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 March 31, 2000
[ ] 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
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(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
incorporation or organization) Identification No.)
707 Skokie Blvd Ste 580, Northbrook, Illinois 60062
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(Address of principal executive offices) (Zip Code)
(847) 412-9411
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(Registrant's telephone number, including area code)
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(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
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As of March 31, 2000, the issuer had outstanding 12,926,924 shares of common
stock, $.02 par value per share.
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Page 1
IFX CORPORATION AND SUBSIDIARIES
Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed consolidated balance sheets as of
March 31, 2000 (Unaudited) and June 30, 1999 3
Condensed consolidated statements of operations
for the three months ended March 31, 2000
(Unaudited) and 1999 (Unaudited), and for
the nine months ended March 31, 2000
(Unaudited) and 1999 (Unaudited) 4
Condensed consolidated statements of cash flows
for the nine months ended March 31, 2000
(Unaudited) and 1999 (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 March 31, 2000 11
Item 3 - Quantitative and Qualitative Disclosures
about Market Risk 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 5 - Related Party Transaction 18
Item 6 - Exhibits and reports on form 8-K 18
(A) Exhibits
Exhibit 27 Financial Data Schedule (EDGAR only)
Exhibit 99.1 Risk Factors
EXPLANATORY NOTE
This Amendment No. 1 to Quarterly Report on Form 10-Q/A is being filed to
correct a typographical error on the Consolidated Statements of Cash Flows for
the 9 months ended March 31, 2000, to revise notes 6 and 11 to the enclosed
financial statements, to revise the enclosed "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and to revise the
Financial Data Schedule on Exhibit 27.
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Page 2
PART I--FINANCIAL INFORMATION
IFX CORPORATION AND SUBSIDIARIES
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.
March 31, June 30,
2000 1999
ASSETS (Unaudited)
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CURRENT ASSETS:
Cash and cash equivalents................................. $14,080,800 $ 5,482,800
Receivables, net of allowance for doubtful accounts of
$724,800 and $80,100, at March 31, 2000 and June 30, 1999
respectively............................................. 1,263,500 458,300
Deferred income taxes..................................... 458 000 --
Net assets (liabilities) of discontinued operations....... (242,600) 3,726,900
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Total current assets.................................... 15,559,700 9,668,000
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PROPERTY AND EQUIPMENT:
Equipment, furniture and leasehold improvements........... 6,600,200 2,253,500
Assets under capital lease................................ 6,179,100 --
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12,779,300 2,253,500
Less: accumulated depreciation and amortization........... (2,113,600) (369,300)
----------- -----------
Total property and equipment, net....................... 10,665,700 1,884,200
----------- -----------
OTHER ASSETS:
Acquired customer base, net of amortization of $3,319,600
and $155,500, respectively.............................. 17,036,100 2,686,600
Investment in Yupi Internet Inc........................... 2,565,500 3,113,500
Investments in and advances to affiliates................. 94,300 241,500
Notes receivable.......................................... 620,000 612,500
Deferred income taxes..................................... 1,270,600 --
Foreign taxes recoverable................................. 799,700
Capitalized software, net................................. 2,378,500 --
Other assets.............................................. 2,035,500 655,200
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Total other assets...................................... 26,800,200 7,309,300
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TOTAL ASSETS............................................... $53,025,600 $18,861,500
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 9,967,500 $ 2,447,200
Accrued liabilities for acquisitions...................... 3,743,000 --
Deferred revenues......................................... 90,700 --
Deferred lease credits.................................... 35,300 --
Capital lease obligation.................................. 802,400 --
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Total current liabilities............................... $14,638,900 2,447,200
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LONG-TERM LIABILITIES:
Deferred gain on sale of investment....................... 2,551,900 --
Notes payable............................................. 451,700 316,900
Deferred lease credits.................................... 105,700 --
Capital lease obligation.................................. 5,832,800 --
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Total long-term liabilities............................. 8,942,100 316,900
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TOTAL LIABILITIES.......................................... 23,581,000 2,764,100
----------- -----------
ADVANCE ON SALE OF SUBSIDIARY COMMON STOCK................. 5,572,500 --
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.02 par value; 50,000,000 shares
authorized, 12,926,924 and 6,830,240 shares issued
and outstanding, respectively............................ 258,500 136,600
Paid-in capital.......................................... 51,524,800 11,299,100
(Accumulated deficit) Retained earnings.................. (15,737,400) 4,817,200
Accumulated other comprehensive income (loss)............ 456,700 (26,000)
Deferred compensation..................................... (12,630,500) (129,500)
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TOTAL STOCKHOLDERS' EQUITY................................. 23,872,100 16,097,400
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $53,025,600 $18,861,500
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
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IFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
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2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
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STATEMENT OF OPERATIONS DATA:
Revenues:
Dial Up............................................... $ 2,076,900 $ -- $ 5,004,300 $ --
Dedicated............................................. 1,066,100 -- 1,497,600 --
Hosting and Design Web Services....................... 125,200 -- 293,100 --
Other................................................. 1,000 -- 290,800 --
------------ ----------- ------------ ----------
Total revenues........................................ 3,269,200 -- 7,085,800 --
Cost and expenses:
Cost of revenues...................................... 2,385,600 -- 4,933,500 --
General and administrative............................ 5,359,200 647,800 12,725,600 1,100,300
Depreciation and amortization......................... 2,262,600 -- 4,617,500 --
Sales and Marketing................................... 4,668,900 6,713,500
Stock Compensation.................................... 2,289,500 3,930,000
------------ ----------- ------------ ----------
Total operating expenses.............................. 16,965,800 647,800 32,920,100 1,100,300
Operating loss from
Continuing operations................................. (13,696,600) (647,800) (25,834,300) (1,100,300)
Other income (expense):
Interest income....................................... 83,800 100,300 233,900 283,700
Income (Loss) on operations of
equity investee..................................... (6,400) -- (41,900) 6,700
Gain on sale of investment, related party............. 1,900,000 -- 1,900,000 --
Other................................................. (43,700) 8,900 24,500 18,900
------------ ----------- ------------ ----------
Total other income.................................... 1,933,700 109,200 2,116,500 309,300
Loss from continuing operations
before income taxes................................... (11,762,900) (538,600) (23,717,800) (791,000)
(Provision)/Benefit from income tax..................... 301,600 (3,400) 1,728,600 (10,200)
------------ ----------- ------------ ----------
Loss from continuing operations......................... (11,461,300) (542,000) (21,989,200) (801,200)
Income from discontinued
operations, net of taxes.............................. 494,600 1,036,000 1,434,600 2,767,500
------------ ----------- ------------ ----------
Net income (loss)....................................... $(10,966,700) $ 494,000 $(20,554,600) $1,966,300
============ =========== ============ ==========
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Loss from continuing operations......................... $ (1.01) $ (0.08) $ (2.41) $ (0.12)
Income from discontinued operations..................... $ 0.04 $ 0.15 $ 0.16 $ 0.43
------------ ----------- ----------- ----------
Net income (loss)......................................... $ (0.97) $ 0.07 $ (2.25) $ 0.31
============ =========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted....................................... 11,315,382 6,655,539 9,121,522 6,390,950
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The accompanying notes are an integral part of the consolidated financial
statements.
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IFX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $(20,554,600) $1,966,300
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation................................................... 1,453,400 -
Amortization................................................... 3,164,100 -
Deferred taxes................................................. (1,728,600) 833,300
Bad debt expense............................................... 644,700 -
Compensation associated with stock options..................... 3,930,000 -
Loss on operations of equity investee.......................... 41,900 -
Changes in operating asset and liabilities:
Receivables.................................................. (856,900) (32,800)
Foreign taxes recoverable.................................... (799,700) -
Other assets................................................. (1,196,300) (122,800)
Due to/from affiliates....................................... (112,500) (5,100)
Deferred revenues............................................ 90,700 -
Deferred lease credits....................................... 141,000
Accounts payable and accrued expenses........................ 6,338,700 245,200
Change in net assets from discontinued operations.............. 3,969,500 1,734,500
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Cash provided (used) by operating activities..................... (5,474,600) 4,618,600
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CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of investment in Yupi Internet Inc........... 548,000 (113,500)
Deferred gain on sale of investment.......................... 2,551,900 -
Acquisitions, primarily customer base........................ (1,927,500)
(Increase) decrease in investments in and
advances to affiliates..................................... 105,300 (229,800)
Increase (decrease) in notes receivable...................... (7,500) 3,700
Purchase of PP&E............................................. (2,504,100) (342,700)
Purchase of capitalized software............................. (1,878,500) -
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Cash used in investing activities.............................. (3,112,400) (682,300)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................................. 111,900 -
Payments of capital lease obligation......................... (43,900) -
Issuance of common stock..................................... 11,061,900 1,000,000
Advance on sale of subsidiary common stock................... 5,572,500 -
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Cash provided by financing activities.......................... 16,702,400 1,000,000
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Effect of exchange rate changes on cash.......................... 482,600 -
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Increase (decrease) in cash and cash equivalents................. 8,598,000 4,936,300
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Cash and cash equivalents, beginning of period................... 5,482,800 5,633,200
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Cash and cash equivalents, end of period......................... $ 14,080,800 10,569,500
============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes................................... - $ 250,000
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SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITIES DISCLOSURE:
Value of stock issued in conjunction with acquisitions....... $ 12,854,500 -
============ ==========
Acquisition of equipment and software through assumption of
capital lease obligations.................................. $ 6,679,100 -
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The accompanying notes are an integral part of the consolidated financial
statements.
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IFX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(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 March 31, 2000
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
IFX Ltd. 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 IFX Ltd., IFX decided not to invest the sales proceeds in the
trading business and, instead, decided to continue to develop businesses in the
Internet industry in Latin America. 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.
FX Chicago Brokerage Accounts. 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 ninety-nine 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.
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The following table summarizes financial information related to the
discontinued trading business of IFX Ltd. and FX Chicago:
Three Months Ended Nine Months Ended
March 31, March 31,
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2000 1999 2000 1999
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Total revenues..................................... $ 801,900 $2,765,300 $2,333,300 $8,430,300
========= ========== ========== ==========
Income from discontinued
operations before income taxes................... $761,000 $1,593,800 $2,207,100 $4,218,600
Income tax provision on discontinued operation..... (266,400) (557,800) (772,500) (1,451,100)
--------- ---------- ---------- ----------
Income from discontinued operations, net of taxes.. $ 494,600 $1,036,000 $1,434,600 $2,767,500
========= ========== ========== ==========
The information set forth in the remaining Notes to the Financial
Statements relates to continuing operations unless otherwise specified.
NOTE 3. RECENT DEVELOPMENTS AND ACQUISITIONS
Developments
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Tutopia.com and 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 9 countries: Argentina, Brazil, Chile, Colombia, El
Salvador, Guatemala, Mexico, Panama and Venezuela. 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.
Tutopia.com Inc. is a combination content / free access provider that
offers users throughout the region free Internet access services and a default
destination to the Tutopia portal site when the users first log on to use the
Internet. The Tutopia portal has been developed to offer Internet users
localized information about select major cities in Latin America. Through the
end of April 2000, Tutopia.com raised approximately $5.5 million through a
private placement. Tutopia intends to use the proceeds to expand its content
development team, assemble an advertising-space sales force, cover customer
support expenses, invest in marketing and compact disc distribution, and pay for
Internet connectivity, which Tutopia will purchase on a wholesale basis from
IFX. IFX provides certain technical and administrative support to Tutopia.
Yupi Internet, Inc. On January 18, 2000, Yupi Internet, Inc. ("Yupi")
filed a Form S-1 for the registration of its initial public offering of
approximately 7,000,000 shares at a price range of $13 to $15. IFX currently
holds a minority interest in Yupi that it purchased in 1999 for approximately
$3.1 million in exchange for convertible preferred stock, common stock and the
right to acquire up to 25,901 shares of the common stock of Yupi at a
predetermined price.
Spinway Media Network, Inc. On January 24, 2000, Tutopia.com, Inc. entered
into an agreement (the "Spinway Agreement") with Spinway Media Network, Inc.
("Spinway") providing Tutopia with the use of Spinway's persistant-ad box
technology. A copy of the Spinway Agreement was filed as an exhibit in the
prior Form 10Q.
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Facilito, Inc. In March 2000, IFX and The Intcomex Group ("Intcomex")
launched Facilito.com, a multi-category Internet e-tailer in Mexico. By
leveraging off the in-country distribution and logistics infrastructure and
fulfillment capabilities of its strategic partner, Intcomex, as well as the on-
line audience and Internet related assets in the Latin American Internet space
of IFX, Facilito.com should be able to target and serve the growing Internet
audience in Latin America. Intcomex is a privately-held company controlled by
affiliates of Michael Shalom.
Graham Group. 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 $1.1 million over the next four years.
Haworth Capital. In January 2000 IFX entered into a leasing agreement with
De Lage Landen Financial Services, a division of Haworth Capital. The agreement
provided IFX the financing for approximately $200,000 in office furniture.
Acquisitions
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Openway, Ltda. On January 3, 2000, IFX purchased substantially all of the
assets of Openway Ltda., a Colombian Internet Service Provider. Openway provides
dial-up, web design and web hosting services to consumers and corporations in
Bogota, Colombia.
Brasilnet Comunicacoes S.A. On January 21, 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.
For the acquisitions during the third quarter of fiscal 2000, the total
purchase prices were approximately $2.12 million, of which none was paid or will
be paid in cash, approximately $2.0 million was paid or will be paid by issuing
approximately 99,146 shares of the Company's common stock and by assuming
liabilities of approximately $0.12 million. The total cash acquired in those
acquisitions was approximately $22,000. 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 $1,786,800 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 March 31, 2000.
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Nine Months Ended
March 31,
-------------------------
2000 1999
------------ ----------
(Unaudited)
Total revenues............................ $ 8,463,400 $3,020,400
Net income (loss)......................... (18,917,000) 220,500
Basic and diluted net income (loss) per
common share............................ $ (2.07) $ .03
NOTE 5. SUBSEQUENT EVENTS
Accelerated Payments to Consultants. IFX has several consulting agreements
in place with service providers in Latin America. These consultants have helped
IFX build its network and expand its services in the region. Consulting
Agreements with certain of the consultants required the issuance by IFX of IFX
stock depending on the growth of IFX users. During April 2000 IFX fixed certain
contingent amounts and accelerated certain payments to those consultants by
issuing 325,963 shares of IFX common stock with an approximate value of $9.3
million.
Secured Promissory Note to Lucent Technologies. In April 2000, IFX
received $2,691,000 from Lucent Technologies to finance Lucent equipment that
IFX had acquired in Brazil. The amount advanced is pursuant to the existing $10
million credit line that IFX has established with Lucent and will be repaid in
30 equal monthly installments of principal and interest beginning on the first
day of the sixth month following the date of the first scheduled interest
payment.
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 March
31, 2000 by segment is presented below:
United Brazil Chile Mexico Venezuela Other Total
States
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Revenues 4,900 1,435,300 409,400 537,700 391,400 490,500 3,269,200
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Income (loss)
from continuing
operations
before taxes (7,447,000) (1,647,100) (250,100) (495,600) (50,200) (1,872,900) (11,762,900)
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Selected unaudited financial information for the nine months ended March
31, 2000 by segment is presented below:
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Page 9
United Brazil Chile Mexico Venezuela Other Total
States
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Revenues 4,900 2,443,300 1,215,100 1,227,500 1,124,500 1,070,500 7,085,800
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Loss from
continuing
operations
before taxes (15,233,100) (2,185,500) (1,478,100) (832,300) (518,200) (3,470,600) (23,717,800)
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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. Deferred Lease Credit
Deferred lease credits are amortized on a straight-line basis primarily
over the life of the applicable lease. In January 2000, IFX received $147,000
from Compaq Computers ("Compaq") in order for IFX to assume Compaq's property
lease in Miami Lakes. That amount will be amortized over the remainder of the
four year lease that IFX assumed.
NOTE 10. Stockholders' Equity
International Technology Investments, LC. On March 29, 2000, International
Technology Investments, LC ("ITI"), exercised its remaining 1,500,000 options to
acquire IFX common stock at $2.00 per share for a total of $3.0 million. In
addition, ITI paid the outstanding note payable of $4.95 million from the
options that it had exercised in the prior quarter. This brings the total number
of shares held by ITI to 6,000,000. ITI is controlled by Michael Shalom, CEO of
IFX.
NOTE 11. Related Party Transaction
In February 2000, IFX entered into a Stock Purchase Agreement ("agreement")
with Lee Casty, a more than five percent holder of IFX common stock. The
agreement is for the sale to Mr. Casty of a certain number shares of Yupi
Internet, Inc. ("Yupi") Preferred Stock owned by IFX. The sale proceeds of
$5,000,000 will be used for the Company's working capital. The exact number of
Yupi preferred shares to be transferred by IFX to Mr. Casty will be fixed upon
the initial public offering of Yupi shares, or, in the absence of a Yupi public
offering, then upon the occurrence of certain other valuation events. In no
event will the valuation event extend beyond twelve months plus one day from the
initial sale transaction. The Company recorded a gain of $1.9 million and
deferred gain of $2.6 million in connection with the sale. The gain recognized
represents the minimum amount the Company expects to realize on this
transaction.
NOTE 12. Accrued Liabilities on Acquisitions
On most of IFX's acquisitions, the Company pays a certain amount at the
closing ("first payment") and another amount 60 to 360 days after closing
("second payment"). The amounts owed by IFX to the ISP's it has acquired are
classified as accrued liabilities on acquisitions. As of March 31, 2000, IFX had
accrued liabilities on acquisition of approximately $3.8 million of which
approximately $2.8 million is due in IFX common stock and approximately $1.0
million is due in cash.
NOTE 13. 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
it's customers. At March 31, 2000, IFX had a net difference of approximately
$0.8 million which was classified as Foreign Taxes Recoverable.
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ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Period Ended March 31, 2000.
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.
GENERAL
IFX is a leading provider of Internet connectivity and value-added
services in Latin America. It operates two brands:
. Unete.com. Under the Unete.com brand IFX is focused on serving
small and medium sized businesses in Latin America with the following
services: dial-up connection, dedicated lines, web hosting, web design
and co-location. The countries in which IFX provide services are:
Argentina, Brazil, Bolivia, Chile, Colombia, Costa Rica, El Salvador,
Guatemala, Honduras, Mexico, Nicaragua, Panama, Uruguay and Venezuela.
Users under the Unete network, can connect in any of the 14 countries
IFX serves and in many major cities in the United States via a local
telephone call and with no roaming fees.
. Tutopia.com. In January 2000, IFX launched Tutopia.com, a free
Internet access business and web portal with local content. Tutopia
offers individual users free access to the Internet while providing
advertisers with an online direct marketing tool. The free Internet
access is offered to users in Argentina, Brazil, Chile, Colombia, El
Salvador, Guatemala, Mexico, Panama and Venezuela. In addition,
Tutopia.com serves as a web portal for some of the major cities were
viewers can obtain local information such as news, restaurants, movies
and weather of their local city. Through the end of April 2000,
approximately 600,000 users have registered for free Internet access
with Tutopia.com.
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Historical Background
IFX was incorporated in Illinois in July 1985. IFX changed its state of
incorporation to Delaware in May 1995. 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 our
majority-owned U.K. subsidiary) to MINC 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)
of a decreasing percentage during the ninety-nine months following the sale.
Since July 1996 and up until September 1999, IFX's revenues have consisted
primarily of earn-out payments from the asset sale, interest income and income
from operations of our 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 the Internet service markets in
Latin America. At that time, IFX entered into an agreement with International
Technology Investments to pursue the Internet market. The Company then opened
offices in Florida and started recruiting new management and operational teams.
In June 1999, IFX sold its 50.1% interest in IFX Ltd., the only remaining
business that was not related to the Internet, in exchange for approximately
$2.45 million in cash and a note receivable, and a redeemable preference share
entitling us to quarterly payments equal to approximately 30% of the net profits
(as specifically defined) of IFX Ltd. through June 30, 2002.
IFX acquired its first ISP in April 1999 in Mexico. Since that date, IFX
has acquired 25 ISPs and has started 4 Internet operations in Latin America, has
made 2 strategic investments in Internet businesses (Yupi and E-Pagos) and has
started additional businesses through joint ventures (Facilito.com and
Commtouch.)
Discontinued Operations
Due to the discontinued operations, our primary source of revenues changed
from trading revenues and foreign exchange operations to subscriber fees from
Internet operations. Our revenues from Fiscal Years 2000, 1999, 1999 and 1997
related to discontinued operations are shown as "Income from Discontinued
Operations, net of income taxes." The revenues from IFX's acquisitions are
accounted from the date of purchase.
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Due to the discontinued operations, our 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 ISP acquisitions are accounted from the date of
purchase.
As of March 31, 2000, the Company had approximately 560 employees.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 31, 2000, cash used by continuing and
discontinued operations was approximately $5.5 million compared to cash provided
by continuing and discontinued operations of $4.6 million for the same period in
1999. The majority of cash for the nine months ended March 31, 2000, 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 March 31, 2000, the Company held approximately $14.1 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 nine months ended March 31, 2000, cash used in investment activities
was approximately $3.1 million compared to cash used in investment activities of
$0.7 million for the same period in 1999. The increase was primarily due to the
purchases of equipment, and acquisitions and software implementations.
During the quarter, IFX received approximately $7.95 million from ITI as
part of its agreement with IFX. In addition, Tutopia.com received approximately
$5.0 million from a private placement which commenced during January 2000.
Stockholders' equity at March 31, 2000 was approximately $23.9 million as
compared with $16.1 million at June 30, 1999.
RESULTS OF OPERATIONS - THREE MONTHS AND NINE MONTHS ENDED MARCH 1999
COMPARED TO 1999
Revenues. In the three months and nine months ended March 31, 2000, IFX
derived $2.1 million or 64%, and $5.0 million or 71%, 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 nine months ended March 31, 2000, IFX
derived $1.1 million or 33%, and $1.5 million or 21%, 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 $0.1 million or 3%, and $0.6 million or 8% of the total
continuing revenues for the three months and nine months ended March 31, 2000
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 nine months ended March 31, 1999 from
continuing operations are $0, since the Company had not yet been involved in the
Internet business. Revenues for the period ended March 31, 1999 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
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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 $2.4 million and $0 for the three months ended March 31, 2000 and March 31,
1999, respectively; and were $4.9 million and $0 for the nine months ended March
31, 2000 and March 31, 1999, respectively.
General and Administrative Expenses. General and administrative costs are
primarily for salaries, legal, accounting and consulting fees, General and
administrative expenses were $5.4 million and $0.1 million for the three months
ended March 31, 2000 and March 31, 1999, respectively; and were $12.7 million
and $1.1 million for the nine months ended March 31, 2000 and March 31, 1999,
respectively. The increase was primarily due to an increase in payroll.
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 is related to
property and equipment, software and acquired customer base. IFX depreciates its
fixed 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 $2.3 milion and $0 for the three months ended March 31, 2000 and
March 31, 1999, and were $4.6 million and $0 for the nine months ended March 31,
2000 and March 31, 1999, respectively.
The Company will continue to invest heavily in purchases of computer
equipment and software 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.
Sales and Marketing. Sales and marketing costs are primarily for
advertising, market analysis, trade show expenses and sales related expenses of
our ISP service. Sales and marketing expenses were $4.7 million and $0 for the
three months ended March 31, 2000 and March 31, 1999, respectively; and were
$6.7 million and $0 for the nine months ended March 31, 2000 and March 31, 1999,
respectively. The increase was primarily due to an increase in launch of the
Tutopia.com free ISP and the increase in payroll of IFX's sales team.
Deferred Stock Compensation. Deferred stock compensation is primarily
expenses related to stock options issued below market price. Deferred stock
compensation was $2.3 million and $0 for the three months ended March 31, 2000
and March 31, 1999, respectively; and were $3.9 million and $0 for the nine
months ended March 31, 2000 and March 31, 1999, respectively. The increase was
primarily due to an increase in options awarded to new and existing employees.
Other Income. Other income is mostly derived from investment in short-term
government notes. Other income was $0.03 million and $0.1 million for the three
months ended March 31, 2000 and March 31, 1999, respectively; and was $0.2
million and $0.3 million for the nine months ended March 31, 2000 and March 31,
1999, respectively. The decreases were primarily due to a decrease in average
cash balances available for investment.
Gain on Investment. Gain on investment was derived from the sale of 500,000
preferred shares of Yupi Internet, Inc. to Mr. Lee Casty. The company recorded
a gain of $1.9 million and a deferred gain of $2.6 million on the sale.
Other Income and Gains from Discontinued Operations. Earn out payments from
the 1996 sale of its brokerage asset to MINE E.D. & F. Man International, Inc.,
and from the 1999 sale of its 50.1% interest in IFX Ltd. are shown as
discontinued operations, net of expenses and taxes. In the three months ended
March 31, 2000, the Company earned approximately $0.5 million compared to $1.0
million for the three months ended March 31, 1999. For the nine months ended
March 31, 2000
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the Company earned $1.4 million compared to $2.8 million for the nine months
ended March 31, 1999. 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 March 31, 2000 and March
31, 1999, the Company recorded a tax benefit from its continuing operations of
approximately $0.3 million and a tax provision of $0.01 million, respectively.
For the nine months ended March 31, 2000, the Company recorded a tax benefit
from its continuing operations of approximately $1.7 million and for March 31,
1999 a tax provision of $0.01 million. The effective tax rate for the three
months ended March 31, 2000 was 2.6% compared to 0.6% for the three months ended
March 31, 1999. The effective tax rate for the nine months ended March 31, 2000
was 7.3% compared to 1.3% for the nine months ended March 31, 1999.
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 March 31, 2000 was approximately $11.5 million, or $(1.01) per share,
compared to a net loss of $0.5 million, or $(0.08) per share, for the three
months ended March 31, 1999. Including discontinued operations, the Company
recorded a net loss of $11.0 million, or $(0.97) per share, compared to a net
income of $0.5 million, or $0.07 per share, for the three months ended March 31,
1999.
IFX's loss from continuing operations for the nine months ended March 31,
1999 was approximately $22.0 million, or $(2.41) per share, compared to a net
loss of $0.8 million, or $(0.12) per share, for the nine months ended March 31,
1999. Including discontinued operations, the Company recorded a net loss of
$20.6 million, or $(2.25) per share, compared to a net income of $2.0 million,
or $0.31 per share, for the nine months ended March 31, 1999.
CREDIT AGREEMENTS
Graham Group. 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 $1.1 million over the next 4 years.
Lucent Technologies. During the quarter, IFX increased its credit line with
Lucent Technologies from $2.7 million to $5.6 million. With this increase in the
credit line, IFX increased the capacity of its network throughout the region.
IBM Credit Corporation. In March 2000, IFX entered into a leasing agreement
with IBM Credit Corporation. The agreement provided IFX the financing for
approximately $365,000 worth of IBM equipment.
Haworth Capital. In January 2000, IFX entered into a leasing agreement with
De Lage Landen Financial Services, a division of Haworth Capital. The agreement
provided IFX the financing for approximately $200,000 in office furniture.
Year 2000 Readiness
In the prior year, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
assessment and testing of systems. As a result of those planning and assessment
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the year 2000 date change. To date, Year 2000
compliance costs have not been material. The Company is not aware of any
material problems resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the Year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
If it comes to our attention that there are any Year 2000 problems with our
service or that some of our third-party hardware and software used in our
internal systems are not Year 2000 compliant, then we will endeavor to make
modifications to our products and internal systems, or purchase new internal
systems, to
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quickly respond to the problem. At the present time, however, we do not
anticipate incurring additional material costs related to Year 2000 compliance.
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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
conversion to US Dollars.
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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.
ITEM 5 - OTHER INFORMATION
Related Party Transaction
- -------------------------
In February 2000, IFX entered into a Stock Purchase Agreement ("agreement")
with Lee Casty, a more than five percent holder of IFX common stock. The
agreement is for the sale to Mr. Casty of a certain number shares of Yupi
Internet, Inc. ("Yupi") Preferred Stock owned by IFX. The sale proceeds of
$5,000,000 will be used for the Company's working capital. The exact number of
Yupi preferred shares to be transferred by IFX to Mr. Casty will be fixed upon
the initial public offering of Yupi shares, or, in the absence of a Yupi public
offering, then upon the occurrence of certain other valuation events. In no
event will the valuation event extend beyond twelve months plus one day from the
initial sale transaction.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
27 Financial Data Schedule (EDGAR only)
99.1 Risk Factors
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: May 15, 2000 By: /S/ JOEL EIDELSTEIN
-----------------------------
Joel Eidelstein
President
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Dated: May 15, 2000 By: /S/ JOSE LEIMAN
------------------------
Jose Leiman
Chief Financial Officer
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