-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RJSEdcYvXZjCLuey7DKov2q9ox70CkGhjzmHyofEPifZVXt5scNUWsTifxORpFnS M8Br7HAM+XMRYs9nMiwzig== 0000912057-02-022614.txt : 20020531 0000912057-02-022614.hdr.sgml : 20020531 20020531142546 ACCESSION NUMBER: 0000912057-02-022614 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020531 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRICOM SA CENTRAL INDEX KEY: 0001052124 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-14816 FILM NUMBER: 02667684 BUSINESS ADDRESS: STREET 1: AVE LOPE DE VEGA NO 95 CITY: SANTO DOMINGO STATE: G8 BUSINESS PHONE: 8094766000 MAIL ADDRESS: STREET 1: AVE LOPE DE VEGA NO 95 CITY: SANTO DOMINGO STATE: G8 ZIP: 00000 20-F 1 a2081199z20-f.txt FORM 20-F SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 20-F / / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 1-14816 [TRICOM(R) LOGO] TRICOM, S.A. (Exact name of Registrant as specified in its charter) DOMINICAN REPUBLIC (Jurisdiction of incorporation or organization) AVENIDA LOPE DE VEGA NO. 95, SANTO DOMINGO, DOMINICAN REPUBLIC (Address of principal executives offices) Securities registered pursuant to Section 12(b)of the Act. AMERICAN DEPOSITARY SHARES CLASS A COMMON STOCK, PAR VALUE RD$10 PER SHARE Securities registered pursuant to Section 12(g)of the Act. NONE Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. 11-3/8% SENIOR NOTES DUE SEPTEMBER 1, 2004 Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. AT DECEMBER 31, 2001, THERE WERE 24,245,920 SHARES OF CLASS A COMMON STOCK AND 19,144,544 SHARES OF CLASS B STOCK ISSUED AND OUTSTANDING. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark which financial statement item the Registrant has elected to follow: Item 17 Item 18 X ----- ----- TABLE OF CONTENTS
PAGE PART I. .............................................................................2 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS*.......................2 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE*.....................................2 ITEM 3. KEY INFORMATION..............................................................3 ITEM 4. INFORMATION ON THE COMPANY..................................................17 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................................45 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..................................57 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...........................61 ITEM 8. FINANCIAL INFORMATION.......................................................66 ITEM 9. THE OFFER AND LISTING.......................................................69 ITEM 10. ADDITIONAL INFORMATION......................................................70 ITEM 11. QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................77 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES*.....................78 PART II. ............................................................................78 ITEM 13. DEFAULTS, DIVIDED ARREARAGES AND DELINQUENCIES..............................78 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS*...................................................................78 ITEM 15. [RESERVED]..................................................................79 ITEM 16. [RESERVED]..................................................................79 PART III. ............................................................................79 ITEM 17. FINANCIAL STATEMENTS**......................................................79 ITEM 18. FINANCIAL STATEMENTS........................................................79 ITEM 19. EXHIBITS....................................................................79
* Omitted because the Item is not applicable or the answer is negative. ** The Company has completed Item 18 in lieu of this Item. i GENERAL INTRODUCTION UNLESS THE CONTEXT INDICATES OTHERWISE, ALL REFERENCES TO (i) THE "COMPANY" OR "TRICOM" REFER TO TRICOM, S.A. AND ITS CONSOLIDATED SUBSIDIARIES AND THEIR RESPECTIVE OPERATIONS, AND INCLUDE TRICOM'S PREDECESSORS, AND (ii) "GFN" REFERS TO GFN CORPORATION LTD. AND ITS DIRECT AND INDIRECT SUBSIDIARIES, OTHER THAN THE COMPANY AND ITS SUBSIDIARIES, AND INCLUDES GFN'S PREDECESSORS. PRESENTATION OF CERTAIN FINANCIAL INFORMATION The Company prepares its consolidated financial statements in conformity with generally accepted accounting principles in the United States. The Company adopted the United States dollar as its functional currency effective January 1, 1997. See "Item 5. Operating and Financial Review and Prospects" and Note 2 of Notes to the audited consolidated financial statements of the Company at December 31, 2000 and 2001 and for the years ended December 31, 1999, 2000 and 2001 (the "Consolidated Financial Statements"). Unless otherwise stated, Dominican peso amounts that appear in this Annual Report have been translated into United States dollars. At December 31, 2000 and 2001, the rates used by the Company to translate Dominican peso-denominated accounts at the year-end were RD$16.69 and RD$17.05, respectively. In this Annual Report references to "$," "US$" or "U.S. dollars" are to United States dollars, and references to "Dominican pesos" or "RD$" are to Dominican pesos. This Annual Report contains translations of certain Dominican peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Dominican peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. The average of prices of one U.S. dollar quoted by certain private commercial banks (the "Private Market Rate") as reported by Banco Central de la Republica Dominicana (the "Central Bank") on December 31, 2001 was RD$17.03= US$1.00, the date of the most recent financial information included in this Annual Report. The Federal Reserve Bank of New York does not report a noon buying rate for Dominican pesos. On May 3, 2002, the Private Market Rate was RD$17.83= US$1.00. FORWARD-LOOKING STATEMENTS The statements contained in this Annual Report, which are not historical facts, are forward-looking statements that involve risks and uncertainties. Management cautions the reader that these forward-looking statements are only predictions; actual events or results may differ materially as a result of risks facing the Company. Such risks include, but are not limited to, the following factors: - the effect of our substantial indebtedness on our ability to fund expansion and out competitive position; - our ability to generate cash flow from operations to meet our debt service requirements; - our dependence on high interest short-term borrowings in the Dominican financial markets; - competition in Dominican markets for local, long distance and wireless services with multinational telecommunications providers; - litigation in the United States, the Dominican Republic and Panama initiated by competitors; - declining rates for international long distance traffic; - our reliance in the U.S. long distance markets on resellers, many of which have been adversely affected by intensified competition; - our inability to minimize credit risks; - customer churn; - rapid technological change; 1 - rejection of our concession agreement in the Dominican Republic; - fraudulent or pirated use of our wireless and cable television services; - our dependence on third parties for television programming; - our vulnerability to viruses, hackers and other disruptions; - the possible effect of interruptions in cable service; - our significant capital expenditure and working capital requirements and our need to finance such expenditures; - our experience in operating a cable television business; - the effect of objections filed with Dominican regulatory authorities to our purchase of the cable television operations; - concerns about health risks associated with wireless equipment; - our inability to manage effectively our rapid expansion; - our inability to obtain licenses or concessions in markets outside the Dominican Republic; - the continued growth of the Dominican and Central American economies, demand for telecommunication services in the Dominican Republic and Central America and moderation of inflation; and - the continuation of a favorable political, economic and regulatory environment in each of the Dominican Republic and Central America. PART I. ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not Applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not Applicable. 2 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.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1997 1998 1999 2000 2001 ------------ ---------- ---------- ---------- ---------- (IN THOUSANDS)(1) STATEMENTS OF OPERATIONS DATA: Operating revenues: Toll.................................... $ 15,511 $ 17,645 $ 23,118 $ 28,666 $ 29,018 International........................... 39,432 50,332 60,592 84,187 82,024 Local service........................... 6,412 11,863 33,299 51,310 71,687 Data and Internet....................... - 1,079 560 3,461 8,268 Cellular and PCS........................ 13,073 20,364 26,474 35,796 37,302 Paging.................................. 5,079 4,528 2,696 1,704 1,051 Sale of equipment....................... 5,502 4,115 7,690 5,263 2,686 Installation and activation fees........ 5,071 12,937 15,502 13,749 14,348 Cable revenues.......................... - - - - 4,736 Other................................... 21 2,640 889 162 919 ------------ ---------- ---------- ---------- ---------- Total operating revenues 90,102 125,501 170,819 224,298 243,772 ------------ ---------- ---------- ---------- ---------- Operating costs: Satellite connections and carrier (excluding network depreciation expense of $7,433, $11,382, $15,983, $29,342 and $44,510 in 1997,1998, 1999, 2000 and 2001, respectively, included below)......... 31,271 32,309 43,688 68,608 68,337 Programming cost........................ - - - - 1,225 Network depreciation expense............ 7,433 11,382 15,983 29,342 44,510 Expense in lieu of income taxes(2)...... 6,248 9,562 12,764 10,174 12,646 General and administrative expenses, including non-network depreciation expense of $1,956, $3,240, $4,855, $6,824 and $9,922, in 1997, 1998, 1999, 2000 and 2001, respectively........... 25,631 39,379 51,501 70,691 98,755 Cost of equipment sold.................. 2,558 2,244 3,988 2,911 2,069 Other................................... 1,101 1,148 1,433 1,550 1,746 ------------ ---------- ---------- ---------- ---------- Total operating costs 74,242 96,024 129,357 183,276 229,289 ------------ ---------- ---------- ---------- ---------- Operating income: 15,860 29,478 41,462 41,022 14,484 ------------ ---------- ---------- ---------- ---------- Other income (expenses): Interest expense, net................... (12,047) (12,873) (20,041) (30,736) (39,680) Foreign currency exchange gain (loss)... (706) 104 (203) (303) (260) Gain on sale of land.................... - - 898 - - Gain on sale of equipment............... - - - 30 (283) Other, net.............................. (83) 845 179 (197) 1,362 ------------ ---------- ---------- ---------- ---------- Other expenses, net................. (12,836) (11,924) (19,166) (31,206) (38,861) Earnings before income taxes, extraordinary item and cumulative effect of accounting change................................ 3,023 17,554 22,296 9,816 (24,378) Income taxes............................ - 352 (142) (588) (511) Minority interest....................... - - - - 1,775 Extraordinary item...................... (5,453)(3) - - - - Cumulative effect of accounting change:. - - - - - Organization costs.................... - - (120) - - Installations and activations revenues - - - (16,453)(4) - ------------ ---------- ---------- ---------- ---------- Net earnings (loss)................. $ (2,430) $ 17,906 $ 22,035 $ (7,226) $ (23,114) ============ ========== ========== ========== ==========
3
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1997 1998 1999 2000 2001 ------------ ---------- ---------- ---------- ---------- Basic earnings per common share: Earnings before extraordinary item and cumulative effect of accounting change $ 0.17 $ 0.78 $ 0.89 $ 0.33 $ (0.78) Extraordinary item...................... (0.31)(3) - - - - Cumulative effect of accounting change.. - - - (0.59)(4) - Net earnings (loss)..................... $ (0.14) $ 0.78 $ 0.89 $ (0.26) $ (0.78) Average number of common shares outstanding 17,600 22,945 24,845 27,724 29,571
AT DECEMBER 31, -------------------------------------------------------------------- BALANCE SHEET DATA: 1997 1998 1999 2000 2001 ------------ ---------- ---------- ---------- ---------- Cash and cash equivalents................... $ 5,733 $ 15,377 $ 13,460 $ 18,200 $ 12,576 Working capital (deficit)................... 4,846 (19,600) (83,659) (125,299) 187,271 Property, plant and equipment, net.......... 202,978 330,456 455,045 586,224 685,917 Total assets 321,144 444,815 531,478 682,440 829,415 Long-term debt and capital leases (excluding current portion) (5) ..................... 232,000 200,000 240,413 276,744 304,869 Total indebtedness.......................... 242,755 279,257 336,468 398,809 498,155 Shareholders' equity........................ 42,093 127,561 149,869 210,796 253,534 OTHER FINANCIAL DATA: Capital expenditures (5).................... $ 92,668 $ 142,101 $ 145,426 $ 168,913 $ 116,575 Net cash provided (used) by operating 42,339 activities.................................. 39,095 26,912 31,526 34,002 Net cash used in investing activities....... (168,636) (121,171) (64,360) (149,395) (144,884) Net cash provided by financing activities... 132,059 104,065 30,966 111,796 105,258 EBITDA(6)................................... 31,497 53,662 75,261 87,681 82,222 Ratio of EBITDA to net interest expense..... 2.6x 4.2x 3.7x 2.9x 2.1x Ratio of total indebtedness to EBITDA....... 7.8x 5.2x 4.5x 4.5x 6.1x OTHER OPERATING DATA: International minutes (in thousands) (7).... 157,411 231,075 360,532 597,204 768,394 Local access lines in service (at period end) 43,195 80,616 118,926 148,312 177,352 Mobile subscribers (at period end).......... 41,107 108,532 176,080 284,991 364,059 Cable subscribers (at period end) (8)....... - - - - 64,466
- ---------- (1) Except per share, ratios and other operating data. (2) Since 1996, we have made payments in lieu of income tax to the Dominican government, in accordance with the terms of our concession agreement. These payments represent 10% of gross domestic revenues, after deducting charges for access to the local network, plus 10% of net international revenues. Expense in lieu of income taxes also includes a tax, implemented in 1998, of 2% on international settlement revenues collected. This tax amounted to $0.3 million in 1998, $0.6 million in 1999, $0.4 million in 2000 and $0.2 million in 2001. (3) Represents a write-off related to the refinancing of indebtedness. (4) Effective January 1, 2000, we adopted the U.S. Securities and Exchange Commission's Staff Accounting Bulletin No. 101, concerning the recognition of revenue. This pronouncement provides that we recognize net revenues from installations and activations over the period in which we retain our clients. See "Management's Discussion and Analysis of Results of Operations and Financial Condition" and Note 14 of Notes to Consolidated Financial Statements. (5) Includes capital lease obligations entered into in 1999 of $26.2 million, in 2000 of $17.7 million and in 2001 of $3.3 million. (6) EBITDA typically consists of earnings (loss) before interest and other income and expenses, income taxes and depreciation and amortization. As described in note 2 above we make payments to the Dominican government in lieu of income taxes. As a result, we calculate EBITDA prior to the deduction of payments to 4 the Dominican government in lieu of income taxes. Our calculation of EBITDA may not be comparable to EBITDA calculated by other companies. We believe that EBITDA is useful to investor because it commonly is used in the telecommunications industry to analyze companies on the basis of operating performance, leverage and liquidity. However, it does not purport to represent cash generated or used by operating activities and should not be considered in isolation or as a substitute for a measure of performance in accordance with generally accepted accounting principles. For 1999, 2000 and 2001, we have also included in EBITDA amortization of radio frequency rights of $198,333, $320,186 and $660,086, respectively. (7) Includes both inbound and outbound international long distance minutes. (8) Includes 56,896 basic and premium subscribers and 7,570 commercial rooms, which include commercial establishments (for example, any hotel or motel) or multiple dwelling units (for example, any apartment building or hospital), for which we receive a bulk rate for basic cable service offered by us. 5 EXCHANGE RATES The Federal Reserve Bank of New York does not report a noon buying rate for Dominican pesos. The following table sets forth the average official rate for each of the five most recent years and each fiscal quarter within those years, and the high and low official exchange rates for each of the previous six months, all as reported by the Central Bank. The average official rate has been calculated by using the average of the exchange rates on the last day of each month during the period. At May 3, 2002, the average official exchange rate was RD$17.74 per $1.00 while the average private market rate was RD$17.83 per $1.00.
OFFICIAL RATE -------------------------------------------- YEAR ENDED DECEMBER 31, HIGH LOW AVG. ------------- --------- ------------ (RD$ PER $) 1997 14.02 13.91 14.01 1998 15.49 14.02 14.70 1999 15.93 15.50 15.83 2000 16.56 15.91 16.18 2001 16.99 16.58 16.69 MONTH / PERIOD ENDED November 30, 2001 16.98 16.66 16.78 December 31, 2001 16.99 16.97 16.97 January 31, 2002 17.10 16.97 17.04 February 28, 2002 17.15 17.10 17.15 March 31, 2002 17.15 17.15 17.15 April 30, 2002 17.63 17.79 17.73
PRIVATE MARKET RATE -------------------------------------------- YEAR ENDED DECEMBER 31, HIGH LOW AVG. ------------- ------------ -------------- (RD$ PER $) 1997 14.36 14.12 14.27 1998 15.86 14.41 15.23 1999 16.18 15.84 16.03 2000 16.63 16.08 16.37 2001 17.06 16.65 16.88 MONTH / PERIOD ENDED November 30, 2001 16.99 16.91 16.93 December 31, 2001 17.06 16.99 17.04 January 31, 2002 17.38 17.03 17.21 February 28, 2002 17.56 17.15 17.47 March 31, 2002 17.63 17.56 17.60 April 30, 2002 17.85 17.61 17.74
6 RISK FACTORS You should carefully consider the risks described below and other information in this report. RISKS RELATING TO OUR CAPITAL STRUCTURE OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR ABILITY TO FUND EXPANSION AND OUR COMPETITIVE POSITION. We are highly leveraged. At December 31, 2001, we had outstanding approximately $498.2 million in aggregate principal amount of indebtedness, including capital leases, and $253.5 million total shareholders' equity. The degree to which we are leveraged could have important consequences to us, including the following: - a substantial portion of our cash flow must be used to pay interest on our indebtedness. Therefore, our cash flow available for use in our business will be reduced; - our high degree of leverage could increase our vulnerability to changes in general economic conditions; - our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes could be impaired; - we are much more leveraged than our principal competitor in the Dominican Republic, which may be a competitive disadvantage in our principal market; and - our failure to comply with covenants and restrictions contained in the terms of our borrowings could lead to a default which could cause all or a significant portion of our debt to become immediately payable. WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW FROM OPERATIONS TO MEET OUR DEBT SERVICE REQUIREMENTS. Our ability to pay interest on our indebtedness and meet our debt service obligations will depend on our future performance, which in turn depends on successful implementation of our strategy and on financial, competitive, regulatory, technical and other factors, many of which are beyond our control. For the year ended December 31, 2001, our interest expense was $42.1 million and our net cash provided by operating activities was $34.0 million. Approximately $180.3 million of our indebtedness will mature during the 12 months ending December 31, 2002. These borrowings primarily are in the Dominican financial markets, in which short-term financing is the primary form of lending. Historically, we have not encountered problems renewing or rolling over our short-term borrowings at maturity. However, our ability to refinance any of this indebtedness will depend on our financial condition at the time it matures, the restrictions in the agreements governing our indebtedness and other factors, including general market and economic conditions. If refinancing were not possible, we could be forced to dispose of assets at unfavorable prices. In addition, our inability to refinance these obligations could result in our defaulting on our other debt obligations. WE DEPEND ON SHORT-TERM BORROWINGS IN THE DOMINICAN FINANCIAL MARKETS, WHICH BEAR HIGH INTEREST RATES AND WE CANNOT BE CERTAIN THAT THEY WILL CONTINUE TO BE AVAILABLE. We fund a substantial portion of our capital expenditure and working capital requirements with short-term borrowings in the Dominican financial markets. At December 31, 2001, we had $89.2 million of these borrowings, with interest rates ranging from 6.8% to 13% per annum for U.S. dollar denominated debt and from 15% to 19.5% per annum for RD peso denominated debt. These borrowings have maturities ranging up to 180 days and often are 7 payable on demand. However, our current lenders may be unable or unwilling to lend to us in the future. Even if these short-term borrowings continue to be available to us, due to their short-term maturities, we may be required to repay them at times when replacement financing is not available on commercially attractive terms. RISKS RELATED TO OUR OPERATIONS OUR PRINCIPAL COMPETITOR FOR THE PROVISION OF LOCAL SERVICE IN THE DOMINICAN REPUBLIC, CODETEL, HAS SUBSTANTIALLY GREATER MARKET SHARE AND RESOURCES, WHICH MAY PREVENT US FROM MAINTAINING OR INCREASING OUR MARKET SHARE. In the market for provision of local service in the Dominican Republic, we compete primarily with Compania Dominicana de Telefonos C. por A., or Codetel, a wholly owned subsidiary of Verizon Communications Inc. Codetel has an established market presence, networks and resources substantially greater than ours. More than 80% of the Dominican Republic's local access line customers are customers of Codetel. Codetel also has the largest share of the market for cellular and PCS services, approximately 50%. The growth of our market share for local service depends upon our ability to obtain customers in areas that currently are not served, or are underserved, by Codetel and to convince Codetel customers to either add, or switch to, the telephony services we offer. If Codetel implements significant price reductions for particular services we may be forced to reduce our rates in response in order to remain competitive. In addition, Codetel could expend significantly greater amounts of capital than are available to us in order to upgrade its network and/or sustain price reductions over a prolonged period. As a result we may not be able to maintain or increase our market share for local services in other markets in which we compete with Codetel. THERE ARE NEW ENTRANTS IN THE DOMINICAN MARKETS, PARTICULARLY FOR WIRELESS SERVICES, WHICH HAVE INCREASED COMPETITION FOR OUR SERVICES, AND COULD REDUCE OUR MARKET SHARE OR INCREASE PRICE COMPETITION. In addition to Codetel, which had approximately 50% of the subscribers for wireless services at December 31, 2001, we face substantial competition in this market. - In the fourth quarter of 2000, Orange, a subsidiary of France Telecom Group, initiated cellular operations. In 2001, Orange developed an aggressive marketing strategy based on offering services at discounts. We believe that Orange subscribers represent in excess of approximately 20% of subscribers for mobile services in the Dominican Republic. Orange recently announced that it obtained financing to build a $290 million wireless local loop system. - In January 2000, Centennial Communications Corp. acquired 70% of All America Cables & Radio, Inc., an integrated telecommunications provider. Centennial is attempting to expand All America's share of the Dominican market for cellular and PCS services. As a result of these and other potential new entrants, we expect to face more competition in the Dominican telecommunications market in the future, including from international communications companies with vastly greater resources than ours, which could adversely affect our ability to maintain our market share or require us to lower prices. In the international long distance market, investment by U.S. telecommunications companies in Dominican markets could limit the number of U.S. carriers that would send a significant number of minutes to us or otherwise adversely affect our ability to generate international settlement revenue. 8 CENTENNIAL COMMUNICATIONS CORP., ONE OF OUR COMPETITORS IN THE DOMINICAN REPUBLIC, HAS PURSUED LEGAL ACTION AGAINST US WITH THE UNITED STATES FEDERAL COMMUNICATIONS COMMISSION, WHICH, IF DECIDED AGAINST US, COULD RESTRICT OUR INTERNATIONAL BUSINESS IN THE DOMINICAN REPUBLIC AND DECREASE OUR REVENUES. Centennial Communications Corp., which through its subsidiary, All America Cables & Radio, is one of our competitors in the Dominican Republic, filed a complaint against our subsidiary, TRICOM USA, with the United States Federal Communications Commission on September 4, 2001, claiming that: - TRICOM USA and other U.S. carriers of international telecommunications traffic had better termination terms and circuit availability in the Dominican Republic with TRICOM than Centennial for traffic from the U.S. southbound to the Dominican Republic; and - TRICOM U.S.A.'s actions harm competition in the United States and violate the license granted to TRICOM USA by the Federal Communications Commission. Centennial requested that the Federal Communications Commission: - require TRICOM USA to stop accepting special concessions from TRICOM; and - order TRICOM to allocate more network capacity to Centennial in the Dominican Republic and to pay to Centennial unspecified damages. If Centennial prevails, TRICOM USA could be required to pay damages and to stop accepting any special concessions it receives. In addition, this could negatively affect, diminish or eliminate the business we generate from traffic generated in the United States and terminated in the Dominican Republic. Our revenue derived from traffic generated in the U.S. and terminated in the Dominican Republic was $42.9 million in 2001, which represented approximately 17.6% of our total revenue in 2001. BSC OF PANAMA, ONE OF OUR COMPETITORS IN PANAMA, HAS PURSUED LEGAL ACTION AGAINST US, WHICH, IF DECIDED AGAINST US, COULD RESTRICT OUR EXPANSION INTO PANAMA AND LIMIT OR ELIMINATE OUR ABILITY TO GENERATE ADDITIONAL REVENUE. BSC of Panama, S.A., a subsidiary of BellSouth Corporation, one of our competitors in Panama, has initiated a number of actions, including with the Panamanian ENTE REGULADOR DE LOS SERVICOS PUBLICOS, or ENTE, and in the Panama court system seeking to prevent us from providing services using iDEN(R) technology. In an additional action, BellSouth seeks damages from us in the amount of US$20 million, which it claims it may sustain if TRICOM Panama begins using the iDEN(R) system in Panama. To date, we have invested approximately $37 million in our expansion in Panama. If BellSouth prevails in its claims, we may be forced to discontinue our business in Panama, required to pay damages and we would not generate any revenue from to our iDEN(R) operations in Panama. SETTLEMENT RATES FOR INTERNATIONAL TRAFFIC FROM THE UNITED STATES AND PUERTO RICO COULD CONTINUE TO DECLINE, WHICH COULD REDUCE OUR INTERNATIONAL SETTLEMENT REVENUES AND PROFIT MARGINS FROM THESE REVENUES. Revenues from incoming international long distance calls represented approximately 36% of our operating revenues in 1999, 38% in 2000 and 34% in 2001. Approximately 52% of these revenues were attributable to calls originating in the United States and Puerto Rico. Settlement rates for traffic between the United States and the Dominican Republic have declined from $0.41 per minute during 1996 to $.053 per minute during 2001. We believe that competitive and regulatory pressures could continue to push settlement rates lower. Future decreases in settlement rates, without a corresponding increase in our international long distance traffic from the United States, would reduce our international settlement revenues and adversely affect the profit margins that we realize on these revenues. 9 BECAUSE WE ARE RECEIVING AN INCREASING PORTION OF OUR INTERNATIONAL MINUTES FROM U.S.-BASED RESELLERS, WE MAY EXPERIENCE SUBSTANTIAL FLUCTUATION IN OUR INTERNATIONAL REVENUES. Since 1997, we have derived an increasing proportion of international revenues from U.S.-based resellers, which are companies that typically buy long distance minutes in bulk and resell the minutes to other companies or individual end users. During 2001, resellers originated approximately 59% of our international long distance minutes from the United States to the Dominican Republic. While we enter into agreements with resellers, they are not required to provide us with any specified amount of traffic. During the first quarter of 2001, our revenues from resellers declined by 44%, which resulted in a decline in our international settlement revenues for that quarter by 22% from the first quarter of 2000. Volume of minutes increased in subsequent quarters. However, the volume of minutes and revenues we receive from these resellers may vary significantly because of their uncertain financial condition. INTENSE COMPETITION IN U.S. MARKETS AMONG INTERNATIONAL LONG DISTANCE CARRIERS HAS RESULTED IN BANKRUPTCY FILINGS BY A NUMBER OF OUR RESELLER CLIENTS. WE MAY NOT BE ABLE TO COLLECT MONIES THAT THESE CLIENTS OWE TO US. Since the beginning of 2001, twelve U.S. carriers with which we exchanged, exchange or contracted at one time to exchange long distance service filed voluntary petitions for bankruptcy. In seven cases, our subsidiary, TRICOM USA, is an unsecured, pre-petition and/or post-petition creditor. In the other five cases, TRICOM USA has no claims. To date, TRICOM USA has entered into settlement agreements, approved by the courts, with three bankrupt carriers where we have been able to net balances with such carriers. If TRICOM USA were permitted to net balances, in all its other cases, our claims would be reduced to approximately US$590,000. We may not be able to net balances or recover any portions of the amounts owed to us. In addition, we may face substantial delays in resolving our claims and may not receive full payment of our claims. In two cases, the bankrupt carriers applied to prevent us from altering, refusing or discontinuing services, although the courts in these cases did not grant the requests of these carriers. We may be compelled to provide service to other carriers in bankruptcy under terms mandated by the court, which may not be as favorable to us as terms that we receive from other resellers. In addition, pursuant to an August 2001 service level agreement with Enron Broadband Services, L.P., TRICOM USA prepaid approximately US$420,000 for the purchase of a private line bandwidth. On April 5, 2002, Enron filed a motion with the bankruptcy court to reject the agreement. We have objected to such rejection of the agreement. However, the outcome of this case is uncertain. OUR EFFORTS TO MINIMIZE CREDIT RISKS MAY ADVERSELY AFFECT OUR EFFORTS TO EXPAND OUR CUSTOMER BASE. During 1996, we terminated service for a significant number of mobile subscribers due to credit considerations, which adversely affected our results of operations. Since that time, we have instituted measures to minimize consumer credit risks. However, our efforts to minimize consumer credit risks may not be successful as we expand and offer our services across many different social and economic markets, including in new markets in Central America that we may enter. Moreover, efforts to minimize credit risks may limit the number of our new subscribers. OUR NET GROWTH IN SUBSCRIBERS MAY BE REDUCED BY CUSTOMER DISCONNECTIONS OR CHURN. Our results of operations in the past have been, and in the future may be, affected by subscriber disconnections. In order to realize net growth in subscribers, we must replace disconnected subscribers and add new subscribers. The sales and marketing costs associated with attracting new subscribers are substantial, relative to the costs of providing service to existing subscribers. Our average monthly disconnection rate, or "churn rate," during 2001 was 4.6% for cellular and PCS subscribers, compared to 3.1% during 2000 and 1.9% for local access line subscribers, compared to 2.3% in 2000. If we are not able to maintain our credit policies, or not otherwise able to limit churn, we will not experience net growth in subscribers. 10 WE MAY NOT HAVE SUFFICIENT RESOURCES TO KEEP PACE WITH CHANGES IN TECHNOLOGIES USED TO PROVIDE TELECOMMUNICATIONS SERVICES OR THE TECHNOLOGIES THAT WE HAVE CHOSEN TO PROVIDE SERVICE MAY BE LESS POPULAR AMONG USERS THAN OTHER TECHNOLOGIES. If we do not offer the latest technology, we may not be able to retain our existing customers or attract new ones. Our digital mobile technology could become obsolete. Our investment, to date, in our Dominican market exceeds $700 million and we would require substantial investment to replace all or a substantial part of it and to build our Central American network. WE MAY LOSE REVENUE OR INCUR INCREASED COST AS A RESULT OF FRAUDULENT OR PIRATED USE OF OUR PCS AND CELLULAR OR CABLE TELEVISION SERVICES. We estimate that our lost revenues from fraudulent use of our PCS and cellular networks totaled $711,000 and $496,000 during 2000 and 2001, respectively. Anti-fraud technology continually becomes obsolete, and we will have to make future expenditures to acquire and use anti-fraud technology. We face substantial and widespread access to our cable television services by unauthorized users, or pirates. When our services are pirated, we forfeit potential subscribers and related revenues. IF WE ARE UNABLE TO CONTINUE OFFERING HIGH-QUALITY PROGRAMMING, OUR CABLE REVENUES MAY DECLINE. The success of our cable television services depends upon our ability to acquire popular, high-quality programming content. We license a significant portion of our programming from third parties. We cannot assure that our arrangements with these third parties regarding programming will not be terminated, or that they will be renewed on favorable terms, if at all. If some or all of our license arrangements are terminated or if we cannot negotiate new agreements on terms favorable to us, we may lose existing subscribers and attract fewer new subscribers, which would reduce our revenues. OUR NETWORK OPERATIONS MAY BE VULNERABLE TO HACKING, VIRUSES AND OTHER DISRUPTIONS. "Hacking" involves efforts to gain unauthorized access to information or systems or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment. In addition, the inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability. Computer viruses, break-ins or other problems could lead to: - the interruption, delay or cessation in services to our subscribers; - the compromise of confidential information stored in the computer systems of our subscribers; - damage to our reputation and decreases in use of our services; and - costly litigation. OUR CABLE NETWORK COULD FAIL OR SHUT DOWN, WHICH COULD CAUSE US TO LOSE CUSTOMERS. Interruptions in our services due to the failure or shutdown of our network could harm our reputation and cause us to lose customers. Even upon completion of the expansion and upgrade of our existing cable network, we will still be vulnerable to damage to our network, interruptions in our services and cessation of our operations, which our insurance may not cover. The success of our high-speed Internet access and, if and when offered, IP telephony services depends on our ability to maintain high-quality data transmission with minimal service disruptions or interference. This is critical to our ability to attract and retain subscribers. 11 RISKS RELATING TO OUR EXPANSION STRATEGY WE MAY NOT BE ABLE TO FINANCE OUR CAPITAL EXPENDITURE NEEDS, WHICH COULD RESULT IN THE DELAY OR ABANDONMENT OF SOME OR ALL OF OUR DEVELOPMENT AND EXPANSION PLANS AND EXPENDITURES. We currently anticipate that our capital expenditures will be approximately $65 million in 2002. We believe that we will continue to expend substantial amounts in subsequent years. We believe our cash generated by operations and borrowings available to us are sufficient to fund our capital expenditures for 2002. In the event additional funds are required, we would be forced to obtain them through additional borrowings, including, if available, vendor financing or through the public or private sale of debt or equity securities. Acquisitions or investments may require additional financing. There can be no assurance that additional financing will be available to us or, if available, that it can be obtained on terms acceptable to us or within limitations that are contained in our current or future financing arrangements. Our ability to access additional funds may be limited by: - the terms of our existing financing agreements, including restrictive covenants; - conditions in the U.S. and in international markets that may adversely affect the availability or cost of capital; - the volatility of the economies of Latin America and Asia, or in the local markets in which we operate, which may make lenders less likely to extend credit to us; - our high level of indebtedness, which may affect our attractiveness as a potential borrower; and - the market's perception of our performance. Failure to obtain additional financing could result in the delay or abandonment of some or all of our development and expansion plans and expenditures, including the building of our iDEN(R) network in Central America. WE DO NOT HAVE EXPERIENCE IN OPERATING A CABLE TELEVISION BUSINESS AND IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE THE RECENTLY ACQUIRED CABLE BUSINESS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS COULD BE ADVERSELY AFFECTED. We have not previously operated a cable television business. The success of our acquisition, in part, will depend on our ability to integrate it into our existing systems. Some of our existing operational, financial and management systems may be incompatible with or inadequate to effectively integrate and manage the cable systems. In addition, we may not be able to retain or recruit qualified personnel that may be required. We also may encounter unexpected operating difficulties, liabilities or contingencies. Any of these or other factors could significantly delay or even preclude our realizing synergies or other benefits from our acquisition or place significant demands on our management and financial resources. 12 THE DOMINICAN TELECOMMUNICATIONS REGULATOR RECEIVED OBJECTIONS TO THE TRANSFER OF THE CONCESSION GRANTED TO TCN DOMINICANA TO OPERATE A CABLE NETWORK, WHICH, IF UPHELD, COULD LIMIT OR EVEN PRECLUDE THE OPERATION OF THE CABLE BUSINESS WE ACQUIRED. In November 2001 and February 2002, Instituto Dominicano de Telecomunicaciones or Indotel, the Dominican telecommunications regulator, and we received notices of objections to the transfer of the concession granted to TCN Dominicana, S.A., a wholly-owned subsidiary of Telecable for the operation of its cable business. The objecting parties are cable companies that operate networks in the interior of the Dominican Republic and an association of cable companies from that region. If Indotel were to decide in favor of the objections, it could invalidate the transfer of the concession and impose fines on us. We believe, based upon recent challenges to concessions transfers in which objections did not prevail, that it is unlikely that the objections will prevail. Moreover, Tricom's own concession allows us to provide video and cable services, so that even if the objections are upheld, we believe that we could use our own concession to provide the cable services currently provided in reliance on the Telecable concession. However, it also is possible that Indotel would limit the areas in which we can provide services so that we do not compete in markets currently served by the companies that raised objections. SOCIAL, POLITICAL AND ECONOMIC CONDITIONS IN CENTRAL AMERICAN MARKETS, INTO WHICH WE PLAN TO EXPAND, MAY CAUSE VOLATILITY IN OUR OPERATIONS AND ADVERSELY AFFECT OUR REVENUES FROM THESE MARKETS. We plan to expand into telecommunications markets in Panama, initially, and in other Central American markets, subject to, among other things, our obtaining sufficient financing. We have not operated previously in these markets and they will present numerous challenges to us. Poor social, political and economic conditions, matters over which we have no control, could inhibit our market entry and subsequent performance. Social and political conditions in parts of the Central American markets are volatile and may cause the nature and results of our operations to fluctuate. Historically, volatility in parts of the Central American markets has been caused by: - significant governmental influence over many aspects of local economies; - political and economic instability; - unexpected changes in regulatory requirements; - social unrest; - slow or negative growth; - imposition of trade barriers; - wage and price controls; - natural disasters; and - this volatility could make it difficult for us to sustain our operations in these markets, which could adversely affect our business. GOVERNMENT REGULATIONS IN VARIOUS COUNTRIES MAY HAMPER OUR ABILITY TO GROW AND IMPLEMENT OUR STRATEGY. In each market that we are considering, one or more regulatory entities regulate the licensing, construction, acquisition, ownership and operation of our wireless communications systems. Adoption of new regulations, changes in the current telecommunications laws or regulations or changes in the manner in which they are interpreted or applied could adversely affect our operations. Because of the uncertainty as to the interpretation of regulations in some countries in which we may operate, we may not always be able to provide the services we have planned in each market. It is possible that, in the future, we may face additional regulatory prohibitions or limitations on our services or on foreign ownership of telecommunications companies. Inability to provide planned 13 services could make it more difficult for us to compete in the affected markets. These issues could affect our ability to operate in targeted markets, and therefore impact our growth and strategy plans. IN CENTRAL AMERICAN MARKETS, GOVERNMENT-OWNED OR AFFILIATED TELECOMMUNICATIONS COMPANIES, WIRELINE MONOPOLY OPERATORS AND MULTINATIONAL TELECOMMUNICATION COMPANIES MAY HAVE SIGNIFICANT COMPETITIVE ADVANTAGES THAT WOULD HINDER THE DEVELOPMENT OF OUR WIRELESS BUSINESS THERE. In some markets in Central America, we may not be able to compete effectively against: - incumbent government-owned telecommunications companies; - formerly government-owned companies in which the government may or may not retain a significant interest; - wireline monopoly operators; and - multinational telecommunications companies. We may be at a competitive disadvantage in these markets because these competitors may have: - close ties with national regulatory authorities; - control over connections to local telephone lines; - larger customer base; - greater managerial and technical talent; - ability to cut prices; - better name recognition; - larger spectrum positions; - greater managerial and technical talent; - larger coverage areas than those of our operating companies; or - the ability to subsidize competitive services with revenues generated from other services they provide. For example, in Panama, Cable & Wireless has temporary exclusivity over wireline services and only a subsidiary of BellSouth and Cable & Wireless are licensed to provide wireless services. These competitors, among others, may adversely affect our ability to develop our wireless business in Central America. INITIALLY, OUR COVERAGE IN CENTRAL AMERICAN MARKETS WILL NOT BE AS EXTENSIVE AS THOSE OF OTHER WIRELESS SERVICE PROVIDERS IN OUR MARKETS, WHICH MAY LIMIT OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS. At first, we plan to provide wireless services only in the metropolitan areas and large business centers of Central America. Since our digital mobile networks will not initially offer nationwide coverage in the countries in which we are considering and our technology limits our potential roaming partners, we may not be able to compete effectively with other wireless providers in our markets. 14 Many of the wireless providers in our targeted markets have entered into roaming agreements with each other, which permit these providers to offer coverage to their subscribers in each other's networks. While the iDEN(R) technology that we will deploy is compatible with GSM technology (Global System for Mobile Communications), it is not compatible with any other wireless technology operating in our spectrum. As a result, we cannot enter into roaming agreements with the operators of these other networks. Our customers also will not be able to roam on other systems using technology identical to or compatible with ours where we do not have a roaming agreement. As a result, we will not be able to provide coverage to our subscribers outside of our planned operating digital mobile markets until: - we build out additional networks in areas outside our initially planned markets; - other operators deploy technology compatible to the technology that we will deploy in markets outside of our planned coverage areas and we enter into roaming agreements with those operators; or - handsets that can be used on both our wireless communications networks and networks deploying other technologies become available and we enter into roaming agreements with the operators of those networks. OUR EQUIPMENT IS MORE EXPENSIVE THAN THAT OF SOME COMPETITORS IN CENTRAL AMERICA MARKETS, WHICH MAY AFFECT OUR ABILITY TO ESTABLISH AND MAINTAIN A SIGNIFICANT SUBSCRIBER BASE. We will market multi-function digital handsets. The higher cost of our equipment, as compared to analog handsets and some digital handsets that do not incorporate a comparable multi-function capability, may make it more difficult or less profitable for us to attract customers. This may reduce our growth opportunities or profitability. WE MAY FACE DELAYS CONSTRUCTING OUR DIGITAL MOBILE NETWORK IN CENTRAL AMERICA WHICH WOULD HARM OUR OPERATIONS. We may not be able to complete our currently planned construction successfully or in a timely manner. If we do not, our ability to establish a subscriber base, improve the transmission quality of our digital mobile services and expand our service area could be impaired. It may be necessary to substantially change our proposed plans or otherwise alter our currently anticipated time frames or budgets because we are not able to: - locate suitable sites for communications sites or towers; - obtain any required zoning variances or other governmental or local regulatory approvals; - negotiate acceptable purchase, lease, or other agreements; or - obtain quality supplies in a timely manner, if at all. We also may encounter delays caused by: - frequency cross-interference with other radio spectrum users, including television stations; - shortages of equipment or skilled labor; - engineering or environmental problems; - work stoppages; - weather interference; and 15 - unanticipated cost increases. WE ARE NOT EXPERIENCED IN SELLING AND MARKETING IDEN(R) SERVICES OR IN CENTRAL AMERICAN MARKETS WHICH COULD AFFECT OUR ABILITY TO ESTABLISH OR MAINTAIN A SIGNIFICANT SUBSCRIBER BASE. Once our digital mobile network operations are in place in a particular market, the development of a significant, quality subscriber base depends on the success of our sales and marketing efforts and the receptiveness of the marketplace to our services. We have limited experience in marketing iDEN(R) services anD local conditions in our target markets may require us to modify our sales and marketing efforts or rely, in part, on the efforts of independent dealers and distributors to market our services. If the sales and marketing teams of our operating companies and the independent dealers and distributors are not able to establish a large subscriber base consisting of quality customers in our new markets, our revenues will not grow as planned. SINCE WE RELY PRINCIPALLY ON ONE SUPPLIER TO IMPLEMENT OUR DIGITAL MOBILE NETWORKS, ANY FAILURE OF THAT SUPPLIER TO PERFORM COULD HURT OUR OPERATIONS. Motorola is currently our sole source for the iDEN(R) digital network equipment and handsets useD throughout our markets. If Motorola fails to deliver necessary technology improvements and enhancements and system infrastructure equipment and handsets on a timely, cost-effective basis, or discontinues providing this technology altogether we would not be able to service our existing subscribers or add new subscribers. MOTOROLA MAY SUPPLY IDEN(R) TECHNOLOGY TO OTHER COMPANIES, WHICH COULD NEGATIVELY AFFECT OUR COMPETITIVE POSITION IN THE CENTRAL AMERICA. Motorola, which supplies the iDEN(R) system that we use in Central America, agreed that it would not selL iDEN(R) technology to anybody else for use, before agreed upon dates, in Panama, Costa Rica, Guatemala, Honduras, El Salvador and Nicaragua. Its agreement was conditioned upon our placing orders for systems in each of those countries by specified dates, which we did not do except for Panama. In the case of Panama, our preferred deployment lasted until we initiated our iDEN(R) services in the beginning of April 2002. We have not satisfieD the conditions in other countries. As a result, Motorola is now free to provide the technology in the countries of Central America to anybody else at any time. If it did so, we could lose an important competitive advantage to us. CONCERNS ABOUT HEALTH RISKS ASSOCIATED WITH WIRELESS EQUIPMENT MAY REDUCE THE DEMAND FOR OUR SERVICES. Portable communications devices have been alleged to pose health risks, including cancer, due to radio frequency emissions from these devices. The actual or perceived risk of mobile communications devices could adversely affect us through a reduction in subscribers, reduced network usage per subscriber or through reduced financing available to the mobile communications industry. Studies performed by wireless telephone equipment manufacturers have investigated these allegations and additional studies are ongoing. RISKS RELATING TO OUR PRINCIPAL MARKET, THE DOMINICAN REPUBLIC OUR FINANCIAL CONDITION AND RESULTS OF OPERATION COULD BE ADVERSELY AFFECTED BY DOWNTURNS IN THE DOMINICAN ECONOMY. Most of our operations are conducted in, and most of our customers are located in, the Dominican Republic. Accordingly, our financial condition and results of operations are substantially dependent on economic conditions in the Dominican Republic. While the Dominican Republic's Gross Domestic Product has grown every year since 1991, the rate of growth slowed in 2001 and growth may not continue in the future. Future developments in the Dominican economy could impair our ability to proceed with our business strategies, our financial condition or our results of operations. Our financial condition and results of operations also could be adversely affected by changes in economic or other policies of the Dominican government or other political or economic developments in 16 or affecting the Dominican Republic, as well as regulatory changes or administrative practices of Dominican authorities, over which we have no control. POVERTY, SOCIAL UNREST AND SHORTAGES OF BASIC SERVICES IN THE DOMINICAN REPUBLIC COULD AFFECT THE USE OF TELECOMMUNICATIONS SERVICES, WHICH WOULD DECREASE OUR REVENUES. The Dominican Republic has widespread poverty. As recently as November 1997, the country experienced riots, partly as a result of price increases and shortages of water and electricity. Several state-owned companies have been privatized, including the country's state-owned electric utility company, and there can be no assurance that the implementation of these privatizations will not cause social unrest. Any increase of poverty, social unrest or shortage of basic services could adversely affect the use of telecommunications services. ALTHOUGH INFLATION IN THE DOMINICAN REPUBLIC HAS BEEN MODERATE SINCE 1990, INCREASES IN THE INFLATION RATE WOULD ADVERSELY AFFECT THE DOMINICAN REPUBLIC'S ECONOMY AND THE DEMAND FOR OUR TELECOMMUNICATIONS SERVICES. Inflation has moderated in the Dominican Republic since 1991, following an austerity program instituted by the Dominican government. According to the Central Bank, the annual rates of inflation were 8.4% for 1997, 7.8% for 1998, 5.1% for 1999, 9.0% for 2000 and 4.4% in 2001. However, the country has experienced high levels of inflation in the past, including an inflation rate of 79.9% for 1990. Any increase in the value of the U.S. dollar against the Dominican peso directly affects the Dominican Republic's inflation rate because the Dominican Republic relies heavily on imports from the United States of raw materials and consumer goods. High inflation levels could adversely affect the Dominican Republic's economy and reduce demand for telecommunications services. THE VOLATILITY AND DEPRECIATION OF THE DOMINICAN PESO AGAINST THE U.S. DOLLAR COULD REDUCE THE AMOUNT OF CASH WE WILL HAVE TO REPAY OUR INDEBTEDNESS OR FUND OUR OPERATIONS, INCLUDING THE PURCHASE OF TELECOMMUNICATIONS EQUIPMENT. For 1999, 2000 and 2001, we earned between 55% and 65% of our operating revenues in Dominican pesos and the remainder of our operating revenues in foreign currency, primarily in U.S. dollars. The percentage of operating revenues in Dominican pesos could increase if we successfully increase our share in Dominican local markets in accordance with our strategy. The Dominican peso has depreciated in value against the U.S. dollar in the past and may be subject to fluctuations in the future. Most of our outstanding indebtedness is U.S. dollar-denominated and must be paid in U.S. dollars. Vendors of telecommunications equipment all require that we pay for equipment in U.S. dollars. The devaluation of the Dominican peso could affect adversely our ability to purchase U.S. dollars in order to service our debt obligations and pay our equipment vendors. Our purchase of substantial amounts of U.S. currency in Dominican markets could adversely affect the value of the Dominican peso in relation to the U.S. dollar, and make these purchases more costly for us. ITEM 4. INFORMATION ON THE COMPANY TRICOM, S.A. is incorporated in the Dominican Republic. Our operations are headquartered at Ave. Lope de Vega No. 95, Santo Domingo, Dominican Republic and our telephone number at the above address is 809-476-4000. Our website address is www.tricom.net. Our agent in the United States is CT Corporation System. This agent can be reached at 1633 Broadway, New York, NY 10019 and at telephone number (212) 664-1666. BUSINESS OVERVIEW OVERVIEW We are a leading full service communications provider in the Dominican Republic. We offer local, long distance, mobile, cable television entertainment, Internet and broadband data transmission services. Our wireless network covers approximately 90% of the population in the Dominican Republic. Our network providing local service is 100% digital, the only such network in the Dominican Republic. Telecommunications networks that employ digital technology can transmit higher quality signals at lower costs. We also own interests in undersea fiber 17 optic cable networks that connect and transmit telecommunications signals between Central America, the Caribbean, the United States and Europe. Fiber optic cable is composed of glass strands and transmits telecommunications signals in the form of light. Through our subsidiary, TRICOM USA, Inc., we own telecommunication-switching facilities in New York, Miami and Puerto Rico. Using these facilities, we originate, transport and terminate international long-distance traffic. We are one of the few Latin American long distance carriers that are licensed by the U.S. Federal Communications Commission to use switching facilities that it operates to connect long distance traffic. Through our subsidiary, TCN Dominicana, S.A., we are the largest cable television operator in the Dominican Republic based on our number of subscribers and homes passed. At December 31, 2001, our cable network served 64,466 subscribers, including 56,896 basic and premium subscribers and 7,570 commercial rooms, with approximately 170,000 homes passed. Since our inception in 1992, we have diversified our operations, and have captured a significant share in key markets entirely through internal growth. In 2000, we carried approximately 40% of the southbound voice and data traffic from the United States to the Dominican Republic. Since we introduced wireless services in 1995, we have achieved an approximate 30% market share at year-end 2001, based upon data published by the Indotel, the Dominican agency that regulates telecommunications. Our recent success is reflected in the following period-to-period changes in operating statistics from 2000 to 2001: - Local access lines increased 19.6% to 177,352; - Cellular and PCS subscribers increased 27.7% to 364,059; and - International long distance traffic increased 28.7% to 768.4 million minutes. In April 2002, we initiated a mobile service network in Panama targeted at business customers. We will deploy an advanced integrated radio-telephone and dispatch communications system known as iDEN(R), developed bY Motorola. This technology enables us to use spectrum efficiently and offer multiple wireless services on one digital handset. We plan to capitalize on the increasing demand by business customers for a product that provides advanced mobile services and a complete solution for their intra-regional communication needs. We plan to establish in selected Central American markets a mobile service network deploying iDEN(R) that will providE interrupted connection throughout the region without any change in service provider. Establishment of the network outside of Panama will depend on a number of factors, including the availability of financing and the success of our efforts in Panama. We have purchased a 51% interest in a Panamanian company, Cellular Communications of Panama, S.A., now TRICOM Panama, S.A., which owns the frequency rights for 107 channels of 25 MHz each. TRICOM Panama has approximately 1,750 analog mobile users. These frequencies will give us access to nationwide coverage, covering a population of approximately 2.81 million people. We have constructed an iDEN(R) network, at a cost at DecembeR 31, 2001 of approximately $37 million, in Panama City and Colon, the two largest cities in Panama, and in important transportation corridors in other parts of the country. We initiated digital trunking services in April 2002. We offer digital mobile integrated services, including two-way radio, paging and interconnect services. In 2000, we were awarded, in a government auction, radio frequency rights in Guatemala to 172 channels of 25 MHz, providing us with nationwide coverage. We also have acquired in El Salvador radio frequency rights for an aggregate of 185 channels of 25 MHz, that provides spectrum to operate our iDEN(R) network. We currently dO not intend to develop a network in either Guatemala or El Salvador in 2002. On October 26, 2001, we acquired the shares of TCN Dominicana, S.A., a wholly-owned subsidiary of Telecable Nacional, C. por A., that owns and operates the largest multi-channel system in the Dominican Republic's pay-TV market including the concession granted by the Dominican government to operate a cable system. The transaction was valued at approximately $1,130 per subscriber equivalent or approximately $64.0 million, payable $41.8 million in cash and with 3,375,000 shares of our Class A common stock. At December 31, 2001, our cable network served 64,466 subscribers, including 56,896 basic and premium subscribers and 7,570 commercial rooms, 18 with approximately 170,000 homes passed. Our cable network service area consists of the capital city of Santo Domingo, and the tourist destination areas of Puerto Plata and La Romana. At December 31, 2001, our cable network consisted of 204 miles of fiber optic cable, 718 miles of coaxial cable and 208 nodes. We are expanding and upgrading our existing cable into a broadband bi-directional network that will provide us with a platform for the delivery of a broad range of services. At December 31, 2001, approximately 40% of our network had bi-directional capability, and approximately 70% operated at 750MHz, allowing for a variety of multimedia and telecommunications services, including some interactive programming services and television-based Internet access services. In addition, we intend to market high speed Internet access through cable modem. MARKET OPPORTUNITIES We believe that the Dominican and Central American telecommunications markets represent attractive opportunities and that the following factors will drive growth in these markets: - UNDERSERVED DOMINICAN MARKET. At December 31, 2001, teledensity, the ratio of local access lines per 100 inhabitants, in the Dominican Republic was 10.9 and the ratio of wireless subscribers per 100 inhabitants was 14.5, based upon data published by Indotel. The ratios in Puerto Rico were 33.2 for teledensity and 23.7 for wireless, according to the International Telecommunications Union, or ITU. At December 31, 2000, multi-channel penetration of television households per 100 inhabitants in the Dominican Republic was 15.3, compared to 44.4 for Puerto Rico, according to Kagan World Media, Inc. - DOMINICAN ECONOMY AMONG THE FASTEST GROWING IN LATIN AMERICA. Gross Domestic Product in the Dominican Republic grew at an average annual rate exceeding 6.8% from 1996 through 2001, according to the Central Bank of the Dominican Republic. This has made it one of the fastest growing economies in Latin America. The Dominican Republic experienced real Gross Domestic Product growth of 7.8% in 2000 and 2.7% in 2001 according to the Central Bank. The Central Bank projects growth for the Dominican Republic to exceed 5% in 2002. - STRONG GROWTH IN THE DOMINICAN TELECOMMUNICATIONS MARKET. In 2001, the total telecommunications market in the Dominican Republic was approximately $1.3 billion, according to the Central Bank. The telecommunications market in the Dominican Republic grew at an average annual rate of 18.6% from 1996 to 2001 according to the Central Bank. - UNDERSERVED CENTRAL AMERICAN BUSINESS MARKETS. Markets in Central America share many of the characteristics of markets in the Dominican Republic, including: - rapidly growing economies; - the development of intra-regional trading markets fostered by the adoption of free trade agreements; - low penetration of telecommunications services, continuing privatization and liberalization of markets for telecommunications services; and - and current limited competition in the telecommunications service sector. COMPETITIVE STRENGTHS We believe that the following factors give us a competitive advantage in our existing and targeted markets: ADVANCED NETWORK. We have the only network providing 100% digital local service in the Dominican Republic. Our wireless network covers approximately 90% of the population. Our local network features a wireless local loop system that enables us to connect a customer within 48 hours, substantially less time than required for 19 wireline installation. We currently have switching facilities in New York and Puerto Rico, and interests in international fiber optic cable undersea systems that connect Central America and the Caribbean with the United States and Europe. These facilities enable us to originate, transport and terminate traffic at reduced costs. Our advanced networks also provide our customers with high quality voice and data transmission. We are expanding and upgrading our existing cable network into a broadband bi-directional network that will provide us with a platform for the delivery of a broad range of services. We are in the process of converting our existing cable network into a broadband bi-directional network. Once completed, our broadband bi-directional cable network will have increased network capacity, quality and reliability. This will facilitate the introduction of new services and enable us to increase our subscriber base and our average monthly revenues per subscriber, to reduce our operating costs per subscriber and to facilitate the control of unauthorized, or pirate, users. STRONG BRAND NAME RECOGNITION AND MARKETING CAPABILITIES. Our creative marketing and excellent customer service have allowed us to build a strong brand in our existing markets and to achieve substantial market share in each of our service offerings. We capitalize on our brand name recognition and marketing programs both in the Dominican Republic and to target ethnic communities in New York, New Jersey, New England, Florida and Puerto Rico. In the Dominican Republic we consistently lead the market in introducing innovative business practices and products using advanced technology. We were the first operator in the Dominican Republic to offer prepaid cellular, international calling cards, Internet service and offerings combining different services and pricing options. EXPERIENCED MANAGEMENT. Our management team has significant experience in the telecommunications industry and a track record of building revenues and positive cash flows in telecommunications markets. The core team has been with us since the inception of commercial service in the Dominican Republic. Our ability to identify market opportunities and adapt to new technologies has enabled us to attain significant market share while competing with a dominant provider with greater resources. OUR STRATEGY Our goal is to capitalize on our key strengths to further build our market share and penetrate new markets, while maximizing revenues and cash flows. We intend to: EXPAND EXISTING MARKET COVERAGE IN THE DOMINICAN REPUBLIC AND THE UNITED STATES BY: DEPLOYING CAPITAL PRUDENTLY TO ENHANCE REVENUE GROWTH AND MARGINS. In building our networks in the Dominican Republic, we have managed our investments to respond to the demand for our services, market conditions and the availability and cost of financial resources. In implementing our expansion programs, we plan to build on our business model, targeting markets in Central America with characteristics similar to markets in which we have competed to date. We will manage our expenditures to respond to the success of our different programs and will deploy our financial resources where the combination of demand and the likelihood of returns are greatest. In Central America, we intend to build out our network in one local market or country at a time, initiating service in Panama, for example, before making a significant commitment to other countries. We believe this should allow us to measure the results of our strategy before committing additional resources. FOCUSING ON HIGH-GROWTH MARKET SEGMENTS IN THE DOMINICAN REPUBLIC, INCLUDING RESIDENTIAL LOCAL AND WIRELESS SERVICES. Substantial unmet demand for residential local service remains in the Dominican Republic as large segments of the Dominican population still have limited access to this service. Based upon information published by Indotel, at December 31, 2001, there were approximately 955,145 local access lines in service, representing a teledensity rate of approximately 10.9%. The mobile wireless market has been the fastest growing segment of the Dominican telecommunications market since 1996. Based on information published by Indotel, we believe that, since 1996, the mobile wireless market has grown at an annual average rate of 73%. Our cellular network covers approximately 90% of the population and our PCS network covers approximately 75% of the population. With these two networks we are able 20 to offer dual-band service, allowing PCS customers to use their mobile phone over our analog service as well. We intend to expand our PCS system into additional cities over the next several years, resulting in coverage of 90% of the Dominican population. EXPANDING OUR LONG DISTANCE OPERATIONS IN THE UNITED STATES TO TARGET ADDITIONAL ETHNIC AND GEOGRAPHIC MARKETS AND TO EXPAND OUR OWNERSHIP AND CONTROL OF DISTRIBUTION CHANNELS. As we expand our long distance network in Central America and the Caribbean, we plan to target additional ethnic and geographic markets in the United States through TRICOM USA. Our goal is to offer end-to-end long distance services in new markets where we both own and operate telecommunication facilities, enabling us to start, transport and end calls within our network. TRICOM USA relies on distributors and resellers for the placement of its prepaid calling cards as well as the generation of international traffic to the Dominican Republic and other destinations. Resellers do not operate their own telecommunications networks but purchase minutes and re-sell them to consumers. In order to expand our market presence, and at the same time enhance the profitability to us of traffic generated by our prepaid cards, we will consider opportunities to acquire distributors of prepaid calling cards. Through the acquisition of resellers, we can capture a greater share of outgoing minutes and increase direct access to customers, thus enhancing our profit margins. Resellers also give us greater access to ethnic markets in which we already participate as well as new markets where we are not yet positioned. CAPITALIZING ON OPPORTUNITIES IN THE DOMINICAN REPUBLIC CREATED BY THE GROWING DIGITAL ECONOMY TO EXPAND OUR BROADBAND DATA TRANSMISSION BUSINESS AND INTERNET OPERATIONS. As the Dominican economy has expanded, there has been greater demand for broadband data transmission and Internet services. Our fully digital network positions us to provide broadband access and high speed data transmission to both the corporate and residential markets. During 2000 and 2001, we introduced: - digital subscriber lines, or xDSL, that provides high-bandwidth transmission of voice and data over regular telephone lines; - very small aperture terminal, or VSAT, a relatively small satellite antenna used for high speed satellite-based single to multiple point data transmissions, including for the internet; and - local multipoint distribution service, or LMDS, technologies, which is a broadband wireless single to multiple point communication system that can be used to provide digital two-way voice, data, Internet and video services. In 2002, we intend to begin to offer high-speed Internet access by personal computers to a limited number of our subscribers through cable modems. A cable modem is a small box that connects a personal computer to the Internet via a local cable provider. Cable modems allow personal computer users to download information from on-line services at speeds one hundred times faster than today's fastest telephone modems. EXPAND INTO SELECTED CARIBBEAN AND CENTRAL AMERICAN MARKETS BY: OFFERING A DIFFERENTIATED SET OF SERVICES DIRECTED TO CORPORATE CUSTOMERS, FOCUSING ON HIGHLY CONCENTRATED BUSINESS CENTERS IN OUR TARGETED CENTRAL AMERICAN MARKETS. We believe that several countries in Central America have markets with demographic, regulatory and demand characteristics similar to those in the Dominican Republic at the time Tricom initiated operations, namely: underserved markets and increased liberalization of the telecommunications industry. This experience provides us with the know-how to export our business model into these countries. We will target business customers who have a stronger credit profile and offer, on average, higher revenue per user. In other markets, including the United States 21 and Latin America, the deployment of iDEN(R) technology has resulted in some of thE highest revenues per unit within the wireless markets. We will offer a package of services and features that combine multiple communications services in one digital subscriber unit, emphasizing the differentiated features of iDEN(R) technology and our networks: digitaL mobile telephone services, mobile dispatching, two-way messaging, push-to-talk and one-to-many connections. APPLYING WIRELESS OPERATING EXPERTISE, SCALABLE BACK OFFICE SYSTEMS AND MARKETING KNOW-HOW TO DEVELOP OUR IDEN(R) CENTRAL AMERICAN OPERATIONS. We will rely on the technical expertise that we have developed to deploy wireless technologies to enter new markets. Our deployment of a CDMA-based wireless network has enabled us to enhance our mobile services capabilities while also accelerating the expansion of our local access presence in the Dominican market. This move to expand our operations will be done in a cost-efficient manner using our scalable back office systems, which integrate sales, customer service, collections and financial control functions. We also believe that our marketing know-how is an integral part of our sales model which features proactive sales efforts, targeted campaigns and a reduction of credit risk through the promotion of prepaid services. We believe this model has the potential to revolutionize telecommunications services in Central America. LEVERAGING OUR EXISTING RELATIONSHIPS WITH KEY SUPPLIERS, INCLUDING MOTOROLA, NORTEL AND HARRIS, WE WILL CONTINUE TO BUILDOUT IN THE DOMINICAN REPUBLIC AND PROVIDE TURNKEY SOLUTIONS IN OUR TARGETED CENTRAL AMERICAN MARKETS. Our relationships with our suppliers, including Motorola, Nortel and Harris, are important as we continue to upgrade and deploy our digital mobile networks and provide new products and services to expand our subscriber base. Access to the technology, supplier relationships, network development and marketing expertise of these companies will afford us significant competitive advantages. We will continue to leverage their expertise in the future as we enhance and expand our networks and launch new products and services. SERVICE OFFERINGS Our service offerings include: - Local service; - Mobile services; - International long distance; - Cable television services; and - Broadband data transmission and Internet. LOCAL SERVICE We are a competitive local exchange carrier in the Dominican Republic and had 177,352 local access lines in service at December 31, 2001. Our local access network covers areas with approximately 85% of the population of Santo Domingo, Santiago and eight additional cities. All of our basic telephone service customers have access to a range of value-added services, including call forwarding, three-way calling, call waiting, caller ID and voicemail applications. In addition to local service, we provide direct-dialed, collect and operator-assisted international and domestic long distance services and Internet access to our residential and corporate customers. We offer our customers broad flexibility in assembling customized packages of services, which provide our customers with cost savings and enhanced control over their consumption of telephone services. Customers may 22 choose from a menu of services, including domestic and international long distance services, local service and value-added services. They also may bundle their local access service with cellular or PCS, paging, cable television and Internet services. Service packages permit customers to preset their monthly bills based upon, for example, local service minutes as well as long distance minutes and specified destinations. Customers are responsible for paying for usage levels in excess of preset package amounts, at regular per minute rates. We believe that providing customers with such budgeting capability increases consumer confidence in using telecommunications services, consequently allowing for increased service penetration, higher levels of customer satisfaction and lower incidence of delinquent payments. We have accelerated our local access network expansion program by deploying a wireless local loop. The wireless local loop consists of receivers, that are installed at a customer's house, and digital switches. The receiver is connected by cable to a standard telephone jack that connects to a standard telephone. The receiver is powered by the customer's home power supply and also contains a battery that allows operation to continue for up to approximately 24 hours of standby and eight hours of talk time in the event of a power outage. The wireless local loop offers voice quality as clear as telephones connected by wirelines. We also sell fully integrated systems and components for both turnkey systems and private telephone networks used within enterprises. We are a distributor in the Dominican Republic for Mitel and Comdial equipment, two leading manufacturers of private branch exchanges and key telephone systems. We are also a leading provider of computer telephony integration systems in the Dominican Republic. MOBILE SERVICES Our mobile network covers approximately 90% of the Dominican Republic's population. We currently offer both cellular and PCS service. According to Indotel, there were approximately 1,270,082 analog and PCS cellular subscribers in the Dominican Republic at December 31, 2001. At December 31, 2001, we had 364,059 wireless subscribers, including 125,227 PCS subscribers, representing approximately 30% of the Dominican mobile telephony market. The number of our cellular and PCS subscribers grew by 27.7% during 2001, and our net addition of cellular and PCS subscribers totaled 79,068 in 2001. We attribute a substantial portion of this growth to our prepaid cellular and PCS card, the Amigo(TM) card. At December 31, 2001, prepaid cellular and PCS subscribeRs accounted for 346,308, or 95%, of our 364,059 total cellular and PCS subscribers in the Dominican Republic. Our Amigo(TM) card program has expanded our cellular and PCS customer subscriber base because it offers cellular and PCS service to individuals who would not satisfy our current credit policies and because it appeals to customers who prefer to budget their cellular and PCS telephone spending. We have offered PCS service since April 1999. This technology provides for added security and privacy compared with traditional analog systems, and it also offers greater capacity. PCS customers are able to receive all of the benefits related to a digital service, including digital messaging, caller ID and voicemail. Our PCS network covers areas with approximately 75% of the population in the Dominican Republic and is less extensive than our analog network. We offer a dual-band service, allowing customers to use seamlessly their mobile phones nationwide over both digital and analog networks. We offer domestic as well as international roaming services to participating subscribers. Subscribers who pay the roaming rates gain access to our nationwide cellular and PCS network, while subscribers paying the international roaming fees are able to roam outside of the Dominican Republic, using the networks of cellular service providers with which TRICOM has entered into roaming agreements. We have entered into roaming service agreements with Sprint PCS and Illuminet, formerly Bell South International Wireless, which enable our customers to roam in the continental United States and Central and South America. Under the roaming agreements, when a subscriber of another cellular service provider makes a call from within the Dominican Republic, that service provider pays Tricom for the call at the applicable rate. Conversely, when one of our subscribers makes a call outside the Dominican Republic, we must pay the applicable charges to the cellular service provider in whose region the call originates. These payments are channeled through Cibernet, which functions as a central international clearing house that collects and redistributes roaming fees from and to the participating providers. We have entered into arrangements with major consumer electronics retailers and a network of independent cellular and PCS dealers to offer our cellular and PCS services in conjunction with their sale of handsets. As a result 23 of our arrangements with major electronics retailers for the sale by them of handsets in conjunction with subscriptions for our services, we sold handsets to approximately 4% of our new subscribers in 2001. We do not subsidize or provide credit on the sale of wireless and PCS handsets. We have provided paging services since April 1995. At December 31, 2001, we provided paging services to 12,090 subscribers, representing approximately 12.5% of the Dominican paging market. In 1999 we stopped soliciting new paging subscribers. We believe that the success of our prepaid cellular and PCS program has contributed to the decline of paging as a significant part of our business because customers have replaced paging services with prepaid cellular services. INTERNATIONAL LONG DISTANCE In the Dominican Republic, we provide international long distance services to our local access, cellular and PCS customers. In addition, we offer prepaid calling cards for international long distance, the Efectiva(TM) and Conexion(TM) cards that can be used from any telephone in the Dominican Republic. We operate telephone centeRs that provide access to telephone services to individual customers who either do not have telephone services in their own homes or who are attracted by the competitive pricing of the telephone centers. The centers offer a wide range of telephone services, including bill payments and sales of service in addition to long distance. In the United States, our subsidiary TRICOM USA provides international carrier services primarily to resellers, which account for an increasing share of international long distance traffic between the United States and the Dominican Republic. Through our telecommunications switching facilities in the United States, we have been able to provide resellers with an alternate channel for sending international long distance traffic. In addition, by controlling the origination, transport and termination of international long distance traffic between the United States and the Dominican Republic, we believe that we are able to send and receive such traffic at a lower cost to us than by exchanging traffic with traditional international carriers. Each year since the initiation of TRICOM USA's operations, we have derived a greater percentage of international revenues from resellers. During 2001, resellers originated approximately 59% of the international long distance minutes from the United States to the Dominican Republic that we received. Minutes delivered by resellers may fluctuate significantly. While we enter into agreements with resellers, they are not required to provide to us any amount of traffic. The price per minute charged by us to a reseller is negotiated as often as dictated by the market. At December 31, 2001, we received traffic from approximately 80 resellers. Intense competition in U.S. markets among international long distance carriers has resulted in bankruptcy filings by 12 of our reseller clients since the beginning of 2001. TRICOM USA also markets a number of prepaid cards to ethnic communities in New York, New Jersey, Rhode Island, Alaska, Pennsylvania, Washington, D.C., Illinois, U.S. Virgin Islands, Puerto Rico, Florida, Ohio, Georgia and Canada. Each prepaid card is assigned a unique identification number and a face value ranging from $2 to $20. The prepaid card's dollar balance is reduced by the cost of each call. TRICOM USA sells the cards to distributors that resell the cards to retail outlets. CABLE TELEVISION SERVICES We are the largest provider of cable television services in the Dominican Republic, based on the number of subscribers, and the number of homes passed. At December 31, 2001, our cable network served 64,466 subscribers, including 56,896 basic and premium subscribers and 7,570 commercial rooms, with approximately 170,000 homes passed. One component of our business strategy has been to expand our current base of basic and premium subscribers by providing high-quality programming and other content. In addition to publicly available programming, we license or otherwise acquire programming from various programming providers for broadcast on our cable television network and also produce a limited amount of programming ourselves intended for exclusive broadcast on our network. We currently offer 96 basic and premium channels including HBO, Cinemax, Disney, ESPN, Fox Sports and CNN. We also sell our own advertising time. BASIC SERVICE PACKAGE. Our basic service package provides access to 76 local, UHF and via-satellite channels. Subscribers pay a one-time installation fee of US$50 and a monthly fee of US$23 for this service. We 24 charge an additional installation fee of US$15 for connection of each additional television in the house, plus US$2 per month per outlet. Subscribers do not need a digital decoder to receive the basic service package. PREMIUM DIGITAL SERVICE PACKAGES. Our digital service packages include all of the channels described in our basic service package, with an additional choice of one of our six digital premium packages. These premium packages include one or more digital channels and range from US$9 to US$23 a month per package. Premium subscribers pay the basic package monthly fee plus the additional cost of any or all of these packages. A digital decoder set top box is required for these services. We currently are focusing on marketing our various premium digital service packages to our existing basic subscribers with a view to increasing our overall revenues per subscriber. CABLE TELEVISION SERVICES. One component of our business strategy has been to expand our current base of basic and premium subscribers by providing high-quality programming and other content. In addition to publicly available programming, we license or otherwise acquire programming from various programming providers for broadcast on our cable television network and also produce a limited amount of programming ourselves intended for exclusive broadcast on our network. We also sell our own advertising time. DMX MUSIC Telecable, through DMX Music International, offers digital audio programming through its HFC network. Customers choose from over forty exclusive and adaptable music channels that play twenty-four hours a day, seven days a week. With 130 million customers world wide, DMX music is the leader in Digital Music Programming. Customers are charged a one-time installation fee ranging from US$155 to US$185 and a monthly fee of between US$7 and US$22. INTERACTIVE TV AND NET TV Using digital set top boxes, our premium cable television subscribers can access the Internet without a personal computer with our television-based services. These services are designed to operate with cable systems and a wireless keyboard control. Given the relatively low personal computer penetration rate in the Dominican Republic as compared to other countries, we believe that our television-based Internet access services will enable us to build a new base of Internet subscribers. Interactive TV and Net TV provide customers with a maximum 128 kilobytes connection to different Internet services and spaces provided by our sponsors. These spaces include information on shopping, sports, news, travel, television programming and financial news. Customers with Net TV receive all of these services plus unlimited access to the World Wide Web. Since its introduction, Interactive TV has been a free, added service for our premium cable television subscribers. They can receive Net TV for an additional cost of US$16 a month. We are currently repositioning both products to serve as an alternative for customers wishing to access the World Wide Web who do not have access to a personal computer. BROADBAND DATA TRANSMISSION AND INTERNET We provide broadband data transmission services to large business customers in the Dominican Republic through several means of delivery including fiber optic cable and digital wireless point-to-point radio links. In addition, we provide these large customers with data circuits Internet access, private networks and frame relay services with branches in the different cities in the country. We recently increased transmission capacity to provide larger bandwidths and data services are expected to have a strong growth with the commercial launch of both the digital subscriber lines, or xDSLs, that provide high-bandwidth transmission of voice and data over regular telephone lines and the very small aperture terminals, or VSATs, relatively small satellite antennas used for high speed satellite-based single to multiple point data transmissions, including for the internet. In the Dominican Republic we are the second largest Internet service provider. We provide Internet connectivity to the residential and corporate markets through traditional dial-up connections, digital subscriber lines, 25 or xDSLs, dedicated lines and very small aperture terminals, or VSATs, relatively small satellite antennas used for high speed satellite-based single to multiple point data transmissions, including for the internet, with speeds ranging from 56 kilobytes per second to 2 megabytes per second. Our PCS and paging services are now fully integrated with our Internet service, offering short messaging services, including email and digital messaging through our website, www.tricom.net. In 2000, we entered into a five-year $25 million contract with the Dominican Republic Department of Education to provide broadbased satellite Internet access and Intranet services to every public high school in the Dominican Republic. We intend to offer high-speed Internet access by personal computer to a limited number of our subscribers through cable modems. A cable modem is a small box that connects a personal computer to the Internet by a local cable provider. Cable modems allow personal computer users to download information from on-line services at speeds one hundred times faster than today's fastest telephone modems. The planned development of our cable network's bi-directional capacity will increase our ability to offer bi-directional Internet access services to more of our subscribers. MARKETING AND SALES Our advertising and promotional materials in the Dominican Republic emphasize that we are a full-service provider of local, cellular, data and long distance services and that customers can realize significant savings from our service packaging. Our advertising also emphasizes reliability, performance, quality of service and the multiple advantages that users can obtain from our different products and services. In 2001, we introduced a new corporate image, which seeks to promote that Tricom is accessible, passionate, proactive, revolutionary, and humane. We also introduced a new logo. We use targeted marketing programs, concentrating on urban areas where we currently provide services and employ marketing techniques often used to promote consumer products, including television, radio and newspaper advertising. We also employ door-to-door sales for basic local service and the use of credit card lists and other databases to identify and contact potential users of cellular and PCS services. We distribute gifts to potential and new subscribers, including prepaid calling cards, bonus coupons and other promotional goods bearing our logo. Other means of advertising include billboards, block parties and telemarketing. Our targeted marketing programs concentrate on urban areas where we currently provide services. We use traditional communication media to promote our consumer products, such as television, radio and newspaper advertising. We also use door-to-door sales for basic local service as well as credit card lists and other databases to identify and contact potential users of cellular and PCS services. Seasonal promotions are also made for specific target markets at different points throughout the year. LOCAL AND MOBILE SERVICE During the initial deployment stage of our local services, we relied primarily on door-to-door sales, reflecting the limited geographic extent of our conventional local telephone network build-out. After our wireless local loop was deployed, giving us ubiquitous presence in the major cities of our countries, we have used mass media to a greater extent to promote our local telephone services. Approximately 79% of local access line gross additions are made through direct sales and 21% are completed at our commercial points of sale. We market mobile services through direct sales, database marketing, telemarketing and focus on new users. In an effort to target the middle-class market for cellular services we launched Tricomtrol(sm) during 2001. This prepaid plan offers users the controlled spending indicative of prepaid plans along with the advantages of postpaid plans such as low rates and short-term loans to help customers acquire cellular equipment. We also restructured our postpaid plans in order to offer our clients more options. Our advertising strategy for PCS services focuses on our nationwide coverage, quality of service and competitive prices as well as handset rentals. 26 Our corporate sales and marketing approach to large business customers is to offer comprehensive and customized telecommunications solutions for each corporate customer's needs. Our sales staff works with each customer to gain a better understanding of that customer's operations and to develop application-specific solutions that are appropriate for each customer. Many of our sales executives have engineering backgrounds or receive early training sessions in which they learn telecommunication fundamentals. The product development and customer service teams also offer them continuous support. INTERNATIONAL LONG DISTANCE In addition to our Dominican local access and mobile subscribers, we market our long distance services to individual customers who do not have telephone services in their own homes. In the United States, we target the large immigrant Dominican communities and other ethnic populations. We feature our prepaid cards, Efectiva(TM) and Conexion(TM), in our basic services advertisements, as weLl as in individual advertising. Our advertising emphasizes the accuracy and reliability of our billing as well as savings. The Efectiva(TM) and Conexion(TM) cards are distributed at our commercial offices, call center and thRough wholesalers and retailers. We have three wholesale distributors in the Dominican Republic, who cover the entire country, as well as an internal sales force targeting smaller retailers: a total of 50,000 points of sale for our prepaid cards. Efectiva(TM) was the first long distance calling card in the Dominican Republic. At December 31, 2001, iTs market penetration was over 80% in retail stores around the country. Efectiva(TM) offers 20% to 30% more air-time than the competition. In 2001, we purchased a platform from Sixbell to manage prepaid services. This platform will allow us to offer prepaid customers several options to recharge their minutes. Customers will be able to purchase minutes through ATM machines, over the Internet and through cash registers in all of our customer service offices and affiliated businesses. The Sixbell platform is currently in its final phase of implementation and should be operational in the second half of 2002. Tricom USA advertises its prepaid cards on radio and through print media targeted at Dominican and other ethnic communities, mainly in the New York metropolitan area. Advertisements emphasize price and voice quality as well as patriotic or ethnic themes. Prepaid cards are distributed to wholesalers under our brand name and are sold primarily in small retail stores, including groceries, beauty parlors, drugstores and newsstands. CABLE TELEVISION SERVICE We use a variety of methods to attract new basic subscribers. We currently maintain a call center to respond to incoming calls from potential subscribers. The call center staff is trained to respond to questions concerning our various service packages, as well as contact potential subscribers, market our services and receive payment for our services by credit card. We generally advertise on our cable broadcasts as well as on television and radio broadcasts and in magazines, newspapers and billboards. Our direct marketing includes flyers and promotional materials. Our telemarketing staff focuses on both attracting new subscribers, as well as upgrading our existing basic subscribers to one of our premium service packages. We market our cable services under the brand name, Telecable. Our current marketing strategy is intended to - improve customer service, - develop aggregate value programs to promote subscriber loyalty and timely payments, - reinforce our market position by offering the most aggressive price-product combination in the market, - increase our subscriber base by increasing the penetration levels in our coverage areas, and by converting users that pirate our cable services to legitimate subscribers, 27 - increase our income per subscriber, and - capitalize on the development possibilities of new broadband services. BROADBAND DATA TRANSMISSION AND. INTERNET For broadband data transmission services, we target the large Dominican businesses, which require more sophisticated technology and demand specialized service and support. Our marketing professionals place their focus in this sector, which includes multi-national corporations, local business conglomerates and large hotels. We offer our residential customers Internet access bundled together with local, wireless and other services. We also provide pre-installed Internet access through major Dominican computer retailers, including one-month of free Internet access with the purchase of a new computer. In a promotion to increase computer penetration in the country, we created our "ENTER-NET" plan, offering financing for computer equipment bundled with Internet access via our service through Bancredito: a bank affiliated with GFN, our largest shareholders. In 2001, we developed advertisement campaigns focused on promoting the speed and accuracy of our Internet dial-up services. During 2001, we launched several new services through a Shasta Platform that enables us to offer Firewall services and Virtual Private Networks, among others. During 2001, we launched wireless access to Internet, VPN, and Firewall services. We recently launched a number of broadband delivery systems. These platforms will enable us to increase our penetration into markets requiring high-speed data transmission and Internet access. CUSTOMER SERVICE In the Dominican Republic, we provide customer care for all of our services through 17 service centers and 16 commercial offices. We plan to add 80 new service centers during 2002. We also provide payment services for our customers through several other businesses including supermarkets, banks and other commonly frequented businesses. There are approximately 373 such offices, all of which are linked to our central billing and collection system. Our customers may subscribe for telephone services, pay and obtain information about monthly bills and inquire about billing adjustments at our offices. To enhance customer service, our representatives use our customer service system linked to our central billing and service order system, enabling them to handle expeditiously both billing and service inquiries. We provide a 24-hour interactive voice response service through which customers can register claims and make billing inquiries. In addition, customers may access their account information online 24 hours a day, 7 days a week, on our website, www.tricom.net. Our website provides information about our services and can be used to purchase products including prepaid cards, cellular phones and accessories. We provide installation and repair services to our customers on par with such services provided by the best telecommunications companies throughout the world. In order to achieve this goal, we have established service benchmarks for, among other things, network availability, installation and repair intervals. We investigate other companies' response time and client promises in order to establish equal or better ones that will ensure our competitive advantage. Our customer service department gathers information from our customers, which we then use to tailor our products and services to meet customer needs. We contact customers shortly after initial installation to address any service concerns or problems that they may have. We regularly survey our customers to determine their satisfaction with our services and to improve services based upon the explanations offered by customers who voluntarily cancel their services. Furthermore, we have a customer retention department that works to determine the cause for customer churn and also to develop appropriate retention strategies to target this segment. During 2000, in an effort to improve our customer service, we implemented a customer relationship management (CRM) system, integrating our information systems and our customer relationship management software. This system allows customer service representatives to access all billing, service order and other client specific information. This enables us to offer speedier service and more efficient follow through and to monitor 28 every step of the customer service relationship. During 2001, we implemented the Support and Field Service modules and during 2002 we will finish implementing the collections module. BILLING AND CREDIT POLICIES We have developed an integrated billing system for local, long distance, cellular, cable television, paging and value-added services. The integrated billing system enables our customers to obtain a single bill, providing detailed information about charges for all services rendered. We have led the Dominican telecommunications market in the introduction of billing packages that provide detailed call reports with time-of-day, day-of-week and destination information as well as flexible billing discount programs which are similar to those found in the most competitive markets outside the Dominican Republic. Our subscribers can call our center and speak with a customer care representative and obtain account and statement information. Our customers also can access information over the telephone through "FONOCOM," an interactive voice response system that enables customers to consult their most recent calls and account balances. Our customers also may request a copy of their bill, which is then delivered to them via facsimile transmission. Cash payments may be made at walk-in commercial offices, centers and affiliated bank branches, or funds may be debited from credit cards or bank accounts. Our customers also may pay their bills at any one of our over 440 payment stations, which are located in neighborhood gas stations, grocery stores and other retail outlets. Residential customers, who are not prepaid customers, subscribing for basic telephone service are required to pay an installation fee of up to US$30. If the customer chooses to pay the installation fee in installments, he must pay a 50% down payment and the balance within two months. Each residential basic telephone service subscriber has a credit limit of approximately US$296. We contact any customer exceeding this credit limit and request that such customer pay all or part of the outstanding bill. In December 1999, we introduced a prepaid local access line program. This program appeals to customers who prefer to budget their telephone spending and allows us to expand our market to customers who otherwise would not qualify under our credit policies. We require all individuals wishing to subscribe for cellular and PCS services to own a credit card or prepay either by using the Amigo(TM) card or making a deposit through the Tricomtrol(sm) prepayment program. OUr service contracts do not cover a specified amount of time and remain in effect as long as each customer remains active and current in paying its bills. Each cellular and PCS service subscriber is assigned a credit limit, which varies depending upon the individual's monthly usage and payment history. We also use a credit bureau system to check the credit history of new clients. Since 1996, our policy has been to suspend service for all residential basic telephone service subscribers if payment is not received within 45 days after a bill is issued and to terminate service 45 days after the suspension date. Cellular, PCS and paging services are suspended when the prepayment balance is exhausted or when a customer's credit limit is reached. In order to reinstate service after termination, customers must pay US$15 for wireline services and US$5 for paging services. No fee is required to reinstate Internet services after termination. Cellular subscribers whose service has been terminated may reconnect only by purchasing an Amigo(TM) prepaid card or by paying US$11to obtain Tricomtrol services. Telecable customers muSt pay a US$7 fee to reinstate services. We had an average monthly churn rate for cellular and PCS subscribers of 4.6% in 2001 compared to an average monthly churn rate of 3.1% in 2000, reflecting primarily our decision to disconnect lower revenue-generating prepaid customers by shortening the expiration of our prepaid calling cards to 30 days. We calculate average monthly churn by dividing the number of subscribers disconnected during the year by the sum of subscribers at the beginning of each month during such year. TRICOM USA distributes its prepaid cards through wholesale distributors. Depending on their credit history and the length of their relationship with TRICOM USA, wholesalers are required to pay in full for calling cards upon delivery or are extended credit for up to 15 days. All distributors of prepaid cards in the Dominican Republic are extended credit for up to 30 days. TRICOM USA requires that new and smaller reseller customers pay on a weekly basis for long distance services. Some customers that have a previous relationship with TRICOM USA are extended credit for 15 to 30 29 days on average, depending on proven reliable financial condition. Traditional long distance carriers generally pay TRICOM USA within 60 to 90 days for traffic. MANAGEMENT INFORMATION SYSTEMS Our business applications are designed to fulfill two principal necessities. First, to generate accurate information in real time, which is then readily accessible to employees at all levels of the organization, particularly those dealing directly with customers. Second, to provide our customers with direct access to pertinent information from our computer network. For this reason, we have designed a fully integrated, open architecture network. Our business applications are developed according to industry standards and include the following characteristics: - Tailor made features; - UNIX operating system; - Enterprise Relational Data Base; - GUI; - Table driven; and - Open systems. We use Oracle as our unified database and software application development tool set. We use Oracle Financials as our ERP system, which includes the following modules: accounts payable, accounts receivable, general ledger, purchase orders, inventory control and fixed asset accounting. We have developed an integrated billing and customer care system that runs on the Oracle platform. Our billing system rates calls in one-second increments for calls made from our retail telephone centers, six-second increments for calls made with our prepaid calling cards and one-minute increments for calls made from local access lines, cellular and PCS telephones. It also enables us to rate calls according to each customer's specific service package, thus permitting us to offer tailored packages. This application has been so successful that, in August 2000, we entered into a product marketing alliance agreement with Codisa Software Corp., a leading Latin American developer and provider of business applications, for the exclusive distribution of Tricom's advanced billing and operational support platform. The main features of our Billing System include: convergent (wireless, wireline, Internet, data, paging, dispatch); credit scoring; post and pre-paid: direct debit; credit card; point of sale; cash registers; commissions; multi currency; accounting (automatic interface to GL); web statement and payment; unlimited number of billing cycles; pre-cycle; concurrent billing cycles; flexible handling of letters; messages: inserts and several other functions. The main features of our customer care system are: provisioning for wireless, wireline, Internet, data, paging, dispatch and cable television; retention; trouble tickets; inventory; maintenance; scheduling; plant records; directory listing; claims handling and resellers; multi location; use of Electoral Census data base; corporate quotations; online switch programming (for automatic activation, disconnect, reservation, etc.); product configuration; customer profile: and Map Viewer/EWO. Our Lan/Wan structure is supported by a high-speed metropolitan network that communicates with our main offices through fiber optic cable with alternating routes in a 36 kilometer radius around the capital city of Santo Domingo. Our net switches are strategically located in our main IT centers, allowing users direct access to our applications with the same response time from virtually any location. This network is supported by a combination of state-of-the-art technology from Cisco Systems and Enterasys Networks (formerly Cabletron) conforming a system of intelligent network paths allowing us to seamlessly and automatically switch connections between points. 30 Our Lan topology includes: Gigabit Ethernet Backbone over fiber; TCP/ IP protocol; 100 Mbps dedicated connection for each user; structured cabling, redundancy; 24x7 monitoring and support; and flexible network structure. Our Wan topology includes: TCP/ IP protocol; frame relay; T1; wireless network; VPN access for backup of overseas sites and round-the-clock monitoring; and support of the Wan. Remote sites include New York, Miami, Puerto Rico, Panama, and over seventy other sites. NETWORK INFRASTRUCTURE Our state-of-the-art network includes: - Our local access network; - A digital wireless point-to-point transmission system; - Our mobile network; - Two satellite earth stations in the Dominican Republic and capacity in eleven international undersea cables; and switches in New York, Puerto Rico and in Miami to connect international traffic originating in the U.S; and - Our cable television network. We invested over $800 million from 1992 through 2001 to develop our network, which is fully digital except for portions of our cellular network. LOCAL SERVICE AND MOBILE NETWORK The core of our network is composed of Nortel International gateway switches. These switches have switching capacity of more than 4,300 digital trunk lines and possess special features such as ultra-high-speed, port-to-port call switching that can handle 240,000 calls per second. Our switch time-of-day capability allows us to distribute efficiently our telecommunications traffic and provide, as a result, more competitive pricing. Our switches also provide statistical call distribution information, which allows us to control our flow of traffic. Without such capabilities, we would have to conduct these monitoring tasks manually. The switches also enable us to use one common channel for signaling purposes, optimizing the channels available for voice transmission. Without this capability, a network must use each of its channels to signal the origination and termination for each call, which often results in uncompleted calls and poor circuit utilization. Our wireline local access network is composed of Nortel central switches, 39 remote switches and 51 digital loop carriers. Each of the central switches is capable of supporting up to 90,000 customers. Our Northern Telecom switches enable us to offer value-added services including caller identification, three-way calling and automatic recall. Our intra-city network is comprised of 500 route miles of fiber optic cable and over 3,000 miles of copper cable in seven cities. We use digital loop carrier technology, which is digital network transmission equipment used to provide multiple phone conversations, and fiber optic cable to connect to local access lines. Our central office switches are connected by fiber optic cable to various digital loop carriers located throughout the three largest cities in the Dominican Republic. The digital loop carriers can be located up to 160 kilometers away from the central office switch. The digital loop carriers are small in size and can be easily installed at relatively low cost. These digital loop carriers, in turn, carry telecommunications traffic by copper or fiber optic lines to the customer. All these activities are remotely monitored by our management system, located at our central office. Without the use of the digital loop carriers, we would have to maintain additional central office switches, which would require us to incur 31 substantial additional costs, including land acquisition, obtaining the necessary rights-of-way and hiring additional personnel to manage these operations. We transmit our domestic traffic through a fully redundant digital wireless point-to-point backbone system, which provides both intra-city and inter-city telecommunications services. A point-to-point backbone system is a dedicated connection between two endpoints of a communications network. The backbone system links approximately 85% of the country's population, including Santo Domingo, Santiago, San Francisco de Macoris and certain key areas in the eastern and northern regions of the country like Puerto Plata and Higuey, integral to the tourist and agricultural sectors, respectively. The wireless point-to-point system serves the areas that have high telecommunications usage, including large industrial and commercial areas. We interconnect with Codetel in 12 cities of the Dominican Republic. To oversee and monitor the activities of our network infrastructure, we have installed a network management system. This system allows us to manage our central office switches and remotely monitor all network components. The management system provides continuous information regarding our equipment, any equipment failure, and the security of the network. In addition, it allows the central office to send commands and to test our network. Our cellular network in the Dominican Republic uses analog technology and our PCS network uses CDMA or digital protocol. Our analog mobile network currently has 95 cell sites and two mobile switching centers, in Santo Domingo and Santiago, which enable us to provide mobile coverage to those regions of the Dominican Republic with the greatest demand for mobile services. To provide PCS service, we use two Motorola digital switches, 118 cell sites and ten digital repeaters, which allow us to provide PCS service in 14 main cities and continuous coverage in the main highway routes of the country. INTERNATIONAL LONG DISTANCE NETWORK In July 1998, we installed our own state-of-the-art switching facility in the New York metropolitan area, which we subsequently upgraded to allow us to provide multiple international signaling protocols. We also installed a switch in Puerto Rico that became operational in the second half of 2000, and an additional switch was installed in Miami and became operational in the first quarter of 2001. By having our own switching facilities, we can provide termination of international long distance traffic at very competitive rates to several countries in addition to the Dominican Republic. By purchasing and leasing international traffic capacity from various systems, we have diverse options to route our international traffic, and are fully connected to the international network. We have purchased capacity in international submarine fiber optic cables that have been built to send and receive international traffic to and from various countries. These submarine cables include Americas I, Columbus II, Columbus III, TAINO CARIB and Antilles 1, which directly provide service, or connect with other cables that provide service to Latin America, the Caribbean and Europe. We own 23% of the Antilles 1 submarine cable, which connects the Dominican Republic to the United States via Americas I, Columbus II, Taino Carib, Americas II and Arcos I. In addition, we have an earth station, which connects to the PanAmSat satellite system, and an earth station, which connects to the INTELSAT satellite system serving the Atlantic region, Africa and Europe. The use of these satellite facilities also allows us to route international traffic between the Dominican Republic and most other countries in the world. CABLE TELEVISION NETWORK Our cable television uses a broadband network employing radio frequency transmission over coaxial and/or fiber optic cable to transmit multiple channels carrying images, sound and data between a central facility and a subscriber's television. Coaxial cable is a type of cable used for broadband data and cable systems. This type of cable has high-quality broadband frequency characteristics, noise immunity and physical durability. Fiber optic cable is a communication medium that uses hair-thin glass fibers to transmit signals over long distances with less signal loss or distortion than coaxial cable. Our existing cable network consists of three major portions: a master headend, a distribution network and nodes. At our master headend, programming signals are received, processed, amplified and then sent through our distribution network, which consists of fiber optic and coaxial cables connected to nodes. A node, which is typically shared by a number of subscribers within the same area, is a single connection 32 to any of our distribution network's main fiber optic cables that receives and transmits signals. One node in our existing network typically serves an average of 820 homes passed. Programming signals then travel, via coaxial cable, from nodes into subscribers' homes. As part of our plan for the expansion and upgrade of our network, we plan to redesign our distribution network by installing hubs and additional nodes to improve the quality and redundancy of our services. Hubs receive signals from the headend and retransmit signals to the nodes, increasing the quality and reliability of the signals. At December 31, 2001, our cable network consisted of approximately 204 miles of fiber optic cable, 718 miles of coaxial cable and 208 nodes, passing approximately 170,000 homes. Approximately 98% of our network is constructed above ground, with a small percentage of the fiber optic cable constructed under ground. We are expanding and upgrading our existing cable into a broadband bi-directional network that will provide us with a platform for the delivery of a broad range of services. At December 31, 2001, approximately 40% of our network had bi-directional capability, and we expect that more than 60% of our current network will have bi-directional capability by the end of 2002. The expansion and upgrade of our network involves the conversion of our existing cable network into a broadband bi-directional network. A broadband bi-directional network combines the use of fiber optic cable, which can carry hundreds of video, data and voice channels over long distances, with coaxial cable, which requires a more extensive signal amplification in order to obtain the desired transmission levels for delivering programming signals and nodes. We believe that the primary advantages of a broadband bi-directional network over a coaxial cable network include: - greater bandwidth, which allows us to provide Internet access and other multimedia; - communications services; - better signal quality and reliability; - increased channel capacity; - a reduction in the number of homes per node, which improves the overall capacity of the network and reduces the number of households affected by a disruption in the network; and - bi-directional capability. BROADBAND DATA TRANSMISSION AND INTERNET NETWORK Our Internet Services is provided by a Sun, 3Com and Cisco platform. The network has equipment to connect to international carriers, including Teleglobe, UUNET and Sprint. Currently, we have the capacity to handle more than 10,000 dial-up users and provide email, Internet connection, web hosting, news and real audio/video. Other new services are under development through a Nortel Network Shasta Platform, which became operational in the first quarter of 2002. This platform will enable us to offer our customers firewalls for xDSL and lease lines, bandwith control and auto-bandwidth, filtering, captive portal, content, and virtual private networks. Data communications services are primarily targeted to the business community and provided at a variety of speeds. Our data communications network consists of Newbridge Alcatel data multiplexing nodes, which are network connection points that allow for the transmission of two or more signals over a single channel, linked to fiber optic ring and digital wireless point-to-point radio links. The "last mile" to the customer is provided through fiber optic cable and/or digital wireless point-to-point radio links. Currently we have 8,177 access lines offering speeds in excess of 56 kilobytes per second. Our data network has the capability to monitor the communications link all the way to customer desktop level and to support multiple data protocols such as ATM and frame relay. 33 Our technology infrastructure is built and maintained to assure reliability, security and flexibility and is administered by our technical staff. Each of our servers can function separately, and multiple redundant machines serve key components of our server architecture. We maintain our central production servers at the data center of our headquarters. Our operations depend on the ability of the network operating centers to protect their systems against damage from fire, hurricanes, power loss, telecommunications failure, break-ins or other events. Our local and mobile employ in-house and third-party monitoring software to monitor access to our production and development servers. Our reporting and tracking systems generate daily traffic, demographic and advertising reports, which are copied to backup tapes each night. COMPETITION LOCAL AND MOBILE OPERATIONS We currently compete against three other telecommunications companies in the Dominican market: Codetel, Centennial Dominicana and France Telecom (Orange). Codetel, a wholly owned subsidiary of Verizon, is an integrated communications service provider, which has the largest number of local access lines and subscribers for mobile services in the country. Orange, a subsidiary of France Telecom Group, initiated cellular operations in the fourth quarter 2000. Orange operates a GSM 800 MHZ network in the main cities of the country. In 2001, Orange implemented an aggressive expansion strategy based on low prices in mobile equipment and distribution network with dealers. Orange subscribers represent in excess of 20% of the subscribers for mobile services in the Dominican Republic. Centennial Dominicana, a joint venture of Centennial Communications Corp. launched PCS wireless services in the last quarter of 2000. Centennial offers low long distances calling rates to the United States from the Dominican Republic. The Dominican government also has granted concessions to the following telecommunications companies which either have not yet commenced operations or have minimal operations: Telecomunicaciones America, C. por A., Compania Telefonica del Norte, S.A., Servicios Globales de Telecomunicaciones, S.A., Defisa, S.A., Comunicaciones Dominicanas S.A., Turitel S.A. Economitel C. por A., and Servicios Moviles de Comunicacion, S.A., (MOVICELL). Each of the concessions allows for the provision of the same telecommunications services that we provide. In addition, several international companies have expressed serious interest in entering the Dominican telecommunications market to Indotel. These include AT&T, US Sprint, DG Cell and Telefonica S.A. INTERNATIONAL LONG DISTANCE The international telecommunications industry is intensely competitive and subject to rapid change precipitated by changes in the regulatory environment and advances in technology. Our success depends upon our ability to compete with a variety of other telecommunications providers in the United States and in each of our international markets. Our competitors include large facilities-based multinational carriers including AT&T, MCI/WorldCom and Sprint, smaller facilities- based wholesale long distance service providers in the United States and overseas that have emerged as a result of deregulation and switched-based resellers of international long distance services. Competition primarily is based on price, although reliability, quality of transmission, routing capacity and customer service also are competitive factors. We expect that competition will continue to intensify. CABLE TELEVISION SERVICES We are the largest cable television operator in the Dominican Republic based on our number of subscribers and homes passed as of December 31, 2001. As of that date, our cable network served 64,466 subscribers, including 56,896 basic and premium subscribers and 7,570 commercial rooms, with approximately 170,000 homes passed. We face little competition in Santo Domingo and surrounding areas from other cable television operators. Indotel reports 112 cable operators in the Dominican Republic, including illegal cable television providers, and is currently attempting to register all illegal cable television providers. 34 We also face competition from widespread pirate direct broadcast satellite (DBS) transmission. There is no legal DBS service offered in the Dominican Republic. For several years, the Dominican pay television market has been harmed by the persistent violation of copyright laws or "piracy." TCN Dominicana has deployed encoding technology to aid in reducing piracy from its network. All pay television service providers, including cable television systems, DTH satellite services and multi-point, multi-channel distribution system operators, face substantial competition from other signal delivery methods, including television broadcasters. The ability of potential subscribers to directly receive traditional public over-the-air television signals from television broadcasters may hinder our ability to obtain additional subscribers. CENTRAL AMERICA MOBILE SERVICES REGIONAL STRATEGY We have identified markets in Central America in which we intend to offer specialized mobile radio services using Motorola's iDEN(R) technology. We believe that Central America is an attractive market to target as one congruous telecommunications region. We recently completed the construction of our digital network in Panama and initiated services in April 2002. We currently do not anticipate construction of network or offering services in other countries until we have established our operations in Panama and obtained additional financing. If we proceed with our strategy, we plan to be the first telecommunications operator to establish a seamless intra-regional specialized mobile service network targeted at business customers using a single transmission technology, iDEN(R), in the major business centers in Central America where the majority of the urban population resides. We have interests in international fiber optic submarine cable systems that connect Central America and the Caribbean with the United States and Europe. These facilities will enhance the implementation of our intra-regional strategy, as well as contributing to our share of international traffic. Our interests in submarine cable systems and our ownership of switching facilities enable us to originate, transport and terminate traffic at reduced costs. We also will capitalize on our scalable back office systems, which integrate sales, customer service, collections and financial control functions. These allow us to expand our operations in a cost-efficient manner. Our objective is to provide roaming throughout the region using a unified platform. This will allow us to achieve cost savings in network buildout. Our undersea fiber optic facilities provide connections between each of our targeted markets and our support systems in the Dominican Republic. Generally, in implementing our digital mobile network strategy, we intend to form a strategic alliance with a local group in each country to expand our telecom services and to promote and use the TRICOM name in each market. We intend to create a digital mobile network in each of our targeted markets using Motorola's proprietary iDEN(R) technology. iDEN(R) technology provides one network with four communications systems: dispatch radio, full-duplex telephone interconnect, short message service and data transmission, including packet data and circuit data. Developed by Motorola, iDEN(R) is a high-capacity digital trunked radio system providing integrated voice and data services to its users. The iDEN(R) system uses M16-QAM digital modulation and VSELP (Vector Sum Excited Linear Predictor) speech coding techniques coupled with Time Division Multiple Access (TDMA) channel access methodology to enhance channel capacity and system services. In the iDEN(R) system, a single inbound/outbound frequency pair (25 khz. Bandwith) is shared among six users through the creation and use of six 15-millisecond time slots. Each user transmits and receives during (and only during) one of the time slot intervals, so that the transmission from any given mobile radio is a pulsed RF signal with a 1/6 or 1/3 duty cycle. The base radio is able to transmit and receive during any of the six or three time slots. Each mobile radio user is assigned a unique channel designation, which is defined by both a carrier number and a time slot definition. The carrier number specifies the inbound/outbound frequency pair. On July 31, 2000, we entered into an infrastructure supply agreement to buy systems and license the iDEN(R) technology from Motorola. This serves as a regional frame agreement for our purchase of systems for each country in the region, except Belize. The system components to be supplied include switches, radio subsystems dispatch systems, packet data and intelligent network components. Motorola will provide installation, integration, optimization, management and system engineering, software maintenance and training services. The agreement also 35 provides price discounts for enhanced base transceiver stations, or EBTS, which are antennae located at base sites to provide radio coverage in specific geographic areas, based on the volume of our orders. The agreement contains a warranty for Motorola manufactured hardware equipment for 12 months following the date of shipment and other customary terms and provisions. In addition to the iDEN(R) technology, it will be necessary for us to purchase additional technologies and site components from third parties, including microwave radios, towers, shelters and power generators. PANAMA OVERVIEW In 2001, we purchased a 51% interest in a Panamanian company, Cellular Communications of Panama, S.A., now Tricom Panama, S. A., which owns the frequency rights for 107 channels of 25 megahertz each. Tricom Panama has approximately 2,200 analog mobile users. These frequencies will give us access to nationwide coverage, covering a population of approximately 2.89 million people. In Panama, frequency rights are granted for 20 years and are automatically renewable for additional 20 year terms. We recently completed the construction of our digital network in Panama City and Colon (the two largest cities in Panama) and the transportation corridors that link those cities with airports and ports. We are also in the final construction stages of our network along the corridor that connects Panama City, the capital, with its satellite cities and the most important beaches, recreational and tourist areas of the country. To date, we have invested $37 million in this deployment, primarily for the purchase of: - a switching office for telephone and radio communications dispatch through which mobile service traffic is originated or terminated; - enhanced base transceiver stations, which are antennae located at base sites to provide radio coverage in specific geographic areas; and - site acquisition and construction. Our expected completion date for this phase of the buildout is the second quarter of 2002. On April 8, 2002, we began to offer our iDEN(R) services in Panama. MARKET OPPORTUNITY. At December 31, 2000, Panama had a population of approximately 2.89 million, with an estimated Gross Domestic Product of $7.4 billion in 2000, and a Gross Domestic Product growth rate of 2.5% for that year. Approximately 57% of the population lives in urban areas. Mobile penetration for Panama in 2001 was 17% while wireline penetration was 12.1%. MARKETING PLANS We will offer specialized mobile radio services, including two-way radio, and interconnect services. We plan to offer our digital services mainly to business customers, offering a wide range of bundled programs with different services and pricing plans, customized to meet our clients' specific needs. We are currently marketing our services through direct sales and intend to do so through independent dealers as well. COMPETITION The mobile market in Panama has been open to competition since 1996. TRICOM Panama's digital radio services will compete with the two digital wireless communications providers in the country, Cable & Wireless of Panama and BSC of Panama (a subsidiary of BellSouth), as well as with several analog trunking operators. The Panamanian government granted a 10-year duopoly service concession to both digital wireless operators in 1997 as 36 part of the privatization of the telecommunications industry. Panama had an estimated 17% wireless penetration at year-end 2001. REGULATORY AND LEGAL OVERVIEW To provide telecommunications services, a Panamanian or foreign company must obtain a service concession from the ENTE REGULADOR DE SERVICIOS PUBLICOS, or ENTE. There are two types of service concessions, Type "A" and Type "B". Type "A" service concessions currently are awarded on an exclusive basis. Services under a Type "A" category concession include basic telecommunications and cellular services. Additional concessions of this type will not be granted again until 2003 for basic telephony and long distance and until 2007 for PCS services. Type "B" service concessions are awarded on a non-exclusive basis to companies which meet specific requirements and complete the application procedures for the services they wish to provide. Applicants must include a form of the contract they intend to enter into with potential customers and a diagram of the system that will be operated in order to provide the contemplated services, among other information. Applicants may submit their applications to provide Type "B" services on any one of four specified dates a year. Additionally, since Type "B" telecommunications service concessions are open to all companies which meet the requirements, the terms of the concession are the same for all concession holders. However, each concession holder must comply with fair competition practices in providing services to its clients and in relation to other concession holders. Concession holders also must provide services in a nondiscriminatory manner. Concession holders may also assign or transfer their concessions to other companies which meet the same requirements that ENTE considered at the time it awarded the concession, subject to ENTE's authorization. ENTE may only deny a transfer or assignment when the transfer or assignment would be prohibited by law or against fair competition practices. Telecommunications providers are required to pay annual fees to the government of 1% of their total gross revenues. Tricom Panama has four of the twenty-six Type "B" service concessions, one to provide each of the following services: (1) conventional trunking systems for public or private use, (2) fixed or mobile radio communication services, (3) data transport services, and (4) paging services. Panamanian telecommunications law prohibits companies providing trunking mobile services to hand off telephone calls, even if the hand-off would be from one site to another site owned by the same trunking company. Our iDEN(R) system does not permit hand-off. Therefore, we have built additional EBTS in Panama to minimize the number of calls dropped due to handed-off failures. We believe that additional EBTS will prevent a higher percentage of dropped calls than would otherwise occur due to the effect of this restriction on hand-off under Panamanian law. In addition, Panamanian telecommunications law requires that all concession holders permit and maintain nondiscriminatory interconnection of other concession holders to their networks. A concession holder is required to use its best efforts to reach an interconnection agreement within 120 days from the date on which another concession holder sends a copy of an interconnection request to the ENTE, with confirmation that the concession holder with which interconnection is sought also has received the request. After this 120-day period, any of the parties may request the intervention of the ENTE in negotiations. The ENTE may intervene in the process if interconnection is not negotiated by the parties or is not provided on terms at least equal to those that other concession holders have obtained in similar circumstances. Tricom Panama requested interconnection from Cable & Wireless. With the intervention of the ENTE, the parties negotiated and agreed upon most of the terms of interconnection, except for access charges and certain other economic aspects, which the parties were not able to agree upon. The ENTE resolved the impasse by mandating the access charges and other economic aspects. Thereafter, Cable & Wireless refused to sign the interconnection agreement on the ground that it might be prohibited from doing so by a precautionary measure obtained by BSC of Panama against Tricom Panama in August 2001. Such precautionary measure, which following an appeal was lifted in December 2001, had ordered Tricom Panama to cease the installation of its iDEN(R) system in Panama. The ENTE has imposed on Cable & Wireless sanctions of US$5,000 per day until it signs the interconnection agreement with Tricom Panama. Cable & Wireless appealed the ENTE's sanctions order before the Supreme Court, and the case is pending decision. 37 Panama has no restrictions on repatriation or monetary transfers to and from Panama nor does it have any exchange controls. The unit of currency, the Balboa, is issued only in coins which are identical in size and value with those of the United States. Panama's paper currency is the U.S. dollar. There are few limitations or restrictions on foreign investment, especially for international business operations based in Panama. One of the few exceptions is that certain sales to consumers of retail goods are reserved for Panamanian nationals. As a telecommunications business, we will have to pay a monthly regulatory fee to ENTE of 1% of our previous month's gross income in addition to the 1% of gross revenue annual fee required to be paid by telecommunications providers. We are also subject to certain taxes, including income, franchise, dividend and commercial license taxes. GUATEMALA AND EL SALVADOR In 2000, we were awarded, in a government auction, radio frequency rights in Guatemala to 172 channels of 25 megahertz, providing us with nationwide coverage. We have also acquired the spectrum to operate our iDEN(R) network in El Salvador through the purchase of radio frequency rights for an aggregate of 185 channels of 25 megahertz, 175 of which we purchased from a U.S. telecommunications company that previously owned the rights and 15 of which we acquired through a government auction. We currently do not intend to develop a network in either Guatemala or El Salvador in 2002. REGULATION GENERAL The legal framework of the telecommunications sector in the Dominican Republic consists of General Telecommunications Law No. 153-98, enacted on May 27, 1998, resolutions promulgated under that law and the concession agreements entered into by the Dominican government or the regulator with individual service providers. In addition to the industry-specific legal framework, the Constitution of the Dominican Republic affects the telecommunications sector. Among other individual and social rights, the Dominican Constitution guarantees Dominican citizens the freedom of trade. The Constitution specifically provides that monopolies must be established by law and only for the benefit of the Dominican government. None of the existing concession agreements grants a monopoly in any sector of the telecommunications industry to any carrier, and the Dominican government has announced a policy of encouraging growth through competition in the telecommunications industry. In 1930, Codetel was granted a concession to operate telecommunications services in the Dominican Republic. Over the years, while other service providers entered the Dominican telecommunications market, none was successful in becoming a full-service telephone company able to compete with Codetel because Codetel was not required to allow other service providers to interconnect their services with its physical infrastructure. To provide services, a company would have to install its own wireline telecommunications network. The economics of this requirement hindered competition. As a result, Codetel held a de facto monopoly for more than 60 years. To substantially broaden the number of Dominican citizens with access to a telephone and to allow for the establishment and growth of other modern telecommunications services, the Dominican government adopted a policy of liberalization of the telecommunications sector beginning in the late 1980s. In 1990, the Dominican government granted us a concession to provide a full range of telecommunications services within, from and to the country. Additionally, advancements in wireless technologies made it more cost-effective for companies to penetrate the market even without being able to interconnect to Codetel's network. However, interconnection remained important for full-service competition. In 1994, the Dominican government enacted a series of interconnection resolutions which require all service providers in the Dominican Republic to interconnect with all other service providers pursuant to contracts between them; the guidelines for those contracts are set forth in those resolutions. In May 1994, we entered into an interconnection agreement with Codetel which became effective in November 1994. This agreement allowed us to become the second full-service telecommunications provider in the Dominican Republic. 38 GENERAL TELECOMMUNICATIONS LAW NO. 153-98 OF 1998 Former Telecommunications Law No. 118 of February 1, 1966 was repealed by Law No. 153-98 of May 27, 1998. Law No. 153-98 is the result of a joint government and industry project conducted with the assistance of the ITU, which studied the telecommunications sector in the Dominican Republic. As part of this process, the ITU drafted a proposed telecommunications law and various regulations, including interconnection and tariff regulations, in consultation with Dominican telecommunications carriers. The project was requested by the Technical Secretariat of the Dominican Presidency and the country's telecommunications carriers and was funded by the carriers. Law No. 153-98 established a basic framework to regulate the installation, maintenance and operation of telecommunications networks and the provision of telecommunications services and equipment. The law adopted the "Universal Service Principle," by guaranteeing access to telecommunications services at affordable prices in low-income rural and urban areas. The law creates a fund for the development of the telecommunications sector that is supported by a 2% tax payable by customers and collected by telecommunications providers from them based on billings to customers for telecommunications services. At the same time, the law eliminated the 10% tax previously charged on billings to customers for international and domestic long distance traffic to customers. In addition, the law created an independent regulator with strong regulatory powers, the Dominican Institute of Telecommunications (Instituto Dominicano de las Telecomunicaciones, or Inodotel), and established the regulator's responsibilities, authorities and procedures. The regulator is headed by a five-member council, the members of which serve a four-year term, and includes a representative from the telecommunications industry. Among other responsibilities, Indotel is charged with implementing telecommunications development projects to satisfy the requirements of the Universal Service Principle. Law No. 153-98 grants Indotel control over all frequency bands and channels of radio transmission and communications within the country and over its jurisdictional waters. Law No. 153-98 encourages competition in all telecommunications services by enforcing the right to interconnect with existing participants and ensuring against monopolistic practices, and at the same time upholding those concessions that are operational. The law establishes mechanisms to set cost-based interconnection charges and to resolve interconnection disputes by requiring existing operators to amend their interconnection agreements consistent with the new requirements. The law also eliminates cross subsidies and provides for progressive rate rebalancing of those tariffs that traditionally have been subsidized, in order to reflect costs more closely. This rates rebalancing process was completed on December 31, 2000 in accordance with article 120 of Law No. 153-98. We believe that this legislation, combined with technological advances and the sustained growth of private investment will significantly contribute to the development of the telecommunications sector in the Dominican Republic. Additionally, we expect the increase in demand for long distance services stemming from reduced long distance fees to encourage continued long distance traffic growth. RECENT REGULATORY INITIATIVES PROPOSED TELECOMMUNICATIONS REGULATIONS In 2001 and 2002, Indotel initiated several public inquiry processes, like a U.S. Federal Communications Commission notice for proposed rule making, in connection with several proposed regulations. In November 2001, Indotel published for public comment the "National Routing Plan", which, among other things, intends to divide the country into five regions, within each of which telephone calls would be deemed local. In December 2001, Indotel initiated a public inquiry process for the issuance of pending interconnection regulations. The draft interconnection regulations include the unbundling tenet and several other elements similar to those of the system under the US 1996 Telecommunications Act. In January 2002, Indotel commenced a public inquiry process as to several other regulation projects including a non-rounding up regulation which seeks to establish the second as the traffic measurement and pricing unit within the telephone network. This impedes telephone companies from being able to 39 round up to the next minute fractions of traffic (though a call lasting less than a minute can be rounded up to one minute). Another proposed regulation is aimed at providing subscribers the right to choose whether or not to use the voice mail services of the called party. The adoption and implementation of all or any one of these proposed regulations could have a financial impact on our telecommunications business. PROPOSED CABLE REGULATION In July 2001, Indotel initiated a public inquiry process in connection with a proposed cable broadcasting regulation. The draft cable broadcasting regulation contemplates the "must-carry" rule. Under such rule, cable systems are required to carry virtually "for free" the signals of UHF and VHF channels. The adoption and implementation of this proposed regulation could have a financial impact on our cable television business. OUR CONCESSION AGREEMENT In accordance with former Law No. 118, we entered into a concession agreement with the Dominican government in 1990 under which we were issued a non-exclusive license to establish, maintain and operate a system of telecommunications services throughout the Dominican Republic, as well as between the Dominican Republic and international points. The services which we were permitted to provide under the 1990 concession agreement included telegraphy, radio communications, paging, cellular and local, domestic and international telephone services. In February 1996, we entered into a new concession agreement with the Dominican government which superseded the 1990 concession agreement. Under the 1996 concession agreement, we were granted the same non-exclusive license as provided in the 1990 concession agreement to establish, maintain and operate a telecommunications system throughout the Dominican Republic until June 30, 2010. Under our original provisions, the concession agreement and the license granted under it are renewable automatically for 20-year periods unless, at least three years prior to the end of the then existing term, either we or the Dominican government advise each other of our intention not to renew. Law No. 153-98 establishes that the renewal must be requested during the one year immediately prior to the expiration of the concession, and that the reasons for non-renewal shall be only those set forth in the law. Law No. 153-98 established that within one year after its effectiveness each concession must be adjusted to the provisions of the new law. Indotel has issued Resolution No. 005-99 on December 1999 for such purposes, requesting, as a first step, information on each of the telecommunications companies with valid concession agreements. We have complied with these requirements. Nonetheless, it seems that Indotel is still evaluating all cases and has not yet completed the process of adjustment for any of the currently existing concession agreements. The provisions of our 1996 concession agreement relating to our tax obligations differ from those of the 1990 concession agreement. Under the 1996 concession agreement, we do not pay income tax imposed on other Dominican corporations but make payments to the Dominican government in lieu of income tax on the same basis as Codetel pursuant to its concession agreement. We must pay to the Dominican government, within the first ten days of each month: (1) 10% of gross domestic revenues collected by us during the preceding month for telephone services, telegraph services, paging services, cellular services, local, national and international call services, as well as for any data transmission or broadcast services, and any other related telecommunications services provided by us to our clients, minus any access charges paid to Codetel and to any other company for interconnection, and (2) 10% of net settlement revenues collected from foreign correspondent carriers for the use of our network for termination of international long distance calls. The minimum payment to the Dominican government in lieu of income tax by us is RD$18.0 million ($1.2 million) per annum. We have the right to deduct monthly up to one percent of our tax for outstanding debts 40 from the government of 180 days or more and are entitled to the same exemptions granted to other telecommunications companies under their concessions, with the exception of the following taxes: - import duties - selective consumption tax - taxes on the transfer of industrialized goods and services and exchanging commission. The 10% selective consumption tax previously charged on billings of international and domestic long distance traffic to customers was repealed by Law No. 153-98 and substituted with the 2% CDT tax. In addition, under the 1996 concession agreement, the Dominican government is obligated to grant to us any term or condition that it grants by concession to any other telecommunications provider in the Dominican Republic more favorable than those contained in the 1996 concession agreement. Under the Dominican Constitution, agreements with the Dominican government which contain exemptions from income tax, such as our concession agreement, only become effective upon approval by the Dominican Congress. Neither our concession agreement nor the concession agreements of Codetel, All America Cables & Radio and other companies have been submitted to the Dominican National Congress. We are not aware of any plans of the Dominican government to submit our concession agreement for approval to the Dominican Congress. If our concession agreement is presented to the Dominican Congress, it may not validate the provisions of our concession agreement relating to the payment of taxes. Prior to entering into our existing concession agreement in 1996, Dominican tax authorities asserted that we were required to make payments in lieu of taxes equal to 18% of gross domestic revenues, as was provided in our 1990 concession agreement. If the provisions relating to the payment of taxes in the 1996 concession agreement were to be disapproved by the Dominican Congress, we believe that Dominican tax law would require the payment of a tax equal to 25% of our adjusted net income, and never less than 1.5% of gross revenues, advanced on a monthly basis, the current tax regime generally applicable to Dominican corporate taxpayers. CODETEL'S CONCESSION AGREEMENT Codetel's concession from the Dominican government, originally granted in 1930, was modified on January 23, 1995. The terms of Codetel's concession are substantially identical to those of our 1996 concession agreement. Codetel's concession, like our concession agreement, must be approved by the Dominican Congress because it contains an exemption from the income tax applicable to Dominican corporations. The license provides it with the right to construct, maintain and operate a telecommunications system throughout the Dominican Republic and between the Dominican Republic and other countries. Codetel's concession agreement is valid until April 30, 2010; our concession agreement is valid until June 30, 2010. Codetel's concession agreement, as well as our concession agreement, must be revised and adjusted to the provisions and general principles of the new legislation one year after the law takes effect. Codetel, like us, has complied with the information requirements of Indotel, under Resolution No. 005-99, but it is still in the process of adjusting its concession agreement in accordance with the provisions of Law No. 153-98. Codetel, like us, is required to pay a fixed monthly tax imposed on gross domestic income, and net revenues from international settlement payments. Codetel's minimum tax payment is RD$360.0 million ($23.0 million) per annum compared to our minimum of RD$18.0 million ($1.1 million). INTERCONNECTION RESOLUTIONS Article 123 of Law No. 153-98 provides that the new regulator, Indotel, must issue an Interconnection Regulation. On August 1, 1998, the Directorate General, acting provisionally until Indotel was formed, enacted Resolution No. 98-01, which contains the provisional regulation for the application and collection of the contribution for the development of the telecommunications. On August 10, 1998, the Directorate General enacted Resolution No. 98-03, which reorganizes the general assignment of the cellular frequency bands and granted us a 41 license to operate all of Band A and its frequency expansions under sub-bands A, and it also granted a license to Codetel to operate Band B completely, and its expansion under sub-bands B. OUR INTERCONNECTION AGREEMENT WITH CODETEL In May 1994, we entered into an interconnection agreement with Codetel which sets forth the terms and conditions for interconnection between each party's network in the Dominican Republic. The interconnection agreement, which has an indefinite term, requires each of us to provide access to the other's respective network on equal, nondiscriminatory and transparent terms. Additionally, the interconnection agreement obligates each party to provide to the other any terms or conditions more favorable than it provides to any other telecommunications entity for interconnection. Under the interconnection agreement, the parties began paying an interconnection charge for local-to-local traffic in 1996, which is revised annually. Additionally, use of the network by either us or Codetel to originate or terminate cellular, domestic long distance and international long distance calls requires payment of an access charge, which is reviewed annually and is calculated based upon an established formula. The access charge consists of a usage charge and a subsidy charge which only is incurred with respect to international calls. On January 2, 1998, we and Codetel executed an addendum to the interconnection agreement which provides, among other things, that it will: (1) remove any technical or operational impediment to telephone users accessing our network from Codetel's network; (2) automatically deliver to us the identification number of any call originating on Codetel's network which is subject to our access charge; (3) install interconnection facilities without delay upon our request, provided that we bear the expense of installing any such facilities; (4) connect calls to emergency services and toll-free numbers on Codetel's network, and make operators available to assist calls from our network to numbers on Codetel's network; and (5) make Codetel's database of telephone numbers available to us at no charge on a trimonthly basis. On January 11, 2000, we and Codetel executed a second addendum to the interconnection agreement to: (1) provide that local interconnection of each company's respective Internet nodes and to enable the clients of each company to access both our respective servers and nodes to access the Internet; (2) simplify the billing and collection process for interconnection services; and (3) amend the regulation on interconnection costs. In addition, the second interconnection amendment adjusted the access charges by: (1) lowering the charge for international long distance calls from RD$0.86 ($0.05) per minute to RD$0.84 ($0.05) per minute for the first quarter of 2000, RD$0.80 ($0.05) per minute for the second quarter of 2000, RD$0.76 ($0.05) per minute for the third quarter of 2000, RD$0.72 ($0.04) per minute for the fourth quarter of 2000, and RD$0.68 ($0.04) starting January 1, 2001; (2) increasing the charges for national long distance calls and calls made from cellular telephones from RD$0.63 ($0.04) to RD$0.68 ($0.04); and 42 (3) charging for "calling party pays" traffic a use charge of RD$0.68 ($0.04) per minute and a variable complementary charge depending on the amount of cellular lines on service. Law No. 153-98 establishes that interconnection agreements entered into by the providers must be revised and readjusted to reflect and incorporate the provisions and general principles set forth in the new law within one year from the effectiveness of the law. Indotel is expected to issue a regulation for these purposes, but has not, to this date, done so. Codetel and we have, through our second addendum to the interconnection agreement, adjusted our interconnection agreement to the provisions of Law No. 153-98. U.S. TELECOMMUNICATIONS REGULATION The following summary of United States regulatory developments does not purport to describe all present and proposed regulations and legislation affecting the telecommunications industry. Other existing federal and state regulations are currently the subject of judicial proceedings, legislative hearings and administrative proposals which could change, in varying degrees, the regulation of telecommunications companies in the United States. Certain FCC international policies apply to all carriers that originate or terminate telecommunications services in the United States. Through several policy initiatives in the last several years, the FCC has encouraged greater competition in foreign markets. A particular focus of the FCC has been "accounting rates" or "settlement rates," which are the amount of payment negotiated between carriers for the termination of international telephone calls. On August 7, 1997, the FCC adopted a Report and Order regarding the regulation of international accounting rates. The order establishes certain settlement rate benchmarks based on foreign carriers' publicly available tariffed rates and data published by the International Telecommunications Union, which the FCC refers to as the "tariffed components price" or "TCP" methodology. Under the TCP methodology, the FCC analyzes three tariffed network elements: (1) international transmission facilities; (2) international switching facilities; and (3) national extension (domestic transport and termination). The FCC also considers each country's level of economic development in determining country-specific settlement benchmark rates. The FCC has grouped each country into one of four categories based on its level of economic development--upper income, upper middle income, lower middle income and lower income. The settlement rate benchmark for each category is calculated using the average of the TCPs for all countries in each respective category. The per-minute benchmark settlement rates are $0.15 for upper income, $0.19 for upper middle income, $0.19 for lower middle income and $0.23 for lower income. Under the FCC's income categories, the Dominican Republic is in the lower middle income group and our benchmark settlement rate would be $0.19 cents per minute. Pursuant to the order, U.S. carriers were required to enter into settlement rate arrangements with foreign carriers in lower middle income countries at or below the applicable benchmark rate by January 1, 2001. Currently, TRICOM's settlement benchmark rate for the Dominican Republic is within the prescribed limits. In April 1999, the FCC adopted an order approving sweeping reform of the international settlements policy. The 1999 order deregulated inter-carrier settlement arrangements between U.S. carriers and foreign non-dominant carriers on competitive routes. Among other rule amendments, the FCC's April 1999 order eliminated the international settlements policy and contract filing requirements for arrangements with foreign carriers that lack market power. 43 On February 15, 1997, 69 countries (including the United States and the Dominican Republic) signed a global agreement on basic telecommunications services. Under the auspices of the World Trade Organization, the global agreement aims to increase competition among its signatories through the removal or lowering of entry barriers to foreign markets and the implementation of pro-competitive regulatory principles. On February 5, 1998, the global agreement went into effect. In an order released in November 1997, the FCC took the steps necessary to open the U.S. market to increased competition, in accordance with U.S. commitments in the WTO Basic Telecom Agreement. The FCC adopted an open entry standard for applicants from WTO Members seeking to: (1) obtain Section 214 authority from the FCC to provide international facilities-based, resold switched and resold non-interconnected private line services; (2) receive authorization to exceed the 25 percent indirect foreign ownership benchmark in Section 310(b)(4) of the Communications Act for wireless licenses; and (3) receive submarine cable landing licenses. The FCC's open entry standard includes a presumption in favor of foreign participation by applicants from WTO member countries. On September 11, 1995, the FCC issued an order approving the application of Domtel Communications, Inc., which later changed its name to TRICOM USA, Inc., to provide, on a facilities-based basis, voice, data and private line services between the United States and various international points, including the Dominican Republic. The FCC also approved Domtel Communications, Inc. as a non-dominant provider on all routes, including to the Dominican Republic. We began initiating U.S. traffic pursuant to this authorization in 1997. Domtel Communications, Inc. was also granted global resale authority by the FCC in 1996. Since the effectiveness of the interconnection agreement with Codetel, we have entered into operating agreements with U.S. correspondents. TRICOM USA, Inc. also has the ability as a U.S. carrier to develop its own business plan for markets other than the Dominican Republic, and has been approved by the FCC to communicate from the United States with 186 countries via satellite and with 28 countries via fiber optic submarine cables. As a carrier holding an international authorization from the FCC, TRICOM USA is subject to various statutory and regulatory telecommunications mandates, including the duty to offer services at just and reasonable rates, the obligation to file and maintain tariffs at the FCC setting forth TRICOM USA's rates, terms and conditions, and the requirement to obtain prior approval for most transfers of control and assignments of authorizations, except those considered non-substantial, or "pro forma" under FCC rules. The FCC may address regulatory non-compliance with a variety of enforcement mechanisms, including monetary forfeitures, refund orders, injunctive relief, license conditions, and/or license revocation. We believe we are in compliance with all material laws and regulations in the countries in which we operate. Future regulatory, judicial, or legislative activities could have a material adverse effect on our financial condition, results of operations or cash flow. We are certified by the public utility commissions of Puerto Rico, Florida and New York, and are currently in the process of obtaining certification in Alaska, California, Georgia, Illinois, Maryland, Massachusetts, New Jersey, Pennsylvania, Rhode Island, U.S. Virgin Islands, including St. Thomas and St. John, and Washington, D.C. In addition, TRICOM USA obtained on July 7, 2000 a Class B License for the provision of international telecommunications services, and is in the process of registering to do business in Ontario and Quebec. TRICOM USA does not operate telecommunications facilities used in transporting basic telecommunications service traffic between Canada and other countries. TRICOM USA's services in Canada are provided through a service arrangement with MCI WorldCom, to handle traffic originated from the prepaid calling cards sold in Canada. 44 As we expand our operations into other countries, we may become subject to varying degrees of regulation in those jurisdictions where we provide service. Laws and regulations regarding telecommunications differ significantly from country to country. PROPERTY, PLANT AND EQUIPMENT Our principal properties consist of our fiber optic network, satellite earth stations, nodes and real estate. At December 31, 2001, the net book value of our real estate and equipment was approximately $686 million. Our real estate holdings are strategically located throughout the Dominican Republic, providing the infrastructure for the telecommunications network and sales facilities. Most of our properties are related directly to our telecommunications operations and are used for network equipment of various types, such as telephone exchanges, transmission stations, wireless point-to-point radio equipment and digital switching nodes. Our current headquarters are located in downtown Santo Domingo in a building that we own. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS REVENUE OVERVIEW We derive our operating revenues primarily from toll revenues, international revenues, local services, data and Internet, cellular and PCS services, cable television services, the sale of equipment and installations. The components of each of these services are as follows: Toll revenues are amounts we receive from our customers in the Dominican Republic for international and domestic long distance calls, as well as interconnection charges received from Codetel, the incumbent local service provider, and other carriers, for calls that originate in or transit their networks but terminate in our network. Toll revenues are generated by residential and commercial customers, calling card users, cellular and PCS subscribers and retail telephone centers, and large corporate accounts. Toll revenues are recognized as they are billed to customers, except for revenues from prepaid calling cards, which are recognized as the calling cards are used or expire. International revenues represent amounts recognized by us for termination of traffic from foreign telecommunications carriers to the Dominican Republic. Traffic is based on the minutes that the foreign telecommunications companies have terminated in the Dominican telecommunications network, either on our own network or on Codetel's network, including revenues derived from our U.S.-based international long distance prepaid calling cards. Local service revenues consist of monthly fees, local measured service and local measured charges for value-added services, including call forwarding, three-way calling, call waiting and voicemail, as well as calls made to cellular users under the calling-party-pays system and revenues from other miscellaneous local access services. Local measured service includes monthly phone line rental for a specified number of calls within a defined area, plus a charge for additional calls. Data and Internet revenues consist of fixed monthly fees received from our residential and corporate customers for high speed broadband data transmission and Internet connectivity services, including traditional dial-up connections, dedicated lines, private networks, frame relay, digital subscriber lines, or xDSLs, that provide high-bandwidth transmission of voice and data over regular telephone lines and very small aperture terminals, or VSATs, relatively small satellite antennas used for high speed satellite-based single to multiple point data transmissions, including for the internet. Cellular and PCS revenues represent fees received for mobile cellular and PCS services, including interconnection charges for calls incoming to our cellular and PCS subscribers from other companies' subscribers. Cellular and PCS revenues do not include fees received for international long distance calls generated by our cellular and PCS subscribers. Cellular and PCS fees consist of fixed monthly fees, per minute usage charges and additional charges for value-added services, including call waiting, call forwarding, three-way calling and voicemail, and for other miscellaneous cellular and PCS services. 45 Paging revenues consist of fixed monthly charges for nationwide service and use of paging equipment and activation fees. Beginning in 1999, we determined that paging will not play a major role in our future marketing programs. Revenues from the sale of equipment consist of sales fees for customer premise equipment, including private automatic branch exchanges, which are small versions of a phone company's central switching system often used by private companies, and key telephone systems, residential telephones, cellular and PCS handsets and paging units. Cable television revenues consist of monthly fees derived from basic programming, expanded basic programming, premium services, digital music services, Internet access, installation and revenues from advertising sales to national advertisers on non-broadcast channels we carry over our cable communications systems. Cable television revenues are recognized when the service is provided and collection is probable. Installation revenues consist of fees we charge for installing local access lines, private branch exchanges and key telephone systems as well as fees for activating cellular phones and PCS. Beginning with January 1, 2000, we have recognized these revenues over the estimated period in which, based on our experience, we retain such clients. Initially we estimated this period as 35 months. Effective October 2, 2001, we revised this period to 24 months, based on our experience with clients. In prior periods, we recognized these revenues when they were collected. Other revenues consist of revenues that are not generated from our core businesses, including commissions received for providing package handling services for a courier and commissions received for collection services for utility companies. 46 The following table sets forth the percentage contribution of each category of revenues to total operating revenues for the period indicated:
YEAR ENDED DECEMBER 31, ---------------------------- 1999 2000 2001 -------- -------- -------- Toll 13.5% 12.8% 11.9% International 35.5 37.5 33.6 Local service 19.5 22.9 26.0 Data and Internet 0.3 1.5 3.4 Cellular and PCS 15.5 16.0 15.3 Paging 1.6 0.8 0.4 Sale of equipment 4.5 2.3 1.1 Installation and activation fees 9.1 6.1 5.9 Cable - - 1.9 Other 0.5 0.1 0.4 -------- -------- -------- 100.0% 100.0% 100.0% ======== ======== ========
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:
YEAR ENDED DECEMBER 31, --------------------------- 1999 2000 2001 -------- ------- -------- Operating costs 75.7% 81.7% 94.1% Operating income 24.3 18.3 5.9 Interest expense, net 11.7 13.7 16.3 Other income (expenses), net (11.2) (13.9) (15.9) Earnings (loss) before income taxes, minority interest and cumulative effect of accounting change 13.1 4.4 (10.0) Net earnings (loss) 12.9 (3.2) (9.5) EBITDA 44.1 39.1 33.7
2001 COMPARED TO 2000 OPERATING REVENUES. Our total operating revenues increased 8.7% to $243.8 million in 2001 from $224.3 million in 2000. This growth stemmed primarily from increases in revenues from local service, data and Internet, cable television and wireless services, offset, in part, by decreased international revenues and decreased revenues from the sale and lease of equipment. TOLL. Toll revenues increased 1.2% to $29.0 million during 2001 from $28.7 million for 2000, primarily as a result of higher interconnection charges and a higher volume of domestic long distance traffic, offset, in part, by decreased revenues derived from outbound international traffic. Revenues from interconnection charges increased 13.3% to $8.1 million during 2001 from $7.2 million in 2000. The increase in interconnection charges reflected the growth in our local access subscription base, as well as growth in the Dominican telephony markets. Revenues from outbound international calls decreased by 12% to $14.5 million during 2001 from $16.5 million in 2000, primarily as a result of a decrease in the price per minute for outbound international calls for residential and commercial customers. The average price per minute for outbound international calls declined to 47 $0.54 in 2001 from $0.89 in 2000. Outbound international minutes increased by 1.9% to 33.1 million in 2001 from 32.5 million minutes during 2000, reflecting increased traffic volume from our cellular and PCS customers. Domestic long distance revenues increased 5.9% to $5.4 million during 2001 from $5.0 million in 2000. Domestic long distance minutes increased by 10.8% to 50.8 million minutes during 2001 from 45.9 million minutes during 2000. The increase in domestic long distance minutes resulted from higher traffic volume from our retail call centers. The increase in domestic long distance minutes was offset in part by an approximate 16% decrease in 2001 in the average price per minute. Pending regulatory proposals that would divide the Dominican Republic into five zones and provide that intrazone calls are local could have the effect of decreasing rates for some calls if the regulations are adopted. INTERNATIONAL. Our international revenues decreased 2.6% to $82.0 million in 2001 from $84.2 million in 2000, primarily as the result of continued pricing pressures for traffic between the United States and the Dominican Republic. Our average settlement rate was $0.095 per minute during 2000 and $0.053 per minute during 2001. The volume gains achieved in 2001 were not sufficient to offset pricing declines, particularly during the fourth quarter of 2001, in which international revenues decreased 16% from international revenues in the fourth quarter of 2000. Inbound minutes increased by 30% to 732.7 million minutes in 2001 from 563.4 million in 2000. TRICOM USA accounted for approximately 86.0% of our total inbound minutes in 2001 compared to 71.1% in 2000. Total minutes from our U.S.-based international long distance prepaid cards increased by 48.1% to 205.2 million minutes in 2001 from 138.6 million during 2000. Revenues from our U.S. based international long distance prepaid calling cards increased by 27.6% to $31.6 million in 2001 from $24.8 million in 2000. LOCAL SERVICE. Local service revenues increased 23.6% to $63.4 million during 2001 from $51.3 million in 2000, primarily as the result of the continued growth in the number of local lines in service. In 2001, we added 29,040 net local access lines compared to 29,386 net local access lines added in 2000. At December 31, 2001, we had 177,352 local access lines in service compared to 148,312 local access lines in service at December 31, 2000 representing a 19.6% increase. As a result of a higher number of lines in service, measured local service revenues increased by 23.1% to $13.2 million in 2001 from $10.8 million in 2000. Revenues from monthly fees increased by 20.6% to $40.3 million in 2001 from $33.4 million in 2000. Revenues derived from cellular calls under the calling-party-pays system increased by 37.3% to $6.5 million in 2001 from $4.8 million in 2000. Our average monthly churn rate for local service was 1.9% in 2001 compared to 2.3% in 2000. We calculate our average monthly churn rate by dividing the number of subscribers disconnected during a given period by the sum of subscribers at the beginning of each month during such period. DATA AND INTERNET. Data and Internet service revenues increased 138.9% to $8.3 million in 2001 from $3.0 million in 2000, primarily as the result of the continued growth in the number of data and Internet subscribers. The number of our data and Internet subscribers grew to 8,713 at December 31, 2001 compared to 6,080 at December 31, 2000. The increase in revenue also reflects an increase in our average basic monthly rent as well as revenues that we received from our contract with the Dominican government to provide data and Internet services to Dominican public high schools. CELLULAR AND PCS. Our cellular and PCS revenues grew 4.2% to $37.3 million in 2001 from $35.8 million in 2000. The growth in our wireless operations was the result of a 27.7% increase in subscribers. At December 31, 2001, we had 364,059 cellular and PCS subscribers compared to 284,991 at December 31, 2000. As a result of a higher average subscriber base, minutes of usage increased 22.6% to 204.2 million minutes in 2001 from 166.6 million minutes in 2000. The average price per minute of use declined to $0.20 in 2001 from $0.24 in 2000, reflecting increased price competition initiated by new entrants to the market in 2000. We attribute the substantial growth of our subscriber base to the continued success of our prepaid cellular program. Prepaid cellular and PCS services generated approximately 70% of our total minutes of use and 71% of total cellular and PCS revenues in 2001. Prepaid revenues increased by 27.6% to $26.7 million in 2001 from $20.9 million in 2000. Revenues from post paid subscribers declined by 16.8% in 2001 from 2000, reflecting a decline in the number of post paid subscribers. We initiated programs in 2002, which have resulted in increasing our postpaid 48 subscriber base. Our average monthly churn rate for cellular and PCS services increased to 4.6% in the 2001 from 3.3% in 2000 reflecting primarily our decision to disconnect low-usage prepaid subscribers during 2001. PAGING. Paging revenues decreased 38.3% to $1.1 million in 2001 from $1.7 million in 2000, primarily as a result of the Company's decision to focus on having new customers move away from paging services and into prepaid cellular services. At December 31, 2001, we had 12,090 paging subscribers compared to 21,622 paging subscribers at December 31, 2000. Our average monthly churn rate for paging services increased to 4.3% in 2001 from 3.3% in 2000. SALE OF EQUIPMENT. Revenues from the sale of equipment decreased 49% to $2.7 million in 2001 from $5.3 million in 2000, primarily as a result of lower sales of cellular and PCS handsets and private branch exchanges and key telephone systems. We have entered into arrangements for the distribution of cellular and PCS services through major electronics retailers. These arrangements have decreased equipment sales revenues but we believe added subscribers and we believe contribute to increased cellular and PCS service revenues. INSTALLATION AND ACTIVATION. Installation and activation revenues increased 4.4% to $14.3 million in 2001 from $13.7 million in 2000, primarily as a result of higher average activation fees for local access service, offset, in part, by lower revenues derived from lower average activation fees charged for cellular and PCS services. In response to competition, recently we have not charged activation fees for new cellular and PCS customers. CABLE TELEVISION. In the fourth quarter of 2001, we acquired the shares of TCN Dominicana, S.A., a wholly-owned subsidiary of Telecable Nacional, C. por A., that owns and operates the largest multi-channel system in the Dominican Republic's pay-TV market including the concession granted by the Dominican government to operate a cable system. Revenues from cable television services totaled $4.7 million in 2001, primarily from basic and premium programming services and advertising sales. At December 31, 2001, we had 64,466 cable subscribers, including 56,896 basic and premium subscribers, and 7,570 commercial rooms. Programming services revenues totaled $3.9 million and advertising revenues totaled $768,000 in 2001. OPERATING COSTS. Major components of operating costs are: - satellite connections and carrier costs, which include amounts owed to foreign carriers for the use of their networks for termination of outbound traffic and payments for international satellite circuit leases; - programming costs, which are amounts paid to programming providers for licenses to broadcast on our cable television network basic and premium programming and other content; - interconnection costs, which are access charges paid primarily to Codetel and payments for international satellite circuit leases; - depreciation of network equipment and leased terminal equipment; - expenses in lieu of income tax; and - selling, general and administrative expenses, which include salaries and other compensation to personnel, non-network depreciation expense, maintenance expenses, marketing expenses, emmissions and other related costs. Our operating costs increased to $229.3 million in 2001 from $183.3 million in 2000. These results reflect higher network and non-network depreciation expenses resulting from a higher depreciable capital base as a result of our capital investment and domestic and international network expansion programs. It also reflects higher general and administrative expense primarily from increased commissions due to the growth of our retail prepaid card 49 operations in the United States. As a percentage of revenues, operating costs increased to 94.1% in 2001 from 81.7% in 2000. SATELLITE CONNECTIONS AND CARRIER COSTS. Satellite connections and carrier costs decreased by 0.4% to $68.3 million in 2001 from $68.6 million in 2000, primarily as a result of lower outbound carrier costs. Outbound carrier costs decreased by 17.6% to $29.3 million in 2001 from $35.6 million in 2000, reflecting decreases in outbound revenues. PROGRAMMING COSTS. Programming costs totaled $1.2 million in 2001. NETWORK DEPRECIATION AND NON-NETWORK DEPRECIATION EXPENSE. Network depreciation increased 51.7% to $44.5 million in 2001 from $29.3 million in 2000, as a result of a higher depreciable asset base due to the continued investments in our local and international networks, including telecommunications equipment and facilities. Non-network depreciation expense with respect to other fixed assets grew 45.4% to $9.9 million in the 2001 from $6.8 million in 2000. EXPENSE IN LIEU OF INCOME TAXES. We make payments to the Dominican government in lieu of income tax equal to 10% of gross domestic revenues, after deducting charges for access to the local network, plus 10% of net international revenues. Expense in lieu of income taxes also includes a tax of 2% on international settlement revenues collected. Expense in lieu of income taxes during 2001 increased by 24.3% to $12.6 million from $10.2 million in 2000. SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and administrative expenses, excluding non-network depreciation expense, increased 39.1% to $88.8 million in 2001 from $63.9 million in 2000. The increase in the amount of selling, general and administrative expenses reflected the greater amount of commissions paid to wholesale distributors of prepaid cards, as a result of a higher number of prepaid cards sold in the United States and the expansion of our prepaid cellular subscriber base in the Dominican Republic, and other expenses, including legal, maintenance and repair of equipment. Commissions paid to wholesale distributors of prepaid cards grew 40.4%% to $16.3 million in 2001 from $11.6 million in 2000. Other expenses increased 29.5% to $18.3 million in 2001 from $14.1 million in 2000. At December 31, 2001, we had 1,829 employees compared to 1,740 employees at December 31, 2000. Salaries and other compensation to personnel increased by 6.6% to $29.0 million in 2001 from $27.2 million in 2000. Marketing expenses increased by 4.1% to $4.5 million in 2001 from $4.3 million in 2000. As a percentage of total operating revenues, selling, general and administrative expenses, excluding non-network depreciation expense, increased to 36.4% in 2001 compared to 28.5% in 2000. COST OF EQUIPMENT SOLD AND OTHER COSTS. Cost of equipment sold, which consists of the cost of sale of customer premise equipment, including private branch exchanges and key telephone systems, as well as cellular and PCS handsets, decreased by 28.9% to $2.1 million in 2001 from $2.9 million in 2000. Other costs, which consist of the cost of sale of prepaid services, increased by 12.6% to $1.7 million in 2001 from $1.6 million in 2000. OPERATING INCOME. Operating income decreased to $14.5 million in 2001 compared to $41.0 million in 2000. Operating income as a percentage of total operating revenues decreased to 5.9% in 2001 from 18.3% in 2000. OTHER INCOME (EXPENSES). Other expenses increased to $38.9 million in 2001 from $31.2 million in 2000, reflecting increased interest expenses resulting from higher average aggregate amount of outstanding debt and despite a decrease in the average interest paid in 2001. We incurred debt primarily to purchase network and telecommunications equipment. NET EARNINGS (LOSS). Net loss totaled $23.1 million, or $0.78 per share, in 2001 compared to a net loss of $7.2 million, or $0.26 per share, in 2000. The net loss in 2000 included the effect of the $16.5 million cumulative effect of the accounting change from the adoption of SAB 101. EBITDA. Earnings before interest and other income, taxes and depreciation and amortization decreased by 6.3% to $82.2 million in 2001 from $87.7 million in 2000. We calculate earnings before interest and other income and 50 expenses, taxes and depreciation and amortization prior to the deduction of payments to the government in lieu of income taxes. 2000 Compared to 1999 OPERATING REVENUES. Our total operating revenues increased 31.3% to $224.3 million in 2000 from $170.8 million in 1999. This growth stemmed primarily from increases in revenues from our international, local service, wireless and toll services, offset, in part, by decreased revenues from the sale and lease of equipment and installations. TOLL. Toll revenues increased 24.0% to $28.7 million during 2000 from $23.1 million for 1999, as a result of higher domestic long distance and outbound international traffic derived from the growth of our customer base. Domestic long distance minutes increased by 47.4% to 45.9 million minutes during 2000 from 31.1 million minutes during 1999. Outbound international minutes increased by 9.4% to 32.5 million minutes in 2000 from 29.7 million minutes in 1999. The increase in numbers of minutes was offset by an decrease of approximately 15% during 2000 of our average per minute long distance tariff. The increases in domestic long distance and outbound minutes resulted from higher traffic volume from our wireless and local service customers. Wireless and local service customers respectively accounted for 32.3% and 31.3% of our total long distance minutes in 2000 compared to 22.3% and 27.9% in 1999. Calls from our call centers account for our remaining minutes. INTERNATIONAL. Our international revenues grew 38.9% to $84.2 million in 2000 from $60.6 million in 1999. This increase was due principally to the growth of inbound traffic volume received from our U.S.-based international carrier, TRICOM USA. Inbound minutes increased by 70.9% to 563.4 million minutes in 2000 from 329.7 million in 1999. TRICOM USA accounted for 71.1% of our total inbound minutes in 2000 compared to 59.4% in 1999. The increase in international revenues was achieved despite the continued trend of decreasing settlement rates for traffic between the United States and the Dominican Republic. Our average settlement rate was $0.14 per minute during 1999 and $0.10 per minute during 2000. We have been able to increase revenues from the provision of international long distance services by increasing the volume of international traffic carried through our network. Future decreases in settlement rates, without corresponding increases in our long distance traffic from the United States, would reduce our international settlement revenues, adversely affect the profit margins that we realize on such traffic and could have a material adverse effect on our business, financial condition and results of operations. LOCAL SERVICE. Local service revenues grew 54.1% to $51.3 million in 2000 from $33.3 million in 1999, primarily as the result of the continued growth in the number of local lines in service. In 2000, we added 29,386 net local access lines compared to 38,310 net local access lines added in 1999. At December 31, 2000, we had 148,312 local access lines in service, including 48,765 wireless local loop lines, compared to 118,926 local access lines in service at December 31, 1999, including 19,284 wireless local lines. The increase in local service revenues also reflects an approximate 15% increase in local access rates. As a result of a higher number of lines in service, interconnection revenues for local calls received from Codetel and other carriers increased 113.8% to $6.2 million in 2000 from $2.9 million in 1999. Our average monthly churn rate for local service was 2.3% for 2000 compared to 1.8% in 1999. We calculate our average monthly churn rate by dividing the number of subscribers disconnected during a given period by the sum of subscribers at the beginning of each month during such period. The increase reflected our policy of financing installation fees for local access adopted in 1999. In October 1999, we reduced installation fees and stopped providing financing, which resulted in decreased monthly churn. DATA AND INTERNET. Data and Internet service revenues grew 518% to $3.5 million in 2000 from $560,000 in 1999, primarily as the result of the continued growth in the number of data and Internet subscribers. Data and Internet subscriber base grew to 6,080 at December 31, 2000 compared to 3,269 at December 31, 1999. CELLULAR AND PCS. Our cellular and PCS revenues grew 35.2% to $35.8 million in 2000 from $26.5 million in 1999. The growth in our wireless operations was the result of a 61.9% increase in subscribers. At December 31, 2000, we had 284,991 cellular and PCS subscribers compared to 176,080 at December 31, 1999. As a result of a 51 higher average subscriber base, airtime minutes increased 27.8% to 166.6 million minutes in 2000 from 130.4 million minutes in 1999. We attribute the substantial growth of our subscriber base to the continued success of our prepaid cellular program. Prepaid cellular and PCS services generated approximately 59% of our total airtime minutes and 58.7% of total cellular and PCS revenues in 2000. Prepaid revenues increased by 44.1% to $20.9 million in 2000 from $14.5 million in 1999. Our average monthly churn rate for cellular and PCS services increased to 3.1% in 2000 from 1.8% in 1999 reflecting primarily our decision in the fourth quarter to eliminate lower revenue-generating prepaid customers by shortening the expiration of our prepaid cards to 30 days. Interconnection revenues attributed to airtime traffic received from Codetel and other carriers increased by 22.4% to $4.3 million in 2000 from $3.5 million in 1999 due to a larger subscriber base, as well as a higher volume of incoming minutes received by prepaid cellular and PCS subscribers. PAGING. Paging revenues decreased 36.8% to $1.7 million in 2000 from $2.7 million in 1999, primarily as a result of the Company's decision to focus on having new customers move away from paging services and into prepaid cellular services. At December 31, 2000, we had 21,622 paging subscribers compared to 28,737 paging subscribers at December 31, 1999. Our average monthly churn rate for paging services increased to 3.4% in 2000 from 2.3% in 1999. SALE OF EQUIPMENT. Revenues from the sale of equipment decreased 31.6% to $5.3 million in 2000 from $7.7 million in 1999, primarily as a result of lower sales of customer premise equipment and cellular and PCS handsets. We have entered into arrangements for the distribution of cellular and PCS services through major electronics retailers. We believe that these arrangements will decrease equipment sales revenues but will add subscribers and increase cellular and PCS service revenues. INSTALLATION AND ACTIVATION. Installation and activation revenues decreased 11.3% to $13.7 million in 2000 from $15.5 million in 1999. The decrease in installation and activation revenues was due to an aggressive promotional marketing strategy undertaken during 2000, which included lowering subscriber activation fees for wireless and local access service, and the effect of adopting a new accounting pronouncement, SAB 101, resulting in the deferral of the recognition of installation revenues and activation fees. Our operating costs increased to $183.3 million in 2000 from $129.4 million in 1999. These results reflect increased satellite connection and carrier costs associated with higher volumes of international traffic; higher general and administrative expenses primarily from increased commissions due to the growth of our retail operations in the U.S.; and higher network depreciation expenses resulting from our capital investment and domestic and international network expansion programs. As a percentage of revenues, operating costs increased to 81.7% in 2000 from 75.7% in 1999. SATELLITE CONNECTIONS AND CARRIER COSTS. Satellite connections and carrier costs increased by 57.0% to $68.6 million in 2000 from $43.7 million in 1999, primarily as a result of higher outbound carrier costs, as well as higher interconnection costs. Outbound carrier costs increased by 86.1% to $35.6 million in 2000 from $19.1 million in 1999. The increase was attributable to increased international traffic through our TRICOM USA hubbing operations. Interconnection costs increased by 37.9% to $27.0 million in 2000 from $19.8 million in 1999, the result of a higher volume of inbound traffic terminating in Codetel's network. NETWORK DEPRECIATION AND NON-NETWORK DEPRECIATION EXPENSE. Network depreciation increased 83.6% to $29.3 million in 2000 from $16.0 million in 1999, as a result of the continued investments in our local and international networks, including telecommunications equipment and facilities. Non-network depreciation expense with respect to other fixed assets grew 40.6% to $6.8 million in 2000 from $4.9 million in 1999. EXPENSE IN LIEU OF INCOME TAXES. We make payments to the Dominican government in lieu of income tax equal to 10% of gross domestic revenues, after deducting charges for access to the local network, plus 10% of net international revenues. Expense in lieu of income taxes also includes a tax of 2% on international settlement revenues collected. Expense in lieu of income taxes during 2000 decreased by 20.3% to $10.2 million from $12.8 million in 1999. The decrease reflects increases in international costs, interconnection costs and accounts receivable 52 reserve which are deducted from revenues in calculating the tax and which increased at a greater rate than the increase in domestic revenues on which the tax is based. SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and administrative expenses, excluding non-network depreciation expense, increased 36.9% to $63.9 million in 2000 from $46.6 million in 1999. The increase in the amount of selling, general and administrative expenses reflected the greater amount of commissions paid to wholesale distributors of prepaid cards as a result of higher revenues from sales of the cards and increased personnel costs due to a higher employee headcount. At December 31, 2000, we had 1,740 employees compared to 1,534 employees at December 31, 1999. As a percentage of total operating revenues, selling, general and administrative expenses, including non-network depreciation expense, increased to 28.5% in 2000 compared to 27.3% in 1999. Commissions paid to wholesale distributors of prepaid cards grew 89.3% to $11.6 million in 2000 from $6.1 million in 1999, primarily as a result of the expansion of our prepaid cellular subscriber base, and a 113% increase in the number of prepaid cards sold in the United States in 2000. COST OF EQUIPMENT SOLD AND OTHER COSTS. Cost of equipment sold, which consists of the cost of sale of customer premise equipment, including private branch exchanges and key telephone systems, as well as cellular and PCS handsets, decreased by 27% to $2.9 million in 2000 from $4.0 million in 1999, primarily as a result of the lower cost of sale from residential telephones, cellular and PCS handsets and paging units. Other costs, which consist of the cost of sale of prepaid services, increased by 8.2% to $1.6 million in 2000 from $1.4 million in 1999. OPERATING INCOME. Operating income was approximately $41.0 million in 2000 compared to $41.5 million in 1999. Operating income as a percentage of total operating revenues decreased to 18.3% in 2000 from 24.3% in 1999. OTHER INCOME (EXPENSES). Other expenses increased to $31.2 million in 2000 from $19.2 million in 1999, reflecting increased interest expenses resulting from higher short-term bank borrowings and vendor financing used to purchase network and telecommunications equipment. NET EARNINGS (LOSS). Earnings before cumulative effect or accounting change totaled $9.2 million, or $0.33 per share, in 2000 compared to $22.2 million, or $0.89 per share, in 1999. Including the $16.5 million cumulative effect of accounting change for the adoption of SAB 101, we had a net loss of $7.2 million, or $0.26 per share, in 2000. EBITDA. Earnings before interest and other income, taxes and depreciation and amortization increased by 16.5% to $87.7 million in 2000 from $75.3 million in 1999. We calculate earnings before interest and other income and expenses, taxes and depreciation and amortization prior to the deduction of payments to the government in lieu of income taxes. ACQUISITIONS In April, 2001, we purchased a 51% interest in a Panamanian company, Cellular Communications of Panama, S.A., now TRICOM Panama, S.A., for approximately $8.1 million. TRICOM Panama has approximately 1,750 analog mobile users and owns the frequency rights for 107 channels of 25 MHz each. These frequencies will give us access to nationwide coverage, covering a population of approximately 2.81 million people. Currently, we are constructing an iDEN(R) network, at a cost as of December 31, 2001 of approximately $37 million, in Panama City and Colon, the two largest cities in Panama, and in important transportation corridors in other parts of the country. Our expected completion date for this phase of the buildout is the second quarter of 2002. We will offer digital mobile integrated services, including two-way radio, paging and interconnect services. On October 26, 2001, we acquired the shares of TCN Dominicana, S.A., a wholly-owned subsidiary of Telecable Nacional, C. por A., that owns and operates the largest multi-channel system in the Dominican Republic's pay-TV market including the concession granted by the Dominican government to operate a cable system. The transaction was valued at approximately $1,130 per subscriber equivalent or approximately $64.0 million, payable $41.8 million in cash and with 3,375,000 shares of our Class A common stock. TCN Dominicana is the leader of the Dominican cable television market with a 43% market share, serving 64,466 cable subscribers, including 56,896 53 basic and premium subscribers and 7,570 commercial rooms, with close to 170,000 homes passed as of December 31, 2001. We intend to expand our subscriber base by increasing our penetration rate over existing homes passed and by expanding the reach of our existing cable network, as well as by marketing our various Internet access services and introducing new multimedia products and services. CRITICAL ACCOUNTING POLICIES During the year ended December 31, 2000, we adopted the U.S. Securities and Exchange Commission's Staff Accounting Bulletin No. 101 concerning the recognition of revenue. This pronouncement provides that we recognize net revenues from installations and activations over the period in which we retain our clients. At the time we adopted SAB 101, we charged activation and installation fees to subscribers for cellular and PCS services and for local access lines. In preparing our financial statements for the year ended December 31, 2000, we estimated that the average service life for our customers that we charged activation and installation fees was 35 months. We based our estimate of average service life on our experience during the preceding five years, which included periods in which we were initiating and developing these service offerings. At December 31, 2000, deferred revenues for installations and activations aggregated $14,654,886, which we anticipated recognizing as follows: $9,010,741 in 2001; $4,793,662 in 2002; and $850,483 in 2003. Effective October 1, 2001, we updated our estimate of the average service life for our customers from 35 to 24 months. We based our revision on our experience during the preceding three years, which we regarded as more representative of current market conditions. The number of wireless subscribers and subscribers for local access lines increased substantially during that period. We also face increased competition, particularly in the wireless markets in which there have been new market entrants since 2000 which have captured significant market share. As a result of these and other factors, our average monthly disconnection or churn rate increased during 2001. We expect these factors to continue to affect our ability to retain customers. As revised, for 2000 and 2001, we recognized revenue of $8,940,040 and $7,512,759 associated with the accounting change from the adoption of SAB 101. Based upon recent market trends to reduce activation fees for wireless and local service, we anticipate that our activation fees and deferred revenue may decrease in the future. In addition, in October 2001, we acquired TCN Dominicana, the largest operator of cable television systems in the Dominican Republic. TCN did not consistently charge fees for the installation and activation of cable service. We currently charge a $50 installation fee. We will apply Staff Accounting Bulletin 101 to the recognition of installation and activation fees for cable service beginning in 2002. However, we do not have experience sufficient yet to determine the average customer service life for cable subscribers. ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141") and No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, we are required to adopt SFAS 142 effective January 1, 2002. The Company's amortization of goodwill for the year ended December 31, 2001 totaled approximately $47,000. Currently, we do not believe that the provisions of SFAS 142 will have a significant effect on our results of operations and financial position. EFFECTS OF INFLATION The annual inflation rate in the Dominican Republic was 5.1% for 1999, 9.0% for 2000 and 4.4% for 2001. The effects of inflation on our operations have not been significant. 54 CHANGE IN FUNCTIONAL AND REPORTING CURRENCY Through December 31, 1996, we used the Dominican peso as our functional and reporting currency. While a significant portion of our revenues, assets and liabilities historically were denominated in U.S. dollars, a clear determination of the functional currency was difficult, and we used the Dominican peso as our functional currency. However, in our opinion, with the issuance of the 11 3/8% senior notes due 2004, in August 1997, our cash flows and financial results of operations are more appropriately presented in the U.S. dollar as the functional currency. Effective January 1, 1997, we changed our functional currency from the Dominican peso to the U.S. dollar. Our financial statements for periods prior to January 1, 1997 have not been restated for this change in the functional currency. However, we did retroactively change our reporting currency to the U.S. dollar. LIQUIDITY AND CAPITAL RESOURCES Substantial capital is required to expand and operate our telecommunications networks. For 2001, we made capital expenditures of $116.5 million, including $37 million incurred for the construction of our iDEN(R) network in Panama. The remaining amount, approximately $79.5 million, was for the installation of additional local access lines, enhancement of our cellular and PCS network, expansion of international facilities and other network improvements, primarily in the Dominican Republic. We currently anticipate making capital expenditures of approximately $65 million in 2002 for increasing capacity and coverage in our local access and mobile networks, continuing the rollout of our bi-directional cable network to support the deployment of digital and interactive services, expanding our international facilities to support increased traffic volume, expanding our local network and other international expansion and for the implementation of our iDEN(R) based network in Panama. In Panama, we expect to expend up to $8 million, primarily for the purchase of handsets. However, the amounts to be invested for these purposes, particularly in Panama, will depend upon a number of factors, including primarily the demand for our services. We currently do not intend to develop a network in either Guatemala or El Salvador in 2002. We have satisfied our working capital requirements and funded capital expenditures from cash generated from operations, short and long-term borrowings, trade finance, capital leases, vendor financing and equity and debt issuances. We believe our cash generated by operations and borrowings available to us will be sufficient to fund our expected capital expenditures through the end of 2002. We frequently evaluate potential acquisitions and joint venture investments. Acquisitions or investments may require us to obtain additional financing. There can be no assurance that additional funding sources will be available to us on terms which we find acceptable or at all. Net cash provided by operating activities was $42.3 million for 2000 and $34.0 million for 2001. We had net accounts receivable of $32.1 million and $34.5 million at December 31, 2000 and December 31, 2001. Our indebtedness was approximately $498.2 million at December 31, 2001, of which $200.0 million was our 113/8% senior notes due 2004, $117.8 million was in long-term borrowings and capital leases, with maturities ranging from fifteen months to six years, and $180.3 million was short-term bank loans, commercial paper, telecommunications equipment financings, trade financings and current portion of capital leases and of long-term debt. At December 31, 2001, our U.S. dollar borrowings, other than the 11 3/8% senior notes due 2004, had interest rates ranging from 4.10% per annum to 13.0% per annum, and our peso borrowings had interest rates ranging from 15% per annum to 19.5% per annum. At December 31, 2001, our U.S. dollar borrowings, other than the 11 3/8 senior notes due 2004, totaled $262.4 million and our peso borrowings totaled $35.8 million. We have credit facilities which, in the aggregate, permit us to borrow up to $340.2 million. At December 31, 2001, there was $267.8 million outstanding under these facilities. We had approximately $72.5 million available for borrowing under these facilities, of which $48.1 million was under facilities with maturities of less than one year. At December 31, 2001, we had $93.5 million of short-term and long-term credit facilities with Dominican banks and institutions and $246.7 million of U.S. dollar-denominated credit facilities with international banks. In addition, in August 2001 the Company implemented a $40 million dollar-denominated and peso-denominated commercial paper program in the Dominican Republic. At December 31, 2001, we had outstanding $30.4 million under such program. The proceeds from the issuance of commercial paper have been used to finance the purchase of telecommunications related assets. 55 At December 31, 2001, our current liabilities exceeded our current assets by $175.6 million. This reflects our short-term borrowings in the Dominican Republic with related companies, local and international banks. Dominican banks lend on a short-term basis in order to negotiate interest rates should market conditions change, without necessarily demanding the repayment of credit facilities. It is our belief that the existence of negative working capital does not affect adversely the continuity of our business. In the first quarter of 2002, we refinanced approximately $77.0 million of our short-term debt with long-term debt. We extended the maturities of our short-term borrowings with five Dominican financial institutions for periods from fifteen months to six years. The refinanced debt has interest rates ranging from 10.75% to 13.33% per annum. We provided security to two financial institutions consisting of liens on telecommunications equipment and mortgages for approximately $19.0 million. We will seek additional credit facilities with international banks to refinance our short-term credit facilities. During 2000, we obtained credit guarantees from Export-Import Bank of the United States of up to $56 million for loans made by The International Bank of Miami, N.A. to be used for purchases of communications equipment and material from Motorola and other U.S. suppliers. At December 31, 2001, the amount of $31.8 million has been disbursed under this facility. The credit guarantees will be repayable up to a five year period. Our credit facilities in the Dominican Republic do not contain financial covenants. One loan with General Electric Capital Corporation of Puerto Rico, which had an outstanding principal amount of $5.6 million at December 31, 2001, contains two financial covenants that require us to maintain a minimum cash flow coverage ratio (defined as net income plus depreciation minus preferred dividends divided by current maturity of long term debt) and EBITDA coverage ratio (defined as earnings before interest, taxes, depreciation and amortization divided by current maturity of long term debt plus interest expense). We failed to comply with these covenants at December 31, 2001. The loan provides us a grace period of 90 days following notification from GE Capital to cure covenant violations. We did not receive notification from GE Capital and it issued to us a waiver of such non compliance. We also amended the loan agreement to eliminate the application of the covenants altogether to the three months periods ended March 31, 2002 and June 30, 2002 and to change the ratios for periods ending after June 30, 2002. The following table contains certain information concerning the Company's material contractual obligations at December 31, 2001.
PAYMENTS DUE BY PERIOD - ----------------------------------------- ------------------------------------------------------------------------ LESS THAN 1 AFTER 5 CONTRACTUAL CASH OBLIGATIONS TOTAL YEAR 1 - 3 YEARS 4 - 5 YEARS YEARS - ----------------------------------------- ------------------------------------------------------------------------ Short-Term Debt 180.3 180.3 - - - Long-Term Debt 305.5 - 269.9 30.3 5.3 Capital Lease Obligations 11.2 - 11.2 - - Operating Leases - - - - - Unconditional Purchase Obligations - - - - - Other Long-Term Obligations 1.2 - 1.2 - - ------------------------------------------------------------------------ TOTAL CONTRACTUAL CASH OBLIGATIONS 498.2 180.3 282.3 30.3 5.3 ========================================================================
At December 31, 2001, our 11 3/8% senior notes due 2004 were rated B1 (with a stable outlook) by Moody's Investors Service ("Moody's") and B+ (with a positive outlook) by Standard & Poor's ("S&P"). On March 26, 2002, S&P reaffirmed its B+ rating of our 11 3/8% senior notes due 2004 and lowered its outlook from positive to stable. On April 30, 2002, Moody's lowered the rating of our 11 3/8% senior notes due 2004 to B3 and lowered its outlook from stable to negative. Our Dominican commercial paper program is not rated by either Moody's or S&P. On December 27, 2001, the Company received net proceeds of US$43.4 million from the issuance of American Depositary Shares or ADSs, each of which represents one share of the Company's Class A Common Stock, at a price of $4.00 per ADS, in a rights offering to shareholders and of 10,000,000 shares of Class A Common Stock to GFN Corporation, one of our major shareholders. The purpose of the rights offering was to provide all shareholders with the opportunity to purchase more shares on the same basis as GFN Corporation, which 56 previously advanced to us $40 million, on an interest free basis, which was used to subscribe for Class A common stock on the same basis offered to all shareholders. We used the proceeds generated from the rights offering for general corporate purposes. ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES We are managed by a Board of Directors, the members of which, in accordance with our by-laws, are elected at the annual shareholders' meeting and serve for a period of one year. The Board of Directors is composed of a Chairman, Vice President, Treasurer, Secretary and eight additional members. The Board of Directors meets at least once every three months. Special meetings of the Board of Directors may be held at any time. The names of our executive officers and directors are set forth below together with their ages at December 31, 2001 and current positions.
NAME AGE POSITION - -------------------------------------- --- -------------------------------------------------------------------- BOARD OF DIRECTORS NAMED BY GFN CORPORATION, LTD.: Manuel Arturo Pellerano Pena 47 Chairman of the Board Hector Castro Noboa 59 Vice President of the Board Marcos J. Troncoso 54 Secretary Carl H. Carlson 44 Treasurer Juan Felipe Mendoza 48 Director Anibal De Castro 56 Director NAMED BY MOTOROLA, INC.: Kevin J. Wiley 42 Director Ralph Smith 47 Director Richard Hanning 50 Director Theodore W. Schaffner 55 Director INDEPENDENT DIRECTORS: Marino Ginebra 55 Director Edwin Corrie 71 Director EXECUTIVE OFFICERS Manuel Arturo Pellerano Pena 47 President, Chief Executive Officer and Chairman of the Board of Directors Marcos J. Troncoso 54 Executive Vice President of International Business Development, Member of the Office of the President and Secretary Carl H. Carlson 44 Executive Vice President, Chief Operating Officer, Member of the Office of the President and Treasurer Carlos F. Vargas 48 First Vice President of Corporate Center and Chief Financial Officer Virgilio Cadena del Rosario 50 Vice President, Engineering TRICOM Latin American Division Carlos Ramon Romero 50 Vice President, Sales Division Ryan Larrauri 30 Vice President, Marketing and Development Division Valeriano Valerio 43 First Vice President, Planning and Operations Ramon Tarrago 38 First Vice President, International Division
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. 57 The Directors are elected annually at the Annual General Meeting of Shareholders. Each Director (when ever elected) holds office until the next Annual General Meeting of Shareholders following his election and until his successor is elected or until his earlier resignation or removal. At this date, no date has been set for the Annual General Meeting of Shareholders. MANUEL ARTURO PELLERANO PENA has served as Chairman of our Board of Directors and President and Chief Executive Officer since August 1994 and as a member of the Board of Directors since our formation in January 1988. He currently serves as President of Bancredito, a bank affiliated with GFN and one of the largest commercial banks in the Dominican Republic and has been a member and the Vice President of the Board of Directors of GFN since April 1989. Mr. Pellerano holds a Bachelor of Science degree in Economics from the Universidad Nacional Pedro Henriquez Urena. MARCOS J. TRONCOSO has served as our Executive Vice President of International Development since March 1992, as Secretary of the Board of Directors since our formation in January 1988 and as Member of the Office of the President since September 1995. Prior to assuming these positions, Mr. Troncoso served as Executive Vice President of GFN beginning in May 1979. Mr. Troncoso received a law degree from Universidad Nacional Pedro Henriquez Urena and a BS degree in business administration with a major in accounting from the University of Puerto Rico. CARL H. CARLSON, our Executive Vice President and Chief Operating Officer since March 1998, has served as Treasurer of the Board of Directors since January 2000 and as a Member of the Office of the President since September 1995. Mr. Carlson was a Senior Vice President from March 1993 until March 1998 and Chief Financial Officer from September 1993 until September 1995. Mr. Carlson served as a Vice President of Finance and Administration from December 1989 until September 1993. Mr. Carlson was an Assistant Vice President for GFN's insurance division from 1987 until December 1989. From 1983 to 1987, Mr. Carlson was a Vice President at Chase Manhattan Bank. Mr. Carlson is a graduate of Instituto Technologico de Santo Domingo where he majored in business administration and accounting and finance. Mr. Carlson earned an MBA from a joint program between the University of South Carolina and Pontifica Universidad Catolica Madre y Maestra. CARLOS F. VARGAS has served as our First Vice President of Corporate Center and as the Chief Financial Officer since July 1996. Immediately prior to his arrival, Mr. Vargas was employed by Bancomercio, S.A., where he held the positions of Vice President, Assistant to the President and Executive Vice President of Finance and Operations from May 1992 until July 1996. Mr. Vargas served as Executive Vice President of Finance and Operations at Banco Popular Dominicano and the Finance Vice President at Grupo Financiero Popular from 1982 until May 1992. Mr. Vargas was employed by Coopers & Lybrand as an audit manager from 1974 until 1982. He is a certified public accountant and earned his degree in accounting from Universidad Nacional Pedro Henriquez Urena. VIRGILIO CADENA DEL ROSARIO has served as our Vice President Engineering TRICOM Latin American since June 2000. Mr. Cadena was First Vice President of Planning and Operations since from September 1995 until June 2000. Mr. Cadena was the Second Vice President of Planning and Operations between July 1991 and September 1995 and Telecommunications Manager from July 1989 until July 1991. Mr. Cadena graduated with a degree in electromechanical engineering from the Universidad Autonoma de Santo Domingo and studied at the Electrical Engineering Department of the University of Kyoto in Japan. CARLOS RAMON ROMERO has served as Vice President of our Sales Division since January 2002. He was Vice President Customer Relationship Management Division from July 2000 to blank and First Vice President of the Residential and Business Division from July 1996 until July 2000. Immediately prior to his arrival, Mr. Romero served as chief executive of a brokerage company which he started in February 1994. Mr. Romero served as Vice President of the Technical Area of Compania Nacional de Seguros, a subsidiary of GFN, from 1980 until February 1994. Mr. Romero earned a BA in International Services from the Universidad Nacional Pedro Henriquez Urena, where he has since held various academic posts. RYAN LARRAURI has served as Vice President of our Marketing and Development Division since June 2001. Before joining TRICOM, he was Vice President of Marketing for GFN's Bancredito and Compania Nacional de 58 Seguros since 1999. He has held numerous directive and executive positions in the textile, consumer goods and financial sectors. Mr. Larrauri is the published author of MARKETING IN THE DOMINICAN REPUBLIC, GENESIS AND EVOLUTION as well as several other specialized articles in the field. Mr. Larrauri has a B.S. in Marketing from the Univesidad Iberomaricana, as well as Post-Graduate degrees in Brand Management, International Business, Bank Management and Strategic planning. VALERIANO VALERIO has served as our First Vice President of Planning and Operations since June 2000 and as Second Vice President of Institutional Relationships between June 1995 and June 2000. Mr. Valerio graduated with a degree in Electrical Engineering from the Universidad Pedro Henriquez Urena and studied at the Nippon Telegraph and Telephone Public Corporation of Tokyo, Japan. RAMON TARRAGO has directed the International Division since its organization as a separate business unit in July 1996 as First Vice President. He was a Second Vice President of the Corporate Center from August 1995 until July 1996. He was a Second Vice President of the International Division from August 1995 until July 1996. He was Director of International Relations from November 1993 until August 1995. From February 1992 until November 1993, he was our Director of Finance. Between May 1991 and February 1992, he was a management associate in the Corporate Banking Unit at the Santo Domingo branch of Citibank. Mr. Tarrago worked for the World Bank's International Finance Corporation in Washington, D.C. from May 1990 to September 1990 and for Bancredito between October 1986 and March 1988. He is the former dean of the MBA program at the Pontificia Universidad Catolica Madre y Maestra and has held an academic post at the Instituto Tecnologico de Santo Domingo. Mr. Tarrago holds both a BA in economics from Universidad Nacional Pedro Henriquez Urena and an MBA with a finance concentration from the Virginia Polytechnic Institute and State University. HECTOR CASTRO NOBOA has served as Vice President of our Board of Directors since August 1994 and as a member since our formation in January 1988. He has been director and Executive Vice President of GFN since April 1989. Between March 1993 and September 1997, Mr. Castro served as the Executive Vice President of Bancredito. Mr. Castro has also worked for the Deutsche Sudamerikanische Bank (Germany), Citibank (Marketing Vice President), Bonanza Dominicana (Chief Financial Officer), Banco Metropolitano (Financial Advisor) and Universidad Nacional Pedro Henriquez Urena (professor of international economics and macroeconomics). Mr. Castro has a degree in Business Economics from Madrid's Universidad Complutense where he studied business economics. JUAN FELIPE MENDOZA has been a member of our Board of Directors since June 1997. Mr. Mendoza currently serves as Chief Executive Officer of Bancredito and President of Compania Nacional de Seguros. He is Vice President of FIDES (Inter-American Federation of Insurance Companies) and its regional commission for Central America and the Caribbean. Mr. Mendoza is a director of Reaseguradora Nuevomundo, Caribbean Hotel Association Insurance Company, Bancredito and GFN Corporation USA. Mr. Mendoza joined GFN in 1977. Prior to joining GFN, Mr. Mendoza was employed in the Internal Audit Department for the Caribbean of the Royal Bank of Canada. Mr. Mendoza graduated from Universidad Nacional Pedro Henriquez Urena and also attended Specialized Insurance Training Programs at Royal Global Insurance of New York and Swiss Insurance Formation Center, Swiss Re, Switzerland. Mr. Mendoza is a certified public accountant. ANIBAL DE CASTRO has been a member of our Board of Directors since May 1998, and has served as President of Editorial AA, a subsidiary of GFN, since May 1994. Mr. De Castro served on the Board of Directors of Corporacion Dominicana de Electricidad (C.D.E), the country's state-owned electric utility provider from 1979 to 1982, and currently serves on the Board of Directors of several Dominican companies and professional associations including Banco de la Pequena Empresa and Fondo de Financiamiento de la Micro-Empresa. Mr. De Castro graduated from Universidad Autonoma de Santo Domingo with a degree in journalism and holds a B.A. in economics from the University of East Anglia in Great Britain. KEVIN J. WILEY has been a member of our Board of Directors since December 1998. He currently serves as the Vice President of Sales for Next Level Communications - a telecommunications equipment provider whose largest shareholder is Motorola, Inc. Prior to his employment at Next Level Communications, Mr. Wiley worked for the Motorola Network Management Group as the Director of Regional Cellular Operations for the Latin America Region from October 1998 until April 2001. He worked as the Vice President and General Manager of Aliant Cellular Communications from July 1995 to July 1997. Mr. Wiley has been involved in various positions within the 59 wireless telecommunications industry throughout his entire career. He has a B.S. in Finance and Management from Creighton University. RALPH SMITH has been a member of our Board of Directors since April 2001. Mr. Smith began working for Motorola in 1985 in its Automotive Electronics Business. He worked there in a variety of sales, project management, strategy and marketing roles. He joined the Corporate Business Development group of the company in 1991 and became an elected officer of the company in 2000. Mr. Smith began his career with a variety of financial and commercial research positions working for United States Steel Supply Division until he left to join Motorola. He has a B.S. degree in Management from Purdue University and a M.B.A. from Indiana University. RICHARD HANNING has been a member of our Board of Directors since April 2001. Mr. Hanning is a Senior Vice President of Motorola and Director of Finance for Motorola's Network Management Group. Mr. Hanning has been a Corporate Vice President with Motorola since 1990. Since joining Motorola in 1977, Mr. Hanning has held numerous other financial positions within Motorola's cellular networks and subscribers businesses. Mr. Hanning is a Director of Telular Corporation, a participant in the fixed wireless telecommunications market. He is also a Director of Omnitel, a Lithuanian cellular operator. He has a B.A. and M.B.A. from the University of Illinois. THEODORE W. SCHAFFNER has been a member of our Board of Directors since October 2001. Mr. Schaffner has been Senior Vice President and Director of Corporate Development at Motorola since 1999. He joined Motorola in 1987 and became the Director of Corporate Business Development in 1989. In 1991, he became Vice President of Corporate Business Development and in this capacity led the Company's efforts to secure access to the markets in China by forming a number of key joint ventures with local companies. In 1996 he became an elected officer of Motorola and continued to build Motorola's Business Development Department and to work on key transactions including the divestiture of Motorola's Semiconductor Components Group and the acquisition of General Instruments. He started his career in the private practice of law and subsequently held positions with the A. E. Staley Manufacturing Company and TRW Inc. He received his Bachelors of Arts at The Ohio State University and his Juris Doctor degree from Harvard University School of Law. MARINO GINEBRA has been a member of our Board of Directors since October 2001. Mr. Ginebra is the Chairman of the Board of Directors and President of Telecable Nacional, S.A. He has served as member of the Board of Directors of numerous charity associations and social clubs, and is currently a member of the Board of Directors of various banking, insurance and hotel corporations in the Dominican Republic. Mr. Ginebra holds a B.S. in Business Administration and Finance from the Catholic University of the Americas. EDWIN CORRIE has been a member of our Board of Directors since October 2001. Mr. Corrie is the Chairman and President of several corporations operating in the real-estate, investment and agricultural industries in the Dominican Republic. He is a member of the Board of Directors of various leading insurance, tourism, medical, and financial service institutions in the Dominican Republic. Mr. Corrie holds a B.S. in electromechanical engineering from the Massachusetts Institute of Technology and a B.S. in Business Administration from the Harvard Business School. EXECUTIVE COMPENSATION The aggregate amount of compensation we paid during the fiscal year ended December 31, 2001 to our directors and executive officers, as a group (20 persons), was $2.3 million. EMPLOYEES At December 31, 2001, we had 1,374 employees. Of this number, 26 were executives, 92 were managers, and the remaining 1,256 were technicians, salesmen, service and staff employees. We believe that this number may increase over the next several years as we expand our network and customer base. None of our employees belong to labor unions. We believe that we have has good relations with our employees. 60 SHARE OWNERSHIP We refer to Item 7 for information with respect to Manuel Arturo Pellerano Pena, who, to our knowledge, is the only director with 1% or greater percentage of ownership in Tricom. In connection with our initial public offering, our Board of Directors adopted, and GFN and Motorola approved, our 1998 Long-Term Incentive Plan pursuant to which 750,000 shares of Class A common stock were reserved for issuance. At December 31, 2001, there were outstanding options to purchase 483,947 shares of Class A common stock that had been granted to directors, officers and employees at exercise prices ranging from $3.65 per share to $16.00 per share. The options granted expire on the tenth anniversary of the date of grant. At December 31, 2001, there were 262,247 shares available for grant under the plan. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS The following table sets forth certain information known to us with respect to beneficial ownership of the common stock at April 15, 2002 (unless otherwise indicated) by each person, to our knowledge, who beneficially owns 5% or more of the common stock and all officers and directors as a group. Except as otherwise indicated, the holders listed below have sole voting and investment power with respect to all shares beneficially owned by them. For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares as of a given date which such person or group of persons has the right to acquire within 60 days after such date. Information relating to the percentage beneficially owned is calculated in accordance with SEC rule 13d-3 and includes for each of GFN Corporation Ltd., Manuel Arturo Pellerano Pena, Oleander Holdings Inc. and Motorola the shares of Class A common stock issuable upon conversion of the Class B stock owned by it. Each share of Class B stock is freely convertible at any time into one share of Class A common stock, subject to adjustment, and may not be transferred except to GFN, Motorola or permitted transferees, as defined. Each share of Class B stock has ten votes and of Class A common stock has one vote. All of the shares owned by GFN and Motorola are Class B stock and represent 100% of the outstanding shares of Class B stock. If all of the Class B shares were converted to Class A common stock, then GFN Corporation Ltd., Manuel Arturo Pellerano Pena and Oleander Holdings, Inc. would own 63.4% of the Class A common stock and Motorola 24.0% of the Class A common stock.
PERCENTAGE OF CLASS PERCENTAGE OF CLASS A STOCK A STOCK CLASS B SHARES BENEFICIALLY SHARES BENEFICIALLY BENEFICIALLY SHAREHOLDER OWNED OWNED OWNED - --------------------------------------------------------- ----------------- --------------------- ---------------- GFN Corporation Ltd(1)............................... 23,122,157 64.7 60.0 Oleander Holdings, Inc.(1)........................... 12,161,744 34.0 60.0 Manuel Arturo Pellerano Pena(1) ..................... 23,637,186 67.4 60.0 Motorola, Inc........................................ 7,657,818 24.0 40.0 Orient Star Holdings LLC(2).......................... 2,670,000 11.0 -- WaterView Capital Management LLC(3).................. 1,500,000 6.2 -- Goldman Sachs & Co. and Goldman Sachs Group Inc.(4).. 2,008,730 8.3 -- Directors and executive officers as a group (16 persons)(5)...................................... 22,724,417 63.5 60.0 - ------------------------------------------------------------------------------------------------------------------
(1) GFN Corporation Ltd. is controlled by Manuel Arturo Pellerano Pena, our Chairman of the Board of Directors and President, and members of his family. Oleander Holdings, Inc., a Panamanian corporation, is a wholly owned subsidiary of GFN. (2) Inmobiliaria Carso, S.A. de C.V., as the sole member of Orient Star Holdings LLC, is deemed to beneficially own indirectly the ADSs owned directly by Orient Star Holdings LLC. Carlos Slim Helu, Carlos Slim Domit, Marco Antonio Slim Domit, Patrick Slim Domit, Maria Soumaya Slim Domit, Vanessa Paola Slim and Johanna Monique Slim Domit own all of the outstanding voting securities of Inmobiliaria Carso, S.A. de C.V., and are deemed to beneficially own indirectly the ADSs deemed beneficially owned by Inmobiliaria 61 Carso, S.A. de C.V. and directly owned by Orient Star Holdings LLC. This information is based on a Schedule 13-G dated December 27, 2001 and filed with the Securities and Exchange Commission. (3) WaterView Capital Management LLC, a Delaware limited liability company, possesses sole power to vote and direct the disposition of all shares held by WaterView Partners, L.P., a Delaware limited partnership, which owns 958,500 shares, and of D&DF WaterView Partners, L.P., a Delaware limited partnership, which owns 41,500 shares. Georgica Advisors LLC, a Delaware limited liability company, is the holder of, and possesses sole power to vote and direct the disposition of, 500,000 shares. WaterView Capital Management LLC and Georgica Advisors LLC may act together, from time to time, with respect to the shares. Each of the entities discussed above is deemed to beneficially own 1,500,000 shares of the Class A common stock. This information is based on a Schedule 13-D dated November 15, 2000 and filed with the Securities and Exchange Commission. (4) This information is based on a Schedule 13-G dated December 31, 2001 and filed with the Securities and Exchange Commission. (5) Includes 11,486,720 shares of Class B stock and 10,960,413 shares of Class A common stock that may be deemed to be beneficially owned by Mr. Pellerano, our Chairman of the Board of Directors and President, in his capacity as a controlling person of GFN. Also includes 47,544 shares of Class A common stock that are issuable upon exercise of currently exercisable options beneficially owned by officers. Motorola Inc. has announced its intention to sell its shares of Class B stock. Our By-laws provide that upon transfer of such shares (unless to GFN or one of its affiliates), these shares will convert to Class A common stock. SHAREHOLDERS AGREEMENT Each of the current members of the Board of Directors has been elected under the terms of an amended and restated shareholders agreement, dated at May 8, 1998, among TRICOM, Motorola, Oleander Holdings Inc., Zona Franca San Isidro, S.A. and certain nominal shareholders that are affiliates of GFN or TRICOM. The shareholders agreement provides that the Board of Directors will consist, and GFN and Motorola each will vote all of the shares owned by it (or in the case of any transfer of shares to its permitted transferee, as defined in the shareholders agreement, will cause such permitted transferees to vote their shares) in favor, of six directors to be designated by GFN, four directors to be designated by Motorola and two independent directors. The shareholders agreement provides that in order for a person to qualify as an independent director such person must not be: - an officer, employee, principal stockholder, consultant or partner of TRICOM, apart from such directorship, or an officer, employee, principal stockholder, consultant or partner of an entity that was dependent upon TRICOM or any affiliate of TRICOM for more than 5% of its revenues or earnings in its most recent fiscal year; - an officer, director, employee, principal stockholder, consultant or partner of a person that is a competitor of TRICOM or any of its affiliates, any affiliate of such competitor, or any other person that was dependent upon such competitor or affiliate of such competitor for more than 5% of its revenues or earnings in its most recent fiscal year; or - an officer, director, employee, principal stockholder, consultant or partner of Motorola or GFN or an officer, employee, principal stockholder, consultant or partner of an entity that was dependent upon Motorola or any affiliate of Motorola for more than 5% of its revenues or earnings in its most recent fiscal year. Each of Motorola and GFN will be entitled to nominate one independent director so long as it together with its permitted transferees owns at least 25% of the issued and outstanding shares of Class B stock. In calculating the 62 number of shares of Class B stock owned by either GFN or Motorola, there will be included the number of shares of Class B stock owned by any of it permitted transferees. The number of directors other than independent directors that GFN or Motorola each may designate will change if its percentage ownership of Class B stock changes as follows: - if GFN and Motorola each owns 50% of the then outstanding shares of Class B stock, each would have the right to designate five directors; - if either GFN or Motorola owns shares of Class B stock; - greater than 50% but less than or equal to 60% of the then outstanding shares of Class B stock, it would designate six directors and the other four directors; - greater than 60% but less than or equal to 70% of the then outstanding shares of Class B stock, it would designate seven directors and the other three directors; - greater than 70% but less than or equal to 80% of the then outstanding shares of Class B stock, it would designate eight directors and the other two directors; - greater than 80% but less than or equal to 90% of the then issued and outstanding shares of Class B stock, it would designate nine directors and the other one director; or - greater than 90% of the issued and outstanding Class B stock, it would designate all ten directors. Until such time as either Motorola or GFN owns less than 25% of the outstanding shares of Class B stock, the shareholders agreement requires the affirmative vote of nine directors to approve the following actions: - the acquisition or formation by TRICOM of any entity or the making of any investments in an other entity of business, including, but not limited to, the purchasing of equity or debt interests in or the extension of credit to such entity; - the incurrence of indebtedness, if after giving effect to such incurrence, including the proposed application of the proceeds of such indebtedness to pay existing indebtedness, the ratio of indebtedness to shareholders' equity would be greater than three to one; - approval of annual budgets relating to income, capital expenditure, operating expenses and cash flows (provided that this does not require approval of any projected debt incurrence that otherwise complies with the limits described above or of any other proposed corporate action for which super-majority approval is not specifically required); and - the issuance, or redemption, of Class A common stock or other securities or instruments exercisable for or convertible into Class A common stock. In addition, approval by the independent directors is required for any transaction that has a fair market value exceeding $1.0 million which we enter into with either GFN or Motorola and their respective affiliates. The vote of a majority of the directors present at a duly convened meeting is required for all other board actions (and at such time that Motorola or GFN owns less than 25% of the then outstanding shares of Class B stock for the four actions specified as requiring a greater vote). Under the shareholders agreement, if we propose to register any of our securities under the Securities Act of 1933 (other than a registration in connection with a reorganization on Form F-4 or in connection with any employee stock option, stock purchase or savings plan on Form S-8 or similar registration forms), whether or not for our own account, GFN and Motorola are entitled to include shares of Class A common stock owned by them in any such registration, subject to the right of the managing underwriter of any such offering to exclude, due to market conditions, some or all of such securities. In addition, GFN and Motorola each has the right to require us to prepare and file on three occasions a registration statement covering registrable securities with a market value of at least $5.0 million, subject to customary blackout periods. We are generally required to bear the expenses (except 63 underwriting discounts and commissions and fees and expenses of any special counsel) of all such registrations, whether or not initiated by GFN or Motorola. VOTING AGREEMENTS FOR THE 11 3/8% SENIOR NOTES DUE 2004 In connection with the offering of the 11 3/8% senior notes due 2004, Oleander and Motorola each entered into separate voting agreements, dated August 21, 1997 with The Bank of New York, as trustee under the indenture for the senior notes. The voting agreements provide that each of Oleander and Motorola will grant to the trustee for the 11 3/8% senior notes due 2004 the right to vote all of its shares of common stock upon the occurrence of the following events: - our failure to pay interest on the senior notes when due for a period of 30 days; - our failure to pay the principal of or premium on the senior notes when due, whether at maturity, upon redemption or repurchase or otherwise; - our failure to pay principal of and interest on the senior notes required to be purchased in the event of a change of control; - a payment default under any debt instrument for money borrowed by us or any of our guarantor subsidiary (except any such subsidiary that is not a significant subsidiary); or - our failure or the failure of any significant subsidiary to pay final judgments aggregating in excess of $10.0 million within 60 days after the date for which any period for appeal has expired and during which a stay of enforcement of such judgment shall not be in effect. The trustee's right to vote all of the shares of voting stock, once such right is triggered, will continue (a) during the continuation of the first three events set forth above and for one year after the date we cure such event of default or (b) during the continuation of the fourth event. Either Oleander or Motorola may revoke the proxy granted by it under the voting agreement if: - the Dominican Republic becomes bound by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958); - if as of the last day of any fiscal quarter we report shareholders' equity of at least $100 million and for each of the four full consecutive fiscal quarters ending on such date our leverage ratio as defined in the senior note indenture is equal to or less than 2.5 to 1.0; - the senior notes are rated Ba2 or better by Moody's Investors Service, Inc. and BB or better by Standard & Poor's Ratings Group, respectively; or - our obligations with respect to the outstanding senior notes are discharged. In March 2001, the Dominican Republic became bound by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. If we incur any indebtedness that constitutes senior facilities under the senior note indenture and the lender or lenders under such senior facilities are granted a lien by Oleander and Motorola in respect of its voting stock, then the proxy rights granted under the voting agreement will be suspended and the trustee will not have the right to exercise such rights until such time as the senior facilities are repaid in full, provided that: - the trustee is granted a lien or similar interest in respect of the voting stock by Oleander and Motorola for the benefit of the holders, which lien will be subordinated and subject to the prior rights and claims of the senior lenders and TRICOM; and 64 - the holders, the trustee and all senior lenders enter into an escrow agreement and an intercreditor agreement, then the proxy rights granted under the voting agreement. The voting agreements do not prohibit or restrict either Oleander or Motorola from transferring, selling, pledging, or hypothecating any shares of voting stock. Any shares of voting stock transferred to an affiliate of either Oleander or Motorola will remain subject to the voting agreements and any shares of voting stock transferred to a person unaffiliated with either Oleander or Motorola will no longer be subject to the voting agreements. The voting agreements will terminate and be of no further force and effect if (a) any senior lenders holding a security interest in the voting stock foreclose upon such security interest subject to the terms of the intercreditor agreement to be entered into by the senior lenders and the trustee or (b) the proxy is revoked pursuant to the voting agreements. CERTAIN TRANSACTIONS WITH PRINCIPAL SHAREHOLDERS GFN GFN is one of the Dominican Republic's largest privately held companies, with interests in insurance, finance and publishing. GFN provides a number of managerial services to its affiliated companies, including TRICOM, for which the affiliated companies are billed based upon the number of hours that a particular GFN employee spends on providing such services and other factors. GFN employees have provided to us internal auditing, public relations, management information services, legal and personnel management services. For 1999, 2000 and 2001, we paid to GFN $167,470, $234,348 and $128,957, respectively, for such services. GFN also provides us with security services for which we paid $77,382, $227,001 and $267,725 in 1999, 2000 and 2001, respectively. In addition, GFN provides us with advertising services for which we paid $74,104, $250,232 and $1,031,594 in 1999, 2000 and 2001, respectively. We anticipate that we will continue to receive such services from GFN. We lease premises and equipment from GFN and its affiliates. During 1999, 2000 and 2001, we paid to GFN and its affiliates $108,578, $157,600 and $122,568, respectively, for the use of premises and equipment. During 1999 we bought land from an unaffiliated third-party for $1,826,625 which we later sold to an affiliate of GFN for $2,724,458. We also entered into various capital leases with an affiliate of GFN for $26,244,000 during 1999, $20,829,275 during 2000 and $17,856,766 during 2001. In 2000, we sold our Internet portal to GFN affiliate for approximately $2.3 million. We provide life insurance to our employees and have obtained other insurance through Segna, formerly Compania Nacional de Seguros, a GFN affiliated insurance company. We paid insurance premiums to affiliates of GFN totaling $2.0 million, $4.1 million and $4.4 million in 1999, 2000 and 2001, respectively. We provide telecommunications services to GFN and its affiliated companies. GFN and its affiliated companies paid us $2.0 million, $1.9 million and $3.7 million for such services in 1999, 2000 and 2001, respectively. GFN affiliated banks have loaned us funds. We had borrowings from GFN affiliated banks, including financing of letters of credit and open accounts, in the aggregate principal amounts of $31.4 million at December 31, 2000 and $27.1 million at December 31, 2001. MOTOROLA We have purchased telecommunications equipment from Motorola, particularly for the development of our mobile cellular system and our wireless local loop in the Dominican Republic for aggregate consideration of approximately $23.1 million, $20.3 million and $20.2 million during 1999, 2000 and 2001, respectively. During 2001, we purchased from Motorola an iDEN(R) system for Panama, for $20 million. 65 OTHER TRANSACTIONS We have purchased mortgage participation contracts from savings and loan associations in the Dominican Republic that are maintained as compensating balances for mortgage loans made by these associations to several of our officers. At December 31, 2000 and 2001, these mortgage participation contracts totaled $3,289,459 and $3,968,711 respectively. ITEM 8. FINANCIAL INFORMATION CONSOLIDATED FINANCIAL STATEMENT See "Item 18. Financial Statements" OTHER FINANCIAL INFORMATION LEGAL PROCEEDINGS ALL AMERICA CABLES & RADIO LITIGATION On August 13, 2001, Indotel, the Dominican telecommunications regulator, issued an order, in response to a complaint filed by All America Cables & Radio, a subsidiary of Centennial Communications Corp., that we are not dominant in the Dominican market and that the interconnection agreement we offered to All America was not discriminatory. The interconnection agreement that we offered to enter into with All America was the same as we entered into with France Telecom in the Dominican Republic and which, we understand, All America has with Codetel and which Codetel has with France Telecom. Indotel further ruled that if we granted to All America the economic concessions that it seeks from us, the allowance would create discrimination against other carriers in the Dominican Republic, violating the Dominican law telecommunications and the Dominican constitution. On September 14, 2001, Indotel issued an order, in response to a motion submitted by All America for reconsideration of the August 13 order, that ratified the August 13 order and ordered us and All America to enter into an interconnection agreement on substantially the terms and conditions that we proposed. On September 4, 2001, Centennial and its affiliates filed a complaint against Tricom USA Inc. with the United States Federal Communications Commission claiming that - We refused to provide Centennial's affiliate in the Dominican Republic with sufficient facilities and reasonable, nondiscriminatory terms for connecting traffic between ours and its network in the Dominican Republic. - Centennial should not pay to Tricom, S.A. the market rate for terminating calls to Tricom customers in the Dominican Republic determined by Indotel, approximately US$.042 per minute, but should pay $US.011 per minute; our refusal to agree to this rate is discriminatory; and even if Centennial pays the same international termination rate as Tricom USA, Tricom USA gets a benefit because it is affiliated with Tricom, S.A. - We engage in discriminatory behavior because other U.S. carriers including Tricom USA get better interconnection capacity from Tricom, S.A. between the United States and the Dominican Republic than does Centennial. - We are harming competition in the United States by limiting the number of interconnection facilities we have made available to connect calls from Centennial's customers to ours, inflating the price for local termination of international traffic and refusing in general to deal with Centennial on a nondiscriminatory basis. 66 - We are violating the conditions of the license granted to Tricom USA by the FCC to operate as a facilities based carrier which provides that neither Tricom USA nor any persons controlling it would participate in any favorable interconnection arrangements or special concessions not available to other U.S. carriers. Centennial requests that the FCC: - order Tricom USA to cease accepting special concessions from Tricom S.A.; - require Tricom USA and Tricom S.A. to provide adequate interconnection capacity to Centennial and reduce the access charge to a level consistent with costs; - find that Tricom USA is liable to Centennial for damages to compensate Centennial for the losses that it suffered as a result of Tricom's violations of law and the FCC's rules; and - revoke Tricom USA's Section 214 license if Tricom USA does not stop receiving special concessions from Tricom, S.A. We have replied to Centennial's complaint with the FCC on October 13, 2001. We responded that: - Indotel is the regulator with jurisdiction over the complaint and Centennial is attempting to appeal the decision by Indotel in the action brought by All America Cables & Radio Inc. against Tricom in the Dominican Republic; - Centennial failed to provide any evidence that Tricom USA accepts special concessions from Tricom S.A.; - The relief sought by Centennial is improper as Tricom USA owns no facilities in the Dominican Republic and the FCC has no jurisdiction over Tricom S.A., which is the only entity that could provide the interconnection capacity sought by All America Cables & Radio. We requested that the FCC reject jurisdiction over the matter or deny the relief sought by Centennial in its entirety. On November 2, 2001, the parties attended a settlement conference with the FCC. However, the parties did not reach a settlement. On November 5, 2001, the FCC asked that the parties submit briefs regarding certain jurisdictional issues. To date the FCC has not rendered any decisions. On November 13, 2001, Indotel informed us that it would impose monetary sanctions on All America if it did not execute within 5 days the interconnection agreement that we had proposed and which Indotel determined in August 2001, among other things, was not discriminatory. On November 19, 2001, All America signed the interconnection agreement, stating it was doing so under protest of Indotel's order. BELLSOUTH LITIGATION On May 8, 2001, BSC of Panama, S.A., a subsidiary of BellSouth, which owns one of the two cellular telecommunications concessions granted by the Panamanian government, requested that the Panamanian ENTE REGULADOR DE LOS SERVICIOS PUBLICOS, or ENTE, investigate Tricom Panama, S.A. for violations of the Telecommunications Act and the ENTE's regulations. Bell South claimed that Tricom Panama: - will use its iDEN(R) based trunking services to provide cellular telecommunications services, in violation of our license; and - although we proved that our iDEN(R) system has been modified to disable "hand off" capabilities, the fact that the equipment has these capabilities represents a breach of regulations and our license. 67 The ENTE has not issued any ruling on BellSouth's request, but has stated publicly that Panamanian regulations do not limit the provision of mobile services to a particular technology. On August 24, 2001, BellSouth requested that the ENTE initiate a legal review before the Third Chamber of the Panamanian Supreme Court of Justice, of the interpretation given by the ENTE to the definition of "Conventional Trunking System Services." BellSouth alleges that the interpretation given by the ENTE to the definition of "Conventional Trunking System Services," found in Resolution No. JD-025 of December 12, 1996 violates several articles of the Telecommunications Act, including that the ENTE's interpretation allows a trunking service provider to use any mobile system, including any type of cellular systems, as long as the "Hand-Off" capabilities is disabled. Bell South claims that this violates the Telecommunications Act, which states that cellular services are a Type A Service that can only be provided by BellSouth and the other holder of a Type A License, Cable & Wireless. The ENTE has replied that it only regulates services and not technology and that the definition of "Conventional Trunking System Services" protects the temporary exclusivity regime given to cellular services because it does not allow the participation of new cellular service providers in the Panamanian market. The Attorney General also opined that the definition of "Conventional Trunking System Services" is legal. The license given to Tricom Panama is for the operation of conventional trunking services, which it is operating with the iDEN(R) system. The legal review by the Third Chamber of the Panamanian Supreme Court of Justice requested by BellSouth cannot be undertaken until the Supreme Court resolves a constitutional review requested by Tricom Panama on September 10, 2001, regarding the lack of procedure for the Third Chamber to undertake a legal review of the sort sought by BellSouth. On October 22, 2001, the Supreme Court decided it would review the procedure. On August 28, 2001, Tricom Panama received notice of a precautionary order obtained by BellSouth from the Seventh Civil Court of the First Judicial Circuit requiring Tricom Panama to cease all activity directly or indirectly related to the installation and supply of telecommunication services using Motorola's iDEN(R) system. This order forms part of a tort claim, submitted by BellSouth on September 4, 2001, against Tricom Panama for US$20,000,000 for the possible damages that Tricom Panama may cause BellSouth in the event that Tricom Panama initiates operations of an iDEN(R)-based trunking service. On September 11, 2001, Tricom Panama submitted a motion before the Seventh Civil Court to substitute a bond for the precautionary order to cease its activities and at the same time appealed to the Superior Civil Chamber the precautionary order itself. On October 1, 2001, the Seventh Civil Court denied Tricom Panama's motion and, on October 8, 2001, Tricom Panama also appealed this decision to the Superior Civil Chamber. The Tricom Panama defense was based on the following principles: - only the ENTE has by law the power to discontinue public utilities services; - this precautionary measure can only be applied to real property (not to personal property); - there is no imminent damage that justifies the precautionary measure. On September 11, 2001, BellSouth submitted a complaint stating that Tricom Panama was in default of the court order. Tricom Panama also submitted a motion to the Seventh Civil Court to dismiss Bell South's tort claim and to invalidate the precautionary order, due to the court's lack of jurisdiction over a matter that should be decided by the ENTE. On September 28, 2001, Tricom Panama filed a US$1,000,000 damages counterclaim against BellSouth for the public campaign set against Tricom Panama by BellSouth and for the unfounded investigation requested before the ENTE. We believe, based on the advice of our Panamanian legal counsel, that Bell South should not succeed in its claims because: 68 - BellSouth cannot claim any damages caused by Tricom Panama activities, since Tricom Panama operations are protected under a legitimate Conventional Trunking System Services license. - The ENTE is the only authority empowered to declare that the telecommunications services provided by Tricom Panama are not conventional trunking services, or that the iDEN(R) system cannot be used to provide conventional trunking systems. On November 5, 2001, Tricom Panama requested that the ENTE investigate BellSouth for violations of the Telecommunications Act and its concession agreement on account of the failure of BellSouth to (i) recognize the jurisdiction of the ENTE, (ii) follow proper procedure in connection with the precautionary measure it obtained and (iii) provide interconnection. This case is pending the Ente's decision on whether or not to press charges against BellSouth. On November 13, 2001, upon the request of Bell South, the Seventh Civil Court issued an order giving notice to Cable & Wireless of the precautionary order issued against Tricom Panama in late August. Tricom Panama and Cable & Wireless had negotiated the terms of an interconnection agreement with the intervention of the Ente. Upon judicial notice of the precautionary order against Tricom Panama, Cable & Wireless refused to sign the interconnection agreement. The Ente imposed on Cable & Wireless sanctions of US$5,000 per day until it signs the interconnection agreement with Tricom Panama. On December 14, 2001, Cable & Wireless challenged the Ente's sanctions order on constitutional grounds before the Supreme Court, and the case is pending decision. On November 16, 2001, Tricom Panama sought protection from the Superior Tribunal of the Supreme Court on account of the August precautionary order which violated its constitutional right to due process and trial before a body of competent jurisdiction. On December 7, 2001, the court declared the case inadmissible on procedural grounds, and on December 10, 2001, Tricom Panama filed an appeal and motion for reconsideration. On December 20, 2001, the Superior Civil Chamber decided the appeal of the precautionary order in favor of Tricom Panama, thus, lifting the precautionary order. On February 27, 2002, BellSouth challenged this decision in the Court of Cassation. On April 26, 2002, BellSouth filed a claim against Tricom Panama before the ENTE alleging that Tricom Panama is rendering voice and text mail services in violation of its concession and the authorized use of its frequencies. BellSouth argues that value added services, such as voice and text mail services, may only be provided by basic telephony or cellular operators. BellSouth requests that the ENTE revoke Tricom Panama's concession and rights to frequencies. BellSouth further requests as a provisional measure, and until the conclusion of the administrative proceedings, that the ENTE order Tricom Panama to suspend its trunking services or, alternatively, its voice and text mail services. On May 10, 2002, the ENTE ordered Tricom Panama to suspend its voice mail services until the ENTE determines whether the imposition of sanctions is appropriate. There are no other legal proceedings to which we are a party, other than routine litigation incidental to our business which is not otherwise material to our business or financial condition. ITEM 9. THE OFFER AND LISTING AMERICAN DEPOSITARY SHARES The ADSs are traded on the New York Stock Exchange under the symbol "TDR". Shares of Class A common stock are not traded on any other exchange or automated quotation system. At December 31, 2001, there were 27 record holders in the United States of the ADSs. The following tables provide (1) the annual high and low closing prices for the ADSs on the New York Stock Exchange for each fiscal year since we completed our initial public offering, (2) the high and low closing prices for the ADSs on the New York Stock Exchange for each quarter for 2000 and 2001 and the first quarter of 2002 and (3) the high and low closing prices for the ADSs on the New York Stock Exchange each of the last six months. 69
NEW YORK STOCK EXCHANGE --------------------------------- HIGH LOW ---------------- ---------------- YEAR ENDED DECEMBER 31, 1998 $ 11.75 $ 3.81 YEAR ENDED DECEMBER 31, 1999 $ 11.75 $ 6.25 YEAR ENDED DECEMBER 31, 2000 $ 27.88 $ 7.10 YEAR ENDED DECEMBER 31, 2001 $ 12.11 $ 3.60 HIGH LOW ---------------- ---------------- YEAR ENDED DECEMBER 31, 2000 First Quarter $ 27.88 $ 17.18 Second Quarter 21.19 14.31 Third Quarter 19.25 14.63 Fourth Quarter 16.00 7.10 HIGH LOW ---------------- ---------------- YEAR ENDED DECEMBER 31, 2001 First Quarter $ 12.11 $ 7.00 Second Quarter 7.50 6.25 Third Quarter 6.65 5.60 Fourth Quarter 5.70 3.60 HIGH LOW ---------------- ---------------- YEAR ENDING DECEMBER 31, 2002 First Quarter $ 3.92 $ 3.45 MONTH/YEAR November 2001 $ 5.60 $ 4.97 December 2001 4.95 3.60 January 2002 3.92 3.54 February 2002 3.78 3.50 March 2002 3.70 3.45 April 2002 3.55 3.05
ITEM 6. ADDITIONAL INFORMATION MEMORANDUM AND ARTICLES OF ASSOCIATION BOARD OF DIRECTORS The business and affairs of the Company is managed by the Board of Directors, which consists of not more than fifteen or less than eight persons. The Directors of the Company are elected annually at the Annual General Meeting of Shareholders. Each Director (whenever elected) holds office until the next Annual General Meeting of Shareholders following his election and until his successor is elected and qualified or until his earlier resignation or removal. Any Director may resign at any time upon written notice to the Board of Directors, to the Chairman of the Board or to the President of the Company. Any Director may be removed with or without cause at any time by an 70 affirmative vote of a majority of the shareholders entitled to vote. If any vacancies occur in the Board of Directors, of if the authorized number of Directors is increased, the Directors then in office may continue to act, and such vacancies may be filled by a majority of the Directors then in office. Any vacancies or newly created directorships also may be filled by an affirmative vote of a majority of the shareholders entitled to vote at a General Meeting of Shareholders called for such purpose. Regular meetings of the Board of Directors may be held at such places within or out of the Dominican Republic and at such times as the Board of Directors may from time to time determine. Special meetings of the Board of Directors may be held at any time or place within or outside of the Dominican Republic whenever called by the Chairman of the Board, by the President of by any two Directors. Any member of the Board of Directors may participate in a meeting of the Board of Directors by means of a telephone conference or similar communications equipment provided that all persons participating in the meeting can hear each other. At all meetings of the Board of Directors, the presence of a majority of the total number of Directors will constitute a quorum for the transaction of business. The vote of at least a majority of the Directors present at any meeting at which a quorum is present is necessary to constitute the act of the Board of Directors unless otherwise provided by applicable law. PURPOSE Article 2 of our by-laws states that the purpose of the Company is: - to provide, maintain and operate telecommunications systems in the Dominican Republic and elsewhere; - to enter into such agreements as may be required to be interconnected to the switched public telephone network, as well as to any domestic networks rendering inter-urban services, as may be required by said telecommunications systems; and - to construct, maintain, and exploit a private telecommunications system for the transmission of national and international calls and for the transmission or reception of messages and signals of any kind. CAPITAL STOCK Our authorized capital stock consists of 55,000,000 shares of Class A common stock and 25,000,000 shares of Class B stock. Both classes of capital stock vote together as a single class on matters except any matter that would adversely affect the rights of either class. These matters would need to be approved by a special meeting of the holders of the class of shares to be affected. The Class A common stock has one vote per share and the Class B stock has ten votes per share. The economic rights of each class of capital stock are identical. REGISTRATION AND TRANSFER All shares are evidenced by share certificates in registered form. Dominican law requires that all shares be represented by a certificate, although a single certificate may represent multiple shares of stock. Certificates may be issued in the name of the registered holder, bearer or to-order form. All of our share certificates are issued in the name of. Dominican law also requires that all transfers, encumbrances and liens on nominative shares must he recorded in the share registry and only are enforceable against us and third parties after such registration has taken place. The Bank of New York is the registrar and transfer agent for the Class A common stock, except during shareholders meetings when we will maintain the share registry for the Class A common stock. SHAREHOLDERS MEETINGS Shareholders are entitled to vote on all matters at ordinary or special shareholders' meetings. The board of directors will convene an annual shareholders' meeting at least once a year in order for shareholders: 71 - to elect new directors and a vigilance officer; - to acknowledge the vigilance officer's report; and - for management to report upon our financial performance and for the shareholders to decide whether or not to distribute dividends. Ordinary shareholders' meetings may be convened at other times in order to transact other business, including to remove directors. Special shareholders' meetings are convened in order to effect fundamental changes in our structure, including to approve amendments to our by-laws. Under our by-laws, shareholders' meetings may be convened by: - the Chairman of the Board of Directors; - a majority of the members of the board at any time; - at the request of the holders of 30% of the shares entitled to be cast at such meeting; and - at the request of the vigilance officer in urgent circumstances, which are not defined under Dominican law. Shareholders meetings may he convened not less than 30 but not more than 60 calendar days after written notice has been mailed to shareholders. A majority of the shares entitled to be cast constitutes a quorum at all shareholders meetings. Our by-laws provide that holders of two-thirds of the votes entitled to be cast is required to approve: - amendments to the by-laws, including increases or decreases of our authorized share capital; - the issuance of shares of Class B stock in addition to those shares of Class B stock outstanding on the date of the adoption of the by-laws, except in connection with a dividend or other distribution with respect to, or a subdivision, consolidation or reclassification of all outstanding shares of stock; - the declaration and payment of any dividend or distribution with respect to our capital stock; - any increase or decrease in the number of directors; and - our voluntary winding up or liquidation or the filing of a bankruptcy petition. The affirmative vote of the holders of a majority of votes entitled to be cast is required to approve all other actions. Shareholders may vote by proxy, and the depositary will cast proxies as directed by the holders of the ADRs. LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY In addition to voting for directors at the annual shareholder's meeting, shareholders are asked to vote upon the performance of management. Our vigilance officer, an officer elected by the shareholders each year, delivers a report on our financial performance and other issues related to management's performance. If the holders of a majority of the votes entitled to be cast approve management's performance, all shareholders are deemed to have released the directors and officers from claims or liability to us or our shareholders arising out of actions taken or any failure to take actions by any of them on our behalf during the prior fiscal year, with certain exceptions. Shareholders will likely fail in any suit brought in a Dominican court with respect to the acts or omissions deemed to have been released. Officers and directors may not be released from any claims or liability for criminal acts, fraud, self-dealing or gross negligence. If the shareholders do not approve management's performance, the vigilance officer's report may form the basis of any suit brought by the shareholders against our officers and directors. 72 Our by-laws provides that we will indemnify any person made or threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person, or a person of whom he or she is the legal representative, is or was our director, officer, employee or agent or any of our predecessors, or serves or served any other enterprise as a director, officer, employee or agent at our request or any of our predecessors. We are required to pay any expenses reasonably incurred by a director or officer in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it ultimately is determined that he or she is not entitled to be indemnified by us under our by-laws or otherwise. We may, by action of our Board of Directors, provide for the payment of such expenses incurred by our employees and agents as it deems appropriate. LIQUIDATION RIGHTS Each shareholder is entitled to a proportionate share of any of our assets available upon dissolution after the payment of debts owed to creditors. Shareholders are deemed to be creditors of our company to the extent of declared and unpaid dividends. DIVIDENDS Under Dominican law, only shareholders may authorize the declaration and payment of dividends. Shareholders are entitled to receive dividends in proportion to their respective capital participation, subject to adjustment as provided in the by-laws. Dividends are payable only from after-tax profits, and only after we have set aside at least 5% of our annual profits as a legal reserve (until such reserve equals 10% of paid-in capital). The by-laws provide that shareholders may only approve the declaration and payment of dividends or distributions if the declaration or payment of such dividend or distribution would not violate any obligation, contractual or otherwise, to which we or any of our subsidiaries are a party or by which any of them or their respective properties or operations are bound. VOTING RIGHTS The holders of Class A common stock and Class B stock vote together with respect to all matters. Every holder of Class A common stock is entitled to one vote for each share of Class A common stock held and every holder of Class B stock is entitled to ten votes for each share of Class B stock held by the number of shares of Class A common stock into which one share of Class B stock is then convertible. Under our by-laws, Class B stock may not be transferred except to permitted transferees. Permitted transferees include 1. Oleander 2. Motorola 3. any subsidiary or affiliate, as defined, and 4. with respect to Oleander, Manuel Arturo Pellerano Pena and any member of the family of Manuel Arturo Pellerano Pena as of the date of the initial public offering that had an interest (including indirectly through any corporation, trust or entity) in Oleander and - the spouse or surviving spouse and natural and adopted children of any such family member - any trust existing solely for the benefit of family members and any person who would be a permitted transferee of any such family member under clause (A) and any trustee of such trust - upon the death of any such member or any person who would be a permitted transferee of any member, such holder's estate or any executor, administrator or other legal representative of such holder, and 73 - any corporation, partnership or other entity all of the outstanding equity interests of which are owned, or all of the outstanding voting power of which is controlled, directly or indirectly by, or any trust or similar entity the sole beneficiaries of which are, such members and their permitted transferees. If, despite these restrictions on transfer, a shareholder owning shares of Class B stock transferred its shares to a person or entity other than to Oleander, Motorola or a permitted transferee, the shareholder will only become entitled to one vote per share. If, with respect to any shares of Class B stock owned by Oleander and its permitted transferees, the shares of common stock owned by Oleander and its permitted transferees constitute less than 10% of the outstanding common stock, such shares of Class B stock will entitle the holder to one vote per share. If, with respect to any shares of Class B stock owned by Motorola and its permitted transferees. the shares of common stock owned by Motorola and its permitted transferees constitute less than 10% of the outstanding common stock, such shares of Class B stock will entitle the holder to one vote per share. Oleander, Motorola and any permitted transferee may pledge shares of Class B stock without reducing the number of votes to which it is entitled; provided, however, that if such shares of Class B stock are transferred to or registered in the name of the pledgee (unless the pledgee is a permitted transferee), the number of votes to which such shares of Class B stock are entitled will be reduced until Oleander, Motorola or any of their permitted transferees either cures any default that resulted in the transfer or registration or reacquires the shares from the pledgee. PREEMPTIVE AND OTHER RIGHTS The holders of Class A common stock and Class B stock are not entitled to preemptive or similar rights. The shares of Class A common stock and Class B stock are not subject to redemption or a sinking fund. Under our by-laws, we are authorized to issue shares of Class B stock only in connection with a dividend or other distribution with respect to, or a subdivision, consolidation or reclassification of, all outstanding shares of Class A common stock. In the event of any subdivision, consolidation, reclassification or other change in the Class A common stock, the Board of Directors, in its discretion, in lieu of issuing additional shares of Class B stock, may adjust the number of shares of Class A common stock into which the Class B stock is convertible and the number of votes to which each share of Class B stock is entitled. REORGANIZATION, CONSOLIDATION, SHARE EXCHANGE OR MERGER In the event of a reorganization, consolidation, share exchange or merger of the Company, each holder of outstanding shares of stock of the Company shall be entitled to receive for each of his shares the same kind and amount of consideration (whether consisting of cash, property or securities) to be received by each other holder of the same class of stock, if any for each of his shares. EXCHANGE CONTROLS FOREIGN EXCHANGE CONTROLS The foreign exchange system of the Dominican Republic is administered by the Central Bank. In January 1991, the Monetary Board of the Central Bank instituted the current foreign exchange system which permits the purchase of foreign currency from commercial banks located in the Dominican Republic. Prior to January 1991, persons were required to purchase foreign currency directly from the Central Bank. The resolution adopted by the Monetary Board in 1991 retained the Central Bank's administrative authority over the foreign exchange system by requiring registration with and approval by the Central Bank in order to repatriate foreign currency abroad. The Monetary Board further liberalized the foreign exchange system in September 1994, but it retained the requirement that the payment of debt obligations abroad be registered with the Central Bank. This registration generally has been regarded as ministerial in nature, except that short-term advances for exports of goods and services still require prior approval of the Central Bank. Dominican banks are required to submit an application form to the Central Bank for approval of any foreign currency exchange transactions. We cannot assure you that Dominican authorities will not change the Dominican Republic's monetary policies to restrict the exchange of Dominican pesos for U.S. dollars. 74 The Central Bank requires that any person who has registered foreign debt obligations pay a 5% commission on amounts of Dominican pesos exchanged for foreign currency to be remitted abroad. FOREIGN EXCHANGE SYSTEM The current foreign exchange system in the Dominican Republic was instituted in January 1991. Under this system, there are two primary exchange rates: - the rate established by the Central Bank at which the Dominican government buys and sells foreign currency or the official rate; and - the freely floating, private commercial bank rate at which private banks and other authorized currency exchange agents sell foreign currency, or the private market rate. OFFICIAL RATE The official rate is the rate at which companies in certain strategic industries are required to surrender revenues received in foreign currency to the Central Bank for Dominican pesos. The strategic industries subject to this requirement include the telecommunications industry, and, as a result, we are subject to this requirement. Accordingly, every U.S. dollar we receive as revenues must be surrendered to the Central Bank at the official rate unless otherwise authorized by the Central Bank. On May 3, 2002, the official rate was RD$17.74 per U.S. dollar. PRIVATE MARKET RATE The private market rate is the rate at which we purchase the foreign currency we need to pay foreign suppliers or otherwise to meet our obligations abroad. According to current regulations, all purchases of foreign currency from private commercial banks must be reported daily to the Central Bank. This requirement permits the Central Bank to supervise and keep statistics on the private market rate but does not give the Central Bank direct control over the private exchange rate. The Central Bank publishes a weighted average private market rate on a weekly basis. The Central Bank is entitled to receive a 5% commission on all purchases of foreign currency to be remitted abroad. Interest, principal and all other payments in respect of the 113/8% senior notes due 2004 are required to be paid to the trustee in U.S. dollars. In addition, most of our equipment and inventory purchases have been made, and are expected to continue to be made, in U.S. dollars. Since September 1999, the Central Bank has allowed us to use revenues received in U.S. dollars to pay interest on the 113/8% senior notes due 2004 without first converting them into pesos. On May 3, 2002, the Private Market Rate was RD$17.83 per U.S. dollar. FOREIGN INVESTMENT The Dominican Republic once restricted the repatriation of foreign direct investments in certain sectors of the economy, including the telecommunications sector. In December 1995, the Dominican government enacted Law No. 16-95 on foreign investment, which, among other things, permitted foreigners to make direct investments in the telecommunications sector and to repatriate funds from such investments. The foreign investment law requires that foreigners register their investment with the Central Bank in order to exchange Dominican pesos for foreign currency. 75 The foreign investment law expanded the definition of direct foreign investment to include investments in debt instruments. Prior to the enactment of the foreign investment law, the Dominican government only treated equity investments as direct foreign investments. As a result, the principal of and interest on debt instruments could be repatriated so long as the obligor adhered to the requirements of the Law on the International Transfer of Funds and the regulations and resolutions promulgated under the law. The foreign investment law brings "financial instruments" within its purview, establishing that foreign investments could take the form of those financial instruments that the Monetary Board categorizes as foreign investments. However, the Monetary Board has yet to identify which "financial instruments" could become registered as a foreign investment. We have been advised by our Dominican counsel, Pellerano & Herrera, that "financial instruments" as contemplated by the foreign investment law are Dominican peso-dominated instruments issued to foreign investors in the Dominican Republic. As such, U.S. dollar-denominated instruments, including the 11 3/8% senior notes due 2004, must be registered as foreign debt obligations under the foreign currency transfer law. TAXATION The following discussion summarizes the principal Dominican Republic income tax consequences of an investment in the ADRs, ADSs or shares of Class A common stock by a person who is neither domiciled in nor a resident of the Dominican Republic for tax purposes and who holds such ADRs, ADSs or shares of Class A common stock for investment purposes and not for purposes of a trade or business. In the opinion of the Dominican law firm, Pellerano & Herrera, the discussion sets forth the material Dominican Republic consequences of such an investment. The discussion is not intended as tax advice to any particular investor. Under our 1996 concession agreement with the Dominican government which grants us our right to operate as a telecommunications provider, dividends and interest paid to any of our shareholders, bondholders or other investors are exempt from Dominican income tax. Under Dominican tax law, the term "dividends" refers to any distribution of profits of a company to its shareholders. Thus, under the 1996 concession agreement, any dividend or distribution paid by us with respect to the class A common stock will not be subject to Dominican income tax. Our 1996 concession agreement has not yet been approved by the Dominican Congress, but was duly executed by the Dominican Executive Branch, making the concession itself valid and binding on the Dominican government under our laws. Provisions in our concession agreement providing preferential tax treatment for Tricom and its shareholders still need to be submitted to and approved by the Dominican Congress to be binding under the Dominican Constitution. At the time our concession agreement was executed, it was not submitted to the Dominican Congress for approval for political reasons. Our concession agreement, along with the concession agreements of most of Tricom's competitors in the telecommunications business, was not submitted to the Dominican Congress because the Dominican Congress was greatly divided at that time and the Dominican Executive Branch did not control a majority of the Congress. However, the tax provisions contained in these concession agreements, along with other concession agreements in other areas, have been completely followed and complied with by our Dominican Tax Administration. Until our 1996 concession agreement is approved by the Dominican Congress, cash dividends and other distributions paid by us with respect to ADSs or shares of Class A common stock held by any holder could be subject to a 25C withholding tax, which would be required to be withheld by us and paid to the Dominican tax administration at the time a cash dividend or other distribution is paid. Such tax withheld may not be a creditable foreign tax in determining the U.S. tax liability of such holder. We are not aware of any plans of the Dominican government to submit our 1996 concession agreement for approval to the Dominican Congress. Our 1996 concession agreement does not specifically address whether capital gains taxes will apply to sales of ADSs in the Dominican Republic. However, it states that the transfer or sale of our shares of any type will be exempt from Dominican income tax. Under the principles of territoriality underlying the Dominican constitution, gain from the sale or exchange of ADRs evidencing the ADSs by a foreign holder outside of the Dominican Republic would not he subject to taxation by the Dominican tax authority even if our 1996 concession agreement were not applicable to gains on the transfer or sale of ADSs. Until our 1996 concession agreement is approved by the Dominican Congress, the Dominican government could require payment of capital gains tax on gain recognized on the sale or exchange in the Dominican Republic of 76 shares of Class A common stock (as distinguished from sales or exchanges of ADSs). The capital gains tax was instituted in the Dominican Republic only in 1992 and was later modified by regulations in 1998 as part of major tax reform legislation. Under present law, the capital gains tax rate is identical to the regular income tax rate of the person or entity that earned such gain; there is no preferential rate. Thus, a corporation selling shares of Class A common stock in the Dominican Republic would be required to pay the corporate income tax of 25% on any gain from a sale or exchange of such shares. An individual, whether also would have to pay income tax at the applicable individual rate, as set forth below, on gain from the sale of shares of Class A common stock in the Dominican Republic. The individual income tax rates applicable, in the Dominican Republic since January 1, 2002 are as follows:
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
The amount of gain on which the capital gains tax is assessed is equal to the sale or transfer price (i.e., amount realized on the sale or transfer) minus the acquisition price, adjusted for inflation. Regulations for the application of the Dominican Tax Code clarify how the tax basis is to be calculated and also provide how the inflation adjustment is to be applied. There is no income tax treaty in force between the Dominican Republic and the United States. There are no Dominican inheritance or succession taxes applicable to the ownership, transfer or disposition of ADSs by a foreign holder not domiciled in the Dominican Republic at the moment of death. It is unclear whether Dominican gift taxes would apply to the transfer or other disposition by gift of shares of Class A common stock by a non-resident foreign holder; however, ADSs or ADRs are not subject to Dominican gift taxes. There are no Dominican stamp, issue, registration or similar taxes or duties payable by holders of ADSs or shares of Class A common stock. ITEM 11. QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about market risks to certain financial instruments includes "forward-looking" statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risks from adverse changes in interest rates and foreign exchange rates. We do not hold or issue financial instruments for trading purposes. INTEREST RATE RISKS Our interest expense is sensitive to changes in the general level of interest rates in the United States and in the Dominican Republic. At December 31, 2001, we had outstanding $200 million aggregate principal amount of senior notes. The senior notes bear interest at fixed rate of 11 3/8% per annum and mature in the year 2004. The fair value of the senior notes was approximately $166 million at December 31, 2001. The senior notes are U.S. dollar denominated. Our primary exposure to market risk for changes in interest rates relates to our short-term borrowings from Dominican banks. Primary exposure is based on the potential of short-term interest rate variation, not on exposure 77 to changes in fair market value of our long-term debt. At December 31, 2001, we had $298.2 million outstanding of short-term and long-term borrowings, other than our senior notes due 2004 but including trade finance, of which $262.4 million was U.S. dollar denominated, and the remaining $35.8 million was Dominican peso denominated. Of the $262.4 million of U.S. dollar dominated debt, $56.9 million was borrowed from Dominican banks, $26.9 million was commercial paper outstanding issued in Dominican markets, while the remaining $178.6 million was borrowed from international banks. Of the total $298.2 million outstanding, $212.2 million had fixed interest rates, while the remaining $86.0 million had variable interest rates. During 2001, our short-term and long-term U.S. dollar denominated borrowings bore interest at rates ranging from 4.10% per annum to 13.0% per annum. During 2001, our short-term and long-term Dominican peso denominated borrowings bore interest at rates ranging from 15.0% per annum to 19.5% per annum. A 10% increase in the average rate for our variable rate debt would have increased our loss for 2001 by approximately $1.5 million. FOREIGN EXCHANGE RISKS We are subject to currency exchange risks. During 2001, we generated revenues of $82.0 million in U.S. dollars and $161.7 million in Dominican pesos. In addition, at December 31, 2001, we had $262.4 million of U.S. dollar-denominated debt outstanding, excluding the $200.0 million principal amount of the 113/8% senior notes due 2004. The impact of changes in foreign exchange rates is determined by measuring the effect of percentage changes in the range of rates during the year for our Dominican peso denominated assets and liabilities. The model reflects the weighted average change in exchange rates as resulting in the same percentage change in foreign exchange gains or losses. Dominican foreign exchange regulations require us and other telecommunications companies to convert all U.S. dollar revenues into Dominican pesos at the official exchange rate, and to purchase US dollars at the private market exchange rate. Although the official exchange rate now fluctuates and is tied to the private market rate, the official exchange rate tends to be lower than the private market rate. During 2001, the average official exchange rate was RD$16.69 per $1.00 while the average private market rate was RD$16.88 per $1.00. Our functional currency is the U.S. dollar and, as a result, we must translate the value of Dominican peso-denominated assets into U.S. dollars when compiling our financial statements. This translation can create foreign exchange gains or losses depending upon fluctuations in the relative value of the Dominican peso against the U.S. dollar. During 2001, we recognized an approximate $283,000 foreign exchange loss. If the Dominican peso had devalued by an additional 10% against the U.S. dollar on average in 2001, then we would have realized an additional foreign exchange loss of approximately $26,000. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not Applicable. PART II. ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Not applicable. 78 ITEM 15. [RESERVED] ITEM 16. [RESERVED] PART III. ITEM 17. FINANCIAL STATEMENTS Not Applicable. ITEM 18. FINANCIAL STATEMENTS The following consolidated financial statements are filed as part of this Annual Report on Form 20-F 1. Independent Auditors' Report. 2. Consolidated Balance Sheets as of December 31, 2000 and 2001. 3. Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000, 2001. 4. Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 2000 and 2001. 5. Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001. 6. Notes to Consolidated Financial Statements. ITEM 19. EXHIBITS EXHIBIT NUMBER 1.1 Amended and Restated By-laws of the Company with English translation thereof.(1) 2.1 Indenture, dated August 21, 1997, between The Bank of New York, as trustee, and the Company.(2) 4.1 IDEN(R) Infrastructure Supply Agreement, dated July 31, 2000, between Motorola, Inc. and Tricom Latinoamerica, S.A.(3) - ---------- (1) Incorporated by Reference to Exhibit 3 to Amendment No. 1 to the Registration Statement on Form F-1, registration number 333-8574, filed May 1, 1998. (2) Incorporated by Reference to Exhibit 4.1 to the Company's Registration Statement on Form F-4, registration number 333-8150, filed December 29, 1997. (3) Incorporated by Reference to Exhibit 4.1 to the Company's Form 20-F/A, file number 1-14816, filed November 21, 2001. 79 TRICOM, S.A. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Independent Auditors' Report..............................................................................F-2 Consolidated Balance Sheets as of December 31, 2000 and 2001..............................................F-3 Consolidated Statements of Operations for the Years Ended December 31, 1999, 2000 and 2001................F-5 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 2000 and 2001......F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 2000 and 2001................F-8 Notes to Consolidated Financial Statements...............................................................F-10
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of TRICOM, S.A.: We have audited the accompanying consolidated balance sheets of TRICOM, S.A. and subsidiaries as of December 31, 2000 and 2001 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three year-period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TRICOM, S.A. and subsidiaries as of December 31, 2000 and 2001 and the results of their operations and their cash flows for each of the years in the three year-period ended December 31, 2001, in conformity with generally accepted accounting principles in the United States of America. As explained in notes 3 and 21 to the consolidated financial statements, the Company's operations in Panama are pending the final authorization from the regulators for the interconnection of its digital trunks system to the Panamanian main network. Such authorization have been challenged by the competition and, as of the date of this report, are pending final resolution by the Panamanian Courts. As discussed in note 27 to the consolidated financial statements, effective July 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and certain provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as required for goodwill and intangible assets resulting from business combinations consummated after June 30, 2001. As explained in note 14 to the consolidated financial statements, effective January 1, 2000, the Company changed its method of accounting for installation and activation revenues. Santo Domingo, Dominican Republic KPMG April 19, 2002 -------------------------------- Member Firm of KPMG International F-2 TRICOM, S.A. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 2001
Assets 2000 2001 - --------------------------------------------------------- --------------- ---------------- Current assets: Cash on hand and in banks (note 6) $ 18,199,552 $ 12,576,050 Accounts receivable (notes 5, 6, 13 and 22): Customers 21,970,677 27,537,952 Carriers 8,729,886 4,168,187 Related parties 1,663,396 5,191,359 Officers and employees 556,577 687,355 Other 1,601,119 1,010,801 --------------- ---------------- Total Inventories 34,521,655 38,595,654 Allowance for doubtful accounts (2,394,903) (4,097,001) --------------- ---------------- Accounts receivable, net 32,126,752 34,498,653 Inventories, net: Equipment and accessories 8,889,385 6,485,541 Other 651,708 568,559 --------------- ---------------- Total inventories 9,541,093 7,054,100 Investments (note 6) - 15,200,000 Prepaid expenses (notes 6 and 18) 7,947,531 5,850,267 Deferred income taxes (note 19) 801,008 1,624,637 --------------- ---------------- Total current assets 68,615,936 76,803,707 --------------- ---------------- Investments (note 7) 3,289,459 3,968,711 Property and equipment, net (notes 4, 6, 9, 12 and 16) 586,223,900 685,916,632 Other assets at cost, net of amortization (notes 6 and 8) 24,310,564 26,214,053 Goodwill, net of amortization (note 9) - 36,511,523 --------------- ---------------- $ 682,439,859 $ 829,414,626 =============== ================
See accompanying notes to consolidated financial statements F-3 TRICOM, S.A. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) DECEMBER 31, 2000 AND 2001
Liabilities and Stockholders' Equity 2000 2001 - -------------------------------------------------------------------- ------------------ ---------------- Current liabilities: Notes payable (notes 6, 10, 11 and 16): Borrowed funds - banks $ 82,131,865 $ 86,872,001 Borrowed funds - related parties 31,410,612 27,076,366 Commercial paper - 29,242,556 Current portion of long-term debt 3,213,939 30,493,532 ------------------ ---------------- 116,756,416 173,684,455 ------------------ ---------------- Current portion of capital leases - related party (notes 6 and 12) 5,308,310 6,643,766 Accounts payable (notes 6 and 13): Carriers 13,835,276 8,831,981 Related parties 2,093,385 6,868,834 Suppliers 21,653,727 17,543,401 Other 242,582 3,881,848 ------------------ ---------------- 37,824,970 37,126,064 Other liabilities (note 14) 19,990,490 14,644,012 Accrued expenses (notes 6 and 15) 14,035,182 20,272,800 ------------------ ---------------- Total current liabilities 193,915,368 252,371,097 ------------------ ---------------- Reserve for severance indemnities (note 9) 9,727 1,639,718 Deferred income taxes (note 19) 974,867 2,172,814 Commercial paper (note 11) - 1,153,759 Capital leases, excluding current portion - related party (notes 6 and 12) 15,520,965 11,213,000 Long-term debt, excluding current portion (note 16) 261,222,759 305,459,748 ------------------ ---------------- Total liabilities 471,643,686 574,010,136 ------------------ ---------------- Minority interest - 1,870,833 Shareholders' equity (notes 17 and 23): Class A common stock at par value RD$10: Authorized 55,000,000 shares; 9,700,000 shares issued at December 31, 2000 and 24,245,920 at December 31, 2001 6,210,025 14,753,134 Class B stock at par value RD$10: Authorized 25,000,000 shares; issued 19,144,544 shares 12,595,095 12,595,095 Additional paid-in-capital 159,981,808 217,290,020 Retained earnings 34,033,002 10,919,165 Other comprehensive income-foreign currency translation (note 2.2) (2,023,757) (2,023,757) ------------------ ---------------- Shareholders equity, net 210,796,173 253,533,657 Commitments and contingencies (notes 3, 16, 18, 19, 20, 21 and 24) ------------------ =--------------- $ 682,439,859 $ 829,414,626 ================== ================
See accompanying notes to consolidated financial statements. F-4 TRICOM, S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
1999 2000 2001 ---- ---- ---- Operating revenues (note 6): Toll revenues $ 23,118,149 $ 28,666,107 $ 29,017,817 International revenues 60,592,134 84,187,050 82,024,320 Local service 33,298,534 51,309,514 63,419,066 Cellular and PCS 26,473,985 35,796,234 37,302,337 Data and Internet 560,086 3,461,192 8,268,003 Paging 2,695,531 1,703,963 1,051,368 Sale of equipment 7,689,534 5,263,137 2,686,304 Installation and activation fees 15,501,847 13,748,906 14,347,671 Cable revenues - - 4,735,872 Other 889,141 161,552 919,427 ------------ ------------- ------------- Total operating revenues 170,818,941 224,297,655 243,772,185 ------------ ------------- ------------- Operating costs: Satellite connections and carrier (note 21) 43,687,794 68,607,640 68,336,474 Programming costs (note 21) - - 1,225,397 Network depreciation 15,982,827 29,341,705 44,510,197 Expense in lieu of income taxes (note 18) 12,763,565 10,173,983 12,646,103 Selling, general and administrative expenses, including depreciation charges of $4,854,652, $6,823,574 and $9,922,008 in 1999, 2000 and 2001, respectively (notes 6, 20, 21 and 24) 51,501,272 70,690,895 98,754,972 Cost of equipment sold 3,988,446 2,911,386 2,069,561 Other 1,432,957 1,550,161 1,745,902 ------------ ------------- -------------- Total operating costs 129,356,861 183,275,770 229,288,606 ------------ ------------- ------------- Operating income 41,462,080 41,021,885 14,483,579 ------------ ------------- ------------- Other income (expenses): Interest expense (note 6) (22,430,031) (34,037,053) (42,108,715) Interest income (note 6) 2,389,329 3,301,031 2,428,316 Foreign currency exchange gain (loss) (202,724) (303,078) (259,951) Gain on sale of land (note 6) 897,833 - - Gain (loss) on sale of equipment - 29,874 (282,713) Other, net (note 6) 179,409 (197,118) 1,361,944 ------------ ------------- ------------- Other expenses, net (19,166,184) (31,206,344) (38,861,119) ------------ ------------- ------------- Earnings (loss) before income taxes, minority interest and cumulative effect of accounting change 22,295,896 9,815,541 (24,377,540) Income taxes (note 19) (141,660) (588,377) (511,376) ------------ ------------- ------------- Earnings (loss) before minority interest and cumulative effect of accounting change 22,154,236 9,227,164 (24,888,916) Minority interest - - 1,775,079 ------------ ------------- ------------- Earnings (loss) before cumulative effect of accounting change 22,154,236 9,227,164 (23,113,837) Cumulative effect of accounting change: Organization costs (119,711) - - Installations and activations revenues (note 14) - (16,452,799) - ------------ ------------- ------------- Net earnings (loss) $ 22,034,525 $ (7,225,635) $ (23,113,837) ============ ============= ============= Earnings (loss) per common share - basic and diluted Earnings before cumulative effect of accounting change 0.89 0.33 (0.78) Cumulative effect of accounting change - (0.59) - ------------ ------------- ------------- Net earnings (loss) per common share - basic and diluted $ 0.89 $ (0.26) $ (0.78) ============ ============= ============= Pro forma amounts assuming the change in accounting principle for installation and activation fees retroactively: Net earnings (loss) $ 17,183,884 $ 9,227,164 $ (23,113,837) ============ ============= ============= Earnings per common share - basic and diluted $ 0.89 $ (0.26) $ (0.78) ============ ============= ============= Average number of common shares used in calculation: Basic 24,844,544 27,723,665 29,571,266 ============ ============= ============= Diluted 24,888,709 27,896,666 29,571,266 ============ ============= =============
See accompanying notes to consolidated financial statements. F-5 TRICOM, S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
Retained Earnings Number of Common Shares Issued Common Stock ------------------------------- --------------------------------- -------------------- Additional Appropriated Class A Class B Class A Class B Paid in Capital Legal Reserve --------------------------------- -------------------- ---------------- -------------- Balance at December 31, 1998 5,700,000 19,144,544 $ 3,750,000 12,595,095 $ 94,015,852 $ 1,172,188 Stock-based compensation to non-employees (note 24) - - - - 273,000 - Transfer to legal reserve (note 23) - - - - - 480,819 Net earnings - - - - - - ---------- ---------- ----------- ---------- ------------- ------------- Balance at December 31, 1999 5,700,000 19,144,544 3,750,000 12,595,095 94,288,852 1,653,007 Issuance of common shares, Net of issuance cost of $6,852,774 (note 17) 4,000,000 - 2,460,025 - 64,687,201 - Stock-based compensation to non-employees (note 24) - - - - 1,005,755 - Net loss - - - - - - ---------- ---------- ----------- ---------- ------------- ------------- Balance at December 31, 2000 9,700,000 19,144,544 6,210,025 12,595,095 159,981,808 1,653,007 Issuance of common shares in payment of company acquisition (notes 9, 17 and 28) 3,375,000 - 1,991,250 - 19,676,250 - Issuance of common shares, net of issuance cost of $1,331,096 (note 17) 11,170,920 - 6,551,859 - 36,801,108 - Stock-based compensation to non-employees (note 24) - - - - 830,854 - Net loss - - - - - - ---------- ---------- ----------- ---------- ------------- ------------- Balance at December 31, 2001 24,245,920 19,144,544 $14,753,134 12,595,095 $ 217,290,020 $ 1,653,007 ========== ========== =========== ========== ============= ============= Other Comprehensive Income-Foreign Currency Shareholders' Un-appropriated Translation Equity, Net ----------------- ---------------- ------------- Balance at December 31, 1998 $ 18,051,924 $ (2,023,757) $ 127,561,302 Stock-based compensation to non-employees (note 24) - - 273,000 Transfer to legal reserve (note 23) (480,819) - - Net earnings 22,034,525 - 22,034,525 ------------ -------------- ------------- Balance at December 31, 1999 39,605,630 (2,023,757) 149,868,827 Issuance of common shares, Net of issuance cost of $6,852,774 (note 17) - - 67,147,226 Stock-based compensation to non-employees (note 24) - - 1,005,755 Net loss (7,225,635) - (7,225,635) ------------ -------------- ------------- Balance at December 31, 2000 32,379,995 (2,023,757) 210,796,173 Issuance of common shares in payment of company acquisition (notes 9, 17 and 28) - 21,667,500 Issuance of common shares, net of issuance cost of $1,331,096 (note 17) - - 43,352,967 Stock-based compensation to non-employees (note 24) - - 830,854 Net loss (23,113,837) - (23,113,837) ------------ -------------- ------------- Balance at December 31, 2001 $ 9,266,158 $ (2,023,757) $ 253,533,657 ============ ============== =============
See accompanying notes to consolidated financial statements. F-6 TRICOM, S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
1999 2000 2001 ----- ----- ---- Cash flows provided by operating activities: Net earnings (loss) $ 22,034,525 $ (7,225,635) $ (23,113,837) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation 20,837,480 36,165,279 54,432,205 Amortization of debt issue cost 1,499,497 1,958,610 2,253,822 Allowance for doubtful accounts 5,420,717 3,499,893 5,519,059 Amortization of radio frequency right 198,333 320,186 660,086 Goodwill amortization - - 47,031 Provision for equipment pending 1,014,605 installation - - Foreign exchange gains 101,835 - - Expenses for severance indemnities 328,807 760,740 1,987,129 Cumulative effect of accounting change in installations and activations revenues - 16,452,799 - Cumulative effect of accounting change in organizations costs 119,711 - - Deferred income tax, net 33,660 491,890 374,318 Value of consulting services received in exchange for stock warrants 273,000 1,005,755 830,854 Minority interest - - (1,775,079) Loss (gain) on sale of fixed assets, net - (836,054) 282,713 Gain on sale of land (897,833) - - Net changes in assets and liabilities: Accounts receivable (13,407,676) (9,497,912) (839,867) Inventories (4,213,002) 160,162 2,498,234 Prepaid expenses (3,532,125) (1,310,464) 2,162,909 Long-term accounts receivable 68,937 22,619 - Other assets (3,944,266) (9,765,092) (3,946,042) Accounts payable 9,005,096 12,429,429 (3,094,374) Other liabilities (3,624,114) (252,016) (7,885,779) Accrued expenses 1,563,855 (1,258,728) 4,635,412 Reserve for severance indemnities (340,279) (782,427) (2,040,943) -------------- -------------- -------------- Total adjustments 9,491,633 49,564,669 57,116,293 -------------- -------------- -------------- Net cash provided by operating activities 31,526,158 42,339,034 34,002,456 -------------- -------------- -------------- Cash flows from investing activities (note 9 and 28): Acquisition of investments (546,185) (578,887) (15,862,209) Proceeds from maturity of US Treasury Bonds and irrevocable restricted funds 54,470,478 - - Proceeds from sale of land 2,724,458 - - Proceeds from sale of fixed assets - 2,405,494 41,653 Business acquisitions, net of cash acquired - - (47,416,009) Acquisition of land (1,826,625) - - Acquisition of property and equipment (119,182,223) (151,221,583) (113,229,826) -------------- -------------- -------------- Net cash used in investing activities (64,360,097) (149,394,976) (176,466,391) -------------- -------------- --------------
(continued) See accompanying notes to consolidated financial statements F-7 TRICOM, S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
1999 2000 2001 ----- ---- ---- Cash flows from financing activities (notes 9 and 28): Borrowed funds from banks 111,580,042 226,440,816 117,508,250 Principal payments to banks (69,643,536) (207,910,973) (115,281,528) Proceeds from issuance of commercial paper - - 30,396,315 Borrowed funds from related parties 62,233,725 71,727,978 82,699,726 Principal payments to related parties (69,929,694) (58,213,312) (87,033,972) Capital lease payments (361,292) (22,745,278) (6,317,907) Re-payment of Carifa bonds (32,000,000) - - Payments of long-term debt - (10,315,216) (3,133,887) Proceeds from issuance of long-term debt 29,087,227 45,664,687 74,650,469 Issuance of common stock - 67,147,226 43,352,967 -------------- -------------- -------------- Net cash provided by financing activities 30,966,472 111,795,928 136,840,433 Effect of exchange rate changes on cash on hand and in banks (50,377) - - -------------- -------------- -------------- Net increase (decrease) in cash and on hand and in banks (1,917,844) 4,739,986 (5,623,502) Cash on hand in and banks at beginning of 18,199,552 the year 15,377,410 13,459,566 -------------- -------------- -------------- Cash on hand an in banks at the end of the year $ 13,459,566 $ 18,199,552 $ 12,576,050 ============== =============== ============== Supplementary information: Interest paid (net of capitalization) (23,373,038) (33,785,503) (40,731,785) Capital lease obligation incurred $ 26,244,000 $ 17,691,845 $ 3,345,398 ============== ============== ==============
See accompanying notes to consolidated financial statements F-8 TRICOM, S.A. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000 and 2001 1 ORGANIZATION AND NATURE OF BUSINESS The consolidated financial statements of TRICOM, S. A. (the Company) include operations of the following companies engaged in the telecommunication and media industry, and with operations in the Dominican Republic, New York, U.S.A. and Republic of Panama. TRICOM, S. A. (Parent Company) GFN Comunicaciones, S. A. TRICOM Centroamerica, S. A. Call Tel Corporation TRICOM USA, Inc. and Subsidiaries TRICOM Latinoamerica, S. A. and Subsidiaries (a company in development stage) TCN Dominicana, S. A. (TCN or Telecable) TRICOM, S. A. (TRICOM or the Company) is a diversified telecommunications company, which provides international and domestic long distance, basic local service, mobile, Internet and broadband services in the Dominican Republic and long distance service through subsidiaries in the United States. The Company's operations in the Dominican Republic are governed by the Telecommunications Law (Law No.153-98) and by a Concession Agreement signed with the Dominican Government and confirmed by the National Congress on April 30, 1990. This agreement is for an initial term of 20-year through June 30, 2010, subject to renewal for an additional 20-year term. Law No. 153-98 establishes a basic framework to regulate the installation, maintenance and operation of telecommunications networks and the provision of telecommunications services and equipment. The law adopted the "Universal Services Principle" by guaranteeing access to telecommunications services at affordable prices in low-income rural and urban areas. The law creates a fund for the development of the telecommunications sectors that is supported by a 2% tax on industry participants' billings of all telecommunication services. TRICOM USA, Inc. (TRICOM USA) is a Company organized under the Laws of Delaware and authorized by the United States Federal Communications Commission (FCC) to operate as a facilities-based carrier in the United States. TRICOM Latinoamerica, S. A. is a company organized under the Laws of the Cayman Islands, on May 12, 2000. The activity of this company is to act as the control of the telecommunication operations in Central America and the Caribbean. TCN Dominicana, S. A. is a company organized on September 13, 2001, under the laws of the Dominican Republic, and engaged in the operation of three cable television systems and networks in the Dominican Republic. F-9 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of TRICOM, S. A.(Parent Company) and its majority owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses. Actual results could differ from those estimates and assumptions. 2.2 FOREIGN CURRENCIES The Company's functional currency is the US Dollar. Monetary assets and liabilities denominated in other currencies are translated to US Dollars at the exchange rate prevailing at the date of the financial statements. The exchange differences resulting from this conversion are charged or credited to foreign currency exchange gains or losses in the accompanying consolidated statements of operations. The transactions expressed in other currencies are translated at the exchange rated prevailing at the time the transaction takes place. Subsidiaries whose functional currency is other than the US Dollar are translated following the guidelines in SFAS 52; accordingly, assets and liabilities are translated to US Dollars at the exchange rate prevailing at the date of the consolidated financial statements. Revenues and expenses are translated at the average rate at the end of each month. Foreign exchange differences arising from transactions in other currencies are charged or credited to operations, while translation difference arising from the conversion of the financial statements in other currencies is recognized in comprehensive income or expense in stockholders' equity. As of December 31, 2000 and 2001, the rates used by the Company to translate Dominican peso denominated accounts at year-end were RD$16.69 and RD$17.05 per one US dollar, respectively. Panamanian Balboas (B/.) are at par with the US dollar. 2.3 CASH AND CASH EQUIVALENTS For the purpose of the statements of cash flows, the Company considers, as cash and cash equivalents, cash on hand, cash in banks, time deposits and highly liquid debt instruments with original maturities, at the time of purchase, of three months or less. 2.4 ALLOWANCE FOR DOUBTFUL ACCOUNTS The allowance for doubtful accounts receivables is established through a charge to an expense account. The Company, after analyzing current market trends and collection history of its receivable portfolio has estimated that, as a rule, that customers receivable balances over 90 days past due are uncollectible and, are therefore reserved. 2.5 INVENTORIES Inventories are valued at the lower of average cost or market. F-10 2.6 PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Construction costs and equipment installations in process are maintained as construction projects until they are completed and/or equipment is placed in service. Depreciation is recorded from first full month that the assets are placed in service. 2.7 DEPRECIATION AND AMORTIZATION The depreciation method used by the Company is the straight-line method, that is, the uniform distribution of cost over the estimated useful lives of the corresponding assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the improvement. The estimated useful lives of assets are as follows:
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
2.8 OTHER ASSETS Deferred debt issue costs and bank debt are amortized over the debt service period of the related debt. The radio frequency rights are amortized on a straight-line basis over their useful lives, which range from 15 to 20 years. Deferred commissions on prepaid calling cards are recognized when the deferred revenues are recorded. Commissions expense on sales of calling cards outside of the Dominican Republic are recognized based on the minutes used. Commission expense on sales of calling cards within the Dominican Republic is recorded when the collections of outstanding invoices to distributors and/or wholesalers are made. Cellular service plans which include the price of the telephone equipment, generate deferred assets for the net cost of the equipment, which is amortized over the initial contract period of 18 months, from the month following the equipment is delivered. 2.9 SEVERANCE INDEMNITIES According to the Labor Code of the Dominican Republic, employers are required to pay severance indemnities to those workers whose labor contracts are terminated without just cause. Just cause is defined in the Labor Code as including misstatements by an employee in his job application, termination of an employee within three months of his hire for poor performance, dishonesty, threats of violence, willful or negligent destruction of property, unexcused absence or termination of the job for which the employee was hired. The Company maintains a minimal reserve to cover severance indemnities based on its experience. As of December 31, 2001, the liability for severance indemnities was $1,625,215 which relates primarily to the obligations for employees of TCN Dominicana, S. A., assumed in connection with the Company's acquisition in 2001. F-11 2.10 REVENUE RECOGNITION TOLL REVENUES Toll revenues are amounts received by the Company from customers in the Dominican Republic for international and domestic long distance calls. These revenues are recognized as the calls are made. INTERNATIONAL SETTLEMENT REVENUES International settlement revenues represent amounts due from telecommunications carriers for calls (based on minutes) originated outside the Dominican Republic, which terminate into the Company's Dominican network as per operating agreements between the Company and each of such carriers. These revenues are recognized as the minutes are provided. PREPAID CALLING CARD REVENUES The Company recognizes revenue from prepaid calling cards based on card usage. The Company accounts for cash received or credit extended from the sale of the prepaid calling cards as deferred revenues, which are then recognized as the cards are used. This revenue may be part of the toll or international revenues depending on the call destination. LOCAL SERVICE REVENUE Local service revenue consists of wire line rent, local measured service (represents minutes used by local customers which are billed at established rates or tariffs per actual minutes of call duration) as well as charges for "Custom Local Access Signaling Services" (CLASS). CLASS represents value-added services which include call forwarding, three-way calling, call waiting and voice mail. It also features vertical services such as incoming-call identification, call trace, call blocking, automatic return of the most recent incoming call, call redial, and selective forwarding and programming to permit for distinctive ringing for incoming calls requested for local customers, which are billed in addition to rent. Local service revenues also include collect call revenues and revenues from other miscellaneous wire line services. These revenues are recognized as the services are rendered. CELLULAR AND PCS REVENUES Represents fees received for mobile cellular and PCS services, including interconnection charges for incoming calls to the Company's cellular and PCS subscribers (these revenues do not include international and domestic long distance calls generated by cellular or PCS units). Cellular and PCS fees consist of fixed monthly access fees and per-minute usage charges, as well as additional charges for custom or vertical features, which include call waiting, call forwarding, three-way calling and voice mail, and for other miscellaneous cellular and PCS services. These revenues are recognized as the services are rendered. DATA AND INTERNET Represents fees received for data transmission services via ATM (Asynchronous Transfer Mode), Frame-Relay, wireless Internet and other such services to residential and corporate customers. These revenues are recognized as the services are rendered. PAGING Paging revenues consist of fixed monthly charges for nationwide service and the use of paging equipment and activation fees. These revenues are recognized as these services are rendered. F-12 SALES OF EQUIPMENT These revenues consist of sales and rental fees charges to customers for communication equipment, including private branch exchanges, key telephone systems, residential telephones, cellular handsets and paging units. These revenues are recognized upon sale to the customer. INSTALLATION AND ACTIVATION FEES Revenues from installations consist of amounts charged by the Company to its clients for the installation of local access lines, private interchange, central telephone systems, as well as charges for the activation of cellular phones and PCS. Effective January 1, 2000, the Company adopted Staff Accounting Bulletin (SAB 101), issued by the Securities and Exchange Commission (SEC), which establishes certain criteria regarding revenue from installation and activation. As a result of this adoption, revenues are recognized over the estimated average service life based on the Company's experience (initially this was calculated as 35 months). In previous years, these revenues were recognized as generated. As a result of a review of the average service lives based on the Company's experience relative to client maintenance during 2001, effective October 1, 2001, the Company revised the estimated average service life period for the amortization of the installation and activation revenue. Consequently, the recognition period for these revenues was changed to 24 months. INCOME FOR CABLE TV SERVICES Consists of fees received for the transmission of television channels and programs in the Dominican Republic, as well as other cable related services. These revenues are recognized as the services are provided. OTHER Other revenues represent revenues that are not generated from the Company's core business activities, including commissions and revenues from the sale of miscellaneous products. These revenues are recognized when the service or product is delivered. 2.11 CAPITALIZATION OF INTEREST Interest is capitalized on qualified projects and included as part of project costs during the period necessary for installation. During the years ended December 31, 1999, 2000 and 2001, interest capitalized as part of construction projects amounted to approximately $11,900,000, $11,300,000 and $9,800,000, respectively. 2.12 EXPENSE IN LIEU OF INCOME TAX The parent company TRICOM, S. A. pays a tax, which is based on a percentage of the Company's domestic gross revenues (less deductions for access to the local network) plus a percentage of the Company's net international settlement revenues. An accrual is made for any difference between the date when these items are reported to the tax authorities and when they are reported in the accompanying consolidated statements of operations. 2.13 INCOME TAXES In the case of subsidiary TRICOM USA, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are F-13 measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 2.14 EARNINGS PER COMMON SHARE Basic earnings per share have been computed based on the weighted average number of common shares outstanding. Diluted earnings per share reflect the increase in average common shares outstanding that would result from the assumed exercise of outstanding stock options, calculated using the treasury stock method. The following table reconciles weighted average common shares outstanding used in the calculation of basic earnings (loss) per common share to the number of shares used in the calculation of diluted earning (loss) per share for the years 1999, 2000 and 2001:
1999 2000 2001 ---------- ---------- ---------- Weighted average number of common shares outstanding - basic...................... 24,844,544 27,723,665 29,571,266 Dilutive effect of potential common shares issuable upon exercise of employee stock options and warrants..................... 44,165 173,001 - ---------- ---------- ---------- Weighted average number of common shares outstanding - diluted........................ 24,888,709 27,896,666 29,571,266 ========== ========== ==========
For 2001, all stock options and warrants are excluded from consideration of diluted loss per share because of the Company's net loss. 2.15 PENSION PLAN From September 1, 2000 a pension administration company has managed the Company's plan, which was converted to a defined contribution plan. Under this arrangement, both the Company and the employee make fixed contributions to the employee's account. The contributions made by the Company are recognized as monthly expenses. Prior to September 1, 2000, the Company had a contributory defined benefit pension and retirement plan that included all personnel. The cost of the plan had been determined based on actuarial studies and includes amortization of past service costs over the estimated average life of its employees. 2.16 IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company accounts for long-lived assets in accordance with the provision of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell. 2.17 ADVERTISING COSTS Advertising costs are expensed as incurred. For the years ended December 31, 1999, 2000 and 2001 these costs amounted to $5,431,834, $4,204,391 and $6,074,121, respectively, and are included as part of selling, general and administrative expenses in the accompanying consolidated statements of operations. F-14 2.18 STOCK OPTION PLAN The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, including FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25" issued in March 2000, in accounting for its fixed plan stock options. As such, compensation expense is recorded on the date of grant only if the market price of the underlying stock exceeded the exercise price. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. 2.19 GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired during 2001, is accounted for as follows: The goodwill resulting from the purchase of 51% interest in the subsidiary in Panama during March of 2001 is amortized on a straight-line basis over the expected periods to be benefited, generally over 40 years. The goodwill resulting from the acquisition of TCN Dominicana, S.A. during October 2001 is not being amortized in accordance with the provisions of SFAS 142. Goodwill acquired in business combinations completed before July 1, 2001 continues to be amortized and tested for impairment prior to the full adoption of SFAS 142 on January 1, 2002. The Company assesses the recoverability of these intangible assets by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. 2.20 RECLASSIFICATION For the year ended December 31, 2001, the Company has classified as a separate line item in operating revenues in the consolidated statements of operations, data and Internet revenues. Previously, these revenues were included as part of local service revenues and totaled $560,086 and $3,461,192 for the years ended December 31, 1999 and 2000. Prior years have been reclassified to conform to the year 2001 presentation. 3 LIQUIDITY As of December 31, 2000 and 2001, the Company's current liabilities exceed its current assets by $125.3 million and $175.6 million, respectively. This is mainly a result of the short-term debt acquired in the Dominican Republic with local banks and related entities which is due on demand. Dominican banks generally make short-term loans with intentions of renegotiating interest rates in the event that the market conditions change. These debts generally are not repaid at maturity. The Company is dependent upon the continued renewal of these loans annually and semi-annually. Based upon its prior experience, the Company expects that it will be able to renew substantially all of these loans in 2002, although such renewals cannot be assured. The Company has identified an action plan to harmonize its financial situation under the best conditions offered by Dominican banks. As a result, during the first quarter of 2002, management renegotiated F-15 approximately $30.5 million of its short-term debts with local banks on a long-term basis. Such debts have been reclassified in the consolidated balance sheet, as long-term debt, as of December 31, 2001. The Company is continuing its efforts to renegotiate, on a long-term basis additional amounts of its short term borrowings. For the year ended December 31, 2001, the Company generated $34 million of cash flow from operations. Additionally, the Company funded its long term development plan through additional short and long-term borrowings and sale of Class A common stock for net proceeds of approximately $43 million primarily to one of its principal stockholders. The Company is currently reviewing its operating and capital needs and may revise or curtail its planned capital expenditures, if necessary. Management believes that cash flow from operations combined with available borrowings will be sufficient to fund its operating and capital needs through the end of 2002. Additionally, during 2001, the Company acquired the largest cable television company of the Dominican Republic. Management estimates that the projected future cash flows from the operations of this subsidiary will augment the cash flows projected by its telecommunications subsidiaries and together will improve the financial position of the Company. While the Company's Panama telecommunications subsidiary initiated its digital trunking operation in April, 2002 using Motorola's iDEN(R) technology, such subsidiary has not yet signed interconnection agreements with telecommunications companies operating in Panama. It may not be able to do so until certain lawsuits and proceedings are decided. A ruling in this case adverse to the Company could have a material negative impact on the Company's financial position and results of future operations. (See note 21). 4 PROPERTY AND EQUIPMENT A detail of property and equipment at December 31, 2000 and 2001 is as follows:
2000 2001 --------------- --------------- Operations and communications: Land...................................... $ 7,118,634 $ 11,902,288 Buildings and improvements................ 15,861,346 19,758,611 Furniture and equipment................... 10,324,397 12,975,140 Communications equipment.................. 156,045,089 216,321,333 Transmission equipment.................... 283,120,786 354,830,797 Other equipment........................... 32,538,363 25,624,184 --------------- --------------- 505,008,615 641,412,353 Less accumulated depreciation................ 70,891,750 114,543,201 --------------- --------------- Sub-total, operations and communications 434,116,865 526,869,152 Property and equipment: Buildings................................. 9,037,820 9,391,263 Furniture and office equipment............ 20,133,420 31,972,835 Transportation equipment.................. 4,636,530 6,612,102 Leasehold improvements.................... 4,807,139 6,307,745 Data processing equipment................. 33,590,043 45,459,879 --------------- --------------- 72,204,952 99,743,824 Less accumulated depreciation............. 21,157,407 31,725,040 --------------- --------------- Sub-total, property and equipment....... 51,047,545 68,018,784 --------------- --------------- Communications equipment pending obsolescence............................ 16,872,746 21,536,007
F-16
2000 2001 --------------- --------------- Cable company equipment pending installation............................ - 3,451,697 Equipment in transit (a).................. 5,789,586 4,396,131 Construction in process (b)............... 78,397,158 61,644,861 --------------- --------------- Property and equipment, net............. $ 586,223,900 $ 685,916,632 =============== ===============
(a) Equipment in transit represents accumulated costs of equipment imported by TRICOM, S. A. and TCN, for which additional import related costs are still to be incurred. (b) A detail of construction in process at December 31, 2000 and 2001 is as follows:
2000 2001 --------------- --------------- Operation and communication Buildings................................. $ 3,104,105 $ 563,058 Transmission equipment (i)................ 48,302,135 40,173,633 Cells..................................... 17,075,909 13,630,164 Other Property and equipment:........... 9,915,009 7,278,006 --------------- --------------- $ 78,397,158 $ 61,644,861 =============== ===============
(i) As of December 31, 2000, this item includes mainly switches and optic fiber projects for the Company's network in Dominican Republic. As of December 31, 2001, this item includes approximately $24.7 million for a network to provide trunking services with iDEN(R) Motorola technology, primarily in the Republic of Panama. (See note 21). 5 ACCOUNTS RECEIVABLE Changes in the allowance for doubtful accounts were as follows:
1999 2000 2001 --------------- --------------- -------------- Allowance at beginning of year............... $ 740,687 $ 4,307,563 $ 2,394,903 Increase for the year, net................... 5,420,717 3,499,893 5,519,059 Write-off during the year.................... (1,853,841) (5,412,553) (3,816,961) --------------- --------------- -------------- Allowance at end of year..................... $ 4,307,563 $ 2,394,903 $ 4,097,001 =============== =============== ==============
6 TRANSACTIONS WITH RELATED PARTIES The transactions with related parties consist principally of bank accounts, investments in certificates of deposits, loans, insurance services, advertising and advisory services and real estate leases. A detail of balances with related companies at December 31, 2000 and 2001, is as follows:
2000 2001 --------------- --------------- Assets: Cash in banks............................ $ 3,677,466 $ 4,689,200 Deposits (a)............................. 13,054,686 6,292,398 Accounts receivable (b).................. 1,663,396 5,191,359 Investments (c).......................... - 15,200,000 Prepaid expenses - insurance............. 4,472,055 4,456,265 Other assets - deposits................ 86,580 86,580 =============== =============== Liabilities: Borrowed funds (d)..................... 31,410,612 27,076,366 Commercial paper (e)................... - 1,964,942 Accounts payable....................... 2,093,385 6,868,834
F-17
2000 2001 --------------- --------------- Accrued expenses - interest payable.... - 338,497 Capital leases......................... 20,928,275 17,856,766 =============== ===============
(a) As of December 31, 2000 includes $2,185,005 in a non-interest bearing time deposit. As of December 31, 2000 and 2001 includes $10,198,900 and $2,000,000, respectively, in interest bearing deposits, which earn interest at rates between 9% and 11% in 2000 and 10% per annum in 2001. Additionally, as of December 31, 2000 and 2001, includes RD$11,195,335 ($670,781) and RD$73,185,385 ($4,292,398) in certificates of deposit, which earn interest rates of 20% per annum in 2000 and interest rates ranging from 15% to 20% per annum in 2001. (b) The Company contracts services from a related party engaged in managing the collection of past due accounts. This related party also provides these services to other related companies. During the year ended December 31 2000 and 2001, the Company recognized collection recoveries from customer accounts previously written off $3,087,728 and $2,450,205, respectively. These amounts are included, net of increase in the allowance for doubtful accounts, in selling, general and administrative expenses in the accompanying consolidated statements of operations. At December 31, 2000, the Company had amounts receivable from the related party of $1,566,447, which was collected in January 2001. As of December 31, 2001, accounts receivable includes $3,737,542 related to an insurance claim filed with Segna, S. A., a related Company, related to the loss of communications equipment. The amount of the claim represents the Company's undepreciated cost basis. (c) Correspond to certificates of deposit that earn between 9% and 10% annual interest and mature in 2002. (d) Correspond to letters of credit and open accounts with annual interest rates that range from 10% to 11.50% in 2000 and 9.5% to 12% in 2001. At December 31, 2001, the Company has available unsecured, short- term lines of credit for approximately $41,800,000. (e) Represent obligations from the issuance of commercial paper in favor of related companies amounting to $818,344, at annual interest rates ranging between 8% to 11% and RD$19,549,500 (equivalent to $1,146,598 at December 31, 2001) at rates ranging between 14% to 16% annual interest. A detail of transactions with related parties during the years ended December 31, 1999, 2000 and 2001, is as follows:
1999 2000 2001 --------------- --------------- -------------- Operating revenues - communications services revenues.................................. $ 1,970,646 $ 1,948,321 $ 3,687,902 Selling, general and administrative expenses: Insurance premiums 2,000,473 4,071,713 4,379,992 Leased premises and equipment 108,578 157,600 122,568 Security services 77,382 227,001 267,725 Pension plan contributions 586,921 738,058 739,247 Advertising services 74,104 250,232 1,031,539 Professional services 167,470 234,348 128,957 Other - - 213,677 Other income (expenses): Interest incurred on loans (710,537) (5,713,690) (5,751,382) Interest earned 265,423 1,805,780 1,906,029
F-18
1999 2000 2001 --------------- --------------- -------------- Gain on sale of land (a) 897,833 - - Other (b) - 806,180 - Bank charges (135,640) (151,600) (56,732) Equipment purchased (Motorola) 23,097,157 20,279,706 20,196,766 =============== =============== ==============
(a) During 1999, the Company bought from an unaffiliated third party a parcel of land that was subsequently sold to a related party. The sale price was $2,724,458 (RD$44,000,000) and the acquisition cost was $1,826,625 (RD$29,500,000). This transaction generated a gain on sale of land of $897,833, which is presented as gain on sale of land in other income (expenses) in the consolidated statements of operations. (b) In July 2000 the Company sold all operational assets related to the operations of the Internet business portal to a related company in the Dominican Republic for $2,315,412 in cash. The gain on the sale of this asset was $806,180, and is included as part of other, net in other income (expenses) in the accompanying consolidated statements of operations. 7 MORTGAGE INVESTMENTS At December 31, 2000 and 2001, consist of mortgage participation contracts, which have been purchased from savings and loan associations in the Dominican Republic. These contracts earn interest at rates between 9% and 12% per annum in 2000 and 7% and 12% per annum in 2001. These investments are maintained as compensating balances for mortgage loans made by these savings and loan associations to certain officers and employees of the Company. 8 OTHER ASSETS Other assets at December 31, 2000 and 2001 consisted of the following:
2000 2001 --------------- --------------- Deferred debt issue costs and bank debt, net (a) $ 7,303,063 $ 8,852,320 Deposits with international carriers (b) 214,340 207,575 Deposits 1,976,585 2,133,880 Radio frequency rights, net (c) 10,766,390 11,029,074 Other (d) 4,050,186 3,991,204 --------------- --------------- $ 24,310,564 $ 26,214,053 =============== ===============
(a) Represent commissions paid to brokers and other expenses incurred at the time of, and directly related to, the issuance of the Senior Notes and prepaid interest on bank debt. For the years ended December 31, 1999, 2000 and 2001, amortization of deferred debt issue cost and bank debt amounted to $1,499,497, $1,958,610 and $2,333,946, respectively, and are included as part of interest expense in the accompanying consolidated statements of operations. (b) At December 31, 2000 and 2001, deposits with international carriers represent security deposits made by TRICOM for the installation of international circuits. These deposits will be recovered at the termination of the agreements. These agreements mature each year and are automatically renewed unless otherwise terminated by the parties. (c) Represent payments for the frequency usage rights to expand the cellular capacity of the Company in the Dominican Republic, as well as payments for the acquisition of the frequency rights for El Salvador, Guatemala and Panama, as part of the plans to expand the Company in Central America and the Caribbean. For the years ended December 31, 1999, 2000 and 2001, the amortization expense amounted to $198,333, $320,186 and $660,086 respectively, and are included as part of selling, general and administrative expenses in the accompanying consolidated statements of operations. F-19 (d) At December 31, 2000 and 2001 include deferred commissions related to prepaid calling cards of $3,591,760 and $2,175,183, respectively. Also at December 31, 2001, this account includes $1,325,398 corresponding to the net deferred asset associated with cellular phone packages offered which include telephone equipment. The basic rate per minute of such packages is higher than other regular packages offered by the Company. At December 31, 2001, the amortization expense associated with net deferred assets of cellular phone packages was $390,977 and is included as part of selling, general and administrative expenses in the accompanying consolidated statements of operations. 9 ACQUISITIONS, GOODWILL AND INTANGIBLE ASSETS On October 26, 2001, the Company completed the acquisition of 100% of the outstanding stock of TCN Dominicana, S. A. (TCN). TCN is engaged in operating cable television systems and is the largest such Company in the Dominican market. The purchase price consisted in cash payments of approximately $42,300,000 and 3,375,000 TRICOM shares with an approximate value of $21,700,000 as of the date the agreement was announced for a total cost of approximately $64,000,000. The TCN acquisition was accounted for using the purchase method of accounting. TRICOM assumed control of the operations of TCN from September 13, 2001. From September 13, 2001 to the date of closing, there were no significant unsatisfied conditions necessary for the final execution of the transaction. The conditions during that period consisted primarily of ministerial legal conditions. Consequently, the consolidated financial statements include the accounts of TCN from October 1, 2001. Allocation of the purchase price to the estimated fair value of assets acquired and liabilities assumed at the date of the acquisition is as follows: Current assets $ 8,052,540 Property and equipment 32,208,572 Other non-current assets 77,977 Goodwill and other intangible assets 34,050,204 --------------- Total assets acquired 74,389,293 --------------- Less: Current liabilities 7,544,934 Other non-current liabilities 2,834,434 --------------- Total liabilities assumed 10,379,368 --------------- Net assets acquired $ 64,009,925 ===============
Included in goodwill and other intangible assets are amounts related to cable franchise rights which have indefinite life. As a result, under the provisions of SFAS 142, these amounts (as with amounts allocated to goodwill) will not be amortized from the date of acquisition but will be measured for impairment in accordance with the Company's established accounting policy. (See note 27). The following unaudited supplemental pro forma information presents the results of operation of the Company as if the TCN acquisition had taken place on January 1, 2000 and 2001, respectively.
2000 2001 --------------- --------------- Revenues $ 241,165,176 $ 257,825,370 Earnings (loss) before cumulative effect of accounting change 11,638,778 (21,532,336) Net loss (4,814,020) (21,532,336) Loss per share-basic and diluted (0.17) (0.73) =============== ===============
The unaudited pro forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of results of operations which actually would have resulted had TCN acquisition occurred as of January 1, 2000 and 2001. F-20 In March 2001, the Company acquired 51% of the outstanding shares of Cellular Communications of Panama, S. A. (subsequently renamed TRICOM Panama, S. A.) a Panamanian Corporation engaged in wireless communications. The total cost of this acquisition, including transaction expenses amounted to $6,303,074 of which $5,272,774 was paid in cash and $1,030,300 through the contribution of a non exclusive license for software developed by TRICOM. Allocation of the purchase price to the estimated fair value of assets acquired and liabilities assumed at the date of the acquisition of the 51% of the Company's equity is as follows: Current assets $ 177,717 Property and equipment 3,305,797 Other non-current assets 666,035 Goodwill 2,508,350 --------------- Total assets acquired 6,657,899 --------------- Less: Current liabilities 351,695 Other non-current liabilities 3,130 --------------- Total liabilities assumed 354,825 --------------- Net assets acquired $ 6,303,074 ===============
As of December 31, 2001, the composition of goodwill and intangible assets is as follows: Acquisition of TCN $ 34,050,204 Acquisition of Cellular Communications of Panama, S. A. (subsequently TRICOM Panama, S. A.) 2,508,350 --------------- 36,558,554 Less amortization 47,031 --------------- Balance at December 31, 2001 $ 36,511,523 ===============
10 BORROWED FUNDS - BANKS Funds borrowed by the Company consist of:
2000 2001 --------------- --------------- Funds denominated in US dollars (a) $ 45,609,165 $ 51,012,974 International Bank of Miami (IBM) (b) 33,047,565 29,817,971 Funds denominated in Dominican. pesos (c) 3,475,135 6,041,056 --------------- --------------- $ 82,131,865 $ 86,872,001 =============== ===============
(a) As of December 31, 2000 and 2001, these amounts represent loans with local and international banks, which accrued interest at annual rates ranging from 9.8% and 12% in 2000 and 5.25% to 12.5% per annum in 2001. (b) As of December 31, 2000 and 2001, represent loans for working capital for an amount of $10,284,791 and $6,101,654, respectively, and for trade finance purposes for an amount of $22,762,774 and $23,716,317, respectively. These loans have interest rates ranging from 11% to 12% per annum in 2000 and from 10.25% to 11.25% per annum in 2001. (c) At December 31, 2000, these loans were RD$58,000,000 bearing interest at a rate of 26% per annum. At December 31, 2001, these loans represented RD$103,000,000 bearing interest at rates ranging from 15% to 16.50% per annum. F-21 Usually these loans are renewable at maturity and are due on demand. At December 31, 2001 the Company has available unused lines of credit with local and international banks for approximately $30,600,000. 11 COMMERCIAL PAPER As of December 31, 2001, commercial paper issued by the Company consist of: Commercial paper in US dollars (a) $ 26,914,427 Commercial paper in Dominican pesos (b) 3,481,888 --------------- Total commercial paper 30,396,315 Less short-term commercial paper 29,242,556 --------------- Long-term commercial paper $ 1,153,759 ===============
(a) Bears interest at annual rates between 8% and 12%. (b) Commercial paper in Dominican pesos for a total amount of RD$59,366,190 which bears interest at annual rates between 13% and 16%. Commercial paper issued by the Company is non-redeemable until maturity. These obligations are issued through the related company "Acciones y Valores, S. A." to a related bank. As of December 31, 2001, the Company has a facility that would allow for the issuance of additional commercial paper in the amount of $13,085,573 and RD$140,633,210 ($8,249,317). The following is a schedule of the maturity for such debt as of December 31, 2001: One to three months $ 3,072,221 Three to six months 5,607,451 Six months to one year 20,562,884 More than one year 1,153,759 ==================
12 CAPITAL LEASES Since December 1999, the Company has entered into various capital lease contracts with a related party. These contracts will mature at various dates during the next four years. Assets recorded under these leases consist of:
2000 2001 --------------- --------------- Communications equipment and other equipment $ 42,488,488 $ 45,696,681 Transportation 1,176,001 1,276,815 Machinery and equipment 271,356 307,748 --------------- --------------- 43,935,845 47,281,244 Less accumulated depreciation 2,350,834 11,169,666 --------------- --------------- $ 41,585,011 $ 36,111,578 =============== ===============
A schedule of the lease payment requirements under these capital leases is as follows: Year ending December 31, 2002 $ 9,584,940 2003 8,816,113 2004 4,988,675
F-22 2005 204,172 -------------- Total lease payments 23,593,900 Less related taxes 2,527,882 -------------- Minimum lease payments 21,066,018 Less amount representing interest (12% to 12.875%) 3,209,252 -------------- Present value of capital lease obligations 17,856,766 Less current maturities of capital lease obligations 6,643,766 -------------- Capital lease obligations $ 11,213,000 ==============
13 TRANSACTIONS WITH CARRIERS Accounts receivable from carriers arise from the interconnection services of inbound calls, while accounts payable result from interconnection services of outbound calls. These charges are based on minutes billed. Amounts paid to carriers constitute one of the main operating costs of the Company. Net amounts receivable and payable for these activities at December 31, 2000 and 2001 were as follows:
2000 2001 ----------------------------------- ----------------------------------- Receivable Payable Receivable Payable ------------------ --------------- --------------- --------------- Inbound $ 13,699,020 $ - $ 7,119,043 $ - Outbound (4,969,134) 12,323,898 (2,950,856) 7,080,318 Payable accounts interconnection operations - 1,511,378 - 1,751,663 ------------------ --------------- --------------- --------------- $ 8,729,886 $ 13,835,276 $ 4,168,187 $ 8,831,981 ================== =============== =============== ===============
14 OTHER LIABILITIES Other liabilities at December 31, 2000 and 2001 consisted of the following:
2000 2001 --------------- ------------- Customer advances $ 1,256,345 $ 2,467,875 Deferred revenues: Calling cards 3,622,686 7,112,025 Installations and activation 14,654,886 4,718,921 Other 456,573 345,191 --------------- ------------- $ 19,990,490 $ 14,644,012 =============== =============
Effective January 1, 2000, the Company adopted the Staff Accounting Bulletin (SAB 101) "Revenue Recognition" issued by the Securities and Exchange Commission (SEC). The adoption of SAB 101 resulted in a change in the revenue recognition policy regarding installation and activation revenues. Such change required the Company to recognize net revenues from installation and activation over the average service life based on the experience of the Company (35 months). This change in the revenue recognition method required the Company to recognize a cumulative effect of accounting change in net revenues from installations and activations for $16,452,799, which is presented as a separate item in the accompanying consolidated statements of operations. The adoption of this bulletin did not affect the cash flows of the Company. Effective October 1, 2001, the Company updated its estimate of the average service life period of its customers for purposes of the recognition of deferred income from activations and installations, as a result, F-23 the service life was revised from 35 to 24 months. This revision was done based on the average service lives of the Company's customers during the last three years. As of December 31, 2000 and 2001, the Company has recognized revenue of $8,940,040 and $7,512,759, respectively, associated with the accounting change to the adoption of SAB 101 to January 1, 2000. This revenue is included as part of net revenue from installation and activation in the accompanying consolidated statements of operations. 15 ACCRUED EXPENSES A summary of accrued expenses at December 31, 2000 and 2001 is as follows:
2000 2001 ------------------ -------------------- Expense in lieu of income tax payable $ 627,543 $ 2,320,633 Interest payable 9,854,165 11,331,294 ITBIS (Net sales tax) 1,058,522 1,830,470 Other 2,494,952 4,790,403 ------------------ -------------------- $ 14,035,182 $ 20,272,800 ================== ====================
16 LONG-TERM DEBT Long-term debt is summarized as follows:
2000 2001 ------------------ -------------------- Senior notes (a) $ 200,000,000 $ 200,000,000 Bank loans: Six loans granted by Banco Lopez de Haro, S.A. and Banco de Desarrollo Industrial for a total amount of RD$103,586,975 in 2000 and eleven loans for a total amount of RD$186,373,755 with interest ranging from 24% to 26% per annum in 2000 and from 15% to 18% per annum in 2001. These loans are payable in monthly installments of RD$4,535,210 (approximately $265,995) including principal plus interest, beginning in January 2000 through December 2008; five of these loans are secured by the communications equipment being financed, of TRICOM, S. A. (Parent Company) with a carrying value of approximately $7,300,000 in 2000 and $6,800,000 in 2001, respectively. 6,206,529 10,931,012
F-24
2000 2001 ------------------ -------------------- Loans with the International Bank of Miami disbursed under a credit guarantee facility from the Export-Import Bank of the United States (EXIMBANK) to purchase equipment from US suppliers. As of December 31, 2000 and 2001 the amounts of $20,230,169 and $26,333,154, respectively, are disbursed under the $36,005,530 facility. As of December 31, 2001 the amount of $5,426,869 is disbursed under the $20,000,000 facility. At December 31, 2000 and 2001, the Company had $35,775,361 and $24,245,507, respectively, available under both facilities. Interest is payable semi-annually at a variable rate of 30-day LIBOR plus 2.25% for interim loans and at a fixed rate applicable to the 3-year US Treasury Obligations plus 2% after a certain date. At December 31, 2000 and 2001, these loans have an interest rate of 8.87% per annum and interest rates ranging from 4.19% to 6.48% per annum, respectively. The principal amount is payable in up to 10 semi-annual installments of approximately $3,311,674 each, which amortization begins partially on March 15, 2002 and on June 15, 2002 until December 15, 2007. These loans are guaranteed by TRICOM USA, Inc. 20,230,169 31,760,023 Loan with Banco Popular de Puerto Rico disbursed under a credit facility of $15,000,000.00 at an interest rate of LIBOR plus 4%. At December 31, 2000 and 2001 this loan has an interest rate of 10.78% and 6.12% per annum, respectively. Interest is payable on a monthly basis and principal is payable in 3 installments of $3,000,000 in June 2003, $4,000,000 in December 2003 and $8,000,000 in June 2004. This loan is guaranteed by TRICOM USA, Inc. 15,000,000 15,000,000 Unsecured loan with Banco Mercantil, S. A. for the amount of RD$150,000,000. At December 31, 2001 this loan has an interest rate of 17.5% per annum, which can be adjusted every 30 to 60 days as per market conditions. Interest is payable on a monthly basis and principal is due on April, 2004. - 8,797,654
F-25
2000 2001 ------------------ -------------------- Loan with General Electric Capital Corporation of Puerto Rico (GE Capital) for $8,000,000. This loan has an interest rate of 30-day LIBOR plus 2.75%, payable on a monthly basis. At December 31, 2000 and 2001, this loan has an interest rate of 9.53% and 5.39% per annum, respectively. The principal amount is payable in 36 consecutively monthly installments of $222,222 beginning on February 1, 2001. This loan is secured by transmission and communication equipment at a cost of $15,864,000. The Company's loan agreement with GE Capital includes the maintenance of certain financial ratios. The loan agreement provides a grace period for the Company to cure covenant violations within 90 days from written notification received from GE Capital. The loan agreement provides a grace period for the Company to cure covenant violations within 90 days from written notification received from GE Capital. The Company failed to meet certain covenant requirements at December 31, 2001 for which GE Capital issued the Company waivers as of that date. In April 2002, the Company and GE Capital signed an amendment to the loan agreement which eliminates the application of the financial covenants to the three month periods ended March 31, 2002 and June 30, 2002 and amends the financial covenants, originally required, for periods ending after June 30, 2002. Consequently the debt obligation with maturity after December 31, 2002 has been classified as a long-term obligation 8,000,000 5,555,548 Loan with Popular Bank & Trust, Ltd. for $27,235,700. This loan has a fixed interest rate of 10.25% p. a. for one year, which can be modified annually according to market conditions. Interest is payable on a monthly basis and principal is payable on 20 quarterly installments of $972,704 each, beginning on January 26, 2002 and a final payment of $7,781,620. This loan is secured by an irrevocable stand by letter of credit issued by Bancredito, S. A. - 27,235,700
F-26
2000 2001 ------------------ -------------------- Unsecured loans with Banco Popular Dominicano, S. A. disbursed under a credit facility of $6,800,000. At December 31, 2001 the RD$92,400,000 loan (approximately US$5,419,355) has an interest rate of 18% per annum, and the $1,249,758 loan has an interest rate of 9.5% per annum, which can be modified every 30 to 60 days according to market conditions. Interest is payable on a monthly basis and principal is payable in equal and consecutive semi-annual installments of approximately $1,133,000 each, beginning in September 2004 and ending on March 2007. - 6,669,114 Loans with Banco Dominicano del Progreso, S. A. disbursed under a credit facility of $5,000,000. These loans have interest rates ranging from 10.5% to 12% per annum, which can be modified every 30 to 60 days as per market conditions. Interest is payable on a monthly basis and principal at maturity in March 2007. These loans are secured by a mortgage valued at $6,900,000. - 3,786,023 Loans with Banco BHD, S. A. and BHD Cayman disbursed under a credit facility of $12,000,000. Outstanding under this facility includes a RD$18,500,000 loan (approximately $1,085,044) at an interest rate of 16% per annum, which can be modified every 30 to 60 days as per market conditions. Loans for a total of $10,133,163 have interest rates ranging from 11% to 12%, which can be modified as per market conditions. Principal repayment is as follows: $6,000,000 is payable in 20 equal and consecutive quarterly installments including capital plus interest of $396,335 each, commencing in May 30, 2002; $2,000,000 is payable at maturity on May 30, 2006 with interest payable on a monthly basis; the remaining principal amount is payable in three equal and consecutive monthly installments of $1,000,000 beginning in June 30, 2003, with interest payable on a monthly basis. Two of these loans are secured by a mortgage valued at $8,000,000, the other by liens on telecommunications equipment of the company for a total amount of approximately $5,000,000. - 11,218,206
F-27
2000 2001 ------------------ -------------------- $15,000,000 revolving line of credit with Hamilton Bank due on May 14, 2002. This loan bears interest at Citibank, N. A. prime rate plus 0.05%. At December 31, 2000 and 2001 this loan has an interest rate of 10% and 5.25% per annum, respectively. This line of credit is guaranteed by TRICOM, S. A. (Parent Company) and by Bancredito, S. A. 15,000,000 15,000,000 ------------------ -------------------- Total bank loans 64,436,698 135,953,280 ------------------ -------------------- Total long-term debt 264,436,698 335,953,280 ------------------ -------------------- Less current portion of long-term debt 3,213,939 30,493,532 ------------------ -------------------- Long-term debt excluding current portion $ 261,222,759 $ 305,459,748 ================== ====================
The aggregate principal amounts due on these long-term debt obligations from December 31, 2001 is as follows: Year ending December 31, 2002 $ 30,493,532 2003 20,914,484 2004 231,620,946 2005 18,014,766 2006 and thereafter 32,909,552 ===================
(a) Senior Notes On August 15, 1997, the Company issued $200,000,000 aggregate principal amount of 11 3/8% Senior Notes due in 2004 (the "Senior Notes"). Interest on the Senior Notes is payable in semi-annual installments on March 1st and September 1st of each year. The Senior Notes may be redeemed at any time at the option of the Company, in whole or in part, after September 1, 2001, at a premium declining to par after September 1, 2003, plus accrued and unpaid interest, and additional amounts, if any, through the redemption date. The Senior Notes are senior unsecured obligations of the Company ranking pari passu in right of payment with all other existing and future senior debt, and will rank senior to any future subordinated indebtedness. The indenture for the Senior Notes contains certain covenants that, among other things, limit the ability of the Company and its Restricted Subsidiaries, as defined in the indenture, to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, repurchase equity interests or subordinated indebtedness, engage in sale and leaseback transactions, create certain liens, enter into certain transactions with affiliates, sell assets of the Company or its Restricted Subsidiaries, engage in any business other than the telecommunications business, issue or sell equity interests of the Company's Restricted Subsidiaries or enter into certain mergers and consolidations. The Senior Notes are guaranteed fully, unconditionally and jointly and severally by each of the Company's restricted subsidiaries, as defined in the indenture for the Senior Notes, each of which is wholly owned by the Company. Separate financial statements of each of the guarantor subsidiaries have not been presented herein because management has determined that such separate financial statements would not be material to the holders of the Senior Notes. Summarized condensed consolidated financial information of TRICOM, S. A. (Parent Company), the subsidiaries guarantors on a combined basis (GFN Comunicaciones, TRICOM Centroamerica, S. A., Call F-28 Tel, TRICOM USA and Subsidiaries, Tricom Latinoamerica, S.A., Tricom, S.A. - -Panama- and TCN Dominicana, S.A.), and the subsidiary not guarantor (Tricom Panama, S.A. - formerly Cellular Communications of Panama, S.A. -) at December 31, 2000 and 2001 and for the years ended December 31, 1999, 2000 and 2001 is as follows (see note 1): F-29 TRICOM, S.A. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BALANCE SHEET DATA AT DECEMBER 31, 2000:
Tricom, S.A. Subsidiaries Subsidiaries Consolidating Total ASSETS Parent Co. Guarantors Not Guarantor Adjustments Consolidated ------ -------------- --------------- ------------------ ----------------- ---------------- Current assets: Cash on hand and in banks $ 17,241,951 $ 957,601 $ - $ - $ 18,199,552 Accounts receivable, net 42,620,337 39,460,594 - (49,954,179) 32,126,752 Other current assets 17,049,765 1,239,867 - - 18,289,632 -------------- ------------- ---------------- --------------- ---------------- Total current assets 76,912,053 41,658,062 - (49,954,179) 68,615,936 Property and equipment net 557,465,684 28,758,216 - - 586,223,900 Other non-current assets 58,932,766 9,207,733 - (40,540,476) 27,600,023 -------------- ------------- ---------------- --------------- ---------------- Total assets $ 693,310,503 79,624,011 - (90,494,655) 682,439,859 ============== ============= ================ =============== ================ LIABILITIES AND STOCKHOLDERS' Tricom S.A. Subsidiaries Subsidiaries Consolidating Total EQUITY Parent Co. Guarantors Not Guarantor Adjustments Consolidated - --------------------------------- -------------- ------------- ---------------- --------------- ---------------- Current liabilities: Notes payable $ 116,756,416 $ - $ - $ - $ 116,756,416 Current portion of capital leases 5,308,310 - - - 5,308,310 Accounts payable 68,895,750 18,883,399 - (49,954,179) 37,824,970 Other current liabilities 29,800,403 4,225,269 - - 34,025,672 -------------- ------------- ---------------- --------------- ---------------- Total current liabilities 220,760,879 23,108,668 - (49,954,179) 193,915,368 Other non-current liabilities 261,753,451 15,974,867 - - 277,728,318 -------------- ------------- ---------------- --------------- ---------------- Total liabilities 482,514,330 39,083,535 - (49,954,179) 471,643,686 Stockholders' equity 210,796,173 40,540,476 - (40,540,476) 210,796,173 -------------- ------------- ---------------- --------------- ---------------- Total liabilities and stockholders' equity $ 693,310,503 $ 79,624,011 $ - $ (90,494,655) $ 682,439,859 ============== ============= ================ =============== ================
F-30 TRICOM, S.A. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BALANCE SHEET DATA AT DECEMBER 31, 2001:
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 ============= ============= ================ =============== ================== Tricom S.A. Subsidiaries Subsidiaries Consolidation Liabilities and Stockholders' Equity Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated - ------------------------------------ ------------- ------------- ---------------- --------------- ------------------ Current liabilities: Notes payable $ 158,259,504 15,424,951 - - 173,684,455 Current portion of capital leases 6,643,766 - - - 6,643,766 Accounts payable 33,536,089 72,631,604 2,642,195 (71,683,824) 37,126,064 Other current liabilities 25,986,347 8,790,651 139,814 - 34,916,812 ------------- ------------- ---------------- --------------- ------------------ Total current liabilities 224,425,706 96,847,206 2,782,009 (71,683,824) 252,371,097 Other non-current liabilities 313,291,919 8,340,609 6,511 - 321,639,039 ------------- ------------- ---------------- --------------- ------------------ Total liabilities 537,717,625 105,187,815 2,788,520 (71,683,824) 574,010,136 Minority interest - - - 1,870,833 1,870,833 Stockholders' equity 253,533,657 32,784,604 3,818,025 (36,602,629) 253,533,657 ------------- ------------- ---------------- --------------- ------------------ Total liabilities and stockholders' equity $ 791,251,282 $ 137,972,419 $ 6,606,545 $ (106,415,620) $ 829,414,626 ============= ============= ================ =============== ==================
F-31 TRICOM, S.A. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999:
Tricom, S.A. Subsidiaries Subsidiaries Consolidating Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated ------------- ------------- ---------------- --------------- ------------------ Operating revenues $ 155,895,506 $ 36,179,982 $ - $ (21,256,547) $ 170,818,941 Operating costs (115,133,014) (35,480,394) - 21,256,547 (129,356,861) ------------- ------------- ---------------- --------------- ------------------ Operating income 40,762,492 699,588 - - 41,462,080 Other expense, net (18,608,256) (868,817) - 310,889 (19,166,184) ------------- ------------- ---------------- --------------- ------------------ Earnings (loss) before income taxes and cumulative effect of accounting change 22,154,236 (169,229) - 310,889 22,295,896 Income taxes - (141,660) - - (141,660) ------------- ------------- ---------------- --------------- ------------------ Earnings (loss) before cumulative effect of accounting change 22,154,236 (310,889) - 310,889 22,154,236 Cumulative effect of account change in organization costs (119,711) - - - (119,711) ------------- ------------- ---------------- --------------- ------------------ Net earnings (loss) $ 22,034,525 $ (310,889) $ - $ 310,889 $ 22,034,525 ============= ============= ================ =============== ==================
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000:
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) ============= ============= ================ =============== ==================
F-32 TRICOM, S.A. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001:
Tricom S.A. Subsidiaries Subsidiaries Consolidating Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated ------------- ------------- ---------------- --------------- ------------------ Operating revenues $ 185,307,689 $ 80,126,179 $ 489,202 $ (22,150,885) $ 243,772,185 Operating costs (169,708,189) (77,618,572) (4,112,730) 22,150,885 (229,288,606) ------------- ------------- ---------------- --------------- ------------------ Operating income 15,599,500 2,507,607 (3,623,528) - 14,483,579 Other expense, net (38,713,337) (1,276,722) 717 1,128,223 (38,861,119) ------------- ------------- ---------------- --------------- ------------------ Earnings (loss) before income taxes and minority interest (23,113,837) 1,230,885 (3,622,811) 1,128,223 (24,377,540) Income taxes - (511,376) - - (511,376) ------------- ------------- ---------------- --------------- ------------------ Earnings (loss) before cumulative effect of accounting change (23,113,837) 719,509 (3,622,811) 1,128,223 (24,888,916) Minority interest - - - 1,775,079 1,775,079 ------------- ------------- ---------------- --------------- ------------------ Net earnings (loss) $ (23,113,837) $ 719,509 $ (3,622,811) $ 2,903,302 $ (23,113,837) ============= ============= ================ =============== ==================
CASH FLOW DATA FOR THE YEAR ENDED DECEMBER 31, 1999:
Tricom S.A. Subsidiaries Subsidiaries Consolidating Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated ------------- ------------- ---------------- --------------- ------------------ Net cash provided by (used in) operating activities $ 38,455,777 $ (6,929,619) $ - $ - $ 31,526,158 Net cash used in investing activities (62,214,283) (2,145,814) - - (64,360,097) Net cash provided by financing activities 21,539,440 9,427,032 - - 30,966,472 Effect of exchange rate changes on cash on hand and in banks (50,412) 35 - - (50,377) ------------- ------------- ---------------- --------------- ------------------ Net increase (decrease) in cash on hand and in banks (2,269,478) 351,634 - - (1,917,844) Cash on hand and in banks at beginning of the year 15,114,242 263,168 - - 15,377,410 ------------- ------------- ---------------- --------------- ------------------ Cash on hand and in banks at the end of the year $ 12,844,764 $ 614,802 $ - $ - $ 13,459,566 ============= ============= ================ =============== ==================
F-33 TRICOM, S.A. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CASH FLOW DATA FOR THE YEAR ENDED DECEMBER 31, 2000
Tricom, S.A. Subsidiaries Subsidiaries Consolidating Parent Co. Guarantors Not Guarantor Adjustments Total Consolidated ------------- ------------- ---------------- --------------- ------------------ Net cash provided by (used in) operating activities $ 54,506,114 $ (12,167,080) $ - $ - $ 42,339,034 Net cash used in investing activities (161,904,855) (21,770,121) - 34,280,000 (149,394,976) Net cash provided by financing activities 111,795,928 34,280,000 - (34,280,000) 111,795,928 ------------- ------------- ---------------- --------------- ------------------ Net increase in cash on hand and in banks 4,397,187 342,799 - - 4,739,986 Cash on hand and in banks at beginning of the year 12,844,764 614,802 - - 13,459,566 ------------- ------------- ---------------- --------------- ------------------ Cash on hand and in banks at the end of the year $ 17,241,951 $ 957,601 $ - $ - $ 18,199,552 ============= ============= ================ =============== ==================
CASH FLOW DATA FOR THE YEAR ENDED DECEMBER 31, 2001:
Tricom S.A. Subsidiaries Subsidiaries Consolidating Parent Co. Guarantors Not Guarantors Adjustments Total Consolidated ------------- ------------- ---------------- --------------- ------------------ Net cash provided by (used in) operating activities $ 31,164,129 $ 5,983,861 $ (3,145,534) $ - $ 34,002,456 Net cash used in investing activities (186,848,944) (22,587,259) (2,597,256) 33,053,654 (178,979,805) Net cash provided by financing activities 149,643,012 16,828,077 5,936,412 (33,053,654) 139,353,847 ------------- ------------- ---------------- --------------- ------------------ Net increase (decrease) in cash on hand and in banks (6,041,803) 224,679 193,622 - (5,623,502) Cash on hand and in banks at beginning of the year 17,241,951 957,601 - - 18,199,552 ------------- ------------- ---------------- --------------- ------------------ Cash on hand and in banks at the end of the year $ 11,200,148 $ 1,182,280 $ 193,622 $ - $ 12,576,050 ============= ============= ================ =============== ==================
F-34 TRICOM, S.A. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17 STOCKHOLDERS' EQUITY The authorized capital stock of the Company consists of 55,000,000 shares of Class A common stock and 25,000,000 shares of Class B common stock. All of the Company's outstanding shares are duly authorized, validly issued and fully paid. Both classes of capital stock vote together as a single class, except on any matter that would adversely affect the rights of either class. The Class A common stock has one vote per share and the Class B has ten votes per share. The economic rights of each class of capital stock are identical. During the second quarter of 2000, the Company sold 4,000,000 Class A common shares in a public offering for US$74.0 million, net of issuance costs of $6,852,774. The proceeds of this issuance were used for capital expenditures associated with increasing the capacity and coverage of local access, mobile and data networks and to expand international facilities to support increased traffic volume and to fund working capital. In October 2001, the Company issued 3,375,000 shares in favor of the previous shareholders of TCN Dominicana, S. A. as part of the purchase price of the company. The value of these shares amounted to $21.7 million, determined based on the average price of the shares of TRICOM, S. A. immediately before and after the date the agreement was announced. During the last quarter of 2001, the Company completed a Rights Offering of common stock to shareholders. This offer was done as a result of the commitment of $40,000,000 for the purchase of shares by Oleander Holding, one of the Company's major shareholders, a subsidiary of GFN Corporation, Ltd. During the second quarter of 2001as a result of this offer, the company issued 11,170,920 shares for a total net proceeds of approximately $43.3 million, net of issuance cost of $1,331,096. 18 EXPENSE IN LIEU OF INCOME TAXES In accordance with the terms of the Concession Agreement signed with the Dominican Government, as revised on February 20, 1996 TRICOM, S. A. (Parent Company) has an exemption from income tax but is required to pay a fixed tax equal to 10% of gross domestic revenues, after deducting charges for access to the local network, plus 10% of net international settlement revenues. This tax will never be less than RD$18,000,000 ($1,055,718) annually. During the year ended December 31, 2000 the Government required the Company to pay RD$7,500,000 ($449,371) as an advance deposit against future tax amounts due. As of December 31, 2000 and 2001, there is RD$6,120,000 (equivalent to $366,687) and RD$0 of the original payment is included in prepaid expenses in the accompanying consolidated balance sheets. 19 INCOME TAXES The subsidiaries operate in several jurisdictions and different tax regimes, of which the most relevant operations are located in the Dominican Republic, United States of America and Panama. Accordingly, each subsidiary must file income and other tax returns for its operations in such jurisdictions. Because of the differences in the tax legislation in each country, each of the individual subsidiaries must file separate income tax returns instead of one on a consolidated basis. Therefore, the information about corporate income tax expense for the years ended December 31, 1999, 2000 and 2001, respectively, represents the sum of the tax obligations of each of the consolidated subsidiaries. The components of income taxes are as follow: F-35
1999 2000 2001 --------------- --------------- --------------- Current U.S. Federal $ (71,701) $ (96,487) $ (1,215) Dominican Republic (a) - - (135,843) U.S. State (36,299) - - --------------- --------------- --------------- (108,000) (96,487) (137,058) Deferred tax (33,660) (491,890) (374,318) --------------- --------------- --------------- $ (141,660) $ (588,377) $ (511,376) =============== =============== ===============
(a) As of December 31, 2001, the applicable taxes of the subsidiary dedicated to the cable television operations in the Dominican Republic, was determined at 1.5% of the gross operating income of the Company for a three month period and seventeen days ending December 31, 2001, as established by the fiscal regulations. The components of deferred tax assets and liabilities in the United States are as follows:
1999 2000 2001 --------------- --------------- --------------- Deferred tax assets: Deferred revenues $ 737,410 $ 211,304 $ 910,711 Net operating loss carry forward 45,856 195,064 487,340 Tax credit carry forward 100,825 132,961 132,961 Other 65,099 261,679 93,625 --------------- --------------- --------------- Total deferred tax assets 949,190 801,008 1,624,637 Deferred tax liabilities: Property and equipment 631,159 974,867 1,588,780 IRC SEC 481 (a) adjustment - - 559,071 Other - net - - 24,963 --------------- --------------- --------------- Total deferred tax liabilities 631,159 974,867 2,172,814 --------------- --------------- --------------- Deferred tax, net $ 318,031 $ (173,859) $ (548,177) =============== =============== ===============
The Company has not recorded a valuation allowance for the deferred tax assets because it believes that sufficient book and taxable income will be generated to realize the benefit of these tax assets. At December 31, 2001, the Company has net operating loss carryforwards ("NOLS") aggregating approximately $586,472 expiring in the year 2019. In addition, the Company has alternative minimum tax credit carryforwards aggregating approximately $132,961 with no expirations. Subsidiaries operating in Cayman Islands and Panama are exempt from income taxes as long as they operate outside Cayman Islands and Panama. 20 PENSION BENEFITS Beginning September 1, 2000, AFP Siembra, S. A. a related pension management company, has managed the Company's pension plan as individual defined contribution accounts similar to the United States 401(k) plan. The plan management company maintains the investments on behalf of the plan participants and reports changes in the value of the individual accounts on a unit investment system. Each individual is to have his or her own individual capitalization account which was opened with total contributions to date plus accrued yield. Under this arrangement, the Company contributes 5% of the employee's salary and the employee contributes 4%. During the four month period ended December 31, 2000 and for the year ended F-36 December 31, 2001, the Company's expense for this plan was approximately $207,000 and $739,000, and is included as part of selling, general and administrative expenses in the accompanying consolidated statements of operations. The pension management company guarantees a minimum return of 1.5% over the mean of the average bid interest rate offered by certificates of deposit from Dominican commercial and multiple services banks reported by the Central Bank of the Dominican Republic, determined monthly, considering the date in which the funds entered the individual account. The pension management company commits to permanently maintain on deposit with banks 90% of the instruments that comprise the total amount of the portfolio of funds being managed. The cost of this service is RD$50 (approximately $3) per employee per month, which is deducted monthly from the contributions that the employer (the Company) makes. The pension management company earns 1% annually on the cumulative balance of each account under its management. Prior to September 1, 2000, substantially all of the employees of the Company were included in a defined benefit plan that was established by Grupo Financiero Nacional, S.A. The benefits were based on the years of service and the employees' compensation during the last several years before retirement. This plan was administered by the Pension and Retirement Plan of the Grupo Financiero Nacional, S. A. The Company made annual contributions to the Plan based on contribution levels determined by independent actuaries. The Company's pension expense was approximately $587,000 and $531,000 in the years ended December 31, 1999 and 2000, respectively, and is included as part of selling, general and administrative expenses in the accompanying consolidated statements of operations. 21 COMMITMENTS AND CONTINGENCIES A summary of commitments and contingencies at December 31, 2001 is as follows: (a) Commitments (i) Since 1995, TRICOM has entered into operating leases with related companies. The total expense under these leases in 1999, 2000 and 2001 was $108,578, $157,600 and $122,568, respectively, and are included as part of selling, general and administrative expenses in the consolidated statements of operations. (ii) TRICOM maintains contracts with foreign entities for the traffic of overseas calls. Such contracts require each entity to obtain the necessary facilities to establish, maintain and operate its respective terminals. The cost of each contract is based upon negotiated rates, which are computed based on the amount of traffic each month. For the years ended December 31, 1999, 2000 and 2001 this cost was $3,706,683, $4,916,317 and $6,622,358, respectively, and is included in the cost of satellite connections in the accompanying consolidated statements of operations. (iii) On May 8, 1997, the Federal Communications Commission (FCC) issued an order to adopt the provisions of the Telecommunications Act of 1996 relating to the preservation and advancement of universal telephone service (the "Universal Service Fund"). The Universal Service Order requires all telecommunications carriers providing interstate telecommunications services to contribute to universal service by contribution to a fund (the "Universal Service Fund"). Universal Service Fund contributions were assessed based upon intrastate, interstate and international end-user gross telecommunications revenue effective January 1 through December 31. At December 31, 1999, 2000 and 2001 the Company contributed $141,141, $251,386 and $50,067, respectively, to the "Universal Service Fund" on end-user telecommunications revenue of $4,756,792 in 1999, $3,582,572 in 2000 and $710,299 in 2001. The contribution F-37 paid is included as part of selling, general and administrative expenses in the accompanying consolidated statements of operations. (iv) The subsidiary dedicated to the televised cable systems operations, has contracts with television and network companies of the United States of America for the transmission of its programs in the Dominican Republic. Such companies require monthly payments, that range between $0.10 and $5.85 per subscriber. The term of these contracts fluctuate between two and three years and are renewable at the option of the parties. As of December 31, 2001, the total amount of these payments was $941,375, which is included as part of the programming costs in the accompanying consolidated statements of operations. (v) The telecommunications law of the Dominican Republic (Law 153-98) establishes that the companies operating in this sector pay to the Instituto Dominicano de Telecomunicaciones (Indotel) a monthly fee equivalent to 2% of its international net income. As of December 31, 1999, 2000 and 2001, the expense for this concept was $566,549, $364,434 and $228,340, respectively. (b) Other Lease Obligations The Company maintains operating leases for the use of office space, telecommunications centers, commercial offices, warehouse, an automobile, an aircraft and others. The operating leases are renewable at the end of the lease period, which is usually one year. Expenses for these leases in 1999, 2000 and 2001 were approximately $476,000, $1,754,000 and $2,600,000, and are included in selling, general and administrative expenses in the consolidated statements of operations. The commitment for lease payments for the next five years is as follow:
Year Amount ---- ------ 2002 $ 2,730,545 2003 2,821,165 2004 2,939,181 2005 3,068,231 2006 and future 11,159,965 ---------------
(c) Legal Proceedings (i) In August 1999, a Dominican company and two individual plaintiffs sued the Company before Dominican courts for alleged losses and damages of up to approximately RD$200,000,000 (approximately $12,000,000) resulting from the imprisonment by Dominican authorities of two of the individuals for 15 days. The plaintiffs alleged that their imprisonment was the result of an investigation by the local district attorney and the police that the Company instigated following an irregular increase in telephonic traffic at certain telephone numbers. The court rejected the action for lack of evidence. However, the plaintiffs appealed, and the case is pending decision. After consulting with legal counsel, the Company believes that this matter will not have a material adverse effect on its results of operations and financial position in the case of an adverse decision. (ii) As of December 31, 2001, the Company has been involved in other lawsuits and legal proceedings arising from the ordinary conduct of its business. Such claims generally relate to tortuous and contractual actions for damages. Claims pursuant to such suits and proceedings amount to approximately $7,400,000 (RD$126,000,000). Management has evaluated these suits and proceedings and believes that the final resolution of these matters will not have a material adverse effect on the Company's results of operations and financial position. F-38 No amounts have been recorded in the accompanying financial statements related to these legal proceedings. (iii) The Company's subsidiary TRICOM USA, Inc. is the defendant in a complaint filed by Centennial Communications Corp., a U. S. corporation, and its affiliates on September 4, 2001 before the United States Federal Communications Commission (FCC). The complaint alleges discriminatory business practices and seeks a significant reduction in the access charges, among other claims relating to conduct by TRICOM, S. A.(the parent company of TRICOM USA) in the Dominican Republic. Centennial seeks damages against TRICOM USA and/or the revocation of its U.S. Section 214 license. Currently, the FCC is examining whether it has jurisdiction to hear this matter. No provision has been made to the consolidated financial statements related to this claim, since the ultimate resolution of this matter is uncertain at this time. (iv) In August 2001, BSC of Panama, S. A., a subsidiary of BellSouth, requested that the regulator initiate a legal review before the Third Chamber of the Panamanian Supreme Court of Justice, of the interpretation given by the regulator to the definition of "Conventional Trunking System Services" found in Resolution No. JD-025 of December 12, 1996. This case is pending final decision by the Supreme Court. Also in August 2001, BSC of Panama, S. A. obtained a general precautionary measure from the Seventh Civil Court of the First Judicial Circuit ordering Tricom Panama, S. A. to cease the installation of its Motorola iDEN(R) technology network. This decision was immediately appealed by Tricom Panama, S.A., and on December 20, 2001 the First Superior Court decided the appeal in Tricom Panama's favor, revoking the aforementioned precautionary measure. In September 2001, BSC of Panama, S. A., filed a petition for declaratory judgment for damages against Tricom Panama, S. A. before the Seventh Civil Circuit Court of the First Judicial Circuit of Panama. This suit seeks that the courts order Tricom Panama to: (i) remove its iDEN(R) system and other equipments in Panama and (ii) pay a minimum indemnity of $20,000,000 for alleged damages. Tricom Panama has filed a counterclaim against BSC of Panama, S. A. As it considers their allegations are unfair and geared to limit their entrance to the Panamanian market. This suit is in discovery stage. Also in September 2001, BSC de Panama, S. A. filed a complaint for contempt by Tricom Panama, S. A. of the Seventh Civil Circuit Court's precautionary measure. This suit is pending decision by the court. Management believes, based on the advice of its Panamanian legal counsel, that BSC of Panama, S.A. should not succeed in its claims. (d) Severance indemnities Companies based in the Dominican Republic maintain reserves under the provisions of U.S. Statement of Financial Accounting Standards "SFAS" No.5 to cover the ultimate payment of severance indemnities. Severance expense amounted to $328,807, $760,740 and $1,987,129 in the years ended December 31, 1999, 2000 and 2001 and are included as part of selling, general and administrative expenses in the accompanying consolidated statement of operations. (e) Other During the year 2001, the taxing authorities of the Dominican Republic audited the tax returns of the Company and its compliance with the tax law as it relates to withholdings and other taxes for the years 1999, 2000 and through June 2001. The results of this tax audit are still not known, however, management is confident that the final results will not be significant. F-39 22 BUSINESS AND CREDIT CONCENTRATION In the normal course of business, the Company has accounts receivable from carriers. Although the Company's exposure to credit risk associated with non-payment by these carriers is affected by conditions or occurrences within the industry, most of these receivables are due from large, well-established companies. The Company does not believe that this concentration of credit risk represents a material risk of loss. 23 LEGAL RESERVE Article 58 of the Code of Commerce of the Dominican Republic requires all companies to segregate at least 5% of net earnings as a legal reserve until such reserve reaches 10% of paid- in capital. This reserve is not available for dividend distribution, except in case of dissolution of the corporation. 24 STOCK OPTION PLAN On May 4, 1998, the Company initiated a Long-term Incentive Plan, in which certain employees could be granted options to purchase shares of the Company's common stock. The Plan is administered by the Board of Directors of the Company and has the authority to determine which employees will participate in the Plan. The Plan authorizes grants of options to purchase up to 750,000 shares of authorized but unissued common stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of grant. All stock options have ten-year terms and vest and become exercisable after one and three years from the date of grant. At December 31, 2000 and 2001, there were 230,370 and 262,247 additional shares available for grant under the Plan, respectively. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net loss would have been increased to the pro-forma amounts indicated below.
2000 2001 ------------------ -------------------- Net loss - as reported $ (7,225,635) $ (23,113,837) ================== ==================== Net loss - pro forma $ (7,929,562) $ (23,538,234) ================== ==================== Net loss per share: As reported - basic and diluted $ (0.26) $ (0.78) ================== ==================== Pro-forma - basic and diluted $ (0.28) $ (0.80) ================== ====================
Weighted Average Options Exercise Price ------------------ ------------------- Balance, December 31, 1998 477,664 12.95 Granted (a) 251,420 8.06 Cancelled (a) (415,664) 13.00 ------------------ ------------------- Balance, December 31, 1999 313,420 8.96 Granted 207,245 20.45 Surrendered (1,035) 8.06 ------------------ ------------------- Balance, December 31, 2000 519,630 13.53 Granted (b) 486,757 6.82 Cancelled (b) (453,130) 13.90
F-40 Surrendered (69,310) 8.35 ------------------ ------------------- Balance, December 31, 2001 483,947 $ 7.17 ================== ===================
(a) Corresponds to the reduction in the exercise price from $13.00 to $8.06 of options granted in 1998. (b) In 2000, the Board of Directors approved a stock option repricing pursuant to which the Company's employees could elect to cancel granted options in exchange for new options with an exercise price of $7.00, which was Company's common stock on New York Stock Exchange. Approximately 520,000 options were eligible for repricing, of which the Company cancelled 303,171 options and granted 241,994 options. The number of repriced options was also reduced proportionately. All other conditions were unchanged. Effective July 1, 2000, the FASB issued Financial Interpretation No. 44 (FIN 44) which amended APB 25 and requires "variable" accounting for all stock option repricing retroactive to December 15, 1998. As a result, these options will require variable accounting until they are exercised, cancelled, forfeited or expired. Under variable accounting, compensation expense must be measured by the difference between the exercise price and the market price of the Company's stock at each reporting period amortized over the vesting period. The effect of the application of FIN 44 during 2000 and 2001 was not significant. Exercise prices of options outstanding as of December 31, 2001 ranged from $3.65 to $16.00. The following table provides certain information with respect to stock options outstanding at December 31, 2001:
Options outstanding ------------------------------------------------------------------ Weighted Average Weighted Average Remaining Range of exercise prices Number Outstanding Exercise Price Contractual Life ------------------ ---------------- ---------------- Under $4.00 5,000 $ 3.65 10.00 $4.00 - $6.00 47,700 5.65 9.90 $6.01 - $8.00 402,877 6.99 9.08 $8.01 - $10.00 7,870 8.10 7.55 $10.01 - $16.00 20,500 14.90 7.63 ------------------ ---------------- ---------------- 483,947 $ 7.17 9.08 ================== ================ ================ Options exercisable ---------------------------------------- Weighted Average Range of exercise prices Number Exercisable Exercise Price ------------------------ ------------------ ---------------- Under $4.00 $ - $ - $4.00 - $6.00 - - $6.01 - $8.00 1,500 6.63 $8.01 - $10.00 - - $10.00 - $16.00 2,813 13.00 ------------- -------------- 4,313 =============
The weighted-average fair value at date of grant for options granted during 2000 and 2001 were $5.83 and $2.60, respectively and were estimated using the Black-Scholes option valuation model with the following weighted-average assumptions.
2000 2001 ------------- -------------- Expected life in years 7.50 7.50 Interest rate 5.10 5.02
F-41 Volatility 79.94 70.56 Expected dividends - - ============= ==============
Warrants: In October, 1999 the Company entered into an agreement with a third party to provide investor relations service for a period of two years. The Company granted warrants to purchase 300,000 Class A common shares of the Company at an exercise price of $8.875 per share. At December 31, 2000 and 2001 the Company had 250,000 and 300,000 shares vested for this contract. The Company is recognizing an expense for the fair value of these options using the Black-Scholes options pricing model as follow: The 150,000 shares vested in 1999 were valued at the fair value of the shares at the date of grant and the 100,000 shares vested in the year 2000 were valued at the fair value of the shares at the date they were vested. The Company had 50,000 shares that are not vested at December 31, 2000, that are valued at the fair value at December 31, 2000. At December 31, 2001 the shares related to this contract are valued at the fair value of the shares the date they were vested. For the years ended December 31, 1999, 2000 and 2001 the Company recognized an expense of $273,000, $1,005,755 and $830,854, respectively, which is included as part of selling, general and administrative expenses in the accompanying consolidated statements of operations. F-42 25 QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables contain selected unaudited consolidated quarterly financial data for the Company:
2000 ----------------------------------------------------------------------- First quarter Second quarter Third quarter Fourth quarter ----------------- --------------- -------------- ---------------- Total operating revenues $ 50,229,735 53,081,404 57,919,395 63,067,121 Operating costs, including depreciation charges of $7,552,734; $8,390,173; $9,168,662 and $11,053,710 for each quarter, respectively 39,401,870 44,406,622 47,125,015 52,342,263 --------------- ------------- ------------ ------------- Operating income 10,827,865 8,674,782 10,794,380 10,724,858 Other income (expenses), net (8,172,126) (6,818,441) (7,297,368) (8,918,409) --------------- ------------- ------------ ------------- Earnings before income taxes and cumulative effect of accounting change 2,655,739 1,856,341 3,497,012 1,806,449 Income taxes (130,250) (140,568) (160,210) (157,349) --------------- ------------- ------------ ------------- Earnings before cumulative effect of accounting change 2,525,489 1,715,773 3,336,802 1,649,100 Cumulative effect of accounting change for installation and activation revenues (16,452,799) - - - --------------- ------------- ------------ ------------- Net earnings (loss) $ (13,927,310) 1,715,773 3,336,802 1,649,100 =============== ============= ============ ============= Earnings (loss) per share $ (0.56) 0.06 0.12 0.06 =============== ============= ============ ============= Number of common shares used in calculation 24,844,544 28,361,028 28,844,544 28,844,544 =============== ============= ============ =============
2001 ----------------------------------------------------------------------- First quarter Second quarter Third quarter Fourth quarter ----------------- --------------- -------------- ---------------- Total operating revenues $ 57,449,378 59,023,070 60,654,087 66,645,650
F-43
2001 ----------------------------------------------------------------------- First quarter Second quarter Third quarter Fourth quarter ----------------- --------------- -------------- ---------------- Operating costs, including depreciation charges of $12,069,872; $13,367,554; $14,378,645 and $14,616,134 for each quarter, respectively 50,064,775 52,895,448 58,031,531 68,296,852 ---------------- -------------- ------------- -------------- Operating income (loss) 7,384,603 6,127,622 2,622,556 (1,651,202) Other income (expenses), net (9,389,238) (9,275,545) (8,070,310) (12,126,026) ---------------- -------------- ------------- -------------- Loss before income taxes and minority interest (2,004,635) (3,147,923) (5,447,754) (13,777,228) Income taxes 16,139 (117,000) (150,000) (260,515) ---------------- -------------- ------------- -------------- Loss before minority interest (1,988,496) (3,264,923) (5,597,754) (14,037,743) Minority interest - 60,026 95,021 1,620,032 ---------------- -------------- ------------- -------------- Net loss $ (1,988,496) (3,204,897) (5,502,733) (12,417,711) ================ ============== ============= ============== Loss per share $ (0.07) (0.11) (0.19) (0.39) ================ ============== ============= ============== Number of common shares used in calculation 28,844,544 28,844,544 28,844,544 31,751,432 ================ ============== ============= ==============
During the fourth quarter of 2001, the Company recognized expense of approximately $4 million for allowance for obsolescence of equipment pending insallation, as well as expenses incurred during the year for operational expenses related to the development of the Company's network in Panama. 26 SEGMENT INFORMATION In the fourth quarter of 1998, the Company adopted Financial Accounting Standards Board Statement No. 131, "Disclosures about Segment of an Enterprise and Related Information", which establishes standards for reporting information about a company's operating segments. The Company has divided its operations into four reportable segments: Wireline, Cellular, International, and Others based upon similarities in revenue generation, cost recognition, marketing and management of its businesses. The reporting segments follow the same accounting policies used for the company's consolidated financial statements and described in the summary of significant accounting policies. Management evaluates a segment's performance based upon profit or loss from operations before income taxes. The segments and a description of their business is as follows: Wireline which includes local access lines. Cellular which includes prepaid and postpaid mobile communication products and services. International which includes long distance carrier services. Cable which includes cable services revenues and Other which includes services such as paging, Internet, data services, local prepaid calling cards and customer contact services. F-44 GEOGRAPHIC
1999 -------------------------------------------------------------------------- Dominican United States Republic Eliminations (a) Consolidated ------------------- --------------- ----------------- ------------- International settlement revenues $ 35,510,406 46,338,275 (21,256,547) 60,592,134 Other 490,836 109,735,971 - 110,226,807 ------------------- --------------- ---------------- ------------ Total operating revenues 36,001,242 156,074,246 (21,256,547) 170,818,941 Operating costs 35,007,605 115,605,803 (21,256,547) 129,356,861 ------------------- --------------- ---------------- ------------ Operating income $ 993,637 40,468,443 - 41,462,080 =================== =============== ================ ============ Identifiable assets $ 25,525,617 514,417,693 (8,464,849) 531,478,461 =================== =============== ================ ============
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 ================== =============== ============== =============== ===============
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 ================== =============== ============== ============== ==============
(a) Revenues costs: Corresponds to elimination of the gross income revenues between subsidiaries and the Company. Identifiable assets: Corresponds to eliminations of intercompany accounts and investments in common stock between TRICOM, S.A. (Parent Company) in the Dominican Republic and the subsidiaries in the United States and Central America. PRODUCTS AND SERVICES
1999 ------------------------------------------------------------------------------------ Wireline Cellular International Others (a) Consolidated ---------------- ------------- --------------- -------------- ------------------ Revenues $ 62,572,264 35,346,554 60,592,134 12,307,989 170,818,941 =============== ============ ============ =========== ================= Operational income 21,085,005 9,846,875 10,185,960 344,240 41,462,080 =============== ============ ============ =========== ================= Proforma operational income assuming the change for accounting principle in installation and activation retroactively 17,193,219 8,768,309 10,185,960 344,240 36,491,728 =============== ============ ============ =========== ================= Identifiable assets 177,806,707 110,876,334 25,590,381 217,205,039 531,478,461 =============== ============ ============ =========== ================= Depreciation expense 11,080,231 5,605,645 2,928,174 1,223,430 20,837,480 =============== ============ ============ =========== =================
F-45 Capital expenditures $ 79,065,923 42,573,958 7,602,493 16,183,849 145,426,223 =============== =========== ========== =========== ===========
2000 ------------------------------------------------------------------------------- Wireline Cellular International Others (a) Consolidated --------------- ------------ ------------- --------------- ------------- Revenues $ 83,491,208 42,450,018 84,187,050 14,169,379 224,297,655 =============== ============ =========== ============ ============= Operational income 19,874,568 14,957,724 2,932,170 3,257,423 41,021,885 =============== ============ =========== ============ ============= Identifiable assets 228,852,370 194,248,738 38,341,447 220,997,304 682,439,859 =============== ============ =========== ============ ============= Depreciation expense 27,109,500 5,185,718 1,953,356 1,916,705 36,165,279 =============== ============ =========== ============ ============= Capital expenditures $ 42,975,001 90,751,943 9,476,159 25,710,325 168,913,428 =============== ============ =========== ============ =============
2001 ----------------------------------------------------------------------------------------- Wireline Cellular International Cable Others (a) Consolidated -------------- ------------ ------------- ---------- ------------- ------------- Revenues $ 98,645,084 44,045,919 82,024,320 4,735,872 14,320,990 243,772,185 ============= ============ =========== ========== =========== =========== Operational income (loss) 13,852,143 4,148,474 590,585 1,009,621 (5,117,244) 14,483,579 ============= ============ =========== ========== =========== =========== Identifiable assets 348,967,885 194,052,349 69,895,502 78,146,866 138,352,024 829,414,626 ============= ============ =========== ========== =========== =========== Depreciation expense 38,252,541 10,546,909 2,502,516 533,544 2,596,695 54,432,205 ============= ============ =========== ========== =========== =========== Capital expenditures 55,655,735 17,780,482 1,537,326 4,815,026 36,786,655 116,575,224 ============= ============ =========== ========== =========== ===========
(a) Other (identifiable assets) include administrative/corporate assets which are not revenue generating. Also includes construction in process and communication equipment pending installation, which at December 31, had not been placed in service and were not specifically associated with any business segment. Other remaining assets do not meet any quantifiable test for determining reportable segments. During 2001, the Company conducted a detail analysis of its identifiable assets by products and services. As a result of such analysis, the Company identified that assets included as part of the Cellular product corresponded to the Wireline product. The amount of these net assets increased to $73,331,613 which were reclassified in the year 2000 in conjunction with the depreciation expenses. 27 NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 "Business Combinations" (SFAS No. 141) and SFAS 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS 141 requires that the purchase method of accounting to be used for all business combinations. SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. In accordance with the provision of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption. The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142 is effective January 1, 2002. Goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001, but before SFAS No. 142 is adopted in full, are not amortized. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized and tested for impairment prior to the full adoption of SFAS No. 142. Upon adoption of SFAS No. 142, the Company is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition separate from F-46 goodwill. The Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. If an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 requires the Company to record fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived asset that result from the acquisition, construction development and/or normal use of the assets. The Company also records a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and change in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. In August, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 addresses financial accounting and reporting for the impairment of disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carry amount of the asset exceeds the fair value of the asset. The Company is required to adopt SFAS No. 144 on January 1, 2002. The Company does not anticipate any impact because of the adoption of this statement. 28 NON-CASH FINANCING AND INVESTING ACTIVITIES During the years 2000 and 2001, the Company entered into capital leases for $17,691,845 and $3,345,398, respectively. (See note 12). During the year 2001, as part of the acquisition of TCN Dominicana, S. A., the Company issued 3,375,000 Class A common stock with a value of $21,667,500. (See note 9). 29 FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amount and estimated fair values of the Company's financial instruments at December 31, 2000 and 2001. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. Amount in parentheses represent liabilities.
2000 2001 ----------------------------------- --------------------------------- Carrying Carrying amount Fair value amount Fair value ------------------- ------------ --------------- ------------- Cash on hand and in banks $ 18,199,552 18,199,552 12,576,050 12,576,050 Accounts receivable 32,126,752 32,126,752 34,498,654 34,498,654 Investments (certificates of deposits) - - 15,200,000 15,200,000 Notes payable to banks and related parties (116,756,416) (116,756,416) (182,498,917) (182,498,917) Accounts payable (37,824,970) (37,824,970) (37,126,064) (37,126,064) Other liabilities (19,990,490) (19,990,490) (14,644,012) (14,644,012) Accrued expenses (14,035,182) (14,035,182) (20,272,800) (20,272,800) Commercial paper - - (30,396,315) (30,396,315)
F-47
2000 2001 ------------------------------------ --------------------------------- Carrying Carrying amount Fair value amount Fair value ------------------- ------------- --------------- ------------- Capital leases (20,829,275) (20,829,275) (17,856,766) (17,856,766) Long-term debt- banks (64,436,698) (63,799,499) (127,155,626) (126,107,022) Long-term debt - senior notes (200,000,000) (186,000,000) (200,000,000) (168,000,000) =================== ============= =============== =============
The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash on hand and in banks, investments in certificates of deposit, notes payable to banks and related parties, accounts payable, other liabilities and accrued expenses: The carrying amounts approximate fair value because of the short maturity of these instruments. Accounts receivable are adjusted by their valuation allowance and, therefore, are presented at realizable value which approximates fair value. Capital lease, commercial paper and long-term debt - banks: The fair value of these debts was estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable by the Company's bankers. Long-term debt senior notes: The fair value of this long term debt was estimated based on quoted market prices on the last business day of the year. F-48 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing Form 20-F and has duly caused this amendment to the annual report to be signed on its behalf by the undersigned, thereunto duly authorized. TRICOM, S.A. Dated: May 29,2002 By: /s/ Carl H. Carlson -------------------------------------------- Carl H. Carlson, Executive Vice President, Chief Operating Officer, Member of the Office of the President and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----