UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File # 0-15187
IFX CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3399452
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
707 Skokie Blvd Ste 580, Northbrook, Illinois 60062
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(847) 412-9411
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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.
X Yes No
----- -----
As of December 31, 1999, the issuer had outstanding 11,084,920 shares of common
stock, $.02 par value per share.
IFX CORPORATION AND SUBSIDIARIES
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed consolidated balance sheets as of
December 31, 1999 (Unaudited) and June 30, 1999 3
Condensed consolidated statements of operations
for the three months ended December 31, 1999
(Unaudited) and 1998 (Unaudited), and for
the six months ended December 31, 1999
(Unaudited) and 1998 (Unaudited) 4
Condensed consolidated statements of cash flows
for the six months ended December 31, 1999
(Unaudited) and 1998 (Unaudited) 5
Notes to condensed consolidated financial
statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
for the Period Ended December 31, 1999 10
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and reports on form 8-K 16
(A) Exhibits
Exhibit 3.1 Spinway Media Network, Inc. Agreement
Exhibit 27 Financial Data Schedule (EDGAR only)
Exhibit 99.1 Risk Factors
(B) Reports on Form 8-K
PART I--FINANCIAL INFORMATION
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Item 1--Financial Statements
Certain information in the financial statements presented below, except for net
income and basic net income per share, differs from amounts previously reported
due to the reclassification of certain revenues and operating expenses to
discontinued operations, reflecting the disposition of the Company's trading
business.
December 31, June 30,
1999 1999
ASSETS (Unaudited)
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 2,318,100 $ 5,482,800
Receivables, net of allowance for doubtful accounts of
$634,100 and $80,100, respectively........................ 866,000 458,300
Note receivable............................................ 2,900,000 --
Net assets of discontinued operations...................... 707,100 3,726,900
----------- -----------
Total current assets..................................... 6,791,200 9,668,000
----------- -----------
PROPERTY AND EQUIPMENT:
Equipment, furniture and leasehold improvements............ 5,758,400 2,253,500
Assets under capital lease................................. 2,740,500 --
----------- -----------
8,498,900 2,253,500
Less: accumulated depreciation and amortization............ (1,445,900) (369,300)
----------- -----------
Total property and equipment, net........................ 7,053,000 1,884,200
----------- -----------
OTHER ASSETS:
Acquired customer base, net of amortization of $1,801,200
and $155,500 respectively................................ 13,692,100 2,686,600
Investment in Yupi Internet Inc............................ 3,113,500 3,113,500
Investments in and advances to affiliates.................. 95,100 241,500
Notes receivable........................................... 618,900 612,500
Deferred income taxes...................................... 1,427,000 --
Capitalized software, net.................................. 235,000 --
Other assets............................................... 1,632,900 655,200
----------- -----------
Total other assets....................................... 20,814,500 7,309,300
----------- -----------
TOTAL ASSETS................................................ $34,658,700 $18,861,500
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses...................... $12,490,400 $ 2,447,200
Capital lease obligation................................... 283,200 --
----------- -----------
Total current liabilities................................ 12,773,600 2,447,200
----------- -----------
LONG-TERM LIABILITIES:
Notes payable.............................................. 436,700 316,900
Capital lease obligation................................... 2,451,200 --
----------- -----------
Total long-term liabilities.............................. 2,887,900 316,900
----------- -----------
TOTAL LIABILITIES........................................... 15,661,500 2,764,100
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.02 par value; 50,000,000 shares
authorized, 11,084,920 and 6,830,240 shares issued
and outstanding, respectively............................. 221,700 136,600
Paid-in capital........................................... 25,356,800 11,299,100
(Accumulated deficit) Retained earnings................... (4,770,700) 4,817,200
Accumulated other comprehensive income (loss)............. 98,700 (26,000)
Deferred compensation...................................... (1,909,300) (129,500)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.................................. 18,997,200 16,097,400
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $34,658,700 $18,861,500
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
IFX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
- ------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Dial Up.................................................. $ 2,016,800 $ -- $ 2,927,400 $ --
Dedicated................................................ 252,100 -- 431,500 --
Hosting and Design Web Services.......................... 113,000 -- 167,900 --
Other.................................................... 216,100 -- 289,800 --
------------ ---------- ------------ ----------
Total revenues........................................... 2,598,000 -- 3,816,600 --
Cost and expenses:
Cost of revenues......................................... 1,471,300 -- 2,547,900 --
General and administrative............................... 6,660,900 302,200 11,051,500 452,500
Depreciation and amortization............................ 1,502,500 -- 2,354,900 --
------------ ---------- ------------ ----------
Total operating expenses................................. 9,634,700 302,200 15,954,300 452,500
Operating loss from
Continuing operations.................................... (7,036,700) (302,200) (12,137,700) (452,500)
Other income (expense):
Interest income.......................................... 65,100 90,000 150,100 183,400
Income (Loss) on operations of
equity investee........................................ (13,500) -- (35,500) --
Other.................................................... 38,100 24,300 68,200 16,700
------------ ---------- ------------ ----------
Total other income....................................... 89,700 114,300 182,800 200,100
Loss from continuing operations
before income taxes...................................... (6,947,000) (187,900) (11,954,900) (252,400)
(Provision)/Benefit from income tax......................... 550,600 52,200 1,427,000 (6,800)
------------ ---------- ------------ ----------
Loss from continuing operations............................. (6,396,400) (135,700) (10,527,900) (259,200)
Income from discontinued
operations, net of taxes................................. 497,700 784,800 940,000 1,731,500
----------- ---------- ------------ ----------
Net income (loss)........................................... $(5,898,700) $ 649,100 $ (9,587,900) $1,472,300
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Loss from continuing operations............................. $ (0.74) $ (0.02) $ (1.31) $ (0.04)
Income from discontinued operations......................... $ 0.06 $ 0.12 $ 0.12 $ 0.28
------------ ---------- ------------ ----------
Net income (loss)............................................. $ (0.68) $ 0.10 $ (1.19) $ 0.24
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted........................................... 8,626,999 6,397,496 8,031,845 6,261,517
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
IFX CORPORATION AND SUBSIDIARIES
CONSDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
December 31,
-----------------------------
1999 1998
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $(9,587,900) $1,472,300
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation.................................... 709,200 -
Amortization.................................... 1,645,700 -
Deferred taxes.................................. (1,427,000) -
Bad debt expense................................ 554,000 -
Compensation associated with stock options...... 1,640,500 -
Equity in net (gain) loss of affiliated
partnerships................................ 35,500 -
Changes in operating asset and liabilities:
Receivables................................... (549,300) (36,400)
Other assets.................................. (793,700) (40,200)
Due to/from affiliates........................ 10,300 15,400
Accounts payable and accrued expenses......... 2,309,200 120,600
Change in net assets from discontinued
operations.................................. 3,019,800 (132,000)
----------- ----------
Cash provided (used) by operating activities...... (2,433,700) 1,399,700
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, primarily customer base......... (1,865,100) -
(Increase) decrease in investments in and
advances to affiliates....................... 110,900 (220,100)
Increase (decrease) in notes receivable....... (6,400) 1,100
Purchase of PP&E.............................. (1,950,900) (56,800)
Purchase of capitalized software.............. (235,000) -
----------- ----------
Cash used in investing activities.............. (3,946,500) (275,800)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable................... 96,900 -
Proceeds (payments) of capital lease
obligation.................................. (6,100) -
Issuance of common stock...................... 3,000,000 1,000,000
----------- ----------
Cash provided by financing activities........... 3,090,800 1,000,000
----------- ----------
Effect of exchange rate changes on cash........... 124,700 -
----------- ----------
Increase (decrease) in cash and cash equivalents.. (3,164,700) 2,123,900
----------- ----------
Cash and cash equivalents, beginning of period.... 5,482,800 5,633,200
----------- ----------
Cash and cash equivalents, end of period.......... $ 2,318,100 $7,757,100
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes................... - $ 250,000
=========== ==========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITIES DISCLOSURE:
Value of stock issued in conjunction with
acquisitions................................ $ 4,822,400 -
=========== ==========
Acquisition of equipment through assumption of
capital lease obligations................... $ 2,740,500 -
=========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of IFX
Corporation and its majority-owned subsidiaries for which it has a controlling
financial interest. All material intercompany accounts and transactions,
including those related to the Company's former subsidiaries, are eliminated in
consolidation.
These condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation have been
reflected in these condensed consolidated financial statements. The balance
sheet at June 30, 1999, has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended June 30, 1999. Operating results for the quarter ended December 31,
1999 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2000. Certain reclassifications have been made in the 1999
financial statements to conform to the fiscal 2000 presentation. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's financial statements on Form 10-K for the year
ended June 30, 1999.
NOTE 2. DISCONTINUED OPERATIONS
In June 1999, IFX divested itself of 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.
On May 31, 1996, an agreement was reached to sell, transfer and assign to
E.D. & F Man International Inc. ("MINC") substantially all of the brokerage
accounts maintained by FX Chicago, Inc. (formerly Index Futures Group, Inc., or
"Index"), together with all positions, securities and other assets held in or
for such accounts and other agreed-upon assets used in the conduct of the
brokerage activities. MINC is a unit of E.D.& F. Man Group, plc, a London-based
international trading and finance conglomerate. This sale was completed as of
July 1, 1996. During 1997, Index ceased being a clearing member at all
exchanges, and ceased being a registered futures commission merchant.
The purchase price payable by MINC in connection with this transaction is
based on a percentage of the net income (as defined in the sales agreement) of
the transferred activities during the sixty-six month period following the sale.
Because the purchase price is contingent upon the future earnings of the
customer accounts sold, none of which is guaranteed, income is recognized as
earned beginning in fiscal year 1997, over the five and one-half years after the
date of the sale. The sales contract required Lee S. Casty to sign a non-
competition agreement. As compensation for providing such an agreement, a
portion of the purchase price was to be paid to Lee S. Casty. Mr. Casty
irrevocably transferred his right to receive payments under such agreement to
the Company. Accordingly, a portion of the purchase price which would otherwise
have been received by Lee S. Casty is being included in revenue by the Company.
In addition, in conjunction with the sale, the Company issued a limited
indemnification agreement to MINC. The agreement covers potential customer
claims arising from activity prior to the sale.
The following table summarizes financial information related to the
discontinued trading business:
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Total revenues....................................... $ 807,600 $2,761,400 $1,531,400 $5,665,000
========== ========== ========== ==========
Income from discontinued
operations before income taxes..................... $ 765,600 $1,207,400 $1,446,100 $2,624,800
Income tax provision on discontinued operation...... (267,900) (422,600) (506,100) (893,300)
---------- ---------- ---------- ----------
Income from discontinued operations, net of taxes... $ 497,700 $ 784,800 $ 940,000 $1,731,500
========== ========== ========== ==========
The information set forth in the remaining Notes to the Financial
Statements relates to continuing operations unless otherwise specified.
NOTE 3. ACQUISITIONS AND RECENT DEVELOPMENTS
NetSpace, S.A. de C.V. On October 1, 1999, IFX purchased all of the
subscriber base of NetSpace, S.A. de C.V. ("NetSpace"), an ISP located in
Toluca, Mexico. NetSpace currently serves customers providing standard dial-up
connections, dedicated Internet products and web hosting.
The Conex Group. On October 6, 1999, IFX purchased all of the capital stock
of Conex Brasil S.A., W3 Informatica Ltda., K3 Informatica Ltda, and Conex
Canoas Ltda. (referred to collectively as the "Conex Group"), which provide
Internet services in the Brazilian city of Porto Alegre and the surrounding
cities of Novo Hamburgo, Santa Maria, and Canoas. The Conex Group currently
serves customers providing standard dial-up connections, dedicated Internet
products and web hosting. On October 21, 1999, the Company filed a Form 8-K with
respect to the acquisition of the Conex Group and its affiliated companies. On
December 20, 1999, the Company filed a Form 8-K/A amending the Form 8-K
previously filed.
Sistemas Integrales, Servicios y Comunicacion, S.A. de C.V. On November 8,
1999, IFX purchased all of the users and assets of Sistemas Integrales,
Servicios y Comunicacion, S.A. de C.V. ("SISCO"). SISCO provides dial-up, web
design and web hosting services to consumers and corporations in Guadalajara,
Jalisco, Mexico.
Panaweb Corporation. On November 30, 1999, IFX purchased all of the capital
stock of Panaweb S.A. ("Panaweb"), a Panama Internet design firm. Panaweb
provides web design and web hosting services to consumers and corporations in
the Republic of Panama. Panaweb also owns and manages one of Panama's leading
local Internet portals, www.panama.net.
Networks Mexico, S.A. de C.V. On December 15, 1999, IFX purchased all of
the users and assets of Networks Mexico, S.A. de C.V. ("NETMEX"). NETMEX
provides dial-up, Web design and Web hosting services to consumers and
corporations in Mexico City, Mexico.
Zalhe Informatica Ltda. On December 14, 1999, IFX purchased all of the
shares of Zalhe Informatica Ltda. ("Zalhe"), a Brazilian Internet Service
Provider. Zalhe is a provider of Internet services including, dial up access,
dedicated access, web design and web hosting in Pelotas, Brazil.
Nicanet, S.A. On December 20, 1999, IFX purchased all of the shares of
Nicanet S.A. ("Nicanet"). Nicanet is a provider of Internet services to
consumers and businesses in Managua, Nicaragua, providing dial up access,
dedicated and wireless access, web development, design and hosting.
Parmil, S.A. On December 23, 1999, IFX purchased all of the shares of
Parmil S.A. ("Multired"). Multired is a provider of Internet services to
Uruguayan consumers and
businesses, providing dial-up, dedicated and wireless access, as well as web
development, design and hosting.
For the acquisitions during the second quarter of fiscal 2000, the total
purchase prices were approximately $8 million, of which approximately $2.1
million was paid or will be paid in cash, approximately $5.7 million was paid or
will be paid by issuing approximately 253,192 shares of the Company's common
stock and assumed liabilities of approximately $0.2 million. The total cash
acquired in those acquisitions was $0.2 million. Each of the acquisitions was
accounted for under the purchase method of accounting. The purchase price in
excess of the net tangible assets aggregated approximately $6,692,800 and was
allocated to Acquired Customer Base. This allocation is preliminary and is
subject to finalization of the Company's valuation analysis. The Acquired
Customer Base is being amortized using the straight-line method over an
estimated life of 3 years. The consolidated financial statements include the
accounts of these acquisitions since the date of purchase.
The following unaudited pro forma data summarize the results of operations
for the periods indicated as if these acquisitions had been completed on July 1,
1998, the beginning of the 1999 fiscal year. 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, 1998 or that may be obtained in the future.
The pro forma data does not give effect to acquisitions completed subsequent to
December 31, 1999.
Six Months Ended
December 31,
------------------------
1999 1998
-------- --------
(Unaudited)
Total revenues............................ $ 5,893,600 $2,540,900
Net income (loss)......................... (9,910,500) 857,900
Basic and diluted net income (loss) per
common share.......................... ($1.23) $.14
NOTE 4. STOCK BASED COMPENSATION PLANS
Employee Stock Option Plan
On October 13, 1999, the Company filed a Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1934, in which, among other
things, it requested shareholder approval for 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. On November 9 the shareholders voted in favor of the amendment increasing
the number of common shares available under the Option Plan from 900,000 to
1,800,000.
Directors Stock Option Plan
On October 13, 1999, the Company filed a Proxy Statement Pursuant to
Section 14(a) of the Securities Exchange Act of 1934, in which, among other
things, it requested shareholder approval for the IFX Corporation Directors
Stock Option Plan (the "Directors Plan"). The purpose of the Directors Plan is
to assist the Company in securing individuals who are not already employees or
officers of the Company to serve on its Board of Directors, and to provide
financial incentives to such directors to exert their best efforts on behalf of
the Company. In general, the Directors Plan provides that, each 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 (including this annual meeting), 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. On
November 9 the shareholders voted in favor of the Directors Plan.
NOTE 5. SUBSEQUENT EVENTS
Free Internet Access. On January 3, 2000, IFX announced that it would offer
a class of service featuring free Internet access in Latin America. The free
access offering is provided by Tutopia.com, Inc., a subsidiary of IFX,and
currently covers 6 countries: Argentina, Brazil, Chile, Colombia, El Salvador
and Mexico. Following the initial implementation, the program will then be
rolled out in the rest of the IFX network. Tutopia.com became the first company
to offer free Internet access in Latin America on a pan-regional basis. IFX will
also continue to offer fee-based premium and business service.
Openway, Ltda. On January 12, 2000, IFX purchased substantially all of the
assets of Openway Ltda., a leading Colombian Internet Service Provider. Openway
provides dial-up, web design and web hosting services to consumers and
corporations in Bogota, Colombia.
Spinway Media Network, Inc. On January 24, 2000, Tutopia.com, Inc. entered
into an agreement (the "Spinway Agreement") with Spinway Media Network, Inc.
("Spinway") under which Tutopia.com's free Internet access will utilize
Spinway's persistent advertising box technology to provide Tutopia.com users
with general and targeted advertising. A copy of the Spinway Agreement is filed
as Exhibit 3.1 to this report.
Brasilnet Comunicacoes S.A. On January 28, 2000, IFX purchased the shares
of Brasilnet Comunicacoes S.A. ("Brasilnet"), a Brazilian Internet Service
Provider. Brasilnet provides dial-up access, web design and web hosting services
to consumers in Joinville, Itajai, Blumenau, Criciuma and Florianopolis, Brazil.
NOTE 6. GEOGRAPHIC INFORMATION
In fiscal 1999 the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information". The new standard changes the information the Company reports about
its operating segments.
The Company is structured primarily around the geographic markets it serves
and operates four reportable segments in Brazil, Chile, Mexico and Venezuela.
All of the segments provide Internet connectivity services. The accounting
policies of the segments are the same as those described in the Significant
Accounting Policies footnote of the June 30, 1999 consolidated financial
statements. The Company evaluates performance based on profit or loss from
operations before income taxes excluding interest income and expenses, equity
income, and gains or losses from securities and other investments.
The Company does not derive more than 10% of its revenues from any
individual customer.
Selected unaudited financial information for the three months ended
December 31, 1999 by segment is presented below:
United Brazil Chile Mexico Venezuela Other Total
States
- ----------------------------------------------------------------------------------------------------
Revenues - 899,600 395,000 421,000 470,500 411,900 2,598,000
- ----------------------------------------------------------------------------------------------------
Income (loss)
from continuing
operations
before taxes (4,452,600) (340,900) (632,600) (137,400) (364,800) (1,018,700) (6,947,000)
- ----------------------------------------------------------------------------------------------------
Selected unaudited financial information for the six months ended December
31, 1999 by segment is presented below
United Brazil Chile Mexico Venezuela Other Total
States
- ----------------------------------------------------------------------------------------------------
Revenues - 1,008,000 805,700 689,900 733,100 579,900 3,816,600
- ----------------------------------------------------------------------------------------------------
Loss from
continuing
operations
before taxes (7,097,700) (538,400) (1,225,900) (336,700) (468,100) (2,288,100) (11,954,900)
- ----------------------------------------------------------------------------------------------------
Information by product lines is presented on the Condensed Consolidated
Statement of Operations.
NOTE 7. Cash & Cash Equivalents
Cash and cash equivalents includes cash and investments of less than three
months in duration.
NOTE 8. Capitalized Software
Effective for fiscal year 2000, the Company adopted the American Institute
of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." The
statement requires capitalization of certain costs incurred in the development
of internal-use software, including external direct material and service costs.
Prior to adoption of SOP 98-1, the Company expensed these costs as incurred.
NOTE 9. Stockholders' Equity
International Technology Investments, LC. On December 31, 1999,
International Technology Investments, LC ("ITI"), exercised its right to
purchase 2,500,000 shares of the Company's common stock for $50,000 in cash and
a short-term note in the amount of $4,950,000. ITI is controlled by Michael
Shalom, CEO of IFX. On January 12, 2000, ITI made a partial payment of
$2,900,000, leaving a remaining principal balance of $2,050,000. The $2,900,000
is reflected as a note receivable on the December 31, 1999 Balance Sheet and the
$2,050,000 is reflected as a reduction to Paid-in Capital. The note receivable
from ITI bears interest at the rate of 7 percent per annum.
Authorization Of Preferred Shares. On November 9, 1999, the shareholders
approved an amendment to the Company's Restated Certificate of Incorporation
providing the Company the authority to issue up to 10,000,000 shares of
preferred stock and, with respect to such shares, to establish among other
things, the price and the rate and nature of dividends, the terms and conditions
on which shares may be redeemed, the terms and conditions for conversion or
exchange into any other class or series of the stock and the voting rights.
Decrease In The Number Of Shares Of Authorized Common Stock. IFX's Restated
Certificate of Incorporation authorized the issuance of 150,000,000 shares of
Common Stock, $.02 par value. As of December 31, 1999, 11,084,920 shares of
Common Stock were issued and outstanding. On November 9, 1999, the shareholders
approved an amendment to the Restated Certificate of Incorporation providing
that the authorized number of shares of Common Stock be decreased from
150,000,000 shares to 50,000,000 shares.
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Period Ended December 31, 1999.
The results shown herein are not necessarily representative of the results
that may be expected in any future period. A discussion of certain risk factors
that could cause future results to differ materially from the results reported
herein is filed herewith as Exhibit 99.1 to this Form 10-Q.
OVERVIEW
The following discussion should be read in conjunction with its
Consolidated Financial Statements and notes that follow it and with the audited
consolidated financial statements, notes thereto, and management's discussion
and analysis for the year ended June 30, 1999, included in the annual report
filed on Form 10-K for such period. This discussion and analysis reflects the
adjustments made to segregate the discontinued operations ("discontinued
operations") that resulted from (i) 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
(ii) from the divesture in June 1999 of its 50.1% interest in IFX Ltd.
Discontinued operations are shown under a separate line item on the Income
Statement and Balance Sheet for fiscal years 2000 and 1999.
Due to the discontinued operations, IFX's primary source of revenues
changed from trading revenues and from foreign exchange operations to subscriber
and other fees from Internet operations. IFX's revenues from 2000 and 1999
related to discontinued operations are shown as "Income from Discontinued
Operations, net of income taxes." The revenues from the ISP acquisitions are
accounted from the date of purchase.
Due to the discontinued operations, IFX's expenses changed from consisting
mostly of interest, commissions and other related brokerage costs to local dial-
up lines, local Internet connections, and depreciation and amortization
expenses. The expenses from the ISP acquisitions are accounted from the date of
purchase.
GENERAL
IFX is a pan-regional Internet Service Provider, or ISP, in Latin America.
The Company's focus is on serving individuals and small businesses. The
Company's primary service is dial-up Internet access, which IFX offers through
its Unete service, in various price and usage plans designed to meet the needs
of its subscribers. Our business services include dedicated phone lines, web
hosting, web page design, and domain name registration. In addition, in February
2000 IFX started offering free basic-level Internet access in 6 countries in
Latin America through its newly-created Tutopia.com, Inc. subsidiary. IFX will
continue to offer premium services to paying users.
IFX offers subscribers complete Internet access in English, Spanish, and
Portuguese, with a user-friendly and easy to install software. The software
contains a set of popular Internet applications including electronic mail, World
Wide Web access, File Transfer Protocol and Internet Relay Chat. Through its
infrastructure of IFX owned subsidiaries and third-party providers, IFX's
subscribers are able to access the Internet in thirteen countries in Latin
America, and in many major cities in the United States via a local telephone
call and with no roaming fees.
Over the past year, IFX has established a regional presence by acquiring
the stock or assets of established independent ISPs throughout Latin America.
The Company hopes that it will attain economies of scale (as the number of
subscribers increases, the costs and expenses per subscriber decrease) in
selling, general and administrative costs, particularly in the areas of numbers
of employees and salaries, operating leases, and marketing expenses. However,
there can be no assurance that the Company will achieve these anticipated cost
reductions. In addition to providing Internet access service, the Company hopes
to expand its Latin American Internet offerings to include advertising, content
and e-commerce. As of December 31, 1999, the Company had approximately 490
employees.
During the quarter ended December 31, 1999 the Company completed the
following acquisitions and investments:
Date Acquisition Business Country
- ---- ----------- -------- -------
October 1999 Netspace, S.A. de C.V ISP Mexico
The Conex Group ISP Brazil
- -------------------------------------------------------------------------
November 1999 SISCO ISP Mexico
- -------------------------------------------------------------------------
December 1999 Panaweb Corporation Web Design Panama
Networks Mexico S.A de C.V. ISP Mexico
Zalhe Informatica, Ltda. ISP Brazil
Nicanet S.A. ISP Nicaragua
Parmil S.A. ISP Uruguay
- ------------------------------------------------------------------------
Prior to July 1996, the primary business of IFX was providing commodity
brokerage services. On July 1, 1996, IFX sold substantially all of its brokerage
assets (other than certain assets of its majority-owned U.K. subsidiary) to
E.D.& F. Man International, Inc., a unit of E.D. & F. Man Group, plc, a London-
based international trading and finance conglomerate, for a purchase price
consisting of cash earn-out payments based upon the sold business's
profitability (as defined in the sale agreement) during the sixty-six months
following the sale. Since July 1996, IFX's revenues have consisted primarily of
earn-out payments from such asset sale, interest income and income from
operations of the Company's former majority-owned British subsidiary, IFX Ltd.,
which conducts foreign exchange business as a registrant of the British
Securities and Futures Authority. In June 1999, IFX divested its 50.1% interest
in IFX Ltd. in exchange for approximately $2.45 million in cash and a note
receivable, and a redeemable preference share entitling IFX to quarterly
payments equal to approximately 31% of the net profits (as specifically defined)
of IFX Ltd. through June 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended December 31, 1999, cash used by continuing
and discontinued operations was approximately $2.4 million compared to cash
provided by continuing and discontinued operations of $1.4 million for the same
period in 1998. The majority of cash for the six months ended December 31, 1999,
was used by the Company's continuing investments and general operating expenses
in the Internet operations. In general, the Company 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 which are classified as cash
equivalents. As of December 31, 1999, the Company held approximately $2.3
million in cash and cash equivalents. The Company expects to meet its operating
cash flow requirements through funds generated by earn-out payments, operations,
and debt and/or equity financings.
For the six months ended December 31, 1999, cash used in investment
activities was approximately $3.9 million compared to cash used in investment
activities of $0.3 million for the same period in 1998. The increase was
primarily due to the purchases of equipment and acquisitions.
Stockholders' equity at December 31, 1999 was approximately $19.0 million
as compared with $16.1 million at June 30, 1999.
RESULTS OF OPERATIONS - THREE MONTHS AND SIX MONTHS ENDED DECEMBER 1999 COMPARED
TO 1998
Revenues. In the three months and six months ended December 31, 1999, IFX
derived $2,016,800 or 78%, and $2,927,400 or 77%, respectively of the total
continuing revenues from subscriptions from individuals for dial-up access to
the Internet. Monthly subscription fees vary by billing plan. With the current
pricing plans, customers have several choices including unlimited local,
unlimited pan-regional and limited local plans.
In addition, in the three months and six months ended December 31, 1999,
IFX derived $252,100 or 10%, and $431,500 or 11%, respectively of the total
continuing revenues from full-time dedicated access connections to the Internet.
Full-time dedicated lines offer small businesses direct and uninterrupted
connections to the Internet without the need to dial any number.
The remaining $329,100 or 12%, and $457,700 or 12% of the total continuing
revenues for the three months and six months ended December 31, 1999 were
derived from certain small business services which include web-hosting, web
design, and other value-added services such as domain name registration, and
from the sale of such items as modems and computer cameras related to
promotions. IFX's web-hosting services allow a business or individual to post
information on the World Wide Web through IFX's servers. IFX's Web design
services offer Internet site development services for small businesses.
Revenues for three months and six months ended December 31, 1998 from
continuing operations are $0, since the Company had not yet been involved in the
Internet business. Revenues for the period ended December 31, 1998 are shown in
the income statement as discontinued operations.
Costs of Revenues. IFX's cost of revenues include all the costs that are
primarily related to the number of subscribers. The primary costs are the local
Internet connection fees paid to the telecommunication companies in each country
and the subscriber start-up expenses. The telecommunication expenses include the
costs of providing its subscribers with local telephone dialing numbers to its
POPs, the costs related to third-party POPs, and the costs of the connections of
IFX's hubs to the Internet backbone. Start-up expenses include the cost of
distributing the compact disk with its starter kit software. Cost of revenues
were $1,471,300 and $0 for the three months ended December 31, 1999 and December
31, 1998, respectively; and were $2,547,900 and $0 for the six months ended
December 31, 1999 and December 31, 1998, respectively.
General and Administrative Expenses. General and administrative costs are
primarily for salaries, legal, accounting and consulting fees, and advertising,
market analysis, and trade show expenses related to the promotions of its ISP
service. General and administrative expenses were $6,660,900 and $302,200 for
the three months ended December 31, 1999 and December 31, 1998, respectively;
and were $11,051,500 and $452,500 for the six months ended December 31, 1999 and
December 31, 1998, respectively. The increase was primarily due to an increase
in payroll and an increase in the marketing strategies including expanding sales
and marketing efforts.
IFX believes that it is necessary to purchase or install POPs in each major
country in Latin America. As IFX continues with that expansion into new markets,
both costs of sales and selling, general and administrative expenses will
increase. IFX expects that these costs will have a short-term negative impact on
its net income. In cities where the Company does not want to establish a
presence, but wants its subscribers to have access to the Internet, it will use
third-party POPs.
Depreciation and amortization. Depreciation and amortization are related to
the depreciation of fixed assets and the amortization of the acquired customer
base from other ISPs. IFX depreciates its assets based on estimated useful lives
that range from three to five years. IFX amortizes purchased customer bases
using the straight-line method over a period of three years, commencing when the
purchase is completed. This amortization has a negative effect on net income.
Depreciation and amortization expense was $1,502,500 and $0 for the three months
ended December 31, 1999 and December 31, 1998, and were $2,354,900 and $0 for
the six months ended December 31, 1999 and December 31, 1998, respectively.
The Company will continue to invest heavily in purchases of computer
equipment, software and acquisitions in Latin America, which will increase its
depreciation and amortization costs. These costs will have a short-term
negative impact on net income, but the Company believes that these increased
costs should be offset by anticipated increases in revenue attributable to
overall subscriber growth and advertising. However, there can be no assurance
that the Company will be able to build, increase or maintain its subscriber base
in a given market to the extent necessary to generate sufficient revenues to
offset these expenses.
Other Income. Other income is mostly derived from investment in short-term
government notes. Other income was $89,700 and $114,300 for the three months
ended December 31, 1999 and December 31, 1998, respectively; and was $182,800
and $200,100 for the six months ended December 31, 1999 and December 31, 1998,
respectively. The decreases were primarily due to a decrease in average cash
balances available for investment.
Other Income and Gains from Discontinued Operations. Earn out payments from
the 1996 sale of its brokerage asset to E.D. & F. Man International, Inc., and
from the 1999 sale of it's 50.1% interest in IFX Ltd. are shown as discontinued
operations, net of expenses and taxes. In the three months ended December 31,
1999, the Company earned approximately $497,700 compared to $784,800 for the
three months ended December 31, 1998. For the six months ended December 31, 1999
the Company earned $940,000 compared to $1,731,500 for the six months ended
December 31, 1998. The decrease in income was due to lower profitability of the
businesses sold. All the earn-out proceeds were invested in IFX's Internet
operations.
Income tax provision. For the three months ended December 31, 1999 and
December 31, 1998, the Company recorded a tax benefit from its continuing
operations of approximately $550,600 and $52,200, respectively. For the six
months ended December 31, 1999, the Company recorded a tax benefit from its
continuing operations of approximately $1,427,000 and for December 31, 1998 a
tax provision of $6,800. The effective tax rate for the three months ended
December 31, 1999 was 8.0% compared to 27.8% for the three months ended December
31, 1998. The effective tax rate for the six months ended December 31, 1999 was
11.9% compared to 2.7% for the six months ended December 31, 1998.
Net income (loss) and income (loss) per share. As a result of the factors
discussed above, IFX's loss from continuing operations for the three months
ended December 31, 1999 was approximately $6.3 million, or $(0.74) per share,
compared to a net loss of $0.1 million, or $(0.02) per share, for the three
months ended December 31, 1998. Including discontinued operations, the Company
recorded a net loss of $5.9 million, or $(0.68) per share, compared to a net
income of $0.6 million, or $0.10 per share, for the three months ended December
31, 1998.
IFX's loss from continuing operations for the six months ended December 31,
1999 was approximately $10.5 million, or $(1.31) per share, compared to a net
loss of $0.3 million, or $(0.04) per share, for the six months ended December
31, 1998. Including discontinued operations, the Company recorded a net loss of
$9.6 million, or $(1.19) per share, compared to a net income of $1.5 million,
or $0.24 per share, for the six months ended December 31, 1998.
CREDIT AGREEMENTS
In January 2000, the Company signed a four-year lease agreement with the
Graham Group for 12,500 square feet of office space in Miami Lakes, Florida, to
commence in January 2000. This lease provides for aggregate payments totaling
approximately $1 million over the next 4 years.
YEAR 2000 COMPLIANCE
The commonly referred to "Year 2000" problem relates to whether computer
systems will properly recognize date sensitive information when the year
changes from 1999 to 2000. Systems that do not properly recognize such
information will generate wrong data and could fail. IFX has identified two
main areas of Year 2000 risk:
1. Internal computer systems or embedded chips could be disrupted or
fail, causing an interruption or decrease in productivity in our
operations; and
2. Computer systems or embedded chips of third parties including, without
limitation, financial institutions, suppliers, vendors, landlords,
customers, international suppliers of telecommunications services and
others, could be disrupted or fail, causing an interruption or
decrease in our ability to continue our operations. This risk is
particularly acute in Latin America, where many older computer
systems are still in use.
Prior to entering the year 2000, the Company developed plans for
implementing, testing and completing any necessary modifications to its key
computer systems and equipment with embedded chips to help ensure that they were
Year 2000 compliant. The costs of addressing Year 2000 issues has been minor to
date, as most of our PC's, laptops, servers, routers and other computer
equipment were found to be Year 2000 compliant. In addition, the Company
identified and communicated with third-party entities with which it transacts
significant business, including critical vendors and financial institutions, to
determine their Year 2000 status and any probable impact on the Company. Our
inquiries did not reveal any significant Year 2000 noncompliance issues
affecting our material third parties.
Now that we have entered the year 2000, we have tested our key computer
systems and equipment and have confirmed that they appear to be Year 2000
compliant. To date, the Company has not experienced any material Year 2000
related disruptions or failures of our systems or services, nor has the Company
been notified of any disruptions or failures in the systems of any of our third
parties. There is an ongoing risk that Year 2000 related problems could still
occur and the Company will continue to monitor and evaluate these risks;
however, we believe that the Year 2000 problem should not pose any significant
operational problems for us.
Item 3. - Quantitative and Qualitative Disclosures about Market Risk
The Company's continuing operations are focused primarily in Latin America,
subjecting the Company to certain political, currency, 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 ISP. 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, especially in Latin
America. This fluctuation can cause the Company to gain or lose on the
translation to US Dollars.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PRECEDINGS
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.
In a matter related to the Company's discontinued operations, on December
28, 1998, John and Christina Blazina had previously filed an NFA arbitration
against Index and others, alleging breach of fiduciary duty, fraud, breach of
contract and negligence in the solicitation and trading of a series of managed
accounts opened at Index in 1995. On November 30, 1999, after a two-day hearing
in Washington DC, a three member arbitration panel ruled that the claimants'
claim was filed outside the two-year limitation on actions contained in the
NFA's Code of Arbitration and terminated the proceeding without any award
against respondents.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
3.1 Spinway Media Network, Inc. Agreement
27 Financial Data Schedule (EDGAR only)
99.1 Risk Factors
(B) REPORTS ON FORM 8-K
On October 21, 1999, IFX Corporation filed a Current Report on Form 8-K
that contained certain exhibits with respect to its acquisition, through its
wholly owned subsidiary Unete.com do Brasil S/C Ltda, of all the issued and
outstanding ownership interests (quotas) of Conex Brasil S.A, W3 Informatica
Ltda, K3 Informatica Ltda, and Conex Canoas Ltda., referred to collectively
herein as the "Conex Group", for aggregate consideration (including
commissions) of approximately $5.2 million, of which approximately $1.8 million
was paid or is payable in cash, approximately $3.3 million was paid or is
payable by issuing shares of the Company's common stock and assuming
liabilities in the approximate amount of $0.1 million. The purchase was
determined through arms' length negotiations with the sellers of the Conex
Group, which are unrelated third parties with respect to the Company.
On December 20, 1999, the Company filed on Form 8-K/A an amendment to the
Form 8-K previously filed on October 21, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IFX CORPORATION
--------------------------
(Registrant)
Dated: February 14, 2000 By: /S/ JOEL EIDELSTEIN
------------------------
Joel Eidelstein
President
Dated: February 14, 2000 By: /S/ JOSE LEIMAN
------------------------
Jose Leiman
Chief Financial Officer