UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2010

o		TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-12475

Terremark Worldwide, Inc.

Delaware		84-0873124
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

2 South Biscayne Blvd., Suite 2800, Miami, Florida 33131
(Address of Principal Executive Offices, Including Zip Code)

Registrant’s telephone number, including area code:
(305) 961-3200

Securities registered pursuant to Section 12(b) of the Act:

(Title of Class)		(Name of Exchange on Which Registered)
Common Stock, par Value $0.001 per Share		NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:
None

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

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o     No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark if the registrant is a shell Company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ

     As of October 23, 2010, there were 66,259,263 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

TABLE OF CONTENTS

				Page
PART I
Item 1.		Financial Statements (unaudited)			3
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			35
Item 4.		Controls and Procedures			35
PART II
Item 1.		Legal Proceedings			36
Item 1A.		Risk Factors			36
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3.		Defaults Upon Senior Securities			45
Item 4.		(Removed and Reserved)			45
Item 5.		Other Information			45
Item 6.		Exhibits			45
Signatures					48
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

		September 30,				March 31,
		2010				2010
ASSETS
Current assets:
Cash and cash equivalents		$	47,661			$	53,468
Accounts receivable, net			52,945				50,266
Current portion of capital lease receivables			330				418
Prepaid expenses and other current assets			14,382				12,605
Total current assets			115,318				116,757
Restricted cash			1,653				1,959
Property and equipment, net			476,116				404,656
Debt issuance costs, net			4,926				3,384
Other assets			13,599				15,384
Capital lease receivables, net of current portion			340				235
Intangibles, net			10,805				11,759
Goodwill			96,112				96,112
Total assets		$	718,869			$	650,246
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capital lease obligations		$	7,208			$	4,919
Accounts payable and other current liabilities			101,335				91,948
Total current liabilities			108,543				96,867
Secured loans			444,952				388,835
Convertible debt			57,192				57,192
Deferred rent and other liabilities			29,374				18,351
Deferred revenue			9,040				8,514
Total liabilities			649,101				569,759
Commitments and contingencies			—				—
Stockholders’ equity:
Series I convertible preferred stock: $0.001 par value, 310 and 312 shares issued and outstanding (liquidation value of approximately $8.0 million)			—				—
Common stock: $0.001 par value, 100,000,000 shares authorized; 65,758,700 and 65,058,331 shares issued and outstanding			66				65
Common stock warrants			8,901				8,901
Additional paid-in capital			463,567				456,860
Accumulated deficit			(402,681	)			(384,667	)
Accumulated other comprehensive loss			(85	)			(672	)
Total stockholders’ equity			69,768				80,487
Total liabilities and stockholders’ equity		$	718,869			$	650,246

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

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

		Six Months Ended								Three Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues		$	163,921			$	135,564			$	84,874			$	69,803
Expenses:
Cost of revenues, excluding depreciation and amortization			87,746				76,482				44,101				39,757
General and administrative			21,692				16,715				11,177				8,479
Sales and marketing			18,907				12,375				10,340				6,099
Depreciation and amortization			24,603				17,766				12,914				8,894
Total operating expenses			152,948				123,338				78,532				63,229
Income from operations			10,973				12,226				6,342				6,574
Other (expenses) income:
Interest expense			(28,647	)			(22,993	)			(14,428	)			(13,929	)
Loss on early extinguishment of debt			—				(10,275	)			—				—
Change in fair value of derivatives			174				(1,439	)			149				61
Interest income			247				212				140				119
Other			522				755				835				265
Total other expenses			(27,704	)			(33,740	)			(13,304	)			(13,484	)
Loss before income taxes			(16,731	)			(21,514	)			(6,962	)			(6,910	)
Income tax expense			(1,283	)			(900	)			(784	)			(326	)
Net loss			(18,014	)			(22,414	)			(7,746	)			(7,236	)
Preferred dividend			(467	)			(469	)			(234	)			(235	)
Net loss attributable to common stockholders		$	(18,481	)		$	(22,883	)		$	(7,980	)		$	(7,471	)
Net loss per common share:
Basic and diluted		$	(0.28	)		$	(0.36	)		$	(0.12	)		$	(0.12	)
Weighted average common shares outstanding — basic and diluted			65,465				63,050				65,725				64,669

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

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

						Common
						Stock Par																				Accumulated
		Preferred				Value								Common				Additional								Other
		Stock				Issued								Stock				Paid-In				Accumulated				Comprehensive
		Series I				Shares				Amount				Warrants				Capital				Deficit				(Loss) Income				Total
Balance at March 31, 2010		$	—				65,058			$	65			$	8,901			$	456,860			$	(384,667	)		$	(672	)		$	80,487
Components of comprehensive (loss) income:
Net loss			—				—				—				—				—				(18,014	)			—				(18,014	)
Foreign currency translation adjustment			—				—				—				—				—				—				587				587
Total comprehensive loss																															(17,427	)
Dividends on preferred stock			—				—				—				—				(467	)			—				—				(467	)
Conversion of preferred shares			—				7				—				—				—				—				—				—
Issuance of common stock in settlement of share-based awards			—				694				1				—				2,503				—				—				2,504
Share-based compensation			—				—				—				—				4,671				—				—				4,671
Balance at September 30, 2010		$	—				65,759			$	66			$	8,901			$	463,567			$	(402,681	)		$	(85	)		$	69,768

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

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Six Months Ended
		September 30,
		2010				2009
Cash flows from operating activities:
Net loss		$	(18,014	)		$	(22,414	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			24,603				17,766
Loss on early extinguishment of debt			—				10,275
Change in fair value of derivatives			(174	)			1,439
Gain on currency translation effect			(281	)			(729	)
Accretion on debt, net			1,117				1,433
Amortization of debt issuance costs			213				639
Provision for doubtful accounts			1,998				569
Interest payment in kind on secured loans			—				395
Settlement of interest rate swaps			—				(8,360	)
Share-based compensation			6,311				4,148
(Increase) decrease in:
Accounts receivable			(4,546	)			(1,747	)
Capital lease receivables, net of unearned interest			6				127
Restricted cash			306				586
Prepaid expenses and other assets			(3,929	)			(2,320	)
Increase (decrease) in:
Accounts payable and other current liabilities			815				1,146
Deferred revenue			3,055				1,771
Deferred rent and other liabilities			2,264				2,893
Net cash provided by operating activities			13,744				7,617
Cash flows from investing activities:
Purchase of property and equipment			(79,076	)			(40,274	)
Net cash used in investing activities			(79,076	)			(40,274	)
Cash flows from financing activities:
Payment on secured loans and convertible debt			—				(290,930	)
Proceeds from financing lease			7,002				—
Payments of preferred stock dividends			(468	)			(456	)
Payments of debt issuance costs			(1,654	)			(3,360	)
Proceeds from issuance of secured notes			55,000				386,963
Payments under capital lease obligations			(2,431	)			(1,587	)
Proceeds from issuance of common stock			312				19,953
Net cash provided by financing activities			57,761				110,583
Effect of foreign currency exchange rates on cash and cash equivalents			1,764				1,012
Net (decrease) increase in cash and cash equivalents			(5,807	)			78,938
Cash and cash equivalents at beginning of period			53,468				51,786
Cash and cash equivalents at end of period		$	47,661			$	130,724

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

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

1.   Business and Organization

Terremark Worldwide, Inc. and subsidiaries (“Terremark” or the “Company”) is a global provider of managed IT solutions leveraging its highly connected carrier-neutral data centers across major networking hubs in the United States, Europe and Latin America. The Company delivers a comprehensive suite of managed solutions including colocation, managed hosting, managed network, disaster recovery, security and cloud computing services. Terremark serves approximately 1,400 customers worldwide across a broad range of sectors, including enterprise, government agencies, systems integrators, network service providers, internet content and portal companies and internet infrastructure companies. The Company delivers its solutions through specialized data centers, including its three primary facilities: NAP of the Americas in Miami, Florida; NAP of the Capital Region in Culpeper, Virginia outside downtown Washington, D.C.; and NAP of the Americas/West in Santa Clara, California.

2.   Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Terremark Worldwide, Inc. and all entities in which Terremark Worldwide, Inc. has a controlling voting interest (“subsidiaries” and collectively with Terremark Worldwide, Inc. “Terremark”) required to be consolidated in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). All significant intercompany accounts and transactions between consolidated companies have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting policies described in the Terremark’s 2010 Annual Report on Form 10-K and should be read in conjunction with such policies and Terremark’s audited consolidated financial statements and notes. The unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations, cash flows and changes in stockholders equity for the periods presented have been included. The operating results for interim periods are not necessarily indicative of the results that can be expected for a full year.

Correction of Immaterial Error Related to Prior Periods

In connection with the preparation of the Quarterly Report on Form 10-Q for the three months ended June 30, 2010, an error was identified in the calculation and presentation of the changes in Accounts Payable and Other Current Liabilities and Purchase of Property and Equipment line items in the statement of cash flows. The Company reviewed the impact of this error on the prior periods in accordance with FASB and Securities and Exchange Commission (“SEC”) guidance and determined that the error was not material to the prior periods. However, the Company has revised the statement of cash flows for the six months ended September 30, 2009 by decreasing net cash used in investing activities for the Purchase of Property and Equipment and decreasing cash flows provided by operating activities in Accounts Payable and Other Current Liabilities by approximately $2.6 million. For the comparative fiscal years, the Company will also correct the prior periods as follows (in thousands):

		Year Ended				Nine Months Ended				Year Ended
		March 31, 2010				December 31, 2009				March 31, 2009
Cash flows from operating activities:
Accounts payable and other current liabilities		$	(9,070	)		$	4,318			$	13,672
Cash flows from investing activities:
Purchase of property and equipment		$	9,070			$	(4,318	)		$	(13,672	)

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Reclassifications

Certain reclassifications have been made to the prior period’s condensed consolidated financial statements to conform to the current presentation.

Significant concentrations

The federal sector, which includes federal government agencies and non-government entities that contract with the federal government, accounted for approximately 20% and 21% of our revenues for the six and three months ended September 30, 2010, respectively, and 22% of our revenues for both the six and three months ended September 30, 2009. No commercial customer accounted for more than 10% of revenues for each of the six and three months ended September 30, 2010 and 2009.

Derivatives

The Company has, in the past, used financial instruments, including interest cap agreements and interest rate swap agreements, to manage exposures to movements in interest rates. The use of these financial instruments modifies the Company’s exposure to these risks and is designed to minimize such risks. The Company does not hold or issue derivative instruments for trading purposes.

The Company entered into two interest rate swap agreements as required under the provisions of the $250.0 million mortgage loan entered into on July 31, 2007. The interest rate swaps were settled on June 24, 2009. See Note 11.

The Company’s 6.625% Senior Convertible Notes, due June 15, 2013 (the “6.625% Senior Convertible Notes”), and $50.0 million aggregate principal amount of the Company’s 12% Senior Secured Notes, due June 15, 2017 (the “$50.0 million 12% Senior Secured Notes”), contain embedded derivatives that require separate valuation. The Company recognizes these derivatives as assets or liabilities on its balance sheet, measures them at their estimated fair value and recognizes changes in their estimated fair value in earnings for the relevant period.

The Company estimates the fair value of its embedded derivatives using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company may eventually pay to settle these embedded derivatives.

Construction in progress

Construction in progress is stated at its original cost and includes direct expenditures associated with the expansion of the Company’s data center footprint and upgrades to infrastructure of current data center footprint. Once an expansion project becomes operational, these capitalized costs are allocated to certain property and equipment categories and are depreciated at the appropriate rates consistent with the estimated useful life of the underlying assets. In addition, the Company has capitalized certain interest costs during the construction phase if certain criteria are met. The following table sets forth total interest cost incurred and total interest cost capitalized (in thousands):

		Six Months Ended								Three Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Interest expense		$	28,647			$	22,993			$	14,428			$	13,929
Interest capitalized			2,886				631				1,592				455
Interest charges incurred		$	31,533			$	23,624			$	16,020			$	14,384

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Fair value of financial instruments

The fair value of secured loans and convertible debt is as follows (in thousands):

		September 30, 2010								March 31, 2010
		Book Value				Fair Value				Book Value				Fair Value
Secured loans:
$420.0 million 12% Senior Secured Notes		$	390,160			$	483,894			$	388,835			$	481,491
$50.0 million 12% Senior Secured Notes			54,792				57,607				—				—
		$	444,952			$	541,501			$	388,835			$	481,491
Convertible debt:
6.625% Senior Convertible Notes		$	57,192			$	61,627			$	57,192			$	59,062

The book value for the Company’s secured loans and convertible debt is net of the unamortized discount or premium to debt principal. See Notes 9 and 10.

Fair value measurements

The table below summarizes the fair values of our financial assets (liabilities) as follows (in thousands):

		Fair Value at
		September 30,				Fair Value Measurement Using
		2010				Level 1				Level 2				Level 3
Money market fund		$	12,190			$	12,190			$	—			$	—
Embedded derivatives			(121	)			—				—				(121	)
		$	12,069			$	12,190			$	—			$	(121	)

The following is a description of the valuation methodologies used for these items, as well as the general classification of such items:

Money market fund instruments — these instruments are valued using quoted prices for identical instruments in active markets. Therefore, the instruments are classified within Level 1 of the fair value hierarchy. These money market funds are included in cash and cash equivalents.

Embedded derivatives — these instruments are embedded within the Company’s 6.625% Senior Convertible Notes and $50.0 million 12% Senior Secured Notes. These instruments were valued using pricing models that incorporate the Company’s stock price, credit risk, volatility, U.S. risk free interest rate, transaction details such as contractual terms, maturity and amount of future cash inflows, as well as assumptions about probability and the timing of certain events taking place in the future. These embedded derivatives are included in deferred rent and other liabilities on the Company’s balance sheet and the change in the fair value is recorded in the income statement line item, change in fair value of derivatives. For a summary of the changes in the fair value of these embedded derivatives, see Note 11.

Effective April 1, 2009, the Company adopted the provisions of accounting standards for fair value measurements for our nonfinancial assets and liabilities measured at fair value on a nonrecurring basis. Nonfinancial assets such as goodwill, other intangible assets, and long-lived assets held and used are measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized or for a business combination.

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Recent accounting pronouncements

In September 2009, the FASB issued accounting guidance which amends the criteria for allocating a contract’s consideration to individual services or products in multiple arrangements. The guidance requires that the best estimate of selling price be used when vendor specific objective or third-party evidence for deliverables cannot be determined. This guidance is effective prospectively for revenue arrangements entered into or materially modified beginning in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements, if any.

On January 1, 2010, the Company adopted new accounting guidance regarding disclosures about fair value measurements. The guidance amends existing disclosure criteria, requiring entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The guidance also amends existing guidance to clarify that an entity must provide fair value measurement disclosures for each major class of assets and liabilities. With respect to the new disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, and its adoption did not have any significant impact on the Company’s condensed consolidated financial statements. The Company is currently evaluating the impact that the disclosure of activity in Level 3 fair value measurements will have on its consolidated financial statements, if any.

3.   Acquisitions

On November 12, 2009, the Company entered into a purchase agreement to acquire all issued and outstanding equity interests in DS3 DataVaulting, LLC, a data management solutions provider, for a final purchase price of $12.1 million in cash, including a working capital adjustment of $0.6 million paid to the sellers on March 1, 2010. Pursuant to the purchase agreement, the sellers agreed to indemnify the Company for certain potential contractual obligations. In accordance with the terms of the related escrow agreement, $1.5 million of the purchase price was placed into an escrow account to secure such indemnification obligations. The escrow agreement ends on May 11, 2011, at which time the remaining funds, if any, will be distributed to the sellers. This data management solutions provider delivers offsite, online data backup and restore services, which enable enterprises and government agencies to rapidly and securely backup and restore files, databases and operating systems. The costs to acquire the data management solutions provider were allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their respective fair values, and any excess was allocated to goodwill. The following summarizes the allocation of the purchase price as of September 30, 2010 (in thousands):

Cash and cash equivalents		$	44
Accounts receivable, net			827
Prepaid and other current assets			258
Property and equipment			1,690
Intangibles			825
Goodwill			9,923
Accounts payable and accrued expenses			(398	)
Deferred revenue			(162	)
Capital lease obligations			(926	)
Net assets acquired		$	12,081

4.   Accounts Receivable

		September 30,				March 31,
		2010				2010
Accounts receivable, net, consists of (in thousands):
Accounts receivable		$	38,033			$	39,359
Unbilled revenue			16,444				12,182
Allowance for doubtful accounts			(1,532	)			(1,275	)
		$	52,945			$	50,266

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Unbilled revenue consists of revenues earned for which the customer has not been billed.

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

5.   Prepaid Expenses and Other Assets

		September 30,				March 31,
		2010				2010
Prepaid expenses and other assets consists of (in thousands):
Prepaid expenses		$	5,601			$	4,741
Deferred costs			10,582				8,758
Deposits			4,616				4,476
Prepaid ground lease			—				3,602
Deferred rent			1,385				1,364
Other			3,179				2,376
Tenant allowance			1,402				1,418
Deferred tax asset			960				949
Interest and other receivables			256				305
			27,981				27,989
Less: current portion			(14,382	)			(12,605	)
		$	13,599			$	15,384

6.   Property and Equipment

		September 30,				March 31,
		2010				2010
Property and equipment, net, consists of (in thousands):
Land		$	23,307			$	18,336
Building			167,182				140,751
Building and leasehold improvements			97,928				81,433
Machinery			214,570				165,035
Equipment, furniture and fixtures			98,164				82,646
Construction in progress			12,556				30,521
			613,707				518,722
Less: accumulated depreciation and amortization			(137,591	)			(114,066	)
		$	476,116			$	404,656

Depreciation and amortization expense, excluding amortization of intangible assets (see Note 7), was $23.6 million and $12.4 million for the six and three months ended September 30, 2010, respectively. Depreciation and amortization expense, excluding amortization of intangible assets, was $16.7 million and $8.4 million for the six and three months ended September 30, 2009, respectively.

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

7.   Intangibles

		Amortization				September 30,				March 31,
		Period (Years)				2010				2010
Intangibles, net, consists of (in thousands):
Customer base			8-10			$	9,125			$	9,125
Technology			4-5				6,400				6,400
Trademarks			—				4,100				4,100
Non-compete agreements			3				100				100
							19,725				19,725
Less: accumulated amortization							(8,920	)			(7,966	)
						$	10,805			$	11,759

The Company expects to record amortization expense associated with these intangible assets as follows for each of the fiscal years ended March 31 (in thousands):

		Customer
		Base				Technology
2011 (six months remaining)		$	538			$	400
2012			1,075				800
2013			1,075				120
2014			1,075				—
2015			1,075				—
2016			547				—
		$	5,385			$	1,320

Amortization of intangibles was $1.0 million and $0.5 million for the six and three months ended September 30, 2010, respectively, and $1.1 million and $0.5 million for the six and three months ended September 30, 2009, respectively, which is included in depreciation and amortization expense in the Company’s accompanying condensed consolidated financial statements.

8.   Accounts Payable and Other Current Liabilities

		September 30,				March 31,
		2010				2010
Accounts payable and other current liabilities consists of (in thousands):
Accounts payable		$	48,638			$	45,934
Accrued expenses			20,517				17,121
Current portion of deferred revenue			10,359				7,138
Interest payable			17,576				17,308
Customer prepayments			4,245				4,447
		$	101,335			$	91,948

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

9. Secured Loans

		September 30,				March 31,
		2010				2010
Secured loans consist of (in thousands):
$420.0 million 12% Senior Secured Notes, due June 15, 2017. Interest is payable semi-annually, on December 15 and June 15 (Effective interest rate of 13.8%)		$	390,160			$	388,835
$50.0 million 12% Senior Secured Notes, due June 15, 2017. Interest is payable semi-annually, on December 15 and June 15 (Effective interest rate of 10.7%)			54,792				—
		$	444,952			$	388,835

          On June 24, 2009 and April 28, 2010 (collectively the “Closing Dates”), the Company issued an aggregate principal amount of $420.0 million (“$420.0 million 12% Senior Secured Notes”) and $50.0 million, respectively, of 12% Senior Secured Notes, due June 15, 2017 (collectively the “12% Senior Secured Notes”), which are guaranteed by substantially all of the Company’s domestic subsidiaries (the “Guarantors”). Additionally, the 12% Senior Secured Notes are secured by a first priority security interest in substantially all of the assets of the Company and the Guarantors, including the pledge of 100% of all outstanding capital stock of each of the Company’s domestic subsidiaries, excluding Terremark Federal Group, Inc. and Technology Center of the Americas, LLC, and 65% of all outstanding capital stock of substantially all of the Company’s foreign subsidiaries, subject to certain customary exceptions relating to our ability to remove the pledge with respect to certain significant subsidiaries which would otherwise result in additional audit requirements under SEC accounting rules such as providing additional audited financial statements for these subsidiaries. The 12% Senior Secured Notes bear interest at 12.0% per annum, payable on December 15 and June 15 of each year. In the event of a change in control of the Company, the Company must offer to purchase all 12% Senior Secured Notes then outstanding at a price equal to 101% of their principal amount, plus accrued interest (if any), to the date of repurchase.

          The loan proceeds for the $420.0 million 12% Senior Secured Notes were used to satisfy and repay all of the Company’s then-outstanding secured indebtedness, which included (i) loans under a first lien credit agreement with a face value of $150.0 million, (ii) loans under a second lien credit agreement with a face value of $100.0 million (the foregoing credit agreements together, the “Credit Agreements”) and (iii) $8.4 million for the settlement of the two interest rate swap agreements that were entered into in connection with the Credit Agreements. The Company paid prepayment premiums of $2.2 million to the holders of the second lien credit agreement in connection with this financing transaction. The Company expects to use the remainder of the proceeds to fund working capital and other general operational purposes.

          The repayment of the amounts outstanding under the Credit Agreements was accounted for as an exchange and early extinguishment of debt, and the $420.0 million 12% Senior Secured Notes were accounted for as a new debt instrument at $387.0 million, net of original issue discount of $33.0 million that included $12.5 million in fees paid to initial purchasers of the notes. The exchange of debt instruments resulted in a loss on the early extinguishment of debt of $10.3 million for the six months ended September 30, 2009. The loss included $7.0 million of unamortized deferred financing costs, $2.3 million of prepayment penalties related to the second lien credit agreement, breakage fees related to the settlement of the interest rate swaps and $1.0 million of unamortized discount.

          In addition, the Company recorded $3.5 million of debt issuance costs related to the $420.0 million 12% Senior Secured Notes. For the six and three months ended September 30, 2010, the Company amortized $1.3 million and $0.7 million of the discount, respectively. For the six and three months ended September 30, 2009, the Company amortized $0.6 million of the discount, respectively. For the six and three months ended September 30, 2010, and 2009, debt issuance costs of $0.1 million and less than $0.1 million were amortized into interest expense, respectively.

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

          The $50.0 million 12% Senior Secured Notes were accounted for as a new debt instrument at $55.0 million, net of premium that included $1.0 million in fees paid to initial purchaser of the notes. The $50.0 million 12% Senior Secured Notes were issued with a substantial premium to par and as a result, the Company determined that the change in control provision would be bifurcated and accounted for separately. The Company has estimated that this embedded derivative does not have significant value, see Note 11. In addition, the Company recorded $1.8 million of debt issuance costs related to the $50.0 million 12% Senior Secured Notes. For the six and three months ended September 30, 2010, the Company amortized $0.2 million and $0.1 million of the premium and less than $0.1 million and less than $0.1 million of the debt issuance costs into interest expense, respectively.

          The Company expects to use the proceeds from the issuance of the $50.0 million 12% Senior Secured Notes for working capital and other general corporate purposes.

10. Convertible Debt

		September 30,				March 31,
		2010				2010
Convertible debt consists of (in thousands):
6.625% Senior Convertible Notes, due June 15, 2013, and convertible into shares of the Company’s common stock at $12.50 per share. Interest at 6.625% is payable semi-annually, on December 15 and June 15 (Effective interest rate of 6.6%)		$	57,192			$	57,192
		$	57,192			$	57,192

          On June 15, 2009, all outstanding obligations under the Company’s 0.5% Senior Subordinated Convertible Notes, (the “Series B Notes”) with a face value of $4.0 million were satisfied and repaid at maturity. On the maturity date, the Company paid $4.1 million to the holders of the Series B Notes, representing the principal amount, including interest paid in kind, and all accrued and unpaid interest. On June 15, 2009, we repaid and satisfied at maturity all outstanding obligations under our 9% Senior Convertible Notes with a face value of $29.1 million. On the maturity date, the Company paid $30.4 million to the holders of such notes, representing $29.1 million of principal and $1.3 million of accrued and unpaid interest.

          The 6.625% Senior Convertible Notes, which were issued on May 2, 2007 in a private exchange for $57.2 million aggregate principal amount of our then outstanding 9% Senior Convertible Notes, are unsecured obligations and rank pari passu with all existing and future unsecured and unsubordinated indebtedness, senior in right of payment to all existing and future subordinated indebtedness, and rank junior to any future secured indebtedness. The Company’s 6.625% Senior Convertible Notes contain two embedded derivatives that require separate valuation from the 6.625% Senior Convertible Notes: an equity participation right which was determined not to have significant value and a contingent put upon change in control. If there is a change in control, the holders of the 6.625% Senior Convertible Notes have the right to require the Company to repurchase their notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest to and including the date of repurchase. If a holder surrenders notes for conversion at any time beginning on the effective notice of a change in control in which 10% or more of the consideration for the Company’s common stock consists of cash, the Company will increase the number of shares issuable upon such conversion by an amount not to exceed 5,085,513 additional shares. The number of additional shares is based on the date on which the partial cash buy-out becomes effective and the price paid or deemed to be paid per share of the Company’s common stock in the change of control. If the Company issues a cash dividend on its common stock, it must pay contingent on the 6.625% Senior Convertible Notes equal to the product of the per share cash dividend and the aggregate number of shares of common stock issuable upon conversion of the outstanding 6.625% Senior Convertible Notes.

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

11. Derivatives

          The Company’s $50.0 million 12% Senior Secured Notes contain an embedded derivative that requires separate valuation from the $50.0 million 12% Senior Secured Notes: a contingent put upon change in control which is described in Note 9.

          The Company’s 6.625% Senior Convertible Notes contain two embedded derivatives that require separate valuation from the 6.625% Senior Convertible Notes: an equity participation right and a contingent put upon change in control, See Note 10.

          As of September 30, 2010 and March 31, 2010, the outstanding embedded derivatives relating to the 6.625% Senior Convertible Notes and $50.0 million 12% Senior Secured Notes, amounted in the aggregate to a liability of $0.1 million and $0.3 million, respectively.

          On February 8, 2008, the Company entered into two interest rate swap agreements as required under the provisions of the Credit Agreements. One of the interest rate swap agreements was effective March 31, 2008 for a notional amount of $148.0 million and a fixed interest rate of 2.999%. Interest payments on this instrument were due on the last day of each March, June, September and December, ending on December 31, 2010. The second interest rate swap agreement entered into was effective on July 31, 2008 for a notional amount of $102.0 million and a fixed interest rate of 3.067%. Interest payments on this instrument were due on the last day of each January, April, July and October, ending on January 31, 2011. The interest rate swap agreements served as an economic hedge against increases in interest rates and were not designated as hedges for accounting purposes. Accordingly, the Company accounted for these interest rate swap agreements on a fair value basis and adjusted these instruments to fair value and the resulting changes in fair value were charged to earnings.

          In connection with the repayment of the Credit Agreements on June 24, 2009, the interest rate swap agreements were unwound and settled for $8.4 million payable to the holders. The Company recorded $0.9 million of interest expense related to the interest rate swap agreements for the six months ended September 30, 2009.

12. Deferred Rent and Other Liabilities

		September 30,				March 31,
		2010				2010
Deferred rent and other liabilities consists of (in thousands):
Deferred rent		$	12,287			$	10,449
Long-term portion of capital lease obligations			14,785				5,751
Deferred tax liability			1,543				1,543
Other liabilities			759				608
		$	29,374			$	18,351

          During the six months ended September 30, 2010, the Company entered into sale leaseback financing for the Company’s Amsterdam, Netherlands property which resulted in net proceeds of $7.0 million. This transaction is in connection with the construction of a new data center in Amsterdam and has been accounted for as a financing lease, wherein the property remains on the Company’s financial statements. No gains or losses resulted from this transaction. The Company effected such financing using an “unrestricted subsidiary” as permitted under the terms of the indenture governing the 12% Senior Secured Notes.

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

13. Commitments and Contingencies

          In the ordinary course of conducting business, we become involved in various legal actions and claims. Litigation is subject to many uncertainties and the Company may be unable to accurately predict the outcome of such matters, some of which could be decided unfavorably to us. The Company’s participation in government contracts subjects us to inquiries, investigations and subpoenas regarding our business with the federal government. Improper or illegal activities may subject us to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with federal government agencies. Management does not believe the ultimate outcome of pending matters of the nature described above would be material.

14. Changes in Stockholders’ Equity

     Issuance of Common stock

          For the six months ended September 30, 2010, the Company issued an aggregate of 693,702 million shares of its common stock to certain employees upon the exercise of stock options and vesting of restricted stock. Issued shares were net of shares surrendered to satisfy the employees’ withholding tax liability.

          On May 29, 2009, in a private transaction, we sold to VMware Bermuda Limited, a wholly-owned subsidiary of VMware, Inc. (“VMware”), four million shares of our common stock at a purchase price of $5.00 per share, for a total purchase price equal to $20 million. As part of the VMware vCloud Initiative, the two companies have worked together to provide leading-edge utility and cloud computing services to the enterprise and federal markets and continue to jointly cooperate to create and launch cloud infrastructure services. For the six and three months ended September 30, 2010, we paid to VMware $0.3 million and $0.1 million in software licensing and other fees, respectively, and for the six and three months ended September 30, 2009, $0.7 million and $0.6 million, respectively.

15. Earnings (Loss) Per Share

          The following table sets forth potential shares of common stock that are not included in the diluted net loss per share calculation because to do so would be anti-dilutive for the periods indicated (in thousands):

		Six Months Ended								Three Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
9% Senior Convertible Notes			—				965				—				—
Common stock warrants			2,018				2,028				2,018				2,025
Common stock options			2,191				2,294				2,117				2,379
Nonvested stock			2,766				1,270				2,934				1,063
Series I convertible preferred stock			1,067				1,072				1,066				1,072
6.625% Senior Convertible Notes			4,575				4,575				4,575				4,575
0.5% Senior Subordinated Convertible Notes			—				244				—				—

16. Share-based Compensation

   Option Awards

          On May 19, 2010, the Company granted stock options to purchase 116,650 shares of its common stock with an exercise price of $7.65 per share to members of the Company’s Board of Directors.

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

     Nonvested Stock Awards

          The Company records the intrinsic value of the nonvested stock as additional paid-in capital. Share-based compensation expense is recognized ratably over the applicable vesting period. As of September 30, 2010, the future compensation expense related to nonvested stock that is anticipated to be recognized is approximately $22.0 million. The cost is expected to be recognized over a weighted average period of 2.2 years. The Company recognized approximately $4.0 million and $2.3 million of share-based compensation expense, associated with nonvested stock, for the six and three months ended September 30, 2010 and $1.8 million and $0.8 million, for the six and three months ended September 30, 2009, respectively. A summary of the Company’s nonvested stock as of September 30, 2010 and changes for the six months ended September 30, 2010 is presented below (in thousands, except for per share data):

						Weighted Average
						Grant Date
		Shares				Fair Value
Outstanding at April 1, 2010			2,430			$	6.54
Granted			1,640				8.54
Vested			(295	)			7.68
Forfeited			(42	)			7.54
Outstanding at September 30, 2010			3,733			$	7.48

     Share-based Compensation Recognized in the Statement of Operations

          The following table presents, by operating expense category, the Company’s share-based compensation expense recognized for all outstanding equity awards (in thousands):

		Six Months Ended								Three Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Cost of revenues		$	2,093			$	1,867			$	1,146			$	950
General and administrative			3,580				1,969				2,057				1,033
Sales and marketing			638				312				369				133
		$	6,311			$	4,148			$	3,572			$	2,116

17. Related Party Transactions

          Following is a summary of transactions for the six and three months ended September 30, 2010 and 2009 and other receivable balances from a corporation controlled by a director of the Company that are included in the accompanying condensed consolidated statements of operations and condensed consolidated balance sheets as of September 30, 2010 and March 31, 2010 (in thousands):

		Six Months								Three Months
		Ended								Ended
		September 30,								September 30,
		2010				2009				2010				2009
Services purchased from related party		$	—			$	61			$	—			$	30
Services from directors			250				200				125				100

		September 30,				March 31,
		2010				2010
Other assets		$	244			$	304

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

          The Company has entered into consulting agreements with three members of the Company’s Board of Directors and an employment agreement with a fourth board member. The consulting agreements provide for a combined annual compensation of $440,000, and the employment agreement provides for an annual compensation of $60,000.

18. Revenues

		Six Months Ended								Three Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues consist of (in thousands):
Colocation		$	70,320			$	53,225			$	37,624			$	27,584
Managed and professional services			78,422				69,937				40,351				36,150
Exchange point services			10,044				9,056				5,167				4,605
Equipment resales			5,135				3,346				1,732				1,464
		$	163,921			$	135,564			$	84,874			$	69,803

          Total arrangement consideration for managed web hosting solutions may include the procurement of equipment. Amounts allocated to equipment and software sold under these arrangements and included in managed and professional services were $6.7 million and $2.9 million for the six and three months ended Spetember 30, 2010, and $4.4 million and $2.7 million for the six and three months ended September 30, 2009, respectively.

19. Information About the Company’s Operating Segment

          As of September 30, 2010 and March 31, 2010, the Company had one reportable business segment, which is data center operations. The data center operations segment provides Tier 1 NAP, Internet infrastructure and managed services in a data center environment. Additionally, the segment provides NAP development and technology infrastructure buildout services.

20. Supplemental Cash Flow Information

		Six Months Ended
		September 30,
		2010				2009
Supplemental disclosures of cash flow information (in thousands):
Cash paid for interest, net of amount capitalized		$	27,029			$	10,499
Cash paid for income taxes			941				38
Non-cash operating, investing and financing activities:
Assets acquired under capital leases			9,664				3,308
Cancellation and expiration of warrants			—				32
Changes in accrued property and equipment			5,425				(2,033	)
Decrease in other assets related to financing lease			3,226				—

21. Supplemental Guarantor and Non-Guarantor Condensed Consolidating Financial Information

          On June 17, 2010, the Company consummated its registered offer to exchange (the “Exchange Offer”) all outstanding 12% Senior Secured Notes (the “Original Notes”) that were not registered under the Securities Act of 1933, as amended (the “Securities Act”), for new 12% Senior Secured Notes that are registered under the Securities Act (the “New Notes”). The terms of the New Notes are substantially identical to the terms of the Original Notes, except that the New Notes are registered under the Securities Act, and the transfer restrictions and registration rights and related additional interest provisions applicable to the Original Notes do not apply to the New Notes. The New Notes represent the same debt as the Original Notes and were issued under the same indenture as the Original Notes. In connection with the Exchange Offer and the registration of the New Notes under the Securities Act, below are certain consolidating financial statements of the Company, the Guarantors and the Company’s subsidiaries that are not Guarantors. In lieu of providing separate unaudited financial statements of the Guarantors, condensed financial statements prepared in accordance with Rule 3-10 of Regulation S-X are presented below.

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The column marked “Issuer” includes the results of Terremark Worldwide, Inc. (the “Parent Company”). The column marked “Guarantor Subsidiaries” includes the results of the Guarantors, which consist of all of the Company’s domestic, wholly-owned, subsidiaries. The column marked “Non-Guarantor Subsidiaries” includes results of the Company’s subsidiaries that are not Guarantors, which consist of the Company’s foreign subsidiaries. Eliminations necessary to arrive at the information for the Company on a consolidated basis for the periods presented are included in the column so labeled and consist primarily of certain intercompany payments between the Parent Company and the Non-Guarantor Subsidiaries. Separate financial statements and other disclosures concerning the Guarantors are not presented because management has determined that they are not material to investors.

          The following represents the supplemental financial statements of the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries. These financial statements should be read in conjunction with our consolidated financial statements and notes thereto.

Condensed Consolidating Balance Sheet as of September 30, 2010
(In thousands)

						Guarantor				Non-Guarantor
		Issuer				Subsidiaries				Subsidiaries				Eliminations				Total
Current assets:
Cash and cash equivalents		$	27,160			$	(63	)		$	20,564			$	—			$	47,661
Accounts receivables, net			—				47,803				5,142				—				52,945
Current portion of capital lease receivables			—				330				—				—				330
Prepaid expenses and other current assets			1,056				9,945				3,381				—				14,382
Total current assets			28,216				58,015				29,087				—				115,318
Investment in subsidiaries			226,970				—				—				(226,970	)			—
Intercompany accounts receivable			382,506				88,020				4,707				(475,233	)			—
Restricted cash			645				1,008				—				—				1,653
Property and equipment, net			6,930				439,716				29,470				—				476,116
Debt issuance costs, net			4,926				—				—				—				4,926
Other assets			1,578				10,827				1,208				(14	)			13,599
Capital lease receivables, net of current portion			—				197				143				—				340
Intangibles, net			—				9,935				870				—				10,805
Goodwill			—				89,169				6,943				—				96,112
Total assets		$	651,771			$	696,887			$	72,428			$	(702,217	)		$	718,869
Current liabilities:
Current portion of capital lease obligations			1,071				5,442				695				—				7,208
Accounts payable and other current liabilities			23,266				68,877				9,192				—				101,335
Total current liabilities			24,337				74,319				9,887				—				108,543
Intercompany accounts payable			85,521				369,150				20,562				(475,233	)			—
Secured loans			444,952				—				—				—				444,952
Convertible debt			57,192				—				—				—				57,192
Deferred rent and other liabilities			4,382				17,813				7,179				—				29,374
Deferred revenue			—				7,161				1,892				(13	)			9,040
Total liabilities			616,384				468,443				39,520				(475,246	)			649,101
Commitments and contingencies			—				—				—				—				—
Stockholders’ equity:
Series I convertible preferred stock			—				—				—				—				—
Common stock			66				—				1,064				(1,064	)			66
Common stock warrants			8,901				—				—				—				8,901
Additional paid-in capital			463,568				189,031				36,875				(225,907	)			463,567
Accumulated (deficit) earnings			(437,148	)			39,413				(4,946	)			—				(402,681	)
Accumulated other comprehensive loss			—				—				(85	)			—				(85	)
Total stockholders’ equity			35,387				228,444				32,908				(226,971	)			69,768
Total liabilities and stockholders’ equity		$	651,771			$	696,887			$	72,428			$	(702,217	)		$	718,869

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Condensed Consolidating Balance Sheet as of March 31, 2010
(In thousands)

						Guarantor				Non-Guarantor
		Issuer				Subsidiaries				Subsidiaries				Eliminations				Total
Current assets:
Cash and cash equivalents		$	43,497			$	517			$	9,454			$	—			$	53,468
Accounts receivable, net			9				45,937				4,320				—				50,266
Current portion of capital lease receivable			—				418				—				—				418
Prepaid expenses and other current assets			674				8,606				3,328				(3	)			12,605
Total current assets			44,180				55,478				17,102				(3	)			116,757
Investment in subsidiaries			224,726				—				—				(224,726	)			—
Intercompany accounts receivable			288,644				45,798				4,282				(338,724	)			—
Restricted cash			638				1,011				310				—				1,959
Property and equipment, net			6,514				373,112				25,030				—				404,656
Debt issuance costs, net			3,384				—				—				—				3,384
Other assets			904				9,895				4,621				(36	)			15,384
Capital lease receivable, net of current portion			—				235				—				—				235
Intangibles, net			—				10,799				960				—				11,759
Goodwill			—				89,169				6,943				—				96,112
Total assets		$	568,990			$	585,497			$	59,248			$	(563,489	)		$	650,246
Current liabilities:
Current portion of capital lease obligations		$	1,183			$	3,589			$	147			$	—			$	4,919
Accounts payable and other current liabilities			24,412				58,455				9,081				—				91,948
Total current liabilities			25,595				62,044				9,228				—				96,867
Intercompany accounts payable			43,783				276,341				18,600				(338,724	)			—
Secured loans			388,835				—				—				—				388,835
Convertible debt			57,192				—				—				—				57,192
Deferred rent and other liabilities			5,074				12,115				1,162				—				18,351
Deferred revenue			—				6,540				2,013				(39	)			8,514
Total liabilities		$	520,479			$	357,040			$	31,003			$	(338,763	)		$	569,759
Commitments and contingencies			—				—				—				—				—
Stockholders’ equity:
Series I convertible preferred stock			—				—				—				—				—
Common stock			65				—				1,063				(1,063	)			65
Common stock warrants			8,901				—				—				—				8,901
Additional paid-in capital			456,859				189,034				34,630				(223,663	)			456,860
Accumulated (deficit) earnings			(417,314	)			39,425				(6,778	)			—				(384,667	)
Accumulated other comprehensive loss			—				(2	)			(670	)			—				(672	)
Total stockholders’ equity			48,511				228,457				28,245				(224,726	)			80,487
Total liabilities and stockholders’ equity		$	568,990			$	585,497			$	59,248			$	(563,489	)		$	650,246