e10vq

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 June 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.

(Exact Name of Registrant as Specified in Its Charter)


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 August 10, 2010, there were 65,710,348 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

PART I. FINANCIAL INFORMATION


ITEM 1.	*FINANCIAL STATEMENTS.*

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

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


	June 30,			March 31,
	2010			2010

ASSETS
Current assets:
Cash and cash equivalents	$	52,318		$	53,468
Accounts receivable, net		56,873			50,266
Current portion of capital lease receivables		388			418
Prepaid expenses and other current assets		14,414			12,605

Total current assets		123,993			116,757
Restricted cash		1,871			1,959
Property and equipment, net		429,563			404,656
Debt issuance costs, net		4,905			3,384
Other assets		12,551			15,384
Capital lease receivables, net of current portion		231			235
Intangibles, net		11,282			11,759
Goodwill		96,112			96,112

Total assets	$	680,508		$	650,246


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capital lease obligations	$	5,473		$	4,919
Accounts payable and other current liabilities		70,259			91,948

Total current liabilities		75,732			96,867
Secured loans		444,404			388,835
Convertible debt		57,192			57,192
Deferred rent and other liabilities		23,926			18,351
Deferred revenue		8,657			8,514

Total liabilities		609,911			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; 65,381,517 and 65,058,331 shares issued and outstanding		65			65
Common stock warrants		8,901			8,901
Additional paid-in capital		458,396			456,860
Accumulated deficit		(394,935	)		(384,667	)
Accumulated other comprehensive loss		(1,830	)		(672	)

Total stockholders’ equity		70,597			80,487

Total liabilities and stockholders’ equity	$	680,508		$	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)


	Three Months Ended
	June 30,
	2010			2009

Revenues	$	79,047		$	65,761

Expenses:
Cost of revenues, excluding depreciation and amortization		43,645			36,725
General and administrative		10,515			8,236
Sales and marketing		8,567			6,276
Depreciation and amortization		11,689			8,872

Total operating expenses		74,416			60,109

Income from operations		4,631			5,652

Other (expenses) income:
Interest expense		(14,219	)		(9,064	)
Loss on early extinguishment of debt		—			(10,275	)
Change in fair value of derivatives		25			(1,500	)
Interest income		107			93
Other		(313	)		490

Total other expenses		(14,400	)		(20,256	)

Loss before income taxes		(9,769	)		(14,604	)
Income tax expense		(499	)		(574	)

Net loss		(10,268	)		(15,178	)
Preferred dividend		(233	)		(234	)

Net loss attributable to common stockholders	$	(10,501	)	$	(15,412	)

Net loss per common share:
Basic and diluted	$	(0.16	)	$	(0.25	)

Weighted average common shares outstanding — basic and diluted		65,201			61,413

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			Total

Balance at March 31, 2010	$	—		65,058	$	65	$	8,901	$	456,860		$	(384,667	)	$	(672	)	$	80,487
Components of comprehensive loss:
Net loss		—		—		—		—		—			(10,268	)		—			(10,268	)
Foreign currency translation adjustment		—		—		—		—		—			—			(1,158	)		(1,158	)

Total comprehensive loss																			(11,426	)
Dividends on preferred stock		—		—		—		—		(233	)		—			—			(233	)
Issuance of common stock in settlement of share-based awards		—		323		—		—		(146	)		—			—			(146	)
Share-based compensation		—		—		—		—		1,915			—			—			1,915

Balance at June 30, 2010	$	—		65,381	$	65	$	8,901	$	458,396		$	(394,935	)	$	(1,830	)	$	70,597

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)


	Three Months Ended
	June 30,
	2010			2009

Cash flows from operating activities:
Net loss	$	(10,268	)	$	(15,178	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		11,689			8,872
Loss on early extinguishment of debt		—			10,275
Change in fair value of derivatives		(25	)		1,500
Loss on currency translation effect		15			—
Accretion on debt, net		569			829
Amortization of debt issuance costs		94			598
Provision for doubtful accounts		1,049			263
Interest payment in kind on secured loans		—			395
Share-based compensation		2,739			2,032
Settlement of interest rate swaps		—			(8,360	)
(Increase) decrease in:
Accounts receivable		(7,807	)		(6,011	)
Capital lease receivables, net of unearned interest		29			105
Restricted cash		88			1,060
Prepaid expenses and other assets		(2,678	)		(2,373	)
(Decrease) increase in:
Accounts payable and other current liabilities		(16,979	)		(7,556	)
Deferred revenue		2,218			3,339
Deferred rent and other liabilities		1,143			2,320

Net cash used in operating activities		(18,124	)		(7,890	)

Cash flows from investing activities:
Purchase of property and equipment		(42,580	)		(11,670	)

Net cash used in investing activities		(42,580	)		(11,670	)

Cash flows from financing activities:
Payments on secured loans and convertible debt		—			(290,930	)
Proceeds from financing lease		7,002			—
Payments of preferred stock dividends		(233	)		(221	)
Payments of debt issuance costs		(957	)		(391	)
Proceeds from issuance of secured notes		55,000			386,963
Payments under capital lease obligations		(1,145	)		(778	)
Proceeds from issuance of common stock		159			19,971

Net cash provided by financing activities		59,826			114,614

Effect of foreign currency exchange rates on cash and cash equivalents		(272	)		389

Net (decrease) increase in cash and cash equivalents		(1,150	)		95,443
Cash and cash equivalents at beginning of period		53,468			51,786

Cash and cash equivalents at end of period	$	52,318		$	147,229

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

(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”) required to be consolidated in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) (collectively referred to as “Terremark”). 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 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 June 30, 2010 Form 10-Q, 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 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 three months ended June 30, 2009 by increasing net cash used in investing activities for the Purchase of Property and Equipment and decreasing cash flows used in operating activities in Accounts Payable and Other Current Liabilities by approximately $2.0 million. During the coming fiscal year, the Company will also correct the prior comparative periods as follows (in thousands):


	Year Ended			Nine Months Ended			Six Months Ended			Year Ended
	March 31, 2010			December 31, 2009			September 30, 2009			March 31, 2009

Cash flows from operating activities:
Accounts payable and other current liabilities	$	(9,070	)	$	4,318		$	(2,555	)	$	13,672

Cash flows from investing activities:
Purchase of property and equipment	$	9,070		$	(4,318	)	$	2,555		$	(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 revenues of approximately 20% and 22% for the three months ended June 30, 2010 and 2009, respectively. No commercial customer accounted for more than 10% of revenues for the three months ended June 30, 2010 and 2009, respectively.

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 aggregate principal amount of $50.0 million 12% Senior Secured Notes (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

The following table sets forth total interest cost incurred and total interest cost capitalized (in thousands):


	Three Months Ended
	June 30,
	2010		2009

Interest expense	$	14,219	$	9,064
Interest capitalized		1,294		176

Interest charges incurred	$	15,513	$	9,240

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):


	June 30, 2010				March 31, 2010
	Book Value		Fair Value		Book Value		Fair Value

Secured loans:
$420.0 million 12% Senior Secured Notes	$	389,489	$	471,551	$	388,835	$	481,491
$50.0 million 12% Senior Secured Notes		54,915		56,004		—		—

	$	444,404	$	527,555	$	388,835	$	481,491

Convertible debt:
6.625% Senior Convertible Notes		57,192		58,895		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 of June 30, 2010 (in thousands):


	Fair Value at
	June 30,			Fair Value Measurement Using
	2010			Level 1		Level 2		Level 3

Money market fund	$	31,111		$	31,111	$	—	$	—
Embedded derivatives		(270	)		—		—		(270	)

	$	30,841		$	31,111	$	—	$	(270	)

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. 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.

Recent accounting pronouncements

In October 2009, the FASB issued guidance that establishes general standards of accounting which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

(deliverables) separately rather than as a combined unit. 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.

In January 2010, the FASB issued guidance that establishes general standards of accounting which amends the use of fair value measures and the related disclosures. This guidance requires new disclosures for transfers in and out of Level 1 and Level 2 fair value measurements. This guidance is effective for the Company for the three months ending September 30, 2010. The Company is currently evaluating the impact that the adoption of this standard 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. The final purchase price included 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 would 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 were allocated to goodwill. The following summarizes the allocation of the purchase price as of June 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


	June 30,			March 31,
	2010			2010

Accounts receivable, net, consists of (in thousands):
Accounts receivable	$	45,674		$	39,359
Unbilled revenue		12,726			12,182
Allowance for doubtful accounts		(1,527	)		(1,275	)

	$	56,873		$	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


	June 30,			March 31,
	2010			2010

Prepaid expenses and other assets consists of (in thousands):
Prepaid expenses	$	4,944		$	4,741
Deferred costs		10,747			8,758
Deposits		4,600			4,476
Prepaid ground lease		—			3,602
Deferred rent		1,382			1,364
Other		2,610			2,376
Tenant allowance		1,410			1,418
Deferred tax asset		1,016			949
Interest and other receivables		256			305

		26,965			27,989
Less: current portion		(14,414	)		(12,605	)

	$	12,551		$	15,384


6.	Property and Equipment


	June 30,			March 31,
	2010			2010

Property and equipment, net, consists of (in thousands):
Land	$	23,268		$	18,336
Building		147,677			140,751
Building and leasehold improvements		94,250			81,433
Machinery		175,504			165,035
Equipment, furniture and fixtures		88,149			82,646
Construction in progress		25,311			30,521

		554,159			518,722
Less: accumulated depreciation and amortization		(124,596	)		(114,066	)

	$	429,563		$	404,656

Depreciation and amortization expense, excluding amortization of intangible assets (see note 7), was $11.2 million and $8.3 million for the three months ended June 30, 2010 and 2009, respectively.

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


7.	Intangibles


	Amortization		June 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				(8,443	)		(7,966	)

			$	11,282		$	11,759

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


	Customer
	Base		Technology

2011 (nine months remaining)	$	806	$	600
2012		1,075		800
2013		1,075		120
2014		1,075		—
2015		1,075		—
2016		556		—

	$	5,662	$	1,520

Amortization of intangibles was $0.5 million and $0.6 million for the three months ended June 30, 2010 and 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


	June 30,		March 31,
	2010		2010

Accounts payable and other current liabilities consists of (in thousands):
Accounts payable	$	37,932	$	45,934
Accrued expenses		16,207		17,121
Current portion of deferred revenue		9,498		7,138
Interest payable		2,529		17,308
Customer prepayments		4,093		4,447

	$	70,259	$	91,948

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


9.	Secured Loans


	June 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%)	$	389,489	$	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 10.6%)		54,915		—

	$	444,404	$	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 outstanding secured indebtedness, including (i) loans under the First Lien Credit Agreement, with a face value of $150.0 million, due August 15, 2012, (ii) loans under the Second Lien Credit Agreement (together with the First Lien Credit Agreement, the “Credit Agreements”), with a face value of $100.0 million, due February 2, 2013, 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 was 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 three months ended June 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 three months ended June 30, 2010 and 2009, the Company amortized $0.7 million and less than $0.1 million of the discount and less than $0.1 million and less than $0.1 million of the debt issuance costs 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 was 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 $1.6 million of debt issuance costs related to the $50.0 million 12% Senior Secured Notes. For the three months ended June 30, 2010, the Company amortized less than $0.1 million of the premium and less than $0.1 million of the debt issuance costs into interest expense.

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


	June 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. 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, each of which is described in Note 10.

As of June 30 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 $0.3 million.

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 adjusts 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 three months ended June 30, 2009.


12.	Deferred Rent and Other Liabilities


	June 30,		March 31,
	2010		2010

Deferred rent and other liabilities consists of (in thousands):
Deferred rent	$	11,478	$	10,449
Long-term portion of capital lease obligations		10,292		5,751
Deferred tax liability		1,543		1,543
Other liabilities		613		608

	$	23,926	$	18,351

During the three months ended June 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 was accounted for as a financing lease, wherein the property remains on the Company’s financial statements. This lease is in connection with the construction of a new data center in Amsterdam. No gains or losses resulted from this transaction. The Company effected such financing using a subsidiary that was designated as an “unrestricted subsidiary” as permitted under the terms of the indenture governing its secured notes to ensure compliance with its terms.

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 three months ended June 30, 2010, the Company issued an aggregate of 316,519 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 three months ended June 30, 2010 and 2009, we paid to VMware $0.1 million in software licensing and other fees.


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):


	Three Months Ended
	June 30,
	2010		2009

9% Senior Convertible Notes		—		1,938
Common stock warrants		2,018		2,028
Common stock options		2,251		2,295
Nonvested stock		2,283		1,283
Series I convertible preferred stock		1,066		1,073
6.625% Senior Convertible Notes		4,575		4,575
0.5% Senior Subordinated Convertible Notes		—		491


16.	Share-based Compensation

Option Awards

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

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 June 30, 2010, the future

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

compensation expense related to nonvested stock that will be recognized is approximately $11.0 million. The cost is expected to be recognized over a weighted average period of 2.0 years. The Company recognized approximately $1.7 million and $1.0 million of share-based compensation expense, associated with nonvested stock, for the three months ended June 30, 2010 and 2009, respectively. A summary of the Company’s nonvested stock as of June 30, 2010 and changes during the three months ended June 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		34			6.92
Vested		(289	)		7.64
Forfeited		(39	)		7.65

Outstanding at June 30, 2010		2,136		$	6.65

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):


	Three Months Ended
	June 30,
	2010		2009

Cost of revenues	$	947	$	917
General and administrative		1,523		936
Sales and marketing		269		179

	$	2,739	$	2,032


17.	Related Party Transactions

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


	Three Months
	Ended
	June 30,
	2010		2009

Services purchased from related party	$	—	$	31
Services from Directors		125		100


	June 30,		March 31,
	2010		2010

Other assets	$	244	$	304

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

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

of $60,000. These agreements in the aggregate are consistent with the director independence requirements of the Nasdaq Stock Market.


18.	Revenues


	Three Months Ended
	June 30,
	2010		2009

Revenues consist of (in thousands):
Colocation	$	32,696	$	25,633
Managed and professional services		38,071		33,798
Exchange point services		4,877		4,451
Equipment resales		3,403		1,879

	$	79,047	$	65,761

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 $4.4 million and $2.0 million for the three months ended June 30, 2010 and 2009, respectively.


19.	Information About the Company’s Operating Segment

As of June 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


	Three Months Ended
	June 30,
	2010			2009

Supplemental disclosures of cash flow information (in thousands):
Cash paid for interest, net of amount capitalized	$	26,827		$	10,309
Cash paid for income taxes		664			138
Non-cash operating, investing and financing activities:
Assets acquired under capital leases		2,640			2,509
Cancellation and expiration of warrants		—			33
Changes in accrued property and equipment		(8,357	)		336
Decrease in other assets related to financing lease		3,226			—


21.	Supplemental Guarantor and Non-Guarantor 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

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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. 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 primarily 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.

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidated Balance Sheet as of June 30, 2010
(In thousands)


				Guarantor			Non-Guarantor
	Issuer			Subsidiaries			Subsidiaries			Eliminations			Total

Current assets:
Cash and cash equivalents	$	35,123		$	(39	)	$	17,234		$	—		$	52,318
Accounts receivables, net		4			51,186			5,683			—			56,873
Current portion of capital lease receivables		—			388			—			—			388
Prepaid expenses and other current assets		958			10,329			3,127			—			14,414

Total current assets		36,085			61,864			26,044			—			123,993
Investment in subsidiaries		225,570			—			—			(225,570	)		—
Intercompany accounts receivable		273,800			(6,438	)		4,103			(271,465	)		—
Restricted cash		579			1,011			281			—			1,871
Property and equipment, net		6,713			398,455			24,395			—			429,563
Debt issuance costs, net		4,905			—			—			—			4,905
Other assets		904			10,616			1,056			(25	)		12,551
Capital lease receivables, net of current portion		—			231			—			—			231
Intangibles, net		—			10,367			915			—			11,282
Goodwill		—			89,169			6,943			—			96,112

Total assets	$	548,556		$	565,275		$	63,737		$	(497,060	)	$	680,508

Current liabilities:
Current portion of capital lease obligations		1,169			4,101			203			—			5,473
Accounts payable and other current liabilities		9,980			51,392			8,897			(10	)		70,259

Total current liabilities		11,149			55,493			9,100			(10	)		75,732
Intercompany accounts payable		(9,057	)		261,339			19,183			(271,465	)		—
Secured loans		444,404			—			—			—			444,404
Convertible debt		57,192			—			—			—			57,192
Deferred rent and other liabilities		4,765			14,159			5,002			—			23,926
Deferred revenue		—			6,783			1,889			(15	)		8,657

Total liabilities		508,453			337,774			35,174			(271,490	)		609,911

Commitments and contingencies		—			—			—			—			—
Stockholders’ equity:
Series I convertible preferred stock		—			—			—			—			—
Common stock		65			—			1,068			(1,068	)		65
Common stock warrants		8,901			—			—			—			8,901
Additional paid-in capital		458,398			189,031			35,469			(224,502	)		458,396
Accumulated (deficit) earnings		(427,261	)		38,471			(6,145	)		—			(394,935	)
Accumulated other comprehensive loss		—			(1	)		(1,829	)		—			(1,830	)

Total stockholders’ equity		40,103			227,501			28,563			(225,570	)		70,597

Total liabilities and stockholders’ equity	$	548,556		$	565,275		$	63,737		$	(497,060	)	$	680,508

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidated 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

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 2010
(In thousands)


				Guarantor			Non-Guarantor
	Issuer			Subsidiaries			Subsidiaries			Eliminations			Total

Revenues	$	7,759		$	66,598		$	12,922		$	(8,232	)	$	79,047

Expenses:
Costs of revenues, excluding depreciation and amortization		88			36,597			7,433			(473	)		43,645
General and administrative		7,615			8,979			1,680			(7,759	)		10,515
Sales and marketing		751			6,540			1,276			—			8,567
Depreciation and amortization		519			9,788			1,382			—			11,689

Total operating expenses		8,973			61,904			11,771			(8,232	)		74,416

(Loss) income from operations		(1,214	)		4,694			1,151			—			4,631

Other (expenses) income:
Interest expense		(14,057	)		(5,771	)		(56	)		5,665			(14,219	)
Change in fair value of derivatives		25			—			—			—			25
Interest income		5,661			78			33			(5,665	)		107
Other		(312	)		50			(51	)		—			(313	)

Total other expenses		(8,683	)		(5,643	)		(74	)		—			(14,400	)

(Loss) income before income taxes		(9,897	)		(949	)		1,077			—			(9,769	)
Income tax expense		(50	)		(5	)		(444	)		—			(499	)

Net (loss) income	$	(9,947	)	$	(954	)	$	633		$	—		$	(10,268	)

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 2009
(In thousands)


				Guarantor			Non-Guarantor
	Issuer			Subsidiaries			Subsidiaries			Eliminations			Total

Revenues	$	—		$	57,673		$	8,460		$	(372	)	$	65,761

Expenses:
Costs of revenues, excluding depreciation and amortization		67			32,166			4,864			(372	)		36,725
General and administrative		6,609			519			1,108			—			8,236
Sales and marketing		587			4,537			1,152			—			6,276
Depreciation and amortization		625			7,515			732			—			8,872

Total operating expenses		7,888			44,737			7,856			(372	)		60,109

Income (loss) from operations		(7,888	)		12,936			604			—			5,652

Other (expenses) income:
Interest expense		(8,928	)		(130	)		(34	)		28			(9,064	)
Loss on early extinguishment of debt		(10,275	)		—			—			—			(10,275	)
Change in fair value of derivatives		(1,500	)		—			—			—			(1,500	)
Interest income		59			37			25			(28	)		93
Other		(91	)		(21	)		602			—			490

Total other (expenses) income		(20,735	)		(114	)		593			—			(20,256	)

(Loss) income before income taxes		(28,623	)		12,822			1,197			—			(14,604	)
Income tax expense		(171	)		—			(403	)		—			(574	)

Net (loss) income	$	(28,794	)	$	12,822		$	794		$	—		$	(15,178	)

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Condensed Consolidated Statement of Cash Flows for the Three Months Ended June 30, 2010
(In thousands)


				Guarantor			Non-Guarantor
	Issuer			Subsidiaries			Subsidiaries			Eliminations		Total

Cash flows from operating activities:
Net (loss) income	$	(9,947	)	$	(954	)	$	633		$	—	$	(10,268	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		519			9,788			1,382			—		11,689
Change in fair value of derivatives		(25	)		—			—			—		(25	)
Loss on currency translation effect		—			—			15			—		15
Accretion on debt, net		569			—			—			—		569
Amortization of debt issuance costs		94			—			—			—		94
Provision for doubtful accounts		—			1,049			—			—		1,049
Share-based compensation		1,107			1,443			189			—		2,739
Decrease (increase) in:
Accounts receivable		5			(6,298	)		(1,514	)		—		(7,807	)
Capital lease receivable, net of unearned interest		—			29			—			—		29
Restricted cash		59			—			29			—		88
Prepaid expenses and other assets		(285	)		(2,459	)		66			—		(2,678	)
(Decrease) increase in:
Accounts payable and other current liabilities		(13,682	)		(2,606	)		(691	)		—		(16,979	)
Deferred revenue		—			1,839			379			—		2,218
Deferred rent and other liabilities		(25	)		1,145			23			—		1,143

Net cash (used in) provided by operating activities		(21,611	)		2,976			511			—		(18,124	)

Cash flows from investing activities:
Purchase of property and equipment		(1,603	)		(40,288	)		(689	)		—		(42,580	)

Net cash used in investing activities		(1,603	)		(40,288	)		(689	)		—		(42,580	)

Cash flows from financing activities:
Intercompany activity, net		(38,839	)		37,420			1,419			—		—
Payments of preferred stock dividends		(233	)		—			—			—		(233	)
Proceeds from financing lease		—			—			7,002			—		7,002
Payments of debt issuance costs		(957	)		—			—			—		(957	)
Proceeds from issuance of secured notes		55,000			—			—			—		55,000
Payments under capital lease obligations		(290	)		(785	)		(70	)		—		(1,145	)
Proceeds from issuance of common stock		159			—			—			—		159

Net cash provided by financing activities		14,840			36,635			8,351			—		59,826

Effect of foreign currency exchange rates on cash and cash equivalents		—			121			(393	)		—		(272	)

Net (decrease) increase in cash and cash equivalents		(8,374	)		(556	)		7,780			—		(1,150	)
Cash and cash equivalents at beginning of period		43,497			517			9,454			—		53,468

Cash and cash equivalents at end of period	$	35,123		$	(39	)	$	17,234		$	—	$	52,318

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Consolidated Statement of Cash Flows for the Three Months Ended June 30, 2009
(In thousands)


							Non-
				Guarantor			Guarantor
	Issuer			Subsidiaries			Subsidiaries			Eliminations		Total

Cash flows from operating activities:
Net (loss) income	$	(28,794	)	$	12,822		$	794		$	—	$	(15,178	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		625			7,515			732			—		8,872
Change in fair value of derivatives		1,500			—			—			—		1,500
Loss on early extinguishment of debt		10,275			—			—			—		10,275
Accretion on debt, net		829			—			—			—		829
Amortization of debt issuance costs		413			185			—			—		598
Provision for doubtful accounts		—			263			—			—		263
Interest payment in kind on secured loans		395			—			—			—		395
Share-based compensation		784			1,150			98			—		2,032
Settlement of interest rate swaps		(8,360	)		—			—			—		(8,360	)
(Increase) decrease in:
Accounts receivable		—			(5,252	)		(759	)		—		(6,011	)
Capital lease receivable, net of unearned interest		—			105			—			—		105
Restricted cash		(40	)		1,100			—			—		1,060
Prepaid expenses and other assets		333			(2,504	)		(202	)		—		(2,373	)
Increase (decrease) in:		—			—			—			—		—
Accounts payable and other current liabilities		(4,418	)		(3,089	)		(49	)		—		(7,556	)
Deferred revenue		—			2,889			450			—		3,339
Deferred rent and other liabilities		1,603			665			52			—		2,320

Net cash (used in) provided by operating activities		(24,855	)		15,849			1,116			—		(7,890	)
Cash flows from investing activities:
Purchase of property and equipment		(940	)		(10,320	)		(410	)		—		(11,670	)

Net cash used in investing activities		(940	)		(10,320	)		(410	)		—		(11,670	)
Cash flows from financing activities:
Payments on secured loans and convertible debt		(290,930	)		—			—			—		(290,930	)
Payments of preferred stock dividends		(221	)		—			—			—		(221	)
Intercompany activity, net		6,097			(6,311	)		214			—		—
Payments under capital lease obligations		(235	)		(494	)		(49	)		—		(778	)
Proceeds from issuance of term loan		386,963			—			—			—		386,963
Payments of debt issuance costs		(391	)		—			—			—		(391	)
Proceeds from issuance of common stock		19,971			—			—			—		19,971

Net cash provided by (used in) financing activities		121,254			(6,805	)		165			—		114,614
Effect of foreign currency exchange rates on cash and cash equivalents		—			—			389			—		389

Net increase (decrease) in cash and cash equivalents		95,459			(1,276	)		1,260			—		95,443
Cash and cash equivalents at beginning of period		41,895			1,363			8,528			—		51,786

Cash and cash equivalents at end of period	$	137,354		$	87		$	9,788		$	—	$	147,229


ITEM 2.	*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.*

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 based on our current expectations, assumptions, and estimates about us and our industry. These forward-looking statements involve risks and uncertainties. Words such as “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “will,” “may,” and other similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. All statements other than statements of historical facts, including, among others, statements regarding our future financial position, business strategy, projected levels of growth, projected costs and projected financing needs, are forward-looking statements. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of several important factors including, without limitation, that we may be further impacted by slowdowns, postponements or cancellations in our client’s businesses or deterioration in the financial condition of our clients, a history of losses, competitive factors, uncertainties inherent in government contracting, inquiries and investigations conducted by government agencies with respect to our government contracts, concentration of business with a small number of clients, the ability to service debt, substantial leverage, material weaknesses in our internal controls and our disclosure controls, energy costs, the interest rate environment, failure to successfully implement expansion plans or integrate acquired businesses into our operations, one-time events and other factors more fully described in “Risk Factors” and elsewhere in this report. The forward-looking statements made in this report relate only to events as of the date on which the statements are made. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely upon forward-looking statements as predictions of future events. Except as required by applicable law, including the securities laws of the United States, and the rules and regulations of the Securities and Exchange Commission, we do not plan and assume no obligation to publicly update or revise any forward-looking statements contained herein after the date of this report, whether as a result of any new information, future events or otherwise.

Our Business

We are a global provider of managed IT solutions with data centers in the United States, Europe and Latin America. We provide carrier neutral colocation, managed services and exchange point services to approximately 1,400 customers worldwide across a broad range of sectors, including enterprises, government agencies, systems integrators, Internet content and portal companies and the world’s largest network providers. We house and manage our customers’ mission-critical IT infrastructure, enabling our customers to reduce capital and operational expenses while improving application performance, availability and security. As a result of our expertise and our full suite of product offerings, customers find it more cost effective and secure to contract us rather than hire dedicated IT staff. Furthermore, as a carrier neutral provider we have more than 160 competing carriers connected to our data centers enabling our customers to realize significant cost savings and easily scale their network requirements to meet their growth. We continue to see an increase in outsourcing as customers face escalating operating and capital expenditures and increased technical demands associated with their IT infrastructure.

We deliver our solutions primarily through three highly specialized data centers, or Network Access Points (NAPs) that were purpose-built and have been strategically located to enable us to become one of the industry leaders in terms of reliability, power availability and connectivity. Our owned NAP of the Americas facility, located in Miami, Florida, is one of the most interconnected data centers in the world and is a primary exchange point for high levels of traffic between the United States, Europe and Latin America; our owned NAP of the Capital Region, or NCR, located outside Washington, D.C., has been designed to address the specific security and connectivity needs of our federal customers; and our leased NAP of the Americas/West, located in Santa Clara, California, is strategically located in Silicon Valley to serve the technology and Internet content provider segments as well as provide access to connectivity to the U.S. west coast, Asia, Pacific Rim and other international locations. Each facility offers our customers access to carrier neutral connectivity as well as technologically advanced security, reliability and redundancy through 100% service level agreements, or SLAs, which means that we agree to provide 100% uptime for all of our customers’ IT equipment contained in our facilities. Our facilities and our IT platform can be expanded on a cost effective basis to meet growing customer demand.

Our primary products and services include colocation, managed services and exchange point services.


	•	Colocation Services: We provide customers with the space, power and a secure environment to deploy their own computing, network, storage and IT infrastructure.


	•	Managed Services: We design, deploy, operate, monitor and manage our clients’ IT infrastructure at our facilities.


	•	Exchange Point Services: We enable our customers to exchange Internet and other data traffic through direct connection with each other or through peering connections with multiple parties.

Our business is characterized by long term contracts, which provide for monthly recurring revenue from a diversified customer base. Our customer contracts are generally three years in duration and for the three months ended June 30, 2010, approximately 90% of our overall revenue was recurring.

Our principal executive office is located at 2 South Biscayne Boulevard, Suite 2800, Miami, Florida 33131. Our telephone number is (305) 961-3200.

Recent Events

On July 16, 2010, at our 2010 Annual Meeting of Stockholders, our stockholders approved the Amended and Restated Terremark Worldwide, Inc. 2005 Executive Incentive Compensation Plan, which, among other things, increased the number of shares of our common stock available for awards under the plan by 5,000,000 shares to a total of 10,500,000 shares.

On April 28, 2010, we completed our offering of $50.0 million 12% Senior Secured Notes due 2017. These notes are part of the same series as the $420.0 million 12% Senior Secured Notes that we issued on June 24, 2009. We pay interest on the aggregate $470.0 million principal amount of the 12% Senior Secured Notes semi-annually in cash in arrears on December 15 and June 15 of each year at the rate of 12% per annum. These notes mature on June 15, 2017. See Note 9 to our consolidated financial statements contained in this Quarterly Report on Form 10-Q.

Results of Operations

Results of Operations for the Three Months Ended June 30, 2010 as Compared to the Three Months Ended June 30, 2009.

Revenues. The following charts provide certain information with respect to our revenues:


	Three Months Ended
	June 30,
	2010			2009

United States		84	%		87	%
International		16	%		13	%

		100	%		100	%


	Three Months Ended June 30,
	2010				2009

Revenues consist of (in thousands):
Colocation	$	32,696	41	%	$	25,633	39	%
Managed and professional services		38,071	48	%		33,798	51	%
Exchange point services		4,877	7	%		4,451	7	%
Equipment resales		3,403	4	%		1,879	3	%

	$	79,047	100	%	$	65,761	100	%

The $13.3 million, or 20% increase in revenues for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 is mainly due to both an increase in our deployed customer base and an expansion of services to existing customers. Our deployed customer base increased to 1,335 customers as of June 30, 2010 from 1,094 customers as of June 30, 2009. Revenues consist of:


	•	colocation services, such as licensing of space and provision of power;

	•	managed and professional services, such as network management, managed web hosting, outsourced network operating center services, network monitoring, procurement of connectivity, managed router services, secure information services, technical support and consulting;

	•	exchange point services, such as peering and cross connects; and

	•	procurement and installation of equipment.

The $7.1 million, or 28% increase in colocation revenue for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 is primarily the result of an increase in our utilization of total net colocation space to 30.3% as of June 30, 2010 from 23.9% as of June 30, 2009. Our utilization of total net colocation space represents space billed to customers as a percentage of total space built-out and available to customers. For comparative purposes, space added during the three months ended June 30, 2010 was assumed to be also available as of June 30, 2009.

The $4.3 million, or 13% increase in managed and professional services revenue for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 is primarily the result of an increase in orders from both existing and new customers as reflected by the growth in our customer base and utilization of space, as discussed above.

The $0.4 million, or 10% increase in exchange point services revenue for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 is mainly due to an increase in cross-connects billed to customers. Cross-connects billed to customers increased to 9,392 as of June 30, 2010 from 8,456 as of June 30, 2009.

Revenues from equipment resales fluctuate quarter over quarter based on customer demand.

We anticipate an increase in revenue from colocation, managed services and exchange point services as we add more customers to our network of NAPs, sell additional services to existing customers and introduce new products and services. We anticipate that the percentage of revenue derived from federal sector customers will fluctuate depending on the timing of exercise of expansion options under existing contracts and the rate at which we sell services to the federal sector. We believe that federal sector revenues will continue to represent a significant portion of our revenues for the foreseeable future.

Costs of Revenues. Costs of revenues, excluding depreciation and amortization, increased $6.9 million, or 19%, to $43.6 million for the three months ended June 30, 2010, from $36.7 million for the three months ended June 30, 2009. Cost of revenues, excluding depreciation and amortization, consist mainly of operations personnel, fees to third party service providers, procurement of connectivity and equipment, technical and colocation space costs, electricity, chilled water, insurance, property taxes, and security services. The increase was mainly due to increases of $3.1 million in certain variable costs such as electricity and maintenance as a result of an increase in orders from both existing and new customers as reflected by the growth in our customer base and utilization of space, as discussed above. We also had increases of $1.7 million in costs of equipment resales, $1.1 million in personnel costs, and $1.0 million in technical and colocation space costs.

The $1.7 million increase in costs of equipment resales for the three months ended June 30, 2010 as compared to the three months ended June 30, 2009 is consistent with the increase in related revenues. The $1.1 million increase in personnel costs was mainly due to an increase in our operations and engineering staffing from 533 employees as of June 30, 2009 to 600 employees as of June 30, 2010 which is mainly due to our expansion of operations throughout our locations.The $1.0 million increase in colocation space costs was primarily the result of new colocation space in Dallas, Texas, and Sao Paulo, Brazil.

General and Administrative Expenses. General and administrative expenses increased $2.3 million, or 28%, to $10.5 million for the three months ended June 30, 2010 from $8.2 million for the three months ended June 30, 2009. General and administrative expenses consist primarily of administrative personnel, professional service fees, rent, and other general corporate expenses. The $2.3 million increase in general and administrative expenses was mainly due to an increase in administrative personnel costs of $1.3 million and professional fees of $0.5 million, which includes accounting, legal and other services. Personnel costs include payroll and share-based compensation.

The $1.3 million increase in administrative personnel costs is the result of $0.6 million of share-based compensation, and an increase in headcount from 158 of administration employees as of June 30, 2009 to 169 administration employees as of June 30, 2010.

Sales and Marketing Expenses. Sales and marketing expense increased $2.3 million, or 37%, to $8.6 million for the three months ended June 30, 2010 as compared to $6.3 million for the three months ended June 30, 2009. The $2.3 million increase in sales and marketing expenses was mainly due to a $0.9 million increase in payroll and sales commissions, $0.8 million increase in provision for doubtful accounts and $0.6 million increase in marketing costs. The $0.9 million increase in payroll and sales commissions was mainly due to an increase in headcount from 106 employees as of June 30, 2009 to 118 employees as of June 30, 2010 coupled with an increase in sales commissions due to increased customer deployments.

Depreciation and Amortization Expenses. Depreciation and amortization expense increased $2.8 million, or 31% to $11.7 million for the three months ended June 30, 2010 from $8.9 million for the three months ended June 30, 2009. The increase is the result of capital expenditures mostly related to the expansion of our data center footprint and upgrades to the infrastructure of our current footprint.

Interest Expense. Interest expense increased $5.1 million, or 56%, to $14.2 million for the three months ended June 30, 2010 from $9.1 million for the three months ended June 30, 2009. This increase is due to higher average outstanding debt balance during the periods.

Loss on Early Extinguishment of Debt. For the three months ended June 30, 2009, we incurred a non-cash loss on the early extinguishment of debt of $10.3 million.

Change in Fair Value of Derivatives. For the three months ended June 30, 2010, we recognized income of less than $0.1 million, as compared to an expense of $1.5 million for the three months ended June 30, 2009, mainly due to the changes in the fair values of our derivatives from our two interest rate swap agreements that became effective February 2009 (first lien) and July 2009 (second lien). We terminated these swap agreements on June 24, 2009 in connection with our issuance of $420 million aggregate principal amount of 12% Senior Secured Notes and the repayment of our first and second lien senior secured credit facilities with a portion of the proceeds from the note issuance.

Other. For the three months ended June 30, 2010 and 2009, we recorded $0.3 million of other expense and $0.5 million of other income, respectively, which were primarily attributable to fluctuations in foreign currency during the periods.

Liquidity and Capital Resources

As of June 30, 2010, our principal source of liquidity was our $52.3 million in unrestricted cash and cash equivalents and our $56.9 million in accounts receivable. On April 28, 2010, we issued an additional $50.0 million of our 12% Senior Secured Notes under the same indenture (the “Indenture”) governing the $420.0 million aggregate principal amount of the notes that we issued on June 24, 2009. The $470.0 million 12% Senior Secured Notes now outstanding comprises a single class of notes. We anticipate that we will generate sufficient cash flows from operations to fund our capital expenditures and debt service in connection with our currently identified business objectives.

In addition, under the Indenture, we may incur additional indebtedness, including up to $75 million, for the purpose of financing the purchase price or cost of construction or improvement of property, plant or equipment, and/or the acquisition of the capital stock of an entity that becomes a restricted subsidiary.

Furthermore, the Indenture permits us to incur additional indebtedness to the extent that our fixed charge coverage ratio would have been at least 2.0 to 1.0 on a pro forma basis (including a pro forma application of the net proceeds from this additional indebtedness) as if this indebtedness had been incurred at and as of the beginning of our most recently completed four fiscal quarters for which internal financial statements are available.

For fiscal year 2011, we anticipate capital expenditures of approximately $115.0 to $120.0 million, with $73.0 million related to the completion of the second and third data centers on our NCR campus in Culpeper, Virginia, $23.0 million to upgrade our technology and service delivery platforms, $13.0 million to finish funding phase 1 of our expansion in Santa Clara, California, $7.0 million for expansion at our Miami NAP, and $4.0 million related to our international operations.

Our projected revenues and cash flows depend on several factors, some of which are beyond our control, including the rates at which we provide services, the timing of exercise of expansion options by customers under existing contracts, the rate at which new services are sold to the federal sector and the commercial sector, the ability to retain the customer base, the willingness and timing of potential customers in outsourcing the housing and management of their technology infrastructure to us, the reliability and cost-effectiveness of our services and our ability to market our services. Besides our cash on hand and any financing activities we may pursue, customer collections are our primary source of cash.

While we believe we have a strong customer base and have experienced strong collections in the past, if the current market conditions continue to deteriorate we may experience increased churn in our customer base, including reductions in their commitments to us, which could have a material adverse effect on our liquidity.

Sources and Uses of Cash

Cash used in operations for the three months ended June 30, 2010 was $18.1 million as compared to cash used in operations of $7.9 million for the three months ended June 30, 2009. The increase in cash used in operations is mainly due to timing of vendor and other payments.

Cash used in investing activities for the three months ended June 30, 2010 was $42.6 million compared to cash used in investing activities of $11.7 million for the three months ended June 30, 2009. This increase is the result of higher capital expenditures mostly related to the expansions of our NCR data center campus in Culpeper, Virginia, upgrades to our technology and service delivery platforms, upgrades to our infrastructure in Miami, Florida and the expansion of our footprint in Santa Clara, California.

Cash provided by financing activities for the three months ended June 30, 2010 was $59.8 million compared to cash provided by financing activities of $114.6 million for the three months ended June 30, 2009. The decrease in cash provided by financing activities is primarily due to the current proceeds received from our $50.0 million 12% Senior Secured Notes and financing lease of our property which resulted in net proceeds of $7.0 million, compared to the prior year proceeds received from our $420.0 million 12% Senior Secured Notes, the issuance of four million shares of our common stock for approximately $20.0 million, and the $290.9 million in repayments of the First Lien and Second Lien Credit Agreements, 9% Senior Convertible Debt and Series B Notes.

Debt Obligations

As of June 30, 2010, our total liabilities were approximately $609.9 million, of which $75.7 million is due within one year.

12% Senior Secured Notes

On June 24, 2009 and April 28, 2010, we completed offerings of $420.0 million and $50.0 million, respectively, of 12% senior secured notes due in 2017, which are guaranteed by substantially all of our domestic subsidiaries and secured by a first priority security interest in substantially all of the assets of us and the guarantors, including the pledge of 100% of all outstanding capital stock of each of our domestic subsidiaries, excluding Terremark Federal Group, Inc. and Technology Center of the Americas, LLC, and 65% of all outstanding capital stock of substantially all our 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.

The senior secured notes bear interest at 12% per annum, payable on December 15 and June 15 of each year.

The senior secured notes are our general secured obligations, secured by first-priority liens on the collateral securing the senior secured notes and rank equal in right of payment with all of our existing and future senior secured indebtedness that is secured on an equal basis with the senior secured notes.

The terms of the Indenture generally limit our ability and the ability of our subsidiaries to, among other things: (i) make restricted payments; (ii) incur additional debt and issue preferred or disqualified stock; (iii) create liens; (iv) create or permit to exist restrictions on our ability or the ability of our restricted subsidiaries to make certain payments or distributions; (v) engage in sale-leaseback transactions; (vi) engage in mergers or consolidations or transfer all or substantially all of our assets; (vii) make certain dispositions and transfers of assets; and (viii) enter into transactions with affiliates. If the senior secured notes are assigned an investment grade rating by both Moody’s and S&P (Standard & Poor’s), and provided that no default has occurred and is continuing, certain of the restrictions would be suspended, including, but not limited to, restrictions on the incurrence of debt, restricted payments, transactions with affiliates and certain restrictions on mergers, consolidations and sales of assets. In addition to certain permitted debt incurrence baskets, including the $75.0 million basket described above, if our pro forma fixed charge coverage ratio is 2.0 to 1.0, then we may incur additional indebtedness that ranks pari passu with the senior secured notes.

6.625% Senior Convertible Notes

We have outstanding $57.2 million aggregate principal amount of 6.625% Senior Convertible Notes due 2013. The notes bear interest at a rate of 6.625% per annum, payable semi-annually, on each December 15 and June 15 and are convertible into shares of our common stock at the option of the holders at $12.50 per share. The notes rank pari passu with all existing and future unsecured and unsubordinated indebtedness, senior in right of payment to all existing and future subordinated indebtedness, and effectively rank junior to any secured indebtedness.

If there is a change in control, the holders of the 6.625% senior convertible notes have the right to require us to repurchase their notes at a price equal to 100% of the principal amount, plus accrued and unpaid interest. If we issue a cash dividend on our common stock, we will pay contingent interest to the holders equal to the product of the per share cash dividend and the number of shares of common stock issuable upon conversion of each holder’s note.

The 6.625% senior convertible notes provide for a make whole premium payable upon conversions occurring in connection with a change in control in which at least 10% or more of the consideration is cash, which can result in our issuing up to 5,085,513 additional shares of our common stock upon such conversions.

Debt Covenants

The provisions of our debt contain a number of covenants that limit or restrict our ability to incur more debt or liens, pay dividends, enter into transactions with affiliates, merge or consolidate with others, dispose of assets or use asset sale proceeds, make acquisitions or investments, enter into hedging activities, make capital expenditures and repurchase stock, subject to financial measures and other conditions. Our ability to incur additional indebtedness and liens and make certain restricted payments and investments depends on our ability to achieve the financial ratios provided in the Indenture governing our senior secured notes.

Our failure to comply with the obligations contained in the indentures governing our debt could result in an event of default under such indentures. Both the indenture governing our 6.625% senior convertible notes and the indenture governing our 12.0% senior secured notes contain cross-default provisions, pursuant to which certain events of default under one indenture could trigger an event of default under the other indenture. An event of default under either such indenture, if not cured or waived, could permit acceleration of the indebtedness or other indebtedness, which could have a material adverse effect on our liquidity, cash flows and results of operations.

Guarantees and Commitments

We lease space for our operations, office equipment and furniture under non-cancelable operating leases. Some equipment is also leased under capital leases, which are included in leasehold improvements, furniture and equipment.

The following table represents the minimum future operating and capital lease payments for these commitments, as well as the combined aggregate maturities (principal, interest and maintenance) for the following obligations for each of the fiscal years ended (in thousands):


	Capital Lease		Operating		Convertible		Secured
	Obligations		Leases		Debt		Loans		Total

2011 (nine months remaining)	$	5,390	$	12,654	$	1,894	$	42,300	$	62,238
2012		6,531		16,029		3,789		56,400		82,749
2013		4,094		12,405		3,789		56,400		76,688
2014		1,106		12,322		59,086		56,400		128,914
2015		913		12,389		—		56,400		69,702
2016 and thereafter		9,474		42,366		—		594,550		646,390

	$	27,508	$	108,165	$	68,558	$	862,450	$	1,066,681

See Liquidity above.

Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies,” in the accompanying condensed consolidated financial statements for a discussion of Recent Accounting Pronouncements.


ITEM 3.	*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.*

At June 30, 2010, our exposure to market risk related primarily to changes in interest rates on our investment portfolio. Our marketable investments consist primarily of short-term fixed interest rate securities. We invest only with high credit quality issuers, and we do not use derivative financial instruments in our investment portfolio. We do not believe that a significant increase or decrease in interest rates would have a material impact on the fair value of our investment portfolio.

We have not entered into any financial instruments for trading purposes. However, the estimated fair value of the derivatives embedded within our 6.625% Senior Convertible Notes and $50.0 million 12% Senior Secured Notes create a market risk exposure resulting from changes in the price of our common stock, interest rates and our credit rating. We do not expect in the near term significant changes in the two-year historical volatility of our common stock used to calculate the estimated fair value of the embedded derivatives. We do not expect the change in the estimated fair value of the embedded derivative to significantly affect our results of operations, and it will not impact our cash flows.

Our 12% Senior Secured Notes and 6.625% Senior Convertible Notes have fixed interest rates and, accordingly, we are not exposed to interest rate or market risk on those instruments.

Our carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reasonable approximations of their fair value.

For the three months ended June 30, 2010, approximately 84% of our recognized revenue has been denominated in U.S. dollars, generated mostly from customers in the U.S., and our exposure to foreign currency exchange rate fluctuations has been minimal. In the future, a larger portion of our revenues may be derived from operations outside of the U.S. and may be denominated in foreign currency. As a result, future operating results or cash flows could be increasingly impacted due to currency fluctuations relative to the U.S. dollar.

Furthermore, to the extent we engage in international sales that are denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make our services less competitive in the

international markets. Although we will continue to monitor our exposure to currency fluctuations and, when appropriate, may use financial hedging techniques to minimize the effect of these fluctuations, we cannot conclude that exchange rate fluctuations will not adversely affect our financial results in the future.

Some of our operating costs are subject to price fluctuations caused by the volatility of underlying commodity prices. The commodity most likely to have an impact on our results of operations in the event of significant price change is electricity. We are closely monitoring the cost over time of electricity. To the extent that electricity costs rise, we have the ability to pass these additional power costs onto our customers that utilize this power. We do not employ forward contracts or other financial instruments to hedge commodity price risk.


ITEM 4.	*CONTROLS AND PROCEDURES.*


(a)	Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, Terremark carried out an evaluation, under the supervision and with the participation of Terremark’s management, including Terremark’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Terremark’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, at June 30, 2010, Terremark’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective in ensuring that information required to be disclosed in the reports Terremark files and submits under the Exchange Act are recorded, processed, summarized and reported as and when required.


(b)	Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

PART II. OTHER INFORMATION


ITEM 1.	*LEGAL PROCEEDINGS.*

In the ordinary course of conducting our business, we become involved in various legal actions and claims. Litigation is subject to many uncertainties and we may be unable to accurately predict the outcome of such matters, some of which could be decided unfavorably to us. Our 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.


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 incurred substantial losses in the past and expect to continue to incur additional losses in the future, which may reduce our ability to raise capital.

For the three months ended June 30, 2010 we incurred a net loss of $10.3 million. The net loss for the three months ended June 30, 2010, included a less than $0.1 million non-cash income on change in fair value of derivatives. For the years ended March, 2010 and 2009, we incurred net losses of $31.7 million and $10.6 million

respectively. The net loss for the year ended March 31, 2010 included a $1.5 million non-cash loss on change in fair value of derivatives and a $10.3 million non-cash loss on the early extinguishment of debt. The net loss for the year ended March 31, 2009 included a $3.9 million non-cash loss on change in fair value of derivatives. We are currently investing heavily in our expansion of our datacenters in Culpeper, Virginia, upgrades to support our infrastructure in Miami, Florida and expansion in Santa Clara, California. As a result, we will incur higher depreciation and other operating expenses that will negatively impact our ability to achieve and sustain profitability unless and until these new facilities generate enough revenue to exceed their operating costs and cover additional overhead needed to scale our business to the anticipated growth. Although our goal is to achieve profitability, there can be no guarantee that we will become profitable, and we may continue to incur additional losses. Even if we achieve profitability, given the competitive nature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our continuing losses may limit our ability to raise needed financing, or to do so on favorable terms, for various reasons including that those losses are taken into account by the organizations that issue investment ratings on our indebtedness.

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, virtualized IT solutions and other colocation providers. In addition to competing with carrier 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 we do.

Because of their greater financial resources, some of our competitors have the ability to adopt aggressive pricing policies. 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 data centers. If our 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 Internet Exchanges 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 our available space 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 data centers, 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 data centers.

A significant portion of our revenues is from contracts with agencies of the United States government and uncertainties and costs inherent in the government contracting arena could adversely affect our business.

For the three months ended June 30, 2010 and the fiscal year ended March 31, 2010, revenues from contracts with the federal sector constituted approximately 20% and 24%, respectively, of our revenues. Generally, U.S. 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. Government contracts typically have an initial term of one year and renewals are at the discretion of the U.S. government. In some cases, government contracts are subject to the uncertainties surrounding congressional appropriations or agency funding. Our failure to renew or replace U.S. government contracts when they expire could have a material adverse effect on our business, financial condition and results of operations.

Government contracts are also subject to specific procurement regulations and other requirements which, although customary in U.S. government contracts, increase our performance and compliance costs. These costs might increase in the future, reducing our margins, which could have a negative effect on our financial condition. The government may also change its procurement practices or adopt new contracting rules and regulations that could be costly to satisfy or that could impair our ability to obtain new contracts. Failure to comply with these regulations and requirements could lead to contract modification or termination, the assessment of penalties and fines and/or suspension or debarment from government contracting or subcontracting for a period of time or permanently, which would limit our growth prospects, have an adverse effect on our reputation and ability to secure future U.S. government contracts and materially adversely affect our business, results of operations and financial condition.

Our participation in government contracts subjects us from time to time to inquiries, investigations and subpoenas and other requests or demands for information regarding our business with the federal government. If improper or illegal activities are uncovered, we may be subject 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. In addition, mere allegations of impropriety could adversely impact our reputation. If we were suspended or debarred from contracting with the federal government generally or with any specific agency, if our reputation or relationships with government agencies were impaired or if the government otherwise were to cease doing business with us or were to significantly decrease the amount of business it does with us, our revenue, cash flows and operating results would be materially adversely affected.

We have been awarded, and may in the future submit bids for, U.S. government contracts that require our employees to maintain various levels of security clearances and require us or our subsidiaries to maintain certain facility security clearances in compliance with Department of Defense and other government requirements. The classified work that we currently perform at our facilities subjects us to the industrial security regulations of the Department of Defense and other federal agencies that are designed to safeguard against unauthorized access by foreigners and others to classified and other sensitive information. Obtaining and maintaining security clearances for employees involves a lengthy process, and it can be difficult to identify, recruit and retain employees who already hold security clearances. If our employees are unable to obtain or retain security clearances, or if our employees who hold security clearances stop working for us, we may face delays in fulfilling contracts or be unable to fulfill or secure new contracts with any customer involved in classified work. Any breach of security for which we are responsible could seriously harm our business, damage our reputation and make us ineligible to work on any classified programs.

We may be subject to penalties for violations of these regulations. If we were to come under foreign ownership, control, or influence, the U.S. government could terminate our contracts with it or decide not to renew them and such a situation could also impair our ability to obtain new contracts and subcontracts.

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 could impair our financial performance.

For the three months ended June 30, 2010 and 2009, we derived approximately 20% and 22% of our revenues and for the years ended March 31, 2010 and 2009 we derived approximately 24% of our revenues from the federal sector, respectively. 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.

A failure to meet customer specifications or expectations could result in lost revenues, increased expenses, negative publicity, claims for damages, harm to our reputation and cause demand for our services to decline.

Our agreements with customers require us to meet specified service levels for the services we provide. In addition, our customers may have additional expectations about our services. Any failure to meet customers’ specifications or expectations could result in:


	•	delayed or lost revenue;

	•	requirements to provide additional services to a customer at reduced charges or no charge;

	•	negative publicity about us, which could adversely affect our ability to attract or retain customers; and

	•	claims by customers for substantial damages against us, regardless of our responsibility for the failure, which may not be covered by insurance policies and which may not be limited by contractual terms of our engagement.

Our ability to successfully market our services could be substantially impaired if we are unable to deploy new infrastructure systems and applications or if new infrastructure systems and applications deployed by us prove to be unreliable, defective or incompatible.

We may experience difficulties that could delay or prevent the successful development, introduction or marketing of hosting and application management services in the future. If any newly introduced infrastructure systems and applications suffer from reliability, quality or compatibility problems, market acceptance of our services could be greatly hindered and our ability to attract new customers could be significantly reduced. We cannot assure you that new applications deployed by us will be free from any reliability, quality or compatibility problems. If we incur increased costs or are unable, for technical or other reasons, to host and manage new infrastructure systems and applications or enhancements of existing applications, our ability to successfully market our services could be substantially limited.

Any interruptions in, or degradation of, our private transit Internet connections could result in the loss of customers or hinder our ability to attract new customers.

Our customers rely on our ability to move their digital content as efficiently as possible to the people accessing their websites and infrastructure systems and applications. We utilize our direct private transit Internet connections to major network providers, such as AT&T and Global Crossing as a means of avoiding congestion and resulting performance degradation at public Internet exchange points.

We rely on these telecommunications network suppliers to maintain the operational integrity of their networks so that our private transit Internet connections operate effectively. If our private transit Internet connections are interrupted or degraded, we may face claims by, or lose, customers, and our reputation in the industry may be harmed, which may cause demand for our services to decline.

Our network infrastructure could fail, which would impair our ability to provide guaranteed levels of service and could result in significant operating losses.

To provide our customers with guaranteed levels of service, we must operate our network infrastructure 24 hours a day, seven days a week, without interruption. We must, therefore, protect our network infrastructure, equipment and customer files against damage from human error, natural disasters, unexpected equipment failure, power loss or telecommunications failures, terrorism, sabotage or other intentional acts of vandalism. Even if we take precautions, the occurrence of a natural disaster, equipment failure or other unanticipated problem at one or more of our data centers could result in interruptions in the services we provide to our customers. We cannot assure you that our disaster recovery plan will address all, or even most, of the problems we may encounter in the event of a disaster or other unanticipated problem. We have experienced service interruptions in the past, and any future service interruptions could:


	•	require us to spend substantial amounts of money to replace equipment or facilities;


	•	entitle customers to claim service credits or seek damages for losses under our service level guarantees;

	•	cause customers to seek alternate providers; or

	•	impede our ability to attract new customers, retain current customers or enter into additional strategic relationships.

Our dependence on third parties increases the risk that we will not be able to meet our customers’ needs for software, systems and services on a timely or cost-effective basis, which could result in the loss of customers.

Our services and infrastructure rely on products and services of third-party providers. We purchase key components of our infrastructure, including networking equipment, from a limited number of suppliers, such as IBM, Cisco Systems, Inc., Microsoft and Oracle.

We may experience operational problems attributable to the installation, implementation, integration, performance, features or functionality of third-party software, systems and services. We may not have the necessary hardware, parts, or software on hand or that our suppliers will be able to provide them in a timely manner in the event of equipment failure. Our inability to timely obtain and continue to maintain the necessary hardware or parts could result in sustained equipment failure and a loss of revenue due to customer loss or claims for service credits under our service level guarantees.

We could be subject to increased operating costs, as well as claims, litigation or other potential liability, in connection with risks associated with Internet security and the security of our systems.

A significant barrier to the growth of e-commerce and communications over the Internet has been the need for secure transmission of confidential information. Several of our infrastructure systems and application services use encryption and authentication technology licensed from third parties to provide the protections necessary to ensure secure transmission of confidential information. We also rely on security systems designed by third parties and the personnel in our network operations centers to secure those data centers. Any unauthorized access, computer viruses, accidental or intentional actions and other disruptions could result in increased operating costs or worsen our reputation with our customers.

For example, we may incur additional significant costs to protect against these interruptions and the threat of security breaches or to alleviate problems caused by these interruptions or breaches. If a third party were able to misappropriate a consumer’s personal or proprietary information, including credit card information, during the use of an application solution provided by us, we could be subject to claims, litigation or other potential liability as well as loss of reputation.

We may be subject to legal claims in connection with the information disseminated through our network, which could divert management’s attention and require us to expend significant financial resources.

We may face liability for claims of defamation, negligence, copyright, patent or trademark infringement and other claims based on the nature of the materials disseminated through our network.

For example, lawsuits may be brought against us claiming that content distributed by some of our customers may be regulated or banned. In these and other instances, we may be required to engage in protracted and expensive litigation that could have the effect of diverting management’s attention from our business and require us to expend significant financial resources. Our general liability insurance may not cover any of these claims or may not be adequate to protect us against all liability that may be imposed. In addition, on a limited number of occasions in the past, businesses, organizations and individuals have sent unsolicited commercial e-mails from servers hosted at our facilities to a number of people, typically to advertise products or services. This practice, known as “spamming,” can lead to statutory liability as well as complaints against service providers that enable these activities, particularly where recipients view the materials received as offensive. We have in the past received, and may in the future receive, letters from recipients of information transmitted by our customers objecting to the transmission. Although we prohibit our customers by contract from spamming, we cannot assure you that our customers will not engage in this practice, which could subject us to claims for damages.

If we are unable to protect our intellectual property and prevent its use by third parties, our ability to compete in the market will be harmed.

We rely on a combination of patent, copyright, trade secret and trademark laws to protect our proprietary technology and prevent others from duplicating our products and services. However, these means may afford only limited protection and may not: (1) prevent our competitors from duplicating our products or services; (2) prevent our competitors from gaining access to our proprietary information and technology; or (3) permit us to gain or maintain a competitive advantage.

Any of our patents may be challenged, invalidated, circumvented or rendered unenforceable. We cannot assure you that we will be successful should one or more of our patents be challenged for any reason. If our patent claims are rendered invalid or unenforceable, or narrowed in scope, the patent coverage afforded our products or services could be impaired, which could significantly impede our ability to market our products or services, negatively affect our competitive position and harm our business and operating results.

We cannot assure you that any pending or future patent applications held by us will result in an issued patent or that, if patents are issued to us, that such patents will provide meaningful protection against competitors or against competitive technologies. The issuance of a patent is not conclusive as to its validity or its enforceability.

The United States federal courts or equivalent national courts or patent offices elsewhere may invalidate our patents or find them unenforceable. Competitors may also be able to design around our patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. If these developments were to occur, it could have an adverse effect on our sales.

We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current employees, despite the existence of nondisclosure and confidentiality agreements and other contractual restrictions. Furthermore, the laws of foreign countries may not protect our intellectual property rights effectively or to the same extent as the laws of the United States. If our intellectual property rights are not adequately protected, we may not be able to commercialize our technologies, products or services and our competitors could commercialize our technologies, which could result in a decrease in our sales and market share that would harm our business and operating results.

Our products or services could infringe on the intellectual property rights of others, which may lead to litigation that could itself be costly, could result in the payment of substantial damages or royalties and/or prevent us from using technology that is essential to our products or services.

We cannot assure you that our products, services or other methods do not infringe the patents or other intellectual property rights of third parties. Infringement and other intellectual property claims and proceedings brought against us, whether successful or not, could result in substantial costs and harm our reputation. Such claims and proceedings can also distract and divert management and key personnel from other tasks important to the success of our business. In addition, intellectual property litigation or claims could force us to do one or more of the following:


	•	cease selling or using any of our products or services that incorporate or makes use of the asserted intellectual property, which would adversely affect our revenue;

	•	pay substantial damages for past use of the asserted intellectual property;

	•	obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all; or

	•	redesign or rename, in the case of trademark claims, our products or services to avoid infringing the intellectual property rights of third parties, which may not be possible and could be costly and time-consuming if it is possible to do.

In the event of an adverse determination in an intellectual property suit or proceeding, or our failure to license essential technology, our sales could be harmed and/or our costs increase, which would harm our financial condition and our stock price may likely decline.

We license intellectual property rights from third-party owners. If such owners do not properly maintain or enforce the intellectual property underlying such licenses, our competitive position and business prospects could be harmed. Our licensor may also seek to terminate our license.

We are a party to a number of licenses that give us rights to third-party intellectual property that is necessary or useful to our business. Our success will depend in part on the ability of our licensors to obtain, maintain and enforce our licensed intellectual property. Our licensors may not successfully prosecute the applications for intellectual property to which we have licenses. Even if patents or other intellectual property registrations issue in respect of these applications, our licensors may fail to maintain these patents or intellectual property registrations, may determine not to pursue litigation against other companies that are infringing these patents or intellectual property registrations, or may pursue such litigation less aggressively than we would. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products or services for sale, which could adversely affect our competitive business position and harm our business prospects.

One or more of our licensors may allege that we have breached our license agreement with them and accordingly seek to terminate our license. If successful, this could result in our loss of the right to use the licensed intellectual property, which could adversely affect our ability to commercialize our technologies, products or services, as well as harm our competitive business position and our business prospects.

We rely on trade secrets and other forms of non-patent intellectual property protection. If we are unable to protect our trade secrets, other companies may be able to compete more effectively against us.

We rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. Our trade secrets may otherwise become known or be independently discovered by competitors.

To the extent that our commercial partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

If any of our trade secrets, know-how or other technologies not protected by a patent were to be disclosed to or independently developed by a competitor, our business, financial condition and results of operations could be materially adversely affected.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Some of our employees may have been previously employed by other companies, including our competitors or potential competitors. As such, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize certain products or services, which would adversely affect our business.

We may be exposed to liability under non-solicitation agreements to which one or more of our employees may be a party with certain of our competitors.

From time to time, we may hire employees who may be parties to non-solicitation or non-competition agreements with one or more of our competitors. Although we expect that all such employees will comply with the terms of their non-solicitation agreements, it is possible that if customers of our competitors chose to move their business to us, or employees of a competitor seek employment with us, even without any action on the part of any employee bound by any such agreement, one or more of our competitors may chose to bring a claim against us and our employee.

We may become subject to burdensome government regulation and legal uncertainties that could substantially harm our business or expose us to unanticipated liabilities.

It is likely that laws and regulations directly applicable to the Internet or to hosting and managed application service providers may be adopted. These laws may cover a variety of issues, including user privacy and the pricing, characteristics and quality of products and services. The adoption or modification of laws or regulations relating to commerce over the Internet could substantially impair the growth of our business or expose us to unanticipated liabilities. Moreover, the applicability of existing laws to the Internet and hosting and managed application service providers is uncertain. These existing laws could expose us to substantial liability if they are found to be applicable to our business. For example, we provide services over the Internet in many states in the United States and elsewhere and facilitate the activities of our customers in these jurisdictions. As a result, we may be required to qualify to do business, be subject to taxation or be subject to other laws and regulations in these jurisdictions, even if we do not have a physical presence, employees or property in those states.

Difficulties presented by international economic, political, legal, accounting and business conditions could harm our business in international markets.

For the three months ended June 30, 2010 and 2009, 16% and 13% of our total revenue and for each of the years ended March 31, 2010 and 2009, 15% and 13% of our total revenue was generated in countries outside of the United States, respectively. Some risks inherent in conducting business internationally include:


	•	unexpected changes in regulatory, tax and political environments;

	•	longer payment cycles and problems collecting accounts receivable;

	•	fluctuations in currency exchange rates;

	•	our ability to secure and maintain the necessary physical and telecommunications infrastructure;

	•	challenges in staffing and managing foreign operations; and

	•	laws and regulations on content distributed over the Internet that are more restrictive than those currently in place in the United States.

Any one or more of these factors could materially and adversely affect our business.

Our substantial leverage may impair our cash flow and financial condition and prevent us from fulfilling our obligations under the notes.

We have a substantial amount of indebtedness. As of June 30, 2010, we have debt totaling approximately $517.4 million, of which $5.5 million is current and payable during the twelve months ending June 30, 2011. As of March 31, 2010, we had debt totaling approximately $456.6 million, of which $4.9 million was current and payable during the twelve months ending March 31, 2011. For a description of our outstanding debt, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” Our substantial indebtedness could have important consequences, including, but not limited to:


	•	making it more difficult for us to satisfy our obligations and comply with other restrictions under our notes and our other indebtedness;

	•	increasing our vulnerability to general adverse economic and industry conditions by making it more difficult for us to react quickly to changing conditions;

	•	limiting our ability to obtain additional or favorable financing to fund future working capital, capital expenditures, debt service requirements, acquisitions and other general corporate purposes;

	•	requiring that we use a substantial portion of our cash flow from operations to pay principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund working capital, capital expenditures, acquisitions and general corporate purposes;


	•	limiting our flexibility in planning for, or reacting to, changes in our business, and the industry in which we operate; and

	•	placing us at a competitive disadvantage to those of our competitors that have less indebtedness.

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.

Despite our current level of indebtedness, we may still be able to incur substantially more indebtedness, which could further exacerbate the risks associated with our substantial leverage.

Subject to specified limitations, the Indenture governing our senior secured notes permits us to incur substantial additional indebtedness, including indebtedness secured equally and ratably by first priority liens on the same collateral securing the notes. In addition, any future credit facility or other agreement governing our indebtedness may allow us to incur additional indebtedness, including secured indebtedness. If new indebtedness is added to our current indebtedness, the risks described above could intensify.

We will require a significant amount of cash to fund our debt service, working capital needs and our expansion plans, and our ability to generate sufficient cash depends upon many factors, some of which are beyond our control

Our ability to make payments on our indebtedness, including the senior secured notes, fund working capital needs and fulfill our expansion plans depends on our ability to generate adequate cash flow. To some extent, our ability to generate adequate cash flow is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations at sufficient levels or that our cash needs will not increase. If we are unable to generate sufficient cash flow from operations to service our indebtedness and meet our other needs, we may have to refinance all or a portion of our existing indebtedness, or obtain additional financing. Alternatively, we may have to reduce expenditures that we deem necessary to our business or sell assets, which may further reduce our ability to generate cash and may reduce the amount of collateral securing the notes. We cannot assure you that any or all of these actions will be sufficient to allow us to service our debt obligations or that any additional financing could be obtained on commercially reasonable terms or at all.

Covenant restrictions under our indebtedness may limit our ability to operate our business.

The indenture that governs our senior secured notes contains, and future financing agreements may contain, covenants that may restrict our ability to finance future operations or capital needs or to engage in other business activities. The indenture governing our senior secured notes restricts, among other things, our ability and the ability of our subsidiaries to:


	•	make restricted payments;

	•	incur additional debt and issue preferred or disqualified stock;

	•	create liens;

	•	create or permit to exist restrictions on our ability or the ability of our restricted subsidiaries to make

	•	certain payments or distributions;

	•	engage in sale-leaseback transactions;


	•	engage in mergers or consolidations or transfer all or substantially all of our assets;

	•	make certain dispositions and transfers of assets; and

	•	enter into transactions with affiliates.

Our ability to comply with these covenants may be affected by many events beyond our control, and we may not be able to comply with these covenants, or in the event of default, to remedy that default. Our failure to comply with the covenants under the notes could result in a default, which could cause our senior secured notes (and by reason of cross-acceleration provisions, our other indebtedness) to become immediately due and payable.

If our financial condition deteriorates, we may be delisted by the NASDAQ and our stockholders could find it difficult to sell our common stock.

Our common stock trades on the NASDAQ Global Market. The NASDAQ 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 that 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 NASDAQ, our stockholders could find it difficult to sell our stock. To date, we have had no communication from the NASDAQ regarding delisting. If our common stock is delisted from the NASDAQ, 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 NASDAQ.

In addition, if our shares are no longer listed on the NASDAQ 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 more difficult to sell their shares on a liquid and efficient market.

Our business could be harmed by prolonged electrical power outages or shortages, or increased costs of energy.

A significant amount of our business is dependent upon the continued operation of the NAP of the Americas building. The NAP of the Americas building and our other NAP facilities are susceptible to regional costs of power, electrical power shortages and planned or unplanned power outages caused by these shortages. A power shortage at an internet exchange 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 that last beyond our backup and alternative power arrangements could harm our customers and have a material adverse effect on our business.

We are dependent on key personnel and the loss of these key personnel could have a material adverse effect on our success.

We are highly dependent on the skills, experience and services of key personnel. The loss of key personnel could have a material adverse effect on our business, operating results or financial condition. We do not maintain key man life insurance with respect to these key individuals. Our recent and 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. Our inability to hire new personnel with the requisite skills could impair our ability to manage and operate our business effectively.

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 facilities in those domestic and international locations where we believe there is significant demand for our services and to expand our facilities in those locations we currently own such as Culpeper, Virginia, where we have the capacity to construct two additional pods, each yielding 50,000 square feet of net colocation space:


	•	identify and obtain the use 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.

If the world-wide financial crisis and the ongoing economic recession continues or intensifies, our ability to meet long-term commitments and our ability to grow our business would be adversely affected; this could adversely affect our results of operations, cash flows and financial condition.

The global economy is currently experiencing a significant contraction, with an almost unprecedented lack of availability of business and consumer credit. We rely on the capital markets, particularly for publicly offered debt, as well as the credit markets, to meet our financial commitments and short-term liquidity needs if internal funds are not available from our operations. Long-term disruptions in the capital and credit markets, similar to those that are currently being experienced, could result from uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions and could adversely affect our access to liquidity needed for our business.

Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures and reducing or eliminating discretionary uses of cash.

Besides our cash on hand and any financing activities we may purse, customer collections are our primary source of cash. While we believe we have a strong customer base and have experienced strong collections in the past, if the current market conditions continue to deteriorate we may experience increased churn in our customer base, including reductions in their commitments to us, which could also have a material adverse effect on our liquidity, results of operation and financial position.

If the ongoing economic recession continues or worsens or if markets continue to be disrupted, there may be lower demand for our services and increased incidence of customers’ inability to pay their accounts. Further, bankruptcies or similar events by customers may cause us to incur bad debt expense at levels higher than historically experienced. These events would adversely impact our results of operations, cash flows and financial position.

Risk Factors Related to Our Common Stock

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 $4.40 per share to $8.91 per share during the 52-week trading period ended June 30, 2010). 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 factors that could cause the price of our common stock in the public market to fluctuate significantly include the following:


	•	actual or anticipated variations in our quarterly and annual 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.

We expect that the price of our common stock will be significantly affected by the availability of shares for sale in the market.

The sale or availability for sale of substantial amounts of our common stock could adversely impact its price. Our certificate of incorporation authorizes us to issue 100,000,000 shares of common stock. On June 30, 2010, there were approximately 65.4 million shares of our common stock outstanding and approximately 12.0 million shares of our common stock reserved for issuance pursuant to our 6.625% Senior Convertible Notes, Series I convertible preferred stock, options, nonvested stock and warrants to purchase our common stock, which consist of:


	•	4,575,200 shares of our common stock reserved for issuance upon conversion of our 6.625% Senior Convertible Notes;

	•	1,034,667 shares of our common stock reserved for issuance upon conversion of our Series I convertible preferred stock;

	•	2,280,164 shares of our common stock issuable upon exercise of options;

	•	2,136,308 shares of our nonvested stock; and

	•	2,018,128 shares of our common stock issuable upon exercise of warrants.

Accordingly, a substantial number of additional shares of our common stock are likely to become available for sale in the foreseeable future, which may have an adverse impact on our stock price.

Our common shares are thinly traded and, therefore, relatively illiquid.

As of June 30, 2010, we had 65,381,517 common shares outstanding. While our common shares trade on the NASDAQ, our stock is thinly traded (approximately 0.5%, or 338,484 shares, of our stock traded on an average daily basis during the twelve months ended June 30, 2010) 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.

Existing stockholders’ interest in us may be diluted by additional issuances of equity securities.

We expect to issue additional equity securities to fund the acquisition of additional businesses and pursuant to employee benefit plans. We may also issue additional equity for other purposes. These securities may have the same rights as our common stock or, alternatively, may have dividend, liquidation, or other preferences to our common stock. The issuance of additional equity securities will dilute the holdings of existing stockholders and may reduce the share price of our common stock.

We do not expect to pay dividends on our common stock, and investors will be able to receive cash in respect of the shares of common stock only upon the sale of the shares.

We have no intention in the foreseeable future to pay any cash dividends on our common stock in accordance with the terms of our new credit facilities. Furthermore, unless we satisfy specified financial ratio covenants we may not pay cash or stock dividends without the written consent of our note holders. Further, the terms of our Series I convertible preferred stock provide that, in the event we pay any dividends on our common stock, an additional dividend must be paid with respect to all of our outstanding Series I convertible preferred stock in an amount equal to the aggregate amount of dividends that would be owed for all shares of commons stock into which the shares of Series I convertible preferred stock could be converted at such time. Therefore, an investor in our common stock will obtain an economic benefit from the common stock only after an increase in its trading price and only by selling the common stock.


ITEM 2.	*UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.*

None.


ITEM 3.	*DEFAULTS UPON SENIOR SECURITIES.*

None.


ITEM 4.	*(REMOVED AND RESERVED).*

None.


ITEM 5.	*OTHER INFORMATION*

None.


ITEM 6.	*EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.*

(a) List of documents filed as part of this report:

1. Financial Statements


	•	Management’s Report on Internal Control over Financial Reporting.

	•	Report of Independent Registered Certified Public Accounting Firm on the Financial Statements — KPMG LLP.

	•	Report of Independent Registered Certified Public Accounting Firm on Internal Control Over Financial Reporting — KPMG LLP.

	•	Consolidated Balance Sheets as of June 30, 2010 and March 31, 2010.

	•	Consolidated Statements of Operations for the Three Months Ended June 30, 2010 and 2009.

	•	Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended June 30, 2010.

	•	Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2010 and 2009.

	•	Notes to Condensed Consolidated Financial Statements.

2. Financial Statement Schedules

All schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or the omitted schedules are not applicable.

3. Exhibits

The following exhibits, which are furnished with this Quarterly Report or incorporated herein by reference, are filed as part of this Quarterly Report.


Exhibit
Number			Description of Exhibit

	4	.1	Supplemental Indenture, dated April 28, 2010, by and among the Company, certain of the Company’s subsidiaries and The Bank of New York Mellon Trust Company, N.A., as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 29, 2010 and incorporated by reference herein).
	4	.2	Form of New Note (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on April 29, 2010 and incorporated by reference herein).
	10	.1	Purchase Agreement, dated April 23, 2010, by and among the Company, the Guarantors and the Initial Purchaser (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 29, 2010 and incorporated by reference herein).
	10	.2	Registration Rights Agreement, dated April 28, 2010, by and among the Company, the Guarantors and the Initial Purchaser (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 29, 2010 and incorporated by reference herein).
	10	.3	Amendment to Collateral Trust Agreement, dated April 28, 2010, by and among the Company, the Guarantors and the Collateral Trustee (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 29, 2010 and incorporated by reference herein).
	10	.4	Additional Secured Debt Designation, dated April 28, 2010, by and between the Company and the Collateral Trustee (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on April 29, 2010 and incorporated by reference herein).
	10	.5	Amended and Restated Employment Agreement with Nelson Fonseca, dated June 10, 2010 (filed as Exhibit 10.53 to the Company’s Annual Report on Form 10-K filed on June 14, 2010 and incorporated by reference herein).
	10	.6	Amended and Restated Terremark Worldwide, Inc. 2005 Executive Incentive Compensation Plan, filed as Annex A to our definitive proxy statement filed in connection with our 2010 Annual Meeting of Stockholders and incorporated by reference herein.
	31	.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a)
	31	.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a)
	32	.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


			Page

PART I
	Item 1.	Financial Statements (unaudited)		3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		32
	Item 4.	Controls and Procedures		33

PART II
	Item 1.	Legal Proceedings		33
	Item 1A.	Risk Factors		33
	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				47
EX-31.1
EX-31.2
EX-32.1
EX-32.2


Exhibit
Number			Description

	31	.1	Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002