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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 2003
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 0-22520
TERREMARK WORLDWIDE, INC
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1981922
- ------------------------------- ----------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation Identification No.)
or Organization)
2601 S. Bayshore Drive, Miami, Florida 33133
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(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code:
(305) 856-3200
----------------------
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 whether the registrant is an accelerated filer (as
defined in Rule 12b of the Exchange Act. Yes [ ] No [ X ] The registrant had
306,473,699 shares of common stock, $0.001 par value, outstanding as of July 30,
2003.
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2003
(unaudited) and March 31, 2003
Condensed Consolidated Statements of Operations for the Three
Months ended June 30, 2003 and 2002 (unaudited)
Condensed Consolidated Statement of Changes in Stockholder's
Deficit for the Three Months Ended June 30, 2003 (unaudited)
Condensed Consolidated Statements of Cash Flows for the Three
Months ended June 30, 2003 and 2002 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk
ITEM 4 Controls and Procedures
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
SIGNATURES
1
Item 1. Financial Statements
Terremark Worldwide, Inc. and Subsidiaries
Condensed Consolidated Financial Statements
June 30, 2003
Terremark Worldwide, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
- --------------------------------------------------------------------------------
June 30, March 31,
2003 2003
------------- -------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 5,361,770 $ 1,408,190
Accounts receivable, net of allowance for doubtful accounts of
$128,211 and $120,340 686,856 494,736
Contracts receivable 20,370 29,204
------------- -------------
Total current assets 6,068,996 1,932,130
Investment in unconsolidated entities, net 826,005 827,667
Restricted cash 777,965 768,905
Property and equipment, net 53,409,689 54,482,964
Other assets 2,838,810 1,589,977
Goodwill 9,999,870 9,999,870
------------- -------------
Total assets $ 73,921,335 $ 69,601,513
============= =============
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of notes payable (includes $3,853,564 and $138,000 due to
related parties) $ 9,341,672 $ 1,464,963
Construction payables 528,270 22,012,162
Accounts payable and accrued expenses 5,948,182 8,434,373
Current portion of capital lease obligations 2,203,427 2,477,467
Interest payable 807,967 4,492,805
Net liabilities of discontinued operations 1,185,927 1,199,531
Convertible debt -- 900,000
------------- -------------
Total current liabilities 20,015,445 40,981,301
Notes payable, less current portion (includes $32,816,149 and $4,100,000 due
to related parties) 32,915,166 56,174,938
Convertible debt, with a face value of 38,880,000 and $14,005,000
(includes $3,650,000 and $3,450,000 due to related parties) 29,832,381 14,005,000
Deferred rent 2,885,534 2,610,623
Capital lease obligations, less current portion 732,646 762,470
Deferred revenue 974,064 971,150
------------- -------------
Total liabilities 87,355,236 115,505,482
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Commitments and contingencies
Series H redeemable convertible preferred stock: $.001 par value, 294
shares issued and outstanding 564,226 556,729
------------- -------------
Series G convertible preferred stock: $.001 par value,
20 shares issued and outstanding 1 1
Common stock: $.001 par value, 400,000,000 shares authorized;
306,462,365 and 256,276,864 shares issued 306,462 256,277
Paid in capital 198,319,375 169,204,208
Accumulated deficit (211,394,325) (214,324,140)
Common stock warrants 2,224,985 1,857,581
Common stock options 1,545,375 1,545,375
Note receivable - related party (Note 5) (5,000,000) (5,000,000)
------------- -------------
Total stockholders' deficit (13,998,127) (46,460,698)
------------- -------------
Total liabilities and stockholders' deficit $ 73,921,335 $ 69,601,513
------------- -------------
The accompanying notes are an integral part of these
consolidated financial statements.
2
Terremark Worldwide, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
- --------------------------------------------------------------------------------
For the three months
ended June 30,
-------------------------------------
2003 2002
------------- -------------
(Unaudited)
Revenues
Data center $ 3,010,615 $ 2,059,128
Data center - contract termination fee 291,537 1,090,638
Development, commission and construction fees 41,081 17,604
Management fees 64,269 82,545
Construction contracts 33,695 1,932,969
------------- -------------
Operating revenues 3,441,197 5,182,884
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Expenses
Data center operations, excluding depreciation 2,556,550 3,094,680
Construction contract expenses, excluding depreciation 46,456 1,833,509
General and administrative 2,645,782 3,285,921
Sales and marketing 772,318 769,606
Depreciation and amortization 1,184,029 1,231,244
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Operating expenses 7,205,135 10,214,960
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Loss from operations (3,763,938) (5,032,076)
------------- -------------
Other income (expense)
Gain on debt restructuring 8,475,000 --
Interest expense (1,832,070) (3,015,627)
Dividend on preferred stock (7,497) (7,497)
Interest income 23,255 28,865
Other 35,065 53,916
------------- -------------
Total other income (expenses) 6,693,753 (2,940,343)
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Income (loss) before income taxes 2,929,815 (7,972,419)
Income taxes -- --
------------- -------------
Net income (loss) $ 2,929,815 $ (7,972,419)
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Basic and diluted net income (loss) per common share: $ 0.01 $ (0.04)
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Weighted average common shares outstanding 289,886,832 204,524,008
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The accompanying notes are an integral part of these
consolidated financial statements.
Terremark Worldwide, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Deficit
- --------------------------------------------------------------------------------
Stockholders' Deficit (Unaudited)
----------------------------------------------------------------------------------------------------
Common Stock
Par Value $.001
----------------- Additional Common Common
Preferred Issued Paid-in Stock Stock Note Receivable Retained
Stock Shares Amount Capital Warrants Options Related Party Deficit
--------- ---------- --------- ------------- ----------- ---------- ------------- -------------
Balance at March 31, 2003 1 256,276,864 $256,277 $169,204,208 $1,857,581 $1,545,375 $(5,000,000) $(214,324,140)
Conversion of debt -- 50,133,334 50,133 23,449,867 -- -- -- --
Exercise of stock options -- 42,667 43 21,777 -- -- -- --
Warrants issued -- -- -- (177,750) 397,950 -- -- --
Exercise of warrants -- 9,500 9 8,521 (3,971) -- -- --
Warrants expired -- -- -- 26,575 (26,575) -- -- --
Beneficial conversion
feature on issuance
of convertible debentures -- -- -- 9,500,000 -- -- -- --
Subscription receivable
(Note 7) -- -- -- (3,713,823) -- -- -- --
Net income -- -- -- -- -- -- -- 2,929,815
----- ----------- --------- ------------ ---------- ---------- ----------- -------------
Balance at June 30, 2003 1 306,462,365 $ 306,462 $198,319,375 $2,224,985 $1,545,375 $(5,000,000) $(211,394,325)
===== =========== ========= ============ ========== ========== =========== =============
The accompanying notes are an integral part of these
consolidated financial statements.
3
Terremark Worldwide, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
For the three months ended
June 30,
(Unaudited)
-----------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 2,929,815 $ (7,972,419)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization 1,184,029 1,240,501
Amortization of beneficial conversion feature on issuance
of convertible debentures 452,381 --
Amortization of loan costs 33,705 232,272
Provision for bad debt 7,871 --
Dividend on preferred stock 7,497 7,497
Gain on debt restructuring (8,475,000) --
(Increase) decrease in:
Accounts receivable (199,991) 597,951
Contracts receivable 8,834 848,415
Other assets (1,089,264) (512,618)
Increase (decrease) in:
Accounts payable and accrued expenses (2,486,191) 59,105
Interest payable (2,687,181) 698,371
Deferred revenue 2,914 12,770
Net assets/liabilities of discontinued operations (13,604) 85,552
Deferred rent 274,911 292,813
------------ ------------
Net cash used in operating activities (10,049,274) (4,409,790)
------------ ------------
Cash flows from investing activities:
Restricted cash (9,060) (11,332)
Purchase of property and equipment (83,828) (650,226)
Investment in unconsolidated entities 1,662 (228,182)
------------ ------------
Net cash used in investing activities (91,226) (889,740)
------------ ------------
Cash flows from financing activities:
(Payments) borrowings of construction payables 118,451 (2,133,154)
New borrowings 750,000 2,181,221
Payments on loans (1,290,723) (436,870)
Issuance of convertible debt 15,836,177 --
Payments on convertible debt (1,025,000)
Payments under capital lease obligations (303,864) (254,594)
Exercise of stock options and warrants 9,039 --
Sale of common stock and warrants -- 7,591,000
------------ ------------
Net cash provided by financing activities 14,094,080 6,947,603
------------ ------------
Net increase in cash and cash equivalents 3,953,580 1,648,073
Cash and cash equivalents at beginning of period 1,408,190 283,078
------------ ------------
Cash and cash equivalents at end of period $ 5,361,770 $ 1,931,151
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2003
- --------------------------------------------------------------------------------
1. Business and organization
Terremark Worldwide, Inc. (together with its subsidiaries, the
"Company") operates facilities at strategic locations around the world from
which the Company assists users of the Internet and large communications
networks in communicating with other users and networks. The Company's primary
facility is the NAP of the Americas, a carrier-neutral Tier-1 network access
point ("the NAP") in Miami, Florida. The NAP provides exchange point, colocation
and managed services to carriers, Internet service providers, network service
providers, government entities, multinational enterprises and other end users.
The Company's strategy is to leverage its concentration of connectivity and
carrier-neutral status to sell services to customers within and outside of the
Company's TerreNAP Data Centers.
On April 28, 2000, the predecessor to the Company, Terremark Holdings,
Inc. (THI) merged with and into AmTec, Inc., a publicly traded international
telecommunications and services company. For accounting purposes the merger was
treated as a reverse acquisition with the Company being the acquirer. As a
result, historical information is that of THI.
Prior to the merger with AmTec, the Company was engaged in the
development, sales, leasing, management and financing of retail, high-rise
office buildings, mixed-use projects, condominiums, hotels and
government-assisted housing. The Company was also involved in a number of
ancillary businesses that complemented its development operations. Specifically,
the Company engaged in offering financial services, property management,
construction management, condominium hotel management, residential and
commercial leasing brokerage, and advisory services. By March 31, 2002, the
Company exited non-core real estate activities, real estate development,
property management, financing and the ancillary businesses that complimented
these real-estate development operations. The Company's remaining real estate
activities include technology construction work and management of the properties
where the NAP of the Americas is located.
2. Liquidity
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and liabilities and
commitments in the normal course of business. From the time of the merger
through June 30, 2003, the Company has incurred net operating losses of
approximately $199.7 million, including approximately $82.6 million of losses
related to discontinued operations. The Company's cash flows from operations for
the three months ended June 30, 2003 and 2002 were negative and the working
capital deficit was approximately $14.0 million and $39.0 million as of June 30,
2003 and March 31, 2003, respectively. Due to recurring losses from operations
and the lack of committed sources of additional debt or equity to support
working capital deficits, substantial doubt exists about the Company's ability
to continue as a going concern.
Historically, the Company has met its liquidity needs primarily through
obtaining additional debt financing and the issuance of equity interests. Some
of the debt financing was either provided by or guaranteed by Manuel D. Medina,
the Company's Chief Executive Officer and Chairman of the
5
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
Board of Directors. In prior periods, the Company also shut down or disposed of
non-core operations and implemented expense reductions to reduce the Company's
liquidity needs.
Based on customer contracts signed as of July 31, 2003, the Company's
monthly cash deficit from operations is approximately $1.2 million. In order to
eliminate this monthly cash deficit from operations, the new monthly revenues
required range from $1.8 million to $2.8 million. This range of new revenue
depends on the mix of the services sold and their corresponding margin. The
Company's required revenues are based on existing contracts, including those
recently announced with the U.S. Government and enterprises, and expected future
contracts from potential customers currently in the sales pipeline. The Company
has identified potential customers, including the federal, state and local
governments, and is actively offering available services to them. However, the
Company's projected revenues and planned cash needs depend on several factors,
some of which are beyond the Company's control, including the rate at which its
services are sold, the ability to retain its customer base, the willingness and
timing of potential customers outsourcing the housing and management of their
technology infrastructure to the Company, the reliability and cost-effectiveness
of the Company's services and the Company's ability to market its services.
The majority of the Company's planned operating cash improvement is
expected to come from an increase in revenues and cash collections from
customers. If the Company fails to achieve planned revenues, it will require
additional financing. There can be no assurances that additional financing will
be available, or that, if available the financing will be obtainable on terms
acceptable to the Company or that any additional financing would not be
substantially dilutive to existing shareholders. If the Company needs to obtain
additional financing and fails to do so, it may have a material adverse effect
on the Company's ability to meet financial obligations and operate as a going
concern.
3. Summary of significant accounting policies
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles for complete annual financial statements. The
unaudited condensed consolidated financial statements reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary to present a fair presentation of the results for the
interim periods presented. Operating results for the quarter ended June 30, 2003
may not be indicative of the results that may be expected for the year ending
March 31, 2004. Amounts as of March 31, 2003, included in the condensed
consolidated financial statements have been derived from audited consolidated
financial statements as of that date.
These unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the year ended March 31, 2003.
6
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
Use of estimates
The Company prepares its financial statements in conformity with
generally accepted accounting principles in the United States of America. These
principles require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications
Certain reclassifications have been made to the prior periods'
financial statements to conform with current presentation.
Significant concentrations
One customer accounted for approximately $384,000 of data center
revenues for the three months ended June 30, 2003. Three customers accounted for
approximately $208,000, $233,000 and $211,000 in data center revenues for the
three months ended June 30, 2002.
Stock-Based Compensation
The Company uses the intrinsic value-based method to account for its
employee stock-based compensation plans. Under this method, compensation expense
is based on the difference, if any, on the date of grant, between the fair value
of the Company's shares and the exercise price of the option.
The Company has adopted the disclosure requirements of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of SFAS No. 123". The following table presents what the net loss and
net loss per share would have been had the Company adopted SFAS No. 123 (in
thousands, except per share data):
For the three months ended June 30,
------------------------------------
2003 2002
------------- -------------
Net income (loss) applicable to common shares - as reported $ 2,929,815 $ (7,972,419)
============= =============
Net income (loss) applicable to common shares - proforma $ 2,399,651 $ (8,670,399)
============= =============
Income (loss) per common share - as reported $ .01 $ (.04)
============= =============
Income (loss) per common share - proforma $ .01 $ (.04)
============= =============
7
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
The Company's fair value calculations for employee grants were made
using the Black-Scholes option pricing model with the following weighted average
assumptions:
2003 2002
------------- -------------
Risk-free rate.................................... 2.14% - 2.90% 4.34% - 4.84%
Volatility......................................... 155% 135% - 155%
Expected life.................................... 5 years 5 years
Expected dividends............................. 0% 0%
Beneficial conversion feature
When the Company issues debt which is convertible into common stock at
a discount from the common stock market price at the date the debt is issued,
the Company recognizes a beneficial conversion feature for the difference
between the closing price and the conversion price multiplied by the number of
shares issuable upon conversion. The beneficial conversion feature is presented
as a discount to the related debt with an offsetting amount increasing
additional paid in capital. The discount is amortized as additional interest
expense from the date the debt is issued to the date it first becomes
convertible.
Recent accounting standards
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement requires that an issuer classify financial instruments which are
within its scope as a liability. Many of those instruments were classified as
equity under previous guidance. Most of the guidance in SFAS No. 150 is
effective for all financial instruments entered into or modified after May 31,
2003, and otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The impact of the Company's adoption of SFAS 150
on its consolidated financial statements will be to increase liabilities and
decrease mezzanine by amounts underlying its outstanding Series H redeemable
preferred stock, which will be reclassified.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group ("DIG") process that effectively required
amendments to SFAS No. 133, and decisions made in connection with other FASB
projects dealing with financial instruments and in connection with
implementation issues raised in relation to the application of the definition of
a derivative and characteristics of a derivative that contains financing
components. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The Company's
management does not believe the adoption of SFAS No. 149 will have a material
impact on our results of operations and consolidated financial statements.
8
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
In March 2003, the FASB reached a consensus on Emerging Issues Task
Force (EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables".
The consensus provides guidance on the accounting for multiple element revenue
arrangements. It also provided guidance on how to separate multiple element
revenue arrangements into its separate units of accounting and how to measure
and allocate the arrangement's total consideration to each unit. The effective
date of EITF 00-21 is for revenue arrangements entered into in fiscal periods
(interim or annual) beginning after June 15, 2003. Early application is
permitted. The Company does not expect the adoption of EITF 00-21, effective
July 1, 2003, to have a material effect on its financial statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
This Interpretation provides guidance for determining a primary beneficiary
period. The effective date of FIN 46 is the first interim period beginning after
June 15, 2003 for variable interest entities acquired before February 1, 2003
and immediately to variable interest entities created after January 31, 2003.
NAP de las Americas-Madrid S.A. may be a variable interest entity in accordance
with FIN 46. The Company's maximum related exposure to loss is approximately
$500,000 at June 30, 2003. The Company does not expect the adoption of FIN 46,
effective beginning on July 1, 2003, to have a material effect on its financial
statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." For guarantees issued or
modified after December 31, 2002, a liability will be recognized for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
requirements were effective for interim and annual financial statements for
periods ending after December 15, 2002. FIN 45 may impact the Company's
financial position or results of operations in subsequent periods, if existing
guarantees are modified.
In April 2002, the FASB approved FASB Statement No. 145 (SFAS 145),
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections. In addition to rescinding SFAS 4, 44, and 64 and
amending SFAS 13, SFAS 145 establishes a financial reporting standard for
classification of extinguishment of debt in the financial statements in
accordance with APB 30. SFAS 145 is effective for the Company's fiscal year
ended March 31, 2004. Management does not expect the adoption of SFAS 145 to
have a material effect on the Company's financial position. However, SFAS 145
had an impact the presentation of the results of operations for the quarter
ended June 30, 2003 (see Note 5).
9
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
5. Notes payable
Notes payable consist of the following:
June 30, March 31,
2003 2003
----------- -----------
(unaudited)
Notes payable to third parties:
Note payable to Ocean Bank, collateralized by substantially all assets of the
NAP of the Americas and a personal guaranty of the Chief Executive Officer. On
April 30, 2003, the note payable to Ocean Bank was reclassified to
"Notes Payable to Related Parties" $ -- $43,974,553
Unsecured notes payable to a corporation, interest accrues
at 10%. Principal and interest due April 1, 2004. On April 30, 2003,
$1,000,000 was converted to convertible debt (Note 7). 3,300,000 4,450,000
Unsecured note payable to a corporation, interest accrues at
15%. Principal and interest due on April 1, 2004. 1,000,000 1,000,000
Unsecured notes payable, interest ranges from 10% to 15%. Principal
and interest due between September 2003 and March 2005. 869,947 291,669
Note payable to a corporation, collateralized by
certain assets of a director and certain shareholders of the Company
Interest accrues at 1% over prime, due on December 31, 2003. 417,178 667,178
Unsecured note payable to a corporation, interest accrues at
9%. Due on demand. -- 518,501
Unsecured note payable to a corporation, interest accrues at 10%
Principal and interest due on May 30, 2003. On April 30, 2003,
amount was converted to convertible debt (Note 7). -- 1,500,000
Unsecured notes payable to individuals, interest accrues at 10%
Principal and interest due on March 31, 2003. On April 30, 2003,
amounts were converted to convertible debt (Note 7). -- 1,000,000
----------- -----------
Total notes payable to third parties 5,587,125 53,401,901
----------- -----------
Notes payable to related parties:
Note payable to Ocean Bank, collateralized by substantially all assets of the
NAP of the Americas and a personal guaranty of the Chief Executive Officer
Amount includes $5.3 million of gain on debt restructuring to be amortized
monthly to reduce interest expense over the life of the remaining debt. 34,287,053 --
10
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
June 30, March 31,
2003 2003
----------- -----------
(unaudited)
Unsecured note payable to a corporation controlled by a
shareholder, interest accrues at 15%. Principal and interest due on
April 1, 2004. 1,600,000 1,600,000
Unsecured notes payable to certain executives and directors
of the Company and third party corporations, interest
accrues at 13%. Principal and interest is due April 1, 2004. On April
30, 2003, $700,000 was converted to convertible debt (Note 7). 782,660 1,500,000
Note payable to the Chief Executive Officer. Interest accrues
at 10%. Principal and interest due on June 30, 2003. In April 30, 2003,
amount was converted to convertible debt (Note 7). -- 1,000,000
Unsecured note payable to the Chief Executive Officer. Interest accrues at 7.5%,
payable monthly, with principal installments of $50,000 due on a quarterly basis
commencing on June 26, 2002, and maturing on June 26, 2003. -- 100,000
Unsecured note payable to a shareholder, interest accrues
at 10%. Due on demand. -- 38,000
----------- -----------
Total notes payable to related parties 36,669,713 4,238,000
----------- -----------
42,256,838 57,639,901
Less: current portion of notes payable 9,341,672 1,464,963
----------- -----------
Notes payable, less current portion $32,915,166 $56,174,938
=========== ===========
On September 5, 2001, the Company closed on a $48 million credit
facility from Ocean Bank. During August 2002, the Company modified the credit
facility. Under the modified terms, the initial maturity date was extended to
September 2003 and the Company had the option to exercise two six-month
extension periods. At closing, the total amount of the credit facility was
disbursed except for approximately $6.6 million that was held as an interest
reserve. Through June 2002, the interest reserve was disbursed monthly to make
interest payments. The amendment reduced the annual interest rate to 7.50%. The
Company commenced making monthly interest payments in July 2002. All other
material provisions of the credit facility remained unchanged. To obtain the
original loan, the Company paid a $720,000 commitment fee to the lender. The
proceeds of the original credit facility were used to:
o repay a $10 million short-term loan from Mr. Medina, the proceeds of
which the Company had used to fund the build out of the NAP of the
Americas (Mr. Medina, in turn, used the $10 million to repay a personal
$10 million short-term loan from Ocean Bank);
o repay $3.5 million of debt that the Company owed to Ocean Bank under a
line of credit personally guaranteed by Mr. Medina;
11
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
o pay $1.2 million in loan costs related to the $48 million credit
facility (including $720,000 commitment fee); and
o fund the NAP of the Americas build out costs.
On April 30, 2003, Ocean Bank revised its loan with the Company by
converting, at $.75 per common share, $15.0 million of the outstanding principal
balance under the credit facility into 20 million shares of the Company's common
stock with an approximate $9.6 million market value and extending the term of
the remaining $29.0 million until April 30, 2006. The resulting $5.4 million
debt restructuring gain was deferred and recorded in notes payable and is being
amortized as reductions in interest expense over the life of the remaining debt.
Concurrent with this transaction, the Company paid all past due interest as of
March 31, 2003, plus accrued interest through April 28, 2003 totaling
approximately $1.6 million and prepaid interest of approximately $900,000. Under
the new terms, interest will be payable monthly at an annual stated rate of
5.25% for the first twelve months and 7.5% thereafter.
The loan is secured by all of the Company's assets and allows for up to
a $25 million junior lien position on the assets of its NAP of the Americas,
Inc. subsidiary. Mr. Medina has personally guaranteed the loan with Ocean Bank.
In addition to Mr. Medina's personal guarantee of the loan, and in
order to obtain the credit facility, the bank further required Mr. Medina, prior
to the bank disbursing funds under the credit facility, to (i) provide a $5.0
million certificate of deposit to the bank as collateral for certain personal
loans that Mr. Medina has with the bank and (ii) commit to accelerate the
maturity date of those personal loans to December 31, 2001. Subsequent to
September 2001, Mr. Medina and the bank changed the maturity date on his
personal loans, first to December 31, 2001 and later to July 1, 2002. In the
event of the Company's default under the credit facility Mr. Medina also agreed
to subordinate any debt that the Company owed to Mr. Medina until the credit
facility is repaid in full. Mr. Medina has repaid part of his personal loans to
the bank through liquidation of the $5.0 million certificate of deposit in
January 2002, leaving an outstanding principal balance of approximately $4.8
million and he exercised his right under such personal loan agreements to extend
their maturity date from July 1, 2002 to June 30, 2003. Subsequent to June 30,
2003, Mr. Medina has exercised his option to extend the loan to December 31,
2003 and has made a principal payment of $200,000 resulting in a $4.6 million
balance.
On September 5, 2001 and in consideration of Mr. Medina's agreeing to
repay his indebtedness to the bank earlier than otherwise required, pledging the
certificate of deposit to the bank and personally guaranteeing the $48 million
credit facility and approximately $21 million of construction payables, the
Company entered into an amended and restated employment agreement with him.
Under the terms of the amended and restated employment agreement, the Company
will indemnify Mr. Medina from any personal liability related to his guarantees
of the Company's debt, use commercially reasonable efforts to relieve Mr. Medina
of all his guarantees of the Company's debt, provide up to $6.5 million of cash
collateral to the bank should Mr. Medina be unable to repay the personal loans
when due and provide a non interest-bearing $5.0 million loan to Mr. Medina for
as long as his guarantees of the Company's debt exist. Mr. Medina and the
Company have agreed that the Company has the right to withhold payment to Mr.
Medina of the $1,375,000 in convertible debt
12
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
held by him until the note to the Company is repaid. The note receivable from
Mr. Medina is shown as an adjustment to equity. The $48 million credit facility
and the note receivable from Mr. Medina were approved by the Board of Directors.
Mr. Medina's note to the Company has a maturity date of December 5,
2004 and bears interest subsequent to September 5, 2002 at 2%, the applicable
federal rate. Interest is due in bi-annual installments beginning on June 30,
2003. The Company reviews the collectibility of this note on a quarterly basis.
6. Construction payables
Construction payables at June 30, 2003 relate to construction of the
Company's colocation facility in Santa Clara, California and technology
construction work.
On November 8, 2002, CRG, LLC entered into an agreement with Cupertino
Electric, Inc. to purchase the entire $18.5 million construction payable
(including accrued interest) owed to Cupertino. On November 11, 2002, the
Company entered into an agreement with CRG that provided the Company the option,
upon the closing of the purchase of the debt by CRG from Cupertino, to repay the
entire debt at a discount by either issuing shares of the Company's common stock
valued at $0.75 per share or making a cash payment of $9.9 million.
On December 5, 2002, CRG, LLC entered into an agreement with Kinetics
Mechanical Services, Inc. and Kinetics Systems Inc. to purchase the Company's
$4.1 million construction payable (including accrued interest) to Kinetics
Mechanical Services, Inc. and Kinetics Systems Inc. On December 5, 2002, the
Company entered into an agreement with CRG that provided the Company with the
option, upon the closing of the purchase of the debt by CRG from Kinetics
Mechanical Services, Inc. and Kinetics Systems Inc., to repay the entire debt at
a discount by either issuing shares of the Company's common stock valued at
$0.75 per share or making a cash payment of $2.4 million.
On April 30, 2003, CRG, LLC ("CRG"), an entity newly formed by a
shareholder of the Company, completed the purchase, at a discount, of the
Company's $22.6 million construction payables (including accrued interest) to
Cupertino Electric, Inc., Kinetics Mechanical Services, Inc. and Kinetics
Systems Inc., all of which were construction contractors for the NAP of the
Americas. At the closing, CRG's purchased construction payables were converted
at $.75 per common share into 30,133,334 shares of the Company's common stock
with an approximate $14.1 million market value in accordance with the November
11, 2002 and the December 5, 2002 option agreements. As a result of these
transactions, the Company recorded a gain on debt restructuring of approximately
$8.5 million.
7. Convertible debt
On April 30, 2003, the Company issued 10% Subordinated Secured
Convertible Debentures (the "Subordinated Debentures") due April 30, 2006 for an
aggregate principal amount of $25.0 million. The debentures are convertible into
shares of the Company's stock at $0.50 per share. Interest is
13
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
payable quarterly beginning July 31, 2003. The debentures were issued in
exchange for $10.3 million in cash, $9.5 million in a promissory note due in
full May 30, 2003 and $5.2 million of notes payable converted to the
Subordinated Debentures. Included in the $5.2 million is $2.0 million of cash
received in March 2003 in anticipation of the debenture transaction.
The maker of the $9.5 million promissory note failed to pay but agreed
on June 16, 2003 to assign the note and the debenture to an entity newly formed
by the son of a director of the Company. Payments received as of August 14,
2003, aggregated approximately $6.9 and the maturity of the remaining
subscription receivable of $2.6 million has been extended from August 15, 2003
to September 15, 2003. Two of the Company's directors have guaranteed payment
and performance in accordance with the amended terms of the note. Management
believes that collection on the remaining balance is reasonably assured. The
$3.7 million of subscription receivable has been presented as an offset to paid
in capital. In connection with this transaction, the Company recognized a
beneficial conversion feature of $9.5 million, based on the June 16, 2003
measurement date.
As of June 30, 2003, the Company has outstanding approximately
$11,130,000, $2,750,000 and 25,000,000 of 13%, 13.125%, and 10% subordinated
convertible debt, respectively. The 13% debt matures on December 31, 2005, the
13.125% debt matures on August 30, 2004 and the 10% debt matures April 30, 2006.
The debt is convertible into the Company's stock at a weighted average
conversion price of $1.8, $0.61 and $0.50 for the convertible debt issued at
13%, 13.125% and 10%, respectively. Prepayment by the Company is permitted under
the 10% debt instrument subsequent to April 30, 2004. Prepayment by the Company
is permitted under the 13% and 13.125% debt instruments, but will entitle
holders of the 13% subordinated debentures to warrants or a premium over their
outstanding principal and interest based upon the following schedule:
Year Redemption Price
---- ----------------
2003 103%
2004 102%
2005 100%
8. Changes to stockholders' deficit
During the three months ended June 30, 2003, the Company entered into
the following equity transactions:
Common stock
In June 2003, approximately $4,000 of warrants were converted to 9,500
shares of common stock at $0.48 per share.
In June 2003, 42,667 shares of common stock were issued in conjunction
with the exercise of 36,667 employee stock options at $0.51 and 6,000 employee
stock options at $0.52.
In April 2003, in conjunction with the Ocean Bank debt conversion of
$15.0 million in debt to equity, the Company issued 20.0 million shares of
common stock at $0.75 per share.
14
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
In April 2003, in conjunction with the CRG transaction whereby $21.6
million in construction payables plus $1.0 million in accrued interest was
converted to equity, the Company issued 30.1 million shares of common stock at
$0.75 per share.
Stock warrants
During the period from March 2001 through June 30, 2003, the Company
issued warrants to third parties for services and to facilitate certain debt and
equity transactions. The following table summarizes information about stock
warrants outstanding as of June 30, 2003:
Estimated
Issuance No. of shares Exercise Expiration Fair Value
Date able to purchase Price Date at Issuance
-------- ---------------- -------- ---------- -----------
June 2003 300,000 $ 0.50 June 2006 $ 220,200
June 2003 250,000 0.75 June 2006 177,750
March 2003 300,000 0.75 March 2007 110,400
December 2002 300,000 0.75 March 2007 110,400
October 2002 1,200,000 0.75 October 2004 90,000
July 2002 100,000 0.54 July 2005 20,900
April 2002 600,000 0.40 March 2007 220,800
June 2001 13,000 1.72 June 2011 22,490
January 2002 9,500 0.48 June 2011 3,971
March 2001 300,000 2.00 March 2006 352,200
November 2000 250,000 2.76 November 2008 394,000
April 2000 600,000 1.25 March 2004 501,874
--------- -----------
Total 4,222,500 $ 2,224,985
========= ===========
9. Related party transactions
Due to the nature of the following relationships, the terms of the
respective agreements might not be the same as those that would result from
transactions among wholly unrelated parties.
The Company's Chief Executive Officer and other related parties have
either provided or guaranteed some of our debt or equity financing. In addition,
services are provided to entities in which the Company owns stock.
15
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
Following is a summary of transactions for the three months ended June
30, 2003 and 2002 and balances with related parties included in the accompanying
balance sheet as of June 30, 2003 and March 31, 2003.
June 30, June 30,
2003 2002
---------- ---------
Rent expense $929,000 $890,000
Property management and construction fees 64,000 47,000
Revenues from NAP de las Americas - Madrid 17,000 66,000
Interest income on notes receivable - related party (Note 5) 19,000 --
Interest income from shareholder 8,000 8,000
Interest expense (Notes 5 and 7) 284,000 309,000
June 30, March 31,
2003 2003
---------- ---------
Other Assets 479,000 471,000
Note receivable - related party 5,000,000 5,000,000
Notes payable to related parties (Note 5) 36,670,000 4,238,000
Convertible debt (Note 7) 3,650,000 3,450,000
In April 2003, in connection with the issuance of the Subordinated
Debentures the Company received $250,000 from two directors.
Included in accounts receivable is a non-trade receivable of
approximately $59,000 due from a related party. There is also a corresponding
payable of approximately $59,000 to the same related party.
10. Information about the Company's operating segments
As of June 30, 2003 and March 31, 2003, the Company had two reportable
business segments, data center operations and real estate services. The data
center operations segment provides Tier 1 NAP, Internet infrastructure and
managed services in a data center environment. The real estate services segment
constructs and manages real estate projects focused in the technology sector.
16
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
The Company's reportable segments are strategic business operations that offer
different products and services.
The accounting policies of the segments are the same as those described
in significant accounting policies. Revenues generated among segments are
recorded at rates similar to those recorded in third-party transactions.
Transfers of assets and liabilities between segments are recorded at cost. The
Company evaluates performance based on the segment's net operating results.
The following presents information about reportable segments.
For the three months ended Data center Real estate
June 30, operations services Total
------------------------- ----------- ----------- ------------
2003
-------------------------
Revenue $ 3,302,152 $ 139,045 $ 3,441,197
Loss from operations (3,599,768) (164,170) (3,763,938)
Net income (loss) 3,093,985 (164,170) 2,929,815
2002
-------------------------
Revenue $ 3,149,766 $ 2,033,118 $ 5,182,884
Loss from operations (4,978,656) (53,420) (5,032,076)
Net loss (7,925,997) (46,422) (7,972,419)
Assets, as of
-------------------------
June 30, 2003 $73,899,432 $ 21,903 $ 73,921,335
March 31, 2003 $67,595,113 $ 2,006,400 $ 69,601,513
A reconciliation of total segment loss from operations to income (loss)
before income taxes for the three months ended June 30, 2003 and 2002 follows:
For the three months ended
June 30,
---------------------------------
2003 2002
----------- -----------
Total segment loss from operations $(3,763,938) $(5,032,076)
Debt restructuring 8,475,000 --
Interest income 23,255 28,865
Interest expense (1,832,070) (3,015,627)
Dividend on preferred stock (7,497) (7,497)
Other expense 35,065 53,916
----------- -----------
Income (loss) before income taxes $ 2,929,815 $(7,972,419)
=========== ===========
17
Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements-Continued
June 30, 2003
- --------------------------------------------------------------------------------
11. Supplemental cash flow information
For the three months ended
June 30,
--------------------------------
2003 2002
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 5,592,406 $ 2,323,984
----------- -----------
Taxes Paid -- --
----------- -----------
Non-cash operating, investing and financing activities:
Warrants issued for services 397,950 220,800
----------- -----------
Conversion of notes payable to convertible debt 5,450,000 --
----------- -----------
Beneficial conversion feature on issuance of convertible debentures 9,500,000 --
----------- -----------
Stock options and warrants exercised and converted to equity 21,311 --
----------- -----------
Conversion of debt and related accrued interest to equity 9,375,000 3,350,000
----------- -----------
Conversion of construction payables and accrued interest to equity 14,125,000 --
----------- -----------
Conversion of liabilities of discontinued operations to equity -- 609,000
----------- -----------
Forgiveness of construction payables -- 904,156
----------- -----------
Conversion of convertible debt and related accrued interest to equity -- 242,700
----------- -----------
Conversion of common stock subscriptions to common stock and paid in capital -- 950,000
----------- -----------
Cancellation of warrants 26,575 --
----------- -----------
* * * * *
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the information
contained in our Annual Report on Form 10-K for the fiscal year ended March 31,
2003, our Condensed Consolidated Financial Statements and elsewhere in this
filing. The information is intended to facilitate an understanding and
assessment of significant changes and trends related to our financial condition
and results of operations.
Our Going Concern Uncertainty
Our consolidated financial statements as of and for the year ended March
31, 2003 were prepared on the assumption that we will continue as a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. Our independent auditors have
issued a report dated June 30, 2003 stating that our recurring operating losses,
negative cash flows, and liquidity deficit raise substantial doubt as to our
ability to continue as a going concern. Investors in our securities should
review carefully our financial statements and the report of our independent
accountants thereon. See "-- Liquidity and Capital Resources" below for a
description of our plans to mitigate the business and financial circumstances
giving rise to our going concern uncertainty.
Recent Events
In July 2003, we opened our NAP in Santa Clara, California to provide our
customers with carrier-neutral access to the major cable systems serving the US
West Coast, Asia/Pacific, Mexico, Central America, Europe and Latin America from
both the west and east coasts of the United States. This footprint extension
adds to the existing NAPs in Miami, Florida, Brazil and Spain, furthering our
vision of integrating a global network of NAPs. In addition, the new NAP will
provide additional redundancy to the network operations center at our NAP of the
Americas in Miami. Since we had previously built-out the facility, opening the
facility required only minimal capital expenditures.
Overview
We operate facilities at strategic locations around the world from which
we assist users of the Internet and large communications networks in
communicating with other users and networks. Our primary facility is the NAP of
the Americas, where we provide exchange point, colocation and managed services
to carriers, Internet service providers, network service providers, government
entities, multi-national enterprises and other end users.
Network access points are locations where two or more networks meet to
interconnect and exchange Internet and data traffic (traffic of data, voice,
images, video and all forms of digital telecommunications), much like air
carriers meet at airports to exchange passengers and cargo. Instead of airlines,
however, participation in NAPs comes from telecommunications carriers, Internet
service providers and large telecommunications and Internet users in general.
Tier-1 NAPs are large centers that access and distribute Internet traffic and,
following the airport analogy, operate much like large, international airport
passenger and cargo transportation terminals or "hubs."
2
Initially, four NAPs -- in New York, Washington, D.C., Chicago, and San
Francisco -- were created and supported by the National Science Foundation as
part of the transition from the United States government-financed Internet to a
commercially operated Internet. Since that time, privately owned NAPs have been
developed, including the NAP of the Americas. We refer to our facilities as
TerreNAP Centers.
Our TerreNAP Centers are carrier-neutral. We enable our customers to
freely choose from among the many carriers available at TerreNAP Centers the
carriers with which they wish to do business. We believe the carrier neutrality
provides us with a competitive advantage when compared to carrier-operated
network access points where customers are limited to conducting business with
one carrier.
The NAP of the Americas generates revenue by providing our customers with:
o the site and platform they need to exchange Internet and data
traffic;
o a menu of related professional and managed services; and
o space to house their equipment and their network facilities in order
to be close to the Internet and data traffic exchange connections
that take place at the NAP of the Americas.
Currently, our customers include telecommunications carriers such as AT&T,
MCI, Qwest and Sprint, enterprises such as Bacardi USA, Intrado and Crescent
Heights, and government agencies including the Diplomatic Telecommunications
Services Programming Office (DTSPO), a division of the United States Department
of State, and the City of Coral Gables.
Organization History
On April 28, 2000, Terremark Holdings, Inc. completed a reverse merger
with AmTec, Inc., a public company. Contemporaneous with the reverse merger, we
changed our corporate name to Terremark Worldwide, Inc. and adopted "TWW" as our
trading symbol on the American Stock Exchange. Historical information of the
surviving company is that of Terremark Holdings, Inc.
Terremark was formed in 1982 and, along with its subsidiaries, was engaged
in the development, sale, leasing, management and financing of various real
estate projects. Terremark provided these services to private and institutional
investors, as well as for its own account. The real estate projects with which
Terremark was involved included retail, high-rise office buildings, mixed-use
projects, condominiums, hotels and governmental assisted housing. Terremark was
also involved in a number of ancillary businesses that complemented its core
development operations. Specifically, Terremark engaged in brokering financial
services, property management, construction management, condominium hotel
management, residential sales and commercial leasing and brokerage, and advisory
services.
After the April 28, 2000 merger, and as a result of changes in our
business conditions, including market changes in the telecommunications industry
and the lack of debt and equity financing vehicles to fund other business
expansion, we began to redefine and focus our strategy, and began implementing a
plan to exit all lines of business and real estate activities not directly
related to the TerreNAP Center strategy. Lines of business discontinued included
IP fax services, unified messaging services, and telephony. Non-core real estate
activities exited included real estate development, property management,
financing and the ancillary businesses that complemented the real estate
development operations. Our real estate activities currently include technology
construction work and management of the property where the NAP of the Americas
is located. As of March 31, 2002, we had completed the exit of lines of business
and real estate activities not related to our TerreNAP Center strategy.
3
Our principal executive office is located at 2601 S. Bayshore Drive,
Miami, Florida 33133. Our telephone number is (305) 856-3200.
Results of Operations
Results of Operations for the Three Months Ended June 30, 2003 as
Compared to the Three Months Ended June 30, 2002
Revenue. Data center revenue increased by approximately $951,000 in the
current period as compared to the prior period. However, total revenue decreased
$1.8 million, or 34.6%, to $3.4 million for the three months ended June 30, 2003
from $5.2 million for the three months ended June 30, 2002. The decrease is due
to a reduction in our development, management and construction contracts revenue
of approximately $1.9 million and a contract termination fee from data center
revenue of approximately $799,000 in 2002, partially offset by an increase in
data center revenue of approximately $951,000.
For the three months ended June 30, 2003 and 2002, approximately 99.5%
and 98.7%, respectively, of our revenues were generated in the United States.
The remainder of our revenues for the period consisted of non-recurring services
billed to NAP of the Americas - Madrid. For the three months ended June 30,
2003, approximately 96% of our total revenues were generated from data center
operations. The remainder was substantially related to technology construction
work. For the three months ended June 30, 2002 approximately 61% of total
revenues were generated from data center operations, approximately 37% was from
real estate projects and technology construction work, and approximately 2% was
from property and construction management.
Data center revenue increased $951,000, or 45%, to $3.0 million for the
three months ended June 30, 2003 from $2.1 million for the three months ended
June 30, 2002. Revenues consisted of recurring revenues of $2.7 million and $1.7
million for the three months ended June 30, 2003 and 2002, respectively,
primarily from charges for colocation, power, peering and some managed services.
Non-recurring revenues were $304,000 and $315,000 for the three months ended
June 30, 2003 and 2002, respectively, primarily related to some managed services
and the recognized portion of deferred installation fees. Installation fees are
recognized ratably over the term of the contract. The increase in revenue was
primarily the result of an increase in orders from existing customers and growth
in our deployed customer base from 52 customers as of June 30, 2002 to 95
customers as of June 30, 2003. We anticipate an increase in revenue from
colocation, power and peering and revenue from managed services as we add more
customers to the NAP of the Americas, sell additional services to existing
customers and introduce new products and services.
Data center -- contract termination fee was $292,000 for the three months
ended June 30, 2003 and represents amounts received from one customer for the
termination of their contracted services with the NAP of the Americas. As a
result of this contract termination, we experienced a decrease in monthly
recurring revenues of approximately $36,000. Contract termination fee was $1.1
million for the three months ended June 30, 2002 and represents amounts received
from one customer for the termination of their contracted services with the NAP
of the Americas. Contract termination fees are recognized upon contract
termination when there are no remaining contingencies or obligations on our
part.
Development, commission and construction fees increased $23,000 to $41,000
for the three months ended June 30, 2003 from $18,000 for the three months ended
June 30, 2002. We do not expect any revenues from development, commission and
construction fees in the future.
4
Management fees decreased $19,000, or 22.8%, to $64,000 for the three
months ended June 30, 2003 from $83,000 for the three months ended June 30,
2002. The decrease is a result of our exiting the management of commercial and
residential properties. The only facility we currently manage is TECOTA, the
property in which the NAP of the Americas is located. We collect a monthly
management fee from TECOTA of approximately $8,000 or 3% of cash collected by
TECOTA, whichever is greater. During the three months ended June 30, 2002, we
managed two properties, one of which was TECOTA. Because we do not plan to
manage properties other than TECOTA, we anticipate that management fees will not
be a significant source of revenues in the future.
Construction contract revenue decreased $1.9 million to $34,000 for the
three months ended June 30, 2003 from $1.9 million for the three months ended
June 30, 2002. During the three months ended June 30, 2003, we completed one
construction contract and, as of June 30, 2003, had two construction contracts
in process. During the three months ended June 30, 2002, we completed three
construction contracts and, as of June 30, 2002, we had two construction
contracts in process. The decrease in construction contract revenue is due to a
decrease in the average revenue per contract, which decreased from $3.6 million
in fiscal year 2002 to $500,000 in fiscal year 2003. Due to our opportunistic
approach to our construction business, we expect revenues from construction
contracts to significantly fluctuate from quarter to quarter. We anticipate
focusing our efforts on obtaining construction contracts for projects related to
technology infrastructure.
Data Center Operations Expenses. Data center operations expenses decreased
$500,000, or 16.1%, to $2.6 million for the three months ended June 30, 2003
from $3.1 million for the three months ended June 30, 2002. Data center
operations expenses consist mainly of rent, operations personnel, electricity,
chilled water and security services. The period over period decrease in data
operations expenses is due to decreases of $91,000 in chilled water, $62,000 in
security services, $63,000 in insurance and $241,000 in personnel costs. The
decrease in chilled water is mainly due to overcharges by our service provider
for which we subsequently received credits. The decrease in security services
and insurance is due to the negotiation of lower rates. The decrease in payroll
is mainly attributable to staff reductions, including two Senior Vice Presidents
and five directors, some of which were replaced with lower payroll level
positions. The number of employees whose salaries are included in data center
operations decreased slightly from 59 for the three months ended June 30, 2002
to 56 for the three months ended June 30, 2003. With the exception of
electricity and chilled water, these expenses are fixed in nature. However,
commencing in fiscal year 2004, we anticipate that certain data center expenses,
principally costs related to managed services, will increase as we provide
additional services to existing customers and introduce new products and
services. We also expect that electricity and chilled water expenses will
increase in the future as we add more customers to the NAP of the Americas.
Contract Construction Expenses. Contract construction expenses decreased
$1.8 million to $46,000 for the three months ended June 30, 2003 from $1.8
million for the three months ended June 30, 2002. This decrease is a result of
the decrease in number of construction contracts and dollar amount of those
projects as discussed above in "construction contracts revenues." We do not
currently anticipate losses on any of the individual construction contracts.
General and Administrative Expenses. General and administrative expenses
decreased $640,000, or 19.4%, to $2.6 million for the three months ended June
30, 2003 from $3.3 million for the three months ended June 30, 2002. General and
administrative expenses consist primarily of salaries and related expenses,
professional service fees, rent and other general corporate expenses. The
decrease in general and administrative expenses is due to decreases in
professional service fees of $223,000, property taxes of $75,000, decrease in
travel and entertainment of $110,000 and decrease in payroll of $163,000. The
decreases in professional services and travel and entertainment are principally
the result of an overall reduction in spending due to cost containment efforts.
The decrease in payroll is mainly attributable to staff reductions. The number
of employees whose salaries are included in general and administrative expenses
decreased from 48 for the three months ended June 30, 2002 to 43 for the three
months ended June 30, 2003. The decrease in property taxes is mainly due
reductions in the taxable basis of certain
5
property and equipment. Effective July 22, 2003, Brian K. Goodkind stepped down
as our Executive Vice President and Chief Operating Officer and became a
strategic advisor to our Chief Executive Officer. In connection with this
modification to our employment relationship with Mr. Goodkind, we accelerated
the vesting on his outstanding stock options and awarded him new stock options.
As a result, we will recognize a non-cash, stock-based compensation charge of
approximately $1.8 million in the quarter ended September 30, 2003.
Sales and Marketing Expenses. Sales and marketing expenses for the three
months ended June 30, 2003 remained constant at approximately $770,000 when
compared to three months ended June 30, 2002. The significant components of
sales and marketing expenses are payroll and benefits. The number of employees
whose salaries are included in sales and marketing expenses were 21 as of June
30, 2002 and 22 as of June 30, 2003.
Depreciation and Amortization Expense. Depreciation and amortization
expense decreased $47,000 to $1.2 million for the three months ended June 30,
2003 from $1.2 million for the three months ended June 30, 2002. The decrease
was due to reductions in property and equipment during year ended March 31,
2003, which in turn decreased depreciation expense.
Debt Restructuring. During the three months ended June 30, 2003, we
incurred a non-cash gain of $8.5 million related to financing transactions
whereby $21.6 million of our construction payables plus $1.0 million in accrued
interest was converted to 30.1 million shares of our common stock with a $14.1
million market value upon conversion.
Interest Expense. Interest expense decreased $1.2 million, or 40.0%, to
$1.8 million for the three months ended June 30, 2003 from $3.0 million for the
three months ended June 30, 2002. The decrease was due to a $33.0 million
decrease in the average debt balance outstanding.
Interest Income. Interest income decreased $6,000 to $23,000 for the three
months ended June 30, 2003 from $29,000 for the three months ended June 30,
2002. The period over period decrease is related to a decrease in average
interest earning cash balances and lower interest rates earned when compared to
prior period. This decrease was offset by a $12,000 increase in interest income
resulting from a $5.0 million note receivable from our Chief Executive Officer,
which began accruing interest in September 2002.
Net Income (Loss). Net income was $2.9 million for the three months ended
June 30, 2003 as compared to a net loss of $8.0 million for the three months
ended June 30, 2002. The net income for the three months ended June 30, 2003 is
mainly due to one-time, non-cash items, including debt-restructuring gain of
approximately $8.5 million and a reduction in interest expense of approximately
$1.2 million.
Liquidity and Capital Resources
Liquidity
From the time of the merger with AmTec through June 30, 2003, we have
incurred net operating losses of approximately $199.7 million including
approximately $82.6 million of losses related to discontinued operations. Our
cash flows from operations for the three months ended June 30, 2003 and 2002
were negative and our working capital deficit was approximately $14.0 million
and $39.0 million as of June 30, 2003 and March 31, 2003, respectively. Due to
our recurring losses from operations, the uncertainty surrounding the
anticipated increase in revenues and the lack of committed sources of additional
debt or equity, substantial doubt exists about our ability to continue as a
going concern.
Historically, we have met our liquidity needs primarily through obtaining
additional debt financing and the issuance of equity interests. Some of our debt
financing was either provided by or guaranteed by Manuel D.
6
Medina, our Chief Executive Officer and Chairman of the Board. In prior periods
we also successfully shut down or disposed of non-core operations and
implemented a series of expense reductions to reduce our liquidity needs. We
have also been successful in working with our creditors to extend payment terms.
Our main sources of liquidity as of June 30, 2003 were cash and cash
equivalents amounting to approximately $5.3 million, a note receivable amounting
to approximately $3.7 million issued for the purchase of a portion of our
convertible debentures which we anticipate collecting no later than September
15, 2003 and our projected increase in monthly revenues. We will continue to
work, if needed, with our creditors to obtain additional financing and/or extend
terms of existing short-term debt. We will also continue to evaluate
opportunities to sell additional equity or debt securities, obtain credit
facilities from lenders, or restructure our debt.
Based on customer contracts signed as of August 11, 2003, our monthly cash
deficit from operations is approximately $1.2 million. In order to eliminate
this current monthly cash deficit from operations, the new monthly revenues
required range from $1.8 million to $2.8 million. This range of new revenue
depends on the mix of the services sold and their corresponding margin. Our
required revenues are based on existing contracts, including those with the U.S.
Government and enterprises, and expected future contracts from potential
customers currently in our sales pipeline. We have identified additional
potential customers, including the federal, state and local governments, and are
actively offering available services to them. However, our projected revenues
and planned cash needs depend on several factors, some of which are beyond our
control, including the rate at which our services are sold to the government
sector and the commercial sector, the ability to retain our customer base, the
willingness and timing of potential customers outsourcing the housing and
management of their technology infrastructure to us, the reliability and
cost-effectiveness of our services and our ability to market our services.
The majority of our planned operating cash improvement is expected to come
from an increase in revenues and cash collections from customers. If we fail to
achieve planned revenues we will require additional financing. There can be no
assurance that additional financing will be available, or that, if available the
financing will be obtainable on terms acceptable to us or that any additional
financing would not be substantially dilutive to existing shareholders. If we
need to obtain additional financing and fail to do so, it may have a material
adverse effect on our ability to meet financial obligations and operate as a
going concern.
Sources and uses of cash
Cash used in operations for the three months ended June 30, 2003 was
approximately $10.0 million compared to cash used in operations of $4.4 million
for the three months ended June 30, 2002, an increase of $5.6 million. This
increase was primarily due to an increase in payments to accounts payable,
accrued expenses and interest payable. These payables and accruals decreased an
aggregate amount of $5.2 million in the three months ended June 30, 2003 as
compared to an increase in the aggregate amount of $772,000 in the three
months ended June 30, 2002.
Cash used in investing activities for the three months ended June 30, 2003
was $91,000 compared to cash used in investing activities of $890,000 for the
three months ended June 30, 2002, a decrease of $799,000. The decrease in the
amount of cash used in investing activities is the result of the completion
of the NAP of the Americas and a portion of our colocation facility in Santa
Clara, California. For the three months ended June 30, 2003, cash of $84,000 was
used primarily for the purchase of property and equipment related to the NAP of
the Americas. For the three months ended June 30, 2002, cash of $650,000 was
used primarily for the purchase of property and equipment related to the NAP of
the Americas.
7
Cash provided by financing activities for the three months ended June 30,
2003 was $14.1 million compared to cash provided by financing activities of $6.9
million for the three months ended June 30, 2002, an increase of $7.2 million.
The increase in cash provided by financing activities resulted primarily from an
increase of $15.8 million of new borrowings partially offset by a decrease in
sale of common stock and warrants of $7.6 million.
Debt and equity activity
Ocean Bank Credit Facility: On September 5, 2001, we borrowed $48.0
million from Ocean Bank. The Ocean Bank credit facility is secured by all of our
assets and allows for up to a $25.0 million junior lien position on the assets
of our NAP of the Americas, Inc. subsidiary. To obtain the original loan, we
paid a $720,000 commitment fee to Ocean Bank. The proceeds of the original
credit facility were used to:
o repay a $10.0 million short-term loan from Manuel D. Medina, our
Chief Executive Officer, the proceeds of which we had used to fund
the build out of the NAP of the Americas (Mr. Medina, in turn, used
the $10.0 million to repay a personal $10.0 million short-term loan
from Ocean Bank);
o repay $3.5 million of debt that we owed to Ocean Bank under a line
of credit personally guaranteed by Mr. Medina;
o pay $1.2 million in loan costs related to the $48.0 million credit
facility (including a $720,000 commitment fee); and
o fund the NAP of the Americas build out costs.
Mr. Medina has personally guaranteed the credit facility. In addition to
Mr. Medina's personal guarantee of the credit facility, and in order to obtain
the facility, Ocean Bank required Mr. Medina, prior to the bank disbursing funds
under the credit facility, to provide a $5.0 million certificate of deposit to
the bank as collateral on certain personal loans that Mr. Medina has with the
bank and commit to accelerate the maturity date of those personal loans to
December 31, 2001. Subsequent to September 2001, Mr. Medina and the bank
extended the maturity date on his personal loans, first to December 31, 2001 and
later to July 1, 2002. In the event of our default under the credit facility,
Mr. Medina also agreed to subordinate debt that we owed to him. Mr. Medina has
repaid part of those personal loans to Ocean Bank through liquidation of the
$5.0 million certificate of deposit in January 2002, leaving an outstanding
principal balance of approximately $4.6 million. In addition, he exercised his
right under the personal loan agreements to extend their maturity date to June
30, 2003. Subsequent to June 30, 2003, Mr. Medina has exercised his option under
the relevant loan documents to extend the loans to December 31, 2003.
In consideration of Mr. Medina's agreeing to repay his indebtedness to
Ocean Bank earlier than otherwise required, pledging the certificate of deposit
and personally guaranteeing our credit facility and approximately $21.0 million
of construction payables, we entered into an amended and restated employment
agreement with him. Under the terms of the amended and restated employment
agreement, we will indemnify Mr. Medina from any personal liability related to
his guarantees of our debt, use commercially reasonable efforts to relieve Mr.
Medina of all his guarantees of our debt, provide up to $6.5 million of cash
collateral to Ocean Bank should Mr. Medina be unable to repay the personal loans
when due and provide a non interest-bearing $5.0 million loan to Mr. Medina for
as long as his guarantees of our debt exist. Mr. Medina and we have agreed that
we have the right to withhold payment to him of $1,375,000 in convertible
debentures owned by him until the note receivable is repaid. The note receivable
from Mr. Medina is shown as an adjustment to equity. The $48.0 million credit
facility and the note receivable from Mr. Medina were approved by our board of
directors.
In July 2002, we and Mr. Medina modified the terms of his $5.0 million
non-interest bearing note payable to us. As amended, the note matures December
5, 2004 and bears interest subsequent to September 5, 2002 at 2%, the applicable
federal rate. Interest is due in bi-annual installments. We review the
collectibility of this note on a quarterly basis.
8
In August 2002, we amended the terms of our Ocean Bank credit facility.
The modified credit facility reduced the annual interest rate to 7.50%. Under
the terms of the amended facility, the initial maturity date was extended to
September 2003 and we had the option to exercise two six-month extension periods
each at a cost of 0.5% of the principal balance outstanding together with a
principal repayment of $2.5 million. During each extension period, a $250,000
monthly principal repayment plus interest would have been due. At closing, the
total amount of the loan was disbursed except for approximately $6.6 million
that was held as an interest reserve. Through June 2002, the interest reserve
was disbursed monthly to make interest payments. We commenced making monthly
interest payments in July 2002. All other material provisions of the credit
facility remained unchanged.
On April 30, 2003, Ocean Bank revised its $44.0 million credit facility
with us by converting $15.0 million of the outstanding principal balance into
equity and extending the term of the remaining $29.0 million until April 30,
2006. Concurrent with this transaction, we paid all past due interest as of
March 31, 2003, plus accrued interest through April 28, 2003 totaling
approximately $1.6 million and prepaid approximately $900,000 of interest. Under
the new terms, interest is payable quarterly at an annual rate of 5.25% for the
first twelve months and 7.5% thereafter.
Construction Payables: On November 8, 2002, CRG, LLC entered into an
agreement with Cupertino Electric, Inc. to purchase our entire $18.5 million
construction payable (including accrued interest) to Cupertino. Under the terms
of their agreement, CRG was to pay Cupertino $8.4 million for the $18.5 million
of our debt. On November 11, 2002, we entered into an agreement with CRG that
provided us with the option, upon the closing of the purchase of our debt by CRG
from Cupertino, to repay the entire debt at a discount by either issuing shares
of our common stock valued at $0.75 per share or making a cash payment.
On December 5, 2002, CRG entered into an agreement with Kinetics
Mechanical Services, Inc. and Kinetics Systems Inc. to purchase our entire $4.1
million construction payable (including accrued interest) to Kinetics. Under the
terms of their agreement CRG was to pay Kinetics $1.9 million. On December 5,
2002, we also entered into an agreement with CRG that provided us the option,
upon the closing of the purchase of the debt by CRG from Kinetics, to repay the
entire debt at a discount by either issuing shares of our common stock valued at
$0.75 per share or making a cash payment.
On April 30, 2003, CRG LLC completed the purchase, at a discount, of our
$22.6 million construction payables (including accrued interest) to Cupertino
and Kinetics. Cupertino and Kinetics were construction contractors for the NAP
of the Americas. At the closing, the construction payables were converted into
30,133,334 shares of our common stock.
CRG was created by Mr. Christian Altaba, one of our shareholders, for the
purpose of buying our debt from Cupertino Electric and Kinetics Mechanical
Services. None of the participants in CRG were or currently are our officers or
directors. There is no affiliation between CRG and Cupertino or Kinetics. CRG is
managed by Mr. Altaba.
Convertible Debentures: On April 30, 2003, we issued 10% Subordinated
Secured Convertible Debentures due April 30, 2006 for an aggregate principal
amount of $25.0 million. The debt is convertible into shares of our common stock
at $0.50 per share. Interest is payable quarterly beginning July 31, 2003. The
debentures were issued in exchange for $10.3 million in cash, $9.5 million in a
promissory note due in full May 30, 2003 and $5.2 million of notes payable which
were converted into the Subordinated Debentures. Included in the $5.2 million is
$2.0 million of cash received in March 2003 in anticipation of the transaction.
The maker of the $9.5 million promissory note failed to pay but agreed on
June 16, 2003 to assign the note and the debenture to an entity newly formed by
the son of one of our directors . Payments received as of August 14, 2003,
aggregated approximately $6.9 million and the maturity of the remaining $2.6
million has been
9
extended from August 15, 2003 to September 15, 2003. Two of the Company's
directors have guaranteed payment and performance in accordance with the amended
terms of the note. Management believes that collection on the remaining balance
is reasonably assured.
In August 2002, we modified the terms of a note payable to a financial
institution. The maturity date was extended until December 2002 with some
principal payments to be made monthly and the remaining principal and interest
due at maturity. In conjunction with the modification and extension of this
note, we issued 400,000 shares of our common stock valued at $180,000 to a
shareholder who formerly guaranteed the note. On March 31, 2003, we entered into
a forbearance agreement with the lender and modified the terms of our note.
Under the modified agreement terms, we made principal payments of $100,000 and
$125,000 in April 2003 and May 2003, respectively, and the financial institution
retained the right to enforce accelerated remedies if we default on the modified
note. We are also required to make seven consecutive monthly principal payments
of $25,000 commencing on June 1, 2003, with interest on the outstanding balance
to be paid monthly, and a balloon payment on or before December 31, 2003,
representing full and final payment of outstanding principal and accrued
interest. We have made all required payments under the forbearance agreement. On
June 30, 2003, the principal balance of the note was $417,178.
As of June 30, 2003, we had not paid approximately $566,000 relating to a
lease. We have negotiated a payment plan with the vendor providing for partial
payments.
Between April 2003 and June 2003, we borrowed an aggregate of $750,000 of
short-term debt bearing interest between at 10%. During the same period, we
repaid $978,000 of our short-term debt.
Guaranties and Commitments
The Technology Center of the Americas, LLC, ("TECOTA"), an entity in which
we have a 0.84% membership interest, owns the building that leases the space to
us for the NAP of the Americas under a 20 year lease. The construction of TECOTA
was funded with $48.0 million in equity and $35.4 million in construction
financing from a consortium of banks. We guaranteed these construction loans
during development and construction of TECOTA. After TECOTA was built, some of
the banks released us from the guarantee, the result of which was to reduce the
guarantee to $5.5 million. As of June 30, 2003, the TECOTA debt outstanding
under the construction loan was $35.4 million. We do not expect to fund any
amounts under our guaranty.
We guarantee up to $6.5 million in personal debt of Manuel D. Medina, our
Chief Executive Officer and Chairman. See "-- Liquidity and Capital Resources"
for details.
10
We lease space for our operations, office equipment and furniture under
non-cancelable operating leases. Some equipment is also leased under capital
leases, which are included in leasehold improvements, furniture and equipment.
The following table represents the minimum future operating and capital lease
payments for these commitments, as well as the combined aggregate maturities for
the following obligations for each of the twelve months ended June 30:
Capital lease
obligations Operating leases Notes payable Convertible debt Total
------------ --------------- ------------- ---------------- ------------
2004 $ 2,203,427 $ 6,022,933 $ 9,341,672 -- $ 17,568,032
2005 709,059 5,901,996 2,336,166 2,750,000 11,697,221
2006 10,117 5,581,098 30,532,012 27,082,381 63,205,608
2007 11,854 5,488,443 46,988 -- 5,547,285
2008 1,616 5,347,842 -- -- 5,349,458
Thereafter -- 69,069,263 -- -- 69,069,263
------------ ------------ ------------ ------------ ------------
$ 2,936,073 $ 97,411,575 $ 42,256,838 $ 29,832,381 $172,436,867
============ ============ ============ ============ ============
New Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." For guarantees issued or
modified after December 31, 2002, a liability will be recognized for the fair
value of the obligation undertaken in issuing the guarantee. The disclosure
requirements were effective for interim and annual financial statements for
periods ending after December 15, 2002. FIN 45 may impact the Company's
financial position or results of operations in subsequent periods, if existing
guarantees are modified. In January 2003, the FASB issued Interpretation No. 46
(FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51: This Interpretation provides guidance for determining a primary
beneficiary period. The effective date of FIN 46 is the first interim period
beginning after June 15, 2003 for variable interest entities acquired before
February 1, 2003 and immediately to variable interest entities created after
January 31, 2003. NAP de las Americas -- Madrid S.A. may be a variable interest
entity in accordance with FIN 46. Our maximum related exposure to loss is
approximately $500,000 at June 30, 2003. We do not expect the adoption of FIN
46, effective July 1, 2003, to have a material effect on our financial
statements.
In March 2003, the FASB reached a consensus on Emerging Issues Task Force
(EITF) Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables". The
consensus provides guidance on the accounting for multiple element revenue
arrangements. It also provided guidance on how to separate multiple element
revenue arrangements into its separate units of accounting and how to measure
and allocate the arrangement's total consideration to each unit. The effective
date of EITF 00-21 is for revenue arrangements entered into in fiscal periods
(interim or annual) beginning after June 15, 2003. Early application is
permitted. The Company does not expect the adoption of EITF 00-21, effective
July 1, 2003, to have a material effect on its financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. The new guidance amends SFAS No. 133 for decisions made as part of the
Derivatives Implementation Group ("DIG") process that effectively required
amendments to SFAS No. 133, and decisions made in connection with other FASB
projects dealing with financial instruments and in connection with
implementation issues raised in relation to the application of the definition of
a derivative and characteristics of a derivative that contains financing
components. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. We do not believe
the adoption of SFAS No. 149 will have a material impact on our results of
operations and consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
requires that an issuer classify financial instruments which are within its
scope as a liability. Many of those instruments were classified as equity under
previous guidance. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and otherwise
effective at the beginning of the first interim
11
period beginning after June 15, 2003. The impact of our adoption of SFAS 150 on
the Company's consolidated financial statements will be to increase liabilities
and decrease mezzanine by the amounts underlying our outstanding Series H
redeemable preferred stock.
Forward Looking-Information
This Annual Report may contain "forward-looking statements" based on our
current expectations, assumptions, and estimates about us and our industry.
These forward-looking statements involve risks and uncertainties. Words such as
"believe," "anticipate," "estimate," "expect," "intend," "plan," "will," "may,"
and other similar expressions identify forward-looking statements. In addition,
any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Our actual results could differ materially from those anticipated in
such forward-looking statements as a result of several factors more fully
described in "Risk Factors" and elsewhere in this Annual Report. The
forward-looking statements made in this Annual Report relate only to events as
of the date on which the statements are made. We undertake no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
Risk Factors
OUR RECURRING LOSSES FROM OPERATIONS AND THE LACK OF COMMITTED SOURCES OF
ADDITIONAL DEBT OR EQUITY TO SUPPORT WORKING CAPITAL DEFICITS RAISES SUBSTANTIAL
DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. From the time of our
merger with AmTec through June 30, 2003, we have incurred net operating losses
of approximately $199.7 million. Our cash flows from operations for the three
months ended June 30, 2003 and 2002 were negative and our working capital
deficit was approximately $14.0 million and $39.0 million as of June 30, 2003
and March 31, 2003, respectively.
The majority of our planned operating cash improvement during our fiscal
year 2004 is expected to come from an increase in revenues and cash collections
from customers. If we fail to achieve planned revenues of $1.8 million to $2.8
million a month, then we will require additional financing. There can be no
assurances that additional financing will be available, or that, if available
the financing will be obtainable on terms acceptable to us or that any
additional financing would not be substantially dilutive to existing
shareholders. If we need to obtain additional financing and fail to do so, it
may have a material adverse effect on our ability to meet financial obligations
and operate as a going concern. Consequently, recurring losses from operations,
the uncertainty surrounding the anticipated increase in revenues, including the
rate at which services are sold and the lack of committed sources of additional
debt or equity, raises substantial doubt about our ability to continue as a
going concern.
OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR ABILITY TO FULFILL OUR
OBLIGATIONS AND OPERATE OUR BUSINESS. As of June 30, 2003, our total liabilities
were approximately $87.4 million, obligations guaranteed by us were $10.1
million and our total shareholders' deficit was $10.3 million. Our substantial
debt and guarantees could have important consequences to you, including the
following:
o our substantial leverage increases our vulnerability to economic
downturns and adverse competitive and industry conditions and could
place us at a competitive disadvantage compared to those of our
competitors that are less leveraged;
o our debt service obligations could limit our flexibility in planning
for, or reacting to, changes in our business and our industry and
could limit our ability to pursue other business opportunities,
borrow more money for operations or capital in the future and
implement our business strategies;
12
o our level of debt may restrict us from raising additional financing
on satisfactory terms to fund working capital, capital expenditures,
product development efforts, strategic acquisitions, investments and
alliances, and other general corporate requirements;
o covenants in our debt instruments limit our ability to pay dividends
or make other restricted payments and investments; and
o our total guarantees are approximately $10.1 million and if we are
required to fund under these guarantees our liquidity and cash flows
would be adversely affected.
WE MAY BE UNABLE TO RAISE THE FUNDS NECESSARY TO REPAY OR REFINANCE OUR
INDEBTNESS. We are obligated to make principal and interest payments on our
credit facility with Ocean Bank each year until it matures in 2006.
Additionally, $61.4 million of our credit facilities mature in 2006. Each of
these obligations requires significant amounts of liquidity. We may need
additional capital to fund those obligations. Our ability to arrange financing
and the cost of this financing will depend upon many factors, including:
o general economic and capital markets conditions, and in particular
the non-investment grade debt market;
o conditions in the Internet infrastructure market;
o credit availability from banks or other lenders;
o investor confidence in the telecommunications industry generally and
our company specifically; and
o the success of our TerreNAP Centers.
if we need additional funds, our inability to raise them will have an
adverse effect on our operations. If we decide to raise additional funds by
incurring debt, we may become subject to additional or more restrictive
financial covenants and ratios.
IF WE DO NOT LOCATE FINANCIAL OR STRATEGIC PARTNERS, WE MAY HAVE TO DELAY
OR ABANDON EXPANSION PLANS. Expenditures commence well before a TerreNAP Center
opens, and it may take an extended period to approach break-even capacity
utilization. It takes a significant period of time to select the appropriate
location for a new TerreNAP Center, construct the necessary facilities, install
equipment and telecommunications infrastructure and hire operations and sales
personnel. As a result, we expect that individual TerreNAP Centers will
experience losses for more than one year from the time they are opened. As a
part of our TerreNAP Center strategy, we intend to rely on third-party financial
or strategic partners to fund the development costs. If we are unable to
establish such third-party relationships, we may delay or abandon some or all of
our development and expansion plans or otherwise forego market opportunities,
making it difficult for us to generate additional revenue and to respond to
competitive pressures.
OUR OPERATIONS IN BRAZIL AND SPAIN EXPOSE US TO RISKS NOT FACED BY
COMPANIES TRANSACTING BUSINESS ONLY IN THE UNITED STATES. We have operations in
foreign countries, including NAP facilities, sales personnel and customer
support operations in Sao Paulo, Brazil and Madrid, Spain. We intend to
13
expand to other international locations in the future. These operations are
subject to economic risks inherent in doing business in foreign countries,
including the following:
o Disruptions in Foreign Markets. Disruptions in financial markets and
the deterioration of the underlying economic conditions in some
countries could have an impact on our sales to customers located in,
or whose end-user customers are located in, these countries.
o Fluctuations in Currency Exchange Rates. Currency instability in
geographic markets other than the United States may make our
services more expensive than services offered by others that are
priced in the local currency. Moreover, many of the costs associated
with our operations located outside the United States are
denominated in local currencies. As a consequence, the increased
strength of local currencies against the U.S. dollar in countries
where we have foreign operations would result in higher effective
operating costs and, potentially, reduced earnings. Currently, we do
not hedge our foreign exchange risk. We cannot assure you that
fluctuations in foreign exchange rates will not have a negative
effect on our operations and profitability.
o Longer Payment Cycles. Our customers outside of the United States
are often allowed longer time periods for payment than our U.S.
customers. This increases the risk of nonpayment due to the
possibility that the financial condition of particular customers may
worsen during the course of the payment period.
o Tariffs, Duties, Limitations on Trade and Price Controls. Our
international operations are affected by limitations on imports,
currency exchange control regulations, transfer pricing regulations,
price controls and other restraints on trade. In addition, the
governments of some countries in which we have operations, have the
ability to exercise significant influence over many aspects of their
domestic economies and international trade.
o Potential Adverse Tax Consequences. Our international operations
create a risk of potential adverse tax consequences, including
imposition of withholding or other taxes on payments by our
customers.
o Credit and Access to Capital Risks. Our local financial or strategic
partners could have reduced access to working capital due to higher
interest rates, reduced bank lending resulting from contractions in
the money supply or the deterioration in their financial condition,
or the inability to access other financing.
o Distributions and other payments from our subsidiaries and
affiliates may be subject to foreign taxes. Distributions of
earnings and other payments, including interest, we receive from our
subsidiaries and affiliates may be subject to withholding taxes
imposed by the jurisdictions in which these entities are formed or
operating. These taxes would reduce the amount of after-tax cash we
would receive from these entities.
o New Competitors and Competitive Environment. As we expand our
operations in markets outside the United States, we will also
encounter new competitors and competitive environments. Our foreign
competitors may enjoy a government-sponsored monopoly on
telecommunications services essential to our business, and will
generally have a better understanding of their local industry and
longer working relationships with local infrastructure providers.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE MARKET FOR DATA CENTER
SERVICES. The market for data center services is extremely competitive and
subject to rapid technological change. Our current and
14
potential competitors include providers of data center services, global,
regional and local telecommunications companies and Regional Bell Operating
Companies, and information technology outsourcing firms. Many of our existing
competitors have greater market presence and financial and personnel resources
than we do. Our competitors include Internet data centers operated by
established communications carriers such as AT&T, Level 3, MCI and Qwest. We
also compete with providers of data services centers, regional Bell operating
companies that offer Internet access and information technology outsourcing
firms. The principal competitive factors in our market include:
o ability to deliver services when requested by the customer;
o Internet system engineering and other professional services
expertise;
o customer service;
o network capability, reliability, quality of service and scalability;
o variety of managed services offered;
o access to network resources, including circuits, equipment and
interconnection capacity to other networks;
o broad geographic presence;
o price;
o ability to maintain and expand distribution channels;
o brand name recognition;
o timing of introductions of new services;
o physical and network security;
o financial resources; and
o customer base.
Some of our competitors may be able to develop and expand their data
center services faster, devote greater resources to the marketing and sale of
their products and adopt more aggressive pricing policies than we can. In
addition, these competitors have entered and will likely continue to enter into
business relationships to provide additional services that compete with the
services we provide.
OUR PRODUCTS AND SERVICES HAVE A LONG SALES CYCLE THAT MAY MATERIALLY
ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. A
customer's decision to purchase services at a TerreNAP Center typically involves
a significant commitment of resources and will be influenced by,
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among other things, the customer's confidence in our financial strength. As a
result, we have a long sales cycle. Delays due to the length of our sales cycle
may materially adversely affect our business, financial condition and results of
operations.
WE BELIEVE OUR MARKET IS LIKELY TO CONSOLIDATE IN THE NEAR FUTURE, WHICH
COULD RESULT IN INCREASED PRICE AND OTHER COMPETITION. Some of our competitors
who sell bandwidth may be able to provide customers with additional benefits
relating to the customer's Internet system and network management solutions,
including reduced local and long distance communications costs, which could
reduce the overall costs of their services relative to ours. We may not be able
to offset the effects of any price reductions.
WE ANTICIPATE THAT AN INCREASING PORTION OF OUR REVENUES WILL BE FROM
CONTRACTS WITH AGENCIES OF THE UNITED STATES GOVERNMENT, AND UNCERTAINTIES IN
GOVERNMENT CONTRACTS COULD ADVERSELY AFFECT OUR BUSINESS. Generally, U.S.
Government contracts are subject to oversight audits by government
representatives, to profit and cost controls and limitations, and to provisions
permitting modification or termination, in whole or in part, without prior
notice, at the government's convenience. In the event of termination, we may
receive some allowance for profit on the work performed. In some cases,
government contracts are subject to the uncertainties surrounding congressional
appropriations or agency funding. Government contracts are subject to specific
procurement regulations. Failure to comply with these regulations and
requirements could lead to suspension or debarment from future government
contracting for a period of time.
WE ARE DEPENDENT ON KEY PERSONNEL AND THE LOSS OF THESE KEY PERSONNEL
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR SUCCESS. We are highly dependent on
the services of Manuel D. Medina, our Chairman. In an attempt to reduce costs,
we have eliminated some management positions. Our potential growth and expansion
and the merger and integration of separate businesses, are expected to place
increased demands on our management skills and resources. Therefore, our success
also depends upon our ability to hire and retain additional skilled and
experienced management personnel. Employment and retention of qualified
personnel is important due to the competitive nature of our industry.
OUR PRESIDENT, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, CANNOT BE REMOVED
WITHOUT CAUSE WHICH COULD DELAY, DEFER OR PREVENT CHANGE IN CONTROL OF OUR
COMPANY OR IMPEDE A MERGER, CONSOLIDATION, TAKEOVER OR OTHER BUSINESS
COMBINATION. Under the terms of our agreement with Manuel D. Medina, our
President, Chairman and Chief Executive Officer, as long as Mr. Medina's
guarantees of our debt exist, we have agreed to nominate Mr. Medina to our board
of directors and not remove Mr. Medina, unless for good cause, or remove any of
our officers without Mr. Medina's consent. This could delay, defer or prevent
change in control of our company or impede a merger, consolidation, takeover or
other business combination that you, as a stockholder, may otherwise view
favorably.
IF THE PRICE OF OUR SHARES REMAINS LOW OR OUR FINANCIAL CONDITION
DETERIORATES, WE MAY BE DELISTED BY THE AMERICAN STOCK EXCHANGE. Our common
stock currently trades on the American Stock Exchange (Amex). The Amex requires
companies to fulfill specific requirements in order for their shares to continue
to be listed. Our securities may be considered for delisting if:
(i) our financial condition and operating results appear to be
unsatisfactory;
(ii) it appears that the extent of public distribution or the aggregate
market value of the securities has become so reduced as to make further dealings
on the Amex inadvisable; or
(iii) we have sustained losses which are so substantial in relation to our
overall operations or our existing financial condition has become so impaired
that it appears questionable whether we will be able to continue operations
and/or meet our obligations as they mature.
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For example, the Amex may consider suspension or delisting of a stock if
the stock has been selling for a substantial period of time at a low price per
share. Our common stock has been trading at relatively low prices for the past
eighteen months and we have sustained net losses for the past three fiscal
years. Therefore, our common stock is at risk of being delisted by the Amex. If
our shares are delisted from the Amex, our stockholders could find it difficult
to sell our stock. To date we have had no communication from the Amex regarding
delisting. If our common stock is delisted from the Amex, we may apply to have
our shares quoted on NASDAQ's Bulletin Board or in the "pink sheets" maintained
by the National Quotation Bureau, Inc. The Bulletin Board and the "pink sheets"
are generally considered to be less efficient markets than the Amex. In
addition, if our shares are no longer listed on the Amex or another national
securities exchange in the United States, our shares may be subject to the
"penny stock"' regulations. If our common stock were to become subject to the
penny stock rules it is likely that the price of our common stock would decline
and that our stockholders would find it difficult to sell their shares. If our
stock were to become delisted we could be in default of various agreements,
including the Ocean Bank credit facility.
OUR BUSINESS COULD BE HARMED BY PROLONGED ELECTRICAL POWER OUTAGES OR
SHORTAGES, OR INCREASED COSTS OF ENERGY. Our NAP facilities are susceptible to
regional costs of power, electrical power shortages and planned or unplanned
power outages caused by these shortages. A power shortage may result in an
increase of the cost of energy, which we may not be able to pass on to our
customers. We attempt to limit exposure to system downtime by using backup
generators and power supplies. Power outages, which last beyond our backup and
alternative power arrangements, could harm our customers and our business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have not entered into any financial instruments for trading or hedging
purposes.
Our carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses is a reasonable approximation of their
fair value.
Our exposure to market risk resulting from changes in interest rates
relates primarily to our debt. An immediate 10% increase or decrease in current
interest rates would furthermore not have a material impact on our debt
obligations due to the fixed nature of our debt obligations. The fair market
value of our long-term fixed interest rate debt is subject to interest rate
risk. Generally, the fair market value of fixed interest rate debt will increase
as interest rates fall and decrease as interest rates rise. These interest rate
changes may affect the fair market value of the fixed interest rate debt but do
not impact our earnings or cash flows.
To date, all of our recognized revenue has been denominated in U.S.
dollars, generated mostly from customers in the U.S., and our exposure to
foreign currency exchange rate fluctuations has been minimal. We expect that
future revenues may be derived from operations outside of the U.S. and may be
denominated in foreign currency. As a result, future operating results or cash
flows could be impacted due to currency fluctuations relative to the U.S.
dollar.
Furthermore, to the extent we engage in international sales that are
denominated in U.S. dollars, an increase in the value of the U.S. dollar
relative to foreign currencies could make our services less competitive in the
international markets. Although we will continue to monitor our exposure to
currency fluctuations, and when appropriate, may use financial hedging
techniques in the future to minimize the effect of these fluctuations, we cannot
conclude you that exchange rate fluctuations will not adversely affect our
financial results in the future.
Some of our operating costs are subject to price fluctuations caused by
the volatility of underlying commodity prices. The commodity most likely to have
an impact on our results of operations in the event of significant price change
is electricity. We are closely monitoring the cost of electricity. To the extent
that electricity costs rise, we are investigating opportunities to pass these
additional power costs onto our
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customers that utilize this power. We do not employ forward contracts or other
financial instruments to hedge commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of a date within 90 days prior to the filing
date of this Form 10-Q, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
are effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) No reports were filed on Form 8-K during the quarter of the fiscal
year ended June 30, 2003.
(b) The following exhibits, which are furnished with this Quarterly Report
or incorporated herein by reference, are filed as part of this Quarterly Report.
Exhibit
Number Exhibit Description
------- -------------------
10.1 Employment Agreement with Brian K. Goodkind
10.2 Non-qualified Stock Option Agreement for Brian K. Goodkind
to purchase 1,278,205 shares of the Company's common stock
10.3 Non-qualified Stock Option Agreement with Brian K. Goodkind
to purchase 1,406,795 shares of the Company's common stock
10.4 First Amendment to the Non-qualified Stock Option Agreement
with Brian K. Goodkind to purchase 200,000 shares of the
Company's common stock
10.5 First Amendment to the Non-qualified Stock Option Agreement
with Brian K. Goodkind to purchase 115,000 shares of the
Company's common stock
31.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 14th day of
August 2003.
TERREMARK WORLDWIDE, INC.
By: /s/ MANUEL D. MEDINA
-------------------------------------
Manuel D. Medina, Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ JOSE A. SEGRERA
-------------------------------------
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
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