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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number:
TRICOM, S.A.
(Exact name of Registrant as specified in its charter)
DOMINICAN REPUBLIC
(Jurisdiction of incorporation or organization)
AVENIDA LOPE DE VEGA NO. 95, SANTO DOMINGO, DOMINICAN REPUBLIC
(Address of principal executives offices)
Securities registered pursuant to Section 12(b) of the Act.
AMERICAN DEPOSITARY SHARES
CLASS A COMMON STOCK, PAR VALUE RD$10 PER SHARE
Securities registered pursuant to Section 12(g) of the Act.
NONE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
11-3/8% SENIOR NOTES DUE SEPTEMBER 1, 2004
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
AT DECEMBER 31, 1999, THERE WERE 5,700,000 SHARES OF CLASS A COMMON STOCK AND
19,144,538 SHARES OF CLASS B STOCK ISSUED AND OUTSTANDING.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the Registrant has
elected to follow:
Item 17 |_| Item 18 |X|
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TABLE OF CONTENTS
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PAGE
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GENERAL INTRODUCTION.........................................................................................1
PART I
ITEM 1. DESCRIPTION OF BUSINESS.............................................................................2
ITEM 2. DESCRIPTION OF PROPERTY............................................................................20
ITEM 3. legal proceedings..................................................................................20
item 4. CONTROL OF REGISTRANT..............................................................................21
item 5. NATURE OF TRADING MARKET...........................................................................24
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.................................24
ITEM 7. TAXATION...........................................................................................26
ITEM 8. SELECTED FINANCIAL DATA............................................................................27
item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.......................................................................................29
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................39
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT...............................................................40
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.............................................................41
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.....................................41
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.....................................................41
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.........................................................42
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES....................................................................42
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES............................42
PART IV
ITEM 17. FINANCIAL STATEMENTS...............................................................................42
ITEM 18. FINANCIAL STATEMENTS...............................................................................42
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS..................................................................43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................................................F-1
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GENERAL INTRODUCTION
UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES TO (I) THE "COMPANY"
OR "TRICOM" REFER TO TRICOM, S.A. AND ITS CONSOLIDATED SUBSIDIARIES AND THEIR
RESPECTIVE OPERATIONS, AND INCLUDE TRICOM'S PREDECESSORS, AND (II) "GFN" REFERS
TO GFN CORPORATION LTD. AND ITS DIRECT AND INDIRECT SUBSIDIARIES, OTHER THAN THE
COMPANY AND ITS SUBSIDIARIES, AND INCLUDE GFN'S PREDECESSORS.
PRESENTATION OF CERTAIN FINANCIAL INFORMATION
The Company prepares its consolidated financial statements in conformity
with generally accepted accounting principles in the United States. The Company
adopted the United States dollar as its functional currency effective January 1,
1997. See "Item 9. Management's Discussion and Analysis of Results of Operations
and Financial Condition" and Note 2 of Notes to the audited consolidated
financial statements of the Company at December 31, 1998 and 1999 and for the
years ended December 31, 1997, 1998 and 1999 (the "Consolidated Financial
Statements"). Unless otherwise stated, Dominican peso amounts that appear in
this Annual Report have been translated into United States dollars. As of
December 31, 1998 and 1999, the rates used by the Company to translate Dominican
peso denominated accounts at the year-end were RD$15.61 and RD$16.05.
In this Annual Report references to "$," "US$" or "U.S. dollars" are to
United States dollars, and references to "Dominican pesos" or "RD$" are to
Dominican pesos. This Annual Report contains translations of certain Dominican
peso amounts into U.S. dollars at specified rates solely for the convenience of
the reader. These translations should not be construed as representations that
the Dominican peso amounts actually represent such U.S. dollar amounts or could
be converted into U.S. dollars at the rate indicated. The average of prices of
one U.S. dollar quoted by certain private commercial banks (the "Private Market
Rate") as reported by Banco Central de la Republica Dominicana (the "Central
Bank") on December 31, 1999 was RD$16.05 = US$1.00, the date of the most recent
financial information included in this Annual Report. The Federal Reserve Bank
of New York does not report a noon buying rate for Dominican pesos. On April 11,
2000, the Private Market Rate was RD$16.24 = US$1.00.
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report which are not historical
facts are forward-looking statements that involve risks and uncertainties.
Management cautions the reader that these forward-looking statements are only
predictions; actual events or results may differ materially as a result of risks
facing the Company. Such risks include, but are not limited to, the following
factors: competition; declining rates for international long distance traffic;
the Company's significant capital expenditure requirements and its need to
finance such expenditures; the inability of the Company to expand its local
access line network in a timely manner and within the amount budgeted for such
capital expenditure program; the inability of the Company to manage effectively
its rapid expansion; the continued growth of the Dominican economy, demand for
telephone services in the Dominican Republic and moderation of inflation; and
the continuation of a favorable political and regulatory environment in the
Dominican Republic.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
TRICOM is a 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.
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 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:
o rapidly growing economies;
o low penetration of telecommunications services;
o continuing privatization and liberalization of markets for
telecommunications services;
o current limited competition in the telecommunications service sector;
and
o 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.
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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.
o 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.
o 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; AND
o 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.
STRONG HISTORIC REVENUE AND CASH FLOW GROWTH.
o 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;
o 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.
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o 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;
o 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.
o 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.
o 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 OPPORTUNITIES IN THE DOMINICAN REPUBLIC CREATED BY THE
GROWING DIGITAL ECONOMY TO EXPAND OUR BROADBAND DATA TRANSMISSION BUSINESS,
ISP, BUSINESS AND E-COMMERCE OPERATIONS.
o 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.
o 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.
EXPAND INTO SELECTED CARIBBEAN AND CENTRAL AMERICAN MARKETS BY:
SELECTIVELY PROVIDING TELECOMMUNICATIONS SERVICES IN TARGET MARKETS;
o 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.
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o 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.
o 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.
o 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.
o 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.
o 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:
o Local service;
o Mobile services;
o International long distance; and
o 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.
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
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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.
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.
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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 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:
o providing the webpages or websites of our merchant customers in our
portal;
o offering them a reliable and fast Internet connectivity platform and a
secure electronic payment gateway featuring 128-bit encryption
technology; and
o webpage design and marketing consulting services.
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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.
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.
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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, 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.
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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 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.
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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.
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:
o Local access network comprising 31 digital loop carriers connected via
fiber rings to three supernode switches and 39 remote switches;
o Fully redundant digital wireless point to point backbone;
o Mobile network comprising two MSCs and 72 cell sites;
o Two satellite earth stations and capacity in six international
undersea cables; and
o 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
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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.
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.
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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 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.
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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 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.
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.
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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 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
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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 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.
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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
Annual Report, 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 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.
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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 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
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<PAGE>
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. 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.
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
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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. Based on our investigation of certification requirements, we
currently anticipate applying for certification in Alaska, Illinois, Maryland,
Massachusetts, Rhode Island and the United States Virgin Islands. 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.
ITEM 2. DESCRIPTION OF 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.
ITEM 3. 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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<PAGE>
ITEM 4. CONTROL OF REGISTRANT
SHARE OWNERSHIP
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. 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>
SHARES PERCENTAGE
BENEFICIALLY BENEFICIALLY PERCENTAGE OF
SHAREHOLDER OWNED OWNED VOTE
- ------------------------------- ----------------- ---------------- -------------
<S> <C> <C> <C>
Oleander Holdings Inc. (1).... 11,486,720 46.2% 58.3%
Motorola Inc.................. 7,657,818 30.8% 30.8%
Directors and executive
officers as a group
(16 persons)............... 11,486,726(2) 46.2% 58.3%
</TABLE>
- ----------
(1) Oleander Holdings, Inc., a Panamanian corporation, is a wholly owned
subsidiary of GFN. GFN is controlled by Manuel Arturo Pellerano Pena, the
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 Franca San Isidro 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:
o 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;
o 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
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o 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 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:
o 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;
o 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:
o 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;
o 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;
o 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 limits described above or of any other proposed corporate
action for which super-majority approval is not specifically required)
and
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o 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 AGREEMENT 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:
o our failure to pay interest on the senior notes when due for a period
of 30 days;
o our failure to pay the principal of or premium on the senior notes
when due, whether at maturity, upon redemption or repurchase or
otherwise;
o 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
o 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:
o the Dominican Republic becomes bound by the United Nations Convention
on the Recognition and Enforcement of Foreign Arbitral Awards (1958);
o 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;
o 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
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o 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.
ITEM 5. NATURE OF TRADING MARKET
AMERICAN DEPOSITARY SHARES
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 April 11, 2000, there were 37 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.
<TABLE>
<CAPTION>
NEW YORK STOCK EXCHANGE
-----------------------
HIGH LOW
------- ------
<S> <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
</TABLE>
ITEM 6. FOREIGN EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS
FOREIGN EXCHANGE CONTROLS
The foreign exchange system of the Dominican Republic is administered by
the Central Bank. In January 1991, the Monetary Board of the Central Bank
instituted the current foreign exchange system which permits the purchase of
foreign currency from commercial banks located in the Dominican Republic. Prior
to January 1991, persons were required to purchase foreign currency directly
from the Central Bank. The resolution adopted by the Monetary Board in
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<PAGE>
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 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 April 6, 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.
On April 6, 2000, the private market rate was RD$16.23 per U.S. dollar.
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
25
<PAGE>
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, must be registered as foreign debt obligations
under the foreign currency transfer law.
ITEM 7. TAXATION
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. 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.
26
<PAGE>
ITEM 8. SELECTED FINANCIAL 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 Annual
Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS)(1)
<S> <C> <C> <C> <C> <C>
Operating revenues:
Toll US$ 12,064 US$ 13,108 US$ 15,511 US$ 17,645 US$ 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 (loss) 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 (loss) before income
taxes, extraordinary item and
cumulative effect of accounting
change US$ 3,135 US$ 4,098 US$ 3,023 US$ 17,554 US$ 22,296
Income taxes -- -- -- 352 (142)
Extraordinary item -- -- (5,453)(3) -- --
Cumulative effect of change in
accounting for organization costs -- -- -- -- (120)
-------- -------- -------- --------- ---------
Net earnings (loss) US$ 3,135 US$ 4,098 US$ (2,430) US$ 17,906 US$ 22,035
======== ======== ======== ========= =========
Basic earnings per common share:
Earnings (loss) before
extraordinary item and
cumulative effect of accounting
change US$ 0.32 US$ 0.41 US$ 0.17 US$ 0.78 US$ 0.89
Extraordinary item -- -- (0.31)(3) -- --
-------- -------- -------- --------- ---------
Net earnings (loss) US$ 0.32 US$ 0.41 US$ (0.14) US$ 0.78 US$ 0.89
======== ======== ======== ========= =========
Weighted average number of
common shares outstanding 9,880 9,880 17,600 22,945 24,845
======== ======== ======== ========= =========
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents US$ 5,993 US$ 4,292 US$ 5,733 US$ 15,377 US$ 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
OTHER FINANCIAL DATA:
Capital expenditures US$ 59,049 US$ 32,104 US$ 92,668 US$ 142,101 US$ 145,426(5)
Net cash provided (ed)
by operating activities 4,616 (2,908) 39,095 26,912 31,526
Net cash ed 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) US$ 10,565 US$ 26,407 US$ 31,497 US$ 53,662 US$ 75,063
OTHER OPERATING DATA:
International minutes (in
thoands) 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 cellular 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.
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<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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.
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<PAGE>
The following table sets forth the percentage contribution of each category
of revenues to total operating revenues for the periods 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 10.2 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>
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.
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
30
<PAGE>
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.
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.
31
<PAGE>
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:
o carrier costs, which include amounts owed to foreign carriers for the
use of their networks for termination of outbound traffic;
o interconnection costs, which are access charges paid primarily to
Codetel;
o depreciation of network equipment and leased terminal equipment;
o payments for international satellite circuit leases;
o expenses in lieu of income tax; and
o 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.
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.
32
<PAGE>
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 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%,
33
<PAGE>
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.
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
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<PAGE>
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.
SATELLITE CONNECTIONS 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 TAXES. 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
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<PAGE>
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 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
17,600,360 at December 31, 1997. Net earnings accounted for 14.3% of total
operating revenues for 1998, while earnings before extraordinary item accounted
for 3.4% for 1997. However, as a result of a $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.
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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 our equity
offering completed in April 2000 will be sufficient to fund our expected
capital expenditures through the first quarter of 2001. We frequently
evaluate potential acquisitions and joint venture investments. Acquisitions
or investments 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 pesodenominated 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.
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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
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.
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ITEM 9A 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 RISK
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
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.
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ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
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>
BOARD OF DIRECTORS
Named by GFN Corporation, Ltd.:
Manuel Arturo Pellerano Pena........... 45 Chairman
Hector Castro Noboa.................... 58 Vice President
Marcos J. Troncoso..................... 51 Secretary
Juan Felipe Mendoza.................... 45 Director
Raisa Gil de Fondeur................... 51 Director
Anibal de Castro....................... 51 Director
Named by Motorola, Inc.:
Fernando Simo.......................... 53 Director
Kevin Wiley............................ 40 Director
Jesus Barona........................... 38 Director
Independent Directors:
Fernando Antonio Rainieri.............. 52 Director
Jose Manuel Villalvazo................. 53 Director
EXECUTIVE OFFICERS
Manuel Arturo Pellerano Pena........... 45 Chief Executive Officer
Carl H. Carlson........................ 42 Executive Vice President and Member of the Office of the
President
Marcos J. Troncoso..................... 51 Executive Vice President and Member of the Office of the
President
Carlos F. Vargas....................... 46 First Vice President, Finance and Administrative
Division, and Chief Financial Officer
Carlos Ramon Romero.................... 47 First Vice President, Residential and Business Services
Division
Ramon Tarrago.......................... 36 First Vice President, International Division
Virgilio Cadena del Rosario............ 47 First Vice President, Network and Engineering Division
</TABLE>
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.
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ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
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 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.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
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.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
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.
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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.
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 $25.6 million at December 31, 1998 and $17.9
million at December 31, 1999.
TRANSACTIONS WITH 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.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
None.
PART IV
ITEM 17. FINANCIAL STATEMENTS
The Registrant has responded to Item 18.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to Item 19 for a list of all financial statement filed as
part of this Annual Report.
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ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
<TABLE>
<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>
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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 1998 1999
----------- ----------- -----------
<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>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRICOM, S.A.
Dated: April 28, 2000 By: /s/ CARL H. CARLSON
---------------------------------
Carl H. Carlson,
Executive Vice President and
Member of the Office of the
President
