UNITED STATES SECURITIES AND EXCHANGE COMMISSION

_____________

Form 10-Q

For the quarterly period ended June 30, 2004

For the transition period from _____________ to _____________

Commission file number 0-22520

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Terremark Worldwide, Inc.

2601 S. Bayshore Drive, Miami, Florida 33133
(Address of Principal Executive Offices, Including Zip Code)

Registrant’s telephone number, including area code:
(305) 856-3200

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes x No o

     The registrant had 366,792,198 shares of common stock, $0.001 par value, outstanding as of July 31, 2004.

Table of Contents

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Item 1. Financial Statements

Terremark Worldwide, Inc. and Subsidiaries

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Terremark Worldwide, Inc. and Subsidiaries

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Terremark Worldwide, Inc. and Subsidiaries

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Terremark Worldwide, Inc. and Subsidiaries

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Terremark Worldwide, Inc. and Subsidiaries

1. BUSINESS AND ORGANIZATION

     Terremark Worldwide, Inc. (together with its subsidiaries, the “Company” or “Terremark”) operates Internet Exchange Point facilities (“IXs”) at strategic locations in Florida, California and Sao Paulo from which the Company assists users of the Internet and large communications networks in communicating with other users and networks. The Company’s primary facility is the NAP of the Americas, a carrier-neutral Tier-1 network access point (the “NAP”) in Miami, Florida. The NAP provides exchange point, colocation and managed services to carriers, Internet service providers, network service providers, government entities, multinational enterprises and other end users.

     In June 2002, the Company entered into an exclusive agreement with the Comunidad Autonoma de Madrid (the “Comunidad”) to develop and operate carrier-neutral network access points in Spain. As part of that agreement, the parties formed NAP de las Americas — Madrid S.A. (“NAP Madrid”) to own and operate carrier-neutral IXs in Spain, modeled after the NAP of the Americas. The shareholders were the Comunidad through its Instituto Madrileno de Desarrollo (“IMADE”), the Camara Oficial de Comercio e Industria de Madrid, Red Electrica Telecomunicaciones, S.A., Telvent Sistemas y Redes S.A., a subsidiary of Abengoa S.A., and Centro de Transportes de Coslada, S.A. (“CTC”). At the time NAP Madrid was formed, the Company owned 1% of its equity, which was subsequently increased to 10%.

     In May 2004, the Company purchased the 20% of the NAP Madrid owned by Telvent Sistemas y Redes S.A. for approximately $550,000. In June 2004, the Company purchased the 20% of this entity owned by Red Electrica Telecomunicaciones, S.A. for approximately $634,000. As of June 30, 2004, the Company had a 50% equity interest in NAP Madrid. Because the Company exercises control, its accounts as of June 30, 2004 included the assets and liabilities of NAP Madrid, as well as the 50% minority interest. The assets of NAP Madrid include 8.7 million shares of Terremark’s common stock and de minimus operating assets. The liabilities of NAP Madrid consist primarily of a bank loan with a balance of 3.0 million Euros ($3.7 million at June 30, 2004). Because it had not commenced significant operations, NAP Madrid did not have any customers, nor did it have any employees. As a result, the Company concluded that the assets acquired do not constitute a business as such term is defined in SFAS No. 141.

     The Company allocated the purchase price based upon the fair value of assets acquired and liabilities assumed. The following is a final allocation of the purchase price:

     In July 2004, the Company purchased the 30% of the interest owned by CTC and IMADE for approximately $1.4 million. As a result of these transactions, the Company presently owns an 80% equity interest of NAP Madrid.

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Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2004

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles for complete annual financial statements. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary to present fairly the financial position and the results of operations for the interim periods presented. Operating results for the quarter ended June 30, 2004 may not be indicative of the results that may be expected for the year ending March 31, 2005. Amounts as of March 31, 2004 included in the condensed consolidated financial statements have been derived from audited consolidated financial statements as of that date. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended March 31, 2004.

     The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated.

Use of estimates

     The Company prepares its financial statements in conformity with generally accepted accounting principles in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

     Certain reclassifications have been made to the prior periods’ financial statements to conform with current presentation.

Investment in unconsolidated entities

     For investments in less than majority-owned entities where the Company does not exercise significant influence, the Company uses the cost method of accounting. For investments in less than majority-owned entities where the Company exercises significant influence, the Company uses the equity method of accounting.

Significant concentrations

     Two customers accounted for approximately 25% and 14% of data center revenues for the three months ended June 30, 2004. One customer accounted for approximately 13% of data center revenues for the three months ended June 30, 2003.

Stock-Based compensation

     The Company uses the intrinsic value method to account for its employee stock-based compensation plans. Under this method, compensation expense is based on the difference, if any, on the date of grant, between the fair value of the Company’s shares and the option’s exercise price. The Company accounts for stock-based compensation to non-employees using the fair value method.

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Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2004

     The following table presents what the net loss and net loss per share would have been had the Company accounted for employee stock-based compensation using the fair value method:

     Fair value calculations for employee grants were made using the Black-Scholes option pricing model with the following weighted average assumptions:

Derivatives

     The Company does not hold or issue derivative instruments for trading purposes. However, the Company’s 9% Senior Convertible Notes due June 15, 2009 (the “Senior Notes”) contain embedded derivatives that require separate valuation from the Senior Notes. The Company recognizes these derivatives as liabilities in its balance sheet and measures those instruments at their estimated fair value, and recognizes changes in the estimated fair value of the derivative instruments in earnings in the period of change.

Recent accounting standards

     In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, (“SAB 104”), Revenue Recognition. SAB 104 updates portions of existing interpretative guidance in order to be consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The adoption of SAB 104 did not have a material effect on the Company’s consolidated financial statements.

     In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. In November 2003, the FASB issued FASB Staff Position No. FASB 150-3 which deferred the measurement provisions of SFAS No. 150 indefinitely for certain mandatorily redeemable non-controlling interests that were issued before November 5, 2003. The FASB plans to reconsider implementation issues and, perhaps, classification or measurement guidance for those

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Terremark Worldwide, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 30, 2004

non-controlling interests during the deferral period. In 2003, the Company applied certain disclosure requirements of SFAS No. 150. To date, the impact of the effective provisions of SFAS No. 150 have been the presentation of the Series H redeemable preferred stock as a liability. While the effective date of certain elements of SFAS No. 150 have been deferred, the adoption of SFAS 150 when finalized is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

     In March 2004, the FASB approved EITF Issue 03-6 “Participating Securities and the Two-Class Method under FAS 128.” EITF Issue 03-6 supersedes the guidance in Topic No. D-95, “Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share”, and requires the use of the two-class method of participating securities. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In addition, EITF Issue 03-6 addresses other forms of participating securities, including options, warrants, forwards and other contracts to issue an entity’s common stock, with the exception of stock-based compensation (unvested options and restricted stock) subject to the provisions of Opinion No. 25 and FASB 123. EITF Issue 03-6 is effective for reporting periods beginning after March 31, 2004 and should be applied by restating previously reported earnings per share. The adoption of EITF Issue 03-6 did not have a material impact on the Company’s financial position or results of operations for the three months ended June 30, 2004.

     The Company’s Senior Notes contain contingent interest provisions which allow the holders of the Senior Notes to participate in any dividends declared on the Company’s common stock. Accordingly, the Senior Notes are considered participating securities under EITF Issue 03-6. The Senior Notes and their treatment under EITF Issue 03-6 will have a dilutive effect only when the Company has net income available to common stockholders.

3. CONVERTIBLE DEBT