UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended June 30, 2001 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission file number 0-15187
IFX CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-3399452
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15050 NW 79/th/ Court, Ste. 200
Miami Lakes, Florida 33016
(Address of principal executive offices) (Zip code)
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(305) 512-1100
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(Registrant's telephone number, including area code)
Securities registers pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.02 par value
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[_]
As of August 31, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $5,500,000 based on the $1.05
per share closing price on the NASDAQ National Market on such date.
As of August 31, 2001, there were 14,276,495 outstanding shares of the
Registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the Annual Meeting of Stockholders to be
filed within 120 days after June 30, 2001 are incorporated herein by reference
in response to Part III, Items 11 through 13, inclusive.
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business........................................................ 3
Item 2. Properties...................................................... 11
Item 3. Legal Proceedings............................................... 11
Item 4. Submission of Matters to a Vote of Security Holders............. 12
PART II
Item 5. Market for IFX's Common Equity and Related
Stockholder Matters............................................. 12
Item 6. Selected Financial Data......................................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 14
Item 7a. Quantitative and Qualitative Disclosures About Market Risk...... 20
Item 8. Financial Statements and Supplementary Data..................... 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures......................... 41
PART III
Item 10. Directors and Executive Officers
of the Registrant............................................... 41
Item 11. Executive Compensation.......................................... 41
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................................... 41
Item 13. Certain Relationships and Related Transactions.................. 41
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K......................................... 42
Signatures.............................................................................. 45
2
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. When used herein, the words, "intend," "anticipate," "believe,"
"estimate," "may," "should," "plans," "will," "continue," "expect," and similar
expressions as they relate to the Company are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in Item 1, "Business" as well as Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
Introduction
IFX Corporation (IFX Corporation and its subsidiaries are referred to
herein as "IFX", "IFX Networks" or the "Company") was incorporated in Delaware
in 1985. The Company's operations are headquartered in Miami, Florida. IFX has
established a pan-regional Internet Protocol ("IP") network through a series of
acquisitions and Company initiated start-up operations. The IFX network
currently reaches over 100 cities in 14 countries: Argentina, Bolivia, Brazil,
Chile, Colombia, El Salvador, Honduras, Guatemala, Mexico, Nicaragua, Panama,
Uruguay, Venezuela and the United States. IFX has over 60 Company-owned Points
of Presence ("POPs") with over 500 employees in the United States and Latin
America.
IFX's network infrastructure, which is marketed under the IFX Networks
brand name, provides Internet network connectivity and offers a broad range of
value-added services to multinational, ISP's, carriers and small to medium-sized
businesses in Latin America. IFX has an extensive geographic network in Latin
America using Lucent, Nortel, Cisco, Sun and IBM equipment. IFX previously
marketed its network offerings in Latin America under the "Unete" brand name,
but management believes that the name "IFX Networks" better reflects the focus
of the company and plans on using the IFX Networks name going forward. Although
the Company's primary focus is to pursue multinational, ISP's, carriers and
small to medium-sized businesses in Latin America, the Company continues to
provide consumer Internet product and services that result in higher gross
profit due to its relatively low cost of revenues.
IFX is a region-wide provider of Internet access and value-added IP based
services focused on offering network solutions including region-wide wholesale
and private label Internet access, dedicated fixed wireline and wireless
Internet access, unlimited dial-up roaming access to IFX Network's POPs
throughout the Latin American region, web design, web-hosting and co-location,
dial-up local area network, or LAN services as well as virtual private network,
or VPN services, and full technical support.
The IFX network is composed of the following:
. Over 60 Company-owned POPs. A POP is an interlinked group of modems,
routers and other computer equipment, located in a particular city that
allows a nearby subscriber to access the Internet through a local
telephone call.
. Approximately 39,500 Remote Access Servers, or RAS ports.
. Network Operating Centers in 13 Latin American countries and the US.
IFX continues to provide consumer Internet products and services in Latin
America.
3
Network Operating Centers in 13 Latin American Countries and the US.
Among the services offered by IFX Networks, there is the wholesaling of its
IP network infrastructure to parties that wish to offer Internet services in the
region, such as Tutopia.com, Inc. (referred to herein as "Tutopia"), a leading
provider of free Internet access on a pan-regional level. Tutopia, which was a
majority-owned and controlled subsidiary of IFX until August 31, 2000, pioneered
free Internet access on a regional basis starting in January 2000 and currently,
operates in 9 countries - Argentina, Chile, Colombia, El Salvador, Guatemala,
Honduras, Mexico, Panama and Venezuela, with over 2 million registered users in
the region. As of June 30, 2001, IFX had an approximately 48% interest in the
shares of Tutopia.
IFX Historical Background
IFX was founded in 1985 as a commodities brokerage house. Since its initial
public offering in 1985, IFX has been listed on the NASDAQ SmallCap Market under
the symbol "FUTR". Prior to July 1996, IFX's primary business was providing
commodity brokerage services. On July 1, 1996, IFX sold substantially all of its
brokerage assets (other than certain assets of its then majority-owned U.K.
subsidiary) to E.D. & F. Man International, Inc. ("MINC"), a unit of E.D. & F.
Man Group, PLC, a London based international trading and finance conglomerate.
The purchase price consisted of cash earn-out payments based upon the sold
business's profitability through December 31, 2001. From July 1996 through
February 1999, IFX's revenues consisted primarily of earn-out payments from the
asset sale, interest income and income from operations of its former
majority-owned British subsidiary, IFX Ltd., which conducts foreign exchange
business as a registrant of the British Securities and Futures Authority. In
November 1998, IFX decided to pursue an Internet strategy in Latin America,
opened an office in South Florida and started recruiting new management and
operational teams. In June 1999, IFX continued the divesture of its non-network
business by selling its 50.1% interest in IFX Ltd. The purchase price consisted
of $2.45 million in cash, a note receivable, and a redeemable preference share
entitling IFX to quarterly payments equal to approximately 30% of the net
profits of IFX Ltd. through June 30, 2002. In September 2000, IFX sold its IFX
Ltd. redeemable preference share to the other shareholders of IFX Ltd. for $2.4
million, thus terminating IFX's right to earn-out payments from IFX Ltd.
The IFX Network
IFX operates a region-wide Latin American IP-based network, providing a
reliable data transmission path connecting its customers to the Internet. In
order to develop a network with region-wide coverage, IFX pursued an extensive
acquisition strategy focused on acquiring established Internet service providers
("ISP's") with POPs in the major markets in Latin America that are operated by
local management teams.
. Network Infrastructure. The IFX network infrastructure consists of
three primary tiers: local POPs; a middle tier, which connects the
POPs to national hubs; and a backbone tier, which connects the
national hubs to the Internet. The IFX network currently includes
approximately 63 POPs owned by the Company and 26 virtual POPs
operated by third-party network providers. Each POP is connected to
one of IFX's 14 national hubs in each respective country through a
dedicated point-to-point line, typically provided by a local
telecommunications carrier. The Company's POPs are connected to the
Internet by multiple leased, high-speed links, including both
satellite-based connections and fiber optic connections. IFX believes
that its network capacity is adequate for the provision of current and
planned access and value-added services, but IFX intends to
opportunistically expand its network as trans-oceanic and land-based
network capacity becomes commercially available and as the need for
additional network capacity arises.
4
IFX's network includes POPs in the following cities:
ARGENTINA CHILE MEXICO
--------- ----- ------
Buenos Aires Antofagasta Guadalajara
Cordoba Chillan Mexico City
Mendoza Concepcion Monterrey
Rosario La Serena Toluca
Los Angeles
BOLIVIA Rancagua NICARAGUA
------- Santiago ---------
Cochabamba Talca Managua
La Paz Temuco
Santa Cruz Valparaiso PANAMA
Sucre ------
Tarija Panama City
COLOMBIA UNITED STATES
-------- -------------
BRAZIL Barranquilla Miami, Florida
------ Bogota
Belo Horizonte Cali
Blumenau Medellin URUGUAY
Campo Bom -------
Canoas Ciudad de la Costa
Curtiba Montevideo
Florianopolis EL SALVADOR Pando
Fortaleza -----------
Joinville San Salvador
Novo Hamburgo VENEZUELA
Pelotas ---------
Porto Alegre GUATEMALA Barquisimeto
Rio de Janeiro --------- Caracas
Salvador Guatemala City Maracaibo
Santa Maria Maturin
Sao Leopoldo HONDURAS Porlamar
Sao Paulo -------- Puerto La Cruz
San Pedro Sula Puerto Ordaz
Tegucigalapa Punto Fijo
Valencia
Valera
. Network Management. IFX considers world-class network management
essential for monitoring its network in multiple countries, maintaining
high customer satisfaction and improving network quality. In addition
to region-wide network monitoring capability at its headquarters in
Miami, Florida, IFX has established network operating systems in
multiple Latin American countries that monitor the performance of IFX's
network equipment. With these systems, IFX is able to efficiently
identify and correct network problems either remotely or by local
dispatch.
. Sales and Customer Service. IFX offers its service through a sales
approach that makes use of local technical talent who understand
customer applications to help provide bundled Internet solutions
consisting of Internet access and other value-added services. This
localized approach allows the Company to provide end-to-end customer
solutions and ongoing support. IFX's direct sales force offers a core
base of technically competent, locally based and experience Internet
sales representatives. IFX provides business customers with technical
support and customer service through its local customer service
representative.
5
Business Strategy
IFX's goal is to become a leading provider of IP based network solutions to
multinational, ISP's, carriers, and small to medium-sized businesses in Latin
America through the delivery of single source Internet solutions.
IFX believes that many businesses are seeking to increase their use of the
Internet as a business tool and are integrating web-based services into their
business processes. Many businesses desire economical Internet access for their
corporate offices and their employees who travel, thereby creating demand for
region-wide dedicated and dial-up Internet access. In addition, IFX's management
believes that within the business marketplace there is a significant opportunity
to upgrade customers to increasingly higher margin value-added services. IFX
anticipates that businesses will continue to seek to outsource certain
information technology functions to full-service IP-based network providers,
such as IFX, in order to reduce costs and improve results.
Products and Services
Business Products and Services
IFX offers services in four basic portfolios: IFX Dedicated connectivity,
IFX Dial-up, IFX Co-location, and IFX Web hosting to small to medium-sized
businesses, multinationals, ISP's and carriers in business in Latin America.
IFX dedicated connectivity
. International Private Line ("IPL"): Point-to-Point Time Division
Multiplex ("TDM") physical connection for a customer's exclusive use.
The customer defines protocol and service. This service can be used for
convergence of voice, video, and data for customers who require the
highest level of security.
. Private Asynchronous Transfer Mode ("ATM"): Permanent Virtual Circuit
from customer premise to customer premise running ATM protocol. Use
includes mission critical data or voice transmission for customers that
want high speed fixed bandwidth at a lower price then an IPL.
. Clear Channel IP: Premium IP service for access to the global Internet
with guaranteed bandwidth on IFX's backbone thereby providing network
monitoring reports to guarantee quality of service. This product is
ideal for ISP's, carriers, multinational companies or small and medium
sized businesses that have mission critical data or for the use of
voice over IP ("VOIP").
. Dedicated IP: Basic IP services for access to the global Internet for
companies needing basic Internet connectivity.
IFX dial-up
. Wholesale Dial-up: Allows customers to utilize the dial-up connectivity
resources of the IFX Dial Network on a wholesale basis. This product is
ideal for ISP's, carriers, and multinational companies who require
local country dial-up access, multi-country dial-up access, global
roaming dial-up access or Virtual Internet Service Provider ("VISP").
. Corporate Dial-up: Unlimited roaming that enables end users to access
the Internet or their corporate extranet while traveling.
IFX co-location
. Managed Co-location: Outsourcing the management and day-to-day
operations at an IFX Data Center. Provides reliable and scalable
network management around the clock. Intended for use by carriers,
ISP's, and small to medium enterprises and multinational companies.
6
. Basic Co-location: Servers are maintained at an IFX POP for bandwidth
management and reliable connectivity to the Internet. For customers
needing space in Data Centers without remote hands-on support.
IFX web hosting
IFX offers web hosting products and services allowing customers to use
IFX's web servers to maintain customer's independent web sites. With
web hosting, businesses can create a presence on the Internet,
furthering their business, marketing and customer service campaigns.
IFX's web hosting products and services include web site maintenance
and ongoing consulting services by IFX.
Although the Company's primary focus is to pursue multinational, ISP's,
carriers and small to medium-sized businesses in Latin America, the Company
continues to provide consumer Internet products and services.
Competition
The market for Internet access and value-added products and services has
become increasingly more competitive, especially in Latin America as Internet
usage has grown, and management expects that this trend will continue. While
Internet usage is lower in Latin America than in more mature markets such as the
United States, many new entrants have been attracted by the large potential
market size.
Though the Company's specific competitors vary from market to market, they
include the following types of businesses:
[] Internet services providers. Depending on the market, IFX's primary
competitors may be small, local Internet service providers with limited
ranges of service and geographic reach, or large international or
regional service providers with broad service offerings, large network
capacities and wide geographic presence.
[] Telecommunications companies. Many of the major international
telecommunications companies offer Internet services in the same
markets as IFX. Some telecommunications providers are subsidized or
government owned. In several markets in which IFX Networks operates,
former telecommunications monopolies have been deregulated and
privatized, and have also become providers of Internet services. New
telecommunication company entrants to these markets, which are
beginning to use high-speed wireless technology to bypass overcrowded
existing networks, are offering Internet and corporate data services as
well. Generally, these network-based companies focus on consumer
dial-up Internet access, large corporate accounts and customer bases
that can generate high volume data traffic to carry on their networks.
[] Cable television companies. Cable operators in some of the Company's
markets have either introduced or announced that they intend to
introduce Internet access services, both by upgrading their networks
and using new, cable modem technology. The existing customers of those
cable operators are primarily residential and their physical networks
are largely limited to residential areas.
Management believes IFX can compete effectively in the Latin American
Internet market. However, any one of the following developments in Latin America
could materially and adversely affect IFX's business, financial condition and
results of operations:
. Growth in the number or strength of strategic alliances among IFX's
competitors continues to grow;
. New platforms for Internet access arising from technological
developments;
. An increased number of global and local companies enter these markets;
. Loss of users;
. Reduced Internet advertising;
. Loss of market share;
. Reduced page views;
. Price reductions and lower profit margins; and
. Lower advertising rates.
7
IFX faces competition on both a country-specific and region-wide level.
IFX's competitors may develop products and services that are better than the
products and services that the Company offers or that may achieve greater market
acceptance. It is also possible that new competitors may emerge and acquire
significant market share. Some of IFX's established competitors and potential
new competitors may also have better brand recognition and significantly greater
financial, technical and marketing resources than IFX.
Government Regulation
To date, government regulations have not materially restricted the
Company's ability to offer Internet products and services in the Company's core
target countries. However, the legal and regulatory environment that pertains to
the Internet is uncertain and may change. New laws and regulations may be
adopted or existing laws may be applied to the Internet and e-commerce. New and
existing laws may cover issues like:
. Sales and other taxes;
. User privacy;
. Pricing controls;
. Characteristics and quality of products and services;
. Consumer protection;
. Cross-border restrictions;
. Foreign investment restrictions;
. Currency controls;
. Licensing requirements;
. Libel and defamation;
. Copyright, trademark and patent infringement;
. Pornography; and
. Nature and content of Internet materials.
Legislation in these areas could slow the growth of Internet use and
decrease the acceptance of the Internet as a communications and commercial
medium. It may take years to determine how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. Any
new legislation or regulation regarding the Internet, or the application of
existing laws and regulations to the Internet, could have an adverse effect on
IFX's business.
The growth of the Internet coupled with publicity regarding Internet fraud
can also lead to the enactment of more stringent consumer protection laws. These
laws may impose additional burdens on the Company's business.
Employees
As of June 30, 2001, IFX employed approximately 500 employees. IFX believes
that its success is dependent in part upon the Company's ability to attract and
retain qualified, experienced employees. IFX considers its relationship with its
employees to be good.
Labor laws in Latin America are generally more protective of employees than
in the United States. Unlike in the United States where an employer will often
have the right to terminate an employee at will, most countries in Latin America
have laws protecting employees from being terminated without paying severance
compensation in established statutory amounts. In some Latin American countries,
the law establishes a minimum number of vacation days.
Intellectual Property and Proprietary Rights
IFX relies on trademark and copyright laws, laws restricting unfair
competition, laws relating to trade secret protection and confidentiality and/or
license agreements with the Company's employees, customers, partners and others
to protect its intellectual property rights. Courts and legislatures in each
country continue to address the issues of the applicability and enforceability
of legal principles concerning intellectual property rights in an Internet
context, which remain substantially uncertain. Many of the countries in which
IFX operates have signed international treaties relating to the protection of
intellectual property. However, the courts in many of these countries have not
had the opportunity to address the legal issues within the Internet context to
the same degree as courts in the United States. Therefore, IFX cannot determine
whether the intellectual property of its non-U.S. operations will be subject to
a lesser or different degree of protection than that generally afforded in the
United States.
The Company uses "IFX" as the primary business name for its operations. The
Company uses "IFX Networks" as a brand name for end products and services in
Latin America. In Latin America, the Company pursues the registration of
trademarks for marks that the Company believes are unique and will be used by
IFX over an extended period of time. IFX has initiated its registration of the
IFX Networks mark in most countries in Latin America. Where IFX has not
registered our marks, competitors with senior rights in marks similar to IFX's
may be able to argue successfully that IFX should be barred from continuing to
use the IFX Networks mark, or competitors may adopt product or service names
similar to IFX's, thereby impending IFX's ability to build brand identity, which
could lead to customer confusion. It is also difficult and expensive to defend
trademark infringement litigation and to police the unauthorized use of marks.
IFX Networks starter software and installation programs are key parts of
the services the Company provides to dial-up subscribers. IFX's goal is to
automatically configure an individual user's Internet access programs after the
user's initial entry with this software. IFX has obtained permission and, where
necessary, licenses from the companies that manufacture the software that IFX
uses.
8
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors and executive officers of the Company and their ages as of
September 15, 2001 are as follows:
Name Age Office
------------------------ ----- ---------------------------------------
Joel M. Eidelstein 35 Chairman of the Board and President
Michael Shalom 31 Chief Executive Officer and Director
Jose Leiman 41 Chief Financial Officer
Charles Delaney 43 Director
Patrick Delhougne 37 Director
Mark O. Lama 39 Director
Burton J. Meyer 54 Director
Charles W. Moore 36 Director
George A. Myers 51 Director
Joel M. Eidelstein has served as a director of the Company since November
1990 and since November 9, 1996 he has served as the President of the Company.
Mr. Eidelstein graduated from Brandeis University in May 1988 and was an
independent commodity futures trader and a floor manager with Index Futures
Group, Inc. from June 1988 until June 1996. Mr. Eidelstein also is a principal
shareholder of ePagos, Inc., an Internet communications software development
company in which IFX owns an interest.
Michael Shalom was elected as IFX's Chief Executive Officer on September 8,
1999 and has served as a director of IFX Networks, Ltd., a subsidiary of IFX,
since November 1998. Prior to July 1999, Mr. Shalom was a principal of, and was
actively involved in the management of the INTCOMEX group of companies, which is
a Latin American wholesale distributor of microcomputers, networking products,
mass storage products, multimedia products, computer peripheral equipment and
computer components. Mr. Shalom is also a principal of International Technology
Investments ("ITI").
Jose Leiman has served as Chief Financial Officer of the Company since July
1, 1999. From March 1996 to June 1999, Mr. Leiman was a CPA and tax attorney
with Ernst & Young LLP, an international accounting firm. Prior to joining Ernst
& Young LLP, Mr. Leiman was an attorney with Dewey Ballantine LLP, an
international law firm. Mr. Leiman has also worked as a CPA with Price
Waterhouse. Mr. Leiman holds J.D. (magna cum laude and order of the coif) and
L.L.M. degrees from Georgetown University Law Center in Washington, D.C. and a
B.B.A. degree with high honors from Florida International University. Mr. Leiman
is admitted to practice law in Florida and Washington, D.C., and is also a
Certified Management Accountant as well as a Certified Public Accountant.
Charles Delaney is the President and Chief Executive Officer of UBS Capital
Americas, which manages $1.5 billion in private equity commitments dedicated to
investments in North and South America, including investments in the
telecommunications, software, and Internet sectors. In 1992, Mr. Delaney founded
UBS AG's private equity businesses in North America and Latin America. In 1999
Mr. Delaney and the partners of UBS Capital Americas raised two direct
investment funds totaling $1.5 billion that are managed by the partners of UBS
Capital Americas. Upon raising these UBS sponsored funds, Mr. Delaney became the
Chief Executive Officer of UBS Capital Americas (and the various related funds
management companies). From 1989 to 1992, Mr. Delaney was in charge of the
Leveraged Finance Group of UBS AG in North America, which financed private
equity transactions. Prior to joining UBS, he worked for the Hong Kong and
Shanghai Banking Group in New York, London and Greece. Mr. Delaney is a graduate
of Lehigh University. Mr. Delaney is also a director of AMS Holdings Corp.,
Aurora Foods Inc. and Edison Schools Inc.
9
Patrick Delhougne is a partner in Ray & Berndtson's technology practice.
Prior to joining Ray & Berndtson, Mr. Delhougne was an equity sales associate
and analyst for J.P. Morgan in London and New York. Previously, he was a case
team leader with Bain & Co. in Munich, Germany responsible for managing strategy
consulting projects. Mr. Delhougne began his career with Siemens PLC in London,
working as the assistant to the chief executive officer and chief financial
officer. He was subsequently promoted to corporate planner in the regional
strategy group, working with the board of directors at Siemens AG in Munich. He
also worked for the Siemens Transportation Group in Erlangen as a commercial
manager. Mr. Delhougne earned a B.B.A degree from the U.S. International
University - Europe (Summa Cum Laude), a postgraduate diploma from the London
School of Economics, and an M.B.A. from the Harvard Graduate School of Business
Administration, which he attended on the Werner von Siemens Scholarship.
Mark O. Lama was elected to the board of directors of IFX in June 2000 and
Tutopia in August 2000. Mr. Lama is a principal of UBS Capital Americas. Prior
to joining UBS Capital Americas in 1998, he worked in the U.S. and Latin America
groups of Chase Capital Partners (a private equity firm), the Banking and
Corporate Finance Group of Chemical Bank and the Emerging Markets group at
Salomon Brothers, Inc. Mr. Lama holds an M.B.A. from Harvard Business School, a
B.S. from Columbia University and a B.A. from Colgate University.
Burton J. Meyer has served as a director of the Company since May 1999. Mr.
Meyer previously served as director of the Company from August 1986 until July
1, 1996 and as President of the Company from July 1987 until July 1, 1996. Mr.
Meyer served as an Executive Vice President of E.D. & F. Man International,
Inc., an international futures and conglomerate brokerage, from July 1996 to
June 30, 2000.
Charles W. Moore was elected to the board of directors of IFX in June 2000
and Tutopia in August 2000. Mr. Moore is partner of UBS Capital Americas. In
this role, Mr. Moore has senior responsibility for all telecommunications-
related investments of UBS Capital Americas. Prior to joining UBS Capital, Mr.
Moore invested for Greenwich Street Capital Partners, LP from November 1994 to
March 1997 and prior thereto worked at Morgan Stanley & Co. in their investment
banking division. Other boards of directors on which Mr. Moore serves include:
Aduronet, Ltd. (London, UK); WorkNet Communications (St. Louis, MO); Netstream
Communications (Roseville, CA); eYak, Inc. (Boston, MA); PF.Net (Reston, VA);
Netrail, Inc. (Atlanta, GA); Dynamicsoft, Inc. (East Hanover, NJ); and
Tutopia.com, Inc. (Miami, FL), a former subsidiary of the Company. Mr. Moore is
a graduate of the University of Michigan and the University of Chicago Graduate
School of Business.
George A. Myers has served as a director of the Company since November
1990. Mr. Myers has been managing general partner of MC Capital, a diversified
real estate company with offices in Chicago, Illinois, Phoenix, Arizona, and San
Diego, California since 1981.
Directors are elected and serve until the next annual meeting or until
their successors are elected and qualified. Officers are elected annually by the
Board of Directors.
In May 2001 the Board of Directors of the Company was increased to eight
directors from seven directors. UBS Capital Americas III, L.P. and UBS Capital
LLC (collectively, the "UBS Capital Americas") are entitled to select three
directors. Further, Lee S. Casty ("Casty") is entitled to appoint one director
and International Technology Investments, LLC ("ITI") is entitled to appoint one
director. ITI and Casty are entitled to jointly select an additional director.
Also, ITI, Casty and UBS Capital Americas are jointly entitled to select two
additional directors who qualify as "independent directors" in accordance with
NASDAQ rules. Effective with the purchase of the Series B Convertible Preferred
Stock by UBS Capital Americas, Charles Delaney and Patrick Delhougne were
appointed as directors.
10
ITEM 2. PROPERTIES
The Company's corporate headquarters are at 15050 N.W. 79/th/ Court,
Suite 200, Miami Lakes, Florida, 33016. Corporate headquarters includes the
Company's offices for coordinating and supporting IFX's Latin American
operations and is located in approximately 12,500 square feet of office space
under a lease that expires in July 2004.
The Company leases office space in 200 West Adams Street, Suite 1500,
Chicago, IL 60606. This space served as the Company's previous corporate
headquarters. However, this office space has been sub-leased in its entirety
until the end of the lease, and for an amount equal to the lease payments.
The Company leases office space in 707 Skokie Blvd, Northbrook, IL. This
space also served as the Company's previous corporate headquarters.
The Company also leases offices in 13 Latin America countries that are used
for general operations, for sales offices and for equipment co-location.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in, and may be threatened with, various legal
proceedings arising from its regular business activities. Management, after
consultation with legal counsel, is of the opinion that the ultimate liability,
if any, resulting from any pending action or proceedings will not have a
material effect on the financial position or results of operations of the
Company.
Legal proceedings with respect to discontinued operations
In April 1994, Index, Futures Group, Inc. ("Index") without admitting or
denying the allegations, paid $100,000 to the CFTC, settling an administrative
action filed on September 29, 1992. In a related action, the equity receiver of
a commodity pool operator brought an action to recover losses of approximately
$600,000, alleging various theories such as constructive trust, negligence,
breach of fiduciary duty and conversion. On May 29, 1996, the district judge
dismissed the complaint in its entirety. On December 4, 1997, the Court of
Appeals affirmed the district judge's dismissal of all claims against Index. On
January 13, 1998, the Court of Appeals denied the Supplemental Plaintiffs'
request for a rehearing of its appeal. On October 2, 1998, the attorney for the
equity receiver of the commodity pool filed a class-action suit on behalf of a
putative class composed of persons who had given money to the commodity pool
operator to invest, some of which was deposited in brokerage accounts at Index
by the commodity pool operator. (Wesselhoff v. FX Chicago, Inc. et al., Circuit
Court of Cook County, Chancery Division, case number 98-CH-13396). The plaintiff
seeks damages of $600,000 plus prejudgment interest, punitive damages, and lost
investment opportunity. The Company believes that the allegations in the
complaint against FX Chicago, Inc. and the Company are without merit and will
defend vigorously.
A German citizen, seeking damages of 6,403,519.19 Deutschmark
(approximately $3.0 million given the exchange rate as of August 31, 2001),
filed a lawsuit in September 1998, in Germany, against an affiliate of E.D.& F.
Man International, Inc. (MINC) which is a unit of E.D.& F. Man Group. The
complaint arose out of transactions that occurred in an account introduced by
Index Futures Group, AG ("Index AG"), an introducing broker of Index, prior to
the asset sale. The Plaintiff alleges that under German law, MINC's affiliate is
successor to Index AG, and thus assumed any liabilities of Index AG. Pursuant to
the asset sale agreement with E.D.&F Man Group, Index is responsible for any
liability "arising out of any state of facts with respect to such Assigned
Contract existing on or prior to the Closing Date". MINC has retained counsel in
Germany to represent its interests in this matter. As Index AG was an
introducing broker of Index and not a former subsidiary of the Company or Index,
the Company does not believe that it will ultimately be liable for damages. In
April 1999, MINC's German counsel reported that the Dusseldorf District Court
dismissed all claims against MINC. However, the plaintiff has filed an appeal
with the Dusseldorf Court of Appeals.
On August 23, 1999, a lawsuit was filed in the Circuit Court of Cook County
naming Index and two individuals as defendants (Craig Bordon v. Sean S. Mayo, et
al., 99L-09368). The complaint alleges breach of contract and damages "in excess
of" $50,000. The Company has not yet been served with the complaint. Based upon
the allegations as set forth in the complaint, the Company believes that the
claim is without merit.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ending June 30, 2001.
PART II
ITEM 5. MARKET FOR IFX's COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
IFX's stock is traded on the NASDAQ SmallCap Market under the symbol
"FUTR". Set forth below is the range of high and low trade prices per share of
the common stock in the NASDAQ SmallCap Market as reported by NASDAQ for the
periods indicated. The quotations do not include retail markups, markdowns, or
commissions.
Fiscal Year 2001: High Low
------------------------------------------
First Quarter $ 13.13 $ 5.50
Second Quarter 7.31 1.78
Third Quarter 5.25 2.03
Fourth Quarter 2.66 1.49
Fiscal Year 2000: High Low
------------------------------------------
First Quarter $ 24.38 $ 14.88
Second Quarter 34.75 16.13
Third Quarter 37.94 27.25
Fourth Quarter 35.00 11.25
Fiscal Year 1999: High Low
------------------------------------------
First Quarter $ 2.44 $ 1.81
Second Quarter 12.50 1.25
Third Quarter 12.63 5.88
Fourth Quarter 21.50 9.38
As of August 31, 2001, there were 195 holders of record and 1,644
beneficial owners of the Registrant's common stock.
The Registrant has not paid a cash dividend on its common stock and does
not expect to pay any cash dividends in the foreseeable future.
12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the fiscal years presented below is
derived from the audited consolidated financial statements of the Company. The
following table summarizes selected historical information of the Company and
its subsidiaries for each of the last five years. Certain of the amounts
presented have been restated as discussed in note 1 of the fiscal 2001
consolidated financial statements. The data should be read in conjunction with
the other financial information included herein, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
the consolidated financial statements and their related notes.
----------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended June 30,
2001 2000 1999 1998 1997
(Restated)
(in thousands, except share and per share amounts)
----------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Total revenues $ 32,122 $ 10,689 $ 725 $ - $ -
Loss from continuing operations (61,189) (47,844) (1,715) (209) (428)
Basic and diluted loss from continuing
operations per share $ (4.44) $ (4.71) $ (0.26) $ (0.03) $ (0.07)
Weighted average common shares outstanding 13,784,897 10,153,565 6,498,204 6,246,545 6,616,893
Balance Sheet Data:
Working capital $ (11,580) $ 3,480 $ 7,221 $ 10,564 $ -
Total assets 48,524 61,297 18,862 11,543 10,031
Capital-lease obligations 16,068 10,968 - - -
Long-term debt (excluding current portion and
capital-lease obligations) 296 375 317 - -
Stockholders' equity $ 10,421 $ 32,543 $ 16,097 $ 11,335 $ 8,204
----------------------------------------------------------------------------------------------------------------------
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere herein.
This discussion and analysis reflects the adjustments made to segregate the
discontinued operations ("discontinued operations") that resulted from the sale
of the Company's brokerage assets in July 1996 to E.D. & F. Man International,
Inc., a unit of E.D. & F. Man Group, PLC, a London based international trading
and finance conglomerate; and from divesture in June 1999 of IFX's 50.1%
interest in IFX Ltd. Discontinued operations are shown under a separate line
item on the Company's consolidated statements of operations for fiscal years
2001, 2000 and 1999; and in the Company's consolidated balance sheet for fiscal
years 2001 and 2000 included elsewhere herein.
In addition, during September 2000, the Company's voting interest in its
majority-owned subsidiary Tutopia.com, Inc. ("Tutopia") fell below 50%. As a
result, the Company deconsolidated Tutopia and began accounting for its
investment under the equity method. Accordingly, the Company restated its fiscal
2000 consolidated financial statements as if Tutopia had been accounted for
under the equity method since its inception in January 2000.
In April 2000, Tutopia issued common stock representing approximately a 15%
interest in Tutopia to shareholders other than the Company, at a price per
common share exceeding the Company's carrying value for the Company's investment
in Tutopia's common stock. The restated financial statements reflect an increase
in the Company's investment in Tutopia of approximately $4 million as of June
30, 2000, to record the amount in excess of the Company's carrying value as a
capital transaction.
During the past two fiscal years, IFX has become a region-wide provider of
Internet access and value-added IP based services focused on offering network
solutions to ISP's, multinationals, carriers and small to medium-sized
businesses throughout Latin America. Offerings include region-wide wholesale and
private label Internet access, dedicated fixed wireline and wireless Internet
access, unlimited dial-up roaming access to IFX Network's Points of Presence or
POPs throughout the region, web design, web-hosting and co-location, dial-up
local area network, or LAN services as well as virtual private network, or VPN
services, and full technical support.
The IFX network is composed of the following:
. Over 60 Company-owned POPs. A POP is an interlinked group of modems,
routers and other computer equipment, located in a particular city
that allows a nearby subscriber to access the Internet through a local
telephone call.
. Approximately 39,500 Remote Access Servers, or RAS ports.
. Network Operating Centers in 13 Latin American countries and the US.
Among the services offered by IFX Networks is the wholesaling of its IP
network infrastructure to parties that wish to offer Internet services in the
region, such as Tutopia, a leading provider of free Internet access on a
pan-regional level. Tutopia helped pioneer free Internet access on a regional
basis starting in January 2000 and currently operates in 9 countries -
Argentina, Chile, Colombia, El Salvador, Guatemala, Honduras, Mexico, Panama and
Venezuela, with over 2 million registered users in the region. As of September
15, 2001, IFX has an approximate 48% ownership interest (assuming the conversion
of all outstanding preferred stock into common stock) in Tutopia.
14
The following table sets forth, for the fiscal periods indicated, the percentage
of total revenues represented by certain items in the Company's consolidated
statement of operations:
Fiscal Year Ended June 30,
2001 2000 1999
------------ ----------- -------------
(Restated)
Dial-up 22.3% 77.3% 85.0%
Dedicated line services 22.4 12.6 3.9
Web hosting and design services 4.0 3.5 11.1
Sales to related party 43.1 - -
Other 8.2 6.6 -
----------- ---------- ---------
TOTAL REVENUES 100.0 100.0 100.0
Cost of revenues 64.7 79.4 61.4
----------- ---------- ---------
Gross profit 35.3 20.6 38.6
General and administrative 84.1 180.6 371.1
Sales and marketing 11.0 21.1 34.1
Depreciation and amortization 53.2 75.3 32.0
Non-cash stock compensation 22.3 59.5 5.4
Impairment of acquired customer base 34.0 - -
Contract cancellation costs - 45.9 -
----------- ---------- ---------
Total operating expenses 204.6 382.4 442.6
----------- ---------- ---------
Operating loss from continuing operations (169.3) (361.8) (404.0)
----------- ---------- ---------
OTHER INCOME (EXPENSE): (25.8) (111.7) 55.8
----------- ---------- ---------
Loss from continuing operations before income taxes (195.1) (473.5) (348.2)
Income tax benefit 4.8 25.9 111.8
----------- ---------- ---------
Loss from continuing operations (190.3) (447.6) (236.4)
Income from discontinued operations, net of taxes 8.8 18.4 429.8
----------- ---------- ---------
Net (loss) income (181.5)% (429.2)% 193.4%
=========== ========== =========
CONTINUING OPERATIONS
Revenues
The companies that IFX has acquired generally had both business and
consumer customers at the time of acquisition. Management plans to grow IFX's
customer base and revenues primarily by marketing Internet access and
value-added services to the ISP's, multinationals, carriers and small to medium
-sized businesses in the Company's markets. IFX expects that revenue from the
sale of the Company's value-added services (such as dedicated line and web
hosting and design services) will increase more rapidly than revenue from the
sale of Internet access services. As a result, IFX's current customer and
revenue mix is not expected to be indicative of the Company's future customer
and revenue mix.
IFX provides Internet access service to customers under contracts that
typically range from one month for dial-up access services to one year or more
for dedicated access services.
15
IFX also derives revenues by providing wholesale Internet access to
businesses that resell such access on a branded or private label basis. Fees for
wholesale access are generally billed on a monthly basis after services are
rendered. Wholesale access customers are billed on either a per port basis or a
per hour basis. Wholesale Internet access service revenues are recognized in the
period in which the services are provided.
Revenues from value-added Internet services come from web hosting, domain
name registration and co-location services. These revenues are recognized in the
period in which the services are provided.
Internet access charges and fees for value-added services vary among the
countries in which IFX does business, depending on competition, economic and
regulatory environments and other market factors. In some markets, the Company
has reduced prices, such as for access services, as a result of competitive
pressure. The Company expects that price reductions will continue in IFX's
markets as the demand for, and supply of, Internet services continue to grow.
The period-to-period comparisons of our results of operations set forth below
reflect acquisitions that we made during the applicable period. Results of
operations from acquisitions effected during a period have been included from
the time of the closing of the acquisition.
For the fiscal year ended June 30, 2001, total revenues increased to $32.1
million from $10.7 million, an increase of $21.4 million or 200.5% in fiscal
2001 from fiscal 2000. Approximately $13.8 million of the increase is
attributable to services provided to Tutopia, a related party. Revenues
resulting from dedicated line services increased by $5.8 million to $7.2 million
for fiscal year 2001 from fiscal year 2000 as a result of management's focus on
corporate clients. Web hosting and design services revenues increased to $1.3
million from $0.4 million in fiscal 2001 from fiscal 2000. Revenue relating to
dial-up decreased 13.1% in fiscal 2001 to $7.2 million from $8.2 million in
fiscal 2000, as the Company continues to pursue its business strategy of
focusing on business clients and not individual dial-up consumers. Other revenue
increased $1.9 million to $2.6 million in fiscal 2001 from fiscal 2000, of which
approximately $1.6 million of the increase is attributable to revenues received
from various Latin American telephone companies through revenue sharing
arrangements.
Revenues increased to $10.7 million for the year ended June 30, 2000, from
$0.7 million for the year ended June 30, 1999. The increase in revenues was
related to the Company's expansion of IFX's user base resulting from
acquisitions in Latin America and the growth in value-added services such as
dedicated access.
Costs of Revenues
IFX Network's costs of revenues primarily consist of costs incurred to
carry customer traffic to and over the Internet. IFX leases lines that connect
the Company's POPs to IFX's national hubs. The Company pays third party network
providers for transit that allows IFX Networks to transmit the Company's
customers' information to or from the Internet. IFX also has other recurring
telecommunications costs, including the cost of local telephone lines that
customers use to reach IFX Network's POPs and access the Company's services, and
satellite bandwidth costs to connect the national hubs to the Internet backbone
via IFX's Miami facilities. Management expects operating costs from providing
Internet services to increase as capacity is increased to meet customer demand.
The Company expects that costs of revenues will decline as a percentage of
revenues as IFX expands the Company's network facilities under long-term leases
and as competition drives down the overall price of such services. Management
also expects cost of revenues to decrease as wireless technology usage expands
and the telecommunication markets in Latin America deregulate.
Gross profit increased to 35.3% for the fiscal year ended June 30, 2001 as
compared to 20.6% for the fiscal year ended June 30, 2000. The increase in gross
profit results from management's continued efforts to reduce costs of revenues
by increasing efficiencies of the Company's use of its equipment as well as
solidifying IFX's network throughout Latin America resulting in the reduction of
third party costs.
Gross profit decreased to 20.6% for the year ended June 30, 2000 as
compared to 38.6% for the year ended June 30, 1999. The decrease in gross profit
was related to the Company's network expansion in order to accommodate the
growth in the user base, especially for Tutopia and for dedicated access.
16
General and Administrative Expenses
IFX's general and administrative expenses are comprised primarily of
compensation costs. Compensation costs include salaries and related benefits,
commissions and bonuses. Other general and administrative expenses include the
costs of travel, rent, utilities, telecommunications, insurance and professional
fees. Management expects that the Company's general and administrative expenses
will increase to support IFX's growth.
General and administrative expenses increased to $27.0 million for the
fiscal year ended June 30, 2001 as compared to the general and administrative
expenses of $19.3 million for the fiscal year ended June 30, 2000. The increase
is primarily due to costs incurred to support the increase in sales during
fiscal 2001. As a percentage of total revenue, general and administrative
expenses decreased 96.5 percentage points to 84.1% in fiscal 2001 from 180.6% in
fiscal 2000 as a result of management's cost reduction efforts.
General and administrative expenses increased to $19.3 million for the year
ended June 30, 2000 from $2.7 million for the year ended June 30, 1999. General
and administrative expenses increased primarily because of the increase in
payroll, which was increased to support the Company's revenue; and for legal,
accounting and consulting fees related to the Company's continued expansion in
Latin America.
Sales and Marketing
Sales and marketing expenses consist primarily of advertising costs,
distribution costs and related production costs. Sales and marketing expenses
increased $1.3 million to $3.5 million for the fiscal year ended June 30, 2001
as compared to $2.2 million for the fiscal year ended June 30, 2000. The
increase is primarily due to costs incurred to support the increase in sales
during fiscal 2001. As a percentage of total revenue, sales and marketing
expenses decreased 10.1 percentage points to 11.0% in fiscal 2001 from 21.1% in
fiscal 2000 as a result of sales growing at a much faster pace than the
Company's marketing expenditures.
Sales and marketing expense increased to $2.2 million for the year ended
June 30, 2000 from $0.2 million for the year ended June 30, 1999. The increase
in fiscal 2000 from fiscal 1999 is primarily attributable to costs associated
with the Company's growth in advertising during fiscal 2000.
Depreciation and Amortization
A large component of the Company's depreciation and amortization expense is
related to the amortization of acquired customer base. The value of acquired
customer bases, which is amortized over three years using the straight-line
method, was created as a result of the allocation of the price paid to acquire a
company that was in excess of the value of its tangible assets. Depreciation
expense is primarily related to telecommunications equipment, computers and
network infrastructure. Assets are depreciated over their useful lives,
generally ranging from three to ten years. Management expects that depreciation
expense will increase as the Company's network infrastructure is expanded.
Depreciation and amortization expense increased $9.0 million to $17.1
million for the year ended June 30, 2001 from $8.1 million for the year ended
June 30, 2000. The increase in depreciation and amortization is a direct result
of increases in computer equipment and assets under capital leases that
primarily consisted of computer and related equipment. Such assets were
purchased to support the increased levels of operations and anticipated future
growth of the Company.
Depreciation and amortization expenses increased to $8.1 million for the
year ended June 30, 2000 from $0.2 million for the year ended June 30, 1999. The
increase in depreciation and amortization expense is attributable to the
increase in property and equipment and the acquired customer base due to the
acquisitions the Company completed in Latin America during late fiscal 1999 and
2000.
17
Non-Cash Stock-Based Compensation Expense
For the fiscal year ended June 30, 2001, the Company recorded $7.2 million
as non-cash stock compensation, an increase of $0.8 million from $6.4 million as
recorded for the fiscal year ended June 30, 2000. IFX has recorded non-cash
stock compensation totaling $6.4 million in connection with the grant of stock
options to employees during the year ended June 30, 2000 as compared to $39,000
for the year ended June 30, 1999. The increase in fiscal 2001 is attributable
predominantly to the amortization related to the increase of additional employee
options in fiscal 2000. Amortization of such amounts in fiscal 2002 is expected
to be approximately $4.5 million.
Impairment of Acquired Customer Base
At June 30, 2001, the Company estimated that the undiscounted cash flows
associated with its acquired customer base may not be sufficient to recover
the net book value of such assets. In accordance with SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS 121"), the Company has recorded an impairment charge of approximately
$10.9 million. This non-cash impairment charge was at estimated fair value. The
estimates of the fair value of the long-lived assets are based on a valuation of
such assets performed by management. The estimated fair values, as required by
SFAS 121, did not consider the value of such assets in a forced sale or
liquidation and were based primarily on an analysis of the operations'
discounted net cash flows.
Contract Cancellation Costs
During fiscal 2000, IFX recorded $4.9 million relating to the cancellation
of certain contracts, which represent one-time charges of a non-recurring
nature. The acceleration and settlement of certain consulting agreements were
paid in shares of IFX common stock with an approximate value of $4.2 million at
the time of issuance.
Other Income/(Expense)
During fiscal 2001, IFX recorded $8.3 million as other expense as compared
to other expense of $11.9 million during fiscal 2000. Other expense in fiscal
2001 is primarily attributable to $3.2 million of the Company's share of the
losses of its equity method investee. In addition, the Company incurred costs
associated with interest expense of $1.9 million and realized a loss on
investments of $2.5 million.
As a result of the deconsolidation and treatment of Tutopia as an equity
investment, the Company expensed approximately $11.8 million related to the
results for Tutopia in fiscal 2000. In addition, interest expense increased to
$0.6 million for the year ended June 30, 2000, as compared to $0 for the year
ended June 30, 1999.
Beneficial Conversion Feature of Preferred Stock
In May 2001, the Company issued approximately 4.4 million shares of
convertible preferred stock for $15.5 million, of which each share is
convertible into one share of the IFX common stock. In June and July 2000, the
Company issued approximately 2 million shares of preferred stock for $25.0
million that were each convertible into one share of IFX common stock at a
conversion price of $12.31 per share. As part of the May 2001 issuance of
preferred stock, the conversion ratio of the 2 million shares of preferred stock
was automatically adjusted to 3.52 shares of common stock for each preferred
share. The change in the conversion ratio resulted in a $25.0 million non-cash
beneficial conversion feature that was recognized as a deemed dividend to
preferred shareholders in the 2001 statement of operations.
18
Income tax benefit
For the year ended June 30, 2001, the Company recorded a tax benefit of
approximately $1.5 million from its continuing operations compared to a benefit
of $2.8 million for the year ended June 30, 2000. The fiscal 2001 benefit is due
to utilization of net operating losses against income from discontinued
operations. The effective tax rate for fiscal 2001 and 2000 was approximately 2%
and 5%, respectively. Operating losses that could not be utilized to recover
prior year tax liabilities have been fully reserved with a valuation allowance
at June 30, 2001 and 2000.
For the year ended June 30, 2000, the Company recorded a tax benefit of
approximately $2.8 million from its continuing operations compared to a benefit
of $0.8 million for the year ended June 30, 1999. The effective tax rate for
fiscal 2000 and 1999 was 5% and 32%, respectively. The benefits consist of tax
expense related to discontinued operations and amounts to be received from the
utilization of net operating loss carry-backs to periods in which the Company
incurred a tax liability. Operating losses that could not be utilized to recover
prior year tax liabilities have been fully reserved with a valuation allowance
at June 30, 2000 and 1999.
Income from discontinued operations, net
For the year ended June 30, 2001, the Company had income from discontinued
operations of approximately $2.8 million, net of taxes, as compared to $2.0
million earned for the year ended June 30, 2000. The increase results from the
$2.4 million sale of a redeemable preference share during fiscal 2001, thereby
reducing future earn-out payments.
For the year ended June 30, 2000, the Company earned net of taxes
approximately $2.0 million from its discontinued operations. That compares to
$3.1 million earned for the year ended June 30, 1999. The decrease was related
to lower profitability of the businesses sold and the lower earn-out percentage
the Company receives.
FINANCIAL CONDITION
Liquidity and Capital Resources
For the year ended June 30, 2001, cash used in operating activities was
approximately $15.0 million compared to cash used of $15.8 million for fiscal
2000. The revenues from Internet operations and earn-out payments related to
discontinued operations provided the majority of cash in fiscal 2001. The cash
used in operations is mainly related to the connectivity expenses of the
Company's network, operating leases, payroll and advertising. In addition, IFX
invests cash not needed for operations at any of its subsidiaries in short-term
investments such as U.S. Government obligations and overnight time deposits. As
of June 30, 2001, the Company had approximately $7.6 million of unrestricted
cash and equivalents. The Company's receivables and deferred revenues have
increased as a result of increased sales, as have prepaid expenses, accounts
payable and accrued expenses.
For the year ended June 30, 2001, cash used in investing activities was
approximately $13.0 million compared to cash used in investing activities of
$2.5 million for the same period in fiscal 2000. A majority of the cash used in
investing activities relates to the acquisition of approximately $7.1 million in
property and equipment, a $3.1 million investment in Tutopia and $0.7 million of
payments on liabilities related to acquisitions. In addition, as a requirement
of certain capital lease obligations which were entered into during fiscal 2001,
the Company was obligated to maintain restricted cash of $2.1 million at June
30, 2001.
For the year ended June 30, 2001, cash provided by financing activities was
approximately $22.7 million compared to $27.0 million for fiscal 2000. IFX
received a $25.6 million investment by UBS Capital and certain other
shareholders during fiscal 2001 through the sale of approximately 5.2 million
shares of preferred stock. Cash of approximately $2.9 million was used for
payments of capital lease obligations.
19
In connection with certain of its capital lease agreements, the Company is
required to maintain cash of $2.1 million in restricted interest-bearing
accounts. In addition, one capital lease agreement contains covenants that
require the Company to maintain certain operating ratios, limitations on debt
and a minimum level of total revenues. As of June 30, 2001, IFX did not meet the
minimum level of revenue covenant that required the Company to have $38 million
in total revenues for fiscal 2001 versus the $32 million actually recognized. As
a result, $1.6 million of long-term lease obligations have been reclassified as
current liabilities. The Company is in negotiation to obtain a waiver of this
requirement during the second quarter of fiscal 2002.
At June 30, 2001, the Company had a working capital deficit of $11.6
million. The Company has also incurred significant operating losses and
operating cash flow deficiencies during the past several fiscal years. As a
result, the Company is dependent on funding from outside sources and existing
shareholders to meet its ongoing commitments and obligations.
On October 11, 2001, UBS Capital Americas agreed to invest an additional $7
million of cash and surrender 1.5 million shares of IFX common stock currently
held by UBS Capital Americas in exchange for approximately 3.8 million shares of
newly issued IFX Series C Preferred Stock. Each share of Series C Preferred
Stock will initially be convertible into one share of IFX common stock. The
Series C Preferred Stock carries a liquidation preference of $3.00 per share and
will also participate with the IFX common stock after UBS Capital Americas
receives its liquidation preference and accrued dividends, provided that the
maximum amount which can be received with respect to the Series C Preferred
Stock after taking into account the participation feature is limited to 3-1/2
times the sum of the Series C Preferred Stock liquidation preference and accrued
dividends.
The UBS Capital Americas investment in IFX is expected to close promptly
following IFX's annual meeting (which is expected to occur on or before December
10, 2001) and the completion of other customary closing conditions. UBS Capital
Americas and certain other shareholders of IFX (together constituting a majority
of the outstanding shares) have entered into an agreement obligating them to
vote in favor of this transaction. In addition, this transaction has already
been approved by the Board of Directors of IFX. This investment will cause the
conversion ratio of the approximately 2 million shares of Series A Preferred
Stock held by UBS Capital Americas to be adjusted so that each share of Series A
Preferred Stock will be convertible into approximately 4.1 shares of IFX common
stock, rather than 3.52 share of IFX common stock as currently provided. This
investment will also cause the conversion ratio of the approximately 4.4 million
shares of Series B Preferred Stock held by UBS Capital Americas to be adjusted
so that each share of Series B Preferred Stock will be convertible into
approximately 1.167 shares of IFX common stock, rather than 1 share of IFX
common stock as originally provided. The terms of both the Series A and B
preferred shares will be amended to add the same limited participation feature
as in the Series C Preferred Stock. As part of this transaction, IFX will also
provide UBS Capital Americas with the ability to exchange its equity investment
in Tutopia.com, Inc. (in which IFX holds a minority investment) for additional
shares of IFX preferred stock within one year of closing. After the purchase of
the Series C Preferred Stock, UBS Capital will own approximately 57% percent of
the shares of IFX (assuming conversion of all IFX convertible preferred stock
into IFX common stock) and will be entitled to appoint a majority of the IFX
Board of Directors.
After the close of this UBS Capital Americas investment, IFX would have
approximately 30 million shares of common stock outstanding if all of IFX's
convertible preferred stock were converted into common stock.
As a result of the transaction discussed above, the Company anticipates
increasing the number of common shares authorized from 50 million to 60 million
increasing the number of preferred shares from 10 million to 20 million.
The Company has also received a commitment for a deferral of payment of
approximately $4 million of principal on one of its capital lease commitments
through approximately November 2002. In consideration for this deferral and
extension, the Company will grant to the lessor 500,000 warrants to purchase
shares of the Company's common stock at $1 per share. Such warrants are
immediately exercisable and expire 10 years from date of grant.
Management also expects to utilize existing cash and cash-equivalents
together with operating cash flows, funds from future earn-out payments, and
amounts to be paid by Tutopia to fund operations. In the past, the Company has
raised funds through the issuance of debt and equity securities and, as
discussed above, IFX has committed to sell additional shares of preferred stock
to UBS through the issuance of Series C Preferred Stock. Management is not
certain whether the Company will be able to continue raising funds through the
issuance of securities or through other means on acceptable terms, or at all.
The Company's inability to raise sufficient funds in the future could affect
IFX's ability to meet its expansion plans, satisfy capital lease and other
obligations and IFX would have to postpone most of the Company's expansion goals
and capital expenditures until financing is obtained. Cash needs will also be
affected by whether Tutopia is able to fulfill its obligations to make cash
payments under its network agreement with IFX.
The shares of the Company's common stock are currently listed on the NASDAQ
Small Cap Market. Due to the decline in the price of the common stock, the
common stock could be suspended or delisted from the NASDAQ due to their minimum
trading requirements, particularly if the Company's stock price is below $1.00
per share for a prolonged period or certain financial requirements imposed by
NASDAQ are not met. However, NASDAQ has announced that it has suspended
enforcement of these minimum trading requirements until January 2, 2002. If the
shares of the Company's common stock were to be suspended or delisted from the
NASDAQ system, it would be much more difficult to dispose of the common stock or
obtain accurate quotations as to the price of the securities. This in turn could
make it more difficult for the Company to issue to make future debt or equity
offerings in the future.
Forward-Looking Statements
The statements contained herein that are not historical facts are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements can be identified by the use of forward-looking
terminology such as "believes," "intends," "plans," "continue," "expects,"
"may," "will," "should," or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. The Company wishes to caution you that these
forward-looking statements addressing the timing, costs and scope of the
Company's acquisition of, or investments in, existing or future ISP's, the
revenue and profitability levels of the ISP's in which the Company invests, the
anticipated reduction in operating costs resulting from the integration and
optimization of those ISP's the liquidity accounts of the Company, and other
matters contained herein regarding matters that are not historical facts, are
only predictions. The Company can give no assurance that the future results
indicated, whether expressed or implied, will be achieved. These projections and
other forward-looking statements are based upon a variety of assumptions
relating to the Company's business, which, although the Company considers
reasonable, may not be realized. Because of the number and uncertainties of the
assumptions underlying the Company's projections and forward-looking statements,
some of the assumptions may not materialize and unanticipated events and
circumstances may occur subsequent to the date of this report. These
forward-looking statements are based on current expectations, and the Company
assumes no obligation to update this information. The inclusion of projections
and other forward-looking statements should not be regarded as a representation
by the Company or any person that these estimates and projections will be
realized, and actual results may vary materially.
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement No. 141, "Business Combinations,"
("SFAS 141") and Statement No. 142, "Goodwill and Other Intangible Assets
"("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used
for all business combinations completed after June 30, 2001. SFAS 141 also
specifies that intangible assets acquired in a purchase method business
combination must meet certain criteria to be recognized and reported apart from
goodwill. SFAS 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead they will be tested
for impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of."
At the July 2001 Emerging Issues Task Force meeting, the SEC staff
announced that, among other things, preferred securities that are redeemable
upon the occurrence of an event outside the control of the issuer, such as the
change in control, are required to be classified outside of equity (EITF D-98
Classification and Measurement of Redeemable Securities). The Company is
currently evaluating the impact of this EITF, which may result in the Company
reclassifying its preferred stock as mezzanine debt.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Exchange Rate and Inflation Risk
The Company's continuing operations are focused primarily in Latin America,
subjecting IFX to certain political, economic and commercial risks and
uncertainty not typically found in the U.S. The Company's exposure to market
risk is directly related to its role as a Latin American Internet services
company. The Company's primary market risk exposure relates to foreign exchange
rate risk. Foreign exchange rate risk arises from the possibility that changes
in foreign currency exchange rates will adversely impact the value of the
Company's assets, liabilities and/or equity. When the Company operates in a
foreign country, the value of the local currency will probably fluctuate. This
fluctuation can cause the Company to gain or lose on the translation to U.S.
dollars.
Interest Rate Risk
The Company's short-term investments are classified as cash and cash
equivalents with original maturities of three months or less. Therefore, changes
in the market's interest rates do not affect the value of the Company's
investments.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
IFX Corporation and Subsidiaries
June 30, 2001 June 30, 2000
------------- -------------
ASSETS (Restated)
Current assets:
Cash and cash equivalents $ 7,647,700 $ 13,835,500
Restricted cash 981,400 --
Receivables, net of allowance for doubtful accounts of $1,955,800 and
$922,500 at June 30, 2001 and 2000, respectively 2,692,400 1,208,600
Net assets of discontinued operations 138,900 952,600
Due from related party 910,500 --
Prepaid expenses 1,261,200 746,000
Income taxes receivable -- 1,632,600
------------ ------------
Total current assets 13,632,100 18,375,300
------------ ------------
Property and equipment, net 24,284,500 15,190,300
Other assets:
Restricted cash - non-current 1,131,700 --
Acquired customer base, net of accumulated amortization of
$4,493,500 and $5,511,800 at June 30, 2001 and 2000, respectively 3,953,900 21,220,500
Investments 3,009,000 4,245,100
Foreign taxes recoverable 1,976,100 1,422,400
Other 536,300 843,100
------------ ------------
Total other assets 10,607,000 27,731,100
------------ ------------
$ 48,523,600 $ 61,296,700
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,926,300 $ 6,683,300
Accrued expenses 5,257,200 4,346,400
Deferred revenues 1,102,700 361,900
Liabilities related to acquisitions -- 1,568,000
Current portion of capital lease obligations 7,926,000 1,935,300
------------ ------------
Total current liabilities 25,212,200 14,894,900
Long-term liabilities:
Notes payable and other long-term liabilities 296,400 374,700
Deferred gain on sale of investment 4,451,900 4,451,900
Capital lease obligations, less current portion 8,142,100 9,032,500
------------ ------------
Total long-term liabilities 12,890,400 13,859,100
------------ ------------
Total liabilities 38,102,600 28,754,000
------------ ------------
Stockholders' equity:
Preferred Stock, convertible, $1.00 par value; 10,000,000 shares authorized, 6,449,131
and 1,210,398 issued and outstanding at June 30, 2001 and 2000, respectively 40,463,900 14,900,000
Common stock, $.02 par value; 50,000,000 shares authorized, 14,276,495 and
13,295,183 shares issued and outstanding at June 30, 2001 and 2000, respectively 285,500 265,900
Additional paid-in capital 77,054,600 70,898,100
Accumulated deficit (99,415,000) (41,059,800)
Accumulated other comprehensive loss (1,118,500) (329,000)
Deferred compensation (6,849,500) (12,132,500)
------------ ------------
Total stockholders' equity 10,421,000 32,542,700
------------ ------------
$ 48,523,600 $ 61,296,700
============ ============
See notes to consolidated financial statements
21
CONSOLIDATED STATEMENT OF OPERATIONS
IFX Corporation and Subsidiaries
Fiscal year ended June 30,
2001 2000 1999
----------------- ----------------- ----------------
(Restated)
REVENUES:
Dial-up $ 7,172,500 $ 8,249,600 $ 616,300
Dedicated line services 7,188,900 1,351,100 28,200
Web hosting and design services 1,283,600 379,000 80,800
Sales to related party 13,842,700 -- --
Other 2,634,100 709,600 --
----------------- ----------------- ----------------
Total revenues 32,121,800 10,689,300 725,300
COSTS AND EXPENSES:
Cost of revenues 20,796,900 8,487,000 445,500
General and administrative 27,030,000 19,304,300 2,691,800
Sales and marketing 3,547,200 2,252,000 247,600
Depreciation and amortization 17,093,800 8,053,100 232,400
Non-cash stock compensation 7,150,600 6,359,100 39,000
Impairment of acquired customer base 10,919,100 -- --
Contract cancellation costs -- 4,906,700 --
----------------- ----------------- ----------------
Total operating expenses 86,537,600 49,362,200 3,656,300
----------------- ----------------- ----------------
Operating loss from continuing
operations (54,415,800) (38,672,900) (2,931,000)
OTHER INCOME (EXPENSE):
Interest income 614,100 343,300 376,100
Interest expense (1,918,400) (611,300) --
Loss on investments (2,505,700) -- --
Equity in loss of investees (3,181,400) (11,775,700) (107,700)
Other (1,307,300) 101,200 136,200
----------------- ----------------- ----------------
Total other (expense) income, net (8,298,700) (11,942,500) 404,600
Loss from continuing operations before
income taxes (62,714,500) (50,615,400) (2,526,400)
Income tax benefit 1,525,800 2,771,400 811,000
----------------- ----------------- ----------------
Loss from continuing operations (61,188,700) (47,844,000) (1,715,400)
Income from discontinued operations, net of
taxes 2,833,500 1,967,000 3,117,600
----------------- ----------------- ----------------
Net (loss) income (58,355,200) (45,877,000) 1,402,200
Deemed dividend on preferred stock (as
a result of beneficial conversion
feature) (25,000,000) -- --
----------------- ----------------- ----------------
Net (loss) income available to
common stockholders $ (83,355,200) $ (45,877,000) $ 1,402,200
================= ================= ================
BASIC AND DILUTED (LOSS) INCOME PER SHARE:
Loss from continuing operations $ (4.44) $ (4.71) $ (0.26)
Discontinued operations 0.20 0.19 0.48
----------------- ----------------- ----------------
Net (loss) income per share (4.24) (4.52) 0.22
Deemed dividend on preferred stock (as
a result of beneficial conversion
feature) (1.81) -- --
----------------- ----------------- ----------------
Net (loss) income per share
available to common stockholders $ (6.05) $ (4.52) $ 0.22
================= ================= ================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,784,897 10,153,565 6,498,204
================= ================= ================
See notes to consolidated financial statements
22
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
IFX Corporation and Subsidiaries
Accumulated
Additional Retained Other
Preferred Common Stock Paid-in Deferred Earnings Comprehensive
Stock Shares Amount Capital Compensation (Deficit) Income (loss) Total
--------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $ -- 6,155,540 $ 123,100 $ 7,842,700 $ -- $ 3,415,000 $ (45,700) $ 11,335,100
Stock issued for cash -- 500,000 10,000 990,000 -- -- 1,000,000
Stock and options issued
for acquisitions -- 174,700 3,500 2,297,900 -- -- 2,301,400
Compensation associated
with grant of stock options
and warrants -- -- 39,000 -- -- 39,000
Deferred compensation
associated with grant of
stock options -- -- -- 129,500 (129,500) -- -- --
Net income -- -- -- -- 1,402,200 1,402,200
Foreign currency
translation -- -- -- -- -- 19,700 19,700
-------------
Comprehensive income -- 1,421,900
--------------------------------------------------------------------------------------------------------
Balance at June 30, 1999 -- 6,830,240 136,600 11,299,100 (129,500) 4,817,200 (26,000) 16,097,400
Stock issued for cash -- 5,541,511 110,800 11,020,800 -- -- -- 11,131,600
Stock issued for
acquisitions -- 835,598 16,700 20,938,200 -- -- -- 20,954,900
Stock issued for contract
termination -- 119,314 2,400 4,154,300 -- -- -- 4,156,700
Issuance of preferred stock 14,900,000 -- -- -- -- -- -- 14,900,000
Compensation expense
associated with variable
stock options -- -- -- 1,144,400 -- -- -- 1,144,400
Deferred compensation
associated with grant of
stock options -- -- -- 17,217,700 (12,003,000) -- -- 5,214,700
Common stock retired -- (31,480) (600) (615,200) -- -- -- (615,800)
Increase in investment in
equity investee as a result
of sale of stock by Tutopia -- -- -- 4,079,800 -- -- -- 4,079,800
Compensation expense
associated with warrants
for contract termination -- -- -- 1,659,000 -- -- -- 1,659,000
Net loss -- -- -- -- -- (45,877,000) -- (45,877,000)
Foreign currency
translation -- -- -- -- -- -- (303,000) (303,000)
-------------
Comprehensive loss -- -- -- -- -- -- -- (46,180,000)
--------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 14,900,000 13,295,183 265,900 70,898,100 (12,132,500) (41,059,800) (329,000) 32,542,700
Stock issued for contract
termination -- 6,000 100 77,600 -- -- -- 77,700
Stock issued for
liabilities related to
acquisitions -- 733,666 14,700 4,293,800 -- -- -- 4,308,500
Issuance of preferred
stock 25,563,900 -- -- -- -- -- -- 25,563,900
Compensation associated
with grant of stock -- 241,646 4,800 2,122,400 -- -- -- 2,127,200
Deferred compensation
associated with grant of
stock options -- -- -- (337,300) 5,283,000 -- -- 4,945,700
Beneficial conversion
feature 25,000,000 -- -- (25,000,000) -- -- -- --
Deemed dividend to
preferred shareholders (25,000,000) -- -- 25,000,000 -- -- -- --
Net loss -- -- -- -- -- (58,355,200) -- (58,355,200)
Foreign currency
translation -- -- -- -- -- -- (789,500) (789,500)
-------------
Comprehensive loss -- -- -- -- -- -- -- (59,144,700)
--------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $ 40,463,900 14,276,495 $ 285,500 $ 77,054,600 $ (6,849,500) $(99,415,000) $(1,118,500) $ 10,421,000
========================================================================================================
See notes to consolidated financial statements
23
CONSOLIDATED STATEMENT OF CASH FLOWS
IFX Corporation and Subsidiaries
For the fiscal year ended June 30,
2001 2000 1999
------------------ ----------------- ---------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (58,355,200) $ (45,877,000) $ 1,402,200
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation 7,239,600 2,696,800 76,900
Amortization 9,854,200 5,356,300 155,500
Doubtful account expenses, net of write-offs 1,033,300 842,400 80,100
Compensation associated with stock options 7,150,600 6,359,100 39,000
Compensation associated with consulting agreements -- 4,156,700 --
Loss on investments 2,505,700 -- --
Impairment of acquired customer base 10,919,100 -- --
Loss valuation allowance on investments 350,400 -- --
Equity in loss of equity investees 3,181,400 330,200 107,700
Effect of deconsolidation of Tutopia.com (2,391,900) 4,674,300 --
Change in net assets of discontinued operations 813,700 2,774,300 1,307,600
Changes in operating asset and liabilities:
Foreign taxes recoverable (553,700) (1,422,400) --
Receivables (2,426,300) (1,112,100) (218,700)
Other assets 306,900 (24,300) (129,500)
Due from related party (910,500) -- --
Income taxes receivable 1,632,600 (1,632,600) --
Prepaid expenses (515,200) (746,000) --
Deferred revenues 740,800 361,900 --
Accounts payable and accrued expenses 4,419,900 7,464,400 840,100
------------------ ----------------- ---------------
Cash (used in) provided by operating activities (15,004,600) (15,798,000) 3,660,900
------------------ ----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, primarily customer base (656,600) (2,443,900) (443,800)
Investments (3,135,000) 4,171,500 (3,342,500)
Restricted cash (2,113,100) -- --
(Increase) in notes receivable -- (2,700) (1,100)
Purchases of property and equipment (7,140,400) (4,236,200) (991,200)
------------------ ----------------- ---------------
Cash used in investing activities (13,045,100) (2,511,300) (4,778,600)
------------------ ----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) of notes payable and other long-term
liabilities 27,300 34,900 (13,000)
Repayment of capital lease obligations (2,939,800) -- --
Proceeds from short-term vendor financing -- 898,500 --
Issuance of common stock -- 11,131,600 1,000,000
Issuance of preferred stock 25,563,900 14,900,000 --
------------------ ----------------- ---------------
Cash provided by financing activities 22,651,400 26,965,000 987,000
------------------ ----------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (789,500) (303,000) (19,700)
------------------ ----------------- ---------------
Net (decrease) increase in cash and cash equivalents (6,187,800) 8,352,700 (150,400)
Cash and cash equivalents, beginning of period 13,835,500 5,482,800 5,633,200
------------------ ----------------- ---------------
Cash and cash equivalents, end of period $ 7,647,700 $ 13,835,500 $ 5,482,800
================== ================= ===============
Supplemental disclosure of cash flow information
Cash paid for interest $ 1,918,400 $ 611,300 $ --
================== ================= ===============
Supplemental non-cash investing and financing activities
disclosure:
Value of stock issued in conjunction with liabilities related
to acquisitions $ 4,308,500 $ 20,954,900 $ 2,301,400
================== ================= ===============
Acquisition of equipment through capital lease obligations $ 8,186,800 $ 1,000,000 $ 2,300,000
================== ================= ===============
Acquisition of equipment through increase in accounts payable $ 940,700 $ -- $ --
================== ================= ===============
See notes to consolidated financial statements
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IFX Corporation and Subsidiaries
June 30, 2001
Note 1 Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements include the
accounts of IFX Corporation and its wholly-owned subsidiaries (collectively
referred to herein as "IFX", "IFX Networks" or the "Company") for which it has a
controlling financial interest. All intercompany accounts and transactions are
eliminated in consolidation.
As more fully discussed in Note 15, during September 2000, the Company's
voting interest in its majority-owned subsidiary, Tutopia.com, Inc. ("Tutopia")
was reduced from approximately 85% to approximately 48%. As a result of this
reduction, the Company deconsolidated Tutopia and began accounting for Tutopia
under the equity method. Accordingly, the Company has restated its consolidated
financial statements as if Tutopia had been accounted for under the equity
method since its inception in January 2000.
In addition, in April 2000, Tutopia issued common stock representing
approximately a 15% interest in Tutopia to shareholders other than the Company,
at a price per common share exceeding the Company's carrying value for the
Company's investment in Tutopia's common stock. The restated financial
statements reflect an increase in the Company's investment in Tutopia of
approximately $4 million as of June 30, 2000 to record the amount in excess of
the Company's carrying value as a capital transaction.
Fiscal Year: The Company's fiscal year end is June 30. References herein to
fiscal 2001, 2000 and 1999 refer to the twelve-month periods ended June 30,
2001, 2000 and 1999, respectively.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates.
Revenue Recognition: Revenue from customer contracts related to dial-up access,
dedicated phone line and web hosting fees are recognized ratably over the term
of the underlying contract, which is generally from one month to three years.
Cash received in advance of revenues earned is recorded as deferred revenues.
Incremental revenues derived from other services are recognized as earned.
Credit Risk: Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash,
investments and trade accounts receivable.
The Company's receivables potentially subject the Company to credit risk,
as collateral is generally not required. The Company's risk of loss is limited
to billings to customers for services. The use of pre-approved charges to
customer credit cards and the ability of IFX to terminate Internet access on
delinquent accounts, helps limit the risk of these losses. In addition, the
large number of customers comprising the Company's customer base helps mitigate
the concentration of credit risk.
Sources of Supplies: The Company relies on third-party networks, local telephone
companies and other companies to provide data communications capacity. Although
management feels alternative telecommunications facilities could be found in a
timely manner, any disruption of these services could have an adverse effect on
the Company's operating results.
Cash and Cash Equivalents: The Company considers as cash equivalents all
financial instruments with maturity of three months or less when purchased.
Restricted Cash: During fiscal 2001, the Company entered into capital lease
agreements relating to computer equipment for expansion of the Company's
Network. As part of certain of these capital lease agreements, the Company is
required to maintain a minimum amount of cash ($2.1 million at June 30, 2001) in
restricted interest-bearing accounts.
Fair Value of Financial Instruments: The carrying amounts of the Company's cash
and cash equivalents, restricted cash, receivables, accounts payable and notes
payable approximate fair value due to the short-term nature of these items.
25
Long-Lived Assets: In the event that facts and circumstances indicate that the
carrying value of the Company's long-lived assets may be impaired, an evaluation
of recoverability is performed. If an evaluation is required, the estimated
future undiscounted cash flow associated with the asset is compared to the
asset's carrying amount to determine if a write-down is required.
Property and Equipment: Property and equipment are stated at cost. Depreciation
and amortization is provided using the straight-line method over the estimated
useful lives of the assets, commencing when assets are installed or placed in
service. The estimated useful lives generally range between 3 and 10 years.
Acquired Customer Base: Acquired customer base consists of the excess of the
purchase price paid over the tangible net assets of acquired companies. The
Company capitalizes specific costs incurred for the purchase of customer bases
from other Internet Service Providers ("ISP's"). Acquired customer base, net of
amortization, at June 30, 2001 was approximately $4.0 million.
Amortization is provided using the straight-line method over three years
commencing when the customer base is acquired. Amortization expense was
approximately $9.9 and $5.4 million for the years ended June 30, 2001 and
June 30, 2000, respectively. In addition, at June 30, 2001, the Company
estimated that the undiscounted cash flows associated with its acquired
customer base may not be sufficient to recover the net book value of such
assets. In accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" the Company has
recorded an impairment charge of approximately $10.9 million in the fourth
quarter of fiscal 2001. This non-cash impairment charge was at estimated fair
value. The estimated fair values, as required by SFAS 121, did not consider the
value of such assets in a forced sale or liquidation and was based primarily on
an analysis of the operations' net cash flows.
Advertising and Marketing Expenses: The Company expenses all advertising and
marketing costs as they are incurred. Advertising expense was $3.5 million, $2.3
million, and $0.2 million during fiscal 2001, 2000 and 1999, respectively.
Risks and Uncertainties: The Company's operations are subject to certain risks
and uncertainties, including those associated with: a brief history operating in
the Internet network business; losses from continuing operations; negative cash
flow and fluctuations in operating results and in foreign currency exchange
rates; funding expansion and acquisitions; political and economic risks
associated with international operations; dependence on key personnel;
dependence on suppliers for operation of the network; the need to implement
additional management information systems; increasing competition from
competitors with lower cost structures, greater recourses, or greater brand
recognition; regulatory risks in the countries in which the Company operates;
decreased growth in Internet usage; financing arrangement terms that may
restrict operations; and pending litigation related to the discontinued
operations.
Reclassification: Certain amounts previously reported have been reclassified to
conform to the current method of presentation.
Stock-Based Compensation: The Company grants stock options generally for a fixed
number of shares with an exercise price equal to or below the fair value of the
shares at the date of grant. The Company accounts for stock option grants to
employees in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and accordingly, recognizes
compensation expense only if the market value of the underlying shares on the
date of the grant is above the exercise price of the options.
Computation of Earnings or Loss per Common Share: The Company calculates
earnings or loss per common share in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Computation of Earnings Per Share".
Accordingly, basic earnings per share are computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share is calculated based upon the sum of the weighted average number of
shares outstanding and the weighted average number of potentially dilutive
securities consisting of stock options and common shares issuable upon the
conversion of the Preferred Stock. Potentially dilutive securities have been
excluded from the calculation of diluted loss per common share since their
effect would have been anti-dilutive. Approximately 3.0 million such potentially
dilutive securities were excluded from the fiscal 2001 earnings per share
calculation.
26
New Pronouncements: In July 2001, the FASB issued Statement No. 141, "Business
Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting
be used for all business combinations completed after June 30, 2001. SFAS 141
also specifies that intangible assets acquired in a purchase method business
combination must meet certain criteria to be recognized and reported apart from
goodwill. SFAS 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead they will be tested
for impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of".
The Company is required to adopt the provisions of SFAS 141 immediately,
and SFAS 142 effective July 1, 2001. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for permanent impairment. The
Company does not believe that either of these pronouncements will have a
significant impact on the Company's financial condition or results of
operations.
At the July 2001 Emerging Issues Task Force meeting, the SEC staff
announced that, among other things, preferred securities that are redeemable
upon the occurrence of an event outside the control of the issuer, such as a
change in control, are required to be classified outside of equity (EIFT D-98
Classification and Measurement of Redeemable Securities). The Company is
currently evaluating the potential impact of this EITF, which may result in the
Company reclassifying its preferred stock as mezzanine debt.
Cost of Computer Software: Effective July 1, 1999, the Company adopted SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which requires that certain costs for the development of internal
use software should be capitalized, including the costs of coding, software
configuration, upgrades and enhancements. For the year ended June 30, 2001 and
2000, the Company capitalized $1.5 million and $2.1 million, respectively.
Investments: At June 30, 2000, the Company had investments for which it did not
have the ability to exercise influence over the investees; therefore, the
Company accounts for these investments under the cost method. Approximately $2.5
million of the Company's investments were written off during the fourth quarter
of fiscal 2001 based on management's estimation that the value of such
investments had been impaired.
Foreign Currency Translation: The functional currency of the Company's active
subsidiaries is the local currency. Foreign currency transactions and financial
statements (except for those relating to countries with highly inflationary
economies) are translated into U.S. dollars at the rate in effect on the date of
the transaction or the date of the financial statements, except that revenues,
costs and expenses are translated at average exchange rates during each
reporting period. Resulting translation adjustments and transaction gains or
losses attributable to certain Intercompany transactions that are of a long-term
investment nature are excluded from results of operations and accumulated in
accumulated other comprehensive income (loss), a separate component of
consolidated stockholders' equity. Gains and losses attributable to other
Intercompany transactions are included in results of operations.
Liquidity Assessment: At June 30, 2001, the Company had a working capital
deficit of $11.6 million. In addition, the Company has incurred significant
operating losses and operating cash flow deficiencies during the past several
fiscal years. As a result, the Company is dependent on funding from outside
sources and existing shareholders to meet its ongoing commitments and
obligations.
On October 11, 2001, UBS Capital Americas agreed to invest an additional $7
million of cash and surrender 1.5 million shares of IFX common stock currently
held by UBS Capital Americas in exchange for approximately 3.8 million shares of
newly issued IFX Series C Preferred Stock. Each share of Series C Preferred
Stock will initially be convertible into one share of IFX common stock. The
Series C Preferred Stock carries a liquidation preference of $3.00 per share and
will also participate with the IFX common stock after UBS Capital Americas
receives its liquidation preference and accrued dividends, provided that the
maximum amount which can be received with respect to the Series C Preferred
Stock after taking into account the participation feature is limited to 3-1/2
times the sum of the Series C Preferred Stock liquidation preference and accrued
dividends.
The UBS Capital Americas investment in IFX is expected to close promptly
following IFX's annual meeting (which is expected to occur on or before December
10, 2001) and the completion of other customary closing conditions. UBS Capital
Americas and certain other shareholders of IFX (together constituting a majority
of the outstanding shares) have entered into an agreement obligating them to
vote in favor of this transaction. In addition, this transaction has already
been approved by the Board of Directors of IFX. This investment will cause the
conversion ratio of the approximately 2 million shares of Series A Preferred
Stock held by UBS Capital Americas to be adjusted so that each share of Series A
Preferred Stock will be convertible into approximately 4.1 shares of IFX common
stock, rather than 3.52 share of IFX common stock as currently provided. This
investment will also cause the conversion ratio of the approximately 4.4 million
shares of Series B Preferred Stock held by UBS Capital Americas to be adjusted
so that each share of Series B Preferred Stock will be convertible into
approximately 1.167 shares of IFX common stock, rather than 1 share of IFX
common stock as originally provided. The terms of both the Series A and B
preferred shares will be amended to add the same limited participation feature
as in the Series C Preferred Stock. As part of this transaction, IFX will also
provide UBS Capital Americas with the ability to exchange its equity investment
in Tutopia.com, Inc. (in which IFX holds a minority investment) for additional
shares of IFX preferred stock within one year of closing. After the purchase of
the Series C Preferred Stock, UBS Capital will own approximately 57% percent of
the shares of IFX (assuming conversion of all IFX convertible preferred stock
into IFX common stock) and will be entitled to appoint a majority of the IFX
Board of Directors.
After the close of this UBS Capital Americas investment, IFX would have
approximately 30 million shares of common stock outstanding if all of IFX's
convertible preferred stock were converted into common stock.
As a result of the transaction discussed above, the Company anticipates
increasing the number of common shares authorized from 50 million to 60 million
increasing the number of preferred shares from 10 million to 20 million.
Subsequent to June 30, 2001, the Company also received a commitment for a
deferral of payment of approximately $4 million of principal on one of its
capital lease commitments through approximately November 2002. In consideration
for this waiver and extension, the Company will issue to the lessor 500,000
warrants to purchase shares of the Company's common stock for $1 per share. Such
warrants are immediately exercisable and expire 10 years from date of grant. In
addition, management expects to utilize existing cash and cash-equivalents
together with operating cash flows, funds from earn-out payments, and amounts to
be paid by Tutopia to fund the Company's operations. As a result of slower than
anticipated reductions in general and administrative expenses and slower
dedicated-line revenue growth than anticipated, IFX raised additional equity
capital during the quarter ended June 30, 2001. In the past, the Company has
raised funds through the issuance of debt and equity securities and IFX may be
required to obtain additional capital during fiscal 2002. Management is not
certain whether the Company in the future will be able to continue raising funds
through the issuance of securities or through other means on acceptable terms,
or at all. The Company's inability to raise sufficient funds in the future could
materially adversely affect IFX's operating results and financial condition, as
well as its ability to meet its expansion plans and to satisfy capital lease and
other obligations. Cash needs will also be affected by whether Tutopia is able
to fulfill its obligations to make cash payments under its network agreement
with IFX.
Note 2 Discontinued Operations
In June 1999, IFX divested its 50.1% interest in IFX Ltd. in exchange for
approximately $2.45 million and a redeemable preference share entitling IFX to
quarterly payments equal to approximately 30% of the net profits, as
specifically defined, of IFX Ltd. through June 30, 2002. Following the sale of
its U.K. subsidiary, IFX decided not to invest the sales proceeds in the trading
business and, instead, decided to continue to develop businesses in the Internet
industry. Accordingly, the Company has accounted for this disposal, and the
disposal of operations related to the same business segment made in prior years,
as noted below, as discontinued operations. In September 2000, IFX sold its IFX
Ltd. redeemable preference share to the other shareholders of IFX Ltd. for $2.4
million, thus terminating IFX's right to future earn-out payments from IFX Ltd.
27
The following table summarizes financial information related to the
Company's discontinued operations:
Fiscal year ended June 30,
-----------------------------------------------
2001 2000 1999
-----------------------------------------------
Income from discontinued operations before income taxes $ 4,359,300 $ 3,026,100 $ 4,785,500
Income tax provision on discontinued operation (1,525,800) (1,059,100) (1,667,900)
-----------------------------------------------
Income from discontinued operations, net of taxes $ 2,833,500 $ 1,967,000 $ 3,117,600
===============================================
The information set forth in the remaining notes to consolidated financial
statements relates to continuing operations unless otherwise specified.
Note 3 Acquisitions
A majority of IFX's acquisitions have been structured such that the Company
pays an agreed upon percentage of the purchase price at closing ("first
payment") with the remainder of the purchase price paid 60 to 360 days after
closing ("second payment"). The amounts owed by IFX to the Internet Service
Providers ("ISP's") it has acquired are classified as liabilities related to
acquisitions. During fiscal 2001, the Company settled such liabilities through
the issuance of 733,666 shares of common stock with a fair market value of $4.3
million and cash of $0.7 million.
The Company accounts for acquisitions under the purchase method of
accounting and the results of operations of the acquired entities have been
included in the financial statements of the Company from the respective dates of
acquisition.
During fiscal 2000, the Company acquired 18 companies for a total purchase
price of approximately $26.0 million, of which approximately $2.4 million was
paid in cash, approximately $20.9 million was paid by issuing 835,598 shares of
the Company's common stock, approximately $1.6 million was recorded as a
liability related to acquisitions and the Company assumed approximately $0.7
million in accounts payable and accrued expenses. No material acquisitions were
made during fiscal 2001.
The following unaudited pro forma data summarizes the results of operations
for the periods indicated as if the acquisitions, which were made during fiscal
2000, had been completed on July 1, 1999, the beginning of fiscal 2000. The pro
forma data gives effect to actual operating results prior to the acquisitions
and adjustments to goodwill amortization and income taxes. These pro forma
amounts do not purport to be indicative of the results that would have actually
been obtained if the acquisitions had occurred on July 1, 1999 or that may be
obtained in the future. The pro forma data does not give effect to acquisitions
completed subsequent to June 30, 2000 since such amounts are immaterial.
Year Ended June 30, 2000
------------------------
(Unaudited)
Total revenues................................... $ 14,306,500
Net loss......................................... (54,978,400)
Basic and diluted net loss per common share...... $ (5.41)
Note 4 Property and Equipment
Property and equipment consists of the following:
June 30,
-------------------------------------
2001 2000
-------------------------------------
Computer equipment $ 7,647,800 $ 3,817,600
Furniture and fixtures 1,445,900 671,800
Leasehold improvements 1,172,500 728,600
Assets under capital lease agreements 19,062,500 10,918,700
Software 3,638,900 2,102,400
Other 1,701,900 162,400
-------------------------------------
34,669,500 18,401,500
Less accumulated depreciation and amortization (10,385,000) (3,211,200)
-------------------------------------
Property and equipment, net $ 24,284,500 $ 15,190,300
=====================================
Accumulated amortization of assets under capital lease agreements was
approximately $5.4 million at June 30, 2001. Amortization expense related to
capital leases is included in depreciation and amortization in the consolidated
statement of operation.
28
Note 5 Accrued Expenses
Accrued expenses consist of the following:
June 30,
---------------------------------
2001 2000
------------------------------------------------------------------------------
Salaries and employee benefits $ 1,078,800 $ 599,200
Legal and professional fees 1,271,800 1,680,800
Telecommunications 2,192,500 763,900
Foreign and local taxes 146,400 915,900
All other 567,700 386,600
------------------------------------------------------------------------------
Total $ 5,257,200 $ 4,346,400
==============================================================================
Note 6 Commitments
Operating and Capital Leases
The Company maintains facilities and offices at various locations
throughout the United States and Latin America for general corporate purposes,
including technology centers, customer call centers, office space and
headquarters. The Company also leases office space in Chicago, Illinois, but
subsequent to August 28, 1998, this space was subleased through the end of the
lease term for an amount equal to the lease payments. In addition to office
leases, the Company is entering into lease agreements for satellite bandwidth.
Lease expense related to continuing operations amounted to $1.5 million, $2.0
million and $0.1 million in fiscal 2001, 2000 and 1999, respectively. Operating
lease commitments at June 30, 2001 were approximately $3.5 million through the
year 2006 of which $0.6 million is related to satellite bandwidth.
At June 30, 2001, the Company had capital lease obligations of
approximately $16.1 million. All the capital leases entered into by the Company
were to finance equipment and software for the Company's network.
Future minimum payments under capital leases and non-cancelable operating
leases with initial terms of one year or more consisted of the following at June
30, 2001:
Operating Net Operating
Lease Sublease Lease Capital Lease Total
Fiscal Year Obligations Rentals Obligations Obligations Obligations
----------------------------------------------------------------------------------------------------------
2002 $ 2,209,000 $ (397,500) $ 1,811,500 $ 7,997,700 $ 9,809,200
2003 871,200 (66,600) 804,600 7,480,900 8,285,500
2004 354,900 - 354,900 3,165,600 3,520,500
2005 57,700 - 57,700 88,300 146,000
2006 44,800 - 44,800 - 44,800
----------------------------------------------------------------------------------------------------------
Total lease obligations $ 3,537,600 $ (464,100) $ 3,073,500 18,732,500 $ 21,806,000
=========== ========== =========== ============
Amount representing interest 2,664,400
--------------
Present value of net minimum lease payments $ 16,068,100
==============
In connection with certain of its capital lease agreements, the Company is
required to maintain cash of $2.1 million in restricted interest-bearing
accounts. In addition, one capital lease agreement contains covenants that
require the Company to maintain certain operating ratios, limitations on debt
and a minimum level of total revenues. As of June 30, 2001, IFX did not meet a
revenue covenant that required the Company to have $38 million in total revenues
for fiscal 2001 versus the $32 million actually recognized. As a result, $1.6
million of long-term lease obligations have been reclassified to current
liabilities. The Company is in negotiation to obtain a waiver of this
requirement during the second quarter of fiscal 2002.
29
Other
A limited indemnification agreement was issued to a buyer of the Company's
brokerage assets. This agreement covers potential customer claims arising from
activity prior to the sale.
Employment agreements
The Company has employment agreements with several of its officers. The
agreements generally require continuation of salary and provide other benefits
subsequent to termination or change of control in the Company.
Note 7 Notes payable and other long-term liabilities
In connection with certain acquisitions, the Company assumed notes payable
aggregating to a principal amount of approximately $0.3 million as of June 30,
2001.
Note 8 Litigation Contingencies
The Company may be threatened with legal proceedings arising from its
regular business activities. In addition, certain of the Company's discontinued
operations are involved in litigation that may impact the Company in the event
of an unfavorable outcome. Management, after consultation with legal counsel, is
of the opinion that the ultimate liability, if any, resulting from any pending
action or proceedings will not have a material effect on the financial position
or results of operations of the Company.
Note 9 Stockholders' Equity
Common Stock
At June 30, 2001, there were 14,276,495 outstanding shares of common stock,
approximately 4,631,790 shares of the Company's common stock reserved for stock
options and warrants, and 210,000 warrants which were granted in fiscal 1999 and
remain outstanding.
During fiscal 2001, IFX issued 6,000, 733,666 and 241,646 shares of common
stock for contract termination liabilities related to acquisitions and shares of
stock granted to employees for compensation, respectively.
Preferred Stock
The Company is authorized to issue shares of preferred stock in series with
such preferences and designations as the Company's Board of Directors may
determine. The Board can, without shareholder approval, issue preferred stock
with voting, dividend, liquidation, and conversion rights. This could dilute the
voting strength of the holders of the common stock and may help IFX's management
impede a takeover or attempted change in control. As of June 30, 2001, the
Company has 6,449,131 preferred shares outstanding.
As reported on the Company's Reports on Forms 8-K dated March 16, 2001 and
May 10, 2001, the Company received approximately $15.5 million in funding from
UBS Capital Americas to be used for working capital purposes. Pursuant to the
Stock Purchase Agreement dated as of March 13, 2001, by and among the Company
and UBS Capital Americas, as amended by Amendment No. 1 to the Stock Purchase
Agreement dated as of March 13, 2001, UBS Capital Americas purchased 3,994,127
shares of IFX's Class I Series B Convertible Preferred Stock and 424,135 shares
of IFX's Class II Series B Convertible Preferred Stock on May 7, 2001. All of
the shares were purchased at $3.50 per share. The Class I Series B Convertible
Preferred Stock has full voting rights and each preferred share is convertible
into one share of IFX's common stock. The Class II Series B Convertible
Preferred Stock has the same rights as the Class I Series B Convertible
Preferred Stock except that it may not vote for the Board of Directors. At the
election of UBS Capital Americas, each share of the Class II Series B
Convertible Preferred Stock is convertible after one year into one share of
Class I Convertible Preferred Stock.
Under the terms of the Series A Preferred Stock previously issued by IFX,
this investment caused the conversion ratio of the approximately 2 million
shares of Series A Preferred Stock held by UBS Capital Americas to be adjusted
so that each share of Series A Preferred Stock will be convertible into
approximately 3.52 shares of the Company's common stock, rather than one share
of the Company's common stock as originally provided. The Series A conversion
ratio adjustment resulted in a beneficial conversion feature of approximately
$25 million. Such amount has been recognized as a deemed dividend to preferred
shareholder in May 2001.
30
In 2000, IFX has issued 2,030,869 shares of IFX Class I Series A Preferred
Stock and IFX Class II Series A Preferred Stock to UBS Capital Americas III in
exchange for $25 million, of which $14.9 million was received by the Company on
June 16, 2000 and $10.1 million was received on July 17, 2000. Each share is
exchangeable for 3.52 share of common stock, subject to adjustment if IFX issues
shares of common stock (or certain common stock equivalents as discussed above)
at less than $3.50 per share. Each share of preferred stock has a liquidation
preference equal to the sum of: a) $12.31 per share and b) $1.231 for each year
that the preferred share is outstanding. The liquidation preference is payable
in the event of a liquidation of IFX as well as a merger, recapitalization,
reorganization, sale of voting control to a single buyer or a group of related
buyers in one or a series of related transactions, or other business combination
transaction involving IFX in which the shareholders of IFX immediately prior to
the consummation of such transaction do not own at least a majority of the
outstanding shares of the surviving corporation or IFX (as applicable)
immediately following the consummation of such transaction or sale of all or
substantially all of the assets of IFX. Dividends accrue on the shares at the
same rate that dividends accrue on shares of IFX common stock in and when
declared by the Company's Board of Directors.
At June 30, 2001, the Company's Series A and Series B Preferred Stock had a
liquidation preference of approximately $44 million (10% per annum liquidation
preference return).
Investment in Tutopia. On the closing of the sale of the IFX Series B
Preferred Stock to UBS Capital Americas, UBS Capital Americas and IFX invested
approximately $1.8 million and $3.1 million, respectively, in Series A
Convertible Preferred Stock of Tutopia. After the investment, the Company's
voting interest in Tutopia remained less than 50%.
On August 31, 2000, UBS Capital Americas and certain other shareholders of
the Company invested a total of $20 million in Tutopia in exchange for Series A
Preferred Stock of Tutopia. Following these investments, assuming the exchange
of all of the Series A Preferred Stock for Tutopia common stock, IFX will
indirectly own approximately 48% of the outstanding stock of Tutopia. Also, the
majority of the owners of the Series A Convertible Preferred Stock receive the
right to appoint a majority of the directors of Tutopia.
Note 10 Stock-Based Compensation Plans
Directors Stock Option Plan
During November 1999, the Company's shareholders approved the IFX
Corporation Directors Stock Option Plan (the "Directors Plan"). In general, the
Directors Plan provides that each non-employee eligible director automatically
will receive an option to purchase (i) 450 shares of common stock upon such
director's initial election to the Board of Directors of the Company, provided
such director is elected after the effective date of the Directors Plan, and
(ii) for each year thereafter and on the date of each annual meeting of the
stockholders of the Company, 450 shares of common stock for service as a
director and 75 shares of common stock for each Committee of the Board of
Directors upon which such director serves.
Employee Stock Option Plan
During November 1999, the Company approved an amendment to the IFX
Corporation 1998 Stock Option and Incentive Plan (the "Option Plan") to increase
the number of shares of common stock available for issuance under the Option
Plan from 900,000 to 1,800,000. In June 2000, the Company's shareholders voted
to increase the size of the Option Plan by an additional 600,000 shares and an
additional 600,000 shares were reserved for issuance pursuant to the 1998 Stock
Option Plan.
In connection with the granting of stock options to employees in fiscal
2000, the Company recorded deferred compensation of approximately $17.2 million.
Deferred compensation is being amortized for financial reporting purposes over
the vesting period of the options. The amount recognized as expense during
fiscal 2001, 2000 and 1999 amounted to approximately $4.9 million, $5.2 million
and $39,000, respectively. No options were granted during fiscal 2001 for which
compensation expense was recorded.
In connection with the sale of the Series B Preferred Stock in May 2001,
the Company has agreed to (i) amended the Option Plan to, among other things,
increase the number of shares of common stock available for issuance under the
Option Plan to 4,631,790 shares of common stock and (ii) adopted the IFX
Corporation 2001 Stock Option Plan (the "2001 Plan"). Options under the 2001
Plan will vest thirty four percent (34%) one year after the date granted, and
eight and one quarter percent (8.25%) on the last day of each of the following
quarters.
31
The following table summarizes the Company's stock option activity:
Weighted Average
Shares Exercise Price
-------------------------------------------------------------------------
Outstanding at June 30, 1999 442,500 $ 5.97
Granted 1,896,167 12.54
Cancelled (34,750) 18.21
Exercised (9,033) 9.71
-------------------------------------------------------------------------
Outstanding at June 30, 2000 2,294,884 10.05
Granted 826,450 4.68
Cancelled (165,518) 17.98
-------------------------------------------------------------------------
Outstanding at June 30, 2001 2,955,816 $ 9.28
=========================================================================
The following table summarizes information concerning outstanding options
at June 30, 2001:
Weighted Average
Weighted Remaining
Exercise Price Number of Average Contractual Life Number Weighted Average
Range Shares Exercise Price (in years) Exercisable Exercise Price
--------------------------------------------------------------------------------------------------------------
$ 3.00 to 5.00 951,825 $ 3.34 9.1 225,333 $ 3.00
5.01 to 10.00 1,178,134 8.75 8.9 94,141 7.85
10.01 to 15.00 398,166 14.04 8.1 142,500 13.47
15.01 to 20.00 407,691 19.20 8.4 153,857 18.94
20.01 to 30.00 20,000 26.25 8.2 20,000 26.25
------------ -------------
2,955,816 $ 9.28 8.8 635,831 $10.65
============ =============
Statement of Financial Accounting Standards No. 123
The Company has elected to account for its stock-based compensation plans
under APB No. 25, however, the Company has computed for pro forma disclosure
purposes the fair value of all options granted using the Black-Scholes
option-pricing model as prescribed by SFAS No. 123 using the following
weighted-average assumptions.
Year Ended June 30,
---------------------------------------------
2001 2000 1999
---------------------------------------------
Risk-Free Interest Rate 5.65% 6.00% 5.50%
Expected Dividend Yield 0.00% 0.00% 0.00%
Expected Lives 5.0 years 5.0 years 5.0 years
Expected Volatility 1.01 0.96 1.25
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The per share
weighted average fair value of options granted during fiscal 2001, 2000 and 1999
was $9.28, $10.05 and $5.97, respectively.
32
The Company's pro forma information is as follows:
Fiscal year ended June 30,
-----------------------------------------------------
2001 2000 1999
-----------------------------------------------------
Net(loss) income As reported $ (58,355,200) $ (45,877,000) $ 1,402,200
Pro forma $ (68,950,700) $ (55,119,000) $ 1,288,600
Basic and diluted earnings
(loss) per share As reported $ (4.24) $ (4.52) $ 0.22
Pro forma $ (5.01) $ (5.43) $ 0.20
Note 11 Segment Reporting
The Company is structured primarily around the geographic markets it serves
and operates reportable segments in Argentina, Bolivia, Brazil, Chile, Colombia,
Mexico, Venezuela, Central America and the United States and all other. All of
the segments provide Internet related services.
Selected financial information for the years ended June 30, 2001 and 2000
by segment is presented below:
2001 2000
---------------------------------------------------------------------------------------------------------
Loss from continuing Loss from continuing
operations before operations before
Revenues income taxes Total assets Revenues income taxes Total assets
---------------------------------------------------------------------------------------------------------
Argentina $ 3,766,700 $ (1,909,600) $ 2,615,100 $ 70,300 $ (3,226,800) $ 988,200
Bolivia 1,513,400 (759,100) 1,102,100 660,100 (816,200) 1,238,700
Brazil 5,725,100 (7,720,400) 14,073,800 3,767,300 (4,813,800) 17,107,300
Chile 3,842,600 (787,300) 2,339,400 1,974,300 (1,965,400) 6,211,100
Colombia 1,945,200 (1,047,000) 1,554,300 119,800 (1,127,900) 884,000
Mexico 3,999,400 (2,563,900) 4,575,000 1,461,900 (2,804,900) 7,513,300
Venezuela 2,730,400 (1,311,800) 2,111,200 1,633,300 (573,800) 2,711,200
Central America 2,170,400 (2,341,300) 1,497,600 550,900 (1,289,600) 2,961,300
United States
and all other 6,428,600 (44,274,100) 18,655,100 451,400 (33,997,000) 21,681,600
----------------------------------------------------------------------------------------------------------------------------
Total $ 32,121,800 $ (62,714,500) $ 48,523,600 $ 10,689,300 $ (50,615,400) $ 61,296,700
============================================================================================================================
Included in the above table are sales to Tutopia of approximately $13.8
million and $0 for fiscal 2001 and 2000, respectively. Sales to Tutopia
represented approximately 43.1% of IFX's total revenues for the fiscal year
ended June 30, 2001.
Note 12 Foreign Taxes Recoverable
In general, IFX's foreign subsidiaries pay a Foreign Value Added Tax
("VAT") on their purchases. The foreign taxes recoverable is the difference
between what IFX has paid in VAT Taxes and what it has collected in VAT from the
Company's customers. At June 30, 2001, IFX had a net difference of approximately
$2.0 million that is classified as Foreign Taxes Recoverable in the accompanying
consolidated balance sheet.
33
Note 13 Income Taxes
The Company accounts for income taxes under FASB Statement No. 109,
"Accounting for Income Taxes" (FASB 109). Deferred income tax assets and
liabilities are determined based upon differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
The benefit relating to income taxes for each of the years ended June
30, is as follows:
Year ended June 30,
-----------------------------------------------
2001 2000 1999
-----------------------------------------------
Current $ 1,525,800 $ 2,771,400 $ 811,000
Deferred - - -
-----------------------------------------------
Total Benefit $ 1,525,800 $ 2,771,400 $ 811,000
===============================================
The benefit reflected is due primarily to the utilization of net operating
losses against income from discontinued operations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
Fiscal Year End
----------------------------------
2001 2000
----------------------------------
DEFERRED TAX ASSETS:
Bad debt reserve $ 684,600 $ 347,100
Depreciation 73,700 59,600
Other accruals 98,400 56,100
Amortization 4,357,300 1,390,500
Deferred gain on investment 1,674,500 1,674,500
Writeoff of investments 965,400 --
Impairment of customer base 3,614,400 --
Tax credits 761,400 761,400
NOL carry-forward 19,298,200 9,639,100
---------------------------------
Deferred tax assets 31,527,900 13,928,300
Less valuation allowance (31,325,900) (13,702,900)
---------------------------------
Total deferred tax assets 202,000 225,400
Deferred tax liabilities:
Other liabilities (202,000) (225,400)
---------------------------------
Total deferred tax liabilities (202,000) (225,400)
---------------------------------
Total net deferred taxes $ -- $ --
=================================
34
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $31.3 million valuation allowance is necessary to reduce the
net deferred tax asset to an amount that will more likely than not be realized.
The change in the valuation allowance for the current year is $17.6 million. At
June 30, 2001, the Company has available net operating loss carry forwards as
follows:
Losses expiring in fiscal 2002-2003
-----------------------------------
El Salvador $ (719,300)
Guatemala (678,700)
Costa Rica (480,200)
Honduras (701,000)
Uruguay (263,800)
Venezuela (1,885,600)
Losses expiring in fiscal 2004-2005
-----------------------------------
Nicaragua $ (286,500)
Argentina (5,136,400)
Colombia (2,260,900)
Panama (765,100)
Losses expiring after 2010
--------------------------
Mexico (4,826,800)
United States (51,284,100)
Losses with indefinite life:
---------------------------
Bolivia (1,469,400)
Brazil (12,534,100)
Chile (2,318,500)
The United States and foreign components of loss from continuing operations
before income taxes are as follows:
For the Year Ending June 30,
------------------------------------------------
2001 2000 1999
------------------------------------------------
United States $(43,970,000) $(24,775,900) $ (1,458,500)
Foreign (18,744,500) (25,839,500) (1,067,900)
------------------------------------------------
Total $(62,714,500) $(50,615,400) $ (2,526,400)
================================================
35
Reconciliation of the total provision for income taxes to the Federal
statutory rate for the years ended June 30, is as follows:
Years ended June 30,
---------------------------------------
2001 2000 1999
---------------------------------------
Tax at U.S. statutory rate (34)% (34)% (34)%
State taxes, net of federal
benefit (3) (2) --
Stock option expense 3 3 --
Warrant expense -- 1 --
Other 1 -- 2
Change in valuation allowance 30 27 --
---------------------------------------
(3)% (5)% (32)%
=======================================
During fiscal year 2001, IFX received a refund of approximately $1.6 million
related to the carry back of net operating losses to fiscal 1999 and 2000.
Note 14 Related Party Transactions
The Company believes that all transactions disclosed below and in Note 15
have been, and the Company's Board of Directors intends that any future
transactions with its officers, directors, affiliates or principal stockholders
will be, on terms that are no less favorable to the Company than those that are
obtainable in arm's length transactions with unaffiliated third parties.
UBS Capital Americas: On an as converted basis, UBS Capital owns approximately
50% of the Company and approximately 34% of the Company's investee, Tutopia.
During fiscal 2001 and 2000, UBS Capital made significant investments in both
the Company and Tutopia as more fully discussed in Note 9. Sales to Tutopia
accounted for approximately 43.1% of the Company's total sales for fiscal 2001.
Tutopia was a consolidated subsidiary of the Company during fiscal 2000 as more
fully discussed in Note 1, and was deconsolidated from the operations of the
Company in September 2000. Tutopia had only nominal revenues in fiscal 2000 and
revenues of approximately $2.1 million in fiscal 2001. To date, Tutopia has been
dependent upon funding from UBS and the Company to pay for the services provided
by IFX. Should UBS or the Company be unwilling or unable to make additional
investments, or should Tutopia be unable to pay the Company through its
operations, the financial condition and operating results of the Company may be
seriously impacted.
Mr. Moore is a director and Mr. Lama a principal of UBS Capital Americas,
LLC, an affiliate of UBS Capital Americas, which purchased $25 million of IFX
Preferred Stock in June and July 2000 and $15 million of preferred stock in
Tutopia, a former subsidiary of IFX, in August 2000. Mr. Moore and Mr. Lama have
an investment interest in UBS and thus may benefit from transactions between UBS
on the one hand and IFX and its subsidiaries on the other.
36
UBS Capital Investment In IFX: As reported on the Company's Reports on
Forms 8-K dated March 16, 2001 and May 10, 2001, the Company received
approximately $15.5 million in funding from UBS Capital Americas to be used for
working capital purposes. Pursuant to the Stock Purchase Agreement dated as of
March 13, 2001, by and among the Company and UBS Capital Americas, as amended by
Amendment No. 1 to the Stock Purchase Agreement dated as of May 7, 2001, UBS
Capital Americas purchased 3,994,127 shares of IFX's Class I Series B
Convertible Preferred Stock and 424,135 shares of IFX's Class II Series B
Convertible Preferred Stock. All of the shares were purchased at $3.50 per
share. The Class I Series B Convertible Preferred Stock has full voting rights
and each preferred share is convertible into one share of the IFX's common
stock. The Class II Series B Convertible Preferred Stock has the same rights as
the Class I Series B Convertible Preferred Stock except that it may not vote for
the Board of Directors. At the election of UBS Capital Americas, each share of
the Class II Series B Convertible Preferred Stock is convertible after one year
into one share of Class I Convertible Preferred Stock. Under the terms of the
Series A Preferred Stock previously issued by IFX, this investment caused the
conversion ratio of the approximately 2 million shares of Series A Preferred
Stock held by the Purchasers to be adjusted so that each share of Series A
Preferred Stock will be convertible into approximately 3.52 shares of the
Company's common stock, rather than one share of the Company's common stock as
originally provided. The Series B conversion ratio adjustment results in a
beneficial conversion feature of approximately $25 million. Such amount was
recognized as a dividend to preferred shareholder in May 2001.
Yupi Shares: Pursuant to an Amended and Restated Stock Purchase Agreement, dated
as of June 12, 2000 between IFX Online, a subsidiary of the Company, and Lee
Casty, a significant stockholder of IFX, IFX Online sold a part of its
shares of Yupi Preferred Stock to Mr. Casty for a total purchase price of
approximately $5.0 million. The proceeds were used for the Company's working
capital.
As a result of Yupi abandoning its IPO plans the Agreement noted above was
amended to provide Casty with a minimum return on his investment in the event
IFX entered into an agreement to sell its investment in Yupi. This contingency
kept IFX from recognizing a gain on the sale until any potential payments to
Casty were resolved or otherwise settled. Accordingly, the $1.9 million gain
previously recognized was reversed in the fourth quarter of fiscal 2000. In
August 2001 Yupi entered into a merger agreement with T1MSN Corp. The Company
received proceeds of approximately $46,000 with respect to such merger, of which
approximately $16,000 is payable to Casty.
Note 15 Tutopia.com, Inc.
During September 2000, the Company's voting interest in its majority-owned
subsidiary, Tutopia was reduced from approximately 85% to approximately 48%. As
a result of this reduction, the Company deconsolidated Tutopia and began
accounting for Tutopia under the equity method. For the fiscal year ended June
30, 2001, IFX derived approximately 43.1% of its total revenues from Tutopia. At
June 30, 2001, IFX has accounts receivable from Tutopia in the amount of
approximately $0.9 million, of which approximately $0.6 million is related to
services provided to Tutopia's Brazilian operations. Tutopia ceased Brazilian
operations during fiscal 2001. IFX and Tutopia entered into an agreement whereby
Tutopia will pay the portion related to Tutopia's Brazilian operations by June
2002, consequently, IFX has elected to defer recognition of revenue on the $0.6
million until payment has been received from Tutopia.
37
The unaudited operating results of Tutopia are as follows:
Fiscal year ended June 30,
2001 2000
(Unaudited) (Unaudited)
---------------- -----------------
Revenues $ 2,113,100 $ 58,300
Operating expenses 25,328,700 13,937,600
---------------- -----------------
Operating loss (23,215,600) (13,879,300)
Net loss $ (22,918,800) $ (13,457,300)
================ =================
During the first quarter of fiscal 2001, the Company's investment in
Tutopia was reduced to $0 under the equity method of accounting. In May 2001,
IFX invested an additional $3.1 million in Tutopia as a result of the UBS
investment in IFX. As a result of this investment, the Company expensed
0.2 million of losses related to its proportionate share of Tutopia's losses.
Selected financial information from Tutopia's Balance Sheet:
June 30, 2001
(Unaudited)
----------------
Current assets $ 4,825,900
Non-current assets 431,400
Total assets 6,286,100
Current liabilities 1,288,600
Long-term liabilities --
Total liabilities 1,288,600
Stockholder's equity 4,994,500
38
Note 16 Quarterly Financial Data (Unaudited)
Quarter ended
------------------------------------------------------------------------------------------------------------------------------
9/30/00 12/31/00 3/31/01 6/30/01 Total
------------------------------------------------------------------------------------------------------------------------------
Revenue $ 7,490,500 $ 8,328,100 $ 8,787,800 $ 7,515,400 $ 32,121,800
Cost of revenues 4,927,300 5,386,400 5,213,900 5,269,300 20,796,900
Income from discontinued operations, net 1,911,700 395,800 406,300 119,700 2,833,500
Net loss (11,308,700) (10,385,700) (9,388,300) (27,272,500) (58,355,200)
Deemed dividend on preferred stock (as
a result of beneficial conversion feature) - - - (25,000,000) (25,000,000)
------------------------------------------------------------------------------------------------------------------------------
Net loss available to common
stockholders $ (11,308,700) $ (10,385,700) $ (9,388,300) $(52,272,500) $ (83,355,200)
==============================================================================================================================
Per share - basic and diluted:
Continuing operations $ (0.99) $ (0.79) $ (0.70) $ (1.96) $ (4.44)
Discontinued operations 0.14 0.03 0.03 0.00 0.20
---------------------------------------------------------------------------------
Net loss (0.85) (0.76) (0.67) (1.96) (4.24)
Deemed dividend on preferred stock (as a
result of beneficial conversion feature) - - - (1.81) (1.81)
------------------------------------------------------------------------------------------------------------------------------
Net loss available to common stockholders $ (0.85) $ (0.76) $ (0.67) $ (3.77) $ (6.05)
==============================================================================================================================
Quarter ended
------------------------------------------------------------------------------------------------------------------------------
9/30/99 12/31/99 3/31/00 6/30/00 Total
------------------------------------------------------------------------------------------------------------------------------
(Restated) (Restated)
Revenue $ 1,218,600 $ 2,598,000 $ 3,269,200 $ 3,603,500 $ 10,689,300
Cost of revenues 1,076,600 1,471,300 2,385,600 3,553,500 8,487,000
Income from discontinued operations, net 442,300 497,700 494,600 532,400 1,967,000
Net loss $ (3,689,200) $ (5,898,700) $(10,966,700) $(25,322,400) $ (45,877,000)
Per share - basic and diluted:
Continuing operations $ (0.56) $ (0.74) $ (1.01) $ (2.40) $ (4.71)
Discontinued operations 0.06 0.06 0.04 0.03 0.19
------------------------------------------------------------------------------------------------------------------------------
Net loss $ (0.50) $ (0.68) $ (0.97) $ (2.37) $ (4.52)
==============================================================================================================================
As discussed in Note 1, the Company determined that the undiscounted cash
flows associated with acquired customer base would not be sufficient to recover
the net book value of such assets resulting in the Company recording an
impairment charge of approximately $10.9 million during the fourth quarter of
fiscal 2001.
In May 2001, the Company completed the issuance of approximately 4.4
million shares of convertible preferred stock for $15.5 million, of which each
share is convertible into one share of the IFX common stock. Prior to May 2001,
the Company had issued approximately 2 million shares of preferred stock for
$25.0 million in June and July 2000 that were each convertible into one share of
IFX common stock at a conversion price of $12.31 per share. As part of the May
2001 sale of preferred stock, the conversion ratio of the 2 million shares of
preferred stock was automatically adjusted to 3.52 shares of common stock for
each preferred share. The change in the conversion ratio resulted in a $25.0
million non-cash beneficial conversion feature that was recognized as a deemed
dividend to preferred shareholders in the 2001 statement of operations.
In June 2001, IFX recognized a loss on its Yupi investment in the amount of
approximately $2.5 million based on management's determination that the value
of such investment had been impaired.
In addition, during September 2000, the Company's voting interest in its
majority-owned subsidiary Tutopia fell below 50%. As a result, the Company
deconsolidated Tutopia and began accounting for its investment under the equity
method. Accordingly, the Company restated its fiscal 2000 consolidated
financial statements as if Tutopia had been accounted for under the equity
method since its inception in January 2000.
39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
IFX Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of IFX
Corporation and subsidiaries as of June 30, 2001 and June 30, 2000, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended June 30, 2001.
Our audits also included the financial statement schedules listed in the Index
at Item 14(a). These financial statements and schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IFX Corporation
and subsidiaries at June 30, 2001, 2000 and 1999, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 1, the consolidated financial statements for the year
ended June 30, 2000 have been restated.
/s/ ERNST & YOUNG LLP
Miami, Florida,
September 10, 2001, except for the
29th through 33rd paragraphs of Note 1,
as to which the date is October 11, 2001
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
--------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to directors and executive officers
is set forth in Part I of this Report. Additional information required
by this Item is incorporated herein by reference to the section
entitled "Compliance with Section 16(a) of the Securities and Exchange
Act of 1934" of the Proxy Statement related to the Company's 2001
Annual Meeting of Stockholders to be filed by the Company with the
Securities and Exchange Commission (the "Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the sections entitled "Executive Compensation" and
"Certain Transactions" of the Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference to the section entitled "Security Ownership of Certain
Beneficial Owners and Management" of the Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the sections entitled "Certain Transactions" and
"Compensation Committee Interlocks and Insider Participation" of the
Definitive Proxy Statement.
41
PART IV
--------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a.)
1. Financial Statements
The following financial statements are attached to this Form 10-K.
Form 10-K Page
Number
-----------------
Report of Independent Certified Public Accountants 40
Consolidated Balance Sheets as of June 30, 2001 and 2000 21
Consolidated Statements of Operations for the years ended June 30, 2001,
2000 and 1999 22
Consolidated Statements of Changes in Stockholders' Equity for the years
ended June 30, 2001, 2000 and 1999 23
Consolidated Statements of Cash Flows for the years ended June 30, 2001,
2000 and 1999 24
Notes to Consolidated Financial Statements 25
2. Financial Statement Schedules
SCHEDULE II
IFX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
(For Continuing Operations)
Additions
-------------------------------
Charged to
Balance at (Benefits Charged to
Beginning of Against) Costs Other Accounts Deductions Balance at
Description Period and Expenses (Describe) (Describe) End of Period
---------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
For the year ended June 30, 2001 $ 922,500 $ 1,033,300 $ -- $ -- $ 1,955,800
For the year ended June 30, 2000 80,100 842,400 -- -- 922,500
For the year ended June 30, 1999/1/ -- 80,100 -- -- 80,100
---------------------------------------------------------------------------------------------------------------
/1/ Reclassified to net assets of discontinued operations
Additions
---------------------------------
Charged to
Balance at (Benefits Charged to
Beginning of Against) Costs Other Accounts Deductions Balance at End
Description Period and Expenses (Describe) (Describe) of Period
--------------------------------------------------------------------------------------------------------------------------
Deferred Tax Valuation Account
For the year ended June 30, 2001 $ 13,702,900 $ -- $ 17,623,000/1/ $ -- $ 31,325,900
For the year ended June 30, 2000 -- -- 13,702,900/1/ -- 13,702,900
For the year ended June 30, 1999 -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
/1/ Record a valuation allowance for deferred tax assets.
All other schedules called for under Regulation S-X are not submitted because
they are not applicable or not required or because the required information is
not material or is included in the financial statements or notes thereto.
42
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Level Name of Subsidiary Jurisdiction Relationship to Parent
----- ------------------ ------------ ----------------------
IFX CORP. State of Delaware N/A
1 IFX/Communications Ventures, Inc. State of Delaware 100% owned subsidiary
2 FX Chicago, Inc. State of Delaware 100% owned subsidiary
3 IFX/Telecom, Inc. State of Delaware 100% owned subsidiary
4 IFX/EN, Inc. State of Delaware 100% owned subsidiary
4a (a) IFX Networks, Ltd. British Virgin Islands 100% owned subsidiary
4a-1 (i) IFX Online, Inc. State of Delaware 100% owned subsidiary
4a-2 (ii) IFX/ENI-SPC I, Inc. British Virgin Islands 100% owned subsidiary
4a-2-1 (A) Unete.com, SRL/1/ Venezuela 100% owned subsidiary
4a-3 (iii) IFX/ENI-SPC II, Inc. British Virgin Islands 100% owned subsidiary
4a-3-1 (A) IFX Networks Costa Rica, SRL Costa Rica 100% owned subsidiary
4a-4 (iv) IFX/ENI-SPC III, Inc. British Virgin Islands 100% owned subsidiary
4a-4-1 (A) IFX Networks Colombia, Ltda. Colombia 100% owned subsidiary
4a-5 (v) IFX/ENI-SPC IV, Inc. British Virgin Islands 100% owned subsidiary
4a-5-1 (A) Servicios de Internet ENI Chile, Ltda. Chile 100% owned subsidiary
4a-5-1-1 (1) IFX Networks Chile, S.A. Chile 100% owned subsidiary
4a-5-1-2 (2) IFX Chile Larga Distancia, S.A. Chile 100% owned subsidiary
4a-6 (vi) IFX/ENI-SPC V, Inc. British Virgin Islands 100% owned subsidiary
4a-6-1 (A) IFX Networks Argentina, SRL Argentina 100% owned subsidiary
4a-7 (vii) IFX/ENI-SPC VI, Inc. British Virgin Islands 100% owned subsidiary
4a-8 (viii) IFXENI-SPC VII, Inc. British Virgin Islands 100% owned subsidiary
4a-8-1 (A) Unete.com Uruguay, S.A./2/ Uruguay 100% owned subsidiary
4a-9 (ix) IFX/ENI-SPC VIII, Inc. British Virgin Islands 100% owned subsidiary
4a-9-1 (A) IFX Networks Bolivia, Ltda. Bolivia 100% owned subsidiary
4a-10 (x) IFX/ENI-SPC IX, Inc. British Virgin Islands 100% owned subsidiary
4a-11 (xi) IFX/ENI-SPC X, Inc. British Virgin Islands 100% owned subsidiary
4a-12 (xii) ENI/SPC Mexican Holdings, Inc. State of Delaware 100% owned subsidiary
4a-12-1 (A) IFX Networks Mexico, S. de R.L. de C.V. Mexico 100% owned subsidiary
4a-13 (xiii) IFX/ENI-SPC Ecuador, Inc. British Virgin Islands 100% owned subsidiary
4a-13-1 (A) Unete.com C. Ltda. Ecuador 100% owned subsidiary
4a-14 (xiv) IFX/ENI-SPC El Salvador, Inc. British Virgin Islands 100% owned subsidiary
4a-14-1 (A) IFX Networks El Salvador, Ltda. de CV El Salvador 100% owned subsidiary
4a-15 (xv) IFX/ENI-SPC Guatemala, Inc. British Virgin Islands 100% owned subsidiary
4a-15-1 (A) IFX Networks Guatemala Ltda. Guatemala 100% owned subsidiary
4a-16 (xvi) IFX Networks Nicaragua, Inc. British Virgin Islands 100% owned subsidiary
4a-16-1 IFX Networks Nicaragua, Inc., and Compania Ltda Nicaragua 100% owned subsidiary
4a-17 (xvii) IFX/ENI-SPC Honduras, Inc. British Virgin Islands 100% owned subsidiary
4a-17-1 (A) Unete.com de Honduras S de RL./3/ Honduras 100% owned subsidiary
4a-18 (xviii) IFX/ENI-SPC Panama, Inc. British Virgin Islands 100% owned subsidiary
4a-18-1 (A) IFX Networks Panama, SA Panama 100% owned subsidiary
4a-19 (xix) IFX/ENI-SPC Uruguay, Inc. British Virgin Islands 100% owned subsidiary
4a-20 (xx) Minority Stock Holding Corp. British Virgin Islands 100% owned subsidiary
4a-21 (xxi) ENI Brazilian Holdings, LLC. State of Delaware 100% owned subsidiary
4a-21-1 (A) IFX do Brasil, Ltda. Brazil 100% owned subsidiary
4a-21-2 (B) IFX Telecomunicacoes do Brasil Ltda Brazil 100% owned subsidiary
4a-22 (xxii) CELC/IFX, LLC State of Delaware 100% owned subsidiary
4a-22-1 (A) Communications Equipment Leasing Corp. British Virgin Islands 100% owned subsidiary
4a-23 (xxiii) IFX/CELC II, Inc. State of Delaware 100% owned subsidiary
5 IFX Facilito, Inc. State of Delaware 100% owned subsidiary
6 Latin Guide, Inc. State of Delaware 100% owned subsidiary
________________________________________
/1/ In the process of changing its legal name to IFX Networks Venezuela, S.R.L.
/2/ In the process of changing its legal name to IFX Networks Uruguay, Ltda.
/3/ In the process of changing its legal name to IFX Networks Honduras, S. de
R.L.
43
PART IV
--------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a.)
1. Financial Statements
The following financial statements are attached to this Form 10-K.
Form 10-K Page
Number
-----------------
Report of Independent Certified Public Accountants 40
Consolidated Balance Sheets as of June 30, 2001 and 2000 21
Consolidated Statements of Operations for the years ended June 30, 2001,
2000 and 1999 22
Consolidated Statements of Changes in Stockholders' Equity for the years
ended June 30, 2001, 2000 and 1999 23
Consolidated Statements of Cash Flows for the years ended June 30, 2001,
2000 and 1999 24
Notes to Consolidated Financial Statements 25
2. Financial Statement Schedules
SCHEDULE II
IFX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts
(For Continuing Operations)
Additions
-------------------------------
Charged to
Balance at (Benefits Charged to
Beginning of Against) Costs Other Accounts Deductions Balance at
Description Period and Expenses (Describe) (Describe) End of Period
---------------------------------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
For the year ended June 30, 2001 $ 922,500 $ 1,033,300 $ -- $ -- $ 1,955,800
For the year ended June 30, 2000 80,100 842,400 -- -- 922,500
For the year ended June 30, 1999/1/ -- 80,100 -- -- 80,100
---------------------------------------------------------------------------------------------------------------
/1/ Reclassified to net assets of discontinued operations
Additions
---------------------------------
Charged to
Balance at (Benefits Charged to
Beginning of Against) Costs Other Accounts Deductions Balance at End
Description Period and Expenses (Describe) (Describe) of Period
--------------------------------------------------------------------------------------------------------------------------
Deferred Tax Valuation Account
For the year ended June 30, 2001 $ 13,702,900 $ -- $ 17,623,000/1/ $ -- $ 31,325,900
For the year ended June 30, 2000 -- -- 13,702,900/1/ -- 13,702,900
For the year ended June 30, 1999 -- -- -- -- --
--------------------------------------------------------------------------------------------------------------------------
/1/ Record a valuation allowance for deferred tax assets.
All other schedules called for under Regulation S-X are not submitted because
they are not applicable or not required or because the required information is
not material or is included in the financial statements or notes thereto.
42
3 Exhibits
The exhibits listed on the Exhibit Index on page 44 of this Form 10-K are filed
herewith or are incorporated herein by reference.
The Company filed reports on Form 8-K on May 10, 2001.
Exhibit Number Description of Exhibit
-------------- ----------------------
3.1/1/ Restated Certificate of Incorporation of the
Registrant
3.2/2/ Certificate of Amendment of Restated Certificate of
Incorporation of the Registrant
3.3/1/ By-laws, effective June 15, 2000
4.1/3/ Amended Certificate of Designation, Powers,
Preferences and Rights of Series A Convertible
Preferred Stock of the Registrant
4.2/3/ Certificate of Designation, Powers, Preferences and
Rights of Series B Convertible Preferred Stock of
the Registrant
4.3/3/ Amended and Restated Registration Rights Agreement
dated as of May 7, 2001 among the Registrant, UBS
Capital Americas III, L.P., UBS Capital LLC,
International Technology Investments, LC and Casty
Grantor Subtrust
10.1/3/ Second Amended and Restated Stockholders Agreement
dated as of May 7, 2001 among Registrant, UBS
Capital Americas III, L.P., UBS Capital LLC,
International Technology Investments, LC, Joel
Eidelstein, Michael Shalom and Casty Grantor
Subtrust
10.2/4/ Series B Convertible Stock Purchase Agreement dated
as of March 13, 2001 among the Registrant, UBS
Capital Americas III, L.P. and UBS Capital LLC
10.3/3/ Amendment No. 1 to Purchase Agreement dated as of
May 7, 2001 among the Registrant, UBS Capital
Americas III, L.P. and UBS Capital LLC
10.4/1/ Form of Non-Qualified Stock Option Agreement (1998
Stock Option Plan) between the Registrant and
employee with attached schedule describing actual
option grants
10.5/4/ Form of Stock Option Agreement (2001 Option Plan)
between the Registrant and employee with attached
schedule describing actual option grants
10.6 Employment Agreement dated as of May 7, 2001 between
Joel Eidelstein and the Registrant
10.8 Employment Agreement dated as of May 7, 2001 between
Michael Shalom and the Registrant
10.9 Payment and Release Agreement dated June 15, 2001,
between Zalman Lekach and the Registrant
10.11 Employment Agreement dated as of May 7, 2001 between
Jose Leiman and the Registrant
10.12/1/ Amended and Restated Stock Purchase Agreement dated
as of June 12, 2000 between the Registrant and Lee
S. Casty
10.13 Agreement between Registrant and Lee S. Casty dated
August 28, 2001
10.14/4/ Form of Directors Stock Option Agreement with
attached schedule describing actual option grants
10.15/6/ Dial Access Agreement dated as of August 30, 2000
between Tutopia.com, Inc. and the Registrant
10.16/5/ Revenue Sharing Agreement dated as of August 31,
2000 between Tutopia.com, Inc. and the Registrant
10.17/2/ Inter-Company Services Agreement dated as of August
31, 2000 between Tutopia.com, Inc. and the
Registrant
10.18/2/ Share Sale Agreement, dated August 24, 2000, between
Duncan Lawrie Offshore Services Limited in its
capacity as trustee for The IFX Group Trust and the
Registrant
10.19/6/ Lucent Technologies Agreement
21.1/5/ List of subsidiaries of the Company
23.1/5/ Consent of Ernst & Young LLP
____________________________________
/1/ Incorporated by reference to Registrant's Report on Form 8-K filed on July
5, 2000
/2/ Incorporated by reference to Registrant's Report on Form 10-Q filed on
February 14, 2001
/3/ Incorporated by reference to Registrant's Report on Form 8-K filed on May
10, 2001
/4/ Incorporated by reference to Registrant's Report on Form 8-K filed on March
16, 2001
/5/ Incorporated by reference to Registrant's Annual Report on Form 10-K filed
on September 28, 2000
/6/ Incorporated by reference to Registrant's Report on Form 10-Q filed on
November 15, 1999
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Miami,
State of Florida, on October 12, 2001.
IFX CORPORATION
By: /s/ Michael Shalom
--------------------------------
Michael Shalom,
Chief Executive Officer
45
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael Shalom, and each of them, his/her
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, to sign, execute and file with the Securities and Exchange
Commission (or any other governmental or regulatory authority), for us and in
our names in the capacities indicated below, this registration statement on Form
10-K (including all amendments thereto) with all exhibits and any and all
documents required to be filed with respect thereto, granting unto said
attorneys-in-fact and agents and each of them, full power and authority to do
and to perform each and every act and thing necessary and/or desirable to be
done in and about the premises in order to effectuate the same as fully to all
intents and purposes as he himself/she herself might or could do if personally
present, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may lawfully do or cause to be done by virtue hereof.
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.
Signature Title Date
--------- ----- ----
/s/ Joel M. Eidelstein Chairman of the Board and President October 12, 2001
------------------------------ ----------------------
Joel M. Eidelstein
/s/ Michael Shalom Chief Executive Officer October 12, 2001
------------------------------ ----------------------
Michael Shalom (Principal Executive Officer)
/s/ Jose Leiman Chief Financial Officer October 12, 2001
------------------------------ ----------------------
(Principal Financial and Accounting
Jose Leiman Officer)
/s/ Charles Delaney Director October 12, 2001
------------------------------ ----------------------
Charles Delaney
/s/ Patrick Delhougne Director October 12, 2001
------------------------------ ----------------------
Patrick Delhougne
/s/ Mark O. Lama Director October 12, 2001
------------------------------ ----------------------
Mark O. Lama
/s/ Burton J. Meyer Director October 12, 2001
------------------------------ ----------------------
Burton J. Meyer
/s/ Charles W. Moore Director October 12, 2001
------------------------------ ----------------------
Charles W. Moore
/s/ George A. Myers Director October 12, 2001
------------------------------ ----------------------
George A. Myers
46