FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of: NOVEMBER 21, 2002
[GRAPHIC OMITTED][GRAPHIC OMITTED]
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-_________
TRICOM, S.A.
QUARTERLY REPORT
FOR THE
THIRD QUARTER
ENDED
SEPTEMBER 30, 2002
TABLE OF CONTENTS
PAGE
GENERAL INTRODUCTION.........................................................1
PART I
FINANCIAL INFORMATION........................................................3
ITEM 1. Financial Statements.......................................3
ITEM 2. Information on the Company................................10
ITEM 3. Operating and Financial Review and Prospects..............11
ITEM 4. Quantitative and Qualitative Disclosures..................22
PART II
OTHER INFORMATION 23
ITEM 1. LEGAL PROCEEDINGS.........................................23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...........................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......24
ITEM 5. OTHER INFORMATION.........................................24
ITEM 6. EXHIBITS AND REPORTS ON FORM 6-K..........................24
GENERAL INTRODUCTION
UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES TO "TRICOM"
REFER TO TRICOM, S.A. AND ITS CONSOLIDATED SUBSIDIARIES AND THEIR RESPECTIVE
OPERATIONS, AND INCLUDE TRICOM'S PREDECESSORS.
PRESENTATION OF CERTAIN FINANCIAL INFORMATION
We prepare our consolidated financial statements in conformity with
generally accepted accounting principles in the United States. We adopted the
United States dollar as our functional currency effective January 1, 1997 and
maintain our books and records in dollars.
In this Quarterly Report references to "$," "US$" or "U.S. dollars" are
to United States dollars, and references to "Dominican pesos" or "RD$" are to
Dominican pesos. This Quarterly Report contains translations of certain
Dominican peso amounts into U.S. dollars at specified rates solely for the
convenience of the reader. These translations should not be construed as
representations that the Dominican peso amounts actually represent such U.S.
dollar amounts or could be converted into U.S. dollars at the rate indicated.
The average of prices of one U.S. dollar quoted by certain private commercial
banks, or the "Private Market Rate", as reported by Banco Central de la
Republica Dominicana, or the "Central Bank", on September 30, 2002 was RD$18.99
= US$1.00, the date of the most recent financial information included in this
Quarterly Report. The Federal Reserve Bank of New York does not report a noon
buying rate for Dominican pesos. On November 19, 2002, the Private Market Rate
was RD$20.39 = 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 us. Such risks include, but are not limited to, the
following factors:
o the effect of our substantial indebtedness on our ability to fund
operations and our competitive position;
o our ability to generate cash flow from operations to meet our
debt service requirements;
o our dependence on high interest short-term borrowings in the
Dominican financial markets;
o possibility of substantial payment to the Dominican tax service
affecting the ability to fund our operations and requiring us to
obtain additional financing;
o not achieving our objectives of improving operating and cash flow
margins and sustaining revenue growth;
o greater market share and resources by our principal competitor in
the Dominican Republic;
o competition in Dominican markets for local, long distance,
wireless, internet and data services with multinational
telecommunications providers;
o disconnection of a substantial portion of our subscriber base and
a new focus on higher margin customers not producing desired
results;
o the effect of litigation in Panama initiated by competitor;
o declining rates for international long distance traffic;
o our reliance in the U.S. long distance markets on resellers, many
of which have been adversely affected by intensified competition
and decreased demand;
o our inability to minimize credit risks;
o customer churn;
o rapid technological change;
o fraudulent or pirated use of our wireless and cable television
services;
o increased competition for our cable business due to proposed
regulations;
o our dependence on third parties for television programming;
1
o the possible effect of interruptions in cable service;
o vulnerability of our computer network to viruses, hackers and
other disruptions;
o the effect of objections filed with Dominican regulatory
authorities to our purchase of certain cable television
operations;
o volatility in the Panama market;
o the inability of our sole supplier to maintain our iDEN network
in Panama;
o concerns about health risks associated with wireless equipment;
o adverse effects to our financial condition due to downturns in
the Dominican economy;
o poverty, social unrest and shortages in the Dominican Republic
affecting the use of telecommunications services;
o inability to enforce claims based on U.S. Securities laws in the
Dominican Republic;
o our dependence on continued growth of the Dominican economy,
demand for telecommunication services in the Dominican Republic
and moderation of inflation; and
o the volatility and depreciation of the Dominican peso against the
U.S. dollar reducing our cash available to repay our indebtedness
or fund our operations;
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN US$)
DECEMBER 31, SEPTEMBER 30,
---------------------- -----------------------
2001 2002
ASSETS (UNAUDITED)
------
Current assets:
Cash on hand and in banks $ 12,576,050 $ 7,143,132
Accounts receivable:
Customers 27,537,952 29,734,487
Carriers 4,168,187 2,942,574
Related parties 5,191,359 678,580
Officers and employees 687,355 1,118,144
Others 1,010,801 2,134,165
-------------------- ---------------------
38,595,654 36,607,950
Allowance for doubtful accounts (4,097,001) (7,107,658)
-------------------- ---------------------
Accounts receivable, net 34,498,653 29,500,292
Inventories, net 7,054,100 6,112,112
Investments 15,200,000 13,522,815
Prepaid expenses 5,850,267 2,433,506
Deferred income taxes 1,624,637 1,902,416
-------------------- ---------------------
Total current assets 76,803,707 60,614,273
-------------------- ---------------------
Mortgage investments 3,968,711 486,682
Property and equipment, net 685,916,632 687,544,862
Other assets at cost, net of amortization 26,214,053 27,448,130
Goodwill and intangible assets, net of amortization 36,511,523 36,511,523
-------------------- ---------------------
$ 829,414,626 $ 812,605,470
==================== =====================
3
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT.)
(IN US$)
DECEMBER 31, SEPTEMBER 30,
---------------------- -----------------------
2001 2002
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable:
Borrowed funds - banks $ 86,872,001 41,144,696
Borrowed funds - related parties 27,076,366 43,744,287
Commercial paper 29,242,556 16,471,936
Current portion of long-term debt 30,493,532 7,215,343
------------------- -------------------
173,684,455 108,576,262
------------------- -------------------
Current portion of capital leases 6,643,766 1,040,615
Accounts payable:
Carriers 8,831,981 9,825,780
Related parties 6,868,834 282,904
Suppliers 17,543,401 18,102,693
Others 3,881,848 866,137
------------------- -------------------
37,126,064 29,077,514
Other liabilities 14,644,012 16,683,676
Accrued expenses 20,272,800 20,850,707
------------------- -------------------
Total current liabilities 252,371,097 176,228,774
------------------- -------------------
Reserve for severance indemnities 1,639,718 1,053,755
Deferred income taxes 2,172,814 2,223,746
Commercial paper 1,153,759 45,597,566
Capital leases, excluding current portion - related party 11,213,000 14,531,321
Long-term debt, excluding current portion 305,459,748 359,150,448
------------------- -------------------
Total liabilities 574,010,136 598,785,610
------------------- -------------------
Minority interest 1,870,833 -
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
September 30, 2002 14,753,134 14,753,134
Class B Stock at par value RD$10: Authorized 25,000,000 shares;
19,144,544 issued at December 31, 2001 and September 30, 2002 12,595,095 12,595,095
Additional paid-in-capital 217,290,020 217,290,020
Retained (loss) earnings 10,919,165 (28,794,632)
Other comprehensive income-foreign currency translation
(2,023,757) (2,023,757)
------------------- ------------------
Shareholders equity, net 253,533,657 213,819,860
------------------- ------------------
$ 829,414,626 $ 812,605,470
=================== ==================
4
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF
OPERATIONS
(IN US$)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ --------------------------------------
2001 2002 2001 2002
---------------- ---------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
OPERATING REVENUES:
Toll revenues $ 7,769,767 $ 7,281,413 $ 22,215,869 $ 21,036,788
International revenues 21,272,185 21,812,650 60,862,735 65,155,992
Local service 15,987,408 16,810,289 46,364,483 51,046,301
Data and Internet 2,146,784 2,994,531 6,024,925 8,072,423
Cellular & PCS 10,182,725 9,323,048 28,228,114 28,299,772
Paging 242,855 143,143 832,273 494,988
Sale of equipment 465,846 481,000 2,652,019 1,721,585
Installation and activation fees 2,405,657 793,574 9,390,783 3,298,383
Cable revenues - 5,856,373 - 16,852,246
Other 180,860 82,386 555,334 416,342
--------------- --------------- ---------------- ----------------
TOTAL OPERATING REVENUES 60,654,087 65,578,407 177,126,535 196,394,820
OPERATING COSTS:
Transport and access charges 17,821,403 19,707,960 49,470,744 57,266,462
Cable programming cost & others - 1,904,152 - 4,672,743
Network depreciation expense 11,617,289 13,656,006 32,464,595 39,624,363
Expense in lieu of income taxes 2,522,431 1,564,867 9,002,698 6,246,766
Selling expense 9,658,369 8,853,204 24,612,454 28,980,140
General and administrative expenses 12,621,379 14,437,134 33,963,379 42,625,138
Cost of equipment sold 382,548 510,992 2,178,545 1,191,648
Non-network depreciation expense 2,761,356 3,321,065 7,352,477 9,611,225
Amortization expenses 158,796 807,349 474,172 1,972,365
Other 487,960 159,919 1,472,688 1,436,822
--------------- --------------- ---------------- ----------------
TOTAL OPERATING COSTS 58,031,531 64,922,648 160,991,752 193,627,672
OPERATING INCOME 2,622,556 655,759 16,134,783 2,767,148
OTHER INCOME (EXPENSES):
Interest expense (8,682,346) (17,247,946) (28,495,020) (46,919,070)
Interest income 665,045 365,368 1,533,802 1,334,087
Foreign currency exchange gain (loss) (26,850) 654,984 (289,285) 702,420
Other, net (26,159) 715,291 515,410 1,004,288
--------------- --------------- ---------------- ----------------
OTHER EXPENSES, NET (8,070,310) (15,512,303) (26,735,093) (43,878,275)
--------------- --------------- ---------------- ----------------
EARNINGS (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST (5,447,754) (14,856,544) (10,600,310) (41,111,127)
Income taxes, net (150,000) (316,422) (250,861) (473,503)
EARNINGS (LOSS) BEFORE MINORITY
INTEREST (5,597,754) (15,172,966) (10,851,171) (41,584,630)
Minority interest 95,021 259,865 155,047 1,870,833
--------------- --------------- ---------------- ----------------
NET EARNINGS (LOSS) $ (5,502,733) $ (14,913,101) $ (10,696,124) $ (39,713,797)
=============== =============== =============== ================
Earnings (loss) per common share:
Earnings (loss) before minority
interest (0.19) (0.35) (0.38) (0.96)
Minority interest 0.00 0.01 0.01 0.04
--------------- --------------- ---------------- ----------------
Earning (loss) per common share $ (0.19) $ (0.34) $ (0.37) $ (0.92)
=============== =============== ================ ================
NUMBER OF COMMON SHARES USED IN
CALCULATION 28,844,544 43,390,464 28,844,544 43,390,464
=============== =============== ================ ================
5
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN US$)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------
2001 2002
----------------- ------------------
Cash flows from operating activities:
Net earnings (loss) $ (10,696,124) $ (39,713,797)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Allowance for doubtful accounts 5,173,937 5,893,869
Deferred income tax, net (67,139) (226,847)
Depreciation 39,817,072 49,235,588
Gain on sale of assets - (1,284,310)
Expense for severance indemnities 1,070,374 1,474,840
Minority interest (155,047) (1,870,833)
Value of consulting services received in exchange
for stock warrants 752,987 -
Net changes in assets and liabilities:
Accounts payable (8,998,679) (8,048,550)
Accounts receivable (3,679,003) (895,508)
Accrued expenses 2,051,308 577,907
Inventories 388,478 (1,011,124)
Other assets (6,876,882) (1,234,077)
Other liabilities (1,618,006) 2,039,664
Prepaid expenses 4,218,965 3,416,761
Reserve for severance indemnities (1,033,948) (2,060,803)
--------------- ----------------
Total adjustments 31,044,417 46,006,577
--------------- ----------------
Net cash provided by (used in) operating activities $ 20,348,293 $ 6,292,780
=============== ================
Cash flows from investing activities:
Acquisition of property and equipment (96,083,468) $ (52,654,969)
Cancellation (acquisition) of investments $ (698,730) 5,159,214
Sale of property and equipment - 5,028,573
--------------- ----------------
Net cash used in investing activities (96,782,198) (42,467,182)
Cash flows from financing activities:
Borrowed (paid) funds 45,191,717 (42,009,923)
Capital lease payments (3,264,593) (2,284,830)
Increase of common stock and additional paid-in
capital 40,000,000 -
Minority interest 4,507,131 -
Payments of long-term debt (2,061,541) (23,278,189)
Proceeds from issuance of long term debt 11,961,530 98,314,426
--------------- ----------------
Net cash provided by financing activities 96,334,244 30,741,484
Net increase in cash and cash equivalents 19,900,339 (5,432,918)
Cash and cash equivalents at beginning of the period 18,199,552 12,576,050
--------------- ----------------
Cash and cash equivalents at end of period $ 38,099,891 $ 7,143,132
=============== ================
<page>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
We consider 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.
6
NOTE 2 - GUARANTEE SUBSIDIARIES FINANCIAL INFORMATION
Our 11-3/8% Senior Notes due 2004 are guaranteed fully, unconditionally and
jointly and severally by each of our restricted subsidiaries, as defined in the
indenture for the Senior Notes, each of which is wholly owned by us.
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
September 30, 2002 for Balance Sheet Data and for the nine month periods ended
September 30, 2001 and 2002 for Statement of Operations and Cash Flow Data is as
follows:
BALANCE SHEET DATA AT DECEMBER 31,
2001:
Tricom, S.A. Subsidiaries Subsidiaries Consolidating Total
ASSETS Parent Co. Guarantors Not 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
============ ============ =========== ============== ============
<page>
BALANCE SHEET DATA AT SEPTEMBER 30,
2002:
Tricom, S.A. Subsidiaries Subsidiaries Consolidating Total
ASSETS Parent Co. Guarantors Not Guarantor Adjustments Consolidated
------
------------- ------------- -------------- --------------- -------------
Current assets: $ $ $ $ $
Cash on hand and in banks 5,101,176 1,840,918 201,038 7,143,132
Accounts receivable, net 108,185,919 20,473,799 694,158 (99,853,584) 29,500,292
Other current assets 19,719,304 3,751,835 499,710 23,970,849
------------- ------------- -------------- --------------- ------------
Total current assets 133,006,399 26,066,552 1,394,906 (99,853,584) 60,614,273
Property, plant and equipment, net 569,870,130 112,441,426 5,233,306 687,544,862
Other non-current assets 73,454,564 13,019,453 791,185 (22,818,867) 64,446,335
------------- ------------- -------------- --------------- ------------
Total assets $ 776,331,093 $ 151,527,431 $ 7,419,397 $ (122,672,451) $812,605,470
============= ============= ============= ============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes Payable $ 100,484,601 $ 7,852,033 $ 239,628 $ $108,576,262
Current portion of capital leases 1,040,615 - - 1,040,615
Accounts payable 18,296,542 102,582,460 8,052,096 (99,853,584) 29,077,514
Other current liabilities 28,105,927 8,790,856 637,600 37,534,383
------------- ------------- -------------- --------------- ------------
Total current liabilities 147,927,685 119,225,349 8,929,324 (99,853,584) 176,228,774
Other non-current liabilities 414,583,548 7,973,288 - 422,556,836
------------- ------------- -------------- --------------- ------------
Total liabilities 562,511,233 127,198,637 8,929,324 (99,853,584) 598,785,610
Minority interest - - -
Stockholders' equity 213,819,860 24,328,794 (1,509,927) (22,818,867) 213,819,860
------------- ------------- -------------- --------------- ------------
------------- ------------- -------------- --------------- ------------
Total liabilities and stockholder's
equity $776,331,093 $151,527,431 $ 7,419,397 $(122,672,451) $812,605,470
============ ============ =========== ============= ============
STATEMENT OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001:
Tricom, S.A. Subsidiaries Subsidiaries Consolidating Total
Parent Co. Guarantors Not Guarantor Adjustments Consolidated
------------- ------------- -------------- --------------- ------------
$ $ $ $ $
Operating revenues 136,370,277 55,522,747 424,404 (15,190,893) 177,126,535
Operating costs (123,628,643) (51,778,728) (775,274) 15,190,893 (160,991,752)
Operating income 12,741,634 3,744,019 (350,870) - 16,134,783
------------- ------------- -------------- --------------- -------------
Other expense, net (23,437,758) (824,117) 34,448 (2,507,666) (26,735,093)
Earnings (loss) before income
taxes and minority interest (10,696,124) 2,919,902 (316,422) (2,507,666) (10,600,310)
Income taxes - (250,861) (250,861)
Minority interest 155,047 155,047
------------- ------------- ------------ ------------ --------------
Net earnings (loss) $(10,696,124) $ 2,669,041 $ (316,422) $ (2,352,619) $ (10,696,124)
============= ============ ============ ============ ==============
<page>
STATEMENT OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002:
Tricom, S.A. Subsidiaries Subsidiaries Consolidating Total
Parent Co. Guarantors Not Guarantor Adjustments Consolidated
------------- ------------- -------------- --------------- ------------
$ $ $ $ $
Operating revenues 141,694,643 77,500,927 1,359,299 (24,160,049) 196,394,820
Operating costs (130,332,747) (81,098,681) (6,356,293) 24,160,049 (193,627,672)
------------- ------------- -------------- --------------- ------------
Operating income 11,361,896 (3,597,754) (4,996,994) - 2,767,148
Other expense, net (50,865,932) (501,071) (330,960) 7,819,688 (43,878,275)
Earnings (loss) before income
taxes and minority interest (39,504,036) (4,098,825) (5,327,954) 7,819,688 (41,111,127)
Income taxes (209,761) (263,742) - (473,503)
Minority interest - - - 1,870,833 1,870,833
------------- ------------- -------------- --------------- ------------
Net earnings (loss) $(39,713,797) $ (4,362,567) $(5,327,954) $ 9,690,521 $(39,713,797)
============= ============= ============= ============== =============
8
CASH FLOW DATA FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001:
Tricom, S.A. Subsidiaries Subsidiaries Consolidating Total
Parent Co. Guarantors Not Guarantor Adjustments Consolidated
------------- ------------- -------------- --------------- ------------
Net cash provided by (used in) $ $ $ $ $
operating activities 16,381,683 3,232,136 (6,437,566) 7,172,040 20,348,293
Net cash used in investing
activities (54,945,109) (32,597,802) (2,183,398) (7,055,889) (96,782,198)
Net cash provided by financing
activities 57,951,258 29,778,708 8,720,429 (116,151) 96,334,244
Effect of exchange rate
changes on cash on hand and in
banks - - - -
------------- ------------- ------------ ------------- --------------
Net increase (decrease) in
cash on hand and in banks 19,387,832 413,042 99,465 - 19,900,339
Cash on hand and in banks at
beginning of the period 17,241,951 957,601 18,199,552
------------- ------------- ------------ ------------- --------------
Cash on hand and in banks at
the end of the period $ 36,629,783 $ 1,370,643 $ 99,465 $ - $ 38,099,891
=========== ============= ============ ============= ==============
CASH FLOW DATA FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2002:
Tricom, S.A. Subsidiaries Subsidiaries Consolidating Total
Parent Co. Guarantors Not Guarantor Adjustments Consolidated
------------- -------------- ------------- ------------- --------------
Net cash provided by (used in)
operating activities $(21,809,222) $ 32,721,072 $ 1,444,010 $ (6,063,080) $ 6,292,780
Net cash used in investing
activities (28,707,000) (13,525,277) (1,676,222) 1,441,317 (42,467,182)
Net cash provided by financing
activities 44,417,250 (18,537,157) 239,628 4,621,763 30,741,484
Effect of exchange rate
changes on cash on hand and in
banks - - - - -
------------ ------------- ------------ ------------- ------------
Net increase (decrease) in
cash on hand and in banks (6,098,972) 658,638 7,416 - (5,432,918)
Cash on hand and in banks at
beginning of the period 11,200,148 1,182,280 193,622 12,576,050
------------ ------------- ------------ ------------- ------------
Cash on hand and in banks at
the end of the period $ 5,101,176 $ 1,840,918 $ 201,038 $ - $ 7,143,132
=========== ============= ============ ============= ============
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, 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, Florida and Puerto Rico.
Using these facilities, we originate, transport and terminate international
long-distance traffic. We are one of the few Latin American based long distance
carriers that are licensed by the U.S. Federal Communications Commission to own
and operate switching facilities in the United States. 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".
In Panama, we have offered digital mobile integrated services since
April 2002 and, at September 30, 2002, we have approximately 5,000 subscribers.
These services consist of two-way radio and paging services using iDEN
technology. Our network covers Panama City and Colon, the two largest cities in
Panama and important transportation corridors in other parts of the country.
Through a 51% owned joint venture, we own frequency rights for 107 channels of
25 MHz each. These frequencies give us access to nationwide coverage, covering a
population of approximately 2.8 million people. We also own radio frequency
rights in El Salvador and Guatemala, but currently do not intend to develop a
network in either country.
RECENT DEVELOPMENTS
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
September 1, 2002, telecommunication providers in the Dominican 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, but without taking
into account additional payments that we would have been required to make with
respect to withholding requirements to which we have been subject.
Our concession agreement also exempted us from the requirement to withhold
5% on interest paid or credited to the accounts of financial institutions
located abroad, and 25% on other payments abroad. 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 lenders or
holders, as applicable, so that the net amount they receive after such
withholding or deduction will not be less than the amount such lenders or
holders 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, or approximately $5.9 million in the aggregate.
APPOINTMENT OF NEW CHIEF FINANCIAL OFFICER
On July 31, 2002, we announced the selection of Ramon Tarrago as our new
Chief Financial Officer. Mr. Tarrago replaces Carlos Vargas, who will now serve
as vice president of Telecable Nacional Dominicana, our cable television
wholly-owned subsidiary.
Mr. Tarrago joined us in 1992 as Director of Finance. He has also worked as
vice president and head of our International Business Division since its
inception in 1995. Before joining us, Mr. Tarrago held positions in the
corporate banking unit at the Dominican Republic branch of Citibank and at the
International Finance Corporation
of the World Bank in Washington, D.C. Mr. Tarrago holds both a BA in economics
from Universidad Nacional Pedro Henriquez Urena and an MBA, with a concentration
in finance, from the Virginia Polytechnic Institute and State University.
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, data and
Internet 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 another
carrier'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. Calling party,
refers to the person who originates the phone call. Calling party pays
is a wireless telephony payment structure in which the party that
places a call to a wireless telephone is billed for interconnection
access, and the recipient is not billed for the airtime charges
corresponding to that call. In the Dominican Republic, the calling
party pays. Local measured service includes monthly phone line rental
for a specified number of minutes within a defined area, plus a charge
for additional minutes.
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.
11
Paging revenues consist of fixed monthly charges for nationwide service
and use of paging equipment and activation fees. Since 1999, paging has
not played a role in our marketing programs and paging revenues have
declined.
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. 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 fees and revenues from
advertising sales to national advertisers on non-broadcast channels we
carry over our cable communications systems. Cable television revenues,
including installation fees, 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 MONTHSENDED NINE MONTHSENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2002 2001 2002
---- ---- ---- ----
Toll revenues 12.8% 11.1% 12.5% 10.7%
International revenues 35.1 33.3 34.4 33.2
Local service 26.4 25.6 26.2 26.0
Data and Internet 3.5 4.6 3.4 4.1
Cellular and PCS 16.8 14.2 15.9 14.4
Paging 0.4 0.2 0.5 0.3
Sale and lease of equipment 0.8 0.7 1.5 0.9
Installation and activation fees 4.0 1.2 5.3 1.7
Cable revenues -- 8.9 -- 8.6
Other 0.3 0.1 0.3 0.2
- ----------
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:
12
THREE MONTHSENDED NINE MONTHSENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2002 2001 2002
---- ---- ---- ----
Operating costs 95.7% 99.0% 90.9% 98.6%
Operating income 4.3 1.0 9.1 1.4
Interest expense, net (13.2) (25.7) (15.2) (23.2)
Other income (expenses) (13.3) (23.7) (15.1) (22.3)
Earnings (loss) before income taxes and minority interest (9.0) (22.7) (6.0) (20.9)
Net earnings (loss) (9.1) (22.7) (6.0) (20.2)
EBITDA 32.5 30.5 36.9 30.7
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE SAME PERIODS IN
2001
OPERATING REVENUES. Our total operating revenues increased 8.1% to $65.6
million during the 2002 third quarter from $60.7 million for the 2001 third
quarter. Total operating revenues increased 10.9% to $196.4 million for the
nine-month period ended September 30, 2002 from $177.1 million for the
nine-month period ended September 30, 2001. Cable television, data and Internet,
local, and international long distance services were the primary contributors to
overall revenue growth during the third quarter. Excluding revenues from cable
television services, which we acquired in October 26, 2001, our total revenues
were $59.7 million for the 2001 third quarter, a decrease of $1 million from
total revenues from the 2001 third quarter, and $179.5 million for the 2002
nine-month period, an increase of $2.4 million from the 2001 nine-month period.
Revenue growth was offset by lower installation and activation revenues
primarily as a result of lower average installation fees as well as decreases in
toll and cellular and PCS revenues.
TOLL. Toll revenues decreased 6.3% to $7.3 million during the 2002 third
quarter from $7.8 million for the 2001 third quarter, and decreased by 5.3% to
$21.0 million during the first nine months of 2002 compared to $22.2 million
during the first nine months of 2001. The decrease in toll revenues resulted
from decreases in revenues derived from outbound international long distance
minutes offset, in part, by increases in access charges and domestic long
distance revenues.
Revenues from outbound international calls decreased by 21.8% to $2.8
million during the 2002 third quarter from $3.5 million during the 2001 third
quarter, and by 20.2% to $8.3 million during the first nine months of 2002 from
$10.4 million during the first nine months of 2001, primarily as a result of a
decrease in the price per minute for outbound international calls for
residential and commercial customers and a decrease in outbound long distance
traffic volume. The average price per minute for residential and commercial
customers' outbound international calls declined to $0.34 in the 2002 third
quarter from $0.47 in the 2001 third quarter. Outbound international minutes
decreased by 3.2% to 9.0 million minutes in the 2002 third quarter from 9.3
million minutes during the 2001 third quarter, and decreased by 3.5% to 26.7
million minutes during the first nine months of 2002 from 27.6 million minutes
during the first nine months of 2001, reflecting decreased traffic volume from
calling cards and cellular and PCS customers.
Domestic long distance revenues increased 53.1% to $2.1 million during the
2002 third quarter from $1.4 million during the 2001 third quarter, and
increased 57.8% to $6.2 million during the first nine months of 2002 from $3.9
million during the first nine months of 2001. Domestic long distance minutes
increased by 14.0% to 14.9 million minutes during the 2002 third quarter from
13.1 million minutes during the 2001 third quarter, and increased 7.7% to 41.2
million minutes during the first nine months of 2002 from 38.3 million minutes
during the first nine months of 2001. The increase in domestic long distance
minutes resulted from higher traffic volume from our retail call centers.
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.
Revenues from access charges increased 3.5% to $2.3 million during the 2002
third quarter from $2.2 million in the 2001 third quarter, and increased 14.5%
to $7.0 million during the first nine months of 2002 compared to $6.1 during the
first nine months of 2001. The increase in interconnection charges reflected the
growth in our local access subscriber base since the 2001 third quarter and in
the Dominican telephony market, as well as our success in
13
attracting high-usage customers. We currently expect to disconnect a substantial
number of lines in service at September 30, 2002 during the fourth quarter of
2002, which could result in us receiving less revenues from access charges.
INTERNATIONAL. Our international revenues increased 2.5% to $21.8 million
during the 2002 third quarter from $21.3 million in the 2001 third quarter, and
increased 7.1% to $65.2 million during the first nine months of 2002 compared to
$60.9 million during the first nine months of 2001, primarily as the result of
higher inbound traffic derived from our U.S.-based international long distance
operations, offset in part by lower international long distance prepaid card
traffic volume. The international revenue increase was achieved despite lower
settlement rates for traffic between the United States and the Dominican
Republic. Our average settlement rate was $0.040 per minute during the 2002
third quarter compared to $0.052 per minute during the 2001 third quarter.
Inbound minutes increased by 44.8% to 277.5 million minutes during the 2002
third quarter from 191.6 million minutes in the 2001 third quarter, and
increased by 40.9% to 734.6 million minutes during the first nine months of 2002
from 521.4 million minutes during the first nine months of 2001.
Total minutes from our U.S.-based international long distance prepaid cards
decreased by 29.8% to 38.3 million minutes in the 2002 third quarter from 54.6
million during the 2001 third quarter, and remained stable at 149.6 million
minutes during the first nine months of 2002 compared to 149.2 million minutes
during the first nine months of 2001. Revenues from our U.S. based international
long distance prepaid calling cards decreased by 37.4% to $5.1 million in the
2002 third quarter from $8.2 million in the 2001 third quarter, and decreased by
8.3% to $21.4 million during the first nine months of 2002 compared to $23.3
million during the first nine months of 2001. Lower prepaid card sales primarily
resulted from competitive pressures and poor results from a third party
distributor that had exclusive rights to distribute our product in the
northeastern U.S. We now have several distributors in the region.
LOCAL SERVICE. Local service revenues increased 5.1% to $16.8 million
during the 2002 third quarter from $16.0 million in the 2001 third quarter, and
increased 10.1% to $51.0 million during the first nine months of 2002 compared
to $46.4 million during the first nine months of 2001, primarily as the result
of the continued growth in the number of lines in service. At September 30,
2002, we had 179,124 lines in service compared to 169,893 lines in service at
September 30, 2001, a 5.4% increase in lines.
As a result of a higher number of lines in service, revenues derived from
cellular calls under the calling-party-pays system increased by 25.9% to $2.2
million in the 2002 third quarter from $1.7 million in the 2001 third quarter,
and increased by 34.3% to $6.2 million during the first nine months of 2002
compared to $4.6 million during the first nine months of 2001. Measured local
service revenues increased by 10.9% to $3.6 million in the 2002 third quarter
from $3.3 million in the 2001 third quarter, and increased by 13.5% to $10.8
million during the first nine months of 2002 from $9.5 million during the first
nine months of 2001.
Revenues from monthly fees decreased by 0.4% to $10.8 million in the 2002
third quarter from $10.9 million in the 2001 third quarter, and increased by
4.2% to $33.9 million during the first nine months of 2002 compared to $32.6
million during the first nine months of 2001. Our average monthly churn rate for
local service increased to 3.3% in the 2002 third quarter compared to 1.6% in
the 2001 third quarter and decreased to 2.0% during the first nine months of
2002 compared to 2.2% during the first nine months of 2001. 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.
During the third quarter, we undertook a number of steps to improve the
profile of our local service customer portfolio, mainly the disconnection of
marginal users, resulting in a reduction in the number of lines in service at
September 30, 2002 from the number at June 30, 2002. We currently expect to
disconnect a substantial number of our lines in service at September 30, 2002
during the fourth quarter of 2002. As a result, we may have fewer lines in
service at December 31, 2002, which could result in lower revenues from monthly
fees, access charges and measured local service.
By disconnecting unprofitable customers, we believe we can better use our
network to provide services to and concentrate our sales efforts on, higher
margin residential and corporate customers. In addition to increasing the
average revenue per user, we believe we can increase service offerings to high
margin customers and ultimately
14
increase our revenues and profitability. We anticipate that local service churn
rate will remain relatively high while we continue our policy of disconnecting
low usage customers.
DATA AND INTERNET. Data and Internet service revenues increased 39.5% to
$3.0 million in the 2002 third quarter from $2.1 million in the 2001 third
quarter, and increased by 34.0% to $8.1 million during the first nine months of
2002 from $6.0 million during the first nine months of 2001, primarily as the
result of the continued growth in the number of data and Internet subscribers.
The number of our data and Internet subscribers increased 23.3% to 10,611 at
September 30, 2002 from 8,606 at September 30, 2001. Revenues from monthly fees
increased by 25.7% to $2.2 million in the 2002 third quarter from $1.7 million
in the 2001 third quarter, and increased by 18.4% to $5.9 million during the
first nine months of 2002 compared to $4.9 million during the first nine months
of 2001.
CELLULAR AND PCS. Our cellular and PCS revenues decreased 8.4% to $9.3
million in the 2002 third quarter from $10.2 million in the 2001 third quarter,
and remained stable at $28.3 million during the first nine months of 2002
compared to $28.2 million during the first nine months of 2001. The decrease in
third quarter cellular and PCS revenues resulted from an approximate 26%
decrease in the average price per minute during the 2002 third quarter,
reflecting increased price competition in the market. For the 2002 nine-month
period declines in average price per minute were offset by increased minutes of
use.
At September 30, 2002, we had 410,918 cellular and PCS subscribers compared
to 332,436 at September 30, 2001. As a result of a higher average subscriber
base, total minutes of usage increased 11.5% to 59.7 million minutes in the 2002
third quarter from 53.5 million minutes in the 2001 third quarter, and increased
10.0% to 167.5 million minutes during the first nine months of 2002 from 152.2
million minutes during the first nine months of 2001.
At September 30, 2002, approximately 5% of our subscriber base consisted of
customers that purchase cellular and PCS services pursuant to fixed-term
contracts and the remaining 95% of our customers purchase their services in
advance, primarily through prepaid calling cards. Prepaid customers include both
those who can receive and make outgoing calls and those who are only able to
receive incoming calls. We believe that our postpaid subscribers seek the
convenience of uninterrupted wireless service and access to high quality
customer service and are willing to pay monthly fees for additional value-added
services. In contrast to postpaid subscribers, prepaid customers typically
generate low levels of usage, access a limited number of value-added services,
and often are unwilling to make a fixed financial commitment or do not have the
credit profile to purchase postpaid plan cellular and PCS services.
Prepaid cellular and PCS services generated approximately 62% of our total
minutes of use and 67% of total cellular and PCS revenues in the 2002 third
quarter compared to approximately 68% of our total minutes of use and 72% of our
total cellular and PCS revenues in the 2001 third quarter. For the first nine
months of 2002, prepaid cellular and PCS services generated approximately 68% of
our total minutes of use and approximately 71% of our total cellular and PCS
revenues, compared to 68% of our total minutes of use and 74% of our total
cellular and PCS revenues during the first nine months of 2001.
At September 30, 2002, we had approximately 150,000 "incoming calls only"
subscribers, all of whom are prepaid subscribers. The substantial majority of
"incoming calls only" subscribers generate little or no traffic. We currently
anticipate voluntarily disconnecting a substantial number of our "incoming calls
only" cellular and PCS subscribers in the fourth quarter of 2002, which could
result in lower airtime and access charge revenues.
Our average monthly churn rate for cellular and PCS services increased to
4.6% in the 2002 third quarter from 3.0% in the 2001 third quarter and decreased
to 4.3% during the first nine months of 2002 compared to 5.1% during the first
nine months of 2001. We anticipate that the cellular and PCS services churn rate
will remain relatively high while we continue our policy of disconnecting
low-usage "incoming calls only" prepaid subscribers.
PAGING. Paging revenues decreased 41.1% to approximately $143,000 in the
2002 third quarter from $243,000 in the 2001 third quarter, and decreased 40.5%
to $495,000 during the first nine months of 2002 from $832,000 during the first
nine months of 2001, primarily as a result of the Company's decision to focus on
migrating new customers away from paging services and into prepaid cellular
services. At September 30, 2002, we had 9,457 paging subscribers compared to
17,878 paging subscribers at September 30, 2001. Our average monthly churn rate
15
for paging services remained stable at approximately 2.0% in the 2002 third
quarter and 2001 third quarter, and increased to 2.9% during the first nine
months of 2002 compared to 2.4% during the first nine months of 2001.
SALE OF EQUIPMENT. Revenues from the sale of equipment increased 3.3% to
$481,000 in the 2002 third quarter from $466,000 in the 2001 third quarter, and
decreased 35.1% to $1.7 million during the first nine months of 2002 compared to
$2.7 million during the first nine months of 2001, 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 increase
cellular and PCS service revenues.
INSTALLATION AND ACTIVATION FEES. Installation and activation revenues
decreased 67.0% to $794,000 in the 2002 third quarter from $2.4 million in the
2001 third quarter, and decreased 64.9% to $3.3 million during the first nine
months of 2002 compared to $9.4 million during the first nine months of 2001.
The decrease reflects lower installation fees charged for local access lines and
wireless services. In addition, installation and activation revenues for the
2001 periods include fees deferred from previous periods in accordance with SEC
Staff Accounting Bulletin 101. Most fees so deferred have been recognized before
2002 and such fees have decreased since 2001. (See "Critical Accounting
Policies").
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 $5.9 million in the third quarter and totaled $16.9 million during the
first nine months of 2002.
At September 30, 2002, we had 71,081 cable subscribers, including 62,035
basic and premium subscribers, and 7,692 commercial rooms, which include
commercial establishments (for example, hotels) 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. Programming services revenues totaled
$4.2 million in the 2002 third quarter and $12.1 million during the first nine
months of 2002. Advertising revenues totaled $1.6 million in the 2002 third
quarter and $4.5 million during the first nine months of 2002.
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 and 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 11.9% to $64.9 million in the 2002 third
quarter from $58.0 million in the 2001 third quarter, and increased 20.3% to
$193.6 million during the first nine months of 2002 from $161.0 million during
the first nine months of 2001. These results reflect higher selling, general and
administrative expenses, as well as increased 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. The increase in operating costs and expenses also reflects
higher transport and access charges costs, as well as the integration of our
16
cable television operations and the launch of operations in Panama. As a
percentage of revenues, operating costs increased to 99.0% in the 2002 third
quarter from 95.7% in the 2001 third quarter, and increased to 98.6% during the
first nine months of 2002 from 90.9% during the first nine months of 2001.
TRANSPORT AND ACCESS CHARGES. Transport and access charges costs
increased by 10.6% to $19.7 million in the 2002 third quarter from $17.8 million
in the 2001 third quarter, and increased by 15.8% to $57.3 million during the
first nine months of 2002 from $49.5 million during the first nine months of
2001, primarily as a result of increased interconnection costs and higher
outbound carrier costs. Interconnection costs increased by 32.2% to $9.5 million
during the 2002 third quarter from $7.2 million during the 2001 third quarter,
and increased by 25.8% to $25.7 million during the first nine months of 2002
from $20.5 million during the first nine months of 2001, as the result of a
higher volume of traffic terminating in other networks. Outbound carrier costs
decreased by 9.5% to $7.3 million in the 2002 third quarter from $8.1 million in
the 2001 third quarter, and increased by 10.4% to $23.3 million during the first
nine months of 2002 from $21.1 million during the first nine months of 2001,
reflecting higher volume of outbound international calls terminating in non-U.S.
destinations.
PROGRAMMING COSTS. Programming costs totaled $1.9 million in the 2002
third quarter and totaled $4.7 million during the first nine months of 2002,
primarily related to fees paid to providers for signals and programming content.
NETWORK DEPRECIATION AND NON-NETWORK DEPRECIATION EXPENSE. Network
depreciation increased 17.5% to $13.7 million in the 2002 third quarter from
$11.6 million in the 2001 third quarter, and increased 22.1% to $39.6 million
during the first nine months of 2002 from $32.5 million during the first nine
months of 2001, 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 20.3% to $3.3 million during the
2002 third quarter from $2.8 million during the 2001 third quarter, and
increased 30.7% to $9.6 million during the first nine months of 2002 from $7.4
million during the first nine months of 2001.
EXPENSE IN LIEU OF INCOME TAXES. In the past, we made 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. Beginning September 1,
2002, in accordance with a Presidential decree, we no longer pay taxes in lieu
of income tax but pay the tax imposed on all Dominican corporations: a tax equal
to the greater of 25% of net taxable income or 1.5% of gross revenues.
Expense in lieu of income taxes during the 2002 third quarter decreased
by 38.0% to $1.6 million from $2.5 million in the 2001 third quarter, and
decreased by 30.6% to $6.2 million during the first nine months of 2002 from
$9.0 million during the first nine months of 2001.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses, excluding non-network depreciation expense, increased
4.5% to $23.3 million in the 2002 third quarter from $22.3 million in the 2001
third quarter, and increased 22.2% to $71.6 million during the first nine months
of 2002 from $58.6 million during the first nine months of 2001. The amount of
selling, general and administrative expenses reflects increased marketing and
advertising expenses, higher provision for uncollectible accounts, occupancy
costs, and other related expenses. These increases were offset in part by lower
commissions paid to wholesale distributors of prepaid cards, and lower salaries
and other personnel compensation costs during the third quarter, as a result of
a reduction in the number of employees.
Marketing expenses decreased to $1.6 million in the 2002 third quarter
from $3.0 million in the 2001 third quarter, and increased to $6.0 million
during the first nine months of 2002 from $4.7 million during the first nine
months of 2001. Expenses for the provision of uncollectible accounts increased
to $2.2 million in the 2002 third quarter from $1.9 million in the 2001 third
quarter, and increased to $6.2 million during the first nine months of 2002 from
$2.9 million during the first nine months of 2001, primarily as a result of a
higher number of contract local service, cellular and PCS and basic and premium
cable subscribers. Occupancy costs increased to $2.0 million in the 2002 third
quarter from $1.8 million in the 2001 third quarter, and increased to $5.9
million during the first nine months of 2002 from $4.9 million during the first
nine months of 2001.
17
Other expenses, which include among others insurance, legal expenses,
maintenance and repair of vehicles and equipment, and other professional
services, increased to $7.4 million in the 2002 third quarter from $6.1 million
in the 2001 third quarter, and increased to $20.9 million during the first nine
months of 2002 from $16.0 million during the first nine months of 2001. Salaries
and other compensation to personnel decreased to $7.1 million in the 2002 third
quarter from $7.4 million in the 2001 third quarter, and totaled $22.4 million
during the first nine months of 2002 compared to $22.2 million during the first
nine months of 2001. At September 30, 2002, we had 1,489 employees compared to
1,491 employees at September 30, 2001.
As a percentage of total operating revenues, selling, general and
administrative expenses, excluding non-network depreciation expense, decreased
to 35.5% in the 2002 third quarter compared to 36.7% in the 2001 third quarter
and increased to 36.5% during the first nine months of 2002 compared to 33.1%
during the first nine months of 2001.
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, increased by 33.6% to $511,000 in the 2002 third quarter from $383,000
in the 2001 third quarter and decreased by 32.1% to $1.5 million during the
first nine months of 2002 from $2.2 million during the first nine months of
2001. Other costs, which consist of the cost of sale of prepaid services,
decreased to $160,000 in the 2002 third quarter from $488,000 in the 2001 third
quarter and decreased to $1.1 million during the first nine months of 2002 from
$1.5 million during the first nine months of 2001.
OPERATING INCOME. Operating income decreased to $656,000 in the 2002
third quarter compared to $2.6 million in the 2001 third quarter, and decreased
to $2.8 million during the first nine months of 2002 compared to $16.1 million
during the first nine months of 2001. Operating income as a percentage of total
operating revenues decreased to 1.0% in the 2002 third quarter from 4.3% in the
2001 third quarter, and decreased to 1.4% during the first nine months of 2002
from 9.1% during the first nine months of 2001.
OTHER INCOME (EXPENSES). Other expenses increased to $15.5 million in
the 2002 third quarter from $8.1 million in the 2001 third quarter, and
increased to $43.9 million during the first nine months of 2002 from $26.7
million during the first nine months of 2001, reflecting increased interest
expenses resulting from higher average aggregate amount of outstanding debt.
Interest expense increased to $17.2 million in the 2002 third quarter from $8.7
million in the 2001 third quarter, and increased to $46.9 million during the
first nine months of 2002 from $28.5 million during the first nine months of
2001. Interest expense also has increased because the amount of interest
capitalized has decreased with the decrease in capital expenditures. During the
first nine months of 2002, we incurred debt primarily to purchase network and
telecommunications equipment.
NET EARNINGS (LOSS). Net loss totaled $14.9 million, or $.34 cents per
share, in the 2002 third quarter compared to a net loss of $5.5 million, or $.19
cents per share, in the 2001 third quarter. For the first nine months of 2002,
net loss totaled $39.7 million, or $.92 cents per share, compared to a net loss
of $10.7 million, or $.37 cents per share, during the first nine months of 2001.
EBITDA. Earnings before interest and other income, taxes and
depreciation and amortization increased by 1.6% to $20.0 million in the 2002
third quarter from $19.7 million in the 2001 third quarter, and decreased by
8.0% to $60.2 million during the first nine months of 2002 from $65.4 million
during the first nine months of 2001. 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 September 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
18
(but with no maximum life). The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after September 30, 2001. With respect
to goodwill and intangible assets acquired prior to July 1, 2001, we adopted
SFAS 142 effective January 1, 2002. As of December 31, 2001, and September 30,
2002, the composition of goodwill and intangible assets totaled $36.5 million,
primarily related to the acquisitions of TCN Dominicana, S.A. and of Cellular
Communications of Panama, S.A. (subsequently renamed TRICOM Panama, S.A.) during
2001.
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 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 new subscribers approximately $50,
which includes a one-time installation fee and the first month of service. Given
current market conditions, we do not foresee charging installation fees in the
future. We do not have sufficient experience to determine the average customer
service life for cable subscribers. We recognized revenues from cable activation
fees for the nine months ended September 30, 2002 in the aggregate of
approximately $185,000.
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 is stated
at the estimated proceeds from the sale, less costs to sell.
19
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.
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 operate and expand our
telecommunications networks. For the first nine months of 2002, we made capital
expenditures of $52.7 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.
The amount expended represents a significant reduction from expenditures in
prior years, including $96.1 million in the first nine months of 2001. This
reflects our previously announced program to reduce capital expenditures by
optimizing the use of our existing network, while minimizing new capital needs
and conserving cash. We currently anticipate making capital expenditures of
approximately $60 million in 2002 to increase capacity and coverage in our local
access and mobile networks, continue deployment of cable television set top
boxes as well as 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 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 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, current cash 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, although we do not currently
contemplate any acquisitions and our 11 3/8% Senior Notes due 2004 limit the
amount that we can invest in joint ventures. Acquisitions, investments or
potential debt repayments 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 $20.3 million for the
first nine months of 2001 compared to $6.3 million for the first nine months of
2002. We had net accounts receivable of $34.5 million and $29.5 million at
December 31, 2001 and September 30, 2002, respectively. Our allowance for
doubtful accounts increased to $7.1 million at September 30, 2002 from $4.1
million at December 31, 2001, primarily as a result of higher number of contract
local service, cellular and PCS, and basic and premium cable subscribers.
Our indebtedness was approximately $528.9 million at September 30, 2002, of
which $200.0 million was our 11 3/8% senior notes due 2004, $219.3 million was
long-term borrowings and capital leases, with maturities ranging
20
from fifteen months to six years, and $109.6 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 September 30, 2002,
our U.S. dollar borrowings and commercial paper, other than the 11 3/8% senior
notes due 2004, had interest rates ranging from 4.62% per annum to 14% per
annum, and our Dominican peso borrowings and commercial paper had interest rates
ranging from 15% per annum to 32% per annum. At September 30, 2002, our U.S.
dollar borrowings, other than the 11 3/8% senior notes due 2004, totaled $289.8
million and our peso borrowings totaled $39.1 million.
At September 30, 2002, we had approximately $20.6 million in cash and
investments. In addition, we had credit facilities, which, in the aggregate,
permit us to borrow up to $289.1 million. At September 30, 2002, there was
$266.8 million outstanding under these facilities. We had approximately $22.3
million available for borrowing under these facilities, of which $18.5 million
was under facilities with maturities of less than one year.
At September 30, 2002, we had $87.4 million of short-term and long-term
approved credit facilities with Dominican banks and institutions and $201.7
million of U.S. dollar-denominated approved credit facilities with international
banks and financial institutions. In addition, at September 30, 2002, the
Company had in place a $74 million dollar-denominated and peso-denominated
commercial paper program in the Dominican Republic. At September 30, 2002, we
had outstanding $62.1 million under such program. The proceeds from the issuance
of commercial paper have been used to finance the purchase of telecommunications
related assets.
At September 30, 2002, our current liabilities exceeded our current assets by
$115.6 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 third quarter of
2002, we restructured approximately $8.0 million of our short-term debt to
long-term debt, extending the maturity of such debt with a financial institution
for a period of three years, with an interest rate of 11% per annum with respect
to dollar denominated borrowings and 28% per annum with respect to peso
denominated borrowings. We will seek additional credit facilities with
international banks to refinance our short-term credit facilities.
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,
and $3.9 million at September 30, 2002, 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. GE Capital waived such non-compliance and 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. At September 30, 2002, we were in
compliance with the GE Capital financial covenants.
The following table contains certain information concerning the Company's
material contractual obligations at September 30, 2002.
PAYMENTS DUE BY PERIOD
- ---------------------------------------- -----------------------------------------------------------------------
CONTRACTUAL CASH OBLIGATIONS TOTAL LESS THAN 1 1 - 3 4 - 5 AFTER 5
YEAR YEARS YEARS YEARS
- ---------------------------------------- --------------- -------------------------------------------------------
Short-Term Debt $ 101.4 101.4 - - -
Long-Term Debt 411.9 7.2 344.0 59.6 1.1
Capital Lease Obligations 15.6 1.0 9.4 5.2 -
Operating Leases - - - - -
Unconditional Purchase Obligations - - - - -
Other Long-Term Obligations - - - - -
-----------------------------------------------------------------------
TOTAL $ 528.9 109.6 353.4 64.8 1.1
=======================================================================
21
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. 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.
In connection with the offering of our 11 3/8 % senior notes due 2004, our
principal shareholders, a subsidiary of GFN Corporation, Ltd., and Motorola,
Inc., entered into voting arrangements with the trustee under the indenture with
respect to the notes. The agreements provided for the grant to the trustee of
proxies giving it the right to vote all shares of common stock upon the
occurrence of specified events of default. GFN and Motorola had the right to
terminate the voting agreements, in certain events, including the Dominican
Republic becoming bound by the United Nations Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, which occurred during 2002. GFN and
Motorola exercised their rights to terminate the voting agreements.
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 September
30, 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
$120 million at September 30, 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 September 30, 2002, we had $328.9
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 $289.8 million
was U.S. dollar denominated, and the remaining $39.1 million was Dominican peso
denominated. Of the $289.8 million of U.S. dollar dominated debt, $51.1 million
was borrowed from Dominican banks, $55.5 million was commercial paper
outstanding issued in Dominican markets, while the remaining $183.1 million was
borrowed from international banks, including branches in the Dominican Republic.
Of the total $328.9 million outstanding, $305.2 million had fixed interest
rates, while the remaining $23.7 million had variable interest rates. At
September 30, 2002, our short-term and long-term U.S. dollar denominated
borrowings and commercial paper bore interest at rates ranging from 4.62% per
annum to 14% per annum. At September 30, 2002, our short-term and long-term
Dominican peso denominated borrowings and commercial paper bore interest at
rates ranging from 15% per annum to 32% per annum. A 10% increase in the average
rate for our variable rate debt would have increased our loss for the 2002 third
quarter by approximately $1.8 million.
FOREIGN EXCHANGE RISKS
We are subject to currency exchange risks. During the first nine months
of 2002, we generated revenues of $65.2 million in U.S. dollars and $131.2
million in Dominican pesos. In addition, at September 30, 2002, we had
22
$289.8 million of U.S. dollar-denominated debt outstanding, excluding the $200.0
million principal amount of the 11 3/8% senior notes due 2004.
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 nine months of 2002, the average
official exchange buying rate was RD$17.41 per $1.00 while the average private
market rate was RD$17.87 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 nine months of 2002, we
recognized an approximate $702,000 foreign exchange gain. If the Dominican peso
had devalued by an additional 10% against the U.S. dollar on average in the 2002
third quarter, then we would have realized an additional foreign exchange gain
of approximately $70,200.
PART II
OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
DOMINICAN TAX ASSESSMENT
In June 2002, we received notice from the Dominican Tax Service
claiming that we owed additional amounts in respect of taxes in lieu of income
taxes for the period from January 1, 1999 through June 30, 2001 (the last day
through which Dominican tax authorities have audited our tax payments) and for
withholding tax on our investment in our wholly-owned subsidiary, TRICOM
Latinoamerica and on certain other payments.
The Service claims that we miscalculated the tax in lieu of income tax
payable under our concession agreement. The concession agreement provides that
we pay, 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 other related telecommunications services minus access charges paid
to other carriers 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 service claims that this
tax was required to be calculated based upon accrued revenues not collections
and seeks RD$98.8 million ($5.3 million), plus penalties and interest. Beginning
September 1, 2002, in accordance with a Presidential decree, we no longer will
pay taxes in lieu of income tax but will pay the tax imposed on all Dominican
corporations.
The Service also claims that we were required to withhold and pay to
the tax service 25% of the amount of our investment in TRICOM Latinoamerica,
approximately $35 million. The 25% withholding tax generally applies to payments
from Dominican source income for services to non-Dominican vendors and to
certain dividends. The Service seeks RD$168.1 million ($9.0 million), plus
penalties and interest, with respect to this claim.
We contested the notice with the Service, answering that we fully
complied with our concession agreement in calculating the tax based on
collections rather than accrued revenues and that there is no required
withholding tax on investments in a wholly owned subsidiary. On August 27, 2002,
the Service rejected substantially all of our
23
response and calculated our aggregate liability on the two claims, including
penalties and interest, as RD$668.3 million ($35.5 million). However, the
Service agreed to drop claims for withholding tax on other payments to non
Dominican service providers. Through December 2000, Dominican tax law imposed
penalties for delinquent tax payments equal to 25% of such delinquent payments
for the first month and 5% of the payments for each additional month in which
payment is not made. In January 2001, the penalties were reduced to 10% for the
first month and 4% for each additional month. Interest on delinquent payments
accrues at the rate of 2.58% per month. Penalties cease to accrue on the date of
notice from the Service. Interest continues to accrue until the delinquent tax
is paid or the claim is resolved.
We appealed the Tax Service determination to the Ministry of Finance
and both we and the Tax Service have the right to appeal any determination by
the Ministry of Finance to the tax courts. We believe that we have complied with
our tax obligations and do not believe that we will be required to pay a
substantial amount in assessments, penalties and interest.
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 3. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE.
ITEM 4. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. OTHER INFORMATION
None.
ITEM 7. EXHIBITS AND REPORTS ON FORM 6-K
(a) Exhibits.
None.
(b) Reports on Form 6-K. The Company filed with the Securities and Exchange
Commission Reports on Form 6-K on August 21, 2002 reporting the
Company's results of operations for the three months ended June 30,
2002.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRICOM, S.A
Dated: November 19, 2002 By: /s/ CARL CARLSON
---------------
Carl Carlson
Executive Vice President
and Member of the
Office of the President
25