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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 20-F
(MARK ONE)
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR
DECEMBER 31, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-14816
[TRICOM(R) LOGO]
TRICOM, S.A.
(Exact name of Registrant as specified in its charter)
DOMINICAN REPUBLIC
(Jurisdiction of incorporation or organization)
AVENIDA LOPE DE VEGA NO. 95, SANTO DOMINGO, DOMINICAN REPUBLIC
(Address of principal executives offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class: on which registered:
AMERICAN DEPOSITARY SHARES THE NEW YORK STOCK EXCHANGE
CLASS A COMMON STOCK, PAR VALUE RD$10 PER SHARE
Securities registered pursuant to Section 12(g) of the Act.
NONE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
11-3/8% SENIOR NOTES DUE SEPTEMBER 1, 2004
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
AT DECEMBER 31, 2002, THERE WERE 45,458,041 SHARES OF CLASS A COMMON STOCK AND
19,144,544 SHARES OF CLASS B STOCK ISSUED AND OUTSTANDING.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark which financial statement item the Registrant has elected
to follow:
Item 17 / / Item 18 /X/
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TABLE OF CONTENTS
<Table>
<Caption>
PAGE
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PART I.............................................................................................................4
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.............................................4
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE...........................................................4
ITEM 3. KEY INFORMATION...................................................................................4
ITEM 4. INFORMATION ON THE COMPANY.......................................................................18
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTUS....................................................38
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.......................................................54
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS................................................57
ITEM 8. FINANCIAL INFORMATION............................................................................61
ITEM 9. THE OFFER AND LISTING............................................................................64
ITEM 10. ADDITIONAL INFORMATION...........................................................................65
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................71
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...........................................72
PART II...........................................................................................................72
ITEM 13. DEFAULTS, DIVIDED ARREARAGES AND DELINQUENCIES...................................................72
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.........................................................................................................72
ITEM 15. CONTROLS AND PROCEDURES..........................................................................72
ITEM 16. [RESERVED].......................................................................................73
PART III..........................................................................................................73
ITEM 17. FINANCIAL STATEMENTS.............................................................................73
ITEM 18. FINANCIAL STATEMENTS.............................................................................73
ITEM 19. EXHIBITS.........................................................................................74
</Table>
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* Omitted because the Item is not applicable or the answer is negative.
** The Company has completed Item 18 in lieu of this Item.
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GENERAL INFORMATION
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report, which are not historical
facts, are forward-looking statements that involve risks and uncertainties.
Management cautions the reader that these forward-looking statements are only
predictions; actual events or results may differ materially as a result of risks
facing the Company. Such risks include, but are not limited to, the following
factors:
- expectations as to the amount of cash required to operate as a going
concern;
- expectations about our ability to restructure successfully our capital
structure, including through the completion of our proposed offer to
exchange our existing 11 3/8% senior notes due 2004 for new notes;
- future financial performance;
- the effect of our substantial indebtedness on our 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;
- the volatility and depreciation of the Dominican peso against the U.S.
dollar;
- the effect if we lose our appeal of a tax assessment levied upon us by
the Dominican Tax Service;
- competition in Dominican markets for local, long distance and wireless
services with multinational telecommunications providers;
- reduced revenues due to our business plan of focusing on higher usage
customers and disconnecting lower usage or unprofitable customers;
- customer non-payments;
- 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;
- fraudulent or pirated use of our wireless and cable television
services;
- our dependence on third parties for television programming;
- the possible effect of interruptions in cable service;
- our vulnerability to viruses, hackers and other disruptions;
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- the effect of objections filed with Dominican regulatory authorities
to our purchase of our cable television operations;
- litigation in Panama initiated by one of our competitors;
- the continuation of a favorable political, economic and regulatory
environment in each of the Dominican Republic and Central America.
- reliance on one supplier to implement our digital wireless network in
Panama;
- concerns about health risks associated with wireless equipment;
- downturns in the Dominican economy;
- 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;
- inability to enforce claims in the Dominican Republic based on U.S.
securities laws;
- inability of holders of ADS to determine many decisions due to a lack
voting power;
- the ability under Dominican corporate law of our major shareholder to
release directors and officers from liability to us and our
shareholders; and
- the possible negative impact on the market price of our ADSs of a
large number of shares eligible for resale.
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PART I.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
The following table provides selected financial and operating data of
TRICOM for the periods indicated. We have derived the selected financial data
from our consolidated financial statements, which have been audited by KPMG,
independent auditors. You should read the information in the following tables in
conjunction with "Operating and Financial Review and Prospects" and the
consolidated financials included in this Annual Report.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)(1)
STATEMENTS OF OPERATIONS DATA:
Operating revenues:
Toll ........................................ $ 17,645 $ 23,118 $ 28,666 $ 29,018 $ 25,984
International ............................... 50,332 60,592 84,187 82,024 87,849
Local service ............................... 11,863 33,299 51,310 63,419 65,739
Cellular and PCS ............................ 20,364 26,474 35,796 37,302 37,664
Data and Internet ........................... 1,079 560 3,461 8,268 10,969
Paging ...................................... 4,528 2,696 1,704 1,051 603
Sale of equipment ........................... 4,115 7,690 5,263 2,686 1,730
Installation and activation fees ............ 12,937 15,502 13,749 14,348 5,344
Cable(2) .................................... - - - 4,736 21,487
Other ....................................... 2,640 889 162 919 671
------------ ------------ ------------ ------------ ------------
Total operating revenues ................ 125,501 170,819 224,298 243,772 258,040
------------ ------------ ------------ ------------ ------------
Operating costs:
Transport and access charges (depreciation
not included) ............................. 32,309 43,688 68,608 68,337 77,226
Programming costs (depreciation not
included)(2) .............................. - - - 1,225 6,712
Impairment charge on long-lived assets ...... - - - - 12,084
Impairment of goodwill and other intangible
assets .................................... - - - 7,650
Network depreciation ........................ 11,382 15,983 29,342 44,510 53,235
Expense in lieu of income taxes(3) .......... 9,562 12,764 10,174 12,646 5,897
Selling, general and administrative expenses,
including non-network depreciation
expense of $3,240, $4,855, $6,824,
$9,922 and $12,959, in 1998, 1999,
2000, 2001 and 2002, respectively ......... 39,379 51,501 70,691 98,755 109,583
Cost of equipment sold ...................... 2,244 3,988 2,911 2,070 1,349
Other ....................................... 1,148 1,433 1,550 1,746 1,233
------------ ------------ ------------ ------------ ------------
Total operating costs ................... 96,024 129,357 183,276 229,289 274,968
------------ ------------ ------------ ------------ ------------
Operating income (loss): ....................... 29,478 41,462 41,022 14,484 (16,928)
------------ ------------ ------------ ------------ ------------
Other income (expenses):
Interest expense, net ....................... (12,873) (20,041) (30,736) (39,680) (62,331)
Foreign currency exchange gain (loss) ....... 104 (203) (303) (260) 2,881
Gain on sale of land ........................ - 898 - - -
Gain (loss) on sale of fixed assets ......... - - 30 (283) 389
Other, net .................................. 845 179 (197) 1,362 (1,487)
------------ ------------ ------------ ------------ ------------
Other expenses, net ..................... (11,924) (19,166) (31,206) (38,861) (60,548)
</Table>
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<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)(1)
STATEMENTS OF OPERATIONS DATA:
Earnings (loss) before income taxes, minority
interest and cumulative effect of accounting
change ...................................... 17,554 22,296 9,816 (24,378) (77,476)
Income taxes .................................. 352 (142) (588) (511) (948)
Minority interest ............................. - - - 1,775 1,871
Extraordinary item ............................ - - - - -
Cumulative effect of accounting change:
Organization costs .......................... - (120) - - -
Installation and activation revenues ........ - - (16,453)(4) - -
------------ ------------ ------------ ------------ ------------
Net earnings (loss) ...................... $ 17,906 $ 22,035 $ (7,226) $ (23,11) $ (76,553)
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)(1)
Basic earnings (loss) per common share:
Earnings before extraordinary item and
cumulative effect of accounting
change .................................... $ 0.78 $ 0.89 0.33 $ (0.78) (1.77)
Extraordinary item ............................ - - - - -
Cumulative effect of accounting change ........ - - (0.59)(4) - -
------------ ------------ ------------ ------------ ------------
Net earnings (loss) - basic and diluted ....... $ 0.78 $ 0.89 $ (0.26) $ (0.78) (1.77)
============ ============ ============ ============ ============
Average number of common shares outstanding .... 22,945 24,845 27,724 29,571 43,400
</Table>
<Table>
<Caption>
AT DECEMBER 31,
1998 1999 2000 2001 2002
BALANCE SHEET DATA: ............................ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents(5) ................... $ 15,377 $ 13,460 $ 18,200 $ 27,776 $ 21,981
Working capital (deficit) ...................... (19,784) (83,659) (125,299) (175,567) (89,421)
Property, plant and equipment, net ............. 330,456 455,045 586,224 685,917 668,120
Total assets ................................... 444,815 531,478 682,440 829,415 782,229
Long-term debt and capital leases (excluding
current portion) ............................. 200,000 240,413 276,744 317,826 385,584
Total indebtedness ............................. 279,257 336,468 398,809 498,155 467,563
Shareholders' equity ........................... 127,561 149,869 210,796 253,534 245,385
OTHER FINANCIAL DATA:
Capital expenditures (6) ....................... $ 142,101 $ 145,426 $ 168,913 $ 116,575 $ 65,764
Net cash provided by operating activities ...... 26,912 31,526 42,339 34,002 13,608
Net cash used in investing activities .......... 121,171 64,360 149,395 176,466 57,918
Net cash provided by financing activities ...... 104,065 30,966 111,796 136,840 37,815
EBITDA(7) ...................................... 53,662 75,261 87,681 82,613 77,853
Ratio of EBITDA to net interest expense ........ 4.2x 3.7x 2.9x 2.1x 1.3x
Ratio of total indebtedness to EBITDA .......... 5.2x 4.5x 4.5x 6.1x 6.0x
OTHER OPERATING DATA:
International minutes (in thousands) (8) ....... 231,075 360,532 597,204 768,394 1,058,542
Local access lines in service (at period end) .. 80,616 118,926 148,312 177,352 150,456
Wireless subscribers (at period end) ........... 108,532 176,080 284,991 364,059 432,058
Cable subscribers (at period end) (2)(9) ....... - - - 64,466 71,726
</Table>
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(1) Except per share, ratios and other operating data.
(2) We acquired our cable television operations on October 26, 2001.
(3) 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. We began paying income
tax on this basis on September 1, 2002. For each of the periods
presented, we made payments in lieu of income taxes equal to 10% of
gross domestic revenues, after deducting charges for access to the
local network, plus 10% of net international revenues. Had we paid
taxes for these periods on the same basis as all Dominican corporate
taxpayers, our taxes would have been $4.5 million for 1998, $5.5
million for 1999, $3.4 million for 2000, $3.7 million for 2001 and
$3.9 million for 2002, an aggregate tax payment savings of
approximately $33.5 million for 1998 through 2002, but without taking
into account additional payments that we would be required to
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make with respect to withholding requirements for, among other things,
services provided to us by non-Dominican vendors, from which our
concession agreement exempted us, but to which we are subject now.
We are required by Dominican law to withhold 5% interest paid to
financial institutions located outside the Dominican Republic and 25%
of all other payments abroad, excluding payments to foreign suppliers
for goods and equipment imported to the Dominican Republic. We are
required by the terms of various financings with non-Dominican lenders
including 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 1998, 1999, 2000, 2001 and 2002, this would have
resulted in additional payments with respect to the notes of $1.1
million (the notes were issued in August 1997 and the first interest
payment was made in 1998) and approximately $1.4 million for 1998,
$474,000 for 1999, $942,000 for 2000, $1.1 million for 2001 and
$588,000 for 2002, with respect to other borrowings, approximately
$3.9 million in the aggregate for 1998 through 2002.
(4) Effective January 1, 2000, we adopted the U.S. Securities and
Exchange Commission's Staff Accounting Bulletin No. 101, concerning
the recognition of revenue. This pronouncement provides that we
recognize net revenues from installations and activations over the
period in which we retain our clients. See "Operating and Financial
Review and Prospects" and note 14 of notes to consolidated financial
statements.
(5) Includes investments in the form of certificates of deposit of $15.2
million at December 31, 2001 and $15.9 million at December 31, 2002.
(6) Includes capital lease obligations entered into in 1999 of $26.2
million, in 2000 of $17.7 million and in 2001 of $3.3 million. We did
not enter into any capital lease obligations in 2002.
(7) EBITDA typically consists of earnings (loss) before interest and other
income and expenses, income taxes and depreciation and amortization.
As described in note 3 above, until September 1, 2002, we made
payments to the Dominican government in lieu of income taxes. As a
result, we calculated EBITDA prior to the deduction of payments to the
Dominican government in lieu of income taxes. Our calculation of
EBITDA also adds impairment charges, which are non-cash charges
related to fixed and intangible assets. Our calculation of EBITDA may
not be comparable to EBITDA calculated by other companies. We believe
that EBITDA is useful to investors because EBITDA is commonly used in
the telecommunications industry to analyze companies on the basis of
operating performance, leverage and liquidity. EBITDA also is used in
covenants in bank credit facilities and high yield indentures to
measure a borrower's ability to incur debt and for other purposes,
and may be the preferred measure for these purposes. Covenants in
the indenture for our 11 3/8% senior notes due 2004, which limit our
ability to incur debt and make restricted payments, are based
upon EBITDA.
Although a number of alternate measures exist, including cash flow
provided by operations, EBITDA is the primary basis used by our
management to measure the operational strength and performance of all
of our operating segments and units. EBITDA eliminates the significant
level of non-cash depreciation and amortization expenses that results
from the capital-intensive nature of our business. Because we use
EBITDA as the measure to evaluate the performance of our businesses,
we reconcile it to operating income, the most directly comparable
financial measure calculated and presented in accordance with
generally accepted accounting principals.
EBITDA does not purport to represent cash generated or used by
operating activities and should not be considered in isolation or as a
substitute for a measure of performance in accordance with generally
accepted accounting principles.
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The table below reconciles EBITDA to Operating Income.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
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1998 1999 2000 2001 2002
---------- ---------- ---------- ---------- ----------
Operating income $ 29,478 $ 41,462 $ 41,022 $ 14,484 $ (16,928)
Plus :
Amortization of deferred cellular equipment
costs - - - 391 2,177
Amortization of radio frequency rights - 198 320 660 778
Expense in lieu of income taxes 9,562 12,764 10,174 12,646 5,897
Impairment charge on long-lived assets - - - - 12,085
Impairment of goodwill and other intangible
assets - - - - 7,650
Network depreciation 11,383 15,983 29,342 44,510 53,235
Non-network depreciation expense 3,240 4,855 6,824 9,922 12,959
--------------------------------------------------------------
EBITDA $ 53,662 $ 75,261 $ 87,681 $ 82,613 $ 77,853
==============================================================
</Table>
(8) Includes both inbound and outbound international long distance
minutes.
(9) Includes, at December 31, 2001, 56,896 basic subscribers and 7,570
commercial rooms and, at December 31, 2002, 62,543 basic subscribers,
7,715 commercial rooms and 1,468 subscribers for cable modem services,
digital audio programming and other services. Commercial rooms include
commercial establishments (for example, any hotel) or multiple
dwelling units (for example, any apartment building or hospital), for
which we receive a bulk rate for basic cable service offered by us.
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EXCHANGE RATES
The Federal Reserve Bank of New York does not report a noon buying rate for
Dominican pesos. The following table sets forth the average official rate for
each of the five most recent years and each fiscal quarter within those years,
and the high and low official exchange rates for each of the previous six
months, all as reported by the Central Bank. The average official rate has been
calculated by using the average of the exchange rates on the last day of each
month during the period. At May 12, 2003, the average official exchange rate was
RD$24.77 per $1.00 while the average private market rate was RD$26.05 per $1.00.
<Table>
<Caption>
OFFICIAL RATE
--------------------------------------------
YEAR ENDED DECEMBER 31, HIGH LOW AVG.
------------- ------------ ----------------
(RD$ PER $)
1998 15.49 14.02 14.70
1999 15.93 15.50 15.83
2000 16.56 15.91 16.18
2001 16.99 16.58 16.69
2002 17.63 16.97 17.45
MONTH / PERIOD ENDED
November 30, 2002 17.56 17.56 17.56
December 31, 2002 17.56 17.56 17.56
January 31, 2003 17.56 17.56 17.56
February 28, 2003 24.50 22.77 23.87
March 31, 2003 23.76 21.90 22.72
April 30, 2003 24.50 23.38 23.78
May 2003 (through May 12, 2003) 24.77 24.40 24.58
<Caption>
PRIVATE MARKET RATE
--------------------------------------------
YEAR ENDED DECEMBER 31, HIGH LOW AVG.
------------- ------------ ----------------
(RD$ PER $)
1998 15.86 14.41 15.23
1999 16.18 15.84 16.03
2000 16.63 16.08 16.37
2001 17.06 16.65 16.88
2002 22.83 17.03 18.54
MONTH / PERIOD ENDED
November 30, 2002 21.56 20.33 20.66
December 31, 2002 22.83 20.71 21.45
January 31, 2003 22.59 20.79 22.02
February 28, 2003 22.58 22.50 24.68
March 31, 2003 25.19 22.53 23.61
April 30, 2003 25.58 23.89 24.69
May 2003 (through May 12, 2003) 26.05 25.34 25.74
</Table>
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RISK FACTORS
You should carefully consider the risks described below and other
information in this Annual Report.
RISKS RELATING TO OUR CAPITAL STRUCTURE AND LIQUIDITY
OUR CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED ON A GOING CONCERN
BASIS.
Our consolidated financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
satisfaction of liabilities in the ordinary course of business. However, because
of recurring operating losses, a continuing working capital deficit and the
effects of the devaluation of the Dominican peso, the realization of assets and
satisfaction of liabilities are subject to uncertainty. We have financed our
capital expenditure and working capital requirements, to the extent we did not
generate sufficient cash flow from operations, with borrowings, principally in
Dominican markets. A substantial portion of our borrowings continue to be short
term borrowings. In light of our recent financial results and adverse
developments in the Dominican economy, we may not be able to generate the cash
required to operate as a going concern or to obtain the financing necessary to
continue funding our business. Our independent auditors report on our 2002
financial statements contains an explanatory paragraph that states that these
factors, among others, create substantial doubt about our ability to continue as
a going concern.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR COMPETITIVE
POSITION.
We are highly leveraged. At December 31, 2002, we had outstanding
approximately $467.6 million in aggregate principal amount of indebtedness,
including capital leases, and total shareholders' equity of $245.4 million.
The degree to which we are leveraged could have important consequences to
us, including the following:
- a substantial portion of our cash flow must be used to pay interest on
our indebtedness and therefore is not available for use in our
business;
- our high degree of indebtedness increases our vulnerability to changes
in general economic and industry conditions;
- our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or
other purposes could be impaired;
- we have much more indebtedness than Codetel, our principal
telecommunications competitor in the Dominican Republic, which may be
a competitive disadvantage in our principal market;
- because some of our borrowings are short-term or at variable rates of
interest, we are vulnerable to interest rate fluctuations, which could
result in our incurring higher interest expenses if interest rates
increase;
- any devaluation of the Dominican peso would cause the cost of our
dollar-denominated debt to increase; and
- our failure to comply with covenants and restrictions contained in the
terms of our borrowings could lead to a default which could cause all
or a significant portion of our debt to become immediately payable.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS OR TO
BORROW TO MEET OUR DEBT SERVICE REQUIREMENTS.
Our ability to pay interest on our indebtedness and meet our debt service
obligations will depend on our future operating performance including our
ability to increase revenues and control expenses, which in turn depends on
successful implementation of our strategy and on financial, competitive,
regulatory, technical and other factors,
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many of which are beyond our control. Our interest expense was $42.1 million for
the year ended December 31, 2001 and $64.3 million for the year ended December
31, 2002, and our net cash provided by operating activities for these years was
$34.0 million and $13.6 million. Our 11 3/8% senior notes will mature in
September 2004. If we cannot extend the maturity of the notes, our cash flow
from operations will not be sufficient to repay the notes and we may not be able
to obtain financing from other sources. We have filed a registration statement
with the Securities and Exchange Commission with respect to a proposed offer to
exchange new notes for the currently outstanding 11 3/8% notes that mature in
September 2004. Holders of our existing notes are not required to exchange those
notes for new notes. If the proposed exchange offer and consent solicitation is
consummated, we may not be able to repay the notes that are not exchanged.
Approximately $82.0 million of our indebtedness will mature during the 12 months
ending December 31, 2003. These borrowings primarily are in the Dominican
financial markets, in which short-term financing is the primary form of lending.
However, our ability to refinance any of this indebtedness will depend on our
financial condition at the time it matures, the restrictions in the agreements
governing our indebtedness and other factors, including general market and
economic conditions, and we may not be able to refinance any of this
indebtedness on commercially attractive terms or at all. If refinancing is not
possible, our creditors could initiate bankruptcy proceedings, most likely in
the Dominican Republic, or we could be forced to dispose of business segments or
assets at unfavorable prices. In addition, our inability to refinance the notes
or our short term Dominican borrowings could result in our defaulting on our
other debt obligations.
WE DEPEND ON SHORT-TERM BORROWINGS IN THE DOMINICAN FINANCIAL MARKETS,
WHICH BEAR HIGH INTEREST RATES AND WE CANNOT BE CERTAIN THAT THEY WILL
CONTINUE TO BE AVAILABLE.
We fund a substantial portion of our capital expenditure and working
capital requirements with short-term borrowings in the Dominican financial
markets. At December 31, 2002, we had $82.0 million principal amount of
short-term borrowings outstanding, including commercial paper, with interest
rates ranging from 18% to 32% per annum for Dominican peso denominated
short-term debt and from 5.75% to 14% per annum for U.S. dollar denominated
short-term debt. As a result of the decline in value of the Dominican peso
and recent increase in the legal reserve requirements imposed on all
financial institutions by the Dominican government, peso denominated
borrowings have become more expensive. At December 31, 2002, we had
approximately $20.7 million of Dominican peso denominated debt and certain of
these borrowings are now at interest rates exceeding 32% per annum. Short
term borrowings in the Dominican Republic have maturities ranging up to 180
days and often are rolled over and payable on demand. However, our current
lenders may be unable or unwilling to lend to us in the future. Even if these
short-term borrowings continue to be available to us, due to their short-term
maturities, we may be required to repay them at times when replacement
financing is not available on commercially attractive terms.
THE VOLATILITY AND DEPRECIATION OF THE DOMINICAN PESO AGAINST THE U.S.
DOLLAR COULD REDUCE THE AMOUNT OF CASH WE WILL HAVE TO REPAY OUR
INDEBTEDNESS OR FUND OUR OPERATIONS, INCLUDING THE PURCHASE OF EQUIPMENT
AND CABLE TELEVISION PROGRAMMING.
For 2000, 2001 and 2002, we earned between 55% and 65% of our operating
revenues in Dominican pesos and the remainder of our operating revenues in
foreign currency, primarily in U.S. dollars. The percentage of operating
revenues in Dominican pesos could increase if we successfully increase our share
in Dominican local markets in accordance with our business strategy. The
Dominican peso depreciated in value against the U.S. dollar in 2002 by
approximately 26% and continued to depreciate in the first quarter of 2003. Most
of our outstanding indebtedness is U.S. dollar-denominated and must be paid in
U.S. dollars. Our vendors of communications equipment and cable programming
providers all require that we pay in U.S. dollars. The devaluation of the
Dominican peso could adversely affect our operating revenues and our ability to
purchase U.S. dollars in order to service our debt obligations, including the
payment of interest on the notes, and pay our equipment vendors and cable
program providers. Our purchase of substantial amounts of U.S. dollars in
Dominican markets could adversely affect the value of the Dominican peso in
relation to the U.S. dollar, and make these purchases more costly for us.
IF OUR APPEAL OF THE TAX ASSESSMENT LEVIED UPON US BY THE DOMINICAN TAX
SERVICE IS UNSUCCESSFUL, THEN WE MAY HAVE TO PAY A SUBSTANTIAL AMOUNT TO
THE DOMINICAN TAX SERVICE WHICH WOULD AFFECT OUR ABILITY TO FUND OUR
OPERATIONS AND WOULD REQUIRE US TO OBTAIN ADDITIONAL FINANCING.
In June 2002, we received notice from the Dominican Tax Service claiming
that we owe additional amounts for the period from January 1, 1999 through June
30, 2001 (the last day through which Dominican authorities have audited our tax
payments) (1) in respect of taxes in lieu of income taxes, (2) for withholding
tax on
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our investment in our wholly-owned subsidiary, TRICOM Latinoamerica and (3) on
certain other payments to non-Dominican vendors. In August 2002, the Tax Service
rejected our objection to the Service's claims, except for withholding tax on
payments to non-Dominican vendors. The Tax Service calculated our aggregate
liability on the two claims, including penalties and interest, as RD$668.3
million ($35.5 million). Interest continues to accrue on delinquent tax payments
at the rate of 2.58% per month until the delinquent tax is paid or the claim is
resolved. We appealed the Tax Service determination, but, if we are required to
pay a substantial amount in assessments, penalties and interest, it would reduce
funds available for our operations and likely would require us to obtain
additional financing, which may not be available to us on commercially
attractive terms or at all.
RISKS RELATED TO OUR OPERATIONS
OUR PRINCIPAL COMPETITOR FOR THE PROVISION OF LOCAL, WIRELESS AND
INTERNATIONAL LONG DISTANCE SERVICES IN THE DOMINICAN REPUBLIC, CODETEL,
HAS SUBSTANTIALLY GREATER MARKET SHARE AND RESOURCES, WHICH MAY PREVENT US
FROM MAINTAINING OR INCREASING OUR MARKET SHARE.
We compete primarily with Compania Dominicana de Telefonos C. por A., or
Codetel, a wholly owned subsidiary of Verizon Communications Inc. Codetel has an
established market presence, networks and resources substantially greater than
ours. At December 31, 2002, approximately 84% of the Dominican Republic's local
access line customers were customers of Codetel. Codetel also had the largest
share of the market for cellular and PCS services, approximately 49% at that
date. Codetel's presence is particularly strong in the market segments that we
now are targeting, including residential and corporate post-paid subscribers for
wireless and local services, who generate greater revenues than pre-paid
individual subscribers. The growth of our market share among residential and
corporate post-paid subscribers depends upon our ability to convince Codetel
customers to either add, or switch to, the telephony services we offer. If
Codetel implements significant price reductions for particular services, we may
be forced to reduce our rates in response in order to remain competitive. In
addition, Codetel could expend significantly greater amounts of capital than are
available to us in order to upgrade its network and/or sustain price reductions
over a prolonged period. As a result, we may not be able to maintain or increase
our market share for local services or in other markets in which we compete with
Codetel.
THERE ARE NEW ENTRANTS IN THE DOMINICAN MARKETS, PARTICULARLY FOR WIRELESS
SERVICES, WHICH HAVE INCREASED COMPETITION FOR OUR SERVICES, AND COULD
REDUCE OUR MARKET SHARE OR INCREASE PRICE COMPETITION.
In addition to Codetel, we face substantial competition in the wireless
market.
- In the fourth quarter of 2000, Orange, a subsidiary of France Telecom
Group, initiated cellular operations. In 2001, Orange developed an
aggressive marketing strategy based on offering services at discounts.
We believe that Orange subscribers represent in excess of
approximately 20% of subscribers for wireless services in the
Dominican Republic. Orange also employs GSM technology which is the
prevalent technology used in Europe and makes its services compatible
with handsets that many tourists use.
- In January 2000, Centennial Communications Corp. acquired 70% of All
America Cables & Radio, Inc., an integrated telecommunications
provider. Centennial is attempting to expand All America's share of
the Dominican market for cellular and PCS services.
As a result of these and other potential new entrants, we expect to face
more competition in the Dominican telecommunications market in the future,
including from international communications companies with vastly greater
resources than ours, which could adversely affect our ability to maintain our
market share or require us to lower prices.
In the international long distance market, investment by U.S.
telecommunications companies in Dominican markets could limit the number of U.S.
carriers that would send a significant number of minutes to us or otherwise
adversely affect our ability to generate international settlement revenue.
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OUR BUSINESS PLAN, WHICH NOW FOCUSES ON HIGHER USAGE CUSTOMERS AND INCLUDES
INVOLUNTARY DISCONNECTIONS OF LOWER USAGE OR UNPROFITABLE CUSTOMERS, MAY
NOT RESULT IN INCREASED REVENUES OR AVERAGE REVENUE PER USER OF OUR OTHER
CUSTOMERS.
Our business plan for our wireless and local services includes
disconnecting subscribers who use our service only to receive calls and do not
make many outgoing calls, which generate greater revenues for us, or do not use
our other services. At December 31, 2002, we had disconnected a substantial
portion of these subscribers from our subscriber base. By disconnecting these
subscribers, we believe we can better use our networks, concentrate our sales
efforts on residential and corporate customers that generate greater per
subscriber revenues and improve our margins. However, our disconnection of
subscribers could result in an overall decrease in revenue. We may not be able
to attract new subscribers that generate greater revenues and we may need to
incur greater marketing and other expenses to do so.
IF WE EXPERIENCE A SIGNIFICANT NUMBER OF CUSTOMER NON-PAYMENTS OUR BUSINESS
AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
Our business plan includes increasing our revenue from post-paid services
including wireless telecommunication services and cable television services.
Although we have instituted measures to minimize consumer credit risks our
efforts to minimize consumer credit risks may not be successful as we expand our
services in the post-paid area. Moreover, efforts to minimize credit risks may
limit the number of our new subscribers. If we experience a significant number
of non-payments or are unable to attract new post-paid customers, then our
revenue will decrease and our cash position will be weakened.
SETTLEMENT RATES FOR INTERNATIONAL TRAFFIC FROM THE UNITED STATES AND
PUERTO RICO HAVE DECLINED AND COULD CONTINUE TO DECLINE, WHICH WOULD REDUCE
OUR INTERNATIONAL SETTLEMENT REVENUES AND PROFIT MARGINS FROM THESE
REVENUES.
Revenues from our international long distance business represented
approximately 38% of our operating revenues in 2000, 34% in 2001 and 34% in
2002. In 2002, approximately 98% of these revenues were attributable to calls
originating in the United States and Puerto Rico. Average settlement rates for
traffic between the United States and the Dominican Republic have declined from
$.41 per minute during 1996 to $.043 per minute at the end of 2002. We believe
that competitive and regulatory pressures could continue to push settlement
rates lower. Future decreases in settlement rates, without a corresponding
increase in our international long distance traffic originating in the United
States, would reduce our international settlement revenues and adversely affect
the profit margins that we realize on these revenues.
BECAUSE WE ARE RECEIVING AN INCREASING PORTION OF OUR INTERNATIONAL MINUTES
FROM U.S.-BASED RESELLERS, WE MAY EXPERIENCE SUBSTANTIAL FLUCTUATION IN OUR
INTERNATIONAL REVENUES.
Since 1997, we have derived an increasing proportion of international
revenues from U.S.-based resellers, which are companies that typically buy long
distance minutes in bulk and resell the minutes to other companies or individual
end users. During 2002, resellers originated approximately 65% of our
international long distance minutes from the United States to the Dominican
Republic. While we enter into agreements with resellers, they are not required
to provide us with any specified amount of traffic. The volume of minutes and
revenues we receive from these resellers in any quarter has varied and may vary
significantly because of competition for their business, primarily from Codetel,
and also because of the uncertain financial condition of many resellers. The
price per minute charged by us to a reseller is negotiated as often as dictated
by the market. At December 31, 2002, we received traffic from approximately 88
resellers. Intense competition in U.S. markets among international long distance
carriers resulted in bankruptcy filings by 12 of our reseller clients in 2001.
A NUMBER OF OUR U.S.-BASED RESELLER CLIENTS AND INTERNATIONAL CARRIERS WITH
WHICH WE EXCHANGE TRAFFIC HAVE FILED FOR BANKRUPTCY. WE MAY NOT BE ABLE TO
COLLECT MONIES THAT THEY OWE TO US.
Since the beginning of 2001, 19 U.S. carriers with which we exchanged,
exchange or contracted at one time to exchange long distance service filed
voluntary petitions for bankruptcy. In twelve cases, our subsidiary, TRICOM USA,
is an unsecured, pre-petition and/or post-petition creditor. Our claims in these
cases aggregate approximately $605,000. In the other seven cases, TRICOM USA has
no claims. To date, TRICOM USA has entered into settlement agreements, approved
by the courts, with three bankrupt carriers where we have been able to net
balances with such carriers. We may not be able to net balances or recover any
portions of the amounts owed to
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us. In addition, we may face substantial delays in resolving our claims and may
not receive full payment of our claims. In two cases, the bankrupt carriers
applied to prevent us from altering, refusing or discontinuing services,
although the courts in these cases did not grant the requests of these carriers.
We may be compelled to provide service to other carriers in bankruptcy under
terms mandated by the court, which may not be as favorable to us as terms that
we receive from other resellers.
In addition, pursuant to an August 2001 service level agreement with Enron
Broadband Services, L.P., TRICOM USA prepaid approximately $420,000 for the
purchase of a private line bandwidth. On April 5, 2002, Enron filed a motion
with the bankruptcy court to reject the agreement. We have objected to the
rejection of the agreement. However, the outcome of this case is uncertain.
OUR NET GROWTH IN, AND REVENUE DERIVED FROM, SUBSCRIBERS MAY BE REDUCED BY
CUSTOMER DISCONNECTIONS OR CHURN.
Our results of operations in the past have been, and in the future may be,
affected by subscriber disconnections, whether initiated by our customers or us.
In order to realize net growth in subscribers, we must replace disconnected
subscribers with new subscribers. Our average monthly disconnection rate, or
"churn rate," was 4.3% for cellular and PCS subscribers during 2002, compared to
4.6% during 2001, and 3.6% for local access line subscribers during 2002,
compared to 1.9% during 2001. During 2002, the churn rate for cable television
was 2.5%. The sales and marketing costs associated with attracting new
subscribers are substantial, relative to the costs of providing service to
existing subscribers. If we are not able to maintain our credit policies, or not
otherwise able to limit churn, we will experience a decline in net growth in
subscribers and revenue.
WE MAY NOT HAVE SUFFICIENT RESOURCES TO KEEP PACE WITH RAPID CHANGES IN
TECHNOLOGIES USED TO PROVIDE TELECOMMUNICATIONS SERVICES WHICH COULD
INCREASE COMPETITION OR REQUIRE US TO MAKE SUBSTANTIAL ADDITIONAL
EXPENDITURES TO MAINTAIN OUR CURRENT NETWORKS, WHICH COULD REDUCE OUR
REVENUES FROM SUBSCRIBERS AND CASH FLOW.
The services we offer are technology intensive. The development of new
technologies could make the technology we use obsolete. We may have to make
substantial additional investments in new technologies to remain competitive.
New technologies we choose may not prove to be commercially successful. Our
investment, to date, in our Dominican market exceeds $800 million and we would
require substantial investment to replace or upgrade all or a substantial part
of our network. We have chosen to improve our liquidity by reducing our capital
expenditures. We anticipate spending not more than approximately $25 million for
2003 capital expenditures, although this is a preliminary estimate. This
compares to $116.5 million expended in 2001 and $65.8 million expended in 2002.
If we do not offer the latest technology, we may not be able to retain our
existing customers or attract new ones.
WE MAY LOSE REVENUE OR INCUR INCREASED COST AS A RESULT OF FRAUDULENT OR
PIRATED USE OF OUR PCS AND CELLULAR OR CABLE TELEVISION SERVICES.
We estimate that our lost revenues from fraudulent use of our PCS and
cellular networks totaled $711,000 for 2000, $496,000 for 2001 and $182,000 for
2002. Anti-fraud technology continually becomes obsolete, and we will have to
make future expenditures to acquire and use anti-fraud technology. We face
substantial and widespread access to our cable television services by
unauthorized users, or pirates. When our services are pirated, we forfeit
potential subscribers and related revenues.
IF WE ARE UNABLE TO CONTINUE OFFERING HIGH-QUALITY PROGRAMMING, OUR CABLE
REVENUES MAY DECLINE.
The success of our cable television services depends upon our ability to
acquire popular, high-quality programming content. We license a significant
portion of our programming from third parties. Our arrangements with these third
parties regarding programming may be terminated, or may not be renewed on
favorable terms, if at all. These third parties could increase our costs of
obtaining programming and we may not be able to pass these costs on to our cable
subscribers. As we upgrade the channel capacity of our cable system and add
programming to our basic cable service, we may not be able to pass programming
costs on to our cable subscribers. If some or all of our programming
arrangements are terminated or if we cannot negotiate new agreements on terms
favorable to us, we may lose existing subscribers and attract fewer new
subscribers, which would reduce our revenues.
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OUR CABLE NETWORK COULD FAIL OR SHUT DOWN, WHICH COULD CAUSE US TO LOSE
CUSTOMERS.
Interruptions in our services due to the failure or shutdown of our cable
network could harm our reputation and cause us to lose customers. Even upon
completion of the expansion and upgrade of our existing cable network, we will
still be vulnerable to damage to our network, interruptions in our services and
cessation of our operations, which our insurance may not cover. The success of
our high-speed Internet access servicing offering depends on our ability to
maintain high-quality data transmission with minimal service disruptions or
interference. This is critical to our ability to attract and retain subscribers.
OUR OPERATIONS MAY BE VULNERABLE TO HACKING, VIRUSES AND OTHER DISRUPTIONS.
"Hacking" involves efforts to gain unauthorized access to information or
systems or to cause intentional malfunctions or loss or corruption of data,
software, hardware or other computer equipment. In addition, the inadvertent
transmission of computer viruses could expose us to a material risk of loss or
litigation and possible liability. Computer viruses, break-ins or other problems
could lead to:
- the interruption, delay or cessation in services to our subscribers;
- the compromise of confidential information relating to our
subscribers;
- damage to our reputation and the loss of subscribers; and
- costly litigation.
THE DOMINICAN TELECOMMUNICATIONS REGULATOR RECEIVED OBJECTIONS TO THE
TRANSFER OF THE CONCESSION GRANTED TO TCN DOMINICANA TO OPERATE A CABLE
NETWORK THAT, IF UPHELD, COULD LIMIT OR EVEN PRECLUDE THE OPERATION OF OUR
CABLE BUSINESS.
In November 2001 and February 2002, Indotel and we received notices of
objections to the transfer to us of the concession granted to TCN Dominicana,
S.A., a wholly-owned subsidiary of Telecable, for the operation of its cable
business. The objecting parties are cable companies that operate cable
television systems in the interior of the Dominican Republic and an association
of cable companies from that region. If Indotel decides in favor of the
objections, it could invalidate the transfer of the concession and impose fines
on us. Based upon past challenges to concessions transfers in which objections
did not prevail, we believe that it is unlikely that these objections will
prevail. Moreover, TRICOM's own concession allows us to provide video and cable
services, so that even if the objections are upheld, we believe that we could
use our own concession to provide the cable services currently provided in
reliance on the Telecable concession. However, it also is possible that Indotel
will limit the areas where we can provide services so that we do not compete in
markets currently served by the companies that raised the objections.
BSC OF PANAMA, ONE OF OUR COMPETITORS IN PANAMA, HAS PURSUED LEGAL ACTION
AGAINST US, WHICH, IF DECIDED AGAINST US, COULD FORCE US TO DISCONTINUE OUR
BUSINESS IN PANAMA AND/OR LIMIT OR ELIMINATE OUR ABILITY TO GENERATE
ADDITIONAL REVENUE.
BSC of Panama, S.A., a subsidiary of BellSouth Corporation, one of our
competitors in Panama, has initiated a number of actions, including with the
Panamanian telecommunications regulatory authority, ENTE REGULADOR DE LOS
SERVICOS PUBLICOS, or ENTE, and in the Panama court system, seeking to prevent
us from providing services using iDEN(R) technology. In an additional action,
BellSouth seeks damages from us in the amount of $20 million, which it claims it
may sustain if TRICOM Panama begins using the iDEN(R) system in Panama. At
December 31, 2002, we had invested approximately $47.9 million in our business
in Panama. If BellSouth prevails in its claims, we may be forced to discontinue
our business in Panama and, as a result, we would not generate any revenue from
our iDEN(R) operations in Panama, lose all or a material portion of our
investment and/or be required to pay damages to BellSouth. On April 4, 2003, the
Supreme Court reinstated a precautionary order, originally issued on August 28,
2001, requiring TRICOM Panama to cease all activity directly or indirectly
related to the installation and supply of telecommunications services using
Motorola's iDEN(R) system.
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CONDITIONS IN PANAMA MAY CAUSE VOLATILITY IN OUR OPERATIONS AND ADVERSELY
AFFECT OUR REVENUES FROM THIS MARKET.
We have expanded into the telecommunications market in Panama. We have not
operated previously in this market and it will present numerous challenges to
us. These include:
- poor and unstable social, political and economic conditions could
inhibit our performance;
- government regulations may hamper our ability to grow and implement
our strategy in Panama;
- competition from entrenched multinational wireless service providers;
- obtaining interconnection with existing wireless and local service
providers;
- multinational telecommunication companies may have close ties with
national regulatory authorities or other significant competitive
advantages that would hinder the development of our wireless business
there;
- initially, our coverage will not be as extensive as those of other
wireless service providers in Panama, which may limit our ability to
establish and maintain a significant subscriber base;
- our equipment is more expensive than that of some competitors in the
Panama, which may adversely affect our ability to establish and
maintain a significant subscriber base;
- we may face delays constructing our digital wireless network, because
of difficulties in obtaining communications sites or towers, zoning or
other governmental approvals, acceptable lease or purchase
arrangements or quality supplies which would harm our operations; and
- we are not experienced in selling and marketing iDEN(R) services in
Panama which could adversely affect our ability to establish or
maintain a significant subscriber base.
SINCE WE RELY PRINCIPALLY ON ONE SUPPLIER TO IMPLEMENT OUR DIGITAL WIRELESS
NETWORK IN PANAMA, ANY FAILURE OF THAT SUPPLIER TO PERFORM COULD HURT OUR
OPERATIONS.
Motorola is our sole source for the iDEN(R) digital network equipment and
handsets used throughout our Panama market. If Motorola fails to deliver
necessary technology improvements and enhancements and system infrastructure
equipment and handsets on a timely, cost-effective basis, or discontinues
providing this technology altogether we would not be able to service our
existing subscribers or add new subscribers. Motorola also may supply iDEN(R)
technology to other companies, which could hurt our competitive position in
Panama.
CONCERNS ABOUT HEALTH RISKS ASSOCIATED WITH WIRELESS COMMUNICATIONS
EQUIPMENT COULD LEAD TO LITIGATION AND MAY REDUCE THE DEMAND FOR OUR
SERVICES.
Wireless communications devices have been alleged to pose health risks,
including cancer, due to radio frequency emissions from these devices. If these
concerns are validated, our ability to continue operations could be adversely
affected. Moreover, the actual or perceived health risk of wireless
communications equipment and related publicity or litigation could adversely
affect us through a reduction in subscribers, reduced network usage per
subscriber, reduced financing available to the wireless communications industry
or litigation costs and damages or settlement payments associated with
litigation brought against us.
RISKS RELATING TO OUR PRINCIPAL MARKET, THE DOMINICAN REPUBLIC
OUR FINANCIAL CONDITION AND RESULTS OF OPERATION COULD BE ADVERSELY
AFFECTED BY DOWNTURNS IN THE DOMINICAN ECONOMY.
Most of our operations are conducted in, and most of our customers are
located in, the Dominican Republic. Accordingly, our financial condition and
results of operations are substantially dependent on economic conditions in the
Dominican Republic. While the Dominican Republic's Gross Domestic Product has
grown every
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year since 1991, the rate of growth slowed in 2001 and 2002 and growth may not
continue in the future. The Dominican peso depreciated in value against the U.S.
dollar in 2002 by approximately 26% and continued to depreciate in the first
quarter of 2003, adversely affecting the Dominican economy. Future developments
in the Dominican economy could impair our ability to proceed with our business
strategies, our financial condition or our results of operations. Our financial
condition and results of operations also could be adversely affected by changes
in economic or other policies of the Dominican government or other political or
economic developments in or affecting the Dominican Republic, as well as
regulatory changes or administrative practices of Dominican authorities, over
which we have no control.
POVERTY, SOCIAL UNREST AND SHORTAGES OF BASIC SERVICES IN THE DOMINICAN
REPUBLIC COULD AFFECT THE USE OF TELECOMMUNICATIONS SERVICES, WHICH WOULD
DECREASE OUR REVENUES.
The Dominican Republic has widespread poverty. As recently as November
1997, the country experienced riots, partly as a result of price increases and
shortages of water and electricity. Several state-owned companies have been
privatized, including the country's state-owned electric utility company, and
there can be no assurance that the implementation of these privatizations will
not cause social unrest. Any increase of poverty, social unrest or shortage of
basic services could adversely affect the use of telecommunications services.
YOU MAY NOT BE ABLE TO ENFORCE CLAIMS IN THE DOMINICAN REPUBLIC BASED ON
U.S. SECURITIES LAWS.
A majority of our directors and all of our officers and our external
auditors, KPMG, reside outside of the United States. A substantial portion of
our assets and the assets of these persons are located outside the United
States. As a result, it may not be possible for investors to effect service of
process within the United States upon us or these other persons to enforce
judgments obtained against us or against them in United States courts predicated
upon the civil liability provisions of the United States federal securities
laws, other federal laws of the United Sates or laws of the several states of
the United States.
No treaty currently exists between the United States and the Dominican
Republic providing for reciprocal enforcement of foreign judgments. We have been
advised by our Dominican counsel, Pellerano & Herrera, that there is doubt as to
(1) the ability of a plaintiff to bring an original action in a Dominican court
which is predicated solely upon the United States securities laws, other federal
laws of the United States or laws of the several states of the United States and
(2) the enforceability in Dominican courts of judgments of Unites States courts
obtained in actions predicated upon civil liability provisions of the United
States federal securities laws, other federal laws of the United States or laws
of the several states of the United States.
Pellerano & Herrera also has advised us that the enforceability of actions
brought in Dominican courts of liabilities predicated on U.S. laws would require
compliance with certain procedures, including the validation by Dominican courts
of decisions rendered by United States courts. Compliance with such procedures
could require a substantial amount of time and expense, and local defendants
could assert defenses to enforcement based on noncompliance with such
procedures. Foreign plaintiffs bringing original actions in a Dominican court
also can, at the request of the defendant, be required to post a litigation bond
in an amount established by such court in its discretion.
The Dominican legal system is based upon civil law principles according to
which judges decide both the facts and legal issues of a case, and they are not
bound by legal precedents. As a result, judges have broader discretion in
reaching decisions than do judges in the United States. The United States
Department of Commerce has reported that Dominicans and foreign observers have
criticized the Dominican judicial system for what they perceive as an
inequitable resolution of business disputes. The Dominican legal system, coupled
with the fact that substantially all of our assets are located in the Dominican
Republic, may present substantial obstacles to the enforcement of judgments
against us as well as our directors and officers in the Dominican Republic.
INCREASES IN THE INFLATION RATE WOULD ADVERSELY AFFECT THE DOMINICAN
REPUBLIC'S ECONOMY AND THE DEMAND FOR OUR SERVICES.
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Inflation has moderated in the Dominican Republic since 1991, following an
austerity program instituted by the Dominican government. According to the
Central Bank, the annual rates of inflation were 7.8% for 1998, 5.1% for 1999,
9.0% for 2000, 4.4% for 2001 and 10.5% in 2002. The increase in inflation in
2002 was principally due to the depreciation of the Dominican peso against the
U.S dollar, higher fuel prices and growth in public spending. However, the
country has experienced high levels of inflation in the past, including an
inflation rate of 79.9% for 1990. During 2002, the Dominican peso lost
approximately 26% of its value against the U.S. dollar. Any increase in the
value of the U.S. dollar against the Dominican peso directly affects the
Dominican Republic's inflation rate because the Dominican Republic relies
heavily on imports from the United States of raw materials and consumer goods.
High inflation levels could adversely affect the Dominican Republic's economy
and reduce demand for our services.
RISKS RELATING TO OUR ADSs
GFN OWNS STOCK WITH A MAJORITY OF THE VOTING POWER AND WILL BE ABLE TO
DETERMINE MANY DECISIONS CONCERNING US.
GFN beneficially owns 11,486,726 shares of Class B stock and, together with
affiliates, including our Chairman of the Board, 15,939,648 shares of Class A
common stock, having approximately 55.5% of our voting power. Motorola, the
other shareholder owning shares of Class B stock, owns 7,657,818 shares of Class
B stock having approximately 32.5% of the voting power. Accordingly, GFN and
Motorola are able to control the election of directors and all other matters
which are subject to a vote of shareholders. Through this ownership, GFN and
Motorola will be able to exert considerable influence over TRICOM's corporate
governance, strategic direction and major corporate actions. This concentration
of ownership may have the effect of delaying or preventing a change of control
of TRICOM even if this change of control would benefit all of our shareholders.
Because GFN and Motorola exercise control over TRICOM, holders of ADSs lack
meaningful power to approve decisions of TRICOM by virtue of their ownership of
ADSs.
GFN MAY ACT WITHOUT APPROVAL OF THE ADS HOLDERS TO RELEASE DIRECTORS AND
OFFICERS FROM LIABILITY.
Under Dominican law, shareholders are asked to vote upon the performance of
management at annual shareholders' meetings. Our vigilance officer delivers a
report on our financial performance and other issues related to management's
performance. If the holders of a majority of the votes entitled to be cast
approve management's performance, all shareholders are deemed to have released
the directors and officers from liability to us or our shareholders arising out
of actions taken or any failure to take actions by any of them on our behalf
during the prior fiscal year, with certain exceptions. As a result, shareholders
likely will fail in any suit brought in a Dominican court with respect to such
acts or omissions. Officers and directors may not be released from any claims or
liability for criminal acts, fraud, self-dealing or gross negligence. GFN
controls a majority of the votes entitled to be cast at annual shareholders'
meetings and, without the concurrence of other shareholders, is able to approve
the performance of management, thereby releasing management from liability to us
or our shareholders, including holders of the ADSs.
WE HAVE A LARGE AMOUNT OF SHARES ELIGIBLE FOR FUTURE SALE, WHICH COULD HAVE
A NEGATIVE IMPACT ON THE MARKET PRICE OF OUR ADSs.
At April 30, 2003, GFN and Motorola owned a total of 19,144,544 shares of
our Class B stock, each of which is convertible into one share of Class A common
stock. GFN and GFN affiliates also owned 15,939,648 shares of Class A common
stock. We issued 3,375,000 shares of Class A common stock in our acquisition of
Telecable. GFN purchased 675,024 of those shares from the Telecable
shareholders. In December 2002, we issued an aggregate of 21,212,121 shares of
Class A common stock in a private placement. In addition, we have outstanding
options and warrants exercisable for an aggregate of 316,150 ADSs and/or shares
of Class A common stock. GFN and Motorola and the former shareholders of
Telecable have registration rights. We cannot predict the effect, if any, that
future sales of ADSs, or the availability of ADSs for sale, would have on the
market price prevailing from time to time. Sales by GFN, Motorola, the former
shareholders of Telecable or the purchasers of Class A common stock in our
recent private placement of substantial amounts of our ADSs in the public
market, or the perception that sales could occur, could adversely affect
prevailing market prices for our common stock. Motorola has indicated its
intention to sell its shares. A reduction in the market price of our ADSs could
impair our ability to raise additional capital through future offerings of our
equity securities.
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ITEM 4. INFORMATION ON THE COMPANY
TRICOM, S.A. is incorporated in the Dominican Republic. Our operations are
headquartered at Ave. Lope de Vega No. 95, Santo Domingo, Dominican Republic and
our telephone number at the above address is 809-476-4000. Our website address
is www.tricom.net. Our agent in the United States is CT Corporation System. This
agent can be reached at 1633 Broadway, New York, NY 10019 and at telephone
number (212) 664-1666.
BUSINESS OVERVIEW
OVERVIEW
We are a full service communications services provider in the Dominican
Republic. We offer local, long distance, wireless, cable television and
broadband data transmission and Internet 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 cost. 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 believe we are one of the few Latin American based
long distance carriers that is 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. At December 31, 2002, our cable network served 71,726
subscribers, including 62,543 basic subscribers, 7,715 commercial rooms and
1,468 subscribers for cable modems, digital audio programming and other
services, with approximately 170,000 homes passed.
We offer two-way radio and paging services in Panama using iDEN(R)
technology. We began offering services in April 2002 and, at December 31, 2002,
we had approximately 8,240 subscribers. Our iDEN(R) network covers Panama City
and Colon, the two largest cities in Panama, and important transportation
corridors in other parts of the country. However, a recent decision by the
Supreme Court in Panama restrains us from offering our two-way radio and paging
services. We also own radio frequency rights in Guatemala and El Salvador that
would allow us to operate our iDEN(R) network using switching facilities
deployed in Panama. We currently do not intend to develop a network in either
Guatemala or El Salvador.
MARKET OPPORTUNITIES
We believe that our markets represent attractive opportunities and that the
following factors will drive growth in these markets:
- UNDERSERVED DOMINICAN MARKET. At December 31, 2002, teledensity, the
ratio of local access lines per 100 inhabitants, in the Dominican
Republic was 11 and the ratio of wireless subscribers per 100
inhabitants was 21, based upon data published by Indotel. The
teledensity ratios in Puerto Rico in 2001were 33 for local access
lines and 24 for wireless, according to the International
Telecommunications Union, or ITU. At December 31, 2001, multi-channel
penetration of television households per 100 inhabitants in the
Dominican Republic was 15, compared to 44 for Puerto Rico, according
to Kagan World Media, Inc.
- DOMINICAN ECONOMY AMONG THE FASTEST GROWING IN LATIN AMERICA. Gross
Domestic Product in the Dominican Republic grew at an average annual
rate exceeding 6% from 1998 to 2002, according to the Central Bank of
the Dominican Republic. This has made it one of the fastest growing
economies in Latin America. The Dominican Republic experienced real
Gross Domestic Product growth of 7.8% in 2000, 2.7% in 2001 and 4.1%
in 2002 according to the Central Bank. The Central Bank projects
growth for the Dominican Republic to be between 2.5% and 3.0% in 2003.
- STRONG GROWTH IN THE DOMINICAN TELECOMMUNICATIONS MARKET. In 2002, the
total
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telecommunications market in the Dominican Republic was approximately
$1.5 billion, according to the Central Bank. The telecommunications
market in the Dominican Republic grew at an average annual rate of
18.6% from 1998 to 2002 according to the Central Bank.
- BUSINESS DEMAND FOR ADVANCED WIRELESS SERVICES IN PANAMA. We believe
that the market in Panama is driven by several factors, including
several characteristics that are common to the market in the Dominican
Republic, including:
- a rapidly growing economy;
- the development of intra-regional trading markets in Central America
fostered by the adoption of free trade agreements; and
- business market demand for advanced wireless services.
COMPETITIVE STRENGTHS
We believe that the following factors give us a competitive advantage in
our existing and targeted markets:
PRODUCT AND SERVICE OFFERINGS. We believe that we provide one of the most
extensive product and service offerings in our market: local, long distance,
wireless, cable television and broadband data transmission and internet
services. With the addition of cable television services to our existing
operations during the fourth quarter of 2001, we are able to provide a complete
suite of telecommunications services.
ADVANCED NETWORK. We have the only network providing 100% digital local
service in the Dominican Republic. Our wireless network covers approximately 90%
of the population. We currently have switching facilities in New York, Florida
and Puerto Rico, and interests in international fiber optic cable undersea
systems that connect Central America and the Caribbean with the United States
and Europe. These facilities enable us to originate, transport and terminate
traffic at reduced costs
Our advanced networks also provide our customers with high quality voice
and data transmission. We are expanding and upgrading our existing cable network
into a broadband bi-directional network. Our broadband bi-directional cable
network will have increased network capacity, quality and reliability. This will
facilitate the introduction of new services and enable us to increase our
subscriber base and our average monthly revenues per subscriber. We also are
deploying set-top boxes to bolster subscriber growth and facilitate the control
of unauthorized or pirate users.
STRONG BRAND NAME RECOGNITION AND MARKETING CAPABILITIES. Our marketing and
customer service have allowed us to build a strong brand in our existing markets
and to achieve substantial market share in each of our service offerings. We
capitalize on our brand name recognition and marketing programs both in the
Dominican Republic and to target ethnic communities in Florida, New England, New
Jersey, New York and Puerto Rico. In the Dominican Republic, we have
consistently lead the market in introducing innovative business practices and
products using advanced technology. We were the first operator in the Dominican
Republic to offer prepaid cellular, international calling cards, Internet
service and offerings combining different services and pricing options.
OUR STRATEGY
Our goal is to capitalize on our strengths in our markets - our developed
network, strong brand name recognition and marketing capabilities and
experienced management - to improve our financial condition and results, while
continuing to build market position. We intend to:
GROW REVENUES AND IMPROVE OPERATING MARGINS BY:
- Focusing on mid and high income residential and corporate subscribers.
In the past, we grew our local and wireless subscriber bases by
capitalizing on the low penetration rates for these services.
However, many of our subscribers use our services on an "incoming
calls only" basis and generate little or no traffic. We intend to
concentrate our marketing and sales efforts on higher usage
residential and corporate subscribers. We believe that we can
increase service offerings to higher usage customers and
ultimately increase our revenues and profitability.
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- Cross-selling services to increase revenues per subscriber.
Our marketing efforts capitalize on our being the only
telecommunications provider that offers all of local, long
distance, wireless, cable television, and broadband data
transmission and Internet services. We promote our value added
services in our wireless and local access businesses, including
what we believe are the most extensive wireless roaming services
offered by any Dominican provider and wireless application
protocol, or Internet access, for handsets. Our cable acquisition
complemented our existing service offerings. There was little
overlap between our existing subscriber base and the Telecable
subscriber base, allowing us additional cross-selling
opportunities.
- Increasing penetration rates in our cable business and subscriptions
for advanced services.
Our cable business offers us access to potential subscribers with
the highest income levels in the Dominican Republic. We will
attempt to increase our subscribers from this potential
subscriber base and offer premium, digital, high speed internet
access and multimedia services made possible by the upgrade of
our network and the deployment of set-top boxes, which we
substantially completed this year.
- In our international business, increasing traffic to higher settlement
priced destinations and diversifying distribution channels for prepaid
cards in the United States.
International long distance traffic from and to the Dominican
Republic accounts for approximately 79% of our total
international long distance minutes. We use our facilities in the
United States to connect traffic to other destinations. We intend
to concentrate on increasing our traffic volumes to destinations
with higher termination rates. We also will expand our card
offerings to target additional ethnic markets in the United
States and add distributors to penetrate these markets.
- Reducing costs, while maintaining our marketing strengths and service
capabilities.
Throughout 2002, we instituted cost control measures, including
headcount reductions. In addition, industry-wide developments
resulted in a reduction of commission rates we and other
telecommunications services providers pay to prepaid card
distributors in the Dominican Republic. We also reorganized our
marketing and sales staff to target higher income subscribers and
subscribers that use services to a greater extent. Our goal is to
continue reducing expenses, while growing revenues.
OPTIMIZE USE OF EXISTING NETWORK, WHILE MINIMIZING NEW CAPITAL NEEDS, BY:
- Disconnecting lower usage subscribers.
By disconnecting lower usage local and wireless subscribers, we
believe that we can better use our network to provide service to,
and concentrate our sales efforts on, higher usage residential
and corporate customers.
- Migrating underutilized equipment to high income, densely populated
areas.
We are redeploying network equipment to areas where we have
greater capacity demands in order to make more efficient use of
our network. This enables us to expand coverage in areas of peak
demand without additional capital expenditures or adversely
affecting overall network coverage or quality of service. The
areas to which we are moving equipment have higher service
demands and greater concentration of corporate and higher income
residential customers.
- Consolidating cable and telephone networks.
Our cable network is a hybrid fiber and coaxial network.
Transmission from the headend to node is by fiber. Our local and
data transmission networks also deploy fiber. We intend to take
advantage of the fiber optic capacity of both networks in areas
that are underserved by either, which will allow us to expand
service offerings without significant capital investments.
- Using existing spectrum to provide wider digital coverage at lower
costs.
We are using our existing spectrum to expand our digital
coverage, avoiding, as a result, the cost of purchasing
additional spectrum to expand our PCS service. We also are able
to
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purchase telecommunications equipment and obtain cell sites for
our digital network at prices that are discounted from prices in
the past.
STRENGTHEN OUR CAPITAL STRUCTURE BY:
- Extending the maturities of our debt.
In 2002, we succeeded in extending the maturity by as much as
five years, of approximately $118 million principal amount of our
short term debt. We will continue to attempt to extend and
refinance our debt.
- Maximizing internally generated cash flow to reduce debt.
Our efforts to maximize the use of our network, minimize capital
expenditures and reduce our costs and expenses, as well as
improve our working capital management, are intended to increase
our cash flow generation and create free cash flow, cash flow
exceeding our capital and operating requirements. To the extent
that we generate cash flow exceeding our capital and operating
requirements, we intend to reduce debt.
SERVICE OFFERINGS
Our service offerings include:
- Local;
- Wireless;
- International long distance;
- Cable television; and
- Broadband data transmission and Internet.
LOCAL
We are a competitive local exchange carrier in the Dominican Republic and
had 150,456 local access lines in service at December 31, 2002. According to the
most recent information from Indotel, there were approximately 909,000 local
access lines in service at December 31, 2002. At December 31, 2002, we had
approximately 16% of the local access line market. Our local access network
covers areas with approximately 85% of the population of Santo Domingo, Santiago
and nine additional cities.
All of our basic telephone service customers have access to a range of
value-added services, including call forwarding, three-way calling, call
waiting, caller ID and voicemail applications. In addition to local service, we
provide direct-dialed, collect and operator-assisted international and domestic
long distance services and Internet access to our residential and corporate
customers.
We offer our customers broad flexibility in assembling customized packages
of services, which provide our customers with cost savings and enhanced control
over their consumption of telephone services. Customers may choose from a menu
of services, including domestic and international long distance services, local
service and value-added services. They also may bundle their local access
service with cellular or PCS, paging, cable television and Internet services.
Service packages permit customers to preset their monthly bills based upon, for
example, local service minutes as well as long distance minutes and specified
destinations. Customers are responsible for paying for usage levels in excess of
preset package amounts, at regular per minute rates. We believe that providing
customers with such budgeting capability increases consumer confidence in using
telecommunications services, consequently allowing for increased service
penetration, higher levels of customer satisfaction and lower incidence of
delinquent payments.
Beginning in 1999, we accelerated our local access network expansion
program by deploying a wireless local loop, which offers voice quality as clear
as telephones connected by wirelines and often can be connected more rapidly
than wireline. Our intra city fiber, wireless local loop and copper network in
Santo Domingo, Santiago and
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five other cities allows us to connect subscribers using wireline as quickly and
at costs comparable to the cost of connection by wireless local loop. Using
wireline connection, we also can offer data transmission and other value added
services attractive to corporate and higher usage residential subscribers that
we are targeting. We intend to convert all wireless local loop subscribers to
wireline over the next several years. Wireless local loop technology can be
redeployed to support our wireless services.
We also sell fully integrated systems and components for both turnkey
systems and private telephone networks used within enterprises. We are a
distributor of leading manufacturers of private branch exchanges and key
telephone systems and a leading provider of computer telephony integration
systems in the Dominican Republic.
WIRELESS
Our wireless network covers approximately 90% of the Dominican Republic's
population. We currently offer both analog cellular and PCS service. According
to Indotel, there were approximately 1,700,609 analog and PCS cellular
subscribers in the Dominican Republic at December 31, 2002. At December 31,
2002, we had 432,058 wireless subscribers, including 199,267 PCS subscribers,
representing approximately 25% of the Dominican wireless telephony market. Our
cellular and PCS subscribers base grew by approximately 18.7% from December 31,
2001 to December 21, 2002, and our net addition of cellular and PCS subscribers
totaled approximately 68,000 during 2002. We attribute a substantial portion of
this growth to our prepaid cellular and PCS card. At December 31, 2002, prepaid
cellular and PCS subscribers accounted for 411,334 or approximately 95% of our
432,058 total cellular and PCS subscribers in the Dominican Republic. Our
prepaid card program has expanded our cellular and PCS customer subscriber base
because it offers cellular and PCS service to individuals who would not satisfy
our current credit policies and because it appeals to customers who prefer to
budget their cellular and PCS telephone spending.
We have offered PCS service since April 1999. This technology provides for
added security and privacy compared with traditional analog systems, and it also
offers greater capacity. PCS customers are able to receive all of the benefits
related to a digital service, including digital messaging, caller ID and
voicemail. Our PCS network covers areas with approximately 75% of the population
in the Dominican Republic and is less extensive than our analog network. We
offer a dual-band service, allowing customers to use seamlessly their wireless
phones nationwide over both digital and analog networks.
We offer domestic as well as international roaming services to
participating subscribers. Subscribers who pay the roaming rates gain access to
our nationwide cellular and PCS network, while subscribers paying the
international roaming fees are able to roam outside of the Dominican Republic,
using the networks of cellular service providers with which TRICOM has entered
into roaming agreements. We have entered into roaming service agreements with
several leading wireless providers which enable our customers to roam in the
continental United States and Central and South America. Under the roaming
agreements, when a subscriber of another cellular service provider makes a call
from within the Dominican Republic, that service provider pays TRICOM for the
call at the applicable rate. Conversely, when one of our subscribers makes a
call outside the Dominican Republic, we must pay the applicable charges to the
cellular service provider in whose region the call originates. These payments
are channeled through Cibernet, which functions as a central international
clearing house that collects and redistributes roaming fees from and to the
participating providers.
We have entered into arrangements with major consumer electronics retailers
and a network of independent cellular and PCS dealers to offer our cellular and
PCS services in conjunction with their sale of handsets. We provide subsidies on
the sale of wireless handsets for customers who purchase post-paid plans for a
minimum term of 18 months. Subsidies vary depending on the handset but can
exceed 50% of the cost of some handsets.
We were the first domestic provider to offer Wireless Application Protocol,
or WAP, to our wireless subscribers, starting in September 2001. WAP brings
Internet content and advanced services to digital cellular phones and other
wireless devices. Digital wireless customers who subscribe to WAP may access
internet content through their wireless devices and perform operations such as
sending e-mail, on-line banking or browsing the Internet.
We have provided paging services since April 1995. At December 31, 2002, we
provided paging services to 8,752 subscribers, representing approximately 14% of
the Dominican paging market. In 1999, we stopped soliciting new paging
subscribers. We believe that the success of our prepaid cellular and PCS program
has
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contributed to the decline of paging as a significant part of
our business because customers have replaced paging services with prepaid
cellular services.
INTERNATIONAL LONG DISTANCE
In the Dominican Republic, we provide international long distance services
to our local access, cellular and PCS customers. In addition, we offer prepaid
calling cards for international long distance, the Efectiva(TM) and Conexion(TM)
cards, that can be used from any telephone in the Dominican Republic. We operate
telephone centers that provide access to telephone services to individual
customers who either do not have telephone services in their own homes or who
are attracted by the competitive pricing of the telephone centers. The centers
offer a wide range of telephone services, including bill payments and sales of
service in addition to long distance.
In the United States, our subsidiary TRICOM USA provides international
carrier services primarily to resellers, which account for an increasing share
of international long distance traffic between the United States and the
Dominican Republic. During 2002, resellers originated approximately 65% of the
international long distance minutes from the United States to the Dominican
Republic that we received. Minutes delivered by resellers may fluctuate
significantly. Through our telecommunications switching facilities in the United
States, we have been able to provide resellers with an alternate channel for
sending international long distance traffic. In addition, by controlling the
origination, transport and termination of international long distance traffic
between the United States and the Dominican Republic, we believe that we are
able to send and receive such traffic at a lower cost to us than by exchanging
traffic with traditional international carriers.
In 1997, TRICOM USA began offering international long distance calling
services to the Hispanic community in the United States, targeting primarily
Dominican communities in New England. Currently TRICOM USA offers prepaid
calling cards in California, Canada, Florida, Georgia, Illinois, Maryland,
Massachusetts, New Jersey, New York, Ohio, Pennsylvania, Puerto Rico, Rhode
Island, U.S. Virgin Islands, Virginia and Washington D.C. Our better-known
prepaid cards are TRICOMPASS, MI GENTE, MI TIERRA, INTERNATIONAL and PA GOZA.
Prepaid calling cards are distributed through wholesalers from our New
Jersey office and through retailers from our New York location. Cards are sold
primarily in small retail stores including groceries, drugstores and newsstands.
Our prepaid calling cards are advertised through special promotions during
Hispanic events and by radio, television and newspapers that target Dominican
and other ethnic communities, particularly in the New York metropolitan area.
Our advertising emphasizes savings, voice quality and patriotic themes.
In addition to prepaid calling cards, TRICOM USA offers national and
international long distance services in New York, New Jersey and Florida. Major
users of this service are calling centers. This service is offered to potential
customers through an independent sales force.
CABLE TELEVISION
We are the largest provider of cable television services in the Dominican
Republic, based on the number of subscribers, and the number of homes passed. At
December 31, 2002, our cable network served 71,726 subscribers, including 62,543
basic subscribers, 7,715 commercial rooms and 1,468 subscribers for cable modem,
digital audio programming and other services, with approximately 170,000 homes
passed. One component of our business strategy has been to expand our number of
basic and expanded basic subscribers by providing high-quality programming and
other content. In addition to publicly available programming, we license or
otherwise acquire programming from various programming providers for broadcast
on our cable television network and also produce a limited amount of programming
ourselves intended for exclusive broadcast on our network. We currently offer 95
basic and expanded basic channels including HBO, Cinemax, Disney, ESPN, Fox
Sports and CNN. We also sell our own advertising time.
BASIC SERVICE PACKAGE. Our basic service packages provide access to a
maximum of 82 local and foreign content channels. Subscribers pay a one time,
refundable deposit per analog set top box and a monthly fee of approximately for
this service. Subscribers do not need a digital decoder to receive the basic
service package.
EXPANDED BASIC SERVICE PACKAGES. Our expanded basic service packages
include all of the channels included in our basic service package, with an
additional choice of one of our eleven analog and digital expanded
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basic service packages. Expanded basic subscribers pay the basic service package
monthly fee plus the additional cost of the expanded programming. An analog or
digital decoder set-top box is required for these services. We are currently
focusing on marketing our various expanded basic service packages to our
existing basic subscribers with a view to increasing our overall revenues per
subscriber.
DIGITAL AND CABLE MODEM SERVICE. In June 2002, we made available digital
cable television and high-speed Internet access over coaxial cable via cable
modem, under the brand name Internet Tornado(R). This service targets primarily
residential customers. Digital cable television provides movie-quality pictures,
digital-quality sound, broadcast services and certain programming not available
through our basic or expanded basic service packages. Our digital cable
television offering includes an on-screen interactive program guide, 17 pay-per
view channels, seven content rich educational resources channels and 50 channels
of commercial free CD-quality music. A digital decoder set-top box is required
for these services.
A cable modem is a small box that connects a personal computer to the
Internet by a local cable provider. Cable modems allow personal computer users
to download information from on-line services at speeds one hundred times faster
than today's telephone modems. Our cable modem service packages offer several
bandwidth and pricing options, ranging from 128 kbps to 1,536 kbps.
DIGITAL MUSIC SERVICES. We offer digital audio programming provided by DMX
Music International through our hybrid fiber coaxial network. Customers choose
from 50 exclusive music channels that play 24 hours a day, seven days a week.
Subscribers for this service primarily are hotels.
BROADBAND DATA TRANSMISSION AND INTERNET
In the Dominican Republic, we are the second largest Internet service
provider. We provide Internet connectivity to the residential and corporate
markets through traditional dial-up connections, digital subscriber lines, or
xDSLs, dedicated lines and very small aperture terminals, or VSATs, and cable
modems. VSATs are relatively small satellite antennas used for high speed
satellite-based single to multiple point data transmissions, including for the
internet, with speeds ranging from 56 kilobytes per second to 2 megabytes per
second.Our PCS and paging services are now fully integrated with our Internet
service, offering short messaging services, including e-mail and digital
messaging through our website, www.tricom.net.
We offer our residential customers Internet access bundled together with
local, wireless and other services. We also provide pre-installed Internet
access through major Dominican computer retailers.
During 2002, we launched several new services such as firewalls for xDSL
and lease lines, bandwidth control and auto-bandwidth, filtering, captive
portal, content, and virtual private networks. We provide wireless access to
Internet for private data administrators and laptop use.
We provide broadband data transmission services to large business customers
in the Dominican Republic through several means of delivery including fiber
optic cable and digital wireless point-to-point radio links. In addition, we
provide these large customers with data circuits, Internet access, private
networks and frame relay services with branches in the different cities in the
country. During 2002, we increased transmission capacity to provide larger
bandwidths and data services primarily for business customers through digital
subscriber lines, or xDSLs, that provide high-bandwidth transmission of voice
and data over regular telephone lines and VSATs.
In 2000, we entered into a five-year $25 million contract with the
Dominican Republic Department of Education to provide broadband satellite
Internet access and Intranet services to every public high school in the
Dominican Republic.
MARKETING AND SALES
Our advertising and promotional materials in the Dominican Republic
emphasize that we are a full-service provider of local, long distance, wireless,
cable television, and broadband data transmission and Internet services and that
customers can realize significant savings from our service packaging. Our
advertising also emphasizes reliability, performance, quality of service and the
multiple advantages that users can obtain from our different products and
services. Seasonal promotions are also made for specific target markets at
different points throughout the year. Since 2001, we have reoriented our sales
force and marketing efforts to focus on corporate, medium and
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small businesses. This sales force is oriented to develop close relationships
with our business customers to assess their needs and offer customized
solutions.
LOCAL AND WIRELESS SERVICE
We use door-to-door sales, telemarketing and mass media to promote and sell
our local services. In the local access market, we use product differentiation
to target residential and business customers.
We market wireless services through direct sales, database marketing, and
telemarketing, focusing on new subscribers. Our post-paid wireless sales target
higher income customers who usually have a higher usage profile. We have
expanded our wireless network to new geographic areas and offer in-building
coverage in highly transited urban areas such as shopping malls, restaurants and
office buildings. Our advertising strategy for PCS services focuses on our
nationwide coverage, quality of service and competitive prices.
Our sales and marketing approach for offering local and wireless services
to large business customers is to offer comprehensive and customized
telecommunications solutions for individual corporate customer's needs. Our
sales staff works closely with each customer to gain a better understanding of
its particular operations and to develop customized local and wireless service
solutions. Many of our sales executives in this market segment have engineering
backgrounds or receive periodical training sessions in which they learn the
fundamentals of our industry as well as thorough information on our family of
products. Our product development and customer service departments also offer
them continuous support.
INTERNATIONAL LONG DISTANCE
In addition to our Dominican local access and wireless subscribers, we
market our long distance services in the Dominican Republic to individual
customers who do not have telephone services in their own homes. In the United
States, we target the large immigrant Dominican communities and other ethnic
populations.
In July 2002, we implemented a platform to manage our prepaid services. As
a result, we have been able to unify all of our calling card products into a
single brand, allowing our customers to use the card for domestic and
international long distance calling as well as prepaid wireless services. On
November 26, 2002, we launched the unified product under the brand name Bla Bla
Bla(R).
We feature our prepaid card in our basic services advertisements, as well
as in individual advertising. Our advertising emphasizes the accuracy and
reliability of our billing as well as savings. Our prepaid card is distributed
at our commercial offices, call centers and through wholesalers and retailers.
We have four wholesale distributors in the Dominican Republic as well as an
internal sales force targeting smaller retailers; a total of approximately
52,000 points of sale for our prepaid cards.
TRICOM USA advertises its prepaid cards on radio and through print media
targeted at Dominican and other ethnic communities, mainly in the New York
metropolitan area. Advertisements emphasize price and voice quality as well as
patriotic or ethnic themes. Prepaid cards are distributed to wholesalers under
our brand name and are sold primarily in small retail stores, including
groceries, drugstores and newsstands.
CABLE TELEVISION
We use a variety of methods to attract new subscribers. We generally
advertise on our cable broadcasts as well as on television and radio broadcasts
and in magazines, newspapers and billboards. Our direct marketing includes
flyers and promotional materials. Our telemarketing staff focuses on both
attracting new subscribers, as well as upgrading our existing basic subscribers
to one of our expanded basic service packages. We market our cable services
under the brand name Telecable(TM).
Our current marketing strategy is intended to promote subscriber loyalty
and timely payments, reinforce our market position by offering better pricing
and more channels,increase our subscriber base by increasing the penetration
levels in our coverage areas, and by converting users that pirate our cable
services to legitimate subscribers and capitalize on the development
possibilities of new broadband services.
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We currently maintain a call center to respond to incoming calls from
potential subscribers. The call center staff is trained to respond to questions
concerning our various service packages, as well as contact potential
subscribers, market our services and receive payment for our services by credit
card.
BROADBAND DATA TRANSMISSION AND INTERNET
For broadband data transmission services, we target large Dominican
businesses, which require more sophisticated technology and demand specialized
service and support. We developed a sales force focused on this sector, which
includes multi-national corporations, local business conglomerates, local and
international banks and large hotels. We also have a specialized sales force
targeting medium and small businesses with products that fit their needs such as
virtual private networks, dial up and broadband xDSL Internet, among others. Our
advertising campaign is focused on promoting the speed and accuracy of our data
transmission services.
CUSTOMER SERVICE
In the Dominican Republic, we provide customer care for all of our services
through 17 service centers and 16 commercial offices. We also provide payment
services for our customers through several other businesses including
supermarkets, banks and other commonly frequented businesses. There are
approximately 373 such offices, all of which are linked to our central billing
and collection system.
Our customers may subscribe for services, pay and obtain information about
monthly bills and inquire about billing adjustments at our offices. To enhance
customer service, our representatives use our customer service system linked to
our central billing and service order system, enabling them to handle
expeditiously both billing and service inquiries.
We provide a 24-hour interactive voice response service through which
customers can register claims and make billing inquiries. In addition, customers
may access their account information online 24 hours a day, seven days a week,
on our website, www.tricom.net. Our website provides information about our
services and can be used to purchase products including prepaid cards, cellular
phones and accessories.
We provide installation and repair services to our customers and have
established service benchmarks for, among other things, network availability,
installation and repair intervals. We research other companies' response time
and client promises in order to establish equal or better ones that will ensure
our competitive advantage.
Our customer service department gathers information from our customers,
which we then use to tailor our products and services to meet customer needs. We
regularly survey our customers to determine their satisfaction with our services
and to improve services based upon the explanations offered by customers who
voluntarily cancel their services. Furthermore, we have a customer retention
department that works to determine the cause for customer churn and also to
develop appropriate retention strategies to target this segment.
We use a customer relationship management (CRM) system, integrating our
information systems and our customer relationship management software. This
system allows customer service representatives to access all billing, service
order and other client specific information. This enables us to offer speedier
service and more efficient follow through and to monitor every step of the
customer service relationship.
BILLING AND CREDIT POLICIES
We have developed an integrated billing system for local, long distance,
wireless, paging and value-added services. The integrated billing system enables
our customers to obtain a single bill, providing detailed information about
charges for all services rendered, other than cable television for which
customers receive a separate bill. We have led the Dominican telecommunications
market in the introduction of billing packages that provide detailed call
reports with time-of-day, day-of-week and destination information as well as
flexible billing discount programs which are similar to those found in the most
competitive markets outside the Dominican Republic. Our subscribers can call our
center and speak with a customer care representative and obtain account and
statement information. Our customers also can access information over the
telephone through an interactive voice response system that enables customers to
consult their most recent calls and account balances.
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Cash payments may be made at walk-in commercial offices, centers and
affiliated bank branches, or funds may be debited from credit cards or bank
accounts. Our customers also may pay their bills at any one of our over 440
payment stations, which are located in neighborhood gas stations, grocery stores
and other retail outlets.
Each residential basic telephone service and wireless subscriber is
assigned a preset credit limit, which varies depending upon the individual's
monthly usage and payment history. We use credit bureaus to check the credit
history of new clients. We require all individuals wishing to subscribe for
cellular and PCS services to have a credit card or prepay for services. We
contact any customer exceeding this credit limit and request that such customer
pay all or part of the outstanding bill.
Our policy is to suspend service for all post-paid subscribers if payment
is not received within 45 days after a bill is issued and to terminate service
45 days after the suspension date. Pre-paid services are suspended when the
prepayment balance is exhausted or the pre-paid card has expired. Upon
suspension, pre-paid service customers may continue to receive in-coming calls.
Service to post-paid subscribers is also suspended when a customer's credit
limit is reached. In order to reinstate service after termination, post-paid
subscribers must pay a reinstallation fee, except for Internet services for
which no reinstallation fee is required after termination.
We had an average monthly churn rate for cellular and PCS subscribers of
4.3% in 2002, 4.6% in 2001 and 3.1% in 2000. We had an average monthly churn
rate for local subscribers of 3.6% in 2002, 1.9% in 2001 and 2.3% in 2000. We
had an average monthly churn rate for cable subscribers of 2.5% in 2002.
Increasing local and cellular churn rates reflect primarily our decision to
disconnect lower revenue-generating prepaid customers. We expect that our churn
rate will increase substantially for mobile and local access services as we
disconnect subscribers that use our services primarily to receive calls. We
calculate average monthly churn by dividing the number of subscribers
disconnected during the year by the sum of subscribers at the beginning of each
month during such year.
TRICOM USA distributes its prepaid cards through wholesale distributors.
Depending on their credit history and the length of their relationship with
TRICOM USA, wholesalers are required to pay in full for calling cards upon
delivery or are extended credit for up to 15 days. All distributors of prepaid
cards in the Dominican Republic are extended credit for up to 30 days.
TRICOM USA requires that new and smaller reseller customers pay on a weekly
basis for long distance services. Some customers that have a previous
relationship with TRICOM USA are extended credit for 15 to 30 days on average,
depending on proven reliable financial condition. Traditional long distance
carriers generally pay TRICOM USA within 60 to 90 days for traffic.
MANAGEMENT INFORMATION SYSTEMS
Our business applications are designed to generate accurate information in
real time for our employees and to provide our customers with direct access to
pertinent information from our computer network. For this reason, we have
designed a fully integrated, open architecture network.
We use Oracle as our unified database and software application development
tool set. We use Oracle Financials as our enterprise resource planning system,
which includes the following modules: accounts payable, accounts receivable,
general ledger, purchase orders, inventory control and fixed asset accounting.
We have also developed an integrated billing and customer care system that runs
on the Oracle platform. In August 2000, we entered into a product marketing
alliance agreement with Codisa Software Corp., a leading Latin American
developer and provider of business applications, for the exclusive distribution
of TRICOM's advanced billing and operational support platform.
NETWORK INFRASTRUCTURE
We invested over $800 million from 1992 through 2002 to develop all of our
networks, which are fully digital except for portions of our cellular network.
LOCAL SERVICE AND WIRELESS NETWORK
The core of our network is composed of gateway switches, possessing special
features such as ultra-high-speed and port-to-port call switching that can
handle 240,000 calls per second. Our switch time-of-day capability allows us to
distribute our telecommunications traffic efficiently and provide, as a result,
more competitive pricing.
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Our switches also provide statistical call distribution information, which
allows us to control our flow of traffic. Without such capabilities, we would
have to conduct these monitoring tasks manually. The switches also handle common
channel signaling protocols, optimizing the channels available for voice
transmission. Without this capability, a network must use each of its channels
to signal the origination and termination for each call, which often results in
uncompleted calls and poor circuit utilization.
Our intra-city wireline local access network is comprised of 500 route
miles of fiber optic cable and over 3,000 miles of copper cable in over seven
cities. The network is composed of central office switches, remote switching
centers and digital loop carriers.
We use digital loop carriers technology, which is a multi-service access
platform connected to the central office through fiber optic cables. This
network layout minimizes the copper plant and employs digital network
transmission equipment used to provide multiple phone conversations, and fiber
optic cable to connect to local access lines. Our central office switches are
connected by fiber optic cable to various digital loop carriers located
throughout the three largest cities in the Dominican Republic.
We transmit our domestic traffic through a fully redundant digital wireless
point-to-point backbone system, which provides both intra-city and inter-city
telecommunications services. A point-to-point backbone system is a dedicated
connection between two endpoints of a communications network. The backbone
system links approximately 85% of the country's population, including major
cities and certain key tourist and rural areas. The wireless point-to-point
system serves the areas that have high telecommunications usage, including large
industrial and commercial areas.
To oversee and monitor the activities of our network infrastructure, we
have installed a network management system. This system allows us to manage our
central office switches and remotely monitor all network components. The
management system provides continuous information regarding our equipment, any
equipment failure, and network security. In addition, it allows the central
office to send commands and to test our network.
Our wireless network in the Dominican Republic uses analog technology and
our PCS network uses CDMA or digital protocol. Our analog wireless network
enables us to provide wireless coverage to those regions of the Dominican
Republic with the greatest demand for wireless services. We provide PCS service
in 14 cities and offer continuous coverage in the main highway routes of the
country.
INTERNATIONAL LONG DISTANCE NETWORK
We have our own state-of-the-art switching facility in the New York
metropolitan area, which we have upgraded to allow us to provide multiple
international signaling protocols. We also have switches in Puerto Rico and
Florida. By having our own switching facilities, we can provide termination of
international long distance traffic at very competitive rates to several
countries in addition to the Dominican Republic.
By purchasing and leasing international traffic capacity from various
systems, we have acquired diverse options to route our international traffic.
This capacity is fully connected to the international network. We have purchased
capacity in 11 international submarine fiber optic cables that have been built
to send and receive international traffic or connect with other cables that
provide service to Latin America, the Caribbean and Europe. We own 23% of the
Antilles 1 submarine cable, which connects the Dominican Republic to the United
States via other submarine cable systems. In addition, we have two earth
stations which connect to satellite systems serving the Atlantic region, Africa
and Europe. The use of these satellite facilities also allows us to route
international traffic between the Dominican Republic and most other countries in
the world.
CABLE TELEVISION NETWORK
Our cable television network uses a broadband network employing radio
frequency transmission over coaxial and/or fiber optic cable to transmit
multiple channels carrying images, sound and data between a central facility and
a subscriber's television. Coaxial cable is a type of cable used for broadband
data and cable systems. This type of cable has high-quality broadband frequency
characteristics, noise immunity and physical durability. Fiber optic cable is a
communication medium that uses hair-thin glass fibers to transmit signals over
long distances with less signal loss or distortion than coaxial cable.
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Our existing cable network consists of three major portions: a master
headend, a distribution network and nodes. At our master headend, programming
signals are received, processed, amplified and then sent through our
distribution network, which consists of fiber optic and coaxial cables connected
to nodes. A node, which is typically shared by a number of subscribers within
the same area, is a single connection to any of our distribution network's main
fiber optic cables that receives and transmits signals. One node in our existing
network typically serves an average of 820 homes passed. Programming signals
then travel, via coaxial cable, from nodes into subscribers' homes. As part of
our plan for the expansion and upgrade of our network, we plan to redesign our
distribution network by installing hubs and additional nodes to improve the
quality and redundancy of our services. Hubs receive signals from the headend
and retransmit signals to the nodes, increasing the quality and reliability of
the signals.
At December 31, 2002, our cable network consisted of approximately 204
miles of fiber optic cable, 718 miles of coaxial cable and 208 nodes, passing
approximately 170,000 homes. Approximately 98% of our network is constructed
above ground, with a small percentage of the fiber optic cable constructed
underground.
The complete channel package signal delivered to our customers in Santo
Domingo is encoded. This allows us to control the theft or piracy of our cable
entertainment services, as well as giving us the opportunity to offer compressed
packages to reach low-income subscribers living in marginal areas, and increase
penetration levels.
The expansion and upgrade of our network involves the conversion of our
existing cable network into a broadband bi-directional network. We currently
plan to complete this upgrade by the end of 2003. A bi-directional network
allows subscribers to transmit as well as receive signals. This allows us to
offer Internet connection, video and games on demand. A broadband bi-directional
network combines the use of fiber optic cable, which can carry hundreds of
video, data and voice channels over long distances, with coaxial cable, which
requires a more extensive signal amplification in order to obtain the desired
transmission levels for delivering programming signals and nodes. We are
expanding and upgrading our existing cable network into a broadband
bi-directional network that will provide us with a platform for the delivery of
a broad range of services.
BROADBAND DATA TRANSMISSION AND INTERNET NETWORK
Data communications services are primarily targeted to the business
community and provided at a variety of speeds. Our data communications network
consists of data multiplexing nodes, which are network connection points that
allow for the transmission of two or more signals over a single channel, linked
to a fiber optic ring and digital wireless point-to-point radio links. The "last
mile" to the customer is provided through fiber optic cable and/or digital
wireless point-to-point radio links. Our data network has the capability to
monitor the communications link all the way to the customer's desktop and to
support multiple data protocols such as ATM and frame relay.
Our technology infrastructure is built and maintained to assure
reliability, security and flexibility, and is monitored by our technical staff.
Each of our servers can function separately, and multiple redundant machines
serve key components of our server architecture.
We maintain our central production servers at the data center of our
headquarters. Our operations depend on the ability of the network operating
centers to protect their systems against damage from fire, hurricanes, power
loss, telecommunications failure, break-ins or other events.
Our local and wireless networks employ monitoring software developed by us
and by others to monitor access to our production and development servers. Our
reporting and tracking systems generate daily traffic, demographic and
advertising reports, which are copied to backup tapes each night.
COMPETITION
The following table sets forth information about our market share in
several of our markets based upon information published by Indotel, at December
31, 2002 (the latest date for which Indotel has published information), and
information that we generate about our operations:
<Table>
<Caption>
Approximate
Service Market Share (%) Rank Number of Providers
------- ---------------- ---- -------------------
Local 15.9 2 3
</Table>
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<Table>
Wireless 25.4 2 4
Data and Internet 11.1 2 3
Cable television 46.0 1 -
</Table>
Indotel reports that there are 112 cable operators in the Dominican
Republic. However, in our principal markets, Santo Domingo and its surrounding
areas and La Romana, we face little competition. In 2002, a third
telecommunications services provider, using wireless technology, began offering
to business customers limited local services and broadband Internet access. This
provider does not offer a full range of local services, and, to date, we believe
has obtained a negligible percentage of the market for local services.
In addition, we and Codetel are the two principal Dominican carriers
terminating Dominican bound international long distance traffic. Centennial
Dominica also offers long distance calls at very low rates to the United States
from the Dominican Republic. However, neither Indotel nor the U.S. Federal
Communications Commission publishes current information about traffic exchanged.
International long distance traffic has expanded dramatically in the last five
years as the price per minute charged to consumers has declined.
The Dominican government also has granted eight concessions to
telecommunications companies which either have not yet commenced operations or
have minimal operations. Each of the concessions allows for the provision of
some or all of the telecommunications services that we provide. In addition,
from time to time, several international companies have expressed to Indotel
interest in entering the Dominican telecommunications market.
LOCAL, DATA AND INTERNET AND WIRELESS
In local service and data and internet, our only established competitor is
Codetel, a wholly owned subsidiary of Verizon. Codetel is an integrated
communications service provider which, at December 31, 2002, had approximately
84% of the local access lines and subscribers for local services and
approximately 89% of the data and internet subscribers in the Dominican
Republic. In 2002, Centennial, using wireless technology, began offering to
businesses local access service and broadband internet access but, to date, we
believe has obtained an insignificant percentage of the market for local
services.
In wireless service, in addition to Codetel which has approximately 49% of
the wireless subscribers, we compete with Orange, a subsidiary of France Telecom
Group, and Centennial Dominicana. Orange operates a GSM 800 MHz network in the
main cities of the country. In 2001, Orange initiated an aggressive expansion
strategy based on low prices on wireless equipment and a distribution network
with dealers. Orange subscribers represent in excess of 20% of total wireless
subscribers in the Dominican Republic. Centennial Dominicana, a joint venture of
Centennial Communications Corp., offers PCS wireless services and has
approximately 6% of the wireless subscribers.
INTERNATIONAL LONG DISTANCE
The international telecommunications industry is intensely competitive and
subject to rapid change precipitated by changes in the regulatory environment
and advances in technology. Our success depends upon our ability to compete with
a variety of other telecommunications providers in the United States and in each
of our international markets. Our competitors include large facilities-based
multinational carriers and smaller facilities- based wholesale long distance
service providers in the United States and overseas that have emerged as a
result of deregulation and switched-based resellers of international long
distance services. Competition primarily is based on price, although
reliability, quality of transmission, routing capacity and customer service also
are competitive factors.
CABLE TELEVISION
We are the largest cable television operator in the Dominican Republic
based on our number of subscribers and homes passed as of December 31, 2002. We
face little competition in Santo Domingo and surrounding areas from other cable
television operators. Indotel reports that there are 112 cable operators in the
Dominican Republic, including illegal cable television providers.
We also face competition from pirate direct broadcast satellite or DBS
transmission. There is no legal DBS service offered in the Dominican Republic.
For several years, the Dominican pay television market has been
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harmed by the persistent violation of copyright laws or "piracy." We have
deployed encoding technology to aid in reducing piracy from our network.
All pay television service providers, including cable television systems,
direct to home or DTH satellite services and multi-point, multi-channel
distribution system operators, face substantial competition from other signal
delivery methods, including television broadcasters. The ability of potential
subscribers to directly receive traditional public over-the-air television
signals from television broadcasters may hinder our ability to obtain additional
subscribers.
PANAMA
OVERVIEW
In 2001, we purchased a 51% interest in a Panamanian company, Cellular
Communications of Panama, S.A., now TRICOM Panama, S. A., which owns the
frequency rights for 107 channels of 25 MHz each. These frequencies give us
access to nationwide coverage, covering a population of approximately 2.9
million. In Panama, frequency rights are granted for 20 years and are
automatically renewable for additional 20 year terms. We initiated offering
iDEN(R) services in April 2002 and had approximately 8,240 subscribers at
December 31, 2002. Our right to offer services has been challenged by BellSouth,
one of the two principal wireless service providers in Panama. A recent decision
by the Supreme Court in Panama restrains us from offering any services in
Panama.
We completed the construction of our digital network in Panama City and
Colon (the two largest cities in Panama) and the transportation corridors that
link those cities with airports and ports. We also completed a network along the
corridor that connects Panama City, the capital, with its surrounding cities and
the most important recreational and tourist areas of the country. At December
31, 2002, we had invested approximately $47.9 million in this deployment,
primarily for the purchase of a switching office for telephone and radio
communications dispatch through which wireless service traffic is originated or
terminated, enhanced base transceiver stations, which are antennae located at
base sites to provide radio coverage in specific geographic areas and site
acquisition and construction.
MARKET OPPORTUNITY.
In 2001, Panama's estimated Gross Domestic Product of $16.9 billion, and a
Gross Domestic Product growth rate of 1.4% for that year. Approximately 57% of
the population lives in urban areas. Wireless penetration for Panama at December
31, 2001 was 17% while wireline penetration was 12.1%.
MARKETING PLANS
We offer specialized wireless radio services, including two-way radio, and
interconnect services. We offer our digital services mainly to business
customers, offering bundled programs with different services and pricing plans,
customized to meet our clients' specific needs. We are currently marketing our
services through direct sales and intend to do so through independent dealers as
well.
COMPETITION
The wireless market in Panama has been open to competition since 1996.
TRICOM Panama's digital radio services will compete with several analog trunking
operators as well as the two digital wireless communications providers in the
country, Cable & Wireless of Panama and BSC of Panama (a subsidiary of
BellSouth). The Panamanian government granted a 10-year duopoly service
concession to both digital wireless operators in 1997 as part of the
privatization of the telecommunications industry.
REGULATORY AND LEGAL OVERVIEW
To provide telecommunications services, a Panamanian or foreign company
must obtain a service concession from the ENTE REGULADOR DE SERVICIOS PUBLICOS,
or ENTE. There are two types of service concessions, Type "A" and Type "B". Type
"A" service concessions currently are awarded on an exclusive basis. Services
under a Type "A" category concession include basic telecommunications and
cellular services. Effective January 2003, ENTE has reclassified Type "A"
services as Type "B" services, and therefore, additional concessions of this
type will not be granted again until 2003 for basic telephony and long distance
and until 2007 for PCS services.
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Type "B" service concessions are awarded on a non-exclusive basis to
companies which meet specific requirements and complete the application
procedures for the services they wish to provide. Applicants must include a form
of the contract they intend to enter into with potential customers and a diagram
of the system that will be operated in order to provide the contemplated
services, among other information. Applicants may submit their applications to
provide Type "B" services on any one of four specified dates a year.
Additionally, since Type "B" telecommunications service concessions are open to
all companies which meet the requirements, the terms of the concession are the
same for all concession holders. However, each concession holder must comply
with fair competition practices in providing services to its clients and in
relation to other concession holders. Concession holders also must provide
services in a nondiscriminatory manner. Concession holders may also assign or
transfer their concessions to other companies which meet the same requirements
that ENTE considered at the time it awarded the concession, subject to ENTE's
authorization. ENTE may only deny a transfer or assignment when the transfer or
assignment would be prohibited by law or against fair competition practices.
Telecommunications providers are required to pay annual fees to the government
of 1% of their total gross revenues.
TRICOM Panama has four of the twenty-six Type "B" service concessions, one
to provide each of the following services: (1) conventional trunking systems for
public or private use, (2) fixed or wireless radio communication services, (3)
data transport services, and (4) paging services.
Panamanian telecommunications law prohibits companies providing trunking
wireless services to hand off telephone calls, even if the hand-off would be
from one site to another site owned by the same trunking company. Our iDEN(R)
system does not permit hand-off. Therefore, we have built additional enhanced
base transceiver stations in Panama to minimize the number of calls dropped due
to handed-off failures. We believe that additional enhanced base transceiver
stations will prevent a higher percentage of dropped calls than would otherwise
occur due to the effect of this restriction on hand-off under Panamanian law.
In addition, Panamanian telecommunications law requires that all concession
holders permit and maintain nondiscriminatory interconnection of other
concession holders to their networks. A concession holder is required to use its
best efforts to reach an interconnection agreement within 120 days from the date
on which another concession holder sends a copy of an interconnection request to
the ENTE, with confirmation that the concession holder with which
interconnection is sought also has received the request. After this 120-day
period, any of the parties may request the intervention of the ENTE in
negotiations. The ENTE may intervene in the process if interconnection is not
negotiated by the parties or is not provided on terms at least equal to those
that other concession holders have obtained in similar circumstances.
TRICOM Panama requested interconnection from Cable & Wireless. With the
intervention of the ENTE, the parties negotiated and agreed upon most of the
terms of interconnection, except for access charges and certain other economic
aspects, which the parties were not able to agree upon. The ENTE resolved the
impasse by mandating the access charges and other economic aspects. Thereafter,
Cable & Wireless refused to sign the interconnection agreement on the ground
that it might be prohibited from doing so by a precautionary measure obtained by
BSC of Panama against TRICOM Panama in August 2001. The precautionary measure
ordered TRICOM Panama to cease the installation of its iDEN(R) system in Panama.
The ENTE has imposed on Cable & Wireless sanctions of US$5,000 per day until it
signs the interconnection agreement with TRICOM Panama. Cable & Wireless
appealed the ENTE's sanctions order before the Supreme Court, and the case is
pending decision. In April 2003, the Supreme Court affirmed the precautionary
order.
Bell South, in a number of related actions and proceedings in Panamanian
courts and the ENTE, has challenged our right to provide wireless services and
has sought $20 million in damages.
Panama has no restrictions on repatriation or monetary transfers to and
from Panama nor does it have any exchange controls. The unit of currency, the
Balboa, is issued only in coins which are identical in size and value with those
of the United States. Panama's paper currency is the U.S. dollar. There are few
limitations or restrictions on foreign investment, especially for international
business operations based in Panama. One of the few exceptions is that certain
sales to consumers of retail goods are reserved for Panamanian nationals.
As a telecommunications business, we will have to pay a monthly regulatory
fee to ENTE of 1% of our previous month's gross income in addition to the 1% of
gross revenue annual fee required to be paid by telecommunications providers. We
are also subject to certain taxes, including income, franchise, dividend and
commercial license taxes.
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CENTRAL AMERICA
In 2000, we were awarded, in a government auction, radio frequency rights
in Guatemala to 172 channels of 25 MHz, providing us with nationwide coverage.
We have also acquired the spectrum to operate our iDEN(R) network in El Salvador
through the purchase of radio frequency rights for an aggregate of 185 channels
of 25 MHz, 175 of which we purchased from a U.S. telecommunications company that
previously owned the rights and 15 of which we acquired through a government
auction. We acquired these rights as part of our strategy to establish in
Central America an interregional specialized wireless service network targeted
at business customers using a single transmission technology in major business
centers. However, we currently do not intend to develop a network in either
Guatemala, El Salvador or elsewhere in the region.
REGULATION
GENERAL
The legal framework of the telecommunications sector in the Dominican
Republic consists of General Telecommunications Law No. 153-98, enacted on May
27, 1998, resolutions and regulations issued by Indotel and the concession
agreements entered into by the Dominican government or the regulator with
individual service providers.
In addition to the industry-specific legal framework, the Constitution of
the Dominican Republic affects the telecommunications sector. Among other
individual and social rights, the Dominican Constitution guarantees Dominican
citizens the freedom of trade. The Constitution specifically provides that
monopolies can be established only by law and only for the benefit of the
Dominican government. None of the existing concession agreements grants a
monopoly in any sector of the telecommunications industry to any carrier, and
the Dominican government has announced a policy of encouraging growth through
competition in the telecommunications industry.
In 1930, Codetel was granted a concession to operate telecommunications
services in the Dominican Republic. Over the years, while other service
providers entered the Dominican telecommunications market, none was successful
in becoming a full-service telephone company able to compete with Codetel
because Codetel was not required to allow other service providers to
interconnect their services with its physical infrastructure. To provide
services, a company would have to install its own wireline telecommunications
network. The economics of this requirement hindered competition. As a result,
Codetel held a de facto monopoly for more than 60 years.
To increase substantially the number of Dominican citizens with access to a
telephone and to allow for the establishment and growth of other modern
telecommunications services, the Dominican government adopted a policy of
liberalization of the telecommunications sector beginning in the late 1980s. In
1990, the Dominican government granted us a concession to provide a full range
of telecommunications services within, from and to the country. Additionally,
advancements in wireless technologies made it more cost-effective for companies
to penetrate the market even without being able to interconnect to Codetel's
network. However, interconnection remained important for full-service
competition. In 1994, the Dominican government enacted a series of
interconnection resolutions requiring all service providers in the Dominican
Republic to interconnect with all other service providers pursuant to contracts
between them. The guidelines for those contracts are set forth in those
resolutions. In May 1994, we entered into an interconnection agreement with
Codetel which became effective in November 1994. This agreement allowed us to
become the second full-service telecommunications provider in the Dominican
Republic.
GENERAL TELECOMMUNICATIONS LAW NO. 153-98 OF 1998
Former Telecommunications Law No. 118 of February 1, 1966 was repealed by
Law No. 153-98 of May 27, 1998. Law No. 153-98 is the result of a joint
government and industry project conducted with the assistance of the ITU, which
studied the telecommunications sector in the Dominican Republic. As part of this
process, the ITU drafted a proposed telecommunications law and various
regulations, including interconnection and tariff regulations, in consultation
with Dominican telecommunications carriers. The project was requested by the
Technical Secretariat of the Dominican Presidency and the country's
telecommunications carriers and was funded by the carriers.
Law No. 153-98 established a basic framework to regulate the installation,
maintenance and operation of telecommunications networks and the provision of
telecommunications services and equipment. The law adopted
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the "Universal Service Principle," by seeking to ensure access to
telecommunications services at affordable prices in low-income rural and urban
areas. The law creates a fund for the development of the telecommunications
sector that is supported by a 2% contribution payable by customers and collected
by telecommunications providers from them based on billings to customers for
telecommunications services.
In addition, the law created an independent regulator with strong
regulatory powers, the Dominican Institute of Telecommunications (Instituto
Dominicano de las Telecomunicaciones, or Inodotel), and established the
regulator's responsibilities, authorities and procedures. The regulator is
headed by a five-member council, the members of which serve a four-year term,
and includes a representative from the telecommunications industry. Among other
responsibilities, Indotel is charged with implementing telecommunications
development projects to satisfy the requirements of the Universal Service
Principle. Law No. 153-98 grants Indotel control over all frequency bands and
channels of radio transmission and communications within the country and over
its jurisdictional waters.
Law No. 153-98 seeks to encourage competition by, among other things,
mandatorily imposing the obligation to interconnect with existing participants
and prohibiting and punishing different types of monopolistic behavior. The law
requires that interconnection charges be cost based and eliminates cross
subsidies. Pursuant to the law, a rate rebalancing process was completed on
December 31, 2000 which eliminated cross subsidies and allows for rates for
services to reflect actual costs. Currently, market participants are free to
establish the rates for the services that they offer.
RECENT REGULATORY INITIATIVES
PROPOSED TELECOMMUNICATIONS REGULATIONS
In 2001 and 2002, Indotel initiated several public inquiry processes, which
are similar to a U.S. Federal Communications Commission notice for proposed rule
making, in connection with several proposed regulations. In November 2001,
Indotel published for public comment the "National Routing Plan", which, among
other things, intends to divide the country into five regions, within each of
which telephone calls would be deemed local. In November 2002, Indotel published
for public comment the "National Routing Plan", which, among other things, would
divide the country into five regions, within each of which telephone calls would
be deemed local.
In January 2002, Indotel commenced a public inquiry process for several
other regulation projects including a non-rounding up regulation which seeks to
establish the second as the traffic measurement and pricing unit within the
telephone network. This would preclude telephone companies from rounding up to
the next minute fractions of traffic (though a call lasting less than a minute
can be rounded up to one minute). Another proposed regulation is aimed at
providing subscribers the right to choose whether or not to use the voice mail
services of the called party. The adoption and implementation of all or any one
of these proposed regulations could have a financial impact on our business and
results of operations.
CABLE REGULATION
Indotel issued cable broadcasting regulations on August 19, 2002. Though
the draft originally proposed included a "must carry rule" (which would have
required cable systems to carry television broadcasters' signals on a virtually
free basis), the final version approved did not include this proposed rule. With
the issuance of these regulations, several claims brought against Telecable by
UHF channels, who also sought the imposition of the must carry rule by
resolution of Indotel, were "closed and decided." The cable broadcasting
regulations, however, prohibit cable systems from discriminating among UHF
channels or among VHF channels.
INTERNATIONAL TERMINATION RATES
On June 22, 2002, Indotel issued a resolution which set a minimum rate for
incoming traffic termination of not less than $.08 per minute. The current
market rate is less than $.05 per minute. The resolution also raises
international long distance access charges from RD$0.68 to RD$0.85 per minute.
Indotel postponed the effectiveness of the resolution because of opposition by
international carriers and the United States government. It currently is
expected that Indotel will implement a minimum rate for incoming traffic from
the United States exceeding $.08 per minute.
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INTERCONNECTION REGULATIONS
On June 22, 2002, Indotel issued interconnection regulations including
rules on co-location, network unbundling, open network architecture and equal
access. The regulations require that interconnection agreements be modified to
conform to the regulations and established a deadline extended by Indotel on
several occasions (the last deadline was December 2, 2002) for filing with
Indotel revised, conforming contracts. Indotel will resolve any disputes between
carriers concerning interconnection terms. We were not able to reach agreement
with Codetel, Orange or Centennial on new interconnection agreements by the
deadline and submitted the dispute to Indotel. On April 11, 2003, a new
interconnection agreement for the Dominican market was entered into by all
current local carriers (Codetel, Centennial, Orange and Tricom). The agreement
provides for a full interconnection among the networks for all
telecommunications traffic. The new agreement provides for the following access
charges per minute of traffic: local traffic, $0.02; national transportation
traffic, $0.01; national traffic, $0.03; international transportation traffic,
$0.015; incoming international traffic, $0.035 for calls terminating for calls
into a fixed network and $0.09 terminating for calls into a mobile network;
mobile or cellular traffic, $0.075. These charges are expressed in Dominican
pesos based on the dollar exchange rate, and will be adjusted every six months.
The interconnection agreement, however, remains subject to Indotel's review.
Notwithstanding the execution of this new agreement and the settling of the
dispute initiated by Tricom, the parties agreed to leave for Indotel to decide
several aspects of the dispute, including Tricom's claim to recoup from Codetel
50% of the costs of preexisting two-way 732 facilities built at Tricom's sole
expense. If Tricom succeeds in its claim, Tricom could recover from Codetel up
to US$7.5 million of the cost of constructing the facility.
PENDING REGULATIONS ON TARIFFS AND COSTS
Further regulations on tariffs and costs, which would complement the
interconnection regulations, are being prepared by Indotel. Consultants from the
U.S. firm, Strategic Policy Research, are advising Indotel on this matter.
OUR CONCESSION AGREEMENT
In accordance with former Law No. 118, we entered into a concession
agreement with the Dominican government in 1990 under which we were issued a
non-exclusive license to establish, maintain and operate a system of
telecommunications services throughout the Dominican Republic, as well as
between the Dominican Republic and international points. The services which we
were permitted to provide under the 1990 concession agreement included
telegraphy, radio communications, paging, cellular and local, domestic and
international telephone services.
In February 1996, we entered into a new concession agreement with the
Dominican government which superseded the 1990 concession agreement. Under the
1996 concession agreement, we were granted the same non-exclusive license as
provided in the 1990 concession agreement to establish, maintain and operate a
telecommunications system throughout the Dominican Republic until June 30, 2010.
Under our original provisions, the concession agreement and the license granted
under it are renewable automatically for 20-year periods unless, at least three
years prior to the end of the then existing term, either we or the Dominican
government advise each other of our intention not to renew. Law No. 153-98
establishes that the renewal must be requested during the one year immediately
prior to the expiration of the concession, and that the reasons for non-renewal
shall be only those set forth in the law.
Law No. 153-98 established that within one year after its effectiveness
each concession must be adjusted to the provisions of the new law. This process,
however, is still pending. Indotel issued Resolution No. 005-99 in December 1999
for such purposes requesting information from each of the telecommunications
companies with valid concession agreements. We have complied with these
requirements. Indotel also empowered the President to execute amendments to our
and other concession agreements to reflect our paying taxes on the same basis as
all Dominican corporate taxpayers and amending provisions of our concession
agreements providing for the payment of tax in lieu of income taxes.
CODETEL'S CONCESSION AGREEMENT
Codetel's concession from the Dominican government, originally granted in
1930, was modified on January 23, 1995 and more recently by the Presidential
decree that eliminated provisions for payment in lieu of income taxes. The terms
and conditions of Codetel's concession are substantially identical to those of
our 1996
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concession agreement. The license provides it with the right to construct,
maintain and operate a telecommunications system throughout the Dominican
Republic and between the Dominican Republic and other countries. Codetel's
concession agreement is valid until April 30, 2010; our concession agreement is
valid until June 30, 2010.
U.S. TELECOMMUNICATIONS REGULATION
The following summary of the Unites States federal regulatory developments
does not purport to describe all present and proposed regulations and
legislation affecting the telecommunications industry. Other existing federal
and state regulations are currently the subject of judicial proceedings,
legislative hearings and administrative proposals which could change, in varying
degrees, the regulations of telecommunications companies in the United States.
On September 11, 1995, the Federal Communications Commission, FCC issued an
order approving the application of Domtel Communications, Inc., which later
changed its name to TRICOM USA, Inc., to provide, on a facilities-based basis,
voice, data and private line services between the United States and various
international points, including the Dominican Republic. The FCC also approved
Domtel Communications as a non-dominant provider on all routes, including to the
Dominican Republic. We began initiating U.S. traffic pursuant to this
authorization in 1997. Domtel Communications was also granted global resale
authority by the FCC in 1996.
Since the effectiveness of the interconnection agreement with Codetel, we
have entered into operating agreements with U.S. correspondents. TRICOM USA also
has the ability as a U.S. carrier to develop its own business plan for markets
other than the Dominican Republic, and has been approved by the FCC to
communicate from the United States with 186 countries via satellite and with 28
countries via fiber optic submarine cables.
As a carrier holding an international authorization from the FCC, TRICOM
USA is subject to various statutory and regulatory telecommunications mandates,
including the duty to offer services at just and reasonable rates, the payment
of certain fees, such as universal service contribution and regulatory fees, and
the requirement to obtain prior approval for most transfers of control and
assignments of authorizations, except those considered non-substantial, or "pro
forma" under FCC rules. The FCC may address regulatory non-compliance with a
variety of enforcement mechanisms, including monetary forfeitures, refund
orders, injunctive relief, license conditions, and/or license revocation.
The FCC recently required mandatory detariffing for all non-dominant
international carriers, with limited exceptions for dial-around, local exchange
carrier implemented services, inbound collect calling, and on-demand Mobile
Satellite Systems. TRICOM USA is a non-dominant carrier, and therefore, was
required to detariff its international services. The FCC now requires carriers
to maintain their rates, terms and conditions for public inspection, including
posting these matters on a carrier's web site. Although TRICOM USA no longer
must maintain tariffs at the FCC, it is still subject to other regulatory
requirements established by the FCC for international carriers, as noted above.
We believe we are in compliance, in all material respects, with all laws
and regulations necessary to conduct our business in the countries in which we
operate, including in the United States. As we expand our operations into other
countries, we may become subject to varying degrees of regulation in those
jurisdictions where we provide service. Laws and regulations regarding
telecommunications differ significantly from country to country. Future
regulatory, judicial, or legislative activities in one or more of the countries
in which we operate could have a material adverse effect on our financial
condition, results of operations or cash flow.
Through several policy initiatives in the last several years, the FCC has
encouraged greater competition in foreign markets. A particular focus of the FCC
has been "accounting rates" or "settlement rates," which are the amount of
payment negotiated between carriers for the termination of international
telephone calls. There are three elements of the FCC's international settlements
policy that serve as conditions on U.S. carriers entering into agreements with
foreign carriers: (1) all U.S. carriers must be offered the same effective
accounting rate and same effective date for the rate; (2) U.S. carriers are
entitled to a proportionate share of U.S.-inbound, or return, traffic based upon
their proportion of U.S.-outbound traffic; and (3) the accounting rate is
divided evenly 50-50 between U.S. and foreign carriers for U.S. inbound and
outbound traffic. The FCC has exempted certain foreign routes from the
international settlements policy where U.S. carriers are able to terminate at
least 50 percent of U.S.-billed traffic at rates that are at least 25 percent
below the benchmark settlement adopted for the foreign country. The Dominican
Republic route has not been exempted from the international settlements policy.
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In 1999, the FCC adopted an order approving sweeping reform of the
international settlements policy. The Order eliminated the international
settlements policy and contract filing requirements for arrangements with
foreign carriers that lack market power. TRICOM USA's arrangements with Codetel,
however, must be filed with the FCC, as the FCC has determined that Codetel
possesses market power in the Dominican Republic.
The FCC has established settlement rate benchmarks based on foreign
carriers' publicly available tariffed rates and data published by the
International Telecommunications Union. TRICOM USA's settlement benchmark rate
for the Dominican Republic is within the FCC's prescribed limits.
International Simple Resale involves the provision of switched services
over resold or facilities-based private lines that connect to the public
switched network at either end-point. Instead of U.S. carriers paying for the
use of half of a shared circuit to a foreign point through traditional
settlement payments, U.S. carriers under International Simple Resale
arrangements may connect or lease a complete or whole circuit end-to-end to the
corresponding foreign carrier's network and pay a negotiated rate for
termination of services on the foreign network. Moreover, International Simple
Resale arrangements are not subject to the restrictions of the international
settlements policy (although the international settlements policy may still
apply to the particular route); therefore, U.S. carriers may negotiate
individual, asymmetric, non-proportionate agreements. The FCC has determined
that the Dominican Republic is eligible for International Simple Resale
(although not currently exempt from the international settlements policy).
The FCC recently launched a proceeding to examine possible additional
reform of the international settlements policies and the international simple
resale and benchmarks policies. While the proceeding appears to be aimed at
streamlining these polices, we cannot be certain what types of modifications to
these policies the FCC may order, or the effect of any such changes upon us. In
addition, the FCC is also reviewing in this proceeding whether foreign mobile
termination charges (charges incurred when U.S. consumers place calls to
wireless telephones in other countries) are harming U.S. consumers and
competition. The FCC may take action to address these charges. We cannot predict
what types of regulations or requirements the FCC may adopt regarding wireless
termination charges, or the effect of any such regulations or requirements on
us.
STATE REGULATION
Most states regulate entry into their telecommunications markets, and
states' regulation of telecommunications companies vary in their regulatory
intensity. The majority of states mandate that companies seeking to provide
telecommunications services in their state apply for, and obtain the requisite
authorization from a public utility commission or similar agency. This
authorization process generally requires the carrier to demonstrate that it has
sufficient financial, technical, and managerial capabilities and that granting
the authorization will serve the public interest.
As an authorized telecommunications carrier in various states, we are (and
will be) subject to the regulatory directives of each state in which we are (and
will be) certified. Some states have particular requirements relating to the
offering of pre-paid services, including disclosures that must be included on
the pre-paid calling cards. As we offer pre-paid services, these requirements
may apply to our pre-paid calling cards. Most states require carriers to file
and maintain state tariffs setting forth their rates, terms and conditions. In
addition to tariff filing requirements, most states require that carriers charge
just and reasonable rates and not discriminate among similarly situated
customers. Some states also require the filing of periodic reports, the payment
of various regulatory fees and surcharges, and compliance with service standards
and consumer protection rules. States also often require prior approvals or
notifications for certain transfers of assets, customers, or ownership of a
certified carrier. States generally retain the right to sanction a carrier or to
revoke certifications if a carrier materially violates relevant laws and/or
regulations.
We are certified to provide telecommunications services by the public
utility commissions of California, District of Columbia, Florida, Georgia,
Illinois, Indiana, Massachusetts, New York, Pennsylvania, Rhode Island and Saint
Thomas in the U.S. Virgin Islands, and are currently in the process of obtaining
certification in Ohio and Maryland. We also are permitted by New Jersey to
provide such services. We cannot be certain that the pending applications will
be granted in a timely manner, or if at all, and we cannot predict what types of
conditions may be imposed upon us in any new authorizations. In addition, it is
possible that state regulators could claim that prepaid calling cards and
associated services are being provided by us prior to obtaining the necessary
authorizations. In such circumstances, we could be subject to enforcement
activities including the possible payment of fines and denial of our application
to provide these services.
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PROPERTY, PLANT AND EQUIPMENT
Our principal properties consist of our fiber optic network, satellite
earth stations, nodes and real estate. At December 31, 2002, the net book value
of our real estate and equipment was approximately $668.1 million. Our real
estate holdings are strategically located throughout the Dominican Republic,
providing the infrastructure for the telecommunications network and sales
facilities. Most of our properties are related directly to our
telecommunications operations and are used for network equipment of various
types, such as telephone exchanges, transmission stations, wireless
point-to-point radio equipment and digital switching nodes. Our current
headquarters are located in downtown Santo Domingo in a building that we own.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Our consolidated financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
satisfaction of liabilities in the ordinary course of business. However, because
of recurring operating losses, a continuing working capital deficit and the
devaluation of the Dominican peso, the realization of assets and satisfaction of
liabilities are subject to uncertainty. We have financed our capital expenditure
and working capital requirements, to the extent we did not generate sufficient
cash flow from operations, with borrowings, principally in Dominican markets. A
substantial portion of our borrowings continue to be short term borrowings. In
light of our recent financial results and adverse developments in the Dominican
economy, we may not be able to generate the cash required to operate as a going
concern or to obtain the financing necessary to continue funding our business.
PRESENTATION OF CERTAIN FINANCIAL INFORMATION
We prepare our consolidated financial statements in conformity with
generally accepted accounting principles in the United States. We adopted the
United States dollar as our functional currency effective January 1, 1997 and
maintain our books and records in dollars.
In this Annual Report references to "$," "US$" or "U.S. dollars" are to
United States dollars, and references to "Dominican pesos" or "RD$" are to
Dominican pesos. This Annual Report contains translations of certain Dominican
peso amounts into U.S. dollars at specified rates solely for the convenience of
the reader. The rates we used to translate Dominican peso-denominated accounts
at the period-end were RD$16.69 at December 31, 2000, RD$17.05 at December 31,
2001 and RD$22.50 at December 31, 2002. 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 December 31, 2002 was RD$20.79 =
US$1.00, the date of the most recent financial information included in this
Annual Report. The Federal Reserve Bank of New York does not report a noon
buying rate for Dominican pesos. On May 12, 2003, the private market rate was
RD$26.05= US$1.00. To the extent information relates to the Dominican Republic
government or the Dominican Republic macroeconomic data, the information in this
Annual Report has been extracted from publications issued by each of Indotel at
www.indotel.org.do and the Central Bank at www.bancentral.gov.do.
REVENUE OVERVIEW
We derive our operating revenues primarily from toll revenues,
international revenues, local services, cellular and PCS services, data and
Internet services, paging services, the sale of equipment, installations and
cable television services. 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
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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 services 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 calling party 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.
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.
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.
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
significantly in each year since then.
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, expanded basic 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.
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The following table sets forth the percentage contribution of each category
of revenues to total operating revenues for the period indicated:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 2001 2002
---------- ---------- ----------
Toll 12.8% 11.9% 10.1%
International revenues 37.5 33.6 34.0
Local service 22.9 26.0 25.5
Cellular and PCS 16.0 15.3 14.6
Data and Internet 1.5 3.4 4.3
Paging 0.8 0.4 0.2
Sale and lease of equipment 2.3 1.1 0.7
Installation and activation fees 6.1 5.9 2.1
Cable revenues - 1.9 8.3
Other 0.1 0.4 0.3
----------- ------------ -----------
100.0% 100.0% 100.0%
=========== ============ ===========
</Table>
- ----------
Note: Percentages may not add up to 100% due to rounding.
The following table sets forth certain items in the statements of
operations and EBITDA expressed as a percentage of total operating revenues for
the period indicated:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 2001 2002
--------- ---------- ----------
Operating costs 81.7% 94.1% 106.6%
Operating income 18.3 5.9 (6.9)
Interest expense, net 13.7 16.3 (24.2)
Other income (expenses), net (13.9) (15.9) (23.5)
Earnings (loss) before income
taxes and minority interest 4.4 (10.0) (30.0)
Net earnings (loss) (3.2) (9.5) (29.7)
EBITDA 39.1 33.7 30.2
</Table>
2002 COMPARED TO 2001
OPERATING REVENUES. Our total operating revenues increased 5.9% to $258.0
million during 2002 from $243.8 million in 2001. Excluding revenues from
cable television services, which we acquired in October 26, 2001, our total
revenues were $236.6 million in 2002, a decrease of $2.4 million from total
revenues in 2001 (excluding cable revenues following the acquisition of our
cable operation). Our total operating revenues increased notwithstanding a
decline in the value of the Dominican peso compared to the U.S. dollar, which
affects the translation into U.S. dollars of our revenues generated in
Dominican pesos. The value of the Dominican peso compared to the U.S. dollar
declined by approximately 26% in 2002 compared to approximately 2% in 2001.
Cable television, data and Internet, local, and international long distance
services were the primary contributors to overall revenue growth during 2002.
The following is a discussion of our operating revenues for each of our
five reportable segments: Wireline, Wireless, International, Cable and Others.
The Other segment includes paging, Internet, data services, Dominican prepaid
calling cards and customer contact services. See note 25 of notes to
consolidated financial statements.
WIRELINE. Wireline revenues decreased 12.9% to $85.9 million during 2002
from $98.6 million in 2001, primarily as a result of lower installation and
activation revenues as well as lower revenues from outbound international long
distance traffic.
WIRELESS. Wireless revenues increased 1.4% to $44.7 million during 2002
from $44.0 million in 2001, primarily due to an increase in the number of our
wireless subscribers.
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INTERNATIONAL. International revenues increased 7.1% to $87.8 million
during 2002 from $82.0 million in 2001, primarily due to higher inbound traffic
derived from our U.S.-based international long distance operations.
CABLE. Cable revenues totaled $21.5 million in 2002 compared to $4.7
million in 2001. We acquired our cable subsidiary in October 2001 and,
therefore, revenues for 2001 do not represent full year results.
OTHER. Other revenues increased 26.7% to $18.1 million during 2002 from
$14.3 million in 2001, primarily due to increased revenue from our data and
Internet services offset by a decrease in revenues from sale of equipment and
paging.
The following is a discussion of our revenues for each of the revenue line
items in our financial statements.
TOLL. Toll revenues decreased 10.5% to $26.0 million during 2002 from $29.0
million in 2001. The decrease in toll revenues resulted from decreases in
revenues derived from outbound international long distance minutes offset, in
part, by increases in domestic long distance and interconnection charges
revenues. The decline in the value of the Dominican peso compared to the U.S.
dollar, which affected the translation of toll revenues generated in Dominican
pesos contributed to the decrease in toll revenues.
Revenues from outbound international calls decreased by 25.7% to $10.8
million during 2002 from $14.5 million during 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 $0.36 during 2002 from $0.54
during 2001. Outbound international minutes remained stable at 33.2 million in
2002 from 33.1 million in 2001.
Domestic long distance revenues decreased 1.0% to $5.3 million during 2002
from $5.4 million during 2001. Domestic long distance minutes increased by 9.4%
to 55.6 million minutes during 2002 from 50.8 million minutes during 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 interconnection charges increased 12.1% to $9.1 million
during 2002 from $8.1 million in 2001, reflecting a higher average local access
subscriber base throughout the year and increased inbound international and
domestic long distance traffic terminating in our network. During 2002 we
disconnected a substantial number of lines in service, which could result in us
receiving less revenues from interconnection charges in 2003.
Indotel recently required that all carriers in the Dominican Republic enter
into a form of interconnection agreement that it specified. Several carriers are
resisting entering into the agreement. Among the effects of the new
interconnection agreement and related regulations would be to allow for
increased charges that we can charge to subscribers, in particular, wireless
subscribers. The interconnection agreement would also increase access charges
that we pay other carriers to terminate calls in their network. Since Codotel
has a larger network than we, and more subscribers, this could have the effect
of increasing our operating costs.
INTERNATIONAL. Our international revenues increased 7.1% to $87.8 million
during 2002 from $82.0 million in 2001. The increase resulted primarily from
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 $.043 per minute during 2002 compared
to $.053 per minute during 2001. Inbound minutes increased by 39.6% to 1,023
million minutes during 2002 from 732.7 million minutes in 2001.
Total minutes from our U.S.-based international long distance prepaid cards
decreased by 10.0% to 184.6 million minutes in 2002 from 205.2 million during
2001. Revenues from our U.S. based international long distance prepaid calling
decreased by 18.4% to $25.8 million in 2002 from $31.6 million in 2001. Lower
prepaid card sales primarily resulted from competitive pressures.
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LOCAL SERVICE. Local service revenues increased 3.7% to $65.7 million
during 2002 from $63.4 million in 2001, primarily as the result of a higher
average local access subscriber base throughout the year. Local service revenue
growth during 2002 was curtailed by the decline in the value of the Dominican
peso compared to the U.S. dollar, which affected the translation of local
service revenues generated in Dominican pesos.
Revenues from monthly fees decreased 3.5% to $38.9 million in 2002 from
$40.3 million in 2001. Revenues derived from cellular calls under the
calling-party-pays system increased by 24.5% to $8.1 million in 2002 from $6.5
million in 2001. Measured local service revenues increased by 3.0% to $13.6
million in 2002 from $13.2 million in 2001. Our average monthly churn rate for
local service subscribers increased to 3.3% in 2002 compared to 1.9% in 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 2002, we disconnected many lower usage subscribers to improve the
profile of our local service customer base, resulting in a reduction in the
number of lines in service at December 31, 2002 from the number at December 31,
2001. At December 31, 2002, we had 150,456 lines in service compared to 177,352
lines in service at December 31, 2001, a 15.2% decrease.
By disconnecting low usage customers, we believe we can better use our
network to provide services to and concentrate our sales efforts on, higher
usage residential and corporate customers. In addition to increasing the average
revenue per user, we believe we can increase service offerings to higher usage
customers and ultimately increase our revenues and profitability.
CELLULAR AND PCS. Cellular and PCS revenues increased 1.0% to $37.1 million
during 2002 from $37.3 million in 2001, primarily as the result of the decline
in the value of the Dominican peso compared to the U.S. dollar, which affected
the translation of cellular and PCS revenues generated in Dominican pesos.
At December 31, 2002, we had 432,058 cellular and PCS subscribers compared
to 364,059 at December 31, 2001. As a result of a higher average subscriber
base, total minutes of usage increased 13.0% to 230.5 million minutes in 2002
from 204.0 million minutes in 2001.
At December 31, 2002, approximately 5% of our subscriber base purchased
cellular and PCS services pursuant to fixed-term contracts and 95% purchased
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 mobile 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.
We currently anticipate continuing our program of disconnecting a
substantial number of our "incoming calls only" cellular and PCS subscribers,
which could result in lower revenues during 2003. Our average monthly churn rate
for cellular and PCS services decreased to 4.3% in 2002 from 4.5% in 2001. We
anticipate that the cellular and PCS services churn rate to increase while we
continue our policy of disconnecting lower usage "incoming calls only" prepaid
subscribers.
DATA AND INTERNET. Data and Internet service increased 32.7% to $11.0
million in 2002 from $8.3 million in 2001, primarily as the result of the
continued growth in the number of data and Internet residential and corporate
subscribers. The number of our data and Internet subscribers increased 24.2% to
10,825 at December 31, 2002 from 8,713 at December 31, 2001. Revenues from
monthly fees increased by 24.8% to $8.3 million in 2002 from $6.7 million in
2001.
PAGING. Paging revenues decreased 42.6% to approximately $603,000 in 2002
from $1.1 million in 2001. At December 31, 2002, we had 8,752 paging subscribers
compared to 12,090 paging subscribers at December 31, 2001. Our average monthly
churn rate for paging services decreased to 2.8% during 2002 compared to 4.8%
during 2001. The number of our subscribers has decreased since our decision in
1999 to stop marketing paging services and declining paging revenues reflect the
run-off of contracts existing at 1999.
SALE OF EQUIPMENT. Revenues from the sale of equipment decreased 35.6% to
$1.7 million in 2002 from $2.7 million in 2001, primarily as a result of lower
sales of customer premise equipment and cellular and PCS
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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 they have added subscribers
and contributed to increased cellular and PCS service revenues.
INSTALLATION AND ACTIVATION FEES. Installation and activation decreased
62.8% to $5.3 million in 2002 from $14.3 million in 2001. The decrease reflects
lower installation fees charged for local access lines and mobile services. In
addition, installation and activation revenues for the 2001 period 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. 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 $21.5 million in 2002, compared to $4.7 million in 2001.
At December 31, 2002, we had 71,726 cable subscribers, including 62,543
basic and expanded basic programming subscribers, 7,715 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, and 1,468 subscribers for cable
modem, digital audio programming and other services. Programming services
revenues totaled $15.1 million in 2002. Advertising revenues totaled $5.8
million in 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 13.7% to $260.8 million in 2002 from $229.3
million in 2001. These results reflect higher network and non-network
depreciation expenses resulting from a higher depreciable capital base, non-cash
asset impairment charges, as well as increased transport and access charges
costs. The increase in operating costs and expenses is also attributed to higher
selling, general and administrative expenses and programming costs reflecting
the integration of our cable television operations and the launch of operations
in Panama. As a percentage of revenues, operating costs increased to 101.2% in
2002 from 94.5% in 2001.
TRANSPORT AND ACCESS CHARGES. Transport and access charges costs increased
by 13.0% to $77.2 million in 2002 from $68.3 million in 2001, primarily as a
result of increased interconnection costs and higher outbound carrier costs.
Interconnection costs increased by 20.0% to $33.8 million during 2002 from $28.2
million during 2001, as the result of a higher volume of traffic terminating in
other networks. Outbound carrier costs increased by 4.6% to $30.7 million in
2002 from $29.3 million in 2001, reflecting higher volume of outbound
international calls terminating in non-U.S. destinations.
PROGRAMMING COSTS. Programming costs totaled $6.7 million in 2002 compared
to $1.2 million in 2001, primarily related to fees paid to providers for signals
and programming content.
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IMPAIRMENT CHARGES ON LONG-LIVED ASSETS, GOODWILL AND OTHER INTANGIBLE
ASSETS. During the 2002 fourth quarter, the Company performed its annual
impairment review and recorded a $7.7 million non-cash impairment charge in
relation to its analog wireless and paging networks in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). The Company also recognized a $12.1 million non-cash impairment
charge in relation to goodwill and other intangible assets in TCN Dominicana,
the Company's cable television wholly-owned subsidiary. Under SFAS No. 144, we
are required to reduce the carrying value of the assets to fair value and
recognize assets impairment charges because the carrying value of the affected
assets exceeded the projected future undiscounted cash flows.
NETWORK DEPRECIATION AND NON-NETWORK DEPRECIATION EXPENSE. Network
depreciation increased 19.6% to $53.2 million during 2002 from $44.5 million
during 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 30.6% to $13.0 million during 2002
from $9.9 million during 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. Since September 1, 2002,
in accordance with Presidential decree No. 405-02, we no longer paid taxes in
lieu of income tax but pay the tax imposed on all Dominican corporations, a tax
equal to the greater of either 25% of net taxable income or 1.5% of gross
revenues. Expense in lieu of income taxes during 2002 decreased by 53.4% to $5.9
million from $12.6 million in 2001.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses, excluding non-network depreciation expense increased 8.8% to $96.6
million during 2002 from $88.8 million during 2001. The amount of selling,
general and administrative expenses reflects a higher provision for
uncollectible accounts and increased marketing and advertising expenses,
insurance expense, occupancy costs, and other related expenses. These increases
were offset in part by lower salaries and other personnel compensation costs and
lower commissions paid to wholesale distributors of prepaid cards.
Expenses for the provision of uncollectible accounts increased to $8.2
million in 2002 from $4.8 million in 2001, primarily as a result of a higher
number of contract local service, cellular and PCS and basic and expanded basic
cable subscribers. Marketing expenses increased to $9.1 million during 2002 from
$7.5 million during 2001. Insurance expense increased to $5.3 million during
2002 from $4.0 million in 2001. Occupancy costs increased to $8.1 million in
2002 from $7.1 million in 2001.
Other expenses, which include, among others legal expenses, maintenance and
repair of vehicles and equipment and other professional services, increased to
$20.1 million in 2002 from $18.4 million in 2001. Salaries and other
compensation to personnel decreased to $28.7 million in 2002 from $31.2 million
in 2001. At December 31, 2002, we had 1,519 employees compared to 1,829
employees at December 31, 2001. Commissions decreased to $21.6 million in 2002
from $22.9 million in 2001.
As a percentage of total operating revenues, selling, general and
administrative expenses, excluding non-network depreciation expense increased to
37.4% during 2002 compared to 36.4% during 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,
decreased by 34.8% to $1.3 million during 2002 from $2.1 million during 2001.
Other costs, which consist of the cost of sale of prepaid services decreased to
$1.2 million during 2002 from $1.7 million during 2001.
OPERATING INCOME (LOSS). Operating loss totaled $16.9 million in 2002
compared to operating income of $14.5 million in 2001.
The following is a discussion of our operating income (loss) for each of
our five reportable segments:
WIRELINE. Wireline operating loss totaled $2.8 million during 2002 compared
to operating income of $13.9 million in 2001.
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WIRELESS. Wireless operating loss totaled $13.3 million during 2002
compared to operating income of $4.1 million in 2001.
INTERNATIONAL. International operating loss totaled $12.5 million during
2002 compared to $600,000 in 2001.
CABLE. Cable operating loss totaled $5.8 million during 2002 compared to
operating income of $1.0 million in 2001.
OTHER. We incurred an operating loss of $7.5 million from Other services
during 2002 compared to operating income of $5.1 million in 2001.
OTHER INCOME (EXPENSES). Other expenses increased to $60.5 million in 2002
from $38.9 million in 2001, primarily as a result of increased interest expenses
resulting from higher average aggregate amount of outstanding debt, incurred
primarily to purchase network and telecommunications equipment. Interest expense
increased to $64.3 million in 2002 from $42.1 million in 2001.
NET EARNINGS (LOSS). Net loss totaled $76.6 million, or $1.76 per share, in
2002 compared to a net loss of $23.1 million, or $0.78 cents per share, in 2001.
EBITDA AND CASH FLOWS. Earnings before interest and other income, taxes and
depreciation and amortization decreased by 5.3% to $77.9 million in 2002 from
$82.2 million in 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 and impairment charges. See
footnote 7 to Selected Financial Data.
Net cash provided by operating activities declined to $13.6 million in 2002
compared to $34.0 million in 2001, reflecting operating loss and a higher net
loss. Net cash used in investing activities declined to $57.9 million in 2002
compared to $176.5 million in 2001, primarily as a result of a decrease in
acquisition of property and equipment. Net cash provided by financing activities
was $38.6 million in 2002 compared to $136.8 in 2001. Financing activities
during 2002 primarily include the proceeds from the issuance of common stock,
combined with lower borrowed funds.
2001 COMPARED TO 2000
OPERATING REVENUES. Our total operating revenues increased 8.7% to $243.8
million in 2001 from $224.3 million in 2000. This growth stemmed primarily from
increases in revenues from local service, data and Internet, cable television
and wireless services, offset, in part, by decreased international revenues and
decreased revenues from the sale and lease of equipment.
The following is a discussion of our operating revenues for each of our
five reportable segments: Wireless, Wireless, International, Cable and Others.
Other includes paging, Internet, data services, local prepaid calling cards and
customer contact services.
WIRELINE. Wireline revenues increased 18.1% to $98.6 million during 2001
from $83.5 million in 2000, primarily as a result of higher interconnection
charges and a higher volume of domestic long distance traffic and continued
growth in the number of local lines in service.
WIRELESS. Cellular revenues increased 3.5% to $44.0 million during 2001
from $42.5 million in 2000, primarily due to an increase in the number of our
wireless subscribers.
INTERNATIONAL. International revenues decreased 2.6% to $82.0 million
during 2001 from $84.2 million in 2000, primarily due to continued pricing
pressures for traffic between the United States and the Dominican Republic.
CABLE. Cable revenues totaled $4.7 million during 2001. We acquired our
cable subsidiary in October 2001 and, therefore, did not have any cable revenues
during 2000.
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OTHER. Other revenues increased 0.7% to $14.3 million during 2001 from
$14.2 million in 2000, primarily due to increased revenue from our data and
Internet services offset by a decrease in revenues from sale of equipment and
paging.
The following is a discussion of our revenues for each of the revenue line
items in our financial statements.
TOLL. Toll revenues increased 1.2% to $29.0 million during 2001 from $28.7
million in 2000, primarily as a result of higher interconnection charges and a
higher volume of domestic long distance traffic, offset, in part, by decreased
revenues derived from outbound international traffic.
Revenues from interconnection charges increased 13.3% to $8.1 million
during 2001 from $7.2 million in 2000. The increase in interconnection charges
reflected the growth in our local access subscription base, as well as growth in
the Dominican telephony markets.
Revenues from outbound international calls decreased by 12% to $14.5
million during 2001 from $16.5 million in 2000, primarily as a result of a
decrease in the price per minute for outbound international calls for
residential and commercial customers. The average price per minute for outbound
international calls declined to $0.54 in 2001 from $0.89 in 2000. Outbound
international minutes increased by 1.9% to 33.1 million in 2001 from 32.5
million minutes during 2000, reflecting increased traffic volume from our
cellular and PCS customers.
Domestic long distance revenues increased 5.9% to $5.4 million during 2001
from $5.0 million in 2000. Domestic long distance minutes increased by 10.8% to
50.8 million minutes during 2001 from 45.9 million minutes during 2000. The
increase in domestic long distance minutes resulted from higher traffic volume
from our retail call centers. The increase in domestic long distance minutes was
offset in part by an approximate 16% decrease in 2001 in the average price per
minute. Pending regulatory proposals that would divide the Dominican Republic
into five zones and provide that intrazone calls are local could have the effect
of decreasing rates for some calls if the regulations are adopted.
INTERNATIONAL. Our international revenues decreased 2.6% to $82.0 million
in 2001 from $84.2 million in 2000, primarily as the result of continued pricing
pressures for traffic between the United States and the Dominican Republic. Our
average settlement rate was $0.095 per minute during 2000 and $0.053 per minute
during 2001. The volume gains achieved in 2001 were not sufficient to offset
pricing declines, particularly during the fourth quarter of 2001, in which
international revenues decreased 16% from international revenues in the fourth
quarter of 2000.
Inbound minutes increased by 30% to 732.7 million minutes in 2001 from
563.4 million in 2000. TRICOM USA accounted for approximately 86.0% of our total
inbound minutes in 2001 compared to 71.1% in 2000. Total minutes from our
U.S.-based international long distance prepaid cards increased by 48.1% to 205.2
million minutes in 2001 from 138.6 million during 2000. Revenues from our U.S.
based international long distance prepaid calling cards increased by 27.6% to
$31.6 million in 2001 from $24.8 million in 2000.
LOCAL SERVICE. Local service revenues increased 23.6% to $63.4 million
during 2001 from $51.3 million in 2000, primarily as the result of the continued
growth in the number of local lines in service. In 2001, we added 29,040 net
local access lines compared to 29,386 net local access lines added in 2000. At
December 31, 2001, we had 177,352 local access lines in service compared to
148,312 local access lines in service at December 31, 2000 representing a 19.6%
increase.
As a result of a higher number of lines in service, measured local service
revenues increased by 23.1% to $13.2 million in 2001 from $10.8 million in 2000.
Revenues from monthly fees increased by 20.6% to $40.3 million in 2001 from
$33.4 million in 2000. Revenues derived from cellular calls under the
calling-party-pays system increased by 37.3% to $6.5 million in 2001 from $4.8
million in 2000. Our average monthly churn rate for local service was 1.9% in
2001 compared to 2.3% in 2000. We calculate our average monthly churn rate by
dividing the number of subscribers disconnected during a given period by the sum
of subscribers at the beginning of each month during such period.
CELLULAR AND PCS. Our cellular and PCS revenues grew 4.2% to $37.3 million
in 2001 from $35.8 million in 2000. The growth in our wireless operations was
the result of a 27.7% increase in subscribers. At December 31, 2001, we had
364,059 cellular and PCS subscribers compared to 284,991 at December 31, 2000.
As a result of a higher average subscriber base, minutes of usage increased
22.6% to 204.2 million minutes in 2001 from 166.6
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million minutes in 2000. The average price per minute of use declined to $0.20
in 2001 from $0.24 in 2000, reflecting increased price competition initiated by
new entrants to the market in 2000.
We attribute the substantial growth of our subscriber base to the continued
success of our prepaid cellular program. Prepaid cellular and PCS services
generated approximately 70% of our total minutes of use and 71% of total
cellular and PCS revenues in 2001. Prepaid revenues increased by 27.6% to $26.7
million in 2001 from $20.9 million in 2000. Revenues from post paid subscribers
declined by 16.8% in 2001 from 2000, reflecting a decline in the number of post
paid subscribers. We initiated programs in 2002, which have resulted in
increasing our postpaid subscriber base. Our average monthly churn rate for
cellular and PCS services increased to 4.6% in the 2001 from 3.3% in 2000
reflecting primarily our decision to disconnect lower usage prepaid subscribers
during 2001.
DATA AND INTERNET. Data and Internet service revenues increased 138.9% to
$8.3 million in 2001 from $3.0 million in 2000, primarily as the result of the
continued growth in the number of data and Internet subscribers. The number of
our data and Internet subscribers grew to 8,713 at December 31, 2001 compared to
6,080 at December 31, 2000. The increase in revenue also reflects an increase in
our average basic monthly rent as well as revenues that we received from our
contract with the Dominican government to provide data and Internet services to
Dominican public high schools.
PAGING. Paging revenues decreased 38.3% to $1.1 million in 2001 from $1.7
million in 2000, primarily as a result of our decision to focus on having new
customers move away from paging services and into prepaid cellular services. At
December 31, 2001, we had 12,090 paging subscribers compared to 21,622 paging
subscribers at December 31, 2000. Our average monthly churn rate for paging
services increased to 4.3% in 2001 from 3.3% in 2000.
SALE OF EQUIPMENT. Revenues from the sale of equipment decreased 49% to
$2.7 million in 2001 from $5.3 million in 2000, primarily as a result of lower
sales of cellular and PCS handsets and private branch exchanges and key
telephone systems. We have entered into arrangements for the distribution of
cellular and PCS services through major electronics retailers. These
arrangements have decreased equipment sales revenues but we believe added
subscribers and we believe contribute to increased cellular and PCS service
revenues.
INSTALLATION AND ACTIVATION. Installation and activation revenues increased
4.4% to $14.3 million in 2001 from $13.7 million in 2000, primarily as a result
of higher average activation fees for local access service, offset, in part, by
lower revenues derived from lower average activation fees charged for cellular
and PCS services. In response to competition, recently we have not charged
activation fees for new cellular and PCS customers.
CABLE. In the fourth quarter of 2001, we acquired the shares of TCN
Dominicana, S.A., a wholly-owned subsidiary of Telecable Nacional, C. por A.,
that owns and operates the largest multi-channel system in the Dominican
Republic's pay-TV market including the concession granted by the Dominican
government to operate a cable system. Revenues from cable television services
totaled $4.7 million in 2001, primarily from basic and expanded basic
programming services and advertising sales. At December 31, 2001, we had 64,466
cable subscribers, including 56,896 basic subscribers, and 7,570 commercial
rooms. Programming services revenues totaled $3.9 million and advertising
revenues totaled $768,000 in 2001.
OPERATING COSTS. Our operating costs increased to $229.3 million in 2001
from $183.3 million in 2000. These results reflect higher network and
non-network depreciation expenses resulting from a higher depreciable capital
base as a result of our capital investment and domestic and international
network expansion programs. It also reflects higher selling, general and
administrative expense primarily from increased commissions due to the growth of
our retail prepaid card operations in the United States. As a percentage of
revenues, operating costs increased to 94.1% in 2001 from 81.7% in 2000.
SATELLITE CONNECTIONS AND CARRIER COSTS. Satellite connections and carrier
costs decreased by 0.4% to $68.3 million in 2001 from $68.6 million in 2000,
primarily as a result of lower outbound carrier costs. Outbound carrier costs
decreased by 17.6% to $29.3 million in 2001 from $35.6 million in 2000,
reflecting decreases in outbound revenues.
PROGRAMMING COSTS. Programming costs totaled $1.2 million in 2001.
NETWORK DEPRECIATION AND NON-NETWORK DEPRECIATION EXPENSE. Network
depreciation increased 51.7% to $44.5 million in 2001 from $29.3 million in
2000, as a result of a higher depreciable asset base due to the continued
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investments in our local and international networks, including
telecommunications equipment and facilities. Non-network depreciation expense
with respect to other fixed assets grew 45.4% to $9.9 million in 2001 from $6.8
million in 2000.
EXPENSE IN LIEU OF INCOME TAXES. In 2000 and 2001 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 included a tax
of 2% on international settlement revenues collected. Expense in lieu of income
taxes during 2001 increased by 24.3% to $12.6 million from $10.2 million in
2000.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and administrative
expenses, excluding non-network depreciation expense, increased 39.1% to $88.8
million in 2001 from $63.9 million in 2000. The increase in the amount of
selling, general and administrative expenses reflected the greater amount of
commissions paid to wholesale distributors of prepaid cards, as a result of a
higher number of prepaid cards sold in the United States and the expansion of
our prepaid cellular subscriber base in the Dominican Republic, and other
expenses, including legal, maintenance and repair of equipment. Commissions paid
to wholesale distributors of prepaid cards grew 40.4% to $16.3 million in 2001
from $11.6 million in 2000. Other expenses increased 29.5% to $18.3 million in
2001 from $14.1 million in 2000. At December 31, 2001, we had 1,829 employees
compared to 1,740 employees at December 31, 2000. Salaries and other
compensation to personnel increased by 6.6% to $29.0 million in 2001 from $27.2
million in 2000. Marketing expenses increased by 4.1% to $4.5 million in 2001
from $4.3 million in 2000.
As a percentage of total operating revenues, selling, general and
administrative expenses, excluding non-network depreciation expense, increased
to 36.4% in 2001 compared to 28.5% in 2000.
COST OF EQUIPMENT SOLD AND OTHER COSTS. Cost of equipment sold, which
consists of the cost of sale of customer premise equipment, including private
branch exchanges and key telephone systems, as well as cellular and PCS
handsets, decreased by 28.9% to $2.1 million in 2001 from $2.9 million in 2000.
Other costs, which consist of the cost of sale of prepaid services, increased by
12.6% to $1.7 million in 2001 from $1.6 million in 2000.
OPERATING INCOME. Operating income decreased to $14.5 million in 2001
compared to $41.0 million in 2000. Operating income as a percentage of total
operating revenues decreased to 5.9% in 2001 from 18.3% in 2000.
The following is a discussion of our operating income (loss) for each of
our five reportable segments:
WIRELINE. Wireline operating income decreased 30.2% to $13.9 million during
2001 from $19.9 million in 2000.
CELLULAR. Cellular operating income decreased 72.7% to $4.1 million during
2001 from $15.0 million in 2000.
INTERNATIONAL. International operating income decreased 79.3% to $0.6
million during 2001 from $2.9 million in 2000.
CABLE. Cable operating income was $1.0 million in 2001. We acquired our
cable subsidiary in October 2001 and, therefore, did not have any cable
operating income during 2000.
OTHER. We incurred an operating loss of $5.1 million from Other services
during 2001 compared to operating income of $3.3 million in 2000.
OTHER INCOME (EXPENSES). Other expenses increased to $38.9 million in 2001
from $31.2 million in 2000, reflecting increased interest expenses resulting
from higher average aggregate amount of outstanding debt and despite a decrease
in the average interest paid in 2001. We incurred debt primarily to purchase
network and telecommunications equipment.
NET EARNINGS (LOSS). Net loss totaled $23.1 million, or $0.78 per share, in
2001 compared to a net loss of $7.2 million, or $0.26 per share, in 2000. The
net loss in 2000 included the effect of the $16.5 million cumulative effect of
the accounting change from the adoption of SAB 101.
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EBITDA AND CASH FLOWS. Earnings before interest and other income, taxes and
depreciation and amortization decreased by 6.3% to $82.2 million in 2001 from
$87.7 million in 2000. We calculate earnings before interest and other income
and expenses, taxes and depreciation and amortization prior to the deduction of
payments to the government in lieu of income taxes. See footnote 7 to Selected
Financial Data.
Net cash provided by operating activities was $34.0 million in 2001
compared to $42.3 million in 2000, reflecting lower operating income resulting
from a higher cost structure and increased net loss. Net cash used in investing
activities was $176.4 million in 2001 compared to $149.4 million in 2000. Cash
used in investing activities was primarily utilized for acquisition of property
and equipment as well as business acquisitions. Net cash provided by financing
activities was $136.8 million in 2001 compared to $111.8 in 2000. Financing
activities during 2001 primarily include the proceeds from the issuance of
common stock, combined with the issuance of long-term debt and commercial paper.
ACQUISITIONS
In April, 2001, we purchased a 51% interest in a Panamanian company,
Cellular Communications of Panama, S.A., now TRICOM Panama, S.A., for
approximately $8.1 million. TRICOM Panama had approximately 888 analog wireless
users at December 31, 2002 and owns the frequency rights for 107 channels of 25
MHz each. These frequencies will give us access to nationwide coverage, covering
a population of approximately 2.8 million people. We have constructed an iDEN(R)
network, at a cost as of December 31, 2002 of approximately $47.9 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
wireless integrated services, including two-way radio, paging and interconnect
services. At December 31, 2002, we had invested approximately $47.9 million in
our Panama operations.
On October 26, 2001, we acquired the shares of TCN Dominicana, S.A., a
wholly-owned subsidiary of Telecable Nacional, C. por A., that owns and operates
the largest multi-channel system in the Dominican Republic's pay-TV market
including the concession granted by the Dominican government to operate a cable
system. The transaction was valued at approximately $1,130 per subscriber
equivalent or approximately $64.0 million, payable $41.8 million in cash and
with 3,375,000 shares of our Class A common stock. TCN Dominicana is the leader
of the Dominican cable television market with a 43 % market share, serving
71,726 cable subscribers and close to 170,000 homes passed as of December 31,
2002. We intend to expand our subscriber base by increasing our penetration rate
over existing homes passed and by expanding the reach of our existing cable
network, as well as by marketing our various Internet access services and
introducing new multimedia products and services.
CRITICAL ACCOUNTING POLICIES
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. We recognized revenue associated with the accounting change from the
adoption of SAB 101 of $8.9 million in 2000 and $7.5 million in 2001.
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.
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
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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 deposit for our analog and digital
set-top boxes, though we do not charge an installation fee. Based on our
experience with Telecable during 2002, we estimate the average service life for
our cable customers to be 24 months. We recognized revenues from cable
activation fees for 2002 in the aggregate of approximately $314,000.
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.
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 assets 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.
During the fourth quarter of 2002, we recognized a $5.9 million
asset-impairment charge associated with our analog wireless and paging networks
in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". Under SAFS No. 144, we were required to reduce the carrying
value of these assets to fair value and recognize asset impairment charges
because the carrying value of the affected assets exceeded the projected future
undiscounted cash flows of these assets. We recognized asset impairment charges
of $4.6 million associated with our analog wireless network and $1.3 million
related to our paging network.
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. Our 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.
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 (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. Upon the adoption of SFAS 142, there was no impairment of goodwill. As of
December 31, 2001 and December 31, 2002, the composition of goodwill and
intangible assets
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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.
EFFECTS OF INFLATION AND CURRENCY DEVALUATION
The annual inflation rate in the Dominican Republic was 9.0% for 2000,
4.4% for 2001 and 10.5% for 2002. The effects of inflation on our operations
have not been significant.
Devaluation of the Dominican peso against the U.S. dollar was
approximately 4%, 2% and 26% for the years ended December 31, 2000, 2001 and
2002, respectively.
CHANGE IN FUNCTIONAL AND REPORTING CURRENCY
Through December 31, 1996, we used the Dominican peso as our functional
and reporting currency. While a significant portion of our revenues, assets and
liabilities historically were denominated in U.S. dollars, a clear determination
of the functional currency was difficult, and we used the Dominican peso as our
functional currency. However, in our opinion, with the issuance of our 11 3/8%
senior notes due 2004, in August 1997, our cash flows and financial results of
operations are more appropriately presented in the U.S. dollar as the functional
currency. Effective January 1, 1997, we changed our functional currency from the
Dominican peso to the U.S. dollar.
LIQUIDITY AND CAPITAL RESOURCES
Substantial capital is required to operate and expand our
telecommunications networks. For 2002, we made capital expenditures of $65.8
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
$116.6 million in 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. Our capital expenditures in
2002 were funded by internally generated cash flow, short-term borrowings,
capital leases and trade and vendor financing. We currently estimate that our
2003 capital expenditures will aggregate approximately $25 million. Capital
expenditures in 2003 will be used to expand the capacity of our local service
and wireless networks, upgrade our cable networks and general network
maintenance.
We have satisfied our working capital requirements and funded capital
expenditures from cash provided by operations, short and long-term
borrowings, trade finance, capital leases, vendor financing and equity and debt
issuances. In December 2002, we received approximately $70 million from the sale
of Class A common stock in a private placement. All of the proceeds of the
private placement were used to repay short-term debt. In 2003, our objective is
to finance capital expenditures from cash provided by operations. In
order to achieve this objective, we have significantly reduced planned capital
expenditures to $25 million. If, however, cash provided by operations is not
sufficient to entirely fund capital expenditures, we believe that current cash
and borrowings available to us will be sufficient to fund the balance. At
December 31, 2002, we had approximately $22 million in cash and investments. At
that date, we also had credit facilities which, in the aggregate, permit us to
borrow $268.6 million, of which approximately $53.3 million remained available
to be borrowed. In addition, our planned capital expenditures are discretionary
and can be postponed or cancelled, if we determine that funds are not available
to us. We frequently evaluate potential acquisitions and joint venture
investments, although we do not currently contemplate any acquisitions and the
indenture governing our notes 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 $34.0 million for 2001 and
$13.6 million for 2002. We had net accounts receivable of $34.5 million at
December 31, 2001 and $25.1 million at December 31, 2002, respectively. Our
allowance for doubtful accounts increased to $7.8 million at December 31, 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 expanded basic cable
subscribers.
Our indebtedness was approximately $467.6 million at December 31, 2002,
compared to $498.2 million at December 31, 2001. Our indebtedness at December
31, 2002 consisted of $200.0 million of our 11 3/8% senior notes due 2004,
$185.6 million of long-term borrowings and capital leases, with maturities of up
to five years, and
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$82.0 million of short-term bank loans, commercial paper, short-term
telecommunications equipment trade financings and current portion of capital
leases and of long-term debt. At December 31, 2002, our U.S. dollar borrowings
and commercial paper, other than the 11 3/8% senior notes due 2004, had interest
rates ranging from 4.50% per annum to 14.93% per annum, and our Dominican peso
borrowings and commercial paper had interest rates ranging from 18% per annum to
32% per annum. At December 31, 2002, our U.S. dollar borrowings, other than the
11 3/8% senior notes, totaled $246.9 million and our peso borrowings totaled
$20.7 million.
Our 11 3/8% senior notes in the aggregate principal amount of $200
million will mature in September 2004. We have filed a registration statement
with the Securities and Exchange Commission for a proposed offer to exchange our
existing 11 3/8% senior notes for new senior notes in the same aggregate
principal amount that would mature at a later date. If we are successful in our
proposed exchange offer and consent solicitation, our liquidity and capital
resources will not be materially affected during 2003 other than by the costs
and expenses of the proposed exchange offer and consent solicitation, which we
currently estimate will be between $8 million and $10 million. The successful
completion of the proposed exchange offer and consent solicitation also would
eliminate our requirement to repay the exchanged portion of the $200 million
principal amount of the notes in September 2004. If we are unsuccessful in the
proposed exchange offer and consent solicitation or if we otherwise cannot
extend the maturity of the notes, our cash flow from operations will not be
sufficient to repay the notes and we may not be able to obtain financing from
other sources.
At December 31, 2002, we had approximately $22.0 million in cash and
investments. In addition, we had credit facilities, which, in the aggregate,
permit us to borrow up to $268.6 million. At December 31, 2002, there was $215.4
million outstanding under these facilities. We had approximately $53.3 million
available for borrowing under these facilities with maturities of less than one
year.
At December 31, 2002, we had $67.9 million of short-term and long-term
approved credit facilities with Dominican banks and institutions and $200.8
million of U.S. dollar-denominated approved credit facilities with international
banks and financial institutions as compared to $93.5 million and $246.7
million, respectively, at December 31, 2001. In addition, at December 31, 2002,
the Company had in place a $71.6 million dollar-denominated and peso-denominated
commercial paper program in the Dominican Republic. At December 31, 2002, we had
outstanding $51.6 million under such program. The proceeds from the issuance of
commercial paper have been used to finance the purchase of telecommunications
related assets.
At December 31, 2002, our current liabilities exceeded our current assets
by $88.6 million compared to $175.6 million at December 31, 2001. The decrease
in negative working capital is due to the repayment of $70 million in short-term
debt with the net proceeds of our issuance of Class A common stock in December
2002 and the refinancing of approximately $118 million of our short-term debt
into long-term debt. The negative working capital 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. 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 $2.9 million at December 31, 2002, contained two financial covenants that
required 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). GE Capital has waived our non-compliance
at September 30, 2002 and agreed to eliminate any financial covenants.
The following table contains certain information concerning the Company's
material contractual obligations at December 31, 2002 (in millions of dollars).
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<Table>
<Caption>
PAYMENTS DUE BY PERIOD
- --------------------------------------- -------------------------------------------------------
LESS THAN 1
CONTRACTUAL CASH OBLIGATIONS TOTAL YEAR 1 - 3 YEARS 4 - 5 YEARS
- --------------------------------------- -------------- ----------- ----------- -----------
Short-term debt $ 48.5 48.5 - -
Long-term debt 404.6 30.8 335.2 38.6
Capital lease obligations 14.5 2.7 10.3 1.5
Operating leases 24.7 2.9 9.9 11.9
-------------- --------- ---------- -----------
TOTAL CONTRACTUAL CASH OBLIGATIONS $ 492.3 84.9 355.4 52.0
============== ========= ========== ===========
</Table>
We borrow from a bank, Bancredito, that is controlled by GFN, one of our
principal shareholders. The terms on which we borrow from Bancredito are similar
to terms available to us from other banks in the Dominican Republic. If loans
from Bancredito were not available to us, we could not be certain that we could
obtain financing from other sources. An affiliate of Bancredito also has acted
as agent for the placement of short-term debt in the commercial paper markets in
the Dominican republic. See "Directors, Senior Management and Employees" and
Note 6 of notes to our consolidated financial statements for discussions of
these transactions.
At December 31, 2001, our 11 3/8% 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%
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% notes due 2004 to B and lowered its
outlook from stable to negative. On December 2, 2002, Moody's lowered the rating
of our 11 3/8% senior notes due 2004 to Caa2. Our rating also has been placed on
review for possible further downgrade. Our domestic commercial paper program is
not rated by either Moody's or S&P. The ratings of our notes by Moody's and S&P
is not a recommendation to buy, sell or hold the notes; these ratings may be
subject to revision or withdrawal at any time by the assigning rating
organization; and each of these rating should be evaluated independently of any
other rating.
The following table describes certain information regarding the ratings
by S&P and Moody's of the notes:
<Table>
<Caption>
S&P DESCRIPTION MOODY'S DESCRIPTION
- ----------------- --------------------------------------- ------- ------------------------------------------------------------
RATING B The obligor currently has the capacity RATING Bonds which are rated Caa are of poor standing.
to meet its financial commitment on the CAA2 Such issues may be in default or there may be
obligation. Adverse business, present elements of danger with respect to
financial, or economic conditions will principal or interest. The modifier 2 indicates
likely impair the obligor's capacity or that the obligation ranks in the mid-range of
willingness to meet its financial its generic rating category.
commitment on the obligation.
NUMBER OF 22 21
RATING
CATEGORIES
RANK 15th (8th lowest) 18th (4th lowest)
AUDIENCE Lenders, investors and other interested Lenders, investors and other interested parties
parties
Business risk Franchise value
CHARACTERISTICS Industry characteristics Leverage
BEING RATED Competitive position Coverage
Management Liquidity
Profitability
Financial risk Management quality
Financial characteristics
Financial policy
Profitability
Capital structure
Cash flow protection
Financial flexibility
-----------------------------------------------------------------------------------------------------------------------------------
</Table>
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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
governing 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 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
We are managed by a Board of Directors, the members of which, in
accordance with our by-laws, are elected at the annual shareholders' meeting and
serve for a period of one year. The Board of Directors is composed of a
Chairman, Vice President, Treasurer, Secretary and eight additional members. The
Board of Directors meets at least once every three months. Special meetings of
the Board of Directors may be held at any time.
The names of our executive officers and directors are set forth below
together with their ages at December 31, 2002 and current positions.
<Table>
<Caption>
NAME AGE POSITION
- -------------------------------- ---- ---------------------------------------------------------------------
BOARD OF DIRECTORS
NAMED BY GFN CORPORATION, LTD.:
Manuel Arturo Pellerano Pena 48 Chairman of the Board
Hector Castro Noboa 61 Vice President of the Board
Marcos J. Troncoso 55 Secretary
Carl H. Carlson 44 Treasurer
Juan Felipe Mendoza 49 Director
Anibal De Castro 53 Director
NAMED BY MOTOROLA, INC.:
Kevin J. Wiley 43 Director
Ralph Smith 47 Director
Richard Hanning 51 Director
Theodore W. Schaffner 56 Director
INDEPENDENT DIRECTORS:
Marino Ginebra 56 Director
Edwin Corrie 74 Director
EXECUTIVE OFFICERS
Manuel Arturo Pellerano Pena 48 President, Chief Executive Officer and Chairman of the Board of
Directors
Marcos J. Troncoso 55 Executive Vice President of International Business Development,
Member of the Office of the President and Secretary
Carl H. Carlson 44 Executive Vice President, Chief Operating Officer, Member of the
Office of the President and Treasurer
Ramon Tarrago 39 Chief Financial Officer and Vice President of International Division
Carlos Ramon Romero 50 Vice President, Business Segment Division
Ryan Larrauri 30 Vice President, Consumer Segment Division
Valeriano Valerio 43 First Vice President, Network Planning and Operations
</Table>
Each of the current members of the Board of Directors has been elected
pursuant to an amended and restated shareholders agreement, dated at May 8,
1998, among Motorola, Inc., Oleander Holdings, Inc., Zona Franca San Isidro,
S.A. and certain individuals, Oleander and Zona, are wholly owned subsidiaries
of GFN, and the individual parties to the agreement are all affiliates of either
GFN or TRICOM.
The Directors are elected annually at the Annual General Meeting of
Shareholders. Each Director (when ever elected) holds office until the next
Annual General Meeting of Shareholders following his election and until his
successor is elected or until his earlier resignation or removal.
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At this date, no date has been set for the Annual General Meeting of
Shareholders.
MANUEL ARTURO PELLERANO PENA has served as Chairman of our Board of
Directors and President and Chief Executive Officer since August 1994 and as a
member of the Board of Directors since our formation in January 1988. He
currently serves as President of Bancredito, a bank affiliated with GFN and one
of the largest commercial banks in the Dominican Republic and has been a member
and the Vice President of the Board of Directors of GFN since April 1989.
Mr. Pellerano holds a Bachelor of Science degree in Economics from the
Universidad Nacional Pedro Henriquez Urena.
MARCOS J. TRONCOSO has served as our Executive Vice President of
International Development since March 1992, as Secretary of the Board of
Directors since our formation in January 1988 and as Member of the Office of the
President since September 1995. Prior to assuming these positions, Mr. Troncoso
served as Executive Vice President of GFN beginning in May 1979. Mr. Troncoso
received a law degree from Universidad Nacional Pedro Henriquez Urena and a BS
degree in business administration with a major in accounting from the University
of Puerto Rico.
CARL H. CARLSON, our Executive Vice President and Chief Operating
Officer since March 1998, has served as Treasurer of the Board of Directors
since January 2000 and as a Member of the Office of the President since
September 1995. Mr. Carlson was a Senior Vice President from March 1993 until
March 1998 and Chief Financial Officer from September 1993 until September 1995.
Mr. Carlson served as a Vice President of Finance and Administration from
December 1989 until September 1993. Mr. Carlson was an Assistant Vice President
for GFN's insurance division from 1987 until December 1989. From 1983 to 1987,
Mr. Carlson was a Vice President at Chase Manhattan Bank. Mr. Carlson is a
graduate of Instituto Technologico de Santo Domingo where he majored in business
administration and accounting and finance. Mr. Carlson earned an MBA from a
joint program between the University of South Carolina and Pontifica Universidad
Catolica Madre y Maestra.
RAMON TARRAGO, has served as our Chief Financial Officer and Vice
President of International Division since July 2002. Mr. Tarrago has directed
the International Division since its organization as a separate business unit in
July 1996 as First Vice President. He was a Second Vice President of the
Corporate Center from August 1995 until July 1996. He was a Second Vice
President of the International Division from August 1995 until July 1996. He was
Director of International Relations from November 1993 until August 1995. From
February 1992 until November 1993, he was our Director of Finance. Between May
1991 and February 1992, he was a management associate in the Corporate Banking
Unit at the Santo Domingo branch of Citibank. Mr. Tarrago worked for the World
Bank's International Finance Corporation in Washington, D.C. from May 1990 to
September 1990 and for Bancredito between October 1986 and March 1988. He is the
former dean of the MBA program at the Pontificia Universidad Catolica
Madre y Maestra and has held an academic post at the Instituto Tecnologico de
Santo Domingo. Mr. Tarrago holds both a BA in economics from Universidad
Nacional Pedro Henriquez Urena and an MBA with a finance concentration from the
Virginia Polytechnic Institute and State University.
CARLOS RAMON ROMERO has served as Vice President of our Business Segment
Division since January 2002. He was Vice President Customer Relationship
Management Division from July 2000 to blank and First Vice President of the
Residential and Business Division from July 1996 until July 2000. Immediately
prior to his arrival, Mr. Romero served as chief executive of a brokerage
company which he started in February 1994. Mr. Romero served as Vice President
of the Technical Area of Compania Nacional de Seguros, a subsidiary of GFN, from
1980 until February 1994. Mr. Romero earned a BA in International Services from
the Universidad Nacional Pedro Henriquez Urena, where he has since held various
academic posts.
RYAN LARRAURI has served as Vice President of our Consumer Segment
Division since June 2001. Before joining TRICOM, he was Vice President of
Marketing for GFN's Bancredito and Compania Nacional de Seguros since 1999. He
has held numerous directive and executive positions in the textile, consumer
goods and financial sectors. Mr. Larrauri is the published author of MARKETING
IN THE DOMINICAN REPUBLIC, GENESIS AND EVOLUTION as well as several other
specialized articles in the field. Mr. Larrauri has a B.S. in Marketing from the
Univesidad Iberomaricana, as well as Post-Graduate degrees in Brand Management,
International Business, Bank Management and Strategic planning.
VALERIANO VALERIO has served as our First Vice President of Network
Planning and Operations since June 2000 and as Second Vice President of
Institutional Relationships between June 1995 and June 2000. Mr. Valerio
graduated with a degree in Electrical Engineering from the Universidad Pedro
Henriquez Urena and studied at the Nippon Telegraph and Telephone Public
Corporation of Tokyo, Japan.
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HECTOR CASTRO NOBOA has served as Vice President of our Board of
Directors since August 1994 and as a member since our formation in January 1988.
He has been director and Executive Vice President of GFN since April 1989.
Between March 1993 and September 1997, Mr. Castro served as the Executive Vice
President of Bancredito. Mr. Castro has also worked for the Deutsche
Sudamerikanische Bank (Germany), Citibank (Marketing Vice President), Bonanza
Dominicana (Chief Financial Officer), Banco Metropolitano (Financial Advisor)
and Universidad Nacional Pedro Henriquez Urena (professor of international
economics and macroeconomics). Mr. Castro has a degree in Business Economics
from Madrid's Universidad Complutense where he studied business economics.
JUAN FELIPE MENDOZA has been a member of our Board of Directors since
June 1997. Mr. Mendoza currently serves as Chief Executive Officer of Bancredito
and President of Compania Nacional de Seguros. He is Vice President of FIDES
(Inter-American Federation of Insurance Companies) and its regional commission
for Central America and the Caribbean. Mr. Mendoza is a director of
Reaseguradora Nuevomundo, Caribbean Hotel Association Insurance Company,
Bancredito and GFN Corporation. Mr. Mendoza joined GFN in 1977. Prior to joining
GFN, Mr. Mendoza was employed in the Internal Audit Department for the Caribbean
of the Royal Bank of Canada. Mr. Mendoza graduated from Universidad Nacional
Pedro Henriquez Urena and also attended Specialized Insurance Training Programs
at Royal Global Insurance of New York and Swiss Insurance Formation Center,
Swiss Re, Switzerland. Mr. Mendoza is a certified public accountant.
ANIBAL DE CASTRO has been a member of our Board of Directors since May
1998, and has served as President of Editorial AA, a subsidiary of GFN, since
May 1994. Mr. De Castro served on the Board of Directors of Corporacion
Dominicana de Electricidad (C.D.E), the country's state-owned electric utility
provider from 1979 to 1982, and currently serves on the Board of Directors of
several Dominican companies and professional associations including Banco de la
Pequena Empresa and Fondo de Financiamiento de la Micro-Empresa. Mr. De Castro
graduated from Universidad Autonoma de Santo Domingo with a degree in journalism
and holds a B.A. in economics from the University of East Anglia in Great
Britain.
KEVIN J. WILEY has been a member of our Board of Directors since
December 1998. He currently serves as the Vice President of Sales for Next Level
Communications - a telecommunications equipment provider whose largest
shareholder is Motorola, Inc. Prior to his employment at Next Level
Communications, Mr. Wiley worked for the Motorola Network Management Group as
the Director of Regional Cellular Operations for the Latin America Region from
October 1998 until April 2001. He worked as the Vice President and General
Manager of Aliant Cellular Communications from July 1995 to July 1997. Mr. Wiley
has been involved in various positions within the wireless telecommunications
industry throughout his entire career. He has a B.S. in Finance and Management
from Creighton University.
RALPH SMITH has been a member of our Board of Directors since April
2001. Mr. Smith began working for Motorola in 1985 in its Automotive Electronics
Business. He worked there in a variety of sales, project management, strategy
and marketing roles. He joined the Corporate Business Development group of
Motorola in 1991 and became an elected officer of Motorola in 2000. Mr. Smith
began his career with a variety of financial and commercial research positions
working for United States Steel Supply Division until he left to join Motorola.
He has a B.S. degree in Management from Purdue University and a M.B.A. from
Indiana University.
RICHARD HANING has been a member of our Board of Directors since April
2001. Mr. Haning was a Senior Vice President of Motorola and Director of Finance
for Motorola's Network Management Group until August 2002. Mr. Haning has been a
Corporate Vice President with Motorola since 1990. Since joining Motorola in
1977, Mr. Haning has held numerous other financial positions within Motorola's
cellular networks and subscribers businesses. Mr. Haning is a Director of
Telular Corporation, a participant in the fixed wireless telecommunications
market. He is also a Director of Omnitel, a Lithuanian cellular operator. He has
a B.A. and M.B.A. from the University of Illinois.
THEODORE W. SCHAFFNER has been a member of our Board of Directors since
October 2001. Mr. Schaffner has been Senior Vice President and Director of
Corporate Development at Motorola since 1999. He joined Motorola in 1987 and
became the Director of Corporate Business Development in 1989. In 1991, he
became Vice President of Corporate Business Development. He received his
Bachelors of Arts at The Ohio State University and his Juris Doctor degree from
Harvard University School of Law.
MARINO GINEBRA has been a member of our Board of Directors since October
2001. Mr. Ginebra is the Chairman of the Board of Directors and President of
Telecable Nacional, S.A. He has served as member of the
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Board of Directors of numerous charity associations and social clubs, and is
currently a member of the Board of Directors of various banking, insurance and
hotel corporations in the Dominican Republic. Mr. Ginebra holds a B.S. in
Business Administration and Finance from the Catholic University of the
Americas.
EDWIN CORRIE has been a member of our Board of Directors since October
2001. Mr. Corrie is the Chairman and President of several corporations operating
in the real-estate, investment and agricultural industries in the Dominican
Republic. He is a member of the Board of Directors of various leading insurance,
tourism, medical, and financial service institutions in the Dominican Republic.
Mr. Corrie holds a B.S. in electromechanical engineering from the Massachusetts
Institute of Technology and a B.S. in Business Administration from the Harvard
Business School.
EXECUTIVE COMPENSATION
The aggregate amount of compensation we paid during the fiscal year
ended December 31, 2002 to our directors and executive officers, as a group (17
persons), was $1.7 million.
EMPLOYEES
At December 31, 2002, we had 1,519 employees. Of this number, 195 were
executives, directors and managers, and the remaining 1,324 were technicians,
salesmen, service and staff employees. We believe that this number may increase
over the next several years as we expand our network and customer base. None of
our employees belong to labor unions. We believe that we have good relations
with our employees.
SHARE OWNERSHIP
We refer to Item 7 for information with respect to Manuel Arturo
Pellerano Pena, who, to our knowledge, is the only director with 1% or greater
percentage of ownership in Tricom.
In connection with our initial public offering, our Board of Directors
adopted, and GFN and Motorola approved, our 1998 Long-Term Incentive Plan
pursuant to which 750,000 shares of Class A common stock were reserved for
issuance. At December 31, 2002, there were outstanding options to purchase
483,947 shares of Class A common stock that had been granted to directors,
officers and employees at exercise prices ranging from $3.65 per share to $16.00
per share. The options granted expire on the tenth anniversary of the date of
grant. At December 31, 2002, there were 266,053 shares available for grant under
the plan.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth certain information known to us with
respect to beneficial ownership of our Class A common stock at April 30, 2003
(unless otherwise indicated) by each person, to our knowledge, who beneficially
owns 5% or more of the Class A common stock and all officers and directors as a
group. Except as otherwise indicated, the holders listed below have sole voting
and investment power with respect to all shares beneficially owned by them.
Each share of Class B stock is freely convertible at any time into one
share of Class A common stock, subject to adjustment, and may not be transferred
except to GFN, Motorola or their permitted transferees, as defined. Each share
of Class B stock has ten votes and of Class A common stock has one vote. GFN and
Motorola own 100% of the outstanding shares of Class B stock. Currently, GFN and
its affiliates have approximately 55.5% of the voting power (including shares of
Class A common stock owned by it and its affiliates) and Motorola approximately
32.5%.
<Table>
<Caption>
PERCENTAGE OF
VOTING POWER
PERCENTAGE OF (ASSUMING THAT ALL
CLASS A CLASS A COMMON OF THE CLASS B
COMMON STOCK PERCENTAGE OF STOCK IS
STOCK SHARES CLASS B STOCK CONVERTED INTO
BENEFICIALLY BENEFICIALLY BENEFICIALLY CLASS A COMMON
SHAREHOLDER OWNED(1) OWNED(1) OWNED STOCK)(1)
- ---------------------------------------------------- -------------- -------------- ------------- ------------------
GFN Corporation Ltd(2)............................... 25,396,193 44.6 60.0 39.3
Oleander Holdings, Inc.(2)........................... 12,161,750 21.4 60.0 18.8
</Table>
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<Table>
Manuel Arturo Pellerano Pena(2)...................... 27,426,374 48.2 60.0 42.5
Motorola, Inc........................................ 7,657,818 14.4 40.0 11.9
Orient Star Holdings LLC(3).......................... 2,835,700 6.2 -- 4.4
Directors and executive officers as a group
(17 persons)(4)..................................... 27,700,058 48.6 60.0 42.9
</Table>
- ----------
(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares as of a given date which such
person or group of persons has the right to acquire within 60 days after
such date. Information relating to the percentage beneficially owned is
calculated in accordance with SEC rule 13d-3 and includes for each of
GFN Corporation Ltd., Manuel Arturo Pellerano Pena, Oleander Holdings
Inc. and Motorola the shares of Class A common stock issuable upon
conversion of the Class B stock beneficially owned by it only. For
purposes of calculating the percentage of Class A common stock
beneficially owned by GFN Corporation Ltd, for example, in accordance
with SEC rule 13d-3, the number of outstanding shares of Class A common
stock does not include shares that would be issuable upon conversion of
Class B stock owned by Motorola. As a result, the percentage of Class A
common stock beneficially owned by any holder of Class B stock is
greater than the percentage of Class A common stock owned by that
holder, assuming conversion of all Class B stock, shown in the column,
"Percentage of Voting Power."
(2) GFN Corporation Ltd. is controlled by Manuel Arturo Pellerano Pena, our
Chairman of the Board of Directors and President, and members of his
family. Oleander Holdings, Inc., a Panamanian corporation, is a wholly
owned subsidiary of GFN.
(3) Inmobiliaria Carso, S.A. de C.V., as the sole member of Orient Star
Holdings LLC, is deemed to beneficially own indirectly the ADSs owned
directly by Orient Star Holdings LLC. Carlos Slim Helu, Carlos Slim
Domit, Marco Antonio Slim Domit, Patrick Slim Domit, Maria Soumaya Slim
Domit, Vanessa Paola Slim and Johanna Monique Slim Domit own all of the
outstanding voting securities of Inmobiliaria Carso, S.A. de C.V., and
are deemed to beneficially own indirectly the ADSs deemed beneficially
owned by Inmobiliaria Carso, S.A. de C.V. and directly owned by Orient
Star Holdings LLC. This information is based on a Schedule 13-G dated
December 31, 2002 and filed with the Securities and Exchange Commission.
(4) Includes 11,486,726 shares of Class B stock and 15,939,648 shares of
Class A common stock that may be deemed to be beneficially owned by Mr.
Pellerano, our Chairman of the Board of Directors and President, in his
capacity as a controlling person of GFN. Also includes 47,544 shares of
Class A common stock that are issuable upon exercise of currently
exercisable options beneficially owned by officers.
Motorola Inc. has announced its intention to sell its shares of Class B
stock. Our By-laws provide that upon transfer of such shares (unless to
GFN or one of its affiliates), these shares will convert to Class A
common stock.
SHAREHOLDERS AGREEMENT
Each of the current members of the Board of Directors has been elected
under the terms of an amended and restated shareholders agreement, dated at May
8, 1998, among TRICOM, Motorola, Oleander Holdings Inc., Zona Franca San Isidro,
S.A. and certain nominal shareholders that are affiliates of GFN or TRICOM.
The shareholders agreement provides that the Board of Directors will
consist, and GFN and Motorola each will vote all of the shares owned by it (or
in the case of any transfer of shares to its permitted transferee, as defined in
the shareholders agreement, will cause such permitted transferees to vote their
shares) in favor, of six directors to be designated by GFN, four directors to be
designated by Motorola and two independent directors. The shareholders agreement
provides that in order for a person to qualify as an independent director such
person must not be:
- an officer, employee, principal stockholder, consultant or
partner of TRICOM, apart from such directorship, or an
officer, employee, principal stockholder, consultant or
partner of an entity that was dependent upon TRICOM or any
affiliate of TRICOM for more than 5% of its revenues or
earnings in its most recent fiscal year;
- an officer, director, employee, principal stockholder,
consultant or partner of a person that is a competitor of
TRICOM or any of its affiliates, any affiliate of such
competitor, or any other
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person that was dependent upon such competitor or affiliate
of such competitor for more than 5% of its revenues or
earnings in its most recent fiscal year; or
- an officer, director, employee, principal stockholder,
consultant or partner of Motorola or GFN or an officer,
employee, principal stockholder, consultant or partner of an
entity that was dependent upon Motorola or any affiliate of
Motorola for more than 5% of its revenues or earnings in its
most recent fiscal year.
Each of Motorola and GFN will be entitled to nominate one independent
director so long as it together with its permitted transferees owns at least 25%
of the issued and outstanding shares of Class B stock. In calculating the number
of shares of Class B stock owned by either GFN or Motorola, there will be
included the number of shares of Class B stock owned by any of it permitted
transferees.
The number of directors other than independent directors that GFN or
Motorola each may designate will change if its percentage ownership of Class B
stock changes as follows:
- if GFN and Motorola each owns 50% of the then outstanding
shares of Class B stock, each would have the right to
designate five directors;
- if either GFN or Motorola owns shares of Class B stock;
- greater than 50% but less than or equal to 60% of the then
outstanding shares of Class B stock, it would designate six
directors and the other four directors;
- greater than 60% but less than or equal to 70% of the then
outstanding shares of Class B stock, it would designate seven
directors and the other three directors;
- greater than 70% but less than or equal to 80% of the then
outstanding shares of Class B stock, it would designate eight
directors and the other two directors;
- greater than 80% but less than or equal to 90% of the then
issued and outstanding shares of Class B stock, it would
designate nine directors and the other one director; or
- greater than 90% of the issued and outstanding Class B stock,
it would designate all ten directors.
Until such time as either Motorola or GFN owns less than 25% of the
outstanding shares of Class B stock, the shareholders agreement requires the
affirmative vote of nine directors to approve the following actions:
- the acquisition or formation by TRICOM of any entity or the
making of any investments in an other entity of business,
including, but not limited to, the purchasing of equity or debt
interests in or the extension of credit to such entity;
- the incurrence of indebtedness, if after giving effect to such
incurrence, including the proposed application of the proceeds
of such indebtedness to pay existing indebtedness, the ratio of
indebtedness to shareholders' equity would be greater than
three to one;
- approval of annual budgets relating to income, capital
expenditure, operating expenses and cash flows (provided that
this does not require approval of any projected debt incurrence
that otherwise complies with the limits described above or of
any other proposed corporate action for which super-majority
approval is not specifically required); and
- the issuance, or redemption, of Class A common stock or other
securities or instruments exercisable for or convertible into
Class A common stock.
In addition, approval by the independent directors is required for any
transaction that has a fair market value exceeding $1.0 million which we enter
into with either GFN or Motorola and their respective affiliates. The vote of a
majority of the directors present at a duly convened meeting is required for all
other board actions (and at such time that Motorola or GFN owns less than 25% of
the then outstanding shares of Class B stock for the four actions specified as
requiring a greater vote).
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Under the shareholders agreement, if we propose to register any of our
securities under the Securities Act of 1933 (other than a registration in
connection with a reorganization on Form F-4 or in connection with any employee
stock option, stock purchase or savings plan on Form S-8 or similar registration
forms), whether or not for our own account, GFN and Motorola are entitled to
include shares of Class A common stock owned by them in any such registration,
subject to the right of the managing underwriter of any such offering to
exclude, due to market conditions, some or all of such securities. In addition,
GFN and Motorola each has the right to require us to prepare and file on three
occasions a registration statement covering registrable securities with a market
value of at least $5.0 million, subject to customary blackout periods. We are
generally required to bear the expenses (except underwriting discounts and
commissions and fees and expenses of any special counsel) of all such
registrations, whether or not initiated by GFN or Motorola.
CERTAIN TRANSACTIONS WITH PRINCIPAL SHAREHOLDERS
GFN
GFN is one of the Dominican Republic's largest privately held companies,
with interests in insurance, finance and publishing. GFN provides a number of
managerial services to its affiliated companies, including TRICOM, for which the
affiliated companies are billed based upon the number of hours that a particular
GFN employee spends on providing such services and other factors. GFN employees
have provided to us internal auditing, public relations, management information
services, legal and personnel management services. For 2000, 2001 and 2002, we
paid to GFN $234,000, $129,000 and $78,000, respectively, for such services. GFN
also provides us with security services for which we paid $227,000, $268,000 and
$228,000 in 2000, 2001 and the 2002, respectively. In addition, GFN provides us
with advertising services for which we paid $250,000, $1.0 million and $695,000
in 2000, 2001 and 2002, respectively. We anticipate that we will continue to
receive such services from GFN.
We lease premises and equipment from GFN and its affiliates. During
2000, 2001 and 2002, we paid to GFN and its affiliates $158,000, $123,000 and
$204,000, respectively, for the use of premises and equipment.
We also entered into various capital leases with an affiliate of GFN for
$20.8 million during 2000 and $17.9 million during 2001. We did not enter into
any capital lease agreements during 2002. In 2000, we sold our Internet portal
to a GFN affiliate for approximately $2.3 million.
We provide life insurance to our employees and have obtained other
insurance through Segna, formerly Compania Nacional de Seguros, a GFN affiliated
insurance company. We paid insurance premiums to affiliates of GFN totaling $4.1
million, $4.4 million and $5.8 million in 2000, 2001 and 2002, respectively.
We provide telecommunications services to GFN and its affiliated
companies. GFN and its affiliated companies paid us $1.9 million, $3.7 million
and $4.2 million for such services in 2000, 2001 and 2002, respectively.
GFN affiliated banks have loaned us funds. We had borrowings from GFN
affiliated banks, including financing of letters of credit and open accounts, in
the aggregate principal amounts of $31.4 million at December 31, 2000, $27.1
million at December 31, 2001 and $34.5 million at December 31, 2002.
MOTOROLA
We have purchased telecommunications equipment from Motorola,
particularly for the development of our wireless cellular system and our
wireless local loop in the Dominican Republic for aggregate consideration of
approximately $20.3 million, $20.2 million and $2.1 million during 2000, 2001
and 2002, respectively. During 2001, we purchased from Motorola an iDEN(R)
system for Panama, for $20 million.
OTHER TRANSACTIONS
We have purchased mortgage participation contracts from savings and loan
associations in the Dominican Republic that are maintained as compensating
balances for mortgage loans made by these associations to several of our
officers. At December 31, 2000, 2001 and December 31, 2002, these mortgage
participation contracts totaled $3.3 million, $4.0 million and $552,000,
respectively.
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ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED FINANCIAL STATEMENTS
See "Item 18. Financial Statements"
OTHER FINANCIAL INFORMATION
LEGAL PROCEEDINGS
BELLSOUTH LITIGATION
On May 8, 2001, BSC of Panama, S.A., a subsidiary of BellSouth, which
owns one of the two cellular telecommunications concessions granted by the
Panamanian government, requested that the Panamanian ENTE REGULADOR DE LOS
SERVICIOS PUBLICOS, or ENTE, investigate TRICOM Panama, S.A. for violations of
the Telecommunications Act and the ENTE's regulations. BellSouth claimed that
TRICOM Panama:
- will use its iDEN(R) based trunking services to provide cellular
telecommunications services, in violation of its license; and
- although we proved that our iDEN(R) system has been modified to
disable "hand off" capabilities, thE fact that the equipment
has these capabilities represents a breach of regulations and
our license.
The ENTE has not issued any ruling on BellSouth's request, but has
stated publicly that Panamanian regulations do not limit the provision of
wireless services to a particular technology.
On August 24, 2001, BellSouth requested that the ENTE initiate a legal
review before the Third Chamber of the Panamanian Supreme Court of Justice, of
the interpretation given by the ENTE to the definition of "Conventional Trunking
System Services." BellSouth alleges that the interpretation given by the ENTE to
the definition of "Conventional Trunking System Services," found in Resolution
No. JD-025 of December 12, 1996 violates several articles of the
Telecommunications Act, including that the ENTE's interpretation allows a
trunking service provider to use any wireless system, including any type of
cellular systems, as long as the "Hand-Off" capabilities are disabled. BellSouth
claims that this violates the Telecommunications Act, which states that cellular
services are a Type A Service that can only be provided by BellSouth and the
other holder of a Type A License, Cable & Wireless.
The ENTE has replied that it only regulates services and not technology
and that the definition of "Conventional Trunking System Services" protects the
temporary exclusivity regime given to cellular services because it does not
allow the participation of new cellular service providers in the Panamanian
market. The Attorney General also opined that the definition of "Conventional
Trunking System Services" is legal. The license given to TRICOM Panama is for
the operation of conventional trunking services, which it is operating with the
iDEN(R) system.
The legal review by the Third Chamber of the Panamanian Supreme Court of
Justice requested by BellSouth cannot be undertaken until the Supreme Court
resolves a constitutional review requested by TRICOM Panama on September 10,
2001, regarding the lack of procedure for the Third Chamber to undertake a legal
review of the sort sought by BellSouth. On October 22, 2001, the Supreme Court
decided it would review the procedure.
On August 28, 2001, TRICOM Panama received notice of a precautionary
order obtained by BellSouth from the Seventh Civil Court of the First Judicial
Circuit requiring TRICOM Panama to cease all activity directly or indirectly
related to the installation and supply of telecommunication services using
Motorola's iDEN(R) system. This order forms part of a tort claim, submitted by
BellSouth on September 4, 2001, against TRICOM Panama for US$20,000,000 for the
possible damages that TRICOM Panama may cause BellSouth in the event that TRICOM
Panama initiates operations of an iDEN(R)-based trunking service.
On September 11, 2001, TRICOM Panama submitted a motion before the
Seventh Civil Court to substitute a bond for the precautionary order to cease
its activities and at the same time appealed to the Superior Civil Chamber the
precautionary order itself. On October 1, 2001, the Seventh Civil Court denied
TRICOM Panama's
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motion and, on October 8, 2001, TRICOM Panama also appealed this decision to the
Superior Civil Chamber. The TRICOM Panama defense was based on the following
principles:
- only the ENTE has by law the power to discontinue public
utilities services;
- this precautionary measure can only be applied to real property
(not to personal property);
- there is no imminent damage that justifies the precautionary
measure.
On September 11, 2001, BellSouth submitted a complaint stating that
TRICOM Panama was in default of the court order.
TRICOM Panama also submitted a motion to the Seventh Civil Court to
dismiss BellSouth's tort claim and to invalidate the precautionary order, due to
the court's lack of jurisdiction over a matter that should be decided by the
ENTE. On September 28, 2001, TRICOM Panama filed a US$1,000,000 damages
counterclaim against BellSouth for the public campaign set against TRICOM Panama
by BellSouth and for the unfounded investigation requested before the ENTE.
We believe, based on the advice of our Panamanian legal counsel, that
BellSouth should not succeed in its claims because:
- BellSouth cannot claim any damages caused by TRICOM Panama
activities, since TRICOM Panama operations are protected under
a legitimate Conventional Trunking System Services license.
- The ENTE is the only authority empowered to declare that the
telecommunications services provided by TRICOM Panama are not
conventional trunking services, or that the iDEN(R) system
cannot be used tO provide conventional trunking systems.
On August 5, 2002, the judge in the Seventh Civil Court transferred the
case to the Eleventh Civil Court of the First Judicial Circuit, which will
continue the proceedings.
On November 5, 2001, TRICOM Panama requested that the ENTE investigate
BellSouth for violations of the Telecommunications Act and its concession
agreement on account of the failure of BellSouth to (1) recognize the
jurisdiction of the ENTE, (2) follow proper procedure in connection with the
precautionary measure it obtained and (3) provide interconnection. This case is
pending the Ente's decision on whether or not to press charges against
BellSouth.
On November 13, 2001, upon the request of BellSouth, the Seventh Civil
Court issued an order giving notice to Cable & Wireless of the precautionary
order issued against TRICOM Panama in late August. TRICOM Panama and Cable &
Wireless had negotiated the terms of an interconnection agreement with the
intervention of the Ente. Upon judicial notice of the precautionary order
against TRICOM Panama, Cable & Wireless refused to sign the interconnection
agreement. The Ente imposed on Cable & Wireless sanctions of $5,000 per day
until it signs the interconnection agreement with TRICOM Panama. On December 14,
2001, Cable & Wireless challenged the Ente's sanctions order on constitutional
grounds before the Supreme Court. On June 19, 2002, the Supreme Court revoked
Ente's resolution that imposed a daily fine of $5,000 per day on Cable &
Wireless until it signs the interconnection agreement.
On November 16, 2001, TRICOM Panama sought protection from the First
Superior Tribunal of Justice on account of the August 2001 precautionary order
which violated its constitutional right to due process and trial before a body
of competent jurisdiction. On December 7, 2001, the court declared the case
inadmissible on procedural grounds, and on December 10, 2001, TRICOM Panama
filed an appeal and motion for reconsideration.
On December 20, 2001, the Superior Tribunal decided the appeal of the
precautionary order in favor of TRICOM Panama on the merits of the claims, thus,
lifting the precautionary order. On February 27, 2002, BellSouth challenged this
decision in the Supreme Court. On July 8, 2002, the Supreme Court confirmed the
decision of the Superior Tribunal of the Supreme Court that rejected defenses to
the August 21 precautionary order based upon procedural grounds. The Supreme
Court's decision did not affect the decision on the merits of the Superior
Tribunal.
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On April 26, 2002, BellSouth filed a claim against TRICOM Panama before
the ENTE alleging that TRICOM Panama is rendering voice and text mail services
in violation of its concession and the authorized use of its frequencies.
BellSouth argues that value added services, such as voice and text mail
services, may only be provided by basic telephony or cellular operators.
BellSouth requests that the ENTE revoke TRICOM Panama's concession and rights to
frequencies. BellSouth further requests as a provisional measure, and until the
conclusion of the administrative proceedings, that the ENTE order TRICOM Panama
to suspend its trunking services or, alternatively, its voice and text mail
services. On May 10, 2002, the ENTE ordered TRICOM Panama to suspend its voice
mail services until the ENTE determines whether the imposition of sanctions is
appropriate.
On September 17, 2002, the Ente granted TRICOM Panama the license to
offer international long distance communications services.
On October 24, 2002, the Ente granted TRICOM Panama the license to offer
basic telecommunications services.
On April 4, 2003, the Supreme Court reinstated a precautionary order,
originally issued on August 28, 2001, requiring TRICOM Panama to cease all
activity directly or indirectly related to the installation and supply of
telecommunications services using Motorola's iDEN(R) system. Notwithstanding the
reinstatement of the order, we continue to use the iDEN(R) system to provide
services. Our Panamanian legal counsel has advised us that the reinstatement of
the precautionary order is not necessarily indicative of the final decision on
BSC's pending claims.
On January 16, 2003, a trial started on BSC's actions to require that
TRICOM Panama cease all activity directly or indirectly related to the
installation and supply of telecommunication services using Motorola's iDEN(R)
system and to recover damages. The 11th Civil Court of the First Judicial
Circuit considered evidence and testimony presented by experts appointed by
TRICOM Panama, BSC and by the court until March 19, 2003. TRICOM Panama has
filed motions that challenge the authority of the 11th Civil Court of the First
Judicial Circuit to decide the case, arguing that only the ENTE may consider the
issues raised by BSC. On May 20, 2003, the Superior Tribunal denied this motion.
Decision on the trial is pending. We understand that, anticipating a final
judgment in its favor in the trial, BSC is preparing a criminal complaint
against TRICOM Panama with respect to its failure to comply with the
precautionary order, reinstated by the Supreme Court, requiring that TRICOM
Panama cease all activity directly or indirectly related to the installation and
supply of telecommunications services.
In February 2003, the ENTE ruled that voice and text mail services do
not violate the terms of the concession granted to TRICOM Panama, thus allowing
TRICOM Panama to legally provide those services under its trunking license.
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. Pursuant to the concession agreement, we
had the obligation to 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 Presidential Decree
No. 405-02, we no longer 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.
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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 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.
OTHER
There are no other legal proceedings to which we are a party, other than
routine litigation incidental to our business which is not otherwise material to
our business or financial condition.
ITEM 9. THE OFFER AND LISTING
AMERICAN DEPOSITARY SHARES
Our ADSs are traded on the New York Stock Exchange under the symbol
"TDR". Shares of Class A common stock are not traded on any other exchange or
automated quotation system. At December 31, 2002, there were 28 record holders
in the United States of the ADSs.
The following table provides the high and low prices and average daily
trading volume for the ADSs on the New York Stock Exchange for (1) 1998, the
year in which we completed our initial public offering, 1999 and 2000 (2) each
quarter of 2001 and 2002, our two most recent full fiscal years, and the first
quarter and second quarter of 2003 to date and (3) each of the most recent six
months.
<Table>
<Caption>
NEW YORK STOCK EXCHANGE
-----------------------------------------------------------
AVERAGE DAILY
HIGH LOW TRADING VOLUME
----------------------- ----------------- -------------
YEAR ENDED DECEMBER 31, 1998.............................. 12 9/16 3 7/16 104,496
YEAR ENDED DECEMBER 31, 1999.............................. 22 5/8 6 35,240
YEAR ENDED DECEMBER 31, 2000.............................. 28 1/2 6 11/20 71,856
YEAR ENDED DECEMBER 31, 2001
First Quarter............................................. 12.46 7.00 13,746
Second Quarter............................................ 7.80 6.00 22,989
Third Quarter............................................. 6.70 5.30 14,836
Fourth Quarter ........................................... 5.75 3.15 45,943
YEAR ENDED DECEMBER 31, 2002
First Quarter............................................. 4.00 3.30 9,288
Second Quarter............................................ 3.90 3.00 13,196
Third Quarter............................................. 3.63 3.09 11,078
Fourth Quarter............................................ 3.20 3.05 33,785
MONTHLY/PERIOD
First Quarter 2003........................................ 3.05 2.76 4,169
Second Quarter (through May 14, 2003)..................... 2.72 2.55 6,660
</Table>
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<Table>
November 2002............................................. 3.29 2.91 60,242
December 2002............................................. 3.09 2.93 34,529
January 2003.............................................. 2.99 2.94 5,200
February 2003............................................. 2.96 2.87 3,559
March 2003................................................ 3.05 2.76 4,257
April 2003................................................ 2.98 2.73 3,376
</Table>
ITEM 10. ADDITIONAL INFORMATION
SHARE CAPITAL
At December 31, 2002 and the date hereof, we had 55,000,000 shares of
our Class A common stock, par value RD$10 per share, authorized. As of December
31, 2002, 45,458,041 shares of Class A common stock were issued and outstanding.
As of December 31, 2003, 45,458.041 shares of Class A common stock were issued
and outstanding. As of December 31, 2002 and the date hereof, we also had
25,000,000 shares of our Class B stock, par value RD$10 per share, authorized,
19,144,544 shares of which were issued and outstanding. We have issued
21,212,121 shares of our Class A common stock since December 31, 2001 and we
have not issued any shares of our Class B stock since May 1998. We have issued
14,545,920 shares of our Class A common stock since December 31, 2000.
On December 31, 2002, we issued 21,212,121 shares of Class A common
stock to a group of investors for an aggregate purchase price of $70,000,000 in
a private placement.
On December 28, 2001, we issued 1,170,920 shares of our Class A common
stock in the form of ADSs for an aggregate purchase price of $4,683,680 in a
rights offering.
On December 28, 2001, we issued 10,000,000 shares of our Class A common
stock to GFN Corporation Ltd., our principal shareholder, for an aggregate
purchase price of $40,000,000.
On October 26, 2001, we issued 3,375,000 shares of our Class A common
stock as partial consideration for our acquisition of the shares of TCN
Dominicana, S.A., a wholly-owned subsidiary of Telecable Nacional, C. por A.,
that owned and operated 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.
On April 12, 2000, we issued 4,000,000 shares of our Class A common
stock in the form of ADSs for an aggregate purchase price of $74 million in
connection with a follow-on public offering.
At December 31, 2002, neither we nor any of our subsidiaries owned any
shares of our Class A common stock or Class B stock.
At December 31, 2002, there were outstanding options to purchase 433,050
shares of our Class A common stock for an average exercise price of $7.12 per
share. These options are held by certain of our officers and employees. At
December 31, 2002, there were outstanding warrants to purchase an aggregate of
300,000 shares of our Class A common stock for an average exercise price of
$8.88 per share. These warrants are held by a former consultant to us on
investor relations maters.
MEMORANDUM AND ARTICLES OF ASSOCIATION
BOARD OF DIRECTORS
Our business and affairs are managed by the board of directors, which
consists of not more than fifteen or less than eight persons. Our directors are
elected annually at the annual general meeting of shareholders. Each director
(whenever elected) holds office until the next annual general meeting of
shareholders following his or her election and until his successor is elected
and qualified or until his or her earlier resignation or removal.
Any director may resign at any time upon written notice to the board of
directors, to the Chairman of the Board or to the President. Any director may be
removed with or without cause at any time by an affirmative vote of
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a majority of the shareholders entitled to vote. If any vacancies occur in the
board of directors, of if the authorized number of directors is increased, the
directors then in office may continue to act, and such vacancies may be filled
by a majority of the directors then in office. Any vacancies or newly created
directorships also may be filled by an affirmative vote of a majority of the
shareholders entitled to vote at a general meeting of shareholders called for
such purpose.
Regular meetings of the board of directors may be held at such places
within or out of the Dominican Republic and at such times as the board of
directors may from time to time determine. Special meetings of the board of
directors may be held at any time or place within or outside of the Dominican
Republic whenever called by the Chairman of the Board, by the President of by
any two directors. Any member of the board of directors may participate in a
meeting of the board of directors by means of a telephone conference or similar
communications equipment provided that all persons participating in the meeting
can hear each other.
At all meetings of the board of directors, the presence of a majority of
the total number of directors will constitute a quorum for the transaction of
business. The vote of at least a majority of the directors present at any
meeting at which a quorum is present is necessary to constitute the act of the
board of directors unless otherwise provided by applicable law.
PURPOSE
Article 2 of our by-laws states that our purpose is:
- to provide, maintain and operate telecommunications systems in
the Dominican Republic and elsewhere;
- to enter into such agreements as may be required to be
interconnected to the switched public telephone network, as
well as to any domestic networks rendering inter-urban
services, as may be required by said telecommunications
systems; and
- to construct, maintain, and exploit a private
telecommunications system for the transmission of national and
international calls and for the transmission or reception of
messages and signals of any kind.
CAPITAL STOCK
Our authorized capital stock consists of 55,000,000 shares of Class A
common stock and 25,000,000 shares of Class B stock. Both classes of capital
stock vote together as a single class on matters except any matter that would
adversely affect the rights of either class. These matters would need to be
approved by a special meeting of the holders of the class of shares to be
affected. The Class A common stock has one vote per share and the Class B stock
has ten votes per share. The economic rights of each class of capital stock are
identical.
REGISTRATION AND TRANSFER
All shares are evidenced by share certificates in registered form.
Dominican law requires that all shares be represented by a certificate, although
a single certificate may represent multiple shares of stock. Certificates may be
issued in the name of the registered holder, bearer or to-order form. All of our
share certificates are issued in the name of the registered holder. Dominican
law also requires that all transfers, encumbrances and liens on nominative
shares must be recorded in the share registry and only are enforceable against
us and third parties after such registration occurs. The Bank of New York is the
registrar and transfer agent for the Class A common stock, except during
shareholders meetings when we maintain the share registry for the Class A common
stock.
SHAREHOLDERS MEETINGS
Shareholders are entitled to vote on all matters at ordinary or special
shareholders' meetings. The board of directors will convene an annual
shareholders' meeting at least once a year in order for shareholders:
- to elect new directors and a vigilance officer;
- to acknowledge the vigilance officer's report; and
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- for management to report upon our financial performance and for
the shareholders to decide whether or not to distribute
dividends.
Ordinary shareholders' meetings may be convened at other times in order
to transact other business, including to remove directors. Special shareholders'
meetings are convened in order to effect fundamental changes in our structure,
including to approve amendments to our by-laws. Under our by-laws, shareholders'
meetings may be convened by:
- the Chairman of the board of directors;
- a majority of the members of the board at any time;
- at the request of the holders of 30% of the shares entitled to
be cast at such meeting; and
- at the request of the vigilance officer in urgent
circumstances, which are not defined under Dominican law.
Shareholders meetings may he convened not less than 30 but not more than
60 calendar days after written notice has been mailed to shareholders. A
majority of the shares entitled to be cast constitutes a quorum at all
shareholders meetings. Our by-laws provide that holders of two-thirds of the
votes entitled to be cast is required to approve:
- amendments to the by-laws, including increases or decreases of
our authorized share capital;
- the issuance of shares of Class B stock in addition to those
shares of Class B stock outstanding on the date of the adoption
of the by-laws, except in connection with a dividend or other
distribution with respect to, or a subdivision, consolidation
or reclassification of all outstanding shares of stock;
- the declaration and payment of any dividend or distribution
with respect to our capital stock;
- any increase or decrease in the number of directors; and
- our voluntary winding up or liquidation or the filing of a
bankruptcy petition.
The affirmative vote of the holders of a majority of votes entitled to
be cast is required to approve all other actions. Shareholders may vote by
proxy, and the depositary will cast proxies as directed by the holders of the
ADRs.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY
In addition to voting for directors at the annual shareholder's meeting,
shareholders are asked to vote upon the performance of management. Our vigilance
officer, an officer elected by the shareholders each year, delivers a report on
our financial performance and other issues related to management's performance.
If the holders of a majority of the votes entitled to be cast approve
management's performance, all shareholders are deemed to have released the
directors and officers from claims or liability to us or our shareholders
arising out of actions taken or any failure to take actions by any of them on
our behalf during the prior fiscal year, with certain exceptions. Shareholders
will likely fail in any suit brought in a Dominican court with respect to the
acts or omissions deemed to have been released. Officers and directors may not
be released from any claims or liability for criminal acts, fraud, self-dealing
or gross negligence. If the shareholders do not approve management's
performance, the vigilance officer's report may form the basis of any suit
brought by the shareholders against our officers and directors.
Our by-laws provides that we will indemnify any person made or
threatened to be made a party to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person, or a person of whom he or she is the legal representative, is or was our
director, officer, employee or agent or any of our predecessors, or serves or
served any other enterprise as a director, officer, employee or agent at our
request or any of our predecessors. We are required to pay any expenses
reasonably incurred by a director or officer in defending a civil or criminal
action, suit or proceeding in advance of the final disposition of such action,
suit or
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proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it ultimately is determined that he or she is
not entitled to be indemnified by us under our by-laws or otherwise. We may, by
action of our board of directors, provide for the payment of such expenses
incurred by our employees and agents as it deems appropriate.
LIQUIDATION RIGHTS
Each shareholder is entitled to a proportionate share of any of our
assets available upon dissolution after the payment of debts owed to creditors.
Shareholders are deemed to be creditors of our company to the extent of declared
and unpaid dividends.
DIVIDENDS
Under Dominican law, only shareholders may authorize the declaration and
payment of dividends. Shareholders are entitled to receive dividends in
proportion to their respective capital participation, subject to adjustment as
provided in the by-laws. Dividends are payable only from after-tax profits, and
only after we have set aside at least 5% of our annual profits as a legal
reserve (until such reserve equals 10% of paid-in capital). The by-laws provide
that shareholders may only approve the declaration and payment of dividends or
distributions if the declaration or payment of such dividend or distribution
would not violate any obligation, contractual or otherwise, to which we or any
of our subsidiaries are a party or by which any of them or their respective
properties or operations are bound.
VOTING RIGHTS
The holders of Class A common stock and Class B stock vote together with
respect to all matters. Every holder of Class A common stock is entitled to one
vote for each share of Class A common stock held and every holder of Class B
stock is entitled to ten votes for each share of Class B stock held by the
number of shares of Class A common stock into which one share of Class B stock
is then convertible. Under our by-laws, Class B stock may not be transferred
except to permitted transferees. Permitted transferees include
1. Oleander
2. Motorola
3. any subsidiary or affiliate, as defined, and
4. with respect to Oleander, Manuel Arturo Pellerano Pena and any
member of the family of Manuel Arturo Pellerano Pena as of the
date of the initial public offering that had an interest
(including indirectly through any corporation, trust or entity)
in Oleander and
- the spouse or surviving spouse and natural and adopted children
of any such family member
- any trust existing solely for the benefit of family members and
any person who would be a permitted transferee of any such
family member under clause (4) and any trustee of such trust
- upon the death of any such member or any person who would be a
permitted transferee of any member, such holder's estate or any
executor, administrator or other legal representative of such
holder, and
- any corporation, partnership or other entity all of the
outstanding equity interests of which are owned, or all of the
outstanding voting power of which is controlled, directly or
indirectly by, or any trust or similar entity the sole
beneficiaries of which are, such members and their permitted
transferees.
If, despite these restrictions on transfer, a shareholder owning shares of Class
B stock transferred its shares to a person or entity other than to Oleander,
Motorola or a permitted transferee, the shareholder will only become entitled to
one vote per share. If, with respect to any shares of Class B stock owned by
Oleander and its permitted transferees, the shares of common stock owned by
Oleander and its permitted transferees constitute less than 10% of
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the outstanding common stock, such shares of Class B stock will entitle the
holder to one vote per share. If, with respect to any shares of Class B stock
owned by Motorola and its permitted transferees. the shares of common stock
owned by Motorola and its permitted transferees constitute less than 10% of the
outstanding common stock, such shares of Class B stock will entitle the holder
to one vote per share. Oleander, Motorola and any permitted transferee may
pledge shares of Class B stock without reducing the number of votes to which it
is entitled; provided, however, that if such shares of Class B stock are
transferred to or registered in the name of the pledgee (unless the pledgee is a
permitted transferee), the number of votes to which such shares of Class B stock
are entitled will be reduced until Oleander, Motorola or any of their permitted
transferees either cures any default that resulted in the transfer or
registration or reacquires the shares from the pledgee.
PREEMPTIVE AND OTHER RIGHTS
The holders of Class A common stock and Class B stock are not entitled
to preemptive or similar rights. The shares of Class A common stock and Class B
stock are not subject to redemption or a sinking fund. Under our by-laws, we are
authorized to issue shares of Class B stock only in connection with a dividend
or other distribution with respect to, or a subdivision, consolidation or
reclassification of, all outstanding shares of Class A common stock. In the
event of any subdivision, consolidation, reclassification or other change in the
Class A common stock, the Board of Directors, in its discretion, in lieu of
issuing additional shares of Class B stock, may adjust the number of shares of
Class A common stock into which the Class B stock is convertible and the number
of votes to which each share of Class B stock is entitled.
REORGANIZATION, CONSOLIDATION, SHARE EXCHANGE OR MERGER
In the event of a reorganization, consolidation, share exchange or
merger of TRICOM, each holder of outstanding shares of our stock shall be
entitled to receive for each of his shares the same kind and amount of
consideration (whether consisting of cash, property or securities) to be
received by each other holder of the same class of stock, if any for each of his
or her shares.
EXCHANGE CONTROLS
FOREIGN EXCHANGE CONTROLS
The foreign exchange system of the Dominican Republic is administered by
the Central Bank. In January 1991, the Monetary Board of the Central Bank
instituted the current foreign exchange system which permits the purchase of
foreign currency from commercial banks located in the Dominican Republic. Prior
to January 1991, persons were required to purchase foreign currency directly
from the Central Bank. The resolution adopted by the Monetary Board in 1991
retained the Central Bank's administrative authority over the foreign exchange
system by requiring registration with and approval by the Central Bank in order
to repatriate foreign currency abroad. The Monetary Board further liberalized
the foreign exchange system in September 1994, but it retained the requirement
that the payment of debt obligations abroad be registered with the Central Bank.
Accordingly, U.S. dollar-denominated instruments, including the notes, must be
registered as foreign debt obligations. This registration generally has been
regarded as ministerial in nature, except that short-term advances for exports
of goods and services still require prior approval of the Central Bank. We
cannot assure you that Dominican authorities will not change the Dominican
Republic's monetary policies to restrict the exchange of Dominican pesos for
U.S. dollars.
On August 20, 2002, the Monetary Board issued its first resolution,
which eliminates the 4.75% commission that was required to be paid on the
amounts of Dominican pesos exchanged for foreign currency to meet payment
obligations abroad.
FOREIGN EXCHANGE SYSTEM
The current foreign exchange system in the Dominican Republic was
instituted in January 1991. Under this system, there are two primary exchange
rates:
- the rate established by the Central Bank at which the Dominican
government buys and sells foreign currency or the official
rate; and
- the freely floating, private commercial bank rate at which
private banks and other authorized currency exchange agents
sell foreign currency, or the private market rate.
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OFFICIAL RATE
The official buying rate is the rate at which companies in certain
strategic industries are required to surrender revenues received in foreign
currency to the Central Bank for Dominican Pesos. The strategic industries
subject to this requirement include the telecommunications industry, and, as a
result, we are subject to this requirement. Accordingly, every U.S. dollar we
receive as revenue must be surrendered to the Central Bank at the official rate,
unless otherwise authorized by the Central Bank.
However, pursuant to the second resolution issued March 13, 2002, the
Monetary Board modified the resolution which created the mechanism to fix the
exchange rate of the Central Bank for selling and purchasing foreign currency.
Currently, the official rate will be a weighted average of the private market
rates quoted by the commercial banks and the exchange agents for the immediately
preceding day.
PRIVATE MARKET RATE
The private market rate is the rate at which we purchase the foreign
currency we need to pay foreign suppliers or otherwise to meet our obligations
abroad. According to current regulations, all purchases of foreign currency from
private commercial banks must be reported daily to the Central Bank. This
requirement permits the Central Bank to collect and maintain statistics on the
private market rate but does not give the Central Bank direct control over the
private market rate. The Central Bank publishes a weighted average private
market rate on a weekly basis.
FOREIGN INVESTMENT
The Dominican Republic once restricted the repatriation of foreign
direct investments in certain sectors of the economy, including the
telecommunications sector. In December 1995, the Dominican government enacted
Law No. 16-95 on foreign investment, which, among other things, permitted
foreigners to make direct investments in the telecommunications sector and to
repatriate funds from such investments. The foreign investment law requires that
foreigners register their investment with the Central Bank in order to exchange
Dominican pesos for foreign currency.
The foreign investment law expanded the definition of direct foreign
investment to include investments in debt instruments. Prior to the enactment of
the foreign investment law, the Dominican government only treated equity
investments as direct foreign investments. As a result, the principal of and
interest on debt instruments could be repatriated so long as the obligor adhered
to the requirements of the Law on the International Transfer of Funds and the
regulations and resolutions promulgated under the law. The foreign investment
law brings "financial instruments" within its purview, establishing that foreign
investments could take the form of those financial instruments that the Monetary
Board categorizes as foreign investments. However, the Monetary Board has yet to
identify which "financial instruments" could become registered as a foreign
investment. We have been advised by our Dominican counsel, Pellerano & Herrera,
that "financial instruments" as contemplated by the foreign investment law are
Dominican peso-dominated instruments issued to foreign investors in the
Dominican Republic.
TAXATION
The following discussion summarizes the principal Dominican Republic
income tax consequences of an investment in the ADRs, ADSs or shares of Class A
common stock by a person who is neither domiciled in nor a resident of the
Dominican Republic for tax purposes and who holds such ADRs, ADSs or shares of
Class A common stock for investment purposes and not for purposes of a trade or
business.
Cash dividends and other distributions paid by us with respect to ADSs
or shares of Class A common stock held by any holder could be subject to a 25%
withholding tax, which would be required to be withheld by us and paid to the
Dominican tax administration at the time a cash dividend or other distribution
is paid. Such tax withheld may not be a creditable foreign tax in determining
the U.S. tax liability of such holder.
Under the principles of territoriality underlying the Dominican
constitution, gain from the sale or exchange of ADRs evidencing the ADSs by a
foreign holder outside of the Dominican Republic would not he subject to
taxation by the Dominican tax authority.
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The Dominican government requires payment of capital gains tax on gain
recognized on the sale or exchange in the Dominican Republic of shares of Class
A common stock (as distinguished from sales or exchanges of ADSs). The capital
gains tax was instituted in the Dominican Republic in 1992 and was later
modified by regulations in 1998 as part of major tax reform legislation. Under
present law, the capital gains tax rate is identical to the regular income tax
rate of the person or entity that earned such gain; there is no preferential
rate. Thus, a corporation selling shares of Class A common stock in the
Dominican Republic would be required to pay the corporate income tax of 25% on
any gain from a sale or exchange of such shares. An individual, also would have
to pay income tax at the applicable individual rate, as set forth below, on gain
from the sale of shares of Class A common stock in the Dominican Republic. The
individual income tax rates applicable, in the Dominican Republic since January
1, 2002 are as follows:
<Table>
<Caption>
If Taxable Income is: The Tax is:
--------------------- -----------
Not over RD$125,256.00 0
Over RD$125,256.01 but not over RD$208,760.00 15% of taxable income over RD$125,526.01
Over RD$208,760.01 but not over RD$313,140.01 RD$12, 526.00 plus 20% of the excess over
RD$208,760.01
Over RD$313,140.01 RD$33,402 plus 25% of the excess over
RD$313,140.01
</Table>
The amount of gain on which the capital gains tax is assessed is equal
to the sale or transfer price (i.e., amount realized on the sale or transfer)
minus the acquisition price, adjusted for inflation. Regulations for the
application of the Dominican Tax Code clarify how the tax basis is to be
calculated and also provide how the inflation adjustment is to be applied.
There is no income tax treaty in force between the Dominican Republic
and the United States.
There are no Dominican inheritance or succession taxes applicable to the
ownership, transfer or disposition of ADSs by a foreign holder not domiciled in
the Dominican Republic at the moment of death. It is unclear whether Dominican
gift taxes would apply to the transfer or other disposition by gift of shares of
Class A common stock by a non-resident foreign holder; however, ADSs or ADRs are
not subject to Dominican gift taxes. There are no Dominican stamp, issue,
registration or similar taxes or duties payable by holders of ADSs or shares of
Class A common stock.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about market risks to certain financial
instruments includes "forward-looking" statements that involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
We are exposed to market risks from adverse changes in interest rates
and foreign exchange rates. We do not hold or issue financial instruments for
trading purposes.
INTEREST RATE RISKS
Our interest expense is sensitive to changes in the general level of
interest rates in the United States and in the Dominican Republic. At December
31, 2002, we had outstanding $200 million aggregate principal amount of notes.
The notes bear interest at fixed rate of 11 (3)/8% per annum and mature in the
year 2004. The fair value of the notes was approximately $110 million at
December 31, 2002. The notes are U.S. dollar denominated.
Our primary exposure to market risk for changes in interest rates
relates to our borrowings from Dominican banks. Primary exposure is based on the
potential of interest rate variation, not on exposure to changes in fair market
value of our long-term debt. At December 31, 2002, we had $267.6 million
outstanding of short-term and long-term borrowings, other than our notes but
including trade finance, of which $246.9 million was U.S. dollar denominated,
and the remaining $20.7 million was Dominican peso denominated. Of the $246.9
million of U.S. dollar dominated debt, $40.0 million was borrowed from Dominican
banks, $47.5 million was commercial paper
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outstanding issued in Dominican markets, while the remaining $159.4 million was
borrowed from international banks, including branches in the Dominican Republic.
Of the total $467.6 million outstanding, $446.7 million had fixed interest
rates, while the remaining $20.9 million had variable interest rates. At
December 31, 2002, our short-term and long-term U.S. dollar denominated
borrowings and commercial paper bore interest at rates ranging from 4.50% per
annum to 14.93% per annum. At December 31, 2002, our short-term and long-term
Dominican peso denominated borrowings and commercial paper bore interest at
rates ranging from 18% 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 year ended
December 31, 2002 by approximately $365,000.
FOREIGN EXCHANGE RISKS
We are subject to currency exchange risks. In 2002, we generated
revenues of $87.8 million in U.S. dollars and $170.2 million in Dominican pesos.
In addition, at December 31, 2002, we had $246.9 million of U.S.
dollar-denominated debt outstanding, excluding the $200.0 million principal
amount of the notes.
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 regulations now provide that the official
exchange rate fluctuates and will be tied to the private market rate, the
official exchange rate tends to be lower than the private market rate. During
2002, the average official exchange buying rate was RD$17.45 per $1.00 while the
average private market rate was RD$18.60 per $1.00. For most of 2002, the
Central Bank maintained the average official exchange buying rate at RD$17.56
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. In 2002, we recognized an approximate
$2.9 million foreign exchange gain. If the Dominican peso had devalued by an
additional 10% against the U.S. dollar on average in the year ended December 31,
2002, then we would have realized an additional foreign exchange gain of
approximately $29,000.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
PART II.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, we carried
out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer an evaluation
of the effectiveness of our disclosure controls and procedures and concluded
that those controls and procedures were effective.
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There has been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date the controls were evaluated.
ITEM 16. [RESERVED]
PART III.
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
The following consolidated financial statements are filed as part of
this Annual Report on Form 20-F
1. Independent Auditors' Report.
2. Consolidated Balance Sheets as of December 31, 2001 and 2002.
3. Consolidated Statements of Operations for the Years Ended
December 31, 2000, 2001 and 2002.
4. Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 2000, 2001 and 2002.
5. Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002.
6. Notes to Consolidated Financial Statements.
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ITEM 19. EXHIBITS
<Table>
<Caption>
Exhibit Number
- -----------------
1.1 Amended and Restated By-laws of TRICOM, S.A. with English
translation thereof (incorporated by reference to Exhibit 3 to
our Amendment No. 1 of the Registration Statement on Form F-1,
filed on May 1, 1998 (file no. 333-08574)).
2.1 Indenture, dated August 21, 1997, between The Bank of New York,
as trustee, and TRICOM, S.A. (incorporated by reference to
Exhibit 4.1 to our Registration Statement on Form F-4, filed on
December 29, 1997 (file no. 08150)).
2.2 Form of Class A Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to our Amendment No. 1 to Registration
Statement on Form F-1, filed on May 1, 1998 (file no.
333-08574)).
2.3 Form of American Depositary Receipt (included as part of Exhibit
2.4) (incorporated by reference to Exhibit 4.2 to our
Registration Statement on Form F-1, filed on April 2, 1998
(file no. 333-08574)).
2.4 Form of Deposit Agreement between The Bank of New York, TRICOM,
S.A. and owners and holders of American Depositary Receipts
(incorporated by reference to Exhibit 4.3 to our Registration
Statement on Form F-1, filed on April 2, 1998 (file no. 333-08574)).
4.1 IDEN(R) Infrastructure Supply Agreement, dated July 31, 2000,
between Motorola, Inc. and Tricom Latinoamerica, S.A.
(incorporated by reference to Exhibit 4.1 to our Annual report on
Form 20-F/A, filed on November 21, 2001 (file no. 14816)).
4.2 Concession Agreement, dated February 20, 1996, between the
Dominican State and TRICOM, S.A. (incorporated by reference to
Exhibit 10.1 to our Registration Statement on Form F-4, filed on
December 29, 1997 (file no. 333-08150)).
4.3 Concession Agreement, dated April 30, 1990, between the Dominican
State and TRICOM, S.A. (incorporated by reference to Exhibit 10.2
to our Registration Statement on Form F-4, filed on December 29,
1997 (file no. 333-08150)).
4.4 Interconnection Agreement, dated May 17, 1994, between Compania
Dominicana de Telefonos, C. por A. (Codetel) and TRICOM, S.A.
(incorporated by reference to Exhibit 10.3 to our Registration
Statement on Form F-4, filed on December 29, 1997 (file no.
333-08150)).
4.5 Addendum to Interconnection Agreement, dated January 2, 1998,
between Codetel and TRICOM, S.A. (incorporated by reference to
Exhibit 10.4 to our Amendment No. 1 to Registration Statement on
Form F-1, filed on May 1, 1998 (file no. 333-08574)).
4.6 Amended and Restated Shareholders Agreement among TRICOM, S.A.,
Motorola, Inc. and Oleander Holding, Inc. (incorporated by
reference to Exhibit 10.7 to our Amendment No. 1 to Registration
Statement on Form F-1, filed on May 1, 1998 (file no. 333-08574)).
4.7 1998 Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.11 to our Amendment No. 1 to Registration Statement on
Form F-1, filed on May 1, 1998 (file no. 333-08574)).
4.8 The Guaranty, dated August 21, 1997, issued by each of TRICOM's
subsidiaries in favor of the holders of 11 3/8% notes due 2004
under the Indenture, dated August 21, 1997 (incorporated by
reference to Exhibit 4.2 to our Registration Statement on Form
F-4, filed on December 29, 1997 (file no. 333-08150)).
4.9 Dealer Manager Agreement, dated December 18, 2002, among TRICOM,
S.A., the guarantors named therein and Bear, Stearns & Co. Inc.
(incorporated by reference to Exhibit 1.1 to our Amendment No. 1
to Registration Statement on Form F-4, filed on March 20, 2003
(file no. 333-101922)).
</Table>
74
<Page>
<Table>
8.1 List of Subsidiaries.
10.1 Certification of Chief Executive Officer pursuant to 18 U..S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
10.2 Certification of Chief Financial Officer pursuant to 18 U..S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
10.3 Consent of KPMG.
</Table>
75
<Page>
TRICOM, S.A. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
Independent Auditors' Report..............................................................................F-2
Consolidated Balance Sheets at December 31, 2001 and 2002.................................................F-3
Consolidated Statements of Operations for the Years Ended December 31, 2000,
2001 and 2002.............................................................................................F-5
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000,
2001 and 2002.............................................................................................F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000,
2001 and 2002.............................................................................................F-7
Notes to Consolidated Financial Statements................................................................F-9
</Table>
F-1
<Page>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of TRICOM, S.A.:
We have audited the accompanying consolidated balance sheets of TRICOM,
S. A. and subsidiaries as of December 31, 2001 and 2002 and the related
consolidated statements of operations, stockholders' equity and comprehensive
income and cash flows for each of the years in the three year-period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TRICOM, S.
A. and subsidiaries as of December 31, 2001 and 2002 and the results of their
operations and their cash flows for each of the years in the three year-period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
under the assumption that the Company will continue as a going concern. As
discussed in notes 3 and 20 to the financial statements, the Company has
suffered recurring losses from operations and is involved in pending legal
actions with telecommunication companies in Panama that have delayed its
penetration in that market. These situations raise substantial doubt about its
ability to continue as a going concern. Management plans in regard to these
matters are also described in note 3. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As explained in notes 3 and 20 to the consolidated financial statements,
the Company's operations in Panama are pending the final authorization from the
regulators for the interconnection of its digital trunking system to the
Panamanian main network. Such authorization has been challenged by the
competition and, as of the date of this report, is pending final resolution by
the Panamanian Courts. The feasibility if the Company's operations in Panama are
dependent on the favorable resolution of these issues by the Supreme Court of
Panama.
As discussed in note 26 to the consolidated financial statements,
effective July 1, 2001 the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
certain provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as
required for goodwill and intangible assets resulting from business combinations
consummated after June 30, 2001.
As described in note 6 to the accompanying consolidated financial
statements, the Company maintains balances and makes significant transactions
with related parties.
Santo Domingo, Dominican Republic KPMG
---------------------------------
April 25, 2003 Member Firm of KPMG International
F-2
<Page>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
AT DECEMBER 31,
ASSETS 2001 2002
---------------- ---------------
Current assets:
Cash on hand and in banks (note 6) $ 12,576,050 $ 6,080,303
Accounts receivable (notes 5, 6 and 21):
Customers 27,537,952 26,253,107
Carriers 4,168,187 3,806,849
Related parties 5,191,359 843,190
Officers and employees 687,355 811,122
Other 1,010,801 1,193,975
---------------- ----------------
38,595,654 32,908,243
Allowance for doubtful accounts (4,097,001) (7,763,109)
---------------- ----------------
Accounts receivable, net 34,498,653 25,145,134
Inventories, net of allowance of $286,162 in 2001
and $706,304 in 2002 7,054,100 3,937,678
Certificates of deposit (notes 6, 7 and 11) 15,200,000 15,900,710
Prepaid expenses (note 6) 5,850,267 7,099,415
Deferred income taxes (note 18) 1,624,637 1,307,870
---------------- ----------------
Total current assets 76,803,707 59,471,110
---------------- ----------------
Mortgage participation contracts (note 8) 3,968,711 463,542
Property and equipment, net (notes 4, 6, 9, 13, 15 and 29) 685,916,632 668,120,192
Intangible assets (note 9) 12,135,877 6,946,978
Goodwill, net of amortization (note 9) 24,375,646 21,914,327
Other assets at cost, net of amortization (notes 6 and 10) 26,214,053 25,312,934
---------------- ----------------
$ 829,414,626 $ 782,229,083
================ ================
</Table>
See accompanying notes to consolidated financial statements
F-3
<Page>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<Table>
<Caption>
AT DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2002
--------------- ---------------
Current liabilities:
Notes payable (notes 6, 11, 12 and 15):
Borrowed funds - banks $ 86,872,001 $ 32,774,334
Borrowed funds - related parties 27,076,366 5,835,592
Commercial paper 29,242,556 9,907,583
Current portion of long-term debt 30,493,532 30,724,888
--------------- ---------------
173,684,455 79,242,397
--------------- ---------------
Current portion of capital leases - related party (notes 6 and 13) 6,643,766 2,738,413
Accounts payable (note 6):
Carriers 8,831,981 11,032,780
Related parties 6,868,834 5,939,222
Suppliers 17,543,401 15,746,551
Other 3,881,848 1,445,558
--------------- ---------------
37,126,064 34,164,111
Interest payable (note 6) 11,331,294 11,595,595
Other liabilities (note 14) 14,644,012 14,910,246
Accrued expenses 8,941,506 6,241,795
--------------- ---------------
Total current liabilities 252,371,097 148,892,557
--------------- ---------------
Reserve for severance indemnities (note 9) 1,639,718 675,742
Deferred income taxes (note 18) 2,172,814 1,691,779
Commercial paper (note 12) 1,153,759 41,708,647
Capital leases, excluding current portion - related party (notes
6 and 13) 11,213,000 11,792,908
Long-term debt, excluding current portion (notes 6 and 15) 305,459,748 332,082,076
--------------- ---------------
Total liabilities 574,010,136 536,843,709
--------------- ---------------
Minority interest 1,870,833 -
Shareholders' equity (notes 16, 22 and 23):
Class A common stock, par value RD$10: Authorized 55,000,000
shares; issued 24,245,920 shares at December 31, 2001 and
45,458,131 at December 31, 2002 14,753,134 24,951,269
Class B stock, par value RD$10: Authorized 25,000,000 shares;
issued 19,144,544 shares 12,595,095 12,595,095
Additional paid-in-capital 217,290,020 275,496,964
Retained earnings (loss) 10,919,165 (65,634,197)
Other comprehensive income-foreign currency translation
(note 2.3) (2,023,757) (2,023,757)
--------------- ---------------
Shareholders' equity, net 253,533,657 245,385,374
Commitments and contingencies (notes 3, 6, 13, 15, 18, 19, 20, 21
and 23)
--------------- ---------------
$ 829,414,626 $ 782,229,083
=============== ===============
</Table>
See accompanying notes to consolidated financial statements.
F-4
<Page>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
Year Ended December 31,
--------------------------------------------
2000 2001 2002
------------ ------------- -------------
Operating revenues (note 6):
Toll revenues $ 28,666,107 $ 29,017,817 $ 25,983,658
International revenues 84,187,050 82,024,320 87,849,481
Local service 51,309,514 63,419,066 65,738,617
Cellular and PCS 35,796,234 37,302,337 37,663,872
Data and Internet 3,461,192 8,268,003 10,968,511
Paging 1,703,963 1,051,368 603,107
Sale of equipment 5,263,137 2,686,304 1,730,070
Installation and activation fees 13,748,906 14,347,671 5,343,997
Cable - 4,735,872 21,487,466
Other 161,552 919,427 670,806
------------ ------------- -------------
TOTAL OPERATING REVENUES 224,297,655 243,772,185 258,039,585
------------ ------------- -------------
Operating costs:
Transport and access charges (depreciation not
included) (note 20) 68,607,640 68,336,474 77,225,633
Programming costs (depreciation not included)
(note 20) - 1,225,397 6,711,789
Impairment charge on long-lived assets (note 29) - - 12,084,483
Impairment of goodwill and other intangible
assets (note 9) - - 7,650,218
Network depreciation 29,341,705 44,510,197 53,235,204
Expense in lieu of income taxes (note 17) 10,173,983 12,646,103 5,896,644
Selling, general and administrative expenses,
including depreciation charges of
$6,823,574, $9,922,008 and $12,959,297 in
2000, 2001 and 2002, respectively (notes
6, 10, 19, 20 and 23) 70,690,895 98,754,972 109,582,586
Cost of equipment sold 2,911,386 2,069,561 1,348,525
Other 1,550,161 1,745,902 1,232,752
------------ ------------- -------------
TOTAL OPERATING COSTS 183,275,770 229,288,606 274,967,834
------------ ------------- -------------
OPERATING INCOME (LOSS) 41,021,885 14,483,579 (16,928,249)
------------ ------------- -------------
Other income (expenses) (notes 6 and 10):
Interest expense (34,037,053) (42,108,715) (64,314,284)
Interest income 3,301,031 2,428,316 1,983,131
Foreign currency exchange gain (loss) (303,078) (259,951) 2,881,442
Gain (loss) on sale of fixed assets, net 29,874 (282,713) 389,217
Other, net (197,118) 1,361,944 (1,487,260)
------------ ------------- -------------
OTHER EXPENSES, NET (31,206,344) (38,861,119) (60,547,754)
------------ ------------- -------------
Earnings (loss) before income taxes, minority
interest and cumulative effect of
accounting change 9,815,541 (24,377,540) (77,476,003)
Income taxes (note 18) (588,377) (511,376) (948,192)
------------ ------------- -------------
Earnings (loss) before minority interest and
cumulative effect of accounting change 9,227,164 (24,888,916) (78,424,195)
Minority interest - 1,775,079 1,870,833
------------ ------------- -------------
Earnings (loss) before cumulative effect of
accounting change 9,227,164 (23,113,837) (76,553,362)
Cumulative effect of accounting change:
Installation and activation revenues (note 14) (16,452,799) - -
------------ ------------- -------------
NET LOSS $ (7,225,635) $ (23,113,837) $ (76,553,362)
============ ============= =============
Earnings (loss) per common share - basic and diluted
Earnings before cumulative effect of accounting
change 0.33 (0.78) (1.77)
Cumulative effect of accounting change (0.59) - -
------------ ------------- -------------
Net loss per common share - basic and diluted $ (0.26) $ (0.78) $ (1.77)
============ ============= =============
AVERAGE NUMBER OF COMMON SHARES USED IN CALCULATION:
BASIC 27,723,665 29,571,266 43,400,464
============ ============= =============
DILUTED 27,896,666 29,571,266 43,400,464
============ ============= =============
</Table>
See accompanying notes to consolidated financial statements.
F-5
<Page>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
<Table>
<Caption>
Number of Common Shares Issued Common Stock
--------------------------------- --------------------------------- Additional
Class A Class B Class A Class B Paid in Capital
--------------------------------- --------------------------------- ---------------
Balance at December 31, 1999 5,700,000 19,144,544 3,750,000 12,595,095 94,288,852
Issuance of common shares, net
of issue cost of $6,852,774
(note 16) 4,000,000 - 2,460,025 - 64,687,201
Stock-based compensation to
non-employees (note 23) - - - - 1,005,755
Net loss - - - - -
--------------- --------------- --------------- --------------- ---------------
Balance at December 31, 2000 9,700,000 19,144,544 6,210,025 12,595,095 159,981,808
Issuance of common shares in
payment of company acquisition
(notes 9, 16 and 27) 3,375,000 - 1,991,250 - 19,676,250
Issuance of common shares, net
of issue cost of $1,331,096
(note 16) 11,170,920 - 6,551,859 - 36,801,108
Stock-based compensation to
non-employees (note 23) - - - - 830,854
Net loss - - - - -
--------------- --------------- --------------- --------------- ---------------
Balance at December 31, 2001 24,245,920 19,144,544 $ 14,753,134 $ 12,595,095 217,290,020
Issuance of common shares,
Net of issue cost of $1,594,921
(note 16) 21,212,211 - 10,198,135 - 58,206,944
Net loss - - - - -
--------------- --------------- --------------- --------------- ---------------
Balance at December 31, 2002 45,458,131 19,144,544 24,951,269 $ 12,595,095 $ 275,496,964
=============== =============== =============== =============== ===============
</Table>
<Table>
<Caption>
Other
Retained Earnings Comprehensive
--------------------------------- Income-Foreign
Appropriated Un- Currency Shareholders'
Legal Reserve appropriate Translation Equity, Net
--------------- --------------- --------------- ---------------
Balance at December 31, 1999 1,653,007 39,605,630 (2,023,757) 149,868,827
Issuance of common shares, net
of issue cost of $6,852,774
(note 16) - - - 67,147,226
Stock-based compensation to
non-employees (note 23) - - - 1,005,755
Net loss - (7,225,635) - (7,225,635)
--------------- --------------- --------------- ---------------
Balance at December 31, 2000 1,653,007 32,379,995 (2,023,757) 210,796,173
Issuance of common shares in
payment of company acquisition
(notes 9, 16 and 27) - - 21,667,500
Issuance of common shares, net
of issue cost of $1,331,096
(note 16) - - - 43,352,967
Stock-based compensation to
non-employees (note 23) - - - 830,854
Net loss - (23,113,837) - (23,113,837)
--------------- --------------- --------------- ---------------
Balance at December 31, 2001 $ 1,653,007 $ 9,266,158 $ (2,023,757) $ 253,533,657
Issuance of common shares,
Net of issue cost of $1,594,921
(note 16) - - - 68,405,079
Net loss - (76,553,362) - (76,553,362)
--------------- --------------- --------------- ---------------
Balance at December 31, 2002 $ 1,653,007 $ (67,287,204) $ (2,023,757) $ 245,385,374
=============== =============== =============== ===============
</Table>
See accompanying notes to consolidated financial statements.
F-6
<Page>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2000 2001 2002
--------------- --------------- ---------------
Cash flows provided by operating activities:
Net loss $ (7,225,635) $ (23,113,837) $ (76,553,362)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 36,165,279 54,432,205 66,194,501
Impairment charge of long-lived asset, 19,734,701
intangible assets and goodwill - -
Amortization of debt issue cost 1,958,610 2,253,822 3,301,996
Allowance for doubtful accounts 3,499,893 5,519,059 7,099,263
Amortization of radio frequency rights 320,186 660,086 778,262
Goodwill amortization - 47,031 -
Allowance for obsolescence of
equipment pending installation - 1,014,605 -
Amortization of deferred cellular
equipment costs - 390,777 2,176,802
Provision for inventory obsolescence 791,806 1,280,458 1,941,517
Expenses for severance indemnities 760,740 1,987,129 2,043,077
Cumulative effect of accounting change
in installations and activations
revenues 16,452,799 - -
Deferred income tax, net 491,890 374,318 (164,268)
Value of consulting services received
in exchange for stock warrants 1,005,755 830,854 -
Minority interest - (1,775,079) (1,870,833)
Loss (gain) on sale of fixed assets,
net (29,874) 282,713 (389,217)
Gain on sale of assets (806,180) - -
Net changes in assets and liabilities:
Accounts receivable (9,497,912) (839,867) 2,254,256
Inventories (631,644) 1,217,776 1,174,905
Prepaid expenses (1,310,464) 2,162,909 (1,249,148)
Long-term accounts receivable 22,619 - -
Other assets (9,765,092) (4,336,819) (5,355,941)
Accounts payable 12,429,429 (3,094,374) (2,961,953)
Interest payable - - 264,301
Other liabilities (252,016) (7,885,779) 895,861
Accrued expenses (1,258,728) 4,635,412 (2,699,711)
Reserve for severance indemnities (782,427) (2,040,943) (3,007,053)
--------------- --------------- ---------------
Total adjustments 49,564,669 57,116,293 90,161,318
--------------- --------------- ---------------
Net cash provided by operating activities 42,339,034 34,002,456 13,607,956
--------------- --------------- ---------------
Cash flows from investing activities
(notes 9 and 27):
Cancellation (acquisition) of
investments (578,887) (15,862,209) 2,804,459
Proceeds from sale of fixed assets 2,405,494 41,653 5,041,173
Business acquisitions, net of cash acquired - (47,416,009) -
Acquisition of property and equipment (151,221,583) (113,229,826) (65,764,127)
--------------- --------------- ---------------
Net cash used in investing activities (149,394,976) (176,466,391) (57,918,495)
--------------- --------------- ---------------
</Table>
(continued)
See accompanying notes to consolidated financial statements
F-7
<Page>
TRICOM, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2000 2001 2002
--------------- --------------- ---------------
Cash flows from financing activities (notes 9
and 27):
Borrowed funds from banks 226,440,816 117,508,250 31,943,835
Principal payments to banks (207,910,973) (115,281,528) (85,041,502)
Proceeds from issuance of commercial paper - 30,396,315 21,219,915
Borrowed funds from related parties 71,727,978 82,699,726 66,986,388
Principal payments to related parties (58,213,312) (87,033,972) (88,227,162)
Capital lease payments (22,745,278) (6,317,907) (3,325,445)
Payments of long-term debt (10,315,216) (3,133,887) (30,493,532)
Proceeds from issuance of long-term debt 45,664,687 74,650,469 56,347,216
Issuance of common stock 67,147,226 43,352,967 68,405,079
--------------- --------------- ---------------
Net cash provided by financing activities 111,795,928 136,840,433 37,814,792
Net increase (decrease) in cash and on hand
and in banks 4,739,986 (5,623,502) (6,495,747)
Cash on hand and in banks at beginning of
the year 13,459,566 18,199,552 12,576,050
--------------- --------------- ---------------
Cash on hand and in banks at the end of the
year $ 18,199,552 $ 12,576,050 $ 6,080,303
=============== =============== ===============
Supplementary information:
Interest paid (net of capitalization) (33,785,503) (40,731,785) (60,747,987)
Expense in lieu of income taxes and income
taxes paid (12,728,693) (11,090,071) (8,611,320)
Capital lease obligation incurred $ 17,691,845 $ 3,345,398 $ -
=============== =============== ===============
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
<Page>
TRICOM, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2002
1 ORGANIZATION AND NATURE OF BUSINESS
The consolidated financial statements of TRICOM, S. A. (the Company)
include operations of the following companies engaged in the
telecommunications and cable broadcasting industry, with operations in the
Dominican Republic, New York, U.S.A. and the Republic of Panama:
TRICOM, S. A. (Parent Company)
GFN Comunicaciones, S. A.
TRICOM Centroamerica, S. A.
Call Tel Corporation
TRICOM USA, Inc. and Subsidiaries
TRICOM Latinoamerica, S. A. and Subsidiaries (a company in development
stage)
TCN Dominicana, S. A. (TCN or Telecable)
TRICOM, S. A. (TRICOM or the Company) is a diversified telecommunications
company, which provides international and domestic long distance, basic
local service, mobile, Internet and broadband services in the Dominican
Republic and long distance service through subsidiaries in the United
States.
The Company's operations in the Dominican Republic are governed by the
Telecommunications Law (Law No.153-98) and by a Concession Agreement signed
with the Dominican Government and ratified by the National Congress on
April 30, 1990. This agreement is for an initial term of 20 years through
June 30, 2010, subject to renewal for an additional 20-year term. Law No.
153-98 establishes a basic framework to regulate the installation,
maintenance and operation of telecommunications networks and the provision
of telecommunications services and equipment. The law adopted the
"Universal Services Principle" by guaranteeing access to telecommunications
services at affordable prices in low-income rural and urban areas. The law
creates a fund for the development of the telecommunications sectors that
is supported by a 2% tax on industry participants' billings of all
telecommunications services.
TRICOM USA, Inc. (TRICOM USA) is a Company organized under the laws of
Delaware and authorized by the United States Federal Communications
Commission (FCC) to operate as a facilities-based long distance carrier in
the United States.
TRICOM Latinoamerica, S. A. is a company organized under the laws of the
Cayman Islands on May 12, 2000. The activity of this company is to act as
the holding company of the Company's telecommunications operations in
Central America and the Caribbean.
TCN Dominicana, S. A. is a company organized on September 13, 2001 under
the laws of the Dominican Republic, and engaged in the operation of three
cable television systems and networks in the Dominican Republic.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
2.1 PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
TRICOM, S. A. (Parent Company) and its majority owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
F-9
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2.2 USE OF ESTIMATES
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America. The preparation of consolidated financial statements in
conformity with these principles requires management to make a number of
estimates and assumptions relating to the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Significant items subject to such
estimates and assumptions include: the carrying amount of property, plant
and equipment, valuation allowances for receivables, inventories,
intangible assets and deferred income tax assets. Actual results could
differ from those estimates.
2.3 FOREIGN CURRENCIES
The Company's functional currency is the US dollar. Monetary assets and
liabilities denominated in other currencies are translated to US dollars at
the exchange rate prevailing at the date of the financial statements. The
exchange differences resulting from this conversion are charged or credited
to foreign currency exchange gains or losses in the accompanying
consolidated statements of operations. The transactions expressed in other
currencies are translated at the exchange rate prevailing at the time the
transaction takes place.
Subsidiaries whose functional currency is other than the US dollar are
translated following the guidelines in SFAS 52. Accordingly, assets and
liabilities are translated to US dollars at the exchange rate prevailing at
the date of the consolidated financial statements. Revenues and expenses
are translated at the average exchange rate at the end of each month.
Foreign exchange differences arising from transactions in other currencies
are charged or credited to operations, while translation differences
arising from the conversion of the financial statements in other currencies
are recognized as comprehensive income or expense in stockholders' equity.
As of December 31, 2001 and 2002, the rates used by the Company to
translate Dominican peso denominated accounts were RD$17.05 and RD$22.50
per one US dollar, respectively. Panamanian Balboas (B/.) were at par with
the US dollar.
2.4 CASH AND CASH EQUIVALENTS
For the purpose of the statements of cash flows, the Company considers as
cash and cash equivalents all cash on hand, cash in banks, time deposits
and highly liquid debt instruments with original maturities at the time of
purchase of three months or less.
2.5 ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts receivable is established through a
charge to an expense account. The Company, after analyzing current market
trends and collection history of its receivable portfolio has estimated
that customers receivable balances over 90 days past due are uncollectible
and are therefore reserved.
2.6 INVENTORIES
Inventories are valued at the lower of average cost or market.
2.7 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Construction costs and
equipment installations in process are maintained as construction projects
until they are completed and/or equipment is placed in service.
Depreciation is recorded from the first full month that the assets are
placed in service. Property and plant related to cable television
operations are carried at cost and include all direct costs and certain
indirect costs associated with the construction of cable television
transmission and distribution systems and new subscriber installations.
F-10
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2.8 DEPRECIATION AND AMORTIZATION
The depreciation method used by the Company is the straight-line method,
that is, the uniform distribution of cost over the estimated useful lives
of the corresponding assets. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the estimated
useful life of the improvement.
The estimated useful lives of assets are as follows:
<Table>
<Caption>
Years
----------
Buildings and improvements 50
Furniture, equipment and transportation equipment 3-15
Leasehold improvements 5-10
Communications and transmission equipment 15
Computer equipment 6.67
Other equipment 5-10
</Table>
2.9 OTHER ASSETS
Deferred debt issue costs and bank debt are amortized over the debt service
period of the related debt.
Radio frequency rights are amortized on a straight-line basis over their
useful lives, which range from 15 to 20 years.
Deferred commissions on prepaid calling cards are recognized when the
deferred revenues are recorded. Commission expenses on sales of calling
cards outside of the Dominican Republic are recognized based on the minutes
used. Commission expense on sales of calling cards within the Dominican
Republic is recorded when collection of outstanding invoices to
distributors and/or wholesalers is made.
Cellular service plans that include the price of the telephone equipment
generate deferred assets for the net cost of the equipment, which is
amortized over the minimal contract period of 18 months from the month
following the delivery of equipment.
2.10 SEVERANCE INDEMNITIES
According to the Labor Code of the Dominican Republic, employers are
required to pay severance indemnities to those workers whose labor
contracts are terminated without just cause. Just cause is defined in the
Labor Code as including misstatements by an employee in his job
application, termination within three months of employment for poor
performance, dishonesty, threats of violence, willful or negligent
destruction of property, unexcused absences or termination of the job for
which the employee was hired. The Company maintains a minimal reserve to
cover severance indemnities based on its experience. At December 31, 2001
and 2002, the liability for severance indemnities was $1,639,718 and
$675,742, which relates primarily to the obligations assumed in connection
with the Company's acquisition in 2001 of TCN Dominicana, S. A.
2.11 REVENUE RECOGNITION
TOLL REVENUES
Toll revenues are amounts received by the Company from customers in the
Dominican Republic for international and domestic long distance calls.
These revenues are recognised as the calls are made.
F-11
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
INTERNATIONAL REVENUES
International revenues represent amounts due from telecommunications
carriers for calls (based on minutes) originated outside the Dominican
Republic, which terminate into the Company's Dominican network under
operating agreements between the Company and each of such carriers. These
revenues are recognised as the minutes are provided.
PREPAID CALLING CARD REVENUES
The Company recognises revenues from prepaid calling cards based on card
usage. The Company accounts for cash received or credit extended from the
sale of the prepaid calling cards as deferred revenues, which are then
recognised as the cards are used. This revenue may be part of the toll or
international revenues depending on the destination of the call.
LOCAL SERVICE REVENUES
Local service revenues consists of wireline rent, local measured service
(represents minutes used by local customers which are billed at established
rates or tariffs per actual minutes of call duration) as well as charges
for "Custom Local Access Signalling Services" (CLASS). CLASS represents
value-added services, which include call forwarding, three-way calling,
call waiting and voice mail. It also features vertical services such as
incoming-caller identification, call trace, call blocking, automatic return
of the most recent incoming call, call redial, and selective forwarding and
programming to permit for distinctive ringing for incoming calls requested
for local customers, which are billed in addition to rent. Local service
revenues also include collect call revenues and revenues from other
miscellaneous wire-line services. These revenues are recognised as the
services are rendered.
CELLULAR AND PCS REVENUES
Represents fees received for mobile cellular and PCS services, including
interconnection charges for incoming calls to the Company's cellular and
PCS subscribers (these revenues do not include international and domestic
long distance calls generated by cellular or PCS units). Cellular and PCS
fees consist of fixed monthly access fees and per-minute usage charges, as
well as additional charges for custom or vertical features, which include
call waiting, call forwarding, three-way calling and voice mail, and for
other miscellaneous cellular and PCS services. These revenues are
recognised as services are rendered.
DATA AND INTERNET REVENUES
Represents fees received for data transmission services via ATM
(Asynchronous Transfer Mode), Frame-Relay, wireless Internet and other such
services to residential and corporate customers. These revenues are
recognised as services are rendered.
PAGING REVENUES
Paging revenues consist of fixed monthly charges for nationwide service and
the use of paging equipment and activation fees. These revenues are
recognised as these services are rendered.
SALE OF EQUIPMENT
These revenues consist of sale and rental fees charged to customers for
communication equipment, including private branch exchanges, key telephone
systems, residential telephones, cellular handsets and paging units. These
revenues are recognised at the time of sale to the customer.
F-12
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
INSTALLATION AND ACTIVATION FEES
Revenues from installations consist of amounts charged for the installation
of local access lines, private interchange, central telephone systems and
charges for the activation of cellular phones and PCS. These revenues are
recognised over the estimated average service life based on the Company's
experience (which in 2000 was 35 months). The direct incremental cost
related to installations and activations are expensed as incurred.
As a result of a review of the average service lives based on the Company's
experience during the last three years, effective October 1, 2001 the
Company revised the estimated average service life period for the
amortization of installation and activation revenue. Consequently, the
recognition period for these revenues was changed to 24 months. The effect
in operations of the change in the estimated average service life was not
significant.
CABLE REVENUES
Consist of subscriber of fees received for the transmission of television
channels and programs in the Dominican Republic and other cable related
services, which revenues are recorded in the period the service is
provided, as well as other advertising services which are recognised when
commercials are telecast.
The Company has entered into transactions that exchange advertising for
advertising. Such transactions are recorded at the estimated fair value of
the advertising received or given in accordance with the provisions of the
EITF issue No. 99-17 "Accounting for Advertising Barter Transactions."
Barter transactions are not material to the Company's consolidated
statements of operations for the years ended December 31, 2001 and 2002.
OTHER REVENUES
Other revenues represent revenues that are not generated from the Company's
core business activities, including commissions and revenues from the
provision of miscellaneous services. These revenues are recognized when the
service is rendered.
2.12 CAPITALIZATION OF INTEREST
Interest is capitalized on qualified projects and included as part of
project costs during the period necessary for installation.
During the years ended December 31, 2000, 2001 and 2002, interest
capitalized as part of construction projects amounted to approximately
$11,300,000, $9,800,000 and $3,500,000, respectively.
2.13 EXPENSE IN LIEU OF INCOME TAX
Up to August 31, 2002, the parent company TRICOM, S. A. paid a tax that was
based on a percentage of the Company's domestic gross revenues (less
deductions for access to the local network) plus a percentage of the
Company's net international settlement revenues. An accrual was made for
any difference between the date when these items are reported to the tax
authorities and when they are reported in the accompanying consolidated
statements of operations. Beginning September 1, 2002, the Company is no
longer subject to this expense in lieu of income taxes, but to regular
income tax on earnings in the Dominican Republic.
2.14 INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amounts of
existing assets and liabilities, and their respective tax bases and
operating losses and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
F-13
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2.15 EARNINGS PER COMMON SHARE
Basic earnings per share have been computed based on the weighted average
number of common shares outstanding. Diluted earnings per share reflect the
increase in average common shares outstanding that would result from the
assumed exercise of outstanding stock options, calculated using the
treasury stock method.
The following table reconciles weighted average common shares outstanding
used in the calculation of basic earnings (loss) per common share to the
number of shares used in the calculation of diluted earning (loss) per
share for the years 2000, 2001 and 2002:
<Table>
<Caption>
For the year ended December 31,
----------------------------------------
2000 2001 2002
---------- ---------- ----------
Weighted average number of common shares
outstanding - basic .................... 27,723,665 29,571,266 43,400,464
Dilutive effect of potential common shares
issuable upon exercise of employee stock
options and warrants ................... 173,001 - -
---------- ---------- ----------
Weighted average number of common shares
outstanding - diluted .................. 27,896,666 29,571,266 43,400,464
========== ========== ==========
</Table>
For 2001 and 2002, all stock options and warrants are excluded from
consideration of diluted loss per share because of the Company's net loss.
2.16 PENSION PLAN
Since September 1, 2000, a private pension administration company has been
managing the Company's plan, which was converted to a defined contribution
plan. Under this arrangement, both the Company and the employee make fixed
contributions to the employee's account. The contributions made by the
Company are recognized as monthly expenses. Prior to September 1, 2000, the
Company had a contributory defined benefit pension and retirement plan. The
cost of the plan had been determined based on actuarial studies and
includes amortization of past service costs over the estimated average life
of its employees.
2.17 IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 144 provides a single accounting model for long-lived assets to be
disposed of. SFAS No. 144 also changes the criteria for classifying an
asset as held for sale and broadens the scope of businesses to be disposed
of that qualify for reporting as discontinued operations and changes the
timing of recognizing losses on such operations. The Company adopted SFAS
No. 144 on January 1, 2002 (see note 29).
In accordance with SFAS No. 144, long-lived assets, such as property,
plant, and equipment are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Assets to be disposed of would
be separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as
held for sale would be presented separately in the appropriate asset and
liability sections of the balance sheet.
Goodwill and intangible assets not subject to amortization are tested
annually for impairment, and more frequently if events and circumstances
indicate that the asset might be impaired. An impairment loss is recognized
to the extent that the carrying amount exceeds the asset's fair value.
F-14
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, ACCOUNTING FOR IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
2.18 ADVERTISING COSTS
Advertising costs are expensed as incurred. For the years ended December
31, 2000, 2001 and 2002 these costs amounted to $4,204,391, $6,074,121 and
$6,819,566, respectively, and are included as part of selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
2.19 STOCK OPTION PLAN
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25, issued in March
2000, to account for its fixed-plan stock options. Under this method,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. SFAS No.
123, Accounting for Stock-Based Compensation, established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the intrinsic-value-based method
of accounting described above, and has adopted only the disclosure
requirements of SFAS No. 123. The following table illustrates the effect on
net loss if the fair-value-based method had been applied to all outstanding
and invested awards in each period.
<Table>
<Caption>
At December 31,
------------------------------
2001 2002
-------------- --------------
Net loss - as reported $ (23,113,837) $ (76,553,362)
Add total stock-based employee compensation
determined under fair-value-based method
for all rewards (424,397) (98,450)
-------------- --------------
Pro forma net loss $ (23,538,234) $ (76,651,812)
-------------- --------------
Net loss per share:
As reported - basic and diluted $ (0.78) $ (1.77)
-------------- --------------
Pro forma - basic and diluted $ (0.80) $ (1.77)
-------------- --------------
</Table>
2.20 GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of
businesses acquired. Effective July 1, 2001, the Company adopted the
provisions of SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, for
business combinations consummated after June 30, 2001, and as of January 1,
2002 for business combinations consummated before June 30, 2001. Goodwill
and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but instead
tested for impairment at least annually in accordance with the provisions
of SFAS No. 142. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, ACCOUNTING FOR IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement required the Company to perform an assessment of
whether there was an indication that goodwill is impaired as of the date of
F-15
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
adoption. To accomplish this, the Company was required to identify its
reporting units and determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of January 1, 2002. The
Company was required to determine the fair value of each reporting unit and
compare it to the carrying amount of the reporting unit within six months
of January 1, 2002. To the extent the carrying amount of a reporting unit
exceeded the fair value of the reporting unit, the Company would be
required to perform the second step of the transitional impairment test, as
this is an indication that the reporting unit goodwill may be impaired. The
second step was required for one reporting unit. In this step, the Company
compared the implied fair value of the reporting unit goodwill with the
carrying amount of the reporting unit goodwill, both of which were measured
as of the date of adoption. The implied fair value of goodwill was
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit
in a manner similar to a purchase price allocation, in accordance with SFAS
No. 141, BUSINESS COMBINATIONS. The residual fair value after this
allocation was the implied fair value of the reporting unit goodwill. The
implied fair value of this reporting unit exceeded its carrying amount and
the Company was not required to recognize an impairment loss.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a
straight-line basis over the expected periods to be benefited, generally 40
years, and assessed for recoverability by determining whether the
amortization of the goodwill balance over its remaining life could be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill and other intangible asset impairment, if
any, was measured based on projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
2.21 INVESTMENT SECURITIES
Investment securities at December 31, 2001 and 2002 consist of certificates
of deposit and mortgage participation contracts. The Company classifies its
securities as held-to-maturity. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold the
security until maturity.
Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts.
A decline in the market value of held-to-maturity securities below cost,
that is deemed to be other than temporary, results in a reduction in
carrying amount to fair value. The impairment is charged to earnings and a
new cost basis for the security is established. Premiums and discounts are
amortized or accreted over the life of the related held-to-maturity
security as an adjustment to yield using the effective interest method.
Interest income is recognized when earned.
3 LIQUIDITY
The consolidated financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets
and satisfaction of liabilities in the ordinary course of business.
However, as a result of recurring operating losses and the effects of the
effects of the devaluation of the Dominican peso, such realization of
assets and satisfaction of liabilities are subject to significant
uncertainty.
At December 31, 2001 and 2002, the Company's current liabilities exceeded
its current assets by $175.6 million and $89.4 million, respectively. In
2001, this was mainly a result of Company's dependence on short-term debt
to fund capital expenditures and other needs obtained in the Dominican
Republic from local banks and related entities. Dominican banks generally
make short-term loans, due on demand, with the intention of renegotiating
interest rates in the event that market conditions change. These debts
generally are renewed and not repaid at maturity and the Company generally
has extended short-term borrowings as they became due. The Company is
dependent upon the continued renewal of these loans annually and
semi-annually. Additionally, the Company has senior notes with an aggregate
principal balance of $200 million due in September 2004. Management's plan
with respect to these notes is discussed below.
F-16
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the year ended December 31, 2001, the Company generated $34 million of
cash flow from operations. Additionally, the Company funded its long-term
development plan through additional short and long-term borrowings and the
sale of Class A common stock for net proceeds of approximately $43 million,
primarily to one of its principal stockholders. The Company significantly
reduced capital expenditures from levels in previous years, and funded
these requirements and capital expenditures with cash flow from operations,
borrowings and equity proceeds.
Additionally, during 2001, the Company acquired the largest cable
television company of the Dominican Republic. Management estimates that the
projected future cash flows from the operations of this subsidiary will
augment the cash flows projected by its telecommunications subsidiaries and
improve the financial position of the Company.
While the Company's Panama telecommunications subsidiary initiated its
digital trunking operation in April 2002 using Motorola's iDEN(R)
technology, such subsidiary has not yet signed interconnection agreements
with telecommunications companies operating in Panama. Further, it may not
be able to do so until certain lawsuits and related proceedings are settled
in the Panama Supreme Court. An adverse ruling in this case could have a
material negative impact on the Company's financial position and results of
future operations. (See note 20).
For the year ended December 31, 2002, the Company generated $13.6 million
of cash flow from operations. Additionally, the Company funded its
long-term development plan through additional short and long-term
borrowings and the sale of Class A common stock for net proceeds of
approximately $68.4 million. The Company has reduced its planned capital
expenditures for 2003 from the amount expended in 2002.
For 2003, the Company intends to continue to optimize the use of its
existing network, while minimizing new capital needs by disconnecting low
usage subscriber, migrating underutilized network equipment to high income,
densely populated areas, consolidating its cable and telephone networks and
using its existing spectrum to provide a wider digital coverage at lower
costs.
The Company also intends to continue to strengthen its capital structure by
continuing to extend the maturities of its debt.
The ability of the Company to pay interest on its indebtedness and meet
debt service obligations will depend on the Company's future operating
performance including the ability to increase revenues and control
expenses, which in turn depends on successful implementation of the
strategy and on financial, competitive, regulatory, technical and other
factors, many of which are beyond the Company's control. Interest expense
was $42.1 million for the year ended December 31, 2001 and $64.3 million
for the year ended December 31, 2002.
Approximately $82 million of the Company's indebtedness will mature during
the 12 months ending December 31, 2003. These borrowings primarily are in
the Dominican financial markets, in which short-term financing is the
primary form of lending. However, the Company's ability to refinance any of
this indebtedness will depend on the financial condition at the time it
matures, the restrictions in the agreements governing the Company's
indebtedness and other factors, including general market and economic
conditions, and the Company may not be able to refinance any of this
indebtedness on commercial attractive terms or at all. If refinancing is
not possible, the Company's creditors could initiate bankruptcy
proceedings, most likely in the Dominican Republic, or the Company could be
forced to dispose of business segments or assets at unfavorable prices.
The Company's 11 3/8% senior notes in the aggregate principal amount of
$200 million will mature in September 2004. The Company has filed a
registration statement with the U.S. Securities and Exchange Commission for
a proposed offer to exchange the existing 11?% senior notes for new senior
notes in the same aggregate principal amount that would mature at a later
date. That registration statement is not yet effective and the Company has
not yet specified the terms of the new notes that it is offering, including
the maturity date and interest rate. The successful completion of the
proposed exchange offer and consent solicitation will eliminate the
requirement to repay the exchanged portion of the $200 million principal
amount of the notes in September 2004. If the Company is unsuccessful in
the proposed exchange offer and consent solicitation or if it otherwise
cannot extend the maturity of the notes, the Company's cash flow from
operations will not be sufficient to repay the notes and the Company may
not be able to obtain financing from other sources.
F-17
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
4 PROPERTY. PLANT AND EQUIPMENT
A detail of property, plant and equipment at December 31, 2001 and 2002 is
as follows:
<Table>
<Caption>
At December 31,
-------------------------------
2001 2002
-------------- --------------
Operations and communications:
Land ................................... $ 11,902,288 $ 9,004,110
Buildings and improvements ............. 19,758,611 20,194,987
Furniture and equipment ................ 12,975,140 13,733,552
Communications equipment ............... 209,017,605 258,976,701
Transmission equipment ................. 353,561,238 422,166,369
Other equipment ........................ 25,624,184 7,359,744
-------------- --------------
632,839,066 731,435,463
Less accumulated depreciation .............. 105,969,914 159,114,008
-------------- --------------
Sub-total, operations and communications 526,869,152 572,321,455
Property and equipment:
Buildings .............................. 9,391,263 9,912,339
Furniture and office equipment ......... 30,679,651 30,482,967
Transportation equipment ............... 6,612,102 6,746,925
Leasehold improvements ................. 6,307,745 11,059,817
Data processing equipment .............. 45,459,879 59,224,929
-------------- --------------
98,450,640 117,426,977
Less accumulated depreciation .......... 30,431,856 44,039,805
-------------- --------------
Sub-total, property and equipment .... 68,018,784 73,387,172
-------------- --------------
Communications equipment pending
installation, net of allowance for
obsolescence of $1,014,605 in 2001 and
$773,406 in 2002 (a) ................. 21,536,007 7,996,892
Cable company equipment pending
installation (a) ..................... 3,451,697 4,342,127
Equipment in transit (b) ............... 4,396,131 1,244,214
Construction in process (c) ............ 61,644,861 8,828,332
-------------- --------------
Property and equipment, net .......... $ 685,916,632 $ 668,120,192
============== ==============
</Table>
(a) Communication equipment, net of allowance for obsolescence, and
cable company equipment pending installation, correspond to assets
acquired for future installation into the network of the Company.
Those assets are recorded at average cost, which is lower than
market.
(b) Equipment in transit represents accumulated costs of equipment
imported by TRICOM, S.A. and TCN, for which additional import related
costs are still to be incurred.
(c) A detail of construction in process at December 31, 2001 and 2002 is as
follows:
F-18
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
<Caption>
At December 31,
------------------------------------
2001 2002
----------------- -----------------
Operation and communication
Buildings............................. $ 563,058 $ 1,226,265
Transmission equipment (I)............ 40,173,633 3,621,570
Cells................................. 13,630,164 775,995
Other-Property and equipment.......... 7,278,006 3,204,502
----------------- -----------------
$ 61,644,861 $ 8,828,332
================= =================
</Table>
(i) As of December 31, 2001, this item includes approximately
$24.7 million for a network to provide trunking services with
Motorola iDEN(R) technology, primarily in the Republic of
Panama. (See note 20).
5 ACCOUNTS RECEIVABLE
Changes in the allowance for doubtful accounts were as follows:
<Table>
<Caption>
At December 31,
-----------------------------------------------------
2000 2001 2002
--------------- --------------- ---------------
Allowance at beginning of year..... $ 4,307,563 2,394,903 $ 4,097,001
Increase for the year, net (a)..... 3,499,893 5,519,059 7,099,263
Write-off during the year.......... (5,412,553) (3,816,961) (3,433,155)
--------------- --------------- ---------------
Allowance at end of year........... $ 2,394,903 4,097,001 $ 7,763,109
=============== =============== ===============
</Table>
(a) The Company contracts services from a related party engaged in
managing the collection of past due accounts. This related party
also provides these services to other related companies. During the
years ended December 31, 2000, 2001 and 2002, the Company recognized
collection recoveries from customer accounts previously written-off
of $3,087,728, $2,450,205 and $420,631, respectively. These amounts
are included, net of increase in the allowance for doubtful
accounts, in selling, general and administrative expenses in the
accompanying consolidated statements of operations.
6 TRANSACTIONS WITH RELATED PARTIES
The Company is an indirect subsidiary of GFN Corporation Limited, a
financial group that has investments in banking, insurance, publishing and
other businesses, principally in the Dominican Republic.
A detail of balances with related companies at December 31, 2001 and 2002,
is as follows:
<Table>
<Caption>
At December 31,
-------------------------------------
2001 2002
--------------- ----------------
Assets:
Cash in banks............................ $ 4,689,200 $ 2,006,577
Deposits - cash equivalent (a)........... 6,292,398 3,750,628
Accounts receivable (b).................. 5,191,359 843,190
Certificate of deposit................... 15,200,000 14,400,710
Prepaid expenses - insurance............. 4,456,265 5,940,537
</Table>
F-19
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
<Caption>
At December 31,
--------------------------------
2001 2002
---------- ----------
Other assets - deposits................ 86,580 -
========== ==========
Liabilities:
Borrowed funds (c)..................... 27,076,366 5,835,592
Commercial paper (d)................... 1,964,942 18,826,198
Accounts payable....................... 6,868,834 5,939,222
Interest payable....................... 338,497 479,477
Capital leases......................... 17,856,766 14,531,321
Long-term debt (e)..................... - 28,601,131
========== ==========
</Table>
(a) At December 31, 2001, includes $2,000,000 in interest bearing deposits
at 10% per annum. Additionally, at December 31, 2001, it includes
RD$73,185,385 (equivalent to $4,292,398) in certificates of deposit,
which earned interest at rates ranging from 15% to 20% per annum. At
December 31, 2002, it includes RD$84,389,130 (equivalent to
$3,750,628) in certificates of deposit, which earned interest at rates
ranging from 20% to 26% per annum.
(b) At December 31, 2001, accounts receivable includes $3,737,542 related
to an insurance claim filed with Segna, S.A., a related company,
related to the loss of communications equipment. The amount of the
claim represents the Company's undepreciated cost basis. This amount
was collected during 2002.
(c) Consists of unsecured loans which cause annual interest at rates
ranging from 9.5% to 12% in 2001 and 13% to 14.5% in 2002. At December
31, 2002, the Company has available unsecured, short- term lines of
credit of approximately $44,300,000 of which $5,900,000 was
outstanding at December 31, 2002.
(d) At December 31, 2001 and 2002, represents obligations from the
issuance of commercial paper to related companies of $818,344 and
$15,789,354, respectively, at annual interest ranging between 8% and
11% in 2001 and between 8% and 14.9% in 2002. At December 31, 2001 and
2002, these amounts also include RD$19,549,500 (equivalent to
$1,146,598) and RD$68,328,980 (equivalent to $3,036,844),
respectively, which generate interest at rates ranging between 14% and
16% per annum in 2001 and between 20% and 25% per annum in 2002.
(e) Unsecured loans with related offshore entities that accrued interest
on a monthly basis at an annual rate of 11.5% maturing in December
2007.
A detail of transactions with related parties during the years ended
December 31, 2000, 2001 and 2002, is as follows:
<Table>
<Caption>
For the years ended December 31,
------------------------------------------
2000 2001 2002
----------- ----------- -----------
Operating revenues - Communications
services revenues.................. $ 1,948,321 $ 3,687,902 $ 4,135,014
Selling, general and administrative
expenses:
Insurance premiums 4,071,713 4,379,992 4,803,472
Leased premises and equipment 157,600 122,568 116,885
Security services 227,001 267,725 190,047
Pension plan contributions 738,058 739,247 662,505
Advertising services 250,232 1,031,539 573,700
Professional services 234,348 128,957 -
Other - 213,677 231,245
</Table>
F-20
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
<Caption>
For the years ended December 31,
------------------------------------------
2000 2001 2002
----------- ----------- -----------
Other income (expenses):
Interest incurred on loans (5,713,690) (5,751,382) (9,767,033)
Interest earned 1,805,780 1,906,029 1,955,588
Gain on sale of fixed assets (a) - - 451,271
Other, net (b) 806,180 - (29,616)
Bank charge (151,600) (56,732) (112,070)
Equipment purchased
(Motorola) 20,279,706 20,196,766 2,095,593
=========== =========== ==========
</Table>
(a) In April and September 2002, the Company sold fixed assets to related
parties for $3,972,758 and $1,050,445, respectively. These
transactions generated a gain on sale of fixed assets of $451,271,
which is included as a separate line item in other income (expenses)
in the consolidated statement of operations as of December 31, 2002.
(b) In July 2000, the Company sold all operational assets related to the
operations of an Internet business portal to a related company in the
Dominican Republic for $2,315,412 in cash. The gain on the sale of
this asset was $806,180, and is included as part of other, net in
other income (expenses) in the accompanying consolidated statements of
operations as of December 31, 2000.
7 CERTIFICATES OF DEPOSIT
At December 31, 2001 and 2002, these are certificates of deposit for
$15,200,000 and $14,400,710, respectively, earning interest at annual rates
from 9% to 10%. Additionally, as of December 31, 2002, these include a
certificate of deposit for $1,500,000, that earns interest at 2.75% per
annum. This investment serves as a guarantee for a short-term loan of the
same amount.
8 MORTGAGE PARTICIPATION CONTRACTS
At December 31, 2001 and 2002, mortgage participation contracts have been
purchased from savings and loans associations in the Dominican Republic.
These contracts earned interest at rates between 7% and 12% per annum in
2001 and 10% per annum in 2002. These investments are maintained as
compensating balances for mortgage loans made by these savings and loans
associations to certain officers and employees of the Company.
9 ACQUISITIONS, GOODWILL AND INTANGIBLE ASSETS
The following summarizes acquisitions made by he Company during the year
ended December 31, 2001:
ACQUISITION OF CABLE OPERATION
On October 26, 2001, the Company completed the acquisition of 100% of the
outstanding shares of TCN Dominicana, S. A. (TCN or Telecable). TCN is
engaged in operating cable television systems and is the largest such
Company in the Dominican market. The purchase price consisted of cash
payments of approximately $42,300,000 and 3,375,000 TRICOM shares with an
approximate value of $21,700,000 as of the date the agreement was announced
for a total cost of approximately $64,000,000. The acquisition of TCN
increased the size and scope of the Company's services offered to customers
and generates synergies between communications and cable operations. The
purchase price was determined based on the Company's assessment of TCN's
leading competitive position in the cable industry and the valuation of its
growth prospects. The TCN acquisition was accounted for using the purchase
method of accounting. TRICOM assumed control of the operations of TCN on
September 13, 2001. From September 13, 2001 to the date of closing, there
were no significant unsatisfied conditions necessary for the final
execution of the transaction. The conditions during that period consisted
F-21
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
primarily of ministerial legal conditions. Consequently, the consolidated
financial statements include the accounts of TCN from October 1, 2001.
The allocation of the purchase price to the estimated fair value of assets
acquired and liabilities assumed at the date of acquisition is as follows:
<Table>
Current assets $ 8,052,540
Property and equipment 32,208,572
Other non-current assets 77,977
Intangible Assets 12,135,877
Goodwill 21,914,327
---------------
Total assets acquired 74,389,293
===============
Less:
Current liabilities 7,544,934
Other non-current liabilities 1,209,219
Reserve for severance indemnities 1,625,215
---------------
Total liabilities assumed 10,379,368
===============
Net assets acquired $ 64,009,925
===============
</Table>
Goodwill and other intangible assets includes amounts related to cable
franchise rights and broadcasting contracts, which have indefinite life. As
a result, under the provisions of SFAS 142, these amounts (as with amounts
allocated to goodwill) have not been amortized from the date of acquisition
and are measured for impairment in accordance with the Company's
established accounting policy. The following supplemental pro forma
information presents the results of operations of the Company as if the TCN
acquisition had taken place on January 1, 2001:
<Table>
<Caption>
2001
---------------
Revenues $ 257,825,370
Earnings (loss) before cumulative effect of accounting change (21,532,336)
Net loss (21,532,36)
Loss per share-basic and diluted (0.73)
===============
</Table>
The pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of results of operations
which actually would have resulted had TCN acquisition occurred as of
January 1, 2001.
ACQUISITION OF OPERATION IN PANAMA
In March 2001, the Company acquired 51% of the outstanding shares of
Cellular Communications of Panama, S. A. (subsequently renamed TRICOM
Panama, S.A.), a Panamanian Corporation engaged in wireless communications.
The total cost of this acquisition, including transaction expenses,
amounted to $6,303,074, of which $5,272,774 was paid in cash and $1,030,300
through the contribution of a non-exclusive license for software developed
by TRICOM.
The allocation of the purchase price to the estimated fair value of assets
acquired and liabilities assumed at the date of acquisition of the 51% of
the Company's equity was as follows:
<Table>
Current assets $ 177,717
Property and equipment 3,305,797
Other non-current assets 666,035
Goodwill 2,508,350
---------
Total assets acquired 6,657,899
---------
</Table>
F-22
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
Less:
Current liabilities 351,695
Other non-current liabilities 3,130
--------------
Total liabilities assumed 354,825
--------------
Net assets acquired $ 6,303,074
==============
</Table>
INTANGIBLE ASSETS
There were no acquisitions of intangible assets during the year ended
December 31, 2002. The summary of changes in the Company's intangible
assets during the year ended December 31, 2002 is as follows:
<Table>
<Caption>
January 1 4th Quarter December 31,
2002 Impairment 2002
--------------- --------------- --------------
Cable license $ 9,303,602 2,356,624 6,946,978
Broadcasting contracts 2,832,275 2,832,275 -
--------------- --------------- --------------
$ 12,135,877 5,188,899 6,946,978
--------------- --------------- --------------
</Table>
The intangible assets are determined to have indefinite useful lives due to
their expected ability to generate cash flows indefinitely. The cable
license is based on an agreement signed with the Dominican government,
which agreement has an indefinite life. In the case of broadcasting
contracts, the contracts can be renewed automatically without additional
payment.
For intangible assets identified as having indefinite useful lives, the
Company was required to test those intangible assets for impairment in
accordance with the provisions of SFAS No. 142 within the first interim
period after adoption. Impairment was measured as the excess of carrying
value over the fair value of an intangible asset with an indefinite life.
The results of this analysis did not require the Company to recognize an
impairment loss.
During the fourth quarter of 2002, the Company performed its annual
impairment review for intangible assets and recorded a charge of
$5,188,899, which is included as part of impairment of goodwill and other
intangible assets in the accompanying consolidated statements of operation
for the year ended December 31, 2002. The impairment charge in the cable
license is basically caused by the devaluation of Dominican peso during the
year 2002. In the case of the broadcasting contracts, during the year 2002
the Company renegotiated a significant part of these contracts, which have
changed the contract terms, which served as the base for the determination
of this intangible asset.
GOODWILL
At December 31, 2001 and 2002, the composition of goodwill is as follows:
<Table>
<Caption>
Central America
----------------------------------------------------
Wireless
Cable Segment Segment Total
--------------- --------------- ---------------
Acquisition of TCN Dominicana, S.A. $ 21,914,327 - 21,914,327
Acquisition of Cellular Communications of
Panama, S. A. (subsequently TRICOM Panama,
S. A.) - 2,508,350 2,508,350
--------------- --------------- ---------------
21,914,327 2,508,350 24,422,677
Less amortization - wireless Central America - (47,031) (47,031)
--------------- --------------- ---------------
Balances at December 31, 2001 $ 21,914,327 2,461,319 24,375,646
--------------- --------------- ---------------
Impairment charge - (2,461,319) (2,461,319)
--------------- --------------- ---------------
Balances at December 31, 2002 $ 21,914,327 - 21,914,327
=============== =============== ===============
</Table>
F-23
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the fourth quarter of 2002, the Company performed its annual
impairment review for goodwill and recognized a goodwill impairment loss of
$2,461,319 related to Central Amercia wireless reporting units since the
carrying amount of the reporting unit was greater than the fair value of
the reporting unit (as determined using the expected present value of
future cash flows) and the carrying amount of the reporting unit goodwill
exceeded the implied fair value of that goodwill. The impairment charge is
included as part of goodwill and other intangible assets in the
accompanying consolidated statements of operation for the year ended
December 31, 2002.
Upon adoption of SFAS No. 142, the Company was required to evaluate its
existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in order
to conform with the new classification criteria in SFAS No. 141 for
recognition separate from goodwill. The Company was also required to
reassess the useful lives and residual values of all intangible assets
acquired, and make any necessary amortization period adjustments by the end
of the first interim period after adoption.
The goodwill is assigned to the cable and cellular segment and is not
deductible for tax purposes.
Net loss and loss per share for the year ended December 31, 2001, adjusted
to exclude amortization expense for goodwill no longer amortized under SFAS
142, is as follows:
<Table>
Net loss:
Reported net loss
$ (23,113,837)
Add back adjusted net loss
Amortization of goodwill 47,031
---------------
$ (23,066,806)
===============
Basic and diluted loss per common share:
Reported net loss $ (0.78)
---------------
Amortization of goodwill -
Adjusted net loss $ (0.78)
===============
</Table>
10 OTHER ASSETS
Other assets at December 31, 2001 and 2002 consisted of the following:
<Table>
<Caption>
At December 31,
---------------------------------
2001 2002
--------------- ---------------
Deferred debt issue costs and bank debt, net (a) $ 8,852,320 $ 7,680,649
Deposits 2,341,455 2,258,162
Radio frequency rights, net (b) 11,029,074 10,250,812
Other (c) 3,991,204 5,123,311
--------------- ---------------
$ 26,214,053 $ 25,312,934
=============== ===============
</Table>
(a) Represent commissions paid to brokers and other expenses incurred at
the time of, and directly related to, the issuance of the Senior Notes
and prepaid interest on bank debt. For the years ended December 31,
2000, 2001 and 2002, amortization of deferred debt issue cost and bank
debt amounted to $1,958,610, $2,253,822 and $3,301,996, respectively,
and are included as part of interest expense in the accompanying
consolidated statements of operations.
(b) Represent payments for the frequency usage rights to expand the
cellular and PCS capacity of the Company in the Dominican Republic, as
well as for the acquisition of the radio frequency rights in El
F-24
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Salvador, Guatemala and Panama, as part of the Company's expansion
plans in Central America. For the years ended December 31, 2000, 2001
and 2002, the amortization expense amounted to $320,186, $660,086 and
$778,262, respectively, and is included as part of selling, general
and administrative expenses in the accompanying consolidated
statements of operations. The fair value of these assets at December
31, 2002 is higher than the book value and was determined based on
market price of these assets, based on information provided by
independent appraisals.
(c) At December 31, 2001 and 2002 other include deferred commissions
related to prepaid calling cards of $2,175,183 and $3,036,104,
respectively. Also, at December 31, 2001 and 2002, this account
includes $1,325,398 and $1,566,774 corresponding to the net deferred
asset associated with cellular and PCS service plans offered which
include handset equipment. The price per minute of such service plans
is higher than other regular service plans offered by the Company. At
December 31, 2001 and 2002, the amortization expense associated with
net deferred assets of cellular and PCS service plans was $390,977 and
$2,176,802 and is included as part of selling, general and
administrative expenses in the accompanying consolidated statements of
operations.
11 BORROWED FUNDS - BANKS
Funds borrowed by the Company consist of:
<Table>
<Caption>
At December 31,
---------------------------------
2001 2002
--------------- ---------------
Funds denominated in US dollars (a) $ 80,830,945 $ 32,774,334
Funds denominated in Dominican pesos (b) 6,041,056 -
--------------- ---------------
$ 86,872,001 $ 32,774,334
=============== ===============
</Table>
(a) At December 31, 2001 and 2002, these amounts represent loans with
local and international banks that accrue interest at annual rates
ranging from 5.25% to 12.5% in 2001 and ranging from 4.6% to 14% in
2002. At December 31, 2002, these amounts include a short-term loan
secured by a certificate of deposit of $1,500,000.
(b) At December 31, 2001, these loans represented RD$103,000,000 bearing
interest at rates ranging from 15% to 16.50% per annum.
Normally these loans are renewable at maturity but technically are due on
demand.
At December 31, 2002, the Company had available unused lines of credit with
local and international banks for approximately $7,800,000.
12 COMMERCIAL PAPER
At December 31, 2001 and December 31, 2002, commercial paper issued by the
Company consisted of:
<Table>
<Caption>
At December 31,
---------------------------------
2001 2002
--------------- ---------------
Commercial paper in US dollars (a) $ 26,914,427 $ 47,541,631
Commercial paper in Dominican pesos (b) 3,481,888 4,074,599
--------------- ---------------
Total commercial paper 30,396,315 51,616,230
Less short-term commercial paper 29,242,556 9,907,583
--------------- ---------------
Long-term commercial paper $ 1,153,759 $ 41,708,647
=============== ===============
</Table>
F-25
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a) At December 31, 2001 and 2002, these instruments accrue interest at
annual rates from 8% to 12% and from 8% to 14.9%, respectively.
(b) At December 31, 2001 and 2002, consists of RD$59,366,190 and
RD$91,678,478, respectively, and were accruing interest at annual
rates ranging between 13% and 16% in 2001 and between 18% and 26% in
2002.
Commercial paper issued by the Company are not callable until maturity.
These obligations are issued through the related company "Acciones y
Valores, S. A." to a related bank through "Valores Profesionales, S. A." At
December 31, 2001 and 2002, the Company has a facility that allows for the
issuance of additional commercial paper in the amount of $13,085,573 and
RD$140,633,210 (equivalent to $8,249,317) and of $12,458,368 and
RD$168,321,525 (equivalent to $7,480,957), respectively.
The following is a schedule of the maturity for such debt at December 31,
2002:
<Table>
One to three months $ 3,472,487
Three to six months 2,997,215
Six months to one year 3,437,881
More than one year 41,708,647
=============
</Table>
13 CAPITAL LEASES
The Company has entered into various capital lease contracts with a related
party. These contracts will mature at various dates during the next four
years. Assets recorded under these capital leases consist of:
<Table>
<Caption>
At December 31,
---------------------------------
2001 2002
--------------- ---------------
Communications equipment and other equipment $ 41,959,139 $ 41,596,684
Transportation 1,276,815 1,276,815
Machinery and equipment 307,748 307,748
--------------- ---------------
43,543,702 43,181,247
Less accumulated depreciation 11,169,666 13,941,685
--------------- ---------------
$ 32,374,036 $ 29,239,562
=============== ===============
</Table>
During 2002 the Company renegotiated these capital lease contracts. This
resulted in lower monthly payments and the extension of their maturity
through 2007.
A schedule of the lease payment requirements under these capital leases is
as follows:
Year ending December 31,
<Table>
2003 $ 5,017,861
2004 5,017,861
2005 5,017,861
2006 5,017,861
2007 1,254,656
----------------
Total lease payments 21,326,100
Less related taxes 2,285,267
----------------
Minimum lease payments 19,040,833
Less amount representing interest 4,509,512
----------------
</Table>
F-26
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
(12% to 12.875% per annum)
Present value of capital lease
obligations 14,531,321
Less current maturities of capital
lease obligations 2,738,413
----------------
Capital lease obligations $ $11,792,908
================
</Table>
14 OTHER LIABILITIES
Other liabilities at December 31, 2001 and 2002 consisted of the following:
<Table>
<Caption>
At December 31,
---------------------------------
2001 2002
--------------- ---------------
Customer advances $ 2,467,875 $ 2,008,018
Deferred revenues:
Calling cards 7,112,025 11,423,671
Installations and activation 4,718,921 1,044,111
Other 345,191 434,446
--------------- ---------------
$ 14,644,012 $ 14,910,246
=============== ===============
</Table>
Effective January 1, 2000, the Company adopted the Staff Accounting
Bulletin No. 101 (SAB 101) "Revenue Recognition" issued by the Securities
and Exchange Commission (SEC). The adoption of SAB 101 resulted in a change
in the revenue recognition policy regarding installation and activation
revenues. Such change required the Company to recognize net revenues from
installation and activation over average service life, which based on the
experience of the Company is 35 months. This change in the revenue
recognition method required the Company to recognize a cumulative effect of
accounting change in net revenues from installations and activations of
$16,452,799, which is presented as a separate item in the accompanying
consolidated statements of operations. The adoption of this bulletin did
not affect the cash flows of the Company.
Effective October 1, 2001, the Company updated its estimate of the average
service life of its customers for purposes of the recognition of deferred
income from activations and installations. As a result, the service life
was revised from 35 to 24 months. This revision was made based on the
estimated average service life of the Company's customers during the
previous three years. The effect in operations of the change in the
estimated average service life was not significant.
At December 31, 2000 and 2001, the Company recognized revenue of $8,940,040
and $7,512,759, respectively, of previously defered revenues associated
with the accounting change resulting from the adoption of SAB 101 at
January 1, 2000. This revenue is included as part of revenue from
installation and activation in the accompanying consolidated statements of
operations.
15 LONG-TERM DEBT
Long-term debt at December 31, 2002 and 2001 consists of the following:
<Table>
<Caption>
2001 2002
---- ----
Senior Notes (a) $ 200,000,000 200,000,000
Related parties (note 6) 28,601,131
Bank loans:
Loans denominated in Dominican pesos equivalent to 10,931,012 7,279,465
</Table>
F-27
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
RD$191,292,710 and RD$163,787,963 at December 31, 2001 and 2002,
respectively. These loans are payable in fixed monthly installments and
cause an annual interest rates ranging between 15% and 18% and interest at
a rate of 32% per annum. As of December 31, 2001 and 2002, respectively.
These loans are secured by transmission and telecommunication equipment
with an approximate book value of $6.8 million in 2001 and $6.4 million in
2002.
Loans denominated in Dominican pesos equivalent to RD$260,900,000 and
RD$207,400,000 as of December 31, 2001 and 2002, respectively. These
loans cause annual interest at 17.50% and from 27% to 30% as of December
31, 2001 and 2002, respectively, which can be adjusted every 30 to 60
days as per market conditions. One of these loans is secured by
telecommunication equipment with an approximate book value of
US$1.3 million. 15,302,053 9,217,777
Loans with variable interest between 5.39% and 8.87% per annum between
4.62% and 7.95% p. a. as of December 31, 2001 and 2002, respectively.
These loans are payable in installments up to 2007. One of these loans
is secured by transmission equipment with an approximate book value of
$15.9 million in 2001 and $14.8 million in 2002. At December 31, 2001 a
loan with a book value of $5,555,548 includes the maintenance of certain
financial ratios. As of December 31, 2001 the Company failed to meet
certain covenant requirements, for which the financial institution
issued the Company a waiver as of that date. During the year 2002 the
Company and the bank renegotiated the contract terms and eliminated the
required compliance with financial ratios. 52,315,571 61,831,443
Loans which cause interest at rates ranging between 9.5% and 12% per
annum and between 9.5% and 14% per annum as of December 31, 2001 and
2002, respectively. These loans have maturities up to year 2007. Some of
the loans are secured by liens on telecommunication equipment and
mortgage with a book value of approximately $19.6 million in 2001 and
$15.8 million in 2002. There is a loan with a book value of $27,235,700
and $23,344,884 at December 31, 2001 and 2002, respectively, which is
secured by an irrevocable stand by letter of credit issued by a related
financial institution. 42,404,644 55,877,148
Revolving line of credit due on May 2002. This loan bears
interest at 5.25% as of December 31, 2001. This line of credit
is guaranteed by Tricom, S. A. (Parent Company) and a related
financial institution. 15,000,000 -
--------------- --------------
Total bank loans and related parties 135,953,280 162,806,964
--------------- --------------
Total long-term debt 335,953,280 362,806,964
Less current portion of long-term debt 30,493,532 30,724,888
--------------- --------------
</Table>
F-28
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
Long-term debt, excluding
current portion $ 305,459,748 $ 332,082,076
=============== ===============
</Table>
The aggregate principal maturities due on these long-term debt obligations
from December 31, 2002 is as follows:
Year ending December 31,
<Table>
2003 $ 30,724,888
2004 235,035,590
2005 29,801,643
2006 28,659,677
2007 and thereafter 38,585,166
==============
</Table>
(a) Senior Notes
On August 15, 1997, the Company issued $200,000,000 aggregate principal
amount of 11 3/8% Senior Notes due in 2004 (the "Senior Notes"). Interest
on the Senior Notes is payable in semi-annual installments on March 1st and
September 1st of each year.
At December 31, 2002, the Company is in the process of extending the
maturity of the Senior Notes. The Company is in the process of completing
the filing of a registration statement with the U.S. Securities and
Exchange Commission (SEC) (see note 3)..
The Senior Notes may be redeemed at any time at the option of the Company,
in whole or in part, after September 1, 2001, at a premium declining to par
after September 1, 2003, plus accrued and unpaid interest, and additional
amounts, if any, through the redemption date. The Senior Notes are senior
unsecured obligations of the Company ranking pari passu in right of payment
with all other existing and future senior debt, and will rank senior to any
future subordinated indebtedness.
The indenture for the Senior Notes contains certain covenants that, among
other things, limit the ability of the Company and its Restricted
Subsidiaries, as defined in the indenture, to incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions,
repurchase equity interests or subordinated indebtedness, engage in sale
and leaseback transactions, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its Restricted
Subsidiaries, engage in any business other than the telecommunications
business, issue or sell equity interests of the Company's Restricted
Subsidiaries or enter into certain mergers and consolidations.
The Senior Notes are guaranteed fully, unconditionally, jointly and
severally by each of the Company's restricted subsidiaries, as defined in
the indenture for the Senior Notes, each of which is wholly owned by the
Company. Separate financial statements of each of the guarantor
subsidiaries have not been presented herein because management has
determined that such separate financial statements would not be material to
the holders of the Senior Notes.
Summarized condensed consolidated financial information of TRICOM, S. A.
(Parent Company), the subsidiaries guarantors on a combined basis (GFN
Comunicaciones, TRICOM Centroamerica, S. A., Call Tel Corporation, 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 2002 and for the years ended December 31, 2000, 2001 and 2002 is
as follows (see note 1):
F-29
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
BALANCE SHEET DATA AT DECEMBER 31, 2001
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Consolidating
ASSETS Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated
--------------- --------------- --------------- --------------- ------------------
Current assets:
Cash on hand and in banks $ 11,200,148 $ 1,182,280 $ 193,622 $ - $ 12,576,050
Accounts receivable, net 87,640,800 17,706,131 835,546 (71,683,824) 34,498,653
Other current assets 27,076,558 2,287,371 365,075 - 29,729,004
--------------- --------------- --------------- --------------- ------------------
Total current assets 125,917,506 21,175,782 1,394,243 (71,683,824) 76,803,707
Property and equipment net 581,160,158 100,344,145 4,412,329 - 685,916,632
Other non-current assets 84,173,618 16,452,492 799,973 (34,731,796) 66,694,287
--------------- --------------- --------------- -------------- ------------------
Total assets $ 791,251,282 $ 137,972,419 6,606,545 $ (106,415,620) $ 829,414,626
=============== =============== =============== =============== ==================
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Not Consolidating
LIABILITIES AND STOCKHOLDERS' EQUITY Parent Co. Guarantors Guarantor Adjustments Total Consolidated
--------------- --------------- --------------- --------------- ------------------
Current liabilities:
Notes payable $ 158,259,504 $ 15,424,951 $ - $ - $ 173,684,455
Current portion of capital leases 6,643,766 - - - 6,643,766
Accounts payable 33,536,089 72,631,604 2,642,195 (71,683,824) 37,126,064
Other current liabilities 25,986,347 8,790,651 139,814 - 34,916,812
--------------- --------------- --------------- --------------- ------------------
Total current liabilities 224,425,706 96,847,206 2,782,009 (71,683,824) 252,371,097
Other non-current liabilities 313,291,919 8,340,609 6,511 - 321,639,039
--------------- --------------- --------------- --------------- ------------------
Total liabilities 537,717,625 105,187,815 2,788,520 (71,683,824) 574,010,136
Minority Interest - - - 1,870,833 1,870,833
Stockholders' equity 253,533,657 32,784,604 3,818,025 (36,602,629) 253,533,657
--------------- --------------- --------------- --------------- ------------------
Total liabilities and
stockholders' equity $ 791,251,282 $ 137,972,419 $ 6,606,545 $ (106,415,620) $ 829,414,626
=============== =============== =============== =============== ==================
</Table>
F-30
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
BALANCE SHEET DATA AT DECEMBER 31, 2002:
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Consolidating
ASSETS Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated
--------------- --------------- --------------- --------------- ------------------
Current assets:
Cash on hand and in banks $ 5,618,403 $ 387,612 $ 74,288 $ - $ 6,080,303
Accounts receivable, net 74,521,264 14,779,057 1,252,796 (65,407,983) 25,145,134
Other current assets 24,068,343 3,656,119 521,211 - 28,245,673
--------------- --------------- --------------- --------------- ------------------
Total current assets 104,208,010 18,822,788 1,848,295 (65,407,983) 59,471,110
Property and equipment net 547,152,376 118,112,502 2,855,314 - 668,120,192
Other non-current assets 93,573,115 12,230,719 758,860 (51,924,913) 54,637,781
--------------- --------------- --------------- --------------- ------------------
Total assets $ 744,933,501 $ 149,166,009 $ 5,462,469 $ (117,332,896) $ 782,229,083
=============== =============== =============== =============== ==================
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Not Consolidating
LIABILITIES AND STOCKHOLDERS' EQUITY Parent Co. Guarantors Guarantor Adjustments Total Consolidated
--------------- --------------- --------------- --------------- ------------------
Current liabilities:
Notes payable $ 77,049,699 $ 624,005 $ 1,568,693 $ - $ 79,242,397
Current portion of capital
leases 2,738,413 - - - 2,738,413
Accounts payable 24,912,223 73,240,436 1,419,435 (65,407,983) 34,164,111
Other current liabilities 22,108,633 9,858,567 780,436 - 32,747,636
--------------- --------------- --------------- --------------- ------------------
Total current liabilities 126,808,968 83,723,008 3,768,564 (65,407,983) 148,892,557
Other non-current liabilities 372,739,159 15,211,993 - - 387,951,152
--------------- --------------- --------------- --------------- ------------------
Total liabilities 499,548,127 98,935,001 3,768,564 (65,407,983) 536,843,709
Minority interest - - - - -
Stockholders' equity 245,385,374 50,231,008 1,693,905 (51,924,913) 245,385,374
--------------- --------------- --------------- --------------- ------------------
Total liabilities and
stockholders' equity $ 744,933,501 $ 149,166,009 $ 5,462,469 $ (117,332,896) $ 782,229,083
=============== =============== =============== =============== ==================
</Table>
F-31
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000:
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Consolidating
Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated
--------------- --------------- --------------- --------------- ------------------
Operating revenues $ 188,897,636 $ 65,697,691 $ - $ (30,297,672) $ 224,297,655
Operating costs (150,954,070) (62,619,372) - 30,297,672 (183,275,770)
--------------- --------------- --------------- --------------- ------------------
Operating income 37,943,566 3,078,319 - - 41,021,885
Other expenses, net (28,716,402) (1,273,401) - (1,216,541) (31,206,344)
--------------- --------------- --------------- --------------- ------------------
Earnings before income taxes
and cumulative effect of
accounting change 9,227,164 1,804,918 - (1,216,541) 9,815,541
Income taxes - (588,377) - - (588,377)
--------------- --------------- --------------- --------------- ------------------
Earnings before cumulative
effect of accounting change 9,227,164 1,216,541 - (1,216,541) 9,227,164
Cumulative effect of change in
Accounting for installations
and activation revenues (16,452,799) - - - (16,452,799)
--------------- --------------- --------------- --------------- ------------------
Net earnings (loss) $ (7,225,635) $ 1,216,541 $ - $ (1,216,541) $ (7,225,635)
=============== =============== =============== =============== ==================
</Table>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Not Consolidating
Parent Co. Guarantors Guarantor Adjustments Total Consolidated
--------------- --------------- ---------------- --------------- ------------------
Operating revenues $ 185,307,689 $ 80,126,179 $ 489,202 $ (22,150,885) $ 243,772,185
Operating costs (169,708,189) (77,618,572) (4,112,730) 22,150,885 (229,288,606)
--------------- --------------- ---------------- --------------- ------------------
Operating income 15,599,500 2,507,607 (3,623,528) - 14,483,579
Other expenses, net (38,713,337) (1,276,722) 717 1,128,223 (38,861,119)
--------------- --------------- ---------------- --------------- ------------------
Earnings (loss) before income
taxes and minority interest (23,113,837) 1,230,885 (3,622,811) 1,128,223 (24,377,540)
Income taxes - (511,376) - - (511,376)
--------------- --------------- ---------------- --------------- ------------------
Earnings (loss) before
minority interest (23,113,837) 719,509 (3,622,811) 1,128,223 (24,888,916)
Minority interest - - - 1,775,079 1,775,079
--------------- --------------- ---------------- --------------- ------------------
Net earnings (loss) $ (23,113,837) $ 719,509 $ (3,622,811) $ 2,903,302 $ (23,113,837)
=============== =============== ================ =============== ==================
</Table>
F-32
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002:
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Consolidating
Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated
--------------- --------------- --------------- --------------- ------------------
Operating revenues $ 182,211,853 $ 103,818,368 $ 2,741,653 $ (30,732,289) $ 258,039,585
Operating costs (182,842,619) (114,365,097) (8,492,407) 30,732,289 (274,967,834)
--------------- --------------- --------------- --------------- ------------------
Operating loss (630,766) (10,546,729) (5,750,754) - (16,928,249)
Other expenses, net (75,140,569) (387,170) (365) 14,980,350 (60,547,754)
--------------- --------------- --------------- --------------- ------------------
Loss before income taxes and
minority interest (75,771,335) (10,933,899) (5,751,119) 14,980,350 (77,476,003)
Income taxes (782,027) (166,165) - - (948,192)
--------------- --------------- --------------- --------------- ------------------
Loss before
minority interest (76,553,362) (11,100,064) (5,751,119) 14,980,350 (78,424,195)
Minority interest - - - 1,870,833 1,870,833
--------------- --------------- --------------- --------------- ------------------
Net loss $ (76,553,362) $ (11,100,064) $ (5,751,119) $ 16,851,183 $ (76,553,362)
=============== =============== =============== =============== ==================
</Table>
CASH FLOW DATA FOR THE YEAR ENDED DECEMBER 31, 2000:
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Consolidating
Parent Co. Guarantors Guarantor Adjustments Total Consolidated
--------------- --------------- --------------- --------------- ------------------
Net cash provided by (used in)
Operating activities $ 54,506,114 $ (12,167,080) $ - $ - $ 42,339,034
Net cash used in investing
activities (161,904,855) (21,770,121) - 34,280,000 (149,394,976)
Net cash provided by financing
activities 111,795,928 34,280,000 - (34,280,000) 111,795,928
--------------- --------------- --------------- --------------- ------------------
Net increase in cash on
Hand and in banks 4,397,187 342,799 - - 4,739,986
Cash on hand in banks at
beginning of the year 12,844,764 614,802 - - 13,459,566
--------------- --------------- --------------- --------------- ------------------
Cash on hand and in banks at
the end of the year $ 17,241,951 $ 957,601 $ - $ - $ 18,199,552
=============== =============== =============== =============== ==================
</Table>
F-33
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
CASH FLOW DATA FOR THE YEAR ENDED DECEMBER 31, 2001:
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Not Consolidating
Parent Co. Guarantors Guarantor Adjustments Total Consolidated
--------------- --------------- ---------------- --------------- ------------------
Net cash provided by (used in)
operating activities $ 31,164,129 $ 5,983,861 $ (3,145,534) $ - $ 34,002,456
Net cash used in investing
activities (186,848,944) (22,587,259) (2,597,256) 33,053,654 (178,979,805)
Net cash provided by financing
activities 149,643,012 16,828,077 5,936,412 (33,053,654) 139,353,847
--------------- --------------- --------------- --------------- ------------------
Net increase (decrease)
in cash on Hand and in
banks (6,041,803) 224,679 193,622 - (5,623,502)
Cash on hand and in banks at
beginning of the year 17,241,951 957,601 - - 18,199,552
--------------- --------------- --------------- --------------- ------------------
Cash on hand and in banks at
the end of the year $ 11,200,148 $ 1,182,280 $ 193,622 $ - $ 12,576,050
=============== =============== =============== =============== ==================
</Table>
CASH FLOW DATA FOR THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
Tricom, S.A. Subsidiaries Subsidiaries Not Consolidating
Parent Co. Guarantors Guarantor Adjustments Total Consolidated
--------------- --------------- --------------- --------------- ------------------
Net cash provided by (used in)
operating activities $ (15,957,985) $ 35,380,401 $ (5,814,460) $ - $ 13,607,956
Net cash provided by (used in)
investing activities (32,360,921) (29,684,007) 499,433 3,627,000 (57,918,495)
Net cash provided by (used in)
financing activities 42,737,161 (6,491,062) 5,459,493 (3,627,000) 38,619,317
--------------- --------------- --------------- --------------- ------------------
Net decrease in cash on
Hand and in banks (5,581,745) (794,668) (119,334) - (6,495,747)
Cash on hand in banks at
beginning of the year 11,200,148 1,182,280 193,622 - 12,576,050
--------------- --------------- --------------- --------------- ------------------
Cash on hand and in banks at
the end of the year $ 5,618,403 $ 387,612 $ 74,288 $ - $ 6,080,303
=============== =============== =============== =============== ==================
</Table>
F-34
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
16 STOCKHOLDERS' EQUITY
The authorized capital stock of the Company consists of 55,000,000 shares
of Class A common stock and 25,000,000 shares of Class B common stock.
All of the Company's outstanding shares are duly authorized, validly issued
and fully paid. Both classes of capital stock vote together as a single
class, except on any matter that would adversely affect the rights of
either class. The Class A common stock have one vote per share and the
Class B stock have ten votes per share. The economic rights of each class
of capital stock are identical.
During the second quarter of 2000, the Company sold 4,000,000 Class A
common shares in a public offering for US$74.0 million, less issue costs of
$6,852,774. The proceeds of this issuance were used for capital
expenditures to increase the capacity and coverage of local access, mobile
and data networks, expand international facilities to support increased
traffic volume and to fund working capital.
In October 2001, the Company issued 3,375,000 class A shares to the
previous shareholders of TCN Dominicana, S. A. as part of the purchase
price of the Company. The value of these shares amounted to approximately
$21.7 million, determined based on the average price of the shares of
TRICOM, S.A. immediately before and after the date the agreement was
announced.
During the last quarter of 2001, the Company completed a Rights Offering of
common stock to shareholders, including Oleander Holding, one of the
Company's major shareholders, which is a subsidiary of GFN Corporation,
Ltd. As a result of this offer, the Company issued 11,170,920 class A
shares for a total net proceeds of approximately $43.3 million, net of
issuance cost of $1,331,096.
At December 31, 2002, the Company received a $70 million equity investment
from a group of private investors, including the Company's chairman and
chief executive officer. The proceeds from this issuance, net of issue cost
of $1,594,921 were used to repay short-term debt, thus reducing the
Company's interest requirements. The Company issued 21,212,121 shares of
the Company's Class A common stock at a price of $3.30 per share.
17 EXPENSE IN LIEU OF INCOME TAXES
Through August 31, 2002, TRICOM, S.A. (Parent Company) paid its income tax
based on the terms of a concession agreement signed with the government of
the Dominican Republic that stipulated a fixed rate of 10% on gross
revenues after deduction of local network charges plus 10% of all long
distance revenues. This tax was never to be less than RD$18,000,000
(equivalent to $800,000). Total tax paid under this concession amounted to
$10,173,983, $12,646,103 and $5,896,644 for the years ended December 31,
2000 and 2001 and the eight month period ended August 31, 2002,
respectively, and is presented as part operating cost in the accompanying
consolidated statements of operations.
18 INCOME TAXES
TRICOM, S.A. (Parent Company) and its subsidiaries operate in several
jurisdictions and under different tax regimes, of which the most relevant
operations are located in the Dominican Republic, the United States of
America and Panama. Accordingly, each subsidiary must file income and other
tax returns for its operations in such jurisdictions. Because of the
differences in the tax legislations in each country, each of the individual
subsidiaries must file separate income tax returns instead of one on a
consolidated basis. Therefore, the information about corporate income tax
expense for the years ended December 31, 2000, 2001 and 2002, respectively,
represents the sum of the tax obligations of each of the consolidated
subsidiaries.
The income tax expenses are as follow:
F-35
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
<Caption>
Current Deferred Total
Year ended December, 2000
U.S. Federal $ (96,487) (491,890) (588,377)
=============== =============== ===============
Year ended December, 2001
U.S. Federal $ (1,215) (374,318) (375,533)
Dominican Republic (a) (135,843) - (135,843)
--------------- --------------- ---------------
$ (137,058) (374,318) (511,376)
=============== =============== ===============
Year ended December, 2002
U.S. Federal $ - 164,268 164,268
Dominican Republic (a) (1,112,460) - (1,112,460)
--------------- --------------- ---------------
$ (1,112,460) 164,268 (948,192)
=============== =============== ===============
</Table>
(a) At December 31, 2001 and 2002, the applicable taxes of the companies
in the Dominican Republic were determined based on the 1.5% of gross
operating income of the Company for the three month and seventeen day
period ended December 31, 2001, and for the year ended December 31,
2002, in the case of the subsidiary TCN, and for a four month period
ended December 31, 2002 in the case of TRICOM, S.A. (Parent Company),
as established by fiscal regulations.
Effective September 1, 2002 TRICOM, S. A. (Parent Company) elected to pay its
corporate income tax in accordance with the Tax Code of the Dominican Republic,
as amended. This Code establishes a tax that is the higher of 25% of net taxable
income or 1.5% of gross revenues. As a result of this new tax regime, TRICOM, S.
A. (Parent Company) paid $782,027 in 2002, based of 1.5% of its gross revenues,
and is presented as income tax expense in the accompanying consolidated
statements of operations for the year ended December 31, 2002
The components of deferred tax assets and liabilities are as follows:
<Table>
<Caption>
2000 2001 2002
Deferred tax assets:
Deferred revenues $ 211,304 910,711 679,046
Property, plant and equipment in the
Dominican Republic - - 7,803,033
Net operating loss carry
forward 195,064 487,340 532,455
Tax credit carry forward 132,961 132,961 96,369
Other 261,679 93,625 -
--------------- --------------- ---------------
Gross deferred tax assets 801,008 1,624,637 9,110,903
Allowance valuation - - (7,803,033)
--------------- --------------- ---------------
Deferred tax assets, net 801,008 1,624,637 1,307,870
--------------- --------------- ---------------
Deferred tax liabilities
Property and equipment in USA 974,867 1,588,780 1,148,285
IRC SEC 481 (a) adjustment - 559,071 229,590
Accrued commission - - 264,216
Other - net - 24,963 49,688
--------------- --------------- ---------------
Total deferred tax liabilities 974,867 2,172,814 1,691,779
--------------- --------------- ---------------
DEFERRED TAX, NET $ (173,859) (548,177) (383,909)
=============== =============== ===============
</Table>
F-36
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment.
At December 31, 2002, the subsidiary in the United States has unused net
operating loss carryover as follows:
<Table>
Expires 2013 $ 561,115
Expires 2015 38,173
Expires 2017 1,337,981
---------------
</Table>
19 PENSION BENEFITS
Effective September 1, 2000, AFP Siembra, S. A., a related pension
management company, assumed the administration of the Company's pension
plan as individual defined contribution accounts similar to the United
States 401(k) plan. The plan management company maintains the investments
on behalf of plan participants and reports changes in the value of the
individual accounts using the unit investment system. Under this plan, each
participant has his or her own individual capitalization account, which was
opened with total contributions and benefits accrued in the predecessor
pension plan. Under this arrangement, the Company contributes 5% of the
employee's salary and the employee contributes 4%. During the four month
period ended December 31, 2000 and for the years ended December 31, 2001
and 2002, the Company's expense for this plan was approximately $207,000
and $739,000 and $662,505, respectively, and is included as part of
selling, general and administrative expenses in the accompanying
consolidated statements of operations.
The pension management company guarantees a minimum return of 1.5% over the
mean of the average bid interest rate offered by certificates of deposit
from Dominican commercial and multiple service banks reported by the
Central Bank of the Dominican Republic, determined monthly, considering the
date in which the funds entered the individual account.
The pension management company commits to permanently maintain on deposit
with banks 90% of the instruments that comprise the total amount of the
portfolio of funds being managed. The cost of this service is RD$50
(approximately $2) per employee per month, which is deducted monthly from
the contributions that the employer (the Company) makes. The pension
management company earns 1% annually on the cumulative balance of each
account under its management.
Prior to September 1, 2000, substantially all of the employees of the
Company were included in a defined benefit plan that was established by
Grupo Financiero Nacional, S.A. The benefits were based on the years of
service and the employees' compensation during the last several years
before retirement. This plan was administered by the Pension and Retirement
Plan of the Grupo Financiero Nacional, S. A.
The Company made annual contributions to the Plan based on contribution
levels determined by independent actuaries. The Company's pension expense
was approximately $531,000 in the year ended December 31, 2000, and is
included as part of selling, general and administrative expenses in the
accompanying consolidated statements of operations.
20 COMMITMENTS AND CONTINGENCIES
A summary of commitments and contingencies at December 31, 2001 and 2002 is
as follows:
(a) Commitments
(i) TRICOM maintains contracts with foreign entities for the
traffic of overseas calls. Such contracts require each entity
to obtain the necessary facilities to establish, maintain and
operate
F-37
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
its respective terminals. The cost of each contract is based
upon negotiated rates, which are computed based on the amount
of traffic each month. For the years ended December 31, 2000,
2001 and 2002 this cost was $4,916,317, $6,622,358 and
$9,963,739, respectively, and is included in the cost of
satellite connections, carriers and interconnection charge in
the accompanying consolidated statements of operations.
(ii) On May 8, 1997, the Federal Communications Commission (FCC)
issued an order to adopt the provisions of the
Telecommunications Act of 1996 relating to the preservation
and advancement of universal telephone service (the "Universal
Service Fund"). The Universal Service Order requires all
telecommunications carriers providing interstate
telecommunications services to contribute to universal service
by contribution to a fund (the "Universal Service Fund").
Universal Service Fund contributions were assessed based upon
intrastate, interstate and international end-user gross
telecommunications revenue effective January 1 through
December 31.
At December 31, 2000, 2001 and 2002 the Company contributed
$251,386, $50,067 and $48,713, respectively, to the "Universal
Service Fund" on end-user telecommunications revenue of
$3,582,572 in 2000, $710,299 in 2001 and $675,567 in 2002. The
contribution paid is included as part of selling, general and
administrative expenses in the accompanying consolidated
statements of operations.
(iii) The subsidiary dedicated to televised cable systems operations
has contracts with television and network companies around the
world for the transmission of its programming content in the
Dominican Republic. Such companies require monthly payments
that range between $0.10 and $5.85 per subscriber in 2001 and
between $0.08 and $12.5 per subscriber in 2002. The term of
these contracts fluctuate between two and three years and are
renewable at the option of the parties. As of December 31,
2001 and 2002, the total amount of these payments was $941,375
and $6,541,489, respectively, which is included as part of the
programming costs in the accompanying consolidated statements
of operations.
(iv) The telecommunications law of the Dominican Republic (Law
153-98) establishes that the companies operating in this
sector pay to the Instituto Dominicano de Telecomunicaciones
(INDOTEL) a monthly fee equivalent to 2% of its international
net income. As of December 31, 2000, 2001 and 2002, the
expense for this concept was $364,434, $228,340 and $497,550,
respectively, which is included as part of selling, general
and administrative expenses in the accompanying consolidated
statements of operations.
(b) Lease Obligations
The Company maintains operating leases for the use of office space,
telecommunications centers, commercial offices, warehouse, an automobile,
an aircraft and others. These operating leases are renewable at the end of
the lease period, which is usually one year. Expenses for these leases in
2000, 2001 and 2002 were approximately $1,754,000, $2,600,000 and
$2,900,000, and are included in selling, general and administrative
expenses in the consolidated statements of operations. The commitment for
lease payments for the next five years is as follow:
<Table>
<Caption>
Year Amount
---- ------
2003 $ 2,904,258
2004 3,097,296
2005 3,271,634
2006 3,495,838
2007 and beyond 11,929,472
===============
</Table>
F-38
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) Legal Proceedings
(i) In August 1999, a Dominican company and two individual
plaintiffs sued the Company before Dominican courts for
alleged losses and damages of up to approximately
RD$200,000,000 (approximately $8,900,000) resulting from the
imprisonment by Dominican authorities of two of the
individuals for 15 days. The plaintiffs alleged that their
imprisonment was the result of an investigation by the local
district attorney and the police that the Company instigated
following an irregular increase in telephonic traffic at
certain telephone numbers. The court rejected the action for
lack of evidence. However, the plaintiffs appealed, and the
case is pending decision. After consulting with legal
counsel, the Company believes that this matter will not have
a material adverse effect on its results of operations and
financial position in the case of an adverse decision.
(ii) As of December 31, 2001 and 2002, the Company has been
involved in other lawsuits and legal proceedings arising
from the ordinary conduct of its business. Such claims
generally relate to tortuous and contractual actions for
damages. Claims pursuant to such suits and proceedings
amount to approximately $7,400,000 (RD$126,000,000) in 2001
and $8,800,000 (RD$198,900,000) in 2002. Management has
evaluated these suits and proceedings and believes that the
final resolution of these matters will not have a material
adverse effect on the Company's results of operations and
financial position.
No amounts have been recorded in the accompanying financial
statements related to these legal proceedings.
(iii) On May 8, 2001, BSC of Panama, S.A., a subsidiary of
BellSouth, which owns one of the two cellular
telecommunications concessions granted by the Panamanian
government, requested that the Panamanian ENTE REGULADOR DE
LOS SERVICIOS PUBLICOS, or ENTE, investigate TRICOM Panama,
S.A. for violations of the Telecommunications Act and the
ENTE's regulations. BellSouth claimed that TRICOM Panama:
- will use its iDEN(R) based trunking services to provide
cellular telecommunications services, in violation of its
license; and
- although the Comany proved that its iDEN(R) system has
been modified to disable "hand off" capabilities, the fact
that the equipment has these capabilities represents a
breach of regulations and Company's license.
The ENTE has not issued any ruling on BellSouth's request, but
has stated publicly that Panamanian regulations do not limit
the provision of wireless services to a particular technology.
On August 24, 2001, BellSouth requested that the ENTE initiate
a legal review before the Third Chamber of the Panamanian
Supreme Court of Justice, of the interpretation given by the
ENTE to the definition of "Conventional Trunking System
Services." BellSouth alleges that the interpretation given by
the ENTE to the definition of "Conventional Trunking System
Services," found in Resolution No. JD-025 of December 12, 1996
violates several articles of the Telecommunications Act,
including that the ENTE's interpretation allows a trunking
service provider to use any wireless system, including any
type of cellular systems, as long as the "Hand-Off"
capabilities are disabled. BellSouth claims that this violates
the Telecommunications Act, which states that cellular
services are a Type A Service that can only be provided by
BellSouth and the other holder of a Type A License, Cable &
Wireless.
The ENTE has replied that it only regulates services and not
technology and that the definition of "Conventional Trunking
System Services" protects the temporary exclusivity regime
given to cellular services because it does not allow the
participation of new cellular service providers in the
Panamanian market. The Attorney General also opined that the
definition of "Conventional Trunking System
F-39
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Services" is legal. The license given to TRICOM Panama is for
the operation of conventional trunking services, which it is
operating with the iDEN(R) system.
The legal review by the Third Chamber of the Panamanian
Supreme Court of Justice requested by BellSouth cannot be
undertaken until the Supreme Court resolves a constitutional
review requested by TRICOM Panama on September 10, 2001,
regarding the lack of procedure for the Third Chamber to
undertake a legal review of the sort sought by BellSouth. On
October 22, 2001, the Supreme Court decided it would review
the procedure.
On August 28, 2001, TRICOM Panama received notice of a
precautionary order obtained by BellSouth from the Seventh
Civil Court of the First Judicial Circuit requiring TRICOM
Panama to cease all activity directly or indirectly related to
the installation and supply of telecommunication services
using Motorola's iDEN(R) system. This order forms part of a
tort claim, submitted by BellSouth on September 4, 2001,
against TRICOM Panama for US$20,000,000 for the possible
damages that TRICOM Panama may cause BellSouth in the event
that TRICOM Panama initiates operations of an iDEN(R)-based
trunking service.
On September 11, 2001, TRICOM Panama submitted a motion before
the Seventh Civil Court to substitute a bond for the
precautionary order to cease its activities and at the same
time appealed to the Superior Civil Chamber the precautionary
order itself. On October 1, 2001, the Seventh Civil Court
denied TRICOM Panama's motion and, on October 8, 2001, TRICOM
Panama also appealed this decision to the Superior Civil
Chamber. The TRICOM Panama defense was based on the following
principles:
- only the ENTE has by law the power to discontinue public
utilities services;
- this precautionary measure can only be applied to real
property (not to personal property);
- there is no imminent damage that justifies the
precautionary measure.
On September 11, 2001, BellSouth submitted a complaint stating
that TRICOM Panama was in default of the court order.
TRICOM Panama also submitted a motion to the Seventh Civil
Court to dismiss BellSouth's tort claim and to invalidate the
precautionary order, due to the court's lack of jurisdiction
over a matter that should be decided by the ENTE. On September
28, 2001, TRICOM Panama filed a US$1,000,000 damages
counterclaim against BellSouth for the public campaign set
against TRICOM Panama by BellSouth and for the unfounded
investigation requested before the ENTE.
The Company believe, based on the advice of its Panamanian
legal counsel, that BellSouth should not succeed in its claims
because:
- BellSouth cannot claim any damages caused by TRICOM Panama
activities, since TRICOM Panama operations are protected
under a legitimate Conventional Trunking System Services
license.
- The ENTE is the only authority empowered to declare that
the telecommunications services provided by TRICOM Panama
are not conventional trunking services, or that the
iDEN(R) system cannot be used to provide conventional
trunking systems.
On August 5, 2002, the judge in the Seventh Civil Court
transferred the case to the Eleventh Civil Court of the First
Judicial Circuit, which will continue the proceedings.
F-40
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On November 5, 2001, TRICOM Panama requested that the ENTE
investigate BellSouth for violations of the Telecommunications
Act and its concession agreement on account of the failure of
BellSouth to (1) recognize the jurisdiction of the ENTE, (2)
follow proper procedure in connection with the precautionary
measure it obtained and (3) provide interconnection. This case
is pending the Ente's decision on whether or not to press
charges against BellSouth.
On November 13, 2001, upon the request of BellSouth, the
Seventh Civil Court issued an order giving notice to Cable &
Wireless of the precautionary order issued against TRICOM
Panama in late August. TRICOM Panama and Cable & Wireless had
negotiated the terms of an interconnection agreement with the
intervention of the Ente. Upon judicial notice of the
precautionary order against TRICOM Panama, Cable & Wireless
refused to sign the interconnection agreement. The Ente
imposed on Cable & Wireless sanctions of $5,000 per day until
it signs the interconnection agreement with TRICOM Panama. On
December 14, 2001, Cable & Wireless challenged the Ente's
sanctions order on constitutional grounds before the Supreme
Court. On June 19, 2002, the Supreme Court revoked Ente's
resolution that imposed a daily fine of $5,000 per day on
Cable & Wireless until it signs the interconnection agreement.
On November 16, 2001, TRICOM Panama sought protection from the
First Superior Tribunal of Justice on account of the August
2001 precautionary order which violated its constitutional
right to due process and trial before a body of competent
jurisdiction. On December 7, 2001, the court declared the case
inadmissible on procedural grounds, and on December 10, 2001,
TRICOM Panama filed an appeal and motion for reconsideration.
On December 20, 2001, the Superior Tribunal decided the appeal
of the precautionary order in favor of TRICOM Panama on the
merits of the claims, thus, lifting the precautionary order.
On February 27, 2002, BellSouth challenged this decision in
the Supreme Court. This challenge has not been decided. On
July 8, 2002, the Supreme Court confirmed the decision of the
Superior Tribunal of the Supreme Court that rejected defenses
to the August 21 precautionary order based upon procedural
grounds. The Supreme Court's decision did not affect the
decision on the merits of the Superior Tribunal.
On April 26, 2002, BellSouth filed a claim against TRICOM
Panama before the ENTE alleging that TRICOM Panama is
rendering voice and text mail services in violation of its
concession and the authorized use of its frequencies.
BellSouth argues that value added services, such as voice and
text mail services, may only be provided by basic telephony or
cellular operators. BellSouth requests that the ENTE revoke
TRICOM Panama's concession and rights to frequencies.
BellSouth further requests as a provisional measure, and until
the conclusion of the administrative proceedings, that the
ENTE order TRICOM Panama to suspend its trunking services or,
alternatively, its voice and text mail services. On May 10,
2002, the ENTE ordered TRICOM Panama to suspend its voice mail
services until the ENTE determines whether the imposition of
sanctions is appropriate.
On September 17, 2002, the Ente granted TRICOM Panama the
license to offer international long distance communications
services.
On October 24, 2002, the Ente granted TRICOM Panama the
license to offer basic telecommunications services.
On April 4, 2003, the Supreme Court reinstated a precautionary
order, originally issued on August 28, 2001, requiring TRICOM
Panama to cease all activity directly or indirectly related to
the installation and supply of telecommunications services
using Motorola's iDEN(R) system. Notwithstanding the
reinstatement of the order, the Company continue to use the
iDEN(R) system to provide services. The Company's Panamanian
legal counsel has advised that the reinstatement of the
precautionary order is not necessarily indicative of the final
decision on BSC's pending claims.
F-41
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On January 16, 2003, a trial started on BSC's actions to
require that TRICOM Panama cease all activity directly or
indirectly related to the installation and supply of
telecommunication services using Motorola's iDEN(R) system and
to recover damages. The 11th Civil Court of the First Judicial
Circuit considered evidence and testimony presented by experts
appointed by TRICOM Panama and by the court until March 19,
2003. TRICOM Panama has filed motions that challenge the
authority of the court to decide the case, arguing that only
the ENTE may consider the issues raised by BSC. Decisions on
the trial and the Company's motion are pending. The Company
understand that, anticipating a final judgment in its favor in
the trial, BSC is preparing a criminal complaint against
TRICOM Panama with respect to its failure to comply with the
precautionary order, reinstated by the Supreme Court,
requiring that TRICOM Panama cease all activity directly or
indirectly related to the installation and supply of
telecommunications services.
In February 2003, the ENTE ruled that voice and text mail
services do not violate the terms of the concession granted to
TRICOM Panama, thus allowing TRICOM Panama to legally provide
those services under its trunking license.
Based on these facts, no reserve for losses was accrued in the
accompanying consolidated financial statements as of December
31, 2001 and 2002. If BellSouth prevails in its claims, the
Company may be forced to discontinue its business in Panama
and, as a result, would not generate any revenue from the
iDEN(R) operations in Panama, lose all or a material portion
of the investment or be required to pay damages to BellSouth.
(d) Severance indemnities
Companies based in the Dominican Republic maintain reserves under the
provisions of U.S. Statement of Financial Accounting Standards "SFAS" No. 5
to cover the ultimate payment of severance indemnities. Severance expense
amounted to $760,740, $1,987,129 and $2,043,077 in the years ended December
31, 2000, 2001 and 2002, respectively and is included as part of selling,
general and administrative expenses in the accompanying consolidated
statement of operations.
(e) Other
During the year 2001, the fiscal authorities of the Dominican Republic
audited the tax returns of the Company and its compliance with the tax law
as it relates to withholdings and other taxes for the years 1999, 2000 and
through June 2001. In June 2002, the Company received notice from the
Dominican tax service claiming that it 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 authorities
have audited tax payments) and for withholding tax on the wholly-owned
subsidiary, TRICOM Latinoamerica and on certain other payments.
The Service claims the Company miscalculated the tax in lieu of income tax
payable under the concession agreement. The concession agreement provided
the Company pays, within the first ten days of each month (1) 10% of gross
domestic revenues collected by the Company 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 the Company's network for termination of
international long distance calls. The Service claims that this tax was
required to be calculated based upon accrued revenues rather than
collections and seeks RD$98.8 million ($5.3 million), plus penalties and
interest.
The Service also claims that the Company was required to withhold and pay
to the tax service 25% of the amount of the investment in TRICOM
Latinoamerica, S. A., for 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.
F-42
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company contested the notice with the Service, indicating that it was
in full compliance with the terms in the concession agreement in
calculating the tax based on collections rather than accrued revenues and
that there is no requirement to withhold tax on investments in a wholly
owned subsidiary. On August 27, 2002, the Service rejected substantially
all of the Company's response and calculated the aggregate liability on the
two claims, including penalties and interest, as RD $668.3 million ($35.5
million). The Service, however, agreed to drop the claims for withholding
tax on other payments to non-Dominican service providers.
The Company appealed the Tax Service determination to the Ministry of
Finance and both the Company and the Tax Service have the right to appeal
any determination by the Ministry of Finance to the tax courts. The Company
considers that it has complied with its tax obligations. The Company
considers that it has complied with its tax obligations, but if the Company
is required to pay a substantial amount in assessments, penalties and
interest, it would reduce funds available for operations and it would
require the Company to obtain additional financing, which may not be
available to the Company on commercially attractive terms or at all.
As of December 31, 2002 TRICOM, S.A. (Parent company) has paid the Tax
Service $1,134,679 in connection with the resolution of the assessments
related to withholdings and VAT. This amount is presented as part of other
expenses in the accompanying consolidated statements of operations.
21 BUSINESS AND CREDIT CONCENTRATION
In the normal course of business, the Company has accounts receivable from
carriers. Although the Company's exposure to credit risk associated with
non-payment by these carriers is affected by conditions or occurrences
within the industry, most of these receivables are due from large,
well-established companies. The Company does not believe that this
concentration of credit risk represents a material risk of loss.
22 LEGAL RESERVE
Article 58 of the Code of Commerce of the Dominican Republic requires all
companies to segregate at least 5% of their net earnings as a legal reserve
until such reserve equals 10% of its paid- in capital. This reserve is not
available for distribution as dividend, except in case of the dissolution
of the corporation.
23 STOCK OPTION PLAN
On May 4, 1998, the Company initiated a Long-term Incentive Plan, in which
certain employees could be granted options to purchase shares of the
Company's common stock. The Plan is administered by the Board of Directors
of the Company and has the authority to determine which employees will
participate in the Plan.
The Plan authorizes grants of options to purchase up to 750,000 authorized
Company shares. Stock options are granted with an exercise price equal to
the stock's fair market value at the date of grant. All stock options have
a term of ten years and become exercisable after one and three years from
the date of grant.
At December 31, 2001 and 2002, there were 266,053 and 338,963 additional
shares available for grant under the Plan, respectively.
Changes in the number of shares subject to options are summarized as
follows:
<Table>
<Caption>
Weighted Average
Options Exercise Price
----------- ------------------
Balance, December 31, 1999 313,420 8.96
Granted 207,245 20.45
Surrendered (1,035) 8.06
----------- ------------------
Balance, December 31, 2000 519,630 13.53
Granted (a) 486,757 6.82
Surrendered (a) (453,130) 13.90
Balance, December 31, 2001 (69,310) 8.35
----------- ------------------
</Table>
F-43
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
Granted 483,947 7.17
Cancelled 2,000 3.00
Surrendered (74,910) 7.42
----------- ------------------
Balance, December 31, 2002 411,037 $ 7.11
=========== ==================
</Table>
(a) In 2001, the Board of Directors approved a stock option repricing
pursuant to which the Company's employees could elect to cancel
granted options in exchange for new options with an exercise price of
$7.00, which was the Company's common stock price on the New York
Stock Exchange. Approximately 520,000 options were eligible for
repricing, of which the Company cancelled 453,130 options and granted
241,994 options.
The number of repriced options was also reduced proportionately. All other
conditions were unchanged. Effective July 1, 2000, the FASB issued
Financial Interpretation No. 44 (FIN 44) which amended APB 25 and requires
"variable" accounting for all stock option repricing granted before six
months of the cancelled date. As a result, these options will require
variable accounting until they are exercised, cancelled, forfeited or
expired. Under variable accounting, compensation expense must be measured
by the difference between the exercise price and the market price of the
Company's stock at each reporting period amortized over the vesting period.
The effect of the application of FIN 44 during 2001 and 2002 was not
significant.
Exercise prices of options outstanding at December 31, 2002 ranged from $3
to $16. The following table provides certain information with respect to
stock options outstanding at December 31, 2002:
<Table>
<Caption>
Options outstanding
-----------------------------------------------------------------
Weighted Average
Weighted Average Remaining Contractual
Range of exercise prices Number Outstanding Exercise Price Life
------------------ ---------------- ---------------------
$3.00-$5.00 7,000 $ 3.46 9.26
$5.01 - $7.00 383,812 6.85 8.26
$7.01 - $9.00 7,225 8.10 7.03
$9.01 - $16.00 13,000 16.00 7.50
------------------ ---------------- ---------------------
411,037 $ 7.11 8.23
================== ================ =====================
</Table>
<Table>
<Caption>
Options exercisable
----------------------------------------------------
Weighted Average
Range of exercise prices Number Exercisable Exercise Price
----------------------------------------- ------------------------- ---------------------
$3.00-$5.00 $ - $ -
$5.01 - $7.00 42,143 6.99
$7.01 - $9.00 2,709 8.10
------------------------- ---------------------
$9.01 - $16.00 - -
44,852
=========================
</Table>
The weighted-average fair value at date of grant for options granted during
2001 and 2002 were $2.60 and $1.90, respectively and were estimated using
the Black-Scholes option valuation model with the following
weighted-average assumptions.
<Table>
<Caption>
2001 2002
---------- ----------
Expected life in years 7.50 7.50
Interest rate 5.02 4.61
</Table>
F-44
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
Volatility 70.56 45.31
Expected dividends - -
========== ==========
</Table>
Warrants:
In October, 1999 the Company entered into an agreement with a third party
to provide investor relations service for a period of two years. The
Company granted warrants to purchase 300,000 Class A common shares of the
Company at an exercise price of $8.875 per share. At December 31, 2001 and
2002 the Company had vested the 300,000 shares for this contract.
The Company recognized an expense for the fair value of these options using
the Black-Scholes options pricing model as follows:
The 150,000 shares vested in 1999 were valued at the fair value of the
shares at the date of grant and the 100,000 shares vested in the year 2000
were valued at the fair value of the shares at the date they were vested.
The Company had 50,000 shares that are not vested at December 31, 2000,
that are valued at the fair value at December 31, 2000. At December 31,
2001 and 2002 the shares related to this contract are valued at the fair
value of the shares the date they were vested.
For the years ended December 31, 2000 and 2001 the Company recognized an
expense of $1,005,755 and $830,854, respectively, which is included as part
of selling, general and administrative expenses in the accompanying
consolidated statements of operations. This contract had no effect in
operating results during 2002.
24 QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables contain selected consolidated quarterly financial data
for the Company:
<Table>
<Caption>
2001
------------------------------------------------------------------------
First quarter Second quarter Third quarter Fourth quarter
--------------- -------------- -------------- ---------------
Total operating revenues $ 57,449,378 $ 59,023,070 $ 60,654,087 $ 66,645,650
Operating costs, including
depreciation charges of
$12,069,872;
$13,367,554;
$14,378,645 and
$14,616,134 for each
quarter, respectively 50,064,775 52,895,448 $ 58,031,531 $ 68,296,852
--------------- -------------- -------------- --------------
Operating income (loss) 7,384,603 6,127,622 2,622,556 (1,651,202)
Other income (expenses), net (9,389,238) (9,275,545) (8,070,310) (12,126,026)
--------------- -------------- -------------- --------------
Loss before income taxes and
minority interest (2,004,635) (3,147,923) (5,447,754) (13,777,228)
Income taxes 16,139 (117,000) (150,000) (260,515)
--------------- -------------- -------------- --------------
Loss before minority interest (1,988,496) (3,264,923) (5,597,754) (14,037,743)
Minority interest - 60,026 95,021 1,620,032
--------------- -------------- -------------- --------------
Net (loss) $ (1,988,496) $ (3,204,897) $ (5,502,733) $ (12,417,711)
=============== ============== ============== ==============
</Table>
F-45
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
Loss per share $ (0.07) $ (0.11) $ (0.19) $ (0.39)
=============== ============== ============== ==============
Number of common shares used
in calculation 28,844,544 28,844,544 28,844,544 31,751,432
=============== ============== ============== ==============
</Table>
<Table>
<Caption>
2002
------------------------------------------------------------------------
First quarter Second quarter Third quarter Fourth quarter
--------------- -------------- -------------- ---------------
Total operating revenues $ 64,050,634 $ 66,732,101 $ 65,578,407 $ 61,678,443
Operating costs, including
depreciation charges of
$16,074,171;
$16,184,346;
$16,977,071 and
$16,958,913 for each
quarter, respectively 62,574,605 66,096,744 64,922,648 81,373,837
--------------- -------------- -------------- --------------
Operating income (loss) 1,476,029 635,357 655,759 (19,695,394)
Other expenses, net (12,601,928) (15,764,147) (15,512,303) (16,669,376)
--------------- -------------- -------------- --------------
Loss before income taxes and
minority interest (11,125,899) (15,128,790) (14,856,544) (36,364,770)
Income taxes (136,994) (20,084) (316,422) (474,692)
--------------- -------------- -------------- --------------
Loss before minority interest (11,262,893) (15,148,874) (15,172,966) (36,839,462)
Minority interest 712,650 916,503 241,680 -
--------------- -------------- -------------- --------------
Net loss $ (10,550,243) $ (14,232,371) $ (14,931,286) $ (36,839,462)
=============== ============== ============== ==============
Loss per share $ (0.24) $ (0.33) $ (0.34) $ (0.86)
=============== ============== ============== ==============
Number of common shares used
in calculation 43,390,464 43,390,464 43,390,464 43,400,464
=============== ============== ============== ==============
</Table>
During the fourth quarter of 2001, the Company recognized expenses for
approximately $4 million for allowance for obsolescence of equipment
pending installation, as well as expenses incurred during the year
corresponding to operational expenses related to the development of the
Company's network in Panama.
During the last quarter of 2002 the Company recognised expenses of
approximately $19 million as a result of impairment of long-lived assets,
intangible assets and goodwill based on the requirements of SFAS 142 and
144.
25 SEGMENT INFORMATION
The Company has adopted Financial Accounting Standards Board Statement No.
131, "Disclosures about Segment of an Enterprise and Related Information",
which establishes standards for reporting information about a company's
operating segments. The Company has divided its operations into five
reportable segments: Wireline, Wireless, International, Cable (from 2001)
and Others based upon similarities in revenue generation, cost recognition,
marketing and management of its businesses.
F-46
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The reporting segments follow the same accounting policies used for the
Company's consolidated financial statements and described in the summary of
significant accounting policies. Management evaluates a segment's
performance based upon profit or loss from operations before income taxes.
The segments and a description of their business is as follows: Wireline
which includes local access lines. Wireless which includes prepaid and
postpaid mobile communication products and services and trunking services.
International which includes long distance carrier services. Cable which
includes cable services revenues and Other which includes services such as
paging, Internet, data services, local prepaid calling cards and customer
contact services.
GEOGRAPHIC
<Table>
<Caption>
2000
----------------------------------------------------------------------------------
Dominican Central
United States Republic America Eliminations (a) Consolidated
-------------- -------------- -------------- ---------------- --------------
International settlement
revenues $ 65,667,150 $ 48,817,572 - $ (30,297,672) $ 84,187,050
Other 29,768 140,080,837 - - 140,110,605
-------------- -------------- -------------- --------------- --------------
Total operating revenues 65,696,918 188,898,409 - (30,297,672) 224,297,655
Operating costs 62,056,005 151,435,223 82,214 (30,297,672) 183,275,770
-------------- -------------- -------------- --------------- --------------
Operating income (loss) $ 3,640,913 $ 37,463,186 $ (82,214) $ - $ 41,021,885
-------------- -------------- -------------- --------------- --------------
Identifiable assets $ 38,107,771 $ 697,291,056 $ 34,383,027 $ (87,341,995) $ 682,439,859
-------------- -------------- -------------- --------------- --------------
</Table>
<Table>
<Caption>
2001
----------------------------------------------------------------------------------
Dominican Central
United States Republic America Eliminations (a) Consolidated
-------------- -------------- -------------- ---------------- --------------
International settlement
revenues $ 74,777,278 29,175,816 - (21,928,774) 82,024,320
Other 613,029 160,867,745 267,091 - 161,747,865
-------------- -------------- -------------- --------------- --------------
Total operating revenues 75,390,307 190,043,561 267,091 (21,928,774) 243,772,185
Operating costs 72,628,186 173,462,997 5,126,197 (21,928,774) 229,288,606
-------------- -------------- -------------- --------------- --------------
Operating income (loss) $ 2,762,121 16,580,564 (4,859,106) - 14,483,579
-------------- -------------- -------------- --------------- --------------
Identifiable assets $ 42,749,104 $ 799,206,711 $ 46,128,961 $ (58,670,150) $ 829,414,626
-------------- -------------- -------------- --------------- --------------
</Table>
<Table>
<Caption>
2002
----------------------------------------------------------------------------------
Dominican Central
United States Republic America Eliminations (a) Consolidated
-------------- -------------- -------------- ---------------- -------------
International settlement
revenues $ 81,968,116 $ 36,613,644 $ - $ (30,732,279) $ 87,849,481
Other 362,776 167,085,675 2,741,653 - 170,190,104
-------------- -------------- -------------- --------------- --------------
Total operating revenues 82,330,892 203,699,319 2,741,653 (30,732,279) 258,039,585
Operating costs 90,761,674 203,020,317 11,918,122 (30,732,279) 274,967,834
-------------- -------------- -------------- --------------- --------------
Operating income (loss) $ (8,430,782) $ 679,002 $ (9,176,469) $ - $ (16,928,249)
-------------- -------------- -------------- --------------- --------------
Identifiable assets $ 42,816,480 $ 799,094,432 $ 60,974,156 $ (120,655,985) $ 782,229,083
-------------- -------------- -------------- --------------- --------------
</Table>
(a) Revenues-costs: Corresponds to elimination of the gross income
revenues between subsidiaries and the Company. Identifiable assets:
Corresponds to eliminations of intercompany accounts and investments
in common stock between TRICOM, S. A. (Parent Company) in the
Dominican Republic and the subsidiaries in United States and Central
America.
F-47
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
PRODUCTS AND SERVICES
<Table>
<Caption>
2000
----------------------------------------------------------------------------------
Wireline Mobile International Others (a) Consolidated
-------------- -------------- -------------- -------------- --------------
Revenues $ 83,491,208 $ 42,450,018 $ 84,187,050 $ 14,169,379 $ 224,297,655
-------------- -------------- -------------- -------------- --------------
Operating income (loss) $ 19,874,568 $ 14,957,724 $ 2,932,170 $ 3,257,423 $ 41,021,885
-------------- -------------- -------------- -------------- --------------
Identifiable assets $ 228,852,370 $ 194,248,738 $ 38,341,447 $ 220,997,304 $ 682,439,859
-------------- -------------- -------------- -------------- --------------
Depreciation expense $ 27,109,500 $ 5,185,718 $ 1,953,356 $ 1,916,705 $ 36,165,279
-------------- -------------- -------------- -------------- --------------
Capital expenditures $ 42,975,001 $ 90,751,943 $ 9,476,159 $ 25,710,325 $ 168,913,428
-------------- -------------- -------------- -------------- --------------
</Table>
<Table>
<Caption>
2001
---------------------------------------------------------------------------------------------------
Wireline Mobile International Cable Others (a) Consolidated
-------------- -------------- -------------- -------------- -------------- --------------
Revenues $ 98,645,084 $ 44,045,919 $ 82,024,320 $ 4,735,872 $ 14,320,990 $ 243,772,185
-------------- -------------- -------------- -------------- -------------- --------------
Operating income (loss) $ 13,852,143 $ 4,148,474 $ 590,585 $ 1,009,621 $ (5,117,244) $ 14,483,579
-------------- -------------- -------------- -------------- -------------- --------------
Identifiable assets $ 348,967,885 $ 194,052,349 $ 69,895,502 $ 78,146,866 $ 138,352,024 $ 829,414,626
-------------- -------------- -------------- -------------- -------------- --------------
Depreciation expense $ 38,252,541 $ 10,546,909 $ 2,502,516 $ 533,544 $ 2,596,695 $ 54,432,205
-------------- -------------- -------------- -------------- -------------- --------------
Capital expenditures $ 55,655,735 $ 17,780,482 $ 1,537,326 $ 4,815,026 $ 36,786,655 $ 116,575,224
-------------- -------------- -------------- -------------- -------------- --------------
</Table>
<Table>
<Caption>
2002
---------------------------------------------------------------------------------------------------
Wireline Mobile International Cable Others (a) Consolidated
-------------- -------------- -------------- -------------- -------------- --------------
Revenues $ 85,885,327 $ 44,679,579 $ 87,849,481 $ 21,487.467 $ 18,137,731 $ 258,039,585
-------------- -------------- -------------- -------------- -------------- --------------
Operating income
(loss) $ (2,830,096) $ (13,280,618) $ 12,507,671 $ (5,766,367) $ (7,558,839) $ (16,928,249)
-------------- -------------- -------------- -------------- -------------- --------------
Identifiable assets $ 331,220,279 $ 155,670,029 $ 59,457,021 $ 88,394,040 $ 147,487,654 $ 782,229,023
-------------- -------------- -------------- -------------- -------------- --------------
Depreciation expense $ 31,845,445 $ 20,362,612 $ 5,912,862 $ 3,646,561 $ 4,427,021 $ 66,194,501
-------------- -------------- -------------- -------------- -------------- --------------
Capital expenditures $ 23,446,404 $ 2,739,438 $ 1,152,894 $ 16,719,548 $ 21,705,843 $ 65,764,127
-------------- -------------- -------------- -------------- -------------- --------------
</Table>
(a) Other (identifiable assets) include administrative/corporate assets
which are not revenue generating. Also includes construction in
process and communication equipment pending installation, which at
December 31, had not been placed in service and were not specifically
associated with any business segment. Other remaining assets do not
meet any quantifiable test for determining reportable segments.
26 NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS (SFAS No. 143). SFAS No. 143 requires the Company
to record fair value of an asset retirement obligation as a liability in
the period in which it incurs a legal obligation associated with the
retirement of tangible long-lived asset that result from the acquisition,
construction development and/or normal use of the assets. The Company
also records a corresponding asset, which is depreciated over the life of
the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to
reflect the passage of time and change in the estimated future cash flows
underlying the obligation. The Company is required to adopt SFAS No. 143
on January 1, 2003. The adoption of SFAS No. 143 is not expected to have
a material effect on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB
STATEMENTS No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 amends existing guidance on reporting
gains and losses on the extinguishment of debt to prohibit the
classification of the gain or loss as extraordinary, as the use of such
extinguishment has become part of the risk management strategy of many
companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback
accounting for certain lease modifications that have economic effects
similar to sale-leaseback transactions. The provisions of the Statement
related to the rescission of Statement No. 4 is applied in fiscal years
beginning after May 15, 2002. Earlier application of these provisions
F-48
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
is encouraged. The provisions of the Statement related to Statement No.
13 were effective for transactions occurring after May 15, 2002, with
early application encouraged. The adoption of SFAS No. 145 is not
expected to have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND
OTHER COSTS TO EXIT AN ACTIVITY. The provisions of this Statement are
effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The adoption of
SFAS No. 146 is not expected to have a material effect on the Company's
financial statements.
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No.
34. This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its
obligations under guarantees issued. The Interpretation also clarifies
that a guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and
are not expected to have a material effect on the Company's financial
statements. The disclosure requirements are effective for financial
statements of interim or annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, an amendment of
FASB Statement No. 123. This Statement amends FASB Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement No. 123 to
require prominent disclosures in both annual and interim financial
statements. The transition and annual disclosure requirements of SFAS 148
are effective for interim periods beginning after December 15, 2002.
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the Interpretation. The
Interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003.
The application of this Interpretation is not expected to have a material
effect on the Company's financial statements. The Interpretation requires
certain disclosures in financial statements issued after January 31, 2003
if it is reasonably possible that the Company will consolidate or
disclose information about variable interest entities when the
Interpretation becomes effective.
27 NON-CASH FINANCING AND INVESTING ACTIVITIES
During the year 2001, the Company entered into capital leases for
$3,345,398 (See note 12).
During the year 2001, as part of the acquisition of TCN Dominicana,
S. A., the Company issued 3,375,000 Class A common stock with a value of
$21,667,500. (See note 9).
28 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amount and estimated fair
values of the Company's financial instruments at December 31, 2001 and
2002. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. Amount in parentheses represent liabilities.
F-49
<Page>
TRICOM, S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<Table>
<Caption>
At December 31,
----------------------------------------------------------------------
2001 2002
-------------------------------- --------------------------------
Carrying Carrying
amount Fair value amount Fair value
------------- ------------- ------------- -------------
Cash on hand and in banks $ 12,576,050 $ 12,576,050 $ 6,080,303 $ 6,080,303
Accounts receivable net 34,498,654 34,498,654 25,145,134 25,145,134
Investments - certificates of
deposits 15,200,000 15,200,000 15,900,710 15,900,710
Notes payable to banks
and related parties (113,948,367) (113,948,367) (38,609,926) (38,609,926)
Accounts payable (37,126,064) (37,126,064) (34,164,111) (34,164,111)
Interest payable (11,331,294) (11,331,294) (11,595,595) (11,595,595)
Other liabilities (14,644,012) (14,644,012) (14,910,246) (14,910,246)
Accrued expenses (8,941,506) (8,941,506) (6,241,795) (6,241,795)
Commercial paper (30,396,315) (30,396,315) (51,616,230) (51,616,230)
Capital leases (17,856,766) (17,856,766) (14,531,321) (14,531,321)
Long-term debt- banks and
related parties (135,953,280) (134,904,976) (162,806,964) (163,532,997)
Long-term debt - senior notes (200,000,000) (168,000,000) (200,000,000) (110,000,000)
============= ============= ============= =============
</Table>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash on hand and in banks, investments in certificates of deposit, notes
payable to banks and related parties, accounts payable, other liabilities
and accrued expenses; the carrying amounts approximate fair value because
of the short maturity of these instruments. Accounts receivable are
adjusted by their valuation allowance and, therefore, are presented at
realizable value that approximates fair value.
Capital lease, commercial paper and long-term debt-banks and related
parties: the fair value was estimated by discounting the future cash
flows of each instrument at rates currently offered to the Company for
similar debt instruments by the Company's bankers.
Long-term debt - senior notes: The fair value of this long term debt was
estimated based on quoted market prices on the last business day of the
year.
29 IMPAIRMENT OF LONG-LIVED ASSETS
At December 31, 2002, the Company recognised an asset impairment charge
of $12,084,483 attributable to certain fixed assets (paging of $1,330,748
and analog network of $10,753,735). As a result of a deterioration of the
telecommunication business, the Company assessed the recoverability of
certain long-lived assets in conformity with Statement of Financial
Accounting Standards No. 144. The Company was required to reduce the
carrying value of the assets to fair value and recognized an asset
impairment charge because the carrying value of the affected assets
exceeded the projected future discounted cash flows of these assets.
F-50
<Page>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing Form 20-F and has duly caused this amendment to the annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
TRICOM, S.A.
Dated: May 22, 2003 By: /s/ CARL H. CARLSON
-------------------------------------------
Carl H. Carlson,
Executive Vice President, Chief Operating
Officer, Member of the Office of the President
and Treasurer
<Page>
CERTIFICATIONS
Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
I, Manuel Arturo Pellerano Pena, certify that:
1. I have reviewed this annual report on Form 20-F of TRICOM, S.A.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of TRICOM, S.A. as of, and for, the periods presented in this annual report;
4. TRICOM S.A.'s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for TRICOM, S.A. and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to TRICOM, S.A.,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of TRICOM, S.A's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. TRICOM, S.A.'s other certifying officers and I have disclosed,
based on our most recent evaluation, to TRICOM, S.A's auditors and the audit
committee of TRICOM, S.A.'s board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect TRICOM,
S.A.'s ability to record, process, summarize and report
financial data and have identified for TRICOM, S.A.'s
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in TRICOM,
S.A.'s internal controls; and
6. TRICOM, S.A.'s other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 22, 2003
/s/ MANUEL ARTURO PELLERANO PENA
--------------------------------------
Manuel Arturo Pellerano Pena
President, Chief Executive Officer and
Chairman of the Board of Directors
<Page>
Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
I, Ramon Tarrago, certify that:
1. I have reviewed this annual report on Form 20-F of TRICOM, S.A.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of TRICOM, S.A. as of, and for, the periods presented in this annual report;
4. TRICOM S.A.'s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for TRICOM, S.A. and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to TRICOM, S.A.,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of TRICOM, S.A's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation
Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. TRICOM, S.A.'s other certifying officers and I have disclosed,
based on our most recent evaluation, to TRICOM, S.A's auditors and the audit
committee of TRICOM, S.A.'s board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect TRICOM,
S.A.'s ability to record, process, summarize and report
financial data and have identified for TRICOM, S.A.'s
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in TRICOM,
S.A.s internal controls; and
6. TRICOM, S.A.'s other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 22, 2003
/s/ RAMON TARRAGO
-------------------------------------
Ramon Tarrago
Chief Financial Officer and Vice President of
International Division
<Page>
INDEX TO EXHIBITS
<Table>
<Caption>
Exhibit Number
- ----------------
1.1 Amended and Restated By-laws of TRICOM, S.A. with English
translation thereof (incorporated by reference to Exhibit 3 to
our Amendment No. 1 of the Registration Statement on Form F-1,
filed on May 1, 1998 (file no. 333-08574)).
2.1 Indenture, dated August 21, 1997, between The Bank of New York,
as trustee, and TRICOM, S.A. (incorporated by reference to
Exhibit 4.1 to our Registration Statement on Form F-4, filed on
December 29, 1997 (file no. 08150)).
2.2 Form of Class A Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to our Amendment No. 1 to Registration
Statement on Form F-1, filed on May 1, 1998 (file no.
333-08574)).
2.3 Form of American Depositary Receipt (included as part of Exhibit
2.4) (incorporated by reference to Exhibit 4.2 to our
Registration Statement on Form F-1, filed on April 2, 1998 (file
no. 333-08574)).
2.4 Form of Deposit Agreement between The Bank of New York, TRICOM,
S.A. and owners and holders of American Depositary Receipts
(incorporated by reference to Exhibit 4.3 to our Registration
Statement on Form F-1, filed on April 2, 1998 (file no.
333-08574)).
4.1 IDEN(R) Infrastructure Supply Agreement, dated July 31, 2000,
between Motorola, Inc. and Tricom Latinoamerica, S.A.
(incorporated by reference to Exhibit 4.1 to our Annual report on
Form 20-F/A, filed on November 21, 2001 (file no. 14816)).
4.2 Concession Agreement, dated February 20, 1996, between the
Dominican State and TRICOM, S.A. (incorporated by reference to
Exhibit 10.1 to our Registration Statement on Form F-4, filed on
December 29, 1997 (file no. 333-08150)).
4.3 Concession Agreement, dated April 30, 1990, between the Dominican
State and TRICOM, S.A. (incorporated by reference to Exhibit 10.2
to our Registration Statement on Form F-4, filed on December 29,
1997 (file no. 333-08150)).
4.4 Interconnection Agreement, dated May 17, 1994, between Compania
Dominicana de Telefonos, C. por A. (Codetel) and TRICOM, S.A.
(incorporated by reference to Exhibit 10.3 to our Registration
Statement on Form F-4, filed on December 29, 1997 (file no.
333-08150)).
4.5 Addendum to Interconnection Agreement, dated January 2, 1998,
between Codetel and TRICOM, S.A. (incorporated by reference to
Exhibit 10.4 to our Amendment No. 1 to Registration Statement on
Form F-1, filed on May 1, 1998 (file no. 333-08574)).
4.6 Amended and Restated Shareholders Agreement among TRICOM, S.A.,
Motorola, Inc. and Oleander Holding, Inc. (incorporated by
reference to Exhibit 10.7 to our Amendment No. 1 to Registration
Statement on Form F-1, filed on May 1, 1998 (file no. 333-08574)).
4.7 1998 Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.11 to our Amendment No. 1 to Registration Statement on
Form F-1, filed on May 1, 1998 (file no. 333-08574)).
4.8 The Guaranty, dated August 21, 1997, issued by each of TRICOM's
subsidiaries in favor of the holders of the 11 3/8% notes due
2004 under the Indenture, dated August 21, 1997 (incorporated by
reference to Exhibit 4.2 to our Registration Statement on Form
F-4, filed on December 29, 1997 (file no. 333-08150)).
4.9 Dealer Manager Agreement, dated December 18, 2002, among TRICOM,
S.A., the guarantors
</Table>
<Page>
<Table>
named therein and Bear, Stearns & Co. Inc. (incorporated by
reference to Exhibit 1.1 to our Amendment No. 1 to Registration
Statement on Form F-4, filed on March 20, 2003 (file no.
333-101922)).
8.1 List of Subsidiaries.
10.1 Certification of Chief Executive Officer pursuant to 18 U..S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
10.2 Certification of Chief Financial Officer pursuant to 18 U..S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
10.3 Consent of KPMG.
</Table>