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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, 2001
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-14816
[TRICOM(R) LOGO]
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, 2001, THERE WERE 24,245,920 SHARES OF CLASS A COMMON STOCK AND
19,144,544 SHARES OF CLASS B STOCK ISSUED AND OUTSTANDING.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark which financial statement item the Registrant has elected
to follow:
Item 17 Item 18 X
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TABLE OF CONTENTS
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PAGE
PART I. .............................................................................2
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS*.......................2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE*.....................................2
ITEM 3. KEY INFORMATION..............................................................3
ITEM 4. INFORMATION ON THE COMPANY..................................................17
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................................45
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..................................57
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...........................61
ITEM 8. FINANCIAL INFORMATION.......................................................66
ITEM 9. THE OFFER AND LISTING.......................................................69
ITEM 10. ADDITIONAL INFORMATION......................................................70
ITEM 11. QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................77
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES*.....................78
PART II. ............................................................................78
ITEM 13. DEFAULTS, DIVIDED ARREARAGES AND DELINQUENCIES..............................78
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS*...................................................................78
ITEM 15. [RESERVED]..................................................................79
ITEM 16. [RESERVED]..................................................................79
PART III. ............................................................................79
ITEM 17. FINANCIAL STATEMENTS**......................................................79
ITEM 18. FINANCIAL STATEMENTS........................................................79
ITEM 19. EXHIBITS....................................................................79
</Table>
* Omitted because the Item is not applicable or the answer is negative.
** The Company has completed Item 18 in lieu of this Item.
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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 INCLUDES 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 5. Operating and Financial Review and Prospects" and Note 2 of
Notes to the audited consolidated financial statements of the Company at
December 31, 2000 and 2001 and for the years ended December 31, 1999, 2000 and
2001 (the "Consolidated Financial Statements"). Unless otherwise stated,
Dominican peso amounts that appear in this Annual Report have been translated
into United States dollars. At December 31, 2000 and 2001, the rates used by the
Company to translate Dominican peso-denominated accounts at the year-end were
RD$16.69 and RD$17.05, respectively.
In this Annual Report references to "$," "US$" or "U.S. dollars" are to
United States dollars, and references to "Dominican pesos" or "RD$" are to
Dominican pesos. This Annual Report contains translations of certain Dominican
peso amounts into U.S. dollars at specified rates solely for the convenience of
the reader. These translations should not be construed as representations that
the Dominican peso amounts actually represent such U.S. dollar amounts or could
be converted into U.S. dollars at the rate indicated. The average of prices of
one U.S. dollar quoted by certain private commercial banks (the "Private Market
Rate") as reported by Banco Central de la Republica Dominicana (the "Central
Bank") on December 31, 2001 was RD$17.03= 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 May 3,
2002, the Private Market Rate was RD$17.83= 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:
- the effect of our substantial indebtedness on our ability to fund
expansion and out competitive position;
- our ability to generate cash flow from operations to meet our debt
service requirements;
- our dependence on high interest short-term borrowings in the Dominican
financial markets;
- competition in Dominican markets for local, long distance and wireless
services with multinational telecommunications providers;
- litigation in the United States, the Dominican Republic and Panama
initiated by competitors;
- declining rates for international long distance traffic;
- our reliance in the U.S. long distance markets on resellers, many of
which have been adversely affected by intensified competition;
- our inability to minimize credit risks;
- customer churn;
- rapid technological change;
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- rejection of our concession agreement in the Dominican Republic;
- fraudulent or pirated use of our wireless and cable television services;
- our dependence on third parties for television programming;
- our vulnerability to viruses, hackers and other disruptions;
- the possible effect of interruptions in cable service;
- our significant capital expenditure and working capital requirements and
our need to finance such expenditures;
- our experience in operating a cable television business;
- the effect of objections filed with Dominican regulatory authorities to
our purchase of the cable television operations;
- concerns about health risks associated with wireless equipment;
- our inability to manage effectively our rapid expansion;
- our inability to obtain licenses or concessions in markets outside the
Dominican Republic;
- the continued growth of the Dominican and Central American economies,
demand for telecommunication services in the Dominican Republic and
Central America and moderation of inflation; and
- the continuation of a favorable political, economic and regulatory
environment in each of the Dominican Republic and Central America.
PART I.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
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ITEM 3. KEY INFORMATION
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 "Operating and Financial Review and Prospects" and the
consolidated financials included in this Annual Report.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
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1997 1998 1999 2000 2001
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(IN THOUSANDS)(1)
STATEMENTS OF OPERATIONS DATA:
Operating revenues:
Toll.................................... $ 15,511 $ 17,645 $ 23,118 $ 28,666 $ 29,018
International........................... 39,432 50,332 60,592 84,187 82,024
Local service........................... 6,412 11,863 33,299 51,310 71,687
Data and Internet....................... - 1,079 560 3,461 8,268
Cellular and PCS........................ 13,073 20,364 26,474 35,796 37,302
Paging.................................. 5,079 4,528 2,696 1,704 1,051
Sale of equipment....................... 5,502 4,115 7,690 5,263 2,686
Installation and activation fees........ 5,071 12,937 15,502 13,749 14,348
Cable revenues.......................... - - - - 4,736
Other................................... 21 2,640 889 162 919
------------ ---------- ---------- ---------- ----------
Total operating revenues 90,102 125,501 170,819 224,298 243,772
------------ ---------- ---------- ---------- ----------
Operating costs:
Satellite connections and carrier (excluding
network depreciation expense of $7,433,
$11,382, $15,983, $29,342 and $44,510 in
1997,1998, 1999, 2000 and 2001,
respectively, included below)......... 31,271 32,309 43,688 68,608 68,337
Programming cost........................ - - - - 1,225
Network depreciation expense............ 7,433 11,382 15,983 29,342 44,510
Expense in lieu of income taxes(2)...... 6,248 9,562 12,764 10,174 12,646
General and administrative expenses,
including non-network depreciation
expense of $1,956, $3,240, $4,855,
$6,824 and $9,922, in 1997, 1998, 1999,
2000 and 2001, respectively........... 25,631 39,379 51,501 70,691 98,755
Cost of equipment sold.................. 2,558 2,244 3,988 2,911 2,069
Other................................... 1,101 1,148 1,433 1,550 1,746
------------ ---------- ---------- ---------- ----------
Total operating costs 74,242 96,024 129,357 183,276 229,289
------------ ---------- ---------- ---------- ----------
Operating income: 15,860 29,478 41,462 41,022 14,484
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Other income (expenses):
Interest expense, net................... (12,047) (12,873) (20,041) (30,736) (39,680)
Foreign currency exchange gain (loss)... (706) 104 (203) (303) (260)
Gain on sale of land.................... - - 898 - -
Gain on sale of equipment............... - - - 30 (283)
Other, net.............................. (83) 845 179 (197) 1,362
------------ ---------- ---------- ---------- ----------
Other expenses, net................. (12,836) (11,924) (19,166) (31,206) (38,861)
Earnings before income taxes, extraordinary
item and cumulative effect of accounting
change................................ 3,023 17,554 22,296 9,816 (24,378)
Income taxes............................ - 352 (142) (588) (511)
Minority interest....................... - - - - 1,775
Extraordinary item...................... (5,453)(3) - - - -
Cumulative effect of accounting change:. - - - - -
Organization costs.................... - - (120) - -
Installations and activations revenues - - - (16,453)(4) -
------------ ---------- ---------- ---------- ----------
Net earnings (loss)................. $ (2,430) $ 17,906 $ 22,035 $ (7,226) $ (23,114)
============ ========== ========== ========== ==========
</Table>
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<Table>
<Caption>
YEAR ENDED DECEMBER 31,
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1997 1998 1999 2000 2001
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Basic earnings per common share:
Earnings before extraordinary item and
cumulative effect of accounting change $ 0.17 $ 0.78 $ 0.89 $ 0.33 $ (0.78)
Extraordinary item...................... (0.31)(3) - - - -
Cumulative effect of accounting change.. - - - (0.59)(4) -
Net earnings (loss)..................... $ (0.14) $ 0.78 $ 0.89 $ (0.26) $ (0.78)
Average number of common shares outstanding 17,600 22,945 24,845 27,724 29,571
</Table>
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<Caption>
AT DECEMBER 31,
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BALANCE SHEET DATA: 1997 1998 1999 2000 2001
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Cash and cash equivalents................... $ 5,733 $ 15,377 $ 13,460 $ 18,200 $ 12,576
Working capital (deficit)................... 4,846 (19,600) (83,659) (125,299) 187,271
Property, plant and equipment, net.......... 202,978 330,456 455,045 586,224 685,917
Total assets 321,144 444,815 531,478 682,440 829,415
Long-term debt and capital leases (excluding
current portion) (5) ..................... 232,000 200,000 240,413 276,744 304,869
Total indebtedness.......................... 242,755 279,257 336,468 398,809 498,155
Shareholders' equity........................ 42,093 127,561 149,869 210,796 253,534
OTHER FINANCIAL DATA:
Capital expenditures (5).................... $ 92,668 $ 142,101 $ 145,426 $ 168,913 $ 116,575
Net cash provided (used) by operating 42,339
activities.................................. 39,095 26,912 31,526 34,002
Net cash used in investing activities....... (168,636) (121,171) (64,360) (149,395) (144,884)
Net cash provided by financing activities... 132,059 104,065 30,966 111,796 105,258
EBITDA(6)................................... 31,497 53,662 75,261 87,681 82,222
Ratio of EBITDA to net interest expense..... 2.6x 4.2x 3.7x 2.9x 2.1x
Ratio of total indebtedness to EBITDA....... 7.8x 5.2x 4.5x 4.5x 6.1x
OTHER OPERATING DATA:
International minutes (in thousands) (7).... 157,411 231,075 360,532 597,204 768,394
Local access lines in service (at period end) 43,195 80,616 118,926 148,312 177,352
Mobile subscribers (at period end).......... 41,107 108,532 176,080 284,991 364,059
Cable subscribers (at period end) (8)....... - - - - 64,466
</Table>
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(1) Except per share, ratios and other operating data.
(2) 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, $0.6 million in 1999, $0.4 million in
2000 and $0.2 million in 2001.
(3) Represents a write-off related to the refinancing of indebtedness.
(4) Effective January 1, 2000, we adopted the U.S. Securities and Exchange
Commission's Staff Accounting Bulletin No. 101, concerning the recognition
of revenue. This pronouncement provides that we recognize net revenues
from installations and activations over the period in which we retain our
clients. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and Note 14 of Notes to Consolidated
Financial Statements.
(5) Includes capital lease obligations entered into in 1999 of $26.2 million,
in 2000 of $17.7 million and in 2001 of $3.3 million.
(6) EBITDA typically consists of earnings (loss) before interest and other
income and expenses, income taxes and depreciation and amortization. As
described in note 2 above 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
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the Dominican government in lieu of income taxes. Our calculation of
EBITDA may not be comparable to EBITDA calculated by other companies. We
believe that EBITDA is useful to investor because it commonly is 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.
For 1999, 2000 and 2001, we have also included in EBITDA amortization of
radio frequency rights of $198,333, $320,186 and $660,086, respectively.
(7) Includes both inbound and outbound international long distance minutes.
(8) Includes 56,896 basic and premium subscribers and 7,570 commercial rooms,
which include commercial establishments (for example, any hotel or motel)
or multiple dwelling units (for example, any apartment building or
hospital), for which we receive a bulk rate for basic cable service
offered by us.
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EXCHANGE RATES
The Federal Reserve Bank of New York does not report a noon buying rate for
Dominican pesos. The following table sets forth the average official rate for
each of the five most recent years and each fiscal quarter within those years,
and the high and low official exchange rates for each of the previous six
months, all as reported by the Central Bank. The average official rate has been
calculated by using the average of the exchange rates on the last day of each
month during the period. At May 3, 2002, the average official exchange rate was
RD$17.74 per $1.00 while the average private market rate was RD$17.83 per $1.00.
<Table>
<Caption>
OFFICIAL RATE
--------------------------------------------
YEAR ENDED DECEMBER 31, HIGH LOW AVG.
------------- --------- ------------
(RD$ PER $)
1997 14.02 13.91 14.01
1998 15.49 14.02 14.70
1999 15.93 15.50 15.83
2000 16.56 15.91 16.18
2001 16.99 16.58 16.69
MONTH / PERIOD ENDED
November 30, 2001 16.98 16.66 16.78
December 31, 2001 16.99 16.97 16.97
January 31, 2002 17.10 16.97 17.04
February 28, 2002 17.15 17.10 17.15
March 31, 2002 17.15 17.15 17.15
April 30, 2002 17.63 17.79 17.73
</Table>
<Table>
<Caption>
PRIVATE MARKET RATE
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YEAR ENDED DECEMBER 31, HIGH LOW AVG.
------------- ------------ --------------
(RD$ PER $)
1997 14.36 14.12 14.27
1998 15.86 14.41 15.23
1999 16.18 15.84 16.03
2000 16.63 16.08 16.37
2001 17.06 16.65 16.88
MONTH / PERIOD ENDED
November 30, 2001 16.99 16.91 16.93
December 31, 2001 17.06 16.99 17.04
January 31, 2002 17.38 17.03 17.21
February 28, 2002 17.56 17.15 17.47
March 31, 2002 17.63 17.56 17.60
April 30, 2002 17.85 17.61 17.74
</Table>
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RISK FACTORS
You should carefully consider the risks described below and other
information in this report.
RISKS RELATING TO OUR CAPITAL STRUCTURE
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR ABILITY TO FUND
EXPANSION AND OUR COMPETITIVE POSITION.
We are highly leveraged. At December 31, 2001, we had outstanding
approximately $498.2 million in aggregate principal amount of indebtedness,
including capital leases, and $253.5 million total shareholders' equity.
The degree to which we are leveraged could have important consequences to
us, including the following:
- a substantial portion of our cash flow must be used to pay interest on
our indebtedness. Therefore, our cash flow available for use in our
business will be reduced;
- our high degree of leverage could increase our vulnerability to
changes in general economic conditions;
- our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or
other purposes could be impaired;
- we are much more leveraged than our principal competitor in the
Dominican Republic, which may be a competitive disadvantage in our
principal market; and
- our failure to comply with covenants and restrictions contained in the
terms of our borrowings could lead to a default which could cause all
or a significant portion of our debt to become immediately payable.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS TO MEET
OUR DEBT SERVICE REQUIREMENTS.
Our ability to pay interest on our indebtedness and meet our debt service
obligations will depend on our future performance, which in turn depends on
successful implementation of our strategy and on financial, competitive,
regulatory, technical and other factors, many of which are beyond our control.
For the year ended December 31, 2001, our interest expense was $42.1 million and
our net cash provided by operating activities was $34.0 million. Approximately
$180.3 million of our indebtedness will mature during the 12 months ending
December 31, 2002. These borrowings primarily are in the Dominican financial
markets, in which short-term financing is the primary form of lending.
Historically, we have not encountered problems renewing or rolling over our
short-term borrowings at maturity. However, our ability to refinance any of this
indebtedness will depend on our financial condition at the time it matures, the
restrictions in the agreements governing our indebtedness and other factors,
including general market and economic conditions. If refinancing were not
possible, we could be forced to dispose of assets at unfavorable prices. In
addition, our inability to refinance these obligations could result in our
defaulting on our other debt obligations.
WE DEPEND ON SHORT-TERM BORROWINGS IN THE DOMINICAN FINANCIAL MARKETS,
WHICH BEAR HIGH INTEREST RATES AND WE CANNOT BE CERTAIN THAT THEY WILL
CONTINUE TO BE AVAILABLE.
We fund a substantial portion of our capital expenditure and working
capital requirements with short-term borrowings in the Dominican financial
markets. At December 31, 2001, we had $89.2 million of these borrowings, with
interest rates ranging from 6.8% to 13% per annum for U.S. dollar denominated
debt and from 15% to 19.5% per annum for RD peso denominated debt. These
borrowings have maturities ranging up to 180 days and often are
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payable on demand. However, our current lenders may be unable or unwilling to
lend to us in the future. Even if these short-term borrowings continue to be
available to us, due to their short-term maturities, we may be required to repay
them at times when replacement financing is not available on commercially
attractive terms.
RISKS RELATED TO OUR OPERATIONS
OUR PRINCIPAL COMPETITOR FOR THE PROVISION OF LOCAL SERVICE IN THE
DOMINICAN REPUBLIC, CODETEL, HAS SUBSTANTIALLY GREATER MARKET SHARE AND
RESOURCES, WHICH MAY PREVENT US FROM MAINTAINING OR INCREASING OUR MARKET
SHARE.
In the market for provision of local service in the Dominican Republic, we
compete primarily with Compania Dominicana de Telefonos C. por A., or Codetel, a
wholly owned subsidiary of Verizon Communications Inc. Codetel has an
established market presence, networks and resources substantially greater than
ours. More than 80% of the Dominican Republic's local access line customers are
customers of Codetel. Codetel also has the largest share of the market for
cellular and PCS services, approximately 50%. The growth of our market share for
local service depends upon our ability to obtain customers in areas that
currently are not served, or are underserved, by Codetel and to convince Codetel
customers to either add, or switch to, the telephony services we offer. If
Codetel implements significant price reductions for particular services we may
be forced to reduce our rates in response in order to remain competitive. In
addition, Codetel could expend significantly greater amounts of capital than are
available to us in order to upgrade its network and/or sustain price reductions
over a prolonged period. As a result we may not be able to maintain or increase
our market share for local services in other markets in which we compete with
Codetel.
THERE ARE NEW ENTRANTS IN THE DOMINICAN MARKETS, PARTICULARLY FOR WIRELESS
SERVICES, WHICH HAVE INCREASED COMPETITION FOR OUR SERVICES, AND COULD
REDUCE OUR MARKET SHARE OR INCREASE PRICE COMPETITION.
In addition to Codetel, which had approximately 50% of the subscribers for
wireless services at December 31, 2001, we face substantial competition in this
market.
- In the fourth quarter of 2000, Orange, a subsidiary of France Telecom
Group, initiated cellular operations. In 2001, Orange developed an
aggressive marketing strategy based on offering services at discounts.
We believe that Orange subscribers represent in excess of
approximately 20% of subscribers for mobile services in the Dominican
Republic. Orange recently announced that it obtained financing to
build a $290 million wireless local loop system.
- In January 2000, Centennial Communications Corp. acquired 70% of All
America Cables & Radio, Inc., an integrated telecommunications
provider. Centennial is attempting to expand All America's share of
the Dominican market for cellular and PCS services.
As a result of these and other potential new entrants, we expect to face
more competition in the Dominican telecommunications market in the future,
including from international communications companies with vastly greater
resources than ours, which could adversely affect our ability to maintain our
market share or require us to lower prices.
In the international long distance market, investment by U.S.
telecommunications companies in Dominican markets could limit the number of U.S.
carriers that would send a significant number of minutes to us or otherwise
adversely affect our ability to generate international settlement revenue.
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CENTENNIAL COMMUNICATIONS CORP., ONE OF OUR COMPETITORS IN THE DOMINICAN
REPUBLIC, HAS PURSUED LEGAL ACTION AGAINST US WITH THE UNITED STATES
FEDERAL COMMUNICATIONS COMMISSION, WHICH, IF DECIDED AGAINST US, COULD
RESTRICT OUR INTERNATIONAL BUSINESS IN THE DOMINICAN REPUBLIC AND DECREASE
OUR REVENUES.
Centennial Communications Corp., which through its subsidiary, All America
Cables & Radio, is one of our competitors in the Dominican Republic, filed a
complaint against our subsidiary, TRICOM USA, with the United States Federal
Communications Commission on September 4, 2001, claiming that:
- TRICOM USA and other U.S. carriers of international telecommunications
traffic had better termination terms and circuit availability in the
Dominican Republic with TRICOM than Centennial for traffic from the
U.S. southbound to the Dominican Republic; and
- TRICOM U.S.A.'s actions harm competition in the United States and
violate the license granted to TRICOM USA by the Federal
Communications Commission.
Centennial requested that the Federal Communications Commission:
- require TRICOM USA to stop accepting special concessions from TRICOM;
and
- order TRICOM to allocate more network capacity to Centennial in the
Dominican Republic and to pay to Centennial unspecified damages.
If Centennial prevails, TRICOM USA could be required to pay damages and to
stop accepting any special concessions it receives. In addition, this could
negatively affect, diminish or eliminate the business we generate from traffic
generated in the United States and terminated in the Dominican Republic. Our
revenue derived from traffic generated in the U.S. and terminated in the
Dominican Republic was $42.9 million in 2001, which represented approximately
17.6% of our total revenue in 2001.
BSC OF PANAMA, ONE OF OUR COMPETITORS IN PANAMA, HAS PURSUED LEGAL ACTION
AGAINST US, WHICH, IF DECIDED AGAINST US, COULD RESTRICT OUR EXPANSION INTO
PANAMA AND LIMIT OR ELIMINATE OUR ABILITY TO GENERATE ADDITIONAL REVENUE.
BSC of Panama, S.A., a subsidiary of BellSouth Corporation, one of our
competitors in Panama, has initiated a number of actions, including with the
Panamanian ENTE REGULADOR DE LOS SERVICOS PUBLICOS, or ENTE, and in the Panama
court system seeking to prevent us from providing services using iDEN(R)
technology. In an additional action, BellSouth seeks damages from us in the
amount of US$20 million, which it claims it may sustain if TRICOM Panama begins
using the iDEN(R) system in Panama. To date, we have invested approximately $37
million in our expansion in Panama. If BellSouth prevails in its claims, we may
be forced to discontinue our business in Panama, required to pay damages and we
would not generate any revenue from to our iDEN(R) operations in Panama.
SETTLEMENT RATES FOR INTERNATIONAL TRAFFIC FROM THE UNITED STATES AND
PUERTO RICO COULD CONTINUE TO DECLINE, WHICH COULD REDUCE OUR INTERNATIONAL
SETTLEMENT REVENUES AND PROFIT MARGINS FROM THESE REVENUES.
Revenues from incoming international long distance calls represented
approximately 36% of our operating revenues in 1999, 38% in 2000 and 34% in
2001. Approximately 52% of these revenues were attributable to calls originating
in the United States and Puerto Rico. Settlement rates for traffic between the
United States and the Dominican Republic have declined from $0.41 per minute
during 1996 to $.053 per minute during 2001. We believe that competitive and
regulatory pressures could continue to push settlement rates lower. Future
decreases in settlement rates, without a corresponding increase in our
international long distance traffic from the United States, would reduce our
international settlement revenues and adversely affect the profit margins that
we realize on these revenues.
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BECAUSE WE ARE RECEIVING AN INCREASING PORTION OF OUR INTERNATIONAL MINUTES
FROM U.S.-BASED RESELLERS, WE MAY EXPERIENCE SUBSTANTIAL FLUCTUATION IN OUR
INTERNATIONAL REVENUES.
Since 1997, we have derived an increasing proportion of international
revenues from U.S.-based resellers, which are companies that typically buy long
distance minutes in bulk and resell the minutes to other companies or individual
end users. During 2001, resellers originated approximately 59% of our
international long distance minutes from the United States to the Dominican
Republic. While we enter into agreements with resellers, they are not required
to provide us with any specified amount of traffic. During the first quarter of
2001, our revenues from resellers declined by 44%, which resulted in a decline
in our international settlement revenues for that quarter by 22% from the first
quarter of 2000. Volume of minutes increased in subsequent quarters. However,
the volume of minutes and revenues we receive from these resellers may vary
significantly because of their uncertain financial condition.
INTENSE COMPETITION IN U.S. MARKETS AMONG INTERNATIONAL LONG DISTANCE
CARRIERS HAS RESULTED IN BANKRUPTCY FILINGS BY A NUMBER OF OUR RESELLER
CLIENTS. WE MAY NOT BE ABLE TO COLLECT MONIES THAT THESE CLIENTS OWE TO US.
Since the beginning of 2001, twelve U.S. carriers with which we exchanged,
exchange or contracted at one time to exchange long distance service filed
voluntary petitions for bankruptcy. In seven cases, our subsidiary, TRICOM USA,
is an unsecured, pre-petition and/or post-petition creditor. In the other five
cases, TRICOM USA has no claims. To date, TRICOM USA has entered into settlement
agreements, approved by the courts, with three bankrupt carriers where we have
been able to net balances with such carriers. If TRICOM USA were permitted to
net balances, in all its other cases, our claims would be reduced to
approximately US$590,000. We may not be able to net balances or recover any
portions of the amounts owed to us. In addition, we may face substantial delays
in resolving our claims and may not receive full payment of our claims. In two
cases, the bankrupt carriers applied to prevent us from altering, refusing or
discontinuing services, although the courts in these cases did not grant the
requests of these carriers. We may be compelled to provide service to other
carriers in bankruptcy under terms mandated by the court, which may not be as
favorable to us as terms that we receive from other resellers.
In addition, pursuant to an August 2001 service level agreement with Enron
Broadband Services, L.P., TRICOM USA prepaid approximately US$420,000 for the
purchase of a private line bandwidth. On April 5, 2002, Enron filed a motion
with the bankruptcy court to reject the agreement. We have objected to such
rejection of the agreement. However, the outcome of this case is uncertain.
OUR EFFORTS TO MINIMIZE CREDIT RISKS MAY ADVERSELY AFFECT OUR EFFORTS TO
EXPAND OUR CUSTOMER BASE.
During 1996, we terminated service for a significant number of mobile
subscribers due to credit considerations, which adversely affected our results
of operations. Since that time, we have instituted measures to minimize consumer
credit risks. However, our efforts to minimize consumer credit risks may not be
successful as we expand and offer our services across many different social and
economic markets, including in new markets in Central America that we may enter.
Moreover, efforts to minimize credit risks may limit the number of our new
subscribers.
OUR NET GROWTH IN SUBSCRIBERS MAY BE REDUCED BY CUSTOMER DISCONNECTIONS OR
CHURN.
Our results of operations in the past have been, and in the future may be,
affected by subscriber disconnections. In order to realize net growth in
subscribers, we must replace disconnected subscribers and add new subscribers.
The sales and marketing costs associated with attracting new subscribers are
substantial, relative to the costs of providing service to existing subscribers.
Our average monthly disconnection rate, or "churn rate," during 2001 was 4.6%
for cellular and PCS subscribers, compared to 3.1% during 2000 and 1.9% for
local access line subscribers, compared to 2.3% in 2000. If we are not able to
maintain our credit policies, or not otherwise able to limit churn, we will not
experience net growth in subscribers.
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WE MAY NOT HAVE SUFFICIENT RESOURCES TO KEEP PACE WITH CHANGES IN
TECHNOLOGIES USED TO PROVIDE TELECOMMUNICATIONS SERVICES OR THE
TECHNOLOGIES THAT WE HAVE CHOSEN TO PROVIDE SERVICE MAY BE LESS POPULAR
AMONG USERS THAN OTHER TECHNOLOGIES.
If we do not offer the latest technology, we may not be able to retain our
existing customers or attract new ones. Our digital mobile technology could
become obsolete. Our investment, to date, in our Dominican market exceeds $700
million and we would require substantial investment to replace all or a
substantial part of it and to build our Central American network.
WE MAY LOSE REVENUE OR INCUR INCREASED COST AS A RESULT OF FRAUDULENT OR
PIRATED USE OF OUR PCS AND CELLULAR OR CABLE TELEVISION SERVICES.
We estimate that our lost revenues from fraudulent use of our PCS and
cellular networks totaled $711,000 and $496,000 during 2000 and 2001,
respectively. Anti-fraud technology continually becomes obsolete, and we will
have to make future expenditures to acquire and use anti-fraud technology. We
face substantial and widespread access to our cable television services by
unauthorized users, or pirates. When our services are pirated, we forfeit
potential subscribers and related revenues.
IF WE ARE UNABLE TO CONTINUE OFFERING HIGH-QUALITY PROGRAMMING, OUR CABLE
REVENUES MAY DECLINE.
The success of our cable television services depends upon our ability to
acquire popular, high-quality programming content. We license a significant
portion of our programming from third parties. We cannot assure that our
arrangements with these third parties regarding programming will not be
terminated, or that they will be renewed on favorable terms, if at all. If some
or all of our license arrangements are terminated or if we cannot negotiate new
agreements on terms favorable to us, we may lose existing subscribers and
attract fewer new subscribers, which would reduce our revenues.
OUR NETWORK OPERATIONS MAY BE VULNERABLE TO HACKING, VIRUSES AND OTHER
DISRUPTIONS.
"Hacking" involves efforts to gain unauthorized access to information or
systems or to cause intentional malfunctions or loss or corruption of data,
software, hardware or other computer equipment. In addition, the inadvertent
transmission of computer viruses could expose us to a material risk of loss or
litigation and possible liability. Computer viruses, break-ins or other problems
could lead to:
- the interruption, delay or cessation in services to our subscribers;
- the compromise of confidential information stored in the computer
systems of our subscribers;
- damage to our reputation and decreases in use of our services; and
- costly litigation.
OUR CABLE NETWORK COULD FAIL OR SHUT DOWN, WHICH COULD CAUSE US TO LOSE
CUSTOMERS.
Interruptions in our services due to the failure or shutdown of our network
could harm our reputation and cause us to lose customers. Even upon completion
of the expansion and upgrade of our existing cable network, we will still be
vulnerable to damage to our network, interruptions in our services and cessation
of our operations, which our insurance may not cover. The success of our
high-speed Internet access and, if and when offered, IP telephony services
depends on our ability to maintain high-quality data transmission with minimal
service disruptions or interference. This is critical to our ability to attract
and retain subscribers.
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RISKS RELATING TO OUR EXPANSION STRATEGY
WE MAY NOT BE ABLE TO FINANCE OUR CAPITAL EXPENDITURE NEEDS, WHICH COULD
RESULT IN THE DELAY OR ABANDONMENT OF SOME OR ALL OF OUR DEVELOPMENT AND
EXPANSION PLANS AND EXPENDITURES.
We currently anticipate that our capital expenditures will be approximately
$65 million in 2002. We believe that we will continue to expend substantial
amounts in subsequent years. We believe our cash generated by operations and
borrowings available to us are sufficient to fund our capital expenditures for
2002. In the event additional funds are required, we would be forced to obtain
them through additional borrowings, including, if available, vendor financing or
through the public or private sale of debt or equity securities. Acquisitions or
investments may require additional financing. There can be no assurance that
additional financing will be available to us or, if available, that it can be
obtained on terms acceptable to us or within limitations that are contained in
our current or future financing arrangements. Our ability to access additional
funds may be limited by:
- the terms of our existing financing agreements, including restrictive
covenants;
- conditions in the U.S. and in international markets that may adversely
affect the availability or cost of capital;
- the volatility of the economies of Latin America and Asia, or in the
local markets in which we operate, which may make lenders less likely
to extend credit to us;
- our high level of indebtedness, which may affect our attractiveness as
a potential borrower; and
- the market's perception of our performance.
Failure to obtain additional financing could result in the delay or
abandonment of some or all of our development and expansion plans and
expenditures, including the building of our iDEN(R) network in Central America.
WE DO NOT HAVE EXPERIENCE IN OPERATING A CABLE TELEVISION BUSINESS AND IF
WE ARE UNABLE TO SUCCESSFULLY INTEGRATE THE RECENTLY ACQUIRED CABLE
BUSINESS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS COULD BE ADVERSELY
AFFECTED.
We have not previously operated a cable television business. The success of
our acquisition, in part, will depend on our ability to integrate it into our
existing systems. Some of our existing operational, financial and management
systems may be incompatible with or inadequate to effectively integrate and
manage the cable systems. In addition, we may not be able to retain or recruit
qualified personnel that may be required. We also may encounter unexpected
operating difficulties, liabilities or contingencies. Any of these or other
factors could significantly delay or even preclude our realizing synergies or
other benefits from our acquisition or place significant demands on our
management and financial resources.
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THE DOMINICAN TELECOMMUNICATIONS REGULATOR RECEIVED OBJECTIONS TO THE
TRANSFER OF THE CONCESSION GRANTED TO TCN DOMINICANA TO OPERATE A CABLE
NETWORK, WHICH, IF UPHELD, COULD LIMIT OR EVEN PRECLUDE THE OPERATION OF
THE CABLE BUSINESS WE ACQUIRED.
In November 2001 and February 2002, Instituto Dominicano de
Telecomunicaciones or Indotel, the Dominican telecommunications regulator, and
we received notices of objections to the transfer of the concession granted to
TCN Dominicana, S.A., a wholly-owned subsidiary of Telecable for the operation
of its cable business. The objecting parties are cable companies that operate
networks in the interior of the Dominican Republic and an association of cable
companies from that region. If Indotel were to decide in favor of the
objections, it could invalidate the transfer of the concession and impose fines
on us. We believe, based upon recent challenges to concessions transfers in
which objections did not prevail, that it is unlikely that the objections will
prevail. Moreover, Tricom's own concession allows us to provide video and cable
services, so that even if the objections are upheld, we believe that we could
use our own concession to provide the cable services currently provided in
reliance on the Telecable concession. However, it also is possible that Indotel
would limit the areas in which we can provide services so that we do not compete
in markets currently served by the companies that raised objections.
SOCIAL, POLITICAL AND ECONOMIC CONDITIONS IN CENTRAL AMERICAN MARKETS, INTO
WHICH WE PLAN TO EXPAND, MAY CAUSE VOLATILITY IN OUR OPERATIONS AND
ADVERSELY AFFECT OUR REVENUES FROM THESE MARKETS.
We plan to expand into telecommunications markets in Panama, initially, and
in other Central American markets, subject to, among other things, our obtaining
sufficient financing. We have not operated previously in these markets and they
will present numerous challenges to us. Poor social, political and economic
conditions, matters over which we have no control, could inhibit our market
entry and subsequent performance. Social and political conditions in parts of
the Central American markets are volatile and may cause the nature and results
of our operations to fluctuate. Historically, volatility in parts of the Central
American markets has been caused by:
- significant governmental influence over many aspects of local
economies;
- political and economic instability;
- unexpected changes in regulatory requirements;
- social unrest;
- slow or negative growth;
- imposition of trade barriers;
- wage and price controls;
- natural disasters; and
- this volatility could make it difficult for us to sustain our
operations in these markets, which could adversely affect our
business.
GOVERNMENT REGULATIONS IN VARIOUS COUNTRIES MAY HAMPER OUR ABILITY TO GROW
AND IMPLEMENT OUR STRATEGY.
In each market that we are considering, one or more regulatory entities
regulate the licensing, construction, acquisition, ownership and operation of
our wireless communications systems. Adoption of new regulations, changes in the
current telecommunications laws or regulations or changes in the manner in which
they are interpreted or applied could adversely affect our operations. Because
of the uncertainty as to the interpretation of regulations in some countries in
which we may operate, we may not always be able to provide the services we have
planned in each market. It is possible that, in the future, we may face
additional regulatory prohibitions or limitations on our services or on foreign
ownership of telecommunications companies. Inability to provide planned
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services could make it more difficult for us to compete in the affected markets.
These issues could affect our ability to operate in targeted markets, and
therefore impact our growth and strategy plans.
IN CENTRAL AMERICAN MARKETS, GOVERNMENT-OWNED OR AFFILIATED
TELECOMMUNICATIONS COMPANIES, WIRELINE MONOPOLY OPERATORS AND MULTINATIONAL
TELECOMMUNICATION COMPANIES MAY HAVE SIGNIFICANT COMPETITIVE ADVANTAGES
THAT WOULD HINDER THE DEVELOPMENT OF OUR WIRELESS BUSINESS THERE.
In some markets in Central America, we may not be able to compete
effectively against:
- incumbent government-owned telecommunications companies;
- formerly government-owned companies in which the government may or may
not retain a significant interest;
- wireline monopoly operators; and
- multinational telecommunications companies.
We may be at a competitive disadvantage in these markets because these
competitors may have:
- close ties with national regulatory authorities;
- control over connections to local telephone lines;
- larger customer base;
- greater managerial and technical talent;
- ability to cut prices;
- better name recognition;
- larger spectrum positions;
- greater managerial and technical talent;
- larger coverage areas than those of our operating companies; or
- the ability to subsidize competitive services with revenues generated
from other services they provide.
For example, in Panama, Cable & Wireless has temporary exclusivity over
wireline services and only a subsidiary of BellSouth and Cable & Wireless are
licensed to provide wireless services. These competitors, among others, may
adversely affect our ability to develop our wireless business in Central
America.
INITIALLY, OUR COVERAGE IN CENTRAL AMERICAN MARKETS WILL NOT BE AS
EXTENSIVE AS THOSE OF OTHER WIRELESS SERVICE PROVIDERS IN OUR MARKETS,
WHICH MAY LIMIT OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.
At first, we plan to provide wireless services only in the metropolitan
areas and large business centers of Central America. Since our digital mobile
networks will not initially offer nationwide coverage in the countries in which
we are considering and our technology limits our potential roaming partners, we
may not be able to compete effectively with other wireless providers in our
markets.
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Many of the wireless providers in our targeted markets have entered into
roaming agreements with each other, which permit these providers to offer
coverage to their subscribers in each other's networks. While the iDEN(R)
technology that we will deploy is compatible with GSM technology (Global System
for Mobile Communications), it is not compatible with any other wireless
technology operating in our spectrum. As a result, we cannot enter into roaming
agreements with the operators of these other networks. Our customers also will
not be able to roam on other systems using technology identical to or compatible
with ours where we do not have a roaming agreement. As a result, we will not be
able to provide coverage to our subscribers outside of our planned operating
digital mobile markets until:
- we build out additional networks in areas outside our initially
planned markets;
- other operators deploy technology compatible to the technology that we
will deploy in markets outside of our planned coverage areas and we
enter into roaming agreements with those operators; or
- handsets that can be used on both our wireless communications networks
and networks deploying other technologies become available and we
enter into roaming agreements with the operators of those networks.
OUR EQUIPMENT IS MORE EXPENSIVE THAN THAT OF SOME COMPETITORS IN CENTRAL
AMERICA MARKETS, WHICH MAY AFFECT OUR ABILITY TO ESTABLISH AND MAINTAIN A
SIGNIFICANT SUBSCRIBER BASE.
We will market multi-function digital handsets. The higher cost of our
equipment, as compared to analog handsets and some digital handsets that do not
incorporate a comparable multi-function capability, may make it more difficult
or less profitable for us to attract customers. This may reduce our growth
opportunities or profitability.
WE MAY FACE DELAYS CONSTRUCTING OUR DIGITAL MOBILE NETWORK IN CENTRAL
AMERICA WHICH WOULD HARM OUR OPERATIONS.
We may not be able to complete our currently planned construction
successfully or in a timely manner. If we do not, our ability to establish a
subscriber base, improve the transmission quality of our digital mobile services
and expand our service area could be impaired. It may be necessary to
substantially change our proposed plans or otherwise alter our currently
anticipated time frames or budgets because we are not able to:
- locate suitable sites for communications sites or towers;
- obtain any required zoning variances or other governmental or local
regulatory approvals;
- negotiate acceptable purchase, lease, or other agreements; or
- obtain quality supplies in a timely manner, if at all.
We also may encounter delays caused by:
- frequency cross-interference with other radio spectrum users,
including television stations;
- shortages of equipment or skilled labor;
- engineering or environmental problems;
- work stoppages;
- weather interference; and
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- unanticipated cost increases.
WE ARE NOT EXPERIENCED IN SELLING AND MARKETING IDEN(R) SERVICES OR IN
CENTRAL AMERICAN MARKETS WHICH COULD AFFECT OUR ABILITY TO ESTABLISH OR
MAINTAIN A SIGNIFICANT SUBSCRIBER BASE.
Once our digital mobile network operations are in place in a particular
market, the development of a significant, quality subscriber base depends on the
success of our sales and marketing efforts and the receptiveness of the
marketplace to our services. We have limited experience in marketing iDEN(R)
services anD local conditions in our target markets may require us to modify our
sales and marketing efforts or rely, in part, on the efforts of independent
dealers and distributors to market our services. If the sales and marketing
teams of our operating companies and the independent dealers and distributors
are not able to establish a large subscriber base consisting of quality
customers in our new markets, our revenues will not grow as planned.
SINCE WE RELY PRINCIPALLY ON ONE SUPPLIER TO IMPLEMENT OUR DIGITAL MOBILE
NETWORKS, ANY FAILURE OF THAT SUPPLIER TO PERFORM COULD HURT OUR
OPERATIONS.
Motorola is currently our sole source for the iDEN(R) digital network
equipment and handsets useD throughout our markets. If Motorola fails to deliver
necessary technology improvements and enhancements and system infrastructure
equipment and handsets on a timely, cost-effective basis, or discontinues
providing this technology altogether we would not be able to service our
existing subscribers or add new subscribers.
MOTOROLA MAY SUPPLY IDEN(R) TECHNOLOGY TO OTHER COMPANIES, WHICH COULD
NEGATIVELY AFFECT OUR COMPETITIVE POSITION IN THE CENTRAL AMERICA.
Motorola, which supplies the iDEN(R) system that we use in Central America,
agreed that it would not selL iDEN(R) technology to anybody else for use, before
agreed upon dates, in Panama, Costa Rica, Guatemala, Honduras, El Salvador and
Nicaragua. Its agreement was conditioned upon our placing orders for systems in
each of those countries by specified dates, which we did not do except for
Panama. In the case of Panama, our preferred deployment lasted until we
initiated our iDEN(R) services in the beginning of April 2002. We have not
satisfieD the conditions in other countries. As a result, Motorola is now free
to provide the technology in the countries of Central America to anybody else at
any time. If it did so, we could lose an important competitive advantage to us.
CONCERNS ABOUT HEALTH RISKS ASSOCIATED WITH WIRELESS EQUIPMENT MAY REDUCE
THE DEMAND FOR OUR SERVICES.
Portable communications devices have been alleged to pose health risks,
including cancer, due to radio frequency emissions from these devices. The
actual or perceived risk of mobile communications devices could adversely affect
us through a reduction in subscribers, reduced network usage per subscriber or
through reduced financing available to the mobile communications industry.
Studies performed by wireless telephone equipment manufacturers have
investigated these allegations and additional studies are ongoing.
RISKS RELATING TO OUR PRINCIPAL MARKET, THE DOMINICAN REPUBLIC
OUR FINANCIAL CONDITION AND RESULTS OF OPERATION COULD BE ADVERSELY
AFFECTED BY DOWNTURNS IN THE DOMINICAN ECONOMY.
Most of our operations are conducted in, and most of our customers are
located in, the Dominican Republic. Accordingly, our financial condition and
results of operations are substantially dependent on economic conditions in the
Dominican Republic. While the Dominican Republic's Gross Domestic Product has
grown every year since 1991, the rate of growth slowed in 2001 and growth may
not continue in the future. Future developments in the Dominican economy could
impair our ability to proceed with our business strategies, our financial
condition or our results of operations. Our financial condition and results of
operations also could be adversely affected by changes in economic or other
policies of the Dominican government or other political or economic developments
in
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or affecting the Dominican Republic, as well as regulatory changes or
administrative practices of Dominican authorities, over which we have no
control.
POVERTY, SOCIAL UNREST AND SHORTAGES OF BASIC SERVICES IN THE DOMINICAN
REPUBLIC COULD AFFECT THE USE OF TELECOMMUNICATIONS SERVICES, WHICH WOULD
DECREASE OUR REVENUES.
The Dominican Republic has widespread poverty. As recently as November
1997, the country experienced riots, partly as a result of price increases and
shortages of water and electricity. Several state-owned companies have been
privatized, including the country's state-owned electric utility company, and
there can be no assurance that the implementation of these privatizations will
not cause social unrest. Any increase of poverty, social unrest or shortage of
basic services could adversely affect the use of telecommunications services.
ALTHOUGH INFLATION IN THE DOMINICAN REPUBLIC HAS BEEN MODERATE SINCE 1990,
INCREASES IN THE INFLATION RATE WOULD ADVERSELY AFFECT THE DOMINICAN
REPUBLIC'S ECONOMY AND THE DEMAND FOR OUR TELECOMMUNICATIONS SERVICES.
Inflation has moderated in the Dominican Republic since 1991, following an
austerity program instituted by the Dominican government. According to the
Central Bank, the annual rates of inflation were 8.4% for 1997, 7.8% for 1998,
5.1% for 1999, 9.0% for 2000 and 4.4% in 2001. However, the country has
experienced high levels of inflation in the past, including an inflation rate of
79.9% for 1990. Any increase in the value of the U.S. dollar against the
Dominican peso directly affects the Dominican Republic's inflation rate because
the Dominican Republic relies heavily on imports from the United States of raw
materials and consumer goods. High inflation levels could adversely affect the
Dominican Republic's economy and reduce demand for telecommunications services.
THE VOLATILITY AND DEPRECIATION OF THE DOMINICAN PESO AGAINST THE U.S.
DOLLAR COULD REDUCE THE AMOUNT OF CASH WE WILL HAVE TO REPAY OUR
INDEBTEDNESS OR FUND OUR OPERATIONS, INCLUDING THE PURCHASE OF
TELECOMMUNICATIONS EQUIPMENT.
For 1999, 2000 and 2001, we earned between 55% and 65% of our operating
revenues in Dominican pesos and the remainder of our operating revenues in
foreign currency, primarily in U.S. dollars. The percentage of operating
revenues in Dominican pesos could increase if we successfully increase our share
in Dominican local markets in accordance with our strategy. The Dominican peso
has depreciated in value against the U.S. dollar in the past and may be subject
to fluctuations in the future. Most of our outstanding indebtedness is U.S.
dollar-denominated and must be paid in U.S. dollars. Vendors of
telecommunications equipment all require that we pay for equipment in U.S.
dollars. The devaluation of the Dominican peso could affect adversely our
ability to purchase U.S. dollars in order to service our debt obligations and
pay our equipment vendors. Our purchase of substantial amounts of U.S. currency
in Dominican markets could adversely affect the value of the Dominican peso in
relation to the U.S. dollar, and make these purchases more costly for us.
ITEM 4. INFORMATION ON THE COMPANY
TRICOM, S.A. is incorporated in the Dominican Republic. Our operations are
headquartered at Ave. Lope de Vega No. 95, Santo Domingo, Dominican Republic and
our telephone number at the above address is 809-476-4000. Our website address
is www.tricom.net. Our agent in the United States is CT Corporation System. This
agent can be reached at 1633 Broadway, New York, NY 10019 and at telephone
number (212) 664-1666.
BUSINESS OVERVIEW
OVERVIEW
We are a leading full service communications provider in the Dominican
Republic. We offer local, long distance, mobile, cable television entertainment,
Internet and broadband data transmission services. Our wireless network covers
approximately 90% of the population in the Dominican Republic. Our network
providing local service is 100% digital, the only such network in the Dominican
Republic. Telecommunications networks that employ digital technology can
transmit higher quality signals at lower costs. We also own interests in
undersea fiber
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optic cable networks that connect and transmit telecommunications signals
between Central America, the Caribbean, the United States and Europe. Fiber
optic cable is composed of glass strands and transmits telecommunications
signals in the form of light. Through our subsidiary, TRICOM USA, Inc., we own
telecommunication-switching facilities in New York, Miami and Puerto Rico. Using
these facilities, we originate, transport and terminate international
long-distance traffic. We are one of the few Latin American long distance
carriers that are licensed by the U.S. Federal Communications Commission to use
switching facilities that it operates to connect long distance traffic. Through
our subsidiary, TCN Dominicana, S.A., we are the largest cable television
operator in the Dominican Republic based on our number of subscribers and homes
passed. At December 31, 2001, our cable network served 64,466 subscribers,
including 56,896 basic and premium subscribers and 7,570 commercial rooms, with
approximately 170,000 homes passed.
Since our inception in 1992, we have diversified our operations, and have
captured a significant share in key markets entirely through internal growth. In
2000, we carried approximately 40% of the southbound voice and data traffic from
the United States to the Dominican Republic. Since we introduced wireless
services in 1995, we have achieved an approximate 30% market share at year-end
2001, based upon data published by the Indotel, the Dominican agency that
regulates telecommunications. Our recent success is reflected in the following
period-to-period changes in operating statistics from 2000 to 2001:
- Local access lines increased 19.6% to 177,352;
- Cellular and PCS subscribers increased 27.7% to 364,059; and
- International long distance traffic increased 28.7% to 768.4 million
minutes.
In April 2002, we initiated a mobile service network in Panama targeted at
business customers. We will deploy an advanced integrated radio-telephone and
dispatch communications system known as iDEN(R), developed bY Motorola. This
technology enables us to use spectrum efficiently and offer multiple wireless
services on one digital handset. We plan to capitalize on the increasing demand
by business customers for a product that provides advanced mobile services and a
complete solution for their intra-regional communication needs. We plan to
establish in selected Central American markets a mobile service network
deploying iDEN(R) that will providE interrupted connection throughout the region
without any change in service provider. Establishment of the network outside of
Panama will depend on a number of factors, including the availability of
financing and the success of our efforts in Panama.
We have purchased a 51% interest in a Panamanian company, Cellular
Communications of Panama, S.A., now TRICOM Panama, S.A., which owns the
frequency rights for 107 channels of 25 MHz each. TRICOM Panama has
approximately 1,750 analog mobile users. These frequencies will give us access
to nationwide coverage, covering a population of approximately 2.81 million
people. We have constructed an iDEN(R) network, at a cost at DecembeR 31, 2001
of approximately $37 million, in Panama City and Colon, the two largest cities
in Panama, and in important transportation corridors in other parts of the
country. We initiated digital trunking services in April 2002. We offer digital
mobile integrated services, including two-way radio, paging and interconnect
services.
In 2000, we were awarded, in a government auction, radio frequency rights
in Guatemala to 172 channels of 25 MHz, providing us with nationwide coverage.
We also have acquired in El Salvador radio frequency rights for an aggregate of
185 channels of 25 MHz, that provides spectrum to operate our iDEN(R) network.
We currently dO not intend to develop a network in either Guatemala or El
Salvador in 2002.
On October 26, 2001, we acquired the shares of TCN Dominicana, S.A., a
wholly-owned subsidiary of Telecable Nacional, C. por A., that owns and operates
the largest multi-channel system in the Dominican Republic's pay-TV market
including the concession granted by the Dominican government to operate a cable
system. The transaction was valued at approximately $1,130 per subscriber
equivalent or approximately $64.0 million, payable $41.8 million in cash and
with 3,375,000 shares of our Class A common stock. At December 31, 2001, our
cable network served 64,466 subscribers, including 56,896 basic and premium
subscribers and 7,570 commercial rooms,
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with approximately 170,000 homes passed. Our cable network service area consists
of the capital city of Santo Domingo, and the tourist destination areas of
Puerto Plata and La Romana.
At December 31, 2001, our cable network consisted of 204 miles of fiber
optic cable, 718 miles of coaxial cable and 208 nodes. We are expanding and
upgrading our existing cable into a broadband bi-directional network that will
provide us with a platform for the delivery of a broad range of services. At
December 31, 2001, approximately 40% of our network had bi-directional
capability, and approximately 70% operated at 750MHz, allowing for a variety of
multimedia and telecommunications services, including some interactive
programming services and television-based Internet access services. In addition,
we intend to market high speed Internet access through cable modem.
MARKET OPPORTUNITIES
We believe that the Dominican and Central American telecommunications
markets represent attractive opportunities and that the following factors will
drive growth in these markets:
- UNDERSERVED DOMINICAN MARKET. At December 31, 2001, teledensity, the
ratio of local access lines per 100 inhabitants, in the Dominican
Republic was 10.9 and the ratio of wireless subscribers per 100
inhabitants was 14.5, based upon data published by Indotel. The ratios
in Puerto Rico were 33.2 for teledensity and 23.7 for wireless,
according to the International Telecommunications Union, or ITU. At
December 31, 2000, multi-channel penetration of television households
per 100 inhabitants in the Dominican Republic was 15.3, compared to
44.4 for Puerto Rico, according to Kagan World Media, Inc.
- DOMINICAN ECONOMY AMONG THE FASTEST GROWING IN LATIN AMERICA. Gross
Domestic Product in the Dominican Republic grew at an average annual
rate exceeding 6.8% from 1996 through 2001, according to the Central
Bank of the Dominican Republic. This has made it one of the fastest
growing economies in Latin America. The Dominican Republic experienced
real Gross Domestic Product growth of 7.8% in 2000 and 2.7% in 2001
according to the Central Bank. The Central Bank projects growth for
the Dominican Republic to exceed 5% in 2002.
- STRONG GROWTH IN THE DOMINICAN TELECOMMUNICATIONS MARKET. In 2001, the
total telecommunications market in the Dominican Republic was
approximately $1.3 billion, according to the Central Bank. The
telecommunications market in the Dominican Republic grew at an average
annual rate of 18.6% from 1996 to 2001 according to the Central Bank.
- UNDERSERVED CENTRAL AMERICAN BUSINESS MARKETS. Markets in Central
America share many of the characteristics of markets in the Dominican
Republic, including:
- rapidly growing economies;
- the development of intra-regional trading markets fostered by the
adoption of free trade agreements;
- low penetration of telecommunications services, continuing
privatization and liberalization of markets for telecommunications
services; and
- and current limited competition in the telecommunications service
sector.
COMPETITIVE STRENGTHS
We believe that the following factors give us a competitive advantage in
our existing and targeted markets:
ADVANCED NETWORK. We have the only network providing 100% digital local
service in the Dominican Republic. Our wireless network covers approximately 90%
of the population. Our local network features a wireless local loop system that
enables us to connect a customer within 48 hours, substantially less time than
required for
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wireline installation. We currently have switching facilities in New York and
Puerto Rico, and interests in international fiber optic cable undersea systems
that connect Central America and the Caribbean with the United States and
Europe. These facilities enable us to originate, transport and terminate traffic
at reduced costs. Our advanced networks also provide our customers with high
quality voice and data transmission. We are expanding and upgrading our existing
cable network into a broadband bi-directional network that will provide us with
a platform for the delivery of a broad range of services. We are in the process
of converting our existing cable network into a broadband bi-directional
network. Once completed, our broadband bi-directional cable network will have
increased network capacity, quality and reliability. This will facilitate the
introduction of new services and enable us to increase our subscriber base and
our average monthly revenues per subscriber, to reduce our operating costs per
subscriber and to facilitate the control of unauthorized, or pirate, users.
STRONG BRAND NAME RECOGNITION AND MARKETING CAPABILITIES. Our creative
marketing and excellent customer service have allowed us to build a strong brand
in our existing markets and to achieve substantial market share in each of our
service offerings. We capitalize on our brand name recognition and marketing
programs both in the Dominican Republic and to target ethnic communities in New
York, New Jersey, New England, Florida and Puerto Rico. In the Dominican
Republic we consistently lead the market in introducing innovative business
practices and products using advanced technology. We were the first operator in
the Dominican Republic to offer prepaid cellular, international calling cards,
Internet service and offerings combining different services and pricing options.
EXPERIENCED MANAGEMENT. Our management team has significant experience in
the telecommunications industry and a track record of building revenues and
positive cash flows in telecommunications markets. The core team has been with
us since the inception of commercial service in the Dominican Republic. Our
ability to identify market opportunities and adapt to new technologies has
enabled us to attain significant market share while competing with a dominant
provider with greater resources.
OUR STRATEGY
Our goal is to capitalize on our key strengths to further build our market
share and penetrate new markets, while maximizing revenues and cash flows. We
intend to:
EXPAND EXISTING MARKET COVERAGE IN THE DOMINICAN REPUBLIC AND THE UNITED STATES
BY:
DEPLOYING CAPITAL PRUDENTLY TO ENHANCE REVENUE GROWTH AND MARGINS.
In building our networks in the Dominican Republic, we have managed our
investments to respond to the demand for our services, market conditions and the
availability and cost of financial resources. In implementing our expansion
programs, we plan to build on our business model, targeting markets in Central
America with characteristics similar to markets in which we have competed to
date. We will manage our expenditures to respond to the success of our different
programs and will deploy our financial resources where the combination of demand
and the likelihood of returns are greatest. In Central America, we intend to
build out our network in one local market or country at a time, initiating
service in Panama, for example, before making a significant commitment to other
countries. We believe this should allow us to measure the results of our
strategy before committing additional resources.
FOCUSING ON HIGH-GROWTH MARKET SEGMENTS IN THE DOMINICAN REPUBLIC, INCLUDING
RESIDENTIAL LOCAL AND WIRELESS SERVICES.
Substantial unmet demand for residential local service remains in the
Dominican Republic as large segments of the Dominican population still have
limited access to this service. Based upon information published by Indotel, at
December 31, 2001, there were approximately 955,145 local access lines in
service, representing a teledensity rate of approximately 10.9%.
The mobile wireless market has been the fastest growing segment of the
Dominican telecommunications market since 1996. Based on information published
by Indotel, we believe that, since 1996, the mobile wireless market has grown at
an annual average rate of 73%. Our cellular network covers approximately 90% of
the population and our PCS network covers approximately 75% of the population.
With these two networks we are able
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to offer dual-band service, allowing PCS customers to use their mobile phone
over our analog service as well. We intend to expand our PCS system into
additional cities over the next several years, resulting in coverage of 90% of
the Dominican population.
EXPANDING OUR LONG DISTANCE OPERATIONS IN THE UNITED STATES TO TARGET ADDITIONAL
ETHNIC AND GEOGRAPHIC MARKETS AND TO EXPAND OUR OWNERSHIP AND CONTROL OF
DISTRIBUTION CHANNELS.
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. Our goal is to offer end-to-end long distance
services in new markets where we both own and operate telecommunication
facilities, enabling us to start, transport and end calls within our network.
TRICOM USA relies on distributors and resellers for the placement of its
prepaid calling cards as well as the generation of international traffic to the
Dominican Republic and other destinations. Resellers do not operate their own
telecommunications networks but purchase minutes and re-sell them to consumers.
In order to expand our market presence, and at the same time enhance the
profitability to us of traffic generated by our prepaid cards, we will consider
opportunities to acquire distributors of prepaid calling cards.
Through the acquisition of resellers, we can capture a greater share of
outgoing minutes and increase direct access to customers, thus enhancing our
profit margins. Resellers also give us greater access to ethnic markets in which
we already participate as well as new markets where we are not yet positioned.
CAPITALIZING ON OPPORTUNITIES IN THE DOMINICAN REPUBLIC CREATED BY THE GROWING
DIGITAL ECONOMY TO EXPAND OUR BROADBAND DATA TRANSMISSION BUSINESS AND INTERNET
OPERATIONS.
As the Dominican economy has expanded, there has been greater demand for
broadband data transmission and Internet services. Our fully digital network
positions us to provide broadband access and high speed data transmission to
both the corporate and residential markets. During 2000 and 2001, we introduced:
- digital subscriber lines, or xDSL, that provides high-bandwidth
transmission of voice and data over regular telephone lines;
- very small aperture terminal, or VSAT, a relatively small satellite
antenna used for high speed satellite-based single to multiple point
data transmissions, including for the internet; and
- local multipoint distribution service, or LMDS, technologies, which is
a broadband wireless single to multiple point communication system
that can be used to provide digital two-way voice, data, Internet and
video services.
In 2002, we intend to begin to offer high-speed Internet access by personal
computers to a limited number of our subscribers through cable modems. A cable
modem is a small box that connects a personal computer to the Internet via a
local cable provider. Cable modems allow personal computer users to download
information from on-line services at speeds one hundred times faster than
today's fastest telephone modems.
EXPAND INTO SELECTED CARIBBEAN AND CENTRAL AMERICAN MARKETS BY:
OFFERING A DIFFERENTIATED SET OF SERVICES DIRECTED TO CORPORATE CUSTOMERS,
FOCUSING ON HIGHLY CONCENTRATED BUSINESS CENTERS IN OUR TARGETED CENTRAL
AMERICAN MARKETS.
We believe that several countries in Central America have markets with
demographic, regulatory and demand characteristics similar to those in the
Dominican Republic at the time Tricom initiated operations, namely: underserved
markets and increased liberalization of the telecommunications industry. This
experience provides us with the know-how to export our business model into these
countries. We will target business customers who have a stronger credit profile
and offer, on average, higher revenue per user. In other markets, including the
United States
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and Latin America, the deployment of iDEN(R) technology has resulted in some of
thE highest revenues per unit within the wireless markets.
We will offer a package of services and features that combine multiple
communications services in one digital subscriber unit, emphasizing the
differentiated features of iDEN(R) technology and our networks: digitaL mobile
telephone services, mobile dispatching, two-way messaging, push-to-talk and
one-to-many connections.
APPLYING WIRELESS OPERATING EXPERTISE, SCALABLE BACK OFFICE SYSTEMS AND
MARKETING KNOW-HOW TO DEVELOP OUR IDEN(R) CENTRAL AMERICAN OPERATIONS.
We will rely on the technical expertise that we have developed to deploy
wireless technologies to enter new markets. Our deployment of a CDMA-based
wireless network has enabled us to enhance our mobile services capabilities
while also accelerating the expansion of our local access presence in the
Dominican market. This move to expand our operations will be done in a
cost-efficient manner using our scalable back office systems, which integrate
sales, customer service, collections and financial control functions. We also
believe that our marketing know-how is an integral part of our sales model which
features proactive sales efforts, targeted campaigns and a reduction of credit
risk through the promotion of prepaid services. We believe this model has the
potential to revolutionize telecommunications services in Central America.
LEVERAGING OUR EXISTING RELATIONSHIPS WITH KEY SUPPLIERS, INCLUDING MOTOROLA,
NORTEL AND HARRIS, WE WILL CONTINUE TO BUILDOUT IN THE DOMINICAN REPUBLIC AND
PROVIDE TURNKEY SOLUTIONS IN OUR TARGETED CENTRAL AMERICAN MARKETS.
Our relationships with our suppliers, including Motorola, Nortel and
Harris, are important as we continue to upgrade and deploy our digital mobile
networks and provide new products and services to expand our subscriber base.
Access to the technology, supplier relationships, network development and
marketing expertise of these companies will afford us significant competitive
advantages. We will continue to leverage their expertise in the future as we
enhance and expand our networks and launch new products and services.
SERVICE OFFERINGS
Our service offerings include:
- Local service;
- Mobile services;
- International long distance;
- Cable television services; and
- Broadband data transmission and Internet.
LOCAL SERVICE
We are a competitive local exchange carrier in the Dominican Republic and
had 177,352 local access lines in service at December 31, 2001. Our local access
network covers areas with approximately 85% of the population of Santo Domingo,
Santiago and eight 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, caller ID and voicemail 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
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choose from a menu of services, including domestic and international long
distance services, local service and value-added services. They also may bundle
their local access service with cellular or PCS, paging, cable television 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, and digital switches. 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 systems and components for both turnkey
systems and private telephone networks used within enterprises. We are a
distributor in the Dominican Republic for Mitel and Comdial equipment, 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 90% of the Dominican Republic's
population. We currently offer both cellular and PCS service. According to
Indotel, there were approximately 1,270,082 analog and PCS cellular subscribers
in the Dominican Republic at December 31, 2001. At December 31, 2001, we had
364,059 wireless subscribers, including 125,227 PCS subscribers, representing
approximately 30% of the Dominican mobile telephony market. The number of our
cellular and PCS subscribers grew by 27.7% during 2001, and our net addition of
cellular and PCS subscribers totaled 79,068 in 2001. We attribute a substantial
portion of this growth to our prepaid cellular and PCS card, the Amigo(TM) card.
At December 31, 2001, prepaid cellular and PCS subscribeRs accounted for
346,308, or 95%, of our 364,059 total cellular and PCS subscribers in the
Dominican Republic. Our Amigo(TM) card program has expanded our cellular and PCS
customer subscriber 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 75% 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.
We offer domestic as well as international roaming services to
participating subscribers. Subscribers who pay the roaming rates gain access to
our nationwide cellular and PCS network, while subscribers paying the
international roaming fees are able to roam outside of the Dominican Republic,
using the networks of cellular service providers with which TRICOM has entered
into roaming agreements. We have entered into roaming service agreements with
Sprint PCS and Illuminet, formerly Bell South International Wireless, which
enable our customers to roam in the continental United States and Central and
South America. Under the roaming agreements, when a subscriber of another
cellular service provider makes a call from within the Dominican Republic, that
service provider pays Tricom for the call at the applicable rate. Conversely,
when one of our subscribers makes a call outside the Dominican Republic, we must
pay the applicable charges to the cellular service provider in whose region the
call originates. These payments are channeled through Cibernet, which functions
as a central international clearing house that collects and redistributes
roaming fees from and to the participating providers.
We 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
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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
approximately 4% of our new subscribers in 2001. We do not subsidize or provide
credit on the sale of wireless and PCS handsets.
We have provided paging services since April 1995. At December 31, 2001, we
provided paging services to 12,090 subscribers, representing approximately 12.5%
of the Dominican paging market. In 1999 we stopped soliciting new paging
subscribers. We believe that the success of our prepaid cellular and PCS program
has contributed to the decline of paging as a significant part of our business
because customers have replaced paging services with prepaid cellular services.
INTERNATIONAL LONG DISTANCE
In the Dominican Republic, we provide international long distance services
to our local access, cellular and PCS customers. In addition, we offer prepaid
calling cards for international long distance, the Efectiva(TM) and Conexion(TM)
cards 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, including bill payments and sales of
service in addition to long distance.
In the United States, our subsidiary TRICOM USA provides international
carrier services primarily to resellers, which account for an increasing share
of international long distance traffic between the United States and the
Dominican Republic. Through our telecommunications 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, transport 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 2001,
resellers originated approximately 59% 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 dictated by the market. At December 31, 2001, we received traffic from
approximately 80 resellers. Intense competition in U.S. markets among
international long distance carriers has resulted in bankruptcy filings by 12 of
our reseller clients since the beginning of 2001.
TRICOM USA also markets a number of prepaid cards to ethnic communities in
New York, New Jersey, Rhode Island, Alaska, Pennsylvania, Washington, D.C.,
Illinois, U.S. Virgin Islands, Puerto Rico, Florida, Ohio, Georgia and Canada.
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.
CABLE TELEVISION SERVICES
We are the largest provider of cable television services in the Dominican
Republic, based on the number of subscribers, and the number of homes passed. At
December 31, 2001, our cable network served 64,466 subscribers, including 56,896
basic and premium subscribers and 7,570 commercial rooms, with approximately
170,000 homes passed. One component of our business strategy has been to expand
our current base of basic and premium subscribers by providing high-quality
programming and other content. In addition to publicly available programming, we
license or otherwise acquire programming from various programming providers for
broadcast on our cable television network and also produce a limited amount of
programming ourselves intended for exclusive broadcast on our network. We
currently offer 96 basic and premium channels including HBO, Cinemax, Disney,
ESPN, Fox Sports and CNN. We also sell our own advertising time.
BASIC SERVICE PACKAGE. Our basic service package provides access to 76
local, UHF and via-satellite channels. Subscribers pay a one-time installation
fee of US$50 and a monthly fee of US$23 for this service. We
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charge an additional installation fee of US$15 for connection of each additional
television in the house, plus US$2 per month per outlet. Subscribers do not need
a digital decoder to receive the basic service package.
PREMIUM DIGITAL SERVICE PACKAGES. Our digital service packages include all
of the channels described in our basic service package, with an additional
choice of one of our six digital premium packages. These premium packages
include one or more digital channels and range from US$9 to US$23 a month per
package. Premium subscribers pay the basic package monthly fee plus the
additional cost of any or all of these packages. A digital decoder set top box
is required for these services. We currently are focusing on marketing our
various premium digital service packages to our existing basic subscribers with
a view to increasing our overall revenues per subscriber.
CABLE TELEVISION SERVICES. One component of our business strategy has been
to expand our current base of basic and premium subscribers by providing
high-quality programming and other content. In addition to publicly available
programming, we license or otherwise acquire programming from various
programming providers for broadcast on our cable television network and also
produce a limited amount of programming ourselves intended for exclusive
broadcast on our network. We also sell our own advertising time.
DMX MUSIC
Telecable, through DMX Music International, offers digital audio
programming through its HFC network. Customers choose from over forty exclusive
and adaptable music channels that play twenty-four hours a day, seven days a
week. With 130 million customers world wide, DMX music is the leader in Digital
Music Programming. Customers are charged a one-time installation fee ranging
from US$155 to US$185 and a monthly fee of between US$7 and US$22.
INTERACTIVE TV AND NET TV
Using digital set top boxes, our premium cable television subscribers can
access the Internet without a personal computer with our television-based
services. These services are designed to operate with cable systems and a
wireless keyboard control. Given the relatively low personal computer
penetration rate in the Dominican Republic as compared to other countries, we
believe that our television-based Internet access services will enable us to
build a new base of Internet subscribers.
Interactive TV and Net TV provide customers with a maximum 128 kilobytes
connection to different Internet services and spaces provided by our sponsors.
These spaces include information on shopping, sports, news, travel, television
programming and financial news. Customers with Net TV receive all of these
services plus unlimited access to the World Wide Web.
Since its introduction, Interactive TV has been a free, added service for
our premium cable television subscribers. They can receive Net TV for an
additional cost of US$16 a month. We are currently repositioning both products
to serve as an alternative for customers wishing to access the World Wide Web
who do not have access to a personal computer.
BROADBAND DATA TRANSMISSION AND INTERNET
We provide broadband data transmission services to large 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 these large customers with data circuits Internet access, private
networks and frame relay services with branches in the different cities in the
country. We recently increased transmission capacity to provide larger
bandwidths and data services are expected to have a strong growth with the
commercial launch of both the digital subscriber lines, or xDSLs, that provide
high-bandwidth transmission of voice and data over regular telephone lines and
the very small aperture terminals, or VSATs, relatively small satellite antennas
used for high speed satellite-based single to multiple point data transmissions,
including for the internet.
In the Dominican Republic we are the second largest Internet service
provider. We provide Internet connectivity to the residential and corporate
markets through traditional dial-up connections, digital subscriber lines,
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or xDSLs, dedicated lines and very small aperture terminals, or VSATs,
relatively small satellite antennas used for high speed satellite-based single
to multiple point data transmissions, including for the internet, with speeds
ranging from 56 kilobytes per second to 2 megabytes per second. Our PCS and
paging services are now fully integrated with our Internet service, offering
short messaging services, including email and digital messaging through our
website, www.tricom.net.
In 2000, we entered into a five-year $25 million contract with the
Dominican Republic Department of Education to provide broadbased satellite
Internet access and Intranet services to every public high school in the
Dominican Republic.
We intend to offer high-speed Internet access by personal computer to a
limited number of our subscribers through cable modems. A cable modem is a small
box that connects a personal computer to the Internet by a local cable provider.
Cable modems allow personal computer users to download information from on-line
services at speeds one hundred times faster than today's fastest telephone
modems. The planned development of our cable network's bi-directional capacity
will increase our ability to offer bi-directional Internet access services to
more of our subscribers.
MARKETING AND SALES
Our advertising and promotional materials in the Dominican Republic
emphasize that we are a full-service provider of local, cellular, data and long
distance services and that customers can realize significant savings from our
service packaging. Our advertising also emphasizes reliability, performance,
quality of service and the multiple advantages that users can obtain from our
different products and services. In 2001, we introduced a new corporate image,
which seeks to promote that Tricom is accessible, passionate, proactive,
revolutionary, and humane. We also introduced a new logo.
We use targeted marketing programs, concentrating on urban areas where we
currently provide services and employ marketing techniques often used to promote
consumer products, including television, radio and newspaper advertising. We
also employ 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.
Our targeted marketing programs concentrate on urban areas where we
currently provide services. We use traditional communication media to promote
our consumer products, such as television, radio and newspaper advertising. We
also use door-to-door sales for basic local service as well as credit card lists
and other databases to identify and contact potential users of cellular and PCS
services. Seasonal promotions are also made for specific target markets at
different points throughout the year.
LOCAL AND MOBILE SERVICE
During the initial deployment stage of our local services, we relied
primarily on door-to-door sales, reflecting the limited geographic extent of our
conventional local telephone network build-out. After our wireless local loop
was deployed, giving us ubiquitous presence in the major cities of our
countries, we have used mass media to a greater extent to promote our local
telephone services. Approximately 79% of local access line gross additions are
made through direct sales and 21% are completed at our commercial points of
sale.
We market mobile services through direct sales, database marketing,
telemarketing and focus on new users.
In an effort to target the middle-class market for cellular services we
launched Tricomtrol(sm) during 2001. This prepaid plan offers users the
controlled spending indicative of prepaid plans along with the advantages of
postpaid plans such as low rates and short-term loans to help customers acquire
cellular equipment. We also restructured our postpaid plans in order to offer
our clients more options. Our advertising strategy for PCS services focuses on
our nationwide coverage, quality of service and competitive prices as well as
handset rentals.
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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 or receive early training
sessions in which they learn telecommunication fundamentals. The product
development and customer service teams also offer them continuous support.
INTERNATIONAL LONG DISTANCE
In addition to our Dominican local access and mobile subscribers, we market
our long distance services to individual customers who do not have telephone
services in their own homes. In the United States, we target the large immigrant
Dominican communities and other ethnic populations.
We feature our prepaid cards, Efectiva(TM) and Conexion(TM), in our basic
services advertisements, as weLl as in individual advertising. Our advertising
emphasizes the accuracy and reliability of our billing as well as savings. The
Efectiva(TM) and Conexion(TM) cards are distributed at our commercial offices,
call center and thRough wholesalers and retailers. We have three wholesale
distributors in the Dominican Republic, who cover the entire country, as well as
an internal sales force targeting smaller retailers: a total of 50,000 points of
sale for our prepaid cards.
Efectiva(TM) was the first long distance calling card in the Dominican
Republic. At December 31, 2001, iTs market penetration was over 80% in retail
stores around the country. Efectiva(TM) offers 20% to 30% more air-time than the
competition.
In 2001, we purchased a platform from Sixbell to manage prepaid services.
This platform will allow us to offer prepaid customers several options to
recharge their minutes. Customers will be able to purchase minutes through ATM
machines, over the Internet and through cash registers in all of our customer
service offices and affiliated businesses. The Sixbell platform is currently in
its final phase of implementation and should be operational in the second half
of 2002.
Tricom USA advertises its prepaid cards on radio and through print media
targeted at Dominican and other ethnic communities, mainly in the New York
metropolitan area. Advertisements emphasize price and voice quality as well as
patriotic or ethnic themes. Prepaid cards are distributed to wholesalers under
our brand name and are sold primarily in small retail stores, including
groceries, beauty parlors, drugstores and newsstands.
CABLE TELEVISION SERVICE
We use a variety of methods to attract new basic subscribers. We currently
maintain a call center to respond to incoming calls from potential subscribers.
The call center staff is trained to respond to questions concerning our various
service packages, as well as contact potential subscribers, market our services
and receive payment for our services by credit card.
We generally advertise on our cable broadcasts as well as on television and
radio broadcasts and in magazines, newspapers and billboards. Our direct
marketing includes flyers and promotional materials. Our telemarketing staff
focuses on both attracting new subscribers, as well as upgrading our existing
basic subscribers to one of our premium service packages. We market our cable
services under the brand name, Telecable.
Our current marketing strategy is intended to
- improve customer service,
- develop aggregate value programs to promote subscriber loyalty
and timely payments,
- reinforce our market position by offering the most aggressive
price-product combination in the market,
- increase our subscriber base by increasing the penetration levels
in our coverage areas, and by converting users that pirate our
cable services to legitimate subscribers,
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- increase our income per subscriber, and
- capitalize on the development possibilities of new broadband
services.
BROADBAND DATA TRANSMISSION AND. INTERNET
For broadband data transmission services, we target the large Dominican
businesses, which require more sophisticated technology and demand specialized
service and support. Our marketing professionals place their focus in this
sector, which includes multi-national corporations, local business conglomerates
and large hotels. We offer our residential customers Internet access bundled
together with local, wireless and other services. We also provide pre-installed
Internet access through major Dominican computer retailers, including one-month
of free Internet access with the purchase of a new computer. In a promotion to
increase computer penetration in the country, we created our "ENTER-NET" plan,
offering financing for computer equipment bundled with Internet access via our
service through Bancredito: a bank affiliated with GFN, our largest
shareholders. In 2001, we developed advertisement campaigns focused on promoting
the speed and accuracy of our Internet dial-up services.
During 2001, we launched several new services through a Shasta Platform
that enables us to offer Firewall services and Virtual Private Networks, among
others. During 2001, we launched wireless access to Internet, VPN, and Firewall
services. We recently launched a number of broadband delivery systems. These
platforms will enable us to increase our penetration into markets requiring
high-speed data transmission and Internet access.
CUSTOMER SERVICE
In the Dominican Republic, we provide customer care for all of our services
through 17 service centers and 16 commercial offices. We plan to add 80 new
service centers during 2002. We also provide payment services for our customers
through several other businesses including supermarkets, banks and other
commonly frequented businesses. There are approximately 373 such offices, all of
which are linked to our central billing and collection system.
Our customers may subscribe for telephone services, pay and obtain
information about monthly bills and inquire about billing adjustments at our
offices. To enhance customer service, our representatives use our customer
service system linked to our central billing and service order system, enabling
them to handle expeditiously both billing and service inquiries.
We provide a 24-hour interactive voice response service through which
customers can register claims and make billing inquiries. In addition, customers
may access their account information online 24 hours a day, 7 days a week, on
our website, www.tricom.net. Our website provides information about our services
and can be used to purchase products including prepaid cards, cellular phones
and accessories.
We 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. We investigate other companies' response time and client promises in
order to establish equal or better ones that will ensure our competitive
advantage.
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.
During 2000, in an effort to improve our customer service, we implemented a
customer relationship management (CRM) system, integrating our information
systems and our customer relationship management software. This system allows
customer service representatives to access all billing, service order and other
client specific information. This enables us to offer speedier service and more
efficient follow through and to monitor
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every step of the customer service relationship. During 2001, we implemented the
Support and Field Service modules and during 2002 we will finish implementing
the collections module.
BILLING AND CREDIT POLICIES
We have developed an integrated billing system for local, long distance,
cellular, cable television, 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 440
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 US$30. If the
customer chooses to pay the installation fee in installments, he must pay a 50%
down payment and the balance within two months. Each residential basic telephone
service subscriber has a credit limit of approximately US$296. 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(TM) card or
making a deposit through the Tricomtrol(sm) 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. We also use a credit
bureau system to check the credit history of new clients.
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. In order to
reinstate service after termination, customers must pay US$15 for wireline
services and US$5 for paging services. No fee is required to reinstate Internet
services after termination. Cellular subscribers whose service has been
terminated may reconnect only by purchasing an Amigo(TM) prepaid card or by
paying US$11to obtain Tricomtrol services. Telecable customers muSt pay a US$7
fee to reinstate services.
We had an average monthly churn rate for cellular and PCS subscribers of
4.6% in 2001 compared to an average monthly churn rate of 3.1% in 2000,
reflecting primarily our decision to disconnect lower revenue-generating prepaid
customers by shortening the expiration of our prepaid calling cards to 30 days.
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 and smaller reseller customers pay on a weekly
basis for long distance services. Some customers that have a previous
relationship with TRICOM USA are extended credit for 15 to 30
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days on average, depending on proven reliable financial condition. Traditional
long distance carriers generally pay TRICOM USA within 60 to 90 days for
traffic.
MANAGEMENT INFORMATION SYSTEMS
Our business applications are designed to fulfill two principal
necessities. First, to generate accurate information in real time, which is then
readily accessible to employees at all levels of the organization, particularly
those dealing directly with customers. Second, to provide our customers with
direct access to pertinent information from our computer network. For this
reason, we have designed a fully integrated, open architecture network.
Our business applications are developed according to industry standards and
include the following characteristics:
- Tailor made features;
- UNIX operating system;
- Enterprise Relational Data Base;
- GUI;
- Table driven; and
- Open systems.
We use Oracle as our unified database and software application development
tool set. We use Oracle Financials as our ERP system, which includes the
following modules: accounts payable, accounts receivable, general ledger,
purchase orders, inventory control and fixed asset accounting.
We have developed an integrated billing and customer care system that runs
on the 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. It also enables us to
rate calls according to each customer's specific service package, thus
permitting us to offer tailored packages. This application has been so
successful that, in August 2000, we entered into a product marketing alliance
agreement with Codisa Software Corp., a leading Latin American developer and
provider of business applications, for the exclusive distribution of Tricom's
advanced billing and operational support platform.
The main features of our Billing System include: convergent (wireless,
wireline, Internet, data, paging, dispatch); credit scoring; post and pre-paid:
direct debit; credit card; point of sale; cash registers; commissions; multi
currency; accounting (automatic interface to GL); web statement and payment;
unlimited number of billing cycles; pre-cycle; concurrent billing cycles;
flexible handling of letters; messages: inserts and several other functions.
The main features of our customer care system are: provisioning for
wireless, wireline, Internet, data, paging, dispatch and cable television;
retention; trouble tickets; inventory; maintenance; scheduling; plant records;
directory listing; claims handling and resellers; multi location; use of
Electoral Census data base; corporate quotations; online switch programming (for
automatic activation, disconnect, reservation, etc.); product configuration;
customer profile: and Map Viewer/EWO. Our Lan/Wan structure is supported by a
high-speed metropolitan network that communicates with our main offices through
fiber optic cable with alternating routes in a 36 kilometer radius around the
capital city of Santo Domingo. Our net switches are strategically located in our
main IT centers, allowing users direct access to our applications with the same
response time from virtually any location. This network is supported by a
combination of state-of-the-art technology from Cisco Systems and Enterasys
Networks (formerly Cabletron) conforming a system of intelligent network paths
allowing us to seamlessly and automatically switch connections between points.
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Our Lan topology includes: Gigabit Ethernet Backbone over fiber; TCP/ IP
protocol; 100 Mbps dedicated connection for each user; structured cabling,
redundancy; 24x7 monitoring and support; and flexible network structure.
Our Wan topology includes: TCP/ IP protocol; frame relay; T1; wireless
network; VPN access for backup of overseas sites and round-the-clock monitoring;
and support of the Wan.
Remote sites include New York, Miami, Puerto Rico, Panama, and over seventy
other sites.
NETWORK INFRASTRUCTURE
Our state-of-the-art network includes:
- Our local access network;
- A digital wireless point-to-point transmission system;
- Our mobile network;
- Two satellite earth stations in the Dominican Republic and capacity in
eleven international undersea cables; and switches in New York, Puerto
Rico and in Miami to connect international traffic originating in the
U.S; and
- Our cable television network.
We invested over $800 million from 1992 through 2001 to develop our
network, 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. These switches have switching capacity of more than 4,300 digital
trunk lines and possess special features such as ultra-high-speed, port-to-port
call switching that can handle 240,000 calls per second. Our switch time-of-day
capability allows us to distribute efficiently our telecommunications traffic
and provide, as a result, more competitive pricing. Our switches also provide
statistical call distribution information, which allows us to control our flow
of traffic. Without such capabilities, we would have to conduct these monitoring
tasks manually. The switches also enable 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 wireline local access network is composed of Nortel central switches,
39 remote switches and 51 digital loop carriers. Each of the central switches is
capable of supporting up to 90,000 customers. Our Northern Telecom switches
enable us to offer value-added services including caller identification,
three-way calling and automatic recall. Our intra-city network is comprised of
500 route miles of fiber optic cable and over 3,000 miles of copper cable in
seven cities.
We use digital loop carrier technology, which is digital network
transmission equipment used to provide multiple phone conversations, and fiber
optic cable 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 our management system, located at our
central office. Without the use of the digital loop carriers, we would have to
maintain additional central office switches, which would require us to incur
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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. A point-to-point backbone system is a dedicated
connection between two endpoints of a communications network. The backbone
system links approximately 85% 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 like Puerto Plata and Higuey, integral to
the tourist and agricultural sectors, respectively. The wireless point-to-point
system serves the areas that have high telecommunications usage, including large
industrial and commercial areas. We interconnect with Codetel in 12 cities of
the Dominican Republic.
To oversee and monitor the activities of our network infrastructure, we
have installed a network management system. This system allows us to manage our
central office switches and remotely monitor all network components. 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 to test our network.
Our cellular network in the Dominican Republic uses analog technology and
our PCS network uses CDMA or digital protocol. Our analog mobile network
currently has 95 cell sites and two mobile switching centers, 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. To provide PCS
service, we use two Motorola digital switches, 118 cell sites and ten digital
repeaters, which allow us to provide PCS service in 14 main cities and
continuous coverage in the main highway routes of the country.
INTERNATIONAL LONG DISTANCE NETWORK
In July 1998, we installed our own state-of-the-art switching facility in
the New York metropolitan area, which we subsequently upgraded to allow us to
provide multiple international signaling protocols. We also installed a switch
in Puerto Rico that became operational in the second half of 2000, and an
additional switch was installed in Miami and became operational in the first
quarter of 2001. By having our own switching facilities, we can provide
termination of international long distance traffic at very competitive rates to
several countries in addition to the Dominican Republic.
By purchasing and leasing international traffic capacity from various
systems, we have diverse options to route our international traffic, and are
fully connected to the international network. We have purchased capacity in
international submarine fiber optic cables that have been built to send and
receive international traffic to and from various countries. These submarine
cables include Americas I, Columbus II, Columbus III, 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 23% of the Antilles 1
submarine cable, which connects the Dominican Republic to the United States via
Americas I, Columbus II, Taino Carib, Americas II and Arcos I. In addition, we
have an earth station, which connects to the PanAmSat satellite system, and an
earth station, which connects to the INTELSAT satellite system serving the
Atlantic region, Africa and Europe. The use of these satellite facilities also
allows us to route international traffic between the Dominican Republic and most
other countries in the world.
CABLE TELEVISION NETWORK
Our cable television uses a broadband network employing radio frequency
transmission over coaxial and/or fiber optic cable to transmit multiple channels
carrying images, sound and data between a central facility and a subscriber's
television. Coaxial cable is a type of cable used for broadband data and cable
systems. This type of cable has high-quality broadband frequency
characteristics, noise immunity and physical durability. Fiber optic cable is a
communication medium that uses hair-thin glass fibers to transmit signals over
long distances with less signal loss or distortion than coaxial cable. Our
existing cable network consists of three major portions: a master headend, a
distribution network and nodes. At our master headend, programming signals are
received, processed, amplified and then sent through our distribution network,
which consists of fiber optic and coaxial cables connected to nodes. A node,
which is typically shared by a number of subscribers within the same area, is a
single connection
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to any of our distribution network's main fiber optic cables that receives and
transmits signals. One node in our existing network typically serves an average
of 820 homes passed. Programming signals then travel, via coaxial cable, from
nodes into subscribers' homes. As part of our plan for the expansion and upgrade
of our network, we plan to redesign our distribution network by installing hubs
and additional nodes to improve the quality and redundancy of our services. Hubs
receive signals from the headend and retransmit signals to the nodes, increasing
the quality and reliability of the signals.
At December 31, 2001, our cable network consisted of approximately 204
miles of fiber optic cable, 718 miles of coaxial cable and 208 nodes, passing
approximately 170,000 homes. Approximately 98% of our network is constructed
above ground, with a small percentage of the fiber optic cable constructed under
ground. We are expanding and upgrading our existing cable into a broadband
bi-directional network that will provide us with a platform for the delivery of
a broad range of services. At December 31, 2001, approximately 40% of our
network had bi-directional capability, and we expect that more than 60% of our
current network will have bi-directional capability by the end of 2002.
The expansion and upgrade of our network involves the conversion of our
existing cable network into a broadband bi-directional network. A broadband
bi-directional network combines the use of fiber optic cable, which can carry
hundreds of video, data and voice channels over long distances, with coaxial
cable, which requires a more extensive signal amplification in order to obtain
the desired transmission levels for delivering programming signals and nodes. We
believe that the primary advantages of a broadband bi-directional network over a
coaxial cable network include:
- greater bandwidth, which allows us to provide Internet access and
other multimedia;
- communications services;
- better signal quality and reliability;
- increased channel capacity;
- a reduction in the number of homes per node, which improves the
overall capacity of the network and reduces the number of households
affected by a disruption in the network; and
- bi-directional capability.
BROADBAND DATA TRANSMISSION AND INTERNET NETWORK
Our Internet Services is provided by a Sun, 3Com and Cisco platform. The
network has equipment to connect to international carriers, including Teleglobe,
UUNET and Sprint. Currently, we have the capacity to handle more than 10,000
dial-up users and provide email, Internet connection, web hosting, news and real
audio/video.
Other new services are under development through a Nortel Network Shasta
Platform, which became operational in the first quarter of 2002. This platform
will enable us to offer our customers firewalls for xDSL and lease lines,
bandwith control and auto-bandwidth, filtering, captive portal, content, and
virtual private networks.
Data communications services are primarily targeted to the business
community and provided at a variety of speeds. Our data communications network
consists of Newbridge Alcatel data multiplexing nodes, which are network
connection points that allow for the transmission of two or more signals over a
single channel, linked to 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
8,177 access lines offering speeds in excess of 56 kilobytes per second. Our
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.
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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 multiple redundant
machines serve key components of our server architecture.
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.
Our local and mobile 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, Centennial Dominicana and France Telecom
(Orange). Codetel, a wholly owned subsidiary of Verizon, is an integrated
communications service provider, which has the largest number of local access
lines and subscribers for mobile services in the country. Orange, a subsidiary
of France Telecom Group, initiated cellular operations in the fourth quarter
2000. Orange operates a GSM 800 MHZ network in the main cities of the country.
In 2001, Orange implemented an aggressive expansion strategy based on low prices
in mobile equipment and distribution network with dealers. Orange subscribers
represent in excess of 20% of the subscribers for mobile services in the
Dominican Republic. Centennial Dominicana, a joint venture of Centennial
Communications Corp. launched PCS wireless services in the last quarter of 2000.
Centennial offers low long distances calling rates to the United States from the
Dominican Republic.
The Dominican government also has granted concessions to the following
telecommunications companies which either have not yet commenced operations or
have minimal operations: Telecomunicaciones America, C. por A., Compania
Telefonica del Norte, S.A., Servicios Globales de Telecomunicaciones, 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, several international companies have expressed serious
interest in entering the Dominican telecommunications market to Indotel. These
include AT&T, US Sprint, DG Cell and Telefonica S.A.
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 including 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. Competition primarily is
based on price, although reliability, quality of transmission, routing capacity
and customer service also are competitive factors. We expect that competition
will continue to intensify.
CABLE TELEVISION SERVICES
We are the largest cable television operator in the Dominican Republic
based on our number of subscribers and homes passed as of December 31, 2001. As
of that date, our cable network served 64,466 subscribers, including 56,896
basic and premium subscribers and 7,570 commercial rooms, with approximately
170,000 homes passed. We face little competition in Santo Domingo and
surrounding areas from other cable television operators. Indotel reports 112
cable operators in the Dominican Republic, including illegal cable television
providers, and is currently attempting to register all illegal cable television
providers.
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We also face competition from widespread pirate direct broadcast satellite
(DBS) transmission. There is no legal DBS service offered in the Dominican
Republic. For several years, the Dominican pay television market has been harmed
by the persistent violation of copyright laws or "piracy." TCN Dominicana has
deployed encoding technology to aid in reducing piracy from its network.
All pay television service providers, including cable television systems,
DTH satellite services and multi-point, multi-channel distribution system
operators, face substantial competition from other signal delivery methods,
including television broadcasters. The ability of potential subscribers to
directly receive traditional public over-the-air television signals from
television broadcasters may hinder our ability to obtain additional subscribers.
CENTRAL AMERICA MOBILE SERVICES
REGIONAL STRATEGY
We have identified markets in Central America in which we intend to offer
specialized mobile radio services using Motorola's iDEN(R) technology. We
believe that Central America is an attractive market to target as one congruous
telecommunications region. We recently completed the construction of our digital
network in Panama and initiated services in April 2002. We currently do not
anticipate construction of network or offering services in other countries until
we have established our operations in Panama and obtained additional financing.
If we proceed with our strategy, we plan to be the first telecommunications
operator to establish a seamless intra-regional specialized mobile service
network targeted at business customers using a single transmission technology,
iDEN(R), in the major business centers in Central America where the majority of
the urban population resides.
We have interests in international fiber optic submarine cable systems that
connect Central America and the Caribbean with the United States and Europe.
These facilities will enhance the implementation of our intra-regional strategy,
as well as contributing to our share of international traffic. Our interests in
submarine cable systems and our ownership of switching facilities enable us to
originate, transport and terminate traffic at reduced costs. We also will
capitalize on our scalable back office systems, which integrate sales, customer
service, collections and financial control functions. These allow us to expand
our operations in a cost-efficient manner. Our objective is to provide roaming
throughout the region using a unified platform. This will allow us to achieve
cost savings in network buildout. Our undersea fiber optic facilities provide
connections between each of our targeted markets and our support systems in the
Dominican Republic. Generally, in implementing our digital mobile network
strategy, we intend to form a strategic alliance with a local group in each
country to expand our telecom services and to promote and use the TRICOM name in
each market.
We intend to create a digital mobile network in each of our targeted
markets using Motorola's proprietary iDEN(R) technology. iDEN(R) technology
provides one network with four communications systems: dispatch radio,
full-duplex telephone interconnect, short message service and data transmission,
including packet data and circuit data.
Developed by Motorola, iDEN(R) is a high-capacity digital trunked radio
system providing integrated voice and data services to its users. The iDEN(R)
system uses M16-QAM digital modulation and VSELP (Vector Sum Excited Linear
Predictor) speech coding techniques coupled with Time Division Multiple Access
(TDMA) channel access methodology to enhance channel capacity and system
services. In the iDEN(R) system, a single inbound/outbound frequency pair (25
khz. Bandwith) is shared among six users through the creation and use of six
15-millisecond time slots. Each user transmits and receives during (and only
during) one of the time slot intervals, so that the transmission from any given
mobile radio is a pulsed RF signal with a 1/6 or 1/3 duty cycle. The base radio
is able to transmit and receive during any of the six or three time slots. Each
mobile radio user is assigned a unique channel designation, which is defined by
both a carrier number and a time slot definition. The carrier number specifies
the inbound/outbound frequency pair.
On July 31, 2000, we entered into an infrastructure supply agreement to buy
systems and license the iDEN(R) technology from Motorola. This serves as a
regional frame agreement for our purchase of systems for each country in the
region, except Belize. The system components to be supplied include switches,
radio subsystems dispatch systems, packet data and intelligent network
components. Motorola will provide installation, integration, optimization,
management and system engineering, software maintenance and training services.
The agreement also
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provides price discounts for enhanced base transceiver stations, or EBTS, which
are antennae located at base sites to provide radio coverage in specific
geographic areas, based on the volume of our orders. The agreement contains a
warranty for Motorola manufactured hardware equipment for 12 months following
the date of shipment and other customary terms and provisions. In addition to
the iDEN(R) technology, it will be necessary for us to purchase additional
technologies and site components from third parties, including microwave radios,
towers, shelters and power generators.
PANAMA
OVERVIEW
In 2001, we purchased a 51% interest in a Panamanian company, Cellular
Communications of Panama, S.A., now Tricom Panama, S. A., which owns the
frequency rights for 107 channels of 25 megahertz each. Tricom Panama has
approximately 2,200 analog mobile users. These frequencies will give us access
to nationwide coverage, covering a population of approximately 2.89 million
people. In Panama, frequency rights are granted for 20 years and are
automatically renewable for additional 20 year terms.
We recently completed the construction of our digital network in Panama
City and Colon (the two largest cities in Panama) and the transportation
corridors that link those cities with airports and ports. We are also in the
final construction stages of our network along the corridor that connects Panama
City, the capital, with its satellite cities and the most important beaches,
recreational and tourist areas of the country. To date, we have invested $37
million in this deployment, primarily for the purchase of:
- a switching office for telephone and radio communications dispatch
through which mobile service traffic is originated or terminated;
- enhanced base transceiver stations, which are antennae located at
base sites to provide radio coverage in specific geographic areas;
and
- site acquisition and construction.
Our expected completion date for this phase of the buildout is the second
quarter of 2002.
On April 8, 2002, we began to offer our iDEN(R) services in Panama.
MARKET OPPORTUNITY.
At December 31, 2000, Panama had a population of approximately 2.89
million, with an estimated Gross Domestic Product of $7.4 billion in 2000, and a
Gross Domestic Product growth rate of 2.5% for that year. Approximately 57% of
the population lives in urban areas. Mobile penetration for Panama in 2001 was
17% while wireline penetration was 12.1%.
MARKETING PLANS
We will offer specialized mobile radio services, including two-way radio,
and interconnect services. We plan to offer our digital services mainly to
business customers, offering a wide range of bundled programs with different
services and pricing plans, customized to meet our clients' specific needs. We
are currently marketing our services through direct sales and intend to do so
through independent dealers as well.
COMPETITION
The mobile market in Panama has been open to competition since 1996. TRICOM
Panama's digital radio services will compete with the two digital wireless
communications providers in the country, Cable & Wireless of Panama and BSC of
Panama (a subsidiary of BellSouth), as well as with several analog trunking
operators. The Panamanian government granted a 10-year duopoly service
concession to both digital wireless operators in 1997 as
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part of the privatization of the telecommunications industry. Panama had an
estimated 17% wireless penetration at year-end 2001.
REGULATORY AND LEGAL OVERVIEW
To provide telecommunications services, a Panamanian or foreign company
must obtain a service concession from the ENTE REGULADOR DE SERVICIOS PUBLICOS,
or ENTE. There are two types of service concessions, Type "A" and Type "B". Type
"A" service concessions currently are awarded on an exclusive basis. Services
under a Type "A" category concession include basic telecommunications and
cellular services. Additional concessions of this type will not be granted again
until 2003 for basic telephony and long distance and until 2007 for PCS
services.
Type "B" service concessions are awarded on a non-exclusive basis to
companies which meet specific requirements and complete the application
procedures for the services they wish to provide. Applicants must include a form
of the contract they intend to enter into with potential customers and a diagram
of the system that will be operated in order to provide the contemplated
services, among other information. Applicants may submit their applications to
provide Type "B" services on any one of four specified dates a year.
Additionally, since Type "B" telecommunications service concessions are open to
all companies which meet the requirements, the terms of the concession are the
same for all concession holders. However, each concession holder must comply
with fair competition practices in providing services to its clients and in
relation to other concession holders. Concession holders also must provide
services in a nondiscriminatory manner. Concession holders may also assign or
transfer their concessions to other companies which meet the same requirements
that ENTE considered at the time it awarded the concession, subject to ENTE's
authorization. ENTE may only deny a transfer or assignment when the transfer or
assignment would be prohibited by law or against fair competition practices.
Telecommunications providers are required to pay annual fees to the government
of 1% of their total gross revenues.
Tricom Panama has four of the twenty-six Type "B" service concessions, one
to provide each of the following services: (1) conventional trunking systems for
public or private use, (2) fixed or mobile radio communication services, (3)
data transport services, and (4) paging services.
Panamanian telecommunications law prohibits companies providing trunking
mobile services to hand off telephone calls, even if the hand-off would be from
one site to another site owned by the same trunking company. Our iDEN(R) system
does not permit hand-off. Therefore, we have built additional EBTS in Panama to
minimize the number of calls dropped due to handed-off failures. We believe that
additional EBTS will prevent a higher percentage of dropped calls than would
otherwise occur due to the effect of this restriction on hand-off under
Panamanian law.
In addition, Panamanian telecommunications law requires that all concession
holders permit and maintain nondiscriminatory interconnection of other
concession holders to their networks. A concession holder is required to use its
best efforts to reach an interconnection agreement within 120 days from the date
on which another concession holder sends a copy of an interconnection request to
the ENTE, with confirmation that the concession holder with which
interconnection is sought also has received the request. After this 120-day
period, any of the parties may request the intervention of the ENTE in
negotiations. The ENTE may intervene in the process if interconnection is not
negotiated by the parties or is not provided on terms at least equal to those
that other concession holders have obtained in similar circumstances.
Tricom Panama requested interconnection from Cable & Wireless. With the
intervention of the ENTE, the parties negotiated and agreed upon most of the
terms of interconnection, except for access charges and certain other economic
aspects, which the parties were not able to agree upon. The ENTE resolved the
impasse by mandating the access charges and other economic aspects. Thereafter,
Cable & Wireless refused to sign the interconnection agreement on the ground
that it might be prohibited from doing so by a precautionary measure obtained by
BSC of Panama against Tricom Panama in August 2001. Such precautionary measure,
which following an appeal was lifted in December 2001, had ordered Tricom Panama
to cease the installation of its iDEN(R) system in Panama. The ENTE has imposed
on Cable & Wireless sanctions of US$5,000 per day until it signs the
interconnection agreement with Tricom Panama. Cable & Wireless appealed the
ENTE's sanctions order before the Supreme Court, and the case is pending
decision.
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Panama has no restrictions on repatriation or monetary transfers to and
from Panama nor does it have any exchange controls. The unit of currency, the
Balboa, is issued only in coins which are identical in size and value with those
of the United States. Panama's paper currency is the U.S. dollar. There are few
limitations or restrictions on foreign investment, especially for international
business operations based in Panama. One of the few exceptions is that certain
sales to consumers of retail goods are reserved for Panamanian nationals.
As a telecommunications business, we will have to pay a monthly regulatory
fee to ENTE of 1% of our previous month's gross income in addition to the 1% of
gross revenue annual fee required to be paid by telecommunications providers. We
are also subject to certain taxes, including income, franchise, dividend and
commercial license taxes.
GUATEMALA AND EL SALVADOR
In 2000, we were awarded, in a government auction, radio frequency rights
in Guatemala to 172 channels of 25 megahertz, providing us with nationwide
coverage. We have also acquired the spectrum to operate our iDEN(R) network in
El Salvador through the purchase of radio frequency rights for an aggregate of
185 channels of 25 megahertz, 175 of which we purchased from a U.S.
telecommunications company that previously owned the rights and 15 of which we
acquired through a government auction. We currently do not intend to develop a
network in either Guatemala or El Salvador in 2002.
REGULATION
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 or the regulator with individual
service providers.
In addition to the industry-specific legal framework, the Constitution of
the Dominican Republic affects the telecommunications sector. Among other
individual and social rights, the Dominican Constitution guarantees Dominican
citizens the freedom of trade. The Constitution specifically provides that
monopolies must be established by law and only for the benefit of the Dominican
government. 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 for 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.
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GENERAL TELECOMMUNICATIONS LAW NO. 153-98 OF 1998
Former Telecommunications Law No. 118 of February 1, 1966 was repealed by
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 to 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 to customers
for 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 Inodotel), and established the
regulator's responsibilities, authorities and procedures. The regulator is
headed by a five-member council, the members of which serve a four-year term,
and includes a representative from the telecommunications industry. Among other
responsibilities, Indotel is charged with implementing telecommunications
development projects to satisfy the requirements of the Universal Service
Principle. Law No. 153-98 grants Indotel control over all frequency bands and
channels of radio transmission and communications within the country and over
its jurisdictional waters.
Law No. 153-98 encourages competition in all telecommunications services by
enforcing the right to interconnect with existing participants and ensuring
against monopolistic practices, and at the same time upholding those concessions
that are operational. The law establishes mechanisms to set cost-based
interconnection charges and to resolve interconnection disputes by requiring
existing operators to amend their interconnection agreements consistent with the
new requirements. The law also eliminates cross subsidies and provides for
progressive rate rebalancing of those tariffs that traditionally have been
subsidized, in order to reflect costs more closely. This rates rebalancing
process was completed on December 31, 2000 in accordance with article 120 of Law
No. 153-98.
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.
RECENT REGULATORY INITIATIVES
PROPOSED TELECOMMUNICATIONS REGULATIONS
In 2001 and 2002, Indotel initiated several public inquiry processes, like
a U.S. Federal Communications Commission notice for proposed rule making, in
connection with several proposed regulations. In November 2001, Indotel
published for public comment the "National Routing Plan", which, among other
things, intends to divide the country into five regions, within each of which
telephone calls would be deemed local. In December 2001, Indotel initiated a
public inquiry process for the issuance of pending interconnection regulations.
The draft interconnection regulations include the unbundling tenet and several
other elements similar to those of the system under the US 1996
Telecommunications Act. In January 2002, Indotel commenced a public inquiry
process as to several other regulation projects including a non-rounding up
regulation which seeks to establish the second as the traffic measurement and
pricing unit within the telephone network. This impedes telephone companies from
being able to
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round up to the next minute fractions of traffic (though a call lasting less
than a minute can be rounded up to one minute). Another proposed regulation is
aimed at providing subscribers the right to choose whether or not to use the
voice mail services of the called party. The adoption and implementation of all
or any one of these proposed regulations could have a financial impact on our
telecommunications business.
PROPOSED CABLE REGULATION
In July 2001, Indotel initiated a public inquiry process in connection with
a proposed cable broadcasting regulation. The draft cable broadcasting
regulation contemplates the "must-carry" rule. Under such rule, cable systems
are required to carry virtually "for free" the signals of UHF and VHF channels.
The adoption and implementation of this proposed regulation could have a
financial impact on our cable television business.
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.
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
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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
- taxes on the transfer of industrialized goods and services and
exchanging commission.
The 10% selective consumption tax previously charged on billings of
international and domestic long distance traffic to customers was repealed by
Law No. 153-98 and substituted with the 2% CDT tax. In addition, under the 1996
concession agreement, the Dominican government is obligated to grant to us any
term or condition that it grants by concession to any other telecommunications
provider in the Dominican Republic more favorable than those contained in the
1996 concession agreement.
Under the Dominican Constitution, agreements with the Dominican government
which contain exemptions from income tax, such as our concession agreement, only
become effective upon approval by the Dominican Congress. 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. 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, and never less than 1.5% of gross revenues,
advanced on a monthly basis, the current tax regime 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
($1.1 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
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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 than it provides to any other
telecommunications entity for interconnection.
Under the interconnection agreement, the parties began paying an
interconnection charge for local-to-local traffic in 1996, which is revised
annually. Additionally, use of the network by either us or Codetel to originate
or terminate cellular, domestic long distance and international long distance
calls requires payment of an access charge, which is reviewed annually and is
calculated based upon an established formula. The access charge consists of a
usage charge and a subsidy charge which only is incurred with respect to
international calls.
On January 2, 1998, we and Codetel executed an addendum to the
interconnection agreement which 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 to:
(1) provide that local interconnection of each company's respective
Internet nodes and to enable the clients of each company to access
both our respective servers and nodes to access the Internet;
(2) simplify the billing and collection process for interconnection
services; and
(3) amend the regulation on interconnection costs. In addition, the second
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 2000, RD$0.80 ($0.05) per minute for the second
quarter of 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 January 1, 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
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(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. Codetel and we have, through
our second addendum to the interconnection agreement, adjusted 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
settlement rate benchmarks based on foreign carriers' publicly available
tariffed rates and data published by the International Telecommunications Union,
which the FCC refers to as the "tariffed components price" or "TCP" methodology.
Under the TCP methodology, the FCC analyzes three tariffed network elements:
(1) international transmission facilities;
(2) international switching facilities; and
(3) national extension (domestic transport and termination).
The FCC also considers each country's level of economic development in
determining country-specific settlement benchmark rates. The FCC has grouped
each country into one of four categories based on its level of economic
development--upper income, upper middle income, lower middle income and lower
income. The settlement rate benchmark for each category is calculated using the
average of the TCPs for all countries in each respective category. The
per-minute benchmark settlement rates are $0.15 for upper income, $0.19 for
upper middle income, $0.19 for lower middle income and $0.23 for lower income.
Under the FCC's income categories, the Dominican Republic is in the lower middle
income group and our benchmark settlement rate would be $0.19 cents per minute.
Pursuant to the order, U.S. carriers were required to enter into settlement rate
arrangements with foreign carriers in lower middle income countries at or below
the applicable benchmark rate by January 1, 2001. Currently, TRICOM's settlement
benchmark rate for the Dominican Republic is within the prescribed limits.
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.
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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. 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.
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. TRICOM USA,
Inc. also has the ability as a U.S. carrier to develop its own business plan for
markets other than the Dominican Republic, and has been approved by the FCC to
communicate from the United States with 186 countries via satellite and with 28
countries via fiber optic submarine cables.
As a carrier holding an international authorization from the FCC, TRICOM
USA is subject to various statutory and regulatory telecommunications mandates,
including the duty to offer services at just and reasonable rates, the
obligation to file and maintain tariffs at the FCC setting forth TRICOM USA's
rates, terms and conditions, and the requirement to obtain prior approval for
most transfers of control and assignments of authorizations, except those
considered non-substantial, or "pro forma" under FCC rules. The FCC may address
regulatory non-compliance with a variety of enforcement mechanisms, including
monetary forfeitures, refund orders, injunctive relief, license conditions,
and/or license revocation.
We believe we are in compliance with all material laws and regulations in
the countries in which we operate. Future regulatory, judicial, or legislative
activities could have a material adverse effect on our financial condition,
results of operations or cash flow.
We are certified by the public utility commissions of Puerto Rico, Florida
and New York, and are currently in the process of obtaining certification in
Alaska, California, Georgia, Illinois, Maryland, Massachusetts, New Jersey,
Pennsylvania, Rhode Island, U.S. Virgin Islands, including St. Thomas and St.
John, and Washington, D.C. In addition, TRICOM USA obtained on July 7, 2000 a
Class B License for the provision of international telecommunications services,
and is in the process of registering to do business in Ontario and Quebec.
TRICOM USA does not operate telecommunications facilities used in transporting
basic telecommunications service traffic between Canada and other countries.
TRICOM USA's services in Canada are provided through a service arrangement with
MCI WorldCom, to handle traffic originated from the prepaid calling cards sold
in Canada.
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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.
PROPERTY, PLANT AND EQUIPMENT
Our principal properties consist of our fiber optic network, satellite
earth stations, nodes and real estate. At December 31, 2001, the net book value
of our real estate and equipment was approximately $686 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 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
REVENUE OVERVIEW
We derive our operating revenues primarily from toll revenues,
international revenues, local services, data and Internet, cellular and PCS
services, cable television services, the sale 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, and other carriers, for calls that originate in or transit their
networks 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. Traffic is based on the minutes that the foreign
telecommunications companies have terminated in the Dominican
telecommunications network, either on our own network or on Codetel's
network, including revenues derived from our U.S.-based international long
distance prepaid 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 voicemail, as well as calls made to
cellular users under the calling-party-pays system and revenues from other
miscellaneous local access services. Local measured service includes
monthly phone line rental for a specified number of calls within a defined
area, plus a charge for additional calls.
Data and Internet revenues consist of fixed monthly fees received from our
residential and corporate customers for high speed broadband data
transmission and Internet connectivity services, including traditional
dial-up connections, dedicated lines, private networks, frame relay,
digital subscriber lines, or xDSLs, that provide high-bandwidth
transmission of voice and data over regular telephone lines and very small
aperture terminals, or VSATs, relatively small satellite antennas used for
high speed satellite-based single to multiple point data transmissions,
including for the internet.
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 voicemail, and for other miscellaneous
cellular and PCS services.
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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 of equipment consist of sales fees for customer
premise equipment, including private automatic branch exchanges, which are
small versions of a phone company's central switching system often used by
private companies, and key telephone systems, residential telephones,
cellular and PCS handsets and paging units.
Cable television revenues consist of monthly fees derived from basic
programming, expanded basic programming, premium services, digital music
services, Internet access, installation and revenues from advertising sales
to national advertisers on non-broadcast channels we carry over our cable
communications systems. Cable television revenues are recognized when the
service is provided and collection is probable.
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 phones and PCS. Beginning with January 1, 2000, we
have recognized these revenues over the estimated period in which, based on
our experience, we retain such clients. Initially we estimated this period
as 35 months. Effective October 2, 2001, we revised this period to 24
months, based on our experience with clients. In prior periods, we
recognized these revenues when they were collected.
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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The following table sets forth the percentage contribution of each category
of revenues to total operating revenues for the period indicated:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------
1999 2000 2001
-------- -------- --------
Toll 13.5% 12.8% 11.9%
International 35.5 37.5 33.6
Local service 19.5 22.9 26.0
Data and Internet 0.3 1.5 3.4
Cellular and PCS 15.5 16.0 15.3
Paging 1.6 0.8 0.4
Sale of equipment 4.5 2.3 1.1
Installation and activation fees 9.1 6.1 5.9
Cable - - 1.9
Other 0.5 0.1 0.4
-------- -------- --------
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,
---------------------------
1999 2000 2001
-------- ------- --------
Operating costs 75.7% 81.7% 94.1%
Operating income 24.3 18.3 5.9
Interest expense, net 11.7 13.7 16.3
Other income (expenses), net (11.2) (13.9) (15.9)
Earnings (loss) before income taxes,
minority interest and cumulative
effect of accounting change 13.1 4.4 (10.0)
Net earnings (loss) 12.9 (3.2) (9.5)
EBITDA 44.1 39.1 33.7
</Table>
2001 COMPARED TO 2000
OPERATING REVENUES. Our total operating revenues increased 8.7% to $243.8
million in 2001 from $224.3 million in 2000. This growth stemmed primarily from
increases in revenues from local service, data and Internet, cable television
and wireless services, offset, in part, by decreased international revenues and
decreased revenues from the sale and lease of equipment.
TOLL. Toll revenues increased 1.2% to $29.0 million during 2001 from $28.7
million for 2000, primarily as a result of higher interconnection charges and a
higher volume of domestic long distance traffic, offset, in part, by decreased
revenues derived from outbound international traffic.
Revenues from interconnection charges increased 13.3% to $8.1 million
during 2001 from $7.2 million in 2000. The increase in interconnection charges
reflected the growth in our local access subscription base, as well as growth in
the Dominican telephony markets.
Revenues from outbound international calls decreased by 12% to $14.5
million during 2001 from $16.5 million in 2000, primarily as a result of a
decrease in the price per minute for outbound international calls for
residential and commercial customers. The average price per minute for outbound
international calls declined to
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$0.54 in 2001 from $0.89 in 2000. Outbound international minutes increased by
1.9% to 33.1 million in 2001 from 32.5 million minutes during 2000, reflecting
increased traffic volume from our cellular and PCS customers.
Domestic long distance revenues increased 5.9% to $5.4 million during 2001
from $5.0 million in 2000. Domestic long distance minutes increased by 10.8% to
50.8 million minutes during 2001 from 45.9 million minutes during 2000. The
increase in domestic long distance minutes resulted from higher traffic volume
from our retail call centers. The increase in domestic long distance minutes was
offset in part by an approximate 16% decrease in 2001 in the average price per
minute. Pending regulatory proposals that would divide the Dominican Republic
into five zones and provide that intrazone calls are local could have the effect
of decreasing rates for some calls if the regulations are adopted.
INTERNATIONAL. Our international revenues decreased 2.6% to $82.0 million
in 2001 from $84.2 million in 2000, primarily as the result of continued pricing
pressures for traffic between the United States and the Dominican Republic. Our
average settlement rate was $0.095 per minute during 2000 and $0.053 per minute
during 2001. The volume gains achieved in 2001 were not sufficient to offset
pricing declines, particularly during the fourth quarter of 2001, in which
international revenues decreased 16% from international revenues in the fourth
quarter of 2000.
Inbound minutes increased by 30% to 732.7 million minutes in 2001 from
563.4 million in 2000. TRICOM USA accounted for approximately 86.0% of our total
inbound minutes in 2001 compared to 71.1% in 2000. Total minutes from our
U.S.-based international long distance prepaid cards increased by 48.1% to 205.2
million minutes in 2001 from 138.6 million during 2000. Revenues from our U.S.
based international long distance prepaid calling cards increased by 27.6% to
$31.6 million in 2001 from $24.8 million in 2000.
LOCAL SERVICE. Local service revenues increased 23.6% to $63.4 million
during 2001 from $51.3 million in 2000, primarily as the result of the continued
growth in the number of local lines in service. In 2001, we added 29,040 net
local access lines compared to 29,386 net local access lines added in 2000. At
December 31, 2001, we had 177,352 local access lines in service compared to
148,312 local access lines in service at December 31, 2000 representing a 19.6%
increase.
As a result of a higher number of lines in service, measured local service
revenues increased by 23.1% to $13.2 million in 2001 from $10.8 million in 2000.
Revenues from monthly fees increased by 20.6% to $40.3 million in 2001 from
$33.4 million in 2000. Revenues derived from cellular calls under the
calling-party-pays system increased by 37.3% to $6.5 million in 2001 from $4.8
million in 2000. Our average monthly churn rate for local service was 1.9% in
2001 compared to 2.3% in 2000. 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.
DATA AND INTERNET. Data and Internet service revenues increased 138.9% to
$8.3 million in 2001 from $3.0 million in 2000, primarily as the result of the
continued growth in the number of data and Internet subscribers. The number of
our data and Internet subscribers grew to 8,713 at December 31, 2001 compared to
6,080 at December 31, 2000. The increase in revenue also reflects an increase in
our average basic monthly rent as well as revenues that we received from our
contract with the Dominican government to provide data and Internet services to
Dominican public high schools.
CELLULAR AND PCS. Our cellular and PCS revenues grew 4.2% to $37.3 million
in 2001 from $35.8 million in 2000. The growth in our wireless operations was
the result of a 27.7% increase in subscribers. At December 31, 2001, we had
364,059 cellular and PCS subscribers compared to 284,991 at December 31, 2000.
As a result of a higher average subscriber base, minutes of usage increased
22.6% to 204.2 million minutes in 2001 from 166.6 million minutes in 2000. The
average price per minute of use declined to $0.20 in 2001 from $0.24 in 2000,
reflecting increased price competition initiated by new entrants to the market
in 2000.
We attribute the substantial growth of our subscriber base to the continued
success of our prepaid cellular program. Prepaid cellular and PCS services
generated approximately 70% of our total minutes of use and 71% of total
cellular and PCS revenues in 2001. Prepaid revenues increased by 27.6% to $26.7
million in 2001 from $20.9 million in 2000. Revenues from post paid subscribers
declined by 16.8% in 2001 from 2000, reflecting a decline in the number of post
paid subscribers. We initiated programs in 2002, which have resulted in
increasing our postpaid
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subscriber base. Our average monthly churn rate for cellular and PCS services
increased to 4.6% in the 2001 from 3.3% in 2000 reflecting primarily our
decision to disconnect low-usage prepaid subscribers during 2001.
PAGING. Paging revenues decreased 38.3% to $1.1 million in 2001 from $1.7
million in 2000, primarily as a result of the Company's decision to focus on
having new customers move away from paging services and into prepaid cellular
services. At December 31, 2001, we had 12,090 paging subscribers compared to
21,622 paging subscribers at December 31, 2000. Our average monthly churn rate
for paging services increased to 4.3% in 2001 from 3.3% in 2000.
SALE OF EQUIPMENT. Revenues from the sale of equipment decreased 49% to
$2.7 million in 2001 from $5.3 million in 2000, primarily as a result of lower
sales of cellular and PCS handsets and private branch exchanges and key
telephone systems. We have entered into arrangements for the distribution of
cellular and PCS services through major electronics retailers. These
arrangements have decreased equipment sales revenues but we believe added
subscribers and we believe contribute to increased cellular and PCS service
revenues.
INSTALLATION AND ACTIVATION. Installation and activation revenues increased
4.4% to $14.3 million in 2001 from $13.7 million in 2000, primarily as a result
of higher average activation fees for local access service, offset, in part, by
lower revenues derived from lower average activation fees charged for cellular
and PCS services. In response to competition, recently we have not charged
activation fees for new cellular and PCS customers.
CABLE TELEVISION. In the fourth quarter of 2001, we acquired the shares of
TCN Dominicana, S.A., a wholly-owned subsidiary of Telecable Nacional, C. por
A., that owns and operates the largest multi-channel system in the Dominican
Republic's pay-TV market including the concession granted by the Dominican
government to operate a cable system. Revenues from cable television services
totaled $4.7 million in 2001, primarily from basic and premium programming
services and advertising sales. At December 31, 2001, we had 64,466 cable
subscribers, including 56,896 basic and premium subscribers, and 7,570
commercial rooms. Programming services revenues totaled $3.9 million and
advertising revenues totaled $768,000 in 2001.
OPERATING COSTS.
Major components of operating costs are:
- satellite connections and carrier costs, which include amounts owed
to foreign carriers for the use of their networks for termination of
outbound traffic and payments for international satellite circuit
leases;
- programming costs, which are amounts paid to programming providers for
licenses to broadcast on our cable television network basic and
premium programming and other content;
- interconnection costs, which are access charges paid primarily to
Codetel and payments for international satellite circuit leases;
- depreciation of network equipment and leased terminal equipment;
- expenses in lieu of income tax; and
- selling, general and administrative expenses, which include salaries
and other compensation to personnel, non-network depreciation expense,
maintenance expenses, marketing expenses, emmissions and other related
costs.
Our operating costs increased to $229.3 million in 2001 from $183.3 million
in 2000. These results reflect higher network and non-network depreciation
expenses resulting from a higher depreciable capital base as a result of our
capital investment and domestic and international network expansion programs. It
also reflects higher general and administrative expense primarily from increased
commissions due to the growth of our retail prepaid card
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<Page>
operations in the United States. As a percentage of revenues, operating costs
increased to 94.1% in 2001 from 81.7% in 2000.
SATELLITE CONNECTIONS AND CARRIER COSTS. Satellite connections and carrier
costs decreased by 0.4% to $68.3 million in 2001 from $68.6 million in 2000,
primarily as a result of lower outbound carrier costs. Outbound carrier costs
decreased by 17.6% to $29.3 million in 2001 from $35.6 million in 2000,
reflecting decreases in outbound revenues.
PROGRAMMING COSTS. Programming costs totaled $1.2 million in 2001.
NETWORK DEPRECIATION AND NON-NETWORK DEPRECIATION EXPENSE. Network
depreciation increased 51.7% to $44.5 million in 2001 from $29.3 million in
2000, as a result of a higher depreciable asset base due to the continued
investments in our local and international networks, including
telecommunications equipment and facilities. Non-network depreciation expense
with respect to other fixed assets grew 45.4% to $9.9 million in the 2001 from
$6.8 million in 2000.
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
during 2001 increased by 24.3% to $12.6 million from $10.2 million in 2000.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and administrative
expenses, excluding non-network depreciation expense, increased 39.1% to $88.8
million in 2001 from $63.9 million in 2000. The increase in the amount of
selling, general and administrative expenses reflected the greater amount of
commissions paid to wholesale distributors of prepaid cards, as a result of a
higher number of prepaid cards sold in the United States and the expansion of
our prepaid cellular subscriber base in the Dominican Republic, and other
expenses, including legal, maintenance and repair of equipment. Commissions paid
to wholesale distributors of prepaid cards grew 40.4%% to $16.3 million in 2001
from $11.6 million in 2000. Other expenses increased 29.5% to $18.3 million in
2001 from $14.1 million in 2000. At December 31, 2001, we had 1,829 employees
compared to 1,740 employees at December 31, 2000. Salaries and other
compensation to personnel increased by 6.6% to $29.0 million in 2001 from $27.2
million in 2000. Marketing expenses increased by 4.1% to $4.5 million in 2001
from $4.3 million in 2000.
As a percentage of total operating revenues, selling, general and
administrative expenses, excluding non-network depreciation expense, increased
to 36.4% in 2001 compared to 28.5% in 2000.
COST OF EQUIPMENT SOLD AND OTHER COSTS. Cost of equipment sold, which
consists of the cost of sale of customer premise equipment, including private
branch exchanges and key telephone systems, as well as cellular and PCS
handsets, decreased by 28.9% to $2.1 million in 2001 from $2.9 million in 2000.
Other costs, which consist of the cost of sale of prepaid services, increased by
12.6% to $1.7 million in 2001 from $1.6 million in 2000.
OPERATING INCOME. Operating income decreased to $14.5 million in 2001
compared to $41.0 million in 2000. Operating income as a percentage of total
operating revenues decreased to 5.9% in 2001 from 18.3% in 2000.
OTHER INCOME (EXPENSES). Other expenses increased to $38.9 million in 2001
from $31.2 million in 2000, reflecting increased interest expenses resulting
from higher average aggregate amount of outstanding debt and despite a decrease
in the average interest paid in 2001. We incurred debt primarily to purchase
network and telecommunications equipment.
NET EARNINGS (LOSS). Net loss totaled $23.1 million, or $0.78 per share, in
2001 compared to a net loss of $7.2 million, or $0.26 per share, in 2000. The
net loss in 2000 included the effect of the $16.5 million cumulative effect of
the accounting change from the adoption of SAB 101.
EBITDA. Earnings before interest and other income, taxes and depreciation
and amortization decreased by 6.3% to $82.2 million in 2001 from $87.7 million
in 2000. We calculate earnings before interest and other income and
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expenses, taxes and depreciation and amortization prior to the deduction of
payments to the government in lieu of income taxes.
2000 Compared to 1999
OPERATING REVENUES. Our total operating revenues increased 31.3% to $224.3
million in 2000 from $170.8 million in 1999. This growth stemmed primarily from
increases in revenues from our international, local service, wireless and toll
services, offset, in part, by decreased revenues from the sale and lease of
equipment and installations.
TOLL. Toll revenues increased 24.0% to $28.7 million during 2000 from $23.1
million for 1999, as a result of higher domestic long distance and outbound
international traffic derived from the growth of our customer base. Domestic
long distance minutes increased by 47.4% to 45.9 million minutes during 2000
from 31.1 million minutes during 1999. Outbound international minutes increased
by 9.4% to 32.5 million minutes in 2000 from 29.7 million minutes in 1999. The
increase in numbers of minutes was offset by an decrease of approximately 15%
during 2000 of our average per minute long distance tariff. The increases in
domestic long distance and outbound minutes resulted from higher traffic volume
from our wireless and local service customers. Wireless and local service
customers respectively accounted for 32.3% and 31.3% of our total long distance
minutes in 2000 compared to 22.3% and 27.9% in 1999. Calls from our call centers
account for our remaining minutes.
INTERNATIONAL. Our international revenues grew 38.9% to $84.2 million in
2000 from $60.6 million in 1999. This increase was due principally to the growth
of inbound traffic volume received from our U.S.-based international carrier,
TRICOM USA. Inbound minutes increased by 70.9% to 563.4 million minutes in 2000
from 329.7 million in 1999. TRICOM USA accounted for 71.1% of our total inbound
minutes in 2000 compared to 59.4% in 1999.
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 $0.14 per minute during
1999 and $0.10 per minute during 2000. 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 grew 54.1% to $51.3 million in 2000
from $33.3 million in 1999, primarily as the result of the continued growth in
the number of local lines in service. In 2000, we added 29,386 net local access
lines compared to 38,310 net local access lines added in 1999. At December 31,
2000, we had 148,312 local access lines in service, including 48,765 wireless
local loop lines, compared to 118,926 local access lines in service at December
31, 1999, including 19,284 wireless local lines. The increase in local service
revenues also reflects an approximate 15% increase in local access rates.
As a result of a higher number of lines in service, interconnection
revenues for local calls received from Codetel and other carriers increased
113.8% to $6.2 million in 2000 from $2.9 million in 1999. Our average monthly
churn rate for local service was 2.3% for 2000 compared to 1.8% in 1999. 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. The increase reflected our policy of financing
installation fees for local access adopted in 1999. In October 1999, we reduced
installation fees and stopped providing financing, which resulted in decreased
monthly churn.
DATA AND INTERNET. Data and Internet service revenues grew 518% to $3.5
million in 2000 from $560,000 in 1999, primarily as the result of the continued
growth in the number of data and Internet subscribers. Data and Internet
subscriber base grew to 6,080 at December 31, 2000 compared to 3,269 at December
31, 1999.
CELLULAR AND PCS. Our cellular and PCS revenues grew 35.2% to $35.8 million
in 2000 from $26.5 million in 1999. The growth in our wireless operations was
the result of a 61.9% increase in subscribers. At December 31, 2000, we had
284,991 cellular and PCS subscribers compared to 176,080 at December 31, 1999.
As a result of a
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higher average subscriber base, airtime minutes increased 27.8% to 166.6 million
minutes in 2000 from 130.4 million minutes in 1999. We attribute the substantial
growth of our subscriber base to the continued success of our prepaid cellular
program.
Prepaid cellular and PCS services generated approximately 59% of our total
airtime minutes and 58.7% of total cellular and PCS revenues in 2000. Prepaid
revenues increased by 44.1% to $20.9 million in 2000 from $14.5 million in 1999.
Our average monthly churn rate for cellular and PCS services increased to 3.1%
in 2000 from 1.8% in 1999 reflecting primarily our decision in the fourth
quarter to eliminate lower revenue-generating prepaid customers by shortening
the expiration of our prepaid cards to 30 days.
Interconnection revenues attributed to airtime traffic received from
Codetel and other carriers increased by 22.4% to $4.3 million in 2000 from $3.5
million in 1999 due to a larger subscriber base, as well as a higher volume of
incoming minutes received by prepaid cellular and PCS subscribers.
PAGING. Paging revenues decreased 36.8% to $1.7 million in 2000 from $2.7
million in 1999, primarily as a result of the Company's decision to focus on
having new customers move away from paging services and into prepaid cellular
services. At December 31, 2000, we had 21,622 paging subscribers compared to
28,737 paging subscribers at December 31, 1999. Our average monthly churn rate
for paging services increased to 3.4% in 2000 from 2.3% in 1999.
SALE OF EQUIPMENT. Revenues from the sale of equipment decreased 31.6% to
$5.3 million in 2000 from $7.7 million in 1999, primarily as a result of lower
sales of customer premise equipment and cellular and PCS handsets. 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.
INSTALLATION AND ACTIVATION. Installation and activation revenues decreased
11.3% to $13.7 million in 2000 from $15.5 million in 1999. The decrease in
installation and activation revenues was due to an aggressive promotional
marketing strategy undertaken during 2000, which included lowering subscriber
activation fees for wireless and local access service, and the effect of
adopting a new accounting pronouncement, SAB 101, resulting in the deferral of
the recognition of installation revenues and activation fees.
Our operating costs increased to $183.3 million in 2000 from $129.4 million
in 1999. These results reflect increased satellite connection and carrier costs
associated with higher volumes of international traffic; higher general and
administrative expenses primarily from increased commissions due to the growth
of our retail operations in the U.S.; and higher network depreciation expenses
resulting from our capital investment and domestic and international network
expansion programs. As a percentage of revenues, operating costs increased to
81.7% in 2000 from 75.7% in 1999.
SATELLITE CONNECTIONS AND CARRIER COSTS. Satellite connections and carrier
costs increased by 57.0% to $68.6 million in 2000 from $43.7 million in 1999,
primarily as a result of higher outbound carrier costs, as well as higher
interconnection costs. Outbound carrier costs increased by 86.1% to $35.6
million in 2000 from $19.1 million in 1999. The increase was attributable to
increased international traffic through our TRICOM USA hubbing operations.
Interconnection costs increased by 37.9% to $27.0 million in 2000 from $19.8
million in 1999, the result of a higher volume of inbound traffic terminating in
Codetel's network.
NETWORK DEPRECIATION AND NON-NETWORK DEPRECIATION EXPENSE. Network
depreciation increased 83.6% to $29.3 million in 2000 from $16.0 million in
1999, as a result of the continued investments in our local and international
networks, including telecommunications equipment and facilities. Non-network
depreciation expense with respect to other fixed assets grew 40.6% to $6.8
million in 2000 from $4.9 million in 1999.
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
during 2000 decreased by 20.3% to $10.2 million from $12.8 million in 1999. The
decrease reflects increases in international costs, interconnection costs and
accounts receivable
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reserve which are deducted from revenues in calculating the tax and which
increased at a greater rate than the increase in domestic revenues on which the
tax is based.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and administrative
expenses, excluding non-network depreciation expense, increased 36.9% to $63.9
million in 2000 from $46.6 million in 1999. The increase in the amount of
selling, general and administrative expenses reflected the greater amount of
commissions paid to wholesale distributors of prepaid cards as a result of
higher revenues from sales of the cards and increased personnel costs due to a
higher employee headcount. At December 31, 2000, we had 1,740 employees compared
to 1,534 employees at December 31, 1999. As a percentage of total operating
revenues, selling, general and administrative expenses, including non-network
depreciation expense, increased to 28.5% in 2000 compared to 27.3% in 1999.
Commissions paid to wholesale distributors of prepaid cards grew 89.3% to
$11.6 million in 2000 from $6.1 million in 1999, primarily as a result of the
expansion of our prepaid cellular subscriber base, and a 113% increase in the
number of prepaid cards sold in the United States in 2000.
COST OF EQUIPMENT SOLD AND OTHER COSTS. Cost of equipment sold, which
consists of the cost of sale of customer premise equipment, including private
branch exchanges and key telephone systems, as well as cellular and PCS
handsets, decreased by 27% to $2.9 million in 2000 from $4.0 million in 1999,
primarily as a result of the lower cost of sale from residential telephones,
cellular and PCS handsets and paging units. Other costs, which consist of the
cost of sale of prepaid services, increased by 8.2% to $1.6 million in 2000 from
$1.4 million in 1999.
OPERATING INCOME. Operating income was approximately $41.0 million in 2000
compared to $41.5 million in 1999. Operating income as a percentage of total
operating revenues decreased to 18.3% in 2000 from 24.3% in 1999.
OTHER INCOME (EXPENSES). Other expenses increased to $31.2 million in 2000
from $19.2 million in 1999, reflecting increased interest expenses resulting
from higher short-term bank borrowings and vendor financing used to purchase
network and telecommunications equipment.
NET EARNINGS (LOSS). Earnings before cumulative effect or accounting change
totaled $9.2 million, or $0.33 per share, in 2000 compared to $22.2 million, or
$0.89 per share, in 1999. Including the $16.5 million cumulative effect of
accounting change for the adoption of SAB 101, we had a net loss of $7.2
million, or $0.26 per share, in 2000.
EBITDA. Earnings before interest and other income, taxes and depreciation
and amortization increased by 16.5% to $87.7 million in 2000 from $75.3 million
in 1999. 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.
ACQUISITIONS
In April, 2001, we purchased a 51% interest in a Panamanian company,
Cellular Communications of Panama, S.A., now TRICOM Panama, S.A., for
approximately $8.1 million. TRICOM Panama has approximately 1,750 analog mobile
users and owns the frequency rights for 107 channels of 25 MHz each. These
frequencies will give us access to nationwide coverage, covering a population of
approximately 2.81 million people. Currently, we are constructing an iDEN(R)
network, at a cost as of December 31, 2001 of approximately $37 million, in
Panama City and Colon, the two largest cities in Panama, and in important
transportation corridors in other parts of the country. Our expected completion
date for this phase of the buildout is the second quarter of 2002. We will offer
digital mobile integrated services, including two-way radio, paging and
interconnect services.
On October 26, 2001, we acquired the shares of TCN Dominicana, S.A., a
wholly-owned subsidiary of Telecable Nacional, C. por A., that owns and operates
the largest multi-channel system in the Dominican Republic's pay-TV market
including the concession granted by the Dominican government to operate a cable
system. The transaction was valued at approximately $1,130 per subscriber
equivalent or approximately $64.0 million, payable $41.8 million in cash and
with 3,375,000 shares of our Class A common stock. TCN Dominicana is the leader
of the Dominican cable television market with a 43% market share, serving 64,466
cable subscribers, including 56,896
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basic and premium subscribers and 7,570 commercial rooms, with close to 170,000
homes passed as of December 31, 2001. We intend to expand our subscriber base by
increasing our penetration rate over existing homes passed and by expanding the
reach of our existing cable network, as well as by marketing our various
Internet access services and introducing new multimedia products and services.
CRITICAL ACCOUNTING POLICIES
During the year ended December 31, 2000, we adopted the U.S. Securities and
Exchange Commission's Staff Accounting Bulletin No. 101 concerning the
recognition of revenue. This pronouncement provides that we recognize net
revenues from installations and activations over the period in which we retain
our clients. At the time we adopted SAB 101, we charged activation and
installation fees to subscribers for cellular and PCS services and for local
access lines. In preparing our financial statements for the year ended December
31, 2000, we estimated that the average service life for our customers that we
charged activation and installation fees was 35 months. We based our estimate of
average service life on our experience during the preceding five years, which
included periods in which we were initiating and developing these service
offerings. At December 31, 2000, deferred revenues for installations and
activations aggregated $14,654,886, which we anticipated recognizing as follows:
$9,010,741 in 2001; $4,793,662 in 2002; and $850,483 in 2003.
Effective October 1, 2001, we updated our estimate of the average service
life for our customers from 35 to 24 months. We based our revision on our
experience during the preceding three years, which we regarded as more
representative of current market conditions. The number of wireless subscribers
and subscribers for local access lines increased substantially during that
period. We also face increased competition, particularly in the wireless markets
in which there have been new market entrants since 2000 which have captured
significant market share. As a result of these and other factors, our average
monthly disconnection or churn rate increased during 2001. We expect these
factors to continue to affect our ability to retain customers. As revised, for
2000 and 2001, we recognized revenue of $8,940,040 and $7,512,759 associated
with the accounting change from the adoption of SAB 101.
Based upon recent market trends to reduce activation fees for wireless
and local service, we anticipate that our activation fees and deferred
revenue may decrease in the future. In addition, in October 2001, we acquired
TCN Dominicana, the largest operator of cable television systems in the
Dominican Republic. TCN did not consistently charge fees for the installation
and activation of cable service. We currently charge a $50 installation fee.
We will apply Staff Accounting Bulletin 101 to the recognition of
installation and activation fees for cable service beginning in 2002.
However, we do not have experience sufficient yet to determine the average
customer service life for cable subscribers.
ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations ("SFAS 141") and
No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under SFAS 142, goodwill and intangible assets with
indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, we are required to adopt SFAS 142 effective January 1, 2002. The
Company's amortization of goodwill for the year ended December 31, 2001 totaled
approximately $47,000. Currently, we do not believe that the provisions of SFAS
142 will have a significant effect on our results of operations and financial
position.
EFFECTS OF INFLATION
The annual inflation rate in the Dominican Republic was 5.1% for 1999, 9.0%
for 2000 and 4.4% for 2001. The effects of inflation on our operations have not
been significant.
54
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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, with the issuance of the 11 3/8%
senior notes due 2004, in August 1997, our cash flows and financial results of
operations are more appropriately presented in the U.S. dollar as the functional
currency. Effective January 1, 1997, we changed our functional currency from the
Dominican peso to the U.S. dollar. Our financial statements for periods prior to
January 1, 1997 have not been restated for this change in the functional
currency. However, we did retroactively change our reporting currency to the
U.S. dollar.
LIQUIDITY AND CAPITAL RESOURCES
Substantial capital is required to expand and operate our
telecommunications networks. For 2001, we made capital expenditures of $116.5
million, including $37 million incurred for the construction of our iDEN(R)
network in Panama. The remaining amount, approximately $79.5 million, was for
the installation of additional local access lines, enhancement of our cellular
and PCS network, expansion of international facilities and other network
improvements, primarily in the Dominican Republic. We currently anticipate
making capital expenditures of approximately $65 million in 2002 for increasing
capacity and coverage in our local access and mobile networks, continuing the
rollout of our bi-directional cable network to support the deployment of digital
and interactive services, expanding our international facilities to support
increased traffic volume, expanding our local network and other international
expansion and for the implementation of our iDEN(R) based network in Panama. In
Panama, we expect to expend up to $8 million, primarily for the purchase of
handsets. However, the amounts to be invested for these purposes, particularly
in Panama, will depend upon a number of factors, including primarily the demand
for our services. We currently do not intend to develop a network in either
Guatemala or El Salvador in 2002.
We have satisfied our working capital requirements and funded capital
expenditures from cash generated from operations, short and long-term
borrowings, trade finance, capital leases, vendor financing and equity and debt
issuances. We believe our cash generated by operations and borrowings available
to us will be sufficient to fund our expected capital expenditures through the
end of 2002. 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 $42.3 million for 2000 and
$34.0 million for 2001. We had net accounts receivable of $32.1 million and
$34.5 million at December 31, 2000 and December 31, 2001.
Our indebtedness was approximately $498.2 million at December 31, 2001, of
which $200.0 million was our 113/8% senior notes due 2004, $117.8 million was in
long-term borrowings and capital leases, with maturities ranging from fifteen
months to six years, and $180.3 million was short-term bank loans, commercial
paper, telecommunications equipment financings, trade financings and current
portion of capital leases and of long-term debt. At December 31, 2001, our U.S.
dollar borrowings, other than the 11 3/8% senior notes due 2004, had interest
rates ranging from 4.10% per annum to 13.0% per annum, and our peso borrowings
had interest rates ranging from 15% per annum to 19.5% per annum. At December
31, 2001, our U.S. dollar borrowings, other than the 11 3/8 senior notes due
2004, totaled $262.4 million and our peso borrowings totaled $35.8 million.
We have credit facilities which, in the aggregate, permit us to borrow up
to $340.2 million. At December 31, 2001, there was $267.8 million outstanding
under these facilities. We had approximately $72.5 million available for
borrowing under these facilities, of which $48.1 million was under facilities
with maturities of less than one year.
At December 31, 2001, we had $93.5 million of short-term and long-term
credit facilities with Dominican banks and institutions and $246.7 million of
U.S. dollar-denominated credit facilities with international banks. In addition,
in August 2001 the Company implemented a $40 million dollar-denominated and
peso-denominated commercial paper program in the Dominican Republic. At December
31, 2001, we had outstanding $30.4 million under such program. The proceeds from
the issuance of commercial paper have been used to finance the purchase of
telecommunications related assets.
55
<Page>
At December 31, 2001, our current liabilities exceeded our current assets
by $175.6 million. This reflects our short-term borrowings in the Dominican
Republic with related companies, local 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. In the first quarter of
2002, we refinanced approximately $77.0 million of our short-term debt with
long-term debt. We extended the maturities of our short-term borrowings with
five Dominican financial institutions for periods from fifteen months to six
years. The refinanced debt has interest rates ranging from 10.75% to 13.33% per
annum. We provided security to two financial institutions consisting of liens on
telecommunications equipment and mortgages for approximately $19.0 million.
We will seek additional credit facilities with international banks to
refinance our short-term credit facilities. During 2000, we obtained credit
guarantees from Export-Import Bank of the United States of up to $56 million for
loans made by The International Bank of Miami, N.A. to be used for purchases of
communications equipment and material from Motorola and other U.S. suppliers. At
December 31, 2001, the amount of $31.8 million has been disbursed under this
facility. The credit guarantees will be repayable up to a five year period.
Our credit facilities in the Dominican Republic do not contain financial
covenants. One loan with General Electric Capital Corporation of Puerto Rico,
which had an outstanding principal amount of $5.6 million at December 31, 2001,
contains two financial covenants that require us to maintain a minimum cash flow
coverage ratio (defined as net income plus depreciation minus preferred
dividends divided by current maturity of long term debt) and EBITDA coverage
ratio (defined as earnings before interest, taxes, depreciation and amortization
divided by current maturity of long term debt plus interest expense). We failed
to comply with these covenants at December 31, 2001. The loan provides us a
grace period of 90 days following notification from GE Capital to cure covenant
violations. We did not receive notification from GE Capital and it issued to us
a waiver of such non compliance. We also amended the loan agreement to eliminate
the application of the covenants altogether to the three months periods ended
March 31, 2002 and June 30, 2002 and to change the ratios for periods ending
after June 30, 2002.
The following table contains certain information concerning the Company's
material contractual obligations at December 31, 2001.
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
- ----------------------------------------- ------------------------------------------------------------------------
LESS THAN 1 AFTER 5
CONTRACTUAL CASH OBLIGATIONS TOTAL YEAR 1 - 3 YEARS 4 - 5 YEARS YEARS
- ----------------------------------------- ------------------------------------------------------------------------
Short-Term Debt 180.3 180.3 - - -
Long-Term Debt 305.5 - 269.9 30.3 5.3
Capital Lease Obligations 11.2 - 11.2 - -
Operating Leases - - - - -
Unconditional Purchase Obligations - - - - -
Other Long-Term Obligations 1.2 - 1.2 - -
------------------------------------------------------------------------
TOTAL CONTRACTUAL CASH OBLIGATIONS 498.2 180.3 282.3 30.3 5.3
========================================================================
</Table>
At December 31, 2001, our 11 3/8% senior notes due 2004 were rated B1 (with
a stable outlook) by Moody's Investors Service ("Moody's") and B+ (with a
positive outlook) by Standard & Poor's ("S&P"). On March 26, 2002, S&P
reaffirmed its B+ rating of our 11 3/8% senior notes due 2004 and lowered its
outlook from positive to stable. On April 30, 2002, Moody's lowered the rating
of our 11 3/8% senior notes due 2004 to B3 and lowered its outlook from stable
to negative. Our Dominican commercial paper program is not rated by either
Moody's or S&P.
On December 27, 2001, the Company received net proceeds of US$43.4 million
from the issuance of American Depositary Shares or ADSs, each of which
represents one share of the Company's Class A Common Stock, at a price of $4.00
per ADS, in a rights offering to shareholders and of 10,000,000 shares of Class
A Common Stock to GFN Corporation, one of our major shareholders. The purpose of
the rights offering was to provide all shareholders with the opportunity to
purchase more shares on the same basis as GFN Corporation, which
56
<Page>
previously advanced to us $40 million, on an interest free basis, which was used
to subscribe for Class A common stock on the same basis offered to all
shareholders. We used the proceeds generated from the rights offering for
general corporate purposes.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
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, Treasurer, Secretary and eight 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 are set forth below
together with their ages at December 31, 2001 and current positions.
<Table>
<Caption>
NAME AGE POSITION
- -------------------------------------- --- --------------------------------------------------------------------
BOARD OF DIRECTORS
NAMED BY GFN CORPORATION, LTD.:
Manuel Arturo Pellerano Pena 47 Chairman of the Board
Hector Castro Noboa 59 Vice President of the Board
Marcos J. Troncoso 54 Secretary
Carl H. Carlson 44 Treasurer
Juan Felipe Mendoza 48 Director
Anibal De Castro 56 Director
NAMED BY MOTOROLA, INC.:
Kevin J. Wiley 42 Director
Ralph Smith 47 Director
Richard Hanning 50 Director
Theodore W. Schaffner 55 Director
INDEPENDENT DIRECTORS:
Marino Ginebra 55 Director
Edwin Corrie 71 Director
EXECUTIVE OFFICERS
Manuel Arturo Pellerano Pena 47 President, Chief Executive Officer and Chairman of the Board of
Directors
Marcos J. Troncoso 54 Executive Vice President of International Business Development,
Member of the Office of the President and Secretary
Carl H. Carlson 44 Executive Vice President, Chief Operating Officer, Member of the
Office of the President and Treasurer
Carlos F. Vargas 48 First Vice President of Corporate Center and Chief Financial Officer
Virgilio Cadena del Rosario 50 Vice President, Engineering TRICOM Latin American Division
Carlos Ramon Romero 50 Vice President, Sales Division
Ryan Larrauri 30 Vice President, Marketing and Development Division
Valeriano Valerio 43 First Vice President, Planning and Operations
Ramon Tarrago 38 First Vice President, International Division
</Table>
Each of the current members of the Board of Directors has been elected
pursuant to an amended and restated shareholders agreement, dated at 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.
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The Directors are elected annually at the Annual General Meeting of
Shareholders. Each Director (when ever elected) holds office until the next
Annual General Meeting of Shareholders following his election and until his
successor is elected or until his earlier resignation or removal.
At this date, no date has been set for the Annual General Meeting of
Shareholders.
MANUEL ARTURO PELLERANO PENA has served as Chairman of our Board of
Directors and President and Chief Executive Officer since August 1994 and as a
member of the Board of Directors since our formation in January 1988. He
currently serves as President of Bancredito, a bank affiliated with GFN and one
of the largest commercial banks in the Dominican Republic and has been a member
and the Vice President of the Board of Directors of GFN since April 1989. Mr.
Pellerano holds a Bachelor of Science degree in Economics from the Universidad
Nacional Pedro Henriquez Urena.
MARCOS J. TRONCOSO has served as our Executive Vice President of
International Development since March 1992, as Secretary of the Board of
Directors since our formation in January 1988 and as Member of the Office of the
President since September 1995. Prior to assuming these positions, Mr. Troncoso
served as Executive Vice President of GFN beginning in May 1979. Mr. Troncoso
received a law degree from Universidad Nacional Pedro Henriquez Urena and a BS
degree in business administration with a major in accounting from the University
of Puerto Rico.
CARL H. CARLSON, our Executive Vice President and Chief Operating Officer
since March 1998, has served as Treasurer of the Board of Directors since
January 2000 and as a Member of the Office of the President since September
1995. Mr. Carlson was a Senior Vice President from March 1993 until March 1998
and Chief Financial Officer from September 1993 until September 1995. Mr.
Carlson served as a Vice President of Finance and Administration from December
1989 until September 1993. Mr. Carlson was an Assistant Vice President for GFN's
insurance division from 1987 until December 1989. From 1983 to 1987, Mr. Carlson
was a Vice President at Chase Manhattan Bank. Mr. Carlson is a graduate of
Instituto Technologico de Santo Domingo where he majored in business
administration and accounting and finance. Mr. Carlson earned an MBA from a
joint program between the University of South Carolina and Pontifica Universidad
Catolica Madre y Maestra.
CARLOS F. VARGAS has served as our First Vice President of Corporate Center
and as the Chief Financial Officer since July 1996. Immediately prior to his
arrival, Mr. Vargas was employed by Bancomercio, S.A., where he held the
positions of Vice President, Assistant to the President and Executive Vice
President of Finance and Operations from May 1992 until July 1996. Mr. Vargas
served as Executive Vice President of Finance and Operations at Banco Popular
Dominicano and the Finance Vice President at Grupo Financiero Popular from 1982
until May 1992. Mr. Vargas was employed by Coopers & Lybrand as an audit manager
from 1974 until 1982. He is a certified public accountant and earned his degree
in accounting from Universidad Nacional Pedro Henriquez Urena.
VIRGILIO CADENA DEL ROSARIO has served as our Vice President Engineering
TRICOM Latin American since June 2000. Mr. Cadena was First Vice President of
Planning and Operations since from September 1995 until June 2000. Mr. Cadena
was the Second Vice President of Planning and Operations between July 1991 and
September 1995 and Telecommunications Manager from July 1989 until July 1991.
Mr. Cadena graduated with a degree in electromechanical engineering from the
Universidad Autonoma de Santo Domingo and studied at the Electrical Engineering
Department of the University of Kyoto in Japan.
CARLOS RAMON ROMERO has served as Vice President of our Sales Division
since January 2002. He was Vice President Customer Relationship Management
Division from July 2000 to blank and First Vice President of the Residential and
Business Division from July 1996 until July 2000. Immediately prior to his
arrival, Mr. Romero served as chief executive of a brokerage company which he
started in February 1994. Mr. Romero served as Vice President of the Technical
Area of Compania Nacional de Seguros, a subsidiary of GFN, from 1980 until
February 1994. Mr. Romero earned a BA in International Services from the
Universidad Nacional Pedro Henriquez Urena, where he has since held various
academic posts.
RYAN LARRAURI has served as Vice President of our Marketing and Development
Division since June 2001. Before joining TRICOM, he was Vice President of
Marketing for GFN's Bancredito and Compania Nacional de
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Seguros since 1999. He has held numerous directive and executive positions in
the textile, consumer goods and financial sectors. Mr. Larrauri is the published
author of MARKETING IN THE DOMINICAN REPUBLIC, GENESIS AND EVOLUTION as well as
several other specialized articles in the field. Mr. Larrauri has a B.S. in
Marketing from the Univesidad Iberomaricana, as well as Post-Graduate degrees in
Brand Management, International Business, Bank Management and Strategic
planning.
VALERIANO VALERIO has served as our First Vice President of Planning and
Operations since June 2000 and as Second Vice President of Institutional
Relationships between June 1995 and June 2000. Mr. Valerio graduated with a
degree in Electrical Engineering from the Universidad Pedro Henriquez Urena and
studied at the Nippon Telegraph and Telephone Public Corporation of Tokyo,
Japan.
RAMON TARRAGO has directed the International Division since its
organization as a separate business unit in July 1996 as First Vice President.
He was a Second Vice President of the Corporate Center from August 1995 until
July 1996. He was a Second Vice President of the International Division from
August 1995 until July 1996. He was Director of International Relations from
November 1993 until August 1995. From February 1992 until November 1993, he was
our Director of Finance. Between May 1991 and February 1992, he was a management
associate in the Corporate Banking Unit at the Santo Domingo branch of Citibank.
Mr. Tarrago worked for the World Bank's International Finance Corporation in
Washington, D.C. from May 1990 to September 1990 and for Bancredito between
October 1986 and March 1988. He is the former dean of the MBA program at the
Pontificia Universidad Catolica Madre y Maestra and has held an academic post at
the Instituto Tecnologico de Santo Domingo. Mr. Tarrago holds both a BA in
economics from Universidad Nacional Pedro Henriquez Urena and an MBA with a
finance concentration from the Virginia Polytechnic Institute and State
University.
HECTOR CASTRO NOBOA has served as Vice President of our Board of Directors
since August 1994 and as a member since our formation in January 1988. He has
been director and Executive Vice President of GFN since April 1989. Between
March 1993 and September 1997, Mr. Castro served as the Executive Vice President
of Bancredito. Mr. Castro has also worked for the Deutsche Sudamerikanische Bank
(Germany), Citibank (Marketing Vice President), Bonanza Dominicana (Chief
Financial Officer), Banco Metropolitano (Financial Advisor) and Universidad
Nacional Pedro Henriquez Urena (professor of international economics and
macroeconomics). Mr. Castro has a degree in Business Economics from Madrid's
Universidad Complutense where he studied business economics.
JUAN FELIPE MENDOZA has been a member of our Board of Directors since June
1997. Mr. Mendoza currently serves as Chief Executive Officer of Bancredito and
President of Compania Nacional de Seguros. He is Vice President of FIDES
(Inter-American Federation of Insurance Companies) and its regional commission
for Central America and the Caribbean. Mr. Mendoza is a director of
Reaseguradora Nuevomundo, Caribbean Hotel Association Insurance Company,
Bancredito and GFN Corporation USA. Mr. Mendoza joined GFN in 1977. Prior to
joining GFN, Mr. Mendoza was employed in the Internal Audit Department for the
Caribbean of the Royal Bank of Canada. Mr. Mendoza graduated from Universidad
Nacional Pedro Henriquez Urena and also attended Specialized Insurance Training
Programs at Royal Global Insurance of New York and Swiss Insurance Formation
Center, Swiss Re, Switzerland. Mr. Mendoza is a certified public accountant.
ANIBAL DE CASTRO has been a member of our Board of Directors since May
1998, and has served as President of Editorial AA, a subsidiary of GFN, since
May 1994. Mr. De Castro served on the Board of Directors of Corporacion
Dominicana de Electricidad (C.D.E), the country's state-owned electric utility
provider from 1979 to 1982, and currently serves on the Board of Directors of
several Dominican companies and professional associations including Banco de la
Pequena Empresa and Fondo de Financiamiento de la Micro-Empresa. Mr. De Castro
graduated from Universidad Autonoma de Santo Domingo with a degree in journalism
and holds a B.A. in economics from the University of East Anglia in Great
Britain.
KEVIN J. WILEY has been a member of our Board of Directors since December
1998. He currently serves as the Vice President of Sales for Next Level
Communications - a telecommunications equipment provider whose largest
shareholder is Motorola, Inc. Prior to his employment at Next Level
Communications, Mr. Wiley worked for the Motorola Network Management Group as
the Director of Regional Cellular Operations for the Latin America Region from
October 1998 until April 2001. He worked as the Vice President and General
Manager of Aliant Cellular Communications from July 1995 to July 1997. Mr. Wiley
has been involved in various positions within the
59
<Page>
wireless telecommunications industry throughout his entire career. He has a B.S.
in Finance and Management from Creighton University.
RALPH SMITH has been a member of our Board of Directors since April 2001.
Mr. Smith began working for Motorola in 1985 in its Automotive Electronics
Business. He worked there in a variety of sales, project management, strategy
and marketing roles. He joined the Corporate Business Development group of the
company in 1991 and became an elected officer of the company in 2000. Mr. Smith
began his career with a variety of financial and commercial research positions
working for United States Steel Supply Division until he left to join Motorola.
He has a B.S. degree in Management from Purdue University and a M.B.A. from
Indiana University.
RICHARD HANNING has been a member of our Board of Directors since April
2001. Mr. Hanning is a Senior Vice President of Motorola and Director of Finance
for Motorola's Network Management Group. Mr. Hanning has been a Corporate Vice
President with Motorola since 1990. Since joining Motorola in 1977, Mr. Hanning
has held numerous other financial positions within Motorola's cellular networks
and subscribers businesses. Mr. Hanning is a Director of Telular Corporation, a
participant in the fixed wireless telecommunications market. He is also a
Director of Omnitel, a Lithuanian cellular operator. He has a B.A. and M.B.A.
from the University of Illinois.
THEODORE W. SCHAFFNER has been a member of our Board of Directors since
October 2001. Mr. Schaffner has been Senior Vice President and Director of
Corporate Development at Motorola since 1999. He joined Motorola in 1987 and
became the Director of Corporate Business Development in 1989. In 1991, he
became Vice President of Corporate Business Development and in this capacity led
the Company's efforts to secure access to the markets in China by forming a
number of key joint ventures with local companies. In 1996 he became an elected
officer of Motorola and continued to build Motorola's Business Development
Department and to work on key transactions including the divestiture of
Motorola's Semiconductor Components Group and the acquisition of General
Instruments. He started his career in the private practice of law and
subsequently held positions with the A. E. Staley Manufacturing Company and TRW
Inc. He received his Bachelors of Arts at The Ohio State University and his
Juris Doctor degree from Harvard University School of Law.
MARINO GINEBRA has been a member of our Board of Directors since October
2001. Mr. Ginebra is the Chairman of the Board of Directors and President of
Telecable Nacional, S.A. He has served as member of the Board of Directors of
numerous charity associations and social clubs, and is currently a member of the
Board of Directors of various banking, insurance and hotel corporations in the
Dominican Republic. Mr. Ginebra holds a B.S. in Business Administration and
Finance from the Catholic University of the Americas.
EDWIN CORRIE has been a member of our Board of Directors since October
2001. Mr. Corrie is the Chairman and President of several corporations operating
in the real-estate, investment and agricultural industries in the Dominican
Republic. He is a member of the Board of Directors of various leading insurance,
tourism, medical, and financial service institutions in the Dominican Republic.
Mr. Corrie holds a B.S. in electromechanical engineering from the Massachusetts
Institute of Technology and a B.S. in Business Administration from the Harvard
Business School.
EXECUTIVE COMPENSATION
The aggregate amount of compensation we paid during the fiscal year ended
December 31, 2001 to our directors and executive officers, as a group (20
persons), was $2.3 million.
EMPLOYEES
At December 31, 2001, we had 1,374 employees. Of this number, 26 were
executives, 92 were managers, and the remaining 1,256 were technicians,
salesmen, service and staff employees. We believe that this number may increase
over the next several years as we expand our network and customer base. None of
our employees belong to labor unions. We believe that we have has good relations
with our employees.
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SHARE OWNERSHIP
We refer to Item 7 for information with respect to Manuel Arturo Pellerano
Pena, who, to our knowledge, is the only director with 1% or greater percentage
of ownership in Tricom.
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. At December 31, 2001, there were outstanding options to purchase
483,947 shares of Class A common stock that had been granted to directors,
officers and employees at exercise prices ranging from $3.65 per share to $16.00
per share. The options granted expire on the tenth anniversary of the date of
grant. At December 31, 2001, there were 262,247 shares available for grant under
the plan.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth certain information known to us with respect
to beneficial ownership of the common stock at April 15, 2002 (unless otherwise
indicated) by each person, to our knowledge, who beneficially owns 5% or more of
the common stock and all officers and directors as a group. Except as otherwise
indicated, the holders listed below have sole voting and investment power with
respect to all shares beneficially owned by them.
For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date which such person or
group of persons has the right to acquire within 60 days after such date.
Information relating to the percentage beneficially owned is calculated in
accordance with SEC rule 13d-3 and includes for each of GFN Corporation Ltd.,
Manuel Arturo Pellerano Pena, Oleander Holdings Inc. and Motorola the shares of
Class A common stock issuable upon conversion of the Class B stock owned by it.
Each share of Class B stock is freely convertible at any time 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. Each share of Class B
stock has ten votes and of Class A common stock has one vote. All of the shares
owned by GFN and Motorola are Class B stock and represent 100% of the
outstanding shares of Class B stock. If all of the Class B shares were converted
to Class A common stock, then GFN Corporation Ltd., Manuel Arturo Pellerano Pena
and Oleander Holdings, Inc. would own 63.4% of the Class A common stock and
Motorola 24.0% of the Class A common stock.
<Table>
<Caption>
PERCENTAGE OF CLASS PERCENTAGE OF
CLASS A STOCK A STOCK CLASS B SHARES
BENEFICIALLY SHARES BENEFICIALLY BENEFICIALLY
SHAREHOLDER OWNED OWNED OWNED
- --------------------------------------------------------- ----------------- --------------------- ----------------
GFN Corporation Ltd(1)............................... 23,122,157 64.7 60.0
Oleander Holdings, Inc.(1)........................... 12,161,744 34.0 60.0
Manuel Arturo Pellerano Pena(1) ..................... 23,637,186 67.4 60.0
Motorola, Inc........................................ 7,657,818 24.0 40.0
Orient Star Holdings LLC(2).......................... 2,670,000 11.0 --
WaterView Capital Management LLC(3).................. 1,500,000 6.2 --
Goldman Sachs & Co. and Goldman Sachs Group Inc.(4).. 2,008,730 8.3 --
Directors and executive officers as a group
(16 persons)(5)...................................... 22,724,417 63.5 60.0
- ------------------------------------------------------------------------------------------------------------------
</Table>
(1) GFN Corporation Ltd. is controlled by Manuel Arturo Pellerano Pena, our
Chairman of the Board of Directors and President, and members of his
family. Oleander Holdings, Inc., a Panamanian corporation, is a wholly
owned subsidiary of GFN.
(2) Inmobiliaria Carso, S.A. de C.V., as the sole member of Orient Star
Holdings LLC, is deemed to beneficially own indirectly the ADSs owned
directly by Orient Star Holdings LLC. Carlos Slim Helu, Carlos Slim Domit,
Marco Antonio Slim Domit, Patrick Slim Domit, Maria Soumaya Slim Domit,
Vanessa Paola Slim and Johanna Monique Slim Domit own all of the
outstanding voting securities of Inmobiliaria Carso, S.A. de C.V., and are
deemed to beneficially own indirectly the ADSs deemed beneficially owned by
Inmobiliaria
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Carso, S.A. de C.V. and directly owned by Orient Star Holdings LLC. This
information is based on a Schedule 13-G dated December 27, 2001 and filed
with the Securities and Exchange Commission.
(3) WaterView Capital Management LLC, a Delaware limited liability company,
possesses sole power to vote and direct the disposition of all shares
held by WaterView Partners, L.P., a Delaware limited partnership, which
owns 958,500 shares, and of D&DF WaterView Partners, L.P., a Delaware
limited partnership, which owns 41,500 shares. Georgica Advisors LLC, a
Delaware limited liability company, is the holder of, and possesses
sole power to vote and direct the disposition of, 500,000 shares.
WaterView Capital Management LLC and Georgica Advisors LLC may act
together, from time to time, with respect to the shares. Each of the
entities discussed above is deemed to beneficially own 1,500,000 shares
of the Class A common stock. This information is based on a Schedule
13-D dated November 15, 2000 and filed with the Securities and Exchange
Commission.
(4) This information is based on a Schedule 13-G dated December 31, 2001 and
filed with the Securities and Exchange Commission.
(5) Includes 11,486,720 shares of Class B stock and 10,960,413 shares of
Class A common 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. Also includes 47,544 shares of
Class A common stock that are issuable upon exercise of currently
exercisable options beneficially owned by officers.
Motorola Inc. has announced its intention to sell its shares of Class B
stock. Our By-laws provide that upon transfer of such shares (unless to
GFN or one of its affiliates), these shares will convert to Class A
common stock.
SHAREHOLDERS AGREEMENT
Each of the current members of the Board of Directors has been elected
under the terms of an amended and restated shareholders agreement, dated at May
8, 1998, among TRICOM, Motorola, Oleander Holdings Inc., Zona Franca San Isidro,
S.A. and certain nominal shareholders that are affiliates of GFN or TRICOM.
The shareholders agreement provides that the Board of Directors will
consist, and GFN and Motorola each will vote all of the shares owned by it (or
in the case of any transfer of shares to its permitted transferee, as defined in
the shareholders agreement, will cause such permitted transferees to vote their
shares) in favor, of six directors to be designated by GFN, four directors to be
designated by Motorola and two independent directors. The shareholders agreement
provides that in order for a person to qualify as an independent director such
person must not be:
- an officer, employee, principal stockholder, consultant or partner of
TRICOM, apart from such directorship, or an officer, employee,
principal stockholder, consultant or partner of an entity that was
dependent upon TRICOM or any affiliate of TRICOM for more than 5% of
its revenues or earnings in its most recent fiscal year;
- an officer, director, employee, principal stockholder, consultant or
partner of a person that is a competitor of TRICOM or any of its
affiliates, any affiliate of such competitor, or any other person that
was dependent upon such competitor or affiliate of such competitor for
more than 5% of its revenues or earnings in its most recent fiscal
year; or
- an officer, director, employee, principal stockholder, consultant or
partner of Motorola or GFN or an officer, employee, principal
stockholder, consultant or partner of an entity that was 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 owns at least 25%
of the issued and outstanding shares of Class B stock. In calculating the
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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.
The number of directors other than independent directors that GFN or
Motorola each may designate will change if its percentage ownership of Class B
stock changes as follows:
- if GFN and Motorola each owns 50% of the then outstanding shares of
Class B stock, each would have the right to designate five directors;
- if either GFN or Motorola owns shares of Class B stock;
- 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;
- greater than 60% but less than or equal to 70% of the then outstanding
shares of Class B stock, it would designate seven directors and the
other three directors;
- greater than 70% but less than or equal to 80% of the then outstanding
shares of Class B stock, it would designate eight directors and the
other two directors;
- greater than 80% but less than or equal to 90% of the then issued and
outstanding shares of Class B stock, it would designate nine directors
and the other one director; or
- greater than 90% of the issued and outstanding Class B stock, it would
designate all ten directors.
Until such time as either Motorola or GFN owns less than 25% of the
outstanding shares of Class B stock, the shareholders agreement requires the
affirmative vote of nine directors to approve the following actions:
- the acquisition or formation by TRICOM of any entity or the making of
any investments in an other entity of business, including, but not
limited to, the purchasing of equity or debt interests in or the
extension of credit to such entity;
- the incurrence of indebtedness, if after giving effect to such
incurrence, including the proposed application of the proceeds of such
indebtedness to pay existing indebtedness, the ratio of indebtedness
to shareholders' equity would be greater than three to one;
- approval of annual budgets relating to income, capital expenditure,
operating expenses and cash flows (provided that this does not require
approval 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
- 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 which 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
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underwriting discounts and commissions and fees and expenses of any special
counsel) of all such registrations, whether or not initiated by GFN or Motorola.
VOTING AGREEMENTS FOR THE 11 3/8% SENIOR NOTES DUE 2004
In connection with the offering of the 11 3/8% senior notes due 2004,
Oleander and Motorola each entered into separate voting agreements, dated August
21, 1997 with The Bank of New York, as trustee under the indenture for the
senior notes. The voting agreements provide that each of Oleander and Motorola
will grant to the trustee for the 11 3/8% senior notes due 2004 the right to
vote all of its shares of common stock upon the occurrence of the following
events:
- our failure to pay interest on the senior notes when due for a period
of 30 days;
- our failure to pay the principal of or premium on the senior notes
when due, whether at maturity, upon redemption or repurchase or
otherwise;
- our failure to pay principal of and interest on the senior notes
required to be purchased in the event of a change of control;
- 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); or
- our failure or the failure of any significant subsidiary to pay final
judgments aggregating in excess of $10.0 million within 60 days after
the date for which any period for appeal has expired and during which
a stay of enforcement of such judgment shall not be in effect.
The trustee's right to vote all of the shares of voting stock, once such
right is triggered, will continue (a) during the continuation of the first three
events set forth above and for one year after the date we cure such event of
default or (b) during the continuation of the fourth event. Either Oleander or
Motorola may revoke the proxy granted by it under the voting agreement if:
- the Dominican Republic becomes bound by the United Nations Convention
on the Recognition and Enforcement of Foreign Arbitral Awards (1958);
- if as of the last day of any fiscal quarter we report shareholders'
equity of at least $100 million and for each of the four full
consecutive fiscal quarters ending on such date our leverage ratio as
defined in the senior note indenture is equal to or less than 2.5 to
1.0;
- the senior notes are rated Ba2 or better by Moody's Investors Service,
Inc. and BB or better by Standard & Poor's Ratings Group,
respectively; or
- our obligations with respect to the outstanding senior notes are
discharged.
In March 2001, the Dominican Republic became bound by the United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
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 its voting stock, then 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, 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; and
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- the holders, the trustee and all senior lenders enter into an escrow
agreement and an intercreditor agreement, then the proxy rights
granted under the voting agreement.
The voting agreements do not prohibit or restrict either Oleander or
Motorola from transferring, selling, pledging, or hypothecating any shares of
voting stock. Any shares of voting stock transferred to an affiliate of either
Oleander or Motorola will remain subject to the voting agreements and any shares
of voting stock transferred to a person unaffiliated with either Oleander or
Motorola will no longer be subject to the voting agreements. The voting
agreements will terminate and be of no further force and effect if (a) any
senior lenders holding a security interest in the voting stock foreclose upon
such security interest subject to the terms of the intercreditor agreement to be
entered into by the senior lenders and the trustee or (b) the proxy is revoked
pursuant to the voting agreements.
CERTAIN TRANSACTIONS WITH PRINCIPAL SHAREHOLDERS
GFN
GFN is one of the Dominican Republic's largest privately held companies,
with interests in insurance, finance and publishing. GFN provides a number of
managerial services to its affiliated companies, including TRICOM, for which the
affiliated companies are billed based upon the number of hours that a particular
GFN employee spends on providing such services and other factors. GFN employees
have provided to us internal auditing, public relations, management information
services, legal and personnel management services. For 1999, 2000 and 2001, we
paid to GFN $167,470, $234,348 and $128,957, respectively, for such services.
GFN also provides us with security services for which we paid $77,382, $227,001
and $267,725 in 1999, 2000 and 2001, respectively. In addition, GFN provides us
with advertising services for which we paid $74,104, $250,232 and $1,031,594 in
1999, 2000 and 2001, respectively. We anticipate that we will continue to
receive such services from GFN.
We lease premises and equipment from GFN and its affiliates. During 1999,
2000 and 2001, we paid to GFN and its affiliates $108,578, $157,600 and
$122,568, respectively, 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,
$20,829,275 during 2000 and $17,856,766 during 2001. In 2000, we sold our
Internet portal to GFN affiliate for approximately $2.3 million.
We provide life insurance to our employees and have obtained other
insurance through Segna, formerly Compania Nacional de Seguros, a GFN affiliated
insurance company. We paid insurance premiums to affiliates of GFN totaling $2.0
million, $4.1 million and $4.4 million in 1999, 2000 and 2001, respectively.
We provide telecommunications services to GFN and its affiliated companies.
GFN and its affiliated companies paid us $2.0 million, $1.9 million and $3.7
million for such services in 1999, 2000 and 2001, respectively.
GFN affiliated banks have loaned us funds. We had borrowings from GFN
affiliated banks, including financing of letters of credit and open accounts, in
the aggregate principal amounts of $31.4 million at December 31, 2000 and $27.1
million at December 31, 2001.
MOTOROLA
We have purchased telecommunications equipment from Motorola, particularly
for the development of our mobile cellular system and our wireless local loop in
the Dominican Republic for aggregate consideration of approximately $23.1
million, $20.3 million and $20.2 million during 1999, 2000 and 2001,
respectively. During 2001, we purchased from Motorola an iDEN(R) system for
Panama, for $20 million.
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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, 2000 and 2001, these mortgage participation contracts
totaled $3,289,459 and $3,968,711 respectively.
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENT
See "Item 18. Financial Statements"
OTHER FINANCIAL INFORMATION
LEGAL PROCEEDINGS
ALL AMERICA CABLES & RADIO LITIGATION
On August 13, 2001, Indotel, the Dominican telecommunications regulator,
issued an order, in response to a complaint filed by All America Cables & Radio,
a subsidiary of Centennial Communications Corp., that we are not dominant in the
Dominican market and that the interconnection agreement we offered to All
America was not discriminatory. The interconnection agreement that we offered to
enter into with All America was the same as we entered into with France Telecom
in the Dominican Republic and which, we understand, All America has with Codetel
and which Codetel has with France Telecom. Indotel further ruled that if we
granted to All America the economic concessions that it seeks from us, the
allowance would create discrimination against other carriers in the Dominican
Republic, violating the Dominican law telecommunications and the Dominican
constitution.
On September 14, 2001, Indotel issued an order, in response to a motion
submitted by All America for reconsideration of the August 13 order, that
ratified the August 13 order and ordered us and All America to enter into an
interconnection agreement on substantially the terms and conditions that we
proposed.
On September 4, 2001, Centennial and its affiliates filed a complaint
against Tricom USA Inc. with the United States Federal Communications Commission
claiming that
- We refused to provide Centennial's affiliate in the Dominican
Republic with sufficient facilities and reasonable, nondiscriminatory
terms for connecting traffic between ours and its network in the
Dominican Republic.
- Centennial should not pay to Tricom, S.A. the market rate for
terminating calls to Tricom customers in the Dominican Republic
determined by Indotel, approximately US$.042 per minute, but should
pay $US.011 per minute; our refusal to agree to this rate is
discriminatory; and even if Centennial pays the same international
termination rate as Tricom USA, Tricom USA gets a benefit because it
is affiliated with Tricom, S.A.
- We engage in discriminatory behavior because other U.S. carriers
including Tricom USA get better interconnection capacity from Tricom,
S.A. between the United States and the Dominican Republic than does
Centennial.
- We are harming competition in the United States by limiting the number
of interconnection facilities we have made available to connect calls
from Centennial's customers to ours, inflating the price for local
termination of international traffic and refusing in general to deal
with Centennial on a nondiscriminatory basis.
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- We are violating the conditions of the license granted to Tricom USA
by the FCC to operate as a facilities based carrier which provides
that neither Tricom USA nor any persons controlling it would
participate in any favorable interconnection arrangements or special
concessions not available to other U.S. carriers.
Centennial requests that the FCC:
- order Tricom USA to cease accepting special concessions from Tricom
S.A.;
- require Tricom USA and Tricom S.A. to provide adequate interconnection
capacity to Centennial and reduce the access charge to a level
consistent with costs;
- find that Tricom USA is liable to Centennial for damages to compensate
Centennial for the losses that it suffered as a result of Tricom's
violations of law and the FCC's rules; and
- revoke Tricom USA's Section 214 license if Tricom USA does not stop
receiving special concessions from Tricom, S.A.
We have replied to Centennial's complaint with the FCC on October 13, 2001.
We responded that:
- Indotel is the regulator with jurisdiction over the complaint and
Centennial is attempting to appeal the decision by Indotel in the
action brought by All America Cables & Radio Inc. against Tricom in
the Dominican Republic;
- Centennial failed to provide any evidence that Tricom USA accepts
special concessions from Tricom S.A.;
- The relief sought by Centennial is improper as Tricom USA owns no
facilities in the Dominican Republic and the FCC has no jurisdiction
over Tricom S.A., which is the only entity that could provide the
interconnection capacity sought by All America Cables & Radio.
We requested that the FCC reject jurisdiction over the matter or deny the
relief sought by Centennial in its entirety.
On November 2, 2001, the parties attended a settlement conference with the
FCC. However, the parties did not reach a settlement. On November 5, 2001, the
FCC asked that the parties submit briefs regarding certain jurisdictional
issues. To date the FCC has not rendered any decisions.
On November 13, 2001, Indotel informed us that it would impose monetary
sanctions on All America if it did not execute within 5 days the interconnection
agreement that we had proposed and which Indotel determined in August 2001,
among other things, was not discriminatory. On November 19, 2001, All America
signed the interconnection agreement, stating it was doing so under protest of
Indotel's order.
BELLSOUTH LITIGATION
On May 8, 2001, BSC of Panama, S.A., a subsidiary of BellSouth, which owns
one of the two cellular telecommunications concessions granted by the Panamanian
government, requested that the Panamanian ENTE REGULADOR DE LOS SERVICIOS
PUBLICOS, or ENTE, investigate Tricom Panama, S.A. for violations of the
Telecommunications Act and the ENTE's regulations. Bell South claimed that
Tricom Panama:
- will use its iDEN(R) based trunking services to provide cellular
telecommunications services, in violation of our license; and
- although we proved that our iDEN(R) system has been modified to
disable "hand off" capabilities, the fact that the equipment has these
capabilities represents a breach of regulations and our license.
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The ENTE has not issued any ruling on BellSouth's request, but has stated
publicly that Panamanian regulations do not limit the provision of mobile
services to a particular technology.
On August 24, 2001, BellSouth requested that the ENTE initiate a legal
review before the Third Chamber of the Panamanian Supreme Court of Justice, of
the interpretation given by the ENTE to the definition of "Conventional Trunking
System Services." BellSouth alleges that the interpretation given by the ENTE to
the definition of "Conventional Trunking System Services," found in Resolution
No. JD-025 of December 12, 1996 violates several articles of the
Telecommunications Act, including that the ENTE's interpretation allows a
trunking service provider to use any mobile system, including any type of
cellular systems, as long as the "Hand-Off" capabilities is disabled. Bell South
claims that this violates the Telecommunications Act, which states that cellular
services are a Type A Service that can only be provided by BellSouth and the
other holder of a Type A License, Cable & Wireless.
The ENTE has replied that it only regulates services and not technology and
that the definition of "Conventional Trunking System Services" protects the
temporary exclusivity regime given to cellular services because it does not
allow the participation of new cellular service providers in the Panamanian
market. The Attorney General also opined that the definition of "Conventional
Trunking System Services" is legal. The license given to Tricom Panama is for
the operation of conventional trunking services, which it is operating with the
iDEN(R) system.
The legal review by the Third Chamber of the Panamanian Supreme Court of
Justice requested by BellSouth cannot be undertaken until the Supreme Court
resolves a constitutional review requested by Tricom Panama on September 10,
2001, regarding the lack of procedure for the Third Chamber to undertake a legal
review of the sort sought by BellSouth. On October 22, 2001, the Supreme Court
decided it would review the procedure.
On August 28, 2001, Tricom Panama received notice of a precautionary order
obtained by BellSouth from the Seventh Civil Court of the First Judicial Circuit
requiring Tricom Panama to cease all activity directly or indirectly related to
the installation and supply of telecommunication services using Motorola's
iDEN(R) system. This order forms part of a tort claim, submitted by BellSouth on
September 4, 2001, against Tricom Panama for US$20,000,000 for the possible
damages that Tricom Panama may cause BellSouth in the event that Tricom Panama
initiates operations of an iDEN(R)-based trunking service.
On September 11, 2001, Tricom Panama submitted a motion before the Seventh
Civil Court to substitute a bond for the precautionary order to cease its
activities and at the same time appealed to the Superior Civil Chamber the
precautionary order itself. On October 1, 2001, the Seventh Civil Court denied
Tricom Panama's motion and, on October 8, 2001, Tricom Panama also appealed this
decision to the Superior Civil Chamber. The Tricom Panama defense was based on
the following principles:
- only the ENTE has by law the power to discontinue public utilities
services;
- this precautionary measure can only be applied to real property (not
to personal property);
- there is no imminent damage that justifies the precautionary measure.
On September 11, 2001, BellSouth submitted a complaint stating that Tricom
Panama was in default of the court order.
Tricom Panama also submitted a motion to the Seventh Civil Court to dismiss
Bell South's tort claim and to invalidate the precautionary order, due to the
court's lack of jurisdiction over a matter that should be decided by the ENTE.
On September 28, 2001, Tricom Panama filed a US$1,000,000 damages counterclaim
against BellSouth for the public campaign set against Tricom Panama by BellSouth
and for the unfounded investigation requested before the ENTE.
We believe, based on the advice of our Panamanian legal counsel, that Bell
South should not succeed in its claims because:
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- BellSouth cannot claim any damages caused by Tricom Panama activities,
since Tricom Panama operations are protected under a legitimate
Conventional Trunking System Services license.
- The ENTE is the only authority empowered to declare that the
telecommunications services provided by Tricom Panama are not
conventional trunking services, or that the iDEN(R) system cannot be
used to provide conventional trunking systems.
On November 5, 2001, Tricom Panama requested that the ENTE investigate
BellSouth for violations of the Telecommunications Act and its concession
agreement on account of the failure of BellSouth to (i) recognize the
jurisdiction of the ENTE, (ii) follow proper procedure in connection with the
precautionary measure it obtained and (iii) provide interconnection. This case
is pending the Ente's decision on whether or not to press charges against
BellSouth.
On November 13, 2001, upon the request of Bell South, the Seventh Civil
Court issued an order giving notice to Cable & Wireless of the precautionary
order issued against Tricom Panama in late August. Tricom Panama and Cable &
Wireless had negotiated the terms of an interconnection agreement with the
intervention of the Ente. Upon judicial notice of the precautionary order
against Tricom Panama, Cable & Wireless refused to sign the interconnection
agreement. The Ente imposed on Cable & Wireless sanctions of US$5,000 per day
until it signs the interconnection agreement with Tricom Panama. On December 14,
2001, Cable & Wireless challenged the Ente's sanctions order on constitutional
grounds before the Supreme Court, and the case is pending decision.
On November 16, 2001, Tricom Panama sought protection from the Superior
Tribunal of the Supreme Court on account of the August precautionary order which
violated its constitutional right to due process and trial before a body of
competent jurisdiction. On December 7, 2001, the court declared the case
inadmissible on procedural grounds, and on December 10, 2001, Tricom Panama
filed an appeal and motion for reconsideration.
On December 20, 2001, the Superior Civil Chamber decided the appeal of the
precautionary order in favor of Tricom Panama, thus, lifting the precautionary
order. On February 27, 2002, BellSouth challenged this decision in the Court of
Cassation.
On April 26, 2002, BellSouth filed a claim against Tricom Panama before the
ENTE alleging that Tricom Panama is rendering voice and text mail services in
violation of its concession and the authorized use of its frequencies. BellSouth
argues that value added services, such as voice and text mail services, may only
be provided by basic telephony or cellular operators. BellSouth requests that
the ENTE revoke Tricom Panama's concession and rights to frequencies. BellSouth
further requests as a provisional measure, and until the conclusion of the
administrative proceedings, that the ENTE order Tricom Panama to suspend its
trunking services or, alternatively, its voice and text mail services. On May
10, 2002, the ENTE ordered Tricom Panama to suspend its voice mail services
until the ENTE determines whether the imposition of sanctions is appropriate.
There are no other legal proceedings to which we are a party, other than
routine litigation incidental to our business which is not otherwise material to
our business or financial condition.
ITEM 9. THE OFFER AND LISTING
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 December 31, 2001, there were 27 record holders in the
United States of the ADSs.
The following tables provide (1) the annual high and low closing prices for
the ADSs on the New York Stock Exchange for each fiscal year since we completed
our initial public offering, (2) the high and low closing prices for the ADSs on
the New York Stock Exchange for each quarter for 2000 and 2001 and the first
quarter of 2002 and (3) the high and low closing prices for the ADSs on the New
York Stock Exchange each of the last six months.
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<Table>
<Caption>
NEW YORK STOCK EXCHANGE
---------------------------------
HIGH LOW
---------------- ----------------
YEAR ENDED DECEMBER 31, 1998 $ 11.75 $ 3.81
YEAR ENDED DECEMBER 31, 1999 $ 11.75 $ 6.25
YEAR ENDED DECEMBER 31, 2000 $ 27.88 $ 7.10
YEAR ENDED DECEMBER 31, 2001 $ 12.11 $ 3.60
<Caption>
HIGH LOW
---------------- ----------------
YEAR ENDED DECEMBER 31, 2000
First Quarter $ 27.88 $ 17.18
Second Quarter 21.19 14.31
Third Quarter 19.25 14.63
Fourth Quarter 16.00 7.10
<Caption>
HIGH LOW
---------------- ----------------
YEAR ENDED DECEMBER 31, 2001
First Quarter $ 12.11 $ 7.00
Second Quarter 7.50 6.25
Third Quarter 6.65 5.60
Fourth Quarter 5.70 3.60
<Caption>
HIGH LOW
---------------- ----------------
YEAR ENDING DECEMBER 31, 2002
First Quarter $ 3.92 $ 3.45
MONTH/YEAR
November 2001 $ 5.60 $ 4.97
December 2001 4.95 3.60
January 2002 3.92 3.54
February 2002 3.78 3.50
March 2002 3.70 3.45
April 2002 3.55 3.05
</Table>
ITEM 6. ADDITIONAL INFORMATION
MEMORANDUM AND ARTICLES OF ASSOCIATION
BOARD OF DIRECTORS
The business and affairs of the Company is managed by the Board of
Directors, which consists of not more than fifteen or less than eight persons.
The Directors of the Company are elected annually at the Annual General Meeting
of Shareholders. Each Director (whenever elected) holds office until the next
Annual General Meeting of Shareholders following his election and until his
successor is elected and qualified or until his earlier resignation or removal.
Any Director may resign at any time upon written notice to the Board of
Directors, to the Chairman of the Board or to the President of the Company. Any
Director may be removed with or without cause at any time by an
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affirmative vote of a majority of the shareholders entitled to vote. If any
vacancies occur in the Board of Directors, of if the authorized number of
Directors is increased, the Directors then in office may continue to act, and
such vacancies may be filled by a majority of the Directors then in office. Any
vacancies or newly created directorships also may be filled by an affirmative
vote of a majority of the shareholders entitled to vote at a General Meeting of
Shareholders called for such purpose.
Regular meetings of the Board of Directors may be held at such places
within or out of the Dominican Republic and at such times as the Board of
Directors may from time to time determine. Special meetings of the Board of
Directors may be held at any time or place within or outside of the Dominican
Republic whenever called by the Chairman of the Board, by the President of by
any two Directors. Any member of the Board of Directors may participate in a
meeting of the Board of Directors by means of a telephone conference or similar
communications equipment provided that all persons participating in the meeting
can hear each other.
At all meetings of the Board of Directors, the presence of a majority of
the total number of Directors will constitute a quorum for the transaction of
business. The vote of at least a majority of the Directors present at any
meeting at which a quorum is present is necessary to constitute the act of the
Board of Directors unless otherwise provided by applicable law.
PURPOSE
Article 2 of our by-laws states that the purpose of the Company is:
- to provide, maintain and operate telecommunications systems in the
Dominican Republic and elsewhere;
- to enter into such agreements as may be required to be interconnected
to the switched public telephone network, as well as to any domestic
networks rendering inter-urban services, as may be required by said
telecommunications systems; and
- to construct, maintain, and exploit a private telecommunications
system for the transmission of national and international calls and
for the transmission or reception of messages and signals of any kind.
CAPITAL STOCK
Our authorized capital stock consists of 55,000,000 shares of Class A
common stock and 25,000,000 shares of Class B stock. Both classes of capital
stock vote together as a single class on matters except any matter that would
adversely affect the rights of either class. These matters would need to be
approved by a special meeting of the holders of the class of shares to be
affected. The Class A common stock has one vote per share and the Class B stock
has ten votes per share. The economic rights of each class of capital stock are
identical.
REGISTRATION AND TRANSFER
All shares are evidenced by share certificates in registered form.
Dominican law requires that all shares be represented by a certificate, although
a single certificate may represent multiple shares of stock. Certificates may be
issued in the name of the registered holder, bearer or to-order form. All of our
share certificates are issued in the name of. Dominican law also requires that
all transfers, encumbrances and liens on nominative shares must he recorded in
the share registry and only are enforceable against us and third parties after
such registration has taken place. The Bank of New York is the registrar and
transfer agent for the Class A common stock, except during shareholders meetings
when we will maintain the share registry for the Class A common stock.
SHAREHOLDERS MEETINGS
Shareholders are entitled to vote on all matters at ordinary or special
shareholders' meetings. The board of directors will convene an annual
shareholders' meeting at least once a year in order for shareholders:
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- to elect new directors and a vigilance officer;
- to acknowledge the vigilance officer's report; and
- for management to report upon our financial performance and for the
shareholders to decide whether or not to distribute dividends.
Ordinary shareholders' meetings may be convened at other times in order to
transact other business, including to remove directors. Special shareholders'
meetings are convened in order to effect fundamental changes in our structure,
including to approve amendments to our by-laws. Under our by-laws, shareholders'
meetings may be convened by:
- the Chairman of the Board of Directors;
- a majority of the members of the board at any time;
- at the request of the holders of 30% of the shares entitled to be cast
at such meeting; and
- at the request of the vigilance officer in urgent circumstances, which
are not defined under Dominican law.
Shareholders meetings may he convened not less than 30 but not more than 60
calendar days after written notice has been mailed to shareholders. A majority
of the shares entitled to be cast constitutes a quorum at all shareholders
meetings. Our by-laws provide that holders of two-thirds of the votes entitled
to be cast is required to approve:
- amendments to the by-laws, including increases or decreases of our
authorized share capital;
- the issuance of shares of Class B stock in addition to those shares of
Class B stock outstanding on the date of the adoption of the by-laws,
except in connection with a dividend or other distribution with
respect to, or a subdivision, consolidation or reclassification of all
outstanding shares of stock;
- the declaration and payment of any dividend or distribution with
respect to our capital stock;
- any increase or decrease in the number of directors; and
- our voluntary winding up or liquidation or the filing of a bankruptcy
petition.
The affirmative vote of the holders of a majority of votes entitled to be
cast is required to approve all other actions. Shareholders may vote by proxy,
and the depositary will cast proxies as directed by the holders of the ADRs.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY
In addition to voting for directors at the annual shareholder's meeting,
shareholders are asked to vote upon the performance of management. Our vigilance
officer, an officer elected by the shareholders each year, delivers a report on
our financial performance and other issues related to management's performance.
If the holders of a majority of the votes entitled to be cast approve
management's performance, all shareholders are deemed to have released the
directors and officers from claims or liability to us or our shareholders
arising out of actions taken or any failure to take actions by any of them on
our behalf during the prior fiscal year, with certain exceptions. Shareholders
will likely fail in any suit brought in a Dominican court with respect to the
acts or omissions deemed to have been released. 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.
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Our by-laws provides that we will indemnify any person made or threatened
to be made a party to any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person, or a
person of whom he or she is the legal representative, is or was our director,
officer, employee or agent or any of our predecessors, or serves or served any
other enterprise as a director, officer, employee or agent at our request or any
of our predecessors. We are required to pay any expenses reasonably incurred by
a director or officer in defending a civil or criminal action, suit or
proceeding in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it ultimately is determined that he or she is
not entitled to be indemnified by us under our by-laws or otherwise. We may, by
action of our Board of Directors, provide for the payment of such expenses
incurred by our employees and agents as it deems appropriate.
LIQUIDATION RIGHTS
Each shareholder is entitled to a proportionate share of any of our assets
available upon dissolution after the payment of debts owed to creditors.
Shareholders are deemed to be creditors of our company to the extent of declared
and unpaid dividends.
DIVIDENDS
Under Dominican law, only shareholders may authorize the declaration and
payment of dividends. Shareholders are entitled to receive dividends in
proportion to their respective capital participation, subject to adjustment as
provided in the by-laws. Dividends are payable only from after-tax profits, and
only after we have set aside at least 5% of our annual profits as a legal
reserve (until such reserve equals 10% of paid-in capital). The by-laws provide
that shareholders may only approve the declaration and payment of dividends or
distributions if the declaration or payment of such dividend or distribution
would not violate any obligation, contractual or otherwise, to which we or any
of our subsidiaries are a party or by which any of them or their respective
properties or operations are bound.
VOTING RIGHTS
The holders of Class A common stock and Class B stock vote together with
respect to all matters. Every holder of Class A common stock is entitled to one
vote for each share of Class A common stock held and every holder of Class B
stock is entitled to ten votes for each share of Class B stock held by the
number of shares of Class A common stock into which one share of Class B stock
is then convertible. Under our by-laws, Class B stock may not be transferred
except to permitted transferees. Permitted transferees include
1. Oleander
2. Motorola
3. any subsidiary or affiliate, as defined, and
4. with respect to Oleander, Manuel Arturo Pellerano Pena and any member
of the family of Manuel Arturo Pellerano Pena as of the date of the
initial public offering that had an interest (including indirectly
through any corporation, trust or entity) in Oleander and
- the spouse or surviving spouse and natural and adopted children of any
such family member
- any trust existing solely for the benefit of family members and any
person who would be a permitted transferee of any such family member
under clause (A) and any trustee of such trust
- upon the death of any such member or any person who would be a
permitted transferee of any member, such holder's estate or any
executor, administrator or other legal representative of such holder,
and
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- any corporation, partnership or other entity all of the outstanding
equity interests of which are owned, or all of the outstanding voting
power of which is controlled, directly or indirectly by, or any trust
or similar entity the sole beneficiaries of which are, such members
and their permitted transferees.
If, despite these restrictions on transfer, a shareholder owning shares of Class
B stock transferred its shares to a person or entity other than to Oleander,
Motorola or a permitted transferee, the shareholder will only become entitled to
one vote per share. If, with respect to any shares of Class B stock owned by
Oleander and its permitted transferees, the shares of common stock owned by
Oleander and its permitted transferees constitute less than 10% of the
outstanding common stock, such shares of Class B stock will entitle the holder
to one vote per share. If, with respect to any shares of Class B stock owned by
Motorola and its permitted transferees. the shares of common stock owned by
Motorola and its permitted transferees constitute less than 10% of the
outstanding common stock, such shares of Class B stock will entitle the holder
to one vote per share. Oleander, Motorola and any permitted transferee may
pledge shares of Class B stock without reducing the number of votes to which it
is entitled; provided, however, that if such shares of Class B stock are
transferred to or registered in the name of the pledgee (unless the pledgee is a
permitted transferee), the number of votes to which such shares of Class B stock
are entitled will be reduced until Oleander, Motorola or any of their permitted
transferees either cures any default that resulted in the transfer or
registration or reacquires the shares from the pledgee.
PREEMPTIVE AND OTHER RIGHTS
The holders of Class A common stock and Class B stock are not entitled to
preemptive or similar rights. The shares of Class A common stock and Class B
stock are not subject to redemption or a sinking fund. Under our by-laws, we are
authorized to issue shares of Class B stock only in connection with a dividend
or other distribution with respect to, or a subdivision, consolidation or
reclassification of, all outstanding shares of Class A common stock. In the
event of any subdivision, consolidation, reclassification or other change in the
Class A common stock, the Board of Directors, in its discretion, in lieu of
issuing additional shares of Class B stock, may adjust the number of shares of
Class A common stock into which the Class B stock is convertible and the number
of votes to which each share of Class B stock is entitled.
REORGANIZATION, CONSOLIDATION, SHARE EXCHANGE OR MERGER
In the event of a reorganization, consolidation, share exchange or merger
of the Company, each holder of outstanding shares of stock of the Company shall
be entitled to receive for each of his shares the same kind and amount of
consideration (whether consisting of cash, property or securities) to be
received by each other holder of the same class of stock, if any for each of his
shares.
EXCHANGE CONTROLS
FOREIGN EXCHANGE CONTROLS
The foreign exchange system of the Dominican Republic is administered by
the Central Bank. In January 1991, the Monetary Board of the Central Bank
instituted the current foreign exchange system which permits the purchase of
foreign currency from commercial banks located in the Dominican Republic. Prior
to January 1991, persons were required to purchase foreign currency directly
from the Central Bank. The resolution adopted by the Monetary Board in 1991
retained the Central Bank's administrative authority over the foreign exchange
system by requiring registration with and approval by the Central Bank in order
to repatriate foreign currency abroad. The Monetary Board further liberalized
the foreign exchange system in September 1994, but it retained the requirement
that the payment of debt obligations abroad be registered with the Central Bank.
This registration generally has been regarded as ministerial in nature, except
that short-term advances for exports of goods and services still require prior
approval of the Central Bank. Dominican banks are required to submit an
application form to the Central Bank for approval of any foreign currency
exchange transactions. We cannot assure you that Dominican authorities will not
change the Dominican Republic's monetary policies to restrict the exchange of
Dominican pesos for U.S. dollars.
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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:
- the rate established by the Central Bank at which the Dominican
government buys and sells foreign currency or the official rate; and
- the freely floating, private commercial bank rate at which private
banks and other authorized currency exchange agents 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.
On May 3, 2002, the official rate was RD$17.74 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 publishes a weighted average private
market rate on a weekly basis. 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 113/8% 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 113/8% senior notes due 2004 without first converting them into
pesos.
On May 3, 2002, the Private Market Rate was RD$17.83 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 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.
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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.
TAXATION
The following discussion summarizes the principal Dominican Republic income
tax consequences of an investment in the ADRs, ADSs or shares of Class A common
stock by a person who is neither domiciled in nor a resident of the Dominican
Republic for tax purposes and who holds such ADRs, ADSs or shares of Class A
common stock for investment purposes and not for purposes of a trade or
business. In the opinion of the Dominican law firm, Pellerano & Herrera, the
discussion sets forth the material Dominican Republic consequences of such an
investment. The discussion is not intended as tax advice to any particular
investor.
Under our 1996 concession agreement with the Dominican government which
grants us our right to operate as a telecommunications provider, 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.
Our 1996 concession agreement has not yet been approved by the Dominican
Congress, but was duly executed by the Dominican Executive Branch, making the
concession itself valid and binding on the Dominican government under our laws.
Provisions in our concession agreement providing preferential tax treatment for
Tricom and its shareholders still need to be submitted to and approved by the
Dominican Congress to be binding under the Dominican Constitution. At the time
our concession agreement was executed, it was not submitted to the Dominican
Congress for approval for political reasons. Our concession agreement, along
with the concession agreements of most of Tricom's competitors in the
telecommunications business, was not submitted to the Dominican Congress because
the Dominican Congress was greatly divided at that time and the Dominican
Executive Branch did not control a majority of the Congress. However, the tax
provisions contained in these concession agreements, along with other concession
agreements in other areas, have been completely followed and complied with by
our Dominican Tax Administration.
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 25C 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 he 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
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shares of Class A common stock (as distinguished from sales or exchanges of
ADSs). The capital gains tax was instituted in the Dominican Republic only in
1992 and was later modified by regulations in 1998 as part of major tax reform
legislation. Under present law, the capital gains tax rate is identical to the
regular income tax rate of the person or entity that earned such gain; there is
no preferential rate. Thus, a corporation selling shares of Class A common stock
in the Dominican Republic would be required to pay the corporate income tax of
25% on any gain from a sale or exchange of such shares. An individual, whether
also would have to pay income tax at the applicable individual rate, as set
forth below, on gain from the sale of shares of Class A common stock in the
Dominican Republic. The individual income tax rates applicable, in the Dominican
Republic since January 1, 2002 are as follows:
<Table>
<Caption>
If Taxable Income is: The Tax is:
--------------------- -----------
Not over RD$125,256.00 0
Over RD$125,256.01 but not over RD$208,760.00 15% of taxable income over RD$125,526.01
Over RD$208,760.01 but not over RD$313,140.01 RD$12,526.00 plus 20% of the excess over
RD$208,760.01
Over RD$313,140.01 RD$33,402 plus 25% of the excess over RD$313,140.01
</Table>
The amount of gain on which the capital gains tax is assessed is equal to
the sale or transfer price (i.e., amount realized on the sale or transfer) minus
the acquisition price, adjusted for inflation. Regulations for the application
of the Dominican Tax Code clarify how the tax basis is to be calculated and also
provide how the inflation adjustment is to be applied.
There is no income tax treaty in force between the Dominican Republic and
the United States.
There are no Dominican inheritance or succession taxes applicable to the
ownership, transfer or disposition of ADSs by a foreign holder not domiciled in
the Dominican Republic at the moment of death. It is unclear whether Dominican
gift taxes would apply to the transfer or other disposition by gift of shares of
Class A common stock by a non-resident foreign holder; however, ADSs or ADRs are
not subject to Dominican gift taxes. There are no Dominican stamp, issue,
registration or similar taxes or duties payable by holders of ADSs or shares of
Class A common stock.
ITEM 11. QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about market risks to certain financial
instruments includes "forward-looking" statements that involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
We are exposed to market risks from adverse changes in interest rates and
foreign exchange rates. We do not hold or issue financial instruments for
trading purposes.
INTEREST RATE RISKS
Our interest expense is sensitive to changes in the general level of
interest rates in the United States and in the Dominican Republic. At December
31, 2001, we had outstanding $200 million aggregate principal amount of senior
notes. The senior notes bear interest at fixed rate of 11 3/8% per annum and
mature in the year 2004. The fair value of the senior notes was approximately
$166 million at December 31, 2001. The senior notes are U.S. dollar denominated.
Our primary exposure to market risk for changes in interest rates relates
to our short-term borrowings from Dominican banks. Primary exposure is based on
the potential of short-term interest rate variation, not on exposure
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to changes in fair market value of our long-term debt. At December 31, 2001, we
had $298.2 million outstanding of short-term and long-term borrowings, other
than our senior notes due 2004 but including trade finance, of which $262.4
million was U.S. dollar denominated, and the remaining $35.8 million was
Dominican peso denominated. Of the $262.4 million of U.S. dollar dominated debt,
$56.9 million was borrowed from Dominican banks, $26.9 million was commercial
paper outstanding issued in Dominican markets, while the remaining $178.6
million was borrowed from international banks. Of the total $298.2 million
outstanding, $212.2 million had fixed interest rates, while the remaining $86.0
million had variable interest rates. During 2001, our short-term and long-term
U.S. dollar denominated borrowings bore interest at rates ranging from 4.10% per
annum to 13.0% per annum. During 2001, our short-term and long-term Dominican
peso denominated borrowings bore interest at rates ranging from 15.0% per annum
to 19.5% per annum. A 10% increase in the average rate for our variable rate
debt would have increased our loss for 2001 by approximately $1.5 million.
FOREIGN EXCHANGE RISKS
We are subject to currency exchange risks. During 2001, we generated
revenues of $82.0 million in U.S. dollars and $161.7 million in Dominican pesos.
In addition, at December 31, 2001, we had $262.4 million of U.S.
dollar-denominated debt outstanding, excluding the $200.0 million principal
amount of the 113/8% senior notes due 2004.
The impact of changes in foreign exchange rates is determined by measuring
the effect of percentage changes in the range of rates during the year for our
Dominican peso denominated assets and liabilities. The model reflects the
weighted average change in exchange rates as resulting in the same percentage
change in foreign exchange gains or losses.
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 2001, the average official exchange rate
was RD$16.69 per $1.00 while the average private market rate was RD$16.88 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 2001, we recognized an
approximate $283,000 foreign exchange loss. If the Dominican peso had devalued
by an additional 10% against the U.S. dollar on average in 2001, then we would
have realized an additional foreign exchange loss of approximately $26,000.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
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ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
PART III.
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
The following consolidated financial statements are filed as part of this
Annual Report on Form 20-F
1. Independent Auditors' Report.
2. Consolidated Balance Sheets as of December 31, 2000 and 2001.
3. Consolidated Statements of Operations for the Years Ended December 31,
1999, 2000, 2001.
4. Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 2000 and 2001.
5. Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 2000 and 2001.
6. Notes to Consolidated Financial Statements.
ITEM 19. EXHIBITS
EXHIBIT NUMBER
1.1 Amended and Restated By-laws of the Company with English translation
thereof.(1)
2.1 Indenture, dated August 21, 1997, between The Bank of New York, as
trustee, and the Company.(2)
4.1 IDEN(R) Infrastructure Supply Agreement, dated July 31, 2000, between
Motorola, Inc. and Tricom Latinoamerica, S.A.(3)
- ----------
(1) Incorporated by Reference to Exhibit 3 to Amendment No. 1 to the
Registration Statement on Form F-1, registration number 333-8574, filed
May 1, 1998.
(2) Incorporated by Reference to Exhibit 4.1 to the Company's Registration
Statement on Form F-4, registration number 333-8150, filed
December 29, 1997.
(3) Incorporated by Reference to Exhibit 4.1 to the Company's Form 20-F/A,
file number 1-14816, filed November 21, 2001.
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TRICOM, S.A. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
Independent Auditors' Report..............................................................................F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001..............................................F-3
Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001................F-5
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 2000 and 2001......F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001................F-8
Notes to Consolidated Financial Statements...............................................................F-10
</Table>
F-1
<Page>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of TRICOM, S.A.:
We have audited the accompanying consolidated balance sheets of TRICOM,
S.A. and subsidiaries as of December 31, 2000 and 2001 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, 2001. 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, 2000 and 2001 and the results of their
operations and their cash flows for each of the years in the three year-period
ended December 31, 2001, in conformity with generally accepted accounting
principles in the United States of America.
As explained in notes 3 and 21 to the consolidated financial statements,
the Company's operations in Panama are pending the final authorization from the
regulators for the interconnection of its digital trunks system to the
Panamanian main network. Such authorization have been challenged by the
competition and, as of the date of this report, are pending final resolution by
the Panamanian Courts.
As discussed in note 27 to the consolidated financial statements, effective
July 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations," and certain
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as required
for goodwill and intangible assets resulting from business combinations
consummated after June 30, 2001.
As explained in note 14 to the consolidated financial statements, effective
January 1, 2000, the Company changed its method of accounting for installation
and activation revenues.
Santo Domingo, Dominican Republic KPMG
April 19, 2002 --------------------------------
Member Firm of KPMG International
F-2
<Page>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
<Table>
<Caption>
Assets 2000 2001
- --------------------------------------------------------- --------------- ----------------
Current assets:
Cash on hand and in banks (note 6) $ 18,199,552 $ 12,576,050
Accounts receivable (notes 5, 6, 13 and 22):
Customers 21,970,677 27,537,952
Carriers 8,729,886 4,168,187
Related parties 1,663,396 5,191,359
Officers and employees 556,577 687,355
Other 1,601,119 1,010,801
--------------- ----------------
Total Inventories 34,521,655 38,595,654
Allowance for doubtful accounts (2,394,903) (4,097,001)
--------------- ----------------
Accounts receivable, net 32,126,752 34,498,653
Inventories, net:
Equipment and accessories 8,889,385 6,485,541
Other 651,708 568,559
--------------- ----------------
Total inventories 9,541,093 7,054,100
Investments (note 6) - 15,200,000
Prepaid expenses (notes 6 and 18) 7,947,531 5,850,267
Deferred income taxes (note 19) 801,008 1,624,637
--------------- ----------------
Total current assets 68,615,936 76,803,707
--------------- ----------------
Investments (note 7) 3,289,459 3,968,711
Property and equipment, net (notes 4, 6, 9, 12 and 16) 586,223,900 685,916,632
Other assets at cost, net of amortization (notes 6 and 8) 24,310,564 26,214,053
Goodwill, net of amortization (note 9) - 36,511,523
--------------- ----------------
$ 682,439,859 $ 829,414,626
=============== ================
</Table>
See accompanying notes to consolidated financial statements
F-3
<Page>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2000 AND 2001
<Table>
<Caption>
Liabilities and Stockholders' Equity 2000 2001
- -------------------------------------------------------------------- ------------------ ----------------
Current liabilities:
Notes payable (notes 6, 10, 11 and 16):
Borrowed funds - banks $ 82,131,865 $ 86,872,001
Borrowed funds - related parties 31,410,612 27,076,366
Commercial paper - 29,242,556
Current portion of long-term debt 3,213,939 30,493,532
------------------ ----------------
116,756,416 173,684,455
------------------ ----------------
Current portion of capital leases - related party (notes 6 and 12) 5,308,310 6,643,766
Accounts payable (notes 6 and 13):
Carriers 13,835,276 8,831,981
Related parties 2,093,385 6,868,834
Suppliers 21,653,727 17,543,401
Other 242,582 3,881,848
------------------ ----------------
37,824,970 37,126,064
Other liabilities (note 14) 19,990,490 14,644,012
Accrued expenses (notes 6 and 15) 14,035,182 20,272,800
------------------ ----------------
Total current liabilities 193,915,368 252,371,097
------------------ ----------------
Reserve for severance indemnities (note 9) 9,727 1,639,718
Deferred income taxes (note 19) 974,867 2,172,814
Commercial paper (note 11) - 1,153,759
Capital leases, excluding current portion - related party (notes
6 and 12) 15,520,965 11,213,000
Long-term debt, excluding current portion (note 16) 261,222,759 305,459,748
------------------ ----------------
Total liabilities 471,643,686 574,010,136
------------------ ----------------
Minority interest - 1,870,833
Shareholders' equity (notes 17 and 23):
Class A common stock at par value RD$10: Authorized 55,000,000
shares; 9,700,000 shares issued at December 31, 2000 and
24,245,920 at December 31, 2001 6,210,025 14,753,134
Class B stock at par value RD$10: Authorized 25,000,000 shares;
issued 19,144,544 shares 12,595,095 12,595,095
Additional paid-in-capital 159,981,808 217,290,020
Retained earnings 34,033,002 10,919,165
Other comprehensive income-foreign currency translation (note 2.2) (2,023,757) (2,023,757)
------------------ ----------------
Shareholders equity, net 210,796,173 253,533,657
Commitments and contingencies (notes 3, 16, 18, 19, 20, 21 and 24)
------------------ =---------------
$ 682,439,859 $ 829,414,626
================== ================
</Table>
See accompanying notes to consolidated financial statements.
F-4
<Page>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<Table>
<Caption>
1999 2000 2001
---- ---- ----
Operating revenues (note 6):
Toll revenues $ 23,118,149 $ 28,666,107 $ 29,017,817
International revenues 60,592,134 84,187,050 82,024,320
Local service 33,298,534 51,309,514 63,419,066
Cellular and PCS 26,473,985 35,796,234 37,302,337
Data and Internet 560,086 3,461,192 8,268,003
Paging 2,695,531 1,703,963 1,051,368
Sale of equipment 7,689,534 5,263,137 2,686,304
Installation and activation fees 15,501,847 13,748,906 14,347,671
Cable revenues - - 4,735,872
Other 889,141 161,552 919,427
------------ ------------- -------------
Total operating revenues 170,818,941 224,297,655 243,772,185
------------ ------------- -------------
Operating costs:
Satellite connections and carrier (note 21) 43,687,794 68,607,640 68,336,474
Programming costs (note 21) - - 1,225,397
Network depreciation 15,982,827 29,341,705 44,510,197
Expense in lieu of income taxes (note 18) 12,763,565 10,173,983 12,646,103
Selling, general and administrative expenses,
including depreciation charges of $4,854,652,
$6,823,574 and $9,922,008 in 1999, 2000 and
2001, respectively (notes 6, 20, 21 and 24) 51,501,272 70,690,895 98,754,972
Cost of equipment sold 3,988,446 2,911,386 2,069,561
Other 1,432,957 1,550,161 1,745,902
------------ ------------- --------------
Total operating costs 129,356,861 183,275,770 229,288,606
------------ ------------- -------------
Operating income 41,462,080 41,021,885 14,483,579
------------ ------------- -------------
Other income (expenses):
Interest expense (note 6) (22,430,031) (34,037,053) (42,108,715)
Interest income (note 6) 2,389,329 3,301,031 2,428,316
Foreign currency exchange gain (loss) (202,724) (303,078) (259,951)
Gain on sale of land (note 6) 897,833 - -
Gain (loss) on sale of equipment - 29,874 (282,713)
Other, net (note 6) 179,409 (197,118) 1,361,944
------------ ------------- -------------
Other expenses, net (19,166,184) (31,206,344) (38,861,119)
------------ ------------- -------------
Earnings (loss) before income taxes, minority
interest and cumulative effect of
accounting change 22,295,896 9,815,541 (24,377,540)
Income taxes (note 19) (141,660) (588,377) (511,376)
------------ ------------- -------------
Earnings (loss) before minority interest and
cumulative effect of accounting change 22,154,236 9,227,164 (24,888,916)
Minority interest - - 1,775,079
------------ ------------- -------------
Earnings (loss) before cumulative effect of
accounting change 22,154,236 9,227,164 (23,113,837)
Cumulative effect of accounting change:
Organization costs (119,711) - -
Installations and activations revenues (note 14) - (16,452,799) -
------------ ------------- -------------
Net earnings (loss) $ 22,034,525 $ (7,225,635) $ (23,113,837)
============ ============= =============
Earnings (loss) per common share - basic and
diluted
Earnings before cumulative effect of accounting
change 0.89 0.33 (0.78)
Cumulative effect of accounting change - (0.59) -
------------ ------------- -------------
Net earnings (loss) per common share - basic
and diluted $ 0.89 $ (0.26) $ (0.78)
============ ============= =============
Pro forma amounts assuming the change in accounting
principle for installation and activation fees
retroactively:
Net earnings (loss) $ 17,183,884 $ 9,227,164 $ (23,113,837)
============ ============= =============
Earnings per common share - basic and diluted $ 0.89 $ (0.26) $ (0.78)
============ ============= =============
Average number of common shares used in calculation:
Basic 24,844,544 27,723,665 29,571,266
============ ============= =============
Diluted 24,888,709 27,896,666 29,571,266
============ ============= =============
</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, 1999, 2000 AND 2001
<Table>
<Caption>
Retained Earnings
Number of Common Shares Issued Common Stock -------------------------------
--------------------------------- -------------------- Additional Appropriated
Class A Class B Class A Class B Paid in Capital Legal Reserve
--------------------------------- -------------------- ---------------- --------------
Balance at December 31, 1998 5,700,000 19,144,544 $ 3,750,000 12,595,095 $ 94,015,852 $ 1,172,188
Stock-based compensation to
non-employees (note 24) - - - - 273,000 -
Transfer to legal reserve (note
23) - - - - - 480,819
Net earnings - - - - - -
---------- ---------- ----------- ---------- ------------- -------------
Balance at December 31, 1999 5,700,000 19,144,544 3,750,000 12,595,095 94,288,852 1,653,007
Issuance of common shares, Net
of issuance cost of $6,852,774
(note 17) 4,000,000 - 2,460,025 - 64,687,201 -
Stock-based compensation to
non-employees (note 24) - - - - 1,005,755 -
Net loss - - - - - -
---------- ---------- ----------- ---------- ------------- -------------
Balance at December 31, 2000 9,700,000 19,144,544 6,210,025 12,595,095 159,981,808 1,653,007
Issuance of common shares in
payment of company acquisition
(notes 9, 17 and 28) 3,375,000 - 1,991,250 - 19,676,250 -
Issuance of common shares, net
of issuance cost of $1,331,096
(note 17) 11,170,920 - 6,551,859 - 36,801,108 -
Stock-based compensation to
non-employees (note 24) - - - - 830,854 -
Net loss - - - - - -
---------- ---------- ----------- ---------- ------------- -------------
Balance at December 31, 2001 24,245,920 19,144,544 $14,753,134 12,595,095 $ 217,290,020 $ 1,653,007
========== ========== =========== ========== ============= =============
<Caption>
Other
Comprehensive
Income-Foreign
Currency Shareholders'
Un-appropriated Translation Equity, Net
----------------- ---------------- -------------
Balance at December 31, 1998 $ 18,051,924 $ (2,023,757) $ 127,561,302
Stock-based compensation to
non-employees (note 24) - - 273,000
Transfer to legal reserve (note
23) (480,819) - -
Net earnings 22,034,525 - 22,034,525
------------ -------------- -------------
Balance at December 31, 1999 39,605,630 (2,023,757) 149,868,827
Issuance of common shares, Net
of issuance cost of $6,852,774
(note 17) - - 67,147,226
Stock-based compensation to
non-employees (note 24) - - 1,005,755
Net loss (7,225,635) - (7,225,635)
------------ -------------- -------------
Balance at December 31, 2000 32,379,995 (2,023,757) 210,796,173
Issuance of common shares in
payment of company acquisition
(notes 9, 17 and 28) - 21,667,500
Issuance of common shares, net
of issuance cost of $1,331,096
(note 17) - - 43,352,967
Stock-based compensation to
non-employees (note 24) - - 830,854
Net loss (23,113,837) - (23,113,837)
------------ -------------- -------------
Balance at December 31, 2001 $ 9,266,158 $ (2,023,757) $ 253,533,657
============ ============== =============
</Table>
See accompanying notes to consolidated financial statements.
F-6
<Page>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<Table>
<Caption>
1999 2000 2001
----- ----- ----
Cash flows provided by operating activities:
Net earnings (loss) $ 22,034,525 $ (7,225,635) $ (23,113,837)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Depreciation 20,837,480 36,165,279 54,432,205
Amortization of debt issue cost 1,499,497 1,958,610 2,253,822
Allowance for doubtful accounts 5,420,717 3,499,893 5,519,059
Amortization of radio frequency right 198,333 320,186 660,086
Goodwill amortization - - 47,031
Provision for equipment pending 1,014,605
installation - -
Foreign exchange gains 101,835 - -
Expenses for severance indemnities 328,807 760,740 1,987,129
Cumulative effect of accounting change
in installations and activations
revenues - 16,452,799 -
Cumulative effect of accounting change
in organizations costs 119,711 - -
Deferred income tax, net 33,660 491,890 374,318
Value of consulting services received
in exchange for stock warrants 273,000 1,005,755 830,854
Minority interest - - (1,775,079)
Loss (gain) on sale of fixed assets, net - (836,054) 282,713
Gain on sale of land (897,833) - -
Net changes in assets and liabilities:
Accounts receivable (13,407,676) (9,497,912) (839,867)
Inventories (4,213,002) 160,162 2,498,234
Prepaid expenses (3,532,125) (1,310,464) 2,162,909
Long-term accounts receivable 68,937 22,619 -
Other assets (3,944,266) (9,765,092) (3,946,042)
Accounts payable 9,005,096 12,429,429 (3,094,374)
Other liabilities (3,624,114) (252,016) (7,885,779)
Accrued expenses 1,563,855 (1,258,728) 4,635,412
Reserve for severance indemnities (340,279) (782,427) (2,040,943)
-------------- -------------- --------------
Total adjustments 9,491,633 49,564,669 57,116,293
-------------- -------------- --------------
Net cash provided by operating activities 31,526,158 42,339,034 34,002,456
-------------- -------------- --------------
Cash flows from investing activities (note 9 and 28):
Acquisition of investments (546,185) (578,887) (15,862,209)
Proceeds from maturity of US Treasury
Bonds and irrevocable restricted funds 54,470,478 - -
Proceeds from sale of land 2,724,458 - -
Proceeds from sale of fixed assets - 2,405,494 41,653
Business acquisitions, net of cash
acquired - - (47,416,009)
Acquisition of land (1,826,625) - -
Acquisition of property and equipment (119,182,223) (151,221,583) (113,229,826)
-------------- -------------- --------------
Net cash used in investing activities (64,360,097) (149,394,976) (176,466,391)
-------------- -------------- --------------
</Table>
(continued)
See accompanying notes to consolidated financial statements
F-7
<Page>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
<Table>
<Caption>
1999 2000 2001
----- ---- ----
Cash flows from financing activities (notes 9 and 28):
Borrowed funds from banks 111,580,042 226,440,816 117,508,250
Principal payments to banks (69,643,536) (207,910,973) (115,281,528)
Proceeds from issuance of commercial paper - - 30,396,315
Borrowed funds from related parties 62,233,725 71,727,978 82,699,726
Principal payments to related parties (69,929,694) (58,213,312) (87,033,972)
Capital lease payments (361,292) (22,745,278) (6,317,907)
Re-payment of Carifa bonds (32,000,000) - -
Payments of long-term debt - (10,315,216) (3,133,887)
Proceeds from issuance of long-term debt 29,087,227 45,664,687 74,650,469
Issuance of common stock - 67,147,226 43,352,967
-------------- -------------- --------------
Net cash provided by financing activities 30,966,472 111,795,928 136,840,433
Effect of exchange rate changes on cash on
hand and in banks (50,377) - -
-------------- -------------- --------------
Net increase (decrease) in cash and on hand
and in banks (1,917,844) 4,739,986 (5,623,502)
Cash on hand in and banks at beginning of 18,199,552
the year 15,377,410 13,459,566
-------------- -------------- --------------
Cash on hand an in banks at the end of the
year $ 13,459,566 $ 18,199,552 $ 12,576,050
============== =============== ==============
Supplementary information:
Interest paid (net of capitalization) (23,373,038) (33,785,503) (40,731,785)
Capital lease obligation incurred $ 26,244,000 $ 17,691,845 $ 3,345,398
============== ============== ==============
</Table>
See accompanying notes to consolidated financial statements
F-8
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 2001
1 ORGANIZATION AND NATURE OF BUSINESS
The consolidated financial statements of TRICOM, S. A. (the Company)
include operations of the following companies engaged in the
telecommunication and media industry, and with operations in the Dominican
Republic, New York, U.S.A. and Republic of Panama.
TRICOM, S. A. (Parent Company)
GFN Comunicaciones, S. A.
TRICOM Centroamerica, S. A.
Call Tel Corporation
TRICOM USA, Inc. and Subsidiaries
TRICOM Latinoamerica, S. A. and Subsidiaries (a company in development
stage)
TCN Dominicana, S. A. (TCN or Telecable)
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 service through subsidiaries in the United
States.
The Company's operations in the Dominican Republic are governed by the
Telecommunications Law (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 an initial term of 20-year 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 telecommunications sectors that
is supported by a 2% tax on industry participants' billings of all
telecommunication services.
TRICOM USA, Inc. (TRICOM USA) is a Company organized under the Laws of
Delaware and authorized by the United States Federal Communications
Commission (FCC) to operate as a facilities-based carrier in the United
States.
TRICOM Latinoamerica, S. A. is a company organized under the Laws of the
Cayman Islands, on May 12, 2000. The activity of this company is to act as
the control of the telecommunication operations in Central America and the
Caribbean.
TCN Dominicana, S. A. is a company organized on September 13, 2001, under
the laws of the Dominican Republic, and engaged in the operation of three
cable television systems and networks in the Dominican Republic.
F-9
<Page>
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.(Parent Company) and its majority owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America. The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America 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 Company's functional currency is the US Dollar. Monetary assets and
liabilities denominated in other currencies are translated to US Dollars at
the exchange rate prevailing at the date of the financial statements. The
exchange differences resulting from this conversion are charged or credited
to foreign currency exchange gains or losses in the accompanying
consolidated statements of operations. The transactions expressed in other
currencies are translated at the exchange rated prevailing at the time the
transaction takes place.
Subsidiaries whose functional currency is other than the US Dollar are
translated following the guidelines in SFAS 52; accordingly, assets and
liabilities are translated to US Dollars at the exchange rate prevailing at
the date of the consolidated financial statements. Revenues and expenses
are translated at the average rate at the end of each month. Foreign
exchange differences arising from transactions in other currencies are
charged or credited to operations, while translation difference arising
from the conversion of the financial statements in other currencies is
recognized in comprehensive income or expense in stockholders' equity.
As of December 31, 2000 and 2001, the rates used by the Company to
translate Dominican peso denominated accounts at year-end were RD$16.69 and
RD$17.05 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 and cash equivalents, cash on hand, cash in banks, time deposits and
highly liquid debt instruments with original maturities, at the time of
purchase, of three months or less.
2.4 ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts receivables is established through a
charge to an expense account. The Company, after analyzing current market
trends and collection history of its receivable portfolio has estimated
that, as a rule, that customers receivable balances over 90 days past due
are uncollectible and, are therefore reserved.
2.5 INVENTORIES
Inventories are valued at the lower of average cost or market.
F-10
<Page>
2.6 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 recorded from first full month that the assets are placed
in service.
2.7 DEPRECIATION AND AMORTIZATION
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. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated
useful life of the improvement.
The estimated useful lives of assets are as follows:
<Table>
<Caption>
Years
--------
Buildings and improvements 50
Furniture, equipment and transportation equipment 3-15
Leasehold improvements 5-10
Communications and transmission equipment 15
Computer equipment 6.67
Other equipment 5-10
</Table>
2.8 OTHER ASSETS
Deferred debt issue costs and bank debt are amortized over the debt service
period of the related debt.
The radio frequency rights are amortized on a straight-line basis over
their useful lives, which range from 15 to 20 years.
Deferred commissions on prepaid calling cards are recognized when the
deferred revenues are recorded. Commissions expense on sales of calling
cards outside of the Dominican Republic are recognized based on the minutes
used. Commission expense on sales of calling cards within the Dominican
Republic is recorded when the collections of outstanding invoices to
distributors and/or wholesalers are made.
Cellular service plans which include the price of the telephone equipment,
generate deferred assets for the net cost of the equipment, which is
amortized over the initial contract period of 18 months, from the month
following the equipment is delivered.
2.9 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. As of December 31,
2001, the liability for severance indemnities was $1,625,215 which relates
primarily to the obligations for employees of TCN Dominicana, S. A.,
assumed in connection with the Company's acquisition in 2001.
F-11
<Page>
2.10 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 due from
telecommunications carriers for calls (based on minutes) originated outside
the Dominican Republic, which terminate into the Company's Dominican
network as per operating agreements between the Company and each of such
carriers. These revenues are recognized as the minutes are provided.
PREPAID CALLING CARD REVENUES
The Company recognizes revenue from prepaid calling cards based on card
usage. The Company accounts for cash received or credit extended from the
sale of the prepaid calling cards as deferred revenues, which are then
recognized as the cards are used. This revenue may be part of the toll or
international revenues depending on the call destination.
LOCAL SERVICE REVENUE
Local service revenue consists of wire line rent, local measured service
(represents minutes used by local customers which are billed at established
rates or tariffs per actual minutes of call duration) as well as charges
for "Custom Local Access Signaling Services" (CLASS). CLASS represents
value-added services which include call forwarding, three-way calling, call
waiting and voice mail. It also features vertical services such as
incoming-call identification, call trace, call blocking, automatic return
of the most recent incoming call, call redial, and selective forwarding and
programming to permit for distinctive ringing for incoming calls requested
for local customers, which are billed in addition to rent. Local service
revenues also include collect call revenues and revenues from other
miscellaneous wire line 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.
DATA AND INTERNET
Represents fees received for data transmission services via ATM
(Asynchronous Transfer Mode), Frame-Relay, wireless Internet and other such
services to residential and corporate customers. 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.
F-12
<Page>
SALES OF EQUIPMENT
These revenues consist of sales and rental fees charges to customers for
communication equipment, including private branch exchanges, key telephone
systems, residential telephones, cellular handsets and paging units. These
revenues are recognized upon sale to the customer.
INSTALLATION AND ACTIVATION FEES
Revenues from installations consist of amounts charged by the Company to
its clients for the installation of local access lines, private
interchange, central telephone systems, as well as charges for the
activation of cellular phones and PCS. Effective January 1, 2000, the
Company adopted Staff Accounting Bulletin (SAB 101), issued by the
Securities and Exchange Commission (SEC), which establishes certain
criteria regarding revenue from installation and activation. As a result of
this adoption, revenues are recognized over the estimated average service
life based on the Company's experience (initially this was calculated as 35
months). In previous years, these revenues were recognized as generated.
As a result of a review of the average service lives based on the Company's
experience relative to client maintenance during 2001, effective October 1,
2001, the Company revised the estimated average service life period for the
amortization of the installation and activation revenue. Consequently, the
recognition period for these revenues was changed to 24 months.
INCOME FOR CABLE TV SERVICES
Consists of fees received for the transmission of television channels and
programs in the Dominican Republic, as well as other cable related
services. These revenues are recognized as the services are provided.
OTHER
Other revenues represent revenues that are not generated from the Company's
core business activities, including commissions and revenues from the sale
of miscellaneous products. These revenues are recognized when the service
or product is delivered.
2.11 CAPITALIZATION OF INTEREST
Interest is capitalized on qualified projects and included as part of
project costs during the period necessary for installation.
During the years ended December 31, 1999, 2000 and 2001, interest
capitalized as part of construction projects amounted to approximately
$11,900,000, $11,300,000 and $9,800,000, respectively.
2.12 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.
2.13 INCOME TAXES
In the case of 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
F-13
<Page>
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.
2.14 EARNINGS PER COMMON SHARE
Basic earnings per share have been computed based on the weighted average
number of common shares outstanding. Diluted earnings per share reflect the
increase in average common shares outstanding that would result from the
assumed exercise of outstanding stock options, calculated using the
treasury stock method.
The following table reconciles weighted average common shares outstanding
used in the calculation of basic earnings (loss) per common share to the
number of shares used in the calculation of diluted earning (loss) per
share for the years 1999, 2000 and 2001:
<Table>
<Caption>
1999 2000 2001
---------- ---------- ----------
Weighted average number of common shares
outstanding - basic...................... 24,844,544 27,723,665 29,571,266
Dilutive effect of potential common shares
issuable upon exercise of employee stock
options and warrants..................... 44,165 173,001 -
---------- ---------- ----------
Weighted average number of common shares
outstanding - diluted........................ 24,888,709 27,896,666 29,571,266
========== ========== ==========
</Table>
For 2001, all stock options and warrants are excluded from consideration of
diluted loss per share because of the Company's net loss.
2.15 PENSION PLAN
From September 1, 2000 a pension administration company has managed the
Company's plan, which was converted to a defined contribution plan. Under
this arrangement, both the Company and the employee make fixed
contributions to the employee's account. The contributions made by the
Company are recognized as monthly expenses. Prior to September 1, 2000, the
Company had a contributory defined benefit pension and retirement plan that
included all personnel. The cost of the plan had been determined based on
actuarial studies and includes amortization of past service costs over the
estimated average life of its employees.
2.16 IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company accounts for long-lived assets in accordance with the provision
of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less cost to
sell.
2.17 ADVERTISING COSTS
Advertising costs are expensed as incurred. For the years ended December
31, 1999, 2000 and 2001 these costs amounted to $5,431,834, $4,204,391 and
$6,074,121, respectively, and are included as part of selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
F-14
<Page>
2.18 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, including FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation an interpretation of APB Opinion No. 25" issued in March 2000,
in accounting for its fixed plan stock options. As such, compensation
expense is recorded on the date of grant only if the 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.
2.19 GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired during 2001, is accounted for as follows:
The goodwill resulting from the purchase of 51% interest in the subsidiary
in Panama during March of 2001 is amortized on a straight-line basis over
the expected periods to be benefited, generally over 40 years.
The goodwill resulting from the acquisition of TCN Dominicana, S.A. during
October 2001 is not being amortized in accordance with the provisions of
SFAS 142.
Goodwill acquired in business combinations completed before July 1, 2001
continues to be amortized and tested for impairment prior to the full
adoption of SFAS 142 on January 1, 2002.
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating cash
flows of the acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
2.20 RECLASSIFICATION
For the year ended December 31, 2001, the Company has classified as a
separate line item in operating revenues in the consolidated statements of
operations, data and Internet revenues. Previously, these revenues were
included as part of local service revenues and totaled $560,086 and
$3,461,192 for the years ended December 31, 1999 and 2000. Prior years have
been reclassified to conform to the year 2001 presentation.
3 LIQUIDITY
As of December 31, 2000 and 2001, the Company's current liabilities exceed
its current assets by $125.3 million and $175.6 million, respectively. This
is mainly a result of the short-term debt acquired in the Dominican
Republic with local banks and related entities which is due on demand.
Dominican banks generally make short-term loans with intentions of
renegotiating interest rates in the event that the market conditions
change. These debts generally are not repaid at maturity. The Company is
dependent upon the continued renewal of these loans annually and
semi-annually. Based upon its prior experience, the Company expects that it
will be able to renew substantially all of these loans in 2002, although
such renewals cannot be assured.
The Company has identified an action plan to harmonize its financial
situation under the best conditions offered by Dominican banks. As a
result, during the first quarter of 2002, management renegotiated
F-15
<Page>
approximately $30.5 million of its short-term debts with local banks on a
long-term basis. Such debts have been reclassified in the consolidated
balance sheet, as long-term debt, as of December 31, 2001. The Company is
continuing its efforts to renegotiate, on a long-term basis additional
amounts of its short term borrowings.
For the year ended December 31, 2001, the Company generated $34 million of
cash flow from operations. Additionally, the Company funded its long term
development plan through additional short and long-term borrowings and sale
of Class A common stock for net proceeds of approximately $43 million
primarily to one of its principal stockholders. The Company is currently
reviewing its operating and capital needs and may revise or curtail its
planned capital expenditures, if necessary. Management believes that cash
flow from operations combined with available borrowings will be sufficient
to fund its operating and capital needs through the end of 2002.
Additionally, during 2001, the Company acquired the largest cable
television company of the Dominican Republic. Management estimates that the
projected future cash flows from the operations of this subsidiary will
augment the cash flows projected by its telecommunications subsidiaries and
together will improve the financial position of the Company.
While the Company's Panama telecommunications subsidiary initiated its
digital trunking operation in April, 2002 using Motorola's iDEN(R)
technology, such subsidiary has not yet signed interconnection agreements
with telecommunications companies operating in Panama. It may not be able
to do so until certain lawsuits and proceedings are decided. A ruling in
this case adverse to the Company could have a material negative impact on
the Company's financial position and results of future operations. (See
note 21).
4 PROPERTY AND EQUIPMENT
A detail of property and equipment at December 31, 2000 and 2001 is as
follows:
<Table>
<Caption>
2000 2001
--------------- ---------------
Operations and communications:
Land...................................... $ 7,118,634 $ 11,902,288
Buildings and improvements................ 15,861,346 19,758,611
Furniture and equipment................... 10,324,397 12,975,140
Communications equipment.................. 156,045,089 216,321,333
Transmission equipment.................... 283,120,786 354,830,797
Other equipment........................... 32,538,363 25,624,184
--------------- ---------------
505,008,615 641,412,353
Less accumulated depreciation................ 70,891,750 114,543,201
--------------- ---------------
Sub-total, operations and communications 434,116,865 526,869,152
Property and equipment:
Buildings................................. 9,037,820 9,391,263
Furniture and office equipment............ 20,133,420 31,972,835
Transportation equipment.................. 4,636,530 6,612,102
Leasehold improvements.................... 4,807,139 6,307,745
Data processing equipment................. 33,590,043 45,459,879
--------------- ---------------
72,204,952 99,743,824
Less accumulated depreciation............. 21,157,407 31,725,040
--------------- ---------------
Sub-total, property and equipment....... 51,047,545 68,018,784
--------------- ---------------
Communications equipment pending
obsolescence............................ 16,872,746 21,536,007
</Table>
F-16
<Page>
<Table>
<Caption>
2000 2001
--------------- ---------------
Cable company equipment pending
installation............................ - 3,451,697
Equipment in transit (a).................. 5,789,586 4,396,131
Construction in process (b)............... 78,397,158 61,644,861
--------------- ---------------
Property and equipment, net............. $ 586,223,900 $ 685,916,632
=============== ===============
</Table>
(a) Equipment in transit represents accumulated costs of equipment imported
by TRICOM, S. A. and TCN, for which additional import related costs are
still to be incurred.
(b) A detail of construction in process at December 31, 2000 and 2001 is as
follows:
<Table>
<Caption>
2000 2001
--------------- ---------------
Operation and communication
Buildings................................. $ 3,104,105 $ 563,058
Transmission equipment (i)................ 48,302,135 40,173,633
Cells..................................... 17,075,909 13,630,164
Other Property and equipment:........... 9,915,009 7,278,006
--------------- ---------------
$ 78,397,158 $ 61,644,861
=============== ===============
</Table>
(i) As of December 31, 2000, this item includes mainly switches and
optic fiber projects for the Company's network in Dominican
Republic. As of December 31, 2001, this item includes approximately
$24.7 million for a network to provide trunking services with
iDEN(R) Motorola technology, primarily in the Republic of Panama.
(See note 21).
5 ACCOUNTS RECEIVABLE
Changes in the allowance for doubtful accounts were as follows:
<Table>
<Caption>
1999 2000 2001
--------------- --------------- --------------
Allowance at beginning of year............... $ 740,687 $ 4,307,563 $ 2,394,903
Increase for the year, net................... 5,420,717 3,499,893 5,519,059
Write-off during the year.................... (1,853,841) (5,412,553) (3,816,961)
--------------- --------------- --------------
Allowance at end of year..................... $ 4,307,563 $ 2,394,903 $ 4,097,001
=============== =============== ==============
</Table>
6 TRANSACTIONS WITH RELATED PARTIES
The transactions with related parties consist principally of bank accounts,
investments in certificates of deposits, loans, insurance services,
advertising and advisory services and real estate leases.
A detail of balances with related companies at December 31, 2000 and 2001,
is as follows:
<Table>
<Caption>
2000 2001
--------------- ---------------
Assets:
Cash in banks............................ $ 3,677,466 $ 4,689,200
Deposits (a)............................. 13,054,686 6,292,398
Accounts receivable (b).................. 1,663,396 5,191,359
Investments (c).......................... - 15,200,000
Prepaid expenses - insurance............. 4,472,055 4,456,265
Other assets - deposits................ 86,580 86,580
=============== ===============
Liabilities:
Borrowed funds (d)..................... 31,410,612 27,076,366
Commercial paper (e)................... - 1,964,942
Accounts payable....................... 2,093,385 6,868,834
</Table>
F-17
<Page>
<Table>
<Caption>
2000 2001
--------------- ---------------
Accrued expenses - interest payable.... - 338,497
Capital leases......................... 20,928,275 17,856,766
=============== ===============
</Table>
(a) As of December 31, 2000 includes $2,185,005 in a non-interest
bearing time deposit. As of December 31, 2000 and 2001 includes
$10,198,900 and $2,000,000, respectively, in interest bearing
deposits, which earn interest at rates between 9% and 11% in 2000
and 10% per annum in 2001. Additionally, as of December 31, 2000 and
2001, includes RD$11,195,335 ($670,781) and RD$73,185,385
($4,292,398) in certificates of deposit, which earn interest rates
of 20% per annum in 2000 and interest rates ranging from 15% to 20%
per annum in 2001.
(b) The Company contracts services from a related party engaged in
managing the collection of past due accounts. This related party
also provides these services to other related companies. During the
year ended December 31 2000 and 2001, the Company recognized
collection recoveries from customer accounts previously written off
$3,087,728 and $2,450,205, respectively. These amounts are included,
net of increase in the allowance for doubtful accounts, in selling,
general and administrative expenses in the accompanying consolidated
statements of operations. At December 31, 2000, the Company had
amounts receivable from the related party of $1,566,447, which was
collected in January 2001. As of December 31, 2001, accounts
receivable includes $3,737,542 related to an insurance claim filed
with Segna, S. A., a related Company, related to the loss of
communications equipment. The amount of the claim represents the
Company's undepreciated cost basis.
(c) Correspond to certificates of deposit that earn between 9% and 10%
annual interest and mature in 2002.
(d) Correspond to letters of credit and open accounts with annual
interest rates that range from 10% to 11.50% in 2000 and 9.5% to 12%
in 2001.
At December 31, 2001, the Company has available unsecured, short-
term lines of credit for approximately $41,800,000.
(e) Represent obligations from the issuance of commercial paper in favor
of related companies amounting to $818,344, at annual interest rates
ranging between 8% to 11% and RD$19,549,500 (equivalent to
$1,146,598 at December 31, 2001) at rates ranging between 14% to 16%
annual interest.
A detail of transactions with related parties during the years ended
December 31, 1999, 2000 and 2001, is as follows:
<Table>
<Caption>
1999 2000 2001
--------------- --------------- --------------
Operating revenues - communications services
revenues.................................. $ 1,970,646 $ 1,948,321 $ 3,687,902
Selling, general and administrative expenses:
Insurance premiums 2,000,473 4,071,713 4,379,992
Leased premises and equipment 108,578 157,600 122,568
Security services 77,382 227,001 267,725
Pension plan contributions 586,921 738,058 739,247
Advertising services 74,104 250,232 1,031,539
Professional services 167,470 234,348 128,957
Other - - 213,677
Other income (expenses):
Interest incurred on loans (710,537) (5,713,690) (5,751,382)
Interest earned 265,423 1,805,780 1,906,029
</Table>
F-18
<Page>
<Table>
<Caption>
1999 2000 2001
--------------- --------------- --------------
Gain on sale of land (a) 897,833 - -
Other (b) - 806,180 -
Bank charges (135,640) (151,600) (56,732)
Equipment purchased (Motorola) 23,097,157 20,279,706 20,196,766
=============== =============== ==============
</Table>
(a) During 1999, the Company bought from an unaffiliated third party a
parcel of land that was subsequently sold 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.
(b) In July 2000 the Company sold all operational assets related to the
operations of the Internet business portal to a related company in
the Dominican Republic for $2,315,412 in cash. The gain on the sale
of this asset was $806,180, and is included as part of other, net in
other income (expenses) in the accompanying consolidated statements
of operations.
7 MORTGAGE INVESTMENTS
At December 31, 2000 and 2001, consist of mortgage participation contracts,
which have been purchased from savings and loan associations in the
Dominican Republic. These contracts earn interest at rates between 9% and
12% per annum in 2000 and 7% and 12% per annum in 2001. These investments
are maintained as compensating balances for mortgage loans made by these
savings and loan associations to certain officers and employees of the
Company.
8 OTHER ASSETS
Other assets at December 31, 2000 and 2001 consisted of the following:
<Table>
<Caption>
2000 2001
--------------- ---------------
Deferred debt issue costs and bank debt, net (a) $ 7,303,063 $ 8,852,320
Deposits with international carriers (b) 214,340 207,575
Deposits 1,976,585 2,133,880
Radio frequency rights, net (c) 10,766,390 11,029,074
Other (d) 4,050,186 3,991,204
--------------- ---------------
$ 24,310,564 $ 26,214,053
=============== ===============
</Table>
(a) Represent commissions paid to brokers and other expenses incurred at
the time of, and directly related to, the issuance of the Senior
Notes and prepaid interest on bank debt. For the years ended
December 31, 1999, 2000 and 2001, amortization of deferred debt
issue cost and bank debt amounted to $1,499,497, $1,958,610 and
$2,333,946, respectively, and are included as part of interest
expense in the accompanying consolidated statements of operations.
(b) At December 31, 2000 and 2001, deposits with international carriers
represent security deposits made by TRICOM for the installation of
international circuits. These deposits will be recovered at the
termination of the agreements. These agreements mature each year and
are automatically renewed unless otherwise terminated by the
parties.
(c) Represent payments for the frequency usage rights to expand the
cellular capacity of the Company in the Dominican Republic, as well
as payments for the acquisition of the frequency rights for El
Salvador, Guatemala and Panama, as part of the plans to expand the
Company in Central America and the Caribbean. For the years ended
December 31, 1999, 2000 and 2001, the amortization expense amounted
to $198,333, $320,186 and $660,086 respectively, and are included as
part of selling, general and administrative expenses in the
accompanying consolidated statements of operations.
F-19
<Page>
(d) At December 31, 2000 and 2001 include deferred commissions related
to prepaid calling cards of $3,591,760 and $2,175,183, respectively.
Also at December 31, 2001, this account includes $1,325,398
corresponding to the net deferred asset associated with cellular
phone packages offered which include telephone equipment. The basic
rate per minute of such packages is higher than other regular
packages offered by the Company. At December 31, 2001, the
amortization expense associated with net deferred assets of cellular
phone packages was $390,977 and is included as part of selling,
general and administrative expenses in the accompanying consolidated
statements of operations.
9 ACQUISITIONS, GOODWILL AND INTANGIBLE ASSETS
On October 26, 2001, the Company completed the acquisition of 100% of the
outstanding stock of TCN Dominicana, S. A. (TCN). TCN is engaged in
operating cable television systems and is the largest such Company in the
Dominican market. The purchase price consisted in cash payments of
approximately $42,300,000 and 3,375,000 TRICOM shares with an approximate
value of $21,700,000 as of the date the agreement was announced for a total
cost of approximately $64,000,000. The TCN acquisition was accounted for
using the purchase method of accounting. TRICOM assumed control of the
operations of TCN from September 13, 2001. From September 13, 2001 to the
date of closing, there were no significant unsatisfied conditions necessary
for the final execution of the transaction. The conditions during that
period consisted primarily of ministerial legal conditions. Consequently,
the consolidated financial statements include the accounts of TCN from
October 1, 2001.
Allocation of the purchase price to the estimated fair value of assets
acquired and liabilities assumed at the date of the acquisition is as
follows:
<Table>
Current assets $ 8,052,540
Property and equipment 32,208,572
Other non-current assets 77,977
Goodwill and other intangible assets 34,050,204
---------------
Total assets acquired 74,389,293
---------------
Less:
Current liabilities 7,544,934
Other non-current liabilities 2,834,434
---------------
Total liabilities assumed 10,379,368
---------------
Net assets acquired $ 64,009,925
===============
</Table>
Included in goodwill and other intangible assets are amounts related to
cable franchise rights which have indefinite life. As a result, under the
provisions of SFAS 142, these amounts (as with amounts allocated to
goodwill) will not be amortized from the date of acquisition but will be
measured for impairment in accordance with the Company's established
accounting policy. (See note 27). The following unaudited supplemental pro
forma information presents the results of operation of the Company as if
the TCN acquisition had taken place on January 1, 2000 and 2001,
respectively.
<Table>
<Caption>
2000 2001
--------------- ---------------
Revenues $ 241,165,176 $ 257,825,370
Earnings (loss) before cumulative effect of
accounting change 11,638,778 (21,532,336)
Net loss (4,814,020) (21,532,336)
Loss per share-basic and diluted (0.17) (0.73)
=============== ===============
</Table>
The unaudited pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of results
of operations which actually would have resulted had TCN acquisition
occurred as of January 1, 2000 and 2001.
F-20
<Page>
In March 2001, the Company acquired 51% of the outstanding shares of
Cellular Communications of Panama, S. A. (subsequently renamed TRICOM
Panama, S. A.) a Panamanian Corporation engaged in wireless communications.
The total cost of this acquisition, including transaction expenses amounted
to $6,303,074 of which $5,272,774 was paid in cash and $1,030,300 through
the contribution of a non exclusive license for software developed by
TRICOM.
Allocation of the purchase price to the estimated fair value of assets
acquired and liabilities assumed at the date of the acquisition of the 51%
of the Company's equity is as follows:
<Table>
Current assets $ 177,717
Property and equipment 3,305,797
Other non-current assets 666,035
Goodwill 2,508,350
---------------
Total assets acquired 6,657,899
---------------
Less:
Current liabilities 351,695
Other non-current liabilities 3,130
---------------
Total liabilities assumed 354,825
---------------
Net assets acquired $ 6,303,074
===============
</Table>
As of December 31, 2001, the composition of goodwill and intangible assets
is as follows:
<Table>
Acquisition of TCN $ 34,050,204
Acquisition of Cellular Communications of
Panama, S. A. (subsequently TRICOM
Panama, S. A.) 2,508,350
---------------
36,558,554
Less amortization 47,031
---------------
Balance at December 31, 2001 $ 36,511,523
===============
</Table>
10 BORROWED FUNDS - BANKS
Funds borrowed by the Company consist of:
<Table>
<Caption>
2000 2001
--------------- ---------------
Funds denominated in US dollars (a) $ 45,609,165 $ 51,012,974
International Bank of Miami (IBM) (b) 33,047,565 29,817,971
Funds denominated in Dominican. pesos (c) 3,475,135 6,041,056
--------------- ---------------
$ 82,131,865 $ 86,872,001
=============== ===============
</Table>
(a) As of December 31, 2000 and 2001, these amounts represent loans with
local and international banks, which accrued interest at annual
rates ranging from 9.8% and 12% in 2000 and 5.25% to 12.5% per annum
in 2001.
(b) As of December 31, 2000 and 2001, represent loans for working
capital for an amount of $10,284,791 and $6,101,654, respectively,
and for trade finance purposes for an amount of $22,762,774 and
$23,716,317, respectively. These loans have interest rates ranging
from 11% to 12% per annum in 2000 and from 10.25% to 11.25% per
annum in 2001.
(c) At December 31, 2000, these loans were RD$58,000,000 bearing
interest at a rate of 26% per annum. At December 31, 2001, these
loans represented RD$103,000,000 bearing interest at rates ranging
from 15% to 16.50% per annum.
F-21
<Page>
Usually these loans are renewable at maturity and are due on demand.
At December 31, 2001 the Company has available unused lines of credit with
local and international banks for approximately $30,600,000.
11 COMMERCIAL PAPER
As of December 31, 2001, commercial paper issued by the Company consist of:
<Table>
Commercial paper in US dollars (a) $ 26,914,427
Commercial paper in Dominican pesos (b) 3,481,888
---------------
Total commercial paper 30,396,315
Less short-term commercial paper 29,242,556
---------------
Long-term commercial paper $ 1,153,759
===============
</Table>
(a) Bears interest at annual rates between 8% and 12%.
(b) Commercial paper in Dominican pesos for a total amount of
RD$59,366,190 which bears interest at annual rates between 13% and
16%.
Commercial paper issued by the Company is non-redeemable until maturity.
These obligations are issued through the related company "Acciones y
Valores, S. A." to a related bank. As of December 31, 2001, the Company has
a facility that would allow for the issuance of additional commercial paper
in the amount of $13,085,573 and RD$140,633,210 ($8,249,317).
The following is a schedule of the maturity for such debt as of December
31, 2001:
<Table>
One to three months $ 3,072,221
Three to six months 5,607,451
Six months to one year 20,562,884
More than one year 1,153,759
==================
</Table>
12 CAPITAL LEASES
Since December 1999, the Company has entered into various capital lease
contracts with a related party. These contracts will mature at various
dates during the next four years. Assets recorded under these leases
consist of:
<Table>
<Caption>
2000 2001
--------------- ---------------
Communications equipment and other equipment $ 42,488,488 $ 45,696,681
Transportation 1,176,001 1,276,815
Machinery and equipment 271,356 307,748
--------------- ---------------
43,935,845 47,281,244
Less accumulated depreciation 2,350,834 11,169,666
--------------- ---------------
$ 41,585,011 $ 36,111,578
=============== ===============
</Table>
A schedule of the lease payment requirements under these capital leases is
as follows:
<Table>
Year ending December 31,
2002 $ 9,584,940
2003 8,816,113
2004 4,988,675
</Table>
F-22
<Page>
<Table>
2005 204,172
--------------
Total lease payments 23,593,900
Less related taxes 2,527,882
--------------
Minimum lease payments 21,066,018
Less amount representing interest
(12% to 12.875%) 3,209,252
--------------
Present value of capital lease
obligations 17,856,766
Less current maturities of capital
lease obligations 6,643,766
--------------
Capital lease obligations $ 11,213,000
==============
</Table>
13 TRANSACTIONS WITH CARRIERS
Accounts receivable from carriers arise from the interconnection services
of inbound calls, while accounts payable result from interconnection
services of outbound calls. These charges are based on minutes billed.
Amounts paid to carriers constitute one of the main operating costs of the
Company.
Net amounts receivable and payable for these activities at December 31,
2000 and 2001 were as follows:
<Table>
<Caption>
2000 2001
----------------------------------- -----------------------------------
Receivable Payable Receivable Payable
------------------ --------------- --------------- ---------------
Inbound $ 13,699,020 $ - $ 7,119,043 $ -
Outbound (4,969,134) 12,323,898 (2,950,856) 7,080,318
Payable accounts
interconnection
operations - 1,511,378 - 1,751,663
------------------ --------------- --------------- ---------------
$ 8,729,886 $ 13,835,276 $ 4,168,187 $ 8,831,981
================== =============== =============== ===============
</Table>
14 OTHER LIABILITIES
Other liabilities at December 31, 2000 and 2001 consisted of the following:
<Table>
<Caption>
2000 2001
--------------- -------------
Customer advances $ 1,256,345 $ 2,467,875
Deferred revenues:
Calling cards 3,622,686 7,112,025
Installations and activation 14,654,886 4,718,921
Other 456,573 345,191
--------------- -------------
$ 19,990,490 $ 14,644,012
=============== =============
</Table>
Effective January 1, 2000, the Company adopted the Staff Accounting
Bulletin (SAB 101) "Revenue Recognition" issued by the Securities and
Exchange Commission (SEC). The adoption of SAB 101 resulted in a change in
the revenue recognition policy regarding installation and activation
revenues. Such change required the Company to recognize net revenues from
installation and activation over the average service life based on the
experience of the Company (35 months). This change in the revenue
recognition method required the Company to recognize a cumulative effect of
accounting change in net revenues from installations and activations for
$16,452,799, which is presented as a separate item in the accompanying
consolidated statements of operations. The adoption of this bulletin did
not affect the cash flows of the Company.
Effective October 1, 2001, the Company updated its estimate of the average
service life period of its customers for purposes of the recognition of
deferred income from activations and installations, as a result,
F-23
<Page>
the service life was revised from 35 to 24 months. This revision was done
based on the average service lives of the Company's customers during the
last three years. As of December 31, 2000 and 2001, the Company has
recognized revenue of $8,940,040 and $7,512,759, respectively, associated
with the accounting change to the adoption of SAB 101 to January 1, 2000.
This revenue is included as part of net revenue from installation and
activation in the accompanying consolidated statements of operations.
15 ACCRUED EXPENSES
A summary of accrued expenses at December 31, 2000 and 2001 is as follows:
<Table>
<Caption>
2000 2001
------------------ --------------------
Expense in lieu of income tax payable $ 627,543 $ 2,320,633
Interest payable 9,854,165 11,331,294
ITBIS (Net sales tax) 1,058,522 1,830,470
Other 2,494,952 4,790,403
------------------ --------------------
$ 14,035,182 $ 20,272,800
================== ====================
</Table>
16 LONG-TERM DEBT
Long-term debt is summarized as follows:
<Table>
<Caption>
2000 2001
------------------ --------------------
Senior notes (a) $ 200,000,000 $ 200,000,000
Bank loans:
Six loans granted by Banco Lopez de Haro, S.A. and
Banco de Desarrollo Industrial for a total amount of
RD$103,586,975 in 2000 and eleven loans for a total
amount of RD$186,373,755 with interest ranging from 24%
to 26% per annum in 2000 and from 15% to 18% per annum
in 2001. These loans are payable in monthly
installments of RD$4,535,210 (approximately $265,995)
including principal plus interest, beginning in January
2000 through December 2008; five of these loans are
secured by the communications equipment being financed,
of TRICOM, S. A. (Parent Company) with a carrying value
of approximately $7,300,000 in 2000 and $6,800,000 in
2001, respectively. 6,206,529 10,931,012
</Table>
F-24
<Page>
<Table>
<Caption>
2000 2001
------------------ --------------------
Loans with the International Bank of Miami disbursed
under a credit guarantee facility from the
Export-Import Bank of the United States (EXIMBANK) to
purchase equipment from US suppliers. As of December
31, 2000 and 2001 the amounts of $20,230,169 and
$26,333,154, respectively, are disbursed under the
$36,005,530 facility. As of December 31, 2001 the
amount of $5,426,869 is disbursed under the $20,000,000
facility. At December 31, 2000 and 2001, the Company
had $35,775,361 and $24,245,507, respectively,
available under both facilities. Interest is payable
semi-annually at a variable rate of 30-day LIBOR plus
2.25% for interim loans and at a fixed rate applicable
to the 3-year US Treasury Obligations plus 2% after a
certain date. At December 31, 2000 and 2001, these
loans have an interest rate of 8.87% per annum and
interest rates ranging from 4.19% to 6.48% per annum,
respectively. The principal amount is payable in up to
10 semi-annual installments of approximately $3,311,674
each, which amortization begins partially on March 15,
2002 and on June 15, 2002 until December 15, 2007.
These loans are guaranteed by TRICOM USA, Inc. 20,230,169 31,760,023
Loan with Banco Popular de Puerto Rico disbursed under
a credit facility of $15,000,000.00 at an interest rate
of LIBOR plus 4%. At December 31, 2000 and 2001 this
loan has an interest rate of 10.78% and 6.12% per
annum, respectively. Interest is payable on a monthly
basis and principal is payable in 3 installments of
$3,000,000 in June 2003, $4,000,000 in December 2003
and $8,000,000 in June 2004. This loan is guaranteed by
TRICOM USA, Inc. 15,000,000 15,000,000
Unsecured loan with Banco Mercantil, S. A. for the
amount of RD$150,000,000. At December 31, 2001 this
loan has an interest rate of 17.5% per annum, which can
be adjusted every 30 to 60 days as per market
conditions. Interest is payable on a monthly basis and
principal is due on April, 2004. - 8,797,654
</Table>
F-25
<Page>
<Table>
<Caption>
2000 2001
------------------ --------------------
Loan with General Electric Capital Corporation of
Puerto Rico (GE Capital) for $8,000,000. This loan has
an interest rate of 30-day LIBOR plus 2.75%, payable on
a monthly basis. At December 31, 2000 and 2001, this
loan has an interest rate of 9.53% and 5.39% per annum,
respectively. The principal amount is payable in 36
consecutively monthly installments of $222,222
beginning on February 1, 2001. This loan is secured by
transmission and communication equipment at a cost of
$15,864,000. The Company's loan agreement with GE
Capital includes the maintenance of certain financial
ratios. The loan agreement provides a grace period for
the Company to cure covenant violations within 90 days
from written notification received from GE Capital. The
loan agreement provides a grace period for the Company
to cure covenant violations within 90 days from written
notification received from GE Capital. The Company
failed to meet certain covenant requirements at
December 31, 2001 for which GE Capital issued the
Company waivers as of that date. In April 2002, the
Company and GE Capital signed an amendment to the loan
agreement which eliminates the application of the
financial covenants to the three month periods ended
March 31, 2002 and June 30, 2002 and amends the
financial covenants, originally required, for periods
ending after June 30, 2002. Consequently the debt
obligation with maturity after December 31, 2002 has
been classified as a long-term obligation 8,000,000 5,555,548
Loan with Popular Bank & Trust, Ltd. for $27,235,700.
This loan has a fixed interest rate of 10.25% p. a. for
one year, which can be modified annually according to
market conditions. Interest is payable on a monthly
basis and principal is payable on 20 quarterly
installments of $972,704 each, beginning on January 26,
2002 and a final payment of $7,781,620. This loan is
secured by an irrevocable stand by letter of credit
issued by Bancredito, S. A. - 27,235,700
</Table>
F-26
<Page>
<Table>
<Caption>
2000 2001
------------------ --------------------
Unsecured loans with Banco Popular Dominicano, S. A.
disbursed under a credit facility of $6,800,000. At
December 31, 2001 the RD$92,400,000 loan (approximately
US$5,419,355) has an interest rate of 18% per annum,
and the $1,249,758 loan has an interest rate of 9.5%
per annum, which can be modified every 30 to 60 days
according to market conditions. Interest is payable on
a monthly basis and principal is payable in equal and
consecutive semi-annual installments of approximately
$1,133,000 each, beginning in September 2004 and ending
on March 2007. - 6,669,114
Loans with Banco Dominicano del Progreso, S. A.
disbursed under a credit facility of $5,000,000. These
loans have interest rates ranging from 10.5% to 12% per
annum, which can be modified every 30 to 60 days as per
market conditions. Interest is payable on a monthly
basis and principal at maturity in March 2007. These
loans are secured by a mortgage valued at $6,900,000. - 3,786,023
Loans with Banco BHD, S. A. and BHD Cayman disbursed
under a credit facility of $12,000,000. Outstanding
under this facility includes a RD$18,500,000 loan
(approximately $1,085,044) at an interest rate of 16%
per annum, which can be modified every 30 to 60 days as
per market conditions. Loans for a total of $10,133,163
have interest rates ranging from 11% to 12%, which can
be modified as per market conditions. Principal
repayment is as follows: $6,000,000 is payable in 20
equal and consecutive quarterly installments including
capital plus interest of $396,335 each, commencing in
May 30, 2002; $2,000,000 is payable at maturity on May
30, 2006 with interest payable on a monthly basis; the
remaining principal amount is payable in three equal
and consecutive monthly installments of $1,000,000
beginning in June 30, 2003, with interest payable on a
monthly basis. Two of these loans are secured by a
mortgage valued at $8,000,000, the other by liens on
telecommunications equipment of the company for a total
amount of approximately $5,000,000. - 11,218,206
</Table>
F-27
<Page>
<Table>
<Caption>
2000 2001
------------------ --------------------
$15,000,000 revolving line of credit with Hamilton Bank
due on May 14, 2002. This loan bears interest at
Citibank, N. A. prime rate plus 0.05%. At December 31,
2000 and 2001 this loan has an interest rate of 10% and
5.25% per annum, respectively. This line of credit is
guaranteed by TRICOM, S. A. (Parent Company) and by
Bancredito, S. A. 15,000,000 15,000,000
------------------ --------------------
Total bank loans 64,436,698 135,953,280
------------------ --------------------
Total long-term debt 264,436,698 335,953,280
------------------ --------------------
Less current portion of long-term debt 3,213,939 30,493,532
------------------ --------------------
Long-term debt excluding current portion $ 261,222,759 $ 305,459,748
================== ====================
</Table>
The aggregate principal amounts due on these long-term debt obligations from
December 31, 2001 is as follows:
<Table>
Year ending December 31,
2002 $ 30,493,532
2003 20,914,484
2004 231,620,946
2005 18,014,766
2006 and thereafter 32,909,552
===================
</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 2004 (the "Senior Notes"). Interest on the Senior
Notes is payable in semi-annual installments on March 1st and September 1st of
each year.
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. 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 Senior Notes are guaranteed fully, unconditionally and jointly and severally
by each of the Company's restricted subsidiaries, as defined in the indenture
for the Senior Notes, each of which is wholly owned by the Company. Separate
financial statements of each of the guarantor subsidiaries have not been
presented herein because management has determined that such separate financial
statements would not be material to the holders of the Senior Notes.
Summarized condensed consolidated financial information of TRICOM, S. A. (Parent
Company), the subsidiaries guarantors on a combined basis (GFN Comunicaciones,
TRICOM Centroamerica, S. A., Call
F-28
<Page>
Tel, TRICOM USA and Subsidiaries, Tricom Latinoamerica, S.A., Tricom, S.A.
- -Panama- and TCN Dominicana, S.A.), and the subsidiary not guarantor (Tricom
Panama, S.A. - formerly Cellular Communications of Panama, S.A. -) at December
31, 2000 and 2001 and for the years ended December 31, 1999, 2000 and 2001 is as
follows (see note 1):
F-29
<Page>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET DATA AT DECEMBER 31, 2000:
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Consolidating Total
ASSETS Parent Co. Guarantors Not Guarantor Adjustments Consolidated
------ -------------- --------------- ------------------ ----------------- ----------------
Current assets:
Cash on hand and in banks $ 17,241,951 $ 957,601 $ - $ - $ 18,199,552
Accounts receivable, net 42,620,337 39,460,594 - (49,954,179) 32,126,752
Other current assets 17,049,765 1,239,867 - - 18,289,632
-------------- ------------- ---------------- --------------- ----------------
Total current assets 76,912,053 41,658,062 - (49,954,179) 68,615,936
Property and equipment net 557,465,684 28,758,216 - - 586,223,900
Other non-current assets 58,932,766 9,207,733 - (40,540,476) 27,600,023
-------------- ------------- ---------------- --------------- ----------------
Total assets $ 693,310,503 79,624,011 - (90,494,655) 682,439,859
============== ============= ================ =============== ================
<Caption>
LIABILITIES AND STOCKHOLDERS' Tricom S.A. Subsidiaries Subsidiaries Consolidating Total
EQUITY Parent Co. Guarantors Not Guarantor Adjustments Consolidated
- --------------------------------- -------------- ------------- ---------------- --------------- ----------------
Current liabilities:
Notes payable $ 116,756,416 $ - $ - $ - $ 116,756,416
Current portion of capital
leases 5,308,310 - - - 5,308,310
Accounts payable 68,895,750 18,883,399 - (49,954,179) 37,824,970
Other current liabilities 29,800,403 4,225,269 - - 34,025,672
-------------- ------------- ---------------- --------------- ----------------
Total current liabilities 220,760,879 23,108,668 - (49,954,179) 193,915,368
Other non-current liabilities 261,753,451 15,974,867 - - 277,728,318
-------------- ------------- ---------------- --------------- ----------------
Total liabilities 482,514,330 39,083,535 - (49,954,179) 471,643,686
Stockholders' equity 210,796,173 40,540,476 - (40,540,476) 210,796,173
-------------- ------------- ---------------- --------------- ----------------
Total liabilities and
stockholders' equity $ 693,310,503 $ 79,624,011 $ - $ (90,494,655) $ 682,439,859
============== ============= ================ =============== ================
</Table>
F-30
<Page>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEET DATA AT DECEMBER 31, 2001:
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Consolidating
Assets Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated
------ ------------- ------------- ---------------- --------------- ------------------
Current assets:
Cash on hand and in banks $ 11,200,148 $ 1,182,280 $ 193,622 $ - $ 12,576,050
Accounts receivable, net 87,640,800 17,706,131 835,546 (71,683,824) 34,498,653
Other current assets 27,076,558 2,287,371 365,075 - 29,729,004
------------- ------------- ---------------- --------------- ------------------
Total current assets 125,917,506 21,175,782 1,394,243 (71,683,824) 76,803,707
Property and equipment net 581,160,158 100,344,145 4,412,329 - 685,916,632
Other non-current assets 84,173,618 16,452,492 799,973 (34,731,796) 66,694,287
------------- ------------- ---------------- --------------- ------------------
Total assets $ 791,251,282 $ 137,972,419 $ 6,606,545 $ (106,415,620) $ 829,414,626
============= ============= ================ =============== ==================
<Caption>
Tricom S.A. Subsidiaries Subsidiaries Consolidation
Liabilities and Stockholders' Equity Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated
- ------------------------------------ ------------- ------------- ---------------- --------------- ------------------
Current liabilities:
Notes payable $ 158,259,504 15,424,951 - - 173,684,455
Current portion of capital leases 6,643,766 - - - 6,643,766
Accounts payable 33,536,089 72,631,604 2,642,195 (71,683,824) 37,126,064
Other current liabilities 25,986,347 8,790,651 139,814 - 34,916,812
------------- ------------- ---------------- --------------- ------------------
Total current liabilities 224,425,706 96,847,206 2,782,009 (71,683,824) 252,371,097
Other non-current liabilities 313,291,919 8,340,609 6,511 - 321,639,039
------------- ------------- ---------------- --------------- ------------------
Total liabilities 537,717,625 105,187,815 2,788,520 (71,683,824) 574,010,136
Minority interest - - - 1,870,833 1,870,833
Stockholders' equity 253,533,657 32,784,604 3,818,025 (36,602,629) 253,533,657
------------- ------------- ---------------- --------------- ------------------
Total liabilities and
stockholders' equity $ 791,251,282 $ 137,972,419 $ 6,606,545 $ (106,415,620) $ 829,414,626
============= ============= ================ =============== ==================
</Table>
F-31
<Page>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999:
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Consolidating
Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated
------------- ------------- ---------------- --------------- ------------------
Operating revenues $ 155,895,506 $ 36,179,982 $ - $ (21,256,547) $ 170,818,941
Operating costs (115,133,014) (35,480,394) - 21,256,547 (129,356,861)
------------- ------------- ---------------- --------------- ------------------
Operating income 40,762,492 699,588 - - 41,462,080
Other expense, net (18,608,256) (868,817) - 310,889 (19,166,184)
------------- ------------- ---------------- --------------- ------------------
Earnings (loss) before income
taxes and cumulative effect
of accounting change 22,154,236 (169,229) - 310,889 22,295,896
Income taxes - (141,660) - - (141,660)
------------- ------------- ---------------- --------------- ------------------
Earnings (loss) before
cumulative effect of
accounting change 22,154,236 (310,889) - 310,889 22,154,236
Cumulative effect of account
change in organization costs (119,711) - - - (119,711)
------------- ------------- ---------------- --------------- ------------------
Net earnings (loss) $ 22,034,525 $ (310,889) $ - $ 310,889 $ 22,034,525
============= ============= ================ =============== ==================
</Table>
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000:
<Table>
<Caption>
Tricom S.A. Subsidiaries Subsidiaries Consolidating
Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated
------------- ------------- ---------------- --------------- ------------------
Operating revenues $ 188,897,636 $ 65,697,691 $ - $ (30,297,672) $ 224,297,655
Operating costs (150,954,070) (62,619,372) - 30,297,672 (183,275,770)
------------- ------------- ---------------- --------------- ------------------
Operating income 37,943,566 3,078,319 - - 41,021,885
Other expenses, net (28,716,402) (1,273,401) - (1,216,541) (31,206,344)
------------- ------------- ---------------- --------------- ------------------
Earnings before income taxes
and cumulative effect of
accounting change 9,227,164 1,804,918 - (1,216,541) 9,815,541
Income taxes - (588,377) - - (588,377)
------------- ------------- ---------------- --------------- ------------------
Earnings before cumulative
effect of accounting change 9,227,164 1,216,541 - (1,216,541) 9,227,164
------------- ------------- ---------------- --------------- ------------------
Cumulative effect of change in
accounting for installations
and activation revenues (16,452,799) - - - (16,452,799)
------------- ------------- ---------------- --------------- ------------------
Net earnings (loss) $ (7,225,635) $ 1,216,541 $ - $ (1,216,541) $ (7,225,635)
============= ============= ================ =============== ==================
</Table>
F-32
<Page>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001:
<Table>
<Caption>
Tricom S.A. Subsidiaries Subsidiaries Consolidating
Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated
------------- ------------- ---------------- --------------- ------------------
Operating revenues $ 185,307,689 $ 80,126,179 $ 489,202 $ (22,150,885) $ 243,772,185
Operating costs (169,708,189) (77,618,572) (4,112,730) 22,150,885 (229,288,606)
------------- ------------- ---------------- --------------- ------------------
Operating income 15,599,500 2,507,607 (3,623,528) - 14,483,579
Other expense, net (38,713,337) (1,276,722) 717 1,128,223 (38,861,119)
------------- ------------- ---------------- --------------- ------------------
Earnings (loss) before income
taxes and minority interest (23,113,837) 1,230,885 (3,622,811) 1,128,223 (24,377,540)
Income taxes - (511,376) - - (511,376)
------------- ------------- ---------------- --------------- ------------------
Earnings (loss) before cumulative
effect of accounting change (23,113,837) 719,509 (3,622,811) 1,128,223 (24,888,916)
Minority interest - - - 1,775,079 1,775,079
------------- ------------- ---------------- --------------- ------------------
Net earnings (loss) $ (23,113,837) $ 719,509 $ (3,622,811) $ 2,903,302 $ (23,113,837)
============= ============= ================ =============== ==================
</Table>
CASH FLOW DATA FOR THE YEAR ENDED DECEMBER 31, 1999:
<Table>
<Caption>
Tricom S.A. Subsidiaries Subsidiaries Consolidating
Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated
------------- ------------- ---------------- --------------- ------------------
Net cash provided by (used in)
operating activities $ 38,455,777 $ (6,929,619) $ - $ - $ 31,526,158
Net cash used in investing
activities (62,214,283) (2,145,814) - - (64,360,097)
Net cash provided by financing
activities 21,539,440 9,427,032 - - 30,966,472
Effect of exchange rate changes
on cash on hand and in banks (50,412) 35 - - (50,377)
------------- ------------- ---------------- --------------- ------------------
Net increase (decrease) in
cash on hand and in banks (2,269,478) 351,634 - - (1,917,844)
Cash on hand and in banks at
beginning of the year 15,114,242 263,168 - - 15,377,410
------------- ------------- ---------------- --------------- ------------------
Cash on hand and in banks at the
end of the year $ 12,844,764 $ 614,802 $ - $ - $ 13,459,566
============= ============= ================ =============== ==================
</Table>
F-33
<Page>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH FLOW DATA FOR THE YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Consolidating
Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated
------------- ------------- ---------------- --------------- ------------------
Net cash provided by (used in)
operating activities $ 54,506,114 $ (12,167,080) $ - $ - $ 42,339,034
Net cash used in investing
activities (161,904,855) (21,770,121) - 34,280,000 (149,394,976)
Net cash provided by financing
activities 111,795,928 34,280,000 - (34,280,000) 111,795,928
------------- ------------- ---------------- --------------- ------------------
Net increase in cash on
hand and in banks 4,397,187 342,799 - - 4,739,986
Cash on hand and in banks at
beginning of the year 12,844,764 614,802 - - 13,459,566
------------- ------------- ---------------- --------------- ------------------
Cash on hand and in banks at the
end of the year $ 17,241,951 $ 957,601 $ - $ - $ 18,199,552
============= ============= ================ =============== ==================
</Table>
CASH FLOW DATA FOR THE YEAR ENDED DECEMBER 31, 2001:
<Table>
<Caption>
Tricom S.A. Subsidiaries Subsidiaries Consolidating
Parent Co. Guarantors Not Guarantors Adjustments Total Consolidated
------------- ------------- ---------------- --------------- ------------------
Net cash provided by (used in)
operating activities $ 31,164,129 $ 5,983,861 $ (3,145,534) $ - $ 34,002,456
Net cash used in investing
activities (186,848,944) (22,587,259) (2,597,256) 33,053,654 (178,979,805)
Net cash provided by financing
activities 149,643,012 16,828,077 5,936,412 (33,053,654) 139,353,847
------------- ------------- ---------------- --------------- ------------------
Net increase (decrease) in
cash on hand and in banks (6,041,803) 224,679 193,622 - (5,623,502)
Cash on hand and in banks at
beginning of the year 17,241,951 957,601 - - 18,199,552
------------- ------------- ---------------- --------------- ------------------
Cash on hand and in banks at the
end of the year $ 11,200,148 $ 1,182,280 $ 193,622 $ - $ 12,576,050
============= ============= ================ =============== ==================
</Table>
F-34
<Page>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17 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 has ten votes per share. The economic rights of each class of capital
stock are identical.
During the second quarter of 2000, the Company sold 4,000,000 Class A
common shares in a public offering for US$74.0 million, net of issuance
costs of $6,852,774. The proceeds of this issuance were used for capital
expenditures associated with increasing the capacity and coverage of local
access, mobile and data networks and to expand international facilities to
support increased traffic volume and to fund working capital.
In October 2001, the Company issued 3,375,000 shares in favor of the
previous shareholders of TCN Dominicana, S. A. as part of the purchase
price of the company. The value of these shares amounted to $21.7 million,
determined based on the average price of the shares of TRICOM, S. A.
immediately before and after the date the agreement was announced.
During the last quarter of 2001, the Company completed a Rights Offering of
common stock to shareholders. This offer was done as a result of the
commitment of $40,000,000 for the purchase of shares by Oleander Holding,
one of the Company's major shareholders, a subsidiary of GFN Corporation,
Ltd. During the second quarter of 2001as a result of this offer, the
company issued 11,170,920 shares for a total net proceeds of approximately
$43.3 million, net of issuance cost of $1,331,096.
18 EXPENSE IN LIEU OF INCOME TAXES
In accordance with the terms of the Concession Agreement signed with the
Dominican Government, as revised on February 20, 1996 TRICOM, S. A. (Parent
Company) has an exemption from income tax but is required to pay 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 ($1,055,718)
annually.
During the year ended December 31, 2000 the Government required the Company
to pay RD$7,500,000 ($449,371) as an advance deposit against future tax
amounts due. As of December 31, 2000 and 2001, there is RD$6,120,000
(equivalent to $366,687) and RD$0 of the original payment is included in
prepaid expenses in the accompanying consolidated balance sheets.
19 INCOME TAXES
The subsidiaries operate in several jurisdictions and different tax
regimes, of which the most relevant operations are located in the Dominican
Republic, United States of America and Panama. Accordingly, each subsidiary
must file income and other tax returns for its operations in such
jurisdictions. Because of the differences in the tax legislation in each
country, each of the individual subsidiaries must file separate income tax
returns instead of one on a consolidated basis. Therefore, the information
about corporate income tax expense for the years ended December 31, 1999,
2000 and 2001, respectively, represents the sum of the tax obligations of
each of the consolidated subsidiaries.
The components of income taxes are as follow:
F-35
<Page>
<Table>
<Caption>
1999 2000 2001
--------------- --------------- ---------------
Current
U.S. Federal $ (71,701) $ (96,487) $ (1,215)
Dominican Republic (a) - - (135,843)
U.S. State (36,299) - -
--------------- --------------- ---------------
(108,000) (96,487) (137,058)
Deferred tax (33,660) (491,890) (374,318)
--------------- --------------- ---------------
$ (141,660) $ (588,377) $ (511,376)
=============== =============== ===============
</Table>
(a) As of December 31, 2001, the applicable taxes of the subsidiary
dedicated to the cable television operations in the Dominican
Republic, was determined at 1.5% of the gross operating income of the
Company for a three month period and seventeen days ending December
31, 2001, as established by the fiscal regulations.
The components of deferred tax assets and liabilities in the United States
are as follows:
<Table>
<Caption>
1999 2000 2001
--------------- --------------- ---------------
Deferred tax assets:
Deferred revenues $ 737,410 $ 211,304 $ 910,711
Net operating loss carry forward 45,856 195,064 487,340
Tax credit carry forward 100,825 132,961 132,961
Other 65,099 261,679 93,625
--------------- --------------- ---------------
Total deferred tax assets 949,190 801,008 1,624,637
Deferred tax liabilities:
Property and equipment 631,159 974,867 1,588,780
IRC SEC 481 (a) adjustment - - 559,071
Other - net - - 24,963
--------------- --------------- ---------------
Total deferred tax liabilities 631,159 974,867 2,172,814
--------------- --------------- ---------------
Deferred tax, net $ 318,031 $ (173,859) $ (548,177)
=============== =============== ===============
</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.
At December 31, 2001, the Company has net operating loss carryforwards
("NOLS") aggregating approximately $586,472 expiring in the year 2019. In
addition, the Company has alternative minimum tax credit carryforwards
aggregating approximately $132,961 with no expirations.
Subsidiaries operating in Cayman Islands and Panama are exempt from income
taxes as long as they operate outside Cayman Islands and Panama.
20 PENSION BENEFITS
Beginning September 1, 2000, AFP Siembra, S. A. a related pension
management company, has managed the Company's pension plan as individual
defined contribution accounts similar to the United States 401(k) plan. The
plan management company maintains the investments on behalf of the plan
participants and reports changes in the value of the individual accounts on
a unit investment system. Each individual is to have his or her own
individual capitalization account which was opened with total contributions
to date plus accrued yield. Under this arrangement, the Company contributes
5% of the employee's salary and the employee contributes 4%. During the
four month period ended December 31, 2000 and for the year ended
F-36
<Page>
December 31, 2001, the Company's expense for this plan was approximately
$207,000 and $739,000, and is included as part of selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
The pension management company guarantees a minimum return of 1.5% over the
mean of the average bid interest rate offered by certificates of deposit
from Dominican commercial and multiple services banks reported by the
Central Bank of the Dominican Republic, determined monthly, considering the
date in which the funds entered the individual account.
The pension management company commits to permanently maintain on deposit
with banks 90% of the instruments that comprise the total amount of the
portfolio of funds being managed. The cost of this service is RD$50
(approximately $3) per employee per month, which is deducted monthly from
the contributions that the employer (the Company) makes. The pension
management company earns 1% annually on the cumulative balance of each
account under its management.
Prior to September 1, 2000, substantially all of the employees of the
Company were included in a defined benefit plan that was established by
Grupo Financiero Nacional, S.A. The benefits were based on the years of
service and the employees' compensation during the last several years
before retirement. This plan was administered by the Pension and Retirement
Plan of the Grupo Financiero Nacional, S. A.
The Company made annual contributions to the Plan based on contribution
levels determined by independent actuaries. The Company's pension expense
was approximately $587,000 and $531,000 in the years ended December 31,
1999 and 2000, respectively, and is included as part of selling, general
and administrative expenses in the accompanying consolidated statements of
operations.
21 COMMITMENTS AND CONTINGENCIES
A summary of commitments and contingencies at December 31, 2001 is as
follows:
(a) Commitments
(i) Since 1995, TRICOM has entered into operating leases with related
companies. The total expense under these leases in 1999, 2000 and
2001 was $108,578, $157,600 and $122,568, respectively, and are
included as part of selling, general and administrative expenses
in the consolidated statements of operations.
(ii) 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 cost of each contract is based upon
negotiated rates, which are computed based on the amount of
traffic each month. For the years ended December 31, 1999, 2000
and 2001 this cost was $3,706,683, $4,916,317 and $6,622,358,
respectively, and is included in the cost of satellite
connections in the accompanying consolidated statements of
operations.
(iii) On May 8, 1997, the Federal Communications Commission (FCC)
issued an order to adopt 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
through December 31.
At December 31, 1999, 2000 and 2001 the Company contributed
$141,141, $251,386 and $50,067, respectively, to the "Universal
Service Fund" on end-user telecommunications revenue of
$4,756,792 in 1999, $3,582,572 in 2000 and $710,299 in 2001. The
contribution
F-37
<Page>
paid is included as part of selling, general and administrative
expenses in the accompanying consolidated statements of
operations.
(iv) The subsidiary dedicated to the televised cable systems
operations, has contracts with television and network companies
of the United States of America for the transmission of its
programs in the Dominican Republic. Such companies require
monthly payments, that range between $0.10 and $5.85 per
subscriber. The term of these contracts fluctuate between two and
three years and are renewable at the option of the parties. As of
December 31, 2001, the total amount of these payments was
$941,375, which is included as part of the programming costs in
the accompanying consolidated statements of operations.
(v) The telecommunications law of the Dominican Republic (Law 153-98)
establishes that the companies operating in this sector pay to
the Instituto Dominicano de Telecomunicaciones (Indotel) a
monthly fee equivalent to 2% of its international net income. As
of December 31, 1999, 2000 and 2001, the expense for this concept
was $566,549, $364,434 and $228,340, respectively.
(b) Other Lease Obligations
The Company maintains operating leases for the use of office space,
telecommunications centers, commercial offices, warehouse, an automobile,
an aircraft and others. The operating leases are renewable at the end of
the lease period, which is usually one year. Expenses for these leases in
1999, 2000 and 2001 were approximately $476,000, $1,754,000 and $2,600,000,
and are included in selling, general and administrative expenses in the
consolidated statements of operations. The commitment for lease payments
for the next five years is as follow:
<Table>
<Caption>
Year Amount
---- ------
2002 $ 2,730,545
2003 2,821,165
2004 2,939,181
2005 3,068,231
2006 and future 11,159,965
---------------
</Table>
(c) Legal Proceedings
(i) In August 1999, a Dominican company and two individual plaintiffs
sued the Company before Dominican courts for alleged losses and
damages of up to approximately RD$200,000,000 (approximately
$12,000,000) resulting from the imprisonment by Dominican
authorities 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
the Company instigated following an irregular increase in
telephonic traffic at certain telephone numbers. The court
rejected the action for lack of evidence. However, the plaintiffs
appealed, and the case is pending decision. After consulting with
legal counsel, the Company believes that this matter will not
have a material adverse effect on its results of operations and
financial position in the case of an adverse decision.
(ii) As of December 31, 2001, the Company has been involved in other
lawsuits and legal proceedings arising from the ordinary conduct
of its business. Such claims generally relate to tortuous and
contractual actions for damages. Claims pursuant to such suits
and proceedings amount to approximately $7,400,000
(RD$126,000,000). Management has evaluated these suits and
proceedings and believes that the final resolution of these
matters will not have a material adverse effect on the Company's
results of operations and financial position.
F-38
<Page>
No amounts have been recorded in the accompanying financial
statements related to these legal proceedings.
(iii) The Company's subsidiary TRICOM USA, Inc. is the defendant in a
complaint filed by Centennial Communications Corp., a U. S.
corporation, and its affiliates on September 4, 2001 before the
United States Federal Communications Commission (FCC). The
complaint alleges discriminatory business practices and seeks a
significant reduction in the access charges, among other claims
relating to conduct by TRICOM, S. A.(the parent company of TRICOM
USA) in the Dominican Republic. Centennial seeks damages against
TRICOM USA and/or the revocation of its U.S. Section 214 license.
Currently, the FCC is examining whether it has jurisdiction to
hear this matter. No provision has been made to the consolidated
financial statements related to this claim, since the ultimate
resolution of this matter is uncertain at this time.
(iv) In August 2001, BSC of Panama, S. A., a subsidiary of BellSouth,
requested that the regulator initiate a legal review before the
Third Chamber of the Panamanian Supreme Court of Justice, of the
interpretation given by the regulator to the definition of
"Conventional Trunking System Services" found in Resolution No.
JD-025 of December 12, 1996. This case is pending final decision
by the Supreme Court.
Also in August 2001, BSC of Panama, S. A. obtained a general
precautionary measure from the Seventh Civil Court of the First
Judicial Circuit ordering Tricom Panama, S. A. to cease the
installation of its Motorola iDEN(R) technology network. This
decision was immediately appealed by Tricom Panama, S.A., and on
December 20, 2001 the First Superior Court decided the appeal in
Tricom Panama's favor, revoking the aforementioned precautionary
measure.
In September 2001, BSC of Panama, S. A., filed a petition for
declaratory judgment for damages against Tricom Panama, S. A.
before the Seventh Civil Circuit Court of the First Judicial
Circuit of Panama. This suit seeks that the courts order Tricom
Panama to: (i) remove its iDEN(R) system and other equipments in
Panama and (ii) pay a minimum indemnity of $20,000,000 for
alleged damages. Tricom Panama has filed a counterclaim against
BSC of Panama, S. A. As it considers their allegations are unfair
and geared to limit their entrance to the Panamanian market. This
suit is in discovery stage.
Also in September 2001, BSC de Panama, S. A. filed a complaint
for contempt by Tricom Panama, S. A. of the Seventh Civil Circuit
Court's precautionary measure. This suit is pending decision by
the court.
Management believes, based on the advice of its Panamanian legal
counsel, that BSC of Panama, S.A. should not succeed in its
claims.
(d) Severance indemnities
Companies based in the Dominican Republic maintain reserves under the
provisions of U.S. Statement of Financial Accounting Standards "SFAS" No.5
to cover the ultimate payment of severance indemnities. Severance expense
amounted to $328,807, $760,740 and $1,987,129 in the years ended December
31, 1999, 2000 and 2001 and are included as part of selling, general and
administrative expenses in the accompanying consolidated statement of
operations.
(e) Other
During the year 2001, the taxing authorities of the Dominican Republic
audited the tax returns of the Company and its compliance with the tax law
as it relates to withholdings and other taxes for the years 1999, 2000 and
through June 2001. The results of this tax audit are still not known,
however, management is confident that the final results will not be
significant.
F-39
<Page>
22 BUSINESS AND CREDIT CONCENTRATION
In the normal course of business, the Company has 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 due from large,
well-established companies. The Company does not believe that this
concentration of credit risk represents a material risk of loss.
23 LEGAL RESERVE
Article 58 of the Code of Commerce of the Dominican Republic requires all
companies to segregate at least 5% of 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.
24 STOCK OPTION PLAN
On May 4, 1998, the Company initiated a 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 after
one and three years from the date of grant.
At December 31, 2000 and 2001, there were 230,370 and 262,247 additional
shares available for grant under the Plan, respectively.
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 loss would have been increased to the pro-forma
amounts indicated below.
<Table>
<Caption>
2000 2001
------------------ --------------------
Net loss - as reported $ (7,225,635) $ (23,113,837)
================== ====================
Net loss - pro forma $ (7,929,562) $ (23,538,234)
================== ====================
Net loss per share:
As reported - basic and diluted $ (0.26) $ (0.78)
================== ====================
Pro-forma - basic and diluted $ (0.28) $ (0.80)
================== ====================
</Table>
<Table>
<Caption>
Weighted Average
Options Exercise Price
------------------ -------------------
Balance, December 31, 1998 477,664 12.95
Granted (a) 251,420 8.06
Cancelled (a) (415,664) 13.00
------------------ -------------------
Balance, December 31, 1999 313,420 8.96
Granted 207,245 20.45
Surrendered (1,035) 8.06
------------------ -------------------
Balance, December 31, 2000 519,630 13.53
Granted (b) 486,757 6.82
Cancelled (b) (453,130) 13.90
</Table>
F-40
<Page>
<Table>
Surrendered (69,310) 8.35
------------------ -------------------
Balance, December 31, 2001 483,947 $ 7.17
================== ===================
</Table>
(a) Corresponds to the reduction in the exercise price from $13.00 to
$8.06 of options granted in 1998.
(b) In 2000, the Board of Directors approved a stock option repricing
pursuant to which the Company's employees could elect to cancel
granted options in exchange for new options with an exercise price of
$7.00, which was Company's common stock on New York Stock Exchange.
Approximately 520,000 options were eligible for repricing, of which
the Company cancelled 303,171 options and granted 241,994 options.
The number of repriced options was also reduced proportionately. All other
conditions were unchanged. Effective July 1, 2000, the FASB issued
Financial Interpretation No. 44 (FIN 44) which amended APB 25 and requires
"variable" accounting for all stock option repricing retroactive to
December 15, 1998. As a result, these options will require variable
accounting until they are exercised, cancelled, forfeited or expired. Under
variable accounting, compensation expense must be measured by the
difference between the exercise price and the market price of the Company's
stock at each reporting period amortized over the vesting period. The
effect of the application of FIN 44 during 2000 and 2001 was not
significant.
Exercise prices of options outstanding as of December 31, 2001 ranged from
$3.65 to $16.00. The following table provides certain information with
respect to stock options outstanding at December 31, 2001:
<Table>
<Caption>
Options outstanding
------------------------------------------------------------------
Weighted Average
Weighted Average Remaining
Range of exercise prices Number Outstanding Exercise Price Contractual Life
------------------ ---------------- ----------------
Under $4.00 5,000 $ 3.65 10.00
$4.00 - $6.00 47,700 5.65 9.90
$6.01 - $8.00 402,877 6.99 9.08
$8.01 - $10.00 7,870 8.10 7.55
$10.01 - $16.00 20,500 14.90 7.63
------------------ ---------------- ----------------
483,947 $ 7.17 9.08
================== ================ ================
<Caption>
Options exercisable
----------------------------------------
Weighted Average
Range of exercise prices Number Exercisable Exercise Price
------------------------ ------------------ ----------------
Under $4.00 $ - $ -
$4.00 - $6.00 - -
$6.01 - $8.00 1,500 6.63
$8.01 - $10.00 - -
$10.00 - $16.00 2,813 13.00
------------- --------------
4,313
=============
</Table>
The weighted-average fair value at date of grant for options granted during
2000 and 2001 were $5.83 and $2.60, respectively and were estimated using
the Black-Scholes option valuation model with the following
weighted-average assumptions.
<Table>
<Caption>
2000 2001
------------- --------------
Expected life in years 7.50 7.50
Interest rate 5.10 5.02
</Table>
F-41
<Page>
<Table>
Volatility 79.94 70.56
Expected dividends - -
============= ==============
</Table>
Warrants:
In October, 1999 the Company entered into an agreement with a third party
to provide investor relations service 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 per share. At December 31, 2000 and
2001 the Company had 250,000 and 300,000 shares vested for this contract.
The Company is recognizing an expense for the fair value of these options
using the Black-Scholes options pricing model as follow:
The 150,000 shares vested in 1999 were valued at the fair value of the
shares at the date of grant and the 100,000 shares vested in the year 2000
were valued at the fair value of the shares at the date they were vested.
The Company had 50,000 shares that are not vested at December 31, 2000,
that are valued at the fair value at December 31, 2000. At December 31,
2001 the shares related to this contract are valued at the fair value of
the shares the date they were vested.
For the years ended December 31, 1999, 2000 and 2001 the Company recognized
an expense of $273,000, $1,005,755 and $830,854, respectively, which is
included as part of selling, general and administrative expenses in the
accompanying consolidated statements of operations.
F-42
<Page>
25 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables contain selected unaudited consolidated quarterly
financial data for the Company:
<Table>
<Caption>
2000
-----------------------------------------------------------------------
First quarter Second quarter Third quarter Fourth quarter
----------------- --------------- -------------- ----------------
Total operating revenues $ 50,229,735 53,081,404 57,919,395 63,067,121
Operating costs, including
depreciation charges of
$7,552,734; $8,390,173;
$9,168,662 and
$11,053,710 for each
quarter, respectively 39,401,870 44,406,622 47,125,015 52,342,263
--------------- ------------- ------------ -------------
Operating income 10,827,865 8,674,782 10,794,380 10,724,858
Other income (expenses), net (8,172,126) (6,818,441) (7,297,368) (8,918,409)
--------------- ------------- ------------ -------------
Earnings before income taxes
and cumulative effect of
accounting change 2,655,739 1,856,341 3,497,012 1,806,449
Income taxes (130,250) (140,568) (160,210) (157,349)
--------------- ------------- ------------ -------------
Earnings before cumulative
effect of accounting
change 2,525,489 1,715,773 3,336,802 1,649,100
Cumulative effect of
accounting change for
installation and
activation revenues (16,452,799) - - -
--------------- ------------- ------------ -------------
Net earnings (loss) $ (13,927,310) 1,715,773 3,336,802 1,649,100
=============== ============= ============ =============
Earnings (loss) per share $ (0.56) 0.06 0.12 0.06
=============== ============= ============ =============
Number of common shares used
in calculation 24,844,544 28,361,028 28,844,544 28,844,544
=============== ============= ============ =============
</Table>
<Table>
<Caption>
2001
-----------------------------------------------------------------------
First quarter Second quarter Third quarter Fourth quarter
----------------- --------------- -------------- ----------------
Total operating revenues $ 57,449,378 59,023,070 60,654,087 66,645,650
</Table>
F-43
<Page>
<Table>
<Caption>
2001
-----------------------------------------------------------------------
First quarter Second quarter Third quarter Fourth quarter
----------------- --------------- -------------- ----------------
Operating costs, including
depreciation charges of
$12,069,872;
$13,367,554; $14,378,645
and $14,616,134 for each
quarter, respectively 50,064,775 52,895,448 58,031,531 68,296,852
---------------- -------------- ------------- --------------
Operating income (loss) 7,384,603 6,127,622 2,622,556 (1,651,202)
Other income (expenses), net (9,389,238) (9,275,545) (8,070,310) (12,126,026)
---------------- -------------- ------------- --------------
Loss before income taxes and
minority interest (2,004,635) (3,147,923) (5,447,754) (13,777,228)
Income taxes 16,139 (117,000) (150,000) (260,515)
---------------- -------------- ------------- --------------
Loss before minority interest (1,988,496) (3,264,923) (5,597,754) (14,037,743)
Minority interest - 60,026 95,021 1,620,032
---------------- -------------- ------------- --------------
Net loss $ (1,988,496) (3,204,897) (5,502,733) (12,417,711)
================ ============== ============= ==============
Loss per share $ (0.07) (0.11) (0.19) (0.39)
================ ============== ============= ==============
Number of common shares used
in calculation 28,844,544 28,844,544 28,844,544 31,751,432
================ ============== ============= ==============
</Table>
During the fourth quarter of 2001, the Company recognized expense of
approximately $4 million for allowance for obsolescence of equipment
pending insallation, as well as expenses incurred during the year for
operational expenses related to the development of the Company's network in
Panama.
26 SEGMENT INFORMATION
In the fourth quarter of 1998, the Company adopted Financial Accounting
Standards Board Statement No. 131, "Disclosures about Segment of an
Enterprise and Related Information", which establishes standards for
reporting information about a company's operating segments. The Company has
divided its operations into four reportable segments: Wireline, Cellular,
International, and Others based upon similarities in revenue generation,
cost recognition, marketing and management of its businesses.
The reporting segments follow the same accounting policies used for the
company's consolidated financial statements and described in the summary of
significant accounting policies. Management evaluates a segment's
performance based upon profit or loss from operations before income taxes.
The segments and a description of their business is as follows: Wireline
which includes local access lines. Cellular which includes prepaid and
postpaid mobile communication products and services. International which
includes long distance carrier services. Cable which includes cable
services revenues and Other which includes services such as paging,
Internet, data services, local prepaid calling cards and customer contact
services.
F-44
<Page>
GEOGRAPHIC
<Table>
<Caption>
1999
--------------------------------------------------------------------------
Dominican
United States Republic Eliminations (a) Consolidated
------------------- --------------- ----------------- -------------
International settlement
revenues $ 35,510,406 46,338,275 (21,256,547) 60,592,134
Other 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>
<Table>
<Caption>
2000
------------------------------------------------------------------------------------------
Dominican Central
United States Republic America Eliminations (a) Consolidated
------------------ ---------------- -------------- ------------------ ----------------
International settlement
revenues $ 65,667,150 48,817,572 - (30,297,672) 84,187,050
Other 29,768 140,080,837 - - 140,110,605
------------------ --------------- -------------- --------------- ---------------
Total operating revenues 65,696,918 188,898,409 - (30,297,672) 224,297,655
Operating costs 62,056,005 151,435,223 82,214 (30,297,672) 183,275,770
------------------ --------------- -------------- --------------- ---------------
Operating income (loss) $ 3,640,913 37,463,186 (82,214) - 41,021,885
================== =============== ============== =============== ===============
Identifiable assets $ 38,107,771 697,291,056 34,383,027 (87,341,995) 682,439,859
================== =============== ============== =============== ===============
</Table>
<Table>
<Caption>
2001
------------------------------------------------------------------------------------------
Dominican Central
United States Republic America Eliminations (a) Consolidated
------------------ ---------------- -------------- ------------------ ----------------
International settlement
revenues $ 74,777,278 29,175,816 - (21,928,774) 82,024,320
Other 613,029 160,867,745 267,091 - 161,747,865
------------------ --------------- -------------- -------------- --------------
Total operating revenues 75,390,307 190,043,561 267,091 (21,928,774) 243,772,185
Operating costs 72,628,186 173,462,997 5,126,197 (21,928,774) 229,288,606
------------------ --------------- -------------- -------------- --------------
Operating income (loss) $ 2,762,121 16,580,564 (4,859,106) - 14,483,579
================== =============== ============== ============== ==============
Identifiable assets $ 42,749,104 799,206,711 46,128,961 (58,670,150) 829,414,626
================== =============== ============== ============== ==============
</Table>
(a) Revenues costs: Corresponds to elimination of the gross income
revenues between subsidiaries and the Company. Identifiable
assets: Corresponds to eliminations of intercompany accounts and
investments in common stock between TRICOM, S.A. (Parent
Company) in the Dominican Republic and the subsidiaries in the
United States and Central America.
PRODUCTS AND SERVICES
<Table>
<Caption>
1999
------------------------------------------------------------------------------------
Wireline Cellular International Others (a) Consolidated
---------------- ------------- --------------- -------------- ------------------
Revenues $ 62,572,264 35,346,554 60,592,134 12,307,989 170,818,941
=============== ============ ============ =========== =================
Operational income 21,085,005 9,846,875 10,185,960 344,240 41,462,080
=============== ============ ============ =========== =================
Proforma operational income
assuming the change for
accounting principle in
installation and activation
retroactively 17,193,219 8,768,309 10,185,960 344,240 36,491,728
=============== ============ ============ =========== =================
Identifiable assets 177,806,707 110,876,334 25,590,381 217,205,039 531,478,461
=============== ============ ============ =========== =================
Depreciation expense 11,080,231 5,605,645 2,928,174 1,223,430 20,837,480
=============== ============ ============ =========== =================
</Table>
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<Page>
<Table>
Capital expenditures $ 79,065,923 42,573,958 7,602,493 16,183,849 145,426,223
=============== =========== ========== =========== ===========
</Table>
<Table>
<Caption>
2000
-------------------------------------------------------------------------------
Wireline Cellular International Others (a) Consolidated
--------------- ------------ ------------- --------------- -------------
Revenues $ 83,491,208 42,450,018 84,187,050 14,169,379 224,297,655
=============== ============ =========== ============ =============
Operational income 19,874,568 14,957,724 2,932,170 3,257,423 41,021,885
=============== ============ =========== ============ =============
Identifiable assets 228,852,370 194,248,738 38,341,447 220,997,304 682,439,859
=============== ============ =========== ============ =============
Depreciation expense 27,109,500 5,185,718 1,953,356 1,916,705 36,165,279
=============== ============ =========== ============ =============
Capital expenditures $ 42,975,001 90,751,943 9,476,159 25,710,325 168,913,428
=============== ============ =========== ============ =============
</Table>
<Table>
<Caption>
2001
-----------------------------------------------------------------------------------------
Wireline Cellular International Cable Others (a) Consolidated
-------------- ------------ ------------- ---------- ------------- -------------
Revenues $ 98,645,084 44,045,919 82,024,320 4,735,872 14,320,990 243,772,185
============= ============ =========== ========== =========== ===========
Operational income (loss) 13,852,143 4,148,474 590,585 1,009,621 (5,117,244) 14,483,579
============= ============ =========== ========== =========== ===========
Identifiable assets 348,967,885 194,052,349 69,895,502 78,146,866 138,352,024 829,414,626
============= ============ =========== ========== =========== ===========
Depreciation expense 38,252,541 10,546,909 2,502,516 533,544 2,596,695 54,432,205
============= ============ =========== ========== =========== ===========
Capital expenditures 55,655,735 17,780,482 1,537,326 4,815,026 36,786,655 116,575,224
============= ============ =========== ========== =========== ===========
</Table>
(a) Other (identifiable assets) include administrative/corporate assets which
are not revenue generating. Also includes construction in process and
communication equipment pending installation, which at December 31, had not
been placed in service and were not specifically associated with any
business segment. Other remaining assets do not meet any quantifiable test
for determining reportable segments.
During 2001, the Company conducted a detail analysis of its identifiable
assets by products and services. As a result of such analysis, the Company
identified that assets included as part of the Cellular product
corresponded to the Wireline product. The amount of these net assets
increased to $73,331,613 which were reclassified in the year 2000 in
conjunction with the depreciation expenses.
27 NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 "Business Combinations"
(SFAS No. 141) and SFAS 142, "Goodwill and Other Intangible Assets" (SFAS
No. 142). SFAS 141 requires that the purchase method of accounting to be
used for all business combinations. SFAS No. 141 specifies criteria that
intangible assets acquired in a business combination must meet to be
recognized and reported separately from goodwill. SFAS No. 142 will require
that goodwill and intangible assets with indefinite useful lives no longer
be amortized, but instead tested for impairment at least annually. In
accordance with the provision of SFAS No. 142. SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121 and subsequently,
SFAS No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 is effective January 1, 2002. Goodwill and intangible assets
determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before SFAS No. 142
is adopted in full, are not amortized. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 continued
to be amortized and tested for impairment prior to the full adoption of
SFAS No. 142.
Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in order
to conform with the new classification criteria in SFAS No. 141 for
recognition separate from
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<Page>
goodwill. The Company will be required to reassess the useful lives and
residual values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period
after adoption. If an intangible asset is identified as having an
indefinite useful life, the Company will be required to test the intangible
asset for impairment in accordance with the provisions of SFAS No. 142
within the first interim period. Impairment is measured as the excess of
carrying value over the fair value of an intangible asset with an
indefinite life. Any impairment loss will be measured as of the date of
adoption and recognized as the cumulative effect of a change in accounting
principle in the first interim period.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). SFAS No. 143 requires the Company to record
fair value of an asset retirement obligation as a liability in the period
in which it incurs a legal obligation associated with the retirement of
tangible long-lived asset that result from the acquisition, construction
development and/or normal use of the assets. The Company also records a
corresponding asset which is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation,
the obligation will be adjusted at the end of each period to reflect the
passage of time and change in the estimated future cash flows underlying
the obligation. The Company is required to adopt SFAS No. 143 on January 1,
2003.
In August, 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144
addresses financial accounting and reporting for the impairment of disposal
of long-lived assets. This Statement requires that long-lived assets 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 the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the
amount by which the carry amount of the asset exceeds the fair value of the
asset. The Company is required to adopt SFAS No. 144 on January 1, 2002.
The Company does not anticipate any impact because of the adoption of this
statement.
28 NON-CASH FINANCING AND INVESTING ACTIVITIES
During the years 2000 and 2001, the Company entered into capital leases for
$17,691,845 and $3,345,398, respectively. (See note 12).
During the year 2001, as part of the acquisition of TCN Dominicana, S. A.,
the Company issued 3,375,000 Class A common stock with a value of
$21,667,500. (See note 9).
29 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amount and estimated fair values
of the Company's financial instruments at December 31, 2000 and 2001. The
fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties. Amount
in parentheses represent liabilities.
<Table>
<Caption>
2000 2001
----------------------------------- ---------------------------------
Carrying Carrying
amount Fair value amount Fair value
------------------- ------------ --------------- -------------
Cash on hand and in banks $ 18,199,552 18,199,552 12,576,050 12,576,050
Accounts receivable 32,126,752 32,126,752 34,498,654 34,498,654
Investments (certificates
of deposits) - - 15,200,000 15,200,000
Notes payable to banks
and related parties (116,756,416) (116,756,416) (182,498,917) (182,498,917)
Accounts payable (37,824,970) (37,824,970) (37,126,064) (37,126,064)
Other liabilities (19,990,490) (19,990,490) (14,644,012) (14,644,012)
Accrued expenses (14,035,182) (14,035,182) (20,272,800) (20,272,800)
Commercial paper - - (30,396,315) (30,396,315)
</Table>
F-47
<Page>
<Table>
<Caption>
2000 2001
------------------------------------ ---------------------------------
Carrying Carrying
amount Fair value amount Fair value
------------------- ------------- --------------- -------------
Capital leases (20,829,275) (20,829,275) (17,856,766) (17,856,766)
Long-term debt- banks (64,436,698) (63,799,499) (127,155,626) (126,107,022)
Long-term debt - senior
notes (200,000,000) (186,000,000) (200,000,000) (168,000,000)
=================== ============= =============== =============
</Table>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash on hand and in banks, investments in certificates of deposit, notes
payable to banks and related parties, accounts payable, other liabilities
and accrued expenses: The carrying amounts approximate fair value because
of the short maturity of these instruments. Accounts receivable are
adjusted by their valuation allowance and, therefore, are presented at
realizable value which approximates fair value.
Capital lease, commercial paper and long-term debt - banks: The fair value
of these debts was estimated by discounting the future cash flows of each
instrument at rates currently offered to the Company for similar debt
instruments of comparable by the Company's bankers.
Long-term debt senior notes: The fair value of this long term debt was
estimated based on quoted market prices on the last business day of the
year.
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<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 amendment to the annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TRICOM, S.A.
Dated: May 29,2002 By: /s/ Carl H. Carlson
--------------------------------------------
Carl H. Carlson,
Executive Vice President, Chief Operating Officer,
Member of the Office of the President and Treasurer