Terremark Worldwide Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For the quarterly period ended September 30, 2006 |
|
o
|
|
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 001-12475
Terremark Worldwide, Inc.
(Exact Name of Registrant as Specified in Its Charter)
|
|
|
Delaware
|
|
84-0873124 |
(State or Other Jurisdiction of
Incorporation or Organization) |
|
(IRS Employer
Identification No.) |
2601 S. Bayshore Drive, Miami, Florida 33133
(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 þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2 of the
Exchange Act.
|
|
|
Large accelerated filer o |
Accelerated filer x |
Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
|
|
|
Class |
|
Outstanding at October 31, 2006 |
|
|
|
Common stock, $0.001 par value per share
|
|
43,779,360 shares |
Table of Contents
i
PART I. FINANCIAL INFORMATION
|
|
Item 1. |
Financial Statements |
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
March 31, | |
|
|
2006 | |
|
2006 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
11,398,901 |
|
|
$ |
20,401,934 |
|
Restricted cash
|
|
|
2,156,731 |
|
|
|
474,073 |
|
Accounts receivable, net of allowance for doubtful accounts of
$600,000 and $200,000
|
|
|
14,528,062 |
|
|
|
10,951,827 |
|
Current portion of capital lease receivable
|
|
|
2,707,053 |
|
|
|
2,507,029 |
|
Prepaid expenses and other current assets
|
|
|
3,450,587 |
|
|
|
2,558,942 |
|
|
|
|
|
|
|
|
Total current assets
|
|
$ |
34,241,334 |
|
|
$ |
36,893,805 |
|
Restricted cash
|
|
|
3,457,867 |
|
|
|
3,814,842 |
|
Property and equipment, net of accumulated depreciation of
$31,342,637 and $26,331,368
|
|
|
130,414,114 |
|
|
|
129,893,318 |
|
Debt issuance costs, net of accumulated amortization of
$3,772,863 and $2,810,403
|
|
|
5,990,611 |
|
|
|
6,963,232 |
|
Other assets
|
|
|
3,871,676 |
|
|
|
2,695,616 |
|
Capital lease receivable, net of current portion
|
|
|
3,237,292 |
|
|
|
4,004,449 |
|
Intangibles, net of accumulated amortization of $910,000 and
$520,000
|
|
|
3,290,000 |
|
|
|
3,680,000 |
|
Goodwill
|
|
|
16,771,189 |
|
|
|
16,771,189 |
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
201,274,083 |
|
|
$ |
204,716,451 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of debt and capital lease obligations
|
|
$ |
2,214,111 |
|
|
$ |
1,890,108 |
|
Accounts payable and other current liabilities
|
|
|
24,935,270 |
|
|
|
20,822,624 |
|
Interest payable
|
|
|
3,605,279 |
|
|
|
3,833,288 |
|
Series H redeemable convertible preferred stock
|
|
|
— |
|
|
|
646,693 |
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$ |
30,754,660 |
|
|
$ |
27,192,713 |
|
Mortgage payable, less current portion
|
|
|
45,675,385 |
|
|
|
45,795,552 |
|
Convertible debt
|
|
|
62,129,416 |
|
|
|
59,102,452 |
|
Derivatives embedded within convertible debt, at estimated fair
value
|
|
|
12,742,575 |
|
|
|
24,960,750 |
|
Notes payable, less current portion
|
|
|
27,118,078 |
|
|
|
25,614,140 |
|
Deferred rent and other liabilities
|
|
|
3,314,223 |
|
|
|
3,267,481 |
|
Capital lease obligations, less current portion
|
|
|
1,493,939 |
|
|
|
852,311 |
|
Deferred revenue
|
|
|
3,796,836 |
|
|
|
4,094,735 |
|
|
|
|
|
|
|
|
Total liabilities
|
|
$ |
187,025,112 |
|
|
$ |
190,880,134 |
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Series I convertible preferred stock: $.001 par value,
323 and 339 shares issued and outstanding (liquidation
value of approximately $8.3 million and $8.6 million)
|
|
$ |
1 |
|
|
$ |
1 |
|
Common stock: $.001 par value, 100,000,000 shares
authorized; 44,594,561 and 44,490,352 shares issued
|
|
|
44,594 |
|
|
|
44,490 |
|
Common stock warrants
|
|
|
12,946,698 |
|
|
|
13,251,660 |
|
Common stock options
|
|
|
582,004 |
|
|
|
582,004 |
|
Additional paid-in capital
|
|
|
291,941,003 |
|
|
|
291,607,528 |
|
Accumulated deficit
|
|
|
(283,737,786 |
) |
|
|
(283,823,243 |
) |
Accumulated other comprehensive loss
|
|
|
(131,484 |
) |
|
|
(317,756 |
) |
Treasury stock: 865,202 shares
|
|
|
(7,220,637 |
) |
|
|
(7,220,637 |
) |
Notes receivable
|
|
|
(175,422 |
) |
|
|
(287,730 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
$ |
14,248,971 |
|
|
$ |
13,836,317 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
201,274,083 |
|
|
$ |
204,716,451 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
1
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended | |
|
For the Three Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center
|
|
$ |
45,587,484 |
|
|
$ |
24,632,200 |
|
|
$ |
24,184,103 |
|
|
$ |
13,961,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
45,587,484 |
|
|
|
24,632,200 |
|
|
|
24,184,103 |
|
|
|
13,961,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data center operations, excluding depreciation
|
|
|
26,459,762 |
|
|
|
15,729,856 |
|
|
|
14,773,552 |
|
|
|
8,718,207 |
|
|
General and administrative
|
|
|
7,661,699 |
|
|
|
7,684,085 |
|
|
|
3,595,002 |
|
|
|
3,503,439 |
|
|
Sales and marketing
|
|
|
5,260,872 |
|
|
|
3,780,133 |
|
|
|
2,636,662 |
|
|
|
2,021,059 |
|
|
Depreciation and amortization
|
|
|
5,395,560 |
|
|
|
3,911,615 |
|
|
|
2,695,644 |
|
|
|
2,047,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
44,777,893 |
|
|
|
31,105,689 |
|
|
|
23,700,860 |
|
|
|
16,289,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
809,591 |
|
|
|
(6,473,489 |
) |
|
|
483,243 |
|
|
|
(2,328,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives embedded within convertible
debt
|
|
|
12,218,175 |
|
|
|
9,977,675 |
|
|
|
(3,298,200 |
) |
|
|
10,441,700 |
|
|
Interest expense
|
|
|
(13,489,290 |
) |
|
|
(12,301,995 |
) |
|
|
(6,871,705 |
) |
|
|
(6,305,142 |
) |
|
Interest income
|
|
|
581,594 |
|
|
|
899,434 |
|
|
|
278,513 |
|
|
|
439,261 |
|
|
Gain on sale of asset
|
|
|
— |
|
|
|
499,388 |
|
|
|
— |
|
|
|
499,388 |
|
|
Other, net
|
|
|
(34,613 |
) |
|
|
(66,136 |
) |
|
|
(35,274 |
) |
|
|
(80,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expenses)
|
|
|
(724,134 |
) |
|
|
(991,634 |
) |
|
|
(9,926,666 |
) |
|
|
4,994,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
85,457 |
|
|
|
(7,465,123 |
) |
|
|
(9,443,423 |
) |
|
|
2,666,152 |
|
|
Income taxes
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
85,457 |
|
|
|
(7,465,123 |
) |
|
|
(9,443,423 |
) |
|
|
2,666,152 |
|
Preferred dividend
|
|
|
(325,800 |
) |
|
|
(372,489 |
) |
|
|
(161,700 |
) |
|
|
(184,700 |
) |
Earnings attributable to participating security holders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(396,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$ |
(240,343 |
) |
|
$ |
(7,837,612 |
) |
|
$ |
(9,605,123 |
) |
|
$ |
2,084,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.01 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.22 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(0.09 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
|
|
43,698,606 |
|
|
|
42,369,338 |
|
|
|
43,719,659 |
|
|
|
42,890,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — diluted
|
|
|
52,139,378 |
|
|
|
49,269,338 |
|
|
|
43,719,659 |
|
|
|
49,790,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
2
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Par Value $.001 | |
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additional | |
|
|
|
Other | |
|
|
|
|
|
|
|
|
Preferred | |
|
Issued | |
|
|
|
Common Stock | |
|
Common Stock | |
|
Paid-in | |
|
Accumulated | |
|
Comprehensive | |
|
Treasury | |
|
Notes | |
|
|
|
|
Stock Series I | |
|
Shares | |
|
Amount | |
|
Warrants | |
|
Options | |
|
Capital | |
|
Deficit | |
|
Loss | |
|
Stock | |
|
Receivable | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at March 31, 2006
|
|
$ |
1 |
|
|
|
44,490,352 |
|
|
$ |
44,490 |
|
|
$ |
13,251,660 |
|
|
$ |
582,004 |
|
|
$ |
291,607,528 |
|
|
$ |
(283,823,243 |
) |
|
$ |
(317,756 |
) |
|
$ |
(7,220,637 |
) |
|
$ |
(287,730 |
) |
|
$ |
13,836,317 |
|
Conversion of preferred stock
|
|
|
— |
|
|
|
53,637 |
|
|
|
53 |
|
|
|
— |
|
|
|
— |
|
|
|
2,225 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,278 |
|
Exercise of stock options
|
|
|
— |
|
|
|
35,072 |
|
|
|
35 |
|
|
|
— |
|
|
|
— |
|
|
|
194,409 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
194,444 |
|
Warrants issued for services
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
92,988 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
92,988 |
|
Accrued dividends on preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(325,679 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(325,679 |
) |
Expiration of warrants
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(397,950 |
) |
|
|
— |
|
|
|
397,950 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock tendered in payment of services
|
|
|
— |
|
|
|
15,500 |
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
64,570 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
64,586 |
|
Repayments of loans issued to employees
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
128,320 |
|
|
|
128,320 |
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
186,272 |
|
|
|
— |
|
|
|
(16,012 |
) |
|
|
170,260 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
85,457 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
85,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
85,457 |
|
|
|
186,272 |
|
|
|
— |
|
|
|
(16,012 |
) |
|
|
255,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
$ |
1 |
|
|
|
44,594,561 |
|
|
$ |
44,594 |
|
|
$ |
12,946,698 |
|
|
$ |
582,004 |
|
|
$ |
291,941,003 |
|
|
$ |
(283,737,786 |
) |
|
$ |
(131,484 |
) |
|
$ |
(7,220,637 |
) |
|
$ |
(175,422 |
) |
|
$ |
14,248,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
3
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
85,457 |
|
|
$ |
(7,465,123 |
) |
Adjustments to reconcile net income (loss) to net cash used in
operating activities
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of long-lived assets
|
|
|
5,395,560 |
|
|
|
3,911,615 |
|
|
Change in estimated fair value of embedded derivatives
|
|
|
(12,218,175 |
) |
|
|
(9,977,675 |
) |
|
Accretion on convertible debt and mortgage payables
|
|
|
3,286,026 |
|
|
|
2,668,412 |
|
|
Amortization of discount on notes payable
|
|
|
658,320 |
|
|
|
533,868 |
|
|
Interest payment in kind on notes payable
|
|
|
845,619 |
|
|
|
271,875 |
|
|
Amortization of debt issue costs
|
|
|
980,732 |
|
|
|
926,226 |
|
|
Provision for bad debt
|
|
|
410,742 |
|
|
|
241,916 |
|
|
Loss on disposal of property and equipment
|
|
|
— |
|
|
|
174,747 |
|
|
Gain on sale of asset
|
|
|
— |
|
|
|
(499,388 |
) |
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(1,325,683 |
) |
|
|
(655,391 |
) |
|
|
Accounts receivable
|
|
|
(3,986,977 |
) |
|
|
(3,171,815 |
) |
|
|
Capital lease receivable
|
|
|
795,338 |
|
|
|
297,557 |
|
|
|
Prepaid and other assets
|
|
|
(1,261,752 |
) |
|
|
(2,577,264 |
) |
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
3,907,370 |
|
|
|
538,596 |
|
|
|
Interest payable
|
|
|
(228,009 |
) |
|
|
1,106,643 |
|
|
|
Deferred revenue
|
|
|
2,371,869 |
|
|
|
2,253,521 |
|
|
|
Deferred rent and other liabilities
|
|
|
192,646 |
|
|
|
(156,116 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(90,917 |
) |
|
|
(11,577,796 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(7,570,979 |
) |
|
|
(3,646,110 |
) |
|
Acquisition of Dedigate
|
|
|
— |
|
|
|
360,125 |
|
|
Proceeds from sale of assets
|
|
|
— |
|
|
|
762,046 |
|
|
Repayments of notes receivable
|
|
|
128,320 |
|
|
|
— |
|
|
Issuance of notes receivable
|
|
|
— |
|
|
|
(344,530 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7,442,659 |
) |
|
|
(2,868,469 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Payments on loans and mortgage payable
|
|
|
(351,521 |
) |
|
|
(414,456 |
) |
|
Payments under capital lease obligations
|
|
|
(407,092 |
) |
|
|
(150,659 |
) |
|
Payments of preferred stock dividends
|
|
|
(246,100 |
) |
|
|
(14,000 |
) |
|
Debt issuance costs
|
|
|
— |
|
|
|
(7,117 |
) |
|
Redemption of preferred stock
|
|
|
(659,188 |
) |
|
|
— |
|
|
Proceeds from exercise of stock options and warrants
|
|
|
194,444 |
|
|
|
232,483 |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,469,457 |
) |
|
|
(353,749 |
) |
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(9,003,033 |
) |
|
|
(14,800,014 |
) |
Cash and cash equivalents at beginning of period
|
|
|
20,401,934 |
|
|
|
44,001,144 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
11,398,901 |
|
|
$ |
29,201,130 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
4
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
1. |
Business and Organization |
Terremark Worldwide, Inc. (the “Company” or
“Terremark”) is a leading operator of integrated
Tier-1 Internet exchanges and a global provider of managed IT
infrastructure solutions for the government and commercial
sectors. Terremark delivers its portfolio of services from seven
locations in the U.S., Europe and Asia. Terremark’s
flagship facility, the NAP of the Americas, located in Miami,
Florida, is its model for carrier-neutral Internet exchanges and
is designed and built to disaster-resistant standards with
maximum security to house mission-critical systems
infrastructure.
|
|
2. |
Summary of Significant Accounting Policies |
The accompanying unaudited condensed consolidated financial
statements include the accounts of Terremark Worldwide, Inc. and
all entities in which Terremark Worldwide, Inc. has a
controlling voting interest (“subsidiaries”) which are
required to be consolidated in accordance with generally
accepted accounting principles in the United States (“U.S.
GAAP”). All significant intercompany accounts and
transactions between consolidated companies have been eliminated
in consolidation.
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. Areas where the nature of the
estimate makes it reasonably possible that actual results could
materially differ from the amounts estimated include revenue
recognition and allowance for bad debts, derivatives, income
taxes, impairment of long-lived assets, stock-based compensation
and goodwill.
|
|
|
Revenue and profit recognition |
Data center revenues consist of monthly recurring fees for
colocation, exchange point, and managed and professional
services fees. Colocation revenues also include monthly rental
income for unconditioned space in the NAP of the Americas.
Revenues from colocation and exchange point services, as well as
rental income for unconditioned space, are recognized ratably
over the term of the contract. Installation fees and related
direct costs are deferred and recognized ratably over the
expected life of the customer installation which is estimated to
be 36 to 48 months. Managed and professional services fees,
including amounts allocated to equipment sold under arrangements
for managed hosting solutions, are recognized in the period in
which the services are provided. Revenue from contract
settlements is generally recognized when collectibility is
reasonably assured and no remaining performance obligation
exists.
In accordance with Emerging Issues Task Force
(“EITF”) Issue No. 00-21, “Revenue
Arrangements with Multiple Deliverables”, when more than
one element such as equipment, installation and colocation
services are contained in a single arrangement, the Company
allocates revenue between the elements based on acceptable fair
value allocation methodologies, provided that each element meets
the criteria for treatment as a separate unit of accounting. An
item is considered a separate unit of accounting if it has value
to the customer on a stand alone basis and there is objective
and reliable evidence of the fair value of the undelivered
items. The fair value of the undelivered elements is determined
by the price charged when the element is sold separately, or in
cases when the item is not sold separately, by using other
acceptable objective evidence.
5
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
Revenue is recognized, when there is persuasive evidence of an
arrangement, the fee is fixed or determinable and collection of
the receivable is reasonably assured. The Company assesses
collectibility based on a number of factors, including past
transaction history with the customer and the credit-worthiness
of the customer. The Company does not request collateral from
its customers. If the Company determines that collectibility is
not reasonably assured, the fee is deferred and revenue is
recognized at the time collection becomes reasonably assured,
which is generally upon receipt of cash.
The Company analyzes current economic news and trends,
historical bad debts, customer concentrations, customer
credit-worthiness and changes in customer payment terms when
evaluating revenue recognition and the adequacy of the allowance
for bad debts.
The Company’s customer contracts generally require the
Company to meet certain service level commitments. If the
Company does not meet required service levels, it may be
obligated to provide credits, usually a month of free service.
Such credits, to date, have been insignificant.
The Company has, in the past, used financial instruments,
including cap agreements, to manage exposure to movements in
interest rates. The use of these financial instruments modifies
the exposure of these risks with the intent to reduce the risk
or cost to the Company.
The Company does not hold or issue derivative instruments for
trading purposes. However, the Company’s 9% Senior
Convertible Notes due June 15, 2009 (the “Senior
Convertible Notes”) contain embedded derivatives that
require separate valuation from the Senior Convertible Notes.
The Company recognizes these derivatives as liabilities in its
balance sheet, measures them at their estimated fair value and
recognizes changes in their estimated fair value in earnings in
the period of change.
The Company, with the assistance of a third party, estimates the
fair value of its embedded derivatives using available market
information and appropriate valuation methodologies. These
embedded derivatives derive their value primarily based on
changes in the price and volatility of the Company’s common
stock. Over the life of the Senior Convertible Notes, given the
historical volatility of the Company’s common stock,
changes in the estimated fair value of the embedded derivatives
are expected to have a material effect on the Company’s
results of operations. Furthermore, the Company has estimated
the fair value of these embedded derivatives using a theoretical
model based on the historical volatility of its common stock
over the past year. If an active trading market develops for the
Senior Convertible Notes or the Company is able to find
comparable market data, it may in the future be able to use
actual market data to adjust the estimated fair value of these
embedded derivatives. Such adjustment could be significant and
would be accounted for prospectively.
Considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts,
if any, that the Company may eventually pay to settle these
embedded derivatives.
|
|
|
Significant concentrations |
Agencies of the federal government accounted for approximately
22% of data center revenues for the six and three months ended
September 30, 2006. No other customer accounted for more
than 10% of data center revenues for the six and three months
ended September 30, 2006. Agencies of the federal
government and Blackbird Technologies, Inc. accounted for
approximately 24% and 11%, respectively, of data center revenues
for the six months ended September 30, 2005. The same two
customers accounted for approximately 23% and 9%, respectively,
of data center revenues for the three months ended
September 30, 2005.
6
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
Stock-Based
Compensation
On August 9, 2005, the Company’s Board of Directors
adopted the 2005 Executive Incentive Compensation Plan, which
was approved by the Company’s shareholders on
September 23, 2005. This comprehensive plan superseded and
replaced all of the Company’s pre-existing stock option
plans. Under the 2005 Executive Incentive Compensation Plan, the
Compensation Committee has the authority to grant stock-based
incentive awards to executives, key employees, directors, and
consultants, including stock options, stock appreciation rights,
or SARs, nonvested stock (commonly referred to as restricted
stock), deferred stock, other stock-related awards and
performance or annual incentive awards that may be settled in
cash, stock or other property (collectively, the
“Awards”). Under the 2005 Executive Incentive
Compensation Plan, the Company has reserved for issuance an
aggregate of 1,000,000 shares of common stock. Awards granted
generally vest over three years with one third vesting per year
from the date of grant and generally expire ten years from the
date of grant. The Company has granted all current outstanding
shares under various pre-existing stock option plans.
Prior to the adoption of SFAS No. 123(R), the
Compensation Committee of the Company’s Board of Directors
approved the vesting, effective as of March 31, 2006, of
all unvested stock options previously granted under the
Company’s stock option and executive compensation plans.
The options affected by this accelerated vesting had exercise
prices ranging from $2.79 to $16.50. As a result of the
accelerated vesting, options to purchase approximately 464,000
shares became immediately exercisable. All other terms of these
options remain unchanged. The decision of the Compensation
Committee to accelerate the vesting of all outstanding options
was made primarily to reduce compensation expense that otherwise
would be recorded starting with the three months ending
June 30, 2006. The future compensation expense that will be
avoided is approximately $1,500,000, $900,000, and $170,000 in
the fiscal years ended March 31, 2007, 2008, and 2009,
respectively.
The Company adopted the provisions of, and accounts for
stock-based compensation in accordance with
SFAS No. 123(R), “Share-Based Payment,” and
related pronouncements (“SFAS 123(R)”), during
the first quarter ended June 30, 2006. The only equity
awards granted during the six months ended September 30,
2006 consisted of 15,300 shares of nonvested stock. The Company
has elected the modified-prospective method, under which prior
periods are not revised for comparative purposes. Under the fair
value recognition provisions of this statement, stock-based
compensation cost is measured at the grant date for all
stock-based awards made to employees and directors based on the
fair value of the award using an option-pricing model and is
recognized as expense over the requisite service period, which
is generally the vesting period. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107
(“SAB 107”) providing supplemental implementation
guidance for SFAS 123(R). The Company has applied the
provisions of SAB 107 in its adoption of SFAS 123(R).
7
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
A summary of the status of the Company’s stock options, as
of March 31, 2006, and September 30, 2006, and changes
during the six months ended September 30, 2006 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
|
|
Weighted | |
|
Average | |
|
|
|
|
|
|
Average | |
|
Remaining | |
|
Aggregate | |
|
|
Shares | |
|
Exercise Price | |
|
Contractual Term | |
|
Intrinsic Value | |
|
|
| |
|
| |
|
| |
|
| |
Outstanding at March 31, 2006
|
|
|
2,279,485 |
|
|
$ |
11.23 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
29,755 |
|
|
|
5.70 |
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
38,967 |
|
|
|
8.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006
|
|
|
2,210,763 |
|
|
$ |
11.32 |
|
|
|
6.08 |
|
|
$ |
(12,763,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006
|
|
|
2,210,763 |
|
|
$ |
11.32 |
|
|
|
6.08 |
|
|
$ |
(12,763,820 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the Company’s nonvested stock, as of
March 31, 2006, and September 30, 2006, and changes
during the six months ended September 30, 2006 is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average | |
|
|
|
|
Grant Date | |
|
|
Shares | |
|
Fair Value | |
|
|
| |
|
| |
Outstanding at March 31, 2006
|
|
|
— |
|
|
$ |
— |
|
Granted
|
|
|
15,300 |
|
|
|
4.20 |
|
Restricted lapsed
|
|
|
— |
|
|
|
— |
|
Canceled
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006
|
|
|
15,300 |
|
|
$ |
4.20 |
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised during the
six and three months ended September 30, 2006 was
approximately $59,000 and $3,600, respectively. The following
table summarizes information about stock options outstanding and
exercisable at September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Vested | |
|
Unvested | |
|
Contractual Life | |
|
Exercise Price | |
|
Number | |
|
Exercise Price | |
Range of Exercise Prices |
|
Options | |
|
Options | |
|
(Years) | |
|
(Outstanding) | |
|
Exercisable | |
|
(Exercisable) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
$2.50 — 5.00
|
|
|
340,850 |
|
|
|
— |
|
|
|
7.58 |
|
|
$ |
3.91 |
|
|
|
340,850 |
|
|
$ |
3.91 |
|
$5.01 — 10.00
|
|
|
1,330,214 |
|
|
|
— |
|
|
|
6.94 |
|
|
|
6.31 |
|
|
|
1,330,214 |
|
|
|
6.31 |
|
$10.00 — 20.00
|
|
|
111,817 |
|
|
|
— |
|
|
|
3.65 |
|
|
|
14.95 |
|
|
|
111,817 |
|
|
|
14.95 |
|
$20.01 — 30.00
|
|
|
114,520 |
|
|
|
— |
|
|
|
0.52 |
|
|
|
29.32 |
|
|
|
114,520 |
|
|
|
29.32 |
|
$30.01 — 50.00
|
|
|
313,362 |
|
|
|
— |
|
|
|
3.70 |
|
|
|
32.78 |
|
|
|
313,362 |
|
|
|
32.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,210,763 |
|
|
|
— |
|
|
|
6.08 |
|
|
$ |
11.32 |
|
|
|
2,210,763 |
|
|
$ |
11.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the adoption of SFAS 123(R), the Company accounted
for stock-based awards to employees and directors using the
intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, “Accounting for Stock
Issued to Employees”, as allowed under
SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). Under the
intrinsic value method, no stock-based compensation expense for
employee stock options had generally been recognized in the
Company’s consolidated statements of operations because the
exercise price of its stock options granted to employees and
directors since the date of our initial public offering
generally equaled the fair market value of the underlying stock
at the date of grant.
8
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
The Company also provided the disclosures required under
SFAS No. 123, as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation —
Transition and Disclosures.” For the six and three months
ended September 30, 2005, all employee stock option awards
were granted with an exercise price equal to the market value of
the underlying common stock on the date of grant. Pro forma
information for the six and three months ended
September 30, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended | |
|
For the Three Months Ended | |
|
|
September 30, 2005 | |
|
September 30, 2005 | |
|
|
| |
|
| |
Net income (loss) attributable to common stockholders as reported
|
|
$ |
(7,837,612 |
) |
|
$ |
2,084,836 |
|
Incremental stock-based compensation if the fair value method
had been adopted
|
|
|
(665,261 |
) |
|
|
(339,668 |
) |
|
|
|
|
|
|
|
Pro forma net income (loss) attributable to common stockholders
|
|
$ |
(8,502,873 |
) |
|
$ |
1,745,168 |
|
|
|
|
|
|
|
|
Basic income (loss) per common share — as reported
|
|
$ |
(0.18 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
Basic income (loss) per common share — pro forma
|
|
$ |
(0.20 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
Diluted loss per common share — as reported
|
|
$ |
(0.22 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
Diluted loss per common share — pro forma
|
|
$ |
(0.24 |
) |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
The assumptions used to value stock options were as follows:
|
|
|
|
|
September 30, |
|
|
2005 |
|
|
|
Risk-free rate
|
|
3.69% - 4.28% |
Volatility
|
|
113% - 118% |
Expected life
|
|
5 years |
Expected dividends
|
|
0% |
The Company uses the Black-Scholes option-pricing model to
determine the fair value of stock options granted under the
Company’s stock option plans. The determination of the fair
value of stock-based payment awards on the date of grant using
an option-pricing model is affected by the Company’s stock
price as well as assumptions regarding a number of complex and
subjective variables. These variables include the Company’s
expected stock price volatility over the term of the awards;
actual and projected employee stock option exercise behaviors,
which is referred to as expected term; risk-free interest rate
and expected dividends.
The Company estimates the expected term of options granted by
taking the average of the vesting term and the contractual term
of the option, as illustrated in SAB 107. The Company
estimates the volatility of its common stock by using its
historical volatility. The Company believes this is the best
representation of its future volatility in accordance with
SAB 107. The Company bases the risk-free interest rate that
it uses in its option-pricing models on U.S. Treasury
zero-coupon issues with remaining terms similar to the expected
term on its equity awards. The Company does not anticipate
paying any cash dividends in the foreseeable future and
therefore uses an expected dividend yield of zero in its
option-pricing models.
9
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
The Company uses the fair value method to value warrants granted
to non-employees. Some warrants are vested over time and some
are vested upon issuance. The Company determines the fair value
for non-employee warrants using the Black-Scholes option-pricing
model with the same assumptions used for employee grants, except
for the expected life, which was assumed to be between 1 and
7 years. When warrants to acquire the Company’s common
stock are issued in connection with the sale of debt or other
securities, aggregate proceeds from the sale of the warrants and
other securities are allocated among all instruments issued
based on their relative fair market values. Any resulting
discount from the face value of debt is amortized to interest
expense using the effective interest method over the term of the
debt.
The Company’s Senior Convertible Notes contain contingent
interest provisions which allow the holders of the Senior
Convertible Notes to participate in any dividends declared on
the Company’s common stock. Further, the Company’s
Series I preferred stock contain participation rights which
entitle the holders to receive dividends in the event the
Company declares dividends on its common stock. Accordingly, the
Senior Convertible Notes and the Series I preferred stock
are considered participating securities.
Basic EPS is calculated as income (loss) available to common
stockholders divided by the weighted average number of common
shares outstanding during the period. If the effect is dilutive,
participating securities are included in the computation of
basic EPS. Our participating securities do not have a
contractual obligation to share in the losses in any given
period. As a result, these participating securities will not be
allocated any losses in the periods of net losses, but will be
allocated income in the periods of net income using the
two-class method. The two-class method is an earnings allocation
formula that determines earnings for each class of common stock
and participating securities according to dividends declared or
accumulated and participation rights in undistributed earnings.
Under the two-class method, net income is reduced by the amount
of dividends declared in the current period for each class of
stock and by the contractual amounts of dividends that must be
paid for the current period. The remaining earnings are then
allocated to common stock and participating securities to the
extent that each security may share in earnings as if all of the
earnings for the period had been distributed. Diluted EPS is
calculated using the treasury stock and “if converted”
methods for potential common stock. For diluted earnings (loss)
per share purposes, however, the Company’s preferred stock
will continue to be treated as a participating security in
periods in which the use of the “if converted” method
results in anti-dilution.
10
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
The following table presents the reconciliation of net income
(loss) attributable to common stockholders to the numerator
used for diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended | |
|
For the Three Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Net income (loss) attributable to common stockholders
|
|
$ |
(240,343 |
) |
|
$ |
(7,837,612 |
) |
|
$ |
(9,605,123 |
) |
|
$ |
2,084,836 |
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings attributable to participating security holders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
396,616 |
|
|
Interest expense, including amortization of discount and debt
issue costs
|
|
|
7,558,440 |
|
|
|
6,898,135 |
|
|
|
— |
|
|
|
3,509,904 |
|
|
Change in fair value of derivatives embedded within convertible
debt
|
|
|
(12,218,175 |
) |
|
|
(9,977,675 |
) |
|
|
— |
|
|
|
(10,441,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted loss per share:
|
|
$ |
(4,900,078 |
) |
|
$ |
(10,917,152 |
) |
|
$ |
(9,605,123 |
) |
|
$ |
(4,450,344 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the reconciliation of weighted
average shares outstanding to basic and diluted weighted average
common shares outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended | |
|
For the Three Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
43,698,606 |
|
|
|
42,369,338 |
|
|
|
43,719,659 |
|
|
|
42,890,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
43,698,606 |
|
|
|
42,369,338 |
|
|
|
43,719,659 |
|
|
|
42,890,383 |
|
Senior Convertible Notes
|
|
|
6,900,000 |
|
|
|
6,900,000 |
|
|
|
— |
|
|
|
6,900,000 |
|
Early conversion incentive
|
|
|
1,540,772 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — diluted
|
|
|
52,139,378 |
|
|
|
49,269,338 |
|
|
|
43,719,659 |
|
|
|
49,790,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
Unless otherwise included above, the following table sets forth
potential shares of common stock that are not included in the
diluted net loss per share calculation above because to do so
would be anti-dilutive for the periods indicated (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months | |
|
For the Three Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Series I convertible preferred stock
|
|
|
1,135,233 |
|
|
|
1,289,883 |
|
|
|
1,099,348 |
|
|
|
1,254,627 |
|
Series H redeemable convertible preferred stock
|
|
|
22,072 |
|
|
|
29,400 |
|
|
|
17,791 |
|
|
|
29,400 |
|
Common stock warrants
|
|
|
2,637,136 |
|
|
|
2,702,436 |
|
|
|
2,637,136 |
|
|
|
2,702,436 |
|
Common stock options
|
|
|
2,210,763 |
|
|
|
1,716,121 |
|
|
|
2,210,763 |
|
|
|
1,716,121 |
|
Nonvested stock
|
|
|
15,300 |
|
|
|
— |
|
|
|
15,300 |
|
|
|
— |
|
Senior Convertible Notes
|
|
|
— |
|
|
|
— |
|
|
|
6,900,000 |
|
|
|
— |
|
Early conversion incentive
|
|
|
— |
|
|
|
— |
|
|
|
2,123,398 |
|
|
|
— |
|
Other comprehensive loss presents a measure of all changes in
stockholder’s equity except for changes resulting from
transactions with stockholders in their capacity as
stockholders. Other comprehensive loss consists of net income
(loss) and foreign currency translation adjustments, which is
presented in the accompanying consolidated statement of
stockholders’ equity.
The Company’s foreign operations generally use the local
currency as their functional currency. Assets and liabilities of
these operations are translated at the exchange rates in effect
on the balance sheet date. If exchangeability between the
functional currency and the U.S. dollar is temporarily lacking
at the balance sheet date, the first subsequent rate at which
exchanges can be made is used to translate assets and
liabilities.
|
|
|
Recent accounting standards |
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 153, “Exchanges
of Nonmonetary Assets, an Amendment of Accounting Pronouncements
Bulletin (“APB”) Opinion No. 29.”
SFAS No. 153 addresses the measurement of exchanges of
nonmonetary assets. It eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive
assets contained in APB Opinion No. 29 and replaces it with
an exception for exchanges that do not have commercial
substance. SFAS No. 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of an
entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for fiscal periods
beginning after June 15, 2005. As the provisions of
SFAS No. 153 are to be applied prospectively, the
adoption of SFAS No. 153 will not have an impact on
the Company’s historical financial statements; however, the
Company will assess the impact of the adoption of this
pronouncement on any future nonmonetary transactions that the
Company enters into, if any.
In February 2006, the FASB issued SFAS No. 155,
“Accounting for Certain Hybrid Instruments,” an
amendment of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” and
SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities-a replacement of FASB Statement No. 125”
(“SFAS No. 155”). SFAS No. 155
improves the financial reporting of certain hybrid financial
instruments by requiring more consistent accounting that
eliminates exemptions and provides a means to simplify the
accounting for such instruments. Specifically,
12
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
SFAS No. 155 allows financial instruments that have
embedded derivatives to be accounted for as a whole (eliminating
the need to bifurcate the derivative from its host) if the
holder elects to account for the whole instrument on a fair
value basis. SFAS No. 155 also (i) clarifies
which interest-only strips and principal-only strips are not
subject to the requirements of SFAS No. 133;
(ii) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation; (iii) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives
and (iv) amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding
a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument.
SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an
entity’s first fiscal year that begins after
September 15, 2006. The Company is currently in the process
of evaluating the impact that the adoption of
SFAS No. 155 will have on its financial position,
results of operations and cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109”
(“FIN 48”), which clarifies the accounting for
uncertainty in tax positions. This interpretation requires the
Company to recognize the impact of a tax position if that
position is more likely than not to be sustained based on the
technical merits of the position. FIN 48 also provides
guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006, with the
cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. The Company is
currently evaluating the impact that the adoption of FIN 48
will have, if any, on its financial position, results of
operations and cash flows.
In September 2006, the U.S. Securities and Exchange Commission
staff issued Staff Accounting Bulletin No. 108
(“SAB 108”), “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”. SAB 108 eliminates
the diversity of practice surrounding how public companies
quantify financial statement misstatements. It establishes an
approach that requires quantification of financial statement
misstatements based on the effects of the misstatements on each
of the Company’s financial statements and the related
financial statement disclosures. SAB 108 must be applied to
annual financial statements for their first fiscal year ending
after November 15, 2006. The Company does not expect
SAB 108 to have a material impact on its financial
position, results of operations and cash flows.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements”
(“SFAS No. 157”). This standard clarifies
the principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy
that prioritizes the information used to develop those
assumptions. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007. The Company is currently in the process
of evaluating the impact that the adoption of
SFAS No. 157 will have on its financial position,
results of operations and cash flows.
In connection with the purchase of TECOTA, the Company obtained
a $49.0 million loan from CitiGroup Global Markets Realty
Corp., $4.0 million of which is restricted and can only be
used to fund customer related capital improvements made to the
NAP of the Americas in Miami. This loan is collateralized by a
first mortgage on the NAP of the Americas building and a
security interest in all the existing building improvements that
the Company has made to the building, certain of the
Company’s deposit accounts and any cash flows generated
from customers by virtue of their activity at the NAP of
13
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
the Americas building. The loan bears interest at a rate per
annum equal to the greater of 6.75% or LIBOR (5.38% at
September 30, 2006) plus 4.75%, and matures in February
2009. This mortgage loan includes numerous covenants imposing
significant financial and operating restrictions on the
Company’s business. See Note 7.
In connection with this financing, the Company issued to
Citigroup Global Markets Realty Corp., for no additional
consideration, warrants to purchase an aggregate of
500,000 shares of the Company’s common stock. Those
warrants expire on December 31, 2011 and are divided into
four equal tranches that differ only in respect of the
applicable exercise prices, which are $6.80, $7.40, $8.10 and
$8.70, respectively. The warrants were valued by an independent
appraiser at approximately $2,200,000, which was recorded as a
discount to the debt principal. Proceeds from the issuance of
the mortgage note payable and the warrants were allocated based
on their relative fair values. The costs related to the issuance
of the mortgage loan were deferred and amounted to approximately
$1,570,000. The discount to the debt principal and the debt
issuance costs are being amortized to interest expense using the
effective interest method over the term of the mortgage loan.
The effective interest rate of the mortgage loan is 8.6%.
Restricted cash consists of:
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
March 31, | |
|
|
2006 | |
|
2006 | |
|
|
| |
|
| |
Capital improvements reserve
|
|
$ |
1,817,829 |
|
|
$ |
2,217,044 |
|
Security deposits under operating leases
|
|
|
1,640,038 |
|
|
|
1,597,798 |
|
Escrow deposits under mortgage loan agreement
|
|
|
2,156,731 |
|
|
|
474,073 |
|
|
|
|
|
|
|
|
|
|
|
5,614,598 |
|
|
|
4,288,915 |
|
Less: current portion
|
|
|
(2,156,731 |
) |
|
|
(474,073 |
) |
|
|
|
|
|
|
|
|
|
$ |
3,457,867 |
|
|
$ |
3,814,842 |
|
|
|
|
|
|
|
|
On June 14, 2004, the Company privately placed
$86.25 million in aggregate principal amount of the Senior
Convertible Notes to qualified institutional buyers. The Senior
Convertible Notes bear interest at a rate of 9% per annum,
payable semiannually, on each December 15 and June 15, and
are convertible at the option of the holders, into shares of the
Company’s common stock at a conversion price of
$12.50 per share. The Company used the net proceeds from
this offering to pay notes payable amounting to approximately
$36.5 million and convertible debt amounting to
approximately $9.8 million. In conjunction with the
offering, the Company incurred $6,635,912 in debt issuance
costs, including $1,380,000 in estimated fair value of warrants
issued to the placement agent to
purchase 181,579 shares of the Company’s common
stock at $9.50 per share. The effective interest rate of
this debt is 23.4%.
The Senior Convertible Notes rank pari passu with all existing
and future unsecured and unsubordinated indebtedness, senior in
right of payment to all existing and future subordinated
indebtedness, and rank junior to any future secured
indebtedness. If there is a change in control of the Company,
the holders have the right to require the Company to repurchase
their notes at a price equal to 100% of the principal amount,
plus accrued and unpaid interest (the “Repurchase
Price”). If a change in control occurs and at least 50% of
the consideration for the Company’s common stock consists
of cash, the holders of the Senior Convertible Notes may elect
to receive the greater of the Repurchase Price or the Total
Redemption Amount. The Total Redemption Amount will be
equal to the product of (x) the
14
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
average closing prices of the Company’s common stock for
the five trading days prior to announcement of the change in
control and (y) the quotient of $1,000 divided by the
applicable conversion price of the Senior Convertible Notes,
plus a make whole premium of $90 per $1,000 of principal if
the change in control takes place before June 15, 2008
reducing to $45 per $1,000 of principal if the change in
control takes place between June 16, 2008 and
December 15, 2008. If the Company issues a cash dividend on
its common stock, it will pay contingent interest to the holders
of the Senior Convertible Notes equal to the product of the per
share cash dividend and the number of shares of common stock
issuable upon conversion of each holder’s note.
The Company may redeem some or all of the Senior Convertible
Notes for cash at any time on or after June 15, 2007, if
the closing price of the Company’s common shares has
exceeded 200% of the applicable conversion price for at least 20
trading days within a period of 30 consecutive trading days
ending on the trading day before the date it mails the
redemption notice. If the Company redeems the notes during the
twelve month period commencing on June 15, 2007 or 2008,
the redemption price equals 104.5% or 102.25%, respectively, of
their principal amount, plus accrued and unpaid interest, if
any, to the redemption date, plus an amount equal to 50% of all
remaining scheduled interest payments on the notes from, and
including, the redemption date through the maturity date.
The Senior Convertible Notes contain an early conversion
incentive for holders to convert their notes into shares of
common stock before June 15, 2007. If exercised, the
holders will receive the number of common shares to which they
are entitled and an early conversion incentive payment in cash
or common stock, at the Company’s option, equal to one-half
the aggregate amount of interest payable through June 15,
2007.
The conversion option, including the early conversion incentive,
the equity participation feature and the takeover make whole
premium due upon a change of control embedded in the Senior
Convertible Notes were determined to be derivative instruments
to be considered separately from the debt and accounted for
separately. As a result of the bifurcation of the embedded
derivatives, the carrying value of the Senior Convertible Notes
at issuance was approximately $50.8 million. The Company is
accreting the difference between the face value of the Senior
Convertible Notes ($86.25 million) and the carrying value
to interest expense under the effective interest method on a
monthly basis over the life of the Senior Convertible Notes.
The Senior Convertible Notes contain three embedded derivatives
that require separate valuation from the Senior Convertible
Notes: a conversion option that includes an early conversion
incentive, an equity participation feature and a takeover make
whole premium due upon a change in control. The Company has
estimated to date that the embedded derivatives related to the
equity participation rights and the takeover make whole premium
do not have significant value.
The Company estimated that the embedded derivatives had a
March 31, 2006 estimated fair value of $24,960,750 and a
September 30, 2006 estimated fair value of $12,742,575
resulting from the conversion option. The change of $12,218,175
in the estimated fair value of the embedded derivatives was
recognized as other income in the six months ended
September 30, 2006. For the three months ended
September 30, 2006, the change in the estimated fair value
of the embedded derivatives was $3,298,200 and was included
within other expenses.
15
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
In connection with the purchase of TECOTA, the Company issued
Senior Secured Notes in an aggregate principal amount equal to
$30.0 million and sold 306,044 shares of its common
stock valued at $2.0 million to the Falcon Investors. The
Senior Secured Notes are collateralized by substantially all of
the Company’s assets other than the TECOTA building, bear
cash interest at 9.875% per annum and “payment in
kind” interest at 3.625% per annum subject to
adjustment upon satisfaction of specified financial tests, and
mature in March 2009. The Senior Secured Notes include numerous
covenants imposing significant financial and operating
restrictions on the Company’s business.
The Company contemporaneously issued to the Falcon Investors,
for no additional consideration, warrants to purchase an
aggregate of 1.5 million shares of the Company’s
common stock. Those warrants expire on December 30, 2011
and are divided into four equal tranches that differ only in
respect of the applicable exercise prices, which are $6.90,
$7.50, $8.20 and $8.80, respectively. The warrants were valued
by a third party expert at approximately $6,600,000, which was
recorded as a discount to the debt principal. Proceeds from the
issuance of the senior secured notes and the warrants were
allocated based on their relative fair values. The costs related
to the issuance of the Senior Secured Notes were deferred and
amounted to approximately $1,813,000. The discount to the debt
principal and the debt issuance costs are being amortized to
interest expense using the effective interest rate method over
the term of the Senior Secured Notes. The effective interest
rate of these notes is 21.4%.
The Company’s new mortgage loan and Senior Secured Notes
include numerous covenants imposing significant financial and
operating restrictions on its business. The covenants place
restrictions on the Company’s ability to, among other
things:
|
|
|
|
• |
incur more debt; |
|
|
• |
pay dividends, redeem or repurchase its stock or make other
distributions; |
|
|
• |
make acquisitions or investments; |
|
|
• |
enter into transactions with affiliates; |
|
|
• |
merge or consolidate with others; |
|
|
• |
dispose of assets or use asset sale proceeds; |
|
|
• |
create liens on our assets; and |
|
|
• |
extend credit. |
Failure to comply with the obligations in the mortgage loan or
the Senior Secured Notes could result in an event of default
under the mortgage loan or the Senior Secured Notes, which, if
not cured or waived, could permit acceleration of the
indebtedness or other indebtedness which could have a material
adverse effect on the Company’s financial condition.
|
|
8. |
Series H Redeemable Convertible Preferred Stock |
In August 2006, the holder of all 294 shares of the
Company’s Series H Redeemable Preferred Stock
exercised its right to require the Company to redeem all of such
shares. Accordingly, the Company paid the Series H holders
$659,188, representing the aggregate liquidation value,
including accrued dividends of $159,188.
16
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
|
|
9. |
Changes in Stockholder’s Equity |
|
|
|
Exercise of employee stock options |
During the six months ended September 30, 2006, the Company
issued 35,072 shares of its common stock in conjunction
with the exercise of options. The exercise price of the options
ranged from $2.70 to $6.80.
In April 2006, the Company issued 12,500 warrants with an
estimated fair value of $92,988 in connection with consulting
services.
|
|
|
Conversion of preferred stock |
During the six months ended September 30, 2006, 16 shares
of the Series I preferred stock were converted to 53,637
shares of common stock.
|
|
|
Loans issued to employees |
In connection with the acquisition of Dedigate, the Company
extended loans to certain Dedigate employees to exercise their
Dedigate stock options. The Dedigate shares received upon
exercise of those options were then exchanged for shares of the
Company’s common stock under the terms of the acquisition.
The loans are evidenced by full recourse promissory notes, bear
interest at 2.50% per annum, mature in August 2007 and are
collateralized by the shares of stock acquired with the loan
proceeds. The outstanding principal balance on such loans, net
of repayments, is reflected as a reduction to stockholders’
equity in the accompanying condensed consolidated balance sheet
at September 30, 2006.
|
|
10. |
Related Party Transactions |
Due to the nature of the following relationships, the terms of
the respective agreements may not be the same as those that
would result from transactions among wholly unrelated parties.
Following is a summary of transactions for the six and three
months ended September 30, 2006 and 2005 and balances with
related parties included in the accompanying condensed
consolidated balance sheet as of September 30, 2006 and
March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended | |
|
For the Three Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Services purchased from Fusion Telecommunications International,
Inc.
|
|
$ |
463,938 |
|
|
$ |
612,193 |
|
|
$ |
8,739 |
|
|
$ |
326,536 |
|
Interest income from shareholder
|
|
|
14,136 |
|
|
|
14,251 |
|
|
|
6,417 |
|
|
|
7,219 |
|
Services provided to a related party
|
|
|
59,155 |
|
|
|
15,338 |
|
|
|
23,682 |
|
|
|
6,388 |
|
Services from directors
|
|
|
230,000 |
|
|
|
142,500 |
|
|
|
40,000 |
|
|
|
40,000 |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
March 31, | |
|
|
2006 | |
|
2006 | |
|
|
| |
|
| |
Other assets
|
|
$ |
413,042 |
|
|
$ |
452,444 |
|
Note receivable — related party
|
|
|
180,339 |
|
|
|
287,730 |
|
The Company has entered into consulting agreements with two
members of its board of directors and into an employment
agreement with another member. One consulting agreement provided
for an annual
17
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
compensation of $250,000 and expired in May 2005. This agreement
was renewed in November 2006, effective as of October 2006, for
annual compensation of $240,000, payable monthly. In addition,
the Company’s board of directors approved the issuance to
this director of 50,000 shares of nonvested stock vesting over a
period of one year. The other two agreements provide for annual
compensation aggregating $160,000.
The Company’s Chief Executive Officer has a minority
interest in Fusion Telecommunications International, Inc.
Data center revenues consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months | |
|
For the Three Months | |
|
|
Ended September 30, | |
|
Ended September 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Colocation
|
|
$ |
18,584,558 |
|
|
$ |
12,714,379 |
|
|
$ |
9,398,509 |
|
|
$ |
6,666,775 |
|
Managed and professional services
|
|
|
20,284,895 |
|
|
|
8,521,559 |
|
|
|
10,414,358 |
|
|
|
5,214,136 |
|
Exchange point services
|
|
|
4,062,068 |
|
|
|
2,743,580 |
|
|
|
2,149,323 |
|
|
|
1,427,487 |
|
Equipment resales
|
|
|
2,605,248 |
|
|
|
646,493 |
|
|
|
2,171,913 |
|
|
|
646,493 |
|
Other
|
|
|
50,715 |
|
|
|
6,189 |
|
|
|
50,000 |
|
|
|
6,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,587,484 |
|
|
$ |
24,632,200 |
|
|
$ |
24,184,103 |
|
|
$ |
13,961,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total arrangement consideration for managed web hosting
solutions may include the procurement of equipment. Amounts
allocated to equipment sold under these arrangements and
included in managed and professional services were $792,270 and
$509,703 for the six and three months ended September 30,
2006 and $119,653 for both the six and three months ended
September 30, 2005. Sales of managed web hosting solutions
commenced in August 2005.
|
|
12. |
Information About the Company’s Operating Segments |
As of March 31, 2006 and September 30, 2006, 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. This segment also
provides NAP development and technology infrastructure build out
services. All other real estate activities are included in real
estate services. The real estate segment provided construction
and property management services. 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 segments’ net operating results.
18
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
The following presents information about reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Center | |
|
Real Estate | |
|
|
For the Six Months Ended September 30, |
|
Operations | |
|
Services | |
|
Total | |
|
|
| |
|
| |
|
| |
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
45,587,484 |
|
|
$ |
— |
|
|
$ |
45,587,484 |
|
Income from operations
|
|
|
809,591 |
|
|
|
— |
|
|
|
809,591 |
|
Net income
|
|
|
85,457 |
|
|
|
— |
|
|
|
85,457 |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
24,632,200 |
|
|
$ |
— |
|
|
$ |
24,632,200 |
|
Income (loss) from operations
|
|
|
(6,512,225 |
) |
|
|
38,736 |
|
|
|
(6,473,489 |
) |
Net income (loss)
|
|
|
(7,502,849 |
) |
|
|
37,726 |
|
|
|
(7,465,123 |
) |
Assets as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
$ |
201,274,083 |
|
|
$ |
— |
|
|
$ |
201,274,083 |
|
|
March 31, 2006
|
|
|
204,716,451 |
|
|
|
— |
|
|
|
204,716,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Center | |
|
Real Estate | |
|
|
For the Three Months Ended September 30, |
|
Operations | |
|
Services | |
|
Total | |
|
|
| |
|
| |
|
| |
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
24,184,103 |
|
|
$ |
— |
|
|
$ |
24,184,103 |
|
Income from operations
|
|
|
483,243 |
|
|
|
— |
|
|
|
483,243 |
|
Net income (loss)
|
|
|
(9,443,423 |
) |
|
|
— |
|
|
|
(9,443,423 |
) |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
13,961,080 |
|
|
$ |
— |
|
|
$ |
13,961,080 |
|
Income (loss) from operations
|
|
|
(2,358,619 |
) |
|
|
29,840 |
|
|
|
(2,328,779 |
) |
Net income
|
|
|
2,637,322 |
|
|
|
28,830 |
|
|
|
2,666,152 |
|
The following is a reconciliation of total segment income (loss)
from operations to loss before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended | |
|
For the Three Months Ended | |
|
|
September 30, | |
|
September 30, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Total segment income (loss) from operations
|
|
$ |
809,591 |
|
|
$ |
(6,473,489 |
) |
|
$ |
483,243 |
|
|
$ |
(2,328,779 |
) |
Change in fair value of derivatives embedded within convertible
debt
|
|
|
12,218,175 |
|
|
|
9,977,675 |
|
|
|
(3,298,200 |
) |
|
|
10,441,700 |
|
Interest expense
|
|
|
(13,489,290 |
) |
|
|
(12,301,995 |
) |
|
|
(6,871,705 |
) |
|
|
(6,305,142 |
) |
Interest income
|
|
|
581,594 |
|
|
|
899,434 |
|
|
|
278,513 |
|
|
|
439,261 |
|
Gain on sale of asset
|
|
|
— |
|
|
|
499,388 |
|
|
|
— |
|
|
|
499,388 |
|
Other, net
|
|
|
(34,613 |
) |
|
|
(66,136 |
) |
|
|
(35,274 |
) |
|
|
(80,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$ |
85,457 |
|
|
$ |
(7,465,123 |
) |
|
$ |
(9,443,423 |
) |
|
$ |
2,666,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
(Unaudited)
|
|
13. |
Supplemental Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
7,946,602 |
|
|
$ |
6,796,947 |
|
Non-cash operating, investing and financing activities:
|
|
|
|
|
|
|
|
|
Assets acquired under capital leases
|
|
|
955,826 |
|
|
|
528,313 |
|
Non-cash preferred dividends
|
|
|
325,800 |
|
|
|
372,489 |
|
Warrants issued for services
|
|
|
92,988 |
|
|
|
25,056 |
|
Net assets acquired in exchange for common stock
|
|
|
— |
|
|
|
10,755,200 |
|
Conversion of preferred stock to equity
|
|
|
2,279 |
|
|
|
— |
|
Stock tendered in payment of services
|
|
|
64,570 |
|
|
|
— |
|
Expiration of warrants
|
|
|
397,950 |
|
|
|
— |
|
20
|
|
Item 2. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations. |
This report contains “forward-looking statements”
within the meaning of the Private Securities Litigation Reform
Act of 1995 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. All statements other than statements
of historical facts, including, among others, statements
regarding our future financial position, business strategy,
projected levels of growth, projected costs and projected
financing needs, are forward-looking statements. Our actual
results could differ materially from those anticipated in such
forward-looking statements as a result of several important
factors including, without limitation, a history of losses,
competitive factors, uncertainties inherent in government
contracting, concentration of business with a small number of
clients, the ability to service debt, substantial leverage,
material weaknesses in our internal controls and our disclosure
controls, energy costs, the interest rate environment, one-time
events and other factors more fully described in “Other
Factors Affecting Operating Results” under “Liquidity
and Capital Resources” below and elsewhere in this report.
The forward-looking statements made in this report relate only
to events as of the date on which the statements are made.
Because forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or
quantified, you should not rely upon forward-looking statements
as predictions of future events. Except as required by
applicable law, including the securities laws of the United
States, and the rules and regulations of the Securities and
Exchange Commission, we do not plan and assume no obligation to
publicly update or revise any forward-looking statements
contained herein after the date of this report, whether as a
result of any new information, future events or otherwise.
Overview
We operate Internet exchange points from which we provide
colocation, interconnection and managed services to the
government and commercial sectors. We deliver our portfolio of
services from seven locations in the U.S., Europe and Asia. Our
flagship facility, the NAP of the Americas, located in Miami,
Florida, is the model for our carrier-neutral Internet exchanges
and is designed and built to disaster-resistant standards with
maximum security to house mission-critical infrastructure. Our
secure presence in Miami, a key gateway to North American, Latin
American and European telecommunications networks, has enabled
us to establish customer relationships with U.S. federal
government agencies, including the Department of State and the
Department of Defense. We have been awarded sole-source
contracts for which only one source of the required services is
believed to be available, with the U.S. federal government,
which we believe will allow us to both further penetrate the
government sector and continue to attract federal information
technology providers. As a result of our primarily fixed cost
operating model, we believe that incremental customers and
revenues will result in improved operating margins and increased
profitability.
We generate revenue by providing high quality Internet
infrastructure on a platform designed to reduce network
connectivity costs. We provide our customers with the following:
|
|
|
|
• |
space to house equipment and network facilities in immediate
proximity to Internet and communications networks; |
|
|
• |
the platform to exchange telecommunications and Internet traffic
and access to network-based services; and |
|
|
• |
related professional and managed services such as our network
operations center, outsourced storage, dedicated hosting and
remote monitoring. |
We differentiate ourselves from our competitors through the
security and strategic location of our facilities and our
carrier-neutral model, which provides access to a critical mass
of Internet and telecommunications connectivity.
21
The immediate proximity of our facilities to major fiber routes
with access to North America, Latin America and Europe has
attracted numerous telecommunications carriers, such as
AT&T, Global Crossing, Latin America Nautilus (a business
unit of Telecom Italia), Progress Telecom, Sprint Communications
and T-Systems (a business unit of Deutsche Telecom), to colocate
their equipment with us in order to better service their
customers. This network density, which allows our customers to
reduce their connectivity costs, combined with the security of
our facilities, has attracted government sector customers,
including Blackbird Technologies, the City of Coral Gables,
Florida, Miami-Dade County, Florida, SRA International and the
United States Southern Command. Additionally, we have had
success in attracting content providers and enterprises such as
Citrix, CBS Sportsline, Google, IDT, Internap, Miniclip, NTT/
Verio, VeriSign, Bacardi USA, Corporación Andina de
Fomento, Florida International University, Intrado, Jackson
Memorial Hospital of Miami and Steiner Leisure.
Results of Operations
Results of Operations for the Six Months Ended
September 30, 2006 as Compared to the Six Months Ended
September 30, 2005.
Revenue. The following charts provide certain information
with respect to our revenues:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months | |
|
|
Ended September 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
U.S. Operations
|
|
|
85 |
% |
|
|
92 |
% |
Outside U.S.
|
|
|
15 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Data center revenues consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended September 30, | |
|
|
| |
|
|
2006 | |
|
|
|
2005 | |
|
|
|
|
| |
|
|
|
| |
|
|
Colocation
|
|
$ |
18,584,558 |
|
|
|
41 |
% |
|
$ |
12,714,379 |
|
|
|
52 |
% |
Managed and professional services
|
|
|
20,284,895 |
|
|
|
44 |
% |
|
|
8,521,559 |
|
|
|
34 |
% |
Exchange point services
|
|
|
4,062,068 |
|
|
|
9 |
% |
|
|
2,743,580 |
|
|
|
11 |
% |
Equipment resales
|
|
|
2,605,248 |
|
|
|
6 |
% |
|
|
646,493 |
|
|
|
3 |
% |
Other
|
|
|
50,715 |
|
|
|
0 |
% |
|
|
6,189 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,587,484 |
|
|
|
100 |
% |
|
$ |
24,632,200 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in data center revenues is mainly due to both an
increase in our deployed customer base and an expansion of
services to existing customers. Our deployed customer base
increased from 359 customers as of September 30, 2005 to
542 customers as of September 30, 2006. Data center
revenues consist of:
|
|
|
|
• |
colocation services, such as licensing of space and provisioning
of power; |
|
|
• |
exchange point services, such as peering and cross connects; and |
|
|
• |
managed and professional services, such as network management,
managed web hosting, outsourced network operating center
services, network monitoring, procurement and installation of
equipment, procurement of connectivity, managed router services,
secure information services, technical support and consulting. |
Our utilization of total net colocation space increased to 15.7%
as of September 30, 2006 from 10.1% as of
September 30, 2005. Our utilization of total net colocation
space represents the percentage of space billed versus total
space available for customers.
The increase in managed and professional services is mainly due
to increases of approximately $2.9 million in additional
managed services provided under government contracts,
$3.8 million in managed
22
web hosting and $2.0 million in equipment resales. We also
earned $3.3 million in professional services related to the
design and development of NAPs in the Canary Islands and the
Dominican Republic.
Equipment resales may fluctuate quarter over quarter based on
customer demand.
The increase in exchange point services is mainly due to an
increase in cross-connects billed to customers. Cross-connects
billed to customers increased to 4,865 as of September 30,
2006 from 3,182 as of September 30, 2005.
We anticipate an increase in revenue from colocation, exchange
point and managed services as we add more customers to our
network of NAPs, sell additional services to existing customers
and introduce new products and services. We anticipate that the
percentage of revenue derived from public sector customers will
fluctuate depending on the timing of exercise of expansion
options under existing contracts and the rate at which we sell
services to the public sector. We anticipate that public sector
revenues will continue to represent a significant portion of our
revenues for the foreseeable future.
Data Center Operations Expenses. Data center expenses
increased $10.8 million to $26.5 million for the six
months ended September 30, 2006 from $15.7 million for
the six months ended September 30, 2005. Data center
operations expenses consist mainly of operations personnel,
procurement of connectivity and equipment, technical and
colocation space rental costs, electricity, chilled water,
insurance, property taxes, and security services. The increase
is mainly due to increases of $2.2 million in managed
services costs, $1.8 million in cost of equipment resales,
$1.8 million in personnel costs, and $1.4 million in
electricity and chilled water costs. As a result of an increase
in colocation space utilization and customer base, we also
experienced increases of $927,000 in the amortization of
customer installation costs, $578,000 in facility costs,
including security, insurance, property taxes and maintenance
costs, and $532,000 in hardware maintenance and support.
The increase in managed service costs includes $1.0 million
in NAP development costs. The remainder of the increase is
primarily the result of an increase in orders from both existing
and new customers as reflected by the growth in our customer
count and utilization of space as discussed above. The increase
in personnel costs is mainly due to an increase in operations
and engineering staff levels. Our staff levels increased to 181
employees as of September 30, 2006 from 158 as of
September 30, 2005. The increase in the number of employees
is mainly attributable to the hiring of personnel to work under
existing and anticipated customer contracts and the expansion of
operations in Herndon, Virginia and Santa Clara, California. The
increase in power and chilled water costs is mainly due an
increase in power utilization and chilled water consumption as a
result of customer and colocation space growth, as well as an
increase in the cost of power.
General and Administrative Expenses. General and
administrative expenses were $7.7 million for both the six
months ended September 30, 2006 and 2005. General and
administrative expenses consist primarily of payroll and related
expenses, professional service fees, travel, rent, and other
general corporate expenses. We expect our general and
administrative expenses to remain at approximately
$4.0 million per quarter.
Sales and Marketing Expenses. Sales and marketing
expenses increased $1.5 million to $5.3 million for
the six months ended September 30, 2006 from
$3.8 million for the six months ended September 30,
2005. The most significant components of sales and marketing
expenses are payroll, sales commissions and promotional
activities. Payroll and sales commissions increased by
$1.5 million mainly due an increase in staff levels and
sales bookings. Our sales and marketing staff levels increased
to 54 employees as of September 30, 2006 from 42 as of
September 30, 2005. We anticipate that our sales and
marketing expenses will range between $2.0 million and
$3.0 million, on a quarterly basis, depending on the
variable nature of sales commissions and the timing of our
marketing expenses.
Depreciation and Amortization Expenses. Depreciation and
amortization expense increased $1.5 million to
$5.4 million for the six months ended September 30,
2006 from $3.9 million for the six months ended
September 30, 2005. The increase is the result of an
increase in capital expenditures necessary to support our
business growth.
23
Change in Fair Value of Derivatives Embedded within
Convertible Debt. Our 9% senior convertible notes due
June 15, 2009 contain embedded derivatives that require
separate valuation from the senior convertible notes. We
recognize these embedded derivatives as a liability in our
balance sheet, measure them at their estimated fair value and
recognize changes in the estimated fair value of the derivative
instruments in earnings. We estimated that the embedded
derivatives had a March 31, 2006 estimated fair value of
$25.0 million and a September 30, 2006 estimated fair
value of $12.7 million. The embedded derivatives derive
their value primarily based on changes in the price and
volatility of our common stock. The estimated fair value of the
embedded derivatives increases as the price of our common stock
increases and decreases as the price of our common stock
decreases. The closing price of our common stock decreased to
$5.55 on September 30, 2006 from $8.50 as of March 31,
2006. As a result, during the six months ended
September 30, 2006, we recognized a gain of
$12.2 million from the change in estimated fair value of
the embedded derivatives. For the six months ended
September 30, 2005, we recognized a gain of
$10.0 million due to the change in value of our embedded
derivatives.
Over the life of the senior convertible notes, given the
historical volatility of our common stock, changes in the
estimated fair value of the embedded derivatives are expected to
have a material effect on our results of operations. See
“Quantitative and Qualitative Disclosures about Market
Risk.” Furthermore, we have estimated the fair value of
these embedded derivatives using a theoretical model based on
the historical volatility of our common stock of (80.3% as of
September 30, 2006) over the past twelve months. If a
market develops for our senior convertible notes or we are able
to find comparable market data, we may be able to use future
market data to adjust our historical volatility by other factors
such as trading volume. As a result, the estimated fair value of
these embedded derivatives could be significantly different. Any
such adjustment would be made prospectively.
Interest Expense. Interest expense increased
$1.2 million to $13.5 million for the six months ended
September 30, 2006 from $12.3 million for the six
months ended September 30, 2005. This increase is due to
the amortization of the discount on the Senior Convertible
Notes. We record amortization using the effective interest
method and accordingly the interest expense associated with
these Senior Notes will increase as the carrying value increases.
Interest Income. Interest income decreased $317,000 to
$582,000 for the six months ended September 30, 2006 from
approximately $899,000 for the six months ended
September 30, 2005. This decrease was due to a decrease in
cash balances.
Net Income (Loss). Net income (loss) for our
reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Data center operations
|
|
$ |
85,457 |
|
|
$ |
(7,502,849 |
) |
Real estate services
|
|
|
— |
|
|
|
37,726 |
|
|
|
|
|
|
|
|
|
|
$ |
85,457 |
|
|
$ |
(7,465,123 |
) |
|
|
|
|
|
|
|
The fluctuation is net income (loss) is primarily due the
change in the fair value of the derivatives embedded with our
senior convertible notes. Excluding the impact of the change in
fair value of the derivatives, we had a net loss in both periods
and that is primarily the result of insufficient revenues to
cover our operating and interest expenses. We will generate net
losses until we reach required levels of monthly revenues.
24
Results of Operations
Results of Operations for the Three Months Ended
September 30, 2006 as Compared to the Three Months Ended
September 30, 2005.
Revenue. The following charts provide certain information
with respect to our revenues:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months | |
|
|
Ended September 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
U.S. Operations
|
|
|
85 |
% |
|
|
88 |
% |
Outside U.S.
|
|
|
15 |
% |
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Data center revenues consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, | |
|
|
| |
|
|
2006 | |
|
|
|
2005 | |
|
|
|
|
| |
|
|
|
| |
|
|
Colocation
|
|
$ |
9,398,509 |
|
|
|
39 |
% |
|
$ |
6,666,775 |
|
|
|
48 |
% |
Managed and professional services
|
|
|
10,414,358 |
|
|
|
43 |
% |
|
|
5,214,136 |
|
|
|
37 |
% |
Exchange point services
|
|
|
2,149,323 |
|
|
|
9 |
% |
|
|
1,427,487 |
|
|
|
10 |
% |
Equipment resales
|
|
|
2,171,913 |
|
|
|
9 |
% |
|
|
646,493 |
|
|
|
5 |
% |
Other
|
|
|
50,000 |
|
|
|
0 |
% |
|
|
6,189 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,184,103 |
|
|
|
100 |
% |
|
$ |
13,961,080 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in data center revenues is mainly due to both an
increase in our deployed customer base and an expansion of
services to existing customers. Our total deployed customer base
increased from 359 customers as of September 30, 2005 to
542 customers as of September 30, 2006. Data center
revenues consist of:
|
|
|
|
• |
colocation services, such as licensing of space and provisioning
of power; |
|
|
• |
exchange point services, such as peering and cross connects; and |
|
|
• |
managed and professional services, such as network management,
managed web hosting, outsourced network operating center
services, network monitoring, procurement and installation of
equipment, procurement of connectivity, managed router services,
secure information services, technical support and consulting. |
Our utilization of total net colocation space increased to 15.7%
as of September 30, 2006 from 10.1% as of
September 30, 2005. Our utilization of total net colocation
space represents the percentage of space billed versus total
space available for customers.
The increase in managed and professional services is mainly due
to increases of approximately $1.5 million in managed web
hosting, and $1.6 million in additional managed services
provided under government contracts. We also earned
$1.1 million in the three months ended September 30,
2006 for professional services related to the design and
development of NAPs in the Canary Islands and the Dominican
Republic. The remainder of the increase is primarily the result
of an increase in orders from both existing and new customers as
reflected by the growth in our customer count and utilization of
space as discussed above.
Equipment resales may fluctuate quarter over quarter based on
customer demand.
The increase in exchange point services is mainly due to an
increase in cross-connects billed to customers. Cross-connects
billed to customers increased to 4,865 as of September 30,
2006 from 3,182 as of September 30, 2005.
We anticipate an increase in revenue from colocation, exchange
point and managed services as we add more customers to our
network of NAPs, sell additional services to existing customers
and introduce
25
new products and services. We anticipate that the percentage of
revenue derived from public sector customers will fluctuate
depending on the timing of exercise of expansion options under
existing contracts and the rate at which we sell services to the
public sector. We anticipate that public sector revenues will
continue to represent a significant portion of our revenues for
the foreseeable future.
Data Center Operations Expenses. Data center expenses
increased $6.1 million to $14.8 million for the three
months ended September 30, 2006 from $8.7 million for
the three months ended September 30, 2005. Data center
operations expenses consist mainly of operations personnel,
procurement of connectivity and equipment, technical and
colocation space rental costs, electricity, chilled water,
insurance, property taxes, and security services. The increase
is mainly due to increases of $1.2 million in managed
services costs, $1.3 million in cost of equipment resales,
$769,000 in personnel costs, and $746,000 in electricity and
chilled water costs. As a result of an increase in colocation
space utilization and customer base, we also experience
increases of $458,000 in hardware maintenance and support and
$491,000 in the amortization of customer installation costs.
The increase in managed service costs includes $545,000 in NAP
development costs. The remainder of the increase is primarily
the result of an increase in orders from both existing and new
customers as reflected by the growth in our customer count and
utilization of space as discussed above. The increase in
personnel costs is mainly due to an increase in operations and
engineering staff levels. Our staff levels increased to 181
employees as of September 30, 2006 from 158 as of
September 30, 2005. The increase in the number of employees
is mainly attributable to the hiring of personnel to work under
existing and anticipated customer contracts and the expansion of
operations in Herndon, Virginia and Santa Clara, California. The
increase in power and chilled water costs is mainly due an
increase in power utilization and chilled water consumption as a
result of customer and colocation space growth, as well as an
increase in the cost of power.
General and Administrative Expenses. General and
administrative expenses increased approximately $92,000 to
$3.6 million for the three months ended September 30,
2006 from $3.5 million for the three months ended
September 30, 2005. General and administrative expenses
consist primarily of payroll and related expenses, professional
service fees, travel, rent, and other general corporate
expenses. We expect our general and administrative expenses to
remain at approximately $4.0 million per quarter.
Sales and Marketing Expenses. Sales and marketing
expenses increased $616,000 to $2.6 million for the three
months ended September 30, 2006 from $2.0 million for
the three months ended September 30, 2005. The most
significant components of sales and marketing are payroll, sales
commissions and promotional activities. Payroll and sales
commissions increased by $793,000 mainly due an increase in
staff levels and sales bookings. Our sales and marketing staff
levels increased to 54 employees as of September 30, 2006
from 42 as of September 30, 2005. We anticipate that our
sales and marketing expenses will range between
$2.0 million and $3.0 million, on a quarterly basis,
depending on the variable nature of sales commissions and the
timing of our marketing expenses.
Depreciation and Amortization Expenses. Depreciation and
amortization expense increased $648,000 to $2.7 million for
the three months ended September 30, 2006 from
$2.0 million for the three months ended September 30,
2005. The increase is the result of an increase in capital
expenditures necessary to support our business growth.
Change in Fair Value of Derivatives Embedded within
Convertible Debt. Our 9% senior convertible notes due
June 15, 2009 contain embedded derivatives that require
separate valuation from the senior convertible notes. We
recognize these embedded derivatives as a liability in our
balance sheet, measure them at their estimated fair value and
recognize changes in the estimated fair value of the derivative
instruments in earnings. We estimated that the embedded
derivatives had a June 30, 2006 estimated fair value of
$9.4 million and a September 30, 2006 estimated fair
value of $12.7 million. The embedded derivatives derive
their value primarily based on changes in the price and
volatility of our common stock. The estimated fair value of the
embedded derivatives increases as the price of our common stock
increases and decreases as the price of our common stock
decreases. The closing price of our common stock increased from
$3.60 on June 30, 2006 to $5.55 as of September 30,
2006. As a result, during the three months ended June 30,
2006, we recognized an expense of $3.3 million from the
change in estimated fair
26
value of the embedded derivatives. For the three months ended
September 30, 2005, we recognized a gain of
$10.4 million due to the change in value of our embedded
derivatives.
Over the life of the senior convertible notes, given the
historical volatility of our common stock, changes in the
estimated fair value of the embedded derivatives are expected to
have a material effect on our results of operations. See
“Quantitative and Qualitative Disclosures about Market
Risk.” Furthermore, we have estimated the fair value of
these embedded derivatives using a theoretical model based on
the historical volatility of our common stock of (80.3% as of
September 30, 2006) over the past twelve months. If a
market develops for our senior convertible notes or we are able
to find comparable market data, we may be able to use future
market data to adjust our historical volatility by other factors
such as trading volume. As a result, the estimated fair value of
these embedded derivatives could be significantly different. Any
such adjustment would be made prospectively.
Interest Expense. Interest expense increased $567,000 to
$6.9 million for the three months ended September 30,
2006 from $6.3 million for the three months ended
September 30, 2005. This increase is due to the
amortization discount on the Senior Convertible Notes. We record
amortization using the effective interest method and accordingly
the interest expense associated with these Senior Notes will
increase as the carrying value increases.
Interest Income. Interest income decreased $161,000 to
$279,000 for the three months ended September 30, 2006 from
approximately $439,000 for the three months ended
September 30, 2005. This decrease was due to a decrease in
cash balances.
Net Income (Loss). Net income (loss) for our
reportable segments was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended | |
|
|
September 30, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Data center operations
|
|
$ |
(9,443,423 |
) |
|
$ |
2,637,322 |
|
Real estate services
|
|
|
— |
|
|
|
28,830 |
|
|
|
|
|
|
|
|
|
|
$ |
(9,443,423 |
) |
|
$ |
2,666,152 |
|
|
|
|
|
|
|
|
The fluctuation is net income (loss) is primarily due the
change in the fair value of the derivatives embedded with our
senior convertible notes. Excluding the impact of the change in
fair value of the derivatives, we had a net loss in both periods
and that is primarily the result of insufficient revenues to
cover our operating and interest expenses. We will generate net
losses until we reach required levels of monthly revenues.
Liquidity and Capital Resources
We generated approximately $809,591 and $483,243 in income from
operations for the six and three months ended September 30,
2006, respectively. Cash used in operations for the six months
ended September 30, 2006 was approximately $91,000. Prior
to this, we incurred losses from operations in each quarter and
annual period dating back to our merger with AmTec, Inc.
As of September 30, 2006, our principal source of liquidity
was our $11.4 million in unrestricted cash and cash
equivalents and our $14.5 million in accounts receivable.
We also have $1.8 million in restricted cash to be used to
fund customer related capital improvements made to the NAP of
the Americas building in Miami. We anticipate that this cash,
coupled with our anticipated cash flows generated from
operations, including anticipated collections on our current
receivable balances, will be sufficient to meet our capital
expenditures, working capital, debt service and corporate
overhead requirements in connection with our currently
identified business objectives. Our projected revenues and cash
flows depend on several factors, some of which are beyond our
control, including the rate at which we provide services, the
timing of exercise of expansion options by customers under
existing contracts, the rate at which new services are
27
sold to the government sector and the commercial sector, the
ability to retain the customer base, the willingness and timing
of potential customers in 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.
As of September 30, 2006, our total liabilities were
approximately $187.0 million.
On December 31, 2004, we purchased the remaining 99.16%
equity interests of TECOTA that were not owned by us and TECOTA
became our wholly-owned subsidiary. TECOTA owns the building in
which the NAP of the Americas is housed. We refer to this
building as the NAP of the Americas building. In connection with
this purchase, we paid approximately $40.0 million for the
equity interests and repaid an approximately $35.0 million
mortgage to which the NAP of the Americas building was subject.
We financed the purchase and repayment of the mortgage from two
sources. We obtained a $49.0 million first mortgage loan
from Citigroup Global Markets Realty Corp., $4.0 million of
the proceeds of which are restricted and can only be used to
fund customer related improvements made to the NAP of the
Americas in Miami. Simultaneously, we issued senior secured
notes in an aggregate principal amount equal to
$30.0 million and sold 306,044 shares of our common
stock valued at $2.0 million to the Falcon Investors. The
$49.0 million loan by Citigroup is collateralized by a
first mortgage on the NAP of the Americas building and a
security interest in all then existing building improvements
that we have made to the building, certain of our deposit
accounts and any cash flows generated from customers by virtue
of their activity at the NAP of the Americas building. The
mortgage loan matures in February 2009 and bears interest at a
rate per annum equal to the greater of (a) 6.75% or
(b) LIBOR plus 4.75% (5.38% as of September 30, 2006).
In addition, if an event of default occurs under the mortgage
loan agreement, we must pay interest at a default rate equal to
5% per annum in excess of the rate otherwise applicable
under the mortgage loan agreement on any amount we owe to the
lenders but have not paid when due until that amount is paid in
full. The terms of the mortgage loan agreement require us to pay
annual rent of $6.9 million to TECOTA. The senior secured
notes are collateralized by substantially all of our assets
other than the NAP of the Americas building, including the
equity interests in our subsidiaries, bear cash interest at
9.875% per annum and “payment in kind” interest
at 3.625% per annum, and mature in March 2009. In the event
we achieve specified leverage ratios, the interest rate
applicable to the senior secured notes will be reduced to 12.5%
but will be payable in cash only. Overdue payments under the
senior secured notes bear interest at a default rate equal to
2% per annum in excess of the rate of interest then borne
by the senior secured notes. Our obligations under the senior
secured notes are guaranteed by substantially all of our
subsidiaries.
We may redeem some or all of the senior secured notes for cash
at any time. If we redeem the notes before December 31,
2006 or during the six month periods commencing on
December 31, 2006, June 30, 2007, or December 31,
2007, the redemption price equals 115.0%, 107.5%, 105.0%, and
102.3%, respectively, of their principal amount, plus accrued
and unpaid interest, if any, to the redemption date. After
June 30, 2008, the redemption price equals 100% of their
principal amounts. Also, if there is a change in control, the
holders of these notes will have the right to require us to
repurchase their notes at a price equal to 100% of the principal
amount, plus accrued and unpaid interest.
Our mortgage loan and our senior secured notes include numerous
covenants imposing significant financial and operating
restrictions on our business. The covenants place restrictions
on our ability to, among other things:
|
|
|
|
• |
incur more debt; |
|
|
• |
pay dividends, redeem or repurchase our stock or make other
distributions; |
|
|
• |
make acquisitions or investments; |
|
|
• |
enter into transactions with affiliates; |
|
|
• |
merge or consolidate with others; |
28
|
|
|
|
• |
dispose of assets or use asset sale proceeds; |
|
|
• |
create liens on our assets; and |
|
|
• |
extend credit. |
Also, a change in control without the prior consent of the
lenders could allow the lenders to demand repayment of the loan.
Our ability to comply with these and other provisions of the
mortgage loan and the senior secured notes can be affected by
events beyond our control. Our failure to comply with the
obligations in the mortgage loan and the senior secured notes
could result in an event of default under the mortgage loan and
the senior secured notes, which, if not cured or waived, could
permit acceleration of the indebtedness or other indebtedness
which could have a material adverse effect on us.
In June 2004, we privately placed $86.25 million in
aggregate principal amount of 9% senior convertible notes
due June 15, 2009 to qualified institutional buyers. The
notes bear interest at a rate of 9% per annum, payable
semi-annually, on each December 15 and June 15 and are
convertible at the option of the holders at $12.50 per
share. We utilized net proceeds of $81.0 million to pay
approximately $46.3 million of outstanding loans and
convertible debt. The balance of the proceeds is being used for
acquisitions and for general corporate purposes, including
working capital and capital expenditures. The notes rank pari
passu with all existing and future unsecured and unsubordinated
indebtedness, senior in right of payment to all existing and
future subordinated indebtedness, and rank junior to any future
secured indebtedness.
If there is a change in control, the holders of the
9% senior convertible notes have the right to require us to
repurchase their notes at a price equal to 100% of the principal
amount, plus accrued and unpaid interest. If a change of control
occurs and at least 50% of the consideration for our common
stock consists of cash, the holders of the 9% senior
convertible notes may elect to receive the greater of the
repurchase price described above or the total redemption amount.
The total redemption amount will be equal to the product of
(x) the average closing prices of our common stock for the
five trading days prior to the announcement of the change of
control and (y) the quotient of $1,000 divided by the
applicable conversion price of the 9% senior convertible
notes, plus a make-whole premium of $90 per $1,000 of
principal if the change of control takes place before
December 15, 2006, reducing to $45 per $1,000 of
principal if the change of control takes place between
June 16, 2008 and December 15, 2008. If we issue a
cash dividend on our common stock, we will pay contingent
interest to the holders equal to the product of the per share
cash dividend and the number of shares of common stock issuable
upon conversion of each holder’s note.
We may redeem some or all of the 9% senior convertible
notes for cash at any time on or after June 15, 2007 if the
closing price of our common shares has exceeded 200% of the
applicable conversion price for at least 20 trading days within
a period of 30 consecutive trading days ending on the trading
day before the date we mail the redemption notice. If we redeem
the 9% senior convertible notes during the twelve month
period commencing on June 15, 2007 or 2008, the redemption
price equals 104.5% or 102.25%, respectively, of their principal
amount, plus accrued and unpaid interest, if any, to the
redemption date, plus an amount equal to 50% of all remaining
scheduled interest payments on the 9% senior convertible
notes from, and including, the redemption date through the
maturity date.
The 9% senior convertible notes contain an early conversion
incentive for holders to convert their notes into shares of
common stock before June 15, 2007. If exercised, the
holders will receive the number of shares of our common stock to
which they are entitled and an early conversion incentive
payment in cash or stock, at our option, equal to one-half the
aggregate amount of interest payable through July 15, 2007.
Sources and Uses of Cash
Cash used in operations for the six months ended
September 30, 2006 and 2005 was approximately $91,000 and
$11.6 million, respectively. We used cash to primarily fund
our operations, including cash interest payments on our debt.
The decrease in cash used in operations is mainly due to a
$7.3 million
29
improvement to $810,000 in income from operations for the six
months ended September 30, 2006 from a $6.5 million
loss from operations for the six months ended September 30,
2005. Cash used in operations was also impacted by the timing of
customer collections and vendor payments.
Cash used in investing activities for the six months ended
September 30, 2006 was $7.4 million compared to cash
used in investing activities of $2.9 million for the six
months ended September 30, 2005, an increase of
$4.5 million. This increase is primarily due to the
payments made in connection with the purchase of property and
equipment for the six months ended September 30, 2006.
Cash used in financing activities for the six months ended
September 30, 2006 was $1.5 million compared to cash
used in financing activities of approximately $354,000 for the
quarter ended September 30, 2005, a decrease of
$1.1 million. This increase is primarily due to the
redemption of the Company’s Series H redeemable
preferred stock for approximately $659,000 in the six months
ended September 30, 2006. We also experienced in the same
period a $256,000 increase in payments under capital lease
obligations related to capital expenditures necessary to support
business growth.
Guarantees and Commitments
Terremark Worldwide, Inc. has guaranteed TECOTA’s
obligation, as borrower, to make payments of principal and
interest under the mortgage loan with Citigroup Global Markets
Realty Group to the extent any of the following events shall
occur:
|
|
|
|
• |
TECOTA files for bankruptcy or a petition in bankruptcy is filed
against TECOTA with TECOTA’s or Terremark’s consent; |
|
|
• |
Terremark pays a cash dividend or makes any other cash
distribution on its capital stock (except with respect to its
outstanding preferred stock); |
|
|
• |
Terremark makes any repayments of its outstanding debt other
than the scheduled payments provided in the terms of the debt; |
|
|
• |
Terremark pledges the collateral it has pledged to the lenders
or pledges any of its existing cash balances as of
December 31, 2004 as collateral for another loan; or |
|
|
• |
Terremark repurchases any of its common stock. |
In addition Terremark has agreed to assume liability for any
losses incurred by the lenders under the credit facility related
to or arising from:
|
|
|
|
• |
Any fraud, misappropriation or misapplication of funds; |
|
|
• |
any transfers of the collateral held by the lenders in violation
of the Citigroup credit agreement; |
|
|
• |
failure to maintain TECOTA as a “single purpose
entity;” |
|
|
• |
TECOTA obtaining additional financing in violation of the terms
of the Citigroup credit agreement; |
|
|
• |
intentional physical waste of TECOTA’s assets that have
been pledged to the lenders; |
|
|
• |
breach of any representation, warranty or covenant provided by
or applicable to TECOTA and Terremark which relates to
environmental liability; |
|
|
• |
improper application and use of security deposits received by
TECOTA from tenants; |
|
|
• |
forfeiture of the collateral pledged to the lenders as a result
of criminal activity by TECOTA; |
|
|
• |
attachment of liens on the collateral in violation of the terms
of the Citigroup credit agreement; |
|
|
• |
TECOTA’s contesting or interfering with any foreclosure
action or other action commenced by lenders to protect their
rights under the credit facility (except to the extent TECOTA is
successful in these efforts); |
|
|
• |
any costs incurred by the lenders to enforce their rights under
the credit facility; or |
30
|
|
|
|
• |
failure to pay assessments made against or to adequately insure
the assets pledged to the lenders. |
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 (principal and interest) for these
commitments, as well as the combined aggregate maturities and
interest for the following obligations as of September 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease | |
|
Operating | |
|
|
|
Mortgage | |
|
|
|
|
|
|
Obligations | |
|
Leases | |
|
Convertible Debt | |
|
Payable | |
|
Notes Payable | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
2007 (six months)
|
|
$ |
697,777 |
|
|
$ |
2,905,925 |
|
|
$ |
3,881,250 |
|
|
$ |
2,109,923 |
|
|
$ |
2,912,433 |
|
|
$ |
12,507,308 |
|
2008
|
|
|
1,037,621 |
|
|
|
4,655,067 |
|
|
|
7,762,500 |
|
|
|
4,219,846 |
|
|
|
4,275,269 |
|
|
|
21,950,303 |
|
2009
|
|
|
643,910 |
|
|
|
3,822,778 |
|
|
|
7,762,500 |
|
|
|
49,414,809 |
|
|
|
35,943,926 |
|
|
|
97,587,923 |
|
2010
|
|
|
331,042 |
|
|
|
3,779,541 |
|
|
|
90,131,250 |
|
|
|
— |
|
|
|
— |
|
|
|
94,241,833 |
|
2011
|
|
|
248,840 |
|
|
|
3,802,032 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,050,872 |
|
Thereafter
|
|
|
— |
|
|
|
33,309,488 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
33,309,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,959,190 |
|
|
$ |
52,274,831 |
|
|
$ |
109,537,500 |
|
|
$ |
55,744,578 |
|
|
$ |
43,131,628 |
|
|
$ |
263,647,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Standards
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 153, “Exchanges
of Nonmonetary Assets, and an Amendment of Accounting
Pronouncements Bulletin (“APB”) Opinion
No. 29”. SFAS No. 153 addresses the
measurement of exchanges of nonmonetary assets. It eliminates
the exception from fair value measurement for nonmonetary
exchanges of similar productive assets contained in APB Opinion
No. 29 and replaces it with an exception for exchanges that
do not have commercial substance. SFAS No. 153
specifies that a nonmonetary exchange has commercial substance
if the future cash flows of an entity are expected to change
significantly as a result of the exchange.
SFAS No. 153 is effective for fiscal periods beginning
after June 15, 2005. As the provisions of
SFAS No. 153 are to be applied prospectively, the
adoption of SFAS No. 153 will not have an impact on
our historical financial statements; however, we will assess the
impact of the adoption of this pronouncement on any future
nonmonetary transactions that we enter into, if any.
In February 2006, the FASB issued SFAS No. 155,
“Accounting for Certain Hybrid Instruments,” an
amendment of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” and
SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities — a replacement of FASB Statement
No. 125” (“SFAS No. 155”).
SFAS No. 155 improves the financial reporting of
certain hybrid financial instruments by requiring more
consistent accounting that eliminates exemptions and provides a
means to simplify the accounting for such instruments.
Specifically, SFAS No. 155 allows financial
instruments that have embedded derivatives to be accounted for
as a whole (eliminating the need to bifurcate the derivative
from its host) if the holder elects to account for the whole
instrument on a fair value basis. SFAS No. 155 also
(i) clarifies which interest-only strips and principal-only
strips are not subject to the requirements of
SFAS No. 133; (ii) establishes a requirement to
evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative
requiring bifurcation; (iii) clarifies that concentrations
of credit risk in the form of subordination are not embedded
derivatives and (iv) amends SFAS No. 140 to
eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to
a beneficial interest other than another derivative financial
instrument. SFAS No. 155 is effective for all
financial instruments acquired or issued after the beginning of
an entity’s first fiscal year that begins after
September 15, 2006. We are currently in the process of
evaluating the impact that the adoption of
SFAS No. 155 will have on our financial position,
results of operations and cash flows.
31
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109”
(“FIN 48”), which clarifies the accounting for
uncertainty in tax positions. This interpretation requires us to
recognize the impact of a tax position if that position is more
likely than not to be sustained based on the technical merits of
the position. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The
provisions of FIN 48 are effective for fiscal years
beginning after December 15, 2006, with the cumulative
effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. We are currently
evaluating the impact that the adoption of FIN 48 will have
on our financial position, results of operations and cash flows.
In September 2006, the U.S. Securities and Exchange Commission
staff issued Staff Accounting Bulletin No. 108
(“SAB 108”), “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”. SAB 108 eliminates
the diversity of practice surrounding how public companies
quantify financial statement misstatements. It establishes an
approach that requires quantification of financial statement
misstatements based on the effects of the misstatements on each
of our financial statements and the related financial statement
disclosures. SAB 108 must be applied to annual financial
statements for their first fiscal year ending after
November 15, 2006. We do not expect SAB 108 to have a
material impact on our financial position, results of operations
and cash flows.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements”
(“SFAS No. 157”). This standard clarifies
the principle that fair value should be based on the assumptions
that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy
that prioritizes the information used to develop those
assumptions. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007. We are currently in the process of
evaluating the impact that the adoption of
SFAS No. 157 will have on our financial position,
results of operations and cash flows.
Other Factors Affecting Operating Results
|
|
|
We have a history of losses, expect future losses and may
not achieve or sustain profitability. |
We have incurred net losses from operations in each quarter and
annual period since our April 28, 2000 merger with AmTec,
Inc. We incurred net losses of $37.1 million,
$9.9 million and $22.5 million for the years ended
March 31, 2006, 2005 and 2004, respectively. As of
September 30, 2006, our accumulated deficit was
$283.7 million. We cannot guarantee that we will become
profitable. Even if we achieve profitability, given the evolving
nature of the industry in which we operate, we may not be able
to sustain or increase profitability on a quarterly or annual
basis, and our failure to do so would adversely affect our
business, including our ability to raise additional funds and
gain new customers.
|
|
|
We may not be able to compete successfully against current
and future competitors. |
Our products and services must be able to differentiate
themselves from existing providers of space and services for
telecommunications companies, web hosting companies and other
colocation providers. In addition to competing with neutral
colocation providers, we must compete with traditional
colocation providers, including local phone companies, long
distance phone companies, Internet service providers and web
hosting facilities. Likewise, with respect to our other products
and services, including managed services, bandwidth services and
security services, we must compete with more established
providers of similar services. Most of these companies have
longer operating histories and significantly greater financial,
technical, marketing and other resources than us.
Because of their greater financial resources, some of our
competitors have the ability to adopt aggressive pricing
policies, especially if they have been able to restructure their
debt or other obligations. As a result, in the future, we may
suffer from pricing pressure that would adversely affect our
ability to generate revenues and adversely affect our operating
results. In addition, these competitors could offer colocation
on neutral terms, and may start doing so in the same
metropolitan areas where we have NAP
32
centers. Some of these competitors may also provide our target
customers with additional benefits, including bundled
communication services, and may do so in a manner that is more
attractive to our potential customers than obtaining space in
our NAP centers. We believe our neutrality provides us with an
advantage over these competitors. However, if these competitors
were able to adopt aggressive pricing policies together with
offering colocation space, our ability to generate revenues
would be materially adversely affected. We may also face
competition from persons seeking to replicate our NAP concept by
building new centers or converting existing centers that some of
our competitors are in the process of divesting. We may
experience competition from our landlords in this regard. Rather
than licensing available space in our buildings to large single
tenants, they may decide to convert the space instead to smaller
square foot units designed for multi-tenant colocation use.
Landlords may enjoy a cost effective advantage in providing
similar services as our NAPs, and this could also reduce the
amount of space available to us for expansion in the future.
Competitors may operate more successfully or form alliances to
acquire significant market share. Furthermore, enterprises that
have already invested substantial resources in outsourcing
arrangements may be reluctant or slow to adopt our approach that
may replace, limit or compete with their existing systems. In
addition, other companies may be able to attract the same
potential customers that we are targeting. Once customers are
located in competitors’ facilities, it may be extremely
difficult to convince them to relocate to our NAP centers.
Our success in retaining key employees and discouraging them
from moving to a competitor is an important factor in our
ability to remain competitive. As is common in our industry, our
employees are typically compensated through grants of stock
options, in addition to their regular salaries. We occasionally
grant new stock options to employees as an incentive to remain
with us. If we are unable to adequately maintain these stock
option incentives and should employees decide to leave, this may
be disruptive to our business and may adversely affect our
business, financial condition and results of operations.
|
|
|
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. |
During the year ended March 31, 2006 and the six months
ended September 30, 2006, revenues under contracts with
agencies of the U.S. federal government constituted 22% of
our data center revenues, respectively. Generally,
U.S. government contracts are also 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 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, which could limit
our growth prospects and adversely affect our business, results
of operations and financial condition. Government contracts
typically have an initial term of one year. Renewal periods are
exercisable at the discretion of the U.S. government. We
may not be successful in winning contract awards or renewals in
the future. Our failure to renew or replace U.S. government
contracts when they expire could have a material adverse effect
on our business, financial condition, or results of operations.
|
|
|
We derive a significant portion of our revenues from a few
clients; accordingly, a reduction in our major clients’
demand for our services or the loss of major clients would
likely impair our financial performance. |
During the quarter ended September 30, 2006, we derived
approximately 22% and 7% of our data center revenues from
agencies of the federal government and Blackbird Technologies,
Inc. During the quarter ended September 30, 2005, we
derived approximately 23% and 9% of our data center revenues
from these same two customers. Because we derive a large
percentage of our revenues from a few major customers, our
revenues could significantly decline if we lose one or more of
these customers or if the amount of business we obtain from them
is reduced.
33
|
|
|
We have significant debt service obligations which will
require the use of a substantial portion of our available
cash. |
We are a highly leveraged company. As of September 30,
2006, our total liabilities were $187.0 million and our
total stockholders’ equity was $14.2 million. Our
mortgage loan and our senior secured notes are, collectively,
collateralized by substantially all of our assets. In addition,
in some circumstances, interest obligations payable with respect
to our senior secured notes may be paid in kind by adding such
interest payments to the principal amount owed under the senior
secured notes increasing further our debt exposure. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources.”
Each of these obligations requires significant amounts of
liquidity. Should we need additional capital or financing, our
ability to arrange financing and the cost of this financing will
depend upon many factors, including:
|
|
|
|
• |
general economic and capital markets conditions, and in
particular the non-investment grade debt market; |
|
|
• |
conditions in the Internet infrastructure market; |
|
|
• |
credit availability from banks or other lenders; |
|
|
• |
investor confidence in the telecommunications industry generally
and our company specifically; and |
|
|
• |
the success of our facilities. |
We may be unable to find additional sources of liquidity on
terms acceptable to us, if at all, which could adversely affect
our business, results of operations and financial condition.
Also, a default could result in acceleration of our
indebtedness. If this occurs, our business and financial
condition would be adversely affected.
|
|
|
The mortgage loan with Citigroup and our senior secured
notes contain numerous restrictive covenants. |
Our mortgage loan with Citigroup and our senior secured notes
contain numerous covenants imposing restrictions on our ability
to, among other things:
|
|
|
|
• |
incur more debt; |
|
|
• |
pay dividends, redeem or repurchase our stock or make other
distributions; |
|
|
• |
make acquisitions or investments; |
|
|
• |
enter into transactions with affiliates; |
|
|
• |
merge or consolidate with others; |
|
|
• |
dispose of assets or use asset sale proceeds; |
|
|
• |
create liens on our assets; and |
|
|
• |
extend credit. |
Our failure to comply with the obligations in our mortgage loan
with Citigroup and our senior secured notes could result in an
event of default under the mortgage loan or the senior secured
notes, which, if not cured or waived, could permit acceleration
of the indebtedness or our other indebtedness, or result in the
same consequences as a default in payment. If the acceleration
of the maturity of our debt occurs, we may not be able to repay
our debt or borrow sufficient funds to refinance it on terms
that are acceptable to us, which could adversely impact our
business, results of operations and financial condition.
34
|
|
|
Our substantial leverage and indebtedness could adversely
affect our financial condition, limit our growth and prevent us
from fulfilling our debt obligations. |
Our substantial indebtedness could have important consequences
to us and may, among other things:
|
|
|
|
• |
limit our ability to obtain additional financing to fund our
growth strategy, working capital, capital expenditures, debt
service requirements or other purposes; |
|
|
• |
limit our ability to use operating cash flow in other areas of
our business because we must dedicate a substantial portion of
these funds to make principal payments and fund debt service
requirements; |
|
|
• |
cause us to be unable to satisfy our obligations under our
existing or new debt agreements; |
|
|
• |
make us more vulnerable to adverse general economic and industry
conditions; |
|
|
• |
limit our ability to compete with others who are not as highly
leveraged as we are; and |
|
|
• |
limit our flexibility in planning for, or reacting to, changes
in our business, industry and market conditions. |
In addition, subject to restrictions in our existing debt
instruments, we may incur additional indebtedness. If new debt
is added to our current debt levels, the related risks that we
now face could intensify. Our growth plans and our ability to
make payments of principal or interest on, or to refinance, our
indebtedness, will depend on our future operating performance
and our ability to enter into additional debt and/or equity
financings. If we are unable to generate sufficient cash flows
in the future to service our debt, we may be required to
refinance all or a portion of our existing debt, to sell assets
or to obtain additional financing. We may not be able to do any
of the foregoing on terms acceptable to us, if at all.
|
|
|
If our financial condition deteriorates, we may be
delisted by the American Stock Exchange and our stockholders
could find it difficult to sell our common stock. |
Our common stock currently trades on the American Stock
Exchange, or 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:
|
|
|
|
• |
our financial condition and operating results appear to be
unsatisfactory; |
|
|
• |
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. |
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 regulations it is likely that the price of our
common stock would decline and our stockholders would find it
difficult to sell their shares.
|
|
|
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 skills, experience and services
of key personnel. The loss of such key personnel could have a
material adverse effect on our business, operating results or
financial condition. We do not maintain keyman life insurance
with respect to these key individuals. Our potential growth and
expansion are expected to place increased demands on our
management skills and resources. Therefore, our success also
depends upon our ability to recruit, hire, train and retain
additional skilled and
35
experienced management personnel. Employment and retention of
qualified personnel is important due to the competitive nature
of our industry. Our inability to hire new personnel with the
requisite skills could impair our ability to manage and operate
our business effectively.
|
|
|
Our business could be harmed by prolonged electrical power
outages or shortages, or increased costs of energy. |
Substantially all of our business is dependent upon the
continued operation of the NAP of the Americas building. The NAP
of the Americas building and our other 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 at a NAP facility 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.
|
|
|
We have acquired and may acquire other businesses, and
these acquisitions involve numerous risks. |
As part of our strategy, we may pursue additional acquisitions
of complementary businesses, products services and technologies
to enhance our existing services, expand our service offerings
and enlarge our customer base. If we complete future
acquisitions, we may be required to incur or assume additional
debt and make capital expenditures and issue additional shares
of our common stock or securities convertible into our common
stock as consideration, which will dilute our existing
stockholders’ ownership interest and may adversely affect
our results of operations. Our ability to grow through
acquisitions involves a number of additional risks, including
the following:
|
|
|
|
• |
the ability to identify and consummate complementary acquisition
candidates; |
|
|
• |
the possibility that we may not be able to successfully
integrate the operations, personnel, technologies, products and
services of the acquired companies in a timely and efficient
manner; |
|
|
• |
diversion of management’s attention from normal daily
operations to negotiate acquisitions and integrate acquired
businesses; |
|
|
• |
insufficient revenues to offset significant unforeseen costs and
increased expenses associated with the acquisitions; |
|
|
• |
challenges in completing products associated with in-process
research and development being conducted by the acquired
businesses; |
|
|
• |
risks associated with our entrance into markets in which we have
little or no prior experience and where competitors have a
stronger market presence; |
|
|
• |
deferral of purchasing decisions by current and potential
customers as they evaluate the likelihood of success of our
acquisitions; |
|
|
• |
issuance by us of equity securities that would dilute ownership
of our existing stockholders; |
|
|
• |
incurrence and/or assumption of significant debt, contingent
liabilities and amortization expenses; and |
|
|
• |
loss of key employees of the acquired companies. |
Failure to manage effectively our growth through acquisitions
could adversely affect our growth prospects, business, results
of operations and financial condition.
|
|
|
We may encounter difficulties implementing our expansion
plan. |
We expect that we may encounter challenges and difficulties in
implementing our expansion plan to establish new Internet
exchange facilities in domestic locations in which we believe
there is significant demand for our services. These challenges
and difficulties relate to our ability to:
36
|
|
|
|
• |
identify and take advantage of locations in which we believe
there is sufficient demand for our services; |
|
|
• |
generate sufficient cash flow from operations or through
additional debt or equity financings to support these expansion
plans; |
|
|
• |
hire, train and retain sufficient additional financial reporting
management, operational and technical employees; and |
|
|
• |
install and implement new financial and other systems,
procedures and controls to support this expansion plan with
minimal delays. |
If we encounter greater than anticipated difficulties in
implementing our expansion plan, it may be necessary to take
additional actions, which could divert management’s
attention and strain our operational and financial resources. We
may not successfully address any or all of these challenges, and
our failure to do so would adversely affect our business plan
and results of operations, our ability to raise additional
capital and our ability to achieve enhanced profitability.
|
|
Item 3. |
Quantitative and Qualitative Disclosures about Market
Risk. |
We have not entered into any financial instruments for trading
purposes. However, the estimated fair value of the derivatives
embedded within our 9% senior convertible notes creates a
market risk exposure resulting from changes in the price of our
common stock. These embedded derivatives derive their value
primarily based on the price and volatility of our common stock;
however, we do not expect significant changes in the near term
in the one-year historical volatility of our common stock used
to calculate the estimated fair value of the embedded
derivatives. Other factors being equal, as of September 30,
2006, the table below provides information about the estimated
fair value of the derivatives embedded within our senior
convertible notes and the effect that changes in the price of
our common stock are expected to have on the estimated fair
value of the embedded derivatives:
|
|
|
|
|
|
|
Estimated Fair Value of | |
Price per Share of Common Stock |
|
Embedded Derivatives | |
|
|
| |
$2.00
|
|
$ |
3,997,661 |
|
$4.00
|
|
$ |
9,492,045 |
|
$6.00
|
|
$ |
16,193,583 |
|
$8.00
|
|
$ |
22,978,267 |
|
$10.00
|
|
$ |
30,383,778 |
|
Our exposure to market risk resulting from changes in interest
rates results from the variable rate of our mortgage loan, as an
increase in interest rates would result in lower earnings and
increased cash outflows. The interest rate on our mortgage loan
is payable at variable rates indexed to LIBOR. The effect of
each 1% increase in the LIBOR rate (5.38% at September 30,
2006) would result in an annual increase in interest expense of
approximately $469,000. Based on the U.S. yield curve as of
September 30, 2006 and other available information, we
project interest expense on our variable rate debt to increase
approximately $160,000, $152,000, $148,000 and $147,000 for the
years ended September 30, 2007, 2008, 2009, and 2010
respectively.
Our 9% senior convertible notes and our senior secured
notes have fixed interest rates and, accordingly, are not
exposed to market risk resulting from changes in interest rates.
However, 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.
Our carrying values of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses are reasonable
approximations of their fair value.
37
As noted above, the estimated fair value of the embedded
derivatives increases as the price of our common stock
increases. These changes in estimated fair value will affect our
results of operations but will not impact our cash flows.
As of September 30, 2006, approximately 85% of our
recognized revenue is 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. In
the future, a larger portion of our 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 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 have the ability
to pass these additional power costs onto our 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. |
|
|
(a) |
Evaluation of Disclosure Controls and Procedures |
Our principal executive and financial officers have conducted an
evaluation, as of the end of the period covered by this report,
of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) of the Exchange Act of 1934 (the
“Exchange Act”) to ensure that information we are
required to disclose in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
forms, and include controls and procedures designed to ensure
that information we are required to disclose in such reports is
accumulated and communicated to management, including our
principal executive and financial officers, as appropriate, to
allow timely decisions regarding required disclosure. Based on
that evaluation, our principal executive and financial officers
concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.
|
|
(b) |
Internal Control Over Financial Reporting |
There has been no change in our internal control over financial
reporting during the six months ended September 30, 2006
that has materially affected, or is reasonably likely to affect,
our internal control over financial reporting.
38
PART II. OTHER INFORMATION
|
|
Item 1. |
Legal Proceedings. |
In the ordinary course of conducting our business, we become
involved in various legal actions and other claims. Litigation
is subject to many uncertainties and we may be unable to
accurately predict the outcome of individual litigated matters.
Some of these matters possibly may be decided unfavorably to us.
It is the opinion of management that the ultimate liability, if
any, with respect to these matters will not be material.
See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Other Factors
Affecting Operating Results.” There were no material
changes from the risk factors previously disclosed in the
Company’s
Form 10-K.
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds. |
None.
|
|
Item 3. |
Defaults upon Senior Securities. |
None.
|
|
Item 4. |
Submission of Matters to a Vote of Security
Holders. |
None.
|
|
Item 5. |
Other Information. |
On November 8, 2006, we entered into an agreement with
Guillermo Amore, one of our directors, commencing
October 20, 2006, engaging Mr. Amore as an independent
consultant. The agreement is for a term of one year after which
it renews automatically for successive one-year periods. Either
party may terminate the agreement by providing 90 days
notice. The agreement provides for an annual compensation of
$240,000, payable monthly. In addition, our board of directors
approved the issuance to Mr. Amore of 50,000 shares of our
nonvested stock pursuant to the terms of our 2005 Executive
Incentive Compensation Plan. The shares of nonvested stock vest
over a period of one year.
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 |
|
Consulting Agreement, dated November 8, 2006, by and
between the Company and Guillermo Amore |
|
|
10 |
.2 |
|
First Amendment, dated as of October 31, 2006, to Loan
Agreement dated as of December 31, 2004, by and among
Technology Center of the Americas, LLC, as Borrower, Citigroup
Global Markets Realty Corp., as Agent and each Lender signatory
thereto |
|
|
10 |
.3 |
|
Employment Agreement, dated as of November 8, 2006, by and
between the Company and Adam T. Smith |
|
|
31 |
.1 |
|
Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
31 |
.2 |
|
Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 |
39
|
|
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
|
|
|
|
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 |
40
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
9th
day of November, 2006.
|
|
|
TERREMARK WORLDWIDE, INC. |
|
|
|
|
|
Manuel D. Medina |
|
Chairman of the Board, |
|
President and Chief Executive Officer |
|
(Principal Executive Officer) |
|
|
TERREMARK WORLDWIDE, INC. |
|
|
|
|
|
Jose A. Segrera |
|
Executive Vice President and |
|
Chief Financial Officer |
|
(Principal Accounting Officer) |
41