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FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of: JUNE 28, 2002
-------------
TRICOM, S.A.
(Translation of registrant's name into English)
AVENIDA LOPE DE VEGA NO. 95, SANTO DOMINGO, DOMINICAN REPUBLIC
(Address of principal executives offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
----------- -----------
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
----------- -----------
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-_________
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TRICOM, S.A.
QUARTERLY REPORT
FOR THE
FIRST QUARTER
ENDED
MARCH 31, 2002
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TABLE OF CONTENTS
PAGE
GENERAL INTRODUCTION
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.................................................3
ITEM 2. INFORMATION ON THE COMPANY...........................................7
ITEM 3. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.........................9
ITEM 4. QUANTITATIVE AND QUALITATIVE DISCLOSURES............................18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...........................19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................19
ITEM 5. OTHER INFORMATION...................................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 6-K....................................19
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GENERAL INTRODUCTION
UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES TO THE "COMPANY"
OR "TRICOM" REFER TO TRICOM, S.A. AND ITS CONSOLIDATED SUBSIDIARIES AND THEIR
RESPECTIVE OPERATIONS, AND INCLUDE TRICOM'S PREDECESSORS.
PRESENTATION OF CERTAIN FINANCIAL INFORMATION
The Company prepares its consolidated financial statements in
conformity with generally accepted accounting principles in the United States.
The Company adopted the United States dollar as its functional currency
effective January 1, 1997.
In this Quarterly Report references to "$," "US$" or "U.S. dollars" are
to United States dollars, and references to "Dominican pesos" or "RD$" are to
Dominican pesos. This 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 March 31, 2002 was RD$17.62 = US$1.00, the date of the most recent
financial information included in this Quarterly Report. The Federal Reserve
Bank of New York does not report a noon buying rate for Dominican pesos. On June
14, 2002, the Private Market Rate was RD$17.88 = US$1.00.
FORWARD-LOOKING STATEMENTS
The statements contained in this Quarterly Report, which are not
historical facts, are forward-looking statements that involve risks and
uncertainties. Management cautions the reader that these forward-looking
statements are only predictions; actual events or results may differ materially
as a result of risks facing the Company. Such risks include, but are not limited
to, the following factors:
- 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;
- rejection of our concession agreement in the Dominican
Republic;
1
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- 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.
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN US$)
<Table>
<Caption>
DECEMBER 31, MARCH 31,
----------------- -----------------
2001 2002
ASSETS (AUDITED) (UNAUDITED)
------
Current assets:
Cash on hand and in banks $ 12,576,050 $ 13,839,225
Accounts receivable:
Customers 27,537,952 29,870,865
Carriers 4,168,187 3,376,643
Related parties 5,191,359 3,697,160
Officers and employees 687,355 1,487,587
Other 1,010,801 3,161,100
----------------- -----------------
38,595,654 41,593,355
Allowance for doubtful accounts (4,097,001) (4,971,300)
----------------- -----------------
Accounts receivable, net 34,498,653 36,622,055
Inventories, net 7,054,100 7,677,314
Investments 15,200,000 15,200,000
Prepaid expenses 5,850,267 5,230,663
Deferred income taxes 1,624,637 1,624,637
----------------- -----------------
Total current assets 76,803,707 80,193,894
----------------- -----------------
Investments 3,968,711 3,915,914
Property and equipment, net 685,916,632 686,236,632
Other assets at cost, net of amortization 26,214,053 27,679,171
Goodwill, net of amortization 36,511,523 36,511,523
----------------- -----------------
$ 829,414,626 $ 834,537,134
================= =================
</Table>
3
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TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT.)
(IN US$)
<Table>
<Caption>
DECEMBER 31, MARCH 31,
----------------- -----------------
2001 2002
(AUDITED) (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Borrowed funds - banks $ 86,872,001 $ 89,069,435
Borrowed funds - related parties 27,076,366 36,916,140
Commercial paper 29,242,556 4,665,784
Current portion of long-term debt 30,493,532 14,709,970
----------------- -----------------
173,684,455 145,361,329
----------------- -----------------
Current portion of capital leases - related party 6,643,766 1,838,827
Accounts payable:
Carriers 8,831,981 10,151,548
Related parties 6,868,834 309,420
Suppliers 17,543,401 17,408,355
Other 3,881,848 689,644
----------------- -----------------
37,126,064 28,558,967
Other liabilities 14,644,012 15,938,922
Accrued expenses 20,272,800 14,436,715
----------------- -----------------
Total current liabilities 252,371,097 206,134,760
----------------- -----------------
Reserve for severance indemnities 1,639,718 1,423,982
Deferred income tax 2,172,814 2,172,814
Commercial paper 1,153,759 42,367,148
Capital leases, excluding current portion - related party 11,213,000 14,968,252
Long-term debt, excluding current portion 305,459,748 323,328,581
----------------- -----------------
Total liabilities 574,010,136 590,395,537
----------------- -----------------
Minority interest 1,870,833 1,158,183
Shareholders' equity:
Class A Common Stock at par value RD$10: Authorized 55,000,000
shares; 24,245,920 shares issued at December 31, 2001 and
March 31, 2002 14,753,134 14,753,134
Class B Stock at par value RD$10: Authorized 25,000,000 shares
at December 31, 2001 and March 31, 2002; 19,144,544 issued at
December 31, 2001 and March 31, 2002 12,595,095 12,595,095
Additional paid-in-capital 217,290,020 217,290,020
Retained earnings 10,919,165 368,922
Other comprehensive income-foreign currency translation (2,023,757) (2,023,757)
----------------- -----------------
Shareholders equity, net 253,533,657 242,983,414
----------------- -----------------
$ 829,414,626 $ 834,537,134
================= =================
</Table>
4
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TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN US$)
<Table>
<Caption>
THREE MONTH PERIOD ENDED
MARCH 31,
-------------------------------------------
2001 2002
-------------------- --------------------
(UNAUDITED) (UNAUDITED)
OPERATING REVENUES:
Toll revenues $ 7,466,507 $ 6,337,969
International revenues 19,660,445 21,279,705
Local service 14,817,795 16,763,768
Data and Internet 1,852,257 2,400,089
Cellular & PCS 8,853,455 9,462,085
Paging 309,774 186,734
Sale of equipment 1,442,216 926,034
Installation and activation fees 2,998,051 1,417,116
Cable revenues - 5,255,039
Other 48,878 22,095
-------------------- --------------------
TOTAL OPERATING REVENUES 57,449,378 64,050,634
OPERATING COSTS:
Transport and access charges 15,992,002 18,180,013
Programming costs - 1,187,410
Network depreciation 9,968,894 12,939,329
Expense in lieu of income taxes 3,318,981 2,054,103
Selling, general and administrative expenses 16,855,933 23,247,873
Non-network depreciation expense 2,101,978 3,134,842
Amortization expenses 156,583 499,897
Cost of equipment sold 1,657,571 1,090,669
Other 12,833 240,469
-------------------- --------------------
TOTAL OPERATING COSTS 50,064,775 62,574,605
OPERATING INCOME 7,384,603 1,476,029
OTHER INCOME (EXPENSES):
Interest expense (9,712,593) (13,631,613)
Interest income 287,522 479,665
Foreign currency exchange gain (loss) (247,815) 176,503
Other, net 283,648 373,517
-------------------- --------------------
OTHER EXPENSES, NET (9,389,238) (12,601,928)
-------------------- --------------------
EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (2,004,635) (11,125,899)
Income taxes, net 16,139 (136,994)
EARNINGS (LOSS) BEFORE MINORITY INTEREST (1,988,496) (11,262,893)
Minority interest - 712,650
-------------------- --------------------
NET EARNINGS (LOSS) $ (1,988,496) $ (10,550,243)
==================== ====================
Earnings (loss) per common share:
Earnings (loss) before minority interest (0.07) (0.26)
Minority interest - 0.02
-------------------- --------------------
Earning (loss) per common share $ (0.07) $ (0.24)
==================== ====================
NUMBER OF COMMON SHARES USED IN CALCULATION 28,844,544 43,390,464
==================== ====================
</Table>
5
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TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN US$)
<Table>
<Caption>
THREE MONTH PERIOD ENDED
MARCH 31,
---------------------------------------
2001 2002
----------------- ------------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net earnings (loss) $ (1,988,496) $ (10,550,243)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Allowance for doubtful accounts 518,737 1,661,968
Deferred income tax, net (16,139) -
Depreciation 12,227,455 16,074,171
Expense for severance indemnities 280,435 -
Minority interest - (712,650)
Value of consulting services received in exchange
for stock warrants 272,739 -
Net changes in assets and liabilities:
Accounts payable 1,894,025 (8,567,097)
Accounts receivable 4,400,498 (3,785,370)
Accrued expenses (3,212,292) 7,732,881
Inventories (499,835) (623,214)
Other assets (2,395,189) (1,465,118)
Other liabilities (772,421) (12,274,056)
Prepaid expenses 2,929,562 619,604
Reserve for severance indemnities (279,578) (215,736)
----------------- ------------------
Total adjustments 15,347,997 (1,554,617)
----------------- ------------------
Net cash provided by (used in) operating activities $ 13,359,501 $ (12,104,860)
================= ==================
Cash flows from investing activities:
Acquisition of property and equipment $ (33,662,051) $ (16,394,171)
Cancellation (acquisition) of investments (316,719) 52,797
Net cash used in investing activities (33,978,770) (16,341,374)
Cash flows from financing activities:
Borrowed funds (paid to) from related parties (3,143,489) 9,839,774
Borrowed funds from banks 18,263,877 2,197,434
Commercial paper 16,636,617
Capital lease payments (1,183,222) (1,049,687)
Issuance of common stock - -
Payments of long-term debt (574,302) (18,672,446)
Proceeds from issuance of long term debt 2,714,775 20,757,717
----------------- ------------------
Net cash provided by financing activities 16,077,639 29,709,409
Net increase in cash and cash equivalents (4,541,630) 1,263,175
Cash and cash equivalents at beginning of the period 18,199,552 12,576,050
----------------- ------------------
Cash and cash equivalents at end of period $ 13,657,922 $ 13,839,225
================= ==================
</Table>
6
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TRICOM, S.A. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The Company considers that all adjustments (all of which are normal
recurring accruals) necessary for a fair statement of financial position and
results of operations for these periods have been made; however, results for
such interim periods are subject to audit. Results for such interim periods are
not necessarily indicative of results for a full year.
NOTE 2 - GUARANTEE SUBSIDIARIES FINANCIAL INFORMATION
The Company's 11-3/8% Senior Notes due 2004 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.
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 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, 2001 and
March 31, 2002 for Balance Sheet Data and for the three month periods ended
March 31, 2001 and 2002 for Statement of Operations and Cash Flow Data is as
follows:
BALANCE SHEET DATA AT DECEMBER 31, 2001:
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Not Consolidating Total
ASSETS Parent Co. Guarantors Guarantor Adjustments 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, plant 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
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
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 stockholder's equity $ 791,251,282 $ 137,972,419 $ 6,606,545 $(106,415,620) $ 829,414,626
============= ============= ============= ============= =============
BALANCE SHEET DATA AT MARCH 31, 2002:
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Not Consolidating Total
ASSETS Parent Co. Guarantors Guarantor Adjustments Consolidated
------ ------------- ------------- ------------- ------------- -------------
Current assets:
Cash on hand and in banks $ 12,985,979 $ 852,226 $ 1,020 -- $ 13,839,225
Accounts receivable, net 80,742,680 13,825,639 134,706 (58,080,970) 36,622,055
Other current assets 24,564,729 4,895,354 272,531 29,732,614
------------- ------------- ------------- ------------- -------------
Total current assets 118,293,388 19,573,219 408,257 (58,080,970) 80,193,894
Property, plant and equipment, net 580,257,154 100,530,331 5,449,147 -- 686,236,632
Other non-current assets 79,823,836 13,142,605 793,467 (25,653,300) 68,106,608
------------- ------------- ------------- ------------- -------------
Total assets $ 778,374,378 $ 133,246,155 $ 6,650,871 $ (83,734,270) $ 834,537,134
============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable $ 128,314,168 $ 16,988,325 $ 58,836 $ $ 145,361,329
Current portion of capital leases 1,838,827 -- -- 1,838,827
Accounts payable 12,743,672 67,379,052 4,086,951 (55,650,707) 28,558,968
Other current liabilities 18,076,769 11,966,008 142,059 190,800 30,375,636
------------- ------------- ------------- ------------- -------------
Total current liabilities 160,973,436 96,333,385 4,287,846 (55,459,907) 206,134,760
Other non-current liabilities 376,095,555 8,165,222 -- 384,260,777
------------- ------------- ------------- ------------- -------------
Total liabilities 537,068,991 104,498,607 4,287,846 (55,459,907) 590,395,537
Minority interest -- 1,158,183 1,158,183
Stockholders' equity 241,323,570 28,747,549 2,363,025 (29,450,730) 242,983,414
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Total liabilities and stockholder's equity $ 778,392,561 $ 133,246,156 $ 6,650,871 $ (83,752,454) $ 834,537,134
============= ============= ============= ============= =============
</Table>
STATEMENT OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2001:
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Not Consolidating Total
Parent Co. Guarantors Guarantor Adjustments Consolidated
------------ ------------ ------------ ------------ ------------
Operating revenues $ 44,008,281 $ 13,441,098 $ -- $ -- $ 57,449,379
Operating costs 37,255,707 12,809,068 -- -- 50,064,775
Operating income 6,752,573 632,030 -- -- 7,384,603
------------ ------------ ------------ ------------ ------------
Other expense, net (9,051,148) (338,090) -- -- (9,389,238)
Earnings (loss) before income taxes
and minority interest (2,298,575) 293,940 -- -- (2,004,635)
Income taxes -- 16,139 -- -- 16,139
Minority interest -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ (2,298,575) $ 310,079 $ -- $ -- $ (1,988,496)
============ ============ ============ ============ ============
<Caption>
STATEMENT OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2002:
Tricom, S.A. Subsidiaries Subsidiaries Not Consolidating Total
Parent Co. Guarantors Guarantor Adjustments Consolidated
------------ ------------ ------------ ------------ ------------
Operating revenues $ 48,992,179 $ 25,327,962 $ 84,954 $(10,354,461) $ 64,050,634
Operating costs 45,760,826 25,142,364 2,025,876 (10,354,461) 62,574,605
Operating income 3,231,353 185,598 (1,940,922) 1,476,029
------------ ------------ ------------ ------------ ------------
Other expense, net (12,600,130) 1,261 (3,059) -- (12,601,928)
Earnings (loss) before income taxes
and minority interest (9,368,777) 186,859 (1,943,981) -- (11,125,899)
Income taxes -- (136,994) -- -- (136,994)
Minority interest -- 712,650 -- -- 712,650
------------ ------------ ------------ ------------ ------------
Net earnings (loss) $ (9,368,777) $ 762,515 $ (1,943,981) $ -- $(10,550,243)
============ ============ ============ ============ ============
</Table>
CASH FLOW DATA FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2001:
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Not Consolidating Total
Parent Co. Guarantors Guarantor Adjustments Consolidated
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities $ 11,633,471 $ 1,726,030 $ -- $ -- $ 13,359,501
Net cash used in investing activities (32,455,704) (1,523,066) (33,978,770)
Net cash provided by financing activities 16,077,639 -- 16,077,639
Effect of exchange rate changes on cash
on hand and in banks -- -- -- -- --
------------ ------------ ------------ ------ ------------
Net increase (decrease) in cash on
hand and in banks (4,744,593) 202,963 -- -- (4,541,630)
Cash on hand and in banks at beginning
of the period 17,301,480 898,072 -- -- 18,199,552
------------ ------------ ------------ ------ ------------
Cash on hand and in banks at the end
of the period $ 12,556,887 $ 1,101,035 $ -- $ -- $ 13,657,922
============ ============ ============ ====== ============
CASH FLOW DATA FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2002:
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Not Consolidating Total
Parent Co. Guarantors Guarantor Adjustments Consolidated
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities $(63,587,127) $ 32,711,812 $ 18,770,455 $ -- $(12,104,860)
Net cash used in investing activities 50,860,379 (59,751,117) (7,450,636) -- (16,341,374)
Net cash provided by financing activities 18,761,432 3,497,341 7,450,636 -- 29,709,409
Effect of exchange rate changes on cash
on hand and in banks -- -- -- -- --
------------ ------------ ------------ ------ ------------
Net increase (decrease) in cash on hand and in banks (23,927,671) (1,030,245) 26,221,091 -- 1,263,175
Cash on hand and in banks at beginning of the period 10,849,939 1,726,111 12,576,050
------------ ------------ ------------ ------ ------------
Cash on hand and in banks at the end of the period $(13,077,732) $ 695,866 $ 26,221,091 $ -- $ 13,839,225
============ ============ ============ ====== ============
</Table>
ITEM 2. INFORMATION ON THE COMPANY
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 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. We market our cable services under the brand name, "Telecable".
RECENT DEVELOPMENTS
PANAMA IDEN SERVICES LAUNCH
On April 8, 2002, we began to offer our iDEN(R) services in Panama. We
have constructed an iDEN(R) network, at a cost at March 31, 2002 of
approximately $40 million, in Panama City and Colon, the two largest cities in
Panama, and in important transportation corridors in other parts of the country.
We offer digital mobile integrated services, including two-way radio, paging 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. However, pending litigation with cellular service
providers in Panama may limit services that we can offer and impair our
marketing efforts.
NEW BASIS FOR DETERMINING INCOME TAX
Since 1996, we have made payments in lieu of income tax to the
Dominican government in accordance with the terms of our concession agreement.
These payments equal 10% of gross domestic revenues, after deducting charges for
access to the local network, plus 10% of net international revenues.
On June 4, 2002, a Presidential decree modified the tax system imposed
on all telecommunication providers in the Dominican Republic by concession
agreements (including by our 1996 concession agreement) in favor of the payment
of a tax equal to the greater of 25% of net taxable income and 1.5% of gross
revenues, which is the tax regime applicable to Dominican corporate taxpayers.
Telecommunication providers in the Dominican Republic are required to
adopt the current Dominican corporate tax regime effective January 1, 2003.
Effective July 1, 2002, telecommunication providers in the Dominican
7
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Republic may opt to continue making payments in lieu of income tax to the
Dominican government through December 31, 2002.
For 1999, 2000 and 2001, we made payments in lieu of income taxes of
$12.8 million, $10.2 million and $12.6 million, respectively. Had we paid taxes
for these years on the same basis as all Dominican corporate taxpayers, our
taxes would have been $5.5 million, $3.4 million and $3.7 million, respectively,
an aggregate tax payment savings of approximately $23 million.
Our concession agreement also exempted us from the requirement to
withhold 5% on interest and dividend payments made to non-Dominican taxpayers
and 25% of payments for services made to non-Dominican vendors. This exemption
also was eliminated by Presidential decree. We are required by the terms of
various financings with non-Dominican lenders, including by our 11 3/8% Senior
Notes due 2004, to pay the amount of the withholding tax on behalf of the lender
so that the net amount it receives after such withholding or deduction will not
be less than the amount the holder would have received if such taxes had not
been withheld. For each of 1999, 2000, and 2001, this would have resulted in
additional payments with respect to the 11 3/8% Senior Notes due 2004 of $1.14
million and approximately $474,000, $942,000 and $1.08 million, respectively,
with respect to other borrowings.
DIGITAL CABLE TELEVISION AND CABLE MODEM LAUNCH
On June 17, 2002, we announced the launch of our digital cable
television and high-speed Internet access over coaxial cable via cable modem.
Digital cable television is an innovative broadcast technology that provides
superior programming, movie-quality pictures, digital-quality sound, broadband
services and a variety of other enhancements. TRICOM's digital cable television
offering includes an on-screen interactive program guide, seventeen pay-per view
channels, seven content rich-educational and informational resources channels,
and 40 channels of commercial-free CD-quality music.
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 the fastest telephone modems currently in use. TRICOM's cable modem service
is targeted to high-income metropolitan households and business users, the most
important potential buyers of high-speed Internet service. TRICOM's cable modem
service packages will offer several bandwidth and pricing options.
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ITEM 3. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
REVENUE OVERVIEW
We derive our operating revenues primarily from toll revenues,
international revenues, local services, 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.
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.
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 and PCS phones.
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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.
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.
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.
The following table sets forth each category of revenues as a
percentage of total operating revenues for the period indicated:
THREE MONTHS
ENDED
MARCH 31,
---------------------------
2001 2002
---- ----
Toll revenues................................. 13.0% 9.9%
International revenues ....................... 34.2 33.2
Local service................................. 25.8 26.2
Data and Internet............................. 3.2 3.7
Cellular and PCS.............................. 15.4 14.8
Paging........................................ 0.5 0.3
Sale and lease of equipment................... 2.5 1.4
Installation and activation fees.............. 5.2 2.2
Cable revenues................................ - 8.2
Other......................................... 0.1 0.0
- ----------------
Note: Percentages may not add up to 100% due to rounding.
The following table sets forth certain items in the statements of
operations expressed as a percentage of total operating revenues for the period
indicated:
THREE MONTHS
ENDED
MARCH 31,
---------------------------
2001 2002
---- ----
Operating costs................................... 87.1% 97.7%
Operating income.................................. 12.9 2.3
Interest expense, net............................. 16.4 20.5
Other income (expenses)........................... (16.3) (19.7)
Earnings (loss) before income taxes and
minority interest ................................ (3.5) (17.4)
Net earnings (loss)............................... (3.5) (16.5)
EBITDA............................................ 39.9 31.4
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THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
OPERATING REVENUES. Our total operating revenues increased 11.5% to
$64.1 million during the 2002 first quarter from $57.4 million for the 2001
first quarter. This growth stemmed primarily from revenues from cable television
services which business we acquired in October 2001, and increases in revenues
from local service, international long distance, wireless, and data and Internet
services, offset, in part, by decreased toll and installation and activation
revenues.
TOLL. Toll revenues decreased 15.1% to $6.3 million during the 2002
first quarter from $7.5 million for the 2001 first quarter, primarily as a
result of lower revenues derived from outbound international long distance
minutes.
Revenues from outbound international calls decreased by 26.9% to $2.7
million during the 2002 first quarter from $3.6 million for the 2001 first
quarter, primarily as a result of lower outbound long distance traffic volume
combined with a decrease in the price per minute for outbound international
calls for residential and commercial customers. Outbound international minutes
decreased by 7.2% to 7.8 million minutes in the 2002 first quarter from 8.4
million minutes during the 2001 first quarter, reflecting decreased traffic
volume from calling cards and residential customers. The average price per
minute for outbound international calls declined to $0.41 in the 2002 first
quarter from $0.67 in the 2001 first quarter.
Revenues from interconnection charges increased 8.2% to $2.2 million
during the 2002 first quarter from $2.0 million in the 2002. The increase in
interconnection charges reflected the growth in our local access subscription
base, as well as continued growth in the Dominican telephony markets.
Domestic long distance revenues increased 3.3% to $1.3 million during
the 2002 first quarter from $1.2 million in the 2001 first quarter. Domestic
long distance minutes increased by 1.7% to 12.8 million minutes during the 2002
first quarter from 12.6 million minutes during the 2001 first quarter. 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 19% decrease in the average price per minute
for domestic long distance calls during the 2002 first quarter. Pending
regulatory proposals that would divide the Dominican Republic into five zones
and provide that intra-zone calls are local could have the effect of decreasing
rates for some calls, if the regulations are adopted.
INTERNATIONAL. Our international revenues increased 8.2% to $21.3
million in the 2002 first quarter from $19.7 million in the 2001 first quarter,
primarily as the result of higher traffic derived from our U.S.-based
international long distance prepaid cards and increased inbound traffic to
direct-route destinations. The revenue increase 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 $0.062 per
minute during the 2001 first quarter and $0.048 per minute during the 2002 first
quarter.
Total minutes from our U.S.-based international long distance prepaid
cards increased by 33.5% to 57.2 million minutes in the 2002 first quarter from
42.8 million during the 2001 first quarter. Revenues from our U.S. based
international long distance prepaid calling cards increased by 20.5% to $8.5
million in the 2002 first quarter from $7.1 million in the 2001 first quarter.
Inbound minutes increased by 32.3% to 210.3 million minutes in the 2002 first
quarter from 151 million minutes in the 2001 first quarter. TRICOM USA accounted
for approximately 84.9% of our total inbound minutes in the 2002 first quarter
compared to 77.3% in the 2001 first quarter.
LOCAL SERVICE. Local service revenues increased 13.1% to $16.8 million
during the 2002 first quarter from $14.8 million in the 2001 first quarter,
primarily as the result of the continued growth in the number of lines in
service. At March 31, 2002, we had 185,201 lines in service compared to 156,237
lines in service at March 31, 2001. In the 2002 first quarter, we added 7,849
net lines compared to 8,015 net lines added in the 2001 first quarter.
As a result of a higher number of lines in service, measured local
service revenues increased by 14.9% to $3.5 million in the 2002 first quarter
from $3.0 million in the 2001 first quarter. Revenues from monthly fees
increased by 4.2% to $10.2 million in the 2002 first quarter from $9.8 million
in the 2001 first quarter. Revenues derived from cellular calls under the
calling-party-pays system increased by 48.2% to $2.0 million in the 2002 first
quarter from
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$1.3 million in the 2001 first quarter. Our average monthly churn rate for local
service was 1.3% in the 2002 first quarter compared to 2.4% in the 2001 first
quarter. 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 29.6%
to $2.4 million in the 2002 first quarter from $1.9 million in the 2001 first
quarter, 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 9,672 at March 31, 2002 compared to 7,171 at March 31, 2001, a 34.9% increase
year-over-year. Revenues from monthly fees increased by 6.2% to $1.7 million in
the 2002 first quarter from $1.6 million in the 2001 first quarter.
CELLULAR AND PCS. Our cellular and PCS revenues grew 6.9% to $9.5
million in the 2002 first quarter from $8.9 million in the 2001 first quarter.
The growth in our wireless operations was the result of a 35.5% increase in
subscribers. At March 31, 2002, we had 388,317 cellular and PCS subscribers
compared to 286,506 at March 31, 2001. As a result of a higher average
subscriber base, minutes of usage increased 11.3% to 54.5 million minutes in the
2002 first quarter from 49.0 million minutes in the 2001 first quarter. The
increase in minutes of usage was offset in part by an approximate 7% decrease in
the average price per minute during the 2002 first quarter, reflecting increased
price competition in the market.
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 73% of our total minutes of use and 72% of
total cellular and PCS revenues in the 2002 first quarter compared to
approximately 69% of our total minutes of use and 70% of our total cellular and
PCS revenues in the 2001 first quarter. Prepaid revenues increased by 14.1% to
$6.9 million in the 2002 first quarter from $6.1 million in the 2001 first
quarter. Our average monthly churn rate for cellular and PCS services decreased
to 4.3% in the 2002 first quarter from 8.3% in the 2001 first quarter reflecting
primarily our decision to disconnect low-usage prepaid subscribers.
PAGING. Paging revenues decreased 39.7% to $.2 million in the 2002
first quarter from $.31 million in the 2001 first quarter, 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 March 31, 2002, we had 10,988
paging subscribers compared to 20,277 paging subscribers at March 31, 2001. Our
average monthly churn rate for paging services increased to 3.5% in the 2002
first quarter from 2.5% in the 2001 first quarter.
SALE OF EQUIPMENT. Revenues from the sale of equipment decreased 35.8%
to $926,000 in the 2002 first quarter from $1.4 million in the 2001 first
quarter, 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.
These arrangements have decreased equipment sales revenues but we believe added
subscribers and contribute to increased cellular and PCS service revenues.
INSTALLATION AND ACTIVATION FEES. Installation and activation revenues
decreased 52.7% to $1.4 million in the 2002 first quarter from $3.0 million in
the 2001 first quarter. The decrease in installation and activation revenues
reflect the effect of a change in accounting policy for the recognition of
revenue from installations and activations over the period in which we retain
our clients (See "Critical Accounting Policies"), as well as 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 $5.3 million in the 2002 first quarter, primarily from basic and premium
programming services and advertising sales. At March 31, 2002, we had 67,659
cable subscribers, including 60,087 basic and premium subscribers, and 7,572
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. During the 2002 first quarter we had 3,193 net additions for basic and
premium cable service. Programming services revenues totaled $3.8 million in the
2002 first quarter. Advertising revenues totaled $1.6 million in the 2002 first
quarter.
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OPERATING COSTS. Major components of operating costs are:
- transport and access charges (formerly referred to as
satellite connection and carrier costs), which include amounts
paid to foreign carriers for our use of their networks for
termination of outbound traffic;
- interconnection costs, which are access charges paid primarily
to Codetel 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;
- depreciation of network and non-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, building
occupancy and maintenance expenses, marketing expenses,
commissions and other related costs.
Our operating costs increased to $62.6 million in the 2002 first
quarter from $50.1 million in the 2001 first quarter. These results reflect
higher selling, general and administrative expenses primarily from increased
commissions due to the growth of our retail prepaid card operations in the
United States. It also reflects 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. As a
percentage of revenues, operating costs increased to 97.7% in the 2002 first
quarter from 87.1% in the 2001 first quarter.
TRANSPORT AND ACCESS CHARGES. Transport and access charges costs
increased by 13.7% to $18.2 million in the 2002 first quarter from $16.0 million
in the 2001 first quarter, primarily as a result of increased outbound carrier
costs and higher interconnection costs. Outbound carrier costs increased by
13.1% to $7.9 million in the 2002 first quarter from $7.0 million in the 2001
first quarter, reflecting higher average cost per minute for outbound
international calls. Interconnection costs increased by 12.8% to $7.3 million in
the 2002 first quarter from $6.4 million in the 2001 first quarter as the result
of a higher volume of traffic terminating in other networks.
PROGRAMMING COSTS. Programming costs totaled $1.2 million in the 2002
first quarter, primarily related to signals and programming content.
NETWORK DEPRECIATION AND NON-NETWORK DEPRECIATION EXPENSE. Network
depreciation increased 29.8% to $13.0 million in the 2002 first quarter from
$10.0 million in the 2001 first quarter, 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 increased 49.1% to $3.1
million in the 2002 first quarter from $2.1 million in the 2001 first quarter.
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 the 2002 first quarter decreased by 38.1% to $2.1 million from $3.3
million in the 2001 first quarter, as a result of lower tax accruals in the area
of prepaid card commissions in order to bring the cost more inline with the
actual tax payment process.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses, excluding non-network depreciation expense, increased
37.9% to $23.2 million in the 2002 first quarter from $16.9 million in the 2001
first quarter. The increase in the amount of selling, general administrative
expenses reflects a greater amount of other expenses, higher marketing expenses,
and increased commissions paid to wholesale distributors of prepaid cards, as
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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.
Other expenses increased 36.6% to $4.4 million in the 2002 first
quarter from $3.2 million in the 2001 first quarter primarily as a result of
higher legal, maintenance and repair of equipment expenses. Marketing expenses
increased by 119.5% to $1.9 million in the 2002 first quarter from $849,000 in
the 2001 first quarter. Commissions paid to wholesale distributors of prepaid
cards increased 18.6% to $6.2 million in the 2002 first quarter from $5.3
million in the 2001 first quarter. At March 31, 2002, we had 1,756 employees
compared to 1,677 employees at March 31, 2001. Salaries and other compensation
to personnel increased by 1.4% to $7.7 million in the 2002 first quarter from
$7.6 million in the 2001 first quarter.
As a percentage of total operating revenues, selling, general and
administrative expenses, excluding non-network depreciation expense, increased
to 36.3% in the 2002 first quarter compared to 29.3% in the 2001 first quarter.
COST OF EQUIPMENT 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 34.2% to $1.1 million in the 2002 first quarter from $1.7
million in the 2001 first quarter. Other costs, which consist of the cost of
sale of prepaid services, increased to $240,000 in the 2002 first quarter from
$13,000 in the 2001 first quarter.
OPERATING INCOME. Operating income decreased to $1.5 million in the
2002 first quarter compared to $7.4 million in the 2001 first quarter. Operating
income as a percentage of total operating revenues decreased to 2% in the 2002
first quarter from 13% in the 2001 first quarter.
OTHER INCOME (EXPENSES). Other expenses increased to $12.6 million in
the 2002 first quarter from $9.4 million in the 2001 first quarter, reflecting
increased interest expenses resulting from higher average aggregate amount of
outstanding debt. We incurred debt primarily to purchase network and
telecommunications equipment.
NET EARNINGS (LOSS). Net loss totaled $10.6 million, or $0.24 per
share, in the 2002 first quarter compared to a net loss of $2.0 million, or
$0.07 per share, in the 2001 first quarter.
EBITDA. Earnings before interest and other income, taxes and
depreciation and amortization decreased by 12.3% to $20.1 million in the 2002
first quarter from $22.9 million in the 2001 first quarter. 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.
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.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
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
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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.
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, which we operate under the name Telecable. Telecable did not
consistently charge fees for the installation and activation of cable service
before we acquired it. We currently charge a $50 installation fee. We will apply
Staff Accounting Bulletin 101 to the recognition of installation and activation
fees from cable services beginning in 2002. However, we do not have sufficient
experience to determine the average customer service life for cable subscribers.
LONG-LIVED ASSETS
The Company's long-lived assets include property and equipment, in
service, under construction or development and held for disposal, as well as
goodwill and identifiable intangible assets to be held and used.
Property and equipment in service is stated at historical costs. Costs
associated directly with network construction, service installations and
development of business support systems and interest expense incurred during the
construction period are capitalized. Depreciation is calculated on a
straight-line basis over the estimated useful lives of assets. The estimated
useful life of telecommunications networks is 15 years and 3 to 10 years for
furniture fixtures, equipment and other. These useful lives are determined based
on historical usage with consideration given to technological changes, trends in
the industry and other economic factors that could impact the network
architecture and asset utilization. Assets held for disposal or sale are stated
at the estimated proceeds from the sale, less costs to sell.
The Company provides for the impairment of long-lived assets, including
goodwill, pursuant to SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-Lived Assets to be Disposed of", which requires that
long-lived assets and certain identifiable intangible held and used by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying value of an assets may not be recoverable. Such events
include, but are not limited to, a significant decrease in market value of an
asset, a significant adverse change in the business climate that could affect
the value of an asset or a current period operating or cash flow loss combined
with a history of operating or cash flow losses. An impairment loss is
recognized when estimated undiscounted future cash flows, before interest,
expected to be generated by the assets are less than its carrying value.
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We adopted the provisions of SFAS No. 142 on January 1, 2002. SFAS No.
142 no longer requires the amortization of goodwill and indefinite-lived
intangible assets. Instead, these assets must be reviewed annually (or more
frequently under certain conditions) for impairment in accordance with this
statement. In accordance with the new rules, starting January 1, 2002, we are no
longer amortizing goodwill, acquired intangible assets, which we determined,
have an indefinite life. 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.
LIQUIDITY AND CAPITAL RESOURCES
Substantial capital is required to expand and operate our
telecommunications networks. For the first three months of 2002, we made capital
expenditures of $16.4 million 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 to increase capacity and coverage in our local access and mobile
networks, continue the rollout of our bi-directional cable network to support
the deployment of digital and interactive services, expand our international
facilities to support increased traffic volume, expand our local network, other
international expansion and to deploy our iDEN(R) based network in Panama.
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 an iDEN(R) based network
elsewhere in Central America 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 $13.4 million for the
first three months of 2001 compared to net cash used of $12.6 million for the
first three months of 2002. We had net accounts receivable of $32.5 million and
$36.6 million at December 31, 2001 and March 31, 2002, respectively. The
increase in accounts receivables was primarily the result of the integration of
our cable television operations.
Our indebtedness was approximately $527.9 million at March 31, 2002, of
which $200.0 million was our 113/8% senior notes due 2004, $180.7 million was
long-term borrowings and capital leases, with maturities ranging from fifteen
months to six years, and $147.2 million was short-term bank loans, commercial
paper, short-term telecommunications equipment trade financings and current
portion of capital leases and of long-term debt. At March 31, 2002, our U.S.
dollar borrowings, other than the 11 3/8% senior notes due 2004, had interest
rates ranging from 4.19% per annum to 13.33% per annum, and our peso borrowings
had interest rates ranging from 17% per annum to 23% per annum. At March 31,
2002, our U.S. dollar borrowings, other than the 11 3/8% senior notes due 2004,
totaled $293.4 million and our peso borrowings totaled $34.5 million.
We have credit facilities, including short-term facilities with
Dominican banks, which, in the aggregate, permit us to borrow up to $321.5
million. At March 31, 2002, there was $280.6 million outstanding under these
facilities. We had approximately $41.0 million available for borrowing under
these facilities, of which $33.2 million was under facilities with maturities of
less than one year.
At March 31, 2002, we had $95.8 million of short-term and long-term
approved credit facilities with Dominican banks and institutions and $225.7
million of U.S. dollar-denominated approved credit facilities with international
banks. In addition, at March 31, 2002, the Company had in place a $51 million
dollar-denominated and peso-
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denominated commercial paper program in the Dominican Republic. At March 31,
2002, we had outstanding $47.3 million under such program. The proceeds from the
issuance of commercial paper have been used to finance the purchase of
telecommunications related assets.
At March 31, 2002, our current liabilities exceeded our current assets
by $125.9 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 restructured approximately $77.0 million of our short-term debt to
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% per annum to
13.33% per annum. The Company 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
March 31, 2002, the amount of $49.4 million has been disbursed under this
facility. The credit guarantees expire on July 1, 2002 and outstanding
disbursements will be repayable up to a five-year period
The following table contains certain information concerning the
Company's material contractual obligations at March 31, 2002.
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
- ----------------------------------------- --------------------------------------------------------------------------
CONTRACTUAL CASH OBLIGATIONS TOTAL LESS THAN 1 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
YEAR
- ----------------------------------------- ------------------ -------------------------------------------------------
Short-Term Debt $ 147.2 147.2 - - -
Long-Term Debt 365.7 - 329.3 35.3 1.1
Capital Lease Obligations 15.0 - 9.8 5.2 -
Operating Leases - - - - -
Unconditional Purchase Obligations - - - - -
Other Long-Term Obligations - - - - -
--------------------------------------------------------------------------
TOTAL CONTRACTUAL CASH OBLIGATIONS $ 527.9 147.2 339.1 40.5 1.1
==========================================================================
</Table>
At December 31, 2001, our 11 3/8% senior notes due 2004 are 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. On May 31, 2002, S&P lowered the rating of our 11 3/8% senior notes
due 2004 to B and lowered its outlook from stable to negative. Our domestic
commercial paper program is not rated by either Moody's or S&P.
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ITEM 4. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about market risks to certain financial
instruments includes "forward-looking" statements that involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
We are exposed to market risks from adverse changes in interest rates
and foreign exchange rates. We do not hold or issue financial instruments for
trading purposes.
INTEREST RATE RISKS
Our interest expense is sensitive to changes in the general level of
interest rates in the United States and in the Dominican Republic. At March 31,
2002, 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
$144 million at March 31, 2002. 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 to
changes in fair market value of our long-term debt. At March 31, 2002, we had
$327.9 million outstanding of short-term and long-term borrowings, other than
our 11 3/8% senior notes due 2004 but including trade finance, of which $293.4
million was U.S. dollar denominated, and the remaining $34.5 million was
Dominican peso denominated. Of the $293.4 million of U.S. dollar dominated debt,
$60.6 million was borrowed from Dominican banks, $47.3 million was commercial
paper outstanding issued in Dominican markets, while the remaining $185.4
million was borrowed from international banks. Of the total $327.9 million
outstanding, $287.6 million had fixed interest rates, while the remaining $40.3
million had variable interest rates. During the first three months of 2002, our
short-term and long-term U.S. dollar denominated borrowings bore interest at
rates ranging from 4.19% per annum to 13.33% per annum. During the first three
months of 2002, our short-term and long-term Dominican peso denominated
borrowings bore interest at rates ranging from 17% per annum to 23% per annum. A
10% increase in the average rate for our variable rate debt would have increased
our loss for the 2002 first quarter by approximately $838,000.
FOREIGN EXCHANGE RISKS
We are subject to currency exchange risks. During the 2002 first
quarter, we generated revenues of $21.3 million in U.S. dollars and $42.8
million in Dominican pesos. In addition, at March 31, 2002, we had $293.4
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 the first three months of 2002, the average
official exchange rate was RD$17.11 per $1.00 while the average private market
rate was RD$17.43 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 the first three months of 2002,
we recognized an approximate $177,000 foreign exchange loss. If the
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Dominican peso had devalued by an additional 10% against the U.S. dollar on
average in the 2002 first quarter, then we would have realized an additional
foreign exchange loss of approximately $17,700.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following is a description of certain recent developments in
litigation previously reported by us:
ALL AMERICA CABLES & RADIO LITIGATION
On May 31, 2002, the United States Federal Communications Commission
("FCC") dismissed with prejudice on grounds of international comity the
complaint of Centennial Communications Corp. ("Centennial") and its affiliates
against Tricom USA, Inc. The complaint alleged, inter alia, that Tricom USA,
Inc. violated the U.S. Telecommunications Act and FCC rules by accepting from
its parent company in the Dominican Republic, Tricom, S.A., unfairly favorable
rates, terms and conditions relating to interconnection and international call
termination in the Dominican Republic.
In August 2001, Indotel, the Dominican telecommunications regulator, in
response to a complaint filed by AACR, issued an order declaring that Tricom,
S.A. is not dominant in the Dominican market and that the interconnection
agreement Tricom, S.A. offered to AACR was not discriminatory. In September
2001, Indotel ordered the parties to enter into an interconnection agreement on
substantially the terms and conditions that Tricom, S.A. proposed. On November
13, 2001, Indotel informed the parties that it would impose monetary sanctions
on AACR if it did not execute the interconnection agreement that Tricom, S.A.
had proposed. On November 19, 2001, AACR signed the interconnection agreement.
Except as previously reported, 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 6-K
(a) Exhibits.
None.
(b) Report on Form 20-F. The Company filed with the Securities and
Exchange Commission a Report on Form 20-F on May 31, 2002,
reporting the Company's results of operations for the year
ended December 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRICOM, S.A
Dated: June 26, 2002 By: s/ CARL CARLSON
---------------
Carl Carlson
Executive Vice President
and Member of the
Office of the President
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