<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM F-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TRICOM, S.A.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DOMINICAN REPUBLIC 481 NOT APPLICABLE
(State or other jurisdiction (Primary Standard Industrial Classification Code Number)
of (I.R.S. Employer
incorporation or Identification Number)
organization)
</TABLE>
TRICOM, S.A.
AVE. LOPE DE VEGA NO. 95
SANTO DOMINGO, DOMINICAN REPUBLIC
TELEPHONE: (809) 476-6000
(Address, including zip code, and telephone number of registrant's principal
executive offices)
CT CORPORATION SYSTEM
111 EIGHTH AVENUE, 13TH FLOOR
NEW YORK, NEW YORK 10011
(212) 894-8940
(Name, address, including zip code, and telephone number, of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN L. WASSERMAN, ESQ. JOHN D. WATSON, JR., ESQ.
PAUL, HASTINGS, LATHAM & WATKINS
JANOFSKY & WALKER LLP 1001 PENNSYLVANIA AVENUE, N.W.
399 PARK AVENUE SUITE 1300
NEW YORK, NEW YORK 10022 WASHINGTON, D.C. 20004
TELEPHONE: (212) 318-6000 TELEPHONE: (202) 637-2200
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------
If only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE AGGREGATE PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) UNIT(2) PRICE (1)(2) FEE(2)
<S> <C> <C> <C> <C>
Class A Common Stock, par value
RD $10 per share(3)............. 4,600,000 $22.0625 $101,487,500 $26,792.70
</TABLE>
(1) Includes securities which the underwriters have the option to purchase to
cover over-allotments, if any.
(2) The filing fee has been calculated pursuant to Rule 457(c) promulgated under
the Securities Act of 1933.
(3) A separate registration statement on Form F-6 will be filed with the
Securities and Exchange Commission to register the American Depositary
Shares evidenced by American Depositary Receipts issuable upon deposit of
the shares of Class A Common Stock registered hereby. Each American
Depositary Share represents one share of Class A Common Stock.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 20, 2000
PRELIMINARY PROSPECTUS
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT A SOLICITATION
FOR NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
<PAGE>
4,000,000 AMERICAN DEPOSITARY SHARES
[LOGO]
EACH REPRESENTING
ONE SHARE OF CLASS A COMMON STOCK
-----------------
This is an offering of American depositary shares by TRICOM, S.A. We are selling
all of the ADSs offered under this prospectus.
Each ADS represents one share of our Class A common stock. Our authorized
capital stock consists of Class A common stock and Class B stock. The economic
rights of each class are identical, but voting rights differ. Holders of the
Class A common stock are entitled to one vote per share and holders of the
Class B stock are entitled to ten votes per share. Both classes vote together as
a single class on all matters except any matter that would adversely affect the
rights of either class. Shares of Class B stock are convertible into shares of
Class A common stock on a one-for-one basis at the option of the holder.
Our ADSs are listed on the New York Stock Exchange under the symbol "TDR." The
last reported sale price of our ADSs on March 16, 2000 was $22.9375 per ADS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT FACTORS YOU SHOULD CONSIDER
BEFORE BUYING THE ADSS.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per
ADS Total
------ ------
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to us........................... $ $
</TABLE>
------------------------
The underwriters may purchase up to an additional 600,000 ADSs from us at the
public offering price less the underwriting discount to cover over-allotments.
The underwriters expect to deliver the ADSs against payment in New York, New
York on , 2000.
------------------------
JOINT BOOKRUNNERS
BEAR, STEARNS & CO. INC. MORGAN STANLEY DEAN WITTER
----------------
The date of this prospectus is , 2000.
<PAGE>
Map of the United States, Central and South America, and the Caribbean
showing the submarine fiber optic cable systems in which Tricom has interests
and Tricom's international gateway switches.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE ADSS BEING SOLD IN THE OFFERING AND
THE FINANCIAL STATEMENTS AND NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, INFORMATION CONTAINED IN THIS
PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OPTIONS TO PURCHASE ADDITIONAL ADSS IN
THE OFFERING WILL NOT BE EXERCISED.
TRICOM, S.A.
OVERVIEW
TRICOM is a leading integrated communications service provider in the
Dominican Republic. Through the only completely digital local access network in
the Dominican Republic, a wireless network covering 80% of the population and
our submarine fiber optic cable systems, we offer local, long distance, mobile,
Internet and broadband data transmission services. Through our subsidiary,
TRICOM USA, Inc., we own switching facilities in New York and are one of the few
Latin American long distance carriers licensed in the United States. In 1998, we
carried 46.4% of the southbound voice and data traffic from the United States to
the Dominican Republic.
Our recent success is reflected in the following period to period changes
from 1998 to 1999:
- Local access lines grew 47.5% to 118,926;
- Cellular and PCS subscribers increased 62.2% to 176,080;
- International long distance minutes increased 56.1% to 360.5 million;
- Revenue increased 36.1% to $170.8 million;
- Net income increased 23.1% to $22.0 million; and
- EBITDA increased 39.9% to $75.0 million.
Our business model has been based on aggressive marketing, strong customer
service, rapid deployment of state-of-the-art technologies and use of highly
integrated management information systems. We have built a strong brand name
since 1992 in the Dominican Republic. Today, our wireless network covers more
than 6.5 million people. In 1999 we launched a wireless local loop system in
areas of Santo Domingo and Santiago, the two largest cities in the Dominican
Republic, and in six other cities. Using wireless local loop technology we can
connect a customer within 48 hours, substantially less time than required for
wireline installation. We intend to grow our Dominican Republic business and in
addition, we intend to export our business model to selected Caribbean and
Central American markets, capitalizing on the expected growth and increasing
liberalization of their telecommunications markets.
Our largest shareholder is GFN Corporation Ltd., one of the Dominican
Republic's largest privately held companies, which owns the country's largest
insurance company and one of its largest banks, as well as other interests in
finance and publishing. Our second largest shareholder is Motorola, Inc. After
giving effect to this offering, GFN will own 39.8% and Motorola will own 26.5%
of our common stock. We believe that their involvement provides us with
important technical expertise, strong local market presence, leadership and
access to new markets.
MARKET OPPORTUNITIES
We believe that the Dominican telecommunications market represents an
attractive opportunity and that the following factors will continue to drive the
growth in this market:
- UNDERSERVED MARKET. According to the International Telecommunication Union
or ITU, at December 31, 1998, teledensity (the ratio of local access lines
to inhabitants) in the Dominican
1
<PAGE>
Republic was 9.3 telephone lines per 100 inhabitants, while the ratio on
that date was 17.2 in Costa Rica, 13.4 in Panama and 35.1 in Puerto Rico.
- AMONG THE FASTEST GROWING ECONOMIES IN LATIN AMERICA. According to the
information provided by the Central Bank of the Dominican Republic, GDP in
the Dominican Republic grew at an average annual rate exceeding 7% from
1993 through 1998. The Dominican Republic experienced real GDP growth of
7.3% in 1998 and 8.3% in 1999. This has made it one of the fastest growing
economies in Latin America. The World Bank projects growth for the
Dominican Republic to exceed 7% in 2000.
- STRONG GROWTH IN THE TELECOMMUNICATIONS SERVICE MARKETS. The
telecommunications service market in the Dominican Republic grew at an
average annual rate of 17.5% from 1993 to 1998 according to the Central
Bank of the Dominican Republic.
We believe significant opportunities also exist in several markets in the
Caribbean and Central America which share many of the characteristics presented
by the Dominican Republic for the past several years, including:
- rapidly growing economies;
- low penetration of telecommunications services;
- continuing privatization and liberalization of markets for
telecommunications services;
- current limited competition in the telecommunications service sector; and
- technological improvements that lower the cost or reduce installation time
for new access lines, enabling new entrants to compete more effectively.
At December 31, 1998, there were approximately 54 million inhabitants in our
targeted Caribbean and Central American markets, with teledensity ratios varying
from 0.8 to 35.1 lines per 100 inhabitants.
OUR STRATEGY
Our goal is to capitalize on our existing core businesses and competitive
skills to further build our market share and penetrate new markets. We intend
to:
LEVERAGE OUR ASSET BASE AND KEY STRENGTHS, INCLUDING OUR:
- switching facilities and international fiber optic submarine cable system;
- local exchange, wireless local loop, and mobile infrastructure;
- strong brand name recognition and marketing capabilities; and
- strong historic revenue and cash flow growth.
EXPAND EXISTING MARKET COVERAGE IN THE DOMINICAN REPUBLIC AND THE UNITED STATES
BY:
- focusing on high-growth market segments in the Dominican Republic,
including residential local and cellular and PCS services;
- expanding our long distance operations in the United States to target
additional ethnic and geographic markets and to expand our ownership and
control of distribution channels; and
- capitalizing on opportunities in the Dominican Republic created by the
growing digital economy to expand our broadband data transmission
business, Internet service provider, or ISP, business and e-commerce
operations.
2
<PAGE>
EXPAND INTO SELECTED CARIBBEAN AND CENTRAL AMERICAN MARKETS BY:
- selectively providing telecommunications services in attractive markets;
and
- applying our wireless operating experience, scalable back office systems
and marketing know-how to develop telecommunications operations.
------------------------
We are incorporated in the Dominican Republic. Our operations are
headquartered at Ave. Lope de Vega No. 95, Santo Domingo, Dominican Republic and
our telephone number at the above address is 809-476-6000. Our website address
is www.tricom.net. The information on our website is not part of this
prospectus.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Offering..................................... 4,000,000 ADSs offered by us
Number of shares of Class A common stock to 9,700,000 shares
be outstanding after this Offering.........
Number of shares of Class B stock to be 19,144,544 shares
outstanding after this Offering............
ADS/Share Ratio.............................. 1/1
Over-allotment Option........................ The underwriters may purchase up to an
additional 600,000 ADSs from us at the public
offering price less the underwriting discount
to cover over-allotments.
Voting Rights................................ Holders of Class A common stock are entitled
to one vote per share. Holders of Class B
stock are entitled to ten votes per share.
Both classes of capital stock vote together
as a single class on all matters submitted to
a vote of the shareholders except any matter
that would adversely affect the rights of
either class.
Conversion and Transfer of Class B Shares.... Shares of Class B stock are convertible into
shares of Class A common stock on a
one-for-one basis at the option of the holder
and may not be transferred except to
permitted transferees.
New York Stock Exchange Symbol............... "TDR"
Depositary................................... The Bank of New York
Use of Proceeds.............................. We intend to use the net proceeds for capital
expenditures and working capital.
THE CONCURRENT DEBT OFFERING
Aggregate Principal Amount................... $300 million of % senior notes due 2007.
Maturity..................................... , 2007.
Ranking...................................... The notes will be senior, unsecured
obligations of TRICOM, S.A. The notes will
not be secured or guaranteed by any of our
subsidiaries.
Certain Covenants............................ The indenture under which the notes are being
issued will contain covenants which, among
other
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
things and subject to important exceptions,
restrict our ability and the ability of our
subsidiaries to:
- borrow money;
- pay dividends on or purchase our stock;
- make investments;
- use assets as security in other
transactions; and
- sell assets or merge with or into other
companies.
Use of Proceeds.............................. We intend to use the net proceeds of the
concurrent debt offering to finance our
tender offer for the 11 3/8% senior notes due
2004, for repayment of debt, capital
expenditures and working capital.
</TABLE>
This offering and the concurrent debt offering are not contingent on each
other.
TENDER OFFER
We currently are offering to purchase by tender offer the $200 million in
principal amount of our 11 3/8% senior notes due 2004. Our offer is conditioned
upon the holders of these notes consenting to amendments to the indenture
governing the notes that would eliminate restrictive covenants, as well as other
conditions, including our obtaining acceptable financing in the concurrent debt
offering.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the ADSs.
ADDITIONAL INFORMATION
In this prospectus, references to "$," "US$, "U.S. dollars" or "dollars" are
to United States dollars, and references to "Dominican pesos" or "RD$" are to
Dominican pesos. We adopted the United States dollar as our functional currency
effective January 1, 1997 and all currency translations are made pursuant to
U.S. generally accepted accounting principles. This prospectus contains
translations of Dominican peso amounts into U.S. dollars at specified rates
solely for the convenience of the reader. These translations do not mean that
the Dominican peso amounts actually represent such U.S. dollar amounts or could
be converted into U.S. dollars at the rate indicated. Unless otherwise stated,
the Dominican peso amounts that appear in this prospectus have been translated
into United States dollars at an exchange rate of RD$16.05 = $1.00. This rate is
the private market rate, which is the average of prices of one U.S. dollar
quoted by certain private commercial banks as reported by Banco Central de la
Republica Dominicana, on December 31, 1999, the date of the most recent
financial information included in this prospectus. The Federal Reserve Bank of
New York does not report a noon buying rate for Dominican pesos. See "Exchange
Rates" for more information regarding rates of exchange. On March 13, 2000, the
private market rate was RD$16.25 = $1.00.
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following table provides summary financial and operating data of TRICOM
for the periods indicated. We prepare our consolidated financial statements in
conformity with U.S. generally accepted accounting principles. We have derived
the summary financial data from our consolidated financial statements, which
have been audited by KPMG, independent auditors. You should read the information
in the following tables in conjunction with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and the consolidated
financial statements included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)(1)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Operating revenues:
Toll..................................................... $ 15,511 $ 17,645 $ 23,118
International............................................ 39,432 50,332 60,592
Local service............................................ 6,412 12,942 33,859
Cellular and PCS......................................... 13,073 20,364 26,474
Paging................................................... 5,079 4,528 2,696
Sale and lease of equipment.............................. 5,502 4,115 7,690
Installations............................................ 5,071 12,937 15,502
Other.................................................... 21 2,640 889
-------- -------- --------
Total operating revenues............................... 90,102 125,501 170,819
-------- -------- --------
Operating costs:
Satellite connections and carrier costs.................. 31,271 32,309 43,688
Network depreciation..................................... 7,433 11,382 15,983
Expense in lieu of income taxes(2)....................... 6,248 9,562 12,764
General and administrative expenses...................... 25,631 39,379 51,501
Other operating costs.................................... 3,659 3,391 5,421
-------- -------- --------
Total operating costs.................................. 74,242 96,024 129,357
-------- -------- --------
Operating income........................................... 15,860 29,478 41,462
-------- -------- --------
Other income (expenses):
Interest expense, net.................................... (12,047) (12,873) (20,041)
Foreign currency exchange gain (loss).................... (706) 104 (203)
Gain on sale of land..................................... -- -- 898
Other.................................................... (83) 845 179
-------- -------- --------
Total other income (expenses).......................... (12,836) (11,924) (19,166)
-------- -------- --------
Earnings before income taxes, extraordinary item and
cumulative effect of accounting change................... 3,023 17,554 22,296
Income taxes............................................... -- 352 (142)
Extraordinary item......................................... (5,453)(3) -- --
Cumulative effect of change in accounting for organization
cost..................................................... -- -- (120)
-------- -------- --------
Net earnings (loss)........................................ $ (2,430) $ 17,906 $ 22,035(4)
======== ======== ========
Basic earnings per common share:
Earnings before extraordinary item and cumulative effect
of accounting change................................... $ 0.17 $ 0.78 $ 0.89
Extraordinary item....................................... (0.31)(3) -- --
Cumulative effect of accounting change................... -- -- --
-------- -------- --------
Net earnings (loss)...................................... $ (0.14) $ 0.78 $ 0.89(4)
======== ======== ========
Weighted average number of common shares outstanding....... 17,600 22,945 24,845
======== ======== ========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------
1999 1999
1997 1998 (ACTUAL) (AS ADJUSTED)(5)
-------- --------- --------- ----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 5,733 $ 15,377 $ 13,460 $113,856
Working capital (deficit)...................... 4,846 (19,600) (83,659) 81,137
Property, plant and equipment, net............. 202,978 330,456 455,045 455,045
Total assets................................... 321,144 444,815 531,478 631,874
Long-term debt and capital leases (excluding
current portion)............................. 232,000 200,000 240,413 340,413
Total indebtedness............................. 242,755 279,257 336,468 372,068
Shareholders' equity........................... 42,093 127,561 149,869 216,129
OTHER FINANCIAL DATA:
Capital expenditures........................... $ 92,668 $ 142,101 $ 145,426(7)
Net cash provided by operating activities...... 39,095 26,912 31,526
Net cash used in investing activities.......... (168,636) (121,171) (64,360)
Net cash provided by financing activities...... 132,059 104,065 30,966
EBITDA(6)...................................... 31,497 53,662 75,063
Ratio of EBITDA to net interest expense(4)..... 2.6x 4.2x 3.7x
Ratio of total indebtedness to EBITDA(4)....... 7.8x 5.2x 4.5x
Ratio of earnings to fixed charges(8).......... 0.9x 1.3x 1.3x
OTHER OPERATING DATA:
International minutes (in thousands)........... 157,411 231,075 360,532
Local access lines in service (at period
end)......................................... 43,195 80,616 118,926
Mobile cellular subscribers (at period end).... 41,107 108,532 176,080
</TABLE>
- --------------------------
(1) Except per share, ratios and other operating data.
(2) We make payments in lieu of income tax to the Dominican government in
accordance with the terms of our concession agreement. These payments
represent 10% of gross domestic revenues, after deducting charges for access
to the local network, plus 10% of net international revenues. Expense in
lieu of income taxes also includes a tax implemented in 1998 of 2% on
international settlement revenues collected. This tax amounted to
$0.3 million in 1998 and $0.6 million in 1999.
(3) Represents a write-off related to the refinancing of indebtedness.
(4) On a pro forma basis, giving effect, as of January 1, 1999, to this
offering, the concurrent issuance of $300 million in principal amount of
% senior notes due 2007 at an assumed interest rate of 12 1/2% per annum
and the application of the net proceeds of the notes issuance to purchase
the $200 million in principal amount of our 11 3/8% senior notes due 2004
and to retire $64.4 million of other indebtedness, our 1999 net income would
have been $8.7 million, our net earnings per share, $0.30, the ratio of
EBITDA to net interest expense, 2.3x, and the ratio of total indebtedness to
EBITDA, 5.0x. These pro forma results do not reflect extraordinary charges
to be incurred by us in connection with the extinguishment of the 11 3/8%
senior notes due 2004 which we estimate to be $20.4 million, including
$11.4 million of cash tender premium. The actual charges will be determined
and recorded in the period in which the tender offer is completed, which we
expect to be in the second quarter of 2000. As a result, we expect to report
a loss for this period.
(5) Gives effect to the (a) sale of ADSs in this offering at an assumed offering
price of $22.9375 per ADS, the sale of $300 million in principal amount of
the % senior notes due 2007, (c) the application of the estimated net
proceeds from both offerings and (d) the purchase of the 11 3/8% senior
notes due 2004 in the tender offer and associated extraordinary charges.
(6) EBITDA typically consists of earnings (loss) before interest and other
income and expenses, income taxes and depreciation and amortization. As
described in note 2, we make payments to the Dominican government in lieu of
income taxes. As a result, we calculate EBITDA prior to the deduction of
payments to the Dominican government in lieu of income taxes. 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.
(7) Includes capital lease obligations incurred during 1999 of $26.2 million.
(8) The ratio of earnings to fixed charges represents the number of times fixed
charges were covered by earnings. Earnings represents the sum of:
(a) pre-tax earnings, (b) fixed charges and (c) amortization of capitalized
interest less (d) interest capitalized and (e) cumulative effect of
accounting change for organizational costs. Fixed charges consist of
(a) expensed and capitalized interest, (b) amortized debt issuance costs and
(c) the interest component of rental expense. For 1997, fixed charges
exceeded earnings by $2.1 million.
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND OTHER
INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN THE ADSS.
RISKS RELATING TO OUR EXISTING OPERATIONS
OUR PRINCIPAL COMPETITOR IN THE DOMINICAN REPUBLIC, CODETEL, ENJOYS
SUBSTANTIALLY GREATER MARKET SHARE AND RESOURCES.
We compete primarily with Compania Dominicana de Telefonos C. por A. or
Codetel, a wholly owned subsidiary of GTE Corp. Codetel has an established
market presence, networks and resources substantially greater than ours. More
than 80% of the Dominican Republic's local access line customers are customers
of Codetel. The growth of our market share depends upon our ability to obtain
customers in areas that currently are not served or are underserved by Codetel
and to convince Codetel customers to either add, or switch to, the telephony
services we offer. If Codetel implements significant price reductions for
particular services we may be forced to reduce our rates in response in order to
remain competitive. In addition, Codetel could expend significantly greater
amounts of capital than are available to us in order to upgrade its network
and/or sustain price reductions over a prolonged period. Any such efforts by
Codetel could have a material adverse effect on our ability to increase or
maintain our market share and on our results of operations.
NEW ENTRANTS IN THE DOMINICAN MARKETS COULD INCREASE COMPETITION FOR OUR
SERVICES.
The Dominican government has granted telecommunications concessions to a
number of companies in the last several years. In 1999, France Telecom acquired
a company which had been granted a concession. While we believe that this
concession has expired and anticipate challenging the concession on this basis,
we expect that France Telecom will seek to use the concession to develop
wireless roaming services targeted at European travelers in the Dominican
Republic. In January 2000, Centennial Cellular Corp. acquired 70% of All America
Cables and Radio, Inc. an integrated telecommunications provider. We believe
that Centennial intends to expand All America's share of the Dominican market
for cellular and PCS services. We also compete with several other providers in
particular market segments, including the international long distance and
cellular markets. In the international long distance market, investment by U.S.
telecommunications companies in Dominican markets could limit the number of U.S.
carriers that would send a significant number of minutes to us or otherwise
adversely affect our ability to generate international settlement revenues. As a
result of these and other potential new entrants, we expect to face more
competition in the Dominican telecommunications market in the future, which
could have a material adverse effect on our ability to increase or even maintain
our market share.
SETTLEMENT RATES FOR INTERNATIONAL TRAFFIC FROM THE UNITED STATES AND PUERTO
RICO COULD CONTINUE TO DECLINE.
Revenues from incoming international long distance calls represented
approximately 44% of our operating revenues in 1997, 40% in 1998 and 35% in
1999. Approximately 98% of these revenues were attributable to calls originating
in the United States and Puerto Rico. Settlement rates for traffic between the
United States and the Dominican Republic have declined from $0.41 per minute
during 1996 to $0.14 per minute during 1999. We believe that competitive and
regulatory pressures could continue to push settlement rates lower. Future
decreases in settlement rates, without a corresponding increase in our
international long distance traffic from the United States, would reduce our
international settlement revenues, adversely affect the profit margins that we
realize on these revenues and have a material adverse effect on our business,
financial condition and results of operations.
8
<PAGE>
BECAUSE WE ARE RECEIVING AN INCREASING PORTION OF OUR INTERNATIONAL MINUTES FROM
U.S.-BASED RESELLERS, WE MAY EXPERIENCE SUBSTANTIAL FLUCTUATION IN OUR
INTERNATIONAL REVENUES.
Since TRICOM USA's inception in 1997, we have derived an increasing
proportion of international settlement revenues from U.S.-based resellers, which
are companies that typically buy long distance minutes in bulk and resell the
minutes to other companies or individual end users. During 1999, resellers
originated 42% of our international long distance minutes from the United States
to the Dominican Republic. While we enter into agreements with resellers, they
are not required to provide us with any specified amount of traffic. The volume
of minutes we receive from these resellers is highly volatile and this
volatility could adversely affect our business, financial condition and results
of operations.
EFFORTS TO MINIMIZE CREDIT RISKS MAY ADVERSELY AFFECT OUR EFFORTS TO EXPAND OUR
CUSTOMER BASE.
During 1996, we terminated service for a significant number of mobile
subscribers due to credit considerations, which adversely affected our results
of operations. Since that time, we have instituted measures to minimize consumer
credit risks. However, there can be no assurance that our efforts to minimize
consumer credit risks will continue to be successful as we expand and offer our
services across many different social and economic markets. Moreover, efforts to
minimize credit risks may limit the number of our new subscribers.
OUR NET GROWTH IN SUBSCRIBERS MAY BE REDUCED BY CUSTOMER DISCONNECTIONS OR
CHURN.
Our results of operations in the past have been, and in the future may be,
affected by subscriber disconnections. In order to realize net growth in
subscribers, disconnected subscribers must be replaced and additional
subscribers must be added. The sales and marketing costs associated with
attracting new subscribers are substantial, relative to the costs of providing
service to existing subscribers. Our average monthly disconnection rate, or
"churn rate," during 1999 was 1.8% for cellular and PCS subscribers and 1.8% for
local access line subscribers. If we are not able to maintain our credit
policies, or not otherwise able to limit churn, we will not experience net
growth in subscribers which could adversely affect our financial condition and
results of operations.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGES AND WE
MAY NOT HAVE SUFFICIENT RESOURCES TO KEEP PACE WITH CHANGES.
The telecommunications industry has been, and is expected to continue to be,
characterized by rapid technological change and evolving industry standards. In
order to remain competitive, we continually must anticipate, respond to and
utilize new technologies. While we believe that, for the foreseeable future, our
installed hardware and open standards network architecture are sufficient to
meet our strategic goals, we cannot predict the effect of technological changes
on our business. Furthermore, we cannot assure you that we will have the
resources to keep pace with changes in technology.
SPECIAL TAX PROVISIONS CONTAINED IN OUR CONCESSION AGREEMENT ARE REQUIRED TO BE
APPROVED BY THE DOMINICAN CONGRESS.
We entered into our existing concession agreement with the Dominican
government in 1996. It replaced an earlier concession agreement into which we
entered in 1990. Under the 1996 agreement, we do not pay income tax imposed on
other Dominican corporations. We have agreed to make payments to the Dominican
government, in lieu of income tax, in an amount equal to 10% of our gross
domestic revenues, after deducting local network access charges, plus 10% of our
net international settlement revenues. Under the Dominican Constitution,
provisions of agreements with the Dominican government that contain exemptions
from income tax only become effective upon approval by the Dominican Congress.
Neither our existing concession agreement, nor the concession agreements of
Codetel, All America Cables and Radio and other competitors, has been submitted
to the Dominican
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Congress for approval. We are not aware of any plans of the Dominican government
to submit any concession agreements to the Dominican Congress for approval.
If our concession agreement is presented to the Dominican Congress, it may
not validate those provisions of the concession agreement relating to the
payment of taxes. Pellerano & Herrera, our Dominican counsel, has advised us
that if the tax provisions were not validated, the remaining terms of our
concession would continue to be governed by the concession agreement. We cannot
assure you that if our concession agreement is presented to, but not approved
by, the Dominican Congress, other terms of our concession would not be adversely
affected.
IF THE PROVISIONS OF OUR CONCESSION AGREEMENT RELATING TO THE PAYMENT OF TAXES
ARE DISAPPROVED, WE COULD BE SUBJECT TO A HIGHER TAX RATE.
Before entering into our existing concession agreement in 1996, Dominican
tax authorities asserted that we were required to pay taxes equal to 18% of
gross domestic revenues, as was provided in the concession agreement which we
and the Dominican government entered into in 1990. If the provisions relating to
the payment of taxes in the 1996 concession agreement were to be disapproved by
the Dominican Congress, we believe that Dominican tax law would require the
payment of a tax equal to 25% of our adjusted net income, the current rate
generally applicable to Dominican corporate taxpayers. We cannot assure you that
the calculation of taxes on either basis would not result in our paying greater
taxes than we would otherwise pay under the terms of our current concession
agreement.
CELLULAR AND PCS FRAUD INCREASES OUR EXPENSES.
The fraudulent use of cellular and PCS telecommunications networks imposes a
significant cost upon cellular and PCS service providers who must bear the cost
of services provided to fraudulent users. We suffer losses of revenue as a
result of fraudulent use, and we also suffer cash costs due to our obligation to
reimburse carriers for the cost of services provided to some fraudulent users.
Although technology has been developed to combat the fraudulent use of
telecommunications networks, this technology does not eliminate fraudulent use
entirely. We must make significant expenditures periodically to acquire, upgrade
and use anti-fraud technology. We have implemented fraud detection and
prevention technology. We cannot assure you, however, that the anti-fraud
technology that we have implemented thus far will continue to be effective in
detecting and preventing fraud. If our anti-fraud technology becomes obsolete,
we will once again have to make significant expenditures to acquire and use
anti-fraud technology.
RISKS RELATING TO OUR EXPANSION STRATEGY
WE MAY NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLAN ON SCHEDULE.
We intend to significantly expand our presence in Dominican and other
markets. We may experience delays as a result of any number of reasons,
including capital shortfalls, the failure of contractors and suppliers to
deliver services and products in a timely manner and our inability to meet our
own installation schedules or to obtain required regulatory approvals,
particularly in markets new to us that are outside of the Dominican Republic.
There can be no assurance that we will be able to implement our business plan in
a timely manner. If we are not able to expand in accordance with our plans, the
growth of our business and the value of the ADSs could be materially adversely
affected.
WE CANNOT BE CERTAIN THAT WE WILL BE ABLE TO FINANCE OUR CAPITAL EXPENDITURE
NEEDS.
We currently anticipate that in 2000 our capital expenditures will be
approximately $186 million. We believe that we will continue to expend
substantial amounts in subsequent years. We believe our cash generated by
operations and the proceeds of this offering and the concurrent debt offering
will be sufficient to fund our expected capital expenditures through the middle
of 2001. In the event additional
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funds are required, we would be forced to obtain them through additional
borrowings, including, if available, vendor financing, or through the public or
private sale of debt or equity securities. Acquisitions or investments, for
example, the investment in Panama subject to a non-binding memorandum of
understanding that we have executed, may require us to obtain additional
financing. There can be no assurance that additional financing will be available
to us or, if available, that it can be obtained on terms acceptable to us or
within limitations that are contained in our current or future financing
arrangements. Failure to obtain additional financing could result in the delay
or abandonment of some or all of our development and expansion plans and
expenditures, which could have a material adverse effect on our business
prospects.
WE DEPEND ON SHORT-TERM BORROWINGS IN THE DOMINICAN FINANCIAL MARKETS. THESE
BORROWINGS BEAR HIGH INTEREST RATES AND WE CANNOT BE CERTAIN THAT THEY WILL
CONTINUE TO BE AVAILABLE.
We fund a substantial portion of our capital expenditure and working capital
requirements with short-term borrowings in the Dominican financial markets.
These borrowings have maturities ranging up to 180 days and often are payable on
demand. At times, the cost of such short-term indebtedness has been as much as
30% per annum and adversely affected our net income. Moreover, from time to
time, the Dominican government has imposed limitations on loans by Dominican
banks in Dominican pesos in order to restrict the country's money supply and
curb inflation. This monetary policy has limited the sources of bank financing
and the amounts available to be borrowed from Dominican banks and increased the
costs of such borrowing. We cannot assure you that these short-term funding
sources will continue to be available if we require them.
SOCIAL, POLITICAL AND ECONOMIC CONDITIONS IN CARIBBEAN AND CENTRAL AMERICAN
MARKETS, INTO WHICH WE PLAN TO EXPAND, MAY CAUSE VOLATILITY IN OUR OPERATIONS
AND ADVERSELY AFFECT OUR BUSINESS.
We plan to expand into Caribbean and Central American telecommunications
markets in which we have not operated previously and these markets will present
numerous challenges to us. Poor social, political and economic conditions,
matters over which we have no control, could inhibit our market entry. Social
and political conditions in parts of the Caribbean and Central American markets
are volatile and may cause the nature and results of our operations to
fluctuate. This volatility could make it difficult for us to sustain our
operations in these markets, which could have an adverse effect on our business.
Historically, volatility in parts of the Caribbean and Central American markets
has been caused by:
- significant governmental influence over many aspects of local economies;
- political and economic instability;
- unexpected changes in regulatory requirements;
- social unrest;
- slow or negative growth;
- imposition of trade barriers;
- wage and price controls; and
- natural disasters.
WE WILL MAKE SIGNIFICANT EXPENDITURES TO IMPLEMENT OUR EXPANSION STRATEGY WHICH,
INCLUDING OUR DIVERSIFICATION INTO THE INTERNET, COULD RESULT IN NEGATIVE CASH
FLOW AND REDUCED EARNINGS BEFORE THEY GENERATE REVENUES.
Expansion of our network and services in accordance with our strategy will
require significant expenditures for operating expenses and other capital
expenditures, a substantial portion of which will be incurred before the
realization of revenues from expansion. These expenditures will result in
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negative cash flow and losses from new operations until we are able to establish
a customer base large enough to generate revenues in excess of the costs
incurred to expand our network and operations. Our future working capital
requirements will depend upon a number of factors, including marketing expenses,
staffing levels, customer growth and construction costs as well as other factors
that are beyond our control. These factors will adversely affect our operating
margins and earnings. For the next several years, we do not expect our
operations to generate sufficient cash flows to fund both our operating and
capital requirements.
OUR ENTRY INTO NEW MARKETS AND BUSINESSES WILL ADVERSELY AFFECT OUR
PROFITABILITY.
Our entry into telecommunications markets in other parts of the Caribbean
and Central America, and our diversification into the Internet, are new
operations for us. These businesses will be subject to the risks, uncertainties
and problems frequently encountered by businesses in early stages of operations,
particularly in new and rapidly developing markets. We cannot assure you that
our revenues from these operations will exceed operating expenses attributable
to them and we expect that we will sustain losses from these operations for at
least the next several years. Losses from these businesses will adversely affect
our profitability.
OUR EXPANSION IN DOMINICAN AND NEW MARKETS MAY STRAIN OUR MANAGEMENT RESOURCES.
Our expansion will continue to increase our operating complexity as well as
the level of responsibility for both existing and new management personnel. Our
ability to effectively manage our expansion will require us to continue to
implement and improve our operational and financial systems and expand, train
and manage our employee base. Our inability to manage effectively our expansion
could have a material adverse effect on our business. The telecommunications
industry is information-intensive and we rely on our management information
systems to generate accurate information for employees and customers. As our
customer and employee base expands, we will be required to expand and upgrade
our information systems to manage the increased volume of information. There can
be no assurance that we will be able to expand or upgrade our systems in
response to such demands.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR ABILITY TO FUND
EXPANSION AND OUR COMPETITIVE POSITION.
We are highly leveraged. At December 31, 1999, we had outstanding
approximately $336.5 million in aggregate principal amount of indebtedness,
including capital leases, and total shareholders' equity of approximately
$149.9 million. Giving effect to the concurrent debt offering, the repayment of
$64.4 million of debt and the purchase in a tender offer of $200 million in
principal amount of our 11 3/8% senior notes due 2004, at December 31, 1999, we
would have had outstanding approximately $372.1 million in aggregate principal
amount of indebtedness and total shareholders' equity of approximately
$216.1 million, assuming completion of this offering at a price of $22.9375 per
ADS. The degree to which we are leveraged could have important consequences to
us, including the following:
- a substantial portion of our cash flow must be used to service our
indebtedness. Therefore, our cash flow available for use in our business
will be reduced;
- our high degree of leverage could increase our vulnerability to changes in
general economic conditions;
- our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes
could be impaired; and
- we are much more leveraged than Codetel, which may be a competitive
disadvantage in our principal market.
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FINANCIAL AND OPERATING RESTRICTIONS IMPOSED BY THE INDENTURES FOR OUR 11 3/8%
SENIOR NOTES DUE 2004 AND FOR THE % SENIOR NOTES DUE 2007 COULD LIMIT OUR
ABILITY TO EXECUTE OUR STRATEGY.
The indentures for our 11 3/8% senior notes due 2004 and for the % senior
notes due 2007 impose financial restrictions on us. Such restrictions affect,
and in certain cases significantly limit or prohibit, our ability to incur
additional indebtedness, pay dividends, create liens on our assets, sell assets,
engage in mergers or acquisitions or make investments, including investments
that may be important in the implementation of our expansion strategy. Failure
to comply with any of these covenants could result in a default under the notes,
which could result in an acceleration of this and other indebtedness.
OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN DEPENDS ON FACTORS OVER WHICH WE HAVE
LIMITED OR NO CONTROL.
Our ability to expand international long distance, to implement PCS and
cellular services and to provide high speed Internet access in markets outside
the Dominican Republic in accordance with our plans will depend on a number of
factors over which we have limited or no control. These factors include our
ability to:
- acquire concessions for spectrum at commercially acceptable prices;
- obtain other required governmental approvals;
- negotiate reasonable interconnection agreements;
- obtain rights of way for fiber optic cables;
- successfully deploy technologies;
- secure leases for base stations; and
- secure agreements with local retailers for the fulfillment of customer
purchases in our e-commerce operations.
Our inability to accomplish any of these could delay, impede or reduce the
scope of the implementation of new services and result in a material adverse
effect on our existing and planned business, financial condition and results of
operations.
IF THE INTERNET IS NOT WIDELY ACCEPTED IN OUR TARGET MARKETS AS A MEDIUM FOR
ADVERTISING AND E-COMMERCE, OUR INTERNET ACCESS BUSINESS MAY NOT BE SUCCESSFUL.
If the Internet is not accepted as a medium for advertising and commerce,
our Internet access business and our e-commerce operations may not be
successful. The adoption of the Internet in the Caribbean and Central America
requires the acceptance of a new method of conducting business and exchanging
information. As a result, we cannot gauge its effectiveness or long-term market
acceptance as compared with traditional media.
THE CARIBBEAN AND CENTRAL AMERICAN INTERNET ACCESS AND E-COMMERCE MARKETS ARE IN
AN EARLY STAGE OF DEVELOPMENT AND MUST GROW FOR OUR STRATEGY TO BE EFFECTIVE.
The Internet access markets in the Caribbean and Central America are not
well developed and Internet use in these markets may be inhibited for a number
of reasons, including:
- cost of computer hardware;
- the cost of Internet access;
- the price and availability of Internet access devices;
- concerns about security, reliability and privacy;
- lack of widespread acceptance of electronic payment methods;
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- concerns about ease of use;
- low levels of credit card use;
- quality of service; and
- the need for improvements in telecommunications infrastructure in many of
our targeted markets.
Our Internet access and e-commerce operations will be materially and
adversely affected if Internet use in the Caribbean and Central America does not
grow or grows more slowly than we expect.
OUR INTERNET ACCESS AND E-COMMERCE OPERATIONS WILL FACE COMPETITION FROM MORE
DEVELOPED COMPANIES WITH GREATER RESOURCES.
Many companies already provide connectivity services and e-commerce targeted
to Spanish-speaking audiences in Latin America, the United States and elsewhere.
Competition for users and e-commerce opportunities is intense and is expected to
increase significantly in the future, particularly because there are no
substantial barriers to entry. Our competitors may achieve greater market
acceptance and brand recognition and have greater financial, technical, and
marketing resources than we have. Increased competition could require us to
lower our prices and increase our selling and marketing expenses.
CHANGES IN THE LEGAL AND REGULATORY ENVIRONMENT FOR THE INTERNET INDUSTRY COULD
INCREASE OUR COSTS AND LENGTHEN THE PERIOD FOR OUR INTERNET OPERATIONS TO BECOME
PROFITABLE.
To date, government regulation has not materially restricted use of the
Internet in Caribbean and Central American markets. However, the legal and
regulatory environment pertaining to the Internet remains relatively undeveloped
and may change. New laws and regulations could be adopted, and existing laws and
regulations could be applied to the Internet and, in particular, to e-commerce.
New and existing laws and regulations could cover, among others, the following
issues:
- sales and other taxes;
- user privacy;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce;
- libel and defamation;
- copyright, trademark and patent infringement; and
- other claims based on the nature and content of Internet materials.
These changes also could slow the growth of the Internet, which could, in
turn, delay growth in demand for our Internet and e-commerce services and
adversely affect our Internet operations.
WE MAY BE SUBJECT TO CLAIMS BASED ON THE CONTENT WE PROVIDE THROUGH OUR
E-COMMERCE OPERATIONS.
The law in the Caribbean, Central America and the United States relating to
the liability of Internet service providers, like us, for activities of their
users is currently unsettled. In the United States, claims have been made
against Internet service providers and networks in the past for defamation,
negligence, copyright or trademark infringement, obscenity, illegal gambling,
personal injury or other theories based on the nature and content of information
that was posted online by their
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visitors. We could be subject to similar claims and incur significant costs in
their defense. In addition, we could be exposed to liability for the selection
of listings that may be accessible through our Internet access and e-commerce
operations or through content and materials that our users may post in
classifieds, message boards, chat rooms or other interactive services. It is
also possible that if any information provided through our services contains
errors, third parties could make claims against us for losses incurred in
reliance on the information. We offer web-based email services, which expose us
to potential liabilities or claims resulting from:
- unsolicited email;
- lost or misdirected messages;
- illegal or fraudulent use of email; or
- interruptions or delays in email service.
Investigating and defending these claims is expensive, even if they do not
result in liability.
WE MAY BE SUBJECT TO CLAIMS BASED ON PRODUCTS SOLD THROUGH OUR E-COMMERCE
OPERATIONS.
We have entered or will enter into arrangements to offer third-party
products and services through our e-commerce operations under which we may be
entitled to receive a share of revenues generated from these transactions. These
arrangements may subject us to additional claims including product liability or
personal injury from the products and services, even though we do not ourselves
provide the products or services. These claims may require us to incur
significant expenses in their defense or satisfaction.
Although we carry insurance, our insurance may not cover all potential
claims to which we are exposed or may not be adequate to indemnify us for all
liability that may be imposed. Any imposition of liability that is not covered
by insurance or is in excess of insurance coverage could have a material adverse
effect on our business, financial condition and results of operations. In
addition, the increased attention focused on liability issues as a result of
these lawsuits and legislative proposals could impact the overall growth of
Internet use.
OUR NETWORK OPERATIONS MAY BE VULNERABLE TO HACKING, VIRUSES AND OTHER
DISRUPTIONS.
"Hacking" involves efforts to gain unauthorized access to information or
systems or to cause intentional malfunctions or loss or corruption of data,
software, hardware or other computer equipment. Hackers, if successful, could
misappropriate proprietary information or cause disruptions in our services. We
do not process credit card transactions but rely on a bank with which we have a
relationship to process these transactions. The bank has implemented a number of
security measures, but we cannot assure you that these measures will be
effective. Security breaches could have a material adverse effect on our
business. In addition, the inadvertent transmission of computer viruses could
expose us to a material risk of loss or litigation and possible liability.
Moreover, if a computer virus affecting our system is highly publicized, our
reputation could be materially damaged and our user traffic may decrease.
RISKS RELATING TO OUR PRINCIPAL MARKET, THE DOMINICAN REPUBLIC
WE COULD BE ADVERSELY AFFECTED BY DOWNTURNS IN THE DOMINICAN ECONOMY.
Most of our operations are conducted in, and most of our customers are
located in, the Dominican Republic. Accordingly, our financial condition and
results of operations are substantially dependent on economic conditions in the
Dominican Republic. While the Dominican Republic's GDP has grown every year
since 1991, there can be no assurance that such growth will continue in the
future. Future developments in the Dominican economy could impair our ability to
proceed with our business strategies, our financial condition or our results of
operations. Our financial condition and results of
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operations also could be adversely affected by changes in economic or other
policies of the Dominican government or other political or economic developments
in or affecting the Dominican Republic, as well as regulatory changes or
administrative practices of Dominican authorities, over which we have no
control.
POVERTY AND SHORTAGES OF BASIC SERVICES IN THE DOMINICAN REPUBLIC COULD AFFECT
US ADVERSELY.
The Dominican Republic has widespread poverty. As recently as
November 1997, the country experienced riots, partly as a result of price
increases and shortages of water and electricity. There can be no assurance that
similar incidents in the future will not have a material adverse effect on us.
Several state-owned companies have been privatized, including the country's
state-owned electric utility company, and there can be no assurance that the
implementation of such privatizations will not cause social unrest.
YOU MAY NOT BE ABLE TO ENFORCE CLAIMS IN THE DOMINICAN REPUBLIC BASED ON U.S.
SECURITIES LAWS.
A majority of our directors and all of our officers and our external
auditors, KPMG, reside outside the United States. A substantial portion of our
assets and the assets of these persons are located outside the United States. As
a result, it may not be possible for investors to effect service of process
within the United States upon us or these other persons to enforce judgments
obtained against us or against them in United States courts predicated upon the
civil liability provisions of the United States federal securities laws, other
federal laws of the United States or laws of the several states of the United
States.
No treaty currently exists between the United States and the Dominican
Republic providing for reciprocal enforcement of foreign judgments. We have been
advised by our Dominican counsel, Pellerano & Herrera, that there is doubt as to
(1) the ability of a plaintiff to bring an original action in a Dominican court
which is predicated solely upon the United States federal securities laws, other
federal laws of the United States or laws of the several states of the United
States and (2) the enforceability in Dominican courts of judgments of United
States courts obtained in actions predicated upon civil liability provisions of
the United States federal securities laws, other federal laws of the United
States or laws of the several states of the United States.
Pellerano & Herrera also has advised us that the enforceability of actions
brought in Dominican courts of liabilities predicated on U.S. laws would require
compliance with certain procedures, including the validation by Dominican courts
of decisions rendered by United States courts. Compliance with such procedures
could take a substantial amount of time, and local defendants could assert
defenses to enforcement based on noncompliance with such procedures. Foreign
plaintiffs bringing original actions in a Dominican court also can, at the
request of the defendant, be required to post a litigation bond in an amount
established by such court in its discretion.
The Dominican legal system is based upon civil law principles according to
which judges decide both the facts and legal issues of a case and they are not
bound by legal precedents. As a result, judges have broader discretion in
reaching decisions than do judges in the United States. The United States
Department of Commerce has reported that Dominicans and foreign observers have
criticized the Dominican judicial system for what they perceive as an
inequitable resolution of business disputes. The Dominican legal system, coupled
with the fact that substantially all of our assets are located in the Dominican
Republic, may present substantial obstacles to the enforcement of judgments
against us as well as our directors and officers in the Dominican Republic.
ALTHOUGH INFLATION IN THE DOMINICAN REPUBLIC HAS BEEN MODERATE SINCE 1990,
INCREASES IN THE INFLATION RATE WOULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS.
Inflation has moderated in the Dominican Republic since 1991, following an
austerity program instituted by the Dominican government. According to the
Central Bank, the annual rates of inflation
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was 9.2% for 1995, 3.9% for 1996, 8.4% for 1997, 7.8% for 1998 and 5.1% for
1999. However, the country has experienced high levels of inflation in the past,
including an inflation rate of 79.9% for 1990. Any increase in the value of the
U.S. dollar against the Dominican peso directly affects the Dominican Republic's
inflation rate because the Dominican Republic relies heavily on imports from the
United States of raw materials and consumer goods. High inflation levels could
adversely affect the Dominican Republic's economy and our business, financial
condition and results of operations or the value of the ADSs. There can be no
assurance that inflation in the Dominican Republic will not change significantly
from current levels.
LOCAL CURRENCIES USED IN THE CONDUCT OF OUR BUSINESS ARE SUBJECT TO DEPRECIATION
OR VOLATILITY.
The Dominican government's economic policies and any future changes in the
value of the Dominican peso against the U.S. dollar could adversely affect the
U.S. dollar value of the ADSs. For 1997, 1998 and 1999, we earned between 55%
and 65% of our operating revenues in Dominican pesos and the remainder of our
operating revenues in foreign currency, primarily in U.S. dollars. The
percentage of operating revenues in Dominican pesos could increase if we
successfully increase our share in Dominican local markets in accordance with
our strategy. The Dominican peso has depreciated in value against the U.S.
dollar in the past and may be subject to fluctuations in the future. We
generally are required to surrender foreign currency revenues to the Central
Bank at the official rate and acquire foreign currency at the private market
rate in order to pay foreign currency-denominated obligations. As a result, we
may lose the spread on foreign exchange transactions. In addition, we must pay a
5% commission to the Central Bank when we convert Dominican pesos into U.S.
dollars. Most of our outstanding indebtedness is U.S. dollar-denominated and
must be paid in U.S. dollars. The official rate as of March 13, 2000 was
RD$16.05 per U.S. dollar.
Vendors of telecommunications equipment all require that we pay for
equipment in U.S. dollars. The devaluation of the Dominican peso could affect
adversely our ability to purchase U.S. dollars in order to service our debt
obligations and pay our equipment vendors. Our purchase of substantial amounts
of U.S. currency in Dominican markets could adversely affect the value of the
Dominican peso in relation to the U.S. dollar, thus making such purchases more
costly for us.
Cash distributions, if any, received by the Depositary in respect of shares
of the Class A common stock underlying the ADSs will be received in Dominican
pesos. The Depositary, to the extent possible and subject to any restrictions
imposed by Dominican law, will convert such Dominican pesos into U.S. dollars at
the then prevailing exchange rate for the purpose of making dividend and other
distribution payments in respect of the ADSs. The value of the ADSs and any
distributions to be received from the Depositary could be affected adversely by
fluctuations in the value of the Dominican peso.
RISKS RELATING TO THE ADSS
OUR PRINCIPAL SHAREHOLDERS OWN STOCK WITH GREATER VOTING POWER WHICH LIMITS THE
INFLUENCE OF OTHER SHAREHOLDERS ON CORPORATE ACTIONS.
Our voting shares are divided into two classes, with different voting
rights. Holders of Class A common stock are entitled to one vote per share while
holders of Class B stock are entitled to ten votes per share. Both classes vote
together as a single class on all matters submitted to a vote of shareholders
except any matter that would adversely affect the rights of either class. These
matters would need to be approved by a special meeting of the holders of the
class of shares to be affected. GFN and certain of its affiliates own 60% of the
Class B stock and Motorola owns 40% of the Class B stock. Following the
offering, the holders of the Class B stock will control 95.2% of the total
voting power, and GFN alone will hold 57.1% of the total voting power. The
holders of Class B stock have the ability to decide all matters requiring the
approval of our shareholders, including the election of directors. GFN and
Motorola have granted to the trustee for the benefit of the holders of the
11 3/8%
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senior notes due 2004 the right to vote all of the shares owned by GFN and
Motorola upon the occurrence of specified events of default under the indenture
for the 11 3/8% senior notes due 2004.
GFN MAY ACT WITHOUT APPROVAL OF THE ADS HOLDERS TO RELEASE DIRECTORS AND
OFFICERS FROM LIABILITY.
Under Dominican law, shareholders are asked to vote upon the performance of
management at annual shareholders' meetings. Our vigilance officer delivers a
report on our financial performance and other issues related to management's
performance. If the holders of a majority of the votes entitled to be cast
approve management's performance, all shareholders are deemed to have released
the directors and officers from liability to us or our shareholders arising out
of actions taken or any failure to take actions by any of them on our behalf
during the prior fiscal year, with certain exceptions. As a result, shareholders
likely will fail in any suit brought in a Dominican court with respect to such
acts or omissions. Officers and directors may not be released from any claims or
liability for criminal acts, fraud, self-dealing or gross negligence. GFN
controls a majority of the votes entitled to be cast at annual shareholders'
meetings and, without the concurrence of other shareholders, is able to approve
the performance of management, thereby releasing management from liability to us
or our shareholders, including holders of the ADSs.
OUR SHARE PRICE MAY BE ADVERSELY AFFECTED BY FUTURE SALES OF RESTRICTED SHARES.
Upon consummation of our offering, we will have 9,700,000 shares of Class A
common stock and 19,144,544 shares of Class B stock outstanding. Each share of
Class B stock is freely convertible by its holder into one share of Class A
common stock. All shares of Class B Stock and Class A common stock into which
Class B stock may be converted are "restricted securities" within the meaning of
Rule 144 promulgated under the Securities Act of 1933. We cannot predict the
effect, if any, that future sales of these restricted shares or the availability
of these shares for sale would have on the market price of the ADSs.
Nonetheless, any sale, or the availability for sale, of a substantial number of
shares of Class A common stock or ADSs in the open market subsequent to the
offering could adversely affect the market price of the ADSs and could impair
our ability to raise additional capital by the sale of equity securities.
OUR SHAREHOLDERS MAY BE SUBJECT TO A WITHHOLDING TAX ON DIVIDENDS IF OUR
CONCESSION AGREEMENT IS SUBMITTED TO THE DOMINICAN CONGRESS BUT NOT APPROVED.
Under our concession agreement, our shareholders are not required to pay
Dominican income tax on dividends. Under the Dominican Constitution, provisions
of agreements with the Dominican government that contain exemptions from income
tax such as those contained in our concession agreement only become effective
upon approval by the Dominican Congress. If our concession agreement is
presented to, but not approved by, the Dominican Congress, cash dividends and
other distributions paid by us with respect to ADSs or shares of Class A common
stock could be subject to a 25% withholding tax, which we would be required to
withhold and pay to the Dominican tax administration at the time a cash dividend
or other distribution is paid. It is possible that any tax withheld would not be
a creditable foreign tax in determining the U.S. tax liability of a holder. As
we would be permitted to credit the amount withheld against our Dominican
corporate income tax, a U.S. holder might be treated as, in effect, not paying
any Dominican tax.
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS MAY NOT BE REALIZED.
Several statements about us contained in this prospectus, including
statements containing the words "believes," "anticipates," "intends," "expects,"
and words of similar import, constitute "forward-looking statements" within the
meaning of Section 21E of the Securities and Exchange Act of 1934. These
forward-looking statements involve numerous known or unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking
18
<PAGE>
statements. Important factors that could cause actual results to differ
materially from those in forward-looking statements, many of which are beyond
our control, include:
- competition;
- declining rates for international long distance traffic;
- reliance on resellers;
- our inability to minimize credit risks;
- customer churn;
- rapid technological change;
- rejection of our concession agreement in the Dominican Republic;
- cellular fraud;
- our ability to implement our business plan on schedule;
- social, political and economic conditions in Caribbean and Central
American markets;
- our significant capital expenditure and working capital requirements and
our need to finance such expenditures;
- the effect of our indebtedness on our ability to fund expansion and remain
competitive and of restrictions contained in such indebtedness;
- our inability to manage effectively our rapid expansion;
- our inability to obtain licenses or concessions in markets outside the
Dominican Republic;
- acceptance of the Internet and growth of the Internet in our target
markets;
- changes in the legal and regulatory environment for the Internet industry;
- 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, economic and regulatory
environment in the Dominican Republic.
THE RELIABILITY OF MARKET DATA INCLUDED IN THIS PROSPECTUS IS UNCERTAIN.
We have included market data from industry publications, including reports
produced by the ITU and the Central Bank of the Dominican Republic. The
reliability of these data cannot be assured. These industry publications
generally indicate that they have obtained information from sources believed to
be reliable, but do not guarantee the accuracy and completeness of their
information. While we believe these industry publications to be reliable, we
have not independently verified their data. We also have not sought the consent
of any of these organizations to refer to their reports in this prospectus.
19
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 4,000,000 ADSs we are
issuing in this offering will be approximately $86.7 million, at an assumed
public offering price of $22.9375 per share, after deducting the estimated
underwriting discount and offering expenses. If the underwriters exercise their
over-allotment option in full, we estimate that the net proceeds for the
additional ADSs we would issue in connection with the over-allotment option
would be approximately $13.1 million. The net proceeds of this offering will be
used for capital expenditures associated with increasing the capacity and
coverage of our local access, mobile and data networks and with expanding our
international facilities to support increased traffic volume and to fund working
capital.
In addition, we are concurrently offering $300 million in principal amount
of % senior notes due 2007. We estimate that the net proceeds from the
concurrent debt offering will be approximately $289.5 million, after deducting
estimated expenses. This offering and the concurrent debt offering are not
contingent on each other. We expect to use the net proceeds of the concurrent
debt offering to finance our purchase by tender offer of our 11 3/8% senior
notes due 2004. We also expect to use the net proceeds to repay $64.4 million of
indebtedness, for capital expenditures associated with increasing the capacity
and coverage of our local access, mobile and data networks, and with expanding
our international facilities to support increased traffic volume and to fund
working capital. The indebtedness to be repaid was used to finance the purchase
of telecommunications related assets and for working capital purposes and bears
interest at rates ranging from 10% per annum to 13% per annum.
We intend to pursue our expansion strategy in selected Caribbean and Central
American markets by teaming with local partners and, where appropriate
opportunities arise, by acquiring existing operations. We continually identify,
evaluate and discuss joint venture and acquisition opportunities with other
parties. We have entered into a non-binding memorandum of understanding and
currently are negotiating for the acquisition of a majority interest in a
Panamanian company that provides mobile services. We have not yet completed our
due diligence or the negotiation of the terms of our investment, although we
anticipate our initial investment would not exceed $28 million. If we make this
investment, we would fund a portion of the investment with the net proceeds from
this offering. We also are engaged in discussions for two other joint venture
investments in other countries in Central America. We cannot assure you that any
of these investments will be completed.
20
<PAGE>
PRICE RANGE OF ADSS
The ADSs are traded on the New York Stock Exchange under the symbol "TDR".
Shares of Class A common stock are not traded on any other exchange or automated
quotation system. At February 22, 2000, there were 38 record holders in the
United States of the ADSs.
The following table provides the high and low prices for the ADSs on the New
York Stock Exchange for each quarter since we completed our initial public
offering on May 4, 1998. The initial public offering price was $13.00.
<TABLE>
<CAPTION>
NEW YORK STOCK
EXCHANGE
-----------------------------------------
HIGH LOW
------------------- -------------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Second Quarter............................................ $12 9/16 $8 3/16
Third Quarter............................................. 10 13/16 5 7/8
Fourth Quarter............................................ 7 1/2 3 7/16
Year Ended December 31, 1999
First Quarter............................................. 9 6
Second Quarter............................................ 11 5/8 6 1/8
Third Quarter............................................. 12 7/16 7 9/16
Fourth Quarter............................................ 22 5/8 7 5/8
Year Ending December 31, 2000
First Quarter (through March 16, 2000).................... 28 1/2 16 1/2
</TABLE>
On March 16, 2000, the last reported sale price of our ADSs on the New York
Stock Exchange was $22.9375.
DIVIDEND POLICY
We have never paid dividends. Under Dominican law, only our shareholders are
entitled to declare dividends out of profits available for distribution. GFN and
Motorola will continue to control us after the offering, and they have indicated
to us that they do not intend to declare dividends on the stock. We anticipate
using earnings, if any, for the expansion and operation of our business. Holders
of ADSs on the applicable record dates will be entitled to all dividends
declared by us on the underlying Class A common stock. If declared, dividends
will be payable in Dominican pesos. The dividends will then be converted by the
Depositary for the benefit of ADS holders into U.S. dollars at the then
prevailing private market rate. Any foreign exchange transactions by Dominican
private commercial banks must be reported to the Central Bank, which is entitled
to receive a 5% commission on transactions so reported. The indenture for the
11 3/8% senior notes due 2004 restricts, and the indenture for the % senior
notes due 2007 will restrict, our ability to pay dividends.
21
<PAGE>
CAPITALIZATION
The following table sets forth at December 31, 1999 our cash and cash
equivalents and capitalization (1) at such date, (2) as adjusted to reflect the
offering of 4,000,000 ADSs at an assumed public offering price of $22.9375 per
ADS and the application by us of the estimated net proceeds of the ADS offering
and (3) as adjusted to reflect the offering of the ADSs and of $300 million in
principal amount of % senior notes due 2007 and the application of the
estimated proceeds of both offerings.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------
AS AS ADJUSTED
ADJUSTED FOR EQUITY AND
FOR EQUITY DEBT
ACTUAL OFFERING OFFERINGS
-------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.................................. $ 13,460 $100,132 $ 113,856
======== ======== ===========
Total short-term debt (including current portion of
long-term debt and capital leases) (1)................... $ 96,055 $ 96,055 $ 31,655
Long term debt:
Bank loans............................................... 28,772 28,772 28,772
11 3/8% senior notes due 2004 (2)........................ 200,000 200,000 --
% senior notes due 2007............................... -- -- 300,000
Capital leases........................................... 11,641 11,641 11,641
-------- -------- -----------
Total long-term debt and capital leases............ 240,413 240,413 340,413
-------- -------- -----------
Shareholders' equity:
Class A common stock, RD$10 par value, 5,700,000 shares
issued and outstanding and 9,700,000 shares as
adjusted............................................... 3,750 6,212 6,212
Class B stock, RD$10 par value, 19,144,544 shares issued
(actual and as adjusted)............................... 12,595 12,595 12,595
Additional paid-in-capital............................... 94,289 178,499 178,499
Retained earnings........................................ 41,259 41,259 20,847 (3)
Equity adjustment for foreign currency translation....... (2,024) (2,024) (2,024)
-------- -------- -----------
Total shareholders' equity............................... 149,869 236,541 216,129
-------- -------- -----------
Total capitalization (including total short-term
debt)............................................ $486,337 $573,009 $ 588,197
======== ======== ===========
</TABLE>
- ------------------------
(1) At December 31, 1999, we had available $40 million of additional borrowing
capacity under our credit facilities and capital leases.
(2) We have offered to purchase by tender offer the $200 million in principal
amount of our 11 3/8% senior notes due 2004. Our offer is conditioned upon
the holders of these notes consenting to amendments to the indenture
governing the notes that would eliminate restrictive covenants, as well as
to other conditions, including our obtaining sufficient financing.
(3) Reflects extraordinary charges to be incurred by us in connection with the
extinguishment of the 11 3/8% senior notes due 2004 which we estimate as
$20.4 million. The actual charges will be determined and recorded in the
period in which the tender offer is completed.
22
<PAGE>
EXCHANGE RATES
FOREIGN EXCHANGE SYSTEM
The current foreign exchange system in the Dominican Republic was instituted
in January 1991. Under this system, there are two primary exchange rates:
(1) the rate established by the Central Bank at which the Dominican government
buys foreign currency or the official rate and (2) the freely floating, private
commercial bank rate at which private banks sell foreign currency, or the
private market rate.
OFFICIAL RATE
The official rate is the rate at which companies in certain strategic
industries are required to surrender revenues received in foreign currency to
the Central Bank for Dominican pesos. The strategic industries subject to this
requirement include the telecommunications industry, and, as a result, we are
subject to this requirement. Accordingly, every U.S. dollar we receive as
revenues must be surrendered to the Central Bank at the official rate unless
otherwise authorized by the Central Bank. Other strategic industries subject to
this requirement include the coffee, sugar, cocoa, minerals and credit card
industries.
On March 13, 2000, the official rate was RD$16.05 per U.S. dollar.
PRIVATE MARKET RATE
The private market rate is the rate at which we purchase the foreign
currency we need to pay foreign suppliers or otherwise to meet our obligations
abroad.
According to current regulations, all purchases of foreign currency from
private commercial banks must be reported daily to the Central Bank. This
requirement permits the Central Bank to supervise and keep statistics on the
private market rate but does not give the Central Bank direct control over the
private exchange rate. The Central Bank is entitled to receive a 5% commission
on all purchases of foreign currency to be remitted abroad.
Interest, principal and all other payments in respect of the 11 3/8% senior
notes due 2004 are required to be paid to the trustee in U.S. dollars. In
addition, most of our equipment and inventory purchases have been made, and are
expected to continue to be made, in U.S. dollars. Since September 1999, the
Central Bank has allowed us to use revenues received in U.S. dollars to pay
interest on the 11 3/8% senior notes due 2004 without first converting them into
pesos. We have requested the Central Bank to allow us to pay interest on the
% senior notes due 2007 without first converting revenues received in U.S.
dollars into pesos.
On March 13, 2000, the private market rate was RD$16.25 per U.S. dollar.
23
<PAGE>
EXCHANGE RATES
The Federal Reserve Bank of New York does not report a noon buying rate for
Dominican pesos. The following tables set forth the high, low, average and
period-end official rates and private market rates as reported by the Central
Bank of the Dominican Republic during each of the periods indicated:
<TABLE>
<CAPTION>
OFFICIAL RATE
----------------------------------------------
YEAR HIGH LOW AVG.(1) AT PERIOD END
- ---- -------- -------- -------- -------------
(RD$ PER $)
<S> <C> <C> <C> <C>
1995...................................................... 12.87 12.87 12.87 12.87
1996...................................................... 14.00 12.87 13.19 13.86
1997...................................................... 14.02 13.91 13.97 14.02
1998...................................................... 15.49 14.02 14.70 15.43
1999...................................................... 15.93 15.50 15.83 15.91
2000 (through March 13, 2000)............................. 16.05 15.93 16.02 16.05
</TABLE>
<TABLE>
<CAPTION>
PRIVATE MARKET RATE
----------------------------------------------
YEAR HIGH LOW AVG.(1) AT PERIOD END
- ---- -------- -------- -------- -------------
(RD$PER $)
<S> <C> <C> <C> <C>
1995...................................................... 13.82 13.01 13.60 13.10
1996...................................................... 14.01 13.11 13.66 13.86
1997...................................................... 14.36 14.12 14.25 14.35
1998...................................................... 15.86 14.41 15.23 15.61
1999...................................................... 16.18 15.84 16.03 16.05
2000 (through March 13, 2000)............................. 16.33 15.98 16.21 16.25
</TABLE>
- ------------------------
(1) The average of average monthly rates during the period reported.
24
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table provides selected financial and operating data of TRICOM
for the periods indicated. We have derived the selected financial data from our
consolidated financial statements, which have been audited by KPMG, independent
auditors. You should read the information in the following tables in conjunction
with "Management's Discussion and Analysis of Results of Operations and
Financial Condition" and the consolidated financials included in this
prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------
(IN THOUSANDS) (1)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Operating revenues:
Toll................................... $ 12,064 $ 13,108 $15,511 $ 17,645 $ 23,118
International.......................... 19,864 42,069 39,432 50,332 60,592
Local service.......................... 616 1,770 6,412 12,942 33,859
Cellular and PCS....................... 7,222 11,011 13,073 20,364 26,474
Paging................................. 2,599 5,170 5,079 4,528 2,696
Sale and lease of equipment............ 1,492 3,969 5,502 4,115 7,690
Installations.......................... 479 1,943 5,071 12,937 15,502
Other.................................. 33 24 21 2,640 889
-------- -------- ------- -------- ---------
Total operating revenues............. 44,369 79,064 90,102 125,501 170,819
-------- -------- ------- -------- ---------
Operating costs:
Satellite connections and carrier
costs................................ 19,947 30,172 31,271 32,309 43,688
Network depreciation................... 3,168 5,797 7,433 11,382 15,983
Expense in lieu of income taxes(2)..... 222 5,348 6,248 9,562 12,764
General and administrative expenses.... 14,799 22,185 25,631 39,379 51,501
Other operating costs.................. 343 1,021 3,659 3,391 5,421
-------- -------- ------- -------- ---------
Total operating costs................ 38,479 64,523 74,242 96,024 129,357
-------- -------- ------- -------- ---------
Operating income......................... 5,889 14,540 15,860 29,478 41,462
-------- -------- ------- -------- ---------
Other income (expenses):
Interest expense, net.................. (4,069) (10,699) (12,047) (12,873) (20,041)
Foreign currency exchange gain
(loss)............................... 1,099 23 (706) 104 (203)
Gain on sale of land................... -- -- -- -- 898
Other.................................. 216 233 (83) 845 (179)
-------- -------- ------- -------- ---------
Total other income (expenses)........ (2,754) (10,443) (12,836) (11,924) (19,166)
-------- -------- ------- -------- ---------
Earnings before income taxes,
extraordinary item and cumulative
effect of accounting change............ 3,135 4,098 3,023 17,554 22,296
Income taxes............................. -- -- -- 352 (142)
Extraordinary item....................... -- -- (5,453)(3) -- --
Cumulative effect of change in accounting
for organization costs................. -- -- -- -- (120)
-------- -------- ------- -------- ---------
Net earnings (loss)...................... $ 3,135 $ 4,098 $(2,430) $ 17,906 $ 22,035
======== ======== ======= ======== =========
Basic earnings per common share:
Earnings before extraordinary item and
cumulative effect of accounting of
change............................... $ 0.32 $ 0.41 $ 0.17 $ 0.78 $ 0.89
Extraordinary item..................... -- -- (0.31)(3) -- --
-------- -------- ------- -------- ---------
Cumulative effect of accounting
change............................... -- -- -- -- --
Net earnings (loss).................... $ 0.32 $ 0.41 $ (0.14) $ 0.78 $ 0.89
======== ======== ======= ======== =========
Weighted average number of common shares
outstanding............................ 9,880 9,880 17,600 22,945 24,845
======== ======== ======= ======== =========
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 5,993 $ 4,292 $ 5,733 $ 15,377 $ 13,460
Working capital (deficit)........... (41,962) (43,586) 4,846 (19,600) (83,659)
Property, plant and equipment,
net............................... 93,749 119,334 202,978 330,456 455,045
Total assets........................ 126,863 163,480 321,144 444,815 531,478
Long-term debt and capital leases
(excluding current portion)....... 32,000 60,000 232,000 200,000 240,413
Total indebtedness.................. 101,954 128,677 242,755 279,257 336,468
Shareholders' equity................ 22,219 24,523 42,093 127,561 149,869
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures................ 59,049 32,104 92,668 142,101 145,426(5)
Net cash provided (used) by
operating activities.............. 4,616 (2,908) 39,095 26,912 31,526
Net cash used in investing
activities........................ (59,386) (32,440) (168,636) (121,171) (64,360)
Net cash provided by financing
activities........................ 52,338 35,419 132,059 104,065 30,966
EBITDA(4)........................... 10,565 26,407 31,497 53,662 75,063
Ratio of EBITDA to net interest
expense........................... 2.6x 2.5x 2.6x 4.2x 3.7x
Ratio of total indebtedness to
EBITDA............................ 9.7x 4.9x 7.8x 5.2x 4.5x
Ratio of earnings to fixed charges
(6)............................... 1.3x 1.1x 0.9x 1.3x 1.3x
OTHER OPERATING DATA:
International minutes (in
thousands)........................ 62,626 126,484 157,411 231,075 360,532
Local access lines in service (at
period end)....................... 5,191 17,071 43,195 80,616 118,926
Mobile subscribers (at period
end).............................. 22,208 16,136 41,107 108,532 176,080
</TABLE>
(1) Except per share, ratios and other operating data.
(2) Prior to 1995, we made payments in lieu of income tax at a rate of 18.0% of
gross domestic collections after deducting access and carrier charges. In
1995, we disputed paying taxes on the basis of gross revenues and, as a
result of a settlement with the Dominican tax authorities, paid a total of
$222,000 to the Dominican government in lieu of income tax. Since 1996, we
have made payments in lieu of income tax to the Dominican government, in
accordance with the terms of our concession agreement. These payments
represent 10% of gross domestic revenues, after deducting charges for access
to the local network, plus 10% of net international revenues. Expense in
lieu of income taxes also includes a tax, implemented in 1998, of 2% on
international settlement revenues collected. This tax amounted to
$0.3 million in 1998 and $0.6 million in 1999.
(3) Represents a write-off related to the refinancing of indebtedness.
(4) EBITDA typically consists of earnings (loss) before interest and other
income and expenses, income taxes and depreciation and amortization. As
described in note 2 we make payments to the Dominican government in lieu of
income taxes. As a result, we calculate EBITDA prior to the deduction of
payments to the Dominican government in lieu of income taxes. 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.
(5) Includes capital lease obligations incurred during 1999 of $26.2 million.
(6) The ratio of earnings to fixed charges represents the number of times fixed
charges were covered by earnings. Earnings represents the sum of
(a) pre-tax earnings, (b) fixed charges and (c) amortization of capitalized
interest less (d) interest capitalized and (e) cumulative effect of
accounting change for organizational costs. Fixed charges consist of
(a) expensed and capitalized interest, (b) amortized debt issuance costs and
(c) the interest component of rental expense. For 1997, fixed charges
exceeded earnings by $2.1 million.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REVENUE OVERVIEW
We derive our operating revenues primarily from toll revenues, international
settlement revenues, cellular and PCS 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 we receive from our customers in the Dominican
Republic for international and domestic long distance calls, as well as
interconnection charges received from Codetel, the incumbent local service
provider, for calls that originate in or transit its network but terminate in
our network. Toll revenues are generated by residential and commercial
customers, calling card users, cellular and PCS subscribers and retail telephone
centers, and large corporate accounts. Toll revenues are recognized as they are
billed to customers, except for revenues from prepaid calling cards which are
recognized as the calling cards are used or expire.
International revenues represent amounts recognized by us for termination of
traffic from foreign telecommunications carriers to the Dominican Republic
either on our own network or on Codetel's network, including revenues derived
from our U.S. based international long distance pre-paid calling cards.
Local service revenues consist of monthly fees, local measured service and
local measured charges for value-added services, including call forwarding,
three-way calling, call waiting and voice mail, as well as calls made to
cellular users under the calling-party-pays system and revenues from other
miscellaneous local access services.
Cellular and PCS revenues represent fees received for mobile cellular and
PCS services, including interconnection charges for calls incoming to our
cellular and PCS subscribers from other companies' subscribers. Cellular and PCS
revenues do not include fees received for international long distance calls
generated by our cellular and PCS subscribers. Cellular and PCS fees consist of
fixed monthly fees, per minute usage charges and additional charges for
value-added services, including call waiting, call forwarding, three-way calling
and voice mail, and for other miscellaneous cellular and PCS services.
Paging revenues consist of fixed monthly charges for nationwide service and
use of paging equipment and activation fees. Beginning in 1999, we determined
that paging will not play a major role in our future marketing programs.
Revenues from the sale and lease of equipment consist of sales and rental
fees for customer premise equipment, including private branch exchanges and key
telephone systems, residential telephones, cellular and PCS handsets and paging
units. Since late 1996, we have only sold, and not leased, equipment.
Installation revenues consist of fees we charge 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 our core
businesses, including commissions received for providing package handling
services for a courier and commissions received for collection services for
utility companies.
28
<PAGE>
The following table sets forth the percentage contribution of each category
of revenues to total operating revenues for the period indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Toll........................................................ 17.2% 14.1% 13.5%
International............................................... 43.8 40.1 35.5
Local service............................................... 7.1 10.3 19.8
Cellular and PCS............................................ 14.5 16.2 15.5
Paging...................................................... 5.6 3.6 1.6
Sale and lease of equipment................................. 6.1 3.3 4.5
Installations............................................... 5.6 10.3 9.1
Other....................................................... 0.1 2.1 0.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The following table sets forth certain items in the statements of operations
and EBITDA expressed as a percentage of total operating revenues for the period
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Operating costs............................................. 82.4% 76.5% 75.7%
Operating income............................................ 17.6 23.5 24.3
Interest expense, net....................................... 13.4 10.3 11.7
Other income (expenses)..................................... 0.8 (0.8) (0.5)
Earnings before income taxes, extraordinary item and
cumulative effect of accounting change.................... 3.4 14.0 13.1
Net earnings (loss)......................................... (2.7) 14.3 12.9
EBITDA...................................................... 35.0 42.8 43.9
</TABLE>
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
OPERATING REVENUES. Our total operating revenues increased 36.1% to
$170.8 million in 1999 from $125.5 million in 1998. This growth stemmed
primarily from increases in revenues generated by the expansion of our local
exchange network, international business and of our cellular services.
TOLL. Toll revenues increased 31.0% to $23.1 million in 1999 from
$17.6 million in 1998. This resulted from both higher domestic long distance and
outbound international traffic. Domestic long distance minutes increased by
54.2% to 31.1 million minutes in 1999 from 20.2 million minutes in 1998 due to a
higher number of local access lines in service. Outbound international minutes
increased by 32.2% to 29.7 million in 1999 from 22.5 million minutes in 1998,
reflecting increased traffic volume from our local and Efectiva prepaid calling
card customers. Local access lines and Efectiva accounted for 27.9% and 26.2% of
our total outbound minutes in 1999 compared to 29.2% and 29.1% for 1998.
Interconnection revenues increased by approximately 63.1% to $5.2 million in
1999 from $3.2 million in 1998.
INTERNATIONAL. International revenues increased 20.4% to $60.6 million in
1999 from $50.3 million in 1998, primarily as a result of the growth of inbound
traffic volume received from our U.S. based international carrier, TRICOM USA.
Inbound minutes increased by 59.6% to 329.7 million minutes in 1999 from
206.6 million in 1998. TRICOM USA accounted for 57% of our total inbound minutes
in 1999 compared to 53.2% in 1998.
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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. Our average settlement rate was $0.21 per minute during
1998 and $0.14 per minute during 1999. We have been able to increase revenues
from the provision of international long distance services by increasing the
volume of international traffic carried through our network. Future decreases in
settlement rates, without corresponding increases in our long distance traffic
from the United States, would reduce our international settlement revenues,
adversely affect the profit margins that we realize on such traffic and could
have a material adverse effect on our business, financial condition and results
of operations.
LOCAL SERVICE. Local service revenues increased 161.6% to $33.9 million in
1999 from $12.9 million in 1998. Higher local service rates and continued growth
in the number of local lines in service resulted in increased local service
revenues for 1999.
In 1999, we added 38,310 net local access lines compared to 37,421 net local
access lines added in 1998. At December 31, 1999, we had 118,926 local access
lines in service, including 19,289 wireless local loop lines, compared to 80,616
local access lines in service at December 31, 1998. There were not any wireless
local loop lines in service at December 31, 1998.
On January 14, 1999, we announced price increases, effective as of
January 1, 1999, for residential monthly fees and for measured local service
rates as part of the industry's process of price rebalancing initiated under the
new Telecommunications Law No. 153-98. Residential monthly fees increased by
approximately 86%. Local service rent revenues increased by 188.6% to
$22.3 million in 1999 from $7.7 million in 1998. We adjusted the price per
minute of measured local service in increments of RD$0.01 until the per minute
rate reached RD$0.25 ($0.015) at December 31, 1999. Measured local service
revenues increased by 80.2% to $3.8 million in 1999 from $2.1 million in 1998,
reflecting increased rates.
As a result of a higher number of lines in service and higher rates for
service, interconnection revenues for local calls received from Codetel
increased 193.5% to $2.9 million in 1999 from $1.0 million in 1998.
Our average monthly churn rate for local service was 1.8% for 1999 compared
to 0.8% in 1998. Average monthly churn increased as a result of
(i) disconnections due to Hurricane Georges; (ii) institution of our policy of
offering financing of installation fees for local access; and (iii) rate
rebalancing. We calculate our average monthly churn rate 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 AND PCS. Cellular and PCS revenues increased 30.0% to
$26.5 million in 1999 from $20.4 million in 1998, primarily as a result of the
increase in the number of cellular and PCS subscribers. In 1999, we added 67,548
net cellular and PCS subscribers, compared to 67,425 net cellular subscribers
added in 1998. At December 31, 1999, we had 169,656 cellular and 6,424 PCS
subscribers compared to 108,532 cellular subscribers at December 31, 1998. We
attribute the substantial growth of our subscriber base to the continued success
of the Amigo prepaid program introduced in the third quarter of 1997.
As a result of a higher average subscriber base, airtime minutes increased
38.7% from 94.0 million in 1998 to 130.4 million in 1999. Interconnection
revenues attributed to airtime traffic received from Codetel increased by 123.7%
to $3.5 million in 1999 from $1.6 million in 1998 due to a higher volume of
incoming minutes received by prepaid cellular and PCS subscribers, as well as to
a larger subscriber base.
Prepaid cellular and PCS services generated approximately 52.0% of our total
airtime minutes and 53.2% of total cellular and PCS revenues in 1999. Prepaid
revenues increased by 83.4% to $14.5 million in 1999 from $7.9 million in 1998.
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Our average monthly churn rate for cellular and PCS services declined to
1.8% in 1999 from 3.6% in 1998 resulting from the increased proportion of
prepaid subscribers in our subscriber base.
PAGING. Paging revenues decreased 40.5% to $2.7 million in 1999 from
$4.5 million in 1998. This reflects increased competition which lowered prices
and margins for paging services. Paging revenues represented 1.6% of total
operating revenues in 1999 compared to 3.6% of total operating revenues in 1998.
At December 31, 1999, we had 28,737 paging subscribers compared to 28,873
paging subscribers at December 31, 1998. Our average monthly churn rate for
paging services declined to 2.3% in 1999 from 3.4% in 1998.
SALE AND LEASE OF EQUIPMENT. Revenues from the sale of equipment increased
86.9% to $7.7 million in 1999 from $4.1 million in 1998. The increase was
attributable to higher sales of customer premise equipment, including private
branch exchanges and key telephone systems, residential telephones and cellular
and PCS handsets in 1999. We have entered into arrangements for the distribution
of cellular and PCS services through major electronics retailers. We believe
that these arrangements will decrease equipment sales revenues but will add
subscribers and increase cellular and PCS service revenues.
INSTALLATIONS. Installation revenues increased 19.8% to $15.5 million in
1999 from $12.9 million in 1998, as a result of our adding 59,513 gross local
access lines and 96,363 gross cellular and PCS customers during 1999 compared to
43,198 gross local access lines and 97,778 gross cellular additions in 1998. The
increase in installations in 1999 helped offset reductions in installation fees
for local lines as part of the rate rebalancing plan that took effect
January 1, 1999.
OPERATING COSTS. Major components of operating costs are:
- carrier costs, which include amounts owed to foreign carriers for the use
of their networks for termination of outbound traffic;
- interconnection costs, which are access charges paid primarily to Codetel;
- depreciation of network equipment and leased terminal equipment;
- payments for international satellite circuit leases;
- expenses in lieu of income tax; and
- general and administrative expenses, which include salaries and other
compensation to personnel, non-network depreciation, maintenance expenses,
marketing expenses and other related costs.
Our operating costs increased 34.7% to $129.4 million in 1999 from
$96.0 million in 1998. The increase in operating costs was primarily the result
of higher satellite connection and carrier costs, increased general and
administrative expenses reflecting our continued expansion, and depreciation
associated with our continued capital expenditure program. However, operating
costs as a percentage of operating revenues declined in 1999, representing 75.7%
of total operating revenues in 1999 compared to 76.5% in 1998.
SATELLITE CONNECTIONS AND CARRIER COSTS. Satellite connections and carrier
costs increased by 35.2% to $43.7 million in 1999 from $32.3 million in 1998
primarily as a result of the 54.2% increase in outbound traffic and higher
interconnection costs. Outbound carrier costs increased by 62.1% from
$11.8 million in 1998 to $19.1 million in 1999. Interconnection costs increased
by 47.9% to $19.8 million in 1999 from $13.4 million in 1998, the result of a
higher volume of inbound traffic terminating in Codetel's network.
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NETWORK DEPRECIATION. Network depreciation increased 40.4% from
$11.4 million in 1998 to $16.0 million in 1999, as a result of our continued
investments in plant and equipment.
EXPENSE IN LIEU OF INCOME TAXES. We make payments to the Dominican
government in lieu of income tax equal to 10% of gross domestic revenues, after
deducting charges for access to the local network, plus 10% of net international
revenues. Expense in lieu of income taxes also includes a tax of 2% on
international settlement revenues collected. Expense in lieu of income taxes
increased by 33.5% to $12.8 million in 1999 from $9.6 million in 1998 reflecting
the increase in revenues derived from our domestic and international business.
GENERAL AND ADMINISTRATIVE. General and administrative expenses, including
non-network depreciation expenses, increased 30.8% to $51.5 million in 1999 from
$39.4 million in 1998 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 December 31,
1999, we had 1,534 employees compared to 1,341 employees at December 31, 1998.
As a result, personnel costs, net of capitalized labor expenses, increased by
29% to $22.2 million in 1999 from $17.2 million in 1998. Commissions increased
by 26.4% to $17.0 million in 1999 from $13.4 million in 1998.
Our expense for doubtful accounts increased by $3.6 million to $4.3 million
in 1999 from $0.7 million in 1998 as the result of the disconnection of local
service customers who had unpaid balances reaching as far back as 1998, and who
contested the bills as a result of Hurricane Georges' interruption of telephone
service. We 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. We set aside an amount
equal to 100% of the outstanding debt as an additional provision during the
second quarter of 1999.
As a percentage of total operating revenues, general and administrative
expenses represented 30.1% in 1999 compared to 31.4% in 1998.
OTHER COSTS. Other costs increased by 59.9% to $5.4 million in 1999 from
$3.4 million in 1998, primarily as a result of increases in the costs of sale of
customer premise equipment, residential telephones and cellular handsets in
1999.
OPERATING INCOME. Operating income increased 40.7% to $41.5 million in 1999
from $29.5 million in 1998. Our operating income as a percentage of total
operating revenues improved to 24.3% in 1999 from 23.5% of total operating
revenues in 1998. This reflects increased economies of scale in our operations.
OTHER INCOME (EXPENSES). Other expenses increased by 60.7% to
$19.2 million in 1999 from $11.9 million in 1998, reflecting increased
short-term bank borrowings and reduced interest income as a result of the
application of pledged securities to pay interest on the senior notes due 2004
and the principal amount of loans from the Caribbean Basin Project Financing
Authority, and additional short-term financing during 1999. If we complete the
concurrent offering of $150.0 million in aggregate principal amount of new
senior notes, interest expense will increase significantly in future periods.
NET EARNINGS. Net earnings increased by 23.1% to $22.0 million in 1999 from
$17.9 million in 1998. On a per share basis, earnings increased to $0.89 per
share in 1999 from $0.78 per share in 1998. The weighted average number of
shares outstanding used in the calculation at December 31, 1998 was 22,944,544
compared to 24,844,544 at December 31, 1999. Net earnings represented 12.9% of
total operating revenues in 1999 compared to 14.3% in 1998.
EBITDA. Earnings before interest and other income and expenses, taxes and
depreciation and amortization increased by 39.9% to $75.0 million for 1999 from
$53.7 million for 1998. We calculate
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earnings before interest and other income and expenses, taxes and depreciation
and amortization prior to the deduction of payments to the government in lieu of
income taxes.
1998 COMPARED TO 1997
OPERATING REVENUES. Our total operating revenues increased 39.3% to
$125.5 million in 1998 from $90.1 million in 1997. We attribute much of this
growth to increased international revenues, increased installation and local
service revenues associated with our local access network expansion program and
the introduction of our prepaid cellular program.
TOLL. Toll revenues increased 13.8% to $17.6 million for 1998 from
$15.5 million for 1997. The increase in toll revenues was attributable to higher
outbound international traffic and domestic long distance minutes. Outbound
international minutes increased by 3.0% to 22.5 million minutes for 1998 from
21.8 million minutes for 1997 reflecting increased traffic volume from the
higher number of local access lines in service and cellular subscribers, as well
as our Efectiva prepaid calling card. Local access lines and the Efectiva
prepaid calling card accounted for 29.2% and 29.1%, respectively, of our total
outbound international minutes for 1998 compared to 24.2% and 28.7%,
respectively, for 1997. Domestic long distance minutes increased by 55.2% to
20.2 million minutes for 1998 from 13.0 million minutes for 1997 due to the
higher number of local access lines in service.
Interconnection revenues related to domestic and international long distance
traffic also increased as a result of the growth of our local access line
installed base. Interconnection revenues increased by approximately 62% to
$3.2 million for 1998 from $2.0 million for 1997. Toll revenues represented
14.1% of total operating revenues for 1998 compared to 17.2% of total operating
revenues for 1997.
INTERNATIONAL. International revenues increased 27.6% to $50.3 million for
1998 from $39.4 million for 1997. This increase was achieved despite a 19.0%
decrease in average settlement rates for 1998 compared to 1997. Inbound minutes
increased by 52.4% to 206.6 million for 1998 from 135.6 million minutes for
1997. The increase in minutes in 1998 was the result of volume based agreements
with various international carriers and the increasing presence of TRICOM USA's
operations in the United States. TRICOM USA accounted for 53.2% of the total
inbound minutes in 1998 compared to 39.0% in 1997. Inbound minutes generated by
TRICOM USA during 1998 included 89.7 million minutes attributable to the
provision of facilities by TRICOM USA to resellers and 20.2 million minutes
attributable to prepaid calling cards distributed in the United States compared
to 48.7 million minutes from the provision of facilities to resellers and
4.2 million minutes attributable to prepaid cards during 1997.
As a result of increased competition in the market, settlement rates for
international long distance service between the Dominican Republic and the
United States declined in 1998 to an average rate of $0.21 per minute from $0.25
per minute during 1997. International revenues represented 40.1% of total
operating revenues for 1998 compared to 43.8% of total operating revenues for
1997.
LOCAL SERVICE. Local service revenues increased 101.8% to $12.9 million for
1998 from $6.4 million for 1997. The increase reflects the growth in the number
of local access lines in service as a result of our local access network
expansion program, combined with higher average monthly fees charged to
customers of $10 during 1998 compared to $8 during 1997.
During 1998, we added 37,421 net local access lines compared to 26,124 net
local access lines added during 1997. At December 31, 1998, we had 80,616 local
access lines in service compared to 43,195 local access lines in service at
December 31, 1997. As a result, interconnection revenues related to local calls
received from Codetel increased 50.9% to $1.0 million for 1998 from $666,000 for
1997. Local service revenues represented 10.3% of total operating revenues for
1998 compared to 7.1% of total operating revenues for 1997.
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CELLULAR. Cellular revenues increased by 55.8% to $20.4 million for 1998
from $13.1 million for 1997. This increase was attributable to the growth of
airtime minutes generated by our prepaid cellular program as well as to a larger
average cellular subscriber base in 1998. Airtime minutes increased 26.1% to
94.0 million minutes for 1998 from 74.5 million minutes for 1997.
During 1998, we added 67,425 net subscribers compared to 24,971 net
subscribers added in 1997. The number of cellular subscribers increased at
December 31, 1998 by 164% to 108,532 from 41,107 at December 31, 1997. We
attribute the increase in cellular airtime and the number of subscribers to the
introduction of prepaid cellular services and the Amigo cellular prepaid card in
the third quarter of 1997. Prepaid cellular services generated approximately 41%
of our total airtime minutes and 39% of total cellular revenues in 1998. Prepaid
cellular revenues increased by $6.8 million to $7.9 million in 1998 compared to
$906,000 during 1997.
Our average monthly churn rate for cellular services was 3.6% for 1998
compared to 3.9% for 1997. Interconnection revenues associated with airtime
traffic received from Codetel increased by 19.6% to $1.6 million in 1998 from
$1.3 million in 1997 due to a higher volume of incoming minutes received by
prepaid cellular subscribers and to a larger number of cellular subscribers.
Cellular revenues represented 16.2% of total operating revenues for 1998
compared to 14.5% of total operating revenues for 1997.
PAGING. Paging revenues decreased 10.9% to $4.5 million for 1998 compared
to $5.1 million for 1997. The decrease in 1998 reflected a decline in the
average revenue per paging subscriber compared to 1997 primarily as a result of
increased competition in the market. In addition, we believe that the success of
our prepaid cellular program has contributed to the decline of paging revenues
by having new customers move away from paging services and into prepaid cellular
services. We added 1,046 net paging subscribers during 1998 compared to 4,791
net paging subscribers added in 1997. The number of paging subscribers increased
by 3.8% to 28,873 at December 31, 1998 from 27,827 at December 31, 1997. Our
average monthly churn rate for paging services declined to 3.4% for 1998
compared to 3.7% for 1997. Paging revenues represented 3.6% of total operating
revenues for 1998 compared to 5.6% of total operating revenues for 1997.
SALE AND LEASE OF EQUIPMENT. Revenues from the sale and lease of equipment
decreased 25.2% to $4.1 million for 1998 from $5.5 million for 1997, primarily
as a result of a lower number of cellular handsets and paging equipment sold. In
1997, we entered into arrangements with major electronics retailers for the
distribution of cellular services. We believe that these arrangements will
decrease revenues from the sale of cellular equipment, but could increase
cellular services revenues by expanding the number of subscriber additions.
Additionally, the decline in revenues from the sale of cellular equipment is
accompanied by a decrease in cost of goods sold. Sale and lease of equipment
revenues represented 3.3% of total operating revenues in 1998 compared to 6.1%
of total operating revenues for 1997. We have strategically migrated away from
this revenue source and have determined that the sale and lease of equipment
will not be a major focus of our marketing efforts.
INSTALLATIONS. Installation revenues increased 155.1% to $12.9 million for
1998 from $5.1 million for 1997. This increase is attributable to the
significant growth in the number of local access line installations and cellular
activations as well as an increase in the installation fee per local access line
from $129 to $258 in January 1998. During 1998, we installed 43,198 gross local
access lines and 97,778 gross cellular additions compared to 31,398 gross local
access lines and 36,153 gross cellular additions for 1997, reflecting increased
domestic market presence. Installation revenues represented 10.3% of total
operating revenues in 1998 compared to 5.6% of total operating revenues for
1997.
OPERATING COSTS. Operating costs represented 76.5% of total operating
revenues for 1998 compared to 82.4% of total operating revenues for 1997.
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SATELLITE CONNECTION AND CARRIER COSTS. Satellite connections and carrier
costs increased by 3.3% to $32.3 million during 1998 compared to $31.3 million
during 1997. The increase in satellite connections and carrier costs reflected a
$4.6 million increase in carrier costs to $11.8 million in 1998 from
$7.2 million in 1997 due to higher volume of outbound traffic. However, this
increase was partially offset by a decrease in interconnection costs, lease
payments for switching facilities and satellite connections.
Interconnection costs decreased by $1.0 million to $9.5 million in 1998 from
$10.6 million in 1997, as a result of lower interconnection charges between our
network and Codetel's network. The interconnection agreement was amended on
January 2, 1998 to reduce access charges for 1998 for international long
distance calls from RD$1.45 ($0.09) per minute to RD$0.98 ($0.06) per minute and
for national long distance and calls made from cellular telephones from RD$0.95
($0.06) per minute to RD$0.63 ($0.04) per minute.
Lease payments for switching facilities and satellite connections decreased
by 30.2% to $4.3 million in 1998 from $5.6 million in 1997 due to cost savings
for leased international facilities that resulted with the commencement of
operations of the Antilles-I fiber optic cable.
NETWORK DEPRECIATION. Network depreciation and depreciation expense
increased 53.1% and 65.6% to $11.4 million and $3.2 million, respectively, for
1998 from $7.4 million and $2.0 million, respectively, for 1997 as a result of
our continued investments in plant and equipment.
EXPENSE IN LIEU OF INCOME TAX. Expense in lieu of income taxes increased by
53.0% to $9.6 million for 1998 from $6.2 million for 1997, due to increased
revenues, a portion of which were not subject to deductible access charges,
including, in particular, installation revenues.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
increased by 53.9% to $39.4 million for 1998 from $25.6 million for 1997. The
increases were primarily attributable to higher personnel costs, other expenses
primarily from sales commissions, and promotional and advertising costs.
Personnel costs, net of capitalized labor costs, for 1998 increased by 43.0% to
$13.3 million from $9.3 million for 1997, reflecting the growth of operations of
TRICOM USA and the Call Tel Corporation, a subsidiary that provides operator
services to our and third parties alphanumeric paging subscribers. At
December 31, 1998, we had 1,341 employees compared to 989 employees at
December 31, 1997. Other expenses increased by $6.6 million to $11.6 million in
1998 from $5.0 million in 1997 primarily resulting from a $4.1 million increase
in sales commissions related to prepaid cards and paid to external
establishments. Promotional and advertising costs increased by $1.7 million to
$4.3 million in 1998 from $2.5 million in 1997, as a result of campaigns related
to the Amigo prepaid card. General and administrative costs as a percentage of
total operating revenues increased to 31.4% for 1998 from 28.4% for 1997.
OTHER COSTS. Other costs decreased by 7.3% to $3.4 million for 1998 from
$3.7 million for 1997, primarily attributable to lower costs of sale of
equipment, as a result of fewer cellular and paging unit sales brought about by
our entering into the distribution arrangements with major electronics
retailers.
OPERATING INCOME. Operating income increased 85.9% to $29.5 million for
1998 from $15.9 million for 1997. Our operating income represented 23.5% of
total operating revenues for 1998 compared to 17.6% of total operating revenues
for 1997 reflecting higher margins from local service, cellular, and
international long distance services.
OTHER INCOME (EXPENSES). Other expenses decreased 7.1% to $11.9 million for
1998 from $12.8 million for 1997 reflecting increases in net interest income and
foreign currency exchange gains. Interest expense increased 11.8% to
$18.0 million for 1998 from $16.1 million for 1997 due to higher long term debt
outstanding as a result of the issuance of $200 million aggregate principal
amount of our 11 3/8% senior notes due 2004 during the third quarter of 1997.
Foreign currency exchange gains
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increased by $810,000 to $104,000 for 1998 from a loss of $706,000 for 1997.
Interest expense as a percentage of total operating revenues declined to 14.3%
for 1998 from 17.9% for 1997.
NET EARNINGS. Net earnings increased to $17.9 million, or $0.78 per share,
for 1998 from earnings before extraordinary item of $3.0 million, or $0.17 per
share, for 1997 as a result of higher operating income. The weighted average
number of shares outstanding at December 31, 1998 were 22,944,544 compared to
17,600,526 at December 31, 1997. Net earnings accounted for 14.3% of total
operating revenues for 1998, while earnings before extraordinary item accounted
for 3.4% for 1997. However, as a result of a $5.5 million write-off related to
the retirement of indebtedness from the proceeds of the 11 3/8% senior notes due
2004 during the third quarter of 1997, we recorded a net loss after
extraordinary items of $2.4 million for 1997.
EBITDA. Earnings before interest and other income and expenses, taxes and
depreciation and amortization increased by 70.4% to $53.7 million for 1999 from
$31.5 million for 1997. We calculate earnings before interest and other income
taxes and expenses, taxes and depreciation and amortization prior to the
deduction of payments to the Dominican government in lieu of income taxes.
EFFECTS OF INFLATION
The annual inflation rate in the Dominican Republic was 8.4% for 1997, 7.8%
for 1998 and 5.1% for 1999. The effects of inflation on our operations have not
been significant.
CHANGE IN FUNCTIONAL AND REPORTING CURRENCY
Through December 31, 1996, we used the Dominican peso as our functional and
reporting currency. While a significant portion of our revenues, assets and
liabilities historically were denominated in U.S. dollars, a clear determination
of the functional currency was difficult, and we used the Dominican peso as our
functional currency. However, in our opinion, since the issuance of the 11 3/8%
senior notes due 2004, in August 1997, our cash flows and financial results of
operations are more appropriately presented in the U.S. dollar as the functional
currency. Effective January 1, 1997, we changed our functional currency from the
Dominican peso to the U.S. dollar. Our financial statements for periods prior to
January 1, 1997 have not been restated for this change in the functional
currency. However, we did retroactively change our reporting currency to the
U.S. dollar.
LIQUIDITY AND CAPITAL RESOURCES
Substantial capital is required to expand and operate our telecommunications
networks. For 1999, we made capital expenditures of $145 million for the
installation of additional local access lines, enhancement of our cellular and
PCS network, expansion of international facilities and other network
improvements. Expansion of international facilities included the installation of
a switch in New York and investments in submarine fiber optic cables. We
currently anticipate making capital expenditures of approximately $186 million
in 2000, a substantial majority of which will be in the Dominican Republic, for
increasing capacity and coverage in our local access and mobile networks,
expanding our international facilities to support increased traffic volume,
expanding our local network and other international expansion. However, the
amounts to be invested for these purposes will depend upon a number of factors,
including primarily the demand for our services.
In addition, as we expand our operations into new areas we will be required
to support increased working capital and capital expenditure needs. We have
satisfied our working capital requirements and funded capital expenditures from
cash generated from operations, short-term and long-term borrowings, trade
finance, vendor financing and equity and debt issuances. We believe our cash
generated by operations and the proceeds of this offering and the concurrent
debt offering will be sufficient to fund our expected capital expenditures
through the middle of 2001. We frequently evaluate potential acquisitions and
joint venture investments. Acquisitions or investments, for example, the
investment in
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Panama subject to a non-binding memorandum of understanding that we have
executed, may require us to obtain additional financing. There can be no
assurance that additional funding sources will be available to us on terms which
we find acceptable or at all.
Net cash provided by operating activities was $26.9 million for 1998 and
$31.5 million for 1999. We had net accounts receivable of $18.4 million and
$26.1 million at December 31, 1998 and December 31, 1999.
Our indebtedness was approximately $336.5 million at December 31, 1999, of
which $200.0 million was our senior notes due 2004, $40.4 million was in
long-term borrowings and capital leases, with maturities ranging from one to
seven years, and $96.1 million was short-term bank loans, telecommunications
equipment financings, trade financings and current portion of capital leases. At
December 31, 1999, our U.S. dollar borrowings (other than the 11 3/8% senior
notes due 2004) had interest rates ranging from 9.0% per annum to 12.9% per
annum, and our peso borrowings had interest rates ranging from 20% per annum to
30% per annum. At December 31, 1999, our U.S. dollar borrowings (other than the
11 3/8 senior notes due 2004) totaled $124.8 million and our peso borrowings
totaled $11.7 million.
We have U.S. dollar- and peso-denominated credit facilities which, in the
aggregate, permit us to borrow up to $176.5 million. At December 31, 1999, there
was $136.5 million outstanding under these facilities. We had approximately
$40.0 million available for borrowing under these facilities, of which
$36.7 million was under facilities with maturities of less than one year.
At December 31, 1999, we had $80.4 million of short-term and long-term, U.S.
dollar and peso- denominated credit facilities with Dominican banks and
institutions and $96.1 million of U.S. dollar-denominated credit facilities with
international banks. In the past, we met a significant portion of our funding
requirements with short-term borrowings in Dominican markets. Recently, the cost
of peso-denominated short-term indebtedness has ranged from 21% per annum to 30%
per annum and has adversely affected our net income. Moreover, from time to
time, the Dominican government has imposed limitations on loans by Dominican
banks in Dominican pesos in order to restrict the country's money supply and
curb inflation. This monetary policy has limited the sources of bank financing
and the amounts available to be borrowed from Dominican banks and increased the
costs of such borrowing.
As of December 31, 1999, our current liabilities exceed our current assets
by $83.7 million. This reflects our short-term borrowings in the Dominican
Republic with related companies and local banks and international banks.
Dominican banks lend on a short-term basis in order to negotiate interest rates
should market conditions change, without necessarily demanding the repayment of
credit facilities. It is our belief that the existence of negative working
capital does not affect adversely the continuity of our business.
We will seek additional credit facilities with international banks to
refinance our short-term credit facilities. In December 1999 and January 2000,
we obtained a commitment from Export-Import Bank of the United States to provide
credit guarantees of up to $46.6 million. The credits will be disbursed by The
International Bank of Miami, N.A. to be used for purchases of communications
equipment and material from Motorola and other suppliers. The commitment
provides that the credits will be available for disbursement over a 12 month
period and will be repayable over five years. We are negotiating the terms of
the facility and we cannot assure you that we will successfully conclude the
negotiations.
YEAR 2000 READINESS
The Year 2000 issue refers to the potential for system and processing
failures of date-related calculations, and is the result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
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date using "00" as the year 1900 rather than the year 2000. This could result in
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, operate our
sites, send invoices, or engage in similar normal business activities.
To date, we have not experienced any material Year 2000 issues and have been
informed by our material suppliers and vendors that they have also not
experienced material Year 2000 issues. We have not spent a material amount on
Year 2000 compliance issues. Most of our expenses were generally related to the
operating costs associated with time spent by employees and consultants in the
evaluation process and Year 2000 compliance matters.
If we fail to identify and remedy any non-compliant internal or external
Year 2000 problems, or Year 2000 problems create a systemic failure beyond our
control, including a prolonged telecommunications or electrical failure or a
prolonged failure of third party software on which we rely, we could be
prevented from operating our business and permitting users access to our sites.
Such an occurrence would have a material adverse effect on our business.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion about market risks to certain financial instruments
includes "forward-looking" statements that involve risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.
We are exposed to market risks from adverse changes in interest rates and
foreign exchange rates. We do not hold or issue financial instruments for
trading purposes.
INTEREST RATE RISKS
Our interest expense is sensitive to changes in the general level of
interest rates in the United States and in the Dominican Republic. At
December 31, 1999, we had outstanding $200 million aggregate principal amount of
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
$164 million and $187 million at December 31, 1998 and December 31, 1999,
respectively.
Our primary exposure to market risk for changes in interest rates relates to
our short-term borrowings from Dominican banks. At December 31, 1998 and
December 31, 1999, we had $47.3 million and $136.5 million of short-term and
long-term borrowings, including trade finance and capital leases outstanding
from Dominican and international banks, mostly denominated in U.S. dollars.
During 1999, our short-term and long-term U.S. dollar denominated borrowings
bore interest at rates ranging from 9.0% per annum to 12.9% per annum. During
1999, our short-term and long-term Dominican peso denominated borrowings bore
interest at rates ranging from 21% to 30% per annum. A 10% increase in the
average rate for our variable rate debt would have decreased our net income for
1999 by approximately $659,000.
FOREIGN EXCHANGE RISKS
We are subject to currency exchange risks. During 1999, we generated
revenues of $60.6 million in U.S. dollars and $110.2 million in Dominican pesos.
In addition, at December 31, 1999, we had $124.8 million of U.S.
dollar-denominated debt outstanding, (excluding the $200.0 million principal
amount of the 11 3/8% senior notes due 2004). At December 31, 1999, we had debt
indexed to the dollar of RD$36.1 million at a contracted exchange rate of
RD$16.00 per $1.00, resulting in a obligation of $2.3 million.
Dominican foreign exchange regulations require us and other
telecommunications companies to convert all U.S. dollar revenues into Dominican
pesos at the official exchange rate, and to purchase US dollars at the private
market exchange rate. Although the official exchange rate now fluctuates and is
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tied to the private market rate, the official exchange rate tends to be lower
than the private market rate. During 1999, the average official exchange rate
was RD$15.83 per $1.00 while the average private market rate was RD$16.03 per
$1.00.
Our functional currency is the U.S. dollar and, as a result, we must
translate the value of Dominican peso-denominated assets into U.S. dollars when
compiling our financial statements. This translation can create foreign exchange
gains or losses depending upon fluctuations in the relative value of the
Dominican peso against the U.S. dollar. During 1999, we recognized an
approximate $203,000 foreign exchange loss. If the Dominican peso had devalued
by an additional 10% against the U.S. dollar on average in 1999, then we would
have realized an additional foreign exchange loss of approximately $20,300.
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly consolidated financial data
for each of the last eight quarters. This data has been prepared on a basis
consistent with the audited consolidated financial statements appearing
elsewhere in this prospectus, and in the opinion of management includes all
adjustments (consisting only of normal recurring adjustments) to present fairly
the unaudited quarterly results when read in conjunction with our audited
consolidated financial statements and the
39
<PAGE>
related notes included in this prospectus. The results of operations for any
quarter are not necessarily indicative of results to be expected for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenues:
Toll......................................... $ 4,534 $ 4,328 $ 4,466 $ 4,317
International settlement..................... 10,843 12,656 13,177 13,656
Local service................................ 2,682 3,033 3,485 3,743
Cellular..................................... 4,236 5,056 5,443 5,629
Paging....................................... 1,264 1,183 1,109 971
Sale and lease of equipment.................. 997 823 978 1,316
Installations................................ 2,398 3,611 3,772 3,156
Other........................................ 62 7 205 2,366
------- ------- ------- -------
Total operating revenues......................... 27,016 30,696 32,636 35,154
------- ------- ------- -------
Operating costs:
Satellite connections and carrier............ 7,478 8,351 7,605 8,875
Network depreciation......................... 2,364 2,775 3,086 3,158
Expense in lieu of income taxes.............. 1,927 2,218 2,575 2,842
General and administrative expenses.......... 7,446 8,479 10,021 10,194
Depreciation expense......................... 637 770 915 918
Other........................................ 1,022 565 754 1,050
------- ------- ------- -------
Total operating costs............................ 20,874 23,157 24,955 27,037
------- ------- ------- -------
Operating income................................. 6,141 7,539 7,681 8,116
------- ------- ------- -------
Other income (expenses):
Interest expense............................. (4,366) (3,876) (3,799) (5,965)
Interest income.............................. 1,178 1,264 1,501 1,190
Foreign currency exchange gain (loss)........ (106) 21 (54) 244
Other........................................ (437) (441 (84) 1,807
------- ------- ------- -------
Total other expenses, net........................ (3,731) (3,032) (2,437) (2,725)
------- ------- ------- -------
Earnings before income taxes..................... 2,411 4,507 5,244 5,392
Income taxes-benefit............................. -- -- -- 352
------- ------- ------- -------
Net earnings..................................... $ 2,411 $ 4,507 $ 5,244 $ 5,743
======= ======= ======= =======
EBITDA........................................... $11,069 $13,301 $14,257 $15,034
======= ======= ======= =======
Earnings per share............................... $ 0.13 $ 0.21 $ 0.22 $ 0.23
======= ======= ======= =======
Weighted average number of shares outstanding.... 19,145 21,045 22,311 22,945
======= ======= ======= =======
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenues:
Toll......................................... $ 4,705 $ 5,620 $ 6,209 $ 6,583
International revenues....................... 12,971 15,382 15,475 16,728
Local service................................ 5,840 7,806 9,386 10,826
Cellular..................................... 5,863 5,962 6,794 7,854
Paging....................................... 900 673 604 518
Sale and lease of equipment.................. 966 1,460 1,414 3,849
Installations................................ 3,419 3,985 4,355 3,743
Other........................................ 158 14 731 23
------- ------- ------- -------
Total operating revenues......................... 34,823 40,902 44,969 50,125
------- ------- ------- -------
Operating costs:
Satellite connections and carrier............ 8,421 9,919 12,400 12,947
Network depreciation......................... 3,449 3,978 3,894 4,661
Expense in lieu of income taxes.............. 2,970 3,217 2,956 3,622
General and administrative expenses.......... 9,601 12,519 10,975 13,552
Depreciation expense......................... 1,045 1,164 1,265 1,381
Other........................................ 1,009 1,353 1,229 1,830
------- ------- ------- -------
Total operating costs............................ 26,495 32,149 32,719 37,993
------- ------- ------- -------
Operating income................................. 8,328 8,753 12,250 12,132
------- ------- ------- -------
Other income (expenses):
Interest expense............................. (4,455) (4,177) (5,677) (8,121)
------- ------- ------- -------
Interest income.............................. 971 747 552 119
Foreign currency exchange gain (loss)........ 165 309 (991) 315
Other........................................ (427) (426) (418) 2,347
------- ------- ------- -------
Total other expenses............................. (3,746) (3,547) (6,534) (5,339)
------- ------- ------- -------
Earnings before income taxes and cumulative
effect of accounting change.................... $ 4,582 $ 5,205 $ 5,716 $ 6,793
Income taxes benefit (expense)................... $ 56 $ -- $ -- $ (198)
------- ------- ------- -------
Earnings before cumulative effect of accounting
change......................................... 4,638 5,205 5,716 6,595
Cumulative effect of change in accounting for
organization expenses.......................... -- -- -- (120)
------- ------- ------- -------
Net earnings..................................... $ 4,638 $ 5,205 $ 5,716 $ 6,475
======= ======= ======= =======
EBITDA........................................... $15,792 $17,111 $20,364 $21,795
======= ======= ======= =======
Earnings per share............................... $ 0.19 $ 0.21 $ 0.23 $ 0.26
======= ======= ======= =======
Weighted average number of shares outstanding.... 24,845 24,845 24,845 24,845
======= ======= ======= =======
</TABLE>
41
<PAGE>
FOREIGN EXCHANGE CONTROLS
The foreign exchange system of the Dominican Republic is administered by the
Central Bank. In January 1991, the Monetary Board of the Central Bank instituted
the current foreign exchange system which permits the purchase of foreign
currency from commercial banks located in the Dominican Republic. Prior to
January 1991, persons were required to purchase foreign currency directly from
the Central Bank. The resolution adopted by the Monetary Board in 1991 retained
the Central Bank's administrative authority over the foreign exchange system by
requiring registration with and approval by the Central Bank in order to
repatriate foreign currency abroad. The Monetary Board further liberalized the
foreign exchange system in September 1994, but it retained the requirement that
the payment of debt obligations abroad be registered with the Central Bank. This
registration generally has been regarded as ministerial in nature, except that
short-term advances for exports of goods and services still require prior
approval of the Central Bank. Dominican banks are required to submit an
application form to the Central Bank for approval of any foreign currency
exchange transactions. We cannot assure you that Dominican authorities will not
change the Dominican Republic's monetary policies to restrict the exchange of
Dominican pesos for U.S. dollars.
The Central Bank requires that any person who has registered foreign debt
obligations pay a 5% commission on amounts of Dominican pesos exchanged for
foreign currency to be remitted abroad.
FOREIGN INVESTMENT
The Dominican Republic once restricted the repatriation of foreign direct
investments in certain sectors of the economy, including the telecommunications
sector. In December 1995, the Dominican government enacted Law No. 16-95 on
foreign investment, which, among other things, permitted foreigners to make
direct investments in the telecommunications sector and to repatriate funds from
such investments. The foreign investment law requires that foreigners register
their investment with the Central Bank in order to exchange Dominican pesos for
foreign currency. In conjunction with The Bank of New York, as depositary, we
will register the issuance of the Class A common stock in this offering with the
Central Bank.
The foreign investment law expanded the definition of direct foreign
investment to include investments in debt instruments. Prior to the enactment of
the foreign investment law, the Dominican government only treated equity
investments as direct foreign investments. As a result, the principal of and
interest on debt instruments could be repatriated so long as the obligor adhered
to the requirements of the Law on the International Transfer of Funds and the
regulations and resolutions promulgated under the law. The foreign investment
law brings "financial instruments" within its purview, establishing that foreign
investments could take the form of those financial instruments that the Monetary
Board categorizes as foreign investments. However, the Monetary Board has yet to
identify which "financial instruments" could become registered as a foreign
investment. We have been advised by our Dominican counsel, Pellerano & Herrera,
that "financial instruments" as contemplated by the foreign investment law are
Dominican peso-dominated instruments issued to foreign investors in the
Dominican Republic. As such, U.S. dollar-denominated instruments, including the
11 3/8% senior notes due 2004 and the % senior notes due 2007, must be
registered as foreign debt obligations under the foreign currency transfer law.
We also intend to register the new senior debt due 2007 as foreign debt
obligations.
42
<PAGE>
BUSINESS
OVERVIEW
TRICOM is a leading integrated communications service provider in the
Dominican Republic. Through the only completely digital local access network in
the Dominican Republic, a wireless network covering 80% of the population and
our submarine fiber optic cable systems, we offer local, long distance, mobile,
Internet and broadband data services. Through TRICOM USA, we own switching
facilities in New York and are one of the few Latin American long distance
carriers licensed in the United States. In 1998, we carried 46.4% of the
southbound voice and data traffic from the United States to the Dominican
Republic.
OUR STRATEGY
Our goal is to capitalize on our existing core businesses and competitive
skills to further build our market share and penetrate new markets. We intend
to:
LEVERAGE OUR ASSET BASE AND KEY STRENGTHS, INCLUDING OUR:
SWITCHING FACILITIES AND INTERNATIONAL FIBER OPTIC SUBMARINE CABLE SYSTEMS.
- We currently have switching facilities in New York and will add a switch
in Puerto Rico in the first half of 2000. We have interests in
international fiber optic submarine cable systems that connect Central
America and the Caribbean with the United States and Europe. These include
interests in Antilles I, Americas II, Pan American Cable System and Maya
I. We also intend to buy an interest in Arcos I, which is currently under
construction. Our facilities enable us to carry traffic at competitive
rates to several countries in addition to the Dominican Republic.
LOCAL EXCHANGE, INCLUDING WIRELESS LOCAL LOOP, AND MOBILE INFRASTRUCTURE.
- Our wireless network covers 80% of the Dominican Republic's population,
more than 6.5 million people. Our local exchange network features a
wireless local loop system that covers areas of Santo Domingo and
Santiago, the two largest cities in the Dominican Republic, and of six
other cities. Using wireless local loop technology we can connect a
customer within 48 hours, substantially less time than required for
wireline installation. We will expand coverage in areas already served by
the wireless local loop system and add new areas as well.
STRONG BRAND NAME RECOGNITION AND MARKETING CAPABILITIES.
- Our aggressive marketing and strong customer service have allowed us to
build a strong brand in our existing markets. We will capitalize on our
brand name recognition and marketing programs for prepaid phone cards to
target ethnic communities in New York, New Jersey, New England, Florida
and Puerto Rico. We will build on existing relationships with resellers
that provide traffic to the Dominican Republic and to other markets to
increase our international traffic.
HISTORIC STRONG REVENUE AND CASH FLOW.
- We have increased EBITDA sequentially in each of the last 11 quarters. Our
revenue and cash flow growth have contributed to the funding of our
network build-out. They serve as the basis for growth in future markets
and, we believe, will facilitate our obtaining additional financing for
our expansion plans.
EXPAND EXISTING MARKET COVERAGE IN THE DOMINICAN REPUBLIC AND THE UNITED STATES
BY:
FOCUSING ON HIGH-GROWTH MARKET SEGMENTS IN THE DOMINICAN REPUBLIC, INCLUDING
RESIDENTIAL LOCAL AND CELLULAR AND PCS SERVICES.
43
<PAGE>
- There remains substantial unmet demand for residential local service in
the Dominican Republic as large segments of the Dominican population still
have limited access to this service. Based upon information available to
us, at December 31, 1999, there were approximately 842,000 local access
lines in service, representing a teledensity rate of approximately 9.9%.
We plan to expand our wireless loop system into three additional cities in
2000 and seven more cities in the following three years. We will increase
capacity in the areas currently covered by the system. In 1999, we
introduced prepaid local access service, which we believe will increase
our penetration.
- The mobile wireless market has been the fastest growing segment of the
Dominican telecommunications market since 1996. Based on information
available to us, we believe the mobile wireless market has grown at an
annual average rate exceeding 70%, based on the number of subscribers. Our
cellular network covers 80% of the population and our PCS network covers
approximately 65% of the population. With these two networks we are able
to offer dual-band service, allowing PCS customers to use their mobile
phone over our analog service as well. We will expand our PCS system into
additional cities over the next several years, resulting in coverage of
75% of the Dominican population.
EXPANDING OUR OPERATIONS IN THE UNITED STATES TO TARGET ADDITIONAL ETHNIC
AND GEOGRAPHIC MARKETS AND TO EXPAND OUR OWNERSHIP AND CONTROL OF
DISTRIBUTION CHANNELS.
- As we expand our long distance network in Central America and the
Caribbean, we plan to target additional ethnic and geographic markets in
the United States through TRICOM, USA. We will then be able to offer
end-to-end long distance services to these new markets.
- TRICOM USA relies on distributors and resellers for the placement of its
prepaid calling cards and the generation of international traffic to the
Dominican Republic and other destinations. In order to expand our market
presence, and at the same time enhance margins on traffic generated by our
prepaid cards, we will consider opportunities to acquire distributors of
prepaid calling cards.
- Through the acquisition of resellers, we can capture a greater share of
the market for outgoing minutes and increase direct access to customers,
which should enhance our profit margins. Resellers also give us greater
access to ethnic markets in which we already participate and access to new
ethnic markets.
CAPITALIZING ON THE OPPORTUNITIES IN THE DOMINICAN REPUBLIC CREATED BY THE
GROWING DIGITAL ECONOMY TO EXPAND OUR BROADBAND DATA TRANSMISSION BUSINESS,
ISP BUSINESS AND E-COMMERCE OPERATIONS.
- As the Dominican economy has expanded, there has been greater demand for
broadband data transmission and Internet services. Our fully digital
network positions us to provide broadband access and high speed data
transmission to both the corporate data and residential ISP market. We are
currently at the final stage of testing digital subscriber line or xDSL,
very small aperture terminal or VSAT, and local multipoint distribution
service or LMDS technologies. We expect to implement one or more of these
technologies on a commercial basis to enhance our delivery of broadband
service. We will also consider acquiring or investing in cable television
systems that would enhance our access to the market for voice and high
speed data transmission.
- We believe our e-commerce opportunities will expand as an increasing
number of businesses and consumers embrace the Internet as a method of
purchasing goods and services. We plan to continue growing our vertically
integrated e-commerce platform, including providing webpages or websites
in our portal, electronic payment gateway and consulting services. We will
pursue partnerships and joint venture opportunities with large local
retailers and distributors in the Dominican Republic and Central America.
We can achieve economies of scale for marketing and connectivity by
increasing our merchant customer base.
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<PAGE>
EXPAND INTO SELECTED CARIBBEAN AND CENTRAL AMERICAN MARKETS BY:
SELECTIVELY PROVIDING TELECOMMUNICATIONS SERVICES IN OUR TARGET MARKETS.
- We believe that several countries in Central America and the Caribbean
have markets that have demographic, regulatory and demand characteristics
similar to those in the Dominican market at the time we initiated our
operations. These characteristics include relatively high settlement
rates, underserved markets dominated by a single incumbent provider and
increased liberalization of the telecommunications industry. In these
countries, we believe we have the opportunity to export our business
model.
- We will seek to establish a presence in each of our target markets in the
region by selectively providing one or more telecommunications services.
We will expand our product offerings over time to include other segments
in which we have been successful in the Dominican Republic including
international long distance, cellular, PCS, broadband data transmission,
Internet and e-commerce.
- In entering new markets, we will consider forming strategic alliances or
joint ventures with local companies, acquiring local companies or
obtaining licenses to provide telecommunications services. We will select
our entry strategy for each market based on our competitive strengths in
that market.
APPLYING OUR WIRELESS EXPERIENCE, SCALABLE BACK OFFICE SYSTEMS AND MARKETING
KNOW-HOW TO DEVELOP TELECOMMUNICATIONS OPERATIONS.
- We will rely on the technical expertise that we have developed to deploy
wireless technologies to enter new markets. Our deployment of a CDMA-based
wireless network has enabled us to enhance our mobile services
capabilities while also accelerating the expansion of our local access
presence in the Dominican market. Our network is one of the largest
wireless local loop networks in operation in the world. Wireless local
loop technology offers ubiquitous coverage, rapid installation, a scalable
network with redeployable equipment, reduced maintenance costs and
mobility, and is ideally suited for new entrants in an underserved
telecommunications market.
- Our scalable back office systems, which integrate sales, customer service,
collections and financial control functions will allow us to expand our
operations in a cost efficient manner.
- We believe that our marketing know-how is an integral part of our sales
model. This model features proactive sales efforts, targeted sales
campaigns and reduction of credit risk through promotion of prepaid
services and can be exported to other markets in the Caribbean and Central
America.
SERVICE OFFERINGS
Our service offerings include:
- Local service;
- Mobile services;
- International long distance; and
- Broadband data transmission and Internet.
LOCAL SERVICE
We are a competitive local exchange carrier and had 118,926 local access
lines in service at December 31, 1999, including 38,310 net lines additions
during 1999. Our local access network covers areas with approximately 80% of the
population of Santo Domingo, Santiago and six additional cities.
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All of our basic telephone service customers have access to a range of
value-added services, including call forwarding, three-way calling, call
waiting, and voice mail applications. In addition to local service, we provide
direct-dialed, collect and operator-assisted international and domestic long
distance services and Internet access to our residential and corporate
customers.
We offer our customers broad flexibility in assembling customized packages
of services, which provide our customers with cost savings and enhanced control
over their consumption of telephone services. Customers may choose from a menu
of services, including domestic and international long distance services, local
service and value-added services. They also may bundle their local access
service with cellular or PCS, paging and Internet services. Service packages
permit customers to preset their monthly bills based upon, for example, local
service minutes as well as long distance minutes and specified destinations.
Customers are responsible for paying for usage levels in excess of preset
package amounts, at regular per minute rates. We believe that providing
customers with such budgeting capability increases consumer confidence in using
telecommunications services, consequently allowing for increased service
penetration, higher levels of customer satisfaction and lower incidence of
delinquent payments.
We have accelerated our local access network expansion program by deploying
a wireless local loop. The wireless local loop consists of receivers that are
installed at a customer's house, digital switches and a base station
transmitter. The receiver is connected by cable to a standard telephone jack
that connects to a standard telephone. The receiver is powered by the customer's
home power supply and also contains a battery that allows operation to continue
for up to approximately 24 hours of standby and eight hours of talk time in the
event of a power outage. The wireless local loop offers voice quality as clear
as telephones connected by wirelines.
We also sell fully integrated turnkey systems and system components. We are
a distributor in the Dominican Republic for Mitel and Comdial, two leading
manufacturers of private branch exchanges and key telephone systems. We are also
a leading provider of computer telephony integration systems in the Dominican
Republic.
MOBILE SERVICES
Our mobile network covers approximately 80% of the Dominican Republic's
population. We currently offer both cellular and PCS service. Based on
information available to us, there were approximately 399,100 cellular and PCS
subscribers in the Dominican Republic at December 31, 1999. At December 31,
1999, we had 176,080 cellular subscribers, including 6,424 PCS subscribers,
representing approximately 44% of the Dominican mobile telephony market. Our net
addition of cellular and PCS subscribers in 1999 was 67,548, which represents
47% of net subscriber additions for 1999 in the Dominican Republic.
Our cellular and PCS subscriber base grew by 62% during 1999. We attribute a
substantial portion of this growth to our prepaid cellular and PCS card, the
Amigo card. At December 31, 1999, prepaid cellular and PCS subscribers accounted
for 40% of the entire cellular and PCS market of the Dominican Republic and 85%
of our cellular and PCS subscribers, based on information available to us. Our
Amigo card program has expanded our cellular and PCS customer base because it
offers cellular and PCS service to individuals who would not satisfy our current
credit policies and because it appeals to customers who prefer to budget their
cellular and PCS telephone spending.
We have offered PCS service since April 1999. This technology provides for
added security and privacy compared with traditional analog systems, and it also
offers greater capacity. PCS customers are able to receive all of the benefits
related to a digital service, including digital messaging, caller ID and
voicemail. Our PCS network covers areas with approximately 65% of the population
in the Dominican Republic and is less extensive than our analog network. We
offer a dual-band service, allowing customers to use seamlessly their mobile
phones nationwide over both digital and analog networks.
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At December 31, 1999, approximately 15% of our current subscribers leased
their handsets from us. We discontinued leasing handsets to new individual
subscribers. We also have entered into arrangements with major consumer
electronics retailers and a network of independent cellular and PCS dealers to
offer our cellular and PCS services in conjunction with their sale of handsets.
As a result of our arrangements with major electronics retailers for the sale by
them of handsets in conjunction with subscriptions for our services, we sold
handsets to less than 15% of our new subscribers in 1999. We do not subsidize or
provide credit on the sale of cellular and PCS handsets.
We have provided paging services since April 1995. At December 31, 1999, we
provided paging services to 28,737 subscribers, representing approximately 11%
of the Dominican paging market according to market information available to us.
In 1999 we stopped soliciting new paging subscribers. We believe that the
success of our prepaid cellular and PCS program has contributed to the decline
of paging as a significant part of our business because customers have replaced
paging services with prepaid cellular services.
INTERNATIONAL LONG DISTANCE
In the Dominican Republic, we provide international long distance services
to our local access, cellular and PCS customers. In addition, we offer a prepaid
calling card for international distance, the Efectiva card, that can be used
from any telephone in the Dominican Republic. We operate telephone centers that
provide access to telephone services to individual customers who either do not
have telephone services in their own homes or who are attracted by the
competitive pricing of the telephone centers. The centers offer a wide range of
telephone services, in addition to long distance.
In the United States, our subsidiary TRICOM USA provides international
carrier services principally to resellers, which account for an increasing share
of international long distance traffic between the United States and the
Dominican Republic. Through our switching facilities in the United States, we
have been able to provide resellers with an alternate channel for sending
international long distance traffic. In addition, by controlling the origination
and termination of international long distance traffic between the United States
and the Dominican Republic, we believe that we are able to send and receive such
traffic at a lower cost to us than by exchanging traffic with traditional
international carriers.
Each year since the initiation of TRICOM USA's operations, we have derived a
greater percentage of international revenues from resellers. During 1999,
resellers originated 42% of the international long distance minutes from the
United States to the Dominican Republic that we received. Minutes delivered by
resellers may fluctuate significantly. While we enter into agreements with
resellers, they are not required to provide to us any amount of traffic. The
price per minute charged by us to a reseller is negotiated as often as monthly.
During 1999, we received traffic from approximately 30 resellers.
TRICOM USA also markets a number of prepaid cards to ethnic communities in
New York, New Jersey, New England, Connecticut and Florida and in Puerto Rico.
Each prepaid card is assigned a unique identification number and a face value
ranging from $2 to $20. The prepaid card's dollar balance is reduced by the cost
of each call. TRICOM USA sells the cards to distributors that resell the cards
to retail outlets.
BROADBAND DATA TRANSMISSION AND INTERNET
We provide broadband data transmission services to 119 of the largest
business customers in the Dominican Republic, through several means of delivery
including fiber optic cable and digital wireless point to point radio links. In
addition, we provide some of these large customers with Internet access, private
networks and frame relay services. Through our integrated services digital
network or ISDN, we
47
<PAGE>
offer unified transmission of voice and data over the same strand of fiber optic
cable. We recently increased transmission capacity to provide larger bandwidths.
In the Dominican Republic we are the second largest ISP. We provide Internet
connectivity to the residential and corporate markets through traditional
dial-up connections, as well as through dedicated lines, with speeds ranging
from 56 Kbps to 1.5 Mbps. In the near future, we expect to deploy our xDSL and
wireless broadband delivery solutions, which are currently in the final stages
of testing. Our PCS and paging services are now fully integrated with our
Internet service, offering email and digital messaging through our website,
www.tricom.net. Our Internet TV product allows users who do not own a personal
computer to access the web through their cable TV sets, adding simplicity to our
already varied offering.
We provide a vertically integrated e-commerce platform targeted to the
largest Dominican and regional retail merchants. Our platform is based on one or
more of the following services:
- providing the webpages or websites of our merchant customers in our
portal;
- offering them a reliable and fast Internet connectivity platform and a
secure electronic payment gateway featuring 128-bit encryption technology;
and
- webpage design and marketing consulting services.
We believe that in the Dominican Republic and other Central American
countries, very few merchants have the scale and resources to build and support
their own websites. They will find significant advantages in sharing the
connection, hosting and marketing costs of having an e-commerce platform
together with other regional merchants. We are developing our own portal
platform and will attempt to minimize marketing and development costs by sharing
them with some of our merchant customers and potential partners. We also will
seek to enter into commercial relationships with some of the largest merchants
able to offer fulfillment services in the Dominican Republic and other targeted
markets. We are in the process of completing agreements with eight retail
merchants that provide transportation, electronics, books, music, software and
computers. Depending on the nature of the relationship with our merchant
customers, we will share a portion of the revenues generated over our e-commerce
platform.
In March 2000, we established a strategic alliance with Intellicom, a
provider of two-way satellite-based Internet services and a subsidiary of U.S.
based Softnet Inc. Under the agreement, we are now a distributor of Intellicom's
products and services in the Dominican Republic, Puerto Rico, Nicaragua,
Honduras, Panama, El Salvador, Costa Rica, Guatemala, Colombia, Venezuela, U.S.
Virgin Islands and other countries in the Caribbean and Central American
regions. Intellicom's services, marketed under the TRICOM brand, combine caching
and satellite technologies and provide broadband Internet access, bypassing
landline telecom infrastructures. These services also include e-mail, network
news groups, user authentication and web hosting and are targeted at ISPs,
educational institutions, multiple dwelling units and large single site or
multi-site businesses including banks, insurance companies and hotels.
MARKETING AND SALES
Our advertising and promotional materials in the Dominican Republic
emphasize that we are a full-service provider of local and long distance
services and that customers can realize significant savings from the packaging
of services. We use targeted marketing programs, concentrating on those areas of
urban centers where we currently provide services and employ marketing
techniques often used to promote consumer products, including television, radio
and newspaper advertising, door-to-door sales for basic local service and the
use of credit card lists and other databases to identify and contact potential
users of cellular and PCS services. We distribute gifts to potential and new
subscribers, including prepaid calling cards, bonus coupons and other
promotional goods bearing our logo. Other means of advertising include
billboards, block parties and telemarketing.
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LOCAL AND MOBILE SERVICE
In the initial stages of our deployment of local services, we relied
primarily on door-to-door sales, reflecting the limited geographic extent of our
conventional local telephone network buildout. Since the deployment of the
wireless local loop which gave us ubiquitous presence, we have used mass media
to a greater extent to promote our local telephone services.
We have achieved our mobile market share growth through direct sales and
database marketing techniques, telemarketing and aggressive massive advertising.
We sell mobile services from 13 of our offices and more than 246 other offices
operated by independent distributors. Through direct sales, we also pursue
additional corporate and commercial accounts which, in 1999, accounted for as
much as 13% of airtime but represented only 3% of our cellular and PCS
subscriber base. We also have entered into arrangements with major consumer
electronics retailers to offer our cellular and PCS services in conjunction with
their sale of handsets.
Our advertising for PCS services emphasizes voice quality, clarity and
value-added services. Our advertising for prepaid cellular services features the
endorsement of Sammy Sosa and emphasizes convenience and accessibility to
customers without credit history.
Our corporate sales and marketing approach to large business customers is to
offer comprehensive and customized telecommunications solutions for each
corporate customer's needs. Our sales staff works with each customer to gain a
better understanding of that customer's operations and to develop
application-specific solutions that are appropriate for each customer. Many of
our sales executives have engineering backgrounds and are supported by product
development and customer service teams.
INTERNATIONAL LONG DISTANCE
In the Dominican Republic, in addition to our local access and mobile
subscribers, we target individual customers who do not have telephone services
in their own homes for our long distance services. In the United States, we
target the large immigrant Dominican community and other ethnic populations.
We feature our prepaid card, Efectiva, in our advertisements for our basic
services, as well as in separate advertising. Our advertising emphasizes the
accuracy and reliability of our billing and the savings that subscribers can
realize. The Efectiva card is distributed at our call centers and through
wholesalers and retailers. We have six wholesale distributors and an internal
sales force targeting smaller retailers totaling 3,200 points of sale for our
prepaid cards.
TRICOM USA advertises its prepaid cards on radio and through print media
targeted at Dominican and other ethnic communities. Advertisements emphasize
price, voice quality as well as patriotic or ethnic themes. Cards are
distributed to wholesalers under the TRICOM name and are sold primarily in small
retail stores, including groceries, beauty parlors, drugstores and newsstands.
Some cards feature endorsements by Sammy Sosa.
BROADBAND DATA TRANSMISSION AND INTERNET
For broadband data transmission services, we target the Dominican Republic's
400 largest businesses, which require more sophisticated technology and demand
more service and support. Our marketing professionals target these businesses in
the Dominican Republic, including large multinationals, local business
conglomerates and the largest hotels.
In the residential market we offer packages that bundle Internet access
together with our local, wireless and other services. We have entered into
arrangements for the distribution of Internet access services through major
Dominican computer retailers, by pre-installing our services and offering the
first month of service free of charge. In a promotion to increase computer
penetration in the country,
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we have also launched our "ENTER-NET" plan offering financing provided by a
GFN-affiliated bank for computer equipment bundled with Internet access via our
service.
We currently are testing a number of broadband delivery systems, including
xDSL, VSAT and LMDS. These platforms will enable us to increase our penetration
into markets requiring high speed data transmission and Internet access.
For e-commerce services, we target the largest local retailers and
distributors in the Dominican Republic and Central America. We market to them
the advantages of offering their customers an efficient and reliable e-commerce
platform and the advantages of outsourcing it to us. We emphasize our
relationship with Bancredito, an affiliate of GFN, which provides us with a
secure electronic payment gateway featuring 128-bit encryption technology, as
well as our growing ISP business and our experience with offering complex
connectivity solutions. Our extensive use of the web to market and manage
customer service and billing for our telephony services serves as a model to
demonstrate our e-commerce expertise.
CUSTOMER SERVICE
In the Dominican Republic, we provide customer service for all of our
services through one central service center and 13 commercial offices. Our
customers may subscribe for telephone services, pay and obtain information about
monthly bills and inquire about billing adjustments at our offices. To enhance
customer service, our representatives use our customer service system linked to
our central billing and service order system, enabling them to handle
expeditiously both billing and service inquiries.
We provide a 24-hour interactive voice response service through which
customers can register claims and make billing inquiries. In addition, customers
may access their account information online 24 hours a day, 7 days a week, on
our website, www.tricom.net. Our website provides information about our services
and can be used to purchase products including prepaid cards, cellular phones
and accessories.
We have recently invested in customer relationship management and
interactive voice response systems in order to improve our customer service
delivery. Among other benefits, these will contribute to our development of our
data warehouse which we will actively use to design our targeted marketing
strategies.
We seek to provide installation and repair services to our customers on par
with such services provided by the best telecommunications companies throughout
the world. In order to achieve this goal, we have established service benchmarks
for, among other things, network availability, installation and repair
intervals.
Our customer service department gathers information from our customers,
which we then use to tailor our products and services to meet customer needs. We
contact customers shortly after initial installation to address any service
concerns or problems that they may have. We regularly survey our customers to
determine their satisfaction with our services and to improve services based
upon the explanations offered by customers who voluntarily cancel their
services. Furthermore, we have a customer retention department that works to
determine the cause for customer churn and also to develop appropriate retention
strategies to target this segment.
BILLING AND CREDIT POLICIES
We have developed an integrated billing system for local, long distance,
cellular, paging and value-added services. The integrated billing system enables
our customers to obtain a single bill, providing detailed information about
charges for all services rendered. We have led the Dominican telecommunications
market in the introduction of billing packages that provide detailed call
reports with time-of-day, day-of-week and destination information as well as
flexible billing discount programs
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which are similar to those found in the most competitive markets outside the
Dominican Republic. Our subscribers can call our center and speak with a
customer care representative and obtain account and statement information. Our
customers also can access information over the telephone through "FONOCOM," an
interactive voice response system that enables customers to consult their most
recent calls and account balances. Our customers also may request a copy of
their bill, which is then delivered to them via facsimile transmission.
Cash payments may be made at walk-in commercial offices, centers and
affiliated bank branches, or funds may be debited from credit cards or bank
accounts. Our customers also may pay their bills at any one of our over 200
payment stations, which are located in neighborhood gas stations, grocery stores
and other retail outlets.
Residential customers, who are not prepaid customers, subscribing for basic
telephone service are required to pay an installation fee of up to RD$3,200
($200) in cash. If the customer chooses to pay the installation fee in
installments, he must pay within two months. We believe that the higher
installation fee is a sufficient threshold for screening subscribers for basic
telephone service. Each residential basic telephone service subscriber has a
credit limit of approximately $313. We contact any customer exceeding this
credit limit and request that such customer pay all or part of the outstanding
bill. In December 1999, we introduced a prepaid local access line program. This
program appeals to customers who prefer to budget their telephone spending and
allows us to expand our market to customers who otherwise would not qualify
under our credit policies.
We require all individuals wishing to subscribe for cellular and PCS
services to own a credit card or prepay either by using the Amigo card or making
a deposit through the Cellflex prepayment program. Our service contracts do not
cover a specified amount of time and remain in effect as long as each customer
remains active and current in paying its bills. Each cellular and PCS service
subscriber is assigned a credit limit, which varies depending upon the
individual's monthly usage and payment history.
Since 1996, our policy has been to suspend service for all residential basic
telephone service subscribers if payment is not received within 45 days after a
bill is issued and to terminate service 45 days after the suspension date.
Cellular, PCS and paging services are suspended when the prepayment balance is
exhausted or when a customer's credit limit is reached. Customers must pay
RD$255 ($16) for wireline services, RD$73 ($5) for paging services and RD$255
($16) for Internet services in order to reinstate service after termination.
Cellular subscribers whose service has been terminated may reconnect only by
purchasing an Amigo prepaid card or by paying RD$188 ($12) to obtain Cellflex
services.
We had an average monthly churn rate for cellular subscribers of 1.8% in
1999 compared to an average monthly churn rate of 3.6% in 1998. We calculate
average monthly churn by dividing the number of subscribers disconnected during
the year by the sum of subscribers at the beginning of each month during such
year.
TRICOM USA distributes its prepaid cards through wholesale distributors.
Depending on their credit history and the length of their relationship with
TRICOM USA, wholesalers are required to pay in full for calling cards upon
delivery or are extended credit for up to 15 days. All distributors of prepaid
cards in the Dominican Republic are extended credit for up to 30 days.
TRICOM USA requires that new reseller customers prepay for long distance
services. Customers that have a previous relationship with TRICOM USA are
extended credit, on average, for up to 15 days. Traditional long distance
carriers generally pay TRICOM USA within 60 to 90 days for traffic.
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MANAGEMENT INFORMATION SYSTEMS
Our management information systems are designed to provide two principal
functions. First, they must generate accurate information in real time, which
employees at all levels of the organization can readily access, particularly
those employees who deal directly with customers. Second, our customers must be
able to access directly pertinent information from our computer network. We have
designed a fully integrated, open architecture computer network with a view to
providing these functions.
We use Oracle as our common database and software application development
tool set. We use Oracle Financials for billing, accounts payable, accounts
receivable, general ledger, purchase orders, inventory control and fixed asset
accounting.
We have developed an integrated billing system that runs on an Oracle
platform. Our billing system rates calls in one-second increments for calls made
from our retail telephone centers, six-second increments for calls made with our
prepaid calling cards and one-minute increments for calls made from local access
lines, cellular and PCS telephones. The billing system also enables us to rate
calls according to each customer's specific service package, thus permitting us
to offer tailored packages.
NETWORK INFRASTRUCTURE
Our state-of-the-art fully digital network includes:
- Local access network comprising 31 digital loop carriers connected via
fiber rings to three supernode switches and 39 remote switches;
- Fully redundant digital wireless point to point backbone;
- Mobile network comprising two MSCs and 72 cell sites;
- Two satellite earth stations and capacity in six international undersea
cables; and
- One supernode switch in New York and one switch in construction in Puerto
Rico.
We invested over $520 million from 1992 through 1999 to develop a network
infrastructure, which is fully digital except for portions of our cellular
network.
LOCAL SERVICE AND MOBILE NETWORK
The core of our network is composed of Nortel International gateway
switches: the DMS-300 and DMS-250 Supernodes. The DMS-300 Supernodes have
switching capacity of more than 4,300 digital trunk lines and possesses special
features such as ultra-high-speed, port-to-port call switching that enables the
device to handle 240,000 calls per second. In addition, the switch's time-of-day
capability allows us to distribute efficiently our telecommunications traffic
and provide, as a result, more competitive pricing. The DMS-250 Supernode switch
also provides statistical call distribution information, which allows us to
control our proportionate flow of traffic. Without such capabilities, we would
have to conduct these monitoring tasks manually. The switch also possesses CCS-7
capability, which enables us to use one common channel for signaling purposes,
optimizing the channels available for voice transmission. Without this
capability, a network must use each of its channels to signal the origination
and termination for each call, which often results in uncompleted calls and poor
circuit utilization.
Our local access network is composed of three Northern Telecom DMS-100
Supernode switches, one DMS-500, one DMS-10 switch, 38 remote switches and 33
digital loop carriers. Each of the DMS-100 switches has a distributed processing
architecture, can handle remote equipment, and is capable of supporting up to
90,000 customers. All of our Northern Telecom switches are equipped with SS7
signaling capability and enable us to offer value-added services including
caller identification, three-way calling and automatic recall. Our intra-city
network is comprised of 400 route miles of fiber optic cable and 2,313 miles of
copper cable in 7 cities.
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We use a modular network architecture design based on digital loop carrier
technology and fiber rings to connect to local access lines. Our central office
switches are connected by fiber optic cable to various digital loop carriers
located throughout the three largest cities in the Dominican Republic. The
digital loop carriers can be located up to 160 kilometers away from the central
office switch. The digital loop carriers are small in size and can be easily
installed at relatively low cost. These digital loop carriers, in turn, carry
telecommunications traffic by copper or fiber optic lines to the customer. All
these activities are remotely monitored by the management system, located at the
central office. Without the use of the digital loop carriers, we would have to
maintain various central office switches, which would require us to incur
substantial additional costs, including land acquisition, obtaining the
necessary rights-of-way and hiring additional personnel to manage these
operations.
We transmit our domestic traffic through a fully redundant digital wireless
point to point backbone system, which provides both intra-city and inter-city
telecommunications services. The system links approximately 80% of the country's
population, including Santo Domingo, Santiago, San Francisco de Macoris and
certain key areas in the eastern and northern regions of the country that are
centers of the tourist and agricultural business industries. With 99.9% circuit
availability, the wireless point to point system serves the areas that have high
telecommunications usage, including large industrial and commercial areas. We
interconnect with Codetel at 18 network access points in 11 cities of the
Dominican Republic.
To oversee and monitor the activities of our network infrastructure, we have
installed an open architecture network management system. This system allows us
to manage our central office switches and remotely monitor all network
components, including remote switches, wireless point to point digital radios,
wireless data communications network and digital loop carriers. This system can
only function in a fully digitalized network such as ours. The management system
provides continuous information regarding our equipment, any equipment failure,
and the security of the network. In addition, it allows the central office to
send commands and engage in remote line testing functions. The management system
enables us to maintain integrated management of our network.
Our cellular network in the Dominican Republic uses NAMPS protocol and our
PCS network uses CDMA protocol. The Motorola EMX-2500 cellular switch, along
with advanced radio channel technology for wireless service systems, allows us
to provide low cost and reliable mobile service. Our mobile network currently
has 72 cell sites with 2,935 RF channels capacity and two mobile switching
centers or MSC, in Santo Domingo and Santiago which enable us to provide mobile
coverage to those regions of the Dominican Republic with the greatest demand for
mobile services.
INTERNATIONAL LONG DISTANCE NETWORK
In July 1998, we installed our own state-of-the-art switching facility in
the New York metropolitan area, a Northern Telecom DMS-250 Supernode. We also
are installing a switch in Puerto Rico that will become operational in the first
half of 2000. By having our own switching facilities, we will be able to provide
termination of international long distance traffic at very competitive rates to
several countries in addition to the Dominican Republic.
By purchasing and leasing international traffic capacity from various
systems, we have diverse options to route our international traffic, and are
fully connected to the international network. We have purchased capacity in
various international submarine fiber optic cables that have been built to send
and receive international traffic to various countries. These submarine cables
include Americas I, Columbus II, TAINO CARIB and Antilles 1, which directly
provide service, or connect with other cables that provide service to Latin
America, the Caribbean and Europe. We own 18% of the Antilles 1 submarine cable,
which connects the Dominican Republic to the United States via Americas I and
Columbus II. We also own interests in the Maya I, Columbus III and Americas II
cables. We also intend to buy an interest in Arcos I, which is currently under
construction. In addition, we have an 11-meter Vertex satellite earth station
which connects to the PanAmSat satellite system and a 15-meter
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standard A INTELSAT earth station which connects to the INTELSAT satellite
system serving the Atlantic region. The use of these satellite facilities allows
us to route international traffic between the Dominican Republic and most other
countries in the world.
BROADBAND DATA TRANSMISSION AND INTERNET NETWORK
Data communications services are primarily targeted to the business
community and provided at a variety of speeds, including subrate, 64 kbps, and
superrate (1.544 Mbps and fractional T-1). Our data communications network uses
a transmission backbone consisting of Newbridge data multiplexing nodes, linked
over a 155 Mbps (OC-3) bi-directional fiber optic ring and digital wireless
point to point radio links. The "last mile" to the customer is provided through
fiber optic cable and/or digital wireless point to point radio links. Currently
we have 3,269 access lines offering speeds in excess of 56 Kbps. This data
network has the capability to monitor the communications link all the way to
customer desktop level and to support multiple data protocols such as ATM and
frame relay.
To provide data communications services, we have strategically installed
various small data nodes in cell sites and RSCs or remote switching centers.
Our technology infrastructure is built and maintained to assure reliability,
security and flexibility and is administered by our technical staff. Each of our
servers can function separately, and key components of our server architecture
are served by multiple redundant machines.
We maintain our central production servers at the data center of our
headquarters. Our operations depend on the ability of the network operating
centers to protect their systems against damage from fire, hurricanes, power
loss, telecommunications failure, break-ins or other events.
We employ in-house and third-party monitoring software to monitor access to
our production and development servers. Our reporting and tracking systems
generate daily traffic, demographic and advertising reports, which are copied to
backup tapes each night.
COMPETITION
LOCAL AND MOBILE OPERATIONS
We currently compete against three other telecommunications companies in the
Dominican market: Codetel, All America Cables and Radio, Inc. and Skytel.
Codetel, a wholly owned subsidiary of GTE Corp., is an integrated communications
service provider and has public telephone centers which compete with our retail
telephone centers. In January 2000, Centennial Cellular Corp. announced its
acquisition of 70% of All America Cables and Radio. We believe that Centennial
intends to expand All America's share of the market for cellular services.
Skytel, a U.S. paging service provider, has been granted a license by the
Dominican government and now provides paging services in the Dominican Republic.
In 1999, France Telecom acquired a company which had been granted a concession.
While we believe that this concession has expired and anticipate challenging the
concession on this basis, we expect that pending disposition of our challenge,
France Telecom will use the concession to develop wireless roaming services
targeted to European tourists. The Dominican government also has granted
concessions to the following telecommunications companies which either have not
commenced operations yet or have minimal operations: Telecomunicaciones America,
C. por A., Compania Telefonica del Norte, S.A., Servicios Globales de
Telecomunicaciones, S.A., Transmisiones & Proyecciones, S.A., Defisa, S.A.,
Comunicaciones Dominicanas S.A., Turitel S.A. Economitel C. por A., and
Servicios Moviles de Comunicacion, S.A., (MOVICELL). Each of the concessions
allows for the provision of the same telecommunications services that we
provide. In addition, we believe that international telecommunications
companies, from time to time, have considered investments in the Dominican
market.
The growth of our market presence in the Dominican Republic depends upon our
ability to obtain customers in areas that currently are not served or are
underserved by Codetel and to convince these
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customers to either add or switch to the telephony services provided by us. We
initially attempted to compete with Codetel by providing lower rates. From time
to time, Codetel has implemented significant price reductions for certain
categories of calls in response to our marketing initiatives and, as a result,
forced us to modify rates for certain services. We will continue our efforts to
compete by reaching unmet demand and providing innovative products and
competitive pricing, reliable communications, responsive customer service and
accurate billing. We emphasize that customers can realize savings through our
packaged service offerings. In addition, we will leverage our fully integrated
and completely digital wireline network to continue to provide accurate and
reliable basic and Value-added telephone services. However, Codetel, if it
decided to do so, could spend significantly greater amounts of capital than are
available to us. Codetel also could upgrade its network or sustain price
reductions over a prolonged period. Any such efforts by Codetel could have a
material adverse effect on our ability to increase or maintain our market share
and on our results of operations.
INTERNATIONAL LONG DISTANCE
The international telecommunications industry is intensely competitive and
subject to rapid change precipitated by changes in the regulatory environment
and advances in technology. Our success depends upon our ability to compete with
a variety of other telecommunications providers in the United States and in each
of our international markets. Our competitors include large facilities-based
multinational carriers such as AT&T, MCI/WorldCom and Sprint, smaller
facilities-based wholesale long distance service providers in the United States
and overseas that have emerged as a result of deregulation and switched-based
resellers of international long distance services. We compete on the basis of
price, reliability, quality of transmission, capacity at any time to terminate
traffic and customer service. We expect that competition will continue to
intensify as the number of new entrants increases as a result of the new
opportunities created by the 1996 Telecommunications Act, implementation by the
FCC of the United States' commitments under the World Trade Organization and
basic telecommunications agreements and changes in legislation and regulation in
various foreign target markets.
INTERNET ACCESS AND E-COMMERCE SERVICES
Many companies already provide connectivity and e-commerce services targeted
to Spanish-speaking audiences. All of these companies compete with us for
subscribers, user traffic, advertising dollars and e-commerce opportunities. We
expect to experience increased competition from the traditional
telecommunications carriers. Competition for subscribers, users and e-commerce
opportunities is intense and is expected to increase significantly in the
future, particularly because there are no substantial barriers to entry in our
markets.
EMPLOYEES
At January 31, 2000, we had 1,527 employees. We believe that this number may
increase over the next several years as we expand our network and our customer
base. None of our employees belong to labor unions. We believe that we have good
relations with our employees.
PROPERTY
Our principal properties consist of our fiber optic network, satellite earth
stations, nodes and real estate. At December 31, 1999, the net book value of our
real estate and equipment was approximately $455.0 million. Our real estate
holdings are strategically located throughout the Dominican Republic, providing
the infrastructure for the telecommunications network and sales facilities. Most
of our properties are related directly to our telecommunications operations and
are used for network equipment of various types, such as telephone exchanges,
transmission stations, wireless point to point radio equipment and digital
switching nodes. Our current headquarters are located in downtown Santo Domingo
in a building that we own.
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LEGAL PROCEEDINGS
In August 1999, a Dominican company, DCS International S.A., and two
individual plaintiffs whom we believe are officers or employees of DCS, sued us
in Dominican courts for alleged losses and damages of up to approximately
RD$200 million ($12 million) resulting from the imprisonment of two of the
individuals for 15 days. The plaintiffs alleged that their imprisonment was the
result of an investigation by the local district attorney and the police that we
instigated following an irregular increase in telephonic traffic at certain
telephone numbers. We requested that the court dismiss the action because of
lack of jurisdiction. The court granted our motion to dismiss and assessed the
costs of the proceedings against the plaintiffs. The plaintiffs may appeal the
ruling or resubmit the action before the proper court within one month from the
date of the ruling. We believe, after consulting with legal counsel in this
action, that the matter will not have a material adverse effect on our results
of operations and financial position.
There are no other legal proceedings to which we are a party, other than
ordinary routine litigation incidental to our business which is not otherwise
material to our business or financial condition.
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LEGISLATION AND REGULATION
Our operations are subject to the Telecommunications Law of the Dominican
Republic and the Dominican system of regulating and structuring the
telecommunications sector, and, with respect to our U.S. operations, U.S. laws
and Federal Communications Commission regulations. The following summary of
these laws and regulations is not intended to be, and does not purport to be,
comprehensive, and the laws and regulations described may be amended, repealed
or otherwise modified.
GENERAL
The legal framework of the telecommunications sector in the Dominican
Republic consists of General Telecommunications Law No. 153-98, enacted on
May 27, 1998, resolutions promulgated under that law and the concession
agreements entered into by the Dominican government with individual service
providers.
In addition to the industry-specific legal framework, the Constitution of
the Dominican Republic affects the telecommunications sector. Among other
individual and social rights, the Dominican Constitution guarantees Dominican
citizens the freedom of trade. The Constitution specifically provides that
monopolies may be established only for the benefit of the Dominican government
and must be created by law. None of the existing concession agreements grants a
monopoly in any sector of the telecommunications industry to any carrier, and
the Dominican government has announced a policy of encouraging growth through
competition in the telecommunications industry.
In 1930, Codetel was granted a concession to operate telecommunications
services in the Dominican Republic. Over the years, while other service
providers entered the Dominican telecommunications market, none was successful
in becoming a full-service telephone company able to compete with Codetel
because Codetel was not required to allow other service providers to
interconnect their services with its physical infrastructure. To provide
services, a company would have to install its own wireline telecommunications
network. The economics of this requirement hindered competition. As a result,
Codetel held a de facto monopoly for more than 60 years.
To substantially broaden the number of Dominican citizens with access to a
telephone and to allow for the establishment and growth of other modern
telecommunications services, the Dominican government adopted a policy of
liberalization of the telecommunications sector beginning in the late 1980s. In
1990, the Dominican government granted us a concession to provide a full range
of telecommunications services within, from and to the country. Additionally,
advancements in wireless technologies made it more cost effective for companies
to penetrate the market even without being able to interconnect to Codetel's
network. However, interconnection remained important to full-service
competition. In 1994, the Dominican government enacted a series of
interconnection resolutions which require all service providers in the Dominican
Republic to interconnect with all other service providers pursuant to contracts
between them; the guidelines for those contracts are set forth in those
resolutions. In May 1994, we entered into an interconnection agreement with
Codetel which became effective in November 1994. This agreement allowed us to
become the second full-service telecommunications provider in the Dominican
Republic.
GENERAL TELECOMMUNICATIONS LAW NO. 153-98 OF 1998
Former Telecommunications Law No. 118 of February 1, 1966 was repealed by
the Law No. 153-98 of May 27, 1998. Law No. 153-98 is the result of a joint
government and industry project conducted with the assistance of the ITU, which
studied the telecommunications sector in the Dominican Republic. As part of this
process, the ITU drafted a proposed telecommunications law and various
regulations, including interconnection and tariff regulations, in consultation
with Dominican
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telecommunications carriers. The project was requested by the Technical
Secretariat of the Dominican Presidency and the country's telecommunications
carriers and was funded by the carriers.
Law No. 153-98 established a basic framework to regulate the installation,
maintenance and operation of telecommunications networks and the provision of
telecommunications services and equipment. The law adopted the "Universal
Service Principle," by guaranteeing access by telecommunications services at
affordable prices in low income rural and urban areas. The law creates a fund
for the development of the telecommunications sector that is supported by a 2%
tax payable by customers and collected by telecommunications providers from them
based on billings to customers for telecommunications services. At the same
time, the law eliminated the 10% tax previously charged on billings of
international and domestic long distance traffic to customers.
In addition, the law created an independent regulator with strong regulatory
powers, the Dominican Institute of Telecommunications (Instituto Dominicano de
las Telecomunicaciones, or INDOTEL), and established the regulator's
responsibilities, authorities and procedures. The regulator is headed by a
five-member council, the members of which serve a four-year term, and includes a
representative from the telecommunications industry. Among other
responsibilities, INDOTEL is charged with implementing telecommunications
development projects to satisfy the requirements of the Universal Service
Principle. Law No. 153-98 grants INDOTEL control over all frequency bands and
channels of radio transmission and communications within the country and over
its jurisdictional waters.
Law No. 153-98 encourages competition in all telecommunications services by
enforcing the right to interconnect with existing participants and ensuring
against monopolistic practices, and at the same time upholding those concessions
that are operational. The law establishes mechanisms to set cost-based
interconnection charges and to resolve interconnection disputes by requiring
existing operators to amend their interconnection agreements consistent with the
new requirements. The law also eliminates cross subsidies and provides for
progressive rate rebalancing of those tariffs that traditionally have been
subsidized, in order to reflect costs more closely.
We believe that this legislation, combined with technological advances and
the sustained growth of private investment will significantly contribute to the
development of the telecommunications sector in the Dominican Republic.
Additionally, we expect the increase in demand for long distance services
stemming from reduced long distance fees to encourage continued long distance
traffic growth.
OUR CONCESSION AGREEMENT
In accordance with former Law No. 118, we entered into a concession
agreement with the Dominican government in 1990 under which we were issued a
non-exclusive license to establish, maintain and operate a system of
telecommunications services throughout the Dominican Republic, as well as
between the Dominican Republic and international points. The services which we
were permitted to provide under the 1990 concession agreement included
telegraphy, radio communications, paging, cellular and local, domestic and
international telephone services.
In February 1996, we entered into a new concession agreement with the
Dominican government which superseded the 1990 concession agreement. Under the
1996 concession agreement, we were granted the same non-exclusive license as
provided in the 1990 concession agreement to establish, maintain and operate a
telecommunications system throughout the Dominican Republic until June 30, 2010.
Under our original provisions, the concession agreement and the license granted
under it are renewable automatically for 20-year periods unless, at least three
years prior to the end of the then existing term, either we or the Dominican
government advise each other of our intention not to renew. Law No. 153-98
establishes that the renewal must be requested during the one-year immediately
prior
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to the expiration of the concession, and that the reasons for non-renewal shall
be only those set forth in the law. It is unclear whether the renewal provisions
of Law No. 153-98 shall be applicable to the Codetel concession agreement.
Law No. 153-98 established that within one year after its effectiveness each
concession must be adjusted to the provisions of the new law. INDOTEL has issued
Resolution No. 005-99 on December 1999 for such purposes, requesting, as a first
step, information on each of the telecommunications companies with valid
concession agreements. We have complied with these requirements. Nonetheless, it
seems that INDOTEL is still evaluating all cases and has not yet completed the
process of adjustment for any of the currently existing concession agreements.
The provisions of our 1996 concession agreement relating to our tax
obligations differ from those of the 1990 concession agreement. Under the 1996
concession agreement, we do not pay income tax imposed on other Dominican
corporations but make payments to the Dominican government in lieu of income tax
on the same basis as Codetel pursuant to its concession agreement. We must pay
to the Dominican government, within the first ten days of each month, (1) 10% of
gross domestic revenues collected by us during the preceding month for telephone
services, telegraph services, paging services, cellular services, local,
national and international call services, as well as for any data transmission
or broadcast services, and any other related telecommunications services
provided by us to our clients, minus any access charges paid to Codetel and to
any other company for interconnection, and (2) 10% of net settlement revenues
collected from foreign correspondent carriers for the use of our network for
termination of international long distance calls. The minimum payment to the
Dominican government in lieu of income tax by us is RD$18.0 million
($1.2 million) per annum. We have the right to deduct monthly up to one percent
of our tax for outstanding debts from the government of 180 days or more and are
entitled to the same exemptions granted to other telecommunications companies
under their concessions, with the exception of the following taxes: import
duties, selective consumption tax, and Taxes on the Transfer of Industrialized
Goods and Services. In addition, under the 1996 concession agreement, the
Dominican government is obligated to grant to us any term or condition that it
grants by concession to any other telecommunications provider in the Dominican
Republic more favorable than those contained in the 1996 concession agreement.
Under the Dominican Constitution, agreements with the Dominican government
which contain exemptions from income tax, such as our concession agreement, only
become effective upon approval by the Dominican Congress. As of the date of this
prospectus, neither our concession agreement nor the concession agreements of
Codetel, All America Cables & Radio and other companies have been submitted to
the Dominican National Congress. We are not aware of any plans of the Dominican
government to submit our concession agreement for approval to the Dominican
Congress.
If our concession agreement is presented to the Dominican Congress, it may
not validate the provisions of our concession agreement relating to the payment
of taxes. Pellerano & Herrera, our Dominican counsel, has advised us that if the
tax provisions were not validated, the remaining terms of our concession would
continue to be governed by the concession agreement. Prior to entering into our
existing concession agreement in 1996, Dominican tax authorities asserted that
we were required to make payments in lieu of taxes equal to 18% of gross
domestic revenues, as was provided in our 1990 concession agreement. If the
provisions relating to the payment of taxes in the 1996 concession agreement
were to be disapproved by the Dominican Congress, we believe that Dominican tax
law would require the payment of a tax equal to 25% of our adjusted net income,
the current rate generally applicable to Dominican corporate taxpayers.
CODETEL'S CONCESSION AGREEMENT
Codetel's concession from the Dominican government, originally granted in
1930, was modified on January 23, 1995. The terms of Codetel's concession are
substantially identical to those of our 1996
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concession agreement. Codetel's concession, like our concession agreement, must
be approved by the Dominican Congress because it contains an exemption from the
income tax applicable to Dominican corporations. The license provides it with
the right to construct, maintain and operate a telecommunications system
throughout the Dominican Republic and between the Dominican Republic and other
countries. Codetel's concession agreement is valid until April 30, 2010 (our
concession agreement is valid until June 30, 2010).
Codetel's concession agreement, as well as our concession agreement, must be
revised and adjusted to the provisions and general principles of the new
legislation one year after the law takes effect. Codetel, like us, has complied
with the information requirements of INDOTEL, under Resolution No. 005-99, but
it is still in the process of adjusting its Concession Agreement in accordance
with the provisions of Law No. 153-98. Codetel, like us, is required to pay a
fixed monthly tax imposed on gross domestic income, and net revenues from
international settlement payments. Codetel's minimum tax payment is
RD$360.0 million ($23.0 million) per annum compared to our minimum of
RD$18.0 million ($1.2 million).
INTERCONNECTION RESOLUTIONS
Article 123 of Law No. 153-98 provides that the new regulator, INDOTEL, must
issue an Interconnection Regulation. On August 1, 1998, the Directorate General,
acting provisionally until INDOTEL was formed, enacted Resolution No. 98-01,
which contains the provisional regulation for the application and collection of
the contribution for the development of the telecommunications. On August 10,
1998, the Directorate General enacted Resolution No. 98-03, which reorganizes
the general assignment of the cellular frequency bands and granted us a license
to operate all of Band A and its frequency expansions under sub-bands A, and it
also granted a license to Codetel to operate Band B completely, and its
expansion under sub-bands B.
OUR INTERCONNECTION AGREEMENT WITH CODETEL
In May 1994, we entered into an interconnection agreement with Codetel which
sets forth the terms and conditions for interconnection between each party's
network in the Dominican Republic. The interconnection agreement, which has an
indefinite term, requires each of us to provide access to the other's respective
network on equal, nondiscriminatory and transparent terms. Additionally, the
interconnection agreement obligates each party to provide to the other any terms
or conditions more favorable that it provides to any other telecommunications
entity for interconnection.
Under the interconnection agreement, the parties began paying an
interconnection charge for local-to-local traffic in 1996, which is revised
annually. Additionally, use of the network by either us or Codetel to originate
or terminate cellular, domestic long distance and international long distance
calls requires payment of an access charge, which is reviewed annually and is
calculated based upon an established formula. The access charge consists of a
usage charge and a subsidy charge which only is incurred with respect to
international calls.
We had been involved in arbitration proceedings with Codetel in connection
with the terms of the interconnection agreement. Codetel sought approximately
$2.5 million in damages, interest and legal costs against us and we filed a
counterclaim against it for $3.7 million in damages. On January 2, 1998, we and
Codetel executed an addendum to the interconnection agreement which resolved all
disputes between us then being arbitrated. The interconnection addendum
provides, among other things, that it will (1) remove any technical or
operational impediment to telephone users accessing our network from Codetel's
network, (2) automatically deliver to us the identification number of any call
originating on Codetel's network which is subject to our access charge,
(3) install interconnection facilities without delay upon our request, provided
that we bear the expense of installing any such facilities, (4) connect calls to
emergency services and toll-free numbers on Codetel's network, and make
operators available
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to assist calls from our network to numbers on Codetel's network and (5) make
Codetel's database of telephone numbers available to us at no charge on a
trimonthly basis. On January 11, 2000, we and Codetel executed a second addendum
to the interconnection agreement for the purposes of (1) providing that local
interconnection of each company's respective Internet nodes shall take place on
May 1, 2000 and to enable our clients to access both our respective servers and
nodes to access the Internet; (2) to simplify the billing and collection process
for interconnection services; and (3) to amend the regulation on interconnection
costs. In addition, the interconnection amendment adjusted the access charges by
(1) lowering the charge for international long distance calls from RD$0.86
($0.05) per minute to RD$0.84 ($0.05) per minute for the first quarter of the
year 2000, RD$0.80 ($0.05) per minute for the second quarter of the year 2000,
RD$0.76 ($0.05) per minute for the third quarter of 2000, RD$0.72 ($0.04) per
minute for the fourth quarter of 2000, and RD$0.68 ($0.04) starting the year
2001; (2) increasing the charges for national long distance calls and calls made
from cellular telephones from RD$0.63 ($0.04) to RD$0.68 ($0.04); and
(3) charging for "calling party pays" traffic a use charge of RD$0.68 ($0.04)
per minute and a variable complementary charge depending on the amount of
cellular lines on service.
Law No. 153-98 establishes that interconnection agreements entered into by
the providers must be revised and readjusted to reflect and incorporate the
provisions and general principles set forth in the new law within one year from
the effectiveness of the law. Indotel is expected to issue a regulation for
these purposes, but has not, to this date, done so. In the mean time, Codetel
and we have, through our January 11, 2000 Addendum, bilaterally sought to adjust
our Interconnection Agreement to the provisions of Law No. 153-98.
U.S. TELECOMMUNICATIONS REGULATION
The following summary of United States regulatory developments does not
purport to describe all present and proposed regulations and legislation
affecting the telecommunications industry. Other existing federal and state
regulations are currently the subject of judicial proceedings, legislative
hearings and administrative proposals which could change, in varying degrees,
the regulation of telecommunications companies in the United States.
Certain FCC international policies apply to all carriers that originate or
terminate telecommunications services in the United States.
Through several policy initiatives in the last several years, the FCC has
encouraged greater competition in foreign markets. A particular focus of the FCC
has been "accounting rates" or "settlement rates," which are the amount of
payment negotiated between carriers for the termination of international
telephone calls.
On August 7, 1997, the FCC adopted a Report and Order regarding the
regulation of international accounting rates. The order establishes certain
accounting rate benchmarks based on categories of economic development of
different countries. The FCC calculates the benchmark rate for each foreign
country by looking at three network elements used to provide international
termination services (i.e., international transmission facilities, international
switching facilities, and domestic transport and termination). Once the rate is
calculated, the country is grouped into one of four categories based on its
level of economic development--upper income, upper middle income, lower middle
income and lower income. The per minute benchmark settlement rates are $0.15 for
upper income, $0.19 for upper middle income, $0.19 for lower middle income and
$0.23 for lower income. Under the FCC's income categories, the Dominican
Republic is in the lower middle income group and our benchmark settlement rate
would be $0.19 cents per minute. Pursuant to the order, U.S. carriers must enter
into settlement rate arrangements with foreign carriers in lower middle income
countries at or below the applicable benchmark rate by January 1, 2001. The FCC
has indicated that it expects U.S. carriers to negotiate proportionate annual
reductions with foreign carriers during the relevant transition period.
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Additionally, to prevent facilities-based U.S. carriers that have foreign
affiliates from using above-cost benchmark settlement rate revenues of their
foreign affiliates to gain an unfair price advantage over other U.S. carriers,
the FCC requires U.S. carriers to negotiate a settlement rate that is at or
below the applicable benchmark rate before the deadline. If the FCC detects
competitive distortions in the U.S. telecommunications market, it will take
enforcement action which may include a requirement that the settlement rates of
the U.S. carrier's foreign affiliate be reduced to the "best practices rate,"
currently calculated at $0.08 per minute, as a condition of continued service on
that route from the United States. The United States Court of Appeals of the
District of Columbia Circuit recently affirmed the FCC's Report and Order.
In 1996, the FCC issued an order that allows U.S. carriers to propose
alternative payment arrangements that deviate from the existing international
settlement policy requiring all U.S. carriers to have the same settlement rate
with a foreign carrier. Additionally, in the order the FCC codified the
proportionate return policy requiring that U.S. carriers receive back the same
proportion of traffic that they send to a foreign carrier. This policy is an
effort by the FCC to restrict a foreign carrier's ability to manipulate the
allocation of return traffic and whipsaw U.S. carriers. However, the FCC may
allow for exceptions to the proportionate return policy for alternative payment
arrangements that satisfy the terms and conditions established in the order.
In April 1999, the FCC adopted an order approving sweeping reform of the
international settlements policy. The 1999 order deregulated inter-carrier
settlement arrangements between U.S. carriers and foreign non-dominant carriers
on competitive routes. Among other rule amendments, the FCC's April 1999 order
eliminated the international settlements policy and contract filing requirements
for arrangements with foreign carriers that lack market power; eliminated the
international settlements policy for arrangements with all carriers on routes
where rates to terminate U.S. calls are at least 25 percent lower than the
relevant settlement rate benchmark previously adopted by the FCC; and eliminated
the flexibility policy discussed in the preceding paragraph.
On February 15, 1997, 69 countries (including the United States and the
Dominican Republic) signed a global agreement on basic telecommunications
services. Under the auspices of the World Trade Organization, the global
agreement aims to increase competition among its signatories through the removal
or lowering of entry barriers to foreign markets and the implementation of
pro-competitive regulatory principles. On February 5, 1998, the global agreement
went into effect.
In an order released in November 1997, the FCC took the steps necessary to
open the U.S. market to increased competition, in accordance with U.S.
commitments in the WTO Basic Telecom Agreement. In summary, the FCC adopted an
open entry standard for applicants from WTO Members seeking to: (1) obtain
Section 214 authority from the FCC to provide international facilities-based,
resold switched and resold non-interconnected private line services;
(2) receive authorization to exceed the 25 percent indirect foreign ownership
benchmark in Section 310(b)(4) of the Communications Act for wireless licenses;
and (3) receive submarine cable landing licenses. The FCC's open entry standard
includes a presumption in favor of foreign participation by applicants from WTO
member countries. The FCC expects this order to significantly increase
competition in the U.S. telecommunications market by facilitating entry by
foreign service providers and investors.
On September 11, 1995, the FCC issued an order approving the application of
Domtel Communications, Inc., which later changed its name to TRICOM USA, Inc.,
to provide, on a facilities-based basis, voice, data and private line services
between the United States and various international points, including the
Dominican Republic. The FCC also approved Domtel Communications, Inc. as a
non-dominant provider on all routes, including to the Dominican Republic. We
began initiating U.S. traffic pursuant to this authorization in 1997. Domtel
Communications, Inc. was also granted global resale authority by the FCC in
1996.
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Since the effectiveness of the interconnection agreement with Codetel, we
have entered into operating agreements with U.S. correspondents, including AT&T,
MCI, AT&T Puerto Rico, Sprint, WorldCom, TLD of Puerto Rico and TresCom. TRICOM
USA, Inc. also has the ability as a U.S. carrier to develop its own business
plan for markets other than the Dominican Republic, and has been approved by the
FCC to communicate from the United States with 186 countries via satellite and
with 28 countries via fiber optic submarine cables.
As a carrier holding an international authorization from the FCC, TRICOM USA
is subject to various statutory and regulatory telecommunications mandates,
including the duty to offer services at just and reasonable rates, the
obligation to file and maintain tariffs at the FCC setting forth TRICOM USA's
rates, terms and conditions, and the requirement to obtain prior approval for
most transfers of control and assignments of authorizations, except those
considered non-substantial, or "pro forma" under FCC rules. The FCC may address
regulatory non-compliance with a variety of enforcement mechanisms, including
monetary forfeitures, refund orders, injunctive relief, license conditions,
and/or license revocation.
We believe we are in compliance with all material laws and regulations in
the countries in which we operate. Future regulatory, judicial, or legislative
activities could have a material adverse effect on our financial condition,
results of operations or cash flow.
We are certified by the public utility commissions of Puerto Rico and
Florida, and are currently investigating whether we need certification in any
other U.S. states. In addition, we are in the process of investigating whether,
under the laws of Canada, the sale by independent distributors of its prepaid
calling cards in Canada qualifies it for the Canadian certification process.
Should the result be positive, our outside counsel is prepared to submit one or
more applications for the appropriate certification.
As we expand our operations into other countries, we may become subject to
varying degrees of regulation in those jurisdictions where we provide service.
Laws and regulations regarding telecommunications differ significantly from
country to country.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
We are managed by a Board of Directors, the members of which, in accordance
with our by-laws, are elected at the annual shareholders' meeting and serve for
a period of one year. The Board of Directors is composed of a Chairman, Vice
President, Secretary and nine additional members. The Board of Directors meets
at least once every three months. Special meetings of the Board of Directors may
be held at any time.
The names of our executive officers and directors of are set forth below
together with their ages at January 1, 2000 and current positions.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
Manuel Arturo Pellerano Pena.............. Chairman of the Board of Directors and
45 President
Hector Castro Noboa....................... 58 Vice President of the Board of Directors
Marcos J. Troncoso........................ Secretary of the Board of Directors,
Executive Vice President and Member of the
51 Office of the President
Carl H. Carlson........................... Executive Vice President and Member of the
42 Office of the President
Carlos F. Vargas.......................... First Vice President, Finance and
Administrative Division, and Chief
46 Financial Officer
Virgilio Cadena del Rosario............... First Vice President, Network and
47 Engineering Division
Carlos Ramon Romero....................... First Vice President, Residential and
47 Business Services Division
Ramon Tarrago............................. First Vice President, International
36 Division
Juan Felipe Mendoza....................... 45 Director
Anibal de Castro.......................... 51 Director
Raisa Gil de Fondeur...................... 51 Director
Fernando A. Simo.......................... 53 Director
Kevin Wiley............................... 40 Director
Jesus Barona.............................. 38 Director
Fernando Rainieri......................... 52 Director
Jose Manuel Villalvazo.................... 53 Director
</TABLE>
MANUEL ARTURO PELLERANO PENA has served as our Chairman of the Board of
Directors and President since August 1994 and as a member of our Board of
Directors since our formation in January 1988. Mr. Pellerano has served as the
Vice President of Bancredito, a bank affiliated with GFN and one of the largest
commercial banks in the Dominican Republic, since March 1989. Mr. Pellerano has
been a
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member and the Vice President of the Board of Directors of GFN since
April 1989. Mr. Pellerano graduated from Universidad Nacional Pedro Henriquez
Urena with a degree in economics.
HECTOR CASTRO NOBOA has served as the Vice President of our Board of
Directors since August 1994 and has served as a member of our Board of Directors
since our formation in January 1988. He has served as a director and Executive
Vice President of GFN since April 1989. Between March 1993 and September 1997,
Mr. Castro served as the Executive Vice President of Bancredito. Mr. Castro also
held various positions at the Deutsche Sudamerikanische Bank (Germany), Citibank
(as Marketing Vice President), Bonanza Dominicana (as Financial Vice President),
Banco Metropolitano (as Financial Advisor) and Universidad Nacional Pedro
Henriquez Urena (as a professor of international economics and macroeconomics).
Mr. Castro graduated from Madrid's Universidad Central where he studied business
economics.
MARCOS J. TRONCOSO has served as our Executive Vice President since
March 1992, as Secretary of the Board of Directors since our formation in
January 1988 and as Member of the Office of the President since September 1995.
Prior to assuming these positions, Mr. Troncoso served as Executive Vice
President of GFN beginning in May 1979. Mr. Troncoso received a law degree from
Universidad Nacional Pedro Henriquez Urena and a BS degree in business
administration with a major in accounting from the University of Puerto Rico.
CARL H. CARLSON has served as our Executive Vice President since March 1998
and as a Member of the Office of the President since September 1995.
Mr. Carlson was a Senior Vice President from March 1993 until March 1998 and
Chief Financial Officer from September 1993 until September 1995. Mr. Carlson
served as a Vice President of Finance and Administration from December 1989
until September 1993. Mr. Carlson was an Assistant Vice President for GFN's
insurance division from 1987 until December 1989. From 1983 to 1987,
Mr. Carlson was a Vice President at Chase Manhattan Bank. Mr. Carlson is a
graduate of Instituto Technologico de Santo Domingo where he majored in business
administration and accounting and finance. Mr. Carlson earned an MBA from a
joint program between the University of South Carolina and Pontifica Universidad
Catolica Madre y Maestra.
CARLOS F. VARGAS has served as our First Vice President of the Finance and
Administrative Division and as the Chief Financial Officer since July 1996.
Immediately prior to his arrival, Mr. Vargas was employed by Bancomercio, S.A.,
where he held the positions of Vice President, Assistant to the President and
Executive Vice President of Finance and Operations from May 1992 until
July 1996. Mr. Vargas served as Executive Vice President of Finance and
Operations at Banco Popular Dominicano and the Finance Vice President at Grupo
Financiero Popular from 1982 until May 1992. Mr. Vargas was employed by
Coopers & Lybrand as an audit manager from 1974 until 1982. He is a certified
public accountant and earned his degree in accounting from Universidad Nacional
Pedro Henriquez Urena.
VIRGILIO CADENA DEL ROSARIO has served as our First Vice President of
Planning and Operations since September 1995. Mr. Cadena was the Second Vice
President of Planning and Operations between July 1991 and September 1995 and
Telecommunications Manager from July 1989 until July 1991. Mr. Cadena graduated
with a degree in electromechanical engineering from the Universidad Autonoma de
Santo Domingo and studied at the Electrical Engineering Department of the
University of Kyoto in Japan.
CARLOS RAMON ROMERO has served as our First Vice President of the
Residential and Business Division since July 1996. Immediately prior to his
arrival, Mr. Romero served as chief executive of a brokerage company which he
started in February 1994. Mr. Romero served as Vice President of the Technical
Area of Compania Nacional de Seguros, a subsidiary of GFN, from 1980 until
February 1994. Mr. Romero earned a BA in International Services from the
Universidad Nacional Pedro Henriquez Urena, where he has since held various
academic posts.
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RAMON TARRAGO has directed the International Division since its organization
as a separate business unit in July 1996 as First Vice President. He was a
Second Vice President of the Corporate Center from August 1995 until July 1996.
He was Director of International Relations from November 1993 until
August 1995. From February 1992 until November 1993, he was our Director of
Finance. Between May 1991 and February 1992, he was a management associate in
the Corporate Banking Unit at the Santo Domingo branch of Citibank. Mr. Tarrago
worked for the World Bank's International Finance Corporation in Washington,
D.C. from May 1990 to September 1990 and for Bancredito between October 1986 and
March 1988. He is the former dean of the MBA program at the Pontificia
Universidad Catolica Madre y Maestra and has held an academic post at the
Instituto Tecnologico de Santo Domingo. Mr. Tarrago holds both a BA in economics
from Universidad Nacional Pedro Henriquez Urena and an MBA with a finance
concentration from the Virginia Polytechnic Institute and State University.
JUAN FELIPE MENDOZA has been a member of our Board of Directors since
June 1997. Mr. Mendoza currently serves as Chief Executive Officer of Bancredito
and President of Compania Nacional de Seguros. He was recently elected Vice
President of FIDES (Inter-American Federation of Insurance Companies) and its
regional commission for Central America and the Caribbean. Mr. Mendoza is a
director of Reaseguradora Nuevomundo, Caribbean Hotel Association Insurance
Company, Bancredito and GFN Corporation USA. Mr. Mendoza joined GFN in 1977.
Prior to joining GFN, Mr. Mendoza was employed in the Internal Audit Department
for the Caribbean of the Royal Bank of Canada. Mr. Mendoza graduated from
Universidad Nacional Pedro Henriquez Urena and also attended Specialized
Insurance Training Programs at Royal Global Insurance of New York and Swiss
Insurance Formation Center, Swiss Re, Switzerland. Mr. Mendoza is a certified
public accountant.
ANIBAL DE CASTRO has been a member of our Board of Directors since
May 1998, and has served as President of Editorial AA, a subsidiary of GFN,
since May 1994. Mr. Castro has served on the Board of Directors of Corporacion
Dominicana de Electricidad (C.D.E), the country's state-owned electric utility
provider from 1979 to 1982, and currently serves on the Board of Directors of
several Dominican companies and professional associations including Banco de la
Pequena Empresa and Fondo de Financiamiento de la Micro-Empresa. Mr. Castro
graduated from Universidad Autonoma de Santo Domingo with a degree in journalism
and holds a B.A. in economics from the University of East Anglia in Great
Britain.
RAISA GIL DE FONDEUR has been a member of our Board of Directors since
May 1998. Mrs. Fondeur has over twenty years of experience in the banking
industry, serving as Executive Vice President for Corporate and International
Businesses for Banco Nacional de Credito since June 1992. From December 1978
until May 1992 Mrs. Fondeur was employed by the Santo Domingo branch of
Citibank, holding the positions of Financial Controller, Treasurer, and
Corporate Bank Head. Mrs. Fondeur has a B.A. in business administration, and a
masters in political science from the Universidad National Pedro Henriquez
Urena.
FERNANDO SIMO has been a member of our Board of Directors since May 1998,
and has served as Corporate Director of Finance, Latin America and Caribbean
countries of Motorola Network Communications Group since May 1999. Prior to this
assignment. From June 1995 to April 1999 Mr. Simo served as Latin America Senior
Group Controller of Motorola Network Communications Group, with responsibility
for all its Latin American operations' finance activities. Mr. Simo holds a B.S.
degree in accounting from the University of Arizona.
KEVIN J. WILEY has been a member of our Board of Directors since
December 1998. Mr. Wiley has been employed by Motorola Network Management Group
as the Director of Regional Cellular Operations for the Latin America Region
since October 1998. Prior to joining Motorola in July 1997, Mr. Wiley was the
Vice President and General Manager of Aliant Cellular Communications from
July 1995 to July 1997. Mr. Wiley has been involved in various positions within
the wireless
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telecommunications industry throughout his entire career. Mr. Wiley graduated
from Creighton University with a B.S. in finance and management.
JESUS BARONA has been a member of our Board of Directors since
December 1998 and has served as the Director of Business Operations in Latin
America since April 1997. Prior to joining Motorola, Mr. Barona served as the
Director of Marketing and Operations for BellSouth Panama from January 1996 to
March 1997. From December 1992 to March 1996, Mr. Barona served as the Senior
Manager of Marketing Operations for BellSouth International. Mr. Barona holds a
degree in marketing from Columbia Business School.
FERNANDO ANTONIO RAINIERI has been a member of our Board of Directors since
July 1998. Mr. Rainieri served as Advisor to the Central Bank of the Dominican
Republic since December 1990 to August 1996, as the Dominican Republic's
Secretary of Tourism from August 1986 to August 1990 and Advisor to the World
Tourism Organization from 1988 to 1990. From 1979 to 1985, Mr. Rainieri served
as General Director of the Fund for the Development of Tourism Infrastructure
(INFRATUR). From 1970 to 1975, Mr. Rainieri held positions as Executive
Assistant at Gulf & Western Americas Corporation. In addition, Mr. Rainieri is
currently on the Board of Directors of several Dominican companies including
Fimaca, Servicios Aereos Dominicanos, La Antillana Comercial, Helados Bon,
Inversiones Bohechio. Mr. Rainieri holds a bachelors degree in Business
Administration and a degree in marketing from Texas A & M University.
JOSE MANUEL VILLALVAZO has been a member of our Board of Directors since
July 1998. A pioneer in the Mexican cellular industry, Mr. Villalvazo has been
an active member of the wireless and satellite communication sectors. In 1990
Mr. Villalvazo co-founded Baja Cellular, the Band A service provider in the
northwestern region of Mexico, and in 1993 he founded Leo One Panamericana, a
Mexican-based low-earth orbiting satellite service providing mobile data
services throughout Latin America. Since 1989 he has served as the Chairman and
CEO of Tecelmex, a holding company with interests in mobile communication. Other
positions within the telecommunications industry which Mr. Villalvazo has held
have included Vice-Chairman of the Mexican Association of Cellular Telephone
Concessionaires (AMCEL) from 1992 to 1995, and Chairman, as well as founder, of
the Latin American Cellular Industry Association (ALACEL) from 1994 to 1996.
Since 1992 he has served as a Member of the Mexican delegation to the
Inter-American Telecommunications Commission (CITEL). Mr. Villalvazo is a
certified public accountant and has a MBA from the University of Mexico.
Each of the current members of the Board of Directors has been elected
pursuant to an amended and restated shareholders agreement, dated as of May 8,
1998, among Motorola, Inc., Oleander Holdings, Inc., Zona Franca San Isidro,
S.A. and certain individuals, Oleander and Zona, are wholly owned subsidiaries
of GFN, and the individual parties to the agreement are all affiliates of either
GFN or TRICOM. There is currently one vacancy on the Board of Directors as a
result of the resignation in December 1999 of a director designated by Motorola.
EXECUTIVE COMPENSATION
The aggregate amount of compensation we paid during the fiscal year ended
December 31, 1999 to our directors and executive officers, as a group (16
persons), was $1.8 million.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY
Pursuant to Dominican law, shareholders are asked to vote upon the
performance of management at annual shareholders' meetings. Our vigilance
officer delivers a report on our financial performance and other issues related
to management's performance. If the holders of a majority of the votes entitled
to be cast approve management's performance, all shareholders are deemed to have
released the directors and officers from claims or liability to us or our
shareholders arising out of actions taken or any failure to take actions by any
of them on our behalf during the prior fiscal year, with certain
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exceptions, and shareholders will likely fail in any suit brought in a Dominican
court with respect to such acts or omissions. Officers and directors may not be
released from any claims or liability for criminal acts, fraud, self-dealing or
gross negligence. If the shareholders do not approve management's performance,
the vigilance officer's report may form the basis of any suit brought by the
shareholders against our officers and directors.
LONG-TERM INCENTIVE PLAN
In connection with our initial public offering, our Board of Directors
adopted, and GFN and Motorola approved, our 1998 Long-Term Incentive Plan
pursuant to which 750,000 shares of Class A common stock were reserved for
issuance. Our Board of Directors, which administers the plan, granted options to
purchase 473,666 shares of Class A common stock to directors, officers and
employees. Each option initially had an exercise price equal to the initial
public offering price of $13.00, expires on the tenth anniversary of the date of
grant and, commencing on or about April 1, 2001, will become exercisable with
respect to 50% of the shares of Class A common stock subject to the option. Each
such option will be fully exercisable after April 1, 2003. In 1999, we agreed to
reduce the exercise price to $8.06 for employees who agreed to reduce the number
of shares issuable upon exercise of their options. As a result, at December 31,
1999, there were options to acquire 313,420 shares outstanding.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to us with respect
to beneficial ownership of the common stock at February 22, 2000 (unless
otherwise indicated) by each person who beneficially owns 5% or more of the
common stock and all officers and directors as a group. Except as otherwise
indicated, the holders listed below have sole voting and investment power with
respect to all shares beneficially owned by them. For purposes of this table, a
person or group of persons is deemed to have "beneficial ownership" of any
shares as of a given date which such person or group of persons has the right to
acquire within 60 days after such date. Information relating to the percentage
beneficially owned following the offering is based on shares of Class A common
stock and Class B stock. Each share of Class B stock is freely convertible into
one share of Class A common stock, subject to adjustment, and may not be
transferred except to GFN, Motorola or permitted transferees, as defined.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
SHARES ----------------------------
BENEFICIALLY PRIOR TO THE FOLLOWING THE
SHAREHOLDER OWNED OFFERING OFFERING
- ----------- ------------ ------------ -------------
<S> <C> <C> <C>
Oleander Holdings, Inc.(1)................................ 11,486,720 46.2% 39.8%
Motorola, Inc............................................. 7,657,818 30.8% 26.5%
Director and executive officers as a group (16 persons)... 11,486,726(2) 46.2% 39.8%
</TABLE>
- ------------------------
(1) Oleander Holdings, Inc., a Panamanian corporation, is a wholly owned
subsidiary of GFN. GFN is controlled by Manuel Arturo Pellerano Pena, our
Chairman of the Board of Directors and President, and members of his family.
(2) Includes 11,486,720 shares of Class B stock that may be deemed to be
beneficially owned by Mr. Pellerano, our Chairman of the Board of Directors
and President, in his capacity as a controlling person of GFN. Does not
include 313,420 shares of Class A common stock issuable upon exercise of
options that are exercisable commencing in 2001 and through 2008.
SHAREHOLDERS AGREEMENT
Each of the current members of the Board of Directors has been elected
pursuant to an amended and restated shareholders agreement, dated as of May 8,
1998, among TRICOM, Motorola, Oleander, Zona and certain nominal shareholders
that are affiliates of GFN or TRICOM.
The shareholders agreement provides that the Board of Directors will
consist, and GFN and Motorola each will vote all of the shares owned by it (or
in the case of any transfer of shares to its permitted transferee, as defined in
the shareholders agreement, will cause such permitted transferees to vote their
shares) in favor, of six directors to be designated by GFN, four directors to be
designated by Motorola and two independent directors. The shareholders agreement
provides that in order for a person to qualify as an independent director such
person must not be:
- an officer, employee, principal stockholder, consultant or partner of
TRICOM, apart from such directorship, or an officer, employee, principal
stockholder, consultant or partner of an entity that was dependent upon
TRICOM or any affiliate of TRICOM for more than 5% of its revenues or
earnings in its most recent fiscal year;
- an officer, director, employee, principal stockholder, consultant or
partner of a person that is a competitor of TRICOM or any of its
affiliates, any affiliate of such competitor, or any other person that was
dependent upon such competitor or affiliate of such competitor for more
than 5% of its revenues or earnings in its most recent fiscal year; or
- an officer, director, employee, principal stockholder, consultant or
partner of Motorola or GFN or an officer, employee, principal stockholder,
consultant or partner of an entity that was
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dependent upon Motorola or any affiliate of Motorola for more than 5% of
its revenues or earnings in its most recent fiscal year.
Each of Motorola and GFN will be entitled to nominate one independent
director so long as it together with its permitted transferees own at least 25%
of the issued and outstanding shares of Class B stock. Each of Motorola and GFN
will be entitled to nominate two independent directors if it together with its
permitted transferees together own more than 75% of the issued and outstanding
shares of Class B stock. In calculating the number of shares of Class B stock
owned by either GFN or Motorola, there will be included the number of shares of
Class B stock owned by any of it permitted transferees, as defined.
The composition of the Board of Directors is intended to approximate the
respective ownership interests of GFN (11,486,720 shares of Class B stock,
representing 46.2% of the shares of common stock, preceding this offering, and
60% of the shares of Class B stock and 58.3% of the total voting power,
preceding this offering), Motorola (7,657,818 shares of Class B stock,
representing 30.8% of the shares of common stock, preceding this offering, and
40% of the shares of Class B stock and 38.8% of the total voting power,
preceding this offering) and the public. The number of directors other than
independent directors that GFN or Motorola each may designate will change if its
percentage ownership of Class B stock changes as follows:
- if GFN and Motorola each owns 50% of the then outstanding shares of
Class B stock, each would have the right to designate five directors;
- if either GFN or Motorola owns shares of Class B stock
(A) greater than 50% but less than or equal to 60% of the then
outstanding shares of Class B stock, it would designate six directors
and the other four directors;
(B) greater than 60% but less than or equal to seventy percent (70%) of
the then outstanding shares of Class B stock, it would designate
seven directors and the other three directors;
(C) greater than 70% but less than or equal to 80% of the then
outstanding shares of Class B stock, eight directors and the other
two directors;
(D) greater than eighty percent (80%) but less than or equal to ninety
percent (90%) of the then issued and outstanding shares of Class B
stock, nine directors and the other one director; or
(E) greater than ninety percent (90%) of the issued and outstanding
Class B stock, all ten directors.
Until such time as either Motorola or GFN owns less than 25% of the
outstanding shares of Class B stock, the shareholders agreement requires the
affirmative vote of nine directors to approve the following actions:
- the acquisition or formation by TRICOM of any entity or the making of any
investments in an other entity of business, including, but not limited to,
the purchasing of equity or debt interests in or the extension of credit
to such entity;
- the incurrence of indebtedness, if after giving effect to such incurrence,
including the proposed application of the proceeds of such indebtedness to
pay existing indebtedness, the ratio of indebtedness to shareholders'
equity would be greater than three to one;
- approval of annual budgets relating to income, capital expenditure,
operating expenses and cash flows (provided that the requirement that
annual budgets be so approved will not require approval by nine directors
of any projected debt incurrence that otherwise complies with the
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limits described above or of any other proposed corporate action for which
super-majority approval is not specifically required) and
- the issuance, or redemption, of Class A common stock or other securities
or instruments exercisable for or convertible into Class A common stock.
In addition, approval by the independent directors is required for any
transaction that has a fair market value exceeding $1.0 million we enter into
with either GFN or Motorola and their respective affiliates. The vote of a
majority of the directors present at a duly convened meeting is required for all
other board actions (and at such time that Motorola or GFN owns less than 25% of
the then outstanding shares of Class B stock for the four actions specified as
requiring a greater vote).
Under the shareholders agreement, if we propose to register any of our
securities under the Securities Act of 1933 (other than a registration in
connection with a reorganization on Form F-4 or in connection with any employee
stock option, stock purchase or savings plan on Form S-8 or similar registration
forms), whether or not for our own account, GFN and Motorola are entitled to
include shares of Class A common stock owned by them in any such registration,
subject to the right of the managing underwriter of any such offering to
exclude, due to market conditions, some or all of such securities. In addition,
GFN and Motorola each has the right to require us to prepare and file on three
occasions a registration statement covering registrable securities with a market
value of at least $5.0 million, subject to customary blackout periods. We are
generally required to bear the expenses (except underwriting discounts and
commissions and fees and expenses of any special counsel) of all such
registrations, whether or not initiated by GFN or Motorola.
VOTING AGREEMENTS FOR THE 11 3/8% SENIOR NOTES DUE 2004
In connection with the offering of the 11 3/8% senior notes due 2004,
Oleander and Motorola each entered into separate voting agreements, dated
August 21, 1997 with The Bank of New York, as trustee under the indenture for
the senior notes. The voting agreements provide that each of Oleander and
Motorola will grant to the trustee the right to vote all of its shares of common
stock upon the occurrence of the following events:
- our failure to pay interest on the senior notes when due for a period of
30 days;
- our failure to pay the principal of or premium on the senior notes when
due, whether at maturity, upon redemption or repurchase or otherwise;
- our failure to pay principal of and interest on the senior notes required
to be purchased in the event of a change of control; or
- a payment default under any debt instrument for money borrowed by us or
any of our guarantor subsidiary (except any such subsidiary that is not a
significant subsidiary, as defined) to pay final judgments aggregating in
excess of $10.0 million within 60 days after the date which any period for
appeal has expired and during which a stay of enforcement of such judgment
shall not be in effect.
The trustee's right to vote all of the shares of voting stock, once such
right is triggered, will continue (a) during the continuation of the first three
events set forth above and for one year after the date we cure such event of
default or (b) during the continuation of the fourth event. Either Oleander or
Motorola may revoke the proxy granted by it under the voting agreement if:
- the Dominican Republic becomes bound by the United Nations Convention on
the Recognition and Enforcement of Foreign Arbitral Awards (1958);
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- if as of the last day of any fiscal quarter we report shareholders' equity
of at least $100 million and for each of the four full consecutive fiscal
quarters ending on such date our leverage ratio as defined in the senior
note indenture is equal to or less than 2.5 to 1.0;
- the senior notes are rated Ba2 or better by Moody's Investors
Service, Inc. and BB or better by Standard & Poor's Ratings Group,
respectively; or
- our obligations with respect to the outstanding senior notes are
discharged.
If we incur any indebtedness that constitutes senior facilities under the
senior note indenture and the lender or lenders under such senior facilities are
granted a lien by Oleander and Motorola in respect of the voting stock, then
provided that the trustee is granted a lien or similar interest in respect of
the voting stock by Oleander and Motorola for the benefit of the holders, which
lien will be subordinated and subject to the prior rights and claims of the
senior lenders and TRICOM, the holders, the trustee and all senior lenders enter
into an escrow agreement and an intercreditor agreement, the proxy rights
granted under the voting agreement will be suspended and the trustee will not
have the right to exercise such rights until such time as the senior facilities
are repaid in full.
The voting agreements do not prohibit or restrict either Oleander or
Motorola from transferring, selling, pledging, or hypothecating any shares of
voting stock. Any shares of voting stock transferred to an affiliate of either
Oleander or Motorola will remain subject to the voting agreements and any shares
of voting stock transferred to a person unaffiliated with either Oleander or
Motorola will no longer be subject to the voting agreements. The voting
agreements will terminate and be of no further force and effect if (a) any
senior lenders holding a security interest in the voting stock foreclose upon
such security interest subject to the terms of the intercreditor agreement to be
entered into by the senior lenders and the trustee or (b) the proxy is revoked
pursuant to the voting agreements.
CERTAIN TRANSACTIONS WITH PRINCIPAL SHAREHOLDERS
GFN
GFN is one of the Dominican Republic's largest privately held companies,
with interests in insurance, finance and publishing. GFN provides a number of
managerial services to its affiliated companies, including TRICOM, for which the
affiliated companies are billed based upon the number of hours that a particular
GFN employee spends on providing such services and other factors. GFN employees
have provided to us internal auditing, public relations, management information
services, legal and personnel management services. For 1997, 1998 and 1999, we
paid to GFN $207,498, $494,125 and $167,470 for such services. GFN also provides
us with security services for which we paid $113,778, $111,460 and $77,382 in
1997, 1998 and 1999. We anticipate that we will continue to receive such
services from GFN.
We lease premises and equipment from GFN and its affiliates. During 1997,
1998 and 1999, we paid to GFN and its affiliates $64,392, $44,610 and $108,578
for the use of premises and equipment.
During 1999 we bought land from an unaffiliated third-party for $1,826,625
which we later sold to an affiliate of GFN for $2,724,458. We also entered into
various capital leases with an affiliate of GFN for $26,244,000 during 1999.
We provide life insurance to our employees and have obtained other insurance
through Compania Nacional de Seguros, a GFN affiliated insurance company. We
paid insurance premiums to affiliates of GFN totaling $1.1 million,
$1.5 million and $2.0 million in 1997, 1998 and 1999.
We provide telecommunications services to GFN and its affiliated companies.
GFN and its affiliated companies paid us $1.1 million, $0.8 million and
$2.0 million for such services in 1997, 1998 and 1999.
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GFN affiliated banks have loaned us funds. We had borrowings from GFN
affiliated banks, including financing of letters of credit on open accounts, in
the aggregate principal amounts of $25.9 million at December 31, 1998 and
$17.9 million at December 31, 1999.
MOTOROLA
We have purchased telecommunications equipment from Motorola, particularly
for the development of our mobile cellular system and our wireless local loop
for aggregate consideration of $8.0 million, $2.3 million and $23.1 million
during 1997, 1998, and 1999.
OTHER TRANSACTIONS
We have purchased mortgage participation contracts from savings and loan
associations in the Dominican Republic that are maintained as compensating
balances for mortgage loans made by these associations to several of our
officers. At December 31, 1998 and 1999, these mortgage participation contracts
totaled $2,164,387 and $2,710,572.
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DESCRIPTION OF CAPITAL STOCK
SET FORTH BELOW IS CERTAIN INFORMATION CONCERNING OUR CAPITAL STRUCTURE AND
A DESCRIPTION OF PROVISIONS OF OUR BY-LAWS AND OF APPLICABLE DOMINICAN LAW. THIS
DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH BY-LAWS AND TO APPLICABLE PROVISIONS OF DOMINICAN LAW.
GENERAL
Our authorized capital stock consists of 55,000,000 shares of Class A common
stock and 25,000,000 shares of Class B stock. Immediately prior to the offering,
we had outstanding 19,144,544 shares of Class B stock and 5,700,000 shares of
Class A common stock. All of our outstanding shares are, and the shares of
Class A common stock upon issuance and sale in the offering will be, duly
authorized, validly issued and fully paid. Both classes of capital stock vote
together as a single class on matters except any matter that would adversely
affect the rights of either class. These matters would need to be approved by a
special meeting of the holders of the class of shares to be affected. The
Class A common stock has one vote per share and the Class B stock has ten votes
per share. The economic rights of each class of capital stock are identical.
REGISTRATION AND TRANSFER
All shares are evidenced by share certificates in registered form. Dominican
law requires that all shares be represented by a certificate, although a single
certificate may represent multiple shares of stock. Certificates may be issued
in nominative, bearer or to-order form. All of our share certificates are issued
in nominative form. Dominican law also requires that all transfers, encumbrances
and liens on nominative shares must be recorded in the share registry and only
are enforceable against us and third parties after such registration has taken
place. The Bank of New York will act as the registrar and transfer agent for the
Class A common stock, except during shareholders meetings when we will maintain
the share registry for the Class A common stock.
SHAREHOLDERS MEETINGS
Shareholders are entitled to vote on all matters at ordinary or special
shareholders' meetings. The board of directors will convene an annual
shareholders' meeting at least once a year in order for shareholders to elect
new directors and a vigilance officer, to acknowledge the vigilance officer's
report, for management to report upon our financial performance and for the
shareholders to decide whether or not to distribute dividends. Ordinary
shareholders' meetings may be convened at other times in order to transact other
business, including to remove directors. Special shareholders' meetings are
convened in order to effect fundamental changes in our structure, including to
approve amendments to our by-laws. Under our by-laws, shareholders' meetings may
be convened by the Chairman of the Board of Directors, the President or a
majority of the members of the board at any time, at the request of the holders
of 30% of the shares entitled to be cast at such meeting and at the request of
the vigilance officer in urgent circumstances, which are not defined under
Dominican law. Shareholders meetings may be convened not less than 30 but not
more than 60 calendar days after written notice has been mailed to shareholders.
A majority of the shares entitled to be cast constitutes a quorum at all
shareholders meetings. Our by-laws provide that holders of two-thirds of the
votes entitled to be cast is required to approve
- amendments to the by-laws, including increases or decreases of our
authorized share capital;
- the issuance of shares of Class B stock in addition to those shares of
Class B stock outstanding on the date of the adoption of the by-laws,
except in connection with a dividend or other distribution with respect
to, or a subdivision, consolidation or reclassification of all outstanding
shares of stock;
- the declaration and payment of any dividend or distribution with respect
to our capital stock;
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- our merger or consolidation or the sale or transfer of all or
substantially all of the our assets;
- any increase or decrease in the number of directors; and
- our voluntary winding up or liquidation or the filing of a bankruptcy
petition.
The affirmative vote of the holders of a majority of votes entitled to be
cast is required to approve all other actions. Shareholders may vote by proxy,
and the depositary will cast proxies as directed by the holders of the ADRS.
It is anticipated that the nominee shareholders for the depositary will vote
the shares of Class A common stock represented by the ADRs in accordance with
instructions provided by each such holder. There can be no assurance, however,
that holders of ADRs will receive notice of any meeting of shareholders
sufficiently prior to the date established by the depositary for the receipt of
instructions to ensure that the Depository will be able to vote the shares of
Class A common stock represented by the ADRs in accordance with such
instructions. Holders of ADRs desiring to attend meetings and vote in person
will be required to exchange their ADRs for shares of Class A common stock.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY
In addition to voting for directors at the annual shareholder's meeting,
shareholders are asked to vote upon the performance of management. Our vigilance
officer, an officer elected by the shareholders each year, delivers a report on
our financial performance and other issues related to management's performance.
If the holders of a majority of the votes entitled to be cast approve
management's performance, all shareholders are deemed to have released the
directors and officers from claims or liability to us or our shareholders
arising out of actions taken or any failure to take actions by any of them on
our behalf during the prior fiscal year, with certain exceptions, and
shareholders will likely fail in any suit brought in a Dominican court with
respect to such acts or omissions. Officers and directors may not be released
from any claims or liability for criminal acts, fraud, self-dealing or gross
negligence. If the shareholders do not approve management's performance, the
vigilance officer's report may form the basis of any suit brought by the
shareholders against our officers and directors.
Our by-laws provides that we will indemnify any person made or threatened to
be made a party to any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person, or a
person of whom he or she is the legal representative, is or was our director,
officer, employee or agent or any of our predecessors, or serves or served any
other enterprise as a director, officer, employee or agent at our request or any
of our predecessors. We are required to pay any expenses reasonably incurred by
a director or officer in defending a civil or criminal action, suit or
proceeding in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it ultimately is determined that he or she is
not entitled to be indemnified by us under our by-laws or otherwise. We may, by
action of our Board of Directors, provide for the payment of such expenses
incurred by our employees and agents as it deems appropriate.
LIQUIDATION RIGHTS
Each shareholder is entitled to a proportionate share of any of our assets
available upon dissolution after the payment of debts owed to creditors.
Shareholders are deemed to be creditors of our company to the extent of declared
and unpaid dividends.
DIVIDENDS
Under Dominican law, only shareholders may authorize the declaration and
payment of dividends. Shareholders are entitled to receive dividends in
proportion to their respective capital participation,
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subject to adjustment as provided in the by-laws. Dividends are payable only
from after-tax profits, and only after we have set aside at least 5% of our
annual profits as a legal reserve (until such reserve equals 10% of paid-in
capital). The by-laws provide that shareholders may only approve the declaration
and payment of dividends or distributions if the declaration or payment of such
dividend or distribution would not violate any obligation, contractual or
otherwise, to which we or any of our subsidiaries are a party or by which any of
them or their respective properties or operations are bound.
VOTING RIGHTS OF CLASS B STOCK
Each share of Class B stock has ten votes. Under our by-laws, Class B stock
may not be transferred except to permitted transferees. Permitted transferees
include (1) Oleander, (2) Motorola, (3) any subsidiary or affiliate, as defined,
and (4) with respect to Oleander, Manuel Arturo Pellerano Pena and any member of
the family of Manuel Arturo Pellerano Pena as of the date of the initial public
offering that had an interest (including indirectly through any corporation,
trust or entity) in Oleander and (A) the spouse or surviving spouse and natural
and adopted children of any such family member, (B) any trust existing solely
for the benefit of family members and any person who would be a permitted
transferee of any such family member under clause (A) and any trustee of such
trust, (C) upon the death of any such member or any person who would be a
permitted transferee of any member under clause (A), such holder's estate or any
executor, administrator or other legal representative of such holder, and
(D) any corporation, partnership or other entity all of the outstanding equity
interests of which are owned, or all of the outstanding voting power of which is
controlled, directly or indirectly by, or any trust or similar entity the sole
beneficiaries of which are, such members and their permitted transferees. If,
despite such restrictions on transfer, a shareholder owning shares of Class B
stock transferred its shares to a person or entity other than to Oleander,
Motorola or a permitted transferee, the shareholder will only become entitled to
one vote per share. If, with respect to any shares of Class B stock owned by
Oleander and its permitted transferees, the shares of common stock owned by
Oleander and its permitted transferees constitute less than 10% of the
outstanding common stock, such share of Class B stock will entitle the holder to
one vote per share. If, with respect to any shares of Class B stock owned by
Motorola and its permitted transferees, the shares of common stock owned by
Motorola and its permitted transferees constitute less than 10% of the
outstanding common stock, such share of Class B stock will entitle the holder to
one vote per share. Oleander, Motorola and any permitted transferee may pledge
shares of Class B stock without reducing the number of votes to which it is
entitled; provided, however, that if such shares of Class B stock are
transferred to or registered in the name of the pledgee (unless the pledgee is a
permitted transferee), the number of votes to which such shares of Class B stock
are entitled will be reduced until Oleander, Motorola or any of their permitted
transferees either cures any default that resulted in the transfer or
registration or reacquires the shares from the pledgee.
PREEMPTIVE AND OTHER RIGHTS
The holders of Class A common stock and Class B stock are not entitled to
preemptive or similar rights. The shares of Class A common stock and Class B
stock are not subject to redemption or a sinking fund. Under our By-laws, we are
authorized to issue shares of Class B stock only in connection with a dividend
or other distribution with respect to, or a subdivision, consolidation or
reclassification of, all outstanding shares of Class A common stock. In the
event of any subdivision, consolidation, reclassification or other change in the
Class A common stock, the Board of Directors, in its discretion, in lieu of
issuing additional shares of Class B stock, may adjust the number of shares of
Class A common stock into which the Class B stock is convertible and the number
of votes to which each share of Class B stock is entitled.
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DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
AMERICAN DEPOSITARY RECEIPTS
The Bank of New York will issue the ADRs evidencing ADSs. Each ADS
represents one share of Class A common stock. We will deposit the shares of
Class A common stock (or the right to such shares) with the New York office of
The Bank of New York (the "Custodian"). Each ADR will also represent securities,
cash or other property deposited with The Bank of New York but not distributed
to ADR holders. The Bank of New York's office is located at 101 Barclay Street,
New York, NY 10286.
You may hold ADRs either directly or indirectly through your broker or other
financial institution. If you hold ADRs directly, you are an ADR holder. If you
hold the ADRs indirectly, you must rely on the procedures of your broker or
other financial institution to assert the rights of ADR holders described in
this section. You should consult with your broker or financial institution to
find out what those procedures are.
Because The Bank of New York will actually hold the shares, you must rely on
it to exercise the rights of a shareholder. The obligations of The Bank of New
York are set out in an agreement among TRICOM, The Bank of New York and you, as
an ADR holder. The agreement and the ADRs are generally governed by New York
law.
The following is a summary of the agreement. Because it is a summary, it
does not contain all the information that may be important to you. For more
complete information, you should read the entire agreement and the ADR.
Directions on how to obtain copies of these are provided in the section entitled
"Additional Information."
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS
The Bank of New York has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on shares or other deposited
securities after deducting its fees and expenses. You will receive these
distributions in proportion to the number of shares your ADRs represent.
CASH. The Bank of New York will convert any cash dividend or other cash
distribution we pay on the shares into U.S. dollars, if it can do so on a
reasonable basis, and subject to Dominican Republic law, and can transfer the
U.S. dollars to the United States. If that is not possible or if any approval
from the Dominican Republic government is needed and cannot be obtained, the
agreement allows The Bank of New York to distribute the Dominican pesos only to
those ADR holders to whom it is possible to do so. It will hold the Dominican
pesos it cannot convert for the account of the ADR holders who have not been
paid. It will not invest the Dominican pesos and it will not be liable for the
interest.
Before making a distribution, any withholding taxes that must be paid under
Dominican Republic law will be deducted. See "Tax Considerations--United States
Tax Considerations--Backup Withholding." The Bank of New York will distribute
only whole U.S. dollars and cents and will round fractional cents to the nearest
whole cent. IF THE EXCHANGE RATES FLUCTUATE DURING A TIME WHEN THE BANK OF NEW
YORK CANNOT CONVERT THE DOMINICAN PESOS, YOU MAY LOSE SOME OR ALL OF THE VALUE
OF THE DISTRIBUTION.
SHARES. The Bank of New York may distribute new ADRs representing any
shares we may distribute as a dividend or free distribution, if we furnish it
promptly with satisfactory evidence that it is legal to do so. The Bank of New
York will only distribute whole ADRs. It will sell shares which would require it
to use a fractional ADR and distribute the net proceeds in the same way as it
does with cash. If The Bank of New York does not distribute additional ADRs,
each ADR will also represent the new shares.
RIGHTS TO RECEIVE ADDITIONAL SHARES. If we offer holders of our ordinary
shares any rights to subscribe for additional shares or any other rights, The
Bank of New York may make these rights available to you. We must first instruct
The Bank of New York to do so and furnish it with satisfactory
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evidence that it is legal to do so. If we do not furnish this evidence and/or
give these instructions, and The Bank of New York decides it is practical to
sell the rights, The Bank of New York will sell the rights and distribute the
proceeds, in the same way as it does with cash. The Bank of New York may allow
rights that are not distributed or sold to lapse. In that case, you will receive
no value for them.
If The Bank of New York makes rights available to you, upon instruction from
you, it will exercise the rights and purchase the shares on your behalf. The
Bank of New York will then deposit the shares and issue ADRs to you. It will
only exercise rights if you pay it the exercise price and any other charges the
rights require you to pay.
U.S. securities laws may restrict the sale, deposit, cancellation and
transfer of the ADRs issued after exercise of rights. For example, you may not
be able to trade the ADRs freely in the United States. In this case, The Bank of
New York may issue the ADRs under a separate restricted deposit agreement which
will contain the same provisions as the agreement, except for the changes needed
to put the restrictions in place.
OTHER DISTRIBUTIONS. The Bank of New York will send to you anything else we
distribute on deposited securities by any means it thinks is legal, fair and
practical. If it cannot make the distribution in that way, The Bank of New York
has a choice. It may decide to sell what we distributed and distribute the net
proceeds in the same way as it does with cash or it may decide to hold what we
distributed, in which case the ADRs will also represent the newly distributed
property.
The Bank of New York is not responsible if it decides that it is unlawful or
impractical to make a distribution available to any ADR holders. We have no
obligation to register ADRs, shares, rights or other securities under the
Securities Act. We also have no obligation to take any other action to permit
the distribution of ADRs, shares, rights or anything else to ADR holders. This
means that you may not receive the distribution we make on our shares or any
value for them if it is illegal or impractical for us to make them available to
you.
DEPOSIT, WITHDRAWAL AND CANCELLATION
The Bank of New York will issue ADRs if you or your broker deposit shares or
evidence of rights to receive shares with the Custodian. Upon payment of its
fees and expenses and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, The Bank of New York will register the appropriate
number of ADRs in the names you request and will deliver the ADRs at its office
to the persons you request.
You may turn in your ADRs at The Bank of New York's office. Upon payment of
its fees and expenses and of any taxes or charges, such as stamp taxes or stock
transfer taxes or fees, The Bank of New York will deliver (1) the underlying
shares to an account designated by you and (2) any other deposited securities
underlying the ADR at the office of the Custodian. Or, at your request, risk and
expense, The Bank of New York will deliver the deposited securities at its
office.
VOTING RIGHTS
You may instruct The Bank of New York to vote the shares underlying your
ADRs but only if we ask The Bank of New York to ask for your instructions.
Otherwise, you won't be able to exercise your right to vote unless you withdraw
the shares. However, you may not know about the meeting enough in advance to
withdraw the shares.
If we ask for your instructions, The Bank of New York will notify you of the
upcoming vote and arrange to deliver our voting materials to you. The materials
will (1) describe the matters to be voted on and (2) explain how you, on a
certain date, may instruct The Bank of New York to vote the shares or other
deposited securities underlying your ADRs as you direct. For instructions to be
valid, The Bank of New York must receive them on or before the date specified.
The Bank of New York will try,
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as far as practical, subject to Dominican Republic law and the provisions of our
by-laws, to vote or to have its agents vote the shares or other deposited
securities as you instruct. The Bank of New York will only vote or attempt to
vote as you instruct.
The Company cannot assure you that you will receive the voting materials in
time to ensure that you can instruct The Bank of New York to vote your shares.
In addition, The Bank of New York and its agents are not responsible for failing
to carry out voting instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise your right to vote
and there may be nothing you can do if your shares are not voted as you
requested.
FEES AND EXPENSES
<TABLE>
<CAPTION>
ADR HOLDERS MUST PAY: FOR:
- --------------------- ---------------------------------------------
<S> <C>
$5.00 (or less) per 100 ADRs................. Each issuance of an ADR, including as a
result of a distribution of shares or rights
or other property. Each cancellation of an
ADR, including if the agreement terminates.
$.02 (or less) per ADR....................... Any cash payment.
Registration or Transfer Fees................ Transfer and registration of shares on the
share register of the Foreign Registrar from
your name to the name of The Bank of New York
or its agent when you deposit or withdraw
shares.
Expenses of The Bank of New York............. Conversion of Dominican pesos to U.S.
dollars. Cable, telex and facsimile
transmission expenses.
Taxes and other governmental charges The Bank
of New York or the Custodian have to pay on
any ADR or share underlying an ADR, for
example, stock transfer taxes, stamp duty
or withholding taxes....................... As necessary.
</TABLE>
PAYMENT OF TAXES
You will be responsible for any taxes or other governmental charges payable
on your ADRs or on the deposited securities underlying your ADRs. The Bank of
New York may refuse to transfer your ADRs or allow you to withdraw the deposited
securities underlying your ADRs until such taxes or other charges are paid. It
may apply payments owed to you or sell deposited securities underlying your ADRs
to pay any taxes owed and you will remain liable for any deficiency. If it sells
deposited securities, it will, if appropriate, reduce the number of ADRs to
reflect the sale and pay to you any proceeds, or send to you any property,
remaining after it has paid the taxes.
RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
If we (1) change the nominal or par value of our shares, (2) reclassify,
split up or consolidate any of the deposited securities, (3) distribute
securities on the shares that are not distributed to you, or (4) recapitalize,
reorganize, merge, liquidate, sell all or substantially all of our assets, or
take any similar action, then the cash, shares or other securities received by
The Bank of New York will become deposited securities. Each ADR will
automatically represent its equal share of the new deposited securities. In
addition, the Bank of New York may, and will if we ask it to, distribute some or
all of the
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cash, shares or other securities it received. It may also issue new ADRs or ask
you to surrender your outstanding ADRs in exchange for new ADRs, identifying the
new deposited securities.
AMENDMENT AND TERMINATION
We may agree with The Bank of New York to amend the agreement and the ADRs
without your consent for any reason. If the amendment adds or increases fees or
charges, except for taxes and other governmental charges or registration fees,
cable, telex or facsimile transmission costs, delivery costs or other such
expenses, or prejudices an important right of ADR holders, it will only become
effective 30 days after The Bank of New York notifies you of the amendment. At
the time an amendment becomes effective, you are considered, by continuing to
hold your ADR, to agree to the amendment and to be bound by the ADRs and the
agreement is amended.
The Bank of New York will terminate the agreement if we ask it to do so. The
Bank of New York may also terminate the agreement if The Bank of New York has
told us that it would like to resign and we have not appointed a new depositary
bank within 90 days. In both cases, The Bank of New York must notify you at
least 90 days before termination.
After termination, The Bank of New York and its agents will be required to
do only the following under the agreement: (1) advise you that the agreement is
terminated, and (2) collect distributions on the deposited securities and
deliver shares and other deposited securities upon cancellation of ADRs. After
termination, The Bank of New York will, if practical, sell any remaining
deposited securities by public or private sale. After that, The Bank of New York
will hold the proceeds of the sale, as well as any other cash it is holding
under the agreement for the pro rata benefit of the ADR holders that have not
surrendered their ADRs. It will not invest the money and will have no liability
for interest. The Bank of New York's only obligations will be to account for the
proceeds of the sale and other cash. After termination our only obligations will
be with respect to indemnification and to pay certain amounts to The Bank of New
York.
INSPECTION OF TRANSFER BOOKS
The Bank of New York will maintain at its transfer office in the Borough of
Manhattan, the City of New York, facilities for the execution and delivery,
registration of transfer, combination or split-up of ADRs and a register for the
registration of ADRs and the registration of the transfer of ADRs that at
reasonable times will be open for inspection by us and the holders of ADRs,
provided that such inspection shall not be for the purpose of communication with
holders of ADRs in the interest of a business or object other than our business
or a matter related to the ADRs.
LIMITATIONS ON OBLIGATIONS AND LIABILITY TO ADR HOLDERS
The agreement expressly limits our obligations and the obligations of The
Bank of New York, and it limits our liability and the liability of The Bank of
New York. TRICOM and The Bank of New York:
- are only obligated to take the actions specifically set forth in the
agreement without negligence or bad faith;
- are not liable if either is prevented or delayed by law or circumstances
beyond their control from performing their obligations under the
agreement;
- are not liable if either exercises discretion permitted under the
agreement;
- have no obligation to become involved in a lawsuit or other proceeding
related to the ADRs or the agreement on your behalf or on behalf of any
other party; and
- may rely upon any documents they believe in good faith to be genuine and
to have been signed or presented by the proper party.
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In the agreement, TRICOM and The Bank of New York agree to indemnify each
other under certain circumstances.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before The Bank of New York will issue or register transfer of an ADR, make
a distribution on an ADR, or process the withdrawal of any shares, The Bank of
New York may require:
- payment of stock transfer or other taxes or other governmental charges and
transfer or registration fees charged by third parties for the transfer of
any shares or other deposited securities;
- production of satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary; and
- compliance with regulations it may establish, from time to time,
consistent with the agreement, including presentation of transfer
documents.
The Bank of New York may refuse to deliver, transfer, or register transfers
of ADRs generally when our books or the books of The Bank of New York are
closed, or at any time if we or The Bank of New York thinks it advisable to do
so.
You have the right to cancel your ADRs and withdraw the underlying shares at
any time except:
- when temporary delays arise because: (1) The Bank of New York or TRICOM
has closed its transfer books; (2) the transfer of shares is blocked to
permit voting at a shareholders' meeting; or (3) TRICOM is paying a
dividend on the shares;
- when you or other ADR holders seeking to withdraw shares owe money to pay
fees, taxes and similar charges; or
- when it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADRs or to the withdrawal
of shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
agreement.
PRE-RELEASE OF ADRS
In certain circumstances, subject to the provisions of the agreement, The
Bank of New York may issue ADRs before deposit of the underlying shares. This is
called a pre-release of the ADR. The Bank of New York may also deliver shares
upon cancellation of pre-released ADRs (even if the ADRs are canceled before the
prerelease transaction has been closed out). A pre-release is closed out as soon
as the underlying shares are delivered to The Bank of New York. The Bank of New
York may receive ADRs instead of shares to close out a pre-release. The Bank of
New York may pre-release ADRs only under the following conditions: (1) before or
at the time of the pre-release, the person to whom the pre-release is being made
must represent to The Bank of New York in writing that it or its customer owns
the shares or ADRs to be deposited; (2) the pre-release must be fully
collateralized with cash or other collateral that The Bank of New York considers
appropriate; and (3) The Bank of New York must be able to close out the
pre-release on not more than five business days' notice. In addition, The Bank
of New York will limit the number of ADRs that may be outstanding at any time as
a result of pre-release, although The Bank of New York may disregard the limit
from time to time, if it thinks it is appropriate to do so.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
GENERAL
At December 31, 1999, we had $336.5 million of indebtedness outstanding, of
which $200.0 million represented the aggregate principal amount of our 11 3/8%
senior notes due 2004 and $136.5 million represented amounts borrowed under
short-term and long-term facilities.
11 3/8% SENIOR NOTES DUE 2004
We issued $200.0 million aggregate principal amount of our 11 3/8% senior
notes due 2004 under the senior note indenture between TRICOM and the trustee.
The senior notes are senior obligations of TRICOM and rank senior in right of
payment to all existing and future subordinated indebtedness of TRICOM. Our
wholly owned subsidiaries, TRICOM USA, Inc., Bay Tel Communication, S.A., GFN
Comunicaciones, S.A. and Call Tel Corporation, each has guaranteed the senior
notes, and each such guaranty is senior to any subordinated indebtedness of each
such subsidiary and ranks PARI PASSU with all unsubordinated indebtedness of
each such subsidiary, except to the extent of any collateral securing such other
indebtedness.
Interest on the senior notes accrues at a rate of 11 3/8% per annum and is
paid semi-annually in cash in U.S. dollars on March 1 and September 1 of each
year. We commenced interest payments on March 1, 1998.
We may redeem, or may be required to redeem, the senior notes under certain
circumstances. We may redeem all or a portion of the senior notes on or after
September 1, 2001, at a premium declining to par after September 1, 2003, plus
accrued interest and other amounts due on the redemption date. Until
September 1, 2000, we may redeem up to 35.0% of the senior notes originally
issued with the net proceeds of one or more issuances and sales of our capital
stock at a redemption price equal to 111.375% of the principal amount of the
senior notes so redeemed, plus accrued interest and other amounts due on the
redemption date; provided, that senior notes having an aggregate principal
amount of at least $130.0 million must remain outstanding after each such
redemption and each such redemption must occur within 180 days of any such
issuance and sale of our capital stock. We may redeem the senior notes in whole,
but not in part, at 100% of their principal amount at any time prior to their
maturity if, as a result of any change in the tax laws of the Dominican
Republic, we or any guarantor of the senior notes has or will become obligated
to pay withholding taxes on the senior notes at a rate greater than 15.0%. If we
experience a "change of control," as defined in the senior note indenture, the
holders of the senior notes are entitled to require us to purchase their senior
notes at a price equal to 101% of the principal amount thereof, plus accrued
interest and other amounts due on the date of repurchase.
The senior note indenture contains certain covenants that, among other
things, limit our ability and our guarantor subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, engage
in sale and leaseback transactions with affiliates, create certain liens, enter
into certain transactions with affiliates, sell our assets or any guarantor
subsidiary, engage in any business other than the telecommunications business,
issue or sell equity interests of our guarantor subsidiaries or enter into
certain mergers and consolidations.
We currently are offering to purchase by tender offer the $200 million in
principal amount of our 11 3/8% senior notes due 2004. Our offer is conditioned
upon the holders of the notes consenting to amendments to the indenture
governing the senior notes that would eliminate restrictive covenants, as well
as to other conditions, including our obtaining acceptable financing in the
concurrent debt offering.
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SENIOR NOTES DUE 2007
We currently are offering $300 million in principal amount of our %
senior notes due 2007. The senior notes will be senior obligations of TRICOM and
will rank senior in right of payment to all existing and future subordinated
indebtedness of TRICOM. None of our subsidiaries will guarantee the senior notes
due 2007.
Interest on our senior notes due 2007 will accrue at a rate of % per
annum and will be paid semi-annually in cash in U.S. dollars on and
of each year. We will commence interest payments on ,
2000.
Except under limited circumstances, our senior notes due 2007 will not be
redeemable at our option prior to maturity. Until , 2003, we may
redeem up to 35% of our senior notes due 2007 originally issued with the net
proceeds of one or more issuances and sales of our capital stock issued after
the date of the indenture at a redemption price equal to % of the principal
amount of our senior notes due 2007 so redeemed, plus accrued interest and other
amounts due on the redemption date; provided, that senior notes due 2007 having
an aggregate principal amount of at least $ million must remain outstanding
after each such redemption and each such redemption must occur within 180 days
of any such issuance and sale of our capital stock. We may redeem the senior
notes due 2007 in whole, but not in part, at 100% of their principal amount at
any time prior to their maturity if, as a result of any change in the tax laws
of the Dominican Republic, we have or will become obligated to pay withholding
taxes on the senior notes due 2007 at a rate greater than 15%. If we experience
a "change of control," the holders of the senior notes due 2007 are entitled to
require us to purchase their notes at a price equal to 101% of the principal
amount thereof, plus accrued interest and other amounts due on the date of
repurchase.
The indenture for the % senior notes due 2007 will contain covenants that
will limit our and our subsidiaries' ability to incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions, repurchase
equity interests or subordinated indebtedness, engage in sale and leaseback
transactions, create liens, enter into transactions with affiliates, sell our
assets, engage in any business other than the telecommunications business, issue
or sell equity interests of our subsidiaries or enter into certain mergers and
consolidations.
This description of the terms of the indenture for our senior notes due 2007
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, all the provisions of the indenture.
CAPITAL LEASES
During 1999 we entered into $26.2 million of capital lease contracts with an
affiliate of GFN. These capital leases mature at various times through 2003. We
used these capital leases to finance the acquisition of communications and other
types of equipment.
HAMILTON BANK FACILITY
Our subsidiary, TRICOM USA has a $15 million revolving credit facility with
Hamilton Bank, N.A. that extends through May 2002. Borrowings bear interest at
the prime rate of Citibank N.A. plus one-half of one percent and are guaranteed
by us and Banco Nacional de Credito, S.A., a bank owned by GFN. At December 31,
1999, we had outstanding borrowings of $15 million under this line. This
facility does not contain any financial or restrictive covenants.
We also have a $5 million short-term facility with Hamilton Bank, N.A. which
expires September 30, 2000. This $5 million short-term facility is for direct
loans of up to $1.0 million and for the issuing of letters of credit,
refinancing letters of credit and financing of trade payables on open
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account of up to 180 days. Borrowings bear interest at the prime rate of
Citibank, N.A. plus one percent. At December 31, 1999, we had borrowings of
$1.0 million under this line.
CITIBANK FACILITY
We have a facility with the Santo Domingo branch of Citibank that allows for
borrowings of up to $20 million. The facility is for unsecured direct loans of
up to one year and opening of letters of credit or trade finance of up to
180 days, with a sublimit of $10.0 million for long-term direct loans. The
facility provides for adjustment to the interest rate every 60 to 90 days. At
December 31, 1999, we had borrowings of $19.8 million under the Citibank
facility, bearing interest at rates ranging from 9.5% to 10.5% per annum.
EXPORT-IMPORT BANK CREDIT FACILITY
In January 2000, we obtained a commitment from Export-Import Bank of the
United States to provide credit guarantees of up to $46.6 million. The credits
will be disbursed by The International Bank of Miami, N.A. to be used for
purchases of communications equipment and material from Motorola and other
suppliers. The commitment provides that the credits will be available for
disbursement over a 12 month period and will be repayable over five years. We
are negotiating the terms of the facility and we cannot assure you that we will
successfully conclude the negotiations.
SHORT-TERM BORROWINGS
We fund a substantial portion of our capital expenditure and working capital
requirements with short-term borrowings in Dominican markets. These borrowings
have maturities ranging up to 180 days and usually are renewed and rolled-over
at maturity. As of December 31, 1999, we had peso- and dollar-denominated
short-term borrowings with the following local banks and institutions: Banco
Fiduciario for $8.6 million, Banco BHD for $6.0 million, Banco Mercantil for
$2.5 million and Conaresa for $12.0 million. In addition, we had
peso-denominated long-term borrowings with Banco Lopez de Haro and Banco de
Desarrollo Industrial totaling $4.1 million. At times, the cost of the
short-term peso-denominated indebtedness has been as high as 30% per annum and
adversely affected our net income. Moreover, from time to time, the Dominican
government has imposed limitations on loans by Dominican banks in Dominican
pesos in order to restrict the country's money supply and curb inflation. This
monetary policy has limited the sources of bank financing and the amounts
available to be borrowed from Dominican banks and increased the costs of such
borrowing. We cannot assure you that these short-term funding sources will
continue to be available in the Dominican markets if we require them.
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TAX CONSIDERATIONS
DOMINICAN REPUBLIC TAX CONSIDERATIONS
The following discussion summarizes the principal Dominican Republic income
tax consequences of an investment in the ADRs, ADSs or shares of Class A common
stock by a person who is neither domiciled in nor a resident of the Dominican
Republic for tax purposes and who holds such ADRs, ADSs or shares of Class A
common stock for investment purposes and not for purposes of a trade or
business. In the opinion of the Dominican law firm, Pellerano & Herrera, the
discussion sets forth the material Dominican Republic consequences of such an
investment. The discussion is not intended as tax advice to any particular
investor.
Under our 1996 concession agreement, dividends and interest paid to any of
our shareholders, bondholders or other investors are exempt from Dominican
income tax. Under Dominican tax law, the term "dividends" refers to any
distribution of profits of a company to its shareholders. Thus, under the 1996
concession agreement, any dividend or distribution paid by us with respect to
the Class A common stock will not be subject to Dominican income tax.
Until our 1996 concession agreement is approved by the Dominican Congress,
cash dividends and other distributions paid by us with respect to ADSs or shares
of Class A common stock held by any holder could be subject to a 25% withholding
tax, which would be required to be withheld by us and paid to the Dominican tax
administration at the time a cash dividend or other distribution is paid. Such
tax withheld may not be a creditable foreign tax in determining the U.S. tax
liability of such holder. See "--United States Tax Considerations." We are not
aware of any plans of the Dominican government to submit our 1996 concession
agreement for approval to the Dominican Congress.
Our 1996 concession agreement does not specifically address whether capital
gains taxes will apply to sales of ADSs in the Dominican Republic. However, it
states that the transfer or sale of our shares of any type will be exempt from
Dominican income tax. Under the principles of territoriality underlying the
Dominican constitution, gain from the sale or exchange of ADRs evidencing the
ADSs by a foreign holder outside of the Dominican Republic would not be subject
to taxation by the Dominican tax authority even if our 1996 concession agreement
were not applicable to gains on the transfer or sale of ADSs.
Until our 1996 concession agreement is approved by the Dominican Congress,
the Dominican government could require payment of capital gains tax on gain
recognized on the sale or exchange in the Dominican Republic of shares of
Class A common stock (as distinguished from sales or exchanges of ADSs). The
capital gains tax was instituted in the Dominican Republic only in 1992 and was
later modified by regulations in 1998 as part of major tax reform legislation.
Under present law, the capital gains tax rate is identical to the regular income
tax rate of the person or entity that earned such gain; there is no preferential
rate. Thus, a corporation selling shares of Class A common stock in the
Dominican Republic would be required to pay the corporate income tax of 25% on
any gain from a sale or exchange of such shares. An individual also would have
to pay income tax at the applicable individual rate, as set forth below, on gain
from the sale of shares of Class A common stock in the Dominican Republic. The
individual income tax rates, in the Dominican Republic for the year 2000 are as
follows:
<TABLE>
<S> <C>
If Taxable Income is: The Tax is:
Not over RD$102,792.00 0.
Over RD$102,792.00 but not over RD$171,309.00 15% of taxable income over RD$102,792.01
Over RD$171,309.00 but not over RD$256,957.00 RD$10,278.00 plus 20% of the excess over
RD$171,309.01
Over RD$256,957.00 RD$27,408 plus 25% of the excess over
RD$256,957.01
</TABLE>
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The amount of gain on which the capital gains tax is assessed is equal to
the sale or transfer price (i.e., amount realized on the sale or transfer) minus
the acquisition price, adjusted for inflation. Regulations for the application
of the Dominican Tax Code clarify how the tax basis is to be calculated and also
provide how the inflation adjustment is to be applied.
There is no income tax treaty in force between the Dominican Republic and
the United States.
There are no Dominican inheritance or succession taxes applicable to the
ownership, transfer or disposition of ADSs by a foreign holder not domiciled in
the Dominican Republic at the moment of death. It is unclear whether Dominican
gift taxes would apply to the transfer or other disposition by gift of shares of
Class A common stock by a non-resident foreign holder; however, ADSs or ADRs are
not subject to Dominican gift taxes. There are no Dominican stamp, issue,
registration or similar taxes or duties payable by holders of ADSs or shares of
Class A common stock.
UNITED STATES TAX CONSIDERATIONS
The following sets forth the material United States federal income tax
consequences of an investment in the ADSs, ADRs or shares of Class A common
stock or shares of Class A common stock. This discussion is based upon United
States federal income tax laws and regulations presently in force and such
authorities may be repealed, revoked or modified, possibly with retroactive
effect, so as to result in United States federal income consequences different
from those discussed below. The discussion is not a full description of all tax
considerations that may be relevant to a decision to purchase ADSs or shares of
Class A common stock or to the holding or disposition of such instruments. In
particular, the discussion is directed only to U.S. holders that will hold ADSs
or shares of Class A common stock as capital assets and that have the United
States dollar as their functional currency. It does not address the tax
treatment of U.S. holders that are subject to special tax rules, such as banks,
securities dealers, insurance companies, tax-exempt entities, holders who hold
ADSs or shares of Class A common stock as part of a hedging, straddle or
conversion transaction and holders of 10% or more of the total combined voting
power of our voting shares. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS ABOUT THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF
THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSS OR SHARES OF CLASS A COMMON
STOCK.
As used herein, "U.S. holder" means a beneficial owner of ADSs or shares of
Class A common stock that is
(1) a United States citizen or resident,
(2) a corporation, partnership or other entity created or organized under
the laws of the United States or any State or any political subdivision
thereof,
(3) an estate the income of which is subject to United States federal income
taxation regardless of its source, or
(4) any trust if both
(x) a court within the United States is able to exercise primary
supervision over the administration of the trust and
(y) one or more United States persons have the authority to control all
substantial decisions of the trust as described in
section 7701(a)(30) of the Internal Revenue Code of 1986, as amended.
If the obligations contemplated by the deposit agreement are
performed in accordance with its terms, holders of ADSs will be
treated for United States federal income tax purposes as the owners
of the shares of Class A common stock represented by ADSs.
CASH AND OTHER DISTRIBUTIONS
Our distributions with respect to shares of Class A common stock (other than
distributions in liquidation and certain distributions in redemption of stock)
will be taxed as ordinary dividend income
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<PAGE>
to the extent that such distributions do not exceed our current and accumulated
earnings and profits, as determined in accordance with United States federal
income tax principles. Distributions, if any, in excess of our current and
accumulated earnings and profits will constitute a non-taxable return of capital
to a U.S. holder and will be applied against and will reduce the U.S. holder's
tax basis in shares of Class A common stock (but not below zero). To the extent
that such distributions exceed the tax basis of the U.S. holder, the excess
generally will be treated as capital gain.
Dividends generally will be includable in the gross income of a U.S. holder
as ordinary income when the dividends are received by the depositary or by the
U.S. holder, as applicable. Dividends paid in Dominican pesos will be includable
in a United States dollar amount based on the exchange rate in effect on the day
of receipt by the depositary or the U.S. holder, as applicable. Any gain or loss
recognized upon a subsequent sale or conversion of the Dominican pesos into U.S.
dollars will be United States source ordinary income or loss. Dividends will not
be eligible for the dividends-received deduction allowed to corporations.
Dividends generally will be foreign source income for purposes of
determining such U.S. holder's foreign tax credit limitation and generally will
be "passive" income. Any Dominican tax withheld on such dividends may not be a
creditable foreign tax in determining the U.S. tax liability of such holder. As
we have been advised by our local counsel that we would be permitted to credit
the amount withheld against our Dominican corporate income tax, the U.S. holder
might be treated as, in effect, not paying any Dominican tax.
Our distributions of additional shares of Class A common stock or of rights
to acquire shares of Class A common stock that are made as part of a pro rata
distribution to all of our shareholders generally will not be subject to federal
income tax. The basis of the new shares or rights generally will be determined
by allocating the U.S. holder's adjusted basis in the old shares between the old
shares and the new shares or rights received, based on their relative fair
market values (except that the basis of the rights will be zero if the fair
market value of the rights is less than 15% of the fair market value of the old
shares at the time of distribution, unless the U.S. holder elects to allocate
part of the basis of the old shares to the rights).
CAPITAL GAINS
U.S. holders will recognize capital gain or loss on the sale or other
disposition of ADSs or shares of Class A common stock held by the U.S. holder or
by the depositary in an amount equal to the difference between the amount
realized for that common share and the U.S. holder's adjusted tax basis in that
share. In the case of an individual U.S. holder, such gain or loss will be taxed
at various preferential rates depending on the extent to which the U.S. holder's
holding period exceeds one year. The deductibility of capital losses is subject
to limitations. U.S. holders will not recognize gain or loss on deposits or
withdrawals of shares of Class A common stock in exchange for ADSs. Any gain
recognized by a U.S. holder on a sale of ADSs or shares of Class A common stock
generally will be treated as United States source income for purposes of
determining such U.S. holder's foreign tax credit limitation.
PASSIVE FOREIGN INVESTMENT COMPANY PROVISIONS. We believe that we are not
and will not become a passive foreign investment company. However, we will be
classified as a passive foreign investment company for U.S. federal income tax
purposes if 75% or more of our gross income is passive income or on average for
the taxable year, 50% or more of our assets, by value (or, if we so elect, by
adjusted basis), produce or are held for the production of passive income. For
this purpose, passive income generally includes dividends, interest, royalties,
rents (other than rents and royalties derived in the active conduct of a trade
or business and not derived from a related person), annuities and gains from
assets that produce passive income. If a foreign corporation owns at least 25%
by value of the stock of another corporation, the foreign corporation is treated
for purposes of the passive foreign investment company tests as owning its
proportionate share of the assets of the other corporation and as receiving
87
<PAGE>
directly its proportionate share of the other corporation's income. If a foreign
corporation is classified as a passive foreign investment company, in any year
with respect to which a U.S. holder owns ADSs or shares of common stock, it
generally will continue to be treated as a passive foreign investment company,
with respect to such shareholder in all succeeding years. We will notify U.S.
holders by letter and provide them with the information as may be required to
make a "qualified electing fund" election effective.
If our company were treated as a passive foreign investment company, and you
are a U.S. holder that does not make a "qualified electing fund election" or a
"mark-to-market election," each as described below, you will be subject to
special rules with respect to: (1) gains realized on the sale or other
disposition of the ADSs or shares of Class A common stock and (2) distributions
on the ADSs or shares of Class A common stock to the extent that those
distributions are treated as excess distributions (defined generally as the
excess of the amount received with respect to the shares in any taxable year
over 125% of the average received in the shorter of either the three previous
years or your holding period before the taxable year). The special rules include
taxation of such gain or excess distribution at ordinary income tax rates and
payment of an interest charge on tax that is deemed to have been deferred with
respect to such gain or excess distribution.
These special passive foreign investment company tax rules will not apply if
the U.S. holder elects to have our company treated as a "qualified electing
fund" and our company provides certain information required for the "qualified
electing fund" election. If our company is treated as a passive foreign
investment company, we intend to notify U.S. holders by letter and provide them
with such information as may be required to make the "qualified electing fund"
election effective. If a U.S. holder makes a "qualified electing fund" election,
the U.S. holder will be currently taxable on its pro rata share of our company's
ordinary earnings and net capital gain (at ordinary income and capital gains
rates, respectively) for each taxable year of our company, regardless of whether
or not distributions were received.
Alternatively, if the ADSs or shares of Class A common stock are treated as
"marketable stock," a U.S. holder may make a mark-to-market election. If this
election is made, the U.S. holder will not be subject to the passive foreign
investment company rules described above. Instead, the U.S. holder generally
will include in each year as ordinary income the excess, if any, of the fair
market value of the ADSs or shares of Class A common stock at the end of the
taxable year over the U.S. holder's adjusted basis in the shares and will be
permitted as ordinary loss in respect of the excess, if any, of the U.S.
holder's adjusted basis in the ADSs or shares of Class A common stock over its
fair market value at the end of the taxable year (but only to the extent of the
net amount previously included in income as a result of the mark-to-market
election). The mark-to-market election is only available with respect to stock
traded on certain U.S. exchanges and other exchanges designated by the U.S.
Treasury. It is anticipated that such election would be available to U.S.
holders. U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE
U.S. FEDERAL INCOME TAX CONSEQUENCES OF HOLDING ADSS OR SHARES OF CLASS A COMMON
STOCK OF OUR COMPANY IF IT IS CONSIDERED A PASSIVE FOREIGN INVESTMENT COMPANY.
FOREIGN PERSONAL HOLDING COMPANIES. We believe that we will not become a
"foreign personal holding company". However, our company will be treated as a
foreign personal holding company if five or fewer U.S. individuals own, or are
treated as owning under certain attribution rules, in the aggregate more than
50% of the voting power or value of our shares, and at least 60% (50% in certain
circumstances) of "gross income" is made up of certain passive type income (for
example, dividends, interest, certain rents and royalties and gain from the sale
of stock or securities) for a taxable year. If a foreign corporation is a
foreign personal holding company, U.S. persons that own shares in the foreign
personal holding company (regardless of the size of their shareholding and
regardless of whether they are individuals) will generally be subject to current
U.S. tax on a pro-rata portion of the foreign personal holding company's
undistributed foreign personal holding company income for the taxable year
although tax-exempt U.S. investors will not be subject to tax on amounts
attributable to foreign
88
<PAGE>
personal holding company income. In addition, U.S. persons that are required
under these rules to include undistributed taxable income for a taxable year and
that own at least 5% of the value of a foreign personal holding company's shares
are required to comply with certain reporting requirements under the Internal
Revenue Code. In addition, if our company became a foreign personal holding
company, U.S. persons who acquire their shares from decedents would not receive
a "stepped-up" basis in such shares. Instead, such U.S. persons would have a tax
basis equal to the lower of fair market value or the decedent's basis.
CONTROLLED FOREIGN CORPORATIONS. We believe that we will not become a
"controlled foreign corporation." However, our company will be treated as a
controlled foreign corporation if "U.S. shareholders" in the aggregate own, or
are treated as owning under certain attribution rules, at least 50% of the
voting power or value of our shares. A U.S. shareholder in general is any U.S.
holder that individually owns, or is treated as owning, at least 10% of the
total combined voting power of our shares.
If a company is a controlled foreign corporation for an uninterrupted period
of 30 days or more during the taxable year, the U.S. shareholders of a
controlled foreign corporation will generally be subject to current U.S. tax on
certain types of income of the foreign corporation ("Subpart F income," which
includes dividends, interest, certain rents and royalties, gain from the sale of
property producing such income, and certain income from sales and services) and,
in certain circumstances, on earnings of the controlled foreign corporation that
are invested in U.S. property, whether or not cash is distributed by the
controlled foreign corporation. In addition, gain on the sale of the controlled
foreign corporation's shares by a U.S. shareholder (during the period that the
corporation is a controlled foreign corporation and thereafter for a five-year
period) will be ordinary income in whole or in part.
BACKUP WITHHOLDING
A U.S. holder of ADSs or shares of Class A common stock may be subject to
"backup withholding" at the rate of 31% with respect to dividends paid on the
ADSs or shares of Class A common stock or the proceeds of sale, exchange or
redemption of ADSs or shares of Class A common stock unless such U.S. holder
(1) is a corporation or comes within certain other exempt categories, and, when
required, demonstrates this fact or (2) provides a correct taxpayer
identification number, certifies that such holder is not subject to backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. Any amount withheld under these rules will be creditable
against the U.S. holder's United States federal income tax liability. A U.S.
holder who does not provide a correct taxpayer identification number may be
subject to penalties imposed by the United States Internal Revenue Service.
The rules for information reporting and backup withholding requirements have
been altered in certain respects with respect to payments after December 31,
2000. It is possible that we and other withholding agents may request a new
withholding certificate in order to qualify for continued exemption from backup
withholding under Treasury regulations when they become effective. Holders of
the shares should consult their tax advisers concerning the possible application
of such alternations to any payments made with respect to the shares.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
dated , 2000, each of the underwriters named below, through Bear,
Stearns & Co. Inc. and Morgan Stanley Dean Witter & Co., acting as
representatives of the several underwriters, has severally agreed to purchase
from us the aggregate number of ADSs set forth opposite its name below at the
public offering price less the underwriting discount set forth on the cover page
of this prospectus:
<TABLE>
<CAPTION>
NUMBER
NAME OF ADSS
- ---- ---------
<S> <C>
Bear, Stearns & Co. Inc.....................................
Morgan Stanley Dean Witter & Co.............................
---------
Total....................................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of legal matters by their counsel and to
various other conditions. Under the underwriting agreement, the underwriters are
obligated to purchase and pay for all of the above ADSs, other than those
covered by the over-allotment option described below, if they purchase any of
the ADSs.
The underwriters propose to offer some of the ADSs directly to the public at
the offering price set forth on the cover page of this prospectus and some of
the ADSs to dealers at this price less a concession not in excess of $
per ADS. The underwriters may allow, and dealers may re-allow, concessions not
in excess of $ per ADS on sales to other dealers. After the offering of
the shares to the public, the representatives of the underwriters may change the
public offering price, concessions and other selling terms.
We have granted to the underwriters an option exercisable for 30 days from
the date of the underwriting agreement to purchase up to 600,000 additional ADSs
at the public offering price less the underwriting discount. The underwriters
may exercise this option solely to cover over-allotments, if any, made in
connection with this offering. To the extent that the underwriters exercise this
option, each underwriter will become obligated, subject to conditions, to
purchase a number of additional ADSs approximately proportionate to each
underwriter's initial purchase commitment as indicated in the preceding table.
The following table shows the underwriting fees to be paid to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriter's option to purchase
additional ADSs.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per ADS.....................................................
Total.......................................................
</TABLE>
Other expenses of this offering (including the registration fees and the
fees of financial printers, counsel and accountants) payable by us are expected
to be approximately $ .
We have agreed that for a period of 180 days after the date of this
prospectus we will not offer, sell, or otherwise dispose of any ADSs or shares
of our common stock except for the shares offered in this offering, shares
issued upon the exercise of presently outstanding options or warrants, and any
shares offered in connection with employee benefit plans, without the prior
written consent of Bear, Stearns & Co. Inc., on behalf of the underwriters.
In addition, our directors and executive officers, and our two largest
shareholders, GFN Corporation Limited and Motorola, who collectively hold a
total of 19,144,544 outstanding shares of our common stock, have agreed, subject
to limited exceptions, not to sell or offer to sell or otherwise
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dispose of any shares of Class A common stock or ADSs or securities convertible
or exchangeable for our Class A common stock or ADSs, for a period of 180 days
after the date of this prospectus without the prior written consent of Bear,
Stearns & Co. Inc., on behalf of the underwriters.
In order to facilitate this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the ADSs.
Specifically, the underwriters may over-allot or otherwise create a short
position in the ADSs for their own account by selling more ADSs than have been
sold to them by us. The underwriters may elect to cover any short position by
purchasing ADSs in the open market or by exercising the over-allotment option
granted to the underwriters. In addition, the underwriters may stabilize or
maintain the price of the ADSs by bidding for or purchasing ADSs in the open
market and may impose penalty bids, under which selling concessions allowed to
syndicate members or other broker-dealers participating in the offering are
reclaimed if ADSs previously distributed in the offering are repurchased in
connection with stabilization transactions or otherwise. The effect of these
transactions may be to stabilize or maintain the market price at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the ADSs to the extent that it
discourages resales. No representation is made as to the magnitude or effect of
these activities. The underwriters are not required to engage in any of these
activities. If commenced by the underwriters, the underwriters may effect these
activities through the New York Stock Exchange and may end any of these
activities at any time.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
Our ADSs are listed on the New York Stock Exchange under the symbol "TDR."
The underwriters may, from time to time, engage in transactions with, and
perform services for, us in the ordinary course of their business. Bear,
Stearns & Co. Inc. and Morgan Stanley Dean Witter & Co. are acting as initial
purchasers in the concurrent debt offering, and Bear Stearns & Co. Inc. is
acting as dealer manager for the tender we are making for the 11 3/8% senior
notes due 2004. They will receive customary compensation for these services.
LEGAL MATTERS
The validity of the ADSs is being passed upon for us by Paul, Hastings,
Janofsky & Walker LLP, New York, New York, and for the underwriters by Latham &
Watkins, Washington, D.C. The validity of the shares of Class A common stock
underlying such ADSs is being passed upon for us by our Dominican counsel,
Pellerano & Herrera, Santo Domingo, Dominican Republic, and for the underwriters
by Castillo & Castillo, Santo Domingo, Dominican Republic. Paul, Hastings,
Janofsky & Walker LLP may rely, without independent investigation, upon the
opinion of Pellerano & Herrera with respect to matters governed by Dominican
Republic law. Latham & Watkins may rely, without independent investigation, upon
the opinion of Castillo & Castillo with respect to matters governed by Dominican
Republic law.
EXPERTS
Our consolidated financial statements at December 31, 1998 and 1999, and for
each of the years in the three-year period ended December 31, 1999, have been
included in this prospectus in reliance upon the report of KPMG, independent
public accountants, appearing elsewhere in this prospectus, and upon the
authority of said firm as experts in accounting and auditing.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
As required by the Securities Act of 1933, we have filed a registration
statement (No. 333- ) relating to the securities offered by this prospectus
with the Securities and Exchange Commission. This prospectus is a part of that
registration statement, which includes additional information.
We file annual reports on Form 20-F and reports on Form 6-K with the SEC.
You may read and copy this information at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices in
New York, New York and Chicago, Illinois. You can also request copies of the
documents, upon payment of a duplicating fee, by writing to the Public Reference
Section of the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the Public Reference Room. In addition, our
reports, proxy statements and other information may be inspected at the offices
of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
The SEC allows us to "incorporate by reference" the information we file with
the SEC. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC. The information
incorporated by reference is considered to be part of this prospectus. Any
information that we file later with the SEC and that is deemed incorporated by
reference will automatically update information in this prospectus. In all such
cases, you should rely on the later information over different information
included in this prospectus.
This prospectus incorporates by reference our Annual Report on Form 20-F for
the year ended December 31, 1998, which we have previously filed with the SEC
and is not delivered with this prospectus. In addition, this prospectus will be
deemed to incorporate by reference the following documents:
- any annual reports on Form 20-F, including any amendments thereto, that we
may file with the SEC prior to the termination of the offering; and
- any report on Form 6-K submitted by us to the SEC prior to the termination
of the offering and identified by us as being incorporated by reference
into this prospectus.
You may request a copy of these filings, at no cost, by contacting us at
Ave. Lope de Vega No. 95, Santo Domingo, Dominican Republic, Attention: Jaime
Garcia, telephone number: 809-476-5054 or at our website,
www.tricom.net/investor.
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<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1998 and 1999.................... F-5
Consolidated Statements of Shareholders' Equity for the
Years Ended
December 31, 1997, 1998 and 1999.......................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-9
Notes to Consolidated Financial Statements.................. F-11
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
TRICOM, S.A.:
We have audited the accompanying consolidated balance sheets of TRICOM, S. A.
and subsidiaries as of December 31, 1998 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three year-period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TRICOM, S. A. and
subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the years in the three year-period
ended December 31, 1999, in conformity with generally accepted accounting
principles in the United States of America.
As explained in note 8 to the consolidated financial statements, effective
January 1, 1999, the Company changed its method of accounting for organization
costs.
KPMG
Member firm of KPMG International
Santo Domingo, Dominican Republic
January 28, 2000
F-2
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (notes 4 and 6)................. $ 15,377,410 $ 13,459,566
Accounts receivable (notes 5, 6 and 12):
Customers............................................... 12,367,843 22,821,951
Carriers................................................ 4,153,003 6,467,016
Related parties......................................... 163,110 40,412
Officers and employees.................................. 275,069 415,702
Current portion of long term accounts receivable........ 75,071 66,369
Other................................................... 2,113,228 624,846
------------ ------------
19,147,324 30,436,296
Allowance for doubtful accounts......................... (740,687) (4,307,563)
------------ ------------
Accounts receivable, net.............................. 18,406,637 26,128,733
Current portion of pledged securities (notes 7 and 15).... 54,470,478 --
Inventories, net
Equipment and accessories............................... 5,245,262 9,429,905
Other................................................... 242,991 271,350
------------ ------------
Total inventories..................................... 5,488,253 9,701,255
Prepaid expenses (notes 6 and 17)......................... 3,104,942 6,637,067
Deferred income taxes (note 18)........................... 556,949 949,190
------------ ------------
Total current assets.................................. 97,404,669 56,875,811
------------ ------------
Long-term accounts receivable............................... 91,556 22,619
Investments (notes 7 and 15)................................ 2,164,387 2,710,572
Property and equipment, net (notes 3 and 15)................ 330,456,448 455,045,191
Other assets at cost, net of amortization (notes 8 and
20)....................................................... 14,697,543 16,824,268
------------ ------------
$444,814,603 $531,478,461
============ ============
</TABLE>
F-3
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (notes 6, 9, 10 and 15):
Borrowed funds--banks................................... $ 21,665,516 $ 63,602,022
Borrowed funds--related parties......................... 25,591,915 17,895,946
Current portion of long-term debt....................... 32,000,000 315,216
------------ ------------
79,257,431 81,813,184
------------ ------------
Current portion of capital leases (notes 6 and 11)........ -- 14,242,056
Accounts payable (notes 6 and 12):
Carriers................................................ 3,106,898 2,987,379
Related parties......................................... -- 10,035,066
Suppliers............................................... 11,772,957 12,043,787
Other................................................... 1,566,076 329,309
------------ ------------
16,445,931 25,395,541
Other liabilities (notes 13 and 20)....................... 7,413,821 3,789,707
Accrued expenses (note 14)................................ 13,887,974 15,293,910
------------ ------------
Total current liabilities............................... 117,005,157 140,534,398
------------ ------------
Reserve for severance indemnities........................... 42,886 31,414
Deferred income taxes (note 18)............................. 205,258 631,159
Capital leases, excluding current portion (notes 6 and
11)....................................................... -- 11,640,652
Long-term debt, excluding current portion (note 15)......... 200,000,000 228,772,011
------------ ------------
Total liabilities....................................... 317,253,301 381,609,634
------------ ------------
Shareholders' equity (notes 16 and 22):
Class A common stock of RD$10 par value; Authorized
55,000,000 shares; issued 5,700,000 shares.............. 3,750,000 3,750,000
Class B common stock of RD$10 par value; Authorized
25,000,000 shares; issued 19,144,544 shares............. 12,595,095 12,595,095
Additional paid-in capital................................ 94,015,852 94,288,852
Retained earnings......................................... 19,224,112 41,258,637
Equity adjustment from foreign currency translation....... (2,023,757) (2,023,757)
------------ ------------
127,561,302 149,868,827
Commitments and contingencies
(notes 3, 15, 17, 18, 19, 20, 21 and 24).................. -- --
------------ ------------
$444,814,603 $531,478,461
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenues (note 6):
Toll revenues............................................. $ 15,510,968 $ 17,644,573 $ 23,118,149
International revenues.................................... 39,432,385 50,332,088 60,592,134
Local service............................................. 6,411,831 12,941,983 33,858,620
Cellular and PCS.......................................... 13,073,309 20,363,647 26,473,985
Paging.................................................... 5,079,103 4,527,579 2,695,531
Sale and lease of equipment............................... 5,502,276 4,114,513 7,689,534
Installations............................................. 5,070,888 12,936,817 15,501,847
Other..................................................... 21,246 2,640,192 889,141
------------ ------------ ------------
Total operating revenues.............................. 90,102,006 125,501,392 170,818,941
------------ ------------ ------------
Operating costs:
Satellite connections and carrier (note 20)............... 31,270,652 32,308,880 43,687,794
Network depreciation...................................... 7,432,818 11,382,446 15,982,827
Expenses in lieu of income taxes (note 17)................ 6,248,317 9,561,710 12,763,565
General and administrative expenses, including
depreciation charges of $1,956,121, $3,239,714 and
$4,854,653 in 1997, 1998 and 1999, respectively (notes
6, 19, 20 and 24)....................................... 25,631,257 39,379,388 51,501,272
Other..................................................... 3,659,422 3,391,347 5,421,403
------------ ------------ ------------
Total operating costs................................. 74,242,466 96,023,771 129,356,861
------------ ------------ ------------
Operating income...................................... 15,859,540 29,477,621 41,462,080
------------ ------------ ------------
Other income (expenses):
Interest expense (note 6)................................. (16,100,251) (18,006,286) (22,430,031)
Interest income (notes 6 and 7)........................... 4,053,079 5,133,348 2,389,329
Foreign currency exchange gain (loss)..................... (705,983) 104,414 (202,724)
Gain on sale of land (note 6)............................. -- -- 897,833
Other..................................................... (83,097) 844,801 179,409
------------ ------------ ------------
Other expenses, net..................................... (12,836,252) (11,923,723) (19,166,184)
------------ ------------ ------------
Earnings before income taxes, extraordinary item and
cumulative effect of accounting change................ 3,023,288 17,553,898 22,295,896
Income taxes (note 18)...................................... -- 351,691 (141,660)
------------ ------------ ------------
Earnings before extraordinary item and cumulative effect
of accounting change.................................. 3,023,288 17,905,589 22,154,236
Extraordinary item--early extinguishment of debt (note
23)......................................................... (5,452,995) -- --
------------ ------------ ------------
Earnings (loss) before cumulative effect of accounting
change................................................ (2,429,707) 17,905,589 22,154,236
Cumulative effect of change in accounting for organization
costs (note 8).............................................. -- -- (119,711)
------------ ------------ ------------
Net earning (loss)...................................... $ (2,429,707) $ 17,905,589 $ 22,034,525
============ ============ ============
Earnings (loss) per common share--basic and diluted:
Earnings before extraordinary item and cumulative effect
of accounting change.................................. 0.17 0.78 0.89
Extraordinary item...................................... (0.31) -- --
Cumulative effect of accounting change.................. -- -- --
------------ ------------ ------------
Net earnings (loss) per common share-basic and
diluted............................................... $ (0.14) $ 0.78 $ 0.89
============ ============ ============
Average number of common share used in calculation:
Basic..................................................... 17,600,360 22,944,544 24,844,544
============ ============ ============
Diluted................................................... 17,600,360 22,944,569 24,888,709
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES
ISSUED COMMON STOCK
---------------------- ------------------------
CLASS A CLASS B CLASS A CLASS B
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996.................. -- 10,126,388 $ -- $23,357,343
Issuance of common shares..................... -- 9,264,141 -- 20,000,000
Net loss...................................... -- -- -- --
--------- ---------- ---------- -----------
Balance at December 31, 1997.................. -- 19,390,529 -- 43,357,343
Issuance of common shares, net of issuance
cost of $6,537,345 (note 16)................ 5,700,000 -- 3,750,000 --
Effect of change from no par value to RD$10
par value (note 16)......................... -- -- -- (30,203,197)
Retirement of treasury stock as a result of
initial public offering..................... -- (245,985) -- (559,051)
Transfer to legal reserve (note 22)........... -- -- -- --
Net earnings.................................. -- -- -- --
--------- ---------- ---------- -----------
Balance at December 31, 1998.................. 5,700,000 19,144,544 3,750,000 12,595,095
Stock-based compensation to non-employees
(note 24)................................... -- -- -- --
Transfer to legal reserve (note 22)........... -- -- -- --
Net earnings.................................. -- -- -- --
--------- ---------- ---------- -----------
Balance at December 31, 1999.................. 5,700,000 19,144,544 $3,750,000 $12,595,095
========= ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
RETAINED EARNINGS
ADDITIONAL ----------------------------
PAID APPROPRIATED UN-
IN CAPITAL LEGAL RESERVE APPROPRIATED
----------- ------------- ------------
<S> <C> <C> <C>
Balance at December 31, 1996........................... $ -- $ 600,233 $ 3,147,997
Issuance of common shares.............................. -- -- --
Net loss............................................... -- (2,429,707)
----------- ---------- -----------
Balance at December 31, 1997........................... -- 600,233 718,290
Issuance of common shares, net of issuance cost of
US$6,537,345 (note 16)............................... 63,812,655 -- --
Effect of change from no par value of RD$10 par value
(note 16)............................................ 30,203,197 -- --
Retirement of treasury stock as a result of initial
public offering...................................... -- -- --
Transfer to legal reserve (note 22).................... -- 571,955 (571,955)
Net earnings........................................... -- -- 17,905,589
----------- ---------- -----------
Balance at December 31, 1998........................... 94,015,852 1,172,188 18,051,924
Stock-based compensation to non-employees (note 24).... 273,000 -- --
Transfer to legal reserve (note 22).................... -- 480,819 (480,819)
Net earnings........................................... -- -- 22,034,525
----------- ---------- -----------
Balance at December 31, 1999........................... $94,288,852 $1,653,007 $39,605,630
=========== ========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-7
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME-EQUITY
ADJUSTMENT FROM
FOREIGN SHAREHOLDERS'
CURRENCY TREASURY EQUITY,
TRANSLATION STOCK NET
--------------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996....................... $(2,023,757) (559,051) $ 24,522,765
Issuance of common shares.......................... -- -- 20,000,000
Net loss........................................... -- -- (2,429,707)
----------- -------- ------------
Balance at December 31, 1997....................... (2,023,757) (559,051) 42,093,058
Issuance of common shares, net of issuance cost of
US$6,537,345 (note 16)........................... -- -- 67,562,655
Effect of change from no par value to RD$10 par
value (note 16).................................. -- -- --
Retirement of treasury stock as a result of initial
public offering.................................. -- 559,051 --
Transfer to legal reserve (note 22)................ -- -- --
Net earnings....................................... -- -- 17,905,589
----------- -------- ------------
Balance at December 31, 1998....................... (2,023,757) -- 127,561,302
Stock-based compensation to non-employees (note
24).............................................. -- -- 273,000
Transfer to legal reserve (note 22)................ -- -- --
Net earnings....................................... -- -- 22,034,525
----------- -------- ------------
Balance at December 31, 1999....................... $(2,023,757) -- $149,868,827
=========== ======== ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-8
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net earnings (loss)................................... $ (2,429,707) $ 17,905,589 $ 22,034,525
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation........................................ 9,388,939 14,622,160 20,837,480
Amortization of debt issue cost..................... 484,231 1,381,361 1,499,497
Allowance for doubtful accounts..................... 1,929,167 1,665,349 5,420,717
Amortization of radio frequency right............... -- -- 198,333
Effect of (gain) loss in foreign exchange rate...... 705,983 31,106 101,835
Expense for severance indemnities................... 329,153 257,690 328,807
Extraordinary item--early extinguishment of debt.... 5,452,995 -- --
Deferred income tax, net............................ -- (351,691) 33,660
Value of consulting services received in exchange
for stock warrants................................ -- -- 273,000
Gain on sale of land................................ -- -- (897,833)
Net changes in assets and liabilities:
Accounts receivable............................... 2,052,023 (3,681,109) (13,407,676)
Inventories....................................... 3,515,558 (3,053,879) (4,213,002)
Prepaid expenses.................................. (33,514) (403,628) (3,532,125)
Long-term accounts receivable..................... 498,121 866,997 68,937
Unearned interest................................. (355,121) (204,576) --
Other assets...................................... (10,364,826) (5,542,150) (3,824,555)
Accounts payable.................................. 17,321,727 (4,471,048) 9,005,096
Other liabilities................................. 1,993,429 4,387,282 (3,624,114)
Accrued expenses.................................. 9,071,492 3,857,953 1,563,855
Reserve for severance indemnities................. (464,519) (355,445) (340,279)
------------ ------------ ------------
Total adjustments............................... 41,524,838 9,006,372 9,491,633
------------ ------------ ------------
Net cash provided by operating activities............... 39,095,131 26,911,961 31,526,158
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of investments............................ (75,967,805) (367,866) (546,185)
Proceeds from maturity of US Treasury Bonds and
irrevocable restricted funds........................ -- 21,297,912 54,470,478
Proceeds from sale of land............................ -- -- 2,724,458
Acquisition of land................................... -- -- (1,826,625)
Acquisition of property and equipment................. (92,667,874) (142,101,012) (119,182,223)
------------ ------------ ------------
Net cash used in investing activities............... (168,635,679) (121,170,966) (64,360,097)
------------ ------------ ------------
</TABLE>
F-9
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowed funds from banks............................. -- 23,234,625 111,580,042
Principal payments to banks........................... (36,410,367) (7,474,114) (69,643,536)
Borrowed funds from related parties................... 1,393,728 57,019,761 62,233,725
Principal payments to related parties................. (15,626,945) (36,277,664) (69,929,694)
Short term obligations................................ (2,235,955) -- --
Capital lease payments................................ -- -- (361,292)
Cancellation of Carifa bonds.......................... -- -- (32,000,000)
Redemption of short term bonds........................ (7,061,768) -- --
Cancellation of long-term debt........................ (28,000,000) -- --
Proceeds from issuance of long-term debt.............. 200,000,000 -- 29,087,227
Issuance of common stock.............................. 20,000,000 67,562,655 --
------------ ------------ ------------
Net cash provided by financing activities........... 132,058,693 104,065,263 30,966,472
Effect of exchange rate changes on cash............... (1,077,444) (161,353) (50,377)
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents......................................... 1,440,701 9,644,905 (1,917,844)
Cash and cash equivalents at the beginning of the
year.................................................. 4,291,804 5,732,505 15,377,410
------------ ------------ ------------
Cash and cash equivalents at the end of the year........ $ 5,732,505 $ 15,377,410 $ 13,459,566
============ ============ ============
Supplementary information:
Expense in lieu of income tax paid.................... (5,908,402) (9,027,468) (11,180,380)
Interest paid (net of capitalization)................. (15,367,463) (17,601,409) (23,373,038)
Capital lease obligations incurred.................... -- -- 26,244,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1 ORGANIZATION AND NATURE OF BUSINESS
The consolidated financial statements of TRICOM, S.A. include operations of
the following companies in the communications industry, which are
identified as and operate in the Dominican Republic and New York, U.S.A.,
under the commercial name TRICOM:
TRICOM, S. A. (Parent Company)
GFN Comunicaciones, S. A.
Bay Tel Communication, S. A.
Call Tel Corporation
TRICOM USA, Inc. and subsidiaries
TRICOM, S. A. ("TRICOM" or the "Company") is a diversified
telecommunications company which provides international and domestic long
distance, basic local service, mobile, Internet and broadband services in
the Dominican Republic and long distance services through subsidiaries in
the United States.
The Company's operations in the Dominican Republic are governed by
Telecommunications Law No. 153-98 and by a Concession Agreement signed with
the Dominican Government and confirmed by the National Congress on
April 30, 1990. This agreement is for 20-year term through June 30, 2010,
subject to renewal for an additional 20-year term. Law No. 153-98
establishes a basic framework to regulate the installation, maintenance and
operation of telecommunications networks and the provision of
telecommunications services and equipment. The law adopted the "Universal
Services Principle" by guaranteeing access to telecommunications services
at affordable prices in low income rural and urban areas. The law creates a
fund for the development of the telecommunication sectors that is supported
by a 2% tax on industry participants' billings of all telecommunication
services.
The Company was formed by GFN Corporation, Ltd. ("GFN"), one of the
Dominican Republic's largest private holding companies, with equity
interest in insurance, finance and publishing companies. GFN currently
holds a 46.2% interest in the Company, while Motorola, Inc. holds a 30.8%
interest. Prior to the completion of the initial public offering,
Motorola, Inc. provided guarantees for the debt financing used to expand
the Company's infrastructure during the early stages of its development and
has assisted in, and continues to advise on, the development of the
Company's network infrastructure.
GFN Comunicaciones, S.A. ("Comunicaciones") is currently inactive.
Bay Tel Communication, S.A. ("Bay Tel") is a corporation organized under
the laws of the Republic of Panama and it ceased its operations in 1995
when substantially all of its net assets and operations were transferred to
TRICOM, S. A. (Parent Company).
Call Tel Corporation ("Call Tel") is a corporation organized under the laws
of the Republic of Panama. It was formed on September 3, 1996 and began its
operations in 1997. Its activities consist of operator-assisted
communications in the Dominican Republic.
TRICOM USA, Inc. ("TRICOM USA") was formed on January 15, 1992 under the
General Corporation Law of Delaware. In September 1995, the United States
Federal Communications Commission ("FCC") authorized TRICOM USA, to operate
as a facilities-based carrier in the United States. Since TRICOM USA
received a license from the FCC, the Company represents an
F-11
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
1 ORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
alternative means of sending and receiving traffic, potentially reducing
the Company's dependence on other U. S. carriers. TRICOM USA began its
operations in 1997.
TRICOM INTERNATIONAL SERVICES, Inc. is a wholly-owned subsidiary of TRICOM
USA. The Company was formed on June 30, 1999 under the General Corporation
Law of Delaware. The Company acts as an agent for the Company, arranging
for telecommunications services in the Dominican Republic paid by Dominican
residents in New York.
ENELPUNTO.COM, Inc. is a wholly-owned subsidiary of TRICOM U.S.A. The
Company was formed on June 28, 1999 under the General Corporation Law of
Delaware. The Company is providing Internet services.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
TRICOM, S. A. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States. Preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses. Actual results could differ from
those estimates and assumptions.
2.2 FOREIGN CURRENCIES
The functional currency of the Company has been the U.S. dollar since
January 1, 1997.
Translation adjustments resulting from the conversion of the consolidated
financial statements to the reporting currency were accumulated and
presented in a separate component of equity in the accompanying
consolidated balance sheets for years prior to January 1, 1997.
Commencing January 1, 1997, the Company has recognized resulting gains and
losses when translating items from currencies other than the U.S. Dollar.
As of December 31, 1998 and 1999, the rates used by the Company to
translate the Dominican peso denominated accounts at year-end were RD$15.61
and RD$16.05 per one US dollar, respectively. Panamanian Balboas (B/.) are
at par with the US dollar.
2.3 CASH AND CASH EQUIVALENTS
For the purpose of the statements of cash flows, the Company considers as
cash equivalents cash time deposits and highly liquid debt instruments with
original maturities of three months or less.
F-12
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2.4 ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts receivable is established through a
charge to an expense account. The Company reserves 100% of the accounts
receivable balances which are past due over 90 days.
2.5 INVENTORIES
Inventories are valued at the lower of average cost or market.
2.6 INVESTMENT SECURITIES
The Company has classified all of its marketable debt securities as
held-to-maturity and has accounted for these investments at amortized cost.
Any premium or discount is amortized or accreted over the life of the
related security. Accordingly, no adjustment for unrealized holding gains
or losses has been reflected in the Company's consolidated financial
statements.
2.7 PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Construction costs and
equipment installations in process are maintained as construction projects
until they are completed and/or equipment is placed in service.
Depreciation is calculated and recorded starting with the first full month
that the assets are placed in service.
2.8 DEPRECIATION
The depreciation method used by the Company is the straight-line method,
that is, the uniform distribution of cost over the estimated useful lives
of the corresponding assets.
The estimated useful lives of assets are as follows:
<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Buildings and improvements.................................. 50
Furniture, equipment and transportation equipment........... 5-10
Equipment for lease......................................... 3-4
Operation and communication equipment....................... 15
Cellular phones............................................. 3
Computer equipment.......................................... 6
====
</TABLE>
2.9 OTHER ASSETS
Other assets consist principally of deferred debt issue costs and radio
frequency rights (see note 8). Deferred debt issue costs are amortized over
the debt service period of the related debt. For the years ended at
December 31, 1997, 1998 and 1999, amortization expense of deferred debt
issue amounted to $484,231, $1,381,361 and $1,499,497, respectively.
F-13
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The radio frequency rights are being amortized over a period of 20 years.
For the year ended at December 31, 1999, the amortization expense amounted
to $198,333.
2.10 SEVERANCE INDEMNITIES
According to the Labor Code of the Dominican Republic, employers are
required to pay severance indemnities to those workers whose labor
contracts are terminated without just cause. Just cause is defined in the
Labor Code as including misstatements by an employee in his job
application, termination of an employee within three months of his hire for
poor performance, dishonesty, threats of violence, willful or negligent
destruction of property, unexcused absence or termination of the job for
which the employee was hired. The Company maintains a minimal reserve to
cover severance indemnities based on its experience in this area.
2.11 REVENUE RECOGNITION
TOLL REVENUES
Toll revenues are amounts received by the Company from customers in the
Dominican Republic for international and domestic long distance calls.
These revenues are recognized as the calls are made.
INTERNATIONAL SETTLEMENT REVENUES
International settlement revenues represent amounts recognized by the
Company for termination of traffic based on minutes from foreign
telecommunications carriers into the Dominican network, as per operating
agreements between the Company and each such carrier. These revenues are
recognized as the minutes are provided.
PREPAID CALLING CARD REVENUES
The Company recognizes revenue for prepaid calling cards based on card
usage. The Company accounts for cash received or credit extended from the
sale of prepaid calling cards as deferred revenues, which are then
recognized as the cards are used. This revenue may be part of the toll or
international revenues depending on the call destination.
F-14
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOCAL SERVICE REVENUE
Local service revenue consist of wireline rent, local measured service as
well as charges for "Custom local access signaling services" (CLASS) or
value-added services, which includes call forwarding, three-way calling,
call waiting and voice mail. It also includes collect call revenues and
revenues from other miscellaneous wireline services. These revenues are
recognized as the services are rendered.
CELLULAR AND PCS REVENUES
Represents fees received for mobile cellular and PCS services, including
interconnection charges for incoming calls to the Company's cellular and
PCS subscribers (these revenues do not include international and domestic
long distance calls generated by cellular or PCS units). Cellular and PCS
fees consist of fixed monthly access fees and per-minute usage charges, as
well as additional charges for custom or vertical features, which include
call waiting, call forwarding, three-way calling and voice mail, and for
other miscellaneous cellular and PCS services. These revenues are
recognized as the services are rendered.
PAGING
Paging revenues consist of fixed monthly charges for nationwide service and
the use of paging equipment and activation fees. These revenues are
recognized as these services are rendered.
SALES AND LEASE OF EQUIPMENT
These revenues consist of sales and rental fees charges for customer
premise equipment, including private branch exchanges, key telephone
systems, residential telephones, cellular handsets and paging units. Since
late 1996, the Company has only sold such equipment. These revenues are
recognized upon sale to the customer.
INSTALLATIONS
Installation revenues consist of fees charges by the Company for installing
local access lines, private branch exchanges and key telephone systems, as
well as fees for activating cellular and PCS handsets. These revenues are
recognized as the services are rendered.
OTHER
Other revenues represent all those revenues that are not generated from the
Company's core business activities, including commissions received for
providing handling services for a courier, commissions received for
collection services for utility companies and revenues from miscellaneous
product sales. These revenues are recognized as the services are earned.
2.12 CAPITALIZATION OF INTEREST
Interest paid on loans whose proceeds are used in specific projects is
capitalized and included as part of project costs during the period
necessary for installation.
During the years ended December 31, 1997, 1998 and 1999, interest and
commissions capitalized as part of construction projects amounted to
approximately $5,590,000, $10,168,000 and $11,963,000, respectively.
F-15
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
2.13 FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments classified as current
assets or current liabilities approximates their book value due to the
relatively short maturities of these financial instruments. See note 15 for
the estimated fair value of the Company's long term debt.
2.14 EXPENSE IN LIEU OF INCOME TAX
The parent company TRICOM, S. A. pays a tax which is based on a percentage
of the Company's domestic gross revenues (less deductions for access to the
local network) plus a percentage of the Company's net international
settlement revenues. An accrual is made for any difference between the date
when these items are reported to the tax authorities and when they are
reported in the accompanying consolidated statements of operations.
2.15 INCOME TAXES
In the case of the subsidiary, TRICOM USA, income taxes are accounted for
under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carry-forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
2.16 EARNINGS PER COMMON SHARE
Basic earnings per share has been computed based on the average number of
common shares outstanding. Diluted earnings per share reflects the increase
in average common shares outstanding that would result from the assumed
exercise of outstanding stock options, calculated using the treasury stock
method.
2.17 PENSION PLAN
The Company has a contributory defined benefit pension and retirement plan
that includes all its personnel. The cost of the plan has been determined
based on actuarial studies and includes amortization of past service costs
over the estimated average life of its employees.
2.18 IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This Statement
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured
F-16
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less cost to sell.
2.19 YEAR 2000
For the years ended December 31, 1998 and 1999, costs incurred for the Year
2000 project amounted to approximately $83,000 and $217,000, respectively.
Such costs were funded through operating cash flows and are included in
general and administrative expenses in the accompanying consolidated
statement of operations.
2.20 ADVERTISING COST
Advertising costs are expensed as incurred. For the years ended
December 31, 1997, 1998 and 1999, these costs amounted to $1,715,270,
$4,461,123 and $5,431,834 respectively, and are included as part of general
and administrative expenses in the accompanying consolidated statements of
operations.
2.21 STOCK OPTION PLAN
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its fixed plan stock options. As such, compensation expense
would be recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting
for Stock-Based Compensation," established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has
elected to continue to apply the intrinsic value-based method of accounting
described above, and has adopted the disclosure requirements of SFAS
No. 123.
2.22 RECLASSIFICATION
At December 31, 1999, the Company has classified prepaid calling cards held
by distributors as accounts receivable--customers in the accompanying
consolidated balance sheets. The classification was changed as a result of
changes in the billing system in 1999. Previously, these amounts were
classified as inventories and totaled $3,199,103 as of December 31, 1998.
Prior years have been reclassified to conform to the 1999 presentation.
F-17
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
3 PROPERTY AND EQUIPMENT
A detail of property and equipment at December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
------------ -------------
<S> <C> <C>
Operations and communications:
Land.................................................... $ 3,454,951 $ 5,288,164
Buildings and improvements.............................. 7,933,993 12,730,864
Furniture and equipment................................. 5,061,611 6,868,212
Communication equipment................................. 46,877,210 94,645,620
Transmission equipment.................................. 95,230,147 170,756,431
Other equipment......................................... 1,253,387 1,668,162
------------ -------------
159,811,299 291,957,453
Less accumulated depreciation........................... 16,506,546 29,196,045
------------ -------------
143,304,753 262,761,408
Communications equipment pending installation........... 28,343,890 31,141,978
In transit (a).......................................... 6,225,237 2,506,092
Construction in process (b)............................. 112,082,008 100,685,397
------------ -------------
Subtotal, operations and communications............... 289,955,888 397,094,875
------------ -------------
Equipment for rental:
Switchboards............................................ 887,916 1,982,393
Telephone equipment and other........................... 21,137,541 31,145,265
------------ -------------
22,025,457 33,127,658
Less accumulated depreciation........................... 9,611,593 12,578,935
------------ -------------
Subtotal, equipment for rental........................ 12,413,864 20,548,723
------------ -------------
Property and equipment:
Buildings............................................... 6,372,566 6,372,566
Furniture and office equipment.......................... 10,087,307 13,965,777
Transportation equipment................................ 2,807,867 4,435,443
Leasehold improvements.................................. 3,500,603 3,879,221
Data processing equipment............................... 14,426,729 23,037,601
------------ -------------
37,195,072 51,690,608
Less accumulated depreciation........................... 9,108,376 14,289,015
------------ -------------
Sub-total, property and equipment..................... 28,086,696 37,401,593
------------ -------------
Property and equipment, net........................... $330,456,448 $ 455,045,191
============ =============
</TABLE>
(a) Equipment in transit represents accumulated costs of equipment imported
by TRICOM, for which additional import related costs are still to be
incurred. At December 31, 1999, this amount includes mainly transmission
equipment and accessories, as well as computer materials and parts in
1998.
F-18
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
3 PROPERTY AND EQUIPMENT (CONTINUED)
(b) A detail of construction in process at December 31, 1998 and 1999 is as
follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Operation and communication:
Buildings.......................................... $ 2,255,751 $ 3,816,556
Transmission equipment (i)......................... 99,370,582 87,642,687
Cells.............................................. 9,505,122 8,502,529
Submarine cable.................................... 950,553 723,625
------------ ------------
$112,082,008 $100,685,397
============ ============
</TABLE>
(i) At December 31, 1998 and 1999, construction in process of
transmission equipment includes projects of a wireless local loop
(WLL) network which are in development, as well as cellular and PCS
cells, fiber optic and other network improvements in 1999.
4 CASH AND CASH EQUIVALENTS
A detail of this account at December 31, 1998 and 1999, is as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Checking accounts.......................................... $ 2,316,963 $ 6,162,442
Cash on hand............................................... 37,810 45,805
Deposits (a)............................................... 13,022,637 7,251,319
----------- -----------
$15,377,410 $13,459,566
=========== ===========
</TABLE>
(a) At December 31, 1998 and 1999 represents certificates of deposit due on
demand and with variable dates of maturity.
5 ACCOUNTS RECEIVABLE
Changes in the allowance for doubtful accounts were as follows:
<TABLE>
<CAPTION>
1997 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Allowance at beginning of year................. $ 4,898,199 $ 668,827 $ 740,687
Increase for the year.......................... 1,929,167 1,665,349 5,420,717
Write-off during the year...................... (6,158,539) (1,593,489) (1,853,841)
----------- ----------- -----------
Allowance at end of year....................... $ 668,827 $ 740,687 $ 4,307,563
=========== =========== ===========
</TABLE>
F-19
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
5 ACCOUNTS RECEIVABLE (CONTINUED)
A detail of accounts receivable--others at December 31, 1998 and 1999, is as
follows:
<TABLE>
<CAPTION>
1998 1999
---------- --------
<S> <C> <C>
Interest receivable......................................... $1,662,351 $235,016
Other....................................................... 450,877 389,830
---------- --------
$2,113,228 $624,846
========== ========
</TABLE>
6 TRANSACTIONS WITH RELATED PARTIES
During the years ended December 31, 1997, 1998 and 1999 the Company made
payments to several related parties for leased premises and equipment,
internal audit services, public relations, systems and procedures, legal
services and personnel management.
The majority of these charges are for services received by the Company from
its sister company Grupo Financiero Nacional, S. A. ("Grupo Financiero"), a
subsidiary of GFN. Grupo Financiero allocates administrative charges based on
the time invested by its employees providing administrative support services
in each of its subsidiaries.
A detail of balances with related companies at December 31, 1998 and
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Assets:
Cash in banks............................................ $ 1,556,788 $ 4,194,306
Deposits (a)............................................. 13,022,637 7,251,319
Accounts receivable...................................... 163,110 40,412
Current portion and long-term accounts receivable........ 88,037 53,820
Prepaid expense-insurance................................ 2,125,601 3,548,458
Liabilities:
Borrowed funds........................................... 25,591,915 17,895,946
Accounts payable--letters of credit (b).................. 1,089,487 985,187
Accounts payable (c)..................................... -- 10,035,066
Capital leases........................................... -- 25,882,708
=========== ===========
</TABLE>
(a) As of December 31, 1998 and 1999 includes $2,185,005 in non-interest
bearing time deposits and certificates of deposit of $10,837,632 and
$7,251,319, respectively, which earn annual interest at rates between 9%
and 11%.
F-20
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
6 TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
(b) These letters of credits bear annual interest ranging from 10% to
11.5% payable at maturity.
(c) Includes $7,775,892 that represents a 7.94% financing facility granted
by Motorola for the acquisition of transmission and communications
equipment. The Company has approved lines of credit with Motorola for
an approximate amount of $13,000,000.
A detail of transactions with related parties during the years ended
December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Interest earned.............................. $ 140,814 $ 270,352 $ 265,423
Interest incurred on loans................... 3,577,394 880,281 710,537
Bank charges................................. 6,585 45,916 135,640
Leased premises and equipment................ 64,392 44,610 108,578
Security services............................ 113,778 111,460 77,382
Insurance premiums........................... 1,101,237 1,520,171 2,000,473
Pension plan contributions................... 310,858 433,998 586,921
Communication services revenue............... 1,098,097 828,316 1,970,646
Gain on sale of land (a)..................... -- -- 897,833
Equipment purchased (Motorola)............... 8,038,214 2,258,028 23,097,157
Advertising services......................... 97,942 134,830 74,104
Professional services........................ 207,498 494,125 167,470
========== ========== ===========
</TABLE>
(a) During 1999, the Company bought from an unaffiliated third party land
which was sold later to a related party. The sale price was $2,724,458
(RD$44,000,000) and the acquisition cost was $1,826,625
(RD$29,500,000). This transaction generated a gain on sale of land of
$897,833, which is presented as gain on sale of land in other income
(expenses) in the consolidated statements of operations.
7 INVESTMENTS
Investments at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
----------- ----------
<S> <C> <C>
Irrevocable restricted funds to pay indebtedness and
interest (a)........................................... $32,772,379 $ --
U.S. Treasury Bonds at cost (b).......................... 21,698,099 --
----------- ----------
54,470,478 --
Less current portion of investments...................... (54,470,478) --
----------- ----------
-- --
----------- ----------
Mortgage participation contracts, at cost which
approximates market value (c).......................... $ 2,164,387 $2,710,572
=========== ==========
</TABLE>
(a) Represents investment used to fund the payment in full of principal
and interest of CARIFA Bonds, as described in Note 15.
F-21
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
7 INVESTMENTS (CONTINUED)
(b) Represents investment securities obtained to provide funding to pay
the full amount of the 1999 interest on the Senior Notes (See
note 15).
(c) At December 31, 1998 and 1999 represents mortgage participation
contracts which have been purchased from saving and loan associations
in the Dominican Republic. These contracts earn interest at rates
between 9% and 12% per annum. These investments are due on demand and
are maintained as compensating balances for mortgage loans made by
these savings and loan associations to several officers of the
Company.
8 OTHER ASSETS
Other assets at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred debt issue costs, net (a)...................... $ 8,296,034 $ 8,864,074
Deposits with international carriers (b)................ 243,652 202,850
Organization expenses, net (c).......................... 119,711 --
Deposits................................................ 361,194 668,432
Radio frequency rights (d).............................. 4,760,000 4,561,667
Other (e)............................................... 916,952 2,527,245
----------- -----------
$14,697,543 $16,824,268
=========== ===========
</TABLE>
(a) Represent commissions paid on issuance to brokers and other expenses
related to the issuance of the Senior Notes and bank debt. As of
December 31, 1998 and 1999, accumulated amortization amounted to
$1,865,592 and $3,365,089, respectively.
(b) As December 31, 1998 and 1999 deposits with international carriers
represent security deposits made by TRICOM for the installation of
international circuits. These deposits will be recovered at the end of
the agreement. These agreements mature each year and are automatically
renewed.
(c) During 1999, the Company changed its method of accounting for
organization expenses in order to comply with Statement of Position
No. 98-5 issued by the American Institute of Certified Public
Accountants. The change involved expensing these costs as incurred,
rather than capitalizing and subsequently amortizing such costs. The
change in the accounting principle resulted in the write-off of the
costs capitalized as of January 1, 1999. The cumulative effect of the
write-off, which totals $119,711, has been expensed and reflected as a
separate line in the 1999 consolidated statements of operations.
(d) Represents payments for user rights for cellular frequencies, in order
to expand the cellular and PCS capacity. These payments are being
amortized over a period of 20 years beginning on March 31, 1999. At
December 31, 1999, accumulated amortization was $198,333.
(e) At December 31, 1999 includes $2,276,012 corresponding to deferred
commissions related to prepaid calling cards.
F-22
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
9 BORROWED FUNDS--BANK
Funds borrowed by the Company are detailed as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Funds denominated in U.S. dollars (a)................... $18,462,441 $56,000,776
Funds denominated in R.D. pesos (b)..................... 3,203,075 7,601,246
----------- -----------
$21,665,516 $63,602,022
=========== ===========
</TABLE>
(a) These borrowings are made with local and international banks and
accrue interest and commissions at rates of 10% to 12.5% per annum as
of December 31, 1998 and 9.5% to 12% at December 31, 1999.
(b) At December 31, 1998, the loans represent RD$50,000,000 and have
maturity ranging from 90 to 180 days, bearing interest of 26% per
annum. At December 31, 1999 these loans amount to RD$122,000,000 and
have maturities ranging from 60 to 90 days and, bear interest of 21%
to 30% per annum.
At December 31, 1999 the Company has lines of credit available with local
and international banks for approximately $13,000,000.
10 BORROWED FUNDS--RELATED PARTIES
At December 31, 1998 and 1999, borrowed funds from related parties include
financing of letters of credit and open accounts issued for $25,591,915 and
$17,895,946, respectively, at interest rates of 11% and 10%, respectively.
At December 31, 1999, the Company has lines of credit available with
related parties for approximately $23,000,000.
11 CAPITAL LEASES
During December, 1999 the Company entered into various capital lease
contracts with a related party. Such contracts have various terms of
maturity during the next four years. The gross amount of plant and
equipment recorded under capital leases as of December 31, 1999 were as
follows:
<TABLE>
<S> <C>
Communications equipment.................................... $17,248,429
Communications equipment pending installation............... 7,548,214
Transportation.............................................. 1,176,001
Machinery and equipment..................................... 271,356
-----------
$26,244,000
===========
</TABLE>
These assets have no accumulated depreciation at December 31, 1999, since
in accordance with the Company's depreciation policy, depreciation is
recorded commencing with the first full month that the assets are placed in
service.
F-23
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
11 CAPITAL LEASES (CONTINUED)
Future lease payments under capital leases as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
2000........................................................ $16,807,222
2001........................................................ 4,936,452
2002........................................................ 4,918,489
2003........................................................ 4,941,102
-----------
Total lease payments........................................ 31,603,265
Less related taxes.......................................... 2,087,198
-----------
Minimum lease payments...................................... 29,516,067
Less amount representing interest (12% to 12.875%).......... 3,633,359
-----------
Present value of net minimum capital lease payments......... 25,882,708
Less current maturities of capital lease obligations........ 14,242,056
-----------
Capital lease obligations................................... $11,640,652
===========
</TABLE>
12 TRANSACTIONS WITH CARRIERS
Net amounts receivable and payable for these activities at December 31, 1998
and 1999 were as follows:
<TABLE>
<CAPTION>
1998 1999
----------------------- ------------------------
RECEIVABLE PAYABLE RECEIVABLE PAYABLE
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Inbound.................................. $6,933,131 $ -- $12,406,384 $ --
Outbound................................. (2,780,128) 1,549,996 (5,939,368) 1,785,132
Payable accounts
Interconnection operations--CODETEL.... -- 1,556,902 -- 1,202,247
---------- ---------- ----------- ----------
$4,153,003 $3,106,898 $ 6,467,016 $2,987,379
========== ========== =========== ==========
</TABLE>
Accounts receivable from carriers arise from interconnection services of
inbound calls. Accounts payable result from interconnection services of
outbound calls. These charges are based on minutes billed. Amounts paid to
carriers constitute one of the main operating costs of the Company.
F-24
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
13 OTHER LIABILITIES
Other liabilities at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Customer advances........................................... $2,131,396 $1,203,764
Deferred revenues........................................... 1,480,664 2,130,985
Other (a)................................................... 3,801,761 454,958
---------- ----------
$7,413,821 $3,789,707
========== ==========
</TABLE>
(a) On September 22, 1998, the Dominican Republic was seriously affected by
hurricane Georges. As a consequence, the transmission and communication
equipment of the Company, as well as other infrastructure suffered certain
damages, for which claims were made to the Company's insurance carrier.
During 1998, the Company received from the insurance company the amounts
claimed, which included $2,505,000 for business interruption that are
included in other operating income for the year ended December 31, 1998. At
December 31, 1998, other liabilities include $3,414,613 corresponding to the
estimated disbursements to be incurred in order to repair the infrastructure
affected by hurricane Georges. The accrued expenses were sufficient to cover
all the payments made during 1999.
14 ACCRUED EXPENSES
A summary of accrued expenses at December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Expense in lieu of income tax payable...................... $ 1,502,581 $ 3,085,766
Interest payable........................................... 9,726,228 8,783,221
Other...................................................... 2,659,165 3,424,923
----------- -----------
$13,887,974 $15,293,910
=========== ===========
</TABLE>
F-25
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
15 LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Senior notes (a)......................................... $200,000,000 $200,000,000
Bank loans:
Four loans with Dominican banks for a total amount of
RD$65,600,000; with interest and commissions ranging from
20% to 24% per annum. These loans are due in monthly
installments of RD$1,399,012 (approximately $87,166)
including principal and interest starting January 2000
through December 2006; two of these loans are secured by
communications equipment in the amount of $3,010,033..... -- 4,087,227
Unsecured line of credit with Citibank, N. A., for the
amount of $10,000,000 renewable every 13 months at 10%
per annum. The interest rate can be revised every 60 to
90 days at the request of the parties.................... -- 10,000,000
Loan with Hamilton Bank, N. A. for a 3-year revolving
line of credit of up to $15 million with an interest rate
of Citibank N. A. prime rate plus 0.05% (9% at December
31, 1999). This line of credit is guaranteed by TRICOM S.
A. and Banco Nacional de Credito, S. A................... -- 15,000,000
------------ ------------
Total bank loans......................................... -- 29,087,227
------------ ------------
Carifa loan (b).......................................... 32,000,000 --
------------ ------------
Total long-term debt................................. 232,000,000 229,087,227
Less current portion of long-term debt................... 32,000,000 315,216
------------ ------------
Long-term debt excluding current portion............. $200,000,000 $228,772,011
============ ============
</TABLE>
F-26
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
15 LONG-TERM DEBT (CONTINUED)
The installment obligations of principal of these long-term loans for the
next years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 315,216
2001........................................................ 378,505
2002........................................................ 25,454,599
2003........................................................ 546,110
2004........................................................ 200,656,185
2005 and thereafter......................................... $ 1,736,612
============
</TABLE>
(a) SENIOR NOTES
On August 15, 1997, the Company issued $200,000,000 aggregate principal
amount of 11 3/8% Senior Notes due in the year 2004 (the "Senior Notes").
Interest on the Senior Notes is payable in semi-annual installments on
March 1st and September 1st of each year, commencing March 1, 1998.
The Senior Notes may be redeemed at any time at the option of the Company,
in whole or in part after September 1, 2001 at a premium declining to par
after September 1, 2003, plus accrued and unpaid interest, and additional
amounts, if any, through the redemption date. Until September 1, 2000, the
Company, at its option, may redeem from time to time up to 35% of the
Senior Notes originally issued with the net proceeds of the issuance and
sale of the Company's capital stock at a redemption price equivalent to
111.375% of the principal amount thereof plus accrued interest to the date
of redemption provided that an aggregate principal amount of the Senior
Notes of up to $130.0 million remain outstanding after each redemption and
each such redemption occurs within 180 days after any issuance and sale of
stock. The Senior Notes are senior unsecured obligations of the Company
ranking PARI PASSU in right of payment with all other existing and future
senior debt, and will rank senior to any future subordinated indebtedness.
The indenture for the Senior Notes contains certain covenants that, among
other things, limit the ability of the Company and its Restricted
Subsidiaries, as defined in the indenture, to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness,
engage in sale and leaseback transactions, create certain liens, enter
into certain transactions with affiliates, sell assets of the Company or
its Restricted Subsidiaries, engage in any business other than the
telecommunications business, issue or sell equity interests of the
Company's Restricted Subsidiaries or enter into certain mergers and
consolidations.
The fair value of this long term debt at December 31, 1999 is estimated in
the amount of $186,500,000 determined through a combination of management
estimates and information obtained from independent third parties, using
market data available on the last business day of the year.
The Senior Notes are guaranteed fully, unconditionally and jointly and
severally by the Company's subsidiaries, each of which is wholly-owned by
the Company. Separate financial statements of each of the guarantor
subsidiaries have not been presented herein because management has
determined that such separate financial statements would not be material
to the holders of the Senior Notes.
F-27
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
15 LONG-TERM DEBT (CONTINUED)
Summarized consolidated financial information of guarantor subsidiaries,
Comunicaciones, Bay Tel, Call Tell and TRICOM USA and subsidiaries, at
December 31, 1998 and 1999 and for the years then ended is as follows (see
note 1):
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 263,168 $ 614,802
Account receivable:
Related parties........................................... 4,057,834 12,190,813
Other..................................................... 1,697,067 4,860,019
----------- -----------
Accounts receivable, net.................................. 5,754,901 17,050,832
----------- -----------
Other current assets...................................... 843,317 1,154,627
----------- -----------
Total current assets.................................... 6,861,386 18,820,261
Property and equipment, net................................. 6,315,155 8,080,300
Other non-current assets.................................... 933,495 1,243,774
----------- -----------
Total assets............................................ $14,110,036 $28,144,335
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Account payable:
Carriers................................................ $ 227,195 $ 1,113,416
Related parties......................................... 5,608,247 1,722,915
Other................................................... 978,057 748,970
----------- -----------
6,813,499 3,585,301
Other current liabilities................................. 1,355,246 3,036,241
----------- -----------
Total current liabilities............................... 8,168,745 6,621,542
Other non-current liabilities............................. 192,036 15,685,752
----------- -----------
Total liabilities....................................... 8,360,781 22,307,294
Stockholder's equity........................................ 5,749,255 5,837,041
----------- -----------
Total liabilities and stockholder's equity.............. $14,110,036 $28,144,335
=========== ===========
</TABLE>
F-28
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
15 LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Operating revenues.................................... $12,805,531 $27,919,654 $36,179,982
Operating costs....................................... 12,932,490 28,861,720 36,282,315
----------- ----------- -----------
Operating loss...................................... (126,959) (942,066) (102,333)
Other income (expense)................................ 1,702 21,685 (66,896)
----------- ----------- -----------
Net loss before income tax.......................... (125,257) (920,381) (169,229)
Income tax............................................ 351,691 (141,660)
----------- ----------- -----------
Net loss.......................................... $ 125,257 $ 568,690 $ 310,889
=========== =========== ===========
CASH FLOW DATA:
Net cash (used in) provided by operating activities... $(2,037,871) $ 83,061 $(6,929,619)
Cash flows used in investments activities--acquisition
of property and equipment........................... (3,500,298) (3,241,348) (2,145,814)
Cash flows from financing activities:
Borrowed funds (paid to) received from banks........ (8,305,916) -- 15,000,000
Borrowed funds (paid to) received from related
parties........................................... 13,652,509 -- (5,608,247)
Short-term obligations.............................. (56,629) -- 35,279
Issuance of common shares........................... 1,100 2,999,000 --
----------- ----------- -----------
Net cash provided by financing activities............. 5,291,064 2,999,000 9,427,032
Effect of exchange rate changes on cash............. 197,601 88 35
----------- ----------- -----------
Net income (decrease) in cash and cash
equivalents....................................... (49,504) (159,199) 351,634
Cash and cash equivalents at beginning of the year.... 471,821 422,317 263,168
----------- ----------- -----------
Cash and cash equivalents at end of the year.......... $ 422,317 $ 263,118 $ 614,802
=========== =========== ===========
</TABLE>
(b) CARIFA LOAN
The Company borrowed $32,000,000 in prior years, from the Caribbean Basin
Project Financing Authority (Carifa).
This loan was repaid in 1999 using the irrevocable deposits described in
note 7.
16 STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of 55,000,000 shares of
Class A common stock and 25,000,000 shares of Class B common stock.
All of the Company's outstanding shares are duly authorized, validly issued
and fully paid. Both classes of capital stock vote together as a single
class, except on any matter that would adversely affect the rights of either
class. The Class A common stock has one vote per share and the Class B stock
has ten votes per share. The economic rights of each class of capital stock
are identical.
F-29
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
16 STOCKHOLDERS' EQUITY (CONTINUED)
In the second quarter of 1998, the Company sold 5,700,000 Class A common
shares in a public offering for $74.1 million, net of issuance costs of
$6,346,545. The proceeds of this issuance were used to expand the Company's
local service cellular and PCS networks and its international switching and
circuit capacity. As well as paying short-term debt primarily incurred to
fund equipment purchases.
All share and per share data set forth in the financial statements reflect
the reclassification of the Company's shares of common stock that were
outstanding prior to TRICOM's initial 1998 public offering of American
Depositary Shares into shares of Class B stock and give effect to an
approximate 3.3132-for- one stock split at that time.
17 EXPENSE IN LIEU OF INCOME TAXES
In accordance with the terms of the Concession Agreement signed with the
Dominican Government, through 1995, TRICOM, S. A. had an exemption from
income tax but had to pay instead a single tax of 18% of gross communication
revenues collected from customers nationwide. This tax was based on the
amounts collected monthly by the Company and was payable within the first
ten (10) days of the month following collection.
As result of a settlement between the Company and the Dominican tax
authorities on February 20, 1996, the Concession Agreement with the
Dominican government was modified to establish a fixed tax equal to 10% of
gross domestic revenues, after deducting charges for access to the local
network, plus 10% of net international settlement revenues. This tax will
never be less than RD$18,000,000 ($1,125,500) annually.
In addition, since July 1998, expense in lieu of income taxes also includes
a tax of 2% on international settlement revenues collected. For
December 31, 1998 and 1999, the cost of this additional tax was $315,801 and
$566,549, respectively, which is included as part of expense in lieu of
income taxes in the accompanying consolidated statements of operations.
For the year ended December 31, 1999 the Company paid RD$30,000,000
(equivalent to approximately $1,869,159) as an advance deposit against the
fixed tax of 10%. This is included in the prepaid expenses in the
accompanying consolidated balance sheets as of December 31, 1999.
F-30
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
18 INCOME TAX
The Company is subject to income taxes in the United States. The components
of income tax (expense) benefit are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Current tax provision........................ $ -- -- (108,000)
Deferred tax................................. -- 351,691 (33,660)
-------- -------- ---------
$ -- $351,691 $(141,660)
======== ======== =========
</TABLE>
The components of deferred income taxes in the United States are summarized
as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred revenue........................................ $483,011 $737,410
Net operating loss carry forward........................ 209,001 45,856
Alternative minimum tax................................. -- 100,825
Other................................................... 43,361 65,099
-------- --------
735,373 949,190
Deferred tax liabilities--property and equipment........ 383,682 631,159
-------- --------
Net deferred tax asset.................................. $351,691 $318,031
======== ========
</TABLE>
The Company has not recorded a valuation allowance for the deferred tax
assets because it believes that sufficient book and taxable income will be
generated to realize the benefit of these tax assets.
In the case of the other subsidiaries, according to the tax legislation of
the Republic of Panama, the Company's is exempt from income taxes as long as
it only operates outside the Republic of Panama.
19 PENSION BENEFITS
Substantially all of the employees of the Company are included in a defined
benefit plan that was established by Grupo Financiero. The benefits are
based upon years of service and the employee's compensation during the last
years before retirement, which is administered by the Plan de Pensiones y
Jubilaciones del Grupo Financiero Nacional, S. A.
The Company makes annual contributions to the Plan based on contribution
levels determined by independent actuaries. The Company's pension expense
was approximately $311,000, $433,000 and $587,000, for the years ended
December 31, 1997, 1998 and 1999, respectively, and is included as part of
general and administrative expenses in the accompanying consolidated
statements of operations.
F-31
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
19 PENSION BENEFITS (CONTINUED)
The following summarizes pension obligation information and estimated plan
asset information for the Company.
<TABLE>
<CAPTION>
NOVEMBER 30, NOVEMBER 30,
1998 1999
------------ ------------
<S> <C> <C>
CHANGES IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............. $1,245,601 $2,234,367
Change in exchange rate............................. (100,541) (61,253)
---------- ----------
Benefit obligation at beginning of year, as
adjusted.......................................... 1,145,060 2,173,114
Service cost........................................ 749,263 940,622
Interest cost....................................... 113,659 186,824
Actuarial gain...................................... 103,056 271,744
Benefits paid....................................... (76,378) (88,392)
Adjustments......................................... 199,707 72,260
---------- ----------
Benefit obligation at end of year................... 2,234,367 3,556,172
---------- ----------
CHANGES IN PLAN ASSETS
Fair value of plan assets at beginning (a).......... 1,550,766 2,513,478
Change in exchange rate............................. (125,174) (68,906)
---------- ----------
Fair value of plan assets at beginning of year,
adjusted.......................................... 1,425,592 2,444,572
Actual return on plan assets........................ 375,674 419,038
Employer contribution............................... 405,871 586,887
Plan participants' contributions.................... 324,697 359,072
Benefits paid....................................... (76,378) (88,392)
Expenses and other adjustments...................... 58,022 (65,001)
---------- ----------
Fair value of plan assets at end of year (a)........ 2,513,478 3,656,176
---------- ----------
FUNDED STATUS OF THE PLAN........................... $ 279,111 $ 100,004
========== ==========
RATE ASSUMPTIONS:
Discount rates...................................... 6.00% 6.00%
Rate of return on plan assets....................... 11.00% 14.39%
========== ==========
</TABLE>
(a) Corresponds to an estimate of the assets allocable to the Company. This
estimate was made by the actuary based on the ratio of total obligations
of TRICOM to the total obligation of Grupo Financiero applied to the
total plan assets. However, there is no segregation of assets applicable
to the employees of the Company.
20 COMMITMENTS AND CONTINGENCIES
In 1995, TRICOM entered into a lease agreement of premises with a related
company. The total amount paid for this lease in 1997, 1998 and 1999 was
$68,216, $72,582 and $108,578, respectively. As part of this agreement, the
Company paid a deposit of $86,580, which is included in other assets in the
accompanying consolidated balance sheets.
F-32
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
20 COMMITMENTS AND CONTINGENCIES (CONTINUED)
TRICOM maintains contracts with foreign entities for the traffic of overseas
calls. Such contracts require each entity to obtain the necessary facilities
to establish, maintain and operate its respective terminals. The costs
involved for each contract are established through different rates, agreed
by the parties, that are computed based on the amount of traffic each month.
For the years ended December 31, 1997, 1998 and 1999 this cost was
$4,642,466, $4,273,617 and $3,706,683 respectively, and is included in the
cost of satellite connections in the accompanying consolidated statements of
operations.
On May 8, 1997, the Federal Communication Commission ("FCC") issued an order
to implement the provisions of the Telecommunications Act of 1996 relating
to the preservation and advancement of universal telephone service ("the
Universal Service Fund"). The Universal Service Order requires all
telecommunications carriers providing interstate telecommunications services
to contribute to universal service by contribution to a fund (the "Universal
Service Fund"). Universal Service Fund contributions were assessed based
upon intrastate, interstate and international end-user gross
telecommunications revenue effective January 1, 1999 through December 31,
1999.
The Company contributed $141,141 to the "Universal Service Fund" on end-user
telecommunications revenue of $4,756,792 for the year ending December 31,
1999.
OTHER LEASE OBLIGATIONS
The Company maintains capital and operating leases for telecommunication
equipment. The operating leases are renewable at the end of the lease period
which is usually one year. The capital leases are for five-year periods with
purchase options at maturity.
Also, the Company has leased buildings for several of its telecommunication
centers, commercial offices and warehouse. These contracts are mostly short
term and renewable at maturity. Expenses for these contract operations in
1997, 1998 and 1999 were approximately $443,000, $405,000 and $476,000,
respectively, and are included in general and administrative expenses in the
consolidated statements of operations.
LEGAL PROCEEDINGS
In 1998, the Company reported to local police authorities an excessive
irregular traffic of calls from a specific telephone number, detected by
monitoring systems of the Company, which was causing a distortion in the
direction of the traffic, assigned to a person. In 1999, a Dominican Company
and another person, both different from the person who had the mentioned
telephone number assigned, sued the Company for alleged loss and damages of
up to approximately $12,000,000. Management, after consulting with legal
counsel, believes that this matter will not have a material adverse effect
on the results of operations and financial position of the Company.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or
liquidity.
F-33
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
20 COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHERS
During 1999, Dominican tax authorities reviewed the statements of tax
withholdings done by the Company corresponding to the year 1998. At
December 31, 1999, the Company has not been informed of the result of this
audit. Management believes that no material adjustments will arise.
SEVERANCE INDEMNITIES
Companies based in the Dominican Republic maintain reserves under the
provisions of U.S. Statement of Financial Accounting Standards ("SFAS") 112
to cover the ultimate payment of severance indemnities. Severance expense
amounted to $329,153, $257,690 and $328,807 in the years ended December 31,
1997, 1998 and 1999.
21 BUSINESS AND CREDIT CONCENTRATION
Most of the company's customers are located in the Dominican Republic. As of
December 31, 1999 no single customer account receivable exceeded $50,000.
In the normal course of business, the Company maintains accounts receivable
from carriers. Although the Company's exposure to credit risk associated
with non-payment by these carriers is affected by conditions or occurrences
within the industry, most of these receivables are extended to large,
well-established companies. The Company does not believe that this
concentration of credit represents a material risk of loss with respect to
its financial position.
22 LEGAL RESERVE
Article 58 of the Code of Commerce of the Dominican Republic requires all
companies to segregate at least 5% of its net earnings as a legal reserve
until such reserve reaches 10% of paid-in capital. This reserve is not
available for dividend distribution, except in case of dissolution of the
corporation.
23 EXTRAORDINARY ITEM
During 1997, as a result of the early extinguishment of its bank credit
facility, the Company charged off existing deferred debt issuance costs
related to that debt amounting to $5,452,995. This is included as an
extraordinary item in the accompanying consolidated statement of operations
for the year ended December 31, 1997.
24 STOCK OPTION PLAN
On May 4, 1998 the Company initiated the Long-Term Incentive Plan, in which
certain employees could be granted options to purchase shares of the
Company's common stock. The Plan is administered by the Board of Directors
of the Company, and has the authority to determine which employees will
participate in the Plan.
The Plan authorizes grants of options to purchase up to 750,000 shares of
authorized, but unissued common stock. Stock options are granted with an
exercise price equal to the stock's fair market value at the date of grant.
All stock options have ten-year terms and vest and become exercisable in
part beginning three years after the date of grant.
F-34
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
24 STOCK OPTION PLAN (CONTINUED)
At December 31, 1999, there were 436,580 additional shares available for
grant under the Plan. The per share weighted-average fair value of stock was
$4.62 on the date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions: 1999--expected volatility of
73.22%, risk-free interest rate of 6.33%, no expected dividends and an
expected life of 3.59 years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net earnings would have been reduced to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net earnings--as reported.......................... $17,905,589 $22,034,525
Net earnings--pro forma............................ 17,647,972 21,648,100
=========== ===========
Net earnings per share:
As reported:
Basic.......................................... 0.78 0.89
Diluted........................................ 0.78 0.89
=========== ===========
Pro-forma:
Basic.......................................... 0.77 0.87
Diluted........................................ 0.77 0.87
=========== ===========
</TABLE>
The Company had no outstanding options in 1997.
During 1998, the Company granted options to purchase 313,420 shares of
common stock. No options were granted in 1999.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER
PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE
- --------------------- ----------- ------------ -------- -----------
<S> <C> <C> <C> <C>
$ 8.06(a) 251,420 3.42 $ 8.06(a) --
13.00 58,000 3.42 13.00 --
6.63 4,000 3.92 6.63 --
====== ------- ------- ------ ------
313,420 3.43 $ 8.96 --
======= ======= ====== ======
</TABLE>
(a) Reflects 1999 reduction in exercise price from $13.00 to $8.06.
No options have been exercised or forfeited during 1998 and 1999.
In addition, on October 1999 the Company entered into an agreement with a
third party to provide investor relations services for a period of two
years. The Company granted warrants to purchase 300,000 Class A common
shares of the Company at an exercise price of $8.875 each share. Warrants
F-35
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
24 STOCK OPTION PLAN (CONTINUED)
for 150,000 shares vested immediately and warrants for the remaining 150,000
vest through April 28, 2001.
The Company is recognizing an expense for the fair value of these options
using the Black Scholes option pricing model as follows:
- Warrants for 150,000 shares that are vested--fair value at date of
grant amortized over two-year period of the contract.
- Warrants for 150,000 shares that are not vested at December 31, 1999
fair market value at December 31, 1999. Amortized over two-year period
of contract.
For the period ended December 31, 1999, the Company recognized $273,000 as
expense for this contract which is included as part of general and
administrative expense in the accompanying consolidated statement of
operations.
25 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables contain selected unaudited consolidated quarterly
financial data for the Company:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Total operating revenue............. $27,015,684 $30,696,227 $32,635,906 $35,153,575
Operating costs, including
depreciation charges of
$3,001,163, $3,544,401, $4,000,956
and $4,075,631 for each quarter,
respectively...................... 20,874,384 23,157,223 24,954,902 27,037,262
----------- ----------- ----------- -----------
Operating income.................... 6,141,300 7,539,004 7,681,004 8,116,313
Other income (expenses)............. (3,730,608) (3,031,937) (2,436,644) (2,724,534)
----------- ----------- ----------- -----------
Earnings before income taxes........ 2,410,692 4,507,067 5,244,360 5,391,779
Income taxes-benefit................ -- -- -- 351,691
----------- ----------- ----------- -----------
Net earnings........................ $ 2,410,692 $ 4,507,067 $ 5,244,360 $ 5,743,470
=========== =========== =========== ===========
Earnings per share.................. $ 0.13 $ 0.21 $ 0.22 $ 0.23
=========== =========== =========== ===========
Number of common shares used in
calculation....................... 19,144,544 21,044,544 22,311,211 22,944,544
=========== =========== =========== ===========
</TABLE>
F-36
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
25 QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Total operating revenue................... 34,823,199 40,901,880 44,968,825 50,125,037
Operating costs, including depreciation
charges of $4,494,884; $5,141,925;
$5,158,482 and $6,042,189 for each
quarter, respectively..................... 26,495,328 32,149,080 32,719,085 37,993,368
---------- ---------- ---------- ----------
Operating income.......................... 8,327,871 8,752,800 12,249,740 12,131,669
Other income (expenses)................... (3,745,609) (3,547,369) (6,534,080) (5,339,126)
---------- ---------- ---------- ----------
Earnings before income taxes and
cumulative effect of accounting change.... 4,582,262 5,205,431 5,715,660 6,792,543
Income taxes benefit (expense)............ 56,203 -- -- (197,863)
---------- ---------- ---------- ----------
Earnings before cumulative effect of
accounting change......................... 4,638,465 5,205,431 5,715,660 6,594,680
Cumulative effect of change in accounting
for organization expenses................. -- -- -- (119,711)
---------- ---------- ---------- ----------
Net earnings.............................. 4,638,465 5,205,431 5,715,660 6,474,969
========== ========== ========== ==========
Earnings per share........................ 0.19 0.21 0.23 0.26
========== ========== ========== ==========
Number of common shares used in
calculation............................... 24,844,544 24,844,544 24,844,544 24,844,544
========== ========== ========== ==========
</TABLE>
26 SEGMENT INFORMATION
As required by SFAS No. 131 "Disclosures about Segment of an Enterprise and
Related Information" the consolidated financial statements of the Company
includes the following information:
GEOGRAPHIC
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
DOMINICAN
UNITED STATES REPUBLIC ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
International settlement revenues............... $12,343,203 $ 35,276,735 $(8,187,553) $ 39,432,385
Others.......................................... -- 50,669,621 -- 50,669,621
----------- ------------ ------------ ------------
Total operating revenues...................... 12,343,203 85,946,356 (8,187,553) 90,102,006
----------- ------------ ------------ ------------
Operating costs............................... 12,421,915 70,008,104 (8,187,553) 74,242,466
----------- ------------ ------------ ------------
Operating income (loss)......................... (78,712) 15,938,252 -- 15,859,540
=========== ============ ============ ============
Identifiable assets............................. $ 3,827,575 $317,636,651 $ (320,689) $321,143,537
=========== ============ ============ ============
</TABLE>
F-37
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
26 SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
DOMINICAN
UNITED STATES REPUBLIC ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
International settlement revenues............... $24,208,283 $ 44,812,490 (18,688,685) $ 50,332,088
Others.......................................... 2,857,215 72,312,089 -- 75,169,304
----------- ------------ ------------ ------------
Total operating revenues...................... 27,065,498 117,124,579 (18,688,685) 125,501,392
----------- ------------ ------------ ------------
Operating costs............................... 27,818,364 86,894,092 (18,688,685) 96,023,771
----------- ------------ ------------ ------------
Operating income................................ $ (752,866) $ 30,230,487 -- $ 29,477,621
=========== ============ ============ ============
Identifiable assets............................. $ 8,603,748 $436,763,531 (552,676) $444,814,603
=========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------------------------------------------
DOMINICAN
UNITED STATES REPUBLIC ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
International settlement revenues............... $35,510,406 $ 46,338,275 (21,256,547) $ 60,592,134
Others.......................................... 490,836 109,735,971 -- 110,226,807
----------- ------------ ------------ ------------
Total operating revenues...................... 36,001,242 156,074,246 (21,256,547) 170,818,941
----------- ------------ ------------ ------------
Operating costs............................... 35,007,605 115,605,803 (21,256,547) 129,356,861
----------- ------------ ------------ ------------
Operating income................................ $ 993,637 $ 40,468,443 -- $ 41,462,080
=========== ============ ============ ============
Identifiable assets............................. $25,525,617 $514,417,693 (8,464,849) $531,478,461
=========== ============ ============ ============
</TABLE>
PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------------------
WIRELINE CELLULAR INTERNATIONAL OTHERS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $35,658,595 $26,604,945 $69,020,773 $12,905,764 (18,688,685) $125,501,392
=========== =========== =========== =========== ============ ============
Operating income................ 12,594,564 11,697,166 12,790,330 11,084,246 (18,688,685) 29,477,621
=========== =========== =========== =========== ============ ============
Identifiable assets............. 88,372,739 66,747,297 22,510,041 267,737,202 (552,676) 444,814,603
=========== =========== =========== =========== ============ ============
Depreciation expense............ 7,924,465 3,222,774 1,509,691 1,965,230 -- 14,622,160
=========== =========== =========== =========== ============ ============
Capital expenditures............ $69,663,693 $31,777,625 $ 6,980,783 $33,678,911 -- $142,101,012
=========== =========== =========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------------------------
WIRELINE CELLULAR INTERNATIONAL OTHERS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $62,572,264 $35,346,554 $81,848,681 $12,307,989 (21,256,547) $170,818,941
=========== =========== =========== =========== ============ ============
Operating income................ 26,958,139 13,167,776 12,781,596 9,811,116 (21,256,547) 41,462,080
=========== =========== =========== =========== ============ ============
Identifiable assets............. 177,806,707 110,876,334 25,590,381 225,669,888 (8,464,849) 531,478,461
=========== =========== =========== =========== ============ ============
Depreciation expense............ 11,080,231 5,605,645 2,928,174 1,223,430 -- 20,837,480
=========== =========== =========== =========== ============ ============
Capital expenditures............ $79,065,923 $42,573,958 $ 7,602,493 $16,183,849 -- $145,426,223
=========== =========== =========== =========== ============ ============
</TABLE>
F-38
<PAGE>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1999
27 SUBSEQUENT EVENT (UNAUDITED)
At January 19, 2000 the Company obtained an approval of credit guarantees
aggregating $46.6 million from the Export-Import Bank of the United States.
The credits guarantees will be disbursed by the International Bank of Miami,
N. A., to fund purchases of communications equipment and materials from
Motorola, Inc. and other U.S. suppliers. The credits will be available for
disbursement during twelve months, will initially bear floating interest
rates later to be converted to fixed interest rates and will feature
five-year principal repayment schedules.
28 LIQUIDITY
As of December 31, 1999, the Company's current liabilities exceed its
current assets by $83.7 million. This reflects the Company's short-term
borrowings in the Dominican Republic with related companies and local banks.
Dominican banks lend on a short-term basis, in order to negotiate interest
rates should market conditions change, without necessarily demanding the
repayment of credit facilities. Additionally, the Company is involved in
negotiations to obtain term financing of up to 5 years for an approximate
amount of $46,600,000. It is the Company's belief that the existence of a
negative working capital does not affect adversely the continuity of its
business.
29 NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). As amended, the
statement becomes effective for fiscal years beginning after June 15, 2000
and will not be applied retroactively. The statement establishes accounting
and reporting standards for derivative instruments and hedging activity. At
December 31, 1999, the Company had no derivatives and, therefore, does not
believe that this Statement will have any effect on its financial position
or results of operations.
F-39
<PAGE>
ANNEX A
THE DOMINICAN REPUBLIC
THE FOLLOWING INFORMATION HAS BEEN DERIVED FROM VARIOUS GOVERNMENT AND
PRIVATE PUBLICATIONS WHICH HAVE NOT BEEN PREPARED OR INDEPENDENTLY VERIFIED BY
US OR THE UNDERWRITERS OR ANY OF OUR RESPECTIVE AFFILIATES OR ADVISERS.
ACCORDINGLY, NEITHER WE, THE UNDERWRITERS NOR ANY OF OUR OR THEIR ADVISORS OF
AFFILIATES MAKES ANY REPRESENTATION AS TO THE ACCURACY OR COMPLETENESS OF THIS
INFORMATION. THE DOCUMENTS FROM THE CENTRAL BANK OF THE DOMINICAN REPUBLIC
REFERRED TO IN THIS ANNEX A AS SOURCES OF FINANCIAL DATA ARE PUBLIC DOCUMENTS OF
THE DOMINICAN REPUBLIC.
TERRITORY AND POPULATION
The Dominican Republic covers 18,704 square miles and occupies the eastern
two-thirds of the Caribbean island of Hispaniola. The country has a population
of approximately 8.2 million, of which more than 60% lives in urban areas and
approximately 40% lives in the capital city of Santo Domingo.
GOVERNMENT
In a report issued in April 1997, the U.S. Department of State's Bureau of
Inter-American Affairs classified the Dominican government as a representative
democracy. The country's Constitution divides governmental powers among
executive, legislative and judicial branches. The President appoints the
cabinet, executes laws passed by the legislative branch and is
commander-in-chief of the armed forces. Legislative power is exercised by a
bicameral Congress. The Senate is composed of 30 members and the Chamber of
Deputies has 120 members. The 16-member Supreme Court of Justice has sole
jurisdiction over actions against the President and members of the Dominican
Congress, hears appeals from lower courts and appoints all lower court judges.
RECENT POLITICAL HISTORY
The Dominican Republic generally has maintained uninterrupted representative
government with elected government officials since the mid-1960s following the
end of Rafael Leonidas Trujillo's dictatorship in 1961. Mr. Joaquin Balaguer of
the PARTIDO REFORMISTA SOCIAL CRISTIANA (PRSC) served as the country's President
from 1966 until 1996, with the exception of two consecutive four-year terms
between 1978 and 1986.
The Dominican Republic recently has undergone sweeping political changes.
The country's presidential elections of 1994 were marred by voting
irregularities, and the PARTIDO REVOLUCIONARIO DOMINICANO (PRD), a centrist
party, contested the election results, claiming widespread election fraud. Under
a negotiated agreement among the country's three major political parties, PRSC,
PRD and the Partido de la Liberacion (PLD), it was agreed that general elections
would be held again in May 1996. A number of political reforms were adopted as a
result of the 1994 political accord. The Dominican Constitution was amended to
(1) prohibit consecutive presidential terms, (2) stagger elections so that
presidential and vice presidential elections are not held in the same year as
congressional and municipal elections, (3) require a presidential candidate to
receive at least a simple majority in order to win without a runoff election and
(4) establish the Judicial National Council to appoint members of the Supreme
Court of Justice. In October 1995, the Dominican Congress further strengthened
the legitimacy of the 1994 political reforms by enacting the Law on Elections,
which embodies the constitutional amendments.
Mr. Balaguer did not run for reelection in 1996, and Leonel Fernandez of the
PARTIDO DE LA LIBERACION DOMINICANA (PLD) was elected President in a runoff
election with approximately 52% of the vote. President Fernandez has continued
the core economic goals of the Balaguer administration, including single-digit
inflation, steady economic growth, fiscal responsibility and promotion of
exports and foreign
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investment. In addition, President Fernandez has created a Commission for
Judicial Reform to encourage greater transparency in the judicial system, which
in the past has been criticized for corruption and the inequitable resolution of
disputes. President Fernandez has announced a comprehensive economic reform
program. The program, among other things, seeks to introduce structural reforms,
including privatization and pension reforms. The President's efforts to
implement his economic reform program and reduce corruption in government have
been hampered because the PLD does not control the Dominican Congress. In
elections held in May 1998, the PRD won 24 of 30 Senate seats. The next
presidential election will occur in May 2000.
SOCIAL STABILITY
In a July 1996 report, the United States Embassy in the Dominican Republic
reported that the socioeconomic environment in the Dominican Republic is
characterized by relative and widespread poverty, with government services and
physical infrastructure unavailable to 40% of the country's population. The U.S.
Agency for International Development has criticized the Dominican government's
macroeconomic policies which, the organization contends, burden the poor
disproportionately.
The Dominican Republic has experienced demonstrations and labor strikes that
have been violent at times. The COORDINADORA DE ORGANIZACIONES SOCIALES, an
umbrella organization for the country's six major labor confederations, called
for a general strike in May 1995. The labor unions sought an increase in the
country's minimum wage, and the Dominican government has since granted this
increase. During June 1995, people protested price increases and shortages of
water and electricity. Such demonstrations were not directed at the government's
austerity programs in general; instead, demonstrators protested the elimination
of specific price supports. In April 1996, Santo Domingo experienced
demonstrations as people protested the worsening energy crisis caused by the
failing state-owned electric utility company. In July 1997 and August 1997,
protesters clashed with military police, resulting in two deaths. In
November 1997, the country again experienced riots partly as a result of price
increases and shortages of water and electricity. There can be no assurance that
the country's privatization and reform policies will not cause further social
discontent.
FOREIGN RELATIONS AND TRADE
The Dominican Republic is a member of the United Nations, the International
Monetary Fund (the "IMF"), the World Bank and the World Trade Organization. It
is a party to the General Agreement on Tariffs and Trade. In addition, the
country is a member of regional associations including the Organization of
American States. The Caribbean Community and Common Market extended free trade
privileges to the country in 1996.
Since 1984, the Caribbean Basin Initiative has given the Dominican Republic
duty-free access to the United States for numerous products. To be eligible for
duty-free access, the product must be grown, produced or manufactured in one or
more of the countries which qualify for Caribbean Basin Initiative benefits and
be exported directly to the United States.
The Dominican Republic also is a signatory to the Fourth Lome Convention
which allows duty-free entry into the European Union of most Dominican products
provided that a minimum of 90% of the value of the components of the product
originates in the Dominican Republic.
During 1998, a number of tariff barriers were removed and free trade
agreements were signed with the Central American Common Market and the Carribean
Community and Common Market.
ECONOMIC OVERVIEW
The U.S. Department of State describes the Dominican Republic as a
middle-income developing country that depends primarily on agriculture, trade
and services, particularly tourism. Although the
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service sector recently has overtaken agriculture as the leading employer of
Dominicans (due primarily to the growth in tourism and free trade zones),
agriculture remains the most important sector in terms of domestic consumption
and is second only to the mining sector in terms of export earnings. Tourism
accounts for over $2.5 billion in annual revenues. Free trade zone earnings and
tourism are the fastest growing export sectors. The U.S. Department of State
estimates that remittances from Dominicans living in the United States amount to
approximately $1.5 billion per year.
The following table sets forth selected economic indicators for the
Dominican Republic for the five years ended December 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997(5) 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Gross Domestic Product (RD$millions)(1)........ 160,587 181,466 212,600 241,910 278,939
Gross Domestic Product (US$millions)(2)........ 11,808 13,284 14,919 15,883 17,434
Real Gross Domestic Product growth (%)(3)...... 4.7(3) 7.3(3) 8.2(3) 7.3(4) 8.0(4)
Inflation (%)(3)............................... 9.2 4.0 8.3 7.8 6.5
Population (millions)(4)....................... 7.8 7.9 8.1 8.2 8.4
Balance on Current Account (US$millions)(3).... (101.0)(5) (239.0)(5) (225.0)(5) (338.4)(4) (499.8)(4)
Change in Gross Reserves (increase)(3)......... 131.0 16.5 (43.5) (103.4) (222.4)
Total external debt (US$billions)(3)........... 4.0 3.8 3.5 3.5 3.6
Average of average monthly exchange rates (RD$:
US$)(3)...................................... 13.60 13.66 14.25 15.23 16.00
</TABLE>
- ------------
(1) Source: International Monetary Fund
(2) Calculated by dividing GDP in RD$ millions by the average exchange rate for
each such year between the RD$ and US$.
(3) Source: Central Bank
(4) World Development Indicators
The Dominican Republic has experienced growth in real GDP since 1991 after
real GDP fell approximately 5.9% in 1990. According to the United Nations
Economic Commission for Latin America and the Caribbean, the Dominican Republic
had the highest GDP growth rate (7.3%) in the region in 1998, followed by Costa
Rica (5.5%), Mexico (4.5%), Argentina (4.0%) Nicaragua (3.5%), Honduras (3.0%)
and Colombia (2.0%).
RECENT ECONOMIC PERFORMANCE
After a period of buoyant economic growth in the 1970s, with growth rates
averaging approximately 8.0% per year, problems emerged in the 1980s and early
1990s with both the external sector and government finances, causing debt
payment problems and high inflation. However, since 1991 the country's debt
problems have been resolved and a series of economic and structural reforms have
been introduced, resulting in lower inflation and increased growth. GDP has
grown in real terms every year since 1991, after a brief recession in 1990.
Since 1991, the Dominican authorities in general have achieved an
environment of strong growth relative to other economies in the region while
keeping price pressures under control. GDP growth has accelerated in recent
years, expanding by approximately 8.2% in 1997, approximately 7.3% in 1998 and
approximately 8.3% in 1999. Recent economic growth has been driven by increased
activity in mining, communications, construction, utilities and tourism.
Despite the increase in economic activity, price pressures have been
relatively modest over the last nine years. After peaking at 79.9% in 1990,
inflation eased in 1991 to approximately 7.9%, primarily because of monetary
policies adopted by the Central Bank. Increased public expenditures caused
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moderate price pressures over the subsequent years, bringing inflation to
approximately 14.3% in 1994 and approximately 9.2% in 1995. Tight monetary
policies pursued by the Central Bank in 1996 further dampened inflationary
pressures, reducing year-end inflation to approximately 4.0%. Inflation
increased to approximately 8.4% in 1997 due in part to a drought which increased
the cost of basic foodstuffs. Inflation for 1998 was 7.8% and for 1999 was 5.1%.
MONETARY POLICY. Tight monetary policy has resulted in high real interest
rates over the last several years. Declining inflation has allowed nominal
interest rates to fall. According to the Economist Intelligence Unit, the
average prime lending rate of commercial banks declined from approximately 49%
in 1990, to approximately 22% in mid 1999. The rate fluctuated between
approximately 21% and 25% from year-end 1997 to 1999. Restrictive monetary
policies also have supported a relatively stable currency during the 1990s. The
exchange rate has declined at a steady but moderate rate since 1990, from
RD$11.40 per U.S. dollar to RD$16.00 per U.S. dollar at the end of 1999.
BALANCE OF PAYMENTS. The current account has posted a deficit every year
since 1968. The trade deficit was approximately $1.5 billion in 1995,
$1.8 billion in 1996, $2.0 billion in 1997, $2.6 billion in 1998 and
$3.0 billion in 1999. While export performance has been strong since 1993,
fueled by higher commodities prices, imports have also risen sharply over the
period to accommodate the needs of the tourism and construction sectors. Exports
increased from $4.2 billion in 1996 to $5.5 billion in 1999, while imports
increased from $5.2 billion in 1996 to $8.2 billion in 1999.
The following table sets forth the details of the Dominican Republic's
balance of payments for the five-year period ending December 31, 1999:
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN US$ MILLIONS)
<S> <C> <C> <C> <C> <C>
Exports(1)................................ 3,652.8 4,195.2 4,613.7 4,980.5 5,203.7
Imports(1)................................ (5,145.0) (5,727.2) (6,608.7) (7,597.3) (8,213.9)
-------- -------- -------- -------- --------
Trade Balance............................. (1,492.2) (1,532.0) (1,995.0) (2,616.8) (3,010.2)
Net Services Balance...................... 1,058.5 1,208.6 1,275.3 1,182.0 1,542.8
Net Income Balance........................ (659.4) (1,062.5) (795.4) (890.1) (952.9)
-------- -------- -------- -------- --------
Balance on Goods, Services & Income....... (1,093.1) (1,385.9) (1,515.1) (2,324.9) (2,420.3)
Net Current Transfers..................... 992.0 1,147.2 1,352.1 1,968.5 1,920.5
-------- -------- -------- -------- --------
Current Account Balance................... (101.1) (238.7) (163.0) (338.4) (499.8)
Financial Account......................... 417.7 334.8 451.8 690.2 1,147.5
Net Errors and Omissions.................. (256.6) (207.0) (193.6) (339.1) (475.8)
Capital Account Balance................... 68.0 72.0 -- -- --
Overall Balance........................... 128.0 (38.9) 95.2 (12.7) 171.8
</TABLE>
- ------------
Source: Central Bank of Dominican Republic.
(1) F.O.B.
(IMF) RESTRUCTURING. During the 1980s, there were a series of debt service
suspensions, debt reschedulings and failures to meet conditions of official
loans. However by 1990, the Dominican government's policy toward international
debt changed. In 1991, arrears were cleared with the IMF and the World Bank. An
18-month stand-by agreement was signed with the IMF, followed by a debt
rescheduling accord with the Paris Club of official lenders. The IMF stand-by
agreement was renegotiated and extended in March 1993. Also in 1993, commercial
bank creditors agreed to a debt reduction accord, which was ratified by the
Dominican Congress in 1994. Total external debt fell by $615.1 million in 1994
largely as a result of the debt reduction plan. This was the first decline in
total external debt in almost two decades. Total external debt declined to
approximately 28% of GDP by 1996, from approximately 47% in 1993. External
public debt was between 20% and 23% of GDP in 1997, 1998 and 1999.
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FISCAL POLICY. Following comprehensive tax reform that resulted in the
enactment of the Tax Code in 1992, fiscal measures were instituted in
September 1994 that have led to better administration of the tax system and a
broadening of the tax base. As a result, there has been an increase in receipts
from income taxes, communications and industrial goods sales taxes, as well as
from customs duties and excise taxes on tobacco and alcoholic beverages. On the
expenditure side, capital and current expenditures since 1992 have been more
disciplined. The result has been a general budget balance since 1994, with
slight budget surpluses of between 0% and 1% of GDP.
In December 1996, President Fernandez announced a comprehensive economic
reform program to strengthen fiscal performance and achieve sustained
macroeconomic stability; open the economy to increased foreign competition;
expand the government's tax base and social spending; and introduce structural
reforms, including privatization and pension reform.
During the first three quarters of 1998, fiscal policy was designed to
control government spending and achieve a balanced budget. During the fourth
quarter, following the occurrence of Hurricane Georges, the government increased
spending for reconstruction.
For 1998, total revenues reached RD$38.6 billion, an increase of
RD$3.8 billion or 10.9% from 1997 and tax revenues grew at a rate of 14.9%. In
1998, revenues were adversely affected by Hurricane Georges, which caused a
slowdown in the economy. A set of measures implemented since mid-1997, including
zero duties on industrial imports, equipment, and machinery imports for the
agro-livestock and textile sectors, and the elimination of commercial and
industrial licenses also resulted in lesser tax revenues than if these policies
had not been adopted.
Government expenditures for 1998 reached RD$37.5 billion, a 13.9% increase
over 1997. This amount includes current and capital spending by the Solidarity
Fund for Reconstruction, created for managing relief efforts as a result of
Hurricane Georges. Current expenditures in 1998 increased by 14.4% from 1997,
and represented 71.6% of total expenditures in 1997 and 71.9% in 1998. Capital
expenditures were RD$410.5 billion during 1998, an increase of 12.8% from 1997,
after having decreased by 23.5% in 1997. Capital expenditures for 1998 reflects
larger capital investments made by the Central Government to counteract the
damage caused by Hurricane Georges to infrastructure and to the housing sector.
During 1999, total revenues reached RD$43.5 billion, an increase of
RD$4.9 billion or 12.8% from 1998. Government expenditures for 1999 reached
RD$45.2 billion, a 20.5% increase over 1998. Current expenditures in 1999
increased by 15.8% to RD$31.2 billion from 1998, representing 69.1% of total
expenditures in 1999. Capital expenditures were RD$14.0 billion during 1999, an
increase of 32.5% from 1998.
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<PAGE>
SECTORAL ANALYSIS
The following table sets forth GDP data for certain major sectors of the
Dominican economy, calculated on the basis of constant market prices in millions
of 1970 Dominican pesos, for the years 1995, 1996, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
GROWTH GROWTH GROWTH
1995 1996 1997 1998 1999 RATE(%) RATE(%) RATE(%)
% OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL 1995/1996 1996/1997 1997/1998
---------- ---------- ---------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AGRICULTURE:
Agriculture.............. 6.8 7.2 6.9 6.4 5.4 13.3 3.8 (1.4)
Livestock................ 5.3 5.2 5.0 4.7 5.4 5.4 3.1 1.5
Fishing and forestry..... 0.6 0.5 0.5 0.6 0.5 1.9 1.0 30.9
---- ---- ---- ---- ---- ---- ---- -----
Total agriculture...... 12.7 12.9 12.9 11.7 11.3 9.5 3.4 1.0
---- ---- ---- ---- ---- ---- ---- -----
MANUFACTURING:
Sugar.................... 0.9 1.0 1.0 0.7 0.5 19.2 7.9 (21.9)
Other.................... 13.0 12.6 12.4 12.3 13.3 3.9 7.1 6.4
Free trade zones(1)...... 3.7 3.5 3.5 3.5 3.2 (0.5) 10.6 7.6
---- ---- ---- ---- ---- ---- ---- -----
Total manufacturing.... 17.6 17.1 16.9 16.5 17.0 3.8 7.9 5.0
---- ---- ---- ---- ---- ---- ---- -----
MINING..................... 2.7 2.6 2.5 2.0 1.8 2.4 3.1 (15.9)
CONSTRUCTION............... 9.5 10.0 10.9 12.1 13.4 13.0 17.1 19.6
COMMERCE................... 12.1 12.3 12.4 12.9 12.9 9.0 8.9 11.5
SERVICES:
Hotels, restaurants,
bars................... 6.4 6.6 7.1 7.0 6.4 11.2 16.7 4.7
Transportation........... 6.8 6.8 6.8 6.9 7.0 8.0 8.1 9.1
Communications........... 3.5 3.8 4.2 4.7 5.0 16.3 19.2 20.6
Utilities (electricity &
water)................. 1.9 2.0 2.0 2.1 2.1 10.3 10.1 13.7
Financial services....... 4.9 4.6 4.4 4.3 4.1 1.9 3.2 4.0
Housing.................. 5.2 4.9 4.7 4.5 4.2 1.6 2.5 2.2
Government............... 8.4 8.3 7.9 7.8 7.4 5.7 3.1 5.2
Other services........... 8.3 8.1 7.8 7.5 7.3 3.9 4.4 4.3
---- ---- ---- ---- ---- ---- ---- -----
Total services......... 45.5 45.1 44.9 44.8 43.5 6.6 7.7 7.0
---- ---- ---- ---- ---- ---- ---- -----
Total GDP.............. 100% 100% 100% 100% 99.9% 7.3% 8.2% 7.3%
==== ==== ==== ==== ==== ==== ==== =====
<CAPTION>
GROWTH
RATE(%)
1998/1999
---------
<S> <C>
AGRICULTURE:
Agriculture.............. 5.2
Livestock................ 8.8
Fishing and forestry..... 4.5
-----
Total agriculture...... 6.8
-----
MANUFACTURING:
Sugar.................... (25.2)
Other.................... 10.9
Free trade zones(1)...... (2.5)
-----
Total manufacturing.... 6.7
-----
MINING..................... (1.5)
CONSTRUCTION............... 18.3
COMMERCE................... 9.1
SERVICES:
Hotels, restaurants,
bars................... 10.0
Transportation........... 8.5
Communications........... 15.6
Utilities (electricity &
water)................. 8.0
Financial services....... 4.2
Housing.................. 2.3
Government............... 3.1
Other services........... 4.3
-----
Total services......... 7.0
-----
Total GDP.............. 8.3%
=====
</TABLE>
- ---------------
(1) Only includes salaries and wages at 1970 constant prices.
Source: Central Bank of Dominican Republic
The Dominican Republic has three primary economic sectors: agriculture,
manufacturing (including the free trade zones) and services. These sectors, as
well as mining, construction and commerce, comprise the total GDP of the
Dominican Republic which, at the year ended December 31, 1999, aggregated
$17.4 billion.
AGRICULTURE. This sector is comprised of livestock, fishing, forestry and
general agriculture. In 1998, the agriculture sector contributed approximately
11.7% of total GDP. This sector was adversely affected in the fourth quarter of
1998 by Hurricane Georges. By contrast, forestry and fishery grew by 30.9% in
1998. In the first nine months of 1999, the agricultural sector grew 6.8% from
RD$657.4 million in 1998 to RD$702.3 million at 1970 constant prices.
MANUFACTURING. Excluding the free trade zones, the manufacturing sector is
comprised of the production of sugar, cement, flour, rice, cattle, rum, beer and
cigarettes. In 1999, the manufacturing sector (excluding the free trade zones)
contributed approximately 13.8% of total GDP. Sugar production is by far the
largest component of the manufacturing sector. In 1999, the overall
manufacturing sector (including the free trade zones) grew by approximately
6.7%.
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FREE TRADE ZONES. The free trade zone system in the Dominican Republic
began in 1969. As of the end of 1999, approximately 473 companies were operating
in 46 free trade zone industrial parks. Companies in the free trade zones
manufacture textiles, garments, shoes, cigars, electronics, hospital supplies,
fur, data processing equipment and jewelry.
Companies established in the free trade zones generally are engaged in the
production of goods and services for export. By law, such companies may sell a
maximum of approximately 20% of their total production in the domestic market,
or alternatively may sell without any restriction if their goods do not compete
with goods produced by domestic companies located outside the free trade zones.
Free trade zone enterprises are generally exempt from Dominican taxes, including
income taxes, export and import duties and taxes on construction and real
property transfers. The contribution to GDP from the free trade zone companies
increased to approximately 3.2% in 1999. The factors that adversely affected the
free trade zones in recent years include (1) the failure by the United States
Congress to approve the Parity Textile Bill which led to a loss of contracts and
(2) the impact of the North American Free Trade Agreement, which has diverted
some investments from the United States to Mexico.
According to the National Council of Free Trade Zones (CONSEJO NACIONAL DE
ZONAS FRANCAS DE EXPORTACION), the total value of exports originating in the
free trade zones grew from $1.2 billion in 1992 to $4.3 billion in 1999. The
contribution of free trade zones to the balance of payments was $1.5 billion in
1999. Since 1990, the total direct employment by companies operating in free
trade zones increased at an annual average rate of approximately 8.0%.
FOREIGN TRADE
Principal exports in 1999 were ferro-nickel ($143.9 million), raw sugar
($65.9 million), coffee ($30.4 million), cocoa ($31.6 million) and tobacco
($72.5 million). Other important exports include bananas, gold, bauxite,
garments and footwear. In 1999, 51.1% of the country's exports were to the
United States and approximately 52% of its imports were from the United States.
Total exports of goods in 1999 were $872.2 million compared to
$888.5 million in 1998. Total imports of goods in 1999 were $5,379.6 million
compared to $4,896.6 million in 1998. Principal imports include petroleum and
petroleum-derived products, food, machinery, cotton goods, industrial raw
materials, motor vehicles, chemicals and pharmaceuticals.
Significant trade barriers still exist in the Dominican Republic. Import
tariffs on most products fall within a range of approximately 3% to 35%. The
Dominican government also imposes a 5% to 80% excise tax on "non-essential"
imports such as home appliances, alcohol, perfumes, jewelry, automobiles, auto
parts and certain agricultural products. In the agricultural sector, Dominican
importers are often able to obtain a "no objection" certificate issued by the
Dominican authorities permitting them to import agricultural goods that either
do not compete with Dominican products or that are necessary to meet the
exigencies of domestic demand. Presidential decrees are also used to ban or
restrict the import of certain commodities for indefinite periods of time.
DIRECT FOREIGN INVESTMENT
The Dominican Republic has changed the legal framework under which local and
foreign businesses operate in the Dominican Republic and has reformed certain
sectors of the economy in order to attract foreign investors. In November 1995,
the new Foreign Investment Law of the Dominican Republic (the "1995 Foreign
Investment Law") was enacted. Regulations implementing this law were enacted in
August 1996 and March 1997. The new legislation resulted from ongoing efforts to
encourage greater foreign investment. The 1995 Foreign Investment Law opened
previously forbidden or restricted areas to foreign investors (including public
services and works, mining, banking, insurance, media, agriculture,
transportation and real estate) and lifted restrictions on equity investments in
domestic entities. The 1995 Foreign Investment Law also streamlined and
simplified the procedures to be followed in registering
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investments by foreign investors. The 1995 Foreign Investment Law also reduced
restrictions on the ability of foreign investors to repatriate funds abroad
without the authorization of the Central Bank, including capital invested in the
Dominican Republic, dividends and capital gains.
The U.S. Commerce Department reports that Dominicans and foreign observers
criticize what they perceive as an inequitable resolution of business disputes
and administration of business regulations in the country. Although the new
government considers judicial reform a high priority, some observers believe
that Dominican courts cannot be depended upon as a fair and reliable means to
resolve disputes. In addition, the centralization of executive authority, the
rapid turnover of public officials and the ambiguity of some Dominican
commercial law has given rise to an institutional culture in which regulatory
officials enjoy wide discretion in the interpretation of regulations. This
administrative environment has led to a lack of regulatory dependability.
The country is not a member of the International Center for the Settlement
of Investment Disputes or a signatory to the New York Convention of 1958, which
governs the negotiation and enforcement of foreign arbitral awards. In addition,
the Dominican government does not enter into binding arbitration with foreign
private citizens. A number of foreign investors and international companies have
pending trade and investment disputes with the Dominican government regarding
the non-fulfillment of contractual obligations with investors, the expropriation
of property or the non-fulfillment of payment obligations. The U.S. Embassy
estimates that the value of these claims approximates $100 million. Moreover,
investors and lenders have often received delayed or inadequate payments in
cases where the court has ordered compensation. However, the Fernandez
administration has changed the government's approach to the systemic problems
affecting business and commerce.
TOTAL FOREIGN DEBT
Total foreign debt owed by Dominican companies, Dominican individuals, and
the Dominican government and its enterprises was approximately $3.5 billion at
December 31, 1997, $3.6 billion at December 31, 1998 and $3.6 billion at
December 31, 1999.
EMPLOYMENT AND WAGES
According to a Central Bank survey, the labor participation rate in the
Dominican Republic (number of persons participating in the labor supply (I.E.
the "active population") as a percentage of the total available labor market
either with a job or presently seeking a job (I.E. the population of persons
older than 10 years)) stood at approximately 52.7% in April 1997. The
unemployment rate (unemployed population as a percentage of the active
population) decreased from approximately 14.4% in 1998 to 13.8% in 1999.
According to the Central Bank survey, hours worked per week averaged
approximately 43 hours. In addition, average income per hour increased
approximately 13% from RD$22.47 in October 1996 to RD$25.40 in April 1997.
In 1995, the National Minimum Wage Commission increased the minimum wage by
approximately 20% (or 7% in real terms) for employees in the private sector and
in the free trade zones and the Dominican Congress approved a 30% increase in
wages for government employees, which constituted a 19% increase in real terms.
In 1997 the Commission further increased on a non-mandatory basis the minimum
wage by 20% for employees in the private sector and the free trade zones.
PRIVATIZATION
The U.S. Commerce Department has reported that many observers of the
Dominican Republic believe that because of historical factors, the country's
government traditionally has played a large role in the Dominican Republic's
economic life. The dictator Rafael Leonidas Trujillo took power in 1930 and
ruled the country for 31 years. During this period, Trujillo promoted industries
largely for his own benefit. After the Trujillo dictatorship fell, the newly
formed government confiscated the Trujillo estate, including
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commercial and industrial enterprises, which accounted for a significant share
of the country's assets. The industrial investments of the Trujillo estate were
then consolidated into three state-owned entities: CORPORACION DOMINICANA DE
ELECTRICIDAD, the public electric utility company or CDE, CONSEJO ESTATAL DEL
AZUCAR, the sugar growing and processing concern or CEA, and CORPORACION
DOMINICANA DE EMPRESAS ESTATALES, a conglomerate of the remaining industrial
enterprises or CORDE.
According to the U.S. Commerce Department, it is widely recognized that the
state-owned enterprises have had a negative impact on the national economy. The
poor financial condition of state-owned enterprises may hinder their sale to
private entities in future privatization programs. The U.S. Commerce Department
also reported that the substantial presence of the government in the economy,
coupled with the existence of complicated regulations, result in the
politicization of many economic decisions and governmental lobbying by business
people. This placed foreign companies at a distinct disadvantage to local
businesses.
Electricity service in 1999 increased 8.1% compared to a 14.2% decrease in
1998. The increase was due primarily to a 11.3% increase in private power
purchases. Although improved, electricity production is still inadequate to meet
peak power demand. The government privatized CDE during 1999. However, the
shortcomings of CDE are of particular concern. The Dominican Republic does not
have a reliable electric power system, with power production persistently
falling below demand levels. Santo Domingo has experienced recurrent black-outs
that have lasted up to 20 hours, and, as a result, many small businesses have
had to close. In response to these frequent black-outs, large businesses have
installed their own power generators. The power outages have been caused by
CDE's inability to pay certain suppliers. CDE's six primary fuel suppliers have
periodically stopped deliveries and two independent power producers periodically
have shut off power to CDE. The electricity crisis may slow economic growth.
The privatization of the state-owned flour mill (Molinos Dominicanos) was
completed in February 1999; and concessions were granted for operating and
upgrading four international airports. The government also leased the 10 sugar
mills owned by the state sugar company in September 1999. The Central Bank of
Dominican Republic has offered for sale all its real estate assets, including
PLAYA GRANDE and MONTELLANO, which are expected to raise a minimum of
$30 million in 1999. In addition, it has opened competitive bidding for the
privatization of the operations of the Rosario Dominicana (a gold mining company
owned by Central Bank).
MONETARY POLICY
MONETARY POLICY IN 1995 AND 1996. According to United Nations Economic
Commission for Latin America and the Caribbean, a cautious monetary policy was
maintained by restricting the amount of credit extended by both the Central Bank
and the State Reserve Bank and banking regulations which require financial
intermediaries to maintain high liquidity. The "broadly-defined" money supply
grew by 15% in nominal terms in 1995 as a result of an increase of 12% in money
and an increase of 17% in savings and time deposits.
In January 1996 the Monetary Board announced measures to encourage business
and increase private-sector loan activity. These measures included (1) reducing
the legal reserve requirement for commercial banks from 25% to 20%;
(2) lowering the Central Bank's discount rate to commercial banks and reducing
the interest rate for agricultural, industrial and small business loans from 22%
per annum to 18.5% per annum; and (3) authorizing development and mortgage banks
to offer savings and checking accounts, issue credit cards and exchange foreign
currencies (previously, only commercial banks could provide such services).
A-9
<PAGE>
To ensure that money supply growth and, thus, inflation, remained under
control, the Monetary Board in January 1996 also (1) issued special Central Bank
bonds to commercial banks to reduce their liquidity and (2) imposed a temporary
private sector credit freeze as a result of which banks were not permitted to
issue new loans to the commercial sector.
Tight monetary policies pursued in 1995 and 1996 helped to contain rises in
consumer prices and to lower rates of inflation.
MONETARY POLICY IN 1996 AND 1997. In December 1996, the Monetary Board
issued a resolution which unified the Official Rate and the Private Market Rate
to RD$14.00 per U.S. dollar. Such measure caused an increase in the exchange
rate during January 1997 from rates prevailing at the end of 1996. By the end of
January, the monetary authorities supplied dollars to the market and took a
number of measures seeking to reduce speculation in the exchange market and
diminish devaluation.
The Official Rate is reviewed on a weekly basis; as a consequence, the level
of the Official Rate has increased in a manner similar to that of the Private
Market Rate, reducing, as a result, the gap between both markets.
MONETARY POLICY IN 1998. Until the third quarter of 1998, monetary policies
aimed to control the growth of the money supply with the purpose of eliminating
surpluses of liquidity accumulated during 1997.
The main measures adopted during the first nine months of the year 1998 were
the following:
- Establishment of a limit on credit facilities to the consolidated public
sector as of December 1997, taking into account the loans approved at that
date and pending to be disbursed.
- Issuance of RD$600.0 million in Certificates of Participation from the
Central Bank at an interest rate of 16%.
- Freezing of the reserves surpluses required to be maintained by the
commercial banking and financial sectors, at the end of the third week of
January 1998, to be returned, starting from April 1998, at a rate of 6.67%
monthly.
- Unification of the official exchange rate at an initial level of
RD$15.33/US$1.00, equal to the weekly average reported in the private
market. In addition, the modification of the commission from 1.5% to 1.75%
on the sale of foreign currencies.
Due the effects of Hurricane Georges, monetary policies were relaxed to
satisfy the increased demand for credit as a result of reconstruction efforts. A
credit was granted to the Central Government by the Banco de Reservas of
RD$500.0 million, and the program of refunding reserves surpluses to the
commercial banking sector was accelerated.
The deposit of foreign currencies with the Central Bank by foreign insurance
companies for compensation of the damages caused by Hurricane Georges, resulted
in increased gross and net international reserves. To counteract potential
pressures on the monetary system as a result of this inflow of foreign currency,
the Monetary Board, as a preventive measure, in mid-November 1998, placed
Certificates of Participation of the Central Bank for an amount of
RD$1,000 million.
MONETARY POLICY IN 1999. In 1999, the Dominican Republic registered an
increase in monetary demand. This reflected increased availability of credit
facilities in commercial and mortgage banking, as a result of monetary policy
flexibility beginning in May 1999. This policy included the release of 20% of
the surplus from the frozen legal reserve for commercial banks, and the
termination in June of restrictive measures on credit for banking dedicated to
the Trade Sector.
In the second and third quarters of 1999, these measures, together with
increased foreign currency reserves attributable to insurance payments,
contributed to a decrease of interest rates, increasing the
A-10
<PAGE>
demand for money and economic growth. The increase in the assets of Central Bank
had its origin, mainly, in the payments of loans granted by multilateral
organizations for national reconstruction, and the payments received from
insurance sources.
The most important monetary policies adopted during 1999 were:
- Increase by RD$1,500 million of Certificates of Participation issued by
the Central Bank to savings and loans associations.
- The authorization of the Central Bank, through the Department of Financing
and Development of Projects, to grant financing to certain production
sectors and for tourist infrastructure, including the agricultural areas
that suffered considerable losses caused by Hurricane Georges, as long as
this aid does not affect the monetary variables and the inflation
objectives established by the Central Bank's Monetary and Financial
Program.
BANKING SYSTEM AND INTEREST RATES
The Dominican banking system includes commercial banks, mortgage banks,
savings and loan associations and development banks. The Central Bank has the
constitutional authority to regulate the Dominican banking system, and it
regulates money supply and controls official foreign exchange reserves.
Commercial banks are the primary sources of financing for the private sector
of the Dominican economy. Most commercial lending is in the form of short-term
lines of credit, with some medium- and long-term financing available,
principally from Central Bank development fund resources. Mortgage banks
traditionally have provided medium- and long-term loans for the construction and
tourism sectors. Annually renegotiated long-term loans, however, are the most
common. Savings and loan associations provide medium- and long-term loans only
for residential housing and may accept savings and CD deposits. Development
banks, both public and private, offer medium- and long-term loans to finance
projects in priority sectors, including agriculture, tourism, industry, services
and transportation.
The World Bank, the International Monetary Fund and the Inter-American
Development Bank is assisting the Dominican government to make the Dominican
financial structure more effective and secure.
During 1998 the commercial and multiservice banks asset and liability
interest rates showed an upward trend, averaging 25.64% and 17.65%,
respectively, due to the monetary control policy adopted during the first nine
months of 1998 compared to averaged 21.01% for assets and 13.40% for liabilities
for 1997.
At the end of 1999 the levels of Central Bank gross and net international
reserves were $881.3 million and $547.0 million, respectively. These are the
highest levels in the history of the Central Bank, and represent a gain in gross
reserves of $222.4 million, or 33.8%, over December 31, 1998. Net reserves were
$193.0 million at December 31, 1999 or 54.5% higher than at December 31, 1998.
The following table shows the composition of international reserves of the
Central Bank as reported by the Central Bank at December 31, 1995, 1996, 1997,
1998 and at September 30, 1999.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
----------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998 1999
-------- -------- -------- -------- -------------
(IN MILLIONS OF US$)
<S> <C> <C> <C> <C> <C>
Gross International Reserve......................... 528.5 512.0 555.5 658.9 881.3
Monetary Reserve.................................... 87.1 91.8 162.9 269.4 405.8
Net International Reserves.......................... 105.2 144.6 180.1 354 547.0
</TABLE>
- ------------
Source: Central Bank of Dominican Republic
A-11
<PAGE>
SECURITIES MARKETS
The securities market in the Dominican Republic is not well developed.
Currently, the Dominican Republic securities market consists of the Bolsa de
Valores de Santo Domingo or the BVSD which has been in operation since 1991.
Securities including stock, fixed income instruments, zero coupon bonds and
commercial paper, among others, may be purchased on the BVSD through any of the
brokers authorized by the BVSD. These financial instruments may also be acquired
through unregistered dealers as Dominican law does not currently provide for
mandatory registration of brokers.
During 1998, however, the BVSD continued to show growth as a low cost
financing alternative for established companies. Trading for 1999 was more than
RD$3.5 billion, compared to RD$3.9 billion traded in 1998 and $2.0 billion in
1997.
The Central Bank, representatives of the different brokerage firms, and
international organizations drafted a bill for a securities law which would
create a Securities Superintendency to regulate and supervise the securities
market. The bill only regulates the public placement market. Under the draft
bill, companies seeking to issue securities to the public would have to obtain
approval from the Superintendency and satisfy financial and disclosure
requirements. In addition, the bill contains the criteria for the admission to
the stock exchange of international securities.
PUBLIC SECTOR FINANCES AND FISCAL POLICY
GENERAL. According to the United Nations Economic Commission for Latin
America and the Caribbean or ECLAC, the fiscal and monetary measures instituted
in September 1994 enabled the Dominican Republic to make progress in
reestablishing its principal macroeconomic balances, achieving fiscal and
external surpluses that helped to keep inflationary pressures under control.
Increased revenues enabled the Dominican government to achieve in 1995 a
surplus of approximately RD$1.7 billion, after two years of deficits. According
to ECLAC, fiscal revenues grew, primarily as a result of better administration
of the tax system and a broadening of the tax base, which brought an increase in
tax receipts from earnings, communications and industrial goods sales (in the
form of a value-added tax), as well as from customs duties and selective taxes
on tobacco and alcoholic beverages. The fiscal surplus, however, was achieved
primarily at the expense of under funding state industries, particularly CDE and
CEA. Fiscal expenditures rose slightly in 1995 due to increased current
expenditures, but capital expenditures decreased approximately 13.3% in 1995.
During 1997 the fiscal policy focused on maintaining macroeconomic stability
and increasing investment in the social sector. The authorities adopted programs
financing social improvements (including for education and housing) improving
worker's compensation, for privatization and to make the collection of taxes
more efficient. Among the measures adopted were: a) increase in salary for
public servants and the application of the inflation adjustment for income tax,
consigned in Law 11-92 of the Tax Code; (b) the elimination of duties on certain
imports; (c) the promulgation of laws that allocate a portion of the Income
Budget to the Judicial and Legislative branches; and (d) the creation of the
Directorate General of Internal Taxes, which unified the Directorate General of
Income Tax and the Directorate General of Internal Income.
The Dominican Republic initiated renegotiation of its private external debt
in 1992. During the latter half of 1992 and the first half of 1993, Dominican
monetary authorities submitted various proposals to international lenders. In
May 1993, the parties reached a preliminary agreement, which then was
renegotiated before a final agreement (the "Debt Restructuring Agreement") was
signed on February 14, 1994. The Debt Restructuring Agreement was ratified by
the Dominican Congress and approved by the President in the summer of 1994.
Pursuant to the Debt Restructuring Agreement, $305.0 million in past due
interest owed to private commercial lenders was restructured as follows:
(1) 12.5% of the amount, or $38.1 million, would be repaid
A-12
<PAGE>
in cash and (2) the balance, or $266.9 million, would be either repurchased at a
discount or exchanged for 15-year, non-collateralized bonds bearing interest at
a variable rate equal to six-month LIBOR plus .81% per annum. The options
available to the Dominican government with respect to the remaining
$912.0 million in outstanding principal include: a buy-back at 25% of face
value, a 30-year discount bond with a grace period and a discount of 35% and an
interest rate of 0.81% over LIBOR, and an 18-year par value bond with a
nine-year grace period, and a yield of 3% the first two years, 3.5% the third
and fourth years, 4% the fifth and sixth, and 0.81% over LIBOR the following
years. The discount bonds are secured by a zero-coupon United States Treasury
bond and a renewable interest guarantee; the par value bonds have no collateral.
With respect to interest arrears, 12.5% must be paid in cash and the remainder
converted to 15-year bonds with a yield of 0.812-5% over LIBOR.
As of December 31, 1998, global foreign public debt registered
$3.51 billion, a decline of $2.2 million as compared to December 31, 1997.
During 1998, the country paid $341.6 million in medium- and long-term debt
service. Government expenditures reached $191.4 million, of which
$109.0 million were received during the last quarter of 1998, including the
purchase of DR reserve fund at the IMF, following Hurricane Georges. During
1998, for each dollar received, the country paid its creditors the equivalent of
$1.80.
During 1999, total funds received by the public sector from foreign mid- and
long-term debt totaled US$308.1 million. This is 59% higher than the amount
received in 1998. These funds originated with multilateral organizations
(specifically the World Bank and the Inter-American Development Bank) and
bilateral agencies (Spain and Germany) and were disbursed for purposes of social
project financing in the health, education, construction, electricity, and water
sectors. Debt service equaled $337.0 million during 1999. This is 1.2% lower
than in 1998.
During 1999, payments made were carried out according to the plan stipulated
in the six-month dispensation granted to the country by the members of the Paris
Club, and by means of the restructuring agreement with Venezuela. By these
means, maturities were paid which originally came due between September 22, 1998
and March 31, 1999.
A-13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
You should only rely on the information contained in this prospectus.
Neither we nor any underwriter has authorized any person to provide you with
different or additional information. This prospectus is not an offer to sell nor
is it seeking an offer to buy the securities in any jurisdiction where such
offer or sale is not permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus regardless of the time of
delivery of this prospectus or of any sale of these securities.
-------------------------
TABLE OF CONTENTS
-------------------------
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 8
Use of Proceeds...................... 20
Price Range of ADSs.................. 21
Dividend Policy...................... 21
Capitalization....................... 22
Exchange Rates....................... 23
Selected Financial and Operating
Data............................... 25
Management's Discussion and Analysis
of Results of Operations and
Financial Condition................ 28
Foreign Exchange Controls............ 42
Business............................. 43
Legislation and Regulation........... 57
Management........................... 64
Principal Shareholders............... 69
Description of Capital Stock......... 74
Description of American Depositary
Receipts........................... 77
Description of Certain
Indebtedness....................... 82
Tax Considerations................... 85
Underwriting......................... 90
Legal Matters........................ 91
Experts.............................. 91
Where You Can Find More
Information........................ 92
Index to Consolidated Financial
Statements......................... F-1
Annex A--The Dominican Republic...... A-1
</TABLE>
[LOGO]
4,000,000 AMERICAN DEPOSITARY SHARES
EACH REPRESENTING
ONE SHARE OF CLASS A COMMON STOCK
---------------------
PROSPECTUS
---------------------
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
MARCH , 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the Offering, all of which will be
borne by Tricom, S.A. (the "Company"), are as follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $26,792.70
NASD Filing Fee............................................. 10,648.75
New York Stock Exchange Listing Fee......................... *
Depositary Fees............................................. *
Custodian Fees.............................................. *
Printing Costs.............................................. *
Legal Fees.................................................. *
Accounting Fees............................................. *
Miscellaneous............................................... *
----------
TOTAL................................................... $ *
==========
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
There are no statutory provisions under applicable Dominican law for the
indemnification or insuring of directors and officers against liability.
Pursuant to Dominican law, shareholders are asked to vote upon the
performance of management at annual shareholders' meetings. The Company's
vigilance officer delivers a report on the financial performance of the Company
and other issues related to management's performance. If the holders of a
majority of the votes entitled to be cast approve management's performance, all
shareholders are deemed to have released the directors and officers from claims
or liability to the Company or its shareholders arising out of actions taken or
any failure to take actions by any of them on behalf of the Company during the
prior fiscal year, with certain exceptions, and shareholders will likely fail in
any suit brought in a Dominican court with respect to such acts or omissions.
Officers and directors may not be released from any claims or liability for
criminal acts, fraud, self-dealing or gross negligence. If the shareholders do
not approve management's performance, the vigilance officer's report may form
the basis of any suit brought by the shareholders against the officers and
directors of the Company.
Article 48 of the Company's by-laws provides that the Company shall
indemnify any person made or threatened to be made a party to any action, suit
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person, or a person of whom he or she is the legal
representative, is or was a director, officer, employee or agent of the Company
or any predecessor of the Company, or serves or served any other enterprise as a
director, officer, employee or agent at the request of the Company or any
predecessor of the Company.
The Company shall pay any expenses reasonably incurred by a director or
officer in defending any civil, criminal, administrative or investigative
action, suit or proceeding in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be determined
that he or she is not entitled to be indemnified by the Company under
Article 48 or otherwise. The Company may, by action of its Board of Directors,
provide for the payment of such expenses incurred by employees and agents of the
Company as it deems appropriate.
II-1
<PAGE>
ITEM 16. EXHIBITS.
(a) Exhibits
<TABLE>
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.(*)
2.1 -- Not applicable.
4.1 -- Form of Class A Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to the Company's Amendment No. 1 to
Registration Statement on Form F-1, filed on May 1, 1998).
4.2 -- Form of American Depositary Receipt (included as part of
Exhibit 4.3) (Incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement on Form F-1, filed on
April 2, 1998).
4.3 -- Form of Deposit Agreement between The Bank of New York,
TRICOM, S.A. and owners and holders of American Depositary
Receipts (Incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form F-1, filed on April
2, 1998).
5.1 -- Opinion of Paul, Hastings, Janofsky & Walker LLP regarding
legality.(*)
8.1 -- Tax Opinion of Paul, Hastings, Janofsky & Walker LLP.(*)
8.2 -- Tax Opinion of Pellerano & Herrera.(*)
15.1 -- Not Applicable.
23.1 -- Consent of Peat, Marwick, Mitchell & Co. (member firm of
KPMG International in the Dominican Republic).
23.2 -- Consent of Paul, Hastings, Janofsky & Walker LLP (included
as part of Exhibit 5.1 above).(*)
23.3 -- Consent of Pellerano & Herrera.(*)
24.1 -- Power of Attorney for directors and officers of TRICOM, S.A.
(included on page II-6).
25 -- Not Applicable.
26 -- Not applicable.
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-2
<PAGE>
(b) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santo Domingo, Dominican Republic on March 16, 2000.
<TABLE>
<S> <C> <C>
TRICOM, S.A.
By: /s/ MANUEL ARTURO PELLERANO PENA
-----------------------------------------
Manuel Arturo Pellerano Pena,
CHAIRMAN OF THE BOARD OF DIRECTORS AND
PRESIDENT
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below hereby appoints Manuel Arturo Pellerano Pena and Carl H. Carlson, and each
of them acting singly, as his true and lawful attorney-in-fact to sign in his
behalf and individually and in the capacity stated below and to file all
amendments (including post-effective amendments) and make such changes and
additions to this Registration Statement, including any subsequent registration
statement for the same offering that may be filed under Rule 462(b), and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, their substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ MANUEL ARTURO PELLERANO PENA Chairman of the Board of
------------------------------------------- Directors and President March 16, 2000
Manuel Arturo Pellerano Pena (Principal Executive Officer)
/s/ HECTOR CASTRO NOBOA
------------------------------------------- Vice President of the Board of March 16, 2000
Hector Castro Noboa Directors
Secretary of the Board of
/s/ MARCOS J. TRONCOSO Directors, Executive Vice
------------------------------------------- President and Member of the March 16, 2000
Marcos J. Troncoso Office of the President
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
First Vice President, Finance
and Administrative Division
/s/ CARLOS F. VARGAS and Chief Financial Officer
------------------------------------------- (Principal Financial Officer March 16, 2000
Carlos F. Vargas and Principal Accounting
Officer)
/s/ JUAN FELIPE MENDOZA
------------------------------------------- Director March 16, 2000
Juan Felipe Mendoza
/s/ ANIBAL DE CASTRO
------------------------------------------- Director March 16, 2000
Anibal de Castro
/s/ RAISA GIL DE FONDEUR
------------------------------------------- Director March 16, 2000
Raisa Gil de Fondeur
/s/ FERNANDO A. SIMO
------------------------------------------- Director March 16, 2000
Fernando A. Simo
/s/ KEVIN WILEY
------------------------------------------- Director March 16, 2000
Kevin Wiley
/s/ JESUS BARONA
------------------------------------------- Director March 16, 2000
Jesus Barona
/s/ FERNANDO RAINIERI
------------------------------------------- Director March 16, 2000
Fernando Rainieri
/s/ JOSE MANUEL VILLALVAZO
------------------------------------------- Director March 16, 2000
Jose Manuel Villalvazo
</TABLE>
II-5
<PAGE>
SIGNATURE OF AUTHORIZED REPRESENTATIVE
Pursuant to the Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of TRICOM, S.A. has signed
this Registration Statement or amendment in Santo Domingo, Dominican Republic on
March 16, 2000.
<TABLE>
<S> <C> <C>
TRICOM USA, INC
By: /s/ CARL H. CARLSON
-----------------------------------------
Carl H. Carlson
VICE PRESIDENT
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- --------------------- --------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement.(*)
2.1 -- Not applicable.
4.1 -- Form of Class A Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to the Company's Amendment No. 1
to Registration Statement on Form F-1, filed on May 1,
1998).
4.2 -- Form of American Depositary Receipt (included as part of
Exhibit 4.3) (Incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement on Form F-1, filed on
April 2, 1998).
4.3 -- Form of Deposit Agreement between The Bank of New York,
TRICOM, S.A. and owners and holders of American Depositary
Receipts (Incorporated by reference to Exhibit 4.3 to the
Company's Registration Statement on Form F-1, filed on
April 2, 1998).
5.1 -- Opinion of Paul, Hastings, Janofsky & Walker LLP regarding
legality.(*)
8.1 -- Tax Opinion of Paul, Hastings, Janofsky & Walker LLP.(*)
8.2 -- Tax Opinion of Pellerano & Herrera.(*)
15.1 -- Not Applicable.
23.1 -- Consent of Peat, Marwick, Mitchell & Co. (member firm of
KPMG International in the Dominican Republic).
23.2 -- Consent of Paul, Hastings, Janofsky & Walker LLP (included
as part of Exhibit 5.1 above).(*)
23.3 -- Consent of Pellerano & Herrera.(*)
24.1 -- Power of Attorney for directors and officers of TRICOM, S.A.
(included on page II-6).
25 -- Not Applicable.
26 -- Not applicable.
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
Exhibit 23.1
[LETTERHEAD OF KPMG]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
TRICOM, S.A.:
We consent to the use of our report included herein and to references
to our firm under the headings "Summary Financial and Operating Data", "Selected
Consolidated Financial and Operating Data" and "Experts" in the prospectus.
/s/ KPMG
Member Firm of KPMG International
Santo Domingo, Dominican Republic
March 17, 2000
