- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
<Table>
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER: 0-22520
---------------------
TERREMARK WORLDWIDE, INC.
(Exact Name of Registrant as Specified in Its Charter)
<Table>
DELAWARE 52-1981922
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2601 S. BAYSHORE DRIVE 33133
MIAMI, FLORIDA (Zip Code)
(Address of Principal Executive Offices)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(305) 856-3200
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The registrant had 199,222,179 shares of common stock, $0.001 par value,
outstanding as of November 13, 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TERREMARK WORLDWIDE, INC.
INDEX
<Table>
<Caption>
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 2
Condensed Consolidated Balance Sheets as of September 30,
2001 (unaudited) and March 31, 2001......................... 2
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended September 30, 2001 and 2000
(unaudited)................................................. 3
Condensed Consolidated Statement of Changes in Stockholder's
Equity for the Six Months Ended September 30, 2001
(unaudited)................................................. 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2001 and 2000 (unaudited)........ 5
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................... 21
Item 6. Exhibits and Reports on Form 8-K............................ 21
Signatures............................................................... 22
</Table>
1
PART I. FINANCIAL INFORMATION
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ITEM 1. FINANCIAL STATEMENTS.
<Table>
<Caption>
SEPTEMBER 30,
2001 MARCH 31, 2001
------------- --------------
(UNAUDITED)
ASSETS
Cash and cash equivalents................................... $ 5,686,965 $ 5,574,687
Restricted cash............................................. 750,000 32,039
Accounts receivable......................................... 2,515,694 2,871,119
Contracts receivable........................................ 1,614,092 4,637,916
Property and equipment, net................................. 62,953,332 25,065,989
Investment in TECOTA, at cost............................... 489,855 489,855
Note receivable -- related party (Note 7)................... 5,000,000 --
Other assets................................................ 3,013,855 2,823,579
Identifiable intangible assets and goodwill, net of
accumulated amortization of $2,705,664 and $1,226,529,
respectively.............................................. 22,233,602 23,712,737
Real estate held for sale................................... 379,009 12,860,657
------------ -------------
TOTAL ASSETS........................................... $104,636,404 $ 78,068,578
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable............................................... $ 44,842,435 $ 13,680,843
Construction payables -- property and equipment............. 24,268,262 16,960,452
Trade payables and other liabilities........................ 9,876,691 16,016,521
Capital lease obligations................................... 4,733,105 1,083,844
Convertible debt............................................ 26,635,746 15,855,382
Deferred revenue............................................ 235,574 284,693
Interest payable............................................ 1,440,124 323,153
Net liabilities of discontinued operations.................. 1,287,566 2,700,847
------------ -------------
TOTAL LIABILITIES...................................... 113,319,503 66,905,735
------------ -------------
Series H redeemable convertible preferred stock: $.001 par
value, 294 and -0- shares authorized, issued and
outstanding, respectively................................. 500,000 --
------------ -------------
Series G convertible preferred stock: $.001 par value, 20
shares authorized, issued and outstanding................. 1 1
Common stock: $.001 par value, 300,000,000 shares
authorized; 200,622,179 and 200,507,179 shares issued, of
which 1,400,000 shares are held in treasury,
respectively.............................................. 200,622 200,507
Paid in capital............................................. 125,379,679 125,339,544
Retained deficit............................................ (137,039,396) (115,724,620)
Common stock warrants....................................... 3,154,473 2,059,398
Common stock options........................................ 1,549,647 1,716,138
Less cost of shares of common stock in treasury............. (2,428,125) (2,428,125)
Commitments and contingencies (Note 9)
------------ -------------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY................... (9,183,099) 11,162,843
------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $104,636,404 $ 78,068,578
============ =============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
2
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Revenues
Data center.................................. $ 621,453 $ -- $ 393,508 $ --
Real estate sales............................ -- 1,715,542 -- 1,061,067
Development, commission and construction
fees....................................... 1,934,917 1,736,746 1,144,696 921,330
Management fees.............................. 818,202 926,568 405,658 571,677
Construction contracts....................... 6,175,679 5,442,139 2,452,678 5,442,139
------------ ------------ ------------ ------------
Operating revenues......................... 9,550,251 9,820,995 4,396,540 7,996,213
------------ ------------ ------------ ------------
Expenses
Data center and telecom facilities
operations................................. 4,049,144 -- 3,167,068 --
Start-up costs -- data centers and telecom
facilities................................. 3,383,127 -- -- --
Cost of real estate sold..................... -- 1,434,496 -- 893,017
Construction contract expenses............... 4,711,854 5,083,324 1,915,247 4,956,987
General and administrative................... 8,901,385 7,617,482 4,753,031 5,283,406
Sales and marketing.......................... 1,878,287 1,749,666 1,398,464 1,010,277
Depreciation and amortization................ 2,617,024 1,691,071 2,048,748 1,321,886
Impairment of leasehold improvements......... 6,462,315 -- 6,462,315 --
------------ ------------ ------------ ------------
Operating expenses......................... 32,003,136 17,576,039 19,744,873 13,465,573
------------ ------------ ------------ ------------
Loss from operations........................... (22,452,885) (7,755,044) (15,348,333) (5,469,360)
------------ ------------ ------------ ------------
Other income (expense)
Interest income.............................. 79,769 295,540 32,911 229,987
Interest expense............................. (3,318,755) (337,186) (2,264,556) (91,959)
Other income (expense)....................... 400,209 (171,553) 368,188 530,591
Dividend on preferred stock.................. (11,747) (34,806) (7,497) --
Gain on sale of real estate held for sale.... 3,988,633 -- 3,882,020 --
------------ ------------ ------------ ------------
Total other income (expense)............... 1,138,109 (248,005) 2,011,066 668,619
------------ ------------ ------------ ------------
Loss from continuing operations before income
taxes........................................ (21,314,776) (8,003,049) (13,337,267) (4,800,741)
Income taxes................................... -- -- -- --
------------ ------------ ------------ ------------
Loss from continuing operations............ (21,314,776) (8,003,049) (13,337,267) (4,800,741)
------------ ------------ ------------ ------------
Loss from discontinued operations, net of
income taxes of $-0-......................... -- (9,230,412) -- (6,935,315)
------------ ------------ ------------ ------------
Net loss..................................... $(21,314,776) $(17,233,461) $(13,337,267) $(11,736,056)
============ ============ ============ ============
Basic and diluted loss per common share:
Continuing operations........................ $ (.11) $ (.05) $ (.07) $ (.03)
Discontinued operations...................... -- (.05) -- (.03)
------------ ------------ ------------ ------------
Net loss..................................... $ (.11) $ (.10) $ (.07) $ (.06)
============ ============ ============ ============
Weighted average common shares outstanding..... 200,622,179 176,721,613 200,622,179 198,806,847
============ ============ ============ ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
3
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<Table>
<Caption>
STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------
COMMON STOCK
PAR VALUE $.001
---------------------- ADDITIONAL COMMON COMMON
PREFERRED ISSUED PAID-IN STOCK STOCK TREASURY RETAINED
STOCK SHARES AMOUNT CAPITAL WARRANTS OPTIONS STOCK DEFICIT
--------- ----------- -------- ------------ ---------- ---------- ----------- -------------
Balance at March 31,
2001............... $1 200,507,179 $200,507 $125,339,544 $2,059,398 $1,716,138 $(2,428,125) $(115,724,620)
Exercise of stock
options............ 115,000 115 40,135
Forfeiture of stock
options............ -- -- -- -- -- (166,491) -- --
Warrants issued...... -- -- -- -- 1,095,075 -- -- --
Net loss............. -- -- -- -- -- -- -- (21,314,776)
-- ----------- -------- ------------ ---------- ---------- ----------- -------------
Balance at September
30, 2001
(unaudited)........ $1 200,622,179 $200,622 $125,379,679 $3,154,473 $1,549,647 $(2,428,125) $(137,039,396)
== =========== ======== ============ ========== ========== =========== =============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
4
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE SIX MONTHS ENDED
SEPTEMBER 30,
---------------------------
2001 2000
------------ ------------
(UNAUDITED)
Cash flows from operating activities:
Net loss.................................................. $(21,314,776) $(17,233,461)
Adjustments to reconcile net loss to net cash used in
operating activities
Discontinued operations................................. -- 9,230,412
Depreciation and amortization of capital leases......... 1,137,889 330,879
Amortization of intangible assets and goodwill.......... 1,479,135 1,663,158
Amortization of loan costs to interest expense.......... 645,425 102,514
Amortization of prepaid compensation and other.......... 70,401 --
Gain on sale of real estate held for sale............... (3,988,633) --
Loss on sale of property and equipment.................. 252,317 --
Impairment of leasehold improvements.................... 6,462,315 --
(Increase) decrease in:
Real estate inventories............................... -- (981,736)
Restricted cash....................................... (717,961) 506,776
Accounts receivable................................... 355,425 2,338,117
Contracts receivable.................................. 3,023,824 (4,161,538)
Other assets.......................................... (647,668) (2,173,977)
Increase (decrease) in:
Trade payable and other liabilities................... (6,133,417) 1,692,974
Interest payable...................................... 1,116,971 583,580
Deferred revenue...................................... (49,119) 192,060
Net liabilities of discontinued operations............ (1,413,281) (3,434,009)
------------ ------------
Net cash used in continuing operations.............. (19,721,153) (11,344,251)
Net cash used in discontinued operations............ -- (2,075,796)
------------ ------------
Net cash used in operating activities............... (19,721,153) (13,420,047)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment........................ (40,805,952) (2,585,326)
Investment in unconsolidated entities, net................ -- (4,049,070)
Proceeds from sale of real estate held for sale........... 16,470,281 55,781,259
Proceeds from sale of property and equipment.............. 30,000 --
Note receivable -- related party.......................... (5,000,000) --
Cash acquired in acquisitions............................. -- 2,368,273
------------ ------------
Net cash (used in) provided by investing
activities.......................................... (29,305,671) 51,515,136
------------ ------------
Cash flows from financing activities:
Construction payables -- property and equipment........... 7,307,810 --
New borrowings............................................ 57,449,704 10,262,403
Payments on loans......................................... (26,288,112) (75,220,430)
Issuance of convertible debt.............................. 10,773,951 --
Capital lease obligations................................. (644,501) --
Exercise of stock options................................. 40,250 470,743
Sale of common stock...................................... -- 28,122,925
Issuance of warrants...................................... -- 168,575
Sale of preferred stock................................... 500,000 --
------------ ------------
Net cash provided by (used in) financing
activities.......................................... 49,139,102 (36,195,784)
------------ ------------
Net increase in cash................................ 112,278 1,899,305
Cash and cash equivalents at beginning of period............ 5,574,687 3,391,977
------------ ------------
Cash and cash equivalents at end of period.................. $ 5,686,965 $ 5,291,282
============ ============
SUPPLEMENTAL DISCLOSURE:
Interest paid (net of amount capitalized)................. $ 2,282,103 $ 313,320
Taxes paid................................................ -- --
Non-cash portion of assets acquired under capital
leases.................................................. 4,293,762 71,778
</Table>
During the quarter ended September 30, 2001, the Company issued $1,095,075 in
warrants to third parties in lieu of cash payments for assets and interest.
The accompanying notes are an integral part of these consolidated financial
statements.
5
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
1. BUSINESS AND ORGANIZATION
Terremark Worldwide, Inc. and its subsidiaries (the "Company") is a
multinational corporation that provides Internet infrastructure and managed
services. It is the owner and operator of the NAP of the Americas, the fifth
Tier-1 Network Access Point ("NAP") in the world. The Company's strategy is to
leverage its experience as the owner and operator of the NAP of the Americas by
developing and operating TerreNAP(SM) Data Centers in Latin America.
TerreNAP(SM) Data Centers provide peering, colocation and managed services to
carriers, Internet Service Providers, other Internet companies and enterprises.
The NAP of the Americas in Miami, Florida, which was operational on July 1,
2001, will be the premier TerreNAP(SM) Data Center.
2. LIQUIDITY
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company had a stockholders'
deficit of $9,183,099 at September 30, 2001 and incurred a net loss of
$21,314,776 for the six months then ended. This loss primarily reflects
establishment of internal operations to support Internet and telecom
infrastructure services and start-up costs associated with the NAP of the
Americas, impairment of the Company's colocation facility in Santa Clara,
California and interest expense on debt. To fund completion of the NAP of the
Americas and existing operations during the balance of fiscal year 2002, the
Company believes it will need approximately $20.0 million in debt or equity
financing, exclusive of interest costs thereon. The majority of these funds
would be used to fund the build-out and working capital of the NAP of the
Americas. These expectations are based upon certain assumptions, the most
significant being the signing of additional customer contracts at the NAP of the
Americas during fiscal 2002. The Company's plan for the balance of 2002 fiscal
year is predicated on obtaining customer contracts, which on an annual basis
would generate revenues of approximately $20.0 million.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles for complete annual financial statements. The
unaudited condensed consolidated financial statements reflect all adjustments,
consisting of normal recurring adjustments, which are, in the opinion of
management, necessary to present a fair presentation of the results for the
interim periods presented. Operating results for the quarter ended September 30,
2001 may not be indicative of the results that may be expected for the year
ending March 31, 2002. Amounts as of March 31, 2001, included in the condensed
consolidated financial statements have been derived from audited consolidated
financial statements as of that date.
These unaudited condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended March
31, 2001.
DATA CENTER REVENUES
Data center revenues currently consist of monthly recurring fees for
colocation, power circuit and peering services and non-recurring installation
fees. Revenues from colocation, power circuit and peering services are billed
and recognized ratably over the period of usage. Non-recurring installation fees
are deferred and recognized ratably over the term of the related contract.
6
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made to the prior periods' financial
statements to conform with current presentation.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board approved Statement
of Financial Accounting Standards No. 141 (FASB 141), Business Combinations, and
Statement of Financial Accounting Standards No. 142 (FASB 142), Goodwill and
Other Intangible Assets. FASB 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
FASB 142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. The provisions of FASB 142 are effective for fiscal
years beginning after December 15, 2001. The Company will adopt FASB 142 at the
beginning of its fiscal year ending March 31, 2003.
In August 2001, the Financial Accounting Standards Board approved Statement
of Financial Accounting Standards No. 144 (FASB 144), Accounting for the
Impairment or Disposal of Long-Lived Assets. FASB 144 supercedes FASB 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of business. FASB 144
retains the requirements of FASB 121 for recognition and measurement of an
impairment loss on long-lived assets, and establishes a single accounting model
for all long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired. The provisions of FASB 144 are effective for fiscal
years beginning after December 15, 2001. The Company will adopt FASB 144 at the
beginning of its fiscal year ending March 31, 2003.
4. CONTRACTS RECEIVABLE
Contracts receivable consist of the following:
<Table>
<Caption>
SEPTEMBER 30, MARCH 31,
2001 2001
------------- ----------
(UNAUDITED)
Completed contracts......................................... $ 321,209 $ 939,312
Contracts in progress....................................... 902,285 2,543,489
Retainage................................................... 390,598 1,155,115
---------- ----------
$1,614,092 $4,637,916
========== ==========
</Table>
5. REAL ESTATE HELD FOR SALE
Real estate held for sale is summarized as follows:
<Table>
<Caption>
SEPTEMBER 30, MARCH 31,
2001 2001
------------- -----------
(UNAUDITED)
Fortune House II land and improvements..................... $ -- $11,668,090
Fortune House I completed condominium units................ 379,009 1,192,567
-------- -----------
$379,009 $12,860,657
======== ===========
</Table>
7
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 2001, the Company sold for $17.2 million Fortune House II, a
proposed condominium/hotel project in Ft. Lauderdale, Florida. In connection
with the sale, the Company repaid approximately $12.1 million in related notes
payable and recorded a gain of approximately $3.9 million.
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
<Table>
<Caption>
SEPTEMBER 30, MARCH 31,
2001 2001
------------- -----------
(UNAUDITED)
Leasehold improvements..................................... $48,107,190 $ 1,217,608
Furniture and equipment.................................... 13,156,842 3,433,806
----------- -----------
61,264,032 4,651,414
Less accumulated depreciation and amortization............. (1,610,995) (542,217)
----------- -----------
59,653,037 4,109,197
Construction in process.................................... -- 20,956,792
Equipment held for installation............................ 3,300,295 --
----------- -----------
$62,953,332 $25,065,989
=========== ===========
</Table>
Property and equipment, net includes $57,537,972 and $4,000,000 in assets
related to the NAP of the Americas and a colocation facility in Santa Clara,
California, respectively, at September 30, 2001. During the three months ended
September 30, 2001, the Company recorded a $6,462,315 impairment charge to the
colocation facility's leasehold improvements based on an option to purchase the
facility granted to one of its vendors. No decision has been made as to whether
the facility will be sold or held for use.
In the three months ended September 30, 2001, the Company reached final
agreement with a vendor regarding amounts due. In connection with this
agreement, the Company recorded $1,082,120 and $267,880 reductions in data
center operations and leasehold improvements, respectively.
7. NOTES PAYABLE AND NOTE RECEIVABLE -- RELATED PARTY
Notes payable consist of the following:
<Table>
<Caption>
SEPTEMBER 30, MARCH 31,
2001 2001
------------- -----------
(UNAUDITED)
Note payable to a financial institution, collateralized
primarily by substantially all assets of the NAP of the
Americas and a personal guaranty of the Chief Executive
Officer. Interest accrues at 9.25%, payable monthly, with
principal balance due March 5, 2003. Maturity date may be
extended for two nine-month periods subject to certain
conditions (see discussion below).......................... $41,340,000 $ --
Note payable to a financial institution, collateralized by
certain assets and personal guarantees of the Chief
Executive Officer and certain executives. Interest accrues
at 1% over prime, payable monthly, with principal balance
due December 2001.......................................... 1,625,000 1,750,000
Unsecured notes payable to certain executives and directors
of the Company, interest accrues at 13%. Principal and
interest due December 31, 2001............................. 1,500,000 --
</Table>
8
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
SEPTEMBER 30, MARCH 31,
2001 2001
------------- -----------
(UNAUDITED)
Unsecured note payable to a corporation in seventy-five
monthly installments of principal and interest beginning
January 1, 1999. Interest accrues at 9.5%.................. 238,993 249,326
Unsecured notes payable to individuals, interest accrues at
8%, with interest due monthly. Principal due on demand..... 138,442 147,139
Note payable to an individual, collateralized by a first
mortgage on land, interest accrues at 12% and is payable
monthly. Principal due November 10, 2001................... -- 7,500,000
$5 million line of credit facility with a financial
institution, collateralized by certain assets of the
Company. Interest accrues at 1% over prime, payable
monthly, with principal balance due upon demand............ -- 3,500,000
Note payable to a commercial lender, collateralized by a
first mortgage on real estate. Principal payable in
installments as condominium units are sold. Interest
accrues at prime, payable through an interest reserve.
Principal and unpaid interest due November 2001, with an
option for a six month extension Guaranteed by the Chief
Executive Officer.......................................... -- 534,378
----------- -----------
$44,842,435 $13,680,843
=========== ===========
</Table>
On September 5, 2001, the Company closed on a $48.0 million loan. At
closing, the total amount of the loan was disbursed except for approximately
$6.6 million that was held as an interest reserve. Through June 2002, the
interest reserve will be disbursed monthly as interest payments are made.
Subsequently, the reserve will be similarly disbursed, provided the NAP of the
Americas achieves $33.0 million in annualized revenues. The proceeds of the loan
have primarily been used to refinance $13.5 million of the Company's short-term
debt and fund the NAP of the Americas build-out costs. The loan is primarily
secured by a first lien position on the assets of the Company's subsidiary, NAP
of the Americas, Inc., and allows for up to a $25.6 million junior lien position
on the assets. As a condition to the loan, Manuel D. Medina, the Company's Chief
Executive Officer, was required to provide a personal guaranty, provide a $5.0
million certificate of deposit to the bank as collateral on certain personal
loans that Mr. Medina has with the bank and commit to repay those personal loans
by December 31, 2001.
On September 5, 2001 and in consideration of Mr. Medina's agreements with
respect to the loan, the Company entered into an amended and restated employment
agreement with Mr. Medina. Under the terms of the agreement, the Company has
agreed to indemnify Mr. Medina from any personal liability related to his
guarantees of the Company's debt, use commercially reasonable efforts to relieve
Mr. Medina of all his guarantees of the Company's debt, provide $6.5 million of
cash collateral to the bank should Mr. Medina be unable to repay the personal
loans by December 31, 2001 and provide a $5.0 million loan to Mr. Medina for as
long as his guarantees of the Company's debt exist.
In connection with Mr. Medina's amended and restated employment agreement,
during September 2001, the Company issued a loan in the amount of $5.0 million
to Mr. Medina. The loan is non-interest bearing and matures when Mr. Medina's
existing guarantees of the Company's debt are relieved.
8. CONVERTIBLE DEBT
During the quarter ended September 30, 2001, the Company issued $4,530,364
of additional subordinated convertible debt. Interest accrues at 13% and is
payable quarterly. The debt matures on December 31,
9
TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2005 and is convertible into the Company's stock at 120% of the 20-day average
trading price prior to the closing. Prepayment by the Company is permitted, but
will entitle holders to warrants or a premium over their outstanding principal
and interest declining from 105% in 2001 at a rate of 1% per year.
9. COMMITMENTS AND CONTINGENCIES
In September 2001, the Company reduced from approximately $60.6 million to
$9.5 million its guaranty of Technology Center of the Americas LLC construction
financing.
10. INFORMATION ABOUT THE COMPANY'S OPERATING SEGMENTS
As of September 30, 2001, the Company had three reportable business
segments, data center operations, telecom facilities management and real estate
services. The data center operations segment provides Tier 1 NAP, Internet and
telecommunications infrastructure and managed services in a data center
environment. The telecom facilities management segment develops, manages and
leases facilities catering primarily to the telecommunications industry. The
real estate services segment constructs, develops, finances and manages real
estate projects. The Company's reportable segments are strategic business
operations that offer different products and services. They are managed
separately because each business requires different expertise and marketing
strategies.
The accounting policies of the segments are the same as those described in
significant accounting policies. Revenues generated among segments are recorded
at rates similar to those recorded in third-party transactions. Transfers of
assets and liabilities between segments are recorded at cost. The Company
evaluates performance based on the segment's net operating results. The
following presents information about reportable segments.
<Table>
<Caption>
DISCONTINUED
TELECOM OPERATIONS --
FOR THE SIX MONTHS DATA CENTER FACILITIES REAL ESTATE TELECOM
ENDED SEPTEMBER 30, OPERATIONS MANAGEMENT SERVICES SERVICES TOTAL
- ------------------- ------------ ----------- ----------- ------------- ------------
2001
Revenue................... $ 621,453 $ -- $ 8,928,798 $ -- $ 9,550,251
Loss from operations...... (12,827,506) (8,055,909) (1,569,470) -- (22,452,885)
Net loss.................. (14,562,194) (8,425,443) 1,672,861 -- (21,314,776)
2000
Revenue................... -- 416,743 $ 9,404,252 $ -- $ 9,820,995
Loss from operations...... -- (2,656,967) (5,098,077) -- (7,755,044)
Net loss.................. -- (2,612,033) (5,391,016) (9,230,412) (17,233,461)
ASSETS, AS OF
September 30, 2001........ $ 61,333,352 $24,953,017 $18,350,035 $ -- $104,636,404
March 31, 2001............ 19,310,184 24,910,377 33,848,017 -- 78,068,578
</Table>
* * * * *
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in our Annual Report on Form 10-K, our Condensed Consolidated
Financial Statements and elsewhere in this filing. The information is intended
to facilitate an understanding and assessment of significant changes and trends
related to our financial condition and results of operations.
This report and other written reports and oral statements made from time to
time by us may contain so-called "forward-looking statements", all of which are
subject to risks and uncertainties. You can identify these forward-looking
statements by the use of words such as "expects", "plans", "will", "estimates",
"forecasts", "projects" and other words of similar meaning. You can also
identify them by the fact that they do not relate strictly to historical or
current facts. These statements are likely to address our growth strategy,
financial results and development programs. You must carefully consider any such
statement and should understand that many factors could cause actual results to
differ from our forward-looking statements. No forward-looking statement can be
guaranteed and actual events or results may differ materially from those
discussed in the forward-looking statements as a result of various factors,
including, without limitation, the risk factors set forth in our Annual Report
on Form 10-K for the year ended March 31, 2001.
Factors that might cause such a difference include, without limitation, our
ability to obtain proper funding for our business plan, decline in demand for
our services or products, the effect of general economic conditions, factors
affecting the growth of the Internet, political instability in countries in
which we do business, telecommunications and other risks and uncertainties
detailed from time to time in our Securities and Exchange Commission filings.
These factors could include inaccurate assumptions and a broad variety of other
risks and uncertainties, including some that are known and some that are not.
OVERVIEW
We are a multinational company that facilitates Internet connectivity and
provides Internet infrastructure and managed services. We are the owner and
operator of the NAP of the Americas, the fifth Tier-1 Network Access Point in
the world, and as a result, we have become an internationally recognized
Internet infrastructure and managed services provider. The NAP of the Americas,
the first TerreNAP(SM) Data Center, and the only carrier-neutral Tier-1 Network
Access Point, or NAP, is located in Miami, Florida and provides peering,
colocation and managed services to carriers, Internet service providers, other
Internet companies and enterprises.
With miles of fiber optic cable laid, looped and recently put into service
around South America and the Caribbean, Internet and telecommunications industry
leaders joined together to create the NAP of the Americas Consortium, with the
goal of promoting the creation of the world's fifth Tier-1 NAP in Florida. In
September 2000, we were selected to own and operate the NAP of the Americas by
that consortium, whose members currently consist of over 100 entities, including
AT&T, Global Crossing, Level 3 Communications, Cable & Wireless, Sprint, FPL
FiberNet, PanAmSat, Williams Communications and EPIK Communications. Since that
time, the consortium's role has transitioned to one of an advisory group and a
prospective customer base.
The NAP of the Americas provides a neutral connection point where
telecommunications carriers can establish bilateral and multilateral connections
between and among their networks, a process known as peering, and purchase
capacity from each other. The NAP of the Americas also provides premium-class
space where carriers, Internet Service Providers, Application Service Providers,
content providers, Internet businesses, telecommunications providers and
enterprises house their equipment and their network facilities in order to be
close to the peering connections that take place at the NAP. This is known as
colocation. In addition, the NAP of the Americas provides a menu of related
managed services, such as a meet-point rooms, advanced network monitoring and
management, and performance monitoring. We expect that the NAP of the Americas
will be a primary channel of Internet traffic from Central and South America and
the Caribbean to North America, Asia and Europe.
11
We were founded in 1982. On April 28, 2000, Terremark Holdings, Inc.
completed a reverse merger with AmTec, Inc., a public company. Contemporaneous
with the reverse merger we changed our corporate name to Terremark Worldwide,
Inc. and adopted "TWW" as our trading symbol on the American Stock Exchange.
Historical information of the surviving company is that of Terremark Holdings,
Inc.
STRATEGY
Our strategy is to leverage our experience as the owner and operator of the
NAP of the Americas to develop and operate TerreNAP(SM) Data Centers, primarily
in Latin America, and in Asia as opportunities arise. TerreNAP(SM) Data Centers
will provide peering, colocation and managed services to carriers, Internet
Service Providers, other Internet companies and enterprises. We intend to use
our 20 years of experience in dealing with Latin America and Asia, the know-how
gained through our designing, engineering, building and operating the NAP of the
Americas and the expertise of our employees, many of whom were formerly
executives with GTE, Nortel, AT&T, BellSouth and Telcordia, for example, to roll
out additional TerreNAP(SM) Data Centers in our target markets. To implement our
strategy and meet our current obligations we will need additional capital as
more fully discussed in Results of Operations and Liquidity and Capital
Resources.
Our sales strategy has a deliberate, phased approach to obtain new
customers:
Phase I was to establish the critical mass of customer connectivity and
Tier-1 status for the NAP of the Americas. With 43 customer contracts as of
September 30, 2001 for the NAP of the Americas, including many of the Tier-1
carriers, we successfully completed this Phase during the second quarter of
fiscal year 2002.
Phase II is focused on selling colocation space:
- by marketing to the service divisions of the large Tier-1 carriers to
expand their presence in the NAP;
- by targeting Internet Service Providers, Application Service Providers
and content providers;
- by selling to Tier-2 carriers in Latin America and Europe that rely on
the Tier-1 carriers for access and services; and
- by addressing the needs of large Latin American enterprises.
We commenced this Phase during the second quarter of fiscal year 2002.
Phase III is focused on selling managed services to our customers both
under the TerreNAP brand and on a wholesale basis when they provide an
integrated set of managed services to their customers. We commenced this Phase
during the third quarter of fiscal year 2002, which will proceed in parallel
with Phase II.
SERVICES
Core Services: We currently offer the following core services through the
NAP of the Americas:
- Peering Services: The NAP provides a peering service called Exchange
Point Service, which is designed to facilitate both bilateral and
multilateral peering among customers. Peering is the exchange of Internet
traffic among service providers.
- Colocation Services: The NAP of the Americas provides the physical
environment necessary to keep a customer's Internet and
telecommunications equipment up and running 24 hours a day, 7 days a
week. This facility is custom designed to exceed industry standards for
electrical and environmental systems. In addition, it offers a wide range
of physical security features, including state-of-the-art biometric
scanners, man traps, smoke detection, fire suppression systems, motion
sensors, secured access, video camera surveillance and security breach
alarms. High levels of reliability are achieved through a number of
redundant subsystems including power and fiber trunks from multiple
sources.
12
Managed Services: Managed services are designed to support a customer's
mission-critical needs. The NAP of the Americas' managed services currently
include:
- Power Circuit Services -- The NAP of the Americas provides clean,
reliable AC and DC power circuit services to our customers. The NAP's
design guarantees 100% availability of power to systems installed at the
NAP, allowing us to perform normal maintenance activities at any
component level without planned or unplanned outages occurring. The
redundancy of our AC power systems, which generate clean, computer-grade
electricity, also feed our centralized and distributed 48 volt DC
systems, giving our customers a large choice in power sources at high
reliability levels.
- Meet-Point Rooms -- All fiber optic cable that enters the NAP of the
Americas enters via conduits that terminate in specific locations called
"meet-point" rooms. The NAP of the Americas owns and manages these
"meet-point" rooms, so they are carrier-neutral, designed with full
scalability, and provisioned with advanced optical cross-connect systems
to facilitate increasing levels of connectivity.
- Network Monitoring -- We can monitor a customer's network to ensure the
ongoing availability and performance of their servers, networks and
applications. Our customers use this service to monitor their network
infrastructure, their customers' networks, past and present network
performance, and project future network utilization.
- Performance Monitoring -- Our Network Operations Center (NOC) staff is
able to monitor our customers' equipment and networks for performance
related issues, providing our customers with updates through e-mail or
viewable website access. This allows our customers to know all the
details of their networks' performance without having to maintain and
manage their own 24/7 facility, yet still have the security and
experience of a world class NOC.
- Network Security -- The NAP of the Americas staff can verify existing
customer procedures, network topology, permissions and access controls,
hardware, software, and utilities. We can then provide managed intrusion
detection services to protect our customers' network elements from attack
on a 24 hours a day, 7 days a week, 365 days a year basis.
- Smart Hands -- The NAP of the Americas offers on-call and
subscription-based services that provide on-site technical support on a
billable basis to our customers.
- Engineering Services -- The NAP of the Americas offers customers
full-service facility and equipment design and engineering services,
including any structural, mechanical, electrical and network systems
required by our telecommunications customers.
During the next twelve months, the NAP of the Americas' managed services
are expected to include: Security and Firewall Services; Billing Platform
Services; Network Storage Services; Bandwidth Measuring Services; Content
Distribution Services; and Disaster Recovery Services. We also expect to add
other services as demand and technology dictate.
CUSTOMERS
As of November 13, 2001, we had 51 signed binding customers contracts with
an average term of five years. These contracts are expected to generate
aggregate contract revenue of approximately $43.0 million for the NAP. The more
than 100 members of the consortium, as well as telecommunication operators,
Internet Service Providers, educational institutions, Application Service
Providers, and content providers, represent principal potential customers for
the services provided by the NAP of the Americas.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
The NAP of the Americas was considered operational as of July 1, 2001.
Therefore no start-up costs are reflected for the three months ended September
30, 2001.
13
Revenue. Total revenue decreased by $3.6 million, or 45.0%, to $4.4
million for the three months ended September 30, 2001 from $8.0 million for the
three months ended September 30, 2000.
Data center revenue was $0.4 million for the three months ended September
30, 2001. No data center revenue was recorded for the comparable period during
2000. The increase was attributable to our peering and colocation services
offered at the NAP. We expect data center revenue to increase in future periods
as customers continue to set up their operations in the NAP of the Americas.
Future data center revenue will be derived from peering, colocation and managed
services.
Revenue from real estate sales was $1.1 million for the three months ended
September 30, 2000 and is attributable to the sale of five condominium units.
For the three months ended September 30, 2001, revenue from two condominium
units sold is recorded as gain on the sale of real estate held for sale.
Development, commission and construction fees increased approximately $0.2
million, or 24.2%, from $0.9 million for the three months ended September 30,
2000 to $1.1 million for the three months ended September 30, 2001. This
increase resulted from an increase in development and construction fees earned
of $91,000, and an increase of $6,000 in commissions from lease signings from
managed buildings.
Management fees earned decreased approximately $0.2 million, or 29.0%, from
$0.6 million for the three months ended September 30, 2000 to $0.4 million for
the three months ended September 30, 2001. Management fees relate to management
of telecom, commercial and residential properties.
Construction contract revenue was $2.5 million for the three months ended
September 30, 2001 as compared to $5.4 million for the three months ended
September 30, 2000. The decrease is a result of the number of contracts in
process. During the September 30, 2001 period we had four construction contracts
in process compared to 19 during the September 30, 2000 period.
Data Center and Telecom Facilities Operations. Data center operations
expense was $3.2 million for the three months ended September 30, 2001. No cost
was recorded for the comparable period during 2000. The increase was
attributable to costs associated with the operations of the NAP of the Americas.
The significant components of these expenses include -- rent expense, operations
personnel, electricity and chilled water costs and security services. With the
exception of electricity and chilled water costs, the majority of these expenses
are fixed in nature. We expect that our costs of electricity and chilled water
and costs related to new managed services will increase in the future as more
customers set up their operations in the NAP of the Americas.
Cost of Real Estate Sold. Cost of real estate sold was $0.9 million for
the three months ended September 30, 2000. For the three months ended September
30, 2001, the cost of real estate sold was included in calculating the gain for
real estate held for sale.
Construction Contract Expenses. Construction contract expenses were $1.9
million for the three months ended September 30, 2001 as compared to $5.0
million for the three months ended September 30, 2000. The decrease is a result
of the number of contracts in process. During the September 30, 2001 period, we
had four construction contracts in process compared to 19 during the September
30, 2000 period. We do not currently anticipate any losses on any of the
individual contracts.
General and Administrative Expenses. General and administrative expenses
decreased by $0.5 million, or 10.0%, from approximately $5.3 million for the
three months ended September 30, 2000 to $4.8 million for the three months ended
September 30, 2001. This decrease is attributable to the decrease in our
investment in personnel and corporate infrastructure related to non core assets.
The significant components of these expenses include personnel, insurance,
office expenses and professional fees. During the three months ended September
30, 2001, our efforts included establishing internal operations to support our
Internet and telecom infrastructure services strategy. We expect general and
administrative expenses directly relating to TerreNAP(SM) Data Centers to
increase over time as we continue to expand our operations.
Sales and Marketing Expenses. Sales and marketing expenses increased $0.4
million, or 38.4%, for the three months ended September 30, 2001. The increase
is principally due to the decrease of marketing expenses associated with the
sale of real estate partially offset by the increase in marketing expenses
associated with marketing the TerreNAP(SM) Data Centers including NAP of the
Americas.
14
Depreciation and Amortization Expense. Depreciation and amortization
expense increased from $1.3 million for the three months ended September 30,
2000 to $2.0 million for the three months ended September 30, 2001. The increase
resulted primarily from the depreciation of the equipment used in the NAP of the
Americas, which was placed in service on July 1, 2001. Therefore, no similar
expenses were recorded for the comparable period during 2000.
Interest Expense. Interest expense increased from $0.1 million for the
three months ended September 30, 2000 to $2.3 million for the three months ended
September 30, 2001 due to an increase in the average debt balance outstanding.
Interest Income. Interest income decreased from $0.2 million for the three
months ended September 30, 2000 to $0.03 million for the three months ended
September 30, 2001, due to a decrease in our average cash balances invested.
Other Income (Expense). Other income (expense) decreased from $0.5 million
for the three months ended September 30, 2000 to $0.4 million for the three
months ended September 30, 2001 due primarily to income earned from our
hospitality operations.
Gain on the Sale of Real Estate Held for Sale. In July 2001, we sold
Fortune House II for $17.2 million and recorded a gain of $3.9 million. During
the three months ended September 30, 2001, we sold two condominium units and
recorded a net gain of $0.03 million.
Impairment of Leasehold Improvements. During the three months ended
September 30, 2001, in accordance with SFAS No. 121, we evaluated the carrying
value of our leasehold improvements. Our Santa Clara facility was impaired due
to a decline in the technology sector and general economic conditions. We have
issued an option to purchase our interest at a price less than its carrying
value. Accordingly we recorded an impairment charge of $6.5 million and adjusted
the basis of the related asset to reflect the option. The alternatives for this
facility are to lease it, to sell our leasehold interest or the third party to
exercise their option.
Net Loss from Continuing Operations. Net loss from continuing operations
increased from $4.8 million for the three months ended September 30, 2000 to
$13.3 million for the three months ended September 30, 2001. This increase was
primarily due to the data center operations costs and the impairment of our
Santa Clara facility.
Net Loss from Discontinued Operations. The net loss from discontinued
operations recorded for the three months ended September 30, 2000 of $6.9
million reflects the losses from operations related to the AmTec and other
acquisitions, the operations of which were subsequently discontinued.
SIX MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2000
Revenue. Total revenue decreased $0.3 million, or 2.8%, to $9.5 million
for the six months ended September 30, 2001 from $9.8 million for the six months
ended September 30, 2000.
Data center revenue was $0.6 million for the six months ended September 30,
2001. No data center revenue was recorded for the comparable period during 2000.
The increase was attributable to our peering and colocation services offered at
the NAP. We expect data center revenue to increase in future periods as
customers continue to set up their operations in the NAP of the Americas. Future
data center revenue will be derived from peering, colocation and managed
services.
Revenue from real estate sales was $1.7 million for the six months ended
September 30, 2000 and was attributable to the sale of eight condominium units.
The revenue from the four condominium units sold during the six months ended
September 30, 2001 is recorded as gain on the sale of real estate held for sale.
Development, commission and construction fees increased approximately $0.2
million, or 11.4%, from $1.7 million for the six months ended September 30, 2000
to $1.9 million for the six months ended September 30, 2001. This increase
resulted from an increase in development and construction fees earned.
15
Management fees earned decreased approximately $0.1 million, or 11.7%, from
$0.9 million for the six months ended September 30, 2000 to $0.8 million for the
six months ended September 30, 2001. Management fees relate to management of
telecom, commercial and residential properties.
Construction contract revenue was $6.2 million for the six months ended
September 30, 2001 as compared to $5.4 million for the six months ended
September 30, 2000. The increase is attributable to the inclusion of six months
of operations of Post Shell Technology Contractors in the 2001 period as
compared to approximately three months during the 2000 period, partially offset
by the decrease in the number of contracts in 2001 as compared to 2000.
Data Center and Telecom Facilities Operations Expense. Data center and
telecom facilities operations expense was $4.0 million for the six months ended
September 30, 2001. No cost was recorded for the comparable period during 2000.
The increase was attributable to costs associated with the operations of the NAP
of the Americas facility. The significant components of these expenses
include -- rent expense, operations personnel, electricity and chilled water
costs and security services. With the exception of electricity and chilled water
costs, the majority of these expenses are fixed in nature. We expect that our
costs of electricity and chilled water and costs related to new managed services
will increase in the future as more customers set up their operations in the NAP
of the Americas.
Start-Up Costs Data Center and Telecom Facilities. Start-up costs for our
NAP of the Americas in Miami, Florida, and our colocation facility in Santa
Clara, California was approximately $2.9 million and $0.5 million, for the six
months ended September 30, 2001, respectively. No cost was recorded for the
comparable period during 2000.
Cost of Real Estate Sold. Cost of real estate sold was $1.4 million for
the six months ended September 30, 2000. The cost of real estate sold during the
six months ended September 30, 2001 is included in calculating the gain for real
estate held for sale.
Construction Contract Expenses. Construction contract expenses were $4.7
million for the six months ended September 30, 2001 as compared to $5.1 million
for the six months ended September 30, 2000. The decrease is a result of the
number of contracts in process and the stage of completion of those projects.
During the September 30, 2001 period, we had four construction contracts in
process compared to 19 during the September 30, 2000 period. These costs are
related to construction contracts resulting from our acquisition of Post Shell
Technology Contractors during the period and the percentage of completion of
those projects. We do not currently anticipate any losses on any of the
individual contracts.
General and Administrative Expenses. During the six months ended September
30, 2001, our efforts included establishing internal operations to support our
Internet and telecom infrastructure services strategy. General and
administrative expenses increased by $1.3 million, or 16.9%, from approximately
$7.6 million for the six months ended September 30, 2000 to $8.9 million for the
six months ended September 30, 2001. This increase is attributable to our
investment in personnel and corporate infrastructure. The significant components
of these expenses include personnel, insurance, office expenses and professional
fees. We expect general and administrative expenses directly relating to
TerreNAP(SM) Data Centers to continue increasing over time as we continue to
expand our operations.
Sales and Marketing Expenses. Sales and marketing expenses increased $0.1
million, or 7.4%, for the six months ended September 30, 2001. The increase is
principally due to the decrease of marketing expenses associated with the sale
of real estate offset by the increase in marketing expenses associated with
marketing the TerreNAP Data Centers including NAP of the Americas.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased from $1.7 million for the six months ended September 30, 2000
to $2.6 million for the six months ended September 30, 2001. The increase
resulted primarily from the depreciation of the equipment used in the NAP of the
Americas, which was placed in service on July 1, 2001. Therefore, no similar
expenses were recorded for the comparable period during 2000.
16
Interest Expense. Interest expense increased from $0.3 million for the six
months ended September 30, 2000 to $3.3 million for the six months ended
September 30, 2001 due to an increase in our average debt balance outstanding.
Interest Income. Interest income decreased from $0.3 million for the six
months ended September 30, 2000 to $0.08 million for the six months ended
September 30, 2001, due to a decrease in our average cash balances invested.
Gain on the Sale of Real Estate Held for Sale. In July 2001, we sold
Fortune House II for $17.2 million and recorded a gain of $3.9 million. During
the six months ended September 30, 2001 we sold four condominium units and
recorded a net gain of $0.1 million.
Impairment of Leasehold Improvements. During the six months ended
September 30, 2001, in accordance with SFAS No. 121, we evaluated the carrying
value of our leasehold improvements. Our Santa Clara facility was impaired due
to a decline in the technology sector and general economic conditions. We have
issued an option to purchase our interest at a price less than its carrying
value. Accordingly we recorded an impairment charge of $6.5 million and adjusted
the basis of the related asset to reflect the option. The alternatives for this
facility are to lease it, to sell our leasehold interest or the third party to
exercise their option.
Net Loss From Continuing Operations. Net loss from continuing operations
increased from $8.0 million for the six months ended September 30, 2000 to $21.3
million for the six months ended September 30, 2001. This increase was due to
the data center and telecom facilities start-up costs incurred in the first
quarter of 2002, the costs incurred since the opening of data center operations
on July 1, 2001, the impairment of the Santa Clara facility and additional
interest on debt.
Net Loss From Discontinued Operations. The net loss from discontinued
operations of $9.2 million recorded for the six months ended September 30, 2000
reflects the losses from operations related to the AmTec and other acquisitions,
the operations of which were subsequently discontinued.
Liquidity and Capital Resources. Cash used in continuing operations for
the six months ended September 30, 2001 was approximately $19.7 million compared
to cash used in operations of $11.3 million for the six months ended September
30, 2000. This increase was primarily the result of increased losses of
approximately $4.1 million. Cash used in discontinued operations amounted to
$2.1 million for the six months ended September 30, 2000. There were no similar
losses for the six months ended September 30, 2001. In the aggregate, cash used
in operating activities was $19.7 million and $13.4 million for the six months
ended September 30, 2001 and 2000, respectively.
Cash used in investing activities for the six months ended September 30,
2001 was $29.3 million compared to cash provided by in investing activities of
$51.5 million for the six months ended September 30, 2000. Cash provided by
investing activities for the six months ended September 30, 2000 resulted
primarily from the sale of Terremark Centre for $55.8 million. Cash used in
investing activities for the six months ended September 30, 2001 resulted
primarily from $40.8 million of cash used for the purchase of property and
equipment related to the NAP of the Americas and our colocation facility in
Santa Clara, California.
Cash provided by financing activities for the six months ended September
30, 2001 was $49.1 million compared to cash used in financing activities of
$36.2 million for the six months ended September 30, 2000. Cash used in
financing activities for the six months ended September 30, 2000 resulted
primarily from payments on loans of approximately $75.2 million, including
approximately $55.2 million in debt associated with Terremark Centre and $14.6
million related to a cancelled line of credit, partly offset by $28.1 million
provided by the sale of our common stock. Cash provided by financing activities
for the six months ended September 30, 2001 resulted primarily from $68.2
million of new borrowings and convertible debt and $7.3 million of construction
payables relating to the NAP of the Americas and our colocation facility in
Santa Clara, California.
Our consolidated financial statements as of March 31, 2001 have been
prepared on the assumption that we will continue as a going concern, which
contemplates the realization of assets and liquidation of liabilities
17
in the normal course of business. Our independent auditors have issued a report
dated July 9, 2001 stating that our recurring operating losses, and negative
cash flows, and stockholders' deficit, combined with our current lack of credit
facilities raise substantial doubt as to our ability to continue as a going
concern. Investors in our securities should review carefully our March 31, 2001
consolidated financial statements and the report of our independent accountants
thereon. Our ability to continue as a going concern is dependent on several
factors, including our ability to raise additional capital and our ability to
improve our operations. There can be no assurance that any financing will be
available through bank borrowings, debt or equity issuances, vendor lines of
credit, or otherwise, on acceptable terms or at all. If future financing
requirements are satisfied through the issuance of equity securities, investors
may experience significant dilution both in terms of their percentage interest
in the Company and the net book value per share of common stock. While we are
actively seeking strategic solutions to our funding issue, there can be no
assurance that we will be able to continue as a going concern.
We incurred a net loss of $21.3 million from continuing operations for the
six months ended September 30, 2001. This loss primarily reflects establishment
of internal operations to support Internet and telecom infrastructure services
and start-up costs associated with the NAP of the Americas, impairment of the
Company's colocation facility in Santa Clara, California and interest expense on
debt. We expect that we will need a significant infusion of cash to fund
retained business operations and planned expansion during the remainder of this
fiscal year. To complete the NAP of the Americas and to fund existing operations
during fiscal year 2002, we will need approximately $20.0 million in debt or
equity financing, exclusive of interest costs thereon. These funds would be used
to fund the build-out and working capital of the NAP of the Americas.
Expectations of cash needs are based on certain assumptions, the most
significant being the signing of additional customer contracts at the NAP of the
Americas during fiscal year 2002. We have identified additional potential
customers and are actively marketing to them available services in the NAP of
the Americas. Our plan for the balance of the fiscal year ending March 31, 2002
is predicated on obtaining customer contacts, which on an annual basis would
generate revenues of approximately $20.0 million.
We intend to allocate our financial resources to activities which are
consistent with our strategy of developing and operating TerreNAP(SM) Data
Centers, including the NAP of the Americas. However, the development of the NAP
of the Americas and other TerreNAP(SM) Data Centers will require substantial
capital resources. As part of our business strategy, we intend to continue to
evaluate potential acquisitions, joint ventures and strategic alliances in or
with companies that provide services or operations that complement our existing
businesses. Such acquisitions may also require financing, which may not be
available to us on acceptable terms.
In the quarter ended September 30, 2001, we met our liquidity needs
primarily through obtaining additional asset based financing. We continue to
have current liquidity needs to support repayment of our construction and other
payables and support operations. Our plan to increase liquidity includes
additional asset based mezzanine financing, equity funding, entering into
strategic relationships, renegotiating currently due construction payables into
larger term obligations, and the potential sale of additional debt or equity
securities sufficient to fund our 2002 business plan. There can be no assurance
that such financing will be available to us. Our ability to obtain financing may
be adversely affected by future declines in the technology sector and general
economic conditions. Further, any additional equity financing may be dilutive to
existing shareholders.
On September 5, 2001, we closed on a $48.0 million credit facility with a
bank. The credit facility bears interest at an annual rate of 9.25%, interest is
paid monthly and the principal balloons in 18 months. We have the option to
exercise two nine-month extension periods each at a cost of 0.5% of the
principal balance outstanding and a principal repayment of $2.5 million. During
each period under extension, a $250,000 monthly principal repayment plus
interest is due. At closing, the total amount of the credit facility was
disbursed except for approximately $6.6 million that has been held as an
interest reserve. For the first nine months after the closing of the loan, the
reserve may be drawn down on a monthly basis as interest payments are made.
Thereafter, the reserve may be drawn down only if the NAP of the Americas
achieves annualized revenues of at least $33.0 million. The proceeds of the
credit facility have been used to (i) refinance $13.5 million of our short-term
debt and (ii) fund the NAP of the Americas build-out costs. The credit facility
is secured by all of our assets and all of our stock in certain of our
subsidiaries. The credit facility
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allows for up to a $25.6 million junior lien position on the assets of our
subsidiary the NAP of the Americas, Inc. As a condition to the credit facility,
Manuel D. Medina, our Chief Executive Officer, was required to (i) provide a
personal guarantee of the credit facility, (ii) provide a $5.0 million
certificate of deposit to the bank as collateral on certain personal loans that
Mr. Medina has with the bank and (iii) commit to repay those personal loans by
December 31, 2001.
On September 5, 2001, in consideration of Mr. Medina's personal
requirements under the credit facility, we entered into an amended and restated
employment agreement with Mr. Medina. Under the terms of the amended and
restated employment agreement we will: indemnify Mr. Medina from any personal
liability related to his guarantees of any of our debt, use commercially
reasonable efforts to relieve Mr. Medina of all his guarantees of our debt,
provide $6.5 million of cash collateral to the bank should Mr. Medina be unable
to repay the personal loans by December 31, 2001, and provide a $5.0 million
loan to Mr. Medina for as long as his guarantees of our debt exist.
Additionally, as long as Mr. Medina's guarantees of our debt exist, we have
agreed to nominate Mr. Medina as the management representative on the our Board
of Directors and not remove Mr. Medina, unless for good cause, or remove any of
our officers without Mr. Medina's consent. There was no change in the amount or
timing of Mr. Medina's cash or non-cash compensation.
In connection with Mr. Medina's amended and restated employment agreement,
during September 2001, we issued a loan in the amount of $5.0 million to Mr.
Medina. The loan is non-interest bearing and matures when Mr. Medina's existing
guarantees of our debt are relieved.
Historically, we have funded operations and investing activities primarily
through short term and long-term debt and equity transactions. Debt financing as
of September 30, 2001 primarily includes the following:
(1) $26.6 million in principal amount of subordinated convertible debt
issued. Interest accrues at 13%, and is payable quarterly beginning March
31, 2001. The debt matures on December 31, 2005 and is convertible into
shares of our common stock at 120% of the 20-day average trading price
prior to its closing. We are permitted to prepay the debentures, which will
entitle holders to warrants or a premium over their outstanding principal
declining from 105% in 2001 at the rate of 1% per year;
(2) $48.0 million loan from a commercial bank secured by certain
assets and personal guarantees of some of our executives (as of September
30, 2001 approximately $41.3 million had been drawn on this facility);
(3) $4.7 million under various capital lease arrangements, with
various terms, secured by equipment;
(4) $1.6 million under a loan from a commercial bank secured by
certain assets and personal guarantees of some of our executives; and
(5) $1.5 million of short term financing was borrowed from certain
members of our executive management team.
Subsequent to September 30, 2001, we obtained $0.85 million of short term
financing from certain of our officers and directors.
In addition to our operating commitments, we have made certain guarantees.
The Technology Center of the Americas, LLC, ("TECOTA") where the NAP of the
Americas is located, obtained $48.0 million of equity and $61.0 million of
construction financing to fund the construction of TECOTA during September 2000.
During September 2001, our guaranty of such construction financing was reduced
from approximately $60.6 million to $9.5 million.
As of September 30, 2001, TECOTA had accounts payable and accrued expenses
of $3.1 million and construction related debt of $28.6 million. Currently we do
not expect to fund any amounts under our guarantee.
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INFLATION AND EXCHANGE RATES
The general rate of inflation in the United States has been insignificant
over the past several years and has not had a material impact on our results of
operations. As we expand international operations, inflation and exchange rate
variations may have substantial effects on our results of operations and
financial condition. The carrying values of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses is a reasonable approximation
of their fair value.
We cannot predict whether interest rates will be at levels attractive to
prospective tenants, buyers or customers and any increase in interest rates
could affect our business adversely.
NEW ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the FASB approved its proposed Statements of Financial
Accounting Standards No. 141 (FASB 141), BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. FASB 141 requires that all business
combinations subsequent to June 30, 2001 be accounted for under the purchase
method of accounting. FASB 142 requires cessation of goodwill amortization and
periodic evaluation of the goodwill carrying value. The provisions of FASB 142
are effective for fiscal years beginning after December 15, 2001. The Company
will adopt FASB 142 at the beginning of its fiscal year ending March 31, 2002.
In August 2001, the Financial Accounting Standards Board approved Statement
of Financial Accounting Standards No. 144 (FASB 144), Accounting for the
Impairment or Disposal of Long-Lived Assets. FASB 144 supercedes FASB 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations -- Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of business. FASB 144
retains the requirements of FASB 121 for recognition and measurement of an
impairment loss on long-lived assets, and establishes a single accounting model
for all long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired. The provisions of FASB 144 are effective for fiscal
years beginning after December 15, 2001. The Company will adopt FASB 144 at the
beginning of its fiscal year ending March 31, 2003.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 5, 2001, we issued warrants to purchase 750,000 shares of
common stock to a third party in connection with a modification of the terms of
our obligations to such third party for services performed. The warrants are
exercisable at $0.77 per share and expire September 2006.
On March 22, 2001, we issued warrants to purchase 300,000 shares of common
stock to a third party for services performed. The warrants are exercisable at
$2.00 per share and expire March 2006.
On June 12, 2001, we issued warrants to purchase an aggregate of 100,000
shares of common stock to third parties for services performed. The warrants are
exercisable at $1.72 per share and expire June 2011.
On June 12, 2001, we issued warrants to purchase 50,000 shares of common
stock to a third party for services performed. The warrants are exercisable at
$1.72 per share and expire June 2002.
On June 26, 2001, we issued warrants to purchase 25,000 shares of common
stock to a third party for services performed. The warrants are exercisable at
$2.00 per share and expire June 2003.
All of the warrants were issued pursuant to Section 4(2) of the Securities
Act of 1933, as amended, as transactions not involving a public offering.
During the three months ended September 30, 2001, we sold $4,530,364 in
principal amount of our 13% Subordinated Convertible Debentures due December 31,
2005. Each debenture is convertible (in multiples of $50,000) at a price per
share equal to 120% of the average market price of our common stock for the
twenty (20) trading days preceding the date the debenture was purchased. The
debentures are convertible at any time, but shares issued upon conversion may
not be sold or transferred prior to December 31, 2001. We may prepay the
debentures at any time on 15 days' notice. Upon prepayment, the Holder may
request repayment either: (i) at a premium (5% in 2001 decreasing to 0% in
2005); or (ii) at par with warrants to purchase shares of common stock in an
amount equal to 10% of the principal repaid exercisable at the conversion price.
The holder may call the debentures, with no premium or warrants, during the
month of January 2003. Conversion rights cease on notice of election to call.
The offer and sale of the debentures were exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act") as the
debentures were sold to accredited investors pursuant to Regulation D and to
non-United States persons in offshore transactions pursuant to Regulation S each
as promulgated under the Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 -- Amendment to Employment Agreement with Manuel D. Medina.
10.2 -- Amended and Restated Credit Agreement with Ocean Bank.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Terremark Worldwide, Inc. has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
TERREMARK WORLDWIDE, INC.
By: /s/ MANUEL D. MEDINA
------------------------------------
Manuel D. Medina,
Chairman of the Board, Chief
Executive Officer
Date: November 14, 2001
By: /s/ JOSE A. SEGRERA
------------------------------------
Jose A. Segrera
Chief Financial Officer
Date: November 14, 2001
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