SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number:
TRICOM, S.A.
(Exact name of Registrant as specified in its charter)
Dominican Republic
(Jurisdiction of incorporation or organization)
Avenida Lope de Vega No. 95, Santo Domingo, Dominican Republic
(Address of principal executives offices)
Securities registered pursuant to Section 12(b) of the Act.
American Depositary Shares
Class A Common Stock, par value RD$10 per share
Securities registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
11-3/8% Senior Notes due September 1, 2004
At December 31, 1998, there were 5,700,000 shares of Class A Common Stock
and 19,144,538 shares of Class B Stock issued and outstanding.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(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
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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
Page
GENERAL INTRODUCTION .........................................................1
PART I
ITEM 1. DESCRIPTION OF BUSINESS .............................................2
ITEM 2. DESCRIPTION OF PROPERTY ............................................23
ITEM 3. LEGAL PROCEEDINGS ..................................................23
ITEM 4. CONTROL OF REGISTRANT ..............................................24
ITEM 5. NATURE OF TRADING MARKET ...........................................26
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS ..........................................................26
ITEM 7. TAXATION ...........................................................27
ITEM 8. SELECTED FINANCIAL DATA ............................................28
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION .........................................31
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .........43
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT ...............................44
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS .............................45
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES .....45
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS .....................45
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED .........................46
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES ....................................46
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES .......................................................46
PART IV
ITEM 17. FINANCIAL STATEMENTS ...............................................47
ITEM 18. FINANCIAL STATEMENTS ...............................................47
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS ..................................47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ..................................F-1
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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. See "Item 9. Management's Discussion and Analysis of Results of Operations
and Financial Condition" and Note 2 of Notes to the audited consolidated
financial statements of the Company at December 31, 1997 and 1998 and for the
years ended December 31, 1996, 1997 and 1998 (the "Consolidated Financial
Statements"). Unless otherwise stated, Dominican peso amounts that appear in
this Annual Report have been translated into United States dollars. As of
December 31, 1997 and 1998, the rates used by the Company to translate Dominican
peso denominated accounts at the year-end were RD$14.35 and RD$15.61; RD$14.25
and RD$15.17 as the average rate, respectively.
In this Annual Report references to "$," "US$" or "U.S. dollars" are to
United States dollars, and references to "Dominican pesos" or "RD$" are to
Dominican pesos. This Annual Report contains translations of certain Dominican
peso amounts into U.S. dollars at specified rates solely for the convenience of
the reader. These translations should not be construed as representations that
the Dominican peso amounts actually represent such U.S. dollar amounts or could
be converted into U.S. dollars at the rate indicated. The average of prices of
one U.S. dollar quoted by certain private commercial banks (the "Private Market
Rate") as reported by Banco Central de la Republica Dominicana (the "Central
Bank") on December 31, 1998 was RD$15.64 = US$1.00, the date of the most recent
financial information included in this Annual Report. The Federal Reserve Bank
of New York does not report a noon buying rate for Dominican pesos. On April 26,
1999, the Private Market Rate was RD$16.11 = US$1.00.
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual 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;
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.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
TRICOM is a full service telecommunications provider in the Dominican
Republic, and has long distance operations in the United States. TRICOM
commenced operations as a low-cost international long distance provider in 1992
and has since expanded to provide basic local service, national long distance,
cellular, paging, Internet access and value-added services. 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$125.5 million in 1998.
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 the 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 emerging carriers which account for an increasing share of the
total traffic between the two countries. For 1998, the Company received 206.6
million minutes from international carriers and generated US$50.3 million in
revenues from international traffic. In January 1997, the Company commenced
operations of its subsidiary TRICOM USA, Inc., a Delaware corporation ("TRICOM
USA"), which is a facilities-based international and resale carrier located in
the United States. In 1998, TRICOM USA accounted for 53.2% of the total
international minutes from the United States received by the Company. The
Company believes that TRICOM USA will provide it with an important means for
gaining additional market share of the international long distance traffic from
the United States to the Dominican Republic.
The Company sent 24.4 million minutes of international long distance
traffic from the Dominican Republic in 1998, generating US$17.6 million in toll
revenues. The Company operates a chain of owned or franchised public telephone
centers and sells a prepaid calling card, the Efectiva Card, which allows
customers to make international long distance calls. The Company receives the
bulk of its international long distance toll revenues from its local service
customers, users of the Efectiva Card, its public telephone centers and its
large business customers. In the future, the Company expects that its local
service customers will generate an increasing portion of these international
long distance revenues, as well as additional long distance revenues for calls
within the Dominican Republic.
DOMESTIC SERVICES
Local Service. TRICOM provides local exchange services to residential and
small business customers in select areas of Santo Domingo, Santiago and San
Francisco de Macoris. These cities are the three largest in the Dominican
Republic, comprising 43% of the total population of the country. At December 31,
1998, the Company had 80,616 local access lines in service, including 37,421 net
local access lines installed during 1998. The Company currently uses copper or
fiber wirelines to connect customers to its network. The Company is accelerating
its penetration of the basic local service market by deploying a fixed digital
cellular system, or wireless local loop ("WLL"). The WLL employs digital
cellular technology that uses the Code Division Multiple Access ("CDMA")
protocol and operates on the 1.9 GHz radio frequency band. The WLL will allow
the Company to achieve faster line installation and to reach broader service
areas than possible with a wireline network. The Company is currently market
testing approximately 3,000 WLL lines in service around the Dominican Republic's
capital city of Santo Domingo and expects to complete its wireless local loop
deployment by the third quarter of 1999.
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Cellular. At December 31, 1998, the Company had 108,532 mobile cellular
subscribers, representing approximately 52% of the subscribers for such service
in the Dominican Republic according to information available to the Company. In
August 1997, the Company initiated several programs to enhance cellular
subscriber growth, including the introduction of the "Amigo" prepaid cellular
card program and arrangements with major consumer electronics retailers to offer
the Company's cellular service in conjunction with their sale of handsets. As a
result, the Company's cellular subscriber base grew by 164% from 41,107
subscribers at September 31, 1997 to 108,532 subscribers at December 31, 1998.
On April 26, 1999, the Company announced the launching of its "Millennium"
PCS digital wireless service. The service will utilize CDMA technology enabling
cellular customers in the Dominican Republic to enjoy higher sound clarity and
call quality than available through analog wireless services. The announcement
marked the completion of the first phase of TRICOM's PCS deployment, which will
initially serve 80% of the nation's capital city of Santo Domingo, covering a
population of approximately 2.5 million people. The second phase of the
Company's digital mobile expansion program is scheduled to be completed by the
end of the second quarter of 1999, expanding coverage to five additional cities
and addressing a total population of over 4 million. The Company believes that
these programs will be instrumental to the future growth of its cellular
subscriber base.
PRINCIPAL SHAREHOLDERS
TRICOM is controlled by GFN Corporation, Ltd. 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. In
May 1998, TRICOM made its initial public offering in the United States of 5.7
million American Depositary Receipts representing an equal number of TRICOM's
Class A Common Stock. The ADRs are listed on the New York Stock Exchange under
the ticker symbol "TDR." 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. At December 31, 1998, GFN owned 46.2% of the shares of
Common Stock (58.3% of the total voting power), Motorola 30.8% (38.8% of the
total voting power) and the public 23% (2.9% of the total voting power).
DOMINICAN TELECOMMUNICATIONS MARKET
The Company believes that several factors make the Dominican Republic an
attractive market for telecommunications services. These factors include:
Potential for Growth of Domestic Services. The Company believes that there
is substantial unmet demand for telephone service in the Dominican Republic as
large segments of the Dominican population have limited access to such services.
According to the International Telecommunications Union, or ITU, a specialized
telecommunications agency of the United Nations, at December 31, 1996 there were
approximately 8.3 telephone lines per 100 inhabitants in the Dominican Republic.
As of December 31, 1998, the Company estimates that the rate of line penetration
has increased to approximately 9.0 telephone lines per 100 inhabitants.
High Volume of International Traffic. According to statistics compiled by
the United States Federal Communications Commission (the "FCC"), the Dominican
Republic received the fourteenth largest volume of international long distance
traffic from the United States in 1997, the last year for which such information
has been compiled. International long distance traffic between the Dominican
Republic and the United States increased at an average annual rate of 10.8%
between 1993 and 1997. The Company attributes the high volume of international
traffic to the increasing number of Dominican expatriates living in the United
States.
New General Telecommunications Law and Rate Rebalancing. The Dominican
Government has initiated a price liberalization process with the adoption of the
new General Telecommunications Law No. 153-98 which became effective on
August 1, 1998. This legislation has created an autonomous regulator and
permits, rate rebalancing of first residential line tariffs, and adjustment of
interconnection fees to reflect marginal costs. As a result of this legislation,
international long distance carriers like TRICOM will no longer pay subsidies
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for the construction of local lines. On January 14, 1999, TRICOM announced price
increases in residential monthly rent charges as well as measured service rates,
effective January 1, 1999.
Rapidly Growing Economy. The Dominican Republic is one of the fastest
growing economies among the developing countries of the world with an average
growth rate of nearly 6.4% and single-digit average inflation rates over the
past five years. According to data published by the Central Bank, the Dominican
Republic's GDP grew by 7.3%, 8.2% and 7.3% during 1996, 1997 and 1998,
respectively. During those same years, the telecommunications sector grew by
16.3%, 19.2% and 20.6%, respectively, making it the fastest growing sector of
the Dominican economy. In 1996 and 1998, the Dominican Republic recorded the
highest GDP growth rate of the 33 countries that comprise the Latin American and
Caribbean regions.
COMPANY STRATEGY
The Company's strategic objectives are to (i) expand domestic services
rapidly in order to take advantage of opportunities presented by significant
unmet demand and (ii) continue to increase its share of the market for
international long distance services. Key elements of the Company's strategy are
as follows:
Expand Local Network to Penetrate Underserved Markets. The Company targets
middle and lower-middle class individual customers and small business in urban
areas that currently have limited access to telephone services from their homes
and places of business. The Company has expanded its local access line network
to 80,616 local access lines at December 31, 1998, including 37,421 net local
access lines installed during 1998. By deploying a WLL, the Company anticipates
that it will be able to further accelerate its local service build-out program,
installing approximately 45,000 local access lines in 1999.
Use WLL to Accelerate Local Network Build-out. On August 18, 1998, the
Company announced the signing of a US$52 million contract with Motorola as the
infrastructure and equipment provider for a 150,000 line CDMA-WLL buildout. The
WLL, which will use CDMA technology and operate on the 1.9 GHz radio frequency
band, allows for widespread coverage and will enable the Company to utilize mass
marketing techniques. The Company initially intends to establish cell sites
covering large areas of Santo Domingo. The WLL will allow for more rapid
installation of basic local service than by the extension of the Company's
wireline network and increase the areas in which the Company can provide
service. The WLL affords the Company greater flexibility because it is scalable,
allowing for increases in service capacity as and where customer demand
warrants. Furthermore, because the equipment for the WLL's base stations is
modular, the Company may redeploy equipment as customer demand changes. The
Company believes that the costs of maintaining the WLL will be lower than those
of maintaining a wireline system. In the future, the Company will be able to
offer fixed basic local and mobile cellular services employing a single
telephone number. The Company is currently market testing approximately 3,000
WLL lines, in service around the Dominican Republic's capital city of Santo
Domingo. The main objectives of the Company's trials are to test the
functionality of the CDMA-WLL network. The Company expects to complete its
wireless local loop deployment by the third quarter.
Offer Service Packages to Enhance Customer Satisfaction and Company
Revenues. TRICOM is the only telecommunications company in the Dominican
Republic that offers customers the "bundling" of services which are invoiced on
a single bill. The Company offers customers broad flexibility in assembling
customized packages of services, which provide customers cost savings and
enhanced control over their telephone spending. Specifically, customers may
purchase a package of services for a preset monthly fee which combines local
service, domestic and international long distance service and/or specialty
features, and may specify, in advance, the number of minutes per month and
destinations for each service included in the package. Customers are responsible
for paying at regular rates for minutes exceeding the preset amount included in
the package. TRICOM believes that by offering customized packages, customers
will subscribe to a wider array of services than they would otherwise and, as a
result, such packages increase the amount of revenues the Company receives per
subscriber. The Company believes that providing customers with such budgeting
capability increases consumer confidence and allows the Company to achieve
increased service penetration, higher levels of customer satisfaction and lower
incidence of delinquent payments.
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Capture Greater Share of International Long Distance Market Through TRICOM
USA. TRICOM USA principally provides international carrier services to emerging
carriers which account for an increasing share of international long distance
traffic from the United States to the Dominican Republic. TRICOM USA provides
emerging carriers with an alternative channel for sending international long
distance traffic. The Company believes that this operational presence has
enabled it to gain a greater share of the traffic from the United States to the
Dominican Republic and to realize higher margins on such traffic than if the
Company operated as a reseller. In July 1998, TRICOM installed its own
state-of-the-art switching facility in the New York metropolitan area, a
Northern Telecom DMS-250 Supernode, configured to handle more than 100,000
trunks. By having its own switching facilities, the Company believes it will be
able to provide termination of international long distance traffic at very
competitive rates to several countries in addition to the Dominican Republic, at
the same time, enabling it to better serve its existing customer base as well as
expand its service base throughout the United States.
Capitalize on Brand Name Recognition. The Company believes that it has
developed significant brand name recognition and that Dominican consumers have
come to associate TRICOM with innovative pricing, reliable service, responsive
customer service and accurate billing. TRICOM consistently emphasizes its brand
name and reputation in its marketing programs. The Company plans to capitalize
on this recognition as it extends its basic local phone service into new areas.
Moreover, the more rapid regional coverage made possible by using the WLL will
make more effective the use of mass media, including television, radio and
newspapers, to promote the Company's brand name and local services.
Leverage High Quality Network. The Company has built a fully integrated,
completely digital local access system. As a result, TRICOM generally offers to
its customers an array of value-added products and services such as Custom Local
Access Signaling Services ("CLASS") that currently cannot be provided over large
portions of the public switched network. The Company believes that its use of
advanced technology has enhanced its reputation as a provider of innovative
telecommunications services and products in the Dominican Republic.
OPERATIONS
TRICOM has organized its operations into units which provide services to
specific market segments or to other units within the Company. Two strategic
business units provide services to domestic and international markets while two
operational units provide company wide services to each of the strategic
business units. The Residential and Business Unit provides a wide variety of
services, including local service, domestic and outbound international long
distance service and cellular and paging services. It also operates the
Company's network of retail telephone centers and markets the Efectiva and Amigo
prepaid calling cards. The International Unit manages the Company's arrangements
and relationships with international long distance carriers and TRICOM USA's
operations in the New York metropolitan area. The Engineering and Operations
Network Unit designs, builds and maintains the Company's network. The Corporate
Center provides financial strategic planning, human resources, management
information and internal auditing and accounting services. Each business and
operational unit is managed by a vice president who reports to the Office of the
President.
RESIDENTIAL AND BUSINESS UNIT
Basic Telephone Service to Residential Customers and Small- to Medium-Sized
Businesses
The Company has been pursuing a local access network expansion program and
had 80,616 local access lines in service at December 31, 1998, including 37,421
net lines installed during 1998. All of the Company's basic telephone service
customers have access to a range of CLASS features, including call forwarding,
three-way calling, call waiting, and voice mail applications. Many of the CLASS
features require connection to digital switches, and the Company currently is
the only Dominican telecommunications provider with a completely digital local
access network. In addition to local service, the Company provides
direct-dialed, collect and operator-assisted international and domestic long
distance services and Internet access to its residential and commercial
customers.
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The Company offers customers broad flexibility in assembling customized
packages of services, which offer customers cost savings and enhanced control
over their consumption of telephone services. Customers may choose from a menu
of services, including domestic and international long distance services, local
service and CLASS features. Service packages also permit customers to preset
their monthly bills based upon. For example, local service minutes as well as
long distance minutes and specified destinations. Customers are responsible for
paying for usage levels in excess of the preset package amounts, at regular per
minute rates. The Company believes that providing customers with such budgeting
capability increases consumer confidence with respect to use of
telecommunications services, consequently allowing for increased service
penetration, higher levels of customer satisfaction and lower incidence of
delinquent payments.
Furthermore, TRICOM offers bundling with other communication services such
as cellular, pagers or Internet. A customer can receive a single invoice for
local service, long distance and other services.
Overview of WLL 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
the signing of Motorola as its WLL infrastructure provider. The four year, US$52
million contract provides for the installation of 150,000 wireless subscribers.
The WLL will use CDMA technology, defined under the IS-95 standard and that
operates on the 1.9 GHz radio frequency band, the same frequency used in the
United States by PCS service providers. This system will deploy certain
technology similar to that deployed by PCS providers in the United States.
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, facilitating the use of 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%.
Although the initial build-out of the WLL was completed by the end of 1998,
the service is currently being market tested and will be available on a limited
basis during the first quarter of 1999. With the completion of the initial
build-out phase, the WLL system will cover approximately 70% of the area of
Santo Domingo, with a population of 2.5 million people, 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 1.5 million people, should be operational by
the third 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 installed 3,000 WLL lines around the Dominican Republic's
capital city of Santo Domingo for market trials. These market trials are
designed to test the functionality of the WLL network, measure customer
satisfaction, identify services preferred by customers, as well as to revise the
Company's internal business processes such as billing, rating and sales.
Preliminary results of the testing and system optimization phase of the WLL
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deployment have been highly successful, as the Company has achieved a call
completion rate of 97%. The market tests represent part of the first phase of
the Company's WLL deployment, along with the expansion of coverage and capacity
in the city of Santo Domingo, which included the installation of 18 cell sites,
a EMX-5000 switch, and the installation of one Centralized Base Site Controller.
The second phase of the Company's WLL deployment will include the installation
of 33 additional cell sites for a total 51 sites, as well as the installation of
an additional EMX-5000 switch in the city of Santiago designed to provide
coverage for the country's northern region localities. The Company expects to
complete it's the first phase of its wireless local loop deployment by the third
quarter of 1999.
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. 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.
Cellular
The Company has provided full domestic cellular services since November
1994. The Company's cellular network covers approximately 80% of the country's
population. The Company currently offers an analog system to satisfy the demand
of the Dominican cellular market, but, the Company intends to offer digital
cellular service as part of its WLL strategy. The Company's mobile cellular
system is an analog system which operates in the 800 MHz radio frequency range,
and the Company holds licenses for a total of approximately 13 MHz of cellular
frequency. Based upon information published by the Secretariat of Public Works
and Communication and publicly available information, the Dominican Republic's
telecommunications authority, there were approximately 210,000 mobile cellular
subscribers in the Dominican Republic at December 31, 1998. At December 31,
1998, the Company had 108,532 mobile cellular subscribers, representing
approximately 52% of the Dominican mobile cellular market.
On April 26, 1999, the Company announced the launching of its "Millennium"
PCS digital wireless service. The technology underlying the Company's PCS
service is Code Division Multiple Access (CDMA IS-95), operating in the 1900 MHz
frequency. This technology provides for added security and privacy compared with
traditional analog systems, and it also offers greater capacity. Millennium
customers will be able to receive all of the benefits related to a digital
service, including digital messaging, caller ID and voicemail. In addition,
TRICOM will offer a dual-band service, allowing customers to use their mobile
phones nationwide over both digital and analog networks.
The ITU and other industry sources estimate that the number of mobile
cellular subscribers in the Dominican Republic will exceed 300,000 by the year
2000. The Company's mobile cellular subscriber base grew by 164% during 1998.
The Company attributes a substantial portion of this growth to the introduction
of TRICOM's prepaid cellular card, the Amigo card, in August 1997. At
December 31, 1998, Amigo represents 40% of the entire cellular market of the
Dominican Republic and 78% of the cellular subscribers of the Company. The Amigo
card program has expanded the Company's cellular customer base because it offers
cellular service to individuals who would not otherwise qualify for such service
under the Company's current credit policies and because it appeals to customers
who prefer to budget their cellular telephone spending. The Company also has
entered into arrangements with major consumer electronics retailers to offer the
Company's cellular services in conjunction with their sale of handsets.
The Company had an average monthly churn rate of 3.6% in 1998 compared to
an average monthly churn rate of 3.9% in 1997. The Company calculates churn by
dividing the number of subscribers disconnected during the year by the sum of
subscribers at the beginning of each month during such year. The Company
believes that its stringent credit policy, instituted during 1996, has reduced
greatly the number of cellular and paging subscribers that are high credit risks
and may contribute to churn rates remaining at the 1998 rate in the future. If
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the Company is not able to maintain its credit policies, or is not able to limit
churn, this could have an adverse effect on its financial condition and results
of operation.
The Company's cellular services include value-added features, including
call waiting, call forwarding, three-way calling, and voice mail.
Until May 1996, the Company leased handsets, and as of December 31, 1998,
approximately 15% of the Company's current subscribers continue to lease their
handsets from the Company. Lease terms are for a minimum of one year. The
Company has discontinued leasing handsets to new individual subscribers. As a
result of its arrangements with major electronics retailers for the sale by them
of handsets in conjunction with subscriptions for Company services, the Company
sold handsets to less than 17% of its new subscribers in 1998. The Company does
not subsidize or provide credit on the sale of cellular handsets.
The Company applies a single rate structure for cellular services
throughout the country and offers rate discounts based upon volume, off-peak and
weekend calling. TRICOM also offers discount rates to customer-defined local and
international calling circles. In each case, the calling circle is comprised of
the five telephone numbers identified by a customer as those most frequently
called by such customer.
Paging
The Company has provided paging services since April 1995. At December 31,
1998, the Company provided paging services to 28,873 subscribers, representing
approximately 13% of the Dominican paging market according to market information
available to the Company. Paging sales have experienced a reduction due to
increased competition in the market. In addition, the Company believes that the
success of its prepaid cellular program has contributed to the decline of its
paging revenues because customers have replaced paging services with prepaid
cellular services.
The Company provides two basic types of pagers: numeric and alphanumeric
display. Digital display pagers permit a caller to transmit to the subscriber a
numeric message that may consist of a telephone number, an account number or
coded information, and has the memory capability to store several numeric
messages that can be recalled by the subscriber when desired. Alphanumeric
display pagers allow subscribers to receive and store messages consisting of
both numbers and text. The Company has implemented the FLEX protocol which
allows for increased alphanumeric messages and improves operational
efficiencies. At December 31, 1998, 52% of the Company's paging subscribers used
alphanumeric pagers and 48% of such subscribers used numeric pagers. The
Company's paging system currently covers approximately 80% of the country's
population. The Company's paging system operates on the 900 MHz radio frequency
band. The technology deployed also assures that a page will be transmitted
within five seconds of its being keyed in 99% of the time and the system has a
completion rate of 99.9%. The Company's paging technology also allows for the
same message to be broadcast to as many as 15 pagers creating a group paging
network.
TRICOM sells paging equipment to its new customers, although it continues
to lease such equipment to customers who had been activated prior to June 1996.
The Company currently does not subsidize or provide credit on the sale of paging
equipment.
Major Business Accounts
Within the Residential and Business Unit, a team of marketing professionals
targets the 400 largest businesses in the Dominican Republic, including large
multinationals, local business conglomerates and the largest hotels. The
Dominican Republic's 400 largest businesses account for a significant share of
the country's outbound long distance service market. These accounts generally
require more sophisticated technology and demand more service and support.
TRICOM also provides private network services for voice and data transmission,
as well as frame relay, trucking systems and Internet access, and cellular and
paging services to its large business customers.
The Residential and Business Unit focuses on providing high quality
products and services to large business accounts. Services typically required by
such accounts include domestic and international long distance service, fax and
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dedicated and private network transmission, local service, paging and cellular
services and equipment leasing. TRICOM has led the Dominican telecommunications
market in the introduction of billing packages that provide detailed call
reports with time-of-day, day-of-week and destination information as well as
flexible billing discount programs which are similar to those found in the most
competitive markets outside the Dominican Republic.
TRICOM provides data communications at the local and national level through
digital microwave facilities and internationally through leased lines. In 1995,
the Company launched its high capacity wireless data network which provides
service for the major commercial and urban areas of Santo Domingo, Santiago and
other major secondary cities, as well as remote areas of the country which cater
to tourism or have large agricultural businesses. The advantages of wireless
communications services are, among other things, faster installation, greater
flexibility in designing customer networks and enhanced security.
The Company is an Internet service provider and provides direct local
access to the Internet via dial-up and dedicated connections and, at
December 31, 1998, provided such service to approximately 2,000 subscribers. The
Company currently offers dial-up service at speeds of up to 56.0 kbps. The
Company recently increased transmission capacity to provide larger bandwidths
and improve the speed of Internet access.
Equipment offered for sale by the Company includes fully integrated turnkey
systems or system components. TRICOM is the exclusive distributor in the
Dominican Republic for Mitel and Comdial, two leading manufacturers of private
branch exchanges and key telephone systems. TRICOM also is a leading provider of
computer telephony integration systems in the Dominican Republic.
Public Telephony
The Company has operated retail telephone centers since 1992. The Company
initially depended upon retail telephone centers to generate outbound
international traffic in order to receive inbound traffic under the terms of
operating agreements with U.S. international carriers. As a result of changes in
the arrangements with U.S. international carriers, the number of minutes
received by U.S. international carriers no longer depends directly upon the
number of minutes sent to such carriers. Consequently, the Company refocused its
public telephony strategy by closing unprofitable retail telephone centers and
concentrating on serving underserved areas.
Telephone centers primarily provide access to high-quality, low-cost
telephone services to individual customers who either do not have telephone
services in their own homes or who are attracted by the competitive pricing of
such centers. Although the centers offer a wide range of telephone services,
customers principally use them for long distance calls. Telephone centers
accounted for approximately, 49%, 36% and 27% of the Company's total outbound
international minutes during, 1996, 1997 and 1998, respectively.
There are three types of public telephone centers: (i) centers operated by
the Company ("Centers"), (ii) minicenters franchised by the Company to third
parties ("Minicenters") and (iii) franchises that operate independently. At
December 31, 1998, there were 12 Centers and 250 Minicenters located throughout
the country, although most are located in urban areas and tourist centers.
Centers offer a wider range of services than Minicenters. In addition to long
distance services, the Centers offer fax, collect call service and power and
cable television bill payment services and Internet connection. Centers are open
from Monday to Saturday and operate between the hours of 8:00 A.M. and 8:00 P.M
on week days, and from 9:00 A.M. to 1:00 P.M. on Saturdays. Minicenters are open
during the regular business hours of the franchised establishments. Minicenters
are placed in a wide range of small, high-traffic retail businesses, such as
drugstores, convenience stores, bakeries, fast food eateries, ice cream shops
and travel agencies.
The Centers and Minicenters provide a distribution channel for the
Company's new products and services. In May 1995, TRICOM introduced the Efectiva
Card, the first prepaid calling card launched in the Dominican Republic, which
allows the customer to make international long distance phone calls by dialing a
four-digit network access code and a 14-digit identification number. The
Efectiva Card can be used to make calls from any telephone in the Dominican
Republic. The product is being distributed through wholesalers and retailers.
The Company has four wholesale distributors currently operating which target
smaller retailers totaling 3,840 points of sale for the Company's prepaid cards.
In addition, the Company has distribution agreements with some of the country's
9
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biggest retailers which account for and additional 1,250 points of sale. The
Efectiva Card also can be used in the United States and Puerto Rico.
INTERNATIONAL LONG DISTANCE
Company revenues from international long distance calls are derived from
two sources: (i) outbound calls made by TRICOM customers (included in "toll
revenues") and (ii) amounts the Company receives from foreign international long
distance carriers that connect calls to the Dominican Republic ("international
revenues"). Operating agreements between the Company and international long
distance carriers govern the second of these two revenue streams. Such
agreements establish, among other things, the rate each party must pay to the
other party to terminate its international and long distance calls in the other
party's country. Each party is paid by the other for the minutes of a call that
terminates in its country according to a wholesale rate which is known as the
"settlement rate." The settlement rate is typically a percentage of a fixed
end-to-end traffic routing rate, which is know as the "accounting rate."
In the past, the Company derived the bulk of its outbound minutes from its
retail telephone centers and business customers. With its local network
expansion, the Company now has begun to generate the majority of its outbound
minutes from its basic local service customers and pre-paid calling cards.
The FCC has exerted pressure to lower settlement rates for international
calls. On August 7, 1997, the FCC adopted an order that would require U.S.
international carriers to enter into settlement rate arrangements at certain
benchmark levels, based upon a country's income level, which in most cases would
be significantly less than previously prevailing settlement rates. The order
took effect on January 1, 1998. The order requires that the benchmark settlement
rate for the Dominican Republic be implemented by January 1, 2001. The benchmark
settlement rate for lower middle income countries, which the FCC has defined to
include the Dominican Republic, is US$0.19 per minute, and the order requires
that such rate be effective not later than January 1, 2001. The Dominican
Republic currently has an effective termination rate below the US$0.19 per
minute benchmark.
U.S. carriers have substantially lowered the effective settlement rate by
promoting volume discount arrangements. The Company has entered into agreements
with most of its correspondent U.S. international carriers which obligate such
carriers to deliver a minimum number of international long distance minutes to
the Company in exchange for per-minute discounts if certain thresholds are met.
Such volume discount agreements have had the effect of increasing the number of
minutes used to calculate the Company's international revenues but decreasing
the Company's per-minute revenue and profit margin on international long
distance calls. As a result of declining settlement rates and volume-based
discounts, the Company's average effective settlement rate declined from US$0.25
per minute at December 31, 1997 to US$0.21 per minute at December 31, 1998. The
Company believes that competitive and regulatory pressures likely will continue
to push settlement rates lower. Future decreases in settlement rates, without a
corresponding increase in the Company's long distance traffic from the United
States, would further reduce the Company's international revenues, adversely
affect the profit margins that the Company realizes on such revenues, and could
have a material adverse effect on the Company's business financial condition and
results of operations.
In 1997, TRICOM USA began to operate as a facilities-based and resale
international carrier in the United States. TRICOM USA provides international
carrier services principally to resellers, which account for an increasing share
of international long distance traffic between the United States and the
Dominican Republic. In July 1998, TRICOM USA installed its own switching
facility in the New York metropolitan area. By having switching facilities in
the United States, the Company has been able to provide to resellers an
alternative channel for sending international long distance traffic. The Company
believes that by operating its own switching facilities, TRICOM USA is able to
provide services for resellers and capture more of the inbound international
traffic from the United States. In addition, by controlling the origination and
termination of international long distance traffic between the United States and
the Dominican Republic, the Company believes that it will be able to send and
receive such traffic on more favorable terms than with international carriers.
Since the initiation of TRICOM USA's operations, the Company has derived a
greater percentage of international revenues from resellers. During 1998,
resellers originated 44% of the international long distance minutes from the
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United States to the Dominican Republic received by the Company. Resellers are
less well-established companies than major U.S. facilities-based carriers and,
as a result, minutes delivered by them may fluctuate significantly.
The Company derives a portion of its international revenues for terminating
calls to information providers located in the Dominican Republic. Information
providers offer information and entertainment services, including stock quotes,
weather, sports results, horoscopes and adult entertainment. The Company does
not terminate calls for adult entertainment services. The Company pays to an
information provider a significant portion of the revenues received by the
Company for terminating an international long distance call to the information
provider. In addition, the Company requires that all advertising material be
submitted to TRICOM for review and approval. The Company randomly monitors the
messages provided by information providers for which it terminates calls to
assure compliance with these guidelines. The number of international long
distance minutes that the Company received from information providers declined
from 11.7 million minutes in 1997 to 9.0 million in 1998. The Company
anticipates that the minutes attributable to, and revenues received from,
information providers will continue to decrease as accounting rates between the
United States and the Dominican Republic decline.
The following table sets forth the total number of minutes of traffic from
the United States to the Dominican Republic ("U.S. Inbound Minutes") and from
the Dominican Republic to the United States ("U.S. Outbound Minutes"), the
number of such minutes, the percentage of U.S. Inbound Minutes and U.S. Outbound
Minutes carried by TRICOM, and the ratio of U.S. Inbound Minutes to U.S.
Outbound Minutes for the years 1994 to 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998(1)
------------------------------------------------
(IN MILLIONS, EXCEPT FOR PERCENTAGES AND RATIOS)
<S> <C> <C> <C> <C> <C>
Total long distance minutes from U.S.
to Dominican Republic ("Total U.S.
Inbound Minutes")................. 314.2 411.5 416.3 385.1 --
U.S. Inbound Minutes carried by TRICOM 33.7 36.7 103.9 131.6 208.0
Percentage of Total U.S. Inbound
Minutes carried by TRICOM......... 10.7% 9.0% 25.0% 34.2% --
Total long distance minutes from
Dominican Republic to U.S. ("Total
U.S. Outbound Minutes")........... 69.2 97.6 112.9 107.8 --
U.S. Outbound Minutes carried by TRICOM 9.5 13.3 16.5 16.9 22.0
Percentage of Total U.S. Outbound
Minutes carried by TRICOM......... 13.7% 13.6% 14.6% 15.7% --
Total U.S. Outbound Minutes........... 4.5 to 1 4.2 to 1 3.7 to 1 3.6 to 1 --
</TABLE>
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Sources: U.S. Federal Communications Commission; TRICOM.
(1) At the date of the filing of this Annual Report, the FCC has not
published international long distance traffic for the year ended December 31,
1998.
MARKETING AND SALES
RESIDENTIAL AND SMALL- TO MEDIUM-SIZED BUSINESS
For basic telephone services, the Residential and Business Unit targets
middle and lower-middle class individual customers in certain areas of Santo
Domingo, Santiago and San Francisco de Macoris who currently have limited access
to telephone services. Studies commissioned by the Company have indicated that
Dominicans frequently use telephone services, particularly long distance
services to call family members living in the United States. Many of these
customers have relied upon retail telephone centers, including those operated by
the Company, for their long distance needs. As the Company has extended the
reach of its local telephone network, it has implemented marketing programs
designed to convert customers who initially may have gained familiarity with
TRICOM through its retail telephone centers into regular subscribers of its
local telephone service. Because of the limited geographic extent of the
Company's conventional local telephone network build-out, which has been
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targeted on a block-by-block basis to satisfy specific areas of unmet demand,
the Company has relied primarily on door-to-door sales to market its local
telephone services. With the deployment of the WLL, the Company expects to
modify its marketing programs to take advantage of mass media to promote its
local telephone services. The Company believes that this will reduce its
marketing and sales expenses as a percentage of local telephone service revenue
and enable it to reach a wider base of potential customers with its advertising.
The Company's advertising and promotional materials emphasize that TRICOM
is a full-service provider of local and long distance services and that
customers can realize significant savings from the packaging of services. TRICOM
uses targeted marketing programs, concentrating on those areas of urban centers
where it currently provides services and employs marketing techniques often used
to promote consumer products, including television, radio and newspaper
advertising, door-to-door sales for basic local service and the use of credit
card lists and other databases to identify and contact potential users of
cellular and paging services. The Company distributes gifts to potential and new
subscribers, including prepaid calling cards, bonus coupons and other
promotional goods bearing the Company's logo. Other means of advertising include
billboards, block parties and telemarketing.
TRICOM primarily has relied upon direct sales and database marketing
techniques to attract its cellular subscribers. TRICOM sells cellular services
from three commercial centers in Santo Domingo, one commercial center in
Santiago and one commercial center in San Francisco de Macoris. Through direct
sales, the Company also aggressively pursues additional corporate and commercial
accounts which have accounted for as much as 16% of usage but represented only
9% of the cellular subscriber base. The Company also has entered into
arrangements with major consumer electronics retailers to offer the Company's
cellular services in conjunction with their sale of handsets.
The Company uses advertising in newspapers, specialized magazines and on
the radio and television to promote its paging services. TRICOM's paging
services are generally sold at a premium over Codetel's, and the Company
believes that its subscribers generally are first-time users. TRICOM's marketing
emphasizes that customers can be connected to its paging network almost
immediately. Paging services are sold primarily through the Company's commercial
offices.
MAJOR BUSINESS ACCOUNTS
The Company's corporate sales and marketing approach to large business
customers is to offer comprehensive telecommunications solutions for each
corporate customer's needs. The Company's sales staff works with each customer
to gain a better understanding of that customer's operations and to develop
application-specific solutions that are appropriate for each customer. Sales
account executives are trained professionals, many of whom have engineering
backgrounds, and are supported by product development and customer service
teams. The product development team, in turn, is supported by the engineering
staff of the Company, which is responsible for overall network architecture
design. Account executives present to customers detailed analyses of their
telecommunications needs, together with comprehensive service proposals and
pricing information. The Company believes that this approach is attractive
because it allows customers to control costs. Billing for all corporate accounts
includes call detail (including time-of-day, day-of-week and destination
information), competitive cost comparisons as well as other management reports
which are provided to each customer on a monthly basis.
TRICOM currently services approximately 337 large-business accounts. The
Company's corporate accounts are concentrated in Santo Domingo, where
multinational, financial, commercial and industrial companies principally are
located. The Company has expanded its marketing efforts to the Cibao region
where the country's second largest city, Santiago, is located. A marketing
director for the Residential and Business Unit markets the Company's services
from TRICOM's Santiago commercial center.
PUBLIC TELEPHONY
TRICOM promotes its Centers by distributing fliers, coupons and other
promotional goods and by advertising on television, radio and in print media.
Company advertising emphasizes the accuracy and reliability of its billing as
well as the convenience and ambiance of facilities. The Company also attempts to
attract customers by selling at its Centers retail items such as magazines,
candy, soft drinks and tickets to major music and sporting events.
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MARKETING AND SALES STAFF
The marketing and sales staff of the Residential and Business Unit consists
of the business unit head, a sales Vice-president, marketing Vice-president, a
customer service director, eight account executives and support personnel. The
Company's corporate sales staff contacts corporate accounts through several
methods, including visiting potential customers, hosting telecommunications
conferences, obtaining customer referrals and sponsoring industry specific
meetings. Account executives have the authority to price and sell services to
new and existing customers within set parameters. The head of the Residential
and Business Unit must approve deviations from such parameters. TRICOM has
designed its pay structure for its corporate sales staff to encourage the
maintenance of long-term relationships with customers. Commissions are generally
based upon a number of factors, including revenues from the services sold,
collection efforts made and the types of services provided. To encourage
continuity and growth of corporate accounts, account executives receive a
residual commission from their existing accounts on an ongoing basis.
BILLING AND CREDIT POLICIES
TRICOM has developed an integrated billing system for local, long distance,
cellular, paging and value-added services. The integrated billing system enables
customers to obtain a single bill, providing detailed information about charges
for all services rendered. Subscribers also can call into the system and obtain
account and statement information. Cash payments may be made at walk-in
commercial offices, centers and affiliated bank branches, or funds may be
debited from credit cards or bank accounts. An automated voice system is used to
alert all customers if they have overdue bills.
Since January 1999, individuals subscribing for basic telephone service are
required to pay an installation fee of up to RD$2,800 (US$179) in cash. If the
customer chooses to pay the installation fee in installments, he must pay an
additional fee depending on the financing, which can be one of the following
options: over three months RD$800 (US$51) per month; over six months RD$420
(US$27) per month; over nine months RD$290 (US$19) per month; and over twelve
months RD$230 (US$15) per month. The Company believes that the higher
installation fee is a sufficient threshold for screening subscribers for basic
telephone service. Each residential basic telephone service subscriber has a
credit limit of approximately US$700. The Company contacts any customer
exceeding this credit limit and requests that such customer pays all or part of
the outstanding bill.
The Company requires all individuals wishing to subscribe for cellular
services to own a credit card or prepay either by using the Amigo card or making
a deposit through the Cellflex prepayment program. Each cellular service
subscriber is assigned a credit limit, which varies depending upon the
individual's monthly usage and payment history. All new subscribers for the
Company's paging services must prepay for such services.
Since 1996, the Company has suspended service for all individual basic
telephone service subscribers if payment is not received within 45 days after a
bill is issued and will be terminated 45 days after the suspension date.
Cellular and paging services are suspended when the prepayment balance is
exhausted or when a customer's credit limit is reached. Customers must pay
RD$170 (US$11) to reinitiate service after suspension. Customers must pay RD$65
(US$4) and RD$1,000 (US$64) for wireline services, RD$585 (US$37) paging
services and RD$400 (US$26) Internet services to reinstate service after
termination. Cellular subscribers whose service has been terminated may
reconnect only by purchasing an Amigo prepaid card, and customers must pay
RD$700 (US$45) to obtain Cellflex services.
There can be no assurance that the Company's efforts to minimize consumer
credit risks will be successful as the Company expands its services,
particularly because the Company anticipates that most of its growth over the
next several years will be from providing basic telephone service to customers
from the middle and lower-middle socioeconomic classes. Moreover, efforts to
minimize credit risks may adversely affect the Company's efforts to expand.
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CUSTOMER SERVICE
The Company provides customer service through one central service center
and twelve commercial offices. Customers may subscribe for telephone services,
pay and obtain information about monthly bills and inquire about billing
adjustments at such offices. To enhance customer service, customer
representatives use computer terminals which are linked to the Company's central
billing and service order system, enabling them to handle expeditiously both
billing complaints and service inquiries. The central service center and the
commercial offices are open six days a week and operate between the hours of
8:00 A.M. and 8:00 P.M. during weekdays and between the hours of 9:00 A.M. and
1:00 P.M on Saturday. In addition, the Company has established service centers
in the country's largest supermarket chain, Supermercado Nacional, offering
customers the benefit of extended schedule from 8 A.M. through 10 P.M. during
weekdays and Saturday and form 8 A.M. to 2 P.M. on Sunday. Orders for new
subscriptions are only accepted at commercial offices and at service centers.
The Company provides a 24-hour interactive voice response service through which
customers can register complaints and make billing inquiries.
TRICOM seeks to provide installation and repair services to its customers
on par with such services provided by the best telecommunications companies
throughout the world. In order to achieve this goal, the Company has established
service benchmarks for, among other things, network availability, installation
and repair intervals.
The customer service department gathers information from customers, which
is then used by the Company to tailor its products and services to meet customer
needs. TRICOM contacts customers shortly after initial installation to address
any service concerns or problems that they may have. The Company regularly
surveys its customers to determine their satisfaction with the services provided
by TRICOM and to improve services based upon the explanations offered by
customers who cancel their services. Furthermore, the Company has a customer
retention department that works to determine the reasons for customer churn and
also to develop appropriate retention strategies to target this segment.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems are designed to provide two
principal functions. First, the Company must generate accurate information in
real time, which employees at all levels of the organization can readily access,
particularly those employees who deal directly with customers. Second, customers
must be able to access directly pertinent information from TRICOM's computer
network. The Company has designed a fully integrated, open architecture computer
network with a view to providing these functions. The Company's billing system
runs on two IBM AS/400 servers, while seven HP-9000 servers form the backbone of
the Company's Customer Care, Service Provisioning and Financial applications.
TRICOM is migrating toward Oracle as its common database and software
application development tool set. The Company uses Oracle Financials for
accounts payable, general ledger, purchase orders, inventory control and fixed
asset accounting.
The Company has developed an integrated billing system that runs on the IBM
AS/400 platform. The Company's billing system rates calls in one-second
increments for calls made from the Company's retail telephone centers,
six-second increments for calls made with its prepaid calling cards and
one-minute increments for calls made from local access lines and cellular
telephones. The Company believes that one-second billing, which is marketed as
"TRICOMETRO, " differentiates its retail telephone centers from those of its
competition. The billing system also enables the Company to rate calls according
to each customer's specific service package, thus permitting the Company to
offer tailored packages.
Customers can access information over the telephone through "FONOCOM," an
interactive voice response system that enables customers to consult their most
recent calls and account balances. Customers may also request a copy of their
bill, which is then delivered to them via facsimile transmission.
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NETWORK INFRASTRUCTURE
TRICOM invested over US$300.0 million from 1992 through 1998 to develop a
network infrastructure that is completely digitalized, except for portions of
its cellular network. Digital technology is more reliable and provides a higher
quality service than analog technology. In addition to basic service, the
digital network allows the Company to provide a wide range of value-added
services at a minimal increase in cost, including cellular voice mail, automatic
facsimile delivery service, Internet access and prepaid calling cards. Service
providers that use analog technologies are unable to provide these additional
services, or must incur greater costs to do so.
Although TRICOM has built its own network infrastructure, the Company is
dependent on connections to other carriers' networks in order to provide a full
range of telecommunications services. TRICOM must interconnect with the
country's principal local exchange network owned by Codetel in order to provide
local and domestic long distance telephone services.
BASIC TELEPHONE SERVICES
The Company's central office switch in the Dominican Republic is a Northern
Telecom DMS-300 Supernode, which forms the core of TRICOM's digital network.
This international gateway switch has capacity of more than 4,300 digital trunk
lines and possesses special features like ultra-high-speed, port-to-port message
switching that enables the device to handle 240,000 messages per second. In
addition, the switch's time-of-day capability allows the Company to distribute
efficiently its telecommunications traffic and provide, as a result, more
competitive pricing. The DMS-250 Supernode switch also provides statistical call
distribution information, which allows the Company to control its proportionate
flow of traffic. Without such capabilities, the Company would have to conduct
these monitoring tasks manually, which would be much more time-consuming and
costly. The switch also possesses CCS-7 capability, which enables the Company to
use one common channel for signaling purposes, optimizing the channels available
for voice transmission. Without CCS-7 capability, a network must use each of its
channels to signal the origination and termination for each call, which often
results in uncompleted calls and poor circuit utilization. This process, which
is not revenue-producing, generally requires a telecommunications network to
lose approximately 30% of its capacity.
Three Northern Telecom DMS-100 Supenode switches, one DMS-500, one DMS-1O
switch, 39 remote switches and 31 digital loop carriers form the Company's local
access and switching platform. Each of the DMS-100 switches has a distributed
processing architecture, can handle remote equipment, and is capable of
supporting up to 90,000 customers. All of the Company's Northern Telecom
switches are equipped with SS7 signaling capability and enable the Company to
offer CLASS features, including caller identification, three-way calling and
automatic recall.
The Company uses digital loop carrier ("DLC") technology and fiber rings to
connect to local access lines. The Company's central office switches are
connected by fiber optic cable to various DLCs located throughout the three
largest cities in the Dominican Republic. The DLCs can be located up to 160
kilometers away from the central office switch. The DLCs are small in size and
can be easily installed at relatively low cost. These DLCS, in turn, carry
telecommunications traffic by copper or fiber lines to the customer. All these
activities are remotely monitored by the management system, located at the
central office. Without the use of the DLCS, the Company would have to maintain
various central office switches, which would require it to incur substantial
additional costs, including purchasing land, obtaining the necessary
rights-of-way and hiring additional personnel to run these offices.
By purchasing and leasing international traffic capacity from various
systems, TRICOM has numerous options for routing its international traffic and
is fully connected to the international network. TRICOM has an 11-meter Vertex
satellite earth station which connects to the PanAmSat satellite system and a
15-meter standard A INTELSAT earth station which connects to the INTELSAT
satellite system serving the Atlantic region. The use of these satellite
facilities allows TRICOM to route international traffic between the Dominican
Republic and most other countries in the world. In addition, TRICOM has
purchased capacity in various international submarine fiber optic cables that
have been built to send and receive international traffic to various countries.
These submarine cables include Americas I, Columbus II, TAINO CARIB and
Antilles 1, which directly provide, or connect with other cables that provide,
service to Latin America, the Caribbean and Europe. The Company owns 22% of the
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Antillas 1 submarine cable, which connects the Dominican Republic to the United
States via Americas I and Columbus II. Maya I Arcos I , Columbus III and
Americas II cable will be operational during 1999.
TRICOM transmits its domestic traffic through a fully redundant digital
microwave backbone system, which provides both intra-city and inter-city
telecommunications services. The system links approximately 80% of the country's
population, including Santo Domingo, San Francisco de Macoris, Santiago and
certain key areas in the eastern and northern regions of the country that are
centers of the tourist and agribusiness industries. With 99.9% circuit
availability, the microwave system serves the areas that have high
telecommunications usage, including large industrial and commercial areas.
To oversee and monitor the activities of its network infrastructure, TRICOM
has installed an open architecture network MAXM management system. This system
allows TRICOM to manage its central office switches and remotely monitor all
network components, including remote switches, microwave digital radios,
wireless data communications network and DLCS. This system can only function if
a telecommunications carrier has a fully digitalized network, as does TRICOM.
The management system provides continuous information regarding the equipment,
any equipment failure, and the security of the network. In addition, it allows
the central office to send commands and engage in remote line testing functions.
The MAXM management system enables the Company to maintain integrated management
of its network.
DATA COMMUNICATIONS
Data communications services are primarily targeted for the business
community and provided at a variety of speeds, including subrate, 64 kbps, and
superrate (1.544 Mbps and fractional T-1). The Company's data communications
network uses a transmission backbone consisting of Newbridge data multiplexing
nodes, linked over a 155 Mbps (OC-3) bidirectional fiber optic ring and digital
microwave radios. The "last mile" to the customer is provided either by wireless
means or wirelines. By providing a network that is accessible both on wireless
and wireline bases, the Company is able to access a broad range of customers.
This data network has the capability to monitor the communications link all the
way to customer desktop level and to support multiple data protocols like ATM,
and Frame Relay.
To provide data communications services, the Company has strategically
installed various small data nodes in cell sites and RSC (remote switching
centers).
CELLULAR AND PAGING
The Motorola EMX-2500 cellular switch, along with advanced radio channel
technology for wireless service systems, allows TRICOM to provide low cost and
reliable cellular service in the Dominican Republic. That network currently has
59 cell sites and two MSC which enable TRICOM to provide cellular coverage to
those regions of the Dominican Republic with the greatest demand for cellular
services.
The Company's paging network is based on the POCSAG 1200 protocol and FLEX
1600 protocol technology deployed in September 1997. The network's
infrastructure consists of a Motorola UNIPAGE terminal and 26 NUCLEUS
transmitters operating on the 929.7625 MHz radio frequency.
INTERNATIONAL LONG DISTANCE
In July of 1998, TRICOM installed its own state-of-the-art switching
facility in the New York metropolitan area, a Northern Telecom DMS-250
Supernode. By having its own switching facilities, the Company believes it will
be able to provide termination of international long distance traffic at very
competitive rates to several countries in addition to the Dominican Republic, at
the same time, enabling it to better serve its existing customer base as well as
expand its service base throughout the United States.
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COMPETITION
TRICOM currently competes against three other telecommunications companies
in the Dominican market: Codetel, All America Cable & Radio and Skytel. Codetel,
a wholly owned subsidiary of GTE Corp., is a full service provider which has
held a virtual monopoly on the Dominican telecommunications market for more than
60 years and has significantly greater financial resources than the Company. All
America Cable & Radio provides domestic and international long distance service
and has public telephone stores which compete with the Company's retail
telephone centers. Skytel, a U.S. paging service provider, has been granted a
license by the Dominican government and now provides paging services in the
Dominican Republic. The Dominican government also has granted concessions to the
following telecommunications companies which either have not commenced
operations yet or have minimal operations: Telecomunicaciones America,
C. por A., Compania Telefonica del Norte, S.A., Servicios Globales de
Telecomunicaciones, S.A., Transmisiones & Proyecciones, S.A., Defisa, S.A.,
Comunicaciones Dominicanas S.A., Turitel S.A. Economitel C. por A., and
Servicios Moviles de Comunicacion, S. A., (MOVICELL). In addition, the Company
believes that international telecommunications companies, from time to time,
have considered investments in Dominican markets.
Until 1994, the barriers to entry into the Dominican market remained
virtually insurmountable because Codetel was not required to permit competitors
to interconnect with its local exchange network. A competitor would have been
required to build its own network infrastructure in order to compete. The
Company believes that dominance by Codetel has accounted, in part, for the low
telephone penetration rate in the Dominican Republic where there are estimated
to be only 9.0 telephone lines per 100 persons as recently as 1998. In addition,
much of Codetel's infrastructure for the domestic market is based upon dated,
analog technologies. The Company believes that as a result of these factors
there is significant unsatisfied demand for both basic and advanced
telecommunications services.
TRICOM was able to enter the full service market because the Dominican
government required that all telecommunications service providers interconnect
their networks. In 1994, Codetel entered into the Interconnection Agreement with
the Company after the Dominican government promulgated a resolution requiring
interconnection. Pursuant to the Interconnection Agreement, the Company has been
able to offer a full range of telecommunications services to its customers since
November 1994. Since the Company began offering full domestic service, TRICOM
has penetrated all segments of the domestic services market and has captured
significant shares of the cellular and paging services markets. Nevertheless,
close to 90% of the Dominican Republic's residential local access line telephony
customers remain Codetel customers.
The growth of the Company's market presence depends upon its ability to
obtain customers in areas that currently are not served or are underserved by
Codetel and to convince Codetel customers to either add or switch to the
telephony services provided by the Company. The Company initially attempted to
compete with Codetel by providing lower rates. From time to time, Codetel has
implemented significant price reductions for certain categories of calls in
response to TRICOM's marketing initiatives and, as a result, forced the Company
to modify certain of its rates. TRICOM will continue its efforts to compete by
reaching unmet demand and providing innovative pricing, reliable service,
responsive customer service and accurate billing. The Company emphasizes that
customers can realize savings through its packaged service offerings. In
addition, TRICOM will leverage its fully integrated and completely digital
wireline network to continue to provide accurate and reliable basic and
value-added telephone services. However, Codetel, if it determined to do so,
could expend significantly greater amounts of capital than are available to the
Company. It also could upgrade its network or sustain price reductions over a
prolonged period. Any such efforts by Codetel could have a material adverse
effect on the Company's ability to increase or maintain its market share and on
its results of operations.
EMPLOYEES
At December 31, 1998, TRICOM had 1,341 employees. Of this number, 44 were
executives, 103 were managers, technicians and salesmen and the remaining 1,194
were service and staff employees. The Company believes that this number may
increase over the next several years as the Company expands its network and its
customer base. None of the Company's employees belong to labor unions. The
Company believes that it has good relations with its employees.
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SUPERVISION AND REGULATION OF TELECOMMUNICATIONS MARKET
A summary of certain provisions of the Telecommunications Law of the
Dominican Republic and the Dominican system of regulating and structuring the
telecommunications sector is set forth below. The summary is not intended to be,
and does not purport to be comprehensive, and the laws and regulations described
may be amended, repealed or otherwise modified.
GENERAL
The legal framework of the telecommunications sector in the Dominican
Republic consists of General Telecommunications Law No. 153-98 ("Law 153-98"),
enacted on May 27, 1998, some resolutions promulgated pursuant to such law
("Resolutions") and the concession agreements entered into by the Dominican
government with individual service providers.
In addition to the industry-specific legal framework, the Constitution of
the Dominican Republic affects the telecommunications sector. Among the various
individual and social rights provided under the Constitution pursuant to
Title 11, Section 1, Article 8, Numeral 12 thereof, Dominican citizens are
guaranteed the freedom of trade. The Constitution specifically provides that
monopolies may be established only for the benefit of the Dominican government
and must be created by law. None of the outstanding concession agreements
contains an exclusive arrangement with any carrier, and the Dominican government
has announced a policy of encouraging growth through competition in the
telecommunications industry.
In 1930, Codetel was granted a concession to operate telecommunications
services in the Dominican Republic. Over the years, while other service
providers entered the Dominican telecommunications market, none was successful
in being a full-service telephone company able to compete with Codetel because
Codetel was not required to allow other service providers to interconnect their
services into Codetel's physical infrastructure. To provide services, a company
would have had to install its own wireline telecommunications network. The
economics of this requirement hindered competition. As a result, Codetel held a
de facto monopoly for more than 60 years.
To substantially broaden the number of its citizens with access to a
telephone and to allow for the establishment and growth of other modem
telecommunications services, the Dominican government adopted a policy of
liberalization of the telecommunications sector beginning in the late 1980's. In
1990, the Dominican government granted TRICOM a concession to provide a full
range of telecommunications services within, from and to the country.
Additionally, advancements in wireless technologies made it more cost effective
for companies to penetrate the market even without being able to interconnect to
Codetel's network. However, interconnection remained important to full-service
competition. In 1994, the Dominican government enacted a series of
interconnection resolutions which require all service providers in the Dominican
Republic to interconnect with all other service providers pursuant to contracts
between them, the guidelines for which are articulated in such resolutions. In
May 1994, TRICOM entered into the Interconnection Agreement with Codetel which
became effective in November 1994. This agreement allowed TRICOM to become the
second full-service telecommunications provider in the Dominican Republic.
GENERAL TELECOMMUNICATIONS LAW NO. 153-98 OF 1998
The former Telecommunications Law No. 118 of February 1, 1966 was derogated
by the Law 153-98 of May 27, 1998. Law 153-98 is the result of a joint
government and industry project conducted with the assistance of the ITU which
studied the telecommunications sector in the Dominican Republic. As part of this
process, the ITU drafted a proposed telecommunications law and various
regulations, including interconnection and tariff regulations, in consultation
with Dominican telecommunications carriers. The project was requested by the
Technical Secretariat of the Dominican Presidency and the country's
telecommunications carriers and was funded by such carriers.
The Law 153-98 establishes a basic framework to regulate the installation,
maintenance and operation of telecommunications networks and the provision of
telecommunications services and equipment. The law ratifies the Universal
Service Principle, by guaranteeing the access of telecommunications services at
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affordable prices in low income rural and urban areas, to be achieved through
market conditions and through the development of the telecommunications sector.
It creates a fund for the development of telecommunications sector that will be
supported by a 2% tax payment by industry participants on the billing of all
telecommunications services, which will be passed on to customers. At the same
time, the law eliminates the 10% tax previously charged on international and
domestic long distance traffic to customers.
In addition, the law creates an independent regulator with strong
regulatory powers, the Dominican Institute of Telecommunications (Instituto
Dominicano de las Telecomunicaciones, or INDOTEL), and establishes its
responsibilities, authorities and procedures. The regulator will be headed by a
five-member council, the members of which will serve a four-year term and shall
include a representative from the telecommunications industry. This body will
implement telecommunications development projects to satisfy the requirements of
the Universal Service Principle. Law 153-98 grants the INDOTEL control over all
frequency bands and channels of radio transmission and communications within the
country and over its jurisdictional water.
The Law 153-98 encourages competition in all telecommunications services,
by enforcing the right to interconnect with existing participants and avoiding
antitrust practices, and at the same time upholding those concessions that are
operational. It establishes mechanisms to set interconnection charges that
reflect real costs and to solve disputes, by requiring existing participants to
adjust its interconnection agreements to the new requirements. It eliminates
crossed subsidies and provides a progressive rate rebalancing of those tariffs
that traditionally have been subsidized, in order to reflect true costs.
The Company believes that this modern legislation, combined with
technological advances and the sustained growth of private investment will
significantly contribute to the development of the telecommunications sector in
the Dominican Republic.
The increase in tariffs stipulated in the telecommunications law will have
a direct positive impact on TRICOM's revenues given that approximately 70% of
the Company's local access lines are primary residential lines and a greater
percentage of its network will consist of primary or first lines as the Company
expands its local network. In addition, interconnection costs to be paid by the
Company will be reduced to reflect true costs, which will result in higher
margins of operations.
Additionally, the increase in demand from reduced long distance fees,
should encourage continued long distance traffic growth.
TRICOM'S CONCESSION AGREEMENT
In accordance with former Law 118, TRICOM and the Dominican government
entered into the 1990 Concession Agreement pursuant to which TRICOM was issued a
non-exclusive license to establish, maintain and operate a system of
telecommunications services throughout the Dominican Republic, as well as
between the Dominican Republic and international points. The services which
TRICOM was permitted to provide under the 1990 Concession Agreement included
telegraphy, radio communications, paging, cellular and local, domestic and
international telephone services.
In February 1996, TRICOM entered into a new Concession Agreement with the
Dominican government which superseded the 1990 Concession Agreement. Pursuant to
the 1996 Concession Agreement, TRICOM was granted the same non-exclusive license
as provided in the 1990 Concession Agreement to establish, maintain and operate
a telecommunications system throughout the Dominican Republic until June 30,
2010. Pursuant to its original provisions, the Concession Agreement and the
license granted thereunder are renewable automatically for 20-year periods
unless, at least three years prior to the end of the then existing term, either
TRICOM or the Dominican government advises the other of its intention not to
renew. Law 153-98 establishes that the renewal must be requested during the
one-year term immediately prior to the expiration of the concession, and that
the reasons for non-renewal shall be only those set forth in the law itself.
Also, Law 153-98 establishes that within one year after its effectiveness each
concession must be adjusted to the provisions of the new law.
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The provisions of the 1996 Concession Agreement relating to the payment of
tax by TRICOM differ from those of the 1990 Concession Agreement. Under the
Concession Agreement, TRICOM does not pay income tax imposed on other Dominican
corporations but makes payments to the Dominican government in lieu of income
tax on the same basis as Codetel pursuant to its concession agreement. TRICOM
must pay to the Dominican government, within the first ten days of each month,
(i) 10% of gross domestic revenues collected by TRICOM during the preceding
month for telephone services, telegraph services, paging services, cellular
services, local, national and international call services, as well as for any
data transmission or broadcast services, and any other related
telecommunications services provided by TRICOM to its clients, minus any access
charges paid to Codetel and to any other company for interconnection, and (ii)
10% of net settlement revenues collected from foreign correspondent carriers for
the use of TRICOM's network for termination of international long distance
calls. The minimum payment to the Dominican government in lieu of income tax by
TRICOM is RD$18.0 million (US$1.2 million) per annum. TRICOM has the right to
deduct monthly up to one percent of its tax for outstanding debts from the
government of 180 days or more and is entitled to the same exemptions granted to
other companies under their concessions, with certain exceptions. In addition,
under the Concession Agreement, the Dominican government is obligated to grant
to the Company any term or condition that it grants by concession to any other
telecommunications provider in the Dominican Republic more favorable than those
contained in the Concession Agreement.
Under the Dominican Constitution, agreements with the Dominican government
which contain exemptions from income tax, such as the Concession Agreement, only
become effective upon approval by the Dominican Congress. As of the date hereof,
neither the Concession Agreement nor the concession agreements of Codetel, All
America Cable & Radio and other companies have been submitted to the Dominican
National Congress. The Company is not aware of any plans of the Dominican
government to submit the Concession Agreement for approval to the Dominican
Congress.
The Company has been advised by counsel that if the Concession Agreement is
presented to, but not approved by, the Dominican Congress, the Dominican
Congress only is empowered to invalidate those provisions of the Concession
Agreement relating to the payment of taxes. In such case, the other terms of the
Company's concession would continue to be governed by the Concession Agreement.
Prior to execution of the Concession Agreement, Dominican tax authorities
asserted that the Company was required to make payments in lieu of taxes equal
to 18% of gross domestic revenues, as provided in the 1990 Concession Agreement.
However, if the Dominican Congress disapproves the provisions of the Concession
Agreement relating to the payment of taxes, the Company believes, and would
argue, that Dominican tax law requires the payment of a tax equal to 25% of the
Company's adjusted net income, the rate generally applicable to Dominican
taxpayers.
CODETEL'S CONCESSION AGREEMENT
Codetel's concession from the Dominican government, originally granted in
1930, was modified on January 23, 1995. The agreement, as modified, is intended
to integrate all the terms and conditions contained in prior agreements between
Codetel and the Dominican government. Codetel and the Dominican government both
have signed and have been acting pursuant to the agreement, but the agreement,
as modified, has not yet been approved by the Dominican Congress.
The terms of Codetel's concession are substantially identical to those of
the Concession Agreement. Codetel's concession, like the Concession Agreement,
must be approved by the Dominican Congress because it subjects Codetel to a
distinct tax regime. The license provides Codetel with the right to construct,
maintain and operate a telecommunications system throughout the Dominican
Republic and between the Dominican Republic and other countries. The agreement
is valid until April 30, 2010 (the Concession Agreement is valid until June 30,
2010).
This Agreement, as well as TRICOM's Concession Agreement, must be revised
and adjusted to the provisions and general principles of the new legislation,
within the first year of the entering into effect of the same. Meanwhile, its
general provisions continue to be applied, and by virtue thereby, Codetel is
exempt from Dominican income tax but, like TRICOM, it is required to pay a fixed
monthly tax imposed on its gross domestic income, and its net revenues from
international settlement payments. Codetel's minimum tax payment is
RD$360.0 million (US$23.0 million) per annum compared to TRICOM's minimum of
RD$18.0 million (US$1.2 million).
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INTERCONNECTION RESOLUTIONS
Article 123 of Law 153-98 provides that the new regulator, INDOTEL, must
issue an Interconnection Regulation. On August 1, 1998, the Directorate General,
acting provisionally until INDOTEL is formed, enacted Resolution No.98-01 which
contains the provisional regulation for the application and collection of the
contribution for the development of the telecommunications ("CDT"). On
August 10, 1998, the Directorate General, enacted Resolution No.98-03 which
reorganizes the general assignment of the cellular frequency bands and granted
the Company a license to operate all of Band A and its expansion, and it also
granted a license to Codetel to operate Band B completely, and its respective
expansion.
INTERCONNECTION AGREEMENT BETWEEN TRICOM AND CODETEL
In May 1994, TRICOM and Codetel entered into the Interconnection Agreement
which sets forth the terms and conditions for interconnection between each
party's network in the Dominican Republic. The Interconnection Agreement, which
has an indefinite term, requires TRICOM and Codetel each to provide access to
its respective network on equal, nondiscriminatory and transparent terms.
Additionally, the Interconnection Agreement obligates each party to provide to
the other any terms or conditions more favorable that it provides to any other
telecommunications entity for interconnection.
Under the Interconnection Agreement, the parties began paying an
interconnection charge for local-to-local traffic in 1996, which is revised
annually. Additionally, use of the network by either TRICOM or Codetel to
originate or terminate certain calls (including cellular, domestic long distance
and international long distance calls) requires payment of an access charge,
which is reviewed annually and is calculated based upon an established formula.
The access charge consists of a usage charge and a subsidy charge which only is
incurred with respect to international calls.
The Company had been involved in arbitration proceedings with Codetel in
connection with the terms of the Interconnection Agreement. Codetel sought
approximately US$2.5 million in damages, interest and legal costs against the
Company and the Company filed a counterclaim against Codetel for US$3.7 million
in damages. On January 2, 1998, the Company and Codetel executed an addendum to
the Interconnection Agreement (the "Interconnection Amendment") which resolved
all disputes between them then being arbitrated. The Interconnection Amendment
provides, among other things, that Codetel will (i) remove any technical or
operational impediment to telephone users accessing TRICOM's network from
Codetel's network, (ii) automatically deliver to TRICOM the identification
number of any call originating on Codetel's network which is subject to a TRICOM
access charge, (iii) install interconnection facilities without delay upon the
request of TRICOM, provided that TRICOM bear the expense of installing any such
facilities, (iv) connect calls to emergency services and toll-free numbers on
Codetel's network, make operators available to assist calls from TRICOM's
network to numbers on Codetel's network and (v) make its database of telephone
numbers available to TRICOM at no charge on a trimonthly basis. In addition, the
Interconnection Amendment adjusted the access charges by (i) lowering the charge
for international long distance calls from RD$1.45 (US$0.09) per minute to
RD$0.98 (US$0.06) per minute for the year ended December 31, 1998, (ii) lowering
the charges for national long distance calls and calls made from cellular
telephones from RD$0.95 (US$0.06) to RD$0.63 (US$0.04) for the year ended
December 31, 1998, (iii) temporarily establishing the interconnection charge for
paging services at RD$0.05 (US$0.003) per minute and (iv) eliminating any access
charge for international long distance calls that are terminated within 12
seconds and for calls made to Internet access servers.
Law 153-98 establishes that interconnection agreements entered into by the
providers must be revised and readjusted to reflect and incorporate the
provisions and general principles set forth in the new law within one year from
the effectiveness of the law.
U.S. TELECOMMUNICATIONS REGULATION
The following summary of United States regulatory developments does not
purport to describe all present and proposed regulations and legislation
affecting the telecommunications industry. Other existing federal and state
regulations are currently the subject of judicial proceedings, legislative
hearings and administrative proposals which could change, in varying degrees,
the regulation of telecommunications companies in the United States.
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Certain FCC international policies affect the Dominican Republic because of
the high level of telecommunications traffic between the United States and the
Dominican Republic (eighth largest volume of international traffic with the
United States in 1996).
Through several policy initiatives in the last several years, the FCC has
encouraged greater competition in foreign markets. The FCC favors creating
competition in foreign markets as a means to drive down the costs of using
international telecommunications facilities. A particular focus on these FCC
initiatives has been "accounting rates' or "settlement rates," which are the
amount of payment negotiated between carriers for the termination of
international telephone calls.
On August 7, 1997, the FCC adopted a Report and Order regarding the
regulation of international accounting rates. The Order establishes certain
accounting rate benchmarks based on categories of economic development levels of
different countries. The benchmark rate for each foreign country is calculated
by looking at the three network elements used to provide international
termination services (i.e., international transmission facilities, international
switching facilities, and domestic transport and termination). Once the rate is
calculated, the country is grouped into one of four categories based on its
level of economic development--upper income, upper middle income, lower middle
income and lower income. The benchmark settlement rates for the four income
categories are US$0.15, US$0.19, US$0.19 and US$0.23 per minute. Under the FCC's
income categories, the Dominican Republic is in the lower middle income group
and its benchmark settlement rate would be US$0.19 cents per minute. Pursuant to
the Order, U.S. carriers would need to enter into settlement rate arrangements
with foreign carriers in lower middle income countries at or below the
applicable benchmark rate by January 1, 2001. The FCC has indicated that it
expects U.S. carriers to negotiate proportionate annual reductions with foreign
carriers during the relevant transition period. Additionally, to prevent U.S.
carriers that have foreign affiliates from using above-cost benchmark settlement
rate revenues of their foreign affiliates to gain an unfair price advantage over
other U.S. carriers, the FCC will require that a U.S. carrier's foreign
affiliates charge a settlement rate that is at or below the applicable benchmark
rate. If the FCC detects competitive distortions in the U.S. telecommunications
market, it will take enforcement action which may include a requirement that the
settlement rates of the U.S. carrier's foreign affiliate be reduced to the "best
practices rate," currently calculated at US$0.08 per minute, as a condition of
continued service on that route from the United States.
In 1996, the FCC issued an order ("Flexibility Order") that allows U.S.
carriers to propose alternative payment arrangements that deviate from the
existing international settlement policy which requires all U.S. carriers to
have the same settlement rate with a foreign carrier. Additionally, in the
Flexibility Order the FCC codified the proportionate return policy requiring
that U.S. carriers receive back the same proportion of traffic that they send to
a foreign carrier. This policy is an effort by the FCC to restrict a foreign
carrier's ability to manipulate the allocation of return traffic and whipsaw
U.S. carriers. However, the FCC may allow for exceptions to the proportionate
return policy for alternative payment arrangements that satisfy the terms and
conditions established in the Flexibility Order. The 1997 FCC Order adopted a
presumption in favor of alternative settlement arrangements on routes to members
of the World Trade Organization.
On February 15, 1997, 69 countries (including the United States and the
Dominican Republic) signed a global agreement on basic telecommunications
services ("GBT Agreement") under the auspices of the World Trade Organization
The GBT Agreement aims to increase competition among its signatories through the
removal or lowering of entry barriers to foreign markets and the implementation
of pro-competitive regulatory principles. The GBT Agreement was scheduled to
take effect on January 1, 1998, but implementation was delayed by the failure of
certain signatory countries to adopt the necessary domestic legislation to
ratify their obligations under the Agreement. On February 5, 1998, the GBT
Agreement did go into effect although certain countries, including the Dominican
Republic, had not ratified their GBT obligations by that date.
In November 1997, the FCC adopted an order (the "1997 FCC Order") to take
the steps necessary to open the U.S. market to increased competition in light of
the GBT Agreement. The FCC expects this order to significantly increase
competition in the U.S. telecommunications market by facilitating entry by
foreign service providers and investors.
In addition, to maintain parity between the rights of U.S. service
providers to operate abroad and the rights of foreign service providers to
operate in the United States, the FCC carefully scrutinizes applications from
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foreign-owned or foreign-affiliated service providers seeking to provide
telecommunications services in the United States. On September 11, 1995, the FCC
issued an order approving the application of Domtel Communications, Inc., which
later changed its name to TRICOM USA, to provide voice, data and private line
services between the United States and various international points, including
the Dominican Republic. The FCC also approved TRICOM USA as a non-dominant
provider, even to the Dominican Republic. TRICOM began initiating U.S. traffic
pursuant to this authorization in 1997.
Since the effectiveness of the Interconnection Agreement with Codetel,
TRICOM has entered into operating agreements with U.S. correspondents, including
AT&T, MCI, AT&T Puerto Rico, Sprint, WorldCom, TLD of Puerto Rico and TresCom.
TRICOM USA's regulatory approval gives the Company the ability to access the
U.S. market through TRICOM USA where necessary to avoid adverse impacts of the
exercise of market power by larger, dominant carriers. TRICOM USA also has the
ability as a U.S. carrier to develop its own business plan for markets other
than the Dominican Republic, and has been approved by the FCC to communicate
from the United States with 186 countries via satellite and with 28 countries
via fiber optic submarine cables.
ITEM 2. DESCRIPTION OF PROPERTY
The principal properties of the Company consist of its fiber optic network,
satellite earth stations, nodes and certain real estate. At December 31, 1998,
the net book value of TRICOM's real estate and equipment was approximately and
US$330.0 million. The Company leases telephone switchboards and equipment which,
at December 31, 1998, had a net book value (after subtracting accumulated
depreciation) of US$12.0 million. The Company's real estate holdings are
strategically located throughout the Dominican Republic, providing the
infrastructure for the telecommunications network and sales facilities. Most of
the Company's properties are related directly to its telecommunications
operations and are used for network equipment of various types, such as
telephone exchanges, transmission stations, microwave radio equipment and
digital switching nodes. The Company's current headquarters are located in
downtown Santo Domingo in a building that is owned by the Company.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party, other than
ordinary routine litigation incidental to the business of the Company which is
not otherwise material to the business or financial condition of the Company.
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ITEM 4. CONTROL OF REGISTRANT
SHARE OWNERSHIP
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Common Stock at April 26, 1999
(unless otherwise indicated) by each person who beneficially owns 10% or more of
the Company's capital stock and all officers and directors as a group. Except as
otherwise indicated, the holders listed below have sole voting and investment
power with respect to all shares beneficially owned by them. On May 4, 1998,
TRICOM consummated the initial public offering of American Depositary shares
representing an equal number of shares of Class A Common Stock. In connection
with this offering the Company reclassified all shares of Common Stock
outstanding prior to the offering as shares of Class B Stock and authorized the
issuance of Class A Common Stock. Each share of Class B Stock entitles the
holder thereof to cast ten votes while each share of Class A entitles the holder
thereof to cast one vote. Each share of Class B Stock is convertible at the
option of the holder into one share of Class A Common Stock.
SHARES OF PERCENTAGE OF
CLASS A COMMON SHARES OF CLASS A COMMON
STOCK CLASS B STOCK STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY
SHAREHOLDER OWNED OWNED OWNED
- --------------------------- ----------------- ---------------- -----------------
Oleander Holdings Inc.(1) 0 11,486,720 0
Motorola Inc 0 7,657,818 0
The Bank of New York, as
depositary(2) 5,700,000 0 100
Directors and executive
officers as a group
(17 persons) 269,999(3) 11,486,720(4) 0
PERCENTAGE OF
CLASS B STOCK
BENEFICIALLY PERCENTAGE OF
SHAREHOLDER OWNED VOTE
- --------------------------- ---------------- ---------------
Oleander Holdings Inc.(1) 60.0% 58.3%
Motorola Inc 40.0 30.8%
The Bank of New York, as
depositary(2) 0 2.9%
Directors and executive
officers as a group
(17 persons) 60.0 58.4%
- ------------
(1) Oleander Holdings, Inc., a Panamanian corporation, is a wholly owned
subsidiary of GFN ("Oleander"). GFN is controlled by Manuel Arturo
Pellerano Pena, the Chairman of the Board of Directors and President of the
Company, and members of his family.
(2) The Bank of New York holds these shares, as depository, through its nominee
Hero & Co.
(3) Represents shares of Class A Common Stock beneficially owned by officers
and directors of the Company.
(4) Includes 11,486,720 shares of Common Stock that may be deemed to be
beneficially owned by Mr. Pellerano, the Chairman of the Company's Board of
Directors and the President of the Company.
AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
Each of the members of the Board of Directors has been elected pursuant to
the Company's Amended By-Laws of April 24, 1998 and the Amended and Restated
Shareholders' Agreement dated May 8, 1998.
The Amended and Restated Shareholders' Agreement provides that the Board of
Directors will be composed of twelve (12) directors, of whom six will be
designated by GFN and four by Motorola. Each of Motorola and GFN also is
entitled to nominate one Independent Director for so long as such Class B
Shareholder and its Affiliates together beneficially own at least twenty-five
percent of the issued and outstanding shares of Class B Stock. The following
actions must be approved by nine of the twelve directors: (i) the acquisition or
formation of any entity or the making of any investments in any other entity or
business, including, but not limited to, the purchasing of equity or debt
securities in, or the extension of credit to, such entity; (ii) the incurrence
of indebtedness by the Company, if after giving effect to such incurrence,
including the proposed application of the proceeds of such indebtedness to pay
-24-
<PAGE>
existing indebtedness, the ratio of indebtedness to shareholders' equity would
be greater than three to one; (iii) the approval of annual budgets relating to
income, capital expenditure, operating expenses and cash flows provided,
however, that such approval is not required for the incurrence of indebtedness
that otherwise complies with the debt to shareholders' equity ratio set forth in
clause (ii) above or any other proposed corporate action for which such
supermajority approval is not required; or (iv) the issuance or redemption of
Class A Common Stock or other securities or instruments exercisable for or
convertible into shares of Common Stock. Likewise, the approval of two
Independent Directors is required to approve any transaction or series of
related transactions that has a fair market value exceeding US$1,000,000 between
the Company and a party to the Amended and Restated Shareholders Agreement or
any Affiliate of a party thereto.
SENIOR NOTE VOTING AGREEMENTS
In connection with the offering of the Senior Notes, Oleander and Motorola
each entered into separate voting agreements, dated August 21, 1997 (the "Voting
Agreements"), with The Bank of New York, as trustee (the "Trustee") under the
Senior Note Indenture. The Voting Agreements provide that each of Oleander and
Motorola will grant to the Trustee the right to vote all of its shares of Common
Stock (the "Voting Stock") upon the occurrence of the following events:
(i) failure of the Company to pay interest on the Senior Notes when due for a
period of 30 days; (ii) failure of the Company to pay the principal of or
premium on the Senior Note when due, whether at maturity, upon redemption or
repurchase or otherwise; (iii) failure of the Company to pay principal of and
interest on the Senior Notes required to be purchased in the event of a change
of control; (iv) a payment default under any debt instrument for money borrowed
by the Company or any guarantor subsidiary of the Company (except any such
subsidiary that is not a significant subsidiary, as defined) which accelerates
the maturity of such debt instruments and US$10.0 million or more in the
aggregate becomes due and payable as a result of such payment default; and
(v) the failure of the Company or any guarantor subsidiary of the Company
(except any such subsidiary that is not a significant subsidiary, as defined) to
pay final judgements aggregating in excess of US$10.0 million within 60 days
after the date which any period for appeal has expired and during which a stay
of enforcement of such judgment shall not be in effect. The Trustee's right to
vote all of the shares of Voting Stock, once such right is triggered, will
continue during the continuation of an event set forth in item (i), (ii) or
(iii) above and for one year after the date such event of default has been cured
by the Company or (b) during the continuation of an event set forth in item (iv)
or (v) above. Either Oleander or Motorola may revoke the proxy granted by it
under the Voting Agreement if (a) the Dominican Republic becomes duly bound by
the United Nations Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (1958), (b) if as of the last day of any fiscal quarter the
Company reports shareholders' equity of at least US$100 million and for each of
the four full consecutive fiscal quarters ending on such date the Company's
leverage ratio as defined in the Senior Note Indenture is equal to or less than
2.5 to 1.0, (c) the Senior Notes are rated Ba2 and BB or better by Moody's
Investors Service, Inc. and Standard & Poor's Ratings Group, respectively, or
(d) the discharge of the Company's obligations with respect to the outstanding
Senior Notes.
In the event that the Company incurs any indebtedness that constitutes
Senior Facilities under the Senior Note Indenture and in connection therewith
the lender or lenders under such Senior Facilities (the "Senior Lenders") are
granted a lien by Oleander and Motorola in respect of the Voting Stock, then,
provided that the Trustee is granted a lien or similar interest in respect of
the Voting Stock by Oleander and Motorola for the benefit of the holders, which
lien will be subordinated and subject to the prior rights and claims of the
Senior Lenders enter into an escrow agreement and an intercreditor agreement,
the proxy rights granted hereunder shall be suspended and the Trustee will not
have the right to exercise such rights until such time as the Senior Facilities
are repaid in full.
The Voting Agreements do not prohibit or restrict either Oleander or
Motorola from transferring, selling, pledging or hypothecating ("transfer") any
shares of Voting Stock. Any shares of Voting Stock transferred to an affiliate
of either Oleander or Motorola will remain subject to the Voting Agreement and
any shares of Voting Stock transferred to a Person unaffiliated with either
Oleander or Motorola will no longer be subject to the Voting Agreements and
certain ancillary agreements. The Voting Agreements will terminate and be of no
further force and effect if (a) any Senior Lenders holding a security interest
in the Voting Stock forecloses upon such security interest subject to the terms
of the intercreditor agreement to be entered into by the Senior Lenders and the
Trustee or (b) the proxy is revoked pursuant to the Voting Agreements.
-25-
<PAGE>
ITEM 5. NATURE OF TRADING MARKET
AMERICAN DEPOSITARY RECEIPTS
On May 4, 1998, the Company successfully completed a US$74.1 million
initial public offering of 5.7 million American Depositary Receipts at an
initial public offering price of $13.00 per ADR. Each ADR represents one share
of TRICOM's Class A Common Stock. The Bank of New York acts as the registrar and
transfer agent for the Class A Common Stock and ADRs. The ADRs are traded on the
New York Stock Exchange under the symbol "TDR." Shares of Class A Common Stock
are not traded on any other exchange or automated quotation system. As of
December 31, 1998, there were approximately 21 record holders in the United
States of the Company's ADRs.
The following table provides information with respect to the high and low
prices for the Company's ADRs on the New York Stock Exchange for each full
quarterly period since issuance.
NEW YORK STOCK EXCHANGE
---------------------------
HIGH LOW
---------- ----------
YEAR ENDED DECEMBER 31, 1998
Third Quarter ................ US$ 10-13/16 US$ 5-7/8
Fourth Quarter ............... 7-1/2 3-7/16
YEAR ENDED DECEMBER 31, 1999
First Quarter ................ 8-15/16 6-1/4
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
SECURITY HOLDERS
FOREIGN EXCHANGE CONTROLS
The foreign exchange system of the Dominican Republic is administered by
the Central Bank. In January 1991, the Monetary Board of the Central Bank
instituted the current foreign exchange system which permits the purchase of
foreign currency from commercial banks located in the Dominican Republic. Prior
to January 1991, persons were required to purchase foreign currency directly
from the Central Bank. The resolution adopted by the Monetary Board in 1991
retained the Central Bank's administrative authority over the foreign exchange
system by requiring registration with and approval by the Central Bank in order
to repatriate foreign currency abroad. The Monetary Board further liberalized
the foreign exchange system in September 1994, but it retained the requirement
that the payment of debt obligations abroad be registered with and approved by
the Central Bank, although such registration and approval generally have been
regarded as ministerial in nature. Dominican banks are required to submit an
application form to the Central Bank for approval of any foreign currency
exchange transactions. The Central Bank has five days from the date it receives
any application to issue its approval or disapproval. The Company believes that,
since 1991 when the current foreign exchange system was instituted, the Central
Bank has not disapproved any foreign currency exchange, other than for failure
to provide proper documentation. There can be no assurance that the Monetary
Board or the Dominican President will not change the Dominican Republic's
monetary policies to restrict the exchange of Dominican pesos for U.S. dollars.
In addition, there can be no assurance that commercial banks in the Dominican
Republic will have a sufficient supply of U.S. dollars to enable the Company to
service its obligations under the Senior Notes or that the Company's purchase of
substantial amounts of U.S. currency in Dominican markets would not adversely
affect the value of the Dominican peso in relation to the U.S. dollar, thus
making such purchases more costly for the Company.
The Central Bank requires that any person who has registered foreign debt
obligations pay a 1.75% commission on amounts of Dominican pesos exchanged for
foreign currency to be remitted abroad.
-26-
<PAGE>
FOREIGN INVESTMENT
The Dominican Republic once restricted the repatriation of foreign direct
investments in certain sectors of the economy, including the telecommunications
sector. In December 1995, the Dominican government enacted Law 16-95 on foreign
investment (the "Foreign Investment Law"), which, among other things, permitted
foreigners to make direct investments in the telecommunications sector and to
repatriate funds from such investments. The Foreign Investment Law requires that
foreigners register their investment with the Central Bank in order to exchange
Dominican pesos for foreign currency. The Company and The Bank of New York, as
depositary, have registered the issuance of the Class A Common Stock with the
Central Bank.
The Foreign Investment Law expanded the definition of direct foreign
investment to include investments in debt instruments. Prior to the enactment of
the Foreign Investment Law, the Dominican government only treated equity
investments as direct foreign investments. As a result, the principal of and
interest on debt instruments could be repatriated so long as the obligor had
adhered to the requirements of the Law on the International Transfer of Funds
and the regulations and resolutions promulgated thereunder (the "Foreign
Currency Transfer Law"). The Foreign Investment Law brings "financial
instruments" within its purview, but the Monetary Board has not identified which
types of "financial instruments" must be registered under the Foreign Investment
Law. The Company has been advised by its Dominican counsel, Pellerano & Herrera,
that "financial instruments" as contemplated by the Foreign Investment Law are
Dominican peso-dominated instruments issued to foreign investors in the
Dominican Republic and that, as such, U.S. dollar-denominated instruments, such
as the Senior Notes, should be registered as foreign debt obligations under the
Foreign Currency Transfer Law.
ITEM 7. TAXATION
Under the Concession Agreement, principal and interest paid to any
bondholder or lender is exempt from Dominican income and withholding tax. Thus,
any payment by the Company of interest with respect to the Senior Notes will not
be subject to Dominican income or withholding tax.
If the Concession Agreement is presented to, but not approved by, the
Dominican Congress, interest paid by the Company with respect to the Senior
Notes held by any holder may be subject to a 15% withholding tax, which would be
required to be withheld by the Company and paid to the Dominican tax
administration at the time interest is paid. Such tax withheld could be a
creditable foreign tax in determining the U.S. tax liability of such holder. A
separate financial and monetary policy reform bill that has been pending in the
Dominican Congress for more than a year contains provisions which would
eliminate altogether withholding taxes on interest payments from Dominican
sources to investors or lenders abroad. If taxes must be withheld, the Company,
with certain exceptions, would be liable for the payment of additional amounts
so that the U.S. holder would receive the same amounts payable had no such
withholding been imposed.
The Concession Agreement does not specifically address whether capital
gains taxes will apply to sales of Senior Notes in the Dominican Republic. Under
the principles of territoriality underlying the Dominican constitution, gain
from the sale or exchange of Senior Notes by a foreign holder outside of the
Dominican Republic would not be subject to taxation by the Dominican tax
authority even if the tax exemptions under Concession Agreement were not
applicable to gains on the transfer or sale of Senior Notes.
There is no income tax treaty in force between the Dominican Republic and
the United States.
There are no Dominican inheritance, gift, or succession taxes applicable to
the ownership, transfer, or disposition of Senior Notes by a foreign holder
based on the principles of territoriality mentioned above. Nevertheless, such
taxes will generally apply to the transfer at death or by gift of Senior Notes
by a foreign holder if it occurs within the Dominican Republic. There are no
Dominican stamp, issue, registration or similar taxes or duties payable by
holders of Senior Notes.
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<PAGE>
ITEM 8. SELECTED FINANCIAL DATA
The following selected consolidated financial data have been derived from
the consolidated financial statements of the Company which have been prepared in
accordance with U.S. GAAP and which have been audited by Peat, Marwick, Mitchell
& Co. (member firm of KPMG International in the Dominican Republic), independent
auditors. The report of Peat, Marwick, Mitchell & Co. with respect to the
financial statements at December 31, 1997 and 1998 and for the years ended
December 31, 1996, 1997 and 1998 appears elsewhere in this Annual Report. The
information contained under "Other Operating Data" and "Quarterly Operating
Data" is unaudited. The data are qualified by reference to, and should be read
in conjunction with, "Item 9. Management's Discussion and Analysis of Results of
Operations and Financial Condition" and the Consolidated Financial Statements
and related notes thereto for the years ended December 31, 1996, 1997 and 1998.
Year ended December 31,
------------------------------------------
1994 1995 1996
--------- --------- ---------
(In thousands)(1)
Statements of Operations
Data:
Operating revenues:
Toll..................... US$10,118 US$12,064 US$ 13,108
International revenues .. 16,742 19,864 42,069
Local service............ -- 616 1,770
Cellular................. 223 7,222 11,011
Paging................... -- 2,599 5,170
Sale and lease of
equipment.............. 1,310 1,492 3,969
Installations............ 163 479 1,943
Other.................... 32 33 24
--------- --------- ---------
Total operating
revenues............... 28,588 44,369 79,064
--------- --------- ---------
Operating costs:
Satellite connections
and carrier costs...... 11,250 19,947 30,172
Network depreciation..... 906 3,168 5,797
Expense in lieu of
income taxes(2)........ 434 222 5,348
General and
administrative expenses 8,101 14,799 22,185
Other operating costs.... 1,141 343 1,021
--------- --------- ---------
Total operating costs.. 21,832 38,479 64,523
--------- --------- ---------
Operating income (loss).... 6,756 5,889 14,540
--------- --------- ---------
Other income (expenses):
Interest expense, net.... (2,274) (4,069) (10,699)
Foreign exchange gain 644 1,099 23
(loss).................
Other.................... (130) 216 233
--------- --------- ---------
Total other income
(expenses)............. (1,760) (2,754) (10,443)
--------- --------- ---------
Earnings (loss) before
income taxes and US$4,996 US$3,135 US$4,098
extraordinary item.......
Income tax benefit -
deferred................. -- -- --
Earnings (loss) before
extraordinary item....... US$4,996 US$3,135 US$4,098
Extraordinary item - early
extinguishment of debt... -- -- --
--------- --------- ---------
Net earnings (loss)........ US$4,996 US$3,135 US$4,098
========= ========= =========
Basic earnings per common
share:
Earnings (loss) before
extraordinary item..... US$ 0.68 US$ 0.32 US$ 0.41
Extraordinary item....... -- -- --
--------- --------- ---------
Net earnings (loss)...... US$ 0.68 US$ 0.32 US$ 0.41
========= ========= =========
Weighted average number of
common shares outstanding 7,357,000 9,880,403 9,880,403
========= ========= =========
Year ended December 31,
------------------------------------------
1997 1998
---------- ----------
(In thousands)(1)
Statements of Operations
Data:
Operating revenues:
Toll..................... US$15,511 US$17,645
International revenues .. 39,432 50,332
Local service............ 6,412 12,942
Cellular................. 13,073 20,364
Paging................... 5,079 4,528
Sale and lease of
equipment.............. 5,502 4,115
Installations............ 5,071 12,937
Other.................... 21 2,640
---------- ----------
Total operating
revenues............... 90,102 125,501
---------- ----------
Operating costs:
Satellite connections
and carrier costs...... 31,271 32,309
Network depreciation..... 7,433 11,382
Expense in lieu of
income taxes (2)....... 6,248 9,562
General and
administrative expenses 25,631 39,379
Other operating costs.... 3,659 3,391
---------- ----------
Total operating costs.. 74,242 96,024
---------- ----------
Operating income (loss).... 15,860 29,478
---------- ----------
Other income (expenses):
Interest expense, net.... (12,047) (12,873)
Foreign exchange gain (706) 104
(loss).................
Other.................... (83) 845
---------- ----------
Total other income
(expenses)............. (12,836) (11,924)
---------- ----------
Earnings (loss) before
income taxes and US$3,023 US$17,554
extraordinary item.......
Income tax benefit -
deferred................. -- 352(3)
Earnings (loss) before
extraordinary item....... US$3,023 US$17,906
Extraordinary item - early
extinguishment of debt... (5,453)(4) --
---------- ----------
Net earnings (loss)........ US$(2,430) US$ 17,906
========== ==========
Basic earnings per common
share:
Earnings (loss) before
extraordinary item..... US$ 0.17 US$ 0.78
Extraordinary item....... (0.31) --
---------- ----------
Net earnings (loss)...... US$ (0.31) US$ 0.78
========== ==========
Weighted average number of
common shares outstanding 17,600,360 22,944,544
========== ==========
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<PAGE>
AT DECEMBER 31,
------------------------------------------
1994 1995 1996
---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents........ US$ 8,950 US$ 5,993 US$ 4,292
Investments, including current
portion:
Pledged securities............. -- -- --
Other investments.............. 385 1,260 1,597
Working capital (deficit)........ 5,206 (41,962) (43,586)
Total assets .................... 68,193 126,863 163,480
Long-term debt................... 32,000 32,000 60,000
Total indebtedness .............. 43,157 101,954 128,677
Shareholders' equity ............ 19,820 22,219 24,523
AT DECEMBER 31,
-------------------------------------
1997 1998
---- ----
BALANCE SHEET DATA:
Cash and cash equivalents........ US$ 5,733 US$15,377
Investments, including current
portion:
Pledged securities............. 75,768(5) 54,470(5)
Other investments.............. 1,797 2,164
Working capital (deficit)........ 4,846 (19,784)
Total assets .................... 321,144 444,815
Long-term debt................... 232,000(6) 200,000
Total indebtedness .............. 242,755(6) 279,257
Shareholders' equity ............ 42,093 127,561
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
---- ---- ----
OTHER FINANCIAL DATA:
EBITDA(7)........................ US$ 9,155 US$10,565 US$26,407
Capital expenditures............. US$29,296 US$59,049 US$32,104
Net cash provided (used)
by operating activities........ (288) 4,616 (2,908)
Net cash used in investing
activities..................... (29,447) (59,386) (32,440)
Net cash provided by financing
activities..................... 36,086 52,338 35,419
OTHER OPERATING DATA:
International minutes (in
thousands):
Inbound(8) .................... 35,120 41,412 105,467
Outbound(9).................... 13,877 21,214 21,017
Local access lines in service
(at period end)................ 6,068 5,191 17,071
Mobile cellular subscribers
(at period end)................ 951 22,208 16,136
Paging subscribers (at period
end)........................... -- 26,330 23,036
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
---- ----
OTHER FINANCIAL DATA:
EBITDA(7)........................ US$31,497 US$ 53,661
Capital expenditures............. US$92,668 US$ 142,101
Net cash provided (used)
by operating activities........ 39,095 26,912
Net cash used in investing
activities..................... (168,636) (121,171)
Net cash provided by financing
activities..................... 132,059 104,065
OTHER OPERATING DATA:
International minutes (in
thousands):
Inbound(8) .................... 135,587 206,631
Outbound(9).................... 21,824 24,444
Local access lines in service
(at period end)................ 43,195 80,616
Mobile cellular subscribers
(at period end)................ 41,107 108,532
Paging subscribers (at period
end)........................... 27,827 28,873
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
QUARTERLY OPERATING
DATA:
International
minutes
(in thousands):
Inbound........... 24,497 24,632 43,539 42,919
Outbound.......... 5,233 5,404 5,534 5,653
Local access lines
in service (at
period 21,904 28,442 34,995 43,195
end)..............
Mobile cellular
subscribers (at
period end)....... 19,343 23,521 30,129 41,107
Paging subscribers
(at period end)... 24,871 26,661 27,443 27,827
Average monthly
churn (mobile
cellular 3.6% 4.1% 4.4% 3.5%
subscribers)(10)..
THREE MONTHS ENDED
----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
---- ---- ---- ----
QUARTERLY OPERATING
DATA:
International
minutes
(in thousands):
Inbound........... 40,858 51,365 51,421 62,987
Outbound.......... 6,302 5,666 5,829 6,647
Local access lines
in service (at
period 51,581 60,419 71,647 80,616
end)..............
Mobile cellular
subscribers (at
period end)....... 55,986 76,095 88,990 108,532
Paging subscribers
(at period end)... 28,332 28,456 28,652 28,873
Average monthly
churn (mobile
cellular 3.6% 2.7% 5.7% 2.4%
subscribers)(10)..
- -----------------------
(1) Except per share, share and operating data.
(2) Prior to 1995, the Company made payments in lieu of income tax at a rate of
18.0% of gross domestic collections after deducting access and carrier
charges. In 1995, the Company disputed paying taxes on the basis of gross
revenues and, as a result of a settlement with the Dominican tax
authorities, paid a total of US$222,000 to the Dominican government in lieu
of income tax. Since 1996, the Company has made payments in lieu of income
tax to the Dominican government, in accordance with the terms of its
Concession Agreement, of 10% of gross domestic revenues, after deducting
charges for access to the local network, plus 10% of net international
revenues. See Note 16 of Notes to Consolidated Financial Statements.
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<PAGE>
(3) Deferred income taxes reflect the next tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes of the
company subsidiary TRICOM USA.
(4) Represents a write-off related to the refinancing of indebtedness. See
"Item 9. Management's Discussion and Analysis of Results of Operation and
Financial Condition."
(5) Represents (x) US$43.0 million and US$21.7 million of United States
Treasury securities pledged to the trustee for the Senior Notes at December
31, 1997 and 1998, respectively, an amount that is estimated as sufficient
to provide for payment in full of interest on the Senior Notes through
September 1, 1999, and (y) US$32.8 million irrevocably deposited with the
trustee for the Carifa Bonds (as defined below), an amount that is
estimated to be sufficient to pay the principal amount of the Carifa Bonds
at their maturity in 1999, together with interest payable through such
date. See Note 7 of Notes to Consolidated Financial Statements.
(6) Includes US$32.0 aggregate principal amount of industrial revenue bonds
("the Carifa Bonds") issued by the Caribbean Basin Projects Financing
Authority to finance a loan to the Company of the same principal amount
(the "Carifa Loan"). The Company has irrevocably deposited an amount with
the trustee for the Carifa Bonds that is estimated to be sufficient to pay
the principal amount of the Carifa Bonds at their maturity in 1999,
together with interest payable through such date.
(7) 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.
(8) Inbound minutes refers to minutes of international long distance calls to
the Dominican Republic that TRICOM receives from foreign correspondent
carriers.
(9) Outbound minutes refers to minutes of international long distance calls
from the Dominican Republic that TRICOM sends to foreign correspondent
carriers and from TRICOM USA.
(10) 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.
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<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
REVENUE RECOGNITION
The Company derives its operating revenues primarily from toll revenues,
international 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 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 revenues represent amounts recognized by the Company for
termination of traffic from foreign telecommunications carriers to the
Dominican network, including revenues derived from the Company's U.S.
based international long distance pre-paid calling cards.
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 other
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 and commissions received for
collection services for utility companies.
-31-
<PAGE>
The following table sets forth the percentage contribution of each
category of revenues to total operating revenues for the periods
indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------ ------------ ------------
Toll............................ 16.6% 17.2% 14.1%
International settlement........ 53.2 43.8 40.1
Local service................... 2.2 7.1 10.3
Cellular........................ 13.9 14.5 16.2
Paging.......................... 6.5 5.6 3.6
Sale and lease of equipment..... 5.0 6.1 3.3
Installations................... 2.5 5.6 10.3
Other........................... 0.1 0.1 2.1
RESULTS OF OPERATIONS
The following table sets forth certain items in the statements of
operations expressed as a percentage of total operating revenues for the periods
indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
------------ ------------ ------------
Operating costs................... 81.6% 82.4% 76.5%
Operating income.................. 18.4 17.6 23.5
Interest expense, net............. (13.5) (13.4) (10.2)
Other income (expenses)........... (13.2) (14.2) (9.5)
Earnings before Extraordinary
Item............................ 5.2 3.4 14.3
Net earnings...................... 5.2 (2.7) 14.3
EBITDA............................ 33.4 35.0 42.8
1998 COMPARED TO 1997
OPERATING REVENUES. The Company's total operating revenues increased 39.3%
to US$125.5 million in 1998 from US$90.1 million in 1997. The Company attributes
much of this growth to increased international 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 13.8% to US$17.6 million for 1998 from
US$15.5 million for 1997. The increase in toll revenues was attributable to
higher outbound international traffic and domestic long distance minutes.
Outbound international minutes increased by 11.2% to 22.5 million minutes for
1998 from 20.2 million minutes for 1997 reflecting increased traffic volume from
the higher number of local access lines in service and cellular subscribers, as
well as the Company's Efectiva prepaid calling card. Local access lines and the
Efectiva prepaid calling card accounted for 29.2% and 29.1%, respectively, of
the total outbound international minutes for 1998 compared to 24.2% and 28.7%,
respectively, for 1997. Domestic long distance minutes increased by 55.2% to
20.2 million minutes for 1998 from 13.0 million minutes for 1997 due to the
higher number of local access lines in service.
Interconnection revenues related to domestic and international long
distance traffic also increased as a result of the growth of the Company's local
access line installed base. Interconnection revenues increased by approximately
62% to US$3.2 million for 1998 from US$2.0 million for 1997. Toll revenues
represented 14.1% of total operating revenues for 1998 compared to 17.2% of
total operating revenues for 1997.
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International. International revenues increased 27.6% to US$50.3 million
for 1998 from US$39.4 million for 1997. This increase was achieved despite a
16.2% decrease in average settlement rates for 1998 compared to 1997. Inbound
minutes increased by 52.4% to 206.6 million for 1998 from 135.6 million minutes
for 1997. The increase in minutes in 1998 was the result of volume based
agreements with various international carriers and the increasing presence of
TRICOM USA's operations in the United States. TRICOM USA accounted for 53.2% of
the total inbound minutes in 1998 compared to 39.0% in 1997. Inbound minutes
generated by TRICOM USA during 1998 included 89.7 million minutes attributable
to the provision of facilities by TRICOM USA to resellers and 20.2 million
minutes attributable to prepaid calling cards distributed in the United States
compared to 48.7 million minutes from the provision of facilities and 4.2
million minutes attributable to Efectiva prepaid cards during 1997.
As a result of increased competition in the market, settlement rates for
international long distance service between the Dominican Republic and the
United States declined in 1998 to an average rate of US$0.212 per minute from
US$0.253 per minute during 1997. 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. By increasing the volume of international traffic that
it handles, TRICOM has been able to increase revenues from the provision of
international long distance services. However, future decreases in settlement
rates, without similar increases in the Company's long distance traffic volume
from the United States would reduce the Company's international 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 revenues represented 40.1% of
total operating revenues for 1998 compared to 43.8% of total operating revenues
for 1997.
Local service. Local service revenues increased 101.8% to US$12.9 million
for 1998 from US$6.4 million for 1997. The increases reflect the growth in the
number of local access lines in service as a result of the Company's local
access network expansion program, combined with a higher average monthly rent
charged to customers which increased to US$10 during 1998 from US$8 during 1997.
Local service rent revenues increased by 109.5% to US$9.3 million for 1998 from
US$4.4 million for 1997 as a result of the higher average local access
subscriber base.
During 1998, the Company added 37,421 net local access lines compared to
26,124 net local access lines added during 1997. The number of net local access
line additions during 1998 represents the highest number of net line additions
in any year since TRICOM began installing local access lines in 1994. At
December 31, 1998, the Company had 80,616 local access lines in service compared
to 43,195 local access lines in service at December 31, 1997. As a result,
interconnection revenues related to local calls received from Codetel increased
50.9% to US$1.0 million for 1998 from US$666,000 for 1997. Local service
revenues represented 10.3% of total operating revenues for 1998 compared to 7.1%
of total operating revenues for 1997.
Cellular. Cellular revenues increased by 55.8% to US$20.4 million for 1998
from US$13.1 million for 1997. This increase was attributable to the growth of
airtime minutes generated by the Company's prepaid cellular program as well as
to a larger average cellular subscriber base in 1998. Airtime minutes increased
26.1% to 94.0 million minutes for 1998 from 74.5 million minutes for 1997. In
addition, the average price per outgoing airtime minute increased by 22% to
US$26 in 1998 from US$21 in 1997.
During 1998, the Company added 67,425 net subscribers compared to 24,971
net subscribers added in 1997. The number of cellular subscribers increased at
December 31, 1998 by 164% to 108,532 from 41,107 at December 31, 1997. The
Company attributes the increase in cellular airtime and the number of
subscribers to the introduction of prepaid cellular services and the Amigo
cellular prepaid card in the third quarter of 1997. Prepaid cellular services
generated approximately 41% of the Company's total airtime minutes and 39% of
total cellular revenues in 1998. Prepaid cellular revenues increased by US$6.8
million to US$7.9 million in 1998 compared to US$906,000 during 1997.
The Company's average monthly churn rate for cellular services was 3.6% for
1998 compared to 3.9% for 1997. 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
19.6% to US$1.6 million in 1998 from US$1.3 million in 1997 due to a higher
volume of incoming minutes received by prepaid cellular subscribers and to a
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larger number of cellular subscribers. Cellular revenues represented 16.2% of
total operating revenues for 1998 compared to 14.5% of total operating revenues
for 1997.
Paging. Paging revenues decreased 10.9% to US$4.5 million for 1998 compared
to US$5.1 million for 1997. The decrease in 1998 reflected a decline in the
average revenue per paging subscriber compared to 1997 primarily as a result of
increased competition in the market. In addition, the Company believes that the
success of its prepaid cellular program has contributed to the decline of its
paging revenues by having customers move away from paging services and into
prepaid cellular services. The Company added 1,046 net paging subscribers during
1998 compared to 4,791 net paging subscribers added in 1997. The number of
paging subscribers increased by 3.8% to 28,873 at December 31, 1998 from 27,827
at December 31, 1997. The Company's average monthly churn rate for paging
services declined to 3.4% for 1998 compared to 3.7% for 1997. Paging revenues
represented 3.6% of total operating revenues for 1998 compared to 5.6% of total
operating revenues for 1997. The Company has determined that paging will not
play a major role in its marketing and promotional program.
Sale and lease of equipment. Revenues from the sale and lease of equipment
decreased 25.2% to US$4.1 million for 1998 from US$5.5 million for 1997,
primarily as a result of a lower number of cellular handsets and paging
equipment sold. In 1997, the Company entered into arrangements with major
electronics retailers for the distribution of cellular services. The Company
believes that these arrangements will decrease revenues from the sale of
cellular equipment, but could increase cellular services revenues by expanding
the number of subscriber additions. Additionally, the decline in revenues from
the sale of cellular equipment is accompanied by a decrease in cost of goods
sold. Sale and lease of equipment revenues represented 3.3% of total operating
revenues in 1998 compared to 6.1% of total operating revenues for 1997. The
Company has strategically migrated away from this revenue source and has
determined that the sale and lease of equipment will not be a major focus of its
marketing efforts.
Installations. Installation revenues increased 155.1% to US$12.9 million
for 1998 from US$5.1 million for 1997. This increase is attributable to 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 1998, the Company installed 43,198
gross local access lines and 97,778 gross cellular additions compared to 31,398
gross local access lines and 36,153 gross cellular additions for 1997,
reflecting increased domestic market presence. Installation revenues represented
10.3% of total operating revenues in 1998 compared to 5.6% of total operating
revenues for 1997.
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 29.3% to
US$96.0 million for 1998 from US$74.2 million for 1997. Operating costs
represented 76.5% of total operating revenues for 1998 compared to 82.4% of
total operating revenues for 1997.
Satellite connections and carrier costs increased by 3.3% to US$32.3
million during 1998 compared to US$31.3 million during 1997. The increase in
satellite connections and carrier costs reflected a US$4.6 million increase in
carrier costs to US$11.8 million in 1998 from US$7.2 million in 1997 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$9.5 million in 1998 from US$10.6 million in 1997, as a result of lower
interconnection charges between the Company's network and Codetel. The Company
and Codetel amended the Interconnection Agreement on January 2, 1998 to, among
other things, reduce access charges for 1998 for international long distance
calls from RD$1.45 (US$0.09) per minute to RD$0.98 (US$0.06) per minute and for
national long distance and calls made from cellular telephones from RD$0.95
(US$0.06) per minute to RD$0.63 (US$0.04) per minute. Lease payments for
switching facilities and satellite connections decreased by 23.3% to US$4.3
million in 1998 from US$5.6 million in 1997 due to cost savings for leased
international facilities that resulted with the commencement of operations of
the Antilles-I fiber optic cable.
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Network depreciation and depreciation expense increased 53.1% and 65.6% to
US$11.4 million and US$3.2 million, respectively, for 1998 from US$7.4 million
and US$2.0 million, respectively, for 1997 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 revenues. This expense in lieu of
income taxes increased by 53.0% to US$9.6 million for 1998 from US$6.2 million
for 1997, due to increased revenues, a portion of which were not subject to
deductible access charges, including, in particular, installation revenues.
Other costs decreased to US$3.4 million for 1998 from US$3.7 million for
1997 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 52.6% to US$36.1
million for 1998 from US$23.7 million for 1997. The increases were primarily
attributable to higher personnel costs, other expenses primarily from sales
commissions, and promotional and advertising costs. Personnel costs for 1998
increased by 29.7% to US$13.3 million from US$9.3 million for 1997, reflecting
the growth of operations of TRICOM USA and the Call Tel Corporation, a
subsidiary of the Company that provides operator services to the Company's and
third parties alphanumeric paging subscribers. At December 31, 1998, the Company
had 1,341 employees compared to 989 employees at December 31, 1997. Other
expenses increased by US$6.6 million to US$11.6 million in 1998 from
US$5.0 million in 1997 primarily resulting from a US$4.1 million increase in
sales commissions related to prepaid cards and paid to external establishments.
Promotional and advertising costs increased by US$1.7 million to US$4.3 million
in 1998 from US$2.5 million in 1997, as a result of campaigns related to the
Amigo prepaid card. General and administrative costs as a percentage of total
operating revenues increased to 28.8% for 1998 from 26.3% for 1997.
OPERATING INCOME. Operating income increased 85.9% to US$29.5 million for
1998 from US$15.9 million for 1997. The Company's operating income represented
23.5% of total operating revenues for 1998 compared to 17.6% of total operating
revenues for 1997 reflecting higher margins from local service, cellular, and
international long distance services.
OTHER INCOME (EXPENSES). Other expenses decreased 7.5% to US$11.9 million
for 1998 from US$12.8 million for 1997 reflecting increases in net interest
income and foreign currency exchange gains. Interest expense increased 11.8% to
US$18.0 million for 1998 from US$16.1 million for 1997 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 Third Quarter of 1997. Foreign currency exchange gains
increased by US$861,000 to US$155,000 for 1998 from a loss of US$706,000 for
1997. Interest expense as a percentage of total operating revenues declined to
14.3% for 1998 from 17.9% for 1997.
NET EARNINGS. Net earnings increased to US$17.9 million, or US$0.78 per
share, for 1998 from earnings before extraordinary item of US$3.0 million, or
US$0.17 per share, for 1997 as a result of higher operating income. The weighted
average number of shares outstanding at December 31, 1998 were 22,944,544
compared to 17,600,360 at December 31, 1997. Net earnings accounted for 14.3% of
total operating revenues for 1998, while earnings before extraordinary item
accounted for 3.4% for 1997. However, as a result of a US$5.5 million write-off
related to the retirement of indebtedness from the proceeds of the Senior Notes
during the third quarter of 1997, the Company recorded a net loss after
extraordinary items of US$2.4million for 1997.
1997 COMPARED TO 1996
OPERATING REVENUES. The Company's total operating revenues increased 14%,
to US$90.1 million for 1997 from US$79.1 million for 1996. The Company expanded
its local access network and generated increased revenue primarily from local
service, cellular service, installation charges and toll revenues. Such
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increases were partially offset by decreased international revenues, which were
approximately 20.4% lower for the first half of 1997 than during the same period
in 1996, as a result of declining international settlement rates. However,
international settlement rate decreases were more than offset by an increase of
56% in traffic to 86.5 million minutes in the second half of 1997 from 55.5
million minutes during the same period in 1996.
Toll. Toll revenues increased 18.3%, to US$15.5 million for 1997 from
US$13.1 million for 1996. The growth in toll revenues primarily was attributable
to the increase by 115.2% in domestic long distance minutes to 13.0 million
minutes for 1997 from 6.0 million minutes for 1996 due to increased usage as a
result of additional local access lines. More than 57% of total domestic long
distance minutes in 1997 were generated by local access lines and the remaining
43% by retail telephone centers compared to 46% generated by local access lines
and 54% generated by retail telephone centers in 1996. Interconnection revenues
related to domestic long distance traffic also increased in 1997 due to the
growth of the Company's local access line installed base. The increase in toll
revenues also was attributable to an increase in the average price per minute
for international long distance calls to the United States made with the
Efectiva prepaid calling card and calls made from the Company's retail telephone
centers. The Company instituted these price increases on December 11, 1996.
Efectiva prepaid cards accounted for 28.7% of international long distance
minutes in 1997, compared to 23.2% of such minutes in 1996. The price per minute
charged for calls using the Efectiva prepaid card is higher than for calls made
from the Company's retail telephone centers. Outbound international minutes
increased 3.8%, to 21.8 million minutes for 1997 from 21.0 million minutes for
1996, reflecting increased traffic volume from the Efectiva prepaid calling card
and the increased number of local access lines. This increase was partially
offset by the reduction of traffic from retail telephone centers, 107 of which
were closed during 1997 as part of the Company's program to close unprofitable
centers and refocus its public telephony strategy. Toll revenues represented
17.2% of total operating revenues for 1997 compared to 16.6% of total operating
revenues for 1996.
International. International revenues decreased 6.3%, to US$39.4 million
for 1997 from US$42.1 million for 1996. The decrease reflected lower settlement
rates and the Company's program to reduce traffic from information providers in
order to reduce lower margin traffic. Settlement rates declined in 1997 to an
average rate of US$0.25 per minute from $0.41 per minute during 1996 as a result
of increased competition in the market for international long distance service
between the Dominican Republic and the United States. This reduction in
settlement rates was offset partially by a 28.6% increase in inbound minutes to
135.6 million minutes for 1997 from 105.5 million minutes for 1996. The increase
in the number of inbound minutes in 1997 reflected new volume-based agreements
and the commencement of TRICOM USA's operations in the United States in January
1997. Volume-based agreements obligate the correspondent carrier to deliver a
minimum number of international long distance minutes to the Company in exchange
for per-minute discounts if certain thresholds are met. In addition to these
competitive factors, the FCC has exerted pressure to lower settlement rates for
international calls and in August 1997 adopted the Order establishing future
benchmark rates between U.S. and foreign carriers. The benchmark settlement rate
established for the Dominican Republic currently is US$0.19 per minute, and the
Order requires that such rate be effective not later than January 1, 2001. The
Company believes that competitive and regulatory pressures likely will continue
to push settlement rates lower. The Company believes that generally as rates
decrease traffic increases. However, future decreases in settlement rates,
without a corresponding increase in the Company's long distance traffic from the
United States, would reduce the Company's net international revenues and
adversely affect the profit margins that the Company realizes on such revenues.
TRICOM USA accounted for 39% of the total inbound minutes in 1997, including 4.2
million minutes attributable to prepaid calling cards and 48.7 million minutes
to the provision of facilities by TRICOM USA to resellers. The increase in
inbound minutes was achieved despite the reduction in traffic from information
providers from 22.3 million minutes for 1996 to 11.7 million minutes for 1997.
The Company anticipates that the minutes attributable to, and revenues received
from, information providers will continue to decrease as settlement rates for
international long distance traffic between the United States and the Dominican
Republic continue to decline. International revenues represented 43.8% of total
operating revenues for 1997 compared to 53.2% of total operating revenues for
1996.
Local Service. Local service revenues increased 262.3%, to US$6.4 million
for 1997 from US$1.8 million for 1996. This increase resulted from growth in the
number of local access lines in service, reflecting the Company's program
initiated in 1996 to expand its share of the market for the basic telephone
service. At December 31, 1997, the Company had 43,195 local access lines in
service compared to 17,071 local access lines in service at December 31, 1996.
The Company installed 26,124 net lines in 1997, representing the largest number
of lines installed by the Company in any year since it commenced operations. As
a result, interconnection revenues related to local calls received from Codetel
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increased 302%, to US$665,544 in 1997 from US$165,761 in 1996. Beginning in
August 1997, the Company increased the average monthly rent for local access
lines by offering a variety of customer-defined packages for local service which
ranged in price from US$9.00 per month to US$28.00 per month, depending upon the
services offered. Local service revenues represented 7.1% of total operating
revenues for 1997 compared to 2.2% of total operating revenues for 1996.
Cellular. Cellular revenues increased by 18.7%, to US$13.1 million for 1997
from US$11.0 million for 1996. This increase was attributable to the growth of
airtime minutes by 33.5%, to 74.5 million minutes for 1997 from 55.8 million
minutes for 1996. The number of mobile cellular subscribers increased by 154.8%,
to 41,107 (including 14,719 prepaid cellular subscribers) from 16,136 at
December 31, 1996. The Company was the first cellular provider in the Dominican
Republic to launch a prepaid cellular program, and the Company attributes the
increases in cellular airtime and the number of mobile cellular subscribers
primarily to the introduction of prepaid cellular services and the Amigo prepaid
card for cellular calls in August 1997. Prepaid cellular services generated
approximately 15% of the Company's total airtime minutes in the fourth quarter
of 1997. The average monthly service revenue per cellular subscriber (excluding
revenues from the sale or lease of equipment and from outgoing international
long distance calls, which are included in sale and lease of equipment and toll
revenues, respectively, but including interconnection revenues associated with
incoming airtime minutes) was US$48.71 in 1997 and US$42.86 in 1996.
The Company added 24,971 net subscribers in 1997, including 10,978 in the
fourth quarter, compared to a net loss of 6,072 subscribers in 1996. The Company
attributes the decline in the number of cellular subscribers in 1996 to two
primary factors. First, the Company terminated service for approximately 15,611
subscribers between April and December 1996, or approximately 71.3% of the
Company's cellular subscribers at March 31, 1996, because such subscribers'
accounts were more than 45 days past due. Second, in response to price increases
implemented by the Company in January 1996, Codetel lowered prices, which had
the dual effect of reducing the Company's share of new cellular subscribers and
prompting some of the Company's cellular subscribers to switch to Codetel. The
Company subsequently reversed the price increases of January 1996 to make its
rates competitive with those of Codetel, resulting in an increase in the number
of its cellular subscribers. The Company's average monthly churn rate for
cellular services was 3.9% for 1997 and 8.7% for 1996. Interconnection revenues
associated with airtime traffic received from Codetel also increased in 1997 due
to the higher volume of incoming minutes received by prepaid cellular
subscribers, as well as to a larger subscriber base. Cellular revenues
represented 14.5% of total operating revenues for 1997 compared to 13.9% for
1996.
Paging. Paging revenues decreased by 1.8%, to US$5.1 million for 1997
compared to US$5.2 million for 1996. The decrease reflected a decline in the
Company's average subscriber base for paging services during the first six
months of 1997 from the average subscriber base for the first six months of
1996, which resulted from price competition and the termination of service for
subscribers by the Company for credit considerations during the second and third
quarters of 1996. However, the Company added 4,791 paging subscribers during
1997 compared to a net loss of 3,294 subscribers in 1996. As a result, the
number of paging subscribers increased by 20.8%, to 27,827 at December 31, 1997
from 23,036 at December 31, 1996. Paging revenues represented 5.6% of total
operating revenues for 1997 compared to 6.5% for 1996. The average monthly
service revenue per paging subscriber was US$13.72 for 1997 and US$15.75 for
1996. The Company's average monthly churn rate for paging services was 3.7% for
1997 and 6.3% for 1996.
Sale and Lease of Equipment. Revenues from the sale and lease of equipment
increased 38.6%, to US$5.5 million for 1997 from US$4.0 million for 1996. This
increase reflected a higher volume of cellular handsets since the Company
implemented a policy in May 1996 which requires individual subscribers to
purchase, rather than lease, cellular handsets, paging units, and telephone
handsets. This policy was implemented in order to reduce credit risks and
associated working capital requirements. During 1997, the Company entered into
arrangements for the distribution of cellular and paging services with major
consumer electronics retailers in conjunction with the sale by them of handsets
and paging units. As a result, the Company sold a lower percentage of cellular
handsets and pagers to new subscribers in 1997 than in 1996. The Company
believes that these arrangements will result in lower revenues from the sale of
handsets and paging units but could increase revenues from cellular and paging
services by increasing the number of the Company's subscribers for such
services. Sale and lease of equipment revenues represented 6.1% of total
operating revenues in 1997 compared to 5.0% of total operating revenues for
1996.
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Installations. Installation revenues increased 161.0%, to US$5.1 million
for 1997 from US$1.9 million for 1996. This increase reflected the increase in
the number of local access line, cellular and paging installations as well as an
increase in the installation fee per local access line from US$100 to US$200 in
August 1997. In January 1998, the Company again increased the local access line
installation fee to US$280. During 1997, the Company installed 31,398 gross
local access lines compared to 15,319 gross local access lines installed for
1996. The Company disconnected 5,274 local access lines during 1997, for an
average monthly churn rate of approximately 1.7%. Installation revenues
represented 5.6% of total operating revenues for 1997 compared to 2.5% of total
operating revenues for 1996.
OPERATING COSTS. Major components of operating costs are (i) carrier costs,
which include amounts owed to foreign carriers for the use of their networks for
termination of outbound traffic and commissions paid to information providers,
(ii) interconnection costs, which are access charges paid to Codetel,
(iii) depreciation of network equipment and leased terminal equipment,
(iv) payments for international satellite circuit leases, (v) expenses in lieu
of income tax and (vi) general and administrative expenses. The Company's
operating costs increased 15.1%, to US$74.2 million for 1997 from
US$64.5 million for 1996. Operating costs represented 82.4% of total operating
revenues for 1997 compared to 81.6% for 1996.
Satellite connections and carrier costs increased 3.6%, to US$31.3 million
in 1997 compared to US$30.2 million in 1996. The Company paid to international
carriers US$7.2 million and US$8.2 million in 1997 and 1996, respectively. The
increase in satellite connections and carrier costs also reflected a US$4.0
million increase in interconnection costs as a result of the significant growth
of inbound traffic and long distance minutes from the Company's network to
Codetel's network. The Company and Codetel amended the Interconnection Agreement
on January 2, 1998 to, among other things, reduce access charges for 1998 for
international long distance calls from RD$1.45 (US$0.09) per minute to RD$0.98
(US$0.06) per minute and for national long distance and calls made from cellular
telephones from RD$0.95 (US$0.06) per minute to RD$0.63 (US$0.04) per minute.
The Company anticipates that these reductions in access charges will lower the
Company's operating costs. If these access charges had been in effect for 1997,
the Company's operating costs would have been reduced by approximately US$3.8
million, net of an increase in expense in lieu of income taxes, and its
operating revenues from access charges received from Codetel would have been
reduced by US$990,000.
Lease payments for switching facilities and satellite connections increased
from US$4.6 million in 1996 to US$5.6 million in 1997. This increase was
attributable primarily to the commencement of operations of TRICOM USA. Network
depreciation increased 28.2%, to US$7.4 million for 1997 from US$5.8 million for
1996 as a result of the Company's continued investment in plant and equipment.
Increases in connections and carrier costs and lease payments in 1997 were
offset by the decrease by US$2.9 million in payments to information providers
and the decrease by US$1.0 million in carrier costs for outbound international
long distance calls due to lower rates charged by international carriers. The
Company paid commissions to information providers in 1997 of US$2.9 million
compared to US$5.8 million in 1996 as a result of the reduction of such traffic.
Pursuant to the terms of the Concession Agreement, TRICOM currently is
making payments to the Dominican government in lieu of income tax equal to 10%
of gross domestic revenues, after deducting Codetel access charges plus 10% of
net international revenues. Expense in lieu of income taxes increased by 16.8%,
to US$6.2 million for 1997 from US$5.3 million for 1996 due to increased
revenues, a higher portion of which were not subject to deductible access
charges, including, in particular, sale and lease and installation revenues.
Other operating costs increased to US$3.7 million for 1997 from US$1.0 million
for 1996 primarily due to higher costs related to the increased volume of sale
of equipment.
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 15.5%, to
US$25.6 million for 1997 from US$22.2 million for 1996. The increases were
primarily attributable to higher personnel costs, commissions, promotional and
advertising costs and occupancy costs. Personnel costs for 1997 increased 51.6%,
to US$9.3 million from US$6.1 million for 1996, due to the start of operations
of TRICOM USA and Call Tel Corporation, a subsidiary of the Company that
provides operator services to the Company's and third parties' alphanumeric
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paging subscribers. At December 31, 1997, the Company had 989 employees compared
to 747 employees at December 31, 1996. Commissions increased by 90%, to
US$1.3 million for 1997 compared to US$683,000 for 1996, as a result of
increased commissions paid to distributors in connection with sales of equipment
and Efectiva, TRICOM USA and cellular prepaid cards. Promotional and advertising
costs increased by 25%, to US$2.5 million in 1997 from US$2.0 million as a
result of the launching of campaigns to promote new prepaid cellular services
and a prepaid card for cellular calls and the increased promotion of local
access lines. Occupancy costs increased by 12.8%, to US$3.4 million in 1997 from
US$3.0 million in 1996 as a result of higher depreciation. These increases were
offset by the significant decline of the Company's provision for uncollectible
accounts, to US$1.9 million for 1997 compared to US$5.5 million for 1996. The
decline in such provision in 1997 reflected the establishment of the Company
policy during 1996 of reserving 100% of all accounts receivable which were 90
days past due and the institution of new billing procedures and credit limits
which reduced the incidence of late payments and defaults on payments during
1997. General and administrative costs as a percentage of total operating
revenues increased slightly, to 28.4% for 1997 from 28.1% for 1996.
OPERATING INCOME. Operating income increased 9.1%, to US$15.9 million for
1997 from US$14.5 million for 1996. The decline in operating margins during 1997
primarily resulted from the decline in international settlement rates. The
Company's operating income represented 17.6% of total operating revenues for
1997 compared to 18.4% of total operating revenues for 1996.
OTHER INCOME (EXPENSE). Other expenses increased 22.9%, to US$12.8 million
for 1997 from US$10.4 million for 1996, reflecting increases in net interest
expense of US$1.3 million and foreign exchange losses of US$706,000 in 1997.
Interest expense increased 45.3%, to US$16.1 million for 1997 from US$11.1
million for 1996 as a result of the issuance of the Senior Notes to refinance
US$135.7 million aggregate principal amount of indebtedness. Interest expense as
a percentage of total operating revenues increased to 17.9% for 1997 compared to
14.0% for 1996.
NET EARNINGS (LOSS). Earnings before extraordinary item decreased 26.2%, to
US$3.0 million for 1997 from US$4.1 million for 1996. Earnings before
extraordinary item accounted for 3.4% of total operating revenues for 1997
compared to 5.2% of total operating revenues for 1996. As a result of a
US$5.5 million write-off related to the retirement of indebtedness with a
portion of the net proceeds from the offering of the Senior Notes during the
third quarter of 1997, the Company recorded a net loss of US$2.4 million for
1997.
EFFECTS OF INFLATION
The annual inflation rates in the Dominican Republic in 1996, 1997 and 1998
were 4.0%, 8.0%, and 7.8%, 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 appropriate functional currency was difficult to
make, 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.
-39-
<PAGE>
The financial statements of the Company as of December 31, 1996 and for
prior years have been remeasured to U.S. dollars using the methodology described
in Financial Accounting Standards (FAS) No. 52. See Note 2.2 of Notes to
Consolidated Financial Statements.
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 1996, 1997 and 1998, the Company expended US$32.1
million, US$92.7 million and US$142.1 million, respectively, for capital
expenditures. During 1997 and 1998, the Company made capital expenditures for
the installation of additional local access lines, enhancement of the Company's
cellular network, expansion of international facilities, including the
installation of TRICOM's switch in New York, and other network improvements. The
Company currently estimates that capital expenditures relating to the
installation of approximately 45,000 wireless local lines will total
approximately US$97.3 million for 1999. The Company anticipates expending
approximately US$11.1 million in 1999 to enhance its cellular network by adding
new cell sites and capacity to existing cell sites. The Company also anticipates
expending approximately US$2.9 million and US$18.6 million during 1999 to expand
its international circuit capacity and network facilities, respectively.
However, the amounts to be expended in 1999 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.
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 is currently market testing
approximately 3,000 WLL lines around the Dominican Republic's capital city of
Santo Domingo and expects to be rolling this product out commercially during the
second quarter of 1999. TRICOM 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 three years, extending coverage to seven additional cities and
increasing capacity in the previously covered cities. The Company anticipates
financing 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 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. 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. Net cash provided by
operating activities was US$26.8 million and US$39.1 million for 1998 and 1997,
respectively, while for 1996 the Company had negative cash flow from operating
activities of 2.9 million. At December 31, 1997, the Company had positive
working capital of US$4.8 million, however, at December 31, 1998 and 1996, the
Company had negative working capital of US$20.4 million and US$43.6 million,
respectively, as a result of increased short-term borrowings.
The Company had account receivables of US$15.9 million, US$15.8 million and
US$24.0 million and allowance for doubtful accounts of US$741,000, US$669,000
and US$4.9 million at December 31, 1998, 1997 and 1996, respectively. Accounts
receivables and allowance for doubtful accounts remained stable for the last two
years given the implementation of tighter credit policies by the Company and
increased traffic from resellers, which the Company requires to prepay for its
services.
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<PAGE>
The Company's total assets increased to US$444.8 million at December 31,
1998 from US$321.1 million at December 31, 1997. The Company's indebtedness was
approximately US$279.3 million at December 31, 1998, of which US$200.0 million
represented the Company's Senior Notes and US$79.3 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 September 1, 1999 and
to pay interest on such industrial revenue bonds through such date.
Shareholders' equity increased to US$127.8 million at December 31, 1998 from
US$42.1 million at December 31, 1997, as a result of the ADR Offering and
increased net income for the period.
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") guaranteed by Motorola,
which permitted the Company to borrow up to US$11.0 million. However, in January
1999, Citibank increased its existing credit facilities to TRICOM by
US$11.0 million to US$20.0 million. In addition, at January 31, 1998 the Company
obtained a US$10.0 million credit facility with a local Dominican bank to
finance working capital. Moreover, the Company is in the process of obtaining
additional credit facilities from international banks for approximately US$17.5
million for working capital purposes. At December 31, 1998, the Company had
approximately US$20.2 million available under short-term, U.S. dollar- and peso-
denominated credit facilities with Dominican banks.
The Company's total assets increased from US$18.9 million at December 31,
1992 to US$444.8 million at December 31, 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 second quarter of 1999. TRICOM expects software reprogramming and
replacement, testing and implementation to be completed by the second quarter of
1999.
-41-
<PAGE>
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 second
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 second
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
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 second 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 is developing a contingency plan in case of failure of its
information technology systems, but it anticipates that it will have tested such
plan by the second 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.
-42-
<PAGE>
ITEM 9A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about market risks to certain financial
instruments of the Company includes "forward-looking" statements that involve
risks and uncertainties. Actual results could differ materially from those
projected in the forward-looking statements.
The Company is exposed to market risks from adverse changes in interest
rates and foreign exchange rates. TRICOM does not engage in speculative or
leveraged transactions, nor does the Company hold or issue financial instruments
for trading purposes. In addition, TRICOM does not engage in any interest rate
or foreign currency exchange rate hedging transactions.
INTEREST RATE RISK
TRICOM's interest expense is sensitive to changes in the general level of
interest rates in the United States and in the Dominican Republic. At
December 31, 1998, TRICOM had outstanding US$200 million aggregate principal
amount of long-term debt, representing TRICOM's Senior Notes. The Senior Notes
bear interest at 11 3/8% per annum and mature in the year 2004. The fair value
of such Senior Notes was approximately US$164 million at December 31, 1998. See
Note 14 of Notes to Consolidated Financial Statements.
TRICOM's primary exposure to market risk for changes in interest rates
relates to its short-term borrowings from Dominican banks. At December 31, 1998,
the Company had US$47.3 million of short-term borrowings, including trade
finance, outstanding from Dominican and international banks mostly denominated
in US$ dollars. The Company's short-term borrowings bore interest at rates
ranging from 9.5% to 12.5% per annum, except for borrowings denominated in
Dominican pesos which bore annual interest at 26%. During 1998, TRICOM's
short-term debt bore interest at an average rate of 10.0% per annum. A 10%
increase in the average rate for TRICOM's short-term debt would have decreased
the Company's 1998 net income by approximately US$50,400.
The amount of short-term debt discussed above excludes US$32 million
aggregate principal amount of industrial revenue bonds which mature in September
1999. TRICOM has deposited irrevocably funds with the trustee of such bonds in
an amount sufficient to pay all accrued interest and principal at maturity.
FOREIGN EXCHANGE RISKS
The Company is subject to currency exchange risks. During 1998, TRICOM
generated US$50.3 in US dollars and US$75.2 million in Dominican pesos. In
addition, at December 31, 1998, the Company had US$44.1 million of US dollar
denominated debt and approximately US$3.2 million of Dominican peso denominated
debt outstanding. At December 31, 1998, TRICOM had an indexed debt to the dollar
of RD$35.0 million at a contracted exchange rate of RD$15.50 per US$1.00,
resulting in a obligation of US$2,258,064.
Dominican foreign exchange regulations require TRICOM and other
telecommunications companies to convert all of its US dollar revenues into
Dominican pesos at the official exchange rate, and it must purchase US dollars
at the private market exchange rate. Although the official exchange rate now
fluctuates and is tied to the private market rate, the official exchange rate
tends to be lower than the private market rate. During 1998, the average
official exchange rate was RD$14.70 per US$1.00 while the average private market
rate was RD$15.23 per US$1.00.
The Company's functional currency is the US dollar and, as a result, it
must translate the value of Dominican peso-denominated assets into US dollars
when compiling its financial statements. This translation can create foreign
exchange gains or losses depending upon fluctuations in the relative value of
the Dominican peso against the US dollar. During 1998, TRICOM recognized an
approximate US$104,000 foreign exchange gain. If the Dominican peso had devalued
by an additional 10% against the US dollar during 1998 on average, then TRICOM
would have realized a foreign exchange gain of US$112,000.
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<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The Company is managed by a Board of Directors, the members of which, in
accordance with the Company's By-laws, are elected at the annual shareholders'
meeting and serve for a period of one year. The Board of Directors is composed
of a Chairman, Vice President, Secretary, Treasurer and eight additional
members. The Board of Directors must meet at least once every three months.
Special meetings of the Board of Directors may be held at any time.
The names of the directors and executive officers of the Company are set
forth below together with their ages at March 31, 1999 and current positions at
the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------
<S> <C> <C>
BOARD OF DIRECTORS
Named by GFN Corporation, Ltd.:
Manuel Arturo Pellerano Pena........... 45 Chairman
Hector Castro Noboa.................... 58 Vice President
Marcos J. Troncoso..................... 51 Secretary
Juan Felipe Mendoza.................... 45 Treasurer
Raisa Gil de Fondeur................... 51 Director
Anibal de Castro....................... 49 Director
Named by Motorola, Inc.:
Richard W. Gasink...................... 48 Director
Fernando Simo.......................... 52 Director
Kevin Wiley............................ 39 Director
Jesus Barona........................... 38 Director
Independent Directors:
Fernando Antonio Rainieri.............. 51 Director
Jose Manuel Villalvazo................. 52 Director
EXECUTIVE OFFICERS
Manuel Arturo Pellerano Pena........... 45 Chief Executive Officer
Carl H. Carlson........................ 41 Executive Vice President
and Member of the Office
of the President
Marcos J. Troncoso..................... 51 Executive Vice President
and Member of the Office
of the President
Carlos F. Vargas....................... 45 First Vice President, Finance
and Administration
Carlos Ramon Romero.................... 46 First Vice President,
Residential and Business
Services
Ramon Tarrago.......................... 35 First Vice President,
International Business
Virgilio Cadena del Rosario............ 47 First Vice President,
Network and Engineering
</TABLE>
Each of the current members of the Board of Directors has been elected
pursuant to a shareholders agreement, dated August 12, 1993, among Motorola,
Oleander Holdings, Inc. and Compania Tropical del Caribe, which are wholly owned
subsidiaries of GFN, and Maxpe S.A. and Artpe, S.A., corporations owned by a
principal of GFN and the Company's President, respectively. After the Company's
initial public offering was consummated, such agreement was amended and
restated. The size of the Board of Directors was increased to 12 members. Two of
the newly appointed directors are independent directors, who are not current or
former officers or employees and are not, or have been, otherwise affiliated
with either Motorola or GFN.
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<PAGE>
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The aggregate amount of compensation paid by the Company during the fiscal
year ended December 31, 1998 to its directors and executive officers, as a group
(17 persons), was US$2.7 million.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
In connection with the Offering of the American Depositary Receipts, the
Board of Directors of the Company adopted resolutions to approve the Company's
1998 Long-Term Incentive Plan (the "Plan"). The Board of Directors of the
Company, which administers the Plan, approved the granting of options to
purchase 473,666 shares of Class A Common Stock to officers and employees. Each
option so granted will have an exercise price equal to the initial public
offering price in the Offering, will expire on the tenth anniversary of the date
of grant and, commencing on or about April 1, 2001, will become exercisable with
respect to 50% of the shares of Class A Common Stock subject to the option. Each
such option will be fully exercisable after April 1, 2003.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
TRANSACTIONS WITH GFN
GFN is one of the Dominican Republic's largest privately held companies,
with interests in insurance, finance and publishing. GFN provides a number of
managerial services to its affiliated companies, including TRICOM, for which the
affiliated companies are billed based upon, among other things, the number of
hours that a particular GFN employee spends on providing such services. GFN
employees have provided to the Company internal auditing, public relations,
management information services, legal and personnel management services. For
1998, the Company paid to GFN US$462,926 for such services. GFN also provides
security services to the Company for which the Company paid US$105,465 in 1998.
The Company anticipates that it will continue to receive such services from GFN.
The Company leases certain premises and equipment from GFN and its
affiliates. During 1998, the Company paid to GFN and its affiliates US$61,535
for the use of such premises and equipment.
The Company provides life insurance to its employees and has obtained other
insurance through Compania Nacional de Seguros, a GFN affiliated insurance
company. The Company paid insurance premiums to affiliates of GFN totaling
US$2.2 millions in 1998.
TRANSACTIONS WITH MOTOROLA
The Company has purchased telecommunications equipment from Motorola,
particularly for the development of its mobile cellular system for aggregate
consideration of US$22.9 million during 1998.
In August 1998, the Company and Motorola entered into a contract pursuant
to which Motorola will provide and install equipment to connect 150,000 wireless
subscribers. The term of the contract is for four years, and TRICOM will pay
Motorola US$52 million under the terms of the contract. The parties negotiated
the contract on an arms-length basis.
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<PAGE>
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
None.
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<PAGE>
PART IV
ITEM 17. FINANCIAL STATEMENTS
The Registrant has responded to Item 18.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statement filed as
part of this Annual Report.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Independent Auditors' Report ......................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 ......... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 ................................ F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998 ................................ F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 ................................ F-7
Notes to Consolidated Financial Statements ........................... F-9
(B) EXHIBITS
2.1 CDMA Amendment to Cellular System Purchase Agreement between
TRICOM, S.A and Motorola, Inc.
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<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report .............................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 .............. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 ....................................... F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998 ....................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1997 and 1998 ....................................... F-7
Notes to Consolidated Financial Statements ................................ F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
TRICOM, S.A. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of TRICOM, S.
A. and subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three year-period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TRICOM, S.
A. and subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the years in the three year-period
ended December 31, 1998, in conformity with generally accepted accounting
principles in the United States of America.
PEAT, MARWICK, MITCHELL & CO.
Member firm of KPMG International
Santo Domingo, Dominican Republic
January 29, 1999
F-2
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
ASSETS 1997 1998
- ------------------------------------------------------- ------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (notes 4 and 6).......... US$ 5,732,505 US$ 15,377,410
Accounts receivable (notes 5, 6 and 11):
Customers........................................ 6,747,148 9,168,740
Carriers......................................... 5,546,399 4,153,003
Related parties.................................. 625,248 163,110
Officers and employees........................... 200,294 275,069
Current portion of long term accounts receivable. 281,382 75,071
Other............................................ 2,390,098 2,113,228
15,790,569 15,948,221
---------- ----------
Allowances for doubtful accounts................. (668,827) (740,687)
---------- ----------
Accounts receivable, net....................... 15,121,742 15,207,534
Current portion of pledged securities (notes 7 and 14) 22,750,000 54,470,478
Inventories, net ................................ 5,633,477 8,687,356
Prepaid expenses ................................ 2,518,052 2,921,680
Deferred income taxes (note 17) ................. -- 556,949
---------- ----------
Total current assets........................... 51,755,776 97,221,407
---------- ----------
Long-term accounts receivable........................ 966,592 91,556
Unearned interest.................................... (204,576) --
---------- ----------
Long-term accounts receivable, net................. 762,016 91,556
---------- ----------
Investments (notes 7 and 14):
Pledged securities................................. 53,018,390 --
Others............................................. 1,796,521 2,164,387
---------- ----------
Total investments................................ 54,814,911 2,164,387
----------- -----------
Property and equipment, net (notes 3 and 14)......... 202,977,596 330,456,448
Other assets at cost, net of amortization (notes 8
and 19)............................................. 10,833,238 14,880,805
-------------- --------------
US$321,143,537 US$444,814,603
============== ==============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998
- ------------------------------------------------------- -------------- --------------
<S> <C> <C>
Current liabilities:
Notes payable (notes 6, 9, 10 and 14):
Borrowed funds - banks........................... US$ 5,905,005 US$ 21,665,516
Borrowed funds - related parties................. 4,849,818 25,591,915
Current portion of long-term debt ............... -- 32,000,000
-------------- ---------------
10,754,823 79,257,431
-------------- ---------------
Accounts payable (notes 6 and 11):
Carriers......................................... 2,327,768 3,106,898
Suppliers........................................ 17,746,637 11,772,957
Other............................................ 1,023,478 1,566,076
-------------- ---------------
21,097,883 16,445,931
Other liabilities (notes 12 and 19)................ 3,039,761 7,413,821
Accrued expenses (note 13)......................... 12,017,371 13,887,974
-------------- ---------------
Total current liabilities........................ 46,909,838 117,005,157
-------------- ---------------
Reserve for severance indemnities.................... 140,641 42,886
Deferred income tax (note 17)........................ -- 205,258
Long-term debt, excluding current portion (note 14):
Carifa loan........................................ 32,000,000 --
Senior Notes....................................... 200,000,000 200,000,000
-------------- ---------------
Total liabilities................................ 279,050,479 317,253,301
-------------- ---------------
Shareholders' equity (notes 15 and 21):
Class A common stock at RD$10 par
value;
Authorized 55,000,000 shares;
5,700,000 shares issued at
December 31,
1998............................................. -- 3,750,000
Class B common stock RD$10 par value in 1998 and no
par value in 1997; Authorized 25,000,000 shares
at December 31, 1997 and 1998; shares issued
19,390,528 shares at December 31, 1997 and 43,357,343
19,144,544 at December 31, 1998.................. 12,595,095
Additional paid-in capital ........................ -- 94,015,852
Retained earnings.................................. 1,318,523 19,224,112
Equity adjustment for foreign currency translation. (2,023,757) (2,023,757)
-------------- ---------------
42,652,109 127,561,302
Less treasury stock at cost, 245,985 Class B
shares, at cost.................................. (559,051) --
-------------- ---------------
42,093,058 127,561,302
Commitments and contingencies (notes 14, 16, 17,
18, 19 and 20)................................... -- --
-------------- ---------------
US$321,143,537 US$444,814,603
============== ===============
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Operating revenues (note 6):
Toll ................................. US$ 13,107,824 US$ 15,510,968 US$ 17,644,573
International revenues................ 42,068,914 39,432,385 50,332,088
Local service......................... 1,769,957 6,411,831 12,941,983
Cellular.............................. 11,011,194 13,073,309 20,363,647
Paging................................ 5,170,031 5,079,103 4,527,579
Sale and lease of equipment........... 3,968,812 5,502,276 4,114,513
Installations......................... 1,942,858 5,070,888 12,936,817
Other................................. 23,975 21,246 2,640,192
-------------- -------------- --------------
Total operating revenues............ 79,063,565 90,102,006 125,501,392
-------------- -------------- --------------
Operating costs:
Satellite connections and carrier
(note 19)........................... 30,171,576 31,270,652 32,308,880
Network depreciation ................. 5,797,312 7,432,818 11,382,446
Expenses in lieu of income taxes
(note 16)........................... 5,347,623 6,248,317 9,561,710
General and administrative expenses,
including depreciation charges by
US$721,676 and US$1,956,121, and
US$3,239,714 as of December 31,
1996, 1997 and 1998, respectively
(notes 6, 18 and 19)................ 22,185,197 25,631,257 39,379,388
Other................................. 1,021,417 3,659,422 3,391,347
-------------- -------------- --------------
Total operating costs............... 64,523,125 74,242,466 96,023,771
-------------- -------------- --------------
Operating income.................... 14,540,440 15,859,540 29,477,621
-------------- -------------- --------------
Other income (expenses):
Interest expense (note 6)............. (11,080,187) (16,100,251) (18,006,286)
Interest income (note 6 and 7)........ 380,938 4,053,079 5,133,348
Gain on sale of fixed assets.......... 213 -- --
Foreign currency exchange gain (loss) 23,275 (705,983) 104,414
Other ................................ 232,899 (83,097) 844,801
-------------- -------------- --------------
Other expenses, net................. (10,442,862) (12,836,252) (11,923,723)
-------------- -------------- --------------
Earnings before income taxes and
extraordinary item.................. 4,097,578 3,023,288 17,553,898
Income tax benefit-deferred (note 17)... -- -- 351,691
Earnings before extraordinary item...... 4,097,578 3,023,288 17,905,589
Extraordinary item -- early
extinguishment of debt (note 14).... -- (5,452,995) --
-------------- -------------- --------------
Net earnings (loss)................. US$ 4,097,578 US$ (2,429,707) US$ 17,905,589
============== ============== ==============
Basic earnings per common share:
Earnings before extraordinary item.... US$ 0.41 US$ 0.17 US$ 0.78
Extraordinary item.................... -- (0.31) --
-------------- -------------- --------------
Net earnings (loss)................... US$ 0.41 US$ 0.14 US$ 0.78
============== ============== ==============
Number of common shares used in
calculation........................ 9,880,403 17,600,360 22,944,544
============== ============== ==============
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
NUMBER OF
COMMON SHARES
ISSUED COMMON STOCK
--------------------- ----------------------
CLASS A CLASS B CLASS A CLASS B
------- ------- ------- -------
Balance at
December 31, 1995.. -- 10,126,388 -- 23,357,343
Equity adjustment
for foreign currency
translation........ -- -- -- --
Transfer to legal
reserve............ -- -- -- --
Net earnings......... -- -- -- --
--------- ---------- ------------- -------------
Balance at
December 31, 1996.. -- 10,126,387 -- 23,357,343
Issuance of common
shares............. -- 9,264,141 -- 20,000,000
Net loss............. -- -- -- --
--------- ---------- ------------- -------------
Balance at
December 31, 1997.. -- 19,360,529 -- 43,357,343
Issuance of
common shares, net
of issuance cost of
US$6,537,345 (note
15)................ 5,700,000 -- 3,750,000 --
Effect of change from
no par value to
RD$10 par value
(note 15).......... -- -- -- (30,203,197)
Retirement of
treasury stock as a
result of initial
public offering.... -- (245,985) -- (559,051)
Transfer to legal
reserve (note 21).. -- -- -- --
Net earnings......... -- -- -- --
--------- ---------- ------------- -------------
Balance at
December 31, 1998.. 5,700,000 19,144,544 US$ 3,750,000 US$12,595,095
========= ========== ============= =============
RETAINED EARNINGS
ADDITIONAL ------------------------------
PAID IN APPROPRIATED
CAPITAL LEGAL RESERVE UNAPPROPRIATED
----------- ------------- --------------
Balance at
December 31, 1995.. -- -- (349,348)
Equity adjustment
for foreign currency
translation........ -- -- --
Transfer to legal
reserve............ -- 600,233 (600,233)
Net earnings......... -- 4,097,578
------------- ------------- -------------
Balance at
December 31, 1996.. -- 600,233 3,147,997
Issuance of common
shares............. -- -- --
Net loss............. -- (2,429,707)
------------- ------------- -------------
Balance at
December 31, 1997.. -- 600,233 718,290
Issuance of
common shares, net
of issuance cost of
US$6,537,345 (note
15)................ 63,812,655 -- --
Effect of change from
no par value to
RD$10 par value
(note 15).......... 30,203,197 -- --
Retirement of
treasury stock as a
result of initial
public offering.... -- -- --
Transfer to legal
reserve (note 21).. -- 571,955 (571,955)
Net earnings......... -- -- 17,905,589
------------- ------------- -------------
Balance at
December 31, 1998.. US$94,015,852 US$ 1,172,188 US$18,051,924
============= ============= =============
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
</TABLE>
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FOR
FOREIGN
CURRENCY TREASURY SHAREHOLDER'S COMPREHENSIVE
TRANSLATION STOCK EQUITY, NET INCOME (LOSS)
----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1995.. (229,684) (559,051) 22,219,260 (229,684)
Equity adjustment
for foreign currency
translation........ (1,794,073) -- (1,794,073) (1,794,073)
Transfer to legal
reserve............ -- -- -- --
Net earnings......... -- -- 4,097,578 4,097,578
------------- ----------- -------------- -------------
Balance at
December 31, 1996.. (2,023,757) (559,051) 24,522,765 2,073,821
Issuance of common
shares............. -- -- 20,000,000 --
Net loss............. -- -- (2,429,707) (2,429,707)
------------- ----------- -------------- -------------
Balance at
December 31, 1997.. (2,023,757) (559,051) 42,093,058 (355,886)
Issuance of
common shares, net
of issuance cost of
US$6,537,345 (note
15)................ -- -- 67,562,655 --
Effect of change from
no par value to
RD$10 par value
(note 15).......... -- -- -- --
Retirement of
treasury stock as a
result of initial
public offering.... -- 559,051 -- --
Transfer to legal
reserve (note 21).. -- -- -- --
Net earnings......... -- -- 17,905,589 17,905,589
------------- ----------- -------------- -------------
Balance at
December 31, 1998.. US$(2,023,757) US$ -- US$127,561,302 US$17,549,703
============= =========== ============== =============
See accompanying notes to the consolidated financial statements
F-7
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998
-------------- ------------- --------------
<S> <C> <C> <C>
Cash flows provided by (used in)
operating activities:
Net earnings (loss) .................. US$ 4,097,578 US$(2,429,707) US$17,905,589
Adjustments to reconcile net
earnings (loss) to net cash
provided by (used in)
operating activities:
Depreciation ....................... 6,518,988 9,388,939 14,622,160
Amortization of debt issue cost .... -- 484,231 1,381,361
Allowance for doubtful accounts .... 5,498,743 1,929,167 1,665,349
Gain on sale of fixed assets ....... (213) -- --
Unrealized loss (gain) in foreign
exchange (23,275) 705,983 31,106
Reserve for severance indemnities .. 56,760 329,153 257,690
Extraordinary item -- early
extinguishment of debt........... -- 5,452,995 --
Deferred income tax, net ........... -- -- (351,691)
Net changes in assets and
liabilities:
Accounts receivable .............. (12,706,835) 2,052,023 (3,681,109)
Inventories ...................... 1,996,493 3,515,558 (3,053,879)
Prepaid expenses ................. (1,302,071) (33,514) (403,628)
Long-term accounts receivable .... 312,247 498,121 866,997
Unearned interest ................ (328,241) (355,121) (204,576)
Other assets ..................... (5,866,462) (10,364,826) (5,542,150)
Accounts payable ................. (307,115) 17,321,727 (4,471,048)
Other liabilities ................ 491,112 1,993,429 4,387,282
Accrued expenses ................. (1,068,941) 9,071,492 3,857,953
Reserve for severance
indemnities ...................... (227,257) (464,519) (355,445)
-------------- -------------- --------------
Total adjustments ...................... (7,006,067) 41,524,838 9,006,372
-------------- -------------- --------------
-------------- -------------- --------------
Net cash provided by (used in)
operating activities.............. (2,908,489) 39,095,131 26,911,961
-------------- -------------- --------------
Cash flows from investing activities:
Acquisition of investments ........... (377,505) (75,967,805) (367,866)
Proceeds from maturity of U.S.
Treasury Bonds..................... -- -- 21,297,912
Cancellation of investments .......... 40,631 -- --
Acquisition of property and
equipment .......................... (32,103,812) (92,667,874) (142,101,012)
Cash received on sale of
fixed assets ....................... 213 -- --
-------------- -------------- --------------
Net cash used in investing
activities ....................... (32,440,473) (168,635,679) (121,170,966)
-------------- -------------- --------------
Cash flows from financing activities:
Borrowed funds from banks ............ 45,192,598 -- 23,234,625
Principal payments to banks .......... (44,394,872) (36,410,367) (7,474,114)
Borrowed funds from related parties .. 24,645,818 1,393,728 57,019,761
Principal payments to related
parties ........................... (17,628,663) (15,626,945) (36,277,664)
Short term obligations ............... (4,223,100) (2,235,955) --
Issuance (redemption) of short-term
bonds............................... 3,827,000 (7,061,768) --
High yield bond issue ................ -- 200,000,000 --
Long-term debt ....................... 28,000,000 (28,000,000) --
Issuance of common stock ............. -- 20,000,000 67,562,655
-------------- -------------- --------------
Net cash provided by financing
activities........................ 35,418,781 132,058,693 104,065,263
-------------- -------------- --------------
Effect of exchange rate changes
on cash .............................. (1,770,798) (1,077,444) (161,353)
-------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents...................... (1,700,979) 1,440,701 9,644,905
Cash and cash equivalents at
beginning of the year................. 5,992,783 4,291,804 5,732,505
-------------- ------------- -------------
Cash and cash equivalents at end of
the year.............................. US$ 4,291,804 US$ 5,732,505 US $15,377,410
============== ============== ==============
Supplemental information:
Expense in lieu of income
tax paid ........................... (4,709,980) (5,908,420) (9,027,468)
Interest paid (net of
capitalization) .................... US$(11,408,428) US$(15,367,463) US$(17,061,409)
============== ============== ==============
See accompanying notes to the consolidated financial statements.
F-8
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1 ORGANIZATION AND NATURE OF BUSINESS
The consolidated financial statements of TRICOM, S.A. include
operations of the following companies in the communications industry, which
are identified as and operate in the Dominican Republic and New York,
U.S.A., under the commercial name TRICOM:
TRICOM, S.A. (Parent Company)
GFN Comunicaciones, S.A.
Bay Tel Communication,
S.A. TRICOM USA, Inc.
Call Tel Corporation
TRICOM, S.A. ("TRICOM" or the "Company") was originally formed under
the laws of the Dominican Republic as Telepuerto San Isidro, S.A. on
January 25, 1988. On December 12, 1995 its legal name was changed to
TRICOM, S.A. The Company is a diversified telecommunications company which
provides international and domestic long distance, basic local service,
cellular and paging telephone services in the Dominican Republic and New
York, U.S.A.
The Company's operations are governed by Telecommunication Law No. 118
and by a concession agreement signed with the Dominican Government and
confirmed by the National Congress on April 30, 1990. This agreement is for
a term of 20 years through June 30, 2010, subject to renewal for an
additional 20-year term. The Company was formed by GFN Corporation, Ltd.
("GFN"), one of the Dominican Republic's largest private holding companies,
with equity interests in insurance, finance and publishing companies. GFN
currently holds a 60% interest in the Company. In 1993, Motorola, Inc.
purchased a 40% interest in the Company. Motorola, Inc. has provided
guarantees for the debt financing used to expand the Company's
infrastructure during its early stages of its development and has assisted
in, and continues to advise on, the development of the Company's network
infrastructure.
GFN Comunicaciones, S.A. ("Comunicaciones"), was formed on April 19,
1989 under the laws of the Dominican Republic. It began its operations in
1992 and ceased operations on July 19, 1995, when substantially all of its
operations and assets were transferred to TRICOM. Comunicaciones is
currently inactive.
Bay Tel Communication, S.A. ("Bay Tel") is a corporation organized
under the laws of the Republic of Panama. It was formed on June 25, 1991,
and ceased its operations during 1995, when its net assets and operations
were transferred to TRICOM, S.A. (Parent Company).
TRICOM USA, Inc. ("TRICOM USA") was formed on January 15, 1992 under
the General Corporation Law of Delaware. In September 1995, the United
States Federal Communications Commission ("FCC") authorized the Company's
subsidiary, TRICOM USA, to operate as a facilities-based carrier in the
United States. Since TRICOM USA received a license from the FCC, the
Company has an alternative means of sending and receiving traffic,
potentially reducing the Company's dependence on other U.S. carriers.
TRICOM USA began its operations in 1997.
F-9
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Call Tel Corporation ("Call Tel") is a corporation organized under the
laws of the Republic of Panama. It was formed on September 3, 1996 and
began its operations in 1997. Its activities consist of operators assisted
communications in the Dominican Republic.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of TRICOM, S.A. and its wholly owned subsidiaries Comunicaciones,
Bay Tel, TRICOM USA and Call Tel. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles in the United
States. The preparation of consolidated financial statements in conformity
with generally accepted accounting principles in the United States 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 date of the financial statements and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates and assumptions.
2.2 FOREIGN CURRENCIES -- CHANGE IN FUNCTIONAL CURRENCY AND REPORTING CURRENCY
Through December 31, 1996, the Company utilized the Dominican peso
("RD$") as its functional and reporting currency. While historically a
significant portion of the Company's revenues, assets and liabilities were
denominated in U.S. dollars, a clear determination of the functional
currency was difficult and the Company utilized the Dominican peso as its
functional currency through December 31, 1996. However, on August 15, 1997,
the Company issued $200,000,000 of U.S. dollar denominated notes due in the
year 2004.
In the Company's opinion, with the issuance of this dollar denominated
debt, the Company's cash flows and financial results of operations are more
appropriately presented with the U.S. dollar as the functional currency and
effective January 1, 1997, the Company changed its functional currency from
the Dominican peso to the U.S. dollar. 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 consolidated financial statements of the Company as of December
31, 1996 and for prior years have been remeasured to U.S. dollars using the
methodology described in the Statement of Financial Accounting Standard
("SFAS") No. 52. Assets and liabilities were translated to the U.S. dollar
at the exchange rate prevailing at the balance sheet date for those years.
Revenues and expenses are translated to U.S. dollars at the weighted
average exchange rate in effect during the reporting period. Translation
adjustments resulting from the conversion of the consolidated financial
statements to the reporting currency are accumulated and presented in a
separate component of equity in the accompanying consolidated balance
sheets for those years.
For purposes of remeasuring the books and records of the Company to
the new functional currency in 1997, the translated balances as of December
31, 1996, became the opening balances for the new accounting basis.
Commencing January 1, 1997, upon the change in functional and
reporting currency, instead of recognizing exchange gains and losses
arising from currencies other than the Dominican peso, the Company
recognized these gains and losses from currencies other than the U.S.
dollar. As of December 31, 1997 and 1998, the rates used by the Company to
translate the Dominican pesos denominated accounts at the end of the year
were RD$14.35 and RD$15.6; RD$14.25 and $15.17 as the average rate,
respectively. Panamanian Balboas are B/.1.00 to the US dollar.
F-10
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 CASH AND CASH EQUIVALENTS
For the purpose of the statements of cash flows, the Company considers
as cash equivalents: cash, time deposits and highly liquid debt instruments
with original maturities of three months or less.
2.4 ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts receivable is established through
a charge to an expense account. The Company reserves 100% of the accounts
receivable balances which are past due over 90 days.
2.5 INVENTORIES
Inventories are valued at the lower of average cost or market.
2.6 INVESTMENT SECURITIES
The Company has classified all of its marketable debt securities as
held-to-maturity and has accounted for these investments at amortized cost.
Any premium and discount is amortized or accreted over the life of the
related security. Accordingly, no adjustment for unrealized holding gains
or losses has been reflected in the Company's financial statements.
2.7 PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Construction costs and
equipment installations in process are maintained as construction projects
until they are completed and/or equipment is placed in service.
Depreciation is calculated and recorded starting with the first full month
that the assets are placed in service.
2.8 DEPRECIATION
The depreciation method used by the Company is the straight-line
method, that is, the uniform distribution of cost over the estimated useful
lives of the corresponding assets.
The estimated useful lives of assets are as follows:
DEPRECIATION
YEARS RATE PER BOOKS
------- --------------
Buildings and improvements.......................... 50 2%
Furniture, equipment and transportation equipment... 5 - 10 20--10%
Equipment for lease................................. 3 - 4 33--25%
Operation and communication equipment............... 15 6.67%
Cellular phones..................................... 3 33%
Computer equipment.................................. 6 16.67%
======= ==============
2.9 OTHER ASSETS
Other assets consist principally of deferred debt issue costs and
right of use of frequency. Deferred debt issue costs are amortized over the
debt service period of the related debt. For the years ended at December
31, 1997 and 1998, amortization expense of deferred debt issue amounts to
$484,231 and $1,381,361. The right of use of frequency cost will be
amortized over a period of 20 years, commencing March 20, 1999, date in
which the right of use will be effective.
2.10. SEVERANCE INDEMNITIES
According to the Labor Code of the Dominican Republic, employers are
required to provide severance indemnities to those workers whose labor
contracts are terminated without justified cause. Justified cause is
F-11
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
defined in the Labor Code as including misstatements by an employee in his
job application, termination of an employee within three months of his hire
for poor performance, dishonesty, threats of violence, willful or negligent
destruction of property, unexcused absence, or termination of the job for
which the employee was hired. The Company maintains reserves to cover
severance indemnities based on its experience in this area.
2.11 REVENUE RECOGNITION
Revenues are recognized as earned depending on the type of service
rendered as follows:
TOLL REVENUES
Toll revenues are amounts received by the Company from customers in
the Dominican Republic for international and domestic long distance calls.
These revenues are recognized as they are rendered.
INTERNATIONAL REVENUES
International settlement revenues represent amounts recognized by the
Company for termination of traffic based on minutes from foreign
telecommunications carriers into the Dominican network, as per operating
agreements between the Company and each such carrier.
PREPAID CALLING CARD REVENUES
The Company recognizes revenue for prepaid calling cards based on card
usage. The Company accounts for cash received from the sale of prepaid
calling cards as deferred revenues, which are then recognized as the cards
are used. This revenue may be part of the toll or international revenues
depending on the call destination.
LOCAL SERVICE REVENUE
Local service revenue consist of wireline rent, local measured service
as well as charges for "Custom local access signaling services" (CLASS),
which includes call forwarding, tree-way calling, call waiting, call
waiting and voice mail. It also includes collect call revenues and revenues
from other miscellaneous wireline services.
CELLULAR REVENUES
Represents fees received for mobile cellular services, including
interconnection charges for call incoming to the Company's cellular
subscribers (these revenues do not include international and domestic long
distance calls generated by cellular units). Cellular fees consist of fixed
monthly access fees and per-minute usage charges, as well as additional
charges for custom or vertical features, which include call waiting, call
forwarding, three-way calling and voice mail, and for other miscellaneous
cellular services.
PAGING
Paging revenues consist of fixed monthly charges for nationwide
service and the use of paging equipment and activation fees.
SALES AND LEASE OF EQUIPMENT
These revenues consist of sales and rental fees charged for customer
premise equipment, including private branch exchanges, key telephone
systems, residential telephones, cellular handsets and paging units. Since
late 1996, the Company has only sold such equipment.
F-12
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INSTALLATIONS
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
Other revenues represents all those revenues that are not generated
from the Company's core business, including commissions received for
providing handling services for a courier, commissions received for
collection services for utility companies and revenues from miscellaneous
product sales.
2.12 CAPITALIZATION OF INTEREST
Interest paid on loans whose proceeds are used in specific projects is
capitalized and included as part of project costs during the period
necessary for installation.
During the years ended December 31, 1996, 1997 and 1998, interest and
commissions were capitalized during construction in the approximate amounts
of $2,440,000, $5,590,000 and $10,168,000, respectively.
2.13 FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments classified as
current assets or current liabilities approximates their book value due to
the relatively short maturities of these financial instruments.
2.14 EXPENSE IN LIEU OF INCOME TAX
The Parent Company - TRICOM, S.A.- pays a tax which is based on a
percentage of the Company's domestic gross revenues (less deductions for
the cost of access to the local network) plus a percentage of the Company's
net international settlement revenues. An accrual is made for any
difference between when these items are reported to the tax authorities and
when they are reported in the accompanying consolidated statements of
operations.
2.15 INCOME TAXES
In the case of the Company's subsidiary, TRICOM USA, income taxes are
accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss
and tax credit carry-forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
2.16 BASIC EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the weighted
average number of shares outstanding in each period. There are no dilutive
common stock equivalents.
On August 15, 1997 the Board of Directors authorized a 3.3132-for-one
stock split. All references in the financial statements to number of shares
and per share amounts of the Company's stock have been retroactively
restated to reflect the increased number of common shares outstanding.
F-13
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.17 PENSION PLAN
On January 1, 1998, the Company adopted SFAS No. 132, Employer's
Disclosures about Pension and Other Post Retirement Benefits. SFAS No. 32
revised employer's disclosures about pension and other post retirement
benefit plans. SFAS No. 132 does not change the method of accounting for
such plans.
The Company has contributory defined benefit pension and retirement
plan that includes all it personnel. The cost of the plan has been
determined based on actuarial studies and includes amortization of past
service costs over the estimated average life of its employees.
2.18 IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. This Statement requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount of fair value less cost to
sell.
2.19 RECLASSIFICATION
The Company has classified unbilled accounts receivable, included in
the accounts receivables-others to accounts receivable-customers, at
December 31, 1997 for a total amount of US$1,135,025 in order to conform
the current presentation at December 31, 1998.
2.20 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
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.
The Company 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.
The Company believes that with modification and replacement of existing
software and hardware, the year 2000 issue can be substantially mitigated.
The Company anticipates that such modifications and replacements will be
completed on a timely basis.
The management of the Company has estimated that the total cost of the
year 2000 project will be approximately $100,000, which is being expensed
as incurred and funded through operating cash flow. At December 31, 1998
the Company has expensed approximately $83,000 which are included as part
of general and administrative expenses in the accompanying consolidated
statements of operations.
2.21 ADVERTISING COST
Advertising costs are expensed as incurred. For the years ended
December 31, 1996, 1997 and 1998, these costs amounted to $2,011,120,
$1,715,270 and $4,461,123, respectively, which are included in general and
administrative expenses in the accompanying consolidated statements of
operations.
F-14
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3 PROPERTY AND EQUIPMENT
A detail of property and equipment at December 31, 1996 and 1997 is as
follows:
</TABLE>
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Operation and communication:
Land.................................... US$ 2,846,403 US$ 3,454,951
Buildings and improvements.............. 6,720,129 7,933,993
Furniture and equipment................. 5,055,133 5,061,611
Communication equipment................. 21,175,711 46,877,210
Transmission equipment.................. 59,029,426 95,230,147
Other equipment......................... 823,948 1,253,387
-------------- --------------
95,650,750 159,811,299
Less accumulated depreciation........... 8,606,453 16,506,546
-------------- --------------
87,044,297 143,304,753
Communication equipment pending
installation......................... 18,270,402 28,343,890
In transit (a).......................... 13,483,815 6,225,237
Construction in process (b)............. 52,189,152 112,082,008
-------------- --------------
Subtotal, operation and communication 170,987,666 289,955,888
-------------- --------------
Equipment for rental:
Switchboards............................ 702,097 887,916
Telephone equipment and other........... 15,605,818 21,137,541
-------------- --------------
16,307,915 22,025,457
Less accumulated depreciation........... 6,333,724 9,611,593
-------------- --------------
Subtotal, equipment for rental.......... 9,974,191 12,413,864
-------------- --------------
Property and equipment:
Building................................ 6,372,566 6,372,566
Furniture and office equipment.......... 8,590,452 10,087,307
Transportation equipment................ 1,629,126 2,807,867
Leasehold improvements.................. 2,273,933 3,500,603
Data processing equipment............... 8,813,840 14,426,729
-------------- --------------
27,679,917 37,195,072
Less accumulated depreciation........... 5,664,178 9,108,376
-------------- --------------
Subtotal, property and equipment..... 22,015,739 28,086,696
-------------- --------------
Total property and equipment, net.... US$202,977,596 US$330,456,448
============== ==============
</TABLE>
(a) Equipment in transit represents accumulated costs of equipment
imported by TRICOM, for which additional import related costs are still
to be incurred. At December 31, 1997 and 1998, this amount includes
transmission equipment and accessories, as well as computer materials
and parts.
(b) A detail of construction in process at December 31, 1997 and
1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
------------- --------------
<S> <C> <C>
Operation and communication:
Buildings........................... US$ 126,919 US$ 2,255,751
Transmission equipment.............. 48,003,937 99,370,582
Cells............................... 3,334,808 9,505,122
Submarine cable..................... 723,488 950,553
------------- --------------
US$52,189,152 US$112,082,008
============= ==============
</TABLE>
At December 31, 1998, construction in process of transmission equipment
including the development of a WLL (Wireless Loop Local Line) as well as
cellular cells.
F-15
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CASH AND CASH EQUIVALENTS
A detail of this account at December 31, 1997 and 1998, is as follows:
1997 1998
------------- -------------
Checking accounts.............. US$ 3,525,871 US$ 2,316,963
Cash on hand................... 21,629 37,810
Deposits(a).................... 2,185,005 13,022,637
------------- -------------
US$ 5,732,505 US$15,377,410
============= =============
(a) At December 31, 1998 represents certificates of deposit due on demand
and with variable dates of maturity.
5. ACCOUNTS RECEIVABLE
Changes in the allowance for doubtful accounts were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------- ------------
<S> <C> <C> <C>
Allowance at beginning of
year....................... US$ 60,263 US$ 4,898,199 US$ 668,827
Increase for the year...... 5,498,743 1,929,167 1,665,349
Write off for the year..... (1,360,807) (6,158,539) (1,593,489)
------------ ------------- -------------
Allowance at end of year... US$ 4,898,199 US$ 668,827 US$ 740,687
============ ============= =============
</TABLE>
A detail of accounts receivable - others at December 31, 1997 and
1998, is as follows:
1997 1998
------------ ------------
Interest receivable(a) US$1,710,991 US$1,662,351
Others 679,107 450,877
------------ ------------
US$2,390,098 US$2,113,228
============ ============
(a) Corresponds to accrued interest earned on investments made by
the Company, as described in Note 7.
6 TRANSACTIONS WITH RELATED PARTIES
During the years ended December 31, 1996, 1997 and 1998, the Company
made payments to several related parties for leased premises and equipment,
internal auditing services, public relations, systems and procedures, legal
services and personnel management.
The majority of these charges are for services received by the Company
from Grupo Financiero Nacional, S.A. ("Grupo Financiero"), a direct
subsidiary of GFN. Grupo Financiero allocates administrative charges based
on the time invested by its employees providing administrative support
services in each of its subsidiaries.
F-16
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
A detail of balances with related companies at December 31, 1997 and
December 31, 1998 is as follows:
1997 1998
------------- -------------
Assets:
Cash............................... US$ 2,568,469 US$ 1,556,788
Deposits(a)........................ 2,185,005 13,022,637
Accounts receivable................ 625,248 163,110
Long-term accounts receivable...... 49,558 --
Liabilities:
Borrowed funds..................... 4,849,818 25,591,915
Accounts payable - suppliers....... US$ 9,312,143 US$ 1,089,487
============= =============
(a) As of December 31, 1997 and 1998, respectively, includes
$2,185,005 in non-interest bearing time deposits. As of
December 31, 1998 includes certificates of deposit by $10,837,632
which earn interest rates between 8.5% and 11% p.a.
A detail of transactions with related parties during the years ended
December 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Interest earned............ US$ 140,814 US$ 270,352 US$ 724,903
Interest incurred on loans. 3,577,394 880,281 658,206
Bank charges............... -- 6,585 11,536
Leased premises and
equipment.................. 64,392 44,610 61,535
Security services.......... 113,778 111,460 105,465
Insurance premiums......... 1,101,237 1,520,171 2,227,096
Pension plan contributions 207,000 311,000 433,000
Communication services
revenue.................... 1,098,097 828,316 689,115
Equipment purchased
(Motorola)................. 8,038,214 2,258,028 22,879,524
Advertising services....... 97,942 134,830 62,811
Professional services...... US$ 207,498 US$ 494,125 US$ 462,926
============ ============ =============
</TABLE>
7 INVESTMENTS
Investments at December 31, 1997 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Irrevocable restricted funds to
pay indebtedness and interest (a).. US$ 32,772,379 US$ 32,772,379
U.S. treasury bonds (b)............ 42,996,011 21,698,099
-------------- --------------
75,768,390 54,470,478
Less current portion of
investments(a)..................... (22,750,000) (54,470,478)
-------------- --------------
53,018,390 --
-------------- --------------
Mortgage participation contracts,
at cost which approximates market
value (c).......................... 1,754,350 2,164,387
Other.............................. 42,171 --
-------------- --------------
US$ 54,814,911 US$ 2,164,387
============== ==============
</TABLE>
F-17
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7 INVESTMENTS (CONTINUED)
(a) Corresponds to investment to be used to fund the payment in full
of principal and interest of CARIFA Bonds, as described in Note
14.
As of December 31, 1998 the fair value of these investments has
been estimated in $32,800,000. This investment matures during
1999.
(b) Corresponds to investment securities, at cost, which approximates
market value, which will be used to provide payments in full of
the interest on Senior Notes corresponding to the years 1998 and
1999.
(c) Represents payments for the right of use of frequency, in order
to expand the cellular capacity. This right of use will be
amortized in a period of 20 years beginning on March 31, 1999,
date in which this right will be effective.
8 OTHER ASSETS
Other assets at December 31, 1997 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Deferred debt issue costs, net(a).......... US$ 9,677,395 US$ 8,296,034
Deposits with international carriers(b).... 348,522 243,652
Organization expenses, net................. 265,670 119,711
Deposits................................... 241,230 361,194
Right of use of frequency (c).............. -- 4,760,000
Income taxes............................... -- 183,262
Other...................................... 300,421 916,952
------------- -------------
US$10,833,238 US$14,880,805
============= =============
</TABLE>
(a) Represent commissions paid on issuance to brokers and other expenses
related to the issuance of the Senior Notes. As of December 31, 1997
and 1998, accumulated amortization amounted to $484,231 and
$1,865,592, respectively.
(b) As December 31, 1997 and 1998, represent security deposits made by
TRICOM for the installation of international circuits. These deposits
will be recovered at the end of the agreement. These agreements mature
each year and are automatically renewed.
(c) Represents payments for the right of use of frequency, in order to
expand the cellular capacity. This right of use will be amortized in a
period of 20 years beginning on March 31, 1999, date in which this
right will be effective.
9 BORROWED FUNDS - BANK
As of December 31, 1997, the Company had borrowings of US$5,905,005;
as of December 31, 1998, this obligation amounted to $18,462,441 and
RD$50,000,000 (US$3,203,075). The majority of these borrowings are made by
Dominican banks and denominated in US dollars, except for US$3,203,075, at
December 31, 1998 which corresponds to borrowed funds in Dominican pesos
and have maturities ranging from 30 to 180 days. At December 31, 1997 the
borrowings in US$ accrued interest and commissions at a rate of 9.5% to 13%
per annum as of December 31, 1998 interest and commissions ranged from 10%
to 12.5% per annum except for the obligation in Dominican pesos which bear
annual interest of 26%.
F-18
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 BORROWED FUNDS -- RELATED PARTIES
Borrowed funds - related parties at December 31, 1997 and 1998,
consist of the following:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Banco Nacional de Credito, S.A.(a).... US$ 4,849,818 US$ --
Bancredito Panama, S.A.(b)............ -- 25,591,915
------------- -------------
US$ 4,849,818 US$25,591,915
============= =============
</TABLE>
(a) At December 31, 1997, includes financing of letters of credit and open
accounts issued for US$3,456,088 with interest ranging from 10.5% to
11% per annum and $1,393,730 in additional unsecured loans.
(b) At December 31, 1997, the Company had no borrowings with Bancredito
Panama, S.A. The balance at December 31, 1998 includes financing of
letters of credit on open accounts issued for B/25,2,91,915 with
interest ranging from 10% to 11.5%.
11 TRANSACTIONS WITH CARRIERS
Accounts receivables from carriers arise from interconnection services
of inbound calls. Accounts payable result from interconnection services of
outbound calls. These charges are based on minutes billed. Amounts paid to
carriers constitute one of the main operating costs of the Company.
Net amounts receivable and payable for these activities at
December 31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
1996 1997
--------------------------- ----------------------------
RECEIVABLE PAYABLE RECEIVABLE PAYABLE
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Inbound......... US$ 7,907,505 US$ -- US$ 6,933,131 US$ --
Outbound........ (2,361,106) 401,506 (2,780,128) 1,549,996
Interconnection
operations
-- Codetel...... -- 1,926,262 -- 1,556,902
------------- ------------- ------------- -------------
US$ 5,546,399 US$ 2,327,768 US$ 4,153,003 US$ 3,106,898
============= ============= ============= =============
</TABLE>
12 OTHER LIABILITIES
Other liabilities at December 31, 1997 and 1998 consisted of the
following:
1996 1997
------------- -------------
Customer advances.......... US$ 1,960,743 US$ 2,131,396
Deferred revenues 596,347 1,480,664
Other(a)................... 482,671 3,801,221
------------- -------------
US$ 3,039,761 US$ 7,413,281
============= =============
(a) At December 31, 1998 includes $3,414,613 of estimated disbursements in
order to repair the infrastructure damaged by Hurricane Georges during
1998, as explained in note 19.
F-19
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13 ACCRUED EXPENSES
A summary of accrued expenses at December 31, 1997 and 1998 is as
follows:
1997 1998
-------------- -------------
Expense in lieu of income tax
payable........................ US$ 968,339 US$ 1,502,581
Interest payable................... 9,321,351 9,726,228
Other.............................. 1,727,681 2,659,165
------------- -------------
US$12,017,371 US$13,887,974
============= =============
14 LONG-TERM DEBT
Carifa Loan
The Company borrowed US$32,000,000 from the Caribbean Basin Project
Financing Authority (Carifa). TRICOM used these funds for the expansion of
its telecommunications network, construction of central offices and
installation of additional cables in Santo Domingo and other cities in the
Dominican Republic.
This loan is guaranteed by Motorola, Inc., and is due in August 1999.
The terms of the agreement provide for semi-annual payments of interest at
a rate of 6.03% per annum, and the payment of principal and accrued
interest at maturity, scheduled for August 1999. At December 31, 1997, and
1998, the Company had made irrevocable deposits to pay the entire principal
and interest of the Carifa Bonds at maturity.
SENIOR NOTES
On August 15, 1997, the Company issued US$200,000,000 aggregate
principal amount of 11-3/8% Senior Notes due in the year 2004 (the "Senior
Notes"). Interest on the Senior Notes is payable in semi-annual
installments on March 1st and September 1st of each year, commencing
March 1, 1998.
The Senior Notes may be redeemed at the option of the Company at any
time, in whole or in part after September 1, 2001 at a premium declining to
par after September 1, 2003 plus accrued and unpaid interest, and
additional amounts, if any, through the redemption date. Until September 1,
2000, the Company, at its option, may redeem from time to time up to 35% of
the Senior Notes originally issued with the net proceeds of the issuance
and sale of the Company's capital stock at a redemption price equivalent to
111.375% of the principal amount thereof plus accrued interest to the date
of redemption, provided that an aggregate principal amount of the Senior
Notes of up to US$130.0 million remain outstanding after each redemption
and each such redemption occurs within 180 days after any issuance and sale
of stock. The Senior Notes are senior unsecured obligations of the Company
ranking pari passu in right of payment with all other existing and future
senior debt, and will rank senior to any future subordinated indebtedness.
The net proceeds from the issuance of the Senior Notes amounted to
approximately US$194.0 million, which were used to repay US$75.1 million of
short-term debt and US$28.0 million of indebtedness under the Company's
Bank Credit Facility, and US$43.0 million to purchase investment securities
to be used to fund the payment of interest on the Senior Notes through
September 1, 1999, and US$32.8 million to fund the payment of principal and
interest of the US$32.0 million Carifa Bonds outstanding when due . The
remaining US$14.0 million was used by the Company for capital expenditures
and working capital.
The indenture for the Senior Notes contains certain covenants that,
among other things, limit the ability of the Company and its Restricted
Subsidiaries, as defined in the indenture, to incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions,
repurchase equity interests or subordinated indebtedness, engage in sale
and leaseback transactions, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its Restricted
Subsidiaries, engage in any business other than the telecommunications
F-20
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
business, issue or sell equity interests of the Company's Restricted
Subsidiaries or enter into certain mergers and consolidations.
The fair value of the long term debt at December 31, 1998 is estimated
in the amount of $164,000,000 determined through a combination of
management estimates and information obtained from independent third
parties, using market data available on the last business day of the year.
The Senior Notes are guaranteed fully, unconditionally and jointly and
severally by the Company's subsidiaries, each of which is wholly-owned by
the Company. Separate financial statements of each of the guarantor
subsidiaries have not been presented herein because management has
determined that such separate financial statements would not be material to
the holders of the Senior Notes.
Summarized consolidated financial information of the guarantor
subsidiaries, GFN Comunicaciones, Bay Tel, TRICOM USA and Call Tel, at
December 31, 1996, 1997 and 1998 is as follows (see note 1):
BALANCE SHEET DATA:
ASSETS 1996 1997 1998
------------- ------------ ------------
Current assets: US$ 471,821 US$ 422,317 US$ 263,168
Cash and cash
equivalents............
Account receivable:
Related parties 29,321,769 -- 4,057,834
Others.............. -- 456,213 1,697,067
---------- -------- ---------
Accounts
receivable, net... 29,321,769 456,213 5,754,901
Other current assets -- 231,843 843,317
---------- -------- ---------
Total current
assets............ 29,793,590 1,110,373 6,861,386
Property and equipment, net -- 3,429,173 6,315,155
Other non-current assets... 37,661 580,886 933,495
---------- -------- ---------
Total assets US$ 29,831,251 US$ 5,120,432 US$ 14,110,036
========== ========= ==========
LIABILITIES AND
STOCKHOLDER'S EQUITY
1996 1997 1998
---------- -------- ---------
Current liabilities:
Account payable:
Carriers US$ -- US$ 354,287 US$ 227,195
Related parties.. -- 602,877 5,608,247
Others ......... 26,389,092 170,844 978,057
---------- -------- ---------
26,389,092 1,128,008 6,813,499
Other current
liabilities 145,603 622,424 1,342,024
---------- -------- ---------
Total current
liabilities 26,534,695 1,750,432 8,155,523
Other non-current
liabilities -- -- 205,258
---------- -------- ---------
Total
liabilities..... 26,534,695 1,750,432 8,360,781
Stockholder's equity 3,296,556 3,370,000 5,749,255
---------- -------- ---------
Total assets US$ 29,831,251 US$ 5,120,432 US$ 14,110,036
========== ========= ==========
F-21
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF OPERATIONS DATA:
1996 1997 1998
---------- ---------- ----------
Operating revenues....... US$ -- US $12,805,531 US$ 27,919,654
Operating costs.......... -- 12,932,490 28,861,720
---------- ---------- ---------
Operating loss........ -- (126,959) (942,066)
Other expenses........... -- 1,702 21,685
---------- ---------- ---------
Loss before income
tax.................. -- (125,257) (920,381)
---------- ---------- ---------
Deferred income tax
benefit................. -- -- 351,691
---------- ---------- ---------
Total assets.......... US$ -- US$ (125,257) US$ (568,690)
========== ========= ==========
CASH FLOWS STATEMENT DATA:
Net cash (used in) provided by
Operating activities.... US$ (557,683) US$(2,037,871) US$ 83,061
Cash flows used in
investment activities-
acquisition of property and
equipment....... -- (3,500,298) (3,241,248)
Cash flows from financing
activities:
Borrowed funds from
banks.................. 7,305,916 (8,305,916) --
Borrowed funds
(paid to) from
related parties........ (5,517,376) 13,652,509 --
Short-term obligations.. (5,517,376) 13,652,509 --
Issuance of common
shares................. -- 1,100 2,999,000
---------- ---------- ---------
Net cash provided by
financing Activities.... 268,977 5,291,064 2,999,000
Effect of exchange rate
changes on cash........... 149,796 197,601 88
---------- ---------- ---------
Net decrease in cash and cash
Equivalents............ (138,910) (49,504) (159,199)
Cash and cash equivalents at
beginning of the year.... 610,731 471,821 422,317
---------- ---------- ---------
Cash and cash equivalents at
end of the year.......... US$ 471,821 US$ 422,317 US$ 263,168
========== ========= ==========
BANK CREDIT FACILITY
The amount outstanding under the Bank credit Facility was
repaid in 1997 with part of the proceeds from the issuance of Senior
Notes.
As a result of the early extinguishment of the Bank Credit
Facility, the Company charged off existing deferred debt issuance costs
related to that debt amounting to $5,452,995. The latter is included as
an extraordinary item in the accompanying consolidated statement of
operations for the year ended December 31, 1997.
15 STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of
55,000,000 shares of Class A Common Stock and 25,000,000 shares of
Class B Common Stock.
All of the Company's outstanding shares are duly authorized,
validly issued and fully paid. Both classes of shares vote together as
a single class on all matters except for any issue that would adversely
F-22
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
affect the rights of either class. The Class A Common Stock has one
vote per share and the Class B has ten votes per share. The economic
rights of each class of stock are identical.
In the second quarter of 1998, the Company sold 5,700,000
Class A Common Shares in an initial Public Offering (IPO) for US$74.1
million, less issuance costs of $6,537,345. The proceeds of this
issuance were used to expand the Company's local service, cellular
networks and its international switching and circuit capacity. Also,
proceeds were used to pay short-term debt primarily obtained to fund
equipment purchases.
All share and per share data set forth in the financial
statements reflect the reclassification of the Company's shares of
Common Stock that were outstanding prior to TRICOM's initial public
offering of American Depositary Shares into shares of Class B Stock and
give effect to an approximate 3.3132 -for- one stock split at that
time.
16 EXPENSE IN LIEU OF INCOME TAXES
In accordance with the terms of the Concession Agreement
signed with the Dominican Government and ratified by the National
Congress, TRICOM, S. A. is exempted from the payment of corporate
income taxes in the Dominican Republic. Instead, the Company agreed to
pay an amount in lieu of income taxes equivalent to 18% of gross
communication revenues collected from customers nationwide. This tax
was based on the amounts collected monthly by the Company and was
payable within the first ten (10) days of the month following
collection.
As result of a settlement between the Company and the
Dominican tax authorities on February 20, 1996, the Concession
Agreement with the Dominican government was modified to reduce the tax
percentage from 18% to 10% of gross domestic revenues, after deducting
charges for access to the local network, plus 10% of net international
settlement revenues. This tax, however, will never be less than
RD$18,000,000 ($1,133,501) annually.
17 INCOME TAX
The Company conducts certain operations in the United States
of America and is accordingly, subject to income tax in the United
States on that part of the operation.
Total income taxes corresponding to the subsidiary TRICOM,USA
Inc. for the year ended December 31, 1998 is allocated to loss from
operations for $(730,330). Income tax expense attributable to income
from operations consists of:
Current Deferred Total
------- -------- -----
Year ended December 31, 1998:
U.S. Federal............ None US$ 244,515 US$ 244,515
State and local........ None 40,314 40,314
----------- -----------
US$ 284,829 US$ 284,829
=========== ===========
The provision, consisting entirely of deferred tax expenses
attributable to income from continuing operations for the year ended
December 31, 1998, is $284,829.
F-23
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
December 31, 1998 are presented as follows:
Deferred tax assets:
Deferred calling card revenue US$ 483,011
Accounts receivable
principally due 9,930
To allowance for doubtful
accounts
Net operating loss carryforwards 209,001
-----------
Total gross deferred
tax assets.. 701,942
Less valuation allowance --
-----------
Net deferred tax assets US$ 701,942
============
Net deferred tax liabilities
- plant and Equipment,
principally due to
Differences in depreciation US$(383,682)
============
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be recognized.
Recognition of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning
strategies in making this assessment. In order to fully realize the
deferred tax assets, the Company will need to generate future taxable
income of approximately $535,900 prior to the expiration of the net
operating loss carryforwards in 2012 and 2013. Taxable income for the
year ended December 31, 1997 and 1998 was ($182,248) and ($353,652),
respectively. The Company started operations in 1997 and projections
for taxable income in 1999 exceed $535,900, thus, a valuation allowance
for deferred tax assets is not necessary. All deferred tax assets are
expected to be realized, however, they could be reduced in the short
term if estimates of future taxable income during the carryforward
period are reduced.
At December 31, 1998 the Company has net operating losses and
carryforwards to offset future income tax. If not used, these
carryfoward credits will expire as follows:
Expiring in Net Operating
Year ended December 31,1998 December of Loss
--------------------------- ----------- ----
1997 2012 US$ 182,248
1998 2013 353,652
Total US$ 535,900
===========
In the case of the other subsidiaries, according to the tax
legislation of the Republic of Panama, the Company is exempt from
income taxes as long as it only operates outside the Republic of
Panama.
18 PENSION BENEFITS
Substantially all of the employees of the Company are included
in a defined benefit plan that was established by Grupo Financiero. The
benefits are based upon years of service and the employee's
compensation during the last years before retirement. The plan was
administered by Compania Nacional de Seguros, C. por A. through 1997,
an insurance company in the Dominican Republic affiliated to Grupo
Financiero and the Company. Effective January 1, 1998 the Plan
Administration was transferred to the Plan de Pensiones y Jubilaciones
del Grupo Financiero Nacional. Accordingly, all assets of the Plan and
accrued liabilities were transferred.
F-24
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company makes annual contributions to the Plan based in
contribution levels determined by independent actuaries. The Company's
pension expense was approximately $207,000, $311,000 and $433,000, for
the years ended December 31, 1996, 1997 and 1998, respectively, and is
included as part of general and administrative expenses in the
accompanying consolidated statements of operations.
The following summarizes pension obligation information and
estimated plan asset information for the Company individually.
DECEMBER 31 DECEMBER 31
1997 1998
----------- -----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
year..................................... US$ 822,197 US$ 1,245,601
Change in exchange rate.................... -- (100,541)
---------- ------------
Benefit obligation at beginning of year,
As adjusted............................. 822,197 1,145,060
Service cost............................... 421,294 640,873
Interest cost.............................. 74,610 107,156
Plan participants' contributions........... 291,986 375,123
Actuarial gain............................. 43,475 81,810
Benefits paid.............................. (64,771) (76,378)
Adjustments by excedents................... (343,190) (39,277)
----------- ------------
Benefit obligation at end of year.......... 1,245,601 2,234,367
----------- ------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
(a)....................................... 1,147,775 1,550,766
Change in exchange rate.................... -- (125,174)
----------- -----------
Fair value of plan assets at beginning of
Year, adjusted.......................... 1,147,775 1,425,592
Actual return on plan assets............... 142,482 156,815
Employer contribution...................... 276,003 324,697
Plan participants' contributions........... 325,579 405,871
Benefits paid.............................. (64,771) (76,378)
Expenses and other adjustments............. (246,302) 276,881
----------- -----------
Fair value of plan assets at end of year
(a)....................................... 1,550,766 2,513,478
----------- -----------
FUNDED STATUS OF THE PLAN US$ 305,165 US$ 279,111
=========== ===========
Assumptions used in accounting for the
pension plan were:
Discount rates............................. 6.00% 6.00%
Rate of return on plan assets.............. 9.82% 11.00%
Rate of compensations increase............. -- --
========== ===========
(a) Corresponds to an estimate of the assets allocable to the
Company. This estimate was made by the actuary based on the
ratio of total obligations of TRICOM to the total obligation of
Grupo Financiero applied to the total plan assets. However,
there is no segregation of assets applicable to the employees of
the Company.
19 COMMITMENTS AND CONTINGENCIES
The Company was organized to offer services related to voice,
data and image transfer to and from the Dominican Republic, through a
private telecommunications network. During its development stage, the
Company obtained all licenses needed for the operation of its equipment
from the corresponding authorities. On May 17, 1994 the Company signed
a contract for the interconnection of its network with that of Compania
Dominicana de Telefonos, C. por A. (Codetel), which became effective in
November 1994. Since then the customers of both companies can
communicate nationally and internationally using either one of the two
networks.
At the end of 1997 the Company and Codetel executed an
addendum to the Interconnection Agreement (the "Interconnection
Amendment"). The Interconnection Amendment provides, among other
things, that Codetel will (i) remove any technical or operational
impediment to telephone users accessing TRICOM's network from Codetel's
F-25
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
network, (ii) automatically deliver to TRICOM the identification number
of any call originating on Codetel's network which is subject to a
TRICOM access charge, (iii) install interconnection facilities without
delay upon the request of TRICOM, provided that TRICOM bears the
expense of installing any such facilities, (iv) connect calls to
emergency services and toll-free numbers on Codetel's network, make
operators available to assist calls from TRICOM's network to numbers on
Codetel's network and (v) make its database of telephone numbers
available to TRICOM at no charge on a quarterly basis.
In addition, the Interconnection Amendment adjusted the access
charges by (i) lowering the charge for international long distance
calls from RD$1.40 per minute to RD$0.98 per minute for the year ending
December 31, 1998 (ii) lowering the charges for national long distance
calls and calls made from cellular telephones from RD$0.95 to RD$0.63
for the year ending December 31, 1998, (iii) temporarily establishing
the interconnection charge for paging services at RD$0.05 per minute
and (iv) eliminating any access charge for international long distance
calls that are terminated within 12 seconds and for calls made to
Internet access servers.
In 1995 TRICOM entered into a lease agreement of premises with
a related company for a monthly payment of $5,100. The total amounts
paid for this lease in 1996, 1997 and 1998 were $64,393, $68,216 and
$72,582, respectively. As part of this agreement, the Company paid a
deposit of $86,580, which is included in other assets in the
accompanying consolidated balance sheets.
TRICOM maintains contracts with foreign entities for the
traffic of overseas calls. Such contracts require each entity to obtain
the necessary facilities to establish, maintain and operate its
respective terminals. The financial costs involved are established
through different rates previously agreed by the parties that are
computed based on the amount of traffic each month. At December 31,
1996, 1997 and 1998 this cost was $2,026,088, $4,642,466 and
$4,273,617, respectively, and is included in the cost of satellite
connections in the accompanying consolidated statements of operations.
Other commitments
-----------------
On September 22, 1998 the Dominican Republic was seriously
affected by Hurricane Georges. The transmission and communication
equipment of the Company, as well as part of the infrastructure
amounting to approximately $9,600,000, were damaged. The Company filed
a claim with the insurance company for the damages suffered and loss of
business amounting to approximately $12,100,000.
At December 31, 1998 the Company received from the insurance
company the amounts claimed which include $2,505,000 for business
interruption, which are included in other operating income in 1998. At
December 31, 1998 other liabilities include $3,414,613 corresponding to
the estimated disbursements to be incurred in order to repair the
infrastructure affected by Hurricane Georges.
Other Lease Obligations
-----------------------
The Company maintains capital and operating leases for
telecommunication equipment. The operating leases are renewable at the
end of the lease period which is usually one year. The capital leases
are for five-year periods with purchase options at maturity.
Also, the Company has leased buildings for several of its
telecommunication centers and commercial offices. These contracts are
mostly short term and renewable at maturity. Expenses for these
contract operations in 1996, 1997 and 1998 were approximately $422,000,
$443,000 and $405,000, respectively, and are included in general and
administrative expenses in the consolidated statements of operations.
Severance indemnities
---------------------
Companies based in the Dominican Republic maintain reserves
under the provisions of U.S. Statement of Financial Accounting
Standards "SFAS" 112 to cover the ultimate payment of severance
F-26
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
indemnities. Severance expense amounted to US$56,760, US$329,153 and
US$257,690 in the years ended December 31, 1996, 1997 and 1998. These
amounts are included in general and administrative expenses in the
accompanying consolidated statements of operations.
20 BUSINESS AND CREDIT CONCENTRATION
Most of the company's customers are located in the Dominican
Republic. As of December 31, 1998 no single customer account receivable
exceeded $50,000.
In the normal course of business the Company maintains
accounts receivable from carriers. Although the Company's exposure to
credit risk associated with non-payment by these carriers is affected
by conditions or occurrences within the industry, most of these
receivables are extended to large, well-established companies. The
Company does not believe that this concentration of credit represents a
material risk of loss with respect to its financial position.
21 LEGAL RESERVE
Article 58 of the Code of Commerce of the Dominican Republic
requires all companies to segregate at least 5% of its net earnings as
a legal reserve until such reserve reaches 10% of paid-in capital. This
reserve is not available for dividend distribution, except in case of
dissolution of the corporation.
22 STOCK OPTION PLAN
On May 4, 1998 the Company initiated the Long-Term Incentive
Plan, in which certain employees could be elected to purchase shares of
the Company's common stock. The Plan is administered by the Board of
Directors of the Company, which also has the authority to determine the
employees that will participate in the Plan.
The total amount of the common stock that will be granted for
all plan purposes will be 750,000 Class A common shares. Options will
be granted for a period no longer than 10 years; in this sense,
employees have the right to execute the Option up to 50% after the
first three years of the grant date and the remaining 50% after five
years of the grant date.
23 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables contain selected unaudited consolidated
quarterly financial data for the Company:
<TABLE>
<CAPTION>
1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Total operating revenue........... 18,190,213 21,180,853 24,459,842 26,271,098
Operating costs, including
Depreciation charges
And expense in lieu of income tax amounting
To $3,347,977, $3,638,733,
$3,745,085 and $4,905,461 for
each quarter, respectively........ 15,564,576 18,491,951 19,338,371 20,847,568
----------- ----------- ----------- -----------
Operating income.................. 2,625,637 2,688,902 5,121,471 5,423,530
----------- ----------- ----------- -----------
Other income (expenses)........... (2,515,963) (2,242,848) (3,687,599) (4,389,842)
----------- ----------- ----------- -----------
Extraordinary item................ -- -- (5,452,995) --
----------- ----------- ----------- -----------
Net earnings (loss)............... 109,674 446,054 (4,019,123) 1,033,688
=========== =========== =========== ===========
Earnings per share................ 0.01 0.03 (0.24) 0.06
=========== =========== =========== ===========
Number of common shares
Used in calculation............ 12,968,047 16,056,502 17,085,851 17,600,360
=========== =========== =========== ===========
</TABLE>
[CAPTION]
F-27
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
1998
-----------------------------------
FIRST QUARTER SECOND QUARTER
----------------- ----------------
<S> <C> <C>
Total operating revenue........................... 27,015,684 30,696,227
Operating costs, including Depreciation charges
And expense in lieu of income tax amounting
To $4,928,043, $5,761,932, $6,576,215 and
$6,917,680 for each quarter, respectively......... 20,874,384 23,157,223
----------------- ------------------
Operating income.................................. 6,141,300 7,539,004
----------------- ------------------
Other income (expenses)........................... (3,730,608) (3,031,937)
----------------- ------------------
Extraordinary item................................ -- --
----------------- ------------------
Net earnings...................................... 2,410,692 4,507,067
============ ============
Earnings per share................................ 0.13 0.21
============ ============
Number of common shares
Used in calculation............................ 19,144,544 21,044,544
============ ============
</TABLE>
<TABLE>
<CAPTION> 1998
------------------------------------
THIRD QUARTER FOURTH QUARTER
---------------- ------------------
<S> <C> <C>
Total operating revenue........................... 32,635,906 35,153,575
Operating costs, including Depreciation charges
And expense in lieu of income tax amounting
To $4,928,043, $5,761,932, $6,576,215 and
$6,917,680 for each quarter, respectively......... 24,954,902 27,037,262
----------------- ----------------
Operating income.................................. 7,681,004 8,116,313
----------------- ----------------
Other income (expenses)........................... (2,436,644) (2,673,748)
----------------- ----------------
Extraordinary item................................ -- 300,905
----------------- ----------------
Net earnings...................................... 5,244,360 5,743,470
============ ============
Earnings per share................................ 0.22 0.23
============ ============
Number of common shares
Used in calculation............................ 22,311,211 22,944,544
============ ============
</TABLE>
24 SEGMENT INFORMATION
As required by SFAS 131, "Disclosures about Segment of an
Enterprise and Related Information", the consolidated financial statements
of the Company include the following geographic information:
<TABLE>
<CAPTION>
1997
----------------------------------------
UNITED STATES DOMINICAN REPUBLIC
----------------- ---------------------
<S> <C> <C>
International revenues..................... 12,343,203 35,276,735
Others..................................... -- 50,669,621
----------------- ---------------------
Total operating revenues............... 12,343,203 85,946,356
----------------- ---------------------
Operating costs............................ 12,421,915 70,008,104
----------------- ---------------------
Operating income (loss)................ (78,712) 15,938,252
============ ===============
Identifiable assets........................ 3,827,575 317,636,651
============ ===============
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------
ELIMINATIONS CONSOLIDATED
---------------- ----------------
<S> <C> <C>
International revenues..................... (8,187,553) 39,432,385
Others..................................... -- 50,669,621
---------------- ----------------
Total operating revenues............... (8,187,553) 90,102,006
---------------- ----------------
Operating costs............................ (8,187,553) 74,242,466
---------------- ----------------
Operating income (loss)................ -- 15,859,540
=========== =============
Identifiable assets........................ (320,689) 321,143,537
=========== =============
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------
UNITED STATES DOMINICAN REPUBLIC
----------------- ----------------------
<S> <C> <C>
International revenues..................... 24,208,283 44,812,490
Others..................................... 2,857,215 72,312,089
----------------- ----------------------
Total operating revenues............... 27,065,498 117,124,579
----------------- ----------------------
Operating costs............................ 27,818,364 86,894,092
----------------- ----------------------
Operating income (loss)................ (752,866) 30,230,487
============ ==============
Identifiable assets........................ 8,603,748 436,763,531
============ ==============
</TABLE>
<TABLE>
<CAPTION>
1998
---------------------------------
ELIMINATIONS CONSOLIDATED
---------------- ----------------
<S> <C> <C>
International revenues..................... (18,688,685) 50,332,088
Others..................................... -- 75,169,304
---------------- ----------------
Total operating revenues............... (18,688,685) 125,501,392
---------------- ----------------
Operating costs............................ (18,688,685) 96,023,771
---------------- ----------------
Operating income (loss)................ -- 29,477,621
============ ==============
Identifiable assets........................ (552,676) 444,814,603
============ ==============
</TABLE>
At December 31, 1998, the Company considers that it has only one
segment of operations, although the management of the Company is evaluating
to include product information in the future.
25 NEW ACCOUNTING STANDARDS
In 1998 the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. At
December 31, 1998 the Company had no derivatives and, therefore, does not
F-28
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
believe that this Statement will have any effect on the Company's financial
position or results of operations.
During 1998 the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. (SOP) 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which
will be effective for the year ending December 31, 1999. Management is
currently analyzing the impact of the adoption of the statement, but does
not believe that it will have a material impact on the Company's financial
statements.
The AICPA also issued SOP No. 98-5, "Reporting on the Costs of
Start-up Activities," which will be effective for the year ending December
31, 1999. The Company is currently evaluating the effects of this
statement, however, management believes its adoption will not have a
material impact on the Company's financial statements.
F-29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRICOM, S.A.
Dated: April 29, 1999 By: /s/ Carl H. Carlson
-------------------------------------
Carl H. Carlson,
Executive Vice President and
Member of the Office of the President
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description Page
- -------------- ----------- ----
2.1 CDMA Amendment to Cellular System Purchase
Agreement between TRICOM, S.A. and
Motorola, S.A.
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Description
------- -----------
2.1 CMDA Amendment to Cellular System Purchase Agreement
between Motorola, Inc. and Tricom, S.A.
Exhibit 2.1
CDMA AMENDMENT
TO CELLULAR SYSTEM PURCHASE AGREEMENT BETWEEN
MOTOROLA, INC. AND TRICOM, S.A.
This Code Division Multiple Access Amendment ("CDMA Amendment")
to the Cellular System Purchase Agreement and to the Installation
and Optimization Services Agreement, both signed on June 7, 1994
is entered into between Motorola, Inc., a Delaware corporation,
by and through its Cellular Infrastructure Group with offices at
1701 Golf Road, Rolling Meadows, Illinois 60008 U.S.A.
("Motorola") and Tricom, S.A., formerly known as Telepuerto San
Isidro, S.A., a company in Dominican Republic with offices at
Number 95, Lope de Vega Avenue, Santo Domingo, National District,
Dominican Republic ("Tricom"), on this thirteenth (13th) day of
August, 1998. Motorola and Tricom may be referred to herein as a
"Party" or collectively as the "Parties."
A. WHEREAS, on June 7, 1994, Motorola and Tricom entered into a
Cellular System Purchase Agreement ("Purchase Agreement")
for the supply of equipment and Software for an analog
cellular system in the Dominican Republic (the "Area"); and
B. WHEREAS, on June 7, 1994, Motorola and Tricom entered into
an Installation and Optimization Services Agreement ("I&O
Agreement") for the services rendered in association with
the analog cellular system; and
C. WHEREAS, Tricom has obtained or will obtain a license to
operate a cellular radiotelephone system utilizing IS-95
code division multiple access technology in the Area; and
D. WHEREAS, Motorola has the hardware and Software products for
a CDMA cellular system designed to operate in the 1900 MHz
band; and
E. WHEREAS, Motorola desires to sell and license, and Tricom
desires to purchase and license a CDMA Cellular System (as
defined below) for the Area as set forth in this CDMA
Amendment, the Purchase Agreement, and the I&O Agreement.
NOW THEREFORE, in consideration of the mutual obligations
contained herein, the Parties hereby agree to amend the Purchase
Agreement as set forth below.
1. SCOPE OF CDMA AMENDMENT
-----------------------
This CDMA Amendment establishes the terms pursuant to which
Motorola shall sell and license to Tricom, and Tricom shall
purchase and license from Motorola the Initial CDMA Cellular
System, the CDMA Expansion Products, Software, and Services
as defined herein and within Attachment "A."
<PAGE>
2. DEFINITIONS
-----------
The following definitions shall be added to Section 1 of the
Purchase Agreement.
Code Division Multiple Access ("CDMA") Cellular System
------------------------------------------------------
"CDMA Cellular System" shall mean the EMX switching
equipment, base site controller, base station RF equipment,
the Software licensed and other products furnished by
Motorola pursuant to this CDMA Amendment for 150,000 lines
as set forth in the Attachment "A" and the subsequent
amendments to the Attachment "A."
Conditional Acceptance and Final Acceptance
-------------------------------------------
"Conditional Acceptance" shall occur when the Parties
complete the Acceptance Test Plans ("ATP"). In the event
that Tricom places Phase 1 of the Initial CDMA Cellular
System into Commercial Service before the Parties complete
the ATPs, Motorola agrees to nevertheless complete said ATPs
with Tricom. "Final Acceptance" shall occur and be evidence
when Tricom signs the Acceptance Completion Certificate at
that point in time when all Punchlist items have been
resolved.
With respect to the CDMA Expansion Product and Services, and
considering that Tricom has entered into an IOS Agreement,
Conditional and Final Acceptance shall occur in the same
manner as provided above with respect to the Initial CDMA
Cellular System.
Initial CDMA Cellular System
----------------------------
"Initial CDMA Cellular System" shall mean the equipment set
forth in Attachment "A" for the first 36,335 lines of the
CDMA Cellular System.
"Phase 1 of the Initial CDMA Cellular System" shall
mean one (1) EMX 5000, one (1) CBSC, and the associated
equipment for eighteen (18) cell sites.
"Phase 2 of the Initial CDMA Cellular System" shall
mean the additional equipment for the first 36,335
lines as specified in Attachment "A."
CDMA Expansion Product
----------------------
"CDMA Expansion Product" shall mean all FNE, Software and
other products purchased to add to or expand the Initial
CDMA Cellular System as summarized in the Attachment "A" or
subsequent amendments to the Attachment "A" as may be
mutually agreed and signed by both Parties hereto.
All other definitions in the Purchase Agreement and the I&O
Agreement shall remain in effect.
<PAGE>
3. PAYMENT TERMS AND PRICING
-------------------------
3.1. General Payment Terms
---------------------
Motorola agrees to delete the requirement of a letter
of credit as specified in Section 5.1.1 of the Purchase
Agreement. Motorola agrees to allow Tricom to use an
open account. Motorola reserves the right to revoke
the privilege of an open account in the event that
Tricom is not in good standing. The Parties agree to
work together to determine such good standing status.
In addition, due to the volume purchase of this CDMA
Cellular System, Motorola agrees to extend the payment
term in Section 5.1.2 of the Purchase Agreement to
seventy-five (75) days from the invoice date.
In the event that Tricom has not made a payment after
said seventy-five (75) days, Motorola agrees to advise
Tricom in writing within ten (10) days of such
nonpayment. Motorola further agrees to reduce the
service fee to the rate of one percent (1%) for any
amounts due which remains unpaid as specified in
Section 5.1.5 of the Purchase Agreement.
3.2. Invoicing Terms
---------------
For Phase 1 and Phase 2 of the Initial CDMA Cellular
System and the CDMA Expansion Product, the following
invoicing terms shall apply:
(a) Upon the shipment date, Motorola shall invoice
Tricom seventy percent (70%) of value of that
shipment for Phase 1 or Phase 2 of the Initial
CDMA Cellular System or CDMA Expansion Product.
(b) Upon Conditional Acceptance, Motorola shall
invoice Tricom the remaining thirty percent (30%)
of the value of Phase 1 or Phase 2 of the Initial
CDMA Cellular System or CDMA Expansion Product.
For the application of Section 14 Force Majeure of the
Purchase Agreement, performance shall mean payment.
3.3. Pricing
-------
The equipment and pricing for the 150,000 lines of the
CDMA Cellular System is set forth in the Attachment "A"
Summary Page. By signing this CDMA Amendment, Tricom
commits to purchase and license the equipment and
Software for said 150,000 lines of the CDMA Cellular
System at the price set forth in the Attachment "A."
<PAGE>
In addition, Attachment "A" details the equipment and
pricing for the Initial CDMA Cellular System. Tricom
agrees to issue a purchase order for said Initial CDMA
Cellular System concurrent with the execution of this
CDMA Amendment.
3.4. Pricing for Additional Equipment
--------------------------------
In the event that Tricom desires to purchase additional
equipment for the CDMA Cellular System, Motorola agrees
to provide Tricom with an additional twenty-five
percent (25%) discount on the RF equipment in addition
to the current discount level for the analog RF
equipment which Motorola gives to Tricom's partner,
Motorola Network Management Group.
3.5. Future Prices
-------------
For a period of five (5) years after the Parties sign
this CDMA Amendment, Motorola agrees to extend to
Tricom the same prices as specified in Attachment A for
Tricom's volume purchases of additional equipment in
increments of a minimum of fifty thousand (50,000)
lines, based on the same design criteria as the CDMA
Cellular System.
4. TECHNICAL SPECIFICATIONS AND PROJECT REQUIREMENTS
4.1. The Parties agree to add the CDMA technical
specifications attached hereto and incorporated herein
as Attachment B1.
4.2. Motorola agrees to comply with tile following
requirements in addition to adhering to the technical
specifications in Attachment B1:
4.2.1 Motorola acknowledges that Tricom may use the
services of an independent third party to
assist Tricom with the CDMA Cellular System
including such responsibilities as review and
analyze the system design for the Initial
CDMA Cellular System and the CDMA Expansion
Product.
4.2.2 Motorola warrants the system design,
coverage, capacity and call quality of the
CDMA Cellular System. This Motorola warranty
is based on the CDMA Cellular System capacity
verification Utilizing Motorola's propagation
tool in conjunction with another independent
tool to audit the capacity of the Initial
CDMA Cellular System and the CDMA Expansion
Product and mutually agreed metric drive
tests on the cell site cloisters which
Motorola agrees to perform prior to
Conditional Acceptance of that cluster. In
the event that the Parties determine that the
mutually agreed criteria have not been met,
Motorola will first attempt to meet such
criteria through reviewing the installation
and optimization of the CDMA Cellular System.
<PAGE>
If, after Motorola reviews the installation
and optimization of the CDMA Cellular System,
the Parties determine that the criteria are
still not met, then Motorola agrees to
engineer a solution to meet the criteria and
provide Motorola-manufactured Fixed Network
Equipment, at its own expense, for that
solution.
4.2.3 System Reliability Outage Credits.
---------------------------------
Motorola agrees to provide Tricomwith an
equipment purchase credit of (i) US
$40,000.00 (forty thousand US dollars) for
any unplanned system outage for a duration of
more than sixty (60) minutes and (11) $500.00
(five hundred US dollars) for each additional
minute after said sixty (60) minutes. Such
outage must (i) render the entire CDMA
Cellular System inoperative or make the
completion of all outgoing or ingoing calls
impossible and (ii) be due solely to the
fault of Motorola-supplied equipment or
Motorola personnel. The total amount of
Motorola's credits shall not exceed US
$1,000,000.00 (one million US dollars). At
the time when Tricom issues the next valid
purchase order for CDMA Expansion Product,
Motorola shall apply these credits, at its
option, to either future purchases of
Motorola equipment or Tricom's open
receivables.
4.2.3 Motorola agrees to provide Tricom with the
following: (i) an Implementation Development
Plan ("IDP") which shall include a list of
the personnel assigned to this project, the
services which Motorola shall provide,
specific locations for the Sites, demarcation
of each Party's respective responsibilities,
etc., (ii) a progress report on a monthly
basis indicating the status of the project,
(iii) a list of recommended spare parts which
Tricom may purchase at its option; such list
is set forth in Attachment A1. The
information regarding expanding the major
system components (i.e., EMX 5000, CBSCS, and
the BTS 4852) is set forth in the Attachment
B1 Technical Specifications.
5. ACCEPTANCE TEST PLAN
The Parties agree to add the Acceptance Test Plans for the
CDMA Cellular System as Attachment "C," and the critical
path schedule which shall set forth the parties respective
responsibilities as Attachment "I" to this CDMA Amendment.
6. SCHEDULE, DELIVERY, AND TERMINATION
The Parties agree to add a schedule for the Initial CDMA
Cellular System as Attachment "I" to this CDMA Amendment.
This schedule shall set forth the Parties respective
responsibilities related to the Initial CDMA Cellular
System.
<PAGE>
6.1. Delivery. Motorola agrees to ship, install, and
--------
prepare through hardware optimization Phase 1 for
Conditional Acceptance in fourteen (14) weeks from the
date that Motorola receives a valid purchase order from
Tricom, excluding each day from the time that Tricom's
---------
freight forwarder, Trans Mar, signs for each of
Motorola's shipments until the time after Tricom
notifies Motorola, and Motorola verifies and signs that
each such shipment is at the respective Site.
Motorola further agrees to ship, install, and prepare
Phase 2 of the Initial CDMA Cellular System for
Conditional Acceptance within twelve (12) months from
the date that Motorola receives a valid purchase order
from Tricom for said Phase 2.
Tricom agrees to have each Site ready for installation
according to the mutually agreed matrix for each Site.
Tricom's sales and marketing plans are established
based on the schedule for the Initial CDMA Cellular
System. Therefore, time is of the essence with this
CDMA Amendment. Motorola agrees to promptly notify
Tricom, in writing, of any delays and/or any actual or
potential labor dispute which delay or threatens to
delay, the timely performance of this CDMA Amendment.
6.2. Delays. If Motorola fails to have Phase I of the
------
Initial CDMA Cellular System ready for Conditional
Acceptance within the fourteen (14) weeks with the
exclusion specified in 6.1 above, and such failure is
solely attributable to Motorola, Motorola agrees to pay
liquidated damages in the amount of US $50,000.00
(fifty thousand US dollars), for each day of delay,
Furthermore, if Motorola fails to have Phase 2 of the
Initial CDMA Cellular System ready for Conditional
Acceptance within the twelve (12) months specified in
6.1 above, and such failure is solely attributable to
Motorola, Motorola agrees to pay liquidated damages in
the amount of US$50,000.00 (fifty thousand US dollars),
for each day of delay.
The Parties agree that the maximum amount of liquidated
damages which Motorola could pay to Tricom for delays
of either Phase 1 and Phase 2 is a total for both
Phases of US $1,000,000.00 (one million US dollars).
Motorola shall apply, at its option, any monies owed to
Tricom for liquidated damages to either (i) future
purchases of Motorola equipment or (i) Tricom's open
receivables, said credits shall apply to the next valid
purchase order which Tricom issues for CDMA Expansion
Product.
The Parties agree that Motorola will not pay any
liquidated damages until after the six (6) weeks period
as specified in Section 6.4 below. The Parties further
agree that in the event that Tricom opts to terminate
<PAGE>
this CDMA Amendment and return the Motorola-supplied
equipment of Phase 1 as also specified in Section 6.4,
then Motorola shall not pay Tricom any such liquidated
damages.
6.3. Incentives. If the Parties complete the ATPs for Phase
----------
1 of the Initial CDMA Cellular System prior to the
fourteen (14) weeks as specified in Section 6.1 above,
Tricom agrees to pay Motorola an amount of US$50,000.00
(fifty thousand US dollars) as an incentive to
Motorola, for each day that Motorola is early.
Furthermore, if the Parties complete the ATPs for Phase
2 of the Initial CDMA Cellular System prior to the
twelve (12) month period as specified above, Tricom
agrees to pay Motorola an amount of US$50,000.00 (fifty
thousands US dollars) as an incentive to Motorola, for
each day that Motorola is early.
The Parties agree that the maximum amount of money
which Tricom could pay to Motorola for incentives for
either Phase 1 and Phase 2 is a total for both Phases
of US $1,000,000.00 (one million US dollars).
Tricom agrees to pay such incentives to Motorola at the
time when Tricom issues the next valid purchase order
to Motorola for CDMA Expansion Product.
6.4. Termination. If Motorola does not pass the System
-----------
Level ATPs for the Initial CDMA Cellular System, the
Parties agree to work together to resolve the
outstanding issues of those System Level ATPs which
were not successful. if the Parties cannot resolve the
outstanding issues within six (6) weeks from the
completion of the first System Level ATP, and those
unresolved issues were due solely to Motorola, then
Tricom, at its option, may immediately terminate this
CDMA Amendment and return the Motorola-supplied
equipment of the Initial CDMA Cellular System. In
addition, Motorola agrees to return to Tricom the money
which Tricom paid to Motorola for said Motorola-
supplied equipment.
7. OPERATION AND MAINTENANCE
Motorola agrees to perform operation and maintenance
services for a period of three (3) months from Conditional
Acceptance as defined above. Motorola agrees to install,
commission, optimize and monitor (i) the CBSC which includes
the A+ / SS7 signaling links between the CBSC and BTSs and
(ii) the EMX 5000 CDMA switch which includes the DMX links
between the CDMA System and Tricom's analog network and the
R1 and SS7 signaling links interconnecting the CDMA System
and the PSTN.
All other network links and interconnects and / or network
elements of Tricom are not included in the operation and
maintenance services.
<PAGE>
Tricom may, at its option, purchase operation and
maintenance services after the three (3) month period
specified in the paragraph above, and Motorola agrees to
provide a quote for such additional services, upon Tricom's
written request.
8. FNE WARRANTY
Motorola agrees to warranty the FNE for the CDMA Cellular
System in accordance with the terms of Section 6 Warranties
of the Purchase Agreement.
9. SOFTWARE
Motorola agrees to license the Software for the CDMA System
in accordance with the term of Exhibit F Software License to
the Purchase Agreement.
10. YEAR 2000 WARRANTY
Motorola warrants that the CDMA Cellular System which
Motorola ships to Tricom pursuant to this CDMA Amendment
shall be able to accurately process date data from, into and
between the year 1999 and the year 2000, including leap year
calculations, as necessary for the primary communication
purpose(s) for which the specific CDMA Cellular System is
designed when Tricom uses the CDMA Cellular System in
accordance with Motorola's documentation, provided that all
other products used in combination with the CDMA Cellular
System properly exchange date data with the CDMA Cellular
System. This warranty shall extend through May 1, 2000.
Shipments prior to January 1, 1999 may require upgrades to
be year 2000 ready. Motorola shall make hardware
modifications (including upgrades) available, at no
additional charge, for those modifications which are
required solely to accommodate Year 2000 ready software
modifications (including upgrades). All other hardware
modifications to accommodate software modifications
(including upgrades) shall be made available at all
additional charge.
IN THE EVENT OF A BREACH OF THIS YEAR 2000 WARRANTY,
TRICOM'S SOLE AND EXCLUSIVE REMEDY SHALL BE TO REPAIR AND /
OR REPLACE.
11. ARBITRATION
Any dispute arising out of or in connection with this CDMA
Amendment shall be submitted for arbitration in Miami,
Florida U.S.A. to be conducted by the American Arbitration
Association in accordance with its substantive and
procedural rules, with the exception of intellectual
property rights which shall be submitted to a court of law
in the State of Illinois. All such proceedings shall be
conducted in English and a daily transcript in shall be
prepared in English. In the event that a dispute arises
between Tricom and Motorola, three arbitrators shall be
selected as follows. One shall be selected by Tricom arid
the other one by Motorola, and the third arbitrator shall be
<PAGE>
selected by the other two arbitrators, which third
arbitrator shall concurrently serve as Chairman of the
arbitration panel; provided, that if either Tricom or
Motorola does not select an arbitrator, then the arbitrator
selected by the other Party may select the remaining two
arbitrators. All of the arbitrators shall be fluent in both
the English and Spanish languages. The English language
text of this CDMA Amendment shall be used in any arbitration
proceedings commenced pursuant to this Section. Arbitration
awards shall be final and binding upon the parties hereto.
The costs of arbitration shall be reasonably determined by
the arbitration panel. Any award of the arbitrators shall
be enforceable by any court having jurisdiction over the
Party or Parties against which the award has been rendered,
or wherever assets of the Party or Parties against which the
award has been rendered call be located.
12. AUTHORITY
Each party represents and warrants that (i) it has obtained
all necessary approvals consents and authorization to enter
into this CDMA Amendment and to perform and carry out its
obligations, (ii) the persons executing this CDMA Amendment
have express authority to do so, and in so executing this
CDMA Amendment, bind the party, and (iii) this CDMA
Amendment is a valid and binding obligation of such party,
enforceable in accordance with its terms.
13. RATIFICATION AND INTEGRATION
Except as specifically stated in this CDMA Amendment,
nothing contained herein shall in any way alter, waive,
annul, vary or affect any terms, condition or provision of
the Purchase Agreement or the I&O Agreement. It is the
intent of the Parties that all of the terms, conditions and
provisions of the Purchase Agreement and the I&O Agreement
shall be in all other respects ratified, confirmed and
continue in full force and effect. This CDMA Amendment and
the Attachments constitute the entire agreement,
representation, whether oral or written. No modification,
amendment or other change may be made to this CDMA Amendment
unless reduce to writing and executed by authorized
representatives of both Parties.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this CDMA
Amendment to be duly executed by their duly authorized officers
as of the day and year first above written.
MOTOROLA, INC. TRICOM
CELLULAR INFRASTRUCTURE
GROUP
BY: /s/ Daniel C. Przybylski BY: /s/ Marcos J. Troncoso
-------------------------- ------------------------
NAME: Daniel C. Przybylski NAME: Marcos J. Troncoso M.
TITLE: Corporate Vice President TITLE: Executive Vice-
and Regional Director of President and
Operations Caribbean and Directors of
Latin America Secretary of the
Board of Tricom, S.A.
