FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of: August 16, 1999
-----------------
TRICOM, S.A.
(Translation of registrant's name into English)
AVENIDA LOPE DE VEGA NO. 95, SANTO DOMINGO, DOMINICAN REPUBLIC
(Address of principal executives offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
----- -----
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
----- -----
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-_________
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TRICOM, S.A.
QUARTERLY REPORT
FOR THE
SECOND QUARTER
ENDED
JUNE 30, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
GENERAL INTRODUCTION..........................................................1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.................................................2
Consolidated Balance Sheet as of December 31, 1998 and
June 30, 1999 (unaudited)................................................2
Consolidated Statement of Operations Three Months and
Three Months ended June 30, 1998 and 1999 (unaudited)....................4
Consolidated Statements of Cash Flows Three Months Ended
June 30, 1998 and 1999 (unaudited).......................................5
Notes to Financial Statements............................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION..............................................6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................. 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................... 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 19
ITEM 5. OTHER INFORMATION.................................................. 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 6-K................................... 19
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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.
In this Quarterly 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 Quarterly 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 June 30, 1999 was RD$15.90 = US$1.00, the
date of the most recent financial information included in this Quarterly Report.
The Federal Reserve Bank of New York does not report a noon buying rate for
Dominican pesos. On August 10, 1999, the Private Market Rate was RD$15.91 =
US$1.00.
FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report which are not
historical facts are forward-looking statements that involve risks and
uncertainties. Management cautions the reader that these forward-looking
statements are only predictions; actual events or results may differ materially
as a result of risks facing the Company. Such risks include, but are not limited
to, the following factors: competition; declining rates for international long
distance traffic; opposition to increased rates for basic local service; the
Company's significant capital expenditure requirements and its need to finance
such expenditures; the inability of the Company to expand its local access line
network in a timely manner and within the amount budgeted for such capital
expenditure program; the inability of the Company to manage effectively its
rapid expansion; the continued growth of the Dominican economy, demand for
telephone services in the Dominican Republic and moderation of inflation; and
the continuation of a favorable political and regulatory environment in the
Dominican Republic.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN US$)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------- --------------
1998 1999
---------------- --------------
ASSETS (AUDITED) (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents US$ 15,377,410 US$ 7,521,529
Accounts receivable:
Customers 9,168,740 12,863,967
Carriers 4,153,003 8,103,798
Related parties 163,110 351,705
Officers and employees 275,069 322,193
Current portion of long term accounts receivable 75,071 35,440
Other 2,113,228 1,349,508
-------------- --------------
15,948,221 23,026,611
Allowance for doubtful accounts (740,687) (1,955,343)
-------------- --------------
Accounts receivable, net 15,207,534 21,071,268
Current portion of pledged securities 54,470,478 43,905,746
Inventories, net 8,687,356 12,834,517
Prepaid expenses 2,921,680 1,736,674
Deferred income taxes 556,949 613,152
-------------- --------------
Total current assets 97,221,407 87,682,886
Long-term accounts receivable 91,556 89,603
Other investments 2,164,387 3,663,242
Property and equipment cost 365,682,963 431,647,913
Accumulated depreciation (35,226,515) (44,863,324)
-------------- --------------
Property and equipment, net 330,456,448 386,784,589
Other assets at cost, net of amortization 14,880,805 15,997,200
TOTAL ASSETS US$444,814,603 US$494,217,520
============== ==============
</TABLE>
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TRICOM, S.A.
CONSOLIDATED BALANCE SHEET
(IN US$)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- --------------
1998 1999
-------------- --------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
LIABILITIES & SHAREHOLDERS EQUITY Current liabilities:
Notes payable:
Borrowed funds-banks US$ 21,665,516 US$ 61,713,451
Borrowed funds-related parties 25,591,915 22,225,492
Current portion of long term debt - Carifa Loan 32,000,000 32,000,000
-------------- --------------
79,257,431 115,938,943
Accounts payable:
Carriers 3,106,898 2,605,622
Suppliers 11,772,957 17,335,586
Other 1,566,076 419,406
-------------- --------------
16,445,931 20,360,614
Other liabilities 7,413,821 5,275,006
Accrued expenses 13,887,974 14,959,139
-------------- --------------
Total current liabilities 117,005,157 156,533,702
Reserve for severance indemnities 42,886 73,362
Deferred income tax 205,258 205,258
Long-term debt:
Senior Notes 200,000,000 200,000,000
-------------- --------------
Total liabilities 317,253,301 356,812,322
Shareholders equity:
Class A Common Stock at par value RD$10: Authorized
55,000,000 shares; 5,700,000 shares issued at
December 31, 1998 and June 30, 1999 3,750,000 3,750,000
Class B Stock at par value RD$10: Authorized
25,000,000 shares at December 31, 1998 and June 30,
1999; 19,144,544 issued at December 31, 1998 and
June 30, 1999 12,595,095 12,595,095
Additional paid-in-capital, excess over par 94,015,852 94,015,852
Retained earnings 19,224,112 29,068,008
Equity adjustment for foreign currency translation (2,023,757) (2,023,757)
-------------- --------------
Shareholders equity, net 127,561,302 137,405,198
TOTAL LIABILITIES &
SHAREHOLDERS EQUITY US$444,814,603 US$494,217,520
============== ==============
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TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN US$)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
------------------------------------------- --------------------------------------------
1998 1999 1998 1999
------------------- ------------------ ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Toll US$ 4,328,095 US$ 5,620,149 US$ 8,861,872 US$10,325,415
International settlement 12,655,827 15,381,932 23,499,289 28,352,912
Local service 3,032,586 7,806,397 5,714,210 13,646,572
Cellular 5,055,764 5,962,077 9,291,410 11,825,411
Paging 1,182,860 672,995 2,446,976 1,573,249
Sale and lease of equipment 823,046 1,459,897 1,820,432 2,425,901
Installations 3,611,023 3,984,767 6,008,559 7,403,946
Other 7,026 13,666 69,163 171,673
------------- ------------- ------------- -------------
TOTAL OPERATING REVENUES 30,696,227 40,901,880 57,711,911 75,725,079
OPERATING COSTS:
Satellite connections
and carriers 8,351,190 9,919,069 15,829,596 18,339,970
Network depreciation 2,774,771 3,978,197 5,138,668 7,427,650
Expense in lieu of
income taxes 2,217,531 3,216,541 4,144,411 6,186,151
General and
administrative expenses 8,478,721 12,518,683 15,924,523 22,119,212
Depreciation expense 769,630 1,163,728 1,406,896 2,209,159
Other 565,380 1,352,862 1,587,513 2,362,266
------------- ------------ ------------- -------------
TOTAL OPERATING COSTS 23,157,223 32,149,080 44,031,607 58,644,408
OPERATING INCOME 7,539,004 8,752,800 13,680,304 17,080,671
OTHER INCOME (EXPENSES):
Interest expense (3,876,498) (4,177,160) (8,242,009) (8,632,020)
Interest income 1,264,436 746,682 2,442,431 1,717,884
Foreign exchange
gain (loss) 21,386 308,636 (84,837) 474,028
Other (441,261) (425,527) (878,130) (852,870)
------------- ------------- ------------- -------------
TOTAL OTHER EXPENSES (3,031,937) (3,547,369) (6,762,545) (7,292,978)
------------- ------------- ------------- -------------
EARNINGS BEFORE
INCOME TAX 4,507,067 5,205,431 6,917,759 9,787,693
INCOME TAX -
DEFERRED CREDIT - - - 56,203
NET EARNINGS US$ 4,507,067 US$ 5,205,431 US$ 6,917,759 US$ 9,843,896
============= ============= ============= =============
EBITDA US$13,300,936 US$17,111,266 US$24,370,279 US$32,903,631
EARNINGS PER SHARE US$ 0.21 US$ 0.21 US$ 0.33 US$ 0.40
WEIGHTED AVG. NUMBER
OF SHARES OUTSTANDING 21,044,544 US$24,844,544 US$21,044,544 US$24,844,544
</TABLE>
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TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN US$)
<TABLE>
<CAPTION>
SIX MONTH PERIOD
ENDED JUNE 30,
---------------------------------------------
1998 1999
------------------- --------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) US$ 6,917,759 US$ 9,843,896
Adjustments to reconcile net earnings (loss) and net cash
provided by operating activities:
Depreciation 6,545,564 9,636,809
Allowance for doubtful accounts 648,223 2,240,388
Accounts receivable charged off (850,888) (1,025,732)
Deferred income tax - benefit - (56,203)
Reserve for severance indemnities, net of payments 86,994 30,475
Net changes in assets and liabilities:
Accounts receivable (2,545,928) (7,078,390)
Inventories (5,501,745) (4,147,161)
Prepaid expenses 700,801 1,185,006
Long-term accounts receivable 675,860 1,953
Unearned interest (120,495) -
Other assets (22,635) (1,116,395)
Accounts payable 18,837,343 3,914,683
Other liabilities 949,932 (2,138,815)
Accrued expenses 756,424 1,071,165
------------- ------------
Total adjustments 20,159,450 2,517,783
------------- ------------
Net cash provided by operating activities 27,077,209 12,361,679
============= =============
Cash flows from investing activities:
Cancellation of investments 11,930,974 9,065,877
Acquisition of property and equipment (76,172,502) (65,964,949)
------------- ------------
Net cash used in investing activities (64,241,528) (56,899,072)
Cash flows from financing activities:
Borrowed funds (paid to) from banks (1,477,674) 40,047,935
Borrowed funds (paid to) from related parties (2,521,510) (3,366,423)
Issuance of common stock 68,184,977 -
------------- ------------
Net cash provided by financing activities 64,185,793 36,681,512
Net increase in cash and cash equivalents 27,021,474 (7,855,881)
Cash and cash equivalents at beginning of the period 5,732,505 15,377,410
Cash and cash equivalents at end of period US$32,753,979 US$ 7,521,529
============= =============
</TABLE>
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TRICOM, S.A. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The Company considers that all adjustments (all of which are normal
recurring accruals) necessary for a fair statement of financial position and
results of operations for these periods have been made; however, results for
such interim periods are subject to year-end audit adjustments. Results for such
interim periods are not necessarily indicative of results for a full year.
NOTE 2 - CALCULATION OF EBITDA
EBITDA consists of earnings (loss) before interest expense, income
taxes, depreciation and amortization. EBITDA is commonly used in the
telecommunications industry to analyze companies on the basis of operating
performance, leverage and liquidity. However, it does not purport to represent
cash generated or used by operating activities and should not be considered in
isolation or as a substitute for a measure of performance in accordance with
generally accepted accounting principles.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
COMPANY OVERVIEW
BACKGROUND
TRICOM is a full-service telecommunications provider in the Dominican
Republic, and a facilities-based long distance carrier in the United States.
TRICOM commenced operations in 1992 and has since expanded to offer
international and domestic long distance, local telephony, analog cellular and
PCS, paging and Internet services. TRICOM serves both the densely populated and
underserved areas of this Caribbean nation and offers long distance service to
the over 1 million Dominicans living in the United States. The Company has
achieved significant growth, with operating revenues increasing from US$1.9
million in 1992, to US$125.5 million in 1998 and has established itself as a key
player in the international long distance market of the Dominican Republic.
TRICOM's network is 100% digital and utilizes cutting edge technology. The
Company is deploying one of the World's largest CDMA-wireless local loop
networks.
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. In January 1997, the Company commenced
operating its subsidiary TRICOM USA, Inc., a Delaware corporation ("TRICOM
USA"). This subsidiary operates as a facilities-based international and resale
carrier within the United States. TRICOM USA provides TRICOM 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 operates a chain of owned or franchised public telephone
centers and sells an international long distance prepaid calling card, the
Efectiva card. 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 represent a greater share
of both international long distance revenues and domestic long distance
revenues.
DOMESTIC SERVICES
Local Service. TRICOM provides local exchange services to residential
and small business customers in the densely populated areas of Santo Domingo,
Santiago and San Francisco de Macoris, the three largest cities in the Dominican
Republic. As of June 30, 1999, the Company had 102,922 local access lines in
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service, including 22,306 net local access lines installed during the first half
of 1999. The Company anticipates installing approximately 45,000 local access
lines in 1999. TRICOM has used conventional copper or fiber wirelines to connect
customers to its network, but going forward, 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 allows the
Company to achieve faster line installation and to reach broader service areas
than previously possible with a traditional wireline network. As of June 30,
1999, the Company had deployed 10,096 WLL lines in the capital city of Santo
Domingo. In July of 1999, the Company completed the second phase of its WLL
deployment by expanding coverage to five additional cities.
Cellular. As of June 30, 1999, the Company had 141,900 mobile cellular.
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 86.5% from 76,095
subscribers at June 30, 1998 to 141,900 subscribers at June 30, 1999.
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 expansion program, completed in July of 1999,
expanded PCS coverage to five additional cities and brings the total population
base to over 4 million. The Company believes that these programs are central
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 June 30, 1999, the allocation of stock ownership
among GFN, Motorola and the public was 46.2% (58.4% voting power), 30.8% (38.8%
voting power), and 23% (2.8% voting power), respectively.
REVENUE RECOGNITION
The Company derives its operating revenues primarily from toll
revenues, international settlement revenues, cellular services, paging services,
local services, the sale and lease of equipment , and installations. The
components of each of these services are as follows:
Toll revenues are amounts received by the Company from its customers in
the Dominican Republic for international and domestic long distance
calls as well as interconnection charges received from 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.
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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.
The following table sets forth the percentage contribution of each
category of revenues to total operating revenues for the period indicated:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------- ----------------
1998 1999 1998 1999
---- ---- ---- ----
Toll................................ 14.1% 13.7% 15.4% 13.6%
International ...................... 41.2 37.6 40.7 37.4
Local service....................... 9.9 19.1 9.9 18.0
Cellular............................ 16.5 14.6 16.1 15.6
Paging.............................. 3.9 1.6 4.2 2.1
Sale and lease of equipment......... 2.7 3.6 3.2 3.2
Installations....................... 11.8 9.7 10.4 9.8
Other............................... 0.0 0.0 0.1 0.2
- ----------------
Note: Percentages may not add up to 100% due to rounding.
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The following table sets forth certain items in the statements of
operations expressed as a percentage of total operating revenues for the period
indicated:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, SEPTEMBER 30,
---------------- --------------
1998 1999 1998 1999
---- ---- ---- ----
Operating costs..................... 75.4% 78.6% 76.3% 77.4%
Operating income.................... 24.6 21.4 23.7 22.6
Interest expense, net............... (8.5) (8.4) (10.1) (9.1)
Other income (expenses)............. (9.9) (8.7) (11.7) (9.6)
Net earnings........................ 14.7 12.7 12.0 13.0
EBITDA.............................. 43.3 41.8 42.2 43.5
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 1999
OPERATING REVENUES. The Company's total operating revenues increased
31.2% from US$57.7 million for the six-month period ended June 30, 1998 (the
"1998 Interim Period") to US$ 75.7 million for the six-month period ended
June 30, 1999 (the "1999 Interim Period"), and by 33.2% from US$ 30.7 million
for the three-month period ended June 30, 1998 (the "1998 Second Quarter") to
US$ 40.9 million for the three-month period ended June 30, 1999 (the "1999
Second Quarter"). The Company attributes this growth to increased local service
and cellular revenues associated with the Company's local network expansion, as
well as to increased international revenues generated by long standing carrier
relations and TRICOM USA, the Company's U.S. subsidiary and facilities-based
international carrier.
Toll. Toll revenues increased 16.5% from US$8.9 million for the 1998
Interim Period to US$10.3 million for the 1999 Interim Period, and by 29.9% from
US$4.3 million for the Second Quarter of 1998 to US$5.6 million for the same
period 1999, as a result of higher domestic and outbound international traffic.
Domestic long distance minutes increased by 52.5% from 9.1 million minutes for
the 1998 Interim Period to 13.9 million minutes for the 1999 Interim Period, and
by 54.9% from 4.6 million in the 1998 Second Quarter to 7.1 million in the 1999
Second Quarter as a result of a higher number of local access lines in service.
Outbound international minutes increased by 26.2% from 10.8 million minutes for
the 1998 Interim Period to 13.7 million for the 1999 Interim Period, and by
33.2% from 5.2 million in the 1998 Second Quarter to 7.0 million in the 1999
Second Quarter, reflecting increased traffic volume from the Efectiva prepaid
calling card, the increased number of local access lines, and the higher number
of cellular subscribers.
Interconnection revenues increased by approximately 83.4% from US$1.4
million for the 1998 Interim Period to US$2.6 for the 1999 Interim Period and by
approximately 90.7% from US$743,000 for the 1998 Second Quarter to US$1.4
million for the 1999 Second Quarter. Toll revenues represented 15.4% of total
operating revenues for the 1998 Interim Period compared to 13.6% of total
operating revenues for the 1999 Interim Period, and 14.1% of total operating
revenues for the 1998 Second Quarter compared to 13.7% of total operating
revenues for the 1999 Second Quarter.
International. International revenues increased 20.7% from US$23.5
million for the 1998 Interim Period to US$28.4 million for the 1999 Interim
Period, and by 21.5% from US$12.7 million for the 1998 Second Quarter to US$15.4
million for the 1999 Second Quarter, primarily as a result of the growth of
inbound traffic volume received from the Company's long standing carrier
relations, as well as from TRICOM USA's operations. Inbound minutes increased by
67.1% from 92.2 million for the 1998 Interim Period to 154.1 million minutes in
the 1999 Interim Period, and by 61.8% from 51.4 million for the 1998 Second
Quarter to 83.1 million for the 1999 Second Quarter. TRICOM USA accounted for
53.4% and 50.9% of the total inbound minutes in the 1998 Interim Period and the
1998 Second Quarter, respectively, compared to 46.8% and 37.6% in the 1999
Interim Period and the 1999 Second Quarter, respectively. Total international
long distance minutes increased by 61.7% from 104.2 million for the 1998 Interim
Period to 168.5 million in the 1999 Interim Period, and by 58.4% from 57.0
million for the 1998 Second Quarter to 90.3 million for the 1999 Second Quarter.
The increase in international revenues was achieved despite a 20.1%
decrease in average settlement rates from US$0.21 per minute for the 1998
Interim Period to US$0.17 per minute for the 1999 Interim Period. Settlement
rates for traffic between the United States and the Dominican Republic have
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declined over the past five years as a result of increased competition in the
market for international long distance service, and the Company anticipates that
competitive and regulatory pressures could push settlement rates lower.
TRICOM has been able to increase revenues from the provision of
international long distance services by increasing the volume of international
traffic that it handles. Future decreases in settlement rates, without
corresponding increases in the Company's long distance traffic from the United
States would reduce the Company's international settlement revenues, adversely
affect the profit margins that the Company realizes on such traffic and could
have a material adverse effect on the Company's business, financial condition
and results of operations. International revenues represented 40.7% of total
operating revenues for the 1998 Interim Period compared to 37.4% of total
operating revenues for the 1999 Interim Period, and 41.2% of total operating
revenues for the 1998 Second Quarter compared to 37.6% of total operating
revenues for the 1999 Second Quarter.
Local service. Local service revenues increased 138.8% from US$5.7
million for the 1998 Interim Period to US$13.6 million for the 1999 Interim
Period, and by 157.4% from US$3.0 million for the 1998 Second Quarter to US$7.8
million for the 1999 Second Quarter, as a result of a higher number of local
access lines in service and higher local service rates.
During the 1998 Interim Period, the Company added 17,224 net local
access lines, including 8,838 net local lines during the 1998 Second Quarter,
compared to 22,306 net local access lines added during the 1999 Interim Period,
including 10,867 net local lines during the 1999 Second Quarter. At June 30,
1999, the Company had 102,922 local access lines in service, including 10,096
Wireless Local Loop lines, compared to 60,419 local access lines in service at
June 30, 1998. As a result of a higher number of lines in service,
interconnection revenues related to local calls received from Codetel increased
139.9% from US$488,000 for the 1998 Interim Period to US$1.2 million for the
1999 Interim Period, and by 180.0% from US$253,000 for the 1998 Second Quarter
to US$711,000 for the 1999 Second Quarter.
On January 14, 1999, the Company announced price increases in
residential monthly rent charges as well as measured local service rates as part
of the industry's process of price liberalization initiated under the new
Telecommunications Law No. 153. Effective as of January 1, 1999, TRICOM
increased the price per minute of measured local service from RD$0.10 (US$0.006)
to RD$0.14 (US$0.009). The Company has and will continue to adjust the price per
minute of measured local service in monthly increments of RD$0.01 until it
reaches RD$0.25 (US$0.015) at December 31, 1999. On average, the price per
minute of measured local service increased by 57.1% from US$0.007 per minute
during the 1998 Second Quarter to US$0.011 per minute during the 1999 Second
Quarter. As a result, measured local service revenues increased by 75.6% from
US$1.0 million during the 1998 Interim Period to US$1.8 million during the 1999
Interim Period, and by 82.1% from US$588,000 for the 1998 Second Quarter to
US$1.0 million during the 1999 Second Quarter. In addition, average monthly rent
charges increased by 77.8% from US$9.96 in the Second Quarter of 1998 to
US$17.71 in the Second Quarter of 1999. Local service rent revenues increased by
176.1% from US$3.0 million during the 1998 Interim Period to US$8.4 million
during the 1999 Interim Period, and by 211.5% from US$1.5 million during the
1998 Second Quarter to US$4.7 million during the 1999 Second Quarter. Local
service revenues represented 9.9% of total operating revenues for the 1998
Interim Period compared to 18.0% of total operating revenues for the 1999
Interim Period, and 9.9% of total operating revenues for the 1998 Second Quarter
compared to 19.1% of total operating revenues for the 1999 Second Quarter.
Cellular. Cellular revenues increased 27.3% from US$9.3 million for the
1998 Interim Period to US$11.8 million for the 1999 Interim Period, and by 17.9%
from US$5.1 million for the 1998 Second Quarter to US$6.0 million for the 1999
Second Quarter, as a result of a larger average subscriber base. The Company
attributes the substantial growth of its cellular subscriber base to the
continued success of the AMIGO prepaid cellular program introduced in the Third
Quarter of 1997. During the 1998 Interim Period, the Company added 34,988 net
cellular subscribers, including 20,109 during the 1998 Second Quarter, compared
to 33,368 net cellular subscribers added during the 1999 Interim Period,
including 14,977 during the 1999 Second Quarter. At June 30, 1999, the Company
had 141,900 cellular subscribers compared to 76,095 at June 30, 1998.
As a result of a higher average subscriber base, airtime minutes
increased 28.7% from 44.6 million for the 1998 Interim Period to 57.4 million
for the 1999 Interim Period, and by 22.7% from 22.9 million for the 1998 Second
Quarter to 29.7 million for the 1999 Second Quarter. Interconnection revenues
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associated with airtime traffic received from Codetel increased by 145.8% from
US$749,000 in the 1998 Interim Period to US$1.8 million in the 1999 Interim
Period, and by 100.5% from US$428,000 in the 1998 Second Quarter to US$859,000
in the 1999 Second Quarter, due to a higher volume of incoming minutes received
by prepaid cellular subscribers, as well as to a larger subscriber base.
Prepaid cellular services generated approximately 52% of the Company's
total airtime minutes and 56% of total cellular revenues in the 1999 Interim
Period. Prepaid cellular revenues increased by 122.2% from US$3.0 million in the
1998 Interim Period to US$6.6 million in the 1999 Interim Period, and by 87.0%
from US$1.8 million in the 1998 Second Quarter to US$3.4 million during the 1999
Second Quarter. The Company's average monthly churn rate for cellular services
declined from 3.2% for the 1998 Interim Period to 1.8% for the 1999 Interim
Period, and from 2.8% for the 1998 Second Quarter to 1.3% for the 1999 Second
Quarter. The Company calculates churn by dividing the number of subscribers
disconnected during a given period by the sum of subscribers at the beginning of
each month during such period. Cellular revenues represented 16.1% of total
operating revenues for the 1998 Interim Period compared to 15.6% of total
operating revenues for the 1999 Interim Period, and 16.5% of total operating
revenues for the 1998 Second Quarter compared to 14.6% of total operating
revenues for the 1999 Second Quarter.
Paging. Paging revenues decreased 35.7% from US$2.4 million for the
1998 Interim Period to US$1.6 million for the 1999 Interim Period, and by 43.1%
from US$1.2 million for the 1998 second quarter to US$673,000 for the 1999
Second Quarter. The decrease reflected a decline in the average revenue per
paging subscriber during the 1999 Interim Period from the average revenue per
paging subscriber during the 1998 Interim Period, 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 encouraging paging subscribers to replace their paging services with
prepaid cellular services. The Company has determined that paging will not play
a major role its marketing and promotional efforts.
At June 30, 1999, the Company had 28,875 paging subscribers compared to
28,456 paging subscribers at June 30, 1998. The Company's average monthly churn
rate for paging services declined from 3.4% for the 1998 Interim Period to 3.0%
for the 1999 Interim Period, and from 3.4% for the 1998 Second Quarter to 2.1%
for the 1999 Second Quarter. Paging revenues represented 4.2% of total operating
revenues for the 1998 Interim Period compared to 2.1% of total operating
revenues for the 1999 Interim Period, and 3.9% of total operating revenues for
the 1998 Second Quarter compared to 1.6% of total operating revenues for the
1999 Second Quarter.
Sale and lease of equipment. Revenues from the sale and lease of
equipment increased 33.3% from US$1.8 million for the 1998 Interim Period to
US$2.4 million for the 1999 Interim Period, and by 77.4% from US$823,000 for the
1998 Second Quarter to US$1.5 million for the 1999 Second Quarter. The increase
was attributed to marketing and sale efforts, which resulted in a higher number
of sales of customer premise equipment, including private branch exchanges and
key telephone systems, residential telephones and cellular handsets during the
first six months of 1999. The Company has entered into arrangements for the
distribution of cellular service with major electronics retailers. The Company
believes that these arrangements will decrease revenues from the sale of
cellular equipment, but could increase cellular service revenues by expanding
the number of subscriber additions. Sale and lease of equipment revenues
represented 3.2% of total operating revenues for both the 1998 and 1999 Interim
Period, and 2.7% of total operating revenues for the 1998 Second Quarter
compared to 3.6% of total operating revenues for the 1999 Second Quarter.
Installations. Installation revenues increased 23.2% from US$6.0
million for the 1998 Interim Period to US$7.4 million for the 1999 Interim
Period, and by 10.4% from US$3.6 million for the 1998 Second Quarter to US$4.0
million for the 1999 Second Quarter. This increase is attributable to the
significant growth in the number of local access line installations and cellular
activations, which helped offset the reductions in installation fees for local
lines as part of the rate rebalancing plan that took effect January 1,1999. The
average installation fee per local access line declined from US$260 during the
1998 Second Quarter to US$202 during the 1999 Second Quarter.
During the 1998 Interim Period, the Company installed 19,589 gross
local access lines and 45,431 gross cellular additions, including 10,036 gross
local access lines and 25,550 gross cellular additions in the 1998 Second
Quarter, compared to 29,621 gross local access lines and 44,355 gross cellular
additions for the 1999 Interim Period, including 15,682 gross local access lines
and 20,011 gross cellular additions in the 1999 Second Quarter. The number of
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gross local access lines additions during the 1999 Second Quarter represents the
highest quarterly number of gross line additions in the Company's history.
Wireless Local Loop lines accounted for 41% of gross additions for the 1999
Second Quarter. Installation revenues represented 10.4% of total operating
revenues in the 1998 Interim Period compared to 9.8% of total operating revenues
for the 1999 Interim Period, and 11.8% of total operating revenues for the 1998
Second Quarter compared to 9.7% of total operating revenues for the 1999 Second
Quarter.
OPERATING COSTS. Major components of operating costs are (a) carrier
costs, which include amounts owed to foreign carriers for the use of their
networks for termination of outbound traffic, (b) interconnection costs, which
are access charges paid to Codetel, (c) depreciation of network equipment and
leased terminal equipment, (d) payments for international satellite circuit
leases, (e) expenses in lieu of income tax, (f) general and administrative
expenses, which include salaries and other compensation to personnel,
maintenance expenses, marketing expenses and other related costs, and
(g) depreciation expense. The Company's operating costs increased 33.2% from
US$44.0 million for the 1998 Interim Period to US$58.6 million for the 1999
Interim Period, and by 38.8% from US$23.2 million for the 1998 Second Quarter to
US$32.1 million for the 1999 Second Quarter, primarily due to increases in
general and administrative expenses, carrier costs and depreciation associated
with the Company's capital expenditure program. Operating costs represented
76.3% of total operating revenues for the 1998 Interim Period compared to 77.4%
of total operating revenues for the 1999 Interim Period.
Satellite connections and carrier costs increased by 15.9% from
US$15.8 million for the 1998 Interim Period to US$18.3 million for the 1999
Interim Period, and by 18.8% from US$8.4 million for the 1998 Second Quarter to
US$9.9 million for the 1999 Second Quarter. This increase reflected a 13.4%
increase in outbound carrier costs from US$5.6 million in the 1998 Interim
Period to US$6.4 million in the 1999 Interim Period due to higher volume of
outbound traffic. Interconnection costs increased by US$3.5 million from US$6.1
million for the 1998 Interim Period to US$9.5 million for the 1999 Interim
Period, as a result of a higher a proportion of the inbound traffic terminating
in the Company's network. These increases were partially offset by a 30.1%
decrease in lease payments for switching facilities and satellite connections
costs from US$2.6 million in the 1998 Interim Period to US$1.8 million in the
1999 Interim Period due to cost savings resulting from the operation of the
Antilles-I fiber optic cable.
Network depreciation and depreciation expense increased 44.5% and 57.0%
from US$5.1 million and US$1.4 million, respectively, for the 1998 Interim
Period to US$7.4 million and US$2.2 million, respectively, for the 1999 Interim
Period, as a result of the Company's continued investments in telephone plant
and equipment.
TRICOM currently is making payments to the Dominican government in lieu
of income tax equal to 10% of net international revenues. This expense in lieu
of income taxes increased by 49.3% from US$4.1 million for the 1998 Interim
Period to US$6.2 million for the 1999 Interim Period, and by 45.1% from US$2.2
million for the 1998 Second Quarter to US$3.2 million for the 1999 Second
Quarter, reflecting the increase in revenues derived from the Company's domestic
and international business.
General and administrative expenses increased 38.9% from US$15.9
million for the 1998 Interim Period to US$22.1 million for the 1999 Interim
Period, and by 47.6% from US$ 8.5 million in the 1998 Second Quarter to US$12.5
million in the 1999 Second Quarter, primarily as a result of higher commissions
paid to sales staff and intermediaries, increased personnel costs due to a
higher employee headcount, and a higher level of allowance for doubtful
accounts. Commissions increased by 34.6% from US$5.9 million in the 1998 Interim
Period to US$8.0 million in the 1999 Interim Period. Personnel costs increased
by 27.9% from US$8.1 million during the 1998 Interim Period to US$10.4 million
for the 1999 Interim Period. At June 30, 1999, the Company had 1,481 employees
compared to 1,272 employees at June 30, 1998. The Company's allowance for
doubtful accounts increased US$1.6 million from US$651,000 for the 1998 Interim
Period to US$2.3 million for the 1999 Interim Period, resulting from the
disconnection of local service customers who had unpaid balances reaching as far
back as the 1998 Fourth Quarter, and who had contested the bills as a result of
Hurricane Georges' interruption of telephone service. The Company allowed these
customers to be reconnected and provided for the deferral of payment of this
debt. Those clients who did not accept the payment plan were considered in
default and were disconnected. The Company set aside an amount equal to 100% of
the outstanding debt as an additional provision for the 1999 Second Quarter. As
a percentage of total operating revenues, general and administrative expenses
represented 27.6% for 1998 Interim Period and 29.2% for the 1999 Interim Period.
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Other costs increased by 48.8% from US$1.6 million the 1998 Interim
Period to US$2.4 million for the 1999 Interim Period, primarily as a result of
increases in the cost of sale of customer premise equipment, residential
telephones and cellular handsets during the first six months of 1999.
OPERATING INCOME. Operating income increased 24.9% from US$13.7 million
for the 1998 Interim Period to US$17.1 million for the 1999 Interim Period, and
by 16.1% from US$7.5 million for the 1998 Second Quarter to US$8.8 million for
the 1999 Second Quarter. The Company's operating income declined from 23.7% of
total operating revenues for the 1998 Interim Period to 22.6% of total operating
revenues for the 1999 Interim Period, and from 24.6% for the 1998 Second Quarter
to 21.4% for the 1999 Second Quarter due to the one-time charge in allowances
for doubtful accounts.
OTHER INCOME (EXPENSES). Other expenses increased by 7.8% from
US$6.8 million for the 1998 Interim Period to US$7.3 million for the 1999
Interim Period, and by 17.0% from US$3.0 million for the 1998 Second Quarter to
US$3.5 million for the 1999 Second Quarter, due to higher long term debt
outstanding as a result of the issuance of US$200 million aggregate principal
amount of the Company's 11 3/8% Senior Notes due 2004, and higher net notes
payable for the period as a result of additional short term financing acquired
by the Company.
NET EARNINGS. Net earnings increased by 42.3% from US$ 6.9 million
during the 1998 Interim Period to US$ 9.8 million during the 1999 Interim
Period, and by 15.5% from US$4.5 million for the 1998 Second Quarter to
US$5.2 million for the 1999 Second Quarter. On a per share basis, earnings
increased from US$0.33 per share for the 1998 Interim Period to US$0.40 per
share for the 1999 Interim Period. Earnings per share were US$ 0.21 for both the
1998 and 1999 Second Quarter. The weighted average number of shares outstanding
used in the calculation at June 30, 1998 was 21,044,544 compared to 24,844,544
at June 30, 1999. On a comparable basis using the total number of shares
outstanding at June 30, 1999, earnings per share would have been US$0.18 for the
1998 Second Quarter. Net earnings represented 12.0% of total operating revenues
for the 1998 Interim Period compared to 13.0% for the 1999 Interim Period, and
14.7% of total operating revenues for the 1998 Second Quarter compared to 12.7%
for the 1999 Second Quarter.
EBITDA. Earnings before interest, taxes, depreciation and amortization
increased by 35.0% from US$24.4 million for the 1998 Interim Period to
US$32.9 million for the 1999 Interim Period, and by 28.6% from US$13.3 million
for the 1998 Second Quarter to US$17.1million for the 1999 Second Quarter.
Increased revenues improved EBITDA margins from 42.2% for the 1998 Interim
Period to 43.5% for the 1999 Interim. However, as a result of the one time
charge in allowance for doubtful accounts during the second quarter of 1999,
EBITDA margins declined from 43.3% for the 1998 Second Quarter to 41.8% for the
1999 Second Quarter.
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 functional currency was difficult, and the Company
used the Dominican peso as its functional currency. However, in the Company's
opinion, with the issuance of the Senior Notes, the Company's cash flows and
financial results of operations are more appropriately presented in the U.S.
dollar as the functional currency. Effective January 1, 1997, the Company
changed its functional currency from the Dominican peso to the U.S. dollar. The
Company's financial statements for periods prior to January 1, 1997 have not
been restated for this change in the functional currency. However, the Company
did retroactively change its reporting currency to the U.S. dollar.
The 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.
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LIQUIDITY AND CAPITAL RESOURCES
Substantial capital is required to expand and operate the Company's
telephone networks. During the second quarter of 1998 and 1999, the Company
expended US$46.8 million and US$40.2 million, respectively, for capital
expenditures. During 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 local access lines will total approximately
US$97.3 million for 1999, including US$66.0 million expended through June 30,
1999. The Company anticipates expending approximately US$32.8 million for the
expansion of its local network and 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. At June 30, 1999, the Company had 10,096 WLL
lines in service and anticipates that it will deploy capacity to connect
approximately 36,000 subscribers in the current year. The first stage of the
Company's WLL deployment covers approximately 60% of the area of Santo Domingo.
The second stage, completed in the second quarter of 1999, expanded coverage to
five additional cities, giving the WLL a system-wide coverage of over
4.0 million people. 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 financed 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. 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 and medium-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 fiscal year-end 1999. Net cash
provided by operating activities was US$19.5 million and US$7.2 million for the
second quarters of 1998 and 1999, respectively.
The Company had account receivables of US$15.9 million and
US$23.0 million and allowance for doubtful accounts of US$ 741,000, and
US$ 2.0 million at December 31, 1998 and June 30, 1999, respectively. The
increase in allowance for doubtful accounts was a one-time charge to cover the
disconnection of local service customers who had unpaid balances reaching as far
back as the fourth quarter of 1998, and who had contested the bills as a result
of Hurricane Georges' interruption of telephone service. The Company allowed
these customers to be reconnected and provided for the deferral of payment of
this debt. Those clients who did not accept the payment plan were considered in
default and were disconnected. The Company set aside an amount equal to 100% of
the outstanding debt as an additional provision for the second quarter of 1999.
The Company's total assets increased from US$444.8 million at
December 31, 1998 to US$494.2 million at June 30, 1999. The Company's
indebtedness was approximately US$316.0 million at June 30, 1999, of which
US$200.0 million represented the Company's Senior Notes and US$115.9 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 from US$127.6 million at December 31,
1998 to US$137.4 million at June 30, 1999, as a result of an increase in
retained earnings for the period.
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The Company's indebtedness was approximately US$316.0 million at
June 30, 1999, of which US$200.0 million represented the Company's Senior Notes
and US$115.9 million represented short-term borrowings, including an aggregate
principal amount of US$32.0 million on industrial revenue bonds issued by the
Caribbean Basin Projects Financing Authority ("Carifa Bonds"). The Company has
irrevocably deposited with the trustee of the Carifa Bonds an amount estimated
to be sufficient to pay the principal amount of the Carifa Bonds at their
maturity on September 1, 1999 and to pay accrued interest on such bonds through
such date.
The Company has U.S. dollar- and peso-denominated credit facilities
available which permit the Company to borrow up to US$112.2 million, and which,
at June 30, 1999, had US$31.1 million available for borrowing. In January 1999,
the Santo Domingo branch of Citibank, N.A. increased the Company's existing US
dollar-denominated credit facility by US$11.0 million to US$20.0 million. At
June 30, 1999, the Company had approximately US$147,000 available for borrowing
under the Citibank facility. In January 1999, the Company obtained a US$10.0
million US dollar-denominated credit facility from Banco BHD, a Dominican bank,
all of which had been drawn upon at June 30, 1999. At June 30, 1999, the Company
had approximately US$66.6 million of short-term, US dollar- and peso-denominated
credit facilities with Dominican banks. The Company has been seeking additional
credit facilities with international banks to refinance its senior credit
facilities.
The Indenture governing the Company's Senior Notes restricts the
ability of the Company to incur additional indebtedness. The Company may incur
additional indebtedness if, after giving effect to the incurrence of such
additional indebtedness, the leverage ratio (as defined in the Indenture) of the
Company for the Company's most recently ended four full fiscal quarters prior to
such incurrence does not exceed 4.0 to 1.0 determined on a pro forma basis.
Notwithstanding the foregoing debt incurrence test, in general, the Company is
permitted to incur the following indebtedness:
. up to an aggregate of US$50.0 million at any one time outstanding
of (i) one or more senior term or revolving credit facilities
with commercial banks or financial institutions of a type
typically entered into by commercial banks and financial
institutions and (ii) one or more commercial paper or other
senior securities programs of the Company;
. any indebtedness incurred in connection with the acquisition of
assets, rights and properties used in connection with a
telecommunications business, so long as the aggregate amount of
such indebtedness does not (i) exceed 80% of the total cost of
such assets, including the cost of design, development, site
acquisition, construction and integration or (ii) exceed 100% of
the cost of the assets, if the indebtedness was extended to cover
the assets excluding the cost of design, development, site
acquisition, construction and integration;
. indebtedness that was outstanding at August 21, 1997 or borrowed
under facilities that were outstanding at such date;
. up to an aggregate of US$10.0 million of additional indebtedness
at any one time outstanding;
. indebtedness which is (i) expressly subordinated to the Senior
Notes, (ii) has an aggregate principal amount less than two times
the aggregate net cash proceeds received by the Company from the
issuance of the Company's equity securities after August 21, 1997
and (iii) has a weighted average life to maturity (as defined in
the Indenture) equal to or greater than the weighted average life
to maturity of the Senior Notes;
. indebtedness incurred to refinance other indebtedness, subject to
certain restrictions;
. intercompany indebtedness; and
. hedging obligations incurred for the purpose of fixing or hedging
interest rate or foreign currency risk with respect to any
floating rate indebtedness.
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The Company does not believe that, at present, it is able to meet the
leverage ratio test set forth in the Indenture, and the Company has relied upon
the exceptions to the general restriction on the incurrence of additional
indebtedness. Of the US$83.9 million of indebtedness outstanding at June 30,
1999 (excluding the US$200.0 million aggregate principal amount of the Senior
Notes and the US$32.0 million aggregate principal amount of the Carifa Bonds),
US$26.6 million had been incurred in connection with the acquisition of assets,
rights and property related to the Company's telecommunications business,
US$50.0 million of indebtedness fit within the Indenture's US$50.0 million
senior indebtedness exception and US$7.3 million of indebtedness fit within the
Indenture's US$10.0 million other indebtedness exception.
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, and expects to have it operational by the third
quarter of 1999. With the new billing system, the Company will have completed
all programming, testing and implementation of all its systems that are
sensitive to Year 2000 Issues.
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 third 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 third
quarter of 1999. The effect on TRICOM's operations of not having these systems
remedied could be significant.
TRICOM believes that its Year 2000 assessment and remediation program
is approximately 100% complete with respect to its critical business systems and
85% 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.
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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 third 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 and anticipates that it will have tested such
plan by the third 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.
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ITEM 3. 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 June
30, 1999, 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 and US$171 million at
December 31, 1998 and June 30, 1999, respectively.
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
and June 30, 1999, the Company had US$47.3 million and US$83.9 million,
respectively, of short-term and medium-term borrowings, including trade finance,
outstanding from Dominican and international banks mostly denominated in US
dollars. During the 1999 Interim Period, the Company's short-term and medium-
term borrowings bore interest at rates ranging from 8.5% to 11.75% per annum,
except for borrowings denominated in Dominican pesos which bore annual interest
at 19.5%. A 10% increase in the average rate for TRICOM's short-term debt would
have decreased the Company's 1999 Interim Period net income by approximately
US$124,000.
The amount of short-term debt discussed above excludes US$32.0 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 the 1999
Interim Period, TRICOM generated revenues of US$15.4 million in US dollars and
US$25.5 million in Dominican pesos. In addition, at June 30, 1999, the Company
had US$80.8 million of US dollar-denominated debt and approximately US$3.1
million of Dominican peso-denominated debt outstanding. At June 30, 1999,
TRICOM had an indexed debt to the dollar of RD$36.2 million at a contracted
exchange rate of RD$16.05 per US$1.00, resulting in an obligation of US$2.3
million.
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 the 1999 Interim Period,
the average official exchange rate was RD$15.79 per US$1.00 while the average
private market rate was RD$16.04 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 the 1999 Interim Period, TRICOM
recognized an approximate US$309,000 foreign exchange gain. If the Dominican
peso had devalued by an additional 10% against the US dollar on average during
the 1999 Interim Period, then TRICOM would have realized a foreign exchange
gain of US$31,000.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party, other
than routine litigation incidental to the business of the Company which is not
otherwise material to the business or financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 6-K
(a) Exhibits.
None.
(b) Reports on Form 6-K. The Company filed with the Securities and Exchange
Commission Reports on Form 6-K on April 23, 1999 and May 17, 1999
reporting the Company's results of operations for the three months
ended March 31, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRICOM, S.A
Dated: August 16, 1999 By: /s/ Carl H. Carlson
-------------------
Carl H. Carlson
Executive Vice President
and Member of the
Office of the President
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