FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of: November 15, 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-_________
<PAGE>
TRICOM, S.A.
Quarterly Report
for the
Third Quarter
ended
September 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
September 30, 1999 (unaudited)............................................2
Consolidated Statement of Operations Three Months and
Nine Months ended September 30, 1998 and 1999
(unaudited)...............................................................4
Consolidated Statements of Cash Flows Nine Months Ended
September 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................................20
i
<PAGE>
GENERAL INTRODUCTION
Unless the context indicates otherwise, all references to (i) the
"Company" or "TRICOM" refer to TRICOM, S.A. and its consolidated subsidiaries
and their respective operations, and include TRICOM's predecessors, and (ii)
"GFN" refers to GFN Corporation Ltd. and its direct and indirect subsidiaries,
other than the Company and its subsidiaries, and include GFN's predecessors.
Presentation of Certain Financial Information
The Company prepares its consolidated financial statements in
conformity with generally accepted accounting principles in the United States.
The Company adopted the United States dollar as its functional currency
effective January 1, 1997.
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 September 30, 1999 was RD$15.98 = 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 November 11, 1999, the Private Market Rate was RD$16.14
= US$1.00.
Forward-Looking Statements
The statements contained in this Quarterly Report which are not
historical facts are forward-looking statements that involve risks and
uncertainties. Management cautions the reader that these forward-looking
statements are only predictions; actual events or results may differ materially
as a result of risks facing the Company. Such risks include, but are not limited
to, the following factors: competition; declining rates for international long
distance traffic; opposition to increased rates for basic local service; the
Company's significant capital expenditure requirements and its need to finance
such expenditures; the inability of the Company to expand its local access line
network in a timely manner and within the amount budgeted for such capital
expenditure program; the inability of the Company to manage effectively its
rapid expansion; the continued growth of the Dominican economy, demand for
telephone services in the Dominican Republic and moderation of inflation; and
the continuation of a favorable political and regulatory environment in the
Dominican Republic.
1
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRICOM, S.A. and Subsidiaries
Consolidated Balance Sheet
(In US$)
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, September 30,
---------------------- ----------------------
1998 1999
---------------------- ----------------------
ASSETS (Audited) (Unaudited)
Current assets:
Cash and cash equivalents US$ 15,377,410 US$ 5,210,549
Accounts receivable:
Customers 9,168,740 15,791,909
Carriers 4,153,003 8,471,134
Related parties 163,110 2,050,319
Officers and employees 275,069 323,902
Current portion of long term accounts receivable 75,071 18,061
Other 2,113,228 461,891
---------------------- ----------------------
15,948,221 27,117,217
Allowance for doubtful accounts (740,687) (2,316,171)
---------------------- ----------------------
Accounts receivable, net 15,207,534 24,801,046
Current portion of pledged securities 54,470,478 -
Inventories, net 8,687,356 9,982,675
Prepaid expenses 2,921,680 1,813,559
Deferred income taxes 556,949 613,152
---------------------- ----------------------
Total current assets 97,221,407 42,420,981
Long-term accounts receivable 91,556 89,715
Other investments 2,164,387 3,768,040
Property and equipment cost 365,682,963 474,725,950
Accumulated depreciation (35,226,515) (50,021,806)
---------------------- ----------------------
Property and equipment, net 330,456,448 424,704,144
Other assets at cost, net of amortization 14,880,805 19,203,953
TOTAL ASSETS US$ 444,814,603 US$ 490,186,833
====================== ======================
</TABLE>
2
<PAGE>
TRICOM, S.A.
Consolidated Balance Sheet
(in US$)
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, September 30,
---------------------- ----------------------
1998 1999
---------------------- ----------------------
(Audited) (Unaudited)
LIABILITIES & SHAREHOLDERS EQUITY Current liabilities:
Notes payable:
Borrowed funds-banks US$ 21,665,516 US$ 51,605,827
Borrowed funds-related parties 25,591,915 34,181,194
Current portion of long term debt - Carifa Loan 32,000,000 -
---------------------- ----------------------
79,257,431 85,787,021
Accounts payable:
Carriers 3,106,898 1,975,394
Suppliers 11,772,957 18,556,374
Related Parties - 965
Other 1,566,076 312,061
---------------------- ----------------------
16,445,931 20,844,794
Other liabilities 7,413,821 4,153,580
Accrued expenses 13,887,974 11,064,220
---------------------- ----------------------
Total current liabilities 117,005,157 121,849,615
Reserve for severance indemnities 42,886 11,103
Deferred income tax 205,258 205,258
Long-term debt:
Bank Credit Facility - 25,000,000
Senior Notes 200,000,000 200,000,000
---------------------- ----------------------
Total liabilities 317,253,301 347,065,976
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 September 30, 1999 3,750,000 3,750,000
Class B Stock at par value RD$10: Authorized
25,000,000 shares at December 31, 1998 and
September 30, 1999; 19,144,544 issued at December 31,
1998 and September 30, 1999 12,595,095 12,595,095
Additional paid-in-capital, excess over par 94,015,852 94,015,852
Legal Reserve 1,172,188 1,172,188
Retained earnings 18,051,924 33,611,479
Equity adjustment for foreign currency translation (2,023,757) (2,023,757)
---------------------- ----------------------
Shareholders equity, net 127,561,302 143,120,857
TOTAL LIABILITIES &
SHAREHOLDERS EQUITY US$ 444,814,603 US$ 490,186,833
====================== ======================
</TABLE>
3
<PAGE>
TRICOM, S.A. and Subsidiaries
Consolidated Statement of Operations
(In US$)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Month Period Ended Nine Month Period Ended
September 30, September 30,
----------------------------------------- -----------------------------------------
1998 1999 1998 1999
----------------- ----------------- ----------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Operating Revenues:
Toll US$ 4,465,767 US$ 6,209,343 US$ 13,327,639 US$ 16,534,758
International settlement 13,177,167 15,474,674 36,616,456 43,827,586
Local service 3,484,598 9,386,068 9,198,808 23,032,640
Cellular 5,443,230 6,794,377 14,734,640 18,619,788
Paging 1,109,492 603,990 3,556,468 2,177,239
Sale and lease of equipment 978,349 1,414,386 2,798,781 3,840,287
Installations 3,772,153 4,355,060 9,780,712 11,759,006
Other 205,150 730,927 274,313 902,600
----------------- ----------------- ----------------- -----------------
Total Operating Revenues 32,615,986 44,968,825 90,347,817 120,693,904
Operating Costs:
Satellite connections and carriers 7,604,076 12,400,327 23,433,672 30,740,297
Network depreciation 3,086,136 3,893,875 8,244,804 11,321,525
Expense in lieu of income taxes 2,575,250 2,955,787 6,719,661 9,141,938
General and administrative expenses 10,020,901 10,975,171 25,945,424 33,094,383
Depreciation expense 914,829 1,264,607 2,231,725 3,473,766
Other 753,710 1,229,318 2,341,223 3,591,584
----------------- ----------------- ----------------- -----------------
Total Operating Costs 24,954,902 32,719,085 68,986,509 91,363,493
Operating income 7,681,004 12,249,740 21,361,308 29,330,411
Other income (expenses):
Interest expense (3,799,246) (5,676,590) (12,041,255) (14,308,610)
Interest income 1,500,694 552,250 3,943,125 2,270,134
Foreign exchange gain (loss) (54,360) (991,387) (139,197) (517,359)
Other (83,732) (418,353) (961,862) (1,271,223)
----------------- ----------------- ----------------- -----------------
Total other expenses (2,436,644) (6,534,080) (9,199,189) (13,827,058)
----------------- ----------------- ----------------- -----------------
Earnings before Income Tax 5,244,360 5,715,660 12,162,119 15,503,353
Income Tax - Deferred credit - - - 56,203
Net earnings US$ 5,244,360 US$ 5,715,660 US$ 12,162,119 US$ 15,559,556
================= ================= ================= =================
EBITDA US$ 14,257,219 US$ 20,364,009 US$ 38,627,498 US$ 53,267,640
Earnings per share US$ 0.22 US$ 0.23 US$ 0.55 US$ 0.63
Weighted avg. number of shares
outstanding 23,311,211 24,844,544 22,311,211 24,844,544
</TABLE>
4
<PAGE>
TRICOM, S.A. and Subsidiaries
Consolidated Statement of Cash Flows
(In US$)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine Month Period
Ended September 30,
---------------------------------------------
1998 1999
------------------- --------------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net earnings (loss) US$ 12,162,119 US$ 15,559,556
Adjustments to reconcile net earnings (loss) and net cash provided by
operating activities:
Depreciation 10,546,556 14,795,291
Allowance for doubtful accounts (45,390) 1,575,484
Deferred income tax - benefit - (56,203)
Reserve for severance indemnities, net of payments (114,770) (31,783)
Net changes in assets and liabilities:
Accounts receivable (1,485,894) (11,168,995)
Inventories (5,633,229) (1,295,319)
Prepaid expenses 1,017,459 1,108,121
Long-term accounts receivable 856,915 1,841
Unearned interest (121,950) -
Other assets (4,899,041) (4,323,148)
Accounts payable 10,175,388 4,398,862
Other liabilities 1,306,943 (3,260,241)
Accrued expenses (286,898) (2,823,754)
------------------- --------------------
Total adjustments 11,316,089 (1,079,844)
------------------- --------------------
Net cash provided by operating activities 23,478,208 14,479,712
=================== ====================
Cash flows from investing activities:
Current Portion of Investments (31,719,879) -
Cancellation of investments 52,808,258 52,866,825
Acquisition of property and equipment (112,198,006) (109,042,987)
------------------- --------------------
Net cash used in investing activities (91,109,627) (56,176,162)
Cash flows from financing activities:
Borrowed funds (paid to) from banks 2,044,663 29,940,311
Borrowed funds (paid to) from related parties 13,565,170 8,589,278
Issuance (redemption) of short-term bonds 32,000,000 (32,000,000)
Long-term debt (32,000,000) 25,000,000
Issuance of common stock 68,062,182 -
------------------- --------------------
Net cash provided by financing activities 83,672,015 31,529,589
Net increase in cash and cash equivalents 16,040,596 (10,166,861)
Cash and cash equivalents at beginning of the period 5,732,505 15,377,410
Cash and cash equivalents at end of period US$ 21,773,101 US$ 5,210,549
=================== ====================
</TABLE>
5
<PAGE>
TRICOM, S.A. and Subsidiaries
Notes to Financial Statements
NOTE 1 - Basis of Presentation
The Company considers that all adjustments (all of which are normal
recurring accruals) necessary for a fair statement of financial position and
results of operations for these periods have been made; however, results for
such interim periods are subject to year-end audit adjustments. Results for such
interim periods are not necessarily indicative of results for a full year.
NOTE 2 - Calculation of EBITDA
EBITDA 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
digital cellular (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 leading participant in the market for international long distance
traffic between the Dominican Republic and the United States. TRICOM's network
is 100% digital and utilizes cutting edge technology. The Company is currently
deploying one of the World's largest CDMA-wireless local loop networks.
International Long Distance Services
TRICOM is a leading participant in the 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.
6
<PAGE>
Domestic Services
Local Service. TRICOM provides local exchange services to residential
and small business customers in densely populated areas of the Dominican
Republic's seven largest cities. As of September 30, 1999, the Company had
113,115 local access lines in service, including 10,193 net local access lines
installed during the third quarter of 1999. The Company anticipates that it will
install approximately 45,000 new lines in 1999. TRICOM uses both conventional
copper or fiber wirelines and digital Wireless Local Loop ("WLL") connections to
connect customers to its network. 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 line
installation in approximately 48 hours and to reach broader service areas than
previously possible with a traditional wireline network.
Cellular. As of September 30, 1999, the Company had 158,850 mobile
cellular clients. In August 1997, the Company introduced its "Amigo" prepaid
cellular card program and formed alliances with major consumer electronics
retailers to offer the Company's cellular service in conjunction with their sale
of handsets. As a result of these efforts, the Company's cellular subscriber
base grew by 78.5% from 88,990 subscribers as of September 30, 1998 to 158,850
subscribers as of September 30, 1999.
On April 26, 1999, the Company announced the launching of its
"Millennium" PCS digital wireless service. The service utilizes CDMA technology
which enables cellular customers in the Dominican Republic to enjoy higher sound
clarity and call quality than that of analog wireless services. The announcement
marked the completion of the first phase of the Company's PCS deployment, which
now serves 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 bringing the total population coverage base
to over 4 million. The Company believes that these programs are principal 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. As of September 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 Compania de Telefonos ("Codetel"), the
country's largest service provider. 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.
7
<PAGE>
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.
The following table sets forth the percentage contribution of each
category of revenues to total operating revenues for the period indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------------- -------------------------
1998 1999 1998 1999
---- ---- ---- ----
Toll............................................... 13.7% 13.8% 14.8% 13.7%
International ..................................... 40.4 34.4 40.6 36.3
Local service...................................... 10.7 20.9 10.2 19.1
Cellular........................................... 16.7 15.1 16.3 15.4
Paging............................................. 3.4 1.3 3.9 1.8
Sale and lease of equipment........................ 3.0 3.1 3.1 3.2
Installations...................................... 11.6 9.7 10.8 9.7
Other.............................................. 0.6 1.6 0.3 0.7
----------------
Note: Percentages may not add up to 100% due to rounding.
</TABLE>
8
<PAGE>
The following table sets forth certain items in the statements of
operations expressed as a percentage of total operating revenues for the period
indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------------- -------------------------
1998 1999 1998 1999
---- ---- ---- ----
Operating costs.................................... 76.5% 72.8% 76.4% 75.7%
Operating income................................... 23.5 27.2 23.6 24.3
Interest expense, net.............................. (7.0) (11.4) (8.9) (10.0)
Other income (expenses)............................ (7.5) (14.5) (10.2) (11.5)
Net earnings....................................... 16.1 12.7 13.5 12.8
EBITDA............................................. 43.7 45.3 42.8 44.1
</TABLE>
Three and Nine Months Ended September 30, 1998 Compared to the Same Periods in
1999
Operating Revenues. The Company's total operating revenues increased
33.6% from US$90.3 million for the nine-month period ended September 30, 1998
(the "1998 Interim Period") to US$ 120.7 million for the nine-month period ended
September 30, 1999 (the "1999 Interim Period"), and by 37.8% from US$ 32.6
million for the three-month period ended September 30, 1998 (the "1998 Third
Quarter") to US$ 45.0 million for the three-month period ended September 30,
1999 (the "1999 Third Quarter"). This growth stemmed primarily from increases in
revenues generated by the Company's local exchange network expansion and
international businesses and from contributions from the expansion of cellular
services.
Toll. Toll revenues increased 24.1% from US$13.3 million for the 1998
Interim Period to US$16.5 million for the 1999 Interim Period, and by 39.0% from
US$4.5 million for the 1998 Third Quarter to US$6.2 million for the same period
in 1999, as a result of higher domestic and outbound international traffic.
Domestic long distance minutes increased by 56.5% from 14.3 million minutes for
the 1998 Interim Period to 22.4 million minutes for the 1999 Interim Period, and
by 63.5% from 5.2 million in the 1998 Third Quarter to 8.5 million in the 1999
Third Quarter due to a higher number of local access lines in service. Outbound
international minutes increased by 31.8% from 16.3 million minutes for the 1998
Interim Period to 21.5 million for the 1999 Interim Period, and by 42.9% from
5.5 million in the 1998 Third Quarter to 7.9 million in the 1999 Third Quarter,
reflecting increased traffic volume from both local and cellular service
customers and increased distribution channels.
Interconnection revenues increased by approximately 60% from US$2.4
million for the 1998 Interim Period to US$3.8 million for the 1999 Interim
Period and by approximately 25% from US$1.0 million for the 1998 Third Quarter
to US$1.2 million for the 1999 Third Quarter. Toll revenues represented 14.8% of
total operating revenues for the 1998 Interim Period compared to 13.7% of total
operating revenues for the 1999 Interim Period, and 13.7% of total operating
revenues for the 1998 Third Quarter compared to 13.8% of total operating
revenues for the 1999 Third Quarter.
International. International revenues increased 19.5% from US$36.7
million for the 1998 Interim Period to US$43.8 million for the 1999 Interim
Period, and by 17.4% from US$13.2 million for the 1998 Third Quarter to US$15.5
million for the 1999 Second Quarter, primarily as a result of the growth of
inbound traffic volume received from the Company's U.S. based international
carrier, TRICOM USA. Inbound minutes increased by 63% from 143.6 million for the
1998 Interim Period to 234.2 million minutes in the 1999 Interim Period, and by
55.6% from 51.4 million for the 1998 Third Quarter to 80.0 million for the 1999
Third Quarter. TRICOM USA accounted for 55.7% and 59.9% of the total inbound
minutes in the 1998 Interim Period and the 1998 Third Quarter, respectively,
compared to 55.1% and 71.1% in the 1999 Interim Period and the 1999 Third
Quarter, respectively. Total international long distance minutes increased by
58.9% from 161.4 million for the 1998 Interim Period to 256.5 million in the
1999 Interim Period, and by 53.8% from 57.3 million for the 1998 Third Quarter
to 88.1 million for the 1999 Third Quarter. In-network termination of inbound
traffic increased from 29% in the 1998 Third Quarter to 33% for the 1999 Third
Quarter.
9
<PAGE>
The increase in international revenues was achieved despite the
continued trend of decreasing settlement rates for traffic between the United
States and the Dominican Republic. 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 40.6% of total operating revenues for the 1998 Interim Period
compared to 36.3% of total operating revenues for the 1999 Interim Period, and
40.4% of total operating revenues for the 1998 Third Quarter compared to 34.4%
of total operating revenues for the 1999 Third Quarter.
Local service. Local service revenues increased 150.4% from US$9.2
million for the 1998 Interim Period to US$23.0 million for the 1999 Interim
Period, and by 169.4% from US$3.5 million for the 1998 Third Quarter to US$9.4
million for the 1999 Third Quarter. Higher local service rates and continued
growth of the number of local lines in service served as catalysts for the
increases in local service revenues during both interim periods in 1999.
During the 1998 Interim Period, the Company added 28,452 net local
access lines, including 11,228 net local lines during the 1998 Third Quarter,
compared to 32,499 net local access lines added during the 1999 Interim Period,
including 10,193 net local access lines added during the 1999 Third Quarter. At
September 30, 1999, the Company had 113,115 local access lines in service,
including 16,313 Wireless Local Loop lines, compared to 71,647 local access
lines in service at September 30, 1998. As a result of a higher number of lines
in service, interconnection revenues related to local calls received from
Codetel increased 157.0% from US$747,000 for the 1998 Interim Period to US$1.9
million for the 1999 Interim Period, and by 189.3% from US$259,000 for the 1998
Third Quarter to US$749,000 for the 1999 Third Quarter.
On January 14, 1999, the Company announced price increases in
residential monthly rental 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 the per
minute rate 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 Third Quarter to US$0.011 per minute during the 1999
Third Quarter. As a result, measured local service revenues increased by 87.5%
from US$1.6 million during the 1998 Interim Period to US$3.0 million during the
1999 Interim Period, and by 97.2% from US$612,000 for the 1998 Third Quarter to
US$1.2 million during the 1999 Third Quarter. In addition, average monthly
rental charges increased by 89.4% from US$10.22 in the Third Quarter of 1998 to
US$19.35 in the Third Quarter of 1999. Local service rent revenues increased by
186.3% from US$5.1 million during the 1998 Interim Period to US$14.6 million
during the 1999 Interim Period, and by 206.3% from US$1.9 million during the
1998 Third Quarter to US$5.9 million during the 1999 Third Quarter. Local
service revenues represented 10.2% of total operating revenues for the 1998
Interim Period compared to 19.1% of total operating revenues for the 1999
Interim Period, and 10.7% of total operating revenues for the 1998 Third Quarter
compared to 20.9% of total operating revenues for the 1999 Third Quarter.
Cellular. Cellular revenues increased 26.4% from US$14.7 million for
the 1998 Interim Period to US$18.6 million for the 1999 Interim Period, and by
24.8% from US$5.4 million for the 1998 Third Quarter to US$6.8 million for the
1999 Third Quarter, primarily as a result of the growth in the Company's
cellular subscribers. During the 1998 Interim Period, the Company added 47,833
net cellular subscribers, including 12,895 subscribers during the 1998 Third
Quarter, compared to 50,318 net cellular subscribers added during the 1999
Interim Period, including 16,950 subscribers during the 1999 Third Quarter. At
September 30, 1999, the Company had 158,850 cellular subscribers compared to
88,990 at September 30, 1998. 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.
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As a result of a higher average subscriber base, airtime minutes
increased 33.1% from 69.1 million for the 1998 Interim Period to 92.0 million
for the 1999 Interim Period, and by 41.1% from 24.5 million for the 1998 Third
Quarter to 34.6 million for the 1999 Third Quarter. Interconnection revenues
associated with airtime traffic received from Codetel increased by 158% from
US$1.0 million in the 1998 Interim Period to US$2.7 million in the 1999 Interim
Period, and by 190.4% from US$284,000 in the 1998 Third Quarter to US$824,000 in
the 1999 Third 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 55% of the Company's
total airtime minutes and 55% of total cellular revenues in the 1999 Interim
Period. Prepaid cellular revenues increased by 90.1% from US$6.1 million in the
1998 Interim Period to US$11.6 million in the 1999 Interim Period, and by 57.8%
from US$2.7 million in the 1998 Third Quarter to US$4.2 million during the 1999
Third Quarter. The Company's average monthly churn rate for cellular services
declined from 4.0% for the 1998 Interim Period to 1.5% for the 1999 Interim
Period, and from 5.6% for the 1998 Third Quarter to 1.6% for the 1999 Third
Quarter. The Company calculates churn by dividing the number of subscribers
disconnected during a given period by the sum of subscribers at the beginning of
each month during such period. Cellular revenues represented 16.3% of total
operating revenues for the 1998 Interim Period compared to 15.4% of total
operating revenues for the 1999 Interim Period, and 16.7% of total operating
revenues for the 1998 Third Quarter compared to 15.1% of total operating
revenues for the 1999 Third Quarter.
Paging. Paging revenues decreased 38.8% from US$3.6 million for the
1998 Interim Period to US$2.2 million for the 1999 Interim Period, and by 45.6%
from US$1.1 million for the 1998 Third Quarter to US$604,000 for the 1999 Third
Quarter. The continued deceleration of this business line reflects the Company's
shift of focus to the cellular business by encouraging paging subscribers to
replace their paging services with prepaid cellular services.
At September 30, 1999, the Company had 29,039 paging subscribers
compared to 28,652 paging subscribers at September 30, 1998. The Company's
average monthly churn rate for paging services declined from 3.5% for the 1998
Interim Period to 2.2% for the 1999 Interim Period, and from 3.5% for the 1998
Third Quarter to 1.5% for the 1999 Third Quarter. Paging revenues represented
3.9% of total operating revenues for the 1998 Interim Period compared to 1.8% of
total operating revenues for the 1999 Interim Period, and 3.4% of total
operating revenues for the 1998 Third Quarter compared to 1.3% of total
operating revenues for the 1999 Third Quarter.
Sale and lease of equipment. Revenues from the sale and lease of
equipment increased 37.2% from US$2.8 million for the 1998 Interim Period to
US$3.8 million for the 1999 Interim Period, and by 44.6% from US$978,000 for the
1998 Third Quarter to US$1.4 million for the 1999 Third 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
1999 Interim Period. In addition, the Company has entered into arrangements for
the distribution of cellular services through major electronics retailers. The
Company believes that these arrangements will decrease equipment sales revenues
but will increase cellular service revenues through promoting additional
subscribers. Sale and lease of equipment revenues represented 3.1% of total
operating revenues for the 1998 Interim Period compared to 3.2% of total
operating revenues for the 1999 Interim Period, and 3.0% of total operating
revenues for the 1998 Third Quarter compared to 3.1% of total operating revenues
for the 1999 Third Quarter.
Installations. Installation revenues increased 20.2% from US$9.8
million for the 1998 Interim Period to US$11.8 million for the 1999 Interim
Period, and by 15.5% from US$3.8 million for the 1998 Third Quarter to US$4.4
million for the 1999 Third Quarter, as a result of the Company's adding 114,701
combined gross wireline and cellular customers during the period. 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$222 during the 1998 Third Quarter to US$198 during the 1999
Third Quarter.
During the 1998 Interim Period, the Company installed 32,295 gross
local access lines and 71,622 gross cellular additions, including 12,706 gross
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local access lines and 26,191 gross cellular additions in the 1998 Third
Quarter, compared to 46,306 gross local access lines and 68,395 gross cellular
additions for the 1999 Interim Period, including 16,685 gross local access lines
and 24,040 gross cellular additions in the 1999 Third Quarter. The number of
gross local access lines additions during the 1999 Third Quarter represents the
highest quarterly number of gross line additions in the Company's history.
Wireless Local Loop lines accounted for 40% of gross additions for the 1999
Third Quarter. Installation revenues represented 10.8% of total operating
revenues in the 1998 Interim Period compared to 9.7% of total operating revenues
for the 1999 Interim Period, and 11.6% of total operating revenues for the 1998
Third Quarter compared to 9.7% of total operating revenues for the 1999 Third
Quarter.
Operating Costs. Major components of operating costs are (a) carrier
costs, which include amounts owed to foreign carriers for the use of their
networks for termination of outbound traffic, (b) interconnection costs, which
are access charges paid to Codetel, (c) depreciation of network equipment and
leased terminal equipment, (d) payments for international satellite circuit
leases, (e) expenses in lieu of income tax, (f) general and administrative
expenses, 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 32.4% from US$69.0
million for the 1998 Interim Period to US$91.4 million for the 1999 Interim
Period, and by 31.1% from US$25.0 million for the 1998 Third Quarter to US$32.7
million for the 1999 Third Quarter. The increase in operating costs was
primarily the result of higher satellite connection and carrier costs, general
and administrative expenses, and depreciation associated with the Company's
continued capital investment program. Operating costs represented 76.4% of total
operating revenues for the 1998 Interim Period compared to 75.7% of total
operating revenues for the 1999 Interim Period.
Satellite connections and carrier costs increased by 31.2% from
US$23.4 million for the 1998 Interim Period to US$30.7 million for the 1999
Interim Period, and by 63.1% from US$7.6 million for the 1998 Third Quarter to
US$12.4 million for the 1999 Third Quarter, primarily as a result of a
substantial increase in outbound traffic and higher interconnection costs.
Outbound carrier costs increased by 57.3% from US$8.4 million in the 1998
Interim Period to US$13.2 million in the 1999 Interim Period. Interconnection
costs increased by 48.1% from US$9.3 million for the 1998 Interim Period to
US$13.8 million for the 1999 Interim Period, the result of a higher a proportion
of the inbound traffic terminating in the incumbent's network.
Network depreciation and depreciation expense increased 37.7% and 49.6%
from US$8.2 million and US$2.3 million, respectively, for the 1998 Interim
Period to US$11.3 million and US$3.5 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 36.0% from US$6.7 million for the 1998 Interim
Period to US$9.1 million for the 1999 Interim Period, and by 14.8% from US$2.6
million for the 1998 Third Quarter to US$3.0 million for the 1999 Third Quarter,
reflecting the increase in revenues derived from the Company's domestic and
international business.
General and administrative expenses increased 27.6% from US$26.0
million for the 1998 Interim Period to US$33.1 million for the 1999 Interim
Period, and by 9.5% from US$10.0 million in the 1998 Third Quarter to US$11.0
million in the 1999 Third Quarter, primarily as a result of increased personnel
costs due to a higher employee headcount, a higher level of allowance for
doubtful accounts, and higher commissions paid to sales staff and
intermediaries. At September 30, 1999, the Company had 1,517 employees compared
to 1,272 employees at September 30, 1998. As a result, personnel costs increased
by 29.9% from US$12.5 million for the 1998 Interim Period to US$16.3 million for
the 1999 Interim Period. The Company's allowance for doubtful accounts increased
by US$2.4 million from US$1.1 million for the 1998 Interim Period to US$3.5
million for the 1999 Interim Period as the result of the disconnection of local
service customers who had unpaid balances reaching as far back as 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 during the second quarter of 1999. Commissions increased by
18.4% from US$9.6 million in the 1998 Interim Period to US$11.3 million in the
1999 Interim Period. As a percentage of total operating revenues, general and
administrative expenses represented 28.7% for the 1998 Interim Period compared
to 27.4% for the 1999 Interim Period.
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Other costs increased by 53.4% from US$2.3 million for the 1998
Interim Period to US$3.6 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 1999 Interim Period.
Operating Income. Operating income increased 37.3% from US$21.4 million
for the 1998 Interim Period to US$29.3 million for the 1999 Interim Period, and
by 59.5% from US$7.7 million for the 1998 Third Quarter to US$12.3 million for
the 1999 Third Quarter. The Company's operating income improved from 23.6% of
total operating revenues for the 1998 Interim Period to 24.3% of total operating
revenues for the 1999 Interim Period, and from 23.5% for the 1998 Third Quarter
to 27.2% for the 1999 Third Quarter, as a result of improved margins in the
Company's local exchange and cellular services, as well productivity
enhancements.
Other Income (Expenses). Other expenses increased by 50.3% from US$9.2
million for the 1998 Interim Period to US$13.8 million for the 1999 Interim
Period, and by 168.2% from US$2.4 million for the 1998 Third Quarter to US$6.5
million for the 1999 Third Quarter, due to higher long term debt outstanding as
a result of the issuance of US$200 million aggregate principal amount of the
Company's 11 3/8% Senior Notes due 2004, 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 27.9% from US$12.2 million
during the 1998 Interim Period to US$15.6 million during the 1999 Interim
Period, and by 9.0% from US$5.2 million for the 1998 Third Quarter to US$5.7
million for the 1999 Third Quarter. On a per share basis, earnings increased
from US$0.55 per share for the 1998 Interim Period to US$0.63 per share for the
1999 Interim Period, and increased from US$0.22 per share for the 1998 Third
Quarter to US$0.23 per share for the 1999 Third Quarter. The weighted average
number of shares outstanding used in the calculation at September 30, 1998 was
22,311,211 compared to 24,844,544 at September 30, 1999. Net earnings
represented 13.5% of total operating revenues for the 1998 Interim Period
compared to 12.9% for the 1999 Interim Period, and 16.1% of total operating
revenues for the 1998 Third Quarter compared to 12.7% for the 1999 Third
Quarter.
EBITDA. Earnings before interest, taxes, depreciation and amortization
increased by 37.9% from US$38.6 million for the 1998 Interim Period to US$53.3
million for the 1999 Interim Period, and by 42.8% from US$14.3 million for the
1998 Third Quarter to US$20.4 million for the 1999 Third Quarter. Increased
revenues improved EBITDA margins from 42.8% for the 1998 Interim Period to 44.1%
for the 1999 Interim, and from 43.7% for the 1998 Third Quarter to 45.3% for the
1999 Third Quarter.
Effects of Inflation
The annual inflation rates in the Dominican Republic in 1996, 1997 and
1998 were 4.0%, 8.0% and 7.8%, respectively. To date, the effects of inflation
on TRICOM's operations have not been significant.
Change in Functional and Reporting Currency
Through December 31, 1996, the Company used the Dominican peso as its
functional and reporting currency. While a significant portion of the Company's
revenues, assets and liabilities historically were denominated in U.S. dollars,
a clear determination of the functional currency was difficult, and the Company
used the Dominican peso as its functional currency. However, in the Company's
opinion, with the issuance of the Senior Notes, the Company's cash flows and
financial results of operations are more appropriately presented in the U.S.
dollar as the functional currency. Effective January 1, 1997, the Company
changed its functional currency from the Dominican peso to the U.S. dollar. The
Company's financial statements for periods prior to January 1, 1997 have not
been restated for this change in the functional currency. However, the Company
did retroactively change its reporting currency to the U.S. dollar.
The Company anticipates that this change in functional currency may
diminish the impact of any future devaluation of the Dominican peso against the
U.S. dollar.
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Liquidity and Capital Resources
Substantial capital is required to expand and operate the Company's
telephone networks. As of September 30, 1999 and 1998, the Company invested US$
109.0 million and US$ 112.2 million, respectively, for capital expenditures.
During the 1999 Interim Period, 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$130 million for 1999, including the US$109.0 million expended through
September 30, 1999. The Company anticipates expending approximately US$44.0
million for the expansion of its local network and US$15.0 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$4.0 million
and US$25.0 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, maintain
network capacity and 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 September 30, 1999, the Company had 16,313
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 covered 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 "ADR Offering"). 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 was funded with
investments in an escrow account, which resulted in the enhancement of the
Company's cash flow through fiscal year-end 1999. Net cash provided by operating
activities was US$23.5 million and US$14.5 million for the Third Quarters of
1998 and 1999, respectively.
The Company had account receivables of US$15.9 million and US$27.1
million and allowance for doubtful accounts of US$741,000, and US$2.3 million at
December 31, 1998 and September 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 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$490.2 million as of September 30, 1999. Shareholders' equity
increased from US$127.6 million at December 31, 1998 to US$143.1 million as of
September 30, 1999, as a result of an increase in retained earnings for the
period.
The Company's indebtedness was approximately US$310.8 million as of
September 30, 1999, of which US$200.0 million represents the Company's Senior
Notes, US$25.0 in medium-term borrowings, and US$85.8 million short-term
borrowings. The US$32.0 million in Caribbean Basin Projects Financing Authority
Bonds ("Carifa Bonds") matured on September 1, 1999 and was paid in full.
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The Company has U.S. dollar- and peso-denominated approved credit
facilities which permit the Company to borrow up to US$ 158.9 million, and
which, as of September 30, 1999, had US$ 47.4 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$20.0 million. As of September 30, 1999, the Company had approximately US$
383,000 available for borrowing under the Citibank facility. In January 1999,
the Company obtained a US$10.0 million US dollar-denominated credit facility
from Banco BHD, a Dominican bank, all of which had been drawn upon as of
September 30, 1999. In August 1999, the Company obtained a US$ 6.3 million
credit facility (RD$ 100.0 million) for direct borrowings and/or trade finance
from a Dominican Bank, Banco Mercantil, of which no amount had been drawn upon
as of September 30, 1999. In addition, TRICOM obtained a US$5.0 million dollar
denominated short-term credit facility from Hamilton Bank for direct borrowings
and trade finance, of which no amount had been drawn upon as of September 30,
1999. On September 30, 1999, the Company had approximately US$ 78.1 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$10.0 million of additional indebtedness
at any one time outstanding;
* indebtedness which is (i) expressly subordinated to the Senior
Notes, (ii) has an aggregate principal amount less than two times
the aggregate net cash proceeds received by the Company from the
issuance of the Company's equity securities after August 21, 1997
and (iii) has a weighted average life to maturity (as defined in
the Indenture) equal to or greater than the weighted average life
to maturity of the Senior Notes;
* indebtedness incurred to refinance other indebtedness, subject to
certain restrictions;
* intercompany indebtedness; and
* hedging obligations incurred for the purpose of fixing or hedging
interest rate or foreign currency risk with respect to any
floating rate indebtedness.
The Company does not believe that, at present, it is able to meet the
leverage ratio test set forth in the Indenture, and the Company has relied upon
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the exceptions to the general restriction on the incurrence of additional
indebtedness. Of the US$ 110.8 million of indebtedness outstanding as of
September 30, 1999 (excluding the US$200.0 million Senior Notes), US$ 54.7
million had been incurred in connection with the acquisition of assets, rights
and property related to the Company's telecommunications business, US$ 46.1
million of indebtedness fits within the Indenture's US$50.0 million senior
indebtedness exception and US$ 10.0 million of indebtedness fits 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 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
assessments completed on the third quarter of 1997, TRICOM 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's plan to resolve Year 2000 Issues involved four phases:
assessment, remediation, testing and implementation. All of these phases have
been successfully completed, concluding the program of modifying and replacing
portions of the Company's software, as well as hardware and operating systems.
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 completed the implementation of its new billing system in
October 1999. This critical financial system was designed so as to be Year 2000
compliant. TRICOM has 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 before December 31, 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 fourth 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
95% complete with respect to its network. The total cost of the Year 2000
project is estimated at US$300,000 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 before December 31,
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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 December 31, 1999 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 fourth quarter of 1999. This contingency plan includes procedures to
ensure that every critical operation could be done manually if needed. 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 hold or issue financial
instruments for trading purposes.
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. As of
September 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$177 million at
December 31, 1998 and September 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 September 30, 1999, the Company had US$47.3 million and US$ 110.8 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 first nine months of 1999, the Company's short-term and
medium-term borrowings bore interest at rates ranging from 8.25% to 11.75% per
annum. The Company did not have borrowing denominated in Dominican pesos at
September 30, 1999. 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$451,000.
Foreign Exchange Risks
The Company is subject to currency exchange risks. During the 1999
Interim Period, TRICOM generated revenues of US$43.8 million in US dollars and
US$76.9 million in Dominican pesos. In addition, as of September 30, 1999, the
Company had US$ 110.8 million of US dollar-denominated debt outstanding. As of
September 30, 1999, TRICOM had an indexed debt to the dollar of RD$36.2 million
at a contracted exchange rate of RD$16.02 per US$1.00, resulting in a 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$15.80 per US$1.00 while the average
private market rate was RD$15.98 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$517,000 foreign exchange loss. 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 loss
of US$52,000.
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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
TRICOM held its annual shareholders' meeting in Santo Domingo on July
13, 1999. The shareholders elected directors and a vigilance officer and voted
upon certain general corporate matters as required by the Commercial Code of the
Dominican Republic and the By-Laws of the Company.
The shareholders elected the following nominees as directors: Manuel
Arturo Pellerano Pena, Hector Castro Noboa, Marcos J. Troncoso Mejia, Juan
Felipe Mendoza, Anibal de Castro, Raisa Gil de Fondeur, Richard W. Gasink,
Fernando Antonio Simo, Kevin Wiley, Jesus Barona, Fernando Antonio Rainieri and
Jose Manuel Villalvazo. Messrs. Wiley, Barona, Rainieri and Villalvazo were
elected as directors for the first time. All other nominees were elected for a
consecutive term. The shareholders elected the slate of directors with
193,284,260 votes in favor, 10,200 votes opposed and 12,037 abstentions. The
shareholders also elected Augustin Lizardo to act as TRICOM's vigilance officer
for another one-year term with 193,279,360 votes in favor, 14,100 votes opposed
and 13,037 abstentions.
The shareholders were asked to confirm the declaration made by the
Chairman of the Board of Directors of the amount of paid-in capital received
during fiscal year 1998. The shareholders confirmed the amount of paid-in
capital attributable to the offer and sale of American Depositary Shares
representing Class A Common Stock with 193,283,310 votes in favor, 5,000 votes
opposed and 18,187 abstentions.
The shareholders were asked to approve the written report presented by
Mr. Augustin Lizardo, TRICOM's vigilance officer, concerning the financial
condition of TRICOM and on the financial statements approved by the Board of
Directors in relation to the accounts for fiscal year 1998. The shareholders
approved this resolution with 193,277,060 votes in favor, 7,000 votes opposed
and 22,437 abstentions.
The shareholders were asked to release Mr. Augustin Lizardo, TRICOM's
vigilance officer, from liability for claims of TRICOM or the shareholders for
any actions taken by him during fiscal year 1998. The shareholders approved this
resolution with 192,481,477 votes in favor, 798,483 votes opposed and 26,537
abstentions.
The shareholders were asked to approve the written report of Mr. Manuel
Arturo Pellerano Pena, Chairman of the Board of Directors, concerning the
operation of the Company during fiscal year 1998 as well as on the actions taken
by the directors in connection with the performance of management during such
period. The shareholders approved this resolution with 193,274,710 votes in
favor, 8,700 votes opposed and 23,087 abstentions.
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The shareholders were asked to approve the financial statements of
TRICOM for fiscal year 1998. The shareholders approved this resolution with
193,276,960 votes in favor, 9,500 votes opposed and 20,037 abstentions.
The shareholders were asked to release the directors from liability for
claims of the Company or the shareholders for actions taken in their capacity as
directors during fiscal year 1998. The shareholders approved the resolution with
192,470,727 votes in favor, 813,033 votes opposed and 22,737 abstentions.
The shareholders were asked to declare TRICOM's earnings on a
consolidating and consolidated basis and to reserve 5% of the Company's profits
as required by the Commercial Code of the Dominican Republic. This resolution
was approved with 193,281,510 votes in favor, 10,000 votes opposed and 14,987
abstentions.
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 a Report on Form 6-K on August 16, 1999
reporting the Company's results of operations for the six
months ended June 30, 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: November 15, 1999 By: s/ Carl H. Carlson
------------------
Carl H. Carlson
Executive Vice President
and Member of the
Office of the President
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