quarter. Paging revenues
represented 3.9% of total operating revenues for the 1998 Interim
Period compared to 5.9% of total operating revenues for the 1997
Interim Period, and 3.4% of total operating revenues for the 1998
Third Quarter compared to 5.3% for the 1997 Third Quarter. The
Company has determined that paging will not be a major focus of
its marketing program.
Sale and lease of equipment. Revenues from the sale and
lease of equipment decreased 36.7% to US$2.8 million for the 1998
Interim Period from US$4.4 million for the 1997 Interim Period,
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and by 5.3% to US$978,000 for the 1998 Third Quarter from US$1.0
million for the 1997 Third Quarter. This decrease reflected a
lower number of cellular handsets and paging equipment sold, as a
result of the Company entering into arrangements for the
distribution of cellular service with major electronics
retailers. The Company believes that these arrangements will
decrease revenues from the sale of cellular handsets, but could
increase cellular services revenues by accelerating the number of
subscriber additions. Sale and lease of equipment revenues
represented 3.1% of total operating revenues in the 1998 Interim
Period compared to 6.9% of total operating revenues for the 1997
Interim Period, and 3.0% of total operating revenues for the 1998
Third Quarter compared to 4.2% of total operating revenues for
the 1997 Third Quarter. The Company has strategically shifted
away from this revenue item and has determined that the sale of
lease of equipment will not be a major focus of its marketing
program.
Installations. Installation revenues increased 231.7% to
US$9.8 million for the 1998 Interim Period from US$3.0 million
for the 1997 Interim Period, and by 206.2% to US$3.8 million for
the 1998 Third Quarter from US$1.2 million for the 1997 Third
Quarter. This increase reflected the significant growth in the
number of local access line installations and cellular
activations as well as an increase in the installation fee per
local access line from US$129 to US$258 in January 1998. During
the 1998 Interim Period, the Company installed 32,295 gross local
access lines and 71,622 gross cellular additions, including
12,706 gross local access lines and 26,191 gross cellular
additions in the 1998 Third Quarter, compared to 22,077 gross
local access lines and 21,736 gross cellular additions for the
1997 Interim Period, including 7,919 gross local access lines and
9,914 gross cellular additions in the 1997 Third Quarter,
reflecting increased domestic market presence. Installation
revenues represented 10.8% of total operating revenues in the
1998 Interim Period compared to 4.6% of total operating revenues
for the 1997 Interim Period, and 11.6% of total operating
revenues for the 1998 Third Quarter compared to 5.0% of total
operating revenues for the 1997 Third Quarter.
OPERATING COSTS. Major components of operating costs are
(a) carrier costs, which include amounts owed to foreign carriers
for the use of their networks for termination of outbound
traffic, (b) interconnection costs, which are access charges paid
to Codetel, (c) depreciation of network equipment and leased
terminal equipment, (d) payments for international satellite
circuit leases, (e) expenses in lieu of income tax, (f) general
and administrative expenses and (g) depreciation expense. The
Company's operating costs increased 29.2% to US$69.0 million for
the 1998 Interim Period from US$53.4 million for the 1997 Interim
Period. Operating costs represented 76.4% of total operating
revenues for the 1998 Interim Period compared to 83.7% of total
operating revenues for the 1997 Interim Period.
Satellite connections and carrier costs increased slightly
by 1.4% to US$23.4 million during the 1998 Interim Period
compared to US$23.1 million during the 1997 Interim Period. The
increase in satellite connections and carrier costs reflected a
US$2.7 million increase in carrier costs to US$8.4 million in
the 1998 Interim Period from US$5.7 million in the 1997 Interim
Period due to higher volume of outbound traffic. However, this
increase was partially offset by a decrease in interconnection
costs, lease payments for switching facilities and satellite
connections. Interconnection costs decreased by US$1.0 million
to US$9.4 million in the 1998 Interim Period from US$10.3 million
in the 1997 Interim Period, as a result of lower interconnection
charges between the Company's network and Codetel. On January 2,
1998, the Company and Codetel amended the Interconnection
Agreement to lower the charge for international long distance
calls from US$0.10 per minute to US$0.07 per minute, as well as
national long distance calls and calls made from cellular
telephones from US$0.06 to US$0.04 for the year ended December
31, 1998. Lease payments for switching facilities and satellite
connections decreased by 21.7% to US$3.5 million in the 1998
Interim Period from US$4.2 million in the 1997 Interim Period due
to cost savings for leased international facilities that resulted
with the commencement of operations of the Antilles-I fiber optic
cable.
Network depreciation and depreciation expense increased
56.9% and 107.1% to US$8.2 million and US$2.3 million,
respectively, for the 1998 Interim Period from US$5.2 million and
US$1.1 million, respectively, for the 1997 Interim Period as a
result of the Company's continued investments in telephone plant
and equipment.
TRICOM currently is making payments to the Dominican
government in lieu of income tax equal to 10% of net
international settlement revenues. This expense in lieu of
income taxes increased by 53.8% to US$6.7 million for the 1998
Interim Period from US$4.4 million for the 1997 Interim Period,
due to increased revenues, a portion of which were not subject to
deductible access charges, including, in particular, installation
revenues. However, all the above mentioned increases where
partially offset by a decrease in other costs to US$2.3 million
for the 1998 Interim Period from US$2.8 million for the 1997
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Interim Period primarily attributable to lower costs of sale of
equipment, as a result of fewer cellular and paging unit sales
brought about by the Company entering into the distribution
arrangements with major electronics retailers.
The Company's general and administrative expenses include
salaries and other compensation to personnel, building
depreciation charges, maintenance expenses, promotional and
advertising costs and other related costs. The Company's general
and administrative expenses increased by 54.7% to US$25.9 million
for the 1998 Interim Period from US$16.8 million for the 1997
Interim Period. The increases were primarily attributable to
higher personnel costs, other expenses primarily from sales
commissions, and promotional and advertising costs. Personnel
costs for the 1998 Interim Period increased by 25.0% to US$9.7
million from US$7.8 million for the 1997 Interim Period,
reflecting the operations of TRICOM USA and the Call Tel
Corporation. At September 30, 1998, the Company had 1,272
employees compared to 759 employees at September 30, 1997. Other
expenses increased by US$5.0 million to US$8.3 million in the
1998 Interim Period from US$3.3 million in the 1997 Interim
Period primarily resulting from a US$3.0 million increase in
sales commissions related to prepaid cards. Promotional and
advertising costs increased by US$1.3 million to US$3.1 million
in the 1998 Interim Period from US$1.8 million in the 1997
Interim Period, as a result of campaigns related to the Amigo
prepaid card. General and administrative costs as a percentage
of total operating revenues increased to 28.7% for the 1998
Interim Period from 26.3% for the 1997 Interim Period.
For the 1998 Third Quarter, the Company's operating costs
increased 29.0% to US$25.0 million from US$19.3 million for the
1997 Third Quarter. However, as a percentage of total revenues,
operating costs decreased to 76.5% for the 1998 Third Quarter
from 79.1% for the 1997 Third Quarter. The increase in the
amount of operating costs is attributable to increased general
and administrative expenses and depreciation. However, these
increases were partially offset by a reduction in satellite
connections and carrier costs. Network depreciation and
depreciation expense increased as a result of the Company's
continued network investments. The Company's general and
administrative expenses increased by 54.4% to US$10.0 million for
the 1998 Third Quarter from US$6.5 million for the 1997 Third
Quarter, mainly due to other expenses, higher personnel costs,
and promotional and advertising costs. As a percentage of
operating revenues, general and administrative expenses increased
to 30.7% for the 1998 Third Quarter from 26.5% for the 1997 Third
Quarter.
OPERATING INCOME. Operating income increased 104.7% to
US$21.4 million for the 1998 Interim Period from US$10.4 million
for the 1997 Interim Period, and increased by 50.0% to US$7.7
million for the 1998 Third Quarter from US$5.1 million for the
1997 Third Quarter. The Company's operating income represented
23.6% of total operating revenues for the 1998 Interim Period
compared to 16.3% of total operating revenues for the 1997
Interim Period. As a percentage of total operating revenues,
operating income increased to 23.5% for the 1998 Third Quarter
compared to 20.9% for the 1997 Third Quarter reflecting higher
margins from local service, cellular and international long
distance services.
OTHER INCOME (EXPENSES). Other expenses increased 8.9% to
US$9.2 million for the 1998 Interim Period from US$8.4 million
for the 1997 Interim Period reflecting increases in net interest
expense. However, other expenses decreased by 33.9% to US$2.4
million for the 1998 Third Quarter from US$3.7 million for the
1997 Third Quarter as a result of higher interest income.
Interest expense increased 42.3% to US$12.0 million for the 1998
Interim Period from US$8.5 million for the 1997 Interim Period
and by 8.2% to US$3.8 million for the 1998 Third Quarter from
US$3.5 million for the 1997 Third Quarter due to higher long term
debt outstanding as a result of the issuance of US$200 million
aggregate principal amount of the Company's 11 3/8% Senior Notes
due 2004 (the "Senior Notes") during the 1997 Third Quarter.
Interest expense as a percentage of total operating revenues
remained unchanged at 13.3% for both the 1998 Interim Period and
the 1997 Interim Period, and decreased to 11.6% for the 1998
Third Quarter compared to 14.4% for the 1997 Third Quarter.
NET EARNINGS. Net earnings increased by US$10.2 million to
US$12.2 million, or US$0.55 per share, for the 1998 Interim
Period from earnings before extraordinary item of US$2.0 million,
or US$0.12 per share, for the 1997 Interim Period and by US$3.8
million to US$5.2 million, or US$0.22 per share, for the 1998
Third Quarter from earnings before extraordinary item of US$1.4
million, or US$0.08 per share, for the 1997 Third Quarter, as a
result of higher operating income. The weighted average number
of shares outstanding at September 30, 1998 were 22,311,211
compared to 17,085,851 at September 30, 1997. Net earnings
accounted for 13.5% and 16.1% of total operating revenues for the
1998 Interim Period and the 1998 Third Quarter, respectively,
while earnings before extraordinary item accounted for 3.1% and
5.9% for the 1997 Interim Period and the 1997 Third Quarter,
respectively. However, as a result of a US$5.5 million write-off
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related to the retirement of indebtedness with the proceeds of
the Senior Notes during the 1997 Third Quarter, the Company
recorded a net loss after extraordinary items of US$3.5 million
for the 1997 Interim Period and US$4.0 million for the 1997 Third
Quarter.
EBITDA. Earnings before interest, taxes, depreciation and
amortization increased by 82.5% to US$38.6 million for the 1998
Interim Period compared to US$21.2 million for the 1997 Interim
Period, and by 60.8% to US$14.2 million for the 1998 Third
Quarter from US$8.9 million for the 1997 Third Quarter, as a
result of higher operating margins. See Note 2 of Notes to
Financial Statements.
EFFECTS OF INFLATION
The annual inflation rates in the Dominican Republic in
1995, 1996 and 1997 were 9.2%, 4.0% and 8.0%, respectively. To
date, the effects of inflation on TRICOM's operations have not
been significant.
CHANGE IN FUNCTIONAL AND REPORTING CURRENCY
Through December 31, 1996, the Company used the Dominican
peso as its functional and reporting currency. While a
significant portion of the Company's revenues, assets and
liabilities historically were denominated in U.S. dollars, a
clear determination of the functional currency was difficult, and
the Company used the Dominican peso as its functional currency.
However, in the Company's opinion, with the issuance of the
Senior Notes, the Company's cash flows and financial results of
operations are more appropriately presented in the U.S. dollar as
the functional currency. Effective January 1, 1997, the Company
changed its functional currency from the Dominican peso to the
U.S. dollar. The Company's financial statements for periods
prior to January 1, 1997 have not been restated for this change
in the functional currency. However, the Company did
retroactively change its reporting currency to the U.S. dollar.
The change in functional currency was made effective as of
January 1, 1997. The effect of the change was to decrease
results of operations by US$301,000 for 1997.
The Company anticipates that this change in functional
currency may diminish the impact of any future devaluation of the
Dominican peso against the U.S. dollar.
LIQUIDITY AND CAPITAL RESOURCES
Substantial capital is required to expand and operate the
Company's telephone networks. During the 1997 Interim Period and
the 1998 Interim Period, the Company expended US$47.4 million and
US$112.2 million, respectively, for capital expenditures. During
1997, the Company made capital expenditures for the installation
of local access lines, expansion of the Company's cellular and
paging system into areas not previously served and expansion of
international facilities. The Company currently plans to make
capital expenditures during 1998 of up to US$138.1 million,
including approximately US$112.2 million expended through
September 30, 1998. The Company currently estimates that
capital expenditures relating to the installation of
approximately 35,000 wire local access lines will total
approximately US$36.1 million for 1998. The Company anticipates
expending approximately US$24.5 million in 1998 to enhance its
cellular network by adding new cell sites and capacity to
existing cell sites. The Company also anticipates expending
during 1998 approximately US$9.3 million to install a switch in
New York and to expand its international circuit capacity and
US$14.0 million for other network improvements. The Company
anticipates expending approximately US$13.6 million for working
capital purposes related to its expansion program, US$4.6 million
in transmission equipment and value added products, US$5.0
million for customer premises equipment and corporate business
accounts purchases, US$11.4 million in network projects and
increases interconnection facilities with local carriers. Also,
the Company anticipates expending approximately US$7.0 million on
data communications equipment and enhancing the Company's
Customer Care Centers. However, the amounts to be expended in
1998 for these purposes will depend upon a number of factors,
including demand for the Company's services and competition in
the Company's various markets. Thereafter, the Company expects
to continue to expand its network in order to increase its
penetration of the residential and commercial markets. The
Company currently estimates that it will expend approximately
US$25.9 million in capital expenditures for the remainder of
1998.
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As part of its local network expansion program, the Company
has tested and intends to deploy a fixed cellular system, called
a wireless local loop, or "WLL", during 1998 in order to
accelerate its expansion into the residential and commercial
markets. In August 1998, the Company selected Motorola as the
infrastructure provider of CDMA technology and equipment for its
WLL and PCS build-out plans. The four-year US$52 million
contract with Motorola provides for the installation of 150,000
wireless subscribers. The Company expects to have its WLL in
operation on a limited basis in the capital city of Santo Domingo
by the first quarter of 1999, and plans to expand into five other
cities during the rest of 1999. The Company anticipates that the
first phase of the WLL build-out will be completed at a cost of
US$12.6 million, and will deploy capacity to connect
approximately 36,000 subscribers by the end of 1999. Upon
completion of the first stage, the WLL system is expected to
cover approximately 60% of the area of Santo Domingo. The
Company expects the second stage, which will cover five
additional cities, to be operational by the end of the second
quarter of 1999. The Company expects to implement the third and
final stage over the course of the following two years, extending
coverage to seven additional cities and increasing capacity in
the previously covered cities. The Company anticipates to
finance the cost of the first phase of the WLL with a portion of
the US$68.7 in net proceeds received from the offering of
5,700,000 American Depositary Receipts (the "ADR Offering") which
was consummated in May 1998, as well as net cash flows from
operations and short-term borrowings.
The Company anticipates that it will be able to meet its
operating and capital requirements with the net proceeds received
from the ADR Offering, cash flows from operating activities and
available borrowings under existing short-term credit facilities.
Management believes that the increased average maturity of the
Company's indebtedness, as a result of its Senior Note Offering
in August 1997, will enhance the Company's operational
flexibility. Net cash provided by operating activities was
US$23.5 million and US$10.3 million for the 1998 Interim Period
and the 1997 Interim Period, respectively. At December 31, 1997
the Company had positive working capital of US$4.8 million,
however, at September 30, 1998 the Company had negative working
capital of US$310,000 as a result of increased short-term
borrowings and accounts payable to suppliers. If the Company
decides to accelerate further the expansion of its local access
network or if the Company's cash flow from operating activities
is lower than expected, the Company may need to obtain additional
financing and there can be no assurance that such financing will
be available. The payment of interest on the Senior Notes for
the first four interest periods has been funded with investments
that are held in an escrow account, which will result in the
enhancement of the Company's cash flow through 1999.
The Company had account receivables of US$17.0 million and
US$15.8 million and allowance for doubtful accounts of US$623,000
and US$669,000 at September 30, 1998 and December 31, 1997,
respectively.
The Company's total assets increased to US$428.1 million at
September 30, 1998 from US$321.1 million at December 31, 1997.
The Company's indebtedness was approximately US$258.2 million at
September 30, 1998, of which US$200.0 million represented the
Company's Senior Notes and US$58.2 million represented short-term
borrowings, including an aggregate principal amount of US$32.0
million of industrial revenue bonds issued by the Caribbean
Basin Projects Financing Authority ("Carifa Bonds"). The Company
has irrevocably deposited with the trustee for the Carifa Bonds
an amount estimated to be sufficient to pay the principal amount
of the Carifa Bonds at their maturity in 1999 and to pay interest
on such industrial revenue bonds through such date.
Shareholders' equity increased to US$122.3 million at September
30, 1998 from US$42.1 million at December 31, 1997, as a result
of the ADR Offering.
As a result of the ADR Offering, GFN and Motorola were no
longer required to provide guarantees of borrowings of the
Company, and the Company terminated a credit facility with
Citibank (the "Citibank Facility") which permitted the Company to
borrow up to US$11.0 million. The Company currently is
negotiating with international banks to obtain a credit facility
to replace the Citibank Facility. There can be no assurance that
the Company will be able to obtain a credit facility to replace
the Citibank Facility or, if it is obtained, that it will be on
terms as favorable as those terms provided in the Citibank
Facility. The inability to obtain a replacement facility could
adversely affect the Company's liquidity.
At September 30, 1998, the Company had approximately US$24.2
million available under short-term, U.S. dollar- and peso-
denominated credit facilities with Dominican banks.
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The Company's total assets increased from US$18.9 million at
December 31, 1992 to US$321.1 million at December 31, 1997 and
US$428.1 million at September 30, 1998.
The Company has not engaged in transactions to hedge against
foreign currency or interest rate fluctuations.
IMPACT OF YEAR 2000
The year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year (the "Year 2000 Issue"). Any of TRICOM's
computer programs or hardware that have date-sensitive software
or embedded microprocessors may recognize a date using "00" as
the year 1900 rather than the year 2000. The failure to correct
any such programs or hardware could result in system failures or
miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business
activities. Based on recent assessments, TRICOM has determined
that it will be required to modify or replace some portions of
its software, and, to a lesser extent, its hardware so that those
systems will properly utilize dates beyond December 31, 1999.
TRICOM believes that with modification and replacement of
existing software and hardware, the Year 2000 Issue can be
substantially mitigated. However, if such modifications and
replacements are not made, or are not completed on a timely
basis, the Year 2000 Issue could have a material impact on the
operations of TRICOM. The Company currently anticipates that
such replacements and modifications will be completed on a timely
basis.
TRICOM's plan to resolve Year 2000 Issues involves four
phases: assessment, remediation, testing and implementation.
TRICOM's management information systems ("MIS") department has
completed an assessment of all material information technology
systems that would be affected by the Year 2000 Issue if not
modified and has initiated a program to modify or replace
portions of its software so that TRICOM's computer systems will
function properly after December 31, 1999. TRICOM's financial
systems, including general ledger, accounts payable, purchase
orders, fixed assets and inventory control functions, already
have been upgraded and are Year 2000 compliant. TRICOM's systems
that assist in the management of service orders, facilities
management, engineering work orders, toll rating, toll editing
and trouble tracking are now Year 2000 compliant. The MIS
department has assessed and modified the BIOS of every computer
on the Company's internal network, and every computer on such
network is now Year 2000 compliant. The MIS department has
commenced a software application development project to improve
TRICOM's billing system and make such systems Year 2000
compliant. The Company anticipates that the new billing
application platform will be completed by the first quarter of
1999. TRICOM expects software reprogramming and replacement,
testing and implementation to be completed by the first quarter
of 1999.
TRICOM's network engineering department has identified every
component of the Company's telecommunications network that may be
subject to Year 2000 failures. The Company anticipates that it
will have remedied or replaced any network components that are
not Year 2000 compliant by the end of the first quarter of 1999.
The remediation or replacement of telecommunications equipment
depends primarily on the manufacturers of that equipment for
modifications. TRICOM is also in the process of assessing the
extent to which its suppliers of other products and services will
be able to supply TRICOM after December 31, 1999. TRICOM has
initiated communications with all of its significant equipment
vendors and other suppliers. TRICOM has not obtained timetables
of expected completion dates of modification, testing and
implementation from all of the vendors and suppliers. TRICOM
does not control its equipment vendors and other suppliers, but
is attempting to have such timetables submitted in the first
quarter of 1999. The effect on TRICOM's operations of not having
these systems remediated could be significant.
TRICOM believes that its Year 2000 assessment and
remediation program is approximately 86% complete with respect to
its critical business systems and 81% complete with respect to
its network. The total cost of the Year 2000 project is
estimated to be less than US$100,000 and is being expensed as
incurred and funded through operating cash flows.
TRICOM conducts transactions that interface directly with
other domestic and international telecommunications networks.
There is no guarantee that the networks of other companies to
which TRICOM's network connects will be timely compliant or that
the failure to so comply would not have an adverse effect on
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TRICOM's network. Furthermore, there can be no assurance that
other telecommunications providers will not experience material
business disruptions that could affect TRICOM as a result of the
Year 2000 Issue. TRICOM plans to complete communications with
important international carriers and providers of international
connectivity as to their Year 2000 readiness in the first quarter
of 1999. The communications to date from such third parties to
TRICOM's inquiries do not indicate that these third parties
expect, at this time, to be non-compliant by the Year 2000 based
on their progress to date. However, the inability of a
substantial number of third parties to complete their Year 2000
resolution process could materially impact TRICOM. For example,
the failure of satellite circuits or international gateway
switches to function properly as a result of the Year 2000 Issue
could cause significant disruptions in TRICOM's ability to
generate revenues, which could have a material adverse effect on
TRICOM's results of operations and financial condition.
TRICOM has not established contingency plans in case of
failure of its information technology systems, but it anticipates
that it will have developed such plans by the end of the first
quarter of 1999. In the event TRICOM's vendors or the
telecommunications networks with which it connects do not expect
to be Year 2000 compliant, TRICOM's contingency plan may include
replacing such vendors or conducting the particular operations
itself.
TRICOM's schedule for completing its Year 2000 modifications
are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the
continued availability of certain resources, and other factors.
Estimates on the status of completion and the expected completion
dates are based on progress to date compared to the timetable
established by its management. TRICOM has not employed the
services of independent contractors to verify TRICOM's assessment
and estimates related to the Year 2000 problem. There can be no
guarantee that these estimates will be achieved and actual
results could differ materially from these plans. Specific
factors that might cause such material differences include,
but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all
relevant computer codes and similar uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not applicable.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a
party, other than routine litigation incidental to the business
of the Company which is not otherwise material to the business or
financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 6-K
(a) Exhibits.
None.
(b) Reports on Form 6-K. The Company filed with the
Securities and Exchange Commission a Report on Form 6-K
on August 14, 1998 reporting the results of the six-
month period ended June 30, 1998 and a Report on Form
6-K on August 19, 1998 reporting the Company's contract
with Motorola to build TRICOM's wireless local loop.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TRICOM, S.A
Dated: November 13, 1998 By: /s/ Carl H. Carlson
-----------------------------
Carl H. Carlson
Executive Vice President
and Member of the
Office of the President
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