| TERREMARK WORLDWIDE INC ITEM 1A RISK FACTORS You should carefully consider the following risks and all other information contained in this report |
| If any of the following risks actually occur, our business along with the consolidated financial conditions and results of operations could be materially and adversely affected |
| The risks and uncertainties described below are those that we currently believe may materially affect our company |
| Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business operations |
| 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 quarterly and annual period since our April 28, 2000 merger with AmTec, Inc |
| We incurred net losses of dlra37dtta1 million, dlra9dtta9 million and dlra22dtta5 million for the years 9 _________________________________________________________________ [63]Table of Contents ended March 31, 2006, 2005 and 2004, respectively |
| As of March 31, 2006, our accumulated deficit was dlra283dtta8 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 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 IX 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 IX 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 |
| 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, revenues under contracts with agencies of the US federal government constituted 22prca of our data center revenues |
| Generally, US government contracts are subject to oversight audits by government representatives, to profit and cost controls and limitations, and to provisions permitting modification or termination, in whole or in part, without prior notice, at the government’s convenience |
| In some cases, government contracts are subject to the uncertainties surrounding congressional appropriations or agency funding |
| Government contracts are also 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 US government |
| We may not be successful in winning contract awards or renewals in the future |
| Our failure to renew or replace US government 10 _________________________________________________________________ [64]Table of Contents 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 clients’ demand for our services or the loss of clients would likely impair our financial performance |
| During the year ended March 31, 2006, we derived approximately 19prca and 14prca of our data center revenues from two customers |
| During the year ended March 31, 2005, we derived approximately 42prca and 12prca 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 |
| ” 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 March 31, 2006, our total liabilities were dlra190dtta9 million and our total stockholders’ equity was dlra13dtta8 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 11 _________________________________________________________________ [65]Table of Contents • 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 |
| 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 that our stockholders would find it difficult to sell their shares |
| 12 _________________________________________________________________ [66]Table of Contents 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, particularly Manuel D Medina, our Chairman, President and Chief Executive Officer |
| Medina or other key personnel could have a material adverse effect on our business, operating results or financial condition |
| 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 experienced management personnel |
| Employment and retention of qualified personnel is important due to the competitive nature of our industry |
| Medina, the amount of coverage may not be sufficient to allow us to obtain a suitable replacement |
| 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 TECOTA building |
| The TECOTA building and our other IX 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 an IX 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 |
| 13 _________________________________________________________________ [67]Table of Contents 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: • 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 |
| Our common shares are thinly traded and, therefore, relatively illiquid |
| As of March 31, 2006, we had 44cmam490cmam352 common shares outstanding (including 865cmam202 treasury shares) |
| While our common shares trade on the American Stock Exchange, our stock is thinly traded (approximately 0dtta4prca of our stock traded on an average daily basis during the three months ended March 31, 2006) and you may have difficulty in selling your shares quickly |
| The low trading volume of our common stock is outside of our control, and may not increase in the near future or, even if it does increase in the future, may not be maintained |
| Our stock price may be volatile, and you could lose all or part of your investment |
| The market for our equity securities has been extremely volatile (ranging from dlra2dtta79 per share to dlra8dtta50 per share during the 52-week trading period ending June 14, 2006) |
| Our stock price could suffer in the future as a result of any failure to meet the expectations of public market analysts and investors about our results of operations from quarter to quarter |
| The following factors could cause the price of our common stock in the public market to fluctuate significantly: • actual or anticipated variations in our quarterly results of operations; • changes in market valuations of companies in our industry; • changes in expectations of future financial performance or changes in estimates of securities analysts; • fluctuations in stock market prices and volumes; • future issuances of common stock or other securities; • the addition or departure of key personnel; and • announcements by us or our competitors of acquisitions, investments or strategic alliances |
| Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the price they desire |
| 14 _________________________________________________________________ [68]Table of Contents You may not receive dividends on our common stock We do not anticipate paying any cash dividends on our common stock in the foreseeable future |
| In addition, the agreements governing our indebtedness, including the terms of the mortgage loan and the senior secured notes restrict our ability to pay dividends on our common stock |