UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

Commission file number 001-12475

 

 

 

 

Terremark Worldwide, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

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:

 

 

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

NONE

 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.  Yes o     No þ

 

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 Website, if an, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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):

 

 

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

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second quarter was approximately $402,331,065 (based on the closing market price of $6.22 per share for the registrant’s common stock as reported on the Nasdaq Global Market on September 30, 2009).

 

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of May 31, 2010 was 65,337,470

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference from the registrant’s definitive proxy statement for its 2010 Annual Meeting of Stockholders (to be filed pursuant to Regulation 14A).

 

 

TABLE OF CONTENTS

 

 

 

The words “Terremark”, “we”, “our”, “ours”, and “us” refer to Terremark Worldwide, Inc. All statements in this discussion that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding Terremark’s “expectations”, “beliefs”, “hopes”, “intentions”, “strategies” or the like. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Terremark cautions investors that actual results or business condition may differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the risk factors discussed in this Annual Report on Form 10-K. Except as required by applicable law, Terremark expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in Terremark’s expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based.

 

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 1,300 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.

 

 

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 our average quarterly revenue churn rate for the past four quarters has been less than 2%. As an illustration of this principle, for the year ended March 31, 2010, approximately 90% of our overall revenue was recurring and over 70% of our new bookings were derived from existing customers.

 

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

 

Competitive Strengths

 

Our business is characterized by the following strengths:

 

 

 

Strategy

 

Our objective is to become the leading provider of IT infrastructure and managed services for enterprise and federal sector customers. Key components of our strategy include the following:

 

 

Products and Services

 

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

 

Colocation

 

Our colocation services, which represented 38% of our revenue, or $111.2 million, for the year ended March 31, 2010, provide clients with the space and power to deploy computing, network, storage and IT infrastructure in our world-class data centers. Through a number of redundant subsystems, including power, fiber and satellite connections, we are able to provide our customers with 100% Service Level Agreements (SLAs) for power and environmental systems, which means that we can agree to provide 100% uptime for all of our customers’ IT equipment contained in our facilities. Our colocation solutions are scalable, allowing our customers

to upgrade space, connectivity and services as their requirements evolve. As a result of the scalability, cost effectiveness and flexibility of our colocation solutions, our customers continue to increase their outsourcing to us, allowing them to reduce their cost of powering and cooling their infrastructure. Furthermore, customers benefit from our data centers’ wide range of physical security features, including biometric scanners, man traps, smoke detection, fire suppression systems, motion sensors, secured access, video camera surveillance and security breach alarms. Our customers sign long-term contracts and are billed on a monthly basis, in advance, by the square foot or by cabinet for space and by the circuit (based on the number of amps) for power. We provide the following colocation services:

 

Space and Power — Each of our data centers house IT infrastructure in a safe, secure and highly connected facility, and customers enjoy a high level of network reliability, which enables them to focus on their core business. This service provides space and power to our clients to deploy their own computing, networking and IT infrastructure. Customers can choose individual cabinets or a secure cage depending on their space and security requirements.

 

Sensitive Compartmented Information Facility (“SCIF”) Services — A service used by the federal sector that includes the buildout and management of a colocation facility including extraordinary security safeguards meeting Director of Central Intelligence Directive (“DCID”) 6/9 Physical Security Standards for SCIF facilities. Facilities meeting DCID 6/9 standards may be utilized for mission-critical federal infrastructure, including colocation, network services, managed hosting and security services delivered by our wholly owned federal subsidiary, Terremark Federal Group, Inc. As of the date of this offering circular, we are the only company awarded a GSA Schedule contract offering colocation space that satisfies the federal government’s requirements to be accredited as a SCIF.

 

Remote Hands/Smart Hands — Reduces cost and maximizes uptime with on-site troubleshooting and maintenance services. Remote Hands service performs simple functions to customers’ equipment upon request, while Smart Hands service offers clients remote assistance using industry-certified engineers to install and maintain complex network environments.

 

Managed Services

 

Our managed services represented 53% of our revenue, or $155.7 million, for the year ended March 31, 2010. We design, deploy, operate, monitor and manage our clients’ IT infrastructure at our facilities. Our customers sign long-term contracts and are billed on a monthly basis, in advance, to use these applications, which minimizes the capital expenditure necessary for them to build this platform in-house while also allowing them to maintain full control over the operating system and application infrastructure. This platform is scalable, allowing us to increase margins as we replicate the service for incremental customers. The division is composed of four subdivisions — managed hosting services, managed network services, managed security/data infrastructure services and equipment/other. The key managed services we provide include:

 

Managed Hosting Services — We offer managed hosting services, in which we house, serve and maintain data environments for various computing environments. These environments can include, without limitation, websites, enterprise resource planning, or ERP, tools and databases. Our managed hosting services, which represented approximately 58% of our managed services revenue for the year ended March 31, 2010, are designed to support complex, transaction-intensive, mission-critical line-of-business and Internet facing applications. Our full suite of managed hosting services allows companies and organizations to reduce their total cost of ownership while increasing IT capability through access to our significant technical expertise and capability as well as our technologically advanced data center, network and computing infrastructure. We provide managed hosting

services on dedicated or virtualized servers located within our facilities. We offer the following managed hosting services to our customers:

 

 

Managed Network Services — Represented approximately 34% of managed services revenue for the year ended March 31, 2010, and leverages our robust connectivity and our Commercial and Secure Network Operations Centers, or NOC, to deliver cost savings, flexibility and the performance that customers demand. We generate monthly recurring revenues by providing the following managed network services to our customers.

 

 

Equipment/Other — Represented approximately 8% of managed services revenue for the year ended March 31, 2010 and consists primarily of services we provide to procure and install equipment utilized as part of our managed services contracts.

 

We use the following proprietary software tools and technologies to deliver these services:

 

Infinistructure^® — A virtualized computing platform that allows customers to scale across equipment and geographies with limited capital expenditure. This technology eliminates the physical server as a point of failure and allows customers to leverage a comprehensive on-demand computing environment with a substantial enterprise-class computing grid partitioned into secure virtual servers. The system guarantees a highly secure environment using complete server isolation, VLAN network partitioning and PCI-compliant firewalls, and is managed and administered with our digitalOps service delivery platform.

 

digitalOps — A service delivery software tool that facilitates the management of most of our colocation, hosting and network services, including computing network design, operations and management environments. The technology also serves as a portal and user interface, enabling customers to monitor and provision their own servers. This advanced technology represents the optimization of the surrounding technical operations and business processes to create the architectural logic of an entire managed environment.

Exchange Point Services

 

Our Exchange Point Services platform represented $18.7 million, or approximately 6%, of revenue for the year ended March 31, 2010 and is designed to allow our customers to connect their networks and equipment with that of others in a flexible and cost-effective manner. The attractiveness of our exchange point services to customers is enhanced by our substantial connectivity with more than 160 competing carriers, which allows our customers to reduce costs while enhancing the reliability and performance associated with the exchange of Internet and other data traffic. Our connectivity options offer our customers a key strategic advantage by providing direct, high-speed connections to peers, partners and some of the most important sources of IP data, content and distribution in the world. Key Exchange Point Services include:

 

Interconnect Services — These services represent physical links that enable our customers to share data with any other clients connected to our exchange point platform. We charge for these links, or Cross-Connect services, through an initial installation fee and an ongoing monthly recurring charge.

 

Peering Services — Provide a highly secure and reliable means to exchange data, deliver IP-based services and deliver content between networks in a carrier neutral environment. We provide a cost-effective alternative to conventional transport, significantly reducing the costs, delays and performance issues often associated with using a complex patchwork of local loops and long-haul transport.

 

Industry Trends

 

According to Tier 1 Research, global demand for data center space increased by 116% from 2002 to 2007 while supply increased by a modest 15% over the same period. Since 2007, demand has continued to outgrow supply, and Tier 1 projects that demand will outgrow supply by 2.5x through 2012. This supply and demand imbalance is replacing what was previously considered a market with excess supply. We believe this growth is being driven by escalating broadband utilization trends, rising power and cooling requirements and an increasing enterprise trend for outsourcing bolstered by a growing need for advanced networking technology provided through reliable and secure infrastructure.

 

 

 

Increased Technical Demands and Technological Developments.  Advanced equipment and new developments have required greater sophistication and augmented the specifications required of data centers. As a result, companies are now faced with a choice of either upgrading their existing facilities or outsourcing all or a portion of their IT infrastructure to a data center with more advanced networking technology and a more reliable and secure infrastructure.

 

Increased Reliance on the Internet.  As more businesses rely on the Internet for e-commerce, email and centralized databases, connectivity, speed and reliability have become a priority, and demands on their IT infrastructure have increased. We believe that the lack of adequate security, climate control and bandwidth in most in-house data centers has led to an increase in data center outsourcing.

 

Adoption of Network-Centric Computing and IP Services.  Technologies such as IP/Ethernet, softswitches and wireless broadband have driven traffic onto multi-purpose IP networks, enabling new applications to be purchased separate from network access. These technologies require increased broadband speeds and reduced latency. Because these requirements have become increasingly difficult for in-house data center solutions to provide, we believe that they have driven the demand for data center outsourcing.

 

Business Continuity and Disaster Recovery.  As businesses have become increasingly dependent upon their data systems and IT infrastructure, business continuity concerns and disaster recovery planning are leading businesses to store an increasing amount of data in secure, off-site facilities that enable them to access this data in real-time. Our secure data centers contain redundant systems (e.g., power and cooling), which are required under many companies’ business continuity and disaster recovery policies. Additionally, our data centers and services enable our customers to regularly scan data to track compliance with such policies.

 

Regulatory Compliance.  Regulations have increasingly addressed enterprises’ use of electronic systems, which we believe will drive growth in demand for our secure, outsourced services. Examples of such regulations include Basel II, which provides direction for managing capital risk, supervisory interaction and public risk disclosure for large banks, as well as Check 21, which permits banks to truncate original checks and process check information electronically.

 

 

Customers

 

Our customers include enterprises, government agencies, systems integrators, Internet content and portal companies as well as the world’s largest network providers. As of March 31, 2010, we had approximately 1,300 customers worldwide. The federal sector accounted for approximately 24% of our revenues for the year ended March 31, 2010. The largest commercial customer accounted for less than 5% of our revenues for the year ended March 31, 2010.

Sales and Marketing

 

Sales

 

The Terremark sales force markets our services to enterprise, federal sector, interactive entertainment, Internet infrastructure, carrier, and channel customers and is organized by business unit, corresponding to U.S. commercial, Federal, Europe and Latin America. Our sales force works with our team of trained support engineers to apply our strategic approach in targeting customers, which focuses on the design of a package of Terremark products and IT infrastructure services based solely on a particular customer’s needs. We sell our products and services through three primary channels:

 

 

Marketing

 

Our marketing organization is responsible for building and communicating a distinct brand, driving qualified leads into the sales pipeline, and ensuring strategic alignment with key partners. Our marketing team supports our strategic priorities through the following primary objectives:

 

 

Competition

 

Our competition includes:

 

 

 

Employees

 

As of March 31, 2010, we had 712 full-time employees in the United States, 89 full-time employees in Europe, 54 full-time employees in Latin America and 4 full-time employees in Turkey. Of these employees, 590 were in data center operations, 109 were in sales and marketing and 160 were in management, finance and administration. Approximately 17.2% of employees have high level federal security clearance. We have no union contracts, and we believe that our relationship with our employees is good.

 

Primary Data Centers

 

NAP of the Americas

 

Constructed in 2001, our owned flagship facility, the NAP of the Americas, located in Miami, Florida is one of the most significant telecommunications projects in the world. This 750,000 gross square-foot facility was the first purpose-built, carrier neutral Network Access Point and is specifically designed to link the United States with the rest of the world.

 

Miami has been ranked as one of the most interconnected cities in the world, ahead of San Francisco, Chicago and Washington, D.C. Our NAP of the Americas is located in downtown Miami, an area that has numerous telecommunications carrier facilities, fiber loops, international cable landings and multiple power grids. This convergence of telecommunications infrastructure, together with the NAP of the Americas’ capabilities, are reasons why global carriers, Internet service providers and other Internet-related businesses, educational institutions, the federal sector and enterprises have chosen to become our clients.

 

Our Network Operations Center, or NOC, provides continuous 24-hour support, monitoring and management of all elements in a customer’s computing infrastructure. This service allows our customers to leverage our investment in hardware, software tools and expertise and to be supported by a NOC without requiring them to make significant investments in equipment and dedicated staff. The NAP of the Americas is equipped with two fully staffed NOCs, one serving our commercial customers and the other serving our federal sector customers.

 

NAP of the Capital Region

 

Constructed in 2008 and strategically located in Culpeper, Virginia, outside of the 50-mile blast zone surrounding downtown Washington, D.C., the owned NAP of the Capital Region (“NCR”) is one of the most secure and technologically sophisticated data centers on the Eastern seaboard.

 

The 30-acre campus is the ideal location for government and enterprise clients requiring colocation solutions engineered to meet the needs of today’s power, space and bandwidth-intensive mission-critical applications and hot/warm sites for disaster recovery/COOP environments.

The NCR campus supports up to five 50,000 square-foot independent data center structures and a 72,000-square-foot secure office building. We have completed two Pods and have a third Pod underway. Each structure is a secure bunker, designed to provide clients who require colocation space that meets standards for sensitive compartmented information facilities (SCIFs). Inside each data center, a professional security staff maintains and operates sophisticated surveillance systems, biometric scanners and secured areas for processing of staff, customers and visitors. Computer Sciences Corporation serves as an anchor customer, and we have already contracted with several new and existing federal and commercial customers.

 

A complete suite of services from colocation and connectivity to managed hosting and comprehensive disaster recovery solutions is offered, including solutions utilizing our Infinistructure^® utility computing platform. NCR is designed to accommodate today’s power requirements for high density computing environments. We offer 100% service level agreements on power and environmentals for NCR.

 

The Company has also secured an additional 27 acres of land immediately adjacent to the NCR campus providing the ability to add at least 250,000 square feet of high-quality data center space and 100,000 square feet of Class A office space, which allows the Company to effectively double the size of the Culpeper campus as demand for the NCR location continues to grow.

 

NAP of the Americas/West

 

Located in Santa Clara, California in Silicon Valley, our leased NAP of the Americas/West (“NAP West”) strategically positions us to service the Asian/Pacific Rim markets and is a key component of our international reach. The facility was engineered to exceed industry standards for power and cooling and is on the critical grid for Silicon Valley Power. Additionally, NAP West’s access to major carriers provides a competitive marketplace that lowers bandwidth costs for our customers while allowing them to select the connectivity best suited to their business. In addition, we own the land adjacent to this facility which we may use to construct an additional 50,000 square foot data facility.

 

Data Center Summary

 

We own or lease properties on which we operate Internet exchange facilities from which we may provide our colocation, interconnection and managed services to the federal and commercial sectors. The following tables, together, contain information on these properties and facilities as of March 31, 2010:

 

 

 

Financial Information About Geographic Areas

 

For our fiscal years ended 2010, 2009 and 2008, our revenue from external customers attributable to the United States and internationally is as set forth below (in thousands):

 

 

As of March 31, 2010, our long lived assets, including property and equipment, net, and identifiable and intangible assets, are located in the following geographic areas (in thousands):

 

 

Our History

 

Terremark was formed in 1982 under the laws of the State of Delaware, and, with its subsidiaries, was engaged in the development, sale, leasing, management and financing of various real estate projects. On April 28, 2000, given the rapid growth of the IT infrastructure sector, Terremark Holdings, Inc. completed a reverse merger with AmTec, Inc., a public company, and contemporaneously changed its name to Terremark Worldwide, Inc, subsequently using this public company to operate within the sector. After the reverse merger, we redefined our business and strategy and implemented a plan to exit all real estate and other lines of business not directly related to our current business model described in this Annual Report on Form 10-K.

Directors and Executive Officers

 

Our executive officers and directors and their ages as of March 31, 2010, are as follows:

 

 

Manuel D. Medina, 57, has served as Chairman of the Board, President and Chief Executive Officer since April 2000, the date that we merged with AmTec, as well as in those positions with Terremark since its founding in 1982. In addition, Mr. Medina is a managing partner of Communication Investors Group, one of our investors. Before founding Terremark as an independent financial and real estate consulting company, Mr. Medina, a certified public accountant, worked with Price Waterhouse after earning a Bachelor of Science degree in Accounting from Florida Atlantic University in 1974.

 

Joseph R. Wright, Jr., 71, has served as our Vice Chairman of the Board since April 2000. Mr. Wright is currently Senior Advisor to The Chart Group, L.P., which is a merchant banking firm investing in both venture and growth capital companies and providing senior level advice and capital access to corporate clients. Previously, Mr. Wright was Chief Executive Officer of Scientific Games, of which he had been a member of the board since 2004 and on which he served as Vice Chairman. Prior to his tenure as Chief Executive Officer of Scientific Games, Mr. Wright served as Chairman of Intelsat, the world’s leading provider of satellite/fiber services with a global fleet of 53 satellites servicing over 200 countries from July 2006 to April 2008 and, prior to this position, from August 2001 to July 2006, served as Chief Executive Officer of PanAmSat, a publicly-listed satellite-based services business, which was acquired by Intelsat in 2006. Before PanAmSat, he was Chairman of GRC International Inc., a public company providing advanced information technology, Internet and software technologies to government and commercial customers, which was sold to AT&T, was Co-Chairman of Baker & Taylor Holdings, Inc., an international book/video/software distribution and e-commerce company, owned by The Carlyle Group and was Executive Vice President, Vice Chairman, and Director of W. R. Grace & Company, Chairman of Grace Energy Company and President of Grace Environmental Company. Mr. Wright also serves on the Board of Directors/Advisors of Federal Signal, the Defense Business Board, the Defense Science Board task force on interoperability, Performance Measurement Advisory Council of the Office of Management and Budget (The White House), the Network Reliability and Interoperability Council of the Federal Communications Commission, the Media Security and Reliability Council of the Federal Communications Commission, the Council on Foreign Relations, the Committee for the Responsible Federal Budget and the New York Economic Club.

 

Guillermo Amore, 71, has served as a member of our Board of Directors since February 2001. From August 2000 to February 2001, Mr. Amore served as the President and Chief Operating Officer of our wholly-owned subsidiary, Terremark Latin America, Inc., prior to which he served as Chairman and Chief Executive Officer of Spectrum Telecommunications Corporation until its acquisition. Mr. Amore has nearly 42 years of

telecommunications experience, much of it focused on the developing markets of Latin America and the Caribbean. During his tenure at GTE Corporation, he built an extensive network of contacts in the region. These contacts served him well in business development and regulatory affairs during his stewardship of Grupo Isacell S.A. of Mexico and of Spectrum Telecommunications. Mr. Amore holds an MBA from Harvard University and a Bachelors degree in Science in Electrical Engineering from Pontificia Universidad Javeriana, Colombia.

 

Timothy Elwes, 74, has served as a member of our Board of Directors since April 2000. Mr. Elwes also served as a member of the Board of Directors of Timothy Elwes & Partners Ltd., a financial services company, between May 1978 and October 1994, the business of which was merged into Fidux Trust Co. Ltd. in December 1995. Since December 2000 he has served as an independent financial services consultant.

 

Antonio S. Fernandez, 70, was elected to our Board of Directors in September 2003. In 1970, Mr. Fernandez was a Systems Engineering Manager at Electronic Data Systems (EDS). In 1971, Mr. Fernandez joined DuPont Glore Forgan as a Vice-President in Operations. In 1974, he joined Thomson McKinnon as Director of Operations and Treasurer. In 1979, he was Director of Operations and Treasurer at Oppenheimer & Co. Inc., where he also served as Chief Financial Officer from 1987 until 1994 and a member of the Board of Directors from 1991 until 1998. In 1991, Mr. Fernandez founded and headed the International Investment Banking Department at Oppenheimer & Co. and served in that capacity until 1999. Mr. Fernandez served on the Board of Banco Latinoamericano de Exportaciones from 1992 until 1999. He also served as Trustee of Mulhenberg College, PA from 1995 until 1998. Mr. Fernandez was a director from 2004 to 2009 of Spanish Broadcasting Systems, an operator of radio stations in the U.S. He graduated from Pace University, NY in 1968 with a Bachelors in Business Administration.

 

Arthur L. Money, 70, has served as a member of our Board of Directors since May 2003. Since September 2002, Mr. Money has been a member of the Board of Directors of SafeNet, a provider of Information Technology security solutions. From 1999 to 2001, Mr. Money was the Assistant Secretary of Defense (C3I) and Department of Defense CIO. Prior to this, Mr. Money served as the Assistant Secretary of the Air Force for Research, Development, and Acquisition, and was Vice President and Deputy General Manager of TRW. From 1989 to 1995, Mr. Money was President of ESL, Inc. He has received distinguished public service awards from the U.S. Department of Defense (Bronze Palm), the U.S. Air Force, and the U.S. Navy. He is currently President of ALM Consulting, specializing in command control and communications, intelligence, signal processing and information processing. Mr. Money received his Master of Science Degree in Mechanical Engineering from the University of Santa Clara and his Bachelor of Science Degree in Mechanical Engineering from San Jose State University.

 

Marvin S. Rosen, 68, has served as a member of our Board of Directors since April 2000. Mr. Rosen is a co-founder and Chairman of the Board of Directors of Fusion Telecommunications International and served as its Vice Chairman from December 1998 to April 2000 and has served as its Chief Executive Officer since April 2000. Since 2004, Mr. Rosen has been a Managing Partner at Diamond Edge Capital Partners, L.L.C. From September 1995 through January 1997, Mr. Rosen served as the Finance Chairman of the Democratic National Committee. Mr. Rosen has served on the Board of Directors of the Robert F. Kennedy Memorial since 1995 and Fusion Telecommunications International, Inc., since 1997, where he has also been Vice-Chairman since December 1998. Mr. Rosen received his Bachelor of Science degree in Commerce from the University of Virginia, his LL.B. from Dickinson School of Law and his LL.M. in Corporations from New York University Law School.

 

Rodolfo A. Ruiz, 61, has served as a member of our Board of Directors since July 2003. Since 2004, Mr. Ruiz has served as Executive Vice President — Spirits for Southern Wine and Spirits of America, Inc. From 1979 to 2003, Mr. Ruiz held a series of senior management positions within the Bacardi organization, inclusive of having served as President and Chief Executive Officer of Bacardi Global Brands, President and Chief Executive Officer of Bacardi Asia/Pacific Region, and several senior executive sales, marketing, financial and operations positions within Bacardi USA. Prior to joining Bacardi, from 1966 to 1979, Mr. Ruiz, in his capacity as a certified public accountant, served as a Senior Auditor, Senior Internal Auditor and Audit Manager with Price Waterhouse & Co. for a wide variety of public and private clients and projects in the United States and Mexico, as well as throughout Latin America, interspersed by a term, from 1973 to 1975, with International Basic Economy Corp, otherwise known as IBEC/Rockefeller Group. Mr. Ruiz holds a Bachelor of Business degree from the University of Puerto Rico.

Frank Botman, 43, has served as a member of our Board of Directors since September 2009. Mr. Botman began his career in 1989 with HSBC in Investment Management and Research, and then as a fund manager with IBM Pension Fund from 1992 to 1994 where he managed the Dutch equity portfolio and European venture capital portfolio. After working at IBM Pension Fund, Mr. Botman founded HAL Capital Management in 1994 where he served as Managing Director. He joined Cyrte Investments B.V. in 2000 (f/k/a Talpa Capital B.V.), a private investment company, as a founder and Managing Director and Head of the Investment Team. Cyrte Investments is a European investment boutique that seeks to invest in media, entertainment, telecom and technology companies. As of September 27, 2007, Cyrte Investments operates as a subsidiary of Delta Lloyd Asset Management NV. Mr. Botman currently serves on the boards of Endemol, Forthnet and RTL Nederland. Mr. Botman holds a degree in commercial economics and business administration from the HEAO Amsterdam.

 

Melissa Hathaway, 41, was appointed to our Board of Directors on February 5, 2010. Ms. Hathaway brings more than 20 years of high-level public and private-sector experience and is considered one of the leading experts on cyber security matters, having served in two Presidential administrations. Ms. Hathaway is President of Hathaway Global Strategies, LLC and a Senior Advisor at Harvard Kennedy School’s Belfer Center, roles she has held since August 2009. Previously, from February 2009 to August 2009, she led the development of the Cyberspace Policy Review in her role as the Acting Senior Director for Cyberspace in the National Security Council of President Barack Obama’s administration. Prior to that, from March 2007 to February 2009, Ms. Hathaway served as Cyber Coordination Executive and Director of the Joint Interagency Cyber Task Force in the Office of the Director of National Intelligence under President George W. Bush. Before working in the Obama and Bush administrations, from June 1993 to February 2007, Ms. Hathaway was a Principal with Booz Allen & Hamilton, Inc., where she led the information operations and long-range strategy and policy support business units. Her efforts at Booz Allen supported key offices within the Department of Defense and Intelligence Community, including the U.S. Southern Command, the U.S. Pacific Command, the Office of the Secretary of Defense for Net Assessment, the Central Intelligence Agency, the Defense Intelligence Agency and the Office of the Director of National Intelligence. Ms. Hathaway earned a B.A. from the American University in Washington DC and has completed graduate studies in international economics and technology transfer policy and is a graduate of the US Armed Forces Staff College with a special certificate in Information Operations.

 

Jamie Dos Santos, 48, has served as our CEO of Terremark Federal Group since July 2005. Ms. Dos Santos is responsible for the planning, development and execution of our federal government sales, marketing and operations strategy. Ms. Dos Santos manages all aspects of our federal government relationships, including with the Department of Defense, Civilian Agencies and the federal systems integrators. From March 2003 to July 2005, Ms. Dos Santos served as our Chief Marketing Officer, in which capacity she was responsible for the development of strategic marketing initiatives and commercial sales strategies that contributed to the company’s sustained growth. From April 2001 to March 2003, Ms. Dos Santos served as our Senior Vice President Global Sales. Prior to joining Terremark, Ms. Dos Santos enjoyed a career of 25 years with several global companies including BellSouth, Bellcore and SAIC. Ms. Dos Santos sits on the AFCEA Intelligence Committee and serves on the AFCEA Board of Directors as a Class Director, Class of 2011. She also sits on the Information Technology Sector Coordinating Council for the US protection of Critical Information Infrastructure. She is a top 100 executive with the Executive Leadership Council and Vice President of the South Florida AFCEA chapter. Ms. Dos Santos’ educational background includes eight years in the Bellcore Training Center, the University of Florida and Harvard Business School for Continuing Education.

 

Jose A. Segrera, 39, has served as our Chief Financial Officer since September 2001. From September 2000 to June 2001, Mr. Segrera served as our Vice President — Finance. From January 2000 to September 2000, Mr. Segrera served as the interim Chief Financial Officer of FirstCom Corporation. From June 1996 to November 1997, Mr. Segrera was a manager in the assurance practice at KPMG Peat Marwick LLP. Mr. Segrera received his Bachelor in Business Administration and his Masters in Professional Accounting from the University of Miami.

 

Nelson Fonseca, 36, has served as our Chief Operating Officer since November 2009 and has served in a variety of capacities within Terremark for the last eight years. Prior to being named Chief Operations Officer, from May 2008 to October 2009, Mr. Fonseca was President of Terremark’s U.S. Public Sector Business Unit. His specific duties included the oversight of Terremark Federal Group, a wholly-owned subsidiary of Terremark

Worldwide, the management of Terremark’s State and Local government initiatives and the NAP of the Capital Region campus in Culpeper, Virginia. Some of his other previous roles at Terremark included, from December 2005 to April 2008, Senior Vice President of Sales for Terremark Federal Group and, during 2002 to 2005, Vice President of Commercial Sales for Terremark Worldwide. Prior to joining Terremark, Mr. Fonseca held various positions at both Telcordia Technologies and Nortel Networks. His responsibilities included business development, product management and systems engineering in support of both domestic and international clients. Mr. Fonseca received his Bachelors degree in Computer Science from Barry University and his Masters degree in Business Administration from the University of Miami.

 

Marvin Wheeler, 56, has served as our Chief Strategy Officer since November 2009. From November 2003 to November 2009 he served as our Chief Operations Officer, and from March 2003 to November 2003, he served as our Senior Vice President, Worldwide Operations. From March 2001 to March 2003, Mr. Wheeler served as Senior Vice President of Operations and General Manager of the NAP of the Americas. From June 1978 to March 2000, Mr. Wheeler managed the Data Center and WAN/LAN Operations for BellSouth, Mr. Wheeler graduated from the University of Florida, where he earned a degree in Business Administration with a concentration in marketing.

 

Adam T. Smith, 38, has served as our Chief Legal Officer since November 2006. From May 2005 to November 2006, Mr. Smith served as our SVP Deputy General Counsel, and from February 2004 to April 2005 as our VP Assistant General Counsel. From April 2000 to January 2004, Mr. Smith led the Electronic Commerce & Technology law practice for a Miami based international law firm, as well as focused on domestic and international corporate transactions, venture capital, and corporate securities. Prior to April 2000, Mr. Smith worked in Washington, D.C., where he was responsible for the review of the legal issues surrounding the Internet aspects of the proposed Sprint/Worldcom merger, and gained federal government experience as an honors intern in the Office of the Secretary of Defense, as well as the Department of State (U.S. Embassy/Santiago, Chile), Office of the Deputy Attorney General, and U.S. House of Representatives International Relations Committee. Mr. Smith received his Juris Doctor from the University of Miami School of Law and his Bachelor of Arts from Tufts University. Mr. Smith is a member of the bar of the State of Florida and the United States District Court for the Southern District of Florida.

 

Where You Can Find Additional Information

 

We file annual, quarterly, and special reports, proxy statements and other information with the SEC. You may read and copy any materials that we have filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our Securities and Exchange Commission filings are also available to the public at the Securities and Exchange Commission’s website at http://www.sec.gov. In addition, we make available free of charge on or through our Internet website, http://www.terremark.com under “Investor Relations”, all of the annual, quarterly and special reports, proxy statements, Section 16 insider reports on Form 3, Form 4 and Form 5 and amendments to these reports and other information we file with the SEC. Additionally, our board committee charters and code of ethics are available on our website and in print to any stockholder who requests them. The information contained on our website is not incorporated herein by reference and does not comprise a part of this Annual Report on Form 10-K.

 

You should carefully consider the following risks and all other information contained in this Annual Report on Form 10-K. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, and the trading price of our common stock could decline. 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, financial condition and results of 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 years ended March 31, 2010, 2009, and 2008, we incurred net losses of $31.7 million, $10.6 million, and $42.2 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. The net loss for the year ended March 31, 2008 included a $27.0 million non-cash loss on the early extinguishment of debt and a $1.1 million non-cash loss on change in fair value of derivatives. We are currently investing heavily in our expansion 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 this 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, as 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 year ended March 31, 2010, revenues from contracts with the federal sector constituted approximately 24% 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 each of the years ended March 31, 2010 and 2009, we derived approximately 24% of our revenues from the federal sector. 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 and 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:

 

 

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:

 

 

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

 

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

 

 

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

 

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 are currently constructing one pod and have the capacity to construct 2 additional pods, each yielding 50,000 square feet of net colocation space. These challenges and difficulties relate to our ability to:

 

 

If we encounter greater than anticipated difficulties in implementing our expansion plan, it may be necessary to take additional actions, which could divert management’s attention and strain our operational and financial resources. We may not successfully address any or all of these challenges, and our failure to do so would adversely affect our business plan and results of operations, our ability to raise additional capital and our ability to achieve enhanced profitability.

Our 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 or parts 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:

 

 

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.

 

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 March 31, 2010, we have debt totaling approximately $456.6 million, of which $4.9 million is current and payable during the twelve months ending March 31, 2011. Additionally, on April 28, 2010, we completed our offering of an additional $50 million aggregate principal amount of our 12% Senior Secured Notes. 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:

 

 

Should we need additional capital or financing, our ability to arrange financing and the cost of this financing will depend upon many factors, including:

 

 

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. 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:

 

 

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:

 

 

 

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.

 

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 or privately-placed 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 has been, and may continue to be, volatile, and you could lose all or part of your investment.

 

The market for our equity securities has been extremely volatile (ranging from $2.51 per share to $8.98 per share during the 52-week trading period ended March 31, 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, but are not limited to, the following:

 

 

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 a substantial number of shares of our common stock could adversely impact the price of our common stock. Our certificate of incorporation authorizes us to issue up to 100,000,000 shares of common stock. On March 31, 2010, there were approximately 65.1 million shares of our common stock outstanding and approximately 12.4 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:

 

 

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 the market price of our common stock.

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

 

As of March 31, 2010, we had 65,058,331 common shares outstanding. While our common shares trade on the NASDAQ, our stock is thinly traded (approximately 0.5%, or 297,669 shares, of our stock traded on an average daily basis during the year ended March 31, 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, capital expenditures 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, and the indenture governing our 12% Senior Secured Notes restricts our ability to pay dividends. 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 may obtain an economic benefit from the common stock only after an increase in its trading price and only by selling the common stock.

 

 

None.

 

 

Our executive offices are located in Miami, Florida. We also have offices in several cities throughout the United States, Europe, and Latin America. We own data centers in Miami, Florida and Culpeper, Virginia. We have also entered into leases for data center space in Dallas, Texas; Santa Clara, California; Herndon, Virginia; Madrid, Spain; Amsterdam, Netherlands; Brussels, Belgium; Istanbul, Turkey; Sao Paulo, Brazil; and Bogota, Colombia. See “Item 1. Business — Primary Data Centers”.

 

 

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 any pending matters of the nature described above would be material.

 

 

 

Common Stock and Preferred Stock Information

 

Our common stock, par value $0.001 per share, trades on the Nasdaq Global Market under the symbol “TMRK”.

 

The following table sets forth, for the fiscal quarters indicated, the high and low sales prices for our common stock as reported on the Nasdaq Global Market:

 

 

 

As of May 31, 2010, there were 626 holders of record of our common stock.

Performance Graph

 

The following graph compares the cumulative 5-year total return to shareholders on Terremark Worldwide, Inc.’s common stock relative to the cumulative total returns of the Russell 2000 index and the RDG Internet Composite index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in the company’s common stock and in each of the indexes on March 31, 2005 and its relative performance is tracked through March 31, 2010.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Terremark Worldwide, Inc., The Russell 2000 Index

And The RDG Internet Composite Index

 

 

The stock performance graph assumes for comparison that the value of the Company’s common stock was $100 on March 31, 2005 and that all dividends were reinvested.

 

Dividend Policy

 

We have never paid any cash dividends and do not anticipate paying any cash dividends in the foreseeable future. We intend to retain any future earnings for reinvestment. Our Board of Directors will make any future determination as to the payment of dividends at its discretion, and its determination will depend upon our operating results, financial condition and capital requirements, general business conditions and such other factors that the Board of Directors considers relevant. Additionally, the indenture governing our 12% Senior Secured Notes restricts our ability to declare and pay dividends, and our 6.625% Senior Convertible Notes contain contingent interest provisions that allow the holders of these notes to participate in any dividends declared on our common stock. Also, holders of our Series I preferred stock are entitled to receive dividends in the event we declare dividends on our common stock. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and Note 10 to our consolidated financial statements contained in this Annual Report on Form 10-K.

Equity Compensation Plan Information

 

This table summarizes share and exercise price information about our equity compensation plans as of March 31, 2010:

 

 

The following selected consolidated financial data has been derived from our audited consolidated financial statements. The data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere herein.

 

 

 

 

 

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, competitive factors, uncertainties inherent in government contracting, concentration of business with a small number of clients, the ability to service debt, substantial leverage, material weaknesses in our internal controls over financial reporting and our disclosure controls, energy costs, changes in interest rates, 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 to events only as of the date hereof. 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 1,300 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.

 

 

 

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 our average quarterly revenue churn rate for the past four quarters has been less than 2% and we experienced no revenue churn in our federal customer base, which we believe is a reflection of the value of our integrated technology solutions and our ability to deliver the highest quality service. As an illustration of this principle, for the year ended March 31, 2010, approximately 90% of our overall revenue was recurring and over 70% of our new bookings were derived from existing customers.

 

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

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Management believes the following significant accounting policies, among others, affect its judgments and estimates used in the preparation of its consolidated financial statements:

 

 

Revenue Recognition and Allowance for Bad Debts

 

Revenues principally consist of monthly recurring fees for colocation, exchange point, managed and professional services fees. Colocation revenues also include monthly rental income for unconditioned space in the NAP of the Americas. Revenues from colocation, exchange point services, and hosting, as well as rental income for unconditioned space, are recognized ratably over the term of the contract. Installation fees and related direct costs are deferred and recognized ratably over the expected life of the customer installation which is estimated to be 36 to 48 months. Managed and professional services are recognized in the period in which the services are provided. Revenues also include equipment resales which are generally recognized in the period in which the equipment is delivered, title transfers and is accepted by the customer. Revenue from contract settlements is generally recognized when collectability is reasonably assured and no remaining performance obligation exists. Taxes collected from customers and remitted to the government are excluded from revenues.

 

As required by the FASB guidance governing when more than one element such as equipment, installation and colocation services are contained in a single arrangement, we allocate revenue between the elements based on

acceptable fair value allocation methodologies, provided that each element meets the criteria for treatment as a separate unit of accounting. An item is considered a separate unit of accounting if it has value to the customer on a standalone basis and there is objective and reliable evidence of the fair value of the undelivered items. The fair value of the undelivered elements is determined by the price charged when the element is sold separately, or in cases when the item is not sold separately, by using other acceptable objective evidence. Management applies judgment to ensure appropriate application of authoritative, including the determination of whether delivered items have standalone value and the determination of fair value for the multiple deliverables, among others. For those arrangements where the deliverables do not qualify as a separate unit of accounting, revenue from all deliverables are treated as one accounting unit and recognized ratably over the term of the arrangement.

 

Revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the receivable is reasonably assured. We assess collectability based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from the customers. If we determine that collectability is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

 

We sell certain third-party service contracts and software assurance or subscription products and evaluate whether the subsequent sales of such services should be recorded as gross revenues or net revenues in accordance with the FASB guidance governing these types of arrangements. We determine whether our role is that of a principal in the transaction and therefore assumes the risks and rewards of ownership or if our role is acting as an agent or broker. Under gross revenue recognition, the entire selling price is recorded as revenue and the cost to the third-party service provider or vendor is recorded as cost of revenues, product and services. Under net revenue recognition, the cost to the third-party service provider or vendor is recorded as a reduction of revenue resulting in net revenue equal to the gross profit on the transaction and there is no cost of revenue.

 

We analyze current economic news and trends, historical bad debts, customer concentrations, customer credit-worthiness and changes in customer payment terms when evaluating revenue recognition and the adequacy of the allowance for bad debts.

 

Our customer contracts generally require us to meet certain service level commitments. If we do not meet required service levels, we may be obligated to provide credits, usually a month of free service.

 

Derivatives

 

In the past, we have 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 exposure of these risks with the intent to reduce the risk or cost to us. We do not hold or issue derivative instruments for trading purposes.

 

We entered into two interest rate swap agreements as required under the provisions of the $250 million mortgage loan entered into on July 31, 2007. The interest rate swaps were settled on June 24, 2009. See Note 11 to our consolidated financial statements contained in this Annual Report on Form 10-K.

 

Our 6.625% Senior Convertible Notes, due June 15, 2013, (the “6.625% Senior Convertible Notes”) contain embedded derivatives that require separate valuation from the 6.625% Senior Convertible Notes. We recognize these derivatives as a liability in its balance sheet, measures them at their estimated fair value, and recognizes changes in their estimated fair value in earnings in the period of change.

 

We estimate the fair value of the Notes’ respective 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 we may eventually pay to settle these embedded derivatives.

 

Accounting for Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts

of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce tax assets to the amounts expected to be realized. In assessing the likelihood of realization, management considers estimates of future taxable income.

 

We have not been audited by the Internal Revenue Service or any other tax authorities for the following open tax periods: the quarter ended March 31, 2006, and the years ended March 31, 2007, 2008, 2009 and 2010. Net operating loss carryovers incurred in years prior to 2005 are subject to audit in the event they are utilized in subsequent years.

 

Goodwill

 

Goodwill and intangible assets that have indefinite lives are not amortized and are instead tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. The goodwill impairment test involves a two-step approach. The first step involves a comparison of the fair value of each of our reporting units with its carrying amount. If a reporting unit’s carrying amount exceeds its fair value, the second step is performed. The second step involves a comparison of the implied fair value and carrying value of that reporting unit’s goodwill. To the extent that a reporting unit’s carrying amount exceeds the implied fair value of its goodwill, an impairment loss is recognized. Identifiable intangible assets not subject to amortization are assessed for impairment by comparing the fair value of the intangible asset to its carrying amount. An impairment loss is recognized for the amount by which the carrying value exceeds fair value. Intangible assets that have finite useful lives are amortized over their useful lives.

 

As of March 31, 2010 and 2009, our goodwill totaled approximately $96.1 million and $86.1 million, respectively. Goodwill represents the carrying amount of the excess purchase price over the fair value of identifiable net assets acquired in conjunction with (i) the April 2000 acquisition of a corporation holding rights to develop and manage facilities catering to the telecommunications industry in the United States, (ii) the September 2005 acquisition of a managed hosting services provider in Europe, (iii) the May 2007 acquisition of a managed hosting services provider in the United States, (iv) the January 2009 acquisition of a disaster recovery and business continuity provider in the United States, and (v) the November 2009 acquisition of a data management solutions company in the United States. We performed the annual test for impairment for the goodwill in the fourth quarter of our fiscal year ended March 31, 2010 and concluded there was no impairment.

 

Impairment of Long-Lived Assets

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events and circumstances include, but are not limited to, prolonged industry downturns, significant decline in our market value and significant reductions in our projected cash flows. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including long-term forecasts of profit margins, terminal growth rates and discounted rates. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

 

As of March 31, 2010 and 2009, our long-lived assets, including property and equipment, net, and identifiable intangible assets, totaled approximately $512.5 million and $400.1 million, respectively.

 

Share-based compensation

 

We account for share-based compensation in accordance with the FASB issued accounting guidance which established accounting and reporting standards for share-based compensation. The fair value of stock option and nonvested stock awards with only service conditions, which are subject to graded vesting, are expensed on a straight-line basis over the vesting period of the awards.

Tax benefits resulting from tax deductions in excess of share-based compensation expense recognized under the fair value recognition provisions are credited to additional paid-in capital in our consolidated balance sheets. Realized tax shortfalls are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense.

 

Recent Accounting Pronouncements

 

See Note 2, “Summary of Significant Accounting Policies,” in the accompanying Consolidated Financial Statements for a discussion of Recent Accounting Pronouncements.

 

Recent Events

 

On April 28, 2010, we completed our offering of $50 million aggregate principal amount of our 12% Senior Secured Notes due 2017. These notes are part of the same series as the $420 million aggregate principal amount of 12% Senior Secured Notes that we issued on June 24, 2009. We pay interest on the aggregate $470 million principal amount of the 12% Senior Secured Notes semi-annually in cash in arrears on June 15 and December 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 Annual Report on Form 10-K.

 

On November 12, 2009, we acquired a data management solutions company 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. This data management solutions company provides customers with 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 acquisition of this data storage provider enhances our overall data storage offering and helps us accelerate the development of our solutions in the area of managed storage. We also expect to realize cost synergies by relocating this data storage provider’s infrastructure to our data centers and eliminating the need to outsource some of our data storage services.

 

Results of Operations

 

Results of Operations for the Year Ended March 31, 2010 as Compared to the Year Ended March 31, 2009.

 

Revenue.

 

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

 

 

 

The $41.9 million, or 16.7% increase in revenues for the year ended March 31, 2010 as compared to the year ended March 31, 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 from 1,088 customers as of March 31, 2009 to 1,318 customers as of March 31, 2010. Revenues consist of:

 

 

The $28.5 million, or 34.4% increase in colocation revenue for the year ended March 31, 2010 as compared to the year ended March 31, 2009 is primarily the result of an increase in our utilization of total net colocation space to 29.0% as of March 31, 2010 from 21.8% as of March 31, 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 twelve months ended March 31, 2010 was assumed to be available as of March 31, 2009.

 

The $13.6 million, or 9.5% increase in managed and professional services for the year ended March 31, 2010 as compared to the year ended March 31, 2009 revenue 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 $2.7 million, or 17.2% increase in exchange point services revenue for the year ended March 31, 2010 as compared to the year ended March 31, 2009 is mainly due to an increase in cross-connects billed to customers. Cross-connects billed to customers increased to 9,154 as of March 31, 2010 from 8,339 as of March 31, 2009.

 

We believe revenues from colocation, exchange point and managed services will increase as we add more customers to our network of NAPs, sell additional services to existing customers and introduce new products and services. We believe that the percentage of revenue derived from public 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 public sector. We believe that public 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 $23.2 million or 17.0% to $159.6 million for the twelve months ended March 31, 2010 from $136.4 million for the twelve months ended March 31, 2009. Costs of revenues, excluding depreciation and amortization, consist primarily of operations personnel, fees to third party service providers, procurement of connectivity and equipment, technical and colocation space rental costs, electricity, chilled water, insurance, property taxes and security services. The increase is mainly due to increases of $7.5 million in colocation space and utility costs, $5.9 million in connectivity procurement costs, $4.2 million in personnel costs, $2.7 million in maintenance for technology and service delivery platforms and $1.9 million in equipment procurement costs.

 

The $5.9 million increase in connectivity procurement costs is in line with an increase in revenues from managed and exchange point services. The $7.5 million increase in colocation space and utility costs is primarily the result of the opening of our new facility in Bogota, Colombia and additional new colocation space in Miami, Florida, Culpeper, Virginia and Sao Paulo, Brazil. The $4.2 million increase in personnel costs is mainly due to operations and engineering staffing levels increasing from 527 employees as of March 31, 2009 to 590 employees as of March 31, 2010, which is attributable to the increase in managed services revenues and an increase in the utilization of our colocation space due to expansion of operations in Santa Clara, California, Sao Paulo, Brazil and Bogota, Colombia.

 

General and Administrative Expenses.  General and administrative expenses decreased $2.0 million or 5.5% to $34.8 million for the year ended March 31, 2010 from $36.8 million for the year ended March 31, 2009. General and administrative expenses consist primarily of administrative personnel, professional service fees, rent, and other general corporate expenses. The decrease in general and administrative expenses is mainly due to a decrease in one-time transaction fees of $0.5 million and other personnel related costs of $0.9 million. The decrease in one-time transaction

fees of $0.5 million relate to costs incurred as a result of an evaluation of strategic alternatives by our Board of Directors in the first quarter of the year ended March 31, 2009, offset by acquisition costs related to the purchase of a data management solutions company in November 2009. The $0.9 million decrease in personnel related costs is the result of closely monitoring our spending for the year ended March 31, 2010. We expect general and administrative expenses to remain between $9.0 and $9.5 million on a quarterly basis for the foreseeable future.

 

Sales and Marketing Expenses.  Sales and marketing expenses increased $2.3 million, or 8.4%, to $28.8 million for the year ended March 31, 2010 from $26.5 million for the year ended March 31, 2009. The $2.3 million increase is mainly due to an increase in sales commissions paid for new bookings. We expect sales and marketing expenses for the foreseeable future to range between $9.0 to $9.5 million on a quarterly basis as we continue to add direct sales manager and support sales engineering to our sales and marketing organization.

 

Depreciation and Amortization Expenses.  Depreciation and amortization expenses increased $9.7 million, or 34.2%, to $37.9 million for the year ended March 31, 2010 from $28.2 million for the year ended March 31, 2009. The increase is the result of capital expenditures necessary to support our business growth and the expansion of operations in Culpeper, Virginia, upgrades to support our infrastructure and expansion in Miami, Florida and Santa Clara, California.

 

Interest Expense.  Interest expense increased $19.6 million, or 65.6%, to $49.6 million for the year ended March 31, 2010 from $30.0 million for the year ended March 31, 2009. This increase is primarily a result of an increase in our average outstanding debt balance during the period.

 

Interest Income.  Interest income decreased $0.9 million to $0.4 million for the year ended March 31, 2010 from approximately $1.3 million for the year ended March 31, 2009. This decrease is primarily due to a decrease in our average cash and cash equivalents balances for the period.

 

Change in Fair Value of Derivatives.  For the year ended March 31, 2010, we recognized an expense of $1.5 million, as compared to an expense of $3.9 million for the year ended March 31, 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.

 

Loss on Early Extinguishment of Debt.  For the year ended March 31, 2010, we incurred a non-cash loss on the early extinguishment of our debt instruments of $10.3 million.

 

Results of Operations for the Year Ended March 31, 2009 as Compared to the Year Ended March 31, 2008.

 

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

 

 

 

The $63.1 million, or 34% increase in revenues for the year ended March 31, 2009 as compared to the year ended March 31, 2008 was mainly due to both an increase in our deployed customer base and an expansion of services to existing customers. Our deployed customer base increased from 983 customers as of March 31, 2008 to 1,088 customers as of March 31, 2009. Revenues consist of:

 

 

Our utilization of total net colocation space increased to 24.8% as of March 31, 2009 from 20.3% as of March 31, 2008. Our utilization of total net colocation space represents space billed to customers as a percentage of total space build-out and available to customers. For comparative purposes, space added during the year ended March 31, 2009 was assumed to be available as of the beginning of the year.

 

The $30.5 million, or 27.3% increase in managed and professional services revenue was mainly due to a $8.9 million increase in revenue related to technology projects primarily from our federal customers and a increase of approximately $7.3 million in managed web hosting services as a result of including a full 12 months of revenues in fiscal 2009 from a managed web hosting provider acquired in May 2007.

 

The $3.4 million, or 26.7% increase in exchange point services revenue is mainly due to an increase in cross-connects billed to customers. Cross-connects billed to customers increased to 8,339 as of March 31, 2009 from 6,830 as of March 31, 2008.

 

Revenues from equipment resales fluctuates year over year based on customer demand.

 

Costs of Revenues.  Costs of revenues, excluding depreciation and amortization, increased $35.5 million or 35.2%, to $136.4 million for the twelve months ended March 31, 2009 from $100.9 million for the twelve months ended March 31, 2008. 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 $12.4 million in personnel costs, $5.9 million in managed services costs, $3.5 million in colocation space costs and $1.9 million in costs of equipment resales. We also had increases of $7.3 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.

 

The $12.4 million increase in personnel costs was mainly due to an increase in our operations and engineering staffing from 466 employees as of March 31, 2008 to 527 employees as of March 31, 2009 which is mainly due to having a full twelve months of personnel expenses from the managed web hosting provider acquired in May 2007 and our expansion of operations in Miami, Florida. The $5.9 million in managed services costs is consistent with

increase in related revenues and includes a $4.9 million increase in connectivity procurement costs. The $3.5 million increase in colocation space costs was primarily the result of the opening of our new facility in Colombia and the addition of new colocation space in Dallas, Texas, and in Brussels, Belgium, and Madrid, Spain. The $1.9 million in costs of equipment resales is consistent with the increase in related revenues.

 

General and Administrative Expenses.  General and administrative expenses increased $4.5 million, or 14.0%, to $36.8 million for the year ended March 31, 2009 from $32.3 million for the year ended March 31, 2008. General and administrative expenses consist primarily of administrative personnel, professional service fees, rent, and other general corporate expenses. The increase in general and administrative expenses was mainly due to an increase in administrative personnel costs of $3.7 million. Personnel costs include payroll and share-based compensation. The $3.7 million increase in administrative personnel was the result of a $1.6 million increase in share-based compensation and an increase in headcount from an average of 142 administrative employees for the year ended March 31, 2008 to an average of 157 administrative employees for the year ended March 31, 2009. This increase was primarily attributable to having a full twelve months of administration personnel expenses of the managed web hosting provider acquired in May 2007 and our expansion of operations in Culpeper, Virginia, and Bogota, Colombia.

 

Sales and Marketing Expenses.  Sales and marketing expenses increased $5.6 million, or 27.1%, to $26.5 million for the year ended March 31, 2009 from $20.9 million for the year ended March 31, 2008. The $5.6 million increase in sales and marketing expenses were mainly due to a $3.1 million increase in payroll and sales commissions and an increase of $1.6 million in provision for doubtful accounts. The increase in payroll and sales commissions was mainly due to an increase in headcount from 83 employees as of March 31, 2008 to 98 employees as of March 31, 2009 coupled with an increase in sales commissions paid for new bookings.

 

Depreciation and Amortization Expenses.  Depreciation and amortization expenses increased $9.5 million, or 51.1%, to $28.2 million for the year ended March 31, 2008 from $18.7 million for the year ended March 31, 2009. The increase was the result of capital expenditures necessary to support our business growth and the expansion of operations in Culpeper, Virginia, upgrades to support our infrastructure and expansion in Miami, Florida and Santa Clara, California.

 

Interest Expense.  Interest expense decreased $2.1 million, or 6.6%, to $30.0 million for the year ended March 31, 2009 from $32.1 million for the year ended March 31, 2008. This decrease was primarily a result of an increase in the amount of interest capitalized as well as lower interest rates on our financing arrangements.

 

Interest Income.  Interest income decreased $3.9 million to $1.3 million for the year ended March 31, 2009 from approximately $5.2 million for the year ended March 31, 2008. This decrease was primarily due to a decrease in our average cash and cash equivalents balances for the period.

 

Change in Fair Value of Derivatives.  For the year ended March 31, 2009, we recognized an expense of $3.9 million, as compared to an expense of $1.1 million for the year ended March 31, 2008, mainly due to the changes in the fair values of our derivatives from our two interest rate swap agreements that became effective March 31, 2008 (first lien) and July 31, 2008 (second lien).

 

Financing Charges and Other.  For the year ended March 31, 2009, we incurred $0.6 million in foreign currency losses. For the year ended March 31, 2008, we expensed $1.2 million of financing charges consisting of title and legal fees. These charges were expensed after determining that our term loan of $250.0 million was not a substantial modification of our existing Credit Suisse debt instruments.

 

Loss on Early Extinguishment of Debt.  For the year ended March 31, 2008, we incurred a non-cash loss on the early extinguishment of our debt instruments of $27.0 million.

 

Liquidity and Capital Resources

 

As of March 31, 2010, our principal source of liquidity was our $53.5 million in unrestricted cash and cash equivalents and our $50.3 million in accounts receivable. On April 28, 2010, we issued an additional $50 million of our 12% Senior Secured Notes as permitted under the indenture governing such notes of which $470 million aggregate principal amount is now outstanding. 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 governing our 12% senior secured notes, we may incur additional indebtedness, including up to $75 million of additional indebtedness for the purpose of financing the purchase price or cost of construction or improvement of property, plant or equipment, including the acquisition of the capital stock of an entity that becomes a restricted subsidiary.

 

Furthermore, we may incur further indebtedness to the extent that our fixed charge coverage ratio would have been at least 2.0 to 1 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, $21.0 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 provided by operations for the year ended March 31, 2010 was $22.5 million as compared to cash provided by operations of $50.9 million for the year ended March 31, 2009. The decrease in cash provided by operations is mainly due to a increase in our net loss and the timing of vendor payments and collections from customers.

 

Cash used in investing activities for the year ended March 31, 2010 was $130.6 million compared to cash used in investing activities of $90.3 million for the year ended March 31, 2009, a decrease of $40.3 million. This decrease is primarily due to the cash used in the acquisition of a data management solutions provider and higher capital expenditures mostly related to our NCR data center campus, upgrade to our technology and service delivery platforms and the expansion of our footprint in Santa Clara, California.

 

Cash provided by financing activities for the year ended March 31, 2010 was $108.9 million compared to cash used in financing activities of $4.4 million for the year ended March 31, 2009, an increase of $113.3 million. The increase in cash provided by financing activities is primarily due to the proceeds received from our $420 million 12% Senior Secured Notes and the issuance of four million shares of our common stock for approximately $20.1 million. These proceeds were offset by $290.9 million used to repay our First Lien and Second Lien Credit Agreements, 9% Senior Convertible Notes and Series B Notes.

 

Debt Obligations

 

As of March 31, 2010, our total liabilities were approximately $569.8 million, of which $96.9 million is due within one year.

12% Senior Secured Notes

 

On June 24, 2009 and April 28, 2010, we completed offerings of $420 million aggregate principal amount and $50 million aggregate principal amount, respectively, of 12% senior secured notes due in 2017, which are guaranteed by substantially all of our domestic subsidiaries. Additionally, the senior secured notes are secured by a first priority security interest in substantially all of the assets of Terremark Worldwide, Inc. 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 were offered and sold in private placements to qualified institutional buyers in the United States in reliance on Rule 144A under the securities act and outside the United States in reliance on Regulation S under the securities act.

 

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 governed by an indenture, dated June 24, 2009, as supplemented, among Terremark Worldwide, Inc., the guarantors and The Bank of New York Mellon Trust Company, N.A., as trustee.

 

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.

 

At any time prior to June 15, 2012, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of the senior secured notes at a redemption price equal to 112% of the principal amount thereof, plus accrued and unpaid interest thereon, with the net cash proceeds of certain sales of our capital stock; provided that (i) at least 65% of the aggregate principal amount of senior secured notes remains outstanding immediately after such redemption, and (ii) the redemption occurs within 120 days of the date of the closing of such sale of our capital stock.

 

At any time prior to June 15, 2013, we may redeem all or a part of the senior secured notes at a redemption price equal to 100% of the principal amount of the senior secured notes redeemed plus an applicable “make-whole” premium (as defined in the indenture), as of, and accrued and unpaid interest, if any, to the redemption date.

 

Additionally, on or after June 15, 2013, we may redeem all or a part of the senior secured notes on any one or more occasions, at the redemption prices (expressed as percentages of principal amount of the notes to be redeemed) set forth below plus accrued and unpaid interest on the senior secured notes redeemed, to the applicable redemption date, if redeemed during the 12-month period beginning on June 15 of each of the years indicated below:

 

 

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. Following the first day that the senior secured notes are assigned an investment grade rating by both Moody’s and S&P, and provided that no default has occurred and is continuing, certain of the restrictions will 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.

 

Under the terms of the indenture, we may incur up to $75 million of additional indebtedness for the purpose of financing the purchase price or cost of construction or improvement of property, plant or equipment, including the acquisition of the capital stock of an entity that becomes a restricted subsidiary. Any or all of this $75 million of additional indebtedness may be secured by parity liens on the collateral securing the senior secured notes, provided that our secured leverage ratio does not exceed 3:75 to 1 on a pro-forma basis as if we had incurred such

indebtedness at and as of the beginning of our most recently completed four fiscal quarters for which internal financial statements are available. Irrespective of our leverage ratio, any or all of this $75 million of additional indebtedness may be secured by junior liens on the collateral securing the senior secured notes.

 

Any additional indebtedness permitted by the governing indenture may rank pari passu with the senior secured notes, provided that our fixed charge coverage ratio would have been at least 2.0 to 1 on a pro forma basis (including a pro forma application of the net proceeds from this additional indebtedness) as if the 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.

 

In the event of a change in control, we will be required to commence and complete an offer to purchase all 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. Additionally, if we or a guarantor sell assets, all or a portion of the net proceeds of which are not reinvested in accordance with the terms of the indenture or are not used to repay certain debt, we will be required to offer to purchase an aggregate principal amount of the outstanding senior secured notes, in an amount equal to such remaining net proceeds, at a purchase price equal to 100% of the principal amount thereof, plus accrued interest and Additional Interest, if any and as defined below, to the payment date.

 

The indenture provides for customary events of default, which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest; breach of covenants or other agreements in the indenture; defaults under or failure to pay certain other indebtedness; the failure by us or our restricted subsidiaries to pay certain final non-appealable judgments; the failure of certain security interests in the collateral securing the senior secured notes to be in full force and effect; the failure in certain instances of any guarantee to be in full force and effect; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the indenture, the trustee or the holders of at least 25% in aggregate principal amount of the senior secured notes then outstanding may declare the principal of, premium, if any, and accrued interest on all the senior secured notes immediately due and payable.

 

The senior secured notes have not been registered under the securities act or any state securities laws and may not be sold except in a transaction registered under, or exempt from, the registration provisions of the securities act and applicable state securities laws. Under the terms of registration rights agreements in respect of the senior secured notes, Terremark and the guarantors have agreed for the benefit of the holders of the senior secured notes to use their best efforts to file with the SEC and cause to become effective a registration statement, or the Exchange Offer Registration Statement. The Exchange Offer Registration Statement would relate to a registered offer to exchange the senior secured notes for an issue of our senior secured notes, or the Exchange Notes, guaranteed by the guarantors, with terms identical to the senior secured notes, except that the Exchange Notes will not bear legends restricting transfer and will not contain terms providing for the payment of additional interest as described below and in the registration rights agreement. In addition, we have agreed to file, in certain circumstances, a shelf registration statement covering resales of the senior secured notes.

 

Because we did not timely file the Exchange Offer Registration Statement or consummate the exchange offer, we have incurred additional interest on the senior secured notes pursuant to the terms of the registration rights agreements. As of March 31, 2010, we had incurred $1.6 million of additional interest, and such additional interest has continued to accrue at a rate of .75% per annum since March 31, 2010 and will continue to accrue until we consummate the registered exchange offer. We have since filed the Exchange Offer Registration Statement, and we commenced the exchange offer on May 18, 2010. We expect to close the exchange offer on June 17, 2010, after which time we will no longer have any obligation to pay additional interest on the senior secured notes.

 

We used a portion of the net proceeds received from the issuance of the senior secured notes to repay in full all amounts outstanding under our $150 million first lien credit agreement and our $100 million second lien credit agreement, together with all interest accrued thereon. Upon effecting this repayment, each of these credit agreements was terminated. Also terminated were the security documents and instruments related to the credit agreements.

 

In connection with the repayment, we paid a 2% call premium in an amount equal to approximately $2.2 million in respect of the amounts outstanding under the second lien credit agreement. Additionally, we

paid approximately $8.4 million in connection with the termination of certain interest rate swap agreements that we had entered into in connection with the credit agreements.

 

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 depend on our ability to achieve the financial ratios provided in the indenture governing our senior secured notes. See Note 9 “Secured Loans,” in the accompanying condensed consolidated financial statements.

 

Our failure to comply with the obligations in the senior secured notes could result in an event of default under the indenture governing the notes, which, 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 sets forth (in thousands) (i) aggregated interest and principal payments due on our outstanding notes, including the April 2010, $50 million new debt (see Note 9 to our consolidated financial statements contained in this Annual Report on Form 10-K) and (ii) the minimum amounts payable in respect of our operating and capital leases, each of the foregoing for the years ending March 31, (including principal, interest, and maintenance).

 

 

At March 31, 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 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 market risk on those instruments resulting from changes in interest rates.

 

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

 

For the year ended March 31, 2010, approximately 85% of our recognized revenue was denominated in U.S. dollars, generated mostly from customers in the U.S., and our exposure to foreign currency exchange rate fluctuations was 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 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 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 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.

 

The financial statements required by this Item 8 are attached hereto as Exhibit (a)(1) to Item 15 of this Annual Report on Form 10-K and are incorporated herein by reference.

 

 

None.

 

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure Controls and Procedures

 

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) are designed to ensure that information required to be disclosed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), to allow for timely decisions regarding required disclosure and appropriate SEC filings.

 

Our Disclosure Committee is responsible for ensuring that there is an adequate and effective process for establishing, maintaining and evaluating disclosure controls and procedures for our public disclosures.

 

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2010, and, based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of such date.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Our management, together with our CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of March 31, 2010 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of March 31, 2010, our internal control over financial reporting was effective.

 

The effectiveness of our internal control over financial reporting as of March 31, 2010 has been audited by KPMG LLP, our independent registered public accounting firm, as stated in its report appearing on page F-3, which expressed an unqualified opinion on the effectiveness of our internal control over financial reporting as of March 31, 2010.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

None.

 

 

The information required by Item 10 with respect to our executive officers is set forth under the caption “Employees” contained in Part I, Item 1 of this Annual Report on Form 10-K.

 

We maintain a Code of Ethics that is applicable to our Chief Executive Officer and Senior Financial Officers. This code of ethics requires continued observance of high ethical standards such as honesty, integrity and compliance with the law in the conduct of our business. Violations under our code of ethics must be reported to our audit committee. A copy of our code of ethics may be requested in print by writing to the Secretary at Terremark Worldwide, Inc., 2 South Biscayne Boulevard, Suite 2800, Miami, Florida 33131. In addition, our code of ethics is available on our website, www.terremark.com under “Investor Relations.” We intend to post on our website amendments to or waivers from our code of ethics.

 

The other information required by this item is incorporated by reference from our Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders.

 

 

The information required by this item is incorporated by reference from our Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders.

 

 

The information required by this item with respect to related stockholder matters is set forth under the caption “Equity Compensation Plan Information” contained in Part II Item 5 of this Annual Report on Form 10-K.

 

The other information required by this item is incorporated by reference from our Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders.

 

 

The information required by this item is incorporated by reference from our Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders.

 

 

The information required by this item is incorporated by reference from our Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders.

 

 

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

 

1. 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

 

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

TERREMARK WORLDWIDE, INC.

 

By:

Manuel D. Medina

Chairman of the Board, President and

Chief Executive Officer

(Principal Executive Officer)

Date: June 11, 2010

 

By:

Jose A. Segrera

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: June 11, 2010

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

EXHIBIT SCHEDULE

 

Table of Contents

 

 

The Board of Directors and Stockholders

Terremark Worldwide, Inc.:

 

We have audited the accompanying consolidated balance sheets of Terremark Worldwide, Inc. and subsidiaries as of March 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Terremark Worldwide, Inc. and subsidiaries as of March 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2010, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Terremark Worldwide, Inc.’s internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated June 11, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

Miami, Florida

June 11, 2010

 

The Board of Directors and Stockholders

Terremark Worldwide, Inc.:

 

We have audited Terremark Worldwide, Inc.’s internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Terremark Worldwide, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Terremark Worldwide, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Terremark Worldwide, Inc. and subsidiaries as of March 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2010, and our report dated June 11, 2010 expressed an unqualified opinion on those consolidated financial statements.

 

 

Miami, Florida

June 11, 2010

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES

 

 

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

TERREMARK WORLDWIDE, INC. AND SUBSIDIARIES